SCOTTISH RE
Moderator: Dean Miller
05-05-06/10:00 am CT
Confirmation #7586906
Page 1
SCOTTISH RE
Moderator: Dean Miller
May 5, 2006
10:00 am CT
Operator: Good morning. My name is (Crystal) and I will be your
conference operator today. At this time I would like to
welcome everyone to the Scottish Re First Quarter Earnings
conference call.
All lines have been placed on mute to prevent any background
noise. After the speaker's remarks there will be a question
and answer session. If you would like to ask a question during
this time simply press star then the number 1 on your
telephone key pad. If you would like to withdraw your question
press star then the number 2.
Thank you. I will now turn the conference over to Mr. Dean
Miller, Chief Financial Officer. Please go ahead sir.
Dean Miller: Thank you (Crystal). Good morning everyone. And welcome the
Scottish Re First Quarter 2006 conference call. We appreciate
you taking the time to join us this morning.
We assume that you've had the opportunity to read the earnings
release and we will focus our prepared remarks on the
highlights of our financial results
SCOTTISH RE
Moderator: Dean Miller
05-05-06/10:00 am CT
Confirmation #7586906
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and business operations for the quarter. After concluding our
prepared remarks we'll take your questions.
There will be a recording of this call available from 1:00 pm
today running through May 19. Instructions on how to access
the reply are included in your conference call invitation with
today's earning release. Also a replay of the call can be
accessed on our website www.scottishre.com.
Before we begin the quarter overview please keep in mind that
certain statements that we make are forward-looking statements
within the meaning of the federal security laws. And
management cautions that forward-looking statements are not
guarantees. Actual results could differ materially from those
expressed or implied.
I'd like to begin with a summary of some of the more
significant financial highlights of the quarter. Last evening
Scottish Re reported net income available to ordinary
shareholders of $11.6 million or 20 cents per diluted ordinary
share for the quarter ended March 31, 2006, compared to $33.4
million or 74 cents per diluted ordinary share for the first
quarter ended March 31, 2005.
Net operating earnings available to ordinary shareholders --
which excludes the impact of net realized gains or losses and
the change in value of imbedded derivatives -- was $14.3
million or 25 cents per diluted ordinary share for the quarter
ended March 31, 2006, which compares to our guidance of 45
cents to 51 cents per share for the quarter. This result was
well below consensus estimates solely due to underperformance
in our international segment.
Our return on average shareholders equity excluding the impact
of FAS 115 other comprehensive income and imbedded derivatives
was 11.5% in the first
SCOTTISH RE
Moderator: Dean Miller
05-05-06/10:00 am CT
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quarter of 2006 compared to 11.9% for the first quarter of
2005. Fully converted book value per ordinary share was $21.13
at March 31, 2006, compared to $21.17 at December 31, 2005.
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 chain in the
value of the imbedded 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.
On a quarter to quarter basis net premiums earned decreased to
$449 million in the first quarter of 2006 from $463.7 million
in the first quarter of 2005. This was driven by one, premiums
in our North American business which were in line with our
plan for 2006 were lower on a comparative basis due to the
curtailment of certain treaties related to our risk management
guidelines in the immediate aftermath of the ING transaction.
Secondly a meaningful shift in the mix of a form of U.S.
reinsurance from co-insurance to yearly renewable term which
has a lower premium rate per thousand but similar or higher
margins.
And thirdly lower premiums in the international segment due to
late reporting by seeding companies and the accelerated run
off of our Latin American business which is the market we have
recently exited.
SCOTTISH RE
Moderator: Dean Miller
05-05-06/10:00 am CT
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In the first quarter Scottish Re's North America segments
pre-tax operating income was slightly better than expected. On
an assumed basis actual to expected mortality experience in
the U.S. 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 retro-sessionaires in the quarter.
During the quarter fewer claims were reported in excess of the
company's per-life retention that would have benefited from
retro-session. Our reported acquisition ratio for North
America which is calculated as a percentage of operating
revenues for the first quarter of 2006 was 15.2% compared to
17.1% in the first quarter of 2005.
Adjusting for the impact of the annuity transaction in late
2005 and the incremental impact of our regulation Triple-X
transactions on investment income the adjusted acquisition
ratio was 16.2%. The decrease from the prior year is
principally due to the reduction of letter of credit fees
historically recorded in acquisition costs.
The company's operating expense ratio -- which is the ratio of
operating expenses to total revenue excluding realized gains
and losses and change in value of imbedded derivatives -- for
the last 12 months ended March 31, 2006, was 5.2% as compared
to an operating expense ratio of 5.0% for the year end
December 31, 2005, resulting principally in lower operating
revenues during the first quarter 2006.
On an 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 a successful integration
of the ING Re acquisition.
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05-05-06/10:00 am CT
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The company's affected tax rate was higher in the first
quarter than prior quarters principally due to the operating
losses that incurred in the international segment.
Consolidated net investment income increased 60% in the first
quarter 2006 over the first quarter 2005 due to an increase in
asset balances and an increase in the effective yield.
This is primarily driven by the full impact this quarter of
the structured financing transactions completed in late
December 2005 and the growth in our U.S. financial solutions
business also in late 2005.
That completes my prepared remarks on the financial results of
the company. I would now like to turn it over to Scott who
will provide additional analysis of our business operations
during the quarter. Scott?
Scott Willkomm: Thank you Dean. I intend to keep my prepared remarks fairly
brief today and I'll focus on the key points we believe are
important when assessing the performance for the first quarter
of 2006 and the company's prospects for future profitable
growth.
I think it goes without saying we're very disappointed with
the quarter for a number of reasons. The most important of
which is that the poor results overshadows the many successes
achieved in the quarter.
As you've read in the earnings release the international
segment was the reason we did not report earnings consistent
with expectations. Our North American operations were slightly
ahead of plan and on a group basis our expenses and other
factors were on plan as well.
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05-05-06/10:00 am CT
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In addition the earnings missed in international was not
related to inadequate internal controls or poor financial
management. We've discussed that on a number of occasions.
The earnings missed in international was due to a number of
factors including higher mortality than normally expected due
to a smaller number of larger claims. These claims on average
were approximately $250,000 per life.
We also received claims reports or late reporting in general
from several clients. Client reporting as we know is poor in
many markets even when the seeding company is of the highest
caliber.
For example in the first quarter a major global life insurer
reported claims from 1998 through 2004 totaling $1.5 million
to us. In the past late client reporting of claims was often
offset by late reporting of a favorable nature. In this
quarter it was not.
In total the international segment was negatively impacted by
approximately $7 million of late reported information by
several seeding companies and an additional $4 million
provision resulting from a review of retro-session recoveries
on certain large claims.
A review of the potential for similar issues to occur in the
future was also undertaken and additional reserves were
established and are included in these adjustments that I've
just mentioned.
Where we erred was not in doing this some time ago. Prior to
2005 the company's international segment specialized in niche
markets in developed companies and broad life insurance
markets in the developing world and
SCOTTISH RE
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05-05-06/10:00 am CT
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focused principally on the reinsurance of short term group
life and PA policies.
Now for the past 18 months you've heard us talk about how the
company has been actively transforming the international
business segment. This transformation plan is comprised of
several actions including first of all overhauling legacy
business practices and installing robust systems and internal
controls; significantly upgrading the caliber of the
management team and the depth of the team and the staff;
exiting geographic markets and running off business with risk
adjusted returns that are below the company's requirements;
and 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.
We're focused on capitalizing on the success the company is
enjoying in its U.K. business and regional expansion. We have
written in the recent past five protection treaties --
mortality treaties -- that are expected to generate
approximately $10 million of premium during the course of '06
and $50 million in the course of 2007 as that production ramps
up.
In addition we closed a $600 million fixed annuity transaction
in the U.K. in early April that we expect will generate
attractive long term returns on capital.
Some other very important positives have occurred over the
past few months. As you know in 2005 Scottish Re originated
about $131 billion of traditional life reinsurance in the
United States markets.
As a result the company was the number two life reinsurer in
the market with a 15.5% recurring new business market share
according to the Annual Society of Actuary Survey that's been
recently completed.
SCOTTISH RE
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05-05-06/10:00 am CT
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In the first quarter the company originated $15.5 billion of
new traditional life reinsurance business which was in line
with our production expectations. The company's total assets
were $12.3 billion as of March 31 '06.
The core investment portfolio which is comprised of fixed
maturity investments, our preferred stock and cash and cash
equivalents totaled $6.8 billion, had a quality rating of AA
on average and effective duration of three years and a
weighted average book yield of 5.1%.
This compares with the December 31 stats of $6.7 billion in
terms of a portfolio balance, average quality rating of AA,
and effective duration of 2.9 years and a book yield of 4.9%.
Regarding funds withheld at interest, funds withheld totaled
$2.6 billion, have an average rating of A, and effective
duration of 4.7 years, and a weighted average book yield of
5.7% as of the 31st of March. This compares with $2.6 billion
at the end of December, a quality rating of A+, and an
effective duration of 5.1 years with a book yield of 5.6%.
Now we review our target durations quarterly setting targets
on the basis of updated liability analysis. With the recent
uptrend in U.S. interest rates we reduced our duration targets
at the end of the quarter for most annuity portfolios. We also
reduced duration targets for some level term portfolios in
connection with securitization transactions.
At the enterprise level target asset duration was 3.69 years
as of March 31 '06 down one quarter of a year from the
December 31 level of 3.94 years. Actual duration was 3.48
years implying a negative duration gap of .45 before the
reductions and .2 after the reductions.
SCOTTISH RE
Moderator: Dean Miller
05-05-06/10:00 am CT
Confirmation #7586906
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When the gap is negative a rise in the yield curve causes the
market value of assets to decline by an amount less than the
decline and the net present value of the liability cash flows.
The negative gap of .45 years based on previous targets was
caused primarily by having a large amount of short term
investments on hand in preparation for the funding of the
Ballantine resecuritization and our managers being short of
our target durations to garner additional value as short rates
drift upwards.
On a trailing 12 month basis the company's return on average
shareholders equity -- which is measured by defining net
operating earnings available to ordinary shareholders by
average shareholders equity excluding the effect of other
comprehensive income and the change in the fair value of
imbedded derivatives -- was 11.5%.
On May 2, 2006, Scottish Re completed an offering by
Ballantine Re a $2.1 billion regulation Triple-X
securitization which is the largest life insurance
(unintelligible) 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 transaction. In addition the company
has permanently lowered the cost of financing the Triple-X
reserves from these underlying policies from the cost assumed
in the pricing of the transaction.
You may recall that when we acquired the ING Re business at
the end of 2004 ING agreed to provide Scottish Re with
Triple-X relief that guaranteed rates that began at 100 basis
points per annum for the years 2005 and 2006
SCOTTISH RE
Moderator: Dean Miller
05-05-06/10:00 am CT
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increasing to 125 basis points in 2007, 150 basis points in
'08, and 175 basis points in 2009. These costs were imbedded
in our pricing of the transaction.
We have now completed the permanent refinancing of the
Triple-X relief at an average rate that is well below the 100
basis point level. In addition we were incentivized to
refinance the ING facility by certain cash rebates.
In connection with the successful completion of Ballantine
Scottish Re received a $6.2 million rebate from ING that will
be reported in the company's results of operations for the
second quarter ending June 30.
Protecting the integrity of the balance sheet and the counter
party relationship we have with our customers is very
important to how we conduct business at Scottish Re.
Scottish Re was one of the first life reinsurance companies to
have catastrophe coverage prior to the tragic events of
September 11. We've continued despite the significant cost to
buy catastrophe coverages that have grown as the company has
grown and include protection from terrorism including nuclear,
chemical, and biological events.
Since 2003 we've been examining the exposure of our industry
and our business at Scottish Re to pandemic risks among other
types of potential mortality shocks.
Like the risks from terrorism and natural catastrophes these
are very real risks that may never come to pass however in our
opinion it would be irresponsible of us not to protect your
investment in the company and the promises we've made to our
customers.
SCOTTISH RE
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05-05-06/10:00 am CT
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I am pleased to report that we have made great progress in
protecting the balance sheet from this type of risk via our
securitization expertise. In that light the company announced
yesterday that it 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. This protection will cost the
company approximately 260 basis or $4 million per annum over
the next three years - in each of the next three years. This
expense was not included in our original earnings guidance and
needs to be updated.
While we're disappointed with the results we reported to the
market last night we should not lose sight of the many
significant accomplishments of the first quarter.
The success of the ING acquisition, our demonstrated ability
to manage capital and mitigate risks through direct access to
the capital markets, combined with the continued execution of
our business strategy positions us well for future profitable
growth. And as a result we are bullish about our prospects for
2006 and beyond.
At this point we'll wrap up our prepared comments and open up
for questions. (Crystal), please?
Operator: At this time I would like to remind everyone if you would like
to ask a question please press star then the number 1 on your
telephone key pad. We'll pause for just a moment to compile
the Q&A roster.
Your first question comes from the line of Andrew Kligerman
with UBS.
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Moderator: Dean Miller
05-05-06/10:00 am CT
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Andrew Kligerman: Hey good morning. A couple of questions just want to rattle
off. With the difficulties in this worldwide life acquisition
kind of coming through a few years later, you know, what
mitigates your concern that some of your more recent
acquisitions like ING and Employees Re won't have similar
instances. That's number one.
Number two, what was meant in the release by your commentary
about the upgrade of management internationally? Can you talk
more specifically about what changes were there?
Third, the DAC to operating revenues ratio had began decline.
First it was 20% to 22%. Then you lowered it to 18 to 20. Now
it was 16 in the quarter on an adjusted basis. So, you know,
where does that ratio go?
And then lastly I need a little help on the tax benefit. You
earned about $6+ million but you had a tax benefit of $7
million. So I want to understand a little better. So four
questions and thanks.
Dean Miller: Okay. Yeah let me start with the ERC and ING acquisitions.
First of all, you know, as you know each and every acquisition
is unique and has different facts and circumstances.
The - you know, on the - well the ING in particular, I mean,
that's the large one that's going to make the most impact on
the results. That's an acquisition that was in our core
product line in our backyard here in the U.S. We knew it well.
Thorough due diligence, you know, supported by external
investors who did their own due diligence.
And then as we've mentioned on previous calls the ultimate
validation of that acquisition is the ability to model the
business, securitize it, have it scrubbed.
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05-05-06/10:00 am CT
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And also we're now into our second year post acquisition. And
the results are performing, you know, at expectation or above.
For example the successful securitization is better than we,
you know, priced for in the acquisition. So, you know, I think
we feel extremely confident that the ING acquisition and the
related pricing has held up and will continue to hold up.
The ERC is less significant. You know, it's an in force book.
You know, it's fully integrated off our systems, you know,
really nothing unique to say about that. But Worldwide Re is a
little different. You know, it's in different territories;
different lines of business, you know, products we weren't as
familiar with.
And I'm not saying that, you know, the due diligence was done
poorly. I mean, it's a legacy - it had some manual systems
that you're all aware of. It's taken a little longer to get
those in. We reported on February 17 that, you know, the
Sarbanes-Oxley weakness is fully remediated. We're up to
current account with almost all of the (seedants) now which is
a big factor in projecting how this goes forward.
But it's - and I don't think you can look at one acquisition
and relate that to other acquisitions in different markets and
different product lines.
Scott Willkomm: Yeah and Andrew I might add that, you know, where we I think
we can and should be criticized on the worldwide acquisition
is, you know, some of the progress that we've made has been in
the past, you know, 12 to 15 months. Quite frankly that's
later than it should be. And we've been very publicly open
about saying that.
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05-05-06/10:00 am CT
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Secondly including this quarter's negative performance in the
international segment it's earned on a pre-tax basis -- I
won't even - I don't have the after-tax number in front of me
-- but on a pre-tax basis taking into account this quarter the
pre-tax operating earnings of that segment have been on the
order of about $53 to $54 million on a $75 million investment.
So, you know, it has had a strong record of good earnings, you
know, with this quarter obviously not being in the same
category. And vis-a-vis Dean will answer a couple of your
other numerical questions vis-a-vis the management comment.
We've been very active over the past couple of quarters in
further deepening, you know, the senior team. We've mentioned
a number of those folks joining us including deputy of the
business - of the international business -- Dave Howe -- who
ran the pricing operations at Swiss Re out of Zurich. You
know, Andrew Linfoot who is the director of our Asian business
who came with a, you know, distinguished background.
There are probably about six or seven other folks that we have
added in the past - call it two or three quarters that you
could and would be right to criticize us for having not done
it, you know, eight or nine quarters ago and augmenting the
team there. But that's what we meant I think by deepening and
enhancing the management capability in the segment.
Now you had two more questions I think we need to answer as
well.
Dean Miller: Yeah referring to the deferred acquisition cost, you know, in
looking at North America you're right it's down year on year.
Now a couple of things to point out. I mean, first of all
we've got to remember that free Triple-X securitization or
structured financing, you know, the LOC fees would go through
SCOTTISH RE
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05-05-06/10:00 am CT
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acquisitions costs. So that in itself is going to make the
number higher historically.
Secondly, you know, we look at the growth in our financial
solutions business, you know, the acquisition costs related to
that business comes through this line but has very little
premium. And so granted we're looking at this on an operating
revenue basis but still it has a higher - if you look at the
financial solutions business separately it has a different
pattern.
So one of the things we've been talking about is the need, you
know, we put the annuity transaction on in late 2005. We're
actively in the market for more. We need to break that out
separately so you get a more consistent pattern by line of
business. So the line of business mix.
And even within traditional - the product mix within
traditional can skew the commission. So, you know, it's a
difficult number when you're dividing, you know, it only takes
a handful of a million on the acquisition dividing into the
big premium number to move it.
But there's nothing underlying that ratio that's different.
There's no change in our commission structure. There's no
change in our present value or future profit or DAC
amortization policies or assumptions. So it does have a little
movement in it.
And again I think it's the breakdown and provide some
statistical supplements to you, line of business splits and
more detail it will be more transparent going forward.
The last question on the tax benefit two points there. No
change in any of our underlying tax calculations, assumptions,
methodology from prior quarters.
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05-05-06/10:00 am CT
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What's really driving the increase in the benefit is primarily
the operating losses in the international segment. Those
losses that we've highlighted in the international segment are
retained within the legal entity in the U.K. and have the 30%
full tax benefit load associated with it. So that's the drive.
You know, we continue to project that the tax benefit, you
know, that has historically been there will migrate down to
zero to an expense over time as we've stated before. But
you've just got that unusual circumstance in the first quarter
with the operating losses and the high tax jurisdiction of the
U.K.
Andrew Kligerman: Okay. Thank you.
Operator: Your next question comes from the line of Jeff Schuman with
KBW.
Jeff Schuman: Hey guys I apologize if I missed some of these. Did you give
the North American base amount at the end of the quarter?
Dean Miller: We did not. North American base amount is about a $1.073
trillion if I'm not mistaken right off the top of my head.
Jeff Schuman: And at the end of the year I think you've given us a pretty
round number of a trillion so did it go up...
Dean Miller: It was flat.
Jeff Schuman: Flat okay.
Dean Miller: This $1.023 billion if my memory serves me correctly at the
end of '05.
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05-05-06/10:00 am CT
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Jeff Schuman: Okay. And then just want to make sure I'm clear on a few of
these smaller items and how to (unintelligible) and so forth.
So the rebate will be in the second quarter - that 6.2
pre-tax. And what's the tax rate or what's the ultimate EPS we
should expect that do you think?
Dean Miller: Yeah that will come through an (unintelligible) subsidiary so
it'll have the 12.5% tax benefit similar to the rebate we had
in the fourth quarter.
Jeff Schuman: Okay. And then the payment to Mike French is a second quarter
event as well?
Dean Miller: Yes it is.
Jeff Schuman: Okay. And we'll tax that one at 35?
Dean Miller: No that'll more likely be in the holding company so it'll have
a zero tax expense.
Jeff Schuman: Okay. And then Scott gave the cap non-expense but I'm sorry I
missed it. What is the cap non-expense?
Dean Miller: It's $4 million a year Jeff.
Jeff Schuman: And that's pre-tax?
Dean Miller: It's a Cayman company so it's pre-imposed.
Jeff Schuman: Okay. And that...
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05-05-06/10:00 am CT
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Dean Miller: That'll be, you know, amortized over the year but because the
mortality bond is actually effective at the beginning of the
year, you know, the second quarter will have the first and
second quarter amortization and then you get onto a more
quarterly run rate.
Jeff Schuman: Okay. So you get a little (unintelligible) in the second?
Dean Miller: Yeah.
Jeff Schuman: Okay. And then the additional securitization I guess you said
it was going to be roughly GAAP neutral. And just in real
simple terms that we're trying to anticipate the income
statement geography what items do we hit for that?
Dean Miller: Yeah what you'll have is an increase in investment income for
the income that we earn on the proceeds from the notes that
are offered. And then you'll have the collateral facility
expense will go up and that will be the cost on the payment on
the notes plus any amortization of the transaction costs to do
the transaction.
Jeff Schuman: And I think all of that hits North America. Is that correct?
Dean Miller: It'll hit the North American segment yes.
Jeff Schuman: Okay. (Unintelligible) so the principal amount that we're
going to earn investment income is the $2.1 billion?
Dean Miller: Yes. That's right. Yeah.
Jeff Schuman: All right. And then just conceptually kind of thinking about
international I think Scott you mentioned the cumulative
segment earnings of about $53 or
SCOTTISH RE
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05-05-06/10:00 am CT
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$54 million over the last few years which is certainly
consisted with the reported statements.
You do carry a lot of your operating expenses so it's in
corporate. I mean, you haven't invested a lot of energy at the
executive level building out international. It is fair to
think some of that may be appropriate to put to use in your
investment in international as well?
Scott Willkomm: Without question. Without question. I think, you know, the -
as you know just anecdotally in conversation, you know, a lot
of us -- Dean, you know, Cliff, myself, a number of the other
folks, you know, from the, you know, parent company are
spending a fair bit of time with the team in international in
general.
So there is certainly, you know, investment not merely
reflected in the direct stat in the international business
itself but also at the group level as well.
Jeff Schuman: Okay. And if we think about international going forward do you
think it's likely that maybe during this year we'll actually
get the kind of segmentation that would help us kind of view
the older business and the newer business somewhat separately
or is that realistic?
Scott Willkomm: We've talked about that internally Jeff. And it's something we
may be able to get to later in the later. It's not a question
of getting to it. It's getting information that we and you
would find credible and useful to separate the new from the
old.
Jeff Schuman: Okay. And then just in terms of kind of the trajectory of the
run off of the older, I mean, you know, we've always thought a
lot of this was kind of shorter tail business.
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05-05-06/10:00 am CT
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Scott Willkomm: Yeah. It is. That's right.
Jeff Schuman: So, I mean, how long does it take for most of the I guess
what's left at this point to kind of run down?
Scott Willkomm: Well, you know, for example in the Middle East market we used
to have, you know, about a year to 15 months ago we had about
85 different seeding companies. And I think we had over 2,000
individual reinsurance relationships, you know, different
product levels and schemes if you will.
We've knocked that down to about 35 and in the process have
gotten rid of a lo of the (unintelligible) while only
impacting top line by about a million or two million in
premium.
That takes, you know, probably on the order of, you know, one
to three years to run off, you know, in terms of the old
business - annual business running off as well as cleaning up
any of the delinquent reporting as we've mentioned in this
call today.
So we're running off the Latin American business. One of the
reasons that your premium on a year over year comparative
basis in international is down is we're running off the Latin
American business extremely fast. We've exited that market.
And it's running off rather quickly.
So - in fact I think somewhere around 40% of that has run off
already and we would expect the balance will be gone by the
end of the year. So it's coming at pretty decent pace.
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We also in the past, you know, prior to some respect to
running off some of the stuff in more recent quarters had
reviewed the pricing on a fair number of the different
relationships and had changed those along the way as well.
So it's well on its way to getting cleaned up. Our plan
internally was to have everything cleaned up by ultimately Q3.
A lot of that is mechanical internal stuff that doesn't
necessary impact the P&L per se.
So - because it is in some respects, you know, causing
resources to be somewhat, you know, split between the new
business opportunities that I've also highlighted as well as
the run off (unintelligible).
Jeff Schuman: And one last issue I think in your release you reiterated your
guidance that you think you can hold OPEX flat this year.
Obviously you continued to invest in some important hires
recently.
And I'm trying to remember what the offsets are that will
still get you to flat. I know if the SOX expenses to go down.
What else kind of goes down to help you fund...
Dean Miller: You have a lot of costs from the ING integration which
was expensed not capitalized. And next come in the residual
bits and pieces are coming down over the first two quarters as
well as that business has been integrated. A lot of that was
principally IT related expense since we put the systems
together.
Scott Willkomm: Another big chunk is part of the remediation of the material
weakness in the U.K. we incurred about $3 million of external
professional fees in assisting us in some of that. And that is
non-recurring.
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05-05-06/10:00 am CT
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Again as a funny aside when I was looking at these numbers
originally I asked Dean if we had actually put in the wrong
word and used absolute instead of relative but it is spot on
in terms of a nominal dollar basis.
Jeff Schuman: Okay. Thank you.
Operator: Your next question comes from the line of John Hall with
Wachovia.
John Hall: Good morning.
Scott Willkomm: Hi John.
John Hall: I have a question. Scott I wasn't sure I understood your
answer or fully understood the time frame that you laid out
for Jeff in terms of when this business is fully run off the
books.
Scott Willkomm: I think it's - the vast majority -- I won't say 100% of it
because I think that's a difficult assessment to make -- but
in terms of that which we're running off it'll be all gone in
about 12 months.
Dean Miller: And the difficulty in presenting that of course is the run off
there - within the Middle East for example there's the run off
business that we purposely non-renewed and don't want to do
that type of business. But we're also actively writing new
Middle Eastern business as we presented in the Investor Day.
So you've kind of got kind of the old legacy - old style
Middle East and the new stuff that we like. So you're not
going to see it when you see Middle East - if we start to
break out top line revenues you won't see Middle East go to
zero, I mean, because that's not our strategic plan. So I just
want to make sure that we understood that it's not all running
off.
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Moderator: Dean Miller
05-05-06/10:00 am CT
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John Hall: Okay. And Scott you mentioned a review and in the press
release it also mentions a review that you undertook during
the quarter I guess to take care of items - or events in the
future.
Could you just elaborate a little bit on that and how much of
what went through the P&L in the quarter is related to the
future as opposed to events that actually occurred.
Dean Miller: Okay John let me handle that one. This relates to the late
reported claims by the seeding companies. You know, just is
just inherent in the nature of the business when you're
outside of the United States and even outside the U.K.
predominantly. It's changed considerably in the last three to
four years.
You're going to get late reporting. It's just part of the
business. What we're trying to do is part of the clean up in
non-renewing, you know, the manually intensive business and
getting the records up to date, one, we're getting a better
handle on what truly is outstanding and what's current so we
can more proactively manage the book.
Secondly, you know, that old legacy is in run off as we've
been mentioning so that piece will go away. But we're still
going to have, you know, we're still exposed to clients and as
Scott mentioned even the big players in the market. And these
certain geographic areas don't have the data from their
underlying systems and (seedants) to do it timely.
So what we're doing is we got hit with, you know, four large
(seedants) that reported to us. Now that's just black and
white. They reported in the first quarter. We've reviewed,
scrubbed it, and it is what it is.
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05-05-06/10:00 am CT
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Unfortunately in the past we might get one. It's immaterial.
Or we get a couple that offset each other. We had a quarter in
which the four went all one way and they added up to a number.
That's about $4 million.
Then what we did because we kind of said, you know, let's
again take a proactive look. And we're no different than our
peers in the industry and we should be proactive in how we
manage this. And we know that there's accounts out there that
are delinquent or are going to have reporting issues.
So let's - I've got to call that data reserve. That's kind of
in my prior life the way we viewed it...
John Hall: So you're essentially saying IB&R.
Dean Miller: Yeah yeah you can call it that. It's there for kind of unknown
known reporting issues on, you know, clients. Now whether you
can attach it to individual companies and so forth that's more
difficult.
But it's a way to say hey we recognize there's some volatility
that's here. Rather than just take it when it comes and be
reactive let's be proactive and say what's our best estimate
given the size of the portfolio, the run up nature of the
portfolio.
You know, there's no assurance that this $3 million is enough
or, you know, if it'll stop. It'll happen again. But it's a
reasonable prudent estimate of some late reporting that might
come until this thing really does run its course and fully run
off.
And even when the run off is gone we're going to have these
issues in the U.K. market, Middle East, and Asia. It's part of
the business. And as we - the
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05-05-06/10:00 am CT
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other thing is as we grow and put the new business on --
especially in the U.K. and Asia -- the late reporting really
starts to become noise and is more manageable and doesn't
overshadow a quarter like it can today with the small segment
that we have.
John Hall: Two things. One to tag on there. Is it safe to say that this
data reserve you're going to continue to add to it as we go
forward?
Dean Miller: What we will do is we will manage that data reserve. So what I
would anticipate as we write new business and get awareness of
accounts that maybe are delinquent we would consider saying do
we need - you know, does the data reserve go up, does it go
down. It's kind of like you manage IB&R. It's an evolving
thing.
You know, like I said the U.K. market that's where the growth
is going to be. The business we're writing now it's very -
we're very demanding on the data requirements and the
timeliness that the data must be sent to us in order for us to
do business with people. And that's the way the market is.
So some of the historical data issues in the U.K. we have the
benefit of not having a legacy book in the U.K. We can start
with the new operating structure. But - I guess the answer to
your question it'll be kind of a managed number. But right now
I don't anticipate that growing to some bigger number over
time given the way we're writing our business.
John Hall: Okay last question. You offered some guidance on operating
expense? I wondered if you wanted to go beyond just expenses
and offer something to update the former guidance that was in
place.
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05-05-06/10:00 am CT
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Dean Miller: Yeah we're prepared to do that. Let's step back a second and
talk about what we talked about on February 17 when we gave
the guidance for 2006. At that point - well we gave guidance
on multiple elements of the financials and different segments.
But the key headline on the EPS - operating EPS was 2.75 to
2.95.
And we gave also at that point some guidance on the quarter
components, you know, highlighting the fact that the second
half of the year was going to be more heavily weighted - even
more so than the typical fourth quarter seasonality that we
have.
And that's a function of some of the new initiatives that we
have in both America and International both in product lines
and different geographies and I'll get into that a little
more.
So that was kind of how we came up with the guidance back
then. Some things have obviously happened since we did our
plan back in the fall, presented it to the board, and
established the guidance.
First of all we've got the press release around the Mike
French and the Tartan Capital Limited that we just talked
about with Jeff. So neither one of those were in the guidance.
So you've got to kind of back that out. You know, that's about
12 cents roughly.
Of course we have the miss in the first quarter. And, you
know, that's about 23 or 25 cents depending on kind of where
you are in the range that we gave for the guidance on the
first quarter. I don't think it's reasonable to expect us to
make up that miss from the first quarter. So we need to adjust
for that.
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05-05-06/10:00 am CT
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And then as we - well and of course we have the rebate. And
I'll kind of give the numbers pre and post rebate because it
does get kind of confusing sometimes so we'll talk about that
secondly.
The other I guess scenarios or variabilities or sensitivities
in the EPS as we sit here now almost into the second week of
May is when we did the plan, you know, we have talked - and we
talked a lot on the Investor Day.
The Investor Day as you know we were very upbeat about the new
initiatives in our key markets particularly in the financial
solutions - the annuity products both here in the U.S. and in
the U.K., you know, the roll out (unintelligible) in a very
thoughtful way - the mortality research center, securitization
and so forth and so on.
You know, all of those, you know, were into our plan guidance
and as we sit here now in the second week of May, you know,
six months, you know, farther along we've got - and three
months when we publicly went off the guidance we've got more
clarity on those initiatives.
And again I think you saw on April 20 that those initiatives
are full force and we feel really good about them. The
question is, you know, what's the timing of when you can
convert a new initiative in a pipeline into a closed
transaction and then contributes to the income statement.
And I would say, you know, especially with some of the
financial solutions transactions they're not the cookie cutter
like some of the traditional and they're highly negotiated and
complex in their structuring. And what we're trying to do is
solve the client's capital issue. And there's lots of ways in
our tool kit that we could do that.
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05-05-06/10:00 am CT
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We have a pipeline right now that's very strong on the annuity
transactions both in the U.S. and the U.K. For example in the
U.K. we're in deep discussions with the top three annuity
writers in the U.K. market - so very positive.
But I would say as we sit here right now knowing that our plan
assumed several of these transactions being written effective
July 1 we're probably not going to get, you know, those three
big writers to close by July 1. So we need to be realistic of
the timing when the new initiatives come on board. Same thing
with the annuity deals in the U.S.
The other thing is sometimes the capital solutions involve an
in force transaction and sometimes it's new business. And that
could have an impact on how the, you know, in force obviously
puts profits immediately on the books and in a new business
you grow into the profits as they write the business. So
you've got those elements.
So, you know, you could put all that together and, you know,
with what we know today and a pipeline of new business and all
the initiates in the time table, you know, and you adjust for
Tartan, French, so forth what our revised guidance would be is
right would be 2.40 to the 2.50 range.
Now that does include the rebate of the $6 million in the
second quarter. So after tax effect of rebate that's about 9
cents. So that's again where we see the year playing out given
the initiatives and the status of them.
John Hall: Okay.
Dean Miller: Okay?
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05-05-06/10:00 am CT
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Operator: Your next question comes from the line Eric Berg with Lehman
Brothers.
Eric Berg: Yeah you've touched on this a little bit but I'm hoping you
can just talk a little bit more about sort of the
retro-sessional support that you currently enjoy to prevent
the type of impact on financials that you had on the quarter
internationally.
Cliff Wagner: Yes this is Cliff Wagner. And I'll take that one. You know,
right now for international our retro-session consists of our
excess retro which, you know, covers all claims in excess of
our retention - our current retention for fully underwritten
business is $1 million and lower for the non-fully
underwritten business.
You know, that's retro-session with highly rated retro-session
companies similar to the ones we have in the U.S. the
manualized funds. You know, besides that we've got our - we do
have catastrophe and clash coverage which, you know, the cat
coverage is for all of our business as well as the clash and,
you know, again cat covers, you know, claims from any one
incident. The attachment point is $10 million and we've got
$80 million coverage above that.
Our clash coverage which we have used in the past is for
unknown accumulations. And the clash coverage, you know, kicks
in when we've got more coverage on an individual that we knew
about at the time of death. And that kicks in at $3 million
and we've got $7 million of coverage above that.
Scott Willkomm: And I think Eric the reference that we made in the press
release and in perhaps the commentary regarding retro-sessions
in the international business is we took a conservative look
at recoveries we are expecting from some of the
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05-05-06/10:00 am CT
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retro-sessions on certain large claims that are pervasive
throughout the industry. Everybody has a little bit of these.
And as you can imagine it's very similar to the resolution of
9/11 claims. People are hinging their positions on two or
three words in a treaty. So instead of, you know, fooling
around with that stuff, you know, from an income statement
perspective we decided to, you know, take a more conservative
reserving standpoint. However we will actually continue to
aggressively pursue the resolution of those in our favor.
Eric Berg: Do you think this points to a need to change Scott or Cliff
your retro-sessional approach or program?
Scott Willkomm: No. What we're talking about with these is on the run off
block. This is - you know, in the comments that we made in the
press release were consistent and linked to the run off block
so this is actually historic in nature. We still want to
resolve it nonetheless. The programs we have today for our new
business and in the international space is fairly
straightforward and consistent with the type of arrangements
one has say in the U.S. for example.
Eric Berg: Thank you.
Scott Willkomm: Yeah.
Operator: Your next question comes from the line of David Havens with
UBS.
David Havens: Yeah good morning guys from the fixed income side of UBS. Just
wondering what sort of a feedback you're getting from the
rating agencies on the Tartan deal and the Ballantine deal
(unintelligible) other securitization efforts that you've
made.
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Moderator: Dean Miller
05-05-06/10:00 am CT
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Dean Miller: Well, you know, very positive. I mean, when we - we just met
with all four rating agencies over the last three to four
months. And if you look kind of back at their public reports
and some of the internal reports that they don't publicize one
of the key risk factors we had in addition to the ING
integration and the infrastructure (unintelligible) which, you
know, we've demonstrated and they're pleased with.
Probably the other real big ticket item was the financing risk
that we had on the mismatch in the liabilities. In a company
that's not as established or as large it doesn't have a strong
parent, you know, the risk is magnified.
So the ability to take what is to them probably one of the
biggest risk factors and turn it into one of the biggest
positives and to do something that our competitors haven't
done is a real, you know, positive for us.
So, you know, that's rating agencies. And especially when you
see S&P come out with their guidance where they really want to
penalize people that haven't taken care of this and reward
those that have.
And then other thing of course is on - I think Scott summed
this up pretty well. On the Tartan - again we don't have the
big parent or the big cash funds that some of our larger
competitors do and so, you know, we need to be more
conservative in our catastrophe cover. And the things that
Cliff just talked about ton the cap plus the Tartan I think
protect us very well.
So, you know, I think what we've done is taken those issues
off the table with the rating agencies.
David Havens: Okay. Thank you.
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05-05-06/10:00 am CT
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Operator: Your next question comes from the line of David Merkel with
Hovde Capital.
David Merkel: Hi. My questions have largely been answered but I'd just like
to give a reflection. In the 1980s early 1990s I worked for a
large international life insurer. And one of the things that
just had the actuaries tearing their hair out was the lags and
the dirtiness of the data. Won't name the company.
But I can understand why you ran into this period. I guess my
question would be what are you putting into place to more
proactively get data from your international (seedants)?
Thanks.
Scott Willkomm: Well I think, you know, David the approach you take and as I
said we can be criticized for not having been more aggressive
in terms of timing when some of these initiatives took place.
And we accept that responsibility or at least those of us who
have been here for that long accept that responsibility.
Just like we do in the U.S. where we're the most active
auditor of customers and we have a very sizable client audit
and review team both claims, underwriting, and operations and
reporting.
And that clearly the benefits and the success of that effort
is somewhat validated by all the securitizations which require
very granular transaction level data that is scrubbed by, you
know, every expert in town.
What we're doing in the international business is not terribly
different. A couple of things - one, in regions such as Asia
and the Middle East instead of running your business from
3,500 miles away in the U.K. we are decamping and
regionalizing the management of those certain regions.
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05-05-06/10:00 am CT
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You need the regional experience. You need the regional, you
know, both cultural appreciation as well as language skills to
have your ear the closest to the ground.
Secondly we are introducing or enforcing as the case may be
more traditional what we would call sort of U.S. and U.K.
style treaty terms. And instead of, you know, a lot of the
business historically as you may recall from your experience
in these markets was written sort of on a one off fact type
basis.
These are a, being trimmed down to the best companies so we're
trimming down the companies we work with to those who are able
to provide us with the information to begin with.
But secondly we're also migrating people to more defined
treaty terms as opposed to less clear even slips and
facultative submissions. Thirdly, we're actually actively
engaged in auditing our customers now in these regions which
was a complete unheard of when we first bought the business
and went to some of the regions. In fact we were told by folks
by the region you can never do it, it'll never happen.
Well the customers that we are doing business with on a
go-forward basis are very proper and thoughtful commercial
enterprises who do not view this as an unreasonable approach.
Just by way of example the first time I went to the Middle
East which is about five years ago I think only one company
was rated by any major rating agency. Today there are over 40
or 45 companies in the region with ratings from A.M. Best,
Moody's, S&P, and Fitch.
SCOTTISH RE
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05-05-06/10:00 am CT
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So, you know, our efforts to focus on the true professionals
in the markets is ideal especially as we bring treaty terms,
underwriting and claims auditing relationships and the like
and information standards to the relationships we have.
David Merkel: Thanks Scott.
Scott Willkomm: Yeah.
Operator: Your next question comes from the line of Richard Sbaschnig
with Oppenheimer.
Richard Sbaschnig: Hey good morning. I just have a question. I wonder if you
could provide more color on the terms of the Ballantine deal?
I guess previously you've been paying I guess 100 basis for
your LOC coverage. And I'm wondering if you could kind of
quantify how that might change going forward.
Scott Willkomm: Well the collateral costs on the Ballantine deal are
reasonably well inside that 100 basis points - magnitude of
probably a 25% to 35% discount from that level when you factor
in the costs of bond insurance and the like.
There were I think eight or nine traunches if I'm not mistaken
of different securities that ultimately go - accumulate to
fund the Ballantine risk. So that's why I'm giving you a
little bit of a range there because each of them had slightly
different feature.
But it's a reasonable improvement in the costs of funds of
funding that block of business. And it's permanent funding
that, you know, will derive benefit over the long term.
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05-05-06/10:00 am CT
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Richard Sbaschnig: So just so I understand the accounting on it, I mean, I guess
we can expect to see possible downtick in kinds of
(unintelligible) expense versus - and obviously an increase in
the collateral interest expense?
Scott Willkomm: Absolutely. Yeah we're just pulling them into a different line
so you can see it separately.
Richard Sbaschnig: Okay. Thanks a lot. Also in terms of this improved disclosure
that you're planning on giving is there any kind of timeline
for that?
Scott Willkomm: You know, we've got it and we're just picking a time and
numbers and I'm hoping to put something out next week with the
10-Q. And we'll continue to work on it and expand it as we go
each and every quarter.
But we'll have something for sure next week with - if nothing
else it'll pull together in one place a lot of things and
it'll have some additional splits in different categories.
Obviously we'll be looking for feedback once it comes out and
what's useful to you so we can work on it going forward.
Richard Sbaschnig: Great. Thanks a lot.
Operator: Your next question comes from the line of Saul Martinez with
Bear Stearns.
Saul Martinez: Hello. Two clarification questions. One on the EPS guidance.
The original -- I just want to be clear -- the original 2.75
to 2.95 did not include the benefit of the refund yet the 2.40
to 2.50 does include the $6.2 million.
And my second question is related to your answer to I believe
Jeff Schuman on the life reinsurance in force - excuse me. You
had one - you said it was one - I believe you said it was
$1.073 trillion versus $1.03 trillion in life insurance
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05-05-06/10:00 am CT
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in force in the U.S. But you only wrote $15 billion in new
business production...
Dean Miller: Yeah Saul when I said - and, you know, we didn't have this
schedule in front of us but life insurance in force did not
change in the first quarter. It never does.
Saul Martinez: Okay. Do you have that number?
Dean Miller: Yeah - come back to us off-line on it. We will get you that
number. But we were recalling two different numbers. And I
apologize for the confusion. The last activity in the first
quarter is generally equal to the new production.
Saul Martinez: Okay. So it's more or less flat so we can extrapolate from
last quarter.
Dean Miller: Yeah in historical quarters pro forma for the ING.
Saul Martinez: Okay. Fair enough.
Dean Miller: And to answer your first question Saul your understanding is
correct.
Saul Martinez: Great. Thanks a lot.
Operator: Your next question comes from the line of John Nadel with Fox
Pitt.
John Nadel: Hi. Good afternoon guys. Couple of questions for you. Can you
- I guess I just wanted to touch on management compensation
and how the first quarter results and the reduction in the
guidance relative to your original guidance. You know, how big
of an impact is that for you guys personally relative to
internal targets for short and long term incentives?
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Scott Willkomm: It can actually be a pretty meaningful change. You know, many
of us to begin with, you know, are meaningful, you know,
shareholders and have meaningful equity compensation.
So with the shares trading off this morning some of us are
experiencing the pain in real time in our long term
compensation although I think that, you know, the long term
prospects are quite bullish so that's short-lived if you will.
We have, you know, in our compensation arrangements
performance based measures that are linked to book value per
share growth, return on equity, and operating earnings growth.
And to have a range over which they vary.
And quite frankly that was not the first consideration in
working on the quarter's results...
John Nadel: No no no I wasn't - I did not mean to imply that.
Scott Willkomm: No. I understand John. But quite frankly I couldn't give you
specific numbers because that wasn't the first thing we were
working on.
John Nadel: Right. Right.
Scott Willkomm: But it would have an impact. And it would quite frankly impact
me the most.
John Nadel: And maybe just following up on that I know maybe this gets a
little personal for you guys but especially given that you do
already own so much and have such a, you know, relatively
large stake are you buyers of the stock today?
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Scott Willkomm: Well actually our insider trading policy doesn't let us be.
But I know that my deferred comp plan has a buy order I think
for May 8 or whatever.
John Nadel: Okay.
Scott Willkomm: Just kind of how they normally do it. It's an automatic thing.
John Nadel: And then a couple of follow items. I think really going back
to Jeff's questions on the international run off business do
you guys have a - can you give us maybe an estimate, some kind
of a ball park range as to what the remaining amount of
premium is there that you would characterize as run off?
Dean Miller: Let's see here. In total?
John Nadel: Yeah.
Scott Willkomm: Well the first thing of course we haven't really talked about
this but in the first quarter for the international segment
the $20 million of premium, you know, a run rate is actually
about $10 million higher than that.
When we talk about the (seedant) late reporting -- that $4
million -- you know, that came off the top line. Those were
premium accrual adjustments. So there's kind of a $4 million
adjustment there.
And then we had as part of the administrative clean up and
getting rid of, you know, we're talking about all those old
accounts we have we had about $5 million or so of top line
premium but it was associated with an equal and offsetting
amount on claims.
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So these were kind of treaties in the admin system that we
verified were not renewed with them. So we lost about $9 to
$10 million. So the run rate is more like $29 million.
But, you know, we talked about Latin America. You know,
that's, you know, a run rate that's going to be down to zero.
Middle East is on a run rate much less than last year. And
then of course Asia is going up and the U.K. is going up.
And the other thing is what you're not going to see in the
premium line is the impact of the annuity transaction that we
closed at the beginning of April which will have a significant
impact to investment income in the bottom line.
So premium isn't going to be the best measure of growth for
the international segment. But what I would say though is
given the pipeline we've got - the premium line item is the
traditional business and the run off of the business is going
as planned.
The writing of the new treaties in the U.K. is going as
planned. And so the expectation for the premium that we gave
on February 17 is still in line.
John Nadel: Okay. All right.
Scott Willkomm: And then if I get the statistical supplement with the splits
by kind of geography the way I'd like you'll be able to kind
of track that quarter to quarter which will be real helpful
for you.
John Nadel: Okay. And then just a quick numbers question. Do you guys have
the - I understand you guys are going to give a little bit
more disclosure starting next week and it'll evolve from
there.
SCOTTISH RE
Moderator: Dean Miller
05-05-06/10:00 am CT
Confirmation #7586906
Page 40
But can you give us a sense for in the first quarter results
how much of the net investment income in the North America
segment was specifically coming from bonds issued associated
with the securitizations?
Dean Miller: Yeah it's the - the incremental net investment income from -
well it'd be - what you have is kind of the full quarter
impact of (unintelligible) end of February last year. So if
you're looking quarter over quarter you've got what two months
versus one month...
John Nadel: Just the dollar amount in the quarter.
Dean Miller: Yeah and then you've got (unintelligible) so it's about $23
million is the impact on investment income incrementally.
John Nadel: Incrementally. Okay.
Dean Miller: Yeah. And then the other big thing in North America is you've
the annuity transaction which we closed at the very end of
2005 which contributes pretty significantly to the growth.
John Nadel: Okay. And then just last question is just going back to this
review especially around late reporting claims etcetera and
international. I guess what kind of struck me most, you know,
about the quarter was that, you know, it was just a couple of
weeks ago, you know, at the analysts meeting.
I mean, what, you know, maybe no easy way of asking this so
I'll just ask it. You know, when did this come up? And if it
came up following the Analyst Day, you know, then we've got
essentially two weeks or so where you guys
SCOTTISH RE
Moderator: Dean Miller
05-05-06/10:00 am CT
Confirmation #7586906
Page 41
would've performed this review. Do you feel comfortable that
that's enough time?
Dean Miller: Well because there's several pieces to it there's not one day
which it came up. But I would say, I mean, when you get, you
know, four (seedants) that report, you know, several
significant items in the quarter. I mean, these things were
notified to us during the first quarter and they kind of came
in at different periods. But the first thing you do is you
just don't take face value and cut a check. You've got to go
back to the client. You ask him for backup support. You know,
you send a team out. You review it.
And given that these have been smaller and, you know, netted
small amounts historically and the size of these, you know, we
scrubbed it extra hard. And so, you know, come April 20, you
know, we're still in the process of saying, you know, does
this make sense and what's the background. You know, why does
this one global reinsured going all the way back to 1998 and
reporting additional claims for us. Does that make sense and
why is that?
So it's a pretty robust analysis we went through to make sure
that these were correct and it takes time. And same thing with
the reinsurance recovery. You know as Scott mentioned that's a
handful of claims that - it's complicated.
We've been in negotiation with the various reinsured for the
last two years. There's been a lot of dialogue just over the
last two months back and forth with the various reinsurers.
And again you don't just conclude that yeah we're going to
cave in and they're right and we're wrong and cut the check.
So, you know, you're trying to get all the facts and look at
it from every angle before you ultimately conclude on these
nature of things.
SCOTTISH RE
Moderator: Dean Miller
05-05-06/10:00 am CT
Confirmation #7586906
Page 42
So I don't think - it's not that we didn't know about them. We
clearly knew about them but we were aggressively researching
them and trying to come to the right conclusion, you know,
before we, you know, concluded.
John Nadel: Okay. Okay thanks guys.
Operator: Again if you would like to ask a question please press star
then the number 1. Your next question comes from the line of
Jonathan Shafter with Boston Provident.
Jonathan Shafter: Hi guys. Two things here. First I just want to make sure I
understand from a numbers point of view that on the $6 million
rebates that you're projecting to occur in the second quarter
so that is approximately 10 or 11 cents of income that was not
in the original guidance numbers that were put out for 2006?
Scott Willkomm: Yeah. Yes it's about 9 nine cents I think if you take the tax
effect and, you know, there's a little movement in the shares.
But about 9 cents. But you're right it was not in the original
guidance. And we're not protecting. It's been collected.
Jonathan Shafter: Right. And then so when we just, you know, the new guidance
sort of on an apples to apples basis comes to - the low end
would come to like 30 then about 25 cents of that is accounted
for in this quarter.
Am I right in the way that I understand what you have said
that this differential on an apples to apples basis and the
old and the new guidance is a matter of timing, that it's a
matter of the lumpiness of deals that won't be in place for
July 1. But we can sort of like push out whatever ramp up rate
we
SCOTTISH RE
Moderator: Dean Miller
05-05-06/10:00 am CT
Confirmation #7586906
Page 43
were expecting for '06 into '07 and just push that out by a
quarter or two or have sort of the fundamental run rate
economics of the business change
Scott Willkomm: With the exception of the Tartan expense and the Mike French
settlement which, you know, are kind of one offs...
Jonathan Shafter: Right.
Scott Willkomm: ...you're right. It's predominantly - the net difference in
the guidance adjustment is that we're still on target to write
the business. We're just projecting we're going to write it,
you know, maybe a little later.
And the other thing is, you know, it is a competitive market
out there. And, you know, we're not going to chase the top
line growth. And, you know, we've got strict return hurdles
and we're sticking to them.
Historically we (unintelligible) and so forth and we didn't
put that in the quarter release this year but it would be
consistent percentages with prior quarters.
Jonathan Shafter: Well does that mean that I should be taking sort of the core
economics as we understood the business yesterday and then
just pushing it out one or two quarters or is what you're
saying actually that the competitive dynamics - the real
economics of the business have changed?
Scott Willkomm: No the economics of the business haven't changed. In fact I
would say the pricing dynamics are as robust as they've ever
been. But then again as Dean said we're not going to chase
business that maybe, you know, either not meeting our risk
requirements or our return requirements. So I think, you know,
to your point it is a timing related matter.
SCOTTISH RE
Moderator: Dean Miller
05-05-06/10:00 am CT
Confirmation #7586906
Page 44
Jonathan Shafter: Is there anything you could say about, you know, the expected
duration of the timing, when you would expect these deals that
were expected to be in place for July?
Scott Willkomm: (Unintelligible) that we referred to the in the U.K. we've
been working on for over two years. When we initially went
into the negotiations with the customer it was reasonably
expected by all parties that it would be six months.
I mean, that's an extreme case of course. But it just gives
you a sense of this, you know, there's another deal that we
just received a treaty on yesterday or the day before which
was supposed to have been buttoned up two months ago. Now, you
know...
Jonathan Shafter: Is it reasonable to expect, I mean, deals can always stretch
longer but it is sort of a reasonable base case expectation
that the economics that we would've been expecting in '06 from
the deals will be there on a run rate basis for the duration
of 2007?
Scott Willkomm: Well that's the point I think I made vis-a-vis some of our
activity in the U.K. as you may recall the comment. We'll
probably see on a few of those treaty deals that we've written
$10 million of premium this year for example, $50 next year.
So that gives you a sense of, you know, a, the answer is yes
but b, it give you a sense of, you know, some of the potential
impact.
Jonathan Shafter: Great. Thank you.
Operator: Again if you would like to ask a question please press star
then the number 1. Sir at this time there are no further
questions.
SCOTTISH RE
Moderator: Dean Miller
05-05-06/10:00 am CT
Confirmation #7586906
Page 45
Scott Willkomm: Well we'd like to thank everyone for joining us this morning
and appreciate all the candid questions. And we look forward
to updating you in the relatively near future with our new
disclosure and as we speak with folks individually. Thank you.
Operator: This concludes today's Scottish Re First Quarter Earnings
conference call. You may now disconnect.
END