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RNS Number:8508T
Omega Insurance Holdings Limited
28 March 2007
28 March 2007
OMEGA INSURANCE HOLDINGS LIMITED
PRELIMINARY RESULTS FOR THE 12 MONTHS ENDED 31 DECEMBER 2006
Omega Insurance Holdings Limited ("Omega" or "the Group"), the international
insurance group based in Bermuda, is pleased to announce a 92% increase in
profits.
Financial Highlights
*Net written premiums: US$88.9 million (2005: US$6.8 million)
*Profit before tax: US$22.0 million (2005: US$11.5 million)
*Earnings per share: US$0.12 (2005: US$0.30)
*Assets per share: US$1.80 (2005: US$1.64)
*Syndicate 958 combined ratio: 72% (2005: 93%)
Operating Highlights
*Establishment of new Bermudian Group holding company in conjunction with
Group reorganisation
*Established and launched Omega Specialty, a Bermudian insurance company
*Incorporation of Omega US, a US surplus lines insurer
*Syndicate 958 forecasting continued unbroken underwriting profitability
Outlook
*Group structure now optimal from strategic, operational and financial
perspectives
*Attractive market conditions in Omega's key areas of focus
*No changes to underwriting strategy and discipline
Richard Tolliday, Chief Executive of Omega, commented: "These are excellent
results. They mark a transition for Omega but demonstrate one thing very
clearly: in planning and implementing the changes to the Group in 2006, we have
remained focused on disciplined underwriting in areas where we have proven
expertise and experience and a truly exceptional track record. The Group is
ideally placed now to grow the business by building upon these foundations. We
look forward with confidence. "
Enquiries:
Omega Insurance Holdings Limited +1 404 513 4063
Richard Tolliday, CEO
John Coles, Threadneedle Communications +44 (0)20 7936 9604
Chairman's Statement
Last year I wrote to you as Chairman of the Omega Group for the first time since
the Group had become publicly traded. This year is also a first, since I write
to you now, following the reorganisation of the Group under a scheme of
arrangement that became effective in November 2006, as Chairman of the Group's
new Bermudian holding company, Omega Insurance Holdings Limited. I am very
pleased to be reporting such important and valuable developments for the Group
in 2006. We have continued to lay excellent foundations for the future growth of
the Group and have coupled that with very strong financial performance.
2006 was a year in which both our results and our operational activities
emphasised that the Group is well advanced in its transition from a business
solely focused around the successful activities of its Lloyd's managing agency
to becoming an international insurance business deploying its own capital in
support of its underwriting in multiple operating units in major world markets.
That journey began with the flotation of the Group in April 2005 and the capital
raised both then and in December of 2005. In one way this continuing transition
lends difficulty to making detailed comparisons with past performance, even
comparing 2006 with 2005. In another way, it highlights clearly the strong bond
of continuity with the past with which we drive forward the progress of Omega.
Summary of result
Our profit before tax of US$22.0 million was up 92% on 2005 (US$11.5 million).
This reflects the deployment of the capital raised in 2005 in the establishment
of Omega Specialty Insurance Company Limited in Bermuda and the earnings from
its first year of underwriting. The earnings stream from our own underwriting
will of course take time to mature but it already now forms the largest
component of our results. The underwriting result for the year was US$14.2
million (2005: US$0.3 million).
2006 enjoyed robust underwriting conditions and, unlike 2005, benign loss
experience. This is clearly reflected in the combined ratio of Syndicate 958 for
2006 of 72% compared with 93% for 2005. Both 2004 and 2005 were years of
significant insured losses. I am particularly pleased to report that Omega's
Syndicate 958 has closed its 2004 year of account at a profit of 7.61% of
capacity and is forecasting a profit of between 5% and 10% for the 2005 year of
account. We are forecasting a profit for the Syndicate's 2006 year of account of
between 12.5% and 20%. Many in the insurance industry will be reporting handsome
profits for 2006 but it is the relative consistency of results across the good
and bad years and relative outperformance of the market across the cycle that
has been the hallmark of Omega.
Placing and Reorganisation
In October 2006 Omega Underwriting Holdings Limited (then named Omega
Underwriting Holdings PLC) completed a placing and raised £32.8 million (US$62
million), net of expenses, from institutional investors. These funds were raised
in order to capitalise our new US based insurance company, Omega US Insurance,
Inc. This company, which will become operational later in 2007, will write
surplus lines insurance business of a similar nature to that underwritten within
Syndicate 958's portfolio. Concurrent with the placing we effected the
reorganisation of the Group by means of a scheme of arrangement under which
Omega Insurance Holdings Limited, a Bermudian holding company, was established
as the holding company of the Group. On 16 March 2007 Omega Specialty Insurance
was transferred to and became a direct subsidiary of Omega Insurance Holdings.
Omega obtained the necessary consent from H.M. Treasury for the transfer of
Omega Specialty by Omega Underwriting Holdings Limited in the UK.
All parts of the reorganisation have now been completed and the Omega Group now
has a corporate structure that is optimal from a strategic, operational and
financial perspective. It is hard to overestimate the importance and value of
this to the Omega Group in the coming years.
I would like to express our gratitude for the support and commitment that the
Omega Group has continued to receive from its investors.
Dividend
In September 2006 the Omega Underwriting Holdings PLC Board was pleased to
declare a special interim dividend of 4.1p per share which was paid to
shareholders in November 2006. This represented both the interim and final
dividend for the 2006 year. The special interim dividend of 4.1p was paid on a
share capital base approximately three times the size of the 3.5p special
interim dividend paid in 2005 which also served as both interim and final
dividend for 2005.
These dividend payments reflect very clearly not only the increased earnings
potential of the Group but also the confidence your Board has in the current and
future prospects of the Company. They are important also as a signal of the
importance your Board attaches to the payment of dividends as part of total
shareholder return. Going forward, the Board intends to pay out a substantial
part of the Group's earnings as dividends.
Strategy
The Omega Group is now an international insurance and reinsurance group,
headquartered in Bermuda with operations in Bermuda, London, the United States
and Cologne. The corporate strategy of the Group is to complement its Lloyd's
business by growing underwriting businesses that are supported by Omega's own
capital. Given the geographic focus of Omega's premium base in the US, and the
aim of building businesses complementary to the Syndicate, the Board regards
Bermuda as a natural location for the holding company to be based.
The operational strategy of Omega can be summed up quite briefly: It is to
continue to underwrite business of the type we have always written in London,
applying the same disciplines we always have, but to create the opportunities of
attracting a greater share of that business by taking ourselves proactively to
the marketplaces, other than London, where large parts of that business are
transacted.
2006 was another year of significant change for Omega. It is therefore
appropriate for me to reiterate my key message of last year. We believe that we
have a very clear understanding of the disciplines and approach to underwriting
with which we have steered a profitable course through multiple cycles of the
insurance market and on which the Group's record of success has been built. We
intend to adhere to those disciplines as we go forward. In short, we have
changed a lot about Omega and enhanced our ability to create and seize
opportunities; we have not changed any of the key factors to our success.
Outlook
The profound changes wrought upon the insurance markets by the hurricane losses
in 2004 and of course those in 2005, including Katrina, continue today. It is
most certainly true that margins and conditions are not universally robust and
some lines of business have seen quite material weakening during 2006 and into
2007. There are signs in the market that some may be inclined to extrapolate
from the experiences of 2006 and judge their pricing and appetite for exposure
on one benign year.
That said, the areas which form the key focus of Omega's underwriting continue
to offer very satisfactory terms and conditions and opportunities for attractive
profitability. The continuing dearth of conventional retrocessional cover on
appropriate terms and conditions from acceptable security underpins a continuing
discipline in the underwriting of target areas. We will be carrying a net
unearned premium reserve of US$25.5 million forward from 2006. The premium was
written at good rates, and substantially all of this will be earned in 2007.
With strong continued trading conditions in our key lines, this affords good
prospects for 2007.
The Syndicate in London expects to write gross premiums in 2007 of up to US$570
million, including the development of a new offshore energy account, and is now
complemented by Omega Specialty in Bermuda, which we expect to write gross
premiums of US$200 to US$250 million for 2007. Work is advanced in the
operational build-out of Omega US. We are, therefore, very positive about the
outlook going forward.
In 2005 and 2006 we have been investing in the future. We have efficiently and
effectively built out our structure and we are continuing to develop our
operations in 2007. We expect these labours to bear more fruit in 2007 and
mature in the years beyond.
Board
We were very pleased to welcome Nicholas Warren to the Board as a non-executive
director in 2006. Nick contributes an understanding of the insurance industry
and, as a Bermudian resident, a particular depth of understanding of the Bermuda
market.
In December 2006 we were also delighted to be able to announce the appointment
of Penelope James as Group Finance Director. She will be taking up her new role
in May 2007 and will be appointed to the Board.
The Omega Team
2006 was another extraordinary year in the development of the Group. Our goal of
an optimal strategic structure was achieved and, at the same time, an unstinting
focus was very successfully maintained upon our core activity of underwriting.
This reflects the combination of skills and experience which comprise the Omega
team and the drive, energy and enthusiasm with which they are applied by every
member of it. Outstanding achievements from an outstanding team. Consequently,
on behalf of the entire Board, I would like to record our thanks for these
achievements and express the confidence and optimism with which we look forward
to the future.
W. Fiederowicz
Review of Operations and Financial Results
Introduction to Omega Insurance Group
Omega is an underwriting group headquartered in Bermuda with operations in
Bermuda, London, the United States and Cologne.
The Group's origins centred on the management of its Lloyd's Syndicate 958 which
has an exceptional record of unbroken underwriting profit in every closed year
of account since its establishment in 1980. The Group receives fees and profit
commissions for the management of the Syndicate. In 2005 Omega began the
execution of its strategy to change the focus of the Group from being primarily
a manager of the third party capital supporting the Syndicate to become an
insurance and reinsurance operation with a significant amount of its own capital
at risk. In April 2005 the Group was floated and admitted to trading on AIM.
£18.2 million, net of expenses, was raised from institutional investors. In
December, Omega completed a second placing and raised a further £85.8 million,
net of expenses. In February 2006, US$172 million was committed to the
capitalisation of Omega Specialty, the Group's Bermudian insurance company. In
October 2006, Omega raised £32.8 million (US$62 million), net of expenses with
which to capitalise Omega US, the Group's newly formed US insurance company.
In 2006, the year under review, the Group's profit before tax was US$22.0
million (2005: US$11.5 million) and after tax was US$15.1 million (2005: US$11.7
million). This result is the first for the Group to reflect earnings from the
deployment of its own capital in support of its own underwriting in Omega
Specialty. 2006 is, therefore, very much a transitional year for Omega. Going
forward the earnings from the Group's own underwriting will become more fully
developed. In 2006 they already represent the largest component of the Group's
profit but are not yet indicative of full earning potential. The underwriting
result for the year under review was US$14.2 million compared with US$0.3
million in 2005. The underwriting result includes the support by Omega Specialty
of our own corporate member's 15.2% share of Syndicate 958 for the 2006 year of
account. Income from managing agency activities, comprised of fees and profit
commissions, net of agency expenses was US$5.0 million for the year. The
contribution in 2005 of managing agency activities was US$12.0 million but
included some one off gains from the introduction of a change in our recognition
of those revenue streams, to bring us more in line with our peers. Income from
investments was US$11.8 million (2005: US$2.1 million).
In executing the Group's strategy of becoming an insurance operation with its
own capital at risk, certain objectives were seen as key. The businesses into
which the Group would deploy its capital should be complementary to its existing
Lloyd's business and involve no departure from Omega's long-established
underwriting discipline and focus. The development of those businesses should
enable the Group to extend its reach into the markets from which it already
sourced business for the Syndicate. The decision was therefore taken to
establish Omega Specialty in Bermuda and, subsequently, to establish Omega US in
the United States. Bermuda has emerged as the premier global market for a number
of the types of insurance and reinsurance business that Omega underwrites.
Establishing operations in the US will afford access to business that would not
otherwise be shown to the Group.
A majority of the Group's premium income is, and has been historically, derived
from business in the US (2006: 61%). In conjunction with the establishment of
the Group's operations in Bermuda and the US, Omega concluded that the Group
would be more appropriately headquartered in Bermuda, where the focus is the
development of the Bermuda and US businesses. Bermuda is seen as the key
location for the headquarters of groups whose principal business, like Omega's,
is the insurance and reinsurance of US based corporations and US based risks.
Beyond its strategic importance as a leading insurance market, the attractions
of Bermuda to the Group include its proximity and transport links to the US, the
insurance expertise, lower brokerage rates, good commercial and legal
infrastructure and the regulatory and tax environment. The Chairman of Omega and
the Group's Chief Executive are on the boards of both Omega Specialty and Omega
US. The Chief Executive has relocated to the US and spends the majority of his
time in Bermuda and the US.
On 9 November 2006 a scheme of arrangement became effective under which Omega
Insurance Holdings Limited, a Bermuda company, became the holding company of the
Omega Group. Shareholders in Omega Underwriting Holdings PLC, the previous
holding company received an equal number of shares in Omega Insurance Holdings
which was admitted to trading on AIM also on 9 November 2006.
In order to provide the Group under its new holding company with a structure
that is strategically, operationally and financially optimal, Omega sought and
gained consent from H. M. Treasury for the transfer of both Omega Specialty and
Omega US from Omega Underwriting Holdings in the UK to Omega Insurance Holdings
in Bermuda. Omega US was transferred to Omega Insurance Holdings by a dividend
in specie of its shares from Omega Underwriting Holdings in December 2006. Omega
Specialty was transferred, also by means of a dividend in specie, on 16 March
2007 to become a direct subsidiary of Omega Insurance Holdings.
The planned reorganisation of the Group as set out to shareholders in the Omega
Underwriting Holdings Scheme Circular in 2006 has now been completed.
The main operating units within the Group are:
- Omega Specialty Insurance Company Limited ("Omega Specialty"), a
Bermudian insurance company;
- Omega US Insurance, Inc. ("Omega US") a US insurance company;
- Omega Underwriting Agents Limited ("Omega Underwriting Agents"), a
Lloyd's managing agent, managing Syndicate 958;
- Omega Europe GmbH, ("Omega Europe"), a company based in Cologne
dedicated to servicing and developing our European and international
reinsurance business; and
- Omega Dedicated Limited ("Omega Dedicated"), a Lloyd's corporate
member supplying capital exclusively to Syndicate 958.
Underwriting Performance
2006 was a year in sharp contrast to the previous two years in terms of loss
activity. This is most readily reflected in the combined ratio of Syndicate 958,
being 72% for 2006, compared with 93% for 2005. The underwriting performance in
2006 reflects both the low level of incurred losses and the absence of any major
insured catastrophes as well as the strong market conditions following the loss
activity in 2004 and 2005.
The market in 2006 was not such that all classes of insurance were subject to
universally hard terms and conditions. Competition was apparent in areas such as
international property insurance and reinsurance. Omega reduced its exposures in
these classes of business. However, the areas of key focus in Omega's portfolio
traded at very attractive terms and conditions and robust margins. The lack of
availability of retrocessional reinsurance cover acted to underpin the market's
discipline. There was little retrocessional cover available that was on
appropriate conditions, at economic terms or from security of acceptable
quality.
Omega's portfolio has an inherent balance created by a diversity of both
geographic exposure and business class. This balance has been a major
contributor to the record of unbroken underwriting profitability, shown in the
results of Syndicate 958, which demonstrates relatively low volatility of
results.
In the circumstances, given the strong trading conditions on so much of Omega's
portfolio and the diversified balance inherent in the portfolio, it was judged
reasonable and appropriate for Omega's underwriting operations to bear increased
net exposures.
----------- -----------
2006 2005
US$'000 US$'000
----------- -----------
Gross premiums written 115,619 58,402
----------- -----------
Net earned premium 66,972 7,345
Claims incurred, net of reinsurance (32,152) (4,748)
Net operating charges (20,654) (2,333)
----------- -----------
Underwriting profit 14,166 264
----------- -----------
2006 2005
-------- --------
US $'000 US $'000
Geographical analysis of gross written premium
by location of risk
US 70,978 34,616
UK 15,369 7,567
Other EU countries 15,463 9,607
Other 13,809 6,612
--------- --------
115,619 58,402
--------- --------
2006 2005
Class analysis of written premium US$'000 US$'000
Non-marine property insurance 26,232 11,367
Property catastrophe treaty reinsurance 35,955 18,384
Property per risk treaty reinsurance 9,389 6,201
Professional indemnity insurance 8,601 4,255
Motor insurance and reinsurance 8,363 3,789
Marine insurance and reinsurance 13,290 8,069
Liability insurance and reinsurance 7,001 2,642
Other 6,788 3,695
-------- --------
115,619 58,402
-------- --------
Non-marine Property Insurance (23 per cent of gross premiums written in 2006):
The account remains core to Omega and is comprised of predominantly low value,
commercial risks. In 2006 the market for this class experienced significant
hardening, particularly in catastrophe exposed areas in the US. Non-US property
insurance experienced a weakening. Although Omega seeks to avoid significant
catastrophe exposures in its property insurance book, nonetheless the account is
predominantly US risks and overall was written at very attractive terms and
conditions.
Property Catastrophe Treaty Reinsurance (31 per cent of gross premiums written
in 2006):
The focus of this account in which Omega is an established underwriter is the
reinsurance of smaller to medium sized insurance companies. In a similar way to
the insurance account, catastrophe reinsurance treaties with US exposures were
significantly re-rated in 2006, following the impact of Hurricane Katrina in
2005, whereas competition intensified for some international areas. Omega
reduced its non-US exposures but was extremely pleased with the terms obtained
for its US reinsurance account. Gross aggregate exposures in most peak zones
were reduced relative to 2005 but income was increased. Net exposures were
larger proportionately than in 2005.
Property Per Risk Treaty Reinsurance (8 per cent of gross premiums written in
2006):
This account is written with a methodology and approach consistent with that
employed on the Property Catastrophe Treaty Reinsurance account, with a similar
bias towards the US and reinsuring smaller to medium sized insurers.
Professional Indemnity Insurance (7.5 per cent of gross premiums written in
2006):
Omega is an established leader in this class of business with its account
focused predominantly on small assureds in the US. The account experienced a
modest easing of rates but premiums remained at attractive levels.
Motor Insurance and Reinsurance (7 per cent of gross premiums written in 2006):
The majority of the insurance element of the account is vehicle physical damage
cover in the US and the reinsurance is comprised of reinsurances of European and
UK motor insurers, covering both physical damage and liability. The market
conditions in 2006 continued to be strong.
Marine Insurance and Reinsurance (11.5 per cent of gross premiums written in
2006):
The account is comprised principally of reinsurances of the direct marine
accounts of insurers, with more than half being on an excess loss basis and the
remainder being proportional. In the wake of the impact of Hurricanes Katrina,
Rita and Wilma on the marine market, there were significant revisions to the
pricing and structuring of marine reinsurance programmes, affording some very
attractive opportunities in this account. This business class also includes
Omega's insurance of yachts and small craft.
Liability Insurance and Reinsurance (6 per cent of gross premiums written in
2006):
Most of the liability insurance underwritten by Omega is the restricted coverage
given in conjunction with the writing of commercial property insurances. The
reinsurances are of European and UK general liability insurers on a risk excess
basis. Whilst the reinsurance business did not experience the strengthening of
rates and terms to which the property sector was subject, margins were
nonetheless maintained.
Other (6 per cent of gross premiums written in 2006):
Classes categorised as "other" include Omega's underwriting, on either an
insurance or reinsurance basis, of satellites, aviation hull war, fine art,
personal accident and kidnap and ransom. Omega underwrites these classes on an
opportunistic basis and therefore expands and contracts the individual lines of
business according to the market conditions.
Omega Specialty
Omega Specialty is a directly held and wholly owned subsidiary of Omega
Insurance Holdings and received its licence from the Bermuda Monetary Authority
in February 2006 as a Class 3 insurer. It was capitalised at US$172 million and
is rated A- (Excellent) by A.M. Best.
During 2006 Omega Specialty wrote gross premiums of US$105.5 million. This was
comprised predominantly of:
- a reinsurance of Omega Dedicated through which Omega Specialty assumed
the risk of the majority of the share of Syndicate 958's capacity
owned by the Group; and
- a 10% quota share reinsurance of Syndicate 958's whole account.
The total of gross written premiums is lower than the previous estimate of
US$145 million but the single largest component of the revision is a change in
the Group's approach to recognition of written premium in respect of small
business binding authority facilities. Only that part of the total twelve month
premium expected to be generated by a particular facility that relates to risks
attaching to the facility in that same calendar year as the inception of the
facility contract itself are now included in the estimate of gross written
premiums for the year in which the facility attaches. The premium derived from
risks attaching in the next calendar year is included in the written premium
estimate for the following year. Importantly, this adjustment has had no effect
on the earned premiums and therefore no effect on the result for 2006, because
none of the written premium that relates to risks attaching to the facilities
during 2007 would have been earned in 2006.
2006 has been an excellent start for Omega Specialty and solid foundations have
been laid down that will serve the company well into the future. Its combined
ratio for 2006 of 80% is not typical of other Bermudian insurers, particularly
those whose first year of trading was 2006. The majority of Bermudian insurers
have portfolios heavily weighted towards catastrophe reinsurance and their
combined ratios will reflect starkly the lack of major loss activity in 2006.
Omega Specialty's account has an inherent diversity and balance, reflecting its
proportional protection of Omega Dedicated and Syndicate 958's whole account.
Its earnings will therefore be relatively more consistent and subject to less
volatility than an account more focused on catastrophe reinsurance. Omega
Specialty also employs the same prudently conservative approach to recognition
of profits and reserving as that historically associated with the Group.
For 2007, Omega Specialty has renewed the reinsurance of Omega Dedicated and the
10% quota share reinsurance of Syndicate 958. In addition, Omega Specialty has
underwritten a 10% qualifying quota share of Syndicate 958's gross whole
account. This contract had the effect of increasing the capacity of the
Syndicate from £249 million to £274 million. This increase in capacity allowed
the Syndicate to expand its underwriting to include an account focused on
offshore energy.
Omega Specialty is also developing its account of third-party reinsurances. The
company is seeking to underwrite reinsurance business similar in type and
composition to that underwritten by Syndicate 958. Cedants are predominantly US
domiciled and smaller to medium sized insurance companies. Omega Specialty has
been pleased with the response it is receiving from both intermediaries and
cedants.
For 2007 Omega Specialty expects to write gross premiums of between US$200
million and US$250 million.
Syndicate 958
Syndicate 958 was established in 1979 to commence underwriting for the 1980 year
of account. It has closed every year of account since its formation at an
underwriting profit, creating an exceptional record of outperformance of the
insurance market across the underwriting cycles. The Syndicate has a capacity of
£274 million for 2007 and is rated A (Excellent) by A.M. Best.
Some 84% of the 2006 year of account capacity of Syndicate 958 is supported by
third-party Names. Omega's own capital supports 15.2% of 958's stamp.
The effective capacity shown below includes a qualifying quota share reinsurance
written by OSIL.
Syndicate 958 - Capacity and profit forecasts
Year of account
2007 2006 2005 2004
Capacity £249m £249m £224m £224m
Effective Capacity £274m
Omega Dedicated share of capacity 16.4% 16.4% 12.9% 1.9%
Omega Group retained share of capacity 15.2% 15.2% 0.5% 0.4%
Omega Group retained share of effective
capacity 22.9%
Profit after standard personal expenses
(* forecasts) 12.5% - 20%* 5% - 10%* 7.6%
The table above shows that the Syndicate has produced a profit for 2004 and is
forecasting a profit for 2005 despite the major hurricanes experienced in those
two years. In 2004 Hurricanes Charley, Frances, Jeanne and Ivan all visited
damage upon Florida. The following year Hurricanes Katrina, Rita and Wilma
brought devastation to the US Gulf coast and Florida.
The Syndicate's portfolio has a diversity of both business class and geographic
spread providing an inherent balance which is reflected in the low volatility of
its results relative to the Lloyd's market as a whole.
100% syndicate figures and ratios
US$'000 Syndicate 958 business
2006 2005 2004
Gross premium written 462,755 438,407 378,159
Net premiums earned 339,862 362,695 287,930
Technical result before personal expenses 96,038 37,738 43,280
Claims ratio 41% 64% 50%
Expense ratio 31% 29% 35%
Combined ratio 72% 93% 85%
The Syndicate combined ratio is stated before exchange movements and standard
member personal expenses.
Omega US
Omega US Insurance is the Group's newly established US surplus lines insurer,
domiciled in Delaware and intending to underwrite on a surplus lines basis, in
all other US states once the company has been granted the requisite eligibility
in each state.
At a capitalisation of US$50 million, from the proceeds of the placing in
October 2006, the company will be seeking a rating from A.M. Best in the near
future. Omega US will be seeking to develop a book of business very similar in
composition to the US property insurance account underwritten by Syndicate 958.
It will be targeting small-sized, commercial, property-orientated business and
seeking to underwrite predominantly in those geographic areas in the US that are
not directly accumulatory with the Group's peak catastrophe zones. It is
intended that Omega US be developed in a way that is complementary to Syndicate
958 and will be seeking business that would not in any event have been offered
to the Syndicate in London.
The Group is delighted to have secured the services of John Curry as Vice
President of Underwriting of Omega US. Prior to joining Omega John was Senior
Vice President of Underwriting and Marketing for United America Indemnity
Insurance Group. He has 33 years of experience in the US insurance industry,
focused very particularly on those areas of business which Omega US intends to
pursue.
No business was written by Omega US in 2006.
Omega Europe
The Group established its operations in Germany in late 2003 to complement the
development of Omega's European reinsurance account. Based in Cologne, it offers
clients access to all of the Omega group's services and is able to facilitate
the placement and servicing of reinsurance business with Syndicate 958.
The team in the Omega offices in Cologne offers a single point of contact for
all enquiries relating to reinsurance business of either a proportional or
non-proportional basis. They are able to inform clients/brokers of the rates,
terms and conditions offered by the Omega Group's underwriters and provide
confirmation of the line that will be underwritten.
Following the placement of business with Syndicate 958, the team in Cologne
again offer a single point of contact for delivering documentation, wordings and
accounting information. Clients are able to contact the team in Cologne on all
matters, including the processing of all premiums and claims.
Whilst market conditions in international reinsurance business are being
adversely impacted by competition driven in part by the quest for diversity, the
Group is pleased with the access Omega Europe provides to attractive business
that would not otherwise be seen.
People
The Group's exceptional achievements and record are the product of its talented
and experienced people. Its remarkable record of retaining key members of staff
continues. Staff turnover in 2006 was again below 3%.
Simultaneous with the expansion of the Group's operations, the management team
has been strengthened in the past twelve months with appointments to the roles
of:
* Group Finance Director (to start in May 2007);
* Group Chief Operating Officer;
* Group Compliance Officer;
* Managing Director of OUAL;
* Vice-President of Underwriting for its newly established US operation;
* Offshore Energy and Onshore Power Underwriter; and
* Binding Authority Manager.
The successful record of Omega and its approach to business, together with its
enhanced international profile, make the Group attractive as an employer to
individuals of the quality that it is seeking to employ.
Outlook
It is most certainly the case that underwriting conditions are not uniform
across all classes of business in 2007. Some areas of business have already
experienced quite significant softening, driven largely by competition for risks
that are thought, by some at least, to be less hazardous or to offer diversity
from peak catastrophe accumulations. The absence of insured catastrophe losses
in 2006 would appear to have generated an excessive degree of comfort in some
underwriters with the levels of risk they are prepared to run. That said, judged
against the past, an encouraging level of discipline is still being displayed by
the market as a whole in key areas.
Much commentary has been published on the legislation passed in Florida in
February 2007 which increased the levels of coverage provided by the
state-funded Florida Hurricane Catastrophe Fund. Opinions have varied as to the
effect of the reform on the conventional reinsurance industry and differing
estimates have been provided as to the total of the reinsurance premiums that
might be lost from the conventional market. The nature of the Group's Florida
reinsurance portfolio, which is weighted towards protecting commercial insurers,
rather then homeowner writers, and the attachment point of many of the
reinsurances underwritten by Omega mean that Omega does not anticipate a
material reduction in its reinsurance premium income for 2007 as a result of the
Florida legislation.
Philip Thorpe-Apps joined the Group in January 2007 to develop an account
focused predominantly on offshore energy and onshore power risks. This is
consistent with Omega's focus upon transparent, short-tail business and an
opportune expansion into a well-rated area of business.
The prospects for Omega for 2007 and beyond are particularly positive. There are
a number of reasons why this is the case:
- Omega's key underwriting accounts are focused in areas, both in
terms of business class and geography, where market conditions
remain most robust and margins continue to afford the prospect of
healthy returns
- The Group is now positioned with an efficient operating structure
that provides it with access to the major markets of London,
Bermuda and the US and will optimise its earnings
- Omega will drive forward by building upon the key factors that
have made it exceptionally successful to date, including its
disciplined focus upon the quality and consistency of its
underwriting and the prudent approach to the management of risk.
Since its flotation in 2005 Omega has retained an unwavering focus upon its
underwriting, clearly demonstrated in its results, whilst at the same time
investing time and resource for the future. As the Group matures into its
enhanced structure that investment can be expected to yield handsome rewards.
Financial Review
Table of financial highlights
2006 2005
US$'000s US$'000s
Gross written premium 115,619 58,402
Net earned premium 66,972 7,345
------------- ------------
Underwriting result 14,166 264
Investment return 10,990 1,931
Managing agents activities 4,989 12,019
Group expenses (8,110) (2,717)
------------- ------------
Profit before tax 22,035 11,497
------------- ------------
Profit after tax 15,103 11,686
------------- ------------
Per share amounts
- Net tangible assets US$1.80 US$1.64
- Earnings US$0.12 US$0.30
- Dividend 4.1 pence 3.5 pence
The earnings per share figure is based on the weighted average number of shares
in issue during the reporting period. The capital raising during December 2005
created 82 million new shares and is the major component in the significant
increase in the weighted average number of shares in issue to 125 million shares
in 2006, from 39 million in 2005. The earning patterns applied to insurance
premium means that the full effect of utilising this capital will not be seen
until 2007.
Overview of financial result
The Group has recognised a significant profit before tax of US$22.0 million
(2005: US$11.5 million) during the year, principally derived from the Group's
increased level of retained (or own) underwriting.
As reported in last years accounts the Group has deployed the majority of the
capital raised during 2005 in the formation and capitalisation of Omega
Specialty Insurance Limited. Omega Specialty secured an AM Best rating of A- and
commenced underwriting in early 2006. In 2006 Omega Specialty wrote both
specific reinsurances of Syndicate 958 and a reinsurance of the corporate name,
Omega Dedicated Limited, which underwrites solely on Syndicate 958. The
underwriting result (as discussed below) is reflective of the excellent results
of Syndicate 958 and its continued profitable track record.
The managing agency continues to contribute positively to the group result,
again reflective of the positive underwriting results of Syndicate 958.
2006 is in effect a year of transition for the Omega Group. For the first time,
through Omega Specialty, its new underwriting platform in Bermuda, Omega began
to retain a material proportion of the underwriting that had historically been
conducted on behalf of the third party capital supporting Syndicate 958.
In October 2006 a further £32.8 million (US$62 million) net of expenses was
raised by way of an additional placing to establish a US subsidiary, Omega US
Insurance Company, Inc., another platform which will begin underwriting in 2007.
This year also saw the formation of a new holding company, Omega Insurance
Holdings Limited, domiciled in Bermuda whose shares were admitted to trading on
AIM on 9 November 2006, replacing by a one for one exchange those of Omega
Underwriting Holdings.
These transactions combine to provide the Omega Group with an optimal
underwriting and financial structure as the underwriting account matures and
grows into 2007 and 2008.
The extent of the change in the Group's structure and operations complicates the
comparisons of the 2006 result with those of the previous year.
During the year under review the Group has adopted a reporting currency of US$
in recognition of the change in the Group, both in terms of income streams and
transactions. All of the comparatives within the financial statements have been
restated to reflect this.
Omega Underwriting Holdings PLC paid a special interim dividend to the
shareholders on the register as at 20 October 2006 of 4.1 pence per share. This
dividend represented the interim and final dividend for 2006.
Underwriting result
During the year under review the Group had the following main sources of
underwriting income.
Firstly Omega Specialty supports the Group's own share of the underwriting in
Syndicate 958 via a reinsurance of the dedicated corporate vehicle Omega
Dedicated Limited. The balance of the corporate name's participation in the
Syndicate is not reinsured through to Omega Specialty and is principally written
by third parties.
Secondly, Omega Specialty underwrote reinsurances of Syndicate 958 predominantly
a direct quota share reinsurance contract. The Syndicate typically purchased
reinsurance from third party reinsurers. However in the wake of the 2004 and
2005 catastrophe experiences and the impact this had on the reinsurance market
no suitable reinsurance cover with appropriate terms and conditions at economic
rates was offered to the Syndicate. Omega Specialty was able to offer a whole
account quota share reinsurance to the Syndicate.
As a consequence of Omega Specialty's underwriting, the Group's retained net
earned premium has increased to US$67.0 million (2005 - US$7.3 million). Of the
net earned premium US$64.5 million relates to the 2006 year of account of
Syndicate 958.
As reported earlier, the benign loss experience experienced over the last 12
months has resulted in an excellent underwriting result being reported for Omega
Specialty's first year of operation.
The underwriting result of the Group for the year is US$14.2 million (2005 -
US$0.3 million) before investment income.
Future prospects
Presently a significant proportion of Omega Specialty's underwriting is only
fully recognised 18 to 24 months after the relevant year of account has begun.
As a consequence each year will not only benefit from its own careful risk
selection but the prudent risk selection from the previous years which continues
to earn through into the next calendar year. This is, in part, reflected by net
unearned premium of US$25.5 million on the year end balance sheet relating to
the 2006 year of account.
For 2007 Omega Specialty has renewed the whole account quota share reinsurance
of the Syndicate. In addition the Group announced in January 2007 that Omega
Specialty has entered into a qualifying quota share arrangement with Syndicate
958. This QQS will allow Syndicate 958 to increase its capacity by £25 million
in order to develop a new marine and energy insurance account.
The Group's third underwriting platform Omega US, complementing the Bermudian
and London operations is planned to commence underwriting during 2007. This will
further enhance the Group's international presence and relationships with its
key markets.
Managing agency
Omega Underwriting Agents receives income from its managed syndicate by way of a
managing agent's fee and a profit commission.
The agency fee reimburses the Agency for the management of a year of account.
The year of account is normally closed at the end of the third year with work on
the closure of that year of account continuing into the first quarter of the
fourth year. The agency fee is therefore recognised over the three open years of
a year of account and an element in the fourth year reflecting the closing of
the year of account and the associated reporting.
Profit commissions are payable to the Agency by its managed syndicate (Syndicate
958) upon closure of a profitable underwriting year, three years after each
underwriting year has commenced. In accordance with generally accepted
accounting practice the Agency recognises the profit commission ahead of its
receipt. Consistent with the Group's conservative strategy any such recognition
is always on a prudent basis and in line with the published forecasts.
The Managing Agency income can be further summarised as follows:
Managing agent income 2006 2005
US$'000 US$'000
Profit commission recognised in the period 7,588 8,277
Additional profit commission recognised upon a change in
recognition policy - 5,073
Agency fees 3,218 2,803
Expenses net of other income (5,817) (4,134)
4,989 12,019
The one-off additional recognition in 2005 for US$ 5 million was as a result of
the Agency adopting a new basis of recognition in line with the profile of the
underlying risks written. This additional recognition during 2005 distorts the
year on year comparison. The profit commission recognised during 2006 is
consistent with the underlying performance of the Syndicates 2004 and 2005 years
of account which although remaining profitable have suffered above average
hurricane activity.
Future prospects
No profit commission has been recognised within these results on the 2006 year
of account. The current estimate for 2006 is a range of 12.5% to 20% return. The
majority of the profit commission on this result will flow through to earnings
in 2007 and the remainder in 2008.
The Managing Agent derive fees and profit commission based on the capacity of
the managed Syndicate which for 2007 is £249 million and for 2008 will reflect
the incorporation of the qualifying quota share reverting to the Syndicate.
Investment return
The Group's investments comprise directly owned investments supporting the
underwriting businesses, and the Group's share of the Syndicate investments.
All of Omega's financial investments are managed under the guidance of the Group
Investment Committee which is responsible for setting the investment strategy,
guidelines and approving the appointment of investment managers.
The cautious investment strategy is designed to avoid excessive fluctuations in
non-underwriting results and is intended to ensure that shareholders' capital is
available for deployment in support of Omega's underwriting.
The syndicate investments are outsourced to investment managers under the
direction of the managing agent finance committee. A conservative investment
strategy is applied to these funds reflecting the short-tail nature of the
Group's insurance portfolio and the annual venture nature of Lloyd's Syndicates.
The investment return for the period has principally derived from funds used to
capitalise Omega Specialty in Bermuda; funds raised at the end of the year to
capitalise Omega US; and the share of the Syndicate funds and funds used to
support the UK operations. These have been analysed further below.
Funds and returns thereon are as follows:
Funds Income Average Return
US$'000 US$000 %
Omega Specialty Bermuda 180,526 8,221 5.6%
Corporate funds 73,606 1,929 3.3%
Syndicate funds 50,135 1,636 4.1%
304,267 11,827
The investment contribution during 2006 from Omega Specialty was US$8.2 million.
The majority of investments were placed in AAA mutual funds which returned 5.5%.
Within corporate funds the group is holding US$49.0 million cash at the year end
which was used to capitalise the new US entity subsequent to the year end.
Future strategy
The Group will continue to pursue a conservative investment strategy with
investment in primarily short-duration, high-grade, fixed-income securities.
It is intended that the management of the Group's capital will be outsourced to
investment specialists, under strict guidelines. The investment strategy of the
Group and Syndicate funds will continue to seek to maximise the investment
returns but only to the extent consistent with the principal aims of
diversification of risk, the preservation of capital and liquidity of funds.
Group expenses
2006 2005
US$'000 US$'000
Other group expenses (7,009) (2,586)
Cost of Finance (minority interests) (1,101) (131)
Group expenses (8,110) (2,717)
The Group undertook a major reorganisation in 2006 by means of a scheme of
arrangement and Omega Insurance Holdings Limited was established as the holding
company. In addition Omega US and its direct holding company were established,
and the subsidiary companies in the US and Bermuda were transferred to Omega
Insurance Holdings Limited to achieve the optimal corporate structure. Increased
expenses comprise some of the incidental costs associated with this
reorganisation and a general increase in the operating costs of the larger
group.
Costs associated with the additional raise along with most of the reorganisation
costs of the Group have been taken to the share premium account. A resolution to
reduce the share premium account of Omega Insurance Holdings and create a
contributed surplus (which is treated as distributable reserve) will be put to
the Annual General Meeting.
Cost of finance represents the profit attributable to the minority interests of
the subsidiary company: Omega Dedicated Limited.
Foreign exchange
A foreign exchange gain of US$5.2 million has been taken directly to reserves in
the statement of total recognised gains and losses. This mainly represents the
revaluation of sterling funds held in Omega Underwriting Holdings Limited
(previously Omega Underwriting Holdings PLC) prior to their allocation to other
group companies. Going forward, foreign exchange differences relating to the
translation of foreign Group companies will continue to be recognised in the
statement of total recognised gains and losses, but it is intended that Group
surplus funds will be transferred to the holding Company and held in US$.
Taxation
The Group's effective tax rate for 2006 reflects the fact that Omega Specialty
Insurance Limited was a controlled foreign company ('CFC') for UK tax purposes
during the year and therefore its profits are subject to UK taxation (by being
apportioned to Omega Underwriting Holdings Limited). In order to reduce the tax
impact of this, Omega Specialty has followed an 'acceptable distribution policy'
in respect of 2006, whereby 90% of its net chargeable profits have been
distributed to Omega Underwriting Holdings Limited with the effect that these
profits are subject to an effective tax rate of 27% rather than the statutory UK
rate of 30%.
As previously reported during the 2005 calendar year on the introduction of
Omega Dedicated (No. 2) Limited ("Omega Dedicated 2") into the Group, £7.9
million of unrelieved UK tax losses became available. The available losses were
offset against the Group's 2005 calendar year profits.
As a consequence only a minimal UK current tax charge was incurred on the
Group's profit for the 2005 calendar year.
Future taxation
Since the year end Omega Specialty Insurance Limited, as previously explained,
became a direct subsidiary of Omega Insurance Holdings Limited on 16 March 2007.
Accordingly since that date any profits generated by Omega Specialty Insurance
Limited should not be subject to UK tax by way of apportionment under the UK CFC
rules. Additionally any distributions made by Omega Specialty Insurance Limited
after that date should not be taxable in the UK. This is expected to result in a
material reduction in the Group's effective tax rate for 2007 and future years.
Dividend policy
Following the Group's strong interim results, and in advance of both the issue
of new ordinary shares in October 2006 and the scheme of arrangement becoming
effective in November 2006, the Board of Omega Underwriting Holdings PLC was
pleased to declare a special interim dividend of 4.1p per share payable to those
shareholders on the register of that company on 20 October 2006. This was a 17
per cent increase in the level of the special interim dividend declared in
November 2005 (3.5p per share). Both dividends represented the interim and final
dividends for the 2005 and 2006 years respectively.
The special interim dividend of 4.1p was paid on a share capital base
approximately three times the size of the 3.5p special interim dividend paid in
2005. This reflects not only the increased earnings potential of the Group but
also the Board's confidence in the current and future prospects of the Company.
In this Company's admission document in 2006 we stated that is the intention of
the Directors to pay out a substantial part of Omega's distributable profits as
dividends. Going forward, the Board intends to declare dividends following
publication of interim and final results on a calendar basis but also to declare
special dividends when individual events or levels of Group profitability lead
to such dividends being an appropriate course of action. The Board intends that
there be an active management of the Group's capital base.
Future dividends will be declared in US dollars but a pounds sterling election
will be made available to those shareholders who wish to receive payments in
pounds sterling. The currency exchange rate applying to pounds sterling dividend
elections in the future will be notified to shareholders at the relevant future
date.
Balance sheet
The continued strength and make up of the balance sheet over the last calendar
year are testament to the Group's increased deployment of capital to
underwriting and also the raising of US$62 million net of expenses in October
2006 to fund our new US operations.
The consolidated balance sheet of the Group includes its share of the assets and
liabilities of Syndicate 958. These assets and liabilities relate to the
Syndicate's open years of account and remain with the Syndicate until closure of
the year at which time the result is released to the Group.
Of the total consolidated assets of the Group US$115 million relate to the
assets of the Syndicate.
Cash and investments have increased by over US$98 million during the year. The
US$62 million net capital raised in November 2006 obviously forms the largest
part of that increase. Cash and investments also include the Group's share of
the Syndicate cash and investments and the majority of the increase reflects the
Group's underwriting on the 2006 year of account.
Funds at Lloyd's, representing cash deposits at Lloyd's and cash and cash
alternatives held at the bank to support a letter of credit deposited at
Lloyd's, are included within cash.
Consolidated Profit and Loss Account - General Business Technical Account
Year ended 31 December 2006
Notes 2006 2005
US$'000 US$'000
Earned premiums, net of reinsurance
Gross premiums written 1 115,619 58,402
Outward reinsurance premiums (26,680) (51,561)
----------- -----------
Net premiums written 88,939 6,841
Change in the provision for unearned premium:
Gross amount (16,403) (11,892)
Reinsurers' share (5,564) 12,396
----------- -----------
66,972 7,345
Allocated investment return transferred from the
non-technical account 2 9,857 277
Reinsurers' share of allocated investment return (819) (144)
----------- -----------
Total technical income 76,010 7,478
----------- -----------
Claims incurred, net of reinsurance
Claims paid:
Gross amount (41,311) (12,847)
Reinsurers' share 34,975 10,434
----------- -----------
(6,336) (2,413)
----------- -----------
Change in the provision for claims:
Gross amount (11,049) (49,415)
Reinsurers' share (14,767) 47,080
----------- -----------
(25,816) (2,335)
----------- -----------
(32,152) (4,748)
Net operating expenses 3 (24,357) (10,796)
Reinsurers' share of net operating expenses 3,703 8,463
Investment expenses and charges (36) (7)
Reinsurers' share of investment expenses and
charges 18 4
----------- -----------
Total technical charges (52,824) (7,084)
----------- -----------
Balance on technical account - general business 23,186 394
----------- -----------
Consolidated Profit and Loss Account - Non-Technical Account
Year ended 31 December 2006
Notes 2006 2005
US$'000 US$'000
Balance on the technical account - general 23,186 394
business
Investment income 11,843 2,363
Realised gains and losses on investments (58) (184)
Unrealised gains and losses on investments 42 (68)
Investment expenses and charges - (33)
Allocated investment return transferred to the
general business technical account 2 (9,857) (277)
Other income 4 11,787 16,919
Other charges, including amortisation (14,908) (7,617)
----------- ----------
Profit on ordinary activities before tax 22,035 11,497
Tax (charge)/credit on profit on ordinary 7 (6,933) 189
activities ----------- ----------
Profit on ordinary activities after tax
attributable to shareholders of the Group 15,102 11,686
----------- ----------
Earnings per share - basic 8 US$0.12 US$0.30
Earnings per share - diluted 8 US$0.12 US$0.30
The profit and loss account relates entirely to continuing activities.
Consolidated Statement of Total Recognised Gains and Losses
Year ended 31 December 2006
2006 2005
US$'000 US$'000
Profit attributable to shareholders of the Group 15,102 11,686
Exchange difference on retranslation of
foreign currency net assets 5,166 -
----------- ----------
Total recognised profits for the year 20,268 11,686
----------- ----------
Consolidated Balance Sheet
As at 31 December 2006
Notes 2006 2005
US$'000 US$'000
ASSETS
Intangible assets
Syndicate participations 9 - 29
-------- -----------
- 29
-------- -----------
Investments
Financial investments 12 222,919 48,153
Deposits with ceding
undertakings - 105
Funds held in overseas
deposits 171 948
-------- -----------
223,090 49,206
-------- -----------
Reinsurers' share of technical provisions
Provision for unearned
premiums 8,437 1,873
Claims outstanding 21,059 31,387
-------- -----------
29,496 33,260
-------- -----------
Debtors
Debtors arising out of
direct insurance operations 15,688 14,906
Debtors arising out of
reinsurance operations 32,158 8,961
Other 13 17,154 12,807
-------- -----------
65,000 36,674
-------- -----------
Other Assets
Tangible assets 10 211 83
Cash at bank and in hand 11 81,348 156,929
-------- -----------
81,559 157,012
-------- -----------
Prepayments and accrued income
Deferred acquisition costs 8,623 4,663
Other prepayments and
accrued income 14 5,992 4,960
-------- -----------
14,615 9,623
-------- -----------
Total assets 413,760 285,804
-------- -----------
Consolidated Balance Sheet
As at 31 December 2006
Notes 2006 2005
US$'000 US$'000
LIABILITIES
Capital and reserves
Called up share capital 15 14,736 10,392
Share premium account 247,418 170,471
Own shares 23 (98) (127)
Profit and loss account 3,066 14,501
--------- --------
Shareholders' funds 16 265,122 195,237
--------- --------
Technical Provisions
Provision for unearned premiums 33,929 14,629
Claims outstanding 69,525 54,796
--------- --------
103,454 69,425
--------- --------
Creditors
Creditors arising out of direct insurance operations 6,506 3,091
Creditors arising out of reinsurance operations 16,910 7,628
Other creditors including taxation and social 17 13,697 7,399
security --------- --------
37,113 18,118
--------- --------
Accruals and deferred income 18 8,071 3,024
--------- --------
Total liabilities and shareholders' funds 413,760 285,804
--------- --------
--------- --------
Net assets per share US$1.80 US$1.64
Net tangible assets per share US$1.80 US$1.64
--------- --------
Consolidated Statement of Cash Flows
Year ended 31 December 2006
Notes 2006 2005
US$'000 US$'000
Net cash inflow from operating activities 20 47,471 24,728
Return on Investments and Servicing of Finance
Servicing of finance (455) (140)
Taxation
Corporation tax paid (1,547) (1,119)
Capital expenditure and financial investment
Purchase of tangible fixed assets (193) (72)
Purchase and sale of investments 22 (173,900) (45,887)
Equity dividends
Equity dividends paid (9,337) (2,350)
Financing
Issue of ordinary share capital 65,801 189,198
Costs of issue (3,808) (10,196)
Reorganisation and listing costs (5,197) -
---------- ---------
Net cash (outflows)/inflows 21 (81,165) 154,162
---------- ---------
Accounting Policies
Basis of Preparation
The consolidated accounts are prepared in accordance with UK Generally Accepted
Accounting Practice ("UK GAAP"), and with the Statement of Recommended Practice
on Accounting for Insurance Business issued by the Association of British
Insurers (the "ABI SORP") dated December 2005 and amended in 2006, except that
foreign exchange differences arising from underwriting operations are included
in the technical account rather than the non-technical account as recommended by
the ABI SORP.
Where the Group participates in insurance business as a member of Lloyd's the
Group's share of the technical result, assets, and liabilities of the syndicate
on which it participates are included on an annual accounting basis.
The parent company has taken advantage of the exemption from presenting separate
financial statements for a Bermudian registered company that prepares
consolidated accounts.
Basis of Consolidation and Accounting
The consolidated accounts incorporate the accounts of Omega Insurance Holdings
Limited and all its subsidiary undertakings ("the Group") drawn up to 31
December 2006.
Omega Insurance Holdings Limited was formed in August 2006 and became the new
parent company of the Group as a result of the Group reorganisation in November
2006. The comparative figures represent the Group as at 31 December 2005 and
incorporate the accounts of Omega Underwriting Holdings PLC and all its
subsidiary undertakings at that date.
The Group has changed its functional and reporting currency from sterling to US
dollars with effect from 1 January 2006. The comparative figures have been
presented in US dollars applying the rates set out in note 26. The US dollar
more accurately reflects the currency of the underlying operations of the Group
from 1 January 2006, the date from which the Group retains a more substantial
volume of the underwriting risk.
Premiums
Written premiums comprise the total premiums receivable for the whole period of
cover under contracts incepting during the financial year, together with
adjustments arising in the financial year to premiums receivable in respect of
business written in previous financial years.
All premiums are shown gross of commission payable to intermediaries and are
exclusive of taxes and duties levied thereon.
Outwards reinsurance premiums are accounted for in the same accounting period as
the premiums for the related direct or inwards business being reinsured.
Written premiums are earned over the period of the policy on a time
apportionment or more appropriate basis, having regard to the exposure of the
risk.
Unearned Premiums Provision
The provision for unearned premiums represents the proportion of gross written
premium which is estimated to relate to exposures in subsequent financial
periods.
Claims
Claims incurred comprise the estimated cost of all claims occurring during the
period, whether reported or not, including related direct and indirect claims
handling costs and adjustments to claims outstanding from previous periods.
The provision for claims outstanding is made on an individual case basis and is
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. The provision also includes the estimated cost of claims incurred but not
reported at the balance sheet date based on statistical methods. The estimation
process includes the use of statistical projections based on previous claims
history, case by case reviews of notified losses, and the use of security
ratings to help assess the financial ability of reinsurers to pay the
reinsurance recoveries anticipated of them.
The provision for claims outstanding is based on information available at the
balance sheet date. Significant delays are experienced in notification and
settlement of certain claims and accordingly the ultimate cost of such claims
cannot be known with certainty at the balance sheet date. Subsequent information
and events may result in the ultimate liability being less than, or greater
than, the amount provided. Any differences between provisions and subsequent
settlements are dealt with in the technical account - general business of later
periods.
Deferred Acquisition Costs
Acquisition costs, comprising commission and other costs related to the
acquisition of insurance contracts are deferred to the extent that they are
attributable to premiums unearned at the balance sheet date.
Unexpired Risks
Provision is made where the cost of claims and 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 deferred acquisition costs,
and premiums receivable.
Quota share reinsurances
Omega Dedicated Limited is reinsured through a quota share reinsurance contract
with a third party on the 2005 year of account. The revenue relating to the
third party reinsurer has been included on the reinsurers share line of
premiums, claims, provisions and expenses. The net balance due to the third
party reinsurer under the quota share contract has been included under creditors
arising out of reinsurance operations.
Omega Specialty Insurance Limited reinsures Syndicate 958 through a quota share
reinsurance contract. Where this represents a reinsurance of third party names
this is accounted for in the same way as other insurance business.
Investment Return
Investment return comprises all investment income, realised investment gains and
losses and movements in unrealised gains and losses, net of investment expenses,
charges and interest.
Realised gains and losses on investments are calculated as the difference
between sale proceeds and purchase price. Unrealised gains and losses on
investments represent the difference between the valuation at the balance sheet
date and their valuation at the previous balance sheet date or purchase price if
acquired during the year, together with the reversal of previously recognised
unrealised gains and losses in respect of investments disposed of in the current
year.
Investment return is included initially within the non-technical account. An
allocation to the technical account is made to reflect the investment return on
the Group's share of Syndicate investments and funds supporting the underwriting
participation.
Other income
Other income includes fees and profit commission charged by the Group to third
party members of Syndicate 958.
Agency fees are charged to a year of account and earned over four years until
its expected closure, in line with the services provided.
Profit commission is receivable on closure of the relevant Lloyd's year of
account, normally after three years. It is accrued during the second and third
years of account when it is reasonably certain that further development will not
result in its reversal.
Investments
Investments are stated at their current values at the end of the year. Listed
investments are included in the balance sheet at mid-market value. Deposits with
credit institutions are included at cost.
Deferred Tax
Deferred tax is recognised in respect of all timing differences that have
originated but not reversed at the balance sheet date where transactions or
events have occurred at that date that will result in an obligation to pay more,
or a right to pay less tax.
Deferred tax assets are recognised only to the extent that the directors
consider that it is more likely than not that there will be suitable taxable
profits from which the future reversal of the underlying timing differences can
be deducted.
Deferred tax is measured on an undiscounted basis at the tax rates that are
expected to apply in the periods in which timing differences reverse, based on
tax rates and laws enacted or substantively enacted at the balance sheet date.
Syndicate Participation
Syndicate capacity purchased at auction is capitalised at cost and amortised on
a straight-line basis over its estimated useful life of 5 years. Amortisation is
charged from the first accounting period following acquisition. The carrying
value is reviewed for impairment if events or changes in circumstances indicate
that the carrying value may not be appropriate.
Depreciation
Depreciation is charged to write off the cost of all tangible fixed assets, in
equal annual instalments over their estimated useful lives at the following
rates:-
Office furniture 20% per annum
Computer equipment 33% per annum
Leases
Rentals payable under operating leases are taken to the profit and loss account
on a straight line basis over the lease term.
Pension Costs
The Group operates a defined contribution pension scheme. Contributions are
charged to the profit and loss account as they become payable in accordance with
the rules of the schemes.
Foreign Currencies
Transactions in foreign currencies are recorded at the rates of exchange
prevailing on the dates of the transactions. At each balance sheet date,
monetary assets and liabilities that are denominated in foreign currencies are
retranslated at the rates prevailing at the balance sheet date. Gains and losses
arising on retranslation are included in the technical account when related to
underwriting operations and the non-technical account when arising from other
sources.
On consolidation the financial statements of Group companies with non-US dollar
functional currencies have been translated using the closing rate method. Assets
and liabilities are translated into US dollars at the rates ruling at the
balance sheet date. Profit and loss account figures are translated into US
dollars at average rates of exchange ruling during the year, which approximate
to actual exchange rates. Exchange differences arising from the translation of
foreign Group companies are recognised in the statement of total recognised
gains and losses.
Forward Exchange Contracts
When deemed appropriate by management the Group may enter into forward exchange
contracts to guarantee the rate of exchange receivable on income denominated in
currencies other than the Group's reporting currency. These contracts are
entered into to limit the downside of any currency fluctuation and are not
speculative in nature. For reporting purposes any income protected is reported
at the guaranteed rate of the relevant contract.
Own Shares
Own shares are stated at cost and shown as a deduction from shareholders' funds.
No gain or loss is recognised in the profit and loss account, or statement of
total recognised gains and losses, on the purchase, sale, issue or cancellation
of the company's shares.
Share Based Payments
In accordance with Financial Reporting Standard ("FRS") 20 the fair value of
equity-settled share-based payments to employees is determined at the date of
grant and is expensed on a straight-line basis over the vesting period based on
the Group's estimate of shares or options that will eventually vest. In the case
of options granted, fair value is measured by a binomial model the material
inputs of which are set out in note 24.
Notes to the Accounts
1. Segmental information
Gross premiums Gross premiums Gross claims Gross operating Reinsurance Total
written earned incurred expenses balance
2006 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
Non-marine
property insurance 26,232 17,101 (9,072) (5,526) (1,461) 1,042
Property catastrophe
treaty reinsurance 35,955 36,324 (10,380) (7,575) (5,622) 12,747
Property per risk
treaty reinsurance 9,389 7,833 (5,570) (1,978) (299) (14)
Professional indemnity
insurance 8,601 4,765 (2,924) (1,812) (306) (277)
Motor insurance
and reinsurance 8,363 8,458 (6,339) (1,762) (107) 250
Marine insurance
and reinsurance 13,290 12,910 (9,467) (2,799) (244) 400
Liability insurance
and reinsurance 7,001 5,364 (3,361) (1,475) (212) 316
Other 6,788 6,461 (5,247) (1,430) (82) (298)
-------- ------- -------- -------- -------- -------
Total 115,619 99,216 (52,360) (24,357) (8,333) 14,166
-------- ------- -------- -------- -------- -------
Gross premiums Gross premiums Gross claims Gross operating Reinsurance Total
written earned incurred expenses balance
2005 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
Non-marine
property insurance 13,205 8,229 (6,651) (2,452) 1,062 188
Property catastrophe
treaty reinsurance 16,539 14,715 (29,669) (3,071) 16,731 (1,294)
Property per risk
treaty reinsurance 6,573 5,571 (8,161) (1,221) 3,328 (483)
Professional indemnity
insurance 4,517 2,353 (1,233) (839) (252) 29
Motor insurance
and reinsurance 4,210 3,969 (2,598) (782) (116) 473
Marine insurance
and reinsurance 7,309 6,629 (10,640) (1,357) 6,263 895
Liability insurance
and reinsurance 2,460 1,848 (1,201) (457) (58) 132
Other 3,589 3,196 (2,109) (667) (96) 324
-------- ------- -------- -------- -------- -------
Total 58,402 46,510 (62,262) (10,846) 26,862 264
-------- ------- -------- -------- -------- -------
2006 2005
US$'000 US$'000
Geographical analysis of gross premiums written by location
of risk
US 70,978 34,616
UK 15,369 7,567
Other EU countries 15,463 9,607
Other 13,809 6,612
--------- ---------
115,619 58,402
--------- ---------
--------- ---------
Analysis of Profit and loss account by income streams 2006 2005
US$'000 US$'000
Underwriting activities 14,166 264
Investment activities - net allocated to technical account 9,020 130
--------- ---------
Technical result 23,186 394
Investment activities - net retained in non-technical
account 1,970 1,801
Managing agency activities 4,989 12,019
Other group expenses (8,110) (2,717)
--------- ---------
Profit on ordinary activities before tax 22,035 11,497
--------- ---------
Investment return is comprised of return on investments less any associated
expenses relating to the management of the funds. Return on investments relating
to underwriting activities is transferred to the technical account.
Managing agency activities relate specifically to the profit, net of expenses
and group management fees, of the management of Syndicate 958.
Other group expenses primarily represent the additional expenses of the Omega
Group.
2. Allocated investment return transferred to general business technical account
2006 2005
US$'000 US$'000
Investment return
Investment income 11,843 2,363
Realised investment gains and losses (58) (184)
Unrealised investment gains and losses 42 (68)
Investment expenses and charges - (33)
---------- ----------
11,827 2,078
---------- ----------
Investment return attributable to:
Syndicate investments 1,636 277
Group funds 10,191 1,801
---------- ----------
11,827 2,078
Investment return transferred to the general business
technical account (9,857) (277)
---------- ----------
1,970 1,801
---------- ----------
3. . Net operating expenses - technical account
2006 2005
US$'000 US$'000
Syndicate operating expenses 1,846 843
Corporate member's personal expenses 1,653 1,086
Brokerage and other business acquisition expenses 19,151 8,867
Corporate operating expenses 1,331 -
Syndicate differences on foreign exchange 376 -
---------- ----------
Net operating expenses 24,357 10,796
---------- ----------
4. Other income - non-technical account
2006 2005
US$'000 US$'000
Profit commission - current recognition policy 7,588 8,277
Profit commission - change in recognition policy - 5,073
---------- ----------
Profit commission 7,588 13,350
Fees 3,218 2,803
Management charges to Syndicate 967 881
Foreign exchange (47) (155)
Miscellaneous 61 40
---------- ----------
Total other income 11,787 16,919
---------- ----------
During 2005 the Group reviewed the earning profile of profit commission
receivable and aligned it with the earning profile of the business underwritten
by the Syndicate. This resulted in a one-off recognition of additional profit
commission of US$5,073,000 during 2005.
5. Staff costs including directors' remuneration
2006 2005
US$'000 US$'000
Wages, salaries and profit related pay 10,698 6,577
Social security costs 982 786
Other pension costs 775 541
---------- ------------
Total staff costs 12,455 7,904
---------- ------------
Staff costs reimbursed by syndicate (5,724) (5,440)
---------- ------------
Staff costs retained 6,731 2,464
---------- ------------
A further charge for share options issued to employees and directors is expensed
to the profit and loss account. The details and amounts are set out in note 24.
Average number of employees employed by the Group during the year
2006 2005
Number Number
Underwriting activities 17 16
Management and administration 16 15
---------- ---------
Total staff employed 33 31
---------- ---------
Total directors' remuneration in the year
2006 2005
US$'000 US$'000
Emoluments 3,479 1,560
Company contributions paid to money purchase pension
scheme 146 131
---------- -----------
Total directors' remuneration 3,625 1,691
---------- -----------
The aggregate gains made by directors on exercise of share options during 2006
was US$521,000 (2005 - US$ nil).
In respect of the executive directors two (2005 - two) were members of the
Group's defined contribution pension scheme The emoluments of the highest paid
director were as follows:
2006 2005
US$'000 US$'000
Emoluments 1,559 687
Company contributions to money purchase pension scheme 65 59
---------- -----------
6. Auditors' remuneration
2006 2005
US$'000 US$'000
Audit of the financial statements 386 252
Local statutory audits of subsidiaries 156 67
Other services pursuant to legislation 331 327
Corporate finance services 696 800
Taxation services 35 62
---------- -----------
Total 1,604 1,508
---------- -----------
The payments for Corporate finance services were principally in relation to the
reorganisation of the Group and the raising of additional capital.
7. Taxation on profit on ordinary activities
2006 2005
US$'000 US$'000
(a) Analysis of charge/(credit) in period
Current tax:
UK corporation tax on profits of the period 2,635 187
Profits taxed under foreign jurisdiction 40 33
Adjustment in respect of prior periods - 35
---------- -----------
Total current tax (see (b) below) 2,675 255
Deferred tax credit
Origination and reversal of timing differences 4,258 (444)
---------- -----------
Tax charge/(credit) for the period 6,933 (189)
---------- -----------
(b) Factors affecting tax charge for the period
Profit on ordinary activities before tax 22,035 11,497
---------- -----------
Profit on ordinary activities multiplied by standard rate
of corporation tax in the UK of 30%: 6,611 3,449
Utilisation of tax losses - (4,239)
Expenses not deductible for tax purposes 362 566
Adjustments in respect of overseas tax rates (65) -
Origin and reversal of timing differences (4,258) 444
Adjustments in respect of exchange translation 25 -
differences
Adjustments to tax charge in respect of prior period - 35
---------- -----------
Current tax charge for the period 2,675 255
---------- -----------
The Group's effective tax rate for 2006 reflects the fact that the majority of
the Group's profits were taxable within the UK. The Group's 2005 effective tax
rate benefited from the inclusion of £7.9 million of unrelieved tax losses
arising from Omega Dedicated (No.2)Ltd.
Moving forward the Group's effective tax rate is expected to fall as
underwriting profits are earned in lower tax jurisdictions.
(c) Deferred tax
Deferred tax is attributable to temporary timing differences arising on the
following:
Underwriting Share options Other Total
profits
US$'000 US$000 US$000 US$000
At 1 January 2006 415 (429) (3) (17)
Movements in year 4,626 (225) (143) 4,258
Foreign exchange
translation differences - (60) - (60)
-------- ---------- ----------- ---------
At 31 December 2006 5,041 (714) (146) 4,181
-------- ---------- ----------- ---------
There are no unrecognised deferred tax items.
8. Earnings per share
The calculation of basic earnings per share is based on the profit after
taxation for the year of US$15,102,000 (2005 - US$11,686,000) and on 124,817,278
(2005 - 39,029,457) ordinary shares, being the weighted average number of
ordinary shares in issue during the year.
The number of shares for the purposes of calculating diluted earnings per share
amounted to 127,868,344 (2005 - 39,531,593) to reflect the dilutive effect of
the future exercise of share options as detailed in note 24.
9. Intangible assets
Syndicate participation rights 2006 2005
US$'000 US$'000
Cost
At 1 January 149 149
Additions - -
-------- ---------
At 31 December 149 149
-------- ---------
Amortisation
At 1 January 120 91
Charge for the period 29 29
-------- ---------
At 31 December 149 120
-------- ---------
Net Book Value
At 1 January 29 58
-------- ---------
At 31 December - 29
-------- ---------
10. Tangible assets
Computer Office Total
equipment furniture
US$'000 US$'000 US$'000
Cost
At 1 January 220 41 261
Currency revaluations 28 7 35
Additions 51 142 193
--------- --------- ---------
At 31 December 299 190 489
--------- --------- ---------
Depreciation
At 1 January 153 25 178
Currency revaluations 25 6 31
Charge for the period 52 17 69
--------- --------- ---------
At 31 December 230 48 278
--------- --------- ---------
Net Book Value
At 1 January 67 16 83
--------- --------- ---------
At 31 December 69 142 211
--------- --------- ---------
11. Cash at bank and in hand
2006 2005
--------- ---------
US$'000 US$'000
Share of syndicate cash 7,741 4,498
Group cash 73,607 152,431
--------- ---------
81,348 156,929
--------- ---------
12. Financial Investments
2006 2005
Historical Market Historical Market
Cost Value Cost Value
US$'000 US$'000 US$'000 US$'000
Debt securities and other fixed
income securities 41,807 41,681 48,212 48,153
Deposits with credit
institutions 181,238 181,238 - -
------- -------- ------- -------
223,045 222,919 48,212 48,153
------- -------- ------- -------
All of the above securities are listed on recognised exchanges. AAA mutual funds
represent the majority of deposits with credit institutions.
Group financial investments include investments held by Group companies and the
Group's share of syndicate assets.
2006 2005
US$'000 US$'000
Group investments 181,238 31,118
Syndicate investments 41,681 17,035
-------- ---------
Market value at 31 December 222,919 48,153
-------- ---------
13. Other debtors
2006 2005
US$'000 US$'000
Trade debtors 47 213
Due from syndicate members 775 657
Other syndicate debtors 6,672 1,703
VAT recoverable 263 341
Deferred tax 860 17
Profit commission closed years 8,409 9,589
Other debtors 128 287
-------- ---------
17,154 12,807
-------- ---------
Of the amounts shown in deferred tax a significant proportion is recoverable in
more than one year.
14. Other prepayments and accrued income
2006 2005
US$'000 US$'000
Syndicate's prepayments - 29
Other prepayments 41 115
Accrued investment income 267 344
Profit commission 5,684 4,472
-------- ---------
5,992 4,960
-------- ---------
Profit commission includes US$5,684,000 (2005: US$4,472,000) which is due after
more than one year.
15. Share capital
Omega Insurance Holdings Limited Omega Underwriting Holdings PLC
2006 2006 2005 2005
Number US$ Number £
Authorised:
Ordinary common
shares of US$0.10 each 1,000,000,000 100,000,000 - -
Ordinary common
shares of £0.05 each - - 177,000,000 8,850,000
Allotted and fully
paid:
Ordinary common
shares of US$0.10 each 147,355,563 14,735,556 - -
Ordinary common
shares of £0.05 each - - 120,840,411 6,042,020
During the year a group reorganisation took place when Omega Insurance Holdings
Limited became the holding company of the Group.
Movement in year relevant to equity shareholders in Omega Group
Ordinary common shares of £0.05 in Omega Number Par Value
Underwriting Holdings PLC: ---------- ----------
---------------------------
Shares in issue at 1 January 2006 120,840,411 £6,042,020
Issue of new shares in placing October 2006 26,515,152 £1,325,758
---------- ----------
Shares replaced with Omega Insurance Holdings
Limited shares in November 2006 (147,355,563) £(7,367,778)
---------- ----------
Ordinary common shares of US$0.10 in Omega
Insurance Holdings Limited:
Shares issued to replace Omega Underwriting
Holdings PLC shares in November 2006 147,355,563 US$14,735,556
-------------- ----------
Shares in issue at 31 December 2006 147,355,563 US$14,735,556
-------------- ----------
16. Reconciliation of movement in shareholders' funds
Share Share Own Merger Profit Total
capital premium shares reserve and loss
US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
Balance at 1
January 2005 963 - - - 4,505 5,468
Profit for the year - - - - 11,686 11,686
Special interim dividend of 3.5
pence per ordinary share - - - - (2,350) (2,350)
Issue of fully
paid bonus shares 771 - - - (771) -
Issue of new share
capital net of costs 8,531 170,471 - - - 179,002
Share based payments - - - - 1,431 1,431
Issue and purchase
of own shares 127 - (127) - - -
-------- ---------- --------- ----- --------- ---------
Balance at 1
January 2006 10,392 170,471 (127) - 14,501 195,237
Vesting of own shares - - 42 - (42) -
Issue of new share capital 2,493 63,308 - - - 65,801
Costs of issue - (3,808) - - - (3,808)
Share based payments - - - - 2,158 2,158
Special interim dividend of 4.1
pence per ordinary share - - - - (9,337) (9,337)
Group reorganisation (12,885) (229,971) 85 - 242,771 -
Establishment of
Omega Insurance
Holdings Limited 14,736 393,329 (98) (140,714) (267,253) -
Reorganisation
and listing costs - (5,197) - - - (5,197)
Transfer merger reserve - (140,714) - 140,714 - -
Profit for the year - - - - 15,102 15,102
Currency translation
differences - - - - 5,166 5,166
--------- ------ ------- ------ ------- -------
Balance at 31
December 2006 14,736 247,418 (98) - 3,066 265,122
--------- ------- ------ ------- ------- -------
A resolution to convert part of the share premium account into a contributed
surplus distributable reserve will be put to the Annual General Meeting.
17. Other creditors including taxation and social security
2006 2005
US$'000 US$'000
Trade creditors - 979
Due to Syndicate members 3,772 433
Other Syndicate creditors 2,830 4,217
Corporation tax 1,629 370
Other tax and social security costs 204 170
Deferred tax 5,041 -
Other creditors 221 1,230
---------- ----------
13,697 7,399
---------- ----------
Of the amounts shown in deferred tax a significant proportion is due in more
than one year. Of the amounts shown in other creditors US$nil (2005: US$466,000)
is due in more than one year.
18. Accruals and deferred income
2006 2005
US$'000 US$'000
Syndicate accruals 223 206
Other accruals 5,761 1,170
Deferred income - underwriting fees 2,087 1,648
---------- ----------
8,071 3,024
---------- ----------
Deferred income includes US$1,062,000 (2005: US$870,000) which will be
recognised in revenue after more than one year.
19. Lease commitments
At 31 December 2006, annual commitments under non-cancellable operating leases
are set out below:
2006 2005
---------- ---------
US$'000 US$'000
Land and Buildings - operating leases which expire:
----------------------------- ---------- ---------
Between two and five years 159 177
---------- ---------
Of the commitments due under operating leases approximately 50% (2005: 62%) will
be reimbursed by the syndicate under the Group's management.
20. Reconciliation of profit on ordinary activities before tax to net
cash inflow from operating activities
2006 2005
US$'000 US$'000
Operating profit before taxation 22,035 11,497
Depreciation of tangible assets 69 91
Amortisation of intangible assets 29 29
Realised and unrealised gains and losses 16 252
Charge in relation to share option awards 2,158 1,431
(Increase) in debtors (27,483) (26,660)
(Increase)/decrease in reinsurers' share of
technical 3,764 (31,849)
provisions
(Increase) in prepayments and accrued income (4,992) (7,243)
Increase in creditors 13,222 15,356
Increase in technical provisions 34,029 60,427
Increase in accruals and deferred income 5,047 1,397
Foreign exchange differences (423) -
---------------- ----------
Net cash inflow from operating activities 47,471 24,728
---------------- ----------
21. Analysis of net funds
1 January 2006 Cash flow Market value 31 December
and currency 2006
movements
-----------------------------------------------------------
US$'000 US$'000 US$'000 US$'000
Cash at bank
and in hand 156,929 (81,165) 5,584 81,348
Investments 49,206 173,900 (16) 223,090
-------- ---------- -------- --------
206,135 92,735 5,568 304,438
-------- ---------- -------- --------
22. Analysis of Cash Flow
2006 2005
----------- ---------
US$'000 US$'000
Financial investments:
Net portfolio investments (149,423) (31,118)
Increase in share of Syndicate assets (24,477) (14,769)
----------- ---------
(173,900) (45,887)
----------- ---------
23. Own shares
During 2005 an Employee Share Trust was set up with 1,470,924 ordinary shares of
Omega Underwriting Holdings PLC of 5p.
The shares held in the trust will, subject to vesting, be issued to meet the
long term incentive plan options granted at nil cost as set out in note 24,
Options A. During the year 490,308 options have vested, and the remaining
options were renewed to be options over the shares of Omega Insurance Holdings
Limited. Consequently, at the year end 980,616 US$0.10 ordinary shares of Omega
Insurance Holdings Limited are held in the Employee Trust and the full value
US$98,061 is included as a reduction in shareholders funds as disclosed in notes
16 and 24. All shares are subject to allocation by the Trustee of the Employee
Share Trust under the direction of the Remuneration Committee.
24. Share Incentive Plans
During the year ended 31 December 2006, the Group operated two Share Incentive
Plans, under which share options have been granted to employees as described
below. There are no cash settlement alternatives.
Long term Date Exercise Exercisable Vesting conditions
incentive plan granted price period
Option A 6 April 0p 6 April 2006 None
2005 to 6 April 2015
Option B 6 April 115p 6 April 2007 TSR performance
2005 to 6 April 2015
Option C 8 April 115.5p 8 April 2007 TSR performance
2005 to 8 April 2015
Option D 21 January 0p 5 December 2008 Two independent performance
2006 to 21 January 2016 conditions
Executive plan
Option E 6 April 116.5p 6 April 2009 TSR performance
2005 to 6 April 2015
Option F 8 April 115.5p 8 April 2009 TSR performance
2005 to 8 April 2015
Option A "nil cost option" is exercisable in 3 equal tranches on 6 April 2006, 6
April 2007 and 6 April 2008. The first tranche was exercised during 2006.
Option B "market value option" is exercisable in 3 equal tranches on 6 April
2007, 6 April 2008, and 6 April 2009.
Option C "market value option" is exercisable in 3 equal tranches on 8 April
2007, 8 April 2008, and 8 April 2009.
Option D "performance related nil cost option" is exercisable as follows: one
half on 5 December 2008 expiring on 21 January 2016, one third on 5 December
2009 expiring on 21 January 2016, and one sixth on 5 December 2010 expiring on
21 January 2016.
Option E and Option F are "market value options".
Total number of shares under options:
Options outstanding at Options outstanding at
1 Jan 2006 Granted Forfeited Exercised Expired 31 Dec 2006
----------- -------- ------- ------- -------- --------
Long Term
Incentive Plan
Option A 1,470,924 - - (490,308) - 980,616
Option B 1,483,635 - - - - 1,483,635
Option C 14,740 - - - - 14,740
Option D - 3,600,000 - - - 3,600,000
Executive
Plan
Option E 103,004 - - - - 103,004
Option F 374,214 - (14,750) - - 359,464
Options B, C, E, and F are subject to the TSR Performance condition - for the
options to vest, average annual total shareholders returns (TSR) over the
relevant performance period must be at least equal to the greater of: a) the
percentage change in the Retail Prices Index (RPI) over the relevant performance
period plus 5 per cent; and b) 10 per cent. The relevant performance period is
the time between the date at which the options were granted and date from which
they are first exercisable as shown above.
Options D are subject to two independent performance conditions. The first
performance condition attaches to 75% of the options granted and relates to the
average compound annual percentage growth in the Group's TSR over the particular
performance period. The second performance period attaches to 25% of the options
granted and relates to the Group's TSR relative to the constituents of a
comparator group identified by the Group over the particular performance period.
The weighted average share price at the date of exercise for shares exercised
during the period was 130.9p. The options outstanding at 31 December 2006 had a
range of exercise price of 0p to 116.5p, a weighted average exercise price of
34.2p (2005 65.64p), and a weighted average remaining contractual life of 9.17
years (2005 9.25 years).
Fair Value of options
Inputs to the Valuation model
The fair values of equity settled awards granted under the Long Term Incentive
Plan and Executive Plan have been calculated using a variation of the Binomial
option pricing model that takes into account the specific features of these two
Share Incentive Plans. The following principal assumptions were used in the
valuation.
Grant date 2006 options 2005 options
----------------- ---------------- ----------------
Share price at date of grant 127.5p 115p - 116.5p
Expected dividend yield 2.50% 0.5% - 2.5%
Expected volatility 25% 10% - 25%
Risk-free interest rate 4.10% 4.2% - 4.25%
Employee turnover 5% - 7% 0.5% - 5%
Volatility has been based on the following:
(i) the annualised volatility of the Group's shares since its floatation on the
AIM market, which was calculated at 5.3% in 2005 and 12.6% in 2006.
(ii) the volatility of comparable listed companies in the insurance sector,
based on historical share price information from the London Business School for
a ten year period dating back to 1995. These average volatility figures ranged
from 25% to 50% over a 3, 5, 7 and 10 year period.
(iii) the Group's current shareholder base which, being made up of institutional
investors, has resulted in a low level of transactions in the Group's shares and
the likelihood of the investor base changing over time resulting in an increased
volume of transactions in the Group's shares and a consequent increase in
volatility, which is usual for AIM listed securities.
Based on the above information, figures of between 10% and 25% have been used
for volatility over the course of the lives of the options, reflecting the
increase in the volatility of the Group's share prices from its current low
level.
Based on the above assumptions, and after allowing for the effects of the TSR
performance criteria by performing Monte Carlo simulations, the fair values of
the options granted are estimated to be:
Weighted average fair value
2005 Long Term Incentive Plan 'Nil cost' options 113.387p
2005 Long Term Incentive Plan 'market value'
options 13.909p
2005 Executive Plan 'market value' options 14.318p
2006 Long Term Incentive Plan options 50.73p
Expense arising from share-based payments
Based on the above fair values and the Group's expectations of employee
turnover, the expense arising from share options granted to employees was
US$2,158,000 for the period ended 31 December 2006 (2005: US$1,431,000). There
were no other share-based payment transactions.
25. Derivative financial instruments
In 2005 the Group entered into foreign exchange contracts in order to manage the
Group's exposure to income arising in a currency other than sterling, the
functional and reporting currency at that time. As at 31 December 2006 the
maturity dates and quantum of the contracts were as follows:
-------------- ------------
31 December 31 December
2006 2005
Amount Amount
protected protected
US$'000 US$'000
Expiring within one year 2,250 6,750
Expiring between one and five years - 2,250
----------------- ---------------
The fair value of derivatives at 31 December 2006 is US$196,000.
26. Exchange rates
The exchange rates used in translating foreign currency amounts in the
preparation of these account are:
2006 2005
------------- --------------
Average rate Year end rate Average rate Year end rate
US$ US$ US$ US$
£1 sterling is
equivalent to 1.84 1.96 1.82 1.72
Euro 1 is
equivalent to 1.25 1.32 1.25 1.18
Can$ 1 is
equivalent to 0.88 0.86 0.82 0.86
As stated in the accounting policies the Group's reporting currency has been
changed to United States dollars with effect from 1 January 2006.
The prior period financial statements have been restated to reflect the change
in reporting currency. Profit and loss account items have been translated at the
2005 average rate of exchange, and balance sheet and capital items, including
capital raised during 2005, have been translated at the rate of exchange ruling
on the date of change of functional currency, the 2005 year end rate.
Translation differences arising are recognised as an expense the Profit and Loss
account.
27. Group consolidated profit and loss account - non technical account for
the period 9 November 2006 to 31 December 2006
The period 9 November 2006 to 31 December 2006 covers the period represented in
these financial statements that Omega Insurance Holdings Limited was the
ultimate holding company of the Group.
The non technical account and the movement in the profit and loss reserve for
this period is set out below:
9 November
to 31 December
2006
US$'000
Balance on the technical account - general business 3,563
Investment income 659
Other income 1,583
Other charges, including amortisation (3,361)
----------
Profit on ordinary activities before tax 2,444
Tax charge on profit on ordinary activities (1,028)
----------
Profit on ordinary activities after tax attributable to
shareholders of the Group 1,416
Share based payments 307
Currency translation differences taken direct to
reserves 1,343
----------
Profit and loss reserve 3,066
----------
28. Related party transactions
W M Fiederowicz, the non-executive Chairman, has participated as a Name on
Syndicate 958 since 1996. He underwrites capacity of £194,524 on the 2006 year
of account (2005 - £175,247), and this participation continues for the 2007 year
of account.
A facility to borrow US$50 million was granted to Syndicate 958 by Omega
Specialty Insurance Company Limited. The facility was drawn down in full on 22
February 2006 and repaid on 3 October 2006. Drawn amounts attracted a rate of
interest of 1.1% above LIBOR. The facility expired in February 2007.
Nicholas Warren, one of the non-executive directors of the Company, is employed
as a Senior Vice President with International Advisory Services Ltd. This
company provide general accounting, administration and information technology
services to the Group and charged US$230,000 in respect of these services to the
Group during 2006
Directors' interests in the shares of the Group are set out in the Directors'
Report.
29. Consolidated entities
The following entities are consolidated within these financial statements.
Subsidiary Country of Proportion of Nature of
undertakings as Incorporation voting rights and Business
at 31 December shares held
2006
Omega Underwriting
Agents Limited UK 100% Lloyd's managing agent
Omega Dedicated
Limited UK 100% Lloyd's corporate member
Omega Specialty
Insurance Company Bermuda 100% Insurance company
Limited
Omega
Underwriting
Investments
Limited UK 100% Dormant company
Omega Europe Germany 100% European underwriting agent
GmbH
Omega Underwriting
Holdings Limited UK 100% Intermediate holding company
Omega US
Holdings, Inc. USA 100% Intermediate holding company
Omega US
Insurance, Inc. USA 100% Insurance company
Omega Europe
Holdings Limited UK 100% Dormant company
Omega Administration
Services Limited UK 100% Service company
to other members
of Omega Group
Omega Dedicated
(No 2) Limited UK 100% Lloyd's
corporate member
- ceased underwriting
All holdings are related to ordinary shares.
30. Financial information and posting of accounts
The financial information set out above does not constitute the Group's
statutory accounts for the year ended 31 December 2005 or 2006, but is derived
from those accounts.
The audited Annual Report and Accounts for 2006 are expected to be posted to
shareholders on 1 May 2007. The Annual General Meeting will be held on 1 June
2007.
The preliminary Results were approved by the Board on 27 March 2007.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR PUUAWWUPMPUM
