Alea Group Holdings (Bermuda) Ltd.

Preliminary Results for the year ended 31 December 2003 - Part 6 of 7

London (ots) - Unaudited Consolidated cash flow statement Restated Year ended Year ended Notes 31 Dec 03 31 Dec 02 $'000 $'000 Net cash inflow from operating activities 6 250,979 99,394 Servicing of finance Interest paid (4,718) (6,530) Taxation Taxation (paid)/refunded (1,674) 1,222 Capital expenditure Purchase of tangible assets (10,266) (9,237) Proceeds on disposal of tangible assets 5,977 Financing Issue of common share capital 291,968 7,092 Purchase of subordinated preferred shares issued by subsidiaries (42,500) Receipt of cash from Capital Enhancement Program 30,000 Capital raising expenses (23,723) (172) --------- --------- 466,043 121,769 ========= ========= Cash flows were invested as follows: Increase/(decrease) in cash holdings 13,752 (3,243) Net portfolio investments Shares and other variable yield securities (331) (704) Debt securities - unit trusts - Listed 6,973 6,978 Debt securities and other fixed income securities 453,123 414,079 Deposits with credit institutions (7,474) (295,341) --------- --------- 452,291 125,012 --------- --------- Net investment of cash flows 466,043 121,769 ========= ========= Unaudited Notes to the Financial Statements 1. ACCOUNTING POLICIES Basis of preparation The financial information is prepared in accordance with applicable United Kingdom accounting standards and under the historical cost accounting rules as modified by the revaluation of investments. The principal accounting policies, which have all been applied consistently throughout the periods covered by this report with the exception of the policy for the recognition of equalisation provision explained below, and which comply with the recommendations of the United Kingdom Statement of Recommended Practice on Accounting for Insurance Business issued by the Association of British Insurers in December 1998 (the ''ABI SORP'') are set out below. The Company is a registered Bermuda company. As such it is obliged to prepare its financial information in accordance with the Bermuda Companies Act 1981, which permits the Company to prepare its financial information under generally accepted accounting principles of the United Kingdom (''UK GAAP''). Accordingly, the financial information has been prepared in accordance with Bermuda Law and under the historical cost accounting rules as modified by the revaluation of investments. This preliminary announcement does not constitute statutory accounts for the financial year ended 31 December 2003. The auditors have not reported on these accounts. This preliminary announcement uses the accounting policies set out in the Group's Listing Particulars except for the policy in respect of employing the longer term rate of return for investments as recommended for UK listed companies by the ABI SORP. This policy has changed since the publication of the Listing Particulars and details of the change are disclosed further below. The financial information in this preliminary announcement for the year ended 31 December 2003 does not constitute statutory accounts for that period but is derived from those accounts, which are currently unaudited, and have been restated for the effects of the change in accounting policy. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and all its subsidiary undertakings. From 1 January 2001 to 26 February 2002 the parent company of the Group was Alea Group Holdings AG, a company incorporated in Switzerland. On 7 December 2001 the Company was incorporated in Bermuda to become the new ultimate parent company of the Group. As at 31 December 2001 following a series of capital injections from existing shareholders and share for share exchanges, certain subsidiaries of Alea Group Holdings AG were partially owned by both the Company and Alea Group Holdings AG, in varying percentages. Alea Group Holdings AG remained the controlling entity as at 31 December 2001. As at 26 February 2002 following completion of regulatory approvals, Alea Group Holdings AG became a 94.49% subsidiary of the Company by way of a share for share exchange and the Company became the new ultimate parentcompany. Following the staff equity exchange becoming effective on 3 April 2002, and certain repurchases from terminating employees, the Company's interest in Alea Group Holdings AG increased to 100%. The above share for share exchanges qualify as a Group reorganisation as the ultimate shareholders and their rights remained the same and no minority interests have been affected. Accordingly, as permitted under FRS 6 ''Acquisitions and Mergers'' this Group reconstruction has been accounted for using merger accounting. Change in accounting policies The Group has determined that it is appropriate to record in the accounts of the Group the claims equalisation provision established by Alea London Limited. This is a change in accounting policy. The Group has opted to comply with the ABI SORP recommendation for UK listed companies of allocating investment return to the technical account based on the longer term rate of return, which the Group has selected as 4.5%. This is a change in accounting policy and has no impact on the profit on ordinary activities after tax. The cumulative effect of the prior year adjustments is shown in the statement of total recognised gains and losses and detailed in note 4. Unaudited Notes to the Financial Statements 2. SEGMENTAL INFORMATION Underwriting results by operating segment before intra-group quota share arrangements The Group's business is composed of four underwriting segments, consisting of London, Alternative Risk, North America (treaty reinsurance) and Europe. The following tables summarise the underwriting results for the Group's business segments as of and for the years ended 31 December 2003 and 31 December 2002. Net premiums written and net premiums earned are presented prior to intra-group quota share arrangements, the underwriting results are also stated before quota share arrangements, and the impact of quota share arrangements on these pre-quota segmental results is presented separately. Year ended 31 London AAR North Europe Total December 2003 America $'000 $'000 $'000 $'000 $'000 Gross Premiums 566,042 261,141 282,921 190,078 1,300,182 Written Outwards (78,198) (129,172) (33,222) (30,879) (271,471) reinsurance premiums ----------------------------------------------------------------- Net premiums written 487,844 131,969 249,699 159,199 1,028,711 ------------------------------------------------------------------ Gross premiums earned 482,701 205,062 228,361 198,151 1,114,275 Net premiums earned 407,656 97,856 189,324 163,645 858,481 Allocated investment return 13,995 12,681 19,022 12,113 57,811 Claims incurred, net of reinsurance (224,988) (70,556) (130,024) (103,082)(528,650) Total net expenses comprise : Acquisition costs (92,521) (19,654) (55,268) (27,958)(195,401) Administrative expenses (32,122) (15,880) (20,984) (21,112) (90,098) Fee income 1,654 - 545 165 2,364 Other technical charges (5,611) (24) (700) (12,669) (19,004) Other expenses (128,600) (35,558) (76,407) (61,574)(302,139) -------- ------------ -------- -------- -------- -------- Under writing result(1) 68,063 4,423 1,915 11,102 85,503 ========= =========== ======== ======== ======== ======== Restated Year ended 31 London AAR North Europe Total December America 2002 $'000 $'000 $'000 $'000 $'000 Gross Premiums Written 376,428 141,394 257,377 156,432 931,631 Outwards reinsurance premiums (76,245) (66,767) (48,328) (32,059) (223,399) ---------- Net premiums 300,183 74,627 209,049 124,373 708,232 written ---------- Gross premiums earned 278,535 54,064 176,375 165,054 674,028 Net premiums earned 220,885 22,044 142,663 132,459 518,051 Allocated investment return 9,398 9,334 17,334 10,886 46,952 Claims incurred, net of reinsurance (108,997) (14,344) (87,632) (110,881) (321,854) Total net expenses comprise : Acquisition costs (49,694) (6,851) (44,904) (26,070) (127,519) Administrative expenses (30,572) (5,779) (21,076) (19,035) (76,462) Fee income 5,807 228 - (364) 5,671 Other technical charges (5,965) (95) (611) (10,007) (16,678) Other expenses (80,424) (12,497) (66,591) (55,476) (214,988) -------- --------- -------- -------- -------- -------- Underwriting result (1) 40,862 4,537 5,774 (23,012) 28,161 ========= ========== ======== ======== ======== ======== (1) Balance on the technical account for general business before claims equalisation provision Intra-group quota share arrangements For the year ended 31 December 2002 and 31 December 2003 intra-group quota share arrangements comprise of the following: a 35% quota share of Alea London business to Alea Europe, a 50% quota share of certain 2000 and prior underwriting year business from Alea Europe to Alea Bermuda, a 70% quota share of Alea North America to Alea Bermuda and an intra-group aggregate excess contract from Alea Europe to Alea Bermuda. The effect of all of these arrangements are detailed below : Year ended London Bermuda US Europe Total 31 December $'000 $'000 $'000 $'000 $'000 2003 Net premiums earned 407,656 2,520 284,660 163,645 858,481 Intercompany reinsurance (142,397) 203,005 (197,151) 36,543 - ------- ------- ------- ------- ------- Net premiums earned after intercompany reinsurance 265,259 205,525 87,509 300,188 858,481 Underwriting result Before intercompany reinsurance 68,063 (10,841) 17,180 11,101 85,503 After intercompany reinsurance 45,468 (5,046) (1,168) 46,249 85,503 Year ended London Bermuda US Europe Total 31 December $'000 $'000 $'000 $'000 $'000 2002 Net premiums earned 220,885 85,325 79,382 132,459 518,051 Intercompany reinsurance (75,604) 75,030 (55,567) 56,141 - ------- ------- ------- ------- ------- Net premiums earned after intercompany reinsurance 145,281 160,355 23,815 188,600 518,051 Underwriting result Before intercompany reinsurance 40,862 9,143 1,168 (23,012) 28,161 After intercompany reinsurance 25,094 7,902 (2,566) (2,269) 28,161 Year ended Year ended 31 Dec 03 31 Dec 02 $'000 $'000 Gross premiums written Insurance Casualty 339,342 125,308 Property 92,226 69,963 Marine, aviation & transport 88 (77) Other 745 215 --------- --------- Total insurance 432,401 195,409 --------- --------- Reinsurance Casualty 584,463 365,182 Property 232,198 294,760 Marine, aviation & transport 32,414 54,709 Other 18,706 21,571 --------- --------- Total reinsurance 867,781 736,222 --------- --------- Total 1,300,182 931,631 ========= ========= Year ended Year ended 31 Dec 03 31 Dec 02 $'000 $'000 Gross premiums earned Insurance Casualty 243,787 57,353 Property 82,466 50,950 Marine, aviation & transport 88 394 Other 619 665 --------- --------- Total insurance 326,960 109,362 --------- --------- Reinsurance Casualty 481,901 285,193 Property 250,377 210,055 Marine, aviation & transport 40,176 48,853 Other 14,861 20,565 --------- --------- Total reinsurance 787,315 564,666 --------- --------- Total 1,114,275 674,028 ========= ========= Year ended Year ended 31 Dec 03 31 Dec 02 $'000 $'000 Net premiums written Insurance Casualty 432,537 55,925 Property 64,311 59,163 Marine, aviation & transport 88 (67) Other 649 131 --------- --------- Total insurance 497,585 115,152 --------- --------- Reinsurance Casualty 288,674 305,024 Property 207,047 225,375 Marine, aviation & transport 16,242 40,333 Other 19,163 22,348 --------- --------- Total reinsurance 531,126 593,080 --------- --------- Total 1,028,711 708,232 ========= ========= Year ended Year ended 31 Dec 03 31 Dec 02 $'000 $'000 Net premiums earned Insurance Casualty 108,613 29,927 Property 69,703 41,777 Marine, aviation & transport 88 491 Other 523 581 --------- --------- Total insurance 178,927 72,776 --------- --------- Reinsurance Casualty 426,111 239,817 Property 213,541 150,065 Marine, aviation & transport 24,600 34,235 Other 15,302 21,158 --------- --------- Total reinsurance 679,554 445,275 --------- --------- Total 858,481 518,051 ========= ========= 3. EARNINGS PER ORDINARY SHARE Basic earnings per ordinary share is based on the profits after tax and the weighted average ordinary shares in issue as follows : Year ended Year ended 31 Dec 03 31 Dec 02 Number Number Weighted average ordinary shares in issue 114,269,807 105,872,303 Fully diluted number of shares 116,266,620 107,965,776 Operating earnings per ordinary share based on the investment income are shown because it is considered to be a more appropriate measure of operating performance than earnings per share including short term fluctuations in investment return. Furthermore, as detailed in the note relating to prior year adjustments, transfers to or from claims equalisation provision are transfers to or from a statutory reserve and not a deduction or credit in arriving at operating profit. The gain on the purchase of subordinated preferred shares issued by subsidiaries has also been excluded in calculating operating profit. The Company has re-denominated the Swiss Franc 110.79 option price to $64.41 for all options issued at that strike price (CHF 5.54 and $3.22, respectively after adjustment for the bonus share grant, comparable to a 20:1 stock split). The Company reports in United States Dollars and the original Swiss Franc price was retained only as a result of the original status of the parent company (AGHAG) before the establishment of the new Bermudan ultimate parent company Alea Group Holdings (Bermuda) Ltd. The impact of converting the Swiss Franc options to United States Dollars options does not change the fully diluted earnings per share and reduces the fully diluted operating earnings per share in 2003 from 55 cents to 54 cents per share. The reconciliation between earnings per ordinary share and operating earnings per ordinary share is as follows: Restated Year ended Year ended 31 Dec 03 31 Dec 02 $'000 $'000 Profit for the financial year attributable to equity shareholders 48,510 54,579 --------- --------- Less Gain on purchase of subordinated preferred 7,500 - shares issued by subsidiaries Short term fluctuations in investment return (22,477) 33,322 Movement in claims equalisation (3,771) (2,368) provisions --------- --------- (18,748) 30,954 Tax thereon 4,251 (1,989) --------- --------- (14,497) 28,965 --------- --------- Operating profit after tax 63,007 25,614 Earnings per share - basic ($) 0.42 0.52 Earnings per share - fully diluted ($) 0.42 0.51 Operating earnings per share - basic ($) 0.55 0.2 Operating earnings per share - fully diluted ($) 0.54 0.24 4. PRIOR YEAR ADJUSTMENTS Reinsurers' share of technical provisions - claims outstanding - aggregate excess reinsurance As part of the Listing process the Group reviewed the application of the deficit payback provisions of each of the Inter-Ocean Adverse Development cover, the Inter-Ocean Aggregate Excess Cover and the OPL Adverse Development Cover and determined that the previous financial statements made a fundamental error in that they did not fully reflect the consequences of the deficit payback and commutation/termination provisions of the contracts. Accordingly reinsurance recoverables were reduced by $24 million in respect of the 2000 annual financial result and by $6 million in respect of the 2001 annual financial result. These amounts have been accounted for as prior year adjustments in these financial statements. Claims equalisation provision Also as part of the Listing process the Group has determined that it is appropriate to record in the accounts of the Group the Claims Equalisation Provision established by Alea London Limited. This change in accounting policy has been accounted for as a prior year adjustment. A claims equalisation provision for the UK subsidiary has been established in accordance with Chapter 6 of the Interim Prudential Sourcebook for UK Insurers (prior to 1 December 2001, the requirements of the Insurance (Reserves) Act 1995 and the Insurance Companies (Reserves) Regulations 1996) for the purposes of mitigating exceptionally high loss ratios in future years. The amounts provided are not liabilities because they are in addition to the provisions required to meet the anticipated ultimate cost of settlement of outstanding claims at the balance sheet date. Longer term rate of return The Group has chosen to allocate investment income to the technical account from the non-technical account using the longer-term rate of return as recommended for listed companies per the ABI SORP. As this is a reallocation of the investment return within the Profit and Loss Account it has no impact on prior year reserves. The impact of the change in accounting policy and the other prior year adjustment is as follows: Year ended Year ended 31 Dec 03 31 Dec 02 $'000 $'000 Profit on ordinary activities after tax under previous accounting policy 43,650 56,238 Change in the claims equalisation provision (3,771) (2,368) Tax credit 1,131 709 -------- -------- (2,640) (1,659) -------- -------- Restated profit on ordinary activities after 41,010 54,579 tax ======== ======== Shareholders' funds attributable to equity interests as previously reported 728,042 442,198 Net effect of the change in accounting policy as above (2,640) (1,659) Prior year adjustment - reinsurers' share of technical provisions - claims outstanding - aggregate excess reinsurance - (30,000) -------- -------- (2,640) (31,659) -------- -------- Restated shareholders' funds attributable to equity interests 725,402 410,540 ======== ======== Profit and loss account as previously reported 17,598 (18,628) Net effect of the change in accounting policy as above (2,640) (1,659) Prior year adjustment - reinsurers' share of technical provisions - claims outstanding - aggregate excess reinsurance - (30,000) -------- -------- (2,640) (31,659) -------- -------- Restated profit and loss account 14,958 (50,287) ======== ======== Part 7 follows

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