9th Aug 2005 07:00
BRIT Insurance Holdings PLC09 August 2005 For immediate release 9 August 20057.00 am BRIT INSURANCE HOLDINGS PLC ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS Brit Insurance Holdings PLC ("Brit"), the UK general insurance group, todaypublishes its income statement and balance sheet for 2004 restated to IFRS.These restated numbers were approved by the Board and have been reported on byBrit's auditors, Ernst & Young LLP, on 8 August 2005. OverviewResults Year ended 31 December 2004 (all figures are in £m except for per share items, which are in pence) IFRS UK GAAP % changeNet assets 722.7 710.0 1.8Net assets per share 74.2 72.9 1.8Net tangible assets 643.5 649.9 (1.0)Net tangible assets per share 66.1 66.7 (1.0)Profit before tax 116.1 102.5 13.3Earnings per share (basic) 8.73 7.45 17.2Earnings per share (diluted) 8.54 7.30 17.0 Matthew Scales, Group Finance Director said: "Our strong balance sheet islargely unchanged on the adoption of IFRS. Our restated income statement for2004 shows a 17% enhancement in earnings per share, principally based on theelimination of goodwill amortisation and exchange movements." Enquiries Matthew Scales, Group Finance Director, Brit Insurance Holdings PLC 020 7984 8516David Haggie, Haggie Financial 020 7417 8989 Introduction All European Union ("EU") listed entities are required to adopt InternationalFinancial Reporting Standards ("IFRS") for accounting periods beginning on orafter 1 January 2005. Brit Insurance Holdings PLC ("Company" or "Group") presents below itsconsolidated financial information for the year ended 31 December 2004 restatedon an IFRS basis, together with a restated balance sheet as at 31 December 2003.The information below includes reconciliations of the restated numbers tothose previously prepared under UK GAAP. The restated consolidated financial information has been approved by the Boardand audited by the Group's auditors, Ernst & Young LLP ("Ernst & Young"). Acopy of Ernst & Young's audit opinion is attached. The restated consolidated financial information has been prepared in accordancewith IFRS adopted for use by the EU and accounting policies expected to beadopted by the Group when it prepares its first set of IFRS financial statementsfor the year ended 31 December 2005. These IFRS accounting policies, as adoptedby the Group, are also attached. The restated consolidated financial information has been prepared in accordancewith IFRS issued by the International Accounting Standards Board ("IASB") andcurrently endorsed by the European Commission effective for 2005 year ends ("theStandards"). The Standards themselves are evolving and are subject to possibleamendment by interpretative guidance from the IASB, emerging practice or otherexternal bodies. Accordingly, the interpretation of the Standards to be appliedmay be subject to change prior to the publication of the Group's results underIFRS in March 2006. The UK GAAP balance sheets have been presented in a format consistent with IFRS.No changes have been made to the previously reported numbers for UK GAAP andthe analysis of the adjustments is based on UK GAAP as at 31 December 2004. The restated consolidated financial information for the year ended 31 December2004, restated balance sheet at 31 December 2003 and the other informationcontained in this document do not constitute statutory accounts of the Group,within the meaning of Section 240 of the Companies Act 1985. The statutoryaccounts for the year ended 31 December 2004, prepared under UK GAAP, have beenreported on by the Group's former auditor, Mazars LLP, and delivered to theregistrar of companies. The report of the auditor's was unqualified and did notcontain statements under section 237(2) or (3) of the Companies Act 1985. Consolidated Income Statement for the year ended 31 December 2004 Year ended 31 December 2004 £'000Income Gross premiums written 1,086,731 Less premiums ceded to reinsurers (176,300) Premiums written net of reinsurance 910,431 Gross amount of change in provision for unearned premiums (63,599) Reinsurers' share of change in provision for unearned premiums 7,642 Net change in provision for unearned premiums (55,957) Net change in other technical provisions (5,254) Earned premiums, net of reinsurance 849,220 Fee and commission income 9,439 Investment income 73,307 Total Income 931,966 Expenses Claims incurred: Claims paid: Gross amount (309,077) Reinsurers' share 57,293 Net claims paid (251,784) Change in the provision for claims: Gross amount (361,621) Reinsurers' share 67,760 Net change in the provision for claims (293,861) Claims incurred net of reinsurance (545,645) Acquisition costs (211,902) Other operating expenses (53,454) Operating profits 120,965 Finance costs (5,205) Share on profit after tax of associates 348 Profit on ordinary activities before tax 116,108 Income tax expense (31,642) Profit on ordinary activities after tax 84,466 Profit attributable to equity shareholders of the parent company 84,466 Basic earnings per share (pence per share) 8.73p Diluted earnings per share (pence per share) 8.54p Reconciliation of the Consolidated Income Statement for the year ended 31 December 2004 Notes £'000 Profit attributable to equity shareholders of the parent company 72,033reported under UK GAAP Reversal of goodwill amortisation 1Subsidiaries 8,101Associated company 24 Investments valuation 2 (421) Reversal of change in equalisation provision 3 (1,737) Share-based payments 4 1,029 Convertible debt 5 (277) Employee benefits 6 (16) Foreign exchange movements 10 8,012 Other adjustments 11 (714) Net tax effect (1,568) Total adjustments net of tax 12,433 Profit attributable to equity shareholders of the parent company 84,466reported under IFRS Consolidated Statement of Recognised Income and Expense for the year ending 31 December 2004 £'000Acquisition of own shares (3,368)Disposal of own shares 181Tax on items taken to equity 848Equity dividends (38,762)Actuarial losses on defined benefit pension scheme (2,938)Movement on employee incentive reserve 661Exercised share options 3CULS conversion 2Issue of share capital 10Net expense recognised directly in equity (43,363)Profit for the year 84,466Total recognised income and expense for the year 41,103 Attributable to equity shareholders of the parent company 41,103 Consolidated Statement of Changes in Equity for the year ended 31 December 2004 Called up Share Investment in Equity portion: share premium own shares convertible capital reserve debt £'000 £'000 £'000 £'000 Balance at 1 January 2004 243,513 481,135 (4,306) 1,681 Arising in the year:Acquisition of own shares (3,368)Disposal of own shares 181 Tax on items taken directly to or transferred fromequityProfit for the yearEquity dividendsActuarial losses on defined benefit pension schemeMovements on employee incentive reserveExercised share options 3CULS conversion 2Issue of share capital 10Capital reorganisation (170,000)Balance at 31 December 2004 243,518 311,145 (7,493) 1,681 Employee Capital Retained Total equity incentive redemption earnings attributable to reserve reserve shareholders £'000 £'000 £'000 £'000 Balance at 1 January 2004 110 586 (41,162) 681,557 Arising in the year:Acquisition of own shares (3,368)Disposal of own shares 181Tax on items taken directly to or transferred from (33) 881 848equityProfit for the year 84,466 84,466Equity dividends (38,762) (38,762)Actuarial losses on defined benefit pension scheme (2,938) (2,938)Movements on employee incentive reserve 661 661Exercised share options 3CULS conversion 2Issue of share capital 10Capital reorganisation 170,000Balance at 31 December 2004 738 586 172,485 722,660 Consolidated Cash Flow Statement for the year ended 31 December 2004 Year ended 31 December 2004 £'000Cash flows from operating activities Net income 116,108 Cash generated from operations 520,873 Income tax recovered 1,621Interest paid (2,758) Net cash flow provided by operating activities 519,736 Cash flows from investing activities Change in investments (188,833)Purchase of property, plant and equipment (1,559)Purchase of intangible assets (8,178)Proceeds from disposal of property, plant and equipment 402Investments in associated undertakings (341)Loan to associated undertakings (652) Net cash used in investing activities (199,161) Cash flows from financing activities Proceeds from exercised share options 9Equity dividends paid (38,762)Net proceeds from issue of floating rate notes 7,984Acquisition of own shares for employee incentive schemes (2,750) Net cash used in financing activities (33,519) Net increase in cash and cash equivalents 287,056Cash and cash equivalents at 1 January 333,279Effect of exchange rate fluctuations on cash and cash equivalents (9,366)Cash and cash equivalents at 31 December 610,969 For the purposes of the consolidated cash flow statement, cash and cashequivalents consist of the amount stated in that balance sheet category less anybank overdrafts included within borrowings. 31 December 2004 31 December 2003 £'000 £'000 Cash and cash equivalents per balance sheets 629,190 348,279Bank overdraft (18,221) (15,000)Cash and cash equivalents per cashflow 610,969 333,279 Reconciliation of Consolidated Balance Sheet as at 31 December 2004 UK GAAP Adjustments IFRSASSETS £'000 £'000 £'000 Intangible assets: Syndicate participations 502 - 502 Software - 7,672 7,672 Goodwill 59,631 11,360 70,991 Property, plant and equipment 11,194 (7,672) 3,522Investments in associates 1,570 24 1,594Reinsurance contracts 326,048 853 326,901Financial investments 1,748,970 (535,245) 1,213,725Deferred acquisition costs 110,436 1,497 111,933Trade and other receivables 499,372 499,372 -Cash and cash equivalents 97,785 531,405 629,190 Total assets 2,855,508 9,894 2,865,402 LIABILITIES AND EQUITY Liabilities Insurance contracts 1,851,516 8,116 1,859,632Employee benefits - 18,470 18,470Borrowings 51,654 16,795 68,449Taxation - 1,456 1,456Deferred taxation 10,837 (6,325) 4,512Provisions for other risks and charges 533 - 533Equalisation provision 3,933 (3,933) -Trade and other payables 216,822 (27,132) 189,690 Total liabilities 2,135,295 7,447 2,142,742 Capital and reserves Called up share capital 243,518 - 243,518Share premium account 311,145 - 311,145Capital redemption reserve 586 - 586Equity portion of convertible debt - 1,681 1,681Employee incentive reserve - 738 738Investment in own shares (5,615) (1,878) (7,493)Retained earnings 160,341 12,144 172,485 Equity shareholders' funds 709,975 12,685 722,660Equity minority interests 10,238 (10,238) - Total equity 720,213 2,447 722,660 Total equity and liabilities 2,855,508 9,894 2,865,402 Analysis of adjustments to the Consolidated Balance Sheet as at 31 December 2004 Goodwill Investment Claims Share-based Convertible Accounting for valuation equalisation Payments debt pension (Note 1) provision accounting obligations (Note 2) (Note 4) (Note 3) (Note 5) (Note 6) £'000 £'000 £'000 £'000 £'000 £'000AssetsIntangible assets:SoftwareGoodwill 11,360Property, plant andequipmentInvestments in associatesReinsurance contractsFinancial investments (3,840)Deferred acquisition costsCash and cash equivalents Total assets 11,360 (3,840) - - - - Liabilities and equity LiabilitiesInsurance contractsEmployee benefits 18,470Borrowings (1,426)TaxationDeferred taxation (537) 1,180 (72) 375 (5,541)Equalisation provision (3,933)Trade and other payables 122 Total liabilities - (415) (2,753) (72) (1,051) 12,929 Capital and reservesEquity portion ofconvertible debt 1,681Employee incentive reserve 738Investment in own shares (1,878)Retained earnings 11,360 (3,425) 2,753 1,212 (630) (12,929)Equity shareholders' funds 11,360 (3,425) 2,753 72 1,051 (12,929)Equity minority interests Total equity 11,360 (3,425) 2,753 72 1,051 (12,929) Total equity & liabilities 11,360 (3,840) - - - - Analysis of adjustments to the Consolidated Balance Sheet as at 31 December 2004 Dividends Taxation Cash Foreign Other Total exchange adjustments adjustments (Note 7) (Note 8) (Note 9) (Note 10) (Note 11) £'000 £'000 £'000 £'000 £'000 £'000AssetsIntangible assets:Software 7,672 7,672Goodwill 11,360Property, plant & equipment (7,672) (7,672)Investments in associates 24 24Reinsurance contracts 853 853Financial investments (531,405) (535,245)Deferred acquisition costs 1,497 1,497Cash and cash equivalents 531,405 531,405 Total assets - - - 2,350 24 9,894 Liabilities and equity LiabilitiesInsurance contracts 8,116 8,116Employee benefits 18,470Borrowings 18,221 16,795Taxation 1,456 1,456Deferred taxation (1,730) (6,325)Equalisation provision (3,933)Trade and other payables (19,305) (1,456) (6,493) (27,132) Total liabilities (19,305) - - 6,386 11,728 7,447 Capital and reservesEquity portion of 1,681convertible debtEmployee incentive reserve 738Investment in own shares (1,878)Retained earnings 19,305 (4,036) (1,466) 12,144Equity shareholders' funds 19,305 - - (4,036) (1,466) 12,685Equity minority interests (10,238) (10,238) Total equity 19,305 - - (4,036) (11,704) 2,447 Total equity & liabilities - - - 2,350 24 9,984 Reconciliation of Consolidated Balance Sheet as at 31 December 2003 UK GAAP Adjustments IFRS 2003 2003Assets £'000 £'000 £'000 Intangible assets: Syndicate participations 2,236 - 2,236 Software - 897 897 Goodwill 67,732 3,259 70,991 Property, plant & equipment 4,779 (897) 3,882Investments in associates 253 - 253Taxation - 227 227Deferred tax assets 18,922 7,263 26,185Reinsurance contracts 325,935 2,011 327,946Financial investments 1,179,191 (167,826) 1,011,365Deferred acquisition costs 100,481 3,328 103,809Trade and other receivables 446,607 (227) 446,380Cash and cash equivalents 183,993 164,286 348,279 Total assets 2,330,129 12,321 2,342,450 Liabilities and equity Liabilities Insurance contracts 1,416,850 19,116 1,435,966Employee benefits - 15,516 15,516Borrowings 58,872 (1,703) 57,169Provisions for other risks and charges 801 - 801Equalisation provision 5,670 (5,670) -Trade and other payables 141,014 10,427 151,441 Total liabilities 1,623,207 37,686 1,660,893 Capital and reserves Called up share capital 243,513 - 243,513Share premium account 481,135 - 481,135Capital redemption reserve 586 - 586Equity portion of convertible debt - 1,681 1,681Employee incentive reserve - 110 110Investment in own shares (4,085) (221) (4,306)Retained earnings (23,625) (17,537) (41,162) Equity shareholders' funds 697,524 (15,967) 681,557Equity minority interests 9,398 (9,398) - Total equity 706,922 (25,365) 681,557 Total equity & liabilities 2,330,129 12,321 2,342,450 Analysis of adjustments to the Consolidated Balance Sheet as at 31 December 2003 Claims Share-based Convertible Accounting for equalisation payments debt pension Investment provision accounting obligations valuation (Note 4) Goodwill (Note 3) (Note 5) (Note 6) (Note 2) (Note 1) £'000 £'000 £'000 £'000 £'000 £'000AssetsSoftwareGoodwill 3,259Property, plant & equipmentTaxationDeferred tax assets 519 (1,701) 33 (376) 4,655Reinsurance contractsFinancial investments (3,540)Deferred acquisition costsTrade and other receivablesCash and cash equivalents Total assets 3,259 (3,021) (1,701) 33 (376) 4,655 Liabilities and equity LiabilitiesInsurance contractsEmployee benefits 15,516Borrowings (1,703)Equalisation provision (5,670)Trade and other payables Total liabilities - - (5,670) - (1,703) 15,516 Capital and reservesEquity portion ofconvertible debt 1,681Employee incentive reserve 110Investment in own shares (221)Retained earnings 3,259 (3,021) 3,969 144 (354) (10,861) Equity shareholders' funds 3,259 (3,021) 3,969 33 1,327 (10,861) Total equity 3,259 (3,021) 3,969 33 1,327 (10,861) Total equity & liabilities 3,259 (3,021) (1,701) 33 (376) 4,655 Analysis of adjustments to the Consolidated Balance Sheet as at 31 December 2003 Taxation Cash Foreign exchange Other Total adjustments adjustments (Note 8) (Note 9) (Note 10) (Note 11) £'000 £'000 £'000 £'000 £'000AssetsSoftware 897 897Goodwill 3,259Property, plant & equipment (897) (897)Taxation 227 227Deferred tax assets 4,133 7,263Reinsurance contracts 2,011 2,011Financial investments (164,286) (167,826)Deferred acquisition costs 3,328 3,328Trade and other receivables (227) (227)Cash and cash equivalents 164,286 164,286 Total assets - - 9,472 - 12,321 Liabilities and equity LiabilitiesInsurance contracts 19,116 19,116Employee benefits 15,516Borrowings (1,703)Equalisation provision (5,670)Trade and other payables 10,427 10,427 Total liabilities - - 19,116 10,427 37,686 Capital and reservesEquity portion of convertible 1,681debtEmployee incentive reserve 110Investment in own shares (221)Retained earnings (9,644) (1,029) (17,537) Equity shareholders' funds - - (9,644) (1,029) (15,967)Equity minority interests (9,398) (9,398) Total equity - - (9,644) (10,427) (25,365) Total equity & liabilities - - 9,472 - 12,321 Notes to the reconciliation of the Balance Sheet at 31 December 2004, at 31December 2003 and reconciliation of the Income Statement for 2004 Note 1: Business combinations and goodwill Brit has elected to apply IFRS 3 "Business Combinations" to all businesscombinations entered into from 1 January 2003. Accordingly, all businesscombinations from this date have been restated. Under IAS 36 "Impairment of Assets", goodwill is no longer amortised over itsuseful economic life but is tested, at least annually, for impairment. Theamount of goodwill carried forward as at 31 December 2003 amounted to £70,991k. Note 2: Investments Under UK GAAP, the value of financial investments is stated in the financialstatements on the following basis: - Listed investments are stated at closing middle market prices onrecognised stock exchanges - Unlisted investments are stated at cost or Directors' valuation. All gains and losses are reflected in the income statement under UK GAAP. As a result of applying IAS 39 "Financial Instruments: Recognition andMeasurement", the Group now carries all investments in debt and equitysecurities at fair value, stated at closing bid prices on recognised stockexchanges. This change in the valuation of securities has a decrease in valueat 31 December 2004 of £3,840k (2003: £3,540k). The Group classifies all investments as designated at fair value through theprofit and loss at inception. Realised and unrealised gains and losses arisingfrom changes in fair value of the financial assets at fair value through theprofit or loss category are included in the income statement in the period inwhich they arise. The Group has entered into a number of derivative contracts. In accordance withIAS 39 these contracts have been recognised in the balance sheet at their fairvalue. Changes in the fair value of derivative instruments are recognisedimmediately in the income statement. Note 3: Reversal of equalisation provision Under UK GAAP an equalisation provision is recorded in the accounts of UKgeneral insurance companies to eliminate or reduce the volatility in incurredclaims arising from exceptional levels of claims in certain classes of business.The annual change in the equalisation provision is recorded in the UK GAAPprofit and loss account. Under IFRS, no equalisation provision is recorded, asno actual liability exists at the balance sheet date. Elimination of the claimsequalisation provision results in an increase to shareholders' equity of £2,753kat 31 December 2004 (2003: £3,969k) and a decrease of £1,737k to profit beforetax for the year ended 31 December 2004. Note 4: Share-based payments Under UK GAAP the cost of shares awarded to participants of the Group'sperformance share plans are amortised on a straight-line basis over the lives ofthe related schemes. For the year ending 31 December 2004 this amortisationtotalled £1,878k (2003: £221k). Under IFRS 2 "Share-Based Payments", changes in respect of share-basedcompensation plans that were granted after 7 November 2002, but had not yetvested at 1 January 2005, are determined based on the fair value of theshare-based compensation at grant date and are recognised in the incomestatement over the vesting period of the expected life of the share basedinstrument. Note 5: Convertible debt instrument Under UK GAAP the convertible unsecured subordinated loan stock ("CULS") arerecognised as a single instrument in the 31 December 2004 balance sheet at£44,115k (2003: £43,872k). Under IAS 32 "Financial Instruments: Disclosure and Presentation" the CULS areseparated into component parts, being a financial liability and equity. At 31December 2004 the debt liability recognised in the balance sheet has reduced by£1,426k (2003: £1,703k). Overall, this change in accounting treatment has resulted in an increase inshareholders' equity of £1,051k at 31 December 2004 (2003: £1,327k). Profitbefore tax decreases by £277k for the year ended 31 December 2004. Note 6: Employee benefits Under IAS 19 "Employee Benefits", the projected benefit obligation is matchedagainst the fair value of the underlying assets and other unrecognised actuarialgains and losses in determining the pension expense for the year. Any pensionasset or obligation must be recorded in the balance sheet. This change in accounting has resulted in the recognition of a deficit of£12,929k (2003: £10,861k), net of deferred tax, valued in accordance with IAS19. Note 7: Dividend recognition Under UK GAAP, equity dividends are accrued in the period to which they relateregardless of when they are declared and approved. Under IAS 10 "Events afterthe Balance Sheet Date", shareholders' dividends are accrued only when declaredand appropriately approved. This has increased shareholders' funds at 31December 2004 by £19,305k (2003: nil). Note 8: Taxation Under UK GAAP, provision is made for deferred tax assets and liabilities, usingthe liability method, arising from timing differences between the recognition ofgains and losses in the financial statements and their recognition in a taxcomputation. Deferred tax is recognised as a liability or asset if thetransactions or events that give the entity an obligation to pay more tax infuture or a right to pay less tax in future have occurred by the balance sheetdate. Under IAS 12 "Income Taxes", deferred taxes are provided under the liabilitymethod for all relevant temporary differences, being the difference between thecarrying amount of an asset or liability in the balance sheet and its value fortax purposes. IAS 12 does not require a provision on all temporary differences.Deferred tax assets are recognised for unused tax losses and other deductibletemporary differences to the extent that it is probable that future taxableprofit will be utilised against the unused tax losses and credits. Note 9: Reclassification of cash IFRS requires a number of presentational changes to cash. At 31 December 2004£531,405k (2003: £164,286k) of the Group's investments meet the definition ofcash equivalents and so have been reclassified to "cash and cash equivalents"from "investments". Note 10: Rates of exchange Under IFRS, functional currency is defined as the currency of the primaryeconomic environment in which the entity operates. The functional currency forall entities of the Group has been deemed to be sterling. Under IAS 21 "The Effects of Changes in Foreign Exchange Rates" foreign currencytransactions are translated into the functional currency using the exchangerates prevailing at the dates of the transactions or at the average rate for theperiod when this is a reasonable approximation. Monetary assets and liabilitiesdenominated in foreign currencies are translated at period end exchange rates.Non-monetary assets and liabilities that are measured at historical costdenominated in a foreign currency are translated using the historical exchangerate. The resulting exchange differences on translation are recorded in theincome statement. Under IFRS unearned premium and deferred acquisition costs are non monetaryliabilities and assets and are therefore not retranslated from the historic costrates. Note 11: Other adjustments Under IAS 27 "Consolidated and Separate Financial Statements" where lossesattributable to the minority in a consolidated subsidiary exceed the minorityinterest in the subsidiary's equity, the excess is allocated against themajority interest except to the extent that the minority interest has a bindingobligation, and is able, to make an additional investment to cover the losses.This has an impact of a decrease of £461k to profit before tax attributable toequity shareholders of the parent company for the year ended 31 December 2004. A number of adjustments required under IFRS relate primarily to presentationalor reclassification changes and have no impact on shareholders' equity. Under IFRS, acquired computer software licences and costs that are directlyassociated with the production of identifiable and unique software productscontrolled by the group are classified as intangible assets. Under UK GAAPthese products were classified as tangible assets and reclassified under IFRSwith no impact on shareholders' funds. Accounting Policies under International Financial Reporting Standards The restated consolidated financial information has been prepared in accordancewith the accounting policies set out below: a) First Time Adoption of International Financial Reporting Standards In common with other European listed companies, the Group is required to prepareits consolidated financial statements for the year ending 31 December 2005 inaccordance with International Financial Reporting Standards ("IFRS") endorsed bythe European Commission ("EC"). The Group has accordingly restated itspreviously reported 2004 consolidated results and financial position. The Group is required to determine its IFRS accounting policies and apply themretrospectively to establish its opening balance sheet under IFRS. However, IFRS1, "First-time adoption of International Financial Reporting Standards" allows anumber of exemptions on adoption of IFRS for the first time and the Group hastaken advantage of the following: Business combinations Brit has elected to apply IFRS 3 "Business Combinations" to all businesscombinations entered into from 1 January 2003. Accordingly, all businesscombinations from this date have been restated. Share-based payment plans The provisions of IFRS 2 "Share-based payments" have not been applied to optionsand awards granted on or before 7 November 2002 or those granted after this datewhich had vested by 1 January 2005. Employee defined benefit obligations All cumulative actuarial gains and losses have been recognised in equity at thedate of transition to IFRS. Designation of previously recognised financial assets IAS 39, "Financial Instruments: Recognition and Measurement" permits a financialasset to be designated on initial recognition as a financial asset at fair valuethrough profit or loss. The Group has taken advantage of an exemption todesignate previously recognised assets as held at fair value through profit orloss at the date of transition. b) Basis of Preparation The Group's consolidated opening and closing IFRS balance sheet, theconsolidated income statement, the consolidated cash flow statement andstatement of recognised income and expense for 2004, have been prepared inaccordance with IFRS, which comprise standards and interpretations issued by theInternational Accounting Standards Board ("IASB") and as adopted by the EC to beeffective for 2005 year ends. The Group has adopted the carved out version ofIAS 39 "Financial Instruments: Recognition and Measurement" as endorsed by theEC. Due to the continuing work of the IASB and possible amendments to theinterpretive guidance, the Group's accounting policies and consequently theinformation presented may change prior to the publication of the Group's resultsunder IFRS in March 2006. The Group has adopted the amendment to IAS 19, "Employee Benefits" published inDecember 2004 permitting the recognition of all actuarial gains and lossesimmediately in equity through the statement of recognised income and expense /consolidated statement of changes in equity. In accordance with IFRS 4, "Insurance Contracts", the Group continues to applyexisting accounting policies to its insurance contracts but has the option tomake improvements to its policies if the changes make the financial statementsmore relevant to decision making needs of the users. Certain amounts recorded in the IFRS financial information include estimates andassumptions made by management about insurance liability reserves, investmentvaluations, interest rates and other factors. Actual results may differ from theestimates made. Where estimates had previously been made under UK GAAP,consistent estimates (after adjustments to reflect any difference in accountingpolicies) have been made on transition to IFRS. Judgements affecting the Group'sbalance sheet have not been revisited with the benefit of hindsight. It ispossible that certain of the above pronouncements will not be endorsed by the EUbefore the end of 2005 in which case there will be changes to these accountingpolicies when preparing the 2005 Annual Report and Accounts. c) Basis of Consolidation The consolidated financial statements include the accounts of the Company, itssubsidiaries and the Group's participation in Lloyd's syndicates' assets,liabilities, revenues and expenses. Subsidiaries are those entities (includingspecial purpose entities) in which the Group directly or indirectly has thepower to govern the operating and financial policies in order to gain economicbenefits and includes the Group's employee benefit trusts and its open endedinvestment company. The financial statements of subsidiaries are prepared forthe same reporting year as the parent company. Consolidation adjustments aremade to convert subsidiary accounts prepared under UK GAAP into IFRS so as toremove any dissimilar accounting policies that may exist. Subsidiaries areconsolidated from the date control is gained. All significant inter-companybalances, profits and transactions are eliminated. Associated undertakings are those entities over which the Group has significantinfluence but not control. The Group's investment in associated undertakings isaccounted for under the equity method of accounting whereby associatedundertakings are carried in the balance sheet at cost plus post-acquisitionchanges in the group's share of net assets of the associate, less any impairmentin value. The Group's investment in associates also includes goodwill identifiedon acquisition less any accumulated impairment loss. The income statementreflects the Group's share of the results of operations of the associate. d) Product Classification Insurance contracts are those contracts that transfer significant insurance riskat the inception of the contract. Contracts that do not transfer significantinsurance risk are investment contracts. Insurance risk is transferred when aninsurer agrees to compensate a policyholder if a specified uncertain futureevent adversely affects the policyholder. e) Other Accounting Policies (i) Insurance contracts a) Premiums Premiums written relate to business incepted during the year, together with anydifferences between booked premiums for prior years and those previouslyaccrued, and include estimates of premiums due but not yet receivable ornotified, less an allowance for cancellations. Premiums are accreted to earningson a pro rata basis over the term of the related policy, except for thosecontracts where the period of risk differs significantly from the contractperiod. In these circumstances, premiums are recognised over the period of riskin proportion to the amount of insurance protection provided. Premiums are shownnet of premium taxes and other levies on premiums. b) Deferred acquisition costs Acquisition costs represent commission and other variable costs that relate tothe securing of new contracts and the renewing of existing contracts. They aredeferred over the period in which the related premiums are earned. c) Claims incurred Claims incurred comprise claims and claims handling costs paid in the year andchanges in the provisions for outstanding claims, including provisions forclaims incurred but not reported and related expenses, together with anyadjustments to claims from prior years. Claims handling costs are mainly thoseexternal costs related to the negotiation and settlement of claims. The Groupdoes not discount its liabilities for unpaid claims. d) Outstanding claims provisions Claims outstanding represent the estimated ultimate cost of settling all claims(including direct and indirect claims settlement costs) arising from eventswhich have occurred up to the balance sheet date, including provision for claimsincurred but not reported, less any amounts paid in respect of those claims. e) Salvage and subrogation reimbursements Some insurance contracts permit the Group to sell (usually damaged) propertyacquired in settling a claim (i.e. salvage). The Group may also have the rightto pursue third parties for payment of some or all costs (i.e. subrogation). Estimates of salvage recoveries are included as an allowance in the measurementof the insurance liability for claims, and salvage property is recognised inother assets when the liability is settled. The allowance is the amount that canreasonably be recovered from the disposal of the property. Subrogation reimbursements are also considered as an allowance in themeasurement of the insurance liability for claims and are recognised in otherassets when the liability is settled. The allowance is the assessment of theamount that can be recovered from the action against the liable third party. f) Provision for unearned premiums The proportion of written premiums that relate to unexpired terms of policies inforce at the balance sheet date is deferred as a provision for unearnedpremiums, calculated on a time apportioned basis. The movement in the provisionis taken to the income statement in order that revenue is recognised over theperiod of the risk. g) Provision for unexpired risks Provision is made for any deficiencies arising when unearned premiums, net ofassociated acquisition costs, are insufficient to meet expected claims andexpenses after taking into account future investment return on the investmentssupporting the unearned premiums provision and unexpired risks provision. Theexpected claims are calculated having regard to events that have occurred up tothe balance sheet date. h) Liability adequacy tests At each balance sheet date, liability adequacy tests are performed, employingthe current estimates of future cash flows under its insurance contracts. If asa result of these tests, the carrying amount of the Group's insuranceliabilities is found to be inadequate in comparison to the value of these futurecash flows, the deficiency is charged to the income statement for the period. i) Reinsurance The Group assumes and cedes reinsurance in the normal course of business.Premiums on reinsurance assumed are recognised as revenue along the same basisas direct business, taking into account the product classification. Reinsurancepremiums ceded and reinsurance recoveries on claims incurred are deducted fromthe respective income and expense accounts. Reinsurance assets include amountsrecoverable from reinsurance companies for paid and unpaid losses and lossadjustment expenses, and ceded unearned premiums. Amounts recoverable fromreinsurer's are calculated with reference to the claims liability associatedwith the reinsured risks. Revenues and expenses arising from reinsuranceagreements are therefore recognised in accordance with the underlying risk ofthe business reinsured. Gains or losses on buying reinsurance are recognised immediately in the incomestatement and are not subject to amortisation. If a reinsurance asset is impaired, the group reduces its carrying amountaccordingly, and will immediately recognise the impairment loss in the incomestatement. A reinsurance asset will be deemed to be impaired if there isobjective evidence, as a result of an event that occurred after initialrecognition of the asset, that the Group may not receive all amounts due to itunder the terms of the contract, and that the event has a reliably measurableimpact on the amounts that the Group will receive from the reinsurer. j) Syndicate assets and liabilities For each managed syndicate on which the Group participates, the Group'sproportion of the syndicate's assets and liabilities has been reflected in itsConsolidated Balance Sheet. Syndicate assets are held subject to trust deeds forthe benefit of the syndicate's insurance creditors. (ii) Revenue recognition a) Fee and commission income Fee and commission income consists mainly of administration and broking feescharged to third parties. They are recognised in the accounting period in whichthe service is rendered by reference to completion of the specific transaction,assessed on the basis of the actual service provided as a proportion of thetotal services to be provided. b) Investment return Investment return comprises all investment income, realised investment gains andlosses and movements in unrealised gains and losses net of investment managementfees. Interest income is recognised on an accruals basis. Dividend income isrecognised when the shareholders' right to receive the payment is established. (iii) Impairment Assets that have an indefinite useful life are not subjected to amortisation butare tested annually for impairment. Other assets are tested for impairmentwhenever events or changes in circumstances indicate that the carrying amountmay not be recoverable.Related Shares:
BRE.L