================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): October 15, 1999
SCOTTISH ANNUITY & LIFE HOLDINGS, LTD.
(Exact Name of Registrant as Specified in its Charter)
Cayman Islands 0-29788 N/A
(State or Other (Commission (IRS Employer
Jurisdiction of File Number) Identification No.)
Incorporation)
Grand Pavilion Commercial Centre, 802 West Bay Road N/A
George Town, Grand Cayman, Cayman Islands, BWI (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (345) 949-2800
(Former Name or Former Address, if Changed Since Last Report)
================================================================================
ITEM 2. Acquisition or Disposition of Assets.
On October 15, 1999 Scottish Annuity & Life Holdings, Ltd. ("Scottish"), through
an indirect wholly owned subsidiary, acquired all of the outstanding shares of
Harbourton Reassurance, Inc. ("Harbourton") from NRG Acquisition Partners, L.P.
("NRG") for $ 25,183,372.00 in cash. The purchase price was determined through
arms-length negotiations between representatives of Scottish and NRG.
Harbourton is a U.S. based reinsurer writing business similar to that of
Scottish. It is licensed in 14 states and the District of Columbia, and is an
authorized reinsurer in 38 states.
ITEM 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Business Acquired:
-----------------------------------------
(i) Report of Independent Auditors............................. F-2
(ii) Audited Balance Sheets as of December 31, 1998
and 1997................................................... F-3
(iii) Audited Statements of Operations for the years
ended December 31, 1998, 1997, and 1996.................... F-4
(iv) Audited Statements of Stockholder's Equity for the
years ended December 31, 1998, 1997, and 1996.............. F-5
(v) Audited Statements of Cash Flows for the years ended
December 31, 1998, 1997, and 1996.......................... F-6
(vi) Audited Notes to the Financial Statements.................. F-8
(b) Pro Forma Financial Information:
-------------------------------
(i) Unaudited pro forma combined condensed balance sheet
for Scottish Annuity & Life Holdings, Ltd. as of
September 30, 1999......................................... F-24
(ii) Unaudited pro forma combined condensed statement of
operations for the twelve months ended September
30, 1999................................................... F-25
(iii) Unaudited pro forma combined condensed statement of
operations for the nine months ended September 30, 1999.... F-26
(iv) Notes to the unaudited pro forma combined condensed
financial statements....................................... F-27
(c) Exhibits:
--------
Exhibit
Number Exhibit
------- -------
10.1 Stock Purchase Agreement by and between Scottish
Annuity & Life Insurance Company (Cayman) Ltd. and NRG
Acquisition Partners, L.P. dated as of June 10, 1999
(incorporated herein by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed with the
Securities Exchange Commission on November 1, 1999)
10.2 Stock Purchase Agreement Amendment dated as of October 15,
1999 (incorporated herein by reference to Exhibit 10.2 to
the Company's Current Report on Form 8-K filed with the
Securities Exchange Commission on November 1, 1999)
23.1 Consent of Ernst & Young LLP
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
SCOTTISH ANNUITY & LIFE HOLDINGS, LTD.
By:/s/ Peter W. Presperin
-----------------------------------
Peter W. Presperin
Senior Vice President, Chief Financial
Officer, and Secretary
Dated: December 21, 1999
Financial Statements
Harbourton Reassurance, Inc.
Years ended December 31, 1998, 1997 and 1996
with Report of Independent Auditors
F-1
Report of Independent Auditors
The Board of Directors and Stockholder
Harbourton Reassurance, Inc.
We have audited the accompanying balance sheets of Harbourton Reassurance, Inc.
as of December 31, 1998 and 1997, and the related statements of operations,
stockholder's equity, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Harbourton Reassurance, Inc. at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Denver, Colorado
April 20, 1999, except for Note 13,
as to which the date is May 18, 1999
F-2
Harbourton Reassurance, Inc.
Balance Sheets
December 31
1998 1997
------------------------------------
Assets
Investments:
Fixed maturities available for sale, at fair
value $128,871,032 $126,228,129
Mortgage loans 21,568 8,451,239
Other invested assets 54,730 573,134
------------------------------------
Total investments 128,947,330 135,252,502
Cash and cash equivalents 12,347,854 22,756,017
Funds withheld by reinsurers 102,404 106,789
Accounts receivable 787,500 827,893
Accrued investment income 1,031,810 1,181,663
Deferred acquisition costs 1,934,902 5,029,383
Income tax recoverable 239,549 1,378,757
Policy loans 711,268 843,186
------------------------------------
Total assets $146,102,617 $167,376,190
====================================
Liabilities and stockholder's equity
Future policy benefits and unpaid claims $ 6,095,514 $ 9,966,183
Policyholders' deposits 91,346,040 108,572,074
Accounts payable to reinsurers 3,168,939 4,560,802
Accounts payable--other 136,000 350,000
Deferred tax liability 3,432,258 2,835,606
Other liabilities - 78,811
------------------------------------
Total liabilities 104,178,751 126,363,476
Stockholder's equity:
Capital stock, par value $100 per share;
50,000 shares authorized, 36,000
shares issued and outstanding 3,600,000 3,600,000
Additional paid-in capital 11,400,000 11,400,000
Retained earnings 24,732,437 25,367,829
Accumulated other comprehensive income 2,191,429 644,885
------------------------------------
Total stockholder's equity 41,923,866 41,012,714
------------------------------------
Total liabilities and stockholder's equity $146,102,617 $167,376,190
====================================
See accompanying notes.
F-3
Harbourton Reassurance, Inc.
Statements of Operations
Year ended December 31
1998 1997 1996
--------------------------------------------------
Revenue:
Gross premiums and policy fees
earned $ 264,396 $ 449,191 $ 4,492,905
Reinsurance ceded (18,825) (17,562) (3,453,790)
--------------------------------------------------
Net premiums 245,571 431,629 1,039,115
Investment product surrender
charges 12,531 122,938 159,833
Net investment income 8,893,303 13,814,295 17,339,101
Net realized gains on 326,708 1,376,599 1,212,251
investments
Miscellaneous revenue 56,032 53,827 33,494
--------------------------------------------------
9,534,145 15,799,288 19,783,794
Benefits and expenses:
Policy benefits and claims 2,600,648 8,894,370 10,296,492
Benefits and claims ceded (215,317) (804,535) (166,122)
--------------------------------------------------
Net benefits and claims 2,385,331 8,089,835 10,130,370
Interest credited on policyholders'
deposits 4,812,615 6,670,735 7,174,620
Amortization of deferred
acquisition costs 2,538,191 988,942 1,195,040
General expenses 907,079 4,409,198 1,571,704
--------------------------------------------------
10,643,216 20,158,710 20,071,734
--------------------------------------------------
Loss before federal income
tax (benefit) expense (1,109,071) (4,359,422) (287,940)
Provision for federal income tax
(benefit) expense:
Current 12,947 (1,493,011) (357,192)
Deferred (486,626) 2,562,788 (614,034)
--------------------------------------------------
(473,679) 1,069,777 (971,226)
--------------------------------------------------
Net (loss) income $ (635,392) $(5,429,199) $ 683,286
==================================================
See accompanying notes.
F-4
Harbourton Reassurance, Inc.
Statements of Stockholder's Equity
Year ended December 31
1998 1997 1996
------------------------- ----------------------------- ------------------------------
Common stock:
Balance at beginning and end of
year $ 3,600,000 $ 3,600,000 $ 3,600,000
------------- ---------------- ----------------
Additional paid-in capital:
Balance at beginning and end of
year 11,400,000 11,400,000 11,400,000
------------- ---------------- ----------------
Retained earnings:
Balance at beginning of year 25,367,829 30,797,028 30,113,742
Net (loss) income (635,392) $ (635,392) (5,429,199) $(5,429,199) 683,286 $ 683,286
-------------------------- ------------------------------ -----------------------------
Balance at end of year 24,732,437 25,367,829 30,797,028
------------- ---------------- ----------------
Accumulated other comprehensive
income:
Balance at beginning of year 644,885 425,770 (989,732)
Net change in unrealized
holding gains, net of tax 2,128,926 1,127,670 2,215,588
Reclassification adjustment for
realized gains included in
net income, net of tax (215,231) (908,555) (800,086)
Effect on DPAC of unrealized
gains and losses, net of tax (367,151) - -
------------- -------------- -------------
Other comprehensive income 1,546,544 1,546,544 219,115 219,115 1,415,502 1,415,502
-------------------------- ------------------------------ -----------------------------
Comprehensive income $ 911,152 $(5,210,084) $2,098,788
============= ============== =============
Balance at end of year 2,191,429 644,885 425,770
------------- ---------------- ----------------
Total stockholder's equity $41,923,866 $41,012,714 $46,222,798
============= ================ ================
See accompanying notes.
F-5
Harbourton Reassurance, Inc.
Statements of Cash Flows
Year ended December 31
1998 1997 1996
-------------------------------------------------
Cash flows from operating activities
Net (loss) income $ (635,392) $ (5,429,199) $ 683,286
Adjustments to reconcile net (loss)
income to net cash (used in) provided
by operating activities:
Depreciation and amortization - - 85,265
Realized investment gains (326,708) (1,376,599) (1,212,251)
Amortization of deferred
acquisition costs 2,538,191 988,942 1,195,040
Change in deferred taxes (486,626) 2,895,001 (394,635)
(Decrease) increase in future
policy benefits and unpaid claims (3,870,669) (12,235,575) 5,604,684
Increase (decrease) in accounts
payable to reinsurers (1,391,863) 1,589,302 (7,587,744)
(Increase) decrease in accounts
payable--other (214,000) (123,000) 473,000
Decrease in funds withheld by
reinsurers 4,385 17,170 20,869
Decrease (increase) in accounts
receivable 40,303 478,566 2,919,220
Change in income taxes 1,139,207 (1,573,011) (1,085,263)
Decrease (increase) in accrued
investment income 149,853 3,116,691 (1,102,151)
(Accretion) amortization of
premiums and discounts on bonds, net (424,015) (694,781) 6,135,465
(Accretion) amortization of
premiums and discounts on mortgage
loans, net 252 (420) 62,381
Other, net 56,601 (147,786) (742,880)
-------------------------------------------------
Net cash (used in) provided by
operating activities (3,420,391) (12,494,699) 5,054,286
Cash flows from investing activities
Proceeds from sales and maturities
of fixed- maturity securities 31,935,750 255,068,714 133,648,062
Investment in fixed-maturity
securities (30,962,823) (251,328,306) (92,580,268)
Proceeds from sale of other invested
assets 585,939 11,924,531 4,093,040
Investment in other invested assets (40,608) (1,264,635) (8,729,758)
Proceeds from sales of purchased
claims rights 2,760 13,872,915 416,772
Investment in mortgage loans - (14,001,249) (19,617,662)
Proceeds from repayments of mortgage
loans 8,717,244 34,164,801 9,774,143
-------------------------------------------------
Net cash provided by investing
activities 10,238,262 48,436,771 27,004,329
F-6
Harbourton Reassurance, Inc.
Statements of Cash Flows (continued)
Year ended December 31
1998 1997 1996
-------------------------------------------------
Cash flows from financing activities
Withdrawals from investment products $(22,038,649) $(27,022,297) $(40,739,498)
Repayment of borrowing - (508,734) (5,609,266)
Interest credited to investment
products 4,812,615 6,670,735 7,174,620
-------------------------------------------------
Net cash used in financing activities (17,226,034) (20,860,296) (39,174,144)
-------------------------------------------------
Net increase (decrease) in cash and
cash equivalents (10,408,163) 15,081,776 (7,115,529)
Cash and cash equivalents, beginning
of year 22,756,017 7,674,241 14,789,770
-------------------------------------------------
Cash and cash equivalents, end of
year $ 12,347,854 $ 22,756,017 $ 7,674,241
=================================================
Supplemental disclosures of cash flow information
Income taxes paid (recovered) $(1,126,271) $80,000 $728,071
================================================
See accompanying notes.
F-7
Harbourton Reassurance, Inc.
Notes to Financial Statements
December 31, 1998 and 1997
1. Organization and Summary of Significant Accounting Policies
Organization
Harbourton Reassurance, Inc. (the Company) common stock has been wholly-owned by
NRG Acquisition Partners L.P. since February 1994. The Company's insurance
operations consist of the reinsurance of life, annuity, and disability income
products from various other U.S. insurance companies. Portions of this assumed
business have been retroceded by the Company to other insurance companies. The
Company has not entered into any new disability income reinsurance business
since August 1993. Effective January 1, 1994, the Company entered into a
reinsurance contract with Hannover Reinsurance Company to cede the Company's
life block of business. The Company is licensed in 15 states and is an approved
or accepted reinsurer in 8 other states.
The Company relocated to Aurora, Colorado, effective April 1, 1996.
Use of Estimates
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Such estimates and assumptions
could change in the future as more information becomes known, which could impact
the amounts reported and disclosed herein.
Investments
Fixed maturities are designated as available-for-sale and are reported at fair
value with unrealized gains and losses, net of related adjustments for deferred
policy acquisition costs and applicable deferred income taxes, reported as
accumulated other comprehensive income, a separate component of stockholder's
equity. Realized gains and losses are reported in income based on the specific
identification of securities sold. Fair values of such securities are based on
quotations at year end.
Mortgage loans are reported at unpaid principal balances.
Investments in purchased claims rights are included in other invested assets and
are reported at cost. Investments in limited partnerships are included in other
invested assets and are reported at fair value with changes in the fair value
reported in income as realized investment gains or losses.
F-8
Harbourton Reassurance, Inc.
Notes to Financial Statements (continued)
1. Organization and Summary of Significant Accounting Policies (continued)
Fair values of the limited partnerships are based on the market values of the
underlying assets of the partnerships at year end. Investments in auto loans,
which are included in other invested assets, are recorded at cost. A provision
for nonperforming loans is recognized as a reduction to the cost basis of these
loans.
Premiums and Policy Fees
Premiums on disability income contracts are reported as earned on a pro rata
basis over the contract period. The portion of premiums not earned at the end of
the period is recorded as unearned premiums and recorded in future policy
benefits. Premiums on life insurance are reported as earned when due.
Included in premiums and policy fees earned are fees earned with respect to
financial reinsurance treaties totaling $35,783, $47,954 and $231,352 in 1998,
1997 and 1996, respectively. Such fees are primarily based on the amount of
statutory relief provided by the treaty.
Deferred Acquisition Costs
Certain costs of acquiring new reinsurance business, principally commissions
paid or allocated to the primary insurance company, have been deferred. For
investment products, such costs are being amortized over the anticipated terms
of the related contracts in proportion to the present value (principally using
an assumed crediting rate) of expected gross profits. Costs deferred relating
to all other insurance products are being amortized to commissions expense in
proportion to the ratio of annual premium revenues to total anticipated premium
revenues. Anticipated investment income is included in the evaluation of the
recoverability of deferred acquisition costs.
Income Taxes
Deferred federal income taxes result primarily from recognizing certain income
and expense items (primarily deferred acquisition costs, adjustments to policy
liabilities and deferred discounts on bonds) for income tax purposes in periods
other than those in which they are recognized for financial reporting purposes.
F-9
Harbourton Reassurance, Inc.
Notes to Financial Statements (continued)
1. Organization and Summary of Significant Accounting Policies (continued)
Future Policy Benefits
Liabilities for future policy benefits are computed based upon assumed
investment yields, mortality, and withdrawal rates anticipated at the time the
policies were reinsured. These assumptions vary by characteristics of the plan
of insurance, year of issue, policy duration, age of insured, and other
appropriate factors. The average assumed investment yield ranges in effect for
1998, 1997 and 1996 ranged from approximately 2.5%-6.5%, 2.5%-6.5% and 6%-8%,
respectively.
Liabilities for disability income benefit reserves are based upon estimates
provided to the Company by ceding reinsurers.
Policyholders' Deposits
With respect to investment products, the Company calculates its liability using
the account value method. The liability for policyholders' deposits on
investment products represents the funds deposited with the primary insurer,
plus accumulated interest less certain administrative charges. Interest credited
to these policies ranged from 4.1% to 5.25% in 1998 and 4.4% to 5.25% in both
1997 and 1996.
Unpaid Claims
The liability for unpaid claims is based, in part, on estimates provided to the
Company by ceding reinsurers.
Statements of Cash Flows
For purposes of the statements of cash flows, cash and cash equivalents includes
demand deposits with banks and other financial institutions and bank repurchase
agreements with a maturity of three months or less when purchased.
Reclassifications
Certain amounts in the 1996 and 1997 financial statements have been reclassified
to conform to the 1998 presentation.
F-10
Harbourton Reassurance, Inc.
Notes to Financial Statements (continued)
1. Organization and Summary of Significant Accounting Policies (continued)
Accounting Changes
During 1998, the Company adopted FASB Statement No. 130, Reporting Comprehensive
Income, which requires an entity to divide comprehensive income into net income
and other comprehensive income in the period recognized. This Statement is
effective for fiscal years beginning after December 15, 1997, with the
restatement of prior period disclosures for comparative purposes. As a result
of implementing this Statement, the Company has classified items of other
comprehensive income by their nature in the statements of stockholder's equity
and the accumulated balance of other comprehensive income in the equity section
of the balance sheet. This Statement affects the presentation of the financial
statements, with no effect on the valuation of total stockholder's equity.
2. Transactions with Related Parties
The Company entered into a management services agreement with Harbourton
Enterprises, an affiliate of the Company. Under the management services
agreement, the Company is billed by Harbourton Enterprises for certain operating
expenses. In each of the years ended December 31, 1998, 1997 and 1996, the
Company was billed $120,000, which is reflected in general and administrative
costs. In addition to the management services fees, the Company reimburses
Harbourton Enterprises for other operating expenses comprised mostly of payroll-
related costs. At December 31, 1998 and 1997, the Company had a payable to
Harbourton Enterprises of approximately $136,000 and $350,000, respectively, for
these costs.
During 1997, the Company sold 98% of its investment in Aurora Equity Partners,
LP and certain fixed maturity securities at fair values to its parent. A gain
of approximately $2,122,000 was realized on these sales.
F-11
Harbourton Reassurance, Inc.
Notes to Financial Statements (continued)
3. Investments
The amortized cost and estimated fair value of investments in fixed maturities
at December 31, 1998 and 1997 are as follows (in 000s):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------
December 31, 1998
- -----------------
Available for sale:
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies $ 85,109 $1,861 $ (4) $ 86,966
Debt securities issued by
foreign governments 40 9 - 49
Corporate debt securities 4,019 31 (28) 4,022
Mortgage-backed securities 35,540 3,695 (1,401) 37,834
---------------------------------------------------------
Total fixed maturities $124,708 $5,596 $(1,433) $128,871
=========================================================
December 31, 1997
- -----------------
Available for sale:
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies $ 69,852 $ 208 $ (1) $ 70,059
Debt securities issued by
foreign governments 42 10 - 52
Corporate debt securities 740 17 (16) 741
Mortgage-backed securities 54,617 1,036 (277) 55,376
---------------------------------------------------------
Total fixed maturities $125,251 $1,271 $(294) $126,228
=========================================================
F-12
Harbourton Reassurance, Inc.
Notes to Financial Statements (continued)
3. Investments (continued)
The amortized cost and estimated fair value of fixed maturities (in 000s) at
December 31, 1998, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Amortized Estimated
Cost Fair Value
----------------------------------
Available for sale:
Due in one year or less $ 27,512 $ 27,788
Due after one year through five years 60,684 62,271
Due after five years through ten years 972 978
Due after ten years - -
----------------------------------
89,168 91,037
Mortgage-backed securities 35,540 37,834
----------------------------------
Total available for sale $124,708 $128,871
==================================
Mortgage-backed securities in the maturity schedule include approximately $10
million in obligations of U.S. Government corporations and agencies at amortized
cost.
Changes in unrealized gains (losses) on fixed maturities available for sale for
the years ended December 31 are summarized as follows (in 000s):
1998 1997 1996
-------------------------------------------------
Gross unrealized gains $ 5,596 $1,271 $ 4,931
Gross unrealized losses (1,433) (294) (4,625)
-------------------------------------------------
Net unrealized gains 4,163 977 306
Adjustment for deferred policy
acquisition costs (556) - -
Deferred income tax expense (1,416) (333) (104)
-------------------------------------------------
Net unrealized gains after related
adjustments and income taxes 2,191 644 202
Less balance at beginning of year 644 202 774
-------------------------------------------------
Change in net unrealized gains $ 1,547 $ 442 $ (572)
=================================================
F-13
Harbourton Reassurance, Inc.
Notes to Financial Statements (continued)
3. Investments (continued)
Proceeds from sales of investments in fixed maturities during 1998, 1997 and
1996 were $15,844,672, $214,267,630 and $43,199,083, respectively. For the
years ended December 31, 1998, 1997 and 1996, gross gains of $31,443, $2,049,584
and $996,000, respectively, and gross losses of $25,741, $405,373 and $453,966,
respectively, were realized on those sales.
Major categories of investment income for the years ended December 31 are
summarized as follows:
1998 1997 1996
---------------------------------------------------
Fixed maturities $8,358,141 $ 8,324,073 $15,290,545
Mortgage loans 419,190 3,440,933 1,727,185
Other invested assets 795,560 2,714,818 2,922,384
---------------------------------------------------
9,572,891 14,479,824 19,940,114
Investment expenses 679,588 665,529 2,601,013
---------------------------------------------------
Net investment income $8,893,303 $13,814,295 $17,339,101
===================================================
The Company had borrowings at December 31, 1998, 1997 and 1996 of $0, $0 and
$508,734, respectively. Interest expense incurred on borrowings was
approximately $0, $48,000 and $1,856,000 during 1998, 1997 and 1996,
respectively.
Net realized gains (losses) on investments for the years ended December 31 are
summarized as follows:
1998 1997 1996
----------------------------------------------------
Fixed maturities $ 5,702 $1,644,211 $ (60,183)
Equity securities 29,687 (73,328) (27,563)
Mortgage loans 287,825 647,434 -
Other invested assets 3,494 (841,718) 1,299,997
----------------------------------------------------
Net realized gains on
investments $326,708 $1,376,599 $1,212,251
====================================================
Investments with a par value of $2,470,000 and $2,478,000 at December 31, 1998
and 1997, respectively, are on deposit with various state insurance departments
and custodians in accordance with statutory and contractual requirements.
F-14
Harbourton Reassurance, Inc.
Notes to Financial Statements (continued)
3. Investments (continued)
Other invested assets consisted of the following as of December 31:
1998 1997
----------------------------------
Autobond loans $54,730 $141,557
Limited partnerships - 77,795
Common stock - 351,022
Purchased claim rights - 2,760
----------------------------------
Total $54,730 $573,134
==================================
The Company has invested in New Jersey Market Transition Facility (MTF)
purchased claims rights. These rights represent assignments of amounts owed on
auto insurance policies issued by the MTF for accident claims. The Company
purchases the rights to the claims from the policy owners at a discount.
Payments of these claims were received by the Company from the MTF on average 18
months from the date funded. At December 31, 1998, the Company had no
investments in MTF purchased claims rights.
The Company has purchased interests in various auto loans. These loans are
purchased at discounts and are collateralized by the vehicles.
Investments in limited partnerships consist of an investment in Aurora Equity
Partners, Limited Partnership (Aurora) and an investment in Mariner Partners
Limited Partnership (Mariner). Aurora seeks opportunities for investments that
offer the possibility of long-term equity appreciation through the purchase of
existing businesses, generally with the participation of senior management of
such businesses. Mariner is engaged primarily in the speculative trading of
securities and commodities. As of December 1997, the Company sold its
investment in Mariner. As of December 1998, the Company sold its remaining
investment in Aurora.
F-15
Harbourton Reassurance, Inc.
Notes to Financial Statements (continued)
3. Investments (continued)
Activity in other invested assets consisted of the following:
Auto Other Purchased Claim
Loans Mariner Aurora Miscellaneous Rights Total
---------------------------------------------------------------------------------------
Invested balance December 31, 1996 $6,666,311 $1,901,716 $ 2,992,778 $ 704,405 $13,875,675 $26,140,885
1997 activity:
Purchases 22,008 - 1,242,627 - 6,376 1,271,011
Sales/maturities 4,918,691 1,925,188 4,418,313 679,411 13,879,291 25,820,894
Write-offs 1,628,071 - - - - 1,628,071
Change in unrealized gains
(losses) - (401,716) (1,717,744) (193,224) - (2,312,684)
Realized gains - 425,188 1,978,447 519,252 - 2,922,887
---------------------------------------------------------------------------------------
Invested balance December 31, 1997 141,557 - 77,795 351,022 2,760 573,134
1998 activity:
Purchases - - - 40,608 - 40,608
Sales/maturities 86,827 - 77,795 421,317 2,760 588,699
Realized gains - - - 29,687 - 29,687
---------------------------------------------------------------------------------------
Invested balance December 31, 1998 $ 54,730 $ - $ - $ - $ - $ 54,730
=======================================================================================
Investments in commercial and residential mortgage loans consisted of the
following as of December 31:
1998 1997
----------------------------------
Commercial loans $ - $3,065,833
Residential loans 21,568 5,385,406
----------------------------------
$ 21,568 $8,451,239
==================================
During 1996, the Company entered into a German deutsche mark swaption with an
aggregate notional amount of 50,000,000 deutsche marks (equivalent to
$32,467,332) at December 31, 1996. In March 1997, the Company sold the deutsche
mark swaption for $679,411 and recognized a realized gain of $519,252.
F-16
Harbourton Reassurance, Inc.
Notes to Financial Statements (continued)
3. Investments (continued)
At December 31, 1998, the Company had no investments in derivative financial
instruments.
4. Liability for Unpaid Claims and Claims Adjustment Expenses
Activity in the liability for unpaid claims and claims adjustment expenses, net
of subrogation, is summarized as follows:
1998 1997
----------------------------------
Balance as of January 1 $6,130,187 $20,102,023
Incurred related to:
Current year - -
Prior years 1,327,366 4,557,477
----------------------------------
Total incurred 1,327,366 4,557,477
Paid related to:
Current year - -
Prior years 4,511,230 18,529,313
----------------------------------
Total paid 4,511,230 18,529,313
----------------------------------
Balance as of December 31 $2,946,323 $ 6,130,187
==================================
The foregoing reconciliations reflect deficiencies of $1,327,366 and $4,557,457
relative to the December 31 1997 and 1996 net reserves that emerged in 1998 and
1997, respectively, for claims that had occurred prior to those balance sheet
dates. The changes in those reserves were due to actual experience
deteriorating below expected results and to the continued refinement of the
reserving methodology for certain disability income reinsurance contracts.
F-17
Harbourton Reassurance, Inc.
Notes to Financial Statements (continued)
5. Reinsurance Transactions
The Company assumes and retrocedes reinsurance. These retrocessional reinsurance
arrangements provide for greater diversification of business, allow management
to control exposure to potential losses arising from large risks, and provide
additional capacity for growth.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policies.
The fair values of reinsurance recoverable and funds withheld by and for
reinsureds approximate the carrying values.
The Company is contingently liable for amounts deducted from unpaid claims and
future policy benefits relating to reinsurance retroceded. Such amounts may
become liabilities of the Company if reinsurers are unable to meet their
obligations assumed under the various reinsurance agreements.
As of December 31, 1998 and 1997, the Company has ceded blocks of insurance
under reinsurance treaties to provide surplus relief reinsurance and to
diversify risk. These reinsurance transactions represent financing arrangements
and, in accordance with generally accepted accounting principles, are not
reflected in the accompanying financial statements except for the risk fees paid
to or received from reinsurers. Surplus relief assumed has the effect of
reducing future statutory surplus as amounts are recaptured from reinsurers.
Surplus relief ceded has the opposite effect on statutory surplus. During 1997,
the majority of these contracts were terminated.
6. Commitments and Contingent Liabilities
The Company is a party to pending or threatened lawsuits arising from the normal
conduct of its business. Due to the climate in insurance and business
litigation, suits against the Company sometimes include substantial additional
claims, consequential damages, punitive damages and other similar types of
relief. While it is not possible to forecast the outcome of such litigation, it
is the opinion of management that the disposition of such lawsuits will not have
a material adverse effect on the Company's financial position or interfere with
its operations.
F-18
Harbourton Reassurance, Inc.
Notes to Financial Statements (continued)
7. Federal Income Taxes
For the current year, the Company files a separate company federal income tax
return. Valuation allowances of $2,698,000 and $2,788,000 have been recognized
at December 31, 1998 and 1997, respectively. The valuation allowances are
related primarily to the tax benefit of the tax-basis deferred acquisition
costs, net operating loss carryforwards and capital loss carryforwards which
management believes may not be realized in future years. The net operating loss
will begin to expire in 2012.
Significant components of the Company's deferred tax liabilities and assets as
of December 31, 1998 and 1997 are as follows:
1998 1997
-------------------------------
Deferred tax liabilities:
Deferred acquisition costs $ 847,000 $1,710,000
Unrealized investment gain 1,338,000 305,000
Tax over book depreciation 47,000 47,000
Accrued market discount 1,625,000 1,576,000
-------------------------------
Total deferred tax liabilities 3,857,000 3,638,000
Deferred tax assets:
Tax-basis deferred acquisition costs 822,000 822,000
Discounted unpaid loss reserves 405,000 802,000
AMT credit 20,000 -
Net operating loss carryforward 992,000 921,000
Capital loss carryforward 884,000 1,045,000
-------------------------------
Total deferred tax assets 3,123,000 3,590,000
Valuation allowance for deferred assets 2,698,000 2,788,000
-------------------------------
Deferred tax asset, net of valuation
allowance 425,000 802,000
-------------------------------
Net deferred tax liability $3,432,000 $2,836,000
===============================
F-19
Harbourton Reassurance, Inc.
Notes to Financial Statements (continued)
7. Federal Income Taxes (continued)
For 1998, 1997 and 1996, the Company has income tax expense (benefit) from
operations as follows:
1998 1997 1996
--------------------------------------------
Current tax (benefit) $ 12,947 $(1,493,011) $(357,192)
expense
Deferred tax (benefit) (486,626) 2,562,788 (614,034)
expense
--------------------------------------------
Tax (benefit) expense $(473,679) $ 1,069,777 $(971,226)
============================================
The Company's income tax expense attributable to continuing operations differs
from the amount of income tax expense that would result from applying the
federal statutory rates to pretax income from operations due to the following:
1998 1997 1996
--------------------------------------------
Tax at statutory rates $(377,084) $(1,482,203) $ (97,747)
Small life insurance
company
deduction - 1,146,559 (382,858)
Valuation allowance
change (89,455) 2,162,264 (337,000)
Other (7,140) (756,843) (153,621)
--------------------------------------------
Tax (benefit) expense $(473,679) $ 1,069,777 $(971,226)
============================================
8. Capital Stock
Capital stock is divided into shares of Class A (16,000 shares) and Class B
(20,000 shares) outstanding at December 31, 1998 and 1997. The terms of each
class are identical to each other in every respect except that the Board of
Directors of the Company may, subject to restrictions imposed by the Insurance
Code of the State of Delaware (Note 9), declare and pay a dividend on the shares
of one class and not on the shares of the other, or declare and pay a dividend
on the shares of one class which is different in amount from the dividends on
the shares of the other class. Neither class of stock shall have preference
relative to the other class with respect to any distributions of the Company's
assets, whether by dividend or by liquidation.
F-20
Harbourton Reassurance, Inc.
Notes to Financial Statements (continued)
9. Restrictions on Stockholder's Equity
The maximum amount of dividends which can be paid by Delaware insurance
companies to shareholders without prior approval of the Insurance Commissioner
is subject to restrictions relating to statutory capital and surplus and
operating earnings. The maximum dividend payout which may be made without prior
approval in 1999 is limited to 10% of statutory capital and surplus at December
31, 1998. In April 1999, the stockholder filed with the Delaware Insurance
Department seeking approval of an extraordinary dividend of $15 million.
The NAIC prescribes Risk-Based Capital (RBC) requirements for life/health
insurance companies. At December 31, 1998 and 1997, the Company exceeded all
minimum RBC requirements.
10. Fair Values of Financial Instruments
The methods and assumptions used by the Company in estimating "fair value"
disclosures for financial instruments in the accompanying financial statements
and notes thereto are disclosed in Note 3.
Because the Company holds mortgage loans over shorter terms, the estimated fair
value approximates cost.
At December 31, 1998 and 1997, the fair value of other invested assets
approximates carrying value.
F-21
Harbourton Reassurance, Inc.
Notes to Financial Statements (continued)
11. Reconciliation to Statutory Reporting
The following schedule reconciles net income (loss) and stockholder's equity
determined in accordance with generally accepted accounting principles (GAAP) to
net gain (loss) from operations and capital and surplus as determined in
accordance with statutory accounting practices (SAP).
1998 1997 1996
-----------------------------------------------
GAAP net (loss) income $ (635,392) $(5,429,199) $ 683,286
Deferred acquisition costs 2,538,191 988,942 1,195,040
Financial reinsurance (1,153,179) (1,409,796) (2,217,498)
Difference in SAP and GAAP (13,883) 577,872 1,007,079
reserves
Deferred federal income taxes (486,626) 2,562,788 (614,034)
Other 480,384 997,968 (1,198,265)
-----------------------------------------------
Statutory net gain (loss) from
operations $ 729,495 $(1,711,425) $(1,144,392)
===============================================
GAAP stockholder's equity $41,923,866 $41,012,714 $46,222,798
Deferred acquisition costs (1,934,902) (5,029,383) (6,018,325)
Financial reinsurance 1,059,098 2,212,276 3,622,076
Difference in SAP and GAAP (15,482) (1,599) (579,471)
reserves
Deferred federal income tax 3,432,258 2,835,606 (59,395)
Unrealized loss (gain) on (4,163,210) (977,098) (549,770)
securities
Auto loans--nonadmitted (54,730) (141,557) (6,666,310)
Asset valuation reserve (394,397) (266,108) (3,266,305)
Interest maintenance reserve (2,681,198) (3,015,220) (2,270,095)
Other (8,041) (37,778) -
-----------------------------------------------
Statutory capital and surplus $37,163,262 $36,591,853 $30,435,203
===============================================
12. Impact of Year 2000 (Unaudited)
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
F-22
Harbourton Reassurance, Inc.
Notes to Financial Statements (continued)
12. Impact of Year 2000 (Unaudited) (continued)
Based on a recent assessment, the Company determined that it will not be
required to modify or replace significant portions of its software so that its
computer systems will function properly with respect to dates in the year 2000
and thereafter. The Company presently believes that the Year 2000 Issue will
not pose significant operational problems for its computer systems.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own Year 2000 Issues. However, there can be no guarantee that the systems
of other companies on which the Company's systems rely will be timely converted
and would not have an adverse effect on the Company's systems. The Company has
determined it has no exposure to contingencies related to the Year 2000 Issue
for the products it has sold.
The total cost of the Year 2000 project is not expected to be significant.
13. Subsequent Event
The Company's parent, NRG Acquisition Partners L.P., signed a letter of intent
on May 18, 1999, whereby an independent third party would acquire 100% of the
common stock of the Company. The acquisition is contingent upon the parties'
agreement to terms and regulatory approval.
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements are
based on the historical consolidated statements of Scottish and Harbourton,
combined and adjusted to give effect to the acquisition. Certain
reclassifications have been made to the historical financial statements to
conform with this pro forma presentation. These statements should be read in
conjunction with the historical financial statements and notes thereto.
The unaudited pro forma combined condensed statements of operations for the
twelve months ended September 30, 1999 and for the nine months ended September
30, 1999 present the results for Scottish and Harbourton as if the acquisition
occurred at the beginning of each period presented. The accompanying unaudited
pro forma combined condensed balance sheet as of September 30, 1999 gives
effect to the acquisition as of that date.
The pro forma adjustments are based upon preliminary estimates, information
currently available and certain assumptions that management believes are
reasonable under the circumstances. Scottish's actual consolidated financial
statements will reflect the effects of the acquisition on and after the
effective time rather than the dates indicated above. The unaudited pro forma
combined condensed financial statements neither purport to represent what the
combined results of operations or financial condition actually would have been
had the acquisition in fact occurred on the assumed dates, nor to project the
combined results of operations and financial position for any future period.
The acquisition will be accounted for by the purchase method and, therefore,
assets and liabilities of Harbourton will be recorded at their fair values. The
excess of the purchase cost over the fair value of net assets acquired at the
effective time of the acquisition will be recorded as goodwill. Allocations
contained in the pro forma statements are based on analysis which may differ,
perhaps significantly, from final allocations.
F-23
Scottish Annuity & Life Holdings, Ltd
Unaudited Pro Forma Combined Condensed Balance Sheet
September 30, 1999
Harbourton
--------------------------------------------
Adjusted Adjustments Pro Forma
Scottish Historical Adjustments Harbourton Scottish
-----------------------------------------------------------------------------------------
ASSETS (a) (b) (c) (d)=(b)+(c) (e) (f)=(a)+(d)+(e)
Fixed maturity investments $441,646,362 $102,455,723 $(88,594,790)(1) $ 13,860,933 (27,193,728)(7) 428,313,567
Cash and cash equivalents 60,102,596 9,629,338 88,594,790 (1) 98,224,128 158,326,724
Funds withheld by reinsurers 39,783 39,783 39,783
Receivables:
Reinsurance premiums 13,690,867 489,278 489,278 14,180,145
Insurance administration fees 240,940 - - 240,940
Accrued interest 3,662,376 373,695 373,695 4,036,071
Deferred acquisition costs 2,162,459 2,118,857 (2,118,857)(2) - 2,162,459
Segregated assets 458,634 - - 458,634
Other assets 82,272 - 2,274,507 (3) 2,274,507 2,356,779
Goodwill - - - 609,558 (8) 609,558
Current income tax receivable - 196,905 196,905 196,905
Deferred tax asset - - 1,814,354 (4) 1,814,354 1,814,354
Policy Loans - 562,619 562,619 562,619
Net fixed assets and leasholds 821,311 - - 821,311
-----------------------------------------------------------------------------------------
Total assets $522,867,817 $115,866,198 $ 1,970,004 $117,836,202 $(26,584,170) $614,119,849
=========================================================================================
LIABILITIES
Reserves for future policy benefits $283,215,197 $ 2,244,873 $ 2,244,873 $285,460,070
Policyholders deposits - 82,901,707 82,901,707 82,901,707
Segregated liabilities 458,634 - 458,634
Accounts payable and accrued expenses 6,963,962 4,959,207 4,959,207 11,923,169
Deferred tax Liability 2,246,479 2,246,479 2,246,479
-----------------------------------------------------------------------------------------
Total liabilities 290,637,793 92,352,266 - 92,352,266 - 382,990,059
-----------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital, par value $0.01 per share: 170,886 3,600,000 3,600,000 (3,600,000)(9) 170,886
Additional paid in capital 237,617,984 11,400,000 11,400,000 (11,400,000)(9) 237,617,984
Unrealized depreciation on investments (10,210,558) (261,445) 261,445 (5) - (10,210,558)
Retained earnings 4,651,712 8,775,377 1,708,559 (6) 10,483,936 (11,584,170)(10) 3,551,478
-----------------------------------------------------------------------------------------
Total shareholders' equity 232,230,024 23,513,932 1,970,004 25,483,936 (26,584,170) 231,129,790
-----------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $522,867,817 $115,866,198 $ 1,970,004 $117,836,202 $(26,584,170) $614,119,849
=========================================================================================
F-24
See accompanying notes.
Scottish Annuity & Life Holdings, Ltd.
Unaudited Pro Forma Combined Condensed Statement of Operations
For the Twelve Months Ended September 30, 1999
Harbourton
----------------------------------------
Adjusted Adjustments Pro Forma
Scottish Historical Adjustments Harbourton Scottish
--------------------------------------------------------------------------------------
(a) (b) (c) (d)=(b)+(c) (e) (f)=(a)+(d)+(e)
REVENUES
Net premium written $ - $ 324,533 324,533 324,533
Investment income, net 8,272,457 6,753,311 6,753,311 (1,255,884)(12) 13,769,884
Realized losses on securites, net (1,014,444) (631,343) 926,890 (11) 295,547 (718,897)
Insurance administration and variable life
fees 477,885 - - 477,885
--------------------------------------- ----------------------------- -------------
Total revenues 7,735,898 6,446,501 926,890 7,373,391 (1,255,884) 13,853,405
--------------------------------------- ----------------------------- -------------
EXPENSES
Claims and other policy benefits 2,660,664 6,271,826 6,271,826 8,932,490
Acquisition costs and other insurance
expenses 713,958 2,275,540 2,275,540 2,989,498
Operating expenses 1,540,624 750,907 750,907 2,291,531
--------------------------------------- ----------------------------- -------------
Total expenses 4,915,246 9,298,273 - 9,298,273 - 14,213,519
--------------------------------------- ----------------------------- -------------
--------------------------------------- ----------------------------- -------------
Net income before federal income tax 2,820,652 (2,851,772) 926,890 (1,924,882) (1,255,884) (360,114)
--------------------------------------- ----------------------------- -------------
Provision for federal income tax:
Current - 6,063 6,063 6,063
Deferred - (208,536) (208,536) (208,536)
--------------------------------------- ----------------------------- -------------
- (202,473) - (202,473) - (202,473)
--------------------------------------- ----------------------------- -------------
--------------------------------------- ----------------------------- -------------
Net income (loss) $ 2,820,652 $(2,649,299) $926,890 $(1,722,409) $(1,255,884) $ (157,641)
======================================= ============================ =============
--------------------------------------- ----------------------------- -------------
Net operating earnings (loss) $ 3,835,096 $(2,017,956) $ - $(2,017,956) $(1,255,884) $ 561,256
======================================= ============================ =============
EARNINGS PER SHARE
Net income (loss) $ 0.18 $ (0.01)
============== =============
Net operating earnings (loss) $ 0.25 $ 0.04
============== =============
Weighted average shares outstanding 15,537,790 15,537,790
============== =============
See accompanying notes.
F-25
Scottish Annuity & Life Holdings, Ltd.
Unaudited Pro Forma Combined Condensed Statement of Operations
For the Nine Months Ended September 30, 1999
Harbourton
---------------------------------------
Adjusted
Scottish Historical Adjustments Harbourton Adjustments Pro Forma Scottish
-------------------------------------------------------------------------------------
(a) (b) (c) (d)=(b)+(c) (e) (f)=(a)+(d)+(e)
REVENUES
Net premium written $ - $ 195,639 $ 195,639 $ 195,639
Investment income, net 7,145,693 5,619,266 5,619,266 (1,140,919) (12) 11,624,040
Realized losses on securites, net (1,014,444) (926,890) 926,890 (11) - (1,014,444)
Insurance administration and variable life
fees 267,999 - - 267,999
-------------------------------------- ------------------------ ------------
Total revenues 6,399,248 4,888,015 926,890 5,814,905 (1,140,919) 11,073,234
-------------------------------------- ------------------------ ------------
EXPENSES
Claims and other policy benefits 2,660,664 3,916,900 3,916,900 6,577,564
Acquisition costs and other insurance
expenses 713,958 369,533 369,533 1,083,491
Operating expenses 759,525 1,179,246 1,179,246 1,938,771
-------------------------------------- ------------------------ ------------
Total expenses 4,134,147 5,465,679 - 5,465,679 - 9,599,826
-------------------------------------- ------------------------ ------------
-------------------------------------- ------------------------ ------------
Net income before federal income tax 2,265,101 (577,664) 926,890 349,226 (1,140,919) 1,473,408
-------------------------------------- ------------------------ ------------
Provision for federal income tax:
Current - 15,000 15,000 15,000
Deferred - 364,396 364,396 364,396
-------------------------------------- ------------------------ ------------
- 379,396 - 379,396 - 379,396
-------------------------------------- ------------------------ ------------
-------------------------------------- ------------------------ ------------
Net income (loss) $ 2,265,101 $ (957,060) $926,890 $ (30,170) $(1,140,919) $ 1,094,012
====================================== ======================== ============
-------------------------------------- ------------------------ ------------
Net operating earnings (loss) $ 3,279,545 $ (30,170) $ - $ (30,170) $(1,140,919) $ 2,108,456
====================================== ======================== ============
EARNINGS PER SHARE
Net income (loss) $ 0.12 $ 0.06
=========== ============
Net operating earnings (loss) $ 0.18 $ 0.11
=========== ============
Weighted average shares outstanding 18,487,447 18,487,447
=========== ===========
See accompanying notes.
F-26
Scottish Annuity & Life Holdings, Ltd.
Notes to the Unaudited Pro Forma Combined Condensed Financial Statements
September 30, 1999
(1) Represents the disposition of fixed maturity investments prior to the
acquisition.
(2) Represents the elimination of Harbourton's intangible asset of deferred
acquisition costs.
(3) Represents the present value of estimated net future cash flows of
Harbourton.
(4) Represents the realizability of a deferred tax asset upon the acquisition
of Harbourton (excluding capital losses).
(5) Represents the realization of unrealized depreciation upon the acquisition
of Harbourton.
(6) Represents the effects of adjustments to the deferred tax asset, other
assets, and the realization of unrealized depreciation.
(7) Represents payments relating to the acquisition, including the purchase
price and adjustments for foregone investment income.
(8) Represents the excess of purchase price (including acquisition costs) over
the fair value of the net assets acquired.
(9) To eliminate Harbourton's capital stock and shareholders' equity.
(10) To eliminate Harbourton's retained earnings and represent foregone
investment income due the payment of the price of the acquisition.
(11) Represents the elimination of Harbourton's non recurring net realized
losses on investments. These resulted from the liquidation of certain
portfolio investments prior to the acquisition.
(12) Represents foregone investment income due to the disposition of portfolio
investments used for the Harbourton acquisition.
F-27