We currently lease office space in Hamilton, Bermuda where our executive and principal offices are located and in Charlotte, North Carolina, George Town, Grand Cayman, Dallas, Texas and Windsor, England. Our life reinsurance business operates out of the Bermuda, Grand Cayman, Charlotte and Windsor offices while our wealth management business operates out of the Grand Cayman office. The Bermuda and Dallas leases expire in 2005, the Grand Cayman lease expires in 2006, the Charlotte lease expires in 2012 and the Windsor lease expires in 2023.
The following selected financial data should be read in conjunction with the Consolidated Financial Statements, including the related Notes, and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Consolidated balance sheet data as of December 31, 2001 reflect the acquisition of Scottish Re Holdings Limited, but consolidated statements of income data for the periods ended December 31, 2001, 2000 and 1999 and consolidated balance sheet data as of December 31, 1999 and 2000 do not reflect the results of Scottish Re Holdings Limited, as the transaction was completed at the close of business on December 31, 2001. Consolidated balance sheet data as of December 31, 2003 reflect the acquisition of ERC Life, but consolidated statement of income data for the years ended December 31, 1999 to December 31, 2002 and consolidated balance sheet data as of December 31, 1999 to 2002 do not reflect the acquisition of ERC Life, as the transaction was completed on December 22, 2003. Consolidated statement of income data for the year ended December 31, 2003 includes net income of $1.2 million in respect of ERC Life.
On December 22, 2003, we completed the acquisition of 95% of the outstanding capital stock of ERC Life Reinsurance Corporation, which we refer to as ERC Life, for $151 million in cash, subject to certain closing adjustments. ERC Life was a subsidiary of General Electric's Employers Reinsurance Corporation, which we call GE ERC, and was one of the companies through which GE ERC conducted life reinsurance business in the United States. ERC Life's business consists primarily of a closed block of traditional life reinsurance with a face amount of $155.6 billion. At the date of acquisition, ERC Life had $1.4 billion in total assets. GE ERC has agreed to administer the business of ERC Life for a fixed monthly fee for up to nine months from the date of acquisition and to assist with the transition of the business to Scottish Re's systems. No GE ERC employees will transfer to Scottish Re. The transaction has increased the number of lives reinsured in North America from approximately 2.1 million to approximately 6.2 million and has increased our gross face amount of in-force business in North America from approximately $119.4 billion to approximately $275.0 billion. ERC Life is rated "A- (excellent)" by A.M. Best Company, which is the fourth highest of sixteen rating levels.
Our premiums earned are recorded in accordance with information received from our ceding companies, or are estimated where this information is not current with the reporting period. These premium estimates are based on historical experience as adjusted for current treaty terms and other information. Actual results could differ from these estimates. Management monitors actual experience, and should circumstances warrant, will revise its estimates of premiums earned.
Present value of in-force business is established upon the acquisition of a subsidiary and is amortized over the expected life of the business at the time of acquisition. The amortization each year will be a function of the gross profits or revenues each year in relation to the total gross profits or revenues expected over the life of business, discounted at the assumed net credit rate. The determination of the initial value and the subsequent amortization require management to make estimates and assumptions regarding the future business results that could differ materially from actual results. Estimates and assumptions involved in the present value of in-force business and subsequent amortization are similar to those necessary in the establishment of reserves and amortization of deferred acquisition costs.
Goodwill is established upon the acquisition of a subsidiary. Goodwill is calculated as the difference between the price paid and the value of individual assets and liabilities on the date of acquisition. We account for goodwill in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets". Goodwill deemed to have an indefinite life is subject to an annual impairment test. Goodwill recognized in the consolidated balance sheet relates to our acquisition of Scottish Re Holdings Limited and has been tested for impairment. We have determined that there is no impairment.
Fixed maturity investments are evaluated for other than temporary impairments in accordance with SFAS No. 115: "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115") and Emerging Issues Task Force 99-20: "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interest in Securitized Assets" ("EITF 99-20") as described in Note 3 to the consolidated financial statements. Under these pronouncements, realized losses are recognized on securities if the securities are determined to be other than temporarily impaired. Factors involved in the determination of potential impairment include fair value as compared to amortized cost, length of time the value has been below amortized cost, credit worthiness of the issuer, forecasted financial performance of the issuer, position of the security in the issuer's capital structure, the presence and estimated value of collateral or other credit enhancement, length of time to maturity, interest rates and our intent and ability to hold the security until the market value recovers.
Our results of operations for the year ended December 31, 2001 do not include the results of operations of Scottish Re Holdings Limited, which we acquired at the close of business on December 31, 2001. Our results of operations for the years ended December 31, 2001 and 2002 do not include the results of operations of ERC Life, which we acquired on December 22, 2003. The results for the year ended December 31, 2003 include net income of $1.2 million in respect of the results of ERC Life for the period from December 22, 2003 to December 31, 2003.
During the year ended December 31, 2002 revenues increased by $185.2 million or 153% to $306.2 million in comparison with the same period in 2001. The increase is primarily due to the acquisition of Scottish Re Holdings Limited, the growth in our Life Reinsurance North America operations and an increase in investment
During the year ended December 31, 2003, total benefits and expenses increased by 89% to $519.6 million from 2002 to 2003. The increase was due to continued growth in our Life Reinsurance North America and Life Reinsurance International segments, a $12.5 million charge to account for revised reporting by a ceding company client in connection with two fixed annuity reinsurance contracts, additional operating costs required to meet the growth in our business and additional interest expense arising from the debt issuance in November and December 2002. Total benefits and expenses increased by 165% to $274.9 million from 2001 to 2002. The increase in benefits and expenses is primarily due to the acquisition of Scottish Re Holdings Limited and the growth in our Life Reinsurance North America operations.
Income from continuing operations for the year ended December 31, 2003 increased by 47% to $48.8 million from $33.2 million in 2002. Diluted earnings per ordinary share from continuing operations before cumulative effect of change in accounting principle amounted to $1.51 for the year ended December 31, 2003 and $1.25 per ordinary share in 2002, an increase of 21%. The growth in both income from continuing operations and diluted earnings per share arises from the reasons discussed above. The growth in diluted earnings per share from continuing operations was offset by the increase in the weighted average number of ordinary shares outstanding due to the public offering of 9,200,000 ordinary shares in July 2003 as discussed in Note 17 to the Consolidated Financial Statements.
Premiums earned during the year ended December 31, 2003 increased by 94% to $392.0 million from $202.5 million in 2002. Premiums earned in our Life Reinsurance North America segment during the year ended December 31, 2003 increased 88% to $230.7 million from $122.8 million in 2002. The increase is due to increases in the amounts of life insurance in-force on existing traditional solutions treaties and on new business written during the year. As of December 31, 2003, premiums earned in our Life Reinsurance North America segment (excluding ERC Life) relates to the reinsurance of approximately $117.3 billion of life insurance in-force on 2.0 million lives and our average benefit coverage per life of $60,000. As of December 31, 2002, we reinsured approximately $67.0 billion of life insurance in-force on 1.2 million lives and our average benefit coverage per life was $51,000.
Premiums earned in our Life Reinsurance International segment during the year ended December 31, 2003 increased by 102% to $161.3 million in comparison with $79.7 million in 2002. Our Life Reinsurance International segment completed the acquisition of an in-force reinsurance transaction effective October 1, 2002. This transaction has contributed $28.0 million to premiums earned during the year compared to $4.8 million of premiums earned in 2002. Premiums earned on other life reinsurance business increased $48.4 million in the year ended December 31, 2003 in comparison with the prior year. The increase is due to an increase in the number of contracts to 2,115 in the current year from 1,387 in the prior year. Of the $48.4 million, $23.4 million relates to revisions in estimates of premiums earned. The majority of business in our Life Reinsurance International segment is in respect of short duration contracts. We have experienced considerable reporting delays from some of our cedents on this business. As part of the implementation of this segment's new administrative system, improved data has been compiled which allowed us to more accurately estimate our premium earned. Premiums earned on aircrew loss of license insurance increased to $23.6 million during the current year in comparison with $16.5 million in the prior year due principally to new business. At December 31, 2003, there were 252 loss of license contracts in comparison with 186 at December 31, 2002.
Life reinsurance fees increased by 87% to $3.1 million during the year ended December 31, 2002 compared to the same period in 2001. The increase is due to the growth in the number of clients. Wealth Management fees increased by 10% to $3.4 million during the year ended December 31, 2002 compared to 2001. The growth in fees was principally due to the growth in segregated account balances, which was due to an increase in the number of clients offset in part by negative investment performance. The number of clients grew from 132 at December 31, 2001 to 164 at December 31, 2002. Segregated assets amounted to $653.6 million and $602.8 million at December 31, 2002 and 2001 respectively. Policy face amounted totaled $936.8 million and $812.4 million at December 31, 2002 and 2001 respectively.
Net investment income increased by $40.1 million or 37% to $148.0 million for the year ended December 31, 2003 from $107.9 million for the prior year. The increase is due to the growth in our average invested assets offset in part by decreases in realized yields during 2003. Our total invested assets have increased significantly because of growth in our Life Reinsurance North America financial solutions business and investment of the proceeds of the HyCU offering in December 2003, our equity offering in July 2003 and our long-term debt offerings in October and November 2003. Total invested assets, excluding ERC Life's invested assets, increased from $2.3 billion at December 31, 2002 to $3.4 billion at December 31, 2003. Funds withheld at interest excluding ERC Life's funds withheld grew from $1.1 billion at December 31, 2002 to $1.2 billion at December 31, 2003.
At December 31, 2002, we held unit-linked securities amounting to $16.5 million. These securities comprised investments in a unit trust denominated in British pounds. These securities were acquired as part of the purchase of Scottish Re Holdings Limited and were recorded at quoted market value. Changes in market value were recorded as net realized gains or losses. During 2003, we novated our liabilities on our unit-linked contracts as
discussed in "Claims and Other Policy Benefits". The liabilities were settled by transferring a portion of the unit-linked securities to the original ceding company. The remaining unit-linked securities were sold realizing a gain of $0.3 million during the year. During the year ended December 31, 2003, changes in market value of those securities of $0.8 million were recognized as realized losses.
During the year ended December 31, 2001 realized losses included amounts recognized as "other than temporary impairments" on fixed maturity investments of $6.9 million. The realization of losses in 2001 was due to the sale and write down of carrying values of securities, predominately securities issued by Enron and its affiliate, Osprey. These losses were offset in part by gains realized primarily for tax purposes on bonds in the portfolio of Scottish Re (U.S.), Inc. and gains of $529,000 on assets sold to fund part of the recapture of a block of business by one client on April 30, 2001. During 2001, we also recognized in income unrealized losses of $0.4 million on certain structured securities in accordance with the requirements of EITF 99-20.
The following tables provide details of the sales proceeds, realized loss, the length of time the security had been in an unrealized loss position and reason for sale for securities sold during 2003, 2002 and 2001.
Relative Value: transaction initiated to improve characteristics of the portfolio income
Claims and other policy benefits in our Life Reinsurance International segment increased by 107% to $104.2 million in the year ended December 31, 2003 from $50.4 million in 2002. The increase is a result of the increased volume of business as previously described, the revisions of estimates of premiums earned as previously discussed together with the acquisition of an in-force block of business effective October 2002. Claims on the in-force block amounted to $18.8 million and $3.5 million for the year ended December 31, 2003 and 2002, respectively. The estimate process contributed a further $17.5 million to claims and other policy benefits.
During 2003, through our Life Reinsurance International segment, we entered into an agreement to novate our unit-linked liabilities. The outstanding liabilities were settled by transferring an agreed number of unit-linked securities to the novation agreement counter-party. The settlement was less than the liability previously recorded of $15.5 million and therefore resulted in a release of liabilities of $3.4 million.
For the year ended December 31, 2003 interest credited to interest sensitive contract liabilities increased by $41.1 million or 85% to $89.2 million from $48.1 million in 2002. Included in interest credited to interest sensitive contract liabilities during the year ended December 31, 2003 is $12.5 million due to revised reporting by a ceding company client in connection with two fixed annuity reinsurance contracts. Interest credited includes interest in respect of funding agreements. The amounts due on funding agreements are included in interest sensitive contract liabilities on our balance sheet and amount to $330.7 million at December 31, 2003 in comparison with $100.0 million at December 31, 2002. Interest credited on these agreements was $2.4 million in 2003 in comparison with $1.2 million in 2002. The remaining increase is due to interest credited on new reinsurance treaties and increases in interest credited on existing treaties due to increasing average liability balances. Interest sensitive contract liabilities amounted to $2.6 billion at December 31, 2003 in comparison with $1.6 billion at December 31, 2002.
Acquisition costs and other insurance expenses for our Life Reinsurance North America segment increased to $83.6 million in 2003 from $48.4 million in 2002. The increase was a result of the growth of our business as described above. As discussed in "Interest credited to interest sensitive contract liabilities" we incurred charges of $12.5 million this year due to revised reporting by a ceding company client in connection with two fixed annuity reinsurance contracts. In light of the impact of the revised reporting on the estimated gross profits of the two treaties in question, we have revised the amortization of deferred acquisition costs on the two treaties, along with two other related treaties.
Acquisition costs and other insurance expenses for our Life Reinsurance International segment increased to $30.1 million in 2003 from $8.3 million in 2002. This was a result of the growth in our business as described above, the revision of estimates of premiums earned discussed above and the acquisition of an in-force block of business effective October 2002. Acquisition costs on the in-force block amounted to $5.7 million in 2003 and $0.3 million in 2002. The revision of estimates of premiums earned contributed a further $6.0 million to acquisition costs and other insurance expenses.
During the year ended December 31, 2002 acquisition costs and other insurance expenses increased by $35.8 million or 147% to $60.1 million from $24.3 million in 2001. The increase was a result of the acquisition of Scottish Re Holdings Limited and the increased number of reinsurance clients in our Life Reinsurance North America segment.
Operating expenses increased to $31.0 million for the year ended December 31, 2003 compared to $23.1 million in 2002. The increase in operating expenses is due to increased personnel and other costs as we continued to grow our business. During 2002 and the first quarter of 2003, we continued to complete the staffing of our principal office in Bermuda. Total employees in our operations have grown from 120 at December 31, 2002 to 140 at December 31, 2003. The number of employees in our Life Reinsurance International segment has grown from 48 at December 31, 2002 to 58 at December 31, 2003. This growth has resulted in additional costs for office running expenses. In 2003, we experienced increased costs of our defined benefit pension plan at Scottish Re Holdings Limited, increased compensation costs for our board of directors, increased legal and professional fees arising as a result of corporate governance legislation, and have also incurred additional costs for directors' and officers' insurance. Our operations are geographically diverse with offices in Bermuda, the Cayman Islands, Charlotte, Dublin and Windsor. With the growth of our business operations, we have incurred additional travel, technology and communication expenses.
Operating expenses increased to $23.1 million in the year ended December 31, 2002 compared to $9.2 million in 2001. The increase is a result of the acquisition of Scottish Re Holdings Limited, a smaller portion of costs being allocated to acquisition expenses and increased personnel costs and other operating costs as we
continued to grow our business. During 2002, we continued to set up our principal office in Bermuda. In addition, as a result of our acquisition of Scottish Re Holdings Limited on December 31, 2001, we have incurred increased operating expenses and additional travel costs. As we continue to grow our operations we have experienced increased personnel costs in all segments. Total employees in our operations, excluding Scottish Re Holdings Limited has grown from 66 employees at December 31, 2001 to 72 at December 31, 2002. Operating expenses in the year ended December 31, 2002 included $1.4 million of non-recurring expenses relating to severance arrangements with certain employees.
Interest expense amounted to $1.4 million in both 2002 and 2001. Interest expense in 2002 includes interest on $115.0 million of convertible debt issued on November 22, 2002, $17.5 million of capital securities issued on December 4, 2002 and borrowings under our credit facilities and reverse repurchase agreement. We incurred interest expense for the first time in the year ended December 31, 2001 amounting to $1.4 million, reflecting the use of borrowings in 2001 under the credit facilities. These borrowings are more fully described under "Liquidity and Capital Resources."
The 2003 and 2002 income tax benefits are in respect of certain of our U.S. taxable entities and are offset by income tax expenses arising on our United Kingdom, Dublin and other U.S. entities. Included in the 2003 income tax benefit is $2.1 million in respect of state taxes. The change in our effective tax rate is due primarily to the ratio of earnings on taxable jurisdictions to that in non-taxable jurisdictions. Currently, we do not believe that a valuation allowance is warranted with respect to any of our deferred tax assets as sufficient taxable income can be generated through tax planning strategies and future income to absorb the deferred tax assets in each taxable jurisdiction.
At December 31, 2003 the portfolio controlled by us consisted of $2.4 billion of fixed income securities, preferred stock and cash. The majority of these assets are traded, however $175.2 million represents investments in private securities. Of the total portfolio, $2.1 billion represented the fixed income portfolio managed by external investment managers and $262.7 million represented other cash balances. The portfolio includes $351.1 million in respect of assets acquired with ERC Life on December 22, 2003.
In the table below are the total returns earned by our portfolio for the year ended December 31, 2003, compared to the returns earned by three indices: the Lehman Brothers Global Bond Index, the S&P 500, and a customized index that we developed with New England Asset Management ("NEAM"), an external investment manager, to take into account our investment guidelines. We believe that this customized index is a more relevant benchmark for our portfolio's performance.
The composition by category of securities that have an unrealized loss at December 31, 2003 and December 31, 2002 are presented in the tables below.
Other industries each represent less than 2% of estimated fair value
At December 31, 2003 there were 409 securities with unrealized loss positions. There were two securities with a loss greater than $1 million. These are securitized assets and are tested for impairment under EITF 99-20. At December 31, 2003 these securities satisfied the impairment tests of EITF 99-20. At December 31, 2002 there were 193 securities with unrealized loss positions. There were two securities with unrealized losses greater than $1.0 million. These were also securitized assets and were tested for impairment under EITF 99-20. At December 31, 2002 these securities satisfied the impairment tests of EITF 99-20.
At December 31, 2003 there were 12 securities with fair values that traded continuously at less than 80% of amortized cost for at least six months or 90% of amortized cost for at least 12 months. The total unrealized loss on these securities amounted to $7.2 million and the largest unrealized loss position was $1.6 million. At December 31, 2002 there were 5 securities with fair values that traded continuously at less than 80% of amortized cost for at least six months or 90% of amortized cost for at least 12 months. The total unrealized loss on these securities amounted to $1.1 million and the largest unrealized loss position was $0.5 million.
At December 31, 2003, funds withheld at interest were in respect of six fixed annuity reinsurance contracts with three ceding companies. At December 31, 2002, we had four modified coinsurance fixed annuity reinsurance contracts with two ceding companies. The new contracts for 2003 relate to contracts assumed on the acquisition of
ERC Life. At December 31, 2003 we had three contracts with Lincoln National Insurance Company that account for $1.3 billion (86%) of the funds withheld balances. The other contracts are with Illinois Mutual Insurance Company and American Founders Life Insurance Company. Lincoln National Insurance Company has financial strength ratings of "A+" from A.M. Best, "AA-" from Standard & Poor's, "Aa3" from Moody's and "AA" from Fitch. In the event of insolvency of the ceding companies on these arrangements we would need to exert a claim on the assets supporting the contract liabilities. However, the risk of loss is mitigated by our ability to offset amounts owed to the ceding company, which are included in interest sensitive contract liabilities, with the amounts owed to us by the ceding company. Interest sensitive contract liabilities relating to these fixed annuity reinsurance contracts amounted to $1.7 billion and $1.1 billion at December 31, 2003 and 2002, respectively.
The investment objectives for these arrangements are included in the agreements. The primary objective is to maximize current income, consistent with the long-term preservation of capital. The overall investment strategy is executed within the context of prudent asset/liability management. The investment guidelines permit investments in fixed maturity securities, and include marketable securities, commercial mortgages, private placements and cash. The maximum percentage of below investment grade securities is 10% and other guidelines limit risk, ensure issuer and industry diversification as well as maintain liquidity and overall portfolio credit quality.
============================================================================== According to data provided by our ceding companies, the following table reflects the market value of assets backing the funds withheld at interest portfolio by sector.
The increase in operating cash flow from 2002 was $97.7 million. It related primarily to increases in premiums, fees, and investment income being greater than increases in benefits, reserve movements and expenses paid. Cash from premiums and fees increased by $116.3 million due to growth in our Life Reinsurance business. Cash from investment income increased by $68.7 million due to the growth in our invested asset base. The increase was offset by declining yields. Cash used to settle benefits increased by $66.9 million due to the growth in our Life Reinsurance business. This use of cash was offset by an increase in related reserves of $64.1 millions. Cash used to pay acquisition and other expenses , including commissions and interest, increased by $84.5 million. This increase related principally to new business written in our Life Reinsurance North America segment, increased operating expenses and increased debt. Acquisition costs include commissions on first year business that are deferred when paid and therefore do not impact net income until later years.
We used operating cash flow of $9.2 million in 2002 in comparison with operating cash flow generated of $31.3 million in 2001. The decrease in operating cash flow from 2001 to 2002 was primarily due to increases in benefits and expenses paid greater than increases in premiums, fees, and investment income. In addition there was a decrease in the cash flows from the acquisition of blocks of reinsurance. Cash from premiums and fees increased by $136.0 million due to the acquisition of Scottish Re Holdings Limited and the increase in the number of clients in our Life Reinsurance North America segment. Cash from investment income increased by $56.2 million due to the growth in our invested asset base. The acquisition of blocks of reinsurance business generated $81.3 million less in cash flows in 2002 compared to 2001. Cash used to pay benefits net of related reserves increased by $171.1 million due to the acquisition of Scottish Re Holdings Limited and the increase in the number of clients in our Life Reinsurance North America segment. Cash used to pay acquisition and other costs, including commissions, increased by $35.7 million. This increase related principally to new business written in our Life Reinsurance North America segment. These costs include commissions on first year business that are deferred when paid and therefore do not impact net income until later years.
The $340.7 million increase in capitalization is due primarily to the net proceeds of our 2003 equity offering of $180.1 million, the net proceeds of the offering of Hybrid Capital Units which are included in mezzanine equity of $138.2 million, the trust preferred securities offerings of $30.0 million, net income for the year of $27.3 million and increases in other comprehensive income. These increases have been offset by dividends paid of $6.2 million. Other comprehensive income consists of the unrealized appreciation on investment, the
At December 31, 2002, total capitalization was $623.6 million compared to $331.3 million in 2001. The $292.3 million increase in capitalization is due primarily to the net proceeds of our 2002 equity offering of $114.3 million, the net proceeds of the convertible debt and capital securities offerings of $ 127.8 million and net income for the year of $32.5 million less dividends paid of $5.0 million and increases in comprehensive income.
On April 4, 2002 we completed a public offering of 6,750,000 ordinary shares (which included the over-allotment option of 750,000 ordinary shares) in which we raised aggregate net proceeds of $114.3 million. We used the net proceeds of the offering to repay short-term borrowings of $40.0 million, which we had borrowed under a credit facility with a U.S. bank, and for general corporate purposes.
On December 4, 2002 we privately placed $17.5 million of capital securities which were issued by a trust subsidiary holding a thirty year $18.0 million aggregate principal amount subordinated note of Scottish Holdings, Inc. which is guaranteed by Scottish Annuity & Life Insurance Company (Cayman) Ltd. Net proceeds were $16.9 million. Scottish Holdings, Inc. provided a $15.0 million capital infusion to its direct subsidiary, Scottish Re (U.S.), Inc. and used the remainder of the net proceeds for general corporate purposes.
On August 20, 2003, the 200,000 Class B warrants originally issued as part of our initial public offering with a strike price of $15.00 were repurchased at a price of $8.00 per warrant or $1.6 million in aggregate.
On December 17 and December 22, 2003, we completed a public offering of 5,750,000 (which included an over allotment option of 750,000) HyCUs. The net proceeds of the offering were $138.2 million. Each HyCU consists of a purchase contract issued by us and a convertible preferred share redeemable on May 21, 2007. The purchase contract obligates the holder to purchase from us, no later than February 15, 2007, for a price of $25 in cash, the following number of shares, subject to anti dilution adjustments:
The proceeds of the sale of these ordinary shares will be used to redeem the convertible preferred shares on May 21, 2007. The convertible preferred shares will be convertible into 1.0607 ordinary shares per $25.00 liquidation preference only on May 21, 2007. Upon conversion we will deliver an amount of cash equal to the $25.00 liquidation preference of the convertible preferred share and ordinary shares for the value of the excess, if any, of the conversion value minus the liquidation preference. We will deliver ordinary shares only if the average closing price is greater than $23.57.
During 2003, we renewed our credit facilities, which currently consist of:
One of the facilities requires that Scottish Annuity & Life Insurance Company (Cayman) Ltd. maintain shareholder's equity of at least $340.0 million. At December 31, 2003, Scottish Annuity & Life Insurance Company (Cayman) Ltd.'s shareholder's equity was $779.7 million. The other facility requires that Scottish Re maintain consolidated net worth of $520.0 million, a maximum debt to total capitalization ratio of 30% and uncollateralised assets of 1.2 times any unsecured borrowings. At December 31, 2003, Scottish Re's net worth was $659.8 million and the ratio of debt to total capitalization was 16.9%. Our failure to comply with the requirements of the credit facilities would, subject to grace periods, result in an event of default, and we could be required to repay any outstanding borrowings. At December 31, 2003, there were no borrowings under the facilities. Outstanding letters of credit under these facilities amounted to $31.2 million.
o Scottish Re (U.S.), Inc. is licensed, accredited, approved or authorized to write reinsurance in 47 states and the District of Columbia. When Scottish Re (U.S.), Inc. enters into a reinsurance transaction with a customer domiciled in a state in which it is not a licensed, accredited, authorized or approved reinsurer, it likewise must provide a reserve credit trust or letter of credit;
Scottish Re and Scottish Annuity & Life Insurance Company (Cayman) Ltd. have executed similar agreements for Scottish Re (Dublin) Limited and may, from time to time, execute additional agreements guaranteeing the performance and/or obligations of their subsidiaries.
Amounts due under funding agreements are included in interest sensitive contract liabilities. These are agreements in which we earn a spread over LIBOR. The contractual repayment terms are detailed in the table above.
In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an Amendment of FASB Statement No. 123". In prior years, we applied the intrinsic value-based expense provisions set forth in ABP Opinion No. 25, "Accounting for Stock Issued to Employees". Effective January 1, 2003, we have prospectively adopted the fair value-based stock option expense provisions of SFAS No. 123 as amended by SFAS No. 148. This has resulted in a charge to income of $207,000 for the year ended December 31, 2003.
The Derivative Implementation Group has released DIG B36 that addresses whether SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" requires bifurcation of a debt instrument into a debt host contract and an embedded derivative if the debt instrument incorporates both interest rate risk and credit risk exposures that are unrelated or only partially related to the creditworthiness of the issuer of that instrument. Under DIG B36 modified coinsurance and funds withheld coinsurance reinsurance agreements where interest is determined by reference to a pool of fixed maturity assets are arrangements containing embedded derivatives requiring bifurcation. Our funds withheld at interest, which arise under modified coinsurance and coinsurance funds withheld agreements are therefore considered to contain embedded derivatives requiring bifurcation. The market value of funds withheld at interest was $1.6 billion at December 31, 2003 and its carrying value was $1.5 billion.
o uncertainties relating to government and regulatory policies (such as subjecting us to insurance regulation or taxation in additional jurisdictions);