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1 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’). 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 parent company is not presented as part of these accounts. The financial statements consolidate the accounts of the Company, its wholly owned subsidiary undertakings, its Employee Share Ownership Trust 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. Goodwill arising on consolidation on 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. Aligned syndicate participations The Group’s aligned syndicate participations are presented on an annual accounting basis. 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 Claims incurred comprise claims and claims handling expenses paid during the financial year together with the movement in the provision for claims outstanding and settlement expenses, including claims incurred but not reported (IBNR). Outward reinsurance recoveries are accounted for in the same accounting period as the associated incurred claims. Claims outstanding comprise provisions for the estimated cost of settling all claims incurred but unpaid at the balance sheet date whether reported or not, and include the related internal and external claims handling expenses. Provisions for claims outstanding are based on information available to the directors and the eventual outcome may vary from the original assessment. Provisions for IBNR are finalised through a review process. The claims reserves are proposed, on a gross and net of reinsurance basis, based on the historical trends of claims development and taking account of underwriting conditions. These are independently reviewed, including assessment of an actuarial best estimate reserve for each class. Provisions for doubtful debt associated with reinsurance receivables are made after a review of the financial strength and trading position of reinsurers. 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. Non-aligned syndicate participations The Group’s non-aligned syndicate participations, which are presented as a discontinued operation, consist entirely of run-off syndicate years of account. These participations are reported on an extension to the three year accounting basis, whereby movements in the calendar year are reported. Premiums Written premiums comprise premiums on contracts incepting during the financial year. Premiums are disclosed gross of brokerage payable and exclude taxes and duties levied on them. Estimates are made for ‘pipeline’ premiums, representing accounts 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. Claims Claims incurred comprise claims and claims handling expenses paid during the financial year together with the movement in the provision for claims outstanding and settlement expenses, including claims incurred but not reported. Loss provisions on open years Provision is also made for losses on each open year of account when it is considered that profits in corporate member subsidiaries may be insufficient to meet these losses. In addition, provision is made for the estimated future deterioration of years of account in run-off. While the directors make every effort to ensure that adequate provision is made for losses on open years of account, their view of the ultimate loss may vary in later periods as a result of subsequent information and events. This in turn may require adjustment of the original provisions. These adjustments are reflected in the financial statements for the period in which the related adjustments are made. Other accounting policies Exchange rates Income and expenditure in US dollars, Euros and Canadian dollars is translated at average rates of exchange for the period. Underwriting transactions denominated in other foreign currencies are 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 in syndicates 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. In the Company’s accounts, realised gains and losses on investments are included in the profit and loss account and unrealised gains and losses are taken directly to capital reserve-unrealised. 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:
The cost of syndicate participations which have been purchased in the Lloyd’s capacity auctions 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. 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 agents 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:
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. 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. 2 ANALYSIS OF CONTINUING AND DISCONTINUED OPERATIONS Continuing operations The events of 11 September 2001 had a significant impact on the Group’s 2001 results. As such, the continuing operations in the technical account have been split between 11 September related and underlying items. Discontinued operations During 1999, the Group disposed of its remaining participations on non-aligned syndicates. The results deriving from this activity are disclosed as discontinued operations. 2002
2001
3 IMPACT OF TERRORIST ATTACKS OF 11 SEPTEMBER 2001 The terrorist attacks of 11 September 2001 resulted in material losses for the Group’s managed syndicates for the year ended 31 December 2001. Development of these losses during the year has been broadly in line with expectations and the incurred loss position has stabilised. Settlements of property losses have begun to be made and there is now greater certainty over these losses. The gross loss estimate by class of business, and the net loss estimates by year of account, compared with the estimated positions at 31 December 2001, are summarised below:
The overall improvement in our gross loss estimate is due to a reduction in our estimate for aviation losses following an internal review of the legal position. This has been partially offset by an increase in notifications from reinsured clients on our property reinsurance account. The increased loss net of reinsurance is due to these higher property reinsurance claims, which are not recoverable from reinsurers, while most of the benefit of the improvement in the estimated aviation loss falls to the syndicates’ reinsurers. In terms of timing most of the changes were experienced in the first half of 2002 with a relatively stable position in the second half. Key assumptions made in estimating the losses from 11 September 2001 include:
£63.9 million of the estimated loss was charged to the technical account in 2001 and the balance of £1.5 million (at 31 December 2002 exchange rates) has been charged to the technical account in 2002. The estimates, and the assumptions and methodology from which they are derived, do not, and may not be taken to constitute an admission that the Group is liable either in respect of a particular class of business or under a particular contract of insurance or reinsurance. A number of insurance companies and Lloyd’s syndicates, including syndicate 2001, are currently in dispute with the leaseholder of the World Trade Center, Silverstein Holdings, as to whether the terrorist attack and destruction of the buildings constitutes one or two insured occurrences. We believe the attacks on the World Trade Center are one occurrence. We have legal guidance that supports this belief. However there is potential for additional loss. In the event that the World Trade Center losses were judged to be two occurrences and two total losses to the excess layers underwritten, it is estimated that the Group’s loss could increase by up to approximately £22 million. However, given our legal advice and the high excess point of the layer which we insured, we believe that this is unlikely. The remaining reinsurance recoveries of the Syndicates have been analysed by grade of reinsurer, as rated by Standard & Poor’s in March 2003, as follows:
Provisions of US$7.2 million have been made for bad debts. Letters of credit amounting to $34.9 million (Amlin Group Share: $24.3 million) have been received from reinsurers securing future recoveries due on 11 September 2001 losses. Last year we disclosed that the syndicates were owed an estimated US$125 million from companies which underwrote through Fortress Re Inc, and that this agency had ceased to trade. At 31 December 2002, US$29.5 million of the debt remained outstanding. During January 2003, a letter of credit was received to reduce the debt to US$7.8 million. 4 SEGMENTAL INFORMATION The segmental analysis for Group operations is set out below:
The Financial Review, describes the Group’s insurance business segments and related results. All business is transacted through the Lloyd’s of London market in the United Kingdom. 5 INVESTMENT RETURN Investment return and expenditure reported in the non-technical account is as follows:
In respect of equity investments and fixed interest securities the longer term rate of return has been determined by having regard to the Group’s historical and expected returns and current portfolio strategy. The rates of return are:
These returns are applied to the average, over the year, of the investments attributable to the shareholders and insurance technical provisions of the aligned syndicate participations. The attributable shareholders’ funds are based on the Funds at Lloyd’s which represent the estimated risk based capital supporting the insurance business. The rate for equities was utilised until the date of disposal of the portfolio. The actual return on investments since 1 January 1997, compared with the aggregate longer term return over the same period, is set out below. All figures are gross of expenses.
6 PRIOR PERIODS’ CLAIMS PROVISIONS Material (under)/over provisions for claims at the beginning of the year as compared with net payments and provisions at the end of the year in respect of prior years’ claims for continuing business are as follows:
The increase to the provisions for Syndicate 2001 predominantly relates to the 11 September losses (see note 3). The adjustment to the provisions for Syndicate 1141 relates to the strengthening of reserves for US casualty business. 7 NET OPERATING EXPENSES
8 OTHER INCOME
9 OTHER CHARGES
Included in the above is £4.2m accrued to cover payments under the Group’s bonus and incentive schemes (2001: £0.4m). 10 DIRECTORS’ REMUNERATION The aggregate remuneration of the directors of the Company, including amounts received from subsidiaries, was:
Remuneration includes remuneration during the period of appointment only. Details of directors’ remuneration and pension benefits, including those of the highest paid director, are included in the Directors’ Remuneration Report. 11 EMPLOYEE INFORMATION The average number of persons employed by the Group, including directors, was:
The aggregate payroll costs in respect of these persons were:
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