Rating Agency Downgrades Reinsurer

The “financials substantially reflect a mark-to-market write-down necessitated by the inability to assert the intent and ability to hold … securities to recovery of amortized value rather than projected losses,” S&P says. “Nonetheless, the uncertain economic value of these investments and associated impairments increase the stress on Scottish Re’s financial condition and degrades its liquidity, capitalization, and financial flexibility.”

Liquidity at the group fell to about $65 million as of June 30, from about $400 million at the end of 2007, S&P says.

Scottish Re managers say the pending sale of international and wealth-management operations should provide about $70 million in liquidity during the third quarter, S&P says.

“Although this might provide sufficient resources to meet liquidity needs for the next several months, unexpected developments — including further declines in the market value of investments — could exhaust liquidity resources sooner,” S&P says. “Scottish Re is taking multiple concurrent actions to maintain its liquidity, ensure statutory reserve credits are not lost, and preserve its solvency.”

S&P believes “that the only strong option available to [Scottish Re] for preserving longer-term solvency is the sale of its North American segment, which constitutes the bulk of its remaining operations,” S&P says. “Given its weak liquidity position, management indicates that if the group does not quickly find a buyer, it could be forced to seek bankruptcy protection relatively soon. Substantial incentives exist for the interested parties to reach a definitive agreement, which increases the likelihood the group will be successful in securing the sale of these operations before exhausting its liquidity.”