<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2000
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition period from ____ to ______
Commission File Number 0-29788
SCOTTISH ANNUITY & LIFE HOLDINGS, LTD.
(Exact Name of Registrant as Specified in Its Charter)
Cayman Islands Not Applicable
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
P.O. Box 10657 APO
Grand Pavilion Commercial Centre
802 West Bay Road
George Town, Grand Cayman
Cayman Islands, British West Indies Not Applicable
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (345) 949-2800
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of August 10, 2000, Registrant had 15,751,740 Ordinary Shares outstanding.
================================================================================
<PAGE>
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets - June 30, 2000
(Unaudited) and December 31, 1999 (note 1) 2
Condensed Consolidated Statements of Income - Three and
Six Months Ended June 30, 2000 (Unaudited) and the Three
and Six Months Ended June 30, 1999 (Unaudited) 3
Condensed Consolidated Statements of Comprehensive Income
(Loss) - Three and Six Months Ended June 30, 2000
(Unaudited) and the Three and Six Months Ended June 30,
1999 (Unaudited) 4
Condensed Consolidated Statements of Shareholders' Equity
- Six Months Ended June 30, 2000 (Unaudited) and the Six
Months Ended June 30, 1999 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows - Six
Months Ended June 30, 2000 (Unaudited) and the Six
Months Ended June 30, 1999 (Unaudited) 6
Notes to the Condensed Consolidated Financial Statements
(Unaudited) 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANAYLSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19
PART II OTHER INFORMATION
ITEM 1 through ITEM 4 20
ITEM 5 and ITEM 6 21
SIGNATURES 22
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Scottish Annuity & Life Holdings, Ltd.
Condensed Consolidated Balance Sheets
(Stated in United States Dollars)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
(unaudited) (note 1)
------------------------------------
<S> <C> <C>
ASSETS
Fixed maturity investments $ 515,385,268 $ 546,806,744
Cash and cash equivalents 85,977,876 29,000,653
Receivables:
Reinsurance 61,399,402 298,295
Risk fees 659,235 861,552
Due from investment brokers 106,337 109,891
Accrued interest 5,406,103 5,554,355
Policy loans 487,484 536,420
Deferred acquisition costs 16,267,320 1,919,528
Present value of inforce business 10,801,659 10,619,599
Other assets 744,678 740,116
Other intangible assets 7,876,057 200,000
Deferred tax benefit 2,588,077 2,218,077
Current income tax receivable 100,934 196,905
Net fixed assets and leasehold improvements 1,981,733 1,026,820
Segregated assets 284,043,173 256,545,532
------------------------------------
Total assets $ 993,825,336 $ 856,634,487
====================================
LIABILITIES
Reserves for future policy benefits $ 474,462,796 $ 365,478,762
Accounts payable and accrued expenses 8,573,317 4,347,648
Due to related party 5,288,302 11,601,464
Segregated liabilities 284,043,173 256,545,532
------------------------------------
Total liabilities 772,367,588 637,973,406
------------------------------------
------------------------------------
MINORITY INTEREST $ 2,752,916 -
------------------------------------
SHAREHOLDERS' EQUITY
Share capital, par value $0.01 per share:
Issued and fully paid: 15,803,340 ordinary shares as of
June 30, 2000 and 16,046,740 as of December 31, 1999 158,033 160,467
Additional paid in capital 225,529,303 227,534,287
Accumulated other comprehensive loss -
Unrealized depreciation on investments (16,447,571) (15,684,732)
Retained earnings 9,465,067 6,651,059
------------------------------------
Total shareholders' equity 218,704,832 218,661,081
------------------------------------
Total liabilities and shareholders' equity $ 993,825,336 $ 856,634,487
====================================
</TABLE>
See notes to the condensed consolidated financial statements
-2-
<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Condensed Consolidated Statements of Income
(Stated in United States Dollars)
Unaudited
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
ended June ended June ended June ended June
30, 2000 30, 1999 30, 2000 30, 1999
----------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Net premiums & reinsurance fees $ 3,586,930 $ - $ 3,619,303 $ -
Investment income, net 11,331,710 4,124,756 21,096,848 7,446,008
Realized losses on securities, net (16,968) (518,911) (144,625) (1,482,824)
Insurance administration and variable fees 539,483 250,496 989,055 476,280
----------------------------------------------------------------
Total revenues 15,441,155 3,856,341 25,560,581 6,439,464
BENEFITS & EXPENSES
Claims and other policy benefits 7,355,873 319,666 12,631,476 319,666
Acquisition costs and other
insurance expenses 3,106,770 733,537 4,220,947 1,222,001
Operating expenses 3,027,808 612,330 4,667,176 1,089,863
----------------------------------------------------------------
Total benefits & expenses 13,490,451 1,665,533 21,519,599 2,631,530
----------------------------------------------------------------
Net income before provision for federal income taxes $ 1,950,704 $ 2,190,808 $ 4,040,982 $ 3,807,934
----------------------------------------------------------------
PROVISION FOR FEDERAL INCOME TAXES
Current - - - -
Deferred (429,627) - (370,000) -
----------------------------------------------------------------
(429,627) - (370,000) -
----------------------------------------------------------------
Net income $ 2,380,331 $ 2,190,808 $ 4,410,982 $ 3,807,934
================================================================
Earnings per share, basic and diluted $ 0.15 $ 0.12 $ 0.28 $ 0.21
================================================================
Dividends declared per share $ 0.05 $ 0.05 $ 0.10 $ 0.05
================================================================
</TABLE>
See notes to the condensed consolidated financial statements
-3-
<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Stated in United States Dollars)
Unaudited
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
ended June ended June ended June ended June
30, 2000 30, 1999 30, 2000 30, 1999
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 2,380,331 $ 2,190,808 $ 4,410,982 $ 3,807,934
Other comprehensive income (loss), net of taxes
Unrealized depreciation on investments:
Unrealized holding depreciation arising
during the period (605,234) (5,822,824) (907,464) (9,509,978)
Add: reclassification adjustment for
losses included in net income 16,968 518,911 144,625 1,482,824
----------------------------------------------------------------
Unrealized depreciation on investments (588,266) (5,303,913) (762,839) (8,027,154)
----------------------------------------------------------------
Comprehensive income (loss) $ 1,792,065 $ (3,113,105) $ 3,648,143 $ (4,219,220)
================================================================
</TABLE>
See notes to the condensed consolidated financial statements
-4-
<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Condensed Consolidated Statements of Shareholders' Equity
(Stated in United States Dollars)
Unaudited
<TABLE>
<CAPTION>
Six Months Six Months
ended June ended June
30, 2000 30, 1999
------------------------------
<S> <C> <C>
SHARE CAPITAL:
Beginning of period $ 160,467 $ 185,684
Repurchase of shares (2,434) -
Sales to direct investors - 80
------------------------------
158,033 185,764
------------------------------
ADDITIONAL PAID-IN CAPITAL:
Beginning of period 227,534,287 252,291,320
Repurchase of shares (2,016,872) -
Sales to direct investors - 87,920
Issuance of equity options 11,888 75,488
------------------------------
225,529,303 252,454,728
------------------------------
ACCUMULATED OTHER COMPREHENSIVE LOSS:
Beginning of period (15,684,732) (853,146)
Unrealized depreciation on investments (762,839) (8,027,153)
------------------------------
(16,447,571) (8,880,299)
------------------------------
RETAINED EARNINGS:
Beginning of period 6,651,059 436,321
Net income 4,410,982 3,807,934
Dividends paid (1,596,974) (928,822)
------------------------------
9,465,067 3,315,433
------------------------------
TOTAL SHAREHOLDERS' EQUITY $ 218,704,832 $ 247,075,626
==============================
</TABLE>
See notes to the condensed consolidated financial statements
-5-
<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Condensed Consolidated Statements of Cash Flows
(Stated in United States Dollars)
Unaudited
<TABLE>
<CAPTION>
Six Months Six Months
ended June ended June
30, 2000 30, 1999
----------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,410,982 $ 3,807,934
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Net realized losses on securities 144,625 1,482,825
Non cash salaries and professional fees 11,888 163,488
Depreciation 162,239 27,633
Amortization of deferred acquisition costs 1,476,198 24,014
Amortization of PVIF 33,600 -
Net change in policy benefit reserves 11,067,616 -
Changes in assets and liabilities:
Reinsurance receivables (61,101,107) (102,663,907)
Risk fees 202,317 -
Policy loans 48,936 -
Other receivables 174,390 2,321,932
Deferred acquisition costs (15,823,990) (1,798,656)
Present value of inforce business (215,660) -
Other assets (4,562) 104,296
Deferred tax benefit (370,000) -
Current income tax receivable 95,971 -
Accounts payable and accrued expenses 4,223,169 (1,166,520)
Due to related party (6,563,162) (326,900)
---------------------------------
Net cash provided by (used in) operating activities (62,026,550) (98,023,861)
---------------------------------
INVESTING ACTIVITIES
Purchase of securities (82,010,108) (470,629,087)
Proceeds on sales of securities 112,753,337 399,993,389
Acquisition of majority interest in subsidiary
net of cash acquired 256,531 -
Purchase of intangible assets (5,178,973) -
Purchase of fixed assets & leasehold improvements (1,117,152) (579,964)
---------------------------------
Net cash provided by (used in) investing activities 24,703,635 (71,215,662)
---------------------------------
FINANCING ACTIVITIES
Deposits to insurance accounts 114,563,046 104,027,579
Withdrawals from insurance accounts (16,646,628) -
Net cost of repurchase of company stock (2,019,306) -
Dividends paid (1,596,974) (928,822)
---------------------------------
Net cash provided by financing activities 94,300,138 103,098,757
---------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 56,977,223 (66,140,766)
Cash and cash equivalents, beginning of period 29,000,653 69,610,299
---------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 85,977,876 $ 3,469,533
=================================
</TABLE>
See notes to the condensed consolidated financial statements
-6-
<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
June 30, 2000
1. Basis of presentation
Accounting Principles - The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles ("GAAP") for and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. The
results for the period are not necessarily indicative of the results to be
expected for the entire year.
The comparative consolidated balance sheet as of December 31, 1999 has been
derived from the audited consolidated financial statements for the period ended
December 31, 1999.
For further information, refer to the consolidated financial statements and
footnotes included in our annual report on Form 10-K for the period ended
December 31, 1999.
We have reclassified some figures from our 1999 financial statements to conform
with our 2000 presentation. These reclassifications had no effect on net income
or shareholders'equity as previously reported.
2. Minority Interest
During the quarter, we acquired a majority holding in Scottish Crown Group
(Bermuda) Ltd. No amount of the resulting minority interest is held in preferred
shares and therefore, we have no dividend requirement in relation to this
minority interest.
-7-
<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
June 30, 2000 (continued)
3. Earnings per ordinary share
Basic earnings per share ("EPS") excludes the dilutive effect of options and
warrants. Diluted EPS includes the dilutive effect of these securities using
the treasury stock method. The weighted-average number of shares is calculated
by weighting how long the shares have been outstanding over the accounting
period.
The dilutive impact of our warrants and options is not material and therefore,
has no effect on EPS.
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 2,380,331 $ 2,190,808 $ 4,410,982 $ 3,807,934
Denominator:
Denominator for basic earnings per share -
Weighted average number of shares 15,986,037 18,576,440 16,016,388 18,574,981
Effect of dilutive securities-
Stock options 16,741 - 12,761 -
Denominator for dilutive earnings per share 16,002,778 18,576,440 16,029,149 18,574,981
Basic earnings per ordinary share $ 0.15 $ 0.12 $ 0.28 $ 0.21
Diluted earnings per share $ 0.15 $ 0.12 $ 0.28 $ 0.21
Actual shares outstanding 15,803,340 18,576,440 15,803,340 18,576,440
</TABLE>
-8-
<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
June 30, 2000 (continued)
4. Segment Reporting
Income from insurance operations is split into three lines of business:
traditional reinsurance, non-traditional reinsurance (previously called
reinsurance) and variable products.
The segment reporting for the lines of business is as follows:
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
ended June 30, ended June 30, ended June 30, ended June 30,
2000 1999 2000 1999
----------------------------------------------------------------
REVENUES FROM EXTERNAL CUSTOMERS
<S> <C> <C> <C> <C>
Variable products $ 539,483 $ 250,495 $ 989,055 $ 476,280
Traditional reinsurance 1,490,642 - 1,490,642 -
Non-traditional reinsurance 11,380,399 612,372 18,623,945 934,872
Other 2,030,631 2,993,474 4,456,939 5,028,312
----------------------------------------------------------------
Total $ 15,441,155 $ 3,856,341 $ 25,560,581 $ 6,439,464
================================================================
NET INCOME BY SEGMENT
Variable products $ 427,582 $ 199,115 $ 779,898 $ 353,778
Traditional reinsurance 484,621 - 139,957 -
Non-traditional reinsurance 2,465,305 (389,451) 3,599,770 (250,066)
Other (997,177) 2,381,144 (108,643) 3,704,222
----------------------------------------------------------------
Total $ 2,380,331 $ 2,190,808 $ 4,410,982 $ 3,807,934
================================================================
ASSETS BY SEGMENT June 30, December 31,
2000 1999
------------------------------
Variable products $ 295,568,525 $ 268,174,719
Traditional reinsurance 5,616,327 -
Non-traditional reinsurance 510,289,650 407,057,362
Other 182,350,834 181,402,406
------------------------------
Total $ 993,825,336 $ 856,634,487
==============================
</TABLE>
-9-
<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
June 30, 2000 (continued)
5. Stock Option Plans
The Company has two stock option plans (the "1998 Plan" and the "1999 Plan")
which allow us to grant non-statutory options, subject to certain restrictions,
to certain eligible employees, non-employee Directors, advisors and consultants.
The minimum exercise price of the options will be equal to the fair market
value, as defined in the plans, of our ordinary shares at the date of grant. The
term of the options shall not be more than ten years from the date of grant.
Unless otherwise provided in the option agreement, the options shall become
exercisable in three equal annual installments, commencing on the first
anniversary of the grant date.
Option activity under the 1998 Plan is as follows:
<TABLE>
<CAPTION>
Weighted average
exercise
Options available Number of price of options
for grant options outstanding
------------------------------------------------------------
<S> <C> <C> <C>
Balance May 12, 1998* - - -
Authorized 1,600,000 - -
Granted (1,070,000) 1,070,000 $ 15.0000
Exercised - - -
Cancelled - - -
----------------- ---------------- ---------------
Balance December 31, 1998 530,000 1,070,000 $ 15.0000
Authorized - - -
Granted (545,600) 545,600 $ 15.0000
Exercised - - -
Cancelled 233,333 (233,333) $ 15.0000
----------------- ---------------- ---------------
Balance December 31, 1999 217,733 1,382,267 $ 15.0000
Authorized - - -
Granted (400,000) 400,000 (1) $ 7.7500
Exercised - - -
Cancelled 500,000 (500,000)(2) $ 15.0000
----------------- ---------------- ---------------
Balance June 30, 2000 317,733 1,282,267 $ 12.7384
================= ================ ===============
</TABLE>
* Date of incorporation
(1) 400,000 options granted to Scott Willkomm upon execution of employment
agreement.
(2) 300,000 cancelled upon the resignation of Peter Presperin and 200,000
cancelled upon the resignation of Henryk Sulikowski.
75,000 options were granted to Larry Stern as of August 1, 2000 upon execution
of employment agreement at an exercise price of $8.75.
-10-
<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
June 30, 2000 (continued)
5. Stock Option Plans (continued)
Option activity under the 1999 Plan is as follows:
<TABLE>
<CAPTION>
Weighted
average exercise
Options price
available for Number of of options
grant options outstanding
------------------------------------------------------------
<S> <C> <C> <C>
Balance December 31, 1998 - - -
Authorized 750,000 - -
Granted (325,000) 325,000 $ 8.0625
Exercised - - -
Cancelled - - -
------------- --------- ---------------
Balance December 31, 1999 425,000 325,000 $ 8.0625
Authorized - - -
Granted (62,500) 64,500 (1) $ 7.7240
Exercised - - -
Cancelled 120,000 (120,000) (2) $ 8.0625
------------- --------- ---------------
Balance June 30, 2000 482,500 269,500 $ 7.9835
============= ========= ===============
</TABLE>
(1) 62,500 options granted to new employees of Scottish Re (U.S.), Inc., having
a term of 7 years and 2,000 shares granted to new employees of Scottish
Annuity & Life Insurance Company (Cayman) Ltd. having a term of 10 years.
(2) 120,000 options cancelled upon the resignation of Henryk Sulikowski.
-11-
<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
June 30, 2000 (continued)
5. Stock Option Plans (continued)
In addition to the Company's stock option plans, 750,000 options were authorized
to be issued to new employees of Scottish Re (U.S.), Inc., our U.S. operations,
by the Board of Directors at an exercise price to be determined on the date of
the grant. The term of the options are seven years from the date of grant. The
options are exercisable in three equal annual installments, commencing on the
first anniversary of the grant date. Options have been granted to new
employees of our U.S. operations, pursuant to a resolution of the Board of
Directors, at an exercise price equal to the fair market value of our ordinary
shares at the date of the grant. The options that have been granted are
reflected in the chart below.
<TABLE>
<CAPTION>
Exercise price
Options available Number of of options
for grant options outstanding
------------------------------------------------------------------
<S> <C> <C> <C>
Balance December 31, 1998 - - -
Authorized 750,000 - -
Granted (586,000) 586,000 $8.1117
Exercised - - -
Cancelled - - -
--------------- --------- ------------
Balance December 31, 1999 164,000 586,000 $8.1117
Authorized - - -
Granted (157,000) 157,000 $8.2325
Exercised - - -
Cancelled - - -
--------------- --------- ------------
Balance June 30, 2000 7,000 743,000 $8.1367
=============== ========= ============
</TABLE>
Summarizing the information above, the company has authorized a total of
3,100,000 options. Of those authorized, 2,369,767 have been granted, leaving
730,233 available for grant. The average exercise price of all options granted
is $10.6286.
-12-
<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Scottish Annuity & Life Holdings, Ltd. ("Scottish Holdings", "we", "us", "our",
or "the Company") completed its initial public offering ("IPO") on November 30,
1998. Our principal assets include the direct or indirect ownership of Scottish
Annuity & Life Insurance Company (Cayman) Ltd. ("Scottish Insurance"), Scottish
Holdings, Inc., Scottish Holdings (Barbados) Limited, Scottish Re (U.S.), Inc.
("Scottish Re") (formerly Harbourton Reassurance, Inc.), The Scottish Annuity
Company (Cayman) Ltd. ("Scottish Annuity"), and a 50.01% share of Scottish Crown
Group (Bermuda) Limited ("Scottish Crown"). Scottish Insurance was formed in
1998 as an offshore company principally to provide reinsurance of life and
annuity products and to issue customized variable life insurance products to
high net worth individuals and families. Scottish Annuity provides customized
variable annuity products to high net worth individuals and families. Scottish
Re, a Delaware insurance company, which is licensed in 15 states and admitted as
a reinsurer in an additional 13 states, provides us with a U.S. based platform
to provide reinsurance products. Scottish Crown was formed to provide customized
variable life and annuity insurance products to high net worth individuals and
families.
-13-
<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Overview
Three months ended June 30, 2000 compared to the three months ended June 30,
----------------------------------------------------------------------------
1999
----
Our net income for the second quarter of $2,380,331 or $0.15 per share was
driven by revenues from our investment portfolio, reinsurance operations, and
insurance administration fees. Net income, when compared to the second quarter
of the prior year, changed primarily due to the following factors: (1) Net
premiums and reinsurance fees increased from $0 to approximately $3.6 million as
a result of new reinsurance transactions, (2) Net investment income increased
from approximately $4.1 million to $11.3 million as a result of invested assets
from reinsurance growing from $0 to over $450 million, (3) Net realized losses
on securities in the second quarter of 1999 of approximately $519,000 were
primarily due to portfolio restructuring, whereas no restructuring was done in
the second quarter of 2000, (4) Insurance administration and variable life fees
increased from approximately $250,000 to $540,000 due primarily to increases in
variable account balances and the purchase of Scottish Annuity, resulting in
100% of the fee income reverting to us, (5) Claims and other policy benefits
were approximately $320,000 in the first quarter 1999 and approximately $7.4
million in the second quarter 2000 as a result of new reinsurance treaties, (6)
Acquisition costs and other insurance expenses increased from approximately
$734,000 to $3.1 million and operating expenses increased from approximately
$612,000 to $3.0 million as a result of increased reinsurance activity and the
implementation of our U.S. reinsurance operations through Scottish Re. Of these
expenses, $900,000 consisted of non-recurring employee expenses related to four
employees, including severance, recruiting and relocation expenses and (7) As a
result of losses on a tax basis in Scottish Re, the deferred tax asset increased
by approximately $430,000.
-14-
<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Six months ended June 30, 2000 compared to the six months ended June 30, 1999
-----------------------------------------------------------------------------
Our net income for the first six months of 2000 of $4,410,982 or $0.28 per share
was driven by revenues from our investment portfolio, reinsurance operations,
and insurance administration fees. Net income, when compared to first six months
of the prior year, changed primarily due to the following factors: (1) Net
premiums and reinsurance fees increased from $0 to approximately $3.6 million as
a result of new reinsurance transactions, (2) Net investment income increased
from approximately $7.4 to $21.1 million as a result of invested assets from
reinsurance growing from $0 to over $450 million, (3) Net realized losses on
securities in the first six months of 1999 of approximately $1.4 million were
primarily due to portfolio restructuring, whereas no restructuring was done in
the first six months of 2000, (4) Insurance administration and variable life
fees increased from approximately $475,000 to $990,000 due primarily to
increases in variable account balances and the purchase of Scottish Annuity,
resulting in 100% of the fee income reverting to us, (5) Claims and other policy
benefits were approximately $320,000 in the first six months of 1999 and
approximately $12.6 million in the first six months of 2000 as a result of new
reinsurance treaties and (6) Acquisition costs and other insurance expenses
increased from approximately $1.2 to $4.2 million and operating expenses
increased from approximately $1.1 to $4.6 million as a result of increased
reinsurance activity and the implementation of our U.S. reinsurance operations
through Scottish Re. Of these expenses, $900,000 consisted of non-recurring
employee expenses related to four employees, including severance, recruiting and
relocation expenses.
Three months ended June 30, 2000 compared to the three months ended March 31,
-----------------------------------------------------------------------------
2000
----
Our net income for the second quarter of 2000 of $2,380,331 or $0.15 per share
increased from $2,030,651 or $0.13 per share in the first quarter of 2000. The
increase in income was primarily due to the following factors: (1) Net premiums
and reinsurance fees increased from approximately $32,000 to approximately $3.6
million as a result of new reinsurance transactions, (2) Net investment income
increased from approximately $9.8 to $11.3 million as a result of invested
assets from reinsurance growing from $350 to over $450 million, (3) Insurance
administration and variable life fees increased from approximately $450,000 to
$540,000 due to increases in variable account balances, (4) Claims and other
policy benefits were approximately $5.2 million in the first quarter of 2000 and
approximately $7.3 million in the second quarter of 2000 as a result of new
reinsurance treaties and (6) Acquisition costs and other insurance expenses
increased from approximately $1.1 to $3.1 million and operating expenses
increased from approximately $1.6 to $3.0 million as a result of increased
reinsurance transactions. Of the expenses in the second quarter, $900,000
consisted of non-recurring employee expenses related to four employees,
including severance, recruiting and relocation expenses.
-15-
<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Investments
Our investment portfolio is managed by two professional investment managers,
General Re - New England Asset Management, Inc. and Prudential Investment
Corporation. Our investment guidelines are designed to diversify the portfolio
to maximize investment income while minimizing risk. At June 30, 2000, the
portfolio had an average quality rating of AA, an average duration of 2.42 years
and an average book yield of 6.96%. This compares with an average quality rating
of AA, an average duration of 2.98 years and an average book yield of 6.79%
respectively at December 31, 1999. A realized loss of $144,625 and net
unrealized depreciation of $762,839 were recognized on investments during the
first six months. A realized loss of $16,968 and net unrealized depreciation of
$588,266 were recognized on investments during the second quarter.
Insurance Operations
Our business consists of three lines of business: traditional, non-traditional
and variable products. Our results reflected revenues from these lines of
business. Since January 1, 2000, in the non-traditional line, we closed on three
reinsurance transactions, that have generated approximately $100 million of
assumed reserves and are expected to generate an additional $50 million of
assumed reserves by year end 2000. As these transactions represent the
assumption of existing reserves for past sales of the ceding company, we account
for the initial assumption on the balance sheet only. Future operations will
include the renewal premiums, benefits and underwriting expense including the
amortization of the acquisition costs related to the initial assumptions. One
treaty was effective February 15th, the others were effective April 1, 2000. In
the traditional life line in the second quarter, we collected approximately $1.5
million of premium on traditional life reinsurance. As of June 30, 2000 we
reinsure approximately $1 billion of life coverage on 25,000 lives. The average
benefit coverage per life is $40,000 and the maximum retention on any one life
is $1 million. Since the beginning of the second quarter, we have signed 5
binders for traditional life reinsurance. These binders and the closed
transactions are expected to create approximately $10 billion of life
reinsurance volume and $14 million of collected premium during 2000. However, no
assurance can be given that these expectations can be achieved. In the variable
products line, we received $9 million of deposits from variable life sales in
the quarter, and subsequently have received an additional $16 million of
deposits.
In addition, Scottish Insurance entered into a joint venture with Crown Capital
Investors, LLC, a Delaware limited liability company ("Crown") to form Scottish
Crown. Scottish Insurance paid $5.25 million for its share of Scottish Crown.
Scottish Crown will provide customized variable life and annuity insurance
products to high net worth individuals and families. Scottish Crown owns two
Bermuda licensed insurance companies, and has a 10 year exclusive distribution
agreement with Crown World Services Ltd., a Bermuda company.
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<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Capital Resources and Liquidity
At June 30, 2000, total capitalization was $218,947,132. We have no material
commitments for capital expenditures and do not anticipate incurring material
indebtedness other than letters of credit or lines of credit, which may be
required in the ordinary course of our reinsurance business.
During the first six months of 2000, we paid a dividend of $0.05 per share, or
$802,337 to shareholders of record as of March 6, 2000, and a dividend of $0.05
per share, or $794,637 to shareholders of record as of June 6, 2000.
Through June 30, 2000 we repurchased 243,400 shares for $2,026,204 (average
price of $8.33 per share), and through August 10, 2000 we have repurchased an
additional 51,600 shares, resulting in an aggregate repurchase to date of
295,000 shares for $2,487,462 (average price of $8.43 per share) under a program
authorized by the Board on April 6, 2000 to repurchase up to $20 million of
outstanding shares.
We expect that our cash and investments, together with cash generated from our
businesses, will provide sufficient sources of liquidity and capital to meet our
needs for the next several years. In addition, we have access to a combined $70
million through available lines and letters of credit, of which approximately
$15.5 million is currently being utilized under a letter of credit in support of
our non-traditional reinsurance business.
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<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Forward Looking Statements
Some of the statements contained in this report are not historical facts and are
forward-looking within the meaning of the Private Securities Litigation Reform
Act. Forward-looking statements involve known and unknown risks, uncertainties
and other factors, which may cause the actual results to differ materially from
the forward-looking statements. When used, the words "may", "will", "expect",
"anticipate", "continue", "estimate", "project", "plan", "intend" and similar
expressions identify forward-looking statements. These forward-looking
statements involve risks and uncertainties including, but not limited to, the
following: our ability to execute the business plan; changes in the general
economic conditions including the performance of the financial markets and
interest rates; changes in insurance regulations or taxes; changes in rating
agency policy; the loss of key executives; trends in the insurance and
reinsurance industries; government regulations; trends that may affect our
financial condition or results of operations; and the declaration and payment of
dividends. Potential investors are cautioned that any forward-looking
statements are not guarantees of future performance and are subject to risks and
uncertainties. Actual results may differ materially from those included within
the forward-looking statements as a result of various factors. Factors that
could cause or contribute to such differences include, but are not limited to,
those described under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and under the heading "Risk
Factors of Investing in our Ordinary Shares" set forth in our Annual Report on
Form 10-K filed with the Securities and Exchange Commission. We assume no
obligation to update any forward-looking statement to reflect actual results or
changes in or additions to the factors affecting such forward-looking
statements.
-18-
<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Risk Factors of Investing in Our Ordinary Shares
Investing in our Ordinary Shares involves a high degree of risk. Prior to
investing in the Ordinary Shares, potential investors should consider carefully
the risk factors set forth in our Annual Report on Form 10-K filed with the
Securities and Exchange Commission, in addition to the other information set
forth in this Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes since December 31, 1999. Please refer to
"Item 7A: Quantitative and Qualitative Disclosures About Market Risk" in our
Annual Report on Form 10-K.
-19-
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not currently involved in any litigation or arbitration.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Default Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Securities Holders
The 2000 Annual Meeting of Shareholders of the Company was held on June 7, 2000.
The following items of business were presented to the shareholders of the
Company (the "Shareholders"):
Election of Directors
The two directors were elected as proposed in the Proxy Statement dated May
1, 2000 under the caption titled "Proposal for Election of Directors" as
follows:
Total Vote Total Vote
For Withheld From
Name Each Director Each Director
---- ------------- -------------
Michael Austin 11,683,497 288,700
Scott E. Willkomm 11,685,197 287,000
Ratification of Independent Auditors
The selection by the Board of Directors, upon the recommendation of the
Audit Committee, of Ernst & Young as the independent auditors for the Company
for the fiscal year ending December 31, 2000 was ratified by the Shareholders by
a vote of 11,711,442 for ratification, 257,755 against, and 3,000 abstaining.
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<PAGE>
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Except as otherwise indicated, the following Exhibits are filed herewith and
made a part hereof:
Exhibit
Number Description of Document
------ -----------------------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
(1) The Company filed a Report on Form 8-K on January 18, 2000
to report that the Company acquired all of the issued and
outstanding shares of common stock of The Scottish Annuity
Company (Cayman) Ltd.
(2) The Company filed a Report on Form 8-K/A on March 20, 2000
to file the financial statements of The Scottish Annuity
Company (Cayman) Ltd. and the Pro Forma Combined Condensed
Financial Statements.
-21-
<PAGE>
SIGNATURES
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, thereunto duly authorized.
SCOTTISH ANNUITY & LIFE HOLDINGS, LTD.
Date: August 10, 2000 By: /s/ Michael C. French
----------------------------------------------
Michael C. French
Chief Executive Officer
Date: August 10, 2000 By: /s/ Bruce J. Crozier
----------------------------------------------
Bruce J. Crozier
Senior Vice President-Chief Financial Officer
and Secretary (Principal Financial Officer and
Principal Accounting Officer)
-22-
<PAGE>
EXHIBIT INDEX
EXHIBIT
SEQUENTIAL
NUMBER
PAGE NO. DESCRIPTION OF DOCUMENT
-------- -----------------------
27.1 Financial Data Schedule
-23-
