-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PnLpZahwGCO9PmeevrBwUyXiXupResQgk0Ebfo5k0Pn9DA8IKRwSxFttH7bxQTo1 WwCkZBN5z4yC/zzSh2vY3g== 0000898080-07-000089.txt : 20070510 0000898080-07-000089.hdr.sgml : 20070510 20070510170505 ACCESSION NUMBER: 0000898080-07-000089 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20070331 FILED AS OF DATE: 20070510 DATE AS OF CHANGE: 20070510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCOTTISH RE GROUP LTD CENTRAL INDEX KEY: 0001064122 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 000000000 STATE OF INCORPORATION: E9 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-16855 FILM NUMBER: 07838866 BUSINESS ADDRESS: STREET 1: GRAND PAVILION COMMERCIAL CENTRE STREET 2: 802 WEST BAY RD GEORGE TOWN GRAND CAYMAN CITY: GRAND CAYMAN CAYMAN STATE: E9 ZIP: 00000 BUSINESS PHONE: 3459492800 MAIL ADDRESS: STREET 1: P O BOX HM 2939 CITY: HAMILTON STATE: D0 ZIP: HM MX FORMER COMPANY: FORMER CONFORMED NAME: SCOTTISH LIFE HOLDINGS LTD DATE OF NAME CHANGE: 19980615 10-Q 1 form10q.txt 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- FORM 1O-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2007 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition period from _____ to _____ Commission File Number: 001-16855 SCOTTISH RE GROUP LIMITED (Exact Name of Registrant as Specified in Its Charter) Cayman Islands 98-0362785 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) P.O. Box HM 2939 Crown House, Second Floor 4 Par-la-Ville Road Hamilton HMO8 Bermuda (Address of Principal Executive Offices) Not Applicable (Zip Code) (441) 295-4451 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year if changed since last report) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by checkmark whether the registrant is a large accelerated filer, or a non-accelerated filer. See definition of "accelerated filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. Large accelerated filer /X/ Accelerated filer / / Non-accelerated filer / / Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes / / No /X/ As of May 9, 2007, the Registrant had 67,995,057 ordinary shares outstanding. ================================================================================ Table of Contents PART I. FINANCIAL INFORMATION................................................2 Item 1. Financial Statements.................................................2 Consolidated Balance Sheets -- March 31, 2007 (unaudited) and December 31, 2006...............................2 Consolidated Statements of Income (Loss) -- Three months ended March 31, 2007 and 2006 (unaudited).......................3 Consolidated Statements of Comprehensive Loss -- Three months ended March 31, 2007 and 2006 (unaudited).......................4 Consolidated Statements of Shareholders' Equity -- Three months ended March 31, 2007 and 2006 (unaudited)........................5 Consolidated Statements of Cash Flows -- Three months ended March 31, 2007 and 2006 (unaudited).............................6 Notes to Consolidated Financial Statements (unaudited)...............7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........................................13 Item 3. Quantitative and Qualitative Disclosures about Market Risk..........33 Item 4. Controls and Procedures.............................................34 PART II. OTHER INFORMATION....................................................35 Item 1. Legal Proceedings...................................................35 Item 1A. Risk Factors........................................................35 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.........35 Item 3. Defaults upon Senior Securities.....................................35 Item 4. Submission of Matters to a Vote of Security Holders.................35 Item 5. Other Information...................................................36 Item 6. Exhibits............................................................36 1 PART I. FINANCIAL INFORMATION Item 1. Financial Statements SCOTTISH RE GROUP LIMITED CONSOLIDATED BALANCE SHEETS (Expressed in Thousands of United States dollars, except share data)
March 31, December 31, 2007 2006 (unaudited) (audited) ----------- ----------- ASSETS Fixed maturity investments, available for sale, at fair value (Amortized cost $8,187,168; 2006 - $8,103,743) ............ $ 8,135,873 $ 8,065,524 Preferred stock, available for sale, at fair value (Cost $114,287; 2006 - $119,721) .......................... 112,009 116,933 Cash and cash equivalents .................................... 692,284 622,756 Other investments ............................................ 65,211 65,448 Funds withheld at interest ................................... 1,835,003 1,942,079 ------------ ------------ Total investments ......................................... 10,840,380 10,812,740 Accrued interest receivable .................................. 56,879 57,538 Reinsurance balances and risk fees receivable ................ 481,022 481,908 Deferred acquisition costs ................................... 610,054 618,737 Amounts recoverable from reinsurers .......................... 545,515 554,589 Present value of in-force business ........................... 48,311 48,779 Other assets ................................................. 199,633 178,311 Segregated assets ............................................ 683,405 683,470 ------------ ------------ Total assets .............................................. $ 13,465,199 $ 13,436,072 ============ ============ LIABILITIES Reserves for future policy benefits .......................... $ 3,970,252 $ 3,919,901 Interest sensitive contract liabilities ...................... 3,305,858 3,399,410 Collateral finance facilities ................................ 3,775,519 3,757,435 Accounts payable and other liabilities ....................... 166,662 95,260 Reinsurance balances payable ................................. 138,119 72,304 Current income tax payable ................................... 4,289 48 Deferred tax liability ....................................... 161,328 169,977 Long-term debt ............................................... 129,500 129,500 Segregated liabilities ....................................... 683,405 683,470 ------------ ------------ Total liabilities ............................................ 12,334,932 12,227,305 ============ ============ MINORITY INTEREST ............................................ 7,716 7,910 MEZZANINE EQUITY ............................................. - 143,665 SHAREHOLDERS' EQUITY Ordinary shares, par value $0.01 per share: Issued and outstanding: 67,995,057 ordinary shares (2006 - 60,554,104) ............................................... 680 606 Preferred shares, par value $0.01 per share: Issued: 5,000,000 shares (2006 - 5,000,000) ................ 125,000 125,000 Additional paid-in capital ................................... 1,195,481 1,050,860 Accumulated other comprehensive (loss) income ................ (10,947) 340 Retained deficit ............................................. (187,663) (119,614) ------------ ------------ Total shareholders' equity ................................ 1,122,551 1,057,192 ------------ ------------ Total liabilities, minority interest, mezzanine equity and shareholders' equity ...................................... $ 13,465,199 $ 13,436,072 ============ ============
See Accompanying Notes to Consolidated Financial Statements (unaudited) 2 SCOTTISH RE GROUP LIMITED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED) (Expressed in Thousands of United States dollars, except share data)
Three months ended --------------------------- March 31, March 31, 2007 2006 --------- --------- Revenues Premiums earned, net ......................................... $ 458,214 $ 449,021 Investment income, net ....................................... 141,597 129,022 Fee income ................................................... 4,630 3,733 Net realized losses .......................................... (4,289) (13,601) Change in value of embedded derivatives, net ................. 5,592 10,146 ------------- ------------- Total revenues ............................................ 605,744 578,321 ------------- ------------- Benefits and expenses Claims and other policy benefits ............................. 383,583 374,463 Interest credited to interest sensitive contract liabilities . 35,302 42,701 Acquisition costs and other insurance expenses, net .......... 95,107 87,531 Operating expenses ........................................... 34,580 31,092 Collateral finance facilities expense ........................ 73,695 31,087 Interest expense ............................................. 3,576 4,893 ------------- ------------- Total benefits and expenses ............................... 625,843 571,767 ------------- ------------- Income (loss) before income taxes and minority interest ...... (20,099) 6,554 Income tax benefit (expense) ................................. (13,381) 7,457 ------------- ------------- Income (loss) before minority interest ....................... (33,480) 14,011 Minority interest ............................................ 268 (162) ------------- ------------- Net income (loss) ............................................ (33,212) 13,849 Dividend declared on non-cumulative perpetual preferred shares (2,266) (2,266) ------------- ------------- Net income (loss) available to ordinary shareholders ......... $ (35,478) $ 11,583 ============= ============= Earnings (loss) per ordinary share - Basic ................... $ (0.55) $ 0.22 ============= ============= Earnings (loss) per ordinary share - Diluted ................. $ (0.55) $ 0.20 ============= ============= Dividends declared per ordinary share ........................ $ - $ 0.05 ============= ============= Weighted average number of ordinary share outstanding Basic ...................................................... 64,191,977 53,434,484 ============= ============= Diluted .................................................... 64,191,977 56,532,914 ============= =============
See Accompanying Notes to Consolidated Financial Statements (unaudited) 3 SCOTTISH RE GROUP LIMITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED) (Expressed in Thousands of United States dollars) Three months ended ---------------------- March 31, March 31, 2007 2006 --------- --------- Net income (loss) .................................... $(33,212) $ 13,849 --------- --------- Other comprehensive loss, net of tax: Unrealized depreciation on investments ............... (8,959) (37,457) Add: reclassification adjustment for net realized gains (losses) included in net income .... (2,868) (7,670) --------- --------- Net unrealized appreciation (depreciation) on investments net of income tax benefit (expense) and deferred acquisition costs of $2,216, and $33,807 ............................... (11,827) (45,127) Cumulative translation adjustment .................... 540 (268) --------- --------- Other comprehensive loss ............................. (11,287) (45,395) --------- --------- Comprehensive loss ................................... $(44,499) $(31,546) ========= ========= See Accompanying Notes to Consolidated Financial Statements (unaudited) 4 SCOTTISH RE GROUP LIMITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) (Expressed in Thousands of United States dollars, except share data)
Three months ended --------------------------- March 31, March 31, 2007 2006 --------- --------- Ordinary shares: Beginning of period .................................................. 60,554,104 53,391,939 Issuance to employees on exercise of options and awards .............. 475 263,917 Issuance to holders of HyCUs on conversion of purchase contracts ..... 7,440,478 - ------------- ------------- End of period ....................................................... 67,995,057 53,655,856 ============= ============= Preferred shares: Beginning and end of period .......................................... 5,000,000 5,000,000 ------------- ------------- Share capital: Ordinary shares: Beginning of period .................................................. $ 606 $ 534 Issuance to employees on exercise of options ......................... - 3 Issuance to holders of HyCUs on conversion of purchase contracts ..... 74 - ------------- ------------- End of period ........................................................ 680 537 ------------- ------------- Preferred shares: Beginning and end of period .......................................... 125,000 125,000 ------------- ------------- Additional paid-in capital: Beginning of period .................................................. 1,050,860 893,767 Issuance to employees on exercise of options ......................... - 3,752 Option and restricted stock unit expense ............................. 715 1,996 Issuance to holders of HyCUs on conversion of purchase contracts ..... 143,675 - Other ................................................................ 231 - ------------- ------------- End of period ........................................................ 1,195,481 899,515 ------------- ------------- Accumulated other comprehensive loss: Unrealized depreciation on investments Beginning of period .................................................. (19,624) (17,879) Change in period (net of tax and deferred acquisition costs) ......... (11,827) (45,127) ------------- ------------- End of period ........................................................ (31,451) (63,006) ------------- ------------- Cumulative translation adjustment Beginning of period .................................................. 22,826 7,888 Change in period (net of tax) ........................................ 540 (268) ------------- ------------- End of period ........................................................ 23,366 7,620 ------------- ------------- Effect of adoption of FAS 158 Beginning and end of period .......................................... (2,862) - ------------- ------------- Total accumulated other comprehensive loss .............................. (10,947) (55,386) ------------- ------------- Retained earnings (deficit): Beginning of period .................................................. (119,614) 262,402 Adoption of FIN 48 on January 1, 2007 ................................ (32,571) - Net income (loss) .................................................... (33,212) 13,849 Dividends declared on ordinary shares ................................ - (2,673) Dividends declared on non-cumulative perpetual preferred shares ...... (2,266) (2,266) ------------- ------------- End of period ........................................................ (187,663) 271,312 ------------- ------------- Total shareholders' equity .............................................. $ 1,122,551 $ 1,240,978 ============= =============
See Accompanying Notes to Consolidated Financial Statements (unaudited) 5 SCOTTISH RE GROUP LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Expressed in Thousands of United States dollars)
Three months ended --------------------------- March 31, March 31, 2007 2006 --------- --------- Operating activities Net income (loss) ....................................................... $ (33,212) $ 13,849 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Net realized losses .................................................. 4,289 13,601 Change in value of embedded derivatives, net ......................... (5,592) (10,146) Amortization of discount on investments .............................. 3,487 4,067 Amortization of deferred acquisition costs ........................... 18,109 18,866 Amortization of present value of in-force business ................... 468 916 Changes in assets and liabilities: Accrued interest receivable ....................................... 635 (1,383) Reinsurance balances and risk fees receivable ..................... 61,395 79,050 Deferred acquisition costs ........................................ (12,327) (34,724) Deferred tax asset and liability .................................. (4,024) (276) Other assets and liabilities ...................................... (16,771) 5,542 Current income tax receivable and payable ......................... 4,232 (4,701) Reserves for future policy benefits, net of amounts recoverable from reinsurers .................................... 41,208 (35,900) Interest sensitive contract liabilities, net of funds ............. 62,759 36,175 withheld at interest Accounts payable and other liabilities ............................ 31,519 (12,270) Other ............................................................. 455 (3,054) ------------ ------------ Net cash provided by operating activities ............................ 156,630 69,612 ------------ ------------ Investing activities Purchase of fixed maturity investments .................................. (308,558) (1,144,900) Proceeds from sales of fixed maturity investments ....................... 56,299 184,417 Proceeds from maturity of fixed maturity investments .................... 159,227 105,673 Purchase of preferred stock investments ................................. - (4,608) Proceeds from sales and maturity of preferred stock investments ......... 5,136 4,821 Purchase of other investments ........................................... 1,090 (9,616) Other ................................................................... 1,131 (2,601) ------------ ------------ Net cash used in investing activities ................................ (85,675) (866,814) ------------ ------------ Financing activities Deposits to interest sensitive contract liabilities ..................... 2,961 113,521 Withdrawals from interest sensitive contract liabilities ................ (27,544) (45,264) Proceeds from issuance of ordinary shares ............................... - 3,755 Proceeds from issuance to holders of HyCUs on conversion of purchase contracts ................................................... 7,338 - Proceeds from collateral finance facility liabilities ................... 18,084 - Dividends paid on ordinary shares ....................................... - (2,673) Dividends paid on perpetual preferred shares ............................ (2,266) (2,266) ------------ ------------ Net cash (used in) provided by financing activities .................. (1,427) 67,073 ------------ ------------ Net change in cash and cash equivalents ................................. 69,528 (730,129) Cash and cash equivalents, beginning of period .......................... 622,756 1,420,205 ------------ ------------ Cash and cash equivalents, end of period ................................ $ 692,284 $ 690,076 ============ ============
See Accompanying Notes to Consolidated Financial Statements (unaudited) 6 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2007 (UNAUDITED) 1. Basis of presentation Accounting Principles -- The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results for the interim period are not necessarily indicative of the results to be expected for the full year ending December 31, 2007. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our 2006 Annual Report on Form 10-K for the year ended December 31, 2006 ("2006 Annual Report"). Consolidation -- We consolidate the results of all of our subsidiaries and all variable interest entities for which we are the primary beneficiary. All significant inter-company transactions and balances have been eliminated on consolidation. Estimates, Risks and Uncertainties -- The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported on the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates and assumptions used by management. Our most significant assumptions are for assumed reinsurance liabilities, premiums receivable, deferred acquisition costs, valuation of investment impairments and estimates of the realizability of gross deferred tax assets. We review and revise these estimates as appropriate. Any adjustments made to these estimates are reflected in the period the estimates are revised. All tabular amounts are reported in thousands of United States dollars, except share and per share data, or as otherwise noted. 2. New accounting pronouncements FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes". FIN 48 prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, "Accounting for Income Taxes". Tax positions must meet a "more likely than not" recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. On January 1, 2007, we adopted FIN 48. See Note 5. FASB Statement No. 157, Fair Value Measurements In September 2006, the FASB issued Statement No. 157 ("SFAS No. 157"), "Fair Value Measurements", which defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements. We are required to adopt SFAS No. 157 on January 1, 2008 and are evaluating the implications of SFAS No. 157 on our results of operations and financial position. 3. Business segments We measure segment performance primarily based on income or loss before income taxes and minority interest. Our reportable segments are strategic business units that are primarily segregated by geographic region. We report segments in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related 7 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) MARCH 31, 2007 (UNAUDITED) 3. Business segments (continued) Information". Our segments are Life Reinsurance North America, Life Reinsurance International and Corporate and Other. The segment reporting is as follows:
Three months ended March 31, 2007 --------------------------------------------- Life Reinsurance ----------------------- North Corporate America International and Other Total ------- ------------- --------- ----- Premiums earned, net .......................................... $ 423,371 $ 34,843 $ - $ 458,214 Investment income, net ........................................ 137,919 3,043 635 141,597 Fee income .................................................... 3,916 - 714 4,630 Net realized losses ........................................... (2,405) (625) (1,259) (4,289) Change in value of embedded derivatives, net .................. 5,592 - - 5,592 ---------- ---------- ---------- ---------- Total revenues ............................................. 568,393 37,261 90 605,744 ---------- ---------- ---------- ---------- Claims and other policy benefits .............................. 357,934 25,649 - 383,583 Interest credited to interest sensitive contract liabilities .. 35,302 - - 35,302 Acquisition costs and other insurance expenses, net ........... 87,223 5,921 1,963 95,107 Operating expenses ............................................ 12,258 9,812 12,510 34,580 Collateral finance facilities expense ......................... 68,856 - 4,839 73,695 Interest expense .............................................. 3,055 - 521 3,576 ---------- ---------- ---------- ---------- Total benefits and expenses ................................ 564,628 41,382 19,833 625,843 ---------- ---------- ---------- ---------- Income (loss) before income taxes and minority interest ....... $ 3,765 $ (4,121) $ (19,743) $ (20,099) ========== ========== ========== ========== Three months ended March 31, 2006 --------------------------------------------- Life Reinsurance ----------------------- North Corporate America International and Other Total ------- ------------- --------- ----- Premiums earned, net .......................................... $ 428,918 $ 20,103 $ - $ 449,021 Investment income, net ........................................ 123,941 2,989 2,092 129,022 Fee income .................................................... 3,017 - 716 3,733 Net realized gains (losses) ................................... (13,919) (1,138) 1,456 (13,601) Change in value of embedded derivatives, net .................. 10,146 - - 10,146 ---------- ---------- ---------- ---------- Total revenues .............................................. 552,103 21,954 4,264 578,321 ---------- ---------- ---------- ---------- Claims and other policy benefits .............................. 347,280 27,183 - 374,463 Interest credited to interest sensitive contract liabilities .. 42,701 - - 42,701 Acquisition costs and other insurance expenses, net ........... 84,408 2,817 306 87,531 Operating expenses ............................................ 14,592 5,777 10,723 31,092 Collateral finance facilities expense ......................... 30,543 - 544 31,087 Interest expense .............................................. 2,562 - 2,331 4,893 ---------- ---------- ---------- ---------- Total benefits and expenses ................................. 522,086 35,777 13,904 571,767 ---------- ---------- ---------- ---------- Income (loss) before income taxes and minority interest ....... $ 30,017 $ (13,823) $ (9,640) $ 6,554 ========== ========== ========== ==========
8 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) MARCH 31, 2007 (UNAUDITED) 3. Business segments (continued) March 31, 2007 December 31, 2006 -------------- ----------------- Assets Life Reinsurance North America........................... $ 12,266,596 $ 12,194,291 International........................... 421,607 431,222 -------------- -------------- Total Life Reinsurance..................... 12,688,203 12,625,513 Corporate and Other........................ 776,996 810,559 -------------- -------------- Total...................................... $ 13,465,199 $ 13,436,072 ============== ============== 9 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) MARCH 31, 2007 (UNAUDITED) 4. Earnings per ordinary share The following table sets forth the computation of basic and diluted earnings per ordinary share. Three months ended ------------------- March 31, March 31, 2007 2006 --------- -------- Numerator: Net income (loss) .............................. $ (33,212) $ 13,849 Dividend declared on non-cumulative perpetual preferred shares .................. (2,266) (2,266) ------------ ------------ Net income (loss) available to ordinary shareholders ................................ $ (35,478) $ 11,583 ============ ============ Denominator: Denominator for basic earnings per ordinary share - weighted average number of ordinary shares .......................... 64,191,977 53,434,484 Effect of dilutive securities -- Stock options and restricted stock units . - 1,221,086 -- Warrants ................................. - 1,030,301 -- 4.50% senior convertible notes and Hybrid Capital Units ..................... - 847,043 ------------ ------------ Denominator for dilutive earnings (loss) per ordinary share .......................... 64,191,977 56,532,914 ============ ============ Basic earnings (loss) per ordinary share ....... $ (0.55) $ 0.22 ============ ============ Diluted earnings (loss) per ordinary share ..... $ (0.55) $ 0.20 ============ ============ In accordance with SFAS No. 128, "Earnings Per Share", the exercise of options and warrants or conversion of convertible securities is not assumed unless it would reduce earnings per share or increase loss per share. 5. Income taxes Income tax expense in the first quarter ended March 31, 2007 was $13.4 million compared to an income tax benefit of $7.5 million in the same period in 2006. The change in our effective tax rate in the first quarter ended March 31, 2007 compared to the same period in 2006 is primarily related to an $ 11.0 million valuation allowance established in the first quarter of 2007 on deferred tax assets. The valuation allowance principally relates to current period tax benefits not being recognized as we can no longer recognize tax benefits for certain legal entities. In addition, a valuation allowance was established on deferred tax assets resulting from estimated statutory and tax projections related to certain legal entities. At the end of the first quarter of 2007, the remaining gross deferred tax asset is supported principally by the reversal of deferred tax liabilities within the carry forward period and, to a much lesser extent, tax planning strategies for which management believes that it is more likely than not that the deferred tax assets will be utilized in subsequent periods, although there is a risk that we will need to establish additional valuation allowances in future quarters. On January 1, 2007, we adopted FIN 48. As a result of the implementation of FIN 48, we recorded a net decrease to our beginning retained earnings of $32.6 million representing a total FIN 48 liability of $78.0 million (excluding previously recognized liabilities of $6.5 million and including interest and penalties of $11.1 million) 10 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) MARCH 31, 2007 (UNAUDITED) 5. Income taxes (continued) reduced by a $45.4 million reduction of our existing valuation allowance. We have total unrecognized tax benefits (excluding interest and penalties) of $73.4 million which did not change significantly during the three months ended March 31, 2007. In addition, future changes in the unrecognized tax benefits would result in a $28.0 million effective tax rate benefit. Our policy for recording interest and penalties associated with uncertain tax positions is to record such items as a component of income tax expense (on a go forward basis excluding the initial amount noted above). We do not reasonably estimate that the unrecognized tax benefit will change significantly within the next twelve months. We file our tax returns as prescribed by the tax laws of the jurisdictions in which we operate. As of March 31, 2007, we remained subject to examination in the following major tax jurisdictions for the years indicated below: Major Tax Jurisdictions Open Years ----------------------- ---------- U.S. Life Group ................. 2001 through 2006 Non-Life Group ............. 2005 through 2006 Ireland ....................... 2002 through 2006 U.K ........................... 2001 through 2006 As discussed in Note 12 to the consolidated financial statements in the 2006 Annual Report, at December 31, 2006 we had a valuation allowance of $304.9 million established against our deferred tax assets. We currently provide a valuation allowance against deferred tax assets when it is more likely than not that some portion, or all of our deferred tax assets, will not be realized. Our valuation allowance decreased by approximately $27.3 million during the three months ended March 31, 2007 to $277.6 million, including the impact of current quarter activity as described above, the impact from applying FIN 48 and other adjustments. 6. Mezzanine equity On December 17, 2003 and December 22, 2003, we issued in a public offering 5,750,000 Hybrid Capital Units or HyCUs. The aggregate net proceeds were $141.9 million. Each HyCU consisted of (i) a purchase contract ("purchase contract") to which the holder was obligated to purchase from us, on February 15, 2007, an agreed upon number of ordinary shares for a price of $25.00 and (b) a convertible preferred share with a liquidation preference of $25.00. Holders of the convertible preferred shares had the option to allow the convertible preferred share to be included in the remarketing process and use the proceeds of the remarketing to settle the purchase contract or elect not to participate in the remarketing by delivering the requisite amount of cash to settle the purchase contract. On January 25, 2007, we gave notice to holders of the HyCUs that we were unable to satisfy certain conditions precedent to the remarketing that were contained in the Remarketing Agreement and, therefore, the remarketing of the convertible preferred shares had failed. Accordingly, holders of the HyCUs only had the option to settle the purchase contracts in cash. On February 15, 2007, we received cash proceeds of $7.3 million to settle 293,500 purchase contracts and, in exchange, issued 293,500 of our ordinary shares. We also released to the settling holder 293,500 convertible preferred shares which were previously held as collateral against the holder's obligation under the purchase contracts. Also on February 15, 2007, we issued 7,146,978 of our ordinary shares to the holders of our HyCUs who did not settle in cash, for which we held convertible preferred shares to secure their obligations under the purchase contracts. On February 22, 2007, we exercised our right to foreclose on the 5,456,500 convertible preferred shares held as collateral for the 5,456,500 purchase contracts that were not settled in cash. In aggregate, we issued 7,440,478 of our ordinary shares on February 15, 2007 and, as of May 9, 2007, have 293,500 convertible preferred shares outstanding. The convertible preferred shares have a dividend rate equal to the 11 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) MARCH 31, 2007 (UNAUDITED) three month LIBOR plus 600 basis points. We are required to redeem these securities for an aggregate amount of $7.3 million plus accrued dividends on May 21, 2007. 7. Mediation On June 16, 2005, we requested mediation from Employers Reinsurance Corporation ("ERC") pursuant to the stock purchase agreement transferring a 95% interest in Scottish Re Life Corporation (formerly ERC Life Corporation) to Scottish Holdings, Inc. We assert that ERC breached certain representations and warranties under the agreement. Any negative outcome from this mediation will not have a material adverse impact on our financial position because the asserted breaches have already been fully reflected in our financial position at March 31, 2007. The parties have held two mediation sessions, but have been unable to resolve the dispute. No date has been scheduled for a future mediation session. 8. Subsequent Event On November 26, 2006, we entered into a Securities Purchase Agreement (the "Securities Purchase Agreement") with MassMutual Capital Partners LLC ("MassMutual Capital"), a member of the MassMutual Financial Group, and SRGL Acquisition, LLC, an affiliate of Cerberus Capital Management, L.P. ("Cerberus"), or another affiliate thereof (such affiliate of Cerberus, together with MassMutual Capital, the "Investors") whereby, subject to the terms and conditions set forth in the Securities Purchase Agreement, the Investors will each purchase 500,000 of our convertible cumulative participating preferred shares (the "Convertible Shares"), which will be newly issued, and which shares may be converted into an aggregate of 150,000,000 ordinary shares, subject to certain adjustments, if any, at any time and will automatically convert on the ninth anniversary of the issue date if not previously converted (the above is collectively referred to as the "Transaction"). The Transaction closed on May 7, 2007 and gross proceeds from the sale of the Convertible Shares to the Investors of $600.0 million were received. The estimated net cash proceeds are approximately $560.0 million after giving effect to the payment of estimated transaction expenses and the transaction fees to be paid to the financial advisors. The Transaction will be reflected in our second quarter 2007 financial statements. Upon the closing of the Transaction, the Investors hold securities representing approximately 68.7% of the voting power of all our shareholders and have the right to designate two-thirds of the members of the Board of Directors for election. 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General Forward-Looking Statements Some of the statements contained in this report are not historical facts and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results to differ materially from the forward-looking statements. Words such as "anticipates", "expects", "intends", "plans", "believes", "seeks", "estimates", "may", "will", "continue", "project", and similar expressions, as well as statements in the future tense, identify forward-looking statements. These forward-looking statements are not guarantees of our future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements. These risks and uncertainties include: o uncertainties relating to the ratings accorded to us and our insurance subsidiaries; o uncertainties in our ability to raise equity capital or other sources of funding to support ongoing capital and liquidity needs; o uncertainties relating to future actions that may be taken by creditors, regulators and ceding insurers relating to our ratings and financial condition; o the risk that our risk analysis and underwriting may be inadequate; o changes in expectations regarding future realization of gross deferred tax assets; o exposure to mortality experience which differs from our assumptions; o risks arising from our investment strategy, including risks related to the market value of our investments, fluctuations in interest rates and our need for liquidity; o uncertainties arising from control of our invested assets by third parties; o developments in global financial markets that could affect our investment portfolio and fee income; o changes in the rate of policyholder withdrawals or recapture of reinsurance treaties; o the risk that our retrocessionaires may not honor their obligations to us; o terrorist attacks on the United States and the impact of such attacks on the economy in general and on our business in particular; o political and economic risks in developing countries; o the impact of acquisitions, including our ability to successfully integrate acquired businesses, the competing demands for our capital and the risk of undisclosed liabilities; o the risk that an ownership change will result in a limitation on our ability to fully utilize tax net operating losses; o loss of the services of any of our key employees; o losses due to foreign currency exchange rate fluctuations; o uncertainties relating to government and regulatory policies (such as subjecting us to insurance regulation or taxation in additional jurisdictions); 13 o risks relating to recent class action litigations; o the competitive environment in which we operate and associated pricing pressures; and o changes in accounting principles. The effects of these factors are difficult to predict. New factors emerge from time to time and we cannot assess the financial impact of any such factor on our business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. Any forward-looking statement speaks only as of the date of this report and we do not undertake any obligation, other than as may be required under the Federal securities laws, to update any forward looking statements to reflect events or circumstances after the date of such statement or to reflect the occurrence of unanticipated events. This discussion and analysis should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited Consolidated Financial Statements and Notes thereto, presented under Item 7 and Item 8, respectively, of our 2006 Annual Report. Overview See "Overview" in Item 7 of our 2006 Annual Report. Status of Credit and Financial Strength Ratings As of May 9, 2007, our insurer financial strength ratings are as follows: Moody's A.M. Best Fitch Investors Standard Company(1) Ratings(2) Service(3) & Poor's(4) ---------- ---------- ---------- ----------- Insurer Financial Strength - -------------------------- Ratings: - -------- Scottish Annuity and Life Insurance Company (Cayman) Ltd...... B+ BB+ Baa3 BB+ Scottish Re (U.S.), Inc. ............. B+ BB+ Baa3 BB+ Scottish Re Ltd ...................... B+ BB+ -- BB+ Scottish Re Life Corporation ......... B+ -- -- BB+ - --------------------------------------- 1 Stable outlook 2 Ratings watch: positive 3 Ratings under review, direction uncertain 4 Developing outlook The ability to write reinsurance partially depends on an insurer's financial condition and its financial strength ratings. These ratings are based on an insurance company's ability to pay policyholder obligations and are not directed toward the protection of investors. Our ability to raise capital for our business and the cost of this capital is influenced by our credit ratings. A security rating is not a recommendation to buy, sell or hold securities. It is subject to revision or withdrawal at any time by the assigning rating organization, and each rating should be evaluated independently of any other rating. Critical Accounting Policies See the discussion of our Critical Accounting Policies in Item 7 of our 2006 Annual Report. 14 Results of Operations All amounts are reported in thousands of United States dollars, except share amounts. Consolidated results of operations
Three months ended --------------------------- March 31, March 31, 2007 2006 --------- --------- Premiums earned, net ................................................. $ 458,214 $ 449,021 Investment income, net ............................................... 141,597 129,022 Fee income ........................................................... 4,630 3,733 Net realized losses .................................................. (4,289) (13,601) Change in value of embedded derivatives, net ......................... 5,592 10,146 ---------- ---------- Total revenues ..................................................... 605,744 578,321 ---------- ---------- Claims and other policy benefits ..................................... 383,583 374,463 Interest credited to interest sensitive contract liabilities ......... 35,302 42,701 Acquisition costs and other insurance expenses, net .................. 95,107 87,531 Operating expenses ................................................... 34,580 31,092 Collateral finance facilities expense ................................ 73,695 31,087 Interest expense ..................................................... 3,576 4,893 ---------- ---------- Total benefits and expenses ........................................ 625,843 571,767 ---------- ---------- Income (loss) before income taxes and minority interest .............. (20,099) 6,554 Income tax (expense) benefit ......................................... (13,381) 7,457 ---------- ---------- Income (loss) before minority interest ............................... (33,480) 14,011 Minority interest .................................................... 268 (162) ---------- ---------- Net income (loss) .................................................... (33,212) 13,849 Dividend declared on non-cumulative perpetual preferred shares ....... (2,266) (2,266) ---------- ---------- Net income (loss) available to ordinary shareholders ................. $ (35,478) $ 11,583 ========== ==========
Revenues Premiums earned in the first quarter ended March 31, 2007 increased 2% to $458.2 million compared to $449.0 million in the same period in 2006. The majority of this increase was in the Life Reinsurance International Segment, where premium growth on U.K. protection treaties offset reduced premiums due to cancelled business by $2.8 million along with the net positive effect of one-off impacts, which increased premiums by an additional $2.4 million. The balance of the increase is due to certain non-recurring adjustments to the Life Reinsurance International Segment premium levels in the first quarter of 2006 which depressed the comparative balance by $9.6 million. Investment income in the first quarter ended March 31, 2007 increased 10% to $141.6 million compared to $129.0 million in the same period in 2006. This increase is principally due to the growth in our average invested assets. Our total invested assets have increased significantly compared to the prior year quarter due to the Ballantyne Re transaction, which closed in May 2006. This increase is partially offset by lower investment income on a particular equity-indexed annuity treaty along with the effect of the termination of four funding agreements during the third quarter of 2006. Expenses Claims and other policy benefits increased by 2% to $383.6 million in the first quarter ended March 31, 2007 from $374.5 million in the same period in 2006. During the first quarter of 2007, the Life Reinsurance North America Segment experienced favorable net mortality of approximately $14.0 million, principally in the ING block. Interest credited to interest sensitive contract liabilities in the first quarter ended March 31, 2007 decreased 17% to $35.3 million compared to $42.7 million for the same period in 2006, principally due to the termination of 15 four funding agreements during the third quarter of 2006 and higher lapses on annuity treaties in late 2006 and the first quarter of 2007. Acquisition costs and other insurance expenses increased 9% to $95.1 million in the first quarter ended March 31, 2007 from $87.5 million in the same period in 2006. This increase is principally due to increased costs in the Life Reinsurance International Segment, in which commission expense on U.K. protection treaties are incurred at a much higher rate than our existing legacy book of business. In addition, the cost of the Tartan Capital Limited catastrophe bond issued in May 2006 resulted in an increase in the first quarter of 2007 as compared to the same period in 2006. Operating expenses increased 11% to $34.6 million for the first quarter ended March 31, 2007 from $31.1 million in the same period in 2006 primarily due to higher personnel costs in the Life Reinsurance International Segment, professional fees (mostly legal and tax) and higher office costs due to the opening of several offices, partially offset by a recovery from an ERC indemnification settlement. This indemnification settlement is not related to the ERC mediation described in Note 7. Collateral facilities expense increased 137% to $73.7 million for the first quarter ended March 31, 2007 from $31.1 million in the same period in 2006 due to the Ballantyne Re transaction completed in May 2006 and the drawdown on the Stingray facility in the third quarter of 2006. Interest expense decreased 27% to $3.6 million for the first quarter ended March 31, 2007 from $4.9 million in the same period in 2006 due to the repurchase of the $115.0 million 4.5% Senior Convertible Notes during the fourth quarter of 2006 and the February 2007 settlement of the HyCUs. Segment Operating Results Life Reinsurance North America
Three months ended ----------------------- March 31, March 31, 2007 2006 ---------- ----------- Premiums earned, net ................................ $ 423,371 $ 428,918 Investment income, net .............................. 137,919 123,941 Fee income .......................................... 3,916 3,017 Net realized losses ................................. (2,405) (13,919) Change in value of embedded derivatives, net ........ 5,592 10,146 ---------- ---------- Total revenues .................................... 568,393 552,103 ---------- ---------- Claims and other policy benefits .................... 357,934 347,280 Interest credited to interest sensitive contract liabilities ....................................... 35,302 42,701 Acquisition costs and other insurance expenses, net . 87,223 84,408 Operating expenses .................................. 12,258 14,592 Collateral finance facilities expense ............... 68,856 30,543 Interest expense .................................... 3,055 2,562 ---------- ---------- Total benefits and expenses ....................... 564,628 522,086 ---------- ---------- Income before income taxes and minority interest .... $ 3,765 $ 30,017 ========== ==========
Revenues Total revenues increased by 3% for the first quarter ended March 31, 2007 to $568.4 million compared to $552.1 million in the same period in 2006. Net premiums earned decreased by 1% in the first quarter of 2007 to $423.4 million compared to $428.9 million in the same period in 2006. Contributing to the decreased premium level were were higher excess retrocession premiums of approximately $14.1 million resulting from the implementation of our retrocession administration system in the second and third quarters of 2006, combined with a 16 shift in underlying business mix that resulted in a higher retrocession premium trend. Partially offsetting this were revisions reported to us by our clients, combined with normal premium accrual fluctuations, resulting in a favorable impact of $8.8 million during the first quarter of 2007. The net realized loss in the first quarter ended March 31, 2007 was $2.4 million compared to a $13.9 million loss in the same period in 2006. The net realized loss for the prior year includes losses related to selling investments in the first quarter of 2006 in preparation of funding the Ballantyne Re transaction. The change in value of the embedded derivatives arises from the application of DIG B36 which addresses whether SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" requires bifurcation of a debt instrument into a debt host contract and an embedded derivative if the debt instrument incorporates both interest rate risk and credit risk exposures that are unrelated or only partially related to the creditworthiness of the issuer of that instrument. Under DIG B36, modified coinsurance and coinsurance funds withheld reinsurance agreements where interest is determined by reference to a pool of fixed maturity assets are arrangements containing embedded derivatives requiring bifurcation. In addition, reinsurance contracts with experience refunds are also considered to be arrangements containing embedded derivatives requiring bifurcation. The change in the value of embedded derivatives increased revenues by $5.6 million in the first quarter of 2007 compared to a $10.1 million increase in the same period in 2006. The primary reason for the larger increase in the prior year was the realization of losses on certain securities held under a modified coinsurance arrangement that were sold in the first quarter of 2006 in order to provide funding for the Ballantyne Re transaction. These prior year gains largely offset the aforementioned prior year realized securities losses. Net investment income increased by 11% in the first quarter ended March 31, 2007 to $137.9 million compared to $123.9 million in the same period in 2006. The increase is principally due to the growth in our average invested assets. Our total invested assets have increased significantly due to the proceeds of the Ballantyne Re transaction that closed in May 2006, which contributed approximately $1.7 billion of additional invested assets. As a result, investment income from the non-annuity-related portfolios was $38.0 million higher in the first quarter of 2007 as compared to the same period in 2006. Partially offsetting this favorable variance were $11.7 million lower investment income on a large equity-indexed annuity treaty for which there are substantially offsetting fluctuations in reserves, interest credited and net acquisition costs. Additionally, offsetting the favorable variance was a $7.5 million reduction due to the termination of four funding agreements in the third quarter of 2006 as a result of ratings downgrades and reduced investment income on annuity business due to declining account values resulting from higher lapses. Yields on the portfolio managed by our external investment managers relating to fixed rate assets were 5.4% and 5.2% at March 31, 2007 and 2006, respectively. Yields on floating rate assets are indexed to LIBOR and increased to 5.8% at March 31, 2007 from 5.3% at March 31, 2006. Expenses Claims and other policy benefits for the first quarter ended March 31, 2007 increased 3% to $357.9 million compared to $347.3 million in the same period in 2006. During the first quarter of 2006, we experienced unfavorable mortality against our expectations of approximately $16.0 million, principally within our ING block. Although gross claims were within expectations in the aggregate, a higher number of smaller claims within our retention limit resulted in retrocession recoveries below our expectations. During the second half of 2006, we updated our mortality experience studies and utilized these updated studies in our best estimate models for 2007. In general, our 2007 best estimate models roughly approximate the equivalent level of incurred claims as actually experienced in 2006. During the first quarter of 2007, we experienced favorable assumed mortality for the ING block of approximately $26.0 million, representing an actual to expected ratio of 90%. The positive experience was driven by favorable results on large claims, especially in the $2.0 million and greater size range. Although the claim count was the highest for any quarter to date, the average size claim was smaller than historical experience. The favorable assumed mortality was partially offset by lower than expected retrocession recoveries of approximately $16.0 million. As such, net mortality for the ING block was approximately $10.0 million favorable for the first quarter of 2007. Experience in our organic and SRLC blocks contributed an additional $4.0 million of favorable net mortality experience in the quarter. In total, our net mortality was $14.0 million favorable or 95% of expected for the first quarter of 2007. Our pricing and actuarial projection models include various lapse assumptions by treaty and by product type which are based on historical experience and industry expectations. Beginning in the third quarter of 2006, we noted that the lapse distribution pattern was such that certain policies had higher than average lapses while others had lower than average lapses. However, the policies with higher lapses had the higher margins and the policies 17 with lower lapses had the lower margins. Based on lapse experience to date, it appears that this lapse pattern is isolated in certain preferred classes and in the early durations of the policies and, therefore, the unfavorable impact will decrease over time. During the first quarter of 2007, we experienced approximately $11.0 million of adverse lapse reserve impact compared to approximately $13.0 million and $14.0 million in the third and fourth quarters of 2006, respectively. Partially offsetting this impact were additional lapses for certain policyholders which had a significant favorable impact on our retrocession reserves and resulted in a release of reserves of $7.3 million during the first quarter of 2007. Interest credited to interest sensitive contract liabilities in the first quarter ended March 31, 2007 decreased 17% to $35.3 million compared to $42.7 million in the same period in 2006. The decrease is principally due to the impact of the termination of four funding agreements in the third quarter of 2006 for which the first quarter of 2006 contained $6.2 million of interest credited. Also impacting the decline was lower annuity business due to higher lapses in the second half of 2006. Interest sensitive contract liabilities amounted to $3.3 billion at March 31, 2007 and $4.0 billion at March 31, 2006. Acquisition costs and other insurance expenses in the first quarter ended March 31, 2007 increased 3% to $87.2 million compared to $84.4 million in the same quarter in 2006. As a percentage of net premiums earned, acquisition and other insurance expenses were 20.6% and 19.7% for the 2007 and 2006 quarterly periods, respectively. Operating expenses for the first quarter ended March 31, 2007 decreased 16% to $12.3 million compared to $14.6 million in the same period in 2006. Operating expenses as a percentage of operating revenues (total revenues excluding realized gains and losses and changes in the value of embedded derivatives) were 2.2% and 2.6% for the 2007 and 2006 periods, respectively. The overall decrease in operating expenses relates primarily to the first quarter 2007 receipt of a $2.6 million indemnification settlement related to the acquisition of the ERC business. This settlement was based on a provision in the purchase agreement regarding the level of statutory unauthorized reinsurance liabilities required for certain reinsurers. This indemnification settlement is not related to the ERC mediation described in Note 7. Collateral finance facilities expense in the quarter ended March 31, 2007 increased 125% to $68.9 million compared to $30.5 million in the same period of 2006. The increase is due to the impact of the Ballantyne Re transaction which closed in May 2006 along with higher financial guarantor costs resulting from our credit rating downgrades. Life Reinsurance International Three months ended ---------------------- March 31, March 31, 2007 2006 --------- --------- Premiums earned, net .......................... $ 34,843 $ 20,103 Investment income, net ........................ 3,043 2,989 Net realized losses ........................... (625) (1,138) --------- --------- Total revenues ............................... 37,261 21,954 --------- --------- Claims and other policy benefits .............. 25,649 27,183 Acquisition costs and other insurance expenses, net ................................ 5,921 2,817 Operating expenses ............................ 9,812 5,777 --------- --------- Total benefits and expenses .................. 41,382 35,777 --------- --------- Loss before income taxes and minority interest. $ (4,121) $(13,823) ========= ========= Revenues Net premiums earned during the first quarter ended March 31, 2007 increased 73% to $34.8 million compared to $20.1 million in the same period in 2006. Excluding the impact of non-recurring items in both 2007 and 2006, underlying premiums grew by $2.8 million. The increase was due principally to the impact of new U.K. protection treaties won in 2006 of $9.0 million, although offset by reduced premium on other cancelled business of $6.2 million related to Middle East, Latin America, U.S. lives business and Loss of License. Additionally, non-recurring impacts in 2007 contributed $2.4 million to the increase. These non-recurring items included additional premium on captive reinsurance business within our protected cell company of $1.5 million and a catch-up of premium bookings 18 due to late notifications by certain clients. In addition, the corresponding quarter of 2006 had the following non-recurring impacts which reduced earned premium: the true-up of data as a result of revised information received from clients of $4.5 million and clean-up activities in the Loss of License/personal accident block of $5.1 million. Investment income in the quarter ended March 31, 2007 and 2006 was $3.0 million. Realized losses were $0.6 million in the first quarter ended March 31, 2007, compared to $1.1 million for 2006. The 2007 losses related to the impairment of a bond of $0.6 million. Expenses Claims and other policy benefits decreased by 6% to $25.6 million in the first quarter ended March 31, 2007 from $27.2 million in the same period in 2006. Claims cost was higher than expected for the first quarter ended March 31, 2007 due to unexpected negative items totaling $2.9 million. The largest items related to claims cost at recapture of certain pools of business of $1.9 million, captive claims of $1.5 million and a number of late reported claims beyond normal expectation of $2.5 million as a whole. However, the result on the U.S. lives business contributed $3.0 million of favorable claims cost through release of reported, but not paid reserves and claims releases arising from premium income accrual reductions. In the first quarter ended March 31, 2006, costs were also higher than expected by $4.3 million due to adverse mortality adjustments on retrocession recoverables and updated cedant data. Acquisition costs and other insurance expenses increased 110% to $5.9 million in the first quarter ended March 31, 2007 from $2.8 million in 2006. Commission expense for new protection treaties entered into in 2006 resulted in an increase of $2.3 million because such treaties carry higher commission levels than those experienced in the existing book. Operating expenses increased 70% to $9.8 million in the first quarter ended March 31, 2007 from $5.8 million in 2006. The main driver of the expense increase was additional senior level staff in support of our new business initiatives hired for U.K. and other international operations (Middle East and Singapore) of $1.0 million. In addition there were transaction bonuses of $0.8 million, costs of running both the Windsor and London offices of $0.4 million, irrecoverable VAT of $0.5 million and other expense increases of $0.4 million. Corporate and Other Three months ended ---------------------- March 31, March 31, 2007 2006 --------- --------- Investment income, net ........................ $ 635 $ 2,092 Fee income .................................... 714 716 Net realized gains (losses) ................... (1,259) 1,456 --------- --------- Total revenues ............................... 90 4,264 --------- --------- Acquisition costs and other insurance expenses, net................................. 1,963 306 Operating expenses ............................ 12,510 10,723 Collateral finance facilities expense ......... 4,839 544 Interest expense .............................. 521 2,331 --------- --------- Total benefits and expenses .................. 19,833 13,904 --------- --------- Loss before income taxes ...................... $(19,743) $ (9,640) ========= ========= Revenues Investment income decreased 70% to $0.6 million for the first quarter ended March 31, 2007 compared to $2.1 million in the same period in 2006. Investment income arises in the segment due to capital not specifically allocated to the Life Reinsurance North America or Life Reinsurance International Segments. Investment income will increase or decrease as capital is raised and deployed to the operating segments. The overall decrease in investment income is principally due to decreased invested assets as a result of the repayment of the $115.0 million 4.5% Senior Convertible Notes in December of 2006. 19 The realized loss of $1.3 million for the first quarter ended March 31, 2007 compared to a realized gain of $1.5 million in the same period in 2006. The realized loss during the quarter represents $0.8 million of foreign exchange losses and $0.2 million of realized loss on other than temporary impairments from our investment portfolio. Expenses Acquisition costs and other insurance expenses increased 542% to $2.0 million compared to $0.3 million in the same period in 2006. This increase is due to the Tartan Capital Limited catastrophe bond issued in May 2006, which is expensed at approximately $1.5 million per quarter. Operating expenses increased 17% to $12.5 million for the first quarter ended March 31, 2007 compared to $10.7 million in the same period in 2006. The increase in expenses was primarily due to increased professional fees, principally in tax and legal costs. Collateral finance facilities expense increased 790% to $4.8 million for the first quarter ended March 31, 2007 compared to $0.5 million in the same period in 2006. The increase was primarily due to borrowing under the Stingray facility during the third quarter of 2006, which results in collateral facility expense of approximately $4.5 million per quarter. Interest expense decreased 78% to $0.5 million for the first quarter ended March 31, 2007 compared to $2.3 million in the same period in 2007. This decrease was due to the repurchase in the fourth quarter of 2006 of the $115.0 million 4.5% Senior Convertible Notes and the February 2007 settlement of the HyCu's. Realized gains (losses) During the first quarter ended March 31, 2007, consolidated net realized losses amounted to $4.3 million in comparison with $13.6 million in the same period in 2006. During the first quarter ended March 31, 2007, there were losses of $4.3 million in respect of other than temporary impairments. There were no other than temporary impairments during the first quarter ended March 31, 2006. Income Taxes Income taxes are recorded in accordance with SFAS No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). In accordance with SFAS No. 109, for all years presented we use the asset and liability method to record deferred income taxes. Accordingly, deferred income tax assets and liabilities are recognized that reflect the net tax effect of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, using enacted tax rates. Such temporary differences are primarily due to tax basis of reserves for future policy benefits, deferred acquisition costs, and net operating loss carry forwards. A valuation allowance is applied to deferred tax assets if it is more likely than not that all, or some portion, of the benefits related to the deferred tax assets will not be realized. Our effective tax rate in each reporting period is determined by dividing the net tax benefit (expense) by our pre-tax income or loss. The change in our effective tax rate is due primarily to the amount in any reporting period of pre-tax earnings attributable to different subsidiaries (which changes from time to time), each of which is subject to different statutory tax rates, as well as any adjustment to the deferred tax asset valuation allowance. Pre-tax earnings of certain subsidiaries in any period may be impacted by the amount of various inter-company charges, including but not limited to net worth maintenance fees and other management fees paid to Scottish Annuity & Life Insurance Company (Cayman) Ltd. and to the parent holding company. These fees are charged in accordance with our inter-company charging policy and may be adjusted periodically within limits prescribed by applicable transfer pricing regulations. We generate deferred tax assets principally due to net operating losses, reserves and unrealized losses on investment securities. In accordance with GAAP, we must conclude whether the future realization of our deferred tax asset is "more likely than not". The evaluation regarding realizability of deferred tax assets is made on a gross as opposed to a net basis. Sources of support for the gross deferred tax asset are the reversal of deferred tax liabilities within the carry forward period (which in the United States is 15 years), projected future taxable income 20 and tax planning strategies. Pursuant to the guidance under SFAS No. 109, we are currently unable to rely on projections of future taxable income. Future quarterly tax amounts will continue to be dependent upon the relationship between pre-tax GAAP profits and statutory profits and will also be impacted by the size and timing of certain statutory related deferred tax liabilities. Moreover, management will continue to assess and determine the need for the amount of the valuation allowance in subsequent periods in accordance with the requirements of SFAS No. 109 or in accordance with FIN 48. Income tax expense in the first quarter ended March 31, 2007 was $13.4 million compared to an income tax benefit of $7.5 million in the same period in 2006. The change in our effective tax rate in the first quarter ended March 31, 2007 compared to the same period in 2006 is primarily related to an $ 11.0 million valuation allowance established in the first quarter of 2007 on deferred tax assets. The valuation allowance principally relates to current period tax benefits not being recognized as we can no longer recognize tax benefits for certain legal entities. In addition, a valuation allowance was established on deferred tax assets resulting from estimated statutory and tax projections related to certain legal entities. Financial Condition Investments At March 31, 2007, the portfolio controlled by us consisting of fixed income securities, preferred stock and cash was $8.8 billion. The portfolio controlled by us excludes the assets held by ceding insurers under modified coinsurance and funds withheld coinsurance arrangements. The majority of these assets are publicly traded securities; however, at March 31, 2007, $505.2 million of this amount represents investments in private securities. Of the total portfolio controlled by us, $8.3 billion represented the fixed income and preferred stock portfolios managed by external investment managers and $0.5 billion represented other cash balances. At December 31, 2006, the portfolio controlled by us consisted of fixed income securities, preferred stock and cash was $8.7 million. The majority of these assets were publicly traded; however, at December 31, 2006, $532.9 million represented investments in private securities. Of the total portfolio controlled by us, $8.2 billion represented the fixed income and preferred stock portfolios managed by external investment managers and $0.5 billion represented other cash balances. At March 31, 2007, the average Standard & Poor's rating of our portfolio was "AA", the average effective duration was 2.9 years and the average book yield was 5.6%, as compared with an average rating of "AA", an average effective duration of 2.9 years and an average book yield of 5.5% at December 31, 2006. At March 31, 2007, the unrealized depreciation on investments, net of tax and deferred acquisition costs, was $53.6 million as compared with unrealized depreciation on investments, net of tax and deferred acquisition costs, of $41.0 million at December 31, 2006. The unrealized depreciation on investments is included in our consolidated balance sheet as part of shareholders' equity. The table below sets forth the total returns earned by our portfolio for the quarter ended March 31, 2007, compared to the returns earned by three indices: the Lehman Brothers Global Bond Index, the S&P 500, and a customized index that we developed to take into account our investment guidelines and the risk characteristics of the underlying liabilities. We believe that this customized index is the most relevant benchmark for our portfolio's performance. Quarter ended March 31, 2007 -------------- Portfolio performance .......................... 1.18% Customized index ............................... 1.32% Lehman Brothers Global Bond Index .............. 1.18% S&P 500 ........................................ 0.64% 21 The following table presents the fixed income investment portfolio credit exposure by Standard & Poor's ratings, where available, and otherwise by ratings provided by other agencies.
March 31, 2007 December 31, 2006 ------------------------- ----------------------- Ratings $ in millions % $ in millions % - ------- -------------- --------- -------------- ------- AAA .................................... $ 3,408.4 38.9% $ 3,350.5 38.5% AA ..................................... 2,382.5 27.2 2,353.1 27.0 A ...................................... 2,065.6 23.6 2,050.9 23.6 BBB .................................... 880.3 10.0 918.5 10.6 BB or below ............................ 23.5 0.3 24.9 0.3 ---------- ------ ---------- ------ Total .................................. $ 8,760.3 100.0% $ 8,697.9 100.0% ========== ====== ========== ======
The following table illustrates the fixed income investment portfolio sector exposure.
March 31, 2007 December 31, 2006 ------------------------- ----------------------- Sector $ in millions % $ in millions % - ------ -------------- --------- -------------- ------- U.S. Treasury securities and U.S. government agency obligations ......... $ 63.6 0.7% $ 68.0 0.8% Corporate securities ................... 2,712.4 31.0 2,700.5 31.1 Municipal bonds ........................ 52.4 0.6 52.2 0.6 Mortgage and asset backed securities ... 5,307.5 60.6 5,244.8 60.3 Preferred stock ........................ 112.0 1.3 116.9 1.3 ---------- ------ ---------- ------ 8,247.9 94.2 8,182.4 94.1 Cash ................................... 512.4 5.8 515.5 5.9 ---------- ------ ---------- ------ Total .................................. $ 8,760.3 100.0% $ 8,697.9 100.0% ========== ====== ========== ======
Management reviews securities with material unrealized losses and tests for other than temporary impairments on a quarterly basis. Factors involved in the determination of potential impairment include fair value as compared to cost, length of time the value has been below cost, credit worthiness of the issuer, forecasted financial performance of the issuer, position of the security in the issuer's capital structure, the presence and estimated value of collateral or other credit enhancement, length of time to maturity, interest rates and our intent and ability to hold the security until the market value recovers. When a decline is considered to be other than temporary, the cost basis of the impaired asset is adjusted to its fair value and a corresponding realized investment loss is recognized in the consolidated statements of income (loss). The actual value at which such financial instruments could actually be sold or settled with a willing buyer may differ from such estimated fair values. The following tables present the estimated fair values and gross unrealized losses for the fixed maturity investments and preferred stock that have estimated fair values below amortized cost or cost as of March 31, 2007 and December 31, 2006. These investments are presented by class and grade of security, as well as the length of time the related market value has remained below amortized cost or cost. 22
March 31 2007 --------------------------------------------------------------------------------------- Equal to or greater Less than 12 months than 12 months Total ------------------------ ------------------------- --------------- ---------- Estimated Unrealized Estimated Unrealized Estimated Unrealized fair value loss fair value loss fair value loss ---------- ---------- ---------- ---------- ---------- ---------- Investment grade securities: - ---------------------------- CMO ................................... $ 331,980 $ (1,581) $ 275,977 $ (5,936) $ 607,957 $ (7,517) Corporates ............................ 687,591 (14,954) 912,681 (28,680) 1,600,272 (43,634) Governments ........................... 27,861 (471) 28,435 (862) 56,296 (1,333) MBS ................................... 18,974 (146) 138,409 (4,118) 157,383 (4,264) Municipals ............................ 1,910 (15) 27,757 (580) 29,667 (595) Other structured securities ........... 1,814,492 (18,880) 611,603 (10,426) 2,426,095 (29,306) Preferred stocks ...................... 12,085 (237) 90,953 (2,632) 103,038 (2,869) ---------- ----------- ---------- ----------- ---------- ----------- Total Investment grade securities ........................... 2,894,893 (36,284) 2,085,815 (53,234) 4,980,708 (89,518) ---------- ----------- ---------- ----------- ---------- ----------- Below investment grade - ---------------------- securities corporates: ---------------------- Corporates ............................ - - 14,393 (524) 14,393 (524) Other structured securities ........... 1,559 (370) 45 (82) 1,604 (452) Preferred stock ....................... - - 347 (19) 347 (19) Total below investment grade securities ..................... 1,559 (370) 14,785 (625) 16,344 (995) ---------- ----------- ---------- ----------- ---------- ----------- Total ................................. $2,896,452 $ (36,654) $2,100,600 $ (53,859) $4,997,052 $ (90,513) ========== =========== ========== =========== ========== =========== December 31, 2006 --------------------------------------------------------------------------------------- Equal to or greater Less than 12 months than 12 months Total ------------------------ ------------------------- --------------- ---------- Estimated Unrealized Estimated Unrealized Estimated Unrealized fair value loss fair value loss fair value loss ---------- ---------- ---------- ---------- ---------- ---------- Investment grade securities: - ---------------------------- CMO ................................... $ 369,457 $ (2,365) $ 252,252 $ (6,327) $ 621,709 $ (8,692) Corporates ............................ 750,806 (15,690) 864,053 (29,078) 1,614,859 (44,768) Governments ........................... 35,805 (615) 21,072 (752) 56,877 (1,367) MBS ................................... 12,116 (136) 138,992 (4,674) 151,108 (4,810) Municipal ............................. 19,865 (187) 18,013 (640) 37,878 (827) Other structured securities ........... 415,596 (2,511) 613,974 (11,735) 1,029,570 (14,246) Preferred stock ....................... 12,246 (295) 95,646 (3,181) 107,892 (3,476) ---------- ----------- ---------- ----------- ---------- ----------- Total investment grade securities .......................... 1,615,891 (21,799) 2,004,002 (56,387) 3,619,893 (78,186) ---------- ----------- ---------- ----------- ---------- ----------- Below investment grade - ---------------------- securities corporates: ---------------------- Corporates ............................ 3,416 (58) 14,975 (570) 18,391 (628) Other structured securities ........... 1,405 (421) 1,256 (662) 2,661 (1,083) Preferred stock ....................... - - 664 (33) 664 (33) ---------- ----------- ---------- ----------- ---------- ----------- Total below investment grade securities .................... 4,821 (479) 16,895 (1,265) 21,716 (1,744) ---------- ----------- ---------- ----------- ---------- ----------- Total ................................. $1,620,712 $ (22,278) $2,020,897 $ (57,652) $3,641,609 $ (79,930) ========== =========== ========== =========== ========== ===========
At March 31, 2007, our fixed income portfolio had 2,983 securities and $90.5 million of gross unrealized losses. No single position had an unrealized loss greater than $1.1 million. There were $36.9 million of unrealized gains on the remainder of the portfolio. There were 130 private securities in an unrealized loss position totaling $4.4 million. At December 31, 2006, our fixed income portfolio had 2,967 securities and $79.9 million of gross unrealized losses. No single position had an unrealized loss greater than $1.3 million. There were $41.6 million of unrealized gains on the remainder of the portfolio. There were 128 private securities in an unrealized loss position totaling $5.1 million. 23 Based on our analysis of each security whose price has been below market for greater than twelve months, we believe that the financial strength, liquidity, leverage, future outlook, and our ability and intent to hold the security until recovery support the view that the security was not other than temporarily impaired as of March 31, 2007. The unrealized losses on fixed maturity securities are primarily a result of rising interest rates, changes in credit spreads and the long-dated maturities of the securities. Additionally, as of March 31, 2007, approximately 98.9% of the gross unrealized losses are associated with investment grade securities. Unrealized losses on securities that have been in an unrealized loss position for periods greater than two years amounted to $12.5 million at March 31, 2007 and $7.8 million at December 31, 2006. Unrealized losses on non-investment grade securities amounted to $1.0 million and $1.7 million at March 31, 2007 and December 31, 2006, respectively. Of these amounts, non-investment grade securities with unrealized losses of $0.6 million at March 31, 2007 and $1.3 million at December 31, 2006 had been in an unrealized loss position for a period greater than one year. The following tables illustrate the by industry analysis of the unrealized losses at March 31, 2007 and December 31, 2006:
March 31, 2007 --------------------------------------------------------------- Amortized Estimated Unrealized Cost % Fair Value % Loss % --------- ----- --------- ----- ---------- ----- Industry - -------- Mortgage and asset backed securities............... $ 3,234,577 63.6% $ 3,193,039 63.9% $ (41,538) 45.9% Banking................... 306,252 6.0 299,661 6.0 (6,591) 7.3 Communications............ 187,473 3.7 180,699 3.6 (6,774) 7.5 Consumer noncyclical...... 149,445 2.9 143,467 2.9 (5,978) 6.6 Brokerage................. 128,555 2.6 125,897 2.5 (2,658) 2.9 Insurance................. 125,427 2.5 122,584 2.5 (2,843) 3.1 Consumer cyclical......... 123,854 2.4 119,894 2.4 (3,960) 4.4 Finance Companies 120,604 2.4 117,842 2.4 (2,762) 3.0 Electric.................. 119,502 2.3 116,645 2.3 (2,857) 3.2 Other*.................... 591,876 11.6 577,324 11.5 (14,552) 16.1 ----------- ------ ----------- ------ ----------- ------ Total..................... $ 5,087,565 100.0% $ 4,997,052 100.0% $ (90,513) 100.0% =========== ====== =========== ====== =========== ====== December 31, 2006 --------------------------------------------------------------- Amortized Estimated Unrealized Cost % Fair Value % Loss % --------- ----- --------- ----- ---------- ----- Industry - -------- Mortgage and asset backed securities............. $ 1,833,878 49.3% $ 1,805,047 49.6% $ (28,831) 36.1% Banking................... 302,782 8.1 296,225 8.1 (6,557) 8.2 Communications............ 204,320 5.5 196,181 5.4 (8,139) 10.2 Consumer non-cyclical..... 153,941 4.1 148,277 4.1 (5,664) 7.1 Insurance................. 137,378 3.7 134,516 3.7 (2,862) 3.6 Financial companies....... 126,646 3.4 124,233 3.4 (2,413) 3.0 Consumer cyclical......... 127,643 3.5 123,455 3.4 (4,188) 5.2 Other*.................... 834,951 22.4 813,675 22.3 (21,276) 26.6 ----------- ------ ----------- ------ ----------- ------ Total..................... $ 3,721,539 100.0% $ 3,641,609 100.0% $ (79,930) 100.0% =========== ====== =========== ====== =========== ======
*Other industries represent less than 3% of the estimated fair value. The expected maturity dates of our fixed maturity investments that have an unrealized loss at March 31, 2007 and December 31, 2006 are presented in the tables below. 24
March 31, 2007 ------------------------------------------------------------------ Amortized Estimated Unrealized Cost % Fair Value % Loss % --------- ----- --------- ----- ---------- ----- Maturity Due in one year or less .............. $ 392,031 7.7% $ 388,859 7.8% $ (3,172) 3.5% Due in one through five years ........ 2,838,228 55.8 2,801,233 56.1 (36,995) 40.9 Due in five through ten years ........ 1,041,551 20.5 1,021,467 20.4 (20,084) 22.2 Due after ten years .................. 815,755 16.0 785,493 15.7 (30,262) 33.4 ---------- ------ ---------- ------ ----------- ------ Total ................................ $5,087,565 100.0% $4,997,052 100.0% $ (90,513) 100.0% ========== ====== ========== ====== =========== ====== December 31, 2006 ------------------------------------------------------------------ Amortized Estimated Unrealized Cost % Fair Value % Loss % --------- ----- --------- ----- ---------- ----- Maturity Due in one year or less .............. $ 337,455 9.1% $ 334,582 9.2% $ (2,873) 3.6% Due in one through five years ........ 1,401,180 37.6 1,377,519 37.8 (23,661) 29.6 Due in five through ten years ........ 1,206,367 32.4 1,179,292 32.4 (27,075) 33.9 Due after ten years .................. 776,537 20.9 750,216 20.6 (26,321) 32.9 ---------- ------ ---------- ------ ----------- ------ Total ................................ $3,721,539 100.0% $3,641,609 100.0% $ (79,930) 100.0% ========== ====== ========== ====== =========== ======
At March 31, 2007, there were 1,983 securities with unrealized loss positions, with one security having an unrealized loss greater than $1.1 million. At December 31, 2006, there were 1,796 securities with unrealized loss securities, with two securities having an unrealized loss greater than $1.0 million. The increase in the number of securities with unrealized losses is primarily attributable to increases in interest rates. At March 31, 2007, there were five securities with a fair value that traded continuously at less than 80% of amortized cost for at least six months or 90% of amortized cost for at least 12 months. The total unrealized loss on these securities amounted to $0.7 million. At December 31, 2006, there were three securities with a fair value that traded continuously at less than 80% of amortized cost for at least six months or 90% of amortized cost for at least 12 months. The total unrealized loss on this security amounted to $0.8 million. The following tables provide details of the sales proceeds, realized loss, length of time the security had been in an unrealized loss position and reason for sale for securities sold with a realized loss during the periods March 31, 2007 and 2006.
Three months ended March 31, 2007 ---------------------------------------------------------------------------------------- Credit Concern Relative Value Tactical Total ------------------- ----------------- -------------------- ------------------- Proceeds Loss Proceeds Loss Proceeds Loss Proceeds Loss -------- ---- -------- ---- -------- ---- -------- ---- Days 0-90....................... $1,219,710 $ (35,913) $ - $ - $73,436,313 $ (71,295) $74,656,023 $(107,208) 91-180..................... - - 700,267 (16,708) 1,152,349 (18,238) 1,852,616 (34,946) 181-270.................... - - - - 812,678 (5,725) 812,678 (5,725) Greater than 270........... 3,056,570 (210,387) 3,278,000 (34,457) 5,202,771 (25,664) 11,537,341 (270,508) ---------- ---------- ---------- --------- ----------- ---------- ----------- ---------- Total...................... $4,276,280 $(246,300) $3,978,267 $(51,165) $80,604,111 $(120,922) $88,858,658 $(418,387) ========== ========== ========== ========= =========== ========== =========== ==========
Three months ended March 31, 2006 ------------------------------------------------------------------------------------------ Credit Concern Relative Value Tactical Total ---------------- -------------------- ------------------ ------------------- Proceeds Loss Proceeds Loss Proceeds Loss Proceeds Loss -------- ---- -------- ---- -------- ---- -------- ---- Days 0-90....................... $ 2,821 $ (19) $ 52,679 $ (22) $ 41,523 $ (171) $ 97,023 $ (212) 91-180..................... 2,729 (59) 9,635 (266) 13,632 (374) 25,996 (699) 181-270.................... 6,124 (678) 1,255 (19) 856 (47) 8,235 (744) Greater than 270........... 2,300 (314) 14,054 (303) 9,751 (177) 26,105 (794) --------- -------- --------- ------- --------- ------- ---------- -------- Total...................... $ 13,974 $(1,070) $ 77,623 $ (610) $ 65,762 $ (769) $ 157,359 $(2,449) ========= ======== ========= ======= ========= ======= ========== ========
25 Funds withheld at interest Funds withheld at interest arise on contracts written under modified coinsurance agreements and funds withheld coinsurance agreements. In substance, these agreements are identical to coinsurance treaties except that the ceding company retains control of and title to the assets. The deposits paid to the ceding company by the underlying policyholders are held in a segregated portfolio and managed by the ceding company or by investment managers appointed by the ceding company. These treaties transfer a quota share of the risks. The funds withheld at interest represent our share of the ceding companies' statutory reserves. The cash flows exchanged with each monthly settlement are netted and include, among other items, our quota share of investment income on our proportionate share of the portfolio, realized losses, realized gains (amortized to reflect the statutory rules relating to interest maintenance reserve), interest credited and expense allowances. At March 31, 2007, funds withheld at interest totaled $1.9 billion with an average rating of "A+", an average effective duration of 4.7 years and an average book yield of 5.9%, as compared to $1.9 billion with an average rating of "A", an average effective duration of 5.0 years and an average book yield of 5.9% at December 31, 2006. These are fixed income investments and include marketable securities, commercial mortgages, private placements and cash. The market value of the funds withheld amounted to $1.9 billion at March 31, 2007 and December 31, 2006. At March 31, 2007 and December 31, 2006, funds withheld at interest were in respect of seven contracts with five ceding companies, respectively. At March 31, 2007, we had three contracts with Lincoln National Life Insurance Company that accounted for $829.9 billion or 45% of the funds withheld balances. Additionally, we had one contract with Security Life of Denver International Limited that accounted for $342.9 million or 19% of the funds withheld balances and one contract with Fidelity & Guaranty Life that accounted for $608.2 million or 33% of the funds withheld balances. The remaining contracts were with Illinois Mutual Insurance Company and American Founders Life Insurance Company. Lincoln National Life Insurance Company has financial strength ratings of "A+" from AM. Best, "AA" from Standard & Poor's, "Aa3" from Moody's and "AA" from Fitch. In the event of insolvency of the ceding companies on these arrangements, we would need to exert a claim on the assets supporting the contract liabilities. However, the risk of loss is mitigated by our ability to offset amounts owed to the ceding company with the amounts owed to us by the ceding company. Reserves for future policy benefits and interest sensitive contract liabilities relating to these contracts amounted to $1.8 billion and $1.9 billion at March 31, 2007 and December 31, 2006, respectively. The investment objectives for these arrangements are included in the modified coinsurance and funds withheld coinsurance agreements. The primary objective is to maximize current income, consistent with the long-term preservation of capital. The overall investment strategy is executed within the context of prudent asset/liability management. The investment guidelines permit investments in fixed maturity securities, and include marketable securities, commercial mortgages, private placements and cash. The maximum percentage of below investment grade securities is 10%, and other guidelines limit risk, ensure issuer and industry diversification, and maintain liquidity and overall portfolio credit quality. According to data provided by our ceding companies, the following table reflects the market value of assets including cash backing the funds withheld at interest portfolio using the lowest rating assigned by the three major rating agencies.
March 31, 2007 December 31, 2006 ---------------------- ------------------- $ in $ in Ratings millions % millions % ------- --------- --------- --------- ------- AAA............................... $ 492.2 26.6% $ 427.5 22.1% AA................................ 166.2 9.0 166.6 8.6 A................................. 504.0 27.2 561.1 29.0 BBB............................... 530.6 28.6 605.6 31.3 BB or below....................... 62.6 3.4 75.1 3.9 --------- ------ --------- ------ 1,755.6 94.8 1,835.9 94.9 Commercial mortgage loans......... 97.1 5.2 98.8 5.1 --------- ------ --------- ------ Total............................. $ 1,852.7 100.0% $ 1,934.7 100.0% ========= ====== ========= ======
26 According to data provided by our ceding companies, the following table reflects the market value of assets backing the funds withheld at interest portfolio by sector.
March 31, 2007 December 31, 2006 -------------------- -------------------- $ in $ in Sector millions % millions % ------ --------- --------- --------- ------- U.S. Treasury securities and U.S. government agency obligations.... $ 64.9 3.5% $ 58.8 3.0% Corporate securities.............. 1,175.5 63.5 1,323.7 68.4 Municipal bonds................... 29.7 1.6 29.9 1.6 Mortgage and asset backed securities....................... 424.1 22.9 463.4 24.0 Commercial mortgage loans......... 97.1 5.2 98.9 5.1 Cash.............................. 61.4 3.3 (40.0) (2.1) ---------- ------ ----------- ------ Total............................. $ 1,852.7 100.0% $ 1,934.7 100.0% ========== ====== =========== ======
Liquidity and Capital Resources Liquidity Cash flow Net cash provided by operating activities amounted to $134.3 million in the first quarter ended March 31, 2007 compared to net cash provided by operating activities of $69.6 million in the first quarter of 2006. Operating cash flow includes cash inflows from premiums, fees and investment income, and cash outflows for benefits and expenses paid. In periods of growth of new business, our operating cash flow may decrease due to first year commissions paid on new business generated. For income recognition purposes these commissions are deferred and amortized over the life of the business. We believe cash flows from operations will be positive over time. However, they may be positive or negative in any one period depending on the amount of new life reinsurance business written, the level of ceding commissions paid in connection with writing that business, the level of renewal premiums earned in the period and the timing of receipt of reinsurance receivables and settlement of reinsurance payables. Net cash used in investing activities was $85.7 million in the first quarter ended March 31, 2007 compared to net cash used in investing activities of $866.8 million in the first quarter of 2006. The decrease in net cash used in investing activities principally relates to the purchases of fixed maturity securities in the first quarter of 2006. Net cash used in financing activities was $1.4 million in the first quarter ended March 31, 2007 compared to and net cash provided by financing activities of $67.1 million in the first quarter of 2006. The Holding Company We are a holding company whose primary uses of liquidity include, but are not limited to, operating expenses, the immediate capital needs of our operating companies, dividends paid to our shareholders and interest payments on our indebtedness. The primary sources of our liquidity include proceeds from our capital raising efforts and interest income on corporate investments. The holding company also receives funding from its subsidiaries through transfer pricing reflecting services performed by the holding company on behalf of its subsidiaries. We will continue to be dependent upon these sources of liquidity. Our liquidity position was greatly improved by the closing of the Transaction, which provided gross proceeds of $600.0 million (see Note 8 to the Financial Statements). 27 Capital and Long-Term Debt Total capitalization at March 31, 2007 and December 31, 2006 is as follows: March 31, December 31, 2007 2006 ----------- ------------ Shareholders' equity.................... $ 1,122,551 $ 1,057,192 Mezzanine equity........................ - 143,665 Long-term debt.......................... 129,500 129,500 ----------- ------------ Total................................... $ 1,252,051 $ 1,330,357 =========== ============ The decrease in shareholders' equity at March 31, 2007 as compared to December 31, 2006 was primarily due to the net loss available to ordinary shareholders of $35.5 million for the first quarter of 2007 and the effect of the adoption of FIN 48 which reduced beginning retained earnings by $32.6 million (see Note 5 to the Consolidated Financial Statements). Shareholder dividends On July 28, 2006, the Board of Directors suspended the dividend on our ordinary shares. All future payments of dividends are at the discretion of our Board of Directors and will depend on our income, capital requirements, insurance regulatory conditions, operating conditions and such other factors as the Board of Directors may deem relevant. In accordance with the forbearance agreement with HSBC (see Collateral section below), we are prohibited from declaring any cash dividend, exclusive of the non-cumulative perpetual preferred shares, during the forbearance period from November 26, 2006 until December 31, 2008, unless at the time of declaration and payment of cash dividend, Scottish Annuity & Life Insurance Company (Cayman) Ltd. has an insurer financial strength rating of at least A- for Standard & Poor's and A3 for Moody's Investors Service. Collateral We must have sufficient assets available for use as collateral to support our borrowings, letters of credit and certain reinsurance transactions. With reinsurance transactions, the need for collateral or letters of credit arises in the following ways: o When Scottish Annuity & Life Insurance Company (Cayman) Ltd., Scottish Re (Dublin) Limited or Scottish Re Limited enter into a reinsurance treaty with a U.S. customer, they must contribute assets into a qualifying reserve credit trust and/or provide a letter of credit to enable the U.S. ceding company to obtain a reserve credit for the reinsurance transaction since these companies are not licensed or accredited U.S. reinsurers. o When Scottish Re (U.S.), Inc. enters into a reinsurance transaction, it typically incurs a need for additional statutory capital to cover strain from acquisition costs and increases in required risk-based capital. To the degree its own surplus is not sufficient to meet this need, we can make an additional capital contribution into Scottish Re (U.S.), Inc. or Scottish Re (U.S.), Inc. can cede a portion of the transaction to another company within the group or an unrelated reinsurance company. If that reinsurer is not a licensed or accredited U.S. reinsurer, it must contribute assets to a qualifying reserve credit trust and/or provide a letter of credit in order for Scottish Re (U.S.), Inc. to obtain reserve credit. Scottish Re (U.S.), Inc. has ceded significant amounts of business to Scottish Re (Dublin) Limited, relieving Scottish Annuity & Life Insurance Company (Cayman) Ltd. of the need to contribute substantial amounts of capital to Scottish Re (U.S.), Inc. in connection with such cessions by Scottish Re (U.S.), Inc. to Scottish Re (Dublin) Limited. Scottish Re (Dublin) Limited must contribute eligible assets to qualifying reserve credit trusts and/or provide letters of credit to provide Scottish Re (U.S.), Inc. with reserve credit. o Scottish Re (U.S.), Inc. and Scottish Re Life Corporation are licensed, accredited, approved or authorized to write reinsurance in 50 states and the District of Columbia. As a result, they generally are not required to provide collateral in order for their U.S. customers to receive reserve credit; however, Scottish Re (U.S.), Inc. may agree to provide a reserve credit trust, security trust, 28 or letter of credit to mitigate the counter-party risk from the customer's perspective, thereby enabling transactions that otherwise would be unavailable or would be available only on significantly less attractive terms. ING Collateral Arrangement Pursuant to the terms of our acquisition of the individual life reinsurance business of ING, ING is obligated to maintain collateral for the Regulation XXX and AXXX statutory reserve requirements of the acquired business for the duration of such requirements. We pay ING a fee based on the face amount of the collateral provided until satisfactory alternative collateral arrangements are made. In 2005 and 2006, we completed three transactions that collectively provided approximately $3.7 billion in collateral arrangements to fund Regulation XXX statutory reserve requirements that were assumed in connection with the acquisition of ING's individual life reinsurance business. As of March 31, 2007, ING is only providing collateral support for our AXXX business. HSBC I In 2004, we entered into a collateral finance facility with HSBC ("HSBC I"). This facility provides up to $200.0 million that can be used to collateralize reinsurance obligations under inter-company reinsurance agreements. Simultaneously, we entered into a total return swap with HSBC under which we are entitled to the total return of the investment portfolio of the trust established for this facility. In accordance with Financial Accounting Standards Board ("FASB") Interpretation No. 46R "Consolidation of Variable Interest Entities - An Interpretation of ARB No. 51 ("FIN 46R"), the trust is considered to be a variable interest entity and we are deemed to hold the primary beneficial interest in the trust. As a result, the trust has been consolidated in our financial statements. The assets of the trust have been recorded as fixed maturity investments. Our consolidated statements of income (loss) show the investment return of the trust as investment income and the cost of the facility is reflected in collateral finance facilities expense. The creditors of the trust have no recourse against our general assets. As at March 31, 2007, $188.5 million of this facility was being utilized. Due to the rating agency downgrades after our announcement of earnings for the second quarter of 2006, HSBC requested additional collateral under the total return swap agreements related to both HSBC I and HSBC II (see below). $65.0 million of additional collateral was provided to HSBC in 2006. On November 26, 2006, we entered into an amended and restated forbearance agreement with HSBC, pursuant to which HSBC has agreed not to make demands for additional collateral under our collateral finance facilities with HSBC so long as certain conditions are met during the forbearance period which ends on December 31, 2008. Shortly following the closing of the Transaction, $32.5 million of the additional collateral noted above will be returned to us. The remaining amount will be returned upon the attainment of an A- credit rating. Orkney Re, Inc. On February 11, 2005, Orkney Holdings, LLC, a Delaware limited liability company ("Orkney I"), issued and sold in a private offering an aggregate of $850.0 million Series A Floating Rate Insured Notes due February 11, 2035 (the "Orkney Notes"). Orkney I was organized for the limited purpose of holding the stock of Orkney Re, Inc., a special purpose captive insurance company, and issuing the Orkney Notes. During May 2007, Orkney Re, Inc. was redomiciled from South Carolina to Delaware. This redomestication had no impact on the Orkney Notes. Scottish Re (U.S.), Inc. holds all of the limited liability company interest in Orkney I, and has contributed capital to Orkney I in the amount of $268.5 million. Proceeds from this offering were used to fund the Regulation XXX reserve requirements for a defined block of level premium term life insurance policies issued between January 1, 2000 and December 31, 2003 reinsured by Scottish Re (U.S.), Inc. to Orkney Re, Inc. Proceeds from the Orkney Notes have been deposited into a series of trusts that collateralize the notes. The holders of the Orkney Notes cannot require repayment from us or any of our subsidiaries, other than Orkney I. The timely payment of interest and ultimate payment of principal for the Orkney Notes are guaranteed by MBIA Insurance Corporation. Interest on the principal amount of the Orkney Notes is payable quarterly at a rate equivalent to three month LIBOR plus 0.53%. At March 31, 2007, the interest rate was 5.89%. Any payment of principal, including by redemption, or interest on the Orkney Notes is sourced from dividends from Orkney Re, Inc. and the balances available in a series of trust accounts. Dividends may only be made with the prior approval of the Director of 29 Insurance in accordance with the terms of its licensing orders and in accordance with applicable law. The Orkney Notes also contain a customary limitation on lien provisions and customary events of default provisions, which, if breached, could result in the accelerated maturity of the Orkney Notes. Orkney I has the option to redeem all or a portion of the Orkney Notes prior to and on or after February 11, 2010, subject to certain call premiums. In accordance with FIN 46R, Orkney I is considered to be a variable interest entity and we are considered to hold the primary beneficial interest. As a result, Orkney I has been consolidated in our financial statements. The assets of Orkney I have been recorded as fixed maturity investments and cash and cash equivalents. Our consolidated statements of income (loss) show the investment return of Orkney I as investment income and the cost of the facility is reflected in collateral finance facilities expense. Orkney Re II plc On December 21, 2005, Orkney Re II plc, an orphan special purpose vehicle incorporated under the laws of Ireland ("Orkney II"), whose issued ordinary shares are held by a share trustee and its nominees in trust for charitable purposes, issued in a private offering $450.0 million of debt to external investors. The debt consisted of $382.5 million Series A-1 Floating Rate Guaranteed Notes (the "Series A-1 Notes"), $42.5 million in aggregate principal amount of Series A-2 Floating Rate Notes (the "Series A-2 Notes"), and $25.0 million Series B Floating Rate Notes (the "Series B Notes"), all due December 31, 2035 (collectively, the "Orkney II Notes"). The Orkney II Notes are listed on the Irish Stock Exchange. Proceeds from this offering were used to fund the Regulation XXX reserve requirements for a defined block of level premium term life insurance policies issued between January 1, 2004 and December 31, 2004 reinsured by Scottish Re (U.S.), Inc. to Orkney II. Proceeds from the Orkney II Notes have been deposited into a series of trusts that collateralize the notes. The holders of the Orkney II Notes cannot require repayment from us or any of our subsidiaries, only from Orkney II. Assured Guaranty (UK) Ltd. has guaranteed the timely payment of the scheduled interest payments and the principal on the maturity date, December 21, 2035, of the Series A-1 Notes. The debt issued to Scottish Annuity & Life Insurance Company (Cayman) Ltd. consisted of $30.0 million of Series C Floating Rate Notes due December 21, 2036. These notes accrue interest only. Payment of interest does not occur until the Orkney II Notes are fully repaid. Scottish Re Group Limited owns $0.5 million Series D Convertible Notes due December 21, 2036 and 76,190,000 Preference Shares of $1.00 each in capital. Interest on the principal amount of the Orkney II Notes is payable quarterly at a rate equivalent to three-month LIBOR plus 0.425% for the Series A-1 Notes, three-month LIBOR plus 0.73% for the Series A-2 Notes, and three-month LIBOR plus 3.0% for the Series B Notes. At March 31, 2007, the interest rate on the Series A-1 Notes was 5.785%, Series A-2 Notes was 6.09%, and Series B Notes was 8.36%. The Orkney II Notes also contain a customary limitation on lien provisions and customary events of default provisions, which, if breached, could result in the accelerated maturity of the Orkney II Notes. Orkney II has the option to redeem all or a portion of the Orkney II Notes prior to and on or after February 11, 2007, subject to certain call premiums. In accordance with FIN 46R, Orkney II is considered to be a variable interest entity and we are considered to hold the primary beneficial interest. As a result, Orkney II has been consolidated in our financial statements. The assets of Orkney II have been recorded as fixed maturity investments and cash and cash equivalents. Our consolidated statements of income (loss) show the investment return of Orkney II as investment income and the cost of the facility is reflected in collateral finance facilities expense. HSBC II On December 22, 2005, we entered into a second collateral finance facility with HSBC ("HSBC II"). This facility is a 20 year collateral finance facility that provides up to $1.0 billion of Regulation XXX collateral support for the business acquired from ING and can be used to collateralize reinsurance obligations under inter-company reinsurance agreements. Simultaneously, we entered into a total return swap with HSBC under which we are entitled to the total return of the investment portfolio of the trust established for this facility. In accordance with FIN 46R, the trust is considered to be a variable interest entity and we are deemed to hold the primary beneficial interest in the trust. As a result, the trust has been consolidated in our financial statements. The assets of the trust have been recorded as fixed maturity investments, cash and cash equivalents. Our consolidated statements of income (loss) show the investment return of the trust as investment income and the cost of the facility is reflected in collateral 30 finance facilities expense. The creditors of the trust have no recourse against our general assets. As at March 31, 2007, $547.5 million of this facility was being utilized. See HSBC I above for a discussion of the additional collateral paid to HSBC under this facility. Reinsurance Facility On December 22, 2005, we entered into a long term reinsurance facility ("Reinsurance Facility"), with a third-party Bermuda-domiciled reinsurer that provides up to $1.0 billion of Regulation XXX collateral support for the business acquired from ING. The Bermuda reinsurer provides security in the form of letters of credit in trust equal to the statutory reserves. All risks and returns arising out of the underlying book of business are retained by us. Ballantyne Re plc On May 2, 2006, Ballantyne Re plc, an orphan special purpose vehicle incorporated under the laws of Ireland issued in a private offering $1.74 billion of debt to external investors and $178.0 million of debt to Scottish Annuity & Life Insurance Company (Cayman) Ltd. The total debt issued to external investors (collectively, the "Notes") consisted of: o $250.0 million of Class A-1 Floating Rate Notes, o $500.0 million of Class A-2 Floating Rate Guaranteed Notes Series A, o $500.0 million of Class A-2 Floating Rate Guaranteed Notes Series B, o $100.0 million of Class A-3 Floating Rate Guaranteed Notes Series A, o $100.0 million of Class A-3 Floating Rate Guaranteed Notes Series B, o $100.0 million of Class A-3 Floating Rate Guaranteed Notes Series C, o $100.0 million of Class A-3 Floating Rate Guaranteed Notes Series D, o $10.0 million of Class B-1 7.51244% Subordinated Notes, o $40.0 million of Class B-2 Subordinated Floating Rate Notes, and o $42.0 million of Class C-1 Subordinated Variable Interest Rate Notes. The debt issued to Scottish Annuity & Life Insurance Company (Cayman) Ltd. consisted of $8.0 million of Class C-1 Subordinated Variable Interest Rate Notes and $170.0 million Class C-2 Subordinated Variable Interest Rate Notes, which Scottish Annuity & Life Insurance Company (Cayman) Ltd. intends to hold (collectively, the "SALIC Notes", and together with the Notes, the "Ballantyne Notes"). Concurrently with its offering of the Ballantyne Notes, Ballantyne Re issued (i) $500,000 of Class D Convertible Notes, which were purchased by Scottish Re Group Limited, (ii) 163.0 million Redeemable Preference Shares of U.S. $1.00 par value per share which were purchased by Scottish Annuity & Life Insurance Company (Cayman) Ltd., and (iii) 18.2 million Non-Redeemable Preference Shares of U.S. $1.00 par value per share which were also purchased by Scottish Annuity & Life Insurance Company (Cayman) Ltd. Interest on the principal amount of the Ballantyne Notes is payable in intervals ranging from every 28 days to monthly to annually, depending on the note, initially at a rate equivalent to one-month LIBOR plus 0.61% for the Class A-1 Floating Rate Notes (and after May 2, 2022, one-month LIBOR plus 1.22%), one-month LIBOR plus 0.31% for the Class A-2 Floating Rate Guaranteed Notes Series A (and after May 2, 2027, one-month LIBOR plus 0.62%), one-month LIBOR plus 0.36% for the Class A-2 Floating Rate Guaranteed Notes Series B (and after May 2, 2027, one-month LIBOR plus 0.72%), 4.99%, 4.99%, 5.00% and 5.01% for Series A, Series B, Series C, and Series D of the Class A-3 Notes, respectively (with the rate on the Class A-3 Notes to reset every 28 days), 7.51% for the Class B-1 Subordinated Notes, one-month LIBOR plus 2.00% for the Class B-2 Subordinated Floating Rate Notes, 31 and a variable rate based on performance of the underlying block of business for the Class C-1 Subordinated Variable Interest Rate Notes and the Class C-2 Subordinated Variable Interest Rate Notes. Proceeds from this offering were used to fund the Regulation XXX reserve requirements for the business acquired from ING. $1.65 billion of the proceeds from the Ballantyne Notes have been deposited into a series of accounts that collateralize the reserve obligations of Scottish Re (U.S.), Inc. The holders of the Ballantyne Notes cannot require repayment from us or any of our subsidiaries. The timely payment of the scheduled interest payments and the principal on the maturity date of Series A of the Class A-2 Notes and Series A, Series B, Series C, Series D and, if issued, Series E of the Class A-3 Notes has been guaranteed by Ambac Assurance UK Limited. The timely payment of the scheduled interest payments and the principal on the maturity date of Series B of the Class A-2 Notes and, if issued, Series F of the Class A-3 Notes has been guaranteed by Assured Guaranty (UK) Ltd. In accordance with FIN 46R, Ballantyne Re is considered to be a variable interest entity and we are considered to hold the primary beneficial interest. As a result, Ballantyne Re is consolidated in our financial statements beginning in the second quarter of 2006. The assets of Ballantyne Re are recorded as fixed maturity investments and cash and cash equivalents. Our consolidated statements of income (loss) include the investment return of Ballantyne Re as investment income and the cost of the facility is reflected in collateral finance facilities expense. Stingray On January 12, 2005, we entered into a put agreement with Stingray Investor Trust ("Stingray") for an aggregate value of $325.0 million. Under the terms of the put agreement, we acquired an irrevocable put option to issue funding agreements to Stingray in return for the assets in a portfolio of 30 day commercial paper. This put option may be exercised at any time. In addition, we may be required to issue funding agreements to Stingray under certain circumstances, including, but not limited to, the non-payment of the put option premium and a non-payment of interest under any outstanding funding agreements under the put agreement. The facility matures on January 12, 2015. This transaction may also provide collateral for Scottish Re (U.S.), Inc. for reinsurance obligations under inter-company reinsurance agreements. At March 31, 2007, $50.0 million was in use for this purpose. We drew down most of the funds available under the facility, in the amount of $265.0 million, during 2006 and $10.0 million in the first quarter of 2007. The put premium and interest costs incurred during the three months ended March 31, 2007 amounted to $4.7 million and is included in collateral finance facilities expense in the consolidated statements of income (loss). The put premium incurred during the three months ended March 31, 2006 amounted to $1.2 million. In accordance with FIN 46R, we are not considered to be the primary beneficiary of Stingray and, as a result, we are not required to consolidate Stingray. We are not responsible for any losses incurred by the Stingray Pass Through Trust. The $275.0 million of funds drawn on the facility are included in interest sensitive contract liabilities on our consolidated balance sheet. Collateral Summary At March 31, 2007, we had $3.8 billion of collateral finance facility obligations relating to the HSBC I, HSBC II, Orkney I, Orkney II and Ballantyne Re transactions. In connection with these transactions, we have assets in trust of approximately $5.7 billion that represent assets supporting the economic reserves, excess reserves, additional funding amounts and surplus in the transactions. The assets in trust are managed in accordance with predefined investment guidelines as to permitted investments, portfolio quality, diversification and duration. As described above, we have a number of facilities in place to provide collateral for our reinsurance business, including HSBC I and Stingray. We are currently in the process of completing an approximately $550.0 million, 15-year facility that will replace HSBC I and fully finance our 2005 and 2006 new business Regulation XXX production. In addition, we anticipate using a portion of the Transaction proceeds to pay-down the $275.0 million outstanding balance on Stingray and utilizing Stingray for short-term Regulation XXX financing. Other existing sources of collateral include cash and other assets which are available, which have been significantly improved with the receipt of the proceeds from the Transaction. During the first quarter of 2007, we entered into a $100 million term loan facility with MassMutual and Cerberus to provide a source of liquidity between the shareholder vote of the Transaction and the closing of the Transaction, if needed. No amounts were drawn on this facility and it was terminated upon the closing of the Transaction on May 7, 2007. 32 Regulatory Capital Requirements Scottish Annuity & Life Insurance Company (Cayman) Ltd. has agreed with Scottish Re (U.S.), Inc. that it will (1) cause Scottish Re (U.S.), Inc. to maintain capital and surplus equal to the greater of $20.0 million or such amount necessary to prevent the occurrence of a Company Action Level Event under the risk-based capital laws of the State of Delaware and (2) provide Scottish Re (U.S.), Inc. with enough liquidity to meet its obligations in a timely manner. Scottish Annuity & Life Insurance Company (Cayman) Ltd. has agreed with Scottish Re Life Corporation that it will (1) cause Scottish Re Life Corporation to maintain capital and surplus equal to at least 175% of Company Action Level RBC, as defined under the laws of the State of Delaware and (2) provide Scottish Re Life Corporation with enough liquidity to meet its obligations in a timely manner. Scottish Annuity & Life Insurance Company (Cayman) Ltd. and Scottish Re Group Limited have agreed with Scottish Re Limited that in the event Scottish Re Limited is unable to meet its obligations under its insurance or reinsurance agreements, Scottish Annuity & Life Insurance Company (Cayman) Ltd. or if Scottish Annuity & Life Insurance Company (Cayman) Ltd. cannot fulfill such obligations, then Scottish Re Group Limited will assume all of Scottish Re Limited's obligations under such agreements. Scottish Re Group Limited and Scottish Annuity & Life Insurance Company (Cayman) Ltd. have executed similar agreements for Scottish Re (Dublin) Limited and Scottish Re Life (Bermuda) Limited and may, from time to time, execute additional agreements guaranteeing the performance and/or obligations of their subsidiaries. All of our regulated insurance entities are in excess of their minimum regulatory capital requirements as of March 31, 2007 and we expect them to remain as such. Off Balance Sheet Arrangements We have no obligations, assets or liabilities other than those disclosed in the financial statements; no trading activities involving non-exchange traded contracts accounted for at fair value; and no relationships and transactions with persons or entities that derive benefits from their non-independent relationship with us or our related parties. New Accounting Standards FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes". FIN 48 prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise's financial statements in accordance with SFAS No. 109. Tax positions must meet a "more likely than not" recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. (See Note 5 to the Consolidated Financial Statements.) FASB Statement No. 157, Fair Value Measurements In September 2006, the FASB issued Statement No. 157 ("SFAS No. 157"), "Fair Value Measurements", which defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements. We are required to adopt SFAS No. 157 on January 1, 2008 and are evaluating the implications of SFAS No. 157 on our results of operations and financial position. Item 3. Quantitative and Qualitative Disclosures about Market Risk Please refer to Part II "Item 1A: Risk Factors" and "Item 7A: Quantitative and Qualitative Disclosures about Market Risk" in our 2006 Annual Report. 33 Item 4. Controls and Procedures Evaluation of disclosure controls and procedures Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on such evaluation, such officers have concluded that our disclosure controls and procedures were effective as of March 31, 2007 to ensure that information required to be disclosed by us in the reports filed and submitted by us under the Exchange Act were recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Changes in internal controls There have not been any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated by the SEC under the Securities Exchange Act of 1934) during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 34 PART II. OTHER INFORMATION Item 1. Legal Proceedings On August 2, 2006, a putative class action lawsuit was filed against us and certain of our current and former officers and directors in the U.S. District Court for the Southern District of New York on behalf of a putative class consisting of investors who purchased our publicly traded securities between December 16, 2005 and July 28, 2006. Between August 7, 2006 and October 3, 2006, seven additional related class action lawsuits were filed against us, certain of our current and former officers and directors, and certain third parties. Two of the complaints were filed on August 7, 2006, and the remaining five complaints were filed on August 14, 2006, August 22, 2006, August 23, 2006, September 15, 2006, and October 3, 2006, respectively. Each of the class actions filed seeks an unspecified amount of damages, as well as other forms of relief. On October 12, 2006, all of the class actions were consolidated. On December 4, 2006, a consolidated class action complaint was filed. The complaint names us; Dean E. Miller, our Chief Financial Officer; Scott E. Willkomm, our former Chief Executive Officer; Elizabeth Murphy, our former Chief Financial Officer; our Board members Michael Austin, Bill Caulfeild-Browne, Robert Chmely, Michael French, Lord Norman Lamont, Hazel O'Leary, and Glenn Schafer; and certain third parties, including Goldman Sachs and Bear Stearns in their capacities as underwriters in various securities offerings by us and Ernst & Young LLP in their capacity as independent registered public accounting firm. The complaint is brought on behalf of a putative class consisting of investors who purchased our securities between February 17, 2005 and July 31, 2006. The complaint alleges violations of Sections 10(b) and 20(a) of the Exchange Act, Rule 10b-5, and Sections 11, 12(a)(2), and 15 of the Securities Act. The complaint seeks an unspecified amount of damages, as well as other forms of relief. On March 7, 2007 we filed a motion to dismiss the putative class action lawsuit. This motion is still pending. In addition, on or about October 20, 2006, a shareholder derivative lawsuit was filed against our directors in the U.S. District Court for the Southern District of New York. The derivative lawsuit alleges, among other things, that defendants improperly permitted us to make false and misleading statements to investors concerning our business and operations, thereby exposing us to liability from class action suits alleging violations of the U.S. securities laws. The derivative lawsuit asserts claims against defendants for breach of fiduciary duty, abuse of control, gross mismanagement, constructive fraud, and unjust enrichment. On January 8, 2007 we filed a motion to dismiss the derivative lawsuit. On May 7, 2007, our motion was granted and the lawsuit was dismissed without prejudice. If plaintiffs wish to file an amended complaint, they must do so within 20 days of the decision. Item 1A. Risk Factors As a result of the closing of the Transaction, certain risks set forth in our 2006 Annual Report relating to whether the Transaction would be completed are no longer applicable. However, the other risks identified could materially affect our business, results of operations or financial condition. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Not applicable. Item 3. Defaults upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders We held an Extraordinary General Meeting of Shareholders on March 2, 2007. The following items of business were presented to our shareholders: Proposal 1: Amendment of Memorandum and Articles of Association Our shareholders approved an increase in our authorized share capital and certain other amendments to our Memorandum and Articles of Association which are necessary to effect the Transaction. The affirmative vote of 66.67% of our outstanding ordinary shares entitled to vote was required to approve the amendments. The results of the vote of our shareholders with respect to this proposal were as follows: For: 41,942,429 (69.26% of our outstanding ordinary shares entitled to vote) 35 Against: 7,232,037 (11.94% of our outstanding ordinary shares entitled to vote) Abstain: 843,376 (1.39% of our outstanding ordinary shares entitled to vote) Proposal 2: Issuance of Convertible Shares Our shareholders approved the issuance of convertible shares in connection with the Transaction, which shares are convertible into ordinary shares representing more than 20% of our outstanding ordinary shares and the issuance of which will result in a change of control of the Company. The affirmative vote of greater than 50% of votes cast, provided that the total votes cast represent over 50% of ordinary shares entitled to vote was required to approve the issuance. The results of the vote of our shareholders with respect to this proposal were as follows: For: 42,055,221 (84.08% of votes cast) Against: 7,120,248 (14.24% of votes cast) Abstain: 842,373 (1.68% of votes cast) Proposal 3: Adjournment of Meeting Our shareholders approved a proposal to adjourn the Extraordinary General Meeting, if necessary, to permit further solicitation of proxies in the event there were not sufficient votes at the time of the Extraordinary General Meeting to approve the transactions contemplated at such meeting. The affirmative vote of greater than 50% of votes cast was required to approve the adjournment of the meeting. The results of the vote of our shareholders with respect to this proposal were as follows: For: 41,986,961 (83.94% of votes cast) Against: 7,207,227 (14.41% of votes cast) Abstain: 823,654 (1.65% of votes cast) The holders of approximately 1.8 million ordinary shares submitted votes in favor of proposals one, two and three just after the polls closed. The inclusion of such shares in the above tally would increase the relevant votes for proposals one, two and three to 72.25%, 84.64% and 84.5%, respectively. Item 5. Other Information Not applicable. Item 6. Exhibits Except as otherwise indicated, the following Exhibits are filed herewith and made a part hereof: 3.1 Memorandum of Association of Scottish Re Group Limited, as amended as of April 7, 2005 (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (6) 3.2 Articles of Association of Scottish Re Group Limited, as amended as of April 7, 2005 (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (6) 4.1 Specimen Ordinary Share Certificate (incorporated herein by reference to Exhibit 4.1 to Scottish Re Group Limited's Registration Statement on Form S-1). (1) 4.2 Form of Amended and Restated Class A Warrant (incorporated herein by reference to Exhibit 4.2 to Scottish Re Group Limited's Registration Statement on Form S-1). (1) 4.3 Form of Securities Purchase Agreement for the Class A Warrants (incorporated herein by reference to Exhibit 4.4 to Scottish Re Group Limited's Registration Statement on Form S-1). (1) 4.4 Form of Securities Purchase Agreement between Scottish Re Group Limited and the Shareholder Investors (incorporated herein by reference to Exhibit 4.10 to Scottish Re Group Limited's Registration Statement on Form S-1). (1) 36 4.5 Form of Securities Purchase Agreement between Scottish Re Group Limited and the Non-Shareholder Investors (incorporated herein by reference to Exhibit 4.12 to Scottish Re Group Limited's Registration Statement on Form S-1). (1) 4.6 Certificate of Designations of Convertible Preferred Shares of Scottish Re Group Limited (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (10) 4.7 Certificate of Designations of Scottish Re Group Limited's Non-Cumulative Perpetual Preferred Shares, dated June 28, 2005 (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (16) 4.8 Specimen Stock Certificate for the Company's Non-Cumulative Perpetual Preferred Shares (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (16) 10.1 Employment Agreement dated June 18, 1998 between Scottish Re Group Limited and Michael C. French (incorporated herein by reference to Exhibit 10.1 to Scottish Re Group Limited's Registration Statement on Form S-1). (1)(24) 10.2 Second Amended and Restated 1998 Stock Option Plan effective October 22, 1998 (incorporated herein by reference to Exhibit 10.3 to Scottish Re Group Limited's Registration Statement on Form S-1). (1)(24) 10.3 Form of Stock Option Agreement in connection with 1998 Stock Option Plan (incorporated herein by reference to Exhibit 10.4 to Scottish Re Group Limited's Registration Statement on Form S-1). (1)(24) 10.4 Investment Management Agreement dated October 22, 1998 between Scottish Re Group Limited and General Re-New England Asset Management, Inc. (incorporated herein by reference to Exhibit 10.14 to Scottish Re Group Limited's Registration Statement on Form S-1). (1) 10.5 Form of Omnibus Registration Rights Agreement (incorporated herein by reference to Exhibit 10.17 to Scottish Re Group Limited's Registration Statement on Form S-1). (1) 10.6 1999 Stock Option Plan (incorporated herein by reference to Exhibit 10.14 to Scottish Re Group Limited's 1999 Annual Report on Form 10-K). (2)(24) 10.7 Form of Stock Options Agreement in connection with 1999 Stock Option Plan (incorporated herein by reference to Exhibit 10.15 to Scottish Re Group Limited's 1999 Annual Report on Form 10-K). (2)(24) 10.8 Employment Agreement dated September 18, 2000 between Scottish Re (U.S.), Inc. and Oscar R. Scofield (incorporated herein by reference to Exhibit 10.16 to Scottish Re Group Limited's 2000 Annual Report on Form 10-K). (3)(24) 10.9 Share Purchase Agreement by and between Scottish Re Group Limited and Pacific Life dated August 6, 2001 (incorporated by reference to Scottish Re Group Limited's Current Report on Form 8-K). (7) 10.10 Amendment No. 1, dated November 8, 2001, to Share Purchase Agreement dated August 6, 2001 by and between Scottish Re Group Limited and Pacific Life (incorporated by reference to Scottish Re Group Limited's Current Report on Form 8-K). (5) 10.11 2001 Stock Option Plan (incorporated herein by reference to Exhibit 10.17 to Scottish Re Group Limited's 2001 Annual Report on Form 10-K). (4)(24) 10.12 Form of Nonqualified Stock Option Agreement in connection with 2001 Stock Option Plan (incorporated herein by reference to Exhibit 10.17 to Scottish Re Group Limited's 2001 Annual Report on Form 10-K). (4)(24) 10.13 Tax Deed of Covenant dated December 31, 2001 between Scottish Re Group Limited and Pacific Life (incorporated by reference to Scottish Re Group Limited's Current Report on Form 8-K). (5) 37 10.14 Letter Agreement dated December 28, 2001 between Scottish Re Group Limited and Pacific Life (incorporated by reference to Scottish Re Group Limited's Current Report on Form 8-K). (5) 10.15 Form of Indemnification Agreement between Scottish Re Group Limited and each of its directors and officers (incorporated by reference to Scottish Re Group Limited's Amended Quarterly Report on Form 10-Q/A for the period ended September 30, 2002). (8)(24) 10.16 Employment Agreement dated July 1, 2002 between Scottish Annuity & Life Insurance Company (Cayman) Ltd. and Thomas A. McAvity, Jr. (incorporated by reference to Scottish Re Group Limited's Amended Quarterly Report on Form 10-Q/A for the period ended September 30, 2002). (8)(24) 10.17 Employment Agreement dated June 1, 2002 between Scottish Re Group Limited and Paul Goldean (incorporated herein by reference to Scottish Re Group Limited's Quarterly Report on Form 10-Q for the period ended March 31, 2004). (14)(24) 10.18 Employment Agreement dated July 1, 2002 between Scottish Re Group Limited and Elizabeth Murphy (incorporated by reference to Scottish Re Group Limited's Amended Quarterly Report on Form 10-Q/A for the period ended September 30, 2002). (8)(24) 10.19 Employment Agreement dated June 1, 2002 between Scottish Re Group Limited and Clifford J. Wagner (incorporated by reference to Scottish Re Group Limited's Amended Quarterly Report on Form 10-Q/A for the period ended September 30, 2002). (8)(24) 10.20 Employment Agreement dated July 8, 2002 between Scottish Re Group Limited and Scott E. Willkomm (incorporated by reference to Scottish Re Group Limited's Amended Quarterly Report on Form 10-Q/A for the period ended September 30, 2002). (8)(24) 10.21 Employment Agreement dated February 10, 2003 between Scottish Re Group Limited and Michael C. French (incorporated herein by reference to Scottish Re Group Limited's 2002 Annual Report on Form 10-K). (12)(24) 10.22 Employment Agreement dated February 10, 2003 between Scottish Re (U.S.), Inc. and Oscar R. Scofield (incorporated herein by reference to Scottish Re Group Limited's 2002 Annual Report on Form 10-K). (12)(24) 10.23 Amended Employment Agreement dated February 10, 2003 between Scottish Re Group Limited and Thomas A. McAvity (incorporated herein by reference to Scottish Re Group Limited's 2002 Annual Report on Form 10-K). (12)(24) 10.24 Indenture, dated November 22, 2002, between Scottish Re Group Limited and The Bank of New York (incorporated herein by reference to Scottish Re Group Limited's Registration Statement on Form S-3). (9) 10.25 Registration Rights Agreement, dated November 22, 2002, by and among Scottish Re Group Limited and Bear Stearns & Co. and Putnam Lovell Securities Inc. (incorporated herein by reference to Scottish Re Group Limited's Registration Statement on Form S-3). (9) 10.26 Employment Agreement dated May 1, 2003 between Scottish Re Holdings Limited and David Huntley (incorporated herein by reference to Scottish Re Group Limited's Quarterly Report on Form 10-Q for the period ended September 30, 2003). (13)(24) 10.27 Stock Purchase Agreement, dated as of October 24, 2003, by and among Scottish Re Group Limited, Scottish Holdings, Inc. and Employers Reinsurance Corporation (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (11) 10.28 Tax Matters Agreement, dated as of January 22, 2003, by and among Scottish Re Group Limited, Scottish Holdings, Inc. and Employers Reinsurance Corporation (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (11) 38 10.29 Transition Services Agreement, dated as of January 22, 2003, by and among Scottish Holdings, Inc. and Employers Reinsurance Corporation (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (11) 10.30 Employment Agreement dated April 21, 2004, by and among Scottish Holdings, Inc. and Seth W. Vance (incorporated herein by reference to Scottish Re Group Limited's Quarterly Report on Form 10-Q for the period ended March 31, 2004). (14)(24) 10.31 Amendment to Employment Agreement dated March 29, 2004, by and between Scottish Re (U.S.), Inc. and Oscar R. Scofield (incorporated herein by reference to Scottish Re Group Limited's Quarterly Report on Form 10-Q for the period ended June 30, 2004, filed with the SEC on August 9, 2004). (24) 10.32 Asset Purchase Agreement, dated as of October 17, 2004, by and among Security Life of Denver Insurance Company, Security Life of Denver International Limited, ING America Insurance Holdings, Inc. (for purposes of Section 11.11), Scottish Re Group Limited, Scottish Re (U.S.), Inc., Scottish Annuity & Life Insurance Company (Cayman) Ltd. (for purposes of Section 5.26) and Scottish Re Life Corporation (for purposes of Section 5.24) (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (15) 10.33 Securities Purchase Agreement, dated as of October 17, 2004, by and among Scottish Re Group Limited and Cypress Merchant B Partners II (Cayman) L.P., Cypress Merchant Banking II-A C.V., 55th Street Partners II (Cayman) L.P. and Cypress Side-by-Side (Cayman) L.P. (including form of Subordinated Note, Class C Warrant, Shareholders' Agreement and Amendments to Articles of Association) (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (15) 10.33 Securities Purchase Agreement, dated as of October 17, 2004, by and among Scottish Re Group Limited and Cypress Merchant B Partners II (Cayman) L.P., Cypress Merchant Banking II-A C.V., 55th Street Partners II (Cayman) L.P. and Cypress Side-by-Side (Cayman) L.P. (including form of Subordinated Note, Class C Warrant, Shareholders' Agreement and Amendments to Articles of Association) (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (15) 10.33 Securities Purchase Agreement, dated as of October 17, 2004, by and among Scottish Re Group Limited and Cypress Merchant B Partners II (Cayman) L.P., Cypress Merchant Banking II-A C.V., 55th Street Partners II (Cayman) L.P. and Cypress Side-by-Side (Cayman) L.P. (including form of Subordinated Note, Class C Warrant, Shareholders' Agreement and Amendments to Articles of Association) (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (15) 10.34 Form of Voting Agreement, by and among Cypress Merchant B Partners II (Cayman) L.P., Cypress Merchant Banking II-A C.V., 55th Street Partners II (Cayman) L.P. and Cypress Side-by-Side (Cayman) L.P., Scottish Re Group Limited and, respectively, each director and each officer of Scottish Re Group Limited (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (15) 10.35 Voting Agreement, dated as of October 15, 2004, by and among Scottish Re Group Limited, Cypress Merchant B Partners II (Cayman) L.P., Cypress Merchant Banking II-A C.V., 55th Street Partners II (Cayman) L.P. and Cypress Side-by-Side (Cayman) L.P. and Pacific Life Insurance Company (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (15) 10.36 Letter Agreement, dated as of October 17, 2004, by and among Scottish Re Group Limited and Cypress Merchant B Partners II (Cayman) L.P., Cypress Merchant Banking II-A C.V., 55th Street Partners II (Cayman) L.P. and Cypress Side-by-Side (Cayman) L.P. (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (15) 10.37 First Supplemental Indenture, dated as of October 26, 2004, between Scottish Re Group Limited and The Bank of New York (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K, filed with the SEC on October 29, 2004). 10.38 Amendment to Employment Agreement dated as of March 29, 2004, by and among Scottish Re Group Limited and Michael C. French (incorporated herein by reference to Scottish Re Group Limited's Quarterly 39 Report on Form 10-Q for the quarter ended September 30, 2004, filed with the SEC on November 8, 2004). (24) 10.39 Employment Agreement, dated as of March 29, 2004, by and among Scottish Re Group Limited and Deborah G. Percy (incorporated herein by reference to Scottish Re Group Limited's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, filed with the SEC on November 8, 2004). (24) 10.40 Employment Agreement, dated as of January 1, 2005, between Scottish Holdings, Inc. and Gary Dombowsky (incorporated herein by reference to Scottish Re Group Limited's 2004 Annual Report on Form 10-K). (20)(24) 10.41 Amendment to Employment Agreement, dated as of February 7, 2005, between Scottish Re Group Limited and Michael C. French (incorporated herein by reference to Scottish Re Group Limited's 2004 Annual Report on Form 10-K). (20)(24) 10.42 Employment Agreement, dated as of February 1, 2005, between Scottish Re Group Limited and Hugh T. McCormick (incorporated herein by reference to Scottish Re Group Limited's 2004 Annual Report on Form 10-K). (20)(24) 10.43 Employment Agreement, dated as of December 1, 2004, between Scottish Holdings, Inc. and Kenneth R. Stott (incorporated herein by reference to Scottish Re Group Limited's 2004 Annual Report on Form 10-K). (20)(24) 10.44 Credit Agreement, dated as of December 29, 2004, among Scottish Annuity & Life Insurance Company (Cayman) Ltd., Scottish Re (Dublin) Limited, Scottish Re (U.S.), Inc., and Scottish Re Limited, as borrowers, Bear Stearns Corporate Lending, Inc. and Wachovia Bank, National Association as Co-Syndication Agents, Bank of America, N.A., as Administrative Agent and L/C Issuer, and The Other Lenders Party Hereto, Banc of America Securities LLC, as Sole Lead Arranger and Sole Book Manager (incorporated herein by reference to Scottish Re Group Limited's 2004 Annual Report on Form 10-K). (20) 10.45 Administrative Services Agreement, dated as of December 31, 2004, between Security Life of Denver Insurance Company and Security Life of Denver International Limited and Scottish Re (U.S.), Inc. (incorporated herein by reference to Scottish Re Group Limited's 2004 Annual Report on Form 10-K). (20) 10.46 Coinsurance Agreement dated December 31, 2004 between Security Life of Denver Insurance Company and Scottish Re (U.S.), Inc. (incorporated herein by reference to Scottish Re Group Limited's 2004 Annual Report on Form 10-K). (20) 10.47 Coinsurance/Modified Coinsurance Agreement, dated December 31, 2004, between Security Life of Denver Insurance Company and Scottish Re (U.S.), Inc. (incorporated herein by reference to Scottish Re Group Limited's 2004 Annual Report on Form 10-K). (20) 10.48 Retrocession Agreement, dated December 31, 2004, between Scottish Re (U.S.), Inc. and Security Life of Denver Insurance Company (incorporated herein by reference to Scottish Re Group Limited's 2004 Annual Report on Form 10-K). (20) 10.49 Retrocession Agreement, dated December 31, 2004, between Scottish Re Life (Bermuda) Limited and Security Life of Denver Insurance Company (incorporated herein by reference to Scottish Re Group Limited's 2004 Annual Report on Form 10-K). (20) 10.50 Reserve Trust Agreement, dated as of December 31, 2004, between Scottish Re (U.S.) Inc., as Grantor, and Security Life of Denver Insurance Company, as Beneficiary, and The Bank of New York, as Trustee, and The Bank of New York, as Securities Intermediary (incorporated herein by reference to Scottish Re Group Limited's 2004 Annual Report on Form 10-K). (20) 10.51 Security Trust Agreement, dated as of December 31, 2004, by and among Scottish Re (U.S.), Inc., as Grantor, Security Life of Denver Insurance Company, as Beneficiary, The Bank of New York, as Trustee, and The Bank of New York, as Securities Intermediary (incorporated herein by reference to Scottish Re Group Limited's 2004 Annual Report on Form 10-K). (20) 40 10.52 Coinsurance Agreement, dated December 31, 2004, between Security Life of Denver International Limited and Scottish Re Life (Bermuda) Limited (incorporated herein by reference to Scottish Re Group Limited's 2004 Annual Report on Form 10-K). (20) 10.53 Coinsurance/Modified Coinsurance Agreement, dated December 31, 2004, between Security Life of Denver International Limited and Scottish Re Life (Bermuda) Limited (incorporated herein by reference to Scottish Re Group Limited's 2004 Annual Report on Form 10-K). (20) 10.54 Coinsurance Funds Withheld Agreement, dated December 31, 2004, between Security Life of Denver International Limited and Scottish Re Life (Bermuda) Limited (incorporated herein by reference to Scottish Re Group Limited's 2004 Annual Report on Form 10-K). (20) 10.55 Reserve Trust Agreement, dated December 31, 2004, between Scottish Re Life (Bermuda) Limited, as Grantor, and Security Life of Denver International Limited, as Beneficiary. The Bank of New York, as Trustee, and The Bank of New York, as Securities Intermediary (incorporated herein by reference to Scottish Re Group Limited's 2004 Annual Report on Form 10-K). (20) 10.56 Security Trust Agreement, dated as of December 31, 2004, by and among Scottish Re Life (Bermuda) Limited, as Grantor, Security Life of Denver International Limited, as Beneficiary, The Bank of New York, as Trustee, and the Bank of New York, as Securities Intermediary (incorporated herein by reference to Scottish Re Group Limited's 2004 Annual Report on Form 10-K). (20) 10.57 Technology Transfer and License Agreement, dated as of December 31, 2004, between Security Life of Denver Insurance Company, ING North America Insurance Corporation and Scottish Re (U.S.), Inc. (incorporated herein by reference to Scottish Re Group Limited's 2004 Annual Report on Form 10-K). (20) 10.58 Transition and Integration Services Agreement, dated December 31, 2004, between Security Life of Denver Insurance Company and Scottish Re (U.S.), Inc. (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (19) 10.59 Form of Remarketing Agreement, between the Company and Lehman Brothers, Inc., as Remarketing Agent (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (16) 10.60 Amended and Restated Credit Agreement, dated as of July 14, 2005, among Scottish Annuity & Life Insurance Company (Cayman) Ltd., Scottish Re (Dublin) Limited, Scottish Re (U.S.), Inc., and Scottish Re Limited, as Borrowers, Bear Stearns Corporate Lending, Inc., HSBC Bank USA, National Association, and Wachovia Bank, National Association as Syndication Agents, Bank of America, N.A., as Administrative Agent and L/C Issuer, and the Other Lenders Party Hereto, Banc of America Securities LLC, as Sole Lead Arranger and Sole Book Manager (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (17) 10.61 Scottish Re Group Limited 2004 Equity Incentive Compensation Plan (incorporated herein by reference to Scottish Re Group Limited's Proxy Statement filed with the SEC on April 1, 2004). 10.62 Amendment No. 1 to Scottish Re Group Limited 2004 Equity Incentive Compensation Plan (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (18) (22)10.63 Amendment No. 2 to Scottish Re Group Limited 2004 Equity Incentive Compensation Plan (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (18) (22) 10.64 Form of Management Stock Option Agreement under the Scottish Re Group Limited 2004 Equity Incentive Compensation Plan (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (18) (24) 10.65 Form of Management Performance Share Unit Agreement under the Scottish Re Group Limited 2004 Equity Incentive Compensation Plan (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (18) (24) 10.66 Form of Management Restricted Share Unit Agreement under the Scottish Re Group Limited 2004 Equity Incentive Compensation Plan (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (18) (24) 41 10.67 Employment Agreement, dated as of July 18, 2005, between Scottish Re Group Limited and Dean Miller (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (19) (24) 10.68 Letter of Credit Agreement, dated as of August 18, 2005, among Scottish Re (Dublin) Limited, as Borrower, Scottish Annuity & Life Insurance Company (Cayman) Ltd., as Guarantor, Bank of America, N.A., as Administrative Agent and L/C Issuer, and the Other Lenders Party Hereto, and Bank of America Securities LLC, as Sole Lead Arranger and Sole Book Manager (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (21) 10.69 Amendment to Employment Agreement, dated as of October 29, 2006, between Scottish Re Group Limited and Paul Goldean (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K which was filed with the SEC on November 2, 2006). (24) 10.70 Securities Purchase Agreement, dated as of November 26, 2006, by and among Scottish Re Group Limited, MassMutual Capital Partners LLC and SRGL Acquisition, LLC (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (22) 10.71 Form of Registration Rights and Shareholders Agreement (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (22) 10.72 Voting Agreement, dated as of November 26, 2006, by and among Scottish Re Group Limited, MassMutual Capital Partners LLC, SRGL Acquisition, LLC, Cypress Merchant B Partners II (Cayman) L.P., Cypress Merchant B II-A C.V., Cypress Side-By-Side (Cayman) L.P. and 55th Street Partners II (Cayman) L.P. (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (22) 10.73 First Amendment to Asset Purchase Agreement, dated as of November 26, 2006, by and among Scottish Re (U.S.), Inc., Scottish Re Life (Bermuda) Limited, Security Life of Denver Insurance Company and Security Life of Denver International Limited (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (22) 10.74 Letter Agreement, dated as of November 30, 2006, by and among Scottish Annuity & Life Insurance Company (Cayman) Ltd., Scottish Re Limited and Comerica Bank (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (23) 10.75 Standby Letter of Credit Application and Agreement, dated as of November 30, 2006, by and between Scottish Annuity & Life Insurance Company (Cayman) Ltd. and Comerica Bank (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (23) 10.76 Standby Letter of Credit Application and Agreement, dated as of November 30, 2006, by and between Scottish Re Limited and Comerica Bank (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (23) 10.77 Amendment No. 2 to Securities Purchase Agreement, dated as of February 20, 2007, by and among Scottish Re Group Limited, MassMutual Capital Partners LLC and SRGL Acquisition, LDC (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K which was filed with the SEC on February 21, 2007). 10.78 Amendment Three to the 2004 Equity Incentive Compensation Plan. (24) 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 42 (1) Scottish Re Group Limited's Registration Statement on Form S-1 was filed with the SEC on June 19, 1998, as amended. (2) Scottish Re Group Limited's 1999 Annual Report on Form 10-K was filed with the SEC on April 3, 2000. (3) Scottish Re Group Limited's 2000 Annual Report on Form 10-K was filed with the SEC on March 30, 2001. (4) Scottish Re Group Limited's 2001 Annual Report on Form 10-K was filed with the SEC on March 5, 2002. (5) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on December 31, 2001. (6) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on June 2, 2005. (7) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on August 9, 2001. (8) Scottish Re Group Limited's Amended Quarterly Report on Form 10-Q/A was filed with the SEC on August 8, 2002. (9) Scottish Re Group Limited's Registration Statement on Form S-3 was filed with the SEC on January 31, 2003, as amended. (10) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on December 17, 2003. (11) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on January 6, 2004. (12) Scottish Re Group Limited's 2002 Annual Report on Form 10-K was filed with the SEC on March 31, 2003. (13) Scottish Re Group Limited's Quarterly Report on Form 10-Q was filed with the SEC on August 12, 2003. (14) Scottish Re Group Limited's Quarterly Report on Form 10-Q was filed with the SEC on May 10, 2004. (15) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on October 21, 2004. (16) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on July 1, 2005. (17) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on July 18, 2005. (18) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on August 8, 2005. (19) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on August 4, 2005. (20) Scottish Re Group Limited's 2004 Annual Report on Form 10-K was filed with the SEC on March 18, 2005. 43 (21) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on August 22, 2005. (22) Scottish Re Group Limited's Current Report on Form 8-K as filed with the SEC on November 29, 2006. (23) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on December 1, 2006. (24) This exhibit is a management contract or compensatory plan or arrangement. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SCOTTISH RE GROUP LIMITED Date: May 10, 2007 By: /s/ Paul Goldean -------------------- Paul Goldean President and Chief Executive Officer Date: May 10, 2007 By: /s/ Dean E. Miller ---------------------- Dean E. Miller Chief Financial Officer 44 EX-31.1 2 ex31-1.txt CERTIFICATION Exhibit 31.1 CERTIFICATION I, Paul Goldean, President and Chief Executive Officer of Scottish Re Group Limited, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Scottish Re Group Limited (the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. designed such internal control over financial reporting, or caused such control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 10, 2007 /s/ Paul Goldean ---------------- Paul Goldean President and Chief Executive Officer EX-31.2 3 ex31-2.txt CERTIFICATION Exhibit 31.2 CERTIFICATION I, Dean E. Miller, Chief Financial Officer of Scottish Re Group Limited, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Scottish Re Group Limited (the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. designed such internal control over financial reporting, or caused such control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 10, 2007 /s/ Dean E. Miller ------------------ Dean E. Miller Chief Financial Officer EX-32.1 4 ex32-1.txt CERTIFICATION Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Scottish Re Group Limited (the "Company") on Form 10-Q for the quarterly period ended March 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Paul Goldean, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Paul Goldean - ---------------- Paul Goldean President and Chief Executive Officer May 10, 2007 A signed original of this written statement required by Section 906 has been provided to Scottish Re Group Limited and will be retained by Scottish Re Group Limited and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 5 ex32-2.txt CERTIFICATION Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Scottish Re Group Limited (the "Company") on Form 10-Q for the quarterly period ended March 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Dean E. Miller, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Dean E. Miller - ------------------ Dean E. Miller Chief Financial Officer May 10, 2007 A signed original of this written statement required by Section 906 has been provided to Scottish Re Group Limited and will be retained by Scottish Re Group Limited and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----