Going Back in After Scottish Re's Blowup

I debated for weeks about whether to write about Scottish Re (SCT - commentary - Cramer's Take). Comments by readers in Cramer's blog kicked me over the edge, particularly one from tototoilet (what a name): "what do [you] make of Merkel not even mentioning SCT since its blow-up?" I care about my reputation and that comment hurt.

I mention almost all of my long trades here (minus microcaps, and you can find those in a 13F filing if you're that desperate about what I think on risky stocks), so not mentioning Scottish Re is not what I would ordinarily do. After all, I 'fessed up on PXRE (PXT - commentary - Cramer's Take) when it blew up, so I'm willing to own up to mistakes.

With Scottish Re, it was the dearth of information that kept me on the sidelines. I'm willing to take more risks for clients; they are institutions that can afford to lose money. I am much more cautious about what I write on RealMoney because I know what it is like to be a small retail investor and how tough it is to know who to trust. I would rather make errors of omission than commission.

With Scottish Re, all of my ordinary certainties were blown away in a single day, July 31. Its shares plunged 75% after it announced that it would book a large second-quarter loss due largely to the write-off of a large deferred tax asset, the CEOs of the holding company and its U.S. and international reinsurance divisions were being sacked, and the company was being put up for sale.

I know how life reinsurers are run; I did business with them as an actuary for 17 years. But my immediate reaction to the news was, "Oh no. This could be a liquidity crisis. Insolvency?"

Further compounding this was the legitimate anger of my boss toward me. We had a sizeable position in Scottish Re, and its implosion made July 31 the worst day in my firm's history. Regular readers may have noted that during this period, the frequency of my writing for RealMoney diminished. I had bigger concerns, and personal ones as well.

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At the time of publication, Merkel and/or his fund was long Scottish Re, though positions may change at any time.

David J. Merkel, CFA, FSA, is a senior investment analyst at Hovde Capital responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. Previously, he managed corporate bonds for Dwight Asset Management. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Merkel cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.

Analyst Certification: All of the views expressed in the report accurately reflect the personal views of the research analyst about any and all of the subject securities or issuers. No part of the compensation of the research analyst named herein was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the research analyst in this report.

Merkel is employed by Hovde Capital Advisors LLC (the "firm"), a registered investment advisor with its principal office located in Washington, D.C. The Firm and/or its affiliates have or may have a long or short position or holding in the securities, options on securities, or other related investments of the issuers mentioned herein.