Alea Group Holdings (Bermuda) Ltd.’s 2005 financial results demonstrate just how devastating the loss of an “A” rating can be. Although the Group posted a small, $4.3 million loss in 2004, it started 2005 in reasonably good shape. Further financial problems, compounded by last fall’s hurricanes, however, were the Group’s undoing. It formally went into run-off last December.
A.M. Best Co. downgraded Alea’s financial strength rating “B++” (Very Good) from “A-” (Excellent) and the issuer credit rating to “bbb” from “a-” of the Group’s insurance and reinsurance operating subsidiaries (See IJ Website Sept. 26, 2005). Standard & Poor’s also lowered the Group’s ratings below “A” grade (See IJ Website Sept.12). The decisions followed the Group’s decision to abandon its plans to raise an additional $210 million in capital to help offset reserve increases of $34.7 million in the second quarter of 2005.
The latest earnings report won’t help. Highlights noted include the following:
— Gross premiums written of $997.5 million (2004: $1.5826 billion), with the reduction reflecting the impact of rating agency actions and entry into run-off.
— Combined ratio of 126.1 percent (2004: 104.2 percent). .
— Net asset value of $2.82 per share (2004: $4.07). .
— Basic and diluted loss per share of $1.03 (2004: $0.02).
— Investment income of $89.1 million (2004: $68.6 million). .
— Net reserve additions of $123.1 million (2004: $93.7 million). .
— Total storm losses of $108.5 million (2004: $51.4 million).
— Total run-off charges of $80.4 million, including redundancy costs, deferred tax write-off and the cost of commuting an aggregate excess contract.
— Net gain of $61.1 million recorded in respect of renewal rights transactions.
— No dividend proposed in respect of the 2005 financial year. .
— 2005 performance complies with the financial covenants under the Group’s bank credit agreement.
Chairman Mark L. Ricciardelli recounted Alea’s 2005 history in an official statement as follows: “In 2005 the Group adopted a revised strategy due to actions taken by rating agencies. The downgrades in Alea’s credit and financial strength ratings from the A- level significantly impaired its ability to attract new and renewal business. As a result the Group was placed into run-off in the fourth quarter. The Board and management are focused on preservation of value with a view to returning cash to shareholders through effective run-off strategies.
“Termination of capital raising plans: In the summer of 2005 the Group developed a strategy to address rating agency A.M. Best’s concerns over risk-based capital adequacy. The Group’s plan to raise $210 million was withdrawn after rating agency Standard and Poor’s downgraded the Group’s credit and financial strength rating from A- to BBB+ in September 2005. The downgrade reflected S&P’s view that the Group had experienced continued disappointing operating performance in recent years and would not have been prevented by raising capital. Following the termination of the capital raising plans A.M. Best downgraded the Group from A- to B++.
“At the lower ratings only the Group’s Continental European business would have been sustainable. The Group concluded that the prospective return on this remaining business was insufficient to reward the existing capital structure or merit raising additional capital.”
The entire report is available on the Group’s Website at: www.aleagroup.com.
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