Ballantyne Re, the special purpose vehicle (SPV) used by Scottish Annuity & Life to finance the excess reserving associated with certain blocks of business ceded by Scottish Re (US) that fall subject to the statutory reserve requirements of the US Regulation XXX regime, announced on February 20 that Ambac Assurance had not granted its consent to Ballantyne Re's request to seek removal of excess funds from the Reinsurance Trust Account (RTA).
Ballantyne Re said that, under the terms of the Amended & Restated (A&R) Reinsurance Agreement dated October 1 2008, "assets in the RTA in excess of 102% of the Required Balance ("excess funds") are available to be released to Ballantyne Re … subject to certain consents".
On February 2 this year Ballantyne Re consulted with Ambac about the release of excess funds from the RTA.
The release of excess funds would also be subject to the consent of Security Life of Denver Insurance Co, with such consent "not to be unreasonably withheld".
Ballantyne Re said that on February 9 Ambac had informed it that Ambac did not grant the consent.
Ballantyne Re was formed in 2004 as an Ireland-based SPV by Scottish Re to execute a reinsurance agreement with Scottish Re (US) to facilitate the funding of redundant statutory reserves. Scottish Re (US) ceded to Ballantyne Re on an indemnity basis relating to a defined block of level premium term policies written between 1996 and 2005 and reinsured with Scottish Re (US) on a co-insurance basis.
Ambac Assurance UK issued financial guarantee policies on the Class A-2 Series A notes and the Class A-3 notes. It guaranteed $900m of the notes issued by Ballantyne.
The collateralised mortgage bonds crisis of 2008 led Ballantyne Re to default on the class A-1 note, which was not guaranteed by Ambac. In January 2009 it sold on a block of its US individual life business to Hannover Re, having originally hoped to sell its entire North American segment. It conceded that it had "acute capital, liquidity and collateral needs".
By May 2009 Ambac had taken legal action against JP Morgan Investment, on allegations that the investment company had breached contracts through inappropriate investments in subprime and other mortgage-backed securities in its role as manager of Ballantyne Re's book of assets. Scottish Re went into run-off and Ballantyne Re entered deconsolidation.
That lawsuit was thrown out in March 2010.
By mid-2012 it became clear that investors in all of the tranches of Ballantyne Re were likely to end up losing money. After the sale of the ING business, its underlying block was the old Security Life of Denver Insurance Account. While the $2.1bn it raised was sound, the investments made with the money were not, hence the case against JP Morgan Asset Management.
By 2013 Fitch had withdrawn its ratings on the Class B-1 and B2 notes (only $50m of the $1.7bn initial issue), with a recovery estimate of 0%. The class A-1 notes had a recovery estimate of 40%.
Fitch noted that Ballantyne Re's liabilities exceeded the current book value of its assets "by a significant margin".