Scottish Re Group Limited Announces Operating Results for the First Quarter
Ended March 31, 2006
Company Release - 05/04/2006 21:04
HAMILTON, Bermuda--(BUSINESS WIRE)--May 4, 2006--Scottish Re Group Limited
(NYSE:SCT) today reported that net income available to ordinary shareholders for
the quarter ended March 31, 2006 was $11.6 million, or $0.20 per diluted
ordinary share, as compared to $33.4 million, or $0.74 per diluted ordinary
share for the prior year period.
Net operating earnings available to ordinary shareholders were $14.3 million, or
$0.25 per diluted ordinary share for the quarter ended March 31, 2006 as
compared to $26.9 million or $0.60 per diluted ordinary share for the prior year
period.
"Net operating earnings available to ordinary shareholders" is a non-GAAP
measurement. The Company determines net operating earnings available to ordinary
shareholders by adjusting net income available to ordinary shareholders 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 available to ordinary shareholders enhances the understanding of its
results of operations by highlighting earnings attributable to the normal,
recurring operation of its reinsurance business. However, net operating earnings
available to ordinary shareholders are not a substitute for net income
determined in accordance with GAAP. Reconciliations to net income available to
ordinary shareholders are provided in the following tables.
The earnings contribution of the Company's International segment was adversely
impacted by adverse mortality and morbidity experience of approximately $4
million on a pre-tax basis. This was driven by the occurrence of ten large
claims in the quarter, as compared to the typical expectation of one per month.
The segment also was negatively impacted by approximately $7 million of late
reported claims by several ceding companies (some in excess of two years old)
and a $4 million provision resulting from a review of retrocession recoveries on
certain large claims. A review of the potential for similar issues to occur in
the future was undertaken and additional reserves were established and included
in these adjustments.
International Segment Transformation
Prior to 2005, the Company's International Segment specialized in niche markets
in developed countries and broader life insurance markets in the developing
world and focused on the reinsurance of short term group life and personal
accident policies.
For the past 18 months, the Company has been actively transforming its
international business segment. This transformation plan is comprised of several
actions: (1) Overhauling legacy business practices and installing robust systems
and internal controls; (2) Significantly upgrading the calibre of the management
team and staff; (3) Exiting geographic markets and running-off business with
risk-adjusted returns that are below the Company's requirements and (4) Actively
developing a substantial presence in the traditional mortality and annuity
business in the United Kingdom and Ireland, as well as, prudently growing
selected key regional markets, such as Asia.
UK New Business Success
"We are focused on capitalizing on the success we are enjoying in our UK
business and regional expansion," Mr. Willkomm said. "We have written five
protection treaties that are expected to generate approximately $10 million of
premium during the course of 2006 and $50 million in 2007. In addition, we
closed a $600 million fixed annuity transaction in the UK in early April that
will generate attractive long-term returns on capital."
Total revenues for the quarter increased to $578.3 million from $556.6 million
for the prior year period, an increase of 3.9%. Excluding realized gains and
losses and the change in value of the embedded derivatives, total revenues for
the quarter increased to $581.8 million from $547.8 million for the prior year
period, an increase of 6.2%.
Total benefits and expenses increased to $571.8 million for the quarter from
$523.1 million for the prior year period, an increase of 9.3%. The increases in
revenues and expenses were principally driven by growth in the Company's
reinsurance business in North America.
US Market Share Leadership Continues
In 2005, Scottish Re originated $131 billion of traditional life reinsurance in
the United States. As a result, the Company was
the number two life reinsurer with a 15.5% recurring new business market share
according to the annual Society of Actuaries survey. In the first quarter, the
Company originated $15.5 billion of new traditional life reinsurance business,
which was in line with production expectations.
In the first quarter, Scottish Re's North American Segment's pre-tax operating
income was slightly better than expected. On an assumed basis,
actual-to-expected mortality experience in the United States was in line with
expectations. However, net claims expense was approximately $5 million greater
than expected due to a lower level of claim recoveries from retrocessionaires in
the quarter. During the quarter, fewer claims were reported in excess of the
Company's per life retention that would have benefited from retrocession.
Consolidated Operating Expenses in Line
The Company's operating expense ratio (which is the ratio of operating expenses
to total revenue excluding realized gains and losses and the change in value of
embedded derivatives) for the last twelve months ended March 31, 2006 was 5.2%,
as compared to an operating expense ratio of 5.0% for the year ended December
31, 2005, resulting principally in lower operating revenues during the first
quarter 2006. On a absolute dollar basis, 2006 operating expenses are on track
to be level with 2005 reflecting the increased scale in our operations in North
America and the successful integration of the ING Re acquisition.
The Company's effective tax rate was higher in the first quarter than prior
quarters principally due to the operating losses incurred in the International
segment.
The Company's total assets were $12.3 billion as of March 31, 2006. The core
investment portfolio, comprising fixed maturity investments, preferred stock and
most of the cash and cash equivalents, totaled $6.8 billion, and had an average
quality rating of "AA", an effective duration of 3.0 years and a weighted
average book yield of 5.1%. This compares with a portfolio balance of $6.7
billion, an average quality rating of "AA", effective duration of 2.9 years and
an average book yield of 4.9% as of December 31, 2005.
Funds withheld at interest, totaling $2.6 billion, had an average quality rating
of "A", an effective duration of 4.7 years and a weighted average book yield of
5.7% at March 31, 2006. This compares with a total of $2.6 billion with an
average quality rating of "A+", an effective duration of 5.1 years and an
average book yield of 5.6% at December 31, 2005.
The Company's book value per share was $20.80 at March 31, 2006 as compared to
$21.48 per share at December 31, 2005. Fully converted book value per share was
$21.13 at March 31, 2006 as compared to $21.17 at December 31, 2005.
On a trailing twelve months basis, the Company's return on average shareholders'
equity - measured by dividing net operating earnings available to ordinary
shareholders by average shareholders' equity excluding the effect of other
comprehensive income and the change in value of embedded derivatives - was
11.5%.
Securitization Breakthroughs
On May 2, 2006, Scottish Re completed an offering by Ballantyne Re, a $2.1
billion Regulation Triple-X securitization, the largest life insurance-linked
securitization ever completed. With the completion of this transaction, Scottish
Re has refinanced all of the Regulation Triple-X business acquired in connection
with the ING Re transaction. In addition, the Company has permanently lowered
the cost of financing the Triple-X reserves from the cost assumed in the pricing
of the transaction. Upon closing, Scottish Re received a $6.2 million rebate fee
from ING that will be reported in the Company's results of operations for the
second quarter ending June 30, 2006.
On May 4, 2006, the Company completed a $155 million mortality catastrophe bond
offering by Tartan Capital Limited. Tartan will pay the Company up to $155
million in the event of severe population mortality.
The Company's earnings conference call will be held at 11:00 am (EST) on Friday,
May 5, 2006. The dial-in number is (877) 502-2902 or (706) 679-5950 and the
conference ID is 7586906. A replay of the call will be available beginning at
3:00 pm on Friday, May 5, 2006 and running through Friday, May 19, 2006. The
dial-in number for the replay is (800) 642-1687 or (706) 645-9291 and the
conference ID is 7586906. An on-demand replay of the conference call will be
available at the Company's Web site, www.scottishre.com.
About Scottish Re
Scottish Re Group Limited is a global life reinsurance specialist. Scottish Re
has operating businesses in Bermuda, Grand Cayman, Guernsey, Ireland, Singapore,
the United Kingdom and the United States. Its flagship 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 Company. Scottish Re Capital Markets,
Inc., a member of Scottish Re Group Limited, is a registered broker dealer that
specializes in securitization of life insurance assets and liabilities.
Additional information about Scottish Re Group Limited can be obtained from its
Web site, 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 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 Share Data)
(Unaudited)
Three months Three months
ended ended
March 31, 2006 March 31, 2005
--------------- ---------------
Total revenues $578,321 $556,562
Net operating earnings available to
ordinary shareholders(1) 14,286 26,931
Net income 13,849 33,420
Net income available to ordinary
shareholders 11,583 33,420
Net operating earnings per ordinary
share
Basic $0.27 $0.67
Diluted $0.25 $0.60
Earnings per ordinary share
Basic $0.22 $0.84
Diluted $0.20 $0.74
Dividends per ordinary share $0.05 $0.05
Weighted average ordinary shares
Outstanding
Basic 53,434,484 39,970,965
Diluted 56,532,914 45,192,171
(1) Excludes the effects of 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 related to these items as well as dividends on the perpetual preferred
shares.
March 31, December 31,
--------- ------------
2006 2005
---- ----
Book value per ordinary share $20.80 $21.48
Basic book value per ordinary
share - excluding other
comprehensive income and value
of embedded derivatives $21.89 $21.89
Fully diluted book value per
ordinary share - excluding
other comprehensive income and
value of embedded derivatives $21.13 $21.17
Scottish Re Group Limited
Consolidated Balance Sheets
(Stated in Thousands of United States Dollars, Except Share Data)
March 31, 2006 December 31, 2005
--------------- -----------------
(Unaudited)
Assets
Fixed maturity investments $6,066,176 $5,292,595
Preferred stock 131,722 133,804
Cash and cash equivalents 690,076 1,420,205
Other investments 64,141 54,619
Funds withheld at interest 2,610,195 2,597,416
--------------- -----------------
Total investments 9,562,310 9,498,639
Accrued interest receivable 45,371 44,012
Reinsurance balances and risk fees
receivable 381,095 325,372
Deferred acquisition costs 620,385 594,583
Amounts recoverable from reinsurers 605,241 551,288
Present value of in-force business 53,826 54,743
Goodwill 34,125 34,125
Other assets 94,719 87,198
Deferred tax benefit 79,435 55,453
Segregated assets 780,132 760,707
--------------- -----------------
Total assets $12,256,639 $12,006,120
=============== =================
Liabilities
Reserves for future policy benefits $3,539,016 $3,477,222
Interest sensitive contract
liabilities 3,990,836 3,907,573
Collateral finance facilities 1,985,681 1,985,681
Accounts payable and other
liabilities 70,750 83,130
Reinsurance balances payable 247,724 114,078
Current income tax payable 4,481 9,155
Long term debt 244,500 244,500
Segregated liabilities 780,132 760,707
--------------- -----------------
Total liabilities 10,863,120 10,582,046
--------------- -----------------
Minority interest 9,334 9,305
Mezzanine equity 143,207 143,057
Shareholders' equity
Ordinary shares, par value $0.01 per
share:
Issued: 53,655,856 shares (2005 -
53,391,939) 537 534
Preferred shares, par value $0.01:
Issued: 5,000,000 shares (2005 -
5,000,000) 125,000 125,000
Additional paid- in capital 899,515 893,767
Accumulated other comprehensive
income (55,386) (9,991)
Retained earnings 271,312 262,402
--------------- -----------------
Total shareholders' equity 1,240,978 1,271,712
--------------- -----------------
Total liabilities, minority
interest, mezzanine equity and
shareholders' equity $12,256,639 $12,006,120
=============== =================
Scottish Re Group Limited
Consolidated Statements of Income
(Stated in Thousands of United States Dollars)
(Unaudited)
Three months Three months
ended ended
March 31, 2006 March 31, 2005
-------------------------------
Revenues
Premiums earned, net $449,021 $463,680
Investment income, net 129,022 80,479
Fee income 3,733 3,624
Realized gains (losses) (13,601) 3,294
Change in value of embedded
derivatives, net 10,146 5,485
--------------- ---------------
Total revenues 578,321 556,562
--------------- ---------------
Benefits and expenses
Claims and other policy benefits 374,463 363,272
Interest credited to interest sensitive
contract liabilities 42,701 30,642
Acquisition costs and other insurance
expenses, net 87,531 91,642
Operating expenses 31,092 24,569
Collateral finance facilities expense 31,087 7,420
Interest expense 4,893 5,594
--------------- ---------------
Total benefits and expenses 571,767 523,139
--------------- ---------------
Income before income taxes and minority
interest 6,554 33,423
Income tax benefit 7,457 368
--------------- ---------------
Income before minority interest 14,011 33,791
Minority interest (162) (371)
--------------- ---------------
Net income $13,849 $33,420
Dividend declared on non-cumulative
perpetual preferred shares (2,266) -
--------------- ---------------
Net income available to ordinary
shareholders $11,583 $33,420
=============== ===============
Scottish Re Group Limited
Supplemental Information - Net Operating Earnings
(Stated in Thousands of United States Dollars, Except Share Data)
(Unaudited)
Three months Three months
ended ended
March 31, 2006 March 31, 2005
-----------------------------
Net operating earnings available to ordinary shareholders
- ---------------------------------------------------------
Net income available to ordinary
shareholders $11,583 $33,420
Realized losses (gains) 13,601 (3,294)
Change in value of embedded derivatives,
net (10,146) (5,485)
Taxes on realized gains/losses and change
in value of embedded derivatives (752) 2,290
-------------- --------------
Net operating earnings available to
ordinary shareholders $14,286 $26,931
============== ==============
Net operating earnings per share
available to ordinary shareholders
Basic $0.27 $0.67
Diluted $0.25 $0.60
============== ==============
Weighted average number of ordinary
shares outstanding
Basic 53,434,484 39,970,965
Diluted 56,532,914 45,192,171
Scottish Re Group Limited
Supplemental Information - Segment Operating Results
(Stated in Thousands of United States Dollars)
(Unaudited)
Life Reinsurance North America
Three months ended
March 31
-----------------------
2006 2005
----------- -----------
Premiums earned, net $428,918 $437,095
Investment income, net 123,941 77,531
Fee income 3,017 2,900
Realized gains (losses) (13,919) 1,441
Change in value of embedded derivatives, net 10,146 5,485
----------- -----------
Total revenues 552,103 524,452
----------- -----------
Claims and other policy benefits 347,280 344,188
Interest credited to interest sensitive
contract liabilities 42,701 30,642
Acquisition costs and other insurance expenses,
net 84,408 88,277
Operating expenses 14,592 11,672
Collateral finance facilities expense 30,543 6,185
Interest expense 2,562 2,708
----------- -----------
Total benefits and expenses 522,086 483,672
----------- -----------
Income before income taxes and minority
interest $30,017 $40,780
=========== ===========
Pre tax operating earnings
- --------------------------
Pre-tax income $30,017 $40,780
Realized losses (gains) 13,919 (1,441)
Change in value of embedded derivatives, net (10,146) (5,485)
----------- -----------
Pre-tax operating earnings $33,790 $33,854
=========== ===========
Scottish Re Group Limited
Supplemental Information - Segment Operating Results (continued)
(Stated in Thousands of United States Dollars)
(Unaudited)
Life Reinsurance International
Three months ended
March 31
-----------------------
2006 2005
----------- -----------
Premiums earned, net $20,103 $26,585
Investment income, net 2,989 2,590
Realized gains (losses) (1,138) 497
----------- -----------
Total revenues 21,954 29,672
----------- -----------
Claims and other policy benefits 27,183 19,084
Acquisition costs and other insurance expenses,
net 2,817 2,846
Operating expenses 5,777 5,849
Total benefits and expenses 35,777 27,779
----------- -----------
Income before income taxes $(13,823) $1,893
=========== ===========
Pre-tax operating earnings
- --------------------------
Pre-tax income $(13,823) $1,893
Realized losses (gains) 1,138 (497)
----------- -----------
Pre-tax operating earnings $(12,685) $1,396
=========== ===========
Scottish Re Group Limited
Supplemental Information - Segment Operating Results (continued)
(Stated in Thousands of United States Dollars)
(Unaudited)
Corporate & Other
Three months ended
March 31
------------------------
2006 2005
------------ -----------
Investment income, net $2,092 $358
Fee income 716 724
Realized gains 1,456 1,356
------------ -----------
Total revenues 4,264 2,438
------------ -----------
Acquisition costs and other insurance
expenses, net 306 519
Operating expenses 10,723 7,048
Collateral finance facilities expense 544 1,235
Interest expense 2,331 2,886
------------ -----------
Total benefits and expenses 13,904 11,688
------------ -----------
Loss before income taxes $(9,640) $(9,250)
============ ===========
Pre-tax operating loss
- ----------------------
Pre-tax loss $(9,640) $(9,250)
Realized losses (gains) (1,456) (1,356)
------------ -----------
Pre-tax operating loss $(11,096) $(10,606)
============ ===========
Scottish Re Group Limited
Supplemental Information - Book Value Per Ordinary Share and
Fully Converted Book Value Per Ordinary Share
(Stated in Thousands of United States Dollars, Except Share Amounts)
(Unaudited)
Fully converted book value per ordinary share is a non-GAAP measure, based on
total shareholders' 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.
March 31, 2006 December 31, 2005
--------------- -----------------
Shareholders' equity - end of period $1,240,978 $1,271,712
Other comprehensive income 55,386 9,991
Fair value of embedded derivative,
net 2,984 11,810
Preferred shares (125,000) (125,000)
Net proceeds from assumed:
Conversion of options 45,072 48,374
Conversion of warrants 39,750 39,750
Conversion of mezzanine equity 143,750 143,750
--------------- -----------------
Numerator for diluted book value per
share calculation $1,402,920 $1,400,387
=============== =================
Ordinary shares outstanding-end of
period 53,655,856 53,391,939
Potential shares issued from assumed:
Exercise of options and
restricted stock units 3,320,020 3,390,936
Conversion of warrants 2,650,000 2,650,000
Conversion of mezzanine equity 6,099,025 6,099,025
Conversion of 4.5% senior convertible
notes 661,870 612,780
--------------- -----------------
Denominator for diluted book value
per share calculation 66,386,771 66,144,680
=============== =================
Book value per ordinary share $20.80 $21.48
Basic book value per ordinary share -
excluding other comprehensive income
and value of embedded derivatives $21.89 $21.89
Fully diluted book value per ordinary
share (excluding other comprehensive
income and the value of embedded
derivatives) $21.13 $21.17
CONTACT: Scottish Re Group Limited
EVP & Chief Financial Officer
Dean E. Miller, 441-298-4395
dean.miller@scottishre.com
SOURCE: Scottish Re Group Limited