RNS Number:3160K
Kiln PLC
24 April 2003
KILN plc
Unaudited preliminary results for the year ended 31st December 2002
Kiln plc, the specialist Lloyd's insurance business, announces unaudited
preliminary results for the year ended 31st December 2002.
HIGHLIGHTS
Financial:
* Profit before tax of #10.53m (2001: loss of #15.69m)
* Earnings per share of 3.77p (2001: loss of 12.30p)
* Technical profit of #20.85m (2001: loss of #8.56m)
* Proposed payment of final dividend of 0.5p per share reflecting group
profitability
* Achieved combined operating ratio for the period of 91% compared with
Lloyd's average of 98%
Operational:
* Total managed capacity for 2003 of #820m - including QQS (2002: #664m)
* Kiln net economic interest increased by 70% to #215m (2002: #126m)
* Strengthened management capability with new appointments
* Continuing strong underwriting conditions
Corporate
* Appointment of Peter Haynes as Group Finance Director, effective 1 July
2003.
* Continued development with W. R. Berkeley Corporation and intention for
Kiln to hold 20% in their UK based insurance company.
Edward Creasy, Chief Executive Officer, Kiln plc, commented:
"The group's return to profit reflects the strength of both our underwriting
team and current market conditions. Our above average combined operating ratio
highlights our core underwriting strength. We continue to enjoy an excellent
business environment and we have positioned ourselves to make the most of the
current opportunity. We are also working on broadening the base of our
underwriting operations to maximise shareholder returns. "
24th April 2003
Enquiries:
Kiln plc Tel: 020 7886 9000
Edward Creasy, Chief Executive Officer
Roy Butler, Finance Director
College Hill Tel: 020 7457 2020
James Henderson
Richard Bowler
There will be a presentation for analysts today at 9.30 am at Kiln plc, 106
Fenchurch Street, London EC3M 5NR.
Chairman's statement
Results and strategy
I am delighted in my first year as Chairman of Kiln plc with the news that we
are reporting a profit before taxation of #10.53 million for 2002 against a loss
of #15.69 million for last year. The excellent underwriting conditions that we
noted at the half-year have continued and the year saw no major catastrophe that
affected our portfolio of risks. Our strategy continues to be one of focusing on
our core business: the specialist, non-commoditised end of the insurance
spectrum. We have steadily and deliberately increased our capacity under
management, in order to take advantage of our core strength in the prevailing
conditions.
Our strategic objective remains unchanged: to continue as one of the premier
independent companies operating at Lloyd's and within the London market,
capitalising on the strengths associated with our brand to develop our
leadership position. Our key strengths lie in our underwriting experience and
skill and in the formation of business relationships and I believe that these
are the foundations on which Kiln can build long-term superior returns for our
shareholders. We are mindful that the current strong underwriting conditions
will not last indefinitely and to that end we are putting considerable effort
into planning for when the market turns, including investigating opportunities
for broadening the base of our underwriting operations.
The Group's premium income
The Group's managed gross premium income has moved ahead considerably, rising
from #194 million in the 1999 year of account to a budgeted premium of #687
million for the 2003 year of account. This has enabled us to match capacity to
the excellent opportunities available in the market over the last two years.
During the same period, our ability to underwrite income on behalf of our
shareholders rose from #102 million to a potential maximum of #237 million in
2003, an increase of 132 per cent; the capital raising exercise achieved in 2002
contributed significantly to our being able to reach this target.
Financial results and dividend
The profit for the year to 31st December 2002, before taxation, of #10.53
million compares with a loss for the year to 31st December 2001 of #15.69
million. After tax the profit is #5.93 million (2001: loss of #11.36 million).
Given Kiln's return to profit, I am pleased to report that we have decided to
resume the payment of dividend. We remain committed to retaining capital within
the business to ensure that we can extract maximum benefit from the current
underwriting conditions for Kiln shareholders and to provide the funds necessary
to take advantage of any new strategic initiative; this is an important factor
for us when considering our dividend policy. The current Lloyd's three year
accounting system restricts our ability immediately to realise cash from
profitable underwriting. As a result, the Board proposes the payment of a final
dividend of 0.5 pence per share, payable on 2nd July 2003 to shareholders on the
register at close of business on 2nd May 2003.
The total net asset value of the group at 31st December 2002 was 53.2p per share
compared with 57.8p on the same date in 2001. The tangible net asset value is
47.7p (2001: 45.4p).
R J Kiln Pension Scheme
We have taken steps to reduce shareholders' exposure to future liabilities
emanating from the R J Kiln & Co Limited Pension and Assurance scheme. After
consultation with employees and the trustees, the Defined Benefit plan will be
closed with effect from 1st May 2003. Kiln employees will receive pension
provision on a defined contribution basis.
Asset and investment strategy
The financial investments of the company at 31st December were valued at #76.22
million or 37.4p per share of which 18 per cent was in equities with the balance
in cash and fixed interest securities. The latter have an average maturity
duration of 3.6 years (2001: 3.5 years). Since the year-end we have reviewed our
investment strategy and have moved out of equities and into a fixed interest
portfolio. This decision meets our objective that, in future, our funds are
protected from the volatility of the equity markets at a time when underwriting
conditions remain strong.
The Future of Lloyd's
Kiln is committed to the Lloyd's market, and continues to support Lloyd's as one
of the best ways to conduct a global insurance business. Being part of Lloyd's
allows us to trade both nationally and internationally, and to benefit from
financial security above and beyond the size of our current balance sheet. The
Lloyd's brand - which has a number of points of crossover with our own - is one
of the strongest in the world, and we value our association with it. I am
delighted that our Chief Executive Officer Edward Creasy has joined the Lloyd's
Franchise Board. This board will bring a modern approach to corporate governance
in the Lloyd's market. It will promote a commercial perspective aimed at
introducing uniformity of excellence, bringing all involved in line with the
high standards that the better businesses in Lloyd's have achieved.
W. R. Berkley Corporation
The relationship between Kiln and W. R. Berkley Corporation has matured
considerably during 2002. In May of 2002, at the time of our rights issue, W. R.
Berkley Corporation became our major shareholder, increasing its holding to 20.1
per cent. More recently, W. R. Berkley Corporation has announced its intention
to form a UK-based insurance company and we are in discussions with W. R.
Berkley Corporation about our holding an interest of around 20 per cent in the
new company.
Board changes - executive and non-executive directors
Roy Butler, who has been with Kiln for over 20 years, most recently as finance
director, retires from the board this year. Roy has seen Kiln through many
stages of its evolution, and he can take much credit for the fact that the
company is in excellent heart. With over 37 years experience of Lloyd's, and
latterly as a member of the Lloyd's Market Association Finance Committee, he is
held in high esteem throughout the Lloyd's market and his understanding of its
workings is hard to match. I thank him for his contribution to Kiln over the
last 20 years.
I welcome to the board Peter Haynes, who joined the company as Corporate
Development Director in September 2002. He takes over from Roy Butler as Finance
Director, effective from the 1st July 2003. Peter has over 20 years' experience
in financial services, and has run multi-million pound insurance and fund
management businesses. As well as running the finance function, Peter will work
closely with Chief Executive Officer Edward Creasy in determining the strategic
direction of the company.
William R Berkley and W Robert Berkley Jr joined the board during the course of
the year. Their respective positions as Chairman and Senior Vice President of
one of the most respected property and casualty insurance companies in the USA
significantly strengthens the depth and breadth of your board.
This is my first year as Chairman of Kiln plc, and I pay tribute to my
predecessor, David Gilchrist, who retired from the post at this time last year.
He brought to Kiln and to the world of insurance and reinsurance a fund of
understanding that was enormously valuable. To him goes credit for many of the
business relationships that are central to Kiln's position in the market today;
I wish him well for the future.
Corporate Governance
In September 2002, the co-ordinating group on accounting and auditing invited
the Financial Reporting Council to set up a committee under the chairmanship of
Sir Robert Smith with the objective of developing guidance for audit committees.
Robert Smith reported in January 2003 and I am pleased to say that the Audit
Committee of Kiln, in substance, follows the recommendations.
The Higgs review on the role and effectiveness of non-executive directors was
published in January 2003 and its recommendations, together with the
recommendations of the Smith report are being considered by the Financial
Reporting Council after the consultative period ends on 14th April 2003 with a
view to a new combined code being in place by 1st July 2003. The Board is
already in conformity with many of the recommendations and will consider fully
the final recommendations; I will report a response at this time next year.
The Future
We are now well into 2003 and, assuming no significant catastrophes, the signs
suggest that the prospects for the year are excellent for Kiln shareholders. The
market remains strong and favourable. Prices continue to rise, albeit at a more
modest rate than twelve months ago, and we have increased the capacity of our
syndicates by 24 per cent accordingly. Kiln faces the future in good heart; my
thanks to the Kiln employees and my fellow directors who have worked hard to
achieve this position, and to our shareholders and advisers for their continuing
support.
Ian Percy
Chairman
24th April 2003
Operating review
Chief Executive Officer's strategic review
It is particularly pleasing to be able to report to Kiln shareholders that the
strategic focus applied to our underwriting portfolio for the last two years is
now delivering worthwhile profits.
Kiln's approach to insurance remains unchanged. Our business is to deploy and
manage shareholders' capital and others funds in order to generate superior
returns from the underwriting of an international portfolio of specialist risks.
We believe that above average returns are achievable only through underwriting
specialisation: the provision of insurance solutions to the risk management
problems that our customers face. Our size means we perform most effectively as
specialists in areas where an underwriter cannot simply follow market trends or
rely on existing statistical information. We are specialist in a number of ways:
in the things that we insure, the coverage we provide, the way we provide it and
the occasions on which we do so. Kiln's philosophy, approach and organisation is
not suitable either for the underwriting or distribution of simple commoditised
insurance products.
People and relationships
In order to compete effectively as a specialist insurer and reinsurer in the
global market, Kiln relies on two core strengths. The first of these is our
people; we employ, develop and train high calibre professionals to underwrite
and manage our portfolios and provide them with a working environment that
encourages commitment and motivation. Our second core strength is our ability to
create and sustain long-term commercial relationships with our distributors and
their customers. Approaching our business relationships in a spirit of
partnership means we have a better understanding of the dynamics of the risks we
accept, and we establish a shared approach to continuous risk management and
risk reduction. To help us build on this approach, we have increased the
sophistication of our pricing and risk modelling techniques and established a
research and development capability over the last twelve months.
Access to capital
We recognise the fundamental importance of attracting capital to our business;
without it, we do not have the essential raw materials with which to work. To
establish and maintain Kiln as an attractive investment, we need to continue to
develop our people and their skills together with the organisation's data and
processes. When we satisfy our investors' demands we are then successful in
attracting and increasing the capital we need in order to maintain our position
of competitive advantage. We continue to benefit from the provision of both our
own shareholders' capital and funds provided to us by other insurance industry
investors. This creates two discrete sources of income for shareholders,
enhancing their overall return and providing us with the necessary assets under
management to demonstrate the financial strength necessary for the confidence of
our customers.
Lloyd's and the regulatory environment
We remain committed to the Lloyd's market and the Lloyd's franchise. It is
through Lloyd's that we have access to the insurance licences that allow us to
trade nationally and internationally. The Lloyd's market provides us with the
rating necessary to demonstrate the financial stability underlying the insurance
policies that Kiln offers. Kiln has been closely associated with the substantial
reform process to which Lloyd's has committed itself over the last twelve
months; we are strong supporters of the principles behind an ambitious programme
of change, which has the potential to strengthen significantly the standing of
Lloyd's in the international insurance and reinsurance marketplace.
Economic scale
Kiln has worked hard over the last three years to ensure that we have the
critical mass necessary to operate effectively as a market leader in Lloyd's and
the London insurance market. Our reliance on multiple sources of capital clearly
demonstrates this, and we continue to look at other opportunities outside the
existing Kiln portfolio to allow us to expand the business. It is central to
Kiln's approach to underwriting, however, that expansion can be warranted only
if it will demonstrably enhance returns to our shareholders. Although prospects
for both profits and growth remain excellent, the focus remains clearly on the
need to generate shareholder returns whatever the business environment.
Our underwriting business continues to be transacted through five syndicates at
Lloyd's, which have the combined capacity to accept #658 million in premium
income in 2003; this has been further enhanced by #162 million secured through
Lloyd's approved proportional reinsurance arrangements. This represents an
annual increase of 24 per cent and a three-year increase of 112 per cent. For
2003, 36.0 per cent is underwritten by Kiln Underwriting Ltd (2002: 38.7 per
cent).
In addition to the investment in our managed syndicates, we are also currently
in discussions with W. R. Berkley Corporation with regard to holding an interest
of around 20 per cent in a casualty insurance company incorporated by W. R.
Berkley Corporation in the United Kingdom. The new company is not expected to
open its doors for business before the third quarter of the year, and is subject
to a range of approvals including those from the Financial Services Authority.
Our current intention is to finance the investment without recourse to
shareholders, whose approval will be sought before the transaction takes place.
Outlook
During the course of the year, Kiln has continued to concentrate on underwriting
activities where we can demonstrate competitive advantage. The time and expense
invested in developing international business relationships provide us with a
better understanding and a greater appreciation of the quality of our
underwriting portfolio. A new entrant into these markets would be unable to
achieve this. The experience and knowledge of our underwriters and their
willingness to dedicate the resources necessary to set contractual terms for the
transfer of risks from our customers, is fully appreciated by the insurance
brokers on whom we rely for our distribution. These factors give Kiln an
enduring advantage in our underwriting approach.
We also continue to benefit from our strategic decision to rely on multiple
sources of capital, which is particularly beneficial when underwriting
conditions are good. It allows us to generate two separate profit streams from
our core underwriting activity. The negotiations currently in train with W. R.
Berkley Corporation to invest in a UK insurance company have the potential to
generate a third differentiated profit flow for our shareholders. We are at a
stage in the insurance cycle where we are positioned to maximise profitability.
Along with the business, we are developing our skill base. In 2002, we took a
number of steps to strengthen our management team, both to enhance our ability
to meet our strategic objectives and to complement the strength in depth that is
in the Kiln underwriting units. To this end, we have appointed Peter Haynes as
the Corporate Development Director of Kiln plc, who becomes Finance Director in
July, Marion Madden as Chief Operating Officer of R J Kiln & Co Ltd, and Kate
Rogers as Head of Corporate Communications. All three bring experience and
skills from having held senior positions in the UK financial services industry,
outside the Lloyd's environment.
It remains our intention to enhance Kiln's position in its market so that we
maintain and build our influence in every area of underwriting in which we
specialise, and we believe we have created the foundations necessary over the
last three years on which this objective can be achieved. Our people remain
critical to our success, and over the last twelve months we have been able to
recruit men and women of the highest calibre, ranging from new graduates to
experienced directors of multinational companies in the insurance industry. The
motivation and commitment of the Kiln workforce remains exemplary; this is a
necessity if we are to be able to continue to attract new capital to our
business.
We are acutely aware of the cyclical nature of the portfolios in which we
specialise. We believe, however, that the combination of poor investment
returns, the developing strain caused by the World Trade Center loss, and the
need to restore and repair insurance company balance sheets ravaged by the
results of poor underwriting and significant asbestos claims, may create
circumstances where the potential for above average rates of return could
continue beyond the short-term. Nonetheless, we remain alert to any signs of
deterioration in pricing and we are considering strategies to protect us against
a more hostile underwriting environment. For the immediate future we remain
focused on delivering quality profits throughout our underwriting portfolio and
we continue to work to develop our business so that we can deliver sustained
long-term returns for our shareholders.
Chief Executive Officer's Operational Review
Kiln's ongoing insurance activities can be classified in five distinct areas of
expertise: International Reinsurance; International Non-Marine Insurance;
Pecuniary and Special Risks; Marine, Aviation and Transport; and Life Assurance.
International Reinsurance
The provision of reinsurance protection for global insurance companies remains a
strength for Kiln, in terms of both reputation and expertise. The recent history
of this account has been dominated by the World Trade Center, not only in terms
of the loss to our balance sheet, but also the impact on reinsurance pricing
throughout the world.
We increased our premium volume under management by 34 per cent during 2002. At
the same time, our risk-by-risk review of the financial consequences of 11th
September 2001 to Kiln remains as it was immediately after the event, although
there remains considerable market uncertainty as to both the overall magnitude
and the contractual nature of the loss.
We remain conscious of the potential volatility inherent in our international
reinsurance underwriting portfolio; for this reason we have improved our
capabilities for modelling and measuring the concentration of risk, so we are
better able to protect shareholders against the uncertainty of return that this
creates. We continue to be aware of our financial exposure to various types of
catastrophe, both in terms of frequency and location, and we are working with
others in the reinsurance industry to reduce and manage our own risk.
International Non-Marine Insurance
The amount of non-standard non-marine international insurance business being
presented to the London insurance market on terms that are favourable for
insurers has increased significantly over the last twelve months. Kiln has
positioned itself to take full benefit of this development, and our income under
management in this area has increased by 29 per cent in the calendar year. We
have used our business relationships and our underwriting expertise to identify
sources of business that have the potential to deliver superior returns in the
medium term, while taking advantage of the opportunities that have arisen as a
direct result of the immediate underwriting environment. As a result, our
current portfolio based on written premium amounts to some 4.5 per cent of the
total Lloyd's market share for these classes (3.2 per cent in 2001).
Market conditions continued to improve during the latest renewal season,
although at a slower pace than last year. Looking forward, we expect the stream
of business coming to Lloyd's to slacken, particularly in respect of the higher
profile risks. We have repositioned ourselves to take greater advantage of the
spread of small to medium sized business, where pricing and quality of portfolio
remain high.
The portfolio is truly international in its nature, and we currently underwrite
business from some 150 countries. We have also been able to benefit from our
experience in underwriting terrorism related risks, which goes back to the
1970s, in order to take advantage of the increased demand for this type of
protection, at the same time ensuring that aggregate exposures are identified
and controlled.
Long term, mutually supportive commercial relationships have been integral to
Kiln as we have sought both to increase and to balance the international
non-marine portfolio of business. We nurture these relationships in order to
build and maintain an underwriting account that can deliver consistent returns
to our shareholders.
Pecuniary and Special Risks
It is through this pecuniary and special risks portfolio that Kiln seeks to
position itself to provide tailor made, innovative solutions. The risk
management processes of our customers identify defined risks, and the solutions
we provide address the current generation of new corporate exposures and
liabilities. The current geo-political instability has also increased demand for
this type of insurance product.
The account is currently made up of political risks, trade disruption insurance,
protection for all forms of intellectual property, a specialist legal expenses
portfolio, trade credit insurance and other specialised customised insurance.
Developing this type of product remains a priority for Kiln; we have recruited
specialists in risk management and intellectual property during the course of
the year in order to develop our expertise in these areas.
Marine, Aviation and Transport
The improvement in underwriting conditions in Marine, Aviation and Transport has
been significant during the course of the last twelve months. The exception to
this is the traditional marine hull market where there are good prospects for
future rate increases because of a series of significant losses in the second
half of the year.
These areas require a high degree of specialist knowledge, and offer a
corresponding potential for profit. Kiln is able to demonstrate its expertise in
difficult and complex underwriting, and exploit these opportunities. We see this
particularly in offshore energy, low value marine hull, and in most classes of
aviation business. We are conscious that the pricing environment for these
classes of business is subject to rapid change, and we continue to monitor the
movement of rates.
The current underwriting environment has meant that we have increased our
premium income under management generated from this portfolio by 47 per cent in
the last twelve months and continue to see good prospects for profitability in
what is a core area of business for the Lloyd's market.
Life Assurance
We underwrite term life assurance, providing protection for the short term and
up to ten years, on both an individual and a group basis. Much of the business
presented to us is linked to other aspects of our non-marine portfolio,
particularly the international accident and health account.
UK Motor
This line of business is now effectively discontinued, following the transfer of
our UK retail business at Link to Rubicon at the beginning of 2002. We
maintained a small involvement in the underwriting of this account during 2002
and withdrew entirely at the end of the year.
Edward Creasy
Chief Executive Officer
24th April 2003
Financial review
The accounts for 2002 reflect the continuing growth in the involvement of the
Group in the underwriting activity of managed syndicates. Market conditions have
continued to improve during the year. Once again the depressed equity markets
have contributed to a disappointing investment result but we are delighted with
the Group operating profit of #17.71 million including longer-term investment
return. This compares to a loss of #10.62 million for the year to 31st December
2001.
These financial statements incorporate the result for the same period of Kiln
Capital and its subsidiary Kiln Underwriting whose share of Group syndicates
decreased from 51.5 per cent to 38.7 per cent but whose underwriting limit
increased by 15 per cent from #178 million to #205 million. Kiln Underwriting
is a corporate member of Lloyd's whose underwriting is conducted solely through
syndicates managed by R J Kiln & Co Limited, a Lloyd's managing agent, whose
result is also incorporated. Group income thus derives from three sources: from
underwriting activities, from agency activities on behalf of third party capital
providers on which fees and profit commissions are earned, and from investment
returns.
Summary of results
The highlights of the consolidated financial statements are as follows:
2002 2001
#m #m
Gross premiums written 268.56 275.59
Technical profit (loss) 20.85 (8.56)
Operating profit (loss) before tax based on longer-term 17.71 (10.62)
investment return
Profit (loss) before tax 10.53 (15.69)
Profit (loss) after tax 5.93 (11.36)
Earning (loss) per share -diluted 3.77 pence (12.30) pence
Net asset value per share 53.2 pence 57.8 pence
The above result represents Kiln Underwriting's participation in the individual
syndicates managed by R J Kiln. The technical profit is a function of the
relative profitability of the managed syndicates and the Kiln Underwriting share
of the respective years of account.
100 per cent technical result of managed syndicates
The Group technical result is derived from its participation in the syndicates
managed. The table below sets out the 100 per cent technical results of these
syndicates on an annual accounting basis.
2002 2001
#m #m
Gross premiums written 652.11 502.22
Net earned premiums 383.01 313.58
Investment income from underwriting 13.85 12.58
Net claims incurred (208.93) (227.26)
Net operating expenses (145.97) (113.55)
Investment expenses and charges (0.44) (0.37)
Technical result 41.72 (15.02)
Claims ratio 55% 72%
Expense ratio 36% 35%
Combined ratio 91% 107%
Definitions
Claims ratio - Net incurred claims as a percentage of net earned premium.
Expense ratio - Net expenses before adjusting for the change in deferred
acquisition costs as a percentage of net written premium.
Combined ratio - Claims ratio plus expense ratio
Net written premium - written premium net of outwards reinsurance but gross of
all policy acquisition costs.
Underwriting: Kiln managed syndicates
The technical account reflects the Group involvement in managed syndicates. The
Group's proportion of each syndicate for years covered by this report and in
place for 2002 are:
Underwriting year
Syndicate 2000 2001 2002 2003
% % % %
308 63.0 65.0 61.2 61.2
510 46.9 53.5 42.9 38.2
557 40.0 40.1 26.7 23.2
807 47.1 47.4 33.8 39.7
1204 - - 10.0 10.0
Net of quota share arrangements the Group has the following percentage interest
in managed syndicates.
2000 2001 2002 2003
% % % %
35.5 37.1 23.9 32.6
Amount of capacity owned by Kiln Underwriting Limited:
Syndicate 2000 2001 2002 2003
#m #m #m #m
308 2.12 2.18 2.44 2.45
510 108.34 142.41 166.38 184.59
557 12.50 12.50 12.50 12.76
807 21.37 21.37 21.37 34.56
1204 - - 2.80 2.80
Total owned capacity 144.33 178.46 205.49 237.16
Total Group managed 311.47 346.47 530.59 657.93
capacity
The 2000 account was closed for all syndicates at 31st December 2002 with an
aggregate loss of #10.34 million of which #2.90 million is due to Kiln
Underwriting. This loss has already been predominately recognised in previous
years.
Both the 2001 and 2002 accounts remain open and in the normal course of events
will be closed at 31st December 2003 and 2004 respectively.
The technical account profit reported in these accounts has been affected by
small deteriorations in the 2000 and 2001 accounts arising predominately from
the property and special lines business. The effect of the losses from the US
terror attacks was fully provided for in our 2001 accounts and our estimates
have not changed significantly since our original provisions were made. The 2002
account is approximately 54 per cent earned and has benefited significantly from
increased rates. The technical result has benefited from the low level of
incurred losses during the calendar year in relation to business earned for both
the 2001 and 2002 years of account.
For the 2000, 2001 and 2002 accounts Kiln Underwriting has entered into quota
share reinsurances whereby reinsurers share in the profits or losses according
to a pre-determined formula. The amount of capacity subject to this contract is
#34 million for 2000, #50 million for 2001 and #79 million for 2002. Contracts
are in place for 2003 but for a much smaller amount of capacity (#22.5 million).
Accordingly Kiln's net economic interest, as represented by total owned capacity
less quota share capacity, is #215 million for 2003 (2002: #126 million).
Insurance business written
The Operating Review describes the insurance business which the Group writes.
Below is an analysis of 2002 gross premiums written included in these financial
statements.
International Reinsurance 19%
UK Motor 1%
Pecuniary and special risks 3%
International non-marine (other) 8%
International non-marine (accident & health) 10%
International non-marine (property) 39%
Marine, Aviation & Transport 19%
Life 1%
Agency activities
The Group earns fees and a commission on profits generated by managed
syndicates. To the extent that the Group participates in its own managed
syndicates, the fees and profit commission are internal transactions with no net
effect on the Group. The Group's result is only affected by earnings in respect
of outside membership of those syndicates which still represents a substantial
proportion.
Profit commissions are not received by the Group until after the closure of a
Lloyd's year of account at the end of its third year; in the meantime, the
commissions can be accrued when the profits on which they are earned are
accrued. Since profit commission is entirely a function of the three-year
account, the developing view of the projected outcome at 36 months is used as
the basis for an accrual; this reflects the projected final amount after
allowing for the degree of uncertainty that attaches to the figure before it is
definitively calculated at the end of the third year of the account.
Syndicate investment return
The Group involvement in the investment returns of managed syndicates is
incorporated into these accounts within the Technical Account.
Sterling funds are invested primarily in short-dated gilts and other high
quality fixed interest securities. US dollar funds are largely invested in US
Treasury Notes, US Government sponsored enterprises, high quality corporate
bonds and, in the case of monies within the Lloyd's Dollar Trust Funds, mutual
funds rated A investing in US money-market and/or fixed interest securities, and
/or Eurodollar and Global bonds carrying a credit rating of AA- or better. In
Canada, Government and Provincial bonds represent the major part of portfolios,
although high-grade corporate and utility issues are purchased if suitable bonds
become available. None of the syndicates' funds participated in any of the
equity markets.
Fund management for group syndicates apart from 1204 was carried out by
Principal Investment Management Limited and for Syndicate 1204 by Credit
Agricole Asset Management (UK) Limited. On 31st January 2003 the responsibility
for investment management of all syndicates was taken over by Threadneedle Asset
Management Limited.
Corporate investment return
No major changes were made during the year to the balance of funds held between
fixed interest and equities. Monies raised during the year from the rights issue
were held on cash deposit from the time of receipt through to the end of the
year. Taking this into account at the year end equities represented 17.6 per
cent of corporate funds and fixed interest 25.8 per cent, (2001: 48.0 per cent
and 42.3 per cent respectively) with the balance being cash. In terms of total
financial investments, equities represented 5.7 per cent and fixed interest 70.6
per cent at the end of the year.
The table, below, provides an analysis of total financial investments. The Funds
at Lloyd's figure in the table includes accrued income.
2002 2001
#'000 #'000
Funds at Lloyd's
Equities 11,470 19,979
Fixed interest 19,683 19,859
Cash and money markets 42,540 3,834
73,693 43,672
Unencumbered corporate funds
Equities 1,769 2,545
Cash and short term deposits 568 275
Unlisted securities and trade investments 187 442
2,524 3,262
Total corporate funds 76,217 46,934
Share of syndicate investments
Variable yield securities 9,249 13,496
Debt securities and other fixed income securities 136,143 32,152
Cash and short term deposits 12,232 29,330
157,624 74,978
Total Financial Investments 233,841 121,912
Our Funds at Lloyd's depreciated during the year by #4.47 million and were
reduced by #2.72 million after investment income. Unencumbered funds depreciated
during the year by #0.49 million, and were reduced by #0.41 million after taking
into account investment income.
Newton Investment Management managed the Group's equity portfolio during the
year and Lazard Asset Management Limited the fixed interest investments. Newton
calculates the overall time-weighted return on our equities to have been a loss
of 21 per cent. At the year end our equities were split 73 per cent in the UK
and 27 per cent overseas. A cautious stance was taken in fixed interest markets
with an average duration at the year end of 3.6 years and this resulted in a
total return calculated by Lazards of 8.6 per cent.
Since the year end, the board has appointed Threadneedle Asset Management
Limited and Newton to manage our investment portfolio, and the equity portfolio
has been sold and replaced by fixed interest securities. This step was taken to
help protect the funds available to support our underwriting from the volatility
of the equity markets. Threadneedle Asset Management Limited is also responsible
for the management of Kiln's syndicate investment portfolios.
Group companies
The Group's UK retail insurance business, Link, was sold with effect from 1st
January 2002, to Rubicon Corporation Limited. The proceeds from the sale have
been credited to the Premiums Trust Fund of Syndicate 510, whose members "owned"
the business.
Roy Butler
Finance Director
24th April 2003
Consolidated profit and loss account (unaudited)
Technical account - general business
for the year ended 31st December 2002
2002 2001
Note #'000 #' 000
Earned premiums, net of reinsurance
Gross premiums written 1 268,558 275,588
Outward reinsurance premiums (81,981) (92,722)
Net premiums written 186,577 182,866
Change in the provision for unearned premiums:
- Gross amount (9,081) (35,085)
- Reinsurers' share (1,716) 21,277
(10,797) (13,808)
Earned premiums, net of reinsurance 175,780 169,058
Investment income
Allocated investment return transferred from the 3 10,480 7,442
non-technical account
Claims incurred, net of reinsurance
Claims paid:
- Gross amount (122,932) (89,484)
- Reinsurers' share 54,264 24,107
Net paid claims (68,668) (65,377)
Change in the provision for claims:
- Gross amount (11,454) (179,552)
- Reinsurers' share (18,464) 110,512
Change in the net provision for claims (29,918) (69,040)
Claims incurred net of reinsurance 2 (98,586) (134,417)
Net operating expenses 4 (66,526) (50,350)
Investment expenses and charges (302) (294)
Balance on the technical account for general business 20,846 (8,561)
Consolidated profit and loss account (unaudited)
Non-technical account
For the year ended 31st December 2002
2002 2001
Note #'000 #' 000
Balance on the technical account - general business
20,846 (8,561)
Investment income 8,439 6,925
Realised (loss) on sale of investments (1,888) (2,842)
Unrealised (loss) on investments (3,070) (1,521)
Investment return on a longer-term rate of return basis, 3 (10,480) (7,442)
transferred to the technical account
Other income 5 17,403 14,483
Other expenses 5 (20,720) (16,960)
Profit (loss) before tax on ordinary activities 10,530 (15,918)
Operating profit (loss) based on longer-term investment 17,706 (10,622)
return
Short term fluctuations in investment return 3 (7,176) (5,296)
Exceptional items - 227
Profit (loss) before tax 10,530 (15,691)
Taxation 7 (4,602) 4,331
Profit (loss) after tax 5,928 (11,360)
Dividends: Interim dividends paid - -
Proposed final dividend (1,020) -
Total Dividends (1,020) -
Retained profit (loss) for the year 4,908 (11,360)
Earnings (loss) per share (pence) - basic 8 3.77 (12.30)
Earnings (loss) per share (pence) - diluted 8 3.77 (12.30)
All income and expenditure relates to continuing operations.
Consolidated statement of total recognised gains and losses (unaudited)
for the year ended 31st December 2002
2002 2001
#'000 #' 000
Profit (Loss) for the financial year 5,928 (11,360)
Transfer of realised gain on unlisted security to profit and loss - (34)
account
Total recognised gains and losses arising in the year 5,928 (11,394)
Prior year adjustment (as explained in Note (7e)) 1,798
Total gains and losses recognised since last Annual Report 7,726
Reconciliation of movements in consolidated shareholders' funds (unaudited)
for the year ended 31st December 2002
Restated
2002 2001
#'000 #'000
Profit (loss) for the year 5,928 (11,360)
Dividend (1,020) -
4,908 (11,360)
Other recognised gains and losses relating to the year - (34)
New share capital subscribed 47,188 -
52,096 (11,394)
Opening shareholders' funds (originally #54,706,000
before adding prior year adjustment of #1,798,000)
56,504 67,898
Closing shareholders' funds 108,600 56,504
Consolidated balance sheet (unaudited)
as at 31st December 2002
Restated
2002 2001
Note #'000 #' 000
Assets
Intangible assets
Purchased Syndicate Capacity 9 11,348 12,066
Tangible assets and investments
Tangible fixed assets 4,740 3,699
Financial investments 10 233,841 121,912
Deposits with ceding undertakings 910 1,072
239,491 126,683
Reinsurers' share of technical provisions
Provision for unearned premiums 34,375 36,091
Reinsurance recoveries on outstanding claims 124,130 137,126
158,505 173,217
Debtors
Debtors arising out of direct insurance operations:
amounts owed by intermediaries 52,500 48,699
Debtors arising out of reinsurance operations:
amounts owed by intermediaries 95,995 69,244
Other debtors 19,787 19,470
168,282 137,413
Other assets
Cash at bank 37,626 51,390
Prepayments and accrued income
Accrued interest and rent 1,113 242
Deferred acquisition costs 27,215 21,599
Other prepayments and accrued income 5,685 11,645
34,013 33,486
Total Assets 649,265 534,255
Consolidated balance sheet (continued)
(unaudited)
as at 31st December 2002
Restated
2002 2001
#'000 #' 000
Liabilities
Capital and reserves
Called up share capital - ordinary 2,040 978
Share premium account 94,275 48,149
Profit and loss account (11,297) (16,205)
Other reserves 23,582 23,582
Shareholders' funds 108,600 56,504
Technical provisions
Provision for unearned premiums 125,498 116,418
Claims outstanding - gross amount 287,097 265,984
412,595 382,402
Provision for other risks and charges - 639
Creditors
Creditors arising out of direct business:
amounts owed to intermediaries 10,533 1,107
Creditors arising out of reinsurance business
amounts owed to intermediaries 106,846 79,216
Other creditors including tax and social security 10,691 14,387
128,070 94,710
Total Liabilities 649,265 534,255
Consolidated cash flow statement (unaudited)
for the year ended 31st December 2002
Year ended Year ended
31st 31st December
December 2001
2002
Note #'000 #'000
Net cash inflow from operating activities 11 56,854 77,081
Servicing of finance
Interest paid (112) (94)
Interest paid on finance leases (29) (6)
Net cash outflow from servicing of finance (141) (100)
Taxation 498 166
Capital expenditure and receipts
Purchase of tangible fixed assets (2,315) (3,623)
Sale of tangible fixed assets 91 250
Capital receipt -
Net cash outflow from capital expenditure (2,224) (3,373)
Acquisitions and disposals
Disposal of Burrage & Co. limited - 2,150
Disposal of syndicate capacity 213 529
Acquisitions of syndicate capacity (76) -
Net cash inflow (outflow) from acquisitions and 137 2,679
disposals
Equity dividends paid - (1,076)
Financing
(Decrease) increase in borrowings (663) 116
Issue of ordinary share capital 50,200 -
Expenses in connection with issuing share capital (3,012) -
Net cash inflow from financing 46,525 116
Cash available for investment 101,649 75,493
Cash flows were invested as follows:
Movement in cash holdings (13,349) 32,362
Net portfolio investment 12 114,998 43,131
Net investment of cash flows 101,649 75,493
Accounting policies
(a) Basis of presentation
The financial statements have been prepared in accordance with Section 255A of,
and Schedule 9A to, the Companies Act 1985, and with the Statement of
Recommended Practice on Accounting for Insurance Business issued by the
Association of British Insurers ("the ABI SORP") dated December 1998. The
balance sheet of the holding company has been prepared in accordance with
Section 226 of, and Schedule 4 to, the Companies Act 1985. A summary of the more
important accounting policies is set out below.
These financial statements have been prepared in accordance with the historical
cost convention modified by the revaluation of certain assets as required by the
SORP. No separate profit and loss account is presented for Kiln plc as permitted
by Section 230 of the Companies Act 1985. The financial statements include the
accounts of all Group companies, together with the Group's participation in
Lloyd's syndicates' assets, liabilities, revenues and expenses. The technical
account for all classes of business has been prepared on an annual accounting
basis.
(b) Changes in accounting polices and estimation techniques
Financial Reporting Standard 19 - Deferred tax, ("FRS19") has been adopted for
the first time in these financial statements. As a consequence full provision
has been made for deferred tax on tax assets and liabilities arising from timing
differences. Prior year figures have been restated accordingly and the effect of
this change is disclosed in Note 7(e).
The transitional disclosures required under FRS17 "Retirement Benefits" have
been presented in Note 6. These disclosures are presented in addition to the
requirements under the existing standard.
A change in the estimation methodology applying to outwards reinsurance premium
has been implemented in the current year. The outwards reinsurance premium which
operates on a "losses occurring during" basis has been separately identified and
its earning modified to more closely reflect the period of risk. The financial
effect is disclosed in Note 1 to the accounts.
(c) Premiums
Gross premiums written, which are stated gross of acquisition costs but
exclusive of premium taxes, relate to business incepted during the year,
together with any difference between booked premiums for prior years and those
previously accrued, and include estimates of premiums due but not yet receivable
or notified to the company by the intermediaries.
Unearned premiums relating to risks in future periods of account are estimated
on a daily pro-rata, or more appropriate, basis.
Outwards reinsurance premiums are accounted for with regard to the incidence of
risk of the premiums for the direct or inwards reinsurance business to which
they relate.
(d) Incurred claims and related reinsurance recoveries
Paid claims represent all claims paid during the year and include claims
handling expenses.
Provision is made at the year-end for the estimated cost of claims incurred but
not settled at the balance sheet date, including the cost of claims incurred but
not yet reported to the company. The estimated cost of claims includes expenses
to be incurred in settling claims and a deduction for the expected value of
salvage and other recoveries. The company takes all reasonable steps to ensure
that it has appropriate information regarding its claims exposures. However,
given the uncertainty in establishing claims provisions, it is likely that the
final outcome will prove to be different from the original liability
established.
The estimation of claims incurred but not reported ("IBNR") is generally subject
to a greater degree of uncertainty than the estimation of the cost of settling
claims already notified to the company, where more information about the claim
event is generally available. Claims IBNR may often not be apparent to the
insured until many years after the event giving rise to the claims has happened.
Classes of business where the IBNR proportion of the total reserve is high
will typically display greater variations between initial estimates and final
outcomes because of the greater degree of difficulty of estimating these
reserves. Classes of business where claims are typically reported relatively
quickly after the claim event tend to display lower levels of volatility. In
calculating the estimated cost of unpaid claims the company uses a variety of
estimation techniques, generally based upon statistical analyses of historical
experience, which assumes that the development pattern of the current claims
will be consistent with past experience. Allowance is made, however, for
changes or uncertainties which may create distortions in the underlying
statistics or which might cause the cost of unsettled claims to increase or
reduce when compared with the cost of previously settled claims including:
* changes in company processes which might accelerate or slow down the
development and/or recording of paid or incurred claims compared with the
statistics from previous periods
* changes in the legal environment
* the effects of inflation
* changes in the mix of business
* the impact of large losses
* movements in industry benchmark
A component of these estimation techniques is usually the estimation of the cost
of notified but not paid claims. In estimating the cost of these the company
has regard to the claim circumstance as reported, any information available from
loss adjusters and information on the cost of settling claims with similar
characteristics in previous periods.
Large claims impacting each relevant business class are generally assessed
separately, being measured on a case by case basis or projected separately in
order to allow for the possible distortive effect of the development and
incidence of these large claims.
Where possible the company adopts multiple techniques to estimate the required
level of provisions. This assists in giving greater understanding of the trends
inherent in the data being projected. The projections given by the various
methodologies also assists in setting the range of possible outcomes. The most
appropriate estimation technique is selected taking into account the
characteristics of the business class and the extent of the development of each
accident year.
Provisions are calculated gross of any reinsurance recoveries. A separate
estimate is made of the amounts that will be recoverable from reinsurers based
upon the gross provisions and having due regard to collectability.
International non-marine, International reinsurance, and Pecuniary loss business
These business areas are predominantly "short tail", that is there is not a
significant delay between the occurrence of the claim and the claim being
reported to the company. The costs of claims notified to the company at the
balance sheet date are estimated on a case by case basis to reflect the
individual circumstances of each claim. The ultimate expected cost of claims is
projected from this data by reference to statistics which show how estimates of
claims incurred in previous periods have developed over time to reflect changes
in the underlying estimates of the cost of notified claims and late
notifications.
Marine, Aviation, and Transport business
This business area has a mix of hull and cargo risks that are "short tail" in
nature, and liability risks which are longer tail. The methodology for
estimating the short tail element of the business is the same as described
above, and the method for assessing liability claims is set out below.
UK Motor business
The estimated cost of motor claims excluding the cost of personal injury claims
is calculated by reference to the projected number of claims, based on
statistics showing how the number of notified claims has been developed over
time, and the anticipated average cost per claim, based on historical levels
adjusted to allow for movements in the variables described above. The estimated
cost of the personal injury element of motor claims notified to the company at
the balance sheet date is assessed by detailed review of the individual
circumstances of each claim, with reference to recent settlements of claims
involving similar injuries and adjusted to allow for the variables described
above. Such estimated costs are treated by the company as outstanding claims.
The IBNR element of personal injury motor claims costs is estimated using the
same method as used for liability claims described below. In addition the
estimate is assessed in the context of the historical development of paid and
incurred claims and the implied loss ratios for each accident year.
Liability claims
Liability claims are longer tail than the classes of business described above
and so a larger element of the claims provision relates to IBNR claims. Claims
estimates for the company's liability business are derived from a combination of
loss ratio based estimates and an estimate based upon actual claims experience
using a predetermined formula whereby greater weight is given to actual claims
experience as time passes. The initial estimate of the loss ratio based on the
experience of previous years adjusted for factors such as premium rate changes
and claims inflation, and on the anticipated market experience, is an important
assumption in this estimation technique. The assessment of claims inflation and
anticipated market experience is particularly sensitive to the level of court
awards and to the development of legal precedent on matters of contract and
tort. This class of business is also subject to the emergence of new types of
latent claims but no allowance is included for this as at the balance sheet
date.
Reinsurance recoveries
Reinsurance recoveries in respect of estimated claims IBNR are assumed to be
consistent with the historical pattern of such recoveries, adjusted to reflect
changes in the nature and extent of the company's reinsurance programme over
time. An assessment is also made of the recoverability of reinsurance recoveries
having regard to market data on the financial strength of each of the
reinsurers.
(e) Life business
All life business represents term life insurance or reinsurance which has been
accounted for on an annual accounting basis similar to general business. Because
of the small size of the life portfolio and the amounts involved, it is included
with general business in the technical account.
(f) Deferred Acquisition Costs
Deferred acquisition costs, representing a proportion of commission and other
acquisition costs that relate to policies in force at the year end, are
amortised over the period in which related premiums are earned.
(g) Reinsurance to close (RITC)
Each syndicate underwriting account is normally closed at the end of the third
year by means of reinsurance into the following year, which reinsures all future
liabilities for the closed year and all previous years in return for a premium
calculated by the underwriter and approved by the managing agent. To the extent
that the Group increases its participation on a managed syndicate from one
Lloyd's year of account to the next, it is a net recipient of premium to
reinsure the earlier year of account into the latter. This share of the RITC
premium is recognised as income at the end of the financial period when the
related Lloyd's year of account closes and is represented in the balance sheet
by the related share of assets and liabilities transferred between the two
Lloyd's years of account of the managed syndicate.
Equitas Reinsurance Limited has reinsured each syndicate, except life Syndicate
308, against all known and unknown liabilities arising from insurance business
relating to 1992 and earlier years of account.
(h) Investment return
Investment return comprises interest and dividends receivable for the year
together with realised and unrealised investment gains and losses.
Investment return on all investments is reported in the non-technical account.
An allocation of net investment return is made from the non-technical account to
the technical account and is based on the longer-term rate of return applied to
managed syndicate funds and invested capital supporting the underwriting
business. The longer-term rate of return is an estimate of the long term trend
of investment performance taking into account the Group's past and current
performance along with relevant trends in the financial markets.
UK dividends are recorded on the date on which they are received and do not
include any imputed tax credit.
(i) Profit commissions
An accrual for profit commission receivable from managed syndicates is
recognised on a basis to reflect the earned element of the projected final
amount. Profit commissions are receivable when the relevant Lloyd's year of
account closes, normally after three years, and are received when the
syndicate's financial statements are despatched to the capital providers.
(j) Quota-share reinsurance contract
Kiln Underwriting Limited (KUL) from the 2000 underwriting year of account has
in place a number of whole account quota-share reinsurance agreements. The
reinsurers participate in their share of the net underwriting results arising
from KUL's participation in one or more syndicates. Other key aspects of the
agreement are that KUL receives a fee based on underwriting capacity and profit
commission where the reinsurer participates in a profit on the business written.
Amounts payable or receivable are settled upon the closure of the underwriting
year.
The fee based income is recognised on the same basis that the underlying gross
premium is earned, and the underwriting element is recognised in accordance with
the earning of the underwriting profit or loss. Profit commission is recognised
when a reliable estimate of underlying profit can be made.
As the arrangement is that of a profit participation settled by a single payment
the accrued amount is recognised as a net figure within operating expenses in
the technical account.
(k) Investments
Investments in marketable securities are stated at their mid-market value at the
balance sheet date.
(l) Intangible assets
Intangible assets, being purchased syndicate capacity, are stated at historical
cost less any amortisation charges. Purchased syndicate capacity is amortised
over a twenty year period, being its useful economic life, on a straight line
basis commencing from the underwriting year to which the purchased capacity
relates.
(m) Tangible fixed assets
Tangible fixed assets are stated at cost less accumulated depreciation. They are
depreciated on a straight-line method over the expected useful lives of each
category of asset as follows:
Computers 3 years
Office furniture and equipment 4 years
(n) Pension costs
The costs of providing pensions are determined on the basis of independent
actuarial advice and are charged to the profit and loss account evenly over the
expected service lives of participating employees. Certain non-contractual
payments may be made relating to particular employees and are charged to the
profit and loss account as paid.
The funding policy follows the accounting policy except where an actuarial
valuation indicates a deficiency or surplus. Such surpluses or deficiencies are,
for funding purposes, dealt with as advised by the actuary.
(o) Foreign currency translations
Monetary assets and liabilities are translated into sterling at the exchange
rates prevailing at the balance sheet date. Income and expenses transactions are
translated using the rates prevailing at the date of transaction or appropriate
average rates except for syndicate US and Canadian dollar transactions, which
are translated at year end exchange rates used for syndicate accounts purposes.
Gains or losses arising on translation are included in the technical account.
(p) Deferred taxation
Deferred tax is recognised in respect of all timing differences that have
originated but not reversed at the balance sheet date where transactions or
events that result in an obligation to pay more tax in the future or a right to
pay less tax in the future have occurred at the balance sheet date. Timing
differences are differences between the Group's taxable profits and its results
as stated in the financial statement.
Deferred tax is measured at the average tax rates that are expected to apply in
the periods in which the timing differences are expect to reverse, based on tax
rates and laws that have been enacted or substantially enacted by the balance
sheet date.
Deferred tax is measured on a non-discounted basis. Deferred tax assets are
recognised to the extent that it is more likely than not that they will be
recovered.
(q) Assets held as agent
The Group acts as an agent in placing the insurable risks as defined in the
terms of the binding authority agreements granted to them and, as such, are not
liable as principals for amounts arising from such transactions. Notwithstanding
this legal relationship, cash, debtors, and creditors arising from insurance
transactions are shown as assets and liabilities.
Notes to the financial statements
1 Analysis of underwriting result before investment return
Year ended 31st December 2002
Gross Gross Gross claims Gross
premiums premiums incurred operating
written earned expenses Reinsurance Underwriting
balance result
#'000 #'000 #'000 #'000 #'000 #'000
Accident & health 26,593 26,699 (11,359) (10,365) (3,281) 1,694
Fire & other damage to 105,475 97,273 (44,578) (32,060) (12,554) 8,081
property
Other international 19,965 20,541 (15,694) (6,500) 1,235 (418)
non-marine
International non-marine 152,033 144,513 (71,631) (48,925) (14,600) 9,357
International reinsurance 49,065 43,683 (9,373) (11,031) (20,042) 3,237
Marine, Aviation & Transport 48,601 41,937 (23,680) (14,413) (6,975) (3,131)
UK Motor 1,760 10,245 (9,847) (1,762) 827 (537)
Pecuniary loss 7,564 9,660 (6,114) (1,784) (203) 1,559
Life 1,788 1,692 (240) (943) (326) 183
Reinsurance to close 7,747 7,747 (13,501) - 5,754 -
Total 268,558 259,477 (134,386) (78,858) (35,565) 10,668
All gross premiums have been underwritten in the Lloyd's of London insurance
market or in the United Kingdom. Where reinsurance inwards business has the
characteristics of primary business it is included with that primary business.
The financial effect of the change of estimation technique for earning outwards
reinsurance premium set out in accounting policy (b) has been to reduce the
technical result in the current year by #2.4 million.
Year ended 31st December 2001
Gross Gross Gross claims Gross Reinsurance Underwriting
premiums premiums incurred operating balance
written earned expenses result
#'000 #'000 #'000 #'000 #'000 #'000
Accident & health 28,144 30,969 (26,477) (9,498) 4,191 (815)
Fire & other damage to property 98,231 75,135 (50,218) (22,700) 7,199 9,416
Other international non-marine 21,654 18,076 (16,069) (4,636) 3,757 1,128
International non-marine 148,029 124,180 (92,764) (36,834) 15,147 9,729
International reinsurance 47,135 45,599 (88,327) (1,003) 22,898 (20,833)
Marine, Aviation & Transport 29,186 21,936 (43,961) (2,931) 21,635 (3,321)
UK Motor 22,852 22,071 (15,566) (6,832) (1,542) (1,869)
Pecuniary loss 10,690 9,180 (6,022) (2,217) (215) 726
Life 2,156 1,997 (1,282) (533) (323) (141)
Reinsurance to close 15,540 15,540 (21,114) - 5,574 -
Total 275,588 240,503 (269,036) (50,350) 63,174 (15,709)
2 US Terror Attacks of 11th September 2001
a) Loss estimate
The terrorist attacks of 11th September 2001 in the United States have resulted
in a number of claims being made against the group as a result of insurance and
reinsurance policies. The current estimate of the gross loss to the group is
approximately #101.2 million at year end rates of exchange. The current estimate
of the net loss after reinsurance recoveries and reinstatement premiums to
reinstate cover for future losses is approximately #16.8 million (2001 - #18.1
million). The reduction during 2002 comprises a gain due to movements in the US
dollar exchange rate offset by a deterioration of #0.4 million on the underlying
US dollar estimate. This claim is unprecedented in the insurance industry and as
such the extent of the gross and net loss to the company is difficult to
estimate with the degree of confidence which is usual for insurance losses.
b) Exposure analysis
Some 71 per cent of the Group's gross exposure emanates from its international
reinsurance account and 24 per cent from the aviation account, part of the
Marine, Aviation, and Transport account. The balance of the loss is spread over
the remainder of the Group's non-marine business lines.
Of the Group's gross loss 76 per cent arises from the participation in Syndicate
510, 15 per cent from the participation in Syndicate 557, and 9 per cent from
the participation in Syndicate 807.
c) Assumptions
For the purpose of calculating the amount of the Group's anticipated losses from
the US terror attacks, the directors have used the following assumptions:
* There will be no UK/US Government financial support or intervention
benefiting the Group;
* All reinsurance recoveries will be collected in full with the exception of
the recoveries from certain companies whose ability to pay is currently
considered by the Kiln Group to be doubtful;
* No subrogation recoveries will be made by the Group;
* War exclusions contained in insurance and reinsurance policies will not
apply; and
* For the purpose of estimating losses and potential reinsurance recoveries,
the losses arising from the attack on the World Trade Center constitute
(other than the aircraft hulls and liabilities losses) a single event.
d) Methodology
The Group adopted the following methodology in analysing its exposures:
* Classes of business which had potential exposure to losses arising out of
the US terror attacks were identified and, where appropriate, reviewed on a
risk by risk basis;
* Exposures which were either not considered by the Directors to be material
or did not relate to the US terror attacks were not analysed on a risk by
risk basis;
* An estimate of the gross loss was established for each relevant risk using
information from placing brokers combined with the Group's own judgement;
* On the inwards reinsurance account an estimate of the applicable inward
reinstatement premium was also established based upon each estimated inwards
claim;
* Reinsurance protections were then reviewed in order to calculate the
anticipated reinsurance recoveries and outwards reinstatement premiums. Due
regard was taken of co-insurance, coverage restrictions and previous
reinsurance erosion from earlier events and the possibility that reinsurance
recoveries may not be collected in full from all reinsurers.
e) Loss alternatives considered
Establishing loss estimates on individual risks involves judgement, and it
remains uncertain whether and to what extent parties such as airport operators
and contractors may be held liable for negligence. In view of this uncertainty
we have also calculated the effect of assuming that such parties are held liable
even where the potential for liability is felt to be remote. Making such an
assumption would not, when taken in isolation, have a material effect on our net
loss estimates.
f) Number of occurrences
Should the attack be determined to constitute more than one occurrence or event
then the Group's exposure to gross and net losses could change, since claims may
be reformulated in respect of each occurrence or event. In view of this
possibility the Group has also endeavoured to estimate the effect of such a
determination and has considered scenarios in which the determination affects
only direct insurance, or direct insurance and reinsurance, or all tiers
including retrocession. Whichever scenario is adopted the effect on the Group's
overall estimated net loss is not considered, when taken in isolation, to be
material.
g) Gross Paid and Incurred as at 31st December 2002
Of our total projected gross loss of #101.2 million, approximately 26 per cent
has been paid and a further 54 per cent is held as noted outstandings.
h) Reinsurance
95 per cent of the Group's unsecured reinsurance recoveries (i.e. not yet
received or not collateralised by cash or letter of credit) are with
counterparties which are rated A grade or better by international rating
agencies. A specific provision for bad debts of approximately #0.95 million has
been made by the Group in relation to the US terrorism losses.
3 Investment return
In calculating the longer-term investment return the following rates of return
have been applied.
2002 2001
Equities 7.0% 8.0%
Fixed interest securities - corporate investments 5.0% 6.0%
Fixed interest securities - managed syndicates 5.0% 5.5%
The operating result represents the profit/(loss) before tax and exceptional
items that would be achieved using the longer-term investment return.
2002 2002 2001 2001
Actual Longer-term Actual Longer-term
rate rate
#' 000 #' 000 #' 000 #' 000
Syndicate investments and cash 6,604 8,267 5,019 4,403
Funds at Lloyd's : Equities (4,364) 1,240 (3,523) 1,877
1,641 973 1,099 1,162
Fixed interest
Total technical account 3,881 10,480 2,595 7,442
Corporate equities (excluding trade investments) (399) 178 (172) 277
3,482 10,658 2,423 7,719
Short-term fluctuation in investment return (7,176) (5,296)
The actual return on investments attributable to general business for the 5 year
period 1st January 1998 to 31st December 2002 is compared below with the
aggregate longer-term return over the same period.
1998-2002
#'000
Longer-term investment return 31,956
Actual investment return 24,284
Effect of short-term fluctuations over the period (7,672)
4 Net operating expenses - technical account
2002 2001
#'000 #'000
Acquisition costs 53,581 47,666
Changes in deferred acquisition costs (3,121) (573)
Administrative expenses 9,966 8,571
Quota-share net payable (recoverable) 6,100 (5,314)
Total 66,526 50,350
5 Other income and other expenses - non-technical account
2002 2002 2001 2001
Other Other Other Other
expenses expenses
income income
#'000 #'000
#'000 #'000
Agency fees received from non-group participants 2,439 - 1,241 -
Profit commission: movement in provisions for amounts
receivable from non-group syndicate participants and for
commission distributable to staff 466 210 512 229
Expenses recharged to non-group participants 13,018 13,018 11,271 11,271
Turnover in units held in managed unit trust - - 76 76
Income and associated costs in respect of service provision - - 937 899
to third parties
Corporate administration costs - 4,858 - 3,665
Profit related remuneration - 1,941 - -
Other income 1,480 - 446 -
Amortisation of syndicate capacity - 693 - 820
Total 17,403 20,720 14,483 16,960
6 Pension arrangements
The company provides pensions for its eligible employees through the R J Kiln &
Co Limited Pension and Assurance Scheme ("the Scheme"). The assets of the scheme
are held in a separate trustee-administered fund.
(a) The Scheme is a defined benefit (final salary) funded pension scheme with a
new defined contribution (money purchase) section (introduced with effect from
19th January 2001 for new employees). The final salary scheme will be closed to
all members with effect from 1st May 2003 and all employees will have access to
a money purchase scheme.
(b) A full actuarial valuation on the final salary scheme was carried out at 1st
May 2001 and updated to 31st December 2002 by C Gemmell, FFA of HSBC Actuaries
and Consultants Limited. The liability amount has been estimated using
approximate actuarial techniques and major assumptions as set out below:
At 31st December At 31st December
2002 2001
(per annum) (per annum)
Rate of increases in salaries 5.0% 5.0%
Rate of increase of pensions in payment
-benefits accrued prior to 1st May 1999: 5.0% 5.0%
-benefits accrued after 1st May 1999: 2.5% 3.0%
Rate of revaluation of deferred pensions in excess of GMP 5.0% 5.0%
Discount rate 5.5% 6.0%
Inflation assumption 2.5% 3.0%
(c) The Final Salary (defined benefit) section part provides benefits on the
basis of one forty-fifth of final salary for each year of pensionable
employment. The funding rate is 35.0 per cent. Certain members of the scheme
have been guaranteed a two-thirds pension at normal retirement date, although
their length of service will be less than that normally required to produce that
level of pension: this has resulted in some additional funding for these
members.
Like other UK pension schemes, the deficit under FRS17 has increased
significantly over the last year through the combined effect of the reduction in
corporate bond yields, which have inflated liabilities, and the reduction in
equity markets, where the majority of scheme assets are held. The FRS17 deficit
is not only highly volatile but also significantly larger than the deficit
calculated by the Scheme Actuary when advising the Trustees, due to the more
conservative nature of the prescribed FRS17 assumptions.
In the light of the FRS17 situation, the following steps have been taken:
* The Company has announced the closure of the final salary scheme to all
existing staff and, from 1st May 2003, will be contributing to a money
purchase arrangement. This means that, in respect of future pension
accrual, the investment risk has been passed from the Company to members,
thereby containing the FRS17 issue.
* The investment strategy of the final salary scheme has been given detailed
consideration and is being adjusted to help reduce volatility relative to
FRS17, while retaining opportunities for recovering markets to help improve
the FRS17 position.
* The Group is intending to make contributions of #750,000 per annum to help
improve scheme funding. This level will be reviewed annually.
The funding rate for the new Money Purchase (defined contribution) section is 15
per cent, and for employees currently in the final salary scheme the funding
rate will be between 15 per cent and 30 per cent.
Pension funding in the defined benefit scheme is allocated by charging the
funding percentage to the divisions for which relevant staff work. Within this
recharge approximately 80 per cent of the Group's 2003 staff costs will be
recharged to managed syndicates, and Kiln Group bears a proportion of this cost
through the capacity it owns.
In addition to the final salary section and new money purchase section of the
Scheme, the company also contributes to a number of individual benefit plans; in
particular, a FURBS on behalf of Edward Creasy and various Personal Pension
Plans and Executive Pension Plans for a number of other employees.
Employer contributions made in respect of the accounting period amounted to:
2002 2001
# #
Final Salary Scheme 1,636,000 2,220,000
Money Purchase Scheme 113,000 19,000
FURBS on behalf of Edward Creasy 24,667 21,920
Other personal pension plans 169,706 114,789
Total 1,943,373 2,375,709
The Final Salary Scheme was closed to new entrants with effect from 19th January
2001. Accordingly, over time, it is expected that the overall age profile of
the active membership will rise and the current service cost calculated under
the Projected Unit method will increase. The Money Purchase Scheme is open to
new entrants.
(d) Asset value in the Final Salary Scheme
Long-term rate of Value at Long-term rate of Value at
return expected at return expected at
31st December 2002 31st December 2001
31st December 2002 31st December 2001
Equities 7.5% p.a. #16,205,000 7.5% p.a. #23,188,000
Property 7.0% p.a. #650,000 7.0% p.a. #650,000
Bonds 5.0% p.a. #13,488,000 5.5% p.a. #13,587,000
Cash 4.0% p.a. #1,355,000 3.0% p.a. #1,694,000
Total market value of assets
#31,698,000 #39,119,000
The following amounts at 31st December 2001 and 31st December 2002 were measured
in accordance with the requirements of FRS17.
Deficit in Final Salary Scheme Value at Value at
31st December 2002 31st December 2001
Total market value of assets #31,698,000 #39,100,000
Present value of Scheme liabilities #59,146,000 #54,300,000
Surplus (deficit) in the Scheme (#27,448,000) (#15,200,000)
Related deferred tax asset #8,234,400 #4,600,000
Net pension asset (liability) (#19,213,600) (#10,600,000)
(e) On full implementation of FRS17 the following amounts would have been
recognised in the performance statements in the year ended 31st December 2002:
Analysis of the amount charged to operating profit #'000
Employer's current service cost 1,570
Past service cost recognition 0
Total Operating charge 1,570
Analysis of the amount credited to other finance income #'000
Expected return on pension scheme assets 2,480
Interest on pension scheme liabilities (3,163)
Net return (683)
Analysis of the amount recognised in STRGL #'000
Actual return less expected return on scheme assets (6,787)
Experience gain (loss) arising on the scheme's liabilities 615
Changes in assumptions underlying the present value of scheme liabilities (5,478)
Actuarial gain (loss) recognised in STRGL (11,650)
Reconciliation of Surplus (deficit) #'000
Surplus (deficit) in scheme at beginning of the (15,181)
year
Movement in the year:
Current service cost (1,570)
Contributions 1,636
Past service costs --
Other finance income (683)
Actuarial gain (loss) (11,650)
Surplus (Deficit) in scheme at end of the year (27,448)
History of experience gains and losses #'000
Difference between the expected and actual
return on scheme assets:
Amount (6,787)
percentage of scheme assets (21%)
Experience gain (loss) on scheme liabilities:
Amount 615
percentage of present value of the scheme 1%
liabilities
Total amount recognised in STRGL:
Amount (11,650)
percentage of present value of the scheme (20%)
liabilities
Projected Pension expense for next year
31st December 2003
Analysis of the amount charged to operating profit #'000
Current service cost 520
Past service cost --
Total operating charge 520
Analysis of the amount credited to other finance income #'000
Expected return on pension scheme assets 1,991
Interest on pension scheme liabilities (3,253)
Net Return (1,262)
Note: Pension expense may change by the year end to take account of events
during the year (eg benefit improvements, settlements, curtailments) not
incorporated into the calculations
The following amounts would have been shown in the balance sheet on the full
implementation of FRS17:
2002 2001
Net assets #'000 #'000
Net assets excluding pension liability 108,600 56,504
Pension liability (19,214) (10,600)
Net assets including pension liability 89,386 45,904
Reserves #'000 #'000
Profit and loss reserve excluding pension liability (11,297) (16,205)
Pension reserve (19,214) (10,600)
Profit and loss reserve including pension liability (30,511) (26,805)
7 Taxation
(a) Tax on profit on ordinary activities Group Company Group Company
2002 2002 2001 2001
UK corporation tax on taxable result at 30% (2001:30%) #'000 #'000 #'000 #'000
Current Tax:
UK Corporation tax on profits of the period - (500) 237 247
Adjustments in respect of previous periods 191 (45) 4 14
Total current tax (note b) 191 (545) 241 261
Deferred Tax:
Origination and reversal of timing differences 4,411 (388) (4,572) 10
Total Deferred tax (note d) 4,411 (388) (4,572) 10
Tax on profit on ordinary activities 4,602 (933) (4,331) 271
(b) Factors affecting tax charge for period
Profit on ordinary activities before tax 10,530 (3,450) (15,691) 1,364
Profit on ordinary activities multiplied by standard rate of 3,159 (1,035) (4,707) 409
Corporation tax in the UK of 30% (2001:30%)
Effects of:
Expenses permanently disallowable 183 16 365 30
Expenses allowable for tax in future periods 388 388 - -
UK Dividend income not taxable (120) (15) (274) (161)
Realised and unrealised losses on equities not currently 1,467 146 786 87
relievable
Disposal adjustments - - (110) (33)
Movement on accelerated capital allowances (87) - (124) -
Movement on underwriting results taxed in future periods (4,990) - 4,386 -
Brought forward losses now relieved - - (85) (85)
Adjust in respect of previous periods 191 (45) 4 14
Current tax charge for period (note a) 191 (545) 241 261
(c) Factors that may affect future tax charge
Underwriting profits earned in the Group's underwriting subsidiary are taxed on
receipt from Lloyd's under the reinsurance to close process and it is expected
that no tax on revenue will become payable on profits until receipt of the 2002
year of account profit in 2005.
Significant tax losses are also held on the tax capital account in respect of
losses on disposal of equities. These losses are only relievable against profits
from other items on the tax capital account and consequently no deferred tax
asset has been recognised. It is our intention to monitor the equity markets
with a view to reinvestment when the outlook is more positive.
(d) Deferred tax asset
2002 2001
#'000 #'000
Underwriting results and profit commission taxed in future periods (1,744) 5,884
Tax losses carried forward 2,110 -
Accelerated capital allowances (139) (107)
Expenses relieved in future period 388 -
Unrealised losses less gains - (120)
615 5,657
(e) Effect of implementation of FRS 19 - Deferred tax
Incorporating FRS 19 has the effect of increasing deferred tax assets recognised
by #1,798,000 at December 2001 in relation to underwriting losses taxable in
future periods and this has been accounted for as a prior year adjustment. There
was no effect in the taxation charge in the profit and loss account.
8 Earnings per ordinary share
Basic earnings per ordinary share has been calculated by dividing the profit
after taxation of #5,928,000 by 157,053,793 the weighted average number of
shares in issue. Diluted earnings per share has been calculated on the same
basis. Share options outstanding have no dilutive impact because the market
value of the company's shares has not met the performance conditions to enable
their exercise.
9 Intangible assets
Syndicate capacity Cost Amortisation Net Book Value
#'000 #'000 #'000
At 1st January 2002 13,856 (1,790) 12,066
Acquisitions 76 -
Disposals at cost and amortisation (123) 22
Amortisation in year - (693)
At 31st December 2002 13,809 (2,461) 11,348
The above figures relate to the Group. The company did not own any intangible
assets for the years ended 31st December 2002 or 31st December 2001.
10 Financial investments
2002 2002 2001 2001
Group Company Group Company
#'000 #'000 #'000 #'000
Shares and other variable-yield securities and units in 22,488 1,770 36,020 2,545
unit trusts
Debt securities and other fixed income securities 155,826 - 52,010 -
Cash, money markets, and short-term deposits held within 55,340 568 33,440 276
investment funds
Unlisted investments 187 417 442 417
Market value at 31st December 233,841 2,755 121,912 3,238
Cost at 31st December 235,613 2,967 126,783 2,897
All investments are listed on recognised securities exchanges around the world
or represent balances with credit institutions apart from the unlisted
investments. The directors of the company believe that these unlisted
investments, which are stated at cost, have not suffered any permanent
diminution in value.
Group financial investments include corporate investments held by Group
companies and the Group's share of syndicate assets. The corporate investments
can be further analysed between Funds at Lloyd's and other investments.
2002 Corporate Syndicate
investments investments
Total
Funds at Other
Lloyd's
#'000
#'000 #'000 #'000
Shares and other variable-yield securities and units in unit 22,488 11,470 1,769 9,249
trusts
Debt securities and other fixed income securities 155,826 19,683 - 136,143
Cash, money markets, and short-term deposits held within 55,340 42,540 568 12,232
investment funds
Unlisted investments 187 - 187 -
Market value at 31st December 233,841 73,693 2,524 157,624
2001 Corporate Syndicate
investments investments
Total
Funds at Other
Lloyd's
#'000
#'000 #'000 #'000
Shares and other variable-yield securities and units in unit
trusts
36,020 19,979 2,545 13,496
Debt securities and other fixed income securities 52,010 19,858 - 32,152
Cash, money markets, and short-term deposits held within 33,440 3,835 275 29,330
investment funds
Unlisted investments 442 - 442 -
Market value at 31st December 121,912 43,672 3,262 74,978
11 Reconciliation of operating profit to net cash inflow from operating
activities
2002 2001
#'000 #'000
Net profit (loss) before taxation 10,530 (15,691)
Depreciation charge including profit on sale of fixed asset 1,763 1,717
Interest on borrowings 141 100
Unrealised loss on investments 3,069 1,521
Change in debtors less creditors 41,351 89,434
56,854 77,081
12 Movement in opening and closing portfolio investment net of financing
2002 2001
#'000 #'000
Net cash inflow / (outflow) for the financial period 115,184 44,242
Increase / (decrease) in net portfolio investments (186) (1,111)
Movement arising from cash flows 114,998 43,131
Changes in market values (3,069) (1,521)
Total movement in portfolio investments net of financing 111,929 41,610
Portfolio investments net of financing at the beginning of the period 121,912 80,302
Portfolio investments net of financing at the end of the period 233,841 121,912
Analysis of Portfolio investments net of financing
2002 2001
#'000 #'000
Listed equities and fixed income investments 178,314 117,360
Cash, deposits, and money market investments 55,340 4,110
Unlisted investments 187 442
233,841 121,912
13 Post Balance Sheet Event
The entire equity portfolio held has been disposed of in March 2003. The
decision to dispose of the equity portfolio was taken by the board due to our
current negative view on the equity market.
A loss of #772,000 will be recognised in 2003 in respect of this disposal.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR UOVAROSRSUUR
