Scottish Re Group Ltd. cleared a major hurdle in its effort to survive with the promise of a $600 million cash infusion from Mass Mutual Capital Partners L.L.C. and Cerberus Capital Management L.P.
Analysts noted that the plan is a step in the right direction, but said actual implementation is needed before a formal reassessment of the reinsurer can begin.
In a Nov. 27 conference call, Paul Goldean, CEO of the company, based in Hamilton, Bermuda, outlined the pending transaction (see sidebar).
In an interview with National Underwriter, Goldean spoke about plans for the company to “retain existing clients and attract new business.”
Goldean says that globally, Scottish Re’s salespeople have been in contact with clients who, for the most part, are not terminating contracts. So, he says, the company is retaining existing business.
Attracting new business, Goldean says, will involve improving ratings in addition to the new capital infusion the company will receive when the transaction closes in roughly 120-150 days. “We have significantly more capital than we need right now for current business,” Goldean says.
He also notes that the 2 new investors have received a commitment for a $500 million Triple-X financing facility that will fully fund 2005 and 2006 business. The company has a large block of Triple-X business that it built and bought through a transaction with ING Re on October 2004.
The ratings goal, according to Goldean, is to return to “at least an ‘A-’ level.” If Scottish gets its ratings back to that level by Jan. 1, 2008, he says, then it could continue to build both capital and new business through 2010 to “nearly the level that it was at before [it stopped writing business].”
The business may be a “slightly different mix,” he says, but declined to provide specifics because more discussion is needed on that point.
New capital could be generated in a variety of ways, including new collateral facilities or earnings from the company’s own book of business, he says.
The issue of an additional capital infusion from the 2 new investors was not raised during negotiations, he says. However, he adds, intuitively an investor does not put up so much capital into a company unless they are willing to support that company.
Goldean says that ultimately a capital infusion rather than an outright purchase turned out to be “the best transaction” for Scottish Re. There are pressures that bidders faced including a mix of rating concerns and sensitivity to the need for capital.
When asked about a $4 per share sales price for the capital infusion if the investors decide to convert preferred shares to common shares, Goldean said he “couldn’t touch on that,” but the shareholder proxy will provide more detail. In general, he cited Scottish Re’s “liquidity position and other matters.”
At close of day on Nov. 28, the company’s stock closed at $5.97. The stock has a 52-week range of $2.95-$25.99.
In a statement, Cerberus management said, “We recognize Scottish Re’s market strengths and great potential for growth. We look forward to working with them to address their immediate and long-term financial requirements and return the company to the right path to an improved market position and value for all stakeholders.”
That right path, according to rating agencies, begins with repayment of 4.5% senior convertible notes on Dec. 6. Scottish has been hampered by a provision that restricts it from moving funds up to the parent from its Scottish Annuity & Life Insurance Co. (Cayman) Ltd. unit.
It was an issue addressed by Dean Miller, Scottish Re’s CFO, during the Nov. 27 call. Scottish is “aggressively reducing the balance of outstanding letters of credit,” Miller says, and is “negotiating alternative ways of eliminating the restriction of our ability to upstream funds…”
As a backup, Miller continues, Scottish is finalizing a back-up LOC which he says should be completed during the week of Dec. 3. Once that back-up LOC is in place, he adds, a Nov. 21 agreement with the bank syndicate group participating in the 4.5% $115 million credit facility agreement will amend that agreement to permit repayment by moving funds up from Scottish Annuity & Life.
Rating agencies cautiously responded to the Scottish Re announcement.
Fitch Ratings, Chicago, says Scottish Re’s ratings remain on ‘Rating Watch Negative’ until issues are resolved, at which point it expects to put the Rating Watch on ‘Evolving.’
Moody’s Investors Service, New York, continues to review Scottish Re’s ratings with direction uncertain.
Moody’s also affirmed the ratings of Mass Mutual. Arthur Fliegelman, a vice president-senior credit officer with the life insurance group, writes that the investment “may offer a significant opportunity for capital appreciation over several years.” The transaction is “opportunistic” and “will not, in Moody’s opinion,” make Scottish a “core member” of Mass Mutual’s operations nor “provide any support beyond its initial investment and its share of the temporary bridge loan.”
If Mass Mutual were to expand its investment or provide further financial support or guarantees, explicit or implicit, then Moody’s would re-evaluate the situation. Moody’s also noted the small investment relative to the company’s size.
Standard & Poor’s Corp., New York, revised its CreditWatch status to “positive” from “negative,” citing factors that include the announced capital infusion and the near elimination of the dividend upstreaming restriction as an “immediate improvement to the liquidity profile of the holding company.” S&P said that upon payment of the $115 million obligation, it anticpates raising Scottish’s ratings including the financial strength ratings of its operating companies to ‘BB’ from ‘B+.’
Moody’s, however, says it needs more information on Scottish Re’s strategic plans. According to Scott Robinson, vice president and senior credit officer–life insurance group, “there are still things that need to be ironed out.” However, he did note that the announcement of the infusion is a positive.
“It is a positive in the sense that a troubled chapter is over. But it is not over,” he said. “The deal needs to close and issues need to be resolved.”
Robinson says he was not surprised that it was an infusion rather than an acquisition because “it is a complicated company,” and its liquidity position created difficulties.
Julie Burke, managing director in Fitch’s Chicago office, says “very good progress” has been made, but Fitch needs to see the announced actions completed and learn more about the strategy going forward.
Burke notes that the transaction, when completed, will offer the company the capital and collateral needed to secure reinsurance deals over time.