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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   ----------

                                    FORM 10-K

                   For Annual and Transition Reports Pursuant
         to Sections 13 or 15(d) of the Securities Exchange Act of 1934

  |X|           Annual Report Pursuant to Section 13 or 15(d) of
                      the Securities Exchange Act of 1934

                   For the fiscal year ended December 31, 2005

  |_|          Transition Report Pursuant to Section 13 or 15(d) of
                      the Securities Exchange Act of 1934

                   For the Transition period from           to

                         Commission File Number 0-29788

                                   ----------

                            SCOTTISH RE GROUP LIMITED
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

            Cayman Islands                             98-0362785
    (State or Other Jurisdiction of                (I.R.S. Employer
    Incorporation or Organization)                  Identification No.)
       Crown House, Third Floor
          4 Par-la-Ville Road
        Hamilton HMO8, Bermuda                       Not Applicable
(Address of Principal Executive Office)                (Zip Code)

      Registrant's telephone number, including area code: (441) 295-4451

          Securities Registered Pursuant to Section 12(b) of the Act:

  Title of Each Class                 Name of Each Exchange on Which Registered
  -------------------                 -----------------------------------------
Ordinary Shares, par value $0.01 per share      New York Stock Exchange
Hybrid Capital Units                            New York Stock Exchange
Non-Cumulative Perpetual Preferred              New York Stock Exchange
  Shares, par value $0.01 per share

           Securities Registered Pursuant to Section 12(g) of the Act:
                                      None

         Indicate  by  checkmark  if the  registrant  is a  well-known  seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes|X| No |_|

         Indicate by checkmark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes |_| No |X|

         Indicate  by check  mark  whether  the  Registrant:  (1) has  filed all
reports  required to be filed by Section 13 or 15(d) of the Securities  Exchange
Act of 1934 during the preceding 12 months (or for such shorter  period that the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes|X| No |_|

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  Registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. |_|

         Indicate by checkmark  whether the  registrant  is a large  accelerated
filer, as defined in Rule 12b-2 of the Exchange Act. Large accelerated filer |X|
Accelerated filer |_| Non-accelerated filer |_|

         Indicate by checkmark  whether the  registrant  is a shell  company (as
defined in Rule 12b-2 of the Exchange Act). Yes|_| No |X|

         The aggregate  market value of the voting stock held by  non-affiliates
of the  Registrant  as of June 30, 2005 was  $793,126,667.  As of March 9, 2006,
Registrant had 53,486,106 ordinary shares outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Certain  information  required  by Items 10,  11, 12, 13 and 14 of Form
10-K is  incorporated  by reference  into Part III hereof from the  registrant's
proxy statement for its 2006 Annual Meeting of  Shareholders,  which is expected
to be filed with the Securities and Exchange  Commission  (the "SEC") within 120
days of the close of the  registrant's  fiscal  year ended  December  31,  2005.
================================================================================



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                           SCOTTTTISH RE GROUP LIMITED

                                    FORM 10-K

                          YEAR ENDED DECEMBER 31, 2005

                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                                                               Page

<S>                                                                                                              <C>
PART I............................................................................................................1

Item 1:    BUSINESS...............................................................................................1
Item 1A    RISK FACTORS..........................................................................................21
Item 1B    UNRESOLVED STAFF COMMENTS.............................................................................34
Item 2:    PROPERTIES............................................................................................34
Item 3:    LEGAL PROCEEDINGS.....................................................................................34
Item 4:    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................................35

PART II..........................................................................................................36

Item 5:    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF
            EQUITY SECURITIES....................................................................................36
Item 6:    SELECTED FINANCIAL DATA...............................................................................37
Item 7:    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................39
Item 7A:   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................72
Item 8:    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...........................................................75
Item 9:    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..................75
Item 9A:   CONTROLS AND PROCEDURES...............................................................................75
Item 9B:   OTHER INFORMATION.....................................................................................78

PART III.........................................................................................................78

Item 10:   DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT........................................................78
Item 11:   EXECUTIVE COMPENSATION................................................................................78
Item 12:   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS........78
Item 13:   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................................78
Item 14:   PRINCIPAL ACCOUNTANT FEES AND SERVICES................................................................78

PART IV..........................................................................................................78

Item 15:   EXHIBITS, FINANCIAL STATEMENT SCHEDULES...............................................................78
</TABLE>



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                                     PART I


Item 1:  BUSINESS

Overview

         Scottish Re Group Limited is a holding company  incorporated  under the
laws of the Cayman  Islands  with our  principal  executive  office in  Bermuda.
Through our operating  subsidiaries,  we are engaged in the  reinsurance of life
insurance,  annuities and annuity-type  products.  These products are written by
life insurance companies and other financial  institutions located in the United
States,  as well as in many other  countries  around the world. We refer to this
business as life reinsurance.

         Since  our  formation  in 1998,  we have  grown to be one of the  three
largest  life  reinsurers  serving  the United  States  (based on the gross face
amount of ordinary life reinsurance business in force in 2004, together with the
pro-forma results of the acquisition of the in-force individual life reinsurance
business of ING America Insurance Holdings, Inc., which we call ING, on December
31,  2004).  On December 22, 2003, we completed  the  acquisition  of 95% of the
outstanding  capital  stock  of  ERC  Life  Reinsurance  Corporation.  ERC  Life
Reinsurance  Corporation's  name was  subsequently  changed to  Scottish Re Life
Corporation.  Scottish Re Life  Corporation's  business consists  primarily of a
closed block of traditional life reinsurance  business. As of December 31, 2005,
the number of lives we reinsured in North America was approximately 13.5 million
and our gross face amount of in-force business was approximately $1.02 trillion.
On December 31,  2001,  we expanded  our  business  outside of North  America by
acquiring World-Wide Holdings Limited and its subsidiary, World-Wide Reassurance
Limited,  which were both subsequently  renamed Scottish Re Holdings Limited and
Scottish Re Limited,  respectively.  Scottish Re Limited,  formed in 1964,  is a
United  Kingdom  based  reinsurer  of  group  life  insurance,  individual  life
insurance and aircrew loss of license insurance in Asia,  Europe,  Latin America
and the Middle East.

         Effective  December 31, 2004, we acquired the  in-force individual life
reinsurance  business of ING.  Pursuant to this  transaction,  Security  Life of
Denver Insurance Company and Security Life of Denver International Limited, both
subsidiaries  of ING,  reinsured  their  in-force   individual life  reinsurance
business to Scottish Re (U.S.), Inc. and Scottish Re Life (Bermuda) Limited on a
100% indemnity reinsurance basis. In addition, Security Life of Denver Insurance
Company and Security  Life of Denver  International  Limited  transferred  to us
certain systems and operating  assets used in their  individual life reinsurance
business.

         Security Life of Denver  Insurance  Company and Security Life of Denver
International  Limited transferred assets of approximately $1.8 billion of their
individual  life  reinsurance  business  to us and we  recorded a  corresponding
amount of reserves for future policy benefits and other liabilities.  Certain of
the acquired assets are held in trust for the benefit of Security Life of Denver
Insurance  Company and Security Life of Denver  International  Limited to secure
our liabilities on the acquired  business.  The ceding commission paid to us was
placed in trust to  secure  our  obligations  under  the  indemnity  reinsurance
treaties and is subject to release upon our  completion of long-term  collateral
arrangements with respect to the acquired  business.  In 2005, we completed such
arrangements  for a portion of the  acquired  business  resulting  in a pro-rata
release of the ceding commission from the trust.

         The  acquired  business  represents  the  individual  life  reinsurance
division  of ING's U.S.  life  insurance  operations,  and was  written  through
Security  Life  of  Denver  Insurance   Company  and  Security  Life  of  Denver
International  Limited.  The acquired  business  mainly  consists of traditional
mortality  risk  reinsurance  written on an  automatic  basis with more than 100
different ceding insurers. Less than 10% of the acquired business was written on
a facultative basis. Most of the business involves guaranteed level premium term
life  insurance  that is subject to the statutory  reserve  requirements  of the
Valuation of Life Insurance  Policies Model Regulation XXX ("Regulation XXX") as
well as universal life insurance that is subject to a similar  statutory reserve
requirement known as Regulation AXXX.

         During 2005, we fully  integrated the ING acquisition with our existing
U.S. traditional business and migrated our Charlotte based policy administration
operations to Denver.  We now administer our combined  business with an enhanced
version of the ING policy administration system, known as SAGE. In addition, the
Denver

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operation  relocated  to new premises  during the fourth  quarter of 2005 and is
supported by a technology  infrastructure  consistent with all of our units. The
combination of technology with the experienced  complement of  approximately  90
life   reinsurance   administration   professionals   has   created  a  scalable
administrative  platform for us.

         We have operating companies in Bermuda,  the Cayman Islands,  Guernsey,
Ireland,  the United  Kingdom  and the  United  States,  and a branch  office in
Singapore.  Our  flagship  subsidiaries  are Scottish  Annuity & Life  Insurance
Company (Cayman) Ltd.,  Scottish Re (U.S.),  Inc.,  Scottish Re (Dublin) Limited
and  Scottish  Re  Limited.  See ratings  section  beginning  on page 12 of this
document for additional information on the above entities.

         In 2005, we established  Scottish Re Capital Markets,  Inc., which is a
registered  broker  dealer,  formed to leverage the  experience and expertise we
have gained through our own efforts securitizing  various reserve  requirements.
We believe  Scottish  Re  Capital  Markets,  Inc.  can  successfully  assist our
clients, both large and small, to effectively and efficiently access the capital
markets  to meet  their  reserving  needs.  By doing so,  we  expect to  develop
stronger  relationships  with our  clients  and  enhance  our  underwriting  and
structuring knowledge.

         As of December 31, 2005,  we had  consolidated  assets of $12.0 billion
and consolidated shareholders' equity of $1.3 billion.

Our Business

Segments

         We have three reportable segments: Life Reinsurance North America, Life
Reinsurance  International  and Corporate and Other.  The reinsurance  operating
segments write reinsurance  business that is wholly or partially retained in one
or more of our reinsurance subsidiaries.

         In our Life Reinsurance North America segment,  we provide solutions to
insurance  companies  seeking  reinsurance  of  life  insurance,  annuities  and
annuity-type  products.  We reinsure  lines of  business  that may be subject to
significant  reserve or capital  requirements by regulatory and rating agencies.
We assume risks  associated with primary life insurance  policies and annuities,
both in-force and new business.  We reinsure:  (i) mortality,  (ii)  investment,
(iii)  persistency  and (iv) expense risks.  We originate  reinsurance  business
predominantly  by marketing our products and services  directly to United States
life insurance and reinsurance companies.

         Prior to 2005, our Life Reinsurance  International  segment specialized
in niche markets in developed  countries and broader life  insurance  markets in
the developing  world and focused on the  reinsurance  of short-term  group life
policies and aircrew "loss of license" insurance.  In 2005, the Life Reinsurance
International  segment  became  actively  engaged in the  reinsurance  of United
Kingdom and Ireland  traditional  solutions  business and annuity  products.  In
addition, the Life Reinsurance International segment established a branch office
in Singapore to reinsure  similar risks in the Asian market.  The life insurance
and annuity products are similar to those offered in the Life Reinsurance  North
America Segment.

         Our  Corporate  and  Other  segment  includes  investment  income  from
invested  assets not allocated to support  reinsurance  segment  operations  and
undeployed  proceeds from our capital raising  efforts,  in addition to realized
investment gains or losses.  General  corporate  expenses consist of unallocated
overhead and  executive  costs and interest  expense  related to the 4.5% senior
convertible notes and 1% dividend payment on the convertible preferred shares of
our Hybrid  Capital  Units  ("HyCUs").  Additionally,  the  Corporate  and Other
segment includes results from the wealth management  operations,  which directly
issues  variable life insurance and variable  annuities and similar  products to
high net worth  individuals and families,  for insurance,  investment and estate
planning purposes.

Life Reinsurance

         Reinsurance is an arrangement under which an insurance company known as
the reinsurer  agrees in a contract called a treaty to assume specified risks of
another insurance company known as the ceding company.  The reinsurer may assume
all or a  portion  of the  insurance  underwritten  by the  ceding  company.  In
exchange for


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<PAGE>

assuming the risks of the ceding company,  the reinsurer receives some or all of
the premium and, in certain  cases,  investment  income  derived from the assets
supporting the reserves of the reinsured  policies.  Reinsurance permits primary
insurers  to  diversify  their  risks  over  larger  pools of risks and to write
insurance  policies  in amounts  larger than they are willing or able to retain.
Also,  reinsurers  have the ability to structure  treaties that allow the ceding
companies to achieve other business and financial objectives such as:

         o        decreasing  the volatility of their earnings by reducing their
                  maximum exposure to any one risk,

         o        improving  their  capital  position by reducing the  financial
                  strain   associated   with  new  business   production  or  by
                  increasing their risk-based capital ratios,

         o        entering new lines of business and offering new products, and

         o        exiting discontinued lines of business.

         In   addition,   reinsurers   may   also   purchase   reinsurance,   or
"retrocession" coverage, to limit their own risk exposure.

         We have two  categories  of life  reinsurance  business,  which we call
Traditional Solutions and Financial Solutions.

         o        Traditional Solutions.  In our Traditional Solutions business,
                  we reinsure  the  mortality  risk on life  insurance  policies
                  written by primary  insurers.  This business is often referred
                  to as traditional life  reinsurance.  We write our Traditional
                  Solutions  business  predominantly  on an automatic basis with
                  respect to newly written life insurance  policies.  This means
                  that we  automatically  reinsure  all  policies  written  by a
                  ceding company that meet the underwriting  criteria  specified
                  in the treaty with the ceding company. Prior to 2005, the Life
                  Reinsurance  International  segment offered  traditional  life
                  reinsurance  products  outside  of  North  America,   focusing
                  primarily  on  the  reinsurance  of  short-term,   group  life
                  policies  in  niche  market   sectors.   In  2005,   the  Life
                  Reinsurance  International  segment became actively engaged in
                  the  reinsurance  of United  Kingdom and  Ireland  traditional
                  solutions business.

         o        Financial Solutions.  In our Financial Solutions business,  we
                  offer   reinsurance   solutions  that  improve  the  financial
                  position  of  our   clients  by   increasing   their   capital
                  availability and statutory  surplus.  These solutions  include
                  contracts under which we assume the investment and persistency
                  risks  of  existing,  as  well as  newly  written,  blocks  of
                  business.   The  products   reinsured  include  annuities  and
                  annuity-type  products,  cash value life  insurance  and, to a
                  lesser  extent,  disability  products  that  are in a  pay-out
                  phase. This line of  business also includes acquired solutions
                  products in which we provide our clients with exit  strategies
                  for discontinued  lines, closed blocks, or lines not providing
                  a good fit for a client's growth strategies. With our assuming
                  full  responsibility  and management of these  contracts,  our
                  clients  can focus and  concentrate  their  full  efforts  and
                  resources on their core  strategies.  Most of these agreements
                  are  coinsurance,  coinsurance  funds  withheld,  or  modified
                  coinsurance  of  primarily   investment   risk  such  that  we
                  recognize  profits or losses primarily from the spread between
                  the  investment  earnings  and the  interest  credited  on the
                  underlying deposit liabilities.

         The traditional life reinsurance  industry has experienced  significant
growth over the past ten years. According to an industry survey, the face amount
of  traditional  life  reinsurance  assumed in the United  States has grown from
approximately  $261.0 billion in 1995 to approximately  $1.0 trillion in 2004, a
15% compounded  annual growth rate.  During the same period,  the face amount of
life insurance  written in the United States has grown from  approximately  $1.1
trillion in 1995 to approximately  $2.0 trillion in 2004, a 7% compounded annual
growth  rate.  Many of the  international  markets in which we operate have also
enjoyed significant growth in recent years.

         We believe that the following trends have contributed and will continue
to  contribute  to the  increasing  demand for life  reinsurance  and  increased
business opportunities for us:

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         o        Consolidation in the life insurance industry. Consolidation in
                  the life insurance industry may create  opportunities for life
                  reinsurers.  Life reinsurers provide financial  reinsurance to
                  help acquirers finance the cash portion of an acquisition, and
                  we  expect  that  any  additional  consolidation  in the  life
                  insurance business may result in incremental opportunities for
                  life   reinsurers.   In   addition,   in  the  context  of  an
                  acquisition, an acquirer may focus on the most promising lines
                  of business  and divest  non-core  lines of  business  through
                  reinsurance.

         o        Consolidation  in the life  reinsurance  industry.  There have
                  been a number of merger and  acquisition  transactions  within
                  the  life   reinsurance   industry   in  recent   years.   The
                  consolidation of the life reinsurance industry has reduced the
                  amount  of life  reinsurance  capacity  available  and  caused
                  primary  insurers to be exposed to concentrated  counter-party
                  risk with the larger consolidating reinsurers.

         o        Increased  capital  sensitivity.  We  believe  that  insurance
                  companies  are now more  focused  on  capital  efficiency  and
                  return  on  capital.   As  a  result,   primary  insurers  are
                  increasingly   utilizing  the  outside  capital   provided  by
                  reinsurance  to help finance  growth and to free up capital to
                  pursue new businesses.  Changing regulatory  environments,  in
                  particular,  in the United Kingdom and Continental  Europe are
                  accelerating this trend in the focus of capital.

         o        Expanding  overseas  markets.   We  believe  that  the  trends
                  described   above  in  the  North  American  market  are  also
                  influencing the reinsurance  industry throughout the world. In
                  addition,  we believe there are  increasing  opportunities  in
                  markets such as Asia,  Europe,  and the Middle East, where the
                  life reinsurance industry is either developing or expanding.

         o        Changing demographics. We expect that the increasing number of
                  "baby  boomers"  reaching  middle  and  late  middle  age will
                  increase  the demand for  products  which  address  retirement
                  planning,   estate  planning  and  survivorship   issues.   In
                  addition,  we believe  that longer life  expectancies  and the
                  reduction  in  government  and  employer   sponsored   benefit
                  programs  will  increase  the  demand for life  insurance  and
                  annuities.  We expect this  increased  demand for insurance to
                  increase demand for reinsurance products in the United States,
                  United Kingdom, Ireland and Asia.

         Wealth Management

         Our variable life  insurance and variable  annuity  products offer high
net worth clients the benefits of investment-oriented insurance products for use
in tax and estate planning. We receive fee income based on the assets associated
with our products.  Our products are targeted towards high net worth individuals
and families who generally  have a liquid net worth of more than $10.0  million.
The wealth management  business requires relatively little capital. We no longer
actively market this business.

Solutions for Regulation XXX Reserves

Background

         The Valuation of Life  Insurance  Policies Model  Regulation,  commonly
referred to as Regulation  XXX, was implemented in the United States for various
types of life  insurance  business  beginning  January 1, 2000.  Regulation  XXX
significantly  increased the level of reserves that United States life insurance
and life reinsurance companies must hold on their statutory financial statements
for various types of life insurance business,  primarily certain level term life
products.  The reserve levels  required under  Regulation XXX increase over time
and are  normally  in excess  of  reserves  required  under  Generally  Accepted
Accounting  Principles  in the United States ("US GAAP").  In  situations  where
primary  insurers have reinsured  business to reinsurers that are unlicensed and
unaccredited

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in the  United  States,  the  reinsurer  must  provide  collateral  equal to its
reinsurance  reserves  in order for the  ceding  company  to  receive  statutory
financial  statement credit.  Reinsurers have  historically  utilized letters of
credit or have placed  assets in trust for the benefit of the ceding  company as
the primary forms of collateral. The increasing nature of the statutory reserves
under  Regulation XXX will likely require  increased  levels of collateral  from
reinsurers  in the future to the extent the  reinsurer  remains  unlicensed  and
unaccredited  in the  United  States.  We believe  that  funding  long  duration
liabilities with shorter-term  funding facilities is not suitable or sustainable
from a  prudent  asset  liability  management  perspective  because  it  creates
significant refinancing or rollover risk every year.

         In order to  mitigate  the  effect  of  Regulation  XXX,  we  retrocede
Regulation XXX reserves to unaffiliated and affiliated unlicensed reinsurers. In
our United States domiciled subsidiaries, statutory capital may be significantly
reduced if the unaffiliated or affiliated  reinsurers were unable to provide the
required collateral to support statutory reserve credit and we could not find an
alternative  source for  collateral.  In the normal  course of business  and our
capital  planning,  we are always looking for  opportunities  to relieve capital
strain  relating to Regulation XXX statutory  reserve  requirements.  We entered
into a number of financing  transactions in 2004 and 2005 which secure long-term
funding for a large portion of our XXX collateral requirements.

Acquired ING Business

         Pursuant  to the  terms  of the  acquisition  of  the  individual  life
reinsurance  business of ING, ING is obligated  to maintain  collateral  for the
Regulation XXX and AXXX statutory reserve  requirements of the acquired business
for the duration of such requirements. We pay ING a fee based on the face amount
of  the  collateral   provided   until   satisfactory   alternative   collateral
arrangements  are made.  We are entitled to a partial  rebate of this fee to the
extent satisfactory alternative collateral arrangements are implemented prior to
the end of 2007.

         In  2005,  we  completed  two  transactions   that  together   provided
approximately  $2.0  billion  in  alternative  collateral  arrangements  to fund
Regulation XXX statutory  reserve  requirements  that were assumed in connection
with the acquisition of ING's individual life reinsurance business.

         The first  transaction is a 20-year  collateral  finance  facility with
HSBC Bank USA,  N.A.  ("HSBC II") that provides up to $1.0 billion of collateral
to satisfy  Regulation XXX statutory reserve  requirements and is in addition to
the  facility  with  HSBC  that was  originally  completed  in 2004.  The  other
arrangement is a long-term reinsurance facility ("Reinsurance  Facility") with a
third party Bermuda reinsurer which provides collateral to secure Regulation XXX
statutory  reserve  requirements  in an amount up to $1.0  billion.  The Bermuda
reinsurer  provides  security in the form of letters of credit in trust equal to
the  statutory  reserves.  These  transactions  have allowed us to secure within
twelve months of the ING  acquisition  long-term  cost  effective  financing for
approximately 40% of the Regulation XXX reserves business acquired from ING. The
HSBC II and the Reinsurance  Facility  transactions  replaced ING collateral and
resulted in a refund  from ING for fees  incurred  during 2005 of $6.7  million.
Additionally,  we believe the  transactions  demonstrate  our ability to quickly
integrate a block of acquired business and secure permanent funding.

Scottish Re (U.S.), Inc. Organic Business

         On  February  11,  2005,  we issued  $850  million of 30-year  maturity
securities from our newly formed wholly-owned subsidiary,  Orkney Holdings, LLC.
Proceeds from this  transaction  fully fund  Regulation XXX reserves  associated
with business  written by Scottish Re (U.S.),  Inc.  between January 1, 2000 and
December  31,  2003.  This  securitization  successfully  matches the  long-term
requirements  imposed  by  Regulation  XXX at a cost  comparable  to  short-term
pricing.  The securities  have recourse to Orkney  Holdings,  LLC and not to any
other Scottish Re entity.

         On December 21, 2005, we completed our second  securitization of excess
reserves  arising  from  Regulation  XXX by  issuing  $450.0  million of 30-year
maturity  securities  through an orphaned  special purpose vehicle  incorporated
under the laws of Ireland,  Orkney Re II, plc.  Proceeds  from this  transaction
fully fund Regulation XXX

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<PAGE>

reserves  associated with business  written by Scottish Re (U.S.),  Inc. between
January 1, 2004 and December 31, 2004. The securities have recourse to Orkney Re
II plc and not to any Scottish Re entity.

         In 2004 we entered into a 20-year collateral finance facility with HSBC
Bank USA,  N.A.  ("HSBC I") that  provides  $200.0  million  that can be used to
satisfy   Regulation  XXX  statutory  reserve   requirements  and  collateralize
reinsurance obligations under intercompany reinsurance agreements.

         In January  2005,  we  completed  another  capital  markets  collateral
facility called the Stingray Pass-Through Trust in an aggregate amount of $325.0
million. Under the terms of the agreement, we acquired an irrevocable put option
to issue  funding  agreements up to $325.0  million.  The facility also provides
collateral  for  Scottish Re (U.S.),  Inc.  for  reinsurance  obligations  under
intercompany quota share reinsurance agreements.

         In the future, we anticipate implementing other capital markets related
solutions  relating to the financing of our statutory  reserve  requirements  as
cost efficient opportunities arise.

Our Strategy

         Our strategy is to use our  experience  and  structural  advantages  to
focus  on  life  reinsurance  and  insurance   products  where  we  can  deliver
specialized advice and products to our customers.  We plan to increase the value
of our franchise by focusing on the following:

         o        Expanding the size and depth of our North American reinsurance
                  client  base.  We will  continue  to  expand  our  core  North
                  American  business by attempting to gain a larger share of the
                  North  American  life  reinsurance  market  both by adding new
                  clients and expanding the business relationships with existing
                  clients.   We  will  leverage  the  ING  acquisition  and  the
                  sophisticated  technology  and  experienced  life  reinsurance
                  administration professionals obtained which created a scalable
                  administrative platform.

         o        Acquisitions.  We may pursue selected  strategic  acquisitions
                  of other life reinsurance businesses.   Our recent acquisition
                  of the in-force  individual  life  reinsurance  business  of
                  ING  is an example of this strategy.

         o        Growing  our  international  business.  We  will  continue  to
                  leverage   our    specialized    knowledge   and   established
                  relationships  to gain a larger share of the life  reinsurance
                  markets   outside   of   North   America.   We  will   explore
                  opportunities  in new markets,  particularly  Asia, as well as
                  seeking to add new clients and expand  business  relationships
                  with existing clients.

         o        Maximizing the convergence  between the insurance industry and
                  capital  markets.  We will  continue  to develop  and  execute
                  securitizations  and  other  capital  markets  initiatives  to
                  decrease our cost of capital and expand our access to a larger
                  client and product base.

         o        Enhancing our financial strength.  We will continue to enhance
                  our  capital  position  and  financial  strength  to meet  the
                  security  needs of our customers and the capital  requirements
                  of rating  agencies.  By enhancing our financial  strength and
                  capital  resources,  we would expect to have  opportunities to
                  participate in reinsurance  transactions in which we might not
                  be  currently  eligible  to  participate.  We also expect that
                  enhancing our  financial  position will allow us to reduce our
                  cost of, and improve our access to, capital.

         o        Leveraging  efficient  operating  structure and organizational
                  flexibility.  We will  continue  to  leverage  our  ability to
                  conduct business in multiple jurisdictions,  which provides us
                  with a flexible and efficient operating platform. Moreover, as
                  we grow our  businesses and leverage the  capabilities  of our
                  corporate  infrastructure,  we expect to improve our operating
                  margins.

                                       6
<PAGE>

Products Offered

Life Reinsurance North America

         In our Life  Reinsurance  North  America  segment,  we reinsure a broad
range of life insurance and annuity  products.  Life insurance  products that we
reinsure  include  yearly  renewable  term,  term  with  multi-year  guarantees,
ordinary  life and  variable  life.  Retail  annuity  products  that we reinsure
include fixed immediate  annuities,  fixed deferred annuities and equity indexed
annuities.  In  addition,  we  reinsure  and may  issue  directly  institutional
annuity-type   products  such  as  funding  agreements,   guaranteed  investment
contracts, pension termination and structured settlement annuities.

         For  these  products,  we write  reinsurance  generally  in the form of
yearly  renewable  term,  coinsurance  or  modified  coinsurance.  Under  yearly
renewable  term,  we share  only in the  mortality  risk for which we  receive a
premium.  In a coinsurance  or modified  coinsurance  arrangement,  we generally
share  proportionately in all material risks inherent in the underlying policies
including mortality, lapses and investments.  Under such agreements, we agree to
indemnify the primary insurer for all or a portion of the risks  associated with
the  underlying  insurance  policy  in  exchange  for a  proportionate  share of
premiums.  Coinsurance  differs from  modified  coinsurance  with respect to the
ownership  of  the  assets  supporting  the  reserves.   Under  our  coinsurance
arrangements,  ownership  of these  assets is  transferred  to us,  whereas,  in
modified coinsurance arrangements, the ceding company retains ownership of these
assets,  but we share in the  investment  income  and risk  associated  with the
assets.

         Our  reinsurance  treaties  are written  predominantly  on an automatic
basis. An automatic  treaty provides for a ceding company to cede  contractually
agreed-upon  risks on specific  blocks of business to us. The reinsurance may be
solicited  directly  by us or  through  reinsurance  intermediaries  and  may be
written on either:

         o        a  proportional  basis under which a specified  percentage  of
                  each risk in the reinsured class of risk is assumed by us from
                  the ceding  company,  along with our portion of the underlying
                  premiums in proportion to such assumed risk; or

         o        an excess of  retention  basis  under which we  indemnify  the
                  ceding company, up to a contractually  specified amount, for a
                  portion of claims exceeding a specified  retention  amount, in
                  consideration of non-proportional premiums being paid.

         In order to diversify  our  mortality  exposure,  we have  historically
sought to limit our  consolidated  enterprise wide retained  exposure under life
policies to no more than $500,000 per life for life  reinsurance  written in our
North American operations. This limit was increased to $1.0 million per life for
newly underwritten business effective January 1, 2005. Our retention on business
acquired in the ING individual life reinsurance  acquisition is $2.0 million per
life.

         Our reinsurance  treaties may provide for recapture rights,  permitting
the ceding company to reassume all or a portion of the risk ceded to us after an
agreed-upon  period of time  (generally  10 years),  subject  to  certain  other
conditions.  Some of our  reinsurance  treaties  allow  the  ceding  company  to
recapture  the ceded risk if we fail to maintain a specified  rating or if other
financial  conditions  relating to us are not  satisfied.  Recapture of business
previously  ceded does not affect  premiums ceded prior to the recapture of such
business  and  typically  involves  the  payment  of  a  recapture  fee  to  us.
Nevertheless, we may need to liquidate substantial assets in order to return the
assets  supporting the reserves to the ceding  company,  and we may also have to
accelerate the amortization of unamortized deferred acquisition costs associated
with the recaptured business, which would reduce our earnings.

         The potential  adverse effects of recapture rights are mitigated by the
following factors:

         o        By  recapturing  reinsurance,  ceding  companies  increase the
                  amount of risk they retain.

         o        Ceding  companies  generally must recapture the same amount of
                  risk on each policy  reinsured under a treaty once a retention
                  increase is made after the treaty stated  non-recapture period
                  expires and a recapture program is undertaken.

                                       7
<PAGE>

         o        We price our treaties  with the goal of  achieving  our target
                  return before the recapture date.

Life Reinsurance International

         Historically,  we reinsured  life insurance and aircrew loss of license
products.  Life insurance products that we reinsured  included  short-term group
and individual  life, and to a lesser extent,  disability and critical  illness.
Our  current  focus is the  reinsurance  of  United  Kingdom,  Ireland  and Asia
traditional  solutions business as well as annuity products. We will continue to
provide  products  on a  facultative  basis and will  expand our  capability  to
reinsure a broad range of life  insurance  and annuity  products on an automatic
treaty basis in our Life Reinsurance International segment.

         Historically,  our principal  international market was the Middle East,
where we have been active since the early 1990s. In 2005,  approximately  29% of
total written premiums in the  international  business  originated from Bahrain,
Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

         In Asia,  our  historical  target  niche  market  was  Japan,  which is
experiencing the development of small affinity group mutual  organizations known
as  kyosai,  as a  parallel  sector  to large  insurance  companies.  We are now
currently  focusing  our efforts in other  countries  such as Korea,  Taiwan and
China.

         As noted above,  we reinsure  aircrew loss of license  coverage,  which
entails the payment of lump sum benefits if aircrew cannot perform their job for
medical  reasons,  as well as  temporary  benefits for the period of time during
which the  aircrew is  grounded  and  waiting  for the  results  of the  medical
examination.

         We  attempt  to  diversify  mortality  risk  in  our  Life  Reinsurance
International  segment by limiting our  consolidated  enterprise  wide  retained
exposure  under  life  policies  to no  more  than  $250,000  per  life  for our
International life reinsurance business.

Wealth Management

         Our wealth  management  business  consists of the  issuance of variable
life insurance  policies and variable annuities and similar products to high net
worth  individuals  and  families.  Premiums,  net  of  expenses,  paid  by  the
policyholder  with  respect to our  variable  products  are placed in a separate
account for the benefit of the policyholder. We invest premiums in each separate
account with one or more investment managers,  some of whom the policyholder may
recommend  and all of whom  are  appointed  by us in our  sole  discretion.  The
policyholder retains the benefits of favorable investment  performance,  as well
as the risk of adverse investment results.  Assets held in the separate accounts
are  generally  not  subject to the claims of our general  creditors.  We do not
provide  any  investment   management  or  advisory  services  directly  to  any
individual variable life or variable annuity  policyholder.  Our revenues earned
from these  policies  consist of  insurance  and  administrative  fees  assessed
against  the assets in each  separate  account.  Our  variable  products  do not
guarantee investment returns. We are no longer actively marketing this business.
Our wealth management business is included in the Corporate and Other segment.

         See Notes to the Consolidated Financial Statements for more information
on our Life  Reinsurance  North  America,  Life  Reinsurance  International  and
Corporate and Other segments.

Marketing

         In our life reinsurance  business, we market to life insurance and life
reinsurance companies. We also target institutions,  such as pension plans, that
have life  insurance-related  risks and that we believe  would  benefit from our
reinsurance products based on our analysis of publicly available information and
other industry data.  Where permitted by law, we actively market our reinsurance
products  primarily  on a  direct  basis.  We  also  seek to  capitalize  on the
relationships  developed  by our  executive  officers and  marketing  staff with
members of the actuarial profession and senior insurance company executives,  at
both primary insurers and other  reinsurers.  Finally, we

                                       8
<PAGE>

work with reinsurance intermediaries, brokers and consultants who are engaged in
obtaining reinsurance on behalf of their clients.

Risk Management

Life Reinsurance

         We  bear  five  principal  classes  of  risk  in our  life  reinsurance
products:

          o    mortality risk,

          o    investment risk,

          o    persistency risk,

          o    expense risk, and

          o    counter-party risk.

         Mortality  risk is the risk that death claims exceed what we expect.  A
greater  frequency or higher average size of death benefits than we expected can
cause us to pay greater death benefits,  adversely  affecting our profitability.
Even if the total  death  benefits  paid over the life of our  contracts  do not
exceed the expected  amount,  sporadic timing of deaths can cause us to pay more
death  benefits in a given time period than  expected,  adversely  impacting our

                                       9
<PAGE>

profitability  in  that  period.  We  address  these  risks  through  selection,
diversification and retrocession.  We analyze each block of business based on an
evaluation of the ceding company's history, management,  target market, products
and underwriting  criteria relative to the industry. In North America, we target
primarily  first  dollar  quota  share  pools of top  producing  direct  writing
companies so that we participate proportionately with other reinsurers on all of
the ceded risks. In addition, we diversify our risks by participating in annuity
and disability products in the payout stage where the mortality risk is the risk
of deaths occurring later,  rather than earlier,  than expected.  A mix of these
products  with life  products  can help  offset  general  trends  in  population
mortality.  We mitigate our risk of exposure to any one block of business or any
one  individual  life by  selectively  limiting  our share to any one  pool.  We
further address the risk of any one large claim by utilizing  retrocession above
our  retention of $1.0 million per life,  effective  January 1, 2005,  for newly
underwritten business written in our Life Reinsurance North America Segment. Our
retention  on  business   acquired  in  the  ING  individual  life   reinsurance
acquisition  is $2.0 million per life.  Our  retention  in our Life  Reinsurance
International  Segment is  approximately  $250,000  per life.  In  addition,  we
maintain  catastrophe  cover on our entire retained life  reinsurance  business,
which,  effective  January 1,  2005,  provides  reinsurance  for losses of $50.0
million  in excess of $10.0  million  for our North  American  risks,  and $57.5
million in excess of $2.5 million for our International  risks. This catastrophe
cover includes protection for terrorism, nuclear, biological and chemical risks.

         Our investments,  which primarily  consist of fixed income  securities,
are subject to market  value,  reinvestment  and  liquidity  risk.  Our invested
assets are funded not only by capital but also by the  proceeds  of  reinsurance
transactions,  some of which entail substantial deposits of funds or assets. The
policies that we reinsure contain  provisions that tend to increase  benefits to
customers  depending on movements in interest  rates.  We analyze the  potential
results of a transaction, including the cash flows of the liabilities and of the
related assets and any risk mitigation  measures,  and we price  transactions to
cover  our  costs,  including  estimated  credit  losses,  and earn a  desirable
risk-adjusted return under various scenarios. We use interest rate swaps and may
use other  hedging  instruments  as tools to mitigate  these risks.  We may also
retrocede some risks to other reinsurers.

         Persistency risk is the risk that policyholders maintain their policies
for either longer or shorter periods than expected.  Persistency can be affected
by surrenders and policy lapses.  Surrenders are the voluntary  termination of a
policy by the  policyholder  and lapses are the termination of the policy due to
non-payment  of the  premium.  Surrenders  usually  involve  the  return  of the
policy's  cash  surrender  value to the  policyholder.  The risk is that  actual
persistency  is  significantly  different  from the  persistency  we  assumed in
pricing.  Persistency  significantly  higher than priced for can cause us to pay
greater than expected  death benefits in future years,  adversely  impacting our
profitability.  Persistency  significantly  lower than  priced for can cause our
deferred   acquisition  costs  to  be   unrecoverable,   possibly  causing  loss
recognition  that would adversely  impact our  profitability.  For policies with
cash surrender  benefits,  surrenders  significantly  greater than expected will
also  cause   increased   liquidity   risk.   We  address  these  risks  through
diversification and surrender charges.

         Expense risk is the risk that actual expenses will be higher than those
covered in pricing. The risk is that expenses per policy reinsured are higher as
a result of a lower number of policies than anticipated,  or that our operations
are less  efficient  than  anticipated.  We address this risk through the use of
automation and management of general expenses.

         Counter-party risk is the risk that retrocessionaires will be unable to
pay claims as they become due. We limit and diversify our counter-party  risk by
spreading   our   retrocession   over  a  pool   comprised   of   highly   rated
retrocessionaires. Our underwriting guidelines provide that any retrocessionaire
to whom we cede business must have a financial  strength rating of at least "A-"
or higher from A.M. Best or an equivalent rating by another major rating agency.
However, even if a retrocessionaire does not pay a claim submitted by us, we are
still responsible for paying that claim to the ceding company.

Wealth Management

         The two principal risks associated with our wealth management  business
are  mortality  risk and  counter-party  risk.  Since we do not have the  direct
investment risks associated with our wealth management  products,  the principal
risk in our variable life insurance  business is mortality risk.  Mortality risk
tends to be more stable when spread across large numbers of insureds.  We expect
that our  variable  life  insurance  policies  will have  relatively  large face
amounts  and  will  be held  by a  relatively  small  number  of  policyholders.
Consequently,  our  associated  mortality  risk  exposure will be greater in the
aggregate, and our probability of loss less predictable,  than an insurer with a
broader  risk pool.  Therefore,  pursuant  to our  underwriting  guidelines,  we
reinsure  substantially  all of the mortality risk  associated with our variable
life insurance  business with highly rated  reinsurers and accordingly rely upon
our reinsurers'  obligation and ability to pay death claims.  The  counter-party
risk is that one or more of our  reinsurers  may fail to pay a  reinsured  death
claim under a variable life insurance policy.

Investment Portfolio

General

         Our general account  investment  portfolio  consists of investments and
cash and cash  equivalents,  which we control,  and funds  withheld at interest,
which are  associated  with modified  coinsurance  agreements.  In most modified
coinsurance  transactions,  the  ceding  insurance  company  retains  the assets
supporting  the ceded  business and manages  them for our account.  Although the
ceding  company  must adhere to  investment  guidelines  agreed to by us for the
management  of these  assets,  we do not control the  selection  of the specific
investments  or the timing of the  purchase or sale of  investments  made by the
ceding company.

         Our general account portfolio  consists  primarily of  investment-grade
fixed  income  securities  and cash.  We seek to generate  attractive  levels of
investment  income while limiting  exposure to risks of changing interest rates,
excess  default  experience  and adverse  changes in asset  values.  Third party
investment  managers  manage  the  portfolio.  We manage the  activities  of the
managers in an asset-liability  management  framework,  setting duration targets
and  other  investment  guidelines  for  each  portfolio  segment.  We also  set
investment  policy and  strategy,  monitor  compliance  and evaluate  results in
relation to customized benchmarks.

Investment Oversight

         Our Finance and Investment  Committee reviews our investment  portfolio
and the  performance of our investment  managers.  In addition,  our Finance and
Investment  Committee  approves  changes in the  investment  policy  proposed by
management and oversees compliance with the investment policy.

                                       10
<PAGE>

Investment Policy

         Our investment  policy includes  limits  requiring  diversification  by
asset  class,  fixed  income  sector and single  issuers and limits  exposure to
lower-rated securities.  It also limits reinvestment risk and requires effective
asset-liability  management  processes  including  the  maintenance  of adequate
liquidity to meet  potential cash outflows and management of exposures to market
risks.

         We are exposed to three  primary  sources of  investment  risk on fixed
income investments:  market value, reinvestment and liquidity risk. Market value
risk is the risk that our invested assets will decrease in value due to a change
in the prevailing market yields for similar assets, an unfavorable change in the
liquidity of the investment or an unfavorable change in the financial  prospects
or  a  downgrade  in  the  credit  rating  of  the  issuer  of  the  investment.
Reinvestment  risk is the risk  that  interest  rates  will  decline  and  funds
reinvested  will  earn  less  than  expected.  Liquidity  risk is the risk  that
liabilities are surrendered or mature sooner than  anticipated,  requiring us to
sell assets at an  undesirable  time to provide for  policyholder  surrenders or
withdrawals.

         We manage  these risks  through  industry  and issuer  diversification,
overall  limits  on  the  amounts  of  credit  risk  taken  and  asset-liability
management, which we refer to as ALM. Our primary ALM practices include:

         o        modeling the cash flows necessary to service each existing and
                  newly  written  reinsurance  liability,   considering  various
                  interest rate scenarios;

         o        segmenting    portfolios    backing    material    reinsurance
                  transactions  and creating  customized  investment  guidelines
                  engineered to support the cash flows for each transaction;

         o        evaluating  and  quantifying  the  risks to  earnings  and the
                  economic value of shareholders' equity created by gaps between
                  the  projected  cash  flows  from  existing  assets  and those
                  required by in-force liabilities; and

         o        reducing the risks caused by mismatches  by  opportunistically
                  buying matching new investments.

         We generally use foreign denominated securities to manage currency risk
if the related reinsurance  transaction is denominated in a foreign currency. We
may enter  into  interest  rate  swaps,  futures,  forwards  and  other  hedging
transactions to manage our risks.  We currently use  derivatives  only to manage
interest rate risk rather than as a speculative investment.

                                       11
<PAGE>

Competition and Ratings

         Competition  in the  life  reinsurance  industry  is  based  on  price,
financial strength ratings, reputation,  experience,  relationships and service.
We consider Swiss Re,  Reinsurance Group of America,  Transamerica  Reinsurance,
Generali USA Life Re and Munich American  Reassurance  Company to be our primary
competitors  in the United States.  In other markets  outside the United States,
our competitors include XL Capital Ltd., Max Reinsurance Ltd. and PartnerRe Ltd.

         Insurance  ratings  are used by  prospective  purchasers  of  insurance
policies,  insurers and  reinsurance  intermediaries  in assessing the financial
strength  and  quality  of  insurers  and   reinsurers.   Rating   organizations
periodically  review  the  financial  performance  and  condition  of  insurers,
including our insurance subsidiaries.

                                       12
<PAGE>

Rating  organizations  assign ratings based upon several factors.  While most of
the factors  considered  relate to the rated  company,  some of the factors take
into account general  economic  conditions and  circumstances  outside the rated
company's  control.  Our insurer  financial  strength  ratings are listed in the
table below for each rating  agency that meets with our  management on a regular
basis:

<TABLE>
<CAPTION>
                                        A.M. Best    Fitch   Moody's Investors  Standard &
                                         Company    Ratings       Service         Poor's
                                         -------    -------       -------         ------
<S>                                    <C>        <C>           <C>             <C>

Insurer Financial Stength Ratings:
  Scottish Annuity and Life
    Insurance Company (Cayman) Ltd.         A-         A              A3*           A-
  Scottish Re (U.S.), Inc.                  A-         A              A3*           A-
  Scottish Re Ltd.                          A-         A              -             A-
  Scottish Re Life Corporation              A-         -              -             A-
</TABLE>



         * Negative outlook

                  A.M.  Best:  "A-  (excellent)"  is fourth  highest  of sixteen
         rating  levels.  A.M.  Best  assigns  an  "A-  (excellent)"  rating  to
         companies  that have,  in its opinion,  on balance,  excellent  balance
         sheet strength,  operating performance and business profile, as well as
         a strong ability to meet their ongoing  obligations  to  policyholders.
         A.M.  Best  maintains a letter  scale rating  system  ranging from "A++
         (superior)" to "F (in liquidation)."

                  Fitch:  "A (strong)"  is sixth  highest of  twenty-two  rating
         levels.  Fitch  assigns  an "A  (strong)"  or "A-  (strong)"  rating to
         companies  that it  characterizes  as having,  in its  opinion,  strong
         capacity to meet  policyholder  and contract  obligations  and moderate
         risk factors and where the impact of any adverse  business and economic
         factors is expected to be small.  Fitch's  insurer  financial  strength
         ratings range from "AAA (exceptionally strong)" to "D (distressed)."

                  Moody's:  "A3 (good)" is the seventh  highest  designation  of
         Moody's Investors Service ("Moody's") twenty-one rating levels. Moody's
         assigns an "A3 (good)" rating to companies that offer,  in its opinion,
         good  financial   security,   but  possess   elements  that  suggest  a
         susceptibility to impairment sometime in the future.  Moody's long term
         insurance  financial strength ratings range from "Aaa (exceptional)" to
         "C (lowest)."

                  Standard  &  Poor's:  "A-  (strong)"  is  seventh  highest  of
         twenty-two  rating  levels.  Standard & Poor's assigns an "A- (strong)"
         rating to companies  that have,  in its opinion,  a strong  capacity to
         meet financial  commitments,  but are somewhat more  susceptible to the
         adverse  effects of changes in  circumstances  and economic  conditions
         than insurers with higher ratings.  Standard & Poor's insurer financial
         strength  ratings  range  from "AAA  (extremely  strong)"  to "R (under
         regulatory supervision)."

         The  ability to write  reinsurance  partially  depends on an  insurer's
financial condition and its financial strength ratings.  These ratings are based
on an insurance  company's  ability to pay policyholder  obligations and are not
directed  toward the  protection  of  investors.  Each of our credit  ratings is
considered  investment  grade. Our ability to raise capital for our business and
the cost of this capital is influenced by our credit ratings.  A security rating
is not a  recommendation  to buy,  sell or hold  securities.  It is  subject  to
revision or  withdrawal at any time by the assigning  rating  organization,  and
each rating should be evaluated independently of any other rating.


Employees

         As of  February  28,  2006,  we  employed  approximately  369 full time
employees,  none of whom  are  unionized.  We  believe  our  relations  with our
employees are good.

                                       13
<PAGE>

Regulation

General U.S. State Supervision

         Various state insurance  departments  enforce insurance and reinsurance
regulation.  The  extent and nature of  regulation  varies  from state to state.
Scottish Re (U.S.), Inc. is a Delaware-domiciled  reinsurer,  which is licensed,
accredited,  approved or  authorized to write  reinsurance  in 50 states and the
District of  Columbia.  Scottish  Re Life  Corporation  is a  Delaware-domiciled
reinsurer,  which is licensed,  accredited,  approved or  authorized  to conduct
reinsurance  in 50 states,  the  District of  Columbia,  Guam and the  Federated
States of Micronesia.  Orkney Re, Inc. is a special  purpose  financial  captive
insurance company formed under the laws of South Carolina.

Insurance Holding Company Regulation

         We and our subsidiaries,  Scottish Re (U.S.), Inc. and Scottish Re Life
Corporation,  are subject to regulation under the insurance holding company laws
of Delaware.  The insurance holding company laws and regulations vary from state
to state, but generally require insurers and reinsurers that are subsidiaries of
insurance   holding  companies  to  register  and  file  with  state  regulatory
authorities  certain  reports  including  information  concerning  their capital
structure,  ownership,  financial  condition  and general  business  operations.
Generally,  all transactions between Scottish Re (U.S.), Inc. and/or Scottish Re
Life  Corporation  and their  affiliates  must be fair and,  if material or of a
certain  kind,  require  prior  notice and  approval or  non-disapproval  by the
Delaware state insurance department. Orkney Re, Inc. is not subject to the South
Carolina  insurance  holding  company  act,  but it is  required  to obtain  the
approval of the South  Carolina  Director of Insurance  before it may materially
amend any  agreements to which it is a party,  enter into any new  agreements or
otherwise  amend  its  business  plan.  State  insurance  holding  company  laws
typically place  limitations on the amounts of dividends or other  distributions
payable by insurers and reinsurers.

         State insurance holding company laws also require prior notice or state
insurance  department  approval of changes in control of an insurer or reinsurer
or its holding  company.  The insurance laws of Delaware provide that no person,
including a corporation or other legal entity, may acquire control of a domestic
insurance or reinsurance  company unless it has given notice to such company and
obtained  prior  written  approval  of the  state  insurance  commissioner.  Any
purchaser of 10% or more of the outstanding voting securities of an insurance or
reinsurance company or its holding company is presumed to have acquired control,
unless this  presumption  is rebutted.  In addition,  many state  insurance laws
require  prior  notification  to the state  insurance  department of a change in
control of a non-domiciliary  insurance  company licensed to transact  insurance
business in that state. While these  pre-notification  statutes do not authorize
the state  insurance  departments  to  disapprove  the change in  control,  they
authorize regulatory action in the affected state if particular conditions exist
such  as  undue  market  concentration.   Any  future  transactions  that  would
constitute a change in control of Scottish Re (U.S.),  Inc. and Scottish Re Life
Corporation  or any of their  U.S.  insurance  subsidiaries  may  require  prior
notification in the states that have adopted pre-acquisition  notification laws.
These prior notice and prior approval laws may discourage potential  acquisition
proposals and may delay,  deter or prevent a change of control of us,  including
transactions  that  some  or  all  of  our  shareholders  might  consider  to be
desirable.

Dividend Restrictions

         State insurance holding company laws typically place limitations on the
amounts of dividends or other distributions  payable by insurers and reinsurers.
Delaware  provides  that,  unless  the prior  approval  of the  state  insurance
commissioner  has been obtained,  dividends may be paid only from earned surplus
and the  maximum  annual  amount  payable is  limited  to the  greater of 10% of
policyholder  surplus at the end of the prior year or 100% of statutory net gain
from operations for the prior year.

         Orkney Re, Inc. may only pay dividends in accordance with  restrictions
and  guidelines  contained in its licensing  order issued by the South  Carolina
Director of  Insurance.  Any  dividends  Orkney Re, Inc. pays are subject to the
lien of the  indenture  relating  to the  long-term  debt of its parent  entity,
Orkney Holdings, LLC.

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<PAGE>

U.S. Reinsurance Regulation

         Scottish Re (U.S.),  Inc.,  Scottish Re Life Corporation and Orkney Re,
Inc. are subject to insurance  regulation and supervision  that in many respects
is similar to the  regulation of licensed  primary  insurers.  Generally,  state
regulatory   authorities  monitor  compliance  with,  and  periodically  conduct
examinations  regarding,   state  mandated  standards  of  solvency,   licensing
requirements,  investment  limitations,  restrictions on the size of risks which
may be reinsured, deposits of securities for the benefit of reinsureds,  methods
of accounting,  and reserves for unearned  premiums,  losses and other purposes.
However, in contrast with primary insurance policies,  which are regulated as to
rate, form, and content, the terms and conditions of reinsurance  agreements are
generally not subject to regulation by state insurance regulators.

         The ability of any primary  insurer to take credit for the  reinsurance
placed with  reinsurers is a significant  component of  reinsurance  regulation.
Typically,  a primary insurer will only enter into a reinsurance agreement if it
can obtain  credit on its statutory  financial  statements  for the  reinsurance
ceded  to the  reinsurer.  Credit  is  usually  granted  when the  reinsurer  is
licensed,  accredited,  approved or authorized to write reinsurance in the state
where the primary  insurer is domiciled.  In addition,  many states allow credit
for  reinsurance  ceded to a reinsurer  if the  reinsurer is licensed in another
jurisdiction and meets certain financial requirements, or if the primary insurer
is provided with  collateral  in the form of letters of credit,  trusts or funds
withheld contracts to secure the reinsurer's obligations.

U.S. Reinsurance Regulation of our Non-U.S. Reinsurance Subsidiaries

         Our non-U.S.  reinsurance  subsidiaries  also assume  reinsurance  from
primary U.S.  insurers.  In order for primary U.S.  insurers to obtain financial
statement credit for the reinsurance obligations of our non-U.S. reinsurers, our
non-U.S.   reinsurance  subsidiaries  must  satisfy  reinsurance   requirements.
Non-U.S.  reinsurers  that are not  licensed  in a state  generally  may  become
accredited  by filing  certain  financial  information  with the relevant  state
commissioner  and  maintaining  a U.S.  trust  fund  for the  payment  of  valid
reinsurance claims. In addition,  many states allow credit for reinsurance ceded
to unlicensed  and  unaccredited  reinsurers if the primary  insurer is provided
with  collateral  in the form of  letters of  credit,  trusts or funds  withheld
contracts to secure the reinsurer's obligations.

U.S. Insurance Regulation of our Non-U.S. Insurance Subsidiaries

         Our  non-U.S.   insurance  subsidiaries  that  sell  wealth  management
products are not licensed to conduct  insurance  business in any jurisdiction in
the United States.  Therefore,  they cannot utilize  traditional  life insurance
marketing  channels such as agents,  nor can they use mail-order or other direct
marketing  channels to conduct  business  with  persons in the United  States or
certain other  jurisdictions.  Accordingly,  they rely primarily on referrals by
financial advisors,  investment managers,  private bankers,  attorneys and other
intermediaries in the United States to generate wealth management business. None
of these intermediaries  represents us as agent or in any other capacity, nor do
they  receive  any  commissions  or other  remuneration  from us for  activities
undertaken in the United States. In addition, policy solicitation,  issuance and
servicing must occur outside of the United States.

NAIC Ratios

         The National Association of Insurance Commissioners,  which we refer to
as the NAIC,  has developed a set of financial  relationships  or tests known as
the NAIC Insurance  Regulatory  Information System to assist state regulators in
monitoring  the  financial  condition of  insurance  companies  and  identifying
companies  that require  special  attention  or action by  insurance  regulatory
authorities.  A second set of confidential  ratios,  called  Financial  Analysis
Solvency  Tracking  System,  "FAST,"  is also  used  for  monitoring.  Insurance
companies  generally  submit data quarterly to the NAIC,  which in turn analyzes
the data using  prescribed  financial  data  ratios,  each with  defined  "usual
ranges." If an insurance company's results vary significantly from usual ranges,
regulators may make further  inquiries.  Regulators have the authority to impose
remedies ranging from increased  monitoring to certain  business  limitations to
various  degrees  of  supervision.  Our U.S.  reinsurance  subsidiaries  are not
currently  subject to  increased  regulatory  scrutiny  based on our ratios,  as
computed under these systems.

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<PAGE>

Statutory accounting principles

         United States Statutory Accounting  Principles,  or SAP, are a basis of
accounting  developed by U.S.  insurance  regulators to monitor and regulate the
solvency of insurance  companies.  In developing SAP, insurance  regulators were
primarily  concerned  with assuring an insurer's  ability to pay all its current
and future  obligations  to  policyholders.  As a result,  statutory  accounting
focuses  on  conservatively  valuing  the assets and  liabilities  of  insurers,
generally in accordance  with standards  specified by the insurer's  domiciliary
jurisdiction. Uniform statutory accounting practices are established by the NAIC
and generally  adopted by regulators  in the various U.S.  jurisdictions.  These
accounting principles and related regulations determine, among other things, the
amounts our insurance subsidiaries may pay to us as dividends.

         U.S. GAAP is designed to measure a business on a  going-concern  basis.
It gives  consideration  to matching of revenue and  expenses  and, as a result,
certain  expenses are capitalized when incurred and then amortized over the life
of the associated  policies.  The valuation of assets and liabilities under U.S.
GAAP is  based in part  upon  best  estimate  assumptions  made by the  insurer.
Shareholders'  equity  represents both amounts  currently  available and amounts
expected to emerge over the life of the  business.  As a result,  the values for
assets,  liabilities and equity  reflected in financial  statements  prepared in
accordance  with U.S.  GAAP may be different  from those  reflected in financial
statements prepared under SAP.

Regulation of investments

         Our U.S.  insurance  subsidiaries  are subject to laws and  regulations
that require  diversification of their investment portfolio and limit the amount
of investments in certain asset categories, such as below investment grade fixed
maturities,  equity real  estate,  other  equity  investments  and  derivatives.
Failure to comply  with  these  laws and  regulations  would  cause  investments
exceeding  regulatory  limitations  to be  treated  as  non-admitted  assets for
purposes of measuring surplus, and, in some instances, would require divestiture
of such non-complying  investments.  We believe the investments made by our U.S.
insurance subsidiaries comply with these laws and regulations.

Market conduct regulation

         The  laws  and  regulations  of  U.S.  jurisdictions  include  numerous
provisions   governing  the  marketplace   activities  of  insurers,   including
provisions  governing the form and content of  disclosure to consumers,  product
illustrations,   advertising,   product  replacement,   sales  and  underwriting
practices, complaint handling and claims handling. The regulatory authorities in
U.S.  jurisdictions  generally enforce these provisions  through periodic market
conduct examinations.

Statutory examinations

         As part of their regulatory oversight process, insurance departments in
U.S. jurisdictions conduct periodic detailed examinations of the books, records,
accounts and business  practices of insurers  domiciled in their  jurisdictions.
These  examinations  generally are conducted in co-operation  with the insurance
departments of two or three other states or jurisdictions,  representing each of
the NAIC zones, under guidelines promulgated by the NAIC.

Risk-Based Capital

         The Risk-Based  Capital (RBC) for Insurers Model Act, or the Model Act,
as it applies to insurers and  reinsurers,  was adopted by the NAIC in 1993. The
main purpose of the Model Act is to provide a tool for  insurance  regulators to
evaluate  the  capital of  insurers  relative  to the risks  assumed by them and
determine whether there is a need for possible  corrective action. U.S. insurers
and  reinsurers are required to report the results of their  risk-based  capital
calculations  as  part of the  statutory  annual  statements  filed  with  state
insurance regulatory authorities.

         The Model Act provides for four different levels of regulatory  actions
based on annual statements, each of which may be triggered if an insurer's Total
Adjusted  Capital,  as defined in the Model  Act,  is less than a  corresponding
level of risk-based capital, which we call RBC.

                                       16
<PAGE>

         o        The Company  Action Level is  triggered if an insurer's  Total
                  Adjusted  Capital is less than 200% of its Authorized  Control
                  Level RBC, as defined in the Model Act. At the Company  Action
                  Level,  the  insurer  must  submit  a plan  to the  regulatory
                  authority  that  discusses  proposed   corrective  actions  to
                  improve its capital position.

         o        The Regulatory Action Level is triggered if an insurer's Total
                  Adjusted  Capital is less than 150% of its Authorized  Control
                  Level RBC. At the  Regulatory  Action  Level,  the  regulatory
                  authority  will perform a special  examination  of the insurer
                  and issue an order specifying  corrective actions that must be
                  followed.

         o        The  Authorized  Control  Level is  triggered  if an insurer's
                  Total  Adjusted  Capital  is less than 100% of its  Authorized
                  Control Level RBC, and at that level the regulatory  authority
                  is  authorized  (although  not  mandated)  to take  regulatory
                  control of the insurer.

         o        The Mandatory Control Level is triggered if an insurer's Total
                  Adjusted  Capital is less than 70% of its  Authorized  Control
                  Level RBC,  and at that level the  regulatory  authority  must
                  take regulatory control of the insurer. Regulatory control may
                  lead to rehabilitation or liquidation of an insurer.

         As of December 31, 2005, the risk-based  capital of Scottish Re (U.S.),
Inc. and Scottish Re Life Corporation exceeded minimum RBC levels.

The Gramm-Leach-Bliley Act

         In November 1999, the  Gramm-Leach-Bliley Act of 1999, or the GLBA, was
enacted,  implementing  fundamental  changes in the  regulation of the financial
services industry in the United States.  The GLBA permits the  transformation of
the  already  converging  banking,   insurance  and  securities   industries  by
permitting mergers that combine commercial banks,  insurers and securities firms
under one holding company, a "financial holding company." Bank holding companies
and other  entities  that qualify and elect to be treated as  financial  holding
companies may engage in activities, and acquire companies engaged in activities,
that are  "financial"  in  nature or  "incidental"  or  "complementary"  to such
financial  activities.  Such financial  activities  include acting as principal,
agent or broker in the  underwriting  and sale of life,  property,  casualty and
other forms of insurance and annuities.  However,  although a bank cannot act as
an insurer nor can it own an insurer as a subsidiary  in most  circumstances,  a
financial  holding  company  can own any kind of  insurer,  insurance  broker or
agent.  Under the GLBA,  national  banks retain their  existing  ability to sell
insurance products in some circumstances.

         Under  state  law,  the  financial  holding  company  must apply to the
insurance  commissioner in the insurer's state of domicile for prior approval of
the acquisition of the insurer. Under the GLBA, no state may prevent or restrict
affiliations between banks and insurers,  insurance agents or brokers.  Further,
states cannot prevent or  significantly  interfere with bank or bank  subsidiary
sales activities.  Finally, both bank and bank affiliates can obtain licenses as
producers.

         Until the passage of the GLBA, the  Glass-Steagall  Act had limited the
ability  of banks  to  engage  in  securities-related  businesses,  and the Bank
Holding  Company Act had restricted  banks from being  affiliated with insurers.
With the passage of the GLBA,  among other  things,  bank holding  companies may
acquire insurers, and insurance holding companies may acquire banks. The ability
of banks to affiliate with insurers may materially  affect our U.S.  reinsurance
subsidiary's  product lines by  substantially  increasing  the number,  size and
financial strength of potential competitors.

Bermuda

         Our Bermuda  subsidiaries  are subject to regulation  under the Bermuda
Companies Act of 1981,  and our Bermuda  insurance  subsidiaries  are subject to
regulation under the Bermuda  Insurance Act of 1978, as amended by the Insurance
Amendment  Act 1995 (which we refer to as the Bermuda  Insurance  Act),  and the
regulations  promulgated thereunder.  They are required,  among other things, to
meet and maintain  certain  standards of solvency,

                                       17
<PAGE>

to file periodic reports in accordance with Bermuda statutory  accounting rules,
to produce annual audited  financial  statements and to maintain a minimum level
of statutory  capital and surplus.  In general,  the  regulation  of insurers in
Bermuda relies heavily upon the auditors,  directors and managers of the Bermuda
insurer,  each of which must  certify  that the insurer  meets the  solvency and
capital requirements of the Bermuda Insurance Act.

         Under the Bermuda  Insurance Act, a Bermuda  insurance company carrying
on long-term  business (which includes the writing of annuity contracts and life
insurance policies with respect to human life) must hold all receipts in respect
of its long-term  business and earnings thereon in a separate long-term business
fund.  Payments  from such  long-term  business fund may not be made directly or
indirectly for any purpose other than those of the insurer's long-term business,
except  in so far as  such  payment  is made  out of  surplus  certified  by the
insurer's  approved  actuary  to be  available  for  distribution  other than to
policyholders.  In addition,  certain of our Bermuda subsidiaries are authorized
by  private  acts  of the  Bermuda  Legislature  (the  Scottish  Annuity  & Life
International  Insurance Company (Bermuda) Ltd.  Consolidation and Amendment Act
2001  and the  Scottish  Annuity  & Life  Insurance  Company  (Bermuda)  Limited
Consolidation  and Amendment Act 2001, which we refer to as the private acts) to
establish separate accounts in respect of one or more life insurance policies or
annuity  contracts.  In  the  event  of an  inconsistency  between  the  Bermuda
Insurance  Act and our  private  acts,  the terms of the  private  acts  control
subject,  however,  to later  amendments  of the Bermuda  Insurance Act or other
relevant laws. Under our private acts, each insurance subsidiary is permitted to
credit to relevant  separate  accounts  such  portion of the  premiums and other
receipts from the related policy or contract,  and any property of the insurance
subsidiary derived from or purchased with such premiums, as the related policies
or  contracts  stipulate.  To the extent  provided in the  relevant  policies or
contracts,  income,  interest  or other  gains  earned  from,  and any  property
acquired  by,  investing  or dealing in the assets of the  separate  account are
credited to the separate account,  and all expenses,  fees or losses relating to
the separate  account are charged against the separate  account.  The assets and
property  held in the  separate  account are to be used for the sole  purpose of
paying  any and all  claims  arising  from or  under  the  related  policies  or
contracts,  and no other person has any right or interest in such  assets.  Upon
the termination of policies or contracts related to a separate account,  and the
discharge  of  obligations  under  the  policies  or  contracts,  the  insurance
subsidiary may terminate the separate  account,  and credit any remaining assets
or property to its general  account.  In the event of  insolvency  of one of our
Bermuda  subsidiaries,  the liquidator is bound to recognize the separate nature
of each separate account,  and is not empowered to apply property  identified as
the property of any one  separate  account to pay the claims of creditors of the
insurance  company  or  policyholders  other than the  policyholder  to whom the
separate account relates.  The private acts also permit our Bermuda subsidiaries
to issue  certain  securities  based on  separate  accounts  that are subject to
similar provisions.

Cayman Islands

         Our Cayman Islands  subsidiaries  are subject to regulation as licensed
insurance   companies  under  Cayman  Islands  law.  These   subsidiaries   hold
unrestricted  Class B insurance  licenses under Cayman Islands Insurance Law and
may therefore carry on an insurance  business from the Cayman  Islands,  but may
not  engage  in  any  Cayman  Islands  domestic   insurance   business.   Unless
specifically exempted, a Cayman Islands insurance company must engage a licensed
insurance manager operating in the Cayman Islands to provide insurance expertise
and oversight.  Our subsidiaries are exempt from this requirement.  In addition,
under the Cayman  Islands  Insurance  Law, a Cayman  Islands  insurance  company
carrying on long-term  business  (which  includes the writing of life  insurance
policies)  must hold all  receipts  in respect  of its  long-term  business  and
earnings  thereon in a separate  long-term  business  fund.  Payments  from such
long-term  business fund may not be made directly or indirectly  for any purpose
other than those of the insurer's  long-term  business  except in so far as such
payments can be made out of any surplus disclosed on an actuarial  valuation and
certified by an actuary to be  distributable  otherwise  than to  policyholders.
Every  Cayman  Islands  insurance  company  carrying on  long-term  business may
establish  any number of separate  accounts in respect of premiums paid to it to
provide (i)  annuities  on human life and (ii)  contracts  of insurance on human
life, and such  respective  premiums shall be kept segregated one from the other
and  independent  of  all  other  funds  of the  Cayman  Islands  insurer,  and,
notwithstanding the provisions of any other written law to the contrary, are not
chargeable  with any liability  arising from any other  business of the insurer.
The scope and the validity of the Cayman Islands law regarding separate accounts
have not been tested in the courts of the Cayman Islands.

                                       18
<PAGE>

Guernsey

         World-Wide   Insurance   PCC  Limited  is  a  protected   cell  company
incorporated  under  the laws of the  Island of  Guernsey  and  licensed  by the
Guernsey  Financial  Services  Commission  or GFSC,  to  carry on  international
insurance  business  under the Insurance  Business  (Bailiwick of Guernsey) Law,
2002. The  activities of World-Wide  Insurance PCC Limited are supervised by the
GFSC. Insurers in Guernsey are required to maintain a minimum margin of solvency
and to ensure that they have funds  available  sufficient to meet a total annual
aggregate  risk  retention  together with any  forecasted  annual  expenses.  In
addition,  insurance  companies are also required to report annually to the GFSC
and must also  retain a  general  representative.  The GFSC  also has  powers to
investigate and intervene in the affairs of insurance companies in Guernsey.

Ireland

         Scottish  Re (Dublin)  Limited is a  reinsurance  company  incorporated
under the laws of  Ireland.  Under  Irish law,  a  reinsurance  company  such as
Scottish Re (Dublin)  Limited is required to maintain a minimum level of paid up
share capital.  As a general  matter,  neither  Scottish Re (Dublin)  Limited is
subject to the same level of regulation in Ireland as a direct writing insurance
company.  However,  the Irish Financial  Services  Regulatory  Authority has the
power under Section 22 of the  Insurance  Act, 1989 (as inserted by Section 5 of
the Insurance Act, 2000) to direct Irish reinsurance  companies to cease writing
business  indefinitely  or for a  specified  period for,  among  other  grounds,
inadequate   capitalization,   unsuitable   directors   and/or   management   or
insufficient staff based in Ireland.  Section 22A of the Insurance Act, 1989 (as
inserted  by  Section 6 of the  Insurance  Act,  2000)  provides  that the Irish
Financial  Services  Regulatory  Authority may create regulations to provide for
the  application  of the general  insurance  laws and  regulations in Ireland to
reinsurance companies such as Scottish Re (Dublin) Limited where it considers it
necessary to do so, in the public interest, in the interest of policyholders and
in the interest of the orderly and proper regulation of the insurance industry.

         Directive  2005/68/EC of the European  Parliament and of the Council of
the European  Commission dated November 16, 2005 (the  "Reinsurance  Directive")
was published in the Official Journal of the European Union on December 9, 2005.
The  Reinsurance  Directive must be implemented by EU Member States on or before
December 10, 2007. It is anticipated that Ireland will implement the Reinsurance
Directive  during  the first  quarter  of 2006.  Once  implemented  by EU Member
States,  the  Reinsurance  Directive will introduce a single passport system for
reinsurers similar to that which currently applies to direct insurers. This will
mean that EU  reinsurers  such as our Irish  subsidiary,  Scottish  Re  (Dublin)
Limited,  will be  authorized by their home state  supervisor  and will, on that
basis,  be entitled to transact  business  anywhere in the European Union either
under the rules of "freedom of establishment" or under the "freedom of services"
rules.

         Some key provisions of the  Reinsurance  Directive for life  reinsurers
such as Scottish Re (Dublin) Limited include the following:

o        EU reinsurers  will be required to limit their purposes to the business
of reinsurance and related operations.

o        EU reinsurers will be obliged to establish  adequate technical reserves
to  cover  their  reinsurance  obligations.  Additionally,  reinsurers  will  be
required  to invest the  assets  covering  their  technical  reserves  and their
equalization  reserves (which are required in the case of credit  reinsurers) in
accordance  with a prescribed  set of rules.  These rules require a reinsurer to
match its investments to its expected claims payments and also require diversity
across  asset  classes  and  counterparties.   Investments  in  derivatives  are
permitted only to reduce investment risks or to facilitate  efficient  portfolio
management.  In addition, home Member States are permitted to require reinsurers
to also  comply  with the more  quantitative  rules  set out in the  Reinsurance
Directive provided they are prudentially justified.

o        EU reinsurers will be obliged to maintain a solvency margin  consisting
of the assets of the reinsurer  "free of any foreseeable  liabilities"  less any
intangible items. Subject to an absolute minimum of EUR 3.0 million, in the case
of life reinsurers,  the required solvency margin will be based on the higher of
a premium basis or a claims basis calculation.  In respect of premiums,  a ratio
of 18% will  apply on the  first  EUR 50.0  million,  with 16%  applying  on the
excess. In respect of claims, a ratio of 26% will apply on the average burden of
claims  determined by reference to a number of preceding  financial  years up to
EUR  35.0  million   with  23%   applying  on   the  excess.  For   unit  linked

                                       19
<PAGE>

business, home Member States may require the solvency margin to be calculated in
accordance  with the rules set out in the  Reinsurance  Directive  applicable to
direct life assurance companies.

o        One-third of the  required  solvency  margin will  constitute a minimum
guarantee fund, which must be not less than EUR 3.0 million.

o        As  regards  transitional   arrangements,   the  Reinsurance  Directive
provides  that  Member  States may allow EU  reinsurers  which are  carrying  on
business at the date of entry into force of the Reinsurance Directive, two years
within  which  to  comply  with,   inter  alia,   the   requirements   regarding
establishment of technical  provisions and reserves and relating to the solvency
margin and the guarantee  fund described  above.  However,  the Irish  Financial
Regulator has embarked on a consultation process with industry on grandfathering
requirements  for existing  reinsurers such as Scottish Re (Dublin)  Limited and
its current thinking  suggests that Irish reinsurers would be expected to comply
with the requirements of the Reinsurance  Directive  regarding the establishment
of technical  provisions  within six months of the  Reinsurance  Directive being
transposed  into Irish law.  Furthermore,  it is expected that Irish  reinsurers
would be  required  to comply  with the  solvency  margin  requirements  and the
investment  rules described above within 12 months of the  transposition  of the
Reinsurance Directive into Irish law.

         All Irish reinsurers,  including Scottish Re (Dublin) Limited,  will be
required to submit a  Reinsurance  Grandfathering  Compliance  Submission to the
Irish Financial  Regulator  showing how they will comply with the new regulatory
requirements.  If Scottish Re (Dublin)  Limited was not already in compliance or
was unable to demonstrate  that it had a compliance plan acceptable to the Irish
Financial  Regulator,  then it  might  not be  allowed  by the  Irish  Financial
Regulator to continue to carry on reinsurance business.

United Kingdom

         Scottish  Re  Limited  is  a  reinsurance   company   incorporated  and
registered in England and Wales and subject to regulation and supervision in the
United Kingdom.  On December 1, 2001, the United  Kingdom's  Financial  Services
Authority,  or FSA,  assumed  its full  powers  and  responsibilities  under the
Financial  Services  and  Markets Act 2000,  or FSMA.  The FSA is now the single
statutory  regulator  responsible  for  regulating   deposit-taking,   insurance
(including reinsurance),  investment and most other financial services business.
It is a criminal offense for any person to carry on a regulated  activity in the
United  Kingdom  unless that person is  authorized  by the FSA or falls under an
exemption.  Scottish Re Limited is authorized to carry on long-term business and
certain  classes of general  business with a  requirement  that it restricts its
business to reinsurance.

         The FSA  has  adopted  a  risk-based  approach  to the  supervision  of
insurance companies.  Under this approach the FSA periodically performs a formal
risk  assessment of insurance and  reinsurance  companies or groups  carrying on
business in the United Kingdom. After each risk assessment,  the FSA will inform
the  insurer/reinsurer of its views on the  insurer's/reinsurer's  risk profile.
This will include  details of any remedial  action that the FSA requires and the
likely  consequences  if this action is not taken.  The FSA also  supervises the
management of insurance and reinsurance  companies  through the approved persons
regime,  by which any  appointment  of  persons  to  perform  certain  specified
"controlled functions" within a regulated entity, must be approved by the FSA.

         Under FSA rules,  insurance and  reinsurance  companies are required to
maintain a margin of  solvency  at all times,  the  calculation  of which in any
particular case depends on the type and amount of business a company writes. The
method of  calculation  of the solvency  margin is set out in the FSA rules and,
for these  purposes,  a  company's  assets and its  liabilities  are  subject to
specific  valuation rules.  Failure to maintain the required  solvency margin is
one of the grounds on which wide powers of  intervention  conferred upon the FSA
may be exercised.

         The  acquisition  of  "control" of any U.K.  insurance  or  reinsurance
company will require FSA approval. For these purposes, a party that "controls" a
U.K.  insurance or reinsurance  company  includes any company or individual that
(together  with its or his  associates)  directly or indirectly  acquires 10% or
more of the shares in a U.K. authorized  insurance or reinsurance company or its
parent  company,  or is entitled  to exercise or control the  exercise of 10% or
more of the voting power in such authorized  insurance or reinsurance company or
its parent  company.  In

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<PAGE>

considering  whether to approve an  application  for  approval,  the FSA must be
satisfied  that  both the  acquirer  is a fit and  proper  person  to have  such
"control"  and that the  interests of consumers  would not be threatened by such
acquisition of "control."  Failure to make the relevant prior  application could
result in action  being taken by the FSA  against  both the person who sought to
acquire control and against the regulated company.

         The  Reinsurance  Directive has been approved by the United Kingdom and
the regulatory  authority is expected to take action within the prescribed  time
period.

New Jurisdictions

         If we or any of our subsidiaries  were to become subject to the laws of
a new jurisdiction where we or that subsidiary is not presently  admitted,  they
may not be in compliance with the laws of the new  jurisdiction.  Any failure to
comply  with  applicable  laws could  result in the  imposition  of  significant
restrictions  on our ability to do business,  and could also result in fines and
other  sanctions,  any or all of which  could  adversely  affect  our  financial
results and operations.

Additional Information

         Our website address is  www.scottishre.com.  Forms 10-K,  10-Q, 8-K and
all  amendments  to such  reports are  available  free of charge on our website.
These  reports are posted to the website as soon as reasonably  practical  after
they have been  filed with the SEC.  We will also  provide  electronic  or paper
copies of these  reports on request.  Information  contained on our website does
not constitute part of this Annual Report on Form 10-K.



Item 1A.  RISK FACTORS

         Investing  in  our  securities  involves  certain  risks.  Any  of  the
following  risks could  materially  adversely  affect our  business,  results of
operations or financial condition.

                          Risks Related to Our Business

A downgrade in the financial ratings of our insurance subsidiaries could make us
less competitive.


         Ratings  are an  important  factor in  attracting  business in our life
reinsurance  business.  Rating  organizations  periodically review the financial
performance  and condition of insurers,  including  our insurance  subsidiaries.
Rating organizations assign ratings based upon several factors. Although most of
the factors  considered  relate to the rated  company,  some of the factors take
into account general  economic  conditions and  circumstances  outside the rated
company's  control.  The  objective  of rating  organizations  is to  provide an
opinion  of  an  insurer's  financial  strength  and  ability  to  meet  ongoing
obligations to its  policyholders.  These ratings are subject to periodic review
by the relevant  rating  agency and may be revised  downward or withdrawn at the
sole  discretion  of the rating  agency.  In addition,  these ratings are not an
evaluation  directed to investors in our securities and are not  recommendations
to buy, sell or hold our  securities.  See "Business - Competition  and Ratings"
for a description of our subsidiaries' ratings.

         A  downgrade  in or  withdrawal  of one or more  ratings  of any of our
insurance  subsidiaries  could  adversely  affect our ability to sell  products,
retain existing  business  (through  recapture  provisions and  non-renewal) and
compete for attractive acquisition opportunities.

Inadequate  risk  analysis  and  underwriting  may  result in a  decline  in our
profits.

         Our success depends on our ability to accurately  assess and manage the
risks  associated  with the business that we reinsure.  We have  developed  risk
analysis  and  underwriting  guidelines,   policies,  and  procedures  with  the
objective of  controlling  the quality of the business as well as the pricing of
the risks we are assuming.  Among other things,  these processes rely heavily on
our  underwriting,  our  analysis of mortality  trends and lapse rates,  and our
understanding of medical  improvements  and their impact on mortality.  If these
processes  are  inadequate or are based on  inadequate  information,  we may not
establish  appropriate  premium  rates and our  reserves  may not be adequate to
cover our losses.

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<PAGE>

         In addition,  we are dependent on the original  underwriting  decisions
made by, and information  provided to us by, ceding companies.  For example,  we
incurred  a charge to net income of $10.4  million in the third  quarter of 2003
when we  discovered  that one of our ceding  insurers  had  underreported  death
claims to us over a three-year  period. We are also subject to the risk that the
ceding clients may not have  adequately  evaluated the risks to be reinsured and
that the  premiums  ceded  may not  adequately  compensate  us for the  risks we
assume. To the extent actual claims exceed our underlying  assumptions,  we will
be required to increase  our  liabilities,  which will reduce our profits in the
period in which we identify the deficiency.

         Reserves are estimates based on actuarial and statistical  projections,
at a given point in time, of what we ultimately  expect to pay out on claims and
benefits,  based on facts and  circumstances  then known,  predictions of future
events,  estimates of future trends in mortality,  morbidity and other  variable
factors such as persistency,  inflation and interest rates.  Because of the many
assumptions  and  estimates  involved in  establishing  reserves,  the reserving
process is inherently uncertain.

Life reinsurance is a highly competitive industry, which could limit our ability
to gain or maintain our competitive position.

         The life reinsurance  industry is highly competitive,  and we encounter
significant competition from other reinsurance companies, as well as competition
from other  providers  of financial  services.  Competition  in the  reinsurance
business is based on price, financial strength ratings, reputation,  experience,
relationships  and service.  Many of our competitors are  significantly  larger,
have greater financial resources and have longer operating histories than we do.
Competition  from  other  reinsurers  could  adversely  affect  our  competitive
position.  We consider  our major  competitors  in the United  States to include
Swiss  Re,  Reinsurance  Group of  America  Inc.,  Munich  American  Reassurance
Company,  Generali USA Life Re, and Transamerica  Reinsurance.  In other markets
outside  the  United  States,  our  competitors  include  XL  Capital  Ltd,  Max
Reinsurance Ltd. and PartnerRe Ltd.

Our life reinsurance contracts and variable life insurance policies expose us to
mortality risk which could negatively affect our net income.

         Mortality risk is the risk that death claims may differ from the amount
we assumed in pricing our reinsurance  contracts and our variable life insurance
policies.  Mortality  experience that is less favorable than the mortality rates
that we assumed  will  negatively  affect our net income.  For  example,  in the
second quarter of 2005, we  experienced  higher than expected  mortality,  which
negatively affected our net income.

         If  our  investment  strategy  is  not  successful,   we  could  suffer
unexpected losses.

         The success of our investment strategy is crucial to the success of our
business. Specifically, we are subject to:

         o        market value risk,  which is the risk that our invested assets
                  will decrease in value. This decrease in value may be due to a
                  change in the yields  realized  on our  assets and  prevailing
                  market yields for similar assets, an unfavorable change in the
                  liquidity of the  investment or an  unfavorable  change in the
                  financial prospects or a downgrade in the credit rating of the
                  issuer of the investment;

         o        reinvestment  risk, which is the risk that interest rates will
                  decline and funds reinvested will earn less than expected; and

         o        duration matching risk, which is the risk that liabilities are
                  surrendered or mature sooner than  anticipated and that we may
                  have to sell  assets at an  undesirable  time to  provide  for
                  policyholder surrenders or withdrawals.

         We attempt to address such risks in product pricing and in establishing
policy reserves. If our assets do not properly match our anticipated liabilities
or our investments do not provide sufficient returns to enable us to satisfy our
guaranteed fixed benefit  obligations  then our profits and financial  condition
would deteriorate.  Also,  declines in

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<PAGE>

the value of our investments that provide  collateral for reinsurance  contracts
would require us to post additional collateral.

         In  addition,   our  investment   portfolio  includes   mortgage-backed
securities,  known as MBSs, and collateralized  mortgage  obligations,  known as
CMOs. As of December 31, 2005, MBSs and CMOs constituted  approximately 16.4% of
our invested assets. As with other fixed income  investments,  the fair value of
these  securities will fluctuate  depending on market and other general economic
conditions  and the interest  rate  environment.  Changes in interest  rates can
expose us to  prepayment  risks on these  investments.  In periods of  declining
interest rates,  mortgage  prepayments  generally increase and MBSs and CMOs are
prepaid more quickly,  requiring us to reinvest the proceeds at the then current
market rates.

         We may also  enter  into  foreign  currency,  interest  rate and credit
derivatives  and other  hedging  transactions  in an  effort  to  manage  risks.
Structuring these derivatives and hedges so as to effectively manage these risks
is an inherently uncertain process. If our calculations are incorrect,  or if we
do not properly  structure our  derivatives  or hedges,  we may have  unexpected
losses and our assets may not be  adequate  to meet our needed  reserves,  which
could adversely affect our business, earnings and financial condition.

         General     economic     conditions     affect    the    markets    for
interest-rate-sensitive  securities,  including  the  level  and  volatility  of
interest  rates and the  extent  and timing of  investor  participation  in such
markets.   Unexpected  changes  in  general  economic  conditions  could  create
volatility or  illiquidity  in these markets in which we hold positions and harm
our investment return.

         Our strategy  includes  growth through  acquisitions.  Our inability to
grow through  acquisitions or to successfully  integrate  acquired  companies or
blocks of business may negatively affect our results of operations.

         Much  of  our  growth,   particularly  in  2005,  has  been  fueled  by
acquisitions.  Our ability to grow  through  acquisitions  depends,  among other
things, on our ability to identify attractive  acquisition  candidates.  We have
completed three major acquisitions since 2001,  including the acquisition of the
in-force  individual life reinsurance  business of ING on December 31, 2004, and
we may make future acquisitions, either of companies or other selected blocks of
business.  While we will evaluate business  opportunities on a regular basis, we
may not be successful in  identifying  any attractive  acquisitions.  We may not
have, or be able to raise on acceptable terms, sufficient financial resources to
make acquisitions. In addition, any acquisition we make is subject to all of the
risks inherent in an acquisition strategy, including:

     o   integrating the acquired financial and operational systems;

     o   establishing satisfactory budgetary and other financial and accounting
         controls;

     o   funding increased capital needs and overhead expenses;

     o   obtaining management personnel required for expanded operations;

     o   funding cash flow shortages that may occur if anticipated sales and
         revenues are not realized or are delayed, whether by general economic
         or market conditions or unforeseen internal difficulties; and

     o   the value of assets acquired may be lower than expected or may
         diminish due to credit defaults or changes in interest rates and
         liabilities assumed may be greater than expected.

         Our failure to manage  successfully  these  operational  challenges and
risks may impact our results of operations. In addition, disputes can arise over
the terms of any acquisition. For example, in connection with the acquisition of
Scottish Re Life Corporation,  formerly ERC Life Reinsurance Corporation, we are
currently in mediation  with the seller over the  representations  made to us at
the time of sale. Also, growth by acquisition may divert a substantial amount of
management time that would otherwise be devoted to our operations.

We may not be able to grow as quickly as we have in the past.

         To the extent  that  consolidation  of the  domestic  life  reinsurance
industry leads to an improved pricing  environment for reinsurers,  such pricing
increases may be offset by larger  retentions and the amount of risk our

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<PAGE>

clients retain. While international  markets in Europe and Asia may offer better
long-term prospects for growth, the timing of the growth is uncertain and is not
likely to offset any slow-down in the domestic life reinsurance industry.

In certain  reinsurance  contracts  we do not  maintain  control of the invested
assets,  which may limit our ability to control investment risks on these assets
and may expose us to credit risk of the ceding company.

         As part of our  business  we enter  into  reinsurance  agreements  on a
modified   coinsurance   and  funds  withheld   coinsurance   basis.   In  these
transactions,  the ceding  insurance  company retains the assets  supporting the
ceded business and manages them for our account.  As of December 31, 2005,  $2.6
billion of assets were held by ceding  companies  under such agreements and were
recorded under "funds  withheld at interest" on our balance sheet.  Although the
ceding  company  must  adhere  to  general  standards  agreed  to by us for  the
management  of these  assets,  we do not control the  selection  of the specific
investments  or the timing of the  purchase or sale of  investments  made by the
ceding  company.  Accordingly,  we may be at risk if the ceding company  selects
investments  that  deviate from our agreed  standards  or if the ceding  company
performs  poorly  in the  purchase,  sale and  management  of those  assets.  In
addition,  these  assets  are not  segregated  from the ceding  company's  other
assets,  and we may not be able to recover  all of these  assets in the event of
the insolvency of the ceding insurer. In certain other reinsurance arrangements,
we may place  assets in a trust in order to  provide  the  ceding  company  with
credit for reinsurance on its financial  statements.  Although we generally have
the right to direct the  investment of assets in these  trusts,  in the event of
the insolvency of the ceding  company,  its receiver may attempt to take control
of those assets.

Interest rate fluctuations  could lower the income we derive from the difference
between the interest rates we earn on our  investments and interest we pay under
our reinsurance contracts.

         Significant  changes  in  interest  rates  expose us to the risk of not
earning  income or  experiencing  losses  based on the  difference  between  the
interest  rates earned on  investments  and the credited  interest rates paid on
outstanding reinsurance contracts.

         Both rising and  declining  interest  rates can  negatively  affect the
income we derive from these  interest  rate spreads.  During  periods of falling
interest rates, our investment earnings will be lower because new investments in
fixed maturity  securities  will likely bear lower interest rates. We may not be
able to fully offset the decline in  investment  earnings  with lower  crediting
rates on our contracts that reinsure life  insurance  policies or annuities with
cash value components. A majority of our annuity and certain other products have
multi-year guarantees and guaranteed floors on their crediting rates.

         During  periods  of  rising  interest  rates,  we may be  contractually
obligated  to  increase  the  crediting  rates on our  contracts  that  reinsure
annuities or life  insurance  policies with cash value  components.  We may not,
however, have the ability to immediately acquire investments with interest rates
sufficient  to offset  the  increased  crediting  rates  under  our  reinsurance
contracts.  Although we develop and maintain asset/liability management programs
and  procedures  designed to reduce the  volatility  of our income when interest
rates are rising or falling,  significant  changes in interest  rates  caused by
factors beyond our control such as changes in  governmental  monetary  policy or
political conditions may negatively affect our interest rate spreads.

         Changes in interest  rates may also affect our  business in other ways.
Lower  interest  rates  may  result  in lower  sales of  certain  insurance  and
investment  products of our  customers,  which  would  reduce the demand for our
reinsurance of these products.

A  prolonged  economic  downturn  could  reduce the demand for  annuity and life
insurance products, which could substantially reduce our revenues.

         A prolonged general economic downturn or poor performance of the equity
and other  capital  markets,  could  lower the demand for many  annuity and life
insurance products.  Because we obtain substantially all of our revenues through
reinsurance  arrangements that cover a portfolio of life insurance products,  as
well as annuities,  our business  would be harmed if the demand for annuities or
life insurance decreased.

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<PAGE>

Policyholder withdrawals or recaptures of reinsurance treaties could force us to
sell  investments  at a loss and  take a  larger  than  anticipated  charge  for
amortization of deferred acquisition costs.

         Some of the products offered by our insurance  subsidiaries and some of
the  products  offered by primary  insurance  companies  that we reinsure  allow
policyholders  and  contract  holders to  withdraw  their  funds  under  defined
circumstances. In addition, our reinsurance agreements may provide for recapture
rights on the part of our insurance company  customers.  Recapture rights permit
these  customers to reassume all or a portion of the risk  formerly  ceded to us
after an agreed upon time,  usually 10 years,  subject to various  conditions or
upon a  downgrade  of any of our  financial  strength  ratings or our failure to
satisfy other financial conditions.  Recapture of business previously ceded does
not affect  premiums ceded prior to the  recapture,  but may result in immediate
payments to our insurance company customers.

         In addition,  when we issue a new insurance  policy or annuity contract
or write a reinsurance  contract,  we defer a portion of the related acquisition
costs by  establishing a deferred  acquisition  cost asset on the balance sheet.
This asset is amortized over the expected term of the acquired business based on
certain  assumptions  about the performance and persistency of that business and
investment experience. To the extent surrender, withdrawal or recapture activity
is greater than we assumed,  or investment  experience is worse than we assumed,
we may incur a  non-cash  charge to write  down the  deferred  acquisition  cost
asset. Any such charge may be partially offset by recapture and surrender fees.

         One of our  customers  exercised  a right of  recapture  in April 2001,
requiring us to pay $185.7 million to the customer.  Because we had expected the
recapture,  we did not have to  dispose  of assets at a loss and we had  already
fully amortized the deferred acquisition costs. In December 2002, another of our
customers  exercised a right of recapture  requiring us to pay $49.3  million to
the  customer.  In that case, we did not have to dispose of assets at a loss and
we recovered all of our unamortized  deferred  acquisition costs relating to the
transaction.   However,   because   recapture   rights  can  be   triggered   by
circumstances,   which  may  be  unforeseeable,  such  as  rating  decreases  or
production  shortfalls,  we may not be able to anticipate  future recaptures and
make adequate preparations to reduce their impact on us. If recaptures occur and
we do not make adequate preparations, our earnings and financial condition could
decline.

With  regard  to  our  business  generally,  the  outcome  of  current  industry
investigations may have an adverse impact.

         The  attorneys  general and the insurance  departments  of New York and
numerous  other  states  have  announced   investigations  of  insurance  broker
compensation arrangements,  bid-rigging and other practices within the insurance
industry,  and may  propose  changes in the  regulation  of broker  compensation
arrangements and disclosure.  Some regulators have also announced investigations
into proper uses of finite reinsurance. We received a letter of inquiry from the
Delaware  Department  of  Insurance  in  November  2004 as part of its review of
Delaware domestic  insurance  companies and their arrangements and dealings with
producers  acting as brokers to which we responded in November 2004. We have not
been contacted by any other government  agency  (including  through receipt of a
subpoena) in connection with these  investigations.  It is impossible to predict
the  outcomes  of these  investigations,  whether  they will  expand  into other
industry practices not yet contemplated,  whether they will result in changes in
insurance  regulation or  practices,  or the impact,  if any, of this  increased
regulatory  scrutiny  of the  insurance  industry on us or on the  liquidity  or
trading prices of our ordinary shares.

Government subpoenas we have received may create negative publicity and the risk
of regulatory action.

         We have received  separate  subpoenas from the staff of the SEC and the
Permanent  Subcommittee on  Investigations of the United States Senate Committee
on Homeland  Security and Governmental  Affairs ("PSI").  The SEC subpoena seeks
documents and other  information  regarding  transactions and trading  involving
Scottish Re securities by certain  former  officers and directors of Scottish Re
(each of whom left those  positions  by  mid-year  2001),  by  certain  original
shareholders of Scottish Re, and by our current Chairman. The PSI subpoena is in
connection   with  the  PSI's  general  review  of  compliance  with  anti-money
laundering,  tax and  securities  laws  and  regulations  related  to  financial
transactions by individuals and domestic and offshore entities. The PSI subpoena
seeks  documents   regarding  the  formation  of  Scottish  Re,  certain  wealth
management products and transactions  involving the individuals mentioned above.
We are fully  cooperating with these inquiries.  While it is premature for

                                       25
<PAGE>

us to  assess  the  scope or any  potential  outcome  to us of these  inquiries,
including any potential  enforcement  actions  involving us, these inquiries may
result in negative publicity and could have an adverse affect on us.


We cede some of the business that we reinsure to other reinsurance companies who
may not pay amounts due to us, which could materially harm our business.

         We cede some of the  business  that we  reinsure  to other  reinsurance
companies,   known  as   retrocessionaires.   We   assume   the  risk  that  the
retrocessionaire  will be unable to pay  amounts  due to us  because  of its own
financial difficulties.  The failure of our retrocessionaires to pay amounts due
to us will not  absolve us of our  responsibility  to pay ceding  companies  for
risks that we reinsure.  Failure of retrocessionaires to pay us could materially
harm our business, results of operations and financial condition.

Natural  disasters,  catastrophes and disasters caused by humans,  including the
threat of terrorist  attacks and related  events,  epidemics,  and pandemics may
adversely affect our business and results of operations.

         Natural  disasters  and  terrorist  attacks,  as well as epidemics  and
pandemics,  can adversely affect our business and results of operations  because
they accelerate  mortality risk.  Terrorist  attacks in the United States and in
other parts of the world and the threat of future  attacks could have a negative
effect on our business.

         We believe our reinsurance  programs are sufficient to reasonably limit
our net losses for individual life claims  relating to potential  future natural
disasters  and  terrorist  attacks.  Our  reinsurance  programs,  including  our
catastrophe coverage,  limited our net losses in individual life claims relating
to the September 11, 2001 terrorist attacks to approximately $750,000.  However,
the  consequences  of  further  natural  disasters,   terrorist  attacks,  armed
conflicts, epidemics and pandemics are unpredictable,  and we may not be able to
foresee events that could have an adverse effect on our business.

         Our  international   operations  subject  us  to  regulatory,   foreign
currency, and other risks which may affect our business. In 2005,  approximately
6% of our earned premiums came from our  international  operations.  Our plan to
grow our international  operations  subjects us to various risks. In addition to
the  regulatory  and foreign  currency  risks we identify later in this section,
these risks include:

     o   volatility in earnings arising out of mortality swings in the initial
         years of operating in new markets;

     o   political and economic instability as well as armed conflict in these
         regions; and

     o   uncertainty arising out of foreign government sovereignty over our
         international operations.

Our  inability to attract and retain  qualified  employees or the loss of any of
our key employees could negatively impact our business.

         Our  success  substantially  depends  upon our  ability to attract  and
retain  qualified  employees and upon the ability of our senior  management  and
other key  employees to implement  our business  strategy.  We believe there are
only a limited number of available qualified executives in the business lines in
which we compete.  We rely substantially upon the services of Scott E. Willkomm,
our Chief Executive Officer,  Paul Goldean, our General Counsel,  David Huntley,
the Chief  Executive  Officer  of  Scottish  Re  Limited,  Hugh  McCormick,  our
Executive Vice  President of Corporate  Development,  Dean E. Miller,  our Chief
Financial Officer, Seth Vance, the Chief Executive Officer of Scottish Holdings,
Inc., and Clifford J. Wagner,  our Chief Actuary.  Each of the foregoing members
of senior  management has employment  agreements and we maintain  $2,500,000 key
man life insurance policies for each of Mr. Willkomm and Mr. Wagner. The loss of
the services of members of our senior  management,  or our inability to hire and
retain  other  talented  personnel  from  the  very  limited  pool of  qualified
insurance  professionals,  could delay or prevent us from fully implementing our
business strategy which could harm our financial performance.

                                       26
<PAGE>

We are  exposed  to foreign  currency  risk which  could  negatively  affect our
business.

         Our functional currency is the United States dollar.  However, our U.K.
subsidiaries,  Scottish Re Holdings  Limited and  Scottish Re Limited,  maintain
operating  expense  accounts  in  British  pounds,  parts  of  their  investment
portfolio in Euros and British pounds and receive other currencies in payment of
premiums.  All of Scottish Re  Limited's  original  U.S.  business is settled in
United States dollars, all Canadian,  Latin American and certain Asia and Middle
East business is converted and settled in United States  dollars,  and all other
currencies  are  converted  and settled in either Euros or British  pounds.  The
results of the business  recorded in Euros or British pounds are then translated
to United  States  dollars.  Scottish Re Limited  attempts to limit  substantial
exposures to foreign currency risk, but does not actively manage currency risks.
To the extent our foreign currency exposure is not properly managed or otherwise
hedged, we may experience exchange losses, which in turn would lower our results
of operations and harm our financial condition.

Our  insurance   subsidiaries  are  highly  regulated,   and  changes  in  these
regulations could harm our business.

         Our insurance and  reinsurance  subsidiaries  are subject to government
regulation in each of the jurisdictions in which they are licensed or authorized
to do  business.  Governmental  agencies  have  broad  administrative  power  to
regulate  many aspects of the  insurance  business,  which may include trade and
claim  practices,   accounting  methods,  premium  rates,  marketing  practices,
advertising,  acceptability  of  collateral  for  purposes of taking  credit for
reinsurance,  policy  forms,  affiliate  transactions,  changes of  control  and
capital adequacy.  These agencies are concerned primarily with the protection of
policyholders   rather  than   shareholders.   Moreover,   insurance   laws  and
regulations, among other things:

         o        establish  solvency  requirements,  including minimum reserves
                  and capital and surplus requirements;

         o        limit the amount of dividends, tax distributions, intercompany
                  loans and other payments our insurance  subsidiaries  can make
                  without prior regulatory approval;

         o        impose  restrictions  on the amount and type of investments we
                  may hold; and

         o        require  assessments  to pay  claims  of  insolvent  insurance
                  companies.

         The NAIC continuously examines existing laws and regulations. We cannot
predict  the  effect  that  any  NAIC  recommendations  or  proposed  or  future
legislation  or rule making in the United  States or  elsewhere  may have on our
financial condition or operations.

         If Scottish Re or any of our subsidiaries were to become subject to the
laws of a new jurisdiction where Scottish Re or that subsidiary is not presently
admitted,  they may not be in compliance with the laws of the new  jurisdiction.
Any failure to comply with  applicable  laws could result in the  imposition  of
significant restrictions on our ability to do business, and could also result in
fines and other sanctions,  any or all of which could harm our financial results
and operations.

Our ability to pay dividends depends on our subsidiaries'  ability to distribute
funds to us.

         We are a holding company,  with our principal assets  consisting of the
stock of our insurance company subsidiaries. Our ability to pay dividends on our
ordinary shares,  HyCUs, our non-cumulative  perpetual  preferred shares, and to
pay  debt  service  on any of our  indebtedness,  depends  significantly  on the
ability of our insurance  company  subsidiaries,  our principal  sources of cash
flow, to declare and distribute  dividends or to advance money to us in the form
of intercompany loans. Our insurance company subsidiaries are subject to various
state and foreign government statutory and regulatory restrictions applicable to
insurance  companies  generally  that limit the amount of  dividends,  loans and
advances and other payments to affiliates.  If insurance  regulators at any time
determine that payment of a dividend or any other payment to an affiliate  would
be detrimental to an insurance subsidiary's policyholders or creditors,  because
of the  financial  condition  of the  insurance  subsidiary  or  otherwise,  the
regulators  may block  dividends  or other  payments  to  affiliates  that would
otherwise be permitted without prior approval.

                                       27
<PAGE>

Our ordinary shares are subject to voting and transfer limitations.

         Under our  articles  of  association,  our board of  directors  (or its
designee) is required,  except for transfers of ordinary  shares executed on any
recognized securities exchange or inter-dealer  quotation system,  including the
NYSE,  to decline to register any transfer of ordinary  shares if our  directors
have any reason to believe that such  transfer  would result in a person (or any
group of which  such  person  is a  member)  beneficially  owning,  directly  or
indirectly, 10% or more of any class of our shares, except that Cypress Merchant
B Partners II (Cayman) L.P.,  Cypress  Merchant  Banking II-A C.V.,  55th Street
Partners II (Cayman) L.P. and Cypress Side-by-Side (Cayman) L.P.  (collectively,
the  "Cypress  Entities")  are each  permitted  to transfer  ordinary  shares to
another  Cypress Entity,  so long as the number of ordinary shares  beneficially
owned  directly or indirectly by the Cypress  Entities in the aggregate does not
exceed  24.9% of a class of our shares.  With  respect to a transfer of ordinary
shares executed on any recognized securities exchange or inter-dealer  quotation
system,  including the NYSE,  if our  directors  have any reason to believe that
such  transfer  would result in a person (or any group of which such person is a
member) beneficially owning, directly or indirectly, 10% or more of any class of
our shares (24.9% in the case of the Cypress Entities), the directors may demand
that such person  surrender  the ordinary  shares to an agent  designated by the
directors,  who will  sell the  ordinary  shares  on any  recognized  securities
exchange or inter-dealer  quotation  system,  including the NYSE. After applying
the proceeds of the sale toward  reimbursing  the  transferee for the price paid
for the ordinary  shares,  the agent will pay the remaining  proceeds to certain
charitable  organizations designated by the directors. The proceeds of such sale
may be used to reimburse the agent for its duties. Similar restrictions apply to
issuances  and  repurchases  of ordinary  shares by us. Our  directors (or their
designee)  also may,  in their  absolute  discretion,  decline to  register  the
transfer  of any  ordinary  shares,  except for  transfers  of  ordinary  shares
executed on any recognized securities exchange or inter-dealer quotation system,
including the NYSE, if they have reason to believe that such transfer may expose
us, our  subsidiaries  or  shareholders  or any person  insured or  reinsured or
proposing to be insured or reinsured by us or any of our subsidiaries to adverse
tax or  regulatory  treatment  in any  jurisdiction  or if they  have  reason to
believe that  registration of such transfer under the Securities Act of 1933, as
amended,  or the  Securities  Act,  under any  state  "blue  sky" or other  U.S.
securities laws or under the laws of any other jurisdiction is required and such
registration has not been duly effected.  With respect to a transfer of ordinary
shares executed on any recognized securities exchange or inter-dealer  quotation
system,  including the NYSE,  if our  directors  have any reason to believe that
such  transfer may expose us, our  subsidiaries  or  shareholders  or any person
insured or reinsured or proposing to be insured or reinsured by us or any of our
subsidiaries  to adverse tax or regulatory  treatment in any  jurisdiction,  the
directors may demand that such person  surrender the ordinary shares to an agent
designated by the directors, who will sell the ordinary shares on any recognized
securities exchange or inter-dealer quotation system,  including the NYSE. After
applying  the proceeds of the sale toward  reimbursing  the  transferee  for the
price paid for the ordinary shares, the agent will pay the remaining proceeds to
certain charitable  organizations  designated by the directors.  The proceeds of
such sale may be used to reimburse  the agent for its duties.  A  transferor  of
ordinary  shares  will be deemed to own such  shares  for  dividend,  voting and
reporting  purposes until a transfer of such ordinary shares has been registered
on our register of members.  We are authorized to request  information  from any
holder  or  prospective  acquirer  of  ordinary  shares as  necessary  to effect
registration  of any such  transaction,  and may  decline to  register  any such
transaction if complete and accurate information is not received as requested.

         In addition,  our articles of  association  generally  provide that any
person (or any group of which such  person is a member)  other than the  Cypress
Entities, holding directly, or by attribution,  or otherwise beneficially owning
our voting shares  carrying 10% or more of the total voting  rights  attached to
all of our  outstanding  voting shares,  will have the voting rights attached to
its voting shares  reduced so that it may not exercise  more than  approximately
9.9% of such total voting rights. In addition, in the event the Cypress Entities
hold directly or by attribution or otherwise beneficially own voting shares with
more than  24.9% of the total  voting  rights of our voting  shares,  the voting
rights of the Cypress  Entities will be reduced so that they may not exercise in
the aggregate  more than  approximately  24.9% of the total voting rights of our
voting shares at any given time.  Because of the  attribution  provisions of the
Internal  Revenue Code of 1986,  as amended,  or the Code,  and the rules of the
Securities  and Exchange  Commission,  or the SEC,  regarding  determination  of
beneficial  ownership,  this  requirement  may have the effect of  reducing  the
voting rights of a shareholder whether or not such shareholder directly holds of
record 10% or more of our voting shares. Further, our board of directors (or its
designee) has the authority to request from any shareholder  certain information
for the purpose of determining  whether such shareholder's  voting rights are to
be reduced.  Failure to respond to such a notice,  or  submitting  incomplete or
inaccurate  information,   gives  our  board  of  directors  (or  its  designee)
discretion  to  disregard  all votes  attached  to such  shareholder's  ordinary
shares.

                                       28
<PAGE>

         On April 7, 2005, our shareholders  approved amendments to our articles
of association  permitting  certain affiliates of The Cypress Group to own up to
24.9% of our ordinary  shares and the issuance of ordinary shares to the Cypress
Entities upon the conversion of the 7% Convertible Junior Subordinated Notes. On
May 4, 2005, the Cypress  Entities  obtained  insurance  regulatory  approval in
Delaware and the United Kingdom to hold more than 10% of our outstanding shares.
The Cypress  Entities,  at December 31, 2005,  hold  approximately  17.5% of our
issued and outstanding ordinary shares.

Our articles of association make it difficult to replace directors and to effect
a change of control.

         Our articles of association  contain  certain  provisions  that make it
more  difficult  for  the   shareholders  to  replace   directors  even  if  the
shareholders consider it beneficial to do so. In addition,  these provisions may
make more difficult the acquisition of control of us by means of a tender offer,
open market  purchase,  a proxy fight or  otherwise,  including by reason of the
limitation on transfers of ordinary  shares and voting rights  described  above.
While these  provisions  are  designed to encourage  persons  seeking to acquire
control to negotiate with our board of directors,  they could have the effect of
discouraging  a  prospective  purchaser  from making a tender offer or otherwise
attempting to obtain  control and may prevent a shareholder  from  receiving the
benefit from any premium over the market price of our ordinary shares offered by
a bidder in a potential takeover.

         Examples of provisions in our articles of  association  that could have
such an effect include:

     o   election of our  directors  is  staggered,  meaning  that the members
         of only one of three  classes of our directors are elected each year;

     o   the total voting power of any  shareholder  owning 10% or more of the
         total voting rights  attached to our ordinary shares will be reduced to
         approximately 9.9% of the total voting rights of our ordinary shares;

     o   our directors  must decline to register the transfer of ordinary
         shares on our share  register  that would result in a person owning 10%
         or more of any class of our shares and may  decline  certain  transfers
         that they believe may have adverse tax or regulatory consequences;

     o   shareholders do not have the right to act by written consent; and

     o   our directors have the ability to change the size of the board of
         directors.

         Even in the absence of an attempt to effect a change in management or a
takeover  attempt,  these provisions may adversely affect the prevailing  market
price of our  ordinary  shares if they are  viewed as  discouraging  changes  in
management and takeover attempts in the future.

         The  Cypress  Entities   currently  own  approximately   17.5%  of  our
outstanding ordinary shares.  Pursuant to a shareholders'  agreement, as long as
the  Cypress  Entities  continue  to hold the  lesser of (i) 9.9% or more of the
voting power of our voting  securities on an  as-converted  basis or (ii) 35% or
more of the securities  purchased on an as-converted basis, the Cypress Entities
have the  non-assignable  right  to  appoint  one  director  and one  non-voting
observer to our board of directors.  The Cypress  Entities'  share ownership and
ability to nominate persons for election to the board of directors might provide
the Cypress Entities with significant influence over potential change in control
transactions.

Applicable insurance laws make it difficult to effect a change of control.

         Under applicable Delaware insurance laws and regulations, no person may
acquire control of us, Scottish Re (U.S.),  Inc. or Scottish Re Life Corporation
Limited,  our Delaware  insurance  subsidiaries,  unless that person has filed a
statement   containing   specified   information  with  the  Delaware  Insurance
Commissioner  and approval for such  acquisition is obtained.  Under  applicable
laws and  regulations,  any person  acquiring,  directly by stock  ownership  or
indirectly (by revocable proxy or otherwise), 10% or more of the voting stock of
any other  person is presumed to have  acquired  control of such  person,  and a
person who  beneficially  acquires  10% or more of our ordinary  shares  without
obtaining  the  approval  of the  Delaware  Insurance  Commissioner  would be in
violation of Delaware's  insurance  holding  company act and would be subject to
injunctive action requiring disposition or seizure of the shares and prohibiting
the voting of such shares,  as well as other action  determined  by the Delaware
Insurance  Commissioner.  In  addition,  because of our  ownership of Orkney Re,
Inc.,  our South  Carolina  special  purpose  reinsurance  captive,  any  person
acquiring control of Orkney Re, Inc.,  directly or indirectly  through acquiring
control of us,  would be required to obtain  approvals  from the South  Carolina
Director of Insurance.

                                       29
<PAGE>

         In addition,  many state  insurance laws require prior  notification to
the state  insurance  department  of a change in  control  of a  non-domiciliary
insurance  company  licensed to transact  insurance  in that state.  While these
pre-notification  statutes do not authorize the state  insurance  departments to
disapprove  the  change in  control,  they  authorize  regulatory  action in the
affected   state  if   particular   conditions   exist  such  as  undue   market
concentration. Any future transactions that would constitute a change in control
of us,  Scottish Re (U.S.),  Inc. or  Scottish Re Life  Corporation  Limited may
require prior notification in the states that have pre-acquisition  notification
laws.  These  prior  notice and prior  approval  laws may  discourage  potential
acquisition proposals and may delay, deter or prevent a change of control of us,
including transactions that some or all of our shareholders might consider to be
desirable.

         Any change in control of Scottish Re Limited would need the approval of
the U.K.  Financial  Services  Authority,  which is the body responsible for the
regulation and supervision of the U.K. insurance and reinsurance industry.

Investors may have  difficulties in suing or enforcing  judgments  against us in
the United States.

         We are a holding company organized under the laws of the Cayman Islands
with its  principal  executive  office in Bermuda.  Certain of our directors and
officers are residents of various  jurisdictions  outside the United States. All
or a substantial portion of our assets and those of such directors and officers,
at any one time,  are or may be  located  in  jurisdictions  outside  the United
States.  Although we have irrevocably  agreed that we may be served with process
in New York,  New York with respect to actions  arising out of or in  connection
with violations of United States Federal  securities laws relating to offers and
sales of ordinary  shares made hereby,  it could be difficult  for  investors to
effect service of process within the United States on our directors and officers
who reside outside the United States or to recover  against us or such directors
and officers on  judgments of United  States  courts  predicated  upon the civil
liability provisions of the United States federal securities laws.

The market price for our ordinary shares may be highly volatile.

         The  market  price for our  ordinary  shares  has  fluctuated,  ranging
between  $21.68 and $26.02 per share for the 52 weeks ended  December  31, 2005.
The  overall  market and the price of our  ordinary  shares may  continue  to be
volatile. There may be a significant effect on the market price for our ordinary
shares due to, among other things:

     -   changes in investors' and analysts' perceptions of the risks and
         conditions of our business,

     -   the size of the public float of our ordinary shares;

     -   the announcement of acquisitions by us or our competitors;

     -   variations in our anticipated or actual operating results or the
         results of our competitors;

     -   regulatory developments;

     -   market conditions; and

     -   general economic conditions.

Limited  trading  volume of our  ordinary  shares  may  contribute  to its price
volatility.

         Our ordinary shares are traded on the New York Stock  Exchange.  During
the twelve months ended  December 31, 2005, the average daily trading volume for
our  ordinary  shares as reported by the NYSE was 245,504  shares.  As a result,
relatively  small  trades  may have a  significant  effect  on the  price of our
ordinary shares.

                                       30
<PAGE>


                            Risks Related to Taxation

If we or  any  of our  non-U.S.  subsidiaries  is  determined  to be  conducting
business in the United States,  we could be liable for U.S. federal income taxes
which could negatively affect our net income.

         We are a holding  company  incorporated  under  the laws of the  Cayman
Islands  with our  principal  executive  office in Bermuda.  We and our non-U.S.
subsidiaries  believe they have  operated and intend to continue  operating in a
manner  such that  neither  we nor any of our  non-U.S.  subsidiaries  should be
treated as engaging in a trade or business in the United  States and thus should
not be subject to U.S. federal income taxation on net income.  Because there are
no definitive  standards  provided by the Code,  regulations or court  decisions
there is  considerable  uncertainty  as to  which  activities  constitute  being
engaged in the  conduct of a trade or business  within the United  States and as
the determination is essentially  factual in nature,  the United States Internal
Revenue  Service,  or the IRS,  could contend that Scottish Re or one or more of
its  non-U.S.  subsidiaries,  is  engaged in a trade or  business  in the United
States for U.S.  federal  income tax  purposes,  and thus may be subject to U.S.
federal income tax and "branch profits" tax on net income.  The highest marginal
federal income tax rates  currently are 35% for a  corporation's  income that is
effectively  connected  with a U.S.  trade or  business  and 30% for the "branch
profits" tax unless the "branch profits" tax is reduced by an applicable  income
tax treaty.

If we or any of our non-U.S.  subsidiaries  is treated as a  controlled  foreign
corporation or a passive  foreign  investment  company or if any of our non-U.S.
insurance subsidiaries generate more than a permissible amount of related person
insurance income, U.S. persons who own our shares may be subject to U.S. federal
income taxation on our undistributed  earnings and may recognize ordinary income
upon disposition of our shares.

         We  believe  that we were not a  controlled  foreign  corporation  or a
passive  foreign  investment  company,  nor have we generated  an  impermissible
amount of related person  insurance income for the year ended December 31, 2005.
Although no  assurances  can be given,  based upon (i) our current  beliefs with
respect  to the  dispersion  of our  share  ownership  and  (ii)  our  financial
information  for the period  ending  December 31, 2005, we do not expect to be a
controlled  foreign  corporation or a passive foreign  investment  company or to
generate an  impermissible  amount of related  person  insurance  income for the
current  year or in the future  but we cannot be  certain  that this will be the
case  because  some  of  the  preceding  facts  are  beyond  our  control.   Our
shareholders who are U.S. persons may be required to include in gross income for
U.S. federal income tax purposes our undistributed earnings if we are treated as
a controlled  foreign  corporation or a passive foreign investment company or if
we have  generated more than a permissible  amount of related  person  insurance
income.  In addition,  in certain cases gain on the  disposition of our ordinary
shares may be treated as ordinary income.

         Controlled  Foreign  Corporation.  Each U.S. 10% holder of a controlled
foreign  corporation  on the last day of the  controlled  foreign  corporation's
taxable year generally must include in gross income for U.S.  federal income tax
purposes  such   shareholder's   pro-rata  share  of  the   controlled   foreign
corporation's  subpart  F  income,  even if the  subpart  F income  has not been
distributed.  For  purposes  of this  discussion,  the term  "U.S.  10%  holder"
includes only persons who, directly or indirectly through non-U.S.  entities (or
through the  application of certain  "constructive"  ownership  rules,  which we
refer to as constructively),  own 10% or more of the total combined voting power
of all  classes of stock of the  foreign  corporation.  In  general,  a non-U.S.
company is treated as a controlled foreign  corporation if such U.S. 10% holders
collectively  own more than 50% of the total  combined  voting power or value of
our stock for an  uninterrupted  period of 30 days or more during any year and a
non-U.S.  insurance  company is treated as a controlled  foreign  corporation if
such U.S.  10%  holders  collectively  own more  than 25% of the total  combined
voting  power or value of our  stock for an  uninterrupted  period of 30 days or
more during any year.

         At the present time,  our largest  aggregate  shareholder,  the Cypress
Entities, owns collectively approximately 17.5% of our ordinary shares. In order
to lessen the risk that Scottish Re or any of its non-U.S. subsidiaries could be
characterized as a controlled foreign  corporation,  our articles of association
prohibit  the  ownership  by any person of shares that would equal or exceed 10%
(or in the case of the Cypress Entities that would exceed 24.9%) of any class of
the issued and  outstanding  Scottish Re shares and  provide a "voting  cutback"
that would,  in certain  circumstances,  reduce the voting power with respect to
Scottish Re shares to the extent  necessary to prevent the Cypress Entities from
owning more than 24.9% of the voting  power of Scottish Re, and any other person
owning more than 9.9% of the voting power of Scottish  Re. We believe,  although
not free from doubt,  based upon  information made available to us regarding our
existing  shareholder  base, that the dispersion of our share  ownership  (other
than with respect to the Cypress Entities) and the provisions of our articles of
association

                                       31
<PAGE>

restricting the transfer, issuance and voting power of our shares should prevent
any  person  (other  than  certain  potential  U.S.  affiliates  of the  Cypress
Entities) from becoming a U.S. 10% holder of Scottish Re; however,  we cannot be
certain  of this  belief  because  of  factual  uncertainties  and some of these
provisions have not been directly passed on by the IRS, or by any court, in this
context.

         If,  however,  one or more U.S.  persons owning  (directly,  indirectly
through  non-U.S.  entities or  constructively)  10% or more of our voting stock
were to acquire  separately  or in the aggregate 25% of the vote or value of the
stock of Scottish Re, our non-U.S.  insurance  subsidiaries  would be treated as
controlled  foreign  corporations.  In  addition,  Scottish  Re  and  its  other
(non-insurance)  non-U.S.  subsidiaries  would be  characterized  as  controlled
foreign  corporations if such U.S.  persons were to acquire more than 50% of the
vote or value of the stock of Scottish  Re. In either  case,  any such U.S.  10%
holder  would be  required  to include in gross  income  its  pro-rata  share of
subpart F income of Scottish Re and/or its non-U.S. subsidiaries.

         Related Person Insurance Income.  If (i) any of our non-U.S.  insurance
subsidiaries'  related person insurance income,  or RPII,  determined on a gross
basis were to equal or exceed 20% of its gross  insurance  income in any taxable
year, (ii) direct or indirect insureds and persons related to such insureds were
to own  directly  or  indirectly  20% or more of the  voting  power  or value of
Scottish Re's stock or any of our non-U.S.  insurance  subsidiaries'  stock, and
(iii) U.S.  persons  (without  regard to whether any U.S.  person is a U.S.  10%
holder) directly,  indirectly or constructively own collectively by voting power
or value 25% or more of our aggregate  shares  (taking into account the relative
vote and value of different  classes of shares),  such U.S. persons who directly
or  indirectly  own our  shares  on the last day of the  taxable  year  would be
required to include in its gross income for U.S.  federal  income tax  purposes,
the U.S. person's pro-rata share of our non-U.S.  insurance  subsidiaries'  RPII
for the portion of the taxable year during,  which any such  non-U.S.  insurance
subsidiary  was a  controlled  foreign  corporation  under  the RPII  provisions
determined as if such RPII were distributed  proportionately  to U.S. persons at
that date,  taking into  account any  differences  existing  with respect to the
distribution rights applicable to different classes of shares.

         Related person insurance income is generally  underwriting  premium and
related investment income attributable to insurance or reinsurance policies when
the direct or indirect insureds are direct or indirect U.S.  shareholders or are
related to such direct or indirect  U.S.  shareholders.  At present,  we believe
that our non-U.S.  insurance  subsidiaries should satisfy the 20% RPII ownership
exception  described  herein  because  the direct or indirect  ownership  of the
shares of  Scottish  Re or any of its  non-U.S.  insurance  subsidiaries  by any
shareholders  that are  direct or  indirect  insureds  of any of  Scottish  Re's
non-U.S.  insurance subsidiaries (or any person related to such insureds) should
be less  than 20% of the  voting  power or  value of  Scottish  Re or any of its
non-U.S.  insurance  subsidiaries.  Even if the  20%  RPII  ownership  exception
described  above is not met,  although  no  assurances  can be given,  we do not
believe that the 20% gross insurance income threshold has been met and we do not
expect  such  threshold  to be met in the future but we cannot be certain of the
preceding belief because certain of the preceding facts are beyond our control.

         If we are characterized as a controlled  foreign  corporation under the
RPII  provisions,  U.S. persons who directly or indirectly own our shares on the
last day of such  taxable  year would be required to include in its gross income
for U.S. federal income tax purposes,  the U.S.  person's  pro-rata share of the
relevant non-U.S.  insurance  subsidiaries'  RPII for the portion of the taxable
year  during  which any such  non-U.S.  insurance  subsidiary  was a  controlled
foreign  corporation  under the RPII provisions  determined as if such RPII were
distributed  proportionately  to such U.S.  person  at that  date,  taking  into
account  any  differences  existing  with  respect  to the  distribution  rights
applicable to different classes of shares.

         Dispositions  of Our Shares.  If we are  considered  to be a controlled
foreign corporation,  any gain from the sale or exchange of our shares by a U.S.
10% holder of our shares may be treated as ordinary  income to the extent of our
earnings and profits during the period that such  shareholder  held our ordinary
shares (with certain adjustments).

         If we are considered to have RPII and U.S.  persons  (without regard to
whether  any U.S.  person  is a U.S.  10%  holder)  collectively  own  directly,
indirectly  or  constructively  25% or more of the voting  power or value of our
aggregate  shares  (taking into account the relative vote and value of different
classes of shares), any gain from the disposition of our shares by a U.S. holder
will generally be treated as income to the extent of such U.S.  holder's portion
of our  undistributed  earnings  and profits  that were  accumulated  during the
period that the U.S.  holder owned the shares  (with  certain  adjustments).  In
addition,  such U.S.  holder will be required to comply with  certain  reporting
requirements,  regardless of the amount of shares owned  directly or indirectly.
However,  because  Scottish Re is not itself  directly  engaged in the insurance
business

                                       32
<PAGE>

and because  proposed U.S.  Treasury  regulations  applicable to this  situation
appear  to apply  only to sales of  shares  of  corporations  that are  directly
engaged in the  insurance  business,  we do not believe  that sale of our shares
should be subject to these rules. The IRS, however, could interpret the proposed
regulations,  or the proposed regulations could be promulgated in final form, in
a manner that would cause these rules to apply to  dispositions  of our ordinary
shares.

         Passive  Foreign  Investment  Company.  In order  to avoid  significant
potential  adverse U.S.  federal income tax consequences for any U.S. person who
owns our shares,  we cannot be  characterized  as a passive  foreign  investment
company,  or PFIC, in any year in which such U.S.  person is a  shareholder.  In
general,  a non-U.S.  corporation is a PFIC for a taxable year if 75% or more of
its  income  constitutes  passive  income or 50% or more of its  assets  produce
passive income. Passive income generally includes interest,  dividends and other
investment income.  Passive income does not, however,  include income derived in
the  active  conduct  of  an  insurance   business  by  a  corporation  that  is
predominantly  engaged in an insurance  business.  This exception is intended to
ensure that income  derived by a bona fide  insurance  company is not treated as
passive  income,  except to the extent such income is  attributable to financial
reserves in excess of the reasonable needs of the insurance  business.  Although
we believe that Scottish Re and its non-U.S. subsidiaries, taken as a whole, are
engaged  predominantly  in insurance  and  reinsurance  activities  that involve
significant  risk transfer and that are otherwise  activities of a type normally
undertaken  by insurance  or  reinsurance  companies,  and do not expect to have
financial  reserves  in  excess  of the  reasonable  needs  of  their  insurance
businesses,  it is possible  that the IRS could take the position  that we are a
PFIC.  Although  we do not believe  that we are or will be a PFIC,  the IRS or a
court could concur that we are a PFIC with respect to any given year.

If we are a controlled foreign  corporation or if any of our non-U.S.  insurance
subsidiaries  generate RPII, U.S.  tax-exempt  organizations that own our shares
may recognize unrelated business taxable income.

         A U.S. tax-exempt organization may recognize unrelated business taxable
income if a portion of our insurance income is allocated to the organization. In
general, insurance income will be allocated to a U.S. tax-exempt organization if
either we are a controlled foreign corporation and the tax-exempt shareholder is
a U.S. 10% holder or there is RPII and certain exceptions do not apply. Although
we do not believe that any U.S. persons should be allocated  subpart F insurance
income, potential U.S. tax-exempt investors are advised to consult their own tax
advisors.

Changes in U.S.  federal  income tax law could  materially  adversely  affect an
investment in our shares.

         Legislation  has been  introduced  in the  U.S.  Congress  intended  to
eliminate  certain  perceived tax advantages of companies  (including  insurance
companies) that have legal domiciles  outside the United States but have certain
U.S.  connections.  While there are no currently pending  legislative  proposals
which,  if  enacted,  would  have  a  material  adverse  effect  on  us  or  our
shareholders,  it is possible that  broader-based  legislative  proposals  could
emerge  in  the  future  that  could  have  an  adverse  impact  on  us,  or our
shareholders.

         Additionally,  the U.S.  federal  income  tax laws and  interpretations
regarding  whether a company is engaged in a trade or business within the United
States,  or is a PFIC,  or whether U.S.  persons would be required to include in
their  gross  income the  subpart F income or the RPII of a  controlled  foreign
corporation are subject to change,  possibly on a retroactive  basis.  There are
currently  no  regulations  regarding  the  application  of the  PFIC  rules  to
insurance  companies and the  regulations  regarding  RPII are still in proposed
form. New  regulations or  pronouncements  interpreting or clarifying such rules
may be  forthcoming.  We  cannot  be  certain  if,  when  or in what  form  such
regulations  or  pronouncements  may be provided and whether such  guidance will
have a retroactive effect.

Future  transactions  may  limit  our  ability  to use  our net  operating  loss
carryforwards.

         As  of  December  31,   2005,   we  had  actual  net   operating   loss
carryforwards,  or NOLs, of  approximately  $615.5  million.  $603.1  million is
attributable  to the U.S.  operations and $12.4 million is  attributable  to the
U.K.  operations.  The U.K. net  operating  loss has an  unlimited  carryforward
period.  The U.S. NOLs may be used to offset future  taxable  income and thereby
reduce our U.S. federal income taxes otherwise payable. Section 382 of the Code,
imposes  an annual  limit on the  ability of a  corporation  that  undergoes  an
"ownership  change" to use its NOLs to reduce its tax liability.  It is possible
that future  transactions  (including  issuances  of new shares and sales of our
shares),  would cause us to undergo an ownership change. In that event, we would
not be able to use our  pre-ownership-change  NOLs in excess  of the  limitation
imposed by Section 382.

                                       33
<PAGE>

If we do not receive further undertakings from the Cayman Islands, we may become
subject to taxes in the Cayman Islands in the future.

         Scottish Re and our Cayman  Islands  subsidiaries,  Scottish  Annuity &
Life Insurance  Company  (Cayman) Ltd. and The Scottish Annuity Company (Cayman)
Ltd.,  have received  undertakings  from the  Governor-in-Council  of the Cayman
Islands  pursuant to the provisions of the Tax Concessions Law, as amended (1999
Revision),  that until the year 2028 with  respect to Scottish  Re and  Scottish
Annuity & Life  Insurance  Company  (Cayman)  Ltd., and until the year 2024 with
respect to The Scottish  Annuity  Company  (Cayman)  Ltd.,  (1) no  subsequently
enacted  Cayman  Islands  law  imposing  any tax on  profits,  income,  gains or
appreciation shall apply to Scottish Re and its Cayman Islands  subsidiaries and
(2) no such tax and no tax in the nature of an estate duty or an inheritance tax
shall be payable on any shares,  debentures or other  obligations of Scottish Re
and its Cayman Islands subsidiaries. We could be subject to Cayman Islands taxes
after the applicable dates.

If Bermuda law changes, we may become subject to taxes in Bermuda in the future.

         Bermuda  currently  imposes no income tax on corporations.  The Bermuda
Minister of Finance,  under The Exempted Undertakings Tax Protection Act 1966 of
Bermuda, has assured us that if any legislation is enacted in Bermuda that would
impose tax computed on profits or income, or computed on any capital asset, gain
or  appreciation,  or any tax in the nature of estate duty or  inheritance  tax,
then the imposition of any such tax will not be applicable to Scottish Re or any
of our  Bermuda  subsidiaries  until March 28,  2016.  Scottish Re or any of our
Bermuda subsidiaries could be subject to Bermuda taxes after that date.

The impact of letters of commitment  from Bermuda and the Cayman  Islands to the
Organization for Economic  Cooperation and Development to eliminate  harmful tax
practices may impact us negatively.

         The Organization for Economic Cooperation and Development, or OECD, has
published  reports and launched a global  dialogue  among member and  non-member
countries  on measures to limit  harmful tax  competition.  These  measures  are
largely directed at counteracting the effects of tax havens and preferential tax
regimes in  countries  around the world.  In the OECD's  report  dated April 18,
2002,  and  updated  as of June 2004 and  November  2005 via a  "Global  Forum",
Bermuda  and the  Cayman  Islands  were not  listed as  uncooperative  tax haven
jurisdictions  because each had previously committed itself to eliminate harmful
tax practices  and to embrace  international  tax  standards  for  transparency,
exchange of  information  and the  elimination of any aspects of the regimes for
financial and other services that attract business with no substantial  domestic
activity. We are not able to predict what changes will arise from the commitment
or whether such changes will subject us to additional taxes.



  Item 1B: UNRESOLVED STAFF COMMENTS

None.

  Item 2:  PROPERTIES

         We  currently  lease  office  space  in  Hamilton,  Bermuda  where  our
executive  and principal  offices are located,  and in Dublin,  Ireland;  George
Town, Grand Cayman; Singapore; Denver, Colorado;  Charlotte, North Carolina; and
Windsor,  England.  Our life reinsurance  business  operates out of the Bermuda,
Grand Cayman, Charlotte,  Denver and Windsor offices while our wealth management
business operates out of the Grand Cayman office. The Bermuda,  Dublin and Grand
Cayman leases expire in 2006,  the Singapore  lease expires in 2008,  the Denver
lease  expires in 2010,  with an option to lease office space for an  additional
five year option,  the  Charlotte  lease  expires in 2016 and the Windsor  lease
expires in 2023.

  Item 3:  LEGAL PROCEEDINGS

         In the  normal  course of our  business,  we and our  subsidiaries  are
occasionally involved in litigation. The ultimate disposition of such litigation
is not expected to have a material  adverse  effect on our financial  condition,
liquidity or results of operations.

                                       34
<PAGE>

  Item 4:  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         We did not  submit any  matter to the vote of  shareholders  during the
fourth quarter of 2005.

                                       35
<PAGE>

PART II

  Item 5:  MARKET FOR  REGISTRANT'S  COMMON  EQUITY,  RELATED  SHAREHOLDER
           MATTERS  AND ISSUER  PURCHASES  OF EQUITY SECURITIES

Market for the Ordinary Shares

         Our ordinary shares, par value $0.01 per share, have been traded on the
New York Stock Exchange under the symbol "SCT" since January 23, 2002.  Prior to
our listing on the New York Stock  Exchange our ordinary  shares were listed and
traded on the NASDAQ  National Market under the symbol "SCOT" since November 24,
1998. This table shows for the indicated periods the high and low intraday sales
prices  per  share for our  ordinary  shares,  as  reported  in The Wall  Street
Journal, and dividend declared per share.

                                                                     Per Share
                                               High         Low       Dividend
                                               ----         ---       --------
Year ended December 31, 2003
First Quarter ............................  $   18.06    $   16.55    $   0.05
Second Quarter ...........................      20.68        17.00        0.05
Third Quarter ............................      24.43        19.85        0.05
Fourth Quarter ...........................      24.62        18.90        0.05
Year  ended December 31, 2004
First Quarter ............................  $   24.59    $   20.21    $   0.05
Second Quarter ...........................      24.40        20.50        0.05
Third Quarter ............................      23.79        19.59        0.05
Fourth Quarter ...........................      26.15        20.90        0.05
Year  ended December 31, 2005
First Quarter ............................  $   26.00    $   22.01    $   0.05
Second Quarter ...........................      24.48        21.68        0.05
Third Quarter ............................      26.02        23.13        0.05
Fourth Quarter ...........................      25.99        23.15        0.05
Period Ended March 9, 2006
January 1, 2006 to March 9, 2006..........  $   25.49    $   23.77    $      -


         As of March 9, 2006, we had 29 record holders of our ordinary shares.

         We  paid cash dividends of $0.20  per ordinary  share in each  of 2005,
2004 and 2003.

         The  declaration  and payment of future  dividends by us will be at the
discretion  of the  Board  of  Directors  and will  depend  upon  many  factors,
including our earnings, financial condition, business needs, capital and surplus
requirements  of our  operating  subsidiaries  and  regulatory  and  contractual
restrictions.

         As a holding  company,  our principal  source of income is dividends or
other statutorily permissible payments from its subsidiaries. The ability to pay
such dividends is limited by the applicable  laws and regulations of the various
countries that we operate in, including Bermuda, the United States,  Ireland and
the  U.K.  See  Item 7,  "Management's  Discussion  and  Analysis  of  Financial
Condition  and Results of  Operations"  and Item 8, Note 15 to the  Consolidated
Financial Statements for further discussion.

         Information  concerning securities authorized for issuance under equity
compensation plans appears in Part III, Item 12, "Security  Ownership of Certain
Beneficial Owners, Management and Related Stockholder Matters".

                                       36
<PAGE>


  Item 6:  SELECTED FINANCIAL DATA

         The following  selected  financial  data should be read in  conjunction
with the  Consolidated  Financial  Statements,  including the related Notes, and
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations".

      (Expressed in Thousands of United States Dollars, except share data)

<TABLE>
<CAPTION>
                                                     Year Ended     Year Ended      Year Ended      Year Ended     Year Ended
                                                    December 31,   December 31,    December 31,    December 31,   December 31,
                                                        2005           2004            2003            2002           2001
                                                    -----------    -----------     -----------     ----------      ----------
<S>                                                 <C>            <C>             <C>             <C>            <C>
Income Statement data:(1)
Total revenues .................................    $ 2,297,329    $   814,387     $  556,045      $  306,212     $ 120,962
Total benefits and expenses ....................      2,183,705        758,936        518,299         274,871       103,729
Income before income taxes and
  minority interest.............................        113,624         55,451         37,746          31,341        17,233
Income from continuing operations
  before cumulative effect of change
  in accounting principle.......................        130,197         71,599         48,789          33,235        17,245
Net income .....................................        130,197         71,391         27,281          32,524        16,839

Dividend declared on non-cumulative
  perpetual preferred shares ...................         (4,758)             -              -               -             -
                                                    -----------    -----------     -----------     ----------     ---------
Net income available to ordinary
  shareholders .................................    $   125,439    $    71,391     $   27,281      $   32,524     $  16,839
                                                    ===========    ===========     ==========      ==========     =========

Per share data:  (1)
   Basic earnings per share:
       Income from continuing
         operations before cumulative
         effect of change in accounting
         principle and discontinued
         operations (2).........................    $      2.86    $      2.00     $      1.59     $     1.32     $    1.10
       Cumulative effect of change in
         accounting principle...................              -              -           (0.64)             -         (0.02)
       Discontinued operations..................              -          (0.01)          (0.06)         (0.03)            -
                                                    -----------    -----------     -----------     ----------     ---------
       Net income available to
         ordinary shareholders.................     $      2.86    $      1.99     $      0.89     $     1.29     $    1.08
                                                    ===========    ===========     ===========     ==========     =========
</TABLE>


                                       37
<PAGE>

<TABLE>
<CAPTION>
                                                     Year Ended     Year Ended      Year Ended      Year Ended     Year Ended
                                                    December 31,   December 31,    December 31,    December 31,   December 31,
                                                        2005           2004            2003            2002           2001
                                                    ------------   ------------    ------------    ------------   ------------
<S>                                                 <C>            <C>             <C>             <C>            <C>
   Diluted earnings per share:
       Income from continuing
         operations before cumulative
         effect of change in accounting
         principle and discontinued
         operations(2)..........................    $       2.64   $       1.91    $       1.51    $       1.25   $       1.05
       Cumulative effect of change in
         accounting principle ..................               -              -           (0.60)              -          (0.03)
       Discontinued operations .................               -          (0.01)          (0.06)          (0.02)             -
                                                    ------------   ------------    ------------    ------------   ------------
       Net income available to
         ordinary shareholders..................    $       2.64   $       1.90    $       0.85    $       1.23   $       1.02
                                                    ============   ============    ============    ============   ============

   Book value per share(3)......................    $      21.48   $      21.60    $      18.73    $      18.24   $      16.44
   Market value per share ......................    $      24.55   $      25.90    $      20.78    $      17.45   $      19.35
   Cash dividends per ordinary share ...........    $       0.20   $       0.20    $       0.20    $       0.20   $       0.20
   Weighted average number of shares
     outstanding:
       Basic....................................      43,838,261     35,732,522      30,652,719      25,190,283     15,646,106
       Diluted..................................      47,531,116     37,508,292      32,228,001      26,505,612     16,485,338
Balance sheet data (at end of year): (1)
   Total fixed maturity investments ............    $  5,292,595   $  3,392,463    $  2,014,719    $  1,003,946   $    583,890
   Total assets ................................      12,006,120      8,952,237       6,053,517       3,291,226      2,141,566
   Long-term debt ..............................         244,500        244,500         162,500         132,500              -
   Total liabilities ...........................      10,582,046      7,937,417       5,242,450       2,800,134      1,810,284
   Minority interest ...........................           9,305          9,697           9,295               -              -
   Mezzanine equity ............................         143,057        142,449         141,928               -              -
   Total shareholders' equity ..................    $  1,271,712   $    862,674    $    659,844    $    491,092   $    331,282
Actual number of ordinary shares
outstanding ....................................      53,391,939     39,931,145      35,228,411      26,927,456     20,144,956
</TABLE>

--------------
(1)  Scottish Re  Holdings  Limited  was  acquired  on December  31, 2001 and is
included in balance sheet data for 2001-2005 and income statement data for years
2002-2005.

     Scottish Re Life  Corporation  was  acquired  on  December  22, 2003 and is
     included  in  balance  sheet  data and  income  statement  data  for  years
     2003-2005.  Consolidated  statement  of  income  data  for the  year  ended
     December  31,  2003  includes  net  income of $1.2  million  in  respect of
     Scottish Re Life Corporation.

     The ING individual life  reinsurance  business was acquired on December 31,
     2004 and is  included  in  balance  sheet  data for years 2004 and 2005 and
     income statement data for 2005.

(2)  Reflects  reduction  for  dividends  declared on  non-cumulative  perpetual
preferred shares.

(3) Book value per share is calculated as  shareholders'  equity  divided by the
number of ordinary shares outstanding.

                                       38
<PAGE>

  Item 7:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

         The following discussion highlights significant factors influencing our
consolidated financial position and our results of operations. It should be read
in  conjunction  with the  summary  of  selected  financial  data,  consolidated
financial  statements  and related notes found under Part II, Item 6 and Item 15
contained  herein.  In  addition,  you should read our  discussion  of "Critical
Accounting Policies" beginning on page 42 for an explanation of those accounting
estimates  that we believe are most  important to the portrayal of our financial
condition  and  results  of  operations  and that  require  our most  difficult,
subjective and complex judgments.


Overview

         We are a holding  company  incorporated  under  the laws of the  Cayman
Islands with our principal  executive  office in Bermuda.  We are a reinsurer of
life insurance,  annuities and annuity-type products. These products are written
by life insurance companies and other financial institutions located principally
in the  United  States.  We  refer  to  this  portion  of our  business  as Life
Reinsurance  North  America.  We also  specialize  in niche markets in developed
countries  and broader life  insurance  markets in the  developing  world.  More
recently,  we have become actively  engaged in the reinsurance of United Kingdom
and Ireland  traditional  solutions  business and annuity products.  We refer to
this portion of our business as Life Reinsurance International. Life Reinsurance
North America and Life Reinsurance  International are each a reporting operating
segment.  We directly issue  variable life insurance and variable  annuities and
similar  products to high net worth  individuals  and  families  for  insurance,
investment and estate  planning  purposes.  In prior years,  we referred to this
portion of our  business  as Wealth  Management,  which was  another  reportable
operating segment.  As this business is no longer a material  contributor to our
results and we are no longer actively marketing this business,  we have combined
it with the  Corporate  and  Other  Segment  for all  periods  presented.  Other
revenues  and  expenses  not  related to Life  Reinsurance  are  reported in the
Corporate and Other Segment.  The segments are consistent  with the way in which
we use financial  information to evaluate business  performance and to determine
the allocation of resources.  We measure segment  performance based on profit or
loss from operations before income taxes.

         On December 31, 2004, we completed the  acquisition  of the  individual
life  reinsurance  business of ING. We reinsured the liabilities of all of ING's
individual life reinsurance business through a 100% coinsurance transaction. ING
transferred to us assets of approximately $1.8 billion.  Certain of these assets
are  held  in  trust  to  secure  the  reserve   obligations  of  the  business.
Additionally, ING transferred to us certain operating assets associated with the
business. During 2005, we fully integrated the ING acquisition with our existing
U.S. traditional business and migrated our Charlotte based policy administration
operations to Denver.  We now administer our combined  business with an enhanced
version  of the ING  policy  administration  system,  known  as  SAGE.  With the
acquisition of the ING life reinsurance business, we have grown to be one of the
three largest life reinsurers serving the United States.

         On December  22,  2003,  we  completed  the  acquisition  of 95% of the
outstanding  capital  stock of ERC Life  Corporation  (renamed  Scottish Re Life
Reinsurance  Corporation),   for  $169.9  million  in  cash.  Scottish  Re  Life
Corporation's  business consists primarily of a closed block of traditional life
reinsurance.

         In 2005, we established  Scottish Re Capital Markets,  Inc., which is a
registered  broker  dealer,  formed to leverage the  experience and expertise we
have  gained  through  our own  efforts  to deal with  Regulation  XXX and other
reserve  requirements.  We believe  Scottish Re Capital Markets can successfully
assist our clients,  both large and small, to effectively and efficiently access
the capital markets to meet their reserving needs.


         The most  important  factors  we  monitor  to  evaluate  our  financial
condition and performance include:

          o    Operations:  premiums, changes in the number of treaties and life
               insurance  in force,  investment  results,  claim  frequency  and
               severity  trends,  claims and benefit ratio and  acquisition  and
               expense ratios and operating earnings per share;

                                       39
<PAGE>

          o    Investments:  credit  quality/experience,  stability of long-term
               returns, cash flows and asset and liability duration; and

          o    Financial  condition:  our financial strength ratings,  financial
               leverage and growth in return on equity and book value per share.

2005 Highlights

          o    Net income was $130.2  million in 2005  compared to $71.4 million
               in 2004.  Net  income  available  to  ordinary  shareholders  per
               diluted  share was $2.64 in 2005  compared  to $1.90 in 2004,  an
               increase of 39%;

          o    Total revenues reached a record $2.3 billion, an increase of 182%
               compared to last year;

          o    On January 12, 2005,  we  completed a private  offering of $325.0
               million   Collateral   Facility   Securities   through   Stingray
               Pass-Through  Trust.  This transaction  allows us to use eligible
               assets as  collateral  in our  reinsurance  business  and it will
               guarantee  our ability and  capacity to issue  $325.0  million of
               funding  agreements in the future,  without any capital market or
               execution risk at the time of issuance;

          o    On February 11, 2005,  we completed our first  securitization  of
               excess  reserves  arising from Regulation XXX through an offering
               by Orkney  Holdings,  LLC of $850.0 million  aggregate  principal
               amount of 30-year maturity securities;

          o    In July  2005,  we  completed  a  public  offering  of  5,000,000
               non-cumulative  perpetual  preferred  shares with net proceeds of
               $120.4 million;

          o    During  the  fourth  quarter  of  2005,  we fully  completed  the
               integration  of the ING  acquisition  with  our  existing  United
               States  traditional  business and migrated  our  Charlotte  based
               policy administration operations to Denver;

          o    On December 21, 2005, we completed our second  securitization  of
               excess  reserves  arising from Regulation XXX through an offering
               by an  orphaned  Irish  special  purpose  reinsurance  company of
               $450.0 million  aggregate  principal  amount of 30-year  maturity
               securities;

          o    In December  2005,  we  completed a public  offering of 7,660,000
               ordinary  shares  (which  included  an over  allotment  option of
               1,410,000  shares) in which we raised  aggregate  net proceeds of
               $174.1 million. In connection with the offering,  we entered into
               variable  share  forward  sales  agreements  whereby  the forward
               purchasers  agree to pay us an aggregate of  approximately  $75.0
               million on September  29, 2006 and an aggregate of  approximately
               $75.0 million on December 29, 2006; and

          o    In December  2005,  we completed two  transactions  that together
               provided   approximately  $2.0  billion  in  collateral  to  fund
               Regulation  XXX  reserve   requirements   that  were  assumed  in
               connection  with  the   acquisition  of  ING's   individual  life
               reinsurance business.

Revenues, expenses and other factors affecting profitability

Revenues

         We derive revenue  primarily from premiums from reinsurance  assumed on
life  business  from  existing  treaties  and  from  premiums  on new  treaties;
investment income;  realized gains and losses from our investment  portfolio and
fees from our financial solutions and wealth management businesses.

         Our primary  business is life  reinsurance,  which involves  reinsuring
life insurance  policies,  with premiums earned typically over a period of 10 to
30 years. Each year,  however, a portion of the business under existing treaties

                                       40
<PAGE>

terminates  due to,  among other  things,  lapses or  surrenders  of  underlying
policies,  deaths of  policyholders  and the  exercise of  recapture  options by
ceding companies.

         Premiums  from  reinsurance  assumed on life  business  are included in
revenues over the premium  paying  period of the  underlying  policies.  When we
acquire  blocks of  in-force  business,  we account  for these  transactions  as
purchases,  and our  results of  operations  include  the net income  from these
blocks as of their  respective  dates of  acquisition.  Reinsurance  assumed  on
annuity  business  does not generate  premium  income but  generates  investment
income over time on the assets we receive from the ceding company.  We also earn
revenues on funding  agreements.  A deposit received on a funding agreement also
does not generate premium income but does create income to the extent we earn an
investment return in excess of our interest payment obligations thereon.

         Our  investment  income  includes  interest  earned on our fixed income
investments   and  income  from  funds   withheld  at  interest  under  modified
coinsurance  agreements or coinsurance  funds withheld  agreements.  Under GAAP,
because our fixed  income  investments  are held as  available  for sale,  these
securities are carried at fair value,  and unrealized  appreciation/depreciation
on these  securities is not included in investment  income on our  statements of
income,  but is  included in  comprehensive  income as a separate  component  of
shareholders'  equity.  Realized  gains and losses  include  gains and losses on
investment  securities  that we sell during a period,  write downs of securities
deemed to be other than temporarily impaired and foreign currency exchange gains
and losses.

Expenses

         We have six  principal  types of expenses:  claims and policy  benefits
under  our  reinsurance  contracts;  interest  credited  to  interest  sensitive
contract liabilities;  acquisition costs and other insurance expenses; operating
expenses; collateral finance facilities expense; and interest expense.

         When we issue a life reinsurance  contract,  we establish  reserves for
claims and future policy  benefits.  These reserves are our estimates of what we
expect to pay in claims and  policy  benefits  and  related  expenses  under the
contract  or  policy.  From time to time,  we may  change  the  reserves  if our
experience  leads us to believe that benefit claims and expenses will ultimately
be greater than the existing reserve.  We report the change in these reserves as
an  expense  during  the  period  when the  reserve  or  additional  reserve  is
established.

         In connection with reinsurance of annuity and annuity-type products, we
record a liability for interest sensitive contract liabilities, which represents
the amount  ultimately  due to the  policyholder.  We credit  interest  to these
contracts each period at the rates  determined in the underlying  contract,  and
the amount is  reported as interest  credited  to  interest  sensitive  contract
liabilities on our consolidated statements of income.

         A portion of the costs of acquiring new business,  such as commissions,
certain  internal  expenses  related to our  policy  issuance  and  underwriting
departments and other variable selling  expenses are capitalized.  The resulting
deferred  acquisition  costs asset is amortized over future periods based on our
expectations  as to the  emergence of future gross  profits from the  underlying
contracts. These costs are dependent on the structure, size and type of business
written.  For certain products,  we may retrospectively  adjust our amortization
when we revise our estimate of current or future  gross  profits to be realized.
The effects of this  adjustment are reflected in earnings in the period in which
we revise our estimate. Acquisition costs also include letter of credit costs.

         Operating expenses consist of salary and salary related expenses, legal
and  professional  fees,  rent and office  expenses,  travel  and  entertainment
expenses,  directors' expenses,  insurance and other similar expenses, except to
the extent capitalized in deferred acquisition costs.

         Collateral  finance  facilities  expense includes costs incurred on our
Regulation XXX funding arrangements and other collateral finance facilities. See
Note 8 to the Consolidated Financial Statements for additional information.

         Interest expense consists of interest charges on our long-term debt and
HyCU instruments.

                                       41
<PAGE>

Other factors affecting profitability

         We seek to generate profits from two principal  sources.  First, in our
Life Reinsurance business, we seek to receive reinsurance premiums and financial
reinsurance  fees that,  together  with  income  from the assets in which  those
premiums are invested, exceed the amounts we ultimately pay as claims and policy
benefits,   acquisition  costs  and  ceding  commissions.   Second,  within  our
investment  guidelines,  we seek  to  maximize  the  return  on our  unallocated
capital.

         The following factors affect our profitability:

         o     the volume of business we write;

         o     volume and amount of death claims  incurred;  o our ability to
               assess and price adequately for the risks we assume;

         o     the mix of  different  types  of  business  that we  reinsure,
               because profits on some lines of business emerge later than on
               other lines;

         o     our  ability to manage our  assets and  liabilities  to manage
               investment and liquidity risk; and

         o     our ability to control expenses.

         In  addition,  our profits can be affected by a number of factors  that
are not within our control. For example,  movements in interest rates can affect
the volume of business that we write,  the income  earned from our  investments,
the interest we credit on interest sensitive  contracts,  the level of surrender
activity  on  contracts  that we  reinsure  and the rate at  which  we  amortize
deferred acquisition costs. Other external factors that can affect profitability
include  mortality  experience  that  varies  from  our  assumed  mortality.  In
addition,  while death claims are reasonably  predictable  over a period of many
years claims  become less  predictable  over shorter  periods and are subject to
significant  fluctuation from quarter to quarter and year to year. Other factors
include changes in regulation or tax laws which may affect the attractiveness of
our  products or the costs of doing  business  and  changes in foreign  currency
exchange rates.

Critical Accounting Policies

         Given the nature of our business,  our accounting  policies require the
use of judgments relating to a variety of assumptions and estimates.  Because of
the inherent  uncertainty  in the  assumptions  and estimates  underlying  these
accounting  policies  under  different  conditions or  assumptions,  the amounts
reported  in  our  financial  statements  could  be  materially  different.  Our
accounting  policies  are  described  in  Note 2 to the  Consolidated  Financial
Statements.  We  believe  our most  critical  accounting  policies  include  the
establishment of reserves for future policy  benefits,  the  capitalization  and
amortization of deferred  acquisition  costs,  the valuation of present value of
in-force  business,  the valuation of investment  impairments,  the valuation of
embedded derivatives,  estimates of premiums,  the valuation of tax balances and
the  determination  of  whether  we are the  primary  beneficiary  of a variable
interest entity.

         Statement of Financial  Accounting Standard ("SFAS") No. 60 "Accounting
and Reporting by Insurance Enterprises" applies to our traditional life policies
with  continuing  premiums.  For these  policies,  reserves  for  future  policy
benefits  are  computed  based  upon  expected  mortality  rates,  lapse  rates,
investment yields,  expenses and other assumptions  established at policy issue,
including a margin for adverse deviation.  Once these assumptions are made for a
given treaty or group of treaties, they will not be changed over the life of the
treaty.  We  periodically  review  actual  historical  experience  and  relative
anticipated  experience  compared to the assumptions used to establish  reserves
for future policy benefits. Further, we determine whether actual and anticipated
experience  indicates that existing  policy  reserves  together with the present
value of future gross  premiums  are  sufficient  to cover the present  value of
future  benefits,  settlement and maintenance  costs and to recover  unamortized
acquisition costs.  Significant changes in experience or assumptions may require
us to  provide  for  expected  losses  on a group of  treaties  by  establishing
additional net reserves.  Because of the many  assumptions and estimates used in
establishing reserves

                                       42
<PAGE>

and the long-term nature of the reinsurance  contracts,  the reserving  process,
while based on actuarial science, is inherently uncertain.

         We primarily  rely on our own valuation and  administration  systems to
establish  reserves for future policy  benefits.  The reserves for future policy
benefits may differ from those established by ceding companies due to the use of
different assumptions,  based principally on actual and anticipated  experience,
including  industry  experience and standards.  We rely on our ceding companies,
however,  to provide  accurate  policy level data,  including face amount,  age,
duration and other  characteristics  as well as underlying  premiums and claims.
This data  constitutes the primary  information  used to establish  reserves for
essentially  all  of  our  future  policy  benefits.   The  use  of  reinsurance
intermediaries in our transactions with ceding companies has been infrequent. In
the few instances in which intermediaries are involved, we receive data from the
intermediary in a similar timeframe and fashion as if received directly from the
ceding company.

         Claims  payable for  incurred but not  reported  losses are  determined
using case basis estimates and lag studies of past experience. The time lag from
the date of the claim or death to when the ceding  company  reports the claim to
us can vary  significantly  by ceding company,  but generally  averages around 2
months.  We update our analysis of incurred but not reported  losses,  including
lag studies, on a quarterly basis and adjust our claim liabilities  accordingly.
The adjustments in a given period have generally not been  significant  relative
to the overall reserves for future policy benefits or our results of operations.

         In the  underwriting  process,  we perform  procedures  to evaluate the
ceding company's process for compiling and reporting data. After entering into a
reinsurance  contract,  we work closely with our ceding companies to help ensure
information  submitted by them is in accordance with the underlying  reinsurance
contracts.  Additionally,  we have a  dedicated  compliance  team that  performs
extensive audits,  including on-site audits and desk reviews, of the information
provided by ceding companies. In addition to ceding company audits, we routinely
perform  analysis,  at a treaty level,  to compare the actual  results of ceding
companies  against initial pricing and expected results.  Generally,  there have
been few disputes or  disagreements  with ceding companies and most are resolved
through normal administration procedures.

         Occasionally,  we experience processing backlogs and establish reserves
for  processing  backlogs  with a goal of  clearing  all  backlogs as quickly as
possible. There were no significant processing backlogs at December 31, 2005.

         SFAS No. 97  "Accounting  and  Reporting by Insurance  Enterprises  for
Certain Long-Duration  Contracts and for Realized Gains and Losses from the Sale
of Investments" applies to investment contracts,  limited premium contracts, and
universal life-type contracts. For investment and universal life-type contracts,
future benefit  liabilities  are held using the  retrospective  deposit  method,
increased  for  amounts  representing  unearned  revenue  or  refundable  policy
charges.  Acquisition costs are deferred and recognized as expense as a constant
percentage of gross margins using assumptions as to mortality,  persistency, and
expense  established at policy issue without provision for adverse deviation and
are revised  periodically to reflect emerging actual experience and any material
changes  in  expected  future  experience.   Liabilities  and  the  deferral  of
acquisition  costs are established  for limited premium  policies under the same
practices as used for  traditional  life policies  with the  exception  that any
gross  premium in excess of the net  premium is  deferred  and  recognized  into
income as a constant  percentage of insurance in force.  Should the  liabilities
for future  policy  benefits  plus the present  value of expected  future  gross
premiums for a product be  insufficient  to provide for expected future benefits
and expenses for that product,  deferred  acquisition  costs will be written off
and thereafter, if required, a premium deficiency reserve will be established by
a charge to  income.  Changes in the  assumptions  for  mortality,  persistency,
maintenance  expense  and  interest  could  result in  material  changes  to the
financial statements.

         Reinsurance   premiums  from  traditional  life  policies  and  annuity
policies with life  contingencies  are generally  recognized as revenue when due
from policyholders and are reported net of amounts retroceded.  Traditional life
policies  include  those  contracts  with  fixed  and  guaranteed  premiums  and
benefits, and consist principally of whole life and term insurance policies. For
our traditional  life reinsurance  business,  we estimate assumed premiums using
actuarial model  projections at the treaty level.  Consistent  with  reinsurance
industry practices, these models use the most recent policy level data available
from our ceding  companies  and our estimate of new business for treaties  still
open to new business.  The estimated  premiums from the models are then compared

                                       43
<PAGE>

to  historical   trends  in  reported  assumed  premiums  by  treaty  and  other
information and adjusted if appropriate.  Actual results could differ from these
estimates. The adjustments in a given period have generally not been significant
to the overall premiums or results of operations.

         Based  on  historical   experience,   the  creditworthiness  of  ceding
companies and our  contractual  right of offset,  uncollectible  assumed premium
amounts  have been  infrequent  and not  material.  Any  provision  for doubtful
accounts would be recorded on a specific case-by-case basis.

         The  development  of  policy  reserves  and  amortization  of  deferred
acquisition  costs for our products  requires  management to make  estimates and
assumptions regarding mortality,  lapse, expense and investment experience. Such
estimates are primarily based on historical  experience and information provided
by  ceding  companies.   Actual  results  could  differ  materially  from  those
estimates.  Management  monitors  actual  experience,  and should  circumstances
warrant, will revise its assumptions and the related reserve estimates.

         Present value of in-force  business is established upon the acquisition
of a subsidiary  and is amortized  over the expected life of the business at the
time of acquisition.  The amortization each year will be a function of the gross
profits or revenues each year in relation to the total gross profits or revenues
expected  over the life of the  business,  discounted  at the assumed net credit
rate. The  determination  of the initial value and the  subsequent  amortization
require  management  to make  estimates  and  assumptions  regarding  the future
business results that could differ materially from actual results. Estimates and
assumptions  involved in the present value of in-force  business and  subsequent
amortization are similar to those necessary in the establishment of reserves and
amortization of deferred acquisition costs.

         Our primary  investments  are in fixed maturity  securities,  including
corporate and government bonds, asset and  mortgage-backed  securities.  All our
fixed  maturity and  preferred  stock are  classified as  available-for-sale  as
defined in SFAS No. 115,  "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS No. 115").  Available-for-sale securities are carried at fair
value with the difference from amortized cost included in  shareholders'  equity
as a component of accumulated other comprehensive  income. The difference is net
of related deferred  acquisition costs and taxes. Fair values for fixed maturity
securities  are  based on  quoted  market  prices,  where  available.  For fixed
maturity  securities  that are not actively  traded,  fair values are  estimated
using values obtained from independent pricing services.

         Determining  whether a decline in current  fair  values is other than a
temporary decline in value for securities classified as  available-for-sale  can
frequently  involve a variety of  assumptions  and estimates,  particularly  for
investments that are not actively traded on established  markets.  For instance,
assessing the value of some investments  requires an analysis of expected future
cash flows.

         Management reviews securities with material unrealized losses and tests
for other than temporary  impairments on a quarterly basis.  Factors involved in
the  determination  of  potential  impairment  include fair value as compared to
cost,  length of time the value has been below cost,  credit  worthiness  of the
issuer, forecasted financial performance of the issuer, position of the security
in  the  issuer's  capital  structure,  the  presence  and  estimated  value  of
collateral  or other credit  enhancement,  length of time to maturity,  interest
rates and our intent and  ability to hold the  security  until the market  value
recovers.  When a decline is  considered to be  "other-than-temporary"  the cost
basis of the  impaired  asset is adjusted to its fair value and a  corresponding
realized investment loss is recognized in the consolidated statements of income.
The actual value at which such financial  instruments  could actually be sold or
settled with a willing buyer may differ from such estimated fair values.

         As the discussion  above indicates,  there are risks and  uncertainties
associated with  determining  whether  declines in the fair value of investments
are  other-than-temporary.  These  include  subsequent  significant  changes  in
general overall economic  conditions,  as well as specific  business  conditions
affecting  particular issuers,  future financial market effects such as interest
rate spreads, future rating agency actions and significant accounting,  fraud or
corporate  governance issues that may adversely affect certain  investments.  In
addition,  there are often significant  estimates and assumptions that we use to
estimate the fair values of securities, including projections of expected

                                       44
<PAGE>

future  cash flows and pricing of private  securities.  We  continually  monitor
developments and update  underlying  assumptions and financial models based upon
new information.

         See  "Accounting   Pronouncements   FSP  FAS  115-1,  "The  Meaning  of
Other-Than-Temporary  Impairment and Its Application to Certain Investments" for
a discussion of potential  changes to the requirements for  other-than-temporary
impairments in Note 2 to the Consolidated Financial Statements.

         Our funds withheld at interest arise on modified  coinsurance and funds
withheld coinsurance  transactions.  Derivatives  Implementation Group Issue No.
B36 "Embedded  Derivatives:  Bifurcation of a Debt Instrument that  Incorporates
Both  Interest  Rate and Credit Rate Risk  Exposures  that are Unrelated or Only
Partially  Related to the  Creditworthiness  of the  Issuer of that  Instrument"
("DIG B36") indicates that these transactions contain embedded derivatives.  The
embedded  derivative  feature  in our funds  withheld  treaties  is similar to a
fixed-rate  total  return swap on the assets held by the ceding  companies.  The
swap  consists  of two parts.  The first is the market  value of the  underlying
asset portfolio and the second is a hypothetical loan to the ceding company. The
hypothetical  loan  is  based  on the  expected  cash  flows  of the  underlying
reinsurance liability.  We have developed models to systematically  estimate the
value of the total return swap.  The fair value of the  embedded  derivative  is
affected by changes in expected  cash  flows,  credit  spreads of the assets and
changes in "risk-free"  interest rates.  The change in fair value is included in
our  calculation  of estimated  gross profits and,  therefore,  also affects the
amortization  of  deferred  acquisition  costs.  In  addition to our quota share
indemnity  funds  withheld  contracts,  we have entered  into various  financial
reinsurance  treaties that, although considered funds withheld,  do not transfer
significant  insurance  risk and are recorded on a deposit method of accounting.
As a result of the experience  refund  provisions of these treaties the value of
the embedded  derivative  is  currently  considered  immaterial.  Changes in our
expectations  of future  cash  flows  could  result in  material  changes to the
financial statements.

         We utilize  the asset and  liability  method of  accounting  for income
taxes.  Under this method,  deferred  income taxes reflect the net tax effect of
temporary differences between the carrying amounts of assets and liabilities for
financial  reporting  purposes and the amounts used for income tax purposes.  At
December 31, 2005, we have net operating  tax losses of $615.5  million  against
which a valuation allowance of $18.5 million has been established.  The deferral
of benefits from tax losses is evaluated  based upon  management's  estimates of
the future  profitability of our taxable entities based on current forecasts and
the period for which losses may be carried  forward.  A valuation  allowance may
have to be established  for any portion of a deferred tax asset that  management
believes will not be realized.  Should the future income of these  entities fall
below expectations,  a further valuation allowance would have to be established,
which could be significant.

         In December 2003, the FASB revised FASB  Interpretation No. 46 and 46R,
"Consolidation of Variable Interest Entities" ("FIN 46" and "FIN 46R") which was
originally  issued in January 2003. FIN 46R addresses  whether  certain types of
entities,  referred  to  as  variable  interest  entities  ("VIEs"),  should  be
consolidated in a company's financial  statements.  A company must consolidate a
VIE in which it has an ownership,  contractual or other financial interest if it
is  determined  to be the  primary  beneficiary.  A  primary  beneficiary  has a
variable  interest  that will absorb a majority of the  expected  losses if they
occur,  receive a majority of the entity's expected returns, or both. We are the
primary beneficiary of the collateral finance facilities  discussed in Note 8 to
the Consolidated  Financial Statements,  except for the Stingray Investor Trust,
and have consolidated the variable interest entities in accordance with FIN 46R.
The Stingray Investor Trust,  discussed in Note 8 to the Consolidated  Financial
Statements,  is a variable  interest  entity but we are not considered to be the
primary beneficiary of the Investor Trust.  Accordingly,  it is not consolidated
in accordance with FIN 46R.

Consolidated results of operations

         Our results of  operations  for the years ended  December  31, 2003 and
2004 do not include the results of the  acquisition of the ING  individual  life
reinsurance business,  which was completed on December 31, 2004. The results for
the year ended  December  31, 2003 include net income of $1.2 million in respect
of the results of Scottish Re Life  Corporation for the period from December 22,
2003 to December  31,  2003.  All amounts are  reported in  thousands  of United
States dollars, except per share amounts.

                                       45
<PAGE>

<TABLE>
<CAPTION>
                                                           Year Ended       Year Ended          Year Ended
                                                          December 31,     December 31,        December 31,
                                                              2005             2004                2003
                                                          ------------     -------------       ------------
<S>                                                       <C>               <C>                <C>
Premiums earned, net..................................    $1,933,930        $  589,445         $  390,654
Investment income, net................................       355,837           217,138            148,028
Fee income............................................        12,316            11,547              7,907
Net realized gains (losses)...........................         3,738            (8,304)            (4,448)
Change in value of embedded derivatives, net..........        (8,492)            4,561             13,904
                                                          ----------        ----------         ----------
Total revenues........................................     2,297,329           814,387            556,045
                                                          ----------        ----------         ----------
Claims and other policy benefits......................     1,442,505           425,965            275,887
Interest credited to interest sensitive
   contract liabilities...............................       132,968           106,525             89,156
Acquisition costs and other insurance expenses, net...       423,775           151,405            114,678
Operating expenses....................................       115,573            54,658             31,021
Due diligence costs...................................             -             4,643                  -
Collateral finance facilities expense.................        48,146             2,724                  -
Interest expense......................................        20,738            13,016              7,557
                                                          ----------        ----------         ----------
Total benefits and expenses...........................     2,183,705           758,936            518,299
                                                          ----------        ----------         ----------
Income before income taxes and minority interest......       113,624            55,451             37,746
Income tax benefit  ..................................        16,434            16,679             11,105
                                                          ----------        ----------         ----------
Income from continuing operations before minority
   interest...........................................       130,058            72,130             48,851
Minority interest.....................................           139              (531)               (62)
                                                          ----------        ----------         ----------
Income before cumulative effect of change in
  accounting principle and discontinued operations....       130,197            71,599             48,789
Cumulative effect of change in accounting principle...             -                 -            (19,537)
Loss from discontinued operations.....................             -              (208)            (1,971)
                                                          ----------        ----------         ----------
Net income............................................       130,197            71,391             27,281
Dividend declared on non-cumulative perpetual
   preferred shares...................................        (4,758)                -                  -
                                                          ----------        ----------         ----------
Net income available to ordinary shareholders.........    $  125,439        $   71,391         $   27,281
                                                          ==========        ==========         ==========
</TABLE>

Comparison of 2005 to 2004

Revenues

         Total  revenues  increased by 182% in 2005 to $2.3 billion  compared to
2004. The increase in premiums earned is primarily due to the acquisition of the
ING business on December 31, 2004 and growth in the  traditional  solutions line
of business in our Life Reinsurance  North America  Segment.  The key drivers of
the 2005  increase in investment  income were the growth in our invested  assets
which  arises from  business  growth and the ING  acquisition,  net  proceeds of
$120.4 million from our offering of 5,000,000 non-cumulative perpetual preferred
shares in July 2005 and investment income earned on the invested assets from our
Regulation XXX initiatives completed during the year.

         When  analyzing the impact of net  investment  income on the results of
the  segment,  it is important to  understand  that a portion of the  investment
income earned is credited to the  policyholders  of our fixed annuity  products.
The interest  credited to policyholders  is included in the segment's  expenses.
Annuity  product  interest  rate  margins  represent  the excess of the yield on
earning assets over the average crediting rate.

         Net  realized  gains  were  $12.0  million  higher in 2005  than  2004.
Improvements  in the credit  markets in 2005  resulted  in less write  downs for
other than temporary impairments of available for sale securities - $2.4 million
in 2005 as compared  to $9.9  million in 2004.  We also  realized a gain of $2.2
million in 2005  compared to a loss of $2.2 million for the same period in 2004,
resulting from the mark to market of an interest rate swap.  This derivative


                                       46
<PAGE>

has not been designated as a hedge and,  accordingly,  changes in fair value are
recorded in the determination of net income.

         The  change  in  value  of the  embedded  derivatives  arises  from the
application of DIG B36.  During the year ended December 31, 2003, we implemented
the requirements of DIG B36 which addresses whether SFAS No. 133 "Accounting for
Derivative  Instruments and Hedging Activities"  requires  bifurcation of a debt
instrument  into a debt host  contract  and an embedded  derivative  if the debt
instrument  incorporates  both interest rate risk and credit risk exposures that
are unrelated or only partially related to the creditworthiness of the issuer of
that  instrument.  Under DIG B36  modified  coinsurance  and  coinsurance  funds
withheld  reinsurance  agreements where interest is determined by reference to a
pool of fixed maturity assets, are arrangements  containing embedded derivatives
requiring bifurcation. In addition, reinsurance contacts with experience refunds
are also considered to be arrangements containing embedded derivatives requiring
bifurcation.  DIG B36 was effective  for fiscal  quarters  beginning  October 1,
2003. The change in the value of embedded derivatives decreased revenues by $8.5
million in 2005 compared to an increase of $4.6 million in 2004.  This change in
value  arose  principally  because of the  asset/liability  mismatch on modified
coinsurance contracts assumed in the ING acquisition, coupled with a decrease in
risk free interest rates and widening of credit spreads.


         Expenses

         Total benefits and expenses in 2005 increased significantly compared to
2004 from $759.0 million to $2.2 billion or an increase of 188%. The increase in
claims  and  policy  benefits,  acquisition  costs and  operating  expenses  was
primarily  due to the  acquisition  of the ING business on December 31, 2004 and
continued  growth  in our Life  Reinsurance  North  America  Segment.  Growth in
interest  credited  reflects an increase in account balances and crediting rates
on these  balances.  Additional  operating costs in 2005 resulted from increased
resources to support the growth in our  business and $7.0 million of  additional
costs  necessary to meet the  requirements  of the  Sarbanes-Oxley  Act of 2002.
Collateral  finance  facilities  expense in 2005 is  impacted  by the  increased
Regulation  XXX  financing  transactions  completed  during  the year.  Interest
expense  increased  in 2005  due to full  year of  interest  on the  2004  trust
preferred offerings,  interest on the Cypress Notes and increases in LIBOR rates
during 2005.

         When  analyzing  the impact of  collateral  finance  facilities  on the
consolidated  results, it is important to understand that this expense is offset
by the  investment  income  earned on the fixed  maturity  investments  from the
collateral finance facility  transactions.  The net margin represents the excess
of the yield on earning assets over the interest rate costs  associated with the
collateral finance facility.

         Our  effective  tax rate in each  reporting  period  is  determined  by
dividing the net tax benefit (expense) by our pre-tax income or loss. The change
in our effective tax rate is due primarily to the amount in any reporting period
of pre-tax earnings  attributable to different  subsidiaries (which changes from
time to time),  each of which may have  different  tax rates.  The change in our
effective tax rate is due  primarily to the  relationship  of pre-tax  income or
losses in different  jurisdictions.  See Note 13 of the  Consolidated  Financial
Statements for additional details.

         Included in the 2005 tax benefit is a $2.5 million expense related to a
write-off of a deferred tax asset related to state income taxes. The 2005 income
tax benefit is in respect of certain of our U.S.  taxable  entities and our U.K.
entities,  offset by income tax  expenses  arising on our Irish entity and other
U.S. entities.  At December 31, 2005, we believe that it is more likely than not
that all gross  deferred  tax assets will reduce  taxes  payable in future years
except for a valuation allowance of $18.5 million.

         Net income  increased by 82%, or $58.8 million in 2005 compared to 2004
due to the reasons outlined above.

Comparison of 2004 to 2003

Revenues

         Total revenues  increased by 46% in 2004 compared to 2003. The increase
in premiums earned is primarily due to the impact of the acquisition of Scottish
Re Life Corporation on December 22, 2003 and growth in the

                                       47
<PAGE>

traditional  solutions  line of business in our Life  Reinsurance  North America
Segment.  The  increase  in fee  income  in 2004  arises  principally  from  our
acquisition of Scottish Re Life Corporation. The primary drivers of the increase
in  investment  income  in 2004 are the  impact of the  growth  in our  invested
assets,  which arises from business growth and acquisition,  net proceeds on our
offering  of  ordinary  shares in July  2003,  our HyCU  offering  in the fourth
quarter of 2003 and trust preferred debt offerings in the fourth quarter of 2003
and the second quarter of 2004.

         During 2004,  realized  losses  amounted to $8.3 million in  comparison
with realized  losses of $4.4 million in 2003.  Included in 2004 realized losses
is $2.2 million  resulting  from the mark to market of an interest rate swap not
designated  as a hedge  which was  entered  into in  relation  to certain of our
investment assets not supporting reinsurance liabilities. In 2004, we recognized
losses of $9.9 million in respect of impairments on the portfolio  controlled by
us compared to $6.3 million in 2003.

         DIG B36 was effective for fiscal quarters beginning October 1, 2003. We
reviewed all contracts at October 1, 2003 and determined  that the value of this
derivative, net of related deferred acquisition costs, after taxation was a loss
of $19.5 million.  This is shown in the  consolidated  statements of income as a
cumulative  effect of change in  accounting  principle  for 2003.  The change in
value of the derivative,  net of related deferred  amortization  costs, for 2004
amounted to a gain of $4.6 million.  In the quarter ended December 31, 2003, the
change in value of this  derivative  amounted  to a gain of $13.9  million.  The
change in value is primarily  due to movements in risk free  interest  rates and
exposure to changing credit spreads.

Expenses

         Total benefits and expenses  increased by 46% to $758.9 million in 2004
from $518.3 million in 2003. The increase was due to the acquisition of Scottish
Re Life  Corporation,  continued  growth in our Life  Reinsurance  North America
Segment, additional operating costs required to meet the growth in our business,
additional   operating  costs   necessary  to  meet  the   requirements  of  the
Sarbanes-Oxley  Act of 2002,  costs  relating to due  diligence  activities  and
additional  interest  expense arising from the HyCU offering and trust preferred
debt offerings in the fourth quarter of 2003 and the second quarter of 2004.

         During 2003, we decided to discontinue our Wealth Management operations
in Luxembourg.  We have transferred our Luxembourg Wealth Management business to
third  parties,  closed  the  Luxembourg  office  and  are  in  the  process  of
liquidating  our  Luxembourg  subsidiary.  We have  reported  the results of the
Luxembourg  wealth  management  activities as  discontinued  operations.  Losses
incurred  in  respect  of these  operations  in 2004 and 2003  amounted  to $0.2
million and $2.0 million, respectively.

         The 2004  income  tax  benefit  is in  respect  of  certain of our U.S.
taxable entities and our U.K. and Irish entities,  offset by income tax expenses
arising on our other U.S.  entities.  Included in the 2004 income tax benefit is
$1.7  million in respect of U.S.  state taxes and $10.0  million  arising in our
Irish entity relating to the acquisition of the ING individual life business. In
2004,  we  established  reserves  of $3.3  million in  respect  of  certain  tax
positions.

         Net income increased by 162%, or $44.1 million in 2004 compared to 2003
due to the reasons outlined above.

                                       48
<PAGE>


Segment Operating Results

Life Reinsurance North America

<TABLE>
<CAPTION>
                                                                 Year Ended         Year Ended        Year Ended
                                                                December 31,       December 31,      December 31,
                                                                    2005               2004              2003
                                                                ------------      -------------      -------------
<S>                                                             <C>               <C>              <C>
Revenues
Premiums earned, net.....................................       $  1,814,875      $    466,927      $     229,796
Investment income, net...................................            341,539           206,009            135,731
Fee income...............................................              9,233             7,867              4,067
Net realized gains (losses)..............................              1,121            (7,974)            (6,124)
Change in value of embedded derivatives, net.............             (8,492)            4,561             13,904
                                                                ------------      ------------      -------------
   Total revenues........................................          2,158,276           677,390            377,374
                                                                ------------      ------------      -------------
Benefits and expenses
Claims and other policy benefits.........................          1,365,599           344,319            171,711
Interest credited to interest sensitive
   contract liabilities..................................            132,968           106,525             89,156
Acquisition costs and other insurance expenses, net......            400,992           131,658             82,682
Operating expenses.......................................             48,849            18,408              8,646
Collateral finance facilities expense ...................             43,113             2,724                  -
Interest expense.........................................             10,823             4,605              1,109
                                                                ------------      ------------      -------------
   Total benefits and expenses...........................          2,002,344           608,239            353,304
                                                                ------------      ------------      -------------
Income before income taxes and minority interest.........       $    155,932      $     69,151      $      24,070
                                                                ============      ============      =============
</TABLE>

         In  our  Life  Reinsurance  North  America  Segment  we  reinsure  life
insurance,  annuities and  annuity-type  products  through yearly renewable term
agreements,  coinsurance and modified coinsurance agreements.  These reinsurance
arrangements are predominantly on an automatic basis. These products are written
by life insurance companies and other financial institutions located principally
in the United States. The results of the ING acquisition,  which we completed on
December  31,  2004,  are  included in the results of this  segment for the year
ended December 31, 2005.


         Comparison of 2005 to 2004

         Revenues

         Net premiums earned  increased by $1.3 billion or 289% in 2005 compared
to 2004  primarily as a result of the favorable  impact of the ING  acquisition.
The remaining  increase is due to the increases in the amounts of life insurance
in-force on existing  business and on new business  written during the year. New
business  face amounts  assumed was $131 billion in 2005 compared to $64 billion
in 2004. As of December 31, 2005, we had  approximately  $1.02  trillion of life
reinsurance  in-force.  As of December 31, 2004, we had just under $1.0 trillion
of life insurance in-force.

         Net  investment  income  increased  by $135.5  million,  or 66% in 2005
compared to 2004.  The  increase  is due to the growth in our  average  invested
assets  base  because  of  the  ING   acquisition,   Regulation   XXX  financing
transactions,  increased  operating  cash flows and additional  trust  preferred
securities issued in December 2004.

         On the  portfolio  managed by our  external  investment  managers,  the
yields on fixed rate assets  remained  flat at 5.2% in,  2005  compared to 2004.
Yields on floating  rate assets which are indexed to LIBOR  increased to 4.9% in
2005 from 3.4% in 2004, and the yield on our cash and cash equivalents increased
to 3.9% in 2005 from 1.8% in 2004.

                                       49
<PAGE>

         The change in value of embedded  derivatives,  net of related  deferred
amortization costs and taxes, arises from the application of DIG B36. The change
in the value of embedded derivatives  decreased revenues by $8.5 million in 2005
compared  to an  increase  of $4.6  million in 2004.  This change in value arose
principally  because of the  asset/liability  mismatch on  modified  coinsurance
contracts  assumed in the ING acquisition,  coupled with a decrease in risk free
interest rates and widening of credit spreads.

         Expenses

         Claims and policy benefits  increased by 297% in 2005 compared to 2004.
The increase is primarily due to the impact of the ING  acquisition.  Claims and
other policy benefits, as a percentage of net premiums, were 75.2%, and 73.7% in
2005 and 2004,  respectively.  Death claims are  reasonably  predictable  over a
period of many years,  but are less  predictable  over  shorter  periods and are
subject to  fluctuation  from quarter to quarter.  During the second  quarter of
2005, we  experienced  higher than expected  mortality  which resulted in higher
claims of approximately  $14 million.  This was due principally to a higher than
expected   number  of  large  claims  being   incurred.   Mortality  was  within
expectations  for the  remainder of 2005 and thus overall  mortality in 2005 was
slightly higher than expected. Conversely, in 2004, mortality experience in this
business was slightly better than anticipated.

         In 2005,  interest credited to interest sensitive contract  liabilities
increased by 25% to $133.0  million from $106.5 million in 2004. The increase is
due to interest  credited on new reinsurance  treaties and increases in interest
credited on existing  treaties due to  increasing  average  liability  balances.
Interest sensitive  contract  liabilities were $3.9 billion at December 31, 2005
in comparison with $3.2 billion at December 31, 2004.

         Acquisition  costs and other  insurance  expenses  increased by 205% in
2005 compared to 2004. The increase was a result of the ING  acquisition and the
increased  life and  annuity  business.  Acquisition  costs and other  insurance
expenses,  as a percentage of operating  revenues,  were 18.5% and 19.3% in 2005
and  2004,  respectively.  Operating  revenues  are  defined  as total  revenues
excluding  realized  gains  (losses)  and  changes in the fair value of embedded
derivatives.  Excluding the impact of the $6.7 million rebate  received from ING
related to fees paid on  Regulation  XXX reserves,  acquisition  costs and other
insurance  expenses as a percentage  of operating  revenues  were 18.8% in 2005.
Overall, these percentages will fluctuate due to varying allowance levels within
coinsurance-type  arrangements,  the  timing of amounts  due to and from  ceding
companies,  as  well  as the  amortization  pattern  of  previously  capitalized
amounts,  which  are  based on the  form of the  reinsurance  agreement  and the
underlying insurance policies.  Additionally,  the mix of first year coinsurance
versus yearly  renewable  term can cause the percentage to fluctuate from period
to period.

         Operating  expenses  for  2005  compared  to 2004  increased  by  $30.4
million,  or 165%.  The increase is primarily the result of the ING  acquisition
and  additional  personnel  and  consulting  costs  incurred as we expanded  our
infrastructure  in response to our recent and anticipated  growth.  We increased
our head count principally because of hiring additional  employees in respect of
the acquisition of the ING business and adding  management bench strength in key
functional areas across the segment.  Total employees in this segment have grown
from 91 at December 31, 2004 to 226 at December 31, 2005.  Operating expenses as
a percentage of operating  revenues  decreased from 2.7% in 2004 to 2.3% in 2005
reflecting  the  benefits  of  scale  and a  portion  of  the  benefits  of  the
integration of ING into our existing operations.

         The collateral  finance  facility costs  associated with the Regulation
XXX financing  transactions  completed in 2005  contributed  to the  significant
increase in the collateral  finance facilities expense in 2005. These facilities
are described in Note 8 to the Consolidated Financial Statements.

         Interest  expense  in  this  segment  arises  on  the  trust  preferred
securities.  The increase in interest expense to $10.8 million, results from the
issuance of an  additional  $50.0 million of the trust  preferred  securities in
December 2004 and an increase in the LIBOR interest rates during 2005.

         Comparison of 2004 to 2003

         Revenues

                                       50
<PAGE>

         The  increase  in  premiums  earned  in 2004 as  compared  to 2003  was
primarily due to the impact of the acquisition of Scottish Re Life  Corporation,
on December 22, 2003, which contributed  $124.8 million in earned premiums.  The
remaining  increase  is due to the  increase  in the  number  of  client  ceding
companies  and the  increase  in  business  from these  clients.  Excluding  the
business acquired from ING, as of December 31, 2004, we had approximately $305.1
billion of life reinsurance in force compared to approximately $275.0 billion as
of December 31, 2003.

         Net  investment  income  increased  $70.3  million,  or 52% in  2004 as
compared to 2003.  The  increase  is due to the growth in our  average  invested
assets base and the favorable impact of marginally increased yields during 2004.
At December 31, 2004,  total invested  assets in this segment,  excluding  those
assets  acquired in the  purchase of ING,  increased  to $4.5  billion from $3.6
billion  at  December  31,  2003.  On the  portfolio  managed  by  our  external
investment managers the yields on fixed rate assets less cash were 5.2% and 5.1%
for 2004 and 2003,  respectively.  Yields on floating rate assets are indexed to
LIBOR. The yield on our floating rate assets less cash remained flat at 3.4% in
2004 compared to 2003, and the yield on our cash and cash equivalents  increased
to 1.8% in 2004 from 1.0% in 2003.  In 2004,  the market value of  floating-rate
assets  increased to $963.8  million,  excluding  those  assets  acquired in the
purchase  of ING,  from  $301.8  million  in 2003 as a result  of our  increased
floating rate liabilities.

         Fee income in 2004  increased to $7.9 million from $4.1 million in 2003
principally due to the acquisition of Scottish Re Life Corporation.

         The  change  in  value  of   derivatives,   net  of  related   deferred
amortization   costs,  arises  from  the  application  of  DIG  B36,  which  was
implemented  on October 1, 2003.  During  2004 this  amounted  to a gain of $4.6
million.  This change in value arose principally  because of an increase in risk
free interest rates. The change in value of the embedded  derivatives during the
period  from  October 1, 2003 to December  31, 2003  amounted to a gain of $13.9
million. The gain arose from an increase in the risk free rates.

         Expenses

         Claims and other policy benefits increased by $172.6 milion, or 101% in
2004 as  compared  to 2003.  The  increase  is a result  of the  acquisition  of
Scottish Re Life  Corporation,  the increased number of clients and the increase
in business  from these  clients as  described  above.  Claims and other  policy
benefits,  as a percentage of net premiums earned, were 73.7%, and 74.7% in 2004
and 2003, respectively. The mortality experience in this segment has fluctuated.
This is somewhat  expected as death  claims are  reasonably  predictable  over a
period of many years,  but are less  predictable  over  shorter  periods and are
subject to significant fluctuation.

         Interest credited to interest sensitive contract  liabilities was $17.4
million higher in 2004 than 2003.  During 2003, we incurred $12.5 million due to
revised  reporting  by a ceding  company  client  in  connection  with two fixed
annuity  reinsurance  contracts.   Excluding  this  charge,   interest  credited
increased by 6% in comparison with the 2003. Interest credited includes interest
in respect of funding  agreements.  The  amounts due on funding  agreements  are
included in interest  sensitive  contract  liabilities  on our balance sheet and
amount to $500.6 million at December 31, 2004 in comparison  with $330.7 million
at December 31, 2003.  Interest credited on these agreements was $9.0 million in
2004 in  comparison  with $2.4  million  in 2003.  Interest  sensitive  contract
liabilities  amounted to $3.2  billion at December 31, 2004 in  comparison  with
$2.6 billion at December 31, 2003.

         During 2004,  acquisition costs and other insurance  expenses increased
by 59% to $131.7  million from $82.7 million in 2003.  The increase was a result
of the acquisition of Scottish Re Life  Corporation,  including the amortization
of the present  value of in-force  arising on this  business,  and the increased
life and annuity business as discussed above.


         Operating  expenses  increased  by 113%  to  $18.4  million  in 2004 as
compared to 2003.  Operating  expenses as a  percentage  of  operating  revenues
increased  in 2004 to 2.7% from 2.3% in 2003.  The  increase  is  primarily  the
result of the acquisition of Scottish Re Life Corporation,  additional personnel
costs  incurred as we continue to grow our business  and the costs  necessary to
meet the  requirements  of the Sarbanes Oxley Act of 2002. The costs of Scottish
Re Life Corporation  include the cost of the transition  services agreement with
GE ERC of $2.4  million.  Total  employees in this segment have grown from 64 at
December 31, 2003 to 91 at December 31, 2004.

                                       51
<PAGE>

         Interest  expense  in  this  segment  arises  on  the  trust  preferred
securities.  The increase in interest  expense to $4.6 million in 2004 from $1.1
million in 2003 arises from the issuance of an additional $62.0 million of trust
preferred  securities in October 2003, November 2003 and May 2004. An additional
$50.0 million were issued in December 2004.

         The interest and costs of the collateral  finance facility described in
Note 8 to the  Consolidated  Financial  Statements  are  included in  collateral
finance facility expenses and amounted to $2.7 million in 2004.

Life Reinsurance International

<TABLE>
<CAPTION>
                                                                 Year Ended        Year Ended       Year Ended
                                                                December 31,      December 31,     December 31,
                                                                    2005              2004             2003
                                                               ------------      -------------     ------------
<S>                                                          <C>               <C>               <C>
Revenues
Premiums earned, net.....................................      $    119,055      $     122,518     $    160,858
Investment income, net...................................            11,488             10,023            7,537
Net realized gains ......................................             1,263              1,685              548
                                                               ------------      -------------     ------------
   Total revenues........................................           131,806            134,226          168,943
                                                               ------------      -------------     ------------
Benefits and expenses
Claims and other policy benefits.........................            76,906             81,646          104,176
Acquisition costs and other insurance expenses, net......            20,722             17,634           29,733
Operating expenses.......................................            25,276             18,798           11,518
                                                               ------------      -------------     ------------
   Total benefits and expenses...........................           122,904            118,078          145,427
                                                               ------------      -------------     ------------
Income before income taxes...............................      $      8,902      $      16,148     $     23,516
                                                               ============      =============     ============
</TABLE>


         Prior to 2005, our Life Reinsurance  International  Segment specialized
in niche markets in developed  countries and broader life  insurance  markets in
the developing  world and focused on the  reinsurance  of short-term  group life
policies and aircrew "loss of license"  insurance.  In 2005,  the  International
Segment became actively engaged in the reinsurance of United Kingdom and Ireland
traditional  solutions  business and annuity  products.  The life  insurance and
annuity  products  are similar to those  offered in the Life  Reinsurance  North
America Segment.

         Comparison of 2005 to 2004

         Revenues

         Net  premiums  earned  decreased  $3.5  million,  or  2.8%  in  2005 in
comparison with 2004.  During 2004, we reviewed the pricing and profitability of
all  contracts  written in this  segment  and as a result,  decided not to renew
treaties which did not meet our return  hurdles.  Accordingly,  premiums  earned
decreased  in 2005 as compared to 2004.  In addition  during  2005,  there was a
favorable  movement  of $9.0  million due to revised  reporting  received on our
share of two Lloyd's of London life  syndicates  offset by  revisions to premium
accruals  based  on  improved  underlying  data of $2.2  million.  During  2004,
premiums earned include $4.2 million relating to revised reporting received on a
share of two Lloyd's of London life syndicates.

         Investment income in 2005 increased by $1.5 million, or 15% compared to
2004 due to the investment  income earned on the proceeds of additional  capital
contributed to this segment in December 2004 and June 2005.

         Expenses

         Claims and other policy benefits  decreased to $76.9 million,  or 6% in
2005 compared to 2004.  During 2005,  additional  information  was received from
ceding  companies that resulted in a review of policy  benefits on certain lines
of business and a decrease of $7.9 million in claims and other policy  benefits.
This  was  partially  offset  by an  increase  of $5.3  million  due to  revised
reporting  received on our share of two Lloyd's of London  life


                                       52
<PAGE>

syndicates.  In addition, claims and other policy benefits in 2005 were impacted
by the lower  levels of premiums  written  during 2005 and  revisions to premium
accruals noted in the revenues section above.

         During 2005,  acquisition costs and other insurance  expenses increased
by $3.1 million or 18% to $20.7 million from $17.6 million in 2004.  Acquisition
costs  include  the  amortization  of the present  value of  in-force  business.
Acquisition  costs for 2005  included  $4.3  million  due to  revised  reporting
received on our share of two Lloyd's of London life syndicates and the write-off
of an uncollectible  receivable of $1.2 million.  In 2004, we recognized  profit
commission  income of $1.8  million  arising from a run off book of business and
also  included  $2.4  million  expense  relating  to our share of two Lloyd's of
London life syndicates.

         Operating  expenses  have  increased by 34% to $25.3 million in 2005 as
compared to 2004. The primary  drivers of the increase is $3.0 million  relating
to consulting fees for the review,  design and  implementation  of processes and
controls  required to assist us in the  remediation of the material  weakness in
internal controls noted in 2004. The remaining  increase is principally  related
to increased personnel costs as resources have been added as we continue to grow
our  business  and  include  costs for  recruitment  expenses  and  professional
expenses  incurred  in  addressing  implementation  of the  requirements  of the
Sarbanes Oxley Act of 2002 and United Kingdom regulatory changes.  The number of
employees  in this  segment  has  grown as we  continue  to  strive  to grow our
business in existing and prospective markets.

         Comparison of 2004 to 2003

         Revenues

         Premiums earned in our Life  Reinsurance  International  Segment during
2004 decreased 24% to $122.5 million in comparison  with $160.9 million in 2003.
The  majority of business in our Life  Reinsurance  International  Segment is in
respect of short duration contracts. We experience considerable reporting delays
from  some  of  our  cedents  on  this  business.   In  2003,  as  part  of  the
implementation of this Segment's new  administrative  system,  improved data was
compiled to allow us to more  accurately  estimate  our  premiums  earned.  As a
result,  premiums  earned in 2003 included $23.4 million in respect of revisions
in estimates of premiums earned for past years.  Premiums earned from a specific
portfolio acquired in 2002 were $11.5 million lower in 2004 compared to 2003 due
to the  run-off  nature of the  portfolio.  During  2004 we decided not to renew
certain contracts which did not meet our return  thresholds.  Earned premium for
general  reinsurance  business,  which  consists of aircrew  loss of license and
related  personal  accident,  decreased 5% from $35.8 million to $34.0  million.
Premiums earned in 2004 include $4.2 million  relating to a share of two Lloyd's
of London life syndicates.

         Investment  income during 2004  increased to $10.0 million  compared to
$7.5  million in 2003.  A  portfolio  of  business  was  recaptured  in 2004 and
resulted in additional  investment income of $1.1 million.  The remainder of the
increase is due to the increased  level of invested  assets arising  principally
from growth in business.

         Expenses

         Claims and other policy benefits decreased by 22% to $81.6 in 2004 from
$104.2  million in 2003.  In  comparison  to the prior  year,  claims  have been
impacted by the implementation of the new administrative  system and the related
improvement  in the  estimates  of cedant  balances.  During 2004 we  recognized
claims and other policy  benefits of $1.8 million in respect of the recapture of
the portfolio described above. In addition, during 2004 we incurred $1.0 million
in respect of a claim from our stop loss business.  Partially  offsetting  these
increases  was the release of reserves of $3.1 million  relating to recapture of
the portfolio  described  above.  Claims and other policy  benefits in 2004 also
include  $2.1  million of claims  relating to our share of two Lloyd's of London
life  syndicates.  Claims  and other  policy  benefits  in 2003  were  favorably
impacted  by a $3.4  million  release of reserves on the sale of our unit linked
business in 2003.

         During 2004,  acquisition costs and other insurance  expenses decreased
by $12.1 million or 41% to $17.6 million from $29.7 million in 2003. Acquisition
costs related to a specific  portfolio were $2.3 million lower in 2004 than 2003
due to the  run-off  nature of the  portfolio.  Acquisition  costs  include  the
amortization  of the present value of in-force  business.  This was $1.8 million
lower in 2004  compared  to 2003  primarily  due to the sale of the unit  linked
business in 2003. In 2004 we recognized profit commission income of $1.8 million
arising from a run-off book of

                                       53
<PAGE>

business.  Acquisition  costs in 2004 also include $2.4 million  relating to our
share of two Lloyd's of London life syndicates.

         Operating  expenses have increased by 63% to $18.8 million in 2004 from
$11.5 million in 2003.  The increase is principally  due to increased  personnel
costs as resources  have been added as we continue to grow our business and also
due to  implementation of the requirements of the Sarbanes Oxley Act of 2002 and
United Kingdom  regulatory  changes.  Other expense  increases  compared to 2003
include  office costs due to the move to larger offices in the second quarter of
2003 and  amortization of the costs of a new  administration  system.  Operating
expenses in this segment are incurred in pounds  sterling.  These  expenses have
increased  as a result  of the  depreciation  of the  United  States  dollar  in
comparison with pounds sterling during 2004.


    Corporate and Other
<TABLE>
<CAPTION>
                                               Year Ended          Year Ended          Year Ended
                                              December 31,        December 31,        December 31,
                                                  2005                2004                2003
                                              ------------        ------------        ------------
<S>                                            <C>                <C>                 <C>
Revenues
Investment income, net......................  $      2,810        $      1,106        $      4,760
Fee income..................................         3,083               3,680               3,840
Net realized gains (losses).................         1,354              (2,015)              1,128
                                              ------------        ------------        ------------
Total revenues..............................         7,247               2,771               9,728
                                              ------------        ------------        ------------

Benefits and expenses
Acquisition costs and other insurance
   expenses, net............................         2,061               2,113               2,263
Operating expenses..........................        41,448              17,452              10,857
Interest expense............................         9,915               8,411               6,448
Collateral finance facilities expense.......         5,033                   -                   -
Due diligence costs.........................             -               4,643                   -
                                              ------------        ------------        ------------
   Total benefits and expenses..............        58,457              32,619              19,568
                                              ------------        ------------        ------------
Loss before income taxes....................  $    (51,210)       $    (29,848)       $     (9,840)
                                              ============        ============        ============
</TABLE>


         The  Corporate  and Other Segment is comprised of revenues and expenses
that are not included in the Life Reinsurance segments and it includes corporate
overhead.

         Comparison of 2005 to 2004

         Revenues

         Investment  income arises in the Corporate and Other Segment on capital
not  specifically  allocated  to the  Life  Reinsurance  North  America  or Life
Reinsurance International Segments.  Investment income will increase or decrease
as we raise  capital  and deploy it in our  operating  segments.  Fee income and
acquisition expenses arise from our wealth management operations.

         Expenses

         Operating expenses include the costs of running our principal office in
Bermuda,  compensation  and other costs for our Board of Directors and legal and
professional   fees,   including  those  in  respect  of  corporate   governance
legislation.  Operating expenses have increased by 137% to $41.4 million in 2005
from $17.5  million in 2004.  The

                                       54
<PAGE>

increases  are  principally  due  to  increased   personnel   costs,   including
recruitment and relocation costs, as we continue to grow our business, the costs
of option and restricted  stock unit awards  granted under our equity  incentive
compensation  plans and professional fees of approximately $7.0 million incurred
in respect of the  implementation of the requirements of the  Sarbanes-Oxley Act
of 2002.

         The collateral  finance facilities expense consists of a portion of the
put premium and  amortization  of facility costs on the Stingray  Investor Trust
described in Note 8 to the Consolidated  Financial Statements.  Expenses related
to the  proportion  of the Stingray  Investor  Trust  utilized in 2005 have been
allocated to the Life Reinsurance North America segment.

         Interest expense includes interest on the 4.5% senior convertible notes
and the 1.0% dividend payable on the convertible preferred shares of our HyCU's.
In addition,  interest expense in 2005 included $0.8 million in interest expense
on the Cypress  Notes.  These were  converted  into Class C Warrants on April 7,
2005.

         Comparison of 2004 to 2003

         Operating  expenses have increased by 61% to $17.5 million in 2004 from
$10.9 million in 2003. These increases  relate primarily to increased  personnel
costs   and  the   costs  of   corporate   governance   initiatives,   including
implementation  of the  requirements  of the  Sarbanes-Oxley  Act of  2002.  Due
diligence  costs of $4.6  million were  incurred in respect of various  proposed
acquisitions which were not successful.  During 2004, interest expense increased
by 30% to $8.4  million  from $6.4  million  in 2003 as a result  of the  HyCU's
issued in December 2003.


Financial Condition

Investments

Scottish Re Controlled Portfolio

         At December 31, 2005, the portfolio  controlled by us consisted of $6.7
billion of fixed income  securities,  preferred  stock and cash.  The  portfolio
controlled  by us excludes  the assets held by ceding  insurers  under  modified
coinsurance and funds withheld coinsurance  arrangements.  The majority of these
assets are traded,  however,  $452.9  million  represent  investments in private
securities.  Of the total portfolio  controlled by us, $5.4 billion  represented
the fixed income and preferred stock portfolios  managed by external  investment
managers and $1.3 billion represented other cash balances. At December 31, 2004,
the  portfolio  controlled  by us  consisted  of $4.3  billion  of fixed  income
securities,  preferred  stock and cash. The majority of these assets are traded,
however,  $330.3 million represented  investments in private securities.  Of the
total portfolio,  $3.5 billion  represented the fixed income and preferred stock
portfolio managed by external investment managers and $752.5 million represented
other cash  balances.  The data in the tables  below  exclude the assets held by
ceding  insurers  under  modified  coinsurance  and funds  withheld  coinsurance
agreements.

         At  December  31,  2005,  the average  Standard & Poor's  rating of our
portfolio was "AA", the average effective duration was 2.9 years and the average
book  yield was 4.9% as  compared  with an average  rating of "AA-",  an average
effective  duration  of 3.8 years and an average  book yield of 4.2% at December
31, 2004. At December 31, 2005, the unrealized depreciation on investments,  net
of tax and  deferred  acquisition  costs,  was $17.9  million as  compared  with
unrealized  appreciation  on  investments,  net of tax and deferred  acquisition
costs,  of $13.7  million at December 31,  2004.  The  unrealized  appreciation/
depreciation  on  investments is included in our  consolidated  balance sheet as
part of shareholders' equity.

         In the table below are the total  returns  earned by our  portfolio  in
2005,  compared  to the returns  earned by three  indices:  the Lehman  Brothers
Global Bond Index,  the S&P 500 and a customized index that we developed to take
into account our investment guidelines. We believe that this customized index is
a more relevant benchmark for our portfolio's performance.

                                       55
<PAGE>

<TABLE>
<CAPTION>
                                                                                              Year Ended
                                                                                          December 31, 2005
                                                                                 ------------------------------------
<S>                                                                                               <C>
Portfolio performance.......................................................                      3.22%
Customized index............................................................                      2.53%
Lehman Brothers Global Bond Index...........................................                      1.22%
S&P 500.....................................................................                      4.91%
</TABLE>

         The  following  table  presents the fixed income  investment  portfolio
(market value) credit exposure by category as assigned by Standard & Poor's.

<TABLE>
<CAPTION>
                                                                December 31, 2005            December 31, 2004
                                                             -------------------------     ------------------------
Ratings                                                      $ in millions         %       $ in millions        %
                                                             -------------       -----     -------------      -----
<S>                                                          <C>                  <C>      <C>                 <C>
AAA....................................................      $    3,017.4         44.8%    $    1,754.2        41.1%
AA.....................................................           1,069.1         15.9            451.1        10.5
A......................................................           1,646.9         24.4          1,284.0        30.1
BBB....................................................             977.7         14.5            750.5        17.6
BB or below............................................              28.0          0.4             30.3         0.7
                                                             ------------        -----     ------------       -----
Total..................................................      $    6,739.1        100.0%    $    4,270.1       100.0%
                                                             ============        =====     ============       =====
</TABLE>

         The following table illustrates the fixed income  investment  portfolio
(market value) sector exposure.

<TABLE>
<CAPTION>
                                                                December 31, 2005            December 31, 2004
                                                             -------------------------     ------------------------
Sector                                                       $ in millions         %       $ in millions        %
                                                             -------------       -----     -------------      -----
<S>                                                          <C>                  <C>      <C>                 <C>
U.S. Treasury securities and U.S. government agency
   obligations.........................................      $       47.9          0.7%    $       89.5         2.1%
Corporate securities...................................           2,057.0         30.5          1,618.3        37.9
Municipal bonds........................................              37.6          0.6             20.8         0.5
Mortgage and asset backed securities...................           3,150.1         46.7          1,663.8        39.0
Preferred stock........................................             133.8          2.0            125.2         2.9
                                                              -----------        -----     ------------       -----
                                                                  5,426.4         80.5          3,517.6        82.4
Cash...................................................           1,312.7         19.5            752.5        17.6
                                                              -----------        -----     ------------       -----
Total..................................................       $   6,739.1        100.0%    $    4,270.1       100.0%
                                                              ===========        =====     ============       =====
</TABLE>

         Management reviews securities with material unrealized losses and tests
for other than temporary  impairments on a quarterly basis.  Factors involved in
the  determination  of  potential  impairment  include fair value as compared to
cost,  length of time the value has been below cost,  credit  worthiness  of the
issuer, forecasted financial performance of the issuer, position of the security
in  the  issuer's  capital  structure,  the  presence  and  estimated  value  of
collateral  or other credit  enhancement,  length of time to maturity,  interest
rates and our intent and  ability to hold the  security  until the market  value
recovers.  When a decline is  considered to be  "other-than-temporary"  the cost
basis of the  impaired  asset is adjusted to its fair value and a  corresponding
realized investment loss is recognized in the consolidated statements of income.
The actual value at which such financial  instruments  could actually be sold or
settled with a willing buyer may differ from such estimated fair values.

         The  following  tables  present  the  estimated  fair  values and gross
unrealized  losses for the fixed maturity  investments  and preferred stock that
have  estimated  fair values  below  amortized  cost as of December 31, 2005 and
2004,  respectively.  These  investments  are  presented  by class  and grade of
security,  as well as the length of time the related  market  value has remained
below amortized cost.

                                       56
<PAGE>

<TABLE>
<CAPTION>
                                                                  December 31, 2005
                                 ----------------------------------------------------------------------------------------
                                                               Equal to or greater than
                                   Less than 12 months                 12 months                          Total
                                 -------------------------      -------------------------      --------------------------
                                 Estimated      Unrealized      Estimated     Unrealized        Estimated      Unrealized
                                 fair value        loss         fair value        loss          fair value        loss
                                 -----------     ---------      ----------     ----------      -----------     ----------
<S>                              <C>             <C>            <C>             <C>            <C>              <C>
Investment Grade
  Securities:
CMO......................        $   467,314     $  (4,865)     $   85,305     $   (1,688)     $   552,619     $   (6,553)
Corporates...............          1,132,840       (23,950)         94,218         (2,545)       1,227,058        (26,495)
Governments..............             36,297          (774)          1,999            (71)          38,296           (845)
MBS......................            143,956        (3,383)         42,682         (1,611)         186,638         (4,994)
Municipal................             17,738          (330)          1,621            (68)          19,359           (398)
Other structured
  securities.............          1,028,657       (11,882)        135,341         (3,113)       1,163,998        (14,995)
Preferred stocks.........             98,263        (2,287)         24,106         (1,295)         122,369         (3,582)
                                 -----------     ---------      ----------     ----------      -----------     ----------
Total  investment grade
  securities.............        $ 2,925,065     $ (47,471)     $  385,272     $  (10,391)     $ 3,310,337     $  (57,862)
                                 -----------     ---------      ----------     ----------      -----------     ----------
Below investment grade
  securities:
Corporates...............        $    10,676     $    (655)     $    1,841     $      (59)     $    12,517     $     (714)
Other structured
  securities.............              3,552          (555)          7,260            (29)          10,812           (584)
Preferred stock..........                392           (12)            340            (19)             732            (31)
                                 -----------     ---------      ----------     ----------      -----------     ----------
Total below investment
  grade securities.......             14,620        (1,222)          9,441           (107)          24,061         (1,329)
                                 -----------     ---------      ----------     ----------      -----------     ----------
Total ...................        $ 2,939,685     $ (48,693)     $  394,713     $  (10,498)     $ 3,334,398     $  (59,191)
                                 ===========     =========      ==========     ==========      ===========     ==========
</TABLE>


                                       57
<PAGE>

<TABLE>
<CAPTION>
                                                                  December 31, 2004
                                 ----------------------------------------------------------------------------------------
                                                               Equal to or greater than
                                   Less than 12 months                 12 months                          Total
                                 -------------------------      -------------------------      --------------------------
                                 Estimated      Unrealized      Estimated     Unrealized        Estimated      Unrealized
                                 fair value        loss         fair value        loss          fair value        loss
                                 -----------    ----------      ----------     ----------      -----------       --------
<S>                              <C>             <C>            <C>             <C>            <C>              <C>
Investment Grade
  Securities:
CMO......................        $   225,068    $   (1,830)     $    4,100      $     (96)     $   229,168      $   (1,926)
Corporates...............            241,030        (2,139)         49,445           (660)         290,475          (2,799)
Governments..............             51,123          (139)              -              -           51,123            (139)
MBS......................             49,085          (627)          9,585           (199)          58,670            (826)
Municipal................             12,130          (158)              -              -           12,130            (158)
Other structured
  securities.............            311,733        (2,375)         17,227         (1,125)         328,960          (3,500)
Preferred stocks.........             35,152          (628)            257            (12)          35,409            (640)
                                 -----------    ----------      ----------      ---------      -----------      ----------
Total  investment grade
  securities.............        $   925,321    $   (7,896)     $   80,614      $  (2,092)     $ 1,005,935      $   (9,988)
                                 -----------    ----------      ----------      ---------      -----------      ----------

Below investment grade
  securities:
Corporates...............        $     1,966    $      (35)     $        -      $       -      $     1,966      $      (35)
Other structured
  securities.............              7,988          (977)          2,492         (1,047)          10,480          (2,024)
Preferred stock..........                 54            (1)              -              -               54              (1)
                                 -----------    ----------      ----------      ---------      -----------      ----------
Total below investment
  grade securities.......             10,008        (1,013)          2,492         (1,047)          12,500          (2,060)
                                 -----------    ----------      ----------      ---------      -----------      ----------
Total ...................        $   935,329    $   (8,909)     $   83,106      $  (3,139)     $ 1,018,435      $  (12,048)
                                 ===========    ==========      ==========      =========      ===========      ==========
</TABLE>

         At December 31, 2005,  our fixed income  portfolio had 2,493  positions
and  $59.2  million  of gross  unrealized  losses.  No  single  position  had an
unrealized  loss  greater  than  $0.5  million.  There  were  $25.5  million  of
unrealized  gains on the  remainder  of the  portfolio.  There were 127  private
securities in an unrealized loss position totaling $4.3 million. At December 31,
2004, our fixed income  portfolio had 1,773 positions and $12.0 million of gross
unrealized  losses.  No single position had an unrealized loss greater than $0.9
million.  There were $42.1 million of  unrealized  gains on the remainder of the
portfolio.  There were 44 private  securities  in an  unrealized  loss  position
totaling $0.7 million.

         We believe  that the  analysis  of each  security  whose price has been
below  market for  greater  than  twelve  months  indicated  that the  financial
strength,  liquidity,  leverage,  future outlook,  and our ability and intent to
hold the  security  until  recovery  support the view that the  security was not
other-than-temporarily  impaired as of December 31, 2005. The unrealized  losses
on fixed maturity  securities are primarily a result of rising  interest  rates,
changes in credit  spreads  and the  long-dated  maturities  of the  securities.
Additionally, as at December 31, 2005, approximately 98% of the gross unrealized
losses are associated with investment grade securities.


         Unrealized  losses on securities  that have been in an unrealized  loss
position for periods greater than two years amounted to $1.1 million at December
31,  2005  and  $2.1  million  at  December  31,  2004.   Unrealized  losses  on
non-investment  grade  securities  amounted to $1.3  million and $2.1 million at
December  31,  2005 and  December  31,  2004,  respectively.  Of these  amounts,
non-investment  grade  securities  with  unrealized  losses of $0.1  million  at
December  31,  2005  and  $1.0  million  at  December  31,  2004  had been in an
unrealized  loss position for a period

                                       58
<PAGE>

greater  than one year,  of which there was none at  December  31, 2005 and $1.0
million at December 31, 2004 had been in an unrealized loss position for periods
greater than 2 years.

         The following tables illustrate the industry analysis of the unrealized
losses at December 31, 2005 and 2004:

<TABLE>
<CAPTION>
                                                                       December 31, 2005
                                       ------------------------------------------------------------------------------
                                        Amortized                  Estimated                   Unrealized
                                           Cost           %        Fair Value         %            Loss           %
                                       ----------       -----      ----------        -----     -----------      -----
<S>                                    <C>              <C>        <C>               <C>       <C>              <C>
        Industry
        --------
        Mortgage  and asset backed
           securities.............     $1,941,193        57.2%     $1,914,068         57.4%    $  (27,125)       45.8%
        Banking...................        210,360         6.2         206,189          6.2         (4,171)        7.1
        Communications............        192,282         5.7         186,480          5.6         (5,802)        9.8
        Consumer cyclical.........        114,199         3.4         111,488          3.3         (2,711)        4.6
        Consumer non-cyclical.....        124,998         3.7         122,134          3.7         (2,864)        4.8
        Financial companies.......        103,455         3.0         101,663          3.0         (1,792)        3.0
        Financial other...........        117,803         3.5         115,767          3.5         (2,036)        3.4
        Other*....................        589,299        17.3         576,609         17.3        (12,690)       21.5
                                       ----------       -----      ----------        -----     -----------      -----
        Total.....................     $3,393,589       100.0%     $3,334,398        100.0%    $  (59,191)      100.0%
                                       ==========       =====      ==========        =====     ===========      =====

                                                                       December 31, 2004
                                       ------------------------------------------------------------------------------
                                        Amortized                  Estimated                   Unrealized
                                           Cost           %        Fair Value         %            Loss           %
                                       ----------       -----      ----------        -----     -----------      -----
        Industry
        --------
        Mortgage  and asset backed
           securities.............     $  635,556        61.7%     $  627,279         61.6%    $   (8,277)       68.7%
        Banking...................         89,131         8.7          88,371          8.7           (760)        6.3
        Insurance.................         30,229         2.9          29,831          2.9           (398)        3.3
        Financial other...........         30,081         2.9          29,645          2.9           (436)        3.6
        Brokerage.................         25,071         2.4          24,893          2.4           (178)        1.5
        Financial companies.......         24,293         2.4          24,080          2.4           (213)        1.8
        Communications............         16,734         1.6          16,503          1.6           (231)        1.9
        Other*....................        179,388        17.4         177,833         17.5         (1,555)       12.9
                                       ----------       -----      ----------        -----     ----------       -----
        Total.....................     $1,030,483       100.0%     $1,018,435        100.0%    $  (12,048)      100.0%
                                       ==========       =====      ==========        =====     ==========       =====
</TABLE>

*Other industries each represent less than 3% of estimated fair value

         The expected maturity dates of our fixed maturity investments that have
an  unrealized  loss at December  31, 2005 and 2004 are  presented  in the table
below.

<TABLE>
<CAPTION>
                                                                       December 31, 2005
                                    ----------------------------------------------------------------------------------
                                                                 Estimated                    Unrealized
Maturity                             Book Value         %        Fair Value          %           Loss             %
--------                            -----------       -----     -----------        -----     -----------        -----
<S>                                 <C>               <C>       <C>                <C>       <C>                <C>
Due in one year or less........     $   269,410         7.9%    $   267,712          8.0%    $    (1,698)         2.9%
Due in one through five years..       1,659,946        48.9       1,636,102         49.1         (23,844)        40.3
Due in five through ten years..         925,650        27.3         905,973         27.2         (19,677)        33.2
Due after ten years............         538,583        15.9         524,611         15.7         (13,972)        23.6
                                    -----------       -----     -----------        -----     -----------        -----
Total..........................     $ 3,393,589       100.0%    $ 3,334,398        100.0%    $   (59,191)       100.0%
                                    ===========       =====     ===========        =====     ===========        =====
</TABLE>


                                       59
<PAGE>

<TABLE>
<CAPTION>
                                                                       December 31, 2004
                                    ----------------------------------------------------------------------------------
                                                                 Estimated                    Unrealized
Maturity                             Book Value         %        Fair Value          %           Loss             %
--------                            -----------       -----     -----------        -----     -----------        -----
<S>                                 <C>                <C>      <C>                 <C>      <C>                <C>
Due in one year or less........     $   162,787        15.8%    $   160,087         15.7%    $    (2,700)       22.4%
Due in one through five years..         532,436        51.7         527,660         51.8          (4,776)       39.6
Due in five through ten years..         256,319        24.9         252,939         24.9          (3,380)       28.1
Due after ten years............          78,941         7.6          77,749          7.6          (1,192)        9.9
                                    -----------       -----     -----------        -----     -----------       -----
Total..........................     $ 1,030,483       100.0%    $ 1,018,435        100.0%    $   (12,048)      100.0%
                                    ===========       =====     ===========        =====     ===========       =====
</TABLE>

         At December 31, 2005,  there were 1,698 securities with unrealized loss
positions, with no security having an unrealized loss greater than $0.5 million.
At December 31, 2004,  there were 647 securities  with unrealized loss positions
with no  securities  having an unrealized  loss greater than $0.9  million.  The
increase  in the  number of  securities  with  unrealized  losses  is  primarily
attributable to increases in interest rates.

         At December  31, 2005,  there was one  security  with a fair value that
traded  continuously  at less than 80% of amortized cost for at least six months
or 90% of amortized  cost for at least 12 months.  The  unrealized  loss on this
security  amounted  to $0.5  million.  At  December  31,  2004  there  were  two
securities  with  fair  values  that  traded  continuously  at less  than 80% of
amortized  cost for at least six months or 90% of amortized cost for at least 12
months.  The total unrealized loss on these securities  amounted to $1.1 million
and the largest unrealized loss position was $0.9 million.

         The following  tables provide details of the sales  proceeds,  realized
loss,  length of time the security had been in an  unrealized  loss position and
reason for sale for securities  sold with a realized loss during 2005,  2004 and
2003.

<TABLE>
<CAPTION>
                                                Year ended December 31, 2005
               ---------------------------------------------------------------------------------------
                  Credit Concern          Relative Value            Other                 Total
               -------------------    -------------------    -------------------    -------------------
Days           Proceeds     Loss      Proceeds    Loss       Proceeds     Loss      Proceeds    Loss
----           --------   --------    --------   --------    --------   --------    --------   --------
<C>            <C>        <C>         <C>        <C>         <C>        <C>         <C>        <C>
0-90 .......   $ 43,223   $ (1,703)   $ 44,230   $   (356)   $471,886   $ (1,440)   $559,339   $ (3,499)
91-180 .....        355        (83)     12,456        (59)      6,499        (48)     19,310       (190)
181-270 ....      5,869     (1,246)      2,240         (7)      6,361        (88)     14,470     (1,341)
271-360 ....      2,581       (255)      2,045        (70)      4,881        (29)      9,507       (354)
Greater than
 360........      2,670       (330)          7          -       2,453        (64)      5,130       (394)
               --------   --------    --------   --------    --------   --------    --------   --------
Total ......   $ 54,698   $ (3,617)   $ 60,978   $   (492)   $492,080   $ (1,669)   $607,756   $ (5,778)
               ========   ========    ========   ========    ========   ========    ========   ========
</TABLE>

<TABLE>
<CAPTION>
                                               Year ended December 31, 2004
               ---------------------------------------------------------------------------------------
                  Credit Concern          Relative Value            Other                 Total
               -------------------    -------------------    -------------------    -------------------
Days           Proceeds     Loss      Proceeds    Loss       Proceeds     Loss      Proceeds    Loss
----           --------   --------    --------   --------    --------   --------    --------   --------
<C>            <C>        <C>         <C>        <C>         <C>        <C>         <C>        <C>
0-90 .......   $  7,528   $   (474)   $ 54,772   $ (1,284)   $ 77,107   $ (1,859)   $139,407   $ (3,617)
91-180 .....      1,909       (136)     22,884       (266)      6,543        (46)     31,336       (448)
181-270 ....     10,483       (159)      3,904        (23)        127         (1)     14,514       (183)
271-360 ....          -          -         488        (10)      1,886        (31)      2,374        (41)
Greater than
 360........      8,011       (710)        306        (11)        321        (33)      8,638       (754)
               --------   --------    --------   --------    --------   --------    --------   --------
Total ......   $ 27,931   $ (1,479)   $ 82,354   $ (1,594)   $ 85,984   $ (1,970)   $196,269   $ (5,043)
               ========   ========    ========   ========    ========   ========    ========   ========
</TABLE>

                                       60
<PAGE>

<TABLE>
<CAPTION>
                                               Year ended December 31, 2003
               ---------------------------------------------------------------------------------------
                  Credit Concern         Relative Value            Other                 Total
               -------------------   -------------------     -------------------    -------------------
Days           Proceeds    Loss      Proceeds    Loss        Proceeds     Loss      Proceeds    Loss
----           --------  --------    --------    -------     --------   --------    --------   --------
<C>            <C>       <C>         <C>        <C>         <C>        <C>         <C>        <C>
0-90 .......   $    924   $     (5)   $ 15,389   $   (166)   $ 20,686   $   (191)   $ 36,999   $   (362)
91-180 .....      3,529       (295)      3,693        (35)      1,720        (15)      8,942       (345)
181-270 ....      3,300       (251)        776        (29)        656         (4)      4,732       (284)
271-360.....          -          -         545        (12)        479        (55)      1,024        (67)
Greater than
 360........      6,008       (951)      1,380       (116)          -          -       7,388     (1,067)
               --------   --------    --------   --------    --------   --------    --------   --------
Total.......   $ 13,761   $ (1,502)   $ 21,783   $   (358)   $ 23,541   $   (265)   $ 59,085   $ (2,125)
               ========   ========    ========   ========    ========   ========    ========   ========
</TABLE>

Asset/liability management

         We use various  sophisticated  asset/liability  management processes to
provide  adequate  liquidity  over  the  lives of the  liabilities  and to limit
exposure to changes in interest  rates,  adverse credit  default  experience and
currency risk.

         When we originate each new reinsurance transaction, the price and terms
are based on results of simulation  models in which  projected  investment  cash
flows  will  match  liability  cash  flows  within  reasonable  tolerances.  The
investment portfolio characteristics found to be most suitable for the liability
are used to  design  the  investment  guidelines  and  target  duration  for the
portfolio.  We currently  manage our  asset/liability  processes for over eighty
individual portfolios.

         Liquidity   expectations  and  requirements   vary  with  the  type  of
liability. For liabilities with potentially greater liquidity demands, we select
assets to make the  corresponding  portfolios  more liquid and run more frequent
simulations reflecting updated experience.

         We  periodically  perform  analyses,  update  guidelines and take other
corrective  action to keep the  assets at the  portfolio  and  enterprise  level
suitable for the relevant liabilities. Techniques include simulation of in-force
assets and  liabilities  in  various  interest  rate  scenarios,  adjustment  of
duration  targets for each  portfolio,  monitoring  the gap  between  actual and
target  duration  at  the  portfolio,   legal  entity  and  enterprise   levels.
Historically,  variations  between the maturity of our investment  portfolio and
our liabilities have been small.


Funds withheld at interest

         Funds  withheld at interest  arise on contracts  written under modified
coinsurance agreements and funds withheld coinsurance agreements.  In substance,
these  agreements are identical to coinsurance  treaties  except that the ceding
company  retains  control of and title to the assets.  The deposits  paid to the
ceding  company  by  the  underlying  policyholders  are  held  in a  segregated
portfolio and managed by the ceding company or by investment  managers appointed
by the ceding company.  These treaties  transfer a quota share of the risks. The
funds  withheld  at  interest  represent  our  share  of the  ceding  companies'
statutory  reserves.  The cash flows exchanged with each monthly  settlement are
netted and include,  among other items, our quota share of investment  income on
our  proportionate  share of the  portfolio,  realized  losses,  realized  gains
(amortized  to reflect the  statutory  rules  relating  to interest  maintenance
reserve), interest credited and expense allowances.

         At December  31,  2005,  the funds  withheld at interest  totaled  $2.6
billion with an average  rating of "A+",  an average  effective  duration of 5.1
years and an average  book yield of 5.6% as  compared  to $2.0  billion  with an
average  rating  of "A+",  an  average  effective  duration  of 3.9 years and an
average  book  yield of 5.2% at  December  31,  2004.  These  are  fixed  income
investments and include marketable  securities,  commercial  mortgages,  private
placements  and cash.  The market value of the funds  withheld  amounted to $2.6
billion  and  $2.1   billion  at  December  31,  2005  and  December  31,  2004,
respectively.

         At December 31,  2005,  funds  withheld at interest  were in respect of
seven contracts with five ceding companies. At December 31, 2004, funds withheld
at interest were in respect of seven  contracts with four ceding

                                       61
<PAGE>

companies.  At December 31, 2005, we had three  contracts with Lincoln  National
Life  Insurance  Company  that  accounted  for $1.2  billion or 48% of the funds
withheld balances. Additionally we had one contract with Security Life of Denver
International  Limited  that  accounted  for $0.7  billion  or 27% of the  funds
withheld  balances and one contract with Fidelity & Guaranty Life that accounted
for $0.6 billion or 23% of the funds withheld balances.  The remaining contracts
were with Illinois Mutual Insurance Company and American Founders Life Insurance
Company.  Lincoln National Life Insurance Company has financial strength ratings
of "A+" from A.M.  Best,  "AA-" from  Standard & Poor's,  "Aa3" from Moody's and
"AA" from Fitch.  In the event of  insolvency  of the ceding  companies on these
arrangements  we  would  need to  exert a claim  on the  assets  supporting  the
contract  liabilities.  However, the risk of loss is mitigated by our ability to
offset  amounts  owed to the ceding  company  with the amounts owed to us by the
ceding  company.  Reserves for future  policy  benefits  and interest  sensitive
contract  liabilities  relating to these contracts  amounted to $2.4 billion and
$1.7 billion at December 31, 2005 and 2004, respectively.

         The investment  objectives for these  arrangements  are included in the
modified  coinsurance  and funds withheld  coinsurance  agreements.  The primary
objective  is  to  maximize  current  income,   consistent  with  the  long-term
preservation of capital.  The overall investment strategy is executed within the
context of prudent asset/liability  management. The investment guidelines permit
investments in fixed maturity  securities,  and include  marketable  securities,
commercial  mortgages,  private  placements and cash. The maximum  percentage of
below investment grade securities is 10% and other guidelines limit risk, ensure
issuer and industry diversification,  as well as, maintain liquidity and overall
portfolio credit quality.

         According to data provided by our ceding companies, the following table
reflects the market value of assets including cash backing the funds withheld at
interest  portfolio  using the lowest rating  assigned by the three major rating
agencies.

<TABLE>
<CAPTION>
Ratings                                                      December 31, 2005            December 31, 2004
-------                                                     ----------------------       ----------------------
                                                              millions         %          millions            %
                                                            ----------       -----       ----------        -----
<S>                                                         <C>               <C>        <C>                <C>
AAA....................................................     $    705.9        27.4%      $    692.6         33.3%
AA.....................................................          146.0         5.7             85.0          4.1
A......................................................          741.6        28.9            527.7         25.4
BBB....................................................          785.8        30.6            579.7         27.9
BB or below............................................           78.0         3.0             63.3          3.1
                                                            ----------       -----       ----------        -----
                                                               2,457.3        95.6          1,948.3         93.8
Commercial mortgage loans..............................          112.6         4.4            129.9          6.2
                                                            ----------       -----       ----------        -----
Total..................................................     $  2,569.9       100.0%      $  2,078.2        100.0%
                                                            ==========       =====       ==========        =====
</TABLE>


         According to data provided by our ceding companies, the following table
reflects  the market  value of assets  backing  the funds  withheld  at interest
portfolio by sector.

<TABLE>
<CAPTION>
Sector                                                       December 31, 2005            December 31, 2004
-------                                                     ----------------------       ----------------------
                                                              millions         %          millions            %
                                                            ----------       -----       ----------        -----
<S>                                                         <C>               <C>        <C>                <C>
U.S. Treasury securities and U.S. government agency
   obligations ....................................        $     62.3         2.4%       $     39.7         1.9%
Corporate securities ..............................           1,634.4        63.6           1,096.3        52.8
Municipal bonds ...................................              33.0         1.3              25.2         1.2
Mortgage and asset backed securities ..............             595.1        23.1             314.7        15.1
Commercial mortgage loans .........................             112.5         4.4             129.9         6.3
Cash ..............................................             132.6         5.2             472.4        22.7
                                                           ----------       -----        ----------       -----
Total .............................................        $  2,569.9       100.0%       $  2,078.2       100.0%
                                                           ==========       =====        ==========       =====
</TABLE>


                                       62
<PAGE>

Liquidity and Capital Resources

Cash flow


         Cash  provided by operating  activities  amounted to $365.7  million in
2005 in comparison with $38.9 million in 2004. Operating cash flow includes cash
inflows from premiums, fees and investment income and cash outflows for benefits
and expenses  paid. In periods of growth of new business our operating cash flow
may decrease due to first year commissions paid on new business  generated.  For
income  recognition  purposes these  commissions are deferred and amortized over
the life of the business. The increase in cash flow from operating activities is
principally due to the ING acquisition.

         In 2004, the decrease in operating cash flow in comparison with 2003 is
partly  attributable  to settlement of a tax  liability of  approximately  $23.0
million.  This  liability  resulted  from  actions  taken by the former owner of
Scottish Re Life  Corporation  immediately  prior to its acquisition in December
2003. When adjusted for this payment,  cash inflows from operations in 2004 were
$61.9 million compared to inflows of $88.5 million in 2003. This decrease is due
to  the  timing  of  receipt  of  reinsurance   receivables  and  settlement  of
reinsurance payables.

         We believe  cash  flows from  operations  will be  positive  over time.
However,  they may be positive or  negative in any one period  depending  on the
amount of new life reinsurance business written, the level of ceding commissions
paid in connection  with writing that  business,  the level of renewal  premiums
earned in the period and the timing of receipt of  reinsurance  receivables  and
settlement of  reinsurance  payables.  To address the risk that  operating  cash
flows may not be  sufficient  in any given  period we  maintain a high  quality,
fixed  maturity  portfolio  with  positive  liquidity   characteristics.   These
securities  are  available  for  sale  and can be sold  to meet  obligations  if
necessary.

         Net cash used in  investing  activities  was $1.9  billion  and  $479.9
million in 2005 and 2004,  respectively.  The increase in cash used in investing
activities and, in particular,  the purchases of fixed maturity securities,  are
primarily related to the investment of the proceeds of the ING acquisition,  the
collateral  finance  facilities  and the excess cash  generated by operating and
financing  activities.  In  2004  we  received  $414.0  million  in  cash on the
completion of the ING acquisition.

         Net cash provided by financing  activities was $2.1 billion in 2005 and
$937.5  million in 2004.  The  increase  was  principally  due to the receipt of
proceeds  on our  collateral  finance  facilities  and the  issuance of ordinary
shares and non-cumulative perpetual preferred shares during 2005.


The Holding Company

         We are a holding company whose primary uses of liquidity  include,  but
are not limited to, the  immediate  capital  needs of our  operating  companies,
dividends paid to our  shareholders and interest  payments on our  indebtedness.
See Note 10,  "Debt  Obligations"  in the  Notes to the  Consolidated  Financial
Statements.  The primary  sources of our  liquidity  include  proceeds  from our
capital raising efforts,  interest income on corporate investments and dividends
from  operating  subsidiaries.  As we continue our  expansion  efforts,  we will
continue to be dependent upon these sources of liquidity.

         Historically,   we  have   generated   positive  net  cash  flows  from
operations. However, in the event of significant unanticipated cash requirements
beyond normal liquidity, we have multiple liquidity alternatives available based
on market  conditions  and the amount and timing of the  liquidity  need.  These
options include  borrowings  under committed credit  facilities,  the ability to
issue long-term debt, capital securities or common equity and, if necessary, the
sale of invested assets subject to market conditions.

                                       63
<PAGE>


Capital

         Total capitalization is analyzed as follows:

<TABLE>
<CAPTION>
                                                  December 31,      December 31,      December 31,
                                                     2005              2004               2003
                                                   ----------        ----------        ----------
<S>                                                <C>               <C>               <C>
Shareholders' equity ......................        $1,271,712        $  862,674        $  659,844
Mezzanine equity ..........................           143,057           142,449           141,928
Long-term debt ............................           244,500           244,500           162,500
7.00% Convertible Junior Subordinated Notes                 -            41,282                 -
                                                   ----------        ----------        ----------
                                                   $1,659,269        $1,290,905        $  964,272
                                                   ==========        ==========        ==========
</TABLE>


         The  increase  in  capitalization  at  December  31,  2005  compared to
December 31, 2004 is  principally  due to net proceeds of $174.1  million on the
issuance of 7,660,000  ordinary  shares  (including an over allotment  option of
1,410,000  shares),  net proceeds of $168.3 million on the issuance of 5,000,000
non-cumulative  perpetual preferred shares, the conversion of the 7% Convertible
Junior  Subordinated  Note to ordinary  shares and net income for the year ended
December 31, 2005 of $130.2 million.  These  increases were partially  offset by
the net costs of the variable  equity sale forward  contracts of $13.8  million,
decrease  in  other  comprehensive  income  of $41.6  million  and  increase  in
dividends declared of $6.6 million.  Other comprehensive  income consists of the
unrealized   appreciation/depreciation   on   investments   and  the  cumulative
translation  adjustment  arising  from the  translation  of Scottish Re Holdings
Limited's balance sheet at exchange rates as of December 31, 2005.


         The  increase  in  capitalization  at  December  31,  2004  compared to
December 31, 2003 is due to the net income for the year ended  December 31, 2004
of $71.4 million,  the issuance of ordinary shares and warrants and notes to the
Cypress Entities,  totaling $126.9 million, the issuance of trust preferred debt
of $82.0 million,  the issuance of share capital to employees on the exercise of
options of $8.3  million and an increase in other  comprehensive  income of $2.6
million  partially offset by an increase in dividends  declared of $0.9 million.
Other comprehensive income consists of the unrealized  appreciation/depreciation
on  investments  and the  cumulative  translation  adjustment  arising  from the
translation of Scottish Re Holdings Limited's balance sheet at exchange rates as
of December 31, 2004.

         See Notes 9, 10, 11 and 12 of the Consolidated Financial Statements for
additional details on the items noted in the table.


Shareholder dividends

         Historically,  we have paid  quarterly  dividends of $0.05 per ordinary
share  and  have  paid  quarterly  dividends  on  our  non-cumulative  perpetual
preferred  shares  during  2005.  All future  payments of  dividends  are at the
discretion  of our Board of  Directors  and will depend on our  income,  capital
requirements,  insurance  regulatory  conditions,  operating conditions and such
other  factors  as the  Board of  Directors  may deem  relevant.  The  amount of
dividends  that  we can  pay  will  depend  in  part  on the  operations  of our
reinsurance subsidiaries.


Collateral

         We must have  sufficient  assets  available  for use as  collateral  to
support borrowings, letters of credit and certain reinsurance transactions. With
these  reinsurance  transactions,  the need for  collateral or letters of credit
arises in five ways:

         o        when Scottish Annuity & Life Insurance  Company (Cayman) Ltd.,
                  Scottish  Re (Dublin)  Limited or  Scottish Re Limited  enters
                  into  a  reinsurance  treaty  with a U.S.  customer,  we  must
                  contribute

                                       64
<PAGE>

                  assets into a reserve credit trust with a U.S. bank or issue a
                  letter of credit in order that the ceding  company  may obtain
                  reserve credit for the reinsurance transaction;

         o        when  Scottish  Re  (U.S.),  Inc.  enters  into a  reinsurance
                  transaction,   it  typically  incurs  a  need  for  additional
                  statutory  capital.  This  need can be met by its own  capital
                  surplus, an infusion of cash or assets from us or an affiliate
                  or by ceding a portion of the  transaction to another  company
                  within the group or an unrelated reinsurance company, in which
                  case  that   reinsurer   must   provide   reserve   credit  by
                  contributing  assets in a reserve  credit trust or a letter of
                  credit;

         o        Scottish Re (U.S.), Inc. is licensed, accredited,  approved or
                  authorized to write  reinsurance in 50 states and the District
                  of  Columbia.  When  Scottish  Re (U.S.),  Inc.  enters into a
                  reinsurance  transaction with a customer  domiciled in a state
                  in  which  it is not a  licensed,  accredited,  authorized  or
                  approved reinsurer,  it likewise must provide a reserve credit
                  trust or letter of credit;

         o        Scottish Re Life Corporation is licensed, accredited, approved
                  or authorized to write reinsurance in 50 states,  the District
                  of Columbia, Guam and the Federated States of Micronesia. When
                  Scottish  Re  Life  Corporation   enters  into  a  reinsurance
                  transaction  with a customer  domiciled in a state in which it
                  is  not  a  licensed,   accredited,   authorized  or  approved
                  reinsurer,  it likewise must provide a reserve credit trust or
                  letter of credit; and

         o        even when  Scottish Re (U.S.),  Inc. is licensed,  accredited,
                  approved or authorized to write reinsurance in a state, it may
                  agree with a customer  to  provide a reserve  credit  trust or
                  letter of credit  voluntarily  to mitigate  the  counter-party
                  risk   from  the   customer's   perspective,   thereby   doing
                  transactions  that would be otherwise  unavailable or would be
                  available only on significantly less attractive terms.

         Assets  placed in trust  continue  to be owned by us,  but their use is
restricted  based  on  terms  of the  trust  agreements.  We  have a  number  of
facilities  in place to provide  the  collateral  required  for our  reinsurance
business. See Note 8 of the Consolidated Financial Statements.

Credit facilities


         On July 14, 2005,  Scottish  Annuity & Life Insurance  Company (Cayman)
Ltd.,  Scottish Re (Dublin)  Limited,  Scottish Re (U.S.),  Inc. and Scottish Re
Limited entered into a $200.0 million,  three-year  revolving  unsecured  senior
credit  facility  with a syndicate of banks.  This  facility  replaced a 364-day
facility which was due to mature in October 2005. The facility may be increased,
at our option, to an aggregate principal amount of $300.0 million.  The facility
provides capacity for borrowing and extending letters of credit. The facility is
a  direct  financial  obligation  of each of the  borrowers;  however,  Scottish
Annuity & Life  Insurance  Company  (Cayman) Ltd. has  guaranteed the payment of
obligations  of Scottish  Re (Dublin)  Limited,  Scottish  Re (U.S.),  Inc.  and
Scottish Re Limited.  There were no outstanding borrowings at December 31, 2005.
Outstanding  letters of credit under this facility  amounted to $40.9 million at
December 31, 2005.

         On August 18, 2005,  Scottish Re (Dublin)  Limited entered into a $30.0
million  three-year  revolving,  unsecured  letter  of  credit  facility  with a
syndicate of banks. The credit facility may be increased,  at our option,  to an
aggregate principal amount of $50.0 million.  The facility is a direct financial
obligation of Scottish Re (Dublin)  Limited,  however,  Scottish  Annuity & Life
Insurance  Company  (Cayman)  Ltd. has  guaranteed  the payment  obligations  of
Scottish Re (Dublin) Limited. There were no outstanding borrowings or letters of
credit at December 31, 2005.

         The  financial  covenants of these  facilities  require  that  Scottish
Annuity & Life  Insurance  Company  (Cayman) Ltd.  maintain a minimum  amount of
consolidated  shareholders' equity and maintain the ratio of unencumbered assets
to  aggregate  borrowings  under  the  facilities  of 1.2 times  borrowings.  In
addition,  these  facilities  also  require us to  maintain a minimum  amount of
consolidated  shareholders'  equity and a debt to  capitalization  ratio of less
than 30%. There were no outstanding borrowings and letters of credit at December
31,

                                       65
<PAGE>

2005.  For the purposes of computing the  financial  covenants,  the  collateral
finance facilities and their associated costs are excluded.

         Failure to comply with the requirements of the credit facilities would,
subject to grace periods, result in an event of default and we would be required
to repay any  outstanding  borrowings.  At December  31,  2005,  we and Scottish
Annuity & Life  Insurance  Company  (Cayman) Ltd.  were in  compliance  with the
financial covenants noted in the preceding paragraphs.

         We also have a reverse repurchase agreement with a major broker/dealer.
Under  this  agreement,  we have the  ability  to sell  agency  mortgage  backed
securities with the agreement to repurchase them at a fixed price, providing the
dealer  with a spread  that  equates to an  effective  borrowing  cost linked to
one-month  LIBOR.  This agreement is renewable  monthly at the discretion of the
broker/dealer.  At December 31, 2005 and 2004,  there were no  borrowings  under
this agreement.


ING Collateral Arrangement

         ING is obligated to maintain collateral for the Regulation XXX and AXXX
reserve  requirements  of the business we acquired from them for the duration of
such  requirements  (which relate to state  insurance  law reserve  requirements
applying  to  reserves  for level  premium  term  life  insurance  policies  and
universal life policies).  We will pay ING a fee based on the face amount of the
collateral provided until satisfactory  alternative collateral  arrangements are
made.  In the normal  course of business and our capital  planning we are always
looking for  opportunities  to relieve  capital  strain  relating to XXX reserve
requirements for our existing  business,  as well as, the business acquired from
ING. We completed  two financing  solutions  relating to these  requirements  in
December 2005 and received a $6.7 million rebate of fees incurred in 2005.

HSBC I

         In 2004, we entered into a collateral  finance  facility with HSBC Bank
USA, N.A. ("HSBC I"). This facility  provides $200.0 million that can be used to
collateralize reinsurance obligations under intercompany reinsurance agreements.
Simultaneously,  we entered  into a total  return swap with HSBC Bank USA,  N.A.
under which we are entitled to the total return of the  investment  portfolio of
the trust  established for this facility.  In accordance with FIN 46R, the trust
is  considered  to be a variable  interest  entity and we are deemed to hold the
primary  beneficial  interest  in the  trust.  As a  result,  the trust has been
consolidated  in these financial  statements.  The assets of the trust have been
recorded as fixed maturity  investments.  Our consolidated  statements of income
show the investment return of the trust as investment income and the cost of the
facility is reflected in collateral finance facilities expense. The creditors of
the trust have no recourse against our general assets.

Stingray


         On January 12, 2005,  we entered  into a put  agreement  with  Stingray
Investor  Trust  ("Investor  Trust") for an aggregate  value of $325.0  million.
Under the terms of the put agreement,  we acquired an irrevocable  put option to
issue  funding  agreements  to  Investor  Trust in  return  for the  assets in a
portfolio of 30-day  commercial  paper.  This put option may be exercised at any
time. In addition,  we may be required to issue  funding  agreements to Investor
Trust  under  certain  circumstances,   including,   but  not  limited  to,  the
non-payment  of the put option  premium and a non-payment  of interest under any
outstanding funding agreements under the put agreement.  The facility matures on
January 12, 2015. This  transaction may also provide  collateral for Scottish Re
(U.S.),  Inc.  for  reinsurance   obligations  under  intercompany  quota  share
reinsurance  agreements  and at December 31, 2005,  $50.0 million was in use for
this purpose.  The put premium  incurred during the year ended December 31, 2005
amounted  to $4.7  million,  and is included in  collateral  finance  facilities
expense in the consolidated statements of income. In accordance with FIN 46R, we
are not  considered  to be the primary  beneficiary  of Investor  Trust and as a
result we are not required to consolidate Investor Trust.

Orkney Re, Inc.

                                       66
<PAGE>

         On  February  11,  2005,  Orkney  Holdings,  LLC,  a  Delaware  limited
liability company,  issued and sold in a private offering an aggregate of $850.0
million  Series A Floating Rate Insured Notes due February 11, 2035 (the "Orkney
Notes").  Orkney  Holdings,  LLC is organized for the limited purpose of holding
the stock of Orkney Re, Inc., a South Carolina special purpose captive insurance
company,  and  issuing  the Orkney  Notes.  All of the  common  shares of Orkney
Holdings,  LLC are owned by Scottish Re (U.S.), Inc. Proceeds from this offering
were used to fund the Regulation XXX reserve requirements for a defined block of
level premium term life insurance  policies  issued between  January 1, 2000 and
December  31, 2003  reinsured  by  Scottish  Re (U.S.),  Inc. to Orkney Re, Inc.
Proceeds from the Orkney Notes have been  deposited into a series of trusts that
collateralize the notes.

         The holders of the Orkney Notes cannot require repayment from us or any
of our  subsidiaries,  other than Orkney  Holdings,  LLC. The timely  payment of
interest and ultimate  payment of principal for the Orkney Notes are  guaranteed
by MBIA Insurance Corporation.

         Interest  on the  principal  amount  of the  Orkney  Notes  is  payable
quarterly at a rate  equivalent to three month LIBOR plus 0.53%. At December 31,
2005,  the  interest  rate was 5.07%.  Any payment of  principal,  including  by
redemption,  or  interest on the Orkney  Notes is sourced  from  dividends  from
Orkney  Re,  Inc.  and the  balances  available  in a series of trust  accounts.
Dividends may only be made with the prior  approval of the Director of Insurance
of the State of South  Carolina in  accordance  with the terms of its  licensing
orders and in accordance  with  applicable  law. The Orkney Notes also contain a
customary  limitation  on  lien  provisions  and  customary  events  of  default
provisions,  which, if breached, could result in the accelerated maturity of the
Orkney Notes. Orkney Holdings,  LLC has the option to redeem all or a portion of
the Orkney Notes prior to and on or after February 11, 2010,  subject to certain
call premiums.

         In accordance with FIN 46R, Orkney Holdings, LLC, is considered to be a
variable  interest  entity and we are considered to hold the primary  beneficial
interest.  As a result,  Orkney  Holdings,  LLC has been  consolidated  in these
financial statements.  The assets of Orkney Holdings,  LLC have been recorded as
fixed  maturity  investments  and cash and cash  equivalents.  Our  consolidated
statements  of income  show the  investment  return of Orkney  Holdings,  LLC as
investment  income  and the cost of the  facility  is  reflected  in  collateral
finance facilities expense.

Orkney Re II plc

         On  December  21,  2005,  Orkney Re II plc, an orphan  special  purpose
vehicle incorporated under the laws of Ireland, whose issued ordinary shares are
held by a share  trustee  and its  nominees  in trust for  charitable  purposes,
issued in a private offering $450.0 million of debt to external  investors.  The
debt consisted of $382.5 million Series A-1 Floating Rate Guaranteed  Notes (the
"Series A Notes"),  $42.5  million in aggregate  principal  amount of Series A-2
Floating Rate Notes (the "Series B Notes"),  and $25.0 million Series B Floating
Rate Notes, all due December 31, 2035 (collectively, the "Orkney II Notes"). The
Orkney II Notes  are  listed on the Irish  Stock  Exchange.  Proceeds  from this
offering were used to fund the Regulation XXX reserve requirements for a defined
block of level premium term life insurance  policies  issued between  January 1,
2004 and December 31, 2004 reinsured by Scottish Re (U.S.), Inc. to Orkney Re II
plc.  Proceeds  from the  Orkney II Notes have been  deposited  into a series of
trusts that collateralize the notes.

         The holders of the Orkney II Notes cannot require  repayment from us or
any of our  subsidiaries,  only from Orkney Re II plc. Assured Guaranty (UK) Ltd
has  guaranteed the timely  payment of the scheduled  interest  payments and the
principal on the maturity date, December 21, 2035 of the Series A-1 Notes.


         Interest  on the  principal  amount of the  Orkney II Notes is  payable
quarterly at a rate  equivalent  to three month LIBOR plus 0.425% for the Series
A-1 Notes,  three  month  LIBOR  plus 0.73% for the Series A-2 Notes,  and three
month LIBOR plus 3.0% for the Series B Notes. At December 31, 2005, the interest
rate on the Series A-1 Notes was 4.96%, Series A-2 Notes was 5.27%, and Series B
Notes was 7.50%. The Orkney II Notes also contain a customary limitation on lien
provisions and customary events of default provisions, which, if breached, could
result in the accelerated  maturity of the Orkney II Notes. Orkney Re II plc has
the option to redeem all or a portion of the Orkney II Notes  prior to and on or
after February 11, 2007, subject to certain call premiums.

         In  accordance  with FIN 46R,  Orkney Re II plc is  considered  to be a
variable  interest  entity and we are considered to hold the primary  beneficial
interest. As a result, Orkney Re II plc has been consolidated in these financial
statements.  The assets of Orkney Re II plc have been recorded as fixed maturity
investments and cash and

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<PAGE>

cash  equivalents.  Our  consolidated  statements of income show the  investment
return of Orkney II Re plc as investment  income and the cost of the facility is
reflected in collateral finance facilities expense.

HSBC II

         On December  22,  2005,  we entered  into a second  collateral  finance
facility  with  HSBC Bank USA,  N.A  ("HSBC  II").  This  facility  is a 20 year
collateral  finance  facility that provides up to $1.0 billion of Regulation XXX
collateral  support  for  the  business  acquired  from  ING  and can be used to
collateralize    reinsurance   obligations   under   inter-company   reinsurance
agreements.  Simultaneously,  we entered into a total return swap with HSBC Bank
USA,  N.A.  under which we are  entitled to the total  return of the  investment
portfolio of the trust established for this facility. In accordance with FIN 46R
the trust is  considered to be a variable  interest  entity and we are deemed to
hold the primary  beneficial  interest in the trust. As a result,  the trust has
been  consolidated in these financial  statements.  The assets of the trust have
been recorded as fixed maturity  investments and cash and cash equivalents.  Our
consolidated  statements  of income show the  investment  return of the trust as
investment  income  and the cost of the  facility  is  reflected  in  collateral
finance facilities expense.  The creditors of the trust have no recourse against
our general assets.

Reinsurance Facility

         On December 22, 2005, we entered into a long term reinsurance  facility
with a third party ("Reinsurance  Facility"),  Bermuda-domiciled  reinsurer that
provides  up to $1.0  billion  of  Regulation  XXX  collateral  support  for the
business acquired from ING. The Bermuda reinsurer  provides security in the form
of letters of credit in trust  equal to the  statutory  reserves.  All risks and
returns arising out of the underlying book of business are retained by us.

         At December  31,  2005,  we had $1.986  billion of  collateral  finance
facility obligations relating to the HSBC I, HSBC II, Orkney Re, Inc. and Orkney
Re II plc transactions. In connection with these transactions, we have assets in
trust of approximately $2.705 billion which represent assets supporting both the
economic  and excess  reserves  and surplus in the  transactions.  The assets in
trust are managed in  accordance  with  predefined  investment  guidelines as to
permitted investments, portfolio quality, diversification and duration.

Regulatory Capital Requirements

         Scottish Annuity & Life Insurance Company (Cayman) Ltd. has agreed with
Scottish Re (U.S.),  Inc.  that it will (1) cause  Scottish  Re (U.S.),  Inc. to
maintain  capital  and  surplus  equal to the  greater of $20.0  million or such
amount necessary to prevent the occurrence of a Company Action Level Event under
the risk-based capital laws of the state of Delaware and (2) provide Scottish Re
(U.S.), Inc. with enough liquidity to meet its obligations in a timely manner.

         Scottish Annuity & Life Insurance Company (Cayman) Ltd. has agreed with
Scottish Re Life Corporation that it will (1) cause Scottish Re Life Corporation
to maintain  capital and surplus equal to at least 175% of Company  Action Level
RBC, as defined under the laws of the state of Delaware and (2) provide Scottish
Re Life  Corporation  with enough  liquidity to meet its obligations in a timely
manner.

         Scottish Annuity & Life Insurance Company (Cayman) Ltd. and Scottish Re
Group Limited have agreed with Scottish Re Limited that in the event Scottish Re
Limited is unable to meet its  obligations  under its  insurance or  reinsurance
agreements,  Scottish  Annuity & Life  Insurance  Company  (Cayman)  Ltd. (or if
Scottish  Annuity & Life  Insurance  Company  (Cayman) Ltd.  cannot fulfill such
obligations,  then  Scottish  Re Group  Limited  will  assume all of Scottish Re
Limited's obligations under such agreements.

         Scottish Re Group Limited and Scottish Annuity & Life Insurance Company
(Cayman) Ltd. have executed similar  agreements for Scottish Re (Dublin) Limited
and  Scottish  Re Life  (Bermuda)  Limited and may,  from time to time,  execute
additional  agreements  guaranteeing the performance and/or obligations of their
subsidiaries.

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<PAGE>

         Our business is capital and  collateral  intensive.  We expect that our
cash and investments,  together with cash generated from our businesses, will be
sufficient to meet our current liquidity and letter of credit needs. However, if
our business continues to grow  significantly,  we will need to raise additional
capital.

         Statutory  dividends  limitations  are  outlined  in  Note  15  to  the
Consolidated Financial Statements.

Contractual Obligations and Commitments

         The following table shows our  contractual  obligations and commitments
as of December 31, 2005, other then those arising from our reinsurance  business
including our payments due by period:

<TABLE>
<CAPTION>
                                          Less Than 1                                  More Than
                                             Year          1-3 Years     4-5 Years      5 Years          Total
                                           --------       ----------    ----------      --------     ----------
<S>                                        <C>               <C>           <C>          <C>          <C>
Long-term debt.....................        $115,000          $47,500       $82,000      $      -     $  244,500
Mezzanine equity...................           8,445          145,686             -             -        154,131
Operating leases...................           3,186            6,418         5,814        22,657         38,075
Funding agreements.................         120,000          380,000       100,000             -        600,000
Collateral financing facility
 liabilities.......................               -          450,000     1,535,681             -      1,985,681
Life claims payable................         560,798                -             -             -        560,798
                                           --------       ----------    ----------      --------     ----------
                                           $807,429       $1,029,604    $1,723,495      $ 22,657     $3,583,185
                                           ========       ==========    ==========      ========     ==========
</TABLE>

         Our  long-term  debt  is  described  in  Note  10 to  the  Consolidated
Financial Statements.  Long-term debt includes the $115.0 million of 4.5% senior
convertible  notes  which are due  December  1, 2022.  The notes are  subject to
repurchase by us at a holder's option at various dates, the earliest of which is
December 6, 2006.  Long-term debt also includes capital  securities with various
maturities from 2032 onward. They are however, redeemable at earlier dates. They
have been included in the above table at the earliest redemption date.


         Our  mezzanine  equity  is  described  in Note  11 to the  Consolidated
Financial  Statements and consists of 5,750,000  HyCUs. On February 15, 2007, we
shall receive proceeds from the sale of our ordinary shares of $143.8 million as
required by the purchase  contract  forming part of each HyCU. The proceeds from
this offering will be used by us to repay the  convertible  preferred  shares of
$143.8 million on May 21, 2007. The table above  includes  contractual  payments
and dividends due on the convertible preferred shares.

         We lease  office  space in the  countries  in which we  operate.  These
leases expire at various dates through 2023.

         Amounts due under funding agreements are reported in interest sensitive
contract liabilities. These are agreements in which we earn a spread over LIBOR.
The contractual repayment terms are detailed in the table above.

         Collateral  finance  facility  liabilities  include  HSBC I and II, and
securitization  obligations  with Orkney Re, Inc.,  and Orkney Re II plc.  These
transactions are described in the previous section.  These obligations are fully
secured by fixed maturity  investments and cash and cash equivalents included in
our Consolidated  Balance Sheet. The liabilities have been included in the table
above at the earliest redemption date.

         Life  claims  payable  are  included  in  "Reserve  for  Future  Policy
Benefits" in the Consolidated Balance Sheet. Life claims payable include benefit
and claim  liabilities for which we believe the amount and timing of the payment
is essentially fixed and determinable. Such amounts generally relate to incurred
and reported  death claims and amounted to $560.8  million at December 31, 2005.
As of December 31, 2005,  reserves for future policy  benefits of  approximately
$3.5 billion related  primarily to reinsurance of traditional life insurance and
related policies and approximately  $3.9 billion of interest  sensitive contract
liabilities,  primarily deferred  annuities,  have been excluded from this table
because these amounts are generally comprised of policies or contracts where (i)
we are not  currently  making  payments and will not make payments in the future
until the occurrence of an insurable event,  such as death

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<PAGE>

or disability or (ii) the occurrence of a payment  triggering  event,  such as a
surrender of a policy or contract. The timing of payment on these liabilities is
not  reasonably  fixed and  determinable  since the  insurable  event or payment
triggering event has not yet occurred, and we have no control over the timing of
such occurrence.  In addition to timing of payments,  significant  uncertainties
relating to these liabilities include mortality, morbidity and persistency.

Off balance sheet arrangements

         We  have  no  obligations,  assets  or  liabilities  other  than  those
disclosed in the financial statements forming part of this Form 10-K; no trading
activities involving  non-exchange traded contracts accounted for at fair value;
and no  relationships  and  transactions  with  persons or entities  that derive
benefits from their non-independent relationship with us or our related parties.


New Accounting Pronouncements


Statement  of  Financial  Position  03-1"Accounting  and  Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Insurance Contracts and for
Separate Accounts" ("SOP 03-01")

         In July 2003, the Accounting  Standards  Executive Committee issued SOP
03-01.  This SOP  provides  guidance on  accounting  and  reporting by insurance
enterprises for certain nontraditional  long-duration contracts and for separate
accounts and is effective for financial  statements  for fiscal years  beginning
after  December  15,  2003.  In  implementing  the  SOP,  we have  made  various
determinations,   such  as  qualification   for  separate   account   treatment,
classification of securities in separate account  arrangements,  significance of
mortality and morbidity  risk,  adjustments to contract  holder  liabilities and
adjustments  to estimated  gross profits as defined in SFAS No. 97,  "Accounting
and Reporting by Insurance Enterprises for Certain  Long-Duration  Contracts and
for Realized Gains and Losses from the Sale of Investments".  Implementation  of
this SOP did not have a material effect on our financial statements.


EITF 04-8 "The Effect of Contingently  Convertible  Debt on Diluted Earnings Per
Share"(EITF 04-8)

         In  September  2004,  EITF 04-8 was  issued.  EITF 04-8  requires  that
certain  instruments with embedded  conversion features that are contingent upon
market price  triggers be included in diluted  earnings  per share  calculations
regardless of whether the contingency has been met. Our 4.5% senior  convertible
notes are  convertible  on the basis of a market price  trigger.  On October 26,
2004,  we amended the terms of these notes so that we are required to settle the
principal  amount of $115.0  million in cash on conversion or  repurchase.  As a
result,  we continue to apply the treasury stock method in  calculating  diluted
earnings  per share for amounts in excess of the  principal  of $115.0  million.
Also see Note 10 in the Consolidated Financial Statements.


FASB  Interpretation  No.  46  and  46R,  "Consolidation  of  Variable  Interest
Entities" ("FIN 46" and "FIN 46R")

         In December 2003, the FASB revised FIN 46, which was originally  issued
in January 2003. FIN 46R addresses  whether certain types of entities,  referred
to as variable interest entities ("VIEs"), should be consolidated in a company's
financial  statements.  A  company  must  consolidate  a VIE in  which it has an
ownership, contractual or other financial interest if it is determined to be the
primary  beneficiary.  A primary  beneficiary has a variable  interest that will
absorb a majority of the  expected  losses if they occur,  receive a majority of
the entity's  expected returns,  or both. We are the primary  beneficiary of the
collateral finance facilities discussed in Note 8 to the Consolidated  Financial
Statements,  and have  consolidated the variable interest entities in accordance
with  FIN 46R.  The  Investor  Trust,  discussed  in Note 8 to the  Consolidated
Financial Statements, is a variable interest entity but we are not considered to
be the primary beneficiary of interest in the Investor Trust. Accordingly, it is
not consolidated in accordance with FIN 46R.


SFAS No. 154 "Accounting Changes and Error Corrections" (`SFAS No. 154")


         In May 2005,  the FASB issued SFAS No. 154,  which replaces APB Opinion
No. 20,  Accounting  Changes,  and SFAS No. 3, Reporting  Accounting  Changes in
Interim Financial Statements. SFAS No. 154 requires retrospective application to
prior periods' financial statements for changes in accounting principle,  unless
determination of either the period specific effects or the cumulative  effect of
the change is impracticable or

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<PAGE>

otherwise  promulgated.  SFAS No. 154 is effective  for fiscal  years  beginning
after December 15, 2005. SFAS No. 154, upon adoption,  is not expected to have a
material effect on our results of operations or financial position.


EITF Issue No.  03-1,  The Meaning of  Other-Than-Temporary  Impairment  and Its
Application to Certain  Investments  ("EITF 03-1") and FAS 115-1"The  meaning of
Other-Than-Temporary  Impairment  and Its  Application  to Certain  Investments"
("FSP FAS 115-1")

         In June 2005, the FASB completed its review of EITF Issue No. 03-1, The
Meaning  of  Other-Than-Temporary  Impairment  and Its  Application  to  Certain
Investments.  EITF 03-1 provides accounting guidance regarding the determination
of when an impairment of debt and marketable  equity  securities and investments
accounted for under the cost method  should be  considered  other-than-temporary
and  recognized in income.  EITF 03-1 also  requires  certain  quantitative  and
qualitative  disclosures for debt and marketable equity securities classified as
available-for-sale or held-to-maturity under SFAS No.115, Accounting for Certain
Investments  in Debt and Equity  Securities,  that are  impaired  at the balance
sheet  date  but for  which  an  other-than-temporary  impairment  has not  been
recognized.  The FASB decided not to provide additional  guidance on the meaning
of other-than-temporary impairment but has issued in November 2005, FSP FAS 115,
which  nullifies the guidance in paragraphs  10-18 of EITF 03-1,  and references
existing other than temporary impairment guidance.  FSP FAS 115-1 clarifies that
an  investor  should  recognize  an  impairment  loss no  later  than  when  the
impairment  is  deemed  other-than-temporary,  even if a  decision  to sell  the
security  has not  been  made,  and also  provides  guidance  on the  subsequent
accounting  for an impaired  debt  security.  We have  provided the  appropriate
disclosures  in  accordance  with  EITF  03-1.  FSP FAS 115-1 is  effective  for
reporting  periods  beginning  after  December 15, 2005. The adoption of FSP FAS
115-1 will not have a material  effect on our results of operations or financial
position.

SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments--an amendment
of FASB Statements No. 133 and 140" ("SFAS No. 155")

         In February 2006,  the FASB issued SFAS No. 155, which resolves  issues
addressed in SFAS No. 133 Implementation Issue No. D1, "Application of Statement
133 to  Beneficial  Interests in  Securitized  Financial  Assets." SFAS No. 155,
among other things, permits the fair value remeasurement of any hybrid financial
instrument  that contains an embedded  derivative  that otherwise  would require
bifurcation;  clarifies which interest-only strips and principal-only strips are
not subject to the  requirements  of SFAS No. 133; and establishes a requirement
to evaluate interests in securitized financial assets to identify interests that
are  freestanding  derivatives  or that are hybrid  financial  instruments  that
contain an embedded derivative requiring bifurcation.  SFAS No. 155 is effective
for all  financial  instruments  acquired or issued in a fiscal  year  beginning
after September 15, 2006. We are currently  assessing the impact of SFAS No. 155
on our results of operations and financial position.


Forward-Looking Statements

         Some of the  statements  contained  in this  report are not  historical
facts and are  forward-looking  within  the  meaning of the  Private  Securities
Litigation Reform Act of 1995. Forward looking  statements  include  information
with respect to our known and unknown  risks,  uncertainties  and other factors,
which may cause the actual results to differ materially from the forward-looking
statements.   Words  such  as  "anticipates,"   "expects,"  "intends,"  "plans,"
"believes,"  "seeks,"  "estimates,"  "may,"  "will,"  "continue,"  "project" and
similar  expressions,  as well  as  statements  in the  future  tense,  identify
forward-looking statements.

          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. These risks and uncertainties include:

         o        uncertainties   relating  to  the  ratings   accorded  to  our
                  insurance subsidiaries;

         o        the risk  that  our  risk  analysis  and  underwriting  may be
                  inadequate;

         o        exposure  to  mortality  experience  which  differs  from  our
                  assumptions;

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<PAGE>

         o        risks arising from our investment  strategy,  including  risks
                  related to the market value of our  investments,  fluctuations
                  in interest rates and our need for liquidity;

         o        uncertainties  arising from control of our invested  assets by
                  third parties;

         o        developments in global financial markets that could affect our
                  investment portfolio and fee income;

         o        changes in the rate of  policyholder  withdrawals or recapture
                  of reinsurance treaties;

         o        the  risk  that  our  retrocessionaires  may not  honor  their
                  obligations to us;

         o        terrorist  attacks on the United States and the impact of such
                  attacks  on the  economy  in general  and on our  business  in
                  particular;

         o        political and economic risks in developing countries;

         o        the  impact  of   acquisitions,   including   the  ability  to
                  successfully  integrate  acquired  businesses,  the  competing
                  demands  for  our   capital   and  the  risk  of   undisclosed
                  liabilities;

         o        loss of the services of any of our key employees;

         o        losses due to foreign currency exchange rate fluctuations;

         o        uncertainties  relating to government and regulatory  policies
                  (such as subjecting us to insurance  regulation or taxation in
                  additional jurisdictions);

         o        the competitive environment in which we operate and associated
                  pricing pressures; and

         o        changes in accounting principles.

         The effects of these  factors  are  difficult  to predict.  New factors
emerge from time to time and we cannot assess the  potential  impact of any such
factor on the  business or the extent to which any  factor,  or  combination  of
factors,  may cause  results to differ  materially  from those  contained in any
forward-looking  statement. Any forward-looking  statement speaks only as of the
date of this report and we do not undertake any obligation, other than as may be
required  under the  Federal  securities  laws,  to update  any  forward-looking
statement to reflect events or circumstances after the date of such statement or
to reflect the occurrence of unanticipated events.

Item 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         We  measure  and  manage  market  risks and  other  risks as part of an
enterprise-wide  risk  management  process.  The market risks  described in this
section relate to financial instruments,  primarily in our investment portfolio,
that are  sensitive  to changes in  interest  rates,  credit  risk  premiums  or
spreads, foreign exchange rates and equity prices.

         Our  investments,  which are  primarily  fixed income  securities,  are
subject to market value,  reinvestment,  and liquidity risk. Our invested assets
are  funded  not  only by  capital  but  also  by the  proceeds  of  reinsurance
transactions,  some of which entail substantial deposits of funds or assets. The
cash  flows   required  to  pay  future   benefits   are  subject  to  actuarial
uncertainties  and,  in  some  cases,  the  policies  that we  reinsure  contain
provisions that tend to increase benefits to customers depending on movements in
interest rates. We analyze the potential results of a transaction, including the
cash flows of the liabilities and of the related assets, and any risk mitigation
measures,  and we price  transactions  to cover our costs,  including  estimated
credit  losses,  and  earn  a  desirable   risk-adjusted  return  under  various
scenarios.  We use interest rate swaps as tools to mitigate these risks.  We may
also retrocede some risks to other reinsurers.

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<PAGE>

Interest Rate Risk

         Interest  rate risk consists of two  components:  (1) in a falling rate
scenario,  we have reinvestment risk, which is the risk that interest rates will
decline  and  funds  reinvested  will  earn  less  than is  necessary  to  match
anticipated  liabilities;  and (2) in a rising rate  scenario,  we have the risk
that cash outflows will have to be funded by selling assets,  which will then be
trading at depreciated  values. With some annuity  liabilities,  these risks are
compounded  by   variability  in  liability  cash  flows  arising  from  adverse
experience  in  withdrawals,   surrenders,  mortality,  and  election  of  early
retirement.

         We mitigate both components of risk through asset-liability management,
including the technique of simulating future results under a variety of interest
rate  scenarios and modifying the  investment  and hedging  strategy to mitigate
downside   risk  to   earnings.   Our   investment   portfolio  is  composed  of
fixed-maturity  bond  investments,  of which the  majority is at fixed  interest
rates. For fixed-rate investments backing reinsurance liabilities,  the maturity
structure has been designed to have  approximately  the same exposure to changes
in  interest  rates  as  the  related  liabilities.  Floating-rate  liabilities,
including  borrowings,  are backed  primarily by  floating-rate  assets.  In the
capital account, however, we own investments that are also sensitive to interest
rate  changes and this  sensitivity  is not offset by  liabilities.  Our overall
objective is to limit interest rate exposure.

Credit Risk

         Credit risk relates to the  uncertainty  associated  with the continued
ability of a given obligor to make timely payments of principal and interest. We
measure  and  manage   credit  risk  not  only  of  bond  issuers  but  also  of
counter-parties in reinsurance, retrocession and hedging transactions.

         In our investment portfolio, credit risk is manifested in three ways:

         o        actual and anticipated  deterioration in the  creditworthiness
                  of an issue, as may be reflected in downgrades in its ratings,
                  tend to reduce its market value;

         o        our   managers   might   react  to  the  actual  or   expected
                  deterioration and/or downgrade of an issuer by selling some or
                  all of our  positions,  realizing a loss (or a profit  smaller
                  than  would  have  been  realized  if  the   deterioration  or
                  downgrade had not occurred); and

         o        the  issuer  may go into  default,  ultimately  causing  us to
                  realize a loss.

         One of our key  objectives  in  managing  credit risk is to keep actual
credit  losses  below both the amounts  that we have  assumed and allowed for in
pricing  reinsurance  transactions and the amounts we would have lost, given the
general level of experience for comparably  rated securities of the same type in
the general  market.  We seek to prevent  credit risk,  in the  aggregate,  from
becoming the dominant  source of risk in our overall book of retained risks as a
reinsurer.

         We mitigate credit risk by adopting an investment  policy,  approved by
our board of  directors,  which  limits  overall  exposure  to  credit  risk and
requires  diversification by limiting exposure to any single issuer. We also use
outside  professional  money  management  firms and monitor their  capabilities,
performance and compliance with our investment and risk management policies.

Foreign Currency Risk

         Our functional currency is the United States dollar.  However, our U.K.
subsidiaries,  Scottish Re Holdings  Limited and  Scottish Re Limited,  maintain
operating  expense  accounts  in  British  pounds,  parts  of  their  investment
portfolios in Euros and British pounds,  and receive other currencies in payment
of premiums.  All of Scottish Re Limited's  original U.S. business is settled in
United States dollars, all Canadian,  Latin American and certain Asia and Middle
East business is converted and settled in United States  dollars,  and all other
currencies are converted and settled in Euros or British pounds.  The results of
the  business  recorded in Euros and in British  pounds are then  translated  to
United  States  dollars.  We attempt to limit  substantial  exposures to foreign
currency risk, but do not

                                       73
<PAGE>

actively manage currency risks. To the extent our foreign  currency  exposure is
not properly  managed or otherwise  hedged,  we may experience  exchange losses,
which in turn would  adversely  affect our results of  operations  and financial
condition.

         We may enter into investment, insurance and reinsurance transactions in
the future in currencies  other than United States dollars.  Our objective is to
avoid substantial exposures to foreign currency risk. We will manage these risks
using  policy  limits,   asset-liability   management   techniques  and  hedging
transactions.

Sensitivity Analysis--Change In Interest Rates

         We regularly  conduct analyses to gauge the financial impact of changes
in interest rates on our financial  condition.  Techniques include,  but are not
limited to, comparison of option-adjusted duration of assets and liabilities and
simulation of future asset and liability cash flows under multiple interest rate
scenarios.  Financial  simulations are also used to evaluate  exposure to credit
spreads and will be used as we consider investments and liabilities  denominated
in foreign  currencies.  On a monthly  basis,  we measure  the gap  between  the
effective  duration  of the  investments  and the  target  duration.  For assets
supporting  liabilities,  we set the target  duration to minimize  interest rate
risk for each liability  transaction.  Our investment policy limits the duration
gap to 0.75 years.  For  floating-rate  borrowings  and  liabilities,  we target
floating-rate  assets,  which have a duration  near zero.  For  capital  account
assets, we target a duration of 3.0 years.

Quantitative Disclosure Of Interest Rate Risk

         The following tables provide  information as of December 31, 2005 about
the interest rate sensitivity of the portion of our investment portfolio managed
by  external  managers.  The tables do not include  other cash  balances of $1.3
billion,  or funds  withheld at interest  of $2.6  billion.  The tables show the
aggregate  amount,  by book value and fair  value,  of the  securities  that are
expected to mature in each of the next five years and thereafter, as well as the
weighted average book yield of those  securities.  The expected  maturity is the
weighted  average  life  of  a  security  and  takes  into   consideration   par
amortization (for  mortgage-backed  securities),  call features and sinking fund
features.

         In addition to the maturity structure of our controlled asset portfolio
illustrated  below,  we have entered into an interest rate swap agreement with a
notional amount of $100.0 million and a maturity of July 2009. This swap is used
to manage a portion of the interest  rate  exposure on the balance sheet and has
the effect of  shortening  the duration on our overall  controlled  portfolio by
0.05  years or  approximately  equivalent  to  reducing  our four year  maturity
exposure by $100.0 million.

         December 31, 2005 market interest rates were used as discounting  rates
in the estimation of fair value.

                                       74
<PAGE>

<TABLE>
<CAPTION>
                                                                   Expected Maturity Date
                        ------------------------------------------------------------------------------------------------------------
                                                                                                                          Total Fair
Total                     2006           2007          2008          2009        2010         Thereafter      Total         Value
-----                   ----------    ----------    ----------    ----------    ----------    ----------    ----------    ----------
<S>                     <C>           <C>           <C>           <C>           <C>           <C>           <C>           <C>
Principal amount ....   $  403,018    $  771,146    $1,091,652    $  793,735    $  636,763    $2,315,299    $6,011,613    $5,426,399
Book value ..........      464,440       769,064       757,676       710,213       425,748     2,333,618     5,460,759
Weighted average
  book yield.........          4.9%          4.8%          4.9%          4.8%          4.9%          5.4%          5.1%
</TABLE>
--------------------

<TABLE>
<CAPTION>
                                                                   Expected Maturity Date
                        ------------------------------------------------------------------------------------------------------------
                                                                                                                          Total Fair
Fixed Rate Only           2006           2007          2008          2009        2010         Thereafter      Total         Value
---------------         ----------    ----------    ----------    ----------    ----------    ----------    ----------    ----------
<S>                     <C>           <C>           <C>           <C>           <C>           <C>           <C>           <C>
Principal amount ....   $  110,680    $  284,531    $  674,446    $  369,399    $  517,344    $2,054,403    $4,010,803    $3,438,520
Book value ..........      172,003       281,274       339,483       285,785       305,958     2,086,911     3,471,414             -
Weighted average
  book yield.........          4.6%          4.5%          4.6%          4.8%          4.9%          5.5%          5.2%            -
</TABLE>
--------------------


<TABLE>
<CAPTION>
                                                                   Expected Maturity Date
                        ------------------------------------------------------------------------------------------------------------
                                                                                                                          Total Fair
Floating Rate Only        2006           2007          2008          2009        2010         Thereafter      Total         Value
------------------      ----------    ----------    ----------    ----------    ----------    ----------    ----------    ----------
<S>                     <C>           <C>           <C>           <C>           <C>           <C>           <C>           <C>
Principal amount .....   $  292,338    $  486,615    $  417,206   $  424,336    $  119,419    $  260,896    $2,000,810    $1,987,879
Book value ...........      292,437       487,790       418,193      424,428       119,790       246,707     1,989,345
Weighted average
  book yield..........          5.1%          5.0%          5.1%         4.8%          4.9%          4.7%          5.0%
</TABLE>
--------------------


  Item 8:  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The  information  called  for by this  item is set  forth in "Item  15:
Exhibits, Financial Statement Schedules and Reports on Form 8-K."

  Item 9:  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE

         There  were  no  changes  in  or  disagreements   with  accountants  on
accounting and financial disclosure for the fiscal year ended December 31, 2005.

  Item 9A:    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

         The Chief Executive  Officer and Chief Financial Officer have evaluated
the  effectiveness  (design  and  operation)  of  our  disclosure  controls  and
procedures  (as defined in Rules  13a-15(e) and 15d-15(e)  under the  Securities
Exchange Act of 1934, as amended). Based on such evaluation,  such officers have
concluded that these disclosure  controls and procedures are effective as of the
end of the period covered by this Annual Report.

        Management's Report on Internal Control over Financial Reporting

         Management is responsible for  establishing  and  maintaining  adequate
internal  control  over  financial  reporting  and  for  the  assessment  of the
effectiveness of internal control over financial reporting,  as defined in Rules
13a-15(f) of the  Securities  and Exchange  Act of 1934,  as amended.  Under the
supervision and with the  participation  of management,  including our principal
executive  and  financial  officers,  we have  conducted  an  evaluation  of the

                                       75
<PAGE>

effectiveness  of our internal  control over financial  reporting as of December
31, 2005.  In designing  and  evaluating  the  internal  control over  financial
reporting,  we recognize  that any controls and  procedures,  no matter how well
designed and operated,  can provide only  reasonable  assurance of achieving the
desired control objectives. Also, projections of any evaluation of effectiveness
to future  periods are subject to the risk that  controls may become  inadequate
because of  changes in  conditions,  or that the degree of  compliance  with the
policies or procedures may deteriorate.

         In  making  their   assessment  of  internal   control  over  financial
reporting,   management  used  criteria   established  in  "Internal  Control  -
Integrated Framework" issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the "COSO criteria"). Based on their evaluation, management
has  concluded  that we maintained  effective  internal  control over  financial
reporting as of December 31, 2005, based on the COSO criteria.

         Ernst & Young LLP, the independent  registered  public  accounting firm
that audited our consolidated financial statements included in this report, have
issued an attestation report on management's assessment of internal control over
financial reporting.

Changes in Internal Control over Financial Reporting

         There have been no changes in internal control over financial reporting
identified  in connection  with our  evaluation  that  occurred  during the most
recent fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.


                                       76
<PAGE>

             Report of Independent Registered Public Accounting Firm
                  on Internal Control Over Financial Reporting

The Board of Directors and Shareholders
Scottish Re Group Limited

We  have  audited   management's   assessment,   included  in  the  accompanying
Management's Report on Internal Control over Financial Reporting,  that Scottish
Re Group Limited maintained  effective internal control over financial reporting
as  of  December  31,   2005,   based  on  criteria   established   in  Internal
Control--Integrated   Framework   issued   by  the   Committee   of   Sponsoring
Organizations of the Treadway Commission (the COSO criteria).  Scottish Re Group
Limited's  management is responsible for maintaining  effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's  assessment  and an opinion on the  effectiveness  of the Company's
internal control over financial reporting based on our audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain  reasonable  assurance  about whether  effective
internal  control  over  financial  reporting  was  maintained  in all  material
respects. Our audit included obtaining an understanding of internal control over
financial reporting,  evaluating management's assessment, testing and evaluating
the design and operating  effectiveness of internal control, and performing such
other  procedures as we considered  necessary in the  circumstances.  We believe
that our audit provides a reasonable basis for our opinion.

A company's  internal control over financial  reporting is a process designed to
provide reasonable  assurance  regarding the reliability of financial  reporting
and the preparation of financial  statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial  reporting  includes those policies and procedures that (1) pertain to
the  maintenance  of records that, in reasonable  detail,  accurately and fairly
reflect the  transactions  and  dispositions  of the assets of the company;  (2)
provide  reasonable  assurance  that  transactions  are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting  principles,  and that receipts and  expenditures  of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of  unauthorized  acquisition,  use, or  disposition  of the company's
assets that could have a material effect on the financial statements.

Because of its inherent  limitations,  internal control over financial reporting
may not prevent or detect misstatements.  Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate  because of changes in  conditions,  or that the degree of compliance
with the policies or procedures may deteriorate.

In  our  opinion,   management's  assessment  that  Scottish  Re  Group  Limited
maintained  effective  internal control over financial  reporting as of December
31,  2005,  is  fairly  stated,  in all  material  respects,  based  on the COSO
criteria.  Also, in our opinion,  Scottish Re Group Limited  maintained,  in all
material  respects,  effective  internal control over financial  reporting as of
December 31, 2005, based on the COSO criteria.

We also have  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight Board (United States),  the consolidated balance sheets of
Scottish  Re Group  Limited as of December  31,  2005 and 2004,  and the related
consolidated statements of income,  comprehensive income,  shareholders' equity,
and cash flows for each of the three years in the period ended December 31, 2005
and our report dated March 13, 2006 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP
---------------------


Philadelphia, Pennsylvania
March 13, 2006

                                       77
<PAGE>


NYSE CEO Certification


         We filed our 2005  annual  CEO  certification  with the New York  Stock
Exchange  on  August  10,  2005.  We  anticipate  filing  our  2006  annual  CEO
certification  with the NYSE on or about  June 2, 2006.  Additionally,  we filed
with the SEC as exhibits to our Form 10-K for the year ended  December  31, 2005
the CEO and CFO certifications  required under Section 302 of the Sarbanes Oxley
Act of 2002.



  Item 9B: OTHER INFORMATION

         None.


PART III

  Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

         The information required by this Item 10 will be set forth in our Proxy
Statement for 2006 Annual Meeting of Shareholders  (the "2006 Proxy  Statement")
under the captions "Proposal for Election of Directors," "Principal Shareholders
and  Management  Ownership" and "Section 16(a)  Beneficial  Ownership  Reporting
Compliance" and is incorporated herein by reference.

  Item 11: EXECUTIVE COMPENSATION

         The information  required by this Item 11 will be set forth in the 2006
Proxy  Statement  under the captions  "Management  Compensation"  and "Report on
Executive Compensation" and is incorporated herein by reference.

  Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
           RELATED STOCKHOLDER MATTERS

         The information  required by this Item 12 will be set forth in the 2006
Proxy  Statement  under  the  caption  "Principal  Shareholders  and  Management
Ownership" and is incorporated herein by reference.

  Item 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information  required by this Item 13 will be set forth in the 2006
Proxy Statement  under the caption  "Certain  Transactions"  and is incorporated
herein by reference.

  Item 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES

         The information  required by this Item 14 will be set forth in the 2006
Proxy  Statement  under the caption "Fees Billed to the Company by Ernst & Young
LLP" and is incorporated herein by reference.

                                    PART IV

  Item 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES

Except as otherwise  indicated,  the following  Exhibits are filed  herewith and
made a part hereof:

3.1      Memorandum of Association  of Scottish Re Group Limited,  as amended as
         of April 7, 2005 (incorporated herein by reference to Scottish Re Group
         Limited's Current Report on Form 8-K). (6)


3.2      Articles of Association of Scottish Re Group Limited,  as amended as of
         April 7, 2005

                                       78
<PAGE>

         (incorporated  herein  by  reference  to  Scottish  Re Group  Limited's
         Current  Report  on  Form  8-K).   (6)

4.1      Specimen Ordinary Share Certificate  (incorporated  herein by reference
         to Exhibit 4.1 to Scottish Re Group Limited's Registration Statement on
         Form S-1). (1)


4.2      Form of Amended and Restated  Class A Warrant  (incorporated  herein by
         reference  to Exhibit 4.2 to Scottish Re Group  Limited's  Registration
         Statement on Form S-1). (1)

4.3      Form  of  Securities  Purchase  Agreement  for  the  Class  A  Warrants
         (incorporated herein by reference to Exhibit


4.4      to Scottish Re Group Limited's Registration Statement on Form S-1). (1)
         4.4 Form of Securities  Purchase  Agreement  between  Scottish Re Group
         Limited and the Shareholder Investors (incorporated herein by reference
         to Exhibit 4.10 to Scottish Re Group Limited's  Registration  Statement
         on Form S-1). (1)

4.5      Form of Securities Purchase Agreement between Scottish Re Group Limited
         and the Non-Shareholder  Investors (incorporated herein by reference to
         Exhibit 4.12 to Scottish Re Group Limited's  Registration  Statement on
         Form S-1). (1)

4.6      Certificate of Designations of Convertible Preferred Shares of Scottish
         Re Group Limited (incorporated herein by reference to Scottish Re Group
         Limited's  Current  Report  on  Form  8-K).  (10)

4.7      Certificate   of   Designations   of   Scottish   Re  Group   Limited's
         Non-Cumulative   Perpetual  Preferred  Shares,   dated  June  28,  2005
         (incorporated  herein  by  reference  to  Scottish  Re Group  Limited's
         Current Report on Form 8-K).  (16)

4.8      Specimen Stock Certificate for the Company's  Non-Cumulative  Perpetual
         Preferred Shares (incorporated herein by reference to Scottish Re Group
         Limited's  Current Report on Form 8-K). (16)

10.1     Employment  Agreement  dated June 18,  1998  between  Scottish Re Group
         Limited and  Michael C. French  (incorporated  herein by  reference  to
         Exhibit 10.1 to Scottish Re Group Limited's  Registration  Statement on
         Form S-1). (1)(22)

10.2     Second  Amended and Restated 1998 Stock Option Plan  effective  October
         22, 1998 (incorporated  herein by reference to Exhibit 10.3 to Scottish
         Re Group Limited's Registration Statement on Form S-1). (1)(22)

10.3     Form of Stock  Option  Agreement in  connection  with 1998 Stock Option
         Plan  (incorporated  herein by reference to Exhibit 10.4 to Scottish Re
         Group Limited's Registration Statement on Form S-1). (1)(22)

10.4     Investment Management Agreement dated October 22, 1998 between Scottish
         Re Group  Limited and General  Re-New  England Asset  Management,  Inc.
         (incorporated herein by reference to Exhibit 10.14 to Scottish Re Group
         Limited's Registration Statement on Form S-1). (1)

10.5     Form of Omnibus  Registration Rights Agreement  (incorporated herein by
         reference to Exhibit 10.17 to Scottish Re Group Limited's  Registration
         Statement on Form S-1). (1)

10.6     1999 Stock  Option Plan  (incorporated  herein by  reference to Exhibit
         10.14 to Scottish Re Group  Limited's 1999 Annual Report on Form 10-K).
         (2)(22)

                                       79
<PAGE>
10.7     Form of Stock Options  Agreement in  connection  with 1999 Stock Option
         Plan (incorporated  herein by reference to Exhibit 10.15 to Scottish Re
         Group Limited's 1999 Annual Report on Form 10-K). (2)(22)

10.8     Employment  Agreement  dated  September  18, 2000  between  Scottish Re
         (U.S.), Inc. and Oscar R. Scofield (incorporated herein by reference to
         Exhibit 10.16 to Scottish Re Group Limited's 2000 Annual Report on Form
         10-K). (3)(22)

10.9     Share Purchase  Agreement by and between  Scottish Re Group Limited and
         Pacific  Life  dated  August  6, 2001  (incorporated  by  reference  to
         Scottish Re Group Limited's Current Report on Form 8-K). (7)

10.10    Amendment No. 1, dated  November 8, 2001, to Share  Purchase  Agreement
         dated  August 6, 2001 by and  between  Scottish  Re Group  Limited  and
         Pacific Life  (incorporated by reference to Scottish Re Group Limited's
         Current Report on Form 8-K). (5)

10.11    2001 Stock  Option Plan  (incorporated  herein by  reference to Exhibit
         10.17 to Scottish Re Group  Limited's 2001 Annual Report on Form 10-K).
         (4)(22)


10.12    Form of  Nonqualified  Stock Option  Agreement in connection  with 2001
         Stock Option Plan (incorporated herein by reference to Exhibit 10.17 to
         Scottish Re Group Limited's 2001 Annual Report on Form 10-K). (4)(22)

10.13    Tax Deed of Covenant dated December 31, 2001 between  Scottish Re Group
         Limited and Pacific  Life  (incorporated  by  reference  to Scottish Re
         Group Limited's Current Report on Form 8-K). (5)

10.14    Letter  Agreement  dated  December 28, 2001  between  Scottish Re Group
         Limited and Pacific  Life   (incorporated  by  reference to Scottish Re
         Group Limited's Current Report on Form 8-K). (5)

10.15    Form of  Indemnification  Agreement  between  Scottish Re Group Limited
         and each of its directors and officers  (incorporated   by reference to
         Scottish Re Group Limited's   Amended  Quarterly  Report on Form 10-Q/A
         for the period ended  September  30, 2002).   (8)(22) 10.16  Employment
         Agreement dated July 1, 2002 between Scottish  Annuity & Life Insurance
         Company  (Cayman) Ltd. and Thomas A.  McAvity,  Jr.   (incorporated  by
         reference to Scottish Re Group Limited's  Amended   Quarterly Report on
         Form 10-Q/A for the period ended September 30, 2002). (8)(22)

10.17    Employment  Agreement  dated June 1, 2002   between   Scottish Re Group
         Limited and Paul Goldean (incorporated  herein by reference to Scottish
         Re Group Limited's  Quarterly Report  on Form 10-Q for the period ended
         March 31, 2004). (14)(22)

10.18    Employment  Agreement  dated July 1, 2002   between  Scottish  Re Group
         Limited and Elizabeth  Murphy (incorporated by reference to Scottish Re
         Group Limited's Amended  Quarterly Report on Form 10-Q/A for the period
         ended September 30, 2002). (8)(22)

10.19    Employment  Agreement  dated  June 1, 2002  between  Scottish  Re Group
         Limited and Clifford  J. Wagner  (incorporated by reference to Scottish
         Re Group  Limited's  Amended   Quarterly  Report on Form 10-Q/A for the
         period ended September 30, 2002). (8)(22)

10.20    Employment  Agreement   dated July 8, 2002  between  Scottish  Re Group
         Limited and Scott E. Willkomm  (incorporated   by reference to Scottish
         Re Group  Limited's  Amended  Quarterly   Report on Form 10-Q/A for the
         period ended September 30, 2002). (8)(22)

                                       80
<PAGE>

10.21    Employment  Agreement dated February 10, 2003 between Scottish Re Group
         Limited and  Michael C. French  (incorporated  herein by  reference  to
         Scottish Re Group Limited's 2002 Annual Report on Form 10-K). (12)(22)

10.22    Employment  Agreement  dated  February  10,  2003  between  Scottish Re
         (U.S.), Inc. and Oscar R. Scofield (incorporated herein by reference to
         Scottish Re Group Limited's 2002 Annual Report on Form 10-K). (12)(22)

10.23    Amended  Employment  Agreement dated February 10, 2003 between Scottish
         Re  Group  Limited  and  Thomas  A.  McAvity  (incorporated  herein  by
         reference  to Scottish Re Group  Limited's  2002 Annual  Report on Form
         10-K). (12)(22)

10.24    Indenture,  dated November 22, 2002,  between Scottish Re Group Limited
         and The Bank of New York (incorporated  herein by reference to Scottish
         Re Group Limited's Registration Statement on Form S-3). (9)

10.25    Registration  Rights  Agreement,  dated November 22, 2002, by and among
         Scottish  Re Group  Limited  and Bear  Stearns & Co. and Putnam  Lovell
         Securities Inc.  (incorporated herein by reference to Scottish Re Group
         Limited's Registration Statement on Form S-3). (9)

10.26    Employment  Agreement  dated May 1, 2003  between  Scottish Re Holdings
         Limited and David Huntley (incorporated herein by reference to Scottish
         Re Group Limited's  Quarterly  Report on Form 10-Q for the period ended
         September 30, 2003). (13)(22)

10.27    Stock  Purchase  Agreement,  dated as of October 24, 2003, by and among
         Scottish  Re Group  Limited,  Scottish  Holdings,  Inc.  and  Employers
         Reinsurance  Corporation  (incorporated herein by reference to Scottish
         Re Group Limited's Current Report on Form 8-K). (11)

10.28    Tax  Matters  Agreement,  dated as of January  22,  2003,  by and among
         Scottish  Re Group  Limited,  Scottish  Holdings,  Inc.  and  Employers
         Reinsurance  Corporation  (incorporated herein by reference to Scottish
         Re Group Limited's Current Report on Form 8-K). (11)

10.29    Transition  Services  Agreement,  dated as of January 22, 2003,  by and
         among Scottish  Holdings,  Inc. and Employers  Reinsurance  Corporation
         (incorporated  herein  by  reference  to  Scottish  Re Group  Limited's
         Current Report on Form 8-K). (11)

10.30    Employment  Agreement  dated  April 21,  2004,  by and  among  Scottish
         Holdings,  Inc. and Seth W. Vance (incorporated  herein by reference to
         Scottish  Re Group  Limited's  Quarterly  Report  on Form  10-Q for the
         period ended March 31, 2004). (14)(22)

10.31    Amendment to Employment  Agreement dated March 29, 2004, by and between
         Scottish Re (U.S.), Inc. and Oscar R. Scofield  (incorporated herein by
         reference to Scottish Re Group Limited's  Quarterly Report on Form 10-Q
         for the  period  ended June 30,  2004,  filed with the SEC on August 9,
         2004). (22)

10.32    Asset  Purchase  Agreement,  dated as of October 17, 2004, by and among
         Security  Life of Denver  Insurance  Company,  Security  Life of Denver
         International  Limited,  ING  America  Insurance  Holdings,  Inc.  (for
         purposes  of Section  11.11),  Scottish Re Group  Limited,  Scottish Re
         (U.S.),  Inc.,  Scottish Annuity & Life Insurance Company (Cayman) Ltd.
         (for  purposes of Section 5.26) and Scottish Re Life  Corporation  (for
         purposes of Section 5.24) (incorporated herein by reference to Scottish
         Re Group Limited's  Current Report on Form 8-K). (15) 10.33  Securities
         Purchase Agreement, dated as of October 17, 2004, by and among Scottish
         Re Group  Limited  and Cypress  Merchant B Partners  II (Cayman)  L.P.,
         Cypress  Merchant  Banking II-A C.V.,  55th Street Partners II (Cayman)
         L.P.  and  Cypress  Side-by-Side   (Cayman)  L.P.  (including  form  of
         Subordinated  Note,  Class  C  Warrant,   Shareholders'  Agreement  and
         Amendments  to  Articles  of  Association)   (incorporated   herein  by
         reference to Scottish Re Group  Limited's  Current Report on Form 8-K).
         (15)

10.33    Securities  Purchase  Agreement,  dated as of October 17, 2004,  by and
         among  Scottish Re Group  Limited  and  Cypress  Merchant B Partners II
         (Cayman) L.P., Cypress Merchant Banking II-A C.V., 55th Street Partners
         II (Cayman) L.P. and Cypress Side-by-Side (Cayman) L.P. (including form
         of  Subordinated  Note,  Class C Warrant,  Shareholders'  Agreement and
         Amendments  to

                                       81
<PAGE>

         Articles of Association)  (incorporated herein by reference to Scottish
         Re Group Limited's Current Report on Form 8-K). (15)

10.34    Form of Voting  Agreement,  by and among Cypress Merchant B Partners II
         (Cayman) L.P., Cypress Merchant Banking II-A C.V., 55th Street Partners
         II (Cayman) L.P. and Cypress  Side-by-Side  (Cayman) L.P.,  Scottish Re
         Group  Limited  and,  respectively,  each  director and each officer of
         Scottish Re Group Limited (incorporated herein by reference to Scottish
         Re Group Limited's Current Report on Form 8-K). (15)

10.35    Voting  Agreement,  dated as of October 15, 2004, by and among Scottish
         Re Group Limited, Cypress Merchant B Partners II (Cayman) L.P., Cypress
         Merchant  Banking II-A C.V.,  55th Street Partners II (Cayman) L.P. and
         Cypress  Side-by-Side  (Cayman) L.P. and Pacific Life Insurance Company
         (incorporated  herein  by  reference  to  Scottish  Re Group  Limited's
         Current Report on Form 8-K). (15)

10.36    Letter  Agreement,  dated as of October 17, 2004, by and among Scottish
         Re Group  Limited  and Cypress  Merchant B Partners  II (Cayman)  L.P.,
         Cypress  Merchant  Banking II-A C.V.,  55th Street Partners II (Cayman)
         L.P. and Cypress  Side-by-Side  (Cayman) L.P.  (incorporated  herein by
         reference to Scottish Re Group  Limited's  Current Report on Form 8-K).
         (15)

10.37    First  Supplemental  Indenture,  dated as of October 26, 2004,  between
         Scottish Re Group Limited and The Bank of New York (incorporated herein
         by reference to Scottish Re Group Limited's Current Report on Form 8-K,
         filed with the SEC on October 29, 2004).

10.38    Amendment to  Employment  Agreement  dated as of March 29, 2004, by and
         among  Scottish Re Group  Limited  and Michael C. French  (incorporated
         herein by reference to Scottish Re Group Limited's  Quarterly Report on
         Form 10-Q for the quarter ended September 30, 2004,  filed with the SEC
         on November 8, 2004). (22)

10.39    Employment Agreement, dated as of March 29, 2004, by and among Scottish
         Re Group Limited and Deborah G. Percy (incorporated herein by reference
         to Scottish Re Group  Limited's  Quarterly  Report on Form 10-Q for the
         quarter  ended  September  30, 2004,  filed with the SEC on November 8,
         2004). (22)

10.40    Employment  Agreement,  dated as of January 1, 2005,  between  Scottish
         Holdings,  Inc. and Gary Dombowsky (incorporated herein by reference to
         Scottish Re Group Limited's 2004 Annual Report on Form 10-K). (20)(22)

10.41    Amendment  to  Employment  Agreement,  dated as of  February  7,  2005,
         between  Scottish Re Group Limited and Michael C. French  (incorporated
         herein by reference to Scottish Re Group  Limited's  2004 Annual Report
         on Form 10-K). (20)(22)

10.42    Employment Agreement, dated as of February 1, 2005, between Scottish Re
         Group Limited and Hugh T. McCormick  (incorporated  herein by reference
         to  Scottish  Re Group  Limited's  2004  Annual  Report on Form  10-K).
         (20)(22)

10.43    Employment  Agreement,  dated as of December 1, 2004,  between Scottish
         Holdings,  Inc. and Kenneth R. Stott (incorporated  herein by reference
         to  Scottish  Re Group  Limited's  2004  Annual  Report on Form  10-K).
         (20)(22)

10.44    Credit Agreement, dated as of December 29, 2004, among Scottish Annuity
         & Life Insurance  Company (Cayman) Ltd.,  Scottish Re (Dublin) Limited,
         Scottish Re (U.S.),  Inc., and Scottish Re Limited, as borrowers,  Bear
         Stearns Corporate Lending, Inc. and Wachovia Bank, National Association
         as  Co-Syndication  Agents,  Bank of America,  N.A., as  Administrative
         Agent and L/C  Issuer,  and The Other  Lenders  Party  Hereto,  Banc of
         America  Securities  LLC, as Sole Lead  Arranger  and Sole Book Manager
         (incorporated  herein by reference to Scottish Re Group

                                       82
<PAGE>

         Limited's 2004 Annual Report on Form 10-K). (20)

10.45    Administrative  Services  Agreement,  dated as of  December  31,  2004,
         between Security Life of Denver Insurance  Company and Security Life of
         Denver International Limited and Scottish Re (U.S.), Inc. (incorporated
         herein by reference to Scottish Re Group  Limited's  2004 Annual Report
         on Form 10-K). (20)

10.46    Coinsurance  Agreement dated December 31, 2004 between Security Life of
         Denver  Insurance  Company and Scottish Re (U.S.),  Inc.  (incorporated
         herein by reference to Scottish Re Group  Limited's  2004 Annual Report
         on Form 10-K). (20)

10.47    Coinsurance/Modified  Coinsurance  Agreement,  dated December 31, 2004,
         between  Security  Life of Denver  Insurance  Company  and  Scottish Re
         (U.S.),  Inc.  (incorporated  herein by  reference to Scottish Re Group
         Limited's 2004 Annual Report on Form 10-K). (20)

10.48    Retrocession  Agreement,  dated December 31, 2004,  between Scottish Re
         (U.S.),   Inc.  and   Security   Life  of  Denver   Insurance   Company
         (incorporated  herein by reference to Scottish Re Group  Limited's 2004
         Annual Report on Form 10-K). (20)

10.49    Retrocession  Agreement,  dated December 31, 2004,  between Scottish Re
         Life (Bermuda)  Limited and Security Life of Denver  Insurance  Company
         (incorporated  herein by reference to Scottish Re Group  Limited's 2004
         Annual Report on Form 10-K). (20)

10.50    Reserve  Trust  Agreement,  dated  as of  December  31,  2004,  between
         Scottish  Re (U.S.)  Inc.,  as  Grantor,  and  Security  Life of Denver
         Insurance  Company,  as  Beneficiary,  and  The  Bank of New  York,  as
         Trustee,  and  The  Bank  of  New  York,  as  Securities   Intermediary
         (incorporated  herein by reference to Scottish Re Group  Limited's 2004
         Annual Report on Form 10-K). (20)

10.51    Security Trust  Agreement,  dated as of December 31, 2004, by and among
         Scottish Re (U.S.), Inc., as Grantor, Security Life of Denver Insurance
         Company, as Beneficiary, The Bank of New York, as Trustee, and The Bank
         of  New  York,  as  Securities  Intermediary  (incorporated  herein  by
         reference  to Scottish Re Group  Limited's  2004 Annual  Report on Form
         10-K). (20)

10.52    Coinsurance  Agreement,  dated December 31, 2004, between Security Life
         of Denver International  Limited and Scottish Re Life (Bermuda) Limited
         (incorporated  herein by reference to Scottish Re Group  Limited's 2004
         Annual Report on Form 10-K). (20)

10.53    Coinsurance/Modified  Coinsurance  Agreement,  dated December 31, 2004,
         between Security Life of Denver  International  Limited and Scottish Re
         Life (Bermuda) Limited (incorporated herein by reference to Scottish Re
         Group Limited's 2004 Annual Report on Form 10-K). (20)

10.54    Coinsurance Funds Withheld Agreement,  dated December 31, 2004, between
         Security  Life of Denver  International  Limited  and  Scottish Re Life
         (Bermuda)  Limited  (incorporated  herein by  reference  to Scottish Re
         Group Limited's 2004 Annual Report on Form 10-K). (20)

10.55    Reserve Trust Agreement,  dated December 31, 2004,  between Scottish Re
         Life  (Bermuda)  Limited,  as  Grantor,  and  Security  Life of  Denver
         International  Limited,  as  Beneficiary.  The  Bank  of New  York,  as
         Trustee,  and  The  Bank  of  New  York,  as  Securities   Intermediary
         (incorporated  herein by reference to Scottish Re Group  Limited's 2004
         Annual Report on Form 10-K). (20)

10.56    Security Trust  Agreement,  dated as of December 31, 2004, by and among
         Scottish Re Life (Bermuda) Limited, as Grantor, Security Life of Denver
         International  Limited,  as  Beneficiary,  The  Bank  of New  York,  as
         Trustee,  and  the  Bank  of  New  York,  as  Securities   Intermediary
         (incorporated  herein by reference to Scottish Re Group  Limited's 2004
         Annual Report on Form 10-K). (20)


                                       83
<PAGE>

10.57    Technology  Transfer  and License  Agreement,  dated as of December 31,
         2004,  between  Security Life of Denver  Insurance  Company,  ING North
         America   Insurance   Corporation   and   Scottish   Re  (U.S.),   Inc.
         (incorporated  herein by reference to Scottish Re Group  Limited's 2004
         Annual Report on Form 10-K). (20)

10.58    Transition and Integration Services Agreement, dated December 31, 2004,
         between  Security  Life of Denver  Insurance  Company  and  Scottish Re
         (U.S.),  Inc.  (incorporated  herein by  reference to Scottish Re Group
         Limited's Current Report on Form 8-K). (19)

10.59    Form of Remarketing Agreement, between the Company and Lehman Brothers,
         Inc.,  as  Remarketing  Agent  (incorporated  herein  by  reference  to
         Scottish Re Group Limited's Current Report on Form 8-K). (16)

10.60    Amended and Restated Credit Agreement, dated as of July 14, 2005, among
         Scottish Annuity & Life Insurance  Company  (Cayman) Ltd.,  Scottish Re
         (Dublin) Limited, Scottish Re (U.S.), Inc., and Scottish Re Limited, as
         Borrowers,  Bear  Stearns  Corporate  Lending,  Inc.,  HSBC  Bank  USA,
         National  Association,  and  Wachovia  Bank,  National  Association  as
         Syndication Agents, Bank of America,  N.A., as Administrative Agent and
         L/C  Issuer,  and the  Other  Lenders  Party  Hereto,  Banc of  America
         Securities   LLC,  as  Sole  Lead   Arranger   and  Sole  Book  Manager
         (incorporated  herein  by  reference  to  Scottish  Re Group  Limited's
         Current Report on Form 8-K). (17)

10.61    Scottish Re Group  Limited  2004  Equity  Incentive  Compensation  Plan
         (incorporated  herein by reference to Scottish Re Group Limited's Proxy
         Statement filed with the SEC on April 1, 2004).

10.62    Amendment  No. 1 to Scottish  Re Group  Limited  2004 Equity  Incentive
         Compensation  Plan  (incorporated  herein by  reference  to Scottish Re
         Group Limited's  Current Report on Form 8-K). (18) (22)10.63  Amendment
         No. 2 to Scottish Re Group Limited 2004 Equity  Incentive  Compensation
         Plan  (incorporated  herein by reference to Scottish Re Group Limited's
         Current Report on Form 8-K).  (18) (22) 10.64 Form of Management  Stock
         Option  Agreement  under the  Scottish  Re Group  Limited  2004  Equity
         Incentive  Compensation  Plan  (incorporated  herein  by  reference  to
         Scottish Re Group Limited's Current Report on Form 8-K). (18) (22)

10.65    Form of Management  Performance Share Unit Agreement under the Scottish
         Re Group Limited 2004 Equity Incentive  Compensation Plan (incorporated
         herein by reference to Scottish Re Group  Limited's  Current  Report on
         Form 8-K). (18) (22)

10.66    Form of Management  Restricted  Share Unit Agreement under the Scottish
         Re Group Limited 2004 Equity Incentive  Compensation Plan (incorporated
         herein by reference to Scottish Re Group  Limited's  Current  Report on
         Form 8-K). (18) (22)

10.67    Employment  Agreement,  dated as of July 18, 2005,  between Scottish Re
         Group  Limited and Dean Miller  (incorporated  herein by  reference  to
         Scottish Re Group Limited's Current Report on Form 8-K). (19) (22)

10.68    Letter of Credit Agreement, dated as of August 18, 2005, among Scottish
         Re (Dublin)  Limited,  as Borrower,  Scottish  Annuity & Life Insurance
         Company  (Cayman)  Ltd.,  as  Guarantor,  Bank  of  America,  N.A.,  as
         Administrative  Agent  and L/C  Issuer,  and the  Other  Lenders  Party
         Hereto,  and Bank of America  Securities LLC, as Sole Lead Arranger and
         Sole Book  Manager  (incorporated  herein by  reference  to Scottish Re
         Group Limited's Current Report on Form 8-K).  (21)

                                       84
<PAGE>



21.1     List of Subsidiaries

23.1     Consent of Ernst & Young LLP

24.1     Power of Attorney

31.1     Certification  Pursuant  to Section  302 of the  Sarbanes-Oxley  Act of
         2002.

31.2     Certification  Pursuant  to Section  302 of the  Sarbanes-Oxley  Act of
         2002.

32.1     Certification  Pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant
         to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2     Certification  Pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant
         to Section 906 of the Sarbanes-Oxley Act of 2002.

--------------------

         (1)      Scottish Re Group Limited's Registration Statement on Form S-1
                  was filed with the SEC on June 19, 1998, as amended.
         (2)      Scottish Re Group  Limited's  1999 Annual  Report on Form 10-K
                  was filed with the SEC on April 3, 2000.
         (3)      Scottish Re Group  Limited's  2000 Annual  Report on Form 10-K
                  was filed with the SEC on March 30, 2001.
         (4)      Scottish Re Group  Limited's  2001 Annual  Report on Form 10-K
                  was filed with the SEC on March 5, 2002.
         (5)      Scottish  Re Group  Limited's  Current  Report on Form 8-K was
                  filed with the SEC on December 31, 2001.
         (6)      Scottish  Re Group  Limited's  Current  Report on Form 8-K was
                  filed with the SEC on June 2, 2005.
         (7)      Scottish  Re Group  Limited's  Current  Report on Form 8-K was
                  filed with the SEC on August 9, 2001.
         (8)      Scottish Re Group Limited's  Amended  Quarterly Report on Form
                  10-Q/A was filed with the SEC on August 8, 2002.
         (9)      Scottish Re Group Limited's Registration Statement on Form S-3
                  was filed with the SEC on January 31, 2003, as amended.
         (10)     Scottish  Re Group  Limited's  Current  Report on Form 8-K was
                  filed with the SEC on December 17, 2003.
         (11)     Scottish  Re Group  Limited's  Current  Report on Form 8-K was
                  filed with the SEC on January 6, 2004.
         (12)     Scottish Re Group  Limited's  2002 Annual  Report on Form 10-K
                  was filed with the SEC on March 31, 2003.
         (13)     Scottish Re Group Limited's  Quarterly Report on Form 10-Q was
                  filed with the SEC on August 12, 2003.
         (14)     Scottish Re Group Limited's  Quarterly Report on Form 10-Q was
                  filed with the SEC on May 10, 2004.
         (15)     Scottish  Re Group  Limited's  Current  Report on Form 8-K was
                  filed with the SEC on October 21, 2004.
         (16)     Scottish  Re Group  Limited's  Current  Report on Form 8-K was
                  filed with the SEC on July 1, 2005.
         (17)     Scottish  Re Group  Limited's  Current  Report on Form 8-K was
                  filed with the SEC on July 18, 2005.
         (18)     Scottish  Re Group  Limited's  Current  Report on Form 8-K was
                  filed with the SEC on August 8, 2005.

                                       85
<PAGE>
         (19)     Scottish  Re Group  Limited's  Current  Report on Form 8-K was
                  filed with the SEC on August 4, 2005.
         (20)     Scottish Re Group  Limited's  2004 Annual  Report on Form 10-K
                  was filed with the SEC on March 18, 2005.
         (21)     Scottish  Re Group  Limited's  Current  Report on Form 8-K was
                  filed with the SEC on August 22, 2005.
         (22)     This exhibit is a management  contract or compensatory plan or
                  arrangement.

                                       86
<PAGE>

FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

Report of Independent Registered Public Accounting Firm................  88
Consolidated Balance Sheets............................................  89
Consolidated Statements of Income......................................  90
Consolidated Statements of Comprehensive Income........................  91
Consolidated Statements of Shareholders' Equity........................  92
Consolidated Statements of Cash Flows..................................  94
Notes to Consolidated Financial Statements.............................  95
Schedule I - Summary of Investments  ..................................  146
Schedule II - Condensed Financial Information..........................  147
Schedule III - Supplementary Insurance Information.....................  149
Schedule IV - Reinsurance..............................................  150
Schedule V - Valuation and Qualifying Accounts.........................  152

         All other  schedules are omitted because they are either not applicable
or the  required  information  is included in the  Management's  Discussion  and
Analysis of Financial Condition and Results of Operations,  Financial Statements
or Notes thereto appearing elsewhere in this Form 10-K.

                                       87
<PAGE>



             Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Scottish Re Group Limited


We have  audited the  accompanying  consolidated  balance  sheets of Scottish Re
Group Limited and subsidiaries as of December 31, 2005 and 2004, and the related
consolidated  statements of income,  comprehensive income,  shareholders' equity
and cash flows for each of the three  years in the  period  ended  December  31,
2005. Our audit also included the financial  statement  schedules listed at Item
15(a)(2).  These financial  statements and schedules are the  responsibility  of
Scottish Re Group  Limited's  management.  Our  responsibility  is to express an
opinion on these financial statements and schedules based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the consolidated financial position of Scottish Re Group
Limited and  subsidiaries  at December 31, 2005 and 2004,  and the  consolidated
results of their  operations and their cash flows for each of the three years in
the period ended December 31, 2005, in conformity with U.S.  generally  accepted
accounting  principles.  Also, in our opinion,  the related financial  statement
schedules,  when considered in relation to the basic financial  statements taken
as a whole,  present fairly in all material  respects the  information set forth
therein.

We also have  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight Board (United  States),  the  effectiveness of Scottish Re
Group  Limited's  internal  control over financial  reporting as of December 31,
2005,  based on criteria  established in Internal  Control-Integrated  Framework
issued by the Committee of Sponsoring  Organizations of the Treadway  Commission
and our report dated March 13, 2006 expressed an unqualified opinion thereon.

As discussed in Note 2 to the financial statements,  in 2003 the Company changed
its accounting related to its funds withheld at interest.


/s/Ernst & Yount LLP
--------------------


Philadelphia, Pennsylvania
March 13, 2006



                                       88
<PAGE>

<TABLE>
<CAPTION>
                                             SCOTTISH RE GROUP LIMITED
                                            CONSOLIDATED BALANCE SHEETS
                       (Expressed in Thousands of United States Dollars, except share data)
                                                                                             December 31,       December 31,
                                                                                                 2005                2004
                                                                                            ------------        ------------
<S>                                                                                         <C>                 <C>
Assets
Fixed maturity investments, available for sale, at fair value
   (Amortized cost $5,323,488; 2004 - $3,362,929) .......................................   $  5,292,595        $  3,392,463
Preferred stock available for sale, at fair value  (Cost $137,271; 2004 -
   $124,629) ............................................................................        133,804             125,204
Cash and cash equivalents ...............................................................      1,420,205             794,639
Other investments .......................................................................         54,619              16,250
Funds withheld at interest ..............................................................      2,597,416           2,056,280
                                                                                            ------------        ------------
   Total investments ....................................................................      9,498,639           6,384,836
Accrued interest receivable .............................................................         44,012              32,092
Reinsurance balances and risk fees receivable ...........................................        325,372             495,517
Deferred acquisition costs ..............................................................        594,583             417,306
Amounts recoverable from reinsurers .....................................................        551,288             680,956
Present value of in-force business ......................................................         54,743              62,164
Goodwill ................................................................................         34,125              34,125
Other assets ............................................................................         87,198              38,926
Current income tax receivable ...........................................................              -               7,712
Deferred tax benefit ....................................................................         55,453              15,030
Segregated assets .......................................................................        760,707             783,573
                                                                                            ------------        ------------
   Total assets .........................................................................   $ 12,006,120        $  8,952,237
                                                                                            ============        ============
Liabilities
Reserves for future policy benefits .....................................................   $  3,477,222        $  3,301,715
Interest sensitive contract liabilities .................................................      3,907,573           3,181,447
Collateral finance facilities ...........................................................      1,985,681             200,000
Accounts payable and other liabilities ..................................................         83,130              68,311
Reinsurance balances payable ............................................................        114,078             116,589
Current income tax payable ..............................................................          9,155                   -
7.00% Convertible Junior Subordinated Notes .............................................              -              41,282
Long-term debt ..........................................................................        244,500             244,500
Segregated liabilities ..................................................................        760,707             783,573
                                                                                            ------------        ------------
   Total liabilities ....................................................................     10,582,046           7,937,417
                                                                                            ------------        ------------
Commitments and contingencies (See Note 19)
Minority Interest .......................................................................          9,305               9,697
Mezzanine Equity ........................................................................        143,057             142,449
Shareholders' Equity
Share capital, par value $0.01 per share:
   Issued and outstanding: 53,391,939 ordinary shares  (2004-39,931,145) ................            534                 399
Preferred shares, par value $0.01 per share:
    Issued: 5,000,000 shares ............................................................        125,000                   -
Additional paid-in capital ..............................................................        893,767             684,719
Accumulated other comprehensive income (loss) ...........................................         (9,991)             31,604
Retained earnings .......................................................................        262,402             145,952
                                                                                            ------------        ------------
   Total shareholders' equity ...........................................................      1,271,712             862,674
                                                                                            ------------        ------------
Total liabilities, minority interest, mezzanine equity and shareholders' equity .........   $ 12,006,120        $  8,952,237
                                                                                            ============        ============

                                See Accompanying Notes to Consolidated Financial Statements
</TABLE>


                                       89
<PAGE>

<TABLE>
<CAPTION>
                                             SCOTTISH RE GROUP LIMITED
                                          CONSOLIDATED STATEMENT OF INCOME
                       (Expressed in Thousands of United States Dollars, except share data)

                                                                                      Year Ended       Year Ended     Year Ended
                                                                                      December 31,     December 31,   December 31,
                                                                                          2005            2004           2003
                                                                                      ----------      ----------      ----------
<S>                                                                                   <C>             <C>             <C>
Revenues
Premiums earned, net ............................................................   $  1,933,930    $    589,445    $    390,654
Investment income, net ..........................................................        355,837         217,138         148,028
Fee income ......................................................................         12,316          11,547           7,907
Net realized gains (losses) .....................................................          3,738          (8,304)         (4,448)
Change in value of embedded derivatives, net ....................................         (8,492)          4,561          13,904
                                                                                      ----------      ----------      ----------
  Total revenues ................................................................      2,297,329         814,387         556,045
                                                                                      ----------      ----------      ----------
Benefits and expenses
Claims and other policy benefits ................................................      1,442,505         425,965         275,887
Interest credited to interest sensitive contract liabilities ....................        132,968         106,525          89,156
Acquisition costs and other insurance expenses, net .............................        423,775         151,405         114,678
Operating expenses ..............................................................        115,573          54,658          31,021
Collateral finance facilities expense ...........................................         48,146           2,724               -
Interest expense ................................................................         20,738          13,016           7,557
Due diligence costs .............................................................              -           4,643               -
                                                                                      ----------      ----------      ----------
  Total benefits and expenses ...................................................      2,183,705         758,936         518,299
                                                                                      ----------      ----------      ----------
Income before income taxes and minority interest ................................        113,624          55,451          37,746
Income tax benefit ..............................................................         16,434          16,679          11,105
                                                                                      ----------      ----------      ----------
Income before minority interest .................................................        130,058          72,130          48,851
Minority interest ...............................................................            139            (531)            (62)
                                                                                      ----------      ----------      ----------
Income from continuing  operations before cumulative effect
  of change in accounting  principle and discontinued
  operations ....................................................................        130,197          71,599          48,789
Cumulative effect of change in accounting principle (net of
  taxation of $3,415)............................................................              -               -         (19,537)
Loss from discontinued operations ...............................................              -            (208)         (1,971)
                                                                                      ----------      ----------      ----------
Net income ......................................................................        130,197          71,391          27,281
Dividend declared on non-cumulative perpetual preferred shares ..................         (4,758)              -               -
                                                                                      ----------      ----------      ----------
Net income available to ordinary shareholders ...................................   $    125,439    $     71,391    $     27,281
                                                                                      ==========      ==========      ==========
Basic earnings per share:
  Income from continuing operations before cumulative
    effect of change in accounting principle (1) ................................   $       2.86    $       2.00    $       1.59
  Cumulative effect of change in accounting principle ...........................              -               -           (0.64)
  Discontinued operations .......................................................              -           (0.01)          (0.06)
                                                                                      ----------      ----------      ----------
  Net income available to ordinary shareholders..................................   $       2.86    $       1.99    $       0.89
                                                                                      ==========      ==========      ==========
Diluted earnings per share:
  Income from continuing operations before cumulative
    effect of change in accounting principle (1) ................................   $       2.64    $       1.91    $       1.51
  Cumulative effect of change in accounting principle ...........................              -               -           (0.60)
  Discontinued operations .......................................................              -           (0.01)          (0.06)
                                                                                      ----------      ----------      ----------
  Net income available to ordinary shareholders..................................   $       2.64    $       1.90    $       0.85
                                                                                      ==========      ==========      ==========
Weighted average number of ordinary shares outstanding
  Basic .........................................................................     43,838,261      35,732,522      30,652,719
                                                                                      ==========      ==========      ==========
  Diluted .......................................................................     47,531,116      37,508,292      32,228,001
                                                                                      ==========      ==========      ==========

                                See Accompanying Notes to Consolidated Financial Statements
</TABLE>

(1)  Reflects  reduction  for  dividends  declared on  non-cumulative  perpetual
preferred shares


                                       90
<PAGE>


<TABLE>
<CAPTION>
                                             SCOTTISH RE GROUP LIMITED
                                   CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                  (Expressed in Thousands of United States Dollars)

                                                                                    Year Ended         Year Ended      Year Ended
                                                                                   December 31,       December 31,    December 31,
                                                                                      2005                2004            2003
                                                                                    ---------          ---------       ---------
<S>                                                                                 <C>                <C>             <C>
Net income ................................................................         $ 130,197          $  71,391       $  27,281
                                                                                    ---------          ---------       ---------
Other comprehensive income (loss), net of tax:
    Unrealized appreciation (depreciation) on investments .................           (30,750)             3,644          10,270
    Add: reclassification adjustment for net realized gains
      included in net income ..............................................              (790)            (6,831)         (2,352)
                                                                                    ---------          ---------       ---------
    Net unrealized appreciation (depreciation) on
      investments, net of income taxes and deferred
      acquisition costs of $(32,039), $11,366 and $2,222 ..................           (31,540)            (3,187)          7,918
    Cumulative translation adjustment .....................................           (10,055)             5,757           6,278
    Minimum pension liability adjustment, net of income
      taxes of $(588) .....................................................                 -                  -           1,371
                                                                                    ---------          ---------       ---------
Other comprehensive income (loss) .........................................           (41,595)             2,570          15,567
                                                                                    ---------          ---------       ---------
Comprehensive income ......................................................         $  88,602          $  73,961       $  42,848
                                                                                    =========          =========       =========

                                See Accompanying Notes to Consolidated Financial Statements

</TABLE>


                                       91
<PAGE>

<TABLE>
<CAPTION>
                                             SCOTTISH RE GROUP LIMITED
                                   CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                       (Expressed in Thousands of United States Dollars, except share data)

                                                                               Year Ended        Year Ended        Year Ended
                                                                              December 31,       December 31,      December 31,
                                                                                  2005               2004              2003
                                                                              -----------       -------------     -------------
<S>                                                                            <C>                <C>                <C>
Ordinary shares:
     Beginning of year ................................................        39,931,145         35,228,411         26,927,456
     Ordinary shares issued ...........................................         7,660,000          3,953,183          9,200,000
     Ordinary shares repurchased ......................................                 -                  -         (1,525,000)
     Exercise of options ..............................................           423,467            749,551            425,955
     Exercise of warrants .............................................         5,377,327                  -            200,000
                                                                              -----------       -------------     -------------
     End of year ......................................................        53,391,939         39,931,145         35,228,411
                                                                              ===========       =============     =============
Preferred shares:
      Beginning of year ...............................................                 -                  -                  -
      Non-cumulative perpetual preferred shares issued ................         5,000,000                  -                  -
                                                                              -----------       -------------     -------------
      End of year .....................................................         5,000,000                  -                  -
                                                                              ===========       =============     =============
Share capital:
Ordinary shares:
     Beginning of year ................................................      $        399       $        352       $        269
     Ordinary shares issued ...........................................                77                 40                 92
     Ordinary shares repurchased ......................................                 -                  -                (15)
     Exercise of options ..............................................                 4                  7                  4
     Exercise of warrants .............................................                54                  -                  2
                                                                              -----------       -------------     -------------
     End of year ......................................................               534                399                352
                                                                              -----------       -------------     -------------
Preferred shares:
     Beginning of year ................................................                 -                  -                  -
     Non-cumulative perpetual preferred shares issued .................           125,000                  -                  -
                                                                              -----------       -------------     -------------
     End of year ......................................................           125,000                  -                  -
                                                                              -----------       -------------     -------------
Additional paid-in capital:
     Beginning of year ................................................           684,719            548,750            416,712
     Conversion of 7% Convertible Junior Subordinated Notes ...........            42,061                  -                  -
     Ordinary shares issued, net of issuance costs ....................           174,031             64,824            179,995
     Costs of forward sale agreements .................................           (13,893)                 -                  -
     Ordinary shares repurchased ......................................                 -                  -            (29,966)
     Exercise of options ..............................................             5,358              8,339              4,575
     Option and restricted stock unit expense .........................             5,377                843                207
     Issuance of HyCUs ................................................                 -                  -            (24,171)
     Costs of issue of non-cumulative perpetual preferred shares ......            (4,563)                 -                  -
     Warrants issued ..................................................                 -             62,125              2,998
     Warrants repurchased .............................................                 -                  -             (1,600)
     Other ............................................................               677               (162)                 -
                                                                              -----------       -------------     -------------
     End of year ......................................................           893,767            684,719            548,750
                                                                              -----------       -------------     -------------
Accumulated other comprehensive income (loss):
     Unrealized appreciation (depreciation) on investments
         Beginning of year ............................................            13,661             16,848              8,930
         Change in period (net of income taxes and deferred
           acquisition costs) .........................................           (31,540)            (3,187)             7,918
                                                                              -----------       -------------     -------------
          End of year .................................................           (17,879)            13,661             16,848
                                                                              -----------       -------------     -------------
     Cumulative translation adjustment
         Beginning of year ............................................            17,943             12,186              5,908
         Change in period (net of tax) ................................           (10,055)             5,757              6,278
                                                                              -----------       -------------     -------------
         End of year ..................................................             7,888             17,943             12,186
                                                                              -----------       -------------     -------------
     Minimum pension liability
         Beginning of year ............................................                 -                  -             (1,371)
         Change in period (net of tax) ................................                 -                  -              1,371
                                                                              -----------       -------------     -------------
         End of year ..................................................                 -                  -                  -
                                                                              -----------       -------------     -------------
Total accumulated other comprehensive income (loss) ...................       $    (9,991)      $     31,604      $      29,034
                                                                              ===========       =============     =============
</TABLE>

                                       92
<PAGE>

<TABLE>
<CAPTION>
                                            SCOTTISH RE GROUP LIMITED
                           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (continued)
                      (Expressed in Thousands of United States Dollars, except share data)

                                                                              December 31,       December 31,      December 31,
                                                                                  2005               2004              2003
                                                                              -----------       -------------     -------------
<S>                                                                           <C>                <C>                <C>
Retained earnings:
   Beginning of year ..........................................               $   145,952       $     81,708      $      60,644
   Net income .................................................                   130,197             71,391             27,281
   Dividends declared on non-cumulative perpetual
      preferred shares ........................................                    (4,758)                 -                  -
   Dividends declared on ordinary shares ......................                    (8,989)            (7,147)            (6,217)
                                                                              -----------       -------------     -------------
   End of year ................................................                   262,402            145,952             81,708
                                                                              -----------       -------------     -------------
Total shareholders' equity ....................................               $ 1,271,712        $   862,674        $   659,844
                                                                              ===========       =============     =============

                                See Accompanying Notes to Consolidated Financial Statements

</TABLE>

                                       93
<PAGE>


                            SCOTTISH RE GROUP LIMITED
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                (Expressed in Thousands of United States Dollars)

<TABLE>
<CAPTION>
                                                                                   Year Ended         Year Ended        Year Ended
                                                                                  December 31,       December 31,      December 31,
                                                                                      2005               2004              2003
                                                                                  -----------       -------------     -------------
<S>                                                                               <C>               <C>               <C>
Operating activities
Income before cumulative effect of change in accounting principle
   income ......................................................................  $   130,197       $    71,391       $    46,818
Adjustments to reconcile net income before cumulative effect of change
   in accounting principle to net cash provided by operating activities:
   Net realized losses (gains) .................................................       (3,738)            8,306             4,448
   Changes in value of embedded derivatives, net ...............................        8,492            (4,561)           13,904
   Amortization discount on investments.........................................       18,253            11,140             5,619
   Amortization of deferred acquisition costs ..................................       68,906            80,235            74,239
   Amortization of present value of in-force business ..........................        7,373             7,689             4,926
   Changes in assets and liabilities:
       Accrued interest receivable .............................................      (12,317)             (894)           (6,731)
       Reinsurance balances and risk fees receivable ...........................     (162,358)         (136,792)          (54,689)
       Deferred acquisition costs ..............................................     (232,971)         (180,908)         (167,281)
       Deferred tax liability ..................................................      (19,246)           68,807           (17,350)
       Other assets and liabilities ............................................      (73,723)          (24,807)          (25,561)
       Current income tax receivable and payable ...............................       17,193           (95,631)           (1,459)
       Reserves for future policy benefits, net of amounts
          recoverable from reinsurers...........................................      434,063           211,901           159,242
       Interest sensitive contract liabilities, net of funds
          withheld at interest .................................................      168,188            34,550            25,546
       Accounts payable and other liabilities ..................................       17,328            (5,443)           11,989
       Other ...................................................................           93            (6,131)           14,844
                                                                                  -----------       -----------       -----------
   Net cash provided by  operating activities ..................................      365,733            38,852            88,504
                                                                                  -----------       -----------       -----------
Investing activities
Purchase of fixed maturity investments .........................................   (3,008,823)       (1,832,494)       (1,254,226)
Proceeds from sales of fixed maturity investments ..............................      690,533           595,059           288,611
Proceeds from maturity of fixed maturity investments ...........................      517,775           345,778           216,617
Purchase of preferred stock investments ........................................      (17,028)          (26,186)          (82,717)
Proceeds from sale of preferred stock investments ..............................        4,174            19,620            18,530
Proceeds from maturity of preferred stock investments ..........................            -             6,257             5,137
Cash received on ING acquisition ...............................................            -           414,008                 -
Acquisition of subsidiary net of cash acquired .................................            -                 -          (140,228)
Purchase of other investments ..................................................      (37,737)                -            (4,984)
Other ..........................................................................       (6,843)           (1,898)                -
                                                                                  -----------       -----------       -----------
   Net cash used in investing activities .......................................   (1,857,949)         (479,856)         (953,260)
                                                                                  -----------       -----------       -----------
Financing activities
Proceeds from collateral finance facilities ....................................    1,785,681           200,000                 -
Deposits to interest sensitive contract liabilities ............................      312,956           571,843           736,884
Withdrawals from interest sensitive contract liabilities .......................     (255,515)          (83,319)          (40,783)
Net proceeds from issuance of ordinary shares ..................................      179,466            73,210           187,666
Net proceeds from issuance of non-cumulative perpetual preferred shares ........      120,436                 -                 -
Costs of variable share forward contracts ......................................      (13,815)                -                 -
Net proceeds from issuance of warrants .........................................            -            62,125                 -
Repurchase of ordinary shares ..................................................            -                 -           (29,981)
Repurchase of warrants .........................................................            -                 -            (1,600)
Net proceeds from issuance of long-term debt ...................................            -            79,500            29,047
Net proceeds from issuance of notes payable to buy Cypress Entities ............            -            41,282                 -
Net funds received on issuance of HyCUs ........................................            -                 -           138,223
Net proceeds from exercise of Class C warrants .................................           54                 -                 -
Dividends paid on ordinary shares ..............................................       (8,989)           (7,147)           (6,217)
Dividend paid on non-cumulative perpetual preferred shares .....................       (2,492)                -                 -
                                                                                  -----------       -----------       -----------
   Net cash provided by financing activities ...................................    2,117,782           937,494         1,013,239
                                                                                  -----------       -----------       -----------
Net change in cash and cash equivalents ........................................      625,566           496,490           148,483
Cash and cash equivalents, beginning of year ...................................      794,639           298,149           149,666
                                                                                  -----------       -----------       -----------
Cash and cash equivalents, end of year .........................................  $ 1,420,205       $   794,639       $   298,149
                                                                                  ===========       ===========       ===========
Interest paid ..................................................................  $    18,232       $    16,418       $     6,195
                                                                                  ===========       ===========       ===========
Taxes paid (refunded) ..........................................................  $    (1,041)      $    28,726       $     1,156
                                                                                  ===========       ===========       ===========

                                See Accompanying Notes to Consolidated Financial Statements
</TABLE>
                                       94
<PAGE>


                             SCOTTISH RE GROUP LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 2005

1.   Organization and business

         Organization

         Scottish Re Group Limited is a holding company organized under the laws
of the Cayman Islands with its principal  executive  office in Bermuda.  Through
our operating subsidiaries, we are a reinsurer of life insurance,  annuities and
annuity-type  products.  These products are written by life insurance  companies
and other financial  institutions  located  principally in the United States, as
well as around  the world.  We refer to this  portion  of our  business  as Life
Reinsurance.  To a lesser extent,  we directly issue variable life insurance and
variable  annuities  and  similar  products  to high net worth  individuals  and
families for insurance,  investment and estate  planning  purposes.  We refer to
this portion of our business as Wealth Management.  We have operating  companies
in Bermuda,  the Cayman Islands,  Guernsey,  Ireland, the United Kingdom and the
United States and a branch office in Singapore.

         Business

         In our Life Reinsurance North America Segment,  we provide solutions to
insurance  companies  seeking  reinsurance  of  life  insurance,  annuities  and
annuity-type  products.  We reinsure  lines of  business  that may be subject to
significant  reserve or capital  requirements by regulatory and rating agencies.
We assume risks  associated with primary life insurance  policies and annuities,
both in-force and new business.  We reinsure:  (i) mortality,  (ii)  investment,
(iii)  persistency,  and (iv) expense risks. We originate  reinsurance  business
predominantly  by marketing  our products  and  services  directly to U.S.  life
insurance and reinsurance companies.

         Prior to 2005, our Life Reinsurance  International  Segment specialized
in niche markets in developed  countries and broader life  insurance  markets in
the  developing  world and focused on the  reinsurance  of short-term group life
policies and aircrew "loss of license" insurance.  In 2005, the Life Reinsurance
International  Segment  became  actively  engaged in the  reinsurance  of United
Kingdom and Ireland  traditional  solutions  business and annuity products.  The
life  insurance  and annuity  products are similar to those  offered in the Life
Reinsurance North America Segment.

         In our Wealth  Management  business,  we directly  issue  variable life
insurance  and  variable  annuities  and  similar  products  to high  net  worth
individuals  and  families,  for  insurance,   investment  and  estate  planning
purposes. For us, high net worth generally means individuals and families with a
liquid  net  worth in excess  of $10.0  million.  Variable  life  insurance  and
variable  annuities  have a cash  value  component  that is placed in a separate
account and invested by us on behalf of the  policyholder  with a money manager.
Our Wealth Management business is included in the Corporate and Other segment.

2.   Summary of significant accounting policies

         Basis of presentation

         Accounting   Principles--Our   consolidated  financial  statements  are
prepared in accordance  with  accounting  principles  generally  accepted in the
United  States of America  ("GAAP")  and all  tabular  amounts  are  reported in
thousands of United States  dollars  (except share and per share data).  Certain
items in the prior year financial  statements have been  reclassified to conform
with the current year presentation.

                                       96
<PAGE>

                             SCOTTISH RE GROUP LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005

2.   Summary of significant accounting policies (continued)

         Consolidation--The   consolidated   financial  statements  include  the
assets,  liabilities  and  results  of  operations  of  Scottish  Annuity & Life
Insurance  Company  (Cayman)  Ltd.,  Scottish Re (U.S.),  Inc.  and  Scottish Re
Limited,  as well as other  subsidiaries and all variable  interest entities for
which  we are  the  primary  beneficiary  as  defined  in  Financial  Accounting
Standards  Board  ("FASB")  Interpretation  No. 46R  "Consolidation  of Variable
Interest   Entities  -  An  Interpretation  of  ARB  No.  51."  All  significant
intercompany transactions and balances have been eliminated on consolidation.

         Estimates,  Risks and  Uncertainties--The  preparation of  consolidated
financial  statements  in  conformity  with  GAAP  requires  management  to make
estimates and assumptions  that affect the amounts  reported on the consolidated
financial  statements  and  accompanying  notes.  Actual  results  could  differ
materially  from those estimates and  assumptions  used by management.  Our most
significant  assumptions  are  for  assumed  reinsurance  liabilities,  premiums
receivable,  deferred acquisition costs and valuation of investment impairments.
We review and revise these  estimates as appropriate.  Any  adjustments  made to
these estimates are reflected in the period the estimates are revised.


         Fixed maturity investments

         Fixed maturity  investments  are classified as available for sale, and,
accordingly,  we carry  these  investments  at fair  values on our  consolidated
balance sheets. The fair value of fixed maturity investments is calculated using
quoted market prices provided by independent pricing services. The cost of fixed
maturity  investments  is  adjusted  for  prepayments  and the  amortization  of
premiums  and  discounts.  The  unrealized  appreciation  (depreciation)  is the
difference  between fair value and  amortized  cost and is recorded  directly to
equity  with no impact to net  income.  The  change in  unrealized  appreciation
(depreciation) is included in accumulated other  comprehensive  income (loss) in
shareholders'  equity after deductions for adjustments for deferred  acquisition
costs and deferred  income taxes.  Investment  transactions  are recorded on the
trade date with balances pending settlement  reflected in the balance sheet as a
component of other assets or other  liabilities.  Interest income is recorded on
the accrual basis.

         Realized  gains  (losses) on  securities  are  determined on a specific
identification  method.  Realized  gains and losses are stated net of associated
amortization of deferred  acquisition costs.  Management reviews securities with
material  unrealized losses and tests for other than temporary  impairments on a
quarterly basis.  Factors involved in the determination of potential  impairment
include fair value as compared to cost,  length of time the value has been below
cost, credit worthiness of the issuer,  forecasted financial  performance of the
issuer, position of the security in the issuer's capital structure, the presence
and estimated value of collateral or other credit enhancement, length of time to
maturity,  interest  rates and our intent and ability to hold the security until
the market  value  recovers.  When a decline  is  considered  to be "other  than
temporary"  the cost basis of the  impaired  asset is adjusted to its fair value
and a corresponding  realized  investment loss is recognized in the consolidated
statements of income. The actual value at which such financial instruments could
actually be sold or settled with a willing buyer may differ from such  estimated
fair values.

         Our review of fixed maturities for impairment also includes an analysis
of the total gross unrealized losses. We review all investments with fair values
less than amortized cost, and pay particular attention to those that have traded
continuously  at less than 80% of amortized  cost for at least six months or 90%
of amortized  cost for at least  twelve  months and any other  investments  with
material differences between amortized cost and fair value.  Investments meeting
those criteria are analyzed in detail for "other-than-temporary impairment".

                                       97
<PAGE>

                             SCOTTISH RE GROUP LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005

2.   Summary of significant accounting policies (continued)

         Cash and cash equivalents

         Cash and cash  equivalents  include  cash and  fixed  deposits  with an
original  maturity,  when  purchased,  of three  months  or less.  Cash and cash
equivalents are recorded at face value, which approximates fair value.

         Funds withheld at interest

         Funds  withheld at interest  are funds held by ceding  companies  under
modified  coinsurance  and  coinsurance  funds  withheld  agreements  whereby we
receive  the  interest  income  earned on the funds.  The  balance of funds held
represents the statutory  reserves of the ceding companies and are legally owned
by the ceding company.  Interest accrues to these assets at rates defined by the
treaty terms. These agreements are considered to include embedded derivatives as
further discussed in this Note.

          Retrocession arrangements and amounts recoverable from reinsurers

         In the ordinary course of business,  our reinsurance  subsidiaries cede
reinsurance to other  reinsurance  companies.  These agreements  provide greater
diversification  of business and minimize  the net loss  potential  arising from
large risks. Ceded reinsurance  contracts do not relieve us of our obligation to
the direct writing companies.  The cost of reinsurance  related to long duration
contracts  is  recognized  over the terms of the  reinsured  policies on a basis
consistent with the reporting of those policies.

         In the normal  course of  business,  we seek to limit our  exposure  to
losses on any single insured and to recover a portion of benefits paid by ceding
reinsurance to other insurance  enterprises or reinsurers  under excess coverage
and coinsurance  (quota share)  contracts.  Effective January 1, 2005, we raised
our maximum per life retention on newly written business, excluding the in-force
individual life reinsurance business,  which we acquired (the "ING acquisition")
from ING America Holdings,  Inc.  ("ING"),  to $1.0 million from $0.5 million in
our Life Reinsurance  North America Segment.  Our retention on business acquired
in the ING acquisition is $2.0 million per life. Our targeted maximum  corporate
retention per life in our Life Reinsurance International Segment is $250,000. In
addition,  we  maintain  catastrophe  cover  on our  retained  life  reinsurance
business,  which effective January 1, 2005,  provides  reinsurance for losses of
$50.0 million in excess of $10.0 million for our North  American risks and $57.5
million  excess of $2.5 million for our  International  risks.  The  catastrophe
covers include protection for terrorism, nuclear, biological and chemical risks.

         Amounts  recoverable  from  reinsurers  includes  the balances due from
reinsurance companies for claims and policy benefits that will be recovered from
reinsurers,  based on contracts in force, and are presented net of a reserve for
uncollectible  reinsurance  that has been determined  based upon a review of the
financial  condition  of the  reinsurers  and  other  factors.  The  method  for
determining the reinsurance  recoverable involves actuarial estimates as well as
a  determination  of our  ability to cede claims and policy  benefits  under our
existing  reinsurance  contracts.  The reserve for uncollectible  reinsurance is
based on an estimate of the amount of the reinsurance  recoverable  balance that
we  will  ultimately  be  unable  to  recover  due to  reinsurer  insolvency,  a
contractual dispute or any other reason.

         The methods used to determine the reinsurance  recoverable balance, and
related  bad debt  provision,  are  continually  reviewed  and  updated  and any
resulting  adjustments  are reflected in earnings in the period  identified.  At
December  31,  2005,  we had a reserve  for  uncollectible  reinsurance  of $6.0
million.

                                       98
<PAGE>

                             SCOTTISH RE GROUP LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005

2.   Summary of significant accounting policies (continued)


         Deferred acquisition costs

         Costs of  acquiring  new  business,  which vary with and are  primarily
related to the production of new business, have been deferred to the extent that
such costs are deemed  recoverable  from future premiums or gross profits.  Such
costs  include  commissions  and  allowances  as well as certain costs of policy
issuance and underwriting.  We perform periodic tests to determine that the cost
of  business  acquired  remains  recoverable,   and  if  financial   performance
significantly  deteriorates to the point where a premium  deficiency exists, the
cumulative  amortization is re-estimated and adjusted by a cumulative  charge or
credit to current operations.

         Deferred  acquisition  costs  related  to  traditional  life  insurance
contracts,  substantially  all of which relate to long-duration  contracts,  are
amortized over the  premium-paying  period of the related policies in proportion
to the ratio of individual period premium revenues to total anticipated  premium
revenues  over the life of the policy.  Such  anticipated  premium  revenues are
estimated using the same assumptions  used for computing  liabilities for future
policy benefits.

         Deferred  acquisition  costs  related  to  interest-sensitive  life and
investment-type  policies  are  amortized  over the  lives of the  policies,  in
relation  to the  present  value of  estimated  gross  profits  from  mortality,
investment income, less interest credited, and expense margins.

         The development of and amortization of deferred  acquisition  costs for
our products  requires  management  to make  estimates and  assumptions.  Actual
results could differ materially from those estimates. Management monitors actual
experience,  and should circumstances  warrant,  will revise its assumptions and
the related estimates.

         Present value of in-force business

         The  present  value  of  in-force  business  is  established  upon  the
acquisition of a book of business and is amortized over the expected life of the
business as determined at acquisition.  The amortization each year is a function
of the ratio of annual  gross  profits or  revenues to total  anticipated  gross
profits or revenues  expected over the life of the  business,  discounted at the
assumed net credit rate.  The carrying  value is reviewed at least  annually for
indicators of impairment in value.

         Goodwill

         We account for  goodwill  pursuant to the  provisions  of  Statement of
Financial  Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets".  Goodwill is  established  upon the  acquisition of a subsidiary and is
calculated as the difference  between the price paid and the value of individual
assets and  liabilities  on the date of  acquisition.  Goodwill is not amortized
into results of  operations,  but instead is reviewed for  impairment  annually.
Goodwill  was tested for  impairment  in 2005,  2004 and 2003 and no  impairment
resulted.

         During 2004, we received a payment of $1.7 million in respect of a post
closing  adjustment  of the  purchase  price of  Scottish  Re  Holdings  Limited
(formerly  World-Wide Holdings Limited).  This payment arose on the finalization
of income  taxes due for  periods  prior to the  acquisition  and  resulted in a
decrease in the goodwill arising on the acquisition.

         Other assets

         Other  assets  primarily  include   unamortized  debt  issuance  costs,
collateral  finance  facility  costs and  fixed  assets,  including  capitalized
software. Capitalized software is stated at cost, less accumulated amortization.

                                       99
<PAGE>

                             SCOTTISH RE GROUP LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005

2.   Summary of significant accounting policies (continued)

         Other assets (continued)

Purchased  software  costs,  as well as internal and external  costs incurred to
develop internal-use computer software during the application development stage,
are capitalized.  As of December 31, 2005 and 2004, we had unamortized  computer
software  costs of  approximately  $9.3 million and $8.0 million,  respectively.
During  2005,  2004 and  2003,  we  amortized  computer  software  costs of $3.5
million, $1.7 million and $0.0 million, respectively.

         Segregated assets and liabilities

         Separate  account  investments  are in  respect  of  wealth  management
clients and include the net asset values of the  underlying  funds plus separate
cash and cash equivalent  balances less separate account fees payable to us. The
funds in the  separate  accounts  are not part of our general  funds and are not
available to meet our general  obligations.  The assets and liabilities of these
transactions move in tandem. The client bears the investment risk on the account
and we receive an asset-based fee for providing this service that is recorded as
fee income.

         Separate  account  liabilities  include  amounts  set  aside to pay the
deferred  variable  annuities and the cash values associated with life insurance
policies.   These   balances   consist  of  the  initial   premiums  paid  after
consideration of the net investment  gains/losses  attributable to each separate
account, less fees and withdrawals.

         Foreign Currency Translation

         The  translation  of the foreign  currency  amounts into United  States
dollars is performed for balance sheet accounts using current  exchange rates in
effect at the balance  sheet date and for revenue and expense  accounts  using a
weighted  average  exchange  rate  during  each year.  Gains or  losses,  net of
applicable  deferred income taxes,  resulting from such translation are included
in  accumulated   currency   translation   adjustments,   in  accumulated  other
comprehensive  income (loss) on the  consolidated  balance sheets.  Our material
functional  currencies are the British pound and the Euro for our United Kingdom
operations.

         Revenue recognition

         (i)  Reinsurance  premiums from  traditional  life policies and annuity
policies with life  contingencies  are generally  recognized as revenue when due
from policyholders and are reported net of amounts retroceded.  Traditional life
policies  include  those  contracts  with  fixed  and  guaranteed  premiums  and
benefits,  and consist principally of whole life and term insurance policies. We
estimate assumed premiums using actuarial model projections at the treaty level.
Consistent with reinsurance industry practices, these models use the most recent
policy level data  available  from our ceding  companies and our estimate of new
business for treaties  still open to new business.  The estimated  premiums from
the models are then compared to historical  trends in reported  assumed premiums
by treaty and other  information  and adjusted if  appropriate.  Actual  results
could  differ  from these  estimates.  The  adjustments  in a given  period have
generally not been significant to the overall premiums or results of operations.

         Based  on  historical   experience,   the  creditworthiness  of  ceding
companies and our  contractual  right of offset,  uncollectible  assumed premium
amounts  have been  infrequent  and not  material.  Any  provision  for doubtful
accounts would be recorded on a specific case by case basis.

         Benefits and expenses, net of amounts retroceded,  are matched with net
earned  premiums so as to result in the  recognition of profits over the life of
the contracts.  This is achieved by means of the provision for  liabilities  for
future  policy  benefits and deferral and  subsequent  amortization  of deferred
acquisition costs.

         From time to time, we acquire  blocks of in-force  business and account
for these  transactions  as purchases.  Results of  operations  only include the
revenues and expenses from the  respective  dates of acquisition of these blocks
of in-force business. The initial transfer of assets and liabilities is recorded
on the balance sheet.

                                      100
<PAGE>

                             SCOTTISH RE GROUP LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005

2.   Summary of significant accounting policies (continued)

         Revenue recognition (continued)

         Reinsurance assumed for interest sensitive and investment type products
does not  generate  premium  but  generates  investment  income on the assets we
receive from ceding companies,  policy charges for the cost of insurance, policy
administration,  and surrenders  that have been assessed  against policy account
balances during the period.

         (ii) Fee income is recorded on an accrual basis.

         (iii) Net  investment  income  includes  interest and  dividend  income
together  with  amortization  of  market  premium  and  discounts  and is net of
investment management and custody fees. For mortgage backed securities,  and any
other holdings for which there is a prepayment risk, prepayment  assumptions are
evaluated  and  revised  as  necessary.  Any  adjustments  required  due  to the
resultant   change  in   effective   yields  and   maturities   are   recognized
prospectively.

         Reserves for future policy benefits

         SFAS No. 60 "Accounting and Reporting by Insurance Enterprises" applies
to our traditional life policies with continuing  premiums.  For these policies,
reserves for future policy  benefits are computed based upon expected  mortality
rates,  lapse  rates,   investment   yields,   expenses  and  other  assumptions
established  at policy  issue,  including a margin for adverse  deviation.  Once
these  assumptions  are made for a given treaty or group of treaties,  they will
not be  changed  over the life of the  treaty.  We  periodically  review  actual
historical  experience  and  relative  anticipated  experience  compared  to the
assumptions used to establish reserves for future policy benefits.  Further,  we
determine  whether  actual and  anticipated  experience  indicates that existing
policy  reserves  together with the present  value of future gross  premiums are
sufficient  to cover  the  present  value of  future  benefits,  settlement  and
maintenance  costs and to recover  unamortized  acquisition  costs.  Significant
changes in  experience  or  assumptions  may require us to provide for  expected
losses on a group of treaties by establishing  additional net reserves.  Because
of the many  assumptions  and estimates  used in  establishing  reserves and the
long-term  nature of the reinsurance  contracts,  the reserving  process,  while
based on actuarial science, is inherently uncertain.

         We primarily  rely on our own valuation and  administration  systems to
establish  reserves for future policy  benefits.  The reserves for future policy
benefits may differ from those established by ceding companies due to the use of
different assumptions,  based principally on actual and anticipated  experience,
including  industry  experience and standards.  We rely on our ceding companies,
however,  to provide  accurate  policy level data,  including face amount,  age,
duration and other  characteristics  as well as underlying  premiums and claims.
This data  constitutes the primary  information  used to establish  reserves for
essentially  all  of  our  future  policy  benefits.   The  use  of  reinsurance
intermediaries in our transactions with ceding companies has been infrequent. In
the few instances in which intermediaries are involved, we receive data from the
intermediary in a similar timeframe and fashion as if received directly from the
ceding company.

         Claims  payable for  incurred but not  reported  losses are  determined
using case basis estimates and lag studies of past experience. The time lag from
the date of the claim or death to when the ceding  company  reports the claim to
us can vary  significantly by ceding company,  but generally averages around two
months.  We update our analysis of incurred but not reported  losses,  including
lag studies, on a quarterly basis and adjust our claim liabilities  accordingly.
The adjustments in a given period have generally not been  significant  relative
to the overall reserves for future policy benefits or our results of operations.

         In the  underwriting  process,  we perform  procedures  to evaluate the
ceding company's process for compiling and reporting data. After entering into a
reinsurance contract, we work closely with our ceding

                                      101
<PAGE>

                             SCOTTISH RE GROUP LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005

2.   Summary of significant accounting policies (continued)

         Reserves for future policy benefits (continued)

companies to help ensure information submitted by them is in accordance with the
underlying reinsurance contracts.  Additionally,  we have a dedicated compliance
team that performs extensive audits,  including on-site audits and desk reviews,
of the information  provided by ceding companies.  In addition to ceding company
audits, we routinely perform analysis,  at a treaty level, to compare the actual
results of ceding  companies  against  initial  pricing  and  expected  results.
Generally,  there have been few disputes or disagreements  with ceding companies
and most are resolved through normal administration procedures.

         Occasionally,  we experience processing backlogs and establish reserves
for  processing  backlogs  with a goal of  clearing  all  backlogs as quickly as
possible.  There were no significant  processing  backlogs at December 31, 2005.

         SFAS No. 97  "Accounting  and  Reporting by Insurance  Enterprises  for
Certain Long-Duration  Contracts and for Realized Gains and Losses from the Sale
of Investments" applies to investment contracts,  limited premium contracts, and
universal life-type contracts. For investment and universal life-type contracts,
future benefit  liabilities  are held using the  retrospective  deposit  method,
increased  for  amounts  representing  unearned  revenue  or  refundable  policy
charges.  Acquisition costs are deferred and recognized as expense as a constant
percentage of gross margins using assumptions as to mortality,  persistency, and
expense  established at policy issue without provision for adverse deviation and
are revised  periodically to reflect emerging actual experience and any material
changes  in  expected  future  experience.   Liabilities  and  the  deferral  of
acquisition  costs are established  for limited premium  policies under the same
practices as used for  traditional  life policies  with the  exception  that any
gross  premium in excess of the net  premium is  deferred  and  recognized  into
income as a constant  percentage of insurance in force.  Should the  liabilities
for future  policy  benefits  plus the present  value of expected  future  gross
premiums for a product be  insufficient  to provide for expected future benefits
and expenses for that product,  deferred  acquisition  costs will be written off
and thereafter, if required, a premium deficiency reserve will be established by
a charge to  income.  Changes in the  assumptions  for  mortality,  persistency,
maintenance  expense  and  interest  could  result in  material  changes  to the
financial statements.

         The development of policy reserves for our products requires management
to make  estimates  and  assumptions  regarding  mortality,  lapse,  expense and
investment experience. Interest rate assumptions for individual life reinsurance
reserves  range from 2.5 to 7.0%.  The interest  assumptions  for  immediate and
deferred annuities range from 4.0 to 6.5%.

         Interest sensitive contract liabilities

         The liabilities for interest sensitive  contract  liabilities equal the
accumulated account values of the policies or contracts as of the valuation date
and include  funds  received plus  interest  credited  less funds  withdrawn and
interest paid.  Benefit  liabilities for fixed annuities during the accumulation
period  equal  their  account  values;  after  annuitization,   they  equal  the
discounted present value of expected future payments.

         Other liabilities

         Other  liabilities  primarily  relate to  collateral  facility  accrued
interest, the fair value of embedded derivative and employee benefits.

         Income taxes

         Income taxes are recorded in accordance with SFAS No. 109,  "Accounting
for Income Taxes". In accordance with this statement, for all years presented we
use the asset and liability method to record deferred

                                      102
<PAGE>

                             SCOTTISH RE GROUP LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005

2.   Summary of significant accounting policies (continued)

         Income taxes (continued)

income  taxes.  Accordingly,  deferred  income tax assets  and  liabilities  are
recognized that reflect the net tax effect of the temporary  differences between
the carrying amounts of assets and liabilities for financial  reporting purposes
and the amounts  used for income tax  purposes,  using  enacted tax rates.  Such
temporary  differences  are  primarily  due to tax basis of reserves  for future
policy benefits,  deferred  acquisition costs, present value of in-force and net
operating loss carry forwards.  A valuation allowance is applied to deferred tax
assets if it is more likely than not that all, or some portion,  of the benefits
related to the deferred tax assets will not be realized.

         Stock-based compensation

         Prior to 2003,  we  adopted  the  provisions  of APB  Opinion  No.  25,
"Accounting  for Stock  Issued to  Employees,"  and related  interpretations  in
accounting  for employee  stock  options.  Since the exercise price of the stock
options equals or exceeds the market price of the  underlying  stock on the date
of grant, no compensation expense was recognized.

         Effective   January  1,  2003,  we   prospectively   adopted  the  fair
value-based  stock option expense  provisions of SFAS No. 148.  "Accounting  for
Stock-Based  Compensation  -  Transition  and  Disclosure,  an Amendment to FASB
Statement  No. 123" which is considered  the  preferable  accounting  method for
stock  based  compensation.  Compensation  expense has been  recognized  for all
equity based compensation  granted since January 1, 2003. This has resulted in a
charge to income of $5.4  million,  $0.8  million and $0.2  million in the years
ended December 31, 2005, 2004 and 2003, respectively.

         In  December  2004,  the FASB  revised  SFAS No. 123,  "Accounting  for
Stock-Based Compensation", by issuing "Share-Based Payment" ("SFAS No. 123(R)").
SFAS No. 123(R) requires us to recognize,  in the  determination of income,  the
grant date fair value of all stock  options and other equity based  compensation
issued to employees.  We will adopt the revised  pronouncement  during the first
quarter  of 2006.  The  effects  of  applying  SFAS  No.  123(R)  will  increase
compensation  cost in 2006  because  we will  expense  the  unvested  portion of
options granted in 2002 and prior,  which were previously not expensed under APB
Opinion No. 25. We expect SFAS No. 123(R) will increase  compensation expense by
approximately $0.7 million in 2006.

         Note 14  contains a summary of the pro forma  effects to  reported  net
income  and  earnings  per  share  for  2005,  2004 and 2003 had we  elected  to
recognize  compensation  cost for all  options  based  on the fair  value of the
options granted at grant date as prescribed by SFAS No. 123(R).

            Earnings per share

         In accordance with SFAS No. 128,  "Earnings per Share",  basic earnings
per  share  is  calculated   based  on  the  weighted  average  ordinary  shares
outstanding and excludes any dilutive  effects of options,  restricted stock and
warrants.  Diluted  earnings per share assume the exercise of all dilutive stock
options, restricted stock, warrants, convertible debt instruments and the Hybrid
Capital  Units  ("HyCUs")  using the treasury  stock  method.  Basic and diluted
earnings per share are  calculated by dividing net income  available to ordinary
shareholders  by the applicable  weighted  average number of shares  outstanding
during the year.

         Fair value of financial instruments

         The fair value of assets and liabilities  included on the  consolidated
balance  sheets,  which  qualify as  financial  instruments  under SFAS No. 107,
"Disclosure About Fair Value of Financial Instruments," approximate the carrying
amount presented in the consolidated financial statements.

                                      103
<PAGE>

                             SCOTTISH RE GROUP LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005

2.   Summary of significant accounting policies (continued)

         Derivatives

         All  derivative   instruments   are  recognized  as  either  assets  or
liabilities in the consolidated balance sheets at fair value as required by SFAS
No. 133,  "Accounting for Derivative  Instruments and Hedging Activities" ("SFAS
No.133").  The accounting for changes in the fair value of derivatives that have
not been  designated as a hedge are included in realized gains and losses in the
consolidated statements of income. The gain or loss on derivatives designated as
a hedge of our  interest  expense on  floating  rate  securities  is included in
interest expense.

         Our funds withheld at interest arise on modified  coinsurance  and fund
withheld coinsurance  transactions.  Derivatives  Implementation Group Issue No.
B36 "Embedded  Derivatives:  Bifurcation of a Debt Instrument that  Incorporates
Both  Interest  Rate and Credit Rate Risk  Exposures  that are Unrelated or Only
Partially  Related to the  Creditworthiness  of the  Issuer of that  Instrument"
indicates that these  transactions  contain embedded  derivatives.  The embedded
derivative  feature in our funds  withheld  treaties is similar to a  fixed-rate
total return swap on the assets held by the ceding companies.  The swap consists
of two parts.  The first is the market value of the underlying  asset  portfolio
and the second is a hypothetical  loan to the ceding company.  The  hypothetical
loan  is  based  on  the  expected  cash  flows  of the  underlying  reinsurance
liability.  We have developed models to systematically estimate the value of the
total return  swap.  The fair value of the  embedded  derivative  is affected by
changes in  expected  cash  flows,  credit  spreads of the assets and changes in
"risk-free"  interest  rates.  The  change  in fair  value  is  included  in our
calculation  of  estimated  gross  profits  and,  therefore,  also  affects  the
amortization  of  deferred  acquisition  costs.  In  addition to our quota share
indemnity  funds  withheld  contracts,  we have entered  into various  financial
reinsurance  treaties that, although considered funds withheld,  do not transfer
significant  insurance  risk and are recorded on a deposit method of accounting.
As a result of the experience refund provisions of these treaties,  the value of
the embedded derivative is currently considered immaterial.

         We adopted DIG B36 on October 1, 2003. The initial adoption resulted in
a loss, after tax and after related  amortization of deferred acquisition costs,
of $19.5  million  which  was  recorded  as a  cumulative  effect  of  change in
accounting principle in our consolidated statements of income for the year ended
December 31, 2003. The change in fair value of the derivative between October 1,
2003  and  December  31,  2003  was a gain  of  $13.9  million,  net of  related
amortization  of  deferred  acquisition  costs and taxes.  The fair value of the
derivative  of $24.8  million and $5.2  million at  December  31, 2005 and 2004,
respectively, is included in other liabilities.

         New Accounting Pronouncements

Statement of Financial  Position  03-1,  "Accounting  and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Insurance Contracts and for
Separate Accounts" ("SOP 03-01")

          In July 2003, the Accounting  Standards Executive Committee issued SOP
03-01.  This SOP  provides  guidance on  accounting  and  reporting by insurance
enterprises for certain nontraditional  long-duration contracts and for separate
accounts and is effective for financial  statements  for fiscal years  beginning
after  December  15,  2003.  In  implementing  the  SOP,  we have  made  various
determinations,   such  as  qualification   for  separate   account   treatment,
classification of securities in separate account  arrangements,  significance of
mortality and morbidity  risk,  adjustments to contract  holder  liabilities and
adjustments  to estimated  gross profits as defined in SFAS No. 97,  "Accounting
and Reporting by Insurance Enterprises for Certain  Long-Duration  Contracts and
for Realized Gains and Losses from the Sale of Investments".  Implementation  of
this SOP did not have a material effect on our financial statements.

                                      104
<PAGE>

                             SCOTTISH RE GROUP LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005

2.   Summary of significant accounting policies (continued)

EITF 04-8, "The Effect of Contingently  Convertible Debt on Diluted Earnings Per
Share"("EITF 04-8")

         In  September  2004,  EITF 04-8 was  issued.  EITF 04-8  requires  that
certain  instruments with embedded  conversion features that are contingent upon
market price  triggers be included in diluted  earnings  per share  calculations
regardless of whether the contingency has been met. Our 4.5% senior  convertible
notes are  convertible  on the basis of a market price  trigger.  On October 26,
2004,  we amended the terms of these notes so that we are required to settle the
principal  amount of $115.0  million in cash on conversion or  repurchase.  As a
result,  we continue to apply the treasury stock method in  calculating  diluted
earnings  per share for amounts in excess of the  principal  of $115.0  million.
Also see Note 10 in the Consolidated Financial Statements.

FASB  Interpretation  No.  46  and  46R,  "Consolidation  of  Variable  Interest
Entities" ("FIN 46" and "FIN 46R")

         In December 2003, the FASB revised FIN 46, which was originally  issued
in January 2003. FIN 46R addresses  whether certain types of entities,  referred
to as variable interest entities ("VIEs"), should be consolidated in a company's
financial  statements.  A  company  must  consolidate  a VIE in  which it has an
ownership, contractual or other financial interest if it is determined to be the
primary  beneficiary.  A primary  beneficiary has a variable  interest that will
absorb a majority of the  expected  losses if they occur,  receive a majority of
the entity's  expected returns,  or both. We are the primary  beneficiary of the
collateral finance facilities, except Stingray Investor Trust, discussed in Note
8 to the Consolidated  Financial Statements,  and have consolidated the variable
interest  entities in  accordance  with FIN 46R.  The Stingray  Investor  Trust,
discussed  in Note 8 to the  Consolidated  Financial  Statements,  is a variable
interest  entity but we are not considered to be the primary  beneficiary of the
Investor Trust. Accordingly, it is not consolidated in accordance with FIN 46R.

SFAS No.154, "Accounting Changes and Error Corrections" ("SFAS No. 154")

         In May 2005,  the FASB issued SFAS No. 154,  which replaces APB Opinion
No. 20, "Accounting  Changes",  and SFAS No. 3, "Reporting Accounting Changes in
Interim Financial Statements".  SFAS No. 154 requires retrospective  application
to prior period financial statements for changes in accounting principle, unless
determination of either the period specific effects or the cumulative  effect of
the change is impracticable or otherwise promulgated.  SFAS No. 154 is effective
for fiscal years beginning after December 15, 2005. SFAS No. 154, upon adoption,
is not  expected  to have a  material  effect on our  results of  operations  or
financial position.


EITF Issue No. 03-1,  "The Meaning of  Other-Than-Temporary  Impairment  and Its
Application to Certain Investments" ("EITF 03-1") and FAS 115-1, "The Meaning of
Other-Than-Temporary  Impairment  and Its  Application  to Certain  Investments"
("FSP FAS 115-1")

         In June 2005,  the FASB  completed  its review of EITF Issue No.  03-1,
"The Meaning of  Other-Than-Temporary  Impairment and Its Application to Certain
Investments". EITF 03-1 provides accounting guidance regarding the determination
of when an impairment of debt and marketable  equity  securities and investments
accounted for under the cost method  should be  considered  other-than-temporary
and  recognized in income.  EITF 03-1 also  requires  certain  quantitative  and
qualitative  disclosures for debt and marketable equity securities classified as
available-for-sale or held-to-maturity under SFAS No.115, Accounting for Certain
Investments  in Debt and Equity  Securities",  that are  impaired at the balance
sheet  date  but for  which  an  other-than-temporary  impairment  has not  been
recognized.  The FASB decided not to provide additional  guidance on the meaning
of  other-than-temporary  impairment  but issued in November 2005, FSP FAS 115 ,
which  nullifies the guidance in paragraphs  10-18 of EITF 03-1,  and references
existing other than temporary impairment guidance.  FSP FAS 115-1 clarifies that
an  investor  should  recognize  an  impairment  loss no  later  than  when  the
impairment  is  deemed  other-than-temporary,  even if a  decision  to sell  the
security  has not  been  made,  and also  provides  guidance  on the  subsequent
accounting  for an impaired  debt  security.  We have  provided the  appropriate
disclosures  in  accordance  with  EITF  03-1.  FSP FAS 115-1 is  effective  for
reporting  periods  beginning  after  December 15, 2005. The adoption of FSP FAS
115-1 is not expected to have a material  effect on our results of operations or
financial position.

                                      105
<PAGE>

                             SCOTTISH RE GROUP LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005

2.   Summary of significant accounting policies (continued)


SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments--an amendment
of FASB Statements No. 133 and 140" ("SFAS No. 155")

         In February 2006,  the FASB issued SFAS No. 155, which resolves  issues
addressed in SFAS No. 133 Implementation Issue No. D1, "Application of Statement
133 to  Beneficial  Interests in  Securitized  Financial  Assets." SFAS No. 155,
among other things, permits the fair value remeasurement of any hybrid financial
instrument  that contains an embedded  derivative  that otherwise  would require
bifurcation;  clarifies which interest-only strips and principal-only strips are
not subject to the  requirements  of SFAS No. 133; and establishes a requirement
to evaluate interests in securitized financial assets to identify interests that
are  freestanding  derivatives  or that are hybrid  financial  instruments  that
contain an embedded derivative requiring bifurcation.  SFAS No. 155 is effective
for all  financial  instruments  acquired or issued in a fiscal  year  beginning
after September 15, 2006. We are currently  assessing the impact of SFAS No. 155
on our results of operations and financial position.

3.   Business acquisitions

         On December  31,  2004,  we  completed  the 100%  coinsurance  of ING's
individual  life  reinsurance  business.  The acquisition was accounted for as a
purchase in  accordance  with SFAS No. 141 "Business  Combinations".  During the
year ended  December 31, 2005, we completed the analysis of purchase  accounting
for this acquisition and the final post closing  adjustment of $47.9 million was
paid to ING during the fourth  quarter of 2005. The balance sheet as of the date
of acquisition, as finalized in 2005, was as follows:



                                                              December 31, 2004
                                                             -------------------

                 Total investments.....................      $     1,529,190
                 Reinsurance balances receivable.......              201,019
                 Other assets..........................               67,308
                                                             -------------------
                 Total assets..........................      $     1,797,517
                                                             ===================

                 Reserves for future policy benefits...      $     1,669,090
                 Other liabilities.....................              128,427
                                                             -------------------
                 Total liabilities.....................      $     1,797,517
                                                             ===================



         The acquired business represents the reinsurance division of ING's U.S.
life insurance  operations,  which was written  through  Security Life of Denver
Insurance  Company  and  Security  Life of  Denver  International  Limited.  The
acquired  business  mainly  consists of traditional  mortality risk  reinsurance
written on an automatic basis with more than 100 different ceding insurers. Less
than 10% of the acquired  business was written on a facultative  basis.  Most of
the business  involves  guaranteed  level  premium term life  insurance  that is
subject to the statutory reserve  requirements of NAIC Actuarial  Regulation XXX
as well as  universal  life  insurance  that is subject  to a similar  statutory
reserve requirement known as Regulation AXXX.

         The following  pro-forma  information related to our acquisition of the
ING individual life  reinsurance  business for the years ended December 31, 2004
and 2003 illustrates the effects of the acquisition as if it had occurred at the
beginning of the periods presented. The pro-forma information is not intended to
be indicative  of the  consolidated  results of operations  that would have been
reported if the acquisition had occurred at January 1, 2004 and 2003 nor does it
purport to be indicative of combined results of operations which may be reported
in the future.  In the table below,  dollars are in  millions,  except per share
data.

                                      106
<PAGE>

                             SCOTTISH RE GROUP LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005


3.       Business acquisitions (continued)

<TABLE>
<CAPTION>
                                                         Year Ended           Year Ended
                                                         December 31,         December 31,
                                                              2004               2003
                                                         ------------        ------------
<S>                                                      <C>                   <C>
         Revenue....................................     $    2,115.7          $ 1,547.5
         Net income.................................     $      132.0          $    73.3
         Earnings per ordinary share - Basic........     $       3.08          $    1.81
         Earnings per ordinary share - Diluted......     $       2.96          $    1.75
</TABLE>

         On December  22,  2003,  we  completed  the purchase of 95% of ERC Life
Reinsurance  Corporation  for  $169.9  million  in cash.  There was no  goodwill
arising on the acquisition.  The present value of in-force business acquired was
$56.3 million. On February 19, 2004, ERC Life Reinsurance Corporation's name was
changed to  Scottish Re Life  Corporation.  During the year ended  December  31,
2004, we completed the analysis of purchase accounting for this acquisition. The
balance sheet of Scottish Re Life  Corporation  at the date of  acquisition,  as
finalized in 2004, was as follows:

                                                         December 22,
                                                             2003
                                                         ------------


            Total investments .....................      $   573,538
            Reinsurance balances receivable .......           51,457
            Amounts recoverable from reinsurers ...          730,044
            Other assets ..........................           60,644
                                                         ------------
            Total assets ..........................      $ 1,415,683
                                                         ============
            Reserves for future policy benefits ...      $   933,090
            Interest sensitive contract liabilities          177,486
            Reinsurance balances payable ..........          109,050
            Other liabilities .....................           14,575
                                                         ------------
            Total liabilities .....................      $ 1,234,201
                                                         ============
            Acquired net assets ...................      $   181,482
                                                         ============


         The  following  pro forma  information  related to our  acquisition  of
Scottish Re Life  Corporation for the years ended December 31, 2003  illustrates
the effects of the  acquisition  as if it had  occurred at the  beginning of the
period presented.

                                      107
<PAGE>

                             SCOTTISH RE GROUP LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005


3.   Business acquisitions (continued)

                                                          Year Ended
                                                         December 31,
                                                             2003
                                                         ----------

             Revenue .............................      $   768,223
             Net income ..........................      $    67,663
             Earnings per ordinary share - Basic .      $      2.21
             Earnings per ordinary share - Diluted      $      2.10

         The  pro-forma  information  is not  intended to be  indicative  of the
consolidated  results  of  operations  that  would  have  been  reported  if the
acquisition  had occurred at the  beginning of the period  presented nor does it
purport to be indicative of combined results of operations which may be reported
in the future.

         See Note 19 Commitments and  Contingencies - Mediation,  for additional
detail on the Scottish Re Life Corporation acquisition.

         The  acquisitions  described  above were  accounted for by the purchase
method  of  accounting.  In  accordance  with  SFAS No.  141,  the  accompanying
consolidated  statements  of income do not  include  any  revenues  or  expenses
related to these acquisitions prior to the closing dates.

4.   Discontinued operations

         During  2003,  we  discontinued  our Wealth  Management  operations  in
Luxembourg.  We transferred our Luxembourg Wealth  Management  business to third
parties,  closed the office and are in the process of liquidating our Luxembourg
subsidiary.  We  reported  the  results  of  the  Luxembourg  Wealth  Management
activities as discontinued operations.  Losses from these operations amounted to
$0.2 million in 2004 and $2.0 million in 2003. There were no losses or income in
2005.


5.   Investments

         The amortized cost, gross unrealized  appreciation and depreciation and
estimated fair values of our fixed maturity  investments  and preferred stock at
December 31, 2005 and 2004 are as follows:

<TABLE>
<CAPTION>
                                                                               December 31, 2005
                                                            ---------------------------------------------------------
                                                                              Gross          Gross
                                                             Amortized      Unrealized     Unrealized      Estimated
                                                            Cost or Cost   Appreciation   Depreciation    Fair Value
                                                             ----------     -----------   -----------     -----------
<S>                                                          <C>            <C>           <C>             <C>
U.S. Treasury securities and U.S. government agency          $   48,519     $       244   $      (846)    $    47,917
     obligations.....................................
Corporate securities.................................         2,205,052          16,548       (30,821)      2,190,779
Municipal bonds......................................            37,826             211          (398)         37,639
Mortgage and asset backed securities.................         3,169,362           7,828       (27,126)      3,150,064
                                                             ----------     -----------   -----------     -----------
Total................................................        $5,460,759     $    24,831   $   (59,191)    $ 5,426,399
                                                             ==========     ===========   ===========     ===========
</TABLE>

                                      108
<PAGE>

                             SCOTTISH RE GROUP LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2003


5.   Investments (continued)

<TABLE>
<CAPTION>
                                                                               December 31, 2004
                                                            ---------------------------------------------------------
                                                                              Gross          Gross
                                                             Amortized      Unrealized     Unrealized      Estimated
                                                            Cost or Cost   Appreciation   Depreciation    Fair Value
                                                             ----------     -----------   -----------     -----------
<S>                                                          <C>            <C>           <C>             <C>
U.S. Treasury securities and U.S. government agency
     obligations ..........................................  $   89,418     $      200    $     (139)     $   89,479
Corporate securities ......................................   1,719,502         27,542        (3,474)      1,743,570
Municipal bonds ...........................................      20,712            261          (158)         20,815
Mortgage and asset backed securities ......................   1,657,926         14,154        (8,277)      1,663,803
                                                             ----------     ----------    ----------      ----------
Total .....................................................  $3,487,558     $   42,157    $  (12,048)     $3,517,667
                                                             ==========     ==========    ==========      ==========
</TABLE>


         The contractual  maturities of the fixed maturities and preferred stock
are  as  follows  (actual  maturities  may  differ  as a  result  of  calls  and
prepayments):

                                                December 31, 2005
                                          -----------------------------
                                           Amortized    Estimated Fair
                                          Cost or Cost      Value
                                          ------------  ---------------
Due in one year or less ..............    $  108,343      $  108,012
Due in one year through five years ...       530,852         527,362
Due in five years through ten years...       839,195         832,831
Due after ten years ..................       813,007         808,130
                                          ----------      ----------
                                           2,291,397       2,276,335
Mortgage and asset backed securities..     3,169,362       3,150,064
                                          ----------      ----------
Total ................................    $5,460,759      $5,426,399
                                          ==========      ==========

         The  following  tables  present  the  estimated  fair  values and gross
unrealized  losses for the fixed maturity  investments  and preferred stock that
have  estimated  fair values  below  amortized  cost as of December 31, 2005 and
2004. These investments are presented by class and grade of security, as well as
the length of time the related market value has remained below amortized cost.


                                      109
<PAGE>

                             SCOTTISH RE GROUP LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005


5.   Investments (continued)

<TABLE>
<CAPTION>
                                                                         December 31, 2005
                                        ------------------------------------------------------------------------------------------
                                                                         Equal to or greater than
                                            Less than 12 months                 12 months                           Total
                                        --------------------------       --------------------------       ------------------------
                                         Estimated      Unrealized       Estimated       Unrealized       Estimated     Unrealized
                                        fair value        loss           fair value         loss          fair value       loss
                                        ----------      ----------       ----------      ----------       ----------    ----------
<S>                                     <C>             <C>              <C>             <C>              <C>           <C>
Investment Grade
Securities:
CMO ..............................      $  467,314      $   (4,865)      $   85,305      $   (1,688)      $  552,619    $   (6,553)
Corporates .......................       1,132,840         (23,950)          94,218          (2,545)       1,227,058       (26,495)
Governments ......................          36,297            (774)           1,999             (71)          38,296          (845)
MBS ..............................         143,956          (3,383)          42,682          (1,611)         186,638        (4,994)
Municipal ........................          17,738            (330)           1,621             (68)          19,359          (398)
Other structured securities ......       1,028,657         (11,882)         135,341          (3,113)       1,163,998       (14,995)
Preferred stocks .................          98,263          (2,287)          24,106          (1,295)         122,369        (3,582)
                                        ----------      ----------       ----------      ----------       ----------    ----------
Total  investment grade
securities .......................       2,925,065         (47,471)         385,272         (10,391)       3,310,337       (57,862)
                                        ----------      ----------       ----------      ----------       ----------    ----------
Below investment grade securities:
Corporates .......................          10,676            (655)           1,841             (59)          12,517          (714)
Other structured securities ......           3,552            (555)           7,260             (29)          10,812          (584)
Preferred stock ..................             392             (12)             340             (19)             732           (31)
Total below investment grade            ----------      ----------       ----------      ----------       ----------    ----------
securities .......................          14,620          (1,222)           9,441            (107)          24,061        (1,329)
                                        ----------      ----------       ----------      ----------       ----------    ----------
Total ............................      $2,939,685      $  (48,693)      $  394,713      $  (10,498)      $3,334,398    $  (59,191)
                                        ==========      ==========       ==========      ==========       ==========    ==========
</TABLE>


                                      110
<PAGE>

                             SCOTTISH RE GROUP LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005


5.   Investments (continued)

<TABLE>
<CAPTION>
                                                                   December 31, 2004
                                  ---------------------------------------------------------------------------------------------
                                                                   Equal to or greater than
                                      Less than 12 months                  12 months                           Total
                                  --------------------------       --------------------------       ---------------------------
                                   Estimated      Unrealized       Estimated       Unrealized       Estimated        Unrealized
                                  fair value        loss           fair value         loss          fair value         loss
                                  ----------      ----------       ----------      ----------       ----------      -----------
<S>                               <C>             <C>              <C>             <C>              <C>           <C>
Investment Grade Securities:
CMO ........................      $  225,068      $   (1,830)      $    4,100      $      (96)      $  229,168      $   (1,926)
Corporates .................         241,030          (2,139)          49,445            (660)         290,475          (2,799)
Governments ................          51,123            (139)               -               -           51,123            (139)
MBS ........................          49,085            (627)           9,585            (199)          58,670            (826)
Municipal ..................          12,130            (158)               -               -           12,130            (158)
Other structured
  securities ...............         311,733          (2,375)          17,227          (1,125)         328,960          (3,500)
Preferred stocks ...........          35,152            (628)             257             (12)          35,409            (640)
                                  ----------      ----------       ----------      ----------       ----------      ----------
Total  investment grade ....         925,321          (7,896)          80,614          (2,092)       1,005,935          (9,988)
                                  ----------      ----------       ----------      ----------       ----------      ----------
Below investment grade
  securities:
Corporates .................           1,966             (35)               -               -            1,966             (35)
Other structured
  securities ...............           7,988            (977)           2,492          (1,047)          10,480          (2,024)
Preferred stock ............              54              (1)               -               -               54              (1)
Total below investment            ----------      ----------       ----------      ----------       ----------      ----------
  grade securities .........          10,008          (1,013)           2,492          (1,047)          12,500          (2,060)
                                  ----------      ----------       ----------      ----------       ----------      ----------
Total ......................      $  935,329      $   (8,909)      $   83,106      $   (3,139)      $1,018,435      $  (12,048)
                                  ==========      ==========       ==========      ==========       ==========      ==========
</TABLE>

         We believe that based on an analysis of each  security  whose price has
been below market for greater than twelve months,  that the financial  strength,
liquidity,  leverage,  future  outlook,  and our  ability and intent to hold the
security   until   recovery   support  the  view  that  the   security  was  not
other-than-temporarily  impaired as of December 31, 2005. The unrealized  losses
on fixed maturity  securities are primarily a result of rising  interest  rates,
changes in credit  spreads  and the  long-dated  maturities  of the  securities.
Additionally, as at December 31, 2005, approximately 98% of the gross unrealized
losses are associated with investment grade securities.

         The  analysis  of  realized  gains  (losses)  and  the  change  in  net
unrealized  appreciation  (depreciation)  on  investments  for the  years  ended
December 31, 2005, 2004 and 2003 is as follows:

                                      111
<PAGE>

                             SCOTTISH RE GROUP LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005

5.   Investments (continued)

<TABLE>
<CAPTION>
                                                                  Year Ended     Year Ended     Year Ended
                                                                 December 31,   December 31,   December 31,
                                                                    2005           2004            2003
                                                                  --------       --------       --------
<S>                                                               <C>            <C>            <C>
Gross realized gains (losses)
Fixed maturities:
  Gross realized gains .....................................      $  8,867       $ 10,169       $  7,830
  Gross realized losses ....................................        (6,561)        (3,140)        (3,409)
  Other than temporary impairments .........................        (2,437)        (9,870)        (6,259)
                                                                  --------       --------       --------
                                                                      (131)        (2,841)        (1,838)
Preferred stock:
  Gross realized gains .....................................            23             82            (34)
  Gross realized losses ....................................          (238)        (3,151)           (92)
                                                                  --------       --------       --------
                                                                      (215)        (3,069)          (126)

  Other investments ........................................             -           (636)          (802)
  Foreign currency gains ...................................           402          1,690          1,270
  Change in fair value interest rate swaps .................         2,228         (2,232)             -
  Change in fair value on derivatives ......................         1,454         (1,216)        (2,952)
                                                                  --------       --------       --------
      Net realized gains (losses) ..........................         3,738         (8,304)        (4,448)
                                                                  --------       --------       --------
Change in net unrealized appreciation (depreciation) on
  investments
  Fixed maturities .........................................       (60,426)         8,623          9,152
  Preferred stock ..........................................        (4,041)          (414)           988
  Other investments ........................................           888              -              -
  Change in deferred acquisition costs .....................        13,127         (8,653)             -
  Change in deferred income taxes ..........................        18,912         (2,743)        (2,222)
                                                                  --------       --------       --------
Change in net unrealized appreciation (depreciation) on
  investments ..............................................       (31,540)        (3,187)         7,918
                                                                  --------       --------       --------
Total net realized gains (losses) and change in  net
  unrealized appreciation (depreciation) on investments.....      $(27,802)      $(11,491)      $  3,470
                                                                  ========       ========       ========
</TABLE>


         The  investment  portfolio is managed  following  prudent  standards of
diversification.  Specific  provisions limit the allowable  holdings of a single
issuer and  issuers.  At December  31,  2005,  2004 and 2003,  we did not have a
material  concentration  of investments  in fixed income  securities in a single
issuer or industry.

         Net investment  income for the years ended December 31, 2005,  2004 and
2003 was derived from the following sources:

                                      112
<PAGE>

                             SCOTTISH RE GROUP LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005

5.   Investments (continued)

<TABLE>
<CAPTION>

                                           Year Ended      Year Ended       Year Ended
                                           December 31,   December 31,     December 31,
                                              2005            2004             2003
                                           ---------       ---------       ---------
<S>                                      <C>             <C>             <C>
Fixed maturities available for sale..      $ 225,216       $ 113,763       $  68,579
Preferred stock .....................          8,107           6,245           3,018
Funds withheld at interest ..........        110,523          96,637          76,654
Other investments ...................         21,259           4,176           1,286
Investment expenses .................         (9,268)         (3,683)         (1,509)
                                           ---------       ---------       ---------
Net investment income ...............      $ 355,837       $ 217,138       $ 148,028
                                           =========       =========       =========
</TABLE>


         We are required to maintain  assets on deposit with various  regulatory
authorities  to  support  our  insurance  and  reinsurance   operations.   These
requirements  are  generally  promulgated  in the statutory  regulations  of the
individual  jurisdictions.  The  assets  on  deposit  are  available  to  settle
insurance and  reinsurance  liabilities.  We also utilize trust funds in certain
transactions  where the trust  funds are set up for the  benefit  of the  ceding
companies and generally take the place of Letter of Credit ("LOC") requirements.
At December 31, 2005, restricted assets include fixed maturities of $4.9 billion
and $2.8 billion,  respectively,  and cash and cash  equivalents of $1.0 billion
and  $0.5  billion,  respectively.  The  components  of the  fair  value  of the
restricted assets at December 31, 2005 and 2004 are as follows:



<TABLE>
<CAPTION>
                                                              Year Ended          Year Ended
                                                           December 31, 2005    December 31, 2004
                                                           -----------------    -----------------
<S>                                                               <C>                <C>
Deposits with U.S. regulatory authorities................      $     7,615        $     5,297
Trust funds..............................................        5,941,669          3,303,463
                                                                ----------         ----------
                                                               $ 5,949,284        $ 3,308,760
                                                                ==========         ==========
</TABLE>


6.   Funds withheld at interest

         For  agreements  written on a modified  coinsurance  basis and  certain
agreements  written on a coinsurance  funds withheld basis,  assets equal to the
net statutory reserves are withheld and legally agreed and managed by the ceding
company and are  reflected  as funds  withheld  at interest on the  consolidated
balance sheets.

         At December 31,  2005,  funds  withheld at interest  were in respect of
seven contracts with five ceding companies. At December 31, 2004, funds withheld
at interest were in respect of seven  contracts with four ceding  companies.  At
December 31, 2005, we had three  contracts with Lincoln  National Life Insurance
Company that accounted for $1.2 billion or 48% of the funds  withheld  balances.
Additionally,  we had one contract with  Security  Life of Denver  International
that  accounted for $0.7 billion or 27% of the funds  withheld  balances and one
contract with Fidelity & Guaranty Life that accounted for $0.6 billion or 23% of
the funds withheld balances.  The remaining  contracts were with Illinois Mutual
Insurance Company and American Founders Life Insurance Company. Lincoln

                                      113
<PAGE>

                             SCOTTISH RE GROUP LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2003


6.   Funds withheld at interest (continued)

National Life Insurance  Company,  the largest exposure,  has financial strength
ratings of "A+" from A.M.  Best Company  ("A.M.  Best"),  "AA-" from  Standard &
Poor's Ratings Services, a division of the McGraw-Hill Companies, Inc ("Standard
& Poors"),  "Aa3" from Moody's Investor Services ("Moody's") and "AA" from Fitch
Ratings Ltd.  ("Fitch").  In the event of insolvency of the ceding  companies on
these  arrangements we would need to exert a claim on the assets  supporting the
contract  liabilities.  However, the risk of loss is mitigated by our ability to
offset  amounts  owed to the ceding  company  with the amounts owed to us by the
ceding company.  Interest accrues on these assets at rates defined by the treaty
terms. In most cases, we are subject to the investment  performance on the funds
withheld assets, although we do not control them. To mitigate this risk, we help
set the  investment  guidelines  followed  by the  ceding  company  and  monitor
compliance  with these  guidelines.  Reserves  for future  policy  benefits  and
interest sensitive contract  liabilities relating to these contracts amounted to
$2.4  billion and $1.7  billion at  December  31, 2005 and  2004,
respectively.

         According to data provided by our ceding companies, the amortized cost,
gross  unrealized  appreciation  and  depreciation  and estimated fair values of
invested  assets,  excluding  cash of $132.6  million  (2004 - $472.4  million),
backing our funds  withheld  at  interest  at December  31, 2005 and 2004 are as
follows:

<TABLE>
<CAPTION>
                                                                              December 31, 2005
                                                 -----------------------------------------------------------------
                                                                      Gross            Gross
                                                   Amortized        Unrealized        Unrealized        Estimated
                                                     Cost          Appreciation      Depreciation      Fair Value
                                                  -----------      -----------       -----------       -----------
<S>                                               <C>              <C>               <C>               <C>
U.S. Treasury securities and U.S. government
  agency obligations ........................      $    62,564      $        64       $      (375)      $    62,253
Corporate securities ........................        1,599,376           48,805           (13,749)        1,634,432
Municipal bonds..............................           33,333              206              (581)           32,958
Mortgage and asset backed securities ........          597,437            8,213           (10,540)          595,110
                                                   -----------      -----------       -----------       -----------
                                                     2,292,710           57,288           (25,245)        2,324,753
Commercial mortgage loans ...................          106,954            6,047              (444)          112,557
                                                   -----------      -----------       -----------       -----------
Total .......................................      $ 2,399,664      $    63,335       $   (25,689)      $ 2,437,310
                                                   ===========      ===========       ===========       ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                              December 31, 2004
                                                 -----------------------------------------------------------------
                                                                     Gross             Gross
                                                   Amortized        Unrealized        Unrealized        Estimated
                                                     Cost          Appreciation      Depreciation      Fair Value
                                                  -----------      -----------       -----------       -----------
<S>                                               <C>              <C>               <C>               <C>
U.S. Treasury securities and U.S. government
  agency obligations.........................     $    39,423      $       458       $      (143)      $    39,738
Corporate securities.........................       1,027,809           70,336            (1,896)        1,096,249
Municipal bonds..............................          24,728              738              (228)           25,238
Mortgage and asset backed securities ........         303,833           11,969            (1,088)          314,714
                                                  -----------      -----------       -----------       -----------
                                                    1,395,793           83,501            (3,355)        1,475,939
Commercial mortgage loans....................         121,468            9,212              (832)          129,848
                                                  -----------      -----------       -----------       -----------
Total .......................................     $ 1,517,261      $    92,713       $    (4,187)      $ 1,605,787
                                                  ===========      ===========       ===========       ===========
</TABLE>


                                      114
<PAGE>

                             SCOTTISH RE GROUP LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005


6.   Funds withheld at interest (continued)

         According to data  provided by our ceding  companies,  the  contractual
maturities  (excluding  cash) of the assets  backing  our funds  withheld  fixed
maturities are as follows (actual maturities may differ as a result of calls and
prepayments):

<TABLE>
<CAPTION>
                                                              December 31, 2005
                                                         --------------------------------
                                                          Amortized        Estimated Fair
                                                            Cost                 Value
                                                         ----------           ----------
<S>                                                      <C>                  <C>
Due in one year or less ............................     $   37,881           $   38,100
Due in one year through five years .................        503,014              509,119
Due in five years through ten years ................        842,379              861,911
Due after ten years ................................        311,999              320,513
                                                         ----------           ----------
                                                          1,695,273            1,729,643
Mortgage and asset backed securities ...............        597,437              595,110
Commercial mortgage loans ..........................        106,954              112,557
                                                         ----------           ----------
Total ..............................................     $2,399,664           $2,437,310
                                                         ==========           ==========
</TABLE>



                                      115
<PAGE>

                            SCOTTISH RE GROUP LIMITED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 2005

7.   Present value of in-force business

         A  reconciliation  of the  present  value of  in-force  business is as
         follows:

<TABLE>
<CAPTION>
                                                                     December 31,    December 31,    December 31,
                                                                        2005            2004            2003
                                                                      --------        --------        --------
<S>                                                                   <C>             <C>             <C>
Balance at beginning of year ..................................       $ 62,164        $ 44,985        $ 18,181
Acquisition of Scottish Re Life Corporation ...................              -          24,766          31,506
Amortization ..................................................         (7,373)         (7,689)         (4,926)
Other .........................................................            (48)            102             224
                                                                      --------        --------        --------
Balance at end of year ........................................       $ 54,743        $ 62,164        $ 44,985
                                                                      ========        ========        ========
</TABLE>


         Future estimated amortization of the present value of in-force business
is as follows:

Year ending December 31
-----------------------
2006......................................................          $5,321
2007......................................................           5,371
2008......................................................           5,725
2009......................................................           6,173
2010......................................................           3,608
Thereafter................................................         $28,545


8.   Collateral finance facilities

HSBC I

         In 2004, we entered into a collateral  finance  facility with HSBC Bank
USA, N.A. ("HSBC I"). This facility  provides $200.0 million that can be used to
collateralize reinsurance obligations under intercompany reinsurance agreements.
Simultaneously,  we entered  into a total  return swap with HSBC Bank USA,  N.A.
under which we are entitled to the total return of the  investment  portfolio of
the trust  established for this facility.  In accordance with FIN 46R, the trust
is  considered  to be a variable  interest  entity and we are deemed to hold the
primary  beneficial  interest  in the  trust.  As a  result,  the trust has been
consolidated  in these financial  statements.  The assets of the trust have been
recorded as fixed maturity  investments.  Our consolidated  statements of income
show the investment return of the trust as investment income and the cost of the
facility is reflected in collateral finance facilities expense. The creditors of
the trust have no recourse against our general assets.

Stingray


         On January 12, 2005,  we entered  into a put  agreement  with  Stingray
Investor  Trust  ("Investor  Trust") for an aggregate  value of $325.0  million.
Under the terms of the put agreement,  we acquired an irrevocable  put option to
issue  funding  agreements  to  Investor  Trust in  return  for the  assets in a
portfolio of 30-day  commercial  paper.  This put option may be exercised at any
time. In addition,  we may be required to issue  funding  agreements to Investor
Trust  under  certain  circumstances,   including,   but  not  limited  to,  the
non-payment  of the put option  premium and a non-payment  of interest under any
outstanding funding agreements under the put agreement.  The facility matures on
January 12, 2015. This transaction may also provides  collateral for Scottish Re
(U.S.),  Inc.  for  reinsurance   obligations  under  intercompany  quota  share
reinsurance  agreements  and at December 31, 2005,  $50.0 million was in use for
this purpose. The put premium incurred during the year ended


                                      116
<PAGE>


                            SCOTTISH RE GROUP LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005

8.   Collateral finance facilities (continued)

December 31, 2005 amounted to $4.7 million,  and is included in collateral
finance  facilities  expense  in  the  consolidated  statements  of  income.  In
accordance  with FIN 46R, we are not  considered to have the primary  beneficial
interest in Investor  Trust and as a result we are not  required to  consolidate
Investor Trust.

Orkney Re, Inc.

         On  February  11,  2005,  Orkney  Holdings,  LLC,  a  Delaware  limited
liability company,  issued and sold in a private offering an aggregate of $850.0
million  Series A Floating Rate Insured Notes due February 11, 2035 (the "Orkney
Notes").  Orkney  Holdings,  LLC is organized for the limited purpose of holding
the stock of Orkney Re, Inc., a South Carolina special purpose captive insurance
company,  and  issuing  the Orkney  Notes.  All of the  common  shares of Orkney
Holdings,  LLC are owned by Scottish Re (U.S.), Inc. Proceeds from this offering
were used to fund the Regulation XXX reserve requirements for a defined block of
level premium term life insurance  policies  issued between  January 1, 2000 and
December  31, 2003  reinsured  by  Scottish  Re (U.S.),  Inc. to Orkney Re, Inc.
Proceeds from the Orkney Notes have been  deposited into a series of trusts that
collateralize the notes.

         The holders of the Orkney Notes cannot require repayment from us or any
of our  subsidiaries,  other than Orkney  Holdings,  LLC. The timely  payment of
interest and ultimate  payment of principal for the Orkney Notes are  guaranteed
by MBIA Insurance Corporation.

         Interest  on the  principal  amount  of the  Orkney  Notes  is  payable
quarterly at a rate  equivalent to three month LIBOR plus 0.53%. At December 31,
2005,  the  interest  rate was 5.07%.  Any payment of  principal,  including  by
redemption,  or  interest on the Orkney  Notes is sourced  from  dividends  from
Orkney  Re,  Inc.  and the  balances  available  in a series of trust  accounts.
Dividends may only be made with the prior  approval of the Director of Insurance
of the State of South  Carolina in  accordance  with the terms of its  licensing
orders and in accordance  with  applicable  law. The Orkney Notes also contain a
customary  limitation  on  lien  provisions  and  customary  events  of  default
provisions,  which, if breached, could result in the accelerated maturity of the
Orkney Notes. Orkney Holdings,  LLC has the option to redeem all or a portion of
the Orkney Notes prior to and on or after February 11, 2010,  subject to certain
call premiums.

         In accordance with FIN 46R, Orkney Holdings, LLC, is considered to be a
variable  interest  entity and we are considered to hold the primary  beneficial
interest.  As a result,  Orkney  Holdings,  LLC has been  consolidated  in these
financial statements.  The assets of Orkney Holdings,  LLC have been recorded as
fixed  maturity  investments  and cash and cash  equivalents.  Our  consolidated
statements  of income  show the  investment  return of Orkney  Holdings,  LLC as
investment  income  and the cost of the  facility  is  reflected  in  collateral
finance facilities expense.

Orkney Re II plc

         On  December  21,  2005,  Orkney Re II plc, an orphan  special  purpose
vehicle incorporated under the laws of Ireland, whose issued ordinary shares are
held by a share  trustee  and its  nominees  in trust for  charitable  purposes,
issued in a private offering $450.0 million of debt to external  investors.  The
debt consisted of $382.5 million Series A-1 Floating Rate Guaranteed  Notes (the
"Series A Notes"),  $42.5  million in aggregate  principal  amount of Series A-2
Floating Rate Notes (the "Series B Notes"),  and $25.0 million Series B Floating
Rate Notes, all due December 31, 2035 (collectively, the "Orkney II Notes"). The
Orkney II Notes  are  listed on the Irish  Stock  Exchange.  Proceeds  from this
offering were used to fund the Regulation XXX reserve requirements for a defined
block of level premium term life insurance  policies  issued between  January 1,
2004 and December 31, 2004 reinsured by Scottish


                                      117
<PAGE>


                            SCOTTISH RE GROUP LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005

8.   Collateral finance facilities (continued)

Re (U.S.), Inc. to Orkney Re II plc. Proceeds from the Orkney II Notes have been
deposited into a series of trusts that collateralize the notes.

         The holders of the Orkney II Notes cannot require  repayment from us or
any of our  subsidiaries,  only from Orkney Re II plc. Assured Guaranty (UK) Ltd
has  guaranteed the timely  payment of the scheduled  interest  payments and the
principal on the maturity date, December 21, 2035 of the Series A-1 Notes.

         Interest  on the  principal  amount of the  Orkney II Notes is  payable
quarterly at a rate  equivalent  to three month LIBOR plus 0.425% for the Series
A-1 Notes,  three  month  LIBOR  plus 0.73% for the Series A-2 Notes,  and three
month LIBOR plus 3.0% for the Series B Notes. At December 31, 2005, the interest
rate on the Series A-1 Notes was 4.96%, Series A-2 Notes was 5.27%, and Series B
Notes was 7.50%. The Orkney II Notes also contain a customary limitation on lien
provisions and customary events of default provisions, which, if breached, could
result in the accelerated  maturity of the Orkney II Notes. Orkney Re II plc has
the option to redeem all or a portion of the Orkney II Notes  prior to and on or
after February 11, 2007, subject to certain call premiums.

         In  accordance  with FIN 46R,  Orkney Re II plc is  considered  to be a
variable  interest  entity and we are considered to hold the primary  beneficial
interest. As a result, Orkney Re II plc has been consolidated in these financial
statements.  The assets of Orkney Re II plc have been recorded as fixed maturity
investments and cash and cash equivalents. Our consolidated statements of income
show the investment return of Orkney II Re plc as investment income and the cost
of the facility is reflected in collateral finance facilities expense.

HSBC II

         On December  22,  2005,  we entered  into a second  collateral  finance
facility  with  HSBC Bank USA,  N.A  ("HSBC  II").  This  facility  is a 20 year
collateral  finance  facility that provides up to $1.0 billion of Regulation XXX
collateral  support  for  the  business  acquired  from  ING  and can be used to
collateralize    reinsurance   obligations   under   inter-company   reinsurance
agreements.  Simultaneously,  we entered into a total return swap with HSBC Bank
USA,  N.A.  under which we are  entitled to the total  return of the  investment
portfolio of the trust established for this facility. In accordance with FIN 46R
the trust is  considered to be a variable  interest  entity and we are deemed to
hold the primary  beneficial  interest in the trust. As a result,  the trust has
been  consolidated in these financial  statements.  The assets of the trust have
been recorded as fixed maturity  investments and cash and cash equivalents.  Our
consolidated  statements  of income show the  investment  return of the trust as
investment  income  and the cost of the  facility  is  reflected  in  collateral
finance facilities expense.  The creditors of the trust have no recourse against
our general assets.

Reinsurance Facility

         On December 22, 2005, we entered into a long term reinsurance  facility
with a third party ("Reinsurance  Facility"),  Bermuda-domiciled  reinsurer that
provides  up to $1.0  billion  of  Regulation  XXX  collateral  support  for the
business acquired from ING. The Bermuda reinsurer  provides security in the form
of letters of credit in trust  equal to the  statutory  reserves.  All risks and
returns arising out of the underlying book of business are retained by us.

                                      118
<PAGE>


                            SCOTTISH RE GROUP LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005

8.   Collateral finance facilities (continued)

         At December  31,  2005,  we had $1.986  billion of  collateral  finance
facility obligations relating to the HSBC I, HSBC II, Orkney Re, Inc. and Orkney
Re II plc transactions.  In connection with these transactions we have assets in
trust of approximately $2.705 billion which represent assets supporting both the
economic  and excess  reserves  and surplus in the  transactions.  The assets in
trust are managed in  accordance  with  predefined  investment  guidelines as to
permitted investments, portfolio quality, diversification and duration.

9.   7.00% Convertible Junior Subordinated Notes

         In  order  to  provide  additional  capital  to  support  the  in-force
individual life reinsurance  business  acquired from ING, we signed a Securities
Purchase  Agreement on October 17, 2004 with the Cypress  Merchant B Partners II
(Cayman)  L.P.,  Cypress  Merchant  Banking II-A C.V.,  55th Street  Partners II
(Cayman) L.P. and Cypress Side-by-Side (Cayman) L.P. (collectively, the "Cypress
Entities").  Pursuant to the  Securities  Purchase  Agreement,  we issued to the
Cypress Entities on December 31, 2004, $41.3 million aggregate  principal amount
of 7.00% Convertible Junior  Subordinated Notes with a maturity date of December
31, 2034 (the "7.00% Convertible Junior Subordinated Notes").

         On April 7, 2005, our shareholders approved the conversion of the 7.00%
Convertible Junior  Subordinated Notes and accrued interest thereon resulting in
the issuance of 2,170,896 Class C warrants.  Upon receipt of regulatory approval
on May 4, 2005, the Class C Warrants were converted  into ordinary  shares.  See
Note 12 for additional details.

10.  Debt obligations

         Long-term debt consists of:


<TABLE>
<CAPTION>
                                                  December 31,    December 31,
                                                     2005            2004
                                                    --------       --------
<C>                               <C>               <C>            <C>
4.5% senior convertible notes due 2022 ........     $115,000       $115,000
Capital securities due 2032 ...................       17,500         17,500
Preferred trust securities due 2033 ...........       20,000         20,000
Trust preferred securities due 2033 ...........       10,000         10,000
Trust preferred securities due 2034 ...........       32,000         32,000
Trust preferred securities due 2034 ...........       50,000         50,000
                                                    --------       --------
                                                    $244,500       $244,500
                                                    ========       ========
</TABLE>

4.5% senior convertible notes

         On November 22, 2002 and November 27, 2002,  we issued  $115.0  million
(which  included  an  over-allotment  option of $15.0  million)  of 4.5%  senior
convertible  notes,  which are due  December  1,  2022.  The notes are  general
unsecured  obligations,  ranking  on  parity  in right of  payment  with all our
existing  and  future  unsecured  senior  indebtedness,  and  senior in right of
payment  with  all our  future  subordinated  indebtedness  and do not  have the
benefit  of any  sinking  fund.  Interest  on the notes is payable on June 1 and
December 1 of each  year.  The notes are rated  "Baa2" by Moody's  and "BBB-" by
Standard & Poor's.

                                      119
<PAGE>


                            SCOTTISH RE GROUP LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005


10.  Debt obligations (continued)


         The notes are  convertible  into our  ordinary  shares  initially  at a
conversion rate of 46.0617  ordinary shares per $1,000 principal amount of notes
(equivalent to an initial  conversion  price of $21.71 per ordinary  share).  On
conversion,  we shall settle the principal amount of $115.0 million in cash. The
notes are  redeemable at our option in whole or in part beginning on December 6,
2006, at a redemption  price equal to 100% of the principal  amount of the notes
plus accrued and unpaid interest. The notes are subject to repurchase by us upon
a change of control of Scottish Re or at a holder's  option on December 6, 2006,
December 1, 2010,  December 1, 2012 and December 1, 2017, at a repurchase  price
equal to 100% of the  principal  amount of the notes  plus  accrued  and  unpaid
interest.  The  notes are due on  December  1, 2022  unless  earlier  converted,
redeemed by us at our option or repurchased by us at a holder's option.

         A holder  may  surrender  notes  for  conversion  prior  to the  stated
maturity only under the following circumstances:

         o        during any conversion period if the sale price of our ordinary
                  shares  for at  least  20  trading  days in the  period  of 30
                  consecutive  trading  days  ending  on  the  first  day of the
                  conversion  period  exceeds  120% of the  conversion  price in
                  effect on that 30th trading day;

         o        during  any  period  in which  the  notes  are rated by either
                  Moody's  Investors  Service,  Inc. or Standard & Poor's Rating
                  Group and the credit  rating  assigned  to the notes by either
                  rating agency is  downgraded by two levels or more,  suspended
                  or withdrawn;

         o        if we have called those notes for redemption; or

         o        upon  the  occurrence  of  the  certain  specified   corporate
                  transactions.

         Pursuant  to  a  registration  rights  agreement,   we  filed  a  shelf
registration  statement with the Securities and Exchange Commission,  for resale
of the notes and our ordinary shares issuable upon conversion of the notes.

         Capital securities due 2032

         On December 4, 2002, Scottish Holdings Statutory Trust I, a Connecticut
statutory business trust ("Capital Trust") issued and sold in a private offering
an aggregate of $17.5  million  Floating Rate Capital  Securities  (the "Capital
Securities").  All of the  common  shares  of the  Capital  Trust  are  owned by
Scottish Holdings, Inc., our wholly owned subsidiary.

         The Capital  Securities mature on December 4, 2032. They are redeemable
in whole or in part at any time  after  December  4, 2007.  Interest  is payable
quarterly  at a rate  equivalent  to 3 month LIBOR plus 4%. At December 31, 2005
and December 31, 2004,  the interest  rates were 8.54% and 6.44%,  respectively.
Prior to December 4, 2007,  interest cannot exceed 12.5%.  The Capital Trust may
defer payment of the interest for up to 20 consecutive quarterly periods, but no
later than  December  4, 2032.  Any  deferred  payments  would  accrue  interest
quarterly on a compounded  basis if Scottish  Holdings,  Inc. defers interest on
the Debentures due December 4, 2032 (as defined below).

         The sole assets of the Capital Trust consist of $18.0 million principal
amount of  Floating  Rate  Debentures  (the  "Debentures")  issued  by  Scottish
Holdings, Inc. The Debentures mature on December 4, 2032 and interest is

                                      120
<PAGE>

                            SCOTTISH RE GROUP LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005


10.  Debt obligations (continued)


payable quarterly at a rate equivalent to 3 month LIBOR plus 4%. At December 31,
2005  and  December  31,  2004,   the  interest  rates  were  8.54%  and  6.44%,
respectively.  Prior to December 4, 2007, interest cannot exceed 12.5%. Scottish
Holdings,  Inc.  may defer  payment  of the  interest  for up to 20  consecutive
quarterly  periods,  but no later than December 4, 2032.  Any deferred  payments
would accrue interest quarterly on a compounded basis.  Scottish Holdings,  Inc.
may redeem the Debentures at any time after December 4, 2007 and in the event of
certain changes in tax or investment company law.

         Scottish Annuity & Life Insurance  Company (Cayman) Ltd. has guaranteed
Scottish Holdings, Inc.'s obligations under the Debentures and distributions and
other payments due on the Capital Securities.

Preferred trust securities due 2033

         On October 29, 2003,  Scottish  Holdings,  Inc.  Statutory  Trust II, a
Connecticut  statutory  business trust ("Capital Trust II") issued and sold in a
private  offering an aggregate of $20.0 million  Preferred Trust Securities (the
"Preferred Trust Securities").  All of the common shares of Capital Trust II are
owned by Scottish Holdings, Inc.

         The Preferred  Trust  Securities  mature on October 29, 2033.  They are
redeemable in whole or in part at any time after  October 29, 2008.  Interest is
payable  quarterly at a rate equivalent to 3 month LIBOR plus 3.95%. At December
31,  2005 and  December  31,  2004,  the  interest  rates  were 8.49% and 6.08%,
respectively.  Prior to October 29, 2008, interest cannot exceed 12.45%. Capital
Trust II may defer  payment of the interest for up to 20  consecutive  quarterly
periods,  but no later than October 29, 2033. Any deferred payments would accrue
interest  quarterly  on a compounded  basis if Scottish  Holdings,  Inc.  defers
interest on the 2033 Floating Rate Debentures due October 29, 2033 (as described
below).

         The sole assets of Capital Trust II consist of $20.6 million  principal
amount of Floating Rate Debentures (the "2033 Floating Rate Debentures")  issued
by Scottish  Holdings,  Inc. The 2033 Floating Rate Debentures mature on October
29, 2033 and  interest  is payable  quarterly  at 3 month  LIBOR plus 3.95%.  At
December  31, 2005 and December  31,  2004,  the  interest  rates were 8.49% and
6.08%,  respectively.  Prior to October 29, 2008, interest cannot exceed 12.45%.
Scottish  Holdings,  Inc.  may  defer  payment  of  the  interest  for  up to 20
consecutive  quarterly periods, but no later than October 29, 2033. Any deferred
payments  would  accrue  interest  quarterly  on a  compounded  basis.  Scottish
Holdings,  Inc. may redeem the 2033 Floating  Rate  Debentures at any time after
October  29,  2008 and in the  event of  certain  changes  in tax or  investment
company law.

         Scottish Annuity & Life Insurance  Company (Cayman) Ltd. has guaranteed
Scottish  Holdings,  Inc.'s  obligations under the 2033 Floating Rate Debentures
and distributions and other payments due on the Preferred Trust Securities.

Trust preferred securities due 2033

         On November 14, 2003,  GPIC Holdings Inc.  Statutory  Trust, a Delaware
statutory business trust ("GPIC Trust") issued and sold in a private offering an
aggregate of $10.0 million Trust Preferred Securities (the "2033 Trust Preferred
Securities").  All of the  common  shares of GPIC  Trust  are owned by  Scottish
Holdings, Inc.

         The 2033 Trust Preferred  Securities mature on September 30, 2033. They
are  redeemable  in whole  or in part at any  time  after  September  30,  2008.
Interest is payable  quarterly at a rate equivalent to 3 month LIBOR

                                      121
<PAGE>

                            SCOTTISH RE GROUP LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005


10.  Debt obligations (continued)

plus 3.90%.  At December 31, 2005 and December 31, 2004, the interest rates were
8.44% and 6.46%, respectively.  GPIC Trust may defer payment of the interest for
up to 20 consecutive  quarterly  periods,  but no later than September 30, 2033.
Any deferred  payments would accrue interest  quarterly on a compounded basis if
Scottish  Holdings,  Inc. defers interest on the Junior  Subordinated  Notes due
September 30, 2033 (as described below).

         The sole assets of GPIC Trust consist of $10.3 million principal amount
of  Junior  Subordinated  Notes  (the  "Junior  Subordinated  Notes")  issued by
Scottish  Holdings,  Inc. The Junior  Subordinated Notes mature on September 30,
2033 and interest is payable  quarterly at 3 month LIBOR plus 3.90%. At December
31,  2005 and  December  31,  2004,  the  interest  rates  were 8.44% and 6.46%,
respectively.  Scottish Holdings,  Inc. may defer payment of the interest for up
to 20 consecutive  quarterly periods,  but no later than September 30, 2033. Any
deferred  payments  would  accrue  interest  quarterly  on a  compounded  basis.
Scottish  Holdings,  Inc. may redeem the Junior  Subordinated  Notes at any time
after  September  30,  2008  and in  the  event  of  certain  changes  in tax or
investment company law.

         Scottish Annuity & Life Insurance  Company (Cayman) Ltd. has guaranteed
Scottish Holdings,  Inc.'s  obligations under the Junior  Subordinated Notes and
distributions and other payments due on the trust preferred securities.

Trust preferred securities due 2034

         On May 12,  2004,  Scottish  Holdings,  Inc.  Statutory  Trust  III,  a
Connecticut  statutory business trust ("Capital Trust III") issued and sold in a
private  offering an aggregate of $32.0 million Trust Preferred  Securities (the
"2034 Trust  Preferred  Securities").  All of the common shares of Capital Trust
III are owned by Scottish Holdings, Inc.

         The 2034 Trust Preferred  Securities  mature on June 17, 2034. They are
redeemable  in whole or in part at any time after  June 17,  2009.  Interest  is
payable  quarterly at a rate equivalent to 3 month LIBOR plus 3.80%. At December
31,  2005 and  December  31,  2004,  the  interest  rate was  8.34%  and  6.30%,
respectively.  Prior to June 17, 2009,  interest  cannot exceed 12.50%.  Capital
Trust III may defer payment of the interest for up to 20  consecutive  quarterly
periods,  but no later than June 17, 2034.  Any deferred  payments  would accrue
interest  quarterly  on a compounded  basis if Scottish  Holdings,  Inc.  defers
interest on the 2034  Floating Rate  Debentures  due June 17, 2034 (as described
below).

         The sole assets of Capital Trust III consist of $33.0 million principal
amount of Floating Rate Debentures (the "2034 Floating Rate Debentures")  issued
by Scottish Holdings,  Inc. The 2034 Floating Rate Debentures mature on June 17,
2034 and interest is payable  quarterly at 3 month LIBOR plus 3.80%. At December
31,  2005  and  December  31,  2004  the  interest  rate was  8.34%  and  6.30%,
respectively.  Prior to June 17, 2009,  interest cannot exceed 12.50%.  Scottish
Holdings,  Inc.  may defer  payment  of the  interest  for up to 20  consecutive
quarterly periods,  but no later than June 17, 2034. Any deferred payments would
accrue interest  quarterly on a compounded basis.  Scottish  Holdings,  Inc. may
redeem the 2034 Floating Rate  Debentures at any time after June 17, 2009 and in
the event of certain changes in tax or investment company law.

         Scottish Annuity & Life Insurance  Company (Cayman) Ltd. has guaranteed
Scottish  Holdings,  Inc.'s  obligations under the 2034 Floating Rate Debentures
and distributions and other payments due on the 2034 Trust Preferred Securities.

                                      122
<PAGE>

                            SCOTTISH RE GROUP LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005


10.  Debt obligations (continued)


Trust preferred securities due 2034

         On December  18,  2004,  SFL  Statutory  Trust I, a Delaware  statutory
business  trust  ("SFL  Trust  I")  issued  and sold in a  private  offering  an
aggregate of $50.0 million Trust Preferred  Securities (the "December 2034 Trust
Preferred  Securities").  All of the  common  shares of SFL Trust I are owned by
Scottish Financial (Luxembourg) S.a.r.l.

         The December  2034 Trust  Preferred  Securities  mature on December 15,
2034.  They are  redeemable  in whole or in part at any time after  December 15,
2009.  Interest is payable  quarterly at a rate equivalent to 3 month LIBOR plus
3.50%.  At December 31, 2005, and December 31, 2004 the interest rate was 8.04.%
and 5.95%,  respectively.  Prior to December 15, 2009,  interest  cannot  exceed
12.50%.  SFL Trust I may defer payment of the interest for up to 20  consecutive
quarterly  periods,  but no later than December 15, 2034. Any deferred  payments
would accrue interest quarterly on a compounded basis.

         The sole  assets  of SFL  Trust I consist  of $51.5  million  principal
amount  of  Floating  Rate   Debentures   (the   "December  2034  Floating  Rate
Debentures")  issued by Scottish Financial  (Luxembourg)  S.a.r.l.  The December
2034  Floating  Rate  Debentures  mature on December  15,  2034 and  interest is
payable quarterly at 3 month LIBOR plus 3.50%. At December 31, 2005 and December
31, 2004 the interest rate was 8.04% and 5.95%, respectively.  Prior to December
15,  2009,  interest  cannot  exceed  12.50%.  Scottish  Financial  (Luxembourg)
S.a.r.l.  may defer payment of the interest for up to 20  consecutive  quarterly
periods, but no later than December 15, 2034. Any deferred payments would accrue
interest  quarterly  on  a  compounded  basis.  Scottish  Financial  (Luxemburg)
S.a.r.l. may redeem the December 2034 Floating Rate Debentures at any time after
December  15,  2009 and in the event of  certain  changes  in tax or  investment
company law.

         Scottish Annuity & Life Insurance  Company (Cayman) Ltd. has guaranteed
Scottish Financial  (Luxembourg)  S.a.r.l.'s obligations under the December 2034
Floating  Rate  Debentures  and  distributions  and  other  payments  due on the
December 2034 Trust Preferred Securities.

Credit facilities


         On July 14, 2005,  Scottish  Annuity & Life Insurance  Company (Cayman)
Ltd.,  Scottish Re (Dublin)  Limited,  Scottish Re (U.S.),  Inc. and Scottish Re
Limited entered into a $200.0 million,  three-year  revolving  unsecured  senior
credit  facility  with a syndicate of banks.  This  facility  replaced a 364-day
facility which was due to mature in October 2005. The facility may be increased,
at our option, to an aggregate principal amount of $300.0 million.  The facility
provides capacity for borrowing and extending letters of credit. The facility is
a  direct  financial  obligation  of each of the  borrowers;  however,  Scottish
Annuity & Life  Insurance  Company  (Cayman) Ltd. has  guaranteed the payment of
obligations  of Scottish  Re (Dublin)  Limited,  Scottish  Re (U.S.),  Inc.  and
Scottish Re Limited.  There were no outstanding borrowings at December 31, 2005.
Outstanding  letters of credit under this facility  amounted to $40.9 million at
December 31, 2005.

         On August 18, 2005,  Scottish Re (Dublin)  Limited entered into a $30.0
million  three-year  revolving,  unsecured  letter  of  credit  facility  with a
syndicate of banks. The credit facility may be increased,  at our option,  to an
aggregate principal amount of $50.0 million.  The facility is a direct financial
obligation of Scottish Re (Dublin)  Limited,  however,  Scottish  Annuity & Life
Insurance  Company  (Cayman)  Ltd. has  guaranteed  the payment

                                      123
<PAGE>

                            SCOTTISH RE GROUP LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005


10.  Debt obligations (continued)

obligations  of  Scottish  Re  (Dublin)  Limited.   There  were  no  outstanding
borrowings or letters of credit at December 31, 2005.

         The  financial  covenants of these  facilities  require  that  Scottish
Annuity & Life  Insurance  Company  (Cayman) Ltd.  maintain a minimum  amount of
consolidated  shareholders' equity and maintain the ratio of unencumbered assets
to  aggregate  borrowings  under  the  facilities  of 1.2 times  borrowings.  In
addition,  these facilities also require Scottish Re Group Limited to maintain a
minimum amount of consolidated shareholders' equity and a debt to capitalization
ratio of less than 30%. For the purposes of computing the  financial  covenants,
the collateral facilities and their associated costs are excluded.

         Failure to comply with the requirements of the credit facilities would,
subject to grace periods, result in an event of default and we would be required
to repay any outstanding  borrowings.  At December 31, 2005,  Scottish Annuity &
Life  Insurance  Company  (Cayman)  Ltd. and  Scottish Re Group  Limited were in
compliance with the financial covenants noted in the preceding paragraphs.

         ING is obligated to maintain collateral for the Regulation XXX and AXXX
reserve  requirements  of the business we acquired from them for the duration of
such  requirements  (which relate to state  insurance  law reserve  requirements
applying  to  reserves  for level  premium  term  life  insurance  policies  and
universal  life  policies).  We pay ING a fee  based on the face  amount  of the
collateral provided until satisfactory  alternative collateral  arrangements are
made.  In the normal  course of business and our capital  planning we are always
looking for  opportunities  to relieve capital strain relating to Regulation XXX
reserve  requirements  for  our  previously  existing  business  as  well as the
business  acquired from ING. We completed two  financing  solutions  relating to
these  requirements  in December 2005 and received a $6.7 million rebate of fees
incurred in 2005. See Note 8 for details on the financing solutions.

         We also have a reverse repurchase agreement with a major broker/dealer.
Under  this  agreement,  we have the  ability  to sell  agency  mortgage  backed
securities with the agreement to repurchase them at a fixed price, providing the
dealer  with a spread  that  equates to an  effective  borrowing  cost linked to
one-month  LIBOR.  This agreement is renewable  monthly at the discretion of the
broker/dealer.  At  December  31,  2005 and 2004,  respectively,  there  were no
borrowings under this agreement.

11.  Mezzanine equity

         On  December  17, 2003 and  December  22,  2003,  we issued in a public
offering  5,750,000  Hybrid  Capital Units or HyCUs.  The aggregate net proceeds
were $141.9 million.  Each HyCU consists of (i) a purchase  contract  ("purchase
contract") to which the holder is obligated to purchase from us, on February 15,
2007,  an agreed upon number of ordinary  shares for a price of $25.00 and (b) a
convertible preferred share with a liquidation preference of $25.00, convertible
into ordinary  shares,  which we will settle in cash and ordinary  shares on May
21, 2007.

         The agreed  upon number of shares that the  purchase  contract  will be
settled  for is  called  the  "settlement  rate".  The  settlement  rate on each
purchase contract is as follows:

         (i)      If the average closing price per ordinary share on each of the
                  20  consecutive  trading days ending on the fourth trading day
                  preceding  February 15, 2007 (the "Applicable  Market Value"),
                  is less than or equal to $19.32,  then each purchase  contract
                  will be settled for 1.294 ordinary shares; or

                                      124
<PAGE>

<PAGE>


                            SCOTTISH RE GROUP LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005

11.  Mezzanine equity (continued)

         (ii)     If the  Applicable  Market Value is greater than $19.32,  then
                  each  purchase  contract  will  be  settled  for a  number  of
                  ordinary  shares by dividing  $25.00 by the Applicable  Market
                  Value.

         Each  convertible  preferred  share  is  pledged  to us to  secure  the
holder's  obligations  under  the  purchase  contract.  A holder of the HyCU can
obtain the release of the pledged convertible share by substituting  zero-coupon
treasury  securities as security for the obligation under the purchase contract.
The resulting unit is then known as a Treasury  Unit.  Holders of Treasury Units
can recreate  HyCUs by  re-substituting  the  convertible  preferred  shares and
withdrawing the treasury securities.

         Holders of the  convertible  preferred  shares have the option to allow
the convertible  preferred  share to be included in the remarketing  process and
use the proceeds of the remarketing to settle the purchase contract or elect not
to participate in the remarketing by delivering the requisite  amount of cash to
settle the purchase contract.

         The convertible  preferred  shares will be initially  convertible  into
1.0607 ordinary  shares per $25.00  liquidation  preference  (referred to as the
"conversion  rate"),  subject to  anti-dilution  adjustments.  This  reflects an
initial conversion price of $23.57.  Upon conversion,  we will deliver an amount
of cash up to the liquidation  preference,  in lieu of the ordinary shares,  and
ordinary  shares  for  the  value  of the  excess,  if  any,  of the  conversion
obligation minus the liquidation preference of the convertible preferred shares.
The value of the excess of the conversion obligation is reflected in our diluted
earnings per share computation. The convertible preferred shares are mandatorily
redeemable on May 21, 2007, unless earlier converted.

         Amounts  accumulate  under  the  HyCUs at a rate of  5.875%  per  year,
payable  quarterly  beginning  February  14,  2004.  These  amounts  consist  of
quarterly  contract  adjustment  payments  at a rate  of  4.875%  per  year  and
dividends  at a rate of 1.00%  per  year on the  convertible  preferred  shares,
payable quarterly when declared by our board of directors. We may defer contract
adjustment  payments until no later than the purchase contract  settlement date.
The present value of the contract adjustment  payments  (discounted at a rate of
4.75%) is included in other liabilities and resulted in a decrease in additional
paid-in  capital at the date of issuance.  Issue costs on the purchase  contract
have also been  included in  additional  paid-in  capital.  The dividends on the
convertible preferred shares are included in interest expense.

         We have  accounted  for the  HyCUs in  accordance  with  SFAS  No.  150
"Accounting for Certain  Instruments  with  Characteristics  of Debt and Equity"
("SFAS No. 150").  The convertible  preferred shares that comprise the HyCUs are
not mandatorily redeemable as defined by SFAS No. 150. On the redemption date of
May  21,  2007,  the  convertible  preferred  shares  are  subject  to  optional
conversion by the holder. SFAS No. 150 indicates that a conditionally redeemable
preferred share, such as a convertible preferred share, should not be classified
as a  liability  if it  can be  converted  rather  than  redeemed.  Because  the
convertible  preferred  shares are subject either to conversion or redemption on
May 21, 2007, it is conditionally  redeemable as defined by SFAS No. 150 for all
periods  preceding  that  date.  Accordingly,  the HyCUs have been  recorded  as
mezzanine  equity,  which is net of issuance  costs  related to the  convertible
preferred  shares.

12.  Shareholders' equity

Ordinary shares

         We are  authorized to issue  100,000,000  ordinary  shares of par value
$0.01 each.

                                      125
<PAGE>

                            SCOTTISH RE GROUP LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005

12.  Shareholders' equity (continued)

         On July 23, 2003, we completed a public offering of 9,200,000  ordinary
shares (which included an over-allotment option of 1,200,000 ordinary shares) in
which we raised aggregate net proceeds of $180.1 million.  We used $30.0 million
of these proceeds to repurchase 1,525,000 ordinary shares from Pacific Life at a
purchase  price of $19.66 per share.  During 2003,  we issued  200,000  ordinary
shares upon the exercise of Class A Warrants.

         During  2004,  in order to provide  additional  capital to support  the
acquisition  of the ING  individual  life  reinsurance  business,  we  signed  a
Securities  Purchase  Agreement  on October 17, 2004 with the Cypress  Entities.
Pursuant to the Securities Purchase Agreement, we issued to the Cypress Entities
on December 31, 2004:

         (i)      3,953,183 ordinary shares, par value $0.01 per share (equal to
                  9.9% of the  aggregate  number of ordinary  shares  issued and
                  outstanding  on December  31,  2004,  taking into account such
                  issuance);

         (ii)     Class C Warrants to purchase  3,206,431 ordinary shares (equal
                  to the  difference  between (A) 19.9% of the  ordinary  shares
                  issued and  outstanding  on December 31, 2004 (without  taking
                  into account the issuance of ordinary  shares  pursuant to (i)
                  above) and (B) the  number of  ordinary  shares  issued to the
                  Cypress Entities as provided in (i) above); and

         (iii)    The 7.00% Convertible  Junior  Subordinated Notes discussed in
                  Note 9.

         The proceeds  from the Cypress  Entities  net of a  commitment  fee and
other expenses amounted to $126.9 million. The Class C Warrants were exercisable
on  receipt of  shareholder  and  regulatory  approvals.  On April 7, 2005,  our
shareholders approved the conversion of the Cypress Notes into 2,170,896 Class C
Warrants.  All regulatory  approvals were obtained on May 4, 2005 and all of the
Class C Warrants were converted into 5,377,327 ordinary shares.

         On December  23,  2005,  we  completed a public  offering of  7,660,000
ordinary shares (which included an over-allotment  option of 1,410,000  ordinary
shares) in which we raised aggregate net proceeds of $174.1 million. We used the
proceeds of the  offering  for  general  corporate  purposes,  which may include
investments  in or  advances to  subsidiaries,  possible  acquisitions,  working
capital and other corporate purposes.

         In  connection  with  the  offering,  we  entered  into  forward  sales
agreements with affiliates of Bear, Stearns & Co. Inc and Lehman Brothers,  Inc.
(the  "forward  purchasers")  and the forward  purchasers  borrowed  and sold an
aggregate of approximately  3,150,000  ordinary shares as their initial hedge of
the  forward  sale  agreements.  Pursuant to the forward  sale  agreements,  the
forward  purchasers agree to pay us an aggregate of approximately  $75.0 million
on  September  29,  2006 and an  aggregate  of  approximately  $75.0  million on
December  29,  2006,  subject to our right to receive a portion of such  payment
prior to the settlement  dates.  In exchange,  on each of such dates the we will
deliver to the forward  purchasers a variable number of ordinary shares based on
the average  market  price of the ordinary  shares,  subject to a floor price of
$22.80 and a cap price of $28.80.  We also have the right to net share settle or
cash settle the forward  sale  agreements.  The fair value of the forward  sales
agreements at inception is reflected in shareholders'  equity (as a reduction in
additional  paid-in  capital)  and the  fair  value  is not  adjusted  till  the
settlement  date of the forward.  In  addition,  the  underwriting  costs of the
forward sales agreements have been reflected in  shareholders'  equity (as a
reduction in additional paid-in capital). We expect to use the proceeds from the
forward  sales  agreements  for  general  corporate  purposes  which may include
investments  in or  advances to  subsidiaries,  possible  acquisitions,  working
capital and other corporate purposes.

                                      126
<PAGE>

                            SCOTTISH RE GROUP LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005

12.  Shareholders' equity (continued)

         During  the years  ended  December  31,  2005,  2004 and 2003 we issued
423,467,  749,551 and 425,955 ordinary shares,  respectively,  to employees upon
the  exercise of stock  options.  At December 31,  2005,  there were  53,391,939
outstanding ordinary shares.

Preferred shares

         We are  authorized to issue  50,000,000  preferred  shares of par value
$0.01 each.

         On December 17, 2003 and December 22, 2003, in connection with our HyCU
offering,  we issued 5,750,000  convertible  preferred  shares.  See Note 11 for
additional description of the terms of the convertible preferred shares.

         On June 28, 2005,  we priced our  offering of 5,000,000  non-cumulative
perpetual preferred shares and entered into a purchase agreement relating to the
shares pursuant to which the underwriters of the offering agreed to purchase the
shares.  Gross  proceeds  were $125.0  million and  related  expenses  were $4.6
million. Settlement of the net proceeds occurred on July 6, 2005.

         Dividends  on  the  perpetual   preferred   shares  are  payable  on  a
non-cumulative  basis at a rate per annum of 7.25%  until the  dividend  payment
date in  July  2010.  Thereafter,  the  dividend  rate  may be at a  fixed  rate
determined  through  remarketing of the perpetual  preferred shares for specific
periods of varying  length not less than six months or may be at a floating rate
reset  quarterly based on a predefined set of interest rate  benchmarks.  During
any dividend  period,  unless the full dividends for the current dividend period
on all  outstanding  perpetual  preferred  shares have been declared or paid, no
dividend shall be paid or declared on our ordinary shares and no ordinary shares
or other junior  shares shall be purchased,  redeemed or otherwise  acquired for
consideration.  Declaration  of dividends on the perpetual  preferred  shares is
prohibited  if we  fail  to meet  specified  capital  adequacy,  net  income  or
shareholders' equity levels.

         The perpetual  preferred  shares do not have a maturity date and we are
not  required  to redeem the  shares.  The  perpetual  preferred  shares are not
redeemable prior to July 2010.  Subsequent to July 2010, the perpetual preferred
shares will be  redeemable  at our option,  in whole or in part, at a redemption
price equal to $25.00 per share,  plus any declared and unpaid  dividends at the
redemption date, without accumulation of any undeclared dividends.

         The perpetual  preferred  shares are unsecured and  subordinated to all
indebtedness  that  does not by its  terms  rank  pari  passu or  junior  to the
perpetual  preferred shares. The holders of the perpetual  preferred shares have
no voting rights except with respect to certain fundamental changes in the terms
of  the  perpetual  preferred  shares  and  in  the  case  of  certain  dividend
non-payments.

         The  perpetual  preferred  shares are rated "BB-" by Standard & Poor's,
"Ba1" by Moody's, "BB+" by Fitch Ratings and "BB" by A.M. Best Company.

Warrants

         In  connection  with our  initial  capitalization,  we  issued  Class A
Warrants to related  parties to  purchase an  aggregate  of  1,550,000  ordinary
shares.  The  aggregate  consideration  of $0.1  million  paid for these Class A
Warrants is reflected as additional  paid-in  capital.  In  connection  with our
initial public  offering,  we issued an aggregate of 1,300,000 Class A Warrants.
All Class A Warrants  are  exercisable  at $15.00 per ordinary  share,  in equal
amounts over a three-year period commencing November 1999 and expire in November
2008.

                                      127
<PAGE>


                            SCOTTISH RE GROUP LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005

12.  Shareholders' equity (continued)

         During the year ended  December 31, 2003,  we issued  200,000  ordinary
shares upon the exercise of Class A Warrants and we repurchased  200,000 Class B
Warrants for $3.0 million.

         On  December  31,  2004,  we issued  Class C  Warrants  to the  Cypress
Entities as discussed  above.

         On April 7, 2005, we issued 3,206,431 and 2,170,896,  respectively,  of
Class C  Warrants  to the  Cypress  Entities  as  discussed  above.  The Class C
warrants were subsequently converted into ordinary shares.

         As at December 31, 2005 and 2004, there were 2,650,000 Class A warrants
outstanding.

General restrictions

         The holders of the ordinary  shares are  entitled to receive  dividends
and are  allowed  one vote per share  subject  to  certain  restrictions  in our
Memorandum and Articles of Association.

Dividends declared

         Dividends  declared on ordinary shares  amounted to $9.0 million,  $7.1
million and $6.2  million per  ordinary  share for the years ended  December 31,
2005,  2004 and 2003,  respectively.  Dividends  declared on the  non-cumulative
perpetual  preferred shares amounted to $4.8 million for the year ended December
31, 2005.

13.  Taxation

         There is  presently no taxation  imposed on income or capital  gains by
the  Governments of the Cayman  Islands  ("domestic")  and Bermuda.  Our Bermuda
companies  have been granted an exemption  from income,  withholding  or capital
gains taxation in Bermuda until 2016. If any taxation on income or capital gains
were  enacted in the Cayman  Islands,  Scottish Re and  Scottish  Annuity & Life
Insurance  Company  (Cayman) Ltd. have been granted an exemption until 2028; and
The Scottish  Annuity Company  (Cayman) Ltd. has been granted an exemption until
2024.  These  companies  operate in a manner such that they will owe no U.S. tax
other than premium  excise  taxes and  withholding  taxes on certain  investment
income.  Additionally,  we have operations in various  jurisdictions  around the
world  including,  but not limited to, the United  States,  the United  Kingdom,
Ireland  and   Luxembourg   that  are   subject  to  relevant   taxes  in  those
jurisdictions.  Domestic  income before income tax for the years ended  December
31, 2005,  2004 and 2003 is $173.3  million,  $144.7  million and $57.6 million,
respectively.  Foreign losses before income tax for the years ended December 31,
2005,  2004 and  2003 are  $59.6  million,  $89.3  million  and  $19.8  million,
respectively. Domestic income tax expense for the years ended December 31, 2005,
2004 and 2003 is $1.8 million, $3.4 million and $0, respectively. Foreign income
tax  benefit  for the years  ended  December  31,  2005,  2004 and 2003 is $18.2
million,  $20.1 million and $11.1 million,  respectively.  We are not subject to
taxation  other than as stated above.  There can be no assurance that there will
not be changes in applicable laws, regulations or treaties,  which might require
us to change the way we operate or become subject to taxes.

         Undistributed earnings of our subsidiaries are considered  indefinitely
reinvested and, accordingly, no provision for U.S. federal withholding taxes has
been provided thereon. Our U.S.  subsidiaries are subject to federal,  state and
local corporate  income taxes and other taxes  applicable to U.S.  corporations.
Upon distribution of current

                                      128
<PAGE>


                            SCOTTISH RE GROUP LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005


13.  Taxation (continued)


or  accumulated  earnings and profits in the form of dividends or otherwise from
our U.S.  subsidiaries to us, we would be subject to U.S. withholding taxes at a
30% rate.

         At December 31,  2005,  we had net  operating  loss  carry-forwards  of
approximately $615.5 million (2004 - $129.2 million). $603.1 million are for our
U.S.  entities  that expire in years 2012  through  2025.  $12.4  million of the
operating  loss  carry-forward  resulted  from our U.K.  operations  and have an
unlimited carry-forward period. These net operating loss carry-forwards resulted
primarily from our 1999 acquisition of Scottish Re (U.S.), Inc. and from current
operations of Scottish Re (U.S.),  Inc., Scottish Re Life Corporation,  Scottish
Holdings, Inc., Orkney Re, Inc and Scottish Re Limited.

         At December 31, 2005, we had an  alternative  minimum tax carry-forward
of approximately $2.4 million. There are no foreign tax credit carry-forwards.

         Significant components of our deferred tax assets and liabilities as of
December 31, 2005 and 2004, all of which arise outside of our home country, were
as follows:

<TABLE>
<CAPTION>
                                               December 31, 2005       December 31, 2004
                                               -----------------       -----------------
<S>                                                    <C>             <C>
Deferred tax asset:
   Net operating losses .........................      $ 209,520            $  46,268
   Reserves for future policy benefits ..........         60,226               29,029
   Unrealized depreciation on investments .......         12,212                  793
   Intangible assets ............................          8,234                8,933
   Negative proxy deferred acquisition costs ....         10,196               14,025
   Alternative minimum tax credit ...............          2,442                2,318
   Other ........................................         11,667                6,783
                                                        --------             --------
Total deferred tax asset ........................        314,497              108,149
                                                        --------             --------
Deferred tax liability:
   Unrealized appreciation on investments .......              -               (7,478)
   Undistributed earnings of U.K.  subsidiaries .         (3,155)              (4,959)
   Deferred acquisition costs ...................        (52,503)              (9,415)
   Pension liability ............................         (1,134)              (1,068)
   Reserves for future policy benefits ..........       (166,255)             (24,433)
   Present value of in-force ....................        (13,884)             (18,153)
   Other ........................................         (3,662)              (5,465)
                                                        --------             --------
Total deferred tax liability ....................       (240,593)             (70,971)
                                                        --------             --------
Net deferred tax asset before valuation
   allowance.....................................         73,904               37,178

Valuation allowance .............................        (18,451)             (22,148)
                                                        --------             --------
Net deferred tax asset ..........................      $  55,453            $  15,030
                                                        ========             ========
</TABLE>

         At December 31,  2005,  we believe that it is more likely than not that
all gross  deferred tax assets will reduce taxes  payable in future years except
for a valuation  allowance  of $18.5  million.  This  valuation  allowance is in
respect of negative proxy deferred  acquisition  costs and deferred  acquisition
costs arising


                                      129
<PAGE>

                            SCOTTISH RE GROUP LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005


13.  Taxation (continued)

in respect of the acquisition of the ING individual life  reinsurance  business.
This was established as a result of the purchase  accounting for the acquisition
and  therefore was not included in the  determination  of net income in 2004. We
have also  established  reserves  when we believe that certain tax positions are
likely  to be  challenged  and we may not  fully  prevail  in  overcoming  these
challenges.


         For the years ended  December 31, 2005,  2004 and 2003,  we have income
tax benefit from operations as follows:

                                   Year Ended       Year Ended      Year Ended
                                  December 31,     December 31,    December 31,
                                     2005             2004            2003
                                   --------         --------        --------
Current tax expense .............  $  3,168         $  8,526        $  1,075
Deferred tax benefit ............   (19,602)         (25,205)        (12,180)
                                   --------         --------        --------
Total tax benefit ...............  $(16,434)        $(16,679)       $(11,105)
                                   ========         ========        ========


         Included in the 2005 tax benefit is a $2.5 million expense related to a
write-off of a deferred tax asset related to state income taxes.

         The  acquisition of the ING individual  life  reinsurance  business was
reflected  under U.S. GAAP in accordance with purchase  accounting  requirements
but for taxation was a currently taxable transaction. As a result, approximately
$84.0  million of current tax expense in the year ended  December 31, 2004 and a
corresponding  $84.0  million of  deferred  tax benefit are netted in the income
statement and are not reflected in the table above.

         The weighted  average  expected tax provision has been calculated using
the pre-tax  accounting  income (loss) in each  jurisdiction  multiplied by that
jurisdiction's  applicable statutory tax rate.  Reconciliation of the difference
between the  provision  for income taxes and the  expected tax  provision at the
weighted  average tax rate for the years  December  31,  2005,  2004 and 2003 is
provided below:

<TABLE>
<CAPTION>
                                                              Year Ended        Year Ended        Year Ended
                                                             December 31,      December 31,       December 31,
                                                                 2005              2004               2003
                                                             ============      =============      ============
<S>                                                        <C>               <C>               <C>

Expected tax provision at weighted average rate ........       $(20,290)           $(18,313)        $ (8,287)
Negative deferred acquisition costs ....................              -                (934)          (1,427)
Other and state taxes ..................................          3,856               2,568           (1,391)
                                                             ------------      -------------      ------------
Total tax benefit ......................................       $(16,434)           $(16,679)        $(11,105)
                                                             ============      =============      ============
</TABLE>

14.  Employee benefit plans

Pension plan

         We provide  retirement  benefits to the  majority of  employees,  under
defined  contribution  plans.  Defined  contribution  plan expenses totaled $2.5
million, $1.4 million and $1.1 million for the years ended December 31,

                                       130
<PAGE>

                            SCOTTISH RE GROUP LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005

14.  Employee benefit plans (continued)

2005, 2004 and 2003,  respectively.  In 2002,  pension benefits were provided to
Scottish Re Holdings  Limited  employees  under a defined  benefit pension plan.
During 2003, we established a defined contribution plan for Scottish Re Holdings
Limited.  New  employees  in 2003  joined  this plan and a number  of  employees
transferred from the defined benefit scheme to the defined  contribution scheme.
A  small  number  of  employees   remain  in  the  defined   benefit  plan  and,
additionally,  there  are  preserved  benefits  for  some  transferees  and some
ex-employees  in the defined  benefit  plan.  As at December 31, 2005,  the fair
value of the  defined  benefit  pension plan  assets  were  approximately  $11.3
million and the benefit obligation was approximately $10.5 million.

401(k) plan

         We sponsor a 401(k) plan in the U.S. in which employee contributions on
a pre-tax basis are supplemented by matching contributions.  These contributions
are  invested,  at the  election  of the  employee,  in one or  more  investment
portfolios.  Expenses for the plan  amounted to $1.2  million,  $0.6 million and
$0.5  million,   in  the  years   ended  December  31,  2005,   2004  and  2003,
respectively.

Stock based incentive compensation plans

         We have four stock option plans (the "1998 Plan",  the "1999 Plan", the
"Harbourton  Plan" and the "2001 Plan",  collectively the "Option  Plans").  The
Option  Plans  allow us to  grant  non-statutory  options,  subject  to  certain
restrictions,  to certain eligible employees,  non-employee directors,  advisors
and consultants.  The minimum exercise price of the options will be equal to the
fair market value, as defined in the Option Plans, of our ordinary shares at the
date of grant.  The term of the options is between  seven and ten years from the
date of grant.  Unless otherwise provided in each option agreement,  all granted
options  issued  prior to December  31, 2001 become  exercisable  in three equal
annual installments, except for grants to directors, which are fully exercisable
on the date of grant.  All options  granted  between  January 1, 2002 and May 4,
2004, will become exercisable in five equal installments commencing on the first
anniversary of the grant date, except for annual grants to each director,  which
are fully  exercisable  on the date of grant.  All options  issued  after May 5,
2004, become  exercisable in three equal annual  installments  commencing on the
first anniversary of the grant date,  except for grants to directors,  which are
fully exercisable on the date of grant. Total options authorized under the Plans
are 3,750,000.

         At our Annual  General  Meeting held on May 5, 2004,  our  shareholders
approved the equity incentive  compensation  plan ("2004 ECP"). This plan allows
us to grant non-statutory options and restricted share units, subject to certain
restrictions,  to certain eligible employees,  non-employee directors,  advisors
and consultants. For the first year of the 2004 ECP or the first 250,000 options
issued,  the minimum exercise price of the options will be equal to 110% of fair
market value.  At the discretion of our  Compensation  Committee,  option grants
after the first year of the 2004 ECP or in excess of 250,000  options may have a
minimum  exercise price equal to the fair market value of our ordinary shares at
the date of grant. The term of the options shall not be more than ten years from
the date of grant.  Options will become  exercisable in three equal installments
commencing  on the first  anniversary  of the grant date.,  except for grants to
directors,  which  are  fully  exercisable  on the date of grant  Total  options
authorized  under the 2004 ECP are 750,000.  In addition,  1,000,000  restricted
shares units have been  authorized  under the 2004 ECP of which at least 750,000
will vest based on achievement of certain  performance  goals.  The  performance
measures that must be met for vesting to occur are  established at the beginning
of each three year performance period. Depending on the performance,  the actual
amount of  restricted  share units could  range from 0% to 100%.  The  remaining
250,000 restricted share units may be issued without performance goals.

         During the year ended  December  31, 2005 and 2004,  we issued  589,000
units and  95,700  units,  respectively,  under  the terms of the 2004 ECP.  The
issuance of these  restricted share units resulted in a charge to income of $2.9
million  and $0.3  million  for the  years  ended  December  31,  2005 and 2004,
respectively.

                                       131
<PAGE>

                            SCOTTISH RE GROUP LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005

14.  Employee benefits plans (continued)

         Option activity under all Option Plans and the 2004 ECP is as follows:

<TABLE>
<CAPTION>
                                                   Year Ended             Year Ended              Year Ended
                                                December 31, 2005      December 31, 2004       December 31, 2003
                                               -------------------    -------------------     -------------------
<S>                                           <C>                   <C>                      <C>
Outstanding, beginning of year............          2,491,236              3,086,651               3,398,103
Granted...................................            631,001                253,000                 180,000
Exercised.................................           (422,867)              (749,551)               (425,955)
Cancelled.................................           (113,133)               (98,864)                (65,497)
                                               -------------------    -------------------     -------------------
Outstanding, end of year..................          2,586,237              2,491,236               3,086,651
                                               ===================    ===================     ===================

Options exercisable.......................          1,589,703              1,798,936               2,232,170
                                               ===================    ===================     ===================
Weighted average exercise price per share:
Granted...................................     $         25.5068      $         23.5164       $         18.2515
Exercised.................................     $         12.6811      $         11.1209       $         10.7494
Cancelled.................................     $         21.6711      $         17.9752       $         18.2339
Outstanding, end of year..................     $         17.5411      $         14.8860       $         13.3634
Options exercisable.......................     $         14.0025      $         12.9632       $         11.7862
</TABLE>

         Summary of options outstanding at December 31, 2005:


<TABLE>
<CAPTION>
                                                    Options                                  Options
                                                 Outstanding                               Exercisable
                                  ------------------------------------------ -----------------------------------------
                                                                Weighted                                  Weighted
                                                   Weighted      Average                   Weighted       Average
                                     Number of     Average      Remaining     Number of    Average       Remaining
 Year of         Range of             Shares      Exercise     Contractual      Shares     Exercise     Contractual
  Grant       Exercise Prices       Outstanding     Price         Life       Exercisable     Price          Life
---------   -------------------    -------------  ----------   ------------  -----------  ----------    ------------
<S>       <C>                    <C>            <C>           <C>           <C>         <C>            <C>
    1998              $15.0000        353,336     $15.0000           2.92       353,336    $15.0000            2.92
    1999      $8.0625-$15.0000        172,100     $11.8183           2.33       172,100    $11.8183            2.33
    2000      $7.7500-$ 9.0000        385,000      $8.1792           4.25       385,000     $8.1792            4.25
    2001      $7.0000-$18.7600        277,500     $14.6419           4.47       277,500    $14.6419            4.47
    2002     $15.5000-$21.5100        490,300     $17.9820           6.18       295,500    $18.0973            6.17
    2003     $17.4700-$17.7500         94,000     $17.6830           6.81        22,000    $17.6164            6.45
    2004     $21.7000-$23.8700        198,000     $23.4199           8.35        74,267    $23.2059            8.40
    2005     $22.5000-$26.1030        616,001     $25.4923           9.30        10,000    $25.5000            9.01
            -------------------    -------------  ----------   ------------  -----------  ----------    ------------
              $7.0000-$26.1030      2,586,237     $17.5411           5.94     1,589,703    $14.0025            5.94
            ===================    =============  ==========   ============  ===========  ==========    ============
</TABLE>

         The fair value for the options was estimated at the date of grant using
the Black-Scholes option-pricing model with the following assumptions:

<TABLE>
<CAPTION>

                                                                          2005                2004               2003
                                                                     -------------      --------------     ---------------
<S>                                                                 <C>               <C>                 <C>
Expected dividend yield........................................           0.77%          0.77% - 0.82%      1.00% - 0.82%
Risk free interest rate........................................       3.43% - 4.59%      1.06% - 4.77%      1.06% - 4.44%
Expected life of options.......................................          7 years            7 years            7 years
Expected volatility............................................            0.4                0.4                0.4
</TABLE>

                                       132
<PAGE>

                            SCOTTISH RE GROUP LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005


14.  Employee benefits plans (continued)

         The weighted  average fair value of options  granted in each year is as
follows:

<TABLE>
<CAPTION>
                                                                      Year Ended       Year Ended        Year Ended
                                                                     December 31,     December 31,      December 31,
                                                                         2005             2004              2003
                                                                    -------------    --------------   ---------------
<S>                                                                <C>             <C>              <C>
Weighted average exercise price for all options                     $   17.5411      $   14.8860      $   13.3634
Discounted exercise price......................................     $         -      $         -      $         -
Market price exercise price....................................     $   11.7960      $    7.6581      $    6.8170
Premium exercise price.........................................     $   25.9541      $   23.8700      $         -
</TABLE>


         The weighted  average fair value of  restricted  share units granted in
each year is as follows:

<TABLE>
<CAPTION>
                                                                      Year Ended       Year Ended        Year Ended
                                                                     December 31,     December 31,      December 31,
                                                                         2005             2004              2003
                                                                    -------------    --------------   ---------------
<S>                                                                <C>             <C>              <C>
Restricted share units (number of shares)......................         589,000           95,700                -
Weighted average market price at time of grant.................     $   24.2270      $   21.7572      $         -
</TABLE>

         Option plans approved by shareholders are as follows:

<TABLE>
<CAPTION>
                                                                    Option Plans    Option Plans not
                                                                    Approved by        Approved by    Total Option
                                                                    Shareholders      Shareholders       Plans
                                                                    -------------   ----------------  ------------
<S>                                                                <C>             <C>              <C>
Outstanding..................................................        2,088,737             497,500      2,586,237
Weighted average exercise price..............................         $18.1977            $14.7841       $17.5411
Available for future issuance................................          440,029              59,225        499,254
</TABLE>

         Pro forma  information  regarding  net income and earnings per share is
required by SFAS No. 148, and has been determined as if we accounted for all the
employee stock options under the fair value method of that Statement.

         For purposes of pro forma disclosures,  the estimated fair value of the
options is  amortized  to expense  over the  options'  vesting  period using the
Black-Scholes  model. The  Black-Scholes and pricing model was developed for use
in estimating the fair value of traded options that have no vesting restrictions
and are fully  transferable.  In addition,  option  valuation models require the
input of highly subjective  assumptions including the expected price volatility,
dividend  yield,  risk free interest rate and expected life (in years).  Because
our employee  stock options have  characteristics  significantly  different from
those of traded options, and because changes in the subjective input assumptions
can materially  affect the fair value  estimate,  in management's  opinion,  the
Black-Scholes  model does not  necessarily  provide a reliable single measure of
the fair value of our employee stock options.

                                       133
<PAGE>

                            SCOTTISH RE GROUP LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005



14.  Employee benefits plans (coninued)

         Our pro forma information is as follows:

<TABLE>
<CAPTION>
                                                                       Year Ended        Year Ended       Year Ended
                                                                       December 31,     December 31,     December 31,
                                                                           2005             2004              2003
                                                                      -------------    --------------   ---------------
<S>                                                                  <C>             <C>              <C>

Net income available to ordinary shareholders as reported............   $  125,439      $    71,391       $   27,281

Stock-based employee compensation cost, net of related tax effects,
   included in the determination of net income as reported...........        5,377              843              207

Stock-based employee compensation cost, net of related tax effects,
   that would have been included in the determination of net income
   if the fair value based method had been applied to all awards.....       (6,010)          (1,448)          (2,384)
                                                                      -------------    --------------   ---------------
Net income available to ordinary shareholders - pro forma............    $ 124,806      $    70,786       $   25,104
                                                                      =============    ==============   ===============

                                                                       Year Ended        Year Ended       Year Ended
                                                                       December 31,     December 31,     December 31,
                                                                           2005             2004              2003
                                                                      -------------    --------------   ---------------
Basic net income per share - as reported.............................  $     2.86      $     1.99       $     0.89
Basic net income per share - pro forma...............................  $     2.85      $     1.98       $     0.82
Diluted net income per share - as reported...........................  $     2.64      $     1.90       $     0.85
Diluted net income per share - pro forma.............................  $     2.63      $     1.89       $     0.78
</TABLE>

         As of December 31, 2005,  63,334 options were outstanding in respect of
non-employees (2004 - 133,334; 2003 - 160,501).


15.  Statutory requirements and dividend restrictions

         Our insurance  and  reinsurance  subsidiaries  are subject to insurance
laws and  regulations  in the  jurisdictions  in which they  operate,  including
Bermuda,  the Cayman Islands,  the United States and the United  Kingdom.  These
regulations  include  restrictions  that limit the amount of  dividends or other
distributions, such as loans or cash advances, available to shareholders without
prior approval of the insurance regulatory authorities.

         The  difference  between  financial  statements  prepared for insurance
regulatory  authorities and statements  prepared in accordance with GAAP vary by
jurisdiction;  however  the  primary  difference  is that  financial  statements
prepared  for  insurance   regulatory   authorities  do  not  reflect   deferred
acquisition  costs,  deferred  income  tax net  assets,  intangible  assets  and
unrealized appreciation (depreciation) on investments.

         Our  Bermuda  insurance  companies  are  required to maintain a minimum
capital of $0.25 million.  There are no statutory restrictions on the payment of
dividends  from  retained  earnings  by any of the Bermuda  subsidiaries  as the
minimum  statutory  capital and surplus  requirements are satisfied by the share
capital and additional paid-in capital of each of the Bermuda subsidiaries.

         Under The Insurance Law of the Cayman Islands,  Scottish Annuity & Life
Insurance  Company  (Cayman) Ltd. and The Scottish Annuity Company (Cayman) Ltd.
must each  maintain a minimum net capital worth of $0.24  million.  There are no
statutory restrictions on the payment of dividends from retained earnings by any
of the

                                       134
<PAGE>


                            SCOTTISH RE GROUP LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005

15.  Statutory requirements and dividend restrictions (continued)

Cayman  subsidiaries as the minimum statutory  capital and surplus  requirements
are satisfied by the share capital and additional paid-in capital of each of the
Cayman subsidiaries.

         Our United States  subsidiaries file financial  statements  prepared in
accordance  with  statutory  accounting  practices  prescribed  or  permitted by
insurance   regulators.   The  NAIC   prescribes   risk-based   capital  ("RBC")
requirements  for U.S.  domiciled  life and health  insurance  companies.  As of
December  31,  2005  and  2004,  Scottish  Re  (U.S.),  Inc.,  Scottish  Re Life
Corporation  and Orkney Re, Inc.  exceeded  all minimum  RBC  requirements.  The
maximum  amount of  dividends  that can be paid by Scottish Re (U.S.),  Inc. and
Scottish Re Life Corporation (Delaware domiciled insurance companies) and Orkney
Re, Inc.  (South  Carolina  domicile)  without  prior  approval of the Insurance
Commissioner  is subject to  restrictions  relating  to  statutory  surplus  and
operating earnings.  The maximum dividend payment that may be made without prior
approval  is limited  to the  greater  of the net gain from  operations  for the
preceding  year or 10% of statutory  surplus as of December 31 of the  preceding
year not exceeding  earned  surplus.  The applicable  statutory  provisions only
permit an insurer to pay a shareholder  dividend from unassigned  surplus. As of
January 1, 2006,  Scottish Re (U.S.),  Inc.  and Orkney Re,  Inc.  could not pay
dividends without prior approval of the Insurance Commissioner. As of January 1,
2006,  Scottish Re Life Corporation could pay maximum  dividends,  without prior
approval, of approximately $7.4 million.

         The following table presents selected statutory  financial  information
for our primary life  reinsurance  legal entities,  as of or for the years ended
December 31, 2005, 2004 and 2003:

<TABLE>
<CAPTION>
                                                 Statutory capital &                      Statutory net
                                                       surplus                         earned income (loss)
                                           --------------------------------   ---------------------------------------
                                                2005              2004           2005          2004          2003
                                           ------------      --------------   -----------   -----------   ------------
<S>                                      <C>                <C>              <C>          <C>           <C>
Scottish Re (U.S.), Inc. ...........        $   229,839        $ 227,864       $ (207,001)   $  (25,573)   $ (110,163)
Scottish Re Life Corporation .......             74,332           68,587            8,757       (68,517)        -
Scottish Re Limited ................             67,600           78,700          (15,747)      $(6,597)          407
</TABLE>


         In  connection  with the  Insurance  Companies  Act 1982 of the  United
Kingdom,  Scottish  Re Limited is required  to  maintain  statutory  minimum net
capital of approximately $48.0 million at December 31, 2005 (December 31, 2004 -
$65.4 million).

         Scottish  Re  (Dublin)  Limited  is  required  by the  Irish  Financial
Services  Regulatory  Authority  to  maintain  a minimum  level of paid up share
capital.  There are  currently no statutory or  regulatory  restrictions  on the
ability of Scottish Re (Dublin)  Limited to make dividend  payments from profits
available for distribution within the meaning of the Companies  (Amendment) Act,
1983.


16.  Reinsurance

         Premiums earned are analyzed as follows:

<TABLE>
<CAPTION>
                                                   Year ended             Year ended                Year ended
                                                December 31, 2005      December 31, 2004         December 31, 2003
                                               -------------------    -------------------       -------------------
<S>                                           <C>                    <C>                       <C>
Premiums assumed.........................      $     2,155,279         $      827,082            $    426,106
Premiums ceded............................            (221,349)              (237,637)                (35,452)
                                               -------------------    -------------------       -------------------
Premiums earned...........................     $     1,933,930         $      589,445            $    390,654
                                               ===================    ===================       ===================
</TABLE>

         Claims and other policy  benefits are net of reinsurance  recoveries of
$158.9 million, $144.5 million and $21.4 million during the years ended December
31, 2005, 2004 and 2003, respectively.

         At  December  31,  2005  and  2004,  there  were no  reinsurance  ceded
receivables  associated with a single  reinsurer with a carrying value in excess
of 1% of total assets.

                                       135
<PAGE>


                            SCOTTISH RE GROUP LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005

17.  Business segments

         The accounting policies of our segments are the same as those described
in the Summary of Significant  Accounting Policies in Note 2. We measure segment
performance  primarily  based  on  income  or  loss  before  income  taxes.  Our
reportable  segments are strategic business units that are primarily  segregated
by  geographic  region.  We report  segments  in  accordance  with SFAS No. 131,
"Disclosures  about  Segments of an  Enterprise  and Related  Information".  Our
segments are Life Reinsurance North America, Life Reinsurance  International and
Corporate and Other. The segment reporting is as follows:

<TABLE>
<CAPTION>
                                                           Year Ended December 31, 2005
                                           --------------------------------------------------------------
                                               Life
                                            Reinsurance          Life
                                               North         Reinsurance       Corporate
                                              America       International      and Other        Total
                                            -------------  ---------------   -------------   ------------
<S>                                       <C>              <C>                <C>            <C>
Premiums earned, net.....................     $ 1,814,875      $  119,055     $          -     $1,933,930
Investment income, net...................         341,539          11,488            2,810        355,837
Fee income...............................           9,233               -            3,083         12,316
Realized gains ..........................           1,121           1,263            1,354          3,738
Change in value of embedded derivative,
   net...................................         (8,492)               -                -        (8,492)
                                            -------------  ---------------   -------------   ------------
   Total revenues........................       2,158,276         131,806            7,247      2,297,329
                                            -------------  ---------------   -------------   ------------

Claims and other policy benefits.........       1,365,599          76,906                -      1,442,505
Interest credited to interest sensitive
   contract liabilities..................         132,968               -                -        132,968
Acquisition costs and other insurance
   expenses, net.........................         400,992          20,722            2,061        423,775
Operating expenses.......................          48,849          25,276           41,448        115,573
Collateral finance facilities expense              43,113               -            5,033         48,146
Interest expense.........................          10,823               -            9,915         20,738
                                            -------------  ---------------   -------------   ------------
   Total benefits and expenses...........       2,002,344         122,904           58,457      2,183,705
                                            -------------  ---------------   -------------   ------------

 Income (loss) before income taxes and
   minority interest.....................      $  155,932       $   8,902       $ (51,210)      $ 113,624
                                            =============  ===============   =============   ============
</TABLE>

                                       136
<PAGE>


                            SCOTTISH RE GROUP LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005

17.  Business segments (continued)

<TABLE>
<CAPTION>
                                                           Year Ended December 31, 2004
                                           --------------------------------------------------------------
                                               Life
                                            Reinsurance          Life
                                               North         Reinsurance       Corporate
                                              America       International      and Other        Total
                                            -------------  ---------------   -------------   ------------
<S>                                       <C>              <C>                <C>            <C>
Premiums earned, net.....................   $     466,927  $     122,518     $         -    $  589,445
Investment income, net...................         206,009         10,023           1,106       217,138
Fee income...............................           7,867              -           3,680        11,547
Realized gains (losses) .................          (7,974)         1,685          (2,015)       (8,304)
Change in value of embedded derivative,
   net...................................           4,561              -               -         4,561
                                            -------------  -------------     -------------   ------------
   Total revenues........................         677,390        134,226           2,771       814,387
                                            -------------  -------------     -------------   ------------
Claims and other policy benefits.........         344,319         81,646               -       425,965
Interest credited to interest sensitive
   contract liabilities..................         106,525              -               -       106,525
Acquisition costs and other insurance
   expenses, net.........................         131,658         17,634           2,113       151,405
Operating expenses.......................          18,408         18,798          17,452        54,658
Collateral finance facilities expense               2,724              -               -         2,724
Interest expense.........................           4,605              -           8,411        13,016
Due diligence costs......................               -              -           4,643         4,643
                                            -------------  -------------     -------------   ------------
   Total benefits and expenses...........         608,239        118,078          32,619       758,936
                                            -------------  -------------     -------------   ------------
Income (loss) before income taxes and
   minority interest.....................   $      69,151  $      16,148     $   (29,848)    $  55,451
                                            =============  =============     =============   ============
</TABLE>

                                       137
<PAGE>


                            SCOTTISH RE GROUP LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005

17.  Business segments (continued)

<TABLE>
<CAPTION>
                                                           Year Ended December 31, 2003
                                           --------------------------------------------------------------
                                               Life
                                            Reinsurance          Life
                                               North         Reinsurance       Corporate
                                              America       International      and Other        Total
                                           --------------  ---------------   -------------   ------------
<S>                                       <C>              <C>                <C>            <C>
Premiums earned, net.....................   $     229,796  $       160,858   $         -      $   390,654
Investment income, net...................         135,731            7,537         4,760          148,028
Fee income...............................           4,067                -         3,840            7,907
Realized gains (losses)..................          (6,124)             548         1,128           (4,448)
Change in value of embedded
   derivative, net.......................          13,904                -             -           13,904
                                           --------------  ---------------   -------------   ------------
   Total revenues........................         377,374          168,943         9,728          556,045
                                           --------------  ---------------   -------------   ------------

Claims and other policy benefits.........         171,711          104,176             -          275,887
Interest credited to interest sensitive
   contract liabilities..................          89,156                -             -           89,156
Acquisition costs and other insurance
   expenses, net.........................          82,682           29,733         2,263          114,678
Operating expenses.......................           8,646           11,518        10,857           31,021
Interest expense.........................           1,109                -         6,448            7,557
                                           --------------  ---------------   -------------   ------------
   Total benefits and expenses...........         353,304          145,427        19,568          518,299
                                           --------------  ---------------   -------------   ------------

Income (loss) before income taxes and
   minority interest.....................   $      24,070  $        23,516   $    (9,840)     $    37,746
                                           ==============  ===============   =============   ============
</TABLE>

         Capital expenditures of each reporting segment were not material in the
periods noted.

         Revenues  from  transactions  with a single  external  customer did not
amount to 10% or more of our revenues.

<TABLE>
<CAPTION>
Assets                                               December 31, 2005    December 31, 2004
                                                    ------------------   -------------------
<S>                                                <C>                  <C>
Life Reinsurance:
         North America..........................     $     10,472,863        $    7,560,937
         International..........................              460,888               396,219
                                                    ------------------   -------------------
Total Life Reinsurance..........................           10,933,751             7,957,156
Corporate and Other.............................            1,072,369               995,081
                                                    ------------------   -------------------
Total...........................................     $     12,006,120        $    8,952,237
                                                    ==================   ===================
</TABLE>

                                       138
<PAGE>

                            SCOTTISH RE GROUP LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005



18.  Earnings per ordinary share

         The  following  table sets forth the  computation  of basic and diluted
earnings per ordinary share:

<TABLE>
<CAPTION>
                                                    Year Ended        Year Ended       Year Ended
                                                    December 31,     December 31,     December 31,
                                                        2005             2004              2003
                                                   -------------    --------------   ---------------
<S>                                              <C>               <C>               <C>
Numerator:
Net income..................................       $     130,197    $     71,391      $      27,281
Dividend declared on non-cumulative
   perpetual preferred shares...............             (4,758)               -                  -
                                                   -------------    --------------   ---------------

Net income available to ordinary
   shareholders.............................       $     125,439    $     71,391      $      27,281
                                                   =============    ==============   ===============
Denominator:
Denominatorfor basic earnings per ordinary
   share
Weighted average number of ordinary shares..          43,838,261      35,732,522        30,652,719
Effect of dilutive securities
   - Stock options and restricted stock.....             661,693         634,562           885,552
   - Warrants...............................           2,237,663         885,363           689,730
   - 4.5% Convertible Notes and Hybrid
       Capital Units........................             793,499         255,845                 -
                                                   -------------    --------------   ---------------
Denominator for dilutive earnings per
   ordinary share...........................          47,531,116      37,508,292        32,228,001
                                                   =============    ==============   ===============
Basic earnings per ordinary share:
     Income from continuing operations (1).......  $        2.86    $       2.00      $       1.59
     Cumulative effect of change in accounting
       principle.................................              -               -             (0.64)
     Discontinued operations.....................              -           (0.01)            (0.06)
                                                   -------------    --------------   ---------------
     Net income available to ordinary
       shareholders.............................   $        2.86    $       1.99      $       0.89
                                                   =============    ==============   ===============
Diluted earnings per ordinary share:
     Income from continuing operations (1).......  $        2.64    $       1.91      $       1.51
     Cumulative effect of change in  accounting
       principle.................................              -               -             (0.60)
     Discontinued operations.....................              -           (0.01)            (0.06)
                                                   -------------    --------------   ---------------
     Net income available to ordinary
        shareholders.............................  $        2.64    $       1.90      $       0.85
                                                   =============    ==============   ===============
</TABLE>


(1)  Reflects  reduction  for  dividends  declared on  non-cumulative  perpetual
     preferred shares.


                                       139
<PAGE>

                            SCOTTISH RE GROUP LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005

19.  Commitments and contingencies


Derivative instruments

         We do not invest in derivatives for speculative purposes and our use of
derivatives  has not been  significant  to our financial  position.  We maintain
investments  in derivative  instruments  such as interest rate swaps and foreign
currency forward contracts for which the primary purposes are to manage duration
or interest rate sensitivity and foreign currency exposure.  We currently record
changes in market value of these  instruments  as realized gains (losses) in the
consolidated statements of operations in accordance with SFAS No. 133.


         By using  derivative  instruments,  we are exposed to credit and market
risk. If the counterparty  fails to perform,  credit risk is equal to the extent
of the fair value gain in the  derivative.  When the fair value of a  derivative
contract is positive,  this generally  indicates that the  counterparty  owes us
and,  therefore,  creates  a  payment  risk to us.  When  the  fair  value  of a
derivative  contract is negative,  we owe the counterparty and therefore we have
no  payment  risk.  We  minimize  the  credit (or  payment)  risk in  derivative
instruments by entering into transactions with high quality  counterparties that
are reviewed regularly by us.

         During  2004,  we entered  into an interest  rate swap  contract in the
amount of $100.0  million in  relation to certain of our  investment  assets not
supporting reinsurance liabilities. This derivative has not been designated as a
hedge.  The fair value of the swap at  December  31,  2005 was a  positive  $1.3
million.  The  change  in fair  value  was a gain of $2.2  million  and has been
included in realized gains (losses) in the consolidated statements of income.

         During 2004, we entered into interest rate swaps with varying  notional
amounts and  maturities,  which have been  designated  as hedges of the variable
interest cash flows of four of the trust  preferred debt issuances  described in
Note 10.  These  interest  rate swaps  require us to pay fixed rate  interest in
exchange  for  variable  rate  interest,  based on a fixed  notional,  until the
maturity of the  contract,  and have been used to eliminate  interest  rate risk
from the hedged  portions of our long term debt.  The  notional  amounts,  reset
periods, variable interest rates and maturities of the interest rate swaps match
the terms of the cash flows of the debt they have been  designated  to hedge and
therefore  the  interest  rate swaps are  considered  to be fully  effective  as
required by SFAS No. 133.  The gain on the  interest  rate swaps for the year of
$0.2 million has been included in interest expense for 2004.


Lease commitments

         We lease  office space in the  countries  in which we conduct  business
under  operating  leases that expire at various dates  through 2023.  Total rent
expense with respect to these operating  leases for the years ended December 31,
2005,  2004 and 2003 were  approximately  $3.2  million,  $1.9  million and $1.7
million, respectively.

         Future minimum lease payments under the leases are expected to be:

Year ending December 31
2006....................................................             $3,186
2007....................................................              3,187
2008....................................................              3,231
2009....................................................              3,246
2010....................................................              2,568
Thereafter..............................................             22,657
                                                                    -------
Total future lease commitments..........................            $38,075
                                                                    =======

                                       140
<PAGE>

                            SCOTTISH RE GROUP LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005

19.  Commitments and contingencies (continued)

Concentrations of credit risk

         The  creditworthiness of a counterparty is evaluated by us, taking into
account credit ratings assigned by rating agencies.  The credit approval process
involves an assessment of factors  including,  among others,  the  counterparty,
country and industry credit exposure limits.  Collateral may be required, at our
discretion,  on  certain  transactions  based  on  the  creditworthiness  of the
counterparty.

         The areas  where  significant  concentrations  of credit risk may exist
include amounts recoverable from reinsurers and reinsurance  balances receivable
(collectively  "reinsurance  assets"),  investments and cash and cash equivalent
balances.  Our reinsurance  assets at December 31, 2005 amounted to $0.9 billion
and  resulted  from  reinsurance  arrangements  in  the  normal  course  of  our
operations.  A credit exposure exists with respect to reinsurance assets as they
may  become  uncollectible.  We  manage  our  credit  risk  in  our  reinsurance
relationships by transacting with reinsurers that we consider financially sound,
and if necessary,  we may hold  collateral in the form of funds,  trust accounts
and/or  irrevocable  letters  of  credit.  This  collateral  can be drawn on for
amounts  that remain  unpaid  beyond  specified  time  periods on an  individual
reinsurer basis.


Legal proceedings

         In the normal course of our business,  we are occasionally  involved in
litigation.  The ultimate disposition of such litigation is not expected to have
a material  adverse effect on our financial  condition,  liquidity or results of
operations.

         The  attorneys  general and the insurance  departments  of New York and
numerous  other  states  have  announced   investigations  of  insurance  broker
compensation arrangements,  bid-rigging and other practices within the insurance
industry,  and may  propose  changes in the  regulation  of broker  compensation
arrangements and disclosure.  Some regulators have also announced investigations
into proper uses of finite reinsurance. We received a letter of inquiry from the
Delaware  Department  of  Insurance  in  November  2004 as part of its review of
Delaware domestic  insurance  companies and their arrangements and dealings with
producers  acting as brokers to which we responded in November 2004. We have not
been contacted by any other government  agency  (including  through receipt of a
subpoena) in connection with these  investigations.  It is impossible to predict
the  outcomes  of these  investigations,  whether  they will  expand  into other
industry practices not yet contemplated,  whether they will result in changes in
insurance  regulation or  practices,  or the impact,  if any, of this  increased
regulatory  scrutiny  of the  insurance  industry on us or on the  liquidity  or
trading prices of the ordinary shares.

Government subpoenas

         We have received  separate  subpoenas from the staff of the SEC and the
Permanent  Subcommittee on  Investigations of the United States Senate Committee
on Homeland  Security and Governmental  Affairs ("PSI").  The SEC subpoena seeks
documents and other information regarding transactions and trading involving our
securities by certain former officers and directors of Scottish Re (each of whom
left those positions by mid-year 2001), by certain of our original  shareholders
of Scottish Re, and by our current  Chairman.  The PSI subpoena is in connection
with the PSI's general review of compliance with anti-money laundering,  tax and
securities laws and regulations related to financial transactions by individuals
and domestic and offshore entities.  The PSI subpoena seeks documents  regarding
our  formation  of  Scottish  Re,   certain  wealth   management   products  and
transactions

                                       141
<PAGE>


                            SCOTTISH RE GROUP LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005

19.  Commitments and contingencies (continued)

involving the individuals  mentioned above. We are fully  cooperating with these
inquiries.  While it is  premature  for us to assess the scope or any  potential
outcome to us of these inquiries,  including any potential  enforcement  actions
involving us, these inquiries may result in negative publicity and could have an
adverse affect on us.

Mediation

         On June 16, 2005, we requested  mediation  from  Employers  Reinsurance
Corporation ("ERC") pursuant to the stock purchase agreement  transferring a 95%
interest in Scottish Re Life  Corporation  (formerly  ERC Life  Corporation)  to
Scottish Holdings,  Inc. We assert that ERC breached certain representations and
warranties  under the agreement.  Any negative  outcome from this mediation will
not have a  material  adverse  impact  on our  financial  position  because  the
asserted breaches have already been fully reflected in our financial position at
December 31,  2005.  Mediation  is  tentatively  scheduled to begin on March 30,
2006.

Tax matters

         We are a Cayman Islands  corporation and certain of our  non-U.S.-based
insurance and reinsurance subsidiaries (non-U.S.  subsidiaries) have not paid or
provided for U.S.  corporate income taxes (except certain  withholding taxes) on
the basis  that  they are not  engaged  in a trade or  business  in the U.S.  or
otherwise  subject  to  taxation  in  the  U.S.  However,   because   definitive
identification  of  activities  which  constitute  being  engaged  in a trade or
business  in the U.S.  is not  provided by the  Internal  Revenue  Code of 1986,
regulations  or court  decisions,  there can be no  assurance  that the Internal
Revenue  Service  ("IRS") will not contend that we or our non-U.S.  subsidiaries
are engaged in a U.S. trade or business or otherwise subject to taxation.  If we
and our  non-U.S.  subsidiaries  were  considered  to be  engaged  in a trade or
business in the U.S.,  we or such  subsidiaries  could be subject to U.S. tax at
regular  corporate tax rates on its taxable income,  if any, that is effectively
connected with such U.S. trade or business plus an additional 30 percent "branch
profits"  tax on such income  remaining,  if any,  after the  regular  corporate
taxes, in which case there could be a significant  adverse effect on our results
of operations and financial condition.  We and our non-U.S.  subsidiaries do not
file U.S. income tax returns  reporting  income subject to U.S. income tax since
we and they do not conduct business within the U.S. However,  we and some of our
non-U.S.  subsidiaries  have filed  protective  tax  returns,  reporting no U.S.
income to preserve the ability to deduct our and their  ordinary  and  necessary
business  expenses should the IRS  successfully  contend that a portion of their
income is subject to a net income tax in the U.S.

                                       142
<PAGE>


                            SCOTTISH RE GROUP LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005

19.  Commitments and contingencies (continued)

         Directors and Officers


         We indemnify our directors and officers as provided in our charters and
by-laws.  Since this  indemnity  generally  is not  subject to  limitation  with
respect  to  duration  or  amount,  we do not  believe  that it is  possible  to
determine the maximum potential amount due under this indemnity in the future.

20.  Quarterly financial data (Unaudited)

         Quarterly  financial  data for the year ended  December  31, 2005 is as
follows:

<TABLE>
<CAPTION>
                                                                                    Quarter Ended
                                                           --------------------------------------------------------------
                                                              December 31      September 30      June 30       March 31
                                                           ---------------    --------------    ----------    -----------
<S>                                                      <C>                 <C>              <C>            <C>
Total revenue..........................................     $   674,980        $   563,741      $  502,046     $ 556,562
Income (loss) from continuing operations before income
    taxes and minority interest........................          59,153             27,846          (6,798)       33,423
Net income.............................................          60,776             34,410           1,591        33,420

Dividend declared on non-cumulative perpetual preferred
    shares.............................................          (2,266)            (2,492)              -             -
                                                            -----------        -----------      -----------   ----------
Net income available to ordinary shareholders..........     $    58,510        $    31,918      $     1,591    $  33,420
Basic earnings per ordinary share......................     $      1.26        $      0.70      $      0.04    $    0.84
Diluted earnings per ordinary share....................     $      1.18        $      0.66      $      0.03    $    0.74

         Quarterly  financial  data for the year ended  December  31, 2004 is as
follows:

                                                                                  Quarter Ended
                                                           --------------------------------------------------------------
                                                              December 31      September 30       June 30      March 31
                                                           ---------------    --------------    ----------    ---------

Total revenue..........................................     $    211,113       $    195,421     $   228,421    $ 179,432
Income from continuing operations before income taxes and         10,968              6,194          26,970       11,319
    minority interest..................................
Income from continuing operations......................           21,254             11,578          28,671       10,096
Net income.............................................           21,046             11,578          28,671       10,096
Basic earnings per ordinary share......................     $       0.58       $       0.32     $      0.80    $    0.29
Diluted earnings per ordinary share....................     $       0.56       $       0.31     $      0.77    $    0.27
</TABLE>


         Revenues for the first,  second and third  quarters of 2005 differ from
amounts included in our respective  Quarterly  Reports on Form 10-Q filed during
2005 due to a change  in  presentation  of  experience  refunds.  In 2005,  $1.6
million,  $1.7  million and ($2.2.  million) of  experience  refunds were netted
against  "Acquisition costs and other insurance  expenses" in the first,  second
and third quarters,  respectively,  but were  reclassified to "Premiums  earned"
beginning  in the  fourth  quarter  of 2005.  In 2004,  revenues  for the first,
second, third and fourth quarters differ from amounts included in our respective
Quarterly Reports on Form 10-Q filed during 2004. In 2004, ($0.3 million), ($1.5
million), ($0.3 million), and ($0.5 million) of experience refunds were

                                       143
<PAGE>


                            SCOTTISH RE GROUP LIMITED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                December 31, 2005

20. Quarterly financial data (Unaudited) (continued)

netted against  "Acquisition  costs and other insurance  expenses" in the first,
second,  third and  fourth  quarters,  respectively,  but were  reclassified  to
"Premiums earned".

         Computations   of  results   per  share  for  each   quarter  are  made
independently   of  results  per  share  for  the  year.  Due  to  rounding  and
transactions affecting the weighted average number of shares outstanding in each
quarter,  the sum  quarterly  results per share does not equal results per share
for the year.


                                       144
<PAGE>


Schedule                                                                Page
I   Summary of Investments.........................................      146
II  Condensed Financial Information................................      147
III Supplementary Insurance Information............................      149
IV  Reinsurance....................................................      150
V   Valuation and Qualifying Accounts..............................      152

All other schedules  specified in Regulation S-X are omitted for the reason that
they are not required,  are not applicable,  or that equivalent  information has
been  included in the  consolidated  financial  statements,  and notes  thereto,
appearing in Item 8.


                                       145
<PAGE>

                            SCOTTISH RE GROUP LIMITED
 SCHEDULE 1 - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
                                December 31, 2005
                (Expressed in Thousands of United States Dollars)

<TABLE>
<CAPTION>
                                                               Year Ended
                                                            December 31, 2005             Amount at
                                                       ----------------------------      which shown
                                                        Amortized           Market         in the
                                                           Cost             Value       Balance Sheet
                                                       -------------   -------------    -------------
<S>                                                   <C>             <C>           <C>
Type of investment:
Fixed maturities

U.S. Treasury securities and U.S. government agency
  obligations.......................................... $     48,519    $     47,918     $    47,918
Corporate securities ..................................    2,067,781       2,056,974       2,056,974
Municipal bonds........................................       37,826          37,639          37,639
Mortgage or asset backed securities ...................    3,169,362       3,150,064       3,150,064
                                                       -------------   -------------    ------------
Total fixed maturities.................................    5,323,488       5,292,595       5,292,595
                                                       -------------   -------------    ------------

Preferred stock........................................      137,271         133,804         133,804
Cash and cash equivalents..............................    1,420,205       1,420,205       1,420,205
Other investments......................................       54,619          54,619          54,619
Funds withheld at interest.............................    2,399,664       2,437,310       2,597,416
                                                       -------------   -------------    ------------
Total investments, cash and cash equivalents...........  $ 9,335,247     $ 9,338,533     $ 9,498,639
                                                       =============   =============    ============
</TABLE>


                                       146
<PAGE>

                            SCOTTISH RE GROUP LIMITED
                  SCHEDULE II - CONDENSED FINANCIAL INFORMATION
                (Expressed in Thousands of United States Dollars)


<TABLE>
<CAPTION>
 UNCONSOLIDATED CONDENSED BALANCE SHEETS
                                                                                  December 31,      December 31,
Assets                                                                                2005              2004
                                                                                 ---------------   --------------
<S>                                                                             <C>              <C>
  Investment in subsidiaries on equity basis.................................       $ 1,534,544     $ 1,144,035
  Cash and cash equivalents..................................................            52,859           2,358
  Other assets...............................................................            14,155          35,882
                                                                                 ---------------   --------------
  Total assets...............................................................       $ 1,601,558     $ 1,182,275
                                                                                 ===============   ==============
Liabilities
  Accounts payable and other liabilities.....................................       $    71,789     $    20,870
  7.00% Convertible Junior Subordinated Notes................................                 -          41,282
  Long term debt.............................................................           115,000         115,000
  Mezzanine equity...........................................................           143,057         142,449
  Total shareholders' equity.................................................         1,271,712         862,674
                                                                                 ---------------   --------------
  Total liabilities, minority interest, mezzanine equity and shareholders'
   equity....................................................................       $ 1,601,558     $ 1,182,275
                                                                                 ===============   ==============
</TABLE>

<TABLE>
<CAPTION>
UNCONSOLIDATED CONDENSED STATEMENTS OF INCOME
                                                                 Year Ended         Year Ended         Year Ended
                                                              December 31, 2005  December 31, 2004  December 31, 2003
                                                              -----------------  -----------------  -----------------
<S>                                                         <C>                <C>                 <C>
Revenues.................................................
Investment income, net...................................     $         12,562    $        4,453      $       3,160
Net realized gains (losses)..............................                  (16)               58                (22)
Other income (loss), net of operating expenses ..........               (1,155)            5,356             22,519
Interest expense.........................................               (9,728)           (8,198)            (6,074)
Income tax expense.......................................                   (9)             (119)                 -
                                                              -----------------  -----------------  -----------------
Income before undistributed earnings of subsidiaries.....                1,654             1,550             19,583
Equity in earnings of subsidiaries.......................
                                                                       128,543            69,841              7,698
                                                              -----------------  -----------------  -----------------
Net income...............................................      $       130,197    $       71,391      $      27,281
                                                              =================  =================  =================

UNCONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                                                  Year Ended         Year Ended          Year Ended
                                                               December 31, 2005  December 31, 2004  December 31, 2003
                                                              -----------------  -----------------  -----------------
Operating activities
Net income................................................     $       130,197    $        71,391     $      27,281
Equity in earnings of subsidiaries........................            (128,543)           (69,841)           (7,698)
Other ....................................................              77,748            (10,622)           10,872
                                                              -----------------  -----------------  -----------------
     Net cash provided by (used in) operating activities..              79,402             (9,072)           30,455
                                                              -----------------  -----------------  -----------------

Investing activities
Proceeds from sales of fixed maturity investments.........                   -              1,546              4642
Capital contributions to subsidiaries.....................            (303,559)          (170,624)         (313,833)
                                                              -----------------  -----------------  -----------------
     Net cash used in investing activities................            (303,559)          (169,078)         (309,191)
                                                              -----------------  -----------------  -----------------
Financing activities
Net proceeds from issuance of ordinary shares and warrants             165,704            135,335           187,666
Repurchase of ordinary shares and warrants................                   -                  -           (31,581)
Net proceeds from issuance of perpetual preferred shares..             120,436                  -                 -
Net proceeds from issuance of notes payable to buy Cypress
     Entities.............................................                   -             41,282                 -
Net funds received on issuance of HyCUs...................                   -                  -            138,223
Dividends paid on non-cumulative perpetual preferred shares             (2,492)                 -                  -
Dividends paid on ordinary shares.........................              (8,989)            (7,147)           (6,217)
                                                              -----------------  -----------------  -----------------
      Net cash provided by financing activities...........             274,659            169,470           288,091
                                                              -----------------  -----------------  -----------------


                                       147
<PAGE>


                            SCOTTISH RE GROUP LIMITED
            SCHEDULE II - CONDENSED FINANCIAL INFORMATION (CONTINUED)
                (Expressed in Thousands of United States Dollars)

Net change in cash and cash equivalents...................              50,502             (8,680)            9,355
Cash and cash equivalents, beginning of year..............               2,358             11,038             1,683
                                                              -----------------  -----------------  -----------------
Cash and cash equivalents, end of year....................      $       52,860    $         2,358     $      11,038
                                                              =================  =================  =================
</TABLE>


                                       148
<PAGE>


                            SCOTTISH RE GROUP LIMITED
               SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
                (Expressed in Thousands of United States Dollars)

<TABLE>
<CAPTION>
                                                                   Year Ended December 31, 2005
                           --------------------------------------------------------------------------------------------------------
                                                                                           Benefits,
                                            Future policy                                   claims,       Amortization
                             Deferred   benefits, and Interest                 Net         losses and      of deferred     Other
                           acquisition    sensitive contract    Premium     investment     settlement      acquisition   operating
Segment                       costs         liabilities        revenue (1)    income        expenses*         costs        costs
                           ------------   ------------------  ------------  ------------   ------------   -------------  ----------
<S>                       <C>            <C>                <C>           <C>             <C>            <C>            <C>
Life Reinsurance North
  America................. $    575,124      $ 7,168,143      $ 1,814,875   $ 341,539      $ 1,498,567      $ 50,847     $ 452,930
Life Reinsurance
   International..........        8,147          216,652          119,055      11,488           76,906        17,232        28,766
Corporate and Other.......       11,312                -                -       2,810                -           827        57,630
                           ------------   --------------      ------------  ----------     ------------   -----------    ----------
Total..................... $    594,583      $ 7,384,795      $ 1,933,930   $ 355,837      $ 1,575,473      $ 68,906     $ 539,326
                           ============   ==============      ============  ==========     ============   ===========    ==========


                                                                    Year Ended December 31, 2004
                           --------------------------------------------------------------------------------------------------------
                                                                                           Benefits,
                                            Future policy                                   claims,       Amortization
                             Deferred   benefits and Interest                  Net         losses and      of deferred     Other
                           acquisition   sensitive contract     Premium     investment     settlement      acquisition   operating
Segment                       costs         liabilities        revenue (1)    income        expenses*         costs        costs
                           ------------   ------------------  ------------  ------------   ------------   -------------  ----------
Life Reinsurance North
   America...............  $ 399,056         $  6,260,282     $   466,927   $ 206,009      $ 450,844        $ 66,864     $  90,531
Life Reinsurance
   International.........      6,077              222,880         122,518      10,023         81,646          12,577        23,855
Corporate and Other......     12,173                    -               -       1,106              -             794        31,825
                           ---------      ---------------     ------------  ----------     ----------     -----------    ----------
Total....................  $ 417,306         $  6,483,162     $   589,445   $ 217,138      $ 532,490        $ 80,235     $ 146,211
                           =========      ===============     ============  ==========     ==========     ===========    ==========
</TABLE>


<TABLE>
<CAPTION>
                                                        Year Ended December 31, 2003
                                ----------------------------------------------------------------------------
                                                                Benefits,
                                                                 claims,      Amortization
                                                    Net        losses and      of deferred        Other
                                   Premium      investment     settlement      acquisition      operating
Segment                          revenue (1)      income        expenses          costs           costs
                                 -----------     ----------    -----------    -------------    -----------
<S>                             <C>            <C>            <C>           <C>               <C>
Life Reinsurance North
     America...................   $ 229,796       $135,731      $ 260,867          $51,461      $ 40,976
Life Reinsurance
     International.............     160,858          7,537        104,176           22,074        19,177
Corporate and Other............           -          4,760              -              704        18,864
                                 -----------     ----------    -----------    -------------    -----------
Total..........................   $ 390,654       $148,028      $ 365,043          $74,239       $79,017
                                 ===========     ==========    ===========    =============    ===========
</TABLE>


     1)   Certain  reclassifications have been made to the 2004 and 2003 amounts
          to conform to the 2005 presentation.

     *    Inculdes  claims and other policy  benefits  and interest  credited on
          interest sensitive contract liabilities.

                                       149
<PAGE>



                            SCOTTISH RE GROUP LIMITED
                            SCHEDULE IV - REINSURANCE
                (Expressed in thousands of United States Dollars)

<TABLE>
                                                                  Year Ended December 31, 2005
                                        --------------------------------------------------------------------------------
                                                                                                             Percentage
                                                           Ceded to       Assumed from                        of amount
                                                            other            other                           assumed to
                                         Gross Amount     companies        companies         Net Amount          net
                                        -------------- --------------- -----------------  --------------    ------------
<S>                                      <C>          <C>                <C>                     <C>        <C>
Life insurance in force
Premiums.............................    $          -   $(139,517,423)  $1,024,250,510     $884,733,088            116%
Life Reinsurance North America.......               -        (204,119)       2,018,994        1,814,875            111%
Life Reinsurance International.......               -         (17,230)         136,285          119,055            114%
Corporate and Other..................               -               -                -                -             -
                                        -------------- --------------- -----------------  --------------    ------------
Total................................    $          -   $    (221,349)  $    2,155,279     $  1,933,930            111%
                                        ============== =============== =================  ==============    ============



                                                                Year Ended December 31, 2004
                                        --------------------------------------------------------------------------------
                                                                                                             Percentage
                                                           Ceded to       Assumed from                        of amount
                                                            other            other                           assumed to
                                         Gross Amount     companies        companies         Net Amount          net
                                        -------------- --------------- -----------------  --------------    ------------
Life insurance in force*
Premiums.............................    $          -   $ (84,925,322)  $  306,408,016     $221,482,694            138%
Life Reinsurance North America.......               -        (226,099)         693,024          466,925            148%
Life Reinsurance International.......               -         (11,538)         134,058          122,520            109%
Corporate and Other..................               -               -                -                -              -
                                        -------------- --------------- -----------------  --------------    ------------
Total................................    $          -   $    (237,637)  $      827,082     $    589,445             140%
                                        ============== =============== =================  ==============    ============
</TABLE>


                                       150
<PAGE>


                            SCOTTISH RE GROUP LIMITED
                     SCHEDULE IV - REINSURANCE (continued)
             (Expressed in thousands of United Staes Dollars)



<TABLE>
<CAPTION>
                                                                Year Ended December 31, 2003
                                        --------------------------------------------------------------------------------
                                                                                                             Percentage
                                                           Ceded to        Assumed                            of amount
                                                            other         from other                         assumed to
                                         Gross Amount     companies        companies         Net Amount          net
                                        -------------- --------------- -----------------  --------------    ------------
<S>                                     <C>            <C>             <C>               <C>                <C>
Life insurance in force
Premiums.............................    $          -   $(93,853,099)   $ 271,176,974      $177,323,875            153%
Life Reinsurance North America.......               -        (25,593)         255,389           229,796            111%
Life Reinsurance International.......               -         (9,860)         170,717           160,857            106%
Corporate and Other..................               -              -               -                  -               -
                                        -------------- --------------- -----------------  --------------    ------------
Total................................    $          -   $    (35,453)   $     426,106      $    390,653            109%
                                        ============== =============== =================  ==============    ============
</TABLE>
 *Excludes business acquired from ING.

                                       151
<PAGE>


                            SCOTTISH RE GROUP LIMITED
                 SCHEDULE V - Valuation and Qualifying Accounts
                (Expressed in thousands of United States Dollars)

<TABLE>
<CAPTION>
                                                       Year Ended December 31, 2005
                                        -----------------------------------------------------------
                                          Balance at     Charges to                    Balance at
                                         Beginning of    Costs and      Charges to       end of
                                            Period        Expenses    Other Accounts     Period
                                        --------------  ------------ ---------------- -------------
<S>                                     <C>            <C>           <C>             <C>
Description
Allowance on income taxes..............  $   (22,148)     $       -    $    3,697*      $  (18,541)
Reserve for uncollectible reinsurance..  $        -       $   6,000    $        -       $   (6,000)


                                                       Year Ended December 31, 2004
                                        -----------------------------------------------------------
                                          Balance at     Charges to                    Balance at
                                         Beginning of    Costs and      Charges to       end of
                                            Period        Expenses    Other Accounts     Period
                                        --------------  ------------ ---------------- -------------
Description
Allowance on income taxes..............  $        -       $      -     $     22,148*    $  (22,148)


                                                       Year Ended December 31, 2003
                                        -----------------------------------------------------------
                                          Balance at     Charges to                    Balance at
                                         Beginning of    Costs and      Charges to       end of
                                            Period        Expenses    Other Accounts     Period
                                        --------------  ------------ ---------------- -------------
Description
Allowance on income taxes..............  $        -       $       -   $         -       $        -
</TABLE>

*   This valuation arose in respect of the acquistion of the ING individual life
    reinsurance  business.  This was  established  as a result of the purchase
    accounting for the  acquisition  and therefore has not been included in the
    determination of net income.

                                       152
<PAGE>


                                   SIGNATURES

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
registrant, in the capacities and on the dates indicated.


<TABLE>
               Signature                                  Title                        Date

<S>                                           <C>                              <C>
         /s/ Michael C. French
-----------------------------------------
           Michael C. French                   Chairman and Director               March 15, 2006

           /s/ Michael Austin
-----------------------------------------
             Michael Austin                    Director                            March 15, 2006

    /s/ G. William Caulfeild-Browne
-----------------------------------------
      G. William Caulfeild-Browne              Director                            March 15, 2006

          /s/ Robert M. Chmely
-----------------------------------------
            Robert M. Chmely                   Director                            March 15, 2006

        /s/ Jean Claude Damerval
-----------------------------------------
          Jean Claude Damerval                 Director                            March 15, 2006

         /s/ Lord Norman Lamont
-----------------------------------------
           Lord Norman Lamont                  Director                            March 15, 2006

           /s/ Hazel O'Leary
-----------------------------------------
             Hazel O'Leary                     Director                            March 15, 2006

            /s/Glenn Schafer
-----------------------------------------
              Glenn Schafer                    Director                            March 15, 2006

          /s/ William Spiegel
-----------------------------------------
            William Spiegel                    Director                            March 15, 2006


         /s/ Scott E. Willkomm
-----------------------------------------
           Scott E. Willkomm                   CEO, President and Director         March 15, 2006
</TABLE>


*    The undersigned,  by signing his name hereto,  does hereby sign this Annual
     Report on Form 10-K  pursuant to the Powers of Attorney  executed on behalf
     of  the  above  named   officers  and  directors  of  the   Registrant  and
     contemporaneously   filed   herewith  with  the   Securities  and  Exchange
     Commission.



/s/ Michael C. French
Michael C. French
Attorney-in-Fact


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