RNS Number:4882P
Alea Group Holdings(Bermuda) Ltd
06 March 2008
Alea Group Holdings (Bermuda) Ltd
Audited results for the 12 months ended 31 December 2007
Alea announces full year 2007 results and provides an update on run-off
Financial Performance
* Insurance contracts liabilities decreased by 20.2% from $1,941.5
million at 31 December 2006 to $1,549.9 million at 31 December 2007.
* Investment income of $73.1 million (20061: $94.8 million) reflecting a
decrease in invested assets as cash is used for claims payments and
commutations.
* Other operating expenses for 2007 were $59.7 million (2006: $66.6
million) which includes $11.9 million of one-time transaction related
expenses, which on a per share2 basis3 was $0.07.
* Result of operating activities of $(56.4) million (2006: $17.1 million).
* Adverse reserve development, net of reinsurance excluding the impact
of commutations and discount in the year ended 31 December 2007 of $29.9
million (2006: adverse reserve development of $37.6 million, net of
reinsurance excluding the impact of commutations and discount).
* Agreements to commute two excess of loss reinsurance treaties resulted
in a loss of $33.8 million, which on a per share basis was $0.19.
* Loss after tax in 2007 of $78.2 million (2006: loss after tax of $0.8
million) which on a per share basis was $0.45 (2006: loss per share of
$0.00).
* Net asset value of $2.46 per share compared with 31 December 2006 of
$2.79 per share including the impact of unrealised losses on investments.
* Subsequent to 31 December 2007 the Group repaid all of its outstanding
bank loans.
Operational Highlights
* Staff headcount reduced to 105 as at 31 December 2007 down from 137 as
at 31 December 2006.
Directorate Changes and Corporate Actions
Several events in 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's4
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 Company 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, which increased its ownership to 72.4%.
Dividend
The Company has not proposed a dividend for the 2007 financial year (2006:
$Nil).
Notes
1. Except where specifically indicated all statements refer to the twelve months
ended 31 December 2007 or 31 December 2006.
2. Weighted average number of ordinary shares of 173.8 million (2006: 173.7
million).
3. Basic and diluted loss per share are the same value.
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").
For further information, please contact:
Mark Cloutier
+1 441 296 9150
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.
MANAGEMENT REPORT
CHIEF EXECUTIVE OFFICER'S REPORT
2007 was another year of significant change for Alea Group. While we continued
to focus on the orderly run-off of the Group's balance sheet we also completed a
number of major transactions including the purchase of a majority interest in
the Group by FIN Acquisition Limited, a Company formed at the direction of
Fortress Investment Group.
As we have stated previously, our goal is to crystallise, preserve and, if
possible, grow our capital base and, through our run-off activities, free-up
excess capital which can be returned to shareholders or reinvested in the
business. While our reported results for 2007 were impacted by several one-time
events that require further explanation, we can report significant further
progress in our efforts to deleverage the Group's balance sheet and secure and
release capital for the benefit of our shareholders.
During the course of the year, we completed a number of commutation transactions
that met our economic objectives, and we believe, reduced volatility in our
provisions for claims outstanding. In our direct insurance portfolio we closed
in excess of 3,000 claims representing a considerable reduction of open claims
outstanding, further reducing uncertainty in our claims provisions. Our total
gross claims provision at 31 December 2007 is $1,549.9 million compared to
$1,938.0 million at 31 December 2006, a reduction of $388.1 million,
representing a considerable further deleveraging of our capital.
Our income statement for 2007 was impacted by a number of one-time items. The
acquisition by FIN Acquisition Limited of 72.4% of our issued share capital
resulted in one-time transaction expenses of $11.9 million. During the year we
commuted an outwards reinsurance agreement resulting in a $25.0 million charge
to earnings. Also, on 11 January 2008 we announced that we had reached agreement
to commute another outwards reinsurance treaty effective 31 December 2007,
resulting in an $8.8 million charge to our income statement, but no impact in
the period to our balance sheet. These transactions, resulting in a total charge
of $45.7 million, are expected to enhance the value of the Group in the long
term and with respect to the commutations will result in a simplification of our
financial statements and accounting for reinsurance recoverables.
In addition to the one-time items, we also experienced net adverse development
of $29.9 million in our claims provisions, occurring principally in our North
American reinsurance portfolio. While less than last year (2006: $37.6 million),
the net adverse development is particularly disappointing given our efforts to
identify and where possible reduce volatility in our claims provisions. With
respect to our claims provisions, we have also made an adjustment to the
discount rate applied to those provisions which are carried at a discount to
reflect the expected performance of the assets supporting those provisions. This
adjustment results in an additional charge of $6.2 million to the income
statement.
The exceptional one-time items, adverse development and the discount rate
adjustment combined to impact operating income by $81.8 million ($0.47 per
share).
While reporting a loss of any kind is disappointing, we continue to make
progress in our efforts to align operating costs with the reducing asset base,
address volatility in the balance sheet and reduce the amount of capital
required to support the business.
Evidence of that progress is found in the fact that during 2007 and shortly
thereafter we repaid the full $200.0 million of bank debt carried by the Group.
Repayment was achieved through funds made available through distributions from
regulated subsidiaries. This action further strengthens the Group's balance
sheet and provides more flexibility in terms of capital management initiatives.
As we move into 2008, we believe we have better positioned the Group by
simplifying our balance sheet, strengthening our reserves and significantly
reducing our debt obligations. We will remain keenly focused on reducing
expenses, further reducing insurance contract liabilities and preserving our
capital and assets. We continue to explore various options for the future of the
Group, including our new addition, Alea Syndicate Management Ltd., which we
formed in 2007 as a vehicle to pursue Lloyd's Reinsurance to Close (RITC)
opportunities.
Both Kirk Lusk and I would also like to extend our gratitude to the staff at
Alea for continuing to contribute to the run-off of the Company and under very
demanding circumstances. Their hard work and dedication has made a significant
contribution to the progress of the run-off and the outlook for the Group.
Mark Cloutier
Chief Executive Officer
5 March 2008
FINANCIAL REVIEW
Consolidated income statement
Year ended Year ended
31 December 2007 31 December 2006
$'million $'million
Gross premiums written 12.7 (74.9)
Revenue
Premium revenue 17.7 303.3
Premium received from/(ceded to) reinsurers 4.7 (87.4)
Net insurance premium revenue 22.4 215.9
Fee income 1.9 3.2
Investment income 73.1 94.8
Net realised losses on financial assets (1.3) (2.5)
Net realised gains on sale of subsidiary - 4.3
Net realised losses on sale of renewal rights (1.7) (5.0)
Total revenue 94.4 310.7
Expenses
Insurance claims and loss adjustment expenses 44.8 173.4
Insurance claims and loss adjustment expenses 34.4 (16.7)
paid to/(recovered from) reinsurers
Net insurance claims 79.2 156.7
Acquisition costs 10.3 69.2
Other operating expenses 59.7 66.6
Restructuring costs 1.6 1.1
Total expenses 150.8 293.6
Results of operating activities (56.4) 17.1
Finance costs (21.7) (24.4)
Loss before income tax (78.1) (7.3)
Income tax (expense)/credit (0.1) 6.5
Loss for the year (78.2) (0.8)
Performance indicators and comparison to prior years
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 31 December 2007 the total insurance contracts balance comprising gross
claims outstanding less discount on claims outstanding, claims handling
provisions and provision for unearned premiums was $1,549.9 million, a decrease
of 20.2% from 31 December 2006 ($1,941.5 million). The claims outstanding, net
of reinsurance at 31 December 2007 was $1,003.1 million (31 December 2006:
$1,075.6 million). Excluding the impact of the commuted Group excess of loss
reinsurance treaty the change in claims outstanding, net of reinsurance was
29.6% (31 December 2006: 29.6%).
The balances are analysed below:
As at As at
31 December 2007 31 December 2006
$'million $'million
Gross claims outstanding
Provision for claims outstanding, reported and not reported 1,605.6 2,026.1
Discount (67.5) (105.9)
1,538.1 1,920.2
Claims handling provisions 11.8 17.8
Total gross claims outstanding 1,549.9 1,938.0
Provision for unearned premiums on insurance contracts - 3.5
Total insurance contracts 1,549.9 1,941.5
Aggregate excess reinsurance
Provision for claims outstanding, reported and not reported 41.2 299.6
Discount - (7.7)
Net aggregate excess reinsurance 41.2 291.9
Other reinsurance
Provision for claims outstanding, reported and not reported 508.6 573.2
Discount (3.0) (2.7)
Net other reinsurance 505.6 570.5
Total reinsurance
Provision for claims outstanding, reported and not reported 549.8 872.8
Discount (3.0) (10.4)
Total reinsurers' share of claims outstanding 546.8 862.4
Provision for unearned premiums on reinsurance contracts - 1.0
Total reinsurance contracts 546.8 863.4
Undiscounted claims outstanding, net of reinsurance 1, 067.6 1,171.1
Discount (64.5) (95.5)
Claims outstanding, net of reinsurance 1,003.1 1,075.6
The following table presents the Group's booked gross claims outstanding before
claims handling provisions and before discount as at 31 December 2007 by class
of business.
General Motor Workers' Professional Property MAT1 Total
$'million liability comp.
1999 and prior 90.9 43.9 38.5 0.5 75.8 3.1 252.7
2000 25.9 10.6 6.7 13.9 21.2 10.7 89.0
2001 25.1 8.3 2.8 9.8 11.0 16.7 73.7
2002 28.3 7.1 5.6 19.4 4.1 5.8 70.3
2003 30.3 23.5 1.3 23.6 5.3 3.4 87.4
2004 33.0 32.9 4.3 24.7 3.4 6.6 104.9
2005 14.6 49.2 12.0 24.3 34.6 2.9 137.6
Reinsurance reserves 248.1 175.5 71.2 116.2 155.4 49.2 815.6
Insurance reserves 221.7 63.7 100.2 26.4 9.0 - 421.0
Total non-life reserves 469.8 239.2 171.4 142.6 164.4 49.2 1,236.6
Life structured settlements 277.1
Life reinsurance 91.9
Provision for claims outstanding, reported and not reported 1,605.6
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 31 December 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 Total
Case reserves 48%
IBNR 52%
Total 100%
Adverse reserve development
During the twelve months ended 31 December 2007 the Group experienced adverse
development in the reserves, net of reinsurance excluding the impact of
commutations and discount of $29.9 million (31 December 2006: adverse reserve
development, net of reinsurance excluding the impact of commutations and
discount of $37.6 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 31 December 2007
30% (31 December 2006: 28%) of the Group's gross reserves were discounted at a
rate of 4.0% (31 December 2006: 4.5%).
As at 31 December 2007 the Group's total net discount was $64.5 million (31
December 2006: $95.5 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 for each category of claims
provisions 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 2007 were $12.7 million (2006: negative $74.9 million
which reflected the cancellation of policies written in prior periods). Net
insurance premium revenue reduced by 89.6% to $22.4 million in 2007 (2006:
$215.9 million). This is primarily due to the Group's decision to cease writing
new and renewal business resulting in a reduction in premium.
Fee income
In 2007 fee income was $1.9 million compared with $3.2 million recorded 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 2007 was $73.1 million, 22.9% ($21.7 million) lower than
the $94.8 million recorded in 2006. The fall recorded reflects a 4.3% yield on
invested assets for 2007 on average invested assets of $1,687.9 million compared
with a 4.3% yield on invested assets for 2006 on average invested assets of
$2,228.3 million.
Net realised losses on financial assets were $1.3 million in 2007 compared with
$2.5 million realised losses in 2006.
Net realised 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 change to the estimate of fair value 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 Year ended Year ended
31 December 2007 31 December 2006
$'million $'million
London/Canopius - (0.8)
AAR/AmTrust (1.9) (5.2)
Europe/SCOR 0.2 1.0
Total (1.7) (5.0)
To date the Group considers that the amounts recoverable of $54.4 million
derived after the adjustments booked in 2007 and 2006 are reasonable. It has
received $22.6 million in cash. The outstanding balance consists of $29.6
million due from AmTrust and $2.2 million due from Canopius.
Insurance claims and loss adjustment expenses
In 2007 the Group incurred net insurance claims and loss adjustment expenses of
$79.2 million (2006: $156.7 million).
Acquisition costs
Acquisition costs 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 2007 total acquisition costs were $10.3 million (2006: $69.2 million) which
includes a charge of $2.6 million in respect of a profit sharing arrangement.
The Group has assessed its deferred acquisition cost asset ("DAC") at 31
December 2007 of $2.3 million (31 December 2006: $3.5 million) as fully
recoverable and as a result has not recorded any DAC write-off in 2007.
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 2007 other operating expenses were $59.7 million. Net of one-time transaction
related expenses of $11.9 million, other operating expenses were $47.8 million.
This compares with other operating expenses in 2006 of $66.6 million.
Restructuring costs
Restructuring costs in 2007 were $1.6 million (2006: $1.1 million). These costs
include severance payments of $1.6 million (2006: $3.6 million) made to
employees who were not part of the original restructuring plan as disclosed at
31 December 2005.
Restructuring costs in 2006 also included a credit of $2.5 million which
resulted 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.
Staff headcount at 31 December 2007 stood at 105 (31 December 2006: 137).
Results of operating activities
In 2007, results of operating activities were a loss of $56.4 million compared
with a profit of $17.1 million in 2006. The Group incurred significant one-time
charges of $45.7 million associated with the change in majority ownership of the
Company and the agreement to commute two large excess of loss reinsurance
treaties. Absent these one-time charges, the results of operating activities
for 2007 would have been a loss of $10.7 million.
Finance costs
Finance costs include investment expenses, foreign exchange movements and debt
interest. In 2007 total finance costs were $21.7 million, compared with $24.4
million recorded in the corresponding period in 2006. The majority of this
decrease resulted from a reduction in bank debt from $200.0 million to $30.0
million in 2007. The outstanding balance was paid in full on 14 January 2008.
Loss before income tax
Loss before income tax was $78.1 million in 2007 compared with a loss of $7.3
million in 2006.
Income tax expense
The income tax expense in 2007 was $0.1 million, compared with a credit of $6.5
million in 2006.
The impact of the income tax expense/(credit) on the income statement is
summarised as follows:
Year ended Year ended
31 December 2007 31 December 2006
$'million $'million
Current tax expense/(credit):
UK corporation tax - 0.3
Foreign tax 1.0 (4.9)
Total current expense/(credit) 1.0 (4.6)
Deferred tax credit: (0.9) (1.9)
Total income tax expense/(credit) 0.1 (6.5)
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 due to
the uncertainty over future profitability.
In 2007 the Group's current tax expense of $1.0 million (2006: credit of $4.6
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 2007 was $78.2 million (2006:
loss of $0.8 million).
Loss per share
Basic and fully diluted loss per share for 2007 was $0.45 per share (2006: loss
per share of $0.00).
Dividend
The Company will not be paying a dividend for the 2007 financial year (2006:
$Nil).
Balance sheet
Total assets
Total assets as at 31 December 2007 decreased by 25.1% to $2,356.3 million from
$3,145.7 million at 31 December 2006.
Net assets
Net assets (shareholders' funds attributable to equity interests) at 31 December
2007 were $428.0 million (31 December 2006: $484.1 million). Net assets per
share were $2.46 (31 December 2006: $2.79).
Net assets have been favourably impacted by a $13.3 million decrease in
cumulative unrealised losses in the investment portfolio described below.
However, net assets have been adversely affected by the $33.8 million loss
associated with the agreement to commute two large excess of loss reinsurance
treaties, $11.9 million in one-time transaction related expenses and by $29.9
million in adverse development.
Reinsurance recoverables
Total reinsurers' share of claims outstanding was $546.8 million at 31 December
2007 (31 December 2006: $862.4 million). The reduction is primarily
attributable to the agreement to commute one large excess of loss reinsurance
treaty completed in 2007.
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 31 December 2007 the value of available for sale investments was $1,365.2
million, compared with $1,664.5 million at 31 December 2006.
Of total invested assets $1,317.2 million (31 December 2006: $1,732.7 million)
is managed by third-party fund managers with the asset mix shown below. The
remaining invested assets of $202.3 million include predominantly mutual funds
invested in fixed income securities and deposits at banking institutions.
Asset class 31 December 2007 31 December 2006
US government 20% 21%
US mortgage 15% 16%
EU and Switzerland government and corporate 15% 14%
US corporate 10% 11%
Asset backed securities 2% 4%
US municipalities 1% 1%
Canadian government and provinces 2% 2%
Cash and cash equivalents 35% 31%
Total 100% 100%
At 31 December 2007 the Group's investment portfolio had an average duration of
1.5 years (31 December 2006: 1.7 years). The Group has maintained a shortened
average duration for the portfolio to provide liquidity anticipated to be
required to support the Group's run-off strategy. The Group may choose to
increase the average duration of the portfolio in the future.
In 2007 the Group achieved a total gross return on the investment portfolio of
5.2% (2006: 3.6%). The investment return comprised 4.3% investment income (2006:
4.3%), 0.1% realised loss (2006: loss of 0.1%) and 1.0% unrealised gain (2006:
loss of 0.6%) on average invested assets of $1,317.2 million (2006: $2,228.3
million).
At 31 December 2007, apart from $3.3 million rated BBB, all of the Group's fixed
income portfolio was rated A or better and 85.3% was rated AA or better (31
December 2006: 93.7%) 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
2007.
There are pledges over certain investments for the issuance of letters of credit
in the normal course of business. As at 31 December 2007 the pledges covered
assets of $282.2 million (31 December 2006: $343.6 million). In addition $134.2
million (31 December 2006: $131.7 million) is held as statutory deposits for
local regulators and a further $534.9 million (31 December 2006: $619.4 million)
is held in trust for the benefit of policy holders including $176.1 million (31
December 2006: $197.5 million) that Alea (Bermuda) Ltd has placed in trust on
behalf of Alea North America Insurance Company.
As at 31 December 2007 the Group held Societe d'Investissement a Capital
Variable ("SICAV") of $58.5 million (31 December 2006: $55.5 million) pledged
for the benefit of French and Belgian cedants. These SICAVs are mutual funds
invested in European fixed income securities with weighted average credit
quality of AAA and duration of approximately six years.
We have reviewed our investment portfolio with regard to any impact from
subprime issues and concluded that no impairment of the invested assets is
required.
Capital management
Financing facilities
The Group raised $100 million of hybrid capital in December 2004 and a further
$20 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 1 January 2007 the Group had $150 million outstanding under its term loan
facility and $50 million outstanding under its revolver facility. Interest was
charged at LIBOR plus 120 basis points on these bank facilities. The bank
facility would have been due 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 of
$125.0 million.
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 was repaid on 14 January 2008.
Liquidity and cashflow
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 2007 was $233.3
million (2006: $585.0 million net cash outflow). The operating cash outflow
reflects claims, commutation payments and expenses.
The net decrease in cash was $8.9 million (increase for 2006 of $42.4 million).
This is after net cash received from investing activities of $411.6 million
(2006: net cash received of $649.3 million) and net cash used in financing
activities of $187.3 million (2006: net cash used of $21.9 million). As a
result, after taking account of exchange movements of $6.0 million (2006: $2.4
million), the Group's cash and cash equivalents at 31 December 2007 were $154.3
million (31 December 2006: $157.2million).
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.
Key risks to which the Group is exposed
As a result of its activities the Group is subject to different types of risk.
These include insurance risk (which incorporates underwriting and reserving
risk), investment risk, credit risk and financial risk (incorporating interest
rate risk, asset price risk, currency risk and liquidity risk). Further details
of each of these types of risk and the procedures that the Group has in place to
mitigate them can be found in note 4 of the Annual Financial Report.
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.
Important events that have occurred since the end of the financial year
Alea London Limited commuted a large excess of loss reinsurance contract on 11
January 2008, effective 31 December 2007. Further detail can be found in note 40
of the Annual Financial Report.
The Group prepaid its outstanding bank loans on 14 January 2008. Further detail
can be found in note 26 of the Annual Financial Report.
Branches
The Company's subsidiaries, Alea London Limited and Alea Europe Ltd. have
licensed branches in Australia and Canada, respectively. A full listing of the
Company's subsidiaries is set out in note 41 of the Annual Financial Report.
Financial calendar 2008
The Group expects to release its interim results for the six months ended 30
June 2008 on 27 August 2008.*
*provisional date
Kirk Lusk
Group Chief Financial Officer
5 March 2008
DIRECTORS' REPORT
Directors that served during the year are as follows:
Robert I Kauffman (Current Chairman)1
Mark B Cloutier (Group Chief Executive Officer)2
Kirk H Lusk (Group Chief Financial Officer)3
Randal A Nardone4
Gregory M Share5
John Reeve (Former Chairman) 6
Timothy C Faries7
James R Fisher8
Todd A Fisher9
Perry Golkin10
R Glenn Hilliard11
Scott C Nuttall12
Notes
1. Appointed as Non-Executive Chairman of the Board effective 5 July 2007.
2. Appointed as an Executive Director effective 1 September 2006. Last
re-elected 26 June 2007.
3. Appointed as an Executive Director effective 1 September 2006. Last
re-elected 26 June 2007.
4. Appointed as a Non-Executive Director effective 5 July 2007.
5. Appointed as a Non-Executive Director effective 5 July 2007.
6. Appointed as independent Non-Executive Chairman of the Board effective 19
November 2003. Last re-elected 26 June 2007. Resigned effective 5 July 2007.
7. Appointed as an independent Non-Executive Director effective 7 December
2001. Last re-elected 26 June 2007. Resigned effective 5 July 2007.
8. Appointed as a Non-Executive Director effective 19 November 2003.
Resigned effective 5 July 2007.
9. Appointed as a Non-Executive Director effective 19 November 2003.
Resigned effective 5 July 2007.
10. Appointed as a Non-Executive Director effective 19 November 2003.
Resigned effective 5 July 2007
11. Appointed as senior independent Non-Executive Director effective 19
November 2003. Last re-elected 29 June 2006. Resigned effective 5 July 2007.
12. Appointed as a Non-Executive Director effective 19 November 2003. Resigned
effective 5 July 2007.
Re-election of Directors
The Company is proposing the reappointment of Kirk H Lusk as Director, who is
retiring by rotation in accordance with the Company's Bye-laws. Mr Lusk is an
Executive Director and Group Chief Financial Officer and Group Chief Operating
Officer.
The Company is also proposing the reappointment of Robert Kauffman, Randal
Nardone and Gregory Share as Directors, each of whom is retiring at the first
Annual General Meeting following their appointments in accordance with the
Company's Bye-laws. Mr Kauffman is the Non- Executive Chairman of the Board.
Messrs Nardone and Share are Non-Executive Directors. Each of their Director's
appointment letters is renewable on 19 June 2011 for an additional three year
term, subject to the provisions of the Company's Bye-laws.
Purchase of own shares
Under contractual arrangements between the Company and certain Group employees,
the Company has the right to repurchase shares in the Company held by such an
employee at the end of their employment. No share purchases pursuant to these
arrangements were made in 2007.
The Company is not required to obtain shareholder approval to authorise
purchases of its own shares under Bermudan law.
Auditors
Deloitte & Touche LLP have expressed their willingness to continue in office as
auditors and a resolution to reappoint them will be proposed at the forthcoming
Annual General Meeting.
Approved by the Board of Directors and signed on behalf of the Board.
George P Judd
Group Secretary
5 March 2008
STATEMENT OF THE DIRECTORS' RESPONSIBILITIES
The Directors (whose names and functions are set out on page 15) are responsible
for preparing the Annual Financial Report including the financial statements.
The Bermudan Companies Act 1981 permits the Company and its subsidiaries
(together, 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 41 in accordance with International Financial
Reporting Standards ('IFRS').
International Accounting Standard 1 requires that financial statements present
fairly for each financial year the Company's financial position, financial
performance and cash flows. This requires the faithful representation of the
effect of transactions, other events and conditions in accordance with the
definitions and recognition criteria for assets, liabilities, income and
expenses set out in the International Accounting Standards Board's 'Framework
for the Preparation and Presentation of Financial Statements.' In virtually all
circumstances, a fair presentation will be achieved by compliance with all
applicable International Financial Reporting Standards. Directors are required
to:
* properly select and apply accounting policies, including whether to
prepare financial statements on a going concern basis;
* present information, including accounting policies, in a manner that
provides relevant, reliable, comparable and understandable information; and
* provide additional disclosures when compliance with the specific
requirements in IFRS is insufficient to enable users to understand the impact
of particular transactions, other events and conditions on the entity's
financial position and financial performance.
The Directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
Company, for safeguarding the assets and for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the Group's
website. Legislation in the United Kingdom and Bermuda governing the
preparation and dissemination of financial statements may differ from
legislation in other jurisdictions.
The Directors confirm that, to the best of their knowledge:
* the financial statements have been prepared in accordance with
International Financial Reporting Standards and give a true and fair view of
the assets, liabilities, financial position and profit or loss of the
Company and its subsidiaries taken as a whole; and
* the Management Report includes a fair review of the development and
performance of the business and position of the Company and its
subsidiaries, taken as a whole, together with a description of the principal
risks and uncertainties they face.
INDEPENDENT AUDITORS' REPORT TO THE MEMBERS OF ALEA GROUP HOLDINGS (BERMUDA) LTD
We have audited the group financial statements (the "financial statements") of
Alea Group Holdings (Bermuda) Ltd for the year ended 31 December 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 41. These financial statements
have been prepared under the accounting policies set out therein.
This report is made solely to the company's members, as a body, in accordance
with section 90 of the Bermuda Companies Act 1981. Our audit work has been
undertaken so that we might state to the company's members those matters we are
required to state to them in an Auditors' 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 and the company's members as a body, for our
audit work, for this report, or for the opinions we have formed.
Respective responsibilities of Directors and Auditors
The Directors' responsibilities for preparing the Annual Financial Report and
the financial statements in accordance with applicable law and International
Financial Reporting Standards (IFRSs) are set out in the Statement of Directors'
Responsibilities.
Our responsibility is to audit the financial statements in accordance with
relevant legal and regulatory requirements and International Standards on
Auditing (UK and Ireland).
We report to you our opinion as to whether the financial statements give a true
and fair view in accordance with the relevant financial reporting framework and
whether the financial statements have been properly prepared in accordance with
the Bermuda Companies Act 1981. We report to you whether in our opinion the
information given in the Directors' Report is consistent with the financial
statements. We also report to you if the company has not kept proper accounting
records and if we have not received all the information and explanations we
require for our audit.
We read the other information contained in the Annual Financial Report and
consider whether it is consistent with the audited financial statements. The
other information comprises only the Management Report, the Board of Directors'
biographies, the Directors' Report and the Statement of the Directors'
Responsibilities. We consider the implications for our report if we become aware
of any apparent misstatements or material inconsistencies with the financial
statements. Our responsibilities do not extend to any further information
outside the Annual Financial Report.
Basis of audit opinion
We conducted our audit in accordance with International Standards on Auditing
(UK and Ireland) issued by the Auditing Practices Board. An audit includes
examination, on a test basis, of evidence relevant to the amounts and
disclosures in the financial statements. It also includes an assessment of the
significant estimates and judgments made by the Directors in the preparation of
the financial statements, and of whether the accounting policies are appropriate
to the Group's circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
Opinion
In our opinion:
* the financial statements give a true and fair view, in accordance with
IFRSs, of the state of the Group's affairs as at 31 December 2007 and of its
loss for the year then ended;
* the financial statements have been properly prepared in accordance
with the Bermuda Companies Act 1981; and
* the information given in the Directors' Report is consistent with the
financial statements.
Deloitte & Touche LLP
Chartered Accountants and Registered Auditors
London
5 March 2008
ALEA GROUP ANNUAL FINANCIAL REPORT 2007
Year ended 31 December 2007
Consolidated income statement
Year ended Year ended
31 December 2007 31 December 2006
Notes $'000 $'000
Gross premiums written 7 12,683 (74,919)
Revenue
Premium revenue 17,666 303,338
Premium received from/(ceded to) reinsurers 4,693 (87,422)
Net insurance premium revenue 7 22,359 215,916
Fee income 7 1,949 3,143
Investment income 8 73,089 94,821
Net realised losses on financial assets 9 (1,310) (2,500)
Net realised gains on sale of subsidiary 10 - 4,336
Net realised losses on sale of renewal rights 5 (1,723) (5,020)
Total revenue 7 94,364 310,696
Expenses
Insurance claims and loss adjustment expenses 44,740 173,408
Insurance claims and loss adjustment expenses paid
to/(recovered from) reinsurers 34,416 (16,716)
Net insurance claims 7, 11 79,156 156,692
Acquisition costs 7 10,279 69,292
Other operating expenses 12,13 59,742 66,555
Restructuring costs 6 1,571 1,087
Total expenses 150,748 293,626
Results of operating activities 7 (56,384) 17,070
Finance costs 14,15 (21,696) (24,407)
Loss before income tax 7 (78,080) (7,337)
Income tax (expense)/credit 16 (100) 6,502
Loss for the year (78,180) (835)
Earnings per share for losses attributable to the equity shareholders of the Company during the period:
Earnings per share on operating activities
Basic ($) 17 (0.45) (0.00)
Diluted ($) 17 (0.45) (0.00)
Consolidated balance sheet
As at As at
31 December 2007 31 December 2006
Notes $'000 $'000
ASSETS
Property, plant and equipment 18 4,487 6,398
Intangible assets 19 8,479 8,479
Deferred acquisition costs 20 2,323 3,506
Financial assets
Equity securities
- available for sale 21 165 198
Debt securities
- available for sale 21 1,365,040 1,664,341
Loans and receivables including insurance 22 273,707 440,961
receivables
Deferred tax assets 23 1,034 1,154
Reinsurance contracts 25 546,801 863,475
Cash and cash equivalents 24 154,253 157,220
Total assets 2,356,289 3,145,732
LIABILITIES
Insurance contracts 25 1,549,891 1,941,514
Borrowings 26 147,785 317,267
Provisions 27 2,837 5,241
Other liabilities and charges 28 33,235 40,954
Trade and other payables 29 191,741 355,606
Current income tax liabilities 2,761 1,009
Total liabilities 1,928,250 2,661,591
Net assets 428,039 484,141
EQUITY
Capital and reserves attributable to the Company's equity holders
Share capital 31, 30 1,738 1,738
Other reserves 30 709,455 687,377
Retained loss 30 (283,154) (204,974)
Total equity 428,039 484,141
Approved by the Board of Directors on 5 March 2008 and signed on its behalf by:
Kirk Lusk
Group Chief Financial Officer
Consolidated cash flow statement
Year ended Year ended
31 December 2007 31 December 2006
Notes $'000 $'000
Cash used in operations 34 (240,764) (586,999)
Income tax recovered 7,505 1,949
Net cash used in operating activities (233,259) (585,050)
Cash flows generated from/(used in) investing
activities
Purchase of property, plant and equipment (647) (735)
Proceeds on sale of property, plant and equipment 63 424
Cash payments to acquire equity and debt securities (5,575,634) (3,820,920)
Cash receipts from sales of equity and debt 5,920,523 4,356,828
securities
Net amounts outstanding for securities 11,935 (6,448)
Cash receipts from sale of subsidiary - 34,726
Cash receipts from interest and dividends 55,380 85,429
Net cash generated from investing activities 411,620 649,304
Cash flows used in financing activities
Repayments of borrowings (170,000) -
Interest paid on borrowings (17,289) (21,888)
Net cash used in financing activities (187,289) (21,888)
Net (decrease)/ increase in cash and cash (8,928) 42,366
equivalents
Cash and cash equivalents at beginning of
year 157,220 116,962
Cash of a subsidiary sold - (4,477)
Exchange gains on cash and bank overdrafts 5,961 2,369
Cash and cash equivalents at end of year 154,253 157,220
Consolidated statement of recognised income and expense
Year ended Year ended
31 December 2007 31 December 2006
$'000 $'000
Gain/(loss) on revaluation of available-for-sale investments 10,999 (11,939)
Exchange differences on translation of foreign 8,620 5,481
operations
Tax on items taken directly into equity (1,030) -
Net loss recognised directly in equity 18,589 (6,458)
Transfers
Transfers to profit and loss on sale of available-for-sale 3,343 913
investments
Tax on items transferred from equity - -
Total transfers net of tax 3,343 913
Loss for the year (78,180) (835)
Total recognised income and expense for the year (56,248) (6,380)
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 41 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 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 which are applicable at the 2007
year end.
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.
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 in force for the year ended 31 December 2007. A summary
of the principal accounting policies is provided in note 3.
3 Accounting policies
The accounting policies set out below have been applied consistently to all
periods presented in these consolidated financial statements.
The accounting policies have been applied consistently by all Group entities.
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 year 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 year-end exchange rates of monetary assets and liabilities
denominated in foreign currencies are recognised in the income statement.
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:
31 December 2007 31 December 2007 31 December 2006 31 December 2006
Average Closing Average Closing
British pound 0.5001 0.5038 0.5437 0.5087
Euro 0.7295 0.6854 0.7964 0.7591
Swiss franc 1.1972 1.1326 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 year, together with adjustments arising in the financial year 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 program 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 4.0% (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 year 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 share-based payment reserve 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.
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.
In the Company's accounts, investments in Group subsidiaries are stated at net
asset value (equity method) with any movement taken to the Company's revaluation
reserve.
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 year and
deferred tax.
The tax currently payable is based on taxable profit for the year. 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
years 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
The International Accounting Standards Board (IASB) issued IFRS 8 'Operating
Segments' on 30 November 2006 effective for annual periods beginning on or after
1 January 2009. IFRS 8 replaces IAS 14 'Segment Reporting' and requires the
disclosure of financial information about the Group based upon the information
used internally to evaluate the performance of the operating segments and the
allocation of resources to those segments. The directors consider this will not
result in significant changes to the current disclosure under IAS 14 'Segment
Reporting'. The Group has not early adopted IFRS 8.
The Group has adopted IFRS 7, 'Financial Instruments: Disclosures' and a
complementary amendment to IAS 1, 'Presentation of Financial Statements -
Capital Disclosures'. This results in additional disclosures of the Group's risk
management policies and the extent to which the Group is exposed to risk.
4 Analysis of risk
Risk management framework
As a global run-off insurance and reinsurance operation, the Group is exposed to
various types of risk.
The Board of Directors retains overall responsibility for the risk management
framework that has been established to mitigate the Group's exposure to risk and
assesses the effectiveness of the controls established to identify, monitor and
mitigate the risks faced by the Group.
The risks that the Group faces include, but are not limited to:
Insurance risk - risk associated with the uncertainty over the likelihood of an
insured event occurring, the quantum of the claim, or the time when claims
payments will fall due.
Investment and credit risk - risk associated with the Group's reinsurance
arrangements, investment portfolio, and other counter party credit risk.
Financial risk - risk associated with possible future change in one or more of a
specified interest rate, financial instrument price, foreign exchange rate or
other variable. Also included within financial risk is liquidity risk, the risk
that obligations cannot be met as they become due as a consequence of being
unable to readily realise assets to meet these obligations.
Insurance risk
Underwriting risk
When it was underwriting insurance business, the Group managed the transfer of
insurance risk from its cedants in a number of ways. Underwriting guidelines
governed the products it was willing to sell and the geographical location in
which the risk was located. Before risk was accepted, its impact upon the
overall risk profile of the insurance portfolio was assessed. Underwriting
controls included the establishment of limits on underwriting authority and the
monitoring of exposure by industry, geographical region and class of business.
The Group used a variety of reserving and modelling methods to determine the
levels of insurance risk accepted. The modelling techniques employed helped the
Group to monitor, estimate and control its exposure to natural and man-made
catastrophes. Diversification was sought through the range of products sold and
geographical locations in which business was written.
The Group Underwriting Committee monitored emerging issues that affected its
exposure to insurance risk such as new areas of liability and the impact of
major losses.
Sources of uncertainty in the estimation of future claim payments
The Group takes steps to ensure that it has appropriate information regarding
its claims exposures. However, given the uncertainty in establishing claims
provisions, it is likely that the final outcome will prove to be different from
the original liability established.
In estimating the liability for the cost of reported claims not yet paid, the
Group considers any information available from loss adjusters and information on
the cost of settling claims with similar characteristics in previous periods.
Large claims are assessed on a case-by-case basis or projected separately in
order to allow for the possible distorting effect of their development and
incidence on the rest of the portfolio.
The estimation of claims incurred but not reported ("IBNR") is generally subject
to a greater degree of uncertainty than the estimation of the cost of settling
claims already notified to the Group, where information about the claim event is
available. An assessment of the liability for future claims is affected not only
by the risks inherent in the perils insured but also by changes that may occur
in the legal and judicial environment before claims are settled, all of which
affect the quantum of the claim. Additionally, the practical limits to
information flows from insured parties hampers the estimation of the claim
amounts.
For casualty risks, for example, claims may not be apparent to the insured until
many years have passed after the event that gave rise to the claims. The Group's
casualty business was typically written on an occurrence basis, meaning that the
Group is liable for all insured events that occurred during the term of
contract, even if the loss is discovered after the end of the contract term.
Liability claims are therefore notified and settled over a long period of time.
As a result, for casualty business, a large element of the claims provision
relates to IBNR and will typically display greater variations between initial
estimates and final outcomes because of the greater degree of difficulty of
estimating these liabilities.
For property business, the greatest uncertainty arises from catastrophe events,
where a single event affects a large number of contracts. In such cases the
Group estimates the IBNR using an exposure methodology, assessing each programme
written by the Group to determine the expected claims in respect of that event.
For property business other than catastrophe, and for casualty business, the
IBNR is typically based on a combination of loss-ratio-based estimates and
claims-experience-based estimates, with greater weight given to actual claims
experience as time passes. The initial loss-ratio estimate is an important
assumption in the estimation technique and is based on a number of factors
including previous years' experience, premium rate changes, market experience
and historical claims inflation.
The projections given by the various methodologies also assist in estimating the
range of possible outcomes. The most appropriate estimation technique is
selected taking into account the characteristics of the business class and the
extent of the development of each underwriting year.
The amount of casualty claims is particularly sensitive to the level of court
awards and to the development of legal precedent on matters of contract and
tort. Casualty contracts are also subject to the emergence of new types of
latent claims, but no allowance is included for this at the balance sheet date.
The following table presents the Group's booked gross claims outstanding before
claims handling provisions and before discount as at 31 December 2007 by class
of business.
General Motor Workers' Professional Property MAT1 Total
$'million liability comp.
1999 and prior 90.9 43.9 38.5 0.5 75.8 3.1 252.7
2000 25.9 10.6 6.7 13.9 21.2 10.7 89.0
2001 25.1 8.3 2.8 9.8 11.0 16.7 73.7
2002 28.3 7.1 5.6 19.4 4.1 5.8 70.3
2003 30.3 23.5 1.3 23.6 5.3 3.4 87.4
2004 33.0 32.9 4.3 24.7 3.4 6.6 104.9
2005 14.6 49.2 12.0 24.3 34.6 2.9 137.6
Reinsurance reserves 248.1 175.5 71.2 116.2 155.4 49.2 815.6
Insurance reserves 221.7 63.7 100.2 26.4 9.0 - 421.0
Total non-life reserves 469.8 239.2 171.4 142.6 164.4 49.2 1,236.6
Life structured settlements 277.1
Life reinsurance 91.9
Provision for claims outstanding, reported and not reported 1,605.6
1 Marine, Aviation and Transport
The following table analyses Alea's gross claims outstanding between incurred
but not reported ('IBNR') and case reserves at 31 December 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 Total
Case reserves 48%
IBNR 52%
Total 100%
Prior year reserve development
The Group's expected loss development is determined by the Group's internal
actuaries based on historical claims analysis and projected trends. Actual
reported losses may vary from expected loss development. Generally, as an
underwriting year matures, the level of newly reported claims decreases.
During the twelve months ended 31 December 2007 the Group experienced adverse
development in the reserves, net of reinsurance excluding the impact of
commutations and discount of $29.9 million (31 December 2006: adverse reserve
development, net of reinsurance excluding the impact of commutations and
discount of $37.6 million).
Net reserve development is determined by netting adverse and positive reserve
development. 129.2% of the negative 2007 reserve development relates to the
Group's reinsurance portfolio (2006: 82%). Reinsurance operations by their
nature add further complications to the reserving process, particularly to
casualty business, where there is an inherent lag in the timing and reporting of
a loss event from an insured or ceding company to the reinsurer. This reporting
lag creates an even longer period of time between the policy inception and when
a claim is finally settled. As a result, more judgement is required to establish
reserves for ultimate losses in reinsurance operations.
The following table presents the development of the Group's claims outstanding
and claims handling expense reserves net of reinsurance and before discount for
the twelve months ended 31 December 2007 for each of the underwriting years
indicated. An increase is an adverse run-off deviation and a decrease is a
positive run-off deviation to the provision for claims outstanding, net of
reinsurance held at the previous balance sheet date
Increase/(decrease) in claims outstanding Year ended 31 December 2007
net of reinsurance
$'million Pre-discount Post discount
Underwriting years 1999 and prior 0.6 7.3
Underwriting year 2000 2.5 6.0
Underwriting year 2001 6.3 10.3
Underwriting year 2002 10.1 12.3
Underwriting year 2003 12.5 7.1
Underwriting year 2004 (13.7) (13.7)
Underwriting year 2005 4.8 4.8
Total 23.1 34.1
Historical ultimate loss ratios ('ULR')
The ULR is an actuarial estimate of total claims to the point of final
settlement as a percentage of gross ultimate premiums. It excludes expenses. The
table below shows the ULR as of 31 December 2007 for proportional and
non-proportional US casualty reinsurance, gross of reinsurance and prior to
discounting. The Group's US casualty reinsurance ULR shown in the table below is
the aggregate ULR for Alea North America, Alea London and Alea Bermuda. The
table also shows the aggregate ULR for Alea Europe.
US casualty US casualty Europe
proportional non-proportional
Underwriting year % % %
1995 - 56.0 65.8
1996 101.0 - 74.6
1997 - - 91.4
1998 19.4 76.4 107.5
1999 156.5 121.2 137.3
2000 125.0 172.9 96.3
2001 86.4 122.9 78.4
2002 73.5 100.2 71.5
2003 65.8 62.0 49.6
2004 62.1 53.2 50.2
2005 70.9 76.7 71.8
Note 25 to the financial statements presents the development of the estimate of
ultimate claim cost for policies underwritten in a given year. This gives an
indication of the accuracy of the Group's estimation technique for ultimate
claims payments.
If the gross claims reserve carried in the balance sheet moved by 1% the impact
on the income statement and equity would be a change of $16.1 million (31
December 2006: $19.6 million) on an undiscounted and pre-tax basis.
Investment and credit risk
Investment risk
The Group's investment strategy is based on a high quality diversified portfolio
of liquid investment grade fixed income securities as a method of preserving
equity capital and prompt claim payment capability.
The Group uses external investment managers to invest its assets. The Group's
Investment Committee establishes investment policies and creates guidelines for
external investment managers. These guidelines specify criteria on the overall
credit quality and liquidity characteristics of the portfolio and include
limitations on the size of certain holdings as well as restrictions on
purchasing certain types of securities.
The Group's invested assets are subject to interest rate risk. The Group's
interest rate risk is concentrated in the US and Europe and is sensitive to many
factors, including governmental monetary polices and domestic and international
economic and political conditions. Based on invested assets at external managers
of $1,317.2 million as at 31 December 2007, a 100 basis point increase/decrease
in interest rates across the yield curve would result in an approximate $19.3
million unrealised loss/profit respectively (2006: on invested assets at
external managers of $1,732.7 million a 100 basis point increase/decrease in
interest rates across the yield curve would result in an approximate $29.6
million unrealised loss/profit respectively). The entire impact of $19.3 million
would be reflected in equity since all investments are available for sale.
The assets managed by third-party fund managers show the asset mix below. The
remaining invested assets of $202.3 million (2006: $89 million) include
predominantly mutual funds invested in fixed income securities.
Asset class 31 December 2007 31 December 2006
in % in %
US government 20 21
US mortgage 15 16
EU and Switzerland government and corporate 15 14
US corporate 10 11
US municipalities 1 1
Asset backed securities 2 4
Canadian government and provinces 2 2
Cash and cash equivalents 35 31
100 100
Financial and insurance liabilities risk
The Group is also exposed to interest rate risk on its insurance reserves and
floating rate borrowings.
Where appropriate, reserves are discounted in accordance with existing UK GAAP
as permitted by IFRS 4. Discount rates are based on the expected future cash
flow derived from assets established for the payment of reserves. The Group
discounts loss reserves for certain business with a mean term to ultimate claims
settlement in excess of four years. The majority of such discount applies to
casualty business. The unwind of the discount is sensitive to the claims payment
pattern.
The Group discount rate used is based on the relevant average investment return
of the last five years. A reduction of 0.1% would reduce the net discount in the
balance sheet by approximately $1.6 million (2006: $2.1 million) and would
negatively impact income statement and equity by the same amount.
The Group has $120 million of trust preferred securities in issue. These
securities provide for a preferred dividend at a rate of three month LIBOR plus
285 basis points.
The Group had $30.0 million outstanding under its loan facility which was due
for repayment on 18 July 2009. This loan carried an interest margin of 200 basis
points over LIBOR and was repaid on 14 January 2008.
Credit risk
When the Group was underwriting, it purchased reinsurance to manage its
catastrophe exposure and mitigate insurance risk. However, the ceding of
insurance risk exposes the Group to credit risk from its reinsurers and
retrocessionaires.
The Group selected its reinsurers and retrocessionaires based on price and
credit quality and continues to monitor them closely over time. It also sought
to diversify its business among reinsurers and retrocessionaires and required
collateral where deemed prudent to do so. Thus, the use of maximum limits for
credit exposure to any one counter party was an effective method for mitigating
credit risk.
The Group required that at the time of purchase all reinsurers and
retrocessionaires had a minimum credit rating of A-, unless high quality
collateral is provided.
Additionally, the Group is subject to credit risk in respect of third party
companies in which the Group holds debt securities issued by those companies. As
a consequence of the established investment policies and in order to mitigate
investment risk, apart from $3.3 million rated BBB, all of the Group's fixed
income portfolio was rated A or better and 85.3% (31 December 2006: 93.7%) was
rated AA or better. 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. 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 2007 or 2006. The following table
illustrates the split of total debt securities by rating of investee.
Credit Rating of investee Debt security investment Debt security investment
as at 31 December 2007 as at 31 December 2006
in % in %
AAA / US Government or equivalent 74.8 82.1
AA 10.5 11.6
A 14.4 6.3
BBB or lower 0.3 -
Total 100.0 100.0
At 31 December 2007, the Group's largest aggregate exposure to any single issuer
other than with respect to the United States, Canadian and European government
and agency securities was $23.4 million (31 December 2006: $27.2 million) in
respect of General Electric Corporation and various subsidiary companies.
Depending upon the duration of the liabilities supported by a particular
portfolio, the Group's portfolio investment duration targets may range from one
to three years. The duration of an investment is based on the maturity of the
security and also reflects the payment of interest and the possibility of early
principal payment of such security. The Group seeks to utilise investment
benchmarks that reflect this duration target. The Investment Committee
periodically revises the Group's investment benchmarks based on business and
economic factors including the average duration of the Group's potential
liabilities.
At 31 December 2007, the Group's investment portfolio had an effective duration
of 1.5 years (31 December 2006: 1.7 years). The Group has shortened duration
targets on its investment portfolios to ensure that sufficient liquidity will be
available to execute the commutation strategy and to reflect the greater
uncertainty now inherent in the duration of its liabilities with this
commutation strategy.
Analysis by credit rating of all financial assets (impaired, past due, neither
past due nor impaired):
As at 31 December 2007
AAA AA A BBB Collateralised Equities Not Non Total
and rated financial
below asset
$'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000
Property, plant and equipment - - - - - - - 4,487 4,487
Intangible assets - - - - - - - 8,479 8,479
Deferred acquisition costs - - - - - - - 2,323 2,323
Financial assets - available 1,021,401 143,186 197,107 3,346 - 165 - - 1,365,205
for sale securities
Loans and receivables 36,134 45,477 72,805 5,176 12,396 - 101,710 9 273,707
including insurance
receivables
Deferred tax assets - - - - - - - 1,034 1,034
Reinsurance contracts 22,886 315,401 83,906 1,980 62,164 - 60,464 - 546,801
Cash and cash equivalents 51,711 78,781 23,611 88 - - 62 - 154,253
Total assets 1,132,132 582,845 377,429 10,590 74,560 165 162,236 16,332 2,356,289
As at 31 December 2006
AAA AA A BBB Collateralised Equities Not Non Total
and rated financial
below asset
$'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000
Property, plant and equipment - - - - - - - 6,398 6,398
Intangible assets - - - - - - - 8,479 8,479
Deferred acquisition costs - - - - - - - 3,506 3,506
Financial assets - available 1,364,728 188,540 110,707 - - 198 366 - 1,664,539
for sale securities
Loans and receivables 40,310 24,504 135,981 11,909 6,903 - 221,072 282 440,961
including insurance
receivables
Deferred tax assets - - - - - - - 1,154 1,154
Reinsurance contracts 40,202 306,648 121,273 2,506 356,814 - 36,032 - 863,475
Cash and cash equivalents 42,160 111,130 1,973 498 - - 1,459 - 157,220
Total assets 1,487,400 630,822 369,934 14,913 363,717 198 258,929 19,819 3,145,732
Analysis by credit rating of assets that were neither past due nor impaired at
the balance sheet date:
As at 31 December 2007
AAA AA A BBB Collateralised Equities Not Non Total
and rated financial
below asset
$'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000
Property, plant and equipment - - - - - - - 4,487 4,487
Intangible assets - - - - - - - 8,479 8,479
Deferred acquisition costs - - - - - - - 2,323 2,323
Financial assets - available 1,021,401 143,186 197,107 3,346 - 165 - - 1,365,205
for sale securities
Loans and receivables 31,606 44,914 69,730 4,562 12,397 - 71,474 9 234,692
including insurance
receivables
Deferred tax assets - - - - - - - 1,034 1,034
Reinsurance contracts 22,886 315,403 83,907 1,468 62,165 - 53,254 - 539,083
Cash and cash equivalents 51,711 78,781 23,611 88 - - 62 - 154,253
Total assets 1,127,604 582,284 374,355 9,464 74,562 165 124,790 16,332 2,309,556
As at 31 December 2006
AAA AA A BBB Collateralised Equities Not Non Total
and rated financial
below asset
$'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000
Property, plant and equipment - - - - - - - 6,398 6,398
Intangible assets - - - - - - - 8,479 8,479
Deferred acquisition costs - - - - - - - 3,506 3,506
Financial assets - available 1,364,728 188,540 110,706 - - 198 367 - 1,664,539
for sale securities
Loans and receivables 40,242 23,782 120,242 10,654 6,903 - 196,639 282 398,744
including insurance
receivables
Deferred tax assets - - - - - - - 1,154 1,154
Reinsurance contracts 40,202 306,648 121,273 2,506 356,814 - 25,168 - 852,611
Cash and cash equivalents 42,160 111,130 1,973 497 - - 1,460 - 157,220
Total assets 1,487,332 630,100 354,194 13,657 363,717 198 223,634 19,819 3,092,651
Analysis of impaired and past due assets
In performing its assessment of which assets should be impaired, the Group
considers reinsurer ratings, the existence of notified disputes and historical
collection experience.
The following table presents financial assets that were impaired, or past due
but not impaired at the end of the year.
As at 31 December 2007
0-3 4-6 7-9 10-12 More Impaired Total Neither Total
months months months months than 12 past due assets
past past past past due months nor
due due due past due impaired
$'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000
Property, plant and equipment - - - - - - - 4,487 4,487
Intangible assets - - - - - - - 8,479 8,479
Deferred acquisition - - - - - - - 2,323 2,323
costs
Financial assets - available - - - - - - - 1,365,205 1,365,205
for sale securities
Loans and receivables including 2,000 2,016 - 836 22,226 11,937 39,015 234,692 273,707
insurance receivables
Deferred tax assets - - - - - - - 1,034 1,034
Reinsurance contracts - - - - - 7,718 7,718 539,083 546,801
Cash and cash - - - - - - - 154,253 154,253
equivalents
Total 2,000 2,016 - 836 22,226 19,655 46,733 2,309,556 2,356,289
assets
As at 31 December 2006
0-3 4-6 7-9 10-12 More Impaired Total Neither Total
months months months months than 12 past due assets
past past past past due months nor
due due due past due impaired
$'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000
Property, plant and equipment - - - - - - - 6,398 6,398
Intangible assets - - - - - - - 8,479 8,479
Deferred acquisition - - - - - - - 3,506 3,506
costs
Financial assets - available - - - - - - - 1,664,539 1,664,539
for sale securities
Loans and receivables including 4,197 389 79 15,480 7,890 14,182 42,217 398,744 440,961
insurance receivables
Deferred tax assets - - - - - - - 1,154 1,154
Reinsurance contracts - - - - 1,400 9,464 10,864 852,611 863,475
Cash and cash - - - - - - - 157,220 157,220
equivalents
Total 4,197 389 79 15,480 9,290 23,646 53,081 3,092,651 3,145,732
assets
As at 31 December 2007 $35.3 million of assets were subject to a valuation
allowance in respect of impairment (2006: $39.8 million). As at 31 December
2007, after deducting the impairment provision of $15.6 million (2006: $16.2
million) the impaired assets had a carrying value of $19.7 million (2006: $23.6
million).
Collateral pledged to and by the Group
The following table shows balance sheet carrying value of collateral pledged by
the Group as a result of its underwriting activities:
As at As at
31 December 2007 31 December 2006
$'000 $'000
Carrying value of financial assets pledged to insured 1,009,808 1,150,211
parties as collateral for liabilities
The financial assets have been pledged as collateral under the following terms
and conditions:
Alea London Limited has written regulated US business and has as a result been
required to provide a collateralised Trust Fund in respect of outstanding claims
relating to this business. Collateral is provided in the form of cash and
approved investments in accordance with the terms of the trust deed. The total
amount of collateral provided at 31 December 2007 was $63.1 million (2006: $67.1
million). In addition Alea London Limited maintains letter of credit ("LOC")
facilities in respect of its previous underwriting activities and is obliged to
collateralise any LOCs issued under these facilities. The total amount of
collateral provided at 31 December 2007 under these treaties was $136.7 million
(2006: $169.4 million). Alea London Limited has SICAV investments of $7.7
million (2006: $6.9 million) pledged as security for reinsurance obligations.
Alea London Limited also has other restricted deposits of $0.4 million (2006:
$2.5 million).
Alea Europe Ltd maintains LOC facilities in respect of its previous underwriting
and is obliged to collateralise any LOCs issued under these facilities. The
total amount of collateral provided at 31 December 2007 was $136.1 million
(2006: $131.7 million). The amount held in trust for the benefit of holders of
North American policies is $68.6 million (2006: $63.9 million). Additionally,
Alea Europe Ltd holds a permanent amendment to irrevocable standby LOC of $3.8
million (2006: $7.9 million) in favour of its cedents. Alea Europe Ltd has SICAV
investments of $50.8 million (2006: $48.7 million) pledged as security for
reinsurance obligations.
Alea (Bermuda) Ltd has pledged collateral in the form of various LOCs totalling
$9.5 million (2006: $42.4 million) which are held as cash and invested assets
in designated collateral accounts. Other collateral pledged totalling $106.9
million (2006: $142.2 million) is in respect of quota share policies written by
Alea (Bermuda) Ltd for Lumberman's and Alea North America Specialty Insurance
Company. The collateral is pledged in form of trust accounts. Additionally
Collateral of $176.2 million (2006: $197.5 million) is pledged in form of a
trust account for the benefit of Alea North America Insurance company.
Alea North American Insurance Company has pledged assets consisting of LOCs,
trust funds and cash totalling $116.3 million (2006: $140.8 million). LOCs are
automatically extended without amendment for a period of one year following the
expiration date. Alea North American Insurance Company also has securities on
deposit at various state regulators totalling $133.7 million (2006: $129.2
million).
The fair value of collateral pledged to the Group as a result of its
underwriting activities:
As at As at
31 December 2007 31 December 2006
$'000 $'000
Fair value of collateral held by the Group that can be sold 94,690 217,463
or repledged regardless of whether the owner of the
collateral defaults
Fair value of any such collateral sold or repledged - -
Carrying amount of any assets obtained by taking possession 48,748 66,806
of collateral held as security
Alea Europe Ltd received an LOC from SCOR SA Paris in respect of the renewal
rights transaction. The LOC was cancelled in 2007. At 31 December 2006 the LOC
amounted to $ 20.0 million.
Alea North American Insurance Company holds collateral as security for claims
due from third-parties of $94.7 million (2006: $197.5 million) which consists of
funds held in trust and LOCs.
Alea (Bermuda) Ltd, holds collateral in respect of certain reinsurance
recoverables in the form of $15.5 million of LOCs (2006: $17.0 million), $2.5
million of cash collateral (2006: $2.3 million) and $30.3 million of funds
withheld (2006: $47.5 million), and generally has the right to hold this
collateral remains until commutation or a mutual agreement to decrease the
collateral.
Impairment provision analysis
The following impairment provisions have been made against reinsurance contracts
with the credit ratings indicated:
As at As at
31 December 2007 31 December 2006
$'000 $'000
AAA - (169)
AA - (866)
A - -
BBB and below - -
Not rated (1,050) (15)
(1,050) (1,050)
The following impairment provisions have been made against debtors arising out
of insurance operations with the credit ratings indicated:
As at As at
31 December 2007 31 December 2006
$'000 $'000
AAA - -
AA - -
A - -
BBB and below - -
Not rated (1,459) (1,893)
(1,459) (1,893)
The following impairment provisions have been made against debtors arising out
of reinsurance operations with the credit ratings indicated:
As at As at
31 December 2007 31 December 2006
$'000 $'000
AAA (2) -
AA (186) (41)
A (249) (744)
BBB and below (509) (177)
Not rated (12,105) (12,310)
(13,051) (13,272)
The following table analyses the movements in the impairment provisions:
Impairment
Provisions
$'000
At 1 January (18,432)
Amounts written off (357)
Recoveries on assets previously written off 37
Net exchange differences 2,537
At 31 December 2006 (16,215)
Amounts written off (699)
Recoveries on assets previously written off 1,673
Net exchange differences (319)
At 31 December 2007 (15,560)
Financial risk
The Group is subject to several types of financial risk. The most significant of
these is the risk that at any given date, the proceeds from realising the
financial assets of the Group may be insufficient to meet the financial
obligations arising from its insurance contracts. The Group is also exposed to
risk as a result of changes in foreign currency and interest rates. Another
significant risk relates to the liquidity of the Group.
Asset and liability mismatch risk
In order to ensure that adequate liquid resources are available to fund
insurance liability cash outflows when they fall due, the Group's practice is to
invest in assets matching the currency and duration of the expected related
liabilities.
Currency risk
The Group reports its results in US Dollars and accordingly, to the extent that
shareholders' funds are invested in assets denominated in currencies other than
US Dollars, exchange gains or losses may arise on translation.
The Group controls its currency risk by investing in assets that match the
currency in which it expects related liabilities to be paid and by investing the
majority of assets backing shareholder funds in US Dollars. The Directors
consider the revaluation gains and losses arising from the revaluation of
non-functional currencies that impact the income statement and equity to be
insignificant.
The Group estimates that its net exposure to currencies is as follows:
As at 31 December 2007
Functional Currencies in $ '000
USD AUD GBP CHF Euro Subtotal
330,730 21,204 440 (22,177) 50,560 380,757
Non-Functional
Currencies
GBP Euro SEK DKK JPY CAD Other Subtotal Total
27,466 22,850 (6,806) (4,753) (4,569) 25,430 (12,336) 47,282 428,039
Functional Currencies
in %
USD AUD GBP CHF Euro Subtotal
77.3 5.0 0.1 (5.2) 11.8 89.0
Non-Functional Currencies in %
GBP Euro SEK DKK JPY CAD Other Subtotal Total
6.4 5.3 (1.6) (1.1) (1.1) 5.9 -2.8 11.0 100.0
As at 31 December 2006
Functional Currencies in $ '000
USD AUD GBP CHF Euro Subtotal
410,699 7,965 3,267 (21,983) 47,545 447,493
Non-Functional
Currencies
GBP Euro SEK DKK JPY CAD Other Subtotal Total
25,196 16,792 (15,548) (265) (4,626) 20,356 (5,257) 36,648 484,141
Functional Currencies
in %
USD AUD GBP CHF Euro Subtotal
84.8 1.6 0.7 (4.5) 9.8 92.4
Non-Functional Currencies in %
GBP Euro SEK DKK JPY CAD Other Subtotal Total
5.2 3.5 (3.2) (0.1) (1.0) 4.2 (1.0) 7.6 100.0
A positive percentage arises when assets exceed liabilities denominated in that
currency while a negative percentage arises when liabilities exceed assets.
The translation gains and losses of functional currencies are recognised as a
separate component of equity where as the gains and losses arising from the
translation of non-functional currencies are recorded in the income statement.
Included within this currency analysis are net non-monetary assets which equate
to 2.8% of the Group's net assets.
Liquidity Risk
Liquidity risk is the potential that obligations cannot be met as they become
due as a consequence of not being able to readily realise assets to meet these
obligations.
As at 31 December 2007, the Group's holding company had in place a $30.0 million
bank term loan which was due for repayment on 18 July 2009. This loan carried an
interest margin of 200 basis points over LIBOR and was repaid on 14 January
2008. Under the terms of the Group's bank credit agreement there were two
financial covenants which required that the Group maintained a minimum adjusted
consolidated tangible net worth and a minimum debt-to-total-capitalisation
ratio. If the Group were to breach either one of these covenants, the lenders
would have had the right to demand early repayment of the loan in advance of the
scheduled repayment date of 18 July 2009.
In December 2004 and January 2005, the Group issued a total of $120.0 million of
hybrid trust preferred securities. These securities were issued through trusts
established by Alea Holdings US Company a subsidiary of the Group holding
company. The margin on these securities was unaffected by the credit rating
downgrades and remains at LIBOR plus 285 basis points. The securities have a
fixed maturity of 30 years, are callable after five years, and allow for a
deferral of quarterly coupons for up to five years.
The following table analyses the contractual maturity dates of the undiscounted
liabilities carried on the Group's balance sheet.
As at 31 December 2007 Undiscounted
On demand One to Three to Over five Total Discount on Total
and within three five years undiscounted insurance discounted
one year years years liabilities contract liabilities
liabilities
$'000 $'000 $'000 $'000 $'000 $'000 $'000
LIABILITIES
Insurance contracts 374,225 417,139 183,463 642,605 1,617,432 (67,541) 1,549,891
Borrowings - 30,000 - 117,785 147,785 - 147,785
Provisions 1,955 543 339 - 2,837 - 2,837
Other liabilities and 29,119 4,116 - - 33,235 - 33,235
charges
Trade and other payables 65,707 42,766 35,489 47,779 191,741 - 191,741
Current income tax 2,761 - - - 2,761 - 2,761
liabilities
Total liabilities 473,767 494,564 219,291 808,169 1,995,791 (67,541) 1,928,250
As at 31 December 2006 Undiscounted
On demand One to Three to Over five Total Discount on Total
and within three five years undiscounted insurance discounted
one year years years liabilities contract liabilities
liabilities
$'000 $'000 $'000 $'000 $'000 $'000 $'000
LIABILITIES
Insurance contracts 355,535 454,445 232,688 1,004,701 2,047,369 (105,855) 1,941,514
Borrowings 200,000 - - 117,267 317,267 - 317,267
Provisions 3,433 1,197 543 68 5,241 - 5,241
Other liabilities and 38,545 2,409 - - 40,954 - 40,954
charges
Trade and other payables 54,379 89,119 43,969 168,139 355,606 - 355,606
Current income tax 1,009 - - - 1,009 - 1,009
liabilities
Total liabilities 652,901 547,170 277,200 1,290,175 2,767,446 (105,855) 2,661,591
Capital risk management
The total amount of capital managed by the Group is $537.4 million (2006: $593.4
million). The Group considers its managed capital to consist of net tangible
assets of $419.6 million (2006: $475.7 million) and the trust preferred
securities of $117.8 million (2006: $117.7 million).
The Board of Directors is responsible for assessing the Group's capital
structure on a regular basis with the aim of selecting a debt-to-equity ratio
that maximises return to shareholders. As at 31 December 2007 the debt-to-equity
ratio was 26% (2006: 40%).
The main aim of the Group's capital management strategy is to free-up excess
capital which can be reinvested in the business or returned to shareholders
consistent with holding sufficient capital in each insurance operating entity to
meet regulatory requirements. The Group has been in run-off since the fourth
quarter 2005 and has conducted its operations in accordance with this strategy.
There have been no changes in the Group's capital management policies since the
previous period.
As at 31 December 2007 the Group was required to hold sufficient capital to meet
the conditions of the bank loan covenant in respect of the $30.0 million term
loan. Subsequent to 31 December 2007 the Group repaid this term loan and is no
longer subject to this capital requirement.
The Group is subject to externally imposed capital requirements in respect of
all entities that previously wrote insurance and reinsurance business. These
requirements, which have been complied with during the year, are enforced within
the individual locations and are detailed below.
Alea London Limited is regulated by the UK Financial Services Authority ("FSA").
It is required by the FSA to submit an annual statement of solvency and to
hold capital resources in excess of its capital resources requirement.
Alea North America Insurance Company is regulated by the New York Insurance
Department ("NYID"). It is required by the NYID to submit an annual risk based
capital statement and to hold total adjusted capital in excess of the Company
Action Level which is 200% of its Authorized Control Level Risk-Based Capital.
Alea (Bermuda) Limited is regulated by the Bermuda Monetary Authority ("BMA").
It is required by the BMA to submit an annual statutory financial return and to
hold statutory capital and surplus in excess of its minimum solvency margin.
Alea Europe is regulated by the Swiss Federal Office of Private Insurance
("FOPI"). A Swiss reinsurer must maintain available own funds at the level of
the required solvency margin, which is calculated by reference to the business
volume (Solvency 1). Additionally, the reinsurer must maintain its target
capital which is defined as the sum of the expected shortfall of change in risk-
bearing capital within one year at the 99% confidence level plus the market
value margin, as required by the Swiss Solvency Test (Solvency 2).
The Group has embedded its capital management processes into its normal
planning, reporting and decision making activities.
5 Net realised losses on sale of renewal rights
Alea London Alea North America Alea Europe Total
Limited Insurance Company Limited
$'000 $'000 $'000 $'000
Year ended 31 December 2007 - (1,880) 157 (1,723)
Year ended 31 December 2006 (800) (5,164) 944 (5,020)
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 year ended 31 December 2007 a charge of $1.7 million was recognised in
respect of the renewal rights transactions (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 ($54.4
million). The Group has received payments to 31 December 2007 of $22.6 million
(31 December 2006: $20.9 million). The remaining balance of $31.8 million (31
December 2006: $35.2 million) is included within loans and receivables including
insurance receivables and consists of $29.6 million owed by AmTrust and $2.2
million owed by Canopius. The non-current portion of the receivable at 31
December 2007 is $29.6 million (31 December 2006: $33.7 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. A 10% deviation of
the projected renewals would result in a change in receivable of $3.92 million.
The directors consider that the receivable is collectable based upon an
assessment of credit rating of AmTrust and Canopius.
6 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 included estimated expenses for future redundancy payments
for employees who cannot be redeployed in the new structure. The provision also
contained 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.
Year ended 31 December 2007
Alea UK Alea US Alea Europe Total
$'000 $'000 $'000 $'000
Redundancy costs incurred in excess of the provision established 1,245 326 - 1,571
based on run-off plan
Total restructuring costs 1,245 326 - 1,571
Year ended 31 December 2006
Alea UK Alea US Alea Europe Total
$'000 $'000 $'000 $'000
Redundancy costs incurred in excess of the provision established 4,135 2,295 - 6,430
based on run-off plan 1
Reversal of estimated restructuring provision due to redundancies - - (2,843) (2,843)
in other entities 1
Reversal of estimated restructuring provision related to onerous - (2,500) - (2,500)
contracts 2
Total restructuring costs 4,135 (205) (2,843) 1,087
1 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.
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.
7 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.
Year ended 31 December 2007 Alea Alea Alea Alea Non - Total
London North Europe Financial allocated
America Services
$'000 $'000 $'000 $'000 $'000 $'000
Gross Premiums Written 2,690 (5,801) 15,794 - - 12,683
Revenue
Net insurance premium revenue 9,003 (4,189) 17,545 - - 22,359
Fee income - 138 1,811 - - 1,949
Investment income - - - 73,089 - 73,089
Net realised losses on financial - - - (1,310) - (1,310)
assets
Net realised gains on sale of - - - - - -
subsidiary
Net realised losses on sale of - (1,880) 157 - - (1,723)
renewal rights
Total revenue 9,003 (5,931) 19,513 71,779 - 94,364
Expenses
Net insurance claims (15,264) (41,741) (22,151) - - (79,156)
Acquisition costs (4,910) (2,070) (3,299) - - (10,279)
Other operating expenses (14,624) (25,186) (13,544) - (6,388) (59,742)
Restructuring costs (1,245) (326) - - - (1,571)
Total expenses (36,043) (69,323) (38,994) - (6,388) (150,748)
Results of operating activities (27,040) (75,254) (19,481) 71,779 (6,388) (56,384)
Finance costs - - - (21,696) - (21,696)
(Loss)/profit before income tax (27,040) (75,254) (19,481) 50,083 (6,388) (78,080)
Income tax expense - - - - (100) (100)
(Loss)/profit for the period (27,040) (75,254) (19,481) 50,083 (6,488) (78,180)
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
subsidiary
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)
Other segment charges included in the income statement are as follows:
Year ended 31 December 2007 Alea Alea Alea Alea Non -
London North Europe Financial allocated Total
America Services
$'000 $'000 $'000 $'000 $'000 $'000
Depreciation (note 18) 1,268 976 290 - - 2,534
Redundancy costs incurred in excess of the 1,245 326 - - - 1,571
provision established based on run-off plan (note
6)
Total restructuring costs 1,245 326 - - - 1,571
Year ended 31 December 2006 Alea Alea Alea Alea Non -
London North Europe Financial allocated Total
America Services
$'000 $'000 $'000 $'000 $'000 $'000
Depreciation (note 18) 1,912 1,792 438 - - 4,142
Redundancy costs incurred in excess of the 4,135 2,295 - - - 6,430
provision established based on run-off plan (note
6)
Reversal of estimated restructuring provision due - - (2,843) - - (2,843)
to redundancies in other entities (note 6)
Estimated restructuring costs (note 6) - (2,500) - - - (2,500)
Total restructuring costs 4,135 (205) (2,843) - - 1,087
The Group had various 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 Company (collectively
Alea US) and Alea Europe Ltd. The impact of intra-group quota share arrangements
on operating result with regard to these legal entities are shown and explained
below.
For the year ended 31 December 2007 intra-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
Insurance Company to Alea Bermuda.
For the year ended 31 December 2006 intra 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 US 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:
Year ended 31 December 2007 Alea Alea Alea Alea Total
London Bermuda US Europe
$'000 $'000 $'000 $'000 $'000
Net insurance premium revenue 9,003 760 (4,949) 17,545 22,359
Intercompany reinsurance - 16,265 (16,827) 562
-
Net insurance premium revenue after 9,003 17,025 (21,776) 18,107 22,359
intercompany reinsurance
Underwriting result 1
Before intercompany reinsurance (27,040) (30,520) (49,242) (19,638) (126,440)
After intercompany reinsurance (28,738) (56,949) (30,275) (10,478) (126,440)
Year ended 31 December 2006 Alea Alea Alea Alea Total
London Bermuda US Europe
$'000 $'000 $'000 $'000 $'000
Net insurance premium revenue 129,312 4,099 57,874 24,631 215,916
Intercompany reinsurance (31,313) 39,345 (39,534) 31,502 -
Net insurance premium revenue after 97,999 43,444 18,340 56,133 215,916
intercompany reinsurance
Underwriting result 1
Before intercompany reinsurance (16,697) (21,548) (28,618) (7,704) (74,567)
After intercompany reinsurance (11,886) (23,968) (37,185) (1,528) (74,567)
1 Results of operating activities excluding investment income, net realised
gains on financial assets, net realised gains on sale of subsidiary and
intangible assets and net realised gains on sale of renewal rights.
Primary segment information - balance sheet 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 balance sheet of each
of these operating segments before the impact of intra-group quota share
arrangements is shown below:
As at 31 December 2007 Alea Alea Alea Alea Non - Total
London North Europe Financial allocated
America Services
$'000 $'000 $'000 $'000 $'000 $'000
ASSETS
Property, plant and equipment 610 3,581 296 - - 4,487
Intangible assets - 8,479 - - - 8,479
Deferred acquisition costs 47 - 2,276 - - 2,323
Financial assets
Equity securities
- available for sale - - - 165 - 165
Debt securities
- available for sale - - - 1,365,040 - 1,365,040
Loans and receivables 41,223 112,847 17,812 101,825 - 273,707
including insurance
receivables
Deferred tax assets - - - - 1,034 1,034
Reinsurance contracts 158,294 104,420 284,087 - - 546,801
Cash and cash equivalents - - - 154,253 - 154,253
Total assets 200,174 229,327 304,471 1,621,283 1,034 2,356,289
LIABILITIES
Insurance contracts 462,322 445,512 642,057 - - 1,549,891
Borrowings - - - 147,785 - 147,785
Provisions - 1,154 1,683 - - 2,837
Other liabilities and charges 8,092 21,515 3,628 - - 33,235
Trade and other payables 68,738 72,464 50,539 - - 191,741
Current income tax
liabilities - - - - 2,761 2,761
Total liabilities 539,152 540,645 697,907 147,785 2,761 1,928,250
Net assets 428,039
EQUITY
Capital and reserves attributable to the Company's equity
holders
Share capital 1,738
Other reserves 709,455
Retained loss (283,154)
Total equity 428,039
As at 31 December 2006 Alea Alea Alea Alea Non - Total
London North Europe Financial allocated
America Services
$'000 $'000 $'000 $'000 $'000 $'000
ASSETS
Property, plant and equipment 1,798 4,221 379 - - 6,398
Intangible assets - 8,479 - - - 8,479
Deferred acquisition costs 420 (37) 3,123 - - 3,506
Financial assets
Equity securities
- available for sale - - - 198 - 198
Debt securities
- available for sale - - - 1,664,341 - 1,664,341
Loans and receivables 85,497 103,258 113,965 138,241 - 440,961
including insurance
receivables
Deferred tax assets - - - - 1,154 1,154
Reinsurance contracts 315,180 256,178 292,117 - - 863,475
Cash and cash equivalents - - - 157,220 - 157,220
Total assets 402,895 372,099 409,584 1,960,000 1,154 3,145,732
LIABILITIES
Insurance contracts 623,259 634,340 683,915 - - 1,941,514
Borrowings - - - 317,267 - 317,267
Provisions 2,139 1,425 1,677 - - 5,241
Other liabilities and charges 5,795 31,677 3,482 - - 40,954
Trade and other payables 118,984 90,631 145,991 - - 355,606
Current income tax
liabilities - - - - 1,009 1,009
Total liabilities 750,177 758,073 835,065 317,267 1,009 2,661,591
Net assets 484,141
EQUITY
Capital and reserves attributable to the Company's equity
holders
Share capital 1,738
Other reserves 687,377
Retained loss (204,974)
Total equity 484,141
The capital expenditures (see also note 18) are as follows:
Alea Alea Alea Alea Non - Total
London North Europe Financial allocated
America Services
$'000 $'000 $'000 $'000 $'000 $'000
Year ended 31 December 2007 54 337 256 - - 647
Year ended 31 December 2006 473 263 - - - 736
Secondary segment information - geographical analysis
The following provides an analysis of gross premiums written by location of
insured and by location of legal entity accepting the risk, and of (loss)/profit
before tax by legal entity accepting risk.
Year ended Year ended
Geographical analysis of gross premiums written by location of insured 31 December 31 December
2007 2006
$'000 $'000
Europe 8,495 (267)
Africa 18 (28)
Near & Middle East 28 (108)
Far East 17 181
Australia & Oceania 172 (96)
North America 3,914 (76,329)
Latin America 39 1,728
12,683 (74,919)
Geographical analysis by location of legal entity
Gross premiums written (Loss)/profit before tax
Year ended Year ended Year ended Year ended
31 December 31 December 31 December 31 December
2007 2006 2007 2006
$'000 $'000 $'000 $'000
Bermuda 613 1,735 (43,011) (8,176)
Jersey - 74 - (1,606)
United Kingdom 2,593 20,973 (9,272) 5,958
United States (6,415) (104,102) (28,214) (24,570)
Switzerland 15,892 6,401 2,417 21,057
12,683 (74,919) (78,080) (7,337)
Geographical analysis by location of legal entity
Carrying value of assets Additions to property, plant
and equipment
As at As at Year ended Year ended
31 December 31 December 31 December 31 December
2007 2006 2007 2006
$'000 $'000 $'000 $'000
Bermuda 796,896 1,135,396 20 -
Jersey - - - -
United Kingdom 512,483 659,344 54 473
United States 408,889 578,450 317 263
Switzerland 638,021 772,542 256 -
2,356,289 3,145,732 647 736
As at As at
31 December 31 December
2007 2006
Operating equity and shareholders' equity interests $'000 $'000
Alea Europe Ltd 239,330 230,660
Alea (Bermuda) Ltd 1 134,703 226,651
Alea US 230,359 241,491
Amounts held in Holding Companies (26,054) 103,703
Amounts held in non-insurance subsidiaries (2,514) (1,097)
Note provided by Alea Europe Ltd to Alea US - -
575,824 801,408
Amounts owed to credit institutions (30,000) (199,574)
Trust preferred securities (117,785) (117,693)
Shareholders' funds attributable to equity interests 428,039 484,141
1 Alea London Limited is wholly owned by Alea (Bermuda) Ltd has net assets as follows:
As at As at
31 December 31 December
2007 2006
$'000 $'000
Alea London Limited 81,827 87,954
8 Investment income
Year ended Year ended
31 December 31 December
2007 2006
$'000 $'000
Financial assets - available for sale:
- Interest income from debt securities 67,070 86,537
Cash and cash equivalents interest income 6,019 8,284
73,089 94,821
9 Net realised losses on financial assets
Year ended Year ended
31 December 31 December
2007 2006
$'000 $'000
Realised gains on financial assets - available 281 4,700
for sale
Realised losses on financial assets - available (1,591) (7,200)
for sale
(1,310) (2,500)
10 Sale of subsidiary
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 recognised in its IFRS accounts a net realised gain
on the sale of $4.3 million in 2006.
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 As at
31 December 29 September
2007 2006
$'000 $'000
ASSETS
Deferred acquisition costs - 45
Financial assets
Debt securities
- available for sale - 25,532
Loans and receivables including insurance receivables - 2,853
Reinsurance contracts - 9,487
Cash and cash equivalents - 4,477
Total assets - 42,394
LIABILITIES
Insurance contracts - 11,769
Other liabilities and charges - 177
Trade and other payables - 58
Total liabilities - 12,004
Net Assets - 30,390
Net realised gains on sale of subsidiary - 4,336
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 disposed of - (4,477)
Total net cash inflow on disposal - 30,249
11 Movement in prior year provision for insurance claims, net of reinsurance
The table below presents amounts included in incurred claims arising from the
movement in the prior year provision for claims outstanding net of reinsurance.
An increase is an adverse run-off deviation and a decrease is a positive run-off
deviation to the provision for claims outstanding, net of reinsurance held at
the previous balance sheet date.
Year ended Year ended
31 December 31 December
2007 2006
Increase/(decrease) in claims outstanding net of reinsurance before $'000 $'000
discount
Underwriting years 1999 and prior 608 (3,242)
Underwriting year 2000 2,475 1,465
Underwriting year 2001 6,298 5,164
Underwriting year 2002 10,072 5,770
Underwriting year 2003 12,546 (1,465)
Underwriting year 2004 (13,677) (26,846)
Underwriting year 2005 4,777 2,209
23,099 (16,945)
Claims outstanding net of reinsurance at prior year end before discount 1,171,165 1,612,450
Discount (95,533) (116,679)
1,075,632 1,495,771
This information is provided by RNS
The company news service from the London Stock Exchange
MORE TO FOLLOW
FR UUUACWUPRUWQ
Alea (LSE:ALEA)
Historical Stock Chart
From Jun 2024 to Jul 2024
Alea (LSE:ALEA)
Historical Stock Chart
From Jul 2023 to Jul 2024
