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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