An investment firm may get control of Scottish Re’s North American reinsurance operations in exchange for $25 million in restructuring financing, if Scottish Re’s managers can persuade a bankruptcy court and insurance regulators to approve the restructuring plan.

Scottish Re managers talk about the restructuring plan in Chapter 11 reorganization pleadings they filed Sunday in the U.S. Bankruptcy Court for the District of Delaware.

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Scottish Re’s North American reinsurance subsidiaries now owe a total of $86 million in principal payments to investors, and the subsidiaries are supposed to make $20 million in interest payments by March 31, according to reorganization case pleadings.

Scottish Re says the best deal it has been able to find so far would be with Hudson Structured Capital Management Ltd., a Bermuda-based company with offices in Stamford, Connecticut.

Hudson Structured could provide a $2.5 million good faith deposit, $10 million to help Scottish Re make payments to creditors and handle reorganization costs, and $12.5 million to recapitalize Scottish Re’s key North American subsidiaries, according to the reorganization pleadings.

If Hudson Structured continues to make the best available offer, and the bankruptcy court approves the deal, then Hudson Structured “will acquire effective ownership” of the major North American reinsurance businesses, according to the reorganization pleadings.

Scottish Re says in a press release announcing the deal that it hopes to complete the deal and the restructuring by Sept. 30.


The History

Scottish Re was a life and annuity reinsurer that came to life in 1998 and made major reinsurance deals in the early 2000s.

The company stopped writing new business in 2008, after it found it was losing money on the reinsurance deals it had made.

The company says that meeting reinsurance obligations on blocks of yearly renewable term life business has been especially difficult.

The Cayman Islands-based parent company, Scottish Re Group Ltd., announced plans in May 2017 to wind down its operations. The company hired a U.S. investment banking firm, Keefe, Bruyette & Woods Inc., to try to find a buyer for the North American reinsurance businesses.

(Related: Keefe, Bruyette to Seek Buyer for Scottish Annuity & Life)

Keefe, Bruyette contacted about 51 potential “strategic and financial buyers or investors,” according to the pleadings.

Twenty-three potential buyers or investors asked for more information, but none was willing to make an offer, in part because of all of the obligations on the reinsurance businesses’ balance sheet, according to the pleadings.

“Thus, a Chapter 11 proceeding is necessary to right-size the debtors’ balance sheet in connection with any transaction,” Scottish Re says in the pleadings.

Keefe, Bruyette also looked to see which of the 51 parties might be interested in acting as a strategic partner in a Chapter 11 case.

Twenty-three entities expressed an interest, three submitted first-round bids, and two submitted second-round bids, according to the pleadings.

Peeking through blinds (Image: Thinkstock)

Peeking through blinds (Image: Thinkstock)

The Scottish Re reinsurance businesses picked Hudson Structured to serve as a “stalking horse purchaser,” or party that could end up with the businesses if no better deal comes along.

Hudson Structured

Hudson Structured is an investment fund. The founder and managing partner, Michael Millette, worked for Goldman Sachs from 1994 to 2015.

While Millette was at Goldman Sachs, he helped that company set up its insurance-linked securities business.

Earlier in his career, Millette worked as a portfolio manager at John Hancock Financial. 

Hudson Structured says on its website that it invests in “reinsurance and insurance-linked assets across all lines of business and all instruments to optimize relative value.”

The Scottish Re Family

The ultimate parent company is Scottish Re Group Ltd., a Cayman Islands business that has started winding down its operations but is not part of the Chapter 11 cases, according to the pleadings. A Bermuda court has put John McKenna and Eleanor Fisher in charge of liquidating the parent company.

Scottish Re Group owns Scottish Annuity & Life Insurance Company (Cayman) Ltd., a Cayman Islands-based company that has a mailing address in Charlotte, North Carolina.

Scottish Annuity, in turn, owns Scottish Holdings Inc. Scottish Holdings is incorporated in Delaware but has its offices and mailing address in Charlotte.

Scottish Holdings owns Scottish Re (U.S.) Inc., Scottish Re’s main North American reinsurance business.

Scottish Annuity and Scottish Holdings are part of the Chapter 11 cases.

Scottish Re (U.S.) is not part of the Chapter 11 cases.

Scottish Re Employee Benefits 

Scottish Re is asking for bankruptcy court permission to continue paying for salaries and benefits for its 30 U.S. employees and its two employees in Bermuda.

In connection with that request, Scottish Re has given some details about its benefits package.

For the U.S. employees, Scottish Re pays 100% of the cost of medical, dental, vision, short-term disability, and long-term disability insurance.

The company also pays 100% of the cost of basic life insurance, basic dependent life insurance, accidental death and dismemberment insurance, and employee assistance program access.

If an employee’s spouse or domestic partner can get health coverage from an employer, the company will pay only 50% of the premiums for the coverage for that spouse or domestic partner.

Employee-paid options include life insurance, cancer insurance, critical illness insurance, hospital confinement insurance and dependent fitness program benefits.

—Read How Will Scottish Re’s Turbulent Year End? on ThinkAdvisor.


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