TIDMALEA
RNS Number : 0809Y
Alea Group Holdings(Bermuda) Ltd
27 August 2009
Alea Group Holdings (Bermuda) Ltd
Interim results for the six months ended 30 June 2009
Alea announces interim results and provides an update on run-off
As detailed in the section headed "Significant Events and Directorate Changes",
on 29 June 2009 the Group1 entered into a share purchase agreement to sell Alea
Holdings UK Limited along with its two subsidiaries (Alea London Limited and
Alea Services UK Limited) to Catalina Holdings (Bermuda) Ltd. Consequently, the
three companies that make up the Alea Holdings UK Limited sub-group have been
treated as a disposal group held for sale as at 30 June 2009 in the condensed
set of consolidated financial statements for the six months ended 30 June 2009.
The results of this disposal group for the six months ended 30 June 2009 and for
the comparative periods are presented as discontinued operations in accordance
with IFRS 5 'Non-current Assets Held for Sale and Discontinued Operations' and
are excluded from financial performance measures in the financial review.
Financial Performance2
* Insurance contract liabilities of the continuing operations decreased by 11.9%
from $885.7 million at 31 December 2008 to $780.5 million at 30 June 20093.
* Investment income was $20.2 million on average invested assets of $930.0 million
(30 June 2008: $24.9 million on average invested assets of $1,145.4 million).
* The Group recognised an impairment of $21.6 million in respect of certain
non-agency US mortgage-backed securities (30 June 2008: $nil).
* Adverse reserve development, net of reinsurance and excluding the impact of
commutations and discount in the six months ended 30 June 2009 was $10.9 million
(30 June 2008: adverse reserve development of $6.6 million, net of reinsurance
and excluding the impact of commutations and discount).
* Other operating expenses for the six months ended 30 June 2009 were $15.7
million (30 June 2008: $15.6 million).
* The result of operating activities was a loss of $28.9 million (30 June 2008:
profit of $3.6 million).
* Loss after tax from continuing operations was $33.7 million (30 June 2008: loss
after tax from continuing operations of $3.5 million).
* The loss after tax derived from discontinued operations was $11.0 million (30
June 2008: profit after tax from discontinued operations of $4.3 million).
* Loss after tax was $44.7 million (30 June 2008: profit after tax of $0.8
million) which on a per share4,5 basis was a loss of $0.26 (30 June 2008:
profit per share of $0.00).
* Net asset value of $2.08 per share (31 December 2008: $2.34 per share; 30 June
2008: $2.29 per share), including the impact of unrealised losses on
investments.
Significant Events and Directorate Changes
On 18 March 2009, Constantine Darras tendered his resignation as a non-executive
director of the Company with effect from 18 March 2009. On 24 April 2009, the
Group announced that Mark Cloutier, CEO of Alea will step down from the Board of
Directors and resign his position as CEO with effect from 31 March 2010, to
pursue other interests. As previously announced, Mr Cloutier intends to stay
actively involved at Alea as CEO and a member of the Board until 31 March 2010.
The Board has initiated the search process for a new CEO.
On 29 June 2009, Alea entered into a share purchase agreement to sell its
UK-based subsidiary Alea Holdings UK Limited to Catalina Holdings (Bermuda) Ltd.
Under the agreement, Alea Holdings UK Limited and its subsidiaries will be sold
at a discount to the book value at which it was carried in the Group's
consolidated financial statements as at 31 December 2008. Consequently, in the
six months ended 30 June 2009 the Group has recognised an estimated loss on
disposal of $12.8 million in respect of this transaction. Completion of the
transaction is contingent upon customary closing conditions and the required
regulatory approvals and notices. Further details relating to discontinued
operations are disclosed in note 10 of the Financial Statements.
Dividend
The Company has not proposed an interim dividend for the 2009 financial year
(2008: $nil).
Notes
1. "Company" refers to Alea Group Holdings (Bermuda) Ltd only. "Group" or "Alea"
refers to Alea Group Holdings (Bermuda) Ltd and all its subsidiaries.
2. Except where specifically indicated all income statement amounts and their
comparatives refer to continuing operations only.
3. Except where specifically indicated all statements refer to the six months ended
30 June 2009 or 30 June 2008.
4. Weighted average number of ordinary shares of 173.9 million on an undiluted
basis (30 June 2008: 173.8 million), 174.2 million on a diluted basis (30 June
2008: 173.8 million).
5. Basic and diluted profit per share are the same value on a rounded basis.
Financial information presented herein has been prepared in accordance with
International Financial Reporting Standards ("IFRS").
Your attention is drawn to the further information contained in the following
sections of this document. You should read the whole of this document and not
just rely on the information contained in this headline summary, which is
qualified in its entirety by the further information contained elsewhere in this
document.
For further information, please contact:
Mark Cloutier
+1 441 296 9150
Sheel Sawhney
+1 860 258 6524
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.
RESPONSIBILITY STATEMENT
The Directors confirm that to the best of their knowledge:
(a) the condensed set of financial statements has been prepared in accordance
with IAS 34 'Interim Financial Reporting and gives a true and fair view of the
assets, liabilities, financial position and profit or loss of the undertakings
included in the consolidation as a whole as required by DTR 4.2.4 R;
(b) the interim management report includes a fair review of the information
required by DTR 4.2.7 R being an indication of important events during the first
six months of the financial year, and their impact on the condensed set of
financial statements and a description of the principal risks and uncertainties
for the remaining six months of the year; and
(c) the interim management report includes a fair review of the information
required by DTR 4.2.8 R, being related parties transactions that have taken
place in the first six months of the current financial year and that have
materially affected the financial position or performance of the Group during
that period and any changes in the related parties transactions described in the
last annual report that could have a material effect on the financial position
or performance of the Group in the first six months of the current financial
year.
By order of the Board
Mark B. Cloutier
CEO
26 August 2009
Carl E. Speck
CFO
26 August 2009
MANAGEMENT REPORT
CHIEF EXECUTIVE OFFICER'S REPORT
The first half of 2009 was clearly a very challenging time for the Group as
evidenced by our results. While struggling with continuing difficulties in the
financial markets and the impact thereof on our income statement and balance
sheet we were still able to make progress in our efforts to reduce overall
reserve obligations, simplify and consolidate the Group's business and balance
sheet and to release capital from our regulated subsidiaries.
Our net loss for the period of $44.7 million was impacted by a number of
one-time items, additions to our reserves for unpaid claims, and most
significantly by other-than-temporary impairment charges relating to several of
our non-agency US mortgage-backed securities. The one-time items include costs
associated with the sale of Alea Holdings UK Limited, several issues arising
from the continued run-off of the Group which are described in the Financial
Review under the heading "Other operating expenses", and the re-securitisation
of a portion of our non-agency US mortgage-backed securities holdings. The
re-securitisation was completed in response to the rating agency downgrade
actions disclosed in our 2008 Annual Financial Report. Further information
relating to the $21.6 million of impairment charges is provided in the Financial
Review under the heading "Investment income, realised gains and losses and
impairment of financial assets".
During the period, insurance contract liabilities decreased $105.2 million
representing further deleveraging of our assets. We completed a number of
commutations on very favorable terms and closed approximately 750 insurance
claims in our direct portfolio, all representing good progress. On the other
hand, we continued to experience net adverse development of $10.9 million in our
provisions for unpaid claims with the majority of that development occurring in
our North American insurance reserve portfolio where, unfortunately, we are not
able to cut off our obligations through commutations. We continue to monitor
that portfolio closely and are taking an aggressive view towards closing cases
at the earliest opportunity.
With respect to the sale of Alea Holdings UK Limited, as previously disclosed,
we believe this transaction represents an opportunity to crystallise the value
embedded in that group of regulated companies and release the majority of the
capital contained therein. A key consideration for us is the fact that insurance
contract obligations are reduced by $315.5 million through the sale and the
capital supporting those obligations becomes available for other uses. It should
be noted the loss reported from discontinued operations of $11.0 million
includes deal-related expenses, the profit for the period of this group and the
estimated loss on the disposal of these discontinued operations in accordance
with IFRS accounting principles.
On 22 May 2009, we perfected a re-securitisation of approximately $264.9 million
of certificate principal balance of non-agency US mortgage-backed securities
resulting in approximately $62.5 million (market value) of securities being
re-qualified to serve as collateral in the various trust and security accounts
we have posted to counterparties as collateral for our assumed reinsurance
obligations. Further information is provided in the Financial Review under the
heading "Invested assets". The cost incurred for the re-securitisation was $1.8
million. The successful completion of this transaction is consistent with, and
supportive of our buy and hold strategy for those securities as discussed in
previous disclosures.
As we move through the second half of the year we will work with regulators to
see the successful completion of the sale of Alea Holdings UK Limited and will
remain diligent in our efforts to preserve and grow our capital, reduce expenses
and liabilities, and explore further opportunities to realise and/ or enhance
the value of the Group.
Mark Cloutier
Chief Executive Officer
26 August 2009
FINANCIAL REVIEW
Consolidated income statement 1
+----------------------------------+---+---+---+---+----+---+---+---+---+---------------+---+
| | | |
+----------------------------------------------+------------------------+-------------------+
| | Six months ended | Year ended |
+----------------------------------------------+------------------------+-------------------+
| | 30 June | 30 June | 31 December |
| | 2009 | 2008 | 2008 |
+----------------------------------------------+------------+-----------+-------------------+
| | $'million | $'million | $'million |
+----------------------------------------------+------------+-----------+-------------------+
| Gross premiums written | 10.7 | 8.0 | 13.8 |
+----------------------------------------------+------------+-----------+-------------------+
| | | | |
+----------------------------------------------+------------+-----------+-------------------+
| Revenue | | | |
+----------------------------------------------+------------+-----------+-------------------+
| Premium revenue | 10.8 | 7.9 | 13.6 |
+----------------------------------------------+------------+-----------+-------------------+
| Premium (ceded to) / received from | (0.1) | 2.1 | 2.2 |
| reinsurers | | | |
+----------------------------------------------+------------+-----------+-------------------+
| Net insurance premium revenue | 10.7 | 10.0 | 15.8 |
+----------------------------------------------+------------+-----------+-------------------+
| | | | |
+----------------------------------------------+------------+-----------+-------------------+
| Fee income | - | 0.5 | 0.5 |
+----------------------------------------------+------------+-----------+-------------------+
| Investment income | 20.2 | 24.9 | 62.8 |
+----------------------------------------------+------------+-----------+-------------------+
| Net realised gains / (losses) on financial | 4.7 | (0.9) | (1.0) |
| assets | | | |
+----------------------------------------------+------------+-----------+-------------------+
| Impairment of financial assets | (21.6) | - | (2.6) |
+----------------------------------------------+------------+-----------+-------------------+
| Total revenue | 14.0 | 34.5 | 75.5 |
+----------------------------------------------+------------+-----------+-------------------+
| | | | |
+----------------------------------------------+------------+-----------+-------------------+
| Expenses | | | |
+----------------------------------------------+------------+-----------+-------------------+
| Insurance claims and loss adjustment | 14.8 | (3.9) | 25.3 |
| expenses | | | |
+----------------------------------------------+------------+-----------+-------------------+
| Insurance claims and loss adjustment | 8.7 | 15.8 | 5.7 |
| expenses paid to reinsurers | | | |
+----------------------------------------------+------------+-----------+-------------------+
| Net insurance claims | 23.5 | 11.9 | 31.0 |
+----------------------------------------------+------------+-----------+-------------------+
| | | | |
+----------------------------------------------+------------+-----------+-------------------+
| Acquisition costs | 3.6 | 3.1 | 5.8 |
+----------------------------------------------+------------+-----------+-------------------+
| Other operating expenses | 15.7 | 15.6 | 30.0 |
+----------------------------------------------+------------+-----------+-------------------+
| Restructuring costs | 0.1 | 0.3 | 1.1 |
+----------------------------------------------+------------+-----------+-------------------+
| Total expenses | 42.9 | 30.9 | 67.9 |
+----------------------------------------------+------------+-----------+-------------------+
| | | | |
+----------------------------------------------+------------+-----------+-------------------+
| Results of operating activities | (28.9) | 3.6 | 7.6 |
+----------------------------------------------+------------+-----------+-------------------+
| | | | |
+----------------------------------------------+------------+-----------+-------------------+
| Finance costs | (5.1) | (6.0) | (5.5) |
+----------------------------------------------+------------+-----------+-------------------+
| | | | |
+----------------------------------------------+------------+-----------+-------------------+
| (Loss) / profit before income tax | (34.0) | (2.4) | 2.1 |
+----------------------------------------------+------------+-----------+-------------------+
| | | | |
+----------------------------------------------+------------+-----------+-------------------+
| Income tax credit / (expense) | 0.3 | (1.1) | (1.1) |
+----------------------------------------------+------------+-----------+-------------------+
| | | | |
+----------------------------------------------+------------+-----------+-------------------+
| (Loss) / profit for the period from | (33.7) | (3.5) | 1.0 |
| continuing operations | | | |
+----------------------------------------------+------------+-----------+-------------------+
| | | | | |
+----------------------------------+---------------+--------+-----------+---------------+
| Discontinued operations | | | |
+----------------------------------------------+------------+-----------+-------------------+
| | | | | |
+----------------------------------+---------------+--------+-----------+---------------+
| (Loss) / profit for the period from discontinued | (11.0) | 4.3 | 2.9 |
| operations | | | |
+--------------------------------------------------+--------+-----------+-------------------+
| | | | | |
+----------------------------------+---------------+--------+-----------+---------------+
| (Loss) / profit for the period | (44.7) | 0.8 | 3.9 |
+----------------------------------------------+------------+-----------+-------------------+
| | | |
| | | |
+----------------------------------+---+---+---+---+----+---+---+---+---+---------------+---+
1 These results have been prepared on a going concern basis. The Directors
consider this to be the appropriate basis as set forth in note 2 of the
Financial Statements.
Performance indicators and comparison to prior years
The Group ceased underwriting new and renewal business and was placed into
run-off and as a result, the standard indicators used to assess the performance
of participants in the insurance industry are not considered appropriate for the
Group. Performance indicators that are relevant to the Group's run-off strategy
are provided where these provide meaningful and useful comparisons.
Reserves and claims
At 30 June 2009, the insurance contracts balance comprising gross claims
outstanding less discount on claims outstanding, claims handling provisions and
provision for unearned premiums carried on the balance sheet was $780.5 million.
In accordance with IFRS 5 'Non-current Assets Held for Sale and Discontinued
Operations' insurance contract liabilities of $315.5 million relating to the
Alea Holdings UK Limited disposal group are shown under the balance sheet
heading 'liabilities of a disposal group classified as held for sale'. At 31
December 2008, the total insurance contract liabilities of the Group excluding
those of the Alea Holdings UK Limited disposal group were $885.7 million which
represents a decrease of 11.9% in the six months to 30 June 2009. The claims
outstanding, net of reinsurance at 30 June 2009 were $484.2 million excluding
$226.3 million in reserves of the Alea Holdings UK Limited disposal group (31
December 2008: $551.6 million excluding the Alea Holdings UK Ltd disposal
group). Therefore, the change in claims outstanding, net of reinsurance was
12.2%.
The balances are set out below. The first table shows all insurance and
reinsurance contract reserves held within the Group, the second table shows the
30 June 2009 balances split between the Alea Holdings UK Limited disposal group
and the rest of the Group's continuing operations:
+----------------------------------+---------------+--------------+----------------+
| | As at | As at | As at |
+----------------------------------+---------------+--------------+----------------+
| | 30 June 20091 | 30 June 2008 | 31 December |
| | | | 2008 |
+----------------------------------+---------------+--------------+----------------+
| | $'million | $'million | $'million |
+----------------------------------+---------------+--------------+----------------+
| Gross claims outstanding | | | |
+----------------------------------+---------------+--------------+----------------+
| Provision for claims | 1,132.1 | 1,435.5 | 1,240.2 |
| outstanding, reported and not | | | |
| reported | | | |
+----------------------------------+---------------+--------------+----------------+
| Discount | (45.4) | (59.3) | (48.7) |
+----------------------------------+---------------+--------------+----------------+
| | 1,086.7 | 1,376.2 | 1,191.5 |
+----------------------------------+---------------+--------------+----------------+
| Claims handling provisions | 9.3 | 11.0 | 9.7 |
+----------------------------------+---------------+--------------+----------------+
| Total insurance contracts | 1,096.0 | 1,387.2 | 1,201.2 |
+----------------------------------+---------------+--------------+----------------+
| | | | |
+----------------------------------+---------------+--------------+----------------+
| Total reinsurance | | | |
+----------------------------------+---------------+--------------+----------------+
| Provision for claims | 387.7 | 465.7 | 425.5 |
| outstanding, reported and not | | | |
| reported | | | |
+----------------------------------+---------------+--------------+----------------+
| Discount | (2.2) | (2.7) | (2.2) |
+----------------------------------+---------------+--------------+----------------+
| Total reinsurance contracts | 385.5 | 463.0 | 423.3 |
+----------------------------------+---------------+--------------+----------------+
| | | | |
+----------------------------------+---------------+--------------+----------------+
| Undiscounted claims outstanding, | 753.7 | 980.8 | 824.4 |
| net of reinsurance | | | |
+----------------------------------+---------------+--------------+----------------+
| Discount | (43.2) | (56.6) | (46.5) |
+----------------------------------+---------------+--------------+----------------+
| Claims outstanding, net of | 710.5 | 924.2 | 777.9 |
| reinsurance | | | |
+----------------------------------+---------------+--------------+----------------+
+----------------------------------+---------------+--------------+----------------+
| | Classified as | Classified | Total |
| | disposal | as insurance | |
| | group | and | |
+----------------------------------+---------------+--------------+----------------+
| | | reinsurance | |
| | | contracts | |
+----------------------------------+---------------+--------------+----------------+
| | | | |
+----------------------------------+---------------+--------------+----------------+
| | As at | As at | As at |
+----------------------------------+---------------+--------------+----------------+
| | 30 June 2009 | 30 June 2009 | 30 June 20091 |
+----------------------------------+---------------+--------------+----------------+
| | $'million | $'million | $'million |
+----------------------------------+---------------+--------------+----------------+
| Gross claims outstanding | | | |
+----------------------------------+---------------+--------------+----------------+
| Provision for claims | 319.0 | 813.1 | 1,132.1 |
| outstanding, reported and not | | | |
| reported | | | |
+----------------------------------+---------------+--------------+----------------+
| Discount | (6.3) | (39.1) | (45.4) |
+----------------------------------+---------------+--------------+----------------+
| | 312.7 | 774.0 | 1,086.7 |
+----------------------------------+---------------+--------------+----------------+
| Claims handling provisions | 2.8 | 6.5 | 9.3 |
+----------------------------------+---------------+--------------+----------------+
| Total insurance contracts | 315.5 | 780.5 | 1,096.0 |
+----------------------------------+---------------+--------------+----------------+
| | | | |
+----------------------------------+---------------+--------------+----------------+
| Total reinsurance | | | |
+----------------------------------+---------------+--------------+----------------+
| Provision for claims | 89.2 | 298.5 | 387.7 |
| outstanding, reported and not | | | |
| reported | | | |
+----------------------------------+---------------+--------------+----------------+
| Discount | - | (2.2) | (2.2) |
+----------------------------------+---------------+--------------+----------------+
| Total reinsurance contracts | 89.2 | 296.3 | 385.5 |
+----------------------------------+---------------+--------------+----------------+
| | | | |
+----------------------------------+---------------+--------------+----------------+
| Undiscounted claims outstanding, | 232.6 | 521.1 | 753.7 |
| net of reinsurance | | | |
+----------------------------------+---------------+--------------+----------------+
| Discount | (6.3) | (36.9) | (43.2) |
+----------------------------------+---------------+--------------+----------------+
| Claims outstanding, net of | 226.3 | 484.2 | 710.5 |
| reinsurance | | | |
+----------------------------------+---------------+--------------+----------------+
The following table presents the Group's total booked gross claims outstanding
before claims handling provisions and before discount including those of the
Alea Holdings UK Limited disposal group as at 30 June 2009 by class of business.
+-----------------------+-----------+--------+----------+--------------+----------+------+---------+
| | General | Motor | Workers' | Professional | Property | MAT1 | Total |
| $'million | liability | | comp. | | | | |
+-----------------------+-----------+--------+----------+--------------+----------+------+---------+
| 1999 and prior | 47.9 | 54.2 | 5.4 | 1.9 | 24.8 | 65.5 | 199.7 |
+-----------------------+-----------+--------+----------+--------------+----------+------+---------+
| 2000 | 17.5 | 9.0 | 11.8 | 8.3 | 4.2 | 17.7 | 68.5 |
+-----------------------+-----------+--------+----------+--------------+----------+------+---------+
| 2001 | 18.3 | 6.1 | 17.8 | 5.1 | 1.8 | 8.3 | 57.4 |
+-----------------------+-----------+--------+----------+--------------+----------+------+---------+
| 2002 | 15.7 | 4.6 | 5.9 | 8.4 | 4.4 | 2.7 | 41.7 |
+-----------------------+-----------+--------+----------+--------------+----------+------+---------+
| 2003 | 23.0 | 11.6 | 2.3 | 15.3 | 1.2 | 1.2 | 54.6 |
+-----------------------+-----------+--------+----------+--------------+----------+------+---------+
| 2004 | 21.0 | 16.3 | 4.2 | 16.8 | 3.4 | 0.1 | 61.8 |
+-----------------------+-----------+--------+----------+--------------+----------+------+---------+
| 2005 | 12.9 | 23.5 | 1.7 | 21.0 | 21.8 | 0.2 | 81.1 |
+-----------------------+-----------+--------+----------+--------------+----------+------+---------+
| Reinsurance reserves | 156.3 | 125.3 | 49.1 | 76.8 | 61.6 | 95.7 | 564.8 |
+-----------------------+-----------+--------+----------+--------------+----------+------+---------+
| Insurance reserves | 125.4 | 29.8 | 57.3 | 21.5 | 6.3 | - | 240.3 |
+-----------------------+-----------+--------+----------+--------------+----------+------+---------+
| Total non-life | 281.7 | 155.1 | 106.4 | 98.3 | 67.9 | 95.7 | 805.1 |
| reserves | | | | | | | |
+-----------------------+-----------+--------+----------+--------------+----------+------+---------+
| Life structured | | | | | | | 238.6 |
| settlements | | | | | | | |
+-----------------------+-----------+--------+----------+--------------+----------+------+---------+
| Life reinsurance | | | | | | | 88.4 |
+-----------------------+-----------+--------+----------+--------------+----------+------+---------+
| Provision for claims outstanding, reported and not | | | 1,132.1 |
| reported | | | |
+-----------------------+-----------+--------+----------+--------------+----------+------+---------+
1 Marine, Aviation and Transport
The following table sets out Alea's gross claims outstanding including those of
the Alea Holdings UK Limited disposal group distinguishing between incurred but
not reported ("IBNR") and case reserves as at 30 June 2009.
+--------------------------------------------------------------+------------------+
| Percentage | Total |
+--------------------------------------------------------------+------------------+
| Case reserves | 47% |
+--------------------------------------------------------------+------------------+
| IBNR | 53% |
+--------------------------------------------------------------+------------------+
| Total | 100% |
+--------------------------------------------------------------+------------------+
Adverse reserve development
During the six months ended 30 June 2009 the Group experienced adverse
development in the reserves, net of reinsurance and excluding the impact of
commutations and discount of $10.9 million (30 June 2008: adverse reserve
development, net of reinsurance and excluding the impact of commutations and
discount of $6.6 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 30 June 2009 39%
(31 December 2008: 38%; 30 June 2008: 39%) of the Group's gross reserves
excluding those of the Alea Holdings UK Limited disposal group were discounted
at a rate of 4.0% (31 December 2008: 4.0%; 30 June 2008: 4.0%).
As at 30 June 2009 the Group's total net discount was $43.2 million, which
consists of $36.9 million included within the line items 'insurance contracts'
and 'reinsurance contracts' and $6.3 million included within the line items
'assets of a disposal group classified as held for sale' and 'liabilities of a
disposal group classified as held for sale' (31 December 2008: $46.5 million; 30
June 2008: $56.6 million). This is expected to reduce to 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 level of four years as permitted by IFRS 4.
Income statement
Gross premiums written and net insurance premium revenue
Gross premiums written in the six months ended 30 June 2009 were $10.7 million
(30 June 2008: $8.0 million). Net insurance premium revenue increased by 7.5% to
$10.7 million in the six months ended 30 June 2009 (30 June 2008: $10.0
million). This low volume results from and is to be expected due to the Group's
decision in 2005 to cease writing new and renewal business.
Fee income
Fee income in the six months ended 30 June 2009 was $nil compared with $0.5
million recorded in the corresponding period in 2008. The fee income in 2008
represents a settlement received by Alea North America Insurance Company in
connection with disputed premium income.
Investment income, realised gains and losses and impairment of financial assets
Investment income in the six months ended 30 June 2009 was $20.2 million, 18.9%
($4.7 million) lower than the $24.9 million recorded in the six months ended 30
June 2008. This reflects a 4.3% yield on invested assets for the six months
ended 30 June 2009 on average invested assets of $930.0 million compared with a
4.3% yield on invested assets for the six months ended 30 June 2008 on average
invested assets of $1,145.4 million.
Net realised gains on financial assets were $4.7 million in the six months ended
30 June 2009 (30 June 2008: $0.9 million realised losses).
The Group recognised an impairment to the amortised cost of non-agency US
mortgage-backed securities of $21.6 million in the six months ended 30 June 2009
(six months ended 30 June 2008: $nil).
At each balance sheet date the Group performs an impairment test with regards to
its non-agency US mortgage-backed securities. An impairment is recognised
wherever the carrying amounts of the assets are less than their recoverable
amounts. Recoverable amounts are determined by projecting estimated future cash
flows associated with holding the assets. Estimating future cash flows requires
explicit assumptions about the future behaviour of the loans collateralising the
securitisation to be made. The key variables in describing the behaviour of
these assets include; the rate of voluntary prepayments, the rate of defaults
and the loss severity on defaulted loans. The data used for the testing is based
in part on historical performance of similar type structured bonds.
Insurance claims and loss adjustment expenses
In the six months ended 30 June 2009, the Group incurred net insurance claims
and loss adjustment expenses of $23.5 million, including net adverse reserve
development of $10.9 million (six months ended 30 June 2008: $11.9 million
including net adverse reserve development of $6.6 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.
In the six months ended 30 June 2009, total acquisition costs were $3.6 million
(30 June 2008: $3.1 million including a reversal of ceded commission of $0.7
million related to a settlement made in North America in respect of disputed
premium income. This is referred to in the "Fee income" section above).
Acquisition costs also include $1.4 million (30 June 2008: $1.3 million) of
commission in respect of life business.
The Group has assessed its deferred acquisition cost asset ("DAC") at 30 June
2009 of $1.3 million (31 December 2008: $1.6 million, 30 June 2008: $2.0
million) as fully recoverable and as a result has not recorded any DAC write-off
in the six months ended 30 June 2009.
Other operating expenses
The Group is focused on minimising operating expenses 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 on net claims outstanding released does not offset other operating
expenses in relation to run-off activities, the Group will establish a run-off
provision.
In the six months ended 30 June 2009, other operating expenses were $15.7
million which includes termination costs of $0.6 million related to a previous
outsourcing agreement, a write-off of capitalised expenses of $0.3 million
relating to Alea Syndicate Management Limited and an over-run of audit fees of
$0.2 million resulting from additional work required in connection with the
downgrades experienced in the non-agency US mortgage-backed securities portfolio
as described the in the section titled "Invested assets". This compares with
other operating expenses in the six months ended 30 June 2008 of $15.6 million.
Restructuring costs
In the six months ended 30 June 2009, restructuring costs were $0.1 million
which consist of severance payments that were not part of the restructuring
provision established at 31 December 2005. In the six months ended 30 June 2008
restructuring costs, which consist of severance payments only, were $0.3
million.
Staff headcount at 30 June 2009 stood at 64 (31 December 2008: 84, 30 June 2008:
92). Excluding the staff of the Alea Holdings UK Limited disposal group, staff
headcount at 30 June 2009 was 43.
Results of operating activities
In the six months ended 30 June 2009, the result of operating activities was a
loss of $28.9 million (including impairment of financial assets of $21.6
million) compared with a profit of $3.6 million in the six months ended 30 June
2008.
Finance costs
Finance costs include investment expenses, foreign exchange movements and debt
interest. In the six months ended 30 June 2009 total finance costs were $5.1
million, compared with $6.0 million recorded in the corresponding period in
2008. Included within finance costs is $2.7 million of interest payable on
$120.0 million of 30-year hybrid trust preferred securities referred to in the
section below entitled "Financing Facilities". Investment expenses also include
a charge of $1.8 million which relates to the costs incurred in re-securitising
certain non-agency US mortgage-backed securities (six months ended 30 June 2008:
$nil). Further detail is provided in the section titled "Invested assets".
Loss before income tax from continuing operations
Loss before income tax from continuing operations was $34.0 million in the six
months ended 30 June 2009 compared with a loss of $2.4 million in the six months
ended 30 June 2008.
Income tax (credit) / expense
The income tax credit in respect of continuing operations in the six months
ended 30 June 2009 was $0.3 million, compared with an expense of $1.1 million in
the six months ended 30 June 2008
The impact of the income tax expense on the income statement is summarised as
follows:
+-----------------------------+----------------+--------+-----------+----------------+
| | | | Continuing operations |
+-----------------------------+----------------+--------+----------------------------+
| | | | |
+-----------------------------+----------------+--------------------+----------------+
| | Six months | Six months ended | Year |
| | ended | | ended |
+-----------------------------+----------------+--------------------+----------------+
| | 30 June 2009 | 30 June 2008 | 31 December |
| | | | 2008 |
+-----------------------------+----------------+--------------------+----------------+
| | $'million | $'million | $'million |
+-----------------------------+----------------+--------------------+----------------+
| Current tax (credit) / | | | |
| expense: | | | |
+-----------------------------+----------------+--------------------+----------------+
| | | | |
+-----------------------------+----------------+--------------------+----------------+
| UK corporation tax | - | - | - |
+-----------------------------+----------------+--------------------+----------------+
| Foreign tax | (0.3) | - | - |
+-----------------------------+----------------+--------------------+----------------+
| | | | |
+-----------------------------+----------------+--------------------+----------------+
| Total current (credit) / | (0.3) | - | - |
| expense: | | | |
+-----------------------------+----------------+--------------------+----------------+
| | | | |
+-----------------------------+----------------+--------------------+----------------+
| Deferred tax expense: | - | 1.1 | 1.1 |
+-----------------------------+----------------+--------------------+----------------+
| | | | |
+-----------------------------+----------------+--------------------+----------------+
| Total income tax (credit) / | (0.3) | 1.1 | 1.1 |
| expense | | | |
+-----------------------------+----------------+--------+-----------+----------------+
I
+-----------------------------+----------------+--------+-----------+----------------+
| | | | |
| | | | Discontinued operations |
+-----------------------------+----------------+--------+----------------------------+
| | | | |
+-----------------------------+----------------+--------------------+----------------+
| | Six months | Six months ended | Year |
| | ended | | ended |
+-----------------------------+----------------+--------------------+----------------+
| | 30 June 2009 | 30 June 2008 | 31 December |
| | | | 2008 |
+-----------------------------+----------------+--------------------+----------------+
| | $'million | $'million | $'million |
+-----------------------------+----------------+--------------------+----------------+
| Current tax expense: | | | |
+-----------------------------+----------------+--------------------+----------------+
| | | | |
+-----------------------------+----------------+--------------------+----------------+
| UK corporation tax | 0.1 | 0.1 | - |
+-----------------------------+----------------+--------------------+----------------+
| Foreign tax | 0.1 | 0.1 | 1.1 |
+-----------------------------+----------------+--------------------+----------------+
| | | | |
+-----------------------------+----------------+--------------------+----------------+
| Total current expense: | 0.2 | 0.2 | 1.1 |
+-----------------------------+----------------+--------------------+----------------+
| | | | |
+-----------------------------+----------------+--------------------+----------------+
| Deferred tax expense: | 0.1 | - | 0.1 |
+-----------------------------+----------------+--------------------+----------------+
| | | | |
+-----------------------------+----------------+--------------------+----------------+
| Total income tax expense | 0.3 | 0.2 | 1.2 |
+-----------------------------+----------------+--------+-----------+----------------+
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. The majority of the trading losses of
the UK entities relate to the Alea Holdings UK Limited disposal group and are
treated as discontinued operations.
In the six months ended 30 June 2009, the Group's current tax credit was $0.3
million (six months ended 30 June 2008: $nil).
In the six months ended 30 June 2008, the deferred tax expense in the income
statement included $1.0 million in respect of the Group's North American
entities. This charge related to unrealised losses taken directly to equity and
consequently there was a corresponding deferred tax credit to equity and no
overall impact on the Group's net assets.
Loss on ordinary activities after income tax from continuing operations
Loss on ordinary activities after income tax in the six months ended 30 June
2009 was $33.7 million (six months ended 30 June 2008: loss of $3.5 million).
Discontinued operations
Discontinued operations consist of the results of the following wholly-owned
subsidiaries for the six months ended 30 June 2009: Alea Holdings UK Limited,
Alea London Limited and Alea Services UK Limited. The results derived from these
entities have been classified as discontinued as these entities form a disposal
group that is available-for-sale. The assets and liabilities of these
subsidiaries have been reclassified to assets and liabilities of a disposal
group classified as held for sale on the face of the balance sheet.
On the 29 June 2009, the Group entered into a definitive agreement for the sale
of the UK disposal group described above, subject to regulatory approvals. The
agreement calls for the sale of these UK operations at a fixed price (i.e.
without adjustment for changes in investment valuations or reserves during the
regulatory approval process).
The results of discontinued operations for the six months ended 30 June 2009 are
a loss of $11.0 million (30 June 2008: profit of $4.3 million). The loss for the
six months ended 30 June 2009 consists of a profit on ordinary activities after
income tax of $1.8 million and an estimated loss on the disposal of these
discontinued operations of $12.8 million.
(Loss) / profit per share
Basic and fully diluted loss per share for all operations of the Group for the
six months ended 30 June 2009 was $0.26 per share (six months ended 30 June
2008: profit per share of $0.00).
Dividend
The Company will not be paying an interim dividend for the 2009 financial year
(interim 2008: $nil).
Balance sheet
Total assets
Total assets as at 30 June 2009 decreased by 6.2% to $1,730.9 million from
$1,845.6 million as at 31 December 2008.
Net assets
Net assets (shareholders' funds attributable to equity interests) at 30 June
2009 were $361.1 million (31 December 2008: $406.1 million, 30 June 2008: $398.7
million). Net assets per share were $2.08 (31 December 2008: $2.34, 30 June
2008: $2.29).
Net assets have been adversely impacted by a $2.2 million increase in cumulative
unrealised losses in the investment portfolio described below. Other than the
impact of cumulative unrealised losses, net assets in the six months to 30 June
2009 have been decreased by a loss of $44.7 million and increased by a foreign
exchange gain of $1.7 million.
Reinsurance recoverables
Total reinsurers' share of claims outstanding was $296.3 million at 30 June 2009
shown under the heading 'reinsurance contracts' on the balance sheet and $89.2
million of reinsurance recoverables in respect of the Alea Holdings UK Limited
disposal group are shown within 'assets of a disposal group classified as held
for sale', giving a total balance of $385.5 million (31 December 2008: $423.3
million, 30 June 2008: $463.0 million). This is a decrease of 8.9% from the
position at 31 December 2008.
Invested assets
The nature of the Group's run-off operations coupled with its long-tail
liabilities allows the Group to pursue a buy and hold investment strategy that
can include an element of long-term securities that may experience some price
volatility. The investment portfolio does not currently consist of any material
equity holdings or direct real estate investments, but in the year ended 31
December 2008 the Group increased its asset weighting in non-agency US
mortgage-backed securities and is still holding all these investments.
As previously disclosed, in accordance with the EU endorsed amendments to IAS 39
and IFRS 7, "Reclassification of Financial Assets," the Group reclassified its
entire portfolio of non-agency US mortgage-backed securities out of investments
available-for-sale into loans and receivables. As of 1 July 2008, the date of
reclassification, the reclassified investments had an amortised cost of
$377.0 million and an approximate market value of $347.0 million. The loss
position is to be amortised over the life of the instruments using the effective
interest method.
As at 30 June 2009, financial assets carried at amortised cost within loans and
receivables had a carrying value of $374.2 million and $6.6 million of financial
assets carried at amortised cost in respect of the Alea Holdings UK Limited
disposal group are shown within 'assets of a disposal group classified as held
for sale' giving a total balance of $380.8 million (31 December 2008: $400.2
million, 30 June 2008: $nil). These assets have an approximate market value of
$169.9 million as at 30 June 2009 (31 December 2008: $253.7 million,
30 June 2008: $nil).
At 30 June 2009 the market value of available-for-sale investments was $653.8
million (of which $274.7 million has been transferred to the line item 'assets
of a disposal group classified as held for sale'), compared with $682.3 million
at 31 December 2008 (30 June 2008: $1,180.0 million). This reduction from the
position at 30 June 2008 reflects the reclassification described above of
non-agency US mortgage-backed securities out of investments available-for-sale,
and into loans and receivables.
Of total invested assets, $1,048.5 million (including those held by the Alea
Holdings UK Limited disposal group) (31 December 2008: $1,054.1 million, 30 June
2008: $1,169.2 million) is managed by fund managers with the asset mix shown
below. The remaining invested assets of $90.5 million (31 December 2008: $146.1
million, 30 June 2008: $175.3 million) include predominantly mutual funds
invested in fixed income securities and deposits at banking institutions.
The following analyses of asset class, credit rating and pledged assets include
the invested assets of the Alea Holdings UK Limited disposal group.
+---------------------------------+----+----+-------+---------------+------------------+
| Asset class | 30 June 2009 | 30 June | 31 December |
| | | 2008 | 2008 |
+---------------------------------+-----------------+---------------+------------------+
| US government | 4% | 15% | 16% |
+---------------------------------+-----------------+---------------+------------------+
| US mortgage | 23% | 19% | 21% |
+---------------------------------+-----------------+---------------+------------------+
| EU and Switzerland government and | 12% | 19% | 10% |
| corporate | | | |
+--------------------------------------+------------+---------------+------------------+
| US corporate | 4% | 3% | 3% |
+---------------------------------+-----------------+---------------+------------------+
| Asset backed securities | 14% | 18% | 22% |
+---------------------------------+-----------------+---------------+------------------+
| US municipalities | - | - | - |
+---------------------------------+-----------------+---------------+------------------+
| Canadian government and | - | 1% | - |
| provinces | | | |
+---------------------------------+-----------------+---------------+------------------+
| Cash, cash equivalents and short term | 43% | 25% | 28% |
| investments | | | |
+-------------------------------------------+-------+---------------+------------------+
| Total | 100% | 100% | 100% |
+---------------------------------+----+----+-------+---------------+------------------+
At 30 June 2009, the Group's investment portfolio had an average duration of 2.7
years (31 December 2008: 0.9 years, 30 June 2008: 0.9 years). The Group seeks to
match duration of the portfolio to expected payment patterns. The Group may
choose to increase the average duration of the portfolio in the future.
In the six months ended 30 June 2009, the Group achieved a total gross return on
the investment portfolio of negative 0.6% (30 June 2008: negative return of
0.3%). The investment return comprised 3.9% investment income (30 June 2008:
4.2%), 0.8% realised gain (30 June 2008: realised loss of 0.2%) and 5.3%
unrealised loss (30 June 2008: unrealised loss of 4.3%) on average invested
assets of $1,240.3 million (30 June 2008: $1,145.4 million).
At 30 June 2009, apart from $34.5 million rated BBB/Baa and $23.5 million rated
BB/Ba, and $87.3 million rate B or below, all of the Group's fixed income
portfolio was rated A or better and 84.2% was rated AA/Aa or better (31 December
2008: 94.6%, 30 June 2008: 98.6%) by either Standard & Poor's or Moody's. The
portfolio had a weighted average rating of AA+/Aa2 based on ratings assigned by
Standard & Poor's, Moody's or Fitch. 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 AA/Aa. The Group recognised an
impairment to the purchase of non-agency US mortgage-backed securities of $21.6
million in the six months ended 30 June 2009 (year ended 31 December 2008: $2.6
million, six months ended 30 June 2008: $nil).
There are pledges of certain investments for the issuance of letters of credit
in the normal course of business. As of 30 June 2009 the pledges covered assets
of $195.7 million (31 December 2008: $208.6 million, 30 June 2008: $261.8
million). In addition, $127.1 million (31 December 2008: $92.4 million, 30 June
2008: $117.4 million) is held as statutory deposits for local regulators and a
further $477.2 million (31 December 2008: $400.7 million, 30 June 2008: $452.9
million) is held in trust for the benefit of policyholders including $179.8
million (31 December 2008: $108.1 million 30 June 2008: $151.5 million) that
Alea (Bermuda) Ltd has placed in trust on behalf of Alea North America Insurance
Company.
As at 30 June 2009, the Group held Société d'Investissement à Capital Variable
("SICAV") of $63.9 million (31 December 2008: $67.9 million, 30 June 2008: $69.9
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.
In its 2008 Annual Financial Report the Group reported that $170.1 million in
book value of option ARM securities, part of the Group's non-agency US
mortgage-backed securities portfolio, were downgraded in February 2009 by
Moody's, in some cases directly from Aaa to Ca. At that time, Standard & Poor's
continued to maintain $164.4 million of these investments with investment grade
ratings, in most cases at AAA, subject to negative credit watch. On 22 May,
2009, $264.9 million of certificate principal balance of new non-agency
US mortgage-backed securities were issued in connection with a re-securitisation
transaction of existing non-agency US mortgage-backed securities of an
equivalent amount. As a result of this transaction, $81.7 million (market value)
of below investment grade non-agency US mortgage-backed securities were
re-securitised to generate $62.5 million (market value) of new non-agency US
mortgage-backed securities rated A or higher by either Standard & Poor's or
Fitch. These new investment grade non-agency US mortgage-backed securities are
available to be used as collateral for the pledge arrangements used by the
Group. This re-securitisation supports the Group's buy and hold strategy for
these securities.
Capital management
Financing facilities
The Group raised $100.0 million of hybrid capital in December 2004 and a further
$20.0 million in early January 2005. This capital is in the form of 30-year
hybrid trust preferred securities priced at LIBOR plus 285 basis points.
Commencing on the 15 June 2009 interest payment date, Alea Holdings US Company
("AHUSCO") has elected to defer the payment of interest on debentures underlying
$120.0 million of trust preferred securities due 2034 and 2035. The deferral
may be continued for a period not to exceed five years under the terms of the
debentures. During the deferral period, unpaid quarterly coupons will compound
at the rate of three month LIBOR (reset quarterly) plus 285 basis points. While
the deferral remains in effect, neither Alea nor AHUSCO may make any payments on
any securities that are pari passu or subordinate to the debentures, including
any common shares.
Liquidity and cash flow
Cash flows from operating activities primarily consist of premiums collected,
investment income and collected reinsurance recoverable balances, less paid
claims, retrocession payments, commutation payments, operating expenses and tax
payments. Net cash outflow from operating activities after income tax paid for
the six months ended 30 June 2009 was $69.1 million (30 June 2008: $201.0
million net cash outflow excluding $41.2 million cash received as a result of
the commutation of a large excess of loss reinsurance treaty).
The net decrease in cash was $37.7 million (increase for the six months ended 30
June 2008 of $10.2 million). This is after net cash received from investing
activities of $56.1 million (30 June 2008: net cash received of $200.2 million)
and net cash used in financing activities of $1.2 million (30 June 2008: net
cash used of $33.6 million). As a result, after taking account of exchange
movements of $0.9 million (30 June 2008: $3.4 million), and deducting cash of a
disposal group of $24.4 million that has been transferred to assets of a
disposal group held for sale, the Group's cash and cash equivalents at
30 June 2009 were $80.0 million (30 June 2008: $164.5 million).
Intra-Group arrangements
The Group manages a number of different intra-Group arrangements designed to
ensure that each local balance sheet retains risk commensurate with its capital
base. The principal means of achieving this is by arranging capacity through
internal quota share reinsurances ('quota shares') 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. There is a
50% quota share of certain 2000 and prior underwriting year business from Alea
Europe to Alea Bermuda. The Group is evaluating options to simplify its capital
structure and balance sheet and is therefore considering commutations of the
remaining quota shares. Such transactions would be subject to regulatory
approval in each jurisdiction affected.
Credit ratings
In the first half of 2006, Alea Group requested the withdrawal of all Group and
member company ratings following ratings downgrades by both Standard & Poor's
and A.M. Best.
Branches
In the six months ended 30 June 2009 the Company's subsidiaries, Alea London
Limited and Alea Europe Ltd. had licensed branches in Australia and Canada,
respectively. Permission from local regulators to close the Australian branch
was granted in December 2008. A full listing of the Company's subsidiaries is
set out in note 40 of the 2008 Annual Financial Report.
Related party transactions
Related party transactions are disclosed in note 20 of the condensed set of
financial statements.
There have been no material changes in the related party transactions described
in the 2008 Annual Financial Report.
Principal risks and uncertainties
There are several different types of risk and uncertainty which could have a
material impact on the Group's performance in the six months to 31 December
2009. Further information of the principal long-term risks and uncertainties to
which the Group is exposed and the procedures that the Group has in place to
mitigate these can be found in note 4 of the Annual Financial Report 2008. The
following risks and uncertainties could cause the actual results for the six
months ended 31 December 2009 to differ materially from expected or historical
results.
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.
The Group seeks to reduce the uncertainty inherent within claims estimation by
using different estimation methods for different classes of business. 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.
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.
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.
Interest rate risk
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 policies and domestic and international
economic and political conditions. Changes in interest rates will have an impact
on both investment income yield derived from invested assets and also the market
value of those assets.
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. Consequently, a reduction in the relevant average
investment return would lead to a reduction in the net discount on the balance
sheet and a charge to the income statement.
The Group has $120.0 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. Therefore, movements in three month LIBOR rates will have an
impact on the level of preferred dividend payable.
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. The Group
required that at the time of purchase all reinsurers and retrocessionaires had a
minimum credit rating of A- / A3, unless high quality collateral was provided.
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.
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.
The Group observes strict investment guidelines when determining counterparties
in which to invest. 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 AA / Aa.
Asset and liability mismatch 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. 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.
Risk management framework
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.
Financial calendar 2009
The Group expects to release its results for the year ended 31 December 2009 on
18 March 2010.*
*provisional date
Carl Speck
Chief Financial Officer
26 August 2009
ALEA GROUP INTERIM REPORT 2009
Six months ended 30 June 2009
Condensed consolidated income statement
+------------------+-------------+-------------+--------+----------+----------+-----------+-------------+
| | | Six | Six | Year |
| | | months | months | ended |
| | | ended | ended | |
+------------------+------------------------------------+----------+----------+-----------+
| | | 30 | 30 | 31 |
| | | June | June | December |
| | | 2009 | 2008 | 2008 |
+------------------+------------------------------------+----------+----------+-----------+
| | Notes | $'000 | $'000 | $'000 |
| | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| Continuing | | | | |
| operations | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| Gross | | 10,731 | 8,034 | 13,788 |
| premiums | | | | |
| written | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| Revenue | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| Premium | | 10,801 | 7,907 | 13,594 |
| revenue | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| Premium | | (93) | 2,054 | 2,194 |
| (ceded | | | | |
| to) / | | | | |
| received | | | | |
| from | | | | |
| reinsurers | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| Net | | 10,708 | 9,961 | 15,788 |
| insurance | | | | |
| premium | | | | |
| revenue | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| Fee | | - | 539 | 539 |
| income | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| Investment | 5 | 20,175 | 24,874 | 62,740 |
| income | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| Net | 6 | 4,684 | (932) | (997) |
| realised | | | | |
| gains | | | | |
| / (losses) | | | | |
| on | | | | |
| financial | | | | |
| assets | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| Impairment | 7 | (21,562) | - | (2,563) |
| of | | | | |
| financial | | | | |
| assets | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| Total | | 14,005 | 34,442 | 75,507 |
| revenue | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| Expenses | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| Insurance | | 14,765 | (3,960) | 25,306 |
| claims | | | | |
| and loss | | | | |
| adjustment | | | | |
| expenses | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| Insurance | | 8,702 | 15,809 | 5,699 |
| claims | | | | |
| and loss | | | | |
| adjustment | | | | |
| expenses | | | | |
| paid to | | | | |
| reinsurers | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| Net | | 23,467 | 11,849 | 31,005 |
| insurance | | | | |
| claims | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| Acquisition | | 3,597 | 3,125 | 5,820 |
| costs | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| Other | | 15,720 | 15,610 | 29,989 |
| operating | | | | |
| expenses | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| Restructuring | 8 | 72 | 284 | 1,066 |
| costs | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| Total | | 42,856 | 30,868 | 67,880 |
| expenses | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| Results | | (28,851) | 3,574 | 7,627 |
| of | | | | |
| operating | | | | |
| activities | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| Finance | | (5,099) | (6,000) | (5,539) |
| costs | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| (Loss) | | (33,950) | (2,426) | 2,088 |
| / | | | | |
| profit | | | | |
| before | | | | |
| income | | | | |
| tax | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| Income | 9 | 277 | (1,050) | (1,069) |
| tax | | | | |
| credit/(expense) | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| (Loss) / profit for the period | | (33,673) | (3,476) | 1,019 |
| from continuing operations | | | | |
+----------------------------------------------+--------+----------+----------+-----------+
| | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| Discontinued | | | | |
| operations | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| (Loss) / profit for | 10 | (10,986) | 4,295 | 2,920 |
| the period from | | | | |
| discontinued | | | | |
| operations | | | | |
+--------------------------------+----------------------+----------+----------+-----------+
| | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| (Loss) | | (44,659) | 819 | 3,939 |
| / | | | | |
| profit | | | | |
| for | | | | |
| the | | | | |
| period | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| | | | | |
| | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| Earnings per share for (losses)/profits attributable to the equity shareholders of |
| the Company during the period: |
+-------------------------------------------------------------------------------------------------------+
| | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| Basic | 11 | (0.20) | (0.02) | 0.00 |
| in | | | | |
| respect | | | | |
| of | | | | |
| continuing | | | | |
| operations | | | | |
| ($) | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| Basic | 11 | (0.06) | 0.02 | 0.02 |
| in | | | | |
| respect | | | | |
| of | | | | |
| discontinued | | | | |
| operations | | | | |
| ($) | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| Diluted in | 11 | (0.20) | (0.02) | 0.00 |
| respect of | | | | |
| continuing | | | | |
| operations | | | | |
| ($) | | | | |
+------------------+------------------------------------+----------+----------+-----------+
| Diluted | 11 | (0.06) | 0.02 | 0.02 |
| in | | | | |
| respect | | | | |
| of | | | | |
| discontinued | | | | |
| operations | | | | |
| ($) | | | | |
+------------------+-------------+-------------+--------+----------+----------+-----------+-------------+
Condensed consolidated balance sheet
+---------------------------------+------------------+---------+-----------+------------+---------------+
| | | As | As at | As at |
| | | at | | |
+---------------------------------+------------------+---------------------+------------+---------------+
| | | 30 June | 30 June | 31 December |
| | | 2009 | 2008 | 2008 |
+---------------------------------+------------------+---------------------+------------+---------------+
| | Notes | | $'000 | $'000 |
| | | $'000 | | |
+---------------------------------+------------------+---------------------+------------+---------------+
| | | | | |
+---------------------------------+------------------+---------------------+------------+---------------+
| ASSETS | | | | |
+---------------------------------+------------------+---------------------+------------+---------------+
| Property, plant and equipment | | 2,790 | 4,413 | 3,535 |
+---------------------------------+------------------+---------------------+------------+---------------+
| Intangible assets | | 8,479 | 8,479 | 8,479 |
+---------------------------------+------------------+---------------------+------------+---------------+
| Deferred acquisition costs | | 1,346 | 2,003 | 1,555 |
+---------------------------------+------------------+---------------------+------------+---------------+
| Assets of a disposal group | 10 | 421,907 | - | - |
| classified as held for sale | | | | |
+---------------------------------+------------------+---------------------+------------+---------------+
| Financial assets | | | | |
+---------------------------------+------------------+---------------------+------------+---------------+
| Equity securities | | | | |
+---------------------------------+------------------+---------------------+------------+---------------+
| - available-for-sale | | 77 | 156 | 111 |
+---------------------------------+------------------+---------------------+------------+---------------+
| Debt securities | | | | |
+---------------------------------+------------------+---------------------+------------+---------------+
| - available-for-sale | | 378,972 | 1,179,893 | 682,206 |
+---------------------------------+------------------+---------------------+------------+---------------+
| Loans and receivables including | 12 | 541,007 | 245,094 | 608,070 |
| insurance receivables | | | | |
+---------------------------------+------------------+---------------------+------------+---------------+
| Deferred tax assets | | - | 1,003 | 653 |
+---------------------------------+------------------+---------------------+------------+---------------+
| Reinsurance contracts | 13 | 296,341 | 462,951 | 423,325 |
+---------------------------------+------------------+---------------------+------------+---------------+
| Cash and cash equivalents | | 79,978 | 164,467 | 117,660 |
+---------------------------------+------------------+---------------------+------------+---------------+
| | | | | |
+---------------------------------+------------------+---------------------+------------+---------------+
| Total assets | | 1,730,897 | 2,068,459 | 1,845,594 |
+---------------------------------+------------------+---------------------+------------+---------------+
| | | | | |
+---------------------------------+------------------+---------------------+------------+---------------+
| LIABILITIES | | | | |
+---------------------------------+------------------+---------------------+------------+---------------+
| Insurance contracts | 13 | 780,551 | 1,387,239 | 1,201,186 |
+---------------------------------+------------------+---------------------+------------+---------------+
| Borrowings | 14 | 117,907 | 117,826 | 117,867 |
+---------------------------------+------------------+---------------------+------------+---------------+
| Liabilities of a disposal group | 10 | 342,993 | - | - |
| classified as held for sale | | | | |
+---------------------------------+------------------+---------------------+------------+---------------+
| Provisions | 15 | 2,266 | 2,410 | 2,808 |
+---------------------------------+------------------+---------------------+------------+---------------+
| Other liabilities and charges | | 38,739 | 20,990 | 21,808 |
+---------------------------------+------------------+---------------------+------------+---------------+
| Trade and other payables | | 87,383 | 141,217 | 95,225 |
+---------------------------------+------------------+---------------------+------------+---------------+
| Current income tax liabilities | | 6 | 67 | 608 |
+---------------------------------+------------------+---------------------+------------+---------------+
| | | | | |
+---------------------------------+------------------+---------------------+------------+---------------+
| Total liabilities | | 1,369,845 | 1,669,749 | 1,439,502 |
+---------------------------------+------------------+---------------------+------------+---------------+
| | | | | |
+---------------------------------+------------------+---------------------+------------+---------------+
| Net assets | | 361,052 | 398,710 | 406,092 |
+---------------------------------+------------------+---------------------+------------+---------------+
| | | | | |
+---------------------------------+------------------+---------------------+------------+---------------+
| EQUITY | | | | |
+---------------------------------+------------------+---------------------+------------+---------------+
| Capital and reserves attributable to the Company's | | |
| equity holders | | |
+--------------------------------------------------------------------------+------------+---------------+
| Share capital | 16 | 1,739 | 1,738 | 1,738 |
+---------------------------------+----------------------------+-----------+------------+---------------+
| Other reserves | | 683,187 | 679,307 | 683,569 |
+---------------------------------+----------------------------+-----------+------------+---------------+
| Retained loss | | (323,874) | (282,335) | (279,215) |
+---------------------------------+----------------------------+-----------+------------+---------------+
| | | | | |
+---------------------------------+----------------------------+-----------+------------+---------------+
| Total equity | | 361,052 | 398,710 | 406,092 |
+---------------------------------+----------------------------+-----------+------------+---------------+
| | | | | |
+---------------------------------+------------------+---------+-----------+------------+---------------+
Approved by the Board of Directors on 26 August 2009 and signed on its behalf
by:
Carl Speck
Chief Financial Officer
Condensed consolidated cash flow statement
+----------------------------------+---+----+--+--------------+----------------+-------------+
| | | Six months | Six months | Year ended |
| | | ended | ended | |
+--------------------------------------+-------+--------------+----------------+-------------+
| | | 30 June 2009 | 30 June 2008 | 31 December |
| | | | | 2008 |
+--------------------------------------+-------+--------------+----------------+-------------+
| |Notes | $'000 | $'000 | $'000 |
+--------------------------------------+-------+--------------+----------------+-------------+
| | | | | |
+--------------------------------------+-------+--------------+----------------+-------------+
| Cash used in operations | 17 | (68,501) | (156,621) | (318,409) |
+--------------------------------------+-------+--------------+----------------+-------------+
| Income tax paid | | (623) | (3,141) | (2,729) |
+--------------------------------------+-------+--------------+----------------+-------------+
| | | | | |
+--------------------------------------+-------+--------------+----------------+-------------+
| Net cash used in operating activities | (69,124) | (159,762) | (321,138) |
+----------------------------------------------+--------------+----------------+-------------+
| | | | | |
+--------------------------------------+-------+--------------+----------------+-------------+
| Cash flows (used in) / generated | | | |
| from investing activities | | | |
+----------------------------------------------+--------------+----------------+-------------+
| Purchase of property, plant and | | (428) | (935) | (885) |
| equipment | | | | |
+----------------------------------+-----------+--------------+----------------+-------------+
| Cash payments to acquire equity and | (1,866,803) | (3,398,470) | (4,733,490) |
| debt securities | | | |
+----------------------------------------------+--------------+----------------+-------------+
| Cash receipts from sales of equity | 1,888,712 | 3,582,440 | 5,011,961 |
| and debt securities | | | |
+----------------------------------------------+--------------+----------------+-------------+
| Net amounts outstanding for | | 24,019 | (7,292) | (5,085) |
| securities | | | | |
+--------------------------------------+-------+--------------+----------------+-------------+
| Cash receipts from interest and | 10,625 | 24,415 | 45,276 |
| dividends | | | |
+----------------------------------------------+--------------+----------------+-------------+
| | | | | |
+--------------------------------------+-------+--------------+----------------+-------------+
| Net cash generated from investing | | 56,125 | 200,158 | 317,777 |
| activities | | | | |
+--------------------------------------+-------+--------------+----------------+-------------+
| | | | | |
+--------------------------------------+-------+--------------+----------------+-------------+
| Cash flows used in financing | | | |
| activities | | | |
+----------------------------------------------+--------------+----------------+-------------+
| Repayments of borrowings | | - | (30,000) | (30,000) |
+--------------------------------------+-------+--------------+----------------+-------------+
| Interest paid on borrowings | | (1,195) | (3,610) | (7,029) |
+--------------------------------------+-------+--------------+----------------+-------------+
| | | | | |
+--------------------------------------+-------+--------------+----------------+-------------+
| Net cash used in financing | | (1,195) | (33,610) | (37,029) |
| activities | | | | |
+--------------------------------------+-------+--------------+----------------+-------------+
| | | | | |
+--------------------------------------+-------+--------------+----------------+-------------+
| Net (decrease) / increase in cash and | (14,194) | 6,786 | (40,390) |
| cash equivalents | | | |
+----------------------------------------------+--------------+----------------+-------------+
| | | | | |
+--------------------------------------+-------+--------------+----------------+-------------+
| Cash and cash equivalents at | | 117,660 | 154,253 | 154,253 |
| beginning of period | | | | |
+--------------------------------------+-------+--------------+----------------+-------------+
| Cash of disposal group transferred | | (24,430) | - | - |
| to assets available-for-sale | | | | |
+-------------------------------------------+--+--------------+----------------+-------------+
| Exchange gains on cash and bank | 942 | 3,428 | 3,797 |
| overdrafts | | | |
+----------------------------------------------+--------------+----------------+-------------+
| | | | | |
+--------------------------------------+-------+--------------+----------------+-------------+
| Cash and cash equivalents at end | | 79,978 | 164,467 | 117,660 |
| of period | | | | |
+----------------------------------+---+----+--+--------------+----------------+-------------+
Condensed consolidated statement of recognised income and expense
+------------------------------------------+--------------+------------+------------+
| | Six months | Six months | Year |
| | ended | ended | ended |
+------------------------------------------+--------------+------------+------------+
| | 30 June 2009 | 30 June | 31 |
| | | 2008 | December |
| | | | 2008 |
+------------------------------------------+--------------+------------+------------+
| | $'000 | $'000 | $'000 |
+------------------------------------------+--------------+------------+------------+
| | | | |
+------------------------------------------+--------------+------------+------------+
| Loss on revaluation of | (9,213) | (30,500) | (20,323) |
| available-for-sale investments | | | |
+------------------------------------------+--------------+------------+------------+
| Exchange differences on translation of | 1,680 | 1,707 | (6,037) |
| foreign operations | | | |
+------------------------------------------+--------------+------------+------------+
| Tax on items taken directly into equity | - | 1,030 | 1,030 |
+------------------------------------------+--------------+------------+------------+
| Net loss recognised directly in equity | (7,533) | (27,763) | (25,330) |
+------------------------------------------+--------------+------------+------------+
| | | | |
+------------------------------------------+--------------+------------+------------+
| Transfers | | | |
+------------------------------------------+--------------+------------+------------+
| Transfers to profit and loss on sale of | 6,995 | (2,302) | (901) |
| available-for-sale investments | | | |
+------------------------------------------+--------------+------------+------------+
| Tax on items transferred from equity | - | - | - |
+------------------------------------------+--------------+------------+------------+
| Total transfers net of tax | 6,995 | (2,302) | (901) |
+------------------------------------------+--------------+------------+------------+
| | | | |
+------------------------------------------+--------------+------------+------------+
| (Loss) / profit for the period | (44,659) | 819 | 3,939 |
+------------------------------------------+--------------+------------+------------+
| | | | |
+------------------------------------------+--------------+------------+------------+
| Total recognised income and expense for | (45,197) | (29,246) | (22,292) |
| the period | | | |
+------------------------------------------+--------------+------------+------------+
The total recognised income and expense are attributable to the Company's equity
holders.
Condensed consolidated statement of changes in equity
+-----------------+--+------+--+---+------+-----------+----+--------+----------+--+------------+-------------+--+------+--+
| | Attributable to equity holders of the Company |
+-----------------+-------------------------------------------------------------------------------------------------------+
| | | | | | | | | | |
+-----------------+---------+------+------+----------------+--------+----------+---------------+----------------+------+
| | Share | Share | Capital | Revaluation | Hedging | Retained | Share-based | Total |
| | capital | premium | reserve | reserve 1 | and | earnings | payment | |
| | | | | | translation | | reserve | |
| | | | | | reserves 2 | | | |
+--------------------+---------+----------+-----------+-------------+-------------+------------+-------------+------------+
| | $'000 | $'000 | $'000 | $'000 | $'000 | $'000 | $'000 | $'000 |
| | | | | | | | | |
+--------------------+---------+----------+-----------+-------------+-------------+------------+-------------+------------+
| | | | | | | | | |
+--------------------+---------+----------+-----------+-------------+-------------+------------+-------------+------------+
| As at 1 January | 1,738 | 629,668 | 75,381 | (30,579) | 7,888 | (279,215) | 1,211 | 406,092 |
| 2009 | | | | | | | | |
+--------------------+---------+----------+-----------+-------------+-------------+------------+-------------+------------+
| | | | | | | | | |
+--------------------+---------+----------+-----------+-------------+-------------+------------+-------------+------------+
| Loss for the | | | | | | (44,659) | | (44,659) |
| period | | | | | | | | |
+--------------------+---------+----------+-----------+-------------+-------------+------------+-------------+------------+
| | | | | | | | | |
+--------------------+---------+----------+-----------+-------------+-------------+------------+-------------+------------+
| Issuance of | 1 | 297 | | | | | (298) | - |
| shares | | | | | | | | |
+--------------------+---------+----------+-----------+-------------+-------------+------------+-------------+------------+
| | | | | | | | | |
+--------------------+---------+----------+-----------+-------------+-------------+------------+-------------+------------+
| Revaluation on | | | | (2,218) | | | | (2,218) |
| available-for-sale | | | | | | | | |
| investments | | | | | | | | |
+--------------------+---------+----------+-----------+-------------+-------------+------------+-------------+------------+
| | | | | | | | | |
+--------------------+---------+----------+-----------+-------------+-------------+------------+-------------+------------+
| Movement in | | | | | | | 157 | 157 |
| share-based | | | | | | | | |
| payment reserve | | | | | | | | |
+--------------------+---------+----------+-----------+-------------+-------------+------------+-------------+------------+
| | | | | | | | | |
+--------------------+---------+----------+-----------+-------------+-------------+------------+-------------+------------+
| Translation | | | | | 1,680 | | | 1,680 |
| gains | | | | | | | | |
+--------------------+---------+----------+-----------+-------------+-------------+------------+-------------+------------+
| | | | | | | | | |
+--------------------+---------+----------+-----------+-------------+-------------+------------+-------------+------------+
| As at 30 June | 1,739 | 629,965 | 75,381 | (32,797) | 9,568 | (323,874) | 1,070 | 361,052 |
| 2009 | | | | | | | | |
+-----------------+--+------+--+---+------+-----------+----+--------+----------+--+------------+-------------+--+------+--+
+--------------------+---------+---------+----------+-------------+-------------+------------+------+------+-----+--------------------------+---+
| | Attributable to equity holders of the Company |
+--------------------+--------------------------------------------------------------------------------------------------------------------------+
| | | | | | | | | | |
+--------------------+---------+---------+----------+-------------+-------------+------------+-------------+-----+------------------------------+
| | Share | Share | Capital | Revaluation | Hedging | Retained | Share-based | Total |
| | capital | premium | reserve | reserve1 | and | earnings | payment | |
| | | | | | translation | | reserve | |
| | | | | | reserves 2 | | | |
+--------------------+---------+---------+----------+-------------+-------------+------------+-------------+------------------------------------+
| | $'000 | $'000 | $'000 | $'000 | $'000 | $'000 | $'000 | $'000 |
| | | | | | | | | |
+--------------------+---------+---------+----------+-------------+-------------+------------+-------------+------------------------------------+
| | | | | | | | | |
+--------------------+---------+---------+----------+-------------+-------------+------------+-------------+------------------------------------+
| As at 1 January | 1,738 | 629,668 | 75,381 | (10,385) | 13,925 | (283,154) | 866 | 428,039 |
| 2008 | | | | | | | | |
+--------------------+---------+---------+----------+-------------+-------------+------------+-------------+------------------------------------+
| | | | | | | | | |
+--------------------+---------+---------+----------+-------------+-------------+------------+-------------+------------------------------------+
| Profit for the | | | | | | 819 | | 819 |
| period | | | | | | | | |
+--------------------+---------+---------+----------+-------------+-------------+------------+-------------+------------------------------------+
| | | | | | | | | |
+--------------------+---------+---------+----------+-------------+-------------+------------+-------------+------------------------------------+
| Revaluation on | | | | (32,802) | | | | (32,802) |
| available-for-sale | | | | | | | | |
| investments - | | | | | | | | |
| gross | | | | | | | | |
+--------------------+---------+---------+----------+-------------+-------------+------------+-------------+------------------------------------+
| Revaluation on | | | | 1,030 | | | | 1,030 |
| available-for-sale | | | | | | | | |
| investments - tax | | | | | | | | |
+--------------------+---------+---------+----------+-------------+-------------+------------+-------------+------------------------------------+
| | | | | | | | | |
+--------------------+---------+---------+----------+-------------+-------------+------------+-------------+------------------------------------+
| Movement in | | | | | | | (83) | (83) |
| share-based | | | | | | | | |
| payment reserve | | | | | | | | |
+--------------------+---------+---------+----------+-------------+-------------+------------+-------------+------------------------------------+
| | | | | | | | | |
+--------------------+---------+---------+----------+-------------+-------------+------------+-------------+------------------------------------+
| Translation gains | | | | | 1,707 | | | 1,707 |
+--------------------+---------+---------+----------+-------------+-------------+------------+-------------+------------------------------------+
| | | | | | | | | |
+--------------------+---------+---------+----------+-------------+-------------+------------+-------------+------------------------------------+
| As at 30 June 2008 | 1,738 | 629,668 | 75,381 | (42,157) | 15,632 | (282,335) | 783 | 398,710 |
+--------------------+---------+---------+----------+-------------+-------------+------------+-------------+------------------------------------+
| | | | | | | | | | |
+--------------------+---------+---------+----------+-------------+-------------+------------+------+------+-----+--------------------------+---+
+-----------------+--+------+--+---+------+-----------+----+--------+----------+--+------------+-------------+--+------+--+
| | Attributable to equity holders of the Company |
+-----------------+-------------------------------------------------------------------------------------------------------+
| | | | | | | | | | |
+-----------------+---------+------+------+----------------+--------+----------+---------------+----------------+------+
| | Share | Share | Capital | Revaluation | Hedging | Retained | Share-based | Total |
| | capital | premium | reserve | reserve 1 | and | earnings | payment | |
| | | | | | translation | | reserve | |
| | | | | | reserves 2 | | | |
+--------------------+---------+----------+-----------+-------------+-------------+------------+-------------+------------+
| | $'000 | $'000 | $'000 | $'000 | $'000 | $'000 | $'000 | $'000 |
| | | | | | | | | |
+--------------------+---------+----------+-----------+-------------+-------------+------------+-------------+------------+
| | | | | | | | | |
+--------------------+---------+----------+-----------+-------------+-------------+------------+-------------+------------+
| As at 1 January | 1,738 | 629,668 | 75,381 | (10,385) | 13,925 | (283,154) | 866 | 428,039 |
| 2008 | | | | | | | | |
+--------------------+---------+----------+-----------+-------------+-------------+------------+-------------+------------+
| | | | | | | | | |
+--------------------+---------+----------+-----------+-------------+-------------+------------+-------------+------------+
| Profit for the | | | | | | 3,939 | | 3,939 |
| period | | | | | | | | |
+--------------------+---------+----------+-----------+-------------+-------------+------------+-------------+------------+
| | | | | | | | | |
+--------------------+---------+----------+-----------+-------------+-------------+------------+-------------+------------+
| Revaluation on | | | | (21,224) | | | | (21,224) |
| available-for-sale | | | | | | | | |
| investments - | | | | | | | | |
| gross | | | | | | | | |
+--------------------+---------+----------+-----------+-------------+-------------+------------+-------------+------------+
| Revaluation on | | | | 1,030 | | | | 1,030 |
| available-for-sale | | | | | | | | |
| investments - tax | | | | | | | | |
+--------------------+---------+----------+-----------+-------------+-------------+------------+-------------+------------+
| | | | | | | | | |
+--------------------+---------+----------+-----------+-------------+-------------+------------+-------------+------------+
| Movement in | | | | | | | 345 | 345 |
| share-based | | | | | | | | |
| payment reserve | | | | | | | | |
+--------------------+---------+----------+-----------+-------------+-------------+------------+-------------+------------+
| | | | | | | | | |
+--------------------+---------+----------+-----------+-------------+-------------+------------+-------------+------------+
| Translation loss | | | | | (6,037) | | | (6,037) |
+--------------------+---------+----------+-----------+-------------+-------------+------------+-------------+------------+
| | | | | | | | | |
+--------------------+---------+----------+-----------+-------------+-------------+------------+-------------+------------+
| As at 31 | 1,738 | 629,668 | 75,381 | (30,579) | 7,888 | (279,215) | 1,211 | 406,092 |
| December 2008 | | | | | | | | |
+-----------------+--+------+--+---+------+-----------+----+--------+----------+--+------------+-------------+--+------+--+
1 The revaluation reserve is a component of shareholders' equity that is used
to record the difference between the market value of available-for-sale
investments carried on the balance sheet and the amortised cost. In addition it
includes an unrealised loss which arose as a result of the decision to
reclassify the portfolio of non-agency US mortgage-backed securities into the
loans and receivables category and carry them at amortised cost. The unrealised
loss in respect of these assets is the difference between the market value and
amortised cost as at 1 July 2008 and this loss is being amortised through the
income statement using the effective interest method from the date of
reclassification.
2Movements in the unrealised gains and losses arising from the translation of
the Group's assets and liabilities denominated in functional currencies of the
Group are shown in the hedging and translation reserve.
Notes to the condensed set of 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 operated 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. The Group now
classifies all of its operations under the 'Run-off business' segment. This
reflects the basis on which the Group's operations are managed and the relative
maturity of the run-off book of business.
On 29 June 2009 the Alea Group entered into a share purchase agreement to sell
Alea Holdings UK Limited along with its subsidiaries Alea London Limited and
Alea Services UK Limited to Catalina Holdings (Bermuda) Ltd. Consequently, the
three companies that make up the Alea Holdings UK Limited sub-group have been
treated as a disposal group held for sale and the results of the disposal group
are presented as discontinued operations for the six months ended 30 June 2009
and for the comparative periods.
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, the consolidated
statement of changes in equity and the related notes 1 to 20 in accordance with
International Financial Reporting Standards ("IFRS"). Accordingly, the financial
information has been prepared in accordance with Bermuda Law.
2 Basis of preparation
The interim financial statements, as required by the Disclosure and Transparency
Rules of the United Kingdom's Financial Services Authority ("FSA"), have been
prepared on the basis of IFRS recognition and measurement principles and in
accordance with IAS 34 'Interim Financial Reporting'.
The condensed 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 the condensed set 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 periods 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 condensed consolidated financial statements have been prepared in
accordance with the accounting policies in force for the year ended 31 December
2008. A summary of the principal accounting policies is provided in note 3.
Going Concern
Further information regarding the Group's business activities, together with the
factors likely to affect its future development, performance and position are
set out in the Chief Executive Officer's Report. The financial position of the
Group, its cash flows, liquidity position and borrowing facilities are described
in the Financial Review. In addition, note 4 of the 2008 Annual Financial Report
includes the Group's objectives, policies and processes for managing its
capital; its financial risk management objectives; details of its financial
instruments and hedging activities and its exposures to credit risk and
liquidity risk.
Having considered the foregoing, after making enquiries, the directors have a
reasonable expectation that the Company and the Group have adequate resources to
continue in operational existence for the foreseeable future. Accordingly, they
continue to adopt the going concern basis in preparing the condensed
consolidated financial statements.
3 Accounting policies
The accounting policies set out below have been applied consistently to all
periods presented in these condensed consolidated financial statements.
The accounting policies have been applied consistently by all Group entities.
Status of interim condensed financial statements
The statements for the two interim periods are unaudited but have been reviewed
by the Company's auditors, Deloitte LLP, and their report for the six months
ended 30 June 2009 is included with this report. The interim condensed financial
statements do not constitute statutory accounts as defined in section 84 of the
Bermuda Companies Act 1981. The results for the year ended 31 December 2008 do
not constitute statutory accounts as defined in section 84 of the Bermuda
Companies Act 1981. The published statutory accounts for the year ended 31
December 2008 received an unqualified audit opinion with an emphasis of matter
paragraph concerning significant uncertainty with respect to the Group's ability
to continue to hold non-agency US mortgage-backed securities accounted for as
loans and receivables at amortised cost.
Basis of consolidation
These condensed financial statements consolidate all the enterprises in which
Alea Group Holdings (Bermuda) Ltd owns or controls, directly or indirectly, the
majority of the voting shares. There are no other enterprises over which the
Group has the ability to exercise control.
Intra-group transactions, balances, and gains and losses are eliminated except
to the extent that the transaction provides evidence of an impairment of the
asset transferred.
The results of subsidiaries liquidated or disposed of during the period are
included in the consolidated income statement up to the effective date of
liquidation or disposal, as appropriate.
Operating segments
The Group classifies all of its operations under the 'Run-off business' segment.
This reflects the basis on which the chief operating decision makers of the
Group manage the operations.
Foreign currency translation
a) Functional and presentation currency
Items included in the financial statements of each of the Group's entities are
measured using the currency of the primary economic environment in which the
entity operates (the 'functional currency'). The consolidated financial
statements are presented in thousands of US dollars, which is the Group's
presentation currency.
b) Group companies
The functional currencies for Group entities are usually the currencies of the
primary economic environment in which the entity operates.
The results and financial position of all the Group entities (none of which has
the currency of a hyperinflationary economy) that have a functional currency
different from the presentation currency are translated into the presentation
currency as follows:
(i) assets and liabilities for each balance sheet presented are translated at
the closing exchange rates at the date of that balance sheet;
(ii) income and expenses for each income statement are translated at
transactional or average exchange rates (unless this average is not a reasonable
approximation of the cumulative effect of the rates prevailing on the
transaction dates, in which case income and expenses are translated at the dates
of the transactions); and
(iii) all resulting exchange differences are recognised as a separate component
of equity.
On consolidation, exchange differences arising from the translation of the net
investment in foreign entities, and of borrowings and other currency instruments
designated as hedges of such investments, are taken to shareholders' equity.
When a foreign operation is sold, such exchange differences are recognised in
the income statement as part of the gain or loss on sale.
c) Transactions and balances
Foreign currency transactions are translated into the functional currency using
the exchange rates prevailing at the dates of the transactions. Foreign exchange
gains and losses resulting from the settlement of such transactions and from the
translation at period-end exchange rates of monetary assets and liabilities
denominated in foreign currencies are recognised in the income statement.
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 finance costs, as applicable.
The foreign currency rates used for significant foreign currencies are as
follows:
+------------------+---------------+---------------+---------------+---------------+
| | 30 June 2009 | 30 June 2009 | 30 June 2008 | 30 June 2008 |
| | Average | Closing | Average | Closing |
+------------------+---------------+---------------+---------------+---------------+
| British pound | 0.6707 | 0.6017 | 0.5042 | 0.5016 |
+------------------+---------------+---------------+---------------+---------------+
| Euro | 0.7432 | 0.7084 | 0.6529 | 0.6332 |
+------------------+---------------+---------------+---------------+---------------+
| Swiss franc | 1.1170 | 1.0805 | 1.0520 | 1.0162 |
+------------------+---------------+---------------+---------------+---------------+
| | | | | |
+------------------+---------------+---------------+---------------+---------------+
| | | | 31 December | 31 December |
| | | | 2008 | 2008 |
| | | | Average | Closing |
+------------------+---------------+---------------+---------------+---------------+
| British pound | | | 0.5457 | 0.6918 |
+------------------+---------------+---------------+---------------+---------------+
| Euro | | | 0.6811 | 0.7093 |
+------------------+---------------+---------------+---------------+---------------+
| Swiss franc | | | 1.0770 | 1.0575 |
+------------------+---------------+---------------+---------------+---------------+
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 fee income or fee 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 requirements of the Association of British Insurers
Statement Of Recommended Practice ('ABI SORP'). The discount rate used is 4.0%
(30 June 2008: 4.0%, 31 December 2008: 4.0%). The Group discounts reinsurance
contract recoverable balances using the same methodology and discount rate.
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 and is accounted for on an
accrual basis. Dividends are accrued on an ex-dividend basis that is when the
right to receive payment is established. Interest income in respect of the
Group's available-for-sale investments and financial assets carried at amortised
cost classified as loans and receivable 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 annual 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. In addition loans and
receivables include non-agency US mortgage-backed securities held for the
foreseeable future and measured at amortised cost using the effective interest
method, less impairment. 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 period and
deferred tax.
The tax currently payable is based on taxable profit for the period. Taxable
profit differs from profit as reported in the income statement because it
excludes items of income or expense that are taxable or deductible in other
periods and it further excludes items that are never taxable or deductible. The
Group's liability for current tax is calculated using tax rates that have been
enacted or substantively enacted by the balance sheet date.
Deferred income tax is provided in full, using the liability method, on all
temporary differences, which are based on the difference between the financial
statement carrying values and the tax bases of assets and liabilities using
enacted income tax rates and laws. Deferred income tax assets are recognised to
the extent that it is regarded as probable that they will be utilised against
sufficient future taxable income. Deferred income tax assets and liabilities are
not discounted.
The carrying amount of deferred tax assets is reviewed at each balance sheet
date and reduced to the extent that it is no longer probable that sufficient
taxable profits will be available to allow all or part of the asset to be
utilised.
The deferred tax that results from unrealised gains and losses on securities
classified as available-for-sale is recognised in shareholders' equity along
with those unrealised gains and losses.
Current tax payable by any Group company on distribution to the holding company
of the undistributed profits of any subsidiaries is recognised as deferred tax
unless the timing of the distribution of those profits is controlled by the
holding company and the temporary difference is not expected to reverse in the
foreseeable future.
In accordance with IAS 12 'Income Taxes', deferred taxation is provided on
temporary differences arising from the revaluation of fixed assets even where
there is no commitment to sell the asset.
Deferred tax assets and liabilities are offset when there is a legally
enforceable right to set off current tax assets against current tax liabilities
and when they relate to income taxes levied by the same taxation authority and
the Group intends to settle its current tax assets and liabilities on a net
basis.
Borrowings
Borrowings are recognised initially at fair value, net of transaction costs
incurred. Borrowings are subsequently stated at amortised cost; any difference
between the proceeds (net of transaction costs) and the redemption value is
recognised in the income statement over the period of the borrowings using the
effective interest method.
Provisions
a) Restructuring costs and legal claims
Provisions for restructuring costs and legal claims are recognised when the
Group has a present legal or constructive obligation as a result of a past
event, it is more likely than not that an outflow of resources will be required
to settle the obligation, and the amount has been reliably estimated.
Restructuring provisions comprise lease termination penalties and employee
termination payments. Provisions are not recognised for future operating losses.
Where there are a number of similar obligations, the likelihood that an outflow
will be required in settlement is determined by considering the class of
obligations as a whole. A provision is recognised even if the likelihood of an
outflow with respect to any one item included in the same class of obligations
may be small.
b) Levies
The Group is subject to various insurance-related assessments or guarantee fund
levies. Related provisions are provided for where there is a present obligation
(legal or constructive) as a result of a past event.
Share capital
Shares are classified as equity when there is no obligation to transfer cash or
other assets. Incremental costs directly attributable to the issue of equity
instruments are shown in equity as a deduction from the proceeds, net of tax.
Incremental costs directly attributable to the issue of equity instruments as
consideration for the acquisition of a business are included in the cost of
acquisition.
Accounting developments
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 Group early-adopted IFRS 8 from 1
January 2008. The disclosures relating to Operating Segments are shown in note 4
to the Financial Statements.
4 Segmental information
Operating results by reportable segment
The Group classifies all of its operations under the 'Run-off business' segment.
This reflects the basis on which the Group's operations are managed by the chief
operating decision maker. Insurance liabilities are determined using a
consistent reserving methodology across the Group and are monitored and reported
on a Group-wide basis, investments and cash treasury are managed by a
centralised function and senior staff resource is deployed on a Group-wide
basis. This structure reflects the relative maturity of the run-off book of
business.
Geographical distribution of non-current assets
The Group holds non-current assets in the following countries:
+--------------------------+---------------+------------+-----------------+----------+
| As at30 June 2009 | Property, | Intangible | Non-current | Total |
| | plant and | assets | deferred | |
| | equipment | | acquisition | |
| | | | costs | |
+--------------------------+---------------+------------+-----------------+----------+
| | $'000 | $'000 | $'000 | $'000 |
+--------------------------+---------------+------------+-----------------+----------+
| | | | | |
+--------------------------+---------------+------------+-----------------+----------+
| Bermuda | 17 | - | - | 17 |
+--------------------------+---------------+------------+-----------------+----------+
| United States | 2,691 | 8,479 | - | 11,170 |
+--------------------------+---------------+------------+-----------------+----------+
| United Kingdom1 | 519 | - | - | 519 |
+--------------------------+---------------+------------+-----------------+----------+
| Switzerland | 82 | - | 870 | 952 |
+--------------------------+---------------+------------+-----------------+----------+
| | 3,309 | 8,479 | 870 | 12,658 |
+--------------------------+---------------+------------+-----------------+----------+
1 The non-current assets of the Group that are located in the United Kingdom are
included within 'Assets of a disposal group classified as held for sale' on the
face of the balance sheet.
+--------------------------+---------------+------------+-----------------+-----------+
| As at30 June 2008 | Property, | Intangible | Non-current | Total |
| | plant and | assets | deferred | |
| | equipment | | acquisition | |
| | | | costs | |
+--------------------------+---------------+------------+-----------------+-----------+
| | $'000 | $'000 | $'000 | $'000 |
+--------------------------+---------------+------------+-----------------+-----------+
| | | | | |
+--------------------------+---------------+------------+-----------------+-----------+
| Bermuda | 26 | - | - | 26 |
+--------------------------+---------------+------------+-----------------+-----------+
| United States | 3,186 | 8,479 | - | 11,665 |
+--------------------------+---------------+------------+-----------------+-----------+
| United Kingdom | 936 | - | - | 936 |
+--------------------------+---------------+------------+-----------------+-----------+
| Switzerland | 265 | - | 73 | 338 |
+--------------------------+---------------+------------+-----------------+-----------+
| | 4,413 | 8,479 | 73 | 12,965 |
+--------------------------+---------------+------------+-----------------+-----------+
+--------------------------+---------------+------------+-----------------+-----------+
| As at31 December 2008 | Property, | Intangible | Non-current | Total |
| | plant and | assets | deferred | |
| | equipment | | acquisition | |
| | | | costs | |
+--------------------------+---------------+------------+-----------------+-----------+
| | $'000 | $'000 | $'000 | $'000 |
+--------------------------+---------------+------------+-----------------+-----------+
| | | | | |
+--------------------------+---------------+------------+-----------------+-----------+
| Bermuda | 25 | - | - | 25 |
+--------------------------+---------------+------------+-----------------+-----------+
| United States | 2,807 | 8,479 | - | 11,286 |
+--------------------------+---------------+------------+-----------------+-----------+
| United Kingdom | 574 | - | - | 574 |
+--------------------------+---------------+------------+-----------------+-----------+
| Switzerland | 129 | - | 1,055 | 1,184 |
+--------------------------+---------------+------------+-----------------+-----------+
| | 3,535 | 8,479 | 1,055 | 13,069 |
+--------------------------+---------------+------------+-----------------+-----------+
5 Investment income
+----------------------------------+---+---+----------+---------------+---------------+
| | | Continuing operations |
| | | |
+----------------------------------+------------------+-------------------------------+
| | Six months ended | Six months | Year |
| | | ended | ended |
+----------------------------------+------------------+---------------+---------------+
| | 30 June 2009 | 30 June 2008 | 31 December |
| | | | 2008 |
+----------------------------------+------------------+---------------+---------------+
| | $'000 | $'000 | $'000 |
+----------------------------------+------------------+---------------+---------------+
| | | | |
+----------------------------------+------------------+---------------+---------------+
| Financial assets - | 6,819 | 23,736 | 24,829 |
| available-for-sale interest income | | | |
+--------------------------------------+--------------+---------------+---------------+
| | | | |
+----------------------------------+------------------+---------------+---------------+
| Financial assets carried at amortised | 13,228 | - | 36,092 |
| cost interest income | | | |
+------------------------------------------+----------+---------------+---------------+
| | | | |
+----------------------------------+------------------+---------------+---------------+
| Cash and cash equivalents | 128 | 1,138 | 1,819 |
| interest income | | | |
+----------------------------------+------------------+---------------+---------------+
| | | | |
+----------------------------------+------------------+---------------+---------------+
| | 20,175 | 24,874 | 62,740 |
+----------------------------------+---+---+----------+---------------+---------------+
+----------------------------------+---+---+----------+---------------+---------------+
| | | Discontinued operations |
| | | |
+----------------------------------+------------------+-------------------------------+
| | Six months ended | Six months | Year |
| | | ended | ended |
+----------------------------------+------------------+---------------+---------------+
| | 30 June 2009 | 30 June 2008 | 31 December |
| | | | 2008 |
+----------------------------------+------------------+---------------+---------------+
| | $'000 | $'000 | $'000 |
+----------------------------------+------------------+---------------+---------------+
| | | | |
+----------------------------------+------------------+---------------+---------------+
| Financial assets - | 3,147 | 6,261 | 12,027 |
| available-for-sale interest income | | | |
+--------------------------------------+--------------+---------------+---------------+
| | | | |
+----------------------------------+------------------+---------------+---------------+
| Financial assets carried at amortised | 348 | - | 401 |
| cost interest income | | | |
+------------------------------------------+----------+---------------+---------------+
| | | | |
+----------------------------------+------------------+---------------+---------------+
| Cash and cash equivalents | 820 | 932 | 1,716 |
| interest income | | | |
+----------------------------------+------------------+---------------+---------------+
| | | | |
+----------------------------------+------------------+---------------+---------------+
| | 4,315 | 7,193 | 14,144 |
+----------------------------------+---+---+----------+---------------+---------------+
+----------------------------------+----+----+--------+---------------+---------------+
| | | Total |
| | | |
+----------------------------------+------------------+-------------------------------+
| | Six months ended | Six months | Year |
| | | ended | ended |
+----------------------------------+------------------+---------------+---------------+
| | 30 June 2009 | 30 June 2008 | 31 December |
| | | | 2008 |
+----------------------------------+------------------+---------------+---------------+
| | $'000 | $'000 | $'000 |
+----------------------------------+------------------+---------------+---------------+
| | | | |
+----------------------------------+------------------+---------------+---------------+
| Financial assets - available-for-sale | 9,966 | 29,997 | 36,856 |
| interest income | | | |
+---------------------------------------+-------------+---------------+---------------+
| | | | |
+----------------------------------+------------------+---------------+---------------+
| Financial assets carried at amortised cost | 13,576 | - | 36,493 |
| interest income | | | |
+--------------------------------------------+--------+---------------+---------------+
| | | | |
+----------------------------------+------------------+---------------+---------------+
| Cash and cash equivalents | 948 | 2,070 | 3,535 |
| interest income | | | |
+----------------------------------+------------------+---------------+---------------+
| | | | |
+----------------------------------+------------------+---------------+---------------+
| | 24,490 | 32,067 | 76,884 |
+----------------------------------+----+----+--------+---------------+---------------+
6 Net realised gains / (losses) on financial assets
+----------------------------------+--+--+------------+---------------+---------------+
| | | Continuing operations |
+----------------------------------+------------------+-------------------------------+
| | Six months ended | Six months | Year |
| | | ended | ended |
+----------------------------------+------------------+---------------+---------------+
| | 30 June 2009 | 30 June 2008 | 31 December |
| | | | 2008 |
+----------------------------------+------------------+---------------+---------------+
| | $'000 | $'000 | $'000 |
+----------------------------------+------------------+---------------+---------------+
| | | | |
+----------------------------------+------------------+---------------+---------------+
| Realised gains on financial assets | 5,112 | 2,237 | 2,752 |
| - available-for-sale | | | |
+-------------------------------------+---------------+---------------+---------------+
| Realised losses on financial assets - | (428) | (3,169) | (3,749) |
| available-for-sale | | | |
+----------------------------------------+------------+---------------+---------------+
| | | | |
+----------------------------------+------------------+---------------+---------------+
| | 4,684 | (932) | (997) |
+----------------------------------+--+--+------------+---------------+---------------+
+----------------------------------+--+--+------------+---------------+---------------+
| | | Discontinued operations |
| | | |
+----------------------------------+------------------+-------------------------------+
| | Six months ended | Six months | Year |
| | | ended | ended |
+----------------------------------+------------------+---------------+---------------+
| | 30 June 2009 | 30 June 2008 | 31 December |
| | | | 2008 |
+----------------------------------+------------------+---------------+---------------+
| | $'000 | $'000 | $'000 |
+----------------------------------+------------------+---------------+---------------+
| | | | |
+----------------------------------+------------------+---------------+---------------+
| Realised gains on financial assets | 198 | - | 6 |
| - available-for-sale | | | |
+-------------------------------------+---------------+---------------+---------------+
| Realised losses on financial assets - | (4) | (384) | (385) |
| available-for-sale | | | |
+----------------------------------------+------------+---------------+---------------+
| | | | |
+----------------------------------+------------------+---------------+---------------+
| | 194 | (384) | (379) |
+----------------------------------+--+--+------------+---------------+---------------+
+----------------------------------+--+--+------------+---------------+---------------+
| | | Total |
| | | |
+----------------------------------+------------------+-------------------------------+
| | Six months ended | Six months | Year |
| | | ended | ended |
+----------------------------------+------------------+---------------+---------------+
| | 30 June 2009 | 30 June 2008 | 31 December |
| | | | 2008 |
+----------------------------------+------------------+---------------+---------------+
| | $'000 | $'000 | $'000 |
+----------------------------------+------------------+---------------+---------------+
| | | | |
+----------------------------------+------------------+---------------+---------------+
| Realised gains on financial assets | 5,310 | 2,237 | 2,758 |
| - available-for-sale | | | |
+-------------------------------------+---------------+---------------+---------------+
| Realised losses on financial assets - | (432) | (3,553) | (4,134) |
| available-for-sale | | | |
+----------------------------------------+------------+---------------+---------------+
| | | | |
+----------------------------------+------------------+---------------+---------------+
| | 4,878 | (1,316) | (1,376) |
+----------------------------------+--+--+------------+---------------+---------------+
7 Impairment of financial assets
The Group recognised an impairment to the amortised cost of non-agency US
mortgage-backed securities of $21.6 million in the six months ended 30 June 2009
(six months ended 30 June 2008: $nil, year ended 31 December 2008: $2.6
million).
At each balance sheet date the Group performs an impairment test with regards to
its non-agency US mortgage-backed securities. An impairment is recognised
wherever the carrying amounts of the assets are less than their recoverable
amounts. Recoverable amounts are determined by projecting estimated future cash
flows associated with holding the assets. Estimating future cash flows requires
explicit assumptions about the future behaviour of the loans collateralising the
securitisation to be made. The key variables in describing the behaviour of
these assets include; the rate of voluntary prepayments, the rate of defaults
and the loss severity on defaulted loans. The data used for the testing is based
in part on historical performance of similar type structured bonds.
8 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 were written down to their residual
value. A restructuring provision was established to cover 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.
Six months ended 30 June 2009
+--------------------------------------+-----+--------+--------------------------------------+---------------------------------------------+-------+
| | Discontinued | Continuing | |
| | operations | operations | |
+--------------------------------------+--------------+------------------------------------------------------------------------------------+-------+
| | Alea | Alea North | Alea | Total |
| | London | America | Europe | |
+--------------------------------------------+--------+--------------------------------------+---------------------------------------------+-------+
| | $'000 | $'000 | $'000 | $'000 |
+--------------------------------------------+--------+--------------------------------------+---------------------------------------------+-------+
| | | | | |
+--------------------------------------------+--------+--------------------------------------+---------------------------------------------+-------+
| Redundancy costs incurred in excess of the | 128 | 72 | - | 200 |
| provision established based on run-off | | | | |
| plan | | | | |
+--------------------------------------------+--------+--------------------------------------+---------------------------------------------+-------+
| | | | | |
+--------------------------------------------+--------+--------------------------------------+---------------------------------------------+-------+
| Total restructuring costs | 128 | 72 | - | 200 |
+--------------------------------------+-----+--------+--------------------------------------+---------------------------------------------+-------+
Six months ended 30 June 2008
+--------------------------------------+-----+--------+--------------------------------------+---------------------------------------------+-------+
| | Discontinued | Continuing | |
| | operations | operations | |
+--------------------------------------+--------------+------------------------------------------------------------------------------------+-------+
| | Alea | Alea North | Alea | Total |
| | London | America | Europe | |
+--------------------------------------------+--------+--------------------------------------+---------------------------------------------+-------+
| | $'000 | $'000 | $'000 | $'000 |
+--------------------------------------------+--------+--------------------------------------+---------------------------------------------+-------+
| | | | | |
+--------------------------------------------+--------+--------------------------------------+---------------------------------------------+-------+
| Redundancy costs incurred in excess of the | 81 | 284 | - | 365 |
| provision established based on run-off | | | | |
| plan | | | | |
+--------------------------------------------+--------+--------------------------------------+---------------------------------------------+-------+
| | | | | |
+--------------------------------------------+--------+--------------------------------------+---------------------------------------------+-------+
| Total restructuring costs | 81 | 284 | - | 365 |
+--------------------------------------+-----+--------+--------------------------------------+---------------------------------------------+-------+
Year ended 31 December 2008
+--------------------------------------+-----+--------+--------------------------------------+---------------------------------------------+-------+
| | Discontinued | Continuing | |
| | operations | operations | |
+--------------------------------------+--------------+------------------------------------------------------------------------------------+-------+
| | Alea | Alea North | Alea | Total |
| | London | America | Europe | |
+--------------------------------------------+--------+--------------------------------------+---------------------------------------------+-------+
| | $'000 | $'000 | $'000 | $'000 |
+--------------------------------------------+--------+--------------------------------------+---------------------------------------------+-------+
| | | | | |
+--------------------------------------------+--------+--------------------------------------+---------------------------------------------+-------+
| Redundancy costs incurred in excess of the | 313 | 283 | - | 596 |
| provision established based on run-off | | | | |
| plan | | | | |
+--------------------------------------------+--------+--------------------------------------+---------------------------------------------+-------+
| Additional restructuring provision | 337 | - | 783 | 1,120 |
| established 1 | | | | |
+--------------------------------------------+--------+--------------------------------------+---------------------------------------------+-------+
| | | | | |
+--------------------------------------------+--------+--------------------------------------+---------------------------------------------+-------+
| Total restructuring costs | 650 | 283 | 783 | 1,716 |
+--------------------------------------+-----+--------+--------------------------------------+---------------------------------------------+-------+
1 As a result of the outsourcing arrangement entered into in the year ended 31
December 2008, an additional provision was established to reflect contractual
obligations made in respect of staff retention bonuses and severance payments.
9 Income tax (credit) / expense
+-----------------------------------+---------------+--------------+---------------+
| | | Continuing operations |
| | | |
+-----------------------------------+---------------+------------------------------+
| | Six months | Six months | Year ended |
| | ended | ended | |
+-----------------------------------+---------------+--------------+---------------+
| | 30 June 2009 | 30 June | 31 December |
| | | 2008 | 2008 |
+-----------------------------------+---------------+--------------+---------------+
| | $'000 | $'000 | $'000 |
+-----------------------------------+---------------+--------------+---------------+
| | | | |
+-----------------------------------+---------------+--------------+---------------+
| Current tax (credit) / expense | | | |
+-----------------------------------+---------------+--------------+---------------+
| | | | |
+-----------------------------------+---------------+--------------+---------------+
| UK corporation tax | 1 | - | - |
+-----------------------------------+---------------+--------------+---------------+
| Foreign tax | (278) | 21 | 40 |
+-----------------------------------+---------------+--------------+---------------+
| | | | |
+-----------------------------------+---------------+--------------+---------------+
| Total current tax | (277) | 21 | 40 |
+-----------------------------------+---------------+--------------+---------------+
| | | | |
+-----------------------------------+---------------+--------------+---------------+
| | | | |
+-----------------------------------+---------------+--------------+---------------+
| Deferred tax | - | 1,029 | 1,029 |
+-----------------------------------+---------------+--------------+---------------+
| | | | |
+-----------------------------------+---------------+--------------+---------------+
| Total income tax (credit) / | (277) | 1,050 | 1,069 |
| expense | | | |
+-----------------------------------+---------------+--------------+---------------+
+-----------------------------------+---------------+--------------+---------------+
| | | Discontinued operations |
| | | |
+-----------------------------------+---------------+------------------------------+
| | Six months | Six months | Year ended |
| | ended | ended | |
+-----------------------------------+---------------+--------------+---------------+
| | 30 June 2009 | 30 June | 31 December |
| | | 2008 | 2008 |
+-----------------------------------+---------------+--------------+---------------+
| | $'000 | $'000 | $'000 |
+-----------------------------------+---------------+--------------+---------------+
| | | | |
+-----------------------------------+---------------+--------------+---------------+
| Current tax expense/(credit) | | | |
+-----------------------------------+---------------+--------------+---------------+
| | | | |
+-----------------------------------+---------------+--------------+---------------+
| UK corporation tax | 67 | 137 | (9) |
+-----------------------------------+---------------+--------------+---------------+
| Foreign tax | 160 | 22 | 1,052 |
+-----------------------------------+---------------+--------------+---------------+
| | | | |
+-----------------------------------+---------------+--------------+---------------+
| Total current tax | 227 | 159 | 1,043 |
+-----------------------------------+---------------+--------------+---------------+
| | | | |
+-----------------------------------+---------------+--------------+---------------+
| | | | |
+-----------------------------------+---------------+--------------+---------------+
| Deferred tax | 48 | 66 | 127 |
+-----------------------------------+---------------+--------------+---------------+
| | | | |
+-----------------------------------+---------------+--------------+---------------+
| Total income tax expense | 275 | 225 | 1,170 |
+-----------------------------------+---------------+--------------+---------------+
+-----------------------------------+---------------+--------------+---------------+
| | | Total |
| | | |
+-----------------------------------+---------------+------------------------------+
| | Six months | Six months | Year ended |
| | ended | ended | |
+-----------------------------------+---------------+--------------+---------------+
| | 30 June 2009 | 30 June | 31 December |
| | | 2008 | 2008 |
+-----------------------------------+---------------+--------------+---------------+
| | $'000 | $'000 | $'000 |
+-----------------------------------+---------------+--------------+---------------+
| | | | |
+-----------------------------------+---------------+--------------+---------------+
| Current tax expense/(credit) | | | |
+-----------------------------------+---------------+--------------+---------------+
| | | | |
+-----------------------------------+---------------+--------------+---------------+
| UK corporation tax | 68 | 137 | (9) |
+-----------------------------------+---------------+--------------+---------------+
| Foreign tax | (118) | 43 | 1,092 |
+-----------------------------------+---------------+--------------+---------------+
| | | | |
+-----------------------------------+---------------+--------------+---------------+
| Total current tax | (50) | 180 | 1,083 |
+-----------------------------------+---------------+--------------+---------------+
| | | | |
+-----------------------------------+---------------+--------------+---------------+
| | | | |
+-----------------------------------+---------------+--------------+---------------+
| Deferred tax | 48 | 1,095 | 1,156 |
+-----------------------------------+---------------+--------------+---------------+
| | | | |
+-----------------------------------+---------------+--------------+---------------+
| Total income tax (credit) / | (2) | 1,275 | 2,239 |
| expense | | | |
+-----------------------------------+---------------+--------------+---------------+
UK corporation tax was calculated at 30% until 31 March 2008. From 1 April 2008,
the rate was reduced to 28% of the estimated assessable UK profit for the
period.
Taxation for other jurisdictions is calculated at the rates prevailing in the
respective jurisdictions.
10 Discontinued operations
On 29 June 2009 the Group entered into a share purchase agreement to sell its
wholly owned subsidiary Alea Holdings UK Limited, which owns Alea London
Limited and Alea Services UK Limited, to Catalina Holdings (Bermuda) Ltd.
Completion of the transaction is contingent upon customary closing conditions
and the required regulatory approvals and notices.
The results of the discontinued operations, which have been included in the
consolidated income statement, were as follows:
+--------------------------------+-----+-----+----------+---------------+--------------+
| | Six months ended | Six months | Year |
| | | ended | ended |
+--------------------------------+----------------------+---------------+--------------+
| | 30 June 2009 | 30 June 2008 | 31 December |
| | | | 2008 |
+--------------------------------+----------------------+---------------+--------------+
| | $'000 | $'000 | $'000 |
+--------------------------------+----------------------+---------------+--------------+
| | | | |
+--------------------------------+----------------------+---------------+--------------+
| Revenue from discontinued | 4,869 | 5,765 | 12,592 |
| operations | | | |
+--------------------------------+----------------------+---------------+--------------+
| | | | |
+--------------------------------+----------------------+---------------+--------------+
| Expenses from discontinued | 2,750 | 1,245 | 8,502 |
| operations | | | |
+--------------------------------+----------------------+---------------+--------------+
| Profit before tax | 2,119 | 4,520 | 4,090 |
+--------------------------------+----------------------+---------------+--------------+
| | | | |
+--------------------------------+----------------------+---------------+--------------+
| Attributable tax expense | (275) | (225) | (1,170) |
+--------------------------------+----------------------+---------------+--------------+
| | | | |
+--------------------------------+----------------------+---------------+--------------+
| Estimated loss on disposal of discontinued | (12,830) | - | - |
| operations | | | |
+--------------------------------------------+----------+---------------+--------------+
| | | | |
+--------------------------------+----------------------+---------------+--------------+
| Net loss attributable to | (10,986) | 4,295 | 2,920 |
| discontinued operations | | | |
+--------------------------------+-----+-----+----------+---------------+--------------+
During the six months ended 30 June 2009 the disposed companies contributed a
cash outflow of $30.5 million (year ended 31 December 2008: $81.9 million, six
months ended 30 June 2008: $25.1 million) to the Group's net cash outflow from
operating activities, a cash inflow of $16.2 million (year ended 31 December
2008: $84.8 million, six months ended 30 June 2008: $36.8 million) in respect of
investing activities and a cash outflow of $nil million (year ended 31 December
2008: $nil million, six months ended 30 June 2008: $nil million) in respect of
financing activities.
The major classes of assets and liabilities comprising the operations classified
as held for sale are as follows:
+--------------------------------------------------------------+-------------------+
| | As at |
+--------------------------------------------------------------+-------------------+
| | 30 June 2009 |
+--------------------------------------------------------------+-------------------+
| | $'000 |
+--------------------------------------------------------------+-------------------+
| | |
+--------------------------------------------------------------+-------------------+
| ASSETS | |
+--------------------------------------------------------------+-------------------+
| | |
+--------------------------------------------------------------+-------------------+
| Property, plant and equipment | 519 |
+--------------------------------------------------------------+-------------------+
| Financial assets | |
+--------------------------------------------------------------+-------------------+
| Debt securities | |
+--------------------------------------------------------------+-------------------+
| - available-for-sale | 274,742 |
+--------------------------------------------------------------+-------------------+
| Loans and receivables including insurance receivables | 32,286 |
+--------------------------------------------------------------+-------------------+
| Deferred tax assets | 700 |
+--------------------------------------------------------------+-------------------+
| Reinsurance contracts | 89,230 |
+--------------------------------------------------------------+-------------------+
| Cash and cash equivalents | 24,430 |
+--------------------------------------------------------------+-------------------+
| | |
+--------------------------------------------------------------+-------------------+
| Total assets of a disposal group classified as held for sale | 421,907 |
+--------------------------------------------------------------+-------------------+
| | |
+--------------------------------------------------------------+-------------------+
| | |
+--------------------------------------------------------------+-------------------+
| LIABILITIES | |
+--------------------------------------------------------------+-------------------+
| Insurance contracts | 315,533 |
+--------------------------------------------------------------+-------------------+
| Provision for loss on sale of disposal group | 12,830 |
+--------------------------------------------------------------+-------------------+
| Other liabilities and charges | 5,704 |
+--------------------------------------------------------------+-------------------+
| Trade and other payables | 8,803 |
+--------------------------------------------------------------+-------------------+
| Current income tax liabilities | 123 |
+--------------------------------------------------------------+-------------------+
| | |
+--------------------------------------------------------------+-------------------+
| Total liabilities of a disposal group classified as held for | 342,993 |
| sale | |
+--------------------------------------------------------------+-------------------+
| | |
+--------------------------------------------------------------+-------------------+
| Net assets of a disposal group classified as held for sale | 78,914 |
+--------------------------------------------------------------+-------------------+
11 Earnings per share
The calculation of the basic and diluted earnings per share is based on the
following data:
+----+--------------------+-----------+------+--------------+--+------+------+--------------+
| | | | | | Continuing operations |
+-------------------------+-----------+------+--------------+--+----------------------------+
| Earnings | | | Six months | Six months | Year |
| | | | ended | ended | ended |
+-------------------------+-----------+------+--------------+----------------+--------------+
| | | | | 30 June | 30 June 2008 | 31 December |
| | | | | 2009 | | 2008 |
+----+--------------------+-----------+------+--------------+----------------+--------------+
| | | | | $ | $ | $ |
+----+--------------------+-----------+------+--------------+----------------+--------------+
| | | | | | |
+-------------------------+-----------+------+--------------+----------------+--------------+
| Earnings for the purposes of basic | (33,673,291) | (3,476,140) | 1,018,848 |
| earnings per share | | | |
+--------------------------------------------+ + + +
| being net (loss)/profit attributable to | | | |
| equity holders of the Company | | | |
+--------------------------------------------+--------------+----------------+--------------+
| | | | | | | |
+----+--------------------+-----------+------+--------------+----------------+--------------+
| Effect of dilutive potential | | - | - | - |
| ordinary shares: | | | | |
+-------------------------------------+------+--------------+----------------+--------------+
| | | | | | | |
+----+--------------------+-----------+------+--------------+----------------+--------------+
| Earnings for the purposes of diluted | (33,673,291) | (3,476,140) | 1,018,848 |
| earnings per share | | | |
+--------------------------------------------+--------------+----------------+--------------+
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
+----+--------------------+-----------+------+--------------+----------------+--------------+
| | | | | | Discontinued |
| | | | | | operations |
+-------------------------+-----------+------+--------------+---------+---------------------+
| Earnings | | | Six months | Six months | Year |
| | | | ended | ended | ended |
+-------------------------+-----------+------+--------------+----------------+--------------+
| | | | | 30 June | 30 June 2008 | 31 December |
| | | | | 2009 | | 2008 |
+----+--------------------+-----------+------+--------------+----------------+--------------+
| | | | | $ | $ | $ |
+----+--------------------+-----------+------+--------------+----------------+--------------+
| | | | | | |
+-------------------------+-----------+------+--------------+----------------+--------------+
| Earnings for the purposes of basic | (10,986,075) | 4,294,884 | 2,919,695 |
| earnings per share | | | |
+--------------------------------------------+ + + +
| being net (loss)/profit attributable to | | | |
| equity holders of the Company | | | |
+--------------------------------------------+--------------+----------------+--------------+
| | | | | | | |
+----+--------------------+-----------+------+--------------+----------------+--------------+
| Effect of dilutive potential | | - | - | - |
| ordinary shares: | | | | |
+-------------------------------------+------+--------------+----------------+--------------+
| | | | | | | |
+----+--------------------+-----------+------+--------------+----------------+--------------+
| Earnings for the purposes of diluted | (10,986,075) | 4,294,884 | 2,919,695 |
| earnings per share | | | |
+----+--------------------+-----------+------+--------------+--+------+------+--------------+
+----+--------------------+-----------+------+--------------+--------------+--------------+
| | | | | | Total |
+-------------------------+-----------+------+--------------+--------------+--------------+
| Earnings | | | Six months | Six months | Year |
| | | | ended | ended | ended |
+-------------------------+-----------+------+--------------+--------------+--------------+
| | | | | 30 June | 30 June | 31 December |
| | | | | 2009 | 2008 | 2008 |
+----+--------------------+-----------+------+--------------+--------------+--------------+
| | | | | $ | $ | $ |
+----+--------------------+-----------+------+--------------+--------------+--------------+
| | | | | | |
+-------------------------+-----------+------+--------------+--------------+--------------+
| Earnings for the purposes of basic | (44,659,366) | 818,744 | 3,938,543 |
| earnings per share | | | |
+--------------------------------------------+ + + +
| being net (loss)/profit attributable to | | | |
| equity holders of the Company | | | |
+--------------------------------------------+--------------+--------------+--------------+
| | | | | | | |
+----+--------------------+-----------+------+--------------+--------------+--------------+
| Effect of dilutive potential | | - | - | - |
| ordinary shares: | | | | |
+-------------------------------------+------+--------------+--------------+--------------+
| | | | | | | |
+----+--------------------+-----------+------+--------------+--------------+--------------+
| Earnings for the purposes of diluted | (44,659,366) | 818,744 | 3,938,543 |
| earnings per share | | | |
+--------------------------------------------+--------------+--------------+--------------+
| | | | | | | |
+----+--------------------+-----------+------+--------------+--------------+--------------+
| Number of shares | | | Six months | Six months | Year ended |
| | | | ended | ended | |
+-------------------------+-----------+------+--------------+--------------+--------------+
| | | | | 30 June | 30 June | 31 December |
| | | | | 2009 | 2008 | 2008 |
+----+--------------------+-----------+------+--------------+--------------+--------------+
| | | | | Number | Number | Number |
+----+--------------------+-----------+------+--------------+--------------+--------------+
| | | | | | | |
+----+--------------------+-----------+------+--------------+--------------+--------------+
| Weighted average number of ordinary | | 173,885,387 | 173,776,703 | 173,772,944 |
| shares for the purposes of basic | | | | |
| earnings per share | | | | |
+-------------------------------------+------+--------------+--------------+--------------+
| | | | | | | |
+----+--------------------+-----------+------+--------------+--------------+--------------+
| Effect of dilutive potential | | | | |
| ordinary shares: | | | | |
+-------------------------------------+------+--------------+--------------+--------------+
| - Restricted Stock | | | 305,780 | 27,820 | 225,957 |
| Units | | | | | |
+-------------------------+-----------+------+--------------+--------------+--------------+
| | | | | | | |
+----+--------------------+-----------+------+--------------+--------------+--------------+
| Weighted average number of ordinary | | 174,191,167 | 173,804,523 | 173,998,901 |
| shares for the purposes of diluted | | | | |
| earnings per share | | | | |
+----+--------------------+-----------+------+--------------+--------------+--------------+
12 Loans and receivables including insurance receivables
+--------------------------------------+--------+---------+-----------+--------------+
| | As at | As at | As at |
+--------------------------------------+------------------+-----------+--------------+
| | 30 June 2009 | 30 June | 31 December |
| | | 2008 | 2008 |
+--------------------------------------+------------------+-----------+--------------+
| | $'000 | $'000 | $'000 |
+--------------------------------------+------------------+-----------+--------------+
| | | | |
+--------------------------------------+------------------+-----------+--------------+
| Deposits with ceding undertakings | 83,904 | 90,488 | 79,455 |
+--------------------------------------+------------------+-----------+--------------+
| Financial assets carried at | 374,234 | - | 400,232 |
| amortised cost | | | |
+--------------------------------------+------------------+-----------+--------------+
| Debtors arising out of insurance | - | - | 14 |
| operations | | | |
+--------------------------------------+------------------+-----------+--------------+
| Debtors arising out of reinsurance | 42,463 | 91,955 | 73,892 |
| operations | | | |
+--------------------------------------+------------------+-----------+--------------+
| Accrued income 1 | 29,679 | 39,352 | 35,842 |
+--------------------------------------+------------------+-----------+--------------+
| Other prepayments | 2,586 | 4,544 | 3,226 |
+--------------------------------------+------------------+-----------+--------------+
| Other debtors | 8,141 | 18,755 | 15,409 |
+--------------------------------------+------------------+-----------+--------------+
| | | | |
+--------------------------------------+------------------+-----------+--------------+
| Total loans and receivables including | 541,007 | 245,094 | 608,070 |
| insurance receivables | | | |
+-----------------------------------------------+---------+-----------+--------------+
| Current asset | 57,294 | 45,334 | 40,375 |
+--------------------------------------+------------------+-----------+--------------+
| Non-current asset | 483,713 | 199,760 | 567,695 |
+--------------------------------------+------------------+-----------+--------------+
| | 541,007 | 245,094 | 608,070 |
+--------------------------------------+--------+---------+-----------+--------------+
1 $26.0 million (31 December 2008: $28.7 million, 30 June 2008: $31.4 million)
of the renewal rights sales are recorded as accrued income at the balance sheet
date as disclosed in note 18.
Loans and receivables including insurance receivables are recorded on the
balance sheet at amortised cost.
13 Insurance and reinsurance contracts
Insurance and reinsurance contracts are comprised of the following:
+----------------------------------------+------------+-------------+--------------+
| | As at | As at | As at |
+----------------------------------------+------------+-------------+--------------+
| | 30 June | 30 June | 31 December |
| | 2009 | 2008 | 2008 |
+----------------------------------------+------------+-------------+--------------+
| | $'000 | $'000 | $'000 |
+----------------------------------------+------------+-------------+--------------+
| | | | |
+----------------------------------------+------------+-------------+--------------+
| Gross claims outstanding | | | |
+----------------------------------------+------------+-------------+--------------+
| Provision for claims outstanding, | 813,145 | 1,435,532 | 1,240,270 |
| reported and not reported | | | |
+----------------------------------------+------------+-------------+--------------+
| Discount | (39,027) | (59,344) | (48,725) |
+----------------------------------------+------------+-------------+--------------+
| | 774,118 | 1,376,188 | (1,191,545) |
+----------------------------------------+------------+-------------+--------------+
| Claims handling provisions | 6,433 | 11,051 | 9,641 |
+----------------------------------------+------------+-------------+--------------+
| Total insurance contracts | 780,551 | 1,387,239 | 1,201,186 |
+----------------------------------------+------------+-------------+--------------+
| | | | |
+----------------------------------------+------------+-------------+--------------+
| | | | |
+----------------------------------------+------------+-------------+--------------+
| Total reinsurance | | | |
+----------------------------------------+------------+-------------+--------------+
| Provision for claims outstanding, | 298,493 | 465,666 | 425,502 |
| reported and not reported | | | |
+----------------------------------------+------------+-------------+--------------+
| Discount | (2,152) | (2,715) | (2,177) |
+----------------------------------------+------------+-------------+--------------+
| Total reinsurance contracts | 296,341 | 462,951 | 423,325 |
+----------------------------------------+------------+-------------+--------------+
| | | | |
+----------------------------------------+------------+-------------+--------------+
| Undiscounted claims outstanding, net | 521,085 | 980,917 | 824,409 |
| of reinsurance | | | |
+----------------------------------------+------------+-------------+--------------+
| Discount | (36,875) | (56,629) | (46,548) |
+----------------------------------------+------------+-------------+--------------+
| Claims outstanding net of reinsurance | 484,210 | 924,288 | 777,861 |
+----------------------------------------+------------+-------------+--------------+
| | | | |
+----------------------------------------+------------+-------------+--------------+
+---------------------------------------+------------+--------------+---------------+
| | As at | As at | As at |
+---------------------------------------+------------+--------------+---------------+
| | 30 June | 30 June 2008 | 31 December |
| | 2009 | | 2008 |
+---------------------------------------+------------+--------------+---------------+
| | $'000 | $'000 | $'000 |
+---------------------------------------+------------+--------------+---------------+
| Current assets | 22,232 | 75,885 | 37,334 |
+---------------------------------------+------------+--------------+---------------+
| Non-current assets | 274,109 | 387,066 | 385,991 |
+---------------------------------------+------------+--------------+---------------+
| Total reinsurance contracts | 296,341 | 462,951 | 423,325 |
+---------------------------------------+------------+--------------+---------------+
+---------------------------------------+------------+--------------+---------------+
| | | | |
+---------------------------------------+------------+--------------+---------------+
| Current liabilities | 154,768 | 259,969 | 228,600 |
+---------------------------------------+------------+--------------+---------------+
| Non-current liabilities | 625,783 | 1,127,270 | 972,586 |
+---------------------------------------+------------+--------------+---------------+
| Total insurance contracts | 780,551 | 1,387,239 | 1,201,186 |
+---------------------------------------+------------+--------------+---------------+
Basis for establishing provision for claims outstanding
Loss reserves for reinsurance business are established based on claims data
reported to the Group by ceding companies supplemented with relevant loss
development patterns used to project the ultimate incurred loss. Ultimate
incurred loss indications are calculated by the Group's actuaries using several
standard actuarial methodologies including paid and incurred loss development
and the Bornhuetter-Ferguson incurred and paid loss methods.
The Group's actuaries utilise several assumptions in applying each methodology,
including loss development factors and expected loss ratios based on pricing
analysis. These reviews and documentation are completed in accordance with
professional actuarial standards appropriate to the jurisdictions where the
business is written. The selected assumptions reflect the actuaries' judgement
based on historical data and experience combined with information concerning the
current claim adjusting environment.
Based on the actuarial indications, the Group selects and records a single point
estimate separately for each line of business for each underwriting year. The
single point reserve estimate is management's best estimate which the Group
considers to be one that has an equal likelihood of developing a redundancy or
deficiency as the loss experience matures. On a semi-annual basis the Group
analyses and records its loss reserve estimates across over 400 detailed lines
of business which reflect class of business, geographic location, insurance
versus reinsurance, proportional versus non-proportional, and treaty versus
facultative exposures. In addition, a limited number of the Group's largest
contracts may be reviewed individually.
During the loss settlement period, additional facts regarding claims are
reported. As this occurs it may be necessary to increase or decrease the unpaid
losses and loss expense reserves. The actual final liability may be
significantly different to prior estimates. The Group reviews additional
reported claim information on a monthly basis. Actual claim experience is
compared to that expected from the most recent actuarial reserve review to
highlight significant variances. A complete actuarial analysis by detailed line
of business including selection of single point estimates is completed
semi-annually and is reviewed by the Group's management.
14 Borrowings
The borrowings represent trust preferred securities and are repayable as
follows:
+------------------------------------+------------+----------------+---------------+
| | As at | As at | As at |
+------------------------------------+------------+----------------+---------------+
| | 30 June | 30 June 2008 | 31 December |
| | 2009 | | 2008 |
+------------------------------------+------------+----------------+---------------+
| | $'000 | $'000 | $'000 |
+------------------------------------+------------+----------------+---------------+
| | | | |
+------------------------------------+------------+----------------+---------------+
| On demand or within one year | - | - | - |
+------------------------------------+------------+----------------+---------------+
| In the second year | - | - | - |
+------------------------------------+------------+----------------+---------------+
| In the third to fifth years | - | - | - |
| inclusive | | | |
+------------------------------------+------------+----------------+---------------+
| After five years | 120,000 | 120,000 | 120,000 |
+------------------------------------+------------+----------------+---------------+
| Total borrowings | 120,000 | 120,000 | 120,000 |
+------------------------------------+------------+----------------+---------------+
| | | | |
+------------------------------------+------------+----------------+---------------+
| Less: Capitalised debt raising | (2,093) | (2,174) | (2,133) |
| expenses | | | |
+------------------------------------+------------+----------------+---------------+
| Total borrowings net of | 117,907 | 117,826 | 117,867 |
| capitalised expenses | | | |
+------------------------------------+------------+----------------+---------------+
| | | | |
+------------------------------------+------------+----------------+---------------+
| | | | |
+------------------------------------+------------+----------------+---------------+
All borrowings are recorded at fair value. The directors consider the carrying
values disclosed above to be a reasonable approximation of the fair value at the
year end.
Trust preferred securities
In December 2004, the Group issued $100.0 million of trust preferred securities
and had in place a commitment for an additional $20.0 million of trust preferred
securities issued in January 2005. These securities (issued from three Delaware
trusts established by Alea Holdings US Company ('AHUSCO'), of which one trust
was established in January 2005) provide for a preferred dividend at a rate of
three month LIBOR plus 285 basis points. These securities allow for the
postponement of preferred dividends under certain circumstances for up to five
years. These securities carry no financial covenants and no cross default
covenants, have a fixed maturity of 30 years, and are callable after five years.
AHUSCO may not optionally redeem the Debentures and thereby retire the trust
preferred securities until the interest payment date following the fifth
anniversary of issue. The earliest call date is 15 March 2010 for the first
issue and 15 June 2010 for the second and third issues. The holders of the
Debentures may not call the Debentures prior to their maturity dates. Commencing
on the 15 June 2009 interest payment date, AHUSCO has elected to defer the
payment of interest on debentures underlying $120 million of trust preferred
securities due 2034 and 2035. The deferral may be continued for a period not to
exceed five (5) years under the terms of the debentures. During the deferral
period, unpaid quarterly coupons will compound at the rate of 3 month LIBOR
(reset quarterly) plus 285 basis points. While the deferral remains in effect,
neither the Company nor AHUSCO may make any payments on any securities that are
pari passu or subordinate to the debentures, including any common shares.
15 Provisions
+-------------------------------------------------------------+------------------+
| | Restructuring |
| | Provision1 |
+-------------------------------------------------------------+------------------+
| | $'000 |
+-------------------------------------------------------------+------------------+
| | |
+-------------------------------------------------------------+------------------+
| At 1 January 2008 | 2,837 |
+-------------------------------------------------------------+------------------+
| | |
+-------------------------------------------------------------+------------------+
| Utilisation of provision due to onerous contracts | (136) |
+-------------------------------------------------------------+------------------+
| Utilisation of provision due to severance payments | (468) |
+-------------------------------------------------------------+------------------+
| Exchange difference | 177 |
+-------------------------------------------------------------+------------------+
| | |
+-------------------------------------------------------------+------------------+
| At 30 June 2008 | 2,410 |
+-------------------------------------------------------------+------------------+
| | |
+-------------------------------------------------------------+------------------+
| Utilisation of provision due to onerous contracts | (135) |
+-------------------------------------------------------------+------------------+
| Utilisation of provision due to severance payments | (455) |
+-------------------------------------------------------------+------------------+
| Additional restructuring provision established2 | 1,120 |
+-------------------------------------------------------------+------------------+
| Exchange difference | (132) |
+-------------------------------------------------------------+------------------+
| | |
+-------------------------------------------------------------+------------------+
| At 31 December 2008 | 2,808 |
+-------------------------------------------------------------+------------------+
| | |
+-------------------------------------------------------------+------------------+
| Utilisation of provision due to onerous contracts | (136) |
+-------------------------------------------------------------+------------------+
| Utilisation of provision due to severance payments | (376) |
+-------------------------------------------------------------+------------------+
| Exchange difference | (30) |
+-------------------------------------------------------------+------------------+
| | |
+-------------------------------------------------------------+------------------+
| At 30 June 2009 | 2,266 |
+-------------------------------------------------------------+------------------+
1 The restructuring provision has been established to cover anticipated future
severance payments and payments under onerous contracts that will arise as a
result of the decision to place all of the Group's operations into run-off.
2 As a result of the outsourcing arrangement entered into in 2008, an additional
provision has been established to reflect contractual obligations made in
respect of staff retention bonuses and severance payments.
For further details regarding the restructuring costs see note 8.
+-------------------------------------------------------------+------------------+
| At 30 June 2009 | |
+-------------------------------------------------------------+------------------+
| Current liabilities | 1,791 |
+-------------------------------------------------------------+------------------+
| Non-current liabilities | 475 |
+-------------------------------------------------------------+------------------+
| | 2,266 |
+-------------------------------------------------------------+------------------+
+-------------------------------------------------------------+------------------+
| At 30 June 2008 | |
+-------------------------------------------------------------+------------------+
| Current liabilities | 1,664 |
+-------------------------------------------------------------+------------------+
| Non-current liabilities | 746 |
+-------------------------------------------------------------+------------------+
| | 2,410 |
+-------------------------------------------------------------+------------------+
+-------------------------------------------------------------+------------------+
| At 31 December 2008 | |
+-------------------------------------------------------------+------------------+
| Current liabilities | 2,197 |
+-------------------------------------------------------------+------------------+
| Non-current liabilities | 611 |
+-------------------------------------------------------------+------------------+
| | 2,808 |
+-------------------------------------------------------------+------------------+
16 Share capital
+--------------------------------------------------------------+---------+--------+
| | Number | |
| | | |
+--------------------------------------------------------------+---------+--------+
| | '000s | $'000 |
+--------------------------------------------------------------+---------+--------+
| | | |
+--------------------------------------------------------------+---------+--------+
| At 1 January 2008 | 173,788 | 1,738 |
+--------------------------------------------------------------+---------+--------+
| Cancellation of shares | (19) | - |
+--------------------------------------------------------------+---------+--------+
| | | |
+--------------------------------------------------------------+---------+--------+
| At 30 June 2008 | 173,769 | 1,738 |
+--------------------------------------------------------------+---------+--------+
| | | |
+--------------------------------------------------------------+---------+--------+
| At 31 December 2008 | 173,769 | 1,738 |
+--------------------------------------------------------------+---------+--------+
| | | |
+--------------------------------------------------------------+---------+--------+
| Issuance of shares | 139 | 1 |
+--------------------------------------------------------------+---------+--------+
| | | |
+--------------------------------------------------------------+---------+--------+
| At 30 June 2009 | 173,908 | 1,739 |
+--------------------------------------------------------------+---------+--------+
17 Cash used in operations
+------------------------------------+---+---+----------+--------------+--------------+
| | Six months ended | Six months | Year |
| | | ended | ended |
+------------------------------------+------------------+--------------+--------------+
| | 30 June 2009 | 30 June 2008 | 31 December |
| | | | 2008 |
+------------------------------------+------------------+--------------+--------------+
| | $'000 | $'000 | $'000 |
+------------------------------------+------------------+--------------+--------------+
| | | | |
+------------------------------------+------------------+--------------+--------------+
| (Loss) / profit for the period | (44,659) | 819 | 3,939 |
+------------------------------------+------------------+--------------+--------------+
| Adjustments for: | | | |
+------------------------------------+------------------+--------------+--------------+
| - tax (credit) / expense | (2) | 1,275 | 2,239 |
+------------------------------------+------------------+--------------+--------------+
| - depreciation | 721 | 1,016 | 1,774 |
+------------------------------------+------------------+--------------+--------------+
| - impairment loss recognised in respect | 21,562 | - | 2,563 |
| of financial assets | | | |
+--------------------------------------------+----------+--------------+--------------+
| - provision for estimated loss on | 12,830 | - | - |
| sale of disposal group | | | |
+----------------------------------------+--------------+--------------+--------------+
| | | | |
+------------------------------------+------------------+--------------+--------------+
| Net cash flows for the period | (10,625) | (24,415) | (45,276) |
| transferred to investing | | | |
| activities | | | |
+------------------------------------+------------------+--------------+--------------+
| Loss on sale of property, plant | - | 4 | 11 |
| and equipment | | | |
+------------------------------------+------------------+--------------+--------------+
| Debt interest expense | 2,687 | 4,044 | 7,511 |
+------------------------------------+------------------+--------------+--------------+
| Loss/(profit) on foreign exchange | 572 | 1,824 | (7,668) |
+------------------------------------+------------------+--------------+--------------+
| | | | |
+------------------------------------+------------------+--------------+--------------+
| Change in operating assets and | | | |
| liabilities (excluding the effect | | | |
| of acquisitions and exchange | | | |
| differences on consolidation) | | | |
+------------------------------------+------------------+--------------+--------------+
| | | | |
+------------------------------------+------------------+--------------+--------------+
| Net decrease in insurance | (93,430) | (236,197) | (394,302) |
| liabilities | | | |
+------------------------------------+------------------+--------------+--------------+
| Net decrease in reinsurance assets | 32,175 | 118,595 | 143,649 |
+------------------------------------+------------------+--------------+--------------+
| Net decrease in loans and | 11,491 | 40,379 | 72,235 |
| receivables | | | |
+------------------------------------+------------------+--------------+--------------+
| Net decrease in other operating | (1,980) | (63,882) | (105,429) |
| liabilities | | | |
+------------------------------------+------------------+--------------+--------------+
| Net movement in share-based | 157 | (83) | 345 |
| payment reserve | | | |
+------------------------------------+------------------+--------------+--------------+
| Cash used in operations | (68,501) | (156,621) | (318,409) |
+------------------------------------+---+---+----------+--------------+--------------+
18Sale 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
which were 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.
Where necessary, amounts are charged or credited to the income statement to
reflect any changes in 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.
Of the three transactions discussed above only one of these is still producing
commissionable premium. This contract is with AM Trust. The next paragraphs
provide analysis of the cash receipts and the outstanding receivables in respect
of this contract.
Following the reassessments performed at each balance sheet date subsequent to
31 December 2005, the gain has been calculated as the fair value of
consideration receivable $40.0 million (30 June 2008: $40.0 million; 31 December
2008: $40.0 million) . The Group has received payments to 30 June 2009 of $14.2
million (30 June 2008: $10.4 million; 31 December 2008: $11.9 million). The
remaining balance of $25.8 million (30 June 2008: $29.6 million; 31 December
2008: $28.1 million) is included within loans and receivables including
insurance receivables, see note 12.
This amount represents the Directors' best estimate of the risk adjusted future
receipts discounted at 4.0%. The Directors' best estimate is based on premium
reported by AM Trust as commissionable, premium reported by AM Trust as
non-commissionable and the consideration of prior production, experienced growth
and published data of the businesses sold.
Whether premium is commissionable is subject to contract interpretation and the
Directors believe that AM Trust has substantially under-reported commissionable
premium in past periods and is currently disputing this practice with AM Trust.
The receipt of the accrued income is dependent upon the future levels of
business generated on renewal in relation to the rights sold over a five year
time period as specified in the sale contract. A 10% deviation of the projected
renewals would result in a change in receivable of $4.0 million.
The directors consider that the receivable is collectable based upon an
assessment of the credit ratings of AM Trust.
19 Contingent liabilities
Structured settlements
The Group, through the Canadian branch of Alea Europe Ltd, has assumed ownership
of certain structured settlements and has purchased annuities from life assurers
to provide fixed and recurring payments to those underlying claimants. As a
result of these arrangements, the Group is exposed to a credit risk to the
extent that any of these insurers are unable to meet their obligations under the
structured settlements. This risk is viewed by the Directors as being remote as
the annuities are fully funded and the Group has only purchased annuities from
Canadian insurers with a financial stability of AA or higher (Standard &
Poor's). The Canadian branch is in run-off and the branch discontinued accepting
assignments of annuities in August 2001.
In the event of all the relevant life insurers being unable to meet their
obligations under the structured settlements, at 30 June 2009, the total
exposure, net of amounts that may be recoverable from the Compensation
Corporation of Canada (a Canadian industry-backed compensation scheme), is
estimated to be 41.2 million Canadian Dollars ($47.5 million) and the maximum in
relation to any one insurer 19.2 million Canadian Dollars ($22.1 million).
Regulatory matters
In connection with a periodic market conduct examination, the California
Department of Insurance has disputed certain fees collected from policyholders
by two agents of one of the Group's subsidiaries. The Group disagrees with the
Department's position, but is cooperating to audit these fee arrangements. The
agreements with the agents involved have been terminated. It is not possible to
predict the impact of this dispute on the Group's financial results.
Company contingent liabilities
In 2002 the Company entered into a top down guarantee with each of the Group's
rated insurance operating entities. These guarantees were in addition to the
pre-existing guarantees already in place between certain subsidiaries of the
Group. Subject to applicable corporate and regulatory requirements, the top down
guarantees required that the Company make funds available to the insurance
operating entities to allow the entities to fulfil their insurance or
reinsurance obligations to the client / customer incurred while the guarantee
remained in effect. The Group terminated all top down and other intra-Group
guarantees effective 30 November 2006.
20 Related party transactions
Fortress Investment Group
At 30 June 2009, certain parties related to Fortress Investment Group owned
72.41% of the Company's issued shares. Effective 1 October 2007 the Company put
in place an amended and restated advisory fee agreement with FIG LLC, a Fortress
affiliate ("Fortress"), under which the Company has agreed to pay Fortress
$1,000,000 per year, payable quarterly in arrears, for advisory services. At 30
June 2009, Fortress had received $500,000. As at 30 June 2009 the outstanding
balance due under these arrangements was $nil. The Fortress Directors'
beneficial interests in common shares of the Company as at 30 June 2009 were as
follows:
+----------------------------------+---------------------------------------------+
| Name of Director | Number of common shares |
+----------------------------------+---------------------------------------------+
| Robert I Kauffman1 | 125,826,832 |
+----------------------------------+---------------------------------------------+
| Randal A Nardone1 | 125,826,832 |
+----------------------------------+---------------------------------------------+
1 Robert Kauffman and Randal Nardone are members of the Joint Investment
Committee formed pursuant to the terms of a Joint Investment Committee Agreement
("JICA") by and among FIG Corp., Fortress Investment Group LLC (the direct
parent of FIG Corp. "Fortress"), Fortress Operating Entity I LP, Fortress
Operating Entity II LP, Messrs Kauffman, Nardone, Peter L. Briger Jr., Wesley R.
Edens and Michael R. Novogratz. Under the terms of the JICA, each other party to
the Joint Investment Committee Agreement has delegated all power to control, to
direct or to cause the direction of the management and policies of the Company
to Messrs Kauffman, Nardone and Edens. As such Messrs Kauffman and Nardone are
interested in the 125,826,832 common shares owned by FIN Acquisition Limited, an
indirect wholly-owned subsidiary of Fortress.
In connection with services involving potential acquisition opportunities in the
property and casualty insurance sector that may be performed by Mark Cloutier,
an executive director of the Company, Mr Cloutier entered into a consultancy
agreement effective 1 October 2007 with Fortress Capital Finance III (A) LLC, a
Fortress affiliate, whereby he would be paid $2,000 per day spent on such
activities plus a discretionary bonus. At 30 June 2009, $Nil had been paid or
accrued under this arrangement.
Investment Management
Fortress Fund IV Advisor LLC ("FFIVA"), a Fortress affiliate, provides
investment management services to the Company and certain of its subsidiaries
pursuant to investment management agreements. FFIVA is paid a flat service fee
of 11 basis points per annum on the total fair market value of the assets under
management, payable quarterly in arrears. At 30 June 2009, FFIVA had
approximately $169.9 million in assets under management.
Key management personnel
The Group considers its key management personnel to include its Directors and
those members of management reporting directly to its Executive Director that
have executive management responsibility for Group-wide operations.
Remuneration of key management personnel
The remuneration of the Directors and those members of management reporting
directly to its Executive Directors that have executive management
responsibility for Group-wide operations, who are the key management personnel
of the Group, is set out below in aggregate for each of the categories specified
in IAS 24 Related Party Disclosures. For the period ended 30 June 2009 this
included 6 individuals (2008: 7).
+----------------------+--------------------+--------------------+------------------+
| | Six months ended | Six months ended | Year ended 31 |
| | 30 June 2009 | 30 June 2008 | December 2008 |
+----------------------+--------------------+--------------------+------------------+
| | $ | $ | $ |
+----------------------+--------------------+--------------------+------------------+
| | | | |
+----------------------+--------------------+--------------------+------------------+
| Short-term employee | 1,987,072 | 1,636,623 | 3,040,840 |
| benefits | | | |
+----------------------+--------------------+--------------------+------------------+
| Post-employment | 75,512 | 46,624 | 116,372 |
| benefits | | | |
+----------------------+--------------------+--------------------+------------------+
| Other long-term | Nil | Nil | Nil |
| benefits | | | |
+----------------------+--------------------+--------------------+------------------+
| Termination benefits | Nil | 271,112 | 278,925 |
+----------------------+--------------------+--------------------+------------------+
| Share-based payment | 156,178 | Nil | Nil |
+----------------------+--------------------+--------------------+------------------+
| | | | |
+----------------------+--------------------+--------------------+------------------+
| Total | 2,218,762 | 1,954,359 | 3,436,137 |
+----------------------+--------------------+--------------------+------------------+
Key management personnel employment and retention contracts
Members of the Group have entered into employment and retention contracts with
Executive Directors and/or certain members of key management, in each case
taking into account the practices in the jurisdiction where the Group operates.
Compensation and termination benefits in the table above include amounts paid in
2007 and 2008 to Executive Directors and certain members of key management under
(and if applicable, settlement of) such contracts, to the extent not reported in
earlier periods.
Share and loan transactions with members of key management
Mark Cloutier
Mr Cloutier was awarded 140,647 restricted stock units on 19 June 2008.
These restricted stock units were awarded pursuant to Part C of the Alea Group
Executive Option and Stock Plan. The restricted stock units were priced in
accordance with the terms of the Plan. The Restricted Stock Units will vest 33%
on 31 December 2008 and 2009, respectively, and the remainder will vest on 31
December 2010 and are not subject to financial performance requirements.
Carl Speck
Mr Speck received an advance in the amount of $8,000 from a subsidiary of the
Company in payment of advance rental due to his landlord in the United States as
a result of his relocation to the United States at the Company's request. This
amount was repaid in 2008. In addition the Company paid a rental deposit of
$16,000 on behalf of Mr Speck. The rental deposit was paid under a residential
lease between Mr Speck and his landlord that was co-signed by a subsidiary of
the Company. That lease was terminated in January 2009 when Mr Speck moved to a
new rental property and paid the rental deposit on that property.
Mr Speck was awarded 140,647 restricted stock units on 19 June 2008. These
restricted stock units were awarded pursuant to Part C of the Alea Group
Executive Option and Stock Plan. The restricted stock units were priced in
accordance with the terms of the Plan. The Restricted Stock Units will vest 33%
on 31 December 2008 and 2009, respectively, and the remainder will vest on 31
December 2010 and are not subject to financial performance requirements.
George Judd
Mr Judd was awarded 140,647 restricted stock units on 19 June 2008. These
restricted stock units were awarded pursuant to Part C of the Alea Group
Executive Option and Stock Plan. The restricted stock units were priced in
accordance with the terms of the Plan. The Restricted Stock Units will vest 33%
on 31 December 2008 and 2009, respectively, and the remainder will vest on 31
December 2010 and are not subject to financial performance requirements.
During the period ending 30 June, 2009, a subsidiary of the Company paid $769 in
total to Mr Judd's spouse, Sally Judd, for filing and record keeping services at
$25.00 per hour.
INDEPENDENT REVIEW REPORT TO ALEA GROUP HOLDINGS (BERMUDA) LTD
We have been engaged by the company to review the condensed set of financial
statements in the half-yearly financial report for the six months ended 30 June
2009 which comprises the income statement, the balance sheet, the cash flow
statement, the statement of recognised income and expense, the statement of
changes in equity and related notes 1 to 20. We have read the other information
contained in the half-yearly financial report and considered whether it contains
any apparent misstatements or material inconsistencies with the information in
the condensed set of financial statements.
This report is made solely to the company in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim
Financial Information Performed by the Independent Auditor of the Entity" issued
by the Auditing Practices Board. Our work has been undertaken so that we might
state to the company those matters we are required to state to them in an
independent review report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone other than
the company, for our review work, for this report, or for the conclusions we
have formed.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been approved
by, the directors. The directors are responsible for preparing the half-yearly
financial report in accordance with the Disclosure and Transparency Rules of the
United Kingdom's Financial Services Authority.
As disclosed in note 2, the annual financial statements of the group are
prepared in accordance with IFRSs. The condensed set of financial statements
included in this half-yearly financial report has been prepared in accordance
with International Accounting Standard 34, "Interim Financial Reporting".
Our responsibility
Our responsibility is to express to the Company a conclusion on the condensed
set of financial statements in the half-yearly financial report based on our
review.
Scope of Review
We conducted our review in accordance with International Standard on Review
Engagements (UK and Ireland) 2410 "Review of Interim Financial Information
Performed by the Independent Auditor of the Entity" issued by the Auditing
Practices Board for use in the United Kingdom. A review of interim financial
information consists of making inquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other review
procedures. A review is substantially less in scope than an audit conducted in
accordance with International Standards on Auditing (UK and Ireland) and
consequently does not enable us to obtain assurance that we would become aware
of all significant matters that might be identified in an audit. Accordingly, we
do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe
that the condensed set of financial statements in the half-yearly financial
report for the six months ended 30 June 2009 is not prepared, in all material
respects, in accordance with International Accounting Standard 34 and the
Disclosure and Transparency Rules of the United Kingdom's Financial Services
Authority.
Deloitte LLP
Chartered Accountants and Statutory Auditors
London, United Kingdom
26 August 2009
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR IFFILTEIRFIA
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