Summary of impact of IFRS
Amlin PLC
10 August 2005
PRESS RELEASE
10 August 2005
For immediate release
Summary of the impact of International Financial Reporting Standards ('IFRS')
From 2005 Amlin plc (the Company) is required to prepare consolidated financial
statements for the Company and its subsidiaries (the Group) in accordance with
IFRS as adopted by the European Union (EU).
The first annual report under IFRS will be for 2005 and the first interim
results reported under IFRS will be for the half year ended 30 June 2005. This
document explains how the Group's reported performance and financial position
are affected by this change.
This note summarises the key impacts on the Group's previously reported net
assets and profits from the adoption of IFRS.
The following is a summary of the financial impact of the transition from UK
GAAP to IFRS.
IFRS adjustments
UK GAAP IFRS
Year ended 31 December 2004
Profit before tax (£m) 121.6 7.3 128.9
Profit after tax (£m) 86.0 5.0 91.0
Earnings per share (pence) 22.1p 1.3p 23.4p
Return on equity 22.3% 1.6% 23.9%
As at 31 December 2004
Net assets (£m) 443.9 15.9 459.8
Net assets per share (pence) 113.6p 4.0p 117.6p
Net tangible assets per share (pence) 99.1p 1.7p 100.8p
The principal adjustments arising from transition relate to:
• Foreign exchange accounting for non-monetary assets;
• Accounting for dividends;
• Accounting for syndicate capacity; and
• Accounting for defined pension schemes.
The transition to IFRS will not:
• Change the underlying operations of the Group;
• Change actual cash flows; and
• Change the previously stated dividend policy.
A full explanation of the impact of the transition to IFRS, including revised
accounting policies, is provided below and is available from the Group's website
(www.amlin.co.uk).
Enquiries:
Richard Hextall, Amlin plc 0207 746 1058
David Haggie, Haggie Financial Limited 0207 417 8989
Amlin plc
Restatement of financial information under International Financial Reporting
Standards (IFRS)
Introduction
From 2005 the Company is required to prepare consolidated financial statements
for the Group in accordance with IFRS as adopted by the European Union (EU).
The first annual report under IFRS will be for 2005 and the first interim
results reported under IFRS will be for the six months ended 30 June 2005. This
document explains how the Group's reported performance and financial position
are affected by this change.
The Group's consolidated balance sheets at 1 January 2004 and 31 December 2004
have been restated in accordance with IFRS issued by the International
Accounting Standards Board (IASB) and endorsed by the European Commission (EC)
and effective for accounting periods commencing after 1 January 2005. The IFRS
themselves are subject to possible amendment by interpretative guidance from the
IASB, or other external bodies, and are therefore subject to change prior to
publication of the Group's first IFRS results in September 2005.
The Group's consolidated financial statements under IFRS consolidate the
accounts of the Company, its subsidiary undertakings and the Group's
underwriting through participation on Lloyd's syndicates.
The UK GAAP financial information contained in this document does not constitute
statutory accounts as defined in section 240 of the Companies Act 1985. The
auditors issued unqualified opinions on the Group's UK GAAP financial statements
for the years ended 31 December 2003 and 31 December 2004.
Transitional arrangements upon first time adoption of IFRS
A company is required to determine its IFRS accounting policies and apply these
retrospectively to determine its opening balance sheet at 1 January 2004 under
IFRS. However, IFRS 1, First time adoption of International Financial Reporting
Standards (IFRS 1) allows a number of exemptions to this general principle upon
adoption of IFRS. The Group has taken advantage of the following transitional
arrangements:
Business combinations
The Group has elected not to apply retrospectively the provisions of IFRS 3,
Business Combinations, to business combinations that occurred prior to 1 January
2004. At the date of transition no adjustment was made between UK GAAP and IFRS
shareholders' funds for any historical business combination.
Equity compensation plans
The Group has elected not to apply the provisions of IFRS 2, Share-based
payments, to options granted on or before 7 November 2002 which had not vested
by 1 January 2004.
Estimates
Where estimates had previously been made under UK GAAP, consistent estimates
(after adjustments to reflect any difference in accounting policies) have been
made for the same date on transition to IFRS (i.e. judgements affecting the
Group's opening balance sheet have not been revisited with the benefit of
hindsight).
Notes to the analysis of adjustments to the balance sheet at 1 January and 31
December 2004 as a result of the transition to IFRS
The UK GAAP balance sheets as at 1 January 2004 and 31 December 2004 have been
represented in a format consistent with IFRS. The material adjustments between
UK GAAP and IFRS are as summarised below. All adjustments apply to the Group's
own assets and liabilities and the Group's share of the assets and liabilities
of the syndicates on which it participates.
Summarised reconciliation of the consolidated balance sheet from UK GAAP to IFRS
As at 1 January 2004 As at 31 December 2004
UK GAAP Adjustments IFRS UK Adjustments IFRS
on GAAP on transition
transition to IFRS
to IFRS
£m £m £m £m £m £m
Property, plant and equipment 6.4 - 6.4 6.2 - 6.2
Intangible assets 57.0 6.2 63.2 56.7 9.3 66.0
Financial investments - 50.6 (0.2) 50.4 90.5 (0.4) 90.1
equities
Financial investments - debt 997.7 2.5 1,000.2 1,210.9 1.5 1,212.4
securities
Loans and receivables, 294.6 (12.9) 281.7 361.1 (74.1) 287.0
including insurance receivables
Deferred income tax - 25.1 25.1 - 22.0 22.0
Reinsurance contracts 518.6 1.5 520.1 603.9 0.9 604.8
Cash and cash equivalents 26.5 4.2 30.7 42.8 4.9 47.7
Total assets 1,951.4 26.4 1,977.8 2,372.1 (35.9) 2,336.2
Share capital 97.7 - 97.7 98.8 - 98.8
Treasury shares (2.4) - (2.4) (1.6) - (1.6)
Other reserves 194.7 0.2 194.9 198.8 0.5 199.3
Retained earnings 93.3 (3.0) 90.3 147.9 15.4 163.3
Total shareholders' equity 383.3 (2.8) 380.5 443.9 15.9 459.8
Insurance contracts 1,484.4 9.6 1,494.1 1,722.0 (60.0) 1,662.0
Borrowings 11.4 - 11.4 58.7 - 58.7
Provisions for other 3.0 - 3.0 4.6 - 4.6
liabilities and charges
Trade and other payables 39.2 (2.5) 36.7 85.0 (13.4) 71.6
Deferred tax liabilities 16.9 20.9 37.8 52.4 20.1 72.5
Retirement benefit obligations - 1.2 1.2 - 1.5 1.5
Current income tax liabilities 13.1 - 13.1 5.5 - 5.5
Total liabilities 1,568.1 29.2 1,597.3 1,928.2 (51.8) 1,876.4
Total equity and liabilities 1,951.4 26.4 1,977.8 2,372.1 (35.9) 2,336.2
Foreign exchange accounting for non-monetary assets and liabilities
IAS 21, The effects of changes in foreign exchange rates, requires foreign
currency denominated non-monetary assets, liabilities and transactions (i.e.
those without a corresponding cash flow, being principally the unearned premium
reserve, the reinsurers' share of the unearned premium reserve and deferred
acquisition costs) to be converted to the functional currency using the exchange
rate prevailing at the date of the original transaction (or an average rate for
the period of the transaction) even when accounted for in subsequent periods.
Prior to the adoption of IFRS the Group converted non-monetary assets and
liabilities at the rate of exchange at the balance sheet date at which they were
reported, regardless of the period in which the asset or liability first arose.
Furthermore, any movement in a non-monetary asset or liability that was
recognised through the profit and loss account was converted using the average
exchange rate for the period in which it was recognised in the profit and loss
account.
The impact of this change is to reduce net assets by £12.3million and
£7.5million at 1 January and 31 December 2004 respectively.
Accounting for reinsurance to close (RITC)
The RITC is a contract between the Lloyd's names on one syndicate year of
account and the names on another syndicate year of account (normally the
following year of the same syndicate), whereby the names on the earlier year
reinsure all their outstanding liabilities with the names on the later year. To
the extent that names maintain their interest from one year to the next there is
no economic effect arising from this transaction. However, where names
interests' change from one year to the next, and Amlin's share of the syndicate
changes as a consequence, there is an economic transfer arising from the RITC.
Prior to the adoption of IFRS the RITC contract was accrued for at the year end,
even though it was normally not finalised until after the year end. To the
extent that Amlin's share of capacity increases from one year to the next this
gave rise to a debtor and an equal increase in liabilities.
Following the transfer to IFRS the RITC is accounted for in the period in which
the contract is finalised. The debtor and the increase in liabilities that
previously existed is therefore now eliminated. In addition, the Group is now
disclosing as premium income the amount of the RITC received relating to the
increase in capacity for one year of account to the next. An equivalent increase
in claims is also recorded.
These adjustments have no net effect on reported profits and net assets.
Dividend accrual
Under UK GAAP the Group accrued for the final dividend in the period in which
the profits to which it related were recognised. Under IAS 10, Events after the
balance sheet date, a dividend should only be recognised in the period in which
it is declared and becomes a present obligation of the Group.
The impact of this change on the balance sheet as at 1 January and 31 December
2004 is to increase shareholders' funds by £6.4million and £19.6million
respectively, being the final dividend for 2003 and 2004 which is now recognised
in 2004 and 2005.
Syndicate capacity
Under UK GAAP, syndicate capacity purchased by the Group is capitalised at cost
in the balance sheet and amortised over its useful economic life, which the
directors considered to be 20 years. An impairment review is performed annually
to ensure that the carrying value is appropriate.
Accounting for syndicate capacity changes under IFRS. IAS 38, Intangible assets,
permits syndicate capacity to be classified as an indefinite life intangible
asset. As such it is recognised at cost and is not amortised but is subject to
an annual review to ensure that its value is not impaired and to determine
whether events and circumstances continue to support an indefinite useful life
assessment.
In adopting IAS 38 the Group has reinstated all syndicate capacity amortised up
to 1 January 2004 to original cost. The impact of this is to increase net assets
by £6.2million and £9.3million at 1 January and 31 December 2004 respectively.
Employee benefits - pensions
Within the Group there are a number of different pension schemes, including two
defined benefit schemes, one of which is a multi-employer scheme. Under UK GAAP
the Group accounts for its defined benefit pension schemes in accordance with
SSAP 24, Accounting for pension costs. Both SSAP 24 and IAS 19, Employee
benefits, permit the multi-employer scheme to be accounted for as a defined
contribution scheme subject to satisfying certain conditions. The Group
believes these conditions are satisfied. Accounting for defined contribution
schemes does not change under IFRS.
Under SSAP 24 the assets and projected liabilities of the remaining defined
benefit scheme are not recognised on the Group's balance sheet. Instead the
costs of the schemes are charged to operating profit so as to spread the expense
of providing future pensions to employees over the remaining average service
lives of current employees in the scheme. Adjustments are made for surpluses or
deficits that arise under the SSAP 24 basis of valuation. An accrual or
prepayment will arise to the extent that the charge in the profit and loss
account does not equate to the cash contributions made into the scheme.
Under IAS 19 the projected liabilities of the defined benefit pension schemes
are matched against the fair value of the underlying assets and other
unrecognised actuarial gains and losses in determining the pension liabilities
for the year. Any pension asset or liability must be recorded on the balance
sheet. IAS 19 does permit cumulative gains or losses that lie within a defined '
corridor' to not be recognised. However, Amlin plc does not currently intend to
apply this 'corridor approach' to valuing pension deficits.
The change in accounting has resulted in the removal of the Group's SSAP 24
balances, a liability of £0.3million, and the recognition of a deficit of
£1.2million, valued in accordance with IAS 19. The overall impact is a reduction
in shareholders' funds of £0.9million.
An amendment was issued to IAS 19 in December 2004 which, subject to endorsement
by the EC, requires that if there is a contractual agreement between employers
in a multi-employer defined benefit scheme, that is accounted for as a defined
contribution scheme, as to how a surplus should be distributed or a deficit
funded, then that surplus or deficit shall be recognised as an asset or a
liability. This requirement will be mandatory for accounting periods commencing
on or after 1 January 2006, if endorsed by the EC. The Group has decided that it
will not early adopt any of the amendments to IAS 19.
Employee benefits - other long-term employee benefits
IAS 19, Employee benefits, requires recognition of the costs of providing for
long-term compensated absences. In accordance with this requirement the Group
has provided £0.3million at 1 January 2004 for the estimated past service cost
of its sabbatical leave scheme.
Reclassifications between financial investments and cash and cash equivalents
As at the 1 January 2004 and 31 December 2004, £2.6million and £2.1million
respectively of the Group's investments meet the definition of cash equivalents
included in IAS 7, Cash flow statements, and have therefore been reclassified
to 'cash and cash equivalents'.
Valuation of financial investments
Under UK GAAP, the Group's financial investments have been carried at the
mid-price quoted on the balance sheet date. IAS 39, Financial investments:
recognition and measurement, requires the Group's financial investments to be
valued at fair value which is deemed to be the bid-price.
This change reduces the valuation of the Group's financial investments by
£0.3million and £1.0million at 1 January and 31 December 2004 respectively
Under IFRS the Group's financial investments are categorised as fair value
through profit and loss. Accordingly, all gains (realised and unrealised) will
be passed through the income statement.
Share-based payments
Under UK GAAP the Group is not required to expense the costs of share-based
payments made to directors and employees in the profit and loss account. IFRS 2,
Share-based payments, requires the cost of all share-based payments to be
charged against profits over their respective vesting periods.
The impact of this change as at 1 January and 31 December 2004 is to reduce
retained earnings by £0.2million and £0.5million respectively.
Discounting of debtors and creditors due after more than one year
Under IFRS debtors and creditors that fall due outside of one year from the
balance sheet date (excluding deferred tax assets and liabilities) must be
discounted to their net present value at the balance sheet date using an
appropriate discount rate. Discounting of such items is not required under UK
GAAP.
The overall impact at 1 January 2004 of complying with this requirement of IFRS
is to increase net assets by £1.0million.
Service companies
Prior to the adoption of IFRS the Group did not consolidate all of its service
companies. Instead net transactions were processed through the syndicate profit
and loss account. IAS27, Consolidated and separate financial statements,
requires that the service companies are consolidated on the basis that they are
controlled by the Group.
The impact of consolidating all service companies as at 1 January 2004 is to
reduce net assets by £1.3million.
Detailed reconciliations from UK GAAP to IFRS
The following tables show in detail the adjustments made to the Group's UK GAAP
balance sheets as at 1 January and 31 December 2004 and the profit and loss
account for the year ended 31 December 2004 in order to change to IFRS.
Detailed reconciliation of the consolidated balance sheet as at 1 January 2004
from UK GAAP to IFRS
UK GAAP Consolidation Re-class Employee Investment Dividend Share
of service between cash benefits valuation accrual based
companies and (IAS19) (IAS39) (IAS10) payments
(IAS18) investments (IFRS2)
£m £m £m £m £m £m £m
Property, plant and
equipment 6.4
Intangible assets 57.0
Financial investments -
equities 50.6 (0.2)
Financial investments -
debt securities 997.7 2.6 (0.1)
Loans and receivables,
including insurance
receivables 294.6 (2.8) (0.5)
Deferred income tax - 0.1
Reinsurance contracts 518.6
Cash and cash equivalents 26.5 6.8 (2.6)
Total assets 1,951.4 4.1 - (0.5) (0.3) - -
Share capital 97.7
Treasury shares (2.4)
Other reserves 194.7 0.2
Retained earnings 93.3 (1.3) (1.4) (0.3) 6.4 (0.2)
Total shareholders' equity 383.3 (1.3) - (1.4) (0.3) 6.4 -
Insurance contracts 1,484.4
Borrowings 11.4
Provisions for other
liabilities and charges 3.0
Trade and other payables 39.3 5.4 (0.3) (6.4)
Deferred tax liabilities 16.9
Retirement benefit
obligations - 1.2
Current income tax
liabilities 13.1
Total liabilities 1,568.1 5.4 - 0.9 - (6.4) -
Total equity and
liabilities 1,951.4 4.1 - (0.5) (0.3) - -
Discounting Syndicate RITC Foreign Deferred IFRS
capacity adjustment exchange on tax
non-monetary (IAS12)
assets
(IAS21)
£m £m £m £m £m £m
Property, plant and
equipment 6.4
Intangible assets 6.2 63.2
Financial investments -
equities 50.4
Financial investments -
debt securities 1,000.2
Loans and receivables,
including insurance
receivables (0.3) (14.4) 5.1 281.7
Deferred income tax 25.0 25.1
Reinsurance contracts 1.5 520.1
Cash and cash equivalents 30.7
Total assets (0.3) 6.2 (14.4) 6.6 25.0 1,977.8
Share capital 97.7
Treasury shares (2.4)
Other reserves 194.9
Retained earnings 1.0 6.2 (12.3) (1.1) 90.3
Total shareholders' equity 1.0 6.2 - (12.3) (1.1) 380.5
Insurance contracts (14.4) 24.1 1,494.1
Borrowings 11.4
Provisions for other
liabilities and charges 3.0
Trade and other payables (1.3) 36.7
Deferred tax liabilities (5.2) 26.1 37.8
Retirement benefit
obligations 1.2
Current income tax 13.1
liabilities
Total liabilities (1.3) - (14.4) 18.9 26.1 1,597.3
Total equity and
liabilities (0.3) 6.2 (14.4) 6.6 25.0 1,977.8
Detailed reconciliation of the consolidated balance sheet as at 31 December 2004
from UK GAAP to IFRS
UK GAAP Consolidation Re-class Employee Investment Dividend Share
of service between cash benefits valuation accrual based
companies and (IAS19) (IAS39) (IAS10) payments
(IAS18) investments (IFRS2)
£m £m £m £m £m £m £m
Property, plant and
equipment 6.2
Intangible assets 56.7
Financial investments -
equities 90.5 (0.4)
Financial investments -
debt securities 1,210.9 2.1 (0.6)
Loans and receivables,
including insurance
receivables 361.1 (0.1) (0.5)
Deferred income tax - 0.1
Reinsurance contracts 603.9
Cash and cash equivalents 42.8 7.0 (2.1)
Total assets 2,372.1 7.0 - (0.5) (1.0) - -
Share capital 98.8
Treasury shares (1.6)
Other reserves 198.8 0.5
Retained earnings 147.9 (2.2) (1.7) (1.0) 19.6 (0.5)
Total shareholders' equity 443.9 (2.2) - (1.7) (1.0) 19.6 -
Insurance contracts 1,722.0 1.6
Borrowings 58.7
Provisions for other
liabilities and charges 4.6
Trade and other payables 85.0 7.6 (0.3) (19.6)
Deferred tax liabilities 52.4
Retirement benefit
obligations - 1.5
Current income tax 5.5
liabilities
Total liabilities 1,928.2 9.2 - 1.2 - (19.6) -
Total equity and
liabilities 2,372.1 7.0 - (0.5) (1.0) - -
Discounting Syndicate RITC Foreign Deferred IFRS
capacity adjustment exchange on tax
non-monetary (IAS12)
assets
(IAS21)
£m £m £m £m £m £m
Property, plant and
equipment 6.2
Intangible assets 9.3 66.0
Financial investments -
equities 90.1
Financial investments -
debt securities 1,212.4
Loans and receivables,
including insurance
receivables (76.6) 3.1 287.0
Deferred income tax 21.9 22.0
Reinsurance contracts 0.9 604.8
Cash and cash equivalents 47.7
Total assets - 9.3 (76.6) 4.0 21.9 2,336.2
Share capital 98.8
Treasury shares (1.6)
Other reserves 199.3
Retained earnings 1.1 9.3 (7.5) (1.7) 163.3
Total shareholders' equity 1.1 9.3 - (7.5) (1.7) 459.8
Insurance contracts (76.6) 15.0 1,662.0
Borrowings 58.7
Provisions for other
liabilities and charges 4.6
Trade and other payables (1.1) 71.6
Deferred tax liabilities (3.5) 23.6 72.5
Retirement benefit
obligations 1.5
Current income tax
liabilities 5.5
Total liabilities (1.1) - (76.6) 11.5 23.6 1,876.4
Total equity and
liabilities - 9.3 (76.6) 4.0 21.9 2,336.2
Detailed reconciliation of the consolidated income statement for the year ended
31 December 2004 from UK GAAP to IFRS
UK GAAP Consolidation Employee Investment Share RITC Foreign Syndicate IFRS
of service benefits valuation based adjustment exchange capacity
companies (IAS39) payments on
(IAS18) (IAS19) (IFRS2) non-
monetary
assets
(IAS21)
£m £m £m £m £m £m £m £m £m
Insurance premium 855.9 15.3 27.8 899.0
revenue
Insurance premium (159.6) (1.7) (161.3)
ceded to reinsurers
Net insurance 696.3 - - - - 15.3 26.1 - 737.7
premium revenue
Fee income - - 3.7 3.7
insurance contracts
Investment income 52.2 0.3 (0.7) 51.8
Net realised gain on (4.3) (4.3)
financial assets
Net fair value gains 4.6 4.6
on assets at fair
value through income
Other operating 5.9 (2.5) 0.3 3.7
income
Net income 754.7 1.5 0.3 (0.7) - 15.3 26.0 - 797.2
Insurance claims and 542.2 15.3 557.5
loss adjustment
expenses
Insurance claims and (163.0) (163.0)
loss adjustment
expenses recovered
from reinsurers
Net insurance 379.2 - - - - 15.3 - - 394.5
benefits and claims
Expenses for the 158.4 (2.5) 5.8 161.7
acquisition of
insurance and
investment contracts
Expenses for 52.3 4.9 0.2 (3.1) 54.3
marketing and
administration
Expenses for asset 4.2 4.2
management services
rendered
Other operating 37.1 0.3 0.4 13.9 51.7
expenses
Expenses 631.2 2.4 0.5 - 0.4 15.3 19.7 (3.1) 666.4
Results of operating 123.5 (0.9) (0.2) (0.7) (0.4) - 6.4 3.1 130.8
activities
Finance costs (1.9) (1.9)
Profit before tax 121.6 (0.9) (0.2) (0.7) (0.4) - 6.4 3.1 128.9
Income tax (35.6) 0.1 0.2 - 0.1 - (1.8) (0.9) (37.9)
Profit for the 86.0 (0.8) - (0.7) (0.3) - 4.6 2.2 91.0
period
ACCOUNTING POLICIES
Summary of significant accounting policies
The significant accounting policies adopted in the preparation of the Group's
IFRS financial statements are set out below:
Basis of preparation and consolidation principles
For the year ended 31 December 2005 the Company is required to prepare
consolidated financial statements under International Accounting Standards (IAS)
as adopted by the European Commission (EC). These will be those IAS,
International Financial Reporting Standards (IFRS) and related interpretations,
subsequent amendments to those standards and related interpretations, future
standards and related interpretations issued and adopted by the International
Accounting Standards Board (IASB) that have been endorsed by the EC. This
process is ongoing and the EC has yet to endorse certain standards issued by the
IASB. Of particular relevance to Amlin plc is IFSR 2, Share based payments,
which the EC have indicated they will adopt, although they have not yet formally
done so.
The preliminary opening balance sheet, IFRS comparatives for 2004 and the
reconciliations between UK GAAP and IFRS have been prepared by management using
the best knowledge of the expected standards and interpretations of the IASB,
facts and circumstances and accounting policies that will be applied when the
Company prepares its first complete set of IFRS financial statements as at 31
December 2005. Therefore until such time, the possibility cannot be excluded
that the accompanying preliminary opening balance sheet may require adjustment
before constituting the final opening balance sheet. Moreover, under IFRS, only
a complete set of financial statements comprising a balance sheet, income
statement, statement of changes in equity and cash flow statement, together with
comparative financial information and explanatory notes, can provide a fair
presentation of the Company's financial position, results of operations and cash
flow.
The financial statements consolidate the accounts of the Company, its subsidiary
undertakings, and the Group's underwriting through participation on Lloyd's
syndicates.
The financial statements have been prepared on the historical cost basis except
for financial investments and pension assets and liabilities which are measured
at their fair value.
In accordance with the standard for Phase 1 of insurance contracts (IFRS 4), the
Group has applied existing accounting practices for insurance contracts,
modified, as appropriate, to comply with the IFRS framework and applicable
standards.
The consolidated financial statements are stated in sterling, which is the
Group's functional and presentational currency.
Use of estimates
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
The Group is subject to regulation in the United Kingdom and presents its
financial statements in sterling. All group entities are incorporated in the
United Kingdom and conduct business in a range of economic environments,
primarily the United Kingdom, United States of America and Europe. Due to the
regulatory environment and the fact that the group trades through the Lloyd's
market, all group companies have adopted sterling as their functional currency.
Income and expenditure in US dollars, Euros and Canadian dollars is translated
at average rates of exchange for the period. Underwriting transactions
denominated in other foreign currencies are translated using the exchange rates
prevailing at the dates of the transactions. Monetary assets and liabilities,
expressed in US dollars, Euros and Canadian dollars are translated into sterling
at the rates of exchange at the balance sheet date. Non-monetary assets and
liabilities are translated at the average rate prevailing in the period in which
the asset or liability first arose. Differences arising on translation of
foreign currency amounts in the syndicate are included in operating expenses.
Assets, liabilities, income and expenditure expressed in other foreign
currencies have been translated at the rates of exchange at the balance sheet
date. Where contracts to sell currency for sterling have been entered into prior
to the year end, the contracted rates have been used. Differences arising on
translation of foreign currency amounts on such items are included in other
charges.
Premiums
Written premiums comprise premiums on contracts incepting during the financial
year. Premiums are disclosed before the deduction of brokerage and taxes or
duties levied on them. Estimates are included for premiums receivable after the
period end but not yet notified, as well as adjustments made in the year to
premiums written in prior accounting periods.
Premiums are earned over the policy contract period. Where the incidence of risk
is the same throughout the contract, the earned element is calculated separately
for each contract on a 24ths or 365ths basis. Where the incidence of risk varies
during the contract, the earned element is calculated based on the estimated
risk profile of the individual contracts involved.
The proportion of written premiums, gross of commission payable, attributable to
periods after the balance sheet date is deferred as a provision for unearned
premiums. The change in this provision is taken to the income statement in order
that revenue is recognised over the period of the risk.
Acquisition costs are costs that are directly attributable to the acquisition of
new business for insurance contracts. They are incurred on the same basis as the
earned proportions of the premiums they relate to. Where these costs are
considered to be recoverable out of future margins in revenues they are
deferred. Deferred acquisition costs are amortised over the period in which the
related revenues are earned. Deferred acquisition costs are reviewed at the end
of each reporting period and are written off when they are considered to be no
longer recoverable.
Insurance contract liabilities
i. Claims
Claims incurred comprise claims paid during the financial year together with the
movement in the provision for claims outstanding.
Claims paid are defined as those claims transactions settled up to the balance
sheet date including the internal and external claims settlement expenses
allocated to those transactions. The reinsurers' share represents recoveries
received from our reinsurance protections in the period plus recoveries
receivable against claims paid that have not been received at the balance sheet
date.
The claims provision also includes, where necessary, a reserve for unexpired
risks where, at the balance sheet date, the estimated costs of future claims and
related deferred acquisition costs are expected to exceed the unearned premium
provision. In determining the need for an unexpired risk provision the
underwriting divisions within the Group have been regarded as groups of business
that are managed together.
The reinsurers' share represents recoveries receivable on all these future
claims provisions net of any provision for bad debt.
Technical provisions are estimated on an undiscounted basis. Provisions on prior
years are subject to a liability adequacy test where future cash flows and
existing amounts provided are reviewed and reassessed. Any changes to the
amounts held are adjusted through the income statement. Provisions are
established so that there is a better than even chance of release from one
underwriting year to the next.
Although the claims provision is considered to be reasonable, having regard to
previous claims experience (including the use in certain statistically based
projections) and case by case reviews of notified losses, on the basis of
information available at the date of determining the provision, the ultimate
liabilities will vary as a result of subsequent information and events.
ii. Loss provisions on open years
Provision is made for the estimated future deterioration of any year of account
of any non-aligned syndicate that has gone into run-off. While the directors
make every effort to ensure that adequate provision is made for losses on open
years of account, their view of the ultimate loss may vary in later periods as a
result of subsequent information and events. This in turn may require adjustment
of the original provisions. These adjustments are reflected in the financial
statements for the period in which the related adjustments are made.
Reinsurance ceded
Reinsurance premiums comprise the cost of reinsurance arrangements placed and
are accounted for in the same financial year as the related direct insurance or
inwards reinsurance business.
Outward reinsurance premiums are accounted for in the same accounting period as
the related direct insurance or inwards reinsurance business. The provision for
reinsurers' share of unearned premiums represents that part of reinsurance
premiums written which is estimated to be earned in following financial years.
Net investment income
Dividends and any related tax credits are recognised as income on the date the
related listed investments are marked ex-dividend. Other investment income,
interest receivable, expenses and interest payable are recognised on an accruals
basis.
Intangible assets
i. Syndicate capacity
The cost of syndicate participations which have been purchased in the Lloyd's
capacity auctions is capitalised at cost. Syndicate capacity is considered to
have an indefinite life and is not subject to an annual amortisation charge. The
continuing value of the capacity is reviewed for impairment annually by
reference to the expected future profit streams to be earned from Syndicate
2001, with any permanent diminution in value being charged to the income
statement.
ii. Goodwill
Goodwill recognised under UK GAAP prior to the date of transition to IFRS is
stated at net book value as at this date. Goodwill recognised subsequent to 1
January 2003, representing the excess of purchase consideration over fair value
of net assets acquired, is capitalised. Goodwill arising on acquisition is
tested for impairment annually or when events or changes in circumstance
indicate that it might be impaired.
Property and equipment
Property, plant and equipment is stated at historical cost less accumulated
depreciation and provision for impairment where appropriate. Depreciation is
calculated on the straight line method to write down the cost of such assets to
their residual values over their estimated useful lives as follows:
Leasehold land and buildings Over period of lease
Motor vehicles 33% per annum
Computer hardware and software 33% per annum
Furniture and office equipment 20% per annum
Internal property improvements 20% per annum
The carrying values of property, plant and equipment are reviewed for impairment
when events or changes in circumstance indicate the carrying value may be
impaired. If any such condition exists, the recoverable amount of the asset is
estimated in order to determine the extent of impairment.
Gains and losses on disposal of property and equipment are determined by
reference to their carrying amount and are taken to the income statement.
Repairs and renewals are charged to the income statement when the expenditure is
incurred.
Financial investments
The Group has classified its financial investments as 'fair value through profit
or loss' (FV) 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. Within the FV category, fixed maturities
and equity securities are classified as trading assets as the Group buys them
with an intention to resell. All other securities are classified as other than
trading within the FV category.
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 cost, including transaction costs, and subsequently re-measured at
fair value based on quoted bid prices. Where quoted bid prices are unavailable,
financial investments are valued by the directors on a prudent basis with regard
to their likely realisable value. Changes in the fair value of investments are
included in the income statement in the period in which they arise.
All dividends and any related tax credits are recognised as income at the date
the related listed investments are marked ex-dividend. Other investment income,
interest receivable, expenses and interest payable are recognised on an accruals
basis.
In the Company's accounts, other financial investments in Group undertakings are
stated at cost less provisions for impairment.
Syndicate investments and cash are held on a pooled basis, the return from which
is allocated to underwriting years of account proportionately to the funds
contributed by the underwriting year.
Borrowings
Borrowings are recognised initially at fair value, net of transaction costs
incurred. Borrowings are subsequently stated at amortised cost; any difference
between the proceeds (net of transaction costs) and the redemption value is
recognised in the income statement over the period of the borrowings using the
effective interest rate method.
Borrowing costs
Borrowing costs constitute interest payable on loans, bank overdraft and fees
charged for the provision of letters of credit. These costs are charged to the
income statement as financing costs, as incurred.
Cash and cash equivalents
Cash and cash equivalents are carried in the balance sheet at fair value. For
the purposes of the cash flow statement, cash and cash equivalents comprise cash
on hand, deposits held on call with banks and other short-term, highly liquid
investments with original maturities of three months or less.
Leases
Leases are classified as finance leases whenever the terms of the lease transfer
substantially all the risks and rewards to the Group. All other leases are
classified as operating leases.
Assets held under finance leases and hire purchase transactions are capitalised
in the balance sheet and depreciated over their useful lives. The initial
capital value is the lower of the fair value of the leased property and the
present value of the minimum lease payments. The capital element of future
lease payments is included in creditors and the interest element is charged to
profit before taxation over the term of the lease.
Rentals payable under operating leases are charged to income in the period in
which they become payable in accordance with the terms of the lease.
Outstanding Employee benefits
i. Pension obligations
The Group participates in a number of pension schemes, including two defined
benefit schemes, defined contribution schemes and personal pension schemes.
One of the defined benefit schemes is a multi-employer scheme. However, there
is insufficient information available to the Company to account for this as a
defined benefit scheme, and therefore in accordance with IAS 19 it is accounted
for as a defined contribution scheme.
The liability in respect of the other defined benefit scheme is calculated as
the present value of the defined benefit obligation at the balance sheet date
minus the fair value of plan assets, together with adjustments for unrecognised
actuarial gains or losses and past service cost. The defined benefit obligation
is calculated annually by independent actuaries using the projected unit credit
method. The present value of the defined benefit obligation is determined by the
estimated future cash outflows using interest rates of government securities
which have terms to maturity approximating the terms of the related liability.
The resulting pension scheme surplus or deficit appears as an asset or liability
in the consolidated balance sheet.
Pension contributions to schemes that are accounted for as defined contribution
plans are charged to the profit and loss account when due. After payment of the
contributions for the defined contribution scheme, the company has no further
payment obligations under these schemes.
ii. Equity compensation plans
The Group operates a number of executive and employee share schemes. These are
accounted for using the fair value method where the cost for providing equity
compensation is based on the fair value of the share option or award at the date
of the grant. The fair value is calculated using an option pricing model and the
corresponding expense is recognised in the income statement over the vesting
period. The accrual for this charge is recognised in equity shareholders' funds.
When the options are exercised, the proceeds received net of any transaction
costs are credited to share capital (par value) and the surplus to share
premium.
iii. Other benefits
Other employee incentive schemes, long-term service awards, including sabbatical
leave, are recognised when they accrue to employees. A provision is made for the
estimated liability for long-service leave as a result of services rendered by
employees up to the balance sheet date.
Taxation
Provision is made for deferred tax liabilities, or credit taken for deferred tax
assets, using the liability method, on all material temporary differences
between tax bases of assets and liabilities and their carrying amounts in the
consolidated financial statements. The principal temporary differences arise
from a delay between the recognition of underwriting profits and their
assessment for tax, depreciation of property and equipment, provisions for
pensions and other post retirement benefits and the revaluation of certain
financial assets and liabilities. The rates of taxation enacted at the balance
sheet date are used to determine the deferred tax.
Deferred tax assets are recognised to the extent that it is probable that future
taxable profit will be available against which the temporary differences can be
utilised.
Deferred tax is credited or charged in the profit and loss account and is
recognised in the balance sheet as a deferred tax asset or liability. Income
tax is recognised in the income statement, except to the extent that it relates
to items directly taken to equity, in which case it is recognised in equity.
Current taxes are based on the results of the Group companies and are calculated
using currently enacted tax rates.
This information is provided by RNS
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