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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

For Annual and Transition Reports Pursuant
to Sections 13 or 15(d) of the Securities Exchange Act of 1934

|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the fiscal year ended December 31, 2006

| | Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

For the Transition period from __________ to

Commission File Number 001-16855

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SCOTTISH RE GROUP LIMITED
(exact name of registrant as specified in its charter)

Cayman Islands 98-0362785
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Crown House, Second Floor
4 Par-la-Ville Road
Hamilton HMO8, Bermuda Not Applicable
(Address of Principal Executive Office) (Zip Code)

Registrant's telephone number, including area code: (441) 295-4451

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Ordinary Shares, par value
$0.01 per share New York Stock Exchange
Hybrid Capital Units New York Stock Exchange
Non-Cumulative Perpetual Preferred
Shares, par value $0.01 per share New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act:
None

Indicate by checkmark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes | | No |X|

Indicate by checkmark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes | | No |X|

Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No | |

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. | |

Indicate by checkmark whether the registrant is a large accelerated filer,
as defined in Rule 12b-2 of the Exchange Act.

Indicate by checkmark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes | | No |X|

The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of June 30, 2006 was $733,900,935. As of February 26, 2007,
Registrant had 67,995,057 ordinary shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information required by Items 10, 11, 12, 13 and 14 of Form
10-K is incorporated by reference into Part III hereof from the registrant's
proxy statement for its 2007 Annual Meeting of Shareholders, which is expected
to be filed with the Securities and Exchange Commission (the "SEC") within 120
days of the close of the registrant's fiscal year ended December 31, 2006.
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SCOTTISH RE GROUP LIMITED

FORM 10-K

YEAR ENDED DECEMBER 31, 2006

TABLE OF CONTENTS

Page

PART I.........................................................................1

Item 1: BUSINESS...........................................................1
Item 1A: RISK FACTORS......................................................22
Item 1B: UNRESOLVED STAFF COMMENTS.........................................40
Item 2: PROPERTIES........................................................40
Item 3: LEGAL PROCEEDINGS.................................................40
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............41

PART II.......................................................................42

Item 5: MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.........................42
Item 6: SELECTED FINANCIAL DATA...........................................45
Item 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............................................47
Item 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........83
Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................85
Item 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE..............................................85
Item 9A: CONTROLS AND PROCEDURES...........................................85
Item 9B: OTHER INFORMATION.................................................88

PART III......................................................................88

Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT....................88
Item 11: EXECUTIVE COMPENSATION............................................88
Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS...................................88
Item 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................88
Item 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES............................88

PART IV.......................................................................88

Item 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES...........................88

PART I

Item 1: BUSINESS

Overview

Since our formation in 1998, we have grown to be one of the three
largest life reinsurers serving the United States (based on the gross face
amount of ordinary life reinsurance business in-force in 2005). On December 31,
2001, we expanded our business outside of North America by acquiring World-Wide
Holdings Limited and its subsidiary, World-Wide Reassurance Limited, which were
both subsequently renamed Scottish Re Holdings Limited and Scottish Re Limited,
respectively.

On December 22, 2003, we completed the acquisition of 95% of the
outstanding capital stock of ERC Life Reinsurance Corporation (subsequently
renamed Scottish Re Life Corporation). Scottish Re Life Corporation's business
consists primarily of a closed block of traditional life reinsurance business.
Effective December 31, 2004, we acquired the in-force individual life
reinsurance business of ING America Insurance Holdings, Inc., which we call ING.
Pursuant to this transaction, Security Life of Denver Insurance Company and
Security Life of Denver International Limited, both subsidiaries of ING,
reinsured their in-force individual life reinsurance business to Scottish Re
(U.S.), Inc. and Scottish Re Life (Bermuda) Limited, respectively on a 100%
indemnity reinsurance basis. In addition, Security Life of Denver Insurance
Company and Security Life of Denver International Limited transferred to us
certain systems and operating assets used in their individual life reinsurance
business.

Security Life of Denver Insurance Company and Security Life of Denver
International Limited transferred assets of approximately $1.8 billion of their
individual life reinsurance business to us and we recorded a corresponding
amount of reserves for future policy benefits and other liabilities. Certain of
the acquired assets are held in trust for the benefit of Security Life of Denver
Insurance Company and Security Life of Denver International Limited to secure
our liabilities on the acquired business. The ceding commission paid to us was
placed in trust to secure our obligations under the indemnity reinsurance
treaties and is subject to release upon our completion of long-term collateral
arrangements with respect to the acquired business. In 2005 and 2006, we
completed such arrangements for a large portion of the acquired business
resulting in a pro-rata release of the ceding commission from the trust.

The acquired business represents the individual life reinsurance
division of ING's U.S. life insurance operations, and was written through
Security Life of Denver Insurance Company and Security Life of Denver
International Limited. The acquired business mainly consists of traditional
mortality risk reinsurance written on an automatic basis with more than 100
different ceding insurers.

Less than 10% of the acquired business was written on a facultative
basis. Most of the business involves guaranteed level premium term life
insurance that is subject to the statutory reserve requirements of the Valuation
of Life Insurance Policies Model Regulation XXX ("Regulation XXX") as well as
universal life insurance that is subject to a similar statutory reserve
requirement known as Regulation AXXX.

During 2005, we integrated the ING acquisition with our existing U.S.
traditional business and migrated our Charlotte based policy administration
operations to Denver. We now administer our combined business with an enhanced
version of the ING policy administration system, known as SAGE. In addition, the
Denver operation relocated to new premises during the fourth quarter of 2005 and
is supported by a technology infrastructure consistent with all of our units.
The combination of technology with the experienced complement of approximately
90 life reinsurance administration professionals has created a scalable
administrative platform for us.

As of December 31, 2006, the number of lives we reinsured in North
America was approximately 14.3 million and our gross face amount of in-force
business was approximately $1.0 trillion.

On November 26, 2006, we entered into a Securities Purchase Agreement
(the "Securities Purchase Agreement") with MassMutual Capital Partners LLC
("MassMutual Capital"), a member of the MassMutual Financial Group, and SRGL
Acquisition, LLC, an affiliate of Cerberus Capital Management, L.P.
("Cerberus"), or another affiliate thereof (such affiliate of Cerberus, together
with MassMutual Capital, the "Investors") whereby, subject to the terms and
conditions set forth in the Securities Purchase Agreement, the Investors will
each purchase 500,000 of our convertible cumulative participating preferred
shares (the "Convertible Shares"), which will be newly issued, and which shares
may be converted into an aggregate of 150,000,000 ordinary shares, subject to
certain adjustments, at any time and will automatically convert on the ninth
anniversary of the issue date if not previously converted (the above is
collectively referred to as the "Transaction").

The Transaction requires shareholder approval of certain proposals, and
a shareholder vote is scheduled for March 2, 2007. The estimated net cash
proceeds to us from the sale of the Convertible Shares to the Investors will be
approximately $560.0 million, after giving effect to the payment of estimated
transaction expenses and the transaction fees to be paid to the financial
advisors. We intend to use the net proceeds for general corporate purposes,
which may include investments in or advances to operating subsidiaries to
provide capital to support insurance obligations and collateral requirements,
working capital and other corporate purposes. The additional capital received
from the Investors will allow us to meet our long-term liquidity and capital
needs and satisfy applicable regulatory and rating agency criteria for required
capital.

Once the Transaction is completed, the Investors will hold securities
representing approximately 68.7% of the voting power of all our shareholders at
the time of investment (subject to certain adjustments, if any) and will have
the right to designate two-thirds of the members of the Board of Directors for
election. You are directed to our Proxy Statement dated January 19, 2007 and the
Proxy Supplement dated February 20, 2007 for more information on the
Transaction.

We have operating companies in Bermuda, the Cayman Islands, Guernsey,
Ireland, the United Kingdom and the United States, a branch office in Singapore,
and a representative office in Japan. Our flagship subsidiaries are Scottish
Annuity & Life Insurance Company (Cayman) Ltd., Scottish Re (U.S.), Inc.,
Scottish Re (Dublin) Limited and Scottish Re Limited. See ratings section
beginning on page 12 of this document for additional information on the above
entities.

In 2005, we established Scottish Re Capital Markets, Inc., which is a
registered broker dealer, formed to leverage the experience and expertise we
have gained through our own efforts securitizing various reserve requirements.

As of December 31, 2006, we had consolidated assets of $13.4 billion
and consolidated shareholders' equity of $1.1 billion.

Our Business

Segments

We have three reportable segments: Life Reinsurance North America, Life
Reinsurance International and Corporate and Other. The life reinsurance
operating segments write reinsurance business that is wholly or partially
retained in one or more of our reinsurance subsidiaries.

In our Life Reinsurance North America Segment, we provide solutions to
insurance companies seeking reinsurance of life insurance, annuities and
annuity-type products. We reinsure lines of business that may be subject to
significant reserve or capital requirements by regulatory and rating agencies.
We assume risks associated with primary life insurance policies and annuities,
both in-force and new business. We reinsure: (i) mortality, (ii) investment,
(iii) persistency and (iv) expense risks. We originate reinsurance business
predominantly by marketing our products and services directly to United States
life insurance and reinsurance companies. Most of the

reinsurance assumed is through automatic treaties, but in 2006 we also began
assuming risks on a facultative basis. Facultative reinsurance allows us to
review an individual risk before it is reinsured.

Prior to 2005, our Life Reinsurance International Segment specialized
in niche markets in developed countries and broader life insurance markets in
the developing world and focused on the reinsurance of short-term group life
policies and aircrew "loss of license" insurance. In 2005, the Life Reinsurance
International Segment became actively engaged in the reinsurance of United
Kingdom and Ireland traditional solutions business and annuity products. In
addition, the Life Reinsurance International Segment established a branch office
in Singapore and a representative office in Japan to reinsure similar risks in
the Asian markets. The life insurance and annuity products are broadly similar
to those offered in the Life Reinsurance North America Segment.

Our Corporate and Other Segment includes investment income from
invested assets not allocated to support reinsurance segment operations and
undeployed proceeds from our capital raising efforts, in addition to realized
investment gains or losses. General corporate expenses consist of unallocated
overhead and executive costs and interest expense related to the 4.5% senior
convertible notes and 1% dividend payment on the convertible preferred shares of
our Hybrid Capital Units ("HyCUs"). Additionally, the Corporate and Other
Segment includes results from our wealth management business, which directly
issues variable life insurance and variable annuities and similar products to
high net worth individuals and families, for insurance, investment and estate
planning purposes.

Life Reinsurance

Reinsurance is an arrangement under which an insurance company known as
the reinsurer agrees in a contract called a treaty to assume specified risks of
another insurance company known as the ceding company. The reinsurer may assume
all or a portion of the insurance underwritten by the ceding company. In
exchange for assuming the risks of the ceding company, the reinsurer receives
some or all of the premium and, in certain cases, investment income derived from
the assets supporting the reserves of the reinsured policies. Reinsurance
permits primary insurers to diversify their risks over larger pools of risks and
to write insurance policies in amounts larger than they are willing or able to
retain. Also, reinsurers have the ability to structure treaties that allow the
ceding companies to achieve other business and financial objectives such as:

o decreasing the volatility of their earnings by reducing their
maximum exposure to any one risk,

o improving their capital position by reducing the financial strain
associated with new business production or by increasing their
risk-based capital ratios,

o entering new lines of business and offering new products, and

o exiting discontinued lines of business.

In addition, reinsurers may also purchase reinsurance, or
"retrocession" coverage, to limit their own risk exposure.

We have two categories of life reinsurance business, which we call
Traditional Solutions and Financial Solutions.

o Traditional Solutions. In our Traditional Solutions business, we
reinsure the mortality risk on life insurance policies written by
primary insurers. This business is often referred to as
traditional life reinsurance. We write our Traditional Solutions
business predominantly on an automatic basis with respect to
newly written life insurance policies. This means that we
automatically reinsure all policies written by a ceding company
that meet the underwriting criteria specified in the treaty with
the ceding company. As previously noted, in 2006 we began
assuming risks on a facultative basis in North America. Prior to
2005, the Life Reinsurance International Segment offered
traditional life reinsurance products outside of North America,
focusing primarily on the reinsurance of short-term, group life
policies in

niche market sectors. In 2005, the Life Reinsurance International
Segment became actively engaged in the reinsurance of United
Kingdom and Ireland traditional solutions business.

o Financial Solutions. In our Financial Solutions business, we
offer reinsurance solutions that improve the financial position
of our clients by increasing their capital availability and
statutory surplus. These solutions include contracts under which
we assume the investment and persistency risks of existing, as
well as newly written, blocks of business. The products reinsured
include annuities and annuity-type products, cash value life
insurance and, to a lesser extent, disability products that are
in a pay-out phase. This line of business also includes acquired
solutions products in which we provide our clients with exit
strategies for discontinued lines, closed blocks or lines not
providing a good fit for a client's business strategies. With our
assuming full responsibility and management of these contracts,
our clients can focus and concentrate their full efforts and
resources on their core strategies. Most of these agreements are
coinsurance, coinsurance funds withheld or modified coinsurance
of primarily investment risk such that we recognize profits or
losses primarily from the spread between the investment earnings
and the interest credited on the underlying deposit liabilities.

The traditional life reinsurance industry experienced rapid growth
between 1995 and 2002. According to an industry survey, the face amount of
traditional individual life reinsurance assumed in the United States grew from
$261.0 billion in 1995 to $1.08 trillion in 2002, a 22% compounded annual growth
rate. Since 2002, the annual face amount of traditional life reinsurance assumed
has declined annually with $844.0 billion of traditional individual life
reinsurance assumed in 2005. During the same time period, the face amount of
individual life insurance written in the United States has grown from
approximately $1.0 trillion in 1995 to $1.8 trillion in 2005, a 6% compounded
annual growth rate.

We believe that the following trends have contributed and will continue
to contribute to the demand for life reinsurance and increased business
opportunities for us:

o Consolidation in the life insurance industry. Consolidation in
the life insurance industry may create opportunities for life
reinsurers. Life reinsurers provide financial reinsurance to help
acquirers finance the cash portion of an acquisition, and we
expect that any additional consolidation in the life insurance
business may result in incremental opportunities for life
reinsurers. In addition, in the context of an acquisition, an
acquirer may focus on the most promising lines of business and
divest non-core lines of business through reinsurance.

o Consolidation in the life reinsurance industry. There have been a
number of merger and acquisition transactions within the life
reinsurance industry in recent years. The consolidation of the
life reinsurance industry has reduced the amount of life
reinsurance capacity available and caused primary insurers to be
exposed to concentrated counter-party risk with the larger
consolidating reinsurers.

o Increased capital sensitivity. We believe that insurance
companies are now more focused on capital efficiency and return
on capital. As a result, primary insurers are increasingly
utilizing the outside capital provided by reinsurance to help
finance growth and to free up capital to pursue new businesses.
Changing regulatory environments, in particular, in the United
Kingdom and Continental Europe are accelerating this trend in the
focus of capital.

o Expanding overseas markets. We believe that the trends described
above in the North American market are also influencing the
reinsurance industry throughout the world. In addition, we
believe there are increasing opportunities in markets such as
Asia and Europe, where the life reinsurance industry is either
developing or expanding.

o Changing demographics. We expect that the increasing number of
"baby boomers" reaching middle and late middle age will increase
the demand for products which address retirement planning, estate
planning and survivorship issues. In addition, we believe that
longer life

expectancies and the reduction in government and employer
sponsored benefit programs will increase the demand for life
insurance and annuities. We expect this increased demand for
insurance to increase demand for reinsurance products in the
United States, United Kingdom, Ireland, Continental Europe and
Asia.

o Increased focus on risk management will continue the trend of
primary insurers to seek reinsurance counter-party risk
diversification.

Wealth Management

Our variable life insurance and variable annuity products offer high
net worth clients the benefits of investment-oriented insurance products for use
in tax and estate planning. We receive fee income based on the assets associated
with our products. Our products are targeted towards high net worth individuals
and families who generally have a liquid net worth of more than $10.0 million.
The wealth management business requires relatively little capital. We no longer
actively market this business.

Solutions for Regulation XXX Reserves

Background

The Valuation of Life Insurance Policies Model Regulation, commonly
referred to as Regulation XXX, was implemented in the United States for various
types of life insurance business beginning January 1, 2000. Regulation XXX
significantly increased the level of reserves that United States life insurance
and life reinsurance companies must hold on their statutory financial statements
for various types of life insurance business, primarily certain level term life
products. The reserve levels required under Regulation XXX increase over time
and are normally in excess of reserves required under Generally Accepted
Accounting Principles in the United States ("US GAAP"). In situations where
primary insurers have ceded business to reinsurers that are unlicensed and
unaccredited in the United States, the reinsurer must provide collateral equal
to its reinsurance reserves in order for the ceding company to receive statutory
financial statement credit. Reinsurers have historically utilized letters of
credit or have placed assets in trust for the benefit of the ceding company as
the primary forms of collateral. The increasing nature of the statutory reserves
required under Regulation XXX will likely require increased levels of collateral
from reinsurers in the future to the extent the reinsurer remains unlicensed and
unaccredited in the United States. We believe that funding long duration
liabilities with shorter-term funding facilities is not suitable or sustainable
from a prudent asset liability management perspective because it creates
significant refinancing or rollover risk every year.

In order to mitigate the effect of Regulation XXX, we retrocede
Regulation XXX reserves to unaffiliated and affiliated unlicensed reinsurers. In
our United States domiciled insurance subsidiaries, statutory capital may be
significantly reduced if the unaffiliated or affiliated reinsurers were unable
to provide the required collateral to support our statutory reserve credit and
we could not find an alternative source for collateral. In the normal course of
business and our capital planning, we are always looking for opportunities to
relieve capital strain relating to Regulation XXX statutory reserve
requirements. We entered into a number of financing transactions in 2004, 2005
and 2006 which secure long-term funding for a large portion of our Regulation
XXX collateral requirements.

Acquired ING Business

Pursuant to the terms of our acquisition of the individual life
reinsurance business of ING, ING is obligated to maintain collateral for the
Regulation XXX and AXXX statutory reserve requirements of the acquired business
for the duration of such requirements. We pay ING a fee based on the face amount
of the collateral provided until satisfactory alternative collateral
arrangements are made. We are entitled to a partial rebate of this fee to the
extent satisfactory alternative collateral arrangements are implemented prior to
the end of 2007.

In 2005 and 2006, we completed three transactions that collectively
provided approximately $3.7 billion in collateral arrangements to fund
Regulation XXX statutory reserve requirements that were assumed in connection
with the acquisition of ING's individual life reinsurance business.

The first transaction is a 20 year collateral finance facility with
HSBC Bank USA, N.A. ("HSBC") that provides up to $1.0 billion of collateral to
satisfy Regulation XXX statutory reserve requirements ("HSBC II") and

is in addition to the facility with HSBC that was originally completed in 2004
("HSBC I"). The second arrangement is a long-term reinsurance facility
("Reinsurance Facility") with a third-party Bermuda reinsurer which provides
collateral to secure Regulation XXX statutory reserve requirements in an amount
up to $1.0 billion. The Bermuda reinsurer provides security in the form of
letters of credit in trust equal to the statutory reserves. Finally, in 2006 we
completed the Ballantyne Re securitization in a private offering of $1.74
billion of debt to external investors and $178.0 million of debt to Scottish
Annuity & Life Insurance Company (Cayman) Ltd. These transactions have allowed
us to secure within eighteen months of the ING acquisition financing for almost
all of the Regulation XXX reserves business acquired from ING. These
transactions replaced ING collateral and resulted in a refund from ING for fees
incurred of $6.7 million in 2005 and $6.2 million in 2006.

Scottish Re (U.S.), Inc. Organic Business

On February 11, 2005, we issued $850.0 million of 30 year maturity
securities from our newly formed wholly-owned subsidiary, Orkney Holdings, LLC.
Proceeds from this transaction fully fund Regulation XXX reserves associated
with business written by Scottish Re (U.S.), Inc. between January 1, 2000 and
December 31, 2003. The securities have recourse to Orkney Holdings, LLC and not
to any other Scottish Re entity.

On December 21, 2005, we completed our second securitization of excess
reserves arising from Regulation XXX by issuing $450.0 million of 30 year
maturity securities through an orphaned special purpose vehicle incorporated
under the laws of Ireland, Orkney Re II plc. Proceeds from this transaction
fully fund Regulation XXX reserves associated with business written by Scottish
Re (U.S.), Inc. between January 1, 2004 and December 31, 2004. The securities
have recourse to Orkney Re II plc and not to any Scottish Re entity.

In 2004, we entered into HSBC I, which provides up to $200.0 million
that can be used to satisfy Regulation XXX statutory reserve requirements and
collateralize reinsurance obligations under inter-company reinsurance
agreements. This facility is currently has a maximum equal to the current
outstanding of approximately $188.5 million.

In January 2005, we completed another capital markets collateral
facility called the Stingray Pass-Through Trust ("Stingray facility") for an
aggregate amount of $325.0 million. Under the terms of the agreement, we
acquired an irrevocable put option to issue funding agreements up to $325.0
million. The facility also provides collateral for Scottish Re (U.S.), Inc. for
reinsurance obligations under inter-company quota share reinsurance agreements.

In the future, we anticipate implementing additional solutions relating
to the financing of our statutory reserve requirements as cost efficient
opportunities arise.

Our Strategy

The events of 2006, in particular the rating downgrades by the various
rating agencies, make the execution of our strategy more challenging. However,
we believe that we will experience ratings upgrades over time following the
close of the Transaction with the Investors. Our short-term strategy is to
complete the Transaction, revise our current structure and organization as
needed, strengthen our operations, remain focused on serving our existing and
potential clients through this transitional period and regain our ratings. Our
longer-term strategy has not changed as a result of recent events and we plan to
increase the value of our franchise by focusing on the following:

o Expanding the size and depth of our North American reinsurance
client base. We will work to expand our core North American
business by attempting to gain a larger share of the North
American life reinsurance market both by adding new clients and
expanding the business relationships with existing clients. We
will continue to leverage the ING acquisition and the
sophisticated

technology and experienced life reinsurance administration
professionals obtained, which created a scalable administrative
platform.

o Growing our international business. We will attempt to leverage
our recently enhanced International executive team to establish
relationships to gain a larger share of selected life reinsurance
markets outside of North America. We will continue to explore
opportunities in new markets, particularly Asia, as well as
seeking to add new clients and expand business relationships with
existing clients.

o Enhancing our financial strength. We will continue to seek to
enhance our capital position and financial strength to meet the
security needs of our customers and the capital requirements of
rating agencies. If we are successful in enhancing our financial
strength and capital resources, we would expect to have
opportunities to participate in reinsurance transactions in which
we might not be currently eligible to participate. We also expect
that enhancing our financial position will allow us to reduce our
cost of, and improve our access to, capital.

o Leveraging efficient operating structure and organizational
flexibility. We will continue to leverage our ability to conduct
business in multiple jurisdictions. Moreover, as we grow our
businesses and leverage the capabilities of our corporate
infrastructure, we hope to improve our operating margins.

Products Offered

Life Reinsurance North America

In our Life Reinsurance North America Segment, we reinsure a broad
range of life insurance and annuity products. Life insurance products that we
reinsure include yearly renewable term, term with multi-year guarantees,
ordinary life and variable life. Retail annuity products that we reinsure
include fixed deferred annuities and equity indexed annuities. In addition, we
reinsure and may issue directly institutional annuity-type products such as
funding agreements, guaranteed investment contracts, pension termination and
structured settlement annuities.

For these products, we write reinsurance generally in the form of
yearly renewable term, coinsurance or modified coinsurance. Under yearly
renewable term, we share only in the mortality risk for which we receive a
premium. In a coinsurance or modified coinsurance arrangement, we generally
share proportionately in all material risks inherent in the underlying policies,
including mortality, lapses and investments. Under such agreements, we agree to
indemnify the primary insurer for all or a portion of the risks associated with
the underlying insurance policy in exchange for a proportionate share of
premiums. Coinsurance differs from modified coinsurance with respect to the
ownership of the assets supporting the reserves. Under our coinsurance
arrangements, ownership of these assets is transferred to us, whereas, in
modified coinsurance arrangements, the ceding company retains ownership of these
assets, but we share in the investment income and risk associated with the
assets.

Our reinsurance treaties are written predominantly on an automatic
basis. Facultative reinsurance is offered on a limited basis for automatic
accounts. An automatic treaty provides for a ceding company to cede
contractually agreed-upon risks on specific blocks of business to us. The
reinsurance may be solicited directly by us or through reinsurance
intermediaries and may be written on either:

o a proportional basis under which a specified percentage of each
risk in the reinsured class of risk is assumed by us from the
ceding company, along with our portion of the underlying premiums
in proportion to such assumed risk; or

o an excess of retention basis under which we indemnify the ceding
company, up to a contractually specified amount, for a portion of
claims exceeding a specified retention amount, in consideration
of non-proportional premiums being paid.

In order to diversify our mortality exposure, we have historically
sought to limit our consolidated enterprise wide retained exposure under life
policies reinsured in our Life Reinsurance North America operations to no more
than $500,000 per life. Effective January 1, 2005, the limit for our non-ING
business was increased to $1.0 million per life. This limit was increased
to $2.0 million per life on January 1, 2007. Our retention on business acquired
in the ING individual life reinsurance acquisition is $2.0 million per life.

Our reinsurance treaties may provide for recapture rights, permitting
the ceding company to reassume all or a portion of the risk ceded to us after an
agreed-upon period of time (generally 10 years), subject to certain other
conditions. Some of our reinsurance treaties allow the ceding company to
recapture the ceded risk if we fail to maintain a specified rating or if other
financial conditions relating to us are not satisfied (such treaties represent
approximately 6% of our in-force business). Recapture of business previously
ceded does not affect premiums ceded prior to the recapture of such business and
typically involves the payment of a recapture fee to us. Nevertheless, we may
need to liquidate substantial assets in order to return the assets supporting
the reserves to the ceding company, and we may also have to accelerate the
amortization of unamortized deferred acquisition costs associated with the
recaptured business, which could reduce our earnings.

The potential adverse effects of recapture rights are mitigated by the
following factors:

o By recapturing reinsurance, ceding companies increase the amount
of risk they retain,

o Ceding companies generally must recapture the same amount of risk
on each policy reinsured under a treaty once a retention increase
is made after the treaty stated non-recapture period expires and
a recapture program is undertaken, and

o We price our treaties with the goal of achieving our target
return before the recapture date.

Life Reinsurance International

Historically, we reinsured life insurance and aircrew loss of license
products. Life insurance products that we reinsured included short-term group
and individual life, and to a lesser extent, disability and critical illness.
Our current focus is the reinsurance of United Kingdom, Ireland, Asia and the
Middle East traditional solutions business as well as annuity products in the UK
and Ireland. We believe this focus will increase the proportion of long term
individual life product and the proportion of critical illness products written.

The Life Reinsurance International Segment is targeting significant
growth over the next three to five years from the UK and Irish protection
markets. The primary products are term life and term critical illness. The UK
represents 28% of the current Life Reinsurance International Segment in-force
premium. In addition to protection products, we are also focusing on annuity
business in the same markets.

In Asia, our historical target niche market was Japan, which is
experiencing the development of small affinity group mutual organizations known
as kyosai, as a parallel sector to large insurance companies. However, our
kyosai business reduced significantly in 2006 due to our rating issues. We are
now focusing our efforts on direct marketing in countries such as Korea, Taiwan
and China.

As noted above, we reinsure aircrew loss of license coverage, which
entails the payment of lump sum benefits if aircrew cannot perform their job for
medical reasons, as well as temporary benefits for the period of time during
which the aircrew is grounded and waiting for the results of the medical
examination.

We diversify mortality risk in our Life Reinsurance International
Segment by limiting our consolidated enterprise-wide retained exposure under
life policies to no more than $1.0 million per life on UK, Irish, and US
residents and $0.5 million per life in respect of all other territories in which
we write business, effective January 1, 2005. Prior to this, the retention in
our Life Reinsurance International Segment was $250,000 per life. These figures
are based on a local currency equivalent amount at the time of policy issue.

Wealth Management

Our wealth management business consists of the issuance of variable
life insurance policies and variable annuities and similar products to high net
worth individuals and families. Premiums, net of expenses, paid by the
policyholder with respect to our variable products are placed in a separate
account for the benefit of the policyholder. We invest premiums in each separate
account with one or more investment managers, some of whom the policyholder may
recommend and all of whom are appointed by us in our sole discretion. The
policyholder retains the benefits of favorable investment performance, as well
as the risk of adverse investment results. Assets held in the separate accounts
are generally not subject to the claims of our general creditors. We do not
provide any investment management or advisory services directly to any
individual variable life or variable annuity policyholder. Our revenues earned
from these policies consist of insurance and administrative fees assessed
against the assets in each separate account. Our variable products do not
guarantee investment returns. We are no longer actively marketing this business.
Our wealth management business is included in the Corporate and Other Segment.

See Notes to the Consolidated Financial Statements for more information
on our Life Reinsurance North America, Life Reinsurance International and
Corporate and Other Segments.

Marketing

In our life reinsurance business, we market to life insurance and life
reinsurance companies. We also target institutions, such as pension plans, that
have life insurance-related risks and that we believe would benefit from our
reinsurance products based on our analysis of publicly available information and
other industry data. Where permitted by law, we actively market our reinsurance
products primarily on a direct basis. We also seek to capitalize on the
relationships developed by our executive officers and marketing staff with
members of the actuarial profession and senior insurance company executives, at
both primary insurers and other reinsurers. Finally, we work with reinsurance
intermediaries, brokers and consultants who are engaged in obtaining reinsurance
on behalf of their clients.

Risk Management

Life Reinsurance

We bear five principal classes of risk in our life reinsurance
products:

o mortality risk,

o investment risk,

o persistency risk,

o expense risk, and

o counter-party risk.

Mortality risk is the risk that death claims, after retrocession
recoveries, exceed what we expect. A greater frequency or higher average size of
death benefits than we expected can cause us to pay greater death benefits,
adversely affecting our profitability. The mix of assumed death claims can also
have an impact on the amount of policies that exceed our reinsurance retention
limit and thus the amount of retrocession recoveries we receive. A larger amount
of assumed death claims below our retention limits can adversely affect our
profitability. Even if the

total death benefits paid over the life of our contracts do not exceed the
expected amount, sporadic timing of deaths can cause us to pay more death
benefits in a given time period than expected, adversely impacting our
profitability in that period. We address these risks through selection,
diversification and retrocession. We analyze each block of business based on an
evaluation of the ceding company's history, management, target market, products
and underwriting criteria relative to the industry. In North America, we target
primarily first dollar quota share pools of top producing direct writing
companies so that we participate proportionately with other reinsurers on all of
the ceded risks. In addition, we seek to diversify our risks by participating in
annuity and disability products in the payout stage where the mortality risk is
the risk of deaths occurring later, rather than earlier, than expected. A mix of
these products with life products can help offset general trends in population
mortality. We mitigate our risk of exposure to any one block of business or any
one individual life by selectively limiting our share to any one pool.

The retention in our Life Reinsurance International Segment is $1.0
million per life on UK, Irish, and US residents and $0.5 million per life in
respect of all other territories in which we write business effective January 1,
2005. Prior to this, the retention in Life Reinsurance International Segment was
$250,000 per life. These figures are based on a local currency equivalent amount
at the time of policy issue. In addition, we maintain catastrophe cover on our
entire retained life reinsurance business, which, effective January 1, 2007,
provides reinsurance for losses of $50.0 million in excess of $50.0 million.
This catastrophe cover includes protection for terrorism, nuclear, biological
and chemical risks. Finally, in May 2006 we entered into an agreement that
provides $155.0 million of collateralized catastrophe protection with Tartan
Capital Limited. The coverage is for the period January 1, 2006 to December 31,
2008 and provides Scottish Annuity & Life Insurance Company (Cayman) Ltd. with
protection from losses arising from higher than normal mortality levels within
the United States, as reported by the U.S. Centers for Disease Control and
Prevention or other designated reporting agency. This coverage is based on a
mortality index, which is based on age and gender weighted mortality rates for
the United States constructed from publicly available data sources, as defined
at inception, and which compares the mortality rates over consecutive 2 year
periods to a reference index value. Since the amount of any recovery is based on
the mortality index, the amount of the recovery may be different than the
ultimate claims paid by Scottish Annuity & Life Insurance Company (Cayman) Ltd.
and any of its affiliates resulting from the loss event.

Our investments, which primarily consist of fixed income securities,
are subject to market value, reinvestment and liquidity risk. Our invested
assets are funded not only by capital but also by the proceeds of reinsurance
transactions, some of which entail substantial deposits of funds or assets. The
policies that we reinsure contain provisions that tend to increase benefits to
customers depending on movements in interest rates. We analyze the potential
results of a transaction, including the cash flows of the liabilities and of the
related assets and any risk mitigation measures, and we price transactions to
cover our costs, including estimated credit losses, and earn a desirable
risk-adjusted return under various scenarios. We use interest rate swaps and may
use other hedging instruments as tools to mitigate these risks. We may also
retrocede some risks to other reinsurers.

Persistency risk is the risk that policyholders maintain their policies
for either longer or shorter periods than expected. Persistency can be affected
by surrenders and policy lapses. Surrenders are the voluntary termination of a
policy by the policyholder and lapses are the termination of the policy due to
non-payment of the premium. Surrenders usually involve the return of the
policy's cash surrender value to the policyholder. The risk is that actual
persistency is significantly different from the persistency we assumed in
pricing. Persistency significantly higher than priced for can cause us to pay
greater than expected death benefits in future years, adversely impacting our
profitability. Persistency significantly lower than priced for can cause our
deferred acquisition costs to be unrecoverable, possibly causing loss
recognition that would adversely impact our profitability. For policies with
cash surrender benefits, surrenders significantly greater than expected will
also cause increased liquidity risk. We address these risks through
diversification and surrender charges.

Expense risk is the risk that actual expenses will be higher than those
covered in pricing. The risk is that expenses per policy reinsured are higher as
a result of a lower number of policies than anticipated, or that our operations
are less efficient than anticipated. We address this risk through the use of
automation and management of general expenses.

Counter-party risk is the risk that retrocessionaires will be unable to
pay claims as they become due. We limit and diversify our counter-party risk by
spreading our retrocession over a pool comprised of highly rated
retrocessionaires. Our underwriting guidelines provide that any retrocessionaire
to whom we cede business must have a financial strength rating of at least "A-"
or higher from A.M. Best or an equivalent rating by another major rating agency.
However, even if a retrocessionaire does not pay a claim submitted by us, we are
still responsible for paying that claim to the ceding company.

Wealth Management

The two principal risks associated with our wealth management business
are mortality risk and counter-party risk. Since we do not have the direct
investment risks associated with our wealth management products, the principal
risk in our variable life insurance business is mortality risk. Mortality risk
tends to be more stable when spread across large numbers of insureds. We expect
that our variable life insurance policies will have relatively large face
amounts and will be held by a relatively small number of policyholders.
Consequently, our associated mortality risk exposure will be greater in the
aggregate, and our probability of loss less predictable, than an insurer with a
broader risk pool. Therefore, pursuant to our underwriting guidelines, we
reinsure substantially all of the mortality risk associated with our variable
life insurance business with highly rated reinsurers and accordingly rely upon
our reinsurers' obligation and ability to pay death claims. The counter-party
risk is that one or more of our reinsurers may fail to pay a reinsured death
claim under a variable life insurance policy.

Investment Portfolio

General

Our general account investment portfolio consists of investments and
cash and cash equivalents, which we control, and funds withheld at interest,
which are associated with modified coinsurance agreements. In most modified
coinsurance transactions, the ceding insurance company retains the assets
supporting the ceded business and manages them for our account. Although the
ceding company must adhere to investment guidelines agreed to by us for the
management of these assets, we do not control the selection of the specific
investments or the timing of the purchase or sale of investments made by the
ceding company.

Our general account portfolio consists primarily of investment-grade
fixed income securities and cash. We seek to generate attractive levels of
investment income while limiting exposure to risks of changing interest rates,
excess default experience and adverse changes in asset values. Third party
investment managers manage the portfolio. We manage the activities of the
managers in an asset-liability management framework, setting duration targets
and other investment guidelines for each portfolio segment. We also set
investment policy and strategy, monitor compliance and evaluate results in
relation to customized benchmarks.

Investment Oversight

Our Investment Committee reviews our investment portfolio and the
performance of our investment managers. In addition, our Finance and Investment
Committee approves changes in the investment policy proposed by management and
oversees compliance with the investment policy.

Investment Policy

Our investment policy includes limits requiring diversification by
asset class, fixed income sector and single issuers and limits exposure to
lower-rated securities. It also limits reinvestment risk and requires effective
asset-liability management processes including the maintenance of adequate
liquidity to meet potential cash outflows and management of exposures to market
risks.

We are exposed to three primary sources of investment risk on fixed
income investments: market value, reinvestment and liquidity risk. Market value
risk is the risk that our invested assets will decrease in value due to a change
in the prevailing market yields for similar assets, an unfavorable change in the
liquidity of the investment or an unfavorable change in the financial prospects
or a downgrade in the credit rating of the issuer of the investment.

Reinvestment risk is the risk that interest rates will decline and funds
reinvested will earn less than expected. Liquidity risk is the risk that
liabilities are surrendered or mature sooner than anticipated, requiring us to
sell assets at an undesirable time to provide for policyholder surrenders or
withdrawals.

We manage these risks through industry and issuer diversification,
overall limits on the amounts of credit risk taken and asset-liability
management, which we refer to as ALM. Our primary ALM practices include:

o modeling the cash flows necessary to service each existing and
newly written reinsurance liability, considering various interest
rate scenarios;

o segmenting portfolios backing material reinsurance transactions
and creating customized investment guidelines engineered to
support the cash flows for each transaction;

o evaluating and quantifying the risks to earnings and the economic
value of shareholders' equity created by gaps between the
projected cash flows from existing assets and those required by
in-force liabilities; and

o reducing the risks caused by mismatches by opportunistically
buying matching new investments.

We generally use foreign denominated securities to manage currency risk
if the related reinsurance transaction is denominated in a foreign currency. We
may enter into interest rate swaps, futures, forwards and other hedging
transactions to manage our risks. We currently use derivatives only to manage
interest rate risk rather than as a speculative investment.

Competition and Ratings

Competition in the life reinsurance industry is based on price,
financial strength ratings, reputation, experience, relationships and service.
We consider Swiss Re, Reinsurance Group of America, Transamerica Reinsurance,
Generali USA Life Re and Munich American Reassurance Company to be our primary
competitors in the United States. In other markets outside the United States,
our competitors include Swiss Re, Reinsurance Group of America, Hannover Re,
Scor and XL Capital Ltd.

Insurance ratings are used by prospective purchasers of insurance
policies, insurers and reinsurance intermediaries in assessing the financial
strength and quality of insurers and reinsurers. Rating organizations
periodically review the financial performance and condition of insurers,
including our insurance subsidiaries. Rating organizations assign ratings based
upon several factors. While most of the factors considered relate to the rated
company, some of the factors take into account general economic conditions and
circumstances outside the rated company's control. Our current insurer financial
strength ratings are listed in the table below for each rating agency that meets
with our management on a regular basis:

Moody's Standard
A.M. Best Fitch Investors &
Company(1) Ratings(2) Service(3) Poor's(4)
---------- ---------- ---------- ---------

Insurer Financial Strength Ratings:
Scottish Annuity and Life Insurance Company (Cayman) Ltd. B BB+ Baa3 BB
Scottish Re (U.S.), Inc. B BB+ Baa3 BB
Scottish Re Ltd. B BB+ - BB
Scottish Re Life Corporation B - - BB

- ---------------
(1) Ratings under review with positive implications
(2) Rating Watch: Evolving
(3) Ratings under review; direction uncertain
(4) Credit Watch: Developing

A.M. Best: "B (Fair)" is seventh highest of sixteen rating
levels. A.M. Best assigns a "B (Fair)" rating to companies that have,
in its opinion, an excellent ability to meet their ongoing obligations
to policy holders. A.M. Best maintains a letter scale rating system
ranging from "A++ (superior)" to "F (in liquidation)."

While not commenting specifically on the potential ratings impact
of closing the Transaction, A.M. Best has indicated that completing
the Transaction would be a major step toward improving our liquidity
posture and should enable us to resume meaningful new business
activities.

Fitch: "BB+ (Moderately Weak)" is eleventh highest of twenty-two
rating levels. Fitch assigns a "BB+ (Moderately Weak)" rating to
companies when, in its opinion, there is a possibility that ceased or
interrupted payments could occur, particularly as a result of adverse
economic or market changes over time. However business or financial
alternatives may be available to allow for policyholder and contract
obligations to be met in a timely manner. Fitch's Insurer Financial
Strength ("IFS") ratings range from "AAA (exceptionally strong)" to "D
(distressed)."

Fitch has indicated that the successful close of the Transaction
would alleviate near-term concerns for collateral financing in 2007,
and is expected to have a positive impact on our business prospects
and franchise, and may result in an upgrade in the ratings assigned to
us sometime shortly following the close of the Transaction. Fitch also
indicated that if the Transaction does not close, it expects that the
ratings of the holding company would be downgraded to a level no
higher than 'CC' and the IFS ratings would be downgraded to no higher
than 'CCC'.

Moody's: "Baa3 (Adequate)" is the tenth highest designation of
Moody's Investors Service ("Moody's") twenty-one rating levels.
Moody's assigns a "Baa(3) (Adequate)" rating to companies that offer,
in its opinion, adequate financial security, however, certain
protective elements may be lacking or may be characteristically
unreliable over any great length of time. Moody's long term insurance
financial strength ratings range from "Aaa (exceptional)" to "C
(lowest)." Moody's has indicated that if the Transaction does not
close, there will be significant downward pressure on our ratings,
adding that failure to raise capital and liquidity would result in a
multi-notch downgrading of our ratings.

Standard & Poor's: "BB (Marginal)" is twelfth highest of
twenty-two rating levels. Standard & Poor's assigns a "BB (Marginal)"
rating to companies that have, in its opinion, marginal financial
security characteristics, and while positive attributes exist, adverse
business conditions could lead to insufficient ability to meet
financial conditions. Standard & Poor's insurer financial strength
ratings range from "AAA (extremely strong)" to "R (under regulatory
supervision)."

Standard & Poor's has indicated that the Transaction could have
positive credit characteristics and that it would evaluate the ratings
based on the terms of the Transaction. Any final resolution would
incorporate the viability of the franchise and business prospects
following the events of the past several months.

The ability to write reinsurance partially depends on an insurer's
financial condition and its financial strength ratings. These ratings are based
on an insurance company's ability to pay policyholder obligations and are not
directed toward the protection of investors. Each of our credit ratings is
considered investment grade. Our ability to raise capital for our business and
the cost of this capital is influenced by our credit ratings. A security rating
is not a recommendation to buy, sell or hold securities. It is subject to
revision or withdrawal at any time by the assigning rating organization, and
each rating should be evaluated independently of any other rating.

Employees

As of February 26, 2007, we employed approximately 399 full time
employees, none of whom are unionized. We believe our relations with our
employees are good.

Regulation

United States

General U.S. State Supervision
- ------------------------------

Various state insurance departments enforce insurance and reinsurance
regulation. The extent and nature of regulation varies from state to state.
Scottish Re (U.S.), Inc. is a Delaware-domiciled reinsurer and licensed,
accredited, approved or authorized to write reinsurance in 50 states and the
District of Columbia. Scottish Re Life Corporation is a Delaware-domiciled
reinsurer and licensed, accredited, approved or authorized to conduct
reinsurance in 50 states, the District of Columbia, and the Federated States of
Micronesia. Orkney Re, Inc. is a special purpose financial captive insurance
company formed under the laws of South Carolina.

Insurance Holding Company Regulation
- ------------------------------------

We and our subsidiaries, Scottish Re (U.S.), Inc. and Scottish Re Life
Corporation, are subject to regulation under the insurance holding company
system laws of Delaware. The insurance holding company system laws and
regulations vary from state to state, but generally require insurers and
reinsurers that are members of insurance holding company systems to register and
file with state regulatory authorities certain reports, including information
concerning their capital structure, ownership, financial condition and general
business operations. Generally, all transactions between Scottish Re (U.S.),
Inc. and/or Scottish Re Life Corporation and other members of our insurance
holding company system must be fair and, if material or of a certain kind,
require prior notice and approval or non-disapproval by the Delaware state
insurance department. State insurance holding company system laws typically
place limitations on the amounts of dividends or other distributions payable by
insurers and reinsurers. Orkney Re, Inc. is not subject to the South Carolina
insurance holding company law, but it is required to obtain the approval of the
South Carolina Director of Insurance before it may materially amend any
agreements to which it is a party, enter into any new agreements or otherwise
amend its business plan or pay dividends.

State insurance holding company system laws also require prior notice
and state insurance department approval of changes in control of an insurer or
reinsurer or its direct or indirect holding company. The insurance laws of
Delaware provide that no person, including a corporation or other legal entity,
may acquire control of a domestic insurance or reinsurance company unless it has
given notice to such company and obtained prior written approval of the state
insurance commissioner. Any purchaser of 10% or more of the outstanding voting
securities of an insurance or reinsurance company or its direct or indirect
holding company is presumed to have acquired control, unless this presumption is
rebutted. In addition, many state insurance laws require prior notification to
the state insurance department of a change in control of a non-domiciliary
insurance company licensed to transact insurance business in that state. While
these pre-notification statutes do not authorize the state insurance departments
to disapprove the change in control, they authorize regulatory action in the
affected state if particular conditions exist such as undue market
concentration. Any future transactions that would constitute a change in control
of Scottish Re (U.S.), Inc. and Scottish Re Life Corporation or any of their
U.S. insurance subsidiaries may require prior notification in the states that
have adopted pre-acquisition notification laws. These prior notice and prior
approval laws may discourage potential acquisition proposals and may delay,
deter or prevent a change of control of us, including transactions that some or
all of our shareholders might consider to be desirable.

Dividend Restrictions
- ---------------------

State insurance holding company laws typically place limitations on the
amounts of dividends or other distributions payable by insurers and reinsurers.
Delaware provides that, unless the prior approval of the state insurance
commissioner has been obtained, dividends may be paid only from earned surplus
and the maximum annual amount payable is limited to the greater of 10% of
policyholder surplus at the end of the prior year or 100% of statutory net gain
from operations (not including realized capital gains) for the prior year.

Orkney Re, Inc. may only pay dividends in accordance with restrictions
and guidelines contained in its licensing order issued by the South Carolina
Director of Insurance. Any dividends Orkney Re, Inc. pays are subject to the
lien of the indenture relating to the long-term debt of its parent entity,
Orkney Holdings, LLC.

U.S. Reinsurance Regulation
- ---------------------------

Scottish Re (U.S.), Inc., Scottish Re Life Corporation and Orkney Re,
Inc. are subject to insurance regulation and supervision that in many respects
is similar to the regulation of licensed primary insurers. Generally, state
regulatory authorities monitor compliance with, and periodically conduct
examinations regarding, state mandated standards of solvency, licensing
requirements, investment limitations, restrictions on the size of risks which
may be reinsured, deposits of securities for the benefit of reinsureds, methods
of accounting, and reserves. However, in contrast with primary insurance
policies, which are regulated as to rate, form, and content, the terms and
conditions of reinsurance agreements are generally not subject to regulation by
state insurance regulators.

The ability of any primary insurer or ceding reinsurer to take credit
for the reinsurance placed with reinsurers is a significant component of
reinsurance regulation. Typically, a primary insurer will only enter into a
reinsurance agreement if it can obtain credit on its statutory financial
statements for the reinsurance ceded to the reinsurer. Credit is usually granted
when the reinsurer is licensed, accredited, approved or authorized to write
reinsurance in the state where the primary insurer is domiciled. In addition,
states generally allow credit for reinsurance ceded to a reinsurer if the
reinsurer is licensed in another jurisdiction and the primary insurer is
provided with collateral in the form of letters of credit, trusts or funds
withheld contracts to secure the reinsurer's obligations.

U.S.Reinsurance Regulation of our Non-U.S. Reinsurance Subsidiaries
- -------------------------------------------------------------------

Our non-U.S. reinsurance subsidiaries also assume reinsurance from
primary U.S. insurers and reinsurers. In order for primary U.S. insurers and
ceding reinsurers to obtain financial statement credit for the reinsurance
obligations ceded to our non-U.S. reinsurers, our non-U.S. reinsurance
subsidiaries must satisfy reinsurance requirements. States generally allow
credit for reinsurance ceded to unlicensed and unaccredited reinsurers if the
ceding insurer or reinsurer is provided with collateral in the form of letters
of credit, trusts or funds withheld contracts to secure the reinsurer's
obligations.

U.S. Insurance Regulation of our Non-U.S. Insurance Subsidiaries
- ----------------------------------------------------------------

Our non-U.S. insurance subsidiaries that sell wealth management
products are not licensed to conduct insurance business in any jurisdiction in
the United States. Therefore, they cannot utilize traditional life insurance
marketing channels such as agents, nor can they use mail-order or other direct
marketing channels to conduct business with persons in the United States or
certain other jurisdictions. Accordingly, they rely primarily on referrals by
financial advisors, investment managers, private bankers, attorneys and other
intermediaries in the United States to generate wealth management business. None
of these intermediaries represents us as agent or in any other capacity, nor do
they receive any commissions or other remuneration from us for activities
undertaken in the United States. In addition, policy issuance and servicing must
occur outside of the United States.

NAIC Ratios
- -----------

The National Association of Insurance Commissioners, which we refer to
as the NAIC, has developed a set of financial relationships or tests known as
the NAIC Insurance Regulatory Information System to assist state regulators in
monitoring the financial condition of insurance companies and identifying
companies that require special attention or action by insurance regulatory
authorities. A second set of confidential ratios, called Financial Analysis
Solvency Tracking System, "FAST," is also used for monitoring. Insurance
companies generally submit data quarterly to the NAIC, which in turn analyzes
the data using prescribed financial data ratios, each with defined "usual
ranges." If an insurance company's results vary significantly from usual ranges,
regulators may make further inquiries. Regulators have the authority to impose
remedies ranging from increased monitoring to certain business limitations to
various degrees of supervision. Our U.S. reinsurance subsidiaries are not
currently subject to increased regulatory scrutiny based on our ratios, as
computed under these systems.

Statutory Accounting Principles
- -------------------------------

United States Statutory Accounting Principles, or SAP, are a basis of
accounting developed by U.S. insurance

regulators to monitor and regulate the solvency of insurance companies. In
developing SAP, insurance regulators were primarily concerned with assuring an
insurer's ability to pay all its current and future obligations to
policyholders. As a result, SAP focuses on conservatively valuing the assets and
liabilities of insurers, generally in accordance with standards specified by the
insurer's domiciliary jurisdiction. Uniform statutory accounting practices are
established by the NAIC and generally adopted by regulators in the various U.S.
jurisdictions. These accounting principles and related regulations determine,
among other things, the amounts our insurance subsidiaries may pay to us as
dividends.

U.S. GAAP is designed to measure a business on a going-concern basis.
It gives consideration to matching of revenue and expenses and, as a result,
certain expenses are capitalized when incurred and then amortized over the life
of the associated policies. The valuation of assets and liabilities under U.S.
GAAP is based in part upon best estimate assumptions made by the insurer.
Shareholders' equity represents both amounts currently available and amounts
expected to emerge over the life of the business. As a result, the values for
assets, liabilities and equity reflected in financial statements prepared in
accordance with U.S. GAAP may be different from those reflected in financial
statements prepared under SAP.

Regulation of Investments
- -------------------------

Our U.S. insurance subsidiaries are subject to laws and regulations
that require diversification of their investment portfolio and limit the amount
of investments in certain asset categories, such as below investment grade fixed
maturities, equity real estate, other equity investments and derivatives.
Failure to comply with these laws and regulations would cause investments
exceeding regulatory limitations to be treated as non-admitted assets for
purposes of measuring surplus, and, in some instances, would require divestiture
of such non-complying investments. We believe the investments made by our U.S.
insurance subsidiaries comply with these laws and regulations.

Market Conduct Regulation
- -------------------------

The laws and regulations of U.S. jurisdictions include numerous
provisions governing the marketplace activities of insurers, including
provisions governing the form and content of disclosure to consumers, product
illustrations, advertising, product replacement, sales and underwriting
practices, complaint handling and claims handling. The regulatory authorities in
U.S. jurisdictions generally enforce these provisions through periodic market
conduct examinations. As our U.S. subsidiaries limit their business to
reinsurance, and our wealth management companies are not licensed to do business
in the U.S., laws and regulations regarding market conduct have only limited
application to us.

Statutory Examinations
- ----------------------

As part of their regulatory oversight process, insurance departments in
U.S. jurisdictions conduct periodic detailed examinations of the books, records,
accounts and business practices of insurers domiciled in their jurisdictions.
These examinations generally are conducted in cooperation with the insurance
departments of two or three other states or jurisdictions, representing each of
the NAIC zones, under guidelines promulgated by the NAIC.

Risk-Based Capital
- ------------------

The Risk-Based Capital (RBC) for Insurers Model Act, or the Model Act,
as it applies to insurers and reinsurers, was adopted by the NAIC in 1993. The
main purpose of the Model Act is to provide a tool for insurance regulators to
evaluate the capital of insurers relative to the risks assumed by them and
determine whether there is a need for possible corrective action. U.S. insurers
and reinsurers are required to report the results of their risk-based capital
calculations as part of the statutory annual statements filed with state
insurance regulatory authorities.

The Model Act provides for four different levels of regulatory actions
based on annual statements, each of which may be triggered if an insurer's Total
Adjusted Capital, as defined in the Model Act, is less than a corresponding
level of risk-based capital, which we call RBC.

o The Company Action Level is triggered if an insurer's Total
Adjusted Capital is less than 200% of its Authorized Control
Level RBC, as defined in the Model Act. At the Company

Action Level, the insurer must submit a plan to the regulatory
authority that discusses proposed corrective actions to
improve its capital position.

o The Regulatory Action Level is triggered if an insurer's Total
Adjusted Capital is less than 150% of its Authorized Control
Level RBC. At the Regulatory Action Level, the regulatory
authority will perform a special examination of the insurer
and issue an order specifying corrective actions that must be
followed.

o The Authorized Control Level is triggered if an insurer's
Total Adjusted Capital is less than 100% of its Authorized
Control Level RBC, and at that level the regulatory authority
is authorized (although not mandated) to take regulatory
control of the insurer.

o The Mandatory Control Level is triggered if an insurer's Total
Adjusted Capital is less than 70% of its Authorized Control
Level RBC, and at that level the regulatory authority must
take regulatory control of the insurer. Regulatory control may
lead to rehabilitation or liquidation of an insurer.

On December 6, 2006, Scottish Re (U.S.), Inc. entered into a Memorandum
of Understanding with the Ohio Department of Insurance pursuant to which the
Ohio regulator agreed to refrain from taking action at such time against
Scottish Re (U.S.), Inc., subject to certain conditions being met including the
completion of the Transaction, for its alleged violation of an Ohio insurance
regulation prohibiting certain levels of statutory losses as a percentage of
surplus.

As of December 31, 2006, the risk-based capital of Scottish Re (U.S.),
Inc., Scottish Re Life Corporation and Orkney Re, Inc. exceeded minimum RBC
levels.

The Gramm-Leach-Bliley Act
- --------------------------

In November 1999, the Gramm-Leach-Bliley Act of 1999, or the GLBA, was
enacted, implementing fundamental changes in the regulation of the financial
services industry in the United States. The GLBA permits the transformation of
the already converging banking, insurance and securities industries by
permitting mergers that combine commercial banks, insurers and securities firms
under one holding company, a "financial holding company." Bank holding companies
and other entities that qualify and elect to be treated as financial holding
companies may engage in activities, and acquire companies engaged in activities,
that are "financial" in nature or "incidental" or "complementary" to such
financial activities. Such financial activities include acting as principal,
agent or broker in the underwriting and sale of life, property, casualty and
other forms of insurance and annuities. However, although a bank cannot act as
an insurer nor can it own an insurer as a subsidiary in most circumstances, a
financial holding company can own any kind of insurer, insurance broker or
agent. Under the GLBA, national banks retain their existing ability to sell
insurance products in some circumstances.

Under state law, the financial holding company must apply to the
insurance commissioner in the insurer's state of domicile for prior approval of
the acquisition of the insurer. Under the GLBA, no state may prevent or restrict
affiliations between banks and insurers, insurance agents or brokers. Further,
states cannot prevent or significantly interfere with bank or bank subsidiary
sales activities. Finally, both bank and bank affiliates can obtain licenses as
producers.

Until the passage of the GLBA, the Glass-Steagall Act had limited the
ability of banks to engage in securities-related businesses, and the Bank
Holding Company Act had restricted banks from being affiliated with insurers.
With the passage of the GLBA, among other things, bank holding companies may
acquire insurers, and insurance holding companies may acquire banks. The ability
of banks to affiliate with insurers may materially affect our U.S. reinsurance
subsidiary's product lines by substantially increasing the number, size and
financial strength of potential competitors.

Bermuda

Our Bermuda subsidiaries are subject to regulation under the Bermuda
Companies Act of 1981, as amended, and our Bermuda insurance subsidiaries are
subject to regulation under the Bermuda Insurance Act of 1978, as amended,
(which we refer to as the Bermuda Insurance Act), and the regulations
promulgated thereunder. They are required, among other things, to meet and
maintain certain standards of solvency, to file periodic reports in accordance
with Bermuda statutory accounting rules, to produce annual audited financial
statements and to maintain a minimum level of statutory capital and surplus. In
general, the regulation of insurers in Bermuda relies heavily upon the auditors,
directors and managers of the Bermuda insurer, each of which must certify that
the insurer meets the solvency and capital requirements of the Bermuda Insurance
Act.

Under the Bermuda Insurance Act, a Bermuda insurance company carrying
on long-term business (which includes the writing of annuity contracts and life
insurance policies with respect to human life) must hold all receipts in respect
of its long-term business and earnings thereon in a separate long-term business
fund. Payments from such long-term business fund may not be made directly or
indirectly for any purpose other than those of the insurer's long-term business,
except in so far as such payment is made out of surplus certified by the
insurer's approved actuary to be available for distribution other than to
policyholders. In addition, certain of our Bermuda subsidiaries are authorized
by private acts of the Bermuda Legislature (the Scottish Annuity & Life
International Insurance Company (Bermuda) Ltd. Consolidation and Amendment Act
2001 and the Scottish Annuity & Life Insurance Company (Bermuda) Limited
Consolidation and Amendment Act 2001, which we refer to as the private acts) to
establish separate accounts in respect of one or more life insurance policies or
annuity contracts. In the event of an inconsistency between the Bermuda
Insurance Act and our private acts, the terms of the private acts control
subject, however, to later amendments of the Bermuda Insurance Act or other
relevant laws. Under our private acts, each insurance subsidiary is permitted to
credit to relevant separate accounts such portion of the premiums and other
receipts from the related policy or contract, and any property of the insurance
subsidiary derived from or purchased with such premiums, as the related policies
or contracts stipulate. To the extent provided in the relevant policies or
contracts, income, interest or other gains earned from, and any property
acquired by, investing or dealing in the assets of the separate account are
credited to the separate account, and all expenses, fees or losses relating to
the separate account are charged against the separate account. The assets and
property held in the separate account are to be used for the sole purpose of
paying any and all claims arising from or under the related policies or
contracts, and no other person has any right or interest in such assets. Upon
the termination of policies or contracts related to a separate account, and the
discharge of obligations under the policies or contracts, the insurance
subsidiary may terminate the separate account, and credit any remaining assets
or property to its general account. In the event of insolvency of one of our
Bermuda subsidiaries, the liquidator is bound to recognize the separate nature
of each separate account, and is not empowered to apply property identified as
the property of any one separate account to pay the claims of creditors of the
insurance company or policyholders other than the policyholder to whom the
separate account relates. The private acts also permit our Bermuda subsidiaries
to issue certain securities based on separate accounts that are subject to
similar provisions.

Cayman Islands

Our Cayman Islands subsidiaries are subject to regulation as licensed
insurance companies under Cayman Islands law. These subsidiaries hold
unrestricted Class B insurance licenses under Cayman Islands Insurance Law and
may therefore carry on an insurance business from the Cayman Islands, but may
not engage in any Cayman Islands domestic insurance business. Unless
specifically exempted, a Cayman Islands insurance company must engage a licensed
insurance manager operating in the Cayman Islands to provide insurance expertise
and oversight. Our subsidiaries are exempt from this requirement. In addition,
under the Cayman Islands Insurance Law, a Cayman Islands insurance company
carrying on both general business and long-term business (which includes the
writing of life insurance policies) must hold all receipts in respect of its
long-term business and all interest, earnings and assets derived therefrom in a
separate long-term business fund. Payments of funds from such long-term business
fund may not be made directly or indirectly for any purpose other than those of
the insurer's long-term business except in so far as such payments can be made
out of any surplus disclosed on an actuarial valuation and certified by an
actuary approved by the Cayman Islands Monetary Authority to be distributable
otherwise than to policyholders. Every Cayman Islands insurance company carrying
on long-term business may establish any number of separate accounts in respect
of contracts to pay (i) annuities on human life and (ii) contracts of insurance
on human life, the assets relating to which shall be kept segregated one from
the other and independent of all other

assets of the Cayman Islands insurer, and, notwithstanding the provisions of any
other law to the contrary, are not chargeable with any liability arising from
any other business of the insurer (including other types of long-term business)
and no liabilities shall be satisfied out of the assets standing to the credit
of the relevant separate account apart from those liabilities arising from the
contracts for which the separate account was established or liabilities relating
specifically to the operation of the separate account. The scope and the
validity of the Cayman Islands law regarding separate accounts have not been
tested in the courts of the Cayman Islands. Assets held with respect to the
reinsurance business of our Cayman Island subsidiaries are typically held in
reinsurance trust accounts, and such assets are available only to satisfy
obligations under the associated reinsurance agreements.

Guernsey

Scottish Re PCC Limited is a protected cell company incorporated under
the laws of the Island of Guernsey and licensed by the Guernsey Financial
Services Commission or GFSC, to carry on international insurance business under
the Insurance Business (Bailiwick of Guernsey) Law, 2002. The activities of
Scottish Re PCC Limited are supervised by the GFSC. Insurers in Guernsey are
required to maintain a minimum margin of solvency and to ensure that they have
funds available sufficient to meet a total annual aggregate risk retention
together with any forecasted annual expenses. In addition, insurance companies
are also required to report annually to the GFSC and must also retain a general
representative. The GFSC also has powers to investigate and intervene in the
affairs of insurance companies in Guernsey.

Ireland

Scottish Re (Dublin) Limited is a reinsurance company incorporated
under the laws of Ireland and subject to the regulation and supervision of the
Irish Financial Services Regulatory Authority (the "Irish Financial Regulator").

The European Communities (Reinsurance) Regulations 2006 (the
"Regulations") came into effect on July 15, 2006 and Ireland thereby became the
first EU Member State to implement Directive 2005/68/EC of the European
Parliament and the Council of the European Commission dated November 16, 2005
(the "Reinsurance Directive"). The Regulations introduce a comprehensive
framework for the authorization and supervision of reinsurance companies in
Ireland for the first time.

Once implemented by all EU Member States, the Reinsurance Directive
will introduce a single passport system within the European Union for
reinsurance companies similar to the regime that currently applies to direct
insurers. The Reinsurance Directive provides that the authorization and
supervision of an EU reinsurance company will be the responsibility of the EU
Member State where the head office of the company is located (known as the "home
state"). Once authorized in its home state, a reinsurance company, such as our
Irish subsidiary Scottish Re (Dublin) Limited, will be automatically entitled to
conduct reinsurance business in all EU Member States under the principles of
freedom of establishment and freedom to provide services. The Reinsurance
Directive provides that the financial supervision of a reinsurance company,
including that of the business it carries on in other member states, either
through branches or under the freedom to provide services, will be the sole
responsibility of the home state. All EU Member States must implement the
Reinsurance Directive on or before December 10, 2007.

Some key provisions of the Regulations that are applicable to Scottish
Re (Dublin) Limited include the following:

o Scottish Re (Dublin) Limited is deemed to be authorized to
carry on the reinsurance of life assurance business, subject
to complying with certain requirements (including the
requirements summarized below) not later than December 10,
2007.

o The objects of Scottish Re (Dublin) Limited must be limited to
carrying on reinsurance business and related operations.

o Scottish Re (Dublin) Limited will be obliged to establish
adequate technical reserves to cover its reinsurance
obligations and it must adopt a prudent person approach when
determining the assets that will constitute such reserves. The
Irish Financial Regulator prescribed certain rules pursuant to
the Regulations

in January 2007 that will be of application to Scottish Re
(Dublin) Limited. These rules provide that Scottish Re
(Dublin) Limited may treat funds withheld by a ceding insurer
as an admitted asset, provided that the value of such an asset
is calculated on a prudent person basis. The valuation of a
funds withheld asset must also be determined in accordance
with certain principles relating to the security and liquidity
of the asset. Similarly, deferred acquisition costs may be
treated as an admitted asset by provided this asset is valued
on a prudent person basis in accordance with certain
principles relating to the diversity, liquidity and security
of the deferred acquisition costs.

o Scottish Re (Dublin) Limited will also be required to maintain
a solvency margin consisting of assets that are "free of any
foreseeable liabilities" less any intangible items. In the
case of the reinsurance of certain classes of life assurance
business (essentially life business with a significant
investment component), the required solvency margin is
calculated in accordance with the rules applicable to those
classes of life assurance business as set out in Directive
2002/83/EC. As regards the reinsurance of all other classes of
life assurance business (essentially "protection" business),
the required solvency margin is determined as the higher of a
premium basis or a claims basis calculation. The premium basis
calculation is the sum of 18% of the first (euro)50.0 million
of premiums received in the immediately preceding financial
year and 16% of the balance of premiums received in that year.
The claims basis calculation is the sum of 26% of the average
burden of claims during a certain number of financial years
preceding the last financial year of the company up to
(euro)35.0 million and 23% of the excess. "Mixed" business
(i.e. reinsurance business that contains components of both
investment and protection business) may be separated for the
purpose of calculating the appropriate solvency margin.

o One-third of the required solvency margin of Scottish Re
(Dublin) Limited will constitute its minimum guarantee fund,
which must not be less than (euro)3.0 million.

The Irish Financial Regulator has requested all life reinsurance
companies, including Scottish Re (Dublin) Limited, to confirm on or before
February 28, 2007 their compliance or non-compliance with the provisions of the
Regulations relating to the maintenance of technical reserves on the basis of
their most recent audited financial statements. On December 13, 2006, we filed
the 2006 Compliance Submission with the Irish Financial Regulator. Scottish Re
(Dublin) Limited will also be required to make a further submission to the Irish
Financial Regulator on or before June 29, 2007 to confirm its compliance or
non-compliance with the provisions of the Regulations relating to the
maintenance of technical reserves, the required solvency margin and guarantee
fund. If Scottish Re (Dublin) Limited is not compliant with the new regulatory
requirements at the time of this submission to the Irish Financial Regulator, it
must include a plan showing how it intends to comply with the new requirements
by September 28, 2007.

Singapore

Scottish Annuity & Life Insurance Company (Cayman) Ltd. has established
a branch in Singapore (the "Singapore Branch"). The Singapore Branch was
registered by the Monetary Authority of Singapore, or MAS, to carry on
reinsurance of life business under the section 8 of the Singapore Insurance Act
on 7 March 2006. The activities of the Singapore Branch are supervised by MAS.
Direct insurers and reinsurers (collectively, `insurers') registered in
Singapore are required to maintain fund solvency requirements and capital
adequacy requirements prescribed by MAS under section 18 of the Insurance Act.
In addition, insurers registered in Singapore are required to submit returns
quarterly to the MAS and must also appoint a Principal Officer. The MAS also has
powers to investigate and intervene in the affairs of insurers in Singapore. The
acquisition of "control" of any insurer registered in Singapore will require MAS
approval.

United Kingdom

Scottish Re Limited is a reinsurance company incorporated and
registered in England and Wales and subject to regulation and supervision in the
United Kingdom. On December 1, 2001, the United Kingdom's Financial Services
Authority, or FSA, assumed its full powers and responsibilities under the
Financial Services and Markets Act 2000, or FSMA. The FSA is now the single
statutory regulator responsible for regulating deposit-taking, insurance
(including reinsurance), investment and most other financial services business.
It is a criminal

offense for any person to carry on a regulated activity in the United Kingdom
unless that person is authorized by the FSA or falls under an exemption.
Scottish Re Limited is authorized to carry on long-term business and certain
classes of general business with a requirement that it restricts its business to
reinsurance.

The FSA has adopted a risk-based approach to the supervision of
insurance companies. Under this approach the FSA periodically performs a formal
risk assessment of insurance and reinsurance companies or groups carrying on
business in the United Kingdom. After each risk assessment, the FSA will inform
the insurer/reinsurer of its views on the insurer's/reinsurer's risk profile.
This will include details of any remedial action that the FSA requires and the
likely consequences if this action is not taken. The FSA also supervises the
management of insurance and reinsurance companies through the approved persons
regime, by which any appointment of persons to perform certain specified
"controlled functions" within a regulated entity, must be approved by the FSA.

Under FSA rules, insurance and reinsurance companies are required to
maintain a margin of solvency at all times, the calculation of which in any
particular case depends on the type and amount of business a company writes. The
method of calculation of the solvency margin is set out in the FSA rules and,
for these purposes, a company's assets and its liabilities are subject to
specific valuation rules. Failure to maintain the required solvency margin is
one of the grounds on which wide powers of intervention conferred upon the FSA
may be exercised.

In addition to the statutory solvency margin described above, insurance
and reinsurance companies are required to carry out their own assessment (known
as an Individual Capital Assessment) of the capital required to ensure that over
a one year time horizon the value of its assets exceeds the value of its
liabilities with a 99.5% degree of confidence. The rules for valuing assets and
liabilities for the purposes of the Individual Capital Assessment are generally
less prescriptive than the valuation methodology applicable to the calculation
of the statutory solvency margin. The Individual Capital Assessment must be
updated annually and may be reviewed periodically by the FSA which may also
issue Individual Capital Guidance, being the amount and quality of capital that
the FSA considers a firm should hold taking into account its review of the
Individual Capital Assessment and its risk assessment of the firm. Insurers and
reinsurers are expected to hold capital in excess of the amount specified in the
Individual Capital Assessment or Individual Capital Guidance, whichever is the
greater. Failure to do so may result in the FSA taking regulatory action.

The acquisition of "control" of any U.K. insurance or reinsurance
company requires FSA approval. For these purposes, a party that "controls" a
U.K. insurance or reinsurance company includes any company or individual that
(together with its or his associates) directly or indirectly acquires 10% or
more of the shares in a U.K. authorized insurance or reinsurance company or its
parent company, or is entitled to exercise or control the exercise of 10% or
more of the voting power in such authorized insurance or reinsurance company or
its parent company. In considering whether to approve an application for
approval, the FSA must be satisfied that both the acquirer is a fit and proper
person to have such "control" and that the interests of consumers would not be
threatened by such acquisition of "control." Failure to make the relevant prior
application could result in action being taken by the FSA against both the
person who sought to acquire control and against the regulated company.

The Reinsurance Directive has been implemented by the United Kingdom.
Since the United Kingdom already operated a comprehensive system for approving,
supervising and regulating reinsurance companies, the implementation of the
directive is not expected to have any material direct impact on the operations
of Scottish Re Limited.

New Jurisdictions

If we or any of our subsidiaries were to become subject to the laws of
a new jurisdiction where we or that subsidiary is not presently admitted, they
may not be in compliance with the laws of the new jurisdiction. Any failure to
comply with applicable laws could result in the imposition of significant
restrictions on our ability to do business, and could also result in fines and
other sanctions, any or all of which could adversely affect our financial
results and operations.

Additional Information

Our Website address is www.scottishre.com. Forms 10-K, 10-Q, 8-K and
all amendments to such reports are available free of charge on our Website.
These reports are posted to the Website as soon as reasonably practical after
they have been filed with the SEC. We will also provide electronic or paper
copies of these reports on request. Information contained on our Website does
not constitute part of this Annual Report on Form 10-K.

Item 1A: RISK FACTORS

Investing in our securities involves certain risks. Any of the
following risks could materially adversely affect our business, results of
operations or financial condition.

Risks Related to Our Business

An unfavorable shareholder vote or delay in the consummation of the Transaction
will adversely affect our business and could lead to further deterioration of
shareholder value.

If our shareholders do not approve the Transaction or if the Transaction is
not consummated for any other reason, we will be required to pursue another
financing transaction which, if available at all, would likely be on less
favorable terms than the Tranaction, or seek other restructuring alternatives,
which would also likely be less favorable to us and our shareholders than the
Transaction.

Having undertaken a thorough process of seeking bids to purchase or
capitalize the company, with the assistance of Goldman Sachs and Bear Stearns,
we do not believe at this time that an alternative financing or restructuring
transaction or pursuit of a run-off plan would be available following a
shareholder rejection of the Transaction. Accordingly, upon a rejection of the
Transaction, we believe we will be required to seek protection under applicable
bankruptcy and insolvency laws in the jurisdictions where we and our operating
subsidiaries are domiciled.

An unfavorable shareholder vote or delay in the consummation of the Transaction
will require us to seek out alternative capital sources which could be
unavailable or on less favorable terms than the Issuance.

We need to raise substantial capital in the short term to meet our
liquidity needs. Without shareholder approval of the Transaction and the
consummation of the Transaction, we would need to seek out alternative capital
sources which may not be available or, if available, would likely be on less
favorable terms than the Transaction. In addition, it is unlikely that we would
be able to enter into such a transaction on a timely basis.

In addition, in connection with the execution of the Securities Purchase
Agreement on November 27, 2006, we entered into a commitment letter with
Cerberus pursuant to which Cerberus agreed to provide Scottish Annuity & Life
Insurance Company (Cayman) Ltd. a term loan facility in an amount of up to $100
million and we entered into a commitment letter with Citigroup Global Markets
Inc. and Calyon Securities (USA) Inc. for a collateral finance facility of up to
$500 million. These facilities were arranged by the Investors and formed part of
the negotiated Transaction. If shareholder approval is not obtained, we will
need to seek alternative capital sources, which may not be available or, if
available, would likely be on less favorable terms.

An unfavorable shareholder vote or delay in the consummation of the Transaction
would likely lead to further downgrading of the ratings of both our operating
companies and our holding company, which could further inhibit our ability to
obtain sources of capital.

Any such further downgrade will further inhibit our ability to obtain
sources of capital and, as discussed below, would likely lead to demands from
existing creditors for additional collateral. Moreover, we believe that our
relationships with existing clients will further suffer during any prolonged
period of uncertainty.

With further ratings downgrades and uncertain prospects of achieving an
alternative restructuring, we would likely lose many of our key employees and
thereby we would risk losing our ability to manage our existing book of business
effectively and to retain value for shareholders.

The recent downgrades, and any further downgrades, could make us less
competitive and will increase our cost of capital.

Ratings are an important factor in attracting business in our life
reinsurance business. Rating organizations periodically review the financial
performance and condition of insurers, including our insurance subsidiaries.
Rating organizations assign ratings based upon several factors. Although most of
the factors considered relate to the rated company, some of the factors take
into account general economic conditions and circumstances outside the rated
company's control. The objective of rating organizations is to provide an
opinion of an insurer's financial strength and ability to meet ongoing
obligations to its policyholders. These ratings are subject to periodic review
by the relevant rating agency and may be revised downward or withdrawn at the
sole discretion of the rating agency. In addition, these ratings are not an
evaluation directed to investors in our securities and are not recommendations
to buy, sell or hold our securities. See "Item 1 - Competition and Ratings"
starting on page 12 for a description of our subsidiaries' ratings.

Although there are certain in-force treaties with recapture provisions
that are triggered by a ratings downgrade, the recent downgrades have and will
continue to adversely affect our ability to sell products, write new treaties,
retain existing business (through the termination of open treaties for new
business), and compete for attractive acquisition opportunities. In addition, as
a result of the downgrades, the interest rates for our credit facilities and
securitization transactions have increased. Our ability to raise capital for our
business and the cost of such capital will be adversely affected by downgrades
in our credit ratings.

An unfavorable shareholder vote or delay in consummation of the Transaction
would likely lead to demands from existing creditors for additional collateral.

On November 26, 2006, we entered into an amended forbearance agreement with
HSBC, whereby HSBC agreed not to make demands for additional collateral under
our collateral finance facilities with them through December 31, 2008 so long as
certain conditions are met. This forbearance agreement will terminate if our
shareholders do not approve the Transaction or if the Transaction is not
consummated for any other reason and we likely will face demands from HSBC for
additional collateral, which we may not be able to meet, and in any event which
would further exacerbate our tight liquidity and capital position. Any breach by
us of our obligation to post collateral could result in an acceleration of our
obligations under these collateral finance facilities, which would require us to
seek bankruptcy protection under applicable law if we were unable promptly to
access alternative sources of capital.

An unfavorable shareholder vote or delay in the consummation of the Transaction
will adversely affect our business and could result in us seeking protection
under applicable bankruptcy and insolvency laws in the jurisdictions where we
and our operating subsidiaries are domiciled and/or regulatory intervention by
our primary insurance regulators.

Given our ongoing liquidity and capital needs, we may need to seek
protection under applicable bankruptcy and insolvency laws in the jurisdictions
where we and our operating subsidiaries are domiciled if the Transaction is not
consummated. Bankruptcy filings by us and our subsidiaries would be complex and
expensive. Moreover, we and our Cayman Islands domiciled subsidiaries would need
to request the commencement of parallel "joint provisional liquidation"
proceedings in Bermuda and the Cayman Islands in order to assure protection from
creditors outside the United States. Coordination of these related proceedings
would be difficult and cumbersome. While we may be able to restructure or sell
our business and emerge from such bankruptcy proceedings, we cannot predict the
costs of, or amount of time we would spend in bankruptcy. Lengthy bankruptcy
proceeding might disrupt our business, as well as create additional concerns for
our employees and policyholders. There can be no assurance concerning the
outcome of such proceedings or their impact on shareholder value.

Further, in the event that shareholders reject the Transaction, we believe
our primary insurance regulators will likely consider exercising one or more
regulatory intervention powers, which are designed primarily for the protection
of our ceding company clients and not shareholders. Such regulatory intervention
powers include regulatory supervision or formal insolvency procedures, in which
case the interests of our shareholders would be subordinated to those of ceding
insurers, which could reduce or eliminate any value to be received by
shareholders.

Our existing sources of liquidity and collateral may be insufficient or
unavailable to fund our expected future liquidity needs and we are required to
raise new sources of equity capital, liquidity and collateral, which sources, if
available, will be on less advantageous terms than our historical sources.

Based on our known sources and uses of liquidity, our liquidity
position is very tight over the near term. As a result of the losses in the
second quarter of 2006, we have either completely drawn down or terminated
certain of our liquidity facilities, including for example the Stingray facility
and our bank credit facility. Without new sources of capital, we face the risk
of running out of liquidity in the second quarter of 2007. No assurances can be
given that we will be successful in obtaining new sources of capital and if not
successful and we are not otherwise able to consummate the Transaction by the
end of the second quarter of 2007, we will face a default on our obligations to
fund our collateral and to meet our capital needs. If our shareholders approve
the Transaction at the Extraordinary General meeting of Shareholders to be held
at March 2, 2007, Cerberus has agreed to provide us a term loan facility in an
amount of $100.0 million. Definitive documentation for this term loan is
currently being negotiated. However, we can give no assurance that we will be
able to successfully enter this term loan facility or satisfy all of the
conditions to borrowing thereunder.

Our ability to pay dividends depends on our subsidiaries' ability to distribute
funds to us.

We are a holding company, with our principal assets consisting of the
stock of our insurance company subsidiaries. Our ability to pay dividends on our
ordinary shares, our non-cumulative perpetual preferred shares, and to pay debt
service on any of our indebtedness, depends significantly on the ability of our
insurance company subsidiaries, our principal sources of cash flow, to declare
and distribute dividends or to advance money to us in the form of inter-company
loans or service fees. Our insurance company subsidiaries are subject to various
state and foreign government statutory and regulatory restrictions applicable to
insurance companies generally that limit the amount of dividends, loans and
advances and other payments to affiliates. If insurance regulators at any time
determine that payment of a dividend or any other payment to an affiliate would
be detrimental to an insurance subsidiary's policyholders or creditors, because
of the financial condition of the insurance subsidiary or otherwise, the
regulators may block dividends or other payments to affiliates that would
otherwise be permitted without prior approval. We have also agreed with HSBC not
to declare any dividends for a two year period, other than on currently
outstanding preferred securities, unless Scottish Annuity & Life Insurance
Company (Cayman) Ltd. receives an insurer financial strength rating of at least
"A-" by Standard & Poor's Rating Services and "A3" by Moody's Investor Service.
In addition, pursuant to the terms of the Securities Purchase Agreement, we have
agreed not to declare any dividends, other than on currently outstanding
preferred securities, until the completion of the Transaction or the termination
of the Securities Purchase Agreement.

The issuance of the Convertible Shares will significantly dilute the interests
of our existing shareholders.

As of December 31, 2006, we had 60,554,104 ordinary shares outstanding
and obligations to issue an additional 12,442,021 ordinary shares upon the
exercise of outstanding options, warrants and other securities exercisable or
convertible into our ordinary shares. Upon the completion of the Transaction,
the Investors will hold approximately 68.7% of our outstanding voting securities
(subject to certain adjustments, if any). As a result, our pro forma fully
converted book value per share as of December 31, 2006, after giving effect to
the Transaction and the payment of related transaction costs, would decrease
from $15.78 per share to $7.68 per share. The Investors will also have priority
over the holders of our ordinary shares with respect to the distribution of our
assets in the event of our liquidation, dissolution or winding up, and will
receive consideration per share potentially in excess of that received by
holders of our ordinary shares in the event of a change of control.

In addition, pursuant to the terms of the Securities Purchase
Agreement, after the consummation of the Transaction, we will indemnify the
Investors for any breaches of representations, warranties and covenants, for
uncollectability of certain reinsurance recoverables and for adverse mortality
in our ING business, subject in each case to certain limitations. Other than
indemnification with respect to the Investors' out-of-pocket costs, our
indemnification obligations will be satisfied not through a cash payment but
rather through adjustment of the conversion ratio of the Convertible Shares.
Therefore, to the extent that we are required to indemnify the Investors
pursuant to the terms of the Securities Purchase Agreement, the holdings of our
existing shareholders will be further diluted.

Upon the consummation of the Transaction, the Investors will own a controlling
block of our voting shares and will have the ability to appoint a majority of
our directors.

Upon the consummation of the Transaction, the Investors will hold
securities representing approximately 68.7% of the voting power of all of our
shareholders (subject to certain adjustments, if any) and will have the ability
to appoint at closing more than a majority of our directors. As a result, the
Investors (and their assignees) will have the ability to determine matters
requiring shareholder approval, including without limitation, the election and
removal of directors, and business combinations, changes of control and sales of
all or substantially all of our assets. Pursuant to the terms of the Certificate
of Designations, holders of Convertible Shares will also have the right to a
separate class vote on a variety of change of control transactions and other key
corporate transactions, including, for example, the incurrence of debt in excess
of $10.0 million.

The market price for our ordinary shares has been and may continue to be highly
volatile.

The market price for our ordinary shares has fluctuated significantly,
ranging between an intraday high of $25.49 per share in March 2006 to an
intraday low of $2.95 per share on July 31, 2006. The overall market and the
price of our ordinary shares may continue to be volatile. There may be a
significant effect on the market price for our ordinary shares due to, among
other things:

o changes in investors' and analysts' perceptions of the risks
and conditions of our business,

o changes in investors' and analysts' perception of the
likelihood of us consummating the Transaction,

o the size of the public float of our ordinary shares,

o the announcement of acquisitions by us or our competitors,

o variations in our anticipated or actual operating results or
the results of our competitors,

o regulatory developments,

o market conditions, and

o general economic conditions.

Our inability to attract and retain qualified employees or the loss of any of
our key employees could negatively impact our business.

Our success substantially depends upon our ability to attract and
retain qualified employees and upon the ability of our senior management and
other key employees to implement our business strategy. We believe there are
only a limited number of available qualified executives in the business lines in
which we compete. We rely substantially upon the services of Paul Goldean, our
President and Chief Executive Officer; David Howell, the Chief Executive Officer
of our Life Reinsurance International Segment; Hugh McCormick, our Executive
Vice President of Corporate Development; Dean Miller, our Chief Financial
Officer; and Clifford Wagner, the Chief Executive Officer of our Life
Reinsurance North America Segment. Each of the foregoing members of senior
management has an employment agreement and we maintain a $2,500,000 key man life
insurance policy for Mr. Wagner. The loss of

the services of members of our senior management, or our inability to hire and
retain other talented personnel from the very limited pool of qualified
insurance professionals, could delay or prevent us from fully implementing our
business strategy which could harm our financial performance.

Several class action securities lawsuits have been filed against us and certain
of our current and former officers and directors, and we cannot predict the
outcome of these lawsuits.

We and certain of our current and former officers and directors have
been named defendants in federal securities class action lawsuits. The
plaintiffs in these lawsuits may make additional claims, expand existing claims
and/or expand the time periods covered by the complaints, and other plaintiffs
may bring additional actions with other claims. We expect to incur significant
defense costs regardless of the outcome of these lawsuits. If we do not prevail
in any such actions, we could be required to pay substantial damages or
settlement costs, part or all of which

may not be covered by insurance. These lawsuits may result in a diversion of our
management's time and attention and the incurrence of increased costs.

Inadequate risk analysis and underwriting may result in a decline in our
profits.

Our success depends on our ability to accurately assess and manage the
risks associated with the business that we reinsure. We have developed risk
analysis and underwriting guidelines, policies, and procedures with the
objective of controlling the quality of the business as well as the pricing of
the risks we are assuming. Among other things, these processes rely heavily on
our underwriting, our analysis of mortality trends and lapse rates, and our
understanding of medical improvements and their impact on mortality. If these
processes are inadequate or are based on inadequate information, we may not
establish appropriate premium rates and our reserves may not be adequate to
cover our losses.

In addition, we are dependent on the original underwriting decisions
made by, and information provided to us by, ceding companies. For example, we
incurred a charge to net income of $10.4 million in the third quarter of 2003
when we discovered that one of our ceding insurers had underreported death
claims to us over a three-year period. We are also subject to the risk that the
ceding clients may not have adequately evaluated the risks to be reinsured and
that the premiums ceded may not adequately compensate us for the risks we
assume. To the extent actual claims exceed our underlying assumptions, we will
be required to increase our liabilities, which will reduce our profits in the
period in which we identify the deficiency.

Reserves are estimates based on actuarial and statistical projections,
at a given point in time, of what we ultimately expect to pay out on claims and
benefits, based on facts and circumstances then known, predictions of future
events, estimates of future trends in mortality, morbidity and other variable
factors such as persistency, inflation and interest rates. Because of the many
assumptions and estimates involved in establishing reserves, the reserving
process is inherently uncertain.

Life reinsurance is a highly competitive industry, which could limit our ability
to gain or maintain our competitive position.

The life reinsurance industry is highly competitive, and we encounter
significant competition from other reinsurance companies, as well as competition
from other providers of financial services. Competition in the reinsurance
business is based on price, financial strength ratings, reputation, experience,
relationships and service. Many of our competitors are significantly larger,
have greater financial resources and have longer operating histories than we do.
Competition from other reinsurers could adversely affect our competitive
position. We consider our major competitors in the United States to include
Swiss Re, Reinsurance Group of America Inc., Munich American Reassurance
Company, Generali USA Life Re, and Transamerica Reinsurance. In other markets
outside the United States, our competitors include Swiss Re, Reinsurance Group
of America, Hannover Re, Scor and XL Capital Ltd.

Our life reinsurance contracts and variable life insurance policies expose us to
mortality risk which could negatively affect our net income.

Mortality risk is the risk that death claims may differ from the amount
we assumed in pricing our reinsurance contracts and our variable life insurance
policies. Mortality experience that is less favorable than the mortality rates
that we assumed will negatively affect our net income. For example, in the
fourth quarter of 2006, we experienced higher than expected mortality, which
negatively affected our net income.

If our investment strategy is not successful, we could suffer unexpected losses.

The success of our investment strategy is crucial to the success of our
business. Specifically, we are subject to:

o market value risk, which is the risk that our invested assets
will decrease in value. This decrease in value may be due to a
change in the yields realized on our assets and prevailing
market yields for similar assets, an unfavorable change in the
liquidity of the investment or an unfavorable change in the
financial prospects or a downgrade in the credit rating of the
issuer of the investment;

o reinvestment risk, which is the risk that interest rates will
decline and funds reinvested will earn less than expected; and

o duration matching risk, which is the risk that liabilities are
surrendered or mature sooner than anticipated and that we may
have to sell assets at an undesirable time to provide for
policyholder surrenders or withdrawals.

We attempt to address such risks in product pricing and in establishing
policy reserves. If our assets do not properly match our anticipated liabilities
or our investments do not provide sufficient returns to enable us to satisfy our
guaranteed fixed benefit obligations then our profits and financial condition
would deteriorate. Also, declines in the value of our investments that provide
collateral for reinsurance contracts would require us to post additional
collateral.

In addition, our investment portfolio includes mortgage-backed
securities, known as MBSs, and collateralized mortgage obligations, known as
CMOs. As of December 31, 2006, MBSs and CMOs constituted approximately 19.2% of
our invested assets. As with other fixed income investments, the fair value of
these securities will fluctuate depending on market and other general economic
conditions and the interest rate environment. Changes in interest rates can
expose us to prepayment risks on these investments. In periods of declining
interest rates, mortgage prepayments generally increase and MBSs and CMOs are
prepaid more quickly, requiring us to reinvest the proceeds at the then current
market rates.

We may also enter into foreign currency, interest rate and credit
derivatives and other hedging transactions in an effort to manage risks.
Structuring these derivatives and hedges so as to effectively manage these risks
is an inherently uncertain process. If our calculations are incorrect, or if we
do not properly structure our derivatives or hedges, we may have unexpected
losses and our assets may not be adequate to meet our needed reserves, which
could adversely affect our business, earnings and financial condition.

General economic conditions affect the markets for
interest-rate-sensitive securities, including the level and volatility of
interest rates and the extent and timing of investor participation in such
markets. Unexpected changes in general economic conditions could create
volatility or illiquidity in these markets in which we hold positions and harm
our investment return.

We may not be able to grow as quickly as we have in the past.

Our current and projected ratings will make new business growth very
challenging for the next several years. To the extent that we do not regain
adequate ratings, our new business volumes may be substantially less than in

prior years. Also, to the extent that consolidation of the domestic life
reinsurance industry leads to an improved pricing environment for reinsurers,
such pricing increases may be offset by larger retentions and the amount of risk
our clients retain. While international markets in Europe and Asia may offer
better long-term prospects for growth, the timing of the growth is uncertain and
is not likely to offset any slow-down in the domestic life reinsurance industry.

In certain reinsurance contracts we do not maintain control of the invested
assets, which may limit our ability to control investment risks on these assets
and may expose us to credit risk of the ceding company.

As part of our business we enter into reinsurance agreements on a
modified coinsurance and funds withheld coinsurance basis. In these
transactions, the ceding insurance company retains the assets supporting the
ceded business and manages them for our account. As of December 31, 2006, $1.9
billion of assets were held by ceding companies under such agreements and were
recorded under "funds withheld at interest" on our balance sheet. Although the
ceding company must adhere to general standards agreed to by us for the
management of these assets, we do not control the selection of the specific
investments or the timing of the purchase or sale of investments made by the
ceding company. Accordingly, we may be at risk if the ceding company selects
investments that deviate from our agreed standards or if the ceding company
performs poorly in the purchase, sale and management of those assets. In
addition, these assets are not segregated from the ceding company's other
assets, and we may not be able to recover all of these assets in the event of
the insolvency of the ceding insurer. In certain other reinsurance arrangements,
we may place assets in a trust in order to provide the ceding company with
credit for reinsurance on its financial statements. Although we generally have
the right to direct the investment of assets in these trusts, in the event of
the insolvency of the ceding company, its receiver may attempt to take control
of those assets.

Interest rate fluctuations could lower the income we derive from the difference
between the interest rates we earn on our investments and interest we pay under
our reinsurance contracts.

Significant changes in interest rates expose us to the risk of not
earning income or experiencing losses based on the difference between the
interest rates earned on investments and the credited interest rates paid on
outstanding reinsurance contracts.

Both rising and declining interest rates can negatively affect the
income we derive from these interest rate spreads. During periods of falling
interest rates, our investment earnings will be lower because new investments in
fixed maturity securities will likely bear lower interest rates. We may not be
able to fully offset the decline in investment earnings with lower crediting
rates on our contracts that reinsure life insurance policies or annuities with
cash value components. A majority of our annuity and certain other products have
multi-year guarantees and guaranteed floors on their crediting rates.

During periods of rising interest rates, we may be contractually
obligated to increase the crediting rates on our contracts that reinsure
annuities or life insurance policies with cash value components. We may not,
however, have the ability to immediately acquire investments with interest rates
sufficient to offset the increased crediting rates under our reinsurance
contracts. Although we develop and maintain asset/liability management programs
and procedures designed to reduce the volatility of our income when interest
rates are rising or falling, significant changes in interest rates caused by
factors beyond our control such as changes in governmental monetary policy or
political conditions may negatively affect our interest rate spreads.

Changes in interest rates may also affect our business in other ways.
Lower interest rates may result in lower sales of certain insurance and
investment products of our customers, which would reduce the demand for our
reinsurance of these products.

A prolonged economic downturn could reduce the demand for annuity and life
insurance products, which could substantially reduce our revenues.

A prolonged general economic downturn or poor performance of the equity
and other capital markets could lower the demand for many annuity and life
insurance products. Because we obtain substantially all of our revenues

through reinsurance arrangements that cover a portfolio of life insurance
products, as well as annuities, our business would be harmed if the demand for
annuities or life insurance decreased. Policyholder withdrawals or recaptures of
reinsurance treaties could force us to sell investments at a loss and take a
larger than anticipated charge for amortization of deferred acquisition costs.

Some of the products offered by our insurance subsidiaries and some of
the products offered by primary insurance companies that we reinsure allow
policyholders and contract holders to withdraw their funds under defined
circumstances. In addition, our reinsurance agreements may provide for recapture
rights on the part of our insurance company customers. Recapture rights permit
these customers to reassume all or a portion of the risk formerly ceded to us
after an agreed upon time, usually 10 years, subject to various conditions or
upon a downgrade of any of our financial strength ratings or our failure to
satisfy other financial conditions. Recapture of business previously ceded does
not affect premiums ceded prior to the recapture, but may result in immediate
payments to our insurance company customers.

In addition, when we issue a new insurance policy or annuity contract
or write a reinsurance contract, we defer a portion of the related acquisition
costs by establishing a deferred acquisition cost asset on the balance sheet.
This asset is amortized over the expected term of the acquired business based on
certain assumptions about the performance and persistency of that business and
investment experience. To the extent surrender, withdrawal or recapture activity
is greater than we assumed, or investment experience is worse than we assumed,
we may incur a non-cash charge to write down the deferred acquisition cost
asset. Any such charge may be partially offset by recapture and surrender fees.

We cede some of the business that we reinsure to other reinsurance companies who
may not pay amounts due to us, which could materially harm our business.

We cede some of the business that we reinsure to other reinsurance
companies, known as retrocessionaires. We assume the risk that the
retrocessionaire will be unable to pay amounts due to us because of its own
financial difficulties. The failure of our retrocessionaires to pay amounts due
to us will not absolve us of our responsibility to pay ceding companies for
risks that we reinsure. Failure of retrocessionaires to pay us could materially
harm our business, results of operations and financial condition.

Natural disasters, catastrophes and disasters caused by humans, including the
threat of terrorist attacks and related events, epidemics, and pandemics may
adversely affect our business and results of operations.

Natural disasters and terrorist attacks, as well as epidemics and
pandemics, can adversely affect our business and results of operations because
they accelerate mortality risk. Terrorist attacks in the United States and in
other parts of the world and the threat of future attacks could have a negative
effect on our business.

We believe our reinsurance programs are sufficient to reasonably limit
our net losses for individual life claims relating to potential future natural
disasters and terrorist attacks. Our reinsurance programs, including our
catastrophe coverage, limited our net losses in individual life claims relating
to the September 11, 2001 terrorist attacks to approximately $750,000. However,
the consequences of further natural disasters, terrorist attacks, armed
conflicts, epidemics and pandemics are unpredictable, and we may not be able to
foresee events that could have an adverse effect on our business.

Our Life Reinsurance International Segment subjects us to regulatory, foreign
currency and other risks which may affect our business.

In 2006, approximately 7% of our earned premiums came from our Life
Reinsurance International Segment. Our Life Reinsurance International Segment
subjects us to various risks. In addition to the regulatory and foreign currency
risks we identify later in this section, these risks include:

o volatility in earnings arising out of mortality swings in the
initial years of operating in new markets;

o political and economic instability as well as armed conflict
in these regions; and

o uncertainty arising out of foreign government sovereignty over
our international operations.

We are exposed to foreign currency risk which could negatively affect our
business.

Our functional currency is the United States dollar. However, our U.K.
subsidiaries, Scottish Re Holdings Limited and Scottish Re Limited, maintain
operating expense accounts in British pounds, parts of their investment
portfolio in Euros and British pounds and receive other currencies in payment of
premiums. All of Scottish Re Limited's original U.S. business is settled in
United States dollars, all Canadian, Latin American and certain Asia and Middle
East business is converted and settled in United States dollars, and all other
currencies are converted and settled in either Euros or British pounds. The
results of the business recorded in Euros or British pounds are then translated
to United States dollars. Scottish Re Limited attempts to limit substantial
exposures to foreign currency risk, but does not actively manage currency risks.
To the extent our foreign currency exposure is not properly managed or otherwise
hedged, we may experience exchange losses, which in turn would lower our results
of operations and harm our financial condition.

Our insurance subsidiaries are highly regulated and changes in these regulations
could harm our business.

Our insurance and reinsurance subsidiaries are subject to government
regulation in each of the jurisdictions in which they are licensed or authorized
to do business. Governmental agencies have broad administrative power to
regulate many aspects of the insurance business, which may include trade and
claim practices, accounting methods, premium rates, marketing practices,
advertising, acceptability of collateral for purposes of taking credit for
reinsurance, policy forms, affiliate transactions, changes of control and
capital adequacy. These agencies are concerned primarily with the protection of
policyholders rather than shareholders. Moreover, insurance laws and
regulations, among other things:

o establish solvency requirements, including minimum reserves
and capital and surplus requirements;

o limit the amount of dividends, tax distributions, inter-
company loans and other payments our insurance subsidiaries
can make without prior regulatory approval;

o impose restrictions on the amount and type of investments we
may hold; and

o require assessments to pay claims of insolvent insurance
companies.

The NAIC continuously examines existing laws and regulations. We cannot
predict the effect that any NAIC recommendations or proposed or future
legislation or rule making in the United States or elsewhere may have on our
financial condition or operations.

If Scottish Re or any of our subsidiaries were to become subject to the
laws of a new jurisdiction where Scottish Re or that subsidiary is not presently
admitted, they may not be in compliance with the laws of the new jurisdiction.
Any failure to comply with applicable laws could result in the imposition of
significant restrictions on our ability to do business, and could also result in
fines and other sanctions, any or all of which could harm our financial results
and operations.

Our ordinary shares are subject to voting and transfer limitations.

Under our articles of association, our Board of Directors (or its
designee) is required, except for transfers of ordinary shares executed on any
recognized securities exchange or inter-dealer quotation system, including the
NYSE, to decline to register any transfer of ordinary shares if our directors
have any reason to believe that such transfer would result in a person (or any
group of which such person is a member) beneficially owning, directly or
indirectly, 10% or more of any class of our shares, except that Cypress Merchant
B Partners II (Cayman) L.P., Cypress Merchant Banking II-A C.V., 55th Street
Partners II (Cayman) L.P. and Cypress Side-by-Side (Cayman) L.P. (collectively,
the "Cypress Entities") are each permitted to transfer ordinary shares to
another Cypress Entity, so long as the number of ordinary shares beneficially
owned directly or indirectly by the Cypress Entities in the aggregate does not
exceed 24.9% of a class of our shares. With respect to a transfer of ordinary
shares executed on any recognized securities exchange or inter-dealer quotation
system, including the NYSE, if our directors have any reason to believe that
such transfer would result in a person (or any group of which such person is a
member) beneficially owning, directly or indirectly, 10% or more of any class of
our shares (24.9% in the case of the Cypress Entities), the directors may demand
that such person surrender the ordinary shares to an agent designated by the
directors, who will sell the ordinary shares on any recognized securities
exchange or inter-dealer quotation system, including the NYSE. After applying
the proceeds of the sale toward reimbursing the transferee for the price paid
for the ordinary shares, the agent will pay the remaining proceeds to certain
charitable organizations designated by the directors. The proceeds of such sale
may be used to reimburse the agent for its duties. Similar restrictions apply to
issuances and repurchases of ordinary shares by us. Our directors (or their
designee) also may, in their absolute discretion, decline to register the
transfer of any ordinary shares, except for transfers of ordinary shares
executed on any recognized securities exchange or inter-dealer quotation system,
including the NYSE, if they have reason to believe that such transfer may expose
us, our subsidiaries or shareholders or any person insured or reinsured or
proposing to be insured or reinsured by us or any of our subsidiaries to adverse
tax or regulatory treatment in any jurisdiction or if they have reason to
believe that registration of such transfer under the Securities Act of 1933, as
amended, or the Securities Act, under any state "blue sky" or other U.S.
securities laws or under the laws of any other jurisdiction is required and such
registration has not been duly effected. With respect to a transfer of ordinary
shares executed on any recognized securities exchange or inter-dealer quotation
system, including the NYSE, if our directors have any reason to believe that
such transfer may expose us, our subsidiaries or shareholders or any person
insured or reinsured or proposing to be insured or reinsured by us or any of our
subsidiaries to adverse tax or regulatory treatment in any jurisdiction, the
directors may demand that such person surrender the ordinary shares to an agent
designated by the directors, who will sell the ordinary shares on any recognized
securities exchange or inter-dealer quotation system, including the NYSE. After
applying the proceeds of the sale toward reimbursing the transferee for the
price paid for the ordinary shares, the agent will pay the remaining proceeds to
certain charitable organizations designated by the directors. The proceeds of
such sale may be used to reimburse the agent for its duties. A transferor of
ordinary shares will be deemed to own such shares for dividend, voting and
reporting purposes until a transfer of such ordinary shares has been registered
on our register of members. We are authorized to request information from any
holder or prospective acquirer of ordinary shares as necessary to effect
registration of any such transaction, and may decline to register any such
transaction if complete and accurate information is not received as requested.

In addition, our articles of association generally provide that any
person (or any group of which such person is a member) other than the Cypress
Entities, holding directly, or by attribution, or otherwise beneficially owning
our voting shares carrying 10% or more of the total voting rights attached to
all of our outstanding voting shares, will have the voting rights attached to
its voting shares reduced so that it may not exercise more than approximately
9.9% of such total voting rights. In addition, in the event the Cypress Entities
hold directly or by attribution or otherwise beneficially own voting shares with
more than 24.9% of the total voting rights of our voting shares, the voting
rights of the Cypress Entities will be reduced so that they may not exercise in
the aggregate more than approximately 24.9% of the total voting rights of our
voting shares at any given time. Because of the attribution provisions of the
Internal Revenue Code of 1986, as amended, or the Code, and the rules of the
Securities and Exchange Commission, or the SEC, regarding determination of
beneficial ownership, this requirement may have the effect of reducing the
voting rights of a shareholder whether or not such shareholder directly holds of
record 10% or more of our voting shares. Further, our Board of Directors (or its
designee) has the authority to request from

any shareholder certain information for the purpose of determining whether such
shareholder's voting rights are to be reduced. Failure to respond to such a
notice, or submitting incomplete or inaccurate information, gives our Board of
Directors (or its designee) discretion to disregard all votes attached to such
shareholder's ordinary shares.

At the Extraordinary General Meeting of Shareholders to be held on
March 2, 2007, our shareholders will be asked, among other things, to vote upon
a proposal to amend our articles of association to permit the Investors to hold
more than 10% of our outstanding ordinary shares. As a result, the Cypress
Entities would become subject to the 10% limitation. These amendments would not
be effective until the completion of the Transaction.

Our articles of association make it difficult to replace directors and to effect
a change of control.

Our articles of association contain certain provisions that make it
more difficult for our shareholders to replace directors even if the
shareholders consider it beneficial to do so. In addition, these provisions may
make more difficult the acquisition of control of us by means of a tender offer,
open market purchase, a proxy fight or otherwise, including by reason of the
limitation on transfers of ordinary shares and voting rights described above.
While these provisions are designed to encourage persons seeking to acquire
control to negotiate with our Board of Directors, they could have the effect of
discouraging a prospective purchaser from making a tender offer or otherwise
attempting to obtain control and may prevent a shareholder from receiving the
benefit from any premium over the market price of our ordinary shares offered by
a bidder in a potential takeover.

Examples of provisions in our articles of association that could have
such an effect include:

o election of our directors is staggered, meaning that the
members of only one of three classes of our directors are
elected each year;

o the total voting power of any shareholder owning 10% or more
of the total voting rights attached to our ordinary shares
will be reduced to approximately 9.9% of the total voting
rights of our ordinary shares;

o our directors must decline to register the transfer of
ordinary shares on our share register that would result in a
person owning 10% or more of any class of our shares and may
decline certain transfers that they believe may have adverse
tax or regulatory consequences;

o shareholders do not have the right to act by written consent;
and

o our directors have the ability to change the size of the Board
of Directors.

Even in the absence of an attempt to effect a change in management or a
takeover attempt, these provisions may adversely affect the prevailing market
price of our ordinary shares if they are viewed as discouraging changes in
management and takeover attempts in the future.

The Cypress Entities currently own approximately 15.4% of our
outstanding ordinary shares. Pursuant to a shareholders' agreement, as long as
the Cypress Entities continue to hold the lesser of (i) 9.9% or more of the
voting power of our voting securities on an as-converted basis or (ii) 35% or
more of the securities purchased on an as-converted basis, the Cypress Entities
have the non-assignable right to appoint one director and one non-voting
observer to our Board of Directors. The Cypress Entities' share ownership and
ability to nominate persons for election to the Board of Directors might provide
the Cypress Entities with significant influence over potential change in control
transactions.

Upon the completion of the Transaction, the Investors will initially
hold securities representing approximately 68.7% of the voting power of all of
our shareholders (subject to certain adjustments, if any). In addition, pursuant
to the terms of a Registration Rights and Shareholders Agreement that we will
enter into with the Investors upon the closing of the Transaction, the Investors
will have the right to designate for election to the board the number of
individuals equal to two-thirds of the authorized number of directors of the
board, rounded up to the nearest whole even number. In addition, for so long as
the Cypress Entities beneficially own at least 2.5% of the outstanding ordinary
shares, the Cypress Entities will be entitled to nominate one individual for
election to the board. The Investors' share ownership and ability to nominate a
majority of persons for election to the Board of Directors would provide the
Investors with significant control over change in control transactions.

Applicable insurance laws make it difficult to effect a change of control.

Under applicable Delaware insurance laws and regulations, no person may
acquire control of us, Scottish Re (U.S.), Inc. or Scottish Re Life Corporation,
our Delaware insurance subsidiaries, unless that person has filed a statement
containing specified information with the Delaware Insurance Commissioner and
approval for such acquisition is obtained. Under applicable laws and
regulations, any person acquiring, directly by stock ownership or indirectly (by
revocable proxy or otherwise), 10% or more of the voting stock of any other
person is presumed to have acquired control of such person, and a person who
beneficially acquires 10% or more of our ordinary shares without obtaining the
approval of the Delaware Insurance Commissioner would be in violation of
Delaware's insurance holding company act and would be subject to injunctive
action requiring disposition or seizure of the shares and prohibiting the voting
of such shares, as well as other action determined by the Delaware Insurance
Commissioner. In addition, because of our ownership of Orkney Re, Inc., our
South Carolina special purpose reinsurance captive, any person acquiring control
of Orkney Re, Inc., directly or indirectly through acquiring control of us,
would be required to obtain approvals from the South Carolina Director of
Insurance.

In addition, many state insurance laws require prior notification to
the state insurance department of a change in control of a non-domiciliary
insurance company licensed to transact insurance in that state. While these
pre-notification statutes do not authorize the state insurance departments to
disapprove the change in control, they authorize regulatory action in the
affected state if particular conditions exist such as undue market
concentration. Any future transactions that would constitute a change in control
of us, Scottish Re (U.S.), Inc. or Scottish Re Life Corporation may require
prior notification in the states that have pre-acquisition notification laws.
These prior notice and prior approval laws may discourage potential acquisition
proposals and may delay, deter or prevent a change of control of us, including
transactions that some or all of our shareholders might consider to be
desirable.

Any change in control of Scottish Re Limited would need the approval of
the U.K. Financial Services Authority, which is the body responsible for the
regulation and supervision of the U.K. insurance and reinsurance industry.

It may be difficult to sue or enforce judgments against us in the United States.

We are a holding company organized under the laws of the Cayman Islands
with its principal executive office in Bermuda. Certain of our directors and
officers are residents of various jurisdictions outside the United States. All
or a substantial portion of our assets and those of such directors and officers,
at any one time, are or may be located in jurisdictions outside the United
States. Although we have irrevocably agreed that we may be served with process
in New York, New York with respect to actions arising out of or in connection
with violations of United States Federal securities laws relating to offers and
sales of ordinary shares made hereby, it could be difficult to effect service of
process within the United States on our directors and officers who reside
outside the United States or to recover against us or such directors and
officers on judgments of United States courts predicated upon the civil
liability provisions of the United States federal securities laws.

Limited trading volume of our ordinary shares may contribute to its price
volatility.

Our ordinary shares are traded on the New York Stock Exchange. During
the twelve months ended December 31, 2006, the average daily trading volume for
our ordinary shares as reported by the NYSE was 1,229,419 ordinary shares.

Risks Related to Taxation

If we or any of our non-U.S. subsidiaries is determined to be conducting
business in the United States, we could be liable for U.S. federal income taxes
which could negatively affect our net income.

We are a holding company incorporated under the laws of the Cayman
Islands with our principal executive office in Bermuda. If we or our non-U.S.
subsidiaries were characterized as engaged in a trade or business in the

United States such company would be subject to U.S. federal income and
additional branch profit taxes on the portion of its earnings that are
effectively connected to such U.S. business. We and our non-U.S. subsidiaries
intend to conduct substantially all of our operations outside of the United
States and limit our U.S. contacts, so that none of these companies should be
characterized as engaged in a U.S. trade or business. However, because there are
not definitive standards provided by the Code, regulations or court decisions,
there is considerable uncertainty as to which activities constitute being
engaged in the conduct of a trade or business within the United States and as
the determination as to whether a non-U.S. corporation is engaged in the conduct
of a trade or business in the United States is essentially factual in nature,
the United States Internal Revenue Service, or the IRS, could contend that we
and/or one or more of our non-U.S. subsidiaries, is engaged in a trade or
business in the United States for U.S. federal income tax purposes. The highest
marginal federal income tax rates currently are 35% for a corporation's income
that is effectively connected with a U.S. trade or business and 30% for the
"branch profits" tax.

Holders of 10% or more of our shares may be subject to U.S. income taxation
under the controlled foreign corporation rules.

If you are a U.S. 10% holder of a non-U.S. corporation that is a
controlled foreign corporation, which we refer to as a CFC, for an uninterrupted
period of 30 days or more during a taxable year, and you own shares in the CFC
directly or indirectly through non-U.S. entities on the last day of the CFC's
taxable year, you must include in your gross income for U.S. federal income tax
purposes your pro rata share of the CFC's "subpart F income," even if the
subpart F income is not distributed. For purposes of this discussion, the term
"U.S. 10% holder" includes only U.S. Persons (as defined below) who, directly or
indirectly through non-U.S. entities (or through the application of certain
"constructive" ownership rules, which we refer to as constructively), own 10% or
more of the total combined voting power of all classes of stock entitled to vote
of the non-U.S. corporation. In general, a non-U.S. corporation is treated as a
CFC if U.S. 10% holders collectively own (directly, indirectly through non-U.S.
entities or constructively) more than 50% of the total combined voting power of
all classes of voting stock of that corporation or the total value of all stock
of that corporation. For purposes of taking into account insurance income, a CFC
also includes a non-U.S. insurance company if U.S. 10% holders collectively own
(directly, indirectly through non-U.S. entities or constructively) more than 25%
of the total combined voting power.

At the present time, our largest aggregate shareholder, the Cypress
Entities, owns collectively approximately 13.7% of our ordinary shares and it is
anticipated that MassMutual Capital will own approximately 34% and Cerberus will
own approximately 34% of the voting power of all of our shareholders, if, as is
expected, our Convertible Shares are issued. In order to lessen the risk that
our direct or indirect shareholders could be required to include our subpart F
income in their U.S federal gross income, our articles of association currently
prohibit the ownership by any person of shares that would equal or exceed 10%
(the "10% Limit") (or in the case of the Cypress Entities that would exceed
24.9%) of any class of the issued and outstanding Scottish Re shares and provide
a "voting cutback" that would, in certain circumstances, reduce the voting power
with respect to Scottish Re shares to the extent necessary to prevent the
Cypress Entities from owning more than 24.9% of the voting power of Scottish Re,
and any other person owning more than 9.9% of the voting power of Scottish Re
(the "Second 10% Limit). If, as is expected to be the case, our Convertible
Shares are issued our articles of association will be amended to exclude
MassMutual Capital and Cerberus from the 10% Limit and Second 10% Limit and to
subject the Cypress Entities to the 10% Limit and Second 10% Limit. We believe,
although not free from doubt, based upon information made available to us
regarding our existing shareholder base, that because of the dispersion of our
share ownership (other than with respect to the Cypress Entities, and if our
Convertible Shares are issued, MassMutual Capital and Cerberus) and the
provisions of our articles of association restricting the transfer, issuance and
voting power of our shares that no U.S. Person (other than certain potential
U.S. affiliates of the Cypress Entities, and if our Convertible Shares are
issued, MassMutual Capital and certain potential U.S. affiliates of Cerberus)
should be a U.S. 10% holder of Scottish Re; however, we cannot be certain of
this result because of factual and legal uncertainties. In addition, the IRS
could challenge the effectiveness of the provisions in our organizational
documents and a court could sustain such a challenge. Accordingly, no assurance
can be given that a U.S. Person will not be characterized as a U.S. 10% holder.

If one or more U.S. Persons owning (directly, indirectly through
non-U.S. entities or constructively) 10% or more of our voting stock were to
acquire separately or in the aggregate 25% of the voting power or value of our
stock, our non-U.S. insurance subsidiaries would be treated as CFCs. If the
Convertible Shares are issued, MassMutual Capital (a U.S. Person) will own
(directly, indirectly through non-U.S. entities or constructively) more than 25%
(but less than 50%) of our voting stock and each of our non-U.S. insurance
subsidiaries should be

characterized as a CFC. Scottish Re and its other (non-insurance) non-U.S.
subsidiaries would be characterized as CFCs if U.S. Persons were to acquire more
than 50% of the voting power or value of our shares. In either case, any U.S.
10% holder would be required to include in its gross income for U.S. federal
income tax purposes its pro-rata share of the subpart F income of each of those
entities characterized as a CFC.

U.S. Persons who hold our shares may be subject to U.S. federal income taxation
at ordinary income rates on their proportionate share of our non-U.S. insurance
subsidiaries related person insurance income.

If U.S. Persons (as defined below) (directly, indirectly through
non-U.S. entities or constructively) own collectively (by voting power or value)
25% or more of our shares (as is expected to be the case), then any U.S. Person
who (directly or indirectly through non-U.S. entities) owns any of our shares on
the last day of any taxable year would be required to include its pro-rata share
of the related person insurance income ("RPII") of one or more of our non-U.S.
insurance subsidiaries or special purpose vehicles (i.e., Orkney Re II plc or
Ballantyne Re plc) in its ordinary gross income for U.S. federal income tax
purposes, determined as described below unless one of the RPII exceptions
described in the next paragraph is applicable.

The RPII rules will not apply, however, and the income inclusion
described above will not be required with respect to RPII earned by any of our
non-U.S. insurance subsidiaries or special purpose vehicles for any taxable
year, if either (i) direct or indirect insureds, and persons related to such
insureds, do not own (directly or indirectly through U.S. or non-U.S. entities),
20% or more of the voting power or value of the stock of such non-U.S. insurance
subsidiary or special purpose vehicle (the "20% RPII Ownership Exception") or
(ii) the RPII of such non-U.S. insurance subsidiary or special purpose vehicle,
determined on a gross basis, does not equal or exceed 20% of its gross insurance
income in any taxable year (the "20% RPII Gross Income Exception").
Qualification for these exceptions is determined on an entity-by-entity basis.
In addition, the RPII rules do not apply to any RPII earned by Scottish Annuity
and Life International Insurance Company (Bermuda) Ltd. and Scottish Re Life
(Bermuda) Limited, which have each elected to be taxed as U.S. corporations.

We believe that, prior to the issuance of the Convertible Shares, and
if they are not issued, our non-U.S. insurance subsidiaries and our special
purpose vehicles should satisfy the 20% RPII Ownership Exception and the 20%
RPII Gross Income Exception. However, if the Convertible Shares are issued, then
because risks underwritten by affiliates of MassMutual Capital are indirectly
reinsured by our non-U.S. insurance subsidiaries and special purpose vehicles,
immediately following the issuance of the Convertible Shares our non-U.S.
insurance subsidiaries will not meet the 20% RPII Ownership Exception and it is
likely that one or more of our special purpose vehicles will not meet the 20%
RPII Ownership Exception. If, in a year in which it failed to meet the 20% RPII
Ownership Exception, any of our non-U.S. insurance subsidiaries or special
purpose vehicles also failed to meet the 20% RPII Gross Income Exception, then
U.S. Persons owning (directly or indirectly through non-U.S. entities) our
shares would be subject to the RPII income inclusion rules, and could be
required to include RPII in their U.S. federal gross income as described below.

RPII is, generally, underwriting premium (and related investment
income) of a non-U.S. insurance company that is attributable to the insurance or
reinsurance of policies under which the direct or indirect insureds are (i) U.S.
Persons that (directly or indirectly through non-U.S. entities) own any shares
of such non-U.S. insurance company or (ii) persons that are in control of,
controlled by or under common control with U.S. Persons that (directly or
indirectly through non-U.S. entities) own the non-U.S. insurance company (such
as MassMutual Capital's affiliates if the Convertible Shares are issued).

Although no assurances can be given, we believe that if the Convertible
Shares are issued, our non-U.S. insurance subsidiaries and our special purpose
vehicles should qualify for the 20% RPII Gross Income Exception immediately
following the issuance of the Convertible Shares, provided we do not generate
substantial additional RPII with respect to our shareholders other than
MassMutual Capital in 2007. Additionally, we believe that our non-U.S. insurance
subsidiaries and our special purpose vehicles should qualify for that exception
in the future, provided we effectively manage the gross amount of RPII generated
with respect to our shareholders.

Under the securities purchase agreement that we entered into with
MassMutual Capital and Cerberus, during the period beginning on November 26,
2006 and ending on the date of issuance of the Convertible

Shares, we and MassMutual Capital and Cerberus have agreed to cooperate and use
commercially reasonable efforts to take such actions as may be appropriate to
reduce the anticipated amount of RPII that may be realized by any of our
non-U.S. insurance subsidiaries in the tax year beginning January 1, 2007 in a
manner that is reasonably acceptable to us and to each Investor. In addition,
the MassMutual Capital and Cerberus have indicated to us that they do not intend
to cause the gross RPII of any of our non-U.S. insurance subsidiaries or special
purpose vehicles to equal or exceed 20% of each such company's gross insurance
income in any tax year. There can be no assurance, however, that this exception
will be met. Avoidance of the RPII income inclusion rules depends upon numerous
factors, including the identity of persons directly or indirectly insured by our
non-U.S. insurance subsidiaries and special purpose vehicles, that are not
solely within our control.

If, for any taxable year, (i) one or more of our non-U.S. insurance
subsidiaries or special purpose vehicles meet the 25% ownership threshold
described above (as is expected to be the case) and fail to meet the 20% RPII
Ownership Exception (as is expected to be the case if the Convertible Shares are
issued) and (ii) do not qualify for the 20% RPII Gross Income Exception
described above, each U.S. Person who (directly or indirectly through non-U.S.
entities) owned our shares on the last day of such taxable year would be
required to include RPII in their U.S. federal gross income (regardless of
whether such income is distributed), which may materially adversely affect an
investment in our shares. The amount of RPII includable in gross income for U.S.
federal income tax purposes by each such U.S. Person would equal the U.S.
Person's pro-rata share of the relevant entity's RPII, determined as if such
RPII were distributed proportionately only to U.S. Persons that are holders of
shares (directly or indirectly through non-U.S. entities) on that date (taking
into account any differences existing with respect to the distribution rights
applicable to different classes of shares). The amount includible in gross
income would be limited by each such U.S. Person's share of the non-U.S.
insurance subsidiary's or special purpose vehicle's earnings and profits for the
tax year, as reduced by the U.S. Person's share, if any, of certain prior-year
deficits in earnings and profits. Such amount would be taxable at ordinary
income rates. Moreover, any RPII that is includible in the income of a U.S.
tax-exempt organization generally will be treated as unrelated business taxable
income.

If a U.S. Person were to own more than 50% of our shares (either
directly or indirectly), our insurance subsidiaries would be treated as
controlled by the U.S. Person for purposes of the RPII rules, and the
reinsurance of their business by our non-U.S. insurance subsidiaries or special
purpose vehicles would generate RPII. In that event, the 20% RPII Gross Income
Exception would not be met by any of our non-U.S. insurance subsidiaries or
special purpose vehicles (as their business is currently conducted). Our
Articles of Association do not and will not prohibit any person from acquiring
more than 50% of our shares (directly or indirectly through non-U.S. entities).
MassMutual Capital and Cerberus have indicated to us that they have no present
intention of taking any action that would reasonably be expected to result in
the ownership of more than 50% of our shares by a U.S. Person (either directly
or indirectly through non-U.S. entities). There can be no assurance, however,
that this will not occur and that U.S. Persons owning our shares (directly or
indirectly through non-U.S. entities) will not have RPII income inclusions.

For these purposes "U.S. Person" means: (i) a citizen or resident of
the United States, (ii) a partnership or corporation created or organized in or
under the laws of the United States, or under the laws of any State thereof
(including the District of Columbia), (iii) an estate the income of which is
subject to U.S. federal income taxation regardless of its source, (iv) a trust
if either (x) a court within the United States is able to exercise primary
supervision over the administration of such trust and one or more U.S. persons
have the authority to control all substantial decisions of such trust or (y) the
trust has a valid election in effect to be treated as a U.S. person for U.S.
federal income tax purposes or (v) any other person or entity that is treated
for U.S. federal income tax purposes as if it were one of the foregoing. If a
partnership owns any of our shares, the application of the RPII rules to any of
its partners will generally depend upon the status of the partner and the
activities of the partnership. If you are a partner of a partnership that owns
our shares, you should consult your tax advisor.

The RPII provisions have never been interpreted by the courts or the
Treasury Department in final regulations, and regulations interpreting the RPII
provisions of the Code exist only in proposed form. It is not certain whether
these regulations will be adopted in their proposed form or what changes or
clarifications might ultimately be made thereto or whether any such changes, as
well as any interpretation or application of

RPII by the IRS, the courts or otherwise, might have retroactive effect. The
RPII provisions include the grant of authority to the Treasury Department to
prescribe "such regulations as may be necessary to carry out the purpose of this
subsection including regulations preventing the avoidance of this subsection
through cross insurance arrangements or otherwise." Accordingly, the meaning of
the RPII provisions and the application thereof to us is uncertain. In addition,
we cannot be certain that the amount of RPII or the amounts of the RPII
inclusions for any particular RPII shareholder, if any, will not be subject to
adjustment based upon subsequent IRS examination. Shareholders are advised to
consult with their tax advisors regarding the application of these provisions.

U.S. Persons who dispose of our shares may be subject to U.S. federal income
taxation at the rates applicable to dividends on a portion of their gains if
any.

Under section 1248 of the Internal Revenue Code, any gain from the sale
or exchange of the shares in a non-U.S. corporation by a U.S. Person, which was
a U.S. 10% holder at any time during the five-year period ending on the date of
disposition when the corporation was a CFC, may be treated as a dividend to the
extent of the CFC's earnings and profits (determined under U.S. federal income
tax principles) during the period that the shareholder held the shares (with
certain adjustments). We believe, although not free from doubt, based upon
information made available to us regarding our existing shareholder base, the
dispersion of our share ownership (other than with respect to the Cypress
Entities, and if our Convertible Shares are issued, MassMutual Capital and
Cerberus) and the provisions of our articles of association restricting
transfer, issuance and voting power of our shares that no U.S. Person (other
than certain potential U.S. affiliates of the Cypress Entities, and if our
Convertible Shares are issued, MassMutual Capital and certain potential U.S.
affiliates of Cerberus) should be characterized a U.S. 10% holder of Scottish Re
and/or its non-U.S. subsidiaries, although we cannot be certain of the preceding
result because of factual and legal uncertainties. To the extent it is the case
that we have no U.S. 10% holders (other than certain potential U.S. affiliates
of the Cypress Entities, and if our Convertible Shares are issued, MassMutual
Capital and certain potential U.S. affiliates of Cerberus), the application of
Code section 1248 under the regular CFC rules should not apply to dispositions
of our ordinary shares (other than possibly to certain potential U.S. affiliates
of the Cypress Entities, and if our Convertible Shares are issued, MassMutual
Capital and certain potential U.S. affiliates of Cerberus). It is possible,
however, that the IRS could challenge the effectiveness of these provisions and
that a court could sustain such a challenge.

Internal Revenue Code section 1248 also applies to the sale or exchange
of shares in a non-U.S. corporation if the non-U.S. corporation would be treated
as a CFC for RPII purposes regardless of whether the shareholder is a U.S. 10%
holder or whether the 20% RPII gross income exception or the 20% RPII ownership
exceptions are met. Existing proposed regulations do not address whether
Internal Revenue Code section 1248 would apply if a non-U.S. corporation is not
a CFC but the non-U.S. corporation has a subsidiary that is a CFC and that would
be taxed as an insurance company if it were a domestic corporation. We believe,
however, that this application of Code section 1248 under the RPII rules should
not apply to dispositions of our shares because we will not be directly engaged
in the insurance business. We cannot be certain, however, that the IRS will not
interpret the proposed regulations in a contrary manner or that the U.S.
Treasury Department will not amend the proposed regulations to provide that
these rules will apply to dispositions of our shares.

U.S. tax-exempt organizations that own our shares may recognize unrelated
business taxable income.

A U.S. tax-exempt organization may recognize unrelated business taxable
income if a portion of our insurance income is allocated to the organization. In
general, insurance income will be allocated to a U.S tax-exempt organization if
either we are a controlled foreign corporation and the tax-exempt shareholder is
a U.S. 10% holder or there is RPII and certain exceptions do not apply. Although
we do not believe that any U.S. persons should be allocated our insurance
income, potential U.S. tax-exempt investors are advised to consult their own tax
advisors.

U.S. Persons who hold our shares will be subject to adverse U.S. federal income
tax consequences if we are considered to be a passive foreign investment
company.

If we are considered a passive foreign investment company, or a PFIC,
for U.S. federal income tax purposes, a U.S. Person who owns directly or, in
some cases, indirectly (e.g. through a non-U.S. partnership) any of our shares
will be subject to adverse U.S. federal income tax consequences, including
subjecting the investor to a greater tax liability than might otherwise apply
and subjecting the investor to a tax on amounts in advance of when such tax
would otherwise be imposed, in which case an investment in our shares could be
materially adversely affected. In addition, if we were considered a PFIC, upon
the death of any U.S. individual owning ordinary shares, such individual's heirs
or estate would not be entitled to a "step-up" in the basis of the ordinary
shares which might otherwise be available under U.S. federal income tax laws.

In general, a non-U.S. corporation is a PFIC for a taxable year if 75%
or more of its income constitutes passive income or 50% or more of its assets
produce passive income. Passive income generally includes interest, dividends
and other investment income. Passive income does not, however, include income
derived in the active conduct of an insurance business by a corporation that is
predominantly engaged in an insurance business. This exception is intended to
ensure that income derived by a bona fide insurance company is not treated as
passive income, except to the extent such income is attributable to financial
reserves in excess of the reasonable needs of the insurance business. The PFIC
provisions also contain a look-through rule under which a foreign corporation
shall be treated as if it "received directly its proportionate share of the
income" and as if it "held its proportionate share of the assets" of any other
corporation in which it owns at least 25% of the value of the stock.

We believe for purposes of the PFIC rules, that each of our U.S.,
Bermuda, Irish, U.K. and Guernsey insurance subsidiaries should be characterized
as predominantly engaged in an active insurance business and is unlikely to have
financial reserves in excess of the reasonable needs of its insurance business
in each year of operations. Accordingly, the income and assets of these
companies should be treated as active. Further, we expect that the active income
and assets of these companies should comprise more than 25% of our gross income
and more than 50% of our assets for 2007 and we expect this should be the case
for the foreseeable future. As a result, we believe that we are not, have not
been, and currently do not expect to become, a PFIC for U.S. federal income tax
purposes. We cannot assure you, however, that we will not be deemed a PFIC by
the IRS. If we were considered a PFIC, it could have material adverse tax
consequences for an investor that is subject to U.S. federal income taxation.
There are currently no regulations regarding the application of the PFIC
provisions to an insurance company. New regulations or pronouncements
interpreting or clarifying these rules may be forthcoming. We cannot predict
what impact, if any, such guidance would have on an investor that is subject to
U.S. federal income taxation.

Changes in U.S. federal income tax law could materially adversely affect an
investment in our shares.

Legislation has been introduced in the U.S. Congress intended to
eliminate certain perceived tax advantages of companies (including insurance
companies) that have legal domiciles outside the United States but have certain
U.S. connections that may have a material adverse impact on us or our
shareholders or require us to restructure certain of our business operations in
the future. In addition, it is possible that similar legislative proposals could
be introduced and enacted by the current Congress or future Congresses that
could have an adverse impact on us, or our shareholders.

Additionally, the U.S. federal income tax laws and interpretations
regarding whether a company is engaged in a trade or business within the United
States, or is a PFIC, or whether U.S. persons would be required to include in
their gross income the subpart F income or the RPII of a controlled foreign
corporation are subject to change, possibly on a retroactive basis. There are
currently no regulations regarding the application of the PFIC rules to
insurance companies and the regulations regarding RPII are still in proposed
form. New regulations or pronouncements interpreting or clarifying such rules
may be forthcoming. We cannot be certain if, when or in what form such
regulations or pronouncements may be provided and whether such guidance will
have a retroactive effect.

If we do not receive further undertakings from the Cayman Islands, we may become
subject to taxes in the Cayman Islands in the future.

Scottish Re and our Cayman Islands subsidiaries, Scottish Annuity &
Life Insurance Company (Cayman) Ltd. and The Scottish Annuity Company (Cayman)
Ltd., have received undertakings from the Governor-in-Council of the Cayman
Islands pursuant to the provisions of the Tax Concessions Law, as amended (1999
Revision), that until the year 2028 with respect to Scottish Re and Scottish
Annuity & Life Insurance Company (Cayman) Ltd., and until the year 2024 with
respect to The Scottish Annuity Company (Cayman) Ltd., (1) no subsequently
enacted Cayman Islands law imposing any tax on profits, income, gains or
appreciation shall apply to Scottish Re and its Cayman Islands subsidiaries and
(2) no such tax and no tax in the nature of an estate duty or an inheritance tax
shall be payable on any shares, debentures or other obligations of Scottish Re
and its Cayman Islands subsidiaries. We could be subject to Cayman Islands taxes
after the applicable dates.

If Bermuda law changes, we may become subject to taxes in Bermuda in the future.

Bermuda currently imposes no income tax on corporations. The Bermuda
Minister of Finance, under The Exempted Undertakings Tax Protection Act 1966 of
Bermuda, has assured us that if any legislation is enacted in Bermuda that would
impose tax computed on profits or income, or computed on any capital asset, gain
or appreciation, or any tax in the nature of estate duty or inheritance tax,
then the imposition of any such tax will not be applicable to Scottish Re or any
of our Bermuda subsidiaries until March 28, 2016. Scottish Re or any of our
Bermuda subsidiaries could be subject to Bermuda taxes after that date.

The impact of letters of commitment from Bermuda and the Cayman Islands to the
Organization for Economic Cooperation and Development to eliminate harmful tax
practices may impact us negatively.

The Organization for Economic Cooperation and Development, or OECD, has
published reports and launched a global dialogue among member and non-member
countries on measures to limit harmful tax competition. These measures are
largely directed at counteracting the effects of tax havens and preferential tax
regimes in countries around the world. In the OECD's report dated April 18,
2002, and updated as of June 2004 and September 2006, Bermuda and the Cayman
Islands were not listed as uncooperative tax haven jurisdictions because each
had previously committed itself to eliminate harmful tax practices and to
embrace international tax standards for transparency, exchange of information
and the elimination of any aspects of the regimes for financial and other
services that attract business with no substantial domestic activity. We are not
able to predict what changes will arise from the commitment or whether such
changes will subject us to additional taxes.

Impact of adoption of FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes

In July 2006, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income
Taxes". FIN 48 prescribes detailed guidance for the financial statement
recognition, measurement and disclosure of uncertain tax positions recognized in
an enterprise's financial statements in accordance with FASB Statement No. 109,
"Accounting for Income Taxes." Tax positions must meet a "more likely than not"
recognition threshold at the effective date to be recognized upon the adoption
of FIN 48 and in subsequent periods.

FIN 48 will be effective for fiscal years beginning after December 15,
2006 and the provisions of FIN 48 will be applied to all tax positions upon
initial adoption. The cumulative effect of applying the provisions of FIN 48
will be reported as an adjustment to the opening balance of retained earnings
for that fiscal year. We have not completed our evaluation of the effect of
adoption of FIN 48. However, due to the fact that we have established tax
positions in previously filed tax returns and are expected to take tax positions
in future tax returns that will have effect in the financial statements, the
adoption of FIN 48 may have a significant impact on our consolidated financial
statements.

Issuance of the Convertible Shares will limit our ability to use our net
operating loss carry forwards.

As of December 31, 2006, we had estimated net operating loss
carry forwards, or NOLs, of approximately $817.3 million of which $695.9 million
is attributable to the U.S. $93.0 is attributable to Ireland, $25.4 million is
attributable to the U.K. and $3.0 million is attributable to Singapore. The
U.K., Singapore and Irish net operating losses have an unlimited carry forward
period. The U.S. NOLs may be used to offset future taxable income and thereby
reduce our U.S. federal income taxes otherwise payable. Section 382 of the Code,
imposes an annual limit on the ability of a corporation that undergoes an
"ownership change" to use its NOLs to reduce its tax liability. The issuance of
the Convertible Shares will cause us to undergo an ownership change. In which
event, we would not be able to use our pre-ownership-change NOLs in excess of
the limitation imposed by section 382 of the Code. The Code section 382 NOL
limitation following the issuance of the Convertible Shares is calculated by
multiplying our value as of the date of the issuance by the federal long term
tax exempt rate (currently 4.18%). This may result in a substantial increase in
the amount of U.S. federal income tax payable by our U.S. consolidated life
insurance subsidiary group. This would also result in the write-down of our
associated gross deferred tax asset for GAAP purposes. However, we have already
provided a full valuation allowance against the related gross deferred tax asset
therefore such a write-down would not materially impact the net balance carried
on the balance sheet.

Item 1B: UNRESOLVED STAFF COMMENTS

None.

Item 2: PROPERTIES

We currently lease office space in Hamilton, Bermuda where our
executive and principal offices are located, and in Dublin, Ireland; George
Town, Grand Cayman; Singapore; Dubai; Japan; Denver, Colorado; Charlotte, North
Carolina; London, United Kingdom and Windsor, United Kingdom. Our life
reinsurance business operates out of the Bermuda, Charlotte, Denver, Dublin,
Singapore, Dubai, Japan, London and Windsor offices while our wealth management
business operates out of the Grand Cayman office.

The Cayman lease is month to month, the Japan lease expires in 2007,
the Dublin, Dubai and Singapore leases expire in 2008, the Denver lease expires
in 2009 with an option to lease office space for an additional five years, the
Bermuda lease expires in 2011 and the London and Charlotte leases expire in
2016. The Windsor lease expires in 2023 but there is an option to break the
lease in 2013. Certain of the offices have lease renewal options for terms
ranging from 1 to 5 years.

Item 3: LEGAL PROCEEDINGS

On August 2, 2006, a putative class action lawsuit was filed against us
and certain of our current and former officers and directors in the U.S.
District Court for the Southern District of New York on behalf of a putative
class consisting of investors who purchased our publicly traded securities
between December 16, 2005 and July 28, 2006. Between August 7, 2006 and October
3, 2006, seven additional related class action lawsuits were filed against us,
certain of our current and former officers and directors, and certain third
parties. Two of the complaints were filed on August 7, 2006, and the remaining
five complaints were filed on August 14, 2006, August 22, 2006, August 23, 2006,
September 15, 2006, and October 3, 2006, respectively. Each of the class actions
filed seeks an unspecified amount of damages, as well as other forms of relief.
On October 12, 2006, all of the class actions were consolidated. On December 4,
2006, a consolidated class action complaint was filed. The complaint names us;
Dean E. Miller, our Chief Financial Officer; Scott E. Willkomm, our former Chief
Executive Officer; Elizabeth Murphy, our former Chief Financial Officer; our
Board members Michael Austin, Bill Caulfeild-Browne, Robert Chmely, Michael
French, Lord Norman Lamont, Hazel O'Leary, and Glenn Schafer; and certain third
parties, including Goldman Sachs and Bear Stearns in their capacities as
underwriters in various securities offerings by us and Ernst & Young LLP in
their capacity as independent registered public accounting firm. The complaint
is brought on behalf of a putative class consisting of investors who purchased
our securities between February 17, 2005 and July 31, 2006. The complaint
alleges violations of Sections 10(b) and 20(a) of the Exchange Act, Rule 10b-5,
and Sections 11, 12(a)(2), and 15 of the Securities Act. The complaint seeks an
unspecified amount of damages, as well as other forms of relief. We contest the
allegations that have been asserted and plan to vigorously defend our interests
in the action.

In addition, on or about October 20, 2006, a shareholder derivative
lawsuit was filed against our directors in the U.S. District Court for the
Southern District of New York. The derivative lawsuit alleges, among other
things, that defendants improperly permitted us to make false and misleading
statements to investors concerning our business and operations, thereby exposing
us to liability from class action suits alleging violations of the U.S.
securities laws. The derivative lawsuit asserts claims against defendants for
breach of fiduciary duty, abuse of control, gross mismanagement, constructive
fraud, and unjust enrichment. On January 8, 2007 we filed a motion to dismiss
the derivative lawsuit. Our motion is currently pending.

Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

We did not submit any matter to the vote of shareholders during the
fourth quarter of 2006.

PART II

Item 5: MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES

Market for the Ordinary Shares

Our ordinary shares, par value $0.01 per share, have been traded on
the New York Stock Exchange under the symbol "SCT". This table shows for the
indicated periods the high and low intraday sales prices per share for our
ordinary shares, as reported in Bloomberg, and dividend declared per share.

Per Share
High Low Dividend
--------- --------- -----------

Year ended December 31, 2004
First Quarter........................................................ $ 24.59 $ 20.21 $ 0.05
Second Quarter....................................................... 24.40 20.50 0.05
Third Quarter........................................................ 23.79 19.59 0.05
Fourth Quarter....................................................... 26.15 20.90 0.05
Year ended December 31, 2005
First Quarter........................................................ $ 26.00 $ 22.01 $ 0.05
Second Quarter....................................................... 24.48 21.68 0.05
Third Quarter........................................................ 26.02 23.13 0.05
Fourth Quarter....................................................... 25.99 23.15 0.05
Year ended December 31, 2006
First Quarter........................................................ $ 25.49 $ 23.77 $ 0.05
Second Quarter....................................................... 24.91 16.57 0.05
Third Quarter........................................................ 16.75 2.95 -
Fourth Quarter....................................................... 11.67 5.15 -
Period Ended February 26, 2007
January 1, 2007 to February 26, 2007 $ 5.45 $ 3.36 $ -

As of February 26, 2007, we had 33 record holders of our ordinary
shares.

We paid cash dividends of $0.10 per ordinary share in 2006 and $0.20
per ordinary share in each of 2005 and 2004.

Except as provided herein, the declaration and payment of future
dividends by us will be at the discretion of the Board of Directors and will
depend upon many factors, including our earnings, financial condition, business
needs, capital and surplus requirements of our operating subsidiaries and
regulatory and contractual restrictions. In accordance with the amended
forbearance agreement with HSBC, we are prohibited from declaring any cash
dividend, exclusive of the non-cumulative perpetual preferred shares during the
forbearance period from November 26, 2006 until December 31, 2008, unless at the
time of declaration and payment of cash dividend, Scottish Annuity & Life
Insurance Company (Cayman) Ltd. has an insurer financial strength rating of at
least A- for Standard & Poor's and A3 for Moody's Investors Service. In
addition, pursuant to the terms of the Securities Purchase Agreement, we have
agreed not to declare any dividends, other than on currently outstanding
preferred securities and other than with the consent of the Investors, until the
completion of the Transaction or the termination of the Securities Purchase
Agreement.

As a holding company, our principal source of income is dividends or
other statutorily permissible payments from our subsidiaries. The ability to pay
such dividends is limited by the applicable laws and regulations of the various
countries that we operate in, including Bermuda, the United States, Ireland and
the U.K. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Item 8, Note 14 to the Consolidated
Financial Statements for further discussion.

Information concerning securities authorized for issuance under equity
compensation plans appears in Part III, Item 12, "Security Ownership of Certain
Beneficial Owners, Management and Related Stockholder Matters".

Performance Graph

The following graph compares the cumulative shareholder return on our
ordinary shares with the Standard & Poor's 500 Stock Index, Standard & Poor's
(Life/Health) Index. The indices are included for comparative purposes only, do
not necessarily reflect management's opinion that such indices are an
appropriate measure of relative performance of the Company's ordinary shares,
and are not intended to forecast or be indicative of future performance of the
ordinary shares. The comparison assumes $100 was invested as of November 24,
1998 (the date our ordinary shares began trading on a "when issued" basis) and
the reinvestment of all dividends. The closing market price of the Company's
ordinary shares on December 29, 2006 was $5.34 per share.

Comparison of Cumulative Shareholder Return

The following tables show total return to shareholders, including reinvestment
of dividends:

Annual Return Percentage
Year Ended
----------------------------------------------------
Company / Index December December December December December
31, 2002 31, 2003 31, 2004 31, 2005 31, 2006
-------- -------- -------- -------- --------

Scottish Re Group Limited.............. (8.77) 20.29 25.68 (4.43) (78.24)
S&P 500 Index.......................... (22.10) 28.67 10.84 4.92 15.83
S&P 500 Life & Health Insurance........ (16.23) 27.06 22.06 22.56 16.55

Indexed Returns
Year Ended
---------------------------------------------------------------
Base
Company/ Index Period
December December December December December December
31, 2001 31, 2002 31, 2003 31, 2004 31, 2005 31, 2006
-------- -------- -------- -------- -------- --------

Scottish Re Group Limited ............. 100 91.23 109.74 137.92 131.81 28.68
S&P 500 Index.......................... 100 77.90 100.23 111.10 116.57 135.02
S&P 500 Life & Health Insurance........ 100 83.77 106.44 129.92 159.23 185.58

The following graph is the comparison of cumulative five year total
return of the Company's ordinary shares compared to the S&P 500 Index and the
S&P 500 Life & Health Insurance Index:

[GRAPHIC OMITTED][GRAPHIC OMITTED]

Item 6: SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction
with the Consolidated Financial Statements, including the related Notes, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".

(Expressed in Thousands of United States Dollars, except share data)

Year Ended Year Ended Year Ended Year Ended Year Ended
December December December December December
31, 2006 31, 2005 31, 2004 31, 2003 31, 2002
------------ ------------ ----------- ----------- -----------

Income Statement data: (1)
Total revenues.......................... $ 2,451,500 $ 2,297,329 $ 814,387 $ 556,045 $ 306,212
Total benefits and expenses............. 2,598,990 2,183,705 758,936 518,299 274,871
Income (loss) before income taxes and
minority interest..................... (147,490) 113,624 55,451 37,746 31,341
Income (loss) from continuing operations
before cumulative effect of change in
accounting principle.................. (366,714) 130,197 71,599 48,789 33,235
Net income (loss) ...................... (366,714) 130,197 71,391 27,281 32,524
Dividend declared on non-cumulative
perpetual preferred shares............ (9,062) (4,758) - - -
Imputed dividend on prepaid variable share
forward contract...................... (881) - - - -
Net income (loss) available to ordinary
shareholders.......................... $ (376,657) $ 125,439 $ 71,391 $ 27,281 $ 32,524

Per share data:(1)
Basic earnings (loss) per share:
Income (loss) from continuing operations
before cumulative effect of change in
accounting principle and discontinued
operations (2)...................... $ (6.70) $ 2.86 $ 2.00 $ 1.59 $ 1.32
Cumulative effect of change in
accounting principle................ - - - (0.64) -
Discontinued operations............... - - (0.01) (0.06) (0.03)
------------- ------------ ------------ ------------ ------------
Net income (loss) available to ordinary
shareholders........................ $ (6.70) $ 2.86 $ 1.99 $ 0.89 $ 1.29
============= ============= ============ ============ ============

Diluted earnings (loss) per share:
Income (loss) from continuing operations
before cumulative effect of change in
accounting principle and discontinued
operations (2)...................... $ (6.70) $ 2.64 $ 1.91 $ 1.51 $ 1.25
Cumulative effect of change in
accounting principle................ - - - (0.60) -
Discontinued operations............... - - (0.01) (0.06) (0.02)
------------- ------------- ------------ ------------ ------------
Net income (loss) available to ordinary
shareholders........................ $ (6.70) $ 2.64 $ 1.90 $ 0.85 $ 1.23
============= ============= ============ ============ ============

Book value per share (3)................ $ 15.39 $ 21.48 $ 21.60 $ 18.73 $ 18.24
Market value per share.................. $ 5.34 $ 24.55 $ 25.90 $ 20.78 $ 17.45
Cash dividends per ordinary share....... $ 0.10 $ 0.20 $ 0.20 $ 0.20 $ 0.20
Weighted average number of shares
outstanding:
Basic................................. 56,182,222 43,838,261 35,732,522 30,652,719 25,190,283
Diluted............................... 56,182,222 47,531,116 37,508,292 32,228,001 26,505,612
Balance sheet data (at end of year): (1)
Total fixed maturity investments........ $ 8,065,524 $ 5,292,595 $ 3,392,463 $ 2,014,719 $ 1,003,946
Total assets............................ 13,436,072 12,116,303 8,952,237 6,053,517 3,291,226
Long-term debt.......................... 129,500 244,500 244,500 162,500 132,500
Total liabilities....................... 12,227,305 10,692,229 7,937,417 5,242,450 2,800,134
Minority interest....................... 7,910 9,305 9,697 9,295 -
Mezzanine equity........................ 143,665 143,057 142,449 141,928 -
Total shareholders' equity.............. $ 1,057,192 $ 1,271,712 $ 862,674 $ 659,844 $ 491,092
Actual number of ordinary shares outstanding 60,554,104 53,391,939 39,931,145 35,228,411 26,927,456
- ---------------

(1) Scottish Re Holdings Limited was acquired on December 31, 2001 and is
included in balance sheet data for 2002-2006 and income statement data for
years 2002-2006.

Scottish Re Life Corporation was acquired on December 22, 2003 and is
included in balance sheet data and income statement data for years
2003-2006. Consolidated statement of income data for the year ended
December 31, 2003 includes net income of $1.2 million in respect of
Scottish Re Life Corporation.

The ING individual life reinsurance business was acquired on December 31,
2004 and is included in balance sheet data for years 2004-2006 and income
statement data for years 2005 and 2006.

(2) Reflects reduction for dividends declared on non-cumulative perpetual
preferred shares.

(3) Book value per share is calculated as shareholders' equity divided by the
number of ordinary shares outstanding.

Item 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion highlights significant factors influencing our
consolidated financial position and our results of operations. It should be read
in conjunction with the summary of selected financial data, consolidated
financial statements and related notes found under Part II, Item 6 and Item 15
contained herein. In addition, you should read our discussion of "Critical
Accounting Policies" beginning on page 49 for an explanation of those accounting
estimates that we believe are most important to the portrayal of our financial
condition and results of operations and that require our most difficult,
subjective and complex judgments.

The most important factors we monitor to evaluate our financial
condition and performance includes:

o Operations: premiums, changes in the number of treaties and
life insurance in-force, investment results, claim frequency
and severity trends, claims and benefit ratio and acquisition
and expense ratios and operating earnings per share;

o Investments: credit quality/experience, stability of long-term
returns, cash flows and asset and liability duration; and

o Financial condition: our financial strength ratings, financial
leverage, liquidity and growth in return on equity and book
value per share.

Revenues, expenses and other factors affecting profitability

Revenues

We derive revenue primarily from premiums from reinsurance assumed on
life business from existing treaties and from premiums on new treaties,
investment income, realized gains and losses from our investment portfolio and
fees from our financial solutions and wealth management businesses.

Our primary business is life reinsurance, which involves reinsuring
life insurance policies, with premiums earned typically over a period of 10 to
30 years. Each year, however, a portion of the business under existing treaties
terminates due to, among other things, lapses or surrenders of underlying
policies, deaths of policyholders occasionally and the exercise of recapture
options by ceding companies.

Premiums from reinsurance assumed on life business are included in
revenues over the premium paying period of the underlying policies. When we
acquire blocks of in-force business, we account for these transactions as
purchases, and our results of operations include the net income from these
blocks as of their respective dates of acquisition. Reinsurance assumed on
annuity business does not generate premium income but generates investment
income over time on the assets we receive from the ceding company. We also earn
revenues on funding agreements. A deposit received on a funding agreement also
does not generate premium income but does create income to the extent we earn an
investment return in excess of our interest payment obligations thereon.

Our investment income includes interest earned on our fixed income
investments and income from funds withheld at interest under modified
coinsurance agreements or coinsurance funds withheld agreements. Under GAAP,
because our fixed income investments are held as available for sale, these
securities are carried at fair value, and unrealized appreciation/depreciation
on these securities is not included in investment income on our statements of
income (loss), but is included in comprehensive income as a separate component
of shareholders' equity. Realized gains and losses include gains and losses on
investment securities that we sell during a period, write downs of securities
deemed to be other than temporarily impaired and foreign currency exchange gains
and losses.

Expenses

We have six principal types of expenses: claims and policy benefits
under our reinsurance contracts, interest credited to interest sensitive
contract liabilities, acquisition costs and other insurance expenses, operating
expenses, collateral finance facilities expense and interest expense.

When we issue a life reinsurance contract, we establish reserves for
claims and future policy benefits. These reserves are our estimates of what we
expect to pay in claims and policy benefits and related expenses under the
contract or policy. From time to time, we may change the reserves if our
experience leads us to believe that benefit claims and expenses will ultimately
be greater than the existing reserve. We report the change in these reserves as
an expense during the period when the reserve or additional reserve is
established.

In connection with reinsurance of annuity and annuity-type products, we
record a liability for interest sensitive contract liabilities, which represents
the amount ultimately due to the policyholder. We credit interest to these
contracts each period at the rates determined in the underlying contract, and
the amount is reported as interest credited to interest sensitive contract
liabilities on our consolidated statements of income (loss).

A portion of the costs of acquiring new business, such as commissions,
certain internal expenses related to our policy issuance and underwriting
departments and other variable selling expenses are capitalized. The resulting
deferred acquisition costs asset is amortized over future periods based on our
expectations as to the emergence of future gross profits from the underlying
contracts. These costs are dependent on the structure, size and type of business
written. For certain products, we may retrospectively adjust our amortization
when we revise our estimate of current or future gross profits to be realized.
The effects of this adjustment are reflected in earnings in the period in which
we revise our estimate. Acquisition costs also include letter of credit costs
although this amount has decreased significantly in the past two years due to
the collateral finance transactions we have completed for which the cost is
included in collateral finance facility expense.

Operating expenses consist of salary and salary related expenses, legal
and professional fees, rent and office expenses, travel and entertainment
expenses, directors' expenses, insurance and other similar expenses, except to
the extent capitalized in deferred acquisition costs.

Collateral finance facilities expense includes costs incurred on our
Regulation XXX funding arrangements and other collateral finance facilities. See
Note 7 to the Consolidated Financial Statements for additional information.

Interest expense consists of interest charges on our long-term debt and
HyCU instruments.

Other factors affecting profitability

We seek to generate profits from two principal sources. First, in our
Life Reinsurance business, we seek to receive reinsurance premiums and financial
reinsurance fees that, together with income from the assets in which those
premiums are invested, exceed the amounts we ultimately pay as claims and policy
benefits, acquisition costs and ceding commissions. Second, within our
investment guidelines, we seek to maximize the return on our unallocated
capital.

The following factors affect our profitability:

o the volume of business we write;

o volume and amount of death claims incurred and lapse
experience;

o our ability to assess and price adequately for the risks we
assume;

o changes in our assessment of the realizability of deferred tax
assets;

o the mix of different types of business that we reinsure,
because profits on some lines of business emerge later than on
other lines;

o our ability to manage our assets and liabilities to manage
investment and liquidity risk; and

o our ability to control expenses.

In addition, our profits can be affected by a number of factors that
are not within our control. For example, movements in interest rates can affect
the volume of business that we write, the income earned from our investments,
the interest we credit on interest sensitive contracts, the level of surrender
activity on contracts that we reinsure and the rate at which we amortize
deferred acquisition costs. Other external factors that can affect profitability
include mortality experience that varies from our assumed mortality. In
addition, while death claims are reasonably predictable over a period of many
years, claims become less predictable over shorter periods and are subject to
significant fluctuation from quarter to quarter and year to year. Other factors
include changes in regulation or tax laws which may affect the attractiveness of
our products or the costs of doing business and changes in foreign currency
exchange rates.

Critical Accounting Policies

Given the nature of our business, our accounting policies require the
use of judgments relating to a variety of assumptions and estimates. Because of
the inherent uncertainty in the assumptions and estimates underlying these
accounting policies under different conditions or assumptions, the amounts
reported in our financial statements could be materially different. Our
accounting policies are described in Note 2 to the Consolidated Financial
Statements. We believe our most critical accounting policies include the
establishment of reserves for future policy benefits, the capitalization and
amortization of deferred acquisition costs, the valuation of present value of
in-force business, the valuation of investment impairments, estimates of
premiums, the valuation of tax balances and the determination of whether we are
the primary beneficiary of a variable interest entity.

Statement of Financial Accounting Standard ("SFAS") No. 60 "Accounting
and Reporting by Insurance Enterprises" applies to our traditional life policies
with continuing premiums. For these policies, reserves for future policy
benefits are computed based upon expected mortality rates, lapse rates,
investment yields, expenses and other assumptions established at policy issue,
including a margin for adverse deviation. Once these assumptions are made for a
given treaty or group of treaties, they will not be changed over the life of the
treaty. We periodically review actual historical experience and relative
anticipated experience compared to the assumptions used to establish reserves
for future policy benefits. Further, we determine whether actual and anticipated
experience indicates that existing policy reserves together with the present
value of future gross premiums are sufficient to cover the present value of
future benefits, settlement and maintenance costs and to recover unamortized
acquisition costs. Significant changes in experience or assumptions may require
us to provide for expected losses on a group of treaties by establishing
additional net reserves. Because of the many assumptions and estimates used in
establishing reserves and the long-term nature of the reinsurance contracts, the
reserving process, while based on actuarial science, is inherently uncertain.

We primarily rely on our own valuation and administration systems to
establish reserves for future policy benefits. The reserves for future policy
benefits may differ from those established by ceding companies due to the use of
different assumptions, based principally on actual and anticipated experience,
including industry experience and standards. We rely on our ceding companies,
however, to provide accurate policy level data, including face amount, age,
duration and other characteristics as well as underlying premiums and claims.
This data constitutes the primary information used to establish reserves for
essentially all of our future policy benefits. The use of reinsurance
intermediaries in our transactions with ceding companies has been infrequent. In
the few instances in which intermediaries are involved, we receive data from the
intermediary in a similar timeframe and fashion as if received directly from the
ceding company.

analysis of incurred but not reported losses, including lag studies, on a
quarterly basis and adjust our claim liabilities accordingly. The adjustments in
a given period have generally not been significant relative to the overall
reserves for future policy benefits or our results of operations.

In the underwriting process, we perform procedures to evaluate the
ceding company's process for compiling and reporting data. After entering into a
reinsurance contract, we work closely with our ceding companies to help ensure
information submitted by them is in accordance with the underlying reinsurance
contracts. Additionally, we have a dedicated compliance team that performs
extensive audits, including on-site audits and desk reviews, of the information
provided by ceding companies. In addition to ceding company audits, we routinely
perform analysis, at a treaty level, to compare the actual results of ceding
companies against initial pricing and expected results. Generally, there have
been few disputes or disagreements with ceding companies and most are resolved
through normal administration procedures.

Occasionally, we experience processing backlogs and establish reserves
for processing backlogs with a goal of clearing all backlogs as quickly as
possible. There were no significant processing backlogs at December 31, 2006.

SFAS No. 97 "Accounting and Reporting by Insurance Enterprises for
Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale
of Investments" applies to investment contracts, limited premium contracts, and
universal life-type contracts. For investment and universal life-type contracts,
future benefit liabilities are held using the retrospective deposit method,
increased for amounts representing unearned revenue or refundable policy
charges. Acquisition costs are deferred and recognized as expense as a constant
percentage of gross margins using assumptions as to mortality, persistency, and
expense established at policy issue without provision for adverse deviation and
are revised periodically to reflect emerging actual experience and any material
changes in expected future experience. Liabilities and the deferral of
acquisition costs are established for limited premium policies under the same
practices as used for traditional life policies with the exception that any
gross premium in excess of the net premium is deferred and recognized into
income as a constant percentage of insurance in force. Should the liabilities
for future policy benefits plus the present value of expected future gross
premiums for a product be insufficient to provide for expected future benefits
and expenses for that product, deferred acquisition costs will be written off
and thereafter, if required, a premium deficiency reserve will be established by
a charge to income. Changes in the assumptions for mortality, persistency,
maintenance expense and interest could result in material changes to the
financial statements.

Reinsurance premiums from traditional life policies and annuity
policies with life contingencies are generally recognized as revenue when due
from policyholders and are reported net of amounts retroceded. Traditional life
policies include those contracts with fixed and guaranteed premiums and
benefits, and consist principally of whole life and term insurance policies. For
our traditional life reinsurance business, we estimate assumed premiums using
actuarial model projections at the treaty level. Consistent with reinsurance
industry practices, these models use the most recent policy level data available
from our ceding companies and our estimate of new business for treaties still
open to new business. The estimated premiums from the models are then compared
to historical trends in reported assumed premiums by treaty and other
information and adjusted if appropriate. Actual results could differ from these
estimates. The adjustments in a given period have generally not been significant
to the overall premiums or results of operations. However, in the second quarter
of 2006, we made an adjustment to reduce premium accruals by approximately $8.0
million related to prior periods.

Based on historical experience, the creditworthiness of ceding
companies and our contractual right of offset, uncollectible assumed premium
amounts have been infrequent and not material. Any provision for doubtful
accounts would be recorded on a specific case-by-case basis.

The development of policy reserves and amortization of deferred
acquisition costs for our products requires management to make estimates and
assumptions regarding mortality, lapse, expenses and investment experience. Such
estimates are primarily based on historical experience and information provided
by ceding companies. Actual results could differ materially from those
estimates. Management monitors actual experience, and should circumstances
warrant, will revise its assumptions and the related reserve estimates.

Present value of in-force business is established upon the acquisition
of block of business and is amortized over the expected life of the business at
the time of acquisition. The amortization each year will be a function of the
gross profits or revenues each year in relation to the total gross profits or
revenues expected over the life of the business, discounted at the assumed net
credit rate. The determination of the initial value and the subsequent
amortization require management to make estimates and assumptions regarding the
future business results that could differ materially from actual results.
Estimates and assumptions involved in the present value of in-force business and
subsequent amortization are similar to those necessary in the establishment of
reserves and amortization of deferred acquisition costs.

Our primary investments are in fixed maturity securities, including
corporate and government bonds, asset and mortgage-backed securities. All of our
fixed maturity and preferred stock are classified as available-for-sale as
defined in SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". Available-for-sale securities are carried at fair value with the
difference from amortized cost included in shareholders' equity as a component
of accumulated other comprehensive income. The difference is net of related
deferred acquisition costs and taxes. Fair values for fixed maturity securities
are based on quoted market prices, where available. For fixed maturity
securities that are not actively traded, fair values are estimated using values
obtained from independent pricing services.

Determining whether a decline in current fair values is other than a
temporary decline in value for securities classified as available-for-sale can
frequently involve a variety of assumptions and estimates, particularly for
investments that are not actively traded on established markets. For instance,
assessing the value of some investments requires an analysis of expected future
cash flows.

Management reviews securities with material unrealized losses and tests
for other than temporary impairments on a quarterly basis. Factors involved in
the determination of potential impairment include fair value as compared to
cost, length of time the value has been below cost, credit worthiness of the
issuer, forecasted financial performance of the issuer, position of the security
in the issuer's capital structure, the presence and estimated value of
collateral or other credit enhancement, length of time to maturity, interest
rates and our intent and ability to hold the security until the market value
recovers. When a decline is considered to be "other-than-temporary" the cost
basis of the impaired asset is adjusted to its fair value and a corresponding
realized investment loss is recognized in the consolidated statements of income
(loss). The actual value at which such financial instruments could actually be
sold or settled with a willing buyer may differ from such estimated fair values.

As the discussion above indicates, there are risks and uncertainties
associated with determining whether declines in the fair value of investments
are other-than-temporary. These include subsequent significant changes in
general overall economic conditions, as well as specific business conditions
affecting particular issuers, future financial market effects such as interest
rate spreads, future rating agency actions and significant accounting, fraud or
corporate governance issues that may adversely affect certain investments. In
addition, there are often significant estimates and assumptions that we use to
estimate the fair values of securities, including projections of expected future
cash flows and pricing of private securities. We continually monitor
developments and update underlying assumptions and financial models based upon
new information.

See "Accounting Pronouncements FSP FAS 115-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments" for
a discussion of potential changes to the requirements for other-than-temporary
impairments in Note 2 to the Consolidated Financial Statements.

Income taxes are recorded in accordance with SFAS No. 109, "Accounting
for Income Taxes" ("SFAS No. 109"). In accordance with SFAS No. 109, for all
years presented we use the asset and liability method to record deferred income
taxes. Accordingly, deferred income tax assets and liabilities are recognized
that reflect the net tax effect of the temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes, using enacted tax rates. Such
temporary differences are primarily due to tax basis of reserves for future
policy benefits, deferred acquisition costs, and net operating loss carry
forwards. A valuation allowance is applied to deferred tax assets if it is more
likely than not that all, or some portion, of the benefits related to the
deferred tax assets will not be realized.

Future quarterly tax amounts will continue to be dependent upon the
relationship between pre-tax GAAP profits and statutory profits and will also be
impacted by the size and timing of certain statutory related deferred tax
liabilities. Moreover, management will continue to assess and determine the
need for the amount of the valuation allowance in subsequent periods in
accordance with the requirements of SFAS No. 109 or in accordance with FIN 48.

In December 2003, the Financial Accounting Standards Board ("FASB")
revised FASB Interpretation No. 46 and 46R, "Consolidation of Variable Interest
Entities" ("FIN 46" and "FIN 46R"), which was originally issued in January 2003.
FIN 46R addresses whether certain types of entities, referred to as variable
interest entities ("VIEs"), should be consolidated in a company's financial
statements. A company must consolidate a VIE in which it has an ownership,
contractual or other financial interest if it is determined to be the primary
beneficiary. A primary beneficiary has a variable interest that will absorb a
majority of the expected losses if they occur, receive a majority of the
entity's expected returns, or both. We are the primary beneficiary of certain of
the collateral finance facilities discussed in Note 7 to the Consolidated
Financial Statements and have consolidated the variable interest entities in
accordance with FIN 46R. The Stingray Investor Trust, discussed in Note 7 to the
Consolidated Financial Statements, is a variable interest entity but we are not
considered to be the primary beneficiary of the Investor Trust. Accordingly, it
is not consolidated in accordance with FIN 46R.

Consolidated results of operations

Our results of operations for the year ended December 31, 2004 do not
include the results of the acquisition of the ING individual life reinsurance
business, which was completed on December 31, 2004. All amounts are reported in
thousands of United States dollars, except per share amounts.

Year Ended Year Ended Year Ended
December 31, 2006 December 31, 2005 December 31, 2004
----------------- ----------------- -----------------

Premiums earned, net................................ $ 1,841,985 $ 1,933,930 $ 589,445
Investment income, net.............................. 616,624 355,837 217,138
Fee income.......................................... 14,493 12,316 11,547
Net realized gains (losses)......................... (27,405) 3,738 (8,304)
Change in value of embedded derivatives, net........ 5,803 (8,492) 4,561
---------------- -------------- -------------

Total revenues...................................... 2,451,500 2,297,329 814,387
---------------- -------------- -------------

Claims and other policy benefits.................... 1,591,472 1,442,505 425,965
Interest credited to interest sensitive contract
liabilities...................................... 172,967 132,968 106,525
Acquisition costs and other insurance expenses, net. 409,185 423,775 151,405
Operating expenses.................................. 152,311 115,573 54,658
Goodwill impairment................................. 34,125 - -
Collateral finance facilities expense............... 215,791 48,146 2,724
Interest expense.................................... 23,139 20,738 13,016
Due diligence costs................................. - - 4,643
---------------- -------------- -------------
Total benefits and expenses......................... 2,598,990 2,183,705 758,936
---------------- -------------- -------------
Income (loss) before income taxes and minority interest (147,490) 113,624 55,451
Income tax benefit (expense) ....................... (220,592) 16,434 16,679
---------------- -------------- -------------
Income (loss) from continuing operations before
minority interest................................ (368,082) 130,058 72,130
Minority interest................................... 1,368 139 (531)
---------------- -------------- -------------
Income (loss) before discontinued operations........ (366,714) 130,197 71,599
Loss from discontinued operations................... - - (208)
---------------- -------------- -------------
Net income (loss)................................... (366,714) 130,197 71,391
Dividend declared on non-cumulative perpetual
preferred shares................................. (9,062) (4,758) -
Imputed dividend on prepaid variable share forward
contract......................................... (881) - -
---------------- -------------- -------------
Net income (loss) available to ordinary shareholders $ (376,657) $ 125,439 $ 71,391
================ ============== =============

Comparison of 2006 to 2005

Revenues

Total revenues increased by 7% in 2006 to $2,451.5 million compared to
$2,297.3 million in 2005. Net premiums earned decreased by 5% in 2006 to
$1,842.0 million compared to $1,933.9 million in 2005. Net premiums for the year
were adversely affected by our ratings downgrades, which negatively affected new
business volume, increased retrocession costs and the adverse effect of certain
adjustments in 2006 to revise previous estimates related to premium accrual
estimates, estimates for external retrocession premiums due, experience refunds
and cedant balance true-ups.

The net realized loss in 2006 was $27.4 million compared to a net gain
of $3.7 million in 2005. The majority of the realized losses related to the
selling of investments in preparation of funding the Ballantyne Re transaction
along with losses incurred from the rebalancing of an investment portfolio
related to a specific annuity agreement.

The change in value of the embedded derivatives arises from the
application of DIG B36 which addresses whether SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities" requires bifurcation of a debt
instrument into a debt host contract and an embedded derivative if the debt
instrument incorporates both interest rate risk and credit risk exposures that
are unrelated or only partially related to the creditworthiness of the issuer of
that instrument. Under DIG B36, modified coinsurance and coinsurance funds
withheld reinsurance agreements where interest is determined by reference to a
pool of fixed maturity assets are arrangements containing

embedded derivatives requiring bifurcation. In addition, reinsurance contracts
with experience refunds are also considered to be arrangements containing
embedded derivatives requiring bifurcation. The change in the value of embedded
derivatives increased revenues by $5.8 million in 2006 compared to a decrease of
$8.5 million in 2005. The primary reason for the increase was related to the
realization of losses on certain securities held under a modified coinsurance
arrangement that were sold from the modified coinsurance arrangement in the
first quarter of 2006 in order to provide collateral for the Ballantyne Re
securitization.

Net investment income increased by 73% in 2006 to $616.6 million
compared to $355.8 million in 2005. The increase in investment income is
primarily due to the income on higher total investments from the new
securitization structures, including Ballantyne Re, Orkney Re II and HSBC II,
combined with higher interest rates.

Expenses

Total benefits and expenses increased by 19% in 2006 to $2,599.0
million compared to $2,183.7 million in 2005. The increase was principally due
to $167.6 million higher collateral finance facilities expense as a result of
our Regulation XXX transactions completed in December 2005 and May 2006, reduced
slightly by $11.7 million due to lower letter of credit costs, higher than
expected mortality, adverse lapse experience and additional operating expenses
due to increased headcount, severance, legal fees, directors' fees and other
costs related to the sale of the company that could not be capitalized. In
addition, based on a reassessment of the in-force and new business profits of
the Life Reinsurance International Segment, goodwill of approximately $34.0
million was written-off and approximately $12.0 million of deferred acquisition
costs were deemed unrecoverable.

The loss before income taxes and minority interest was $147.5 million
in 2006 compared to income before income taxes and minority interest of $113.6
million in 2005.

Income tax expense in 2006 was $220.6 million compared to an income tax
benefit of $16.4 million in 2005. The change in our effective tax rate in 2006
compared to 2005 is primarily related to a valuation allowance established on
deferred tax assets during the year. The valuation allowances primarily resulted
from the actual results of legal entity statutory income and movements in
statutory reserves for the period combined with a reassessment of certain tax
planning strategies.

We generate deferred tax assets principally due to net operating
losses, reserves and unrealized losses on investment securities. In accordance
with SFAS No. 109, we must conclude whether the future realization of our
deferred tax asset is "more likely than not". The evaluation regarding
realizability of deferred tax assets is made on a gross as opposed to a net
basis. Sources of support for the gross deferred tax asset are the reversal of
deferred tax liabilities within the carry forward period (which in the United
States for life insurance companies is 15 years), projected future taxable
income and tax planning strategies. Pursuant to the guidance under SFAS No. 109,
we are currently unable to rely on projections of future taxable income.
Therefore, we must rely on tax planning strategies for support of the gross
deferred tax asset.

Prior to the second quarter of 2006, these tax planning strategies
provided justification to support our deferred tax asset. The combination of the
increased pressure on our existing tax planning strategies, the operating loss
for the period, and the prospects of a ratings downgrade during the second
quarter led management to conclude that it was no longer "more likely than not"
that the full amount of the gross deferred tax asset could be realized.
Accordingly, we established a valuation allowance of $112.4 million during the
second quarter. During the third quarter we established an additional valuation
allowance on deferred tax assets principally related to current period tax
benefits not being recognized and an additional valuation allowance established
on prior period deferred tax assets resulting from revised statutory and tax
projections related to certain legal entities.

Income tax expense in the fourth quarter of 2006 was $118.2 principally
related to an approximate $91.0 million valuation allowance established on
deferred tax assets. The valuation allowance resulted from a specific tax
planning strategy no longer available to us. In this regard, we have a deferred
tax asset resulting from reserves and a net operating loss associated with the
Orkney I securitization. In accordance with SFAS No. 109, a portion of this
gross deferred tax asset was historically supported by the reversal of deferred
tax liabilities within the carry forward period and the remaining portion was
supported by a tax planning strategy. The tax planning strategy involved our
ability to request a change from the use of statutory accounting principles to
GAAP in the filings with the South Carolina Department of Insurance. This change
would have eliminated the gross deferred tax asset relating to reserves and the
net operating loss. While the request would effectively put us back to the
default method of accounting in South Carolina, it nevertheless required the
approval of the South Carolina Department of Insurance. In prior periods, we
concluded that this tax planning strategy was both prudent and feasible.

During the second half of 2006, we formally requested the South
Carolina Department of Insurance to approve such a change in our accounting
basis. However, in February the South Carolina Department of Insurance indicated
that our request for a change in accounting basis would not be granted.
Accordingly, our tax planning strategy was determined to no longer be prudent
and feasible and we established a valuation allowance of approximately $91.0
million in the fourth quarter of 2006.

At December 31, 2006, we believe that it is more likely than not that
the remaining gross deferred tax assets, net of the valuation allowance of
$304.9 million, will reduce taxes payable in future years. At the end of the
fourth quarter, the remaining gross deferred tax asset is supported by the
reversal of deferred tax liabilities within the carry forward period and a tax
planning strategy related to SFAS No. 115 and management's ability to retain
certain securities with unrealized losses.

Future quarterly tax amounts will continue to be dependent upon the
relationship between pre-tax GAAP profits and statutory profits and will also be
impacted by the size and timing of certain statutory related deferred tax
liabilities. Moreover, management will continue to assess and determine the need
for the amount of the valuation allowance in subsequent periods in accordance
with the requirements of SFAS No. 109 and FIN 48.

Comparison of 2005 to 2004

Revenues

Total revenues increased by 182% in 2005 to $2,297.3 million compared
to 2004. The increase in premiums earned is primarily due to the acquisition of
the ING business on December 31, 2004 and growth in the traditional solutions
line of business in our Life Reinsurance North America Segment. The key drivers
of the 2005 increase in investment income were the growth in our invested assets
which arises from business growth and the ING acquisition, net proceeds of
$120.4 million from our offering of 5,000,000 non-cumulative perpetual preferred
shares in July 2005 and investment income earned on the invested assets from our
Regulation XXX initiatives completed during the year.

When analyzing the impact of net investment income on our results, it
is important to understand that a portion of the investment income earned is
credited to the policyholders of our fixed annuity products. The interest
credited to policyholders is included in expenses. Annuity product interest rate
margins represent the excess of the yield on earning assets over the average
crediting rate.

Net realized gains were $12.0 million higher in 2005 than 2004.
Improvements in the credit markets in 2005 resulted in less write downs for
other than temporary impairments of available for sale securities - $2.4 million
in 2005 as compared to $9.9 million in 2004. We also realized a gain of $2.2
million in 2005 compared to a loss of $2.2 million for the same period in 2004,
resulting from the mark to market adjustment of an interest rate swap. This
derivative has not been designated as a hedge and, accordingly, changes in fair
value are recorded in the determination of net income.

The change in the value of embedded derivatives decreased revenues by
$8.5 million in 2005 compared to an increase of $4.6 million in 2004. This
change in value arose principally because of the asset/liability mismatch on
modified coinsurance contracts assumed in the ING acquisition, coupled with a
decrease in risk free interest rates and widening of credit spreads.

Expenses

Total benefits and expenses in 2005 increased significantly compared to
2004 from $759.0 million to $2.2 billion or an increase of 188%. The increase in
claims and policy benefits, acquisition costs and operating expenses was
primarily due to the acquisition of the ING business on December 31, 2004 and
continued growth in our Life Reinsurance North America Segment. Growth in
interest credited reflects an increase in account balances and crediting rates
on these balances. Additional operating costs in 2005 resulted from increased
resources to support the growth in our business and $7.0 million of additional
costs necessary to meet the requirements of the Sarbanes-Oxley Act of 2002.
Collateral finance facilities expense in 2005 is impacted by the increased
Regulation XXX financing transactions completed during the year. Interest
expense increased in 2005 due to full year of interest on the 2004 trust
preferred offerings, interest on the Cypress Notes and increases in LIBOR rates
during 2005.

When analyzing the impact of collateral finance facilities on the
consolidated results, it is important to understand that this expense is offset
by the investment income earned on the fixed maturity investments from the
collateral finance facility transactions. The net margin represents the excess
of the yield on earning assets over the interest rate costs associated with the
collateral finance facility.

Included in the 2005 tax benefit is a $2.5 million expense related to
the write-off of a deferred tax asset related to state income taxes. The 2005
income tax benefit is in respect of certain of our U.S. taxable entities and our
U.K. entities, offset by income tax expenses arising on our Irish entity and
other U.S. entities.

Net income increased by 82%, or $58.8 million, in 2005 compared to 2004
due to the reasons outlined above.

Segment Operating Results

Life Reinsurance North America

Year Ended Year Ended Year Ended
December 31, 2006 December 31, 2005 December 31, 2004
---------------------- ----------------- -----------------

Revenues
Premiums earned, net............................... $ 1,719,239 $ 1,814,875 $ 466,927
Investment income, net............................. 584,359 341,539 206,009
Fee income......................................... 11,491 9,233 7,867
Net realized gains (losses)........................ (19,043) 1,121 (7,974)
Change in value of embedded derivatives, net....... 5,803 (8,492) 4,561
----------------- -------------- --------------
Total revenues.................................. 2,301,849 2,158,276 677,390
----------------- -------------- --------------
Benefits and expenses
Claims and other policy benefits................... 1,490,346 1,365,599 344,319
Interest credited to interest sensitive contract 172,967 132,968 106,525
liabilities.....................................
Acquisition costs and other insurance expenses, net 360,737 400,992 131,658
Operating expenses................................. 58,133 48,849 18,408
Collateral finance facilities expense ............. 205,210 43,113 2,724
Interest expense................................... 11,613 10,823 4,605
----------------- -------------- --------------
Total benefits and expenses..................... 2,299,006 2,002,344 608,239
----------------- -------------- --------------
Income before income taxes and minority interest... $ 2,843 $ 155,932 $ 69,151
================= ============== ==============

Comparison of 2006 to 2005

Revenues

Premiums earned during 2006 decreased 5% to $1,719.2 million compared
to $1,814.9 million in 2005. A portion of this decrease was due to a curtailment
of a number of large treaties immediately following the ING acquisition that did
not meet our risk management criteria and a shift in business mix from
coinsurance to yearly renewable term life reinsurance. Also impacting premiums
were adjustments in the second quarter of 2006 related to revisions of certain
estimates. We recorded an adjustment to reduce premiums by approximately $4.0
million as a result of a revision of estimates relating to 2005. 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. In addition, as a result of an
initiative to improve the quality of our external retrocession data and related
administration systems, we made a number of revisions to the estimates and
underlying assumptions used in calculating our retrocession premiums. As a
result, during the second quarter of 2006, we recorded an additional
retrocession adjustment of approximately $13.0 million. In connection with our
periodic internal review of the underlying performance of our treaties, we
recorded a $16.5 million experience refund adjustment that reduced our third
quarter of 2006 premiums. These experience refunds related to underlying
profitability of specific assumed treaties, most notably within our ING block.
Treaty provisions for these contracts permit our clients to participate in the
overall profitability of the business, assuming certain financial measurement
thresholds are met. In the fourth quarter of 2006, we recorded a $5.3 million
collectability allowance pertaining to accruals for recoveries of retroceded
premiums. Experience refunds on retroceded business were approximately $9.0
million favorable in 2006. These experience refunds are directly related to our
underlying mortality experience. The above favorable amount partially offsets
the adverse mortality experienced in 2006, as discussed below.

Finally, premiums earned in 2006 were lower than in 2005 due to the
termination of new business on certain treaties, an overall reduction in new
business volume and a decrease in renewal premiums as a result of the rating
downgrades in mid 2006. Traditional life reinsurance new business face amounts
assumed was $56.0 billion in 2006 compared to $131.0 billion in 2005.

Investment income for 2006 increased 71% to $584.4 million compared to
$341.5 million for 2005. The increase was principally due to the growth in our
average invested assets but also favorably impacted by an increase in interest
rates. Our total invested assets have increased significantly because of growth
in our Life Reinsurance North America Segment, including the closing of a large
equity-indexed annuity contract at the end of 2005 and the investment of the
proceeds of our Regulation XXX transactions that closed in December 2005 and May
2006. The Life Reinsurance North America Segment also benefited from a large
portion of the proceeds from the December 2005 equity issuance which were
contributed to this segment. Additionally contributing to the favorable increase
is $63.2 million of investment income on the previously described equity-indexed
annuity treaty which was substantially offset by fluctuations in reserves,
interest credited and net acquisition costs. Our investment portfolio maintained
an average quality rating of AA- and increased its average book yield from 5.1%
in 2005 to 5.6% in 2006.

Realized losses for 2006 were $19.0 million compared to a $1.1 million
gain in 2005. The net realized loss for the year includes losses related to
selling investments in the first quarter of 2006 in preparation of funding the
Ballantyne Re transaction. These gains were effectively offset by gains in the
change in value of embedded derivatives. The change in value of embedded
derivatives for 2006 resulted in a $5.8 million gain compared to a loss of $8.5
million in 2005. The primary reason for the increase was related to the
realization of losses on certain securities held under a modified coinsurance
arrangement that were sold in the first quarter of 2006 in order to provide
collateral for the Ballantyne Re securitization.

Expenses

Claims and other policy benefits for 2006 increased 9% to $1,490.3
million compared to $1,365.6 million for 2005. Claims and other policy benefits
as a percentage of net earned premiums were 87% and 75% for 2006 and 2005,
respectively. In the first quarter of 2006, although gross claims were within
expectations in the aggregate, a higher number of smaller claims within our
retention limit resulted in retrocession recoveries below our expectations,
which resulted in approximately $16.0 million of adverse mortality, principally
within our ING block. We experienced a similar situation in the fourth quarter
of 2006, although at a much lower level. Mortality was within expectations for
the second and third quarters of 2006 but again adverse in the fourth quarter of
2006 by approximately $14.0 million. In addition to the lower than expected
retrocession recoveries, the fourth quarter of 2006 mortality experience was due
to a combination of higher claim volume and higher average claim size.
Offsetting our adverse mortality in the first and fourth quarters were favorable
experience refunds of $5.8 million and $3.4 million, respectively, which are
recorded in premiums as previously noted. For the full year ended 2006, our
actual net mortality (excluding experience refunds) was approximately 103% of
expected on over $1.1 billion in claims.

Our pricing and actuarial projection models include various lapse
assumptions by treaty and by product type which are based on historical
experience and industry expectations. While our actual lapse experience during
the third and fourth quarters of 2006 was only slightly lower in the aggregate
than expected, we noted that the lapse distribution pattern was such that
certain policies had higher than average lapses while others had lower than
average lapses. However, the policies with higher lapses had the higher margins
and the policies with lower lapses had the lower margins, thereby reducing our
earnings against expectations by approximately $13 million and $14 million in
the third and fourth quarters of 2006, respectively.

Related to the improvement in retrocession data and related
administration systems, we revised our estimates based on refinements of certain
of our calculations and processes for the net cost of reinsurance. The impact of
these changes resulted in an adjustment which increased our claims and other
policy benefits by approximately $8 million in the second quarter of 2006.
During the third quarter of 2006, and in connection with ongoing initiatives to
improve the quality of our cedant information, we received updated claims
totaling $9.2 million relating to the 2004 and 2005 years. Although the
increased claims from cedant reporting were largely mitigated by offsetting
premium adjustments, they had the impact of artificially increasing the claims
and benefits ratio for the year. Finally, as noted above, there was a reserve
fluctuation on the equity-indexed annuity contract of approximately $19.8
million which impacted 2006 claims.

Interest credited to interest sensitive contract liabilities increased
30% to $173.0 million in 2006 compared to $133.0 million in 2005. The increase
was principally due to the previously described equity-indexed annuity contract
written in late 2005, along with increases in interest credited on existing
treaties due to increasing average liability balances. During the third quarter
of 2006, we terminated four funding agreements, resulting in a decrease to our
interest sensitive contract liabilities of approximately $650.0 million.

Acquisition costs and other insurance expenses decreased 10% to $360.7
million in 2006 compared to $401.0 million in 2005. Acquisition costs and other
insurance expenses as a percentage of net earned premiums for 2006 and 2005 were
21% and 22%, respectively. During the second quarter of 2006, we recorded
adjustments of $13.0 million to increase deferred acquisition cost amortization
related to several deferred fixed annuity treaties in which emerging lapse
experience was significantly higher than expected. This adjustment was partially
offset as we received a $6.2 million rebate from ING as a result of the
Ballantyne Re securitization (a similar rebate of $6.7 million was received in
2005 resulting from our 2005 collateral finance facility transactions).
Excluding the ING rebate, letter of credit fees have declined in 2006 by $18.8
million as a result of the Regulation XXX transactions completed in December
2005 and May 2006. During the fourth quarter of 2006, a client review revealed
usage of an incorrect allowance percentage by the client resulting in a $6.6
million favorable adjustment. The 2005 acquisition costs were impacted by a
$17.7 million adjustment which increased acquisition costs with a corresponding
decrease to the change in reserves related to the purchase accounting
adjustments for the ING block.

Operating expenses for 2006 increased 19% to $58.1 million compared to
$48.8 million in 2005. Operating expenses as a percentage of operating revenues
(total revenues excluding realized gains and losses and changes in the value of
embedded derivatives) were 2.5% and 2.3% for 2006 and 2005, respectively. The
overall increase in operating expenses related primarily to an overall increase
in headcount in 2006 compared to 2005, executive severance costs of $3.1 million
and increases in compensation costs, legal fees and depreciation expenses.
Partially offsetting these amounts was a $1.2 million reduction in restricted
share expense in 2006 compared to 2005 related to the reversal of previously
recognized expense in accordance with SFAS No. 123(R), combined with lower
consulting fees and technical service fees paid to ING.

Collateral finance facilities expenses for 2006 increased 376% to
$205.2 million compared to $43.1 million in 2005. This increase is due to the
interest costs relating to the Regulation XXX transactions. In addition,
beginning in the second half of 2005, a portion of the cost of the Stingray
facility was charged to the Life Reinsurance North America Segment. Due to
rating agency downgrades, our 2006 collateral finance facilities expenses
increased by $5.8 million relating to additional fees to be paid to the
financial guarantors of our securitization transactions.

Comparison of 2005 to 2004

Revenues

Net premiums earned increased by $1.3 billion, or 289%, in 2005
compared to 2004 primarily as a result of the favorable impact of the ING
acquisition. The remaining increase was due to the increases in the amounts of
life insurance in-force on existing business and on new business written during
the year. New business face amounts assumed was $131 billion in 2005 compared to
$64 billion in 2004. As of December 31, 2005, we had approximately $1.02
trillion of life reinsurance in-force compared to just under $1.0 trillion at
December 31, 2004.

Net investment income increased by $135.5 million, or 66% in 2005
compared to 2004. The increase was due to the growth in our average invested
assets base because of the ING acquisition, Regulation XXX financing
transactions, increased operating cash flows and additional trust preferred
securities issued in December 2004.

On the portfolio managed by our external investment managers, the
yields on fixed rate assets (5.2%) did not change in 2005 compared to 2004.
Yields on floating rate assets, which are indexed to LIBOR, increased to 4.9% in
2005 from 3.4% in 2004, and the yield on our cash and cash equivalents increased
to 3.9% in 2005 from 1.8% in 2004.

The change in value of embedded derivatives, net of related deferred
amortization costs and taxes, arises from the application of DIG B36. The change
in the value of embedded derivatives decreased revenues by $8.5 million in 2005
compared to an increase of $4.6 million in 2004. This change in value arose
principally because of the asset/liability mismatch on modified coinsurance
contracts assumed in the ING acquisition, coupled with a decrease in risk free
interest rates and widening of credit spreads.

Expenses

Claims and policy benefits increased by 297% in 2005 compared to 2004.
The increase was primarily due to the impact of the ING acquisition. Claims and
other policy benefits, as a percentage of net premiums, were 75.2% and 73.7% in
2005 and 2004, respectively. Death claims are reasonably predictable over a
period of many years, but are less predictable over shorter periods and are
subject to fluctuation from quarter to quarter. During the second quarter of
2005, we experienced higher than expected mortality which resulted in higher
claims of approximately $14 million. This was due principally to a higher than
expected number of large claims being incurred. Mortality was within
expectations for the remainder of 2005 and, therefore, overall mortality in 2005
was slightly higher than expected. Conversely, in 2004, mortality experience was
slightly better than anticipated.

In 2005, interest credited to interest sensitive contract liabilities
increased by 25% to $133.0 million from $106.5 million in 2004. The increase was
due to interest credited on new reinsurance treaties and increases in interest
credited on existing treaties due to increasing average liability balances.
Interest contract liabilities were $3.9 billion at December 31, 2005 compared to
with $3.2 billion at December 31, 2004.

Acquisition costs and other insurance expenses increased by 205% in
2005 compared to 2004. The increase was a result of the ING acquisition and the
increased life and annuity business. Acquisition costs and other insurance
expenses, as a percentage of operating revenues, were 18.5% and 19.3% in 2005
and 2004, respectively. Operating revenues are defined as total revenues
excluding realized gains (losses) and changes in the fair value of embedded
derivatives. Excluding the impact of the $6.7 million rebate received from ING
related to fees paid on Regulation XXX reserves, acquisition costs and other
insurance expenses as a percentage of operating revenues were 18.8% in 2005.
Overall, these percentages fluctuate due to varying allowance levels within
coinsurance-type arrangements, the timing of amounts due to and from ceding
companies, as well as the amortization pattern of previously capitalized
amounts, which are based on the form of the reinsurance agreement and the
underlying insurance policies. Additionally, the mix of first year coinsurance
versus yearly renewable term can cause the percentage to fluctuate from period
to period.

Operating expenses for 2005 compared to 2004 increased by $30.4
million, or 165%. The increase was primarily the result of the ING acquisition
and additional personnel and consulting costs incurred as we expanded our
infrastructure in response to our recent and anticipated growth. We increased
our head count principally because of hiring additional employees in respect of
the acquisition of the ING business and adding management bench strength in key
functional areas across the segment. Total employees in this segment have grown
from 91 at December 31, 2004 to 226 at December 31, 2005. Operating expenses as
a percentage of operating revenues decreased from 2.7% in 2004 to 2.3% in 2005
reflecting the benefits of scale and a portion of the benefits of the
integration of ING into our existing operations.

The collateral finance facility costs associated with the Regulation
XXX financing transactions completed in 2005 contributed to the significant
increase in the collateral finance facilities expense in 2005. These facilities
are described in Note 7 to the Consolidated Financial Statements.

Interest expense in this segment was incurred on the trust preferred
securities. The increase in interest expense to $10.8 million resulted from the
issuance of an additional $50.0 million of trust preferred securities in
December 2004 and an increase in the LIBOR interest rates during 2005.

Life Reinsurance International

Year Ended Year Ended Year Ended
December 31, 2006 December 31, 2005 December 31, 2004
----------------- ----------------- -----------------

Revenues
Premiums earned, net............................... $ 122,746 $ 119,055 $ 122,518
Investment income, net............................. 24,106 11,488 10,023
Net realized gains (losses)........................ (11,569) 1,263 1,685
----------------- -------------- --------------
Total revenues.................................. 135,283 131,806 134,226
----------------- -------------- --------------
Benefits and expenses
Claims and other policy benefits................... 101,126 76,906 81,646
Acquisition costs and other insurance expenses, net 37,332 20,722 17,634
Operating expenses................................. 31,236 25,276 18,798
Goodwill impairment................................ 33,758 - -
----------------- -------------- --------------
Total benefits and expenses..................... 203,452 122,904 118,078
----------------- -------------- --------------
Income (loss) before income taxes.................. $ (68,169) $ 8,902 $ 16,148
================= ============== ==============

Comparison of 2006 to 2005

Revenues

Net premiums earned during 2006 increased by 3% to $122.7 million
compared to $119.1 million in 2005. There was an increase of premiums earned
from a number of new UK protection treaties over the course of 2006 amounting to
$14.5 million. In addition, a number of clean up activities within the portfolio
took place in 2006 both positive and negative, with an overall impact of
reducing premium by $2.0 million reflecting updated data received from cedants
but also a business initiative to reduce historic backlogs in processing. In
addition, in 2005 premiums were grossed up as a result of updated information
from two Lloyds syndicates which accounted for increased premium of $9.0
million, related to prior periods.

Investment income in 2006 increased 109% to $24.1 million compared to
$11.5 million in 2005. The increase was mainly due to a single large annuity
agreement which provided $11.3 million of additional investment income during
the year.

Realized losses for 2006 were $11.6 million compared to a $1.3 million
gain for 2005. The net realized loss for the year to date includes a $7.2
million loss related to the rebalancing of the investment portfolio in respect
of the annuity agreement in the second quarter of 2006 and a further loss of
$3.3 million arising from a previously unrealized loss position becoming
realized upon the recapture of this annuity agreement in the third quarter of
2006. These losses were caused by rising GBP interest rates and were offset by
reductions in the liability value that we had to pay the ceding company upon
termination of the transaction.

Expenses

Claims and other policy benefits increased by 31% in 2006 to $101.1
million compared to $76.9 million in 2005. Claims cost grew significantly in
2006 due to the new U.K. protection treaties, amounting to $9.3 million. There
was a significant increase in claims cost recorded in the first quarter of 2006
arising from adverse mortality and morbidity experience, adjustments on
retrocession recoverables and updated cedant data of approximately $12.0 million
in total. Additionally, during the fourth quarter of 2006, claims related to our
North American lives business increased $3.0 million as a result of the
accelerated processing of backlog. Prior year claims were also higher than
average due to $5.3 million of claims in relation to information received from
two of our syndicates in Lloyd's of London. Other effects in 2005 amounted to
reduced claims cost of $6.0 million.

Acquisition costs and other insurance expenses increased by 80% in 2006
to $37.3 million compared to $20.7 million in 2005. In general, acquisition
costs and other insurance expenses have increased due to a shift in business mix
towards long term protection business which carries a higher average commission
rate. In addition, collateral costs of $3.5 million in relation to the recapture
of the annuity agreement increased other insurance expenses in the year, but
were offset by $4.0 million of reduced costs previously described in 2005 due to
one-off cost adjustments in respect of our Lloyd's of London syndicates. Our
deferred acquisition costs are principally related to our U.K. protection
business written in late 2005 and 2006. Given the relatively small amount of
in-force business in the Life Reinsurance International Segment, the assessment
of the recoverability of deferred acquisition costs is very dependent upon
projections of new business margins. Based on the impact of the rating
downgrades and other market developments within the U.K., we revised our
estimate of the future margins on this business and determined that a
substantial portion of our deferred acquisition costs were unrecoverable and,
accordingly, a write-off of $11.8 million deferred acquisition costs was made in
the fourth quarter of 2006.

Operating expenses increased by 23% in 2006 to $31.2 million compared
to $25.3 million in 2005. An increase in personnel costs in response to the
anticipated growth in the Life Reinsurance International Segment in addition to
severance costs, including those related to the Life Reinsurance International
Segment head office relocation from Windsor to London, were offset by reductions
primarily in various professional services costs and adjustments related to
non-commission acquisition costs deferred. A provision for shortfall in future
rental income of $2.0 million and accelerated write-down of fixed assets of $1.8
million related to the Windsor property lease was made in the fourth quarter of
December 31, 2006.

An impairment review was undertaken during the fourth quarter of 2006
of the goodwill balance carried within the Life Reinsurance International
Segment related to previously acquired business, resulting in a full write-down
of $33.8 million.

Comparison of 2005 to 2004

Revenues

Net premiums earned decreased $3.5 million, or 3%, in 2005 compared
to 2004. During 2004, we reviewed the pricing and profitability of all contracts
written in this segment and, as a result, decided not to renew treaties which
did not meet our profitability goals. Accordingly, premiums earned decreased in
2005 as compared to 2004. In addition, during 2005 there was an increase in net
premiums of $9.0 million due to revised reporting received on our share of two
Lloyd's of London life syndicates offset by revisions to premium accruals of
$2.2 million based on improved underlying data. During 2004, premiums earned
included $4.2 million relating to revised reporting received on a share of two
Lloyd's of London life syndicates.

Investment income in 2005 increased by $1.5 million, or 15%, compared
to 2004 due to the investment income earned on the proceeds of additional
capital contributed to this segment in December 2004 and June 2005.

Expenses

Claims and other policy benefits decreased to $76.9 million, or 6%, in
2005 compared to 2004. During 2005, additional information was received from
ceding companies that resulted in a review of policy benefits on certain lines
of business and a decrease of $7.9 million in claims and other policy benefits.
This was partially offset by an increase of $5.3 million due to revised
reporting received on our share of two Lloyd's of London life syndicates. In
addition, claims and other policy benefits in 2005 were impacted by the lower
levels of premiums written during 2005 and revisions to premium accruals
described above.

During 2005, acquisition costs and other insurance expenses increased
by $3.1 million, or 18%, to $20.7 million from $17.6 million in 2004.
Acquisition costs include the amortization of the present value of in-force
business. Acquisition costs for 2005 included $4.3 million due to revised
reporting received on our share of two Lloyd's of London life syndicates and the
write-off of an uncollectible receivable of $1.2 million. In 2004, we

recognized profit commission income of $1.8 million arising from a run off book
of business and also included $2.4 million expense relating to our share of two
Lloyd's of London life syndicates.

Operating expenses increased by 34% to $25.3 million in 2005 as
compared to 2004. The primary drivers of the increase were $3.0 million relating
to consulting fees for the review, design and implementation of processes and
controls required to assist us in the remediation of the material weakness in
internal controls noted in 2004. The remaining increase was principally related
to personnel costs from increased headcount as we continue to grow our business
and include costs for recruitment expenses and professional expenses incurred in
addressing implementation of the requirements of the Sarbanes Oxley Act of 2002
and United Kingdom regulatory changes. The number of employees in this segment
has grown as we continue to strive to grow our business in existing and
prospective markets.

Corporate and Other

Year Ended Year Ended Year Ended
December 31, 2006 December 31, 2005 December 31, 2004
----------------- ----------------- -----------------

Revenues
Investment income, net............................. $ 8,159 $ 2,810 $ 1,106
Fee income......................................... 3,002 3,083 3,680
Net realized gains (losses)........................ 3,207 1,354 (2,015)
------------- ------------ ------------
Total revenues.................................. 14,368 7,247 2,771
------------- ------------ ------------
Benefits and expenses
Acquisition costs and other insurance expenses, net 11,116 2,061 2,113
Operating expenses................................. 62,942 41,448 17,452
Goodwill impairment................................ 367 - -
Interest expenses.................................. 10,581 9,915 8,411
Collateral finance facilities expense.............. 11,526 5,033 -
Due diligence costs................................ - - 4,643
------------- ------------ ------------
Total benefits and expenses..................... 96,532 58,457 32,619
------------- ------------ ------------
Loss before income taxes $ (82,164) $ (51,210) $ (29,848)
============= ============ ============

Comparison of 2006 to 2005

Revenues

Investment income increased by 190% in 2006 to $8.2 million compared to
$2.8 million in 2005. Investment income arises in the Corporate and Other
Segment due to capital not specifically allocated to the Life Reinsurance North
America or Life Reinsurance International Segments. Investment income will
increase or decrease as capital is raised and deployed to the operating
segments. The increase is principally due to an increase in investment assets
arising from the borrowing under the Stingray facility, a portion of the
proceeds received from the equity issuance in December 2005 and settlement of
the forward share sale agreement during the third quarter of 2006.

Expenses

Acquisition costs and other insurance expenses increased by 439% in
2006 to $11.1 million compared to $2.1 million in 2005. The increase is
partially due to a $4.3 million write-off of a portion of our deferred
acquisition costs and present value of in-force business related to our wealth
management business resulting from the impact of our ratings downgrades. In
addition, we incurred $3.1 million of costs in 2006 for the Tartan Capital
Limited catastrophe bond issued in May 2006 and $1.0 million for federal excise
taxes, which had previously been charged to the Life Reinsurance North America
segment prior to 2006.

and professional fees, including those in respect of corporate governance
legislation and regulations. Operating expenses increased by 52% in 2006 to
$62.9 million compared to $41.4 million in 2005. Salaries were $9.3 million
higher due to $6.5 million of severance paid to certain executives with the
balance of the increase related to a higher headcount in 2006 as compared to
2005. Directors' costs were approximately $3.0 million higher as a result of the
formation of the Office of the Chairman to assist in the sale of the Company and
higher D&O insurance costs. Also related to the sale of the Company were various
uncapitalizable costs of approximately $5.0 million. Finally, legal costs were
higher in 2006 related to the class action suit, the SEC and Senate Subcommittee
subpoenas and other various matters. These higher costs were partially offset by
$1.5 million of lower benefit costs, mainly relating to a reversal of accruals
for performance based restricted stock awards. It was determined that the
performance thresholds related to these awards were unlikely to be met and in
accordance with FAS 123(R), previously recognized costs were reversed in the
third quarter of 2006.

Interest expense increased by 7% in 2006 to $10.6 million compared to
$9.9 million in 2005. This increase was as a result of our utilization of our
credit facilities and reverse repurchase agreements during the current year.
Other interest expense included interest on the 4.5% Senior Convertible Notes
and the 1.0% dividend payable on the convertible preferred shares of our HyCU's.
Nearly all of the 4.5% Senior Convertible Notes were repurchased and retired in
December 2006 with the remaining $8,000 retired in January 2007.

Collateral finance facilities expense increased by 129% in 2006 to
$11.5 million compared to $5.0 million in 2005. The collateral finance
facilities expense consisted entirely of the put premium and interest costs
under the Stingray facility. Costs increased during the current year due to
borrowing under the Stingray facility in August 2006.

Comparison of 2005 to 2004

Revenues

Investment income arises in the Corporate and Other Segment on capital
not specifically allocated to the Life Reinsurance North America or Life
Reinsurance International Segments. Investment income will increase or decrease
as we raise capital and deploy it in our operating segments. Fee income and
acquisition expenses arise from our wealth management operations.

Expenses

Operating expenses include the costs of running our principal office in
Bermuda, our senior executive officers, legal and capital markets departments,
compensation and other costs for our Board of Directors and legal and
professional fees, including those in respect of corporate governance
legislation and regulations. Operating expenses increased by 137% to $41.4
million in 2005 from $17.5 million in 2004. The increases were principally due
to increased personnel costs, including recruitment and relocation costs, as we
continue to grow our business, the costs of option and restricted stock unit
awards granted under our equity incentive compensation plans and professional
fees of approximately $7.0 million incurred in respect of the implementation of
the requirements of the Sarbanes-Oxley Act of 2002.

The collateral finance facilities expense consisted of a portion of the
put premium and amortization of facility costs on the Stingray facility
described in Note 7 to the Consolidated Financial Statements. Expenses related
to the proportion of the Stingray facility utilized in 2005 have been allocated
to the Life Reinsurance North America segment.

Interest expense includes interest on the 4.5% Senior Convertible Notes
and the 1.0% dividend payable on the convertible preferred shares of our HyCU's.
In addition, interest expense in 2005 included $0.8 million in interest expense
on the Cypress Notes. These were converted into Class C Warrants on April 7,
2005.

Financial Condition

Investments

Scottish Re Controlled Portfolio

At December 31, 2006 and 2005, the portfolio controlled by us
consisting of fixed income securities, preferred stock and cash was $8.7 billion
and $6.7 billion, respectively. The portfolio controlled by us excludes the
assets held by ceding insurers under modified coinsurance and funds withheld
coinsurance arrangements. The majority of these assets are publicly traded
securities; however, at December 31, 2006, $532.9 million and $452.9 million,
respectively, represent investments in private securities. Of the total
portfolio controlled by us, $8.2 billion and $5.4 billion at December 31, 2006
and 2005, respectively, represented the fixed income and preferred stock
portfolios managed by external investment managers and $0.5 billion and $1.3
billion, respectively, represented other cash balances. The data in the tables
below exclude assets held by ceding insurers under modified coinsurance and
funds withheld coinsurance agreements.

At December 31, 2006, the average Standard & Poor's rating of our
portfolio was "AA" the average effective duration was 2.9 years and the average
book yield was 5.5% as compared to an average rating of "AA" an average
effective duration of 2.9 years and an average book yield of 4.9% at December
31, 2005. At December 31,

2006, the unrealized depreciation on investments, net of tax and deferred
acquisition costs, was $41.0 million as compared to unrealized appreciation on
investments, net of tax and deferred acquisition costs, of $17.9 million at
December 31, 2005. The unrealized appreciation/depreciation on investments is
included in our consolidated balance sheet as part of shareholders' equity.

In the table below are the total returns earned by our portfolio in
2006, compared to the returns earned by three indices: the Lehman Brothers
Global Bond Index, the S&P 500 and a customized index that we developed to take
into account our investment guidelines and the risk characteristics of the
underlying liabilities. We believe that this customized index is the most
relevant benchmark for our portfolio's performance.

Year Ended
December 31, 2006
---------------------------
Portfolio performance............................ 4.58%
Customized index................................. 4.21%
Lehman Brothers Global Bond Index................ 3.64%
S&P 500.......................................... 15.78%

The following table presents the fixed income investment portfolio
credit exposure by Standard & Poor's ratings, where available, and otherwise by
ratings provided by other agencies.

December 31, 2006 December 31, 2005
------------------------ --------------------------
Ratings $ in millions % $ in millions %
- ------- ------------------------ --------------------------
AAA............... $ 3,350.5 38.5% $ 3,017.4 44.8%
AA................ 2,353.1 27.0 1,069.1 15.9
A................. 2,050.9 23.6 1,646.9 24.4
BBB............... 918.5 10.6 977.7 14.5
BB or below....... 24.9 0.3 28.0 0.4
--------- ----- -------------- -----
Total............. $ 8,697.9 100.0% $ 6,739.1 100.0%
========= ===== ============== =====

The following table illustrates the fixed income investment portfolio
sector exposure.

December 31, 2006 December 31, 2005
------------------------ -------------------------
Sector $ in millions % $ in millions %
- ------- ------------------------ -------------------------
U.S. Treasury
securities and U.S.
government agency
obligations.......... $ 68.0 0.8% $ 47.9 0.7%
Corporate securities..... 2,700.5 31.1 2,057.0 30.5
Municipal bonds.......... 52.2 0.6 37.6 0.6
Mortgage and asset backed
securities........... 5,244.8 60.3 3,150.1 46.7
Preferred stock.......... 116.9 1.3 133.8 2.0
------- ------ ----------- ------
8,182.4 94.1 5,426.4 80.5
Cash..................... 515.5 5.9 1,312.7 19.5
-------- ------ ----------- ------
Total.................... $8,697.9 100.0% $ 6,739.1 100.0%
======== ====== =========== ======

The following tables present the estimated fair values and gross
unrealized losses for the fixed maturity investments and preferred stock that
have estimated fair values below amortized cost as of December 31, 2006 and
2005. These investments are presented by class and grade of security, as well as
the length of time the related market value has remained below amortized cost.

December 31, 2006
-----------------------------------------------------------------------------------
Equal to or greater than
Less than 12 months 12 months Total
--------------------------- ------------------------ --------------------------
Estimated Unrealized Estimated Unrealized Estimated Unrealized
fair value loss fair value loss fair value loss
------------ ---------- ---------- ---------- ---------- -----------

Investment grade
securities:
CMO...................... $ 369,457 $ (2,365) $ 252,252 $ (6,327) $ 621,709 $ (8,692)
Corporates............... 750,806 (15,690) 864,053 (29,078) 1,614,859 (44,768)
Governments.............. 35,805 (615) 21,072 (752) 56,877 (1,367)
MBS...................... 12,116 (136) 138,992 (4,674) 151,108 (4,810)
Municipal................ 19,865 (187) 18,013 (640) 37,878 (827)
Other structured
securities............. 415,596 (2,511) 613,974 (11,735) 1,029,570 (14,246)
Preferred stock.......... 12,246 (295) 95,646 (3,181) 107,892 (3,476)
----------- ------------ ----------- ------------ ----------- ------------

Total investment grade
securities............. $ 1,615,891 $ (21,799) $ 2,004,002 $ (56,387) $ 3,619,893 $ (78,186)
----------- ------------ ----------- ------------ ----------- ------------
Below investment grade
securities:
Corporates............... $ 3,416 $ (58) $ 14,975 $ (570) $ 18,391 $ (628)
Other structured
securities............. 1,405 (421) 1,256 (662) 2,661 (1,083)
Preferred stock.......... 0 0 664 (33) 664 (33)
----------- ------------ ----------- ------------ ----------- ------------
Total below investment
grade securities....... 4,821 (479) 16,895 (1,265) 21,716 (1,744)
----------- ------------ ----------- ------------ ----------- ------------
Total.................... $ 1,620,712 $ (22,278) $ 2,020,897 $ (57,652) $ 3,641,609 $ (79,930)
=========== ============ =========== ============ =========== ============

December 31, 2005
-----------------------------------------------------------------------------------
Equal to or greater than
Less than 12 months 12 months Total
--------------------------- ------------------------ --------------------------
Estimated Unrealized Estimated Unrealized Estimated Unrealized
fair value loss fair value loss fair value loss
------------ ---------- ---------- ---------- ---------- -----------
Investment Grade
Securities:
CMO...................... $ 467,314 $ (4,865) $ 85,305 $ (1,688) $ 552,619 $ (6,553)
Corporates............... 1,132,840 (23,950) 94,218 (2,545) 1,227,058 (26,495)
Governments.............. 36,297 (774) 1,999 (71) 38,296 (845)
MBS...................... 143,956 (3,383) 42,682 (1,611) 186,638 (4,994)
Municipal................ 17,738 (330) 1,621 (68) 19,359 (398)
Other structured
securities............. 1,028,657 (11,882) 135,341 (3,113) 1,163,998 (14,995)
Preferred stocks......... 98,263 (2,287) 24,106 (1,295) 122,369 (3,582)
----------- ------------ ----------- ------------ ----------- ------------
Total investment grade
securities............. $ 2,925,065 $ (47,471) $ 385,272 $ (10,391) $ 3,310,337 $ (57,862)
----------- ------------ ----------- ------------ ----------- ------------
Below investment grade
securities:
Corporates............... $ 10,676 $ (655) $ 1,841 $ (59) $ 12,517 $ (714)
Other structured
securities............. 3,552 (555) 7,260 (29) 10,812 (584)
Preferred stock.......... 392 (12) 340 (19) 732 (31)
----------- ------------ ----------- ------------ ----------- ------------
Total below investment
grade securities....... 14,620 (1,222) 9,441 (107) 24,061 (1,329)
----------- ------------ ----------- ------------ ----------- ------------
Total.................... $ 2,939,685 $ (48,693) $ 394,713 $ (10,498) $ 3,334,398 $ (59,191)
=========== ============ =========== ============ =========== ============

At December 31, 2006, our fixed income portfolio had 2,967 securities
and $79.9 million of gross unrealized losses. No single position had an
unrealized loss greater than $1.3 million. There were $41.6 million of
unrealized gains on the remainder of the portfolio. There were 128 private
securities in an unrealized loss position totaling $5.1 million. At December 31,
2005, our fixed income portfolio had 2,493 positions and $59.2 million of gross
unrealized losses. No single position had an unrealized loss greater than $0.5
million. There were $25.5 million of unrealized gains on the remainder of the
portfolio. There were 127 private securities in an unrealized loss position
totaling $4.3 million in our fixed income portfolio.

Based on our analysis of each security whose price has been below
market for greater than twelve months, we believe that the financial strength,
liquidity, leverage, future outlook, and our ability and intent to hold the
security until recovery support the view that the security was not
"other-than-temporarily" impaired as of December 31, 2006. The unrealized losses
on fixed maturity securities are primarily a result of rising interest rates,
changes in credit spreads and the long-dated maturities of the securities.
Additionally, as of December 31, 2006, approximately 98% of the gross unrealized
losses are associated with investment grade securities.

Unrealized losses on securities that have been in an unrealized loss
position for periods greater than two years amounted to $7.8 million at December
31, 2006 and $1.1 million at December 31, 2005. Unrealized losses on
non-investment grade securities amounted to $1.7 million and $1.3 million at
December 31, 2006 and December 31, 2005, respectively. Of these amounts,
non-investment grade securities with unrealized losses of $1.3 million at
December 31, 2006 and $0.1 million at December 31, 2005 had been in an
unrealized loss position for a period greater than one year.

The following tables analyze the industry analysis of the unrealized
losses at December 31, 2006 and 2005 by industry:

December 31, 2006
-------------------------------------------------------------------------------------
Amortized Estimated Unrealized
Cost % Fair Value % Loss %
----------- -------- --------------- -------- ----------- --------

Industry
Mortgage and asset backed
securities............... $1,833,878 49.3% $ 1,805,047 49.6% $ (28,831) 36.1%
Banking.................... 302,782 8.1 296,225 8.1 (6,557) 8.2
Communications............. 204,320 5.5 196,181 5.4 (8,139) 10.2
Consumer non-cyclical...... 153,941 4.1 148,277 4.1 (5,664) 7.1
Insurance.................. 137,378 3.7 134,516 3.7 (2,862) 3.6
Financial companies........ 126,646 3.4 124,233 3.4 (2,413) 3.0
Consumer cyclical.......... 127,643 3.5 123,455 3.4 (4,188) 5.2
Other*..................... 834,951 22.4 813,675 22.3 (21,276) 26.6
---------- ------ ----------- ------- ---------- -------
Total...................... $3,721,539 100.0% $ 3,641,609 100.0% $(79,930) 100.0%
========== ====== =========== ======= ========== =======

December 31, 2005
-------------------------------------------------------------------------------------
Amortized Estimated Unrealized
Cost % Fair Value % Loss %
----------- -------- --------------- -------- ----------- --------
Industry
Mortgage and asset backed
securities............... $ 1,941,193 57.2% $ 1,914,068 57.4% $ (27,125) 45.8%
Banking.................... 210,360 6.2 206,189 6.2 (4,171) 7.1
Insurance.................. 192,282 5.7 186,480 5.6 (5,802) 9.8
Financial other............ 114,199 3.4 111,488 3.3 (2,711) 4.6
Brokerage.................. 124,998 3.7 122,134 3.7 (2,864) 4.8
Financial companies........ 103,455 3.0 101,663 3.0 (1,792) 3.0
Communications............. 117,803 3.5 115,767 3.5 (2,036) 3.4
Other*..................... 589,299 17.3 576,609 17.3 (12,690) 21.5
----------- ------ ----------- ------- ---------- -------
Total...................... $ 3,393,589 100.0% $ 3,334,398 100.0% $ (59,191) 100.0%
=========== ====== =========== ======= ========== =======
- -----------------

* Other industries each represent less than 3% of estimated fair value

The expected maturity dates of our fixed maturity investments that have
an unrealized loss at December 31, 2006 and 2005 are presented in the table
below.

December 31, 2006
----------------------------------------------------------------------------
Estimated Unrealized
Maturity Book Value % Fair Value % Loss %
- -------- ---------- --------- ------------ -------- ------------ -------

Due in one year or less.......... $ 337,455 9.1% $ 334,582 9.2% $ (2,873) 3.6%
Due in one through five years.... 1,401,180 37.6 1,377,519 37.8 (23,661) 29.6
Due in five through ten years.... 1,206,367 32.4 1,179,292 32.4 (27,075) 33.9
Due after ten years.............. 776,537 20.9 750,216 20.6 (26,321) 32.9
---------- ------ ---------- ------ ----------- ------
Total............................ $3,721,539 100.0% $3,641,609 100.0% $ (79,930) 100.0%
========== ====== ========== ====== =========== ======

December 31, 2005
----------------------------------------------------------------------------
Estimated Unrealized
Maturity Book Value % Fair Value % Loss %
- -------- ---------- --------- ------------ -------- ------------ -------
Due in one year or less.......... $ 269,410 7.9% $ 267,712 8.0% $ (1,698) 2.9%
Due in one through five years.... 1,659,946 48.9 1,636,102 49.1 (23,844) 40.3
Due in five through ten years.... 925,650 27.3 905,973 27.2 (19,677) 33.2
Due after ten years.............. 538,583 15.9 524,611 15.7 (13,972) 23.6
---------- ------ ---------- ------ ----------- ------
Total............................ $3,393,589 100.0% $3,334,398 100.0% $ (59,191) 100.0%
========== ====== ========== ====== =========== ======

At December 31, 2006, there were 1,796 securities with unrealized loss
positions, with two securities having an unrealized loss greater than $1.0
million. At December 31, 2005, there were 1,698 securities with unrealized
losses: no securities had an unrealized loss greater than $0.5 million. The
increase in the number of securities with unrealized losses is primarily
attributable to increases in interest rates.

At December 31, 2006, there were three securities with a fair value
that traded continuously at less than 80% of amortized cost for at least six
months or 90% of amortized cost for at least 12 months. The total unrealized
loss on this security amounted to $0.8 million. At December 31, 2005 there was
one security with fair values that traded continuously at less than 80% of
amortized cost for at least six months or 90% of amortized cost for at least 12
months. The total unrealized loss on this security amounted to $0.5 million.

The following tables provide details of the sales proceeds, realized
loss, length of time the security had been in an unrealized loss position and
reason for sale for securities sold with a realized loss during 2006, 2005 and
2004.

Year ended December 31, 2006
-------------------------------------------------------------------------------------------------
Credit Concern Relative Value Other Total
---------------------- --------------------- ----------------------- -----------------------
Days Proceeds Loss Proceeds Loss Proceeds Loss Proceeds Loss
- ---- --------- ---------- --------- ---------- --------- ---------- --------- -----------

0-90.......... $ 20,503 $ (857) $ 193,855 $ (3,909) $ 457,378 $ (955) $ 671,736 $ (5,721)
91-180........ 4,105 (81) 11,597 (331) 70,781 (931) 86,483 (1,343)
181-270....... 8,072 (798) 2,099 (34) 8,782 (245) 18,953 (1,077)
271-360....... 2,397 (206) 8,886 (284) 11,544 (137) 22,827 (627)
Greater than
360......... 9,750 (983) 8,507 (199) 26,255 (560) 44,512 (1,742)
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Total......... $ 44,827 $ (2,925) $ 224,944 $ (4,757) $ 574,740 $ (2,828) $ 844,511 $ (10,510)
========= ========== ========= ========== ========= ========== ========= ==========

Year ended December 31, 2005
-------------------------------------------------------------------------------------------------
Credit Concern Relative Value Other Total
---------------------- --------------------- ----------------------- -----------------------
Days Proceeds Loss Proceeds Loss Proceeds Loss Proceeds Loss
- ---- --------- ---------- --------- ---------- --------- ---------- --------- -----------

0-90.......... $ 43,223 $ (1,703) $ 44,230 $ (356) $ 471,886 $ (1,440) $ 559,339 $ (3,499)
91-180........ 355 (83) 12,456 (59) 6,499 (48) 19,310 (190)
181-270....... 5,869 (1,246) 2,240 (7) 6,361 (88) 14,470 (1,341)
271-360....... 2,581 (255) 2,045 (70) 4,881 (29) 9,507 (354)
Greater than
360......... 2,670 (330) 7 - 2,453 (64) 5,130 (394)
--------- ---------- --------- ---------- --------- ---------- --------- -----------
Total......... $ 54,698 $ (3,617) $ 60,978 $ (492) $ 492,080 $ (1,669) $ 607,756 $ (5,778)
========= ========== ========= ========== ========= ========== ========= ==========

Year ended December 31, 2004
-------------------------------------------------------------------------------------------------
Credit Concern Relative Value Other Total
---------------------- --------------------- ----------------------- -----------------------
Days Proceeds Loss Proceeds Loss Proceeds Loss Proceeds Loss
- ---- --------- ---------- --------- ---------- --------- ---------- --------- -----------
0-90.......... $ 7,528 $ (474) $ 54,772 $ (1,284) $ 77,107 $ (1,859) $ 139,407 $ (3,617)
91-180........ 1,909 (136) 22,884 (266) 6,543 (46) 31,336 (448)
181-270....... 10,483 (159) 3,904 (23) 127 (1) 14,514 (183)
271-360....... - - 488 (10) 1,886 (31) 2,374 (41)
Greater than
360......... 8,011 (710) 306 (11) 321 (33) 8,638 (754)
--------- ---------- --------- ---------- --------- ---------- --------- -----------
Total......... $ 27,931 $ (1,479) $ 82,354 $ (1,594) $ 85,984 $ (1,970) $ 196,269 $ (5,043)
========= ========== ========= ========== ========= ========== ========= ==========

Asset/liability management

We use various asset/liability management processes to provide adequate
liquidity over the lives of the liabilities and to limit exposure to changes in
interest rates, adverse credit default experience and currency risk.

When we originate each new reinsurance transaction, the price and terms
are based on results of simulation models in which projected investment cash
flows will match liability cash flows within reasonable tolerances. The
investment portfolio characteristics found to be most suitable for the liability
are used to design the investment guidelines and target duration for the
portfolio. We currently manage our asset/liability processes for one hundred
individual portfolios.

Liquidity expectations and requirements vary with the type of
liability. For liabilities with potentially greater liquidity demands, we select
more liquid assets and run more frequent simulations reflecting updated
experience.

We periodically perform analyses, update guidelines and take other
corrective action to keep the assets at the portfolio and enterprise level
suitable for the relevant liabilities. Techniques include simulation of in-force
assets and liabilities in various interest rate scenarios, adjustment of
duration targets for each portfolio, and monitoring the gap between actual and
target duration at the portfolio, legal entity and enterprise levels.
Historically, variations between the maturity of our investment portfolio and
our liabilities have been small at the aggregate level.

Funds Withheld at Interest Portfolio

Funds withheld at interest arise on modified coinsurance agreements and
funds withheld coinsurance agreements. In economic substance, these agreements
are identical to coinsurance treaties except that the ceding company retains
control of and title to the assets. The ceding company holds assets backing the
statutory reserves in a segregated portfolio, which is managed by the ceding
company or by investment managers appointed by the ceding company. These
treaties transfer a quota share of the risks. The funds withheld at interest
represent our share of the ceding companies' statutory reserves. The cash flows
exchanged with each monthly settlement are netted and include, among other
items, our quota share of investment income on our proportionate share of the
portfolio, realized losses, realized gains (amortized to reflect the statutory
rules relating to interest maintenance reserve), interest credited and expense
allowances.

At December 31, 2006, the market value of the assets representing funds
withheld at interest totaled $1.9 billion with an average rating of "A" an
average effective duration of 5.0 years and an average book yield of 5.9% as
compared to $2.6 billion with an average rating of "A+" an average effective
duration of 5.1 years and an average book yield of 5.6% at December 31, 2005.
These are fixed income investments and include marketable securities, commercial
mortgages, private placements and cash. The market value of the funds withheld
amounted to $1.9 billion and $2.6 billion at December 31, 2006 and December 31,
2005, respectively.

At December 31, 2006 and 2005, funds withheld at interest were in
respect of seven contracts with four ceding companies. At December 31, 2006, one
contract with Lincoln National Life Insurance Company accounted for $0.9 billion
or 47% of the funds withheld balances. One contract with Security Life of Denver
International Limited that accounted for $0.3 billion or 18% of the funds
withheld balances, and one contract with Fidelity & Guaranty Life accounted for
$0.6 billion or 33% of the funds withheld balances. The remaining contracts were
with Illinois Mutual Insurance Company and American Founders Life Insurance
Company. Lincoln National Life Insurance Company has financial strength ratings
of "A+" from AM. Best, "AA" from Standard & Poor's, "Aa3" from Moody's and "AA"
from Fitch. In the event of insolvency of the ceding companies on these
arrangements, we would need to exert a claim on the assets supporting the
contract liabilities. However, the risk of loss is mitigated by our ability to
offset amounts owed to the ceding company with the amounts owed to us by the
ceding company. Reserves for future policy benefits and interest sensitive
contract liabilities relating to these contracts amounted to $1.7 billion and
$2.4 billion at December 31, 2006 and 2005, respectively.

The investment objectives for these arrangements are included in the
modified coinsurance and funds withheld coinsurance agreements. The primary
objective is to maximize current income, consistent with the long-term
preservation of capital. The overall investment strategy is executed within the
context of prudent asset/liability management. The investment guidelines permit
investments in fixed maturity securities, and include marketable securities,
commercial mortgages, private placements and cash. The maximum percentage of
below investment grade securities is 10% and other guidelines limit risk, ensure
issuer and industry diversification, as well as, maintain liquidity and overall
portfolio credit quality.

According to data provided by our ceding companies, the following table
reflects the market value of assets including cash backing the funds withheld at
interest portfolio using the lowest rating assigned by the three major rating
agencies.

December 31, 2006 December 31, 2005
-------------------------- -------------------------
Ratings $ Millions % $ Millions %
- ------- ------------- ---------- ------------- ---------
AAA............... $ 427.5 22.1% $ 705.9 27.4%
AA................ 166.6 8.6 146.0 5.7
A................. 561.1 29.0 741.6 28.9
BBB............... 605.6 31.3 785.8 30.6
BB or below....... 75.1 3.9 78.0 3.0
------------- ---------- ------------- ---------
1,835.9 94.9 2,457.3 95.6
Commercial
mortgage loans.... 98.8 5.1 112.6 4.4
------------- ---------- ------------- ---------
Total............. $ 1,934.7 100.0% $ 2,569.9 100.0%
============= ========== ============= =========

According to data provided by our ceding companies, the following table
reflects the market value of assets backing the funds withheld at interest
portfolio by sector.

December 31, 2006 December 31, 2005
---------------------- ------------------
Sector $ Millions % $ Millions %
- ---- ------------ ------- ---------- -----
U.S. Treasury securities and U.S.
government agency obligations .... $ 58.8 3.0% $ 62.3 2.4%
Corporate securities ............... 1,323.7 68.4 1,634.4 63.6
Municipal bonds .................... 29.9 1.6 33.0 1.3
Mortgage and asset backed
securities ....................... 463.4 24.0 595.1 23.1
Commercial mortgage loans .......... 98.9 5.1 112.5 4.4
Cash ............................... (40.0) (2.1) 132.6 5.2
------------ ------- ---------- ------
Total .............................. $ 1,934.7 100.0% $ 2,569.9 100.0%
============ ======= ========== ======

Liquidity and Capital Resources

Cash flow

Net cash provided by operating activities amounted to $462.9 million in
2006 compared to net cash provided by operating activities of $365.7 million in
2005. Operating cash flow includes cash inflows from premiums, fees and
investment income, and cash outflows for benefits and expenses paid. In periods
of growth of new business our operating cash flow may decrease due to first year
commissions paid on new business generated. For income recognition purposes
these commissions are deferred and amortized over the life of the business.
During 2006, $442.3 million of funds withheld were released as a result of the
Ballantyne Re transaction.

We believe cash flows from operations will be positive over time.
However, they may be positive or negative in any one period depending on the
amount of new life reinsurance business written, the level of ceding commissions
paid in connection with writing that business, the level of renewal premiums
earned in the period and the timing of receipt of reinsurance receivables and
settlement of reinsurance payables.

Net cash used in investing activities was $2,799.9 million in 2006
compared to net cash used in investing activities of $1,857.9 million in 2005.
The increase in net cash used in investing activities principally relates to the
purchases of fixed maturity securities. In the current year, these were
primarily related to the investment of the proceeds of the Regulation XXX
transactions closed in December 2005 and May 2006 and the excess cash generated
by operating and financing activities. In 2005, these were primarily related to
the investment of the proceeds of the collateral finance facilities and the
excess cash generated by operating and financing activities and investment of
funds received on the ING acquisition.

Net cash provided by financing activities was $1,539.6 million in 2006
and $2,117.8 million in 2005. The current year financings included $1,771.8
million raised in collateral finance facilities, $265.0 million from the
drawdown of the Stingray facility, $147.4 million from the prepaid variable
share forward contract, reduced by $522.3 million related to net withdrawals
from interest sensitive contracts and $115.0 million repayment of long term
debt. Prior year financings mainly relate to collateral finance facilities
proceeds.

Credit facilities

On July 14, 2005, Scottish Annuity & Life Insurance Company (Cayman)
Ltd., Scottish Re (Dublin) Limited, Scottish Re (U.S.), Inc. and Scottish Re
Limited entered into a $200.0 million, three-year revolving unsecured senior
credit facility with a syndicate of banks to provide capacity for borrowing and
extending letters of credit. All outstanding letters of credit under this
facility were cancelled and the facility was terminated effective January 19,
2007.

On August 18, 2005, Scottish Re (Dublin) Limited entered into a $30.0
million three-year revolving, unsecured letter of credit facility with a
syndicate of banks. Effective September 22, 2006, Scottish Annuity & Life
Insurance Company (Cayman) Ltd. and Scottish Re (Dublin) Limited terminated the
$30 Million Credit Agreement. All letters of credit outstanding under the
agreement, in an aggregate of $10.0 million, were cancelled.

On November 21, 2006, Scottish Annuity & Life Insurance Company
(Cayman) Ltd. and Scottish Re Limited entered into a one year, $5.0 million
letter of credit facility on a fully secured basis. Outstanding letters of
credit at December 31, 2006 and February 23, 2007 were $1.6 million and $75,000,
respectively.

The Holding Company

We are a holding company whose primary uses of liquidity include, but
are not limited to, operating expenses, the immediate capital needs of our
operating companies, dividends paid to our shareholders and interest payments on
our indebtedness. See Note 9 "Debt Obligations" in the Notes to the Consolidated
Financial Statements. The primary sources of our liquidity include proceeds from
our capital raising efforts, interest income on corporate investments and
dividends from operating subsidiaries. The holding company also receives funding
from its subsidiaries through transfer pricing reflecting services performed by
the holding company on behalf of its subsidiaries. We will continue to be
dependent upon these sources of liquidity. On December 6, 2006, we repurchased
nearly all of the $115.0 million 4.5% Senior Convertible Notes issued by
Scottish Re, which note holders had the right to put to us. The remaining $8,000
in Senior Convertible Notes were subsequently repurchased and cancelled in
January 2007.

Based on our known sources and uses of liquidity, our liquidity
position is very tight over the near term. During the third quarter of 2006, we
successfully completed a reinsurance transaction that provided approximately
$120.0 million of additional liquidity. To further enhance our liquidity
position, we are negotiating a $100 million term loan facility with Cerberus to
provide a source of liquidity until the closing of the Transaction. To the
extent that we are not able to close this term loan facility or obtain
additional sources of liquidity, we face the possibility of running out of
liquidity in the second quarter of 2007. Over the longer term, we will need
significant amounts of new capital to support existing and new business. These
capital requirements will largely be satisfied by the consummation of the
Transaction.

Capital

Total capitalization is analyzed as follows:

December 31, 2006 December 31, 2005 December 31, 2004
-------------------- -------------------- ---------------------

Shareholders' equity........................ $ 1,057,192 $ 1,271,712 $ 862,674
Mezzanine equity............................ 143,665 143,057 142,449
Long-term debt.............................. 129,500 244,500 244,500
7.00% Convertible Junior Subordinated Notes. - - 41,282
-------------------- -------------------- ---------------------
$ 1,330,357 $ 1,659,269 $ 1,290,905
==================== ==================== =====================

The decrease in shareholders' equity at December 31, 2006 as compared
to December 31, 2005 was primarily due to the net loss available to ordinary
shareholders of $376.7 million for 2006, partially offset by the settlement of
the prepaid variable share forward contract in which we received $147.3 million
in the aggregate and issued an aggregate 6,578,948 ordinary shares.

The increase in capitalization at December 31, 2005 compared to
December 31, 2004 was principally due to net proceeds of $174.1 million on the
issuance of 7,660,000 ordinary shares (including an over allotment option of
1,410,000 shares), net proceeds of $168.3 million on the issuance of 5,000,000
non-cumulative perpetual preferred shares, the conversion of the 7% Convertible
Junior Subordinated Note to ordinary shares and net income for the year ended
December 31, 2005 of $130.2 million. These increases were partially offset by
the net costs of the variable equity sale forward contracts of $13.8 million,
decrease in other comprehensive income of $41.6 million and increase in
dividends declared of $6.6 million. Other comprehensive income consists of the
unrealized appreciation/depreciation on investments and the cumulative
translation adjustment arising from the translation of Scottish Re Holdings
Limited's balance sheet at exchange rates as of December 31, 2005.

See Notes 8, 9, 10 and 11 of the Consolidated Financial Statements for
additional details on the items noted in the table.

Prepaid variable share forward contract

In connection with the December 23, 2005 ordinary share offering, we
entered into forward sales agreements with affiliates of Bear, Stearns & Co.
Inc. and Lehman Brothers, Inc. (the "forward purchasers") and the forward
purchasers borrowed and sold an aggregate of approximately 3,150,000 ordinary
shares as their initial hedge of the forward sale agreements. Pursuant to the
forward sale agreements, the forward purchasers agreed to pay us an aggregate of
approximately $75.0 million on September 29, 2006 and an aggregate of
approximately $75.0 million on December 29, 2006, subject to our right to
receive a portion of such payment prior to the settlement dates. In exchange, on
each of such dates we would deliver to the forward purchasers a variable number
of ordinary shares based on the average market price of the ordinary shares,
subject to a floor price of $22.80 and a cap price of $28.80. We also had the
right to net share settle or cash settle the forward sale agreements. The fair
value of the forward sales agreements at inception was reflected in
shareholders' equity (as a reduction in additional paid-in capital). In
addition, the underwriting costs of the forward sales agreements were reflected
in shareholders' equity (as a reduction in additional paid-in capital).

On June 26, 2006, we exercised our right of prepayment under the
forward sale agreements and received 75% of the $150.0 million proceeds totaling
$110.0 million, net of prepayment discounts of $2.5 million. This prepayment was
recorded as a separate component of consolidated shareholders' equity. The total
amount of the discount related to the prepayment transaction was recorded as an
imputed dividend charge over the applicable contract settlement period.

On August 9, 2006, the forward purchasers notified us of the occurrence
of "Increased Cost of Stock Borrow" under the forward sale agreements and
proposed price adjustments thereto. Pursuant to the forward sales agreements,
upon receipt of such notification, we were entitled to elect to (a) agree to
amend the transactions to take into account the price adjustments; (b) pay the
forward purchasers an amount corresponding to the price adjustments; or (c)
terminate the transactions. On August 11, 2006, the forward purchasers proposed
an amendment to the forward sales agreements which provided us an additional
alternative, the acceleration of the scheduled maturity date to August 14, 2006
under each of the forward sales agreements. We agreed to this amendment on
August 14, 2006. On August 17, 2006, we received cash proceeds of $36.5 million
and issued 6,578,948 ordinary shares, which satisfied in full our
obligation to deliver shares pursuant to the forward sales agreements and the
forward purchasers' obligations to pay us under such agreements. An imputed
dividend was charged to earnings based on the pro-rated amount of time that
elapsed from the original prepayment date until settlement date. The balance of
the discount reduced the net proceeds on issuance of shares.

Upon the settlement of the forward sales agreements, we have received
$147.3 million in the aggregate and issued an aggregate 6,578,948 ordinary
shares.

Long-term debt

Effective December 1, 2006, we executed an amendment to our bank credit
facility agreement that permitted the payment of up to $115.0 million from
Scottish Annuity & Life Insurance Company (Cayman) Ltd. to Scottish Re Group
Limited. The payment was transferred on December 4, 2006. These actions enabled
us to repurchase nearly all of the $115.0 million 4.5% Senior Convertible Notes
which note holders had the right to put to us on December 6, 2006. We
subsequently repurchased the remaining $8,000 in Senior Convertible Notes that
were not put in order to retire the full issue. The notes were purchased at a
repurchase price of 100% of their principal amount plus accrued and unpaid
interest and additional amounts, if any, in cash.

Shareholder dividends

On July 28, 2006, the Board of Directors suspended the dividend on our
ordinary shares. All future payments of dividends are at the discretion of our
Board of Directors and will depend on our income, capital requirements,
insurance regulatory conditions, operating conditions and such other factors as
the Board of Directors may deem relevant.

In accordance with the forbearance agreement with HSBC, we are
prohibited from declaring any cash dividend, exclusive of the non-cumulative
perpetual preferred shares during the forbearance period from November 26, 2006
until December 31, 2008, unless at the time of declaration and payment of cash
dividend, Scottish Annuity & Life Insurance Company (Cayman) Ltd. has an insurer
financial strength rating of at least A- for Standard & Poor's and A3 for
Moody's Investors Service.

Collateral

We must have sufficient assets available for use as collateral to
support our borrowings, letters of credit and certain reinsurance transactions.
With reinsurance transactions, the need for collateral or letters of credit
arises in the following ways:

o When Scottish Annuity & Life Insurance Company (Cayman) Ltd., Scottish
Re (Dublin) Limited or Scottish Re Limited enter into a reinsurance
treaty with a U.S. customer, they must contribute assets into a
qualifying reserve credit trust and/or provide a letter of credit to
enable the U.S. ceding company to obtain a reserve credit for the
reinsurance transaction since these companies are not licensed or
accredited U.S. reinsurers.

o When Scottish Re (U.S.), Inc. enters into a reinsurance transaction, it
typically incurs a need for additional statutory capital to cover
strain from acquisition costs and increases in required risk-based
capital. To the degree its own surplus is not sufficient to meet this
need, we can make an additional capital contribution into Scotitsh Re
(U.S.), Inc. or Scottish Re (U.S.), Inc. can cede a portion of the
transaction to another company within the group or an unrelated
reinsurance company. If that reinsurer is not a licensed or accredited
U.S. reinsurer, it must contribute assets to a qualifying reserve
credit trust and/or provide a letter of credit in order for Scottish Re
(U.S.), Inc. to obtain reserve credit. Scottish Re (U.S.), Inc. has
ceded significant amounts of business to Scottish Re (Dublin) Limited,
relieving Scottish Annuity & Life Insurance Company (Cayman) Ltd. of
the need to contribute substantial amounts of capital to Scottish Re
(U.S.), Inc. in connection with such cessions by Scottish Re (U.S.),
Inc. to Scottish Re (Dublin) Limited, Scottish Re (Dublin) Limited must
contribute eligible assets to qualifying reserve credit trusts and/or
provide letters of credit to provide Scottish Re (U.S.), Inc. with
reserve credit.

o Scottish Re (U.S.), Inc. and Scottish Re Life Corporation are licensed,
accredited, approved or authorized to write reinsurance in 50 states
and the District of Columbia. As a result, they generally are not
required to provide collateral in order for their U.S. customers to
receive reserve credit; however, Scottish Re (U.S.), Inc. may agree to
provide a reserve credit trust, security trust, or letter of credit to
mitigate the counter-party risk from the customer's perspective,
thereby enabling transactions that otherwise would be unavailable or
would be available only on significantly less attractive terms.

ING Collateral Arrangement

The first transaction is a 20 year collateral finance facility with
HSBC that provides up to $1.0 billion of collateral to satisfy Regulation XXX
statutory reserve requirements ("HSBC II") and is in addition to the facility
with HSBC that was originally completed in 2004 ("HSBC I"). The second
arrangement is a long-term reinsurance facility ("Reinsurance Facility") with a
third-party Bermuda reinsurer which provides collateral to secure Regulation XXX
statutory reserve requirements in an amount up to $1.0 billion. The Bermuda
reinsurer provides security in the form of letters of credit in trust equal to
the statutory reserves. Finally, in 2006 we completed the Ballantyne Re
securitization in a private offering of $1.74 billion of debt to external
investors and $178.0 million of debt to Scottish Annuity & Life Insurance
Company (Cayman) Ltd. These transactions have allowed us to secure within
eighteen months of the ING acquisition financing for almost all of the
Regulation XXX reserves business acquired from ING. These transactions replaced
ING collateral and resulted in a refund from ING for fees incurred of $6.7
million in 2005 and $6.2 million in 2006.

HSBC I

In 2004, we entered into a collateral finance facility with HSBC ("HSBC
I"). This facility provides up to $200.0 million that can be used to
collateralize reinsurance obligations under inter-company reinsurance
agreements. Simultaneously, we entered into a total return swap with HSBC under
which we are entitled to the total return of the investment portfolio of the
trust established for this facility. In accordance with FIN 46R, the trust is
considered to be a variable interest entity and we are deemed to hold the
primary beneficial interest in the trust. As a result, the trust has been
consolidated in our financial statements. The assets of the trust have been
recorded as fixed maturity investments. Our consolidated statements of income
(loss) show the investment return of the trust as investment income and the cost
of the facility is reflected in collateral finance facilities expense. The
creditors of the trust have no recourse against our general assets. As at
December 31, 2006, approximately $188.5 million of this facility was being
utilized.

Due to the rating agency downgrades after our announcement of earnings
for the second quarter of 2006, HSBC requested additional collateral under the
total return swap agreements related to both HSBC I and HSBC II (see below). In
exchange for us agreeing to provide HSBC with additional collateral of up to
$65.0 million, HSBC agreed to forbear from demanding any amounts of additional
collateral through December 6, 2006. To date, we have provided HSBC with $65.0
million of additional collateral.

On November 26, 2006, we entered into an amended and restated
forbearance agreement with HSBC, pursuant to which HSBC has agreed not to make
demands for additional collateral under our collateral finance facilities with
HSBC so long as certain conditions are met during the forbearance period which
ends on December 31, 2008. This amended forbearance agreement will terminate if
the Transaction is not completed. We will likely face demands from HSBC for
additional collateral in this event, thereby further exacerbating our tight
liquidity and capital position. Any breach by us of our obligation to post
collateral could result in an acceleration of our obligations under these
collateral finance facilities, which would require us to seek bankruptcy
protection under applicable law if we were unable promptly to access alternative
sources of capital. (See Note 2 to the Consolidated Financial Statements).

Stingray

On January 12, 2005, we entered into a put agreement with Stingray
Investor Trust ("Stingray") for an aggregate value of $325.0 million. Under the
terms of the put agreement, we acquired an irrevocable put option to issue
funding agreements to Stingray in return for the assets in a portfolio of 30 day
commercial paper. This put option may be exercised at any time. In addition, we
may be required to issue funding agreements to Stingray under certain
circumstances, including, but not limited to, the non-payment of the put option
premium and a non-payment of interest under any outstanding funding agreements
under the put agreement. The facility matures on January 12, 2015. This
transaction may also provide collateral for Scottish Re (U.S.), Inc. for
reinsurance obligations under inter-company reinsurance agreements. At December
31, 2006, $58.0 million was in use for this purpose. We drew down most of the
remaining funds, in the amount of $265.0 million, under this facility on August
14, 2006. The put premium and interest costs incurred during the years ended
December 31, 2006 and 2005 amounted to $10.2 million and $4.7 million,
respectively, and is included in collateral finance facilities expense in the
consolidated statements of income (loss). In accordance with FIN 46R, we are not
considered to be the primary beneficiary of Stingray and, as a result, we are
not required to consolidate Stingray. We are not responsible for any losses
incurred by the Stingray Pass Through Trust. The $265.0 million of funds drawn
on the facility are included in interest sensitive contract liabilities on our
balance sheet.

Orkney Re, Inc.

On February 11, 2005, Orkney Holdings, LLC, a Delaware limited
liability company ("Orkney I"), issued and sold in a private offering an
aggregate of $850.0 million Series A Floating Rate Insured Notes due February
11, 2035 (the "Orkney Notes"). Orkney I was organized for the limited purpose of
holding the stock of Orkney Re, Inc., a South Carolina special purpose captive
insurance company, and issuing the Orkney Notes. Scottish Re (U.S.), Inc. holds
all of the limited liability company interest in Orkney I, and has contributed
capital to Orkney I in the amount of $268.5 million. Proceeds from this offering
were used to fund the Regulation XXX reserve requirements for a defined block of
level premium term life insurance policies issued between January 1, 2000 and
December 31, 2003 reinsured by Scottish Re (U.S.), Inc. to Orkney Re, Inc.
Proceeds from the Orkney Notes have been deposited into a series of trusts that
collateralize the notes.

The holders of the Orkney Notes cannot require repayment from us or any
of our subsidiaries, other than Orkney I. The timely payment of interest and
ultimate payment of principal for the Orkney Notes are guaranteed by MBIA
Insurance Corporation.

Interest on the principal amount of the Orkney Notes is payable
quarterly at a rate equivalent to three month LIBOR plus 0.53%. At December 31,
2006, the interest rate was 5.91%. Any payment of principal, including by
redemption, or interest on the Orkney Notes is sourced from dividends from
Orkney Re, Inc. and the balances available in a series of trust accounts.
Dividends may only be made with the prior approval of the Director of Insurance
of the State of South Carolina in accordance with the terms of its licensing
orders and in accordance with applicable law. The Orkney Notes also contain a
customary limitation on lien provisions and customary events of default
provisions, which, if breached, could result in the accelerated maturity of the
Orkney Notes. Orkney I has the option to redeem all or a portion of the Orkney
Notes prior to and on or after February 11, 2010, subject to certain call
premiums.

In accordance with FIN 46R, Orkney I is considered to be a variable
interest entity and we are considered to hold the primary beneficial interest.
As a result, Orkney I has been consolidated in our financial statements. The
assets of Orkney I have been recorded as fixed maturity investments and cash and
cash equivalents. Our consolidated statements of income (loss) show the
investment return of Orkney I as investment income and the cost of the facility
is reflected in collateral finance facilities expense.

Orkney Re II plc

On December 21, 2005, Orkney Re II plc, an orphan special purpose
vehicle incorporated under the laws of Ireland ("Orkney II"), whose issued
ordinary shares are held by a share trustee and its nominees in trust for
charitable purposes, issued in a private offering $450.0 million of debt to
external investors. The debt consisted of $382.5 million Series A-1 Floating
Rate Guaranteed Notes (the "Series A-1 Notes"), $42.5 million in aggregate
principal amount of Series A-2 Floating Rate Notes (the "Series A-2 Notes"), and
$25.0 million Series B Floating Rate Notes (the "Series B Notes"), all due
December 31, 2035 (collectively, the "Orkney II Notes"). The Orkney II Notes are
listed on the Irish Stock Exchange. Proceeds from this offering were used to
fund the Regulation XXX reserve requirements for a defined block of level
premium term life insurance policies issued between January 1, 2004 and December
31, 2004 reinsured by Scottish Re (U.S.), Inc. to Orkney II. Proceeds from the
Orkney II Notes have been deposited into a series of trusts that collateralize
the notes.

The holders of the Orkney II Notes cannot require repayment from us or
any of our subsidiaries, only from Orkney II. Assured Guaranty (UK) Ltd. has
guaranteed the timely payment of the scheduled interest payments and the
principal on the maturity date, December 21, 2035, of the Series A-1 Notes.

The debt issued to Scottish Annuity & Life Insurance Company (Cayman)
Ltd. consisted of $30.0 million of Series C Floating Rate Notes due December 21,
2036. These notes accrue interest only. Payment of interest does not occur until
the Orkney II Notes are fully repaid. Scottish Re Group Limited owns $0.5
million Series D Convertible Notes due December 21, 2036 and 76,190,000
Preference Shares of $1.00 each in capital.

Interest on the principal amount of the Orkney II Notes is payable
quarterly at a rate equivalent to three-month LIBOR plus 0.425% for the Series
A-1 Notes, three-month LIBOR plus 0.73% for the Series A-2 Notes, and
three-month LIBOR plus 3.0% for the Series B Notes. At December 31, 2006, the
interest rate on the Series A-1 Notes was 5.80%, Series A-2 Notes was 6.11%, and
Series B Notes was 8.38%. The Orkney II Notes also contain a customary
limitation on lien provisions and customary events of default provisions, which,
if breached, could result in the accelerated maturity of the Orkney II Notes.
Orkney II has the option to redeem all or a portion of the Orkney II Notes prior
to and on or after February 11, 2007, subject to certain call premiums.

In accordance with FIN 46R, Orkney II is considered to be a variable
interest entity and we are considered to hold the primary beneficial interest.
As a result, Orkney II has been consolidated in our financial statements. The
assets of Orkney II have been recorded as fixed maturity investments and cash
and cash equivalents. Our consolidated statements of income (loss) show the
investment return of Orkney II as investment income and the cost of the facility
is reflected in collateral finance facilities expense.

HSBC II

On December 22, 2005, we entered into a second collateral finance
facility with HSBC ("HSBC II"). This facility is a 20 year collateral finance
facility that provides up to $1.0 billion of Regulation XXX collateral support
for the business acquired from ING and can be used to collateralize reinsurance
obligations under inter-company reinsurance agreements. Simultaneously, we
entered into a total return swap with HSBC under which we are entitled to the
total return of the investment portfolio of the trust established for this
facility. In accordance with FIN 46R, the trust is considered to be a variable
interest entity and we are deemed to hold the primary beneficial interest in the
trust. As a result, the trust has been consolidated in our financial statements.
The assets of the trust have been recorded as fixed maturity investments, cash
and cash equivalents. Our consolidated statements of income (loss) show the
investment return of the trust as investment income and the cost of the facility
is reflected in collateral finance facilities expense. The creditors of the
trust have no recourse against our general assets. As at December 31, 2006,
$529.0 million of this facility was being utilized.

See HSBC I above for a discussion of the additional collateral paid to
HSBC under this facility.

Ballantyne Re plc

On May 2, 2006, Ballantyne Re plc, an orphan special purpose vehicle
incorporated under the laws of Ireland issued in a private offering $1.74
billion of debt to external investors and $178.0 million of debt to Scottish
Annuity & Life Insurance Company (Cayman) Ltd. The total debt issued to external
investors (collectively, the "Notes") consisted of:

o $250.0 million of Class A-1 Floating Rate Notes,

o $500.0 million of Class A-2 Floating Rate Guaranteed Notes
Series A,

o $500.0 million of Class A-2 Floating Rate Guaranteed Notes
Series B,

o $100.0 million of Class A-3 Floating Rate Guaranteed Notes
Series A,

o $100.0 million of Class A-3 Floating Rate Guaranteed Notes
Series B,

o $100.0 million of Class A-3 Floating Rate Guaranteed Notes
Series C,

o $100.0 million of Class A-3 Floating Rate Guaranteed Notes
Series D,

o $10.0 million of Class B-1 7.51244% Subordinated Notes,

o $40.0 million of Class B-2 Subordinated Floating Rate Notes,
and

o $42.0 million of Class C-1 Subordinated Variable Interest Rate
Notes.

The debt issued to Scottish Annuity & Life Insurance Company (Cayman)
Ltd. consisted of $8.0 million of Class C-1 Subordinated Variable Interest Rate
Notes and $170.0 million Class C-2 Subordinated Variable Interest Rate Notes,
which Scottish Annuity & Life Insurance Company (Cayman) Ltd. intends to hold
(collectively, the "SALIC Notes", and together with the Notes, the "Ballantyne
Notes"). Concurrently with its offering of the Ballantyne Notes, Ballantyne Re
issued (i) $500,000 of Class D Convertible Notes, which were purchased by
Scottish Re Group Limited, (ii) 163.0 million Redeemable Preference Shares of
U.S. $1.00 par value per share which were purchased by Scottish Annuity & Life
Insurance Company (Cayman) Ltd., and (iii) 18.2 million Non-Redeemable
Preference Shares of U.S. $1.00 par value per share which were also purchased by
Scottish Annuity & Life Insurance Company (Cayman) Ltd.

Class A-1 Floating Rate Notes (and after May 2, 2022, one-month LIBOR plus
1.22%), one-month LIBOR plus 0.31% for the Class A-2 Floating Rate Guaranteed
Notes Series A (and after May 2, 2027, one-month LIBOR plus 0.62%), one-month
LIBOR plus 0.36% for the Class A-2 Floating Rate Guaranteed Notes Series B (and
after May 2, 2027, one-month LIBOR plus 0.72%), 4.99%, 4.99%, 5.00% and 5.01%
for Series A, Series B, Series C, and Series D of the Class A-3 Notes,
respectively (with the rate on the Class A-3 Notes to reset every 28 days),
7.51% for the Class B-1 Subordinated Notes, one-month LIBOR plus 2.00% for the
Class B-2 Subordinated Floating Rate Notes, and a variable rate based on
performance of the underlying block of business for the Class C-1 Subordinated
Variable Interest Rate Notes and the Class C-2 Subordinated Variable Interest
Rate Notes.

Proceeds from this offering were used to fund the Regulation XXX
reserve requirements for the business acquired from ING $1.65 billion of the
proceeds from the Ballantyne Notes have been deposited into a series of accounts
that collateralize the reserve obligations of Scottish Re (U.S.), Inc.

The holders of the Ballantyne Notes cannot require repayment from us or
any of our subsidiaries. The timely payment of the scheduled interest payments
and the principal on the maturity date of Series A of the Class A-2 Notes and
Series A, Series B, Series C, Series D and, if issued, Series E of the Class A-3
Notes has been guaranteed by Ambac Assurance UK Limited. The timely payment of
the scheduled interest payments and the principal on the maturity date of Series
B of the Class A-2 Notes and, if issued, Series F of the Class A-3 Notes has
been guaranteed by Assured Guaranty (UK) Ltd.

In accordance with FIN 46R, Ballantyne Re is considered to be a
variable interest entity and we are considered to hold the primary beneficial
interest. As a result, Ballantyne Re is consolidated in our financial statements
beginning in the second quarter of 2006. The assets of Ballantyne Re are
recorded as fixed maturity investments and cash and cash equivalents. Our
consolidated statements of income (loss) include the investment return of
Ballantyne Re as investment income and the cost of the facility is reflected in
collateral finance facilities expense.

Reinsurance Facility

On December 22, 2005, we entered into a long term reinsurance facility
("Reinsurance Facility"), with a third-party Bermuda-domiciled reinsurer that
provides up to $1.0 billion of Regulation XXX collateral support for the
business acquired from ING. The Bermuda reinsurer provides security in the form
of letters of credit in trust equal to the statutory reserves. All risks and
returns arising out of the underlying book of business are retained by us.

Collateral Summary

At December 31, 2006, we had $3.8 billion of collateral finance
facility obligations relating to the HSBC I, HSBC II, Orkney I, Orkney II and
Ballantyne Re transactions. In connection with these transactions, we have
assets in trust of approximately $5.6 billion that represent assets supporting
the economic reserves, excess reserves, additional funding amounts and surplus
in the transactions. The assets in trust are managed in accordance with
predefined investment guidelines as to permitted investments, portfolio quality,
diversification and duration.

As described above, we have a number of facilities in place to provide
collateral for our reinsurance business, including HSBC I and Stingray. However,
the HSBC I facility has been fully utilized and it is uncertain if a similar
facility can be completed or if the current facility will remain available for
future use following a permanent Regulation XXX transaction which would reduce
the current usage of the HSBC I facility. Finally, the Stingray facility has
been fully utilized. Other existing sources of collateral include cash and other
assets which are available, although extremely limited in their amount.

Based on our known sources and uses of liquidity, our collateral and
liquidity position is very tight over the near term. During the third quarter of
2006, we successfully completed a reinsurance transaction that provided
approximately $120.0 million of additional liquidity. To further enhance our
liquidity position, we are negotiating a $100 million term loan facility with
Cerberus to provide a source of liquidity until the closing of the Transaction.
To the extent that we are not able to close this term loan facility or obtain
additional sources of liquidity in the second quarter of 2007. We face the
possibility of running out of collateral and liquidity. Over the longer term, we
will need significant amounts of new capital to support existing and new
business. These capital requirements will largely be satisfied by the
consummation of the Transaction.

Regulatory Capital Requirements

Scottish Annuity & Life Insurance Company (Cayman) Ltd. has agreed with
Scottish Re (U.S.), Inc. that it will (1) cause Scottish Re (U.S.), Inc. to
maintain capital and surplus equal to the greater of $20.0 million or such
amount necessary to prevent the occurrence of a Company Action Level Event under
the risk-based capital laws of the State of Delaware and (2) provide Scottish Re
(U.S.), Inc. with enough liquidity to meet its obligations in a timely manner.

Scottish Annuity & Life Insurance Company (Cayman) Ltd. has agreed with
Scottish Re Life Corporation that it will (1) cause Scottish Re Life Corporation
to maintain capital and surplus equal to at least 175% of Company Action Level
RBC, as defined under the laws of the State of Delaware and (2) provide Scottish
Re Life Corporation with enough liquidity to meet its obligations in a timely
manner.

Scottish Annuity & Life Insurance Company (Cayman) Ltd. and Scottish Re
Group Limited have agreed with Scottish Re Limited that in the event Scottish Re
Limited is unable to meet its obligations under its insurance or reinsurance
agreements, Scottish Annuity & Life Insurance Company (Cayman) Ltd. or if
Scottish Annuity & Life Insurance Company (Cayman) Ltd. cannot fulfill such
obligations, then Scottish Re Group Limited will assume all of Scottish Re
Limited's obligations under such agreements.

Scottish Re Group Limited and Scottish Annuity & Life Insurance Company
(Cayman) Ltd. have executed similar agreements for Scottish Re (Dublin) Limited
and Scottish Re Life (Bermuda) Limited and may, from time to time, execute
additional agreements guaranteeing the performance and/or obligations of their
subsidiaries.

All of our regulated insurance entities are in excess of their minimum
regulatory capital requirements as of December 31, 2006. See Risk Factors
beginning on page 22 for a discussion of the potential impact on our regulatory
capital requirements if the Transaction is not consummated.

Tartan Capital Limited

On May 4, 2006, we entered into an agreement that provides two classes
totaling $155.0 million of collateralized catastrophe protection with Tartan
Capital Limited ("Tartan"), a special purpose Cayman Islands company which was
funded through a catastrophe bond transaction. This coverage is for the period
January 1, 2006 to December 31, 2008 and provides Scottish Annuity & Life
Insurance Company (Cayman) Ltd. with protection from losses arising from higher
than normal mortality levels within the United States, as reported by the U.S.
Centers for Disease Control and Prevention or other designated reporting agency.
This coverage is based on a mortality index, which is based on age and gender
weighted mortality rates for the United States constructed from publicly
available data sources, as defined at inception, and which compares the
mortality rates over consecutive 2 year periods to a reference index value. Upon
the occurrence of a loss event, where the indexed losses exceeds the trigger
level for a given tranche, the percentage of the original principal for each
tranche paid to Scottish Annuity & Life Insurance Company (Cayman) Ltd.
increases linearly between the trigger level and exhaustion level. Since the
amount of any recovery is based on the mortality index, the amount of the
recovery may be different than the ultimate claims paid by Scottish Annuity and
Life Insurance Company (Cayman) Ltd.'s and any of its affiliates resulting from
the loss event.

In accordance with SFAS No. 133, this contract is considered to be a
derivative. We record this contract at fair value which is included in "Other
assets" and "Other liabilities" in the consolidated balance sheets with any
changes in the value reflected in "Acquisition costs and other insurance
expenses" in the consolidated statements of income (loss). There is no quoted
market value available for this derivative. The fair value is estimated
utilizing published mortality data. Expenses related to this transaction are
included in "Acquisition costs and other insurance expenses" in the Corporate
and Other Segment.

Tartan is a variable interest entity under the provisions of FIN 46R.
We are not the primary beneficiary of this entity and are, therefore, not
required to consolidate it in our consolidated financial statements.

Contractual Obligations and Commitments

The following table shows our contractual obligations and commitments
as of December 31, 2006, other then those arising from our reinsurance business
including our payments due by period:

Less Than 1 More Than 5
Year 1-3 Years 4-5 Years Years Total
------------- ------------ ------------- ------------- ------------

Long-term debt................... $ 17,500 $ 112,000 $ - $ - $ 129,500
Operating leases................. 5,615 10,536 9,021 28,373 53,545
Funding agreements............... - 100,000 - 265,000 365,000
Collateral finance facilities.... 2,189,480 717,955 850,000 - 3,757,435
Life claims payable.............. 500,465 - - - 500,465
------------- ------------ ------------- ------------- ------------
$ 2,713,060 $ 940,491 $ 859,021 $ 293,373 $ 4,805,945
============= ============ ============= ============= ============

Our long-term debt is described in Note 9 to the Consolidated Financial
Statements. Long-term debt includes capital securities with various maturities
up to 2034. They are however, redeemable at earlier dates. They have been
included in the above table at the earliest redemption date.

We lease office space in the countries in which we operate. These
leases expire at various dates through 2023.

Amounts due under funding agreements are reported in interest sensitive
contract liabilities in the consolidated balance sheets. These are agreements in
which we earn a spread over LIBOR. The contractual repayment terms are detailed
in the table above.

Collateral finance facilities include HSBC I and HSBC II, and
securitization obligations with Orkney Re, Orkney Re II plc and Ballantyne Re
plc. These transactions are described in the previous section. These obligations
are fully secured by fixed maturity investments and cash and cash equivalents
included in our Consolidated Balance Sheet. The liabilities have been included
in the table above at the earliest redemption date.

Life claims payable are included in "Reserves for Future Policy
Benefits" in the consolidated balance sheets. Life claims payable include
benefit and claim liabilities for which we believe the amount and timing of the
payment is essentially fixed and determinable. Such amounts generally relate to
incurred and reported death claims and amounted to $500.5 million at December
31, 2006. As of December 31, 2006, reserves for future policy benefits of
approximately $3.9 billion related primarily to reinsurance of traditional life
insurance and related policies and approximately $3.4 billion of interest
sensitive contract liabilities, primarily deferred annuities, have been excluded
from this table because these amounts are generally comprised of policies or
contracts where (i) we are not currently making payments and will not make
payments in the future until the occurrence of an insurable event, such as death
or disability or (ii) the occurrence of a payment triggering event, such as a
surrender of a policy or contract. The timing of payment on these liabilities is
not reasonably fixed and determinable since the insurable event or payment
triggering event has not yet occurred, and we have no control over the timing of
such occurrence. In addition to timing of payments, significant uncertainties
relating to these liabilities include mortality, morbidity and persistency.

Off balance sheet arrangements

We have no obligations, assets or liabilities other than those
disclosed in the financial statements forming part of this Form 10-K, no trading
activities involving non-exchange traded contracts accounted for at fair value,
and no relationships and transactions with persons or entities that derive
benefits from their non-independent relationship with us or our related parties.

New Accounting Pronouncements

FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes

In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"),
"Accounting for Uncertainty in Income Taxes". FIN 48 prescribes detailed
guidance for the financial statement recognition, measurement and disclosure of
uncertain tax positions recognized in an enterprise's financial statements in
accordance with SFAS No. 109. Tax positions must meet a "more likely than not"
recognition threshold at the effective date to be recognized upon the adoption
of FIN 48 and in subsequent periods.

FIN 48 is effective for fiscal years beginning after December 15, 2006
and the provisions of FIN 48 will be applied to all tax positions upon initial
adoption. The cumulative effect of applying the provisions of FIN 48 will be
reported as an adjustment to the opening balance of retained earnings for that
fiscal year. We have not completed our evaluation of the effect of adoption of
FIN 48. However, due to the fact that we have established tax positions in
previously filed tax returns and are expected to take tax positions in future
tax returns that will affect the financial statements, the adoption of FIN 48
may have a significant impact on our consolidated financial statements.

FASB Statement No. 123(R), Share-Based Payment

In December 2004, the FASB revised SFAS No. 123 by issuing SFAS No.
123(R) which requires us to recognize, in the determination of income, the grant
date fair value of all stock options and other equity based compensation issued
to employees. We adopted SFAS No. 123(R) on January 1, 2006.

FASB Statement No. 156, Accounting for Servicing of Financial Assets -- an
amendment of FASB Statement No. 140

In March 2006, the FASB issued Statement No. 156 ("SFAS No. 156"),
"Accounting for Servicing of Financing Assets", which permits an entity to
choose either of the following measurement methods for each class of separately
recognized servicing assets and servicing liabilities:

o Amortization method -- amortize servicing assets or servicing
liabilities in proportion to and over the period of net
servicing income or net servicing loss and assess the
servicing assets or liabilities for impairment or increased
obligation based on fair value at each reporting date. This
method is consistent with current subsequent measurement
guidance for servicing rights.

o Fair value measurement method -- measure servicing assets or
servicing liabilities at fair value at each reporting date and
report changes in fair value in earnings in the period in
which the change occurs.

SFAS No. 156 is effective as of the beginning of an entity's first
fiscal year that begins after September 15, 2006. We are currently assessing the
impact of SFAS No. 156 on our results of operations and financial position.

FASB Statement No. 157, Fair Value Measurements

In September 2006, the FASB issued Statement No. 157 ("SFAS No. 157"),
"Fair Value Measurements," which defines fair value, establishes a framework for
measuring fair value under GAAP and expands disclosures about fair value
measurements. We are required to adopt SFAS No. 157 on January 1, 2008 and are
evaluating the implications of SFAS No. 157 on our results of operations and
financial position.

Statement of Position 05-1, Accounting by Insurance Enterprises for
Deferred Acquisition Costs in Connection with Modifications or Exchanges
of Insurance Contracts

In September 2005, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") 05-1, Accounting by Insurance
Enterprises for Deferred Acquisition Costs in Connection with Modifications or
Exchanges of Insurance Contracts ("SOP 05-1"). SOP 05-1 provides guidance on
accounting by insurance enterprises for deferred acquisition costs on internal
replacements of insurance and investment contracts other than those specifically
described in SFAS No. 97. SOP 05-1 defines an internal replacement as a
modification in product benefits, features, rights, or coverages that occurs by
the exchange of a contract for a new contract, or by amendment, endorsement, or
rider to a contract, or by the election of a feature or coverage within a
contract. Under SOP 05-1, modifications that result in a substantially unchanged
contract will be accounted for as a continuation of the replaced contract. A
replacement contract that is substantially changed will be accounted for as an
extinguishment of the replaced contract resulting in a release of unamortized
deferred acquisition costs, unearned revenue and deferred sales inducements
associated with the replaced contract. The SOP will be adopted in fiscal years
beginning after December 15, 2006. We are currently evaluating the impact of SOP
05-1 and do not expect that the adoption of SOP 05-1 will have a material impact
on our consolidated financial statements.

Forward-Looking Statements

Some of the statements contained in this report are not historical
facts and are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act. Forward-looking statements involve known and
unknown risks, uncertainties and other factors, which may cause the actual
results to differ materially from the

forward-looking statements. Words such as "anticipates", "expects", "intends",
"plans", "believes", "seeks", "estimates", "may", "will", "continue", "project",
and similar expressions, as well as statements in the future tense, identify
forward-looking statements.

These forward-looking statements are not guarantees of our future
performance and are subject to risks and uncertainties that could cause actual
results to differ materially from the results contemplated by the
forward-looking statements. These risks and uncertainties include:

o our ability to consummate the Transaction (including obtaining
necessary regulatory approvals and shareholder approval) and
realize the benefits of such transaction;

o the impact on our financial condition of the failure to
consummate the Transaction;

o the validity of assumptions and methodologies used by
management in analyzing potential run-off scenarios and in
predicting our further capital and liquidity needs and the
inability to predict with certainty any future scenarios;

o uncertainties relating to the ratings accorded to us and our
insurance subsidiaries;

o uncertainties in our ability to raise equity capital or other
sources of funding to support ongoing capital and liquidity
needs;

o uncertainties relating to future actions that may be taken by
creditors, regulators and ceding insurers relating to our
ratings and financial condition;

o the risk that our risk analysis and underwriting may be
inadequate;

o changes in expectations regarding future realization of gross
deferred tax assets;

o exposure to mortality experience which differs from our
assumptions;

o risks arising from our investment strategy, including risks
related to the market value of our investments, fluctuations
in interest rates and our need for liquidity;

o uncertainties arising from control of our invested assets by
third parties;

o developments in global financial markets that could affect our
investment portfolio and fee income;

o changes in the rate of policyholder withdrawals or recapture
of reinsurance treaties;

o the risk that our retrocessionaires may not honor their
obligations to us;

o terrorist attacks on the United States and the impact of such
attacks on the economy in general and on our business in
particular;

o political and economic risks in developing countries;

o the impact of acquisitions, including our ability to
successfully integrate acquired businesses, the competing
demands for our capital and the risk of undisclosed
liabilities;

o risk that an ownership change will result in a limitation on
our ability to fully utilize tax net operating losses;

o loss of the services of any of our key employees;

o losses due to foreign currency exchange rate fluctuations;

o uncertainties relating to government and regulatory policies
(such as subjecting us to insurance regulation or taxation in
additional jurisdictions);

o risks relating to recent class action litigations;

o the competitive environment in which we operate and associated
pricing pressures; and

o changes in accounting principles.

The effects of these factors are difficult to predict. New factors
emerge from time to time and we cannot assess the financial impact of any such
factor on our business or the extent to which any factor, or combination of
factors, may cause results to differ materially from those contained in any
forward-looking statement. Any forward-looking statement speaks only as of the
date of this report and we do not undertake any obligation, other than as may be
required under the Federal securities laws, to update any forward looking
statements to reflect events or circumstances after the date of such statement
or to reflect the occurrence of unanticipated events.

Item 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We measure and manage market risks and other risks as part of an
enterprise-wide risk management process. The market risks described in this
section relate to financial instruments, primarily in our investment portfolio,
that are sensitive to changes in interest rates, credit risk premiums or
spreads, foreign exchange rates and equity prices.

Our investments, which are primarily fixed income securities, are
subject to market value, reinvestment, and liquidity risk. Our invested assets
are funded not only by capital but also by the proceeds of reinsurance
transactions, some of which entail substantial deposits of funds or assets. The
cash flows required to pay future benefits are subject to actuarial
uncertainties; in some cases, the policies that we reinsure contain provisions
that tend to increase benefits to customers depending on movements in interest
rates. We analyze the potential results of a transaction, including the cash
flows of the liabilities and of the related assets, and any risk mitigation
measures, and we price transactions to cover our costs, including estimated
credit losses, and earn a desirable risk-adjusted return under various
scenarios. We use interest rate swaps and options as tools to mitigate these
risks. We may also retrocede some risks to other reinsurers.

Interest Rate Risk

Interest rate risk consists of two components: (1) in a falling rate
scenario, funds reinvested may earn less than is necessary to match anticipated
liabilities; and (2) in a rising rate scenario, cash outflows may have to be
funded by selling assets, which will then be trading at depreciated values. With
some annuity liabilities, these risks are compounded by potential adverse
selection by customers in exercising their surrender options in rising rate
scenarios and the effect of minimum guaranteed credited rates in falling rate
scenarios.

We mitigate both components of risk through asset-liability management,
including the technique of simulating future results under a variety of interest
rate scenarios and modifying the investment and hedging strategy to mitigate
downside risk to earnings. Our investment portfolio is composed of
fixed-maturity bond investments, of which the majority is at fixed interest
rates. For fixed-rate investments backing reinsurance liabilities, the maturity
structure has been designed to have approximately the same exposure to changes
in interest rates as the related liabilities. Floating-rate liabilities,
including borrowings, are backed primarily by floating-rate assets. In the
capital account, however, we own investments that are also sensitive to interest
rate changes and this sensitivity is not offset by liabilities. Our overall
objective is to limit interest rate exposure.

Credit Risk

Credit risk relates to the uncertainty associated with the continued
ability of a given obligor to make timely payments of principal and interest. We
measure and manage credit risk not only of bond issuers but also of
counter-parties in reinsurance, retrocession and hedging transactions.

In our investment portfolio, credit risk is manifested in three ways:

o actual and anticipated deterioration in the creditworthiness
of an issue, as may be reflected in downgrades in its ratings,
tend to reduce its market value;

o our managers might react to the actual or expected
deterioration and/or downgrade of an issuer by selling some or
all of our positions, realizing a loss (or a profit smaller
than would have been realized if the deterioration or
downgrade had not occurred); and

o the issuer may go into default, ultimately causing us to
realize a loss.

One of our key objectives in managing credit risk is to keep actual
credit losses below both the amounts that we have assumed and allowed for in
pricing reinsurance transactions and the amounts we would have lost, given the
general level of experience for comparably rated securities of the same type in
the general market. We seek to prevent credit risk, in the aggregate, from
becoming the dominant source of risk in our overall book of retained risks as a
reinsurer.

We mitigate credit risk by adopting an investment policy, approved by
our Board of Directors, which limits overall exposure to credit risk and
requires diversification by limiting exposure to any single issuer. We also use
outside professional money management firms and monitor their capabilities,
performance and compliance with our investment and risk management policies.

Foreign Currency Risk

Our functional currency is the United States dollar. However, our U.K.
subsidiaries, Scottish Re Holdings Limited and Scottish Re Limited, incur
operating expenses in British pounds, reinsure business denominated in U.S.,
dollars, British pounds, Euros and other currencies, and maintain parts of their
investment portfolios in Euros and British pounds. All of Scottish Re Limited's
original U.S. business is settled in United States dollars, all Canadian, Latin
American and certain Asia and Middle East business is converted and settled in
United States dollars, and all other currencies are converted and settled in
Euros or British pounds. The results of the business recorded in Euros and in
British pounds are then translated to United States dollars. We attempt to limit
substantial exposures to foreign currency risk, but do not actively manage
currency risks. To the extent our foreign currency exposure is not properly
managed or otherwise hedged, we may experience exchange losses, which in turn
would adversely affect our results of operations and financial condition.

We may enter into investment, insurance and reinsurance transactions in
the future in currencies other than United States dollars. Our objective is to
avoid substantial exposures to foreign currency risk. We will manage these risks
using policy limits, asset-liability management techniques and hedging
transactions.

Sensitivity Analysis-Change In Interest Rates

We regularly conduct analyses to gauge the financial impact of changes
in interest rates on our financial condition. Techniques include, but are not
limited to, simulation of future asset and liability cash flows under multiple
interest rate scenarios and comparison of option-adjusted duration of assets and
liabilities. On a monthly basis, we measure the gap between the effective
duration of the investments and the target duration. For assets supporting
liabilities, we set the target duration to minimize interest rate risk for each
liability transaction. Our investment policy limits the duration gap to 0.75
years. For floating-rate borrowings and liabilities, we target floating-rate
assets, which have a duration near zero. For capital account assets, we target a
duration of 3.0 years.

Quantitative Disclosure of Interest Rate Risk

The following tables provide information as of December 31, 2006 about
the interest rate sensitivity of the portion of our investment portfolio managed
by external managers. The tables do not include other cash balances of $0.5
billion, or funds withheld at interest of $1.9 billion. The tables show the
aggregate amount, by book value and fair value, of the securities that are
expected to mature in each of the next five years and thereafter, as well as the
weighted average book yield of those securities. The expected maturity is the
weighted average life of a security and takes into consideration par
amortization (for mortgage-backed securities), call features and sinking fund
features.

In 2004, we entered into an interest rate swap agreement with a
notional amount of $100.0 million and a maturity of July 2009. On August 2,
2006, we terminated the swap contract for net proceeds of $3.5 million. This
swap was used to manage a portion of the interest rate exposure on the balance
sheet and had the effect of shortening the duration on our overall controlled
portfolio by 0.05 years or approximately equivalent to reducing our four year
maturity exposure by $100.0 million.

December 31, 2006 market interest rates were used as discounting rates
in the estimation of fair value.

Expected Maturity Date
- -----------------------------------------------------------------------------------------------------------------------
Total
Total 2007 2008 2009 2010 2011 Thereafter Total Fair Value
- ----- -------- ---------- ---------- ---------- -------- ---------- ---------- -----------

Principal amount.. $555,471 $1,049,348 $1,365,567 $1,791,564 $918,149 $3,121,903 $8,802,002 $8,226,123
Book value........ 571,448 952,384 1,147,134 1,521,020 764,278 3,308,154 8,264,418
Weighted average
book yield...... 5.38% 5.26% 5.52% 5.62% 5.43% 5.61% 5.53%

Expected Maturity Date
- -----------------------------------------------------------------------------------------------------------------------
Total
Fixed Rate Only 2007 2008 2009 2010 2011 Thereafter Total Fair Value
- ----------------- -------- ---------- ---------- ---------- -------- ---------- ---------- -----------
Principal amount.. $248,131 $484,614 $555,126 $560,741 $513,893 $2,524,770 $4,887,275 $4,302,714
Book value........ 264,022 387,889 336,389 289,950 360,041 2,708,615 4,346,906
Weighted average
book yield...... 5.13% 4.57% 4.89% 5.05% 5.20% 5.59% 5.35%

Expected Maturity Date
- ----------------------------------------------------------------------------------------------------------------------
Total
Floating Rate Only 2007 2008 2009 2010 2011 Thereafter Total Fair Value
- ------------------ -------- ---------- ---------- ---------- -------- ---------- ---------- -----------
Principal amount. $307,340 $564,734 $810,441 $1,230,823 $404,256 $597,133 $3,914,727 $3,923,409
Book value....... 307,426 564,495 810,745 1,231,070 404,237 599,539 3,917,512
Weighted average
book yield..... 5.60% 5.74% 5.78% 5.76% 5.64% 5.69% 5.73%

Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information called for by this item is set forth in "Item 15:
Exhibits, Financial Statement Schedules and Reports on Form 8-K."

Item 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

There were no changes in or disagreements with accountants on
accounting and financial disclosure for the fiscal year ended December 31, 2006.

Item 9A: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Chief Executive Officer and Chief Financial Officer have evaluated
the effectiveness (design and operation) of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended). Based on such evaluation, such officers have
concluded that these disclosure controls and procedures are effective as of the
end of the period covered by this Annual Report.

Management's Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate
internal control over financial reporting and for the assessment of the
effectiveness of internal control over financial reporting, as defined in Rules
13a-15(f) of the Securities and Exchange Act of 1934, as amended. Under the
supervision and with the participation of management, including our principal
executive and financial officers, we have conducted an evaluation of the
effectiveness of our internal control over financial reporting as of December
31, 2006. In designing and evaluating the internal control over financial
reporting, we recognize that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

In making their assessment of internal control over financial
reporting, management used criteria established in "Internal Control -
Integrated Framework" issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the "COSO criteria"). Based on their evaluation, management
has concluded that we maintained effective internal control over financial
reporting as of December 31, 2006, based on the COSO criteria.

Ernst & Young LLP, the independent registered public accounting firm
that audited our consolidated financial statements included in this report, have
issued an attestation report on management's assessment of internal control over
financial reporting.

Changes in Internal Control over Financial Reporting

There have been no changes in internal control over financial reporting
identified in connection with our evaluation that occurred during the most
recent fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.

Report of Independent Registered Public Accounting Firm
on Internal Control Over Financial Reporting

The Board of Directors and Shareholders Scottish Re Group Limited

We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that Scottish
Re Group Limited maintained effective internal control over financial reporting
as of December 31, 2006, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Scottish Re Group
Limited's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the company's
internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion, management's assessment that Scottish Re Group Limited
maintained effective internal control over financial reporting as of December
31, 2006, is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, Scottish Re Group Limited maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2006, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Scottish Re Group Limited as of December 31, 2006 and 2005, and the related
consolidated statements of income (loss), comprehensive income (loss),
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2006 of Scottish Re Group Limited and our report dated
February 28, 2007 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Charlotte, North Carolina
February 28, 2007

NYSE CEO Certification

We filed our 2006 annual CEO certification with the New York Stock
Exchange on June 5, 2006. We anticipate filing our 2007 annual CEO certification
with the NYSE on or about June 1, 2007. Additionally, we filed with the SEC as
exhibits to our Form 10-K for the year ended December 31, 2006 the CEO and CFO
certifications required under Section 302 of the Sarbanes Oxley Act of 2002.

Item 9B: OTHER INFORMATION

None.

PART III

Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

The information required by this Item 10 will be set forth in our Proxy
Statement for 2007 Annual Meeting of Shareholders (the "2007 Proxy Statement")
under the captions "Proposal for Election of Directors," "Principal Shareholders
and Management Ownership" and "Section 16(a) Beneficial Ownership Reporting
Compliance" and is incorporated herein by reference.

Item 11: EXECUTIVE COMPENSATION

The information required by this Item 11 will be set forth in the 2007
Proxy Statement under the captions "Management Compensation" and "Report on
Executive Compensation" and is incorporated herein by reference.

Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The information required by this Item 12 will be set forth in the 2007
Proxy Statement under the caption "Principal Shareholders and Management
Ownership" and is incorporated herein by reference.

Item 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item 13 will be set forth in the 2007
Proxy Statement under the caption "Certain Transactions" and is incorporated
herein by reference.

Item 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item 14 will be set forth in the 2007
Proxy Statement under the caption "Fees Billed to the Company by Ernst & Young
LLP" and is incorporated herein by reference.

PART IV

Item 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES

Except as otherwise indicated, the following Exhibits are filed
herewith and made a part hereof:

3.1 Memorandum of Association of Scottish Re Group Limited, as amended as
of April 7, 2005 (incorporated herein by reference to Scottish Re Group
Limited's Current Report on Form 8-K). (6)

3.2 Articles of Association of Scottish Re Group Limited, as amended as of
April 7, 2005 (incorporated herein by reference to Scottish Re Group
Limited's Current Report on Form 8-K). (6)

4.1 Specimen Ordinary Share Certificate (incorporated herein by reference
to Exhibit 4.1 to Scottish Re Group Limited's Registration Statement on
Form S-1). (1)

4.2 Form of Amended and Restated Class A Warrant (incorporated herein by
reference to Exhibit 4.2 to Scottish Re Group Limited's Registration
Statement on Form S-1). (1)

4.3 Form of Securities Purchase Agreement for the Class A Warrants
(incorporated herein by reference to Exhibit 4.4 to Scottish Re Group
Limited's Registration Statement on Form S-1). (1)

4.4 Form of Securities Purchase Agreement between Scottish Re Group Limited
and the Shareholder Investors (incorporated herein by reference to
Exhibit 4.10 to Scottish Re Group Limited's Registration Statement on
Form S-1). (1)

4.5 Form of Securities Purchase Agreement between Scottish Re Group Limited
and the Non-Shareholder Investors (incorporated herein by reference to
Exhibit 4.12 to Scottish Re Group Limited's Registration Statement on
Form S-1). (1)

4.6 Certificate of Designations of Convertible Preferred Shares of Scottish
Re Group Limited (incorporated herein by reference to Scottish Re Group
Limited's Current Report on Form 8-K). (10)

4.7 Certificate of Designations of Scottish Re Group Limited's
Non-Cumulative Perpetual Preferred Shares, dated June 28, 2005
(incorporated herein by reference to Scottish Re Group Limited's
Current Report on Form 8-K). (16)

4.8 Specimen Stock Certificate for the Company's Non-Cumulative Perpetual
Preferred Shares (incorporated herein by reference to Scottish Re Group
Limited's Current Report on Form 8-K). (16)

10.1 Employment Agreement dated June 18, 1998 between Scottish Re Group
Limited and Michael C. French (incorporated herein by reference to
Exhibit 10.1 to Scottish Re Group Limited's Registration Statement on
Form S-1). (1)(24)

10.2 Second Amended and Restated 1998 Stock Option Plan effective October
22, 1998 (incorporated herein by reference to Exhibit 10.3 to Scottish
Re Group Limited's Registration Statement on Form S-1). (1)(24)

10.3 Form of Stock Option Agreement in connection with 1998 Stock Option
Plan (incorporated herein by reference to Exhibit 10.4 to Scottish Re
Group Limited's Registration Statement on Form S-1). (1)(24)

10.4 Investment Management Agreement dated October 22, 1998 between Scottish
Re Group Limited and General Re-New England Asset Management, Inc.
(incorporated herein by reference to Exhibit 10.14 to Scottish Re Group
Limited's Registration Statement on Form S-1). (1)

10.5 Form of Omnibus Registration Rights Agreement (incorporated herein by
reference to Exhibit 10.17 to Scottish Re Group Limited's Registration
Statement on Form S-1). (1)

10.6 1999 Stock Option Plan (incorporated herein by reference to Exhibit
10.14 to Scottish Re Group Limited's 1999 Annual Report on Form 10-K).
(2)(24)

10.7 Form of Stock Options Agreement in connection with 1999 Stock Option
Plan (incorporated herein by reference to Exhibit 10.15 to Scottish Re
Group Limited's 1999 Annual Report on Form 10-K). (2)(24)

10.8 Employment Agreement dated September 18, 2000 between Scottish Re
(U.S.), Inc. and Oscar R. Scofield (incorporated herein by reference to
Exhibit 10.16 to Scottish Re Group Limited's 2000 Annual Report on Form
10-K). (3)(24)

10.9 Share Purchase Agreement by and between Scottish Re Group Limited and
Pacific Life dated August 6, 2001 (incorporated by reference to
Scottish Re Group Limited's Current Report on Form 8-K). (7)

10.10 Amendment No. 1, dated November 8, 2001, to Share Purchase Agreement
dated August 6, 2001 by and between Scottish Re Group Limited and
Pacific Life (incorporated by reference to Scottish Re Group Limited's
Current Report on Form 8-K). (5)

10.11 2001 Stock Option Plan (incorporated herein by reference to Exhibit
10.17 to Scottish Re Group Limited's 2001 Annual Report on Form 10-K).
(4)(24)

10.12 Form of Nonqualified Stock Option Agreement in connection with 2001
Stock Option Plan (incorporated herein by reference to Exhibit 10.17 to
Scottish Re Group Limited's 2001 Annual Report on Form 10-K). (4)(24)

10.13 Tax Deed of Covenant dated December 31, 2001 between Scottish Re Group
Limited and Pacific Life (incorporated by reference to Scottish Re
Group Limited's Current Report on Form 8-K). (5)

10.14 Letter Agreement dated December 28, 2001 between Scottish Re Group
Limited and Pacific Life (incorporated by reference to Scottish Re
Group Limited's Current Report on Form 8-K). (5)

10.15 Form of Indemnification Agreement between Scottish Re Group Limited and
each of its directors and officers (incorporated by reference to
Scottish Re Group Limited's Amended Quarterly Report on Form 10-Q/A for
the period ended September 30, 2002). (8)(24)

10.16 Employment Agreement dated July 1, 2002 between Scottish Annuity & Life
Insurance Company (Cayman) Ltd. and Thomas A. McAvity, Jr.
(incorporated by reference to Scottish Re Group Limited's Amended
Quarterly Report on Form 10-Q/A for the period ended September 30,
2002). (8)(24) 10.17 Employment Agreement dated June 1, 2002 between
Scottish Re Group Limited and Paul Goldean (incorporated herein by
reference to Scottish Re Group Limited's Quarterly Report on Form 10-Q
for the period ended March 31, 2004). (14)(24)

10.18 Employment Agreement dated July 1, 2002 between Scottish Re Group
Limited and Elizabeth Murphy (incorporated by reference to Scottish Re
Group Limited's Amended Quarterly Report on Form 10-Q/A for the period
ended September 30, 2002). (8)(24)

10.19 Employment Agreement dated June 1, 2002 between Scottish Re Group
Limited and Clifford J. Wagner (incorporated by reference to Scottish
Re Group Limited's Amended Quarterly Report on Form 10-Q/A for the
period ended September 30, 2002). (8)(24)

10.20 Employment Agreement dated July 8, 2002 between Scottish Re Group
Limited and Scott E. Willkomm (incorporated by reference to Scottish Re
Group Limited's Amended Quarterly Report on Form 10-Q/A for the period
ended September 30, 2002). (8)(24)

10.21 Employment Agreement dated February 10, 2003 between Scottish Re Group
Limited and Michael C. French (incorporated herein by reference to
Scottish Re Group Limited's 2002 Annual Report on Form 10-K). (12)(24)

10.22 Employment Agreement dated February 10, 2003 between Scottish Re
(U.S.), Inc. and Oscar R. Scofield (incorporated herein by reference to
Scottish Re Group Limited's 2002 Annual Report on Form 10-K). (12)(24)

10.23 Amended Employment Agreement dated February 10, 2003 between Scottish
Re Group Limited and Thomas A. McAvity (incorporated herein by
reference to Scottish Re Group Limited's 2002 Annual Report on Form
10-K). (12)(24)

10.24 Indenture, dated November 22, 2002, between Scottish Re Group Limited
and The Bank of New York (incorporated herein by reference to Scottish
Re Group Limited's Registration Statement on Form S-3). (9)

10.25 Registration Rights Agreement, dated November 22, 2002, by and among
Scottish Re Group Limited and Bear Stearns & Co. and Putnam Lovell
Securities Inc. (incorporated herein by reference to Scottish Re Group
Limited's Registration Statement on Form S-3). (9)

10.26 Employment Agreement dated May 1, 2003 between Scottish Re Holdings
Limited and David Huntley (incorporated herein by reference to Scottish
Re Group Limited's Quarterly Report on Form 10-Q for the period ended
September 30, 2003). (13)(24)

10.27 Stock Purchase Agreement, dated as of October 24, 2003, by and among
Scottish Re Group Limited, Scottish Holdings, Inc. and Employers
Reinsurance Corporation (incorporated herein by reference to Scottish
Re Group Limited's Current Report on Form 8-K). (11)

10.28 Tax Matters Agreement, dated as of January 22, 2003, by and among
Scottish Re Group Limited, Scottish Holdings, Inc. and Employers
Reinsurance Corporation (incorporated herein by reference to Scottish
Re Group Limited's Current Report on Form 8-K). (11)

10.29 Transition Services Agreement, dated as of January 22, 2003, by and
among Scottish Holdings, Inc. and Employers Reinsurance Corporation
(incorporated herein by reference to Scottish Re Group Limited's
Current Report on Form 8-K). (11)

10.30 Employment Agreement dated April 21, 2004, by and among Scottish
Holdings, Inc. and Seth W. Vance (incorporated herein by reference to
Scottish Re Group Limited's Quarterly Report on Form 10-Q for the
period ended March 31, 2004). (14)(24)

10.31 Amendment to Employment Agreement dated March 29, 2004, by and between
Scottish Re (U.S.), Inc. and Oscar R. Scofield (incorporated herein by
reference to Scottish Re Group Limited's Quarterly Report on Form 10-Q
for the period ended June 30, 2004, filed with the SEC on August 9,
2004). (24)

10.32 Asset Purchase Agreement, dated as of October 17, 2004, by and among
Security Life of Denver Insurance Company, Security Life of Denver
International Limited, ING America Insurance Holdings, Inc. (for
purposes of Section 11.11), Scottish Re Group Limited, Scottish Re
(U.S.), Inc., Scottish Annuity & Life Insurance Company (Cayman) Ltd.
(for purposes of Section 5.26) and Scottish Re Life Corporation (for
purposes of Section 5.24) (incorporated herein by reference to Scottish
Re Group Limited's Current Report on Form 8-K). (15)

10.33 Securities Purchase Agreement, dated as of October 17, 2004, by and
among Scottish Re Group Limited and Cypress Merchant B Partners II
(Cayman) L.P., Cypress Merchant Banking II-A C.V.,

55th Street Partners II (Cayman) L.P. and Cypress Side-by-Side (Cayman)
L.P. (including form of Subordinated Note, Class C Warrant,
Shareholders' Agreement and Amendments to Articles of Association)
(incorporated herein by reference to Scottish Re Group Limited's
Current Report on Form 8-K). (15) 10.33 Securities Purchase Agreement,
dated as of October 17, 2004, by and among Scottish Re Group Limited
and Cypress Merchant B Partners II (Cayman) L.P., Cypress Merchant
Banking II-A C.V., 55th Street Partners II (Cayman) L.P. and Cypress
Side-by-Side (Cayman) L.P. (including form of Subordinated Note, Class
C Warrant, Shareholders' Agreement and Amendments to Articles of
Association) (incorporated herein by reference to Scottish Re Group
Limited's Current Report on Form 8-K). (15)

10.33 Securities Purchase Agreement, dated as of October 17, 2004, by and
among Scottish Re Group Limited and Cypress Merchant B Partners II
(Cayman) L.P., Cypress Merchant Banking II-A C.V., 55th Street Partners
II (Cayman) L.P. and Cypress Side-by-Side (Cayman) L.P. (including form
of Subordinated Note, Class C Warrant, Shareholders' Agreement and
Amendments to Articles of Association) (incorporated herein by
reference to Scottish Re Group Limited's Current Report on Form 8-K).
(15)

10.34 Form of Voting Agreement, by and among Cypress Merchant B Partners II
(Cayman) L.P., Cypress Merchant Banking II-A C.V., 55th Street Partners
II (Cayman) L.P. and Cypress Side-by-Side (Cayman) L.P., Scottish Re
Group Limited and, respectively, each director and each officer of
Scottish Re Group Limited (incorporated herein by reference to Scottish
Re Group Limited's Current Report on Form 8-K). (15)

10.35 Voting Agreement, dated as of October 15, 2004, by and among Scottish
Re Group Limited, Cypress Merchant B Partners II (Cayman) L.P., Cypress
Merchant Banking II-A C.V., 55th Street Partners II (Cayman) L.P. and
Cypress Side-by-Side (Cayman) L.P. and Pacific Life Insurance Company
(incorporated herein by reference to Scottish Re Group Limited's
Current Report on Form 8-K). (15)

10.36 Letter Agreement, dated as of October 17, 2004, by and among Scottish
Re Group Limited and Cypress Merchant B Partners II (Cayman) L.P.,
Cypress Merchant Banking II-A C.V., 55th Street Partners II (Cayman)
L.P. and Cypress Side-by-Side (Cayman) L.P. (incorporated herein by
reference to Scottish Re Group Limited's Current Report on Form 8-K).
(15)

10.37 First Supplemental Indenture, dated as of October 26, 2004, between
Scottish Re Group Limited and The Bank of New York (incorporated herein
by reference to Scottish Re Group Limited's Current Report on Form 8-K,
filed with the SEC on October 29, 2004).

10.38 Amendment to Employment Agreement dated as of March 29, 2004, by and
among Scottish Re Group Limited and Michael C. French (incorporated
herein by reference to Scottish Re Group Limited's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2004, filed with the SEC
on November 8, 2004). (24)

10.39 Employment Agreement, dated as of March 29, 2004, by and among Scottish
Re Group Limited and Deborah G. Percy (incorporated herein by reference
to Scottish Re Group Limited's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004, filed with the SEC on November 8,
2004). (24)

10.40 Employment Agreement, dated as of January 1, 2005, between Scottish
Holdings, Inc. and Gary Dombowsky (incorporated herein by reference to
Scottish Re Group Limited's 2004 Annual Report on Form 10-K). (20)(24)

10.41 Amendment to Employment Agreement, dated as of February 7, 2005,
between Scottish Re Group Limited and Michael C. French (incorporated
herein by reference to Scottish Re Group Limited's 2004 Annual Report
on Form 10-K). (20)(24)

10.42 Employment Agreement, dated as of February 1, 2005, between Scottish Re
Group Limited and Hugh T. McCormick (incorporated herein by reference
to Scottish Re Group Limited's 2004 Annual Report on Form 10-K).
(20)(24)

10.43 Employment Agreement, dated as of December 1, 2004, between Scottish
Holdings, Inc. and Kenneth R. Stott (incorporated herein by reference
to Scottish Re Group Limited's 2004 Annual Report on Form 10-K).
(20)(24)

10.44 Credit Agreement, dated as of December 29, 2004, among Scottish Annuity
& Life Insurance Company (Cayman) Ltd., Scottish Re (Dublin) Limited,
Scottish Re (U.S.), Inc., and Scottish Re Limited, as borrowers, Bear
Stearns Corporate Lending, Inc. and Wachovia Bank, National

Association as Co-Syndication Agents, Bank of America, N.A., as
Administrative Agent and L/C Issuer, and The Other Lenders Party
Hereto, Banc of America Securities LLC, as Sole Lead Arranger and Sole
Book Manager (incorporated herein by reference to Scottish Re Group
Limited's 2004 Annual Report on Form 10-K). (20)

10.45 Administrative Services Agreement, dated as of December 31, 2004,
between Security Life of Denver Insurance Company and Security Life of
Denver International Limited and Scottish Re (U.S.), Inc. (incorporated
herein by reference to Scottish Re Group Limited's 2004 Annual Report
on Form 10-K). (20)

10.46 Coinsurance Agreement dated December 31, 2004 between Security Life of
Denver Insurance Company and Scottish Re (U.S.), Inc. (incorporated
herein by reference to Scottish Re Group Limited's 2004 Annual Report
on Form 10-K). (20)

10.47 Coinsurance/Modified Coinsurance Agreement, dated December 31, 2004,
between Security Life of Denver Insurance Company and Scottish Re
(U.S.), Inc. (incorporated herein by reference to Scottish Re Group
Limited's 2004 Annual Report on Form 10-K). (20)

10.48 Retrocession Agreement, dated December 31, 2004, between Scottish Re
(U.S.), Inc. and Security Life of Denver Insurance Company
(incorporated herein by reference to Scottish Re Group Limited's 2004
Annual Report on Form 10-K). (20)

10.49 Retrocession Agreement, dated December 31, 2004, between Scottish Re
Life (Bermuda) Limited and Security Life of Denver Insurance Company
(incorporated herein by reference to Scottish Re Group Limited's 2004
Annual Report on Form 10-K). (20)

10.50 Reserve Trust Agreement, dated as of December 31, 2004, between
Scottish Re (U.S.) Inc., as Grantor, and Security Life of Denver
Insurance Company, as Beneficiary, and The Bank of New York, as
Trustee, and The Bank of New York, as Securities Intermediary
(incorporated herein by reference to Scottish Re Group Limited's 2004
Annual Report on Form 10-K). (20)

10.51 Security Trust Agreement, dated as of December 31, 2004, by and among
Scottish Re (U.S.), Inc., as Grantor, Security Life of Denver Insurance
Company, as Beneficiary, The Bank of New York, as Trustee, and The Bank
of New York, as Securities Intermediary (incorporated herein by
reference to Scottish Re Group Limited's 2004 Annual Report on Form
10-K). (20)

10.52 Coinsurance Agreement, dated December 31, 2004, between Security Life
of Denver International Limited and Scottish Re Life (Bermuda) Limited
(incorporated herein by reference to Scottish Re Group Limited's 2004
Annual Report on Form 10-K). (20)

10.53 Coinsurance/Modified Coinsurance Agreement, dated December 31, 2004,
between Security Life of Denver International Limited and Scottish Re
Life (Bermuda) Limited (incorporated herein by reference to Scottish Re
Group Limited's 2004 Annual Report on Form 10-K). (20)

10.54 Coinsurance Funds Withheld Agreement, dated December 31, 2004, between
Security Life of Denver International Limited and Scottish Re Life
(Bermuda) Limited (incorporated herein by reference to Scottish Re
Group Limited's 2004 Annual Report on Form 10-K). (20)

10.55 Reserve Trust Agreement, dated December 31, 2004, between Scottish Re
Life (Bermuda) Limited, as Grantor, and Security Life of Denver
International Limited, as Beneficiary. The Bank of New York, as
Trustee, and The Bank of New York, as Securities Intermediary
(incorporated herein by reference to Scottish Re Group Limited's 2004
Annual Report on Form 10-K). (20)

10.56 Security Trust Agreement, dated as of December 31, 2004, by and among
Scottish Re Life (Bermuda) Limited, as Grantor, Security Life of Denver
International Limited, as Beneficiary, The

Bank of New York, as Trustee, and the Bank of New York, as Securities
Intermediary (incorporated herein by reference to Scottish Re Group
Limited's 2004 Annual Report on Form 10-K). (20)

10.57 Technology Transfer and License Agreement, dated as of December 31,
2004, between Security Life of Denver Insurance Company, ING North
America Insurance Corporation and Scottish Re (U.S.), Inc.
(incorporated herein by reference to Scottish Re Group Limited's 2004
Annual Report on Form 10-K). (20)

10.58 Transition and Integration Services Agreement, dated December 31, 2004,
between Security Life of Denver Insurance Company and Scottish Re
(U.S.), Inc. (incorporated herein by reference to Scottish Re Group
Limited's Current Report on Form 8-K). (19)

10.59 Form of Remarketing Agreement, between the Company and Lehman Brothers,
Inc., as Remarketing Agent (incorporated herein by reference to
Scottish Re Group Limited's Current Report on Form 8-K). (16)

10.60 Amended and Restated Credit Agreement, dated as of July 14, 2005, among
Scottish Annuity & Life Insurance Company (Cayman) Ltd., Scottish Re
(Dublin) Limited, Scottish Re (U.S.), Inc., and Scottish Re Limited, as
Borrowers, Bear Stearns Corporate Lending, Inc., HSBC Bank USA,
National Association, and Wachovia Bank, National Association as
Syndication Agents, Bank of America, N.A., as Administrative Agent and
L/C Issuer, and the Other Lenders Party Hereto, Banc of America
Securities LLC, as Sole Lead Arranger and Sole Book Manager
(incorporated herein by reference to Scottish Re Group Limited's
Current Report on Form 8-K). (17)

10.61 Scottish Re Group Limited 2004 Equity Incentive Compensation Plan
(incorporated herein by reference to Scottish Re Group Limited's Proxy
Statement filed with the SEC on April 1, 2004).

10.62 Amendment No. 1 to Scottish Re Group Limited 2004 Equity Incentive
Compensation Plan (incorporated herein by reference to Scottish Re
Group Limited's Current Report on Form 8-K). (18) (22)10.63 Amendment
No. 2 to Scottish Re Group Limited 2004 Equity Incentive Compensation
Plan (incorporated herein by reference to Scottish Re Group Limited's
Current Report on Form 8-K). (18) (22) 10.64 Form of Management Stock
Option Agreement under the Scottish Re Group Limited 2004 Equity
Incentive Compensation Plan (incorporated herein by reference to
Scottish Re Group Limited's Current Report on Form 8-K). (18) (24)

10.65 Form of Management Performance Share Unit Agreement under the Scottish
Re Group Limited 2004 Equity Incentive Compensation Plan (incorporated
herein by reference to Scottish Re Group Limited's Current Report on
Form 8-K). (18) (24)

10.66 Form of Management Restricted Share Unit Agreement under the Scottish
Re Group Limited 2004 Equity Incentive Compensation Plan (incorporated
herein by reference to Scottish Re Group Limited's Current Report on
Form 8-K). (18) (24)

10.67 Employment Agreement, dated as of July 18, 2005, between Scottish Re
Group Limited and Dean Miller (incorporated herein by reference to
Scottish Re Group Limited's Current Report on Form 8-K). (19) (24)

10.68 Letter of Credit Agreement, dated as of August 18, 2005, among Scottish
Re (Dublin) Limited, as Borrower, Scottish Annuity & Life Insurance
Company (Cayman) Ltd., as Guarantor, Bank of America, N.A., as
Administrative Agent and L/C Issuer, and the Other Lenders Party
Hereto, and Bank of America Securities LLC, as Sole Lead Arranger and
Sole Book Manager (incorporated herein by reference to Scottish Re
Group Limited's Current Report on Form 8-K). (21)

10.69 Amendment to Employment Agreement, dated as of October 29, 2006,
between Scottish Re Group Limited and Paul Goldean (incorporated herein
by reference to Scottish Re Group Limited's Current Report on Form 8-K
which was filed with the SEC on November 2, 2006). (24)

10.70 Securities Purchase Agreement, dated as of November 26, 2006, by and
among Scottish Re Group Limited, MassMutual Capital Partners LLC and
SRGL Acquisition, LLC (incorporated herein by reference to Scottish Re
Group Limited's Current Report on Form 8-K). (22)

10.71 Form of Registration Rights and Shareholders Agreement (incorporated
herein by reference to Scottish Re Group Limited's Current Report on
Form 8-K). (22)

10.72 Voting Agreement, dated as of November 26, 2006, by and among Scottish
Re Group Limited, MassMutual Capital Partners LLC, SRGL Acquisition,
LLC, Cypress Merchant B Partners II (Cayman) L.P., Cypress Merchant B
II-A C.V., Cypress Side-By-Side (Cayman) L.P. and 55th Street Partners
II (Cayman) L.P (incorporated herein by reference to Scottish Re Group
Limited's Current Report on Form 8-K). (22)

10.73 First Amendment to Asset Purchase Agreement, dated as of November 26,
2006, by and among Scottish Re (U.S.), Inc., Scottish Re Life (Bermuda)
Limited, Security Life of Denver Insurance Company and Security Life of
Denver International Limited (incorporated herein by reference to
Scottish Re Group Limited's Current Report on Form 8-K). (22)

10.74 Letter Agreement, dated as of November 30, 2006, by and among Scottish
Annuity & Life Insurance Company (Cayman) Ltd., Scottish Re Limited and
Comerica Bank (incorporated herein by reference to Scottish Re Group
Limited's Current Report on Form 8-K). (23)

10.75 Standby Letter of Credit Application and Agreement, dated as of
November 30, 2006, by and between Scottish Annuity & Life Insurance
Company (Cayman) Ltd. and Comerica Bank (incorporated herein by
reference to Scottish Re Group Limited's Current Report on Form 8-K).
(23)

10.76 Standby Letter of Credit Application and Agreement, dated as of
November 30, 2006, by and between Scottish Re Limited and Comerica Bank
(incorporated herein by reference to Scottish Re Group Limited's
Current Report on Form 8-K). (23)

10.77 Amendment No. 2 to Securities Purchase Agreement, dated as of February
20, 2007, by and among Scottish Re Group Limited, MassMutual Capital
Partners LLC and SRGL Acquisition, LDC (incorporated herein by
reference to Scottish Re Group Limited's Current Report on Form 8-K
which was filed with the SEC on February 21, 2007).

10.78 Amendment Three to the 2004 Equity Incentive Compensation Plan. (24)

21.1 List of Subsidiaries

23.1 Consent of Ernst & Young LLP

24.1 Power of Attorney

31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.

31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.

32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.

(1) Scottish Re Group Limited's Registration Statement on Form S-1
was filed with the SEC on June 19, 1998, as amended.

(2) Scottish Re Group Limited's 1999 Annual Report on Form 10-K
was filed with the SEC on April 3, 2000.

(3) Scottish Re Group Limited's 2000 Annual Report on Form 10-K
was filed with the SEC on March 30, 2001.

(4) Scottish Re Group Limited's 2001 Annual Report on Form 10-K
was filed with the SEC on March 5, 2002.

(5) Scottish Re Group Limited's Current Report on Form 8-K was
filed with the SEC on December 31, 2001.

(6) Scottish Re Group Limited's Current Report on Form 8-K was
filed with the SEC on June 2, 2005.

(7) Scottish Re Group Limited's Current Report on Form 8-K was
filed with the SEC on August 9, 2001.

(8) Scottish Re Group Limited's Amended Quarterly Report on Form
10-Q/A was filed with the SEC on August 8, 2002.

(9) Scottish Re Group Limited's Registration Statement on Form S-3
was filed with the SEC on January 31, 2003, as amended.

(10) Scottish Re Group Limited's Current Report on Form 8-K was
filed with the SEC on December 17, 2003.

(11) Scottish Re Group Limited's Current Report on Form 8-K was
filed with the SEC on January 6, 2004.

(12) Scottish Re Group Limited's 2002 Annual Report on Form 10-K
was filed with the SEC on March 31, 2003.

(13) Scottish Re Group Limited's Quarterly Report on Form 10-Q was
filed with the SEC on August 12, 2003.

(14) Scottish Re Group Limited's Quarterly Report on Form 10-Q was
filed with the SEC on May 10, 2004.

(15) Scottish Re Group Limited's Current Report on Form 8-K was
filed with the SEC on October 21, 2004.

(16) Scottish Re Group Limited's Current Report on Form 8-K was
filed with the SEC on July 1, 2005.

(17) Scottish Re Group Limited's Current Report on Form 8-K was
filed with the SEC on July 18, 2005.

(18) Scottish Re Group Limited's Current Report on Form 8-K was
filed with the SEC on August 8, 2005.

(19) Scottish Re Group Limited's Current Report on Form 8-K was
filed with the SEC on August 4, 2005.

(20) Scottish Re Group Limited's 2004 Annual Report on Form 10-K
was filed with the SEC on March 18, 2005.

(21) Scottish Re Group Limited's Current Report on Form 8-K was
filed with the SEC on August 22, 2005.

(22) Scottish Re Group Limited's Current Report on Form 8-K as
filed with the SEC on November 29, 2006.

(23) Scottish Re Group Limited's Current Report on Form 8-K was
filed with the SEC on December 1, 2006.

(24) This exhibit is a management contract or compensatory plan or
arrangement.

FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

Page
Report of Independent Registered Public Accounting Firm............... 98
Consolidated Balance Sheets........................................... 99
Consolidated Statements of Income (Loss).............................. 100
Consolidated Statements of Comprehensive Income (Loss)................ 101
Consolidated Statements of Shareholders' Equity....................... 102-103
Consolidated Statements of Cash Flows................................. 104
Notes to Consolidated Financial Statements............................ 105-153
Schedule I - Summary of Investments................................... 154
Schedule II - Condensed Financial Information......................... 155-156
Schedule III - Supplementary Insurance Information.................... 157
Schedule IV - Reinsurance............................................. 158
Schedule V - Valuation and Qualifying Accounts........................ 159

All other schedules are omitted because they are either not applicable
or the required information is included in the Management's Discussion and
Analysis of Financial Condition and Results of Operations, Financial Statements
or Notes thereto appearing elsewhere in this Form 10-K.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of Scottish Re Group Limited

We have audited the accompanying consolidated balance sheets of Scottish Re
Group Limited and subsidiaries as of December 31, 2006 and 2005, and the related
consolidated statements of income (loss), comprehensive income (loss),
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2006. Our audit also included the financial statement
schedules listed at Item 15 (a) (2). These financial statements and schedules
are the responsibility of Scottish Re Group Limited's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Scottish Re Group
Limited and subsidiaries at December 31, 2006 and 2005, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2006, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.

As discussed in Note 2 to the financial statements, Scottish Re Group Limited
reported a net loss for the year ended December 31, 2006 and a retained deficit
at December 31, 2006. In addition, the Company has experienced deteriorating
financial performance and worsening liquidity and collateral position. These
concerns raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans as to these matters also are described in Note
2. The 2006 financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Scottish Re
Group Limited's internal control over financial reporting as of December 31,
2006, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated February 28, 2007 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Charlotte, North Carolina
February 28, 2007

SCOTTISH RE GROUP LIMITED
CONSOLIDATED BALANCE SHEETS
(Expressed in Thousands of United States Dollars, except share data)

December 31, December 31,
2006 2005
---------------- -----------------

Assets
Fixed maturity investments, available for sale, at fair value
(Amortized cost $8,103,743; 2005-$5,323,488)............................... $ 8,065,524 $ 5,292,595
Preferred stock available for sale, at fair value (Cost $119,721 2005-$137,271) 116,933 133,804
Cash and cash equivalents..................................................... 622,756 1,420,205
Other investments............................................................. 65,448 54,619
Funds withheld at interest.................................................... 1,942,079 2,597,416
---------------- -----------------
Total investments.......................................................... 10,812,740 9,498,639
Accrued interest receivable................................................... 57,538 44,012
Reinsurance balances and risk fees receivable................................. 481,908 426,838
Deferred acquisition costs.................................................... 618,737 594,583
Amounts recoverable from reinsurers........................................... 554,589 560,005
Present value of in-force business............................................ 48,779 54,743
Goodwill...................................................................... - 34,125
Other assets.................................................................. 178,311 87,198
Deferred tax assets........................................................... - 55,453
Segregated assets............................................................. 683,470 760,707
---------------- -----------------
Total assets............................................................... $ 13,436,072 $ 12,116,303
================ ===============

Liabilities
Reserves for future policy benefits........................................... $ 3,919,901 $ 3,526,220
Interest sensitive contract liabilities....................................... 3,399,410 3,907,573
Collateral finance facilities................................................. 3,757,435 1,985,681
Accounts payable and other liabilities........................................ 95,260 83,130
Reinsurance balances payable.................................................. 72,304 175,263
Current income tax payable.................................................... 48 9,155
Deferred tax liability........................................................ 169,977 -
Long-term debt................................................................ 129,500 244,500
Segregated liabilities........................................................ 683,470 760,707
---------------- --------------
Total liabilities.......................................................... 12,227,305 10,692,229

Commitments and contingencies (See Note 18) - -
Minority Interest............................................................. 7,910 9,305
Mezzanine Equity.............................................................. 143,665 143,057
Shareholders' Equity
Share capital, par value $0.01 per share:
Issued and outstanding: 60,554,104 ordinary shares (2005 - 53,391,939)..... 606 534
Preferred shares, par value $0.01 per share:
Issued: 5,000,000 shares (2005 - 5,000,000 shares)......................... 125,000 125,000
Additional paid-in capital.................................................... 1,050,860 893,767
Accumulated other comprehensive income (loss)................................. 340 (9,991)
Retained earnings (deficit)................................................... (119,614) 262,402
---------------- ---------------
Total shareholders' equity................................................. 1,057,192 1,271,712
---------------- ---------------
Total liabilities, minority interest, mezzanine equity and shareholders' equity $ 13,436,072 $ 12,116,303
================ ===============

See Accompanying Notes to Consolidated Financial Statements
2

SCOTTISH RE GROUP LIMITED
CONSOLIDATED STATEMENT OF INCOME (LOSS)
(Expressed in Thousands of United States Dollars, except share data)

Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2006 2005 2004
------------- -------------- ------------

Revenues
Premiums earned, net .............................................................. $ 1,841,985 $ 1,933,930 $ 589,445
Investment income, net ............................................................ 616,624 355,837 217,138
Fee income ........................................................................ 14,493 12,316 11,547
Net realized gains (losses) ....................................................... (27,405) 3,738 (8,304)
Change in value of embedded derivatives, net ...................................... 5,803 (8,492) 4,561
------------- ------------- ------------
Total revenues ................................................................. 2,451,500 2,297,329 814,387
Benefits and expenses
Claims and other policy benefits .................................................. 1,591,472 1,442,505 425,965
Interest credited to interest sensitive contract liabilities ...................... 172,967 132,968 106,525
Acquisition costs and other insurance expenses, net ............................... 409,185 423,775 151,405
Operating expenses ................................................................ 152,311 115,573 54,658
Goodwill impairment ............................................................... 34,125 -- --
Collateral finance facilities expense ............................................. 215,791 48,146 2,724
Interest expense .................................................................. 23,139 20,738 13,016
Due diligence costs ............................................................... -- -- 4,643
------------- ------------- ------------
Total benefits and expenses .................................................... 2,598,990 2,183,705 758,936
------------- ------------- ------------
Income (loss) before income taxes and minority interest ........................... (147,490) 113,624 55,451
Income tax benefit (expense) ...................................................... (220,592) 16,434 16,679
------------- ------------- ------------
Income (loss) before minority interest ............................................ (368,082) 130,058 72,130
Minority interest ................................................................. 1,368 139 (531)
------------- ------------- ------------
Income (loss) from continuing operations before discontinued
operations ........................................................................ (366,714) 130,197 71,599
Loss from discontinued operations ................................................. -- -- (208)
------------- ------------- ------------
Net income (loss) ................................................................. (366,714) 130,197 71,391
Dividend declared on non-cumulative perpetual preferred shares .................... (9,062) (4,758) --
Imputed dividend on prepaid variable share forward contract ....................... (881) -- --
------------- ------------- ------------
Net income (loss) available to ordinary shareholders .............................. $ (376,657) $ 125,439 $ 71,391
============= ============= ============
Basic earnings (loss) per share:
Income (loss) from continuing operations ....................................... $ (6.70) $ 2.86 $ 2.00
Discontinued operations ........................................................ -- -- (0.01)
------------- ------------- ------------
Net income (loss) available to ordinary shareholders ........................... $ (6.70) $ 2.86 $ 1.99
============= ============= ============
Diluted earnings (loss) per share:
Income (loss) from continuing operations ....................................... $ (6.70) $ 2.64 $ 1.91
Discontinued operations ........................................................ -- -- (0.01)
------------- ------------- ------------
Net income (loss) available to ordinary shareholders ........................... $ (6.70) $ 2.64 $ 1.90
============= ============= ============
Weighted average number of ordinary shares outstanding
Basic .......................................................................... 56,182,222 43,838,261 35,732,522
============= ============= ============
Diluted ........................................................................ 56,182,222 47,531,116 37,508,292
============= ============= ============

See Accompanying Notes to Consolidated Financial Statements

100

SCOTTISH RE GROUP LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Expressed in Thousands of United States Dollars)

Year Ended Year Ended Year Ended
December 31, 2006 December 31, 2005 December 31, 2004
----------------- ----------------- -----------------

Net income (loss).......................................... $ (366,714) $ 130,197 $ 71,391
Other comprehensive income (loss), net of tax:
Unrealized appreciation (depreciation) on investments... (18,055) (30,750) 3,644
Add: reclassification adjustment for net realized gains
included in net income.................................. 16,310 (790) (6,831)
----------------- ----------------- -----------------
Net unrealized appreciation (depreciation) on investments,
net of income tax benefit (expense) and deferred
acquisition costs of $(4,097), $(32,039) and $11,366 ... (1,745) (31,540) (3,187)
Cumulative translation adjustment....................... 14,938 (10,055) 5,757
Minimum pension liability............................... (2,862) - -
----------------- ----------------- -----------------
Other comprehensive income (loss).......................... 10,331 (41,595) 2,570
----------------- ----------------- -----------------
Comprehensive income (loss)................................ $ (356,383) $ 88,602 $ 73,961
================= ================= =================

See Accompanying Notes to Consolidated Financial Statements

101

SCOTTISH RE GROUP LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Expressed in Thousands of United States Dollars, except share data)

Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2006 2005 2004
------------- ------------ ---------------

Ordinary shares:
Beginning of year ............................ 53,391,939 39,931,145 35,228,411
Ordinary shares issued ....................... 6,578,948 7,660,000 3,953,183
Issuance to employees on exercise of options . 583,217 423,467 749,551
Issuance on exercise of warrants ............. -- 5,377,327 --
------------- ------------ ---------------
End of year .................................. 60,554,104 53,391,939 39,931,145
------------- ------------ ---------------
Preferred shares:
Beginning of year ............................ 5,000,000 -- --
Non-cumulative perpetual preferred shares
issued...................................... -- 5,000,000 --
------------- ------------ ---------------
End of year .................................. 5,000,000 5,000,000 --
------------- ------------ ---------------
Share capital:
Ordinary shares:
Beginning of year ............................ $ 534 $ 399 $ 352
Ordinary shares issued ....................... 66 77 40
Issuance to employees on exercise of options . 6 4 7
Issuance on exercise of warrants ............. -- 54 --
------------- ------------ ---------------
End of year .................................. 606 534 399
------------- ------------ ---------------
Preferred shares:
Beginning of year ............................ 125,000 -- --
Non-cumulative perpetual preferred shares
issued...................................... -- 125,000 --
------------- ------------ ---------------
End of year .................................. 125,000 125,000 --
------------- ------------ ---------------
Additional paid-in capital:
Beginning of year ............................ 893,767 684,719 548,750
Ordinary shares issued, net of issuance costs 147,318 174,031 64,824
Issuance to employees on exercise of options . 6,795 5,358 8,339
Option and restricted stock unit expense ..... 2,586 5,377 843
Conversion of 7% Convertible Junior
Subordinated Notes ......................... -- 42,061 --
Costs of forward sale agreements ............. -- (13,893) --
Costs of issue of non-cumulative perpetual
preferred shares ........................... -- (4,563) --
Warrants issued .............................. -- -- 62,125
Other ........................................ 394 677 (162)
------------- ------------ ---------------
End of year .................................. 1,050,860 893,767 684,719
------------- ------------ ---------------

Accumulated other comprehensive income (loss):
Unrealized appreciation (depreciation) on
investments
Beginning of year ............................ (17,879) 13,661 16,848
Change in period (net of income taxes and
deferred acquisition costs)................. (1,745) (31,540) (3,187)
------------- ------------ ---------------
End of year .................................. (19,624) (17,879) 13,661
------------- ------------ ---------------
Cumulative translation adjustment
Beginning of year ............................ 7,888 17,943 12,186
Change in period (net of tax) ................ 14,938 (10,055) 5,757
------------- ------------ ---------------
End of year .................................. 22,826 7,888 17,943
------------- ------------ ---------------
Minimum pension liability
Beginning of year ............................ -- -- --
Change in period (net of tax) ................ (2,862) -- --
------------- ------------ ---------------
End of year .................................. (2,862) -- --
------------- ------------ ---------------
Total accumulated other comprehensive income
(loss)........................................... $ 340 $ (9,991) $ 31,604
------------- ------------ ---------------

See Accompanying Notes to Consolidated Financial Statements

102

SCOTTISH RE GROUP LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (continued)
(Expressed in Thousands of United States Dollars, except share data)

Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2006 2005 2004
------------- ------------ ---------------

Retained earnings (deficit):
Beginning of year ............................ $ 262,402 $ 145,952 $ 81,708
Net income (loss) ............................ (366,714) 130,197 71,391
Dividends declared on ordinary shares ........ (5,359) (8,989) (7,147)
Dividends declared on non-cumulative
perpetual preferred shares ................. (9,062) (4,758) --
Imputed dividend on prepaid variable
shareforward contract ...................... (881) -- --
------------- ------------ ---------------
End of year .................................. (119,614) 262,402 145,952
------------- ------------ ---------------
Total shareholders' equity ...................... $ 1,057,192 $ 1,271,712 $ 862,674
============= ============ ===============

See Accompanying Notes to Consolidated Financial Statements

103

SCOTTISH RE GROUP LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in Thousands of United States Dollars)

Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2006 2005 2004
--------------- -------------- ----------------

Operating activities
Net income (loss)............................................. $ (366,714) $ 130,197 $ 71,391
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:.................................
Net realized losses (gains).............................. 27,405 (3,738) 8,306
Changes in value of embedded derivatives, net............ (5,803) 8,492 (4,561)
Amortization discount on investments..................... 15,903 18,253 11,140
Amortization of deferred acquisition costs............... 117,302 77,398 80,235
Amortization and write-down of present value
of in-force business................................... 5,970 7,373 7,689
Goodwill impairment...................................... 34,125 - -
Changes in assets and liabilities:.......................
Accrued interest receivable.......................... (12,129) (12,317) (894)
Reinsurance balances and risk fees receivable........ (151,856) 102,118 (136,792)
Deferred acquisition costs........................... (134,586) (241,463) (180,908)
Deferred tax asset and liability..................... 228,843 (19,246) 68,807
Other assets and liabilities......................... (77,726) (73,723) (24,807)
Current income tax receivable and payable............ (9,337) 17,193 (95,631)
Reserves for future policy benefits, net of
amounts recoverable from reinsurers................ 387,666 474,344 211,901
Interest sensitive contract liabilities, net of funds 388,571 (136,568) 34,550
withheld at interest
Accounts payable and other liabilities............... 11,946 17,328 (5,443)
Other................................................ 3,348 92 (6,131)
--------------- -------------- ----------------
Net cash provided by operating activities................ 462,928 365,733 38,852
--------------- -------------- ----------------
Investing activities
Purchase of fixed maturity investments........................ (4,471,513) (3,008,823) (1,832,494)
Proceeds from sales of fixed maturity investments............. 1,159,659 690,533 595,059
Proceeds from maturity of fixed maturity investments.......... 512,718 517,775 345,778
Purchase of preferred stock investments....................... (10,299) (17,028) (26,186)
Proceeds from sale and maturity of preferred stock investments 26,431 4,174 25,877
Cash received on ING acquisition.............................. - - 414,008
Purchase of other investments................................. (10,799) (37,737) -
Other......................................................... (6,146) (6,843) (1,898)
--------------- -------------- ----------------
Net cash used in investing activities.................... (2,799,949) (1,857,949) (479,856)
--------------- -------------- ----------------
Financing activities
Proceeds from collateral finance facilities................... 1,771,754 1,785,681 200,000
Deposits to interest sensitive contract liabilities........... 154,569 312,956 571,843
Withdrawals from interest sensitive contract liabilities...... (676,028) (255,515) (83,319)
Proceeds from issuance of ordinary shares..................... 153,698 179,466 73,210
Net proceeds from issuance of non-cumulative perpetual
preferred shares............................................ - 120,436 -
Net proceeds from drawdown of Stingray facility............... 265,000 - -
Costs of variable share forward contracts..................... - (13,815) -
Net proceeds from issuance of warrants........................ - - 62,125
Net proceeds from issuance of long-term debt.................. - - 79,500
Repayment of long term debt................................... (115,000) - -
Net proceeds from issuance of notes payable to buy
Cypress Entities............................................ - - 41,282
Net proceeds from exercise of Class C warrants................ - 54 -
Dividends paid on ordinary shares............................. (5,359) (8,989) (7,147)
Dividend paid on non-cumulative perpetual preferred shares.... (9,062) (2,492) -
--------------- -------------- ----------------
Net cash provided by financing activities................ 1,539,572 2,117,782 937,494
--------------- -------------- ----------------
Net change in cash and cash equivalents....................... (797,449) 625,566 496,490
Cash and cash equivalents, beginning of year.................. 1,420,205 794,639 298,149
--------------- -------------- ----------------
Cash and cash equivalents, end of year........................ $ 622,756 $ 1,420,205 $ 794,639
=============== ============== ================
Interest paid................................................. $ 9,908 $ 18,232 $ 16,418
=============== ============== ================
Taxes paid (refunded)......................................... $ 1,774 $ (1,041) $ 28,726
=============== ============== ================

See Accompanying Notes to Consolidated Financial Statements

104

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006

1. Organization and business

Organization

Scottish Re Group Limited is a holding company incorporated under the
laws of the Cayman Islands with our principal executive office in Bermuda.
Through our operating subsidiaries, we are principally engaged in the
reinsurance of life insurance, annuities and annuity-type products. These
products are written by life insurance companies and other financial
institutions located in the United States, as well as in many other countries
around the world. We refer to this portion of our business as Life Reinsurance.
To a lesser extent, we directly issue variable life insurance and variable
annuities and similar products to high net worth individuals and families for
insurance, investment and estate planning purposes. We refer to this portion of
our business as Wealth Management. We have operating companies in Bermuda, the
Cayman Islands, Guernsey, Ireland, the United Kingdom and the United States, a
branch office in Singapore and a representative office in Japan. Our flagship
subsidiaries are Scottish Annuity & Life Insurance Company (Cayman) Ltd.,
Scottish Re (U.S.), Inc., Scottish Re (Dublin) Limited and Scottish Re Limited.

Business

In our Life Reinsurance North America Segment, we provide solutions to
insurance companies seeking reinsurance of life insurance, annuities and
annuity-type products. We reinsure lines of business that may be subject to
significant reserve or capital requirements by regulatory and rating agencies.
We assume risks associated with primary life insurance policies and annuities,
both in-force and new business. We reinsure: (i) mortality, (ii) investment,
(iii) persistency, and (iv) expense risks. We originate reinsurance business
predominantly by marketing our products and services directly to United States
life insurance and reinsurance companies. Most of the reinsurance assumed is
through automatic treaties, but in 2006 we also began assuming risks on a
facultative basis. Facultative reinsurance allows us to review an individual
risk before it is reinsured.

Our Corporate and Other Segment includes investment income from
invested assets not allocated to support reinsurance segment operations and
undeployed proceeds from our capital raising efforts, in addition to realized
investment gains or losses. General corporate expenses consist of unallocated
overhead and executive costs and interest expense related to our various
activities. Additionally, the Corporate and Other Segment includes results from
our wealth management business, which directly issues variable life insurance
and variable annuities and similar products to high net worth individuals and
families, for insurance, investment and estate planning purposes. Variable life
insurance and variable annuities have a cash value component that is placed in a
separate account and invested by us on behalf of the policyholder with a money
manager.

On November 26, 2006, we entered into a Securities Purchase Agreement
(the "Securities Purchase Agreement") with MassMutual Capital Partners LLC
("MassMutual Capital"), a member of the MassMutual Financial Group, and SRGL
Acquisition, LLC, an affiliate of Cerberus Capital Management, L.P.
("Cerberus"), or another affiliate thereof (such affiliate of Cerberus, together
with MassMutual Capital, the "Investors") whereby, subject to the terms and
conditions set forth in the Securities Purchase Agreement, the Investors will
each purchase 500,000 of our convertible cumulative participating preferred
shares (the "Convertible Shares"), which will be newly issued, and which shares
may be converted into an aggregate of 150,000,000 ordinary shares, subject to
certain adjustments, if any, at any time and will automatically convert on the
ninth anniversary of the issue date if not previously converted (the above is
collectively referred to as the "Transaction").

105

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2006

1. Organization and business (continued)

The Transaction requires shareholder approval which is to be voted upon
at a shareholders' meeting scheduled for March 2, 2007. The estimated net cash
proceeds to us from the sale of the Convertible Shares to the Investors will be
approximately $560.0 million, after giving effect to the payment of estimated
transaction expenses and the transaction fees to be paid to the financial
advisors. We intend to use the net proceeds for general corporate purposes,
which may include investments in or advances to operating subsidiaries to
provide capital to support insurance obligations and collateral requirements,
working capital and other corporate purposes. The additional capital received
from the Investors will allow us to meet our long-term liquidity and capital
needs and satisfy applicable regulatory and rating agency criteria for required
capital.

106

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

2. Summary of significant accounting policies

Basis of presentation

Accounting Principles - Our consolidated financial statements are
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP"). Certain items in the prior year financial
statements have been reclassified to conform to the current year presentation.

Going Concern - During 2006, our financial performance deteriorated, we
were downgraded by the various rating agencies and our liquidity and collateral
position became very tight. We reported a net loss available to ordinary
shareholders of $376.7 million for the year ended December 31, 2006 and have an
accumulated retained earnings deficit of $119.6 million at December 31, 2006.
Though non-cash deferred tax valuation allowances and goodwill adjustments
constituted a significant component of the reported net loss, we have
experienced, and expect to continue to experience, decreases in revenues
resulting from the rating downgrades and extremely tight liquidity and
collateral. As a result, we engaged Goldman Sachs and Bear Stearns as our
financial advisors to assist us in exploring strategic alternatives, including
the sale of the Company or a significant capital infusion. This process was
completed on November 26, 2006 with the announcement of the Transaction as
described in Note 1.

If our shareholders do not approve the Transaction or if the
Transaction is not consummated for any other reason, we will be required to
pursue another financing transaction which, if available at all, would likely be
on less favorable terms than the Transaction, or seek other restructuring
alternatives, which would also likely be less favorable to us and our
shareholders than the Transaction, and which may require us to seek protection
under applicable bankruptcy and insolvency laws in the jurisdictions where we
and our operating subsidiaries are domiciled.

We need to raise substantial capital in the short term to meet our
liquidity and collateral needs. Without shareholder approval of the Transaction
and the consummation of the Transaction, we would need to seek out alternative
capital sources which may not be available or, if available, would likely be on
less favorable terms than the Transaction. In addition, it is unlikely that we
would be able to enter into such a transaction on a timely basis. To further
enhance our liquidity and collateral position, we are negotiating a $100 million
term loan facility with Cerberus to provide a source of liquidity until the
closing of the Transaction. In addition, we entered into a commitment letter
with Citigroup Global Markets Inc. and Calyon Securities (USA) Inc. for a
collateral finance facility of up to $500.0 million. These facilities were
arranged by the Investors and formed part of their negotiated proposal
considered by our Board of Directors. These commitments are conditioned upon
shareholder approval of the Transaction being obtained. If shareholder approval
is not obtained, we will need to seek alternative liquidity and collateral
sources, which may not be available or, if available, would likely be on less
favorable terms. To the extent that we are not able to close this term loan
facility or obtain additional sources of liquidity, including the consummation
of the Transaction, we face the possibility of running out of liquidity in the
second quarter of 2007.

On November 26, 2006, we entered into an amended forbearance agreement
with HSBC, whereby HSBC agreed not to make demands for additional collateral
under our collateral finance facilities with HSBC through December 31, 2008 so
long as certain conditions are met. This forbearance agreement will terminate if
our shareholders do not approve the Transaction or if the Transaction is not
consummated for any other reason and we likely will face demands from HSBC for
additional collateral, which we may not be able to meet, and in any event which
would further exacerbate our tight liquidity and capital position. Any breach by
us of our obligation to post collateral could result in an acceleration of our
obligations under these collateral finance facilities, which would require us to
seek bankruptcy protection under applicable law if we were unable promptly to
access alternative sources of capital.

107

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

2. Summary of significant accounting policies (continued)

In light of ratings actions taken over the last few months, immediate
action may be taken by the rating agencies to further downgrade the ratings of
both our operating companies and our holding company. The various rating
agencies have publicly announced their intention to further downgrade us if the
Transaction is not consummated. Any such further downgrade will further inhibit
our ability to obtain sources of capital and, as discussed below, would likely
lead to demands from existing creditors for additional collateral. Moreover, we
believe that our relationships with existing clients will further suffer during
any prolonged period of uncertainty. With further ratings downgrades and
uncertain prospects of achieving an alternative restructuring, we would likely
lose many of our key employees and thereby we would risk losing our ability to
manage our existing book of business effectively and to retain value for
shareholders.

Because of the necessity of consummating the Transaction and the
uncertainties regarding the ultimate consummation of the Transaction, there is
substantial doubt about our ability to continue as a going concern. Our
consolidated financial statements have been prepared in accordance with GAAP on
a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. Accordingly, our
consolidated financial statements do not include any adjustments relating to the
recoverability of assets and classification of liabilities that might be
necessary should we be unable to continue as a going concern.

Consolidation - The consolidated financial statements include the
assets, liabilities and results of operations of Scottish Re Group Limited and
its subsidiaries and all variable interest entities for which we are the primary
beneficiary as defined in Financial Accounting Standards Board ("FASB")
Interpretation No. 46R "Consolidation of Variable Interest Entities-An
Interpretation of ARB No. 51 (FIN 46R")". All significant inter-company
transactions and balances have been eliminated on consolidation.

Estimates, Risks and Uncertainties - The preparation of consolidated
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ
materially from those estimates and assumptions used by management. Our most
significant assumptions are for assumed reinsurance liabilities, premiums
receivable, deferred acquisition costs, valuation of investment impairments and
estimates of the realizability of gross deferred tax assets. We review and
revise these estimates as appropriate. Any adjustments made to these estimates
are reflected in the period the estimates are revised

All tabular amounts are reported in thousands of United States dollars,
except share and per share data, or as otherwise noted.

Fixed maturity investments

Fixed maturity investments are classified as available for sale and
accordingly, we carry these investments at fair values on our consolidated
balance sheets. The fair value of fixed maturity investments is calculated using
quoted market prices provided by independent pricing services. The cost of fixed
maturity investments is adjusted for prepayments and the amortization of
premiums and discounts. The unrealized appreciation (depreciation) is the
difference between fair value and amortized cost and is recorded directly to
equity with no impact to net income. The change in unrealized appreciation
(depreciation) is included in accumulated other comprehensive income (loss) in
shareholders' equity after deductions for adjustments for deferred acquisition
costs and deferred income taxes. Investment transactions are recorded on the
trade date with balances pending settlement reflected in the balance sheet as a
component of cash and cash equivalents. Interest income is recorded on the
accrual basis.

108

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

2. Summary of significant accounting policies (continued)

Realized gains (losses) on securities are determined on a specific
identification method. Realized gains and losses are stated net of associated
amortization of deferred acquisition costs. Management reviews securities with
material unrealized losses and tests for other than temporary impairments on a
quarterly basis. Factors involved in the determination of potential impairment
include fair value as compared to cost, length of time the value has been below
cost, credit worthiness of the issuer, forecasted financial performance of the
issuer, position of the security in the issuer's capital structure, the presence
and estimated value of collateral or other credit enhancement, length of time to
maturity, interest rates and our intent and ability to hold the security until
the market value recovers. When a decline is considered to be
"other-than-temporary" the cost basis of the impaired asset is adjusted to its
fair value and a corresponding realized investment loss is recognized in the
consolidated statements of income (loss). The actual value at which such
financial instruments could actually be sold or settled with a willing buyer may
differ from such estimated fair values.

Our review of fixed maturities for impairment also includes an analysis
of the total gross unrealized losses. We review all investments with fair values
less than amortized cost, and pay particular attention to those that have traded
continuously at less than 80% of amortized cost for at least six months or 90%
of amortized cost for at least twelve months, any other investments with
material differences between amortized cost and fair value and investments with
unrealized losses that we have decided to sell or probable that we would sell
within the next three months. Investments meeting those criteria are analyzed in
detail for "other-than-temporary impairment".

Cash and cash equivalents

Cash and cash equivalents include cash and fixed deposits with an
original maturity, when purchased, of three months or less. Cash and cash
equivalents are recorded at face value, which approximates fair value.

Funds withheld at interest

Funds withheld at interest are funds held by ceding companies under
modified coinsurance and coinsurance funds withheld agreements whereby we
receive the interest income earned on the funds. The balance of funds held
represents the statutory reserves of the ceding companies and are legally owned
by the ceding company. Interest accrues to these assets at rates defined by the
treaty terms. These agreements are considered to include embedded derivatives as
further discussed in this Note.

Retrocession arrangements and amounts recoverable from reinsurers

In the ordinary course of business, our reinsurance subsidiaries cede
reinsurance to other reinsurance companies. These agreements provide greater
diversification of business and minimize the net loss potential arising from
large risks. Ceded reinsurance contracts do not relieve us of our obligation to
the direct writing companies. The cost of reinsurance related to long duration
contracts is recognized over the terms of the reinsured policies on a basis
consistent with the reporting of those policies.

In the normal course of business, we seek to limit our exposure to
losses on any single insured and to recover a portion of benefits paid by ceding
reinsurance to other insurance enterprises or reinsurers under excess coverage
and coinsurance (quota share) contracts. In order to diversify our mortality
exposure, we have historically sought to limit our consolidated enterprise wide
retained exposure under life policies reinsured in our Life Reinsurance North
America operations to no more than $500,000 per life. Effective January 1, 2005,
the limit for our non-ING business was increased to $1.0 million per life. This
limit was increased to $2.0 million per life on January 1, 2007. Our
retention on business acquired in the ING individual life reinsurance
acquisition is $2.0 million per life. Our retention in our Life Reinsurance
International Segment is $1.0 million per life on UK, Irish, and US residents
and $0.5 million in respect of all other territories in which we write business
effective January 1, 2005. Prior to this, the retention in Life Reinsurance
International Segment was $250,000. These figures are based on a local currency
equivalent amount at the time of policy issue. In addition, we maintain
catastrophe cover on our entire retained life reinsurance

109

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

2. Summary of significant accounting policies (continued)

business, which, effective January 1, 2007, provides reinsurance for losses of
$50.0 million in excess of $50.0 million. This catastrophe cover includes
protection for terrorism, nuclear, biological and chemical risks.

Amounts recoverable from reinsurers includes the balances due from
reinsurance companies for claims and policy benefits that will be recovered from
reinsurers, based on contracts in force, and are presented net of a reserve for
uncollectible reinsurance that has been determined based upon a review of the
financial condition of the reinsurers and other factors. The method for
determining the reinsurance recoverable involves actuarial estimates as well as
a determination of our ability to cede claims and policy benefits under our
existing reinsurance contracts. The reserve for uncollectible reinsurance is
based on an estimate of the amount of the reinsurance recoverable balance that
we will ultimately be unable to recover due to reinsurer insolvency, a
contractual dispute or any other reason.

The methods used to determine the reinsurance recoverable balance, and
related bad debt provision, are continually reviewed and updated and any
resulting adjustments are reflected in earnings in the period identified. At
December 31, 2006 and 2005, we had a reserve for uncollectible reinsurance of
$12.1 million and $6.0 million, respectively.

Deferred acquisition costs

Costs of acquiring new business, which vary with and are primarily
related to the production of new business, have been deferred to the extent that
such costs are deemed recoverable from future premiums or gross profits. Such
costs include commissions and allowances as well as certain costs of policy
issuance and underwriting. We perform periodic tests to determine that the cost
of business acquired remains recoverable, and if financial performance
significantly deteriorates to the point where a premium deficiency exists, the
cumulative amortization is re-estimated and adjusted by a cumulative charge or
credit to current operations.

Deferred acquisition costs related to traditional life insurance
contracts, substantially all of which relate to long-duration contracts, are
amortized over the premium-paying period of the related policies in proportion
to the ratio of individual period premium revenues to total anticipated premium
revenues over the life of the policy. Such anticipated premium revenues are
estimated using the same assumptions used for computing liabilities for future
policy benefits.

Deferred acquisition costs related to interest-sensitive life and
investment-type policies are amortized over the lives of the policies, in
relation to the present value of estimated gross profits from mortality and
investment income, less interest credited and expense margins.

The development of and amortization of deferred acquisition costs for
our products requires management to make estimates and assumptions. Actual
results could differ materially from those estimates. Management monitors actual
experience, and should circumstances warrant, will revise its assumptions and
the related estimates.

Present value of in-force business

The present value of in-force business is established upon the
acquisition of a book of business and is amortized over the expected life of the
business as determined at acquisition. The amortization each year is a function
of the ratio of annual gross profits or revenues to total anticipated gross
profits or revenues expected over the life of the business, discounted at the
assumed net credit rate (4.9% for 2006). The carrying value is reviewed at least
annually for indicators of impairment in value.

110

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

2. Summary of significant accounting policies (continued)

Goodwill

We account for goodwill pursuant to the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets". Goodwill is established upon the acquisition of a subsidiary and is
calculated as the difference between the price paid and the value of individual
assets and liabilities on the date of acquisition. Goodwill is not amortized
into results of operations, but instead is reviewed for impairment annually.
Goodwill was tested for impairment in 2004 and 2005 and no impairment resulted.
During 2006, we determined that the implied fair value of our goodwill was less
than its carrying value and accordingly, the goodwill balance was written off.

Other assets

Other assets primarily include unamortized debt issuance costs,
collateral finance facility costs, funds on deposit as security for certain
collateral finance facilities, and fixed assets, including capitalized software.
Capitalized software is stated at cost, less accumulated amortization. Purchased
software costs, as well as internal and external costs incurred to develop
internal-use computer software during the application development stage, are
capitalized. As of December 31, 2006 and 2005, we had unamortized computer
software costs of approximately $12.7 million and $9.3 million, respectively.
During 2006, 2005 and 2004, we amortized computer software costs of $5.2
million, $3.5 million and $1.7 million, respectively.

As of December 31, 2006 and 2005, we had unamortized collateral finance
facilities costs of approximately $69.3 million and $41.8 million, respectively.
During 2006 and 2005, we amortized collateral finance facilities costs of $5.4
million and $1.7 million, respectively. There was no amortization of collateral
finance facilities costs in 2004.

As of December 31, 2006 and 2005, we had unamortized debt issuance
costs of approximately $1.3 million and $4.5 million, respectively. During 2006,
2005 and 2004, we amortized debt issuance costs of $2.5 million, $2.5 million
and $1.6 million, respectively.

Segregated assets and liabilities

Separate account investments are in respect of wealth management
clients and include the net asset values of the underlying funds plus separate
cash and cash equivalent balances less separate account fees payable to us. The
funds in the separate accounts are not part of our general funds and are not
available to meet our general obligations. The assets and liabilities of these
transactions move in tandem. The client bears the investment risk on the account
and we receive an asset-based fee for providing this service that is recorded as
fee income.

Separate account liabilities include amounts set aside to pay the
deferred variable annuities and the cash values associated with life insurance
policies. These balances consist of the initial premiums paid after
consideration of the net investment gains/losses attributable to each separate
account, less fees and withdrawals.

Foreign Currency Translation

The translation of the foreign currency amounts into United States
dollars is performed for balance sheet accounts using current exchange rates in
effect at the balance sheet date and for revenue and expense accounts using a
weighted average exchange rate during each year. Gains or losses, net of
applicable deferred income taxes, resulting from such translation are included
in accumulated currency translation adjustments, in accumulated other
comprehensive income (loss) on the consolidated balance sheets. Our material
functional currencies are the British pound and the Euro for our United Kingdom
operations.

111

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

2. Summary of significant accounting policies (continued)

Revenue recognition.

(i) Reinsurance premiums from traditional life policies and
annuity policies with life contingencies are generally
recognized as revenue when due from policyholders and are
reported net of amounts retroceded. Traditional life policies
include those contracts with fixed and guaranteed premiums and
benefits, and consist principally of whole life and term
insurance policies. For our traditional life reinsurance
business, we estimate assumed premiums using actuarial model
projections at the treaty level. Consistent with reinsurance
industry practices, these models use the most recent policy
level data available from our ceding companies and our
estimate of new business for treaties still open to new
business. The estimated premiums from the models are then
compared to historical trends in reported assumed premiums by
treaty and other information and adjusted if appropriate.
Actual results could differ from these estimates. The
adjustments in a given period have generally not been
significant to the overall premiums or results of operations.

Benefits and expenses, net of amounts retroceded, are matched with net
earned premiums so as to result in the recognition of profits over the life of
the contracts. This is achieved by means of the provision for liabilities for
future policy benefits and deferral and subsequent amortization of deferred
acquisition costs.

From time to time, we acquire blocks of in-force business and account
for these transactions as purchases. Results of operations only include the
revenues and expenses from the respective dates of acquisition of these blocks
of in-force business. The initial transfer of assets and liabilities is recorded
on the balance sheet. Reinsurance assumed for interest sensitive and investment
type products does not generate premium but generates investment income on the
assets we receive from ceding companies, policy charges for the cost of
insurance, policy administration, and surrenders that have been assessed against
policy account balances during the period.

(ii) Fee income is recorded on an accrual basis.

(iii) Net investment income includes interest and dividend income
together with amortization of market premium and discounts and
is net of investment management and custody fees. For mortgage
backed securities, and any other holdings for which there is a
prepayment risk, prepayment assumptions are evaluated and
revised as necessary. Any adjustments required due to the
resultant change in effective yields and maturities are
recognized prospectively.

Reserves for future policy benefits

112

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

2. Summary of significant accounting policies (continued)

establishing additional net reserves. Because of the many assumptions and
estimates used in establishing reserves and the long-term nature of the
reinsurance contracts, the reserving process, while based on actuarial science,
is inherently uncertain.

Claims payable for incurred but not reported losses are determined
using case basis estimates and lag studies of past experience. The time lag from
the date of the claim or death to when the ceding company reports the claim to
us can vary significantly by ceding company, but generally averages around 2
months. We update our analysis of incurred but not reported losses, including
lag studies, on a quarterly basis and adjust our claim liabilities accordingly.
The adjustments in a given period have generally not been significant relative
to the overall reserves for future policy benefits or our results of operations.

SFAS No. 97 "Accounting and Reporting by Insurance Enterprises for
Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale
of Investments" ("SFAS No. 97"), applies to investment contracts, limited
premium contracts, and universal life-type contracts. For investment and
universal life-type contracts, future benefit liabilities are held using the
retrospective deposit method, increased for amounts representing unearned
revenue or refundable policy charges. Acquisition costs are deferred and
recognized as expense as a constant percentage of gross margins using
assumptions as to mortality, persistency, and expense established at policy
issue without provision for adverse deviation and are revised periodically to
reflect emerging actual experience and any material changes in expected future
experience. Liabilities and the deferral of acquisition costs are established
for limited premium policies under the same practices as used for traditional
life policies with the exception that any gross premium in excess of the net
premium is deferred and recognized into income as a constant percentage of
insurance in force. Should the liabilities for future policy benefits plus the
present value of expected future gross premiums for a product be insufficient to
provide for expected future benefits and expenses for that product, deferred
acquisition costs will be written off and thereafter, if required, a premium
deficiency reserve will be established by a charge to income. Changes in the
assumptions for mortality, persistency, maintenance expense and interest could
result in material changes to the financial statements.

113

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

2. Summary of significant accounting policies (continued)

The development of policy reserves for our products requires management
to make estimates and assumptions regarding mortality, lapse, expense and
investment experience. Interest rate assumptions for individual life reinsurance
reserves range from 2.5% to 7.0%. The interest assumptions for deferred
annuities ranged from 2.7% to 6.1% during 2006.

Interest sensitive contract liabilities

The liabilities for interest sensitive contract liabilities equal the
accumulated account values of the policies or contracts as of the valuation date
and include funds received plus interest credited less funds withdrawn and
interest paid. Benefit liabilities for fixed annuities during the accumulation
period equal their account values; after annuitization, they equal the
discounted present value of expected future payments.

Other liabilities

Other liabilities primarily relate to collateral facility accrued
interest and the fair value of embedded derivatives.

Income taxes

Income taxes are recorded in accordance with SFAS No. 109, "Accounting
for Income Taxes" ("SFAS No. 109"). In accordance with SFAS No. 109, for all
years presented we use the asset and liability method to record deferred income
taxes. Accordingly, deferred income tax assets and liabilities are recognized
that reflect the net tax effect of the temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes, using enacted tax rates. Such
temporary differences are primarily due to tax basis of reserves, deferred
acquisition costs, and net operating loss carry forwards. A valuation allowance
is applied to deferred tax assets if it is more likely than not that all, or
some portion, of the benefits related to the deferred tax assets will not be
realized.

Stock-based compensation

Prior to January 1, 2006, we accounted for stock-based compensation in
accordance with SFAS No. 123 ("SFAS No. 123"), "Accounting for Stock-Based
Compensation", as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". Under the fair value recognition
provisions of SFAS No. 123, stock-based compensation expense for all stock-based
awards issued from January 1, 2003 was measured at the grant date based on the
value of the award and was recognized as expense over the service period for
awards that were expected to vest.

In December 2004, the FASB revised SFAS No. 123 by issuing "Share-Based
Payment" ("SFAS No. 123(R)"). SFAS No. 123(R) requires us to recognize, in the
determination of income, the grant date fair value of all stock options and
other equity based compensation issued to employees.

Effective January 1, 2006, we adopted SFAS No.123(R) using the
modified-prospective transition method. Under the modified-prospective
transition method, compensation cost recognized includes compensation costs for
all share-based payments granted prior to, but not yet vested, as of January 1,
2006, based on the grant date fair value estimated in accordance with the
original provisions of SFAS No. 123, and compensation costs for all share-based
payments granted subsequent to January 1, 2006, based on the grant date fair
value estimated in accordance with the provisions of SFAS No. 123(R). Results
for prior periods have not been restated.

114

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

2. Summary of significant accounting policies (continued)

Earnings per share

In accordance with SFAS No. 128, "Earnings per Share", basic earnings
per share is calculated based on the weighted average ordinary shares
outstanding and excludes any dilutive effects of options, restricted stock and
warrants. Diluted earnings per share assume the exercise of all dilutive stock
options, restricted stock, warrants, convertible debt instruments and the Hybrid
Capital Units ("HyCUs") using the treasury stock method. Basic and diluted
earnings per share are calculated by dividing net income available to ordinary
shareholders by the applicable weighted average number of shares outstanding
during the year.

Fair value of financial instruments

The fair value of assets and liabilities included on the consolidated
balance sheets, which qualify as financial instruments under SFAS No. 107,
"Disclosure About Fair Value of Financial Instruments," approximate the carrying
amount presented in the consolidated financial statements.

Derivatives

All derivative instruments are recognized as either assets or
liabilities in the consolidated balance sheets at fair value as required by SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"). The accounting for changes in the fair value of derivatives that have
not been designated as a hedge are included in realized gains and losses in the
consolidated statements of income (loss). The gain or loss on derivatives
designated as a hedge of our interest expense on floating rate securities is
included in interest expense.

Our funds withheld at interest arise on modified coinsurance and fund
withheld coinsurance transactions. Derivatives Implementation Group Issue No B36
"Embedded Derivatives: Bifurcation of a Debt Instrument that Incorporates Both
Interest Rate and Credit Rate Risk Exposures that are Unrelated or Only
Partially Related to the Creditworthiness of the Issuer of that Instrument"
indicates that these transactions contain embedded derivatives. The embedded
derivative feature in our funds withheld treaties is similar to a fixed-rate
total return swap on the assets held by the ceding companies. The swap consists
of two parts. The first is the market value of the underlying asset portfolio
and the second is a hypothetical loan to the ceding company. The hypothetical
loan is based on the expected cash flows of the underlying reinsurance
liability. We have developed models to systematically estimate the value of the
total return swap. The fair value of the embedded derivative is affected by
changes in expected cash flows, credit spreads of the assets and changes in
"risk-free" interest rates. The change in fair value is included in our
calculation of estimated gross profits and, therefore, also affects the
amortization of deferred acquisition costs. In addition to our quota share
indemnity funds withheld contracts, we have entered into various financial
reinsurance treaties that, although considered funds withheld, do not transfer
significant insurance risk and are recorded on a deposit method of accounting.
As a result of the experience refund provisions of these treaties, the value of
the embedded derivative is currently considered immaterial.

The fair value of the embedded derivative of $0.6 million and $24.8
million at December 31, 2006 and 2005, respectively, is included in other
liabilities.

New Accounting Pronouncements

FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes

115

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

2. Summary of significant accounting policies (continued)

109. Tax positions must meet a "more likely than not" recognition threshold at
the effective date to be recognized upon the adoption of FIN 48 and in
subsequent periods.

FASB Statement No. 156, Accounting for Servicing of Financial Assets - an
amendment of FASB Statement No. 140

o Amortization method - amortize servicing assets or servicing
liabilities in proportion to and over the period of net
servicing income or net servicing loss and assess the
servicing assets or liabilities for impairment or increased
obligation based on fair value at each reporting date. This
method is consistent with current subsequent measurement
guidance for servicing rights.

o Fair value measurement method - measure servicing assets or
servicing liabilities at fair value at each reporting date and
report changes in fair value in earnings in the period in
which the change occurs.

SFAS No. 156 is effective as of the beginning of an entity's first
fiscal year that begins after September 15, 2006. We have not completed our
evaluation of the effect of adoption of SFAS No. 156 on our results of
operations and financial position.

FASB Statement No. 157, Fair Value Measurements

In September 2006, the FASB issued Statement No. 157 ("SFAS No. 157"),
"Fair Value Measurements", which defines fair value, establishes a framework for
measuring fair value under GAAP and expands disclosures about fair value
measurements. We are required to adopt SFAS No. 157 on January 1, 2008 and are
evaluating the implications of SFAS No. 157 on our results of operations and
financial position.

116

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

2. Summary of significant accounting policies (continued)

Statement of Position 05-1, Accounting by Insurance Enterprises for
Deferred Acquisition Costs in Connection with Modifications or Exchanges
of Insurance Contracts

3. Business acquisitions

On December 31, 2004, we completed the 100% coinsurance of ING's
individual life reinsurance business. The acquisition was accounted for as a
purchase in accordance with SFAS No. 141, "Business Combinations". Accordingly,
the accompanying consolidated statements of income (loss) do not include any
revenues or expenses related to this transaction prior to the closing date.
During the year ended December 31, 2005, we completed the analysis of purchase
accounting for this acquisition and the final post closing adjustment of $47.9
million was paid to ING during the fourth quarter of 2005. The balance sheet as
of the date of acquisition, as finalized in 2005, was as follows:

December 31,
2004
------------------------
Total investments $ 1,529,190
Reinsurance balances receivable 201,019
Other assets 67,308
------------------------
Total assets $ 1,797,517
========================
Reserves for future policy benefits $ 1,669,090
Other liabilities 128,427
------------------------
Total liabilities $ 1,797,517
========================

The acquired business represents the reinsurance division of ING's U.S.
life insurance operations, which was written through Security Life of Denver
Insurance Company and Security Life of Denver International Limited. The
acquired business mainly consists of traditional mortality risk reinsurance
written on an automatic basis with more than 100 different ceding insurers. Less
than 10% of the acquired business was written on a facultative basis. Most of
the business involves guaranteed level premium term life insurance that is
subject to the statutory reserve requirements of NAIC Actuarial Regulation XXX
as well as universal life insurance that is subject to a similar statutory
reserve requirement known as Regulation AXXX.

The following pro-forma information related to our acquisition of the
ING individual life reinsurance business for the years ended December 31, 2004
illustrates the effects of the acquisition as if it had occurred at the
beginning of the period presented. The pro-forma information is not intended to
be indicative of the consolidated results of operations that would have been
reported if the acquisition had occurred on January 1, 2004 nor does it purport
to be indicative of combined results of operations which may be reported in the
future. In the table below, dollars are in millions, except per share data.

Year Ended
December 31,
2004
---------------------------
(dollars in millions)
Revenue............................. $ 2,115.7
Net income.......................... $ 132.0

Year Ended
December 31,
2004
---------------------------
Earnings per ordinary share - Basic $ 3.08
Earnings per ordinary share - Diluted $ 2.96

117

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

4. Investments

The amortized cost, gross unrealized appreciation and depreciation and
estimated fair values of our fixed maturity investments and preferred stock at
December 31, 2006 and 2005 are as follows:

December 31, 2006
---------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost or Cost Appreciation Depreciation Fair Value
--------------- ------------- --------------- ---------------

U.S. Treasury securities and U.S. government agency
obligations ..................................... $ 69,205 $ 183 $ (1,367) $ 68,021
Corporate securities.................................. 2,842,906 23,436 (48,905) 2,817,437
Municipal bonds....................................... 52,676 345 (827) 52,194
Mortgage and asset backed securities.................. 5,258,677 14,959 (28,831) 5,244,805
--------------- ------------- --------------- ---------------
Total................................................. $ 8,223,464 $ 38,923 $ (79,930) $ 8,182,457
=============== ============= =============== ===============

December 31, 2005
---------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost or Cost Appreciation Depreciation Fair Value
--------------- ------------- --------------- ---------------
U.S. Treasury securities and U.S. government agency
obligations....................................... $ 48,519 $ 244 $ (846) $ 47,917
Corporate securities.................................. 2,205,052 16,548 (30,821) 2,190,779
Municipal bonds....................................... 37,826 211 (398) 37,639
Mortgage and asset backed securities.................. 3,169,362 7,828 (27,126) 3,150,064
--------------- ------------- --------------- ---------------
Total................................................. $ 5,460,759 $ 24,831 $ (59,191) $ 5,426,399
=============== ============= =============== ===============

The contractual maturities of the fixed maturities and preferred stock
are as follows (actual maturities may differ as a result of calls and
prepayments):

December 31, 2006
-----------------------------------------------
Amortized Estimated
Cost or Cost Fair Value
-------------------- ------------------------

Due in one year or less ............................................. $ 98,600 $ 98,281
Due in one year through five years................................... 727,272 721,570
Due in five years through ten years.................................. 1,100,026 1,091,209
Due after ten years.................................................. 1,038,889 1,026,592
-------------------- ------------------------
2,964,787 2,937,652
Mortgage and asset backed securities................................. 5,258,677 5,244,805
-------------------- ------------------------
Total ............................................................... $ 8,223,464 $ 8,182,457
==================== ========================

118

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

4. Investments (continued)

December 31, 2006
----------------------------------------------------------------------------------
Equal to or greater than
Less than 12 months 12 months Total
-------------------------- -------------------------- --------------------------
Estimated Unrealized Estimated Unrealized Estimated Unrealized
fair value loss fair value loss fair value loss
------------ ------------ ----------- ------------ ----------- ------------

Investment Grade Securities:
CMO......................... $ 369,457 $ (2,365) $ 252,252 $ (6,327) $ 621,709 $ (8,692)
Corporates.................. 750,806 (15,690) 864,053 (29,078) 1,614,859 (44,768)
Governments................. 35,805 (615) 21,072 (752) 56,877 (1,367)
MBS......................... 12,116 (136) 138,992 (4,674) 151,108 (4,810)
Municipal................... 19,865 (187) 18,013 (640) 37,878 (827)
Other structured securities. 415,596 (2,511) 613,974 (11,735) 1,029,570 (14,246)
Preferred stocks............ 12,246 (295) 95,646 (3,181) 107,892 (3,476)
------------ ------------ ----------- ------------ ----------- ------------
Total investment grade
securities................ 1,615,891 (21,799) 2,004,002 (56,387) 3,619,893 (78,186)
------------ ------------ ----------- ------------ ----------- ------------

Below investment grade
securities:
Corporates.................. 3,416 (58) 14,975 (570) 18,391 (628)
Other structured securities. 1,405 (421) 1,256 (662) 2,661 (1,083)
Preferred stock............. - - 664 (33) 664 (33)
------------ ------------ ----------- ------------ ----------- ------------
Total below investment
grade securities.......... 4,821 (479) 16,895 (1,265) 21,716 (1,744)
------------ ------------ ----------- ------------ ----------- ------------
Total ...................... $ 1,620,712 $ (22,278) $ 2,020,897 $ (57,652) $ 3,641,609 $ (79,930)
============ ============ =========== ============ =========== ============

December 31, 2005
----------------------------------------------------------------------------------
Equal to or greater than
Less than 12 months 12 months Total
-------------------------- -------------------------- --------------------------
Estimated Unrealized Estimated Unrealized Estimated Unrealized
fair value loss fair value loss fair value loss
------------ ------------ ----------- ------------ ----------- ------------
Investment Grade Securities:
CMO......................... $ 467,314 $ (4,865) $ 85,305 $ (1,688) $ 552,619 $ (6,553)
Corporates.................. 1,132,840 (23,950) 94,218 (2,545) 1,227,058 (26,495)
Governments................. 36,297 (774) 1,999 (71) 38,296 (845)
MBS......................... 143,956 (3,383) 42,682 (1,611) 186,638 (4,994)
Municipal................... 17,738 (330) 1,621 (68) 19,359 (398)
Other structured securities. 1,028,657 (11,882) 135,341 (3,113) 1,163,998 (14,995)
Preferred stocks............ 98,263 (2,287) 24,106 (1,295) 122,369 (3,582)
------------ ------------ ----------- ------------ ----------- ------------
Total investment grade
securities................ 2,925,065 (47,471) 385,272 (10,391) 3,310,337 (57,862)
------------ ------------ ----------- ------------ ----------- ------------

Below investment grade
securities:
Corporates.................. 10,676 (655) 1,841 (59) 12,517 (714)
Other structured securities. 3,552 (555) 7,260 (29) 10,812 (584)
Preferred stock............. 392 (12) 340 (19) 732 (31)
------------ ------------ ----------- ------------ ----------- ------------
Total below investment
grade securities.......... 14,620 (1,222) 9,441 (107) 24,061 (1,329)
------------ ------------ ----------- ------------ ----------- ------------
Total....................... $ 2,939,685 $ (48,693) $ 394,713 $ (10,498) $ 3,334,398 $ (59,191)
============ ============ =========== ============ =========== ============

119

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

4. Investments (continued)

We believe that based on an analysis of each security whose price has
been below market for greater than twelve months, that the financial strength,
liquidity, leverage, future outlook, and our ability and intent to hold the
security until recovery support the view that the security was not
other-than-temporarily impaired as of December 31, 2006. The unrealized losses
on fixed maturity securities are primarily a result of rising interest rates,
changes in credit spreads and the long-dated maturities of the securities.
Additionally, as at December 31, 2006, approximately 98% of the gross unrealized
losses are associated with investment grade securities.

The analysis of realized gains (losses) and the change in net
unrealized appreciation (depreciation) on investments for the years ended
December 31, 2006, 2005 and 2004 are as follows:

Year Ended December Year Ended December Year Ended December
31, 2006 31, 2005 31, 2004
-------------------- ------------------- -------------------

Gross realized gains (losses)
Fixed maturities:.............................
Gross realized gains........................ $ 7,828 $ 8,867 $ 10,169
Gross realized losses....................... (21,796) (6,561) (3,140)
Other than temporary impairments............ (4,125) (2,437) (9,870)
-------------------- ------------------- -------------------
(18,093) (131) (2,841)

Preferred stock:..............................
Gross realized gains........................ 35 23 82
Gross realized losses....................... (1,450) (238) (3,151)
-------------------- ------------------- -------------------
(1,415) (215) (3,069)

Other investments........................... 882 -- (636)
Foreign currency gains...................... 98 402 1,690
Change in fair value interest rate swaps.... 4,388 2,228 (2,232)
Change in fair value on derivatives......... (13,265) 1,454 (1,216)
-------------------- ------------------- -------------------
Net realized gains (losses)............... (27,405) 3,738 (8,304)
-------------------- ------------------- -------------------

Change in net unrealized appreciation
(depreciation) on investments...............
Fixed maturities............................ (5,914) (60,426) 8,623
Preferred stock............................. 679 (4,041) (414)
Other investments........................... (607) 888 --
Change in deferred acquisition costs........ 3,107 13,127 (8,653)
Change in deferred income taxes............. 990 18,912 (2,743)
-------------------- ------------------- -------------------
Change in net unrealized appreciation
(depreciation) on investments............... (1,745) (31,540) (3,187)
-------------------- ------------------- -------------------
Total net realized gains (losses) and change
in net unrealized appreciation
(depreciation) on investments............... $ (29,150) $ (27,802) $ (11,491)
==================== =================== ===================

The investment portfolio is managed following prudent standards of
diversification. Specific provisions limit the allowable holdings of a single
issuer and issuers. At December 31, 2006, 2005 and 2004, we did not have a
material concentration of investments in fixed income securities in a single
issuer or industry.

Net investment income for the years ended December 31, 2006, 2005 and
2004 was derived from the following sources:

120

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

4. Investments (continued)

Year Ended December Year Ended December Year Ended December
31, 2006 31, 2005 31, 2004
-------------------- ------------------- ----------------------

Fixed maturities available for sale........... $ 389,786 $ 225,216 $ 113,763
Preferred stock............................... 8,395 8,107 6,245
Funds withheld at interest.................... 163,618 110,523 96,637
Other investments............................. 69,358 21,259 4,176
Investment expenses........................... (14,533) (9,268) (3,683)
-------------------- ------------------- ----------------------
Net investment income......................... $ 616,624 $ 355,837 $ 217,138
==================== =================== ======================

We are required to maintain assets on deposit with various regulatory
authorities to support our insurance and reinsurance operations. These
requirements are generally promulgated in the statutory regulations of the
individual jurisdictions. The assets on deposit are available to settle
insurance and reinsurance liabilities. We also utilize trust funds in certain
transactions where the trust funds are set up for the benefit of the ceding
companies and generally take the place of Letter of Credit ("LOC") requirements.
At December 31, 2006 and 2005, restricted assets include fixed maturities of
$7.7 billion and $4.9 billion, respectively, and cash and cash equivalents of
$445.5 million and $1.0 billion, respectively. The components of the fair value
of the restricted assets at December 31, 2006 and 2005 are as follows:

December 31, 2006 December 31, 2005
------------------ ------------------

Deposits with U.S. regulatory authorities........ $ 9,843 $ 7,615
Trust funds...................................... 8,129,018 5,941,669
------------------ ------------------
$ 8,138,861 $ 5,949,284
================== ==================

5. Funds withheld at interest

For agreements written on a modified coinsurance basis and certain
agreements written on a coinsurance funds withheld basis, asset values recorded
in the balance sheet are equal to the net statutory reserve fund balances
withheld and legally agreed and managed by the ceding company. The amounts in
the funding accounts are adjusted quarterly to equal the net statutory reserve
balances.

At December 31, 2006 and 2005, funds withheld at interest were in
respect of seven contracts with four ceding companies. At December 31, 2006, we
had one contract with Lincoln National Life Insurance Company that accounted for
$0.9 billion or 47% of the funds withheld balances. Additionally, we had one
contract with Security Life of Denver International Limited that accounted for
$0.3 billion or 18% of the funds withheld balances and one contract with
Fidelity & Guaranty Life that accounted for $0.6 billion or 33% of the funds
withheld balances. The remaining contracts were with Illinois Mutual Insurance
Company and American Founders Life Insurance Company. Lincoln National Life
Insurance Company has financial strength ratings of "A+" from AM. Best, "AA"
from Standard & Poor's, "Aa3" from Moody's and "AA" from Fitch. In the event of
insolvency of the ceding companies on these arrangements, we would need to exert
a claim on the assets supporting the contract liabilities. However, the risk of
loss is mitigated by our ability to offset amounts owed to the ceding company
with the amounts owed to us by the ceding company. Reserves for future policy
benefits and interest sensitive contract liabilities relating to these contracts
amounted to $1.7 billion and $2.4 billion at December 31, 2006 and 2005,
respectively.

121

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

5. Funds withheld at interest (continued)

According to data provided by our ceding companies, the amortized cost,
gross unrealized appreciation and depreciation and estimated fair values of
invested assets, backing our funds withheld at interest at December 31, 2006 and
2005 are as follows:

December 31, 2006
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost or Cost Appreciation Depreciation Fair Value
------------- -------------- --------------- --------------

U.S. Treasury securities and U.S. government
agency obligations .............................. $ 59,049 $ 48 $ (325) $ 58,772
Corporate securities.................................. 1,307,490 29,130 (12,879) 1,323,741
Municipal bonds....................................... 30,706 68 (837) 29,937
Mortgage and asset backed securities.................. 464,319 6,094 (6,968) 463,445
------------- -------------- --------------- --------------
1,861,564 35,340 (21,009) 1,875,895
Commercial mortgage loans............................. 95,397 3,672 (223) 98,846
------------- -------------- --------------- --------------
Total................................................. $ 1,956,961 $ 39,012 $ (21,232) $ 1,974,741
------------- -------------- --------------- --------------

December 31, 2005
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost or Cost Appreciation Depreciation Fair Value
------------- -------------- --------------- --------------
U.S. Treasury securities and U.S. government
agency obligations .............................. $ 62,564 $ 64 $ (375) $ 62,253
Corporate securities.................................. 1,599,376 48,805 (13,749) 1,634,432
Municipal bonds....................................... 33,333 206 (581) 32,958
Mortgage and asset backed securities.................. 597,437 8,213 (10,540) 595,110
------------- -------------- --------------- --------------
2,292,710 57,288 (25,245) 2,324,753
Commercial mortgage loans............................. 106,954 6,047 (444) 112,557
------------- -------------- --------------- --------------
Total................................................. $ 2,399,664 $ 63,335 $ (25,689) $ 2,437,310
------------- -------------- --------------- --------------

According to data provided by our ceding companies, the contractual
maturities (excluding cash) of the assets backing our funds withheld fixed
maturities are as follows (actual maturities may differ as a result of calls and
prepayments):

December 31, 2006
--------------------------------
Amortized Estimated
Cost Fair Value
---------------- ---------------

Due in one year or less............................... $ 118,040 $ 118,041
Due in one year through five years.................... 467,375 477,200
Due in five years through ten years................... 581,076 584,048
Due after ten years................................... 230,754 233,162
---------------- ---------------
1,397,245 1,412,451
Mortgage and asset backed securities.................. 464,319 463,444
Commercial mortgage loans............................. 95,397 98,846
---------------- ---------------
Total................................................. $ 1,956,961 $ 1,974,741
================ ==============

122

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

6. Present value of in-force business

A reconciliation of the present value of in-force business is as
follows:

December 31, 2006 December 31, 2005 December 31, 2004
------------------- -------------------- ---------------------

Balance at beginning of year.................. $ 54,743 $ 62,164 $ 44,985
Acquisition of Scottish Re Life Corporation... - - 24,766
Amortization.................................. (4,734) (7,373) (7,689)
Other......................................... (1,230) (48) 102
------------------- -------------------- ---------------------
Balance at end of year........................ $ 48,779 $ 54,743 $ 62,164
=================== ==================== =====================

We acquired a block of wealth management business in 1999. During the
fourth quarter of 2006, the present value of in-force business was written down
by $1.2 million on this block of business based on our assessment of the present
value of future margins.

Future estimated amortization of the present value of in-force business
is as follows:

Year ending December 31
2007.......................................... $ 5,189
2008.......................................... 5,451
2009.......................................... 5,800
2010.......................................... 3,695
2011.......................................... 3,348
Thereafter.................................... $ 25,296
--------
$ 48,779
========

7. Collateral finance facilities

HSBC I

123

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

7. Collateral finance facilities (continued)

capital position. Any breach by us of our obligation to post collateral could
result in an acceleration of our obligations under these collateral finance
facilities, which would require us to seek bankruptcy protection under
applicable law if we were unable promptly to access alternative sources of
capital. (See Note 2).

Stingray

Orkney Re, Inc.

124

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

7. Collateral finance facilities (continued)

consolidated statements of income (loss) show the investment return of Orkney I
as investment income and the cost of the facility is reflected in collateral
finance facilities expense.

Orkney Re II plc

The debt issued to Scottish Annuity & Life Insurance Company (Cayman)
Ltd. consisted of $30.0 million of Series C Floating Rate Notes due December 21,
2036. These Notes accrue interest only. Payment of interest does not occur until
the Orkney II Notes are fully repaid. Scottish Re Group Limited owns $0.5
million Series D Convertible Notes due December 21, 2036 and 76,190,000
Preference Shares of $1.00 each in capital.

HSBC II

125

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

7. Collateral finance facilities (continued)

facilities expense. The creditors of the trust have no recourse against our
general assets. As at December 31, 2006, $529.0 million of this facility was
being utilized

See HSBC I above for a discussion of the additional collateral paid to
HSBC under this facility.

Ballantyne Re plc

o $250.0 million of Class A-1 Floating Rate Notes,

o $500.0 million of Class A-2 Floating Rate Guaranteed Notes
Series A,

o $500.0 million of Class A-2 Floating Rate Guaranteed Notes
Series B,

o $100.0 million of Class A-3 Floating Rate Guaranteed Notes
Series A,

o $100.0 million of Class A-3 Floating Rate Guaranteed Notes
Series B,

o $100.0 million of Class A-3 Floating Rate Guaranteed Notes
Series C,

o $100.0 million of Class A-3 Floating Rate Guaranteed Notes
Series D,

o $10.0 million of Class B-1 7.51244% Subordinated Notes,

o $40.0 million of Class B-2 Subordinated Floating Rate Notes,
and

o $42.0 million of Class C-1 Subordinated Variable Interest Rate
Notes.

Interest on the principal amount of the Ballantyne Notes is payable in
intervals ranging from every 28 days to monthly to annually, depending on the
note, initially at a rate equivalent to one-month LIBOR plus 0.61% for the Class
A-1 Floating Rate Notes (and after May 2, 2022, one-month LIBOR plus 1.22%),
one-month LIBOR plus 0.31% for the Class A-2 Floating Rate Guaranteed Notes
Series A (and after May 2, 2027, one-month LIBOR plus 0.62%), one-month LIBOR
plus 0.36% for the Class A-2 Floating Rate Guaranteed Notes Series B (and after
May 2, 2027, one-month LIBOR plus 0.72%), 4.99%, 4.99%, 5.00% and 5.01% for
Series A, Series B, Series C, and Series D of the Class A-3 Notes, respectively
(with the rate on the Class A-3 Notes to reset every 28 days), 7.51% for the
Class B-1 Subordinated Notes, one-month LIBOR plus 2.00% for the Class B-2
Subordinated Floating Rate Notes,

126

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

7. Collateral finance facilities (continued)

and a variable rate based on performance of the underlying block of business for
the Class C-1 Subordinated Variable Interest Rate Notes and the Class C-2
Subordinated Variable Interest Rate Notes.

Reinsurance Facility

8. 7.00% Convertible Junior Subordinated Notes

In order to provide additional capital to support the in-force
individual life reinsurance business acquired from ING, we signed a Securities
Purchase Agreement on October 17, 2004 with the Cypress Merchant B Partners II
(Cayman) L.P., Cypress Merchant Banking II-A C.V., 55th Street Partners II
(Cayman) L.P. and Cypress Side-by-Side (Cayman) L.P. (collectively, the "Cypress
Entities"). Pursuant to the Securities Purchase Agreement, we issued to the
Cypress Entities on December 31, 2004, $41.3 million aggregate principal amount
of 7.00% Convertible Junior Subordinated Notes with a maturity date of December
31, 2034 (the "7.00% Convertible Junior Subordinated Notes").

On April 7, 2005, our shareholders approved the conversion of the 7.00%
Convertible Junior Subordinated Notes and accrued interest thereon resulting in
the issuance of 2,170,896 Class C warrants. Upon receipt of regulatory approval
on May 4, 2005, the Class C Warrants were converted into ordinary shares. See
Note 11 for additional details.

127

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

9. Debt obligations

Long-term debt consists of:
December 31, December 31,
2006 2005
----------------- ---------------
4.5% senior convertible notes due 2022..... $ - $ 115,000
Capital securities due 2032................ 17,500 17,500
Preferred trust securities due 2033........ 20,000 20,000
Trust preferred securities due 2033........ 10,000 10,000
Trust preferred securities due 2034........ 32,000 32,000
Trust preferred securities due 2034........ 50,000 50,000
----------------- ---------------
$ 129,500 $ 244,500
================= ===============
4.5% Senior Convertible Notes

On November 22, 2002 and November 27, 2002, we issued $115.0 million
(which included an over-allotment option of $15.0 million) of 4.5% Senior
Convertible Notes, which are due December 1, 2022.

The notes were redeemable at our option or at a holder's option in
whole or in part beginning on December 6, 2006, at a redemption price equal to
100% of the principal amount of the notes plus accrued and unpaid interest.

On December 6, 2006, we repurchased nearly all of the $115.0 million
4.5% Senior Convertible Notes issued by Scottish Re, which note holders had the
right to put to us. The remaining Senior Convertible Notes were called and fully
repaid in January 2007.

Capital securities due 2032

On December 4, 2002, Scottish Holdings Statutory Trust I, a Connecticut
statutory business trust ("Capital Trust") issued and sold in a private offering
an aggregate of $17.5 million Floating Rate Capital Securities (the "Capital
Securities"). All of the common shares of the Capital Trust are owned by
Scottish Holdings, Inc., our wholly owned subsidiary.

The Capital Securities mature on December 4, 2032. They are redeemable
in whole or in part at any time after December 4, 2007. Interest is payable
quarterly at a rate equivalent to 3 month LIBOR plus 4%. At December 31, 2006
and December 31, 2005, the interest rates were 9.36% and 8.54%, respectively.
Prior to December 4, 2007, interest cannot exceed 12.5%. The Capital Trust may
defer payment of the interest for up to 20 consecutive quarterly periods, but no
later than December 4, 2032. Any deferred payments would accrue interest
quarterly on a compounded basis if Scottish Holdings, Inc. defers interest on
the Debentures due December 4, 2032 (as defined below).

The sole assets of the Capital Trust consist of $18.0 million principal
amount of Floating Rate Debentures (the "Debentures") issued by Scottish
Holdings, Inc. The Debentures mature on December 4, 2032 and interest is payable
quarterly at a rate equivalent to 3 month LIBOR plus 4%. At December 31, 2006
and December 31, 2005, the interest rates were 9.36% and 8.54%, respectively.
Prior to December 4, 2007, interest cannot exceed 12.5%. Scottish Holdings, Inc.
may defer payment of the interest for up to 20 consecutive quarterly periods,
but no later than December 4, 2032. Any deferred payments would accrue interest
quarterly on a compounded basis. Scottish Holdings, Inc. may redeem the
Debentures at any time after December 4, 2007 and in the event of certain
changes in tax or investment company law.

Scottish Annuity & Life Insurance Company (Cayman) Ltd. has guaranteed
Scottish Holdings, Inc.'s obligations under the Debentures and distributions and
other payments due on the Capital Securities.

128

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

9. Debt obligations (continued)

Preferred trust securities due 2033

On October 29, 2003, Scottish Holdings, Inc. Statutory Trust II, a
Connecticut statutory business trust ("Capital Trust II") issued and sold in a
private offering an aggregate of $20.0 million Preferred Trust Securities (the
"Preferred Trust Securities"). All of the common shares of Capital Trust II are
owned by Scottish Holdings, Inc.

The Preferred Trust Securities mature on October 29, 2033. They are
redeemable in whole or in part at any time after October 29, 2008. Interest is
payable quarterly at a rate equivalent to 3 month LIBOR plus 3.95%. At December
31, 2006 and December 31, 2005, the interest rates were 9.31% and 8.49%,
respectively. Prior to October 29, 2008, interest cannot exceed 12.45%. Capital
Trust II may defer payment of the interest for up to 20 consecutive quarterly
periods, but no later than October 29, 2033. Any deferred payments would accrue
interest quarterly on a compounded basis if Scottish Holdings, Inc. defers
interest on the 2033 Floating Rate Debentures due October 29, 2033 (as described
below).

The sole assets of Capital Trust II consist of $20.6 million principal
amount of Floating Rate Debentures (the "2033 Floating Rate Debentures") issued
by Scottish Holdings, Inc. The 2033 Floating Rate Debentures mature on October
29, 2033 and interest is payable quarterly at 3 month LIBOR plus 3.95%. At
December 31, 2006 and December 31, 2005, the interest rates were 9.31% and
8.49%, respectively. Prior to October 29, 2008, interest cannot exceed 12.45%.
Scottish Holdings, Inc. may defer payment of the interest for up to 20
consecutive quarterly periods, but no later than October 29, 2033. Any deferred
payments would accrue interest quarterly on a compounded basis. Scottish
Holdings, Inc. may redeem the 2033 Floating Rate Debentures at any time after
October 29, 2008 and in the event of certain changes in tax or investment
company law.

Scottish Annuity & Life Insurance Company (Cayman) Ltd. has guaranteed
Scottish Holdings, Inc.'s obligations under the 2033 Floating Rate Debentures
and distributions and other payments due on the Preferred Trust Securities.

Trust preferred securities due 2033

On November 14, 2003, GPIC Holdings Inc. Statutory Trust, a Delaware
statutory business trust ("GPIC Trust") issued and sold in a private offering an
aggregate of $10.0 million Trust Preferred Securities (the "2033 Trust Preferred
Securities"). All of the common shares of GPIC Trust are owned by Scottish
Holdings, Inc.

The 2033 Trust Preferred Securities mature on September 30, 2033. They
are redeemable in whole or in part at any time after September 30, 2008.
Interest is payable quarterly at a rate equivalent to 3 month LIBOR plus 3.90%.
At December 31, 2006 and December 31, 2005, the interest rates were 9.26% and
8.44%, respectively. GPIC Trust may defer payment of the interest for up to 20
consecutive quarterly periods, but no later than September 30, 2033. Any
deferred payments would accrue interest quarterly on a compounded basis if
Scottish Holdings, Inc. defers interest on the Junior Subordinated Notes due
September 30, 2033 (as described below).

The sole assets of GPIC Trust consist of $10.3 million principal amount
of Junior Subordinated Notes (the "Junior Subordinated Notes") issued by
Scottish Holdings, Inc. The Junior Subordinated Notes mature on September 30,
2033 and interest is payable quarterly at 3 month LIBOR plus 3.90%. At December
31, 2006 and December 31, 2005, the interest rates were 9.26% and 8.44%,
respectively. Scottish Holdings, Inc. may defer payment of the interest for up
to 20 consecutive quarterly periods, but no later than September 30, 2033. Any
deferred payments would accrue interest quarterly on a compounded basis.
Scottish Holdings, Inc. may redeem the Junior Subordinated Notes at any time
after September 30, 2008 and in the event of certain changes in tax or
investment company law.

Scottish Annuity & Life Insurance Company (Cayman) Ltd. has guaranteed
Scottish Holdings, Inc.'s obligations under the Junior Subordinated Notes and
distributions and other payments due on the trust preferred securities.

Trust preferred securities due 2034

On May 12, 2004, Scottish Holdings, Inc. Statutory Trust III, a
Connecticut statutory business trust ("Capital Trust III") issued and sold in a
private offering an aggregate of $32.0 million Trust Preferred Securities (the
"2034 Trust Preferred Securities"). All of the common shares of Capital Trust
III are owned by Scottish Holdings, Inc.

The 2034 Trust Preferred Securities mature on June 17, 2034. They are
redeemable in whole or in part at any time after June 17, 2009. Interest is
payable quarterly at a rate equivalent to 3 month LIBOR plus 3.80%. At December
31, 2006 and December 31, 2005, the interest rate was 9.16% and 8.34%,
respectively. Prior to June 17, 2009, interest cannot exceed 12.50%. Capital
Trust III may defer payment of the interest for up to 20 consecutive quarterly
periods, but no later than June 17, 2034. Any deferred payments would accrue
interest quarterly on a compounded basis if Scottish Holdings, Inc. defers
interest on the 2034 Floating Rate Debentures due June 17, 2034 (as described
below).

The sole assets of Capital Trust III consist of $33.0 million principal
amount of Floating Rate Debentures (the "2034 Floating Rate Debentures") issued
by Scottish Holdings, Inc. The 2034 Floating Rate Debentures mature on June 17,
2034 and interest is payable quarterly at 3 month LIBOR plus 3.80%. At December
31, 2006 and December 31, 2005 the interest rate was 9.16% and 8.34%,
respectively. Prior to June 17, 2009, interest cannot exceed 12.50%. Scottish
Holdings, Inc. may defer payment of the interest for up to 20 consecutive
quarterly periods, but no later than June 17, 2034. Any deferred payments would
accrue interest quarterly on a compounded basis. Scottish Holdings, Inc. may
redeem the 2034 Floating Rate Debentures at any time after June 17, 2009 and in
the event of certain changes in tax or investment company law.

129

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

9. Debt obligations (continued)

Scottish Annuity & Life Insurance Company (Cayman) Ltd. has guaranteed
Scottish Holdings, Inc.'s obligations under the 2034 Floating Rate Debentures
and distributions and other payments due on the 2034 Trust Preferred Securities.

Trust preferred securities due 2034

On December 18, 2004, SFL Statutory Trust I, a Delaware statutory
business trust ("SFL Trust I") issued and sold in a private offering an
aggregate of $50.0 million Trust Preferred Securities (the "December 2034 Trust
Preferred Securities"). All of the common shares of SFL Trust I are owned by
Scottish Financial (Luxembourg) S.a.r.l.

The December 2034 Trust Preferred Securities mature on December 15,
2034. They are redeemable in whole or in part at any time after December 15,
2009. Interest is payable quarterly at a rate equivalent to 3 month LIBOR plus
3.50%. At December 31, 2006, and December 31, 2005 the interest rate was 8.86%
and 8.04%, respectively. Prior to December 15, 2009, interest cannot exceed
12.50%. SFL Trust I may defer payment of the interest for up to 20 consecutive
quarterly periods, but no later than December 15, 2034. Any deferred payments
would accrue interest quarterly on a compounded basis.

The sole assets of SFL Trust I consist of $51.5 million principal
amount of Floating Rate Debentures (the "December 2034 Floating Rate
Debentures") issued by Scottish Financial (Luxembourg) S.a.r.l. The December
2034 Floating Rate Debentures mature on December 15, 2034 and interest is
payable quarterly at 3 month LIBOR plus 3.50%. At December 31, 2006 and December
31, 2005 the interest rate was 8.86% and 8.04%, respectively. Prior to December
15, 2009, interest cannot exceed 12.50%. Scottish Financial (Luxembourg)
S.a.r.l. may defer

130

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

9. Debt obligations (continued)

payment of the interest for up to 20 consecutive quarterly periods, but no later
than December 15, 2034. Any deferred payments would accrue interest quarterly on
a compounded basis. Scottish Financial (Luxemburg) S.a.r.l. may redeem the
December 2034 Floating Rate Debentures at any time after December 15, 2009 and
in the event of certain changes in tax or investment company law.

Scottish Annuity & Life Insurance Company (Cayman) Ltd. has guaranteed
Scottish Financial (Luxembourg) S.a.r.l.'s obligations under the December 2034
Floating Rate Debentures and distributions and other payments due on the
December 2034 Trust Preferred Securities.

Credit facilities

131

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

10. Mezzanine equity

On December 17, 2003 and December 22, 2003, we issued in a public
offering 5,750,000 Hybrid Capital Units or HyCUs. The aggregate net proceeds
were $141.9 million. Each HyCU consisted of (i) a purchase contract ("purchase
contract") to which the holder is obligated to purchase from us, on February 15,
2007, an agreed upon number of ordinary shares for a price of $25.00 and (b) a
convertible preferred share with a liquidation preference of $25.00.

Holders of the convertible preferred shares had the option to allow
the convertible preferred share to be included in the remarketing process and
use the proceeds of the remarketing to settle the purchase contract or elect not
to participate in the remarketing by delivering the requisite amount of cash to
settle the purchase contract.

On January 25, 2007, we gave notice to holders of the HyCUs that we
were unable to satisfy certain conditions precedent to the remarketing that were
contained in the Remarketing Agreement and that therefore, the remarketing of
the convertible preferred shares had failed. Accordingly, holders of the HyCUs
only had the option to settle the purchase contracts in cash. On February 15,
2007, we received cash proceeds of $7.3 million to settle 293,500 purchase
contracts and, in exchange, issued 293,500 of our ordinary shares. We also
released to the settling holder 293,500 convertible preferred shares which were
previously held as collateral against the holder's obligation under the purchase
contracts. Also on February 15, 2007, we issued 7,146,978 of our ordinary shares
to the holders of our HyCUs who did not settle in cash, for which we held
convertible preferred shares to secure their obligations under the purchase
contracts. On February 22, 2007, we exercised our right to foreclose on the
5,456,500 convertible preferred shares held as collateral for the 5,456,500
purchase contracts that were not settled in cash.

In aggregate, we issued 7,440,478 of our ordinary shares on February
15, 2007 and, as of February 28, 2007, have 293,500 convertible preferred shares
outstanding. The convertible preferred shares have a dividend rate equal to the
three month LIBOR plus 600 basis points. We are required to redeem these
securities for an aggregate amount of $7.3 million plus accrued dividends on May
21, 2007.

We have accounted for the HyCUs in accordance with SFAS No. 150
"Accounting for Certain Instruments with Characteristics of Debt and Equity"
("SFAS No. 150"). The convertible preferred shares that comprise the HyCUs are
not mandatorily redeemable as defined by SFAS No. 150. On the redemption date of
May 21, 2007, the convertible preferred shares are subject to optional
conversion by the holder. SFAS No. 150 indicates that a conditionally redeemable
preferred share, such as a convertible preferred share, should not be classified
as a liability if it can be converted rather than redeemed. Because the
convertible preferred shares are subject either to conversion or redemption on
May 21, 2007, it is conditionally redeemable as defined by SFAS No. 150 for all
periods preceding that date. Accordingly, the HyCUs have been recorded as
mezzanine equity, which is net of issuance costs related to the convertible
preferred shares.

11. Shareholders' equity

Ordinary shares

We are authorized to issue 100,000,000 ordinary shares of par value
$0.01 each.

During 2004, in order to provide additional capital to support the
acquisition of the ING individual life reinsurance business, we signed a
Securities Purchase Agreement on October 17, 2004 with the Cypress Entities.
Pursuant to the Securities Purchase Agreement, we issued to the Cypress Entities
on December 31, 2004:

132

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

11. Shareholders' equity (continued)

(i) 3,953,183 ordinary shares, par value $0.01 per share (equal to
9.9% of the aggregate number of ordinary shares issued and
outstanding on December 31, 2004, taking into account such
issuance);

(ii) Class C Warrants to purchase 3,206,431 ordinary shares (equal
to the difference between (A) 19.9% of the ordinary shares
issued and outstanding on December 31, 2004 (without taking
into account the issuance of ordinary shares pursuant to (i)
above) and (B) the number of ordinary shares issued to the
Cypress Entities as provided in (i) above); and

(iii) The 7.00% Convertible Junior Subordinated Notes discussed in
Note 8.

The proceeds from the Cypress Entities net of a commitment fee and
other expenses amounted to $126.9 million. The Class C Warrants were exercisable
on receipt of shareholder and regulatory approvals. On April 7, 2005, our
shareholders approved the conversion of the Cypress Notes into 2,170,896 Class C
Warrants. All regulatory approvals were obtained on May 4, 2005 and all of the
Class C Warrants were converted into 5,377,327 ordinary shares.

On December 23, 2005, we completed a public offering of 7,660,000
ordinary shares (which included an over-allotment option of 1,410,000 ordinary
shares) in which we raised aggregate net proceeds of $174.1 million. We used the
proceeds of the offering for general corporate purposes, which included
investments in or advances to subsidiaries, working capital and other corporate
purposes.

During the years ended December 31, 2006, 2005 and 2004, we issued
583,217, 423,467 and 749,551 ordinary shares, respectively, to employees upon
the exercise of stock options. At December 31, 2006, there were 1,717,159
outstanding ordinary shares.

Prepaid variable share forward contract

133

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

11. Shareholders' equity (continued)

forward sales agreements which provided us an additional alternative, the
acceleration of the scheduled maturity date to August 14, 2006 under each of the
forward sales agreements. We agreed to this amendment on August 14, 2006. On
August 17, 2006, we received cash proceeds of $36.5 million and issued 6,578,948
ordinary shares, which satisfied in full our obligation to deliver shares
pursuant to the forward sales agreements and the forward purchasers' obligations
to pay us under such agreements. An imputed dividend was charged to earnings
based on the pro-rated amount of time that elapsed from the original prepayment
date until settlement date. The balance of the discount reduced the net proceeds
on issuance of shares.

Upon the settlement of the forward sales agreements, we have received
$147.3 million in the aggregate and issued an aggregate 6,578,948 ordinary
shares.

Preferred shares

We are authorized to issue 50,000,000 preferred shares of par value
$0.01 each.

On December 17, 2003 and December 22, 2003, in connection with our HyCU
offering, we issued 5,750,000 convertible preferred shares. On February 15,
2007, we issued 293,500 ordinary shares in settlement of certain of the purchase
contracts and 7,146,978 ordinary shares due to foreclosure of certain of the
HycU purchase contracts at 1.0607 ordinary share per HyCU contract. See Note 10
for additional description of the terms of the convertible preferred shares.

On June 28, 2005, we priced our offering of 5,000,000 non-cumulative
perpetual preferred shares and entered into a purchase agreement relating to the
shares pursuant to which the underwriters of the offering agreed to purchase the
shares. Gross proceeds were $125.0 million and related expenses were $4.6
million. Settlement of the net proceeds occurred on July 6, 2005.

Dividends on the perpetual preferred shares are payable on a
non-cumulative basis at a rate per annum of 7.25% until the dividend payment
date in July 2010. Thereafter, the dividend rate may be at a fixed rate
determined through remarketing of the perpetual preferred shares for specific
periods of varying length not less than six months or may be at a floating rate
reset quarterly based on a predefined set of interest rate benchmarks. During
any dividend period, unless the full dividends for the current dividend period
on all outstanding perpetual preferred shares have been declared or paid, no
dividend shall be paid or declared on our ordinary shares and no ordinary shares
or other junior shares shall be purchased, redeemed or otherwise acquired for
consideration. Declaration of dividends on the perpetual preferred shares is
prohibited if we fail to meet specified capital adequacy, net income or
shareholders' equity levels.

The perpetual preferred shares do not have a maturity date and we are
not required to redeem the shares. The perpetual preferred shares are not
redeemable prior to July 2010. Subsequent to July 2010, the perpetual preferred
shares will be redeemable at our option, in whole or in part, at a redemption
price equal to $25.00 per share, plus any declared and unpaid dividends at the
redemption date, without accumulation of any undeclared dividends.

The perpetual preferred shares are unsecured and subordinated to all
indebtedness that does not by its terms rank pari passu or junior to the
perpetual preferred shares. The holders of the perpetual preferred shares have
no voting rights except with respect to certain fundamental changes in the terms
of the perpetual preferred shares and in the case of certain dividend
non-payments.

The perpetual preferred shares are rated "CCC" by Standard & Poor's,
"B2" by Moody's, "B-" by Fitch Ratings and "ccc+" by A.M. Best Company.

Warrants

134

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

11. Shareholders' equity (continued)

In connection with our initial capitalization, we issued Class A
Warrants to related parties to purchase an aggregate of 1,550,000 ordinary
shares. The aggregate consideration of $0.1 million paid for these Class A
Warrants is reflected as additional paid-in capital. In connection with our
initial public offering, we issued an aggregate of 1,300,000 Class A Warrants.
All Class A Warrants are exercisable at $15.00 per ordinary share, in equal
amounts over a three-year period commencing November 1999 and expire in November
2008.

During the year ended December 31, 2003, we issued 200,000 ordinary
shares upon the exercise of Class A Warrants and we repurchased 200,000 Class B
Warrants for $3.0 million.

On December 31, 2004, we issued Class C Warrants to the Cypress
Entities as discussed in Note 11.

On April 7, 2005, we issued 3,206,431 and 2,170,896, respectively, of
Class C Warrants to the Cypress Entities as discussed in Note 11. The Class C
warrants were subsequently converted into ordinary shares.

As at December 31, 2006 and 2005, there were 2,650,000 Class A warrants
outstanding.

General restrictions

The holders of the ordinary shares are entitled to receive dividends
and are allowed one vote per share subject to certain restrictions in our
Memorandum and Articles of Association.

Dividends

On July 28, 2006, the Board of Directors suspended the dividend on the
ordinary shares. All future payments of dividends are at the discretion of our
Board of Directors and will depend on our income, capital requirements,
insurance regulatory conditions, operating conditions and such other factors as
the Board of Directors may deem relevant.

In accordance with the amended forbearance agreement with HSBC (see
Note 7), we are prohibited from declaring any cash dividend, exclusive of the
non-cumulative perpetual preferred shares during the forbearance period from
November 26, 2006 until December 31, 2008, unless at the time of declaration and
payment of cash dividend, Scottish Annuity & Life Insurance Company (Cayman)
Ltd. has an insurer financial strength rating of at least A- for Standard &
Poor's and A3 for Moody's Investors Service.

12. Taxation

The consolidated income tax expense or benefit is determined by
applying the income tax rate for each subsidiary to its pre-tax income or loss
in any reporting period, as well as by the valuation allowance recorded during
the period. The tax rates for our subsidiaries vary from jurisdiction to
jurisdiction and range from 0% to approximately 39%. Our effective tax rate in
each reporting period is determined by dividing the net tax benefit (expense) by
our pre-tax income or loss. The change in our effective tax rate is due
primarily to the amount in any reporting period of pre-tax earnings attributable
to different subsidiaries (which changes from time to time), each of which is
subject to different statutory tax rates, as well as to the valuation allowance
recorded during the period. Pre-tax earnings of certain subsidiaries in any
period may be impacted by the amount of various inter-company charges, including
but not limited to net worth maintenance fees and other management fees paid to
Scottish Annuity & Life Insurance Company (Cayman) Ltd. and to the parent
holding company. These fees are

135

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

12. Taxation (continued)

charged in accordance with our inter-company charging policy and may be
adjusted periodically within limits prescribed by applicable transfer pricing
regulations.

There is presently no taxation imposed on income or capital gains by
the Governments of the Cayman Islands ("domestic") and Bermuda. Our Bermuda
companies have been granted an exemption from income, withholding or capital
gains taxation in Bermuda until 2016. If any taxation on income or capital gains
were enacted in the Cayman Islands, Scottish Re and Scottish Annuity & Life
Insurance Company (Cayman) Ltd. have been granted an exemption until 2028; and
The Scottish Annuity Company (Cayman) Ltd. has been granted an exemption until
2024. These companies operate in a manner such that they will owe no U.S. tax
other than premium excise taxes and withholding taxes on certain investment
income. Additionally, we have operations in various jurisdictions around the
world including, but not limited to, the United States, the United Kingdom,
Ireland, Singapore and Luxembourg that are subject to relevant taxes in those
jurisdictions.

Domestic income before income tax for the years ended December 31,
2006, 2005 and 2004 is $192.4 million, $173.3 million and $144.7 million,
respectively. Foreign losses before income tax for the years ended December 31,
2006, 2005 and 2004 are $339.9 million, $59.6 million and $89.3 million,
respectively. Domestic income tax expense for the years ended December 31, 2006,
2005 and 2004 is $1.0 million, $1.8 million and $3.4 million, respectively.
Foreign income tax expense for the year ended December 31, 2006 is $219.6
million and foreign income tax benefit for the years ended December 31, 2005 and
2004 is $18.2 million and $20.1 million, respectively. We are not subject to
taxation other than as stated above. There can be no assurance that there will
not be changes in applicable laws, regulations or treaties, which might require
us to change the way we operate or become subject to taxes.

At December 31, 2006, we had tax net operating loss carry forwards of
approximately $817.3 million (2005 - $695.9 million). $695.9 million are for our
U.S. entities that expire in years 2019 through 2026. $25.4 million, $3.0
million and $93.0 of the operating loss carry forward resulted from our U.K.,
Singapore and Irish entities, respectively, and have an unlimited carry forward
period. These net operating loss carry forwards resulted primarily from current
operations of Scottish Re (U.S.), Inc., Scottish Re Life Corporation, Scottish
Holdings, Inc., Orkney Re, Inc, Ballantyne Re and Scottish Re Limited.

At December 31, 2006, we had an alternative minimum tax carry forward
of approximately $2.4 million. There are no foreign tax credit carry forwards.

Undistributed earnings of our subsidiaries are considered indefinitely
reinvested and, accordingly, no provision for U.S. federal withholding taxes has
been provided thereon. Our U.S. subsidiaries are subject to federal, state and
local corporate income taxes and other taxes applicable to U.S. corporations.
Upon distribution of current or accumulated earnings and profits in the form of
dividends or otherwise from our U.S. subsidiaries to us, we would be subject to
U.S. withholding taxes at a 30% rate.

Significant components of our deferred tax assets and liabilities as of
December 31, 2006 and 2005, all of which arise outside of our home country, were
as follows:

136

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

12. Taxation (continued)
December 31, December 31,
2006 2005
------------- --------------
Deferred tax asset:
Net operating losses.......................... $ 267,706 $ 209,520
Reserves for future policy benefits........... 113,892 60,226
Unrealized depreciation on investments........ 16,182 12,212
Intangible assets............................. 7,069 8,234
Negative proxy deferred acquisition costs..... - 10,196
Alternative minimum tax credit................ 2,442 2,442
Collateral finance facilities costs........... 7,221 -
Other......................................... 16,545 11,667
------------- --------------
Total deferred tax asset......................... $ 431,057 $ 314,497
============= ==============
Deferred tax liability:
Undistributed earnings of U.K. subsidiaries... $ (3,345) $ (3,155)
Deferred acquisition costs.................... (65,599) (52,503)
Pension liability............................. (914) (1,134)
Reserves for future policy benefits........... (210,184) (166,255)
Present value of in-force..................... (15,018) (13,884)
Other......................................... (1,113) (3,662)
------------- --------------
Total deferred tax liability..................... $ (296,173) $ (240,593)
============= ==============
Net deferred tax asset before valuation
allowance..................................... 134,884 73,904

Valuation allowance............................. (304,862) (18,451)
------------- --------------
Net deferred tax asset (liability).............. $ (169,978) $ 55,453
============= ==============

Income tax expense in the 2006 was $220.6 million compared to an income
tax benefit of $16.4 million in 2005. The change in our effective tax rate in
2006 compared to 2005 is primarily related to a $209.1 million valuation
allowance established on deferred tax assets.

137

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

12. Taxation (continued)

For the years ended December 31, 2006, 2005 and 2004, we have income
tax benefit (expense) from operations as follows:

Year Ended Year Ended Year Ended
December 31, 2006 December 31, 2005 December 31, 2004
-------------------- --------------------- --------------------

Current tax expense (benefit)....................... $ (1,272) $ 3,168 $ 8,526
Deferred tax expense (benefit)...................... 221,864 (19,602) (25,205)
-------------------- --------------------- --------------------
Total tax expense (benefit)......................... $ 220,592 $ (16,434) $ (16,679)
==================== ===================== ====================

Included in the 2005 tax benefit is a $2.5 million expense related to a
write-off of a deferred tax asset related to state income taxes.

The acquisition of the ING individual life reinsurance business was
reflected under U.S. GAAP in accordance with purchase accounting requirements
but for taxation was a currently taxable transaction. As a result, approximately
$84.0 million of current tax expense in the year ended December 31, 2004 and a
corresponding $84.0 million of deferred tax benefit are netted in the income
statement and are not reflected in the table above.

138

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

12. Taxation (continued)

The weighted average expected tax provision has been calculated using
the pre-tax accounting income (loss) in each jurisdiction multiplied by that
jurisdiction's applicable statutory tax rate. Reconciliation of the difference
between the provision for income taxes and the expected tax provision at the
weighted average tax rate for the years December 31, 2006, 2005 and 2004 is
provided below:

Year Ended Year Ended Year Ended
December 31, 2006 December 31, 2005 December 31, 2004
-------------------- --------------------- --------------------

Expected tax provision at weighted average rate..... $ (83,209) $ (20,290) $ (18,313)
Negative deferred acquisition costs................. - - (934)
Change in valuation allowance....................... 293,890 - -
Write-down of goodwill.............................. 9,432 - -
Other and state taxes .............................. 479 3,856 2,568
-------------------- --------------------- --------------------
Total tax expense (benefit)......................... $ 220,592 $ (16,434) $ (16,679)
==================== ===================== ====================

13. Employee benefit plans

Pension plan

We provide retirement benefits to the majority of employees, under
defined contribution plans. Defined contribution plan expenses totaled $3.6
million, $2.9 million and $1.9 million for the years ended December 31, 2006,
2005 and 2004, respectively. In 2002, pension benefits were provided to Scottish
Re Holdings Limited employees under a defined benefit pension plan. During 2003,
we established a defined contribution plan for Scottish Re Holdings Limited. New
employees in 2003 joined this plan and a number of employees transferred from
the defined benefit scheme to the defined contribution scheme. A small number of
employees remain in the defined benefit plan and, additionally, there are
preserved benefits for some transferees and some ex-employees in the defined
benefit plan. As at December 31, 2006, the fair value of the defined benefit
pension plan assets were approximately $12.2 million and the benefit obligation
was approximately $11.7 million. In 2006, we implemented SFAS 158 "Employers
Accounting for Defined Benefit Pension and Other Post Retirement Plans". This
resulted in the over funded balance of $2.9 million recorded in other
comprehensive income.

401(k) plan

We sponsor a 401(k) plan in the U.S. in which employee contributions on
a pre-tax basis are supplemented by matching contributions. These contributions
are invested, at the election of the employee, in one or more investment
portfolios. Expenses for the plan amounted to $1.7 million, $1.2 million and
$0.6 million, in the years ended December 31, 2006, 2005 and 2004, respectively.

Stock based incentive compensation plans

We have four stock option plans (the "1998 Plan", the "1999 Plan", the
"Harbourton Plan" and the "2001 Plan", collectively the "Option Plans"). The
Option Plans allow us to grant non-statutory options, subject to certain
restrictions, to eligible employees, non-employee directors, advisors and
consultants. The minimum exercise price of the options will be equal to the fair
market value, as defined in the Option Plans, of our ordinary shares at the date
of grant. The term of the options is between seven and ten years from the date
of grant. Unless otherwise provided in each option agreement, all options
granted between January 1, 2002 and May 4, 2004, will become exercisable in five
equal installments commencing on the first anniversary of the grant date, except
for annual grants to each director, which are fully exercisable on the date of
grant. All options issued after May 5, 2004, become exercisable in three equal
annual installments commencing on the first anniversary of the grant date,
except for grants to directors, which are fully exercisable on the date of
grant. All options fully vest upon a change in control. Total options authorized
under the Option Plans are 3,750,000.

139

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

13. Employee benefit plans (continued)

The equity incentive compensation plan ("2004 ECP") allows us to grant
non-statutory options and restricted share units, subject to certain
restrictions, to eligible employees, non-employee directors, advisors and
consultants. For the first year of the 2004 ECP or the first 250,000 options
issued, the minimum exercise price of the options will be equal to 110% of fair
market value. At the discretion of our Compensation Committee, option grants
after the first year of the 2004 ECP or in excess of 250,000 options may have a
minimum exercise price equal to the fair market value of our ordinary shares at
the date of grant. The term of the options shall not be more than ten years from
the date of grant. Options will become exercisable in three equal installments
commencing on the first anniversary of the grant date, except for grants to
directors, which are fully exercisable on the date of grant. Total options
authorized under the 2004 ECP are 750,000. In addition, 1,000,000 restricted
share units have been authorized under the 2004 ECP of which at least 750,000
will vest based on achievement of certain performance goals. The performance
measures that must be met for vesting to occur are established at the beginning
of each three year performance period. Depending on the performance, the actual
amount of restricted share units could range from 0% to 100%. The remaining
250,000 restricted share units may be issued without performance goals.

As a result of adopting SFAS No. 123(R) (see Note 2), loss before
income taxes for the year ended December 31, 2006 is $0.6 million higher,
respectively, than if we had continued to account for stock-based compensation
awarded before January 1, 2003 under Accounting Principles Board Opinion No. 25.
Diluted loss per share for the year ended December 31, 2006 would be $6.69 per
share, respectively, without the adoption of SFAS No. 123(R).

Pro forma information regarding net income and earnings per share is
required by SFAS No. 123(R) for periods prior to the adoption of SFAS No.
123(R), and has been determined as if we accounted for all employee equity based
compensation under the fair value method of SFAS No 123(R).

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period using the
Black-Scholes model. The Black-Scholes pricing model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected price volatility,
dividend yield, risk free interest rate and expected life (in years). In
management's opinion, because our employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, the
Black-Scholes model does not necessarily provide a reliable single measure of
the fair value of our employee stock options.

The net income available to ordinary shareholders under the proforma
method would have resulted in $0.6 million of additional cost for the year ended
December 31, 2005 and 2004, respectively or $0.01 per share on a basic and
diluted net income per share for each year.

Stock Options

Option activity under all Option Plans and the 2004 ECP is as follows:

Year Ended December Year Ended December Year Ended December
31, 2006 31, 2005 31, 2004
-------------------- -------------------- ---------------------

Outstanding, beginning of year................ 2,586,237 2,491,236 3,086,651
Granted....................................... 154,000 631,001 253,000
Exercised..................................... (583,217) (422,867) (749,551)
Cancelled..................................... (439,501) (113,133) (98,864)
-------------------- -------------------- ---------------------
Outstanding, end of year...................... 1,717,519 2,586,237 2,491,236
==================== ==================== =====================
Options exercisable........................... 1,121,372 1,589,703 1,798,936
==================== ==================== =====================

140

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

13. Employee benefit plans (continued)

Year Ended December Year Ended December Year Ended December
31, 2006 31, 2005 31, 2004
-------------------- -------------------- ---------------------

Weighted average exercise price per share:
Granted....................................... $ 24.5487 $ 25.5068 $ 23.5164
Exercised..................................... $ 11.6619 $ 12.6811 $ 11.1209
Cancelled..................................... $ 19.9815 $ 21.6711 $ 17.9752
Outstanding, end of year...................... $ 19.5413 $ 17.5411 $ 14.8860

Weighted average exercisable price per share at December 31, 2006 and
2005 was $17.3514 and $14.0025, respectively.

During the years ended December 31, 2006, 2005 and 2004, the following
activity occurred under our plans:

December 31, 2006 December 31 2005 December 31, 2004
----------------- ---------------- -----------------

Weighted average grant date fair value of options... $ 11.9471 $ 11.1375 $ 10.6954
Total intrinsic value of options exercised.......... $ 4,151,363 $ 4,898,372 $ 8,871,770
Total fair value of options vested.................. $ 6,623,307 $ 3,603,720 $ 4,265,789

Summary of options outstanding at December 31, 2006:

Options Outstanding Options Exercisable
------------------------------------------ -----------------------------------------
Weighted Weighted
Weighted Average Weighted Average
Number of Average Remaining Number of Average Remaining
Year of Range of Shares Exercise Contractual Shares Exercise Contractual
Grant Exercise Prices Outstanding Price Life Exercisable Price Life
- ----------- -------------------- ------------- ------------ ------------ ------------- ---------- --------------

1998 $15.000 300,002 $15.0000 1.92 300,002 $15.0000 1.92
1999 $8.0625-$15.000 101,100 $14.3138 2.22 101,100 $14.3138 2.22
2000 $7.9375-$9.0000 76,000 $8.8158 3.27 76,000 $8.8158 3.27
2001 $13.5000-$18.7600 126,167 $15.0890 3.85 126,167 $15.0890 3.85
2002 $15.5000-$21.5100 326,250 $17.9455 5.19 247,550 $17.9846 5.18
2003 $17.4700-$17.7500 79,000 $17.7234 6.32 37,000 $17.7084 6.32
2004 $21.7000-$23.8000 73,000 $22.6492 7.35 43,200 $22.4950 7.43
2005 $23.6000-$26.1030 521,000 $25.5626 8.30 180,353 $25.5603 8.29
2006 $18.9000-$24.7500 115,000 $24.4804 9.14 10,000 $24.7500 9.13
-------------------- ------------- ------------ ------------ ------------- ---------- --------------
$7.9375-$26.1030 1,717,519 $19.5413 5.61 1,121,372 $17.3514 5.61
==================== ============ ============ ============ ============= ========== ==============

The aggregate intrinsic value of options outstanding and exercisable
amounted to $nil at December 31, 2006.

The fair value of each option award is estimated on the date of grant
using the Black-Scholes option-pricing model, which uses the assumptions noted
in the following table. Expected dividend yield is based on the historical
dividend patterns as a percentage of the market value of the stock. Expected
volatility is based on implied volatilities from options traded on our ordinary
shares. The expected term of options granted is derived using the "simplified"
method as allowed under the provisions of the Securities and Exchange
Commission's Staff Accounting Bulletin No. 107 and represents the period of time
that options granted are expected to be outstanding. The risk-free interest rate
for periods within the contractual life of the option is based on the U.S.
Treasury yield curve in effect at the time of grant.

December 31, 2006 December 31, 2005
------------------- --------------------
Expected dividend yield............ 0.00% 0.77%
Risk free interest rate............ 4.64%-5.01% 3.53%-4.01%
Expected life of options........... 7 years 7 years
Expected volatility................ 0.64 0.35

Compensation expense for stock options for the years ended December 31,
2006, 2005 and 2004 was $3.8 million, $2.5 million and $0.8 million,
respectively. We recognize compensation costs for stock options with pro-rata
vesting evenly over the requisite service period. There was no tax benefit
during the year ended December 31, 2006.

141

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

13. Employee benefit plans (continued)

As of December 31, 2006, there was $2.9 million of total unrecognized
compensation costs related to stock options. These costs are expected to be
recognized over a period of up to three years or immediately upon a change in
control. Upon a change in control, all stock options will immediately vest.

During the year ended December 31, 2006, the amount of cash received
from the exercise of share options was $7.8 million and there was no tax benefit
realized from stock options.

Restricted Share Awards

Restricted share award activity under the 2004 ECP is as follows:

December 31, 2006 December 31, 2005 December 31, 2004
------------------- ------------------ -------------------

Outstanding, beginning of period.................... 659,200 95,700 -
Granted............................................. 283,000 589,000 95,700
Exercised........................................... (18,013) - -
Cancelled........................................... (290,185) (25,500) -
------------------- ------------------ -------------------
Outstanding end of period .......................... 634,002 659,200 95,700
=================== ================== ===================
Restricted share units exercisable, end of period... - - -
=================== ================== ===================

Weighted average exercise price for restricted share units is $0.

During the years ended December 31, 2006, 2005 and 2004, the following
activity occurred under our plans:

December 31, 2006 December 31, 2005 December 31, 2004
------------------- ------------------ -------------------

Weighted average grant date fair value of awards.... $ 23.6080 $ 24.2249 $ 21.7572
------------------- ------------------ -------------------

We have three restricted share award tranches based on the year of
grant and service and performance period related to them: "2004-2006 Grants",
"2005-2007 Grants" and "2006-2008 Grants". "2005-2007 Grants" and "2006-2008
Grants" are comprised of two components - restricted stock units and performance
shares. The third tranche "2004-2006 Grants" is comprised of performance shares
only. During the quarter ended September 30, 2006, we concluded that the
performance targets of the performance shares in all three tranches were no
longer probable of being achieved and as a result we reversed $4.1 million of
compensation expense relating to these performance shares.

Compensation expense for restricted share awards for the year ended
December 31, 2006 and 2005 was $1.1 million and $2.9 million, respectively.
There was no compensation expense for restricted share awards for December 31,
2004. We recognize compensation costs for restricted share awards with cliff
vesting evenly over the requisite service period. There was no tax benefit
during the year ended December 31, 2006.

As of December 31, 2006, there was $7.6 million of total unrecognized
compensation costs related to restricted share awards. These costs are expected
to be recognized over a period of up to three years or immediately upon a change
in control. Upon a change in control, all restricted share awards will
immediately vest and performance shares will vest at a 50% award amount.

142

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

14. Statutory requirements and dividend restrictions

Our insurance and reinsurance subsidiaries are subject to insurance
laws and regulations in the jurisdictions in which they operate, including
Bermuda, the Cayman Islands, the United States and the United Kingdom, Ireland
and Singapore. These regulations include restrictions that limit the amount of
dividends or other distributions, such as loans or cash advances, available to
shareholders without prior approval of the insurance regulatory authorities.

The difference between financial statements prepared for insurance
regulatory authorities and statements prepared in accordance with GAAP vary by
jurisdiction; however the primary difference is that financial statements
prepared for insurance regulatory authorities do not reflect deferred
acquisition costs, deferred income tax net assets, intangible assets and
unrealized appreciation (depreciation) on investments.

Our Bermuda insurance companies are required to maintain a minimum
capital of $0.25 million. There are no statutory restrictions on the payment of
dividends from retained earnings by any of the Bermuda subsidiaries as the
minimum statutory capital and surplus requirements are satisfied by the share
capital and additional paid-in capital of each of the Bermuda subsidiaries.

Under The Insurance Law of the Cayman Islands, Scottish Annuity & Life
Insurance Company (Cayman) Ltd. and The Scottish Annuity Company (Cayman) Ltd.
must each maintain a minimum net capital worth of $0.24 million. There are no
statutory restrictions on the payment of dividends from retained earnings by any
of the Cayman subsidiaries as the minimum statutory capital and surplus
requirements are satisfied by the share capital and additional paid-in capital
of each of the Cayman subsidiaries.

Our United States subsidiaries file financial statements prepared in
accordance with statutory accounting practices prescribed or permitted by
insurance regulators. The NAIC prescribes risk-based capital ("RBC")
requirements for U.S. domiciled life and health insurance companies. As of
December 31, 2006 and 2005, Scottish Re (U.S.), Inc., Scottish Re Life
Corporation and Orkney Re, Inc. exceeded all minimum RBC requirements. The
maximum amount of dividends that can be paid by Scottish Re (U.S.), Inc. and
Scottish Re Life Corporation (Delaware domiciled insurance companies) and Orkney
Re, Inc. (South Carolina domicile) without prior approval of the Insurance
Commissioner is subject to restrictions relating to statutory surplus and
operating earnings The maximum dividend payment that may be made without prior
approval is limited to the greater of the net gain from operations for the
preceding year or 10% of statutory surplus as of December 31 of the preceding
year not exceeding earned surplus. The applicable statutory provisions only
permit an insurer to pay a shareholder dividend from unassigned surplus. As of
January 1, 2006, Scottish Re (U.S.), Inc., Scottish Re Life Corporation and
Orkney Re, Inc. could not pay dividends without prior approval of the Insurance
Commissioner.

The following table presents selected statutory financial information
for our primary life reinsurance legal entities, as of or for the years ended
December 31, 2006, 2005 and 2004:

Statutory capital & surplus Statutory net earned income (loss)
--------------------------- --------------------------------------------
2006 2005 2006 2005 2004
------------- -------------- ------------ --------------- --------------

Scottish Re (U.S.), Inc............. $ 305,934 $ 229,839 $ (208,032) $ (263,486) $ (25,573)
Scottish Re Life Corporation........ 81,294 74,332 (3,741) 8,757 (68,517)

143

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

14. Statutory requirements and dividend restrictions (continued)

Scottish Re Limited's statutory filling for the year ended December 31,
2006 has not yet been filed. At December 31, 2005 and 2004, Scottish Re Limited
had statutory capital and surplus of $84.3 million and $87.2 million,
respectively. For the years ended December 31, 2005 and 2004 Scottish Re Limited
had a statutory net earned loss of $13.9 million and $6.6 million, respectively.
In connection with the Insurance Companies Act 1982 of the United Kingdom,
Scottish Re Limited is required to maintain statutory minimum net capital of
approximately $47.8 million and $65.4 million at December 31, 2005 and 2004,
respectively.

Scottish Re (Dublin) Limited is required by the Irish Financial
Services Regulatory Authority ("IFSRA") to maintain a minimum level of paid up
share capital. There are currently no statutory or regulatory restrictions on
the ability of Scottish Re (Dublin) Limited to make dividend payments from
profits available for distribution within the meaning of the Companies
(Amendment) Act, 1983. On 15 July 2006, Statutory Instrument 380 of 2006
transposed into Irish law European Union Council Directive 2005/68/EC. The
Directive establishes a regulatory regime for reinsurance organizations and
defines minimum requirements for certain liabilities, assets backing these
liabilities and surplus. IFSRA targets 150% of this minimum surplus level. This
targeted level as of 31 December 2006 is $247.0 million and the Company has
$423.0 million of assets available to meet this requirement.

The company action level risk based capital percentage at December 31,
2006 for Scottish Re (U.S.) Inc. and Scottish Re Life Corporation was 269% and
296%, respectively.

15. Reinsurance

Premiums earned are analyzed as follows:

Year Ended Year Ended Year Ended
December 31, 2006 December 31, 2005 December 31, 2004
-------------------- --------------------- ---------------------

Premiums assumed.................................... $ 2,176,623 $ 2,155,279 $ 827,082
Premiums ceded...................................... (334,638) (221,349) (237,637)
-------------------- --------------------- ---------------------
Premiums earned..................................... $ 1,841,985 $ 1,933,930 $ 589,445
==================== ===================== =====================

Claims and other policy benefits are net of reinsurance recoveries of
$347.1 million, $158.9 million and $144.5 million during the years ended
December 31, 2006, 2005 and 2004, respectively.

At December 31, 2006 and 2005, there were no reinsurance ceded
receivables associated with a single reinsurer with a carrying value in excess
of 1% of total assets.

144

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

16. Business segments

The accounting policies of our segments are the same as those described
in the Summary of Significant Accounting Policies in Note 2. We measure segment
performance primarily based on income or loss before income taxes. Our
reportable segments are strategic business units that are primarily segregated
by geographic region. We report segments in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". Our
segments are Life Reinsurance North America, Life Reinsurance International and
Corporate and Other. The segment reporting is as follows:

Year Ended December 31, 2006
-----------------------------------------------------------------------
Life Life
Reinsurance Reinsurance Corporate and
North America International Other Total
--------------- ----------------- ----------------- ---------------

Premiums earned, net............................. $ 1,719,239 $ 122,746 $ - $ 1,841,985
Investment income, net........................... 584,359 24,106 8,159 616,624
Fee income....................................... 11,491 - 3,002 14,493
Realized gains (losses).......................... (19,043) (11,569) 3,207 (27,405)
Change in value of embedded derivative, net...... 5,803 - - 5,803
--------------- ----------------- ----------------- ---------------
Total revenues................................ 2,301,849 135,283 14,368 2,451,500
--------------- ----------------- ----------------- ---------------
Claims and other policy benefits................. 1,490,346 101,126 - 1,591,472
Interest credited to interest sensitive contract
liabilities................................... 172,967 - - 172,967
Acquisition costs and other insurance expenses,
net........................................... 360,737 37,332 11,116 409,185
Operating expenses............................... 58,133 31,236 62,942 152,311
Goodwill impairment.............................. - 33,758 367 34,125
Collateral finance facilities expense............ 205,210 - 10,581 215,791
Interest expense................................. 11,613 - 11,526 23,139
--------------- ----------------- ----------------- ---------------
Total benefits and expenses................... 2,299,006 203,452 96,532 2,598,990
--------------- ----------------- ----------------- ---------------
Income (loss) before income taxes and minority
interest...................................... $ 2,843 $ (68,169) $ (82,164) $ (147,490)
=============== ================= ================== ===============

145

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

16. Business segments (continued)

Year Ended December 31, 2005
-----------------------------------------------------------------------
Life Life
Reinsurance Reinsurance Corporate and
North America International Other Total
--------------- ----------------- ----------------- ---------------

Premiums earned, net............................. $ 1,814,875 $ 119,055 $ - $ 1,933,930
Investment income, net........................... 341,539 11,488 2,810 355,837
Fee income....................................... 9,233 - 3,083 12,316
Realized gains................................... 1,121 1,263 1,354 3,738
Change in value of embedded derivative, net...... (8,492) - - (8,492)
--------------- ----------------- ----------------- ---------------
Total revenues................................ 2,158,276 131,806 7,247 2,297,329
--------------- ----------------- ----------------- ---------------
Claims and other policy benefits................. 1,365,599 76,906 - 1,442,505
Interest credited to interest sensitive contract
liabilities................................... 132,968 - - 132,968
Acquisition costs and other insurance expenses,
net........................................... 400,992 20,722 2,061 423,775
Operating expenses............................... 48,849 25,276 41,448 115,573
Collateral finance facilities expenses........... 43,113 - 5,033 48,146
Interest expense................................. 10,823 - 9,915 20,738
--------------- ----------------- ----------------- ---------------
Total benefits and expenses................... 2,002,344 122,904 58,457 2,183,705
--------------- ----------------- ----------------- ---------------
Income (loss) before income taxes and minority
interest...................................... $ 155,932 $ 8,902 $ (51,210) $ 113,624
=============== ================= ================== ===============

146

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

16. Business segments (continued)

Year Ended December 31, 2004
-----------------------------------------------------------------------
Life Life
Reinsurance Reinsurance Corporate and
North America International Other Total
--------------- ----------------- ----------------- ---------------

Premiums earned, net............................. $ 466,927 $ 122,518 $ - $ 589,445
Investment income, net........................... 206,009 10,023 1,106 217,138
Fee income....................................... 7,867 - 3,680 11,547
Realized gains (losses).......................... (7,974) 1,685 (2,015) (8,304)
Change in value of embedded derivative, net...... 4,561 - - 4,561
--------------- ----------------- ----------------- ---------------
Total revenues................................ 677,390 134,226 2,771 814,387
--------------- ----------------- ----------------- ---------------
Claims and other policy benefits................. 344,319 81,646 - 425,965
Interest credited to interest sensitive contract
liabilities................................... 106,525 - - 106,525
Acquisition costs and other insurance expenses,
net........................................... 131,658 17,634 2,113 151,405
Operating expenses............................... 18,408 18,798 17,452 54,658
Collateral finance facilities expenses........... 2,724 - - 2,724
Interest expense................................. 4,605 - 8,411 13,016
Due diligence costs.............................. - - 4,643 4,643
--------------- ----------------- ----------------- ---------------
Total benefits and expenses................... 608,239 118,078 32,619 758,936
--------------- ----------------- ----------------- ---------------
Income (loss) before income taxes and minority
interest...................................... $ 69,151 $ 16,148 $ (29,848) $ 55,451
=============== ================= ================== ===============

Capital expenditures of each reporting segment were not material in the
periods noted.

Revenues from transactions with a single external customer did not
amount to 10% or more of our revenues.

Assets December 31, 2006 December 31, 2005
------------------ -----------------
Life Reinsurance:
North America.............. $ 12,194,291 $ 10,583,046
International.............. 431,222 460,888
------------------ -----------------
Total Life Reinsurance.......... 12,625,513 11,043,934
Corporate and Other............. 810,559 1,072,369
------------------ -----------------
Total........................... $ 13,436,072 $ 12,116,303
================== =================

147

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

17. Earnings per ordinary share

The following table sets forth the computation of basic and diluted
earnings per ordinary share:

Year Ended Year Ended Year Ended
December 31, 2006 December 31, 2005 December 31, 2004
------------------- -------------------- --------------------

Numerator:
Net income (loss)................................... $ (366,714) $ 130,197 $ 71,391
Dividend declared on non-cumulative perpetual preferred
shares........................................... (9,062) (4,758) -
Imputed dividend on prepaid variable share forward
contract......................................... (881) - -
------------------- -------------------- --------------------
Net income (loss) available to ordinary shareholders $ (376,657) $ 125,439 $ 71,391
=================== ==================== ====================
Denominator:
Denominator for basic earnings (loss) per ordinary share
Weighted average number of ordinary shares.......... 56,182,222 43,838,261 35,732,522
Effect of dilutive securities
- Stock options and restricted stock............. - 661,693 634,562
- Warrants....................................... - 2,237,663 885,363
- 4.5% Convertible Notes and Hybrid Capital Units - 793,499 255,845
------------------- -------------------- --------------------
Denominator for dilutive earnings (loss) per ordinary
share............................................ 56,182,222 47,531,116 37,508,292
=================== ==================== ====================

Basic earnings (loss) per ordinary share:
Income (loss) from continuing operations (1)... $ (6.70) $ 2.86 $ 2.00
Discontinued operations........................ - - (0.01)
------------------- -------------------- --------------------
Net income (loss) available to ordinary shareholders $ (6.70) $ 2.86 $ 1.99
=================== ==================== ====================

Diluted earnings (loss) per ordinary share:
Income (loss) from continuing operations (1)... $ (6.70) $ 2.64 $ 1.91
Discontinued operations........................ - - (0.01)
------------------- -------------------- --------------------
Net income (loss) available to ordinary shareholders $ (6.70) $ 2.64 $ 1.90
=================== ==================== ====================
- ---------------

(1) Reflects reduction for dividends declared on non-cumulative perpetual
preferred shares.

148

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

18. Commitments and contingencies

Derivative instruments

We do not invest in derivatives for speculative purposes and our use of
derivatives has not been significant to our financial position. We maintain
investments in derivative instruments such as interest rate swaps for which the
primary purposes are to manage duration or interest rate sensitivity. We
currently record changes in market value of these instruments as realized gains
(losses) in the consolidated statements of operations in accordance with SFAS
No. 133.

By using derivative instruments, we are exposed to credit and market
risk. If the counterparty fails to perform, credit risk is equal to the extent
of the fair value gain in the derivative. When the fair value of a derivative
contract is positive, this generally indicates that the counterparty owes us
and, therefore, creates a payment risk to us. When the fair value of a
derivative contract is negative, we owe the counterparty and therefore we have
no payment risk. We minimize the credit (or payment) risk in derivative
instruments by entering into transactions with high quality counterparties that
are reviewed regularly by us.

Interest Rate Swap

During 2004, we entered into an interest rate swap contract in the
amount of $100.0 million in relation to certain of our investment assets not
supporting reinsurance liabilities. This derivative has not been designated as a
hedge. The change in fair value of the swap during the years ended December 31,
2006 and 2005 amounted to a gain of $4.4 million and $2.2 million, respectively.
These gains and losses are included in realized gains (losses) in the
consolidated statements of income (loss). Also during 2004, we entered into
interest rate swaps with varying notional amounts and maturities, which have
been designated as hedges of the variable interest cash flows of four of the
trust preferred debt issuances described in Note 9. The gain on the interest
rate swaps for the year of $0.9 million has been included in interest expense
for 2006. On August 2, 2006, we terminated the swap contracts for net proceeds
of $3.5 million.

Tartan Capital Limited

On May 4, 2006, we entered into an agreement that provides two classes
totaling $155.0 million of collateralized catastrophe protection with Tartan
Capital Limited ("Tartan"), a special purpose Cayman Islands company which was
funded through a catastrophe bond transaction. This coverage is for the period
January 1, 2006 to December 31, 2008 and provides Scottish Annuity & Life
Insurance Company (Cayman) Ltd. with protection from losses arising from higher
than normal mortality levels within the United States, as reported by the U.S.
Centers for Disease Control and Prevention or other designated reporting agency.
This coverage is based on a mortality index, which is based on age and gender
weighted mortality rates for the United States constructed from publicly
available data sources, as defined at inception, and which compares the
mortality rates over consecutive 2 year periods to a reference index value. Upon
the occurrence of a loss event, where the indexed losses exceeds the trigger
level for a given tranche, the percentage of the original principal for each
tranche paid to Scottish Annuity & Life Insurance Company (Cayman) Ltd.
increases linearly between the trigger level and exhaustion level. Since the
amount of any recovery is based on the mortality index, the amount of the
recovery may be different than the ultimate claims paid by Scottish Annuity and
Life Insurance Company (Cayman) Ltd. and any of its affiliates resulting from
the loss event.

149

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

18. Commitments and contingencies (continued)

published mortality data. Expenses related to this transaction are included in
"Acquisition costs and other insurance expenses" in the Corporate and Other
Segment.

Lease commitments

We lease office space in the countries in which we conduct business
under operating leases that expire at various dates through 2023. Total rent
expense with respect to these operating leases for the years ended December 31,
2006, 2005 and 2004 was approximately $5.0 million, $3.2 million and $1.9
million, respectively.

Future minimum lease payments under the leases are expected to be:

Year ending December 31
2007.......................................... $5,615
2008.......................................... 5,334
2009.......................................... 5,202
2010.......................................... 4,537
2011.......................................... 4,484
Thereafter.................................... 28,373
-----------
Total future lease commitments................ $53,545
===========

Concentrations of credit risk

The creditworthiness of a counter-party is evaluated by us, taking into
account credit ratings assigned by rating agencies. The credit approval process
involves an assessment of factors including, among others, the counterparty,
country and industry credit exposure limits. Collateral may be required, at our
discretion, on certain transactions based on the creditworthiness of the
counterparty.

The areas where significant concentrations of credit risk may exist
include amounts recoverable from reinsurers and reinsurance balances receivable
(collectively "reinsurance assets"), investments and cash and cash equivalent
balances. A credit exposure exists with respect to reinsurance assets as they
may become uncollectible. We manage our credit risk in our reinsurance
relationships by transacting with reinsurers that we consider financially sound,
and if necessary, we may hold collateral in the form of funds, trust accounts
and/or irrevocable letters of credit. This collateral can be drawn on for
amounts that remain unpaid beyond specified time periods on an individual
reinsurer basis.

Legal proceedings

150

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

18. Commitments and contingencies (continued)

E. Miller, our Chief Financial Officer; Scott E. Willkomm, our former Chief
Executive Officer; Elizabeth Murphy, our former Chief Financial Officer; our
Board members Michael Austin, Bill Caulfeild-Browne, Robert Chmely, Michael
French, Lord Norman Lamont, Hazel O'Leary, and Glenn Schafer; and certain third
parties, including Goldman Sachs and Bear Stearns in their capacities as
underwriters in various securities offerings by us and Ernst & Young LLP in
their capacity as independent registered public accounting firm. The complaint
is brought on behalf of a putative class consisting of investors who purchased
our securities between February 17, 2005 and July 31, 2006. The complaint
alleges violations of Sections 10(b) and 20(a) of the Exchange Act, Rule 10b-5,
and Sections 11, 12(a)(2), and 15 of the Securities Act. The complaint seeks an
unspecified amount of damages, as well as other forms of relief. We contest the
allegations that have been asserted and plan to vigorously defend our interests
in the action.

Government subpoenas

We have received separate subpoenas from the staff of the SEC and the
Permanent Subcommittee on Investigations of the United States Senate Committee
on Homeland Security and Governmental Affairs ("PSI"). The SEC subpoena seeks
documents and other information regarding transactions and trading involving our
securities by certain former officers and directors of Scottish Re (each of whom
left those positions by mid-year 2001), by certain of our original shareholders
of Scottish Re, and by our former Chairman. The PSI subpoena is in connection
with the PSI's general review of compliance with anti-money laundering, tax and
securities laws and regulations related to financial transactions by individuals
and domestic and offshore entities. The PSI subpoena seeks documents regarding
our formation of Scottish Re, certain wealth management products and
transactions involving the individuals mentioned above. We believe we have fully
responded to these inquiries. We have not received any further inquiry. Due to
the nature of the subpoenas, it is difficult to fully assess the scope or any
potential outcome to us of these inquiries, including any potential enforcement
actions involving us, these inquiries may result in negative publicity and could
have an adverse affect on us.

Mediation

On June 16, 2005, we requested mediation from Employers Reinsurance
Corporation ("ERC") pursuant to the stock purchase agreement transferring a 95%
interest in Scottish Re Life Corporation (formerly ERC Life Corporation) to
Scottish Holdings, Inc. We assert that ERC breached certain representations and
warranties under the agreement. Any negative outcome from this mediation will
not have a material adverse impact on our financial position because the
asserted breaches have already been fully reflected in our financial position at
December 31, 2006. The parties have held multiple mediation sessions, but have
been unable to resolve the dispute. No date has been scheduled for a future
mediation session.

151

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

18. Commitments and contingencies (continued)

Directors and Officers

We indemnify our directors and officers as provided in our charters and
by-laws. Since this indemnity generally is not subject to limitation with
respect to duration or amount, we do not believe that it is possible to
determine the maximum potential amount due under this indemnity in the future.

19. Quarterly financial data (Unaudited)

Quarterly financial data for the year ended December 31, 2006 is as
follows:

Quarter Ended
-----------------------------------------------------------------
December 31 September 30 June 30 March 31
--------------- -------------- ------------- -------------

Total revenue.................................. $ 668,207 $ 611,346 $ 593,626 $ 578,321
Income (loss) from continuing operations before
income taxes and minority interest.......... (114,825) (6,806) (32,413) 6,554
Net income (loss).............................. (231,558) (27,415) (121,590) 13,849

Dividend declared on non-cumulative perpetual
preferred shares............................ (2,265) (2,266) (2,265) (2,266)

Imputed dividend on prepaid variable share
forward contract............................ - (809) (72) -
--------------- -------------- ------------- -------------

Net income (loss) available to ordinary
shareholders................................ $ (233,823) $ (30,490) $ (123,927) $ 11,583
=============== ============== ============= =============

Basic earnings (loss) per ordinary share....... $ (3.86) $ (0.54) $ (2.31) $ 0.22
Diluted earnings (loss) per ordinary share..... $ (3.86) $ (0.54) $ (2.31) $ 0.20

152

SCOTTISH RE GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2006

19. Quarterly financial data (Unaudited) (continued)

Quarterly financial data for the year ended December 31, 2005 is as
follows:

Quarter Ended
----------------------------------------------------------------
December 31 September 30 June 30 March 31
--------------- -------------- ------------- -------------

Total revenue.................................. $ 674,980 $ 563,740 $ 502,046 $ 556,563
Income from continuing operations before income
taxes and minority interest................. 59,153 27,846 (6,798) 33,423
Net income..................................... 60,776 34,410 1,591 33,420
Dividend declared on non-cumulative perpetual
preferred shares............................ (2,266) (2,492) - -
--------------- -------------- ------------- -------------
Net income available to ordinary shareholders.. $ 58,510 $ 31,918 $ 1,591 $ 33,420
=============== ============== ============= =============

Basic earnings per ordinary share.............. $ 1.26 $ 0.70 $ 0.04 $ 0.84
Diluted earnings per ordinary share............ $ 1.18 $ 0.66 $ 0.03 $ 0.74

Revenues for the first, second and third quarters of 2005 differ from
amounts included in our respective Quarterly Reports on Form 10-Q filed during
2005 due to a change in presentation of experience refunds. In 2005, $1.6
million, $1.7 million and ($2.2 million) of experience refunds were netted
against "Acquisition costs and other insurance expenses" in the first, second
and third quarters, respectively, but were reclassified to "Premiums earned"
beginning in the fourth quarter of 2005.

Computations of results per share for each quarter are made
independently of results per share for the year. Due to rounding and
transactions affecting the weighted average number of shares outstanding in each
quarter, the sum quarterly results per share does not equal results per share
for the year.

Schedule Page
I Summary of Investments....................................... 154
II Condensed Financial Information.............................. 155-156
III Supplementary Insurance Information.......................... 157
IV Reinsurance.................................................. 158
V Valuation and Qualifying Accounts............................ 159

All other schedules specified in Regulation S-X are omitted for the
reason that they are not required, are not applicable, or that equivalent
information has been included in the consolidated financial statements, and
notes thereto, appearing in Item 8.

153

SCOTTISH RE GROUP LIMITED
SCHEDULE 1 - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 2006
(Expressed in Thousands of United States Dollars)

Year Ended December 31, 2006 Amount at
---------------------------- which shown in
Amortized Cost Market Value Balance Sheet
----------------- --------------- -----------------

Type of investment:
Fixed maturities
U.S. Treasury securities and U.S. government
agency obligations.................................... $ 69,205 $ 68,021 $ 68,021
Corporate securities..................................... 2,723,185 2,700,504 2,700,504
Municipal bonds.......................................... 52,676 52,194 52,194
Mortgage or asset backed securities...................... 5,258,677 5,244,805 5,244,805
----------------- --------------- -----------------
Total fixed maturities................................... 8,103,743 8,065,524 8,065,524
----------------- --------------- -----------------
Preferred stock.......................................... $ 119,721 $ 116,933 $ 116,933
Cash and cash equivalents................................ 622,756 622,756 622,756
Other investments........................................ 65,448 65,448 65,448
Funds withheld at interest............................... 1,942,079 1,942,079 1,942,079
----------------- --------------- -----------------
Total investments, cash and cash equivalents............. $ 10,853,747 $ 10,812,740 $ 10,812,740
================= =============== =================

154

SCOTTISH RE GROUP LIMITED

SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

(Expressed in Thousands of United States Dollars)

BALANCE SHEETS (PARENT COMPANY)

Assets December 31, 2006 December 31, 2005
-------------------- ----------------------

Investment in subsidiaries on equity basis............................. $ 1,197,570 $ 1,534,544
Cash and cash equivalents.............................................. 14,238 52,859
Other assets........................................................... 26,993 14,155
-------------------- ----------------------
Total assets........................................................... $ 1,238,801 $ 1,601,558
==================== ======================
Liabilities
Accounts payable and other liabilities................................. $ 37,944 $ 71,789
Long term debt......................................................... - 115,000
Mezzanine equity....................................................... 143,665 143,057
Total shareholders' equity............................................. 1,057,192 1,271,712
-------------------- ----------------------
Total liabilities, minority interest, mezzanine equity and
shareholders' equity................................................. $ 1,238,801 $ 1,601,558
==================== ======================

STATEMENTS OF INCOME (LOSS)(PARENT COMPANY)

Year Ended Year Ended Year Ended
December 31, 2006 December 31, 2005 December 31, 2004
------------------- --------------------- ---------------------

Revenues
Investment income, net............................. $ 21,917 $ 12,562 $ 4,453
Net realized gains (losses)........................ (82) (16) 58
Other income (loss), net of operating expenses..... (5,889) (1,155) 5,356
Interest expense................................... (8,683) (9,728) (8,198)
Income tax expense................................. (69) (9) (119)
------------------- --------------------- ---------------------
Income before undistributed earnings (loss) of
subsidiaries..................................... 7,194 1,654 1,550
Equity in earnings (loss) of subsidiaries.......... (373,908) 128,543 69,841
------------------- --------------------- ---------------------
Net income (loss).................................. $ (366,714) $ 130,197 $ 71,391
=================== ===================== =====================

155

SCOTTISH RE GROUP LIMITED

SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)

(Expressed in Thousands of United States Dollars)

STATEMENTS OF CASH FLOWS (PARENT COMPANY)

Year Ended Year Ended Year Ended
December 31, 2006 December 31, 2005 December 31, 2004
-------------------- -------------------- ---------------------

Operating activities
Net income (loss).................................. $ (366,714) $ 130,197 $ 71,391
Equity in earnings (loss) of subsidiaries.......... 373,908 (128,543) (69,841)
Other.............................................. (47,046) 77,748 (10,622)
-------------------- -------------------- ---------------------
Net cash provided by (used in) operating activities (39,852) 79,402 (9,072)
-------------------- -------------------- ---------------------
Investing activities
Proceeds from sales of fixed maturity investments.. - - 1,546
Capital contributions to subsidiaries.............. (23,047) (303,560) (170,624)
-------------------- -------------------- ---------------------
Net cash used in investing activities........... (23,047) (303,560) (169,078)
-------------------- -------------------- ---------------------
Financing activities
Net proceeds from issuance of ordinary shares and
warrants........................................ 153,698 165,704 135,335
Net proceeds from issuance of perpetual preferred
shares.......................................... - 120,436 -
Net proceeds from issuance of long term debt (115,000) - -
Net proceeds from issuance of notes payable to buy
Cypress Entities................................ - - 41,282
Dividends paid on non-cumulative perpetual preferred
shares.......................................... (9,062) (2,492) -
Dividends paid on ordinary shares.................. (5,359) (8,989) (7,147)
-------------------- -------------------- ---------------------
Net cash provided by financing activities....... 24,277 274,659 169,470
==================== ==================== =====================
Net change in cash and cash equivalents............ (38,622) 50,501 (8,680)
Cash and cash equivalents, beginning of year....... 52,860 2,358 11,038
-------------------- -------------------- ---------------------
Cash and cash equivalents, end of year............. $ 14,238 $ 52,859 $ 2,358
==================== ==================== =====================

156

SCOTTISH RE GROUP LIMITED

SCHEDULE III - SUPPLEMENTAL INSURANCE INFORMATION

(Expressed in Thousands of United States Dollars)

Year Ended December 31, 2006
---------------------------------------------------------------------------------------------
Future
policy
benefits
and
Interest Claims, Amortization
Deferred sensitive Net losses and of deferred Other
acquisition contract Premium investment settlement acquisition operating
Segment costs liabilities revenue (1) income expenses* costs costs
- ------- ------------- ----------- ------------ ----------- ----------- ------------- -------------

Life Reinsurance North
America.............. $ 603,729 $ 6,809,203 $1,719,239 $ 584,359 $ 1,663,313 $ 75,952 $ 559,741
Life Reinsurance
International........ 7,618 245,108 122,746 24,106 101,126 29,598 72,728
Corporate and Other..... 7,390 - - 8,159 - 3,922 92,610
----------- ----------- ---------- ---------- ----------- ----------- ----------
Total................... $ 618,737 $ 7,054,311 $1,841,985 $ 616,624 $ 1,764,439 $ 109,472 $ 725,079
=========== =========== ========== ========== =========== =========== ==========

Year Ended December 31, 2005
---------------------------------------------------------------------------------------------
Future
policy
benefits
and
Interest Claims, Amortization
Deferred sensitive Net losses and of deferred Other
acquisition contract Premium investment settlement acquisition operating
Segment costs liabilities revenue (1) income expenses* costs costs
- ------- ------------- ----------- ------------ ----------- ----------- ------------- -------------
Life Reinsurance North
America.............. $ 575,124 $ 7,217,141 $1,814,875 $ 341,539 $ 1,498,567 $ 50,847 $ 452,930
Life Reinsurance
International........ 8,147 216,652 119,055 11,488 76,906 17,232 28,766
Corporate and Other..... 11,312 - - 2,810 - 827 57,630
----------- ----------- ---------- ---------- ----------- ---------- ----------
Total................... $ 594,583 $ 7,433,793 $1,933,930 $ 355,837 $ 1,575,473 $ 68,906 $ 539,326
=========== =========== ========== ========== =========== ========== ==========

Year Ended December 31, 2004
---------------------------------------------------------------------------------------------
Future
policy
benefits
and
Interest Claims, Amortization
Deferred sensitive Net losses and of deferred Other
acquisition contract Premium investment settlement acquisition operating
Segment costs liabilities revenue (1) income expenses* costs costs
- ------- ------------- ----------- ------------ ----------- ----------- ------------- -------------
Life Reinsurance North
America.............. $ 399,056 $ 6,260,282 $ 466,927 $ 206,009 $ 450,844 $ 66,864 $ 90,531
Life Reinsurance
International........ 6,077 222,880 122,518 10,023 81,646 12,577 23,855
Corporate and Other..... 12,173 - - 1,106 - 794 31,825
------------- ----------- ------------ ----------- ----------- ------------- -------------
Total................... $ 417,306 $ 6,483,162 $ 589,445 $ 217,138 $ 532,490 $ 80,235 $ 146,211
============= =========== ============ =========== =========== ============= =============

- ---------------

(1) Certain reclassifications have been made to the 2004 and 2005 amounts to
conform to the 2006 presentation.

* Includes claims and other policy benefits and interest credited on interest
sensitive contract liabilities.

157

SCOTTISH RE GROUP LIMITED

SCHEDULE IV - REINSURANCE

(Expressed in Thousands of United States Dollars)

Year Ended December 31, 2006
--------------------------------------------------------------------------------
Percentage
of amount
Gross Ceded to other Assumed from assumed
Amount companies other companies Net Amount to net
------------ ----------------- ----------------- -------------- -----------

Life Insurance In force Premiums......... - (56,646,676) 1,022,947,133 966,300,457 106%
============ ================= ================ ============== ===========
Life Reinsurance North America........... $ - $ (320,390) $ 2,039,630 $ 1,719,239 119%
Life Reinsurance International........... - (14,248) 136,993 122,746 112%
Corporate and Other...................... - - - -- -
------------ ----------------- ----------------- -------------- -----------
Total.................................... $ - $ (334,638) $ 2,176,623 $ 1,841,985 118%
============ ================= ================= ============== ===========

Year Ended December 31, 2005
--------------------------------------------------------------------------------
Percentage
of amount
Gross Ceded to other Assumed from assumed
Amount companies other companies Net Amount to net
------------ ----------------- ----------------- -------------- -----------
Life Insurance In force Premiums......... - (139,517,423) 1,024,250,510 884,733,087 116%
============ ================= ================= ============== ===========
Life Reinsurance North America........... $ - $ (204,119) $ 2,018,994 $ 1,814,875 111%
Life Reinsurance International........... - (17,230) 136,285 119,055 114%
Corporate and Other...................... - - - - -
------------ ----------------- ----------------- -------------- -----------
Total.................................... $ - $ (221,349) $ 2,155,279 $ 1,933,930 111%
============ ================= ================= ============== ===========

Year Ended December 31, 2004
--------------------------------------------------------------------------------
Percentage
of amount
Gross Ceded to other Assumed from assumed
Amount companies other companies Net Amount to net
------------ ----------------- ----------------- -------------- -----------
Life Insurance In force Premiums*........ - (84,925,322) 306,408,016 221,482,694 138%
============ ================= ================= ============== ===========
Life Reinsurance North America........... $ - $ (226,099) $ 693,024 $ 466,925 148%
Life Reinsurance International........... - (11,538) 134,058 122,520 109%
Corporate and Other...................... - - - - -
------------ ----------------- ----------------- -------------- -----------
Total.................................... $ - $ (237,637) $ 827,082 $ 589,445 140%
============ ================= ================= ============== ===========

- ---------------
* Excludes business acquired from ING.

158

SCOTTISH RE GROUP LIMITED

SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS

(Expressed in Thousands of United States Dollars)

Year Ended December 31, 2006
-----------------------------------------------------------------
Balance at Charges to
Beginning of Costs and Charges to Balance at end
Period Expenses Other Accounts of Period
-------------- -------------- --------------- ---------------

Description
Allowance on income taxes...................... $ 18,451 $ 209,137 $ 77,274 $ 304,862
Reserve for uncollectible reinsurance.......... $ 6,000 $ 6,124 $ - $ 12,124

Year Ended December 31, 2005
-----------------------------------------------------------------
Balance at Charges to
Beginning of Costs and Charges to Balance at end
Period Expenses Other Accounts of Period
-------------- -------------- --------------- ---------------
Description
Allowance on income taxes...................... $ 22,148 $ - $ (3,697)* $ 18,451
Reserve for uncollectible reinsurance.......... $ - $ 6,000 $ - $ 6,000

Year Ended December 31, 2004
-----------------------------------------------------------------
Balance at Charges to
Beginning of Costs and Charges to Balance at end
Period Expenses Other Accounts of Period
-------------- -------------- --------------- ---------------
Description
Allowance on income taxes...................... $ - $ - $ 22,148* $ 22,148

- ---------------
* This valuation arose in respect of the acquisition of the ING individual
life reinsurance business. This was established as a result of the purchase
accounting for the acquisition and therefore has not been included in the
determination of net income.

159

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant, in the capacities and on the dates indicated.

Signature Title Date
--------- ----- ----

/s/ Glenn Schafer
- ------------------------------------------
Glenn Schafer Chairman and Director March 1, 2007

/s/ Michael Austin
- ------------------------------------------
Michael Austin Director March 1, 2007

/s/ G. William Caulfeild-Browne
- ------------------------------------------
G. William Caulfeild-Browne Director March 1, 2007

/s/ Robert M. Chmely
- ------------------------------------------
Robert M. Chmely Director March 1, 2007

/s/ Jean Claude Damerval
- ------------------------------------------
Jean Claude Damerval Director March 1, 2007

/s/ Michael French
- ------------------------------------------
Michael French Director March 1, 2007

/s/ Lord Norman Lamont
- ------------------------------------------
Lord Norman Lamont Director March 1, 2007

/s/ Hazel O'Leary
- ------------------------------------------
Hazel O'Leary Director March 1, 2007

/s/ Jeffrey Hughes
- ------------------------------------------
Jeffrey Hughes Director March 1, 2007

/s/ Paul Goldean
- ------------------------------------------
Paul Goldean CEO and Director March 1, 2007

160