Scottish Re Group Limited Announces Operating Results for the Second Quarter
Ended June 30, 2007
HAMILTON, Bermuda--(BUSINESS WIRE)--
After a five day extension resulting from last week's Form 12b-25 filing,
Scottish Re Group Limited (NYSE:SCT) today reported that net income available to
ordinary shareholders for the three months ended June 30, 2007 was $99.5
million, or $0.63 per diluted ordinary share, as compared to a net loss
available to ordinary shareholders of $123.9 million, or $2.31 per diluted
ordinary share, for the prior year period. Net income available to ordinary
shareholders for the six months ended June 30, 2007 was $64.7 million, or $0.58
per diluted ordinary share, as compared to a net loss available to ordinary
shareholders of $112.3 million, or $2.10 per diluted ordinary share for the
prior year period.
Net operating earnings available to ordinary shareholders for the three months
ended June 30, 2007 was $98.2 million, or $0.62 per diluted ordinary share, as
compared to a net operating loss of $130.3 million, or $2.43 per diluted
ordinary share, for the prior year period. Net operating earnings available to
ordinary shareholders for the six months ended June 30, 2007 was $62.3 million,
or $0.56 per diluted ordinary share, as compared to a net operating loss of
$116.0 million, or $2.17 per diluted ordinary share, for the prior year period.
Included in net income available to ordinary shareholders and net operating
earnings for the three months ended June 30, 2007 is a significant one-time tax
benefit. This benefit resulted from the interaction between the release of a
previously recorded valuation allowance following the redomestication of Orkney
Re, Inc. and Section 382 of the Internal Revenue Code restrictions on the future
deduction of net operating losses incurred prior to the change-in-control.
Excluding the one-time tax benefit, we reported a pre-tax operating loss of
$52.9 million for the three months ended June 30, 2007 as compared to a pre-tax
operating loss of $28.5 million for the prior year period. The pre-tax operating
loss increased over the prior year period primarily due to expenses incurred in
the current quarter related to the change-in-control. As in the first quarter of
2007, we continue to report pre-tax operating losses due to the impact our
underlying GAAP valuation models have on profit emergence in our North America
traditional life reinsurance business, the impact of our current financial
strength ratings on the level of new business production and collateral
financing costs, and the costs of penetrating certain international markets.
Despite the second quarter pre-tax operating loss, we made significant progress
on several fronts. New business production of $5.8 billion in our North America
segment was higher than planned and, despite our financial strength ratings, we
won a number of new treaties and incurred no treaty recaptures. Mortality
experience in our North America segment was favorable to plan for the second
consecutive quarter. We also exited our Middle Eastern business through a
retrocession arrangement with Arab Insurance Group because that business did not
meet our strategic objectives. Additionally, we initiated the first phase of our
restructuring program. We incurred $20.3 million of restructuring expenses
during the current quarter and expect to incur an additional $6.0 million of
restructuring expenses in the second half of 2007.
Paul Goldean, Chief Executive Officer of Scottish Re Group Limited, commented,
"Following the completion of the equity investment transaction with affiliates
of MassMutual Capital Partners and Cerberus Capital Management on May 7, 2007,
we have taken the first steps towards re-establishing our position as a leading
global life reinsurance company. We initiated a series of process improvement
initiatives across the Company focused on strengthening our financial, risk
management and operational controls."
"Our new Board of Directors was elected and met earlier this month. During this
meeting, I resigned from the Board of Directors and George Zippel, our incoming
Chief Executive Officer effective tomorrow, was elected to the Board. As
planned, a number of key executives have left the organization. We are actively
recruiting their replacements and expect to make further organizational changes
in the coming quarter."
Mr. Goldean concluded, "We have also undertaken a detailed review of our
non-prime investment exposure which includes $2.1 billion of subprime
residential Asset Backed Securities and an additional $1.0 billion of Alt-A
Residential Mortgage Backed Securities. We are working actively with our third
party investment managers to further evaluate and proactively manage our
subprime and Alt-A exposures. Additional disclosure of our subprime and Alt-A
exposures have been made available in our Form 10-Q for the three months ended
June 30, 2007."
Other Financial Highlights
Total revenues for the three months ended June 30, 2007 increased 3% to $612.7
million from $593.6 million for the prior year period. Excluding realized gains
and losses and the change in value of embedded derivatives, total revenues for
the three months ended June 30, 2007 increased 2% to $611.4 million from $597.6
million for the prior year period. Total revenues for the six months ended June
30, 2007 increased 4% to $1,218.4 million from $1,171.9 million for the prior
year period. Excluding realized gains and losses and the change in value of
embedded derivatives, total revenues for the six months ended June 30, 2007
increased 3% to $1,215.9 million from $1,179.3 million for the prior year
period.
Total benefits and expenses increased 6% to $664.3 million for the three months
ended June 30, 2007 from $626.0 million for the prior year period. Total
benefits and expenses increased 8% to $1,290.1 million for the six months ended
June 30, 2007 from $1,197.8 million for the prior year period.
Operating expenses increased 52% to $59.8 million for the three months ended
June 30, 2007 from $39.4 million for the prior year period. Operating expenses
increased 34% to $94.4 million for the six months ended June 30, 2007 from $70.5
million for the prior year period. The Company's operating expense ratio (the
ratio of operating expenses to total revenues excluding realized gains and
losses and the change in value of embedded derivatives) for the six months ended
June 30, 2007 was 8%, as compared to an operating expense ratio of 6% for the
prior year period.
Income tax benefit for the three months ended June 30, 2007 was $154.3 million
compared to income tax expense of $89.0 million for the prior year period.
Income tax benefit for the six months ended June 30, 2007 was $140.9 million
compared to income tax expense of $81.6 million for the prior year period. In
the second quarter of 2007, our valuation allowance
decreased by approximately $203.6 million to $74.0 million. A majority of the
valuation release is attributable to the expected utilization of net operating
loss carryforwards at the U.S. Consolidated Tax Life Group to offset significant
current year taxable income generated from the redomestication of Orkney Re,
Inc. from South Carolina to Delaware, which occurred in May 2007. The net
operating loss carryforwards were previously written off via a valuation
allowance, thus the utilization of these results in an offsetting valuation
allowance release.
We look forward to sharing additional information at our scheduled earnings call
and additionally, have posted to our Website, www.scottishre.com a Financial
Data Supplement to add further clarification to our financial results for the
quarter.
The Company's earnings conference call will be held at 8:30 am (EDT) on
Wednesday, August 15, 2007. The dial-in number is 800-657-1263 (U.S.) or
973-633-8200 (International) and the passcode is 8947744. The conference call
will also be broadcast live via audio Webcast, which will be available on the
home page of the Company's Website at www.scottishre.com. Following the earnings
conference call, a replay of the call will be available for two weeks beginning
at 11:00 am (EDT) on Wednesday, August 15 2007, and ending at 12:00 am (EDT) on
Wednesday, August 29, 2007. The dial-in number for the call replay is
877-519-4471 (U.S.) or 973-341-3080 (International) and the passcode is 8947744.
An audio Webcast of the call will be archived and available for the same period
on the Company's Website at www.scottishre.com.
About Scottish Re
Scottish Re Group Limited is a global life reinsurance specialist. Scottish Re
has operating businesses in Bermuda, Grand Cayman, Guernsey, Ireland, Singapore,
the United Kingdom and the United States. Its flagship operating subsidiaries
include Scottish Annuity & Life Insurance Company (Cayman) Ltd., Scottish Re
(U.S.), Inc. and Scottish Re Limited. Additional information about Scottish Re
Group Limited can be obtained from its Website at www.scottishre.com.
Certain statements included herein 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. Management of the Company cautions that 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 expressed or implied by the forward-looking statements.
-- uncertainties relating to the ratings accorded to us and our
insurance subsidiaries;
-- uncertainties in our ability to raise equity capital or other sources of
funding to support ongoing capital and liquidity needs;
-- uncertainties relating to future actions that may be taken by creditors,
regulators and ceding insurers relating to our ratings and financial
condition;
-- the risk that our risk analysis and underwriting may be
inadequate;
-- changes in expectations regarding future realization of gross
deferred tax assets;
-- exposure to mortality experience which differs from our
assumptions;
-- risks related to recent negative developments in the residential
mortgage market, especially in the subprime sector, and our exposure to
such market;
-- 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;
-- uncertainties arising from control of our invested assets by
third parties;
-- developments in global financial markets that could affect our
investment portfolio and fee and other income;
-- changes in the rate of policyholder withdrawals or recapture of
reinsurance treaties whether caused by ratings pressures or general
market conditions;
-- the impact of adjustments to previous financial estimates arising from
our process improvement program under which, among other things, enhance
the automation of our reporting, valuation, and administrative tools
(cedant and retrocession accounting);
-- the risk that our retrocessionaires may not honor their
obligations to us;
-- terrorist attacks on the United States and the impact of such
attacks on the economy in general and on our business in
particular;
-- political and economic risks in developing countries;
-- the impact of acquisitions, including our ability to successfully
integrate acquired businesses, the competing demands for our capital and
the risk of undisclosed liabilities;
-- the risk that an ownership change will result in a limitation on our
ability to fully utilize tax net operating losses;
-- loss of the services of any of our key employees;
-- losses due to foreign currency exchange rate fluctuations;
-- uncertainties relating to government and regulatory policies
(such as subjecting us to insurance regulation or taxation in
additional jurisdictions);
-- risks relating to recent class action litigations;
-- the competitive environment in which we operate and associated
pricing pressures; and
-- changes in accounting principles.
Investors are also directed to consider the risks and uncertainties discussed in
documents filed by the Company with the Securities and Exchange Commission.
Scottish Re Group Limited
Financial Highlights
(Stated in Thousands of United States Dollars, Except Share Data)
(Unaudited)
Three months ended Six months ended
June 30 June 30
2007 2006 2007 2006
------------ ------------ ------------ ------------
Total revenue $ 612,653 $ 593,626 $ 1,218,397 $ 1,171,947
Net operating
earnings (loss)
available to
ordinary
shareholders(a) 98,232 (130,313) 62,318 (116,024)
Net income (loss) 102,690 (121,590) 69,478 (107,741)
Net income (loss)
available to
ordinary
shareholders 99,543 (123,927) 64,650 (112,344)
Net operating
earnings (loss)
per ordinary
share
Basic $ 1.44 $ (2.43) $ 0.94 $ (2.17)
Diluted $ 0.62 $ (2.43) $ 0.56 $ (2.17)
Income (loss) per
ordinary share
Basic $ 1.46 $ (2.31) $ 0.98 $ (2.10)
Diluted $ 0.63 $ (2.31) $ 0.58 $ (2.10)
Dividends declared
per ordinary
share $ - $ - $ - $ 0.05
Weighted average
ordinary shares
outstanding
Basic 68,195,614 53,720,242 66,204,855 53,578,152
Diluted 158,854,955 53,720,242 111,784,966 53,578,152
(a) Excludes the effects of net realized capital gains and losses and the change
in value of embedded derivatives, as adjusted for the related effects upon the
amortization of deferred acquisition costs, and taxes related to these items as
well as dividends on the perpetual preferred shares and imputed dividend on
prepaid variable share forward contract.
June 30, December 31,
2007 2006
---------- ------------
Book value per ordinary share $ 15.21 $ 15.39
Basic book value per ordinary share -
excluding other comprehensive income and
value of embedded derivatives $ 16.36 $ 15.50
Fully diluted book value per ordinary share -
excluding other comprehensive income and
value of embedded derivatives $ 7.83 $ 15.78
Scottish Re Group Limited
Consolidated Balance Sheets
(Stated in Thousands of United States Dollars, Except Share Data)
June 30, December 31,
2007 2006
(Unaudited) (Audited)
------------ ------------
Assets
Fixed maturity investments $ 7,977,603 $ 8,065,524
Preferred stock 104,771 116,933
Cash and cash equivalents 1,110,585 622,756
Other investments 65,685 65,448
Funds withheld at interest 1,747,573 1,942,079
------------ ------------
Total investments 11,006,217 10,812,740
Accrued interest receivable 58,749 57,538
Reinsurance balances and risk fees receivable 472,594 481,908
Deferred acquisition costs 627,114 618,737
Amounts recoverable from reinsurers 552,822 554,589
Present value of in-force business 47,282 48,779
Other assets 124,770 178,311
Deferred tax asset 7,283 -
Segregated assets 725,716 683,470
------------ ------------
Total assets $13,622,547 $13,436,072
============ ============
Liabilities
Reserves for future policy benefits $ 4,018,420 $ 3,919,901
Interest sensitive contract liabilities 2,905,150 3,399,410
Collateral finance facilities 3,800,603 3,757,435
Accounts payable and other liabilities 160,612 69,949
Reinsurance balances payable 147,830 97,615
Current income tax payable 6,476 48
Deferred tax liability - 169,977
Long term debt 129,500 129,500
Segregated liabilities 725,716 683,470
------------ ------------
Total liabilities 11,894,307 12,227,305
------------ ------------
Minority interest 7,388 7,910
Mezzanine equity
Convertible cumulative participating
preferred shares (liquidation preference
$606.5 million) 556,049 -
Hybrid capital units - 143,656
------------ ------------
Total mezzanine equity 556,049 143,656
------------ ------------
Shareholders' equity
Ordinary shares, par value $0.01 per share:
Issued and outstanding 68,383,370 shares
(2006 - 60,554,104) 684 606
Non-cumulative perpetual preferred shares,
par value $0.01 per share: Issued: 5,000,000
shares (2006 - 5,000,000) 125,000 125,000
Additional paid-in capital 1,204,629 1,050,860
Accumulated other comprehensive income (loss) (78,272) 340
Retained deficit (87,238) (119,614)
------------ ------------
Total shareholders' equity 1,164,803 1,057,192
------------ ------------
Total liabilities, minority interest,
mezzanine equity and shareholders' equity $13,622,547 $13,436,072
============ ============
Scottish Re Group Limited
Consolidated Statements of Income (Loss)
(Stated in Thousands of United States Dollars)
(Unaudited)
Three months ended Six months ended
June 30 June 30
2007 2006 2007 2006
--------- ---------- ----------- -----------
Revenues
Premiums earned, net $446,296 $ 444,942 $ 904,510 $ 893,963
Investment income, net 160,879 147,977 302,476 276,999
Fee and other income 4,234 4,639 8,864 8,372
Net realized losses (2,055) (11,298) (6,344) (24,899)
Change in value of
embedded derivatives,
net 3,299 7,366 8,891 17,512
--------- ---------- ----------- -----------
Total revenues 612,653 593,626 1,218,397 1,171,947
--------- ---------- ----------- -----------
Benefits and expenses
Claims and other policy
benefits 388,248 372,101 771,831 746,564
Interest credited to
interest sensitive
contract liabilities 36,420 55,399 71,722 98,100
Acquisition costs and
other insurance
expenses, net 96,501 104,872 191,608 192,403
Operating expenses 59,802 39,365 94,382 70,457
Collateral finance
facilities expense 75,285 47,236 148,980 78,323
Interest expense 8,034 7,066 11,610 11,959
--------- ---------- ----------- -----------
Total benefits and
expenses 664,290 626,039 1,290,133 1,197,806
--------- ---------- ----------- -----------
Loss before income taxes
and minority interest (51,637) (32,413) (71,736) (25,859)
Income tax benefit
(expense) 154,321 (89,043) 140,940 (81,586)
--------- ---------- ----------- -----------
Income (loss) before
minority interest 102,684 (121,456) 69,204 (107,445)
Minority interest 6 (134) 274 (296)
--------- ---------- ----------- -----------
Net income (loss) 102,690 (121,590) 69,478 (107,741)
Dividends declared on
non-cumulative perpetual
preferred shares (2,265) (2,265) (4,531) (4,531)
Imputed dividend on
prepaid variable share
forward contract - (72) - (72)
Amount allocated to
convertible cumulative
participating preferred
shareholders (882) - (297) -
--------- ---------- ----------- -----------
Net income (loss)
available to ordinary
shareholders $ 99,543 $(123,927) $ 64,650 $ (112,344)
========= ========== =========== ===========
Pre tax operating loss
Pre-tax loss $(51,637) $ (32,413) $ (71,736) $ (25,859)
Net realized losses 2,055 11,298 6,344 24,899
Change in value of
embedded derivatives,
net (3,299) (7,366) (8,891) (17,512)
--------- ---------- ----------- -----------
Pre-tax operating loss $(52,881) $ (28,481) $ (74,283) $ (18,472)
========= ========== =========== ===========
Scottish Re Group Limited
Supplemental Information - Net Operating Earnings (Loss)
(Stated in Thousands of United States Dollars, Except Share Data)
(Unaudited)
"Net operating earnings (loss) available to ordinary shareholders" is a non-GAAP
measurement. The Company determines net operating earnings (loss) available to
ordinary shareholders by adjusting net earnings (loss) available to ordinary
shareholders by net realized capital gains and losses and the change in value
of embedded derivatives, as adjusted for the related effects upon the
amortization of deferred acquisition costs and taxes. While these items may be
significant components in understanding and assessing the Company's earnings
(loss) available to ordinary shareholders enhances the understanding of its
results of operations by highlighting earnings attributable to the normal,
recurring operation of its reinsurance business. However, net operating
earnings (loss) available to ordinary shareholders is not a substitute for net
loss determined in accordance with GAAP. Reconciliations to net earnings (loss)
available to ordinary shareholders are provided in the following tables.
Three months ended Six months ended
June 30 June 30
2007 2006 2007 2006
------------- ------------ ------------- ------------
Net operating
earnings (loss)
available to
ordinary
shareholders
Net income
(loss)
available to
ordinary shares $ 99,543 $ (123,927) $ 64,650 $ (112,344)
Net realized
losses 2,055 11,298 6,344 24,899
Change in value
of embedded
derivatives,
net (3,299) (7,366) (8,891) (17,512)
Taxes on
realized losses
and change in
value of
embedded
derivatives (67) (10,318) 215 (11,067)
------------- ------------ ------------- ------------
Net operating
earnings (loss)
available to
ordinary
shareholders $ 98,232 $ (130,313) $ 62,318 $ (116,024)
============= ============ ============= ============
Net operating
earnings (loss)
per share
available to
ordinary
shareholders
Basic $ 1.44 $ (2.43) $ 0.94 $ (2.17)
Diluted $ 0.62 $ (2.43) $ 0.56 $ (2.17)
Weighted average
number of
ordinary shares
outstanding
Basic 68,195,614 53,720,242 66,204,855 53,578,152
Diluted 158,854,955 53,720,242 111,784,966 53,578,152
Scottish Re Group Limited
Supplemental Information - Segment Operating Results
(Stated in Thousands of United States Dollars)
(Unaudited)
Life Reinsurance North America
Three months ended Six months ended
June 30 June 30
2007 2006 2007 2006
--------- --------- ----------- -----------
Revenues
Premiums earned, net $430,282 $407,549 $ 853,653 $ 836,467
Investment income, net 153,449 136,763 291,368 260,704
Fee and other income 2,711 3,879 6,627 6,896
Net realized losses (2,593) (5,479) (4,998) (19,398)
Change in value of
embedded derivatives, net 3,299 7,366 8,891 17,512
--------- --------- ----------- -----------
Total revenues 587,148 550,078 1,155,541 1,102,181
--------- --------- ----------- -----------
Benefits and expenses
Claims and other policy
benefits 375,634 338,626 733,568 685,906
Interest credited to
interest sensitive
contract liabilities 36,420 55,399 71,722 98,100
Acquisition costs and
other insurance expenses,
net 89,657 97,280 176,880 181,688
Operating expenses 13,161 14,538 25,419 29,130
Collateral finance
facilities expense 69,085 45,891 137,941 76,434
Interest expense 3,233 3,038 6,288 5,600
--------- --------- ----------- -----------
Total benefits and
expenses 587,190 554,772 1,151,818 1,076,858
--------- --------- ----------- -----------
Income (loss) before
income taxes and minority
interest $ (42) $ (4,694) $ 3,723 $ 25,323
========= ========= =========== ===========
Pre tax operating earnings
(loss)
Pre-tax income (loss) $ (42) $ (4,694) $ 3,723 $ 25,323
Net realized losses 2,593 5,479 4,998 19,398
Change in value of
embedded derivatives, net (3,299) (7,366) (8,891) (17,512)
--------- --------- ----------- -----------
Pre-tax operating earnings
(loss) $ (748) $ (6,581) $ (170) $ 27,209
========= ========= =========== ===========
Scottish Re Group Limited
Supplemental Information - Segment Operating Results (continued)
(Stated in Thousands of United States Dollars)
(Unaudited)
Life Reinsurance International
Three months ended Six months ended
June 30 June 30
2007 2006 2007 2006
--------- --------- --------- ---------
Revenues
Premiums earned, net $ 16,014 $ 37,393 $ 50,857 $ 57,496
Investment income, net 3,037 8,971 6,080 11,960
Fee and other income 753 - 753 -
Net realized losses (10) (6,908) (635) (8,046)
--------- --------- --------- ---------
Total revenues 19,794 39,456 57,055 61,410
--------- --------- --------- ---------
Benefits and expenses
Claims and other policy
benefits 12,614 33,475 38,263 60,658
Acquisition costs and other
insurance expenses, net 5,237 6,185 11,158 9,002
Operating expenses 11,455 7,874 21,267 13,651
--------- --------- --------- ---------
Total benefits and expenses 29,306 47,534 70,688 83,311
--------- --------- --------- ---------
Loss before income taxes $ (9,512) $ (8,078) $(13,633) $(21,901)
========= ========= ========= =========
Pre-tax operating loss
Pre-tax loss $ (9,512) $ (8,078) $(13,633) $(21,901)
Net realized losses 10 6,908 635 8,046
--------- --------- --------- ---------
Pre-tax operating loss $ (9,502) $ (1,170) $(12,998) $(13,855)
========= ========= ========= =========
Scottish Re Group Limited
Supplemental Information - Segment Operating Results (continued)
(Stated in Thousands of United States Dollars)
(Unaudited)
Corporate & Other
Three months ended Six months ended
June 30 June 30
2007 2006 2007 2006
--------- --------- --------- ---------
Revenues
Investment income, net $ 4,393 $ 2,243 $ 5,028 $ 4,335
Fee and other income 770 760 1,484 1,476
Net realized gains (losses) 548 1,089 (711) 2,545
--------- --------- --------- ---------
Total revenues 5,711 4,092 5,801 8,356
--------- --------- --------- ---------
Benefits and expenses
Acquisition costs and other
insurance expenses, net 1,607 1,407 3,570 1,713
Operating expenses 35,186 16,953 47,696 27,676
Collateral finance facilities
expense 6,200 1,345 11,039 1,889
Interest expense 4,801 4,028 5,322 6,359
--------- --------- --------- ---------
Total benefits and expenses 47,794 23,733 67,627 37,637
--------- --------- --------- ---------
Loss before income taxes $(42,083) $(19,641) $(61,826) $(29,281)
========= ========= ========= =========
Pre-tax operating loss
Pre-tax loss $(42,083) $(19,641) $(61,826) $(29,281)
Net realized loses (gains) (548) (1,089) 711 (2,545)
--------- --------- --------- ---------
Pre-tax operating loss $(42,631) $(20,730) $(61,115) $(31,826)
========= ========= ========= =========
Source: Scottish Re Group Limited
Contact: Scottish Re Group Limited
Investor Relations: Paul Goldean, 441-298-4378
Investors@scottishre.com
or
Scottish Re
Media: Rayissa Palmer, 704-752-3422
Info@scottishre.com