By Scott Neil From Royal Gazette

Stock decline: Scottish Re’s share price fell dramatically during 2006 as it was rocked by financial troubles. By early 2008 the company was in run off and its shares had been delisted by the New York Stock Exchange. The company has this week started a voluntary, provisional winding up process

Almost ten years after mounting losses pushed Bermudian-headquartered Scottish Re Group Ltd into run-off, the life reinsurance specialist has started a voluntary, provisional winding-up process.

The action comes after the company’s management raised doubt that it would be able to continue as a going concern in 2018.

Now, what remains of the company in Bermuda and Cayman Islands is set to be wound up, and the action may involve the sale of subsidiary Scottish Annuity & Life Insurance Company (Cayman) Ltd.

The company recorded a loss of $208.2 million last year and said there was “substantial doubt” it would be able to meet deferred interest payments due in the first quarter of 2018.

The Supreme Court of Bermuda has granted an order for the provisional winding-up proceedings to begin. Parallel winding-up proceedings have been filed in Cayman Islands where Scottish Re Group is incorporated.

In the late 1990s and early 2000s, the group enjoyed notable success before buckling under yearly losses of hundreds of millions of dollars.

An attempt to restore Scottish Re’s fortunes through a $600 million equity injection in late 2006 saved it from possible bankruptcy.

However, it was only a temporary reprieve. The following year it was battered by losses from the sub-prime meltdown as high-risk mortgages went into default. At the time Scottish Re had $3.1 billion of investments in sub-prime and “Alt A” mortgages, representing almost a third of its total investments.
Repeated downgrades from rating agencies dropped the company’s stock into junk territory and made it virtually impossible for it to attract new business.

In early 2008 the company ceased writing new business and placed its remaining reinsurance treaties in run-off. The company’s shares, which three years earlier were worth $25 each, dropped below $1 and were delisted by the New York Stock Exchange.

Scottish Re’s losses for 2008 totalled $2.71 billion.

The story of Scottish Re Group follows an upward trajectory from 1998 until 2006, when it hit financial trouble before being brought to its knees by the sub-prime meltdown.

The business started with $250 million of capital in 1998 as Scottish Annuity & Life Holdings. It incorporated in Cayman Islands and one of its two wholly owned subsidiaries was The Scottish Annuity Company (Cayman) Ltd, which was incorporated in 1994.

It then acquired Scottish Re (US) Inc, a Delaware reinsurance company, in 1999, the same year of its initial public offering.

In 2000, it acquired a controlling interest in Scottish Crown Group (Bermuda) Ltd, which owned two Bermuda-listed insurance companies engaged in insurance policies for high net worth individuals.

The following year Scottish Annuity was the largest reinsurer with a physical presence in Cayman. It decided to move its corporate and international reinsurance operations to Bermuda to take advantage of the global insurance business which passed through the island.

At the time, Michael French, then CEO, said: “Bermuda is the capital of the global insurance industry.”
The company had offices in Cayman, Bermuda, Ireland, England and North Carolina, but despite its name had no office in Scotland. It was moving away from the annuity business and into reinsurance. By the end of 2002 it had $68 billion of life insurance in force, covering 1.3 million lives.

In 2003, the company rebranded as Scottish Re, with total assets of about $3.8 billion. But three years later its income plunged with adverse mortality and morbidity expenses and millions of dollars of late claims from ceding companies.

Scott Wilkomm resigned as CEO after second-quarter operating losses of $130 million in 2006, mostly due to the reversal of tax credits that had boosted previous earnings.

As a result, AM Best and other agencies downgraded the company’s ratings below A-, a level considered important for reinsurers to attract and retain business.

Legal challenges rocked the company, including a US Senate investigation and nine class actions launched by investors. Scottish Re also faced the challenge of a $115 million convertible note repayment coming due at the end of 2006.

With the possibility of bankruptcy on the horizon, the company agreed to sell control of itself to MassMutual Capital Partners and private equity firm Cerberus for $600 million. The sale equated to about $4 per share, far below the $12 for which investors had hoped.

Scottish Re’s net loss for 2006 totalled $368.3 million. The rating agency downgrades continued.
In 2007 the company, which at the time employed 18 people in Bermuda, appeared to be turning things around. Then the US Securities and Exchange Commission identified an error in the calculations of Scottish Re’s second-quarter results — it was a $120.8 million one-time deduction, and that changed the quarterly income from $1.46 per share to a 30 cents loss.

Even as the company sold its Middle East life portfolio to bolster its capital position, the sub-prime mortgage crisis was under way. In the third quarter, Scottish Re took a $95 million hit from sub-prime exposure.

By early 2008 its shares were worth less than $1.

Scottish Re announced it had ceased writing new business and notified exiting customers it would not be accepting any new reinsurance risks under existing reinsurance treaties, placing remaining treaties into run-off.

The company’s shares were delisted from the NYSE in March 2008.

Scottish Re sold its London-based international life reinsurance segment, and some other international segments, to Pacific Lifecorp.

In 2009, Hannover Re bought a block of individual life reinsurance business that had been acquired by Scottish Re from ING in 2004.

In 2011, the company completed a merger with SGRL Acquisition, a new subsidiary of Cerberus Capital Management and certain affiliates of Massachusetts Mutual Life Insurance Company, under Cayman Islands laws, with Scottish Re Group Ltd the surviving group.

During the past six years Scottish Re has continued to manage its reinsurance business in run-off.
It reported a $208.2 million loss for 2016, with a shareholders’ deficit of $32.5 million as of December 31. Adverse mortality in the traditional solutions yearly renewable term business negatively impacted operating results.

Unless there is significant improvement in the performance of that business this year, the company said it will “incur additional capital strain, thereby further reducing available funds and eroding the company’s ability to pay the deferred interest on the capital and trust preferred securities as such deferred interest payments become due during the first quarter of 2018”.

In its consolidated statement for 2016, the company said: “Accordingly, substantial doubt exists that the company will be able to meet these deferred interest payments.”

Regarding this week’s announced voluntary, provisional winding-up proceedings, the Supreme Court has granted an order appointing John McKenna of Finance & Risk Services Ltd, Bermuda, and Eleanor Fisher of Kalo (Cayman) Ltd, of the Cayman Islands, as joint provisional liquidators of Scottish Re Group.

They will work with the board and management to create a restructuring plan for Scottish Re, which may involve the sale of the group’s subsidiary Scottish Annuity & Life Insurance Company (Cayman).
Keefe, Bruyette & Woods has been retained to assist Scottish Re in the process of identifying an acquirer for Scottish Annuity. Qualified parties interested in participating in the sale process should contact Joseph Beebe or Peter Houston of KBW by e-mail at [email protected]

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