Full Year Results -3 -12-


|                                          |         |        $'000 |        $'000 | 
+------------------------------------------+---------+--------------+--------------+ 
|                                          |         |              |              | 
+------------------------------------------+---------+--------------+--------------+ 
| Profit/(loss) for the year               |         |       3,939  |     (78,180) | 
+------------------------------------------+---------+--------------+--------------+ 
| Adjustments for:                         |         |              |              | 
+------------------------------------------+---------+--------------+--------------+ 
|  - tax expense                           |         |       2,239  |          100 | 
+------------------------------------------+---------+--------------+--------------+ 
|  - depreciation                          |         |       1,774  |       2,534  | 
+------------------------------------------+---------+--------------+--------------+ 
| - impairment loss recognised in respect  |         |       2,563  |            - | 
| of financial assets                      |         |              |              | 
+------------------------------------------+---------+--------------+--------------+ 
| Net cash flows for the period            |         |     (45,276) |     (55,380) | 
| transferred to investing activities      |         |              |              | 
+------------------------------------------+---------+--------------+--------------+ 
| Loss/(profit) on sale of property, plant |         |          11  |        (16)  | 
| and equipment                            |         |              |              | 
+------------------------------------------+---------+--------------+--------------+ 
| Debt interest expense                    |         |       7,511  |      18,184  | 
+------------------------------------------+---------+--------------+--------------+ 
| Profit on foreign exchange               |         |      (7,668) |     (4,388)  | 
+------------------------------------------+---------+--------------+--------------+ 
|                                          |         |              |              | 
+------------------------------------------+---------+--------------+--------------+ 
| Change in operating assets and liabilities (excluding the effect  |              | 
| of acquisitions and exchange differences on consolidation)        |              | 
+-------------------------------------------------------------------+--------------+ 
|                                          |         |              |              | 
+------------------------------------------+---------+--------------+--------------+ 
| Net decrease in insurance liabilities    |         |    (394,302) |    (444,459) | 
+------------------------------------------+---------+--------------+--------------+ 
| Net decrease in reinsurance assets       |         |     143,649  |     332,392  | 
+------------------------------------------+---------+--------------+--------------+ 
| Net decrease in loans and receivables    |         |      72,235  |     179,495  | 
+------------------------------------------+---------+--------------+--------------+ 
| Net decrease in other operating          |         |    (105,429) |    (191,192) | 
| liabilities                              |         |              |              | 
+------------------------------------------+---------+--------------+--------------+ 
| Net movement in share-based payment      |         |         345  |         146  | 
| reserve                                  |         |              |              | 
+------------------------------------------+---------+--------------+--------------+ 
| Cash used in operations                  |         |    (318,409) |    (240,764) | 
+------------------------------------------+---------+--------------+--------------+ 
 34 Contingent liabilities 
Structured settlements 
The Group, through the Canadian branch of Alea Europe Ltd, has assumed ownership 
of certain structured settlements and has purchased annuities from life assurers 
to provide fixed and recurring payments to those underlying claimants. As a 
result of these arrangements, the Group is exposed to a credit risk to the 
extent that any of these insurers are unable to meet their obligations under the 
structured settlements. This risk is viewed by the Directors as being remote as 
the annuities are fully funded and the Group has only purchased annuities from 
Canadian insurers with a financial stability of AA or higher (Standard & 
Poor's). The Canadian branch is in run-off and the branch discontinued accepting 
assignments of annuities in August 2001. 
In the event of all the relevant life insurers being unable to meet their 
obligations under the structured settlements, at 31 December 2008, the total 
exposure, net of amounts that may be recoverable from the Compensation 
Corporation of Canada (a Canadian industry-backed compensation scheme), is 
estimated to be $47.5 million Canadian Dollars ($47.9 million) and the maximum 
in relation to any one insurer $25.4 million Canadian Dollars ($25.6 million). 
Subpoenas and requests for information/regulatory matters 
In connection with a periodic market conduct examination, the California 
Department of Insurance has disputed certain fees collected from policyholders 
by two agents of one of the Group's subsidiaries. The Group disagrees with the 
Department's position, but is cooperating to audit these fee arrangements. The 
agreements with the agents involved have been terminated. It is not possible to 
predict the impact of this dispute on the Group's financial results. 
Company contingent liabilities 
In 2002 the Company entered into a top down guarantee with each of the Group's 
rated insurance operating entities. These guarantees were in addition to the 
pre-existing guarantees already in place between certain subsidiaries of the 
Group. Subject to applicable corporate and regulatory requirements, the top down 
guarantees required that the Company make funds available to the insurance 
operating entities to allow the entities to fulfil their insurance or 
reinsurance obligations to the client/customer incurred while the guarantee 
remained in effect. The Group terminated all top down and other intra-Group 
guarantees effective 30 November 2006. 
Legion Companies in Liquidation 
Alea Europe is in dispute with Legion Insurance Company (in liquidation) and 
Villanova Insurance Company (in liquidation) regarding the terms of an aggregate 
excess reinsurance reinsurance treaty that was automatically commuted on July 31 
2006 in accordance with an agreed formula.  Legion and Villanova have sought to 
draw a letter of credit in the amount of $6,818,480 in connection with their 
claim that amounts remain due under this treaty. Alea Europe sued Legion and 
Villanova in Connecticut District Court and obtained a temporary restraining 
order preventing Legion and Villanova from drawing the letter of credit.  Based 
upon an agreement to arbitrate the matter, Alea Europe has withdrawn the 
litigation on condition that Legion not draw the letter of credit for sums 
relating to the aggregate excess reinsurance treaty until a final arbitration 
decision on the matter has been rendered. Alea Europe intends to vigorously 
pursue its interests in this matter. 
 
 
35 Exposure to specific credit risk 
Exposure to Lumbermens 
In connection with the Group's acquisition of the Equus Re reinsurance division 
of Lumbermens on 3 December 1999, Alea (Bermuda) Ltd and Lumbermens entered into 
a 100% quota share reinsurance of the Lumbermens business written by Equus Re 
through 3 December 1999 (namely, business written by Equus Re prior to the 
Group's acquisition of the Equus Re operations). Lumbermens, in turn, provides 
stop loss reinsurance to Alea (Bermuda) Ltd for losses in excess of a 75% paid 
loss ratio on the same business incepting prior to 1 October 1999 (the 
"Protected Business"). In addition to the Protected Business, the parties agreed 
that the Group would write new and renewal business on behalf of Lumbermens (as 
the reinsurer) up to 31 December 2001, which business is ceded by a 100% quota 
share reinsurance to Alea (Bermuda) Ltd (the "Fronted Business"). Concurrent 
with these arrangements, Lumbermens retained Alea North America Company ("ANAC") 
as its agent to adjust and pay claims and collect premiums for both the 
Protected Business and the Fronted Business. 
The respective obligations of Alea (Bermuda) Ltd and Lumbermens noted above are 
subject to contractual mutual offset provisions under the reinsurance agreements 
and as permitted under Illinois law. Further, in respect of the Protected 
Business, Lumbermens is contractually required to fund losses on its own behalf 
once the 75% paid loss ratio is met. The Group's balance sheet therefore, 
records (i) no net balance due from Lumbermens under the Protected Business, as 
the 75% paid loss ratio was met in late December 2003 (specifically, $64.35 
million due to and from Lumbermens), and (ii) as at 31 December 2008, an 
aggregate balance due to Lumbermens under the Fronted Business and in respect of 
business written by Equus Re between 1 October 1999 and 3 December 1999 of 
$37.4 million (2007: $39.2 million), after taking credit for amounts treated as 
paid for accounting purposes. 
As is required for credit for reinsurance purposes when cessions are made to 
non-US licensed reinsurers, Alea (Bermuda) Ltd must collateralise its 
obligations to Lumbermens. Pursuant to contract, the amount of posted collateral 
is required to equal 120% of the estimated loss reserves, which based on the 
above year-end balance due from Alea (Bermuda) Ltd would be approximately 
$44.9 million (2007: $47.0 million). 
Alea (Bermuda) Ltd and Lumbermens continue to disagree over the level of 
reserves requiring collateralisation. However, following commutations completed 
in 2008 with Lumbermens with respect to certain ceding companies and a further
Alea (LSE:ALEA)
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