Scottish Re Subprime Exposure Detailed

Bermuda-based Scottish Re has disclosed that it holds $2.1 billion in asset-backed securities backed by subprime mortgages and an additional $1 billion in Alt-A residential mortgage-backed securities.

If market value declines are severe enough, there could be a strain on the company's liquidity position, said Duncan Hayward, chief accounting officer with Scottish Re.

The company discussed its investment exposure to the subprime market during an earnings call last week. Management said that highly rated and higher-quality holders would help the company minimize any impact from subprime troubles.

Mr. Hayward said securities backed by subprime mortgages represent 19 percent of the company's investment portfolio.

Mr. Hayward noted that Scottish Re's investment managers purchased highly rated tranches from high-quality issuers. For the ABS securities, he said, 74 percent are “double-A-minus” or higher, and 98 percent are “A” rated or higher.

Alt-A securities represent 9 percent of the company's investment portfolio, he continued. A total of 87 percent of those holdings are rated “double-A-minus” or higher, and 98 percent are rated “A-minus” or higher, he continued.

The ratings and higher-quality holdings that Scottish Re has, according to Mr. Hayward, are due at least in part to investment guidelines established at the end of 2004.

In that year Scottish Re raised $4.1 billion in a transaction with ING and established Triple-X collateral facilities. Triple-X describes reserving requirements for level premium insurance contracts. Another reason cited for Triple-X was the more attractive spreads that were available compared with corporate bonds.

A total of $1.8 billion in high-quality subprime asset-backed securities were purchased in “2005, 2006 and 2007 vintages,” he added. Seventy-six percent of that exposure was “double-A-minus” or higher, and over 90 percent was “A-minus” or higher, he added.

In that second quarter, there was a total of $3.3 million of realized losses and $14.6 million of unrealized losses from subprime ABS, he continued.

In July, unrealized losses totaled $97 million, less than 1 percent of Scottish Re's investment portfolio, he noted. And, as of early August, a third of 1 percent of the investment portfolio, totaling $35 million, was subject to downgrades, Mr. Hayward said.

At June 30, there was a $50,000 write-down of Alt-A bonds and $12.4 million in unrealized losses in those Alt-A holdings, he noted.

Scottish Re has three securitizations, with $1.6 billion in subprime-backed securities and $685 million in Alt-A holdings, Mr. Hayward added. Although he said Scottish Re believes the potential for loss is limited, he did add that if assets are worth less than the securitization block, then it could be necessary to secure reserve credit outside of those facilities.