The Bermuda-based Alea Group announced that its first half profits suffered a 47 percent decline to $25.9 million, compared to $48.8 million in the same period of 2004, due mainly to total reserve increases of $34.7 million. The insurer also announced plans to raise approximately $210 million in additional capital.
The investment firm KKR has an approximate 40 percent stake in the Alea Group (formerly Rhine Re). The Group has been under siege since A.M. Best announced in June that it was placing Alea’s “A-” ratings under review (See IJ Website June 9, 2005). Standard & Poor’s had earlier lowered its outlook on Alea from “stable” to “negative” (See IJ Website March 16).
Other highlights in the earnings report included the following:
• Combined ratio in six months ended 30 June 2005 of 101.9 percent (H1 2004: 95.8 percent)
• Adjusted combined ratio for the same period of 96.2 percent (H1 2004: 92.2 percent) reflecting strong performance from continuing business offset by impact of Windstorm Erwin.
• Net asset value of $4.12 per share (£2.28 at 30 June 2005 at an exchange rate of $1.81 = £1).
• Windstorm Erwin in January impacted Group’s performance by $18.5 million and first half combined ratio by 3.0 percent, less than previously anticipated forecast of $20-25 million.
• GPW in the six months ended 30 June 2005 down 14 percent to $855.3 million (H1 2004: $993.2 million); adjusted for the Bristol West contract commutation [note] GPW are up 4 percent to $911.8 million (H1 2004: $876.5 million).
• 79 percent of the 2005 gross reserve development related to professional liability contracts and 93 percent related to the Group’s reinsurance portfolio.
• Annualised return on equity of 5.4 percent.
• Basic and diluted EPS $0.11 (2004: $0.21)
Alea’s bulletin said that “In light of the claims reserve adjustments and changes in market conditions” the Group is now implementing the following initiatives:
• Its soft market strategy emphasizing a move away from reinsurance and towards insurance, and a rebalancing towards global property business and away from longer-tail US casualty reinsurance business. Insurance portfolio combined ratio in six months ended 30 June 2005 of 95.0 percent (H1 2004: 90.1 percent). Reinsurance combined ratio1 for the same period of 105.9 percent (H1 2004: 97.9 percent);
• A pro-active cost management program, including the consolidation of operations to improve operational efficiency;
• An active claims management and commutation strategy; and
• Enhanced strategic planning and performance management, using the management team’s experience in the insurance industry, and improved reporting systems.
Concerning the capital raising initiative the company said it “continues to work with its advisors to take the necessary steps required to raise additional capital to respond to A.M. Best’s concerns over Alea’s risk-adjusted capital.” The perspective $210 million net of expenses, which it expects to raise will meet those requirements. It’s proposing to do so through an equity rights issue. “The Group is also exploring an issue of up to $50 million of perpetual preferred shares to partially reduce the amount of equity required. The Group has discussed its funding proposals with the rating agencies,” said the bulletin.
The threat of losing its “A” rating has had a negative effect, Alea acknowledged. It said that the following had impacted its outlook and prospects:
• The Group’s policy renewals have been affected by A.M. Best’s announcement of 10 June 2005 regarding capital, such that Gross Premiums Written (“GPW”) in the second half of 2005 are expected to be lower than the comparable period in 2004.
• The key period for the Group’s policy renewals for the remainder of 2005 is November and December, by which time it is expected that the position with A.M. Best will be clarified.
• For insurance and reinsurance business incepting in the first six months of 2005 the Group has recorded average rate reductions, net of claims inflation, of approximately 2 per cent. Some increases in property catastrophe rates have been experienced.
• Exposure to Hurricane Katrina too early to be estimated.
Group CEO Mark L. Ricciardelli commented: “The first half of 2005 has been one of challenge and change for Alea. We are today announcing a number of initiatives, which the Directors believe, will reduce the volatility in the Group’s operating performance. The reserve development taken in the first half of 2005 reflects our continued active management of our claims portfolio. We are encouraged by the performance of our insurance portfolio which delivered a combined ratio in the first half of 2005 of 95.0 percent (H1: 2004: 90.1 percent). In light of the potential capital raising the Directors have decided not to pay an interim dividend for 2005.”