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SAN FRANCISCO (MarketWatch) -- Scottish Re Group shares rebounded 71% on Tuesday after the life reinsurance and annuity company said it isn't facing near-term solvency or liquidity problems and suggested that ratings downgrades won't take as big a bite out of its business as investors feared on Monday.
Scottish Re (SCT : scottish re group limited shs
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Last: 6.84+2.85+71.43%

6:50pm 08/01/2006

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6.84, +2.85, +71.4%) shares lost three quarters of their value on Monday after the company's chief executive resigned in the wake of an unexpected second-quarter loss. The Bermuda-based firm said it also suspended its dividend and hired investment banks Goldman Sachs (GS : The Goldman Sachs Group, Inc.
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Last: 151.26-1.49-0.98%

6:44pm 08/01/2006

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151.26, -1.49, -1.0%) and Bear Stearns (BSC : The Bear Stearns Companies Inc.
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Last: 139.45-2.42-1.71%

6:41pm 08/01/2006

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139.45, -2.42, -1.7%) to consider strategic alternatives and track down extra capital. See full story.
A.M. Best and other rating agencies downgraded the company's ratings on Monday to below A-, a level that's considered important for reinsurers to attract and retain business. The downgrades sparked concern that Scottish Re could break some clauses in its debt agreements. There are also ratings triggers in some reinsurance contracts that allow customers to cancel policies and take back premiums.
Scottish Re tried to calm many of these concerns in a statement Tuesday morning.
"We do not face any near-term liquidity or solvency issues," the company said. "We are not in violation of any of the covenants associated with our outstanding debt and convertible securities or back-up liquidity lines."
Scottish Re also said it's tried to negotiate new reinsurance business without ratings triggers during the past three years. The company also said it's attempted to get ratings triggers taken out of old contracts.
While reinsurance agreements differ, ratings triggers, when they are included, allow customers to cancel policies if ratings fall below certain levels and take back or "recapture" the premiums they passed on to the reinsurer.
If lots of ratings triggers happen at once, reinsurers can face lots of recaptures that drain them of capital, like a run on a bank.
"Any treaties with rating triggers represent a de minimus amount of our in-force business," Scottish Re noted.
That eased concerns of one analyst, Andrew Kilgerman of UBS, who upgraded his recommendation on Scottish Re shares to neutral from reduce on Tuesday.
"Heavy recapture activity seems unlikely because ratings triggers comprise a small portion of Scottish Re's in-force business," Kligerman said in a note to clients. "Life reinsurers (including Scottish Re) have been pushing back on the inclusion of ratings triggers over the past few years."
Less than 5% of the U.S. traditional life reinsurance business written by Scottish Re rival Reinsurance Group of America (RGA : Reinsurance Group of America, Incorporated
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Last: 50.38+0.81+1.63%

6:49pm 08/01/2006

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50.38, +0.81, +1.6%) over the past three to four years includes a ratings trigger, Kligerman noted.
Scottish Re's book value currently stands at roughly $5.80 a share, Kligerman estimated. The company probably needs more than $300 million in extra capital over the next year, he added.
Scottish Re shares jumped 71% to $6.84 on Tuesday