SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
Confirmation # 2906522
Page 1
SCOTTISH RE
Moderator: Paul Goldean
August 4, 2006
7:30 am CT
Operator: Good morning my name is (Cynthia). And I will be your
conference operator today. At this time I would like to
welcome everyone to the Scottish RE Group Limited Second
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 one on your
telephone keypad. If you would like to withdraw your
question, press the pound key. I would now like to turn
today's call over to Bill Caulfeild-Browne, Vice Chairman,
Board of Directors for Scottish RE Group Limited. Please go
ahead sir.
Bill Caulfeild-Browne: Good morning everyone and welcome to the Scottish RE
Group Limited second quarter 2006 conference call. My name
is Bill Caulfeild-Browne and as stated I am the Vice
Chairman of our board. 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 law and management cautions that forward looking
statements are not guarantees.
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
Confirmation # 2906522
Page 2
Actual results could differ materially from those expressed
or implied. We expressly incorporate the risk factors
contained in the company's SEC filings. Given the challenges
faced by our company the board has accepted the resignations
of Scott Willkomm, former President and CEO of Scottish RE
Group Limited and Seth Vance former CEO of the North
American segment.
Earlier this quarter the board accepted the resignation of
David Huntley former CEO of the International segment. In
addition to the recent changes in senior management we have
established a special committee, the Office of the Chairman
to assist executive management in directing the company in
the near term. This committee is comprised of Glenn Schafer,
as non-executive Chairman, Paul Goldean, Dean Miller, Cliff
Wagner, David Howell, and myself as non-executive Vice
Chairman.
Glenn and I will be spending much of our time in the company
offices over the next few months. We believe that this
committee will allow for more fluid interaction between
management and the board. I'd like to hand over to Glenn now
who probably needs no introduction but whom we are very
fortunate to have acquired for our board. He brings 35 years
of experience in insurance culminating in a position of Vice
Chairman and President of Pacific Life from which he
recently retired. Glenn it's all yours.
Glenn Schafer: Thank you Bill. As non-executive chairman I would like to
make the following statement. First there are no
re-statements. Second there are no material weaknesses from
a Sarbanes Oxley perspective. Third we are confident that
there's much intrinsic value in our book of business. And
fourth - and we'll only pursue strategic options that
achieve this goal.
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
Confirmation # 2906522
Page 3
The board of directors felt that more attention should be
devoted to operational effectiveness given the rapid growth
of the company and the increased complexity of its
operations. As a result the board has strengthened the
senior management team with promotion and hiring of key
individuals including Paul Goldean, Interim CEO of Scottish
RE Group Limited.
Paul has been Executive Vice President and General Counsel
since 2002. Prior to joining the company Paul worked at
Jones, Day, Reavis & Pogue where among other things he acted
as outside counsel to the company. David Howell, CEO of the
International segment. David joined Scottish RE last
November as Deputy CEO and has assumed the role of CEO with
David Huntley's departure.
Mr. Howell was Chief Pricing Officer for Swiss Re's life
re-insurance business in Europe, Asia, and Latin America.
During his tenure he increased Swiss Re's focus on helping
clients manage their capital through re-insurance and
implemented a rigorous pricing process. Cliff Wagner, CEO of
the North American segment, Cliff has been Executive Vice
President and Chief Actuary since January 2002 having
originally joined the company in early 2000.
Prior to joining the company Cliff worked for TransAmerica
Re-insurance Company and the Hartford Insurance Group. Cliff
is the fellow of the Society of Actuaries and a member of
the American Academy of Actuaries. (Andy Amadias), CFO of
the North American segment. (Andy) recently joined Scottish
RE from AIG where he was Vice President and Chief Financial
Officer in Central and Eastern Europe responsible for life
insurance, mutual funds, and banking operations.
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
Confirmation # 2906522
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Prior to that he was with Price, Waterhouse, Coopers in
their Insurance Practice Audit group. (Meredeith Radachek),
Chief Actuary of the North American segment, prior to
joining Scottish RE earlier this year (Meredith) was a
consulting actuary and a partner in (Millim) and USA for 19
years and has also worked as an actuary for Investors Life
Insurance Company in North America and Penn Mutual Life
Insurance Company.
(Meredith) is a fellow of the Society of Actuaries and a
member of the American Academy of Actuaries. (Duncan
Hayward), CFO of the International segment, (Duncan) comes
to Scottish RE from Swiss RE where he held senior finance
positions in both Zurich and London for the life and health
business. Prior to this (Duncan) was Price, Waterhouse,
Cooper's for over 10 years in various audit roles and spent
five years at a UK directorshire as a Director of Group
Financial Reporting.
In addition to the management changes the board has
undertaken a number of operational reviews and has engaged
outside advisors to assist us in completing both the review
of internal operations and in exploring our strategic
options. Now let me introduce Paul Goldean, Interim Chief
Executive Office for Scottish RE Group Limited who will take
us through these initiatives.
Paul Goldean: Thank you Glenn. And before I begin I would like to thank
Bill and Glenn for their efforts over the last few weeks and
look forward to working with them on an ongoing basis. The
loss for the quarter is predominantly the result of
non-recurring, non-cash adjustments and will not prevent
Scottish RE from meeting its future obligations. Dean will
provide greater detail at the conclusion of my remarks.
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
Confirmation # 2906522
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In order to address the concerns over the various
operational issues, the board authorized the following third
party experts to perform a comprehensive operational review.
First Tillinghast is in the process of completing an
actuarial appraisal of the economic value of our business.
Second Tillinghast has also performed a review and validated
the appropriateness and reasonableness of our North American
segment U.S. GAAP reserves.
Third another nationally recognized actuarial firm has
completed a review of our mortality experience and
projection system which we call Summit. In addition this
same firm reviewed our North American segment traditional
business pricing models. Both of these reviews resulted in
positive validation of our processes. At our request Ernst &
Young performed an enhanced review of the second quarter
financials.
And finally another nationally recognized public accounting
firm reviewed the premium accrual process for the
International segment and the process was found to be
satisfactory. As a result of these in depth reviews we are
not aware of any additional adjustments to our financial
statements that would be required. As Dean will discuss
later, we are confident that Scottish RE has sufficient
liquidity and collateral to meet it's near term obligations.
In addition we do not believe our in force business has any
material exposure to re-capture based on ratings triggers.
While there is sufficient liquidity to meet existing needs,
due to the capital intensity of life insurance sustained
growth requires ready access to capital. The board of
directors and senior management are contemplating the
following strategic options.
First the raising of an additional capital cushion, second a
strategic partnership, and finally sale of the company. To
this end the board has hired both Goldman Sachs and Bear
Stearns to advise on the various strategic
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
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options. This is proceeding on an accelerated timeline. At
this point Dean Miller, Chief Financial Officer for Scottish
RE Group Limited will walk you through the second quarter
financial results.
Dean Miller: Thank you Paul. I'd like to begin with a summary of some of
the more significant financial highlights of the quarter.
The net loss available to ordinary shareholders for the
three months ended June 30, 2006 was $123.9 million or a
loss of $2.31 per diluted ordinary share as compared to net
income available to ordinary shareholders of $1.6 million or
3 cents per diluted ordinary share for the prior year
period.
Our net operating loss available to ordinary shareholders
was $130.3 million or a loss of $2.43 per diluted ordinary
share for the three months ended June 30, 2006 as compared
to net operating earnings of $19.7 million or 42 cents per
diluted ordinary share for the prior year period. I would
now like to walk you through the most significant factors
impacting the second quarter.
Scottish RE generates a deferred tax asset principally due
to net operating losses, reserves, and unrealized losses on
investment securities. In accordance with U.S. GAAP we must
conclude whether the future realization of our gross
deferred tax asset is more likely than not to be realized.
Sources of support for the gross deferred tax asset are the
reversal of deferred tax liabilities within the carry
forward period which in the U.S. is 15 years, projected
future taxable income, or tax planning strategies.
However we are unable to use projections of future taxable
income since we do not have a history of taxable income.
Therefore we must rely heavily on tax planning strategies
for support of the gross deferred tax asset. Prior to this
quarter these tax planning strategies have provided ample
justification to support our deferred tax asset.
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
Confirmation # 2906522
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In the second quarter we completed Ballatyne RE a Triple X
securitization. While this transaction eliminated the long
term financing mismatch which has become an increasingly
important issue in the industry, it eliminated a large
cushion that greatly reduced flexibility in our tax planning
strategies and increased pressure on our remaining
strategies.
In addition we have refined our statutory and tax
projections during the second quarter which provided more
insight into the expected future timing and magnitude of our
deferred tax assets and liabilities. The combination of the
increased pressure on our existing tax planning strategies,
the anticipating operating loss for the quarter, and the
prospects of a ratings downgrade led management to conclude
that it was no longer more likely than not that the full
amount of the growth deferred tax assets could be realized.
Accordingly we established a valuation allowance of $112.4
million during the quarter. Nevertheless the existence of
taxable income in the future periods would allow us to
utilize the deferred tax asset in full regardless of the
amount held as part of this valuation allowance. It is
important to note that this assessment does not reflect any
change in our view of the future profitability of our core
focus business.
In addition to this non cast charge to income it should be
noted that future quarterly tax amounts will be dependent
upon the relationship between pre-tax GAAP profits and the
statutory profits and will also be impacted by the size and
timing of certain statutory related deferred tax
liabilities. Accordingly taxes will continue to be a
difficult item to project but our current best estimate is
that we will be a - we will have a tax expense going
forward.
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
Confirmation # 2906522
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Allow me now to move on to the annuity back adjustments or
deferred acquisition costs. In 2001 we wrote several
deferred fixed annuity treaties for which the terms of the
underlying product allow the policy holder to surrend the
policy at the end of five years with no penalty. Our
(Sieden) began writing this business several months prior to
Scottish RE entering into the treaty and has been
experiencing lapses much higher than expected in the last
several months.
Scottish RE has also recently received last experience
similar to the (Sieden). Based on the emerging last
experience and an analysis of the guaranteed crediting rate
to the policyholder compared to the current interest rates
we concluded that an adjustment to our last assumption was
appropriate as required under FAS 97. Accordingly a deferred
acquisition cost adjustment of approximately $13 million was
made reflecting our current best estimate of the ultimate
lapse rate on these treaties.
It is important to note that only one third of our back
balance is related to our annuity business and subject to an
unlocking of assumptions under FAS 97. The remaining back
balance relates to our traditional life business which is
subject to FAS 60 and a write down of that is only possibly
in the event of a loss recognition event.
Another area of significant adjustment relates to our
external retrocession administration and the related
accounting. Following the acquisition and integration of the
ING business we recognized the need to improve the quality
of our underlying data and external retrocession systems. As
a result of this initiative we now have the ability to more
accurately administer our retrocession and identify that
external retrocession premiums have been under approved in
prior years resulting in an adjustment of approximately $13
million this quarter.
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
Confirmation # 2906522
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While this is primarily a catch up adjustment related to
prior years it'll be some impact on future projected
operating profits. In addition to the improvements noted
above, we performed a thorough review of the various
experience refund and reserve calculations related to our
external retrocession programs. Based on this review we
refined certain of our calculations and processes to allow
for a more accurate recording of the next cost of
reinsurance each quarter.
The impact of these changes resulted in an adjustment of
approximately $8 million in the second quarter. Again while
this adjustment relates primarily to prior periods there
will be come impact on operating profits going forward. I
would like now to briefly discuss the impact of changes in
our premium accruals. Consistent with all re-insurers we
received (Seiden) information on a lag of up to three
months.
Premium accruals are typically based on historical premium
trends. Accordingly we must estimate premiums each month as
they're then trued up when actual premiums are received.
During the second quarter we made an $8 million adjustment
in premium accruals in North America resulting from a
revision of estimates related to prior periods. This
adjustment related principally to the ING block and resulted
from the unusual activity in premium levels post acquisition
which made the use of historical trends less effective in
estimating current period accruals.
This adjustment has no impact on the overall amount of
premiums received or to be received compared to our original
expectations from the ING block. The final significant area
of negative impact on the quarter relates to higher than
expected operating costs of approximately $9 million. These
costs relate
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
Confirmation # 2906522
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principally to severance and retirement costs of $5 million
and other non-recurring and operating expenses of
approximately $4 million.
The second quarter results do not include any provisions for
severance costs related to recent resignations. Personally
offsetting these adjustments was the $6.2 million rebate
received from ING as a result of our Ballantyne
resecuritization. The Ballantyne resecuritization completes
the successful financing of the Triple X reserves related to
the ING business for which ING was committed to provide
letters of credit at increasing costs to the duration of the
underlying policies.
The overall result of the above items is the significant
shortfall in earnings compared to our original expectations.
Another item of significance to note regarding the second
quarter includes the pre-funding of the variable forward
contracts we entered into in December of 2005. Cash proceeds
of approximately $110 million were received in late June
with a corresponding entry to prepaid variable share forward
contracts and our shareholders equity.
At the end of September and December of this year the
forward contracts will be settled the share will be issued.
For purposes of the central quarter there was no impact on
our earnings per share, our book value per share relating to
the pre-funding of the forward contracts. Additional cash
proceeds of approximately $40 million will be received
during the third and fourth quarters of 2006.
Because our shares are currently trading below the forward
contract floor price of $22.80, we anticipate the maximum
number of shares under the contract will be issued which
equals approximately 6.6 million shares. The issuance of
these shares is accretive to our fully converted book value
per share.
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
Confirmation # 2906522
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As previously stated earlier this week we expect operating
earnings for the third and fourth quarters to be lower than
our previously announced guidance due to lower than expected
new business volumes, higher than anticipated retrocession
costs, and changes in our income tax expense. While we are
not providing revised guidance for the third and fourth
quarters or for 2007 at this time, there are two additional
factors that should be considered in understanding our
revised operating earnings run rate.
First mortality in the second quarter was in line with
expectations which we expect to continue over the long term.
And second we expect our existing portfolio of reinsured
business to continue to be profitable and produce favorable
results. As we announced earlier this week we are suspending
our quarterly dividend of 5 cents per share on our ordinary
shares. Now Glenn will provide some closing comments.
Glenn Schafer: I want to assure you that we are intensely focused on
resolving the current challenges including the ramifications
of the rating downgrades and working with our clients and
constituents to continue to provide the quality service that
they have come to expect from us.
Scottish RE has a valuable franchise with a solid book of
business, dedicated employees, and a board of directors and
senior management that are focused on pursuing strategic
opportunities that maximize shareholder value. This
concludes our prepared comments. The operator will now open
the call for questions.
Operator: Thank you. Ladies and gentlemen as a reminder to ask a
question please press star then the number one on your
telephone keypad. We will pause for just a
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
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moment to compile the Q&A roster. Your first question comes
from John Nadel with Fox-Pitt Kelton.
John Nadel: Hi good morning everybody. A couple of questions. I guess
you mentioned that Tillinghast is doing an actuarial
appraisal of the economic value of the company. Any early
indications of where they're coming in?
Dean Miller: John not at this time. We're still working on completing
that analysis and are working hard to get that completed
hopefully over the next coming weeks.
John Nadel: So Scottish, you know, notwithstanding Tillinghast work,
does Scottish management have their own estimate as to what
the fair market value is?
Dean Miller: Not at this time. What we've engaged as you know, Goldman
and Bear Stearns to assist us in our strategic alternatives
and part of that process is taking these various data points
such as the appraisal and others and coming to that kind of
conclusion. And we're still in the process of working on
that.
John Nadel: Okay. If I might turn to DNO. Can you give us a sense for,
you know, especially in light of the class actions that have
been filed what your current DNO policy limit is and who are
your providers?
Paul Goldean: John, this is Paul Goldean. You know, we'd have to look that
up. We do have - we believe we have sufficient coverage and
that's about all we can answer on this call at this time.
John Nadel: Can you provide that limit to investors and analysts after
the call?
Paul Goldean: John I don't see why not. Let me - I need to look up the
information first.
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
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John Nadel: Okay. And then I guess, you know, maybe one more question
would just be, you know, if, you know, you talked about I
guess three different potential, you know, resolutions here
raising additional capital I assume to, you know, to
continue to be an ongoing concern a strategic partnership or
a sale. You know, if we think about the first, you know, the
first resolution there raising additional capital, you know,
moving forward as a going concern.
I mean, can you give us a sense for, you know, at the
minimus amount of your in force has recapture, you know,
provisions give due to ratings changes but, you know, these
things are often, you know, negotiated. Can you just give us
a sense for, you know, what in the past week or so your
interaction has been with, you know, your large, you know,
(Seiden) relationships?
I mean do you - are you seeing the signs that your new
business opportunity is, you know, have dried up and are
clients actively discussing with you the opportunity to pull
business back?
Dean Miller: Well John I think so far what we're seeing is - well first
of all we've, you know, have a proactive action plan to go
out and discuss the situation with all of our clients. But
what we're seeing right now is the clients, you know,
waiting for the call today, being patient, and giving us a
chance to get all the information out and meet with them.
So, so far no, you know, no indication of any, you know,
knee jerk reaction or negative reaction.
So one of the things that the capital rates - one of the
things that the board and senior management are looking on
the capital raises, it does help with the rating agencies
and mitigate any continued downward ratings pressure and
also and most importantly with the clients the additional
capital and liquidity and solvency will help mitigate any,
you know, new business issues we'll have with our clients.
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
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John Nadel: And I guess just finally and I'll turn it over to others and
I'll get back in the queue. But have the rating agencies - I
assume they have. Have they given you an indication, you
know, if the resolution is, you know, number one to go, you
know, go raise capital to be a going concern? I mean is -
have they given you a sense for how much additional capital
is necessary? And, you know, what forms it might take?
Dean Miller: No we haven't had those level discussions with the rating
agencies at this point. Most of our discussions were focused
around the Q2 results, what happened, our liquidity and
collateral, capital positions as it is today and projected,
you know, through the near term, and what our strategic
alternatives were. But we haven't got into any feedback on,
you know, their reaction to, you know how those strategic
alternatives might play out.
John Nadel: Okay. Thanks very much.
Operator: Your next question comes from Saul Martinez with Bear
Stearns.
Saul Martinez: Hi good morning. A tough question for me to ask but I need -
this is just sort of a big picture question. You know, given
that you have had numerous operational accounting
communication missteps in the last couple of years that have
quite frankly destroyed a lot of shareholder value. And that
many of you are still - have been with the company now for a
while. Why should investors trust you to get through what's
frankly a pretty challenging situation here?
Second question just a follow on John Nadel's question that
just - you may have addressed it. But if you can just give
us a timeframe on the Tillinghast
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
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economic value and reserve studies? When we should expect
something to be released there?
Dean Miller: Well Saul let me address the second one quickly. With
respect to timing, you know, it's our expectation we're
pushing hard to get that done in the next one to two weeks.
However with respect to the distribution of the results of
that, that is a report for management and the board to use
in evaluating strategic alternatives. And I would not at
this stage think that that would be for public disclosure.
It may be on limited basis for certain parties but that is
at the consent and release of Tillinghast.
Saul Martinez: Is there a risk that Tillinghast, in your view, that
Tillinghast makes you up your reserves there by triggering a
financial distress scenario?
Dean Miller: No I don't see that. I mean - what they're doing is a
traditional appraisal value of the end force and then net
worth under, you know, best estimate assumptions. But I
don't see any indication of that. And the review is I mean
substantially complete. We're in the final stages of the
company just verifying the final numbers. And there's been,
you know, no discussion or indication of anything like that.
Paul Goldean: And Saul this is Paul Goldean. And I think I'll address your
first question. I think there's three key areas we would
focus on to restore shareholder trust in the company. First
one is communicate more effectively and clearly about what
it is we're doing and avoid going after large acquisitions.
The second is continue to focus on our operational
effectiveness.
And I think you see a significant amount of that over this
quarter. And last and most importantly is to evaluate and
execute one of our strategic initiatives that
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
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we've identified earlier in the call. And those are the
three board categories that we look at.
Saul Martinez: Okay. Thanks a lot good luck with that.
Paul Goldean: Also one last thing Saul, I was looking through my notes.
We've also, you know, employed several new employees in the
company with extensive experience. I think Glenn spoke about
them in his opening remarks. And we look at them as key
people acquisitions to the company allow us to evaluate our
business and our prospects much more effectively.
Saul Martinez: Okay thanks a lot.
Operator: Your next question comes from Christen Binesen with
Merrill Lynch.
Christen Binesen: Good afternoon gentlemen. This is Christen Binesen with
Merrill Lynch in London. I wondered if you could help me
with a couple of things. The first thing is whether you as a
management team believe that you do need to get upgraded
again to be an ongoing business. And second, under these
Stingray facility that you have you have the optionality to
put a funding agreement which would improve liquidity I
understand. I wondered if you could tell me what
consideration you've given to that potential option please.
Thank you.
Dean Miller: Well it's the first one we believe that we do need the
upgrade. And as (unintelligible).
Christen Binesen: Sorry I'm losing you.
Dean Miller: Well there's someone's Blackberry is near their phone. It's
not anyone in our room but I guess the second one is
regarding Stingray. We feel we can draw
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
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on Stingray any time we need to that's the reason it was set
up. It was designed for, you know, emergency situations or
situations where you needed to draw the amount of the cash
that's identified in that facility.
Christen Binesen: No I completely understand that. I guess what I was looking
for and that I'm sure is what everybody understands. But I
guess what I was trying to look for is to which extent do
you think that this is a situation like it was set up for?
Dean Miller: Well what we have done is looked at all of our known
operating sources and uses of cash flow. And in addition to
that we have all of our available sources of liquidity and
collateral such as Stingray our credit facility. And based
on that complete analysis is where we come to the conclusion
that we have sufficient resources to meet our near term
liquidity and collateral needs.
So, you know, you can't single out one facility. You have to
look at the whole package of available sources and
liquidity. And that Stingray's just one of them. And as Paul
mentioned, it is there for our use when we need it and it's
a committed 10 year facility.
Christen Binesen: Okay thank you very much.
Operator: Your next question comes from Tom Van Buskirk with McMahan
Securities.
Tom Van Buskirk: Hi. Is there a way you can break apart a little bit the two
pieces of the adjustments to premium accruals? You said
there was going to be both the catch up and a go forward
affect. Is there a way to kind of - to kind of break that
out to get a sense of what the affect will be going forward?
Dean Miller: Yes on the premium accruals there's no go forward affect on
that. The premium accrual is the $8 million adjustment this
quarter was related to prior
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
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periods but that's, you know, the balance at the end of Q2
is fairly stated on the premium accruals. What I was
referring to was the potential impact on our operating
profits going forward with respect to the external
retrocession program. With that the - we're estimating about
$4 to $5 million of additional net reinsurance costs per
quarter going forward.
Tom Van Buskirk: Okay. And then just as a follow up given everything that's
happened and everything that's still in flock - in flux as
far as reviewing - as far as Tillinghast review, etc., is
there a way that you can number one discuss available
liquidity at the holding company and any restrictions on
that? And relate that to the upcoming flex for the
convertible notes and anything that might make the liquidity
available to fund that less of a certainty? And then finally
are you considering alternatives to funding the foot on
that?
Dean Miller: Well we have looked at alternatives to funding the foot and
have at this time concluded that, you know, there aren't
adequate or replacement facilities or options for that. So
we are planning for the cash put in December. With respect
to your first question, you know, to going back to what I
said before, we have all of our available sources and uses
of cash.
One of the key uses of liquidity of course is the $115
million convertible to that, you know most likely will be
put in December. And again don't want to go into all the
detailed sources and uses but again we've got sufficient
liquidity available to us through either cash at the holding
company, cash at other legal entities, operating cash flow
we know will be generated and available facilities to meet
that obligation with no concern.
And also with respect to those credit facilities and other
sources of liquidity, we've looked at the implications of
any ratings downgrades, other triggering events or
restrictions on getting access to those liquidity facilities
and feel
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
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comfortable that there are none and those facilities are
there for our use when we need them.
Tom Van Buskirk: Okay and then just finally, can you give us an update on
holding company cash number? And finally on - because of the
changes in your tax situation going forward with the
valuation allowance, does that change any intercompany
movements through tax sharing or what not that would help
you in terms of holding company liquidity?
Dean Miller: With respect to the holding company liquidity, we don't
disclose the amount but I can say that we do hold at least
one year's of dividend and interest in cash at the holding
company for the rating agencies. With respect to your second
question, there's no impact on any of the intercompany tax
sharing or cash tax amounts related to the, you know,
assessment that we need an evaluation allowance. That's a
separate analysis that's, you know, done on a GAAP basis.
Tom Van Buskirk: Okay. And I'm sorry I just want to jump in with one more and
then I'll get back in queue. Is the decision to suspend the
common dividend, was that driven by liquidity or regulatory
or rating agency concerns? What was the primary motivation
for that?
Dean Miller: Yes it was not a liquidity consideration. It was more to
demonstrate to the rating agencies in particular that the
board and management are taking things seriously and looking
at things differently but not a liquidity concern.
Tom Van Buskirk: Thanks very much.
Operator: Your next question comes from Andrew Kligerman with UBS.
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
Confirmation # 2906522
Page 20
Andrew Kligerman: Yes good morning. A few questions. First let me please start
with the valuation of the company. You brought in
Tillinghast and E&Y. First with Tillinghast I understand
that a year or two ago they represented (Cypress) in its
substantial investment in the company.
Why should I be comfortable that you're using a firm that's
already made a decision? Are you basically getting an answer
that you already know? So why should I be comfortable with
your bringing them on board?
And then with respect to E&Y assessing your GAAP accounting
and so forth, again why should we be comfortable with them
given the issues that we're now seeing? And I have some
follow ups.
Dean Miller: Well Andrew with respect to Tillinghast, I mean first of all
the work that they did was not on behalf of the company. It
was behalf on a third party so this, you know...
Andrew Kligerman: Right but obviously the third party made the decision to
make a substantial investment post that so it just seems
that this might be an answer that you know you're getting.
Dean Miller: Well I mean I guess what I would say is, you know,
Tillinghast is a reputable firm and their name speaks for
itself and, you know, they will be and have gone through
their internal review, peer review process and feel
comfortable with the results.
And ultimately it's for those who get access to the report
to read it and look at the assumptions and make their own
conclusions. It's very transparent as to what the
assumptions are the sensitivities and the methodologies. So
I hear
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
Confirmation # 2906522
Page 21
what you're saying but it's a standard appraisal report
that, you know, is very transparent. I'm sorry go ahead
Andrew.
Andrew Kligerman: And then E&Y?
Dean Miller: Yes with respect to E&Y, I mean let me be clear on the scope
of their work. All we did was knowing the sensitivity of the
quarter especially if you're looking forward to potential
capital rates or sale, all we really did there is make sure
we communicated very up front and very transparently with
E&Y about the issues.
And they made their own risk assessment but also we
encouraged them to come in and really follow on our
footsteps and make sure that what we did was both reasonable
and they agreed. At this stage and so they just - it was a
quarterly review under the professional standards. But given
the nature of the adjustments and the magnitude of the
adjustments, they and us, you know, both agreed that, you
know, extra level of scrutiny in the review was required.
And they performed a very thorough review. But, you know,
the only thing - I wouldn't attach any more to it than a
quarterly review with a little more robustness which is
appropriate given the circumstances of the situation we're
in.
Andrew Kligerman: Okay fair point on the quarter it seems. But then how did
they miss this tax issue over the past two, three years?
Where were they?
Dean Miller: Well it's not - well they're very involved in that issue.
It's not an issue of missing the tax issue. You know, as I
mentioned in my prepared remarks, you know, our tax planning
strategies we had various tax planning strategies of which
management, you know, felt very comfortable with our ability
to
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
Confirmation # 2906522
Page 22
execute those strategies. And we had, you know, sufficient
amounts of, you know, supportable future taxable income that
we were very comfortable.
And given the nature and the subjectivity of an item like a
valuation allowance that was heavily scrutinized by E&Y and
has been, you know, each period in which we issue the
financials. What's - so but what's happened is in the second
quarter the facts and circumstances of the situation around
how you assess the deferred tax asset realization have
changed.
Andrew Kligerman: Meaning Ballantyne.
Dean Miller: Well that's part of it but it's also - I mean you have to
look at what FAS 109 requires you to do is look at all of
the positive and negative evidence to come to the conclusion
that your tax planning strategies are both prudent and
feasible okay. So you have to take in all the evidence.
So part of the evidence that we're looking at are things
like I mentioned before which is, you know, the pressure of
the rating agencies, the impact of potential downgrade, or,
you know, the ability - you have to look at the ability to,
you know, to execute certain transactions. And when you have
more restrictions or limited flexibility you have to take a
different view on those tax planning strategies.
What Ballantyne did was we had various tax planning
strategies that we felt very comfortable with. We also had
other blocks of business that, you know, we could apply tax
planning strategies to that gave us some extra cushion.
Ballantyne, all Ballantyne did was it put profitable
business into a securitized vehicle, you know, that limited
some flexibility in what you could do with that block of
business.
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
Confirmation # 2906522
Page 23
So in other words it kind of took some of the cushion away
and then put more pressure on the existing tax planning
strategies that we were relying on so that combined with
like I said these other external pressures that evolved in
the second quarter led us to the conclusion that it was more
- not more likely than not, a double negative there.
But the other issue is the liquidity of the company, as I
mentioned, we have more refined projections of our GAAP and
statutory projections which, you know, give you a better
view of the magnitude and the timing of these deferred tax
assets. One of the things we haven't talked about is the
first step in realizing the gross deferred tax asset is the
offset that you get in reversing deferred tax liabilities.
So to the extent you take - refine your view of the
magnitude and the timing of those liabilities it has an
impact on your assessment. But it's clearly fact and
circumstances new to us in our assessment of the - of our
tax planning strategies for the quarter.
Andrew Kligerman: I understand how you newly assessed it. I'm a little
confused on why - I'd rather go offline on it. But I find it
somewhat confusing and leading to it. Why would, you know,
if indeed circumstances have changed very naturally and
again I need to follow up offline because it's probably too
detailed.
Why then would the CEO, the Chairman and CEO depart, the CEO
of North America and the CEO of International depart so
abruptly? And what exactly happened there? I mean, you know,
why did they leave so abruptly? Did they do something wrong?
Glenn Schafer: No there were - this is Glenn Schafer. No they did not do
anything wrong I guess other than maybe operate effectively.
And this is something that the
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
Confirmation # 2906522
Page 24
board's been working on for quite some time. And Scott and
the people involved felt that under the circumstances with
the rating agency pressures that it was best that they
resign for the company and the company have an opportunity
to get a fresh start. And it would help significantly with
the rating agencies. This isn't something that happened over
night. This is something that the board's been looking at
for quite some time.
Andrew Kligerman: How long have you been considering it Glenn?
Glenn Schafer: I don't know. You know, I haven't been on the board that
long. I'm just saying it's not something that happened over
night. It's been under consideration for a while and was one
of the reasons they sought to bring me aboard to, you know,
to bring some additional experience in the insurance and
reinsurance area.
Andrew Kligerman: And you came on board when Glenn?
Glenn Schafer: Pardon?
Andrew Kligerman: When did you come on board?
Glenn Schafer: As non-exec Chair in May.
Andrew Kligerman: In May okay. Because okay - and so no Sarbanes Oxley issues
here then even though you were concerned for a while. We saw
1Q results back in May, you know, no Sarbanes Oxley issues?
Dean Miller: That's correct. And just some recollection of Q1. You know,
the Q1 results principally really in International were
things like mortality, morbidity,
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
Confirmation # 2906522
Page 25
(Seiden) reporting, and, you know, not control related
issues that caused the Q1...
Andrew Kligerman: Right but the tax issues at the time you weren't aware of
any tax issues then or the way you'd have to reevaluate that
asset?
Dean Miller: Absolutely not.
Andrew Kligerman: Okay. And then last thing the mortality you said it was in
line. Historically the management team had guided analysts
to a 73 to 75% benefits ratio with respect to the GAAP
benefits divided by the GAAP premium. In the first quarter
that ratio kind of spiked up to 81 and I was informed at the
time that it had something to do with retrocession and size
of policy and that it really was in line in the first
quarter.
This is the North American mortality. This quarter the ratio
has gone up again to 83%. I just want to make sure, you
know, why that original guidance was 73 to 75 and now in the
first half of the year we're seeing kind of a bump up in
mortality. And I want to make sure that I should be
comfortable with that.
Dean Miller: Yes the 73 to 75 I think you're referring to second quarter
last year I think is where...
Andrew Kligerman: But the whole year it came in at about 75 for the full year.
Dean Miller: Yes the - one of the things you need to do for this quarter
in particular is reflect some of these non-recurring
adjustments that distort the ratios. So if I - if you look
at kind of a normalized basis and, you know, the premium
accruals that we talked about and some of the external
retrocession comes to the premium.
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
Confirmation # 2906522
Page 26
So what you've done is you've adjusted premiums downward by,
you know, just north of $20 million. So long story short, if
you adjust for those items to get a current period, you get
a benefit ratio in North America traditional of just about
79% which is very consistent with what it was in Q1.
Andrew Kligerman: Great.
Dean Miller: So - and - so we're consistent quarter over quarter and in
line with, you know, our internal projections. So can't
respond to the 73 to 75 but I feel comfortable with the, you
know, quarter over quarter spot on and very spot on with
respect to our projections for the quarter on mortality.
Andrew Kligerman: Great. Thanks very much.
Operator: Your next question comes from Eric Berg with Lehman
Brothers.
Eric Berg: Okay good morning. I've listened to everything that's been
said. I've tried to understand everything's that's been said
and I think I understand sort of what happened. But it's the
whys that continue to baffle me in the following sense.
Scottish is not new to securitization. You've been doing it
for a while.
You have the world's legal experts and tax experts who've
been involved with the securitization forever. Presumably
they know that securitization produce income inside trusts
against which deferred tax assets cannot be used if that is
the idea here. You're working on Ballantyne for months. How
does Ballantyne suddenly jump up and surprise the world's
leading tax experts? At least that's my impression of what
happened here, how does that happen if my impression is
right?
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
Confirmation # 2906522
Page 27
Dean Miller: Well first of all as I was trying to mention before the
Ballantyne in itself was not related to a tax planning
strategy that was supporting to the first tax asset
previously. What we have is existing tax planning strategies
at year end, at the end of the first quarter, and again at
the end of the - well at the end of the first quarter that
fully supported the growth deferred tax asset.
And then what Ballantyne did was just remove some of the
excess cushion that made the assessment of those other tax
paying strategies, you know, without doubt. So all
Ballantyne did is not like I said, not by itself did it
create the valuation allowance. It just put some extra
pressure on the other existing tax planning strategies.
The real thing that changed was the other external and
environmental factors that occurred during the second
quarter that put pressure on those tax planning strategies
and also like I said the refinement and the projections of
the magnitude and the timing of some of the reversing
liabilities. So and what might be helpful - this is
complicated but it might be helpful if I just give a little
bit of background on 109, the FAS 109 which is the guidance
under U.S. GAAP for tax.
You have to apply tax planning strategies. It's no elective.
You have to do it. And as I briefly mentioned before, the
strategy must be both prudent and feasible. So what the
rules say is that if management probably would not take
action because it would not be in the company's best
interest, it would not be prudent and that if management
does not have the ability to carry out an action it would
not be feasible.
So that's the rule. So we have to determine that it's both
prudent and feasible. So when tax planning strategies, you
know, for example would involved recapturing business from
one jurisdiction to another to create taxable income
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
Confirmation # 2906522
Page 28
and there's, you know, knock on impact of executing that
transaction you have to look at the environment that we're
operating in in this quarter given the ratings, the share
pressure, you know, less financial flexibility.
And we as management have to make a determination is it in
the company's best interest to execute that tax planning
strategy? And even so do we have the ability to carry it
out? And again you look at that and under FAS 109 under the
more likely than not you have to be greater than 50% assured
that you can do it both prudent and feasible. And so that's
rally what's driving this is looking at is it in the best
interest and can we execute these in the environment we're
in. And that's the stuff that we came to.
Eric Berg: Okay. I have two more questions here. Your elaboration was
very helpful. My second question is, what was the change you
considered in the external environment, what specifically
happened during the quarter that led you to conclude that
certain actions that you might have taken to get this tax
asset - to use this tax asset were no longer whatever the
words are practical and prudent? What happened during the
quarter that undermined your ability to act in a way that
would have allowed you to get at this asset?
Dean Miller: Yes I mean the difficulty Eric is we have multiple tax
planning strategies each individually very complicated and
involved. It involves various, you know, actions on the
company. So it's difficult to answer that question without
going into each tax planning strategy individually which is
just not appropriate on this call today.
So it's a number of factors applied to a number of tax
planning strategies and I think we just have - I think we're
just going to have to, you know, leave it at that at this
stage so we can - we'll do our best offline for those that
would like an education of one of mine. But it is
complicated.
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
Confirmation # 2906522
Page 29
Eric Berg: Okay. Last question so as to allow - so as to move on and
allow others to participate here. I think you said during
the - one of the members of the management team said during
their prepared remarks that there really was no change in
the expected profit on the business. Yet the news release
does reference revised statutory and tax projections. So my
question is, is the business that is on the books as you
look forward less profitable - going to be less profitable
than you thought? Have you revised your projections for
profit?
Dean Miller: Well with that comment regarding revised projections with
respect to tax, what - the impact is from a statutory basis
there's a couple of things that impact tax. It's where the
profits emerge first of all in which legal jurisdiction. So
that's one factor is the total amount of profits can be the
same but if your projections indicate that you're going to
have more or less in one tax jurisdiction versus another
that has an impact on your analysis for tax.
Secondly the projections from a statutory again are, you
know, one of the key launches are projections of tax
reserves. And those are actuarially modeled and the timing
of those tax reserves is important because as I think I
mentioned briefly you can only take credit for reversing
deferred tax liabilities to the extent that they reverse
within the carry forward period.
So again if you change your view of the tax reserves in the
timing or magnitude of those that has an impact. But that
has no impact on the profitability of the firm.
Eric Berg: All right thank you very much. It was - it to be quite
complex but your answers are helpful. Thank you.
Dean Miller: Thanks Eric.
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
Confirmation # 2906522
Page 30
Operator: Your next question comes from Jeff Schuman with KBW.
Jeff Schuman: Good morning. First of all I was wondering if you could give
us some help in understanding what earnings might have
looked like this quarter X all the items. And I think there
are a few impediments to our doing ourself. I think first of
all some of the items you mentioned is not clear if they're
before or after tax. And it's not I guess clear to us from
where we sit how maybe the tax recognition would have been
impacted in the period. But can you give us any sense of
kind of what the core earnings looked like in the quarter?
Dean Miller: Yes it's difficult to answer. I mean - hadn't looked at it
that way Jeff. But it would have been slightly below because
of the increased retrocession costs. That would be the one
thing and then the taxes but I haven't tried to go through
and back out all the adjustments and try to get to a, you
know, at the end of the day it's - if you back everything
out you could back the plan. So I just don't have a good
answer for you on that one.
Jeff Schuman: Okay. Next issue on growth, I mean we've talked about the
fact that there's limited ability for clients to recapture.
I think we can all make some assumptions about the
likelihood that you'll write a lot of new treaties in the
near term. But I'm wondering about another piece. What
happens to open treaties where clients may have some
discretion to not submit new business? What, you know, if
you don't write new treaties for a while, kind of what is
the revenue growth trajectory look like from here?
Dean Miller: Yes we've got various types of business on our books. First
of all you have in force treaties with no new business. And
those, you know, will only be affected to the extent there's
a recapture provision on the ratings trigger which we said
is the minimal. Secondly we have treaties on the books that
are open
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
Confirmation # 2906522
Page 31
to new business. And there are termination provisions with
notice anywhere from 30 to 90 days in which the client can,
you know, terminate for new business.
When that happens after the notice period all of the in
force business has been written up to the date of the new
business termination, stays on the books, and will continue
to do so with the renewal premiums and so forth, you know,
through the duration of the policies. And again they can't
recapture that piece unless there's a recapture provision.
And then we have I guess the third piece if you will is
new/new business which are treaties we haven't written yet.
And we have various quotes that are in the queue and then we
have, you know, going forward business that we'll begin to
quote. So, you know, it's difficult to predict.
As I mentioned earlier feedback from the clients to date has
been positive, supportive, and we'll just continue to
address the client issues as aggressively and as hard as we
can to make sure they're comfortable with our position. And
that's also one of the reasons why resolving or getting more
clarity on the strategic alternatives as soon as possible is
important.
Jeff Schuman: Have any clients exercised the right to terminate open
treaties at this point?
Dean Miller: None that I'm aware of and I'm looking around at some of my
colleagues. One small one is the word I'm getting.
Jeff Schuman: Okay. And on strategic options, I'm not clear. Do you
anticipate raising capital during the kind of strategic
review period? Or is the capital cushion something that
would come into existence just if you did not pursue the
other options?
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
Confirmation # 2906522
Page 32
Dean Miller: I think what we'll do is we're going to embark on both work
streams simultaneously. And we're working through with our
bankers right now what that process will be. Again we're
focused very much on the quarter right now. And next week is
when we'll sit with the bankers and go through a time table
for both of those work streams. But we'll start them both
concurrently. And we will adjust the timetable for each
accordingly.
Jeff Schuman: And what does option number two mean, the strategic
partnership? Does that mean that someone takes an ownership
interest but its less than100%? Or what does that mean?
Dean Miller: It's any variation of anything other than just 100%
direct sale?
Jeff Schuman: Okay. And then lastly, you know, back to the outside
reviews. You said that the appraisal review might be
something that's more internal for management. I'm wondering
about public release of the reserve reviews and the pricing
reviews. As it sits right now I think it's a little bit
uncomfortable. I mean these reports are very involved.
They're typically written with, you know, careful
conclusions. They describe scope, assumptions, limitations,
methodologies. And, you know, I think investors are going to
rely on any way on conclusions that would be I think best to
see those conclusions kind of in their entire supported
basis. Is there any ability to actually release some of
these reports?
Dean Miller: The professional firms, you know, the scope of the
engagement is such that it's not for public disclosure.
And...
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
Confirmation # 2906522
Page 33
Jeff Schuman: But you've already disclosed, you know, very important
conclusions which is the reserves are great and the pricings
great.
Dean Miller: Yes. What is - the scope is it's a report intended for
management to assist management and the board in coming to
conclusions about the company that we can then share, you
know, with you. But I do not think that any of these reports
except on very selective occasions will be able to be shared
with third parties. So again it's assisting the board and
management in getting comfortable with the operations so
that we can then relay that comfort externally.
Jeff Schuman: Okay. I just...
Dean Miller: I hear what you're saying Jeff.
Jeff Schuman: It's awkward for us to rely on the conclusions without the
benefit of the further understanding that you have when you
rely on those conclusions. Okay thank you.
Operator: Your next question comes from David Havens with UBS.
David Havens: Yes good morning guys. I just had two questions for you.
First one is a quick one. Has Stingray been tapped at this
point in (Parter) and (Holt)?
Dean Miller: We have utilized Stingray for about $15 million and that was
drawn on I believe last fourth quarter? Yes or earlier in
the year for letters of credit to support an intragroup
reinsurance treaty.
David Havens: Okay. Okay and that's $15 million.
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
Confirmation # 2906522
Page 34
Dean Miller: I'm sorry - 50, 5-0.
David Havens: Oh 5-0 and that was in the first quarter.
Dean Miller: First or second early second in that time period.
David Havens: All right. And the other question, you know, I understand
you're probably not interested in getting into specifics in
this venue or at this time. But could you characterize for
us the initial intensity of outside interests in executing
either a partnership or out right sale of the company?
Dean Miller: Yes I don't think we can comment on that at this stage.
David Havens: Not in general terms.
Dean Miller: No not even in general terms. It's too early.
David Havens: Okay. Thank you.
Operator: Your next question comes from Scott Frost with HSBC.
Scott Frost: Hello this probably seems like a silly question. But are you
saying that if you're unable to either raise capital, find a
strategic partner, or sell the company you won't be able to
continue as a going concern?
Dean Miller: No we can.
Scott Frost: You cannot.
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
Confirmation # 2906522
Page 35
Dean Miller: No we will be able to operate as a going concern even
without a capital raise or a sale or strategic partner. And
we will - what we'll have to do of course is reevaluate, you
know, our operations in that scenario and adjust
accordingly. But the board and management, you know, have
concluded and that's a big part of the discussion we had at
the rating agency about the ability to continue and to stand
alone and not be dependents upon the successful completion
of either strategic alternative.
Scott Frost: Okay. Are there - also as far as rating triggers, are there
any other rating triggers on deposit type contracts or
collateral finance facilities? And are you - with respect to
your credit facility, I guess the $200 million facility, has
anything been drawn on that? And are you in compliance with
all the reps and warranties associated with that facility?
Dean Miller: Yes on rating triggers and additional collateral we do have
some funding agreements which contain some rating triggers
in which we're in discussion with the banks currently about
what's the best way to proceed. We can unwind those without
a significant cost. But we're trying to work with the best
situation not significant additional collateral.
Scott Frost: Do you an amount that are subject to those triggers? Like
you list those on your balance sheet at about what, $4
billion how much you're subject to ratings triggers now?
Dean Miller: No the funding agreements are $600 million and they're fully
collateralized. These are fully collateralized funding
agreements and $600 million. So the - any - if any
additional collateral is required by the counter parties it
will not be significant and it's fully factored into our
liquidity and collateral analysis that we've gone through to
come to our conclusions.
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
Confirmation # 2906522
Page 36
Secondly with respect to the credit facility, we are not in
breach of any of the covenants on any of our credit
facilities. And the only - and we have a $200 million credit
facility and then a separate - same exact terms but in
Dublin for $30 million so a total of $230 million that could
be used for both borrowing and letters of credit. And the
only outstandings on those facilities are a portion for
letters of credit.
Scott Frost: How much?
Dean Miller: Its $115 I believe yes and I apologize. I'm not sure if
that's a number or that's a current number as of today or
the actual June 30. But it will be fully disclosed in the
10Q when it's filed.
Scott Frost: All right. Thank you.
Operator: Your next question comes from Erle Savage with Piper
Jaffray.
Erle Savage: Hi there. I was wondering if you could address your
intention with regard to the dividend on the non cumulative
preferred? And also where the holders of those shares end up
with the strategic option?
Paul Goldean: Yes we're intended to honor that on dividend. Our dividend -
the ordinary share dividend is the one we canceled. And we
have no intent at this time to cancel or not pay the other
dividends on the other two products that are out there.
Operator: Your next question comes from Richard Sbaschnig with
Oppenheimer.
Richard Sbaschnig: Morning thanks for taking my call. I guess the first
question I had is just, you know, with regard to these
strategic options. Do you have any kind of - I
SCOTTISH RE
Moderator: Paul Goldean
08-04-06/7:30 am CT
Confirmation # 2906522
Page 37
now you can't speak necessarily to any kind of specific time
limit. But do you have maybe a upper limit in terms of the
timeframe for those options?
Dean Miller: You know it's on an accelerated timeframe. As we said before
it's in the best interest of the company and the
shareholders and our clients to do this as quickly as
possible. But, you know, outside six months is a reasonable
outside number. But it's difficult - these prophesies are
difficult to predict but all we can guarantee you is we're
going to pursue them as aggressively and as focused as we
can immediately. And it's probably - this is a good time to
probably talk about the 10Q.
We will - the 10Q originally - the original due date is
August 9. We will file the 12B25 extension which gives you
the extra five days and the only reason we're doing that is
given the, you know, the issues with the rating agencies and
the extra things around the corner we want to make sure
there's ample time for the board and our external advisors
to review the document before it's filed. But we are
confident it will be filed no later than August 14.
Richard Sbaschnig: Now in terms of your strategic options, I mean one I didn't
see there and I guess you're going to really try to avoid
this. But what about just simply, you know, putting the
company in run off or dramatically shrinking the book and
pulling capital out of the in force and running it like
that? I guess why is that not on the table at all seemingly?
Dean Miller: Well I think you're looking at that kind of a variation of
the third scenario we talked about before which is if we
don't do the capital and we don't do a sale or partnership
it's a reassessment of our operating model. And we're not
focused on that right now because we're focused on
alternatives one and two. In fact we believe they're more
viable and we'll provide better results for the shareholder.
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Richard Sbaschnig: The - in terms of - I guess you really can't speak to this
right now. But just - I guess if there was any sort of
preference that you had with regard to those options.
Dean Miller: As I say I mean at this stage again we're in the process of
working with our bankers to get the process going to work on
both streams concurrently. You know, what the board and
management will have to do is evaluate each option as they
come and there's variables as you're well aware in each. And
it's difficult to put on over the other until you get into
the process and see what's there.
Richard Sbaschnig: Sure. The - also, you know, just changing directions a
little bit. I mean I guess you've had Tillinghast and other
folks kind of reviewing the traditional business and making
sure reserves and pricing that they're okay. But what about
the - I guess are they taking a look at the financial
solutions business as well? And just what do you think - is
anybody taking a look at the pricing and assumptions there
as well?
Dean Miller: Yes what we've done is - well as part of the appraisal of
course Tillinghast has evaluated each of the annuity and the
financial solutions especially in the annuity business.
They've looked at each of the annuity treaties, all the
assumptions, and have included, you know their assumptions
and estimates on those treaties in their appraisal.
Secondly we as a company of course have looked at all of the
treaties and we do, you know, every quarter. And then, you
know, with the issue on the one treaty on the last race, you
know, there was an extra scrutiny looking for similar terms
and treaties any and why likewise has looked at them. The
other thing that we mentioned briefly as one of the other
validation procedures we
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did was Tillinghast also looked at all of our U.S. GAAP
reserves which includes all the financial solutions. So that
was included in that reserve review that they did in
applying on it.
Richard Sbaschnig: But in terms of the - I have a question but what more I'm
trying to get at is kind of it calls in the question the
assumptions you're maybe making on that business. I'm just
curious why on that new treaty that you did have charges on.
Why wasn't that amortized over the surrender charge period?
Dean Miller: Well what you do is you're making your last assumptions by
year over the duration of the business based on the terms of
the treaty. So...
Richard Sbaschnig: But, you know I mean, it ran - I mean they were out of the
surrender charge period. I mean why it is a surprise that
all of a sudden there's a spike in lapses once the surrender
charge period ends. That's what I don't understand.
Dean Miller: Well what you have is the policyholder, you know, has this
look period where they can surrender it no penalty. But the
contract stays in force and continues. So what the
assumption you have to make on this treaty is there needs to
be a shock lapse assumption for that post five year and then
you go back to a normal lapse assumption for subsequent
years. And then there's another period down the road in
several years in which they can have another no penalty
withdrawal period. So...
Richard Sbaschnig: Okay I got you. So there was...
Dean Miller: We're amortizing it over the life. It's just that there's
this one little look period where they can get out. And if
they don't they're back in so.
Richard Sbaschnig: Okay yes. Actually that makes a lot of sense. Thanks a lot.
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Dean Miller: Thanks Rich.
Operator: Your next question comes from John Lepore with Basso
Capital.
John Lepore: Hi. I think most of my questions have been answered
regarding liquidity. But just to clarify, on - the Stingray
facility, how much is available first of all? And I know you
said you drew on $50 million but how much is available? And
secondly could you just talk a little bit about the uses of
fund over the near term other than the obviously be put
obligation on the convertibles because you went through the
sources pretty well except I had those two questions so.
Dean Miller: The Stingray the outstanding usage on that currently is $272
that's $2-7-2 million that's available sorry. And then
secondly on the uses you're exactly right the $115 million
on the converts is the primary one. Other than that it's
normal dividends and interest and just normal operating cash
flow which are, you know, none of which are individually
significant an amount in the near term so that's the big
one.
John Lepore: Okay. So, you know, it's left and like I guess over the next
let's say by year end how much is the, you know, normal
operating cash flow and dividends do you anticipate using?
Dean Miller: Well I don't think we want to give out a level of detail on
that. But it's - the big ticket item is the $115 and the
other stuff is normal cash flow.
John Lepore: Okay. And the last question just a - can - on the sale
forward sales proceeds, can that be earmarked for the
convertibles? And secondly can the credit facilities be
drawn under to pay for the subordinated the convertibles or
is
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there restriction on paying off subordinated debt at all for
drawing down credit facilities?
Dean Miller: Yes the forward - the $110 million that's just cash for our
use any way we want to likewise the additional $40 million
that we'll get in Q3 and Q4 so again that's just general
cash. With respect to the line and the additional
availability on the line and whether that can be used for
that my understanding is that it cannot be because of the
inability - I think it's the upward dividend restrictions.
Because the converts are at the top holding company and the
money would come in at the - at a lower holding company.
John Lepore: Okay.
Dean Miller: So we're funding that through other existing sources.
John Lepore: Okay great. Thank you.
Operator: Your next question comes from Asif Khan with Morgan Stanley.
Asif Khan: Yes hi just a couple of quick questions regarding the
forward arrangements. In the case of the (unintelligible) is
there any provisions in there that could limit the amount of
money you get in February 2007?
Dean Miller: No.
Asif Khan: And just help me understand how is the forward variable
share agreement? How are they accretive at 6.6 million
shares to future capital base?
Dean Miller: Well because we're issuing the shares at the floor of the
2280 so if you look at - I don't know if you've had the
chance on the financial data supplement yet
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that we'll put. In the financial data supplement that got
posted to our web site, on page seven I believe is a
reconciliation of the book value per share. And if you look
at - we show several type of book value per share
calculations but one being the fully converted.
So when you bring in the assumed proceeds of the total
amount of the forward of $150 million and then bring in the
full amount of the shares at 6.6 million it's accretive to
that book value per share calculation because of the stock
price to the floor.
Asif Khan: And I may have missed this but off the $150 did you say that
you've already received $110?
Dean Miller: Yes 110 in last couple of days of June. And you'll see that
as a separate line item in our shareholder's equity
statement on the balance sheet.
Asif Khan: Got it. And the remaining 40 is to come in September and
December.
Dean Miller: Exactly.
Asif Khan: Thank you.
Operator: Your next question comes from John Hall with
Wachovia Securities.
John Hall: Yes just a few quick questions. We'll run through pretty
fast. Dean, I was wondering if you could outline what stat
capital is by entity, U.S. and foreign?
Dean Miller: Yes we're - that would be approximately $1 billion. And that
would include all of the insurance companies that their
statutory capital and the non insurance companies at their
GAAP capital so just to be clear. If you look at
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the footnote in our 10K, the requirement there is to list
the statutory surplus of our significant insurance
companies. But what that's missing is one there's several
other insurance companies but it's also most importantly
missing (Salek) which is where we hold most of our capital.
You got to make sure you put that into the equation.
John Hall: Right so that's the Grand Caymen?
Dean Miller: Yes.
John Hall: Right. Okay is there any double counting in that $1 billion
by virtue of downstream companies?
Dean Miller: No all that is properly eliminated in the consolidation of
that amount.
John Hall: Okay great. Second question, prior to all the turmoil of
this week, did you have any discussions rough or other wise
with parties about selling the company in the past?
Dean Miller: No.
John Hall: None at all.
Dean Miller: None that you would, you know, normal discussion that
anybody would have but no concerted effort.
John Hall: Okay. Next question, the 15% ROE target that had been out
there is off the table. What are we looking at here? Are we
looking at an 8 to 9% type return company or something
higher than that on an ongoing basis when we're through with
all this?
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Dean Miller: Yes we are looking at - you're right 15% is no longer
viable. And it's difficult given the uncertainty around the
new business implications and the rating downgrades and some
other costs and expenses we're going to have. But those are
short term in nature. But yes it's going to be in the single
digits, in the high single digits would be our best estimate
at this time.
John Hall: Okay. And then how about a just a - and this is the last
one, a quick order of magnitude on the severance that we're
going to see in the second half of the year?
Paul Goldean: Total severance we're looking at is between $5 and $5.5
million.
John Hall: And that's in the third quarter or second half of the year
in...
Paul Goldean: Third quarter.
John Hall: Third quarter. Okay. Thanks very much.
Dean Miller: Thanks John.
Operator: Your next question comes from Samuel Crawford with Stone
Harbor.
Samuel Crawford: Good morning thanks for taking the question. Just to revisit
liquidity briefly again, when you undertook your sources and
uses analysis, was there any assumption made for generation
of new business or was it purely a static run off as of a
certain balance sheet date?
Dean Miller: Yes what we've done in those projections is assumed a
current run rate of new business. So to the extent there is
any negative implication of the rating
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downgrades that would improve our liquidity and capital
position going forward from what we've projected currently.
Samuel Crawford: Okay. And on the (dack) the $13 million adjustment that was
surely a range of estimates. Is that a midpoint?
Dean Miller: It's our best estimate of the quarter based on the evidence
we have and it's evidence that the (Seiden) has and very
limited evidence what we have. But we think it is a good
best estimate.
Samuel Crawford: So no indication at all as to whether or not that fell into
the high end or the low end of a given range given your
assumptions?
Dean Miller: No. I mean it's - we just took the available information we
had and the facts around the treaty and made our best
estimate.
Samuel Crawford: And last question really how long is it going to take you to
get around and have more than just quick initial
conversations but conversations with some depth and quality
to them with all of your customers to assure yourself about
where the customer base if and how they're attitudes are
(unintelligible)?
Paul Goldean: Both the heads of our International segment and our North
American segment are actively working on a plan to meet with
all of our clients. And now that we've released earnings I
think they'll be a lot more proactive in going out and
meeting those clients.
Glenn Schafer: And I can speak behalf of myself, I'm going to spend just
part of this afternoon talking with several major clients.
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Samuel Crawford: And I have no doubt I'm just wondering if that is likely to
be a matter of days or a matter of weeks or how long it
might take?
Paul Goldean: A couple of weeks at the most.
Samuel Crawford: Thank you.
Operator: Your next question comes from Matthew Dundon with Miller
Tabak.
Matthew Dundon: Hi yes I have a question you mentioned that a clear target
of strategic moves be it your first or your second option is
going to be to raise ratings. When you're talking about the
raisings you're trying to raise, are you looking both at the
whole cut ratings where you're now standing at, you know,
top junk level or are you looking at the insurer ratings or
both?
Dean Miller: I think we'd be looking at both.
Matthew Dundon: Do you think that there's a single or a group of
transactions that can address them both or would not whole
co money flow down in the correct way for instance new whole
co senior debt strikes me probably would not improve. Whole
co ratings would keep them at that Double D plus level but
might help the insurers and I don't know if that - what do
you think about that?
Dean Miller: I think it's premature to think about, you know, where the
proceeds flow in and which entities and how they flow down
and the implications on the rating agency. I think that's
we're still not at that stage yet. But the intent would be
to, you know, have an impact positively on the ratings.
Matthew Dundon: Do you have a feeling that you'll be able to have productive
conversations with the agencies as you're starting to look
at potential terms and what the
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market might be for some of those plays that they can give
you some guidance in terms of structure and the extent that
there's a market for whatever you're trying to bring that
it'll have a result at both levels?
Dean Miller: Yes absolutely. We'll have, you know, very continuous
dialogue with the rating agencies as we go through, you
know, all these concurrent paths over the next 30 days. So I
would suspect that they can't react if they don't have
information. So as we bring them information on a timely
basis we'll get the feedback to our evaluation basis.
Matthew Dundon: Thanks a lot.
Operator: Your next question comes from Thomas Mitchell with Miller
Tabak.
Thomas Mitchell: Hi I wanted to sort of look at this from a different
perspective. You had some wonderful insurance questions. But
if you look at your stock as a stock in the world, if you
were a self company a $2.43 charge out of $20 book would not
have taken you to $3 or $4 a share and now maybe $8 a share.
It might have gone to $16 or $17.
On the other hand if people look at $1 trillion as in force
life insurance and understand that you've had huge growth
and that you're top three operating executives have all been
fired you look at that and say well gee only a 1% change in
your assumptions on your total in force book of business
could wipe everything out.
So it seems to me that there's a striking dichotomy between
how seriously the market is taking this, how seriously you
are taking this, and the amount of trouble you seem to have
reported. Is this all due to the rating agencies being
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disappointed? Have you essentially put them in the position
of being able to control your destiny and is that why your
guys had to leave?
Paul Goldean: Well Thomas I think - this is Paul Goldean. I think there's
several questions in your question. But I guess the first
one is we can't predict shareholder action. In the news that
was put out, you know, I think was taken by the market and
they - certain assumptions were made on that information
that we're showing you now we don't think is correct.
And I think that's the general point that you're trying to
get to in your question. If I missed it, come back and let
us know but that's - I'm not sure that we followed every
turn in that.
Thomas Mitchell: No I think - well it seems like the reaction must have been
over done. I'm concerned that put it differently even if you
never wrote another dollar of business wouldn't the expected
value of the company to be received after the proceeds of
all the run off be pretty close to book value? Wouldn't that
be a normal assumption to make?
Dean Miller: Follow what you're saying I mean I think suffice to say we
are - you're raising good questions and those are exactly
the questions that the board and management are actively
engaged with our bankers right now to try and answer so that
the board can make the appropriate decisions over the coming
weeks. But it's not a simple issue. And there's not a simple
answer unfortunately.
Paul Goldean: And one more thing Thomas, you know, just note that rating
agencies are important constituents to all insurance
companies. So they do have a definite impact on every
insurance company and to a certain extent they do, you know,
through the rating system keep a control over us.
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Thomas Mitchell: And I guess my last - the last point I wanted to get at is
that I think that looking at the tremendous increase in your
book of business admittedly through acquisitions in which
you may have done due diligence that the increase in your
book of business it is normal for an outsider to assume that
if a book of business grows very rapidly and that company
announces that it has had some problems.
The assumption is that there must have been something in
that growth of new business either organic or through
acquisition that management didn't know about and was
surprised by. I'm getting the sense from your answers on
this call that there's not very much of that. Is that a
reasonable inference for me to make?
Paul Goldean: We're still a little lost on your question again.
Thomas Mitchell: Well it's this. Most companies that get into trouble that
have been rapidly growing whether they're in the insurance
business or another business. It turns out that there was
something wrong with their assumptions about the new
business they acquired. The problems you have reported don't
seem to reflect very much of that sort of thing. And I'm
wondering is it correct to infer that you've really taken a
hard look at all your new business in the last few years
whether acquired or organic and made the decision that there
aren't any really serious problems with it.
Dean Miller: That is what we've done. And I guess we're just struggling
for an answer because there's so many pieces to the puzzle.
But you know what - you're right. I mean following an
acquisition is a period of integration. And the ING
acquisition was a big acquisition and that integration is
complete. But what happened in the second quarter it's not
looking back at a particular acquisition
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or looking back at organic new business production and
coming to a different conclusion.
It's getting, you know, evaluating the facts, the
information we have available in the quarter, and refining
certain calculations and estimates and making the
appropriate adjustments to get exactly what you said. It's
comfort that the financial statements are fairly stated
today at the end of the second quarter. And that's what
we're focused on is not where I came from or how it happened
but, you know, getting them right today. And that includes
you know, the underlying calculations and processes and
controls.
Thomas Mitchell: Okay thank you.
Operator: Your next question comes from David Merkel with Hovde
Capital.
David Merkel: Hi. When I think about your earnings, I think about them in
three pieces, mortality margins, investment income margins,
and expense margins. And I guess you could throw in things
like just risk margins that you received, you know, fee
income from. But from what I'm hearing you think that
mortality margins haven't deteriorated. What are the
investment margins and your overall expense levels? Because
if you're moving from a 15% ROE run rate to a mid to high
single digit ROE run rate it means that something has
deteriorated which one?
Dean Miller: Yes our - well one of the big reconciled items right off the
bat is taxes. So that's part of the adjustment from previous
historical returns on equities to future ones. With respect
to investments our investment portfolio is very sound, very
high quality and continues to perform at expectations so no
change in anything on the investment portfolio very clean.
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On expenses it's - on expenses there's besides the impact of
the non-recurring charges we've had this quarter the run
rate is much higher will continue to be higher than I think
originally expected due to the need to look at the
infrastructure and respond to the growth. So and there's
other factors that we've been talking about in prior calls
around things like catastrophe coverage and other scale
issues and so forth when you compare us to some of our
competitors.
And then the other piece of course is cost of capital. And
the cost of capital, you know, has gone up with the
securitizations. And, you know, securitizations eliminate
the mismatch and are a big risk management in very
successful thing but do have an impact on the capital
structure.
David Merkel: Okay. When you do (dack) recoverability at the insurance
companies that I've worked for, you can do (dack)
recoverability across the company as a whole by line, by
class here and I suppose at a re-insurance company even down
to the tree level. What's your sell division level that you
end up deciding when you can't recover your (dack)? Is it
just by line of business or do you do...?
Dean Miller: It's a line of business level.
David Merkel: Okay thank you. I guess my second to the last question
(Orkney). You had to put in some more capital into (Orkney)
as I recall from your 10Q in March. What ended up prompting
that? Was it something from the Delaware regulator? Or is it
just something that is just common to what you have to do in
order to run an affiliated re-insurer?
Dean Miller: I'll try and summarize this as briefly as possible. (Orkney)
is a wholly owned subsidiary of SRUS which is our main U.S.
regulated entity and is domiciled in Delaware. The issue is
at what value do you record an investment in
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subsidiary like (Orkney). Now statutory accounting
principles typically have you record insurance companies at
a statutory value.
The unique thing here is (Orkney) won as a vehicle was
formed solely for the purpose of securitizing the excess
Triple X reserves. So it was kind of a strange result. If
you follow to the letter of the law the statutory guidance,
that you would account for it on statutory and put all those
excess reserves onto your books.
So we've had discussions with Delaware. They agreed with us
that was kind of non sensical conclusion but ultimately when
it came to filing our 10K and getting formal sign off from
Delaware they were unable to give us formal sign off that
GAAP was the appropriate measure as opposed to statutory.
And the issue with Delaware of course is there was nothing
in the literature that said that.
And so we - so they said they agree with us and they'll work
with us over the year. So what we did is we conservatively
recorded our investment in (Orkney) at a statutory account
value. And what that did is in the first quarter generated
some statutory strain as we put up additional reserves. That
was fully funded in the second quarter.
What we're in the process of doing now is working with
Delaware and they're being very cooperative and working with
us to find a resolution to this issue that allows them to
get comfortable with the change and with the end result will
be of course will be taken from a statutory to a GAAP,
release the reserves, and get a pick up in our statutory
capital in the U.S. So right now it's in our accounts and
books at that conservative statutory level.
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David Merkel: Okay. My last question, when I look at all of your options
whether it's seeking new capital, a strategic partner or
sale, or you know, if none of those happen. You know,
Scottish RE can survive but it would be a very different
company. It probably would not have a new business
origination franchise. And the reason - is it a fair
assumption on my part is the reason that you're looking at
these other three options is that you think that new
business origination franchise has real value?
Dean Miller: Absolutely. We're, you know, number two or number three in
new business market share in the United States and that's
tremendous value.
David Merkel: Right. Well in my opinion given the whole ogolopolistic
nature of re-insurance I would think that it has value.
Thanks.
Dean Miller: Thank you.
Operator: Your next question comes from Michael McNulty with Context
Capital.
Michael McNulty: Hi I just wanted to confirm that the $110 million forward
sale that you received has been maintained at the parent
company? And then I had a follow up on that.
Dean Miller: No it's been pushed down into the operating subsidiaries.
Michael McNulty: Okay. So then the question I have is if it's been pushed
down and there are restrictions right now on putting that
money back up, where will the money come from to pay off the
convertibles come December?
Dean Miller: It's all those other sources of liquidity that we talked
about earlier. So when I talked about our sources of
liquidity before, the proceeds - the $110 million of
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proceeds that we've received to date are not part of those
sources in determining that we have sufficient liquidity.
It's the other sources.
Michael McNulty: But I know that like on your Stingray and some of your other
credit facilities they're all at the (unintelligible) I
think as when you answered John Lepore's question from Basso
that you had said you could not up stream given to the
parent company.
Paul Goldean: That's not correct. Our primary Cayman Island operating
company can freely distribute dividends up to the parent
company which is also a Cayman Island company.
Michael McNulty: Okay.
Dean Miller: What we were referring to before was the ability to draw
down on the credit facility and then up stream that. That's
all we were referring to earlier but other than that we have
complete freedom with respect to the cash flow at the
holding company.
Michael McNulty: Okay. And how much available liquidity do you have at the
Cayman subsidiary that you could bring up to the parent?
Dean Miller: I mean that's what we discussed before. And like I said
we've got available cash at various entities that is free to
use that fully supports our uses in the near term. So it's
in place we, you know, that it's free and flexible with no
restrictions.
Michael McNulty: Okay. And then - okay thanks I appreciate it. Now one thing
is if - is there anything that you can foresee between now
and the end of the year that would
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require you to induce some of that so called unrestricted
capital into a restricted subsidiary to keep the rating
agencies happy?
Dean Miller: Nothing that we're aware of or rating agencies have been
hinting nothing like that.
Michael McNulty: And will the rating agencies be continually monitoring you
on a quarter by quarter basis forcing you to potentially put
up more capital? Or have they been - or are they fully
comfortable that you have enough now through the end of the
year?
Dean Miller: I think - I mean we have varying degrees of interaction with
all of the rating agencies. But principally we provide them
with quite a bit of information each quarter. But I think
that's a good point about the capital. Each of the rating
agencies have their own, you know, risk based capital models
that are one unique to them but also unique to Scottish
based on our operations.
But as of June 30 and projected to the end of the year based
on again flat new business production and everything else we
are currently and projected to be well in excess of the
minimum capital requirements of all the rating agencies.
Another important point to note is that the capital that we
hold to satisfy the rating agencies is well in excess of
what the regulators want us to hold at the insurance
entities.
Michael McNulty: Okay. And then just wanted to just ask from a more macro
overview, you see GE selling off their business. You seen
ING selling off the business. And I know Scott Willkomm and
his former team were buying a lot of these companies. And it
just begs the question, you've gone from a 15% ROI down to
an 8% ROI. How profitable is this business? And does it
makes sense for a smaller player like you folks to be doing
this on a going forward given that
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under Regulation Triple X the reserves just keep climbing
every year from what I understand? In other words the
problem gets worse as you go forward.
Dean Miller: Yes fair point. First of all I mean we haven't been 15% in
the past. So we're not coming down from that. But more to
your point is there's no doubt bigger is better and for all
the obvious reasons.
Michael McNulty: Okay thank you very much.
Operator: Your next question comes from David Young with AFLAC.
David Young: Yes thank you. Earlier the statement was made that Stingray
had been tapped for $50 million. I was wondering if you
could describe as to what was meant by that comment.
Dean Miller: Well we can use Stingray in a number of ways and for
reasons. And we transacted an intragroup re-insurance treaty
like we have - we always do but on a particular treaty that
went offshore to get re-insurance credit on a statutory
basis you need to post assets or letters of credit. And so
for that particular treaty we drew on the Stingray facility
to post the letters of credit.
David Young: And what is - I'm sorry.
(Mary Chapman): This is (Mary Chapman) in the room with David Young also of
AFLAC still. The letter of credit is a letter of credit to
(Salak) or to what entity?
Dean Miller: Well it would be on the benefit of Scottish RE U.S. The
seeding company within our group in the U.S.
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(Mary Chapman): And the letter of credit, were there funding agreements from
(Salak) put into the trust at Stingray to replace the drawn
facility from the letter of credit?
Dean Miller: Let me clarify. There's two different ways Stingray can be
used. One withdraw cash by the issuance of funding
agreements or two utilize letter of credit facilities to
support statutory strain in Scottish RE U.S. What we did was
issue letters of credit to support the statutory strain in
Scottish RE U.S. We did not issue funding agreements and
withdraw cash.
(Mary Chapman): And the letters of credit on - are a senior obligation of
the entity to which they were issued?
Dean Miller: That's an obligation of (Salak).
(Mary Chapman): At a senior level or a subordinated level?
Dean Miller: Yes it's an insurance liability so it would be senior.
(Mary Chapman): It's an insurance liability. Is it ranked - I'm sorry. Is
that obligation ranked comparative to with policyholder
obligations?
Dean Miller: Hold on one second. If the assets are over drawn out of that
trust then ultimately (Salak) has to put a funding agreement
to the Stingray trust. So it's a funding agreement out of
Cayman which are pursue to policyholders in the Cayman.
(Mary Chapman): Okay thank you.
Dean Miller: Okay I made sure you heard that.
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(Mary Chapman): I did hear that.
Dean Miller: Yes happy to take off line if that helps later date.
Operator: Ladies and gentlemen we have reached the end of the allotted
time for questions and answers today. We'd like to turn the
conference back over to management for closing remarks.
Paul Goldenan: Yes this is Paul Goldean. And I'd like tothank all the
participants on the call today and look forward to speaking
to you in the future. And that should end our call for
today.
Operator: Thank you ladies and gentlemen for participating in
today's Scottish RE Group Limited Second Quarter Earnings
Conference Call. You may now disconnect.
END
Paul Goldean: Yes this is Paul Goldean. And I'd like to thank all the
participants on the call today and look forward to speaking
to you in the future. And that should end our call for
today.
Operator: Thank you ladies and gentlemen for participating in today's
Scottish RE Group Limited Second Quarter Earnings Conference
Call. You may now disconnect.
END