Scottish Re To Acquire Big Block From ING Re
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.”
The UBS report notes that ING Re suffered mortality experience that was 12% over its pricing expectations in September 2003 related to business written in the mid-1990s. The adverse mortality, according to UBS, led ING to take a $55 million charge in third quarter 2003. ING Re, the report continues, will record an after-tax deferred acquisition cost write-off in third quarter 2004 for mortality mispricing.
A total of about 54% of the total in-force business assumed consists of Triple-X/A Triple-X business, according to the report.
The Valuation of Life Insurance Policies model regulation, known as Guideline Triple-X, and its successor model, Guideline A-Triple X, establish guidelines for reserving for level premium term and universal life products. A-Triple X addresses reserving for UL products with shadow accounts, part of a product design that keeps a policy in force.
Following the announcement, Fitch Ratings, New York, affirmed Scottish Res BBB long-term issuer rating, as well as the ratings on all its outstanding debt, and affirmed the A insurer financial strength ratings of all operating subsidiaries. Fitch says its rating outlook is Stable.
In affirming the ratings, Fitch concludes that the ratings strengths of the transaction outweighed certain ratings concerns. Because the books of business are complementary, with minimal overlap, the transaction will improve Scottish Res diversification, significantly enhance its overall scale and provide the opportunity to gain access to new clients, according to Fitch. Management anticipates that the acquisition will be highly accretive to earnings and that transition risk will be reduced because the business comes with certain systems, and a core group of reinsurance specialists will be retained from ING to administer the business, Fitch adds.
Moodys Investors Service, New York, affirmed the A3 insurance financial strength ratings of the companys core insurance subsidiaries, Scottish Annuity & Life Insurance Company (Cayman) Ltd. and Scottish Re (U.S.), Inc.
The outlooks for the ratings of Scottish Re and its subsidiaries were changed to negative from stable, however.
According to Moodys, the negative outlooks reflect a decline in risk-adjusted capital levels (as calculated by Moodys) caused by this very large transaction and the integration risk associated with it, as well as the uncertainty regarding the future financial performance of the block of business being acquired. The rating agency added that this opinion also was based on the substantial and recent rapid growth at Scottish Re, including the non-organic acquisition expansion, which increases the risk profile and potential earnings volatility of the company.
Offsetting these weaknesses, Moodys notes, is that the ING transaction remains consistent with the core strategy of Scottish Re to grow its traditional mortality-risk business. The rating agency added that benefits of the transaction include broader market presence and scale, additional life reinsurance expertise, and enhanced earnings capacity. In addition, Moodys pointed out that Scottish Re has mitigated the rollover risk that is associated with letters of credit that are backing statutory reserve requirements (e.g., Regulation XXX reserves) by means of the transaction structure.
Reproduced from National Underwriter Edition, October 21, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.