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US life industry's gross exposure to rehabilitating reinsurer tops $2B

The collapse of the proposed sale of Scottish Re (U.S.) Inc. and subsequent action by the Delaware Department of Insurance to place the life reinsurer into rehabilitation raises concern anew for the dozens of cedants potentially affected.

Bankruptcy court documents filed March 27 by affiliates of the reinsurer indicate that the deal, part of an effort to stave off what were billed as potentially "apocalyptic" consequences for creditors of Scottish Holdings Inc. and Scottish Annuity & Life Insurance Co. (Cayman) Ltd., was terminated Feb. 16 and that efforts to pursue an alternative transaction did not succeed. With Scottish Re (U.S.) continuing to suffer losses, the court documents said, the Delaware regulator moved March 1 to place the company into rehabilitation, given its "impaired" and "unsound condition."

The developments came roughly 13 months after Scottish Holdings and Scottish Annuity & Life commenced U.S. Chapter 11 proceedings as they faced acute liquidity issues. The Chapter 11 filing and the proposed sale of Scottish Re (U.S.) had been part of Scottish Re Group Ltd.'s overall sale and restructuring plan, launched in May 2017 when the group began winding-up proceedings in Bermuda and the Cayman Islands.

The company expressed confidence in its Sept. 30, 2018, quarterly statement that the sale of Scottish Re (U.S.) to an affiliate of Hildene Capital Management LLC would occur "no later than the first quarter of 2019," even as its surplus tumbled by $12.5 million to $37.6 million during the first nine months of the year. But before 2018 concluded, according to the transcript of a December hearing, the Delaware regulator subjected Scottish Re (U.S.) to an order of supervision, due to what company representatives described as a dramatic acceleration of adverse mortality experience on a previously problematic block of business reinsured on behalf of a single, unnamed cedant group on a yearly renewable term basis.

Although the cedant and reinsurer had purportedly developed a preliminary framework to resolve certain disputed claims, the higher adverse mortality rendered that potential solution unworkable. And, in the absence of such a solution, Scottish Re representatives said the economics of the proposed sale "simply will not work."

A review of 2018 annual statement data collected by S&P Global Market Intelligence finds that U.S. life insurers took reserve credits of $1.81 billion in the aggregate as part of various reinsurance agreements with Scottish Re (U.S.) covering life, annuity and related claims gross of any related collateral held in trust. They showed $123.7 million in paid losses recoverable and $121 million in unpaid losses recoverable under Scottish Re relationships involving life, annuity and accident-and-health cessions.

The John Hancock subsidiaries of Manulife Financial Corp. accounted for a U.S. life industry-high $40.3 million in paid and unpaid recoverables related to Scottish Re, according to a review of disclosures on Schedule S - Part 2 of their annual statements. In their respective management discussion and analysis sections, John Hancock Life Insurance Co. (U.S.A.) and John Hancock Life Insurance Co. of New York reported combined reinsurance receivables of $35 million, while reserve credit related to Scottish Re (U.S.) agreements totaled $233.8 million for the two entities, second-highest at group level behind Lincoln National Corp.'s $282.5 million.

Lincoln National Life Insurance Co. did not directly reference Scottish Re (U.S.)'s status in its annual statement, but a source familiar with the relationship indicated that the gross reserve credit included $50.9 million associated with a coinsurance annuity treaty that is fully backed by assets held in trust. As such, the group's reserve credit associated with Scottish Re would net out to $231.6 million.

Allstate Life Insurance Co. of New York, in an SEC filing dated April 1, said the reinsurer "remains current on claims payments to the Company." Allstate Life Insurance Co. included a similar statement in a Feb. 22 filing, adding that it had reinsurance recoverables totaling $139 million due from Scottish Re (U.S.) stemming from the years-earlier divestiture of its direct response distribution business. The Allstate Corp. subsidiary reported a substantially lower number in its annual statutory statement: reserve credits and recoverables of $57 million.

Allstate Life said in the notes to its statutory statements that it would continue to monitor the progress of the bankruptcy proceedings, proposed sale and related restructuring activities "for any potential negative affect" on Scottish Re (U.S.).

Other groups with more than $100 million in gross reserve credits associated with Scottish Re included Protective Life Corp., the Transamerica subsidiaries of Aegon NV and the life units of Nationwide Mutual Insurance Co.

A March 27 motion by the official committee of unsecured creditors of Scottish Holdings and Scottish Annuity & Life posited that the Scottish Re (U.S.) rehabilitation has "substantially lessened" the potential for success of a Chapter 11 reorganization of the two entities. They requested that the case be converted to a Chapter 7 liquidation.