Interim Results

Beazley Group PLC 07 September 2005 7 September 2005 Beazley Group plc Interim results for the six months ended 30 June 2005 Beazley Group plc ('Beazley'), one of the Lloyd's market leaders, today announces its interim results. H1 2005 Beazley Group Highlights: •Profit before tax increased to £35.2m (H1 2004: £24.7m) •Gross premiums increased to £275.4m (H1 2004: £210.8m) •Net insurance premium revenue increased to £166.4m (H1 2004: £130.8m) •Earnings per share of 6.8p (H1 2004: 7.4p) •An increase in the interim dividend to 1.5p (H1 2004: 0.3p) •Net assets per share increased to 83p (H1 2004: 72p) •Combined ratio of 89% (H1 2004: 84%) H1 2005 Managed Syndicate Highlights: •Managed syndicate gross written premiums increased to £408.2m (H1 2004: £394.1m) •Increased ownership of managed syndicates to 70% in 2005 (54% in 2004) •Forecast return on capacity has been increased from 12.5% to 13.6% for the 2003 year of account; and remains at 6.5% for the 2004 year account H1 2005 US Business Highlights: •Continued recruitment of top quality employees •Completion of the acquisition of Omaha Property and Casualty Insurance Company Andrew Beazley, Chief Executive Officer of Beazley, said: 'I am pleased to report a set of results that demonstrate the continued growth of our business. Trading conditions continued to remain favourable in many of our key markets and the expansion of our US operations will continue to provide further growth opportunities. We remain on track to deliver a full year dividend of 4p which we committed to at the 2004 full year results. 'Hurricane Katrina has had a devastating effect on the lives of thousands of people, the full extent of which will not be known for some time. We believe the magnitude of this loss to be a market changing event. We are at the very early stages of evaluating the likely claims that will be made as a result of hurricane Katrina. Our preliminary estimate based on the little information available is of a net loss to the group of USD50m. This would have an impact of about £20m on the group's profit for 2005.' Contacts Beazley Group plc Tel: 020 7667 0623 Andrew Beazley Andrew Horton Nicholas Furlonge Finsbury Tel: 020 7251 3801 Simon Moyse Amanda Lee Interim results statement Overall results The board of Beazley Group plc is pleased to report a profit before tax for the six months to 30 June 2005 of £35.2m (2004: £24.7m). Net assets per share have increased to 83p from 77p at the end of 2004. The group's gross written premiums increased to £275.4m (2004: £210.8m) and net insurance premium revenue increased to £166.4m (2004: £130.8m). The gross written premium has grown because the group increased its ownership of the managed syndicates from 54% in 2004 to 70% in 2005. The combined ratio for the group for the half year is 89% (2004: 84%). We are at the early stages of assessing the losses arising out of the tragic events caused by hurricane Katrina. There is currently a lack of information on the extent of damage with a wide range of published estimates of the total loss. Our preliminary estimate based on the little information available is a net loss to the managed syndicates of USD75m with the group's share of this estimated to be USD50m. This would have an impact of about £20m on the group's profits for 2005. We expect to update the market when the information is more reliable. We believe Katrina is a loss of such magnitude that it will have a positive impact on rates and extend the period of good underwriting conditions. We are therefore expecting to revise our business plan for 2006 and beyond. Dividend As announced at the time of the rights issue last year it is the group's intention to pay a dividend of not less than 4p for 2005. As part of this full year dividend the board is pleased to report that it has decided to pay an interim dividend of 1.5p per ordinary share (2004: 0.3p). This will be paid on 11 November 2005 to shareholders on the register at the close of business on 21 October 2005. Managed syndicate results Gross written premiums for the managed syndicates increased to £408.2m from £394.1m in 2004. The forecast return on capacity for the 2003 year of account has increased from 12.5% to 13.6%. The forecast for 2004 year of account remains at 6.5%. US We have continued to make significant progress on our initiative in the US. Our recruitment of high calibre staff has gone well. The managing general agent is now writing both Property and Specialty Lines business on behalf of our managed syndicates. Our operation writing high value homeowners' property risk in the Carolinas, Florida and Georgia has written USD2.9m of premium up until the end of June 2005. Specialty Lines has written USD0.7m. We have attracted staff with great experience in their particular areas - we will now see the level of premium writing increase. During the half year we completed the acquisition of Omaha Property and Casualty Insurance Company (OPAC) from the Mutual of Omaha. OPAC is a licensed carrier in 50 states. We have renamed the company Beazley Insurance Company Inc, and are in the process of redomesticating the company from Nebraska to Connecticut. We have injected USD50m of capital into the company and have received an A- rating from AM Best. The company is expected to start writing business before the end of 2005 on an admitted market basis for various coverages including directors and officers' liability insurance, errors and omissions liability, employment practices liability, fidelity and fiduciary liability (covering potential liability arising from a breach of fiduciary duty of staff benefit plan trustees for example). Trading conditions Trading conditions have generally remained favourable and in line with our expectations. The average renewal rate reduction for the period was 1.2%. The most pressure on rates has been in our large commercial property account where we have seen average rate renewal reductions of 5.8%. The table below shows renewal rates movement based on the 2000 prevailing rates. 2000 2001 2002 2003 2004 2005 year to date Marine 100% 111% 131% 143% 143% 143% Property 100% 119% 151% 157% 149% 145% Specialty Lines 100% 114% 158% 189% 197% 194% Reinsurance 100% 112% 160% 167% 166% 165% ------- ------- ------- ------- ------- ------- Total 100% 115% 152% 169% 170% 168% ------- ------- ------- ------- ------- ------- We continue to see the cost of reinsurance remaining firm. Investment returns, despite increases in US dollar interest rates, are still relatively low and for the industry to remain profitable underwriting discipline has to be maintained. Specialty Lines The growth of the business has slowed in 2005 in line with expectations about market and environmental conditions. We continue to focus on leveraging our ability in areas where we have the expertise and experience to do so. We are now actively writing business via Beazley USA which gives us improved access to small and medium sized business. Recently, David Marock joined from McKinsey to lead the claims team. His previous projects included directing the Lloyd's claim strategy project and his experience and strategy will be valuable as we review the efficiencies to be gained in the claims management process. Property Group Trading conditions remain generally favourable in all lines of business across the Property Group and are in line with our expectations. Competition on large commercial property accounts continues, which has resulted in a reduction in premium income. This is consistent with our 2005 plan, as we decline business that does not meet our rating criteria. Rate increases are being obtained on risks in the Caribbean and Florida following last year's hurricanes. The engineering team, who joined Beazley last September, have enjoyed an excellent showing of business and are on target to meet their budget. Market conditions remain good. The Beazley office in Florida writing high values homeowners' property risks has made good progress in establishing itself in the market place and has begun utilising the BeazleyTrade technology platform to underwrite business. Reinsurance The development of 2004 windstorm losses in the first quarter of 2005 served to stabilise rates in the US and Japan. Europe and other large non-life markets saw rates down in the region of 5% to 10%. We have continued to expand our position on our core accounts in the US and Europe through the first few months of 2005 and have also seen new business opportunities in Europe, the UK and the US. Marine The rate environment has held up more favourably than we would have anticipated a year ago. The hull and marine liability account renewals are generally maintaining expiring rates. Cargo and energy accounts are showing some downward pressure but that is balanced by rate rises on the Gulf of Mexico energy exposures. The split of the marine account for 2005 is broadly similar to that of 2004 except for the addition of a three man UK cargo team. This is business that is underwritten through regional brokers and the team operates remotely with the support of the BeazleyTrade platform. The claims frequency remains reasonably benign in all marine classes and there has been no change in the market's supply and demand equilibrium. No dramatic change is foreseen in the marine market for the rest of the year. BeazleyTrade We are continuing development of our online underwriting and claims platform, BeazleyTrade. The platform supports the end to end underwriting process and includes automatic rating and production of comprehensive policy documentation. A number of business classes have been implemented on the platform including Beazley US property (homeowners), specialty lines (multiple products) and UK cargo. A suite of products for our UK small professional indemnity business is undergoing final testing and will be followed by further products for Beazley US specialty lines, cargo and property. We will be starting to offer direct access to the platform for selected brokers within the next year. For appropriate classes of business, this will allow the broker to submit risks for automatic risk assessment and rating. Wherever possible, the platform will provide an automatic quotation for the broker and produce full policy documentation immediately on the broker opting to accept the proposed terms. The platform will automatically refer risks not appropriate for auto-rating to an underwriter who will then use the same platform to complete the transaction. We have also added the first release of our e-claims module which allows entry and tracking of claims against BeazleyTrade policies. This will be used by claims managers within Beazley and will also be offered to authorised loss adjustors and third party administrators. We plan to add additional capabilities including a secure document management repository. Capital resources The capacity of the combined syndicates is planned to reduce to £700m for the 2006 underwriting year from £742m in 2005 - this is subject to approval by Lloyd's. The group's own capacity is anticipated to be at least £490m. The capital required for underwriting at Lloyd's in 2005 was set at 46.2% of capacity by Lloyd's using their risk based capital model. We are now in the process of switching from the Lloyd's risk based capital model to individual capital assessments (ICA). We have submitted our ICA to Lloyd's for our 2006 underwriting and are discussing this with Lloyd's. International Financial Reporting Standards (IFRS) These results have been prepared under the new International Financial Reporting Standards. The change to IFRS from UK General Accepted Accounting Principles (UK GAAP) has had no material impact on either the group's 2004 net assets or group's reported profit. A reconciliation of the 2004 profit and equity between UK GAAP and IFRS is shown below. For the six months results the different treatment of foreign exchange on non-monetary items between IFRS and UK GAAP has added £6m to the group's reported profit before tax. Non-monetary items include unearned premium reserve, reinsurers' share of unearned premium reserve and deferred acquisition cost. Under IFRS these balances are carried at historic exchange rates, whilst monetary items are translated at closing rates. This mismatch under IFRS will lead to more volatility in reported profits than has historically occurred under UK GAAP. Investments Total funds under management (investments plus cash) for the group have increased from £551m as at the end of December 2004 to £778m as the funds from our underwriting activities have continued to increase. We continue with our strategy of investing up to 12% of total group's assets in alternative assets (high yield bonds, equities and hedge funds), the remainder of our investments remain in high grade bonds. Historically we have held short duration bonds (average duration six months). We have recently given our high grade bond fund manager more flexibility regarding duration and our expectation is that the average duration of our bond portfolio will increase. Outlook Underwriting conditions in most areas remain good and the group continues to invest in areas where we feel value can be added in the future with specific emphasis on harnessing technology to enhance productivity and to broaden our access to business. The US based business is now gathering momentum and we expect to see this business grow considerably over the next two years. The use of our trading platform BeazleyTrade will enhance our business flow further. We launched our reworked website (www.beazley.com) in July which is targeted towards our brokers, giving them better information on our products and how to reach us. We are continuing to assess and upgrade the process and effectiveness of claims management to ensure cost effective analysis and payment of valid claims. Investment returns remain relatively low which together with the cost of reinsurance are key drivers to the maintenance of discipline within underwriting. The cost of reinsurance is expected to firm in the light of hurricane Katrina and therefore we believe that the underwriting cycle will be extended and good underwriting conditions maintained. Andrew Beazley Chief Executive Officer 7 September 2005 Condensed consolidated interim income statement for the period ended 30 June 2005 ------ --------- --------- ---------- Note 6 Months ended 6 Months ended Year to 30 June 2005 30 June 2004 31 December (unaudited) (unaudited) 2004 £m £m (unaudited) £m ------ --------- --------- ---------- Insurance premium revenue 213.5 168.2 374.1 Insurance premium ceded to reinsurers (47.1) (37.4) (71.4) --------- --------- ---------- Net insurance premium revenue 2 166.4 130.8 302.7 Net investment income 3 12.3 4.0 11.3 Other income 10.6 6.3 11.2 --------- --------- ---------- 22.9 10.3 22.5 Net Income 2 189.3 141.1 325.2 Insurance claims 128.9 81.8 224.8 Insurance claims recovered from reinsurers (34.0) (11.8) (42.8) --------- --------- ---------- Net insurance claims 2 94.9 70.0 182.0 Expenses for the acquisition of insurance 42.1 30.4 71.4 Administrative expenses 10.6 9.0 17.6 Finance costs 0.5 0.1 1.1 Other expenses 6.0 7.0 17.8 --------- --------- ---------- 59.2 46.5 107.9 Expenses 2 154.1 116.5 289.9 Results of operating activities 35.2 24.6 35.3 Share of profit of associates - 0.1 0.1 Profit before tax 35.2 24.7 35.4 Income tax expense (10.6) (7.8) (10.6) --------- --------- ---------- Profit after tax 24.6 16.9 24.8 --------- --------- ---------- Earnings per share (pence per share): Basic 4 6.8 7.4 9.9 Diluted 4 6.8 7.4 9.9 Dividends (pence per share): Paid 5 0.7 0.5 0.8 Proposed 5 1.5 0.3 1.0 Condensed consolidated interim balance sheet as at 30 June 2005 --------- --------- ---------- 30 June 2005 30 June 2004 31 December (unaudited) (unaudited) 2004 £m £m (unaudited) £m --------- --------- ---------- ASSETS Plant and equipment 0.9 - - Intangible assets 14.8 7.1 8.1 Deferred acquisition costs 49.2 38.6 38.3 Investments in associates 1.3 1.3 1.3 Financial investments 601.6 304.6 469.9 Loans and receivables including insurance receivables 136.8 102.8 89.0 Deferred income tax 2.7 2.4 2.8 Reinsurance contracts 271.6 104.2 98.3 Other receivables 22.6 20.1 25.4 Cash and cash equivalents 176.4 47.0 81.5 --------- --------- ---------- Total Assets 1,277.9 628.1 814.6 --------- --------- ---------- EQUITY Share capital 18.0 11.5 18.0 Reserves Share premium reserve 230.5 132.4 230.5 Merger reserve 1.6 1.6 1.6 Other reserves (0.2) 0.3 0.4 Retained earnings 49.2 19.9 27.1 --------- --------- ---------- Total Equity 299.1 165.7 277.6 LIABILITIES Insurance contracts 803.0 369.2 460.5 Borrowings 27.3 - 9.4 Deferred income tax 16.3 8.5 8.4 Current income tax liabilities 2.7 2.6 3.2 Trade and other payables 126.6 78.2 51.6 Retirement benefit obligations 2.9 3.9 3.9 --------- --------- ---------- Total Liabilities 978.8 462.4 537.0 --------- --------- ---------- Total Equity and Liabilities 1,277.9 628.1 814.6 --------- --------- ---------- Condensed consolidated interim statement of changes in equity for the period ended 30 June 2005 -------- --------- -------- ------- Share Capital Reserves Retained Total Earnings £m £m £m £m -------- --------- -------- ------- Balance as at 1 January 2004 11.5 134.2 4.1 149.8 Retained profits for the period - - 16.9 16.9 2003 final dividends paid - - (1.1) (1.1) Increase in employee share options - 0.1 - 0.1 -------- --------- -------- ------- Balance as at 30 June 2004 11.5 134.3 19.9 165.7 Issue of shares 6.5 - - 6.5 Share premium on issue of shares - 103.6 - 103.6 Capitalised listing costs - (5.5) - (5.5) Retained profits for the period - - 7.9 7.9 Increase in employee share options - 0.1 - 0.1 2004 interim dividends paid - - (0.7) (0.7) -------- --------- -------- ------- Balance as at 31 December 2004 18.0 232.5 27.1 277.6 Retained profits for the period - - 24.6 24.6 Increase in employee share options - 0.1 - 0.1 Acquisition of own shares held in ESOP - (1.7) - (1.7) Foreign exchange translation differences - 1.0 - 1.0 2004 final dividends paid - - (2.5) (2.5) -------- --------- -------- ------- Balance as at 30 June 2005 18.0 231.9 49.2 299.1 -------- --------- -------- ------- Condensed consolidated interim cash flow statement for the period ended 30 June 2005 6 Months ended 6 Months ended Year to 30 June 2005 30 June 2004 31 December (unaudited) (unaudited) 2004 £m £m (unaudited) £m --------- --------- ---------- Cash flow from operating activities Profit after tax 24.6 16.9 24.8 Adjustments for non-cash items: Equity settled share based compensation 0.3 0.3 0.4 Foreign exchange on translation of foreign subsidiary 1.0 - - Tax expense 10.6 7.8 10.6 Net fair value losses on financial assets 0.7 0.9 0.5 Share in profit of associates - (0.1) (0.1) Changes in operating assets and liabilities: Increase in insurance contracts 342.5 110.7 202.0 Increase in insurance receivables (47.8) (20.2) (6.4) Decrease/(increase) in other receivables 2.7 (10.7) (16.0) Increase in deferred acquisition costs (10.9) (6.4) (6.1) Increase in reinsurance contracts (173.3) (45.3) (39.4) Increase in trade and other payables 75.0 40.0 13.3 Income tax paid (3.1) (0.7) (3.3) Group contribution to pension fund (1.0) - - Acquisition of own shares held in ESOP (1.7) - - --------- --------- ---------- Net cash from operating activities 219.6 93.2 180.3 Cash flow from investing activities Purchase of syndicate capacity - - (1.0) Purchase of insurance licences (5.0) - - Purchase of plant and equipment - software (1.8) - - - other (0.9) - - Purchase of investments (863.9) (328.9) (663.5) Proceeds from sale of investments 731.5 264.4 434.1 --------- --------- ---------- Net cash used in investing activities (140.1) (64.5) (230.4) Cash flow from financing activities Proceeds from issue of shares - - 104.6 Proceeds from borrowings 17.9 - 9.4 Dividends paid (2.5) (1.1) (1.8) --------- --------- ---------- Net cash used in financing activities 15.4 (1.1) 112.2 Net increase in cash and cash equivalents 94.9 27.6 62.1 Cash and cash equivalents at beginning of period 81.5 19.4 19.4 --------- --------- ---------- Cash and cash equivalents at end of period 176.4 47.0 81.5 --------- --------- ---------- Notes to the interim financial statements for the period ended 30 June 2005 1. Statement of accounting policies Beazley Group plc is a group domiciled in England and Wales. The condensed consolidated interim financial statements of the group for the six months ended 30 June 2005 comprise the group and its subsidiaries and the group's interest in associates. EU law (IAS Regulation EC 1606/2002) requires that the next annual consolidated financial statements of the group, for the year ending 31 December 2005, be prepared in accordance with International Financial Reporting Standards (IFRSs) adopted for use in the EU ('adopted IFRSs'). This interim financial information has been prepared on the basis of the recognition and measurement requirements of IFRSs in issue that either are endorsed by the EU and effective (or available for early adoption) at 30 June 2005 or are expected to be endorsed and effective (or available for early adoption) at 31 December 2005, the group's first annual reporting date at which it is required to use adopted IFRSs. Based on these adopted and unadopted IFRSs, the directors have made assumptions about the accounting policies expected to be applied, which are set out below, when the first annual IFRS financial statements are prepared for the year ending 31 December 2005. In particular, the directors have assumed that IAS 19 - Employee Benefits issued by the International Accounting Standards Board and International Financial Reporting Interpretations Committee (IFRIC) Interpretations issued by the IFRIC will be adopted by the EU in sufficient time that they will be available for use in the annual IFRS financial statements for the year ending 31 December 2005. In addition, the adopted IFRSs that will be effective (or available for early adoption) in the annual financial statements for the year ending 31 December 2005 are still subject to change and to additional interpretations and therefore cannot be determined with certainty. Accordingly, the accounting policies for that annual period will be determined finally only when the annual financial statements are prepared for the year ending 31 December 2005. An explanation of how the transition to IFRSs has effected the reported income statement, balance sheet and cash flows of the group is provided in note 7. This note includes reconciliations of equity and profit and loss for the comparative periods reported under UK GAAP to those reported for those periods under IFRSs. The comparative figures for the financial year ended 31 December 2004 and the period ended 30 June 2004 are not the group's statutory accounts for those periods. Those accounts, which were prepared under UK Generally Accepted Accounting Principles, have been reported on by the group's auditors and delivered to the registrar of companies. The report of the auditors was unqualified and did not contain statements under section 237(2) or (3) of the Companies Act 1985. The group's transition date is 1 January 2004 and it has prepared its opening IFRS balance sheet at that date. The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. The policies have been consistently applied to all periods presented, unless otherwise stated. Basis of presentation The consolidated financial statements are prepared using the historical cost convention except that financial investments are stated at their fair value. First time adoption of IFRS The group has taken advantage of the following exemptions set out in IFRS 1. a) Business combinations The group has elected not to retrospectively apply IFRS 3 - Business Combinations. It has not restated business combinations that occurred prior to 1 January 2004. b) Employee benefits The group has elected to recognise all actuarial losses under the defined benefit pension scheme as at 1 January 2004. c) Share based payments The group has not applied the requirements of IFRS 2 - Share Based Payments to share options granted before 7 November 2002. d) Estimates Estimates included in the opening balance sheet at 1 January 2004, 30 June 2004 and 31 December 2004 are consistent with the estimates made at the same date under UK GAAP. The exemption for IFRS 4 - Insurance Contracts, IAS 32 - Financial Instruments: Disclosure and Presentation and IAS 39 - Financial Instruments: Recognition and Measurement have not been taken as the group has restated all comparatives. Use of estimates The preparation of the financial statements requires the group to make certain critical estimates and assumptions. Although these estimates are based on management's best knowledge of current facts, circumstances and to some extent future events and actions, actual results ultimately may differ from those estimates, possibly significantly. Consolidation a) Subsidiary undertakings Subsidiary undertakings, which are those entities in which the group directly or indirectly has the power to exercise control over financial and operating policies, have been consolidated. They are consolidated from the date on which control is transferred to the group and cease to be consolidated from the date on which control ceases. The group has used the purchase method of accounting for the acquisition of subsidiaries. Under purchase accounting, the cost of acquisition is measured as the fair value of assets given, shares issued or liabilities undertaken at the date of acquisition plus costs directly attributable to the acquisition. The excess of the cost of an acquisition over the fair value of the net assets of the subsidiary acquired is recorded as goodwill. Certain group subsidiaries underwrite as corporate members of Lloyd's on the syndicate managed by Beazley Furlonge Limited. In view of the several liability of underwriting members at Lloyd's for the transactions of syndicates in which they participate, the attributable share of transactions, assets and liabilities of the syndicate has been included in the financial statements. b) Associates Associates are those entities in which the group has power to exert significant influence, but which it does not control. Significant influence is generally presumed if the group has between 20% and 50% of voting rights. Investments in associates are accounted for using the equity method of accounting. Under this method, the group's share of post acquisition profits or losses are recognised in the income statement and its share of post acquisition movements in reserves are recognised in reserves. The cumulative post acquisition movements are adjusted against the cost of the investment. When the group's share of loss equals or exceeds the carrying amount of the associate, the carrying amount is reduced to nil and recognition for the loss is discontinued except to the extent that the group has incurred obligations in respect of the associate. Equity accounting is discontinued when the group no longer has significant influence over the investment. c) Intercompany balances and transactions All intercompany transactions, balances and unrealised gains or losses on transactions between group companies have been eliminated. All accounting policies have been consistently applied throughout the group. Foreign currency translation a) Functional and presentation currency Items included in the financial statements of each subsidiary are measured using the currency of the primary economic environment in which it operates (the 'functional currency'). The consolidated financial statements are presented in GBP, which is the group's presentation currency. b) Transactions and balances Foreign currency transactions are translated into the functional currency using average exchange rates applicable to this period and which the group considers to be a reasonable approximation of the historic rate. Foreign exchange gains and losses resulting from the settlement of such transactions and from translation at the period end of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. Non-monetary items recorded at historical cost in foreign currencies are translated using the exchange rate on the date of the transaction. c) Group companies The results and financial position of the group companies that have a functional currency different from the presentation currency are translated into the presentation currency as follows: i) assets and liabilities are translated at the closing rate at the date of that balance sheet; ii) income and expenses for each income statement are translated at average exchange rates in the period; iii) all resulting exchange differences are recognised as a separate component of equity. The exchange differences on disposal of foreign entities are recognised in the income statement as part of the gain or loss on disposal. Insurance contracts Insurance contracts (including inwards reinsurance contracts) are defined as those containing significant insurance risk. Insurance risk is considered significant if and only if, an insured event could cause an insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance. Such contracts remain insurance contracts until all rights and obligations are extinguished or expire. Premiums Gross premiums written represent premiums on business incepting in the financial year together with adjustments to premiums written in previous accounting periods and estimates for pipeline premiums. Gross premiums written are stated before deduction of brokerage, taxes, duties levied on premiums and other deductions. Unearned premiums A provision for unearned premium (gross of reinsurance) is made which represents that part of the gross premiums written that is estimated will be earned in the following financial periods. It is calculated using the daily pro rata method where the premium is apportioned over the period of risk. Deferred Acquisition Costs (DAC) Acquisition costs comprise brokerage, premium levy and staff related costs of the underwriters acquiring new business and renewing existing contracts. The proportion of acquisition costs in respect of unearned premiums are deferred at the balance sheet date and recognised in later periods when the related premiums are earned. Claims These include the cost of claims and claims handling expenses paid during the period, together with the movements in provisions for outstanding claims, claims incurred but not reported (IBNR) and future claims handling provisions. The provision for claims comprises amounts set aside for claims advised and IBNR. The IBNR amount is based on estimates calculated using widely accepted actuarial techniques which are reviewed quarterly by the group actuary and annually by Beazley's independent consulting actuary as part of the statutory actuarial opinion process. The techniques generally use projections, based on past experience of the development of claims over time, to form a view on the likely ultimate claims to be experienced. For more recent underwriting years, regard is given to the variations in the business portfolio accepted and the underlying terms and conditions. Thus, the critical assumptions used when estimating provisions are that past experience is a reasonable predictor of likely future claims development and that the rating and business portfolio assumptions are a fair reflection of the likely level of ultimate claims to be incurred for the more recent years. Liability adequacy testing At each balance sheet date, liability adequacy tests are performed to ensure the adequacy of the insurance liabilities net of DAC. In performing these tests, current best estimates of future contractual cash flows, claims handling and administration expenses as well as investment income from the assets backing such liabilities are used. Any deficiency is immediately charged to the profit or loss initially by writing off DAC and by subsequently establishing a provision for losses arising from liability adequacy tests ('unexpired risk provision'). Reinsurance contracts These are contracts entered into by the group with reinsurers under which the group is compensated for losses on contracts issued by the group and that meet the definition of an insurance contract. Insurance contracts entered into by the group under which the contract holder is another insurer (inwards reinsurance) are included with insurance contracts. Any benefits to which the group is entitled under its reinsurance contracts held are recognised as reinsurance assets. These assets consist of balances due from reinsurers and include reinsurers share of provisions for claims. These balances are based on calculated amounts of outstanding claims and projections for IBNR, net of estimated irrecoverable amounts having regard to the reinsurance programme in place for the class of business, the claims experience for the period and the current security rating of the reinsurer involved. Reinsurance liabilities are primarily premiums payable for reinsurance contracts and are recognised as an expense when due. The group assesses its reinsurance assets for impairment. If there is objective evidence of impairment, then the carrying amount is reduced to its recoverable amount and the impairment loss is recognised in the income statement. Insurance receivables and payables Receivables and payables are recognised when due. These include amounts due to and from agents, brokers and insurance contract holders. Dividends paid Dividend distribution to the shareholders of the group is recognised in the period in which the dividends are authorised by the directors. The final dividend is approved by the shareholders in the group's annual general meeting. Plant and equipment All fixed assets are recorded at cost less accumulated depreciation. Depreciation is calculated using the straight line method to allocate the cost of the assets to their residual values over their estimated useful lives as follows: Leasehold improvements remaining period of the lease Computer equipment three years Other assets three to five years These assets' residual value and useful lives are reviewed at each balance sheet date and adjusted if appropriate. Intangible assets a) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the group's share of the net assets of the acquired subsidiary/associate at the date of acquisition. Goodwill is carried at cost less accumulated impairment losses. Goodwill is annually tested for impairment. Goodwill is allocated to each cash generating unit for the purpose of impairment testing. Goodwill is impaired when the net present value of the forecast future cash flows are insufficient to support its carrying value. b) Licences Licences are shown at historical cost. They have an indefinite useful life and are carried at cost less accumulated impairment. Licences are annually tested for impairment and provision is made for any impairment when the net present value of future cash flows are less than the carrying value. c) Syndicate capacity The syndicate capacity represents the cost of purchasing the group's participation in syndicate 2623. The capacity is capitalised at cost in the balance sheet. It has an indefinite useful life and is carried at cost less accumulated impairment. It is annually tested for impairment and provision is made for any impairment. d) Computer software Costs that are directly associated with the development of identifiable and unique software products and that will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets. Costs include external consultant's fees, certain qualifying internal staff costs and other costs incurred to develop and maintain software programmes. Other non-qualifying costs have been expensed as incurred. These costs are amortised over their estimated useful life (3 years). Investments Investments are recognised in the balance sheet at such time that the group becomes a party to the contract of the financial instrument. An investment is derecognised when the group relinquishes control of the contractual rights. On acquisition of the investment, the group is required to classify its investments into the following categories: financial assets at fair value through income, loans and receivables, held to maturity and available for sale. Financial assets at fair value through the income statement A financial asset is classified as fair value through the income statement at inception if it is acquired principally for the purpose of selling in the short term, if it forms part of a portfolio in which there is evidence of short term profit taking or if it is designated so by management. Purchases and sales are recognised on the trade date, which is the date the group commits to purchase or sell the asset, net of transaction costs. These investments are subsequently carried at fair value. Any gains and losses arising from changes in fair value are recognised in the income statement in the period in which they arise. Investment income Investment income consists of dividends, interest, realised and unrealised gains and losses on trading investments. Dividends on equity securities are recorded as revenue on the ex-dividend date. Interest is recognised on an accruals basis. Realised gain or loss on disposal of an investment is the difference between the proceeds (net of transaction costs) and the carrying value of the investment. Unrealised investment gains and losses represent the difference between the carrying value, and the carrying value at the previous period end or purchase value during the period. Cash and cash equivalents Cash and cash equivalents consist of cash at bank and in hand, deposits held at call with banks, bank overdrafts and other short term highly liquid investments with maturities of three months or less from the date of acquisition. Operating leases Leases where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made for operating leases are charged to the income statement on a straight line basis over the period of the lease. Employee benefits a) Annual leave and long service leave Employee entitlements to annual leave and long service leave are recognised when they accrue to employees. b) Pension obligations The group operates a defined benefit and a defined contribution pension scheme. The schemes are generally funded by payments from the group taking account of the recommendations of an independent qualified actuary. A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors like age, years of service and compensation. The pension costs are assessed using the projected unit method. Under this method the costs of providing pensions is charged to the income statement so as to spread the regular costs over the service lives of employees in accordance with the advice of the qualified actuary, who values the plans annually. The pension obligation is measured at present value of the estimated future cashflows. All actuarial gains or losses are recognised in the profit or loss using the corridor approach over the average remaining service lives of employees. The corridor approach is defined as the excess of net cumulative unrecognised gains and losses at the end of the previous reporting period and the greater of: i) 10% of present value of the defined benefit obligation at that date; and ii) 10% of fair value of plan assets at that date. For the defined contribution plan, the group pays contributions to a privately administered pension plan. Once the contributions have been paid, the group has no further obligations. The group's contributions are charged to the income statement in the period to which they relate. c) Share based compensation The group offers option plans over the group's ordinary shares to certain employees, including Save As You Earn plan (SAYE). The group accounts for share compensation plans that were granted after 7 November 2002 using the fair value method. Under this method the cost of providing share based compensation is based on the fair value of the share options at grant date, which is recognised in the income statement over the expected service period of the related employees. The fair value of the share options are determined using the Black Scholes method. When the options are exercised, the proceeds received, net of any transaction costs, are credited to share capital (nominal value) and share premium. Income taxes Income tax on the profit or loss for the period presented comprises current and deferred tax. Current tax is the expected tax payable on the taxable income for the year using tax rates at balance sheet date and any adjustments in respect of prior periods. Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax assets are recognised in the balance sheet to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Borrowings Borrowings are initially recorded at proceeds less transaction costs incurred. Subsequently borrowings are stated at amortised cost and interest is recognised in the income statement over the period of the borrowings using the effective interest method. Earnings per share Basic earnings per share is calculated by dividing profit after tax available to shareholders by the weighted average number of ordinary shares in issue during the period. For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares such as share options granted to employees. Provisions and contingencies Provisions are recognised when the group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources of economic benefits will be required to settle the obligation and a reliable estimate of the obligation can be made. Where the group expects a provision to be reimbursed, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. Contingencies are disclosed if there is a present obligation that may, but probably will not require an outflow of resources. 2. Segmental analysis The principal activity of the group is insurance. The following primary business segments, marine, property, specialty lines and reinsurance have been applied. All foreign exchange differences on non-monetary items have been included within the unallocated totals, together with any expenses which cannot be allocated to specific business segments. The foreign exchange has been split out as this provides a fairer representation of the loss ratios, which would otherwise be distorted by the mismatch arising under IFRS whereby unearned premium reserves and DAC are treated as non-monetary items and claims reserves are treated as monetary items. 30 June 2005 ------------------------------------------ Marine Property Specialty Lines Reinsurance Unallocated Total £m £m £m £m £m £m ------- ------- -------- -------- -------- ------- Gross premiums written 47.7 61.6 124.6 41.5 - 275.4 Net premiums written 34.4 48.4 77.8 28.3 - 188.9 Net insurance premium revenue 28.9 35.2 85.0 15.8 1.5 166.4 Net investment income 1.2 2.2 7.7 1.2 - 12.3 Other Income 0.7 1.1 0.7 0.8 7.3 10.6 ------- ------- -------- -------- -------- ------- Net Income 30.8 38.5 93.4 17.8 8.8 189.3 Net claims 13.8 15.0 58.8 7.3 - 94.9 Expenses for the acquisition of insurance contracts 8.1 11.6 17.8 3.8 0.8 42.1 Administrative expenses 1.3 2.8 5.5 1.0 - 10.6 Other expenses including finance costs 0.5 1.5 1.8 0.5 2.2 6.5 ------- ------- -------- -------- -------- ------- Expenses 23.7 30.9 83.9 12.6 3.0 154.1 Profit before tax 7.1 7.6 9.5 5.2 5.8 35.2 Tax expense (10.6) ------- Profit after tax 24.6 ------- Claims ratio 48% 43% 69% 46% 57% Expense 33% 41% 27% 30% 32% ratio Combined ratio 81% 84% 96% 76% 89% 30 June 2004 ------------------------------------------ Marine Property Specialty Lines Reinsurance Unallocated Total £m £m £m £m £m £m ------- ------- -------- -------- -------- ------- Gross premiums written 32.8 47.1 98.4 32.5 - 210.8 Net premiums written 21.4 40.5 53.2 24.1 - 139.2 Net insurance premium revenue 16.6 32.7 60.1 15.9 5.5 130.8 Net investment income 0.3 1.0 2.3 0.4 - 4.0 Other Income 0.6 1.8 1.9 2.0 - 6.3 ------- ------- -------- -------- -------- ------- Net Income 17.5 35.5 64.3 18.3 5.5 141.1 Net claims 8.4 14.3 40.9 6.4 - 70.0 Expenses for the acquisition of insurance contracts 4.4 8.2 12.8 3.7 1.3 30.4 Administrative expenses 1.4 2.5 4.0 1.1 - 9.0 Other expenses including finance costs 0.6 1.6 1.4 0.9 2.6 7.1 ------- ------- -------- -------- -------- ------- Expenses 14.8 26.6 59.1 12.1 3.9 116.5 Results from operating activities 2.7 8.9 5.2 6.2 1.6 24.6 Share of profit of associates 0.1 Profit before tax 24.7 Tax expense (7.8) ------- Profit after tax 16.9 ------- Claims ratio 51% 44% 68% 40% 54% Expense ratio 35% 33% 28% 30% 30% Combined ratio 86% 77% 96% 70% 84% 31 December 2004 ------------------------------------------ Marine Property Specialty Lines Reinsurance Unallocated Total £m £m £m £m £m £m ------- ------- -------- --------- -------- ------- Gross premiums written 62.1 93.1 203.7 43.4 - 402.3 Net premiums written 50.8 77.0 168.4 32.8 - 329.0 Net insurance premium revenue 43.5 72.6 143.7 33.9 9.0 302.7 Net investment income 1.1 2.1 7.0 1.1 - 11.3 Other Income 3.5 4.3 1.0 2.4 - 11.2 ------- ------- -------- --------- -------- ------- Net Income 48.1 79.0 151.7 37.4 9.0 325.2 Net claims 20.9 38.9 98.0 24.2 - 182.0 Expenses for the acquisition of insurance contracts 11.5 19.7 31.6 7.0 1.6 71.4 Administrative expenses 2.9 5.0 8.0 1.7 - 17.6 Other expenses including finance costs 2.1 2.9 4.5 0.7 8.7 18.9 ------- ------- -------- --------- -------- ------- Expenses 37.4 66.5 142.1 33.6 10.3 289.9 Results from operating activities 10.7 12.5 9.6 3.8 (1.3) 35.3 Share of profit of associates 0.1 ------- Profit before tax 35.4 Tax expense (10.6) ------- Profit after tax 24.8 ------- Claims ratio 48% 54% 68% 71% 60% Expense ratio 33% 34% 28% 26% 29% Combined ratio 81% 88% 96% 97% 89% 3. Net investment return --------- --------- --------- 6 Months ended 6 Months ended Year to 31 30 June 2005 30 June 2004 December 2004 (unaudited) (unaudited) £m £m (unaudited) £m --------- --------- --------- Investment income at fair value through income statement - dividend income 0.1 - 0.1 - interest income 13.6 4.8 12.9 Realised gains/(losses) on financial investments at fair value through income statement - realised gains 0.3 0.4 0.5 - realised losses (0.5) (0.1) (1.1) Net fair value gains/(losses) on financial investments through income statement - fair value gains - - 1.5 - fair value losses (0.7) (0.9) (2.0) Investment management expenses (0.5) (0.2) (0.6) --------- --------- --------- Net Investment Income 12.3 4.0 11.3 --------- --------- --------- 4. Earnings per share --------- --------- --------- 6 Months ended 6 Months ended Year to 31 30 June 2005 30 June 2004 December 2004 (unaudited) (unaudited) (unaudited) --------- --------- --------- Basic 6.8p 7.4 p 9.9 p Diluted 6.8p 7.4 p 9.9 p Basic Basic earnings per share is calculated by dividing profit after tax of £24.6m (2004: £16.9m) by the weighted average number of issued shares during the period of 360.6m (2004: 229.5 m). Diluted Diluted earnings per share is calculated by dividing profit after tax of £24.6m (2004: £16.9m) by the adjusted weighted average number of shares of 360.8m (2004: 229.6m). The adjusted weighted average number of shares assumes conversion of all dilutive potential ordinary shares, being share options. 5. Dividends An interim net dividend of 1.5p (2004: 0.3p) per ordinary share is payable on 11 November 2005 to shareholders registered on 21 October 2005 in respect of the six months to 30 June 2005. These financial statements do not provide for the dividends as a liability. 6. Acquisition of subsidiary On 22 March 2005, the group acquired all the shares in Omaha Property and Casualty Insurance Company for USD20.5m in cash. The company was renamed Beazley Insurance Company, Inc. The acquisition had the following effect on the group's assets and liabilities: Acquiree's net assets at the acquisition date: £ m Cash and cash equivalents 6.0 Intangible assets - Licences 4.6 ---------- Consideration paid 10.6 ---------- As part of the acquisition, the group acquired licences to underwrite admitted lines business in the 50 US states. The licences have an indefinite useful life and are carried at cost less accumulated impairment. 7. Transition to IFRS - reconciliations Reconciliation of Profit ---------------------- ---------------------- 6 months ended 30 June 2004 Year to 31 December 2004 ---------------------- ---------------------- ------ -------- -------- --------- ---------- ---------- --------- Notes UK GAAP Effect of IFRS UK GAAP Effect of IFRS transition to transition to IFRS IFRS £m £m £m £m £m £m ------ -------- -------- --------- ---------- ---------- --------- Insurance premium revenue 161.3 6.9 168.2 362.8 11.3 374.1 Insurance premium ceded to reinsurers (36.0) (1.4) (37.4) (69.1) (2.3) (71.4) -------- -------- --------- ---------- ---------- --------- Net insurance premium revenue a 125.3 5.5 130.8 293.7 9.0 302.7 Net investment income b 4.2 (0.2) 4.0 11.8 (0.5) 11.3 Other income 6.3 - 6.3 11.2 - 11.2 -------- -------- --------- ---------- ---------- --------- Net Income 135.8 5.3 141.1 316.7 8.5 325.2 Insurance claims 81.8 - 81.8 224.8 - 224.8 Insurance claims recovered from reinsurers (11.8) - (11.8) (42.8) - (42.8) -------- -------- --------- ---------- ---------- --------- Net insurance claims 70.0 - 70.0 182.0 - 182.0 Expenses for the acquisition of insurance contracts a 29.2 1.2 30.4 69.8 1.6 71.4 Administrative expenses 9.0 - 9.0 17.6 - 17.6 Other expenses including finance costs a,c,h 5.6 1.5 7.1 14.0 4.9 18.9 -------- -------- --------- ---------- ---------- --------- Expenses 113.8 2.7 116.5 283.4 6.5 289.9 Results from operating activities 22.0 2.6 24.6 33.3 2.0 35.3 Share of profit of associates 0.1 - 0.1 0.1 - 0.1 -------- -------- --------- ---------- ---------- --------- Profit before tax 22.1 2.6 24.7 33.4 2.0 35.4 Income tax expense i (6.8) (1.0) (7.8) (10.0) (0.6) (10.6) -------- -------- --------- ---------- ---------- --------- Profit after tax 15.3 1.6 16.9 23.4 1.4 24.8 -------- -------- --------- ---------- ---------- --------- ------------------ ------------------ ------------------ Reconciliation 1 January 2004 30 June 2004 31 December 2004 of Equity ------------------ ------------------ ------------------ Notes UK GAAP Effect of IFRS UK GAAP Effect of IFRS UK GAAP Effect of IFRS transition to transition to transition to IFRS IFRS IFRS £m £m £m £m £m £m £m £m £m ------ ------- -------- ------- ------- -------- ------- ------- -------- ------- ASSETS Intangible assets c 7.1 - 7.1 6.9 0.2 7.1 7.7 0.4 8.1 Deferred acquisition costs a 30.5 1.7 32.2 37.8 0.8 38.6 37.0 1.3 38.3 Investments in associates 1.2 - 1.2 1.3 - 1.3 1.3 - 1.3 Financial investments b,d,e 241.0 - 241.0 317.7 (13.1) 304.6 578.0 (108.1) 469.9 Loans and receivables including insurance receivables f 80.3 2.3 82.6 102.8 - 102.8 89.0 - 89.0 Deferred income tax i - 2.2 2.2 - 2.4 2.4 - 2.8 2.8 Reinsurance contracts a,e 56.8 2.1 58.9 103.5 0.7 104.2 185.8 (87.5) 98.3 Other receivables f 9.4 - 9.4 17.8 2.3 20.1 25.0 0.4 25.4 Cash and cash equivalents d 19.4 - 19.4 34.1 12.9 47.0 68.6 12.9 81.5 ------- -------- ------- ------- -------- ------- ------- -------- ------- Total Assets 445.7 8.3 454.0 621.9 6.2 628.1 992.4 (177.8) 814.6 ------- -------- ------- ------- -------- ------- ------- -------- ------- EQUITY Share 11.5 - 11.5 11.5 - 11.5 18.0 - 18.0 capital Reserves Share premium reserve 132.4 - 132.4 132.4 - 132.4 230.5 - 230.5 Merger reserve 1.6 - 1.6 1.6 - 1.6 1.6 - 1.6 Other reserves h - 0.2 0.2 - 0.3 0.3 - 0.4 0.4 Retained earnings 7.9 (3.8-) 4.1 21.8 (1.9) 19.9 27.9 (0.8) 27.1 ------- -------- ------- ------- -------- ------- ------- -------- ------- Total Equity 153.4 (3.6) 149.8 167.3 (1.6) 165.7 278.0 (0.4) 277.6 LIABILITIES Insurance contracts a,e 249.2 9.3 258.5 365.5 3.7 369.2 638.2 (177.7) 460.5 Borrowings - - - - - - 9.4 - 9.4 Deferred income tax i 3.5 - 3.5 7.3 1.2 8.5 7.2 1.2 8.4 Current income tax liabilities 0.4 - 0.4 2.6 - 2.6 3.2 - 3.2 Trade and other payables g,h 39.2 (1.3) 37.9 79.2 (1.0) 78.2 56.4 (4.8) 51.6 Retirement benefit obligations f - 3.9 3.9 - 3.9 3.9 - 3.9 3.9 ------- -------- ------- ------- -------- ------- ------- -------- ------- Total Liabilities 292.3 11.9 304.2 454.6 7.8 462.4 714.4 (177.4) 537.0 ------- -------- ------- ------- -------- ------- ------- -------- ------- Total Equity and Liabilities 445.7 8.3 454.0 621.9 6.2 628.1 992.4 (177.8) 814.6 ------- -------- ------- ------- -------- ------- ------- -------- ------- The principal changes are explained below. a. Foreign exchange In the group's UK GAAP financial statements, income statement transactions are translated into sterling using an average rate of exchange for the period. Assets and liabilities are translated into sterling using the rate of exchange on the balance sheet date. Any foreign exchange gains or losses are recognised in the statements of total recognised gains and losses. IAS 21 - The effects of changes in foreign exchange rates requires all monetary items to be translated into sterling at the rate of exchange on the balance sheet date. All foreign exchange gains or losses on monetary items are recognised in the income statement. Non-monetary items are initially converted into sterling using the rate at the date of transaction and are not subsequently re-valued. Deferred acquisition costs, unearned premium and reinsurers' share of unearned premium are deemed to be non-monetary items. b. Investments In the group's UK GAAP financial statements, listed investments are stated at market value and other investments are stated at directors' valuation. Market value is determined by mid market prices on balance date. All gains and losses on investments representing the difference between carrying value at balance date and their purchase price are taken to the income statement. On adoption of IAS 39 - Financial Instruments: Recognition and Measurement, the group categorised all investments as financial assets through income and valued them at fair value. Fair value is determined by reference to bid price or current offer price. The accounting for gains or losses on these financial assets is similar to UK GAAP. c. Intangible assets Goodwill Under FRS 10 - Goodwill and Intangible Assets, goodwill acquired in a business combination was capitalised and amortised on a straight line basis over its useful economic life, which was estimated to be 20 years. IFRS 3 - Business Combinations prohibits goodwill acquired in a business combination to be amortised. Instead, the goodwill is tested for impairment at least annually. On transition to IFRS at 1 January 2004, any goodwill previously amortised or written off was not reinstated. Syndicate capacity In accordance with IAS 38 - Intangible Assets, syndicate capacity is capitalised and has an indefinite useful life. As such, syndicate capacity is annually tested for impairment and is no longer amortised. Previously under UK GAAP, syndicate capacity was capitalised and amortised on a straight line basis over its useful economic life, which was estimated to be 20 years. d. Cash and cash equivalents IAS 7 - Cash Flow Statements defines cash and cash equivalents as short term (3 months or less from the date of acquisition), highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. All investments that meet this definition have been reclassified from investments to cash and cash equivalents on transition to IFRS. e. Reinsurance to close (RITC) In the UK GAAP financial statements, the syndicate underwriting account is 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. As the RITC is approved after the balance sheet date, this is a non-adjusting event under IAS 10 - Events After Balance Sheet Date and recognised in the period in which it is approved. f. Retirement benefit obligations In accordance with IAS 19 - Employee Benefits, the present value of defined benefit obligations are matched against the fair value of the plan assets. The resulting surplus or deficit is recognised as an asset or liability on the balance sheet. Previously under SSAP 24 - Accounting for Pension Costs, pension costs were recognised in the income statements over the employees' working lives with the group. The difference between the amount recognised in the income statement and the contribution made by the group were treated as an asset or liability on the balance sheet. The assets and liabilities of the defined benefit scheme were not recognised on the balance sheet but disclosed in the notes to the financial statements. The group is virtually certain that part of these costs would be reimbursed from the capital providers of syndicate 623. The group has recognised this as an asset in accordance with IAS 19. g. Dividends In accordance with IAS 10 - Events after Balance Date, dividends are recognised in the period in which they are declared. However, under UK GAAP dividends are recognised as a liability in the period to which they relate regardless of when they were declared and approved. h. Share options The group applied IFRS 2 - Share Based Payment at 1 January 2005 to all share based payment arrangements granted after 7 November 2002. These transactions were accounted for at intrinsic value under UK GAAP. Share based compensation plans granted after 7 November 2002 but not vested at 1 January 2004, are determined at fair value at grant date. The fair value is expensed over the expected life of the options, which is between 3.5 and 6.5 years. The adoption of IFRS 2 is equity neutral for equity settled transactions. i. Deferred tax In the group's UK GAAP financial statements, deferred tax assets and liabilities were recognised for timing differences that had originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax or right to pay less tax in the future had occurred at the balance sheet date. Timing differences are differences between the group's taxable profits and its results as stated in the UK GAAP financial statements. The group did not discount its UK GAAP deferred tax assets or liabilities. In accordance with IAS 12 - Income Taxes, the group calculates deferred taxes using a balance sheet liability method on all temporary differences between the tax base of assets and liabilities and their carrying value in the consolidated financial statements. Deferred income taxes are recognised at tax rates on balance sheet date and are expected to apply in periods in which the temporary differences are expected to reverse. IAS 21 prohibits discounting of deferred taxes. j. Explanation of material adjustments to the cash flow statement On transition to IFRS, highly liquid investments with maturities of less than 3 months are classified as cash and cash equivalents. Previously these were recognised as investments. Independent review report to Beazley Group plc Introduction We have been engaged by the company to review the financial information from the income statement onwards and we have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information. This report is made solely to the company in accordance with the terms of our engagement to assist the company in meeting the requirements of the Listing Rules of the Financial Services Authority. Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached. Directors' responsibilities The interim report, including the financial information contained therein, is the responsibility of and has been approved by the directors. The directors are responsible for preparing the interim report in accordance with the Listing Rules which require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual financial statements except where any changes, and the reasons for them, are disclosed. As disclosed in note 1 to the financial information, the next annual financial statements of the group will be prepared in accordance with IFRSs adopted for use in the European Union. The accounting policies that have been adopted in preparing the financial information are consistent with those that the directors currently intend to use in the next annual financial statements. There is, however, a possibility that the directors may determine that some changes to these policies are necessary when preparing the full annual financial statements for the first time in accordance with those IFRSs adopted for use by the European Union. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4 Review of interim financial information issued by the Auditing Practices Board for use in the United Kingdom. A review consists principally of making enquiries of group management and applying analytical procedures to the financial information and underlying financial data and, based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review is substantially less in scope than an audit performed in accordance with Auditing Standards and therefore provides a lower level of assurance than an audit. Accordingly, we do not express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 30 June 2005. KPMG Audit Plc Chartered Accountants 8 Salisbury Square London EC4Y 8BB 7 September 2005 Company information Directors Jonathan Agnew* - Chairman Andrew Beazley - Chief Executive Dudley Fishburn* Nicholas Furlonge Jonathan Gray Andrew Horton - Finance Director Neil Maidment Andy Pomfret* Johnny Rowell Joe Sargent* Tom Sullivan* * non executive director Company Secretary Arthur Manners Contacts Registered office One Aldgate London EC3N 1AA Company Number 4082477 Auditors KPMG Audit Plc 8 Salisbury Square London EC4Y 8BB Legal Advisors Norton Rose Kempson House Camomile Street London EC3A 7AN Financial Advisors Lexicon Partners Limited One Paternoster Square London EC4M 7DX Stockbrokers Numis Securities Limited Cheapside House 138 Cheapside London EC2V 6LH Principal Bankers Lloyds TSB Bank plc 113-116 Leadenhall Street London EC3A 4AX Registrars Lloyds TSB Registrars The Causeway Worthing West Sussex BN99 6DA This information is provided by RNS The company news service from the London Stock Exchange

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