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Alea Group
Insurer Alea Group reported some bad news in its latest trading statement.
Alea announced that a comprehensive review of reserves was nearing completion and that two areas of weakness had been discovered:in US casualty reinsurance contracts written between 1999 and 2002 and in European reinsurance accounts written by Rhine Re upto 2000. Provisions are being made for these, which, together with the losses caused by the hurricane season will push the combined ratio to 103%-105%.
Alea reports that insurance rates are expected to rise by 0%-5% and reinsurance rates by 0%-10% but does not disclose the important figure of the average rate increase so it is difficult to assess hte impact of this. Our expectation was that rates would rise following the hurricane season, we can take some comfort from the fact that rates have not fallen but can say little more until the final figures are released.
Investment returns are expected to improve due to lower unrealised losses on the fixed income investment portfolio. The full year unrealised loss is expected to be less than US$10 million compared to an unrealised loss of US$29 million at the half year.
The new CEO seems to have taken the opportunity presented by the storm season to “clean up the books” - i.e. ensure that all the bad news is fully relfected in the accounts. The storm losses and the reserve strengthening exercise will mean that the full year results will be poor. A further rise in interest rates could cause investment losses to rise as the capital value of its bond portfolio falls.
The recovery in the insurance rates has been weaker than we had originally expected, the company reports that market rates have actually fallen for certain classes (US workers’compensation down between 0 and 2%, non-US general liability reinsurance down by 5%, property reinsurance in Europe down by 5% and property catastrophe reinsurance down by 5% to 10%).
The prospective PE of 6.1× (at the current price of 186.5p) is at the lower end of the sector range.
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