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Counterparties monitoring Scottish Re situation as Chapter 11 case proceeds

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Counterparties monitoring Scottish Re situation as Chapter 11 case proceeds

Certain entities with business reinsured by the U.S. unit of Scottish Re Group Ltd. are keeping tabs on the Chapter 11 bankruptcy proceedings of Scottish Holdings, Inc. and Scottish Annuity & Life Insurance Co. (Cayman) Ltd.

"Due to the status of [Scottish Re (U.S.) Inc.] as a principal operating subsidiary of the Scottish Re group, it is expected that [Scottish Holdings] will take all prudent actions necessary to allow [Scottish Re (U.S.)] to fully discharge its obligations in the most efficient and effective manner during the restructuring and sale process," Allstate Life Insurance Co. said in notes in its 2017 annual statement. Allstate Life Insurance Co. of New York provided a similar statement in its annual statement.

The Scottish Re entities selected Hudson Structured Capital Management Ltd. as the stalking-horse bidder for Scottish Re (U.S.) and Scottish Annuity & Life in a bankruptcy court-supervised process that remains subject to the receipt of higher and/or better offers, as well as an auction. The stalking-horse bid contemplates that HSCM Bermuda Special Opportunities Fund Ltd. would pay consideration of $12.5 million to the Scottish Re entities' estate upon the effectiveness of their Chapter 11 reorganization plan. They have also committed to providing $12.5 million to recapitalize the targets.

Scottish Re (U.S.) is not a debtor in the Chapter 11 proceeding, Allstate Life said in the annual statement. Contracts and relationships between that entity and its reinsurance counterparties "are largely unaffected." And, the insurer added, the bankruptcy filing and proposed sale will not impact the recoverbility of its reinsurance recoverables from Scottish Re (U.S.).

The company took reserve credits of $75.6 million in the aggregate as of Dec. 31, 2017, for various reinsurance relationships with Scottish Re (U.S.), according to Schedule S, Part 3 of its annual statement. It had reinsurance recoverable from Scottish Re (U.S.) in the amount of $5.7 million on paid and unpaid losses. Allstate Life of New York, meanwhile, recorded a reserve credit of $620,642 associated with several Scottish Re (U.S.) agreements that took effect in June 2002.

The Allstate Corp. units account for only a small portion of the $2.45 billion in life and annuity reserves, including modified coinsurance reserves, that Scottish Re (U.S.) reported as having assumed from unaffiliated entities as of year-end 2017. That sum marks a decline from $2.80 billion a year earlier. A decline of $161.6 million in aggregate reserves assumed through six reinsurance relationships with Pacific Life Insurance Co. accounts for a substantial portion of the overall reduction.

Protective Life Corp. and John Hancock Life Insurance Co. USA continued to rank among Scottish Re (U.S.)'s largest cedants as of year-end 2017 based on the reserve credits they recorded.

Scottish Re (U.S.), which has been in runoff since 2008, saw its capital and surplus decline to $50.1 million as of Dec. 31, 2017, from $56.7 million a year earlier. A negative change in surplus owing to reinsurance fully offset the $45.2 million in net income the company posted for the year. Its company action level risk-based capital ratio, however, remained essentially unchanged on a year-over-year basis at 190.1% as the company's authorized control level RBC declined at about the same rate as total adjusted capital.

In bankruptcy court filings, Scottish Holdings officials have warned of the potentially dire consequences of a so-called "meltdown scenario" in which the Delaware Department of Insurance places Scottish Re (U.S.) into receivership.

Scottish Annuity & Life has committed to making capital contributions as necessary in order to maintain Scottish Re (U.S.)'s surplus equal to the greater of 200% or the amount necessary for the reinsurer to avoid a company action level event under Delaware's RBC framework. In the event of a receivership, Scottish Annuity & Life would become responsible for all of Scottish Re (U.S.)'s debts. It also would face more than $300 million in additional claims arising from defaults on commitments to ceding insurers.