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