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Life Health > Life Insurance

With $130 Million Loss In 2Q, Scottish Re's President Resigns

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An eight-year-old life reinsurer says it expects to record a $130 million net operating loss for the second quarter.

The board of the reinsurer, Scottish Re Group Ltd., Hamilton, Bermuda, has decided to postpone the company’s dividend on ordinary shares, and Scott Willkomm, the company’s president, has resigned.

Scottish Re’s board has formed a special committee to help Glenn Schafer, the chairman, run the company, and it has named Paul Goldean, the company’s general counsel, to be the interim CEO.

Scottish Re says it has hired Goldman Sachs Group and Bear Stearns & Company, both of New York, to help it evaluate “strategic alternatives and potential sources of capital.”

Scottish Re has used acquisitions to grow rapidly over the past few years, and the company was the third largest U.S. life reinsurer at the end of 2005, according to Standard & Poor’s Ratings Services, New York. S&P has put Scottish Re’s BBB minus counterparty credit rating on CreditWatch with negative implications.

Scottish Re is emphasizing that it still has enough resources to meet its obligations to customers and lenders.

“We would like to reassure our clients, investors and creditors that we do not face any near-term liquidity or solvency issues,” the company says. “All of our regulated entities are capitalized well in excess of their minimum required levels.”

Scottish Re says it is confident about its ability to meet obligations to holders of $115 million in convertible notes that are puttable to Scottish Re in December.

“It should also be noted that we are not in violation of any of the covenants associated with our outstanding debt and convertible securities or back-up liquidity lines,” Scottish Re says. “We have made a concerted effort during the past 36 months to negotiate new business without ratings triggers and have negotiated such terms out of older treaties.”

Scottish Re is attributing the second quarter loss mainly to a $112 million “valuation allowance” on deferred tax assets.

Other causes include a reduction in estimated premium accruals, increased retrocession costs, a write-down of deferred acquisition costs due to higher-than-expected lapse rates on some fixed annuity treaties, and severance and retirement costs, Scottish Re says.

Scottish Re “has announced a series of ‘one time charges’ and accounting adjustments over a period of multiple quarters,” according to analysts at Moody’s Investors Service, New York, which has lowered the insurance financial strength ratings on Scottish Re’s main insurance subsidiaries to Baa2, from A3, with a negative outlook. “Despite a number of recent investments in personnel and systems to improve risk management and internal controls at the company, the recent earnings announcement diminishes Moody’s confidence that there will not be further adverse developments over the near to medium term.”

But Scottish Re’s “liquidity profile and capital position appear adequate over the near to medium term,” Moody’s analysts conclude.

Another life reinsurer founded about the same time as Scottish Re, Annuity and Life Re (Holdings) Ltd., Hamilton, Bermuda, ran into financial problems in 2002. That company ended up using termination, recapture, novation and coinsurance agreements to get out of all reinsurance arrangements. At this point, Annuity and Life Re’s only source of revenue is income from its investment portfolio, according to Annuity and Life Re’s 2005 annual report.


Scottish Re says its $130 million net loss in the second quarter was due to these factors:

–A $112 million “valuation allowance” on deferred tax assets.

–A reduction in estimated premium accruals.

–Increased retrocession costs.

–A write-down of deferred acquisition costs due to higher-than-expected lapse rates on some fixed annuity treaties.

–Severance and retirement costs.


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