Alea Heads Into Runoff as 2005 Loss Estimate Approaches $240 Million

Alea Group Holdings (Bermuda) Ltd. unveiled a runoff strategy for its insurance and reinsurance businesses as it estimated its after-tax losses were between $200 million and $240 million for 2005. 
 
The Bermuda-based group said it moved into runoff because it couldn't attract a suitable volume of business after its ratings were downgraded in the third and fourth quarters last year. "The group's revised strategy will be to preserve value for shareholders through proactive management of its insurance and reinsurance contracts," Alea said in a statement. 
 
Alea (LSE:ALEA) said the runoff strategy would add $95 million to $105 million to charges against 2005 earnings. The group also expects after-tax losses from last year's storms of between $108 million and $125 million. Another $95 million in after-tax charges stems from reserve development. 
 
News of the loss estimates sent Alea's stock into a slide in London, where it was trading at 65 pence ($1.15) a share on the afternoon of Jan. 30, down 23.3% from the previous close. The group plans to release preliminary 2005 results in the first week of April. 
 
As for reserve development, Alea said a further $69 million has been added to reserving charges in the second half of 2005, on top of $34.7 million in charges during the first half. "The group is still in the process of completing its year-end reserve analysis, including further review of pricing, claims and underwriting trends in recent underwriting years, calculation of the impact of quota-share arrangements, development of a final reserve number for the legacy London Imperial runoff book, further analysis of asbestos and environmental reserves, and calculation of the discount on the resulting second-half reserve development," Alea said. 
 
Among its restructuring efforts, the group shed 160 of the 400 jobs it had at the start of the year. 
 
Alea recently had sold off a number of businesses as part of its restructuring effort, including the 2006 renewal rights of its European property/casualty treaty portfolio to French reinsurer Scor Group (BestWire, Dec. 8, 2005). 
 
Lloyd's underwriter Canopius Managing Agents Ltd. previously said its Syndicate 4444 would offer renewal capacity for business underwritten by Alea London Ltd.'s facilities division (BestWire, Dec. 5, 2005). Under that agreement, Paul Webb, senior vice president at Alea London, along with "a substantial number" of the Alea facilities team, joined Canopius. The Alea London portfolio consists of business generated by managing general agents based in the United States. 
 
Alea also said it would sell the renewal rights of primary program business written by Alea Alternative Risk to subsidiaries of New York-based AmTrust Group, a privately held insurance and financial services company. Under terms of that agreement, Alea would get an initial payment of $12 million at closing. Alea also would get cash payments equal to 3% of the gross premiums written in the five years from closing, to be offset against the initial $12 million payment (BestWire, Nov. 23, 2005). 
 
The Bermuda insurer's net profit for the first six months of 2005 fell to $19.5 million from $36.9 million a year earlier, as the company boosted reserves by $34.7 million, mostly to cover prior-year development in the U.S. casualty reinsurance segment. The company also cited recent rating downgrades as adding to financial pressure. 
 
A.M. Best Co. on Jan. 30 downgraded the financial strength rating to B (Fair) from B++ (Very Good) and the issuer credit rating to "bb" from "bbb" of the insurance and reinsurance operating subsidiaries of Alea Group Holdings (Bermuda) Ltd. A.M. Best then withdrew all ratings and assigned an NR-4 (Company Request) to the Alea Group companies.