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October 20, 2004 at 08:00 PM
Scottish Re To Acquire Big Block From ING Re
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Scottish Re Group Ltd. will acquire the U.S. individual life reinsurance business of ING Re in a transaction that includes INGs transfer of $800 million in reserves and its payment of a $560 million ceding commission to Scottish Re.
The transaction consists of traditional mortality business, which in the life reinsurance industry requires collateral to satisfy the reserve requirements of the Valuation of Life Insurance model regulation, better known as Triple-X, and its successor Guideline, A-Triple X. Scottish Re is already in the traditional mortality business and the transaction will provide the company, based in Hamilton, Bermuda, with scale, says Melissa Daly, a Scottish Re spokesperson.
In a statement, Fred Hubbell, an ING executive board member, said the transaction fits INGs strategy of allocating capital where it can generate the best returns. The transaction is expected to reduce the capital requirements of INGs U.S. reinsurance business by $560 million, improve ING Groups debt/equity ratio by .2% and increase the capital coverage ratio of ING Insurance by 19%.
Following the acquisition, Scottish Re will have approximately $1 trillion of face amount of life reinsurance in force, $8 billion in assets, $2.1 billion in revenues and a capital base of approximately $1.3 billion.
In addition to the assets transferred by ING Re, Scottish Re will raise an additional $230 million in new capital, which will satisfy the capital requirements for the new business. The new capital includes $180 million to be provided by the Cypress Group, a private equity firm based in New York, and, an additional $50 million of trust-preferred securities. The size of Cypress Groups stake in Scottish Re in exchange for the investment is 9.9% of ordinary shares, according to Daly. If warrants and sub-debt are exercised, the total would increase to 22% of Scottish Res ordinary shares, she adds.
But the size of Scottish Re following the close of the transaction, expected by year-end 2004, would make it the third largest life reinsurer in the U.S. and the 10th largest globally, she says.
UBS issued a report following the announcement that left Scottish Res rating at Neutral 2-Unchanged. UBS cited unanswered questions as the reason why, at the reports issuance, it had not modeled upside potential into its estimates.
Among the issues that UBS analyst Andrew Kligerman cites in his report on SCT is the need for more information on how the ING block is modeled for mortality, “given the blocks poor track record.”
The report cites SCT as saying that “about 70% of the ceding commission is to cover the businesss cost of capital and required capital while the remaining 30% is to cover SCTs more conservative view of the businesss mortality experience outlook.”
