Reinsurer Says It Is In A Weak Bargaining Position

The would-be investors also have filed applications or notices with regulators in Bermuda, the Cayman Islands, Guernsey, Ireland, Singapore and the United Kingdom.

Shareholders might not like the fact that the deal would dilute their equity, but Scottish Re warns that the company is in a bad position to negotiate a better deal because of rating agency downgrades and the possibility that regulators might take action.

In September 2006, officials with the Ohio Department of Insurance told Scottish Re that it had “found Scottish Re (U.S.) Inc. to be in violation of an Ohio insurance regulation prohibiting an insurance company from having statutory losses in a 12-month period in excess of 50% of its capital and surplus,” Scottish Re says in the preliminary proxy.

In addition, provisions of an agreement between Scottish Re and the would-be investors might require Scottish Re to pay the MassMutual affiliate and the Cerberus affiliate group a total of about $37 million fees and reimbursement charges if Scottish Re ends up accepting what it believes to be a better takeover proposal, Scottish Re says.

Moreover, Scottish Re is vulnerable to collateral calls from its bank, and it is likely that shareholders would receive little or no value in run-off scenario, the company says.

If the deal now under consideration is not completed, Scottish Re might have to file for bankruptcy or insolvency protection, the company says.

Officers and executives of Scottish Re have an incentive to support the MassMutual/Cerberus affiliate proposal, because the would-be investors have agreed to try to keep officers’ and directors’ liability insurance in place for current Scottish Re officers and directors, as long as the price of the coverage does not double from the amount paid during the 12-month period that ended Oct. 31, 2006, Scottish Re says.

Additional information was contributed to this article by Allison Bell.