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FINANCIAL STATEMENTS / ACCOUNTING POLICIES
Basis of preparation and consolidation
The consolidated financial statements have been prepared in
accordance with applicable accounting standards and under the
historical cost accounting rules, modified to include the revaluation
of investments, in accordance with the provisions of Section 255A,
Schedule 9A and other requirements of the Companies Act 1985.
The Group has also adopted the recommendations of the Statement of
Recommended Practice on Accounting for Insurance Business issued
by the Association of British Insurers (ABI SORP) in 2003.
The balance sheet of the parent company has been prepared in
accordance with the provisions of Section 230 of, and Schedule 4 to,
the Companies Act 1985. In accordance with the exemption permitted
under this section, the profit and loss account of the Company is not
presented as part of these accounts.
The financial statements consolidate the accounts of the Company,
its subsidiary undertakings, and the Group’s underwriting through
participation on Lloyd’s syndicates. The accounting information in
respect of non-aligned syndicate participations has been provided
by the managing agents of those syndicates through an information
exchange facility operated by Lloyd’s and has been audited by the
respective syndicates’ auditors. The actual information in respect of
these non-aligned participations is included to the extent that it is
available or, where this is not the case, provisions are made for the
expected impact.
Syndicate participations
Premiums
Written premiums comprise premiums on contracts incepting during the
financial year. Premiums are disclosed gross of brokerage and exclude
taxes and duties levied on them. Estimates are included for ‘pipeline’
premiums, representing amounts due to the Group but not yet notified,
as well as adjustments made in the year to premiums written in prior
accounting periods.
Outward reinsurance premiums are accounted for in the same
accounting period as the related direct insurance or inwards
reinsurance business.
Unearned premiums
A provision for unearned premiums represents that part of premiums
written, and reinsurers’ share of premiums written, which is estimated
to be earned in following financial years. It is calculated separately
for each insurance contract on the 24ths or 365ths basis, where
the incidence of risk is the same throughout the contract. Where the
incidence of risk varies during the term of the contract, the provision
is based on the estimated risk profile of business written.
Acquisition costs
Acquisition costs comprise brokerage incurred on insurance contracts
written during the financial year. They are spread over an equivalent
period to that which the premiums on the underlying business
are earned. Deferred acquisition costs represent the proportion of
acquisition costs incurred in respect of unearned premiums at the
balance sheet date.
Claims paid
Claims paid comprise claims and claims handling expenses paid during
the financial year.
Claims provisions
Provisions for claims outstanding comprise notified claims and claims
incurred but not reported (IBNR). The change in the provision for
claims represents the movement in the provision for claims outstanding.
The gross provision for claims outstanding is included as a liability
on the balance sheet. The technical claims provision represents
management’s estimate of the cost of settling all claims incurred
but unpaid at the balance sheet date, whether reported or not.
The reinsurers’ share of these anticipated future claims is calculated by
applying the gross provisions against the Group’s reinsurance protection
and is net of any provision for bad debt based on an assessment of the
underlying security of the reinsurers on the policies. The reinsurers’
share of technical provisions is included as an asset on the balance
sheet. Notified claims are estimates of future claims payments in
respect of reported claims based on the latest information available
including advices from claims assessors and lawyers. The IBNR element
is calculated initially by each of the Group’s divisions using statistical
analysis of historical trends, balanced with interpretation of current
underwriting trends and market and case loss information, in order to
calculate the ultimate loss projection of the business on risk. Where
Amlin leads business it has control over the agreement of claims and
where it does not lead it relies on the lead underwriter to keep it
informed of the latest developments.
These claims provisions are reviewed to ensure judgements made are
reasonable and supportable. This review process includes comparison
of technical claims provisions, on an underwriting year basis, with
independent actuarial projections produced on a best estimate basis by
our in-house actuarial team. The underwriting year loss ratios are then
adjusted to remove assumed future major losses. This process is
repeated each quarter with the actuarial assessment reviewed at the
end of the financial year by an independent external actuary.
Although the claims provision is considered to be reasonable, having
regard to previous claims experience, the statistical projections and
case reviews of notified losses, the ultimate liabilities will vary as a
result of subsequent developments and events. These adjustments are
reflected in the financial statements for the period in which the related
adjustments are made.
Unexpired risks provision
Provision is made for unexpired risks where, at the balance sheet
date, the costs of outstanding claims and related deferred acquisition
costs are expected to exceed the unearned premium provision. The
unexpired risks provision is included within technical provisions in
the balance sheet.
Other accounting policies
Exchange rates
Income and expenditure in US dollars, Euros and Canadian dollars are
translated at average rates of exchange for the period. Underwriting
transactions denominated in other foreign currencies are included at
their historical rates.
Syndicate assets and liabilities, expressed in US dollars, Euros and
Canadian dollars are translated into sterling at the rates of exchange
at the balance sheet date.
Differences arising on translation of foreign currency amounts on
insurance transactions are included in the technical account. Other
assets, liabilities, income and expenditure expressed in foreign
currencies have been translated at the rates of exchange at the balance
sheet date unless contracts to sell currency for sterling have been
entered into prior to the year end, in which case the contracted rates
have been used. Differences arising on translation of foreign currency
amounts on such items are included in the non-technical account.
Investments
Listed investments are stated at market value at the close of business
on the balance sheet date. Unlisted investments are valued by the
directors on a prudent basis with regard to their likely realisable value.
In the Company’s accounts, investments in Group undertakings are
stated at cost less provisions for impairment.
Syndicate investments and investment income
Syndicate investments and cash are held on a pooled basis, the return
from which is allocated to underwriting years of account proportionately
to the funds contributed by the year of account.
Investment return
All dividends and any related tax credits are recognised as income on
the date the related listed investments are marked ex-dividend. Other
investment income, interest receivable, expenses and interest payable
are recognised on an accruals basis.
Realised gains or losses are calculated as the difference between the
net sales proceeds and their purchase price in the financial year or
their valuation at the commencement of the year. Unrealised gains
and losses are calculated as the difference between the valuation of
investments at the balance sheet date and their purchase price in
the financial year or valuation at the commencement of the year.
Allocation of investment return
All of the investment return arising in the year is reported initially in
the non-technical account. A transfer is made from the non-technical
account to the technical account representing:
- for aligned syndicate participations, the longer term investment return
on investments supporting the technical provisions and related
shareholders’ funds. The longer term investment return is an estimate
of the expected return over time for each relevant category of
investments having regard to past performance, current trends and
future expectations; and
- for non-aligned syndicate participations, the actual return on
investments supporting the technical provisions and related
shareholders’ funds.
Intangible fixed assets
The cost of syndicate participations is capitalised and amortised on
a straight line basis over its estimated useful economic life of twenty
years beginning in the underwriting year in which the purchased
syndicate participation commences.
Goodwill arising on consolidation of acquisitions prior to 31 May 1998,
representing the excess of the fair value of the consideration over the
fair value of the assets acquired, has been written off against reserves.
The goodwill on other acquisitions is capitalised and is amortised on a
straight line basis over its estimated useful life.
Other income and charges
Agency fees are recognised on an accruals basis. Profit commission
receivable is accrued in direct relation to underwriting income earned
and is subject to the normal managing agent’s terms.
Tangible fixed assets
The cost of other fixed assets is depreciated over their expected useful
lives on a straight line basis.
Depreciation rates are within the following ranges:
| Leasehold land and buildings |
Over period of lease |
| Motor vehicles |
25–33% per annum |
| Computer equipment |
33–50% per annum |
| Furniture and office equipment |
20–50% per annum |
| Internal property improvements |
20–33% per annum |
Pensions
Pension contributions to defined benefit schemes are charged to the
profit and loss account so as to spread the cost of pensions over
employees’ working lives with the Group, based on actuarial triennial
valuations. Pension contributions to employees’ money purchase
schemes are charged to the profit and loss account when due.
Amlin contributes to a defined benefit scheme which is, for the
purposes of both Statement of Standard Accounting Practice 24 and
Financial Reporting Standard 17, considered to be a multi-employer
scheme. Consequently, contributions to this scheme are charged to the
profit and loss account when due.
Deferred tax
Deferred taxation is provided in full on timing differences that result
in an obligation at the balance sheet date to pay more tax, or a right
to pay less tax, at a future date, at rates expected to apply when they
crystallise based on current tax rates and law. Timing differences arise
from the inclusion of items of income and expenditure in taxation
computations in periods different from those in which they are included
in financial statements. Deferred tax assets are recognised to the extent
that it is regarded as more likely than not that they will be recovered.
Deferred tax assets and liabilities are not discounted.
Leased assets
Assets held under finance leases and hire purchase transactions are
capitalised in the balance sheet and depreciated over their useful lives.
The outstanding instalments are included in creditors and the interest
element is charged against profits over the period of the contract.
Payments made under operating leases are charged to the profit and
loss account evenly over the period of the lease. Where there are rent
free periods in property leases, the cost of the lease is spread evenly
up to the period of the first rent review.
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