16th Sep 2005 07:00
SVB Holdings PLC16 September 2005 NEWS RELEASE For immediate release SVB Holdings PLC Results for the six months ended 30 June 2005 Highlights • Record interim profits before tax £27.7 million (H1 2004: loss £120.1 million) • Earnings per share 5.3p (H1 2004: loss 26.8p) • Annualised return on equity 40% (H1 2004: 45%) (1) • Tangible net assets per share 38.2p (H1 2004: 30.9p) • Investment return £13.4 million (H1 2004: £4.5 million) • Combined ratio 71.9% (H1 2004: 77.0%) (2) Matthew Fosh, Chief Executive, today said: "SVB has delivered record interim profits, and the financial effects of thediscontinued business remain within expectations. The strong rating environmentexperienced by the insurance industry in the past few years will be extendedfurther by a disaster of the magnitude of Hurricane Katrina. The business isresilient in the face of formidable challenges and I am proud of the way we areresponding." Enquiries: Matthew Fosh, SVB Holdings PLC 020 7903 7300 Nick Miles, M:Communications 020 7153 1539 A presentation to analysts and shareholders is taking place this morning at10.00a.m. in the Madrid Room, 9th Floor, Citypoint, 1 Ropemaker Street, EC2. This summary should be read in conjunction with the detailed announcement whichfollows. (1) 2004 stated excluding discontinued business(2) Calculated on an earned premium basis SVB Holdings PLC Results for the six months ended 30 June 2005 Operating and Financial Review Overview-------- The first half has been characterised by modest rate softening in many areas ofthe market, a generally benign claims environment in most areas in which SVB'songoing underwriting units operate and a major change in the regulatorylandscape, both in the capital setting process and in the adoption of the newIFRS accounting standards. We have continued to invest in actuarial support, claims, systems and otherareas critical to achieving underwriting success. Management of the discontinuedunits has delivered tangible benefits in claims mitigation and reinsurancecollections. Together with the strength of the ongoing franchise, this hasallowed a partial refinancing of SVB's solvency capital. The effect of Hurricane Katrina on our industry will be significant, both interms of insured losses and future underwriting. We will revisit our 2006business plan in the second half to take account of this. Once again, we thank our employees across the Group for their strongcontribution. Operating review---------------- Highlights---------- The ongoing business performed strongly in the first half. Despite modest rateeasing, underwriting profit from the continuing business was £43.3 million(2004: £39.6 million), including a foreign exchange gain of £6.0 million. The first half combined ratio for the ongoing business (calculated on an earnedpremium basis) was 71.9%, compared to 77.0% in the first half of 2004 and 89.4%for 2004 as a whole. The claims ratio during the first half was 37.9%, asatisfactory performance compared to 36.1% in the same period last year and56.3% for 2004 as a whole. Our underwriters continued to see a good mix of renewal and new business.However, we have been firm in declining business where the rating, or the termsand conditions, did not meet our requirements. The decision last year towithdraw from a number of US direct liability classes, and to scale back ourexposure in some other areas where SVB had a sub scale presence, proved to bewell timed. Operational structure and objectives------------------------------------ We report our underwriting results by segment, being Specialty, Property,Liability and Aviation & Marine. We show separately the financial results fromthe run off of the Discontinued Units, which are made up of LiabilityReinsurance, Healthcare and Third Party Liability. Our key objective is to develop and sustain a leading London Market insurancebusiness capable of delivering returns in excess of our pre tax hurdle rate. Thehurdle rate is currently set at 15%. We are also focussed on managing the runoff of the Discontinued Units in the most financially advantageous and effectiveway for shareholders. Underwriting review------------------- Rating eased in the first half. SVB's rating index to 30 June is as follows: +------------------+-------+-------+---------+---------+-------+---------+| | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 H1 |+------------------+-------+-------+---------+---------+-------+---------+| | | | | | | |+------------------+-------+-------+---------+---------+-------+---------+|Specialty | 100 | 125 | 212 | 281 | 292 | 273 |+------------------+-------+-------+---------+---------+-------+---------+|Property | 100 | 118 | 159 | 165 | 158 | 155 |+------------------+-------+-------+---------+---------+-------+---------+|Liability | 100 | 117 | 171 | 196 | 207 | 204 |+------------------+-------+-------+---------+---------+-------+---------+|Aviation & Marine | 100 | 132 | 284 | 304 | 295 | 274 |+------------------+-------+-------+---------+---------+-------+---------+| | | | | | | |+------------------+-------+-------+---------+---------+-------+---------+|Whole account | 100 | 123 | 193 | 228 | 230 | 220 |+------------------+-------+-------+---------+---------+-------+---------+ While first half softening clearly indicates some erosion in profitability,rates are still adequate to provide the basis for satisfactory returns if claimsexperience is in line with business plan assumptions. On this basis, we continueto be optimistic that the continuing business can generate returns in excess ofboth the cost of capital and the hurdle rate. The results for the first half of this year show underwriting profit from thecontinuing business of £43.3 million. This was achieved despite losses frombusiness such as US direct professional indemnity, from which SVB has withdrawnbut which are not included in Discontinued Units. In addition, there weredistortions in earnings patterns which complicate the presentation of resultsfor this six month period. These distortions affect profitability on a segmental basis and render segmentalcombined ratios potentially misleading at the interim stage this year. They havehad a material negative impact on the Specialty result but have boosted theprofit on Aviation & Marine. In both instances they prompt a caveat thatsegmental performance in the first half of the year is not expected to provide areliable indication of comparative full year performance, although theunderwriting result for the period taken across all segments is in line with ourexpectations. Specialty--------- The Specialty segment reported an underwriting profit in the first half of £2.9million (2004: £11.8 million). The Specialty result is distorted by the need to adjust premium projections inrespect of business written in 2004. This depresses gross premiums and theimpact is then magnified at the net level by the mis-match resulting fromexpensing outwards reinsurance faster than inwards business is earned. Claims experience has continued to be satisfactory overall, despite some furtherunfavourable development on US Dollar Professional Indemnity business inheritedfrom Syndicate 1212. The account written by Syndicate 1007 in 2003 is proving tobe very profitable. The first half distortion in the earnings pattern of the Specialty segment isexpected to reverse, at least in part, in the second half. Property-------- The Property units generated an underwriting profit in the period to 30 June of£15.8 million (2004: £11.3 million). The Property result again reflects a favourable claims experience over theperiod. There has been no material movement in the reserves established forwindstorm losses in the second half of 2004, although that experience amplydemonstrates the ability of such events to have a major impact upon the overalloutcome for the year. The damage resulting from Hurricane Katrina constitutes a major event for theinsurance industry. On the assumption that the insured loss is $40 billion, ourcurrent expectation is that the underwriting cost to SVB will be around £25million net of reinsurance and reinstatement premiums. An industry loss on thisscale is expected to be positive in rating terms in the next 12-18 months, andwe are currently reviewing our 2006 business plan with this in mind. Liability--------- The Liability segment generated underwriting profit in the first half of £7.4million (2004: £9.5 million). We have referred in the past to making a cautious early assessment ofprofitability when setting reserves for our continuing Liability business. Thishas again been the case in the period to 30 June, where we have benefited fromreserve releases on older years. Non-marine sterling occurrence form businesswas the principal source of profit on the older years in the first half. Aviation & Marine----------------- The Aviation & Marine segment produced an underwriting profit of £10.5 million(2004: £0.2 million loss). Last year the contribution from Aviation Reinsurance reflected the move of somebusiness from losses occurring to risks attaching, which in turn extended theearnings pattern of the premium volume in question. This unwound in the firsthalf of 2005, which has combined with a continuing benign claims environment anda positive revision in respect of losses occurring in 2001. The result is anexceptional level of Aviation profit. The Marine performance was held backfollowing a late notification on excess of loss business inherited from CLM, aclass from which SVB withdrew in 2002. Discontinued Units------------------ The Discontinued Units are made up of SVB's legacy Liability Reinsurance,Healthcare and Third Party business. In the first half of 2005 the DiscontinuedUnits produced a loss before investment return of £12.4 million (2004: £36.5million loss), which was absorbed by the provision established on 30 June 2004.Net of investment return of £0.7 million the Discontinued Units loss is £11.7million. Most of the business is long tail reinsurance, where delays in loss advice byceding companies and changing patterns of loss development have rendered it anotoriously difficult area to model actuarially. We have described some of theaction taken to deal with these problems in the past and the DiscontinuedBusiness Unit ("DBU") is continuing to devote resources to running off thelegacy business. At the interim stage last year a provision of £103.6 million was established atGroup level to cover the possibility of further deterioration in syndicatereserves established on a best estimate basis. Utilisation of the provision inthe second half of 2004 was £36.5 million, leaving £67.1 million to be carriedforward on 1 January 2005. In the first half of 2005 a further £12.4 million of this provision has beenutilised, principally in respect of deterioration on three of the 19 largecontracts. The balance of account performed in line with actuarial expectationand no material reserve strengthening was required in the period. Theexceptional provision carried forward at 30 June 2005 is therefore £54.7million. The cumulative financial impact of the Discontinued Units since 2001 is £152.6million, made up as follows: €2001: £20.5 million €2002: £18.6 million €2003: £25.1 million •H1 2004: £39.5 million •H2 2004: £36.5 million •H1 2005: £12.4 million Business infrastructure and resources------------------------------------- SVB has two principal operating components. The Lloyd's sub group, which contains the managing agency, corporate member andinvestment companies, underwrites solely on Syndicates 1007 and 2147. SVB Distribution Limited, which is the parent of Novae (our wholly-owned servicecompany into which SVB Underwriting Services and CIFS have been merged) andFusion (in which SVB has an 80% equity interest, which may subject toperformance conditions be reduced to 51% under a management incentive scheme). As at 30 June 2005 the SVB Group had 323 employees, of whom 141 were in theLloyd's sub group (including seven in the DBU), 47 in Novae and 135 in Fusion.Excluding cost of capital and Lloyd's charges, the 2005 budgeted overhead of theLloyd's sub group is £21 million (of which the DBU is over £2 million), Novae is£6 million and Fusion is £16 million. Cost control and process improvement remain key management objectives. The Groupcurrently comprises 13 ongoing corporate entities and two managed syndicates. Weare committed to acquiring the outstanding third party capacity on reasonablefinancial terms and merging the syndicates as soon as possible. Annualised cashcost savings (excluding cost of capital) of £2.0 million have been achieved inthe first half, with a full year target of £2.5 million. We are planning a series of further systems upgrades in the second half aimed atimproving the accuracy of annually accounted information, particularly inrelation to earnings patterns. Risk management--------------- SVB has identified six key risk pillars. Its risk budget is allocated acrossthese risk pillars. The majority of SVB's risk budget is allocated to insurancerisk. The risk pillars are: • Insurance risk (comprising underwriting and reserving risk) • Investment risk • Credit risk • Liquidity risk • Operational risk • Group risk Risk is managed at an operating level by a series of committees made up ofexecutives from the Lloyd's sub group and, where relevant, Novae and Fusion.These committees report directly or indirectly to the Group Risk Committeechaired by Jeremy Adams, which in turn reports to the Board of SVB Holdings. An explicit risk tolerance has been set for two of the most significant riskpillars SVB faces. Underwriting risk is set by reference to Willingness To Lose ("WTL"), being themaximum loss net of reinsurance and reinstatement premiums the Group is preparedto absorb from any one catastrophic event. Base case WTL varies according to thetype of event concerned. For most natural disasters base case WTL is £30million, with a peak net exposure for extreme US property catastrophe events of£45 million. Following Hurricane Katrina, we are reviewing our business plan toestablish whether future rate hardening in key property classes might justify agreater risk appetite. Investment risk is controlled through detailed investment guidelines. Inaddition, investment managers have standing instructions to manage financialassets such that there is a less than 10% chance of recording a total return inany 12 month period of worse than minus 1%. Outlook------- Prior to Hurricane Katrina, rates were expected to soften in the second half.Following Katrina, rates for property and energy classes, both direct andreinsurance, are now expected to harden. SVB's mix of business means that itwill benefit from rate hardening in the property segment. There is littleevidence so far of rate improvement in the longer tail casualty classes. The market generally appears well-disciplined and wordings remain favourable.Claims experience in the first half was benign. The second half is likely to bedominated by Hurricane Katrina. SVB reduced its premium capacity by 13% to £437 million in 2005. We had expectedto reduce premium capacity by around 7% in 2006, although we are reviewing thisin the light of changed market conditions. Within these parameters, and assuming a generally benign claims environment, weremain confident that each of the four underwriting segments can continue todeliver a return in excess of our hurdle rate. Financial review---------------- Highlights---------- The first half was dominated by the submission to Lloyd's of the IndividualCapital Assessment, the refinancing of the capital stack and further progress onmanaging the reinsurance asset. Capital structure and management-------------------------------- On 23 June SVB filed the second iteration of its Individual Capital Assessment("ICA") with Lloyd's. The ICA identified a base capital requirement at December2005, at the 99.5 percentile and before inter-syndicate diversification credit,of £234 million. This compares to Lloyd's assessment at December 2004 of SVB'sEnhanced Capital Requirement ("ECR") at £194 million, and Lloyd's own Risk BasedCapital ("RBC") requirement for 2005 of £312 million. SVB's actual capital requirement for 2006 is likely to be set at a premium tothe base ICA, reflecting Lloyd's stated policy of limiting movement from RBC to+/- 15% and its rating-driven strategy of setting capital at a higher confidencelevel than the 99.5% adopted by the FSA. The amount of capital for 2006 will befinally determined ahead of coming into line in November. On 28 June we announced that SVB had replaced two reinsurer letters of credit,totalling £19 million, with a letter of credit from Lloyds TSB. This new capitalis available to support the 2005 and, if certain conditions are met, the 2006years of account. On an annualised basis, the refinancing saves around £4million in cost of capital. The estimated pre-tax cost of capital has fallen,following the refinancing, from an average 12.2% in the first half to 11.1% inthe third quarter. The return to the bank market on normal commercial termsrepresents an important milestone in SVB's rehabilitation. Annualised pre tax return on capital in the period was 28%. Annualised pre taxreturn on equity was 40%. The annual pre tax hurdle rate remains 15%. Thecomponents of the return calculation are set out below: +------------------------------+-----------------+-----------------+|£'m unless stated | Equity capital | Gross capital || | employed | employed |+------------------------------+-----------------+-----------------+| | | |+------------------------------+-----------------+-----------------+|Operating profit | 39.6 | 39.6 |+------------------------------+-----------------+-----------------+|Financing costs | (11.9) | - |+------------------------------+-----------------+-----------------+|Profit before tax | 27.7 | 39.6 |+------------------------------+-----------------+-----------------+| | | |+------------------------------+-----------------+-----------------+|Average equity capital | 137.5 | 137.5 ||employed | | |+------------------------------+-----------------+-----------------+|Average geared capital | - | 143.7 ||employed | | |+------------------------------+-----------------+-----------------+|Average capital employed | 137.5 | 281.2 |+------------------------------+-----------------+-----------------+| | | |+------------------------------+-----------------+-----------------+|Pre tax return on capital | 40% | 28% ||employed (annualised) | | |+------------------------------+-----------------+-----------------+| | | |+------------------------------+-----------------+-----------------+|H1 2004 comparative (restated,| 45% | 27% ||excluding discontinued units) | | |+------------------------------+-----------------+-----------------+| | | |+------------------------------+-----------------+-----------------+ Reinsurance asset----------------- At 30 June 2005 reinsurers' share of claims outstanding was £475.0 million(December 2004: £499.2 million). This represented 3.2 times shareholders' funds(December 2004: 3.9 times). SVB's reinsurance asset is high for three reasons: extensive use of excess ofloss protection in the 1997-2000 soft market; heavy use of proportional andsurplus treaty capacity with major European reinsurers during the same period;and the aggregation effect of operating a medium tail business. The first twoare legacy effects and, as the older business, and discontinued units inparticular, have started to run off, have begun to diminish. There has been a major initiative to pursue late payment of reinsurance to SVB.Investment in and management focus on credit control and query resolution hasled to a 64% reduction in aged reinsurance in the nine months to 30 June 2005. Investment assets----------------- The investment strategy remains conservative and there is little appetite formarket risk. Our solvency capital is invested in cash and short duration,investment grade sterling bonds. Insurance working capital assets are held inthe currencies in which they arise, again in short duration, investment gradebonds. As at 30 June our managers are forecasting 2005 total return on solvencycapital of 4.8%; 4.6% on sterling insurance working capital and 2.5% on dollarinsurance working capital. Claims activity and reserving----------------------------- Claims activity for the ongoing business in the first half has centred on thefinancial institutions account. The investment banks involved in the WorldComand Enron litigation have either settled or are seeking settlement withplaintiff investors. Those banks will no doubt in turn seek to recover some oftheir outlay from insurers. This is an area which we continue to monitorclosely. So far as the discontinued units are concerned, the DBU is now fully resourcedto cater for the volume of legacy claims. The focus for the liabilityreinsurance area remains on auditing and reviewing the major cedants so as toform an up-to-date judgement on the appropriate level of reserves, particularlyon the 19 large contracts. Cash flow--------- Cash inflow net of portfolio movements during the period was £16.1 million(2004: outflow £42.0 million). This reflects receipt of the 2002 closed yearprofit from Syndicate 2147. International Financial Reporting Standards------------------------------------------- The June 2005 interim accounts are the first prepared under InternationalFinancial Reporting Standards ("IFRS"). The principal effects of transition from UK GAAP to IFRS on the results of theGroup are detailed in Note 20. The principal effects are as follows: • Deferred acquisition costs and the unearned premium reserve are shown on the balance sheet at historic rather than period end exchange rates. This has led to an increase in profit before tax for the period of £6.0 million compared to the position under UK GAAP • The treatment of convertible debt on the balance sheet has changed. IFRS requires the disaggregation of the debt and equity components of the convertible bond. This has led to a reduction in profit before tax in the period of £0.5 million as the debt component accretes to par value • Recognition of costs in respect of employee share options under IFRS has resulted in a £0.4 million reduction in the profit before tax for the period compared to the treatment under UK GAAP • Financial assets are stated at bid rather than mid market price, which has reduced profit before tax in the period by £0.1 million There is no effect on cash flow from the adoption of IFRS. Consolidated Unaudited Income Statementfor the six months ended 30 June 2005 Six months Six months Year ended ended ended 30 June 30 June 31 December 2005 2004 2004 £m £m £m Restated Restated NoteGross premium revenue 154.2 258.2 466.9Less premium ceded to reinsurers (42.8) (54.5) (49.8) ------ ------ ------Net premium revenue 6 111.4 203.7 417.1 Fees and commission income 7 3.0 2.7 5.7Investment return 8 13.4 4.5 26.0 ------ ------ ------Total revenue (net of reinsurance 127.8 210.9 448.8payable) Gross claims incurred (57.6) (436.0) (582.4)Reinsurers share of claims incurred 18.3 170.3 167.7 ------ ------ ------Net claims incurred 9 (39.3) (265.7) (414.7) Operating expenses 10 (48.9) (59.8) (135.6) ------ ------ ------Operating profit/(loss) 39.6 (114.6) (101.5) Financing costs 11 (11.9) (5.5) (12.1)Profit/(loss) before income taxes 27.7 (120.1) (113.6) Income taxes 12 (8.5) 23.3 23.5 ------ ------ ------ Dividend 2 - - - Profit/(loss) for the period 19.2 (96.8) (90.1) ------ ------ ------ Attributable to:Equity holders of the parent 19.0 (97.3) (90.6)Minority interest 0.2 0.5 0.5 ------ ------ ------ 19.2 (96.8) (90.1) ------ ------ ------ Earnings per share 3 5.3 (26.8) (24.9)Basic earnings per share (pence) Consolidated Unaudited Statement of Changes in Equityfor the six months ended 30 June 2005 Six months Six months Year ended ended ended 31 30 June 30 June December 2005 2004 2004 £m £m £m Restated Restated Note Profit for the period 19.2 (96.8) (90.1) Total change in equity for the 19.2 (96.8) (90.1)period Attributable to:Equity holders of the parent 19.0 (97.3) (90.6)Minority interest 0.2 0.5 0.5 Consolidated Unaudited Balance Sheet 30 June 31 December 2005 2004 £m £m Restated Note AssetsProperty, plant and equipment 3.1 3.4Intangible assets 14 8.8 9.3Deferred acquisition costs 42.0 46.9Deferred tax assets 35.7 44.3Investments 15 555.5 535.5Reinsurance contracts 16 540.8 546.0Receivables- arising from underwriting business 274.7 360.4- arising from service companies and othersubsidiaries 48.0 46.2Cash and cash equivalents 218.4 191.4 --------- ---------Total assets 1,727.0 1,783.4 LiabilitiesInsurance contracts 17 (1,402.0) (1,471.7)Financial liabilities- Convertible debt (44.4) (43.9)- Loan notes (19.5) (19.5)Deferred income (11.4) (10.8)Income taxes (0.4) (1.4)Payables- arising from underwriting business (45.5) (58.7)- arising from service companies and othersubsidiaries (55.5) (48.3)Total liabilities (1,578.7) (1,654.3) --------- ---------Net assets 148.3 129.1 Shareholders' equityShare capital 114.4 114.4Share premium 83.6 83.6Retained earnings (119.9) (138.9)Other reserves 63.4 63.4Equity component of convertible debt 5.5 5.5 --------- --------- Total shareholders' equity 147.0 128.0Minority interests 1.3 1.1 --------- ---------Minority interests and shareholders'Equity 148.3 129.1 Net asset value per share (p) 40.7 35.4Net tangible asset value per share (p) 38.2 32.9 Consolidated Unaudited Cash Flow Statementas at 30 June 2005 Six months Six months Year ended ended Ended 30 June 30 June 31 December 2005 2004 2004 Note £m £m £m Restated Restated Cash generated from operations 19 38.1 (13.1) (26.5)- Interest paid (2.6) (1.8) (4.1)- Income taxes paid (0.7) - (2.0) ------ ------ ------Net cash from operating 34.8 (14.9) (32.6)activities Cash flows from investingactivities- Acquisition of property, plant (2.6) (1.9) (2.9)and equipment- Net portfolio investment (16.1) (37.0) (45.0) ------ ------ ------Net cash flow from investing (18.7) (38.9) (47.9)activities Cash flows from financingactivities- Receipts from issue of loan - 14.4 20.0notes- Expenses relating to issue of - (0.4) (0.5)loan notes- Dividends paid - (2.2) (2.2) ------ ------ ------Net cash flow from finance - 11.8 17.3activities ------ ------ ------Movement in cash holdings 16.1 (42.0) (63.2) Notes to the Interim Financial Information 1. Significant accounting policies SVB Holdings PLC is a company domiciled in England and Wales. The consolidatedinterim financial statements of the Company for the six months ended 30 June2005 comprise the Company and its subsidiaries (together referred to as the"Group"). The interim financial statements were authorised for issue by the directors on16 September 2005. (a) Statement of compliance The interim financial statements for the six months ended 30 June 2005 have notbeen audited, nor have the financial statements for the equivalent period in2004. The financial statements have been prepared in accordance withInternational Financial Reporting Standards ("IFRS") adopted for use by theEuropean Union ("EU") and accounting policies expected to be adopted by theGroup when it prepares its first set of IFRS financial statements for the yearended 31 December 2005. The statutory accounts for the year ended 31 December 2004, prepared under UKGAAP, have been reported on by the Group's auditor, KPMG Audit Plc, anddelivered to the registrar of companies. The report of the auditors wasunqualified but included an emphasis of matter paragraph. The comparativefigures provided for the 12 months ended 31 December 2004 are based on theGroup's statutory accounts after restatements required following the change fromUK GAAP to IFRS. The interim financial statements do not constitute statutory accounts of theGroup within the meaning of Section 240 of the Companies Act 1985. (b) Basis of preparation The Group's consolidated opening and closing IFRS balance sheet, theconsolidated income statement, the consolidated cash flow statement andstatement of changes in equity, have been prepared in accordance with IFRS,which comprise standards and interpretations issued by the InternationalAccounting Standards Board ("IASB") and as adopted by the EU to be effective for2005 year end. The preparation of financial statements in conformity with IFRS requiresmanagement to make judgements, estimates and assumptions that affect theapplication of policies and reported amounts of assets and liabilities, incomeand expenses. Where estimates had previously been made under UK GAAP, consistentestimates (after adjustments to reflect any difference in accounting policies)have been made on transition to IFRS. Actual results may differ from theseestimates. 1. Significant accounting policies (continued) (b) Basis of preparation (continued) The accounting policies set out below have been applied consistently to allyears presented in these consolidated interim financial statements and inpreparing the comparative IFRS balance sheets (see Note 20) (c) Basis of consolidation Subsidiaries are entities controlled by the Company. Control exists when theCompany has the power, directly or indirectly, to govern the financial andoperating policies of an entity so as to obtain benefits from its activities. Inassessing control, potential voting rights that presently are exercisable orconvertible are taken into account. All subsidiaries are consolidated within the Group. Intragroup balances and anyunrealised gains and losses or income and expenses arising from intragrouptransactions, are eliminated in preparing the consolidated financial statements. (d) Classification and accounting for insurance contracts Insurance contracts are those contracts that transfer significant insurance riskat the inception of the contract. Insurance risk is transferred when an insureragrees to compensate a policyholider if a specified uncertain future eventadversely affects the policyholder. (i) Premiums Written premiums comprise the premiums on contracts entered into during theyear, irrespective of whether they relate in whole or in part to a lateraccounting period. Premiums are disclosed gross of commission payable tointermediaries and exclude taxes and levies based on premiums. Premiums writteninclude adjustments to premiums written in prior accounting periods andestimates for pipeline premiums. An estimate is made at the balance sheet dateto recognise retrospective adjustments to premiums or commissions. Outwardreinsurance premiums are accounted for in the same accounting period as thepremiums for the related direct insurance business. (ii) Unearned premium provision The provision for unearned premiums comprises the proportion of gross premiumswritten which is estimated to be earned in the following or subsequent financialyears, computed separately for each insurance contract using the daily pro ratamethod. 1) Significant accounting policies (continued) (iii) Claims Claims incurred in respect of general business consist of claims and claimshandling expenses paid during the financial year together with the movement inthe provision for outstanding claims. Claims outstanding comprise provisions for the estimated cost of settling allclaims incurred but unpaid at the balance sheet date whether reported or not,and related internal and external claims handling expenses. The ultimate liability as a result of outstanding claims will vary due tosubsequent information and events and may result in significant adjustments tothe amounts provided. Adjustments to the amounts of claims provisionsestablished in prior years are reflected in the financial statements for theperiod in which the adjustments are made, and disclosed separately if material. The ultimate cost of outstanding claims is estimated by using a range ofstandard actuarial projection techniques, such as the Chain Ladder andBornhuetter-Ferguson methods. Such methods extrapolate the development of claimsnumbers for each underwriting year, based on the claims patterns of earlieryears and expected loss ratios. The main assumption underlying these techniques is that past claims developmentexperience can be used to project ultimate claims costs. Judgement is used toassess the extent to which past trends may not apply in future and alternativeapproaches are applied as appropriate for catastrophe exposed claims where lossdevelopment patterns are less regular. The approach adopted takes into account, inter alia, the nature and materialityof business and the type of data available. Specific estimates are set by theReserving Committee based on a blend of these techniques, applying theirexperience and knowledge to the circumstances of individual claims and in thecase of certain US liability classes the advice of US attorneys who specialisein claims of this nature. Additional qualitative input, such as allowance forone-off occurrences or changes in legislation, policy conditions or portfoliomix, is also used in arriving at the estimate of the most likely ultimate costof claims with the input of both internal and independent actuaries. At the early stage of development of long-tail classes of business significantweight is given to changes in the rating environment and conditions on renewalof policies in arriving at ultimate claims costs. Provisions are calculatedallowing for reinsurance recoveries and a separate asset is recorded for thereinsurers' share, having regard to recoverability. (iv) Unexpired risk provision If losses are projected after taking account of investment income in respect ofthe unearned premiums for classes of business managed together after the balancesheet date, further provisions are made. 1) Significant accounting policies (continued) (v) Reinsurance The Group ceded reinsurance in the normal course of business for the purpose oflimiting its net loss potential through the diversification of its risks.Premiums on reinsurance assumed are recognised as revenue on the same basis asdirect business, taking into account the product classification. Reinsurance assets include amounts recoverable from reinsurers' for losses andloss adjustment expenses. If a reinsurance asset is impaired, the group reducesits carrying amount accordingly, and will immediately recognise the impairmentloss in the income statement. A reinsurance asset will be deemed to be impairedif there is objective evidence, as a result of an event occurring 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 reliable measurableimpact on the amounts that the group will receive from the reinsurer. Reinsurance arrangements do not relieve the Group from its direct obligations toits policyholders. (e) Segment reporting The Group regards class of insurance business as the most appropriate form ofsegmental reporting. (f) Revenue Refer to accounting policy (d) for details of revenue recognition. (g) Fees and commission income Fees and commission income comprise managing agent's fees receivable from thirdparty capital providers and commission receivable by the Group's servicecompanies. (h) Expenses (i) Operating lease payments Payments made under operating leases are recognised in the income statement on astraight-line basis over the term of the lease. Lease incentives received arerecognised in the income statement as an integral part of the total leaseexpense. (ii) Financing costs Financing costs comprise interest payable on borrowings and letter of creditfacilities provided by third parties. 1) Significant accounting policies (continued) (i) Income tax Income tax on the profit or loss for the year comprises current and deferredtax. Income tax is recognised in the income statement except to the extent thatit relates to items recognised directly in equity, in which case it isrecognised in equity.Current tax is the expected tax payable on the taxable income for the year andany adjustment to tax payable in respect of previous years. The Group calculatesincome tax using the current income tax rate. A deferred tax asset is recognised only to the extent that it is probable thatfuture taxable profits will be available against which the asset can beutilised. (j) Foreign currency Transactions in foreign currencies are translated at the average foreignexchange rate for the period. Monetary assets and liabilities denominated inforeign currencies at the balance sheet date are translated at the foreignexchange rate ruling at that date. Foreign exchange differences arising ontranslation are recognised in the income statement. Non-monetary assets andliabilities are translated using the historical transaction rate. (k) Intangible assets Purchased syndicate capacity is included at cost and amortised over thedirectors' estimate of its useful economic life, currently fifteen years.Amortisation commences in the financial year in which the underwriting resultsfrom the purchased capacity are first recognised. Provision is made for anypermanent diminution in the carrying amount of purchased capacity. (l) Property, plant and equipment (i) Owned assets Property, plant and equipment are stated at cost less accumulated depreciation(see below) and any impairment in value. Where categories of property, plant and equipment have different useful lives,they are accounted for as separate items. (ii) Depreciation Depreciation is charged to the income statement on a straight-line basis overthe estimated useful lives of each part of an item of property, plant andequipment. The estimated useful lives are as follows: Furniture and equipment 3 - 5 yearsComputer equipment 3 yearsOffice refurbishment 3 - 5 years The residual value, if not insignificant, is reassessed annually. 1) Significant accounting policies (continued) (m) Financial assets Financial assets are classified as current assets and are stated at fair valuethrough profit and loss. Any gain or loss as a result of a change in fair valueis recognised directly through the income statement. The fair value of financial instruments classified as fair value through profitor loss are held at their quoted bid price at the balance sheet date. (n) Deferred acquisition costs Acquisition costs comprise all direct costs arising from the conclusion ofinsurance contracts. Deferred acquisition costs represent the proportion ofacquisition costs incurred which corresponds to the unearned premiums provision.Acquisition costs are deferred only to the extent that available future marginsare expected to cover them. (o) Receivables Receivables are stated at cost less impairment losses. (p) Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits. (q) Impairment The carrying amounts of the Group's assets and deferred tax assets are reviewedat each balance sheet date to determine whether there is any indication ofimpairment. If any such indication exists, the asset is measured at estimatedrecoverable amount. (r) Convertible debt The fair value of the liability portion of the convertible loan stock isdetermined by discounting contractual cash outflows using an equivalentnon-convertible bond. The amount is carried as a liability on an amortised costbasis until extinguished on conversion or redemption. The remainder of the issueproceeds is allocated to the conversion option and is recognised and included inshareholders equity. Transaction costs are amortised on a straight line basisover the duration of the bond. 1) Significant accounting policies (continued) (s) Interest-bearing loans and borrowings Interest-bearing loans and borrowings are recognised initially at fair valueless attributable issue costs. Attributable issue costs are amortised on astraight line basis over the term of the borrowings. (t) Dividends Dividends are recognised as a liability in the period in which they aredeclared. (u) Employee benefits (i) Defined contribution plans Obligations for contributions to defined contribution pension plans arerecognised as an expense in the income statement as incurred. (ii) Share-based payment transactions The Group equity incentive schemes allow Group employees to acquire shares ofthe Company. The fair value of options and long term incentive plan (LTIP)shares granted are recognised as an expense with a corresponding increase inequity. The fair value is measured at grant date and spread over the periodduring which the employees become unconditionally entitled to the options. Thefair value of the options granted is measured using a binomial lattice model,taking into account the terms and conditions upon which the options weregranted. The amount recognised as an expense is adjusted to reflect the actualnumber of share options that vest except where forfeiture is due only to shareprices not achieving the threshold for vesting. (v) Payables Payables are stated at cost. 2) Interim dividend No interim dividend is payable in respect of the period (2004: nil). 3) Earnings per share The calculation of earnings per share is based on a profit attributable toshareholders of £19.2 million (2004: loss of £96.8 million) and on 361.2 millionshares (2004: 361.2 million shares), being the number of shares in issueexcluding own shares held within the Group's Long Term Incentive Plan, duringthe six months ended 30 June 2005. 4) Principal exchange rates (to Sterling) Six months ended Six months ended Year ended 30 June 2005 30 June 2004 31 December 2004 Period Period Period Period Period Period average end average end average endUS dollar 1.87 1.79 1.82 1.81 1.83 1.92Euro 1.46 1.48 1.49 1.49 1.47 1.41Canadian dollar 2.31 2.20 2.44 2.43 2.38 2.30 5) Segmental information An analysis of the technical profit of the Group is presented below. Thisanalyses the underwriting return split by segment, separating out the activitiesof the ongoing business from the reserve deterioration on the discontinuedunits. It is included to increase clarity over the performance of the ongoingunits, but does not represent a discontinued business analysis for IFRS 5purposes. Six months Specialty Property Liability Aviation Total Discontinued Totalended 30 June (ongoing) and (ongoing)2005 Marine £m £m £m £m £m £m £mGross Written 38.5 46.2 33.7 17.0 135.4 (1.5) 133.9premiumNet written 0.9 39.5 17.9 10.2 68.5 (1.4) 67.1premiumNet premium 47.9 42.4 20.4 8.4 119.1 (1.4) 117.7revenueNet claims 29.3 16.2 2.8 (3.2) 45.1 11.9 57.0incurredNet syndicate 10.6 14.0 13.4 2.5 40.5 (0.2) 40.3expensesInvestment 4.8 2.0 0.5 0.6 7.9 0.8 8.7return onsyndicateinvestmentsTechnical 4.4 14.6 7.4 10.5 36.9 (12.4) 24.5profit/(loss)- 100% levelTechnical 2.9 15.8 7.4 10.5 36.6 (11.7) 24.9profit /(loss)- SVB shareInvestment 6.3 - 6.3return oncorporate FALNet group (3.3) (0.7) (4.0)expensesOperating 39.6 (12.4) 27.2profit /(loss)Financing (11.9) - (11.9)costsProfit/(loss) 27.7 (12.4) 15.3before tax Six months Specialty Property Liability Aviation Total Discontinued Totalended 30 June (ongoing) and (ongoing)2004 Marine £m £m £m £m £m £m £mGross written 105.9 58.3 32.8 20.5 217.5 0.1 217.6premiumNet written 63.7 38.0 26.2 14.4 142.3 0.5 142.8premiumNet premium 71.0 29.4 23.4 7.6 131.4 10.5 141.9earnedNet claims 23.2 12.5 5.7 6.1 47.5 47.1 94.6incurredNet syndicate 30.4 9.2 10.8 3.4 53.8 0.3 54.1expensesInvestment 1.2 0.6 0.3 0.4 2.5 (0.5) 2.0return onsyndicateinvestmentsTechnical 17.1 10.8 9.7 (0.2) 37.4 (41.3) (3.9)profit/(loss)- 100% levelTechnical 11.8 11.3 9.5 (0.2) 32.4 (39.5) (7.1)profit /(loss)- SVB shareInvestment 3.0 - 3.0return oncorporate FALExceptional (103.6) (103.6)lossNet group (6.9) - (6.9)expensesOperating 28.5 (143.1) (114.6)profit /(loss)Financing (5.5) - (5.5)costsProfit/(loss) 23.0 (143.1) (120.1)before tax Specialty Property Liability Aviation Total Discontinued Total (ongoing) and (ongoing) Marine £m £m £m £m £m £m £mYear ended 31December 2004Gross written 193.3 153.9 87.0 26.0 460.2 (0.3) 459.9premiumNet written 171.0 116.3 86.3 19.5 393.1 21.4 414.5premiumNet premium 174.5 93.2 59.9 11.0 338.6 31.4 370.0revenueNet claims 102.6 49.4 35.0 3.7 190.7 115.6 306.3incurredNet syndicate 54.7 31.0 21.8 4.5 112.0 (0.2) 111.8expensesInvestment 9.6 2.5 0.9 0.9 13.9 3.8 17.7return onsyndicateinvestmentsTechnical 21.2 17.6 7.9 4.8 51.5 (84.1) (32.6)profit/(loss)- 100% levelTechnical 15.1 18.1 7.8 4.8 45.8 (79.5) (33.7)profit /(loss)- SVB shareInvestment 10.5 - 10.5return oncorporate FALExceptional - (67.1) (67.1)lossNet group (11.2) - (11.2)operatingexpensesOperating 45.1 (146.6) (101.5)profit /(loss)Financing (12.1) - (12.1)costsProfit/(loss) 33.0 (146.6) (113.6)before tax All items from gross written premium to technical profit/(loss) - 100% level arestated at 100% ownership level. 6) Premium revenue Six months Six months Year ended ended ended 30 June 30 June 31 December 2005 2004 2004 £m £m £m Gross written premium 129.2 278.4 507.8Change in provision for 25.0 (20.3) (40.9)unearned premiumOutward reinsurance premium (61.8) (71.1) (47.8)Change in reinsurers' share 19.0 16.7 (2.0)of provision for unearned premium ---- ---- ----Net premium revenue 111.4 203.7 417.1 7) Fees and commission income Six months Six months Year ended ended ended 30 June 30 June 31 December 2005 2004 2004 £m £m £m Managing agency fees 0.6 0.8 1.7Other income 2.4 1.9 4.0 ---- ---- ---- 3.0 2.7 5.7 8) Investment return Six months Six months Year ended ended ended 30 June 30 June 31 December 2005 2004 2004 £m £m £m Interest income 14.4 7.5 33.4Realised gains and losses (1.6) (2.3) (5.6)Unrealised gains and losses 0.6 (0.7) (1.8) ---- ---- ---- 13.4 4.5 26.0 9) Net claims incurred Six months Six months Year ended ended ended 30 June 30 June 31 December 2005 2004 2004 £m £m £m Claims paid (148.1) (129.9) (289.6)Reinsurers share of claims 62.2 50.9 116.7paidChange in gross claims 78.1 (202.7) (225.8)provisionChange in exceptional loss 12.4 (103.6) (67.1)provisionChange in reinsurers share of (43.9) 119.6 51.1claims provision ---- ---- ---- (39.3) (265.7) (414.7) 10) Operating expenses Six months Six months Year ended ended ended 30 June 30 June 31 December 2005 2004 2004 £m £m £m Brokerage and other business 22.8 43.0 79.8acquisition costsChange in deferred brokerage 4.9 0.1 10.8and business acquisitioncostsOther operating expenses 21.2 16.7 45.0 ---- ---- ---- 48.9 59.8 135.6 11) Financing costs Six months Six months Year ended ended ended 30 June 30 June 31 December 2005 2004 2004 £m £m £m Cost of convertible bond 2.3 2.3 4.6Loan note interest 1.0 - 1.0Letter of credit cost 8.6 3.2 6.5 ---- ---- ---- 11.9 5.5 12.1 12) Income taxes Six months Six months Year ended ended ended 30 June 30 June 31 December 2005 2004 2004 £m £m £m Profit before tax 27.7 (120.1) (113.6)Current tax at 30% (8.3) 36.0 34.1Tax losses not recognised in - (12.7) (10.6)periodEffect of disallowable (0.2) - -expenditure ---- ---- ---- (8.5) 23.3 23.5 30 June 31 December 2005 2004 £m £m Deferred tax:Unutilised tax losses 35.7 44.3 13) Employees The average number of persons employed during the period (including directors),analysed by business unit, was as follows: Six months Year ended ended 30 June 31 December 2005 2004 Lloyd's business 138 133Distribution business 183 155 ---- ---- 321 288 14) Intangible assets 30 June 31 December 2005 2004 £m £m Syndicate capacity 8.8 9.3 15) Investments 30 June 31 December 2005 2004 £m £mFair value through profit or loss:Fixed interest securities 554.7 534.5Equities 0.8 1.0 ---- ---- 555.5 535.5 Syndicate 322.9 216.8Corporate 232.6 318.7 ---- ---- 555.5 535.5 Listed 555.5 534.5Unlisted - 1.0 ---- ---- 555.5 535.5 Breakdown of debt securities by credit rating: 30 June 31 December 2005 2004 % % Government/AAA 90.9 90.9AA+/AA/AA- 4.6 3.8A+/A/A- 4.5 5.3 ---- ---- 100.0 100.0 ---- ---- Breakdown of investments by currency: 30 June 31 December 2005 2004 % % US Dollar 45.3 45.6Sterling 48.6 47.1Canadian Dollar 6.1 7.3 ---- ---- 100.0 100.0 ---- ---- 16) Reinsurance contracts 30 June 31 December 2005 2004 £m £m Reinsurance contracts 540.8 546.0Less:Reinsurers' share of:- provisions for unearned (65.8) (46.8)premium- claims outstanding 475.0 499.2- provision for lossesincurred but not reported (130.2) (156.7) ------- ------- Balance 344.8 342.5 ------- -------Being:Recoveries on claims notifiednot yet due 354.5 351.7Provision for bad debt(notified not yet due) (9.7) (9.2) ------- -------Net recoveries on claimsnotified not yet due 344.8 342.5 Recoveries due on paid claims 47.9 69.6Provision for bad debt (paidclaims) (5.1) (5.8) ------- -------Net reinsurance balancebefore collateral 387.6 406.3Collateral received oravailable (27.3) (25.4) ------- -------Balances net of collateral 360.3 380.9 ------- ------- The reinsurers' share of paid and notified losses can be analysed by creditrating as follows*: 30 June 31 December 2005 2004 % % S&P: AAA 11.8 12.2AMB: A++S&P: AA 36.8 33.9AMB: A/A-S&P: A (inc Lloyd's) 45.6 47.4AMB: B++/B+Less than A 5.8 6.5 ---- ---- 100.0 100.0 ---- ---- * Due to the way the Group monitors its reinsurance balances different ratingagencies are used depending upon the domicile of the reinsurer. Standard andPoors (S&P) and AM Best (AMB) ratings have been grouped together in a way thatthe Group has deemed most appropriate. 17) Insurance contracts Claims Unearned Total outstanding premium reserve £m £m £m 30 June 2005Gross 1,093.4 253.9 1,347.3Reinsurance 475.0 65.8 540.8 31 December 2004Gross 1,125.5 279.0 1404.6Reinsurance 499.2 46.8 546.0 MovementGross - incurred 78.1 25.1 103.2Gross - currency loss (46.0) - (46.0) ---- ---- ---- 32.1 25.1 57.2 Reinsurance - incurred 44.0 (19.0) 25.0Reinsurance - currency gain (19.8) - (19.8) ---- ---- ---- 24.2 (19.0) 5.2 Exceptional loss provision1 January 2005 67.1 - 67.1Utilised in the period (12.4) - (12.4) ---- ---- ----30 June 2005 54.7 - 54.7 Total gross provisions 1,148.1 253.9 1,402.0Total reinsurance provisions 475.0 65.8 540.8 In addition to reserves established at syndicate level on the basis of actuarialbest estimate, an additional £67.1 million of provision was held at Group levelas 1 January 2005 in respect of the uncertainty surrounding potential futureclaims development from discontinued units. This provision, which is over andabove syndicate reserves set at actuarial best estimate, was established in 2004to meet possible future adverse claims development. During the six months ended30th June 2005 £12.4 million of this provision was utilised, leaving £54.7million remaining at 30 June 2004. 18) Insurance reserves and investment assets As at 30 Speciality Property Liability Aviation Total Discontinued TotalJune 2005 (ongoing) & Marine (ongoing) £m £m £m £m £m £m £mGross 513.5 67.0 116.1 67.8 764.4 329.0 1,093.4provisionfor claimsoutstandingReinsurers' 286.4 29.4 23.0 40.9 379.7 95.3 475.0share ofclaimsoutstandingInvestment 149.3 20.2 7.1 6.3 182.9 140.0 322.9assetsattributable As at 31 Speciality Property Liability Aviation Total Discontinued TotalDecember (ongoing) & Marine (ongoing)2004 £m £m £m £m £m £m £mGrossprovision 500.7 87.7 121.1 81.0 790.5 335.0 1,125.5for claimsoutstandingReinsurers'share of 285.2 44.0 24.4 47.9 401.5 97.7 499.2claimsoutstandingInvestmentassets 98.4 25.9 3.8 6.6 134.7 184.4 319.1attributable 19) Cash generated from operations Six months Six months Year ended ended ended 30 June 30 June 31 December 2005 2004 2004 £m £m £m Profit/(loss) on ordinary 27.7 (120.1) (113.6)activities before taxCash flow from syndicates 32.7 (33.1) (33.1)Depreciation and amortisation 1.2 2.3 2.4Unrealised losses on (0.3) 0.7 (0.7)investmentsChange in debtors less (10.8) 33.5 51.4creditorsMovement in exceptional loss (12.4) 103.6 67.1provision ---- ---- ----Net cash flow from operations 38.1 (13.1) (26.5) ---- ---- ---- 20) IFRS re-statement 31 Investments Foreign Convertible DAC 31 December exchange December 2004 Note (a) Note (b) Note (c) Note 2004 (d) £m £m UK GAAP IFRSAssetsIntangible assets 9.3 9.3Property, plant and 3.4 3.4equipmentInvestments 535.6 (0.1) 535.5Deferred tax assets 44.3 44.3Reinsurers' share oftechnical provisions 545.6 0.4 546.0Receivables arising fromunderwriting business 359.1 1.3 360.4Deferred acquisition costs 49.3 1.6 (4.0) 46.9Receivables arising fromservice companies and othersubsidiaries 46.2 46.2Cash and cash equivalents 191.4 191.4Total assets 1,784.2 (0.1) 3.3 (4.0) 1,783.4 LiabilitiesTechnical provisions 1,472.6 (0.9) 1,471.7Financial liabilities- Convertible debt 48.3 (4.4) 43.9- Loan notes 19.5 19.5Payables arising fromunderwriting business 58.7 58.7Deferred income 10.8 10.8Income taxes 1.4 1.4Payables arising from 48.3 48.3service companies and othersubsidiariesTotal liabilities 1,659.6 (0.9) (4.4) 1,654.3Net assets 124.6 (0.1) 4.2 4.4 (4.0) 129.1 Shareholders' equityShare capital 114.4 114.4Share premium 83.6 83.6Retained earnings (137.9) (0.1) 4.2 (1.1) (4.0) (138.9)Other reserves 63.4 63.4Equity component ofconvertible debt - 5.5 5.5 Total shareholders' equity 123.5 (0.1) 4.2 4.4 (4.0) 128.0Minority interests 1.1 1.1Minority interests and 124.6 (0.1) 4.2 4.4 (4.0) 129.1shareholders' equity 31 Investments Foreign Convertible 31 December exchange December 2003 Note (a) Note (b) Note (c) 2003 £m £m UK GAAP IFRSAssetsIntangible assets 10.2 10.2Property, plant and equipment 1.7 1.7Investments 405.9 (0.1) 405.8Deferred tax assets 19.1 19.1Reinsurers' share of technical 496.9 0.1 497.0provisionsReceivables arising from 234.7 0.8 235.5underwriting businessDeferred acquisition costs 57.7 0.8 58.5Receivables arising from 93.4 93.4service companies and othersubsidiariesCash and cash equivalents 251.8 251.8Total assets 1,571.4 (0.1) 1.7 1,573.0 LiabilitiesTechnical provisions 1,137.8 (0.4) 1,137.4Financial liabilities- Convertible debt 47.9 (5.5) 42.4- Loan notes 20.0 20.0Payables arising from 99.4 99.4underwriting businessDeferred income 7.4 7.4Payables arising from service 45.5 45.5companies and othersubsidiariesDividends payable 2.2 2.2Total liabilities 1,360.2 (0.4) (5.5) 1,354.3Net assets 211.2 (0.1) 2.1 5.5 218.7 Shareholders' equityShare capital 114.4 114.4Share premium 83.6 83.6Retained earnings (50.8) (0.1) 2.1 (48.8)Other reserves 63.4 63.4Equity component of - 5.5 5.5convertible debt Total shareholders' equity 210.6 (0.1) 2.1 5.5 218.1Minority interests 0.6 0.6Minority interests and 211.2 (0.1) 2.1 5.5 218.7shareholders' equity Six months Year ended ended 30 June 31 December 2004 2004 £m £m Note UK GAAP profit after tax (94.7) (86.6) Re-statement due to de-recognition of deferredindirect acquisition costs (d) (2.0) (4.0)Effect of change in treatment of foreign exchange (b) 0.7 2.3Share options charge (e) (0.3) (0.6)Change in valuation of investments (a) - (0.1)Convertible amortisation (c) (0.5) (1.1) ---- ----IFRS profit after tax (96.8) (90.1) ---- ---- (a) Under UK GAAP, listed investments are stated at mid-market values and stated at closing market prices on recognised stock exchanges. As a result of applying IAS 39 "Financial Instruments: Recognition and Measurement", the Group now carries all listed investments in debt and equity securities at closing bid prices on recognised stock exchanges. This has had the effect of decreasing investment valuation at 31 December 2003 of £0.1 million and 31 December 2004 of £0.1 million. (b) Under IAS 21 "The effects of Changes in Foreign Exchange Rates" foreign currency transactions are translated into functional currency (Sterling for the SVB Group) using average exchange rates for the period. Monetary assets and liabilities denominated in foreign currencies are translated at period end exchange rates. Non-monetary assets and liabilities are measured at historical cost and translated at the historic exchange rate. The resulting exchange differences are recorded in the income statement. Under IFRS unearned premium and deferred acquisition costs are deemed to be non-monetary liabilities and assets and are therefore translated at historic exchange rates. This differs from the UK GAAP treatment for these items which stipulated that they should be translated at the exchange rate prevailing at the period end. (c) Under UK GAAP the Group's convertible bond was recognised as a single instrument in the balance sheet. Under IAS 32 "Financial Instruments: Disclosure and Presentation", the convertible debt is separated into its component parts, being a financial liability and equity. This results in a reduction in the debt liability and an increase to shareholders equity as indicated in the re-statement tables. It also results in an annualised reduction in profit before tax of £1.1 million representing the debt accretion to par value. (d) The Group has revised the way in which it records Deferred Acquisition Costs (DAC). Under UK GAAP an element of centralised costs were deemed to relate to the acquisition of business. This element was deferred and earned on the same basis as the underwriting results. While there is no guidance on the treatment of the deferral of such non-direct expenses under IFRS, the Group has further simplified its approach to the recognition of deferred costs by only recognising direct underwriting costs as acquisition costs. The financial impact of this has been disclosed separately in the IFRS re-statement table for clarity. (e) Under IFRS 2 "Share-Based Payments", charges in respect of share-based employee incentive plans that were granted after 7 November 2002, but had not yet vested at 1 January 2005, are determined based on the fair value of the awards at grant date. This charge is recognised in the income statement over the vesting period of the expected life of the share based instrument. Independent review report to SVB Holdings PLC We have been engaged by the company to review the financial information set outin the Consolidated Unaudited Income Statement, the Consolidated UnauditedBalance Sheet, the Consolidated Unaudited Statement of Changes in Equity and theConsolidated Unaudited Cash Flow Statement and Notes 1 to 20, and have read theother information contained in the interim report and considered whether itcontains any apparent misstatements or material inconsistencies with thefinancial information. This report is made solely to the company in accordance with the terms of ourengagement to assist the company in meeting the requirements of the ListingRules of the Financial Services Authority. Our review has been undertaken sothat we might state to the company those matters we are required to state to itin this report and for no other purpose. To the fullest extent permitted by law,we do not accept or assume responsibility to anyone other than the company forour review work, for this report, or for the conclusions we have reached. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of and has been approved by the directors. The directors areresponsible for preparing the interim report in accordance with the ListingRules which require that the accounting policies and presentation applied to theinterim figures should be consistent with those applied in preparing thepreceding annual financial statements except where any changes, and the reasonsfor them, are disclosed. As disclosed in note 1 to the financial information, the next annual financialstatements of the group will be prepared in accordance with IFRSs adopted foruse in the European Union. The accounting policies that have been adopted in preparing the financialinformation are consistent with those that the directors currently intend to usein the next annual financial statements. There is, however, a possibility thatthe directors may determine that some changes to these policies are necessarywhen preparing the full annual financial statements for the first time inaccordance with those IFRSs adopted for use by the European Union. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4Review of interim financial information issued by the Auditing Practices Boardfor use in the United Kingdom. A review consists principally of making enquiriesof management and applying analytical procedures to the financial informationand underlying financial data and, based thereon, assessing whether theaccounting policies and presentation have been consistently applied unlessotherwise disclosed. A review is substantially less in scope than an auditperformed in accordance with Auditing Standards and therefore provides a lowerlevel of assurance than an audit. Accordingly, we do not express an auditopinion on the financial information. Fundamental Uncertainty In forming our opinion, we have considered the adequacy of the disclosures madein note 17 to the interim report regarding the uncertainties involved indetermining the level of gross loss reserves in relation to the classes ofbusiness referred to by management as discontinued units. In view of thesignificance of this uncertainty we consider that it should be drawn to yourattention but our opinion is not qualified in this respect. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 June 2005. KPMG Audit PlcChartered AccountantsRegistered AuditorLondon 16 September 2005 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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