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Scottish Re Group Limited Investor Day March 15, 2005 Safe Harbor • This presentation contains certain forward looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include information with respect to our financial condition, our results of operations and businesses and the expected impact of this offering on our financial condition. 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. 2 Discussion Agenda • • • • • • • • • Corporate Overview The Global Life Reinsurance Industry International North America Investments Financial Review Mortality XXX & Securitization Concluding Remarks 3 Corporate Overview • Global life reinsurance specialist • Clients in over 45 countries • Bermuda head office with operating companies in Bermuda, Cayman Islands, Ireland, United Kingdom and the United States • #3 ranking in US by in-force and new business • Closed the acquisition of ING Re’s U.S. life reinsurance business on December 31, 2004 • Total assets of $9.1 billion* • Total equity of $862 million* • Total capital resources of $1.3 billion* *As of December 31, 2004 4 Our Business Model • Focused life reinsurance specialist with a global platform • Experienced management team with excellent industry relationships • Disciplined risk management • Disciplined pricing assumptions with target IRR of 15% • Portfolio approach leads to limited exposure to any one customer, any one life and any one event • Monitoring and managing acquired business • Quality is not sacrificed for volume • Efficient corporate organization • Strong financial strength ratings • “A-” S&P, “A-” A.M. Best, “A” Fitch, “A3” Moody’s • Complementary products with uncorrelated risks • • Mortality Risk Spread Risk 5 New Business Origination Strategy • Origination Philosophy • Focus on direct origination • Intermediary relationships supplement direct approach Three seats at the table – client, broker & Scottish Re No issues related to Spitzer investigation • Origination Channels • Newly written business • Inforce transactions • Acquisitions of reinsurance blocks 6 Experienced Management Team Scott E. Willkomm Oscar Scofield Seth Vance, CPA David Huntley, FIA Thomas McAvity, Jr. Elizabeth Murphy, CA Clifford Wagner, FSA, MAAA Paul Goldean Hugh McCormick CEO & President, Scottish Re Group Limited Chairman, Scottish Holdings, Inc. CEO, Scottish Holdings, Inc. CEO, Scottish Re Holdings Limited EVP & CIO, Scottish Re Group Limited EVP & CFO, Scottish Re Group Limited EVP & Chief Actuary, Scottish Re Group Limited EVP & General Counsel, Scottish Re Group Limited EVP of Corporate Development, Scottish Re Group Limited Over 270 employees globally 7 Active Board of Directors Michael C. French Scott E. Willkomm Michael Austin, MBE, CFE G. William Caulfeild-Browne Robert Chmely, FSA, CFA Jean-Claude Damerval Lord Norman Lamont Hazel R. O'Leary William Spiegel Chairman, Scottish Re Group Limited President & CEO, Scottish Re Group Limited Former Managing Partner, KPMG Peat Marwick Cayman Islands Former COO, Swiss Re Life and Health Former President, Prudential Asset Management Chairman of JCD Services Limited Former CEO of AXA’s International Operations Member British House of Lords; Former Chancellor of the Exchequer Former US Secretary of Energy President Fisk University Managing Director, The Cypress Group 8 Global Life Reinsurance Industry Overview Scott Willkomm President & CEO Life Reinsurance Industry At A Glance • Value proposition • Private sector risk transfer supports economic growth • Allows ceding companies to minimize volatility and spread risk • Delivers stable returns to investors • Growing • • • • 2003 global premium $29.5 billion up from $9.6 billion in 1993 Expected to double in ten years Past 10 years dominated by US growth Next 10 years driven by non-US growth • Consolidating • Global • Evolving business and capital models 10 Historical Factors Demand for Life Reinsurance Grows Significantly in US • • • • Business model of life companies shifts from underwriter to asset gatherer Use reinsurers to fund growth of new business (shift from excess to quota share) Companies demutualize and become more focused on capital and earnings management Regulatory changes increase the amount of capital needed to support mortality business (Regulation XXX) • • • Supply of Capacity Plentiful and Cheap During 1990s, European composites acquire life re specialists to diversify business Low cost capital (LOCs) funds growth Reinsurers able to provide mortality assessment expertise and outsourcing of mortality risk to primary companies Aggressive pricing to fuel market share objectives Lower return expectations on life re business subsidized by higher returns on P&C lines • • 11 Prospects for the Future Demand for Life Reinsurance Growth Goes Global • North America • • Will sustain high level of utilization for newly written business • Growth driven by inforce opportunities Europe • • New solvency regime puts Europe’s life industry approximately €60 billion in the hole • • Regulators seeking counterparty diversification opens opportunities for new market entrants • Restructuring of European life balance sheet will take the rest of the decade Rest of World • Economic growth will drive primary industry • Primary companies seek both capital and technical support from reinsurers Supply of Capacity Becoming Scarce Since 9/11, significant capital has exited non-life segment as financial markets retrenched ($170 billion vaporized) and adverse loss development increased ($120 billion) resulting in retrenchment or withdrawal Limited number of larger players emerging as life re industry consolidates Higher cost of capital coupled with higher hurdle rates of return driving higher reinsurance premiums • • 12 Life Reinsurance Growth Outpaces GDP Life Premium Annual Growth in Excess of GDP 200% 180% 160% 140% 120% 100% 80% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Insurance 13 Reinsurance Source: Swiss Re Economic Research and Consulting Life Insurance Premiums in 2003 Life Insurance Premium Volume North America Europe Asia Latin America Rest of World Totals 30% 35% 31% 1% 3% $1,672 billion Life Reinsurance Premium Volume 66% 25% 3% 1% 4% $30 billion 1.8% Global Cession Rate Source: Swiss Re, sigma 14 Growing Global Life Reinsurance Markets $60 $50 Life Reinsurance Premiums Billions of US Dollars 14.5 $57.2 5.8 $40 $30 $20 $10 $0 $29.5 2.4 7.5 36.8 $9.6 3.6 4.7 1.3 19.6 1993 North America 15 2003 Europe Rest of World 2013E Source: Swiss Re Economic Research and Consulting, historical data; Scottish Re projection Global Trends • Mature Markets • Shift from mortality risk to longevity risk • Cost and amount of available capital principal driver of economic model • Developing Markets • • • • Economic growth Shift from short-term to long-term risk Shift from group to individual Greater degree of investment-related products than mature markets • Emerging Markets • Economic growth • Focus on short-term • Focus on group 16 US Market Opportunities Near-Term 2005-2007 Mortality Risk •Cession rates have peaked •Pricing improvement has peaked Mid-Term 2007-2010 •Cession rates may decrease slightly •Pricing will decrease in step with cost of capital improvement Long-Term 2010+ •No longer the market driver Spread Risk •Continue to be heavily influenced by interest rate trends •Never a barn-burner •Emerging opportunity •Key growth driver of the industry Longevity Risk 17 US Market Key Trends • • • • Mature Market Primary Term Market Growing at 2% to 3% Consolidation Permits Near-Term Market Share Gains Competition • • • • Top-tier New market entrants Downsizing Others • Demographic Trends • Regulatory Trends 18 UK/Ireland Market Opportunities Near-Term 2005-2007 Mortality Risk •Emergence of protection products •Use of pool-style reinsurance Mid-Term 2007-2010 •Modest growth •Not likely to become major market •EU Solvency II likely to be non-event Long-Term 2010+ Spread Risk Longevity Risk •Selective opportunities to reinsure payout annuities •New business and inforce blocks •Key growth driver of the industry 19 Rest of Europe • Old Europe • • • • Denial Solvency II Relationship Driven Opportunistic Approach • New Europe • Similar to most emerging markets • Follow existing customer relationships 20 Asia/Japan • • • • • Second largest economy in the world Greatest amount of life insurance per capita $7 billion life reinsurance premium in 2003 Competition Regulatory Trends • Privatization of the Kampo • Regulation of the Kyosai • Variable annuities • Demographic Trends • Aging population • Emergence of longevity risk products 21 Other Markets • Developing and Emerging Markets • Middle East • Latin America 22 Life Reinsurance Expertise Needs to Evolve • Current view • Mortality and morbidity transferred to Reinsurer • Direct companies retain most of the risk associated with savings products • The Catalyst • Demographics of an aging population • Evolving needs of consumer – change in primary company model • Future • New model sees both mortality and savings risks transferred to reinsurer • Direct companies are product design and distribution experts 23 Reinsurer’s Capital Model Needs to Change • Capital requirements continue to escalate • Regulation XXX • Fast Track • Solvency II • Rating Agencies • Demand continues to expand • Mature Markets • Developing Markets – Drives economic prosperity • “True Cost of Capital” is appreciated 24 Learning from the Success of Banks Banks initially were underwriters of risk with a buy and hold business model… As regulatory changes in the late 1980s and early 1990s changed attitudes towards capital… Banks sought out alternative forms of low-cost capital to grow their business… With the advent of securitization, banks turned retained interest rate and credit risk into fee income… • As a result, bank ROEs expanded and currently outperform life insurance ROEs with less volatility and more resilience to market events • • • • 25 Historic Life Reinsurance Model • Medical underwriting expertise • Risk retention strategy Capital Primary Insurer Reinsurer Capital Markets Individual Policies Reinsurance 26 Investment Community Current Life Reinsurance Model • Mortality assessment experts • Securitize/reinsure peak risks Capital Primary Insurer Reinsurer Capital Markets Individual Policies Investment Community Reinsurance Risk 27 Future Life Reinsurance Model • Capital and risk management expertise • Securitize/reinsure many risks • Increase velocity of money Capital Primary Insurer Reinsurer Capital Markets Individual Policies Reinsurance 28 Investment Community Risk Conclusions • Life reinsurance is a vigorous and resilient market with a significant appetite for risk • Reinsurance industry tends to respond to developments in the primary industry rather than drive trends by providing leadership • Industry thinks it understands risk management but has a lot to learn • Shift to new business model has been slow • At Scottish Re, we have built a factory for processing and financing individual mortality risk • We need to extend that “factory” to other risks, such as longevity/lifespan risk • Scottish Re’s “capital and risk management” model designed to capitalize on industry evolution 29 International David Huntley - Chief Executive Officer Aidan Sherry - Director, Long Term Business Andrew Maynard - Director, Group & Specialty Unit Steve Griffiths - Chief Pricing Officer Scottish Re Limited International • Overview • Short-term Business • Long-term Business 31 Background and Overview • • • • • • • • Scottish Re acquired Worldwide Reassurance Limited at end of 2001 In existence for more than 40 years Niche market player focused on emerging and underdeveloped markets Writing primarily short-term products Utilized both direct client and broker relationships Not very capital intensive Cash flow positive Historically manually intensive processes 32 Geographical Distribution 4% 17% 4% Japan Rest of World UK/Ireland Middle East United States Latin America 42% 27% 6% 2004 Earned Premium by Region ($121m) as of 12/31/2004 33 Background and Overview • • • • • Most of the products are short-term Most are underwritten in Windsor Primarily Group Life, Individual Life and Loss of Licence Some personal accident in the Middle East Modest exposure to morbidity 34 Product Distribution Group - Life Group - Other 25% 34% Individual Life Loss of Licence/PA 5% 36% 2004 Earned Premiums by Product ($121m) as of 12/31/2004 35 Where We Are Today • Significant modernization completed • • • • • • • • • • New general ledger (PeopleSoft) New administrative system (SICs) New valuation system (MoSes) New pricing system (MoSes) Overhauled business processes Sales & Marketing Risk Management Financial Management Operational Management Legal Services • Dynamic shift in leadership and management capability 36 Where We Are Today • Major improvement in quality of book • • • • • • Eliminated poor performing treaties Cancelled volatile lines of business Increased pricing where required Tightened terms and conditions Overhauled contract language Improved retention management 37 Where We Are Today • Repositioning of front-end to spear-head growth • Long-term business focused primarily on UK/Ireland protection and annuity business • Group and Specialty Business Unit focussed on Middle East Loss of Licence/PA Latin America Japan/SE Asia • Strengthening of back office support 38 Group and Specialty Business Unit (GSBU) Global & Specialty Business Unit • GSBU is principally responsible for our annually renewable portfolio consisting of • Group Life and Accident • Aircrew Loss of Licence • Our focus markets for 2005 are • • • • Middle East Japan Latin America Loss of Licence/PA • Our objective is to grow our portfolio premium by 20% in 2005 to $90 million • Key goal to be well in excess of $100 million annual gross earned premium within 18 months • Re-engineer portfolio by embracing technology 40 Growth in Key Markets • Existing Group Life business planned to grow by at least 20% in 2005 • Scottish Re well positioned in key growth markets: Asia Pacific, Middle East • Potential for growth in China • • • • Low cost principle starting in Asia, extending to China/India Less than 10% of population in China have flown China will train more than 6,000 new commercial pilots over the next 5 years 3 new private airlines will be licensed in 2005, increasing competition 41 Growth in Key Markets • Development of bancassurance sector will initiate trend towards individual products • Increasing wealth in the tiger economies of the Middle East • Absence of (or limited) social benefit system for migrant workers necessitating personal savings for retirement or ill-health • Ability of individuals to buy land and property will drive borrowing requiring insurance • Repatriation of Arab capital from North America needs a new home • Insurers need to innovate to provide long term insurance products to meet these needs • Long Term products require competent sales forces trained within the regulatory environment • Competitive markets will drive price and product structures • Product Development is expensive • Products may be traditional or Takaful (Islamic) solutions • Essential to meet the requirements of all market sectors • Will necessitate separate approaches to be developed • Scottish Re’s expert market knowledge and skills will be applied to this sector as it develops providing a platform for long term growth 42 Risk Management Features of Short Term Business • Less capital intensive • Ability to respond to changes in risk factors or underwriting performance • Re-pricing business and amending terms as necessary • Discontinuing poorly performing business • Enables us to: • Optimize profit performance in the light of competitor activity • Provide a more stable profit performance 43 Risk Management Initiatives for Short Term Business in 2005 • Enhance growth • Underwriting and claims audits of treaty clients • External tool predicting future trends in changes to global terrorism • Optimal use of management information • Segmentation of risks • Refining underwriting approach • Improving basis of agreement with clients • Removing the ambiguity • Defining transfer of risk • Tightening policy terms and conditions • Supporting growth • Aviation in new markets • Takaful 44 Long Term Business Unit (LTBU) Long Term Business Unit • UK and Ireland • Business growth • Protection • Portfolio acquisition • Annuity 46 Annuities in UK/Ireland • Income in retirement • Guaranteed income for life • Reinsurance opportunity • Transfer of investment and ALM risk • Transfer of longevity risk • Risk management considerations • • • • Understanding current mortality experience Annuitant review process Administration standards Independent review of pricing 47 Annuities - Longevity Risk • • • • Historic UK mortality improvements higher than expected Cohort effect in UK and Ireland Significant research undertaken Will the past be a guide to the future: • • • • Will cohort effect continue? Smoking prevalence Obesity Pandemic (Bird Flu) • Life offices adopting prudent stance • FSA Regulations – Individual Capital Assessments 48 Annuities – Investment Considerations • Asset liability management • Project target cash flows (liability cash flows and target profits)—long duration • Buy diversified asset portfolio with cash flows needed to cover target cash flows • Adjust portfolio over time • Use spread product to enhance risk-adjusted yield • Achieve competitive price and desired ROE • Suitable corporate and ABS bonds are limited, making diversification a challenge • Limited range of issuers of longer maturities in GBP and EUR • Spreads tighter than comparable credits in US • Supplement available corporates with synthetic corporate bonds • Buy GBP/EUR AAA bonds and sell protection in credit default swaps • Buy USD corporates and swap currency to EUR/GBP 49 Annuities – Market Profile • Exposures at December 31, 2003 INSURER RESERVES £bn INSURER RESERVES £bn Prudential NU Life & Pensions Legal & General Assurance 21.3 16.3 10.9 Standard Life Co-operative Equitable Life 10.3 8.1 5.8 • Historically, limited number of reinsurance transactions • Aviva with XL Re • GE Life with Hannover Re and Partner Re • Competitors XL Re Partner Re Max Re • Limited Reinsurance Capacity Hannover Re Prudential (Part VII transfer) • Deal limits – Per deal/year 50 Annuities – Drivers of Current Demand • Individual Capital Assessment regime • Longevity risk exposures increasing • “Greying of Europe” • Membership of defined benefit plans has declined by 60% since 1995 • Growth in number of closed funds – capital constraints/reduce earnings volatility • Smaller insurers – avoid diseconomies of scale • Limited reinsurance capacity – act now or miss out • Significant pipeline in UK and Ireland 51 Questions & Answers North America Seth Vance - President & CEO Paul Turner - SVP, Risk Management Larry Roy - SVP, Sales & Marketing Tom McAvity – EVP, Chief Investment Officer, Scottish Re Group Limited Overview • • • • North America ING Acquisition Traditional Solutions Financial Solutions 54 North America Corporate Organization Chart SRGL Scottish Re Group Limited (Cayman) Group Holding Co. Listed on NYSE SAC The Scottish Annuity Company (Cayman) Ltd. (Cayman) Wealth Management SALIC Scottish Annuity & Life Insurance Company ( Cayman ) Ltd. (Cayman) Reinsurance Operating Co . Holds Financing Ags& Funding Ags; Issues . Guarantees to other Operating Companies Scottish Financial ( Luxembourg) S.a.r.l. (Luxembourg) Financing Co. SFL THL Tartan Holdings (U.K .) Limited (England / / Wales) Holding Co. . TF Tartan Financial England Wales U.K. Financing Co. SRVG SRGL Vermögensverwaltungs GmbH (Germany) SRH Scottish Re Holdings Limited (England / Wales) Holding & Services Co. Holding Co. SHBM Scottish Annuity & Life Holdings (Bermuda) Limited (Bermuda) Holding Company SHBB (Barbados) Scottish Holdings Ltd . (Barbados) Holding Company SRD Scottish Re (Dublin) Limited (Ireland) Reins. Operating Co. SRL Scottish Re Limited (England / Wales) Reinsurance Operating Co. SRPC Scottish Re PCC Limited (Guernsey) Insurance & Reins. Operating Co. SALIB Scottish Annuity & Life Insurance Company (Bermuda) Limited (Bermuda) Weatlth Management Operating Co. SHI Scottish Holdings , Inc . (US Delaware) WWLA World Wide Life Assurance S.A. (Luxembourg) Holding Co. Wealth Management Operating Co. [in liquidation] SAIL Scottish Annuity & Life International Insurance Company (Bermuda) Ltd . (Bermuda) 953 (d ) Wealth Management Reinsurance Operating Co. Reinsurance Operating Co. SRE Scottish Re (U .S .), Inc . ( US Delaware) TWM Tartan Wealth Management, Inc . (US Delaware) Wealth Management Training Co. SRC Scottish Reinsurance Intermediaries (Canada) Inc . (Canada) Dormant Co. OHL Orkney Holdings, LLC (US - Delaware ) Delaware) Holding Co. SRLC Scottish Re Life Corporation ( US - Delaware ) Reinsurance Operating Co. SSL Scottish Solutions LLC (US North Carolina) Dormant Reins. Broker Co. SRLB Scottish Re Life (Bermuda) Limited (Bermuda) 953 (d ) Reinsurance Operating Co. ORE Orkney Re , Inc . (USSouth Carolina) 56 As of December 31, 2004 Reinsurance Operating Co. North America Organization Chart SHI . Scottish Holdings, Inc. (U.S. - Delaware) Holding Co. SRE Scottish Re (U.S.), Inc. (U.S. – Delaware) Reinsurance Operating Co OHL Orkney Holdings, LLC (U.S. – Delaware) Holding Co. SRLC Scottish Re Life Corporation (U.S. – Delaware) SRLB Scottish Re Life Bermuda (Bermuda – 953D) Reinsurance Operating Co. Reinsurance Operating Co. ORE Orkney Re, Inc. (U.S. – South Carolina) Reinsurance Operating Co. 57 December 31, 2004 . Location of Scottish Re Employees Denver 80 Charlotte 161 Total 142 N. America Dublin 1 Windsor 75 Bermuda 14 Cayman 3 58 Scottish Re North America Pre-Tax Operating Earnings $80 $73 $70 $60 $ in Millions $50 $40 $30 $20 $10 $0 2001 2002 2003 2004 $19 $16 $28 59 Scottish Re North America Total Assets $9,000 $8,000 $7,000 $7,641 $ in Millions $6,000 $5,000 $4,000 $3,000 $2,236 $4,882 $2,000 $1,000 $0 $1,430 2001 60 2002 2003 2004 Scottish Re North America Total Revenue $800 $700 $600 $675 $ in Millions $500 $400 $300 $218 $378 $200 $110 $100 $0 2001 61 2002 2003 2004 North American Business Model • • • • • • Focused life reinsurance specialist Experienced management team Excellent industry relationships Quality underwriting and pricing are not sacrificed for volume Monitoring and managing acquired business Disciplined risk management • Mortality risk retained Maximum exposure - $1 million per life - Scottish Re (U.S.) Maximum exposure - $2 million per life - ING Re Book Maximum pool share – 25% • Portfolio approach limits exposure to any one customer/life/event 62 North American Business Model – Cont’d • Strong financial strength ratings for Scottish Re (U.S.), Inc. • “A-” S&P, “A-” A.M. Best, “A” Fitch, “A3” Moody’s • Complementary products with uncorrelated risks • Mortality Risk (target top U.S. term writers) • Spread Risk Fixed annuities – SPDA, SPIA Collateralized funding agreements Life insurance – whole life, U/L, pre-need/ final expense Disabled life reserves 63 Acquisition of ING Re’s Life Reinsurance Business Transaction Overview • Scottish Re acquired the U.S. individual life reinsurance business of ING Re • As consideration, ING transferred to Scottish Re: • Assets equal to economic reserves of approximately $800 million • A ceding commission of $560 million • Certain systems and operating assets • Scottish Re raised $230 million of additional capital to enhance post-transaction RBC • $180 million of common equity • $50 million of trust preferred • Rating agencies reaffirmed ratings 65 Transaction Rationale Transaction Attributes Profile Enhancements • • Provides significant portfolio diversification Opportunity to extend client base – minimal overlap in large clients • Approximately $700 billion face amount of inforce acquired • In excess of $1.3 billion in assets transferred • • Assets chosen by Scottish Re as to appropriate quality and duration Increase market presence and scale 66 Transaction Rationale Transaction Attributes Profile Enhancements • • Greatly reduces transition risk to Scottish Re Attracted talented reinsurance specialists and enhanced Scottish Re skill base • Business comes with certain systems and operating assets and existing employee pool • Structured as reinsurance transaction to domestic and offshore Scottish Re entities • Takes advantage Scottish Re tax attributes and capital efficiencies 67 Transaction Rationale Transaction Attributes Profile Enhancements • Immediately accretive to ROE and EPS • Negative ceding commission of $560 million • ING remains obligated to provide XXX/AXXX collateral support • • Support committed for the duration of the business Incentive for Scottish Re to find alternative collateral • Raised $230 million of additional capital to enhance RBC levels 68 • Transaction makes no call on existing or future Scottish Re resources External Integration Resources • Accenture • IT • Ogletree Deakins • Human Resources Legal Counsel • Brunswick Group • Internal and external communications • Ernst & Young • ING audit work • Purchase accounting 69 Integration Tactics • Run-off transaction • All open treaties were cancelled • Scottish Re underwrote and re-priced 37 treaties • Underwriting • ING Re ceased facultative underwriting of new business • Hired four additional underwriters for inforce business • Risk management / risk mitigation • Retention – reduce ING Re retention to $2 million per life by purchasing a layer of retrocession • Pool participation – Manage new business participation to Scottish Re target maximum of 25% • Catastrophe cover – Include ING Re under current Scottish Re cat cover program • Clash cover – Include ING Re under current Scottish Re clash cover program 70 Personnel Retained 83 former ING Re employees Actuarial/Financial Administration Sales & Marketing Technology Underwriting 18 46 5 10 4 71 2003 Market Share Scottish Re the 3rd largest US life reinsurer by inforce. 30% 27.8% 25 20 15.8% 15 14.7% 9.9% 10 9.3% 9.1% 7.2% 4.8% 4.1% 2.4% 2.2% 5 0 Swiss Re RGA Scottish Re (1) Pro Forma(1) ING Re Transamerica Munich American Re Employers/ ERC Scottish Re Generali Revios Re General Re 72 Source: 2003 Society of Actuaries Life Reinsurance survey. (1) Estimated pro forma market share based on business acquired. Acquired Business December 31, 2004 Inforce Total Amount: $690 billion Mortality Non-XXX 39.0% COLI/BOLI 3.0% UL Secondary Guarantee 4.0% Mortality XXX 54.0% 73 Transaction Highlights • • • • Excellent strategic fit enhances and strengthens business Creates top 10 player globally and top 3 player domestically Enhance resources, knowledge, people and expertise Add significant research capabilities • Mortality research and study • SUMMIT (mortality assessment application) • Added 6 new clients in top tier direct writers • Immediately accretive to ROE and EPS • Enhances shareholder value 74 Traditional Solutions Paul Turner - SVP, Risk Management Traditional Solutions • Mortality risk transfer of newly underwritten policies • Produces a high quality homogeneous portfolio • Targets automatic treaties of the top North American life insurers • High volume business yields economies of scale • Opportunistic participation in COLI/BOLI mortality reinsurance utilizing ING resources and expertise 76 North America – Life Reinsurance Inforce Inforce Volume ($ Billion) Origination Organic Growth ERC Life Block ING Re Block Average Size Net $53,000 $15,000 $88,000 Policy Count (Million) 2.9 3.9 7.1 Gross $166 $138 $690 Net $159 $60 $628 Combined 13.9 $994 $847 $61,000 As of December 31, 2004 77 Net Retained Inforce Volume $900 $800 $700 $ in Billions $600 $500 $400 $300 $200 $71 $60 $159 $628 $100 $0 $67 $117 2002 2003 2004 Organic Growth 78 ERC Life Block ING Re Block Distribution by Policy Size – Net Retained Inforce 250,000 499,999 3% 100,000 249,999 13% 500,000 + 1% 0 - 24,999 40% 50,000 99,999 22% 79 25,000 - 49,999 21% Distribution by State – Net Retained Inforce 14.00% 7.00 – 8.00% 5.00 – 6.99% 4.00 – 4.99% 3.00 – 3.99% 2.00 – 2.99% 1.00 – 1.99% 0 - .99% 80 Distributions – Net Retained Inforce • Underwriting class 25% - Standard Nonsmoker 69% - Preferred Nonsmoker • Average issue age — 46 • Gender 3% - Preferred Smoker 3% - Standard Smoker 71% - Male 29% - Female 81 Quote Opportunity Analysis Traditional Solutions Quotes Year 2000 2001 2002 2003 2004 (Includes ING Re) 2004 ING Re Only Won 25 31 30 43 72 15 Lost* 32 39 23 20 24 6 Declined-w/d 23 20 20 20 50 8 82 Quote Loss Analysis Traditional Solutions Quotes Year 2000 2001 2002 2003 2004 (Includes ING Re) Price 16 23 19 16 22 Rating 5 1 0 1 0 Fac UW 6 9 2 1 1 Other 5 6 2 2 1 83 COLI/BOLI • Opportunity • Added two ING Re employees with extensive COLI/BOLI experience Actuarial Underwriting • Obtained extensive mortality expertise with tailored pricing model • Less of a commodity/less competitive due to smaller market and limited reinsurer capacity • Risk Management • • • • Only reinsure YRT business Retro of 20% - 50% of all risk depending on participation in the direct company’s pool Retained concentration risk limited to a maximum of $25 million per location Reinsurance participation on all risks 84 Financial Solutions Larry Roy - SVP North American Sales & Marketing Financial Solutions: GAAP Total Reserves $3,500 $3,000 $2,500 $2,900 $3,298 $ in Millions $2,000 $1,500 $1,004 $1,760 $1,000 $499 $500 $177 $0 1999 86 2000 2001 2002 2003 2004 Financial Solutions Products We reinsure • Fixed deferred annuities—SPDA and FPDA • Annual reset • Multi-year guarantee • Fixed payout annuities—SPIA • Immediate annuities • Pension terminations • Structured settlements • Disabled life reserves • Permanent life insurance • Whole and universal life • Pre-need and final expense We issue directly • Collateralized funding agreements 87 GAAP Reserves by Business Type $71.0 $500.6 $16.6 ($ in millions) $252.6 $2,457.3 Fixed Annuities Disabled Life Reserves 88 Life Insurance Credit Life & A&H Funding Agreements Financial Solutions Business • • • • • • Complements our Traditional Solutions business Reinsure newly written business and inforce blocks Mostly coinsurance; some modco Full risk transfer: spread and actuarial risks Direct relationships with large and middle market clients Customized solutions to fit client’s needs and objective 89 Benefits to Client from Reinsuring with Scottish Re • Free up capital for growth or to restore desired ratios • Achieve economies of scale on larger volume written and inforce • Lower marginal expenses • Lever distribution, brand, and issuance and administration capabilities • Reduce risks retained by insurer • Interest rate, credit and actuarial risks • Maintain or enhance ratings • Add value with consultative approach to relationship management 90 Reinsuring Inforce Blocks • Inforce transactions hard to sell until yields rise • Business written in higher rate period requires negative ceding commission • Should be offset by gain on assets ceded • Can provide exit strategy from inforce business • 100% coinsurance with TPA 91 Comparing Benefits of Life and Spread Reinsurance LIFE REINSURANCE (Traditional Solutions) • Transfer risk • Retain smaller quota share • Limit retention/life SPREAD REINSURANCE (Financial Solutions) • Transfer (de-lever) risk • Credit risk (fewer assets) • Interest rate risk • Usage: over 60% • Relief supports growth • XXX strain and RBC • Economies of scale • Usage: less than 10% • Relief supports growth • Acquisition costs & RBC • Economies of scale • Positive leverage • More competitive rate • Higher RORC • Quality of income • Positive leverage • More competitive rate • Higher RORC • Lever scarce assets • Standardized • Customized 92 Asset Liability Management Thomas A. McAvity, Jr. EVP & Chief Investment Officer Price Fixed Deferred Annuities for Rising Rate Scenarios • • New money yields are low and likely to rise When new money yields rise significantly above inforce yields, • Inforce margins eventually get squeezed and lapses may rise • But sales improve; new money rates well above minimum guarantees • We price using a realistic set of scenarios • Median scenario: 5-10 year yields keep rising • Some scenarios higher, some lower, than median • Probability-weight results to get expected IRR • Adjust ALM strategy for rising rate scenario • Shorten duration of new money assets • Widen new money margin, compensating for potential spread compression and interest-sensitive lapses • Persuade client of need to emulate our practice 94 Reinsuring Fixed Deferred Annuities • We are selective in originating new transactions • Some direct writers offer higher rates than we can support • We tend to win business when prospective client: • Focuses on profitability and risk as well as volume • Employs prudent ALM and investment strategy • Our risk-adjusted yield is competitive with client’s • Achieve alignment with ceding company with deal structure • Client retention: eat own cooking • Discipline around setting new money and renewal rates: the “bank” • Prefer contingent trail to up-front ceding commission 95 Bias Towards Multi-Year Guarantees and MVAAs • Given: yield curve steep and rates likely to rise • Multi-year guarantees less risky than annual reset • Customers don’t expect increase until end of term • Longer guarantee periods permit longer duration assets with higher yields • Market value adjustment an addition benefit to insurer • Favorable selection bias • Over two thirds of our deferred annuity business is multi-year guarantees 96 Downside Risk of Annual Reset SPDA: 1Yr. Mismatch 15,000 10,000 Net Income 5,000 0 1 -5,000 -10,000 -15,000 2 3 4 5 6 7 8 9 10 11 12 13 14 15 2nd Percentile 25th Percentile 5th Percentile Median 10th Percentile 97 Reinsuring Payout Annuities • For client • Diversify large case risk • Lever limited supply of suitable juicy assets • Expand market share beyond in-house capacity limits • Benefit cash flows vary with longevity but not interest rates • Embedded/implied credited rate fixed at inception of transaction • Long term payouts pose risks • Credit: vulnerable to scenario with bad default spikes • Interest rates: mitigate by approximately matching liability cash flows • Actuarial assumptions may prove incorrect 98 FS Deals Combine Investment and Actuarial Risks Interest Rate Risk Fixed deferred annuities Life insurance Embedded options; adjust duration as yields change Match duration with laddered portfolio Adjust duration for experience; laddered portfolio Noncallable; floatingrate Laddered portfolio matches liability cash flows Credit Risk Moderate: diversify; high quality profile Moderate; diversify; high quality profile Moderate; diversify; high quality profile Moderate; diversify; high quality profile Significant (long); diversify; high quality profile Actuarial Risks Interest sensitive lapse; minimum guarantees; mortality Mortality risk; modest lapse risk Impaired life longevity risk; no new claims None Longevity risk; imperfect mortality hedge Disabled life reserves Funding agreements Payout annuities 99 Collateralized Funding Agreements • $500 MM closed to date • Issued by Scottish Annuity & Life Insurance Company (Cayman) Ltd. (“SALIC”), our Cayman Islands flagship • Bought by banks and their conduits • UBS #1: $100 MM closed 6/02; 5-year average life • UBS #2: $100 MM closed 7/03; 5-year average life • Bear Stearns (Liquid Funding): $100 MM closed 11/03; 3-year average life Annually extendable by mutual agreement Extended on first anniversary • Fleet (Eagle Funding): $200 MM closed 12/03; 4.5-year average life • Limit ALM and liquidity risk by: • Matching floating-rate liabilities with floating-rate assets • Staggering repayment schedules • Ramp up funding at issue 100 101 P rinc ipal $M M 10 15 20 25 30 35 40 45 5 J u l-06 A u g -06 S e p -06 O c t-06 N o v -06 D e c -06 J a n -07 F e b -07 M a r-07 A p r-07 M a y -07 J u n -07 J u l-07 A u g -07 S e p -07 O c t-07 N o v -07 D e c -07 J a n -08 F e b -08 M a r-08 A p r-08 M a y -08 J u n -08 J u l-08 A u g -08 S e p -08 O c t-08 N o v -08 D e c -08 J a n -09 F e b -09 M a r-09 Principal Repayments Are Staggered Avoiding need to generate large sums of cash in a given month, week or day UBS 1 UBS 2 B e ar F le e t Questions & Answers Investments as of December 31, 2004 Thomas A. McAvity, Jr. EVP and Chief Investment Officer Growth in Invested Assets ($ millions) Invested Assets Increase Q/Q $3,959 26.9% Core ING-Modco $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 $1,555 $1,582 $1,536 $546 $1,532 $2,404 $2,649 Modco $2,989 $3,076 $4,270 $4,231 6.9% $4,497 6.3% $4,613 2.5% $6,348 37.6% $7,000 $1,508 104 Third-Party Investment Managers Generalists • General Re New England Asset Management (NEAM) • Principal Global Advisors • Asset Allocation and Management (AAM) • Wellington Management • J P Morgan Fleming (Q1 2005) Specialists • Spectrum Asset Management—hybrid preferreds • Stephens—Treasuries Investment Accounting • NEAM for all core assets 105 Swap Curves in USD, GBP and Euro GBP Swap Curve USD Swap Curve Euro Swap Curve • • • 106 USD curve flatter, as short term rates have risen, but still steep GBP curve remains inverted; investor demand at long end EUR curve: steep; long term rates have declined GBP & EUR Continue Inroads vs. USD GBP EUR 107 USD Swap Curve Flattening and Rates Rising Since Mid-2003 10y USD Swap 5y USD Swap 3mth LIBOR 108 Moody’s Corporate Bond Default Counts • Defaults back to normal after 2001-2002 spike, which was worse than 1990-1991 109 US 5-Year Spreads: Corporate A and BBB vs. Swaps 5Y A to Swaps • Spreads have reverted to tight levels • Default are expected to remain low 5Y BBB to Swaps 110 Investment/ALM Strategy • Manage investments in asset-liability framework • Most assets back liabilities • Portfolio formed and guidelines customized for each transaction • Update target durations to reflect aging, experience and yield curve changes • USD yield curve likely to keep rising and flattening • Maintaining short duration bias in relation to liability-based targets • Reduced exposure to bonds with interest-sensitive cash flows • Hedged some price exposure of assets not backing liabilities • Continue pricing U.S. annuity business cautiously • Helping International team coinsure UK and Irish retirement annuities 111 Trend in Gross Spreads on FAS 97 Transactions--Same Store Basis 8% 7% 6% 5% 4% 3% 2% 1% 0% Jun01 Sep01 Dec01 Mar02 Jun02 Sep02 Dec02 Mar03 Jun03 Sep03 Dec03 Mar04 Jun04 Sep04 Dec04 Investment Yield Credited Rate Spread 112 Duration Gap History 0.8 0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 • Excludes cash received on 12/31/04 from ING Re transaction and Cypress investment 113 Enterprise Core ModCo Comparison of Actual Duration to Target--Enterprise 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Enterprise (Actual) Enterprise (Target) • Excludes cash received 12/31/04 from ING Re transaction and Cypress investment 114 Comparison of Actual Duration to Target—Core and Modco Portfolios 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Sep-02 Dec-02 Mar-03 Jun-03 Core (Actual) Core (Target) Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Modco (Actual) Modco (Target) • Excludes cash received 12/31/04 from ING Re transaction and Cypress investment 115 Achieving Competitive Risk-Adjusted Yields • Spreads have tightened, especially corporate bonds • Actively manage for relative value • Contrarian behavior • Overweight structured securities • Use less liquid assets where suitable: spread and diversification • • • • Hybrid preferreds (pay interest rather than dividends) Private placements Credit tenant loans Mezzanine tranches of structured securities • Adhere to enterprise quality limits • Limit call/extension risk 116 Portfolio Yields – Core Assets Historical Portfolio Book Yields 7.8 6.8 5.8 4.8 3.8 2.8 1.8 0.8 0 De 0 c0 M 0 ar -0 Ju 1 n0 Se 1 p0 De 1 c0 M 1 ar -0 Ju 2 n0 Se 2 p0 De 2 c0 M 2 ar -0 Ju 3 n0 Se 3 p0 De 3 c0 M 3 ar -0 Ju 4 n0 Se 4 p0 De 4 c04 pSe Y ie ld Month Cash Book Yield Fixed Book Yield Floater Book Yield 117 Average Book Yield on Fixed Rate Bonds Has Been Stable Portfolio Fixed Rate Book Yield vs. Blended Corporate Yield 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 Yield 118 c9 M 9 ar -0 Ju 0 n0 Se 0 p0 De 0 c0 M 0 ar -0 Ju 1 n0 Se 1 p0 De 1 c0 M 1 ar -0 Ju 2 n0 Se 2 p0 De 2 c0 M 2 ar -0 Ju 3 n0 Se 3 p0 De 3 c0 M 3 ar -0 Ju 4 n0 Se 4 p0 De 4 c04 Month Blended Corp Yield L-T Fixed Rate Yield De Quality Profile of Bond Portfolio Enterprise Quality As Percent of Total Market Value Excluding Commercial Mortgages and Preferreds 35% 30% 25% 20% 15% 10% 5% 0% AAA 12/31/03 AA 3/31/04 A 6/30/04 BBB 9/30/04 <=BB 12/31/04 • Excludes cash received on 12/31/04 from ING Re transaction and Cypress investment 119 Quality of Enterprise Bond Portfolio: Moody’s WARF Score Core Portfolio ModCo Enterprise 400 Weighted Average Rating Factor 350 300 250 200 150 100 50 De c-0 2 De c-0 3 Se p Se p Ma Ma De c-0 4 -03 -04 -02 -03 r-0 r-0 Ju n Ju n Se p -04 3 4 • Excludes cash received on 12/31/04 from ING Re transaction and Cypress investment • Higher WARF means more risk 120 Sector Allocations Total Assets Com. Mrg 2% MBS 2% CMO 10% CMBS 6% Cash 19% Govt. 3% ABS 14% Pfd. Stk. 2% Corp 42% 121 Sector Allocation: Core Vs. Modco Controlled Assets Modco Assets MBS 2% CMO 13% CMBS 5% Cash 18% CMO 4% ABS 4% Pfd. Stk. 0% Com. Mrg 6% MBS 1% CMBS 6% Cash 23% Govt. 3% Govt. 3% ABS 18% Corp 53% Corp 38% Pfd. Stk. 3% 122 Questions & Answers Financial Review Elizabeth Murphy, EVP & Chief Financial Officer Capital Resources $1,400 $1,200 $1,000 $ in Millions $800 $600 $400 $200 $0 Q4 02 Q1 03 Q2 03 Q3 03 Q4 03 Q1 04 Q2 04 Total Capital $1.3 Billion Q304 Q404 Shareholders' Equity 125 Mezzanine Equity Long-Term Debt Total Assets $10,000 $9,000 $8,000 $7,000 $6,053 $9,048 $ in Millions $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 1998 1999 2000 2001 2002 2003 2004 $857 $254 $1,169 $2,142 $3,291 126 Total Equity $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 1999 2000 2001 2002 2003 2004 $219 $234 $240 $244 $331 $335 $491 $482 $660 $652 $862 $849 $ in Millions Including effect of SFAS 115 and fair value of derivatives Excluding effect of SFAS 115 and fair value of derivatives 127 Book Value Per Share $25.00 $21.60 $21.39 $20.00 $18.24 $16.44 $16.62 $15.34 $15.59 $17.91 $18.73 $18.51 $15.00 $14.60 $13.63 $10.00 1999 2000 2001 2002 2003 2004 Including effect of SFAS 115 and fair value of derivatives Excluding effect of SFAS 115 and fair value of derivatives 128 Capital Structure at December 31, 2004 Consolidated Balance Sheet Capital Position ($ Millions) 2002 2003 2004 Long-Term Debt $ $ $ Convertible Debt 115.0 115.0 115.0 Trust Preferred 17.5 47.5 129.5 HyCUs 141.9 142.5 Cypress Notes 41.3 Common Equity 491.1 659.8 862.5 Total Capitalization $ 623.6 $ 964.3 $ 1,290.7 Debt + TPfd + HyCU/Total Cap Debt + TPfd + 25% HyCU/Total Cap 21.25% 21.25% 31.57% 20.53% 33.18% 24.90% 129 Total Revenue $900 $800 $700 $812 $ in Millions $600 $500 $400 $306 $557 $300 $200 $100 $0 1999 2000 2001 2002 2003 2004 $84 $23 $121 130 Net Operating Earnings $90 $80 $70 $81 $ in Millions $60 $50 $40 $30 $20 $10 $0 1999 2000 2001 2002 2003 2004 $12 $16 $22 $42 $41 131 Net Operating EPS $2.50 $2.12 $2.00 $1.58 $1.50 $1.01 $1.31 $1.28 $1.00 $0.64 $0.50 $0.00 1999 2000 2001 2002 2003 2004 132 Expense Ratios 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 1999 133 17.81% 11.82% 7.37% 7.37% 5.66% 6.63%* 2000 2001 2002 2003 2004 * Includes Sarbanes-Oxley Expenses Shares Outstanding – 2005 Estimate Basic Shares Outstanding (1/1/04) 39,931,145 Dilution for Options, Restricted Stock & Warrants 2,000,000 Dilution for Cypress Warrants Dilution for Convertible Senior Notes Dilution for HyCUs Dilution for Cypress Notes Dilution for 2005 Equity Offering ($200M) 2005E Weighted Average Shares Outstanding 3,206,431 1,000,000 700,000 1,598,032 3,750,000 52,185,608 Assumptions Weighted average share price for 2005 of $26.50 Shareholder approval for Cypress investment received April 7, 2005 134 Liquidity & Credit Facilities • $175 Million Unsecured Syndicated Credit Facility • 12 banks • Available to a SALIC, Scottish Re (U.S.), Scottish Re (Dublin), Scottish Re Limited • $34 million in outstanding LOCs at December 31, 2004 • Reverse repurchase facility • Currently no usage 135 Surplus Relief & Collateral Facilities • Surplus Relief • • • • Currently 2 facilities Backed by non-cancelable evergreen letters of credit Current capacity $124 million Ultimate capacity $140 million Collateralizes XXX reserves $200 million Five-year renewable facility Will primarily be used as a collateral warehouse Contingent capital facility $325 million May be used to collateralize XXX or any other type of business need Closed on January 12, 2005 XXX Securitization $850 million To cover all XXX business written prior to December 31, 2003 Closed on February 11, 2005 • HSBC Facility • • • • • Stingray Pass-Through Trust • • • • • Orkney Holdings, LLC • • • • 136 The Cypress Group (“Cypress”) Investment • Approximately $180 million of capital was provided by Cypress • Cypress investment intended to be in the form of ordinary shares of Scottish Re • Securities structured as a combination of ordinary shares, warrants to purchase ordinary shares and bridge securities • Upon receipt of shareholder vote (April 7, 2005) and regulatory approval, all Cypress securities will be automatically converted into ordinary shares 137 Cypress - Terms and Conditions • Ordinary Shares representing 9.9% of pre-money shares outstanding • Effective purchase price will be $19.375 • Warrants, with a $0.01 strike price, to buy ordinary shares • • • • Together, with Ordinary Shares, will represent 19.9% ownership Cash dividend payment equal to dividend paid on Ordinary Shares No voting rights Effective purchase price will be $19.375 • $41.3 million aggregate principal amount of 7% Convertible Subordinated Notes due 2034 • Convertible Subordinated Notes interest payments in-kind until year 3, at Scottish Re’s option of cash or in-kind for years 4-10, and at Cypress’ option thereafter • No voting rights • If shareholder approval is received, but regulatory approval is not, the Convertible Subordinated Notes will convert into Warrants • Convertible at the purchase price of $19.375 138 Cypress - Failed Conditions • Cypress will need regulatory and shareholder approvals to have more than a 10% voting ownership stake • If shareholder approval is not received (a “Failed Condition”), Scottish Re will be subject to certain penalty payments • A Failed Condition will have occurred if: Closing occurs in 2004, but shareholder approval is not received by June 30, 2005, or Closing occurs after January 1, 2005, but shareholder approval is not received within 180 days • Convertible Subordinated Notes will be subject to a Penalty Rate. The Penalty Rate is a rate per annum equal to: 15% through December 31, 2005, 17% through December 31, 2006, and 19% thereafter • Scottish Re will make additional per annum payments on the Warrants Payments equal to 5% of the product of the number of shares underlying the Warrants and $19.375 Scottish Re may opt to make such additional Warrant payment in cash or by issuing additional Convertible Subordinated Notes in an equal aggregate principal amount • Each Warrant will receive twice the dividend then currently payable on Ordinary Shares until shareholder approval is attained • Scottish Re may redeem the Convertible Subordinated Notes at the expiration of the Cypress lock-up period in an amount equal to the principal times the Penalty Rate through December 31, 2007 139 Questions & Answers Mortality Risk Management Key Discussion Points • • • • • Economic factors affecting life reinsurance market Scottish Re risk management framework Observable trends in mortality Where we go from here Conclusions 142 Life Reinsurance Market Environment • A great deal of talk in past 12-18 months of ‘hardening’ life reinsurance market • Definite evidence of: • Reduction in capacity • Increased pricing • Underlying cause of pricing trends: • Supply/demand dynamics • Underlying economics 143 Upward Pricing Trend in Large Part Due to Economic Factors • Cost of capital • XXX Reserve collateralization costs • Sustained low interest rate environment Non-mortality Factors Mortality Assumption Correction • Some reinsurers dropped assumptions inappropriately low in late 1990’s to early 2000’s A correction needed Upward Trend in Mortality By Issue Year • Relaxing of underwriting in direct marketplace • Separate issue from secular mortality improvement Underlying mortality continues to improve Insured mortality will continue to improve assuming underwriting is held constant 144 Scottish Re Position Unique in Life Reinsurance Market • Scottish Re is one of major life re players • 3rd largest inforce in the United States • Top 10 in the world • Scottish Re has tremendous scale with about $1 trillion inforce • Over 90% of inforce priced and put on books within the past 18 months ING Re block acquired 12/04 -- $700 billion ERC block acquired 12/03 -- $150 billion Organic growth -- $100 billion new business written since 1/1/03 • Vast majority of block priced in current environment 145 Scottish Re Position Relative to Economic Factors • Cost of capital • XXX Reserve collateralization costs • Sustained low interest rate environment Non-mortality Factors • Scottish Re is a leader in developing secure, long term collateralization of XXX reserve obligations • All major XXX blocks backed by long term support • Organic SCT Block – Orkney Re • ING XXX Block – Long term backdrop from ING Group • ERC Block – No XXX obligations • Strong and efficient capital structure 146 Scottish Re Position Relative to Economic Factors • Some reinsurers dropped assumptions inappropriately low in late 1990’s to early 2000’s A correction needed Mortality Assumption Correction • Hyper-competitive era pre-dates Scottish Re • Over 90% of Scottish Re inforce acquired and priced in past 18 months • Priced using contemporary and realistic mortality assumptions • Have benefit of past experience on inforce business • Essentially all pre-2000 policy issues acquired via acquisition • Provides large scale to Scottish Re without legacy issues of underpriced business 147 Scottish Re Position Relative to Economic Factors • Relaxing of underwriting in direct marketplace • Separate issue from secular mortality improvement Underlying mortality continues to improve Insured mortality will continue to improve assuming underwriting is held constant Upward Trend in Mortality By Issue Year • Underwriting guidelines began to relax in second half of 1990’s • Scottish Re framework not created during that timeframe • Assumptions were set appropriate to 2001-2004 era • Demonstrated versus inception to date mortality results • Framework in place to ensure assumptions follow future movements 148 Strong Risk Management Framework to Assure Positive Results Going Forward • • • • Review all treaties on a quarterly basis – “Early Warning System” Experienced pricing staff Industry leader from underwriting audit perspective Already strong framework bolstered by assets from ING acquisition 149 Underwriting and Claims Audits • Essential to monitor client use of underwriting and claims authority • Framework to: • Set clear expectations to ceding company • Explicit provisions in pricing assumptions • Audit to validate • Scottish Re conducted 19 underwriting reviews in 2004 • Four experienced underwriters added via ING acquisition • Scottish Re will conduct > 30 audits during 2005 150 ING Acquisition Augments Risk Management Capabilities • Additional underwriting resources • Four underwriters with over 80 years combined experience • Dedicated mortality research personnel • Access to vast amounts of historical mortality data • Longer durations • Increased statistical credibility • Well maintained and usable format • Summit Mortality Assessment System • Tool for aiding in setting customized assumptions • Explicitly reflects key underwriting requirements and criteria • Valuable for setting assumptions and interpreting experience 151 Mortality Management Loop Base Assumptions • Success starts with solid base mortality assumptions • Scottish Re (U.S.) organic block has exhibited favorable experience inception to date • Approximately 95% of expected 152 Mortality Management Loop Differentiating Factors Base Assumptions • Important to be able to differentiate among situations • Target market and distribution differences • Underwriting guidelines and criteria • Underwriting philosophy and quality • Risks in applying ‘average’ assumption across the board • Win when you’re low, Lose when you’re high • Result will fail to meet expectations • Summit provides improved efficiency and precision to do this 153 Mortality Management Loop Differentiating Factors Base Assumptions Company-specific Experience • Important to use all available information • Firsthand mortality experience relating to situation is ideal • Scottish Re well positioned to use vast amounts of client specific data • Available from Scottish Re (U.S.) block • Available from ING block • Available from X factor and other outside sources 154 Mortality Management Loop Differentiating Factors Base Assumptions Company-specific Experience Appropriate Deal-specific Assumption • End goal is an appropriate assumption tailored to the situation to allow efficient selection of risks. • Win where you want to win • Lose where you want to lose • Losing is an acceptable result when it’s the right economic answer 155 Mortality Management Loop Differentiating Factors Audits Base Assumptions Company-specific Experience Appropriate Deal-specific Assumption • Auditing key to ensure proper controls • Guidelines being followed • Exceptions within tolerance for pricing 65% of 2004 New Business Production from Clients Audited in 2004 • 19 audits performed in 2004 • 30+ planned for 2005 156 Mortality Management Loop Differentiating Factors Audits Base Assumptions Company-specific Experience Appropriate Deal-specific Assumption Emerging Experience • Critical to be able to evaluate emerging experience in varying timeliness and detail • Quarterly reviews of all significant treaties • Timely review at high level ensures “Early Warning System” of emerging material surprises • Comprehensive mortality studies and analysis • Operate at slightly longer lag • Provide detailed understanding of performance of business relative to expectations • Requires experience and context to ensure complete value and interpretation 157 Mortality Management Loop Differentiating Factors Audits Base Assumptions Company-specific Experience Appropriate Deal-specific Assumption Active Deal Management Emerging Experience • Important to be proactive in dealing with emerging issues • • • • Quick feedback and action on any adverse audit findings When necessary, re-price or terminate underperforming treaties Adjust assumptions & pricing relative to changes in underwriting practices Reset expectations around inforce performance relative to available information 158 Mortality Management Loop Differentiating Factors Audits Base Assumptions Company-specific Experience Appropriate Deal-specific Assumption Active Deal Management Emerging Experience • Feedback not only used at ‘micro’ level for deal management • “Plow back” information to continuously improve and enhance overall process • Mortality data leads to adjustments in base assumptions • Audits change views/benchmarking of client companies • Emerging data allows validation of fit of differentiation mechanisms • Keep eye on macro-level trends to ensure no ‘systemic drift’ from reality 159 Macro Trends in Mortality • Underlying mortality continues to improve, but at a slowing rate • • • • Medical advances continue to improve mortality in underlying population Outside of a handful of temporary periods, has been the case for 100 years Rate of improvement has been at a declining pace Improvement has not been level by age or gender Males have improved materially more in past 25 years than females Middle ages have seen the most improvement (40-55) Have benefited the most from lipid and hypertensive medication Mortality at younger ages driven more by accidental deaths Little improvement in mortality at the oldest ages 160 Macro Trends in Mortality • Male vs. female mortality differential is narrowing • Male mortality has improved more than females • Medical advancements have focused more on male causes of death More progress on CVD than cancer Lipid and blood pressure medications • Lifestyle convergence Higher proportion of working women Still carrying long existing stresses of home • Relevant to life re pricing for situations with unusually skewed distributions of male or female business 161 Macro Trends in Mortality • Overall large amount mortality not favorable to ‘core’ policy sizes • In theory, large amount mortality should be quite favorable Positive socio-economic factors “Kitchen sink” underwriting • In reality, emerging experience on large policies is comparable to experience at core amounts ($250,000-$1,000,000) • Driven by a number of factors Significant pressure to place large cases (stresses needs for audits) Experience on young issue ages at high amounts very unfavorable Some evidence of efficient replacement of early-mid 1990’s large amount policies with lower priced products or more preferred classes Increased incentive to both policyholder and producer for large policies 162 Macro Trends in Mortality • Upward trend in mortality by issue year due to relaxed underwriting requirements at ceding companies • Life industry has long focused on ‘better’ underwriting practices For most of history, ‘better’ = lower mortality Recent history ‘Better’ = faster & cheaper with similar mortality • Current industry status on underwriting requirements vs. mid-1990’s Fewer attending physician statements Fewer treadmill EKG’s Higher paramedical limits Oral fluid has replaced blood testing in places • Some of these changes are cost justified and good business decisions Yet, have upward implications to mortality • Separate from ‘mortality improvement’ Mortality is improving…assuming underwriting paradigm held constant 163 Relaxing of Underwriting Guidelines • Key to success in this paradigm is differentiating subtle differences in underwriting • Two historical life reinsurer pitfalls: • “Death of 1,000 nicks” Suffer from sequence of several minor underwriting changes Move paramed limit from $1MM to $2MM – 1% Move EKG limit for ages <50 from $500,000 to $2MM – 1.5% Replace blood with oral fluid for ages <40 and amounts <$250,000 – 2% Change preferred criteria on driving from 0 MV in 2 years to 2 in 3 years – 1% CUMULATIVE IMPACT = 1.01 x 1.015 x 1.02 x 1.01 = 105.6% • Definition of acceptable change in underwriting is ‘in line with market’ Being in line with market is important lack of alignment can equal anti-selection If however market drifts upward and assumptions not adjusted, will fail to meet expectations • Current mortality assumptions should not equate to 100% of experience from past 10 years • Should equate to 100% of past few years worth of issues • Summit provides an improved method for differentiating going forward 164 Where Scottish Re Goes From Here • Implement Summit into pricing • Very consistent with 2000-2003 SRUS pricing assumptions • Facilitates more scientific differentiation of ‘shades of gray’ • Explicit mechanism to address underwriting guideline relaxation • Reflect emerging trends • Male/Female relationship • Older ages • Large amounts (not a focus given Scottish Re risk parameters) • • Continue to strengthen ability to monitor risk • Increased audit resources and alignment with pricing process • Leverage capabilities to provide more comprehensive real time study ability Strengthen ‘provisions’ in pricing process • Far more data available for early to mid-duration assumptions • Less directly applicable data available for later duration assumptions • Further from current timeframe assumptions become ‘provisions’ Current market should allow strengthening of provisions to increase probability of achieving targeted returns High attained ages Later durations Mortality improvement 165 Conclusions • No legacy issues • 3rd largest U.S. reinsurer by inforce, but business priced or re-priced in past 18 months • Well positioned from a capital and XXX collateralization perspective • Organically produced block on target relative to pricing assumptions • 95% A/E inception to date • Working to strengthen an already strong risk management framework to assure future success • Increased sophistication in systems and processes • Improved controls, studies, monitoring • Increased resources toward risk management Additional underwriting and audit resources Dedicated mortality research capability • “Best practices” approach toward integration with ING acquisition • A strong commitment to be the world’s most profitable reinsurer… 166 Questions & Answers Funding of XXX Reserves—Project Orkney Clifford J. Wagner, EVP and Chief Actuary Hugh T. McCormick, EVP, Corporate Development The Regulation XXX Burden • The introduction of Regulation XXX (2000) placed burdensome “redundant” statutory reserve requirements on writers of life insurance policies with guaranteed terms • Created reserve strain for both primary insurers and reinsurers • Some insurers and reinsurers move reserves offshore where the redundant reserve requirements can be collateralized with traditional 364-day LOCs • Exposes assuming reinsurers to renewal and repricing risks • LOC capacity has become constrained • Increased urgency as level term sales remain brisk • XXX LOC demand exceeded $11 billion as of 2003 • Moody’s estimates the XXX LOC demand to exceed $45 billion by 2007 • Ultimately exceeding $100 billion • Current traditional LOC capacity can not absorb that demand • S&P’s view is that the current LOC solution, “though workable, is temporary” 169 Magnitude of the XXX Issue Forecasted XXX Reserves ($ in billions) $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 2002 2003 2004E 2005E 2006E 2007E 2008E High 170 Midpoint Low Source: Moody’s Scottish Re XXX Collateral Solutions • During the past 9 months, Scottish Re has funded four XXX collateral facilities, three short to medium term solutions, and one long-term securitization • Unsecured revolving credit facility • $175 million • 364-Day • HSBC Collateral Facility • $200 million • 5-year • Stingray Pass-Through Trust • $325 million • 10-year • Orkney Re • $825 million • 30-year 171 Unsecured Revolving Credit Facility • $175 million • 364-Day Revolving Credit Tranche • Accordian Option, permitted to expand the Facility to a maximum of $200 million • Participation from 12 banks • Use of Proceeds • General corporate purposes • Credit for reinsurance 172 HSBC: XXX Collateral Facility • $200 million facility • Relieves Regulation XXX capital strain by providing Scottish Re (U.S.) with credit for reinsurance • Permits Scottish Re (Dublin) to secure reserves and reduces strain on existing capital • May be extended each year for an additional five year period upon the consent of HSBC • Considered a variable interest entity and is consolidated on balance sheet • Rating Agency Treatment • To be treated as “Operational” leverage and excluded from financial leverage calculations 173 Stingray Pass – Through Trust • $325 million of capital available to be used as an alternative to letters of credit • • • • • • Guarantees collateral when, and if required, in return for an annual fee Provides Scottish Re (U.S.) with credit for reinsurance Not restricted to a particular book of business Access to the facility is unconditional and at all times There are no financial covenants applicable Maturity of 10 years • Rating Agency Treatment • Treated as off-balance sheet, excluded from both operational and financial leverage calculations • S&P “A-”, Moodys “A3”, AM Best “A-” 174 Insurance Securitization to Address XXX Issues Securitization has emerged as an important tool for managing various aspects of the insurance business • Risk mitigation • Transfer of extreme tail risk to investors • Embedded value monetization • Raising proceeds against future profits • Acquisition finance • Leveraged buyout of insurance blocks • Capital relief • Funding of non-economic reserves from capital markets 175 Background of Life Insurance Securitization • • • • In 1988, Prudential securitized life insurance policy loans Subsequent securitizations ran into regulatory concerns in New York and California Since 2001, life insurance securitization has been expanding significantly Regulation XXX reserve requirements have been a major driver • In 2003, First Colony (GE, now Genworth) completed the first River Lake transaction • In 2004, Banner Life and William Penn (Legal and General) completed a similar transaction • In 2005, Scottish Re completed the Orkney transaction 176 Orkney Re – Transaction Overview • • • • • • Securities issued by newly formed subsidiary Orkney Holdings LLC $850 million in ultimate XXX reserve relief Associated with a defined book of business (can be repeated with additional blocks) Covers all XXX business written by Scottish Re (U.S.) prior to January 1, 2004 MBIA insured timely payment of interest and ultimate payment of principal Favorable terms • • • • • Principal Coupon Ratings Maturity Weighted Avg. Life $850 million 3mL + 53bps AAA/Aaa February 2035 16.3 Years 177 Orkney Re – Structure • Scottish Re (U.S.) created Orkney Holdings LLC, a Delaware holding company, and its whollyowned subsidiary, Orkney Re, a South Carolina Special Purpose Financial Captive • Business with XXX reserves was reinsured to Orkney Re • Orkney Holdings sold notes to capital markets investors, and contributes the proceeds to Orkney Re as needed to fund the growth in XXX strain • Orkney Re placed the proceeds in “Reg. 114 Trust” in order to provide Scottish Re (U.S.) with credit for reinsurance • Orkney Re pays dividends to Orkney Holdings, which pays interest and principal on the notes • Dividend payments are subject to regulatory approval • The notes are “wrapped” by MBIA • Amortization of the notes is tied to the projected life of the reinsured business 178 Orkney Re – Schematic Scottish Re (U.S.) Dividends Notes with MBIA Guaranty Capital Scottish Re (U.S.) is Sole Beneficiary Reinsurance Agreement Capital Market Investors Orkney Holdings LLC Proceeds Dividends Proceeds & Capital Orkney Re Reg. 114 Trust 179 Orkney Re – Transaction Highlights • Fully funded to expected peak XXX reserve amount • Debt has recourse only to Orkney Holdings and no recourse to any other Scottish entity • Scottish Re has no exposure to: • Market rollover risk • Liquidity risk • MBIA credit risk • Stable and competitive cost with no rollover risk • Cost is known upfront and fully funded • 100bps maximum cost with a zero return on investments • 30 year maturity • Favorable rating agency treatment • Excluded from both operational and financial leverage calculations • Scottish Re mortality exposure for defined block is capped 180 Execution Considerations • Highly structured • Extensive documentation requirements • Required sophisticated internal and external resources • Regulatory considerations • Jurisdiction of captive—South Carolina SPFC legislation—others, such as Vermont? • Local regulatory rules—approval of affiliate transactions • Rating agency considerations • Data intensive - Quality of data received from primary companies is critical to modeling 181 Scottish Re Projected Statutory Reserve Strain Forecasted Reserve Strain ($ in millions) $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Projected Strain 182 Orkney Re ING Re Economic Reserves Future of Insurance Securitization • As capital market investors get a deeper understanding of insurance risks, the insurance business will get increasingly transformed • Instead of accumulating assets and liabilities, companies will develop blocks and sell them to investors through non-recourse structures • Securitization will become increasingly possible for more complex risks (terrorism, longevity) • Securitization structures will develop to be more regulatory and accounting friendly with lower transaction costs • There will be a robust secondary market in life insurance policies and the policies will be more efficiently aggregated and securitized • Reinsurers will need to adapt their business models to embrace securitization tools or risk being disintermediated 183 Questions & Answers Concluding Remarks Investment Highlights • • • • • • • • • Leading global life reinsurance specialist Exceptional industry trends playing to Scottish Re’s strengths Experienced and conservative management team Low volatility performance ING Re acquisition was both transformational and strategic Targeted international expansion Industry leader in sourcing the capital markets for both capital and risk management solutions Expanding ROE, book value per share and operating earnings per share Growth at a value price 186 Scottish Re Group Limited Investor Day March 15, 2005
