Final Results - Year Ended 31 Dec 1999, Part 2

Amlin PLC 18 May 2000 Part 2 Notes to the Preliminary Results for the year ended 31 December 1999 1. Basis of preparation and consolidation The preliminary announcement, which does not constitute statutory accounts, has been prepared in accordance with 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'). Details of changes in accounting policies and prior period adjustments are set out in note 3. 2. Principal accounting policies a. 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 principally 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 the gross premium written, and reinsurers' share of premiums written, which is estimated to be earned in the following or subsequent 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 over 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 outstanding claims and settlement expenses, including claims incurred but not reported. Outward reinsurance recoveries are accounted for in the same accounting period as the claims for the related direct or inwards reinsurance business being reinsured. 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. Provision for claims outstanding are based on information available to the directors and the eventual outcome may vary from the original assessment. Unexpired risk 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. b. Non-aligned syndicate participations The group's non-aligned syndicate participations, which are presented as a discontinued operation, are reported on a three year accounting basis: Premiums Written premiums comprise premiums estimated to be receivable in respect of contracts commencing in the financial year. Premiums are disclosed gross of brokerage payable and exclude taxes and duties levied on them. Estimates are made for 'pipeline' premiums due to the Group but not yet notified and adjustments 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 except in relation to excess of loss contracts, where the initial premium is charged when paid. Claims Claims incurred comprise claims and claims handling expenses paid during the financial year together with the movement in the provision for outstanding claims and settlement expenses, including claims incurred but not reported. The excess of premiums written and syndicate investment income over the claims and syndicate expenses paid in respect of business incepting in an underwriting year, is carried forward for two years in a fund and no profit is recognised until the end of the third year following the start of each underwriting year, when the account is normally closed. The fund is included in 'claims outstanding' Open year loss provisions Provision is also made for losses on each open year of account for each corporate member subsidiary when it is considered that profits in the same corporate member may be insufficient to meet these losses. In addition, provision is made for the estimated future deterioration of any year of account of any syndicate that has gone into 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, which are reflected in the financial statements for the period in which the related adjustments are made. c. Other principal accounting policies Exchange rates Income and expenditure in US dollars or 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 or 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. Investment return All dividends and any related tax credits are recognised as income on the date the related listed investments are marked ex-dividend. Other investment income, interest receivable, expenses and interest payable are recognised on an accruals basis. Realised gains or losses are calculated as the difference between the net sales proceeds and their purchase price in the financial year or their valuation at the commencement of the year. Unrealised gains and losses are calculated as the difference between the valuation of investments at the balance sheet date and their purchase price in the financial year or valuation at the commencement of the year. Allocation of investment return All of the investment return arising in the year is reported initially in the non-technical account. In accordance with the ABI 'SORP', a transfer is made from the non-technical account to the technical account representing: for the aligned syndicate participations, the longer term investment return on investments supporting the technical provisions and related shareholders' funds. The longer term investment return is an estimate of the expected return over time for each relevant category of investments having regard to past performance, current trends and future expectations; and for the non-aligned syndicate participations, the actual return on investments supporting the technical provisions and related shareholders' funds. Intangible fixed assets Goodwill on transactions completed prior to 31 May 1998 has been written off to reserves and has not been reinstated. Goodwill arising since 1 June 1998 is amortised and written off over its useful economic life. On the subsequent disposal of the underlying investment, any goodwill not yet amortised is taken to the profit and loss account when calculating the profit or loss on disposal. 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 twenty years beginning in the underwriting year in which the purchased syndicate participation commences. 3. Changes in accounting policy and prior period adjustments a) Annual accounting The financial statements for the seven months ended 31 December 1998 were prepared on the three year accounting basis under which underwriting results are recognised at the end of the third year of the Lloyd's three year accounting cycle. The financial statements for the year ended 31 December 1999 have adopted annual accounting for reporting the Group's results for its aligned syndicate participations. The results for the seven months ended 31 December 1998 have been restated onto this basis. The results of the Group's share of the non-aligned syndicates continue to be reported on a three year accounting basis because the information necessary to convert to annual accounting is not available to the Group. Annual accounting will help to focus attention on the current trading conditions in which the Group operates and facilitates comparison with the Group's competitors in the broader insurance industry where the use of annual accounting is standard practice. The principal differences between annual accounting and three year accounting concern the timing of the recognition of underwriting results of a particular year of account. b) Investment return The investment return arising in the year is reported initially in the non- technical account. In accordance with the ABI 'SORP', a transfer is made from the non-technical account to the technical account to reflect the longer term investment return on investments supporting the technical provisions and related shareholders' funds on the aligned syndicate participations. The longer term investment return is an estimate of the long term trend investment return for the relevant category of investments having regard to past performance, current trends and future expectations. The effect of this basis of presentation is that operating profit includes an investment return that is based on assumed longer term rates of return rather than actual returns, thus smoothing out the volatility arising from fluctuations in the market value of the investment portfolio. At the profit before tax level, an adjustment is made to bring actual investment return into the results. For non-aligned syndicate participations, the transfer from the non-technical account to the technical account represents the actual investment return arising in the period. The use of a longer term return is inappropriate for this discontinued activity. c) Foreign exchange Income and expenditure accounted for in either US dollars or Canadian dollars is translated at average rates of exchange for the period rather than the previous policy of period end exchange rates. Underwriting transactions denominated in other foreign currencies continue to be included at the historical converted sterling rates. The use of average rates is considered to better reflect the impact of US and Canadian dollar activity and reduces the effect of short term currency fluctuations that may occur close to a period end. Syndicate assets and liabilities, expressed in either US dollars or Canadian dollars continue to be translated into sterling at the rates of exchange at the balance sheet date. The effect on the results of this change in accounting policy is not material and therefore no restatement is presented. The net effect of the other changes in accounting policy on the technical account and on the profit and loss reserves brought forward on 1 January 1999 are set out below: d) Annual accounting and investment return The group's share of the technical results of aligned syndicates are presented for the first time on an annual basis under which insurance profits are recognised as they are earned instead of at the point of release of the underwriting profit on the closure of each Lloyd's year of account, normally, after three years. Seven months underwriting activity for aligned syndicates is included in the 1998 comparatives in place of the twelve months' figures that were previously reported. Allocated investment return is included in the technical account Prior year comparatives have been restated, and a reconciliation between the balance on the technical account, for aligned syndicates, as reported in the preliminary results and under the previous period's accounting policies is as follows: The effect on the technical account is as Year 7 months follows: ended to 31 31 December December 1999 1998 £m £m Balance on technical account under previous 1.8 0.7 accounting policies Annual accounting adjustments: 1997 (1996) year of account profit recognised 1.3 (0.2) in earlier periods 1998 (1997) year of account profit recognised 0.7 1.4 in the period 1999 (1998) year of account costs recognised (13.5) (15.4) in the period Adjustment to seven months result basis - 5.6 Effect of investment smoothing 12.1 3.5 Balance on the technical account for 2.4 (4.4) continuing operations The reconciliation of prior year reserves is as follows: £m Profit and loss account as previously reported at 76.3 1 January 1999 Annual accounting underwriting losses in prior periods (16.6) not previously recognised Adjustment for loss provisions previously 4.5 recognised Tax effect of the restatements 2.6 At 1 January 1999 as restated 66.8 4. Analysis of continuing and discontinued operations Discontinued operations The results of discontinued operations are reported separately Technical account During 1999, the group disposed of its remaining participations on non-aligned syndicates. The results deriving from this activity are disclosed as discontinued operations. Non-technical account The results of subsidiary undertakings disposed of in the year are included up to the date of disposal. Discontinued operations represent the results of Whittington Group Limited and Amlin Capital Management Limited which were sold on 4 November 1999; and the results of the group's Members Agency companies, principally Amlin Private Capital Limited , Murray Lawrence Members Agency Limited, BMA Members Agency Limited and Murray Lawrence (Underwriting Agents) Limited. In 1999, the Board agreed to dispose of these businesses and the sale was completed on 6 March 2000. 7 months 31 December 1998 1999 (Restated) Continuing Discontinued Total Continuing Discontinued Total operations operations operations operations £m £m £m £m £m £m Technical Account Gross premiums 161.4 91.4 252.8 52.7 170.3 223.0 written Outward (34.6) (22.7) (57.3) (12.0) (35.2) (47.2) reinsurance premiums Net premiums 126.8 68.7 195.5 40.7 135.1 175.8 written Change in the provision for unearned premiums - gross amount (22.8) - (22.8) (12.3) - (12.3) - reinsurers' 2.4 - 2.4 1.1 - 1.1 share Earned premiums, net 106.4 68.7 175.1 29.5 135.1 164.6 of reinsurance Allocated investment return transferred from the non-technical account 14.8 9.9 24.7 4.5 13.3 17.8 Claims paid - gross amount (69.1) (85.4) (154.5) (13.3) (86.8) (100.1) - reinsurers' 16.9 31.6 48.5 2.6 28.4 31.0 share Change in the provision for claims - gross amount (48.1) (38.6) (86.7) (24.0) (99.9) (123.9) - reinsurers' 21.2 25.5 46.7 8.7 56.3 65.0 share Claims incurred, net (79.1) (66.9) (146.0) (26.0) (102.0) (128.0) of reinsurance Net (39.7) (12.8) (52.5) (12.4) (33.5) (45.9) operating expenses Balance on the technical account for 2.4 (1.1) 1.3 (4.4) 12.9 8.5 general business 4. Analysis of continuing and discontinued operations - continued 7 months to 31 December 1998 1999 (Restated) Continuing Discontinued Total Continuing Discontinued Total Operations Operations Operations Operations Notes £m £m £m £m £m £m Non-technical account Balance 2.4 (1.1) 1.3 (4.4) 12.9 8.5 on the technical account for general business Investment 16.5 10.1 26.6 6.2 13.6 19.8 Income Unrealised 10.8 - 10.8 0.3 - 0.3 investment gains Investment (1.4) (0.2) (1.6) (1.4) (0.3) (1.7) expenses and charges Allocated investment return transferred to the Technical (14.8) (9.9) (24.7) (4.5) (13.3) (17.8) account 13.5 (1.1) 12.4 (3.8) 12.9 9.1 Other 5.8 24.2 30.0 10.4 20.7 31.1 income Other (9.9) (17.8) (27.7) (8.8) (18.2) (27.0) charges Operating profit 9.4 5.3 14.7 (2.2) 15.4 13.2 Comprising: Operating 7.2 5.3 12.5 (3.1) 15.4 12.3 profit based on longer term investment return Short term fluctuations 2.2 - 2.2 0.9 - 0.9 in investment return Profit on sale of 5.0 8.7 syndicate participations Loss on sale of (1.4) - subsidiary undertakings Merger costs - (3.9) Profit on ordinary 18.3 18.0 activities before taxation 5. Investment performance The investment return on the Group's corporate and syndicate investment portfolio is included in the non-technical account. For aligned syndicates, an amount equivalent to the longer term investment return which is expected to be realised on both the Funds at Lloyd's (i.e. the corporate assets supporting managed underwriting) and syndicate investments, has been transferred to the technical account. These assets, the assumed long term return and the actual return are summarised below: Average Assumed Actual 1999 assets held longer term return during 1999 return % £m % Continuing operations Funds at Lloyd's Bonds 68 6.0% 3.5% Equities 77 8.0% 19.0% Syndicate investments Bonds 34 6.0% 3.5% 6. Earnings per share Earnings per share is based on the profit attributable to shareholders for the year ended 31 December 1999 of £12.1 million (7 months to 31 December 1998: £11.5 million) and the weighted average number of shares in issue during the period. Shares held by the Employee Share Ownership Trust ('ESOT') are excluded from the weighted average number of shares. Basic and diluted earnings per share are as follows: 7 Months to 31 December 1998 1999 (Restated) million million Profit for the period £12.1 £11.5 Weighted average number of 206.5 205.5 shares in issue Dilutive shares to be issued 6.3 14.2 Adjusted average number of shares 212.8 219.7 in issue Basic earnings per share 5.9p 5.6p Diluted earnings per share 5.6p 5.2p Dilutive shares to be issued represent an adjustment for shares which are expected to be issued to satisfy deferred consideration for acquisitions together with outstanding warrants and options which may be issued, after taking into account the respective option and warrant prices and the market values of Amlin plc shares at 31 December 1999 and 17 May 2000. 7. Financial investments The Group's financial investments comprise the following: At valuation At cost 1999 1998 1999 1998 £m £m £m £m Shares and other variable 117.3 157.7 103.9 72.9 yield securities Debt securities and other fixed 244.0 200.3 243.3 197.0 income securities Participation in investment 11.7 6.7 11.7 6.5 pools Loans secured by 0.7 0.3 0.7 0.3 mortgages Deposits with credit 45.6 13.7 44.0 12.6 institutions Overseas deposits 5.1 8.6 5.1 8.6 Early releases from Premium Trust - 0.2 - 0.2 Funds held at Lloyd's Other 1.7 13.1 1.7 13.1 426.1 400.6 410.4 311.2 In Group owned 265.4 249.8 251.7 163.6 companies In syndicates 160.7 150.8 158.7 147.6 426.1 400.6 410.4 311.2 Listed investments included in Group owned total are as follows: Shares and other variable 115.2 151.9 100.7 71.6 yield securities Debt securities and other 107.7 82.4 108.5 80.4 fixed income securities 222.9 234.3 209.2 152.0 8. Summary of Members Agencies and Whittington Group results The contribution of these businesses, excluding profits from disposal, to profit before tax is summarised below: 1999 1998 £m £m Whittington Group 3.3 - Members' agency 3.1 2.5 6.4 2.5 9. Financial information The financial information set out above does not constitute the Company's statutory accounts for year ended 31 December 1999, but is derived from those accounts. Statutory accounts for the period ended 31 December 1998 have been delivered, and those for the year ended 31 December 1999 will be delivered, to the Registrar of Companies. Final dividend record date 5 June 2000. Final dividend payment date 20 July 2000.

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