SOURCE: Alea Group Holdings (Bermuda) Ltd

September 20, 2006 02:01 ET

Alea Group Holdings (Bermuda) Ltd announces interim results and provides an update on run-off

Hamilton, Bermuda -- (MARKET WIRE) -- September 20, 2006 --

20 September 2006

                 Alea Group Holdings (Bermuda) Ltd          
      Interim results for the six months ended 30 June 2006

 Alea announces interim results and provides an update on run-off 

Financial Performance

-  Net insurance premium revenue for the six months ended 
   30 June 2006 was $209.7 million(1) (30 June 2005: $610.7 million), 
   with the reduction reflecting the impact of the Group's decision to 
   cease writing new/renewal business and place its operations into 
   run-off.

-  Loss after tax for the six months ended 30 June 2006 was 
   $10.7 million (2) (six months ended 30 June 2005: profit of 
   $19.5 million).

-  Net asset value of $2.57 per share(3) (GBP1.40 per share) 
   compared with 30 June 2005 of $4.12 per share (GBP2.28 per 
   share).

-  Net asset value at 30 June 2006 was impacted by cumulative 
   unrealised losses on investments of $49.3 million (30 June 
   2005: cumulative gains of $17.2 million).

-  Basic and diluted loss per share of $0.06 (30 June 2005: 
   earnings per share of $0.11).(4)

-  Investment income of $49.2 million (30 June 2005: $43.0 million).

-  Insurance contracts liabilities decreased from $2,872.5 million 
   at 31 December 2005 to $2,451.7 million at 30 June 2006.

-  Other operating expenses for the six months ended 30 June 
   2006 were $42.5 million compared with $61.2(5) million in the 
   six months ended 30 June 2005.

-  Limited adverse development (net of commutations) of 
   $3.1 million representing 0.1% of gross claims outstanding.

-  During the period, the Group entered into an agreement to 
   sell Alea North America Specialty Insurance Company 
   ("ANASIC") to a member company of Praetorian Financial 
   Group, Inc. ("Praetorian").(6)

-  2006 performance remains within the financial covenants 
   under the Group's bank credit agreement.

Run-off

Following the announcement of the Group's intention to cease underwriting and place its insurance operations into run-off, the Group adopted a run-off plan that includes a proactive cost management programme including consolidation of certain operations to improve operational efficiency, and an aggressive claims management and commutation strategy. The key elements of the plan are to preserve net assets through effective management of the run-off of the Group's balance sheet, manage other operating expenses and finance costs to levels less than or equal to investment income by year end 2007, and ultimately return capital to shareholders.

Effective 1 September 2006, Mark Cloutier was appointed Chief Executive Officer of the Group and with Kirk Lusk, Group Chief Financial Officer, joined the Board of Directors.

Outlook

The Group's performance for the first half of 2006 with respect to commutations is on plan. In addition, headcount and expenses are running as expected. Notwithstanding our performance, there can be no certainty as to the timing or amounts of future distributions to shareholders. Any future distributions will be subject to execution of commutations on economic terms acceptable to the Group, appropriate regulatory approvals being obtained to fund intra-group distributions, applicable legal restrictions, repayment of the Group's $150 million term loan and $50 million revolver and the retention of adequate capital to meet other obligations.

Comments of John Reeve, Non-executive Chairman of the Board of Directors:

"The first half of 2006 has been a challenging time for Alea, despite which the Group's results and run-off strategy are on plan. The Group is making progress in its efforts to reduce volatility in the balance sheet while at the same time achieving the operating efficiencies needed to sustain a successful run-off. We are pleased with the partnership of Mark Cloutier as Group CEO and Kirk Lusk as Group CFO and welcome them as executive members of the Board of Directors.

The Company(7) has not proposed an interim dividend for 2006."

Comments of Mark Cloutier, Group Chief Executive:

"The Group's operating results excluding finance costs are slightly better than plan, which is encouraging given the significant changes implemented in the transition to run-off. We made considerable improvements in the areas of staff and organisational restructuring, claims and commutation strategies, and expense and cash flow management. Additional progress has been made with respect to reducing volatility in the portfolio and accelerating our exit from active exposures through commutations and unearned premium cut-offs. As we move ahead, we will remain keenly focused on expense reduction initiatives, further embedding of cash and claim management strategies, and an acceleration of commutation activity."

Notes

1. Except where specifically indicated all statements refer to the six months ended 30 June 2006 or 2005.

2. 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.

3. GBP1.40 per share at an exchange rate of $1.83=GBP1 (2005: GBP2.28 per share at an exchange rate of $1.81 = GBP1).

4. Weighted average number of ordinary shares of 173.7 million (at 30 June 2005: 174.4 million).

5. The $61.2 million is stated after adding back $25.0 million of expenses that were reclassified at 30 June 2005 from other operating expenses to acquisition costs in accordance with IAS 1 'Presentation of Financial Statements'.

6. Both the sale and any subsequent distribution of proceeds are subject to regulatory approval and other customary conditions. Alea will continue to administer the run-off of the in force business as of the closing date.

7. "Company" refers to Alea Group Holdings (Bermuda) Ltd only. "Group" refers to Alea Group Holdings (Bermuda) Ltd, and all subsidiaries.

Financial information presented herein has been prepared in accordance with International Financial Reporting Standards ("IFRS") and is unaudited.

Senior management will be briefing analysts today by conference call at 10:00 am (BST time).


Conference telephone number         +44 208 322 2048

 

 

For more information on Alea see www.aleagroup.com. 
For further information, please contact:

 

Media:                Sheel Sawhney    
                      +1 860 258 6524 

Analysts & Investors: Kirk Lusk 
                      +1 860 258 6566

                      Financial Dynamics
                      Robert Bailhache
                      Nick Henderson
                      +44 20 7831 3113

Past performance cannot be relied upon as a guide to future performance.

Certain statements made in this document that are not based on current or historical facts are forward-looking in nature including, without limitation, statements containing words "believes," "anticipates," "plans," "projects," "intends," "expects," "estimates," "predicts," and words of similar import. All statements other than statements of historical facts including, without limitation, those regarding the Group's financial position, business strategy, plans and objectives of management for future operations (including development plans and objectives) are forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Group to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. In particular, forecasting of reserves for future losses is based on historical experience and future assumptions. As a result they are inherently subjective and may fluctuate based on actual future experience and changes to current or future trends in the legal, social or economic environment. Such forward-looking statements are based on numerous assumptions regarding the Group's present and future business strategies and the environment in which the Group will operate in the future. These forward-looking statements speak only as at the date of this document or other information concerned. Alea Group Holdings (Bermuda) Ltd expressly disclaims any obligations or undertaking (other than reporting obligations imposed on us in relation to our listing on the London Stock Exchange) to disseminate any updates or revisions to any forward-looking statements contained herein to reflect any changes in the Group's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. References in this paragraph to the Group are to Alea Group Holdings (Bermuda) Ltd and its subsidiaries from time to time.

Financial Review


Unaudited consolidated income statement

 
                                                                    
                                      Six months ended    Year ended
                             30 June 2006 30 June 2005   31 December
                                                                2005
                                $'million    $'million     $'million
Gross premiums written             (37.9)        855.3         997.5
                                                                    
Revenue                                                             
Premium revenue                     270.9        723.9       1,347.8
Premium ceded to reinsurers        (61.2)      (113.2)       (261.1)
Net insurance premium               209.7        610.7       1,086.7
revenue                                                             
                                                                    
Fee income                            0.4          1.3           3.0
Investment income                    49.2         43.0          89.1
Net realised (losses)/gains         (1.4)          3.6           0.7
on financial assets                                                 
Net realised gains on sale            0.9            -          61.1
of renewal rights                                                   
Total revenue                       258.8        658.6       1,240.6
                                                                    
Expenses                                                            
Insurance claims and loss           176.3        485.0       1,146.6
adjustment expenses                                                 
Insurance claims and loss          (27.4)       (72.4)       (227.4)
adjustment expenses                                                 
recovered from reinsurers                                           
Net insurance claims                148.9        412.6         919.2
                                                                    
Acquisition costs                    64.2        174.8         335.8
Other operating expenses             42.5         36.2          95.4
Restructuring costs                   1.6            -          22.4
Total expenses                      257.2        623.6       1,372.8
                                                                    
Results of operating                  1.6         35.0       (132.2)
activities                                                          
                                                                    
Finance costs                      (16.0)        (9.1)        (19.9)
                                                                    
(Loss)/profit before income        (14.4)         25.9       (152.1)
tax                                                                 
                                                                    
Income tax credit/(expense)           3.7        (6.4)        (26.8)
                                                                    
(Loss)/profit on ordinary          (10.7)         19.5       (178.9)
activities after income tax                                         
for the period                                                      

Performance indicators and comparison to prior periods

The Group ceased underwriting new and renewal business and was placed into run-off in the fourth quarter of 2005. The Group's business has therefore changed significantly and as a result certain performance comparisons with prior periods may become less meaningful. In this report, the Group has modified some of the prior period comparisons to make them relevant to the business in its current state. Going forward, the relevance of period-to-period comparisons included in Group reporting will be considered in light of the Group's run-off strategy with the objective of making only meaningful and useful comparisons.

Reserves and claims

At 30 June 2006 the total insurance contracts balance comprising gross claims outstanding, claims handling provisions, discount on claims and claims handling provision and provision for unearned premiums was $2,451.7 million, a decrease of 18.8% from 30 June 2005 ($3,019.4 million) and a decrease of 14.6% from 31 December 2005 ($2,872.5 million). The claims outstanding, net of reinsurance at 30 June 2006 was $1,344.8 million. This is a decrease of 5.9% compared with 31 December 2005 ($1,429.4 million) but is an increase of 15.6% from $1,163.5 million as at 30 June 2005. This increase reflects the fact that the Group was still an ongoing business during the second half of 2005.

The balances are analysed below:

                                      As at      As at       As at
                                    30 June    30 June 31 December
                                       2006       2005        2005
                                  $'million  $'million   $'million
Gross claims outstanding                                          
Provision for claims                2,415.1    2,231.8     2,531.9
outstanding, reported and not                                     
reported                                                          
Discount                            (127.7)    (155.7)     (133.4)
                                    2,287.4    2,076.1     2,398.5
Claims handling provisions             25.5       22.6        30.4
Total gross claims outstanding      2,312.9    2,098.7     2,428.9
Provision for unearned premiums       138.8      920.7       443.6
on insurance contracts                                            
Total insurance contracts           2,451.7    3,019.4     2,872.5
                                                                  
Aggregate excess reinsurance                                      
Provision for claims                  321.3      435.0       343.3
outstanding, reported and not                                     
reported
Discount                              (9.1)     (30.6)      (11.3)
Net aggregate excess reinsurance      312.2      404.4       332.0

Other reinsurance                                                 
Provision for claims                  659.8      538.0       673.0
outstanding, reported and not                                     
reported                                                          
Discount                              (3.9)      (7.2)       (5.5)
Net other reinsurance                 655.9      530.8       667.5
                                                                  
Total reinsurance                                                 
Provision for claims                  981.1      973.0     1,016.3
outstanding, reported and not                                     
reported                                                          
Discount                             (13.0)     (37.8)      (16.8)
Total reinsurers' share of            968.1      935.2       999.5
claims outstanding                                                
Provision for unearned premiums        32.9       89.8        58.1
on reinsurance contracts                                          
Total reinsurance contracts         1,001.0    1,025.0     1,057.6
                                                                  
Claims outstanding, net of                                        
reinsurance                                                       
Before discount                     1,459.5    1,281.4     1,546.0
Discount                            (114.7)    (117.9)     (116.6)
Claims outstanding, net of          1,344.8    1,163.5     1,429.4
reinsurance                                                       

 

The following table presents the Group's booked gross loss and 
loss expense reserves before claims handling provision as at 
30 June 2006 by class of business.

 
                             General     Motor     Workers'
$'million                  liability                  comp.
1999 and prior                 115.0      56.0         35.8
2000                            38.2      14.5         13.9
2001                            34.5      14.2         19.2
2002                            43.0      24.5         10.7
2003                            50.7      46.0          8.0
2004                            67.7      77.0         13.9
2005                            32.0      76.8          4.6
Total reinsurance              381.1     309.0        106.1
reserves                                                   
Insurance reserves             266.8      96.3        224.1
Total non-life reserves        647.9     405.3        330.2
Life structured                                            
settlements                                                
Life reinsurance                                           
Sale of ANASIC                                             
Total reserves                                             

 
                     Professional   Property     MAT     Total
                                                              
$'million                                                     
1999 and prior                1.6       34.5   100.2     343.1
2000                         27.1        8.9    25.0     127.6
2001                         27.7        6.1    14.8     116.5
2002                         55.4        9.8     6.4     149.8
2003                         43.5       11.8     6.8     166.8
2004                         72.3       32.3     0.4     263.6
2005                         43.5      164.3     1.2     322.4
Total reinsurance           271.1      267.7   154.8   1,489.8
reserves                                                      
Insurance reserves           36.4       40.4       -     664.0
Total non-life              307.5      308.1   154.8   2,153.8
reserves                                                      
Life structured                                          246.3
settlements                                                   
Life reinsurance                                          21.6
Sale of ANASIC                                           (6.6)
Total reserves                                         2,415.1

 

 

The following table analyses Alea's gross reserves between 
incurred but not reported ("IBNR") and case as at 30 June 2006. 
The insurance and reinsurance splits are in line with the Group's 
typical business tail and the relative maturity of the respective 
books.

 
Percentage               Insurance     Reinsurance             Total
Case                           39%             53%               49%
IBNR                           61%             47%               51%
Total                         100%            100%              100%

Adverse development

During the six months ended 30 June 2006 the Group experienced deterioration net of commutations in the gross reserves of $3.1 million ($2.2 million net of reinsurance).

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 2006 25% of the Group's gross reserves were discounted at a rate of 4.5%.

As at 30 June 2006 the Group's total net discount was $114.7 million (30 June 2005: $117.9 million). This is expected to reduce towards zero over the duration of the normal course payout of the reserves. The unwinding of the discount will be charged to insurance claims and loss adjustment expenses in the income statement as the remaining expected duration drops below the UK GAAP qualified level as permitted by IFRS 4.

Income statement

Gross premiums written and net insurance premium revenue

Gross premiums written ("GPW") in the six months ended 30 June 2006 were $(37.9) million (six months ended 30 June 2005: $855.3 million) reflecting the cancellation of policies written in prior periods. Net insurance premium revenue reduced by 66% to $209.7 million in the six months ended 30 June 2006 (six months ended 30 June 2005: $610.7 million). This is primarily due to the Group's decision to cease writing new and renewal business resulting in a reduction in premium.

Premiums written generally take three years to earn through the income statement. These patterns differ by business class and operational unit. Overall, they approximate 40% in the first, 55% in the second and 5% in the third year. As at 30 June 2006 the Group had net unearned premiums of $105.9 million (30 June 2005: $830.9 million). The Group anticipates that no significant insurance premium revenue will be recognised in 2008 as the majority of unearned premium will have been released and recognised as revenue by 31 December 2007.

The Group has assessed its 30 June 2006 deferred acquisition cost asset ("DAC") of $30.0 million (30 June 2005: $228.7 million) as fully recoverable and as a result has not recorded any DAC write-off in its six months to 30 June 2006 income statement.

Fee income

Fee income in the six months ended 30 June 2006 was $0.4 million compared with $1.3 million recorded in the same period in 2005. Fee income represents income arising on structured reinsurance and insurance contracts without significant transfer of insurance risk. These contracts are accounted for on a deposit accounting basis.

Investment income and realised gains and losses

Investment income in the six months ended 30 June 2006 was $49.2 million, 14% ($6.2 million) higher than the $43.0 million recorded in the six months ended 30 June 2005. The growth recorded reflects 4.0% investment income in the six months ended 30 June 2006 on average invested assets of $2,331 million compared with 3.6% investment income in the six months ended 30 June 2005 on average invested assets of $2,312 million.

Net realised losses on financial assets were $1.4 million in the six months ended 30 June 2006 compared with $3.6 million realised gains in the six months ended 30 June 2005.

Net realised gains on sale of renewal rights

The Group completed three renewal rights transactions in the fourth quarter of 2005. These were accounted for as net realised gains on sale of renewal rights of $61.1 million, which was recognised in the year ended 31 December 2005, and represents the directors' valuation at fair value of the business sold. Subsequently, an additional $0.9 million has been recognised in the six months ended 30 June 2006. These amounts reflect the discounted estimated future cash flows arising from specified percentages of applicable commissionable premiums written over the applicable period. 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 dependent upon receipt of commissionable premium on applicable business which is periodically evaluated by the Board.

The table below summarises each transaction:

Transaction     Completion           2006 income        2005 income
                date                 ($'million)        ($'million)
London/Canopius 5 Dec 2005                     -                8.0
AAR/AmTrust     14 Dec 2005                    -               47.0
Europe/SCOR     19 Dec 2005                  0.9                6.1
Total                                        0.9               61.1

To date the Group considers that the accruals above are reasonable and has received in cash $20.1 million of the estimated total of $62.0 million. The outstanding balance consists of $37.0 million due from AmTrust and $4.9 million due from Canopius.

Insurance claims and loss adjustment expenses

In the six months ended 30 June 2006 the Group incurred net insurance claims and loss adjustment expenses of $148.9 million (six months to 30 June 2005: $412.6 million).

The claims outstanding net of reinsurance at 30 June 2006 were $1,344.8 (at 31 December 2005: $1,429.4 million), which equates to a decrease of $84.6 million in the six month period.

Acquisition costs

Acquisition costs are costs are directly associated with the acquisition of insurance and reinsurance contracts including brokerage, commissions, underwriting expenses and other acquisition costs. They are deferred and amortised over the period of contract, consistent with the earning of premium.

Given that the Group is no longer accepting new insurance risk, and is releasing its unearned premium reserves as the risk associated with those premium receipts is extinguished, acquisition costs are expected to decrease.

In the six months ended 30 June 2006 total acquisition costs were $64.2 million (six months ended 30 June 2005: $174.8 million).

Other operating expenses

The Group plans to reduce other operating expenses so that in any given period they are less than total investment income in that period net of finance costs. To the extent that investment income net of discount released does not offset other operating expenses, the Group will establish a run-off provision. The current Group projections indicate that a run-off provision is not required.

In the six months to 30 June 2006 other operating expenses were $42.5 million. This compares with other operating expenses in the six months to 30 June 2005 of $36.2 million which were stated net of a $25.0 million reclassification from other operating expenses to acquisition costs. This accounting treatment was performed to comply with IAS 1 'Presentation of Financial Statements' and represents premium related expenses. As the Group is now in run-off, the equivalent reclassification is no longer required.

Restructuring costs

Restructuring costs in the six months ended 30 June 2006 were $1.6 million (year ended 31 December 2005: $22.4 million). The Group anticipates headcount at the end of 2006 will be less than 200 and will reduce further in line with reserves and invested assets.

Included are redundancy costs incurred of $4.1 million for severance payments made to employees who were not part of the original restructuring plan as disclosed at 31 December 2005.

Restructuring costs also include a credit of $2.5 million which results from Alea North America's sublease of its empty offices in Wilton and a resulting reversal of part of the previously recognised provision for onerous contracts.

Results of operating activities

In the six months ended 30 June 2006, results of operating activities were a profit of $1.6 million compared with a profit of $35.0 million in the six months ended 30 June 2005 reflecting the transition into run-off detailed above.

Finance costs

Finance costs include investment expenses, foreign exchange movements and debt interest. In the six months ended 30 June 2006 total finance costs were $16.0 million, compared with $9.1 million recorded in the same period in 2005. The majority of this increase results from a rise in interest rates. As is detailed in the section on Financing Facilities, interest is charged at LIBOR plus 285 basis points on the trust preferred facility and at LIBOR plus 120 basis points on the three-year bank facility. The Group was also significantly impacted by the weakening of the dollar in the European operations.

Loss before income tax

Loss before income tax was $14.4 million in the six months ended 30 June 2006 compared with a profit of $25.9 million in the six months ended 30 June 2005. This reduction reflects the change in the results of operating activities noted above and the transition into run-off.

Income tax expense

The income tax credit in the six months ended 30 June 2006 was $3.7 million, compared with a charge of $6.4 million in the six months ended 30 June 2005. The effective tax rate was 25.9% in the six months ended 30 June 2006 (six months ended 30 June 2005: 24.8%). The impact of the income tax credit on the income statement is summarised as follows:

                         Six months       Six months            Year
                              ended            ended           ended
                       30 June 2006     30 June 2005     31 December
                                                                2005
                          $'million        $'million       $'million
Current tax                                                         
(credit)/charge:                                                    
                                                                    
UK corporation tax              0.3              0.4               -
Foreign tax                   (2.1)              6.4           (0.2)
                                                                    
Total current                 (1.8)              6.8           (0.2)
period
                                                                    
Deferred tax                  (1.9)            (0.4)            27.0
(credit)/charge:                                                    
                                                                    
Total income tax              (3.7)              6.4            26.8
(credit)/expense                                                    
                                                                    

In the year ended 31 December 2005 the Group wrote off the majority of its deferred tax assets to reflect uncertainty over future profitability. Consequently, the Group's Swiss and UK entities have significant trading losses carried forward in respect of which no deferred tax assets have been recognised.

In the six months to 30 June 2006 the Group's North American entities made a pre tax loss of $13.3 million. As a result of these allowable tax losses, the Group has reversed a previously recognised deferred tax liability of $1.9 million and has also recognised a current tax recoverable of $2.8 million.

The corporation tax for the interim periods ended 30 June 2006 and 30 June 2005 was calculated so as to represent the best estimate of the weighted average annual corporation tax rate expected for the full financial year.

Loss on ordinary activities after income tax

Loss on ordinary activities after income tax in the six months ended 30 June 2006 was $10.7 million, compared with a profit of $19.5 million in the six months ended 30 June 2005.

Loss per share

Basic and fully diluted loss per share for the six months ended 30 June 2006 was $0.06 per share (six months ended 30 June 2005: earnings per share: $0.11).

Dividend

The Company will not be paying an interim dividend for the 2006 financial year.

Balance sheet

Total assets

Total assets as at 30 June 2006 decreased by 16% to $3,769.5 million from $4,513.5 million at 30 June 2005.

Net assets

Net assets (shareholders' funds attributable to equity interests) at 30 June 2006 were $447.1 million (30 June 2005: $718.3 million). Net assets per share were $2.57 (30 June 2005: $4.12). At the 30 June 2006 exchange rate of $1.83= GBP1, net assets per share were GBP1.40 (30 June 2005: GBP2.28 at an exchange rate of $1.81 = GBP1). Net assets have remained relatively stable compared with the position at 31 December 2005 ($490.4 million) after taking into consideration the impact of interest rate movements on the investment portfolio described below.

Reinsurance recoverables

Total reinsurers' share of claims outstanding was $968.1 million at 30 June 2006 ($935.2 at 30 June 2005). The increase is primarily due to catastrophe losses incurred in the second half of 2005 offset by the commutation of the Inter-Ocean adverse development and aggregate excess of loss covers.

Invested assets

The Group's investment strategy emphasises a high quality diversified portfolio of liquid investment grade fixed income securities as a method of preserving capital. The investment portfolio does not currently consist of equity or real estate investments, but the Group may, in the future, invest in other asset classes on a modest basis as part of a continuing conservative investment strategy.

At 30 June 2006 the value of available for sale investments was $1,980.7 million, compared with $2,123.5 million at 30 June 2005.

Of total invested assets $1,971.6 million (30 June 2005: $2,092.0 million) is managed by third-party fund managers with the asset mix shown below. The remaining invested assets of $9.1 million include predominantly mutual funds invested in fixed income securities.

Asset class                              30 June 2006  30 June 2005
US government                                     28%           27%
US mortgage                                       20%           20%
EU and Switzerland government and                 16%           16%
corporate                                                          
US corporate                                      11%           12%
Asset backed securities                            5%            8%
US municipalities                                  1%           11%
Canadian government and provinces                  3%            2%
Cash and other                                    16%            4%
Total                                            100%          100%

At 30 June 2006 the Group's investment portfolio had an average duration of 2.6 years (30 June 2005: 3.4 years). The Group intends to monitor the average duration of the portfolio to provide liquidity anticipated to be required to support the Group's run-off strategy.

In the first half of 2006 the Group achieved a total gross return on the investment portfolio of 0.8% (six months ended 30 June 2005: 4.9%). The investment return comprised 4.0% investment income (six months ended 30 June 2005: 3.6%), 0.1% realised loss (six months ended 30 June 2005: gain of 0.3%) and 3.1% unrealised loss (six months ended 30 June 2005: gain of 1.0%) on average invested assets of $2,331 million (six months ended 30 June 2005: $2,312 million).

At 30 June 2006 all of the Group's fixed income portfolio was rated A or better and 98% was rated AA or better by either Standard & Poor's or Moody's. The portfolio had a weighted average rating of AAA based on ratings assigned by Standard & Poor's or Moody's. Other than with respect to US, Canadian and European Union government and agency securities, the Group's investment guidelines limit its aggregate exposure to any single issuer to 5% of its portfolio. All securities must be rated A or better at the time of purchase and the weighted average rating requirement of the Group's portfolio is AAA. There were no investment write-offs in either 2005 or the first half of 2006.

There are pledges over certain investments for the issuance of letters of credit in the normal course of business. As at 30 June 2006 the pledges covered assets of $425.2 million (30 June 2005: $286.4 million). In addition $132.3 million (30 June 2005: $104.2 million) is held as statutory deposits for local regulators and a further $762.0 million (30 June 2005: $805.9 million) is held in trust for the benefit of policy holders including $286.5 million (30 June 2005: $435.9 million) that Alea (Bermuda) Ltd has placed in trust on behalf of Alea North America Insurance Company.

As at 30 June 2006 the Group held Societe d'Investissement a Capital Variable ("SICAV") of $51.8 million (30 June 2005: $40.5 million) pledged for the benefit of French and Belgian cedants. These SICAVs are mutual funds invested in European fixed income securities with average credit quality of AAA and duration of approximately five and a half years.

Capital management

Financing facilities

The Group raised $100 million of hybrid capital in December 2004 and a further $20 million in early January 2005. This capital is in the form of 30-year hybrid trust preferred securities priced at LIBOR plus 285 basis points.

At 30 June 2006 the Group had $150 million outstanding under its term loan facility and $50 million outstanding under its revolver facility. Interest is charged at LIBOR plus 120 basis points on the three-year bank facilities. The bank facilities are due in September 2007.

The Group's bank facilities are subject to covenants including tangible minimum net equity, debt-to-capitalisation ratio limitations, limitations on granting of liens, limitations on payments of dividends, limitations on other disposition of assets, limitations on increased indebtedness and limitations on distribution of assets.

Liquidity and cashflow

Cash flows from operating activities primarily consist of premiums collected, investment income and collected reinsurance recoverable balances, less paid claims, retrocession payments, operating expenses and tax payments. Net cash outflow from operating activities after income tax paid for the six months ended 30 June 2006 was $195.6 million (six months ended 30 June 2005: $61.1 million net cash inflow). The operating cash outflow reflects the transition into run-off and the reduction in premium received.

The net increase in cash was $16.8 million (decrease for six months ended 30 June 2005 of $57.8 million). This is after net cash received from investing activities of $225.8 million (six months ended 30 June 2005: net cash used of $118.1 million) and net cash used in financing activities of $10.6 million (six months ended 30 June 2005: net cash outflow of $1.4 million). As a result the Group's cash and bank overdraft at 30 June 2006 was $133.8 million (30 June 2005: $135.8 million).

Intra-group arrangements

The Group manages a number of different intra-group arrangements designed to ensure that each local balance sheet retains risk commensurate with its capital base. The principal means of achieving this is by arranging capacity through internal quota share reinsurances ('quota shares') primarily with Alea Bermuda. For 2002 to 2006 underwriting years the Group has put in place a 70% quota share to Alea Bermuda of Alea North America's insurance and reinsurance business. For 2001 to 2005 underwriting years there is a 35% quota share arrangement from Alea London to Alea Europe. There is a 50% quota share of certain 2000 and prior underwriting year business from Alea Europe to Alea Bermuda. For 2002 to 2005 underwriting years, there is an intra-group aggregate excess of loss contract from Alea Europe to Alea Bermuda. Given the change in circumstances, the Group is evaluating options to simplify its capital structure and balance sheet and is therefore considering commutations of the quota shares. Such transactions would be subject to regulatory approval in each jurisdiction affected.

Strategic alternatives

The Group continues to explore sale options for all or certain parts of the Group. There can be no guarantees that any transaction will take place or that a sale of the Group would be at a premium to the current market price.

As previously announced, Alea has entered into a definitive agreement to sell Alea North America Specialty Insurance Company ("ANASIC"), its US based excess and surplus lines company to a member company of Praetorian Financial Group, Inc. ("Praetorian"). Praetorian will purchase all of Alea's shares in ANASIC in exchange for a cash payment of $4 million plus the policyholders' surplus of ANASIC as of the closing date. Total consideration will be between $30 million and $36 million and the transaction is expected to be completed by year-end 2006. As at 30 June 2006 $43.0 million has been reclassified as assets and $12.4 million as liabilities of disposable subsidiary on the face of the balance sheet.

Employee share restrictions

As previously announced, the Board has waived certain contractual prohibitions restricting former employees from selling their shares in the Company for five years from purchase and thereafter only with prior Board approval. The Board has also waived these requirements for current employees with effect from the publication of these results for limited periods following publication of the Group's interim and full year results subject to certain conditions and all applicable legal and regulatory restrictions. As at 1 September 2006 current employees hold approximately 682,000 shares.

Credit ratings

On 8 September 2005 Standard and Poor's ("S&P") lowered its long-term counterparty credit and insurer financial strength ratings on the Group to BBB+ from A-. The downgrade followed the publication of the Group's interim results on 31 August 2005 which did not meet S&P's expectations. On 5 December 2005, S&P lowered its long-term counterparty credit and insurer financial strength ratings on the Group to BBB from BBB+. The downgrade followed the placement of Alea London into run-off following the sale of policy renewal rights to Canopius announced on the same day. On 14 February 2006 S&P affirmed the Group's credit rating at BBB (stable outlook). At the same time the ratings were withdrawn at management's request.

On 23 September 2005 A.M. Best lowered the Group's financial strength rating from A- to B++ due to concerns over the Group's risk adjusted capitalisation. On 30 January 2006 A.M. Best downgraded the Group's financial strength rating to B from B++ and the issuer credit rating to BB from BBB due to the Group's entry into run-off and expected poor operational performance. At the same time the ratings were withdrawn at management's request.

Financial calendar 2007

The Group expects to post its results for the year ended 31 December 2006 on 4 April 2007.*

*provisional date

Kirk Lusk Group Chief Financial Officer 19 September 2006

ALEA GROUP INTERIM REPORT 2006

Six months ended 30 June 2006


Consolidated income statement

 
                                          Six       Six      Year
                                       months    months     ended
                                        ended     ended        31
                                      30 June   30 June  December
                                         2006      2005      2005
                               Notes    $'000     $'000     $'000
                                                                 
Gross premiums written             6 (37,941)   855,343   997,528
                                                                 
Revenue                                                          
Premium revenue                       270,850   723,873 1,347,768
Premium ceded to reinsurers          (61,170) (113,173) (261,026)
Net insurance premium revenue      6  209,680   610,700 1,086,742
                                                                 
Fee income                         6      409     1,322     3,006
Investment income                  8   49,177    42,966    89,138
Net realised (losses)/gains on        (1,426)     3,588       672
financial assets                                                 
Net realised gains on sale of      4      930         -    61,079
renewal rights                                                   
Total revenue                      6  258,770   658,576 1,240,637
                                                                 
Expenses                                                         
Insurance claims and loss             176,373   485,050 1,146,589
adjustment expenses                                              
Insurance claims and loss            (27,441)  (72,407) (227,320)
adjustment expenses recovered                                    
from reinsurers                                                  
Net insurance claims               6  148,932   412,643   919,269
Acquisition costs                  6   64,181   174,838   335,788
Other operating expenses               42,488    36,131    95,435
Restructuring costs                5    1,556         -    22,354
Total expenses                        257,157   623,612 1,372,846
                                                                 
Results of operating               6    1,613    34,964 (132,209)
activities                                                       
                                                                 
Finance costs                        (15,971)   (9,054)  (19,892)
                                                                 
(Loss)/profit before income        6 (14,358)    25,910 (152,101)
tax                                                              
                                                                 
Income tax credit/(expense)        9    3,712   (6,425)  (26,827)
                                                                 
(Loss)/profit on ordinary            (10,646)    19,485 (178,928)
activities after income tax                                      
for the period                                                   
 
Earnings per share for (losses)/profits attributable to the     
equity shareholders of the Company during the period:           
                                                                
Earnings per share on operating                                 
activities                                                      
                                                                
Basic ($)                          7   (0.06)      0.11    (1.03)
Diluted ($)                        7   (0.06)      0.11    (1.03)
                                                             
                                                                
                                                                
                                                                

 

Consolidated balance sheet

 
                                     As at      As at       As at
                                   30 June    30 June 31 December
                                      2006       2005        2005
                          Notes      $'000      $'000       $'000
                                                                 
ASSETS                                                           
Property, plant and                  8,287     14,772       9,908
equipment                                                        
Intangible assets                    8,479      9,683       8,479
Deferred acquisition                30,036    228,743     107,000
costs                                                            
Assets of a disposal         11     43,045          -           -
group classified as                                              
held for sale                                                    
Financial assets                                                 
Equity securities                                                
- available for sale                   161        136         161
Debt securities                                                  
- available for sale             1,980,557  2,123,485   2,205,532
Loans and receivables including    563,105    952,980     678,158
insurance receivables                                            
Deferred tax assets                  1,104     22,954         997
Reinsurance contracts        12  1,001,007  1,024,975   1,057,639
Cash and cash                      133,749    135,795     116,962
equivalents                                                      
                                                                 
Total assets                     3,769,530  4,513,523   4,184,836
                                                                 
LIABILITIES                                                      
Insurance contracts          12  2,451,660  3,019,428   2,872,456
Borrowings                   13    316,983    316,306     316,631
Liabilities of a             11     12,415          -           -
disposal group                                                   
classified as held                                               
for sale                                                         
Provisions                   14      9,505          -      17,562
Other liabilities and               41,524     33,468      37,145
charges                                                          
Trade and other                    489,291    417,123     447,648
payables                                                         
Deferred tax                             -          -       1,878
liabilities                                                      
Current income tax                   1,005      8,906       1,087
liabilities                                                      
                                                                 
Total liabilities                3,322,383  3,795,231   3,694,407
                                                                 
Net assets                         447,147    718,292     490,429
                                                                 
EQUITY                                                           
Capital and reserves                                             
attributable to the                                              
Company's equity                                                 
holders                                                          
Share capital                15      1,737      1,737       1,737
Other reserves               15    660,195    728,128     692,831
Retained loss                15  (214,785)   (11,573)   (204,139)
                                                                 
Total equity                       447,147    718,292     490,429
                                                                 

 

Approved by the Board of Directors on 19 September 2006 and 
signed on its behalf by:

 

Kirk Lusk
Group Chief Financial Officer

 

Consolidated cash flow statement

 
                                 Six months  Six months        Year
                                      ended       ended       ended
                                    30 June     30 June 31 December
                                       2006        2005        2005
                          Notes       $'000       $'000       $'000
                                                                   
Cash (used in)/              16   (197,622)      64,814     114,453
generated from                                                     
operations                                                         
Income tax recovered/                 2,034     (3,710)     (3,271)
(paid)                                                             
                                                                   
Net cash (used in)/               (195,588)      61,104     111,182
from operating                                                     
activities                                                         
                                                                   
Cash flows from                                                    
investing activities                                               
Purchase of property,                 (265)     (4,594)     (6,656)
plant and equipment                                                
Proceeds on sale of                     124         482       2,343
property, plant and                                                
equipment                                                          
Cash payments to                (1,657,627) (1,466,321) (2,612,771)
acquire equity and                                                 
debt securities                                                    
Cash receipts from                1,837,675   1,303,221   2,351,715
sales of equity and                                                
debt securities                                                    
Net amounts                              41       6,341     (2,087)
outstanding for                                                    
securities                                                         
Cash receipts from                   45,832      42,782      92,123
income from interest                                               
and dividends                                                      
                                                                   
Net cash from/(used                 225,780   (118,089)   (175,333)
in) investing                                                      
activities                                                         
                                                                   
Cash flows from                                                    
financing activities                                               
Repurchases of                            -     (2,065)     (2,135)
ordinary shares                                                    
Proceeds from issuance                    -      20,000      20,000
of trust preferred                                                 
securities                                                         
Dividends paid to                         -    (12,203)    (12,203)
Company's shareholders                                             
Capital raising fees                      -           -         240
Interest paid on                   (10,606)     (7,107)    (16,103)
borrowings                                                         
                                                                   
Net cash used in                   (10,606)     (1,375)    (10,201)
financing activities                                               
                                                                   
Net increase/                        19,586    (58,360)    (74,352)
(decrease) in cash and                                             
bank overdrafts                                                    
                                                                   
Cash and bank                       116,962     193,628     193,628
overdrafts at                                                      
beginning of period                                                
Cash of a disposal           11       (495)           -           -
group classified as                                                
held for sale                                                      
Exchange (losses)/                  (2,304)         527     (2,314)
gains on cash and bank                                             
overdrafts                                                         
                                                                   
Cash and bank                       133,749     135,795     116,962
overdrafts at end of                                               
period                                                             

 

Consolidated statement of recognised income and expense

 
                        Six months   Six months             Year
                             ended        ended            ended
                           30 June 30 June 2005 31 December 2005
                              2006                              
                             $'000        $'000            $'000
                                                                
(Loss)/profit on          (35,994)        9,274         (20,519)
revaluation of                                                  
available-for-sale                                              
investments                                                     
Exchange differences on      4,158      (4,891)          (4,934)
translation of foreign                                          
operations                                                      
Tax on items taken               -      (4,806)          (2,120)
directly into equity                                            
Net loss recognised       (31,836)        (423)         (27,573)
directly into equity                                            
                                                                
Transfers                                                       
Transfers to profit and      (613)      (3,248)          (6,074)
loss on sale of                                                 
available-for-sale                                              
investments                                                     
Tax on items                     -          123              669
transferred from equity                                         
Total transfers net of       (613)      (3,125)          (5,405)
tax                                                             
                                                                
(Loss)/profit for the     (10,646)       19,485        (178,928)
period                                                          
                                                                
Total recognised income   (43,095)       15,937        (211,906)
and expense for the                                             
period                                                          

Notes to the financial statements

1 General information

Alea Group Holdings (Bermuda) Ltd (the "Company") and its subsidiaries (collectively the "Group") were engaged in the business of underwriting insurance and reinsurance risks. The Group operates through four principal operating segments representing London market business, North American business including alternative risk transfer and reinsurance, Continental European reinsurance and financial services. In 2005 the Group ceased to write new business and placed all operations into run-off. Although the Group has disposed of the renewal rights for Alea Alternative Risk, Alea London and Alea Europe and placed all operations into run-off, the Group will continue to service claims relating to business written during 2006 and prior for the foreseeable future. As such, it is considered appropriate to recognise all amounts as relating to continuing operations.

The Company is registered in Bermuda and is listed on the London Stock Exchange. As such it is required to prepare its financial information in accordance with the Bermuda Companies Act 1981, which permits the Company and the Group to prepare financial statements which comprise the consolidated income statement, the consolidated balance sheet, the consolidated cash flow statement, the consolidated statement of recognised income and expense and the related notes 1 to 18 in accordance with International Financial Reporting Standards ("IFRS"). Accordingly, the financial information has been prepared in accordance with Bermuda Law.

2 Basis of preparation

The interim financial statements, as required by the Listing Rules of the United Kingdom's Financial Services Authority ("FSA"), have been prepared on the basis of IFRS recognition and measurement principles but, as permitted by the FSA, the Group has not adopted IAS 34 'Interim Financial Reporting' early, and consequently, the full requirements of that standard have not been applied.

The consolidated financial statements are presented in thousands of US dollars, rounded to the nearest thousand. They have been prepared under the historical cost convention, as modified by the revaluation of financial instruments which have been classified as available for sale and financial assets and financial liabilities (including derivative instruments) at fair value through profit and loss.

The preparation of financial statements in conformity with IFRS requires management to exercise its judgement in making estimates and assumptions that affect the application of the Group's accounting policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgement about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the periods in which the estimates are revised if the revisions affect only those periods or in the periods of the revision and future periods if applicable.

Judgements made by management in the application of IFRS that have a significant effect on the consolidated financial statements and estimates with a significant risk of material adjustments in following years are discussed below.

As IFRS are limited in specifying full insurance-specific guidelines to the requirements of IFRS 4 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 'Insurance Contracts'. The annual basis of accounting has been applied to all classes of business.

Going concern basis

The Company's borrowings include a $150 million bank term loan and a $50 million bank revolver facility with its lending bank syndicate. These arrangements are subject to two financial covenants which require that the Group maintains a minimum adjusted consolidated tangible net worth and a minimum debt-to-total-capitalisation ratio. If the Group were to breach either one of these covenants, the lenders would have the right to demand early repayment of these loans in advance of the scheduled repayment date of September 2007.

The Group has met these minimum requirements at 30 June 2006 on the basis of the Group's unaudited balance sheet at that date, and based on the Group's current projections, the Directors believe that the Group will continue to be able to service these borrowings, comply with the financial covenants and repay or refinance these amounts when they fall due. However, both the balance sheet and the projections reflect assumptions made by the Directors that are subject to material uncertainty which may cast significant doubt as to whether the Group will be able to continue as a going concern. In particular:


-  the fair value recorded in the balance sheet of the proceeds
   arising from the sale of renewal rights (see Note 4) depends on 
   assumptions as to the level of future premium income written by 
   the purchasers of those renewal rights;

-  the level of insurance reserves recorded in the balance sheet
   depends on actuarial assumptions relating to the likelihood 
   of insured events occurring, the quantum of claims (that have 
   occurred, whether reported or not) and the time when claim 
   payments fall due; and

-  the availability to the Company of funds to repay the loans
   depends on insurance subsidiaries obtaining regulatory approval 
   to make intra-group distributions or loans as well as the two 
   significant balance sheet assumptions set out above.

The Group is in an ongoing dialogue with the lending bank syndicate regarding the Group's business outlook and strategy and will work closely with the syndicate to manage any future issues should they arise. Run-off plans have been presented to regulators in each relevant territory and the Group expects to maintain continuous and open dialogue with them. On this basis, the Directors believe that the Company will be able to repay, renew or renegotiate bank funding as necessary during the remaining term of the loans, and in any case on maturity of the loans in September 2007, and therefore that it is appropriate to continue to prepare these financial statements on a going concern basis. The financial statements do not include any adjustments that would be necessary if the going concern basis was not appropriate.

These consolidated financial statements have been prepared in accordance with the accounting policies in force for the period ending 30 June 2006. A summary of the principal accounting policies is provided in Note 3.

3 Accounting policies

Status of interim financial statements

The statements for the two interim periods are unaudited but have been reviewed by the Company's auditors, Deloitte & Touche LLP, and their report for the six months ended 30 June 2006 is included with this report. The interim financial statements do not constitute statutory accounts as defined in section 84 of the Bermuda Companies Act 1981. The results for the year ended 31 December 2005 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 2005 received an unqualified audit opinion.

Basis of consolidation

These financial statements consolidate all the enterprises in which Alea Group Holdings (Bermuda) Ltd owns or controls, directly or indirectly, the majority of the voting shares. There are no other enterprises over which the Group has the ability to exercise control.

Intra-group transactions, balances, and gains and losses are eliminated except to the extent that the transaction provides evidence of an impairment of the asset transferred.

Segment reporting

A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from other business segments. A geographical segment is engaged in providing services within a particular economic environment that are subject to risks and returns that are different from those of segments operating in other economic environments

Foreign currency translation

(a) Functional and presentation currency

Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the 'functional currency'). The consolidated financial statements are presented in thousands of US dollars, which is the Group's presentation currency.

(b) Group companies

The functional currencies for Group entities are usually the currencies of the primary economic environment in which the entity operates.

The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

(i) assets and liabilities for each balance sheet presented are translated at the closing exchange rates at the date of that balance sheet;

(ii) income and expenses for each income statement are translated at transactional or average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and

(iii) all resulting exchange differences are recognised as a separate component of equity.

On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders' equity. When a foreign operation is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale.

(c) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges.

Translation differences on non-monetary items are reported as part of the fair value gain or loss. Translation differences on non-monetary items, such as equities classified as available-for-sale financial assets, are included in the revaluation reserve in equity.

To safeguard against fluctuations in exchange rates, Group entities seek to match assets and liabilities in currency. However, currency gains/losses which do arise from transactions in a currency other than a functional currency are reported in the income statement within other income or other expenses, as applicable.

The foreign currency rates used for significant foreign currencies are as follows:

                              30 June 2006     30 June 2006
                                   Average          Closing
                                                           
British pound                       0.5606           0.5457
Euro                                0.8138           0.7872
Swiss franc                         1.2741           1.2329
                                                           

 
                           30 June 2005        30 June 2005
                                Average             Closing
                                                           
British pound                    0.5327              0.5525
Euro                             0.7763              0.8261
Swiss franc                      1.1985              1.2786
                                                           

 

 
                       31 December 2005   31 December 2005
                                Average            Closing
                                                          
                                                          
British pound                    0.5500             0.5788
Euro                             0.8022             0.8420
Swiss franc                      1.2418             1.3105

Insurance contracts

The Group enters into contracts that transfer insurance risk or financial risk or both.

Insurance contracts are those contracts that transfer significant insurance risk. Insurance risk is defined as risk, other than financial risk, transferred from the holder of a contract to the issuer. Financial risk is defined as the risk of a possible future change in one or more of a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract.

Those contracts that do not transfer significant insurance risk are accounted for by recognising an asset or liability based on the consideration paid or received less any explicitly identified premiums or fees to be retained by the ceding company. Future cash flows are estimated to calculate the effective yield, and revenues and expenses are recorded as other income or expense.

Premium revenue

For all insurance contracts, premiums are recognised as revenue proportionally over the period of coverage, having regard, where appropriate, to the incidence of risk and this is known as earned premium. The portion of premium receivable on in-force contracts that relates to unexpired risks at the balance sheet date is reported as the unearned premium liability. Premiums are shown before deduction of commission and are exclusive of taxes and duties levied thereon.

Premiums comprise total premiums earned under contracts incepting during the financial period, together with adjustments arising in the financial period to premiums earned in respect of business written in previous financial years. Premiums also include estimates of pipeline premiums earned on business written but not yet notified to the Group.

In respect of both risks accepted and risks ceded by the Group, premiums and claims relating to reinsurance arrangements which do not involve significant transfer of insurance risk are not recognised in the income statement but are accounted for as deposits due from, or liabilities due to, reinsurers or cedants.

Reinsurance

The Group cedes premium and risks in the normal course of business in order to limit the potential for losses arising from risks accepted. Insurance premiums ceded to reinsurers on contracts that are deemed to transfer significant insurance risk are recognised as an expense in a manner that is consistent with the recognition of insurance premium revenue arising from the underlying risks being protected. Reinsurance contracts that do not meet the definition of an insurance contract are accounted for as financial assets. The portion of premium ceded to reinsurers on in-force contracts that relates to unexpired risks at the balance sheet date is reported as the unearned premium asset.

Insurance claims and loss adjustment expenses recovered from reinsurers are accounted for in the same accounting period as the claims for the related inward insurance and reinsurance business being covered and are estimated in a manner consistent with the claim liability associated with the reinsurance policy.

Provision is made for potentially non-collectable reinsurance recoveries and the exposure of the Group to credit risk is assessed through the aggregation of reinsurance assets due from counter parties belonging to the same insurance groups.

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 made on an individual case basis and are based on the estimated ultimate cost of all claims notified but not settled by the balance sheet date, together with the provision for related claims handling costs and net of salvage and subrogation recoveries. The provision also includes the estimated cost of claims incurred but not reported at the balance sheet date based on statistical methods.

The Group discounts certain categories of claims provisions, such as certain casualty and auto liability claims, where the expected average interval between the date of claim settlement and the balance sheet date is in excess of four years in accordance with the statutory regulations of the European Union. The discount rate used is 4.5%.

Liability adequacy test

At each balance sheet date, liability adequacy tests are performed to ensure the adequacy of the insurance contract liabilities net of related DAC and premiums receivable.

Provision is made where current best estimates of future contractual cash flows and claims handling and administration expenses arising after the end of the financial period from contracts concluded before that date is expected to exceed the provision for unearned premiums net of DAC and premiums receivable. Investment income from the assets backing the liabilities is taken into account in calculating the provision. The assessment of whether a provision is necessary is made on the basis of information available as at the balance sheet date, after offsetting surpluses and deficits arising on products which are managed together. Any deficiency is immediately charged to the income statement initially by writing off DAC and by subsequently establishing a provision for losses arising from liability adequacy tests (the unexpired risk provision). Any DAC written off as a result of this test cannot subsequently be reinstated.

Investment income

Investment income includes dividends, rent and interest. Dividends are accrued on an ex-dividend basis that is when the right to receive payment is established. Interest and rental income are recognised on an accruals basis. Interest income in respect of the Group's available for sale investments is recognised using the effective interest method.

Fee income

Fee income represents income arising on finite risk reinsurance and insurance contracts without significant transfer of insurance risk and expense related to deposits received from reinsurers. Such income is recognised over the term of the contract.

Employee Benefits

(a) Share-based payments

The cost of awards to employees that take the form of shares or rights to shares is charged to the income statement as personnel costs on a straight line basis over the period to which the employee's performance relates and a corresponding amount is reflected in revenue reserves in shareholders' equity. The charge is calculated as being the fair value of the shares at the date of grant, reduced by any consideration payable by the employee, and a reasonable expectation of the extent to which performance criteria will be met.

(b) Pension costs

The Group only operates defined contribution pension arrangements. Contributions are charged to the income statement as employee benefit expense as they become payable in accordance with the rules of each scheme. The Group has no further payment obligations once the contributions have been paid. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available.

Operating leases

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease.

Property, plant and equipment

Property, plant and equipment comprises items of equipment only. Equipment is stated at cost less accumulated depreciation and impairment losses when appropriate. Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives vary between three and five years for fixtures and equipment.

The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income statement.

The residual values and useful lives of the assets are reviewed at each balance sheet date and adjusted if appropriate.

Intangible assets

Intangible assets represent the cost of licences acquired to conduct business in the United States. The Directors consider these licences to have indefinite useful lives. Licences are granted for an indefinite period and are essential to carry on business. The licences are tested for impairment at each balance sheet date.

Investments - Financial Instruments

The Group recognises a financial asset or a financial liability on its balance sheet when it becomes a party to the contractual provisions of the instrument. On initial recognition the Group determines the category of financial instrument and values it accordingly. The classification depends on the purpose for which the investments are acquired.

(a) Available-for-sale securities

Available-for-sale securities are non-derivative financial assets, typically equities or bonds. On initial recognition, the fair value is the cost including transaction costs directly attributable to the acquisition. On subsequent remeasurement the fair value excludes transaction costs on disposal and represents the listed bid price. Fair value movements are recognised in equity.

(b) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market other than those that the Group intends to sell in the short term or that it has designated as at fair value through income or available-for-sale. Receivables arising from insurance contracts are also classified in this category and are reviewed for impairment as part of the impairment review of loans and receivables.

Trade receivables do not carry any interest rate and are measured at the fair value which is their nominal value less appropriate allowances for estimated irrecoverable amounts. On the initial recognition of loans the carrying value is determined as the proceeds of the loans less the costs of the transaction which are amortised over the length of the loan period in accordance with the effective interest method.

(c) Derivative financial instruments

Derivative financial instruments are initially measured at fair value on the contract date. The method of recognising the gain or loss on subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument. Gains or losses on derivatives that are not classified as hedges are recognised in the income statement. Derivatives are classified as held-for-trading unless they are designated as hedges.

The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at inception of the hedge and on an ongoing basis, as to whether the derivative instruments used in hedging transactions are expected to be and have been highly effective in offsetting changes in fair value or cash flows of hedged items.

The Group has not designated any investments to be held to maturity or to be valued at fair value through income.

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 into equity until such time that the financial asset is derecognised.

Cash and cash equivalents

Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts.

Impairment of assets

The Group reviews the carrying amounts of its tangible and intangible assets at each balance sheet date to determine whether there is any indication of impairment. If any indication exists, the asset's recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of an asset or its cash generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement.

The recoverable amount is the greater of the net selling price and the value in use. In assessing the value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

Taxation

Income tax expense represents the sum of the tax payable in the period and deferred tax.

The tax currently payable is based on taxable profit for the period. Taxable profit differs from profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other periods and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred income tax is provided in full, using the liability method, on all temporary differences, which are based on the difference between the financial statement carrying values and the tax bases of assets and liabilities using enacted income tax rates and laws. Deferred income tax assets are recognised to the extent that it is regarded as probable that they will be utilised against sufficient future taxable income. Deferred income tax assets and liabilities are not discounted.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be utilised.

The deferred tax that results from unrealised gains and losses on securities classified as available for sale is recognised in shareholders' equity along with those unrealised gains and losses.

Current tax payable by any Group company on distribution to the holding company of the undistributed profits of any subsidiaries is recognised as deferred tax unless the timing of the distribution of those profits is controlled by the holding company and the temporary difference is not expected to reverse in the foreseeable future.

In accordance with IAS 12 'Income Taxes', deferred taxation is provided on temporary differences arising from the revaluation of fixed assets even where there is no commitment to sell the asset.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.

Borrowings

Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method.

Provisions

(a) Restructuring costs and legal claims

Provisions for restructuring costs and legal claims are recognised when the Group has a present legal or constructive obligation as a result of a past event, it is more likely than not that an outflow of resources will be required to settle the obligation, and the amount has been reliably estimated. Restructuring provisions comprise lease termination penalties and employee termination payments. Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

(b) Levies

The Group is subject to various insurance-related assessments or guarantee fund levies. Related provisions are provided for where there is a present obligation (legal or constructive) as a result of a past event.

Share capital

Shares are classified as equity when there is no obligation to transfer cash or other assets. Incremental costs directly attributable to the issue of equity instruments are shown in equity as a deduction from the proceeds, net of tax. Incremental costs directly attributable to the issue of equity instruments as consideration for the acquisition of a business are included in the cost of acquisition.

Accounting developments

The International Accounting Standards Board (IASB) issued IFRS 7 'Financial Instruments: Disclosures' in August 2005. IFRS 7 requires disclosure of the significance of financial instruments for an entity's financial position and performance and of quantitative information about exposure to risks arising from financial instruments. The standard is effective for annual periods beginning on or after 1 January 2007.

4 Net realised gains on sale of renewal rights

                      Alea Alea North  Alea Europe        Total
                    London    America      Limited             
                   Limited  Insurance                          
                              Company                          
                     $'000      $'000        $'000        $'000
                                                               
                                                               
                                                               
Six months               -          -          930          930
ended 30 June                                                  
2006 (1)                                                       
                                                               
Six months               -          -            -            -
ended 30 June                                                  
2005                                                           
                                                               
Year ended 31        8,000     47,000        6,079       61,079
December 2005                                                  

The above-mentioned three renewal rights transactions which took place in 2005 are detailed below.

The gains were calculated as the fair value of consideration receivable ($62.0 million). The Group has received payments to date of $20.1 million. The remaining balance of $41.9 million is included within loans and receivables including insurance receivables. The non-current portion of the receivable is $37.0 million.

These amounts represent the directors' best estimates of the risk adjusted future receipts discounted at 4.5%. These receipts are dependent upon the future levels of business generated on renewal in relation to the rights sold over differing time periods as specified in the sale contracts. In estimating the future receipts from which the fair value gain has been derived, the directors have taken into consideration factors such as prior premium production levels and growth rates of business sold, external projections and have made certain assumptions about levels of program transfer and renewal probabilities of future premiums.

The key data is:

                                 Alea   Alea North  Alea Europe
                               London      America      Limited
                              Limited    Insurance             
                                           Company             
                                                               
2005 Premium of $ millions        167          405          252
business sold                                                  
                                                               
Estimated       $ millions        160        1,698           74
premium to be                                                  
received during                                                
contract period                                                
Contract period      years          2            5            1
Best estimate   $ millions          8           47            6
of receipts                                                    
Contractual     $ millions         30           75           30
maximum sales                                                  
proceeds                                                       
                                                               
                                                               
Impact on fair  increased           9           52            7
value reported  by 10%                                         
if production                                                  
premium                                                        
                decreased           7           42            5
                by 10%                                         

(1) In the six months ended 30 June 2006 Alea Europe Ltd recognised an additional $0.9 million net realised gain on the sale of renewal rights. This additional gain arises due to the fact that the realised gain has now been translated into the reporting currency using the finalised exchange rates stipulated in the renewal rights contract. All assumptions used at 31 December 2005 in determining the net realised gain are unchanged.

5 Restructuring costs

In the second half year of 2005, the Group announced that it would run-off all remaining property and casualty business. Those fixed assets not subject to renewal rights agreements and not required for the run-off operations have been written down to their residual value. Redundancy costs were incurred during 2005 in Wilton and Rocky Hill. A restructuring provision was established at 31 December 2005 for employees in London, Basel and Zug. This provision included estimated expenses for future redundancy payments to employees who could not 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 were expected to be vacated as part of the restructuring. The provision has been established based on the run-off plan and its balance is disclosed in Note 14. Other costs are included in the claims handling provisions.

Six months ended 30 June 2006

                     Alea Alea North  Alea Europe        Total
                   London    America                          
                    $'000      $'000        $'000        $'000
Redundancy          2,572      1,484            -        4,056
costs incurred (1)                                            
Estimated               -    (2,500)            -      (2,500)
restructuring                                                 
costs (2)                                                     
                                                              
Total               2,572    (1,016)            -        1,556
restructuring                                                 
costs                                                         

(1) Redundancy costs incurred reflect severance payable to employees which were not part of the original restructuring plan as disclosed for 31 December 2005.

(2) Restructuring costs also include a credit of $2.5 million which results from Alea North America's sublease of its empty offices in Wilton and a resulting reversal of part of the previously recognised provision for onerous contracts.

Year ended 31 December 2005

                          Alea Alea North Alea Europe      Total
                        London    America                       
                                                                
                         $'000      $'000       $'000      $'000
                                                                
                                                                
Impairment loss             69      1,049         527      1,645
recognised in                                                   
respect of                                                      
property, plant and                                             
equipment                                                       
Impairment loss            366        933           -      1,299
recognised in                                                   
respect of licences                                             
Redundancy costs             -      1,157           -      1,157
incurred                                                        
Estimated                6,032      4,769       7,452     18,253
restructuring costs (1)                                         
                                                                
                                                                
                                                                
Total restructuring      6,467      7,908       7,979     22,354
costs                                                           

 
                                                                 
                                                                 

 
(1) The estimated restructuring costs can be further analysed  
as follows:                                                    

 
                          Alea Alea North Alea Europe      Total
                        London    America                       
                                                                
                         $'000      $'000       $'000      $'000
                                                                
                                                                
                                                                
                                                                
                                                                
Redundancy               3,322          -       6,988     10,310
provision                                                       
Onerous contracts        2,710      4,769         464      7,943
Estimated                6,032      4,769       7,452     18,253
restructuring costs                                             

 
                                                                 
                                                                 

 
The key assumptions are derived from the following variables:  

 
                           Alea      Alea  Alea Europe     Total
                         London     North                       
                                  America                       
                         Number    Number       Number    Number
                                                                
                                                                
                                                                
                                                                
                                                                
Reduction in                 48         -           35        83
headcount based on                                              
run-off plan                                                    
Reduction in                  7        41            7        55
headcount as part of                                            
contractual                                                     
agreements with                                                 
regards to sale of                                              
renewal rights                                                  
Reduction in                  -        57            -        57
headcount based on                                              
realigned structure                                             
already implemented                                             
at 31 December 2005                                             
Total headcount              55        98           42       195
reduction                                                       

The redundancy provision and the provision for onerous contracts are derived purely from the headcount reductions listed above. There is very limited uncertainty with regards to the redundancy provision. In the six months ended 30 June 2006 (see Note 14), 37 per cent of the provision has already been paid.

6 Segmental information

Primary segment information - operating results by operating segment

The Group managed and conducted its business through four principal operating segments representing London market business, North American business including alternative risk transfer and reinsurance, Continental European reinsurance, the insurance operations in each jurisdiction, and financial services, the central investment operation which supports the insurance operations in each jurisdiction.

The operating result of each of these operating segments before the impact of intra-group quota share arrangements is shown below.

Six months ended 30 June 2006      Alea        Alea       Alea
                                 London       North     Europe
                                            America           
                                  $'000       $'000      $'000
                                                              
Gross Premiums Written         (16,948)    (21,159)        166
                                                              
Revenue                                                       
Net insurance premium            89,594      97,838     22,248
revenue                                                       
Fee income                          309         100          -
Investment income                     -           -          -
Net realised losses on                -           -          -
financial assets                                              
Net realised gains on sale            -           -        930
of renewal rights                                             
Total revenue                    89,903      97,938     23,178
                                                              
Expenses                                                      
Net insurance claims           (66,302)    (68,865)   (13,765)
Acquisition costs              (25,444)    (31,963)    (6,774)
Other operating expenses       (10,072)    (18,577)   (11,496)
Restructuring costs             (2,572)       1,016          -
Total expenses                (104,390)   (118,389)   (32,035)
                                                              
Results of operating           (14,487)    (20,451)    (8,857)
activities                                                    
                                                              
Finance costs                         -           -          -
                                                              
(Loss)/profit before income    (14,487)    (20,451)    (8,857)
tax                                                           
                                                              
Income tax credit                     -           -          -
                                                              
(Loss)/profit for the period   (14,487)    (20,451)    (8,857)

 

 
Six months ended 30 June 2006       Alea      Non -      Total
                               Financial  allocated           
                                Services                      
                                   $'000      $'000      $'000
                                                              
Gross Premiums Written                 -          -   (37,941)

Revenue                                                       
Net insurance premium                  -          -    209,680
revenue                                                       
Fee income                             -          -        409
Investment income                 49,177          -     49,177
Net realised losses on           (1,426)          -    (1,426)
financial assets                                              
Net realised gains on sale             -          -        930
of renewal rights                                             
Total revenue                     47,751          -    258,770
                                                              
Expenses                                                      
Net insurance claims                   -          -  (148,932)
Acquisition costs                      -          -   (64,181)
Other operating expenses               -    (2,343)   (42,488)
Restructuring costs                    -          -    (1,556)
Total expenses                         -    (2,343)  (257,157)
                                                              
Results of operating              47,751    (2,343)      1,613
activities                                                    
                                                              
Finance costs                   (15,971)          -   (15,971)
                                                              
(Loss)/profit before income       31,780    (2,343)   (14,358)
tax                                                           
                                                              
Income tax credit                      -      3,712      3,712
                                                              
(Loss)/profit for the period      31,780      1,369   (10,646)

 

 
Six months ended 30 June 2005     Alea        Alea       Alea
                                London       North     Europe
                                           America           
                                 $'000       $'000      $'000
                                                             
Gross Premiums Written         170,709     428,279    256,355
                                                             
Revenue                                                      
Net insurance premium          176,310     305,829    128,561
revenue                                                      
Fee income                       1,052           6        264
Investment income                    -           -          -
Net realised gains on                -           -          -
financial assets                                             
Net realised gains on sale           -           -          -
of renewal rights                                            
Total revenue                  177,362     305,835    128,825
                                                             
Expenses                                                     
Net insurance claims          (98,920)   (206,669)  (107,054)
Acquisition costs             (47,899)    (99,317)   (27,622)
Other operating expenses      (13,882)    (10,004)    (9,869)
Restructuring costs                  -           -          -
Total expenses               (160,701)   (315,990)  (144,545)
                                                             
Results of operating            16,661    (10,155)   (15,720)
activities                                                   
                                                             
Finance costs                        -           -          -
                                                             
(Loss)/profit before income     16,661    (10,155)   (15,720)
tax                                                          
                                                             
Income tax expense                   -           -          -
                                                             
(Loss)/profit for the           16,661    (10,155)   (15,720)
period                                                       

 
Six months ended 30 June 2005      Alea      Non -      Total
                              Financial  allocated           
                               Services                      
                                  $'000      $'000      $'000
                                                             
Gross Premiums Written                -          -    855,343
                                                             
Revenue                                                      
Net insurance premium                 -          -    610,700
revenue                                                      
Fee income                            -          -      1,322
Investment income                42,966          -     42,966
Net realised gains on             3,588          -      3,588
financial assets                                             
Net realised gains on sale            -          -          -
of renewal rights                                            
Total revenue                    46,554          -    658,576
                                                             
Expenses                                                     
Net insurance claims                  -          -  (412,643)
Acquisition costs                     -          -  (174,838)
Other operating expenses              -    (2,376)   (36,131)
Restructuring costs                   -          -          -
Total expenses                        -    (2,376)  (623,612)
                                                             
Results of operating             46,554    (2,376)     34,964
activities                                                   
                                                             
Finance costs                   (9,054)          -    (9,054)
                                                             
(Loss)/profit before income      37,500    (2,376)     25,910
tax                                                          
                                                             
Income tax expense                    -    (6,425)    (6,425)
                                                             
(Loss)/profit for the            37,500    (8,801)     19,485
period                                                       

 

 

 
Year ended 31 December 2005       Alea        Alea       Alea
                                London       North     Europe
                                           America           
                                 $'000       $'000      $'000
                                                             
Gross Premiums Written         247,110     498,547    251,871
                                                             
Revenue                                                      
Net insurance premium          298,086     550,639    238,017
revenue                                                      
Fee income                       2,814       (152)        344
Investment income                    -           -          -
Net realised gains on                -           -          -
financial assets                                             
Net realised gains on sale       8,000      47,000      6,079
of renewal rights                                            
Total revenue                  308,900     597,487    244,440
                                                             
Expenses                                                     
Net insurance claims         (295,955)   (387,534)  (235,780)
Acquisition costs             (95,006)   (189,550)   (51,232)
Other operating expenses      (30,804)    (29,769)   (20,574)
Restructuring costs            (6,467)     (7,908)    (7,979)
Total expenses               (428,232)   (614,761)  (315,565)
                                                             
Results of operating         (119,332)    (17,274)   (71,125)
activities                                                   
                                                             
Finance costs                        -           -          -
                                                             
(Loss)/profit before income  (119,332)    (17,274)   (71,125)
tax                                                          
                                                             
Income tax expense                   -           -          -
                                                             
(Loss)/profit for the year   (119,332)    (17,274)   (71,125)

 

 
Year ended 31 December 2005       Alea      Non -        Total
                             Financial  allocated             
                              Services                        
                                 $'000      $'000        $'000
                                                              
Gross Premiums Written               -          -      997,528
                                                              
Revenue                                                       
Net insurance premium                -          -    1,086,742
revenue                                                       
Fee income                           -          -        3,006
Investment income               89,138          -       89,138
Net realised gains on              672          -          672
financial assets                                              
Net realised gains on sale           -          -       61,079
of renewal rights                                             
Total revenue                   89,810          -    1,240,637
                                                              
Expenses                                                      
Net insurance claims                 -          -    (919,269)
Acquisition costs                    -          -    (335,788)
Other operating expenses             -   (14,288)     (95,435)
Restructuring costs                  -          -     (22,354)
Total expenses                       -   (14,288)  (1,372,846)
                                                              
Results of operating            89,810   (14,288)    (132,209)
activities                                                    
                                                              
Finance costs                 (19,892)          -     (19,892)
                                                              
(Loss)/profit before income     69,918   (14,288)    (152,101)
tax                                                           
                                                              
Income tax expense                   -   (26,827)     (26,827)
                                                              
(Loss)/profit for the year      69,918   (41,115)    (178,928)

The Group has intra-group quota share arrangements between the following legal companies: Alea London Limited, Alea Bermuda Ltd, Alea North America Insurance Company and Alea North America Specialty Insurance Company (collectively Alea US) and Alea Europe Ltd. The impact of intra-group quota share arrangements on operating result with regards to the legal entities mentioned above is shown and explained below.

For the periods ended 30 June 2006, 30 June 2005 and 31 December 2005 intra group quota share arrangements included the following: a 35% quota share of Alea London business to Alea Europe for underwriting years 2002 through 2005, a 50% quota share of certain 2000 and prior underwriting year business from Alea Europe to Alea Bermuda and a 70% quota share of Alea North America to Alea Bermuda. There was an intra-group aggregate excess contract from Alea Europe to Alea Bermuda until 31 December 2005 which has been commuted as of 1 January 2006. The effects of these arrangements are described below:

Six months ended 30 June 2006      Alea       Alea       Alea
                                 London    Bermuda         US
                                                             
                                  $'000      $'000      $'000
                                                             
Net insurance premium            89,594        471     97,367
revenue                                                      
Intercompany reinsurance       (31,293)     68,285   (68,157)
Net insurance premium            58,301     68,756     29,210
revenue after intercompany                                   
reinsurance                                                  
Underwriting result (1)                                      
Before intercompany            (14,487)    10,959)    11,835)
reinsurance                                                  
After intercompany             (14,110)   (13,344)   (15,651)
reinsurance                                                  
                                                             
                                                             

 
Six months ended 30 June 2006             Alea         Total
                                        Europe              
                                         $'000         $'000
                                                            
Net insurance premium revenue           22,248       209,680
Intercompany reinsurance                31,165             -
Net insurance premium revenue           53,413       209,680
after intercompany reinsurance                              
Underwriting result (1)                                     
Before intercompany reinsurance        (9,787)      (47,068)
After intercompany reinsurance         (3,963)      (47,068)
                                                            
                                                            

 

 

 
Six months ended 30 June 2005      Alea       Alea        Alea
                                 London    Bermuda          US
                                  $'000      $'000       $'000
                                                              
Net insurance premium           176,310      4,461     301,368
revenue                                                       
Intercompany reinsurance       (61,563)    215,193   (210,957)
Net insurance premium           114,747    219,654      90,411
revenue after intercompany                                    
reinsurance                                                   
Underwriting result (1)                                       
Before intercompany              16,661   (18,922)       6,391
reinsurance                                                   
After intercompany               10,694   (15,574)       1,538
reinsurance                                                   
                                                              

 
Six months ended 30 June 2005             Alea        Total
                                        Europe
                                         $'000        $'000
                                                           
Net insurance premium revenue          128,561      610,700
Intercompany reinsurance                57,327            -
Net insurance premium revenue          185,888      610,700
after intercompany reinsurance                             
Underwriting result (1)                                    
Before intercompany reinsurance       (15,720)     (11,590)
After intercompany reinsurance         (8,248)     (11,590)
                                                           

 

 
Year ended 31 December 2005        Alea       Alea       Alea
                                 London    Bermuda         US
                                  $'000      $'000      $'000
                                                             
Net insurance premium           298,086      4,991    545,648
revenue                                                      
Intercompany reinsurance      (105,915)    392,876  (384,340)
Net insurance premium           192,171    397,867    161,308
revenue after intercompany                                   
reinsurance                                                  
Underwriting result (1)                                      
Before intercompany           (127,332)   (64,021)   (14,541)
reinsurance                                                  
After intercompany             (95,618)  (124,790)   (33,954)
reinsurance                                                  

 
Year ended 31 December 2005               Alea         Total
                                        Europe              
                                         $'000         $'000
                                                            
Net insurance premium revenue          238,017     1,086,742
Intercompany reinsurance                97,379             -
Net insurance premium revenue          335,396     1,086,742
after intercompany reinsurance                              
Underwriting result (1)                                     
Before intercompany reinsurance       (77,204)     (283,098)
After intercompany reinsurance        (28,736)     (283,098)

(1) Results of operating activities excluding investment income, net realised gains on financial assets and intangible assets and net realised gains on sale of renewal rights.

Secondary segment information - geographical analysis

The following provides an analysis of gross premiums written by location of insured and by location of legal entity accepting the risk, and of (loss)/profit before tax by legal entity accepting risk.

                    Six months    Six months    Year ended
                         ended         ended              
Geographical      30 June 2006  30 June 2005   31 December
analysis of                                           2005
gross premiums                                            
written by                                                
location of              $'000         $'000         $'000
insured                                                   
                                                          
                                                          
Europe                     627       307,799       281,259
Africa                    (34)         1,778         2,010
Near & Middle             (77)         6,139         5,477
East                                                      
Far East                   105         6,399         5,535
Australia &              (132)         2,739         2,817
Oceania                                                   
North America         (40,390)       519,199       687,973
Latin America            1,960        11,290        12,457
                      (37,941)       855,343       997,528
                                                          

 
Geographical analysis by location of legal entity       
                          Gross premiums written        
                    Six months   Six months   Year ended
                         ended        ended             
                  30 June 2006 30 June 2005  31 December
                                                    2005
                         $'000        $'000        $'000
                                                        
Bermuda                (1,574)        3,546        5,758
Jersey                      89          133          216
United Kingdom           7,135      171,087      247,603
United States         (43,757)      424,733      492,789
Switzerland                166      255,844      251,162
                       37,941)      855,343      997,528

 
Geographical analysis by location of legal entity         

 
                         (Loss)/profit before tax        
                    Six months   Six months    Year ended
                         ended        ended              
                  30 June 2006 30 June 2005   31 December
                                                     2005
                         $'000        $'000         $'000
                                                         
Bermuda                  1,543     (12,503)     (113,722)
Jersey                   (167)          894         1,577
United Kingdom         (6,601)       18,466      (77,426)
United States         (13,284)        2,455        13,754
Switzerland              4,151        6,598        23,716
                      (14,358)       25,910     (152,101)

Gross premiums written are analysed on a legal entity basis and therefore reflect London contact office business in Switzerland of $0.0 million in the period ended 30 June 2006 (30 June 2005: -$0.5 million; 31 December 2005: -$0.8 million).

                              As at           As at         As at
                       30 June 2006    30 June 2005  30 June 2005
Operating equity              $'000           $'000         $'000
and shareholders'                                                
equity interests                                                 
                                                                 
Alea Europe Ltd             209,019         219,277       212,312
Alea (Bermuda) Ltd          263,440         511,934       279,821
(1)                                                              
Alea US                     263,680         265,227       275,556
Amounts held in             (6,398)         (2,417)         3,862
Holding Companies                                                
Amounts held in               1,884           8,071         3,004
non-insurance                                                    
subsidiaries                                                     
Note provided by             32,505          32,505        32,505
Alea Europe Ltd to                                               
Alea US                                                          
                            764,130       1,034,597       807,060
Amounts owed to           (199,290)       (198,722)     (199,006)
credit institutions                                              
Trust preferred           (117,693)       (117,583)     (117,625)
securities                                                       
Shareholders' funds         447,147         718,292       490,429
attributable to                                                  
equity interests                                                 
                                                                 
                                                                 
(1) The entities wholly owned by Alea (Bermuda) Ltd have net     
assets as follows:                                               

 
                               As at           As at     As at
                        30 June 2006    30 June 2005        31
                                                      December
                                                          2005
                               $'000           $'000     $'000
                                                              
Alea London Ltd               70,729         195,571    84,857
Alea Global Risk Ltd           6,032          10,915    11,411
Alea Jersey Ltd                1,159           2,084     2,082

7 Earnings per share

The calculation of the basic and diluted earnings per share is based on the following data:

                           Six months    Six months    Year ended
                                ended         ended              
                         30 June 2006  30 June 2005   31 December
                                                             2005
                                                                 
Earnings                            $             $             $
                                                                 
                                                                 
                                                                 
Earnings for the                                                 
purposes of basic                                                
earnings per share                                               
being net profit             (10,646)        19,485     (178,928)
attributable to equity                                           
holders of the Parent                                            
                                                                 
                                                                 
                                                                 
Earnings for the             (10,646)        19,485     (178,928)
purposes of diluted                                              
earnings per share                                               
                                                                 
                                                                 
                                                                 
Number of shares           Six months    Six months    Year ended
                                ended         ended              
                         30 June 2006  30 June 2005   31 December
                                                             2005
                               Number        Number        Number
                                                                 
                                                                 
                                                                 
                                                                 
                                                                 
Weighted average          173,718,475   174,104,068   173,913,624
number of ordinary                                               
shares for the                                                   
purposes of basic                                                
earnings per share                                               
                                                                 
                                                                 
                                                                 
Effect of dilutive                                               
potential ordinary                                               
shares:                                                          
- Share options                     -       310,110             -
                                                                 
                                                                 
                                                                 
Weighted average          173,718,475   174,414,178   173,913,624
number of ordinary                                               
shares for the                                                   
purposes of diluted                                              
earnings per share                                               
                                                                 

 

8 Investment income

 
                           Six months    Six months   Year ended
                                ended         ended             
                         30 June 2006  30 June 2005  31 December
                                                            2005
                                $'000         $'000        $'000
                                                                
Financial assets -                                              
available for sale:                                             
                                                                
-Interest income from          45,084        39,437       82,047
debt securities                                                 
                                                                
Cash and cash                   4,093         3,529        7,091
equivalents interest                                            
income                                                          
                                                                
                               49,177        42,966       89,138

 

9 Income tax expense

 
                             Six months    Six months      Year
                                  ended         ended     ended
                           30 June 2006  30 June 2005        31
                                                       December
                                                           2005
                                  $'000         $'000     $'000
                                                               
Current tax (credit)/                                          
charge:                                                        
                                                               
UK corporation tax                  288           374        42
Foreign tax                     (2,077)         6,406     (208)
                                                               
Total current period            (1,789)         6,780     (166)
                                                               
                                                               
Deferred tax (credit)/          (1,923)         (355)    26,993
charge:                                                        
                                                               
Total income tax (credit)       (3,712)         6,425    26,827
/expense                                                       

In the year ended 31 December 2005 the Group wrote off its deferred tax assets to reflect uncertainty over future profitability. The Group's Swiss and UK entities have significant trading losses carried forward in respect of which no deferred tax assets have been recognised due to the unpredictability of future profit streams.

Note 6 Segmental information shows that in the six months to 30 June 2006 the Group's North American entities made a pre tax loss of $13.3 million. As a result of these allowable tax losses the Group has reversed a previously recognised deferred tax liability of $1.9 million and has also recognised a current tax recoverable of $2.8 million.

The corporation tax for the interim periods ended 30 June 2006 and 30 June 2005 was calculated so as to represent the best estimate of the weighted average annual corporation tax rate expected for the full financial year.

10 Dividends

                               Six months  Six months      Year
                                    ended       ended     ended
                             30 June 2006     30 June        31
                                                 2005  December
                                                           2005
                                    $'000       $'000     $'000
                                                               
Final dividend for the                  -      12,203    12,203
year ended 31 December                                         
2004 of $0.07 per share                                        
                                                               
                                        -      12,203    12,203

11 Disposal of subsidiary

Alea North America Insurance Company has entered into an agreement to sell its Delaware excess and surplus lines carrier, Alea North America Specialty Insurance Company ("ANASIC") to Insurance Corporation of Hannover, a member company of Praetorian Financial Group, Inc. ("Praetorian").

Under the terms of the agreement, Praetorian will purchase all of Alea's shares in ANASIC in exchange for a cash payment of $4 million plus the policyholders' surplus of ANASIC as of the closing date.

Total consideration will be between $30 million and $36 million. Subsequent distribution of proceeds is subject to regulatory approval and other conditions.

On the closing date, the Group's Alea Bermuda Ltd affiliate will assume 100% of all business written by ANASIC prior to the closing date. The obligations under the agreements will be supported by a guarantee of the Company.

The sale is subject to regulatory approval and other customary conditions. Alea will continue to administer the run-off of the in force business as of the closing date.

Alea North America Specialty Insurance Company           As at
                                                  30 June 2006
                                                         $'000
                                                              
ASSETS                                                        
Deferred acquisition costs                                  50
Financial assets                                              
Debt securities                                               
- available for sale                                    31,727
Loans and receivables including insurance                  245
receivables                                                   
Reinsurance contracts                                   10,528
Cash and cash equivalents                                  495
                                                              
Total assets                                            43,045
                                                              
                                                              
LIABILITIES                                                   
Insurance contracts                                     12,258
Other liabilities and charges                              125
Trade and other payables                                    32
                                                              
Total liabilities                                       12,415
                                                              
Net assets                                              30,630
                                                              
EQUITY                                                        
Capital and reserves attributable to the                      
Company's equity holders                                      
Share capital                                            3,500
Share premium                                           26,623
Revaluation reserve (1)                                (1,111)
Retained earnings                                        1,618
                                                              
Total equity                                            30,630

(1) The revaluation reserve reflects the cumulative effect of unrealised gains and losses in respect of debt securities held for sale directly recognised in equity

12 Insurance and reinsurance contracts

Insurance and reinsurance contracts are comprised of the following:

                                   As at        As at      As at
                            30 June 2006 30 June 2005         31
                                                        December
                                                            2005
                                   $'000        $'000      $'000
                                                                
Gross claims outstanding                                        
Provision for claims           2,415,042    2,231,736  2,531,928
outstanding, reported and                                       
not reported                                                    
Discount                       (127,702)    (155,681)  (133,443)
                               2,287,340    2,076,055  2,398,485
Claims handling provisions        25,509       22,690     30,372
Total gross claims             2,312,849    2,098,745  2,428,857
outstanding                                                     
Provision for unearned           138,811      920,683    443,599
premiums on insurance                                           
contracts                                                       
Total insurance contracts      2,451,660    3,019,428  2,872,456
                                                                
Aggregate excess                                                
reinsurance                                                     
Provision for claims             321,270      434,978    343,312
outstanding, reported and                                       
not reported                                                    
Discount                         (9,132)     (30,678)   (11,308)
Net aggregate excess             312,138      404,300    332,004
reinsurance                                                     
                                                                
Other reinsurance                                               
Provision for claims             659,810      538,040    672,952
outstanding, reported and                                       
not reported                                                    
Discount                         (3,866)      (7,152)    (5,455)
Net other reinsurance            655,944      530,888    667,497
                                                                
Total reinsurance                                               
Provision for claims             981,080      973,018  1,016,264
outstanding, reported and                                       
not reported                                                    
Discount                        (12,998)     (37,830)   (16,763)
Total reinsurers' share of       968,082      935,188    999,501
claims outstanding                                              
Provision for unearned            32,925       89,787     58,138
premiums on reinsurance                                         
contracts                                                       
Total reinsurance              1,001,007    1,024,975  1,057,639
contracts                                                       
                                                                
Claims outstanding, net of                                      
reinsurance                                                     
Before discount                1,459,471    1,281,408  1,546,036
Discount                       (114,704)    (117,851)  (116,679)
Claims outstanding net of      1,344,767    1,163,557  1,429,357
reinsurance                                                     
                                                                
                                   As at        As at      As at
                            30 June 2006 30 June 2005         31
                                                        December
                                                            2005
Security held for                  $'000        $'000      $'000
aggregate excess                                                
reinsurance                                                     
                                                                
Deposits received from            46,946       93,381     47,445
reinsurers                                                      
Trust fund and LOC               260,561      283,684    279,704
collateral available                                            
against aggregate excess                                        
contracts                                                       
Total collateral available       307,507      377,065    327,149
against aggregate excess                                        
reinsurance recoverable                                         
Collateral held in respect             -           87         13
of unearned premiums                                            
Total collateral held            307,507      377,152    327,162

 

13 Borrowings

 
The borrowings are repayable as        As at      As at         As at
follows:                             30 June    30 June   31 December
                                        2006       2005          2005
                                       $'000      $'000         $'000
                                                                     
                                                                     
On demand or within one year               -          -             -
In the second year                   200,000          -       200,000
In the third to fifth years                -    200,000             -
inclusive                                                            
After five years                     120,000    120,000       120,000
                                     320,000    320,000       320,000
                                                                     
Less: Capitalised debt raising       (3,017)    (3,694)       (3,369)
expenses                                                             
Amount due for settlement after      316,983    316,306       316,631
12 months                                                            
                                                                     
Debt raising expenses are capitalised and are amortised over the     
period of the loan.                                                  
                                                                     
Analysis of borrowings:                                              
                                       As at      As at         As at
                                     30 June    30 June   31 December
                                        2006       2005          2005
                                       $'000      $'000         $'000
                                                                     
                                                                     
Amounts owed to credit               200,000    200,000       200,000
institutions                                                         
Trust preferred securities           120,000    120,000       120,000
Total borrowings                     320,000    320,000       320,000
                                                                     

All borrowings are recorded at fair value.

Amounts owed to credit institutions

The three-year bank term loan of $200.0 million and the $50.0 million revolver currently carry an interest margin of 120 basis points, which is adjustable based upon the Standard and Poor's debt ratings for Alea. The $50.0 million revolver facility is additionally subject to a commitment fee of 40% of the applicable margin. The term loan was used to repay the pre-existing financing facilities with the balance being used for general corporate expenses.

In February 2005, the $50.0 million revolver was fully drawn and the funds were used to make a voluntary prepayment of $50.0 million under the $200.0 million term loan. This prepayment was accompanied by an amendment which increased the financial flexibility of Alea under this financing.

The loan imposes restrictive covenants including tangible minimum equity, debt-to-capitalisation ratio limitations, limitations on the granting of liens, payment of dividends, other dispositions of assets, increased indebtedness and distribution of assets.

Trust preferred securities

In December 2004, the Group issued $100.0 million of trust preferred securities and had in place a commitment for an additional $20.0 million of trust preferred securities, issued in January 2005. These securities (issued from three Delaware trusts established by Alea Holdings US Company, of which one trust was established in January 2005) provide for a preferred dividend at a rate of three month LIBOR plus 285 basis points. These securities allow for the postponement of preferred dividends under certain circumstances for up to five years. These securities carry no financial covenants and no cross default covenants, have a fixed maturity of 30 years, and are callable after five years.

14 Provisions

                                                Restructuring
                                                    Provision
                                                        $'000
                                                             
At 31 December 2004                                         -
                                                             
Additional provision in the period                          -
Exchange difference                                         -
                                                             
At 30 June 2005                                             -
                                                             
Additional provision in the period (see Note           18,253
5)                                                           
Exchange difference                                     (691)
                                                             
At 31 December 2005                                    17,562
                                                             
Utilisation of provision due to onerous               (1,233)
contracts                                                    
Reversal of provision due to onerous                  (2,500)
contracts (1)                                                
Utilisation of provision due to severance             (4,960)
payments                                                     
Exchange difference                                       636
                                                             
At 30 June 2006                                         9,505

(1) As a result of Alea North America's sublease of its empty offices in Wilton a reversal of the previously recognised provision for onerous contracts has been made. The reversal is part of the restructuring costs presented in the income statement.

For further details regarding the restructuring costs see Note 5.

15 Consolidated statement of changes in equity

                     Attributable to equity holders 
                             of the Company         
                                                    
                         Share       Share   Capital
                       capital     premium   reserve
                         $'000       $'000     $'000
                                                    
As at 1 January 2006     1,737     629,311    75,381
                                                    
Loss of the period                                  
                                                    
Revaluation on                                      
available for sale                                  
investments - gross                                 
                                                    
Revaluation on                                      
available for sale                                  
investments - tax                                   
                                                    
Movement in share                                   
based payment                                       
reserve                                             
                                                    
Translation gains -                                 
gross                                               
                                                    
Translation gains -                                 
tax                                                 
                                                    
As at 30 June 2006       1,737     629,311    75,381
                                                    

 
                        Attributable to equity holders of the   
                                       Company                  

 
                    Revaluation    Hedging and     Retained
                    reserve (1)    translation     earnings
                                  reserves (2)             
                          $'000          $'000        $'000
                                                           
As at 1 January        (12,671)          (176)    (204,139)
2006                                                       
                                                           
Loss of the                                        (10,646)
period                                                     
                                                           
Revaluation on         (36,607)                            
available for                                              
sale investments                                           
- gross                                                    
                                                           
Revaluation on                -                            
available for                                              
sale investments                                           
- tax                                                      
                                                           
Movement in                                                
share based                                                
payment reserve                                            
                                                           
Translation                              4,158             
gains - gross                                              
                                                           
Translation                                  -             
gains - tax                                                
                                                           
As at 30 June          (49,278)          3,982    (214,785)
2006                                                       

 
                        Attributable to equity holders of the   
                                       Company                  

 
                    Share     Non-distributable       Total
                    based           reserve (3)            
                  payment                                  
                  reserve                                  
                    $'000                 $'000       $'000
                                                           
As at 1 January       986                     -     490,429
2006                                                       
                                                           
Loss of the                                        (10,646)
period                                                     
                                                           
Revaluation on                                     (36,607)
available for                                              
sale                                                       
investments -                                              
gross                                                      
                                                           
Revaluation on                                            -
available for                                              
sale                                                       
investments -                                              
tax                                                        
                                                           
Movement in         (187)                             (187)
share based                                                
payment reserve                                            
                                                           
Translation                                           4,158
gains - gross                                              
                                                           
Translation                                               -
gains - tax                                                
                                                           
As at 30 June         799                     -     447,147
2006                                                       

 

 

 
                          Attributable to equity holders of the 
                                         Company                

 
                                                         
                             Share       Share    Capital
                           capital     premium    reserve
                             $'000       $'000      $'000
                                                         
As at 1 January 2005         1,744     631,439     75,381
                                                         
Repurchase of shares           (7)     (2,058)           
                                                         
Profit of the period                                     
                                                         
Revaluation on                                           
available for sale                                       
investments - gross                                      
                                                         
Revaluation on                                           
available for sale                                       
investments - tax                                        
                                                         
Movement in share based                                  
payment reserve                                          
                                                         
Transfer to                                              
non-distributable                                        
reserve - gross                                          
                                                         
Transfer                                                 
non-distributable                                        
reserve - tax                                            
                                                         
Translation losses -                                     
gross                                                    
                                                         
Translation losses -                                     
tax                                                      
                                                         
Dividend paid                                            
                                                         
As at 30 June 2005           1,737     629,381     75,381

 
                 Attributable to equity holders of the Company 

 
                                                            
                       Revaluation    Hedging and   Retained
                       reserve (1)    translation   earnings
                                     reserves (2)           
                             $'000          $'000      $'000
                                                            
As at 1 January 2005        12,502          7,629   (17,376)
                                                            
Repurchase of shares                                        
                                                            
Profit of the period                                  19,485
                                                            
Revaluation on               6,026                          
available for sale                                          
investments - gross                                         
                                                            
Revaluation on             (1,367)                          
available for sale                                          
investments - tax                                           
                                                            
Movement in share                                           
based payment                                               
reserve                                                     
                                                            
Transfer to                                          (2,113)
non-distributable                                           
reserve - gross                                             
                                                            
Transfer                                                 634
non-distributable                                           
reserve - tax                                               
                                                            
Translation losses -                      (4,891)           
gross                                                       
                                                            
Translation losses -                      (3,316)           
tax                                                         
                                                            
Dividend paid                                       (12,203)
                                                            
As at 30 June 2005          17,161          (578)   (11,573)

 
                        Attributable to equity holders of the    
                                       Company                   
                       Share based Non-distributable        Total
                           payment       reserve (3)             
                           reserve                               
                             $'000             $'000        $'000
                                                                 
As at 1 January 2005           823             4,368      716,510
                                                                 
Repurchase of shares                                      (2,065)
                                                                 
Profit of the period                                       19,485
                                                                 
Revaluation on                                              6,026
available for sale                                               
investments - gross                                              
                                                                 
Revaluation on                                            (1,367)
available for sale                                               
investments - tax                                                
                                                                 
Movement in share              113                            113
based payment                                                    
reserve                                                          
                                                                 
Transfer to                                    2,113            -
non-distributable                                                
reserve - gross                                                  
                                                                 
Transfer                                       (634)            -
non-distributable                                                
reserve - tax                                                    
                                                                 
Translation losses -                                      (4,891)
gross                                                            
                                                                 
Translation losses -                                      (3,316)
tax                                                              
                                                                 
Dividend paid                                            (12,203)
                                                                 
As at 30 June 2005             936             5,847      718,292

 

 
                 Attributable to equity holders of the Company 

 
                                                         
                             Share       Share    Capital
                           capital     premium    reserve
                             $'000       $'000      $'000

As at 1 January 2005         1,744     631,439     75,381
                                                         
Repurchase of shares           (7)     (2,128)           
                                                         
Loss of the period                                       
                                                         
Revaluation on                                           
available for sale                                       
investments - gross                                      
                                                         
Revaluation on                                           
available for sale                                       
investments - tax                                        
                                                         
Movement in share based                                  
payment reserve                                          
                                                         
Transfer from                                            
non-distributable                                        
reserve - gross                                          
                                                         
Transfer to                                              
non-distributable                                        
reserve - tax                                            
                                                         
Translation losses -                                     
gross                                                    
                                                         
Translation losses -                                     
tax                                                      
                                                         
Dividend paid                                            
                                                         
As at 31 December 2005       1,737     629,311     75,381

 
                 Attributable to equity holders of the Company 

 
                                                            
                       Revaluation   Hedging and    Retained
                       reserve (1)   translation    earnings
                                    reserves (2)            
                             $'000         $'000       $'000
                                                            
As at 1 January 2005        12,502         7,629    (17,376)
                                                            
Repurchase of shares                                        
                                                            
Loss of the period                                 (178,928)
                                                            
Revaluation on            (26,593)                          
available for sale                                          
investments - gross                                         
                                                            
Revaluation on               1,420                          
available for sale                                          
investments - tax                                           
                                                            
Movement in share                                           
based payment                                               
reserve                                                     
                                                            
Transfer from                                          6,240
non-distributable                                           
reserve - gross                                             
                                                            
Transfer to                                          (1,872)
non-distributable                                           
reserve - tax                                               
                                                            
Translation losses -                     (4,934)            
gross                                                       
                                                            
Translation losses -                     (2,871)            
tax                                                         
                                                            
Dividend paid                                       (12,203)
                                                            
As at 31 December         (12,671)         (176)  (204,139) 
2005                                                        

 
                 Attributable to equity holders of the Company 

 
                        Share   Non-distributable       Total
                        based         reserve (3)            
                      payment                                
                      reserve                                
                        $'000               $'000       $'000
                                                             
As at 1 January 2005      823               4,368     716,510
                                                             
Repurchase of shares                                  (2,135)
                                                             
Loss of the period                                  (178,928)
                                                             
Revaluation on                                       (26,593)
available for sale                                           
investments - gross                                          
                                                             
Revaluation on                                          1,420
available for sale                                           
investments - tax                                            
                                                             
Movement in share         163                             163
based payment                                                
reserve                                                      
                                                             
Transfer from                             (6,240)           -
non-distributable                                            
reserve - gross                                              
                                                             
Transfer to                                 1,872           -
non-distributable                                            
reserve - tax                                                
                                                             
Translation losses -                                  (4,934)
gross                                                        
                                                             
Translation losses -                                  (2,871)
tax                                                          
                                                             
Dividend paid                                        (12,203)
                                                             
As at 31 December         986                   -     490,429
2005                                                         

(1) The revaluation reserve is a component of shareholders' equity that is used to record the difference between the market value of available for sale investments carried on the balance sheet and the amortised cost of those assets. Unrealised gains and losses arising when the market value is compared with the amortised cost of the assets are posted to this reserve.

(2) Movements in the unrealised gains and losses arising from the translation of the Group's assets and liabilities denominated in functional currencies of the Group are shown in the hedging and translation reserve.

(3) The non-distributable reserve represents a statutory reserve established by Alea London Limited in accordance with UK Company Law for the purposes of mitigating exceptionally high loss ratios in future years as required by Schedule 9A of the Companies Act.

16 Net cash flow from operating activities

                               Six months  Six months  Year ended
                                    ended       ended            
                                  30 June     30 June 31 December
                                     2006        2005        2005
                                    $'000       $'000       $'000
                                                                 
(Loss) / profit for the          (10,646)      19,485   (178,928)
period                                                           
Adjustments for:                                                 
- tax expense                     (3,712)       6,425      26,827
- depreciation                      1,955       3,001       5,897
- impairment loss recognised            -           -       1,645
in respect of property, plant                                    
and equipment                                                    
- impairment loss recognised            -           -       1,299
in respect of licences                                           
Net cash flows for the period    (45,832)    (42,783)    (92,123)
transferred to investing                                         
activities                                                       
Loss on sale of property,              42          63          64
plant and equipment                                              
Debt interest expense              11,282       7,441      16,344
Loss/(profit) on foreign            8,311     (1,229)     (2,606)
exchange                                                         
                                                                 
Change in operating assets                                       
and liabilities (excluding                                       
the effect of acquisitions                                       
and exchange differences on                                      
consolidation)                                                   
                                                                 
Net increase in insurance       (464,492)     256,253     100,806
liabilities                                                      
Net decrease/(increase) in         69,059    (31,007)    (57,440)
reinsurance assets                                               
Net decrease/(increase) in        212,294   (119,515)     266,719
loans and receivables                                            
Net increase/(decrease) in         24,304    (33,433)      25,786
other operating liabilities                                      
Net movement in share based         (187)         113         163
payment reserve                                                  
Net cash from operating         (197,622)      64,814     114,453
activities                                                       

17 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 2006, 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 39 million Canadian Dollars ($35 million) and the maximum in relation to any one insurer 18 million Canadian Dollars ($16 million).

Litigation

In January 2003, a claim was made against the Group and its indirect subsidiary Alea North America Company ('ANAC') by a former employee of ANAC alleging, inter alia, discrimination, harassment and retaliation for damages totalling $3.5 million. The Group's motion for summary judgement resulted in the dismissal of most of the claims prior to trial. In October 2005 a jury verdict was rendered in favour of the Group and ANAC on all remaining claims. The former employee has appealed. At this stage it is not possible to estimate the amount of any potential liability that may arise for the Group. The Group believes the allegations are unfounded and is vigorously defending itself against the claim and is opposing the appeal. No provision has been made in the accounts for this matter.

Subpoenas and requests for information/regulatory matters

The US domiciled insurance members of the Group received certain subpoenas and information requests with respect to the ongoing investigations by various regulators and governmental authorities relating to industry??wide investigations into US producer compensation practices and arrangements. In November 2004, Alea North America Insurance Company ("ANAIC") received a subpoena from the Attorney General of New York and, together with Alea North America Speciality Insurance Company ("ANASIC"), received inquiries from the insurance departments of Delaware and North Carolina. No allegations of wrongdoing have been made against ANAIC, ANASIC nor any of their employees, nor does the Group have reason to believe that any of them are specific targets of any investigation.

The Group has cooperated fully with these inquiries. After concluding their internal investigations in connection with these matters, these member companies have reported to these regulatory authorities that they have identified no transactions or information causing concern, nor are they aware of any improper conduct.

Certain members of the Group have received subpoenas and information requests with respect to finite reinsurance from the US Securities and Exchange Commission, the FSA, the Australian Prudential Regulatory Authority and the Florida and Delaware state insurance authorities.

The Group has cooperated or is cooperating fully with each authority from which it has received an inquiry and is aware of no improper conduct.

These industry??wide investigations, including certain of the investigations to which the Group is a party, are ongoing and it is not possible to predict the impact that these investigations, or any enquiries specific to the Group, may have on the Group's current or future business and financial results. Moreover, there can be no assurance that further investigations will not be initiated or reopened in the future.

In connection with a periodic market conduct examination, the California Department of Insurance has disputed certain fees collected from policyholders by two agents of one of the Group's subsidiaries. The Group disagrees with the Department's position, but is cooperating to audit these fee arrangements. The agreements with the agents involved have been terminated. It is not possible to predict the impact of this dispute on the Group's financial results.

Company contingent liabilities

In the third quarter of 2002 the Company entered into a top down guarantee with each of the Group's rated insurance operating entities. These guarantees are 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 require 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 remains in effect.

18 Related party transactions

Kohlberg Kravis Roberts & Co., L.P./Fisher Capital Corp. L.L.C.

Certain parties related to Kohlberg Kravis Roberts & Co., L.P. own in excess of 40% of the Company's issued shares. The Company has certain relationship, management rights, shareholder and advisory fee agreements, as amended with Kohlberg Kravis Roberts & Co., L.P., KKR 1996 Fund (Overseas), Limited Partnership, KKR Partners (International), Limited Partnership and Fisher Capital Corp. L.L.C. These agreements are further described in the Company's Listing Particulars dated 14 November 2003. The Group pays annual advisory fees of $750,000 to Kohlberg Kravis Roberts & Co., L.P., an affiliate of KKR 1996 Fund (Overseas), Limited Partnership, a shareholder and KKR Partners (International), Limited Partnership, also a shareholder and $350,000 to Fisher Capital Corp. L.L.C., also a shareholder. As at 30 June 2006, Kohlberg Kravis Roberts & Co., L.P. and Fisher Capital Corp. LLC have received $375,000 and $175,000, respectively. As at 30 June 2006 the balance due under these arrangements was $nil (30 June 2005: $nil; 31 December 2005: $nil). Certain of the Company's directors are interested in these entities as described in the annual Directors' Report.

Loans to officers

Loans to officers were offered in connection with their purchase of Company shares and are interest bearing and except as described below, are full recourse and made on consistent terms as those to other employees. Mr M Ricciardelli received a loan of $375,000 in connection with his purchase of pledged shares at a cost of $750,000 in March 2004 that bears interest at 1 year LIBOR set on the funding date and reset annually on each anniversary thereof. Upon termination of employment Mr M Ricciardelli is not personally liable for any amounts in excess of the value of the shares pledged plus any accrued but unpaid bonus contractually payable to him. Consistent with other borrowers, Mr M Ricciardelli's loan is repayable in five equal annual instalments of 20% of the principal amount thereof. Mr M Ricciardelli paid the first annual principal instalment on his loan of $75,000, together with accrued interest of $11,111 in 2005. At 30 June 2006, Mr M Ricciardelli's outstanding balance was $300,000 and accrued interest was $10,632. In connection with Mr M. Ricciardelli's separation arrangements, he has agreed to repay his loan from the proceeds from the sales of his pledged shares and restricted stock units.

As at 30 June 2006 the Group had loans to key management personnel, including the amount set out above in respect of Mr M Ricciardelli, in aggregate principal amounts of $450,000 (30 June 2005: $525,000). The number of key management personnel that had outstanding loans at 30 June 2006 was 3 (30 June 2005: 3). Key management personnel are as described below.

Key management personnel

The Group considers its key management personnel to include its directors and those members of management reporting directly to its executive directors that have executive management responsibility for Group-wide operations.

Remuneration of key management personnel

The remuneration of the directors and those members of management reporting directly to its executive directors that have executive management responsibility for Group-wide operations, who are the key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures. For six months ended 30 June 2006 this included 12 individuals (2005: 14).

                     Six month ended Six month ended      Year ended
                        30 June 2006    30 June 2005     31 December 
                                                                2005
Short-term employee       $1,169,411      $2,242,965      $3,507,538
benefits                                                            
Post-employment              $14,250         $98,358        $138,630
benefits                                                            
Other long-term             $119,194         $77,493        $154,986
benefits                                                            
Termination benefits        $192,234      $3,131,004      $3,025,159
Share-based payment          $65,072        $130,422        $262,417
TOTAL                     $1,560,161      $5,680,242      $7,088,730

Key management personnel employment and retention contracts

Members of the Group have entered into employment and retention contracts with executive Directors and/or certain members of key management, in each case taking into account the practices in the jurisdiction where the Group operates. Terms of these agreements as they apply to the Company's Directors at year-end 2005 are set out in the Director's Remuneration Report. Termination benefits in the table above include amounts paid in 2005 and during the first six month period of 2006 to departing executive Directors and certain members of key management in settlement of such contracts.

Share and loan transactions with members of key management

Stewart Laderman

On 6 April 2005, the Company repurchased Mr Laderman's 183,880 common shares for GBP 340,178 and 498,688 vested options granted on 19 May 2000 for GBP 69,816 in each case in accordance with the terms of his stockholder's agreement by reference to the price per common share on 31 March 2005. Mr Laderman was granted a GBP 172,237 loan in connection with the common share purchase program, bearing interest at 6.85% and repayable in instalments of 20% each 31 August, commencing in 2001. At 31 December 2004 Mr Laderman had repaid the loan in full, including interest.

Kirk Lusk

Mr Lusk was granted a $49,998 loan in connection with the common share purchase program, bearing interest at 4.1625% and repayable in instalments of 20% each 31 August, commencing in 2005. The Board approved a deferral of principal repayment on Mr Lusk's loan in 2005.

Thomas Weidman

Mr Weidman was granted a $99,999 loan in connection with the share purchase program, bearing interest at 3.7665% and repayable in instalments of 20% each 31 August commencing in 2006.

Amanda Atkins

On 6 April 2005 the Company purchased 35,060 Common Shares held by Ms Atkins for GBP 64,861 in accordance with the terms of her Stockholders' Agreement at the closing price of a Common Share on the London Stock Exchange on 31 March 2005. For details regarding the compromise agreement with Ms Atkins see the Directors' Remuneration Report section in the Alea Group Annual Report 2005.

Mark Ricciardelli

In connection with Mr M Ricciardelli's separation arrangements, on 29 June 2006, the Company agreed that it would vest all restricted stock units not already vested and deliver the underlying shares (totaling 70,918 shares) to Mr M Ricciardelli for sale on or about 22 September 2006. The proceeds of the sale of such shares, together with the simultaneous sale of shares purchased in 2004 by Mr M Ricciardelli (164,821 shares) will be used to satisfy the balance of Mr Ricciardelli's loan of $300,000 plus accrued interest of $13,360 through 31 August 2006, his last day of employment. Mr Ricciardelli's options will be cancelled in accordance with the terms of his option agreement.

INDEPENDENT REVIEW REPORT TO ALEA GROUP HOLDINGS (BERMUDA) LTD

Introduction

We have been instructed by the company to review the financial information for the six months ended 30 June 2006 which comprise the consolidated income statement, the consolidated balance sheet, the consolidated cash flow statement, the consolidated statement of recognised income and expense and related notes 1 to 18. We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information.

This report is made solely to the company in accordance with Bulletin 1999/4 issued by the Auditing Practices Board. Our work has been undertaken so that we might state to the company those matters we are required to state to them in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed.

Directors' responsibilities

The interim report, including the financial information contained therein, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the interim report in accordance with the Listing Rules of the Financial Services Authority which require that the accounting policies and presentation applied to the interim figures are consistent with those applied in preparing the preceding annual accounts except where any changes, and the reasons for them, are disclosed. The directors have elected not to comply with International Accounting Standard 34 Interim Financial Reporting.

Review work performed

We conducted our review in accordance with the guidance contained in Bulletin 1999/4 issued by the Auditing Practices Board for use in the United Kingdom. A review consists principally of making enquiries of group management and applying analytical procedures to the financial information and underlying financial data and, based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit performed in accordance with International Standards on Auditing (UK and Ireland) and therefore provides a lower level of assurance than an audit. Accordingly, we do not express an audit opinion on the financial information.

Emphasis of matter - going concern

In forming our review conclusion, which is not qualified, we have considered the adequacy of the disclosure made in note 2 to the financial information concerning the company's ability to continue as a going concern. The company has borrowings which are subject to covenants. Compliance with those covenants at the period end and in the future is based on the estimates in the balance sheet and cash flow projections. Both of these are prepared on the basis of assumptions that are subject to material uncertainty. These conditions, along with the other matters explained in note 2 to the financial information, indicate the existence of a material uncertainty which may cast significant doubt about the company's ability to continue as a going concern. The financial information does not include adjustments that would result if the company was unable to continue as a going concern.

Review conclusion

On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 30 June 2006.

 
Deloitte & Touche LLP
Chartered Accountants
London
19 September 2006


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