RNS Number:3993D
Alea Group Holdings(Bermuda) Ltd
06 September 2007
Alea Group Holdings (Bermuda) Ltd
Interim results for the six months ended 30 June 2007
Alea announces interim results and provides an update on run-off
Financial Highlights
* Insurance contracts liabilities decreased by 12.5% from $1,941.5
million at 31 December 2006 to $1,698.1 million at 30 June 2007
(30 June 2006: $2,451.7 million).
* Investment income of $38.9 million (30 June 20061: $49.2 million)
reflecting a decrease in invested assets as claims, commutations and
operating expenses are paid.
* Other operating expenses were $27.2 million (30 June 2006: $42.5
million).
* Operating income of $3.3 million (30 June 2006: $1.6 million).
* Loss after tax was $11.0 million (30 June 2006: loss after tax of
$10.7 million), which on a per share2 basis3 was $0.06 (30 June 2006:
loss per share of $0.06).
* Adverse reserve development, net of reinsurance excluding the impact
of commutations and discount in the six months ended 30 June 2007 of
$15.9 million (30 June 2006: adverse reserve development of $14.7
million, net of reinsurance excluding the impact of commutations and
discount).
* Net asset value of $2.71 per share (31 December 2006: $2.79 per share;
30 June 2006: $2.57 per share) including impact of cumulative
unrealised losses.
* Subsequent to 30 June 2007, the Group refinanced its outstanding bank
loans and made an optional prepayment leaving $30 million outstanding
as at 18 July 2007, maturing in July of 2009.
Operational Highlights
* Headcount reduced to 119 as at 30 June 2007 down from 137 as at 31
December 2006.
Directorate Changes and Corporate Actions
Several events in the first half of 2007 resulted in a significant change in
both the ownership and the Board of Directors of Alea Group Holdings (Bermuda)
Ltd. Following the acquisition by FIN Acquisition Limited of approximately 67%
of the Company's shares in issue, on 6 July 2007, the Group announced the
resignation of each of John Reeve, Timothy Faries, James Fisher, Todd Fisher,
Perry Golkin, R. Glenn Hilliard, and Scott Nuttall as directors of the Company4
with effect from 5 July 2007. The Group further announced the appointment of
Robert Kauffman, Randal Nardone and Greg Share as non-executive directors of the
Company with simultaneous effect. Mr Kauffman was also appointed Chairman of
the Board.
On 10 July 2007, the Group announced the conversion of the currency in which the
Company's shares trade on the London Stock Exchange from pounds sterling to US
dollars. On 18 July 2007, the Group announced it had posted a circular to its
shareholders relating to the conversion of the Company's listing on the Official
List of the UK Listing Authority from a primary listing to a secondary listing,
with an effective date of 16 August 2007.
On 23 July 2007, FIN Acquisition Limited announced it had closed to further
acceptances on 20 July 2007, its recommended cash offer to acquire the shares of
Alea Group Holdings (Bermuda) Ltd. As of 20 July 2007, FIN Acquisition Limited
had received valid acceptances of its offer in respect of a total of
approximately 72 per cent. of the Company's shares in issue.
Dividend
The Company has not proposed an interim dividend for 2007.
Comments of Mark Cloutier, Group Chief Executive
The first half of 2007 has been yet another period of significant change and
challenge for Alea. While we have continued to focus on the orderly run-off of
the Group's balance sheet, we also completed a major transaction resulting in a
new majority shareholder, FIN Acquisition Limited, taking a significant interest
in the Group. We welcome our new shareholder and the participation and support
of our new Directors and we thank the departing Board members for their
contributions over the past rather difficult period.
Our result for the first half of the year while representing an improvement over
the same period last year (loss before tax of $10.3 million versus a loss before
tax of $14.4 million in the first half of 2006) is nonetheless disappointing
relative to our expectations. While it is disappointing to have made a loss, we
have however, continued to make good progress in our efforts to preserve the
Group's capital base, reduce volatility in our balance sheet and meet the terms
of all our debt obligations. Insurance contract liabilities reduced a further
12.5% ($243.4 million) in the period, representing further deleveraging of our
assets. During the interim period we repaid $75.0 million of our $200.0 million
bank facility. Subsequent to the interim period, we refinanced the existing
facility and together with optional prepayments have reduced total senior debt
outstanding to $30.0 million.
As we move through the second half of 2007 and into 2008, we will remain keenly
focused on reducing expenses, further reducing insurance contract liabilities,
preserving our capital and assets, pursuing commutations that make economic
sense for the Group, and the development of our plans for the future of the
Group. We continue to explore various options to realise or enhance the value
of Alea which may include acquisitions, divestitures or recommencing
underwriting activities in certain select segments of the industry.
Notes:
1. Except where specifically indicated all statements refer to the six months
ended 30 June 2007 or 2006.
2. Weighted average number of ordinary shares of 173.8 million (30 June 2006:
173.7 million).
3. Basic and diluted loss per share are the same.
4. "Company" refers to Alea Group Holdings (Bermuda) Ltd only. "Group" refers to
Alea Group Holdings (Bermuda) Ltd, and all its subsidiaries.
Financial information presented herein has been prepared in accordance with
International Financial Reporting Standards ("IFRS") and is unaudited.
For further information, please contact:
Media: Sheel Sawhney Analysts & Investors: Kirk Lusk
+1 860 258 6524 +1 860 258 6566
Financial Dynamics
Robert Bailhache
Nick Henderson
+44 20 7269 7114
Past performance cannot be relied upon as a guide to future performance.
Certain statements made in this document that are not based on current or
historical facts are forward-looking in nature including, without limitation,
statements containing words "believes," "anticipates," "plans," "projects,"
"intends," "expects," "estimates," "predicts," and words of similar import. All
statements other than statements of historical facts including, without
limitation, those regarding the Group's financial position, business strategy,
plans and objectives of management for future operations (including development
plans and objectives) are forward-looking statements. Such forward-looking
statements involve known and unknown risks, uncertainties and other important
factors that could cause the actual results, performance or achievements of the
Group to be materially different from future results, performance or
achievements expressed or implied by such forward-looking statements. In
particular, forecasting of reserves for future losses is based on historical
experience and future assumptions. As a result they are inherently subjective
and may fluctuate based on actual future experience and changes to current or
future trends in the legal, social or economic environment. Such forward-looking
statements are based on numerous assumptions regarding the Group's present and
future business strategies and the environment in which the Group will operate
in the future. These forward-looking statements speak only as at the date of
this document or other information concerned. Alea Group Holdings (Bermuda) Ltd
expressly disclaims any obligations or undertaking (other than reporting
obligations imposed on us in relation to our listing on the London Stock
Exchange) to disseminate any updates or revisions to any forward-looking
statements contained herein to reflect any changes in the Group's expectations
with regard thereto or any change in events, conditions or circumstances on
which any such statement is based. References in this paragraph to the Group are
to Alea Group Holdings (Bermuda) Ltd and its subsidiaries from time to time.
FINANCIAL REVIEW
Unaudited consolidated income statement
Six months ended Year ended
30 June 2007 30 June 2006 31 December 2006
$'million $'million $'million
Gross premiums written 8.0 (37.9) (74.9)
Revenue
Premium revenue 11.6 270.9 303.3
Premium ceded to reinsurers (0.4) (61.2) (87.4)
Net insurance premium revenue 11.2 209.7 215.9
Fee income 1.9 0.4 3.2
Investment income 38.9 49.2 94.8
Net realised losses on (1.1) (1.4) (2.5)
financial assets
Net realised gains on sale of - - 4.3
disposal group
Net realised gains/(losses) - 0.9 (5.0)
on sale of renewal rights
Total revenue 50.9 258.8 310.7
Expenses
Insurance claims and loss 8.4 176.3 173.4
adjustment expenses
Insurance claims and loss 6.4 (27.4) (16.7)
adjustment expenses recovered
from reinsurers
Net insurance claims 14.8 148.9 156.7
Acquisition costs 4.8 64.2 69.2
Other operating expenses 27.2 42.5 66.6
Restructuring costs 0.8 1.6 1.1
Total expenses 47.6 257.2 293.6
Results of operating 3.3 1.6 17.1
activities
Finance costs (13.6) (16.0) (24.4)
Loss before income tax (10.3) (14.4) (7.3)
Income tax (expense)/credit (0.7) 3.7 6.5
Loss for the period (11.0) (10.7) (0.8)
Performance indicators and comparison to prior periods
The Group ceased underwriting new and renewal business and was placed into
run-off in the fourth quarter of 2005. The Group's business has therefore
changed significantly and as a result the standard indicators used to assess the
performance of participants in the insurance industry are not considered
appropriate for the Group. Performance indicators that are relevant to the
Group's run-off strategy are provided where these provide meaningful and useful
comparisons.
Reserves and claims
At 30 June 2007 the total insurance contracts balance comprising gross claims
outstanding less discount on claims outstanding, claims handling provisions and
provision for unearned premiums was $1,698.1 million, a decrease of 12.5% from
31 December 2006 ($1,941.5 million). The claims outstanding, net of reinsurance
at 30 June 2007 was $811.3 million. This is a decrease of 19.4% compared with
31 December 2006 ($1,006.8 million).
The balances are analysed below:
As at As at As at
30 June 2007 30 June 2006 31 December 2006
$'million $'million $'million
Gross claims outstanding
Provision for claims outstanding, 1,707.8 2,415.1 1,957.3
reported and not reported
Discount (95.6) (127.7) (105.9)
1,612.2 2,287.4 1,851.4
Claims handling provisions 16.1 25.5 17.8
Total gross claims outstanding 1,628.3 2,312.9 1,869.2
Provision for unearned premiums on 69.8 138.8 72.3
insurance contracts
Total insurance contracts 1,698.1 2,451.7 1,941.5
Aggregate excess reinsurance
Provision for claims outstanding, 288.3 321.3 299.6
reported and not reported
Discount (5.5) (9.1) (7.7)
Net aggregate excess reinsurance 282.8 312.2 291.9
Other reinsurance
Provision for claims outstanding, 538.6 659.8 573.2
reported and not reported
Discount (4.4) (3.9) (2.7)
Net other reinsurance 534.2 655.9 570.5
Total reinsurance
Provision for claims outstanding, 826.9 981.1 872.8
reported and not reported
Discount (9.9) (13.0) (10.4)
Total reinsurers' share of claims 817.0 968.1 862.4
outstanding
Provision for unearned premiums on 0.6 32.9 1.0
reinsurance contracts
Total reinsurance contracts 817.6 1,001.0 863.4
Undiscounted claims outstanding, 897.0 1,459.5 1,102.3
net of reinsurance
Discount (85.7) (114.7) (95.5)
Claims outstanding, net of 811.3 1,344.8 1,006.8
reinsurance
The following table presents the Group's booked gross claims outstanding before
claims handling provisions and before discount as at 30 June 2007 by class of
business.
General Motor Workers' Professional Property MAT(1) Total
$'million liability comp.
1999 and prior 98.5 47.6 18.4 1.0 32.5 87.6 285.6
2000 22.8 11.5 10.3 14.2 7.0 23.2 89.0
2001 27.4 8.4 17.3 10.3 2.9 11.2 77.5
2002 26.1 13.6 7.9 19.7 7.3 5.0 79.6
2003 36.3 26.2 5.5 27.0 3.5 5.3 103.8
2004 35.7 40.4 9.3 26.9 12.3 0.2 124.8
2005 12.5 55.9 3.0 23.6 61.4 0.4 156.8
Total reinsurance reserves 259.3 203.6 71.7 122.7 126.9 132.9 917.1
Insurance reserves 219.7 70.9 171.6 27.9 12.4 - 502.5
Total non-life reserves 479.0 274.5 243.3 150.6 139.3 132.9 1,419.6
Life structured settlements 269.9
Life reinsurance 18.3
Provision for claims outstanding, reported and not reported 1,707.8
(1) Marine, Aviation and Transport
The following table analyses Alea's gross claims outstanding between incurred
but not reported ("IBNR") and case reserves as at 30 June 2007. The insurance
and reinsurance splits are in line with the Group's typical business tail and
the relative maturity of the respective books.
Percentage Insurance Reinsurance Total
Case reserves 43% 52% 49%
IBNR 57% 48% 51%
Total 100% 100% 100%
Adverse reserve development
During the six months ended 30 June 2007 the Group experienced adverse
development in the reserves, net of reinsurance excluding the impact of
commutations and discount of $15.9 million (30 June 2006: adverse reserve
development, net of reinsurance excluding the impact of commutations and
discount of $14.7 million).
Loss reserve discount
As permitted by IFRS 4, categories of claims provisions where the expected
average interval between the date of settlement and the balance sheet date is in
excess of four years may be discounted at a rate which does not exceed that
expected to be earned by assets covering the provisions. As at 30 June 2007 27%
(31 December 2006: 28%; 30 June 2006: 25%) of the Group's gross reserves were
discounted at a rate of 4.5%.
As at 30 June 2007 the Group's total net discount was $85.7 million (31 December
2006: $95.5 million; 30 June 2006: $114.7 million). This is expected to reduce
towards zero over the duration of the normal course of payout of the reserves.
The unwinding of the discount will be charged to insurance claims and loss
adjustment expenses in the income statement as the remaining expected duration
drops below the UK GAAP qualified level of four years as permitted by IFRS 4.
Income statement
Gross premiums written and net insurance premium revenue
Gross premiums written in the six months ended 30 June 2007 were $8.0 million
(30 June 2006: negative $37.9 million which reflected the cancellation of
policies written in prior periods). Net insurance premium revenue reduced by
94.6% to $11.2 million in the six months ended 30 June 2007 (30 June 2006:
$209.7 million). This is primarily due to the Group's decision to cease writing
new and renewal business resulting in a reduction in premium.
As at 30 June 2007 the Group had net unearned premiums of $69.2 million (31
December 2006: $71.3 million; 30 June 2006: $105.9 million). The Group
anticipates that no significant insurance premium revenue will be recognised in
2008 as the majority of unearned premium will have been released and recognised
as revenue by 31 December 2007.
The Group has assessed its 30 June 2007 deferred acquisition cost asset ("DAC")
of $2.7 million (31 December 2006: $3.5 million; 30 June 2006: $30.0 million) as
fully recoverable and as a result has not recorded any DAC write-off in its six
months ended 30 June 2007 income statement.
Fee income
Fee income in the six months ended 30 June 2007 was $1.9 million compared with
$0.4 million recorded in the corresponding period in 2006. Fee income represents
income arising on structured reinsurance and insurance contracts without
significant transfer of insurance risk. These contracts are accounted for on a
deposit accounting basis.
Investment income and realised gains and losses
Investment income in the six months ended 30 June 2007 was $38.9 million, 20.9%
($10.3 million) lower than the $49.2 million recorded in the six months ended 30
June 2006. The change recorded reflects 4.3% yield on invested assets for the
six months ended 30 June 2007 on average invested assets of $1,788.4 million
compared with 4.0% yield on invested assets for the six months ended 30 June
2006 on average invested assets of $2,331 million.
Net realised losses on financial assets were $1.1 million in the six months
ended 30 June 2007 compared with $1.4 million realised losses in the six months
ended 30 June 2006.
Net realised gains/(losses) on sale of renewal rights
The Group completed three renewal rights transactions in the fourth quarter of
2005. These were accounted for as net realised gains on sale of renewal rights
of $61.1 million. Subsequently, the following movements have been recognised in
the Income Statement reflecting a necessary change to the fair value which was
based on the latest financial data available. These amounts reflect the
discounted estimated future cash flows arising from specified percentages of
applicable commissionable premiums written over the applicable period in
accordance with the terms of the sale contracts.
The table below summarises the change in the fair value of each transaction:
Transaction Six months Six months Year ended
ended ended 31 December 2006
30 June 2007 30 June 2006
$'million $'million $'million
London/Canopius - - (0.8)
AAR/AmTrust - - (5.2)
Europe/SCOR - 0.9 1.0
Total - 0.9 (5.0)
To date the Group considers that the accruals above are reasonable and has
received in cash $22.4 million of the estimated total consideration of $56.1
million. The outstanding balance consists of $31.5 million due from AmTrust and
$2.2 million due from Canopius.
Insurance claims and loss adjustment expenses
In the six months ended 30 June 2007 the Group incurred net insurance claims and
loss adjustment expenses of $14.8 million (six months ended 30 June 2006: $148.9
million).
The claims outstanding net of reinsurance at 30 June 2007 were $811.3 million
(at 31 December 2006: $1,006.8 million), which equates to a decrease of $195.5
million in the six month period.
Acquisition costs
Acquisition costs are costs that are directly associated with the acquisition of
insurance and reinsurance contracts including brokerage, commissions,
underwriting expenses and other acquisition costs. They are deferred and
amortised over the period of contract, consistent with the earning of premium.
Given that the Group is no longer accepting new insurance risks and is releasing
its unearned premium reserves as the risk associated with those premium receipts
is extinguished, acquisition costs are expected to become insignificant.
In the six months ended 30 June 2007 total acquisition costs were $4.8 million (
six months ended 30 June 2006: $64.2 million) which includes a charge of $2.4
million in respect of a London profit sharing arrangement relating to a
commutation.
Other operating expenses
The Group plans to minimise operating expenses as much as possible while still
retaining the personnel and capabilities to manage an efficient run-off of the
existing book and pursue other corporate activities. To the extent that
investment income net of discount released does not offset other operating
expenses in relation to run-off activities, the Group will establish a run-off
provision.
In the six months ended 30 June 2007 other operating expenses were $27.2
million. This compares with other operating expenses in the six months ended 30
June 2006 of $42.5 million.
Restructuring costs
Restructuring costs in the six months ended 30 June 2007 were $0.8 million (six
months ended 30 June 2006: $1.6 million). Staff headcount at 30 June 2007 stood
at 119 (30 June 2006: 169) and the Group anticipates that this will reduce as
reserves and invested assets decline.
The restructuring costs in the six months ended 30 June 2007 represent
redundancy costs incurred for severance payments made to employees who were not
part of the original restructuring plan as disclosed at 31 December 2005.
Results of operating activities
In the six months ended 30 June 2007, results of operating activities were a
profit of $3.3 million compared with a profit of $1.6 million in the six months
ended 30 June 2006.
Finance costs
Finance costs include investment expenses, foreign exchange movements and debt
interest. In the six months ended 30 June 2007 total finance costs were $13.6
million, compared with $16.0 million recorded in the corresponding period in
2006. The majority of this decrease results from a reduction in borrowings. On
19 April 2007, the Group repaid $25.0 million of the term loan and all of $50.0
million revolver using its cash reserves, leaving an outstanding amount at 30
June 2007 of $125.0 million.
Loss before income tax
Loss before income tax was $10.3 million in the six months ended 30 June 2007
compared with a loss of $14.4 million in the six months ended 30 June 2006. This
reduction reflects the change in the results of operating activities and the
reduction in finance costs noted above.
Income tax expense
The income tax charge in the six months ended 30 June 2007 was $0.7 million,
compared with a credit of $3.7 million in the six months ended 30 June 2006.
The impact of the income tax credit on the income statement is summarised as
follows:
Six months ended Six months ended Year ended
30 June 2007 30 June 2006 31 December 2006
$'million $'million $'million
Current tax expense/
(credit):
UK corporation tax 0.1 0.3 0.3
Foreign tax 0.5 (2.1) (4.9)
Total current period 0.6 (1.8) (4.6)
Deferred tax: 0.1 (1.9) (1.9)
Total income tax expense/ 0.7 (3.7) (6.5)
(credit)
In the year ended 31 December 2005 the Group wrote off the majority of its
deferred tax assets to reflect uncertainty over future profitability. The
Group's Swiss, US and UK entities have significant trading losses carried
forward in respect of which no deferred tax assets have been recognised.
In the six months ended 30 June 2007 the Group's current tax charge of $0.6
million (30 June 2006: credit of $1.8 million) is mainly derived from branches
where there are no trading losses carried forward available.
Loss on ordinary activities after income tax
Loss on ordinary activities after income tax in the six months ended 30 June
2007 was $11.0 million (30 June 2006: loss of $10.7 million).
Loss per share
Basic and fully diluted loss per share for the six months ended 30 June 2007 was
$0.06 per share (30 June 2006: loss per share: $0.06).
Dividend
The Company will not be paying an interim dividend for the 2007 financial year.
Balance sheet
Total assets
Total assets as at 30 June 2007 decreased by 13.4% to $2,724.4 million from
$3,145.7 million at 31 December 2006 (30 June 2006: $3,769.5 million).
Net assets
Net assets (shareholders' funds attributable to equity interests) at 30 June
2007 were $471.0 million (31 December 2006: $484.1 million; 30 June 2006: $447.1
million). Net assets per share were $2.71 (31 December 2006: $2.79; 30 June
2006: $2.57).
Net assets have remained relatively stable compared with the position at 31
December 2006 ($484.1 million) after taking into consideration the impact of
interest rate movements on the investment portfolio described below.
Reinsurance recoverables
Total reinsurers' share of claims outstanding was $817.0 million at 30 June 2007
(31 December 2006: $862.4 million; 30 June 2006: $968.1 million).
Invested assets
The Group's investment strategy emphasises a high quality diversified portfolio
of liquid investment grade fixed income securities as a method of preserving
capital. The investment portfolio does not currently consist of equity or real
estate investments, but the Group may, in the future, invest in other asset
classes.
At 30 June 2007 the value of available for sale investments was $1,394.8
million, compared with $1,664.5 million at 31 December 2006 (30 June 2006:
$1,980.7 million).
Of total invested assets $1,343.7 million (31 December 2006: $1,732.7 million;
30 June 2006: $1,971.6 million) is managed by third-party fund managers with the
asset mix shown below. The remaining invested assets of $51.1 million include
predominantly mutual funds invested in fixed income securities.
Asset class As at As at As at
30 June 2007 30 June 2006 31 December
2006
% % %
US government 24 28 21
US mortgage 15 20 16
EU and Switzerland government and 15 16 14
corporate
US corporate 11 11 11
Asset backed securities 3 5 4
US municipalities 1 1 1
Canadian government and provinces 2 3 2
Cash and other 29 16 31
Total 100 100 100
At 30 June 2007 the Group's investment portfolio had an average duration of 1.6
years (30 June 2006: 2.6 years). The Group has shortened the average duration of
the portfolio to provide liquidity anticipated to be required to support the
Group's run-off strategy. The Group may chose to increase the average duration
of the portfolio in the future.
In the six months ended 30 June 2007 the Group achieved a total gross return on
the investment portfolio of 3.6% (30 June 2006: 0.8%). The investment return
comprised 4.3% investment income (30 June 2006: 4.0%), 0.1% realised loss (30
June 2006: loss of 0.1%) and 0.6% unrealised loss (30 June 2006: loss of 3.1%)
on average invested assets of $1,788.4 million (30 June 2006: $2,331.0 million).
At 30 June 2007 all of the Group's fixed income portfolio was rated A or better
and 98.2% (30 June 2006: 98.0%) was rated AA or better by either Standard &
Poor's or Moody's. The portfolio had a weighted average rating of AAA based on
ratings assigned by Standard & Poor's or Moody's. Other than with respect to US,
Canadian and European Union government and agency securities, the Group's
investment guidelines limit its aggregate exposure to any single issuer to 5% of
its portfolio. Under the Group's current investment guidelines, all securities
must be rated A or better at the time of purchase and the weighted average
rating requirement of the Group's portfolio is AAA. There were no investment
write-offs in either 2006 or the first half of 2007.
There are pledges over certain investments for the issuance of letters of credit
in the normal course of business. As at 30 June 2007 the pledges covered assets
of $310.8 million (31 December 2006: $343.6 million; 30 June 2006: $425.2
million). In addition $129.5 million (31 December 2006: $131.7 million;
30 June 2006: $132.3 million) is held as statutory deposits for local regulators
and a further $588.2 million (31 December 2006: $611.6 million; 30 June 2006:
$762.0 million) is held in trust for the benefit of policy holders including
$181.1 million (31 December 2006: $197.5 million; 30 June 2006: $286.5 million)
that Alea (Bermuda) Ltd has placed in trust on behalf of Alea North America
Insurance Company.
As at 30 June 2007 the Group held Societe d'Investissement a Capital Variable
("SICAV") of $53.9 million (31 December 2006: $55.5 million; 30 June 2006: $51.8
million) pledged for the benefit of French and Belgian cedants. These SICAVs are
mutual funds invested in European fixed income securities with average credit
quality of AAA and duration of approximately six years.
Capital management
Financing facilities
The Group raised $100.0 million of hybrid capital in December 2004 and a further
$20.0 million in early January 2005. This capital is in the form of 30-year
hybrid trust preferred securities priced at LIBOR plus 285 basis points.
At 30 June 2007 the Group had $125.0 million outstanding under its loan
facility. Interest was charged at LIBOR plus 120 basis points on this bank
facility. The bank facility would have been due in September 2007. On 6 July
2007, the Group negotiated a new term loan credit facility with Banc of America
Securities Limited as facility agent. Under this facility, the Group drew down
the maximum aggregate commitment of $90.0 million, which, along with $35.0
million of its own cash reserves, was used to repay the pre-existing bank
facility of $125.0 million.
The Group made an optional prepayment of $60.0 million on 18 July 2007. The
remaining $30.0 million falls due for repayment on 18 July 2009.
The Group's bank facility contains covenants including tangible minimum net
equity, debt-to-capitalisation ratio limitations, limitations on granting of
liens, limitations on payments of dividends, limitations on other disposition of
assets, limitations on increased indebtedness and limitations on distribution of
assets.
Liquidity and cash flow
Cash flows from operating activities primarily consist of premiums collected,
investment income and collected reinsurance recoverable balances, less paid
claims, retrocession payments, operating expenses and tax payments. Net cash
outflow from operating activities after income tax paid for the six months ended
30 June 2007 was $228.2 million (30 June 2006: $195.6 million net cash outflow).
The operating cash outflow reflects the transition into run-off and the
reduction in premium received.
The net decrease in cash was $4.5 million (increase for six months ended 30 June
2006 of $16.8 million). This is after net cash received from investing
activities of $308.5 million (30 June 2006: net cash received of $225.8 million)
and net cash used in financing activities of $85.2 million (30 June 2006: net
cash used of $10.6 million). As a result, the Group's cash and cash equivalents
at 30 June 2007 were $152.7 million (30 June 2006: $133.8 million).
Intra-Group arrangements
The Group manages a number of different intra-Group arrangements designed to
ensure that each local balance sheet retains risk commensurate with its capital
base. The principal means of achieving this is by arranging capacity through
internal quota share reinsurances ('quota shares') primarily with Alea Bermuda.
For 2002 to 2006 underwriting years, the Group has put in place a 70% quota
share to Alea Bermuda of Alea North America's insurance and reinsurance
business. For 2001 to 2005 underwriting years there was a 35% quota share
arrangement from Alea London to Alea Europe in place which was commuted in the
third quarter of 2006. There is a 50% quota share of certain 2000 and prior
underwriting year business from Alea Europe to Alea Bermuda. Given the change in
circumstances, the Group is evaluating options to simplify its capital structure
and balance sheet and is therefore considering commutations of the remaining
quota shares. Such transactions would be subject to regulatory approval in each
jurisdiction affected.
Credit ratings
In the first half of 2006, Alea Group requested the withdrawal of all Group and
member company ratings following ratings downgrades by both Standard and Poor's
and A.M. Best.
Financial calendar 2008
The Group expects to post its results for the year ended 31 December 2007 on 12
March 2008.*
*provisional date
Kirk Lusk
Group Chief Financial Officer
5 September 2007
ALEA GROUP INTERIM REPORT 2007
Six months ended 30 June 2007
Consolidated income statement
Six months Six months Year ended
ended ended 31
30 June 30 June December
2007 2006 2006
$'000 $'000 $'000
Notes
Gross premiums written 4 8,023 (37,941) (74,919)
Revenue
Premium revenue 11,563 270,850 303,338
Premium ceded to reinsurers (340) (61,170) (87,422)
Net insurance premium revenue 4 11,223 209,680 215,916
Fee income 4 1,957 409 3,143
Investment income 5 38,858 49,177 94,821
Net realised losses on financial assets (1,120) (1,426) (2,500)
Net realised gains on sale of disposal group 10 - - 4,336
Net realised gains/(losses) on sale of 6 - 930 (5,020)
renewal rights
Total revenue 4 50,918 258,770 310,696
Expenses
Insurance claims and loss adjustment expenses 8,394 176,373 173,408
Insurance claims and loss adjustment expenses 6,427 (27,441) (16,716)
recovered from reinsurers
Net insurance claims 4 14,821 148,932 156,692
Acquisition costs 4 4,836 64,181 69,292
Other operating expenses 27,172 42,488 66,555
Restructuring costs 7 795 1,556 1,087
Total expenses 47,624 257,157 293,626
Results of operating activities 4 3,294 1,613 17,070
Finance costs (13,532) (15,971) (24,407)
Loss before income tax 4 (10,238) (14,358) (7,337)
Income tax (expense)/credit 8 (725) 3,712 6,502
Loss for the period (10,963) (10,646) (835)
Earnings per share for losses attributable to the equity shareholders of the Company
during the period:
Earnings per share on operating activities
Basic ($) 9 (0.06) (0.06) (0.00)
Diluted ($) 9 (0.06) (0.06) (0.00)
Consolidated balance sheet
As at As at As at
30 June 2007 30 June 31
2006 December
2006
Notes $'000 $'000 $'000
ASSETS
Property, plant and equipment 5,260 8,287 6,398
Intangible assets 8,479 8,479 8,479
Deferred acquisition costs 2,674 30,036 3,506
Assets of a disposal group classified as held 10 - 43,045 -
for sale
Financial assets
Equity securities
- available for sale 212 161 198
Debt securities
- available for sale 1,394,598 1,980,557 1,664,341
Loans and receivables including insurance receivables 341,755 563,105 440,961
Deferred tax assets 1,100 1,104 1,154
Reinsurance contracts 11 817,637 1,001,007 863,475
Cash and cash equivalents 152,706 133,749 157,220
Total assets 2,724,421 3,769,530 3,145,732
LIABILITIES
Insurance contracts 11 1,698,080 2,451,660 1,941,514
Borrowings 12 242,602 316,983 317,267
Liabilities of a disposal group classified as 10 - 12,415 -
held for sale
Provisions 13 4,064 9,505 5,241
Other liabilities and charges 31,020 41,524 40,954
Trade and other payables 277,176 489,291 355,606
Deferred tax liabilities - - -
Current income tax liabilities 454 1,005 1,009
Total liabilities 2,253,396 3,322,383 2,661,591
Net assets 471,025 447,147 484,141
EQUITY
Capital and reserves attributable to the
Company's equity holders
Share capital 14 1,738 1,737 1,738
Other reserves 14 685,224 660,195 687,377
Retained loss 14 (215,937) (214,785) (204,974)
Total equity 471,025 447,147 484,141
Approved by the Board of Directors on 5 September 2007 and signed on its behalf
by:
Kirk Lusk
Group Chief Financial Officer
Consolidated cash flow statement
Six months Six months Year ended
ended ended 31 December
30 June 2007 30 June 2006 2006
$'000 $'000 $'000
Notes
Cash used in operations 15 (230,983) (197,622) (586,999)
Income tax recovered 2,746 2,034 1,949
Net cash used in operating activities (228,237) (195,588) (585,050)
Cash flows generated from/(used in) investing
activities
Purchase of property, plant and equipment (218) (265) (735)
Proceeds on sale of property, plant and equipment 5 124 424
Cash payments to acquire equity and debt securities (3,339,027) (1,657,627) (3,820,920)
Cash receipts from sales of equity and debt 3,611,670 1,837,675 4,356,828
securities
Net amounts outstanding for securities 6,849 41 (6,448)
Cash receipts from sale of disposal group - - 34,726
Cash receipts from interest and dividends 29,264 45,832 85,429
Net cash generated from investing 308,543 225,780 649,304
activities
Cash flows used in financing activities
Repayments of borrowings (75,000) - -
Interest paid on borrowings (10,161) (10,606) (21,888)
Net cash used in financing activities (85,161) (10,606) (21,888)
Net (decrease)/ increase in cash and cash (4,855) 19,586 42,366
equivalents
Cash and cash equivalents at beginning of 157,220 116,962 116,962
period
Cash of a disposal group sold 10 - (495) (4,477)
Exchange gains/(losses) on cash and bank overdrafts 341 (2,304) 2,369
Cash and cash equivalents at end of period 152,706 133,749 157,220
Consolidated statement of recognised income and expense
Six months ended Six months ended Year ended
30 June 2007 30 June 2006 31 December 2006
$'000 $'000 $'000
Loss on revaluation of (7,260) (35,994) (11,939)
available-for-sale investments
Exchange differences on translation 3,659 4,158 5,481
of foreign operations
Net loss recognised directly in (3,601) (31,836) (6,458)
equity
Transfers
Transfers to profit and loss on 1,544 (613) 913
sale of available-for-sale
investments
Total transfers net of tax 1,544 (613) 913
Loss for the period (10,963) (10,646) (835)
Total recognised income and expense (13,020) (43,095) (6,380)
for the period
The total recognised income and expense are attributable to the Company's equity
holders.
NOTES TO THE FINANCIAL STATEMENTS
1 General information
Alea Group Holdings (Bermuda) Ltd (the "Company") and its subsidiaries (together
the "Group") were engaged in the business of underwriting insurance and
reinsurance risks. The Group operates through four principal operating segments
representing London market business, North American business including
alternative risk transfer and reinsurance, Continental European reinsurance and
financial services. In 2005 the Group ceased to write new business and placed
all operations into run-off. Although the Group has disposed of the renewal
rights for Alea Alternative Risk, Alea London and Alea Europe and placed all
operations into run-off, the Group will continue to service claims relating to
business written during 2005 and prior for the foreseeable future. As such, it
is considered appropriate to recognise all amounts as relating to continuing
operations.
The Company is registered in Bermuda and is listed on the London Stock Exchange.
As such it is required to prepare its financial information in accordance with
the Bermuda Companies Act 1981, which permits the Company and the Group to
prepare financial statements which comprise the consolidated income statement,
the consolidated balance sheet, the consolidated cash flow statement, the
consolidated statement of recognised income and expense and the related notes 1
to 17 in accordance with International Financial Reporting Standards ("IFRS").
Accordingly, the financial information has been prepared in accordance with
Bermuda Law.
2 Basis of preparation
The interim financial statements, as required by the Listing Rules of the United
Kingdom's Financial Services Authority ("FSA"), have been prepared on the basis
of IFRS recognition and measurement principles but, as permitted by the FSA, the
Group has not adopted IAS 34 'Interim Financial Reporting' early, and
consequently, the full requirements of that standard have not been applied.
The consolidated financial statements are presented in thousands of US dollars,
rounded to the nearest thousand. They have been prepared under the historical
cost convention, as modified by the revaluation of financial instruments which
have been classified as available for sale and financial assets and financial
liabilities at fair value through profit and loss.
The preparation of financial statements in conformity with IFRS requires
management to exercise its judgement in making estimates and assumptions that
affect the application of the Group's accounting policies and reported amounts
of assets and liabilities, income and expenses. The estimates and associated
assumptions are based on historical experience and various other factors that
are believed to be reasonable under the circumstances, the results of which form
the basis of making the judgement about the carrying values of assets and
liabilities that are not readily available from other sources. Actual results
may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised in the periods in which the
estimates are revised if the revisions affect only those periods or in the
periods of the revision and future periods if applicable. Judgements made by
management in the application of IFRS that have a significant effect on the
consolidated financial statements and estimates with a significant risk of
material adjustments in following years are discussed below.
As IFRS are limited in specifying full insurance-specific guidelines to the
requirements of IFRS 4 'Insurance Contracts' pending completion of the second
phase of the IASB's project on insurance contracts, accounting policies for
insurance contracts have been selected with primary consideration to existing UK
GAAP as permitted by IFRS 4. The annual basis of accounting has been applied to
all classes of business.
These consolidated financial statements have been prepared in accordance with
the accounting policies and methods of computation in force for the period
ending 31 December 2006. A summary of the principal accounting policies is
provided in note 3.
3 Accounting policies
Status of interim financial statements
The statements for the two interim periods are unaudited but have been reviewed
by the Company's auditors, Deloitte & Touche LLP, and their report for the six
months ended 30 June 2007 is included with this report. The interim financial
statements do not constitute statutory accounts as defined in section 84 of the
Bermuda Companies Act 1981. The results for the year ended 31 December 2006 do
not constitute statutory accounts as defined in section 84 of the Bermuda
Companies Act 1981. The published statutory accounts for the year ended 31
December 2006 received an unqualified audit opinion including an emphasis of
matter paragraph regarding going concern.
Basis of consolidation
These financial statements consolidate all the enterprises in which Alea Group
Holdings (Bermuda) Ltd owns or controls, directly or indirectly, the majority of
the voting shares. There are no other enterprises over which the Group has the
ability to exercise control.
Intra-group transactions, balances, and gains and losses are eliminated except
to the extent that the transaction provides evidence of an impairment of the
asset transferred.
The results of subsidiaries liquidated or disposed of during the period are
included in the consolidated income statement up to the effective date of
liquidation or disposal, as appropriate.
Segment reporting
A business segment is a group of assets and operations engaged in providing
products or services that are subject to risks and returns that are different
from other business segments. A geographical segment is engaged in providing
services within a particular economic environment that are subject to risks and
returns that are different from those of segments operating in other economic
environments.
Foreign currency translation
a) Functional and presentation currency
Items included in the financial statements of each of the Group's entities are
measured using the currency of the primary economic environment in which the
entity operates (the 'functional currency'). The consolidated financial
statements are presented in thousands of US dollars, which is the Group's
presentation currency.
b) Group companies
The functional currencies for Group entities are usually the currencies of the
primary economic environment in which the entity operates.
The results and financial position of all the Group entities (none of which has
the currency of a hyperinflationary economy) that have a functional currency
different from the presentation currency are translated into the presentation
currency as follows:
(i) assets and liabilities for each balance sheet presented are translated at
the closing exchange rates at the date of that balance sheet;
(ii) income and expenses for each income statement are translated at
transactional or average exchange rates (unless this average is not a reasonable
approximation of the cumulative effect of the rates prevailing on the
transaction dates, in which case income and expenses are translated at the dates
of the transactions); and
(iii) all resulting exchange differences are recognised as a separate component
of equity.
On consolidation, exchange differences arising from the translation of the net
investment in foreign entities, and of borrowings and other currency instruments
designated as hedges of such investments, are taken to shareholders' equity.
When a foreign operation is sold, such exchange differences are recognised in
the income statement as part of the gain or loss on sale.
c) Transactions and balances
Foreign currency transactions are translated into the functional currency using
the exchange rates prevailing at the dates of the transactions. Foreign exchange
gains and losses resulting from the settlement of such transactions and from the
translation at period-end exchange rates of monetary assets and liabilities
denominated in foreign currencies are recognised in the income statement, except
when deferred in equity as qualifying cash flow hedges and qualifying net
investment hedges.
Translation differences on non-monetary items are reported as part of the fair
value gain or loss. Translation differences on non-monetary items, such as
equities classified as available-for-sale financial assets, are included in the
revaluation reserve in equity.
To safeguard against fluctuations in exchange rates, Group entities seek to
match assets and liabilities in currency. However, currency gains/losses which
do arise from transactions in a currency other than a functional currency are
reported in the income statement within other income or other expenses, as
applicable.
The foreign currency rates used for significant foreign currencies are as
follows:
30 June 2007 30 June 2007 30 June 2006 30 June 2006
Average Closing Average Closing
British pound 0.5066 0.4992 0.5606 0.5457
Euro 0.7515 0.7437 0.8138 0.7872
Swiss franc 1.2252 1.2318 1.2741 1.2329
31 December 31 December
2006 2006
Average Closing
British pound 0.5437 0.5087
Euro 0.7964 0.7591
Swiss franc 1.2544 1.2201
Insurance contracts
The Group enters into contracts that transfer insurance risk or financial risk
or both.
Insurance contracts are those contracts that transfer significant insurance
risk. Insurance risk is defined as risk, other than financial risk, transferred
from the holder of a contract to the issuer. Financial risk is defined as the
risk of a possible future change in one or more of a specified interest rate,
financial instrument price, commodity price, foreign exchange rate, index of
prices or rates, credit rating or credit index or other variable, provided in
the case of a non-financial variable that the variable is not specific to a
party to the contract.
Those contracts that do not transfer significant insurance risk are accounted
for by recognising an asset or liability based on the consideration paid or
received less any explicitly identified premiums or fees to be retained by the
ceding company. Future cash flows are estimated to calculate the effective
yield, and revenues and expenses are recorded as other income or expense.
Premium revenue
For all insurance contracts, premiums are recognised as revenue proportionally
over the period of coverage, having regard, where appropriate, to the incidence
of risk and this is known as earned premium. The portion of premium receivable
on in-force contracts that relates to unexpired risks at the balance sheet date
is reported as the unearned premium liability. Premiums are shown before
deduction of commission and are exclusive of taxes and duties levied thereon.
Premiums comprise total premiums earned under contracts incepting during the
financial period, together with adjustments arising in the financial period to
premiums earned in respect of business written in previous financial years.
Premiums also include estimates of pipeline premiums earned on business written
but not yet notified to the Group.
In respect of both risks accepted and risks ceded by the Group, premiums and
claims relating to reinsurance arrangements which do not involve significant
transfer of insurance risk are not recognised in the income statement but are
accounted for as deposits due from, or liabilities due to, reinsurers or
cedants.
Reinsurance
The Group cedes premium and risks in the normal course of business in order to
limit the potential for losses arising from risks accepted. Insurance premiums
ceded to reinsurers on contracts that are deemed to transfer significant
insurance risk are recognised as an expense in a manner that is consistent with
the recognition of insurance premium revenue arising from the underlying risks
being protected. Reinsurance contracts that do not meet the definition of an
insurance contract are accounted for as financial assets. The portion of premium
ceded to reinsurers on in-force contracts that relates to unexpired risks at the
balance sheet date is reported as the unearned premium asset.
Insurance claims and loss adjustment expenses recovered from reinsurers are
accounted for in the same accounting period as the claims for the related inward
insurance and reinsurance business being covered and are estimated in a manner
consistent with the claim liability associated with the reinsurance policy.
Provision is made for potentially non-collectable reinsurance recoveries and the
exposure of the Group to credit risk is assessed through the aggregation of
reinsurance assets due from counter parties belonging to the same insurance
groups.
Renewal rights transactions
Renewal rights transactions represent books of insurance and reinsurance
business sold to third parties. The Directors use fair value accounting for
renewal rights transactions. Valuations and revaluations of such transactions
are recognised in the Income Statement as net realised gains or losses on sale
of renewal rights.
In determining the fair value for the business sold, the Directors value the
discounted estimated future cash flows arising from specified percentages of
applicable commissionable premiums written over the applicable period in
accordance with the terms of the sale contracts. In determining the fair market
value of renewal rights sold, the Directors consider the prior production and
growth of the businesses sold, external projections and the most recent
assessment of the businesses sold. The Directors also make certain assumptions
about levels of programme transfer and renewal probabilities of future premiums.
As the ultimate consideration receivable is dependent upon the future levels of
business generated on renewal in relation to the rights sold over differing time
periods as specified in the sale contracts, it is necessary for the Directors to
review and re-evaluate the fair value of the consideration receivable based on
the likely volumes of renewal business that will be written. Consequently,
adjustments to the consideration receivable recognised in the Income Statement
will be made at each balance sheet date where required.
Deferred acquisition costs ("DAC")
Costs which vary and are directly associated with the acquisition of insurance
and reinsurance contracts including brokerage, commissions, underwriting
expenses and other acquisition costs are deferred and amortised over the period
of contract, consistent with the earning of premium. These are shown as a
capitalised asset in the balance sheet.
Insurance claims and loss adjustment expenses
Insurance claims and loss adjustment expenses comprise the estimated cost of all
claims occurring prior to the balance sheet date, whether reported or not, and
include loss adjustment expenses related to internal and external direct and
indirect claims handling costs, and adjustments to claims outstanding from
previous years. Claims handling costs include related internal and external
direct and indirect claims handling costs and consist of third party loss
adjustor fees, legal expenses and claims staff costs.
Liabilities for unpaid claims are determined on an individual case basis and are
based on the estimated ultimate cost of all claims notified but not settled by
the balance sheet date, together with the provision for related claims handling
costs and net of salvage and subrogation recoveries. The provision also includes
the estimated cost of claims incurred but not reported at the balance sheet date
based on statistical methods.
The Group discounts certain categories of claims provisions, such as certain
casualty and auto liability claims, where the expected average interval between
the date of claim settlement and the balance sheet date is in excess of four
years in accordance with the statutory regulations of the European Union. The
discount rate used is 4.5% (30 June 2006: 4.5%).
Liability adequacy test ("LAT")
At each balance sheet date, liability adequacy tests are performed to ensure the
adequacy of the insurance contract liabilities net of related DAC and premiums
receivable.
Provision is made where current best estimates of future contractual cash flows
and claims handling and administration expenses arising after the end of the
financial period from contracts concluded before that date is expected to exceed
the provision for unearned premiums net of DAC and premiums receivable.
Investment income from the assets backing the liabilities is taken into account
in calculating the provision. The assessment of whether a provision is necessary
is made on the basis of information available as at the balance sheet date,
after offsetting surpluses and deficits arising on products which are managed
together. Any deficiency is immediately charged to the income statement
initially by writing off DAC and by subsequently establishing a provision for
losses arising from liability adequacy tests (the unexpired risk provision). Any
DAC written off as a result of this test cannot subsequently be reinstated.
Investment income
Investment income includes dividends and interest. Dividends are accrued on an
ex-dividend basis that is when the right to receive payment is established.
Interest and rental income are recognised on an accruals basis. Interest income
in respect of the Group's available for sale investments is recognised using the
effective interest method.
Fee income
Fee income represents income arising on finite risk reinsurance and insurance
contracts without significant transfer of insurance risk and expense related to
deposits received from reinsurers. Such income is recognised over the term of
the contract.
Employee Benefits
a) Share-based payments
The cost of awards to employees that take the form of shares or rights to shares
is charged to the income statement as personnel costs on a straight-line basis
over the period to which the employee's performance relates and a corresponding
amount is reflected in revenue reserves in shareholders' equity. The charge is
calculated as being the fair value of the shares at the date of grant, reduced
by any consideration payable by the employee, and a reasonable expectation of
the extent to which performance criteria will be met.
b) Pension costs
The Group only operates defined contribution pension arrangements. Contributions
are charged to the income statement as employee benefit expense as they become
payable in accordance with the rules of each scheme. The Group has no further
payment obligations once the contributions have been paid. Prepaid contributions
are recognised as an asset to the extent that a cash refund or a reduction in
the future payments is available.
Operating leases
Leases in which a significant portion of the risks and rewards of ownership are
retained by the lessor are classified as operating leases. Payments made under
operating leases (net of any incentives received from the lessor) are charged to
the income statement on a straight-line basis over the period of the lease.
Property, plant and equipment
Property, plant and equipment comprise items of equipment only. Equipment is
stated at cost less accumulated depreciation and impairment losses when
appropriate. Depreciation is charged to the income statement on a straight-line
basis over the estimated useful lives of the assets. The estimated useful lives
vary between three and five years for fixtures and equipment.
The gain or loss arising on the disposal or retirement of an asset is determined
as the difference between the sales proceeds and the carrying amount of the
asset and is recognised in the income statement.
The residual values and useful lives of the assets are reviewed at each balance
sheet date and adjusted if appropriate.
Intangible assets
Intangible assets represent the cost of licences acquired to conduct business in
the United States. The Directors consider these licences to have indefinite
useful lives. Licences are granted for an indefinite period and are essential to
carry on business. The licences are tested for impairment at each balance sheet
date.
Investments - Financial Instruments
The Group recognises a financial asset or a financial liability on its balance
sheet when it becomes a party to the contractual provisions of the instrument.
On initial recognition the Group determines the category of financial instrument
and values it accordingly. The classification depends on the purpose for which
the investments are acquired.
a) Available-for-sale securities
Available-for-sale securities are non-derivative financial assets, typically
equities or bonds. On initial recognition, the fair value is the cost including
transaction costs directly attributable to the acquisition. On subsequent
remeasurement the fair value excludes transaction costs on disposal and
represents the listed bid price. Fair value movements are recognised in equity.
b) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market other than those
that the Group intends to sell in the short term or that it has designated as at
fair value through income or available-for-sale. Receivables arising from
insurance contracts are also classified in this category and are reviewed for
impairment as part of the impairment review of loans and receivables.
Trade receivables do not carry any interest rate and are measured at the fair
value which is their nominal value less appropriate allowances for estimated
irrecoverable amounts. On the initial recognition of loans the carrying value is
determined as the proceeds of the loans less the costs of the transaction which
are amortised over the length of the loan period in accordance with the
effective interest method.
c) Derivative financial instruments
Derivative financial instruments are initially measured at fair value on the
contract date. The method of recognising the gain or loss on subsequent changes
in fair value depends on whether the derivative is designated as a hedging
instrument. Gains or losses on derivatives that are not classified as hedges are
recognised in the income statement. Derivatives are classified as
held-for-trading unless they are designated as hedges.
The Group documents at the inception of the transaction the relationship between
hedging instruments and hedged items, as well as its risk management objective
and strategy for undertaking various hedge transactions. The Group also
documents its assessment, both at inception of the hedge and on an ongoing
basis, as to whether the derivative instruments used in hedging transactions are
expected to be and have been highly effective in offsetting changes in fair
value or cash flows of hedged items.
The Group has not designated any investments to be held to maturity or to be
valued at fair value through profit and loss.
Financial assets and liabilities are offset and the net amount reported in the
balance sheet only when there is a legally enforceable right to offset the
recognised amounts and there is an intention to settle on a net basis, or to
realise the asset and settle the liability simultaneously.
Purchases and sales of securities and currencies are recognised on trade date -
the date on which the Group commits to purchase or sell the asset.
Before evaluating whether, and to what extent, de-recognition of a financial
asset or liability is appropriate, the Group determines whether de-recognition
should be applied to only part of the financial asset / liability or group of
financial assets / liabilities. The Group only derecognises a financial asset or
liability when the contractual rights and obligations to the cash flows expire
or the financial asset / liabilities are transferred and the Group has also
transferred substantially all risks and rewards of ownership.
Gains and losses on derecognition are recognised through the income statement.
Changes in fair value of available for sale investments, except for foreign
exchange gains and losses and impairment losses which are recognised in the
income statement, are directly recorded in equity until such time that the
financial asset is derecognised.
Cash and cash equivalents
Cash and cash equivalents includes cash in hand, deposits held at call with
banks, other short-term highly liquid investments with original maturities of
three months or less, and bank overdrafts.
Impairment of assets
The Group reviews the carrying amounts of its tangible and intangible assets at
each balance sheet date to determine whether there is any indication of
impairment. If any indication exists, the asset's recoverable amount is
estimated. An impairment loss is recognised whenever the carrying amount of an
asset or its cash generating unit exceeds its recoverable amount. Impairment
losses are recognised in the income statement.
The recoverable amount is the greater of the net selling price and the value in
use. In assessing the value in use, the estimated future cash flows are
discounted to their present value using a pre-tax discount rate that reflects
current market assessments of the time value of money and the risks specific to
the asset for which the estimates of future cash flows have not been adjusted.
Taxation
Income tax expense represents the sum of the tax payable in the period and
deferred tax.
The tax currently payable is based on taxable profit for the period. Taxable
profit differs from profit as reported in the income statement because it
excludes items of income or expense that are taxable or deductible in other
periods and it further excludes items that are never taxable or deductible. The
Group's liability for current tax is calculated using tax rates that have been
enacted or substantively enacted by the balance sheet date.
Deferred income tax is provided in full, using the liability method, on all
temporary differences, which are based on the difference between the financial
statement carrying values and the tax bases of assets and liabilities using
enacted income tax rates and laws. Deferred income tax assets are recognised to
the extent that it is regarded as probable that they will be utilised against
sufficient future taxable income. Deferred income tax assets and liabilities are
not discounted.
The carrying amount of deferred tax assets is reviewed at each balance sheet
date and reduced to the extent that it is no longer probable that sufficient
taxable profits will be available to allow all or part of the asset to be
utilised.
The deferred tax that results from unrealised gains and losses on securities
classified as available for sale is recognised in shareholders' equity along
with those unrealised gains and losses.
Current tax payable by any Group company on distribution to the holding company
of the undistributed profits of any subsidiaries is recognised as deferred tax
unless the timing of the distribution of those profits is controlled by the
holding company and the temporary difference is not expected to reverse in the
foreseeable future.
In accordance with IAS 12 'Income Taxes', deferred taxation is provided on
temporary differences arising from the revaluation of fixed assets even where
there is no commitment to sell the asset.
Deferred tax assets and liabilities are offset when there is a legally
enforceable right to set off current tax assets against current tax liabilities
and when they relate to income taxes levied by the same taxation authority and
the Group intends to settle its current tax assets and liabilities on a net
basis.
Borrowings
Borrowings are recognised initially at fair value, net of transaction costs
incurred. Borrowings are subsequently stated at amortised cost; any difference
between the proceeds (net of transaction costs) and the redemption value is
recognised in the income statement over the period of the borrowings using the
effective interest method.
Provisions
a) Restructuring costs and legal claims
Provisions for restructuring costs and legal claims are recognised when the
Group has a present legal or constructive obligation as a result of a past
event, it is more likely than not that an outflow of resources will be required
to settle the obligation, and the amount has been reliably estimated.
Restructuring provisions comprise lease termination penalties and employee
termination payments. Provisions are not recognised for future operating losses.
Where there are a number of similar obligations, the likelihood that an outflow
will be required in settlement is determined by considering the class of
obligations as a whole. A provision is recognised even if the likelihood of an
outflow with respect to any one item included in the same class of obligations
may be small.
b) Levies
The Group is subject to various insurance-related assessments or guarantee fund
levies. Related provisions are provided for where there is a present obligation
(legal or constructive) as a result of a past event.
Share capital
Shares are classified as equity when there is no obligation to transfer cash or
other assets. Incremental costs directly attributable to the issue of equity
instruments are shown in equity as a deduction from the proceeds, net of tax.
Incremental costs directly attributable to the issue of equity instruments as
consideration for the acquisition of a business are included in the cost of
acquisition.
Accounting developments
In the current financial year, the Group will adopt International Financial
Reporting Standard 7 'Financial Instruments: Disclosures' ('IFRS 7') for the
first time. As IFRS 7 is a disclosure standard, there is no impact of that
change in accounting policy on this interim report. Full details of the change
will be disclosed in our annual report for the year ending 31 December 2007.
NOTES TO THE FINANCIAL STATEMENTS
4 Segmental information
Primary segment information - operating results by operating segment
The Group managed and conducted its business through four principal operating
segments representing London market business, North American business including
alternative risk transfer and reinsurance, Continental European reinsurance and
financial services - the central investment operation.
The operating result of each of these operating segments before the impact of
intra-group quota share arrangements is shown below.
Six months ended 30 June Alea Alea Alea Alea Non - Total
2007 London North Europe Financial allocated
America Services
$'000 $'000 $'000 $'000 $'000 $'000
Gross Premiums Written 1,888 (1,610) 7,745 - - 8,023
Revenue
Net insurance premium 4,689 (2,226) 8,760 - - 11,223
revenue
Fee income - 186 1,771 - - 1,957
Investment income - - - 38,858 - 38,858
Net realised losses on - - - (1,120) - (1,120)
financial assets
Total revenue 4,689 (2,040) 10,531 37,738 - 50,918
Expenses
Net insurance claims 3,757 (13,656) (4,922) - - (14,821)
Acquisition costs (3,750) 945 (2,031) - - (4,836)
Other operating expenses (11,193) (7,684) (6,128) - (2,167) (27,172)
Restructuring costs (518) (277) - - - (795)
Total expenses (11,704) (20,672) (13,081) - (2,167) (47,624)
Results of operating (7,015) (22,712) (2,550) 37,738 (2,167) 3,294
activities
Finance costs - - - (13,532) - (13,532)
(Loss)/profit before (7,015) (22,712) (2,550) 24,206 (2,167) (10,238)
income tax
Income tax expense - - - - (725) (725)
(Loss)/profit for the (7,015) (22,712) (2,550) 24,206 (2,892) (10,963)
period
Six months ended 30 June Alea Alea Alea Alea Non - Total
2006 London North Europe Financial allocated
America Services
$'000 $'000 $'000 $'000 $'000 $'000
Gross Premiums Written (16,948) (21,159) 166 - - (37,941)
Revenue
Net insurance premium 89,594 97,838 22,248 - - 209,680
revenue
Fee income 309 100 - - - 409
Investment income - - - 49,177 - 49,177
Net realised losses on - - - (1,426) - (1,426)
financial assets
Net realised gains on - - 930 - - 930
sale of renewal rights
Total revenue 89,903 97,938 23,178 47,751 - 258,770
Expenses
Net insurance claims (66,302) (68,865) (13,765) - - (148,932)
Acquisition costs (25,444) (31,963) (6,774) - - (64,181)
Other operating expenses (10,072) (18,577) (11,496) - (2,343) (42,488)
Restructuring (costs)/ (2,572) 1,016 - - - (1,556)
releases
Total expenses (104,390) (118,389) (32,035) - (2,343) (257,157)
Results of operating (14,487) (20,451) (8,857) 47,751 (2,343) 1,613
activities
Finance costs - - - (15,971) - (15,971)
(Loss)/profit before (14,487) (20,451) (8,857) 31,780 (2,343) (14,358)
income tax
Income tax credit - - - - 3,712 3,712
(Loss)/profit for the (14,487) (20,451) (8,857) 31,780 1,369 (10,646)
period
Year ended 31 December 2006 Alea Alea Alea Alea Non - Total
London North Europe Financial allocated
America Services
$'000 $'000 $'000 $'000 $'000 $'000
Gross Premiums Written 21,247 (102,368) 6,202 - - (74,919)
Revenue
Net insurance premium revenue 129,312 61,973 24,631 - - 215,916
Fee income 502 2,641 - - - 3,143
Investment income - - - 94,821 - 94,821
Net realised losses on financial - - - (2,500) - (2,500)
assets
Net realised gains on sale of - 4,336 - - - 4,336
disposal group
Net realised (losses)/gains on (800) (5,164) 944 - - (5,020)
sale of renewal rights
Total revenue 129,014 63,786 25,575 92,321 - 310,696
Expenses
Net insurance claims (85,795) (58,285) (12,612) - - (156,692)
Acquisition costs (38,292) (23,466) (7,534) - - (69,292)
Other operating expenses (18,288) (29,148) (15,032) - (4,087) (66,555)
Restructuring (costs)/releases (4,135) 205 2,843 - - (1,087)
Total expenses (146,510) (110,694) (32,335) - (4,087) (293,626)
Results of operating activities (17,496) (46,908) (6,760) 92,321 (4,087) 17,070
Finance costs - - - (24,407) - (24,407)
(Loss)/profit before income tax (17,496) (46,908) (6,760) 67,914 (4,087) (7,337)
Income tax credit - - - - 6,502 6,502
(Loss)/profit for the period (17,496) (46,908) (6,760) 67,914 2,415 (835)
The Group has intra group quota share arrangements between the following legal
companies Alea London Limited, Alea Bermuda Ltd, Alea North America Insurance
Company, Alea North America Specialty Insurance Company1 (collectively Alea US)
and Alea Europe Ltd. The impact of intra-group quota share arrangements on
operating result with regards to these legal entities are shown and explained
below.
The group quota share arrangements comprise a 50% quota share of certain 2000
and prior underwriting year business from Alea Europe to Alea Bermuda and a 70%
quota share of Alea North America to Alea Bermuda. A 35% quota share of Alea
London business to Alea Europe was commuted as at 30 September 2006.
The effects of all of these arrangements are detailed below:
Six months ended 30 June Alea Alea Alea Alea Total
2007 London Bermuda US Europe
$'000 $'000 $'000 $'000 $'000
Net insurance premium 4,689 392 (2,618) 8,760 11,223
revenue
Intercompany reinsurance - 16,437 (16,387) (50) -
Net insurance premium 4,689 16,829 (19,005) 8,710 11,223
revenue after intercompany
reinsurance
Underwriting result 2
Before intercompany (7,015) (8,604) (16,275) (2,550) (34,444)
reinsurance
After intercompany (3,693) (20,496) (10,689) 434 (34,444)
reinsurance
Six months ended 30 June Alea Alea Alea Alea Total
2006 London Bermuda US Europe
$'000 $'000 $'000 $'000 $'000
Net insurance premium 89,594 471 97,367 22,248 209,680
revenue
Intercompany reinsurance (31,293) 68,285 (68,157) 31,165 -
Net insurance premium 58,301 68,756 29,210 53,413 209,680
revenue after intercompany
reinsurance
Underwriting result 2
Before intercompany (14,487) (10,959) (11,835) (9,787) (47,068)
reinsurance
After intercompany (14,110) (13,344) (15,651) (3,963) (47,068)
reinsurance
Year ended 31 December Alea Alea Alea Alea Total
2006 London Bermuda US Europe
$'000 $'000 $'000 $'000 $'000
Net insurance premium 129,312 4,099 57,874 24,631 215,916
revenue
Intercompany reinsurance (31,313) 39,345 (39,534) 31,502 -
Net insurance premium 97,999 43,444 18,340 56,133 215,916
revenue after intercompany
reinsurance
Underwriting result 2
Before intercompany (16,697) (21,548) (28,618) (7,704) (74,567)
reinsurance
After intercompany (11,886) (23,968) (37,185) (1,528) (74,567)
reinsurance
1 Alea North America Specialty Insurance Company was disposed on 29 September
2006 as detailed in note 10.
2 Results of operating activities excluding investment income, net realised
gains on financial assets, net realised gains on sale of disposal group and
intangible assets and net realised gains on sale of renewal rights.
Secondary segment information - geographical analysis
The following provides an analysis of gross premiums written and of (loss)/
profit before tax by location of legal entity accepting the risk.
Geographical analysis by location of legal entity
Gross premiums written (Loss)/profit before tax
Six months ended Six months Year ended Six months Six months Year ended
ended ended ended
30 June 2007 31 December 31
30 June 2006 2006 30 June 30 June December
$'000 2007 2006 2006
$'000 $'000 $'000 $'000 $'000
Bermuda 704 (1,574) 1,735 (14,654) 1,543 (8,176)
Jersey - 89 74 - (167) (1,606)
United 1,936 7,135 20,973 5,929 (6,601) 5,958
Kingdom
United (2,315) (43,757) (104,102) (8,786) (13,284) (24,570)
States
Switzerland 7,698 166 6,401 7,273 4,151 21,057
8,023 (37,941) (74,919) (10,238) (14,358) (7,337)
As at As at As at
30 June 2007 30 June 2006 31 December 2006
$'000 $'000 $'000
Operating equity and shareholders'
equity interests
Alea Europe Ltd 236,279 209,019 230,660
Alea (Bermuda) Ltd 1 222,584 263,440 226,651
Alea US 236,463 263,680 241,491
Amounts held in Holding Companies 20,542 (6,398) 103,703
Amounts held in non-insurance (2,241) 1,884 (1,097)
subsidiaries
Note provided by Alea Europe Ltd to - 32,505 -
Alea US
713,627 764,130 801,408
Amounts owed to credit institutions (124,858) (199,290) (199,574)
Trust preferred securities (117,744) (117,693) (117,693)
Shareholders' funds attributable to 471,025 447,147 484,141
equity interests
1 The entities wholly owned by Alea (Bermuda) Ltd have net assets as follows:
As at As at As at
30 June 2007 30 June 2006 31 December 2006
$'000 $'000 $'000
Alea London Ltd 93,005 70,729 87,954
Alea Global Risk Ltd 2 - 6,032 -
Alea Jersey Ltd 2 - 1,159 -
2 These entities were liquidated in the fourth Quarter 2006.
5 Investment income
Six months Six months Year ended
ended ended 31 December 2006
30 June 2007 30 June 2006
$'000 $'000 $'000
Financial assets - available for sale:
- Interest income from debt securities 33,751 45,084 86,537
Cash and cash equivalents interest 5,107 4,093 8,284
income
38,858 49,177 94,821
6 Net realised (losses)/gains on sale of renewal rights
Alea London Alea North Alea Europe Total
Limited America Limited
Insurance
Company
$'000 $'000 $'000 $'000
Six months ended 30 June - - - -
2007
Six months ended 30 June - - 930 930
2006
Year ended 31 December (800) (5,164) 944 (5,020)
2006
The Group completed three renewal rights transactions in the fourth quarter of
2005. These were accounted for as net realised gains on sale of renewal rights
of $61.1 million, which was recognised in the year ended 31 December 2005, and
represented the Directors' valuation at fair value of the business sold. In
determining the fair market value of renewal rights sales, the Board considered
the prior production and growth of the businesses sold, external projections and
a recent assessment of the businesses sold. The fair market value of the renewal
rights is regularly evaluated by the Board based on available data.
In the six months the 30 June 2007 a charge of $nil million was recognised in
respect of the renewal rights transactions (six months ended 30 June 2006 credit
of $0.9 million, year ended 31 December 2006 charge of $5.0 million). These
amounts reflect the necessary changes to the fair value which is based on the
latest financial data available. These amounts reflect the discounted estimated
future cash flows arising from specified percentages of applicable
commissionable premiums written over the applicable period in accordance with
sale contracts.
The gains were calculated as the fair value of consideration receivable ($56.1
million). The Group has received payments to date of $22.4 million. The
remaining balance of $33.7 million is included within loans and receivables
including insurance receivables. The non-current portion of the receivable is
$31.5 million.
These amounts represent the Directors' best estimates of the risk adjusted
future receipts discounted at 4.5%. These receipts are dependent upon the future
levels of business generated on renewal in relation to the rights sold over
differing time periods as specified in the sale contracts.
The key data is:
Alea London Alea North Alea Europe
Limited America Limited
Insurance
Company
2005 Premium of business $ millions 167 405 252
sold
Estimated premium to be $ millions 144 1,508 86
received during contract
period
Contract period years 2 5 1
Best estimate of receipts $ millions 7 42 7
Contractual maximum sales $ millions 30 75 30
proceeds
7 Restructuring costs
In 2005, the Group announced its intention to run-off all remaining property and
casualty business. Those fixed assets not subject to renewal rights agreements
and not required for the run-off operations have been written down to their
residual value. Redundancy costs have been incurred in Connecticut. A
restructuring provision has been established for employees in London, Basel and
Zug. This provision includes estimated expenses for future redundancy payments
for employees who cannot be redeployed in the new structure. The provision also
contains estimated expenses with regards to onerous contracts. Onerous contracts
are operating leases in respect of any premises that are expected to be vacated
as part of the restructuring. The provision was established based on a run-off
plan approved by the Board of Directors. Other costs are included in the claims
handling provisions.
Six months ended 30 June 2007
Alea UK Alea US Alea Total
Europe
$'000 $'000 $'000 $'000
Redundancy costs incurred in excess of 518 277 - 795
the provision established based on
run-off plan 1
Total restructuring costs 518 277 - 795
Six months ended 30 June 2006
Alea UK Alea US Alea Total
Europe
$'000 $'000 $'000 $'000
Redundancy costs incurred in excess of 2,572 1,484 - 4,056
the provision established based on
run-off plan 1
Reversal of estimated restructuring - (2,500) - (2,500)
provision related to onerous contracts
2
Total restructuring costs 2,572 (1,016) - 1,556
Year ended 31 December 2006
Alea UK Alea US Alea Total
Europe
$'000 $'000 $'000 $'000
Redundancy costs incurred in excess of 4,135 2,295 - 6,430
the provision established based on
run-off plan 1
Reversal of estimated restructuring - - (2,843) (2,843)
provision due to redundancies in other
entities 3
Reversal of estimated restructuring - (2,500) - (2,500)
provision related to onerous contracts
2
Total restructuring costs 4,135 (205) (2,843) 1,087
1 Redundancy costs incurred reflect severance payable to employees who were not
part of the original restructuring plan as disclosed for 31 December 2005.
2 Restructuring costs also include a credit of $2.5 million which results from
Alea North America's sublease of its empty offices in Wilton and a resulting
reversal of part of the previously recognised provision for onerous contracts.
3 In order to execute the run-off plan, the Group reassessed where centres of
competency should be located geographically. This resulted in revisions being
made to the locations of where staff were retained and consequently additional
severance payments were incurred by Alea London and Alea North America whilst
Alea Europe was able to reverse an element of the restructuring provision
previously established.
8 Income tax expense/(credit)
Six months ended Six months ended Year ended
30 June 2007 30 June 2006 31 December 2006
$'000 $'000 $'000
Current tax expense/(credit):
UK corporation tax 130 288 326
Foreign tax 521 (2,077) (4,934)
Total current tax 651 (1,789) (4,608)
Deferred tax 74 (1,923) (1,894)
Total income tax expense/(credit) 725 (3,712) (6,502)
The Group's Swiss and UK entities have significant trading losses carried
forward in respect of which no deferred tax assets have been recognised due to
the unpredictability of future profit streams.
The corporation tax for the interim periods ended 30 June 2007 and 30 June 2006
was calculated so as to represent the best estimate of the weighted average
annual corporation tax rate expected for the full financial year.
9 Earnings per share
The calculation of the basic and diluted earnings per share is based on the
following data:
Earnings Six months Six months Year ended
ended ended 31 December
30 June 2007 30 June 2006 2006
$ $ $
Earnings for the purposes of basic earnings per share (10,963,577) (10,645,842) (835,201)
being net loss attributable to equity holders of the Company
Effect of dilutive potential ordinary shares: - - -
Earnings for the purposes of diluted earnings per share (10,963,577) (10,645,842) (835,201)
Number of shares Six months Six months Year ended
ended ended 31 December
30 June 2007 30 June 2006 2006
Number Number Number
Weighted average number of ordinary shares for the 173,788,126 173,718,475 173,738,502
purposes of basic earnings per share
Effect of dilutive potential ordinary shares:
- Share options - - -
Weighted average number of ordinary shares for the 173,788,126 173,718,475 173,738,502
purposes of diluted earnings per share
10 Sale of disposal group
Alea North America Specialty Insurance Company
Alea North America Insurance Company ("ANAIC") sold its Delaware excess and
surplus lines carrier, Alea North America Specialty Insurance Company ("ANASIC")
to Insurance Corporation of Hannover, a member company of Praetorian Financial
Group, Inc. on 29 September 2006. ANAIC received a cash payment of $34.7 million
representing $4 million plus the statutory policyholders' surplus of ANASIC as
at date of sale. The Group has recognised in its IFRS accounts a net realised
gain on the sale of $4.3 million.
On the date of the sale, the Group's Alea (Bermuda) Ltd affiliate assumed 100%
of all business written by ANASIC prior to the closing date. The obligations
under the agreements are supported by a guarantee of the Company.
As at 30 June As at 30 June As at 29
2007 2006 September 2006
$'000 $'000 $'000
ASSETS
Deferred acquisition costs - 50 45
Financial assets
Debt securities
- available for sale - 31,727 25,532
Loans and receivables - 245 2,853
including insurance
receivables
Reinsurance contracts - 10,528 9,487
Cash and cash equivalents - 495 4,477
Total assets - 43,045 42,394
LIABILITIES
Insurance contracts - 12,258 11,769
Other liabilities and - 125 177
charges
Trade and other payables - 32 58
Total liabilities - 12,415 12,004
Net assets - 30,630 30,390
Net realised gains on sale - - 4,336
of disposal group
Total net consideration - - 34,726
The total consideration was
satisfied in cash.
Net cash inflow arising on
disposal:
Cash consideration - - 34,726
Cash and cash equivalents - - (4,477)
disposed of
Total net cash inflow on - - 30,249
disposal
11 Insurance and reinsurance contracts
Insurance and reinsurance contracts are comprised of the following:
As at 30 As at 30 June 2006 As at 31
June 2007 December 2006
$'000 $'000 $'000
Gross claims outstanding
Provision for claims outstanding, 1,707,763 2,415,042 1,957,249
reported and not reported
Discount (95,584) (127,702) (105,855)
1,612,179 2,287,340 1,851,394
Claims handling provisions 16,124 25,509 17,823
Total gross claims outstanding 1,628,303 2,312,849 1,869,217
Provision for unearned premiums on 69,777 138,811 72,297
insurance contracts
Total insurance contracts 1,698,080 2,451,660 1,941,514
Aggregate excess reinsurance
Provision for claims outstanding, 288,308 321,270 299,544
reported and not reported
Discount (5,486) (9,132) (7,657)
Net aggregate excess reinsurance 282,822 312,138 291,887
Other reinsurance
Provision for claims outstanding, 538,601 659,810 573,216
reported and not reported
Discount (4,431) (3,866) (2,665)
Net other reinsurance 534,170 655,944 570,551
Total reinsurance
Provision for claims outstanding, 826,909 981,080 872,760
reported and not reported
Discount (9,917) (12,998) (10,322)
Total reinsurers' share of claims 816,992 968,082 862,438
outstanding
Provision for unearned premiums on 645 32,925 1,037
reinsurance contracts
Total reinsurance contracts 817,637 1,001,007 863,475
Undiscounted claims outstanding, net of 896,978 1,459,471 1,102,312
reinsurance
Discount (85,667) (114,704) (95,533)
Claims outstanding net of reinsurance 811,311 1,344,767 1,006,779
As at 30 As at 30 June 2006 As at 31
June 2007 December 2006
$'000 $'000 $'000
Security held for aggregate excess
reinsurance
Deposits received from reinsurers 45,246 46,946 46,119
Trust fund and LOC collateral available 232,970 260,561 240,182
against aggregate excess contracts
Total collateral available against 278,216 307,507 286,301
aggregate excess reinsurance recoverable
12 Borrowings
The borrowings are repayable As at 30 June As at 30 June 2006 As at 31
as follows: 2007 December 2006
$'000 $'000 $'000
On demand or within one year 125,000 - 200,000
In the second year - 200,000 -
In the third to fifth years - - -
inclusive
After five years 120,000 120,000 120,000
Total borrowings 245,000 320,000 320,000
Less: Capitalised debt raising (2,398) (3,017) (2,733)
expenses
Total borrowings net of 242,602 316,983 317,267
capitalised expenses
Analysis of borrowings:
As at 30 June As at 30 June 2006 As at 31
2007 December 2006
$'000 $'000 $'000
Amounts owed to credit 125,000 200,000 200,000
institutions
Trust preferred securities 120,000 120,000 120,000
Total borrowings 245,000 320,000 320,000
All borrowings are recorded at fair value.
Amounts owed to credit institutions
Subsequent to the balance sheet date, on 6 July 2007, the Group negotiated a new
term loan credit facility with Banc of America Securities Limited as facility
agent. Under this agreement, the Group drew down the maximum aggregate
commitment of $90.0 million, which, along with $35.0 million of its own cash
reserves, was used to repay the entire remaining amount of $125.0 million due
under pre-existing bank facility.
The conditions attaching to both facilities are detailed below.
Conditions attaching to amounts owed to credit institutions as at 30 June 2007
The three-year bank term loan of $200.0 million and the $50.0 million revolver
carried an interest margin of 120 basis points, which was adjustable based upon
the Standard and Poor's debt ratings for Alea. The $50.0 million revolver
facility was additionally subject to a commitment fee of 40% of the applicable
margin.
These borrowings fell due for repayment in September 2007. On 19 April 2007, the
Group repaid $25.0 million of the term loan and all of $50.0 million revolver
using its cash reserves, leaving an outstanding amount at 30 June 2007 of $125.0
million.
Conditions attaching to the term loan agreed 6 July 2007
The Group drew down the maximum aggregate commitment under this new term loan
agreement of $90.0 million. This was due for repayment in three equal
instalments of $30.0 million on 16 October 2007, 14 January 2008 and 18 July
2009. However, the Group made an optional prepayment of $60.0 million on
18 July 2007. The remaining $30.0 million falls due for repayment on 18 July
2009.
The new term loan carries an interest rate of LIBOR plus 200 basis points.
The loan imposes restrictive covenants including tangible minimum equity,
debt-to-capitalisation ratio limitations, limitations on the granting of liens,
payment of dividends, other dispositions of assets, increased indebtedness and
distribution of assets.
Trust preferred securities
In December 2004, the Group issued $100.0 million of trust preferred securities
and had in place a commitment for an additional $20.0 million of trust preferred
securities issued in January 2005. These securities (issued from three Delaware
trusts established by Alea Holdings US Company, of which one trust was
established in January 2005) provide for a preferred dividend at a rate of three
month LIBOR plus 285 basis points. These securities allow for the postponement
of preferred dividends under certain circumstances for up to five years. These
securities carry no financial covenants and no cross default covenants, have a
fixed maturity of 30 years, and are callable after five years.
13 Provisions
Restructuring
Provision
$'000
At 31 December 2005 17,562
Utilisation of provision due to onerous contracts (1,233)
Reversal of provision due to onerous contracts 1 (2,500)
Utilisation of provision due to severance payments (4,960)
Exchange difference 636
At 30 June 2006 9,505
Utilisation of provision due to onerous contracts (819)
Utilisation of provision due to severance payments (3,678)
Exchange difference 233
At 31 December 2006 5,241
Utilisation of provision due to onerous contracts (907)
Utilisation of provision due to severance payments (285)
Exchange difference 15
At 30 June 2007 4,064
1 As a result of Alea North America's sublease of its empty offices in Wilton a
reversal of the previously recognised provision for onerous contracts has been
made. The reversal is part of the restructuring costs presented in the income
statement.
For further details regarding the restructuring costs see note 7.
14 Consolidated statement of changes in equity
Attributable to equity holders of the Company
Share Share Capital Revaluation Hedging and Retained Share based Total
capital premium reserve reserve 1 translation earnings payment
reserves 2 reserve
$'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000
As at 1 1,738 629,668 75,381 (23,697) 5,305 (204,974) 720 484,141
January 2007
Loss of the (10,963) (10,963)
period
Revaluation on (5,716) (5,716)
available for
sale
investments -
gross
Revaluation - -
on available
for sale
investments -
tax
Movement in (96) (96)
share based
payment
reserve
Translation 3,659 3,659
gains - gross
Translation - -
gains - tax
As at 30 June 1,738 629,668 75,381 (29,413) 8,964 (215,937) 624 471,025
2007
Attributable to equity holders of the Company
Share Share Capital Revaluation Hedging and Retained Share based Total
capital premium reserve reserve 1 translation earnings payment
reserves2 reserve
$'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000
As at 1 1,737 629,311 75,381 (12,671) (176) (204,139) 986 490,429
January
2006
Loss of the (10,646) (10,646)
period
Revaluation (36,607) (36,607)
on available
for sale
investments
- gross
Revaluation - -
on available
for sale
investments
- tax
Movement in (187) (187)
share based
payment
reserve
Translation 4,158 4,158
gains -
gross
Translation - -
gains - tax
As at 30 1,737 629,311 75,381 (49,278) 3,982 (214,785) 799 447,147
June 2006
Attributable to equity holders of the Company
Share Share Capital Revaluation Hedging and Retained Share based Total
capital premium reserve reserve 1 translation earnings payment
reserves 2 reserve
$'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000
As at 1 1,737 629,311 75,381 (12,671) (176) (204,139) 986 490,429
January
2006
Issuance of 1 357 (358) -
shares
Loss of the (835) (835)
year
Revaluation (11,026) (11,026)
on
available
for sale
investments
- gross
Revaluation - -
on
available
for sale
investments
- tax
Movement in 92 92
share based
payment
reserve
Translation 5,481 5,481
gains -
gross
Translation - -
gains - tax
As at 31 1,738 629,668 75,381 (23,697) 5,305 (204,974) 720 484,141
December
2006
1 The revaluation reserve is a component of shareholders' equity that is used to
record the difference between the market value of available for sale investments
carried on the balance sheet and the amortised cost of those assets. Unrealised
gains and losses arising when the market value is compared with the amortised
cost of the assets are taken to this reserve.
2 Movements in the unrealised gains and losses arising from the translation of
the Group's assets and liabilities denominated in functional currencies of the
Group are shown in the hedging and translation reserve.
15 Cash (used in)/generated from operations
Six months ended Six months Year ended
30 June 2007 ended 31 December
30 June 2006 2006
$'000 $'000 $'000
Loss for the period (10,963) (10,646) (835)
Adjustments for:
- tax expense/(credit) 725 (3,712) (6,502)
- depreciation 1,370 1,955 4,142
Net cash flows for the period transferred to investing (29,264) (45,832) (85,429)
activities
(Profit)/loss on sale of property, plant and (12) 42 305
equipment
Net realised gains on sale of disposal Group - - (4,336)
Debt interest expense 10,976 11,282 22,990
(Profit)/loss on foreign exchange (8,381) 8,311 1,500
Change in operating assets and liabilities (excluding the effect of acquisitions and
exchange differences on consolidation)
Net decrease in insurance liabilities (236,938) (464,492) (979,468)
Net decrease in reinsurance assets 36,216 69,059 212,680
Net decrease in loans and receivables 94,069 212,294 364,831
Net (decrease)/increase in other operating (88,685) 24,304 (116,968)
liabilities
Net movement in share based payment reserve (96) (187) 91
Cash used in operations (230,983) (197,622) (586,999)
16 Contingent liabilities
Structured settlements
The Group, through the Canadian branch of Alea Europe Ltd, has assumed ownership
of certain structured settlements and has purchased annuities from life assurers
to provide fixed and recurring payments to those underlying claimants. As a
result of these arrangements, the Group is exposed to a credit risk to the
extent that any of these insurers are unable to meet their obligations under the
structured settlements. This risk is viewed by the Directors as being remote as
the annuities are fully funded and the Group has only purchased annuities from
Canadian insurers with a financial stability of AA or higher (Standard &
Poor's). The Canadian branch is in run-off and the branch discontinued accepting
assignments of annuities in August 2001.
In the event of all the relevant life insurers being unable to meet their
obligations under the structured settlements, at 30 June 2007, the total
exposure, net of amounts that may be recoverable from the Compensation
Corporation of Canada (a Canadian industry-backed compensation scheme), is
estimated to be 42.5 million Canadian Dollars ($40.1 million) and the maximum in
relation to any one insurer 18.3 million Canadian Dollars ($17.3 million).
Subpoenas and requests for information/regulatory matters
The US domiciled insurance members of the Group received certain subpoenas and
information requests with respect to the ongoing investigations by various
regulators and governmental authorities relating to industry??wide
investigations into US producer compensation practices and arrangements. In
November 2004, Alea North America Insurance Company ("ANAIC") received a
subpoena from the Attorney General of New York and, together with Alea North
America Speciality Insurance Company ("ANASIC"), received inquiries from the
insurance departments of Delaware and North Carolina. No allegations of
wrongdoing have been made against ANAIC, ANASIC nor any of their employees, nor
does the Group have reason to believe that any of them are specific targets of
any investigation.
The Group has cooperated fully with these inquiries. After concluding their
internal investigations in connection with these matters, these member companies
have reported to these regulatory authorities that they have identified no
transactions or information causing concern, nor are they aware of any improper
conduct.
Certain members of the Group have received subpoenas and information requests
with respect to finite reinsurance from the US Securities and Exchange
Commission, the FSA, the Australian Prudential Regulatory Authority and the
Florida and Delaware state insurance authorities.
The Group has cooperated or is cooperating fully with each authority from which
it has received an inquiry and is aware of no improper conduct.
These industry??wide investigations, including certain of the investigations to
which the Group is a party, are ongoing and it is not possible to predict the
impact that these investigations, or any enquiries specific to the Group, may
have on the Group's current or future business and financial results. Moreover,
there can be no assurance that further investigations will not be initiated or
reopened in the future.
In connection with a periodic market conduct examination, the California
Department of Insurance has disputed certain fees collected from policyholders
by two agents of one of the Group's subsidiaries. The Group disagrees with the
Department's position, but is cooperating to audit these fee arrangements. The
agreements with the agents involved have been terminated. It is not possible to
predict the impact of this dispute on the Group's financial results.
17 Related party transactions
Kohlberg Kravis Roberts & Co., L.P./Fisher Capital Corp. L.L.C.
At 30 June 2007, certain parties related to Kohlberg Kravis Roberts & Co., L.P.
owned in excess of 40% of the Company's issued shares. In connection with that
ownership, the Company had in place certain relationship, management rights,
shareholder and advisory fee agreements, as amended with Kohlberg Kravis Roberts
& Co., L.P., KKR 1996 Fund (Overseas), Limited Partnership, KKR Partners
(International), Limited Partnership and Fisher Capital Corp. L.L.C. These
agreements were further described in the Company's Listing Particulars dated 14
November 2003. The Group paid annual advisory fees of $750,000 to Kohlberg
Kravis Roberts & Co., L.P., an affiliate of KKR 1996 Fund (Overseas), Limited
Partnership, a shareholder and KKR Partners (International), Limited
Partnership, also a shareholder and $350,000 to Fisher Capital Corp. L.L.C.,
also a shareholder. In connection with negotiations pertaining to acquisition of
control of the Company by FIN Acquisition Limited, Kohlberg Kravis Roberts &
Co., L.P. and Fisher Capital Corp. LLC agreed to waive payment of these fees for
the period commencing 1 April 2007. As at 30 June 2007, Kohlberg Kravis Roberts
& Co., L.P. and Fisher Capital Corp. LLC received $187,500 and $87,500,
respectively. As at 30 June 2007 the balance due under these arrangements was
$Nil (30 June 2006: $Nil). Certain of the Company's former Directors were
interested in these entities as described in the Directors' Report included
within the Annual Report 2006.
Loans to officers
Loans to officers were offered in connection with their purchase of Company
shares and are interest bearing are full recourse and made on consistent terms
as those to other employees. Mr M Ricciardelli received a loan of $375,000 in
connection with his purchase of pledged shares at a cost of $750,000 in March
2004 bearing interest at 1 year LIBOR set on the funding date and reset annually
on each anniversary thereof. Mr M Ricciardelli repaid his loan plus accrued
interest in 2006 from the proceeds from the sales of his pledged shares and
restricted stock units.
As at 30 June 2007 the Group had loans to key management personnel, in aggregate
principal amounts of $39,998 (30 June 2006: $450,000). The number of key
management personnel that had outstanding loans at 30 June 2007 was 1 (30 June
2006: 3). Key management personnel are as described below.
Appleby Hunter Bailhache
Timothy C Faries, a Director of the Company, is a partner and the Insurance Team
Practice Leader at Appleby Hunter Bailhache, Barristers & Attorneys, in Bermuda.
In the six months to 30 June 2007 the Company paid $81,866 (six months to 30
June 2006: $42,699) in respect of fees for legal and corporate administrative
services provided by Appleby Hunter Bailhache.
As at 30 June 2007 the amount outstanding was $51,636 (30 June 2006: $15,325).
Key management personnel
The Group considers its key management personnel to include its Directors and
those members of management reporting directly to its Executive Directors that
have executive management responsibility for Group-wide operations.
Remuneration of key management personnel
The remuneration of the Directors and those members of management reporting
directly to its Executive Directors that have executive management
responsibility for Group-wide operations, who are the key management personnel
of the Group, is set out below in aggregate for each of the categories specified
in IAS 24 Related Party Disclosures. For period ended 30 June 2007 this included
9 individuals (2006: 12).
Six months ended 30 Six months ended 30 Year ended 31
June 2007 June 2006 December 2006
Short-term employee $1,103,518 $1,169,411 $3,190,672
benefits
Post-employment $56,417 $14,250 $41,571
benefits
Other long-term Nil $119,194 $114,783
benefits
Termination benefits $125,620 $192,234 $2,244,314
Share-based payment Nil $65,072 $171,830
Total $1,285,555 $1,560,161 $5,763,170
Key management personnel employment and retention contracts
Members of the Group have entered into employment and retention contracts with
Executive Directors and/or certain members of key management, in each case
taking into account the practices in the jurisdiction where the Group operates.
Terms of these agreements as they apply to the Company's Directors at year-end
2006 are set out in the Director's Remuneration Report included within the
Annual Report 2006. Termination benefits in the table above include amounts paid
in the first six months period of 2006 and 2007 to departing Executive Directors
and certain members of key management in settlement of such contracts, to the
extent not reported in earlier periods.
Share and loan transactions with members of key management
Kirk Lusk
Mr Lusk was granted a $49,998 loan in connection with the common share purchase
program, bearing interest at 4.1625% and repayable in instalments of 20% each 31
August, commencing in 2005. The Board approved a deferral of principal repayment
on Mr Lusk's loan in 2005. In October 2006, Mr Lusk paid the 2006 principal
instalment of $10,000 on this loan plus accrued interest of $2,118 through the
instalment payment date. On 12 June, 2007, Mr Lusk agreed to repay the full
principal balance of his loan and accrued interest with the proceeds on the
tender of his shares to FIN Acquisition Limited.
Thomas Weidman
Mr Weidman was granted a $99,999 loan in connection with the share purchase
program, bearing interest at 3.7665% and repayable in instalments of 20% each 31
August commencing in 2006. The Board approved a deferral of principal and
interest on Mr Weidman's loan in 2006. Mr Weidman fully repaid the principal
balance of his loan plus accrued interest in July 2007 with the proceeds of the
sale of his shares of the Company. In accordance with the terms of his RSU
award, Mr Weidman was issued 6,543 RSU shares on 21 September 2006. In
connection with his separation arrangements, on 31 March 2007, Mr Weidman
forfeited his remaining 19,629 RSU shares.
Mark Ricciardelli
In connection with Mr M Ricciardelli's separation arrangements, on 29 June 2006,
the Company agreed that it would vest all restricted stock units not already
vested and deliver the underlying shares (totalling 70,918 shares) to Mr M
Ricciardelli for sale. A portion of the proceeds of the sale of such shares,
together with the simultaneous sale of shares purchased in 2004 by Mr M
Ricciardelli (164,821 shares) were used to satisfy the balance of Mr
Ricciardelli's loan of $300,000 plus accrued interest of $13,360 through 31
August 2006, his last day of employment.
INDEPENDENT REVIEW REPORT TO ALEA GROUP HOLDINGS (BERMUDA) LTD
Introduction
We have been instructed by the company to review the financial information for
the six months ended 30 June 2007 which comprise the Consolidated Income
Statement, the Consolidated Balance Sheet, the Consolidated Cash Flow Statement,
the Consolidated Statement of Recognised Income and Expense and the related
notes 1 to 17. We have read the other information contained in the interim
report and considered whether it contains any apparent misstatements or material
inconsistencies with the financial information.
This report is made solely to the company in accordance with Bulletin 1999/4
issued by the Auditing Practices Board. Our work has been undertaken so that we
might state to the Company those matters we are required to state to them in an
independent review report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone other than
the Company, for our review work, for this report, or for the conclusions we
have formed.
Directors' responsibilities
The Interim Report, including the financial information contained therein, is
the responsibility of, and has been approved by, the Directors. The Directors
are responsible for preparing the Interim Report in accordance with the Listing
Rules of the Financial Services Authority which require that the accounting
policies and presentation applied to the interim figures are consistent with
those applied in preparing the preceding Annual Accounts except where any
changes, and the reasons for them, are disclosed. The Directors have elected not
to comply with International Accounting Standard 34 Interim Financial Reporting.
Review work performed
We conducted our review in accordance with the guidance contained in Bulletin
1999/4 issued by the Auditing Practices Board for use in the United Kingdom. A
review consists principally of making enquiries of group management and applying
analytical procedures to the financial information and underlying financial data
and, based thereon, assessing whether the accounting policies and presentation
have been consistently applied unless otherwise disclosed. A review excludes
audit procedures such as tests of controls and verification of assets,
liabilities and transactions. It is substantially less in scope than an audit
performed in accordance with International Standards on Auditing (UK and
Ireland) and therefore provides a lower level of assurance than an audit.
Accordingly, we do not express an audit opinion on the financial information.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 30 June 2007.
Deloitte & Touche LLP
Chartered Accountants
London
5 September 2007
Notes: A review does not provide assurance on the maintenance and integrity of
the website, including controls used to achieve this, and in particular on
whether any changes may have occurred to the financial information since first
published. These matters are the responsibility of the Directors but no control
procedures can provide absolute assurance in this area.
Legislation in the United Kingdom governing the preparation and dissemination of
financial information differs from legislation in other jurisdictions.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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