LONDON, March 2, 2004 (PRIMEZONE) -- FINANCIAL REVIEW
Highlight
-Profit before tax of GBP77.6m (2002:GBP10.0m)
-88.5% combined ratio
-53.3% increase in gross written premium
-67.6% increase in net unearned premium reserve to GBP466.7m
-41.7% increase in net tangible assets
-Acquisition of Professional Risks Insurance Limited ("PRI") now renamed Brit Insurance (UK) Limited ("BIL(UK)")
-100% ownership of syndicate 2987
-Dividend policy
-Brit Insurance Limited "A" rating from Fitch and A M Best
Summary of Results
Total operating profit was GBP75.4m (2002: GBP11.4m). Operating profit at the long-term rate of investment return was GBP91.2m (2002: GBP25.0m).
The long term rates of return have been adopted as below:
Equities 7%
Cash and bonds 5%
Syndicate funds 5%
Total operating profit by business division:
Underwriting Underwriting
Lloyd's Companies Total Other Total Total
2003 2003 2003 2003 2003 2002
GBPm GBPm GBPm GBPm GBPm GBPm
Technical
result 63.5 36.8 100.3 - 100.3 52.0
Investment
return * 31.4 22.7 54.1 9.0 63.1 26.3
Investment
income (32.1) (11.9) (44.0) - (44.0) (27.4)
transferred to
technical account
Interest
payable (0.1) - (0.1) (4.5) (4.6) (5.1)
Fees and
commission 2.3 - 2.3 6.3 8.6 16.0
Other income - 0.1 0.1 1.4 1.5 1.0
Other expenses - - - (25.4) (25.4) (31.5)
Amortisation (1.9) - (1.9) (6.5) (8.4) (6.3)
Operating
profit at long-term
rate of return 63.1 47.7 110.8 (19.7) 91.1 25.0
Short-term (7.6) (8.1) (15.7) - (15.7) (13.6)
fluctuations in
investment return
Operating 55.5 39.6 95.1 (19.7) 75.4 11.4
profit
* At the long term rate of return where applicable
Underwriting operations
The Group writes insurance business through Brit Insurance Ltd ("BIL") and at Lloyd's. The net assets of BIL totalled GBP178.8m at 1 January 2003 and increased to GBP334.2m by 31 December 2003, following the Group reorganisation and integration of PRI. Capacity at Lloyd's for the 2003 underwriting year was GBP513.8m (2002:GBP454.2m). All Lloyd's business written by the Group for 2004 will be in Syndicate 2987. The Life Syndicate 389 was put into run off with effect from 31 December 2003.
Underwriting at Lloyd's is supported by Funds at Lloyd's ("FAL") which totalled GBP308.0m at 31 December 2003 (2002: GBP271.9m). For 2004, the FAL supports GBP500.0m (2003: GBP500.0m) of capacity on Syndicate 2987 and the run-off requirements of Syndicate 389 and remaining non-managed syndicates. In addition, the Qualifying Quota Shares ("QQSs") have been utilised to increase Syndicate 2987's capacity.
Overall Lloyd's capacity by underwriting year:
2004 2003 2002 2001
Syndicate 100% Brit 100% Brit 100% Brit 100% Brit
share share share share share share share share
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
250 - - - - - - 99.9 46.0
389 - - 15.0 13.8 14.0 12.7 7.6 7.6
735 - - - - - - 75.0 70.0
800 - - - - - - 62.6 34.3
1202 - - - - - - 69.9 53.7
2040 - - 14.0 - 14.0 - 14.0 -
2400 - - - - 30.0 1.5 30.0 1.5
2987 500.0 500.0 500.0 500.0 450.0 440.0 - -
TOTAL 500.0 500.0 529.0 513.8 508.0 454.2 359.0 213.1
Group QQSs 50.0 50.0 100.0 100.0 75.0 73.3 - -
3rd party - - 22.0 22.0 53.3 52.1 - -
QQSs
TOTAL 550.0 550.0 651.0 635.8 636.3 579.6 359.0 213.1
after QQSs
Net written premium income for the year has grown to GBP850.8m (2002: GBP522.2m). Net earned premium income for the year has grown to GBP671.4m (2002: GBP325.3m). The difference between net written premium and net earned premium of GBP179.4m is counterbalanced by the increase in the net unearned premium reserve (which totalled GBP466.7m at 31 December (2002: GBP278.5m), an increase of GBP188.2m). The 31 December 2003 net unearned premium reserve represents premium that has been written predominantly at 2003 rates but has yet to be earned in the technical account. 48.8% of income written in 2003 was earned during the calendar year. The remaining 51.2% will be earned in future years and is carried forward as an unearned premium reserve on the balance sheet.
The technical account for the year is analysed below to demonstrate the recognition of earned premium income from the 2003 and 2002 underwriting years, which represents most of the business in force during the 2003 calendar year. The analysis also shows the effect of movements in the calendar year 2003 arising from business incepting in 2001 and prior years.
Technical Account for the year ended 31 December 2003
Calendar Year 2003 2003 2003 2003 2002
Business Business Business
incepting incepting incepting
2003 2002 2001 and
prior TOTAL TOTAL
GBPm GBPm GBPm GBPm GBPm
Earned premium
net of 414.2 248.5 8.7 671.4 325.3
reinsurance
Claims incurred
net of (257.6) (132.5) (10.4) (400.5) (205.1)
reinsurance
Change in
equalisation (3.9) 0.7 - (3.2) (2.5)
provision
Change in
other technical
provisions (0.7) - - (0.7) 0.5
Net operating
expenses (139.1) (72.1) 0.4 (210.8) (93.7)
Technical
result before 12.9 44.6 (1.3) 56.2 24.5
investment return
Claims ratio 59.7% 62.9%
Expense ratio 28.8% 25.7%
Combined ratio 88.5% 88.6%
The 2000 underwriting year was the final year that Brit participated on externally managed syndicates. In the ordinary course of events these participations should have closed at 31 December 2002. There are twelve syndicates with Brit involvement in run off at 31 December 2003. Total Brit capacity on these syndicates is GBP39.3m and they have been reserved at the mid-point of managing agent's forecasts. The total net reserve on these run off syndicates is GBP2.4m.
Investments
Group assets under management totalled GBP1,434.9m at 31 December 2003 (2002: GBP1,036.4m). GBP871.9m was managed by EPIC Asset Management Ltd ("EPAM"), a 70 per cent subsidiary of The Equity Partnership Ltd ("EPL"), an associated company of the Group.
As of 1 March 2004, the boards of BIL and Brit Syndicates Limited ("BSL") transferred the management of fixed interest portfolios totalling around GBP300.0m to EPAM.
In addition at 31 December 2003 GBP42.3m (2002: nil) of the Group's equity portfolio was also managed by Epic Specialist Investments Limited.
The Group has a direct holding of 34.1% in EPL, the holding company of EPAM and GBP14.6m invested in shares of EPIC PLC, a company listed on the London Stock Exchange. EPL is treated as an associated company and the Group equity accounted a profit arising from this activity of GBP0.2m (2002: GBP0.1m) for the year. EPAM had funds under management of GBP1,134.6m at 31 December 2003 (2002: GBP809.5m).
Investment Return
2003 investment returns were in excess of benchmarks for the equity portfolios and in line with benchmarks for the cash and bond portfolios. Current benchmarks for the cash and bond portfolios range from seven day LIBID to a one to five year gilt index.
Total assets under Group management at 31 December 2003 (including 100% of syndicate assets) were invested as below:
31 December 2003 31 December 2002
2003 Return 2002 Return
GBPm GBPm GBPm GBPm
Equities 154.0 17.4 91.1 (16.5)
Bonds 793.7 23.3 500.3 24.5
Cash and deposits 487.2 10.9 445.0 12.5
Total 1,434.9 51.6 1,036.4 20.5
The currency mix of the investment portfolio was:
31 December 31 December
2003 2002
% %
Sterling 61.8 83.6
US$ 30.9 14.5
Euros 5.7 1.4
Other 1.6 0.5
Total 100.0 100.0
Equity investments include managed equity portfolios, which form part of the Group's Funds at Lloyd's, investments in Lloyd's entities and a number of strategic investments. A breakdown of these investments is given below:
Equity Investments
31 December Return 31 December Return
2003 for year 2002 for year
2003 2002
GBPm GBPm GBPm GBPm
Lloyd's listed 13.7 2.8 15.2 (1.6)
investments
Listed investments 0.9 0.7 1.9 0.2
Non listed investments 1.1 (0.2) 2.4 (1.7)
Managed portfolios 116.0 13.5 41.0 (9.9)
Protected funds 1.4 - 9.7 0.1
Ebix Inc 6.3 4.9 1.5 (3.8)
EPIC PLC - Capital 9.9 (5.1) 15.0 (0.3)
shares
EPIC PLC - Income 4.7 0.8 4.4 0.5
shares
Total 154.0 17.4 91.1 (16.5)
The duration of the total bond portfolio was 1.27 years at 31 December 2003 (2002: 1.60 years). The bond portfolios were invested as below:
2003 2002
Rating GBPm GBPm
Government 425.5 280.1
AAA 164.2 117.2
AA 133.9 30.0
A 64.4 66.5
BBB 4.4 4.1
Other 1.3 2.4
Total 793.7 500.3
Governments include UK, US, Italian, Canadian, German, Spanish and Swiss Government Bonds (2002: UK, US, Canadian, Swiss and German).
Non-underwriting operations
Peoples Choice, the Group's telesales broking operation was sold for GBP7.2m (before expenses) on 31 July 2003. This has produced a profit on disposal of GBP2.1m. The result for the period to 31 July 2003 was a loss of GBP3.7m (2002: GBP4.6m).
The Group has a 77.2% investment in Ri3K Ltd ("Ri3K"), a web based business to business infrastructure for the reinsurance industry. Ri3K became a subsidiary on 31 December 2002. The Group results for the year include a net loss of GBP3.9m arising from Ri3K (2002: equity accounted loss of GBP0.9m).
Expenses
2003 2002
GBPm GBPm
Commissions charged to technical account 132.1 63.2
Other acquisition costs 33.5 9.4
Administrative expenses 45.2 21.1
Total technical account expenses 210.8 93.7
Non-technical account net operating
expenses 33.8 37.7
Total technical account expenses 244.6 131.4
Administrative expenses and other acquisition costs incurred by the group during the year were:
2003 2002
GBPm GBPm
Payroll costs before profit related pay 28.9 16.7
Profit related pay 6.7 1.9
Accommodation costs 4.3 2.2
Legal & professional charges 4.1 2.7
IT costs 5.6 2.8
Marketing & communications 1.0 0.4
Amortisation 8.5 6.3
Exchange movements 7.9 5.2
VAT irrecoverable 1.8 1.0
Lloyd's charges 16.9 7.2
Other syndicate expenses 6.1 5.2
Other 6.1 0.9
97.9 52.5
Peoples Choice 10.6 15.7
Ri3K 4.0 -
TOTAL 112.5 68.2
Result after tax
The result after tax and minority interests was a profit of GBP57.5m (2002:GBP5.4m). The effective tax rate was 26.3 per cent (2002: 23.7 per cent).
Earnings per Share
Basic earnings per share were 6.58p (2002: 1.11p). Details of the calculation are given in Note 12 to the financial statements.
Key Ratios
2003 2002
Net written premium / Gross written premium 83.8% 78.8%
Net written premium growth 62.9% 113.0%
Net written premium / Weighted average
shareholders' funds 139.9% 163.9%
Technical result / Net earned premium 14.9% 16.0%
Claims ratio 59.7% 62.9%
Expense ratio 28.8% 25.7%
Combined ratio 88.5% 88.6%
Gross technical provisions / Gross
written premium 140.0% 156.0%
Net technical provisions / NWP 128.9% 136.9%
Shareholders' funds / Net technical provisions 64.0% 66.7%
Insurance debtors / Shareholders' funds 57.5% 76.4%
Insurance debtors / Total assets 17.3% 20.3%
Dividend per Share
The Directors are not in a position to recommend the payment of a dividend due to losses in previous years which have resulted in a lack of distributable reserves. The negative balance on the Company's profit and loss account at 31 December 2003 was GBP25.7m (2002: negative balance of GBP27.1m), but this included a profit of GBP39.8m arising on the intra-group sale of BIL. This profit is non-distributable. The Company's negative distributable reserves at 31 December 2003 were GBP65.6m (2002: GBP27.1m). The Company intends to recommence payment of dividends as soon as it is possible to do so, via the proposed capital reorganisation.
Brit Underwriting Group Limited (formerly PRI Group PLC)
On 22 May 2003, the Group completed the acquisition of Brit Underwriting Group Limited. This acquisition created goodwill of GBP51.2m. Further details of this transaction can be seen in Note 18 to the financial statements.
Reinsurance Recoverable
Total recoveries from reinsurers at 31 December were:
2003 2002
GBPm GBPm
Amounts due at 31 December 37.8 25.4
Recoveries in respect of outstanding claims222.9 233.3
Total 260.7 258.7
Credit Quality 2003 2002
% %
AAA 1.5 9.5
AA 19.9 20.4
A 66.5 61.6
BBB 5.1 4.1
Unrated 7.0 4.4
Total 100.0 100.0
Gearing and Liquidity
Total Group debt at 31 December 2003 was GBP58.9m (2002: GBP64.6m). This comprised GBP15.0m (2002: GBP21.0m) of bank borrowings and GBP43.9m (2002: GBP43.6m) of 8.5% Convertible Unsecured Subordinated Loan Stock 2008. The final date for conversion of the loan stock is 31 October 2005. The bank borrowings are the remaining part of an GBP80m variable rate facility taken out in February 2000. The facility has been repaid from the proceeds of sale of listed Lloyd's investments. The final repayment under the facility is due on 3 February 2005.
Total gearing is 8.4 per cent (2002: 13.6 per cent) of Shareholders' funds. The Group has previously commented that it will investigate additional facilities in order to have these available should the need arise.
Interest payments during the year totalled GBP4.6m (2002: GBP5.1m). Interest cover was 18.0 times (2002: 2.5 times).
Liquidity throughout the Group is strong and at 31 December 2003, GBP41.1m (2002: GBP67.9m) of cash and liquid securities was held at holding company level. This gives the Group flexibility to expand both the insurance company and the Lloyd's operation during 2004 in addition to providing working capital. It is anticipated that some of these funds will be required to meet increasing Funds at Lloyd's requirements as the regulatory demands for capital increase.
The Group has also renewed a US$80m standby credit facility which can be drawn to supplement any gross liability funding requirements of the Lloyd's trust funds in the United States.
It is important to maintain sufficient liquidity at holding company level because funds held in the regulated insurance operations are not available to other group companies. Assets within BIL are segregated from the rest of the Group and dividend payments from BIL require FSA consent. Funds generated from Lloyd's syndicate activities are held within a range of Lloyd's trust funds and are released on closure in line with Lloyd's three year accounting. Some intra syndicate funding is permitted provided that proper terms and conditions are established on an arms length basis. The closures of the four syndicates that merged to form composite Syndicate 2987 and 100% Brit ownership from 2003 will simplify this process.
Lloyd's has announced its intention to permit wholly owned aligned syndicates to distribute profits after only one year. This change is due to come into effect in 2005. The amount and terms relating to such distributions are still under review by Lloyd's.
Treasury Policy
The Investment Committee has responsibility for the overall financing policy of the Group and for cash and liquidity management. Investment policy at the date of this report is to continue holding the majority of funds in short dated, liquid investments with high credit quality.
Investment Managers are chosen and appointed by the Directors of the individual operating companies. Monitoring the performance of investment managers is delegated by the regulated companies to the Investment Committee.
Investments are managed according to specific guidelines and benchmarks for different types of fund. There are four main sets of such guidelines which apply respectively to:
-Corporate funds
-Syndicate funds
-Insurance company funds
-Funds at Lloyd's
The differences in the guidelines reflect the various regulatory obligations pertinent to each fund.
Overall asset mix varies from time to time but it is not anticipated that more than 30 per cent of total Group net tangible assets would be invested in equities (excluding assets supporting pension scheme liabilities).
The Group writes a substantial amount of its business in foreign currencies, especially US dollars and Euros. The Investment Committee reviews exposures arising from retained profits and losses arising in foreign currencies and enters into currency transactions as appropriate.
The Group's gross written premium is shown below by currency:
Gross Written Premium
GBPm %
GBP Sterling * 477.8 47.0
US Dollars 450.9 44.4
Can Dollars 19.1 1.9
Euros 67.9 6.7
1,015.7 100.0
* Sterling includes other miscellaneous currencies
Overall foreign exchange policy is reviewed monthly. Current policy is to make regular monthly sales of US$10m.
On 24 December 2003 a US$100m option transaction involving both the purchase and sale of options was entered into to hedge US dollar profits.
Liabilities in the principal trading currencies of sterling, US dollars and Euros are substantially matched with assets held in those currencies. Other currencies are converted into sterling.
Capital Adequacy and Financial Strength
The Group retains high solvency margins in its overall insurance operations.
Projected gross premium for 2004 is GBP1.3bn which is 205.7 per cent of net tangible assets. The Group is therefore projecting to write insurance business at a ratio to overall net tangible assets of just over 2:1.
BIL has a financial strength rating of A (Excellent) with a stable outlook from A M Best and A (Strong) with positive outlook from Fitch.
Solvency requirements are becoming progressively more stringent and the calculations more risk based. In July 2003 the FSA released CP 190, which sets out the proposals for the new Enhanced Capital Requirement ("ECR"). The ECR will be greater than the current Minimum Capital Requirement ("MCR") as set out in CP 181. Additionally, insurers will have to do their own capital modelling based on stress and scenario testing in order to derive an Individual Capital Adequacy Standard ("ICAS"). Finally the FSA will conduct its own assessment of the insurer's capital adequacy to produce Individual Capital Guidance ("ICG").
The capital requirement for UK insurers is likely to be the highest of the MCR, ECR, ICAS or ICG. There could also be an expectation of an adequate buffer above this level.
Groups that include a regulated UK insurer have to file a Parent Undertaking Solvency Calculation with the FSA. Under current procedures the filing is for information purposes only and a negative result is accepted. This situation is expected to change for the 2005 financial year and Groups will have to demonstrate an overall surplus. In determining the Group solvency requirement, it is necessary to add up the solo requirements of the individual underwriting entities. The Group must maintain sufficient capital to exceed the sum of the solo requirements. For the purposes of defining total Group capital, goodwill and short term debt are excluded from the calculation.
Current projections indicate that the Group has adequate capital to support planned future growth at both Group and solo level based upon the new solvency regime.
Group Pension Schemes
The Group operates three main pension schemes:
- A money purchase scheme based on the stakeholder legislation.
- A final salary scheme. This scheme was closed to new members during 2001.
- A Funded Unapproved Retirement Benefit scheme for employees earning more than the statutory earnings cap.
Total scheme assets at 31 December 2003 were GBP56.7m. Asset allocation was 86.4% equities and the remaining 13.6% in cash and bonds. The Group has not adopted FRS 17 in respect of the final salary scheme. Details of the effect of accounting under FRS 17 have been included in Note 35 to the accounts. The scheme at 31 December 2003 would have had a liability net of deferred tax under FRS 17 rules of GBP10.9m (2002: GBP7.3m).
Asset Value per Share
At 31 December 2003 net assets totalled GBP701.5m (2002: GBP476.3m) equivalent to 72.0p per share (2002: 63.7p). Net tangible assets totalled GBP631.5m (2002: 445.6m) equivalent to 64.8p per share (2002: 59.6p).
International Financial Reporting Standards
The Group is aware of the requirement for EU listed companies to adopt International Financial Reporting Standards ("IFRS") for accounting periods beginning on or after 1 January 2005. The Group is taking steps to meet this timetable.
The Group has initiated a project to facilitate a smooth and successful conversion to IFRS. Its scope includes monitoring the ongoing developments in IFRS, assessing the financial and non-financial impact and implications for the Group, and determining courses of action and implementing strategies.
Outlook for 2004
- Target 2004 gross premium written of GBP1.3bn
- Continuing strong rating environment
- Expansion of UK regional presence
- Internalisation of investment management
- Capital reorganisation
- Continuing systems investment
Matthew Scales Group Finance Director
Consolidated Profit and Loss Account - Technical Account - General
Business for the year ended 31 December 2003
Year Year
ended ended
31 31
December December
2003 2002
Notes GBP'000 GBP'000
Earned premiums, net of
reinsurance:
Gross premiums written 1,015,727 662,715
Outward reinsurance premiums (164,962) (140,555)
--------------------------
Net premiums written 850,765 522,160
--------------------------
Change in the provision for
unearned premiums (181,388) (218,445)
Change in the provision for
unearned premiums,
reinsurers' share 2,059 21,569
--------------------------
Net change in the provision
for unearned
premiums (179,329) (196,876)
--------------------------
Earned premiums, net of
reinsurance 671,436 325,284
Allocated investment return
transferred from 43,985 27,405
the non-technical account
--------------------------
Total technical income 715,421 352,689
--------------------------
Claims incurred, net of reinsurance:
Claims paid:
Gross amount (228,667) (171,559)
Reinsurers' share 89,490 69,170
--------------------------
Net claims paid (139,177) (102,389)
--------------------------
Change in the provision for claims:
Gross amount (224,234) (84,194)
Reinsurers' share (37,039) (18,496)
--------------------------
Net change in the provision
for claims (261,273) (102,690)
--------------------------
Claims incurred, net of
reinsurance 2 (400,450) (205,079)
Change in other technical
provisions (673) 513
Net operating expenses 3 (210,840) (93,684)
Change in the equalisation
provision (3,186) (2,483)
--------------------------
Total technical charges (615,149) (300,733)
--------------------------
--------------------------
Balance transferred to the
non-technical account 100,272 51,956
==========================
Consolidated Profit and Loss Account - Non-Technical Account
for the year ended 31 December 2003
Year Year
ended ended
31 31
December December
2003 2002
Notes GBP'000 GBP'000
Balance on technical account
for general business 100,272 51,956
Net investment return 4 42,699 7,561
Allocated investment return
transferred to the technical
account for general business (43,985) (27,405)
Fees and commissions 5 8,653 15,981
Other income 6 1,540 992
Other expenses 7 (33,761) (37,708)
--------------------------
Operating profit 75,418 11,377
Profit on disposal of subsidiary 19 1,920 -
undertakings
Share of operating profit/(loss) 16 219 (1,395)
in associated undertakings
--------------------------
Profit on ordinary activities
before tax 77,557 9,982
Tax charge on profit on ordinary
activities 11 (20,385) (2,363)
--------------------------
Profit on ordinary activities
after tax 57,172 7,619
Equity minority interests 30 312 (2,258)
--------------------------
Profit attributable to members
of the parent company 57,484 5,361
==========================
Operating profit based on the
long-term rate 91,158 25,022
of investment return
Short-term fluctuations in
investment return (15,740) (13,645)
--------------------------
Operating profit 75,418 11,377
==========================
Basic earnings per share
(pence per share) 12 6.58p 1.11p
==========================
Diluted earnings per share
(pence per share) 12 6.50p 1.11p
==========================
In accordance with the amendment to Financial Reporting Standard 3 "Reporting Financial Performance" the inclusion of unrealised gains and losses in the profit and loss account to reflect the marking to market of investments in the balance sheet is deemed not to be a departure from the unmodified historical cost basis of accounting. Accordingly a separate note of historical cost profits and losses is not given.
All results arise from continuing operations.
Statement of Total Recognised Gains and Losses for the year ended 31 December 2003
Year ended Year ended
31 31
December December
2003 2002
GBP'000 GBP'000
Profit attributable to members of
the parent company 57,484 5,361
Acquisition of Ri3K Limited - 1,428
--------------------------
Total recognised gains and losses
relating to the year 57,484 6,789
==========================
Consolidated Balance Sheet
as at 31 December 2003
Assets As at As at
31 December 31 December
2003 2002
Notes GBP'000 GBP'000
Intangible assets:
Syndicate participations 2,236 4,155
Goodwill 67,732 26,607
--------------------------
13 69,968 30,762
--------------------------
Investments:
Financial investments 14 1,164,122 781,172
Investments in associated
undertakings 16 253 116
--------------------------
1,164,375 781,288
--------------------------
Reinsurers' share of technical provisions:
Provision for unearned premiums 103,072 85,794
Claims outstanding 222,863 233,334
--------------------------
325,935 319,128
--------------------------
Debtors:
Arising out of direct insurance 147,917 108,040
operations
Arising out of reinsurance operations 255,305 255,701
Other debtors 20 31,976 47,155
--------------------------
435,198 410,896
--------------------------
Other Assets:
Tangible assets 21 4,779 4,867
Cash at bank and in hand 183,993 130,914
Own shares 22 3,975 1,211
Other assets 15,069 6,289
--------------------------
207,816 143,281
--------------------------
Prepayments and accrued income:
Deferred tax asset 23 18,922 38,395
Deferred acquisition costs 100,481 61,159
Other prepayments and accrued income 24 11,409 9,082
--------------------------
130,812 108,636
--------------------------
--------------------------
Total assets 2,334,104 1,793,991
==========================
Liabilities As at As at
31 December 31 December
2003 2002
Notes GBP'000 GBP'000
Capital and reserves:
Called up share capital 27 243,513 186,867
Share premium account 28 481,135 370,107
Capital redemption reserve 28 586 586
Profit and loss account 28 (23,735) (81,219)
--------------------------
Equity Shareholders' funds 29 701,499 476,341
--------------------------
Equity minority interests 30 9,398 (371)
--------------------------
Technical provisions:
Provision for unearned premiums 569,764 364,287
Claims outstanding - gross 852,340 673,480
Equalisation provision 5,670 2,483
Other technical provisions (5,254) (6,462)
--------------------------
1,422,520 1,033,788
--------------------------
Provisions for other risks and
charges: 26 801 1,129
Creditors: Amounts falling due
within one year
Arising out of direct insurance 23,969 18,888
operations
Arising out of reinsurance
operations 71,862 162,401
Other creditors 25 31,195 32,999
--------------------------
127,026 214,288
--------------------------
Creditors: Amounts falling due
after more than one year
Other creditors including
convertible debt 25 58,872 64,625
Accruals and deferred income 13,988 4,191
--------------------------
Total liabilities 2,334,104 1,793,991
==========================
Balance Sheet of the Company As at As at
31 31
December December
as at 31 December 2003 2003 2002
Notes GBP'000 GBP'000
Fixed asset investments:
Investments in subsidiary
undertakings 15 506,854 293,497
Investments in associated
undertakings 16 62 62
Other investments 14 63,005 84,621
Own shares 22 445 920
--------------------------
570,366 379,100
--------------------------
Current assets:
Debtors 20 187,539 206,842
Deferred tax asset 23 295 295
Prepayments and accrued income 24 19 60
Cash at bank and in hand 4,066 10,129
--------------------------
191,919 217,326
--------------------------
Creditors: Amounts falling due within one
year
Other creditors 25 - (95)
Accruals and deferred income (3,923) (1,293)
--------------------------
(3,923) (1,388)
--------------------------
--------------------------
Net current assets 187,996 215,938
--------------------------
--------------------------
Total assets less current
liabilities 758,362 595,038
--------------------------
Creditors: Amounts falling due
after more than one year
Other creditors including
convertible debt 25 (58,872) (64,625)
--------------------------
Net assets 699,490 530,413
==========================
Capital and reserves:
Called up share capital 27 243,513 186,867
Share premium account 28 481,135 370,107
Capital redemption reserve 28 586 586
Profit and loss account 28 (25,744) (27,147)
--------------------------
Equity Shareholders' funds 699,490 530,413
==========================
The financial statements were approved by the Board of Directors on
1 March 2004 and were signed on its behalf by
Clive Coates, Chairman
Matthew Scales, Finance Director
Consolidated Cash Flow Statement
for the year ended 31 December 2003
Notes Year Year
ended ended
31 31
December December
2003 2002
GBP'000 GBP'000
Net cash inflow/(outflow) from
operating activities 33 (ii) 226,416 (460)
Returns on investment and
servicing of finance:
Interest paid (4,600) (5,072)
--------------------------
Taxation:
Corporation tax (paid)/recovered (973) 3,423
--------------------------
Capital expenditure:
Purchase of syndicate capacity - (1,506)
Purchase of tangible fixed assets (1,931) (2,187)
Proceeds from disposal of
tangible fixed assets 6 43
--------------------------
(1,925) (3,650)
--------------------------
Acquisitions and disposals:
Acquisition of subsidiary
undertakings 50,037 316
Disposal of subsidiary undertakings 4,881 -
Acquisition of own shares for the (3,559) -
Performance Share Plan
Disposal of associated undertaking - 400
Loan to associated undertaking - (2,750)
--------------------------
51,359 (2,034)
--------------------------
Financing:
Decrease in bank loans (7,037) (7,812)
Net proceeds from placing and
open offer - 194,150
--------------------------
(7,037) 186,338
--------------------------
--------------------------
Increase in cash in the year 263,240 178,545
==========================
Cash flows were invested as
follows:
Increase/(decrease) in cash
holdings 33 (iii) 41,819 (36,484)
Net portfolio investments:
Deposits with credit
institutions 33 (iv) 26,589 (90,284)
Fixed income investments 33 (iv) 128,176 313,966
Variable income investments 33 (iv) 18,517 (3,086)
Protected funds 33 (iv) (8,336) (2,055)
Equities 33 (iv) 56,475 (3,512)
-------------------------
Increase in cash in the year 263,240 178,545
=========================
The consolidated cashflow statement excludes syndicate cashflows and cash held within Lloyd's premium trust funds on behalf of the Group's underwriting subsidiaries.
I Basis of preparation of financial statements
Basis of preparation
The financial statements of the Group and the Company have been prepared in accordance with applicable accounting standards and under the historical cost accounting rules, modified by the revaluation of investments.
The financial statements of the Group have been prepared in accordance with Section 255 of, and Schedule 9A to, the Companies Act 1985, as amended by the Companies Act 1985 (Insurance Companies Accounts) Regulations 1993. The recommendations of the Statement of Recommended Practice on Accounting for Insurance Businesses issued by the Association of British Insurers in November 2003 (the "ABI SORP") have been adopted.
The balance sheet of the Company has been prepared in accordance with Schedule 4 to the Companies Act 1985. No profit and loss account is presented for the Company as permitted by Section 230 of the Companies Act. The profit dealt with in the accounts of the parent company was GBP1,403,000 (2002: loss of GBP17,119,000).
Basis of consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries, together with the Group's participation in the Lloyd's syndicates' assets, liabilities, revenues and expenses for the year ended 31 December 2003. In the Group accounts, associated undertakings are accounted for on the equity basis from the date the Directors deem that the Group exercises a significant influence over the Company. Subsidiaries are consolidated from the date control is gained.
II Accounting Policies
1 Underwriting activities
(a) Managed syndicates and the insurance companies
The results for all classes of business have been determined on an annual basis whereby the incurred cost of claims, commission and related expenses are charged against the earned proportion of premium, net of reinsurance as follows:
(i) Premiums written relate to business incepted during the year, together with any differences between booked premiums for prior years and those previously accrued, and include estimates of premiums due but not yet receivable or notified, less an allowance for cancellations.
(ii) Unearned premiums represent the proportion of premiums written in the year that relate to unexpired terms of policies in force at the balance sheet date.
(iii) Acquisition costs represent commission and other expenses arising from the conclusion of insurance contracts. They are deferred over the period in which the related premiums are earned.
(iv) Claims incurred comprise claims and related expenses paid in the year and changes in the provisions for outstanding claims, including provisions for claims incurred but not reported and related expenses, together with any other adjustments to claims from prior years. Where applicable deductions are made for salvage and other recoveries.
(v) Claims outstanding represent the ultimate cost of settling all claims (including direct and indirect claims settlement costs) arising from events which have occurred up to the balance sheet date, including provision for claims incurred but not yet reported, less any amounts paid in respect of those claims. Claims outstanding are reduced by anticipated salvage and other recoveries.
For the managed syndicates, claims provisions have been established on a class of business basis for each year of account. The Underwriting and Management teams of the syndicates conduct a quarterly review of each class of business for all years of account. Claims are projected to the ultimate position after 36 months and provision is made for known claims and claims incurred but not reported.
For the insurance companies, claims based estimation techniques have been used to establish claims provisions for catastrophe reinsurance, financial risks and mortgage indemnity classes of business. The relevant management teams review each contract quarterly and set the provision on a contract by contract basis. Provisions are established for all known losses and major events to the extent that management estimates that individual contracts are likely to incur a loss. Claims provisions for all other classes of business have been established on an individual class of business basis. The underwriting and management teams conduct a quarterly review of each class of business. Claims are projected to the ultimate position and provision is made for known claims and claims incurred but not reported.
(vi) Unexpired risks provision: Provision is made for any deficiencies arising when unearned premiums, net of associated acquisition costs, are insufficient to meet expected claims and expenses after taking into account future investment return on the investments supporting the unearned premiums provision and unexpired risks provision. The expected claims are calculated having regard to events that have occurred up to the balance sheet date.
Unexpired risk surpluses and deficits are offset where business classes are managed together and a provision is made if an aggregate deficit arises.
(vii) Equalisation reserves (the insurance companies): Amounts are set aside in accordance with the requirements of the Insurance Companies (Reserves) Regulations 1996 for the purpose of mitigating exceptionally high loss ratios in future years. The amounts reserved are not liabilities because they are in addition to the provisions required to meet the anticipated ultimate cost of settlement of outstanding claims at the balance sheet date. Notwithstanding this, they are required by Schedule 9A to the Companies Act 1985 to be included within technical provisions.
(viii) Net operating expenses: Operating expenses are charged in the year in which they were incurred.
(ix) The principles of the annual basis of accounting for insurance business are applied to the underwriting transactions and balances of the managed syndicates. Results under the annual basis of accounting are estimated on the basis of premiums earned in the year as a proportion of the projected ultimate premiums for each syndicate year of account, together with any adjustments in relation to prior years. Premium earnings patterns are set on the basis of the Underwriter's and Internal Actuary's judgement. Major claims are allocated to the year in which they occur.
(x) For each managed syndicate on which the Group participates, the Group's proportion of the syndicate's assets and liabilities has been reflected in its Consolidated Balance Sheet. Syndicate assets are held subject to trust deeds for the benefit of the Syndicate's insurance creditors.
(b) Non-managed syndicates
The Group's non-managed syndicate participations consist entirely of run-off syndicate years of account, with the last year being 2000. These participations are accounted for on a three year funded basis.
(i) Premiums
Written premiums comprise adjustments made in the year to premiums written in prior accounting periods. Outward reinsurance premiums are accounted for in the same accounting period as the related direct insurance or inwards reinsurance business.
(ii) Claims
Claims incurred comprise claims and claims handling expenses paid during the financial year together with the movement in the provision for claims outstanding and settlement expenses, including claims incurred but not reported.
(iii) Loss provisions on run-off years
Provision is made for the estimated future deterioration of years of account in run-off. External Managing Agents' published forecast information and Management's market knowledge are used to establish the loss provision for the non-managed syndicates. All available information is reviewed quarterly and the open year loss provisions are set on a syndicate by syndicate basis. While the directors make every effort to ensure that adequate provision is made for losses on open years of account, their view of the ultimate loss may vary in later periods as a result of subsequent information and events. This in turn may require adjustment of the original provisions. These adjustments are reflected in the financial statements for the period in which the related adjustments are made.
2 Other accounting policies
(a) Investments
(i) The values of financial investments are stated in the financial statements on the following basis:
- Listed investments are stated at closing middle market
prices on recognised stock exchanges.
- Unlisted investments and subsidiary undertakings are stated
at cost or Directors' valuation.
(ii) Investment return
Investment return comprises all investment income, realised investment gains and losses and movements in unrealised gains and losses, net of investment expenses, charges and interest.
Realised gains and losses arise from the difference between proceeds and cost. Unrealised investment gains and losses are calculated as the difference between the valuation at the balance sheet date and the valuation at the last balance sheet date or purchase price, if acquired during the year. Unrealised investment gains and losses include adjustments in respect of unrealised gains and losses recorded in prior years which have been realised during the year and are reported as realised gains and losses in the current year's profit and loss account.
The investment return is accounted for in the non-technical account. An allocation is made from the non-technical account to the general business technical account to reflect the long-term investment return on funds supporting underwriting business. The long-term investment return is an estimate of the long-term investment return for the Brit Insurance Holdings PLC Group, including the managed syndicates, having regard to performance, current trends and future expectations.
(b) Goodwill
Goodwill arising on the acquisition of companies or businesses is capitalised and amortised on a straight line basis over the period which, in the Directors' opinion, is its useful economic life. For all acquisitions up to 31 December 2002, the Directors' estimate of the useful economic life of the goodwill arising is ten years.
Where, following a formal impairment review conducted in accordance with Financial Reporting Standard 11 "Impairment of Fixed Assets and Goodwill" ("FRS 11"), there has been, in the Directors' opinion, a permanent diminution in value of any goodwill being carried, this impairment is recognised in the profit and loss account.
(c) Syndicate participation rights
Where the Group has purchased the right to participate on managed syndicates, the cost is capitalised and amortised in equal annual instalments over three years. Amortisation commences from the date the underwriting results are first recognised in the technical account.
If, at any time, the Directors become aware of a permanent diminution in the value of the Group's right to participate on a syndicate, the asset will be written down accordingly. If a syndicate participation is sold any related costs are offset against the disposal proceeds and any gain or loss is taken to the Non-Technical Profit and Loss Account in the same accounting period.
(d) Taxation
Items of income/gain and expenditure/loss are recognised and assessable to corporation tax in the same period, after adjustment in accordance with tax legislation, except for the following:
The Group is taxed on its share of the underwriting results declared by syndicates and for tax purposes these are deemed to accrue evenly over the calendar year in which they are declared. The non-managed syndicate results included in these financial statements (excluding any additional provisions made by Directors) relate to the 2000 and prior Years of Account and will be declared for tax purposes in the calendar year 2003. The managed syndicate results included in these financial statements relate to the annually accounted result for the 2003 calendar year. These will be declared for tax purposes in the years following the closure of the relevant Years of Account contributing to the annually accounted result.
The Inland Revenue determines the taxable results of individual syndicates on the basis of computations submitted by the Managing Agent. At the date of approval of these financial statements, none of the syndicate taxable results have been agreed. Any adjustments that may be necessary to the tax provisions established by the Group as a result of Inland Revenue agreement of the taxable results of individual syndicates will be reflected in the financial statements of subsequent periods.
(e) Deferred taxation
Deferred tax is provided in full on timing differences which result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date, at rates expected to apply when they crystallise based on current tax rates and law. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in the financial statements. Deferred tax is not provided on timing differences arising from the revaluation of fixed assets where there is no commitment to sell the asset, or on unremitted earnings of subsidiaries and associates where there is no commitment to remit those earnings. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be recovered. Deferred tax assets and liabilities are not discounted.
(f) Tangible fixed assets
Tangible fixed assets are stated at cost. Depreciation is calculated so as to write-off the cost over their estimated useful economic lives on a straight line basis as follows:
Freehold property 2% per annum
Office refurbishment costs, computers (except
personal computers and visual display units),
office machinery, furniture and equipment
20% per annum
Motor vehicles and visual display units 25% per annum
Personal computers 33% per annum
(g) Own shares
Own shares held as assets are stated at the lower of cost and market valuation.
(h) Agency fees
Agency fees are recognised in the period to which the fee relates.
(i) Expenses
All expenses are accounted for on an accruals basis. Expenses which are incidental to the acquisition or disposal of an investment are treated as part of the cost or proceeds of the investment.
Profits arising in Marham Consortium Management Limited, which are due to a Brit managed syndicate, are charged as an expense to the Group.
(j) Pension costs
The Group operates a defined contribution stakeholder pension scheme, a defined contribution funded unapproved retirement benefits scheme and several other defined contribution schemes. It also makes payments into a number of personal money purchase pension plans. Contributions in respect of these schemes are charged to the profit and loss account in the period to which they relate.
The Group also operates a defined benefit pension scheme with pension benefits funded over employee's periods of service. Contributions are based on the recommendation of the scheme actuary following the valuation of the fund and are charged to the profit and loss account so as to spread the cost of the pension over the employee's working lives with the Group. This scheme closed to new members on 4 October 2001.
(k) Leased assets
Rentals under operating leases are charged on a straight line basis over the lease term, even if the payments are not made on such a basis. Benefits received and receivable as an incentive to enter into an operating lease are similarly spread on a straight line basis over the lease term, except where the period to the review date on which the rent is first expected to be adjusted to the prevailing market rate is shorter than the full lease term, in which case the shorter period is used.
(l) Foreign currencies
Transactions in foreign currencies other than Sterling, United States dollars, Canadian dollars and Euros are translated at the rate of exchange ruling at the date the transaction is processed. Unless otherwise stated, transactions in United States dollars, Canadian dollars and Euros are translated at the average rates of exchange for the period. Assets and liabilities in currencies other than Sterling are translated at the rate of exchange ruling at 31 December of each year. Exchange differences arising on translation are dealt with in the profit and loss account.
Foreign currency options are marked to market. Any gains or losses are recognised in the profit and loss account.
(m) Convertible Unsecured Subordinated Loan Stock 2008 ("CULS")
CULS are initially stated at the amount of the net proceeds after deduction of issue costs. The carrying amount is increased by the finance cost in respect of the accounting period and reduced by payments made in the period. CULS are reported as a liability unless conversion actually occurs. No gain or loss is recognised on conversion. Finance costs of the CULS are recognised in the profit and loss account over their term at a constant rate on the carrying value.
(n) Performance Share Plans
A provision is set up for an amount equivalent to the amortised portion of the period end market value of shares which have been awarded to participants of the Group's performance share plans. Such amortisation is calculated on a straight-line basis over the lives of the related Schemes. Where shares are acquired by, or issued to, the Brit Insurance Holdings PLC Employee Share Participation Trust, such shares are included in own shares at the market value of the company's shares on the date those shares were acquired and the investment is amortised against profits on a straight-line basis over the life of the scheme.
1 Segmental information
(i) Underwriting result before investment return
Year ended 31 December 2003
Gross Gross Gross
premiums premiums claims Operating
written earned incurred expenses
GBP'000 GBP'000 GBP'000 GBP'000
Direct
Business:
Accident and 17,459 8,678 (4,735) (3,293)
Health
Motor 113,087 96,646 (63,923) (23,093)
Marine, 78,930 84,973 (46,218) (17,915)
Aviation and
Transport
Property 160,227 114,274 (58,656) (37,130)
Third Party 224,535 179,029 (138,732) (40,072)
Liability
Life 14,016 13,809 (6,986) (8,221)
Miscellaneous 66,018 38,827 (15,777) (20,761)
and Pecuniary
Loss
Total direct 674,272 536,236 (335,027) (150,485)
Reinsurance
business:
Reinsurance 341,455 298,103 (117,874) (60,355)
acceptances
Total 1,015,727 834,339 (452,901) (210,840)
Year ended 31 December 2003
Change in
Reinsurance other technical
balance provisions Result
GBP'000 GBP'000 GBP'000
Direct Business:
Accident and Health (710) - (60)
Motor (2,483) - 7,147
Marine, Aviation and (16,219) - 4,621
Transport
Property (13,366) - 5,122
Third Party Liability (10,634) - (10,409)
Life (1,806) - (3,204)
Miscellaneous and (2,125) - 164
Pecuniary Loss
Total direct (47,343) - 3,381
Reinsurance business:
Reinsurance (63,109) (673) 56,092
acceptances
Total (110,452) (673) 59,473
Year ended 31 December 2002
Gross Gross Gross
Premiums premiums claims Operating
written earned incurred expenses
GBP'000 GBP'000 GBP'000 GBP'000
Direct business:
Accident and Health 514 306 (213) (64)
Motor 76,356 36,066 (23,363) (8,344)
Marine, Aviation and 65,812 52,255 (35,864) (9,962)
Transport
Property 54,105 30,857 (18,543) (7,202)
Third Party Liability 94,213 50,232 (41,396) (11,309)
Life 13,498 9,127 (4,909) (3,164)
Miscellaneous and 22,666 5,100 (11,329) (2,655)
Pecuniary Loss
Total direct 327,164 183,943 (135,617) (42,700)
Reinsurance business:
Reinsurance 335,551 260,327 (120,136) (54,073)
acceptances
Total 662,715 444,270 (255,753) (96,773)
Year ended 31 December 2002
Change in
Reinsurance Other technical
balance provisions Result
GBP'000 GBP'000 GBP'000
Direct business:
Accident and Health (43) - (14)
Motor (1,032) - 3,327
Marine, Aviation and (6,527) - (98)
Transport
Property (2,613) - 2,499
Third Party Liability 4,445 - 1,972
Life (934) - 120
Miscellaneous and 7,607 - (1,277)
Pecuniary Loss
Total direct 903 - 6,529
Reinsurance business:
Reinsurance acceptances (66,126) 513 20,505
Total (65,223) 513 27,034
(ii) Gross premium written by geographical segment
Year ended 31 December 2003
United Other EU Outside
Kingdom member EU Total
states
GBP'000 GBP'000 GBP'000 GBP'000
Direct
Business:
Accident and 5,561 - 11,898 17,459
Health
Motor 106,908 6,179 - 113,087
Marine, 2,198 7,174 69,558 78,930
Aviation and
Transport
Property 56,974 8,868 94,385 160,227
Third Party 125,814 19,872 78,849 224,535
Liability
Life 14,016 - - 14,016
Miscellaneous 48,995 691 16,332 66,018
and Pecuniary
Loss
Total direct 360,466 42,784 271,022 674,272
Reinsurance
business:
Reinsurance 42,927 26,323 272,205 341,455
acceptances
Total 403,393 69,107 543,227 1,015,727
Year ended 31 December 2002
United Other EU Outside
Kingdom member EU Total
states
GBP'000 GBP'000 GBP'000 GBP'000
Direct Business:
Accident and Health 202 7 305 514
Motor 76,286 3 67 76,356
Marine, Aviation 20 13,129 52,663 65,812
and Transport
Property 15,186 625 38,294 54,105
Third Party 27,655 6,379 60,179 94,213
Liability
Life 7,957 1,837 3,704 13,498
Miscellaneous and 17,788 591 4,287 22,666
Pecuniary Loss
Total direct 145,094 22,571 159,499 327,164
Reinsurance
business:
Reinsurance 35,943 38,483 261,125 335,551
acceptances
Total 181,037 61,054 420,624 662,715
(iii) Technical account
Year ended 31 December 2003
Syndicate Insurance
participations companies Total
GBP'000 GBP'000 GBP'000
Gross premiums written 610,942 404,785 1,015,727
Net premiums written 495,348 355,417 850,765
Net premiums earned 431,406 240,030 671,436
Net investment return on technical
funds and underwriting capital at the
long-term rate 32,080 11,905 43,985
Net claims incurred (250,573) (149,877) (400,450)
Changes in other technical
provisions,
net of reinsurance - (673) (673)
Net operating expenses (149,374) (61,466) (210,840)
Change in equalisation provision - (3,186) (3,186)
Technical profit 63,539 36,733 100,272
Claims ratio (%) 58.1 62.7 59.7
Expense ratio (%) 33.4 22.3 28.8
Combined ratio (%) 91.5 85.0 88.5
Year ended 31 December 2002
Syndicate Insurance
participations companies Total
GBP'000 GBP'000 GBP'000
Gross premiums written 526,302 136,413 662,715
Net premiums written 413,435 108,725 522,160
Net premiums earned 267,862 57,422 325,284
Net investment return on technical
funds and underwriting capital at
the long-term rate 24,128 3,277 27,405
Net claims incurred (169,169) (35,910) (205,079)
Changes in other technical
provisions,
net of reinsurance - 513 513
Net operating expenses (87,132) (6,552) (93,684)
Change in equalisation provision - (2,483) (2,483)
Technical profit 35,689 16,267 51,956
Claims ratio (%) 63.2 61.6 62.9
Expense ratio (%) 29.8 10.3 25.7
Combined ratio (%) 93.0 71.9 88.6
The figures for the syndicate participations for both years are after
adjustments to eliminate the business transferred to the Group's
insurance companies by way of quota share reinsurances.
(iv) Corporate
Year ended 31 December 2003
Underwriting Underwriting Peoples
(Lloyd's) (companies) Choice
GBP'000 GBP'000 (Europe)
Limited
GBP'000
Technical result
at the long-term 63,539 36,733 -
rate of return
Other investment (766) 10,869 61
return
Interest payable (68) - (704)
Fees and 2,271 - 6,251
commissions
Other income 56 90 1,257
Other expenses - - (10,453)
65,032 47,692 (3,588)
Amortisation of
goodwill and (1,919) - (153)
syndicate
participations
Operating
profit/(loss) 63,113 47,692 (3,741)
based on
long-term rate of
investment return
Short-term
fluctuations in (7,614) (8,126) -
investment return
Operating 55,499 39,566 (3,741)
profit/(loss)
Profit on
disposal of - - -
subsidiary
undertakings
Share of
operating profit - - -
in associated
undertakings
Profit/(loss) 55,499 39,566 (3,741)
before taxation
Net assets 293,959 382,427 -
Net tangible 280,086 334,362 -
assets
Year ended 31 December 2003
Ri3K Limited
GBP'000 Other Total
GBP'000 GBP'000
Technical result at the
long-term - - 100,272
rate of return
Other investment return 9 8,878 19,051
Interest payable (5) (3,820) (4,597)
Fees and commissions 131 - 8,653
Other income - 137 1,540
Other expenses (3,989) (10,912) (25,354)
(3,854) (5,717) 99,565
Amortisation of goodwill
and - (6,335) (8,407)
syndicate participations
Operating profit/(loss)
based on long-term rate of (3,854) (12,052) 91,158
investment return
Short-term fluctuations in
investment return - - (15,740)
Operating profit/(loss) (3,854) (12,052) 75,418
Profit on disposal of
subsidiary undertakings - 1,920 1,920
Share of operating profit
in associated undertakings - 219 219
Profit/(loss) before (3,854) (9,913) 77,557
taxation
Net assets 8,492 16,621 701,499
Net tangible assets 1,116 15,967 631,531
Year ended 31 December 2002
Underwriting Underwriting Peoples Choice
(Lloyd's) (company) (Europe) Limited
GBP'000 GBP'000 GBP'000
Technical result at the long-term 35,689 16,267 -
rate of return
Other investment return (442) 3,605 119
Interest payable (10) - (425)
Fees and commissions 5,318 - 10,663
Other income 42 238 768
Other expenses (8,366) - (15,427)
32,231 20,110 (4,302)
Impairment of goodwill - - -
Amortisation of goodwill and
syndicate participations (2,604) - (262)
Operating profit/(loss) based on
long-term rate of investment return 29,627 20,110 (4,564)
Short-term fluctuations in
investment return (12,056) (1,589) -
Operating profit/(loss) 17,571 18,521 (4,564)
Share of operating loss in -
associated undertakings - -
Profit/(loss) before taxation 17,571 18,521 (4,564)
Net assets 251,622 178,759 5,000
Net tangible assets 233,747 178,759 545
Year ended 31 December 2002
Ri3K
Limited Other Total
GBP'000 GBP'000 GBP'000
Technical result at the long-term - - 51,956
rate of return
Other investment return - (4,396) (1,114)
Interest payable - (4,650) (5,085)
Fees and commissions - - 15,981
Other income - (56) 992
Other expenses - (7,692) (31,485)
- (16,794) 31,245
Impairment of goodwill - (1,570) (1,570)
Amortisation of goodwill and
syndicate participations - (1,787) (4,653)
Operating profit/(loss) based on
long-term rate of investment return - (20,151) 25,022
Short-term fluctuations in -
investment return - (13,645)
Operating profit/(loss) - (20,151) 11,377
Share of operating loss in -
associated undertakings (1,395) (1,395)
Profit/(loss) before taxation - (21,546) 982
Net assets 9,196 31,764 476,341
Net tangible assets 764 31,764 445,579
2 Claims incurred, net of reinsurance
Year ended 31 December 2003
Syndicate Insurance
participations companies Total
GBP'000 GBP'000 GBP'000
Gross amount:
2001 and prior underwriting years 13,157 (1,087) 12,070
2002 underwriting year 122,215 36,941 159,156
2003 underwriting year 159,214 122,461 281,675
---------------------------------
294,586 158,315 452,901
---------------------------------
Reinsurers' share:
2001 and prior underwriting years (3,113) 1,408 (1,705)
2002 underwriting year (24,930) (1,720) (26,650)
2003 underwriting year (15,969) (8,127) (24,096)
---------------------------------
(44,012) (8,439) (52,451)
---------------------------------
Claims incurred, net of reinsurance:
2001 and prior underwriting years 10,044 321 10,365
2002 underwriting year 97,285 35,221 132,506
2003 underwriting year 143,245 114,334 257,579
---------------------------------
250,574 149,876 400,450
---------------------------------
Year ended 31 December 2002
Syndicate Insurance
participations company Total
GBP'000 GBP'000 GBP'000
Gross amount:
2000 and prior underwriting years 26,337 966 27,303
2001 underwriting year 67,126 3,514 70,640
2002 underwriting year 122,658 35,152 157,810
----------------------------------
216,121 39,632 255,753
----------------------------------
Reinsurers' share:
2000 and prior underwriting years (10,352) (1,241) (11,593)
2001 underwriting year (13,062) (204) (13,266)
2002 underwriting year (23,538) (2,277) (25,815)
----------------------------------
(46,952) (3,722) (50,674)
----------------------------------
Claims incurred, net of reinsurance:
2000 and prior underwriting years 15,985 (275) 15,710
2001 underwriting year 54,064 3,310 57,374
2002 underwriting year 99,120 32,875 131,995
----------------------------------
169,169 35,910 205,079
----------------------------------
3 Net operating expenses
31 December 31 December
2003 2002
GBP'000 GBP'000
Acquisition costs 199,594 113,258
Movement in deferred acquisition costs (33,946) (40,640)
Administrative expenses 37,566 15,838
Loss on exchange translation 7,626 5,228
----------------------------
210,840 93,684
============================
4 Investment return
(i) Investment return - the total investment return comprises:
31 December 31 December
2003 2002
GBP'000 GBP'000
Investment return on Funds at Lloyd's
and other corporate funds:
Investment income 20,638 14,345
Realised losses on investments (6,244) (10,816)
Unrealised gains/(losses) on investments 15,282 (7,547)
Investment management expenses (1,692) (937)
Interest payable on bank loans (764) (1,264)
Interest payable on convertible unsecured (3,836) (3,821)
loan stock
23,384 (10,040)
Investment return on syndicate funds:
Investment income 13,562 11,184
Realised (losses)/gains on investments (6,128) 1,352
Investment management expenses (1,289) (228)
6,145 12,308
Investment return on insurance company
funds:
Investment income 17,908 5,578
Realised (losses)/gains on investments (2,339) 63
Unrealised losses on investments (1,795) (152)
Investment management expenses (604) (196)
13,170 5,293
Total investment return
Investment income 52,108 31,107
Realised losses on investments (14,711) (9,401)
Unrealised gains/(losses) on investments 13,487 (7,699)
Investment management expenses (3,585) (1,361)
Interest payable on bank loans (764) (1,264)
Interest payable on convertible unsecured (3,836) (3,821)
loan stock
42,699 7,561
(ii) Investment return - the long-term investment return
The transfer to the technical account represents the estimated long-term rate of return applied to the Group's share of investment assets supporting the insurance business of the insurance companies and Lloyd's syndicates, together with Funds at Lloyd's.
The long-term rates of return were based on the historical asset performance, current and prospective bond yields and the estimated risk premium for holding equity investments. For the investment assets of the insurance companies and the Funds at Lloyd's, separate rates were established and applied to the average bond and equity components of the underwriting investment assets. For the syndicate investments, a single weighted rate was applied to all categories of investment.
The long-term rates of return used were:
31 December 31 December
2003 2002
% %
Insurance companies and Funds at Lloyd's
Equities - capital return 5.0 5.0
Equities - income 2.0 2.0
Bonds and cash 5.0 5.0
Syndicate investments 5.0 5.0
Comparison of long-term investment return with actual return
1999 1999
to to
2003 2002
GBP'000 GBP'000
Actual return attributable to
Shareholders:
Funds at Lloyd's 27,684 9,362
Syndicate funds 41,627 35,483
Insurance company funds 9,555 5,777
78,866 50,622
Long-term return credited to technical
account:
Funds at Lloyd's 50,755 35,775
Syndicate funds 47,630 30,530
Insurance company funds 19,234 7,330
117,619 73,635
Excess of the long-term investment 38,753 23,013
return over actual returns
5 Fees and commissions
31 December 31 December
2003 2002
GBP'000 GBP'000
Managing agent's fees 1,644 1,624
Sale and administration of private 6,251 10,663
motor and household insurance
(Peoples Choice (Europe) Limited)
Marham Consortium Management Limited 465 2,597
fees and profit commission
Broking commission earned 162 1,097
Reinsurance industry electronic 131 -
infrastructure design and development
(Ri3K Limited)
8,653 15,981
6 Other income
31 December 31 December
2003 2002
GBP'000 GBP'000
Rental and other income 1,540 992
7 Other expenses
31 December 31 December
2003 2002
GBP'000 GBP'000
The following items have been
charged/(credited) in operating profit:
Amortisation of goodwill 6,488 2,502
Impairment of goodwill - 1,570
Amortisation of syndicate capacity 1,919 2,150
Depreciation of tangible fixed assets 2,169 1,925
Loss/(profit) on sale of fixed assets 844 (27)
Operating lease rentals - land and 2,522 2,140
buildings
Consortium result (271) 1,328
Details of Auditors' remuneration are
given in Note 10.
8 Staff costs
31 December 31 December
2003 2002
GBP'000 GBP'000
Wages and salaries (including profit 36,617 24,604
related pay)
Social security costs 3,098 2,202
Other pension costs 3,583 1,860
43,298 28,666
The average number of employees during the year, including
Executive Directors, was as follows:
31 December 31 December
2003 2002
Number Number
Management 33 42
Administration 307 413
Underwriting 327 284
667 739
9 Directors' emoluments
The following table gives the disclosures required by the Directors' Remuneration Report Regulations 2002 in respect of the Directors who participated during the year in the Group defined benefit pension plan:
Increase Accrued Transfer Transfer Increase in
in pension value of value of transfer
accrued benefits accrued accrued value in the
pension at benefits benefits year
during 12 May at 12 at after
the year 2003 May 2003 31 contributions
GBP p.a. GBP p.a. GBP December GBP
2002
GBP
Andrew 200 13,900 137,900 126,800 11,100
Holland
Andrew Holland left the defined benefit plan on 1 February 2003 and transferred the cash equivalent transfer value of his rights on 12 May 2003.
The transfer value has been calculated on the basis of actuarial advice in accordance with the actuarial guidance note, GN 11.
The disclosures given above are those required by the Directors' Remuneration Report Regulations 2002.
Disclosures in relation to Directors' pensions continue to also be required under the Listing Rules until those Rules are revised to take account of the Directors' Remuneration Report Regulations 2002. The Listing Rules disclosures, the figures for which are calculated after excluding the effects of inflation, are as follows:
Increase in
accrued
pension Accrued Accrued Increase
during pension pension in transfer
the year in benefits at benefits at value
excess 12 May 2003 31 December during
of inflation GBP p.a. 2002 the year
GBP p.a. GBP p.a. GBP
Andrew 100 13,900 13,700 11,100
Holland
Neil Eckert is a member of the Brit Insurance Limited defined contribution scheme.
Matthew Scales is a member of the FURBS scheme and the Brit Insurance Limited defined contribution scheme.
Dane Douetil is a member of the FURBS scheme and the defined contribution Brit Group Services Limited stakeholder scheme.
Andrew Holland joined the FURBS scheme and defined contribution Brit Group Services Limited stakeholder scheme on 1 February 2003 and was a member until leaving the Company on 31 December 2003.
The Non-Executive Directors do not have any pension entitlements.
Further details of the pension schemes are given in Note 35.
10 Auditors' remuneration
31 December 2003 31 December 2002
Mazars Other Mazars Other
auditors auditors
GBP'000 GBP'000 GBP'000 GBP'000
Audit services:
Statutory audit Corporate 235 9 296 -
Syndicate 64 293 75 311
Audit-related regulatory
reporting :
Corporate regulatory reports 25 - 3 -
Interim review 40 - 30 -
Further Assurance Services:
Acquisition * 170 - - -
Disposals 21 - - -
Capital raising - - 257 -
Tax services:
Compliance services 105 15 103 4
Advisory services 38 - 35 -
Other services:
Printing services 162 - - -
Other advisory 37 3 14 180
897 320 813 495
Of the above charges, GBP520,000 (2002: GBP481,000) has been charged to the non-technical account.
* Included within the capitalised acquisition costs on the purchase of Brit Underwriting Group Limited.
11 Taxation
(i) Analysis of charge in year
31 December 31 December
2003 2002
GBP'000 GBP'000
Current taxation:
UK corporation tax on profits of the - (2)
year
Adjustments in respect of prior years (145) 2,282
Overseas tax (250) (38)
Share of associates' tax (82) 346
(477) 2,588
Deferred tax:
Origination and reversal of timing (19,908) (4,951)
differences
(19,908) (4,951)
Tax charge on profit on ordinary (20,385) (2,363)
activities
(ii) Factors affecting tax charge for
year
31 December 31 December
2003 2002
GBP'000 GBP'000
Profit on ordinary activities before 77,557 9,982
tax
Profit on ordinary activities (23,267) (2,995)
multiplied by standard rate of
corporation tax in the UK
of 30% (2002: 30%)
Effects of:
Expenses not deductible for tax (4,100) (1,960)
purposes and other permanent
differences
Investment gains/(losses) for which no 4,429 (6,709)
tax relief is available in future
periods
Equity dividends not subject to 646 604
corporation tax
Short-term timing differences:
Syndicate 20,874 11,648
results
Realised and 139 835
unrealised
investment
losses
Other timing 1,197 (1,079)
differences
Overseas taxation not recoverable (250) (38)
Adjustments to tax charge in respect (145) 2,282
of prior years
Current tax (charge)/credit for the (477) 2,588
year (per Note 11(i))
(iii) Factors that may affect future tax charges
The future tax charge for the Group is dependent on the ability of the Group to utilise tax losses as they become available.
12 Earnings per share
The calculations of the basic and diluted earnings per share are based on the following figures :
31 December 31 December
2003 2002
GBP'000 GBP'000
Profit attributable to members of 57,484 5,361
the parent company
Dilutive post tax effect on profits:
Convertible Unsecured Subordinated 2,685 -
Loan Stock
Diluted profit attributable to 60,169 5,361
members of the parent company
31 December 31 December
2003 2002
Number Number
Basic weighted average number of 874,056,697 481,174,679
shares
Dilutive potential ordinary shares:
Convertible Unsecured Subordinated 51,276,076 -
Loan Stock
Employee share options 698,381 81,611
Diluted weighted average number of 926,031,154 481,256,290
shares
In accordance with Financial Reporting Standard 14, Convertible Unsecured Subordinated Loan Stock and employee share options are only treated as dilutive when their conversion to ordinary shares would decrease net profit per share or increase net loss from continuing operations.
13 Intangible assets
Syndicate
participations Goodwill Total
GBP'000 GBP'000 GBP'000
Cost:
At 1 January 2003 * 9,025 36,527 45,552
Acquired with Brit - 771 771
Underwriting Group Limited
Additions - 51,358 51,358
Disposals - (8,248) (8,248)
At 31 December 2003 9,025 80,408 89,433
Amortisation:
At 1 January 2003 * 4,870 9,920 14,790
Acquired with Brit - 35 35
Underwriting Group Limited
Disposals - (3,767) (3,767)
Charge for the year 1,919 6,488 8,407
At 31 December 2003 6,789 12,676 19,465
Net book value:
At 31 December 2003 2,236 67,732 69,968
At 31 December 2002 4,155 26,607 30,762
In accordance with the provisions of Financial Reporting Standard 10 "Goodwill and Intangible Assets", the goodwill arising on the acquisition of Ri3K Limited has been subject to an impairment review being the first full financial year after its acquisition. The Directors believe that following this impairment review, the carrying value of Ri3K Limited does not exceed its recoverable amount.
* An impairment charge of GBP1,570,000 made in the year ended 31 December 2002 has been reallocated from cost to amortisation for fairer presentation purposes.
14 Investments Group :
31 December 2003 31 December 2002
Market Market
value Cost value Cost
GBP'000 GBP'000 GBP'000 GBP'000
Investments - corporate
Shares and other
variable-yield
securities and units in
unit trusts :
Listed 215,936 220,268 84,937 111,137
Unlisted 1,115 7,440 5,372 10,760
Debt securities and other
fixed income securities :
Listed 474,477 478,420 329,392 328,862
Unlisted 125,960 125,677 93,196 93,229
Deposits with credit 60,047 60,047 33,458 33,458
institutions
Total investments - 877,535 891,852 546,355 577,446
corporate
Investments - syndicate
participations
Shares and other
variable-yield
securities and
units in unit
trusts :
Listed 9,188 10,278 4,736 4,801
Debt securities and
other fixed
income securities :
Listed 211,443 231,984 153,563 155,839
Participation in 65,956 68,661 29,184 29,184
investment pools
Deposits with - - 45,561 45,561
credit institutions
Other - - 1,773 1,773
Total investments - 286,587 310,923 234,817 237,158
syndicate
participations
Total investments 1,164,122 1,202,775 781,172 814,604
Company :
31 December 2003 31 December 2002
Market Cost Market value Cost
value
GBP'000 GBP'000 GBP'000 GBP'000
Investments -
corporate
Shares and other
variable-yield
securities and
units in unit
trusts :
Listed 23,935 29,603 23,440 37,596
Unlisted 1,115 7,440 2,373 7,761
Debt securities
and other fixed
income securities :
Listed 23,967 23,920 58,808 58,798
Unlisted - - - -
Deposits with 13,988 13,988 - -
credit institutions
Total investments 63,005 74,951 84,621 104,155
- corporate
If the investments held at 31 December 2003 had been sold at that date, there would have been no liability to tax.
The movement in the Company's corporate investments during the year were as follows:
31 December 31 December
2003 2002
GBP'000 GBP'000
Market value at 1 January 84,621 41,829
Purchases 186,504 292,053
Sales (213,081) (241,720)
Sales - realised losses on sales (345) (9,192)
Increase in unrealised gains 5,306 1,651
Market value at 31 December 63,005 84,621
15 Investments in subsidiary undertakings
Company: GBP'000
Cost at 1 January 2003 306,903
Opening provision for permanent diminution in value (13,406)
Value at 1 January 2003 293,497
Movements in the year
Purchases:
(i) Purchase of Brit Underwriting Group Limited 173,514
(ii)Purchase of new Brit Underwriting Group Limited
share capital 195,202
Disposals:
(i) Peoples Choice (Europe) Limited
Cost (10,973)
Provision for permanent diminution in value 10,973
(ii) Brit Insurance Limited
Cost (156,691)
Balance arising on settlement of contingent
share capital 1,332
Value at 31 December 2003 506,854
Cost at 31 December 2003 507,955
Closing provision for permanent diminution in value (1,101)
Value at 31 December 2003 506,854
Further details relating to the acquisition of Brit Underwriting Group Limited are provided in Note 18.
Further details relating to the disposal of Peoples Choice (Europe) Limited are provided in Note 19.
Brit Insurance Limited was sold to Brit Underwriting Group Limited on 4 December 2003.
Brit Underwriting Group Limited issued new share capital on 4 December 2003.
Details of the Company's principal subsidiaries are as follows:
Name of company Nature of Proportion Proportion
business of of
ordinary ordinary
shares held shares held
by the by subsidiary
Company % %
Underwriting companies
Brit Insurance
Limited Insurance company 100
Brit Insurance
(UK) Limited * Insurance company 100
Brit Syndicates
Limited Lloyd's managing agent 100
Brit UW
Limited Lloyd's corporate member 100
Wren Insurance
Services
Limited Lloyd's syndicate support company 100
Marham Consortium
Management Lloyd's syndicate support company 100
Limited
Investment company
Masthead
Insurance
Underwriting Intermediate holding company 100
Limited
Distribution companies
Ri3K Limited E-commerce solutions company 77.2
Ri3K Asia Pte
Limited E-commerce solutions company 83.5
Group services companies
Brit Group
Services
Limited Group services company 100
PRI Management
Limited Group services company 100
Intermediate holding companies
Wren Limited Intermediate holding company 100
Wren Holdings
Group PLC Intermediate holding company 100
HCG Holdings
Limited Intermediate holding company 100
Finsbury
Underwriting
Limited Intermediate holding company 100
Brit Underwriting
Group
Limited * Intermediate holding company 100
Open ended investment company
CF Epic
Investment
Funds Open ended investment company 81.6
Lloyd's corporate members (last year of account
1999)
HCG Alpha
Limited Lloyd's corporate 100
member
HCG Bravo
Limited Lloyd's corporate 100
member
HCG Charlie
Limited Lloyd's corporate 100
member
HCG Delta
Limited Lloyd's corporate 100
member
HCG Echo
Limited Lloyd's corporate 100
member
HCG Foxtrot
Limited Lloyd's corporate 100
member
FUIT One
Limited Lloyd's corporate 100
member
FUIT Two
Limited Lloyd's corporate 100
member
FUIT Three
Limited Lloyd's corporate 100
member
FUIT Four
Limited Lloyd's corporate 100
member
FUIT Five
Limited Lloyd's corporate 100
member
Masthead A
Limited Lloyd's corporate 100
member
Masthead B
Limited Lloyd's corporate 100
member
Masthead C
Limited Lloyd's corporate 100
member
Masthead D
Limited Lloyd's corporate 100
member
Masthead E
Limited Lloyd's corporate 100
member
All companies are registered and operate in England with the exception of Ri3K Asia Pte Limited which is incorporated and operates in Singapore.
* On 22 May 2003, the Company purchased Brit Underwriting Group Limited (formally PRI Group plc). See Note 18 for further information.
Brit Insurance (UK) Limited (formally Professional Risks Insurance Limited) ceased to accept business from third parties from 1 July 2003.
All subsidiaries are included in the Group consolidated financial statements.
16 Investments in associated undertakings
Group :
The Equity
Partnership
Limited
GBP'000
Profit and loss accounts, Group share:
Turnover 1,340
Profit on ordinary activities before 219
tax
Tax charge on profit (82)
Profit on ordinary activities after 137
tax
Balance sheet, Group share:
Fixed assets 4
Current Assets 763
Current (514)
Liabilities
Net assets 253
The movements in the Group's investments in associated
undertakings are as follows:
The Equity
Partnership
Limited
GBP'000
Balance at 1 January 2003 116
Share of profit after tax arising in the year 137
Balance at 31 December 2003 253
The carrying value of The Equity Partnership Limited in the Group balance sheet represents the Group's share in its net assets.
The carrying value of The Equity Partnership Limited in the Company balance sheet represents it's cost of GBP62,000 (2002: GBP62,000)
The Equity Partnership Limited
The Company owns 34.1% of the ordinary share capital of The Equity Partnership Limited ("EPL").
As at the balance sheet date, EPL had issued GBP850,000 of preference shares to a third party. These preference shares do not have dividend rights but EPL is prevented from paying a dividend on the ordinary shares until the preference shares have been repaid in full.
The company's principal activity is that of an investment manager.
The company's accounting reference date is 31 December. It is registered and operates in England.
17 Significant interests in other companies
At 31 December 2003, the Company/Group had holdings in the companies listed below which exceeded 20% of any class of equity share capital.
The Company/Group does not exercise control over or significantly influence the activities of these companies and therefore the holdings have not been equity accounted.
Country Percen Percen Latest Aggreg Profit/
of tage tage availa ate (loss) after
Incorpora Class of of ble capital tax for
Name tion and class class accounts and the year
of registration of held held reserves GBP'000
Underta capital by by
king Company Group GBP'000
Insurance USA Ordi 23.2% 23.2% 31 (1,632) (626)
Broadcast nary Dec
Systems shares 2001
Inc
Ebix USA Comm 40.1% 40.1% 31 2,953 314
Inc on Dec
stock 2002
The
Equity Isle of Capi 14.4% 34.7% 31 34,696 2,802
Partner Man tal Jul
ship shares 2003
Investment Company
PLC
The
Equity Isle of Income 0.0% 4.8% 31 34,696 2,802
Partner Man shares Jul
ship 2003
Investment Company
PLC
The investment in Insurance Broadcast Systems Inc was written down to nil in the books of the Company during 2002.
18 Acquisitions
(i) Brit Underwriting Group Limited
On 22 May 2003, the Group purchased the entire share capital of Brit Underwriting Group Limited (formally PRI Group plc) by issuing new ordinary Brit Insurance Holdings PLC shares in exchange for the Brit Underwriting Group Limited shares not already owned by Brit. Prior to this date, Brit held 811,215 shares in Brit Underwriting Group Limited as a trade investment being a holding of 0.6%. Brit issued 1.703 new ordinary shares, valued at 74 pence each, for each remaining Brit Underwriting Group Limited share. This transaction has been accounted for as an acquisition.
Goodwill:
The provisional goodwill arising in respect of the acquisition of Brit Underwriting Group Limited is as follows:
GBP'000
Fair value of consideration and costs
Cost of existing holding 893
Issue of 226,583,744 new Brit Insurance Holdings PLC
ordinary shares 167,672
Costs of acquisition 4,949
173,514
Fair value of net assets acquired (122,306)
Goodwill capitalised 51,208
Less goodwill amortised as at 31 December
2003 (3,143)
Goodwill carried forward 48,065
The Brit Underwriting Group Limited acquisition balance sheet contains technical provisions whose value will not be known until premiums written up to the date of acquisition have been fully earned and their related claims reported. Consequently, the goodwill at this stage is classed as provisional.
The net assets of Brit Underwriting Group Limited on 22 May 2003
were as follows:
Book value
and
fair value
at
acquisition
GBP'000
Intangible assets 736
Investments 107,886
Reinsurers' share of technical provisions 5,859
Debtors 14,164
Other assets 33,910
Prepayments and accrued income 6,174
Technical provisions (40,355)
Creditors (6,068)
122,306
There are no fair value adjustments to the net assets of Brit Underwriting Group Limited at the date of acquisition.
The summarised profit and loss account for Brit Underwriting Group Limited from 1 January 2003 (the beginning of its accounting period) to 22 May 2003 (the date of acquisition) and for the period commencing 21 February 2002 (the date of its incorporation) and ended 31 December 2002 (being its previous accounting period) was as follows:
Period Period
1 January 2003 21 February 2002
to 22 May 2003 to 31 December 2002
GBP'000 GBP'000
Gross premiums 29,100 18,507
written
Loss before tax (6,082) (1,450)
Tax 1,825 435
Loss after tax (4,257) (1,015)
(ii) CF Epic Investment Funds
CF Epic Investment Funds is an open ended investment company ("OEIC") which managed two funds at 31 December 2003 being the Insurance and General Fund and the UK Equity Fund.
On 14 October 2003, the Group acquired an 81.5% interest in the Insurance and General Fund for GBP35,000,000 and an 81.9% interest in the UK Equity Fund for GBP10,000,000. CF Epic Investment Funds had not traded prior to this date.
This transaction resulted in the Group having an overall interest in CF Epic Investment Funds of 81.6% and has been accounted for as an acquisition. The cash consideration of GBP45,000,000 was equal to the value of the net assets acquired and hence no goodwill arose on acquisition. The assets of CF Epic Investment Funds at acquisition consisted of cash and investments in listed companies.
19 Disposals
(i) Peoples Choice (Europe) Limited
Between 11 July and 30 July 2003, the Group purchased the remaining 17.7% minority interest in Peoples Choice (Europe) Limited for a cash consideration of GBP149,350. On 31 July 2003, the Group disposed of Peoples Choice (Europe) Limited, retaining no further ownership interest.
The loss before tax of Peoples Choice (Europe) Limited for the period up to the date of disposal was GBP3,741,000, and for the year ending 31 December 2002 was a loss of GBP4,564,000.
Net assets disposed of and the related sales proceeds were as
follows:
GBP'000
Fixed assets 545
Current assets 5,686
Creditors (5,772)
Net assets 459
Related goodwill 4,244
Profit on disposal 2,069
Net sale proceeds 6,772
(ii) Ri3K Limited
On 7 February 2003, Ri3K Limited, a subsidiary company issued new share capital to third parties.
As a consequence, the Group's holding in Ri3K Limited reduced from 80.0% to 77.2%.
The transaction has been treated as a deemed disposal.
Net liabilities disposed of and the related sales proceeds were as follows:
GBP'000
Fixed assets 7
Current assets 16
Creditors (83)
Share of net liabilities (60)
Related goodwill 237
Loss on disposal (149)
Net sale proceeds 28
20 Debtors
Group Company
Amounts due within
one year: 31 31 31 31
December December December December
2003 2002 2003 2002
GBP'000 GBP'000 GBP'000 GBP'000
Trade debtors 6,078 15,644 - -
Amounts owed by
managed 1,347 4,394 550 750
syndicates
Amounts owed by Group - - 186,550 205,837
undertakings
Tax recoverable 227 231 - -
Other debtors 6,177 1,827 439 255
Share of syndicates'
other 18,147 25,059 - -
debtor balances
31,976 47,155 187,539 206,842
21 Tangible assets
The net book value of tangible assets is made up as follows:
Group: Freehold Office Computers Motor Total
property Refurbishment and office Vehicles GBP'000
GBP'000 GBP'000 machinery, GBP'000
furniture
and
equipment
GBP'000
Cost:
At 1 January
2003 509 2,321 11,796 76 14,702
Additions - 613 1,318 - 1,931
Acquisitions - - 1,824 - 1,824
Disposals - (3) (3,600) - (3,603)
Exchange - - (18) - (18)
adjustments
At 31 December 509 2,931 11,320 76 14,836
2003
Depreciation:
At 1 January
2003 320 1,056 8,410 49 9,835
Charge for the 7 492 1,657 13 2,169
period
Acquisitions - - 263 - 263
Disposals - (3) (2,199) - (2,202)
Exchange - - (8) - (8)
adjustments
At 31 December 327 1,545 8,123 62 10,057
2003
Net book value:
At 31 December 182 1,386 3,197 14 4,779
2003
At 31 December 189 1,265 3,386 27 4,867
2002
22 Own shares
In December 1999, May 2000 and December 2001 the trustees of the Brit Long-Term Incentive Plan ("the LTIP") acquired Brit Insurance Holdings PLC shares on behalf of certain employees, in accordance with the terms of that plan. Following the vesting of some of these shares during 2003 the number of shares held at 31 December 2003 was 588,268 (2002:1,182,680). Details of the LTIP are given in Note 36.
In November 2003 the trustees of the Brit Performance Share Plan 2003 ("the PSP") acquired Brit Insurance Holdings PLC shares on behalf of certain employees, in accordance with the terms of that plan. The number of shares held at 31 December 2003 was 4,659,895 (2002: nil). Details of the PSP are given in Note 36.
As at 31 December 2003 Brit Insurance Limited held 265,623 (2002: 265,623) ordinary 25p shares of Brit Insurance Holdings PLC.
Group Company
31 31 31 31
December December December December
2003 2002 2003 2002
GBP'000 GBP'000 GBP'000 GBP'000
Brit Insurance Holdings PLC 445 920 445 920
shares - Long-Term Incentive
Plan
Brit Insurance Holdings
PLC 3,337 - - -
shares - Performance Share
Plan
Brit Insurance Holdings PLC 193 202 - -
shares - Held by Brit Insurance
Limited
Peoples Choice (Europe ) Ltd Shares
and loan stock - Held by Peoples
Choice (Europe)
Trustees Ltd - 89 - -
3,975 1,211 445 920
In October 2001, the Brit All Employee Share Ownership Plan ("the (ESOP") commenced purchasing shares to be held in trust for the benefit of employees of the Group. Ongoing purchases of shares are made on a monthly basis. Details of the ESOP including the market value of its shares are given in Note 36.
23 Deferred tax Group Company
31 31 31 31
December December December December
2003 2002 2003 2002
GBP'000 GBP'000 GBP'000 GBP'000
Declared underwriting losses 7,989 35,037 - -
Provision for future
underwriting losses 100 2,386 - -
Unrealised losses on
investments 625 764 295 295
Other timing differences 208 208 - -
18,922 38,395 295 295
Undiscounted provision for 38,395 43,346 295 926
deferred taxation at the
start of the year
Acquired with Brit Underwriting 435 - - -
Group Limited
Deferred tax charge in profit
and loss account for year
(Note 11(i)) (19,908) (4,951) - (631)
Provision at the end of the
year 18,922 38,395 295 295
In determining the deferred tax position, it has been assumed that Group relief will be available between companies within the Group.
It has been assumed that the Group will make profits in the foreseeable future sufficient to recover the deferred tax asset.
There are unrealised equity losses of GBP1,717,000 (2002: GBP12,356,000) on which deferred tax has not been provided because of uncertainty as to the timing of their utilisation. If these losses were included at 31 December 2003, the deferred tax asset would be increased by GBP515,000 (2002: GBP3,707,000).
In addition the Group has unclaimed capital allowances on which deferred tax has not been provided because of the uncertainty as to the timing of their utilisation. If the capital allowances were included at 31 December 2003, the deferred tax asset would be increased by GBP1,149,000 (2002: GBP900,000).
24 Prepayments and accrued income
Group Company
31 31 31 31
December December December December
2003 2002 2003 2002
GBP'000 GBP'000 GBP'000 GBP'000
Accrued income:
- underwriting 7,870 1,003 - -
- investment income 417 4,832 19 48
- other - 284 - 12
Prepayments 812 1,249 - -
Share of syndicates'
prepayments 2,310 1,714 - -
and accrued income
11,409 9,082 19 60
25 Other creditors
Amounts payable within one year: Group Company
31 31 31 31
December December December December
2003 2002 2003 2002
GBP'000 GBP'000 GBP'000 GBP'000
Bank loans and overdrafts - 1,037 - -
Trade creditors 58,473 93,216 - -
Amounts due to managed syndicates - 737 - -
Other taxes and social security 1,639 1,470 - -
costs
Other creditors 5,110 1,338 - 95
Share of syndicates' other (34,027) (64,799) - -
creditor balances
31,195 32,999 - 95
Group Company
31 31 31 31
December December December December
2003 2002 2003 2002
GBP'000 GBP'000 GBP'000 GBP'000
Amounts payable between two and five years:
- Bank borrowings 15,000 21,000 15,000 21,000
- Convertible Unsecured 43,872 43,625 43,872 43,625
Subordinated Loan Stock 2008
58,872 64,625 58,872 64,625
On 3 February 2000, the Group entered into a GBP80,000,000 facility with Barclays Bank PLC and National Westminster Bank PLC. The interest rate payable on the loan is equal to LIBOR plus 1.0%. GBP15,000,000 remains outstanding as at 31 December 2003 and falls due for repayment on 3 February 2005.
Under the terms of this facility, the lenders have a fixed and floating charge over certain investments owned by the Company.
The convertible unsecured subordinated loan stock attracts interest at 8.5%. The holders have the right, which expires on 31 October 2005, to convert each GBP100 of loan stock into GBP28.41 nominal of ordinary share capital. Issue costs are being amortised over the term of the loan stock.
26 Provisions for other risks and charges
Provision Provision Provision for
For lease for rent-free pension and similar Group
shortfall period obligations Total
GBP'000 GBP'000 GBP'000 GBP'000
At 1 January
2003 606 462 61 1,129
Utilised during
the year (36) (231) (61) (328)
At 31 December
2003 570 231 - 801
The provision for lease shortfalls is in respect of a property which is leased by Wren Underwriting Agencies Limited and sublet to third parties. Under the terms and conditions of the leases, the Directors anticipate a loss arising over the period of the lease which has been recognised as a provision.
The provision for rent-free period relates to a lease agreement entered into in July 1999 which provides an 18 month rent-free period. The lease is being charged evenly to the profit and loss account up to the date of the first rent review, being five years after the lease agreement commenced.
The provision for pensions and similar obligations relates to the defined contribution scheme in operation for employees of Brit Insurance Limited.
27 Share capital
31 31 31 31
December December December December
2003 2002 2003 2002
Number Number
GBP'000 GBP'000 '000 '000
Authorised:
Ordinary shares of 25p
each 350,000 280,000 1,400,000 1,120,000
Allotted, issued and fully paid:
Ordinary shares of 25p
each 243,513 186,867 974,054 747,466
Number of 25p ordinary shares allotted, issued
and fully paid: 2003 2002
Number Number
At 1 January 747,466,314 421,593,793
Exercised share options 25 25
Converted unsecured loan stock 3,564 52,406
Acquisition of Brit Underwriting
Group Limited 226,583,744 -
Settling contingent share capital - 5,737,705
Placing and open offer - 319,109,052
Terminating Brit Insurance Limited phantom - 973,333
share option scheme
At 31 December 974,053,647 747,466,314
On 22 May 2003 the Company issued 25 ordinary shares in relation to exercised share options.
During the May and October 2003 conversion periods, the Company issued 3,106 and 458 shares respectively to converting holders of the Convertible Unsecured Loan Stock 2008 issued on 18 December 2001.
During the period May 2003 to August 2003 the Company issued 226,583,744 shares to Brit Underwriting Group Limited shareholders in return for shares in that company. Details of this acquisition are given in Note 18.
On 18 June 2003, the Company's authorised share capital was increased from 1,120,000,000 to 1,400,000,000 25p ordinary shares.
28 Reserves
Group: Share Capital Profit
premium redemption and
account reserve loss account Total
GBP'000 GBP'000 GBP'000 GBP'000
Balance at 1
January 2003 370,107 586 (81,219) 289,474
Issue of shares 111,028 - - 111,028
Profit for the year - - 57,484 57,484
At 31 December
2003 481,135 586 (23,735) 457,986
Company: Share Capital Profit
premium redemption and
account reserve loss account Total
GBP'000 GBP'000 GBP'000 GBP'000
Balance at 1
January 2003 370,107 586 (27,147) 343,546
Issue of shares 111,028 - - 111,028
Profit for the year - - 1,403 1,403
At 31 December
2003 481,135 586 (25,744) 455,977
The Company had negative distributable reserves of GBP65,587,000 at 31 December 2003 (2002: GBP27,147,000).
29 Reconciliation of Equity Shareholders' funds
Group Company
31 December 31 December 31 December 31 December
2003 2002 2003 2002
GBP'000 GBP'000 GBP'000 GBP'000
Total recognised gains/
(losses) for 57,484 6,789 1,403 (17,119)
the year
Issue of shares 167,674 208,840 167,674 208,840
Issue costs charged to
the share - (10,081) - (10,081)
premium account
Settlement of Brit
Insurance - (5,291) - (5,291)
Limited contingent purchase consideration
Total movements during
the year 225,158 200,257 169,077 176,349
Opening Equity
Shareholders' 476,341 276,084 530,413 354,064
funds
Closing Equity
Shareholders' 701,499 476,341 699,490 530,413
funds
30 Equity minority interests
31 31
December December
2003 2002
GBP'000 GBP'000
At 1 January (371) (2,258)
Equity minority interest at date of acquisition 10,134 -
- CF Epic Investment Funds
Equity minority interest at date of acquisition - (371)
- Ri3K Limited
Deemed disposal of Ri3K Limited (53) -
Loss on ordinary activities after tax (312) -
Write down of equity minority interests - 2,258
- Peoples Choice (Europe) Limited
At 31 December 9,398 (371)
The equity minority interest in Ri3K Limited represents holdings of 22.8% of the ordinary shares.
The holders of these equity minority interest shares have no rights against any other group company.
31 Capital commitments
31 31
December December
2003 2002
GBP'000 GBP'000
Capital expenditure contracted
but not provided 580 57
for in the financial statements
32 Operating leases
At 31 December 2003, the Group was committed to making the following payments under non-cancellable operating leases in the year to 31 December 2004:
Land & buildings Other
31 31 31 31
December December December December
2003 2002 2003 2002
GBP'000 GBP'000 GBP'000 GBP'000
Annual commitments under operating leases
which expire:
- within one year 280 73 126 93
- between two to five years 47 235 84 115
- after five years 1,802 2,042 - -
2,129 2,350 210 208
33 Consolidated cash flow statement notes
(i) Scope of the consolidated cash flow statement
The consolidated cashflow statement excludes syndicate cashflows and cash held within Lloyd's premium trust funds on behalf of the Group's underwriting subsidiaries.
(ii) Reconciliation of operating profit to net cash outflow from
operating activities
31 December 31 December
2003 2002
GBP'000 GBP'000
Profit before tax on ordinary 77,557 9,982
activities
Loss/(profit) on sale of fixed assets 844 (18)
(Profit)/loss on disposal of subsidiary (1,920) -
undertakings
(Profit)/loss on disposal of associated - 212
undertaking
Depreciation of fixed assets and exchange 2,179 1,925
adjustments
Amortisation of goodwill 6,488 2,502
Impairment of goodwill - 1,570
Charges in respect of employee share 221 603
schemes
Amortisation loan stock issue costs 250 252
Amortisation of syndicate capacity 1,919 2,150
Increase in debtors (72,838) (94,599)
Decrease in creditors (13,303) (13,518)
Increase in provisions 223,395 63,492
Realised and unrealised investment (2,767) 18,732
(gains)/losses
Unrealised losses on own shares 10 -
Share of result of associated (219) 1,183
undertakings
Interest payable 4,600 5,072
Net cash inflow/(outflow) from operating 226,416 (460)
activities
(iii) Movement in opening and closing portfolio
investments net of financing
31 December 31 December
2003 2002
GBP'000 GBP'000
Net cash inflow/(outflow) for the year 41,819 (36,484)
Cash flow - portfolio investments 221,421 215,029
Movement arising from cashflows 263,240 178,545
Changes in market value and currencies 2,767 (18,732)
Other changes 106,992 -
Total movement in portfolio investments net 372,999 159,813
of financing
Portfolio at 1 January 580,381 420,568
Portfolio at 31 December 953,380 580,381
(iv) Movement in cash and portfolio investments
At Changes At
1 Cash to Other 31
January Flow Market changes December
2003 GBP'000 value GBP'000 2003
GBP'000 and GBP'000
currencies
GBP'000
Cash at bank and in 34,026 41,819 - - 75,845
hand
Deposits with credit 33,458 26,589 - - 60,047
institutions
Total cash 67,484 68,408 - 135,892
Fixed income 422,588 128,176 (11,509) 61,182 600,437
investments
Variable income 6,063 18,517 (363) 46,703 70,920
investments
Protected funds 9,747 (8,336) (28) - 1,383
Equities 74,499 56,475 14,667 (893) 144,748
Total portfolio 512,897 194,832 2,767 106,992 817,488
investments
Total cash and 580,381 263,240 2,767 106,992 953,380
portfolio investments
Borrowings (22,037) 7,037 - - (15,000)
Total cash and 558,344 270,277 2,767 106,992 938,380
portfolio investments,
net of debt
(v) Net cash outflow on portfolio investments
Year ended 31 December 2003 Year ended 31 December 2002
Net cash Net cash
Purchases Sales flow Purchases Sales flow
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Deposits
with 26,589 - 26,589 3,216 93,500 (90,284)
credit institutions
Fixed
income 1,619,256 1,491,080 128,176 1,254,048 940,082 313,966
investments
Variable
income 25,547 7,030 18,517 5,072 8,158 (3,086)
investments
Protected
funds - 8,336 (8,336) - 2,055 (2,055)
Equities 90,880 34,405 56,475 46,407 49,919 (3,512)
1,762,272 1,540,851 221,421 1,308,743 1,093,714 215,029
34 Purchase of subsidiaries
During the period, the Group acquired Brit Underwriting Group Limited. The assets of Brit Underwriting Group Limited on the date of acquisition included cash of GBP32,351,000.
Full details of these acquisitions and the assets acquired are given in Note 18.
35 Pensions
The Group has the following pension schemes in operation:
(i) Brit Group Services Limited - defined benefit pension scheme
For Brit Group Services Limited employees, the Group operates a funded pension scheme providing benefits for its employees based on final pensionable emoluments. The assets of the Scheme are held in a separate trustee administered fund. The most recent completed actuarial valuation of the Scheme was carried out as at 31 July 2000 by a professionally qualified actuary using the projected unit method. The actuarial assumptions made for the valuation were that the investment returns would be 7.5% per annum, salary increases would average 5% per annum and that present and future pensions for members retiring from the Scheme would increase at the rate of 3% per annum. For the Minimum Funding Requirement (MFR), the Scheme's assets at 31 July 2000 taken at a value of GBP66.4 million, exceed 120% of the amount of liabilities of the Scheme as at that date.
Due to the significant fall in equity markets since the valuation date the position has worsened. However, at 31 December 2003 the value of assets was above 100% of the amount of liabilities on the MFR basis. The employer has been making contributions at the rate of 24.8% of pensionable salaries since 1 January 2003.
The pension cost charge represents contributions payable by the Group to the fund and amounted to GBP1,690,730 (2002: GBP1,305,154).
At 31 December 2003 no contributions were payable to the fund (2002: GBPnil).
Financial Reporting Standard 17 "Retirement Benefits" ("FRS 17") disclosures
While the Group continues to account for pension costs in accordance with Statement of Standard Accounting Practice 24 "Accounting for Pension Costs", under Financial Reporting Standard 17 "Retirement Benefits" transitional disclosures are required as at 31 December 2003 using the different measurement basis prescribed by the Standard. None of the information set out in a) to g) below is reflected in the primary statements of the Group for the year ended 31 December 2003.
a) Composition of the scheme
The provisional results of the formal actuarial valuation as at 31 July 2003 were updated to the accounting date by an independent qualified actuary in accordance with the transitional arrangements of FRS 17. As required by FRS 17, the value of the defined benefit liabilities has been measured using the projected unit method.
The following table sets out the key FRS 17 assumptions used for the scheme. The table also sets out as at the accounting date the fair value of assets, a breakdown of the assets into the main asset classes, the present value of the FRS 17 liabilities and the deficit of assets below the FRS 17 liabilities (which equals the Gross pension liability).
31 December 31 December 31 December
2003 2002 2001
% % %
Retail Price Index
inflation 2.80 2.30 2.50
Discount rate 5.40 5.60 6.00
Pension increases in
payment 2.60 2.30 2.50
General salary increases 4.80 4.30 4.50
The assets in the scheme and the expected long-term rates of return
were:
31 December 2003 31 December 2002 31 December 2001
Expected Expected Expected
return Value return Value return Value
% GBP'000 % GBP'000 % GBP'000
Equities 7.70 48,741 7.40 37,906 8.00 46,957
Bonds 5.40 4,316 5.60 5,537 6.00 6,020
Gilts 4.80 2,411 4.40 2,733 4.90 3,712
Cash 4.60 1,187 4.00 1,862 5.10 3,138
Total market
value of
assets 56,655 48,038 59,827
Present value of (72,171) (58,401) (53,434)
liability
(Deficit)/surplus in (15,516) (10,363) 6,393
the scheme
Gross pension
(liability)/asset (15,516) (10,363) 6,393
Related deferred
tax asset/ 4,655 3,109 (1,918)
(liability) at 30%
Net pension (10,861) (7,254) 4,475
(liability)/asset
Under FRS 17, the scheme would be represented on the balance sheet at 31 December 2003 as a liability of GBP15,516,000 (2002: GBP10,363,000), which amounts to GBP10,861,000 net of deferred tax (2002: GBP7,254,000).
Notes:
(1) Figures have been estimated, where necessary.
(2) Contributions were paid at the rate of 15.0% of pensionable
salaries until 31 December 2002, thereafter they have been paid
at the rate of 24.8% of pensionable salaries.
(3) The Scheme closed to new entrants with effect from 4 October
2001. Under the projected unit method the current service cost
will increase as the members of the scheme approach retirement.
b) Analysis of the amounts to be charged to operating profit (for
illustrative purposes only)
31 December 31 December
2003 2002
GBP'000 GBP'000
Employer's part of current service cost 2,059 2,144
Vested past service cost 125 118
Curtailment (306) 0
Total operating charge 1,878 2,262
c) Analysis of the amount to be credited to other finance income
(for illustrative purposes only)
31 December 31 December
2003 2002
GBP'000 GBP'000
Expected return on pension scheme assets 3,273 4,418
Interest on pension scheme liabilities (3,249) (3,199)
Net return - credit 24 1,219
Analysis of amount recognised in the Statement of Total
Recognised Gains and Losses (for illustrative purposes only)
31 December 31 December
2003 2002
GBP'000 GBP'000
Actual return less expected return on pension
scheme assets 6,428 (15,155)
Experience (losses) and gains arising on the
scheme liabilities (2,499) 190
Changes in assumptions underlying the present
value of scheme liabilities (8,965) (2,093)
Actuarial loss recognised in the Statement of
Total Recognised Gains and Losses (5,036) (17,058)
e) Movement in scheme deficit during the year (for illustrative
purposes only)
31 December 31 December
2003 2002
GBP'000 GBP'000
(Deficit)/surplus in scheme at beginning of the (10,363) 6,393
year
Movement in year:
Current service cost (total) (2,059) (2,143)
Aggregate contributions 1,737 1,344
Past service costs (vested and (125) (118)
non-vested)
Curtailment 306 -
Other finance income 24 1,219
Actuarial loss recognised in the Statement of
Total Recognised Gains and Losses (5,036) (17,058)
Deficit in scheme at end of the year (15,516) (10,363)
f) History of experience gains and losses (for illustrative purposes
only)
31 December 31 December
2003 2002
GBP'000 GBP'000
Difference between expected and actual return on scheme assets:
Amount - gain / 6,428 (15,155)
(loss)
Percentage of scheme assets 11% (32%)
Experience gains and losses on scheme liabilities
Amount - (loss) / (2,499) 190
gain
Percentage of the present value of the
scheme (3%) 0%
liabilities
Total amount recognised in the Statement of Total
Recognised Gains and Losses
Amount - (loss) (5,036) (17,058)
Percentage of the present value of the
scheme (7%) (29%)
liabilities
g) Reserves note (for illustrative purposes only)
31 December 31 December
2003 2002
GBP'000 GBP'000
Profit and loss reserve excluding pension (23,735) (81,219)
liability
Pension reserve (10,861) (7,254)
Profit and loss reserve (34,596) (88,473)
(ii) Brit Group Services Limited - Defined Contribution Stakeholder
Scheme
From 5 October 2001, Brit Group Services Limited has operated a defined contribution stakeholder pension scheme. The assets of the scheme are held separately from those of the Company in an independently administered fund.
The pension cost charge represents contributions payable by the Group to the fund and amounted to GBP1,034,710 (2002: GBP458,506).
At 31 December 2003 no contributions were payable to the fund (2002: GBPnil).
(iii) Brit Group Services Limited - Funded Unapproved Retirement Benefits Scheme ("FURBS")
Brit Group Services Limited also operates a defined contribution FURBS, into which additional contributions are paid in respect of certain employees. The assets of the scheme are held separately from those of the Company in an independently administered fund.
The pension cost charge represents contributions payable by the Company to the fund and amounted to GBP72,000 (2002: GBP161,968).
At 31 December 2003, contributions amounting to GBP72,000 (2002: GBP88,898) were payable to the fund and are included in creditors.
(iv) Brit Insurance Limited
For Brit Insurance Limited employees, the Group operates a defined contribution pension scheme. The assets of the scheme are held separately from those of the Company in an independently administered fund. The pension cost charge represents contributions payable by the Company to the fund and amounted to GBP63,044 (2002: GBP110,589). At 31 December 2003, no contributions were payable to the fund (2002: GBP95,040).
(v) PRI Management Limited
PRI Management Limited operates a defined contribution pension scheme. The assets of the scheme are held separately from those of the Company in an independently administered fund. The pension cost charge represents contributions payable by the Company to the fund and amounted to GBP172,519 for the period since acquisition. At 31 December 2003, contributions amounting to GBP9,153 were payable to the fund and are included in creditors.
36 Long-Term incentive schemes
There are three active schemes and five closed schemes, details of which are set out below:
Active Schemes
(i) Brit All Employee Share Ownership Plan ("the ESOP")
Approved by members at the Annual General Meeting on 20 June 2001, the ESOP comprises a Trust Deed and Rules establishing an All Employee Share Ownership Scheme which was approved by the Inland Revenue, pursuant to the Finance Act 2000. All eligible employees of the Company and participating subsidiaries are entitled to participate subject to various detailed provisions. An independent Trustee holds all shares purchased under the plan and dividends are payable on shares held in the Trust. Pursuant to the ESOP, the Board may award free shares or give employees the opportunity to acquire partnership shares or make an award of matching shares to those employees who have invested in partnership shares or require or allow employees to reinvest dividends paid on their plan shares in further dividend shares.
An aggregate of 158,500 free shares were awarded on 19 October 2003 to 317 members of staff, including certain executive Directors, (each of whom were awarded 500 shares each) at a cost per share of 71p each. Since the launch of the ESOP, all participating employees have had the opportunity to subscribe for partnership shares on a monthly basis and to be awarded matching shares. All shares are held in trust for a three year qualifying period.
As at 31 December 2003, the Trust held 375,000 free shares, 243,285 matching shares and 488,824 partnership shares with a total nominal value of GBP276,777 and a market value, based on mid-market value of the Company's shares at close of business on 31 December 2003, as shown in the Official List of the London Stock Exchange of GBP805,422. This equates to 0.11% of the Company's issued share capital as at 31 December 2003.
(ii) Brit Executive Share Option Scheme 2003 ("the ESOS")
The ESOS was approved by shareholders on 18 June 2003 and comprises of two parts, namely the 'Approved' part, which has been approved by the Inland Revenue, and the 'Unapproved' part, which is intended to be used primarily where executives have more than GBP30,000 worth of outstanding Approved options.
The price per share payable upon exercise of an option will not be less than the higher of the average of the middle-market quotations of a share on the London Stock Exchange on the three dealing days immediately prior to the grant date, provided that no such dealing day falls prior to the date on which the Company last announced its results for any period and the nominal value of a share (unless the option is expressed to relate only to existing shares).
Outstanding options granted at nil cost under the ESOS are as follows:
Date of Number of Number of Subscription price Date
grant employees shares under per 25p from Expiry
including option share which date
Directors (pence) exercisable
3 Nov 03 79 8,004,738 76.92 3 Nov 06 2 Nov 13
(iii) Brit Performance Share Plan 2003 ("the PSP")
The PSP was approved by shareholders on 18 June 2003.
Awards will be satisfied by the transfer of shares from the Company's employee benefit trust which may acquire shares for this purpose either by subscribing for new shares or by buying shares in the market. The trustees have waived their entitlement to dividends on any shares acquired. As at 31 December 2003, the employee benefit trust held 5,248,163 ordinary 25p shares which represented 0.54% of the issued share capital of the Company as at 31 December 2003.
Awards have been made under the PSP as follows:
Date of Number of Number of Value of shares Latest vesting
date employees shares at date of
grant including grant
Directors
GBP
3 Nov 03 54 4,659,894 3,459,971 2 May 07
Closed Schemes
(iv) Brit 1998 Approved Executive Share Option Scheme ("the Approved Scheme")
The Approved Scheme is a discretionary share option scheme approved by the Inland Revenue. Following shareholder approval of the ESOS in 2003, no further grants of options will be made under the Approved Scheme. Options granted under the Approved Scheme were subject to performance criteria at the discretion of the Board and are generally exercisable between three and ten years from the date of grant.
Outstanding options granted at nil cost under this scheme are as follows:
Date Number of Number Subscription Date from Expiry
of employees of price per which date
grant including shares 25p share exercisable
Directors under (pence)
option
6 Dec 4 118,379 80.25 6 Dec 02 5 Dec
99 09
8 Jun 1 38,710 77.50 8 Jun 03 7 Jun
00 10
20 9 162,164 74.00 20 Nov 03 19 Nov
Nov 00 10
7 Jun 24 361,241 113.50 7 Jun 04 6 Jun
01 11
27 1 28,368 70.50 27 May 05 26 May
May 02 12
6 Feb 11 130,118 75.50 6 Feb 06 5 Feb
03 13
(v) Brit 1998 Approved Executive Share Option Scheme - Part B (formerly Wren Approved Share Option Scheme 1998)
This is a discretionary share option scheme approved by the Inland Revenue. Options granted under this scheme were not subject to performance criteria and are generally exercisable between three and ten years from date of grant. All option holders accepted rollover terms granting them options over shares in the Company on 21 September 1999. It is not expected that any future options will be granted under this scheme.
Outstanding options granted at nil cost under this scheme are as follows:
Date Number of Number Subscription Date from Expiry
of employees of price per which date
grant including shares 25p share exercisable
Directors under (pence)
option
10 16 397,557 112.00 10 Sep 01 9 Sep
Sep 98 08
(vi) Brit 1998 Unapproved Executive Share Option Scheme ("The Unapproved Scheme")
The Unapproved Scheme is a discretionary share option scheme not approved by the Inland Revenue. Following shareholder approval of the ESOS in 2003, no further grants of options will be made under the Unapproved Scheme. Options granted under this scheme were subject to performance criteria determined by the Board and are generally exercisable between three and ten years from the date of grant.
Outstanding options granted at nil cost under this scheme are as follows:
Date Number of Number Subscription Date from Expiry
of employees of price per which date
grant including shares 25p share exercisable
Directors under (pence)
option
10 2 799,999 142.50 10 Sep 01 9 Sep
Sep 98 08
6 Dec 7 1,875,000 80.25 6 Dec 02 5 Dec
99 09
24 2 550,000 66.00 24 May 03 23 May
May 00 10
20 5 715,000 74.00 20 Nov 03 19 Nov
Nov 00 10
7 Jun 1 125,000 113.50 7 Jun 04 6 Jun
01 11
31 37 2,497,550 70.50 31 May 05 30 May
May 02 12
31 8 2,460,000 70.83 31 May 05 30 May
May 02 12
5 Jun 10 635,500 70.50 5 Jun 05 4 Jun
02 12
23 3 1,353,913 62.50 23 Oct 05 22 Oct
Oct 02 12
4 Nov 2 839,844 64.00 4 Nov 05 3 Nov
02 12
15 1 240,000 78.00 15 Jan 06 14 Jan
Jan 03 13
(vii) Brit 1998 Unapproved Executive Share Option Scheme - Part B (formerly Wren Unapproved Share Option Scheme 1998)
This is a discretionary share option scheme not approved by the Inland Revenue. Options granted under this scheme were subject to performance criteria (other than those granted on 18 May 1998) determined by the board of Wren Limited. Options are generally exercisable between three and ten years from the date of grant (with the exception of those granted on 18 May 1998). All option holders accepted rollover terms granting them options over shares in the Company on 21 September 1999. It is not expected that any future options will be granted under this scheme.
Outstanding options granted at nil cost under this scheme are as follows:
Date Number of Number Subscription Date from Expiry
of employees of price per which date
grant including shares 25p share exercisable
Directors under (pence)
option
18 2 542,920 119.00 22 Dec 00 17 May
May 98 08
14 1 117,500 130.50 14 Aug 01 13 Aug
Aug 98 08
(viii) Brit Long Term Incentive Plan 1999 ("the LTIP")
Following shareholder approval of the PSP in 2003, no further awards will be made under the LTIP.
The LTIP was controlled by the Remuneration Committee, which set performance targets in respect of all allocations. The LTIP was established under a discretionary employee benefit trust set up for the provision of benefits and assistance to employees of the Company and its subsidiaries. Further details of the trust are disclosed in part (iii) above.
Outstanding awards made under the LTIP are as follows:
Date of Number of Number of Value of Latest
grant employees shares shares at vesting
including date of date
Directors grant
24 May 00 3 266,500 181,220 31 Dec 03
18 Dec 01 1 67,030 50,000 31 Dec 04
37 Related party transactions
(i) Directors' interests in share capital
The interests of the Directors who held office as at 31 December 2003 and their families in the ordinary shares of 25p each of the Company are as follows:
Held at 31 December 2003 Held at 31 December 2002
Shares Options PSP/LTIP Shares Options PSP/LTIP
Dane
Douetil 820,483 1,806,744 462,613 770,483 1,449,224 102,500
Neil
Eckert 5,822,335 1,601,993 491,055 1,561,588 1,114,473 187,708
Matthew
Scales 107,185 1,230,166 496,780 82,185 872,646 136,667
Clive
Coates 100,000 - - 20,000 - -
Glyn
MacAulay 40,000 - - 40,000 - -
Don
McCrickard 40,000 - - - - -
Anthony
Townsend 352,538 - - 352,538 - -
Jo
Welman 208,874 510,526 - 128,500 510,526 93,855
All Directors' interests in the ordinary shares of the Company are beneficial. Neil Eckert, Anthony Townsend and Jo Welman are also interested in 456,761, 47,543 and nil units of 8.5% Convertible Unsecured Subordinated Loan Stock 2008 respectively (2002: 456,761, 47,543 and 40,077 respectively). No other Director held any interest in the 8.5% Convertible Unsecured Subordinated Loan Stock 2008 as at 31 December 2003 and no Director held any interest in any other group company.
As at 27 February 2004, the Employee Share Ownership Trust was interested in 1,153,291 ordinary 25p shares in which the directors who are employees are deemed to be interested by virtue of section 324 of the Companies Act 1985 (see note 36 of the financial statements).
As at 27 February 2004, the employee benefit trust held 5,248,163 ordinary 25p shares in which the directors who are employees are deemed to be interested by virtue of section 324 of the Companies Act 1985 (see note 36 of the financial statements).
(ii) Directors' interests in transactions
Jo Welman is a shareholder in The Equity Partnership Limited ("EPL"). EPL's subsidiaries, EPIC Asset Management Limited and EPIC Special Investments Limited, have entered into certain investment management agreements with the Group and, accordingly, Jo Welman is interested in these contracts. Details of these contracts are set out in part (iv) below.
(ii) Loans
As at the balance sheet date, Brit Insurance Holdings PLC had a loan of GBP5,700,000 outstanding made to Ri3K Limited, a 77.2% owned subsidiary. This amount has been fully provided for in the books of the Company. With effect from 1 January 2004, interest will be charged on outstanding balances at an annual rate of 1% above the prevailing LIBOR rate.
(iv) Trading
The Equity Partnership Limited, EPIC Asset Management Limited and EPIC Special Investments Limited
During the year, the Group traded with The Equity Partnership Limited ("EPL"), an associated undertaking 34.1% owned by Brit Insurance Holdings PLC and with EPIC Asset Management Limited ("EPAM") and EPIC Special Investments Limited ("ESI"), subsidiaries of EPL. Jo Welman, a Non-Executive Director of Brit Insurance Holdings PLC is also a Director of EPL. Brit Insurance Holdings PLC charges EPL GBP8,500 per annum per EPL employee in respect of operational office costs.
EPL, EPAM and ESI also have an agreement with Brit Group Services Limited ("BGS"), a 100% subsidiary of Brit Insurance Holdings PLC, whereby BGS pays certain expenses on behalf of these companies which it then recovers in full. The total of all of these costs amounted to GBP2,863,222 (2002: GBP2,032,782), of which GBP782,267 (2002: GBP260,634) was outstanding at the balance sheet date.
EPL also traded during the year with The Equity Partnership Investment Company PLC ("EPIC"), a company with a 29.9% holding in EPL. Brit Insurance Holdings PLC owns 34.7% of the ordinary share capital of EPIC. EPIC purchased investment management services from EPL amounting to GBP698,836 (2002: GBP712,876). As at the balance sheet date the amounts owed in relation to these services amounted to GBP114,000 (2002: GBP105,000).
EPAM and ESI are Investment Managers regulated by the Financial Services Authority and provided the following services to Brit Insurance Holdings PLC and its subsidiaries:
EPAM
Fund Fee charged outstanding per annum
Value
As at As at As at
31 31 31
Commenced December December December
2003 2003 2002
GBP GBP GBP
Investment Management:
Brit 2001 100,000 8,400
Insurance
Holdings PLC
GBPm % GBP GBP
Investment Advisory:
Brit 2001 514 0.18 89,400 68,800
Syndicates
Limited
Brit 2002 23 0.15 3,300 7,300
Insurance
Holdings PLC
Masthead 2002 142 0.15 19,800 13,000
Insurance
Underwriting
Limited
Brit 2002 160 0.15 31,300 8,400
Insurance
Limited
ESI
Fund Fee charged outstanding per
Value annum
As at As at As at
31 31 31
Commenced December December December
2003 2002
2003
GBPm % GBP GBP
2001 100,000 8,400
Investment Advisory:
Brit 2003 5 1.5 6,820 -
Syndicates
Limited
Brit 2003 13 1 10,946 -
Syndicates
Limited
Brit 2003 1 1 1,873 -
Insurance
Holdings PLC
Masthead 2003 5 1 4,580 -
Insurance
Underwriting
Limited
Brit 2003 3 1.5 11,569 -
Insurance
Limited
Brit 2003 26 1 26,718 -
Insurance
Limited
Brit 2003 8 1 6,567 -
Insurance
(UK) Limited
Ebix Inc
The Group entered into various software and service agreements with Ebix Inc, a company in which Brit Insurance Holdings PLC owns 40.1% of the common stock. The cost of these contracts in 2003 was GBP1,100,551 (2002: GBP1,292,799). GBP29,268 (2002: GBP413,298) was outstanding at the year end.
Brit Insurance Limited / managed syndicate
During the year a syndicate managed by Brit Syndicates Limited paid a gross quota share premium to Brit Insurance Limited amounting to GBP103,889,790.
38 Contingent liabilities
(i) Fixed and floating charges
(a) Company
Lloyd's has a floating guarantee over the assets of Brit Insurance Holdings PLC.
Brit Insurance Holdings PLC has given a guarantee in respect of a leasing contract entered into by a subsidiary company. The value of this guarantee did not exceed GBP30,000 at 31 December 2003.
(b) Group
If any of the corporate member subsidiaries fails to meet any of its Lloyd's obligations, after having called on the Group under its guarantees, then:
(a) Lloyd's will be entitled to require the other corporate member subsidiaries to cease or reduce their underwriting; and/or
(b) having regard to the fact that the Central Fund or the New Central Fund may be applied to discharge the obligations of the defaulting corporate member subsidiary, Lloyd's will be entitled to require each of the other corporate member subsidiaries to make contributions to the New Central Fund up to the amount of their respective net profits held from time to time in Premium Trust Funds, sufficient to reimburse the Central Fund or the New Central Fund in full for any payment made on behalf of the defaulting member.
At the date of signing these financial statements the Group is not aware of any corporate member subsidiary failing to meet its Lloyd's obligations.
On 26 November 1999, there was a reorganisation of the Group such that:
(i) all underwriting at Lloyd's is now conducted through one corporate member subsidiary; and
(ii) all investments and assets supporting the underwriting at Lloyd's are held in one subsidiary, being Masthead Insurance Underwriting Limited ("Masthead").
A number of agreements were entered into in order to achieve this.
A deed of charge was entered into by Masthead with Lloyd's to support the underwriting activities of all corporate member subsidiaries within the Brit Insurance Holdings PLC Group. Masthead entered into deeds of covenant with Lloyd's to cover the run-off liabilities of these corporate members. It also entered into guarantees with respect to interavailable funds of GBP118,738,728. As at 31 December 2003 the value of these funds was GBP86,807,120 (2002: GBP88,126,983).
Lloyd's has the right to retain the income on charged investments, although it is not expected to exercise this right unless it considers there to be a risk that one or more of the covenants might need to be called and, if called, might not be honoured in full.
The parent company, Brit Insurance Holdings PLC, has given an indemnity to Lloyd's, of up to GBP63,333,500, in the event that Masthead fails to meet its obligations. The directors do not consider this to be likely.
(ii) Bank borrowings
As detailed in Note 25, Brit Insurance Holdings PLC had a Term Facility Agreement with National Westminster Bank PLC and Barclays Bank PLC at 31 December 2003.
Under the terms of this facility, the lenders have a fixed and floating charge over certain investments owned by the Company. The lenders have priority over the charges held by Lloyd's.
39 Financial information and posting of accounts
The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 December 2002 or 2003, but is derived from those accounts. Statutory accounts for 2002 have been delivered to the Registrar of Companies and those for 2003 will be delivered in due course. The auditors have reported on those accounts; their reports were unqualified and did not contain statements under Section 237 (2) or (3) of the Companies Act 1985. The audited Annual Report and Accounts for 2003 are expected to be posted to shareholders by no later than 31 March 2004. Copies of the Report may be obtained from that date by writing to the Company Secretary, Brit Insurance Holdings PLC, 55 Bishopsgate, London, EC2N 3AS. The Annual General Meeting of the Company will be held at the same address at 10am on 27 May 2004. The Preliminary Results were approved by the Board on 1 March 2004.
This information is provided by RNS The company news service from the London Stock Exchange