Alea Group Posts $10.9 Million Profit; Completes Reserve Review; CFO Resigns

The Bermuda-based Alea Group Holdings announced preliminary results for 2004 showing a pretax profit of $10.9 million, compared to $54.5 million in 2003.The result exceeded analysts’ forecasts, as many had predicted a loss.

Alea, formed in 1997 with a management buyout of Rhine Re from Baloise under the direction of Kohlberg, Kravis, Roberts (KKR), has been reassessing its reserves. The earnings announcement also revealed that CFO Amanda J. Atkins has resigned effective April 5. She joins several other senior management personnel who have recently left the company. The situation has led Standard & Poor’s to lower its outlook on the Group from stable to negative (See following article).

Highlights cited in the earnings bulletin included the following:
– Comprehensive reserve study completed in-line with guidance of 5-7 point second half increase in combined ratio (H1 2004: 95.7 percent).
– Reserve increases of $72.5 million in the second half (H1 2004: $21.2 million; 2003: $19.2 million) add 6.1 points to combined ratio.
– Combined ratio (note) of 104.2 percent (2003: 96.8 percent) in-line with guidance of 103-105 percent.
– Underlying combined ratio (note) of 93.9 percent (2003: 94.5 percent) reflecting strong performance from core business.
– Net asset value of $4.05 per share (GBP2.10 at 31 December 2004 exchange rate of $1.93 = GBP1).
– Second half storm losses of $51.4 million, lower than $55 million forecast originally.
– Gross premiums up 22 percent to $1.583 billion (2003: $1.3 billion).
– Profit before tax of $10.9 million (2003: $54.5 million), including unrealized investment losses of $7.1 million (2003: $29.2 million).
– Tax charge of $16.6 million (2003: $13.5 million) reflecting limited tax relief on reserve additions and one-off US withholding tax charge of $4 million.
– Fully diluted after tax loss per share of $0.03 (2003: profit of $0.42) – fully diluted operating EPS $0.06 (2003: $0.54).
– Annualized operating return on equity (note) of 2 percent.
– Final 2004 dividend of $0.07 per share recommended, to give total dividend of $0.10 per share.

Concerning its future outlook Alea noted the following:
– Growing insurance portfolio with a combined ratio of 89.1 percent (2003: 104.1 percent): reinsurance combined ratio of 110.9 percent (2003: 93.5 percent).
– Strong underwriting conditions continue: rate increases equal to claims inflation. Profitability consistent with target RoE.
– Net unearned premium reserve increased 17 percent to $660 million (note) (2003: $563 million) representing tangible future revenue.
– Pre-tax loss estimate from Windstorm Erwin in January 2005 of between $20 million and $25 million.

CEO Mark L. Ricciardelli commented: “We have completed our rigorous global reserve review, which led to a second half reserve increase of $73 million, in-line with our previous guidance. This action, combined with the unusually high natural catastrophe losses experienced brought our combined ratio to 104.2 percent. We believe we have a rigorous approach to reserving, and that prospectively our risks and opportunities are balanced. We are particularly pleased with our growing insurance portfolio which has contributed to our underlying combined ratio of 93.9%, reinforcing our belief in Alea’s core strategy of focussing on small and mid-size clients and low to medium volatility risks.

“2004 was a year of significant and positive change for Alea. We strengthened our management team, realigned our US operations, instituted more rigorous strategic planning processes, including a metrics-driven operating culture, and implemented a new leadership team structure. In addition, we continued to grow our business, principally on the insurance side, bringing that segment into closer balance with our reinsurance portfolio.

We remain committed to our long-term goal of a 12-15 percent cross-cycle return on equity. I believe this underlying performance, along with our reserve actions, place us in a stronger position as we move towards this goal in 2005.”