Last checked at 10 Mar 2009 07:00
Omega Insurance Holdings Limited
Results for the 12 Months to 31 December 2008
Highlights
Financial
Net written premium US $224.6million (2007: US$196.3 million)
Profit before tax US $28.2million (2007: US$59.5 million)
Profit after tax US $22.2million (2007: US$50.5 million)
Basic earnings per share 15.1 US cents (2007: 34.4 US cents)
Net assets per share US$1.92 (2007: US$2.09)
Group combined ratio 101.4% (2007: 79.3%)
Return on equity 7.2% (2007: 19.0%)
Dividends paid of 11.3 US cents equating to 75% of 2008 profits (2007: 24.0 cents)
Operating
Syndicate 958 closes 2006 year of account at a return of 23.4% of capacity - its 27th consecutive year to close with an underwriting profit.
Syndicate 958 2007 and 2008 underwriting years of account forecast to be profitable.
Investment returns in excess of 5% as a result of the high quality low risk portfolio in an environment of extraordinary turbulence.
Omega US now eligible to write in 42 jurisdictions.
Omega Specialty well established, showing premium growth of 8%.
Capital raise of £130 million announced in December 2008 creates financial flexibility and enables us to take advantage of the current and future opportunities in our core markets.
Developments and Outlook
Significant opportunities in all our existing core lines as a result of the impact of Hurricane Ike coupled with widespread balance sheet stress elsewhere in the industry, with limited fresh capital available.
Our ungeared, well capitalised balance sheet provides a strong platform from which to grasp these opportunities.
Established multi-platform strategy leaves Omega well positioned to reach into those core markets where opportunities are emerging.
Investment portfolio continues to operate with capital preservation and liquidity as its primary aim.
Application to move to Main List of London Stock Exchange on track for first half of 2009.
JP Morgan Cazenove appointed as sponsor to move to Main List and as joint broker to the Company thereafter.
Mr Coleman Ross appointed to the Board as a non executive director.
John Robinson to focus on Group responsibilities. Subject to regulatory approval, Daria Vanous to be appointed Active Underwriter for Syndicate 958.
Commenting on the results Richard Tolliday, Chief Executive of Omega said: "Despite one of the worst years on record for insured losses I am delighted that we have achieved a profit in line with market expectations. We are also forecasting an underwriting profit for Syndicate 958 for the 2008 year of account, despite the losses suffered from Hurricanes Ike and Gustav, which would extend its record of underwriting profitability to 29 years.
The support we received for our capital raising from both existing and new investors in December is testament to the belief shareholders have placed in us and ensures that we are in a strong position to take advantage of rapidly improving markets."
Enquiries:
Omega Insurance Holdings Limited +1 441 294 6610
Richard Tolliday, CEO
Threadneedle Communications 020 7653 9848
John Coles
Chairman's Statement
It is indeed a fortunate Chairman who can report, as I do to you, that their Company has ended 2008 stronger and better positioned than it started it. It is, I suspect, a still rarer Chairman that can attest to the Company looking forward with genuine excitement to seizing the opportunities that lie ahead in 2009 and beyond. It is of course not by accident that Omega can count 2008 as a year of success and be so well prepared for the future. The caution and prudence that are a core of steel to every aspect of Omega's business are evidenced in the results for the year. Despite one of the worst years on record for insured losses and an unprecedented reduction in asset values worldwide, Omega has delivered a profit for the full year in line with market expectations. The support that we enjoyed from existing and new investors in our capital raise in January 2009 was a significant testament to the recognition that the Group is positioned to exploit the opportunities arising from the challenges presented by the market.
Omega's Performance
I am delighted to say that Omega met expectations delivering a profit for the year of $22.2 million, making a small profit in the second half despite a loss of the scale of Ike. Given the events of 2008, this is a highly creditable result. As we forecast in our trading statement in October 2008, Hurricane Ike has now come to be recognised by the industry as a much more substantial loss than was at first thought, especially in relation to Marine Energy.
Omega has always prioritised prudent financial management, from the way we determine the underwriting risk we take, to our approach to the management of our assets. Our historically cautious investment philosophy also proved to be the right approach in times of extraordinary market turbulence. Our low risk, high quality fixed income book provided us with protection from the market's worst excesses. The flight to US Treasuries buoyed our investment return, in the short term, with returns in excess of 5% for the year.
Our portfolio remains highly liquid. Despite this, as the markets have become more volatile Omega has secured collateralised credit lines to enable the Company to choose whether and when to release assets from the portfolio, should it choose to. Those facilities remain undrawn.
Operationally, the Group has made tremendous strides. The Omega Specialty platform in Bermuda which wrote its first premium in 2006, not only reinsures certain other parts of the Group and Syndicate 958, but has a thriving third party reinsurance book.
The Omega US team have not only secured eligibility to write surplus lines in 42 jurisdictions, but also now have relationships with 31 managing agents.
There is still plenty of work to do to build out these platforms to support the scale of growth we are planning. However we are confident we have the structure, and the management teams in place to deliver the profitable growth we are targeting.
Dividend
In November 2008, the Group paid a dividend of $15.2 million, representing 70% of the first half profits. In February 2009 the group paid a further Special Interim Dividend of $1.5million. We have and will continue to pay out a substantial proportion of profit in the form of dividends, demonstrating Omega's continuing commitment to keeping only the capital it requires to build its operating platform and deliver an appropriate shareholder return.
Strategy
We have a clear and consistent strategy. We are building a diversified and robust underwriting group with active units in our major centres of Bermuda, the US, Lloyd's and Cologne. The Group continues to write business of the type it has always written in London, applying the same disciplines we always have. The Group seeks opportunities to attract a greater share of that business by proactively taking ourselves to those marketplaces where large parts of that business are transacted.
Our 2008 performance is clear evidence that a balance of underwriting, both third party and through the syndicate, and earning fees and profit commissions for managing others' third party capital is demonstrably effective and sufficiently flexible to adapt to the changing economic environment.
We continue to believe that with platforms in London, Cologne, Bermuda and the US and a holding company in Bermuda, we have the optimal structure from a marketing, operational and financial perspective.
Outlook
At the time of the placing announced in December 2008, raising £130 million before expenses, we described the market conditions which we were anticipating would provide the opportunity to grow the Group's underwriting. The key drivers we identified were the ultimate insured cost of Hurricanes Ike and Gustav, the erosion of balance sheets in the industry through asset write-downs and the specific problems faced by certain major carriers. We were of the view that there would be a resultant hardening of the market from the combination of these factors but that this would be a progressive change throughout the course of 2009. Everything we have seen subsequently has confirmed those expectations. Although fresh capital has been raised by a number industry players, it is small by comparison to the amount raised in 2005, for example. The 1 January renewals displayed the start of this hardening. The dynamics in the insurance industry are more complex and widespread than has been the case in hardening markets in the past when the catalyst has solely been a large catastrophic loss. However, the results of these dynamics are likely to be sustained for longer, not least because there is no likely influx of capital into the industry in the way or of the scale that occurred after Hurricane Andrew, World Trade Center or Hurricane Katrina.
Developments in 2009
In announcing the share placing in December, we stated our intention to apply to join the London Stock Exchange Main List in the first half of 2009. Omega floated on AIM in April 2005 and the Board considers a move to a full listing to be both timely and appropriate for the Company's increasing market capitalisation. The Board regards the investment market visibility which comes with the move as an important step in our development as an international underwriting group. It is also a timely opportunity to review a number of aspects of how we manage our business.
The Board has appointed JP Morgan Cazenove as sponsor for the move to the Main List and as a broker to the Company thereafter.
We are delighted that Coleman Ross has agreed to join our Board with effect from 10 March 2009 and become Chair of the Audit Committee, with effect from 1 April 2009. Coleman spent 34 years at PricewaterhouseCoopers where he was Chairman and Managing Partner of the firm's insurance practice in the US. He was audit partner for some of the firm's major insurance and banking clients. Subsequent to retiring from public accounting practice, Coleman served a total of three and a half years as Chief Financial Officer of two insurance companies and, following that, has held and continues to hold the position of an independent director on a number of insurance related businesses. We look forward to the very significant contribution that he will bring to the Board and the governance of the Group.
We have also recognised that the expansion of the Group has reached a point which requires our Chief Underwriting Officer, John Robinson, to be able to dedicate himself full-time to supporting the development of all of the Group's underwriting activities and ensuring that the philosophy, approach and underwriting discipline that have driven the success of Syndicate 958 since its formation in 1980 are maintained across the Group. With that in mind, John will be relinquishing the post of Active Underwriter of Syndicate 958 with effect from the end of 2009. Daria Vanous, who joined the Group in 2003, will, subject to regulatory approval, be succeeding John as Active Underwriter of Syndicate 958 and will be working closely with John on the transition during the remainder of 2009 as a senior member of the Group's underwriting team.
I should like to record my thanks to our shareholders for their continued support of Omega and their trust in our custody of shareholder value which they once again demonstrated during the year.
2008 was a year in which Omega did not just survive but prospered and is positioned for considerable achievements going forward into 2009 and beyond. This is the result of the continued dedication and energy of Omega's talented team. The Board and I would like to express our thanks for their unstinting enthusiasm and very considerable achievements. We look into the future eagerly and with confidence.
Walter Fiederowicz
Chairman
9 March 2009
Chief Executive Officer's Review
2008 Performance
The 2008 profit before tax for the Group was $28.2 million (2007: $59.5 million) and profit after tax $22.2 million (2007: $50.5 million). This represents a return on equity of some 7.2%. In an environment of exceptional volatility in the investment and currency markets and in a year which has seen what will almost certainly be the third largest ever insured loss, this reaffirms Omega's ability to perform at times of stress.
The result comprises a loss of $3.0 million from underwriting activities, a profit of $21.1 million from managing agency activities and $21.8 million of investment income, with $11.7 million of expenses net of foreign exchange gains.
Underwriting Performance
| 2008 | 2007 | ||
| Class analysis of written premium | US$'000 | US$'000 | |
| Non-marine property insurance | 77,112 | 59,777 | |
| Property catastrophe treaty reinsurance | 68,927 | 63,719 | |
| Property per risk treaty reinsurance | 14,622 | 14,913 | |
| Professional indemnity insurance | 12,578 | 15,526 | |
| Motor insurance and reinsurance | 12,616 | 14,832 | |
| Marine insurance and reinsurance | 47,124 | 42,947 | |
| Liability insurance and reinsurance | 24,566 | 19,102 | |
| Other | 7,857 | 12,041 | |
| 265,402 | 242,857 |
| Group Underwriting Results | 2008 US$'000 | 2007 US$'000 | ||
| Gross premiums written | 265,402 | 242,857 | ||
| Net earned premium | 215,679 | 161,546 | ||
| Claims incurred, net of reinsurance | (163,930) | (78,869) | ||
| Net operating charges | (54,757) | (49,275) | ||
| Underwriting (loss)/profit | (3,008) | 33,402 |
Underwriting performance in 2008 has been dominated by Hurricanes Ike and Gustav and losses earlier in the year, including the flood losses in the mid-West of the US. However, the underlying results in other areas have been very strong and are evidence of the inherent balance and diversity, both in terms of geography and business class, in the portfolio. Consequently, the result is only a small underwriting loss of US$3.0 million (2007: a profit of US$ 33.4 million).
The book has retained a good balance, with growth in both the small ticket business written through agents across the US and in the catastrophe exposed property reinsurance business written through Bermuda.
We remain increasingly optimistic about the opportunities in US surplus lines, with domestic carriers retrenching to their core areas with their balance sheets weakened particularly through issues on their investment portfolios. With less capacity available in the market place, we believe rates in energy and property catastrophe will push upwards over the 1 April and 1 July renewals. The lack of availability of reinsurance is expected to send rates up generally as we move into 2010. International rates continue to be poor as competitors use it to provide balance to their US writing. While rates remain low Omega maintains a reduced international account.
Turning to individual lines of business:
Non-Marine Property: This class is predominantly surplus lines business written through managing agents across the US. The account focuses on smaller regional agents with whom we have long standing relationships. Rates and terms have started to strengthen, but further hardening is expected. Some significant players now have weakened balance sheets and weakened competitive positions. We believe this class offers good growth opportunity. The vast majority of Omega US business falls into this class.
Property Catastrophe: The Syndicate has written this class since its creation in 1980 specialising in small lines on the reinsurances of regional insurers in the US which gives a degree of inherent diversification. Attritional performance on the account is excellent. The vast majority of our business written through Omega Specialty is property catastrophe related.
Property Per Risk: This account is written by the Syndicate and Omega Specialty. The account has avoided many of the major industrial losses in the year, with its focus also being on reinsuring smaller to medium sized insurance companies.
Professional Indemnity: This is a core account to the Syndicate, but is currently writing limited premium as rates on this line have been under pressure in recent years. The professional indemnity account focuses on small insureds across the US. It does not insure banks or financial institutions. Its exposure to sub-prime is limited to a reserve of US$3.5 million in the Syndicate. The nature of the accounts means we anticipate negligible exposure to Madoff or Stanford related claims.
Motor: This motor reinsurance account is predominantly written through the Cologne operation and has a positive outlook for 2009.
Marine: This marine account is dominated by the offshore energy account in the Syndicate. A small element of the class related to Marine Excess of Loss reinsurance from which the Syndicate has largely withdrawn for 2009.
The Syndicate writes a variety of other business on an opportunistic basis including some satellite cover.
Claims
2008 was dominated by Hurricane Ike following shortly after Hurricane Gustav. Hurricane Ike was an extraordinary storm, both in terms of the scale of its coverage and its linkage with other weather fronts, which meant that it continued to create significant damage as it tracked up through the mid west.
The combined cost to the Group of Ike and Gustav was US$41.3 million net of reinsurance. Of this amount, US$8.3 million net related to offshore losses. The figure of US$41.3 million is net of reinsurance but substantial unutilised reinsurance cover remains, including on an aggregate whole account basis, which provides protection against any material deterioration in either the specific or attritional losses.
Underlying attritional loss ratios on the 2008 year of account have been extremely positive and the Group's focus on smaller-ticket risks meant that it avoided many of the major losses that impacted the market in the first half of 2008.
Omega Specialty
During 2008, Omega Specialty wrote gross premiums of US$252.4 million (2007: US$233.4 million). This was comprised predominantly of:
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;
quota share reinsurances of 20% of Syndicate 958's gross whole account;
a book of third party reinsurance;
quota share reinsurance of 50% of the new Omega US net whole account.
Looking ahead to 2009, the reinsurance of the Syndicate and Group subsidiaries have been renewed.
Omega Specialty is A- (Excellent) by AM Best.
In 2008, 80% of Omega Specialty's premium income of $252.4 million was sourced from Syndicate 958. This means that Omega Specialty has a portfolio with a broader diversity and greater inherent balance and consistency of profitability than would be normal in the Bermudian reinsurance market that is still dominated by companies with a property catastrophe focus. As Omega Specialty's third party catastrophe book grows, we have sought to maintain a balance in the business mix, by the reinsurance of part of the growing Omega US book, with its mix of property and liability and wide geographic footprint. By maintaining this balance Omega Specialty expects to continue Syndicate 958's historic low result volatility compared to its peer group. This in itself enables Omega Specialty to write a greater premium to capital ratio than its less diversified peers.
For Andrew Stapleton, Omega Specialty's Chief Underwriting Officer, 2008 has been his first full year of underwriting with the Group. The account of third party reinsurances has grown by 236% to $43.9 million (2007: $13.1 million). The account is dominated by property catastrophe business of a similar nature to that underwritten within the syndicate for many years.
As the capacity in the Bermudian market contracts as a result of balance sheet pressure from ratings agencies, investment losses suffered by some and Hurricanes Ike and Gustav, Omega Specialty has found itself well placed to capitalise. This is further amplified by a move amongst insureds to further diversify their exposure across underwriters. We are seeing this trend continue in 2009 with Omega Specialty seeing an 85% increase in the number of programmes it was invited to write at the 1 January 2009 renewal stage. We believe that with the further strengthening of the capital base in early 2009, as a result of the capital raise, Omega Specialty will continue to attract business on positive terms.
In terms of losses, Omega Specialty's book has seen total claims of $157.5 million. Of this $39.4 million was the result of Hurricanes Ike and Gustav through the reinsurances of the Syndicate and the third party writings.
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. The Syndicate has a capacity of £249 million for 2009 and is rated A (Excellent) by AM Best.
Some 83.6% of the capacity of Syndicate 958 is supported by third-party Names. Omega's own capital supports 16.4% of Syndicate 958's stamp.
| Table - Syndicate 958 - Capacity and profit forecasts | Year of account | |||
| 2009 | 2008 | 2007 | 2006 | |
| Capacity | £249m | £249m | £249m | £224m |
| Effective capacity including qualifying quota share | £274m | |||
| Omega Group share of capacity | 16.4% | 16.4% | 16.4% | 16.4% |
| Omega Group retained share of capacity | 16.4% | 16.4% | 15.2% | 15.2% |
| Omega Group retained share of effective capacity | n/a | n/a | 22.9% | n/a |
| Profit after standard personal expenses - forecast | n/a | 0 - 10% | 12.5% - 17.5% | 23.4% |
Note: For the 2007 year of account only, the capacity of the Syndicate was effectively increased by £25 million as a result of including a qualifying quota share provided by Omega Specialty.
The table above shows that the Syndicate has closed the 2006 year of account with a return of 23.4%. The 2007 forecast profit range has been maintained despite the account being subject to claims of some $10.2 million on Ike and Gustav. Both of these years of account have benefitted from investment performance and foreign exchange gains.
The 2008 year of account has borne net losses of $72 million on Hurricanes Ike and Gustav. The underlying attritional performance on 2008 at this point is, however, extremely positive, allowing a forecast profit range of 0 - 10%.
For the 2009 year of account, capacity remains at £249 million. The Syndicate continues to write all the same core lines. It has withdrawn from marine excess of loss to focus on more profitable core lines. The marine energy book will be trimmed back in some areas as the insights from Hurricane Ike are reviewed.
The Syndicate sees strong opportunities in its core lines of property catastrophe, per risk, and non-marine property, all of which are benefitting from rating shifts post Ike and competitors being troubled by the capital markets issues.
Omega US
For Omega US 2008 saw a continuation of the building out of its operational and legal infrastructures from which it will increase its underwriting base. Achievements in 2008 have resulted in Omega US:
holding licences in 42 jurisdictions , allowing it to source and underwrite business from most of its targeted state territories. For those remaining states where licenses are yet to be obtained applications to the relevant authorities are in the process of being obtained;
holding signed agreements with 31 Managing General Agents ("MGA's"). Many of these MGA's are well known to the Group through long and well established trading relationships with the Group's managed Lloyd's syndicate;
enhancing its I.T. infrastructure including electronic interfacing with MGA's for exchange of underwriting data; and
making further appointments to management roles including a full time Chief Financial Officer, Claims manager as well as additional underwriting support.
Whilst underwriting income has come on stream more slowly than originally forecast, the Board is confident that the above actions and achievements ensure a successful base from which to meet expectations in 2009. This is coupled with our strong belief and expectations of improving market conditions throughout 2009 and into 2010. These beliefs stem from the impact to certain of our target markets resulting from hurricanes Gustav and Ike in 2008 and from the challenges that certain of our competitors face following impairments to their balance sheets in 2008.
Omega Europe
The Group established its operation in Cologne in 2003 to complement the development of the Syndicate's European reinsurance account. It offers clients access to all of the Syndicate 958's services and is able to facilitate the placement and servicing of reinsurance business with the Syndicate.
The team in the Omega offices in Cologne offer 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 Syndicate's underwriters and provide confirmation of the line 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.
Omega Europe has been extremely successful in bringing business to the Syndicate that would not normally have been seen.
International rates continue to be under pressure from competition by companies seeking diversification. We believe that rates in this area have been depressed to a point where margins are in many cases simply not adequate. We remain highly selective and will continue to be so until the rating environment begins to turn. Current underwriting, however, remains highly profitable. Omega Europe would also, when the rating environment becomes more attractive, be in a position to place business for Omega Specialty in addition to the Syndicate.
Outlook
As we stated at the time of the announcement of our capital raise in December 2008, we anticipate there being a continuing and progressive market strengthening in Omega's core lines of business throughout 2009 and into 2010. So far this year we have seen the evidence we would have expected, at this stage, confirming our views. There has been a widespread reassessment by many insurers and reinsurers of the scale of the impact of Hurricane Ike and material increases in their loss estimates. Asset write-downs, impairments and associated liquidity issues have continued to affect many in the industry. Some sources of capital have withdrawn completely, particularly from the reinsurance space. Some major companies continue to be beset with difficulties.
We have already seen material increases in large areas of our reinsurance account and expect these to continue through the next major renewal dates at 1 April and 1 July. The offshore energy market will undergo substantial rerating but we intend to be selective in our underwriting of this account, particularly in respect of exposures in the Gulf of Mexico where we believe further restructuring of exposures and coverage is required.
We are seeing the signs of market hardening in US surplus lines and expect this to gather pace significantly from this point on.
We are witnessing a market dislocation of a type we have not previously seen and that means that, as we expected, it is taking the industry longer to react and adjust than if it were reacting to a single large event. It means also that the influxes of new capital of the magnitude that have historically followed the removal of capital from the industry are simply not going to happen. In consequence this market adjustment should be more prolonged than in the past.
Omega is ideally positioned to take advantage of this opportunity. We have a strong balance sheet and an operating structure that allows us to reach further into our core markets and a talented team to ensure we do so successfully and profitably. John Robinson's move from the post of Active Underwriter of Syndicate 958 to focus on his role as Chief Underwriting Officer is an important one for the Group. It will ensure that we are able to optimise the exploitation of these opportunities in Bermuda and the US but also that we continue to consistently apply a rigorous underwriting discipline in all of our operating units. Daria Vanous, who, subject to regulatory approval, will succeed John on the Syndicate, is a talented and experienced leader in our underwriting team who will work closely with John to provide a continuity of leadership.
We continue to face the future with optimism and confidence. Our confidence is inspired by our understanding of the fundamental drivers of our success to date. Omega has a track record of which it is very proud. Our portfolio is based upon longstanding relationships and has inherent diversity and balance. Our balance sheet is strong and liquid. We are certain that we have the team and the capability to ensure continued adherence to those principles and even greater success in future years.
Richard Tolliday
Chief Executive Officer
9 March 2009
Financial Review
The Group has recognised a profit before tax of US $28.2 million (2007: US$59.5 million) for 2008, representing a return on equity of 7.2%. Whilst increasing profits are always desirable, we recognise that in a specialty writer with catastrophe exposure there will be years when profit is depleted.
We see the result as demonstrating the power of the Omega proposition and the benefits of Omega's diversified book of business. As with the Syndicate for many years before it, the Group seeks to avoid the deepest impact of both attritional cyclical change and catastrophes by maintaining a diversified, highly regionalised portfolio, by keeping a balance between underwriting and managing the capital of others, and by focusing its appetite for risk on its underwriting rather than its investments as well.
The result of this is a Group profit even after one of the largest catastrophe events of all time.
Table of financial highlights
| 2008 | 2007 | ||
| US$'000 | US$'000 | ||
| Gross premiums written | 265,402 | 242,857 | |
| Net earned premium | 215,679 | 161,546 | |
| Underwriting result | (3,008) | 33,402 | |
| Investment return | 21,827 | 17,972 | |
| Managing Agent's activities+ | 21,079 | 25,004 | |
| Group expenses (net of other income) | (11,676) | (16,902) | |
| Profit before tax | 28,222 | 59,476 | |
| Profit after tax | 22,212 | 50,536 | |
| Per share amounts | |||
| - Net assets | US$1.92 | US$2.09 | |
| - Earnings * | 15.1 cents | 34.4 cents | |
| - Dividend | 11.3 cents | 24.0 cents |
+ Excluding investment income
* The earnings per share figure is based on the weighted average number of shares in issue during the period.
Overview of financial result
Underwriting result
The Group has four main sources of underwriting income.
Firstly, the Group shares in the underwriting and non-technical income and expense of Syndicate 958 through the 16.4% participation of Omega Dedicated, its dedicated corporate vehicle. There is a quota share provided by Omega Specialty to Omega Dedicated which supports the majority of this underwriting. In former years there was a small third party participation in the profits of Omega Dedicated. There was a full and final settlement of outstanding liabilities to the minority interest during 2008.
Secondly, Omega Specialty underwrites quota share reinsurances of Syndicate 958. These reinsurances are written on an underwriting year of account basis, and the proportion of the Syndicate underwriting quota share varies depending on the particular year. For both the 2008 and 2009 years, this quota share percentage is 20%.
Thirdly, Omega Specialty underwrites its own reinsurance book through the Bermuda reinsurance market.
Finally, Omega US underwrites surplus lines business in the US. There is a 50% quota share of the Omega US underwriting to Omega Specialty.
Clearly, these underwriting results, a small loss of US$3.0 million and a 101% combined ratio, are dominated by Hurricanes Ike and Gustav which are estimated to cost the Group a combined $41.3 million. $7.4 million of this amount relates to the Bermuda reinsurance third party business, $1.0 million to Omega US and the remainder is derived from the Syndicate.
We manage our exposures through a combination of outwards reinsurance, caps on inwards reinsurances and whole account protections defining the scale of our potential net exposures. The Ike and Gustav onshore losses are of a size and nature that any significant deteriorations would be are expected to trigger reinsurance recoveries.
Through market announcements in November 2008 and January 2009, we explained that we expected Ike and Gustav to bring our earnings down by some $34 million, towards a breakeven second half and that, as the Group was predicting recoveries on the whole account protections, further deterioration to earnings from hurricane activity or attritional losses was not expected.
In fact, despite some movement in our gross estimates, as the scale of energy losses across the market has revealed itself, our expected recovery on these whole account protections has fallen since that announcement due to the strength of the underlying attritional performance. The resulting reduction in our recoveries on the whole account protections explains the increase in our estimate of the net cost of the two hurricanes.
In relation to the impact of earning through in 2008 of earlier years' underwriting, the 2007 year of account has seen increased claims activity in the second half of 2008. This is partly due to Hurricanes Ike and Gustav on our marine and non-marine binder books which have a longer earnings period than most other lines in which we operate, and partly due to loss activity in the final quarter due to a market loss linked to the Californian wildfires
Development from earlier years of account is negligible.
The Bermuda reinsurance book, excluding the Ike and Gustav losses, is running extremely well at a loss ratio of 30%.
In summary, the underwriting result is clearly dominated by the hurricane activity, but the underlying attritional performance is strong, giving comfort as to the quality of the earnings that will derive from business written in 2008 but not yet earned.
Managing agency
Omega Underwriting Agents receives income from the management of Syndicate 958 by way of a managing agent's fee and a profit commission.
The agency fee reimburses the agency for the costs of 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, calculated as 0.75% of capacity is, therefore, recognised over the three open years of account and a small proportion in the fourth year reflecting the costs of closing of the year of account and associated reporting.
Profit commission is payable to the Agency by Syndicate 958 upon closure of a profitable underwriting year, in effect three years after each underwriting year has commenced, and is recognised in line with the underlying earnings of the Syndicate for each underwriting year.
| Managing agent income | 2008 US$’000 | | 2007 US$’000 |
| Profit commission recognised in the year | 18,861 | | 24,811 |
| Agency fees | 3,025 | | 3,656 |
| Expenses net of other income | (807) | | (3,463) |
| | 21,079 | | 25,004 |
In 2007, the profit commission included an amount of US$8.3 million which would have been recognised in earlier years had the revised basis of recognition described above been adopted prior to that financial year. In contrast, the 2008 profit commission is US$18.9 million, driven by the strength of investment income and foreign exchange in the Syndicate as well as the inherent profitability of the 2006 and 2007 year of account underwriting.
Investment return
In an extraordinary, troubled and volatile year for the investment markets, the Group has remained focused on limiting to the extent possible, its market, liquidity and investment credit risk.
Consequently, during the course of 2007 and 2008, the Group has benefitted from its long held cautious investment strategy.
The Group's investments comprise directly owned investments supporting our underwriting businesses and our share of the Syndicate investments. Both sets of funds are managed in line with a cautious investment strategy.
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 the appointment of investment managers.
The management of the Syndicate's investments is outsourced to investment managers under the direction of the managing agent's Finance Committee. A conservative investment strategy is applied to these funds reflecting the short tail nature of the Syndicate's insurance and reinsurance portfolio and the annual venture nature of Lloyd's syndicates.
The priority in our portfolios has always been,, and remains, one of capital protection first and return second. The Group Investment Committee and agency Finance Committee continued to monitor both the guidelines and investment performance closely with no holdings in equities or asset backed paper.
No write downs in the value of investments have been experienced and the Group has not experienced any reduction in the liquidity of its assets.
Cash is held in either deposits or AAA rated money market accounts. None of these accounts are enhanced yield, rather their stated primary purpose is capital protection. The Group has continued to monitor its exposures, however, and continues to monitor concentration risk. Despite the conservatism of our position, and the success so far at navigating through the market issues, we are not complacent. The Group continues to review and take action to reduce concentrations of risk where possible.
The Group's investments and cash deposits can be analysed as follows:
| Syndicate | Group Share of Syndicate | Corporate Assets | Total Group | |
| Asset Type | US$'m | US$'m | US$'m | US$'m |
| Government Bond | 238 | 39 | 169 | 208 |
| Government Agency | 45 | 7 | - | 7 |
| Government Guaranteed | 64 | 11 | - | 11 |
| Corporate Bonds | 80 | 13 | 33 | 46 |
| Deposits with credit institutions | 49 | 8 | 57 | 65 |
| Cash Deposits | 88 | 15 | 77 | 92 |
| Total | 564 | 93 | 336 | 429 |
The Group has achieved investment returns of 5.3%. This excludes a fair value gain of US$1.7 million on foreign currency contracts put in place to protect the value of the capital raise proceeds ultimately received in early 2009.
The composition of the Group's return can best be analysed as follows:
| Funds at 31 December 2008 US$'000 | Average Return % | ||
| Syndicate funds | 93,438 | 5.32 | |
| Corporate premium funds | 15,867 | 4.05 | |
| Corporate funds supporting underwriting | |||
| - Bermuda | 268,829 | 5.77 | |
| - US | 51,054 | 3.01 | |
| 429,188 | 5.33 |
This return has been largely driven by the unrealised gains in the value of treasuries through the second half of 2008. As we have stated before, our investment performance will continue to be dominated by the performance of US treasuries and high grade corporate debt.
We are conscious that US treasury yields are now at staggeringly low levels. However, the Group does not feel it is appropriate at this stage to increase the risk it is taking in its investment portfolios. As a result of current high treasury valuations and interest rate levels in the US, we expect to see reduced income levels in 2009.
Group Expenses
| 2008 US$ 000 | 2007 US$ 000 | ||
| Underwriting operating expenses | 8,024 | 4,321 | |
| Other corporate expenses: | |||
| Foreign exchange gains | (3,908) | (736) | |
| Other | 17,969 | 22,112 | |
| Finance Costs | 235 | 791 | |
| 22,320 | 26,488 |
Underwriting expenses have increased as we have built on the platforms in Bermuda and Omega US.
The reduction in corporate costs year on year is driven by two factors; firstly, the beginning of underwriting in Omega US has meant effort and cost focused in 2007 in setting up the company is now focused on developing the underwriting business.
The other driver is bonus costs which have fallen by 26% to US$2.5 million from US$3.4 million in 2007 despite growing underlying salary costs as we have built our level of underwriting talent. In setting the level of bonuses, the Board have been cognisant of the return for shareholders in 2008 relative to 2007 but also the operational achievements of the Group.
Overall corporate expenses have remained under tight control throughout our growth period. As we move towards listing on the Main Market, it is important from an operational and risk perspective that infrastructure is enhanced as a result we would expect staff numbers to grow as key individuals are added selectively.
Foreign exchange management
2008 has seen foreign currency volatility of extraordinary proportions with the value of sterling falling by 28% against the US dollar over the year.
To the extent possible, the currencies of assets and liabilities are matched to minimise the effect of such volatility on the Group's profit and shareholders' equity. Surplus assets are held in US dollars.
The net result on revaluation of these items is an exchange gain of $3.9 million (2007: $0.7 million).
In addition, as the managing agency receives its income from the Syndicate which reports its results in sterling, the agency has a sterling functional currency. This has the effect that the level of profit commission from the Syndicate that the Group recognises fluctuates with movements in the sterling value of Syndicate assets and liabilities.
Taxation
The Group's effective tax rate for the period is 21%. This rate is driven by the substantial proportion of the 2008 result derived from profit commission, which is taxable in the U.K.
The majority of underwriting profits in the Group are taxed at Bermuda rates and, therefore, in a year without catastrophe activity of the scale witnessed in 2008, we would expect a substantially lower rate of taxation.
Capital and Dividends
The balance sheet strength post the capital raise is such that the Group is confident it can take advantage of the opportunities ahead whilst retaining a robust capital position.
We believe that those opportunities will emerge over the coming 12 - 18 months and, therefore not all of that capital will be deployed in 2009. In terms of dividends, the Omega Group has always and continues to make clear its intention to return a substantial part of its profit to shareholders in the form of dividends.
In making the decision as to affordability of such a dividend, the Board takes into account both its current and anticipated future requirements. To the extent possible, the excess we return to shareholders. The Board recognises that in doing this there will be times when dividend levels are reduced due to increase capital needs to support growth plans for instance.
In relation to 2008 earnings, an interim dividend was paid in November of US 10.3 cents and in January a further special interim dividend of US 1.0 cent was paid. These dividends combined represent a distribution of some 75% of the Group's profit after tax.
Consolidated income statement
Year ended 31 December 2008
| | Notes | 2008 US$’000 | | 2007 US$’000 |
| Income | | | | |
| Gross premiums written | 3 | 265,402 | | 242,857 |
| Premiums ceded to reinsurers | 3 | (40,783) | | (46,543) |
| Net premiums written | | 224,619 | | 196,314 |
| | | | | |
| Change in gross provision for unearned premiums | | (11,111) | | (39,975) |
| Reinsurers’ share of change in the provision for unearned premiums | | 2,171 | | 5,207 |
| Net earned premium | | 215,679 | | 161,546 |
| Investment return | 4 | 21,827 | | 17,972 |
| Other income | 5 | 23,699 | | 30,269 |
| Net revenue | | 261,205 | | 209,787 |
| Expenses | | | | |
| Insurance claims | | (183,687) | | (84,252) |
| Insurance claims recoverable from reinsurers | | 19,757 | | 5,383 |
| Net insurance claims | 10 | (163,930) | | (78,869) |
| Net acquisition costs | | (46,733) | | (44,954) |
| Other underwriting operating expenses | 6 | (8,024) | | (4,321) |
| Other corporate expenses | 6 | (14,061) | | (21,376) |
| Finance costs | | (235) | | (791) |
| Total expenses | | (232,983) | | (150,311) |
| Profit before tax | | 28,222 | | 59,476 |
| Income tax | 7 | (6,010) | | (8,940) |
| Total recognised profit for the year | 22,212 | | 50,536 | |
| | | | | |
| Earnings per share – basic | 8 | 15.1 cents | | 34.4 cents |
| Earnings per share – diluted | 8 | 14.1 cents | | 33.1 cents |
Consolidated Balance Sheet
As at 31 December 2008
| | Notes | 2008 US$’000 | | 2007 US$’000 |
| ASSETS | | | | |
| Cash and cash equivalents | 11 | 92,554 | | 82,063 |
| Financial investments | 12 | 336,634 | | 273,864 |
| Deferred acquisition costs | | 20,379 | | 17,585 |
| Reinsurance assets | 13 | 98,139 | | 117,214 |
| Insurance receivables | | 29,995 | | 18,553 |
| Prepayments and accrued income | | 29,065 | | 25,080 |
| Other debtors | | 25,065 | | 16,691 |
| Deferred tax assets | 7 | 3,218 | | 2,438 |
| Property and equipment | | 463 | | 479 |
| Intangible assets | 14 | 2,315 | | 149 |
| Total assets | | 637,827 | | 554,116 |
| EQUITY | | | | |
| Called up share capital | 15 | 14,766 | | 14,758 |
| Share premium account | | 147,918 | | 147,694 |
| Contributed surplus | | 100,000 | | 100,000 |
| Own shares | | - | | (49) |
| Foreign exchange reserve | | (11,182) | | 1,593 |
| Profit and loss account | | 32,091 | | 44,606 |
| Total equity and reserves | | 283,593 | | 308,602 |
| LIABILITIES | | | | |
| Insurance contracts | 16 | 295,801 | | 193,000 |
| Trade and other payables | | 54,681 | | 44,454 |
| Current income tax liabilities | | 3,000 | | 7,245 |
| Deferred tax liabilities | 7 | 752 | | 815 |
| Total liabilities | | 354,234 | | 245,514 |
| Total liabilities and equity | | 637,827 | | 554,116 |
| | | | | |
| Net assets per share | | US$1.92 | | US$2.09 |
| Net tangible assets per share | | US$1.90 | | US$2.09 |
The financial statements were approved by the board of directors on 9 March 2009 and were signed on its behalf by
Richard Tolliday Penny James
Director Director Consolidated statement of changes in equity
Year ended 31 December 2008
| Share capital | Share premium account | Contributed surplus | Own shares | Foreign exchange reserve | Profit and loss account | Total | |
| US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | |
| Balance at 1 January 2008 | 14,758 | 147,694 | 100,000 | (49) | 1,593 | 44,606 | 308,602 |
| Currency translation differences | - | - | - | - | (12,775) | - | (12,775) |
| Tax on items taken directly to or transferred from equity | - | - | - | - | - | 515 | 515 |
| Total income and expense for the year recognised directly in equity | - | - | - | - | (12,775) | 515 | (12,260) |
| Profit for the year | - | - | - | - | - | 22,212 | 22,212 |
| Total income and expense for the year | - | - | - | - | (12,775) | 22,727 | 9,952 |
| Vesting of own shares | - | - | - | 49 | - | (49) | - |
| Issue of new share capital | 8 | 224 | - | - | - | - | 232 |
| Share based payments | - | - | - | - | - | 4,072 | 4,072 |
| Dividends | - | - | - | - | - | (39,265) | (39,265) |
| Balance at 31 December 2008 | 14,766 | 147,918 | 100,000 | - | (11,182) | 32,091 | 283,593 |
Consolidated statement of changes in equity
Year ended 31 December 2007
| Share capital | Share premium account | Contributed surplus | Own shares | Foreign exchange reserve | Profit and loss account | Total | ||
| US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | ||
| Balance at 1 January 2007 | 14,736 | 247,641 | - | (98) | 1,162 | 1,960 | 265,401 | |
| Currency translation differences | - | - | - | - | 431 | - | 431 | |
| Tax on items taken directly to or transferred from equity | - | - | - | - | - | 360 | 360 | |
| Total income and expense for the year recognised directly in equity | - | - | - | - | 431 | 360 | 791 | |
| Profit for the year | - | - | - | - | - | 50,536 | 50,536 | |
| Total income and expense for the year | - | - | - | - | 431 | 50,896 | 51,327 | |
| Vesting of own shares | - | - | - | 49 | - | (49) | - | |
| Issue of new share capital | 22 | 576 | - | - | - | - | 598 | |
| Share based payments | - | - | - | - | - | 3,125 | 3,125 | |
| Dividends | - | - | - | - | - | (11,326) | (11,326) | |
| Conversion of share premium | - | (100,000) | 100,000 | - | - | - | - | |
| Reorganisation and listing costs | - | (523) | - | - | - | - | (523) | |
| Balance at 31 December 2007 | 14,758 | 147,694 | 100,000 | (49) | 1,593 | 44,606 | 308,602 |
Consolidated cash flow statement
Year ended 31 December 2008
| Notes | 2008 US$'000 | 2007 US$'000 (restated) | ||
| Cash flows from operating activities | ||||
| Cash generated from operations | 18 | 73,438 | 19,610 | |
| Interest paid | (2,145) | (279) | ||
| Income tax paid | (7,086) | (8,896) | ||
| Net cash inflows from operating activities | 64,207 | 10,435 | ||
| Cash flow from investing activities | ||||
| Purchase of property and equipment | (169) | (332) | ||
| Purchase of intangible assets | (2,166) | - | ||
| Net cash (outflow) from investing activities | (2,335) | (332) | ||
| Cash flows from financing activities | ||||
| Equity dividends paid | (39,265) | (11,326) | ||
| Issue of share capital | 232 | 598 | ||
| Reorganisation and listing costs | - | (523) | ||
|
Net cash (outflow) from financing activities | (39,033) | (11,251) | ||
| Net increase/(decrease) in cash and cash equivalents | 22,839 | (1,148) | ||
| Cash and cash equivalents at start of period | 82,063 | 81,348 | ||
| Foreign exchange currency movements | (12,348) | 1,863 | ||
| Cash and cash equivalents at end of period | 11 | 92,554 | 82,063 |
Notes to the consolidated financial statements
1. General Information
Omega Insurance Holdings Limited ("the Company") is domiciled in Bermuda. The address of the registered office is provided in the Company information page.
Details of the Omega Group's principal activities are included in the Financial Review.
2. Accounting Policies
The basis of preparation, basis of consolidation and significant accounting policies adopted in the preparation of the Group's financial statements are set out below.
Basis of Preparation
The consolidated accounts are prepared in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board ("IFRS") and interpretations issued by the International Financial Reporting Interpretations Committee ("IFRIC"), both as adopted for use by the European Union ("EU"), and applied in accordance with the provisions of the Bermuda Companies Act 1981.
The financial statements have been prepared on the historical cost basis except for financial investments and share options which are measured at their fair value.
Consolidated financial statements values are presented in US dollars rounded to the nearest $'000 unless otherwise stated.
The consolidated cash flow statement has been restated to show the net purchase or sale of investments as cash generated from operations instead of a cash flow from investing activities. This new presentation reflects more accurately the nature of the Group's activities.
Basis of Consolidation
The consolidated financial statements incorporate the accounts of Omega Insurance Holdings Limited and all its subsidiary undertakings ("the Group") drawn up to 31 December 2008.
The financial statements of subsidiaries are prepared for the same reporting year as the parent company. Consolidation adjustments are made to convert subsidiary financial statements prepared under local GAAP into IFRS so as to remove any different accounting policies that may exist.
The Group's share of the transactions, assets and liabilities relating to its Syndicate participation is included in the consolidated financial statements.
Inter-company transactions and balances between Group companies are eliminated.
Changes to International Financial Reporting Standards
The accounting policies adopted are consistent with those of the previous financial year except as noted.
In the current year the Group has adopted IFRIC 11 - IFRS 2 "Group and treasury share transactions". The adoption of this interpretation has not had any effect on the financial position or performance of the Group.
At the date of authorisation of these financial statements, the following standards and interpretations, applicable to the Group, which have not been applied in these financial statements were in issue but are not yet effective. These include:
- IFRS 2 (amended) "Share-based payment - vesting conditions and cancellations"
- IFRS 3 (revised 2008) "Business combinations"
- IFRS 8 "Operating segments"
- IAS 1 (revised 2007) "Presentation of financial statements"
- IAS 27 (revised 2008) "Consolidated and separate financial statements"
The directors anticipate that the adoption of these standards and interpretations will have no material impact on the financial statements of the Group.
Estimates and assumptions
The preparation of financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities. Although these estimates are based on management's best knowledge of current events and actions, actual results may ultimately differ from those estimates.
Foreign currency translation
a) Functional currency
Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The consolidated financial statements are presented in US dollars, the functional currency of the Company and the presentation currency of the Group.
b) Transactions and balances
Transactions in foreign currencies are recorded at the rates of exchange prevailing on the dates of the transactions or a suitable average rate. 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. Exchange differences arising on retranslation are included in the income statement. Non-monetary assets, being assets without a corresponding cash flow such as unearned premium reserves and deferred acquisition costs, are translated in the balance sheet at the exchange rate prevailing at the date of the original transaction.
c) Group companies
The results and financial position of Group entities which have a different functional currency are translated into the Group presentation currency as follows:
- assets and liabilities are translated at the closing rate at the balance sheet date
- income and expenses are translated at average exchange rates
all resulting exchange differences are recognised in the statement of changes in equity.
Insurance contracts
a) Premiums
Written premiums comprise premiums on contracts incepted during the financial year as well as adjustments made in the year to premiums written in prior accounting periods. Estimates are made for pipeline premiums, representing amounts due but not yet notified.
For delegated authority business estimates of how much business will attach to a facility is based on experience and information provided by the broker. Estimates are updated on a regular basis. It is assumed that risks attaching to the master facility incept evenly across the period of the facility and therefore only that proportion of risks that have incepted to the master facility by the balance sheet date are reported within written premium in these financial statements.
All premiums are shown gross of commission payable to intermediaries and are exclusive of taxes and duties levied thereon.
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.
b) Reinsurance premium ceded
Outwards reinsurance premiums are accounted for in the same accounting period as the premiums for the related direct or inwards business being reinsured.
c) Unearned Premiums
The provision for unearned premiums represents the proportion of gross written premium which is estimated to relate to exposures in subsequent financial periods. The change in the unearned premium provision is taken to income so that revenue is recognised in accordance with the period of risk.
d) 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. Deferred acquisition costs are amortised over the period in which the related revenue is earned.
Claims
a) Claims incurred
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 outstanding claims provisions from previous periods.
b) Outstanding claims provisions
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 ("IBNR") at the balance sheet date based on statistical methods.
These methods generally involve projecting from past experience of the development of claims over time to form a view of the likely ultimate claims to be experienced for more recent underwriting, having regard to variations in the business accepted and the underlying terms and conditions. For the most recent years, where a high degree of uncertainty arises from projections, estimates may be based on assessments of the business accepted and underwriting conditions. The Group does not discount its liabilities for unpaid claims. Where applicable, deductions are made for salvage and other recoveries.
The reinsurers' share of provisions for claims is based on the amounts of outstanding claims and projections for IBNR, net of estimated irrecoverable amounts, having regard to the reinsurance programme in place for the class of business, the claims experience for the year and the current security rating of the reinsurance companies involved.
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 income statement of later periods.
c) Liability adequacy test
Provision is made where the expected cost of claims and expenses arising after the end of the financial period from contracts concluded before that date exceeds the provision for unearned premiums, net of deferred acquisition costs, premiums receivable and related investment return.
Investments
a) Financial assets at fair value through the income statement
The Group has classified its financial investments as "fair value through income" to the extent that they are not reported as cash and cash equivalents. This classification has been determined by management based on the decision at the time of acquisition and reflects the fact that the investment portfolios are managed, and their performance evaluated, on a fair value basis. The fair values of quoted financial investments are based on current bid prices. Unlisted investments for which a market exists are stated at the average price at which they are traded on the balance sheet date or the last trading day before that date. Purchases and sales of investments are recognised on the trade date, which is the date the Group commits to purchase or sell the assets. These are initially recognised at fair value, and subsequently re-measured at fair value based on quoted bid prices. Investments are derecognised when they have been sold. Changes in the fair value of investments are included in the income statement in the period in which they arise.
b) Derivative financial instruments
The Group's activities expose it to fluctuations in foreign currency exchange rates. The Group uses foreign exchange forward contracts to hedge these exposures. The Group does not use derivative financial instruments for speculative purposes.
Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at their fair value. Fair values are based on observable market conditions. Changes in the fair value are recognised immediately in the income statement.
c) 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.
Other income
Other income comprises; agency fees, management fees and profit commission charged by the Group to third party members of Syndicate 958; and miscellaneous other income.
Agency fees are charged to a year of account and earned over four years until its expected closure, in line with the services provided. Other management fees are a recharge of expenses incurred and are recognised in the same period as the related expense.
Profit commission is receivable on closure of the relevant Lloyd's year of account, normally after three years. It is recognised as earned on an annual basis to match the related underwriting profits. Profit commissions due after more than one year are held at fair value which is the discounted present value of the nominal amount expected to be received.
Other expenses
Other underwriting operating expenses are recognised on an accruals basis. These comprise the expense directly attributable to the Group's underwriting operations such as acquisition costs, remuneration and other underwriting expenses. They include the Group's share of Syndicate operating expenses and the costs of membership of Lloyd's. They are stated net of contributions from quota share reinsurers.
Other corporate expenses are recognised on an accruals basis. They comprise other group operating expenses not attributable to underwriting.
Employee benefits
a) Pension
The Group provides defined contribution pension schemes for the benefit of employees. Contributions are charged to the income statement in the same period as the related service is provided.
b) Share based payments
The Group operates a number of executive and employee share schemes. In accordance with IFRS 2 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: share price at date of the grant; expected dividend yield; expected volatility; risk free interest rate and employee turnover.
When the options are exercised, the proceeds received, net of transaction costs, are credited direct to equity.
Income taxes
The tax expense represents the sum of the current tax and deferred tax.
a) Current income tax
The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because items of income and expense are taxed in different periods, and it excludes items that are never taxed or deducted. The Group's liability for current tax is calculated using tax rates applicable as at the balance sheet date.
Current income tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the current tax is also dealt with in equity.
b) Deferred income tax
Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding amounts used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered, or to the extent that it has been utilised.
Deferred tax is calculated at the tax rates based on the enacted or substantially enacted tax laws expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.
Cash and cash equivalents
Cash and cash equivalents comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less.
For the purpose of the consolidated cash flow, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts.
Property and equipment
Property and equipment is stated at cost less accumulated depreciation and any impairment in value. Depreciation is calculated on a straight line basis over the estimated useful life of the asset as follows:
Fixtures and fittings - over 5 years
Computer hardware - over 3 years
An item of property and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. A gain or loss arising on derecognition of the asset is calculated as the difference between the net disposal proceeds and the carrying amount of the item. Any such gain or loss is recognised directly in the income statement.
Intangible assets
a) Software development
Computer software development costs that are directly associated with the production of identifiable and unique software products controlled by the Group, and that will generate economic benefits exceeding costs beyond one year, are recognised as intangible assets, and are amortised using the straight line method over their useful lives, not exceeding a period of three years. Amortisation commences when the asset is available for use.
Computer software development costs are subject to an annual impairment review. The amount of any impairment is recognised directly in the income statement.
b) Syndicate participation
Syndicate capacity purchased at auction is recognised at cost. It is considered to have an indefinite useful economic life and is therefore not amortised.
Syndicate capacity is reviewed at each balance sheet date for impairment by reference to the future expected profit streams of Syndicate 958 and the amount of any impairment is recognised directly in the income statement.
Insurance receivables
Insurance receivables are recognised and carried at the recoverable amount. The carrying value of insurance receivables is reviewed for impairment whenever events or circumstances indicate that the carrying amount is greater than the recoverable amount, with the impairment adjustment recorded in the income statement.
Provisions
A provision is recognised when the Group has a present legal or constructive obligation, as a result of a past event, which is probable will result in an outflow of resources and when a reliable estimate of the amount of the obligation can be made.
Leases
Rentals payable under operating leases are taken to the profit and loss account on a straight line basis over the lease term.
Own Shares
Own shares are stated at cost and shown as a deduction from shareholders' funds. No gain or loss is recognised in the income statement on the purchase, sale, issue or cancellation of the company's shares.
Trade and other payables
Trade and other payables are recognised on an accruals basis, based on amounts owed at the balance sheet date.
3. Segmental Information
a) Basis of segmentation
The Group is organised into three distinct underwriting operations being the Group's participation on Syndicate 958, Bermuda reinsurance, and the new underwriting platform set up in the US.
The Lloyd's underwriting agency, which manages Syndicate 958, and Omega Europe (Germany), which acts as a coverholder for the Syndicate, operates as one separate reporting business segment.
Segment results, assets and liabilities include items directly attributable to a segment, as well as those items that can be allocated on a reasonableness basis.
Certain revenues and expenses are incurred relating to central functions, which along with certain related assets and liabilities are retained at the corporate centre level, 'Other'.
Residual income and expenditure not allocated to other segments has been retained at the corporate centre level 'Other'.
Included within gross written premiums for Bermuda reinsurance are premiums from Omega Dedicated Limited of US$90,520,000 (2007: US$82,886,000) and from Omega US Insurance, Inc. US$5,403,000 (2007: US$250,000) on reinsurance contracts undertaken at commercial rates.
The primary segment information is as follows:
(i) Income statement by segment
Year ended 31 December 2008
| Syndicate 958 participation | Bermuda reinsurance | US underwriting business | Lloyd's underwriting agency | Other | Eliminations | Total | |
| US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | |
| Written premium class analysis | |||||||
| Non-marine property insurance | 25,437 | 72,672 | 5,186 | - | - | (26,183) | 77,112 |
| Property catastrophe treaty reinsurance | 21,691 | 67,229 | - | - | - | (19,993) | 68,927 |
| Property per risk treaty reinsurance | 6,881 | 14,087 | - | - | - | (6,346) | 14,622 |
| Professional indemnity insurance | 5,703 | 12,184 | - | - | - | (5,309) | 12,578 |
| Motor insurance and reinsurance | 6,016 | 12,137 | 57 | - | - | (5,594) | 12,616 |
| Marine insurance and reinsurance | 22,973 | 45,302 | - | - | - | (21,151) | 47,124 |
| Liability insurance and reinsurance | 7,946 | 21,221 | 5,563 | - | - | (10,164) | 24,566 |
| Other | 3,650 | 7,577 | - | - | - | (3,370) | 7,857 |
| Gross premiums written | 100,297 | 252,409 | 10,806 | - | - | (98,110) | 265,402 |
| Gross premiums earned | 97,732 | 245,244 | 3,576 | - | - | (92,261) | 254,291 |
| Premiums ceded to reinsurers | (90,921) | (37,699) | (2,253) | - | - | 92,261 | (38,612) |
| Net earned premium | 6,811 | 207,545 | 1,323 | - | - | - | 215,679 |
| Investment return | 544 | 17,272 | 1,809 | 141 | 2,078 | (17) | 21,827 |
| Other income | 1,688 | (1,688) | - | 24,261 | 5,154 | (5,716) | 23,699 |
| Net revenue | 9,043 | 223,129 | 3,132 | 24,402 | 7,232 | (5,733) | 261,205 |
| Expenses | |||||||
| Insurance claims | (74,891) | (176,946) | (3,399) | - | - | 71,549 | (183,687) |
| Insurance claims recoverable from reinsurers | 69,990 | 19,487 | 1,829 | - | - | (71,549) | 19,757 |
| Net insurance claims | (4,901) | (157,459) | (1,570) | - | - | - | (163,930) |
| Net acquisition costs | (1,699) | (44,668) | (366) | - | - | - | (46,733) |
| Other underwriting operating expenses | (478) | (5,451) | (2,095) | - | - | - | (8,024) |
| Depreciation | - | - | - | (76) | (94) | - | (170) |
| Share option charge | - | - | - | - | (4,072) | - | (4,072) |
| Other corporate expenses | - | - | - | (3,106) | (12,429) | 5,716 | (9,819) |
| Finance costs | - | - | - | - | (252) | 17 | (235) |
| Total expenses | (7,078) | (207,578) | (4,031) | (3,182) | (16,847) | 5,733 | (232,983) |
| Profit before tax | 1,965 | 15,551 | (899) | 21,220 | (9,615) | - | 28,222 |
| Claims ratio | 71.9% | 75.9% | 118.7% | 76.0% | |||
| Expense ratio | 32.0% | 24.1% | 186.0% | 25.4% | |||
| Combined ratio | 103.9% | 100.0% | 304.7% | 101.4% |
Year ended 31 December 2007
| Syndicate 958 participation | Bermuda reinsurance | US underwriting business | Lloyd's underwriting agency | Other | Eliminations | Total | |
| US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | |
| Written premium class analysis | |||||||
| Non-marine property insurance | 23,199 | 57,353 | - | - | - | (20,775) | 59,777 |
| Property catastrophe treaty reinsurance | 21,163 | 61,771 | - | - | - | (19,215) | 63,719 |
| Property per risk treaty reinsurance | 5,533 | 14,217 | - | - | - | (4,837) | 14,913 |
| Professional indemnity insurance | 6,460 | 14,795 | - | - | - | (5,729) | 15,526 |
| Motor insurance and reinsurance | 6,312 | 14,297 | - | - | - | (5,777) | 14,832 |
| Marine insurance and reinsurance | 17,572 | 41,260 | - | - | - | (15,885) | 42,947 |
| Liability insurance and reinsurance | 7,605 | 18,258 | - | - | - | (6,761) | 19,102 |
| Other | 4,750 | 11,448 | - | - | - | (4,157) | 12,041 |
| Gross premiums written | 92,594 | 233,399 | - | - | - | (83,136) | 242,857 |
| Gross premiums earned | 86,237 | 193,754 | - | - | - | (77,109) | 202,882 |
| Premiums ceded to reinsurers | (80,731) | (37,464) | (250) | - | - | 77,109 | (41,336) |
| Net earned premium | 5,506 | 156,290 | (250) | - | - | - | 161,546 |
| Investment return | 511 | 14,155 | 1,486 | 359 | 1,634 | (173) | 17,972 |
| Other income | 845 | (845) | - | 30,169 | 501 | (401) | 30,269 |
| Net revenue | 6,862 | 169,600 | 1,236 | 30,528 | 2,135 | (574) | 209,787 |
| Expenses | |||||||
| Insurance claims | (36,401) | (79,666) | - | - | - | 31,815 | (84,252) |
| Insurance claims recoverable from reinsurers | 33,627 | 3,571 | - | - | - | (31,815) | 5,383 |
| Net insurance claims | (2,774) | (76,095) | - | - | - | - | (78,869) |
| Net acquisition costs | (1,459) | (43,495) | - | - | - | - | (44,954) |
| Other underwriting operating expenses | (298) | (4,023) | - | - | - | - | (4,321) |
| Depreciation | - | - | - | (73) | (6) | - | (79) |
| Share option charge | - | - | - | - | (3,125) | - | (3,125) |
| Other corporate expenses | - | - | - | (5,092) | (13,481) | 401 | (18,172) |
| Finance costs | - | - | - | - | (964) | 173 | (791) |
| Total expenses | (4,531) | (123,613) | - | (5,165) | (17,576) | 574 | (150,311) |
| Profit before tax | 2,331 | 45,987 | 1,236 | 25,363 | (15,441) | - | 59,476 |
| Claims ratio | 50.4% | 48.7% | 48.8% | ||||
| Expense ratio | 31.9% | 30.4% | 30.5% | ||||
| Combined ratio | 82.3% | 79.1% | 79.3% |
(ii) Balance sheet by segment
As at 31 December 2008
| Syndicate 958 participation | Bermuda reinsurance | US underwriting business | Lloyd's underwriting agency | Other | Eliminations | Total | |
| US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | |
| Insurance | 88,785 | 199,624 | 9,699 | - | - | (149,595) | 148,513 |
| Investment | 95,745 | 268,829 | 51,055 | 1,408 | 12,151 | - | 429,188 |
| Other | 10,508 | 5,571 | 624 | 30,468 | 15,115 | (2,160) | 60,126 |
| Total assets | 195,038 | 474,024 | 61,378 | 31,876 | 27,266 | (151,755) | 637,827 |
| Insurance | 132,922 | 278,907 | 9,543 | - | - | (125,571) | 295,801 |
| Other | 51,392 | 9,195 | 3,920 | 2,089 | 18,021 | (26,184) | 58,433 |
| Total liabilities | 184,314 | 288,102 | 13,463 | 2,089 | 18,021 | (151,755) | 354,234 |
| Capital expenditure | 1,666 | 93 | 533 | 43 | - | - | 2,335 |
As at 31 December 2007
| Syndicate 958 participation | Bermuda reinsurance | US underwriting business | Lloyd's underwriting agency | Other | Eliminations | Total | |
| US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | |
| Insurance | 63,485 | 171,191 | - | - | - | (81,324) | 153,352 |
| Investment | 88,717 | 203,957 | 48,837 | 6,048 | 8,368 | - | 355,927 |
| Other | 7,340 | 3,086 | 61 | 32,871 | 2,324 | (845) | 44,837 |
| Total assets | 159,542 | 378,234 | 48,898 | 38,919 | 10,692 | (82,169) | 554,116 |
| Insurance | 99,058 | 155,126 | - | - | - | (61,184) | 193,000 |
| Other | 55,522 | 1,056 | 933 | 3,416 | 12,572 | (20,985) | 52,514 |
| Total liabilities | 154,580 | 156,182 | 933 | 3,416 | 12,572 | (82,169) | 245,514 |
| Capital expenditure | - | 210 | 10 | 112 | - | - | 332 |
(iii) Other information by segment
The secondary reporting of the group is by geographical segment. The geographical split of the Group is between the United States, the United Kingdom, Other EU countries and Other, incorporating the Rest of the World.
The segmental analysis of gross written premium is based on location of risk.
Total assets are allocated based on the locations of the underlying asset.
Year ended 31 December 2008
| | Gross Premium Written US$’000 | | Total Assets US$’000 | | Capital Expenditure US$’000 |
| US | 177,955 | | 545,467 | | 626 |
| UK | 27,889 | | 70,800 | | 1,685 |
| Other EU countries | 18,763 | | 16,742 | | 24 |
| Other | 40,795 | | 4,818 | | - |
| | 265,402 | | 637,827 | | 2,335 |
Year ended 31 December 2007
| | Gross Premium Written US$’000 | | Total Assets US$’000 | | Capital Expenditure US$’000 |
| US | 149,559 | | 438,776 | | 220 |
| UK | 31,300 | | 84,106 | | 34 |
| Other EU countries | 24,122 | | 22,983 | | 78 |
| Other | 37,876 | | 8,251 | | - |
| | 242,857 | | 554,116 | | 332 |
4. Investment Return
| Note | 2008 | 2007 | ||
| US$'000 | US$'000 | |||
| Financial investments at fair value through income | ||||
| - Interest income | 12,730 | 8,402 | ||
| Cash and cash equivalents | ||||
| - Interest income | 2,593 | 7,943 | ||
| Net realised gains on investments | 1,938 | 1,227 | ||
| Net unrealised gains on investments | 2,863 | 360 | ||
| Derivative fair value gains | 12 | 1,703 | 40 | |
| 21,827 | 17,972 |
5. Other income
| 2008 | 2007 | ||
| US$'000 | US$'000 | ||
| Profit commission | 18,861 | 24,811 | |
| Management fees | 3,025 | 3,656 | |
| Management charges to syndicate | 1,632 | 1,676 | |
| Other income | 181 | 126 | |
| 23,699 | 30,269 |
During 2007, the Group reviewed the method of estimation of the recognition of profit commission in the managing agency, moving the approach in line with industry best practice. The profit commission was, therefore, accrued in line with the recognition of the underlying earnings of the Syndicate for that underwriting year. The profit commission in 2007 above includes an amount $8.3 million which would have been recognised in earlier years had the change in approach been made before 2007.
6. Other underwriting and corporate expenses
| 2008 | 2007 | ||
| US$'000 | US$'000 | ||
| Staff costs | 14,160 | 14,422 | |
| Operating leases charges | 540 | 398 | |
| Audit fees | 758 | 1,047 | |
| Depreciation | 170 | 79 | |
| General corporate expenses | 10,365 | 11,189 | |
| Foreign exchange (gains)/losses | (3,908) | (1,438) | |
| 22,085 | 25,697 |
| These amounts have been allocated as follows: | |||
| Other underwriting operating expenses | 8,024 | 4,321 | |
| Other corporate expenses | 14,061 | 21,376 | |
| 22,085 | 25,697 |
7. Income tax
| Tax expense | 2008 US$'000 | 2007 US$'000 | |
| Current tax: | |||
| Income tax on profits taxable under UK jurisdiction | 7,145 | 14,958 | |
| Profits taxed under other jurisdictions | 103 | 52 | |
| Adjustment in respect of prior periods | (410) | (561) | |
| Total current tax | 6,838 | 14,449 | |
| Deferred tax (credit)/charge | |||
| Origination and reversal of temporary differences | (856) | (5,624) | |
| Changes in tax rates | - | 21 | |
| Other adjustments in respect of prior years | 28 | 94 | |
| Total deferred tax | (828) | (5,509) | |
| Total tax expense | 6,010 | 8,940 |
In addition to the above deferred tax of US$515,000 (2007: US$360,000) has been credited directly to retained earnings in relation to share options.
| Reconciliation of tax expense | 2008 US$'000 | 2007 US$'000 | |
| Profit for the period | 28,222 | 59,476 | |
| Tax at the standard rate of domestic tax applicable to profits in the country concerned | 5,206 | 8,920 | |
| Add back effect of: | |||
| Expenses not deductible for tax purposes | 88 | 535 | |
| Additional taxable income | 380 | 192 | |
| Permanent timing differences | 718 | (240) | |
| Adjustment in respect of prior periods | (382) | (467) | |
| Total tax charge for the period | 6,010 | 8,940 |
The Group's effective tax rate reflects the fact that a proportion of the Group's profits were taxable within the UK. The standard rate of corporation tax in the UK is 28.5% (2007: 30%).
As the parent company and Omega Specialty, are Bermudian companies and are non-UK resident, their profits are not subject to UK corporation tax. The corporation tax for Bermudian companies is currently 0% (2007: 0%).
For the period from incorporation to 23 March 2007, as a subsidiary of a UK resident company, Omega Underwriting Holdings, Omega Specialty was subject to the UK tax regime.
Deferred tax
Deferred tax is attributable to temporary differences arising on the following:
| Underwriting profits | Share options | Other | Total | ||||
| US$'000 | US$000 | US$000 | US$000 | ||||
| Deferred tax liability/(asset) at 1 January 2008 | 815 | (1,534) | (904) | (1,623) | |||
| Movements in year | (125) | (210) | (1,008) | (1,343) | |||
| Foreign exchange translation differences | 62 | 438 | 500 | ||||
| Deferred tax liability/(asset) at 31 December 2008 | 752 | (1,306) | (1,912) | (2,466) |
The deferred tax liability on underwriting profits represents tax on the technical result in Omega Dedicated which is taxed in the year following the syndicate year of account closing.
Other deferred tax assets are primarily in relation to losses incurred in Omega US. These losses will be utilised against future profits of Omega U
8. Earnings per share
Earnings per share are based on the profit attributable to shareholders and the weighted average number of shares in issue during the period. For the diluted earnings per share the weighted average number of shares in issue is adjusted to reflect the dilutive effect of the future exercise of share options.
| 2008 | 2007 | ||
| Profit for the period in US$'000 | 22,212 | 50,536 | |
| Weighted average number of shares in issue | 147,494,888 | 146,860,622 | |
| Dilutive average number of shares in issue | 157,423,375 | 152,503,304 | |
| Earnings per share: | |||
| Basic (US cents) | 15.1 | 34.4 | |
| Diluted (US cents) | 14.1 | 33.1 |
9. Dividends
Amounts recognised as distributions to equity shareholders in the period:
| 2008 | 2007 | ||
| US$'000 | US$'000 | ||
| 2007 interim dividend of US 7.7 cents per common share | - | 11,326 | |
| 2007 second dividend of US 16.3 cents per common share | 24,056 | - | |
| 2008 interim dividend of US 10.3 cents per common share | 15,209 | - | |
| 39,265 | 11,326 |
In 2007 the share trust waived its rights to dividends over 490,308 shares.
The directors approved a special interim dividend of US1.0 cents per common share, US$1,478,374 paid on 17 February 2009 to shareholders on the register on 23 January 2009.
10. Net insurance claims
| 2008 | 2007 | ||
| US$'000 | US$'000 | ||
| Claims paid | 88,494 | 49,947 | |
| Reinsurers' share of claims paid | (7,690) | (19,157) | |
| Net claims paid | 80,804 | 30,790 | |
| Movement in insurance liabilities | 95,193 | 34,305 | |
| Reinsurers' share of movement in insurance liabilities | (12,067) | 13,774 | |
| Net movement in insurance liabilities | 83,126 | 48,079 | |
| Net insurance claims | 163,930 | 78,869 |
11. Cash and cash equivalents
| 2008 | 2007 | ||
| US$'000 | US$'000 | ||
| Cash at bank and in hand | 36,592 | 22,514 | |
| Short term bank deposits | 55,962 | 59,549 | |
| 92,554 | 82,063 |
Included in cash and cash equivalents are amounts totalling US $66,476,000 (2007: US$59,398,000) not available for use by the Group which are held within the Lloyd's syndicate, as Funds at Lloyd's or to collateralise insurance balances with Syndicate 958.
12. Financial Investments
| Note | 2008 | 2007 | ||
| US$'000 | US$'000 | |||
| Financial Investments at fair value through income | ||||
| Debt securities and other fixed income securities | 271,500 | 194,195 | ||
| Deposit with credit institutions | 57,418 | 74,831 | ||
| Funds held in overseas deposits | 6,013 | 4,838 | ||
| Derivative financial investment - assets | 4 | 1,703 | - | |
| 336,634 | 273,864 |
The group entered into foreign exchange forward and options contracts in December 2008 in order to manage the currency risk on the £124m placing proceeds (net of expenses), which were received in January 2009. At the balance sheet date the fair value of these contracts was an asset of US$1,703,000.
Group financial investments include investments held by Group companies and the Group's share of syndicate investments:
| | 2008 | | 2007 |
| | US$’000 | | US$’000 |
| Group investments | 257,633 | | 197,497 |
| Syndicate investments | 79,001 | | 76,367 |
| | 336,634 | | 273,864 |
Of the amounts included in Group investments US$39,995,000 (2007: $38,331,000) are not available for use by the Group as they are held to collateralise insurance balances with Syndicate 958.
13. Reinsurance assets
| 2008 | 2007 | ||
| US$'000 | US$'000 | ||
| Reinsurers' share of unearned premium | 16,440 | 14,269 | |
| Reinsurers' share of claims outstanding | 28,283 | 15,874 | |
| Debtors arising from reinsurance operations | 53,416 | 87,071 | |
| 98,139 | 117,214 |
14. Intangible assets
| Syndicate Participation rights | Capitalised Software Development Costs | Total | |||
| US$'000 | US$'000 | US$'000 | |||
| Cost | |||||
| At 1 January 2008 and 1 January 2009 | 149 | - | 149 | ||
| Additions | - | 2,166 | 2,166 | ||
| At 31 December 2008 | 149 | 2,166 | 2,315 | ||
| Net Book Value | |||||
| At 1 January 2007 | 149 | - | 149 | ||
| At 31 December 2007 | 149 | - | 149 | ||
| At 31 December 2008 | 149 | 2,166 | 2,315 |
Purchased syndicate capacity entitles the Group to participate in the underwriting activities of Syndicate 958. It is considered to have an infinite useful economic life.
Capitalised software development costs relate to the cost of development of a new underwriting system. At the year end no amortisation had been charged, as the underwriting system was not yet available for use, and no impairment was considered necessary.
15. Share capital
| 2008 Number | 2008 US$ | 2007 Number | 2007 US$ | ||||
| Authorised: | |||||||
| Common shares of US$0.10 each | 10,000,000,000 | 1,000,000,000 | 10,000,000,000 | 1,000,000,000 | |||
| Allotted and fully paid: | |||||||
| Common shares of US$0.10 each | 147,662,417 | 14,766,242 | 147,581,010 | 14,758,101 |
Movement in year relevant to equity shareholders in Omega Group
| Common shares of US$0.10 | Number | Par Value | |
| Shares in issue at 1January 2007 | 147,355,563 | US$14,735,556 | |
| Issue of new shares | 225,447 | US$22,545 | |
| Share in issue at 31 December 2007 | 147,581,010 | US$14,758,101 | |
| Issue of new shares | 81,407 | US$8,141 | |
| Share in issue at 31 December 2008 | 147,662,417 | US$14,766,242 |
16. Insurance Contract assets and liabilities
| 2008 | 2007 | ||||||
| Insurance liabilities | Reinsurance assets | Net | Insurance liabilities | Reinsurance assets | Net | ||
| US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | ||
| Provision for claims reported | 130,296 | (24,691) | 105,605 | 54,769 | (8,743) | 46,026 | |
| Provision for claims incurred but not reported (IBNR) | 80,789 | (3,592) | 77,197 | 64,626 | (7,131) | 57,495 | |
| 211,085 | (28,283) | 182,802 | 119,395 | (15,874) | 103,521 | ||
| Provision for unearned premium | 84,716 | (16,440) | 68,276 | 73,605 | (14,269) | 59,336 | |
| Total insurance contracts | 295,801 | (44,723) | 251,078 | 193,000 | (30,143) | 162,857 | |
For reinsurance assets refer to note 13.
The provision for claims reported and claims incurred but not yet reported (IBNR) may be analysed as follows:
| 2008 | 2007 | ||||||
| Insurance liabilities | Reinsurance assets | Net | Insurance liabilities | Reinsurance assets | Net | ||
| US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | ||
| At 1 January | 119,395 | (15,874) | 103,521 | 69,525 | (21,059) | 48,466 | |
| Change in Syndicate participation | 8,302 | (1,541) | 6,761 | 14,001 | (1,978) | 12,023 | |
| Movement on claims incurred | 183,687 | (19,757) | 163,930 | 84,252 | (5,383) | 78,869 | |
| Claims paid during the year | (88,494) | 7,690 | (80,804) | (49,947) | 19,157 | (30,790) | |
| Other movements * | - | - | - | - | (6,703) | (6,703) | |
| Foreign exchange adjustments | (11,805) | 1,199 | (10,606) | 1,564 | 92 | 1,656 | |
| At 31 December | 211,085 | (28,283) | 182,802 | 119,395 | (15,874) | 103,521 | |
* Other movements relate to third party share of the corporate member transferred to creditors arising out of reinsurance operations.
The provision for unearned premium may be analysed as follows:
| 2008 | 2007 | ||||||||
| Insurance liabilities | Reinsurance assets | Net | Insurance liabilities | Reinsurance assets | Net | ||||
| US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | ||||
| At 1 January | 73,605 | (14,269) | 59,336 | 33,630 | (8,249) | 25,381 | |||
| Premiums written in the year | 265,402 | (40,783) | 224,619 | 242,857 | (46,543) | 196,314 | |||
| Premiums earned in the year | (254,291) | 38,612 | (215,679) | (202,882) | 41,336 | (161,546) | |||
| Other movements * | - | - | - | - | (813) | (813) | |||
| At 31 December | 84,716 | (16,440) | 68,276 | 73,605 | (14,269) | 59,336 | |||
* Other movements relate to third party share of the corporate member transferred to creditors arising out of reinsurance operations.
17. Principal Exchange rates
The exchange rates used in translating foreign currency amounts in the preparation of these accounts are:
| 2008 | 2007 | ||||
| Average rate | Year end rate | Average rate | Year end rate | ||
| US$ | US$ | US$ | US$ | ||
| £1 sterling is equivalent to | 1.85 | 1.44 | 2.00 | 1.99 | |
| Euro 1 is equivalent to | 1.47 | 1.40 | 1.37 | 1.46 | |
| Canadian $1 is equivalent to | 0.94 | 0.81 | 0.93 | 1.02 | |
18. Cash generated from operations
| 2008 | 2007 | ||
| US$'000 | US$'000 (restated) | ||
| Profit before taxation | 28,222 | 59,476 | |
| Adjustments: | |||
| - Depreciation of tangible assets | 170 | 79 | |
| - Realised and unrealised gains and losses | (6,504) | (1,627) | |
| - Charge in relation to financing | 235 | 791 | |
| - Foreign exchange adjustments | (3,908) | (1,438) | |
| - Charge in relation to share option awards | 4,072 | 3,125 | |
| Changes in operating assets and liabilities | |||
| - Increase in financial investments | (56,266) | (48,951) | |
| - (Increase) in deferred acquisition costs | (2,794) | (9,015) | |
| - Decrease/(increase) in reinsurance assets | 19,075 | (55,748) | |
| - (Increase) in insurance receivables | (11,442) | (2,865) | |
| - (Increase) in prepayments and accrued income | (3,985) | (19,088) | |
| - (Increase) in other debtors | (8,375) | (396) | |
| - Increase in insurance liabilities | 102,801 | 89,845 | |
| - Increase in trade and other payables | 12,137 | 5,422 | |
| Cash generated from operations | 73,438 | 19,610 |
19. Events after the balance sheet date
On 8 January 2009, at a Special General Meeting it was agreed that 92,857,142 new common shares (the "Placing Shares") would be issued at £1.40 per share. Application was made for these new placing shares to trade on AIM, and dealing commenced on 30 January 2009. The placing raised £124m of new capital, net of expenses.
20. Related party transactions
Key management compensation
| 2008 | 2007 | ||
| US$'000 | US$'000 | ||
| Salaries and other short term employee benefits | 3,915 | 4,642 | |
| Share-based payments | 2,635 | 1,924 | |
| Post employment benefits - Company contributions paid to money purchase pension scheme | 259 | 243 | |
| Total key management compensation | 6,809 | 6,809 |
The aggregate gain made by directors on exercise of options during 2008 was US$651,888 (2007: US$694,794).
For the purposes of International Accounting Standard 24 "Related party disclosures", key managers are defined as the Board of Directors.
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 2008 and 2007 years of account and £175,247 on the 2006 year of account.
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 provides general accounting, administration and information technology services to the Group and charged US$591,523 in respect of these services to the Group during 2008 (2007: US$575,103).
Directors' interests in the shares of the Company are set out in the Directors' Report.
21 Financial information and posting of accounts
The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 December 2007 or 2008, but is derived from those accounts. The auditors have reported on those accounts; their reports were unqualified and did not contain any explanatory statements.
Copies of the Report and Accounts will be available from the Company's registered office at Clarendon House, Church Street, Hamilton HM11, Bermuda, and on the Company's web-site (www.omegauw.com).
The preliminary results were approved by the Board on 9 March 2009