6th Mar 2007 07:03
BRIT Insurance Holdings PLC06 March 2007 PART 2 OF 2 Notes 1 General information Brit Insurance Holdings PLC ("the Company") is a company registered in Englandand Wales under the Companies Act 1985. The address of the registered office isprovided in the Company's website at www.britinsurance.com. 2 Accounting policies The preliminary results have been prepared in accordance with InternationalFinancial Reporting Standards ("IFRS") adopted for use by the European Union("EU"). This preliminary announcement is prepared on the same basis as set out in theprevious year's annual accounts. Basis of preparation The preliminary results have been prepared in accordance with IFRS and thoseparts of the Companies Act 1985 applicable to companies reporting under IFRS onthe basis of the accounting policies consistent with prior accounting periods.IFRS comprises standards issued by the International Accounting Standards Board("IASB") and interpretations issued by the International Financial ReportingInterpretations Committee ("IFRIC") and as adopted by the EU. The following accounting standards, amendments to accounting standards andinterpretations have been early adopted. - IFRS 7: Financial Instruments: Disclosures - Amendment to IAS 1: Presentation of Financial Statements - Capital Disclosures - IFRIC 11: IFRS 2 Group and Treasury Share Transactions The effect of IFRS 7 and the amendment to IAS 1 has been to increase thedisclosures principally in the risk management section of the financialstatements. IFRIC 11 confirms the Group's current treatment that whereshare-based payment involve an entity's own equity instruments in which theentity chooses or is required to buy its own equity instruments (own shares) tosettle the share-based payment obligation, these should be accounted for asequity-settled share-based payment transactions. None of these standards, amendments or interpretations has resulted in arestatement of prior year numbers. At the date of authorisation of these preliminary results, the followingstandard which has not been applied in these financial statements was in issuebut not yet effective: - IFRS 8: Operating segments The directors anticipate that the adoption of this standard in future periodswill have no material impact on the financial statements of the Group except foradditional disclosures on segmental information when the relevant standards comeinto effect for periods commencing on or after 1 January 2007. In accordance with IFRS 4, "Insurance Contracts", the Group continues to complywith the recommendations of the Statement of Recommended Practice on Accountingfor Insurance Businesses issued by the Association of British Insurers inDecember 2005 (as revised in December 2006). However the Group 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, particularly about insurance liability reserves,investment valuations, interest rates and other factors. Actual results maydiffer from the estimates made. For further information on the use of estimatesand judgements, refer to Note 3. 3 Critical accounting estimates and judgements in applying accounting policies The Group makes estimates and assumptions that affect the reported amounts ofassets and liabilities. Estimates and judgements are continually evaluated andbased on historical experience and other factors, including expectations offuture events that are believed to be reasonable under the circumstances. i) The ultimate liability arising from claims made under insurance contracts The estimation of the ultimate liability arising from claims made underinsurance contracts is the Group's most critical accounting estimate. There areseveral sources of uncertainty that need to be considered in the estimate of theamounts that the Group will ultimately pay to settle such claims. Significant areas requiring estimation and judgement include: • Estimates of the amount of any liability in respect of claims notified but not settled and incurred but not reported claims provisions ("IBNR") included within provisions for insurance and reinsurance contracts. • The corresponding estimate of the amount of reinsurance recoveries which will become due as a result of these estimated claims. • The recoverability of amounts due from reinsurers. • Estimates of the proportion of exposure which has expired in the period as represented by the earned proportion of premiums written. The assumptions used and the manner in which these estimates and judgements aremade are set out below: • Quarterly statistical data is produced in respect of gross and net premiums and claims (paid and incurred). • Projections are produced by an internal actuarial department, with appropriate adjustment for specific claims made by management where deemed appropriate. • The resulting projections are discussed with the experienced underwriting and claims personnel and claims provision recommendations made to an internal reserving panel consisting of senior underwriters, claims managers and finance staff. • Claims provisions are subject to independent external actuarial review at least annually. The panel then approves those estimated claims provisions to be included in the financial statements. • Some classes of business have characteristics which do not necessarily lend themselves easily to statistical estimation techniques. These classes would include Financial Risk, Casualty Treaty, Catastrophe Retrocessional and Mortgage Indemnity Guarantee business. In these cases review is carried out on a policy-by-policy basis to support statistical estimates. • In the event of catastrophe losses and prior to detailed claims information becoming available, claims provision estimates are compiled using a combination of specific recognised modelling software and reviews of material contracts exposed to the event in question. Overall the objectives of the estimates and judgements applied to claimsprovisions seek to state such provisions on a best estimate, undiscounted basis. In addition to claims provisions, the reserve for future loss adjustmentexpenses is also subject to estimation. In arriving at this estimate, regard ishad to the levels of internal and third party loss adjusting expenses incurredannually and the length of time expected to be necessary to adjust all claimsarising from the different classes of business. For this purpose, classes ofbusiness are grouped into short, medium and long tail categories. The estimatedloss adjustment expenses are expressed as a percentage of net insuranceprovisions. These are benchmarked to assess the reasonableness of the estimate. Further judgements are made as to the recoverability of amounts due fromreinsurers. Provisions for bad debts are made specifically, based on thesolvency of reinsurers, payment experience with them and any disputes of whichthe Group is aware. The carrying value at the balance sheet date of gross claims reported and lossadjustment expenses and claims incurred but not reported were £1,801,007,000(2005: £1,992,665,000). The amount of reinsurance recoveries estimated at thebalance sheet date is £314,067,000 (2005: £591,981,000). ii) Impairment of goodwill Determining whether goodwill is impaired requires an estimation of the value inuse of the cash-generating units to which goodwill has been allocated. The valuein use calculation requires the Group to estimate the future cash flows expectedto arise from the cash-generating unit and a suitable discount rate in order tocalculate present value both of which are material sources of uncertainty. The carrying amount of goodwill at the balance sheet date was £70,991,000 (2005:£70,991,000). 4 Segmental information (i) Primary reporting format - business segments As at 31 December 2006 , the Group is organised into three Underwriting Centreswith each representing a strategic business unit that offers varying productsand serves different markets. The three centres are London Market, Reinsurance and UK. The London Market Underwriting Centre underwrites Brit's international and USbusiness other than reinsurance. In the main, London Market deals with wholesalebuyers of insurance, not individuals. Risks are large and usually syndicated byseveral underwriters - the subscription market. Reinsurance is essentially the insurance of insurance and reinsurance companiesand includes providing non-proportional cover for major events such asearthquakes or hurricanes. The UK Underwriting Centre is developing business opportunities within the UKgeneral commercial insurance markets through both wholesale and retail brokersand has opened offices in key locations across the UK. These insurance companies calculate how much risk they want to bear and pass onthe remaining exposure to reinsurers in return for a premium. 'Other underwriting' is made up of Syndicate 389 (Life - final year of accountof 2003), and historic participations on external managed syndicates in run off(final year of account 2000). RI3K functions as an autonomous business function supplying electronicinfrastructure to the insurance and reinsurance industry. Certain revenues and expenses are incurred relating to central functions whichalong with certain related assets and liabilities are retained at the corporatecentre level. 'Other corporate' is made up of residual income and expenditure attaching to thecorporate centre not allocated to other segments. This is the basis on which the Group reports its primary segment information. a Income statement by segment Year ended 31 December 2006 London Market Reinsurance UK Other Total RI3K Other Total Underwriting Underwriting Underwriting underwriting underwriting £'000 corporate £'000 Centre Centre Centre £'000 £'000 £'000 £'000 £'000 £'000 Gross premiums written 706,913 260,897 279,880 (11,401) 1,236,289 - - 1,236,289Less premiums ceded to (115,818) (49,194) (29,041) 2,682 (191,371) - - (191,371)reinsurersPremiums written, net 591,095 211,703 250,839 (8,719) 1,044,918 - - 1,044,918of reinsurance Gross earned premiums 661,870 292,368 281,248 5,748 1,241,234 - - 1,241,234Reinsurers' share (104,324) (55,386) (30,014) (2,847) (192,571) - - (192,571)Earned premiums, net 557,546 236,982 251,234 2,901 1,048,663 - - 1,048,663of reinsurance Fees, commissions and - - - - - 659 116 775other incomeInvestment income, net 46,377 26,163 32,708 155 105,403 9 5,066 110,478realised gains and netfair value gainsTotal revenue 603,923 263,145 283,942 3,056 1,154,066 668 5,182 1,159,916 Gross claims incurred (295,744) (148,542) (181,823) (4,913) (631,022) - - (631,022)Reinsurers' share 36,394 30,053 6,931 1,602 74,980 - - 74,980Claims incurred, net (259,350) (118,489) (174,892) (3,311) (556,042) - - (556,042)of reinsuranceAcquisition costs - (157,458) (45,388) (43,437) (1,306) (247,589) - - (247,589)commissionAcquisition costs - (21,586) (8,786) (11,231) (258) (41,861) - - (41,861)otherOther insurance (37,984) (13,966) (14,022) - (65,972) - - (65,972)related expensesOther expenses - - - - - (4,712) (43,670) (48,382)Total expenses (476,378) (186,629) (243,582) (4,875) (911,464) (4,712) (43,670) (959,846)excluding financecosts Operating profit 127,545 76,516 40,360 (1,819) 242,602 (4,044) (38,488) 200,070Finance costs (14,864)Share of profit of 1,058associatedundertakingsProfit on ordinary 186,264activities before taxIncome tax expense (52,495)Profit attributable to 133,769equity holders of theparent Claims ratio 46.5% 50.0% 69.6% 53.0%Expense ratio 38.9% 28.8% 27.3% 33.9%Combined ratio 85.4% 78.8% 96.9% 86.9% Year ended 31 December 2005 London Reinsurance UK Other Total RI3K Other Total Market Underwriting Underwriting underwriting underwriting £'000 corporate £'000 Underwriting Centre Centre £'000 £'000 £'000 Centre £'000 £'000 £'000 Gross premiums 558,568 328,807 317,862 (2,734) 1,202,503 - - 1,202,503writtenLess premiums ceded (112,447) (100,716) (18,486) 33 (231,616) - - (231,616)to reinsurersPremiums written, net 446,121 228,091 299,376 (2,701) 970,887 970,887of reinsurance Gross earned premiums 522,570 322,315 323,897 4,643 1,173,425 - - 1,173,425Reinsurers' share (110,434) (98,116) (21,302) (1,026) (230,878) - - (230,878)Earned premiums, net 412,136 224,199 302,595 3,617 942,547 - - 942,547of reinsurance Fees, commissions and 7,408 4,786 317 (368) 12,143 1,775 (484) 13,434other incomeInvestment income, 44,949 22,374 46,651 135 114,109 7 7,712 121,828net realised gainsand net fair valuegainsTotal revenue 464,493 251,359 349,563 3,384 1,068,799 1,782 7,228 1,077,809 Gross claims incurred (448,809) (460,036) (182,206) (1,200) (1,092,251) - - (1,092,251)Reinsurers' share 185,836 191,479 13,219 323 390,857 - - 390,857Claims incurred, net (262,973) (268,557) (168,987) (877) (701,394) - - (701,394)of reinsuranceAcquisition costs - (117,313) (43,946) (45,207) (971) (207,437) - - (207,437)commissionAcquisition costs - (19,235) (9,592) (10,803) - (39,630) - - (39,630)otherOther insurance (20,791) (10,384) (12,262) (239) (43,676) - - (43,676)related expensesOther expenses - - - - - (5,274) (12,192) (17,466)Total expenses (420,312) (332,479) (237,259) (2,087) (992,137) (5,274) (12,192) (1,009,603)excluding financecosts Operating profit 44,181 (81,120) 112,304 1,297 76,662 (3,492) (4,964) 68,206Finance costs (5,941)Share of profit of 138associatedundertakingsProfit on ordinary 62,403activities before taxIncome tax expense (14,771)Profit attributable 47,632to equity holders ofthe parent Claims ratio 63.8% 119.8% 55.8% 74.4%Expense ratio 38.2% 28.5% 22.6% 30.8%Combined ratio 102.0% 148.3% 78.4% 105.2% b Balance sheet by segment As at 31 December 2006 London Market Reinsurance UK Other Total RI3K Other Total Underwriting Underwriting Underwriting underwriting underwriting £'000 corporate £'000 Centre Centre Centre £'000 £'000 £'000 £'000 £'000 £'000 Assets held for sale - - - - - - 1,080 1,080 Reinsurance contracts 231,341 98,898 42,678 1,151 374,068 - - 374,068 Intangible assets 8,313 3,804 57,539 259 69,915 7,431 11,636 88,982 Other assets 1,558,498 710,109 764,584 42,585 3,075,776 621 117,790 3,194,187 Total assets 1,798,152 812,811 864,801 43,995 3,519,759 8,052 130,506 3,658,317 Insurance contracts 1,201,782 549,913 613,708 34,654 2,400,057 - - 2,400,057 Other liabilities 131,203 57,583 40,400 1,838 231,024 (528) 214,472 444,968 Total liabilities 1,332,985 607,496 654,108 36,492 2,631,081 (528) 214,472 2,845,025 As at 31 December 2005 London Market Reinsurance UK Other Total RI3K Other Total Underwriting Underwriting Underwriting underwriting underwriting £'000 corporate £'000 Centre Centre Centre £'000 £'000 £'000 £'000 £'000 £'000Investments inassociates - - - - - - 1,380 1,380 Reinsurance contracts 340,378 264,343 44,226 4,235 653,182 - - 653,182 Intangible assets 4,357 2,762 59,899 133 67,151 7,454 11,636 86,241 Other assets 1,325,366 860,951 705,646 20,755 2,912,718 925 191,569 3,105,212 Total assets 1,670,101 1,128,056 809,771 25,123 3,633,051 8,379 204,585 3,846,015 Insurance contracts 1,228,131 778,713 567,016 22,800 2,596,660 - - 2,596,660 Other liabilities 146,082 104,781 39,154 2,190 292,207 705 231,783 524,695 Total liabilities 1,374,213 883,494 606,170 24,990 2,888,867 705 231,783 3,121,355 c) Other information by segment Year ended 31 December 2006 London Market Reinsurance UK Other Total RI3K Other Total Underwriting Underwriting Underwriting underwriting underwriting £'000 corporate £'000 Centre Centre Centre £'000 £'000 £'000 £'000 £'000 £'000 Depreciation 1,424 524 526 - 2,474 70 - 2,544 Amortisation 2,218 816 819 - 3,853 36 - 3,889 Capital expenditure 4,397 1,972 4,690 - 11,059 25 - 11,084 Year ended 31 December 2005 London Market Reinsurance UK Other Total RI3K Other Total Underwriting Underwriting Underwriting underwriting underwriting £'000 corporate £'000 Centre Centre Centre £'000 £'000 £'000 £'000 £'000 £'000 Depreciation 761 379 427 9 1,576 72 - 1,648 Amortisation 1,535 766 862 19 3,182 20 - 3,202 Capital expenditure 4,710 2,408 9,402 - 16,520 145 - 16,665 (ii) Secondary reporting format - geographical segments The Group's business sectors operate mainly in four geographical areas, thoughthe business is managed on a worldwide basis. The segmental split shown below is based on the location of the underlying riskinsured. This is the basis on which the Group reports its secondary segmentalinformation. Gross premiums written Year ended Year ended 31 December 31 December 2006 2005 £'000 £'000 United Kingdom 339,125 393,833Europe 63,863 60,112United States 382,277 325,922Other (including worldwide) 451,024 422,636 1,236,289 1,202,503 Total assets 31 December 31 December 2006 2005 £'000 £'000 United Kingdom 2,116,920 2,227,147Europe 217,464 195,237United States 1,225,809 1,327,379Other (including worldwide) 98,124 96,252 3,658,317 3,846,015 All capital expenditure during 2005 and 2006 has been made in the UnitedKingdom. 5 Fees, commissions and other income Year ended Year ended 31 December 2006 31 December 2005 £'000 £'000 Electronic infrastructure design and development 658 1,775Other fees and commissions 117 32Exchange gains - 11,627 775 13,434 In accordance with International Accounting Standard 1 "Presentation ofFinancial Statements", exchange gains and losses are presented on a net basis.They are reported within revenue where they result in a net gain and withinexpenses where they result in a net loss. 6 Investment income Year ended Year ended 31 December 2006 31 December 2005 £'000 £'000Financial investments at fair value through theprofit and loss:Dividend income 2,182 2,777Interest income 79,116 57,304Interest income on cash and cash equivalents 19,967 25,423 101,265 85,504 7 Net realised gains/(losses) recorded in the income statement Year ended Year ended 31 December 2006 31 December 2005 £'000 £'000Realised appreciation on investments 1,638 2,610Loss on sale of property, plant and equipment - (15) 1,638 2,595 8 Acquisition costs and other operating expenses Year ended Year ended 31 December 2006 31 December 2005 £'000 £'000 Commissions 244,099 219,570Movement on related acquisition cost deferral 3,490 (12,133) 247,589 207,437Staff costs 62,481 45,110Other staff related costs 5,951 4,423Accommodation costs 7,328 5,741Legal and professional charges 9,743 4,825Audit fees 1,276 1,393IT costs 5,895 4,727Marketing and communications 2,822 3,261Irrecoverable VAT 2,641 1,691Depreciation of property, plant and equipment 2,544 1,648Amortisation of intangible assets 3,889 3,202Printing, stationery, postage and telephone 1,120 1,056Travel and entertaining 3,153 2,557Insurance 982 1,419Regulatory levies and charges 14,335 14,777Investment management expenses 3,298 3,066Exchange losses 25,384 -Other 3,991 2,907Movement on insurance related acquisition cost (618) (1,031)deferral 156,215 100,772Acquisition costs and other operating expenses 403,804 308,209 The amounts above have been allocated as follows: Acquisition costs 289,450 247,067Other operating expenses 114,354 61,142 403,804 308,209 9 Income tax expense (i) Tax charged to income statement Year ended Year ended 31 December 2006 31 December 2005 £'000 £'000Current tax:For the period (54,224) (19,900) Adjustments in respect of prior years:Adjustments 5,200 139Total current tax (49,024) (19,761) Deferred tax:Origination and reversal of temporary differences (2,702) 4,990Deferred tax assets previously unrecognised 1,833 -Other adjustments in respect of prior years (2,602) -Total tax charged to income statement (52,495) (14,771) An amount of tax relating to the associated companies of £78,000 (2005: £59,000)has been charged to the income statement within the Group's share of profitafter tax of associated undertakings. £2,300,000 of the adjustments in respect of prior years represents areclassification between current and deferred tax. (ii) Tax (charged)/credited to equity Year ended Year ended 31 December 2006 31 December £'000 2005 £'000Deferred tax (2,661) 1,170 (iii) Tax reconciliation The tax on the Group's profits before tax differs from the theoretical amountthat would arise from using the current standard rate for corporation taxapplicable in the UK of 30% (2005: 30%) as follows: Year ended Year ended 31 December 2006 31 December £'000 2005 £'000Profit on ordinary activities before tax 186,264 62,403 Tax calculated at standard rate for corporation tax (55,879) (18,721)Expenses not deductible for tax purposes (899) (679)Equity dividends not subject to corporation tax 539 833Underwriting results not previously recognised for tax purposes - (60)Overseas tax not recoverable (1,004) -Utilisation of previously unrecognised deferred tax assets oncapital losses and capital allowances - 3,676Deferred tax assets previously unrecognised 1,833 -Other adjustments to tax charge in respect of prior years 2,598 139Tax effect of share of results of associated undertakings 317 41 (52,495) (14,771) In 2006 the Group conducted a review of capital allowances available and claimedrelief for prior years which resulted in a reduction of corporation tax due andidentified future reliefs, now recognised as deferred tax asset. In addition to this a further review of available reliefs and allowances wasconducted along with further consideration of the deferred tax assets andliabilities to be recognised by the Group. The result of the review and theadditional capital allowance claim has resulted in a prior year adjustment tothe tax charge. 10 Earnings per share The calculations of the basic and diluted earnings per share are based on thefollowing figures : Year ended Year ended 31 December 31 December 2006 2005 £'000 £'000 Profit on ordinary activities after tax 133,769 47,632 31 December 31 December 2006 2005 Number '000 Number '000 (restated) Basic weighted average number of shares 324,262,139 321,769,255Employee share options 1,606,725 888,762Diluted weighted average number of shares 325,868,864 322,658,017 Basic earnings per share (pence) (restated) 41.25 14.80Diluted earnings per share (pence) (restated) 41.05 14.76 The comparative numbers of shares has been restated for the period to 31December 2005 to reflect the share consolidation undertaken during 2006.Further information relating to this share consolidation is provided in Note 19. 11 Insurance and reinsurance contracts (i) Balances on insurance and reinsurance contracts 31 December 31 December 2006 2005 £'000 £'000Gross Insurance contractsClaims reported and loss adjustment expenses 953,758 1,050,175Claims incurred but not reported 847,249 942,490 1,801,007 1,992,665Unearned premiums 599,050 603,995Total insurance contracts 2,400,057 2,596,660 Recoverable from reinsurersReinsurance contractsClaims reported and loss adjustment expenses 224,998 355,861Claims incurred but not reported 106,113 256,810 Impairment provision (17,044) (20,690) 314,067 591,981 Unearned premiums 60,001 61,201Total reinsurance contracts 374,068 653,182 NetClaims reported and loss adjustment expenses 728,760 694,314Claims incurred but not reported 741,136 685,680Impairment provision 17,044 20,690 1,486,940 1,400,684Unearned premiums 539,049 542,794Net insurance and reinsurance contracts 2,025,989 1,943,478 Insurance contracts - assumptions and changes in assumptions Process used to decide on assumptions required The risks associated with these insurance contracts and in particular withcasualty insurance contracts are complex and subject to a number of variablesthat complicate quantitative sensitivity analysis. The Group uses several statistical methods to incorporate the variousassumptions made in order to estimate the ultimate costs of claims. The twomethods more commonly used are the chain-ladder and the Bornhuetter-Fergusonmethods. Chain-ladder methods may be applied to premiums, paid claims or incurred claims(i.e., paid claims plus case estimates). The basic technique involves theanalysis of historical claims development factors and the selection of estimateddevelopment factors based on this historical pattern. The selected developmentfactors are then applied to cumulative claims data for each accident year thatis not yet fully developed to produce an estimated ultimate claims cost for eachaccident year. Chain-ladder techniques are most appropriate for mature classes of business thathave a relatively stable development pattern. Chain-ladder techniques are lesssuitable in cases in which the insurer does not have a developed claims historyfor a particular class of business. The Bornhuetter-Ferguson method uses a combination of a benchmark ormarket-based estimate and an estimate based on claims experience. The former isbased on a measure of exposure such as premiums; the latter is based on the paidor incurred claims to date. The two estimates are combined using a formula thatgives more weight to the experience-based estimate as time passes. Thistechnique has been used in situations in which developed claims experience wasnot available for the projection (recent accident years or new classes ofbusiness). The choice of selected results for each year of each class of business dependson an assessment of the technique that has been most appropriate to observedhistorical developments. In certain instances, this has meant that differenttechniques or combination of techniques have been selected for the individualaccident year or groups of accident years within the same class of business. Claims for a number of classes of business, including Financial Risk, MortgageIndemnity Guarantee, Catastrophe Retrocession and Casualty Treaty, do not alwaysconform to the statistical distribution expected. For these classes claimsreserves are additionally reviewed on a policy by policy basis by Underwritersand Claims Managers and these reviews take account of market intelligence inaddition to notified claims. In addition to the estimation of claims reserves certain estimates are producedfor unearned premiums. All inwards premiums are deemed to earn out on a prorata basis over the term of the related policy, except for those contracts wherethe period of risk differs significantly from the contract period. For openmarket business earned premium is calculated at policy level. However, premiumderived from delegated underwriting authorities is calculated by applying the 1/144ths method to estimated premiums applied to the master policy. This assumesthat attachments to master policies arise evenly throughout the period of thatmaster policy. Reinsurance outwards premiums are earned according to the nature of the cover."Losses occurring during" policies are earned evenly over the policy period. "Risks attaching" policies are expensed on the same basis as the inwards businessbeing protected. Changes in assumptions The Group did not change its assumptions for the insurance contracts disclosedin this note during the year. Claims development tables The tables below show the development of claims over a period of time on a grossand net of reinsurance basis. The tables show the cumulative incurred claims, including both notified and IBNRclaims, for each successive accident year at each balance sheet date, togetherwith cumulative claims as at the current balance sheet date. The claims have been adjusted to make them comparable on a year by year basis. They have been grossed up to include 100% of the managed syndicate claims ratherthan the claims that reflects the Brit percentage ownership of each syndicates'capacity during the respective accident years. In addition, claims in currencies other than sterling have been retranslated at31 December 2006 exchange rates. Ultimate gross claimsAccident year 2001 and 2002 2003 2004 2005 2006 Total prior years £'000 £'000 £'000 £'000 £'000 £'000 £'000 At end of accident year 1,837,503 251,793 439,714 690,742 1,126,293 651,809One year later 1,870,895 252,564 413,775 640,281 1,156,672Two years later 1,891,832 248,693 382,312 614,910Three years later 1,893,193 251,037 364,384Four years later 1,891,030 245,595Five years later 1,871,516Estimate of cumulative claims 1,871,516 245,595 364,384 614,910 1,156,672 651,809 4,904,886Cumulative paid claims (3,103,270)Less third party participation in (609)syndicates of prior yearsGross liability as per the balance 1,801,007sheet (Note 11 (i)) Ultimate net claimsAccident year 2001 2002 2003 2004 2005 2006 Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 At end of accident year 1,276,186 194,126 389,280 570,357 779,566 575,937One year later 1,314,245 194,020 365,860 502,338 790,341Two years later 1,323,594 190,765 330,405 480,248Three years later 1,316,002 186,827 318,089Four years later 1,316,123 182,417Five years later 1,310,274 Estimate of cumulative claims 1,310,274 182,417 318,089 480,248 790,341 575,937 3,657,306Cumulative paid claims (2,169,857)Adjustment for change in syndicate ownership (509)Net liability as per the balance sheet (Note 1,486,94011 (i)) Material Surpluses Released The total claims provision releases from prior years amounted to £33,890,000(2005: £110,814,000). In part this arises from the Group's reserving philosophywhich requires the most recent years, with the greatest uncertainty of result,to be prudently reserved leaving a potential for subsequent release. Inaddition, in 2006 there were a number of one-off circumstances giving rise toadditional releases as follows: The Employers' Liability and Public Liability accounts are still relativelyrecent additions to the Group's portfolio. These classes saw substantial rateincreases up to the 2004 underwriting year and with benign claims experience theGroup has been able to release reserves. This continuance of benign claims activity within the Professional Risks classeshas lead to further reductions in reserves. The Group's Property Commercial account has experienced favourable claimsexperience in recent years. The Group's Catastrophe exposed classes have seen reductions in theirattritional loss ratio to reflect the benign claims environment, although partlyoffset by the strengthening of the 2005 Hurricanes. 2005 Hurricanes The ultimate loss in respect of the 2005 Hurricanes has increased in the year. The following table sets out this increase and the ultimate split between paid,outstanding and IBNR claims: 31 December 2006 31 December 2005 Gross paid Gross Gross Total Ultimate Ultimate Ultimate Ultimate claims outstanding IBNR gross gross net claims gross net claims claims reserves claims claimsHurricane US$'m US$'m US$'m US$'m US$'m US$'m US$'m US$'m Katrina 499.3 238.1 22.6 260.7 760.0 341.9 664.8 245.1Rita 104.1 87.3 14.0 101.3 205.4 105.1 149.3 74.3Wilma 73.3 47.1 22.6 69.7 143.0 68.8 100.8 55.1Total 676.7 372.5 59.2 431.7 1,108.4 515.8 914.9 374.5 The increases in the ultimate claims are attributable mainly to deterioration onthe Property, Marine and Catastrophe Retro classes. The gross paid claims represent 61% of the ultimate. The gross reserves held in respect of the Hurricanes equate to 12.2% of totalGroup reserves at 31 December 2006 (2005: 22.9%) In respect of Hurricane Katrina, with the exception of certain quota sharereinsurances on the Property Treaty and Catastrophe Retrocession accounts,reinsurance cover has been largely exhausted. Accordingly the sensitivity of theGroup's net claims to movements in its gross estimated claims is high. Reinsurance cover remains available in respect of Hurricanes Rita and Wilma. (ii) Movements in insurance and reinsurance contracts a) Claims and loss adjustment expenses Year ended 31 December 2006 Year ended 31 December 2005 Gross Reinsurance Net Gross Reinsurance Net As at 1 January 1,992,665 (591,981) 1,400,684 1,284,715 (266,438) 1,018,277 Cash paid for claims settled in the (690,705) 324,101 (366,604) (487,687) 87,358 (400,329)yearChange in syndicate ownership - - - 10,917 (3,369) 7,548 Increase in liabilities 626,387 (74,980) 551,407 1,092,251 (390,857) 701,394 Net exchange differences (127,340) 28,793 (98,547) 92,469 (18,675) 73,794 As at 31 December 1,801,007 (314,067) 1,486,940 1,992,665 (591,981) 1,400,684 b) Unearned premiums Year ended 31 December 2006 Year ended 31 December 2005 Gross Reinsurance Net Gross Reinsurance NetAs at 1 January 603,995 (61,201) 542,794 574,917 (60,463) 514,454Premiums written in the year 1,236,289 (191,371) 1,044,918 1,202,503 (231,616) 970,887Premiums earned during the year (1,241,234) 192,571 (1,048,663) (1,173,425) 230,878 (942,547)As at 31 December 599,050 (60,001) 539,049 603,995 (61,201) 542,794 12 Financial investments 31 December 31 December 2006 2005 £'000 £'000Shares and other variable-yield securities : Listed 226,437 218,025Unlisted - 993 Debt securities and other fixed income securities : Listed 1,425,109 1,156,168 Certificates of deposit 427,752 470,418 2,079,298 1,845,604 Derivative financial instruments 15 106 2,079,313 1,845,710 All financial investments have been designated as fair value through the profitand loss. The derivative financial instruments are credit default swaps entered into inorder to mitigate the credit risk of certain reinsurance counterparties. 13 Trade and other receivables 31 December 31 December 2006 2005 £'000 £'000Trade debtors 10,171 14,020Arising out of direct insurance operations 332,900 304,885Arising out of reinsurance operations 160,679 240,036Prepayments 2,644 10,775Accrued income 31,934 17,717Other debtors 1,994 10,450 540,322 597,883 The carrying amounts disclosed above reasonably approximate fair values at yearend. All amounts are due within one year of the balance sheet date. 14 Assets held for sale The amounts held for sale relate to EPIC Investment Partners Limited ("EIP"). 31 December 31 December 2006 2005 £'000 £'000 Investment 1,080 1,080Loan - 300 1,080 1,380 In January 2007, the Group sold its stake in EIP to Syndicate Asset Managementplc ("SAM"). Under the terms agreed with SAM, the Group will derive initialconsideration of £4,400,000, of which £1,300,000 is cash and the remaining£3,100,000 is 4-year SAM loan notes. The redemption value of the loan noteswould be reduced if revenues derived by EIP from the Group over that period wereto fall below current levels, as the Group is not obliged to keep funds withEIP. In addition, there is deferred contingent consideration of up to£1,100,000 based on the profitability of EIP in the three years post completion. 15 Cash and cash equivalents 31 December 31 December 2006 2005 £'000 £'000Cash at bank and on deposit 367,518 475,963Cash equivalents 53,572 50,675 421,090 526,638 The carrying amounts disclosed above reasonably approximate fair values at yearend. Included in cash and cash equivalents are amounts totalling £183,105,000 (31December 2005: £187,926,000) not available for use by the Group which are heldwithin the Lloyd's syndicates and as Funds at Lloyd's. 16 Employee benefits The Group has the following pension schemes in operation: (i) Brit Group Services Limited - defined benefit pension scheme The Group operates a funded pension plan providing benefits for its employeesbased on final pensionable salaries. The assets of the scheme are held in a separate trustee administered fund. Thisscheme closed to new entrants on 4th October 2001. The scheme is subject to a formal actuarial valuation every three years and thepreliminary results of the valuation carried out as at 31 July 2006 were updatedto the accounting date by an independent qualified actuary in accordance withInternational Accounting Standard 19 "Employee Benefits" ("IAS 19"). As required by IAS 19, the value of the definedbenefit obligation and current service cost has been measured using theprojected unit credit method. The following table sets out the key IAS 19 assumptions used for the scheme. 31 December 31 December 31 December 2006 2005 2004 % % % Retail price inflation 2.90 2.80 2.90Discount rate 5.20 4.80 5.30Pension increases in payment 2.90 2.80 2.70General salary increases 4.90 4.80 4.90Life expectancy of a pensioner aged 60 at balance sheet dateMale 24.7 years 24.6 years 23.3 yearsFemale 27.6 years 27.5 years 26.4 yearsLife expectancy of a member retiring at age 60 in 20 years'timeMale 25.9 years 25.8 years 24.7 yearsFemale 28.7 years 28.6 years 27.7 years The expected rate of return on assets has been derived by taking the weightedaverage of the long term expected rate of return on each of the asset classes atthe start of each year. The expected returns for individual asset classes at the start of each year wereas follows: 31 December 31 December 31 December 2006 2005 2004 % % % Equities 7.30 7.50 7.70Corporate Bonds 4.40 4.80 5.40Gilts 4.00 4.60 4.80Cash 4.00 4.50 4.60Weighted average expected return 6.40 6.70 7.30 The amount included in the balance sheet arising from the Group's obligations inrespect of the scheme is as follows: 31 December 31 December 31 December 2006 2005 2004 £'000 £'000 £'000 Present value of defined benefit obligation 89,719 95,049 79,216Fair value of scheme assets (77,297) (72,231) (60,746)Net pension benefit obligation 12,422 22,818 18,470 The amounts recognised in the income statement are as follows: 31 December 31 December 2006 2005 £'000 £'000Current service cost 2,456 2,265Past service cost 25 -Interest cost 4,546 4,192Expected return on scheme assets (4,680) (4,052)Total expense recognised in the income statement 2,347 2,405 The above charges have been recognised in the acquisition costs and otheroperating expenses lines of the income statement: The actual return on the scheme's assets over the year was £4,354,000 (2005:£12,044,000). The allocation of the scheme's assets were as follows: 31 December 2006 31 December 2005 31 December 2004 Allocation Fair value Allocation Fair value Allocation Fair value % £'000 % £'000 % £'000 Equity instruments 70 54,035 71 51,023 72 43,367 Debt instruments 29 22,826 28 20,760 28 17,101 Other 1 436 1 448 - 278 100 77,297 100 72,231 100 60,746 A reconciliation of the present value of the defined benefit obligation is asfollows: 31 December 31 December 2006 2005 £'000 £'000 Opening defined benefit obligation 95,049 79,216Current service cost 2,456 2,265Past service cost 25 -Interest cost 4,546 4,192Actuarial (gains)/losses (9,195) 11,893Benefits paid (3,162) (2,517)Closing defined benefit obligation 89,719 95,049 A reconciliation of the fair value of the scheme assets is as follows: 31 December 31 December 2006 2005 £'000 £'000 Opening fair value of scheme assets 72,231 60,746Expected return on scheme assets 4,680 4,052Difference between expected and actual return on scheme assets (326) 7,992Contributions by the employer 3,874 1,958Benefits paid (3,162) (2,517)Closing fair value of scheme assets 77,297 72,231 During 2006, the Group has been making regular contributions of 24.7% ofsalaries plus an additional lump sum contribution of £2,390,000. It has agreedto make similar regular contributions plus a lump sum contribution of £5,000,000during 2007 although this is subject to the final results of the actuarialvaluation carried out as at 31 July 2006. A summary of the scheme's experience was as follows: 31 December 31 December 31 December 31 December 2006 2005 2004 2003 £'000 £'000 £'000 £'000 Defined benefit obligation (89,719) (95,049) (79,216) (72,171)Scheme assets 77,297 72,231 60,746 56,655Deficit (12,422) (22,818) (18,470) (15,516) The Group has taken advantage of the exemption in IAS 19 to disclose only threeof the previous four years scheme experience. The recent history of experience gains and losses is as follows: 31 December 31 December 31 December 2006 2005 2004 £'000 £'000 £'000 Difference between expected and actual return on scheme assets:Amount - (loss)/gain (326) 7,992 571Percentage of scheme assets 0% 11% 1%Experience gains and losses on obligations:Amount - gain/(loss) 4,137 (686) (843)Percentage of the present value of the obligations 5% (1%) (1%)Total amount recognised outside income statementAmount - gain/(loss) 8,869 (3,901) (2,938)Percentage of the present value of the obligations 10% (4%) (4%) The cumulative amount recognised in the Statement of Recognised Income andExpense is a gain of £2,030,000 (2005: loss of £6,839,000). (ii) Brit Group Services Limited - Defined Contribution Stakeholder Scheme From 5 October 2001, Brit Group Services Limited has operated a definedcontribution stakeholder pension scheme. The assets of the scheme are heldseparately from those of the Company in an independently administered fund. The pension cost charge represents contributions payable by the Company to thefund and amounted to £3,815,000 (2005: £2,352,000). At 31 December 2006 no contributions were payable to the fund (2005: £nil). (iii) Brit Group Services Limited - Funded Unapproved Retirement BenefitsScheme ("FURBS") Brit Group Services Limited also operated a defined contribution FURBS until itsclosure on 31 March 2006, into which additional contributions were paid inrespect of certain employees. The assets of the scheme were held separatelyfrom those of the Company in an independently administered fund. The pension cost charge represents contributions payable by the Company to thefund and amounted to £nil (2005: £24,000). At 31 December 2006, no contributions were payable to the fund (2005: £nil). (iv) Brit Insurance Limited - Defined Contribution Scheme For Brit Insurance Limited employees, the Group operates a defined contributionpension scheme. The assets of the scheme are held separately from those of theCompany in an independently administered fund. The pension cost charge represents contributions payable by the Company to thefund and amounted to £26,000 (2005: £26,000). At 31 December 2006, no contributions were payable to the fund (2005: £nil). 17 Trade and other payables 31 December 31 December 2006 2005 £'000 £'000 Trade creditors 2,264 8,465Arising out of direct insurance operations 41,286 83,828Arising out of reinsurance operations 131,866 163,639Other taxes and social security costs 1,344 1,087Shares held by third parties - CF Epic Investment Funds 33,811 17,444Accruals and deferred income 20,502 12,122Other creditors 525 6,327 231,598 292,912 Estimated fair values of amounts are the amounts recorded at year end. All amounts are payable within one year of the balance sheet date. 18 Deferred taxation The movement in deferred tax assets and liabilities during the year, taking intoconsideration the offsetting of balances within the same tax jurisdiction is asfollows: Unrealised Pensions Foreign Trading Declared Other Total (profits)/ £'000 exchange losses underwriting £'000 £'000 losses (profit)/ carried results on losses forward £'000 investments on £'000 £'000 non-monetary items £'000Deferred tax balances As at 1 January 2005 187 5,541 1,730 6,476 (18,506) 60 (4,512) Credited to equity - 1,170 - - - - 1,170Credited/(charged) to income (4,748) 134 (4,004) (6,476) 19,140 944 4,990statement (Note 9)At 31 December 2005 (4,561) 6,845 (2,274) - 634 1,004 1,648 Charged to equity - (2,661) - - - - (2,661)Credited/(charged) to income (3,097) (324) 4,891 - (2,934) (1,238) (2,702)statement (Note 9)Deferred tax assets previously 1,833 - - - - - 1,833unrecognised (Note 9)Other adjustments in respect of prior - (134) - - (2,769) 301 (2,602)years (Note 9)At 31 December 2006 (5,825) 3,726 2,617 - (5,069) 67 (4,484) The Directors consider that deferred tax assets are recoverable over futureyears in the light of the Group's current trading and prospects. Deferred income tax assets are recognised for temporary differences to theextent that the realisation of the related tax benefit through the futuretaxable profits is probable. The Group has recognised as a reduction in its deferred tax liability capitallosses. To the extent the losses arose in prior years, the effect is reflectedas a prior year adjustment to the tax charge. As at 31 December 2006 the Groupunrecognised tax balances are nil (2005: £1,834,000). 19 Share capital 31 December 31 December 31 December 31 December 2006 2005 2006 2005 Number '000 £'000 £'000 Number '000 (restated)Authorised:Ordinary shares of 75p each 350,000 350,000 466,667 466,667 Allotted, issued and fully paid:Ordinary shares of 75p each 246,107 245,236 328,143 326,981 31 December 31 December 2006 2005 Number Number (restated)Number of ordinary shares of 75p each,allotted, issued and fully paid:Opening balance 326,980,768 324,690,621Exercised share options 1,161,798 312,667Converted unsecured subordinated loan stock - 1,977,480Closing balance 328,142,566 326,980,768 The Company undertook a consolidation of its share capital on 12 May 2006, suchthat the shareholders received one ordinary 75p share for every three ordinary25p shares owned as at that date. As at 31 December 2006 there were 8,946,971 shares (2005: 1,266,630 (restated))reserved for issue under options. 20 Reconciliation of movements in equity For the Year ended 31 December 2006 Note Called Share Capital Translation Own Retained Total equity up share premium redemption reserve Capital re- shares earnings attributable capital account reserve organisation to £'000 reserve £'000 £'000 shareholders £'000 £'000 £'000 £'000 £'000 Balance at 1 January 2006 245,236 314,758 586 - - (7,550) 171,630 724,660 Arising in the period:Foreign exchange translation differences - - - (1,340) - - - (1,340) Actuarial gains ondefined benefit pension scheme - - - - - - 8,869 8,869 Tax on items taken directly to or transferred from - - - - - - (2,661) (2,661)equityProfit for the year - - - - - - 133,769 133,769 Total recognised income and expense for - - - (1,340) - - 139,977 138,637the year Acquisition of own shares - - - - (288) - (288) Vesting of own shares - - - - - 1,758 (1,758) - Sale of own shares - - - - - 303 (15) 288 Equity dividends 22 - - - - - - (53,555) (53,555) Share-based payments - - - - - - 1,670 1,670 Exercised shareoptions 871 1,626 - - - - - 2,497 Capital reorganisation - (180,000) - - 180,000 - - - Premium on repurchase of unsecured - (617) - - - - - (617)subordinated loan stock Balance at 31 December 246,107 135,767 586 (1,340) 180,000 (5,777) 257,949 813,2922006 The capital redemption reserve results from the redemption of some of the theGroup's own shares and its purpose is to maintain the Group's capital. The translation reserve arises on the revaluation of the overseas associatedundertakings. Following an application to the High Court, the Company was permitted totransfer an amount from the share premium account to a capital reorganisationreserve of £180,000,000. This capital reorganisation became effective on 29March 2006. On 2 March 2007, following £29,411,913 being deposited in separatebank accounts by the Company on the terms approved by the Court, the£180,000,000 was transferred from the capital reorganisation reserve to retainedearnings. For the Year ended 31 December 2005 Note Called Share Capital Equity Own Retained Total equity up share premium redemption portion of shares earnings attributable capital account reserve convertible to debt £'000 £'000 shareholders £'000 £'000 £'000 £'000 £'000 Balance at 1 January 2005 243,518 311,145 586 1,681 (7,493) 173,223 722,660 Arising in the year:Actuarial losses on defined benefit pension scheme - - - - - (3,901) (3,901) Tax on items taken directly to ortransferred from equity - - - - - 1,170 1,170 Profit for the year - - - - - 47,632 47,632 Total recognised income andexpense for the year - - - - - 44,901 44,901 Acquisition of own shares - - - - (107) - (107) Vesting of own shares - - - - 50 - 50 Equity dividends 22 - - - - - (48,462) (48,462) Share-based payments - - - - - 1,060 1,060 Exercised share options 235 420 - - - - 655 Converted unsecured subordinatedloan stock 1,483 3,193 - - - - 4,676 Expiry of loan stock conversion period - - - (1,681) - 1,681 - Acquisition of further 8.4% of RI3K Ltd - - - - - (773) (773) Balance at 31 December 2005 245,236 314,758 586 - (7,550) 171,630 724,660 21 Cash flows provided by operating activities Year ended Year ended 31 December 31 December 2006 2005 £'000 £'000 Operating profit 200,070 68,206 Adjustments for non-cash movements: Realised and unrealised investment gains (9,213) (36,339) Loss on sale of property, plant and equipment - 15 Amortisation of underwriting capacity - 502 Amortisation of software 3,889 2,700 Depreciation of property, plant and equipment and related exchange adjustments 2,534 1,669 Foreign exchange (gains)/losses on financing items (1,068) 969 Foreign exchange losses/(gains) on cash and cash equivalents 19,680 (17,792) Charges in respect of employee share schemes 1,670 1,060 (Credits)/charges in respect of retirement benefits (1,527) 447 Interest income (99,083) (82,727) Dividend Income (2,182) (2,777) Finance costs on borrowing (927) - Changes in working capital: Deferred acquisition costs 2,872 (13,164) Trade and other receivables excluding accrued income 71,778 (92,740) Insurance and reinsurance contracts 82,511 410,747 Trade and other payables (61,314) 102,499 Provisions (46) (44) Cash flows provided by operating activities 209,644 343,231 22 Equity dividends Year ended Year ended 31 December 31 December 2006 2005 £'000 £'000 Final 2004 dividend paid - 6.0p per ordinary share (restated) - 19,305 First 2005 interim dividend paid - 9.0p per ordinary share (restated) - 29,157 Final 2005 dividend paid - 9.0p per ordinary share (restated) 29,198 - First 2006 interim dividend paid - 7.5p per ordinary share 24,357 - 53,555 48,462 The Directors in their meeting dated 5 March 2007 approved a proposal to be putbefore the Annual General Meeting of shareholders, to be held on 24 April 2007,the payment of a final dividend of 9.5p per share for the year ended 31 December2006 to all shareholders on the register at 16 March 2007. Based on the numberof shares in issue as at 5 March 2007, but excluding those owned by the Group'sEmployee Benefit Trust which has waived its entitlement to dividends, this wouldamount to £30,965,000 and will be paid on 27 April 2007. 23 Financial Information and posting of accounts The financial information set out above does not constitute the Company'sstatutory accounts for the year ended 31 December 2005 or 2006, but is derivedfrom those accounts. Statutory accounts for 2005 have been delivered to theRegistrar of Companies and those for 2006 will be delivered by no later than 22March 2007. The auditor has reported on those accounts; their reports wereunqualified and did not contain statements under Section 237(2) or (3) of theCompanies Act 1985. The audited Annual Report and Accounts for 2006 are expected to be posted toshareholders by no later than 22 March 2007. Copies of the Report may beobtained from that date by writing to the Company Secretary, Brit InsuranceHoldings PLC, 55 Bishopsgate, London, EC2N 3AS. The Annual General Meeting ofthe Company will be held at the same address at 12.00p.m. on 24 April 2007. The Preliminary Results were approved by the Board on 5 March 2007. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
BRE.L