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Reinsurer Says It Is In A Weak Bargaining Position

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If investors fail to approve a financing deal Scottish Re Group Ltd. has arranged, the company might face serious problems with ongoing operations.

Executives of Scottish Re, Hamilton, Bermuda, have presented that warning and others in documents filed with the U.S. Securities and Exchange Commission.

The documents include a preliminary proxy statement concerning the financing deal and a notice that the company plans to hold a shareholders’ meeting to give shareholders a chance to vote on the deal.

Scottish Re hopes to give the meeting date in a final proxy statement that will be mailed to shareholders by Jan. 19, the company says.

Scottish Re is a struggling life reinsurer that at one point was one of the most active players in the U.S. life reinsurance market.

The financing deal, announced No. 27, 2006, involves plans for an affiliate of Massachusetts Mutual Life Insurance Company, Springfield, Mass., and a group of affiliates of Cerberus Capital Management L.P., New York, to each invest $300 million in Scottish Re.

The MassMutual affiliate and the Cerberus affiliate group would each get 1 million convertible shares. The convertible shares would be converted into 150 ordinary shares, or enough shares to give the investors ownership of about 69% of Scottish Re’s shareholder voting power, Scottish Re says in the preliminary proxy.

Once the deal was consummated, all company directors other than Paul Goldean, the company’s president, and Jeffrey Hughes, who represents a major shareholder, would resign.

The MassMutual affiliate and the Cerberus affiliate group have filed applications or notices concerning the proposed deal with state regulators in Delaware and South Carolina, the states of domicile for Scottish Re’s U.S. insurance company subsidiaries.

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.