EX-99.1 2 ex991.txt PRESS RELEASE Scottish Re Group Limited Announces Operating Results For The Second Quarter Ended June 30, 2005 HAMILTON, Bermuda--(BUSINESS WIRE)--July 28, 2005--Scottish Re Group Limited (NYSE:SCT) today reported that net income for the quarter ended June 30, 2005 was $1.6 million, or $0.03 per diluted ordinary share, as compared to $28.7 million, or $0.77 per diluted ordinary share for the prior year period. Net income for the six months ended June 30, 2005 was $35.0 million or $0.76 per diluted ordinary share, as compared to $38.8 million, or $1.04 per diluted ordinary share for the prior year period. Net operating earnings were $19.7 million, or $0.42 per diluted ordinary share for the quarter ended June 30, 2005 as compared to $18.1 million, or $0.49 per diluted ordinary share for the prior year period. Net operating earnings were $46.6 million, or $1.01 per diluted ordinary share for the six months ended June 30, 2005 as compared to $34.7 million or $0.93 per diluted ordinary share for the prior year period. "Net operating earnings" is a non-GAAP measurement. We determine net operating earnings by adjusting GAAP net income by net realized capital gains and losses and the change in value of embedded derivatives as adjusted for the related effects upon the amortization of deferred acquisition costs and taxes. While these items may be significant components in understanding and assessing the Company's consolidated financial performance, the Company believes that the presentation of net operating earnings enhances the understanding of its results of operations by highlighting earnings attributable to the normal, recurring operations of its reinsurance business. However, net operating earnings are not a substitute for net income determined in accordance with GAAP. Reconciliations to GAAP net income are provided in the following tables. The results for the quarter were negatively impacted by higher than expected mortality in the quarter that decreased net income and net operating earnings by approximately $11.2 million, or $0.24 per diluted share. "We are disappointed with the results for the quarter," said Scott E. Willkomm, President and Chief Executive Officer of Scottish Re Group Limited . "Unfortunately, a greater than expected number of large claims in North America caused us to miss our earnings expectations for the quarter." "However, it is important to put this in context and recall that we are in the business of accepting risk," he added. "While we take a long-term outlook when developing our expected returns, yet fluctuations in mortality can lead to short-term earnings volatility in any reporting period. If there wasn't any volatility, ceding companies would be less interested in reinsuring their business. Our job is to minimize that volatility to acceptable levels over the long term." "We minimize volatility by limiting our per-life exposures and maintaining very robust retrocession programs. Furthermore, we purchase special retro coverage to minimize the potential volatility that can arise from per-life retentions that are greater than our own," he said. "Finally, we purchase catastrophe and clash coverage to protect ourselves from events beyond our control." Mr. Willkomm added, "The total number of claims in the second quarter was marginally less than what we experienced in the first quarter and consistent with expected levels. However, in the second quarter, we received three very large claims that together totaled $5.3 million. In total, we received 16 more claims in the second quarter with claim amounts greater than $500,000 than we expected." "The higher than expected number of large claims - which we define as claims in excess of $500,000 - did not come from any one ceding company and were not concentrated in any one block or segment of our business," he added. "We anticipate that our claims experience will revert to more expected levels, but the nature of our business is such that our results will continue to be subject to mortality volatility that can impact our results in a positive or negative manner." On a trailing twelve months basis, the Company's return on average equity - measured by dividing net operating earnings by average shareholders equity excluding the effect of FAS 115 and the change in fair value of embedded derivatives - was 11.2%. If the Company had not experienced adverse mortality this quarter, its return on average equity for the last twelve months would have been approximately 12.5%. Total revenue for the quarter increased to $503.8 million from $226.9 million for the prior year period, an increase of 122%. Excluding realized gains and losses and the change in fair value of the embedded derivative, total revenue for the quarter increased to $525.0 million from $214.0 million for the prior year period, an increase of 145%. Total revenue for the six months ended June 30, 2005 increased to $1.1 billion from $406.1 million for the prior year period, an increase of 171%. Excluding realized gains and losses and the change in fair value of the embedded derivative, total revenue for the six months increased to $1.1 billion from $400.4 million for the prior year period, an increase of 175%. Total benefits and expenses increased to $510.6 million for the quarter from $199.9 million, an increase of 155%. For the six months ended June 30, 2005, total benefits and expenses increased to $1.0 billion from $367.8 million, an increase of 172%. The increases were principally driven by the acquisition of the ING individual life business and growth in the Company's reinsurance business in North America. The Company's operating expense ratio (which is the ratio of operating expenses to total revenue excluding realized gains/losses and the change in value of embedded derivatives) for the last twelve months ended June 30, 2005 was 4.8%, as compared to an operating expense ratio of 6.7% for the year ended December 31, 2004. Operating expenses in the second quarter were approximately $2 million greater than the first quarter of 2005 due to professional fees incurred in connection with our financial improvement project in our International business. The Company's total assets were $10.3 billion as of June 30, 2005. The core investment portfolio, comprising fixed maturity investments, preferred stock and most of the cash and cash equivalents, totaled $5.6 billion, and had an average quality rating of "AA-", an effective duration of 3.6 years and a weighted average book yield of 4.6%. This compares with a portfolio balance of $4.3 billion, an average quality rating of "AA-", effective duration of 3.8 years and an average book yield of 4.2% as of December 31, 2004. Funds withheld at interest, totaling $1.9 billion, had an average quality rating of "A", an effective duration of 5.2 years and a weighted average book yield of 5.8% at June 30, 2005. This compares with a total of $2.1 billion with an average quality rating of "A+", an effective duration of 3.9 years and an average book yield of 5.2% at December 31, 2004. The market value of the funds withheld at interest amounted to $1.9 billion at June 30, 2005. Mr. Willkomm added, "The integration of the ING Re business is progressing quite favourably and is slightly ahead of what was anticipated at the time of the transaction. By the end of 2005, we expect to move all of our North American administrative operations from Charlotte to Denver and to migrate our administrative platform to an upgraded version of the ING Re administration system that was acquired during the course of the transaction." "In addition, new business production continues to be strong and during the second quarter, we added $38.5 billion of new traditional life reinsurance volume, bringing total 2005 new business to $87.5 billion." As of June 30, 2005, the Company had approximately $1.1 trillion of gross life reinsurance in force covering 13.9 million lives with an average benefit per life of $74,000 in our North American operations. As of June 30, 2004, we had approximately $298 billion of life reinsurance in force covering 7.4 million lives with an average benefit per life of $40,000 in our North American operations. The Company's book value per share was $23.74 at June 30, 2005 as compared to $21.60 per share at December 31, 2004. Fully diluted book value per share was $20.13 at June 30, 2005 as compared to $19.43 at December 31, 2004. The Company's earnings conference call has been changed to 8:30 am (EDT) on Friday, July 29, 2005. The dial-in number is (877) 502-2902 or (706) 679-5950 and the reservation number is 7550420. A replay of the call will be available beginning at 1:00 pm on Friday, July 29, 2005 and running through Thursday, August 18, 2005. The dial-in number for the replay is (800) 642-1687 or (706) 645-9291 and the PIN code is 7550420. In addition, a simultaneous Web cast, as well as an on-demand replay, of the conference call will be available at the Company's Web site, http://www.scottishre.com/conferencecall. Scottish Re Group Limited is a global life reinsurance specialist and issuer of customized life-insurance based wealth management products for high net worth individuals and families. Scottish Re Group Limited has operating companies in Bermuda, Charlotte, North Carolina, Dublin, Ireland, Grand Cayman and Windsor, England. Its operating subsidiaries include Scottish Annuity & Life Insurance Company (Cayman) Ltd. and Scottish Re (U.S.), Inc. which are rated A- (excellent) by A.M. Best, A (strong) by Fitch Ratings, A3 (good) by Moody's and A- (strong) by Standard & Poor's, Scottish Re Limited, which is rated A- (excellent) by A.M. Best, A (strong) by Fitch Ratings and A- (strong) by Standard & Poor's and Scottish Re Life Corporation Limited which is rated A-(excellent) by A.M. Best. Additional information about Scottish Re can be obtained from its Web site, http://www.scottishre.com. Certain statements included herein are "forward-looking statements" within the meaning of the federal securities laws. The management of Scottish Re Group Limited (the "Company") cautions that forward-looking statements are not guarantees, and that actual results could differ materially from those expressed or implied in the forward-looking statements. Important events that could cause the actual results of operations or financial condition of the Company to differ include, but are not necessarily limited to, the Company's ability to attract clients and generate business; the competitive environment; the Company's ability to underwrite business; performance of outside service providers; mortality risk; surrender risk; investment risk (including asset value risk, reinvestment risk and disintermediation risk); the impact of unforeseen economic changes (such as changes in interest rates, currency exchange rate, inflation rates, recession and other external economic factors); the impact of terrorist activities on the economy, the insurance and related industries in general and the Company in particular; regulatory changes (such as changes in U.S. tax law and insurance regulation which directly affect the competitive environment for the Company's products); rating agency policies and practices; and loss of key executives. Investors are also directed to consider the risks and uncertainties discussed in documents filed by the Company with the Securities and Exchange Commission. Scottish Re Group Limited Financial Highlights (Stated in Thousands of United States Dollars, Except Per Share Data) (Unaudited) -------------------------------------------------------------------------- Three months Three months Six months Six months ended ended ended ended June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004 ------------- ------------- ------------- ------------- Total revenue $503,778 $226,909 $1,061,911 $406,085 Net operating earnings(a) 19,715 18,111 46,645 34,726 Net income 1,591 28,670 35,011 38,764 Net operating earnings per share Basic $0.45 $0.51 $1.12 $0.98 Diluted $0.42 $0.49 $1.01 $0.93 Earnings per share Basic $0.04 $0.80 $0.84 $1.09 Diluted $0.03 $0.77 $0.76 $1.04 Dividends per share $0.05 $0.05 $0.10 $0.10 Weighted average ordinary shares Outstanding Basic 43,462,385 35,747,254 41,726,320 35,537,458 Diluted 47,136,889 37,328,448 46,179,275 37,279,282 (a) Excludes effect of realized gains and losses, change in value of embedded derivatives and the amortization of related deferred acquisition costs. June 30, 2005 December 31, 2004 ----------------- ----------------- Book value per share $23.74 $21.60 Fully diluted book value per share - excluding other comprehensive income and fair value of embedded derivatives $20.13 $19.43 Scottish Re Group Limited Consolidated Balance Sheets (Stated in Thousands of United States Dollars) June 30, 2005 December 31, 2004 ----------------- ----------------- Assets Fixed maturity investments $5,119,254 $3,392,463 Preferred stock 130,231 125,204 Cash and cash equivalents 320,531 794,639 Other investments 24,594 16,250 Funds withheld at interest 1,895,353 2,056,280 ----------------- ----------------- Total investments 7,489,963 6,384,836 Accrued interest receivable 39,645 32,092 Net proceeds receivable on preferred shares 120,786 - Reinsurance balances and risk fees receivable 443,589 470,817 Deferred acquisition costs 477,449 417,306 Amounts recoverable from reinsurers 792,296 774,503 Present value of inforce business 58,752 62,164 Goodwill 34,125 34,125 Other assets 75,382 61,668 Segregated assets 799,329 783,573 ----------------- ----------------- Total assets $10,331,316 $9,021,084 ================= ================= Liabilities Reserves for future policy benefits $3,524,757 $3,370,562 Interest sensitive contract liabilities 3,278,793 3,181,447 Collateral finance facilities 1,050,000 200,000 Accounts payable and other liabilities 102,317 68,311 Reinsurance balances payable 100,060 116,589 7.00% Convertible junior subordinated notes - 41,282 Long term debt 244,500 244,500 Segregated liabilities 799,329 783,573 ----------------- ----------------- Total liabilities 9,099,756 8,006,264 ----------------- ----------------- Minority Interest 9,920 9,697 Mezzanine Equity 142,753 142,449 Shareholders' equity Ordinary shares, par value $0.01 per share: Issued and fully paid:45,453,472 ordinary shares (2004 - 39,931,145) 454 399 Preferred shares, par value $0.01: Issued and fully paid: 10,750,000 shares (2004- 5,750,000) 125,000 - Additional paid- in capital 726,850 684,719 Accumulated other comprehensive income 50,051 31,604 Retained earnings 176,532 145,952 ----------------- ----------------- Total shareholders' equity 1,078,887 862,674 ----------------- ----------------- Total liabilities and shareholders' equity $10,331,316 $9,021,084 ================= ================= Scottish Re Group Limited Consolidated Statements of Income (Stated in Thousand of United States Dollars) Three months Three months Six months Six months ended ended ended ended June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004 ------------- ------------- ------------- ------------- Revenues Premiums earned $438,625 $155,980 $903,875 $289,327 Investment income, net 83,554 54,817 164,033 104,919 Fee income 2,785 3,189 6,409 6,141 Realized gains (losses) 934 (1,687) 4,229 (266) Change in value of embedded derivatives, net (22,120) 14,610 (16,635) 5,964 ------------- ------------- ------------- ------------- Total revenues 503,778 226,909 1,061,911 406,085 ------------- ------------- ------------- ------------- Benefits and expenses Claims and other policy benefits 311,493 122,988 674,766 218,155 Interest credited to interest sensitive contract liabilities 31,723 25,465 62,365 49,658 Acquisition costs and other insurance expenses, net 124,226 37,589 217,438 70,458 Operating expenses 26,500 10,901 51,069 23,755 Collateral finance facilities expense 11,821 - 19,241 - Interest expense 4,813 2,996 10,407 5,773 ------------- ------------- ------------- ------------- Total benefits and expenses 510,576 199,939 1,035,286 367,799 ------------- ------------- ------------- ------------- Income (loss) before income taxes and minority interest (6,798) 26,970 26,625 38,286 Income tax benefit 8,187 1,689 8,555 816 ------------- ------------- ------------- ------------- Income before minority interest 1,389 28,659 35,180 39,102 Minority interest 202 11 (169) (338) ------------- ------------- ------------- ------------- Net income $1,591 $28,670 $35,011 $38,764 ============= ============= ============= ============= Scottish Re Group Limited Supplemental Information - Net Operating Earnings (Stated in Thousand of United States Dollars, Except Per Share Amounts) Three months Three months Six months Six months ended ended ended ended June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004 ------------- ------------- ------------- ------------- Net operating earnings ------------- Net income $1,591 $28,670 $35,011 $38,764 Realized losses (gains) (934) 1,687 (4,229) 266 Change in value of embedded derivatives, net 22,120 (14,610) 16,635 (5,964) Taxes on realized gains/losses and change in value of embedded derivatives (3,062) 2,364 (772) 1,660 ------------- ------------- ------------- ------------- Net operating earnings $19,715 $18,111 $46,645 $34,726 Net operating earnings per share Basic $0.45 $0.51 $1.12 $0.98 Diluted $0.42 $0.49 $1.01 $0.93 ============= ============= ============= ============= Weighted average number of shares Outstanding Basic 43,462,385 35,747,254 41,726,320 35,537,458 Diluted 47,136,889 37,328,448 46,179,275 37,279,282 Scottish Re Group Limited Supplemental Information - Segment Operating Results (Stated in Thousand of United States Dollars) Life Reinsurance North America Three months ended Six months ended June 30 June 30 ------------------------- ------------------------- 2005 2004 2005 2004 ------------ ------------ ------------ ------------ Premiums earned $410,687 $127,272 $848,560 $232,874 Investment income, net 80,956 50,979 158,487 98,386 Fee income 2,007 2,248 4,907 4,350 Realized gains (losses) 2,208 (1,552) 3,650 140 Change in value of embedded derivatives, net (22,120) 14,610 (16,635) 5,964 ------------ ------------ ------------ ------------ Total revenues 473,738 193,557 998,969 341,714 ------------ ------------ ------------ ------------ Claims and other policy benefits 293,599 102,485 637,787 178,078 Interest credited to interest sensitive contract liabilities 31,723 25,465 62,365 49,658 Acquisition costs and other insurance expenses, net 119,737 35,701 208,793 65,236 Operating expenses 10,221 4,142 21,894 9,105 Collateral finance facilities expense 10,448 - 16,633 - Interest expense 2,657 939 5,365 1,625 ------------ ------------ ------------ ------------ Total benefits and expenses 468,385 168,732 952,837 303,702 ------------ ------------ ------------ ------------ Income before income taxes and minority interest 5,353 24,825 46,132 38,012 Income tax benefit 8,465 1,734 8,678 922 ------------ ------------ ------------ ------------ Income before minority interest 13,818 26,559 54,810 38,934 Minority interest 202 11 (169) (338) ------------ ------------ ------------ ------------ Net income $14,020 $26,570 $54,641 $38,596 ============ ============ ============ ============ Net operating earnings ------------- Net income $14,020 $26,570 $54,641 $38,596 Net realized losses (gains) (2,208) 1,552 (3,650) (140) Change in value of embedded derivatives, net 22,120 (14,610) 16,635 (5,964) Taxes on above items (3,204) 2,419 (958) 1,738 ------------ ------------ ------------ ------------ Net operating earnings $30,728 $15,931 $66,668 $34,230 ============ ============ ============ ============ Scottish Re Group Limited Supplemental Information - Segment Operating Results (continued) (Stated in Thousand of United States Dollars) Life Reinsurance International Three months ended Six months ended June 30 June 30 --------------------- ----------------------- 2005 2004 2005 2004 ---------- ---------- ---------- ------------ Premiums earned $27,938 $28,708 $55,315 $56,453 Investment income, net 2,352 3,574 4,942 5,722 Realized gains (losses) 88 (189) 585 (340) ---------- ---------- ---------- ------------ Total revenues 30,378 32,093 60,842 61,835 ---------- ---------- ---------- ------------ Claims and other policy benefits 17,894 20,503 36,979 40,077 Acquisition costs and other insurance expenses, net 3,975 1,334 7,612 3,983 Operating expenses 7,285 3,757 13,134 8,166 ---------- ---------- ---------- ------------ Total benefits and expenses 29,154 25,594 57,725 52,226 ---------- ---------- ---------- ------------ Income before income taxes 1,224 6,499 3,117 9,609 Income tax expense (195) (1,085) (66) (1,123) ---------- ---------- ---------- ------------ Net income $1,029 $5,414 $3,051 $8,486 ========== ========== ========== ============ Net operating earnings ---------------------- Net income $1,029 $5,414 $3,051 $8,486 Realized losses (gains) (88) 189 (585) 340 Taxes on realised losses (gains) 9 (55) 174 (78) ---------- ---------- ---------- ------------ Net operating earnings $950 $5,548 $2,640 $8,748 ========== ========== ========== ============ Scottish Re Group Limited Supplemental Information - Segment Operating Results (continued) (Stated in Thousand of United States Dollars) Corporate & Other Three months ended Six months ended June 30 June 30 --------------------- ---------------------- 2005 2004 2005 2004 ---------- ---------- ---------- ----------- Investment income, net $246 $264 $604 $811 Fee income 778 941 1,502 1,791 Realized gains (losses) (1,362) 54 (6) (66) ---------- ---------- ---------- ----------- Total revenues (338) 1,259 2,100 2,536 ---------- ---------- ---------- ----------- Acquisition costs and other insurance expenses, net 514 554 1,033 1,239 Operating expenses 8,994 3,002 16,041 6,484 Collateral finance facilities expense 1,373 - 2,608 - Interest expense 2,156 2,057 5,042 4,148 ---------- ---------- ---------- ----------- Total benefits and expenses 13,037 5,613 24,724 11,871 ---------- ---------- ---------- ----------- Loss before income taxes (13,375) (4,354) (22,624) (9,335) Income tax benefit (expense) (83) 1,040 (57) 1,017 Loss $(13,458) $(3,314) $(22,681) $(8,318) ========== ========== ========== =========== Net operating loss ------------------ Loss $(13,458) $(3,314) $(22,681) $(8,318) Realized losses (gains) 1,362 (54) 6 66 Taxes on realised losses (gains) 133 - 12 - ---------- ---------- ---------- ----------- Net operating loss $(11,963) $(3,368) $(22,663) $(8,252) ========== ========== ========== =========== Scottish Re Group Limited Supplemental Information - Business Acquired from ING (Stated in Thousand of United States Dollars) This supplemental information is in respect of the business acquired from ING. This information also includes premiums earned, claims and other policy benefits and acquisition costs and other insurance expenses related to 2005 new business on treaties that remained open to new business after the date of acquisition. Since this block has been combined with the Company's existing North America Traditional Solutions business, shared operating expenses are not allocated directly to the results of the block. Three months Six months ended ended June 30, 2005 June 30, 2005 --------------- --------------- Premiums earned (1) $278,776 $567,007 Investment income, net 18,584 36,093 Realized gains 394 2,294 Change in value of embedded derivatives, net (17,616) (13,231) --------------- --------------- Total revenues 280,138 592,163 --------------- --------------- Claims and other policy benefits (1) 183,056 412,544 Acquisition costs and other insurance expenses, net (1) 77,895 136,379 Operating expenses(2) 4,538 9,690 --------------- --------------- Total benefits and expenses 265,489 558,613 --------------- --------------- Income before income taxes and minority interest $14,649 $33,550 =============== =============== (1) Includes premiums earned in connection with new business written in 2005 on treaties that were still open to new business after the date of acquisition. (2) Operating expenses include only direct expenses and do not include an allocation of shared expenses from the Company's North American operation. Scottish Re Group Limited Supplemental Information - Book Value Per Ordinary Share and Fully Diluted Book Value Per Ordinary Share (Stated in Thousand of United States Dollars, Except Per Share Amounts) Fully diluted book value per ordinary share is a non-GAAP measure, based on total shareholder's equity plus the assumed proceeds from the exercise of outstanding options, warrants and other convertible securities, divided by the sum of shares, options and warrants outstanding, and the number of shares required upon the conversion of convertible securities. The Company believes that fully diluted book value per ordinary share more accurately reflects the book value that is attributable to an ordinary share. June 30, 2005 December 31, 2004 ----------------- ------------------ Shareholders' equity - end of period $1,078,887 $862,674 Other comprehensive income (50,051) (31,604) Fair value of embedded derivative, net 21,798 5,162 Preferred shares (125,000) - Net proceed from assumed: Conversion of options 46,090 37,085 Conversion warrants 39,750 39,782 Conversion of Mezzanine Equity 143,750 143,750 Conversion of 7% Convertible notes - 41,282 ----------------- ------------------ Numerator for diluted book value per share calculation $1,155,224 $1,098,131 ================= ================== Ordinary shares outstanding-end of period 45,453,472 39,931,145 Potential shares issued from assumed: Exercise of options and restricted stock units 3,199,936 2,491,236 Conversion of warrants 2,650,000 5,856,431 Conversion of Mezzanine Equity 6,099,025 6,099,025 Conversion of 7% Convertible notes - 2,130,709 ----------------- ------------------ Denominator for diluted book value per share calculation 57,402,433 56,508,546 ================= ================== Book value per ordinary share $23.74 $21.60 Fully diluted book value per ordinary share (excluding other comprehensive income and the fair value of embedded derivatives) $20.13 $19.43 CONTACT: Scottish Re Group Limited , Hamilton Scott E. Willkomm, 441-298-4364 scott.willkomm@scottishre.com SOURCE: Scottish Re Group Limited