13 Mar 2007 07:03
Kiln PLC13 March 2007 PART 1 Kiln plc Record profits and plans for Bermuda Kiln plc, the international specialist insurance and reinsurance group,announces record profits before tax of £64.1 million for the year ended 31December 2006, a proposed 33% increased total dividend for the year of 4p andplans to establish operations in Bermuda. Financial highlights 2006 2005Profit before tax excluding FX effect on non-monetary items £71.3m £4.4mProfit before tax £64.1m £8.5mEarnings per share 14.97p 2.74pReturn on equity 20.2% 4.3%Dividend per share - full year 4p 3pNet assets per share 86p 74p Operational highlights • A year of high rates and low claims • Combined ratio of 77%; claims ratio of 41% (2005: 114% and 80%) • Gross written premiums £429 million, up 22% (2005: £353 million) • Rates up an average of 15.9% in 2006, and ahead of our expectations of 13% • Expanded distribution through acquisition; Kiln offices opened in Hong Kong, Singapore and Belgium Plans for Bermuda In a separate announcement today, Kiln has published plans to introduce a newBermudian domiciled holding company for the Kiln Group, to be named Kiln Ltd,and to establish a new Class 3 Bermudian insurer, Kiln Re. If the proposals areapproved, Kiln plc shareholders will receive one Kiln Ltd share for each Kilnplc share. Kiln Ltd shares will be listed on the London Stock Exchange. Strategic benefits • Bermuda offers a favourable environment for Kiln to develop a more international business and access quality underwriting opportunities globally • Proximity to the US, already Kiln's principal source of business and an area where Kiln is exploring options for developing an onshore presence. • Provides an underwriting platform in Bermuda to complement Lloyd's • Enhanced ability to access alternative sources of capital • Improved ability to deploy capital in response to market conditions Financial benefits • The proposals are expected to be earnings enhancing for the Group in the short to medium term • The increased capital efficiency and flexibility will allow Kiln Ltd to support a higher annual dividend policy of paying at least 4p per share throughout the cycle Outlook • Over £1 billion capacity under management for 2007 • Kiln's owned Lloyd's underwriting capacity £457 million in 2007, an increase of 29% (2006: £353 million) • Rates steady overall for January 2007 renewals • 2007 starting well; but no room for complacency Edward Creasy chief executive officer said: '2006 was an outstanding year for Kiln, thanks to strong pricing and a benignclaims environment. As well as making good profits for our shareholders, we madestrategic progress, opening new offices in Hong Kong, Singapore and Belgium. We believe that Bermuda offers a favourable environment in which to develop theGroup as a growing international business and we expect that our new Bermudianoperations will be complementary to Kiln's existing Lloyd's business. Lloyd'sremains, in our view, a commercially advantageous platform which will continueto form an important part of our insurance activities in future. 2007 has started well and, whilst we are far from complacent, Kiln is wellplaced to continue delivering attractive returns to shareholders.' 13 March 2007 Enquiries Kiln plc 020 7457 2020 (this morning only) thereafter 020 7886 9000Edward CreasyKate Rogers College Hil 020 7457 2020 Tony FriendRoddy Watt Chairman's statement 2006 was a favourable year for Kiln; the company took advantage of profitabletrading conditions resulting from a period characterised by an unusually lowincidence (in number and value) of catastrophic losses, and continuing highpricing levels. These conditions and Kiln's continuing commitment to prudentrisk management have been rewarding for Kiln and our shareholders; in 2006 thecompany generated profits before tax of £64.1 million (2005: £8.5 million), thehighest level in Kiln's history, representing a return on equity after tax of20.2% (2005: 4.3%) and earnings per share of 14.97p (2005: 2.74p). Had it notbeen for the treatment of foreign exchange on non-monetary items that isrequired under IFRS, profit before tax would have been £71.3 million (2005: £4.4million). The combined ratio of 77% (2005: 114%) and in particular the claimsratio of 41% (2005: 80%) reflects the strength of Kiln's underwritingperformance in the year. Kiln's focus is on the generation of high levels of risk adjusted returns fromspecialist underwriting throughout the insurance cycle for our shareholders.During the course of the year we have continued to invest in the development ofour expertise in this area, both in terms of widening our customer base andstrengthening our insurance risk management expertise. Kiln has traditionally operated within the Lloyd's market. In 2006 we expandedour international network of distribution channels to allow us access to a widerspread of overseas business, opening new offices in Europe and Asia to advanceour strategy of developing our underwriting expertise on a wider global scale.We believe this will be facilitated by establishing a new holding company forthe Group located in Bermuda. Bermuda has enjoyed rapid growth and has developedinto a premier global reinsurance market, with a focus on insuring andreinsuring specialist risks. We are also looking at ways in which we canincrease our underwriting presence in the United States, already our largestbusiness market. We believe that having Kiln's base in nearby Bermuda will beadvantageous to these initiatives. This proposed move to Bermuda is an excitingand important development for Kiln. Two years ago we made a commitment to shareholders to make dividend payments ofat least 3p per share throughout the cycle, unless exceptional circumstancesmade this course of action inappropriate. In the light of the profitable yearthat Kiln has had, and to make an immediate distribution of the benefits toshareholders that we believe will arise from our redomiciliation to Bermuda, thedirectors of Kiln have proposed a final dividend this year of 3p per share(2005: 2p) making for a full year dividend of 4p (2005: 3p). If the proposals toredomicile the holding company of the group to Bermuda are approved, the newholding company intends to maintain the annual dividend at or above thismonetary level throughout the insurance cycle, subject to the same conditionregarding exceptional circumstances. Subject to the approval of shareholders,the final dividend will be paid on 18 May 2007 to shareholders on the registeron 20 April 2007. Graham Ball, who has been a non-executive director at Kiln for nine years andhas chaired the audit and risk committee from 2002 to 2006, will retire from theboard at the annual general meeting in May 2007. Graham has served the maximumthree terms allowed under the Combined Code and in that time he has been aconscientious director of Kiln who has been generous with his time andcommitment. I and my predecessor chairmen, along with the whole board, havebenefited enormously from his contribution and I thank him and wish him a longand happy retirement. 2006 was an excellent year for Kiln. We underwrote business carefully andconservatively; the weather was kind to us, and the favourable ratingenvironment that followed the hurricanes in 2005 meant that prices increasedfrom an already high base during the course of the year. Nonetheless, we areholding to the view that we formed over a year ago that future weather patternshave the potential to become more extreme; it remains our judgement that thebenign conditions of 2006 are not what we should expect in the future. Ourfuture approach to risk management will continue to take this into account. Nick CoshChairman Chief executive officer's report Result for 12 months to 31 December 2006 Profits before tax for 2006 were £64.1 million (2005: £8.5 million), which isthe highest in Kiln's history. These profits resulted in excellent earnings pershare for 2006 of 14.97p (2005: 2.74p), and a strong return on equity of 20.2%(2005: 4.3%). The combined ratio for 2006, is as low as at any point in Kiln'shistory, at 77% (2005: 114%).This is made up of an expense ratio of 36% (2005:34%) and a claims ratio of 41% (2005: 80%), which is the operational yardstickfor a specialist insurance company such as Kiln; this reflects clearly thestrength of the underwriting result that the company achieved in 2006. Shareholders' equity increased to £250 million (2005: £216 million), which isequivalent to 86p per share (2005: 74p) and gross written premium increased from£353 million to £429 million in 2006. Kiln's earned premiums, net ofreinsurance, increased by 23% from £222 million in 2005 to £272 million in 2006and net unearned premium, an indicator of future profit potential, increased by17% from £112 million as at 31 December 2005 to £131 million as at 31 December2006. During the year we succeeded in reducing the gross pension deficit fromaround £20 million at the end of 2005 to £3.7 million at the end of 2006,reducing Kiln's related liabilities considerably and thus improving the qualityof the balance sheet. Profit commission earned by R J Kiln during 2006 amounted to £6.5 million, adecrease of 64% on the equivalent period in 2005 (£18.2 million). As profitcommission is earned over three years, the 2006 figure is low because there isno profit commission receivable on the 2005 year of account as a result oflosses from the 2005 hurricanes. W. R. Berkley Insurance (Europe), Limitedcontributed £1.1 million after tax, as it did in 2005. The total gross premium income capacity of the four syndicates managed by R JKiln & Co Limited increased from £703 million in 2005 to £802 million in 2006.At the end of 2006 we announced that this would rise to £990 million for the2007 year of account. In 2007 the group manages over £1 billion of capacity whenthe non-Lloyd's element of underwriting management (our reinsurance underwritingon behalf of W. R. Berkley Insurance (Europe), Limited) is taken into account. Kiln capacity since 2003 2003 2004 2005 2006 2007 £m £m £m £m £m Total owned capacity 238.2 262.9 279.7 353.4 457.2Total group managed Lloyd's capacity 657.1 680.0 702.5 801.9 990.3 Non-Lloyd's capacity 0 0 24.0 27.1 29.6Total managed capacity 657.1 680.0 726.5 829.0 1,019.9 Review of 2006 Any review of 2006 is bound to be in stark contrast to the equivalent for 2005.The underwriting and claims environment that prevailed in 2006 was a furtherreminder of the inherent unpredictability of the insurance risk portfolio inwhich Kiln specialises. At the end of 2005 we worked hard to position ourselvesfor another year of above average hurricane activity. As it turned out, the workundertaken to protect our underwriting portfolio was not tested during the year.The relative lack of catastrophic loss in 2006 demonstrates the other side ofthe volatility coin: catastrophe activity does not necessarily follow ashort-term pattern. The industry-wide insured cost of natural and man madecatastrophes in 2006 is estimated to have been a mere US$15 billion, less than20% of the record equivalent figure of US$80 billion for 2005. 2006 was a year reminiscent of 2003; not only was it relatively benign in termsof claims activities, but it was also a year when pricing for much of Kiln'sportfolio of risks began the year high and continued to rise throughout theyear. Circumstances were very much in our favour and, following the catastropherelated losses of 2005, we positioned Kiln to take advantage of the consequentstrengthening of underwriting prices within our readjusted risk appetite. Giventhese circumstances, and despite the conservative approach we took to protectour investors through the purchase of additional catastrophe reinsurance in 2006with associated additional cost, this has resulted in a year which has generatedsubstantial profits for our shareholders. It is our intention to continue withthis cautious approach. Lloyd's continues to be our primary operating platform. The core Lloyd'sprinciple of the establishment of capital mutuality across a diverse marketplacecreates clear capital efficiency for an operation such as Kiln, and the accessto licences that it affords us is equally beneficial for our business. Thelikely resolution of the reinsurance of the Equitas run-off portfolio will meanthat the financial strength of Lloyd's, from which Kiln benefits, is more robustthan it has been for many years. Kiln's involvement in the G6 - the group ofLloyd's insurers which is working together to introduce electronic transactionbetween ourselves and our Lloyd's brokers - demonstrates our commitment toworking with the market to ensure its continuing leading status in the insuranceworld. The pace of reform at Lloyd's has continued to increase in 2006 and anaggressive agenda for future change has been agreed. In particular, progress indeveloping a less costly and more efficient process in order to handle theplacing of insurance policies and the negotiation and settlement of claims isessential if the Lloyd's market is to maintain its position in the internationalmarketplace. Foundations for successful reform were set during 2006, includingthe achievement of the FSA's contract certainty target. More work has to be donein 2007 to extract full commercial advantage from the initiatives taken in 2006.In addition, Lloyd's needs to take steps to reduce the conflicts of interestthat exist between different types of capital providers to the market, and toredouble its efforts to improve process efficiency at every stage of eachinsurance transaction. This will succeed only if all interested parties - theFranchisor, the management and underwriters of managing agencies, and all thoseinvolved in bringing business to Lloyd's - work together to achieve thesechanges. Kiln's strategy remains consistent. Our focus is firmly on maintaining thequality and discipline of our underwriting, whatever the prevailing marketconditions. We concentrate on underwriting those specialist risks that weunderstand thoroughly, and we apply a cautious approach to all non-underwritingrisks relating to our business. Although Lloyd's remains our primary market ofoperation, it is our plan to extend the reach of Kiln underwriting to othermarkets by enhancing our distribution network. To that end, we have openedoffices in Hong Kong, Singapore and Belgium, adding to our existing operationsin London and South Africa. Our new offices allow us access to internationalinsurance and reinsurance business that does not naturally come to the LondonMarket; we are also able to broaden our product offering in these markets bygiving our local managers direct access to the full range of Kiln underwritingexpertise. Relationships remain fundamental to the way in which we operate, andour recent expansion into these new markets has been significantly helped by thestrength of our connections and relationships in these geographic areas. 2006 offered Kiln many opportunities to succeed and we worked hard to make themost of them. Notwithstanding that, our plans and strategy are based on the viewthat the benign claims environment which we enjoyed in 2006 is not one we - orindeed the market - should expect to continue. These continue to be interestingand challenging times and we are determined to make the best of them on behalfof our capital providers. The future 2007 is the year in which Kiln will consolidate and build on its growinginternational status as we continue to broaden our distribution platform. Inorder to support this, we intend to restructure the Group. The effect of therestructuring will be that the Kiln Group will operate in the future under aBermudian holding company, Kiln Ltd, which will be listed on the London StockExchange. Bermuda has enjoyed rapid growth and has developed into a premier globalreinsurance market, which is now the third largest reinsurance market in theworld (after the United States and Germany). We believe there are a number ofbenefits to a company such as Kiln being based in Bermuda. It will repositionKiln within a wider multinational peer group of specialist internationalunderwriters with holding companies and insurance operations domiciled inBermuda, and provide a platform which is closer to the US insurance market wherewe have ambitions to increase our already considerable market position; it willfurther increase the potential for the Group to access alternative sources ofcapital and improve the flexibility and efficiency of the Group's balance sheet;and provide us with a favourable commercial, legal, regulatory and fiscalenvironment from which to develop a more international business. The Proposalsare expected to be earnings enhancing for the Group in the short to medium term. More details about this proposed transaction set out in the Scheme Circular andProspectus which we expect will be sent to shareholders on or around 23 March2007 and will be available on www.kilnplc.com/kilnltd. In 2007, Kiln's fundamental approach to its business will remain unchanged andwe expect prices to remain steady. Our focus will remain on maximisingrisk-adjusted capital returns from our specialist portfolio of insurance andreinsurance business; capitalising on opportunities where pricing remains in ourfavour; building portfolios of both London Market and international businesswhich fit Kiln's approach to underwriting; and at the same time ensuring thattechnical pricing always remains adequate if we are to continue to accept risksin lines of business that are under pressure from the cycle. In a business whereopportunities for growth have constantly to be reviewed in the light of thepriority of the potential for profit, Kiln will continue to concentrate on thedelivery of shareholder return. 2006 was a year when the environment for growthand profit were aligned and we were able to take full advantage of thatopportunity. The trading conditions in 2007 are unlikely to be as favourable butKiln has worked hard to position itself to make the most of the future. Edward CreasyChief executive officer Financial summary 2006 2005Profit before tax excluding FX effect on non-monetary items £71.3m £4.4mProfit before tax £64.1m £8.5mEarnings per share 14.97p 2.74pCombined ratio 77% 114%Dividend per share - full year in respect of 2006/2005 4p 3pNet assets per share 86p 74pGross written premiums £429m £353mNet earned premiums £272m £222mReturn on equity 20.2% 4.3% Five year summary Please note that all figures are in £ millions and rounded, except whereotherwise shown and that 2002 and 2003 figures are under UK GAAP conventions and2004 - 2006 are under IFRS. Profit and loss summary Year end 31 December 2002 2003 2004 2005 2006Gross written premium 281 267 314 353 429Net earned premium 173 183 181 222 272Technical result 21.8 46.5 35.8 (11.7) 71.2Total investment income 3.8 6.0 9.7 13.6 22.6Pre-tax profit 11.8 33.1 37.9 8.5 64.1Tax rate 39% 26% 32% 31% 32%Post-tax profit 7.2 24.6 25.8 5.8 43.6Return on equity 9% 23% 23% 4% 20%Earnings per share 4.56p 12.04p 12.15p 2.74p 14.97pDividend per share 0.5p 0.6p 3.0p 3.0p 4.0p Balance sheet summary Year end 31 December 2002 2003 2004 2005 2006Shareholders' equity 109 128 137 216 250Investments and cash 272 297 341 501 506Net claims reserves 163 167 141 243 207Associates - 9 9 11m 13NAV per share 53p 63p 67p 74p 86pNTA per share 48p 58p 59p 67p 76pNet pension deficit 19 19 20 7 1Gearing* 5% 23% 29% 19% 29% \* Total on and off balance sheet debt as a percentage of opening shareholders'funds Kiln plcConsolidated Financial Statements Consolidated Income Statementfor the year ended 31 December 2006 2006 2005 Note £'000 £'000Gross written premiums 8 429,146 353,024 Net written premiums 8 291,431 242,546Change in the provision for unearned premiums 8 (19,153) (20,977)Net insurance premium revenue 272,278 221,569Net insurance claims incurred 9 (116,810) (167,280)Investment income from underwriting assets 10 13,153 7,522Net operating expenses 14 (97,390) (73,506) Profit /(Loss) from underwriting operations 71,231 (11,695) Investment income from non-underwriting assets 10 9,488 6,103Fees and commission income 11 22,505 29,049Other income 12 3,210 3,266Finance costs 13 (1,671) (1,346)Corporate and administrative expenses 14 (33,319) (25,570)Foreign exchange (losses) / gains 18 (8,384) 7,590Share of operating results after tax of associated company 25 1,085 1,058 Profit on ordinary activities before taxation 64,145 8,455Income tax expense 19 (20,533) (2,630)Profit after tax attributable to the equity shareholders 43,612 5,825 Earnings per ordinary share Basic 20 14.97p 2.74pDiluted 20 14.96p 2.74p All earnings are from continuing operations. Subsequent to 31 December 2006, the directors proposed a final dividend for 2006of 3.0p (final 2005: 2.0p) per ordinary share, £8,758,705 (final 2005:£5,827,566). This will be accounted for as an appropriation of retained earningsin the full year ending 31 December 2007. The combined interim and final dividend for the year 2006 is 4.0p (2005: 3.0p). Consolidated Statement of Recognised Income and ExpenseFor the year ended 31 December 2006 2006 2005 Note £'000 £'000Actuarial losses on defined benefit pension scheme 39 (307) (2,692)Retirement benefit asset recognised 39 - 14,198Tax on items taken to equity 39 92 (3,701)Exchange differences on retranslation of foreign operations (9) - Net (expense)/income recognised directly in equity (224) 7,805Profit for the year 43,612 5,825 Total recognised income and expense for the year 34 43,388 13,630 Consolidated balance sheetAs at 31 December 2006 2006 2005 Note £'000 £'000AssetsProperty, plant and equipment 22 1,181 718Intangible assets 23 29,197 19,515Deferred acquisition costs 24 50,620 46,076Investments in associated undertakings 25 12,638 11,344Deferred tax asset 26 12,419 8,821Retirement benefit obligation reimbursement right 39 1,710 10,013Reinsurance assets 37 152,116 251,017Prepayments and accrued income 27 10,102 19,647Financial investments 28 263,352 280,195 Insurance receivables 29 210,614 171,470Other assets 30 23,092 17,473Cash and cash equivalents 31 242,643 220,693Total assets 1,009,684 1,056,982 Capital and ReservesCalled up share capital 33 2,914 2,914Share premium 34 165,773 165,782Retained earnings 34 79,615 23,480Other reserves 34 2,140 23,582Total capital and reserves 250,442 215,758 LiabilitiesRetirement benefit obligation 39 3,658 19,986Deferred tax liabilities 26 10,498 5,776Insurance contract liabilities 37 491,008 605,186Current taxes 26 11,318 7,689Insurance payables 180,525 178,904Other liabilities 29,450 23,527Interest bearing loans and borrowings 32 32,785 156Total liabilities 759,242 841,224 Total equity and liabilities 1,009,684 1,056,982 Consolidated cash flow statementFor the year ended 31 December 2006 2006 2005 Note £'000 £'000 Net cash outflows from operating activities 40 (8,885) (11,319) Investing activitiesPurchase of intangible assets (6,286) (6,036)Disposal of intangible assets - 122Purchase of property, plant and equipment (303) (448)Interest and dividends received 23,210 15,380Acquisition of subsidiaries (3,969) -Investment in associate (209) (1,054)Net cash inflows from investing activities 12,443 7,964 Financing activitiesFees on banking facilities (1,054) (680)Issue of ordinary share capital - 76,050Expenses incurred in rights issue (1,025) (2,653)Dividends paid to shareholders 36 (8,741) (6,935)Proceeds from borrowings 34,649 -Net cash inflows from financing activities 23,829 65,782 Net increase in cash and cash equivalents 27,387 62,427Effect of exchange rate changes on cash and cash equivalents (5,563) 5,826Cash and cash equivalents at beginning of year 220,537 152,284Net cash and cash equivalents at end of year 31 242,361 220,537 The notes on the pages that follow form part of these financial statements. 1. Accounting policies 1.1 Group and its operations The consolidated financial statements of Kiln plc for the year ended 31 December2006 were authorised for issue in accordance with a resolution of the directorson 12 March 2007. Kiln plc is a limited company incorporated in the UK whoseshares are publicly traded on the London Stock Exchange. The principal activities of the Group consist of the underwriting of insuranceand reinsurance business together with associated activities. The analysis ofincome across income streams is set out in accounting policy b and note 3. 1.2 Basis of preparation The Group's financial statements have been prepared in accordance withInternational Financial Reporting Standards as adopted by the European Union asthey apply to the financial statements of the Group for the year ended 31December 2006 and applied in accordance with the Companies Act 1985. Theaccounting policies which follow set out those policies which apply in preparingthe financial statements for the year ended 31 December 2006. The Group financial statements are prepared in Sterling and all values arerounded to the nearest thousand pounds (£'000) except when otherwise indicated. The preparation of financial statements requires management to make estimatesand assumptions that effect the amounts reported for assets and liabilities asat the balance sheet date and the amounts reported for revenues and expensesduring the year. The nature of estimation means that actual outcomes coulddiffer from those estimates. The financial statements are also compiled on a going concern basis. The following have been issued but not early adopted and management do notbelieve the adoption of these standards will have a material financial impact onthe financial statements in the period of initial application as theirrequirements are only for additional disclosures. • Amendment to IAS1 Presentation of Financial Statements; Capital Disclosures: effective 1 January 2007.• IFRS 8 Operating Segments: effective 1 January 2009.• IFRS7 Financial instruments: Disclosures; effective 1 January 2007. 1.3 Basis of consolidation The consolidated financial statements incorporate the financial statements ofthe company, and entities controlled by the company (its subsidiaries), for the12 months ended 31 December 2006. Certain subsidiary undertakings underwrite ascorporate members of Lloyd's on syndicates managed by the group. The group'sshare of the transactions, assets and liabilities relating to syndicateparticipation is included in the consolidated financial statements. Inter-company transactions and balances between Group companies are eliminated. 1.4 Summary of accounting policies The significant accounting policies adopted in the preparation of the financialstatements are set out below. They have been applied consistently to allperiods presented in these financial statements. a. Segmental reporting A business segment is a group of assets and operations engaged in providingproducts or services that are subject to risks and returns that are differentfrom those of other business segments. The business segments reported by segmentand activity are: Underwriting Underwriting insurance and reinsurance risks Managing Agency Managing third party insurance capital Associated undertakings Investment in W. R. Berkley Insurance (Europe), Limited, and International Marine (Underwriting Agency) Limited Kiln plc Corporate management activities The underwriting segment is further analysed across different class of businessgroupings according to the way in which they are managed. Geographical segments are selected to analyse the location of business acrossdifferent economic environments, although it should be noted that all risks arewritten through Lloyd's of London which is located in the UK. b. Revenue recognition Premium revenue Gross premiums written relate to policies incepting (coming on risk) during thefinancial year and include estimates of 'pipeline' premiums together with anydifference between booked premiums for prior years and those previously accrued.Written premiums are stated inclusive of acquisition costs but exclusive ofpremium taxes. Written premium is adjusted to premium revenue representing the amount ofpremium deemed to have been earned in the financial year. The provision forunearned premium at the year end comprises the proportion of premium estimatedto be earned after the balance sheet date. The earning of premiums is basedprimarily on time apportionment, with an adjustment for the risk profile ofcertain classes of business particularly those exposed to seasonal weatherrelated events. Coinsurance Coinsurance is where Kiln underwrites only part of the risk with othersyndicates, companies or the client taking the remainder. Where the companyparticipates in coinsurance its share of premiums and claims are taken into theaccounts regardless of whether Kiln is the lead underwriter or not. Mostbusiness is coinsurance in nature. Profit commission on Managing Agency activities The group only recognizes its share of profit commission from third partiesparticipating on the same syndicates. Profit commissions are receivable when therelevant Lloyd's year of account closes, normally after three years, and arereceived in cash when the syndicate's financial statements are dispatched to thecapital providers. The profit commission due is calculated by reference to the managing agencyagreement and accounted for on an accruals basis as at the balance sheet date.The accrual for profit commission receivable from managed syndicates isrecognised using an earnings pattern of 0%/50%/50% which represents the mostreliable estimate of the three year development of a Lloyd's year of account.Profit commission is not therefore recognised in the opening year of a year ofaccount. 50% of the estimated ultimate profit commission balance is recognisedin the second year of a year of account, and the balance of profit commission to100% is recognised in the third year of a year of account. Managing agency fees and recharges to non-group participants Managing agency fees and recharges to non-group participants are recognised asthe services are provided. Investment income from underwriting assets Investment return comprises interest receivable using the effective interestrate method together with fair value investment gains and losses. Non-insurance revenue comprises: i) Investment income from non-underwriting assets which includes interest incomeusing the effective interest rate method. ii) Net gains and losses on the movement of the fair value of investments. iii) Fees and recharges which are earned from the activities of the managingagency. Managing agents fees are calculated as a levy on the stamp of eachsyndicate and earned on an instalment basis. The managing agency incurs theoperating, corporate and administrative expenses of the group and allocatescosts to the syndicates on an apportionment basis. The recharge relating to thenon-group participants is recovered from the syndicates. iv) Other income which includes the gain on the enhanced transfer valueinitiatives relating to the group defined benefit pension fund. v) Dividends received and receivable which are recognised when the shareholder'sright to receive the payment is established. c. Foreign currency translation i) Functional currency Items included in the financial statements of each of the Group's entities aremeasured using the currency of the primary economic environment in which theentity operates (the functional currency). The consolidated financial statementsare presented in pounds sterling which is the functional currency of the parent. ii) Transactions and balances Foreign currency transactions are recorded in the functional currency using theexchange rates prevailing at the dates of the transactions or an appropriateaverage rate of exchange. Foreign exchange gains and losses resulting from thesettlement of monetary items relating to such transactions and from thetranslation at year-end exchange rates of monetary assets and liabilitiesdenominated in foreign currencies are recognised in the income statement.Non-monetary assets (i.e. those without a corresponding cash flow that aremeasured at historical cost) such as unearned premium reserves and deferredacquisition costs are translated in the balance sheet at the exchange rateprevailing at the date of the original transaction (i.e. inception date of theinsurance policy). iii) Group companies The results and financial position of Group entities which have a functionalcurrency different from the presentation currency, are translated into thepresentation currency as follows: • assets and liabilities are translated at the closing rate at the balance sheet date; • income and expenses are translated at average exchange rates; and • all resulting exchange differences are recognised in the statement of recognised income and expenses. d. Claims Paid claims represent all claims paid during the year and include claimshandling expenses. Claims incurred comprise paid claims and changes in the provisions foroutstanding claims, including provisions for claims incurred but not reported(IBNR) and related expenses, together with any adjustments to claims fromprevious years. e. Reinsurance The Group assumes and cedes reinsurance in the normal course of business.Premiums on reinsurance assumed are recognised as revenue in the same manner asdirect business. Premiums on reinsurance ceded are recognised at inception andearned over the risk period covered. The benefits to which the Group is entitled under its reinsurance contracts arerecognised as assets. These assets consist of short term balances due fromreinsurers (classified within insurance receivables) as well as reinsurancerecoveries (classified as reinsurance assets). The reinsurance recoveries arebased on calculated amounts of outstanding claims and projections for IBNR. An impairment review is performed on all reinsurance assets when an indicationof impairment occurs. Reinsurance assets are impaired only if there is objectiveevidence that the Group may not receive all amounts due to it under the terms ofthe contract and if this can be measured reliably. Reinstatement premiums arise when a loss has been incurred on a policy and thereis a clause which allows the reinstatement of the policy with the payment of afurther premium by the policyholder. They are recognised and written in full atthe date of the event giving rise to the reinstatement premium. Gearing Quota-share reinsurance contract: Kiln Underwriting Limited, KilnUnderwriting (807) Limited, Kiln Underwriting (807) No 2 Limited and KilnUnderwriting (308) Limited have in place a number of gearing quota sharereinsurance agreements. The reinsurers participate in their share of the netunderwriting results arising from those companies' participations in one or moresyndicates. Total revenue and expenses are recorded by the companies, which arethen ceded out to the reinsurers in accordance with their participation in theagreement. Other key aspects of the agreements are that the companies mayreceive a fee based on underwriting capacity and profit commission where thereinsurers participate in a profit on the business written. Amounts payable orreceivable are settled upon the closure of the underwriting year. f. Finance cost Finance cost comprises interest paid and payable using the effective interestrate method, together with facility fees on letters of credit and a revolvingloan, and is recorded in the period in which it is incurred. The finance costalso includes the expected investment return on pension assets and interest coston the benefit obligation with respect to the defined benefit pension scheme. Issue costs attributable to subordinated debt finance are amortised over theexpected duration period of the loan. g. Net operating expenses Net operating expenses are recognised on the accruals basis and represent theexpenses incurred by the syndicates on underwriting operations. The managingagent, R J Kiln & Co Limited, incurs the costs and subsequently recovers fromthe syndicates the share relating to non-Group participants. Expenses comprise the cost of acquiring business including commission and profitcommission as well as the staff costs and other expenses attributable tounderwriting operations. h. Performance Related Remuneration The Performance Related Bonus Element (PRBE) of the Performance RelatedRemuneration (PRR), (see note 16) inclusive of employer's national insurancecontributions, may be payable to staff based on Group profitability and eligiblestaff fulfilling certain vesting criteria. It is recognised in the accountsover the employment period to vesting, with the first instalment charged to thefinancial year in which the profit is made. Future amounts payable under PRBEand not recognised in these financial statements are reported in the notes tothe statements as contingent liabilities. The group has set up an Employee Co-investment Plan (COIP) based on an option totake as ordinary shares of Kiln plc, an instalment of each year's PRR award.Share issue costs are recognised over a vesting period. The expense isrecognised over the vesting period of the options. i. Income taxes The tax expense represents the sum of the current tax and deferred tax. The tax currently payable is based on taxable profit for the year. Taxableprofit differs from net profit as reported in the income statement because itemsof income and expense are taxed in different periods, and it excludes items thatare never taxable or deducted. The Group's liability for current tax iscalculated using tax rates applicable as at the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differencesbetween the carrying amounts of assets and liabilities in the financialstatements and the corresponding tax bases used in the computation of taxableprofit, and is accounted for using the liability method. Deferred taxliabilities are generally recognised for all taxable temporary differences anddeferred tax assets are recognised to the extent that it is probable thattaxable profits will be available against which deductible temporary differencescan be utilised. Deferred tax liabilities are recognised for taxable temporary differencesarising on investments in subsidiaries and associates except where the group isable to control the reversal of the temporary difference and it is probable thatthe temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheetdate and reduced to the extent that it is no longer probable that sufficienttaxable profits will be available to allow all or part of the asset to berecovered. Deferred tax is calculated at the tax rates based on the enacted orsubstantially enacted tax laws expected to apply in the period when theliability is settled or the asset is realised. Deferred tax is charged orcredited in the income statement, except when it relates to items charged orcredited directly to equity, in which case the deferred tax is also dealt within equity. j. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciationand any recognised impairment loss. They are depreciated on a straight-linebasis over the expected useful lives of each category of asset as follows: Computer hardware 3 yearsOffice furniture and equipment 4 yearsMotor vehicles 5 yearsProperty (Internal structure) 10 yearsProperty (Building) 33 years Expenditure to restore the future economic benefit of an asset, if it extendsthe useful life of the asset, is capitalised. Costs for repairs and maintenanceare expensed. The carrying values of property, plant and equipment are reviewed for impairmentif events or changes in circumstances indicate the carrying value may not berecoverable, and are written down immediately to their recoverable amount.Useful lives and residual values are reviewed annually and where adjustments arerequired these are made prospectively. An item of property, plant and equipment is derecognised upon disposal or whenno future economic benefits are expected to arise from the continued use of theasset. Any gain or loss arising on the derecognition of the asset is included inthe income statement in the period of derecognition. k. Intangible assets Syndicate capacity Purchased syndicate capacity is recognised at cost. It is considered to have anindefinite useful economic life and is therefore not amortised. Computer software Computer software development costs that are directly associated with theproduction of identifiable and unique software products controlled by the group,and that will generate economic benefits exceeding costs beyond one year, arerecognised as intangible assets, and are amortised using the straight linemethod over their useful lives, not exceeding a period of three years. Purchased syndicate capacity and computer software development costs are subjectto an annual impairment review. The amount of any impairment is recogniseddirectly in the income statement. Goodwill Goodwill arising on acquisitions, representing the excess of the purchaseconsideration over the fair value of identifiable assets, liabilities andcontingent liabilities acquired, is capitalised and is not amortised. Following initial recognition, goodwill is stated at cost less any accumulatedimpairment losses. The carrying amount of goodwill for each cash generating unitis tested for impairment annually, or when events or changes in circumstanceindicate that the carrying amount might be impaired, by comparing the netpresent value of the future earnings stream from the acquired subsidiary againstthe carrying value of goodwill. l. Business Combinations Business combinations are accounted for using the acquisition accounting method.This involves recognising identifiable assets and liabilities of the acquiredbusiness at fair value. Contingent consideration has been included in the costof the acquisitions and is discounted to net present value (NPV) to result in afair value for the consideration. Contingent consideration is recognised to theextent that it is expected to be paid. m. Deferred acquisition costs Deferred acquisition costs, representing the proportion of commission and otheracquisition costs that relate to unearned premium on policies in force at theyear-end, are charged over the period in which related premiums are earned. n. Financial investments All financial investments, excluding loan notes issued by an associate, aredesignated at fair value through the income statement at inception. This is inaccordance with the Group's documented investment strategy. Information relatingto investments is reported to internal management on a fair value basis. Theseare initially recorded at fair value and subsequently remeasured at fair valuethrough the income statement. All regular way purchases and sales of financial investments are recognised onthe trade date, being the date the Group commits to purchase or sell the asset. Fair value determinations for financial investments are based on either bidmarket prices at close of business on the balance sheet date for listedinvestments, broker or dealer price quotations or by reference to current marketvalues of another substantially similar instrument. Investments in unlisted securities are valued at fair value based on eitherinternal valuation models or management's estimate of amounts that could berealised under current market conditions, assuming an orderly liquidation over areasonable time. The Group holds loan notes issued by an associate, and these are recorded atcost. o. Derecognition of financial assets and financial liabilities A financial asset is derecognised when the contractual right to receive cashflows expires or when the asset is transferred. A financial liability isderecognised once the obligation under the liability is discharged, cancelled orexpires. p. Insurance receivables Insurance receivables are recognised and carried at the recoverable amount. Thecarrying value of insurance receivables is reviewed for impairment wheneverevents or circumstances indicate that the carrying amount is greater than therecoverable amount, with the impairment adjustment recorded in the incomestatement. q. Cash and cash equivalents For the purposes of the consolidated cash flow statement, cash and cashequivalents comprise cash at bank and other short-term highly liquid investmentswith a maturity of three months or less from the date of acquisition and bankoverdrafts. r. Product classification Insurance contracts are defined as those containing significant insurance riskat the inception of the contract, or those where at the inception of thecontract there is a scenario with commercial substance where the level ofinsurance risk may be significant. The significance of insurance risk isdependent on both the probability of an insured event and the magnitude of itspotential effect. s. Insurance contract liabilities Provision is made at the year-end for the estimated cost of claims incurred butnot settled at the balance sheet date, including the cost of claims incurred butnot reported (IBNR) to the company. The estimated cost of claims includesexpenses to be incurred in settling claims and a deduction for the expectedvalue of salvage and other recoveries. The company takes all reasonable steps toensure that it has appropriate information regarding its claims exposures.However, given the uncertainty in establishing claims provisions, it is likelythat the final outcome will prove to be different from the original liabilityestablished. All claims provisions are reported on an undiscounted basis. The estimation of claims IBNR is generally subject to a greater degree ofuncertainty than the estimation of the cost of settling claims already notifiedto the company, where more information about the claim event is generallyavailable. Claims IBNR may often not be apparent to the insurer until many yearsafter the event giving rise to the claims has happened. Classes of businesswhere the IBNR proportion of the total reserve is high will typically displaygreater variations between initial estimates and final outcomes because of thegreater degree of difficulty of estimating these reserves. Classes of businesswhere claims are typically reported relatively quickly after the claim eventtend to display lower levels of volatility. In calculating the estimated cost ofunpaid claims the company uses a variety of estimation techniques, generallybased upon statistical analyses of historical experience, which assumes that thedevelopment pattern of the current claims will be consistent with pastexperience. Allowance is made, however, for changes or uncertainties which maycreate distortions in the underlying statistics or which might cause the cost ofunsettled claims to increase or reduce when compared with the cost of previouslysettled claims including: • Changes in company processes which might accelerate or slowdown the development and/or recording of paid or incurred claims compared withthe statistics from previous periods• Changes in the legal environment• The effects of inflation• Changes in the mix of business• The impact of large losses• Movements in industry benchmarks. A component of these estimation techniques is usually the estimation of the costof notified but not paid claims. In estimating the cost of these the company hasregard to the claim circumstance as reported, any information available fromloss adjusters and information on the cost of settling claims with similarcharacteristics in previous periods. Large claims impacting each relevant business class are generally assessedseparately, being measured on a case by case basis or projected separately inorder to allow for the possible distortive effect of the development andincidence of these large claims. Where possible the company adopts multiple techniques to estimate the requiredlevel of provisions. This assists in giving greater understanding of the trendsinherent in the data being projected. The projections given by the variousmethodologies also assist in setting the range of possible outcomes. The mostappropriate estimation technique is selected taking into account thecharacteristics of the business class and the extent of the development of eachaccident year. Property & Risk Solutions, Reinsurance, Accident & Health, and Life business These business areas are predominantly 'short tail', that is there is not asignificant delay between the occurrence of the claim and the claim beingreported to the company. The costs of claims notified to the company at thebalance sheet date are estimated on a case by case basis to reflect theindividual circumstances of each claim. The ultimate expected cost of claims isprojected from this data by reference to statistics which show how estimates ofclaims incurred in previous periods have developed over time to reflect changesin the underlying estimates of the cost of notified claims and latenotifications. Marine and Aviation business These business areas have a mix of hull and cargo risks that are 'short tail' innature, and liability risks which are longer tail. The methodology forestimating the short tail element of the business is the same as describedabove. Liability claims are longer tail than the classes of business described aboveand so a larger element of the claims provision relates to IBNR claims. Claimsestimates for the company's liability business are derived from a combination ofloss ratio based estimates and an estimate based upon actual claims experienceusing a predetermined formula whereby greater weight is given to actual claimsexperience as time passes. The initial estimate of the loss ratio based on theexperience of previous years adjusted for factors such as premium rate changesand claims inflation, and on the anticipated market experience, is an importantassumption in this estimation technique. The assessment of claims inflation andanticipated market experience is particularly sensitive to the level of courtawards and to the development of legal precedent on matters of contract andtort. This class of business is also subject to the emergence of new types oflatent claims but no allowance is included for this as at the balance sheetdate. Liability Adequacy Provision Provision has been made for any deficiencies arising when unearned premiums, netof associated acquisition costs, are insufficient to meet expected claims andexpenses after taking into account future investment return on the investmentssupporting the unearned premiums provision and liability adequacy provision. Theexpected claims are calculated having regard only to events that have occurredprior to the balance sheet date. Unexpired risk surpluses and deficits are offset where business classes aremanaged together and a provision is made if an aggregate deficit arises. t. Pension benefit obligation Contributions to the group defined contribution pension scheme are charged whendue. For the group defined benefit scheme (now closed to future years of serviceaccrual), the cost of providing benefits is determined by the Scheme Actuarywith actuarial valuations for IAS19 being carried out at each balance sheetdate. The retirement benefit obligation recognised in the balance sheet represents thepresent value of the defined benefit obligation less the fair value of schemeassets. Any asset resulting from this calculation is limited to past servicecost, plus the present value of available refunds and reductions in futurecontributions to the plan. The total pension scheme obligations are recognised on the Kiln plc consolidatedbalance sheet. Also recognised is a reimbursement asset reflecting amountsrecoverable under the managing agency agreement from third party Namesparticipating in Kiln syndicates. Kiln secured agreement from members' agentseffective 1 January 2005 to this treatment. u. Provisions A provision is recognised when the Group has a present legal or constructiveobligation, as a result of a past event, which is probable will result in anoutflow of resources and when a reliable estimate of the amount of theobligation can be made. v. Leases A lease is an agreement whereby the lessor conveys to the lessee in return forpayment the right to use an asset for a period of time. Rentals payable under operating leases are charged to the income statement on astraight-line basis over the lease terms. w. Borrowings Borrowings are initially recognised at fair value, net of transaction costsincurred and subsequently stated at amortised cost. Fair value is normallydetermined by reference to the fair value of the proceeds received. Anydifference between the initial carrying amount and the redemption value isrecognised in the income statement over the period of the borrowings using theeffective interest method. x. Investments in associates The Group's interests in its associates, being those entities over which it hassignificant influence and which are neither subsidiaries nor joint ventures, areaccounted for using the equity method of accounting. Under the equity method, the investment in an associate is carried in thebalance sheet at cost plus post-acquisition changes in the Group's share of netassets of the associate, less distributions received and less any impairment invalue of individual investments. The consolidated income statement reflects theshare of the associate's results after tax. Where a Group company transacts with an associate of the Group, profits andlosses are eliminated to the extent of the Group's interest in the relevantassociate. y. Offsetting of financial instruments Financial assets and liabilities are offset and the net amount reported in thebalance sheet only when there is a legally enforceable right to off set therecognised amounts and there is an intention to settle on a net basis, or torealise the assets and settle the liability simultaneously. z. Current and non current disclosure For each asset and liability line item that combines amounts expected to berecovered or settled (a) no more than twelve months after the balance sheet dateand (b) more than twelve months after the balance sheet date, the relevant notediscloses the amount expected to be recovered or settled after more than twelvemonths. 2. Use of critical accounting estimates and judgements in applyingaccounting policies The preparation of the financial statements necessitates the use of estimates,assumptions and judgements applied consistently, year on year. These estimatesand assumptions affect the reported amounts of assets and liabilities andcontingent liabilities at the balance sheet date as well as affecting thereported income and expenses for the year. Although the estimates are based onmanagement's best knowledge and judgement of current facts as at the balancesheet date, the actual outcome may differ from these estimates, possiblysignificantly. The following sets out the more significant estimates and judgements made: Written Written premium is reported according to its date of inception.premium Pipeline premium is estimated based on underwriters' estimated premiums written on a risk by risk basis with an adjustment to recognise that not all policies will be implemented. For delegated authority business the underwriter estimates how much business will attach to a facility based on information provided by the broker and using the underwriter's experience bearing in mind the trading conditions of the market. This estimate is updated on a regular basis. It is assumed that risks attaching to the master facility incept evenly across the period of the facility and therefore only that proportion of risks that have incepted to the master facility by the balance sheet date are reported within written premium in these financial statements. Reinstatement premiums arise when a loss has been incurred on a policy and there is a clause which allows the reinstatement of the policy with the payment of a further premium by the policyholder. They are recognised and written in full at the date of the event giving rise to the reinstatement premium. Earned premium The earning of premiums is based primarily on time apportionment, with an adjustment for the risk profile of certain classes of business particularly those exposed to seasonal weather related events. Kiln recognises the reinstatement premiums as arising from the claim event and therefore these premiums are earned in full at the date of the claim. The original premium is earned across the original policy period unless there is no further cover available under the policy whereby it is recognised as fully earned. Incurred but A full description is set out within the accounting policy on insurance accounting liabilities -not reported accounting policy (s) above.claims (IBNR) Pension A full description is set out in note 39 under principal actuarial assumptions.liabilities Reinsurance Reinsurance is deemed to be fully recoverable unless there is a reason to doubt its fullrecoverables recoverability. In these circumstances specific provisions are made based on the expected proportional recovery. 3. Segmental analysis Basis of segmentation The primary segmental analysis of the Group's income statement is reported usingthe divisional structure of the Group as this is how performance is monitored bymanagement. Return on equity by business segment is calculated by expressing segmentalprofit after tax as a percentage of the segment's opening shareholders' equity.Where reinsurance is bought that covers multiple business lines, the basis ofallocation of this cost is in proportion to the protection requested by thedivision. A geographical analysis of net insurance revenue and investments is alsoprovided as secondary segmental information as required by IAS 14. Consolidated Income Statement by Business Segments Technical result year ended 31 December 2006 Marine Aviation Life, Accident Reinsurance Property Total & Health Underwriting £'000 £'000 £'000 £'000 £'000 £'000Gross written premiums 66,346 23,753 40,576 67,736 230,735 429,146Net written premiums 52,910 18,991 26,768 26,364 166,398 291,431Change in the provision forunearned premiums (3,813) (1,222) (621) 389 (13,886) (19,153) Net insurance premium revenue 49,097 17,769 26,147 26,753 152,512 272,278Net insurance claims incurred (20,128) (6,217) (10,017) (1,965) (78,483) (116,810)Net operating expenses (16,190) (6,468) (11,618) (8,910) (54,204) (97,390)Technical result fromunderwriting operationsexcluding investment income 12,779 5,084 4,512 15,878 19,825 58,078 All net insurance premium revenue has arisen from external customers. Profit & Loss year ended 31 December 2006 Total Managing Associated Kiln plc Eliminations Group Underwriting Agency Undertakings £'000 £'000 £'000 £'000 £'000 £'000Technical result fromunderwriting operationsexcluding investment income 53,130 - - - 4,948 58,078Investment income fromunderwriting assets 13,153 - - - - 13,153 Profit from underwriting 66,283 - - - 4,948 71,231operationsInvestment income from non 6,603 863 551 10,618 (9,147) 9,488underwriting activities Fees and commission income 90 27,127 - 553 (5,265) 22,505Other income 82 951 - 1 2,176 3,210Finance costs (8,876) (349) - (1,229) 8,783 (1,671)Corporate and administrativeexpenses (1,093) (26,956) - (5,270) - (33,319)Foreign exchange (losses)/gains (9,072) - - 688 - (8,384)Share of operating results ofassociated companies - - 1,085 - - 1,085 Profit on ordinary activitiesbefore taxation 54,017 1,636 1,636 5,361 1,495 64,145Income tax expense (16,215) (531) (491) (1,194) (2,102) (20,533) Profit after tax attributableto the Equity shareholders 37,802 1,105 1,145 4,167 (607) 43,612 Consolidated Balance Sheet by Business Segments as at 31 December 2006 Total Managing Associated Kiln plc Group Underwriting Agency Undertakings £'000 £'000 £'000 £'000 £'000 Total Assets 914,010 49,887 19,297 26,490 1,009,684 Shareholders' Equity 214,592 25,018 19,297 (8,465) 250,442Total Liabilities 699,418 24,869 - 34,955 759,242Total Equity and Liabilities 914,010 49,887 19,297 26,490 1,009,684 Return on Equity 27.3% 6.4% 6.5% 9.8% 20.2%Net assets 214,592 25,018 19,297 (8,465) 250,442Net tangible assets 196,944 19,608 19,297 (14,604) 221,245 Capital expenditure 3,849 3,517 - 5,739 13,105Depreciation 29 344 - 57 430Amortisation - 2,528 - - 2,528 Consolidated Income Statement by Business Segments Technical result year ended 31 December 2005 Marine Aviation Life, Accident Reinsurance Property Total & Health Underwriting £'000 £'000 £'000 £'000 £'000 £'000 Gross written premiums 48,112 20,020 36,844 73,306 174,742 353,024Net written premiums 33,895 15,545 27,875 34,028 131,203 242,546Change in the provision forunearned premiums (3,674) (2,229) (2,944) 1,331 (13,461) (20,977)Net insurance premium revenue 30,221 13,316 24,931 35,359 117,742 221,569Net insurance claims incurred (17,500) (7,690) (10,608) (44,231) (87,251) (167,280)Net operating expenses (11,299) (3,997) (11,154) (6,094) (40,962) (73,506)Technical result fromunderwriting operationsexcluding investment income 1,422 1,629 3,169 (14,966) (10,471) (19,217) All net insurance premium revenue has arisen from external customers. Profit & Loss year ended 31 December 2005 Total Managing Associated Kiln plc Eliminations Group Underwriting Agency Undertakings £'000 £'000 £'000 £'000 £'000 £'000Technical result fromunderwriting operationsexcluding investment income (28,095) - - - 8,878 (19,217)Investment income fromunderwriting assets 7,522 - - - - 7,522 Profit from underwriting (20,573) - - - 8,878 (11,695)operationsInvestment income from nonunderwriting activities 4,359 826 551 4,356 (3,989) 6,103 Fees and commission income 90 38,135 - - (9,176) 29,049Other income - 1,133 - - 2,133 3,266Finance costs (3,989) (155) - (873) 3,671 (1,346)Corporate and administrativeexpenses (835) (19,533) - (5,202) - (25,570)Foreign exchange gains/(losses) 9,194 - - (1,604) - 7,590Share of operating results ofassociated companies - - 1,058 - - 1,058 Profit on ordinary activitiesbefore taxation (11,754) 20,406 1,609 (3,323) 1,517 8,455Income tax expense 3,483 (6,531) (165) 997 (414) (2,630) Profit after tax attributableto the Equity shareholders (8,271) 13,875 1,444 (2,326) 1,103 5,825 Consolidated Balance Sheet by Business Segments as at 31 December 2005 Total Managing Associated Kiln plc Group Underwriting Agency Undertakings £'000 £'000 £'000 £'000 £'000 Total Assets 935,590 46,100 17,490 57,802 1,056,982 Shareholders' Equity 138,562 17,281 17,490 42,425 215,758Total Liabilities 797,028 28,819 - 15,377 841,224Total Equity and Liabilities 935,590 46,100 17,490 57,802 1,056,982 Return on Equity (6.8%) 106.3% 8.8% 16.0% 4.3%Net assets 138,562 17,281 17,490 42,425 215,758Net tangible assets 123,689 12,639 17,490 42,425 196,243 Capital expenditure 2,311 4,213 - - 6,524Depreciation - 659 - - 659Amortisation - 1,796 - - 1,796Other non cash expenses - 25 - - 25 Analysis by geographical segments The geographical region 'other countries' combines Africa, Middle East,Australasia, South America with worldwide risks. The North American Free TradeArea (NAFTA) includes USA, Canada and Mexico. £'000 UK Other Europe NAFTA Region Asia Other Countries Total31 December 2006Net insurance premium 28,362 32,772 135,205 22,686 53,253 272,278revenue As a percentage 11% 12% 50% 8% 19% 100%Segment assets 8,230 9,329 966,574 8,568 16,983 1,009,684Capital expenditure 13,105 - - - - 13,105 UK Other Europe NAFTA Region Asia Other Countries Total£'00031 December 2005Net insurance premiumrevenue 24,493 28,943 106,970 17,890 43,273 221,569 As a percentage 11% 13% 49% 8% 19% 100%Segment assets 31,722 44,926 873,219 20,015 87,100 1,056,982Capital expenditure 6,524 - - - - 6,524 Agency income (fees and profit commission) and the result of associatedundertakings are earned in the United Kingdom. Currency split The settlement currency for gross premiums written by the Kiln syndicates issplit approximately as follows: 2006 2005 US dollars 67% 63%GB pounds 27% 32%Canadian dollars 6% 5% 4. 100% operating results of managed syndicates The Group operating result is derived from its participation in the syndicatesmanaged. The table below sets out the 100% underwriting operating results ofthese syndicates on an annual accounting basis. Year to Year to 31 December 2006 31 December 2005 £'000 £'000 Gross written premiums 946,113 863,810Net written premiums 763,575 703,384Change in the provision for unearned premiums: (31,075) (54,802)Earned premiums, net of reinsurance 732,500 648,582Investment return from underwriting assets 32,970 19,880Claims incurred net of reinsurance (299,209) (516,761)Net commissions (205,801) (166,991)Operating expenses (61,393) (50,413)Net operating expenses (267,194) (217,404)Profit/(loss) from underwriting operations 199,067 (65,703)Claims ratio (%) 41% 80%Acquisition cost ratio (%) 28% 26%Expense ratio (%) 8% 8%Combined ratio % 77% 114% Definitions Claims ratio Net incurred claims as a percentage of net earned premiumExpense ratio Operating expenses as a percentage of net earned premiumAcquisition cost ratio Net acquisition costs as a percentage of net earned premiumCombined ratio Claims ratio plus expense and acquisition cost ratiosNet earned premium Earned premium net of outwards reinsurance but gross of all policy acquisition costs Sensitivities The following table shows the impact a 1% change in either the ratios forclaims, acquisition costs, or net operating expenses, and hence the combinedratio, would have on the underwriting profit. All ratios are calculated usingthe same denominator being earned premiums, net of reinsurance. Year to Year to 31 December 2006 31 December 2005 £'000 £'000 For the syndicates at 100% level 7,325 6,486At Group level 2,723 2,216 Operating expenses have been adjusted to exclude the additional contributionsrelating to costs of the Enhanced Transfer Exercises described in Note 39. Theseexercises are not part of Kiln's ongoing business and the costs have thereforebeen excluded from expenses. The costs arising from loans between syndicateyears of account have similarly been eliminated. Had they been included theexpense ratio would have been higher by 1% (2005: 1%). 5. Group participation in managed syndicates Syndicate 2006 Group % of total 2005 Group % of total Group owned syndicate Group owned syndicate capacity capacity capacity capacity £'000 £'000Life 308 7,190 55.3% 5,508 57.1%Combined 510 294,565 47.1% 225,971 41.4%Non- Marine 557 - 0.0% 2,500 5.2%Non-Marine 807 51,640 46.9% 45,693 45.7%Total 353,395 44.0% 279,672 39.7% Of the Group owned capacity above, the following is supported by gearing quotashare reinsurers, who supply the capital to support this underwriting in returnfor a share in the economic results of the underwriting. Syndicate 2006 GQS as a % of 2005 GQS as a % of GQS element of Group capacity GQS element of Group capacity Group capacity Group capacity £'000 £'000Life 308 4,590 63.8% 1,507 27.4%Combined 510 20,000 6.8% 17,500 7.7%Non- Marine 557 - 0.0% - 0.0%Non-Marine 807 32,250 62.5% 16,250 35.6%Total 56,840 16.1% 35,257 12.6% 6. Significant Loss Events The 2005 Hurricanes: Katrina, Rita and Wilma The losses fall principally on Kiln's property catastrophe reinsurance, propertyand marine portfolios of business. The 100% expected losses for Kiln's managedsyndicates and Kiln plc's share thereof, in US dollars are as follows: As at 31 As at 31 As at 31 As at 31 December 2006 December 2006 December 2005 December 2005 Gross US$'m Net US$'m Gross US$'m Net US$'m100% Kiln managed syndicates 978 430 949 394Kiln plc 359 145 350 135 At the balance sheet date, the total gross expected losses are allocated asfollows: Paid Losses Provision for Provision for Total reported claims claims incurred but not reported (IBNR) US$'m US$'m US$'m US$'m100% Kiln managed syndicates 627 305 46 978Kiln plc 229 113 17 359 This note provides an update on Kiln's estimates of the managed syndicates'gross and net losses arising out of the US hurricanes. a) Methodology The methodology and assumptions arriving at the estimates has not changed duringthe course of the year. However as time has passed, the more detailedinformation available to us and the more precise notification of outstandinglosses provided to us by our clients have informed our estimates to anincreasing extent, and those estimates have become less dependent uponassumptions that we were initially obliged to make. b) Risk factors Most of the risk factors outlined last year are repeated below. Whilst thesefactors remain pertinent, as claims are paid and loss notifications mature, theextent of the risks they represent diminish. i. Methodology and assumptions The methodology and/or assumptions used in establishing the loss provisions mayultimately prove to be inappropriate and/or incorrect. ii. Property business interruption The full extent of business interruption losses which will be paid under directproperty policies remains uncertain, but given the nature and limited extent ofthe syndicates' exposure to business interruption on direct property losses,this is not expected to materially affect their overall net loss. iii. Inwards reinsurance business The process of establishing estimates of losses emanating from inwardsreinsurance business is more subjective than establishing estimates of lossesfrom direct insurance business. This is because less reliance can be placedupon loss information which is received via insurance companies than uponinformation received directly from insureds. iv. Legal action It is possible that legal action pursued either by individuals or on a classaction basis or by various state authorities, in an attempt to render theintention and effect of flood exclusions in insurance policies coveringproperties affected by the US hurricanes null and void, may be successful. Thismight have an adverse impact on the amount of the losses currently estimated. v. Reinsurance recoveries In calculating the net losses referred to above, consideration has been given tothe ability of reinsurers of the syndicates to pay the recoveries which willfall due from them in respect of the US hurricanes, and to whether theestablishment of any provision for potential bad debt is therefore appropriate.The failure of any reinsurer to pay recoveries over and above any such bad debtprovision could have an adverse impact on the net losses. vi. Exchange rate risk The losses arising from the US Hurricanes are predominantly payable in USdollars. Any subsequent changes in the level of estimated or actual net lossesarising from the hurricanes will be translated at the end of the relevant yearat the appropriate exchange rate. An adverse change in the US dollar rate fromthe 2006 year end rate of £1:US$1.96 could result in a proportionate increase inthe net insurance liabilities arising from the US hurricanes. 7. Business Combinations Kiln Asia Limited On 17 November 2006, Kiln plc's wholly owned subsidiary R J Kiln & Co Limitedacquired 100% of the share capital of the Hong Kong based underwriting agency,International Reinsurance Services Limited (IRS), for the benefit of Names onSyndicate 510. The investment is held non-beneficially by R J Kiln & Co Limitedon behalf of the syndicate, as the syndicate is not allowed to hold fixedassets. IRS was renamed Kiln Asia Limited on 27 November 2006. The fair value of the identifiable assets and liabilities of Kiln Asia Limitedat the date of acquisition and the corresponding carrying amounts were: Kiln Asia Limited Fair value at Carrying value acquisition £'000 £'000Property, plant and equipment 45 45Investments 12 12Trade debtors 178 178Cash & bank 2 2Creditors - amounts falling due within one year (68) (68)Net assets acquired 169 169Goodwill (Note 23) 1,035Consideration 1,204Satisfied by:Cash 594Related costs of acquisition 169Contingent consideration 441 1,204 The carrying value of the identifiable assets and liabilities are the amountsrecorded in the financial statements of Kiln Asia Limited at the date ofacquisition prepared in accordance with Group accounting policies. The consideration payable is an initial sum of US$1.12 million (£594,000)followed by an estimated discounted deferred amount of US$838,000 (£441,000)over the earn out period of five years. Belgian Marine Insurers S.A. On 7 December 2006, Kiln plc's wholly owned subsidiary R J Kiln & Co (No.2)Limited acquired 100% of the share capital of Belgian Marine Insurers S.A.(Belmarine). Belmarine is the second largest marine underwriting unit in Belgiumspecialising in cargo policies and blue and brown water hull business. The fair value of the identifiable assets and liabilities of Belmarine at thedate of acquisition and the corresponding carrying amounts were: Belgian Marine Insurers S.A. Fair value at Carrying value acquisition £'000 £'000Property, plant and equipment 545 481Intangible assets 1 1Investments 44 44Trade debtors 26 26Cash & bank 1,967 1,967Creditors - amounts falling due within one year (268) (268)Net assets acquired 2,315 2,251Goodwill (Note 23) 4,157Consideration 6,472Satisfied by:Cash 5,094Related costs of acquisition 81Issue shares 567Contingent consideration 730 6,472 The carrying value of the identifiable assets and liabilities are the amountsrecorded in the financial statements of Belmarine at the date of acquisitionprepared in accordance with Group accounting policies. The difference between the carrying value and fair value of property, plant andequipment recognises the difference between land and buildings recognised atcost less accumulated depreciation recorded in the acquired company and the fairvalue to the Group on acquisition. The total consideration is approximately €9.57 million (£6.47 million) includingan undiscounted deferred element of €1.08 million (£730,000). The deferredamount is based on Belmarine achieving a predetermined increase in net assets inthe twelve months to 31 December 2006. This target was achieved, and thedeferred amount has been paid subsequent to the 2006 year end audit ofBelmarine, with 90% paid in cash and 10% in Kiln plc ordinary shares (note 41). Goodwill has been recognised on both business combinations effected during theyear as it reflects the expertise within these companies in providing insuranceservices to the market. Shown below are the combined revenues and profit after taxation for Kiln plc asthough the acquisition date for all business combinations effected during theyear had been 1 January 2006. The financial information is not necessarilyindicative of the combined results that would have been attained had theacquisitions taken place at 1 January 2006, nor is it necessarily indicative offuture results. 2006 £'000Revenues 429,146Profit after tax attributable to shareholders 44,178 Since the acquisition dates, the acquired companies have broken even. 8. Insurance premium revenue Note 2006 2005 £'000 £'000Gross premium revenueGross written premiums 37 429,146 353,024Total reinsurers' share of gross written premiums 37 (137,715) (110,478)Total net written premiums 37 291,431 242,546 Change in the provision for unearned premiumsGross change in unearned premium provision (34,099) (18,924)Reinsurers' share of change in unearned premium provision 14,946 (2,053)Total net change in the provision for unearned premiums (19,153) (20,977) Total net insurance premium revenue 37 272,278 221,569 During the year, the Group did not assume or cede any reinsurance policies thatresulted in a profit or loss on inception. 9. Insurance claims incurred Note 2006 2005 £'000 £'000Gross claims paidTotal gross claims paid 37 250,043 183,175Reinsurers' share of gross claims paid 37 (114,535) (75,777)Total net claims paid 37 135,508 107,398 Gross change in insurance liabilitiesGross change in outstanding claims (106,866) 160,143Reinsurers' share of change in outstanding claims 88,168 (100,261)Total net change in insurance liabilities (18,698) 59,882 Total net insurance claims incurred 116,810 167,280 10. Investment income 2006 2005 £'000 £'000Interest on investments and cash 12,898 8,368Net fair value gains / (losses) on underwriting investments 255 (846)Investment income from underwriting assets 13,153 7,522 Interest on investments and cash 9,834 5,706Interest on loan notes issued by an associate 551 551Dividends on unlisted investments 571 755Net fair value losses on non-underwriting investments (1,468) (909)Investment income from non-underwriting assets 9,488 6,103 Total investment income 22,641 13,625 An analysis of the investment income by investment type is shown below: Rate of return 2006 2005 2006 2005 % % £'000 £'000Syndicate investments 4.4 3.0 13,153 7,522Funds at Lloyds: Fixed interest and cash 5.0 5.0 5,306 2,600Corporate investments 4.6 4.4 4,182 3,503Total investment income 4.4 3.7 22,641 13,625 Returns from corporate investments include income, gains and losses fromunlisted investments and loan notes issued by associated companies. Funds atLloyd's is the capital required by Lloyd's to support the amount of insurancebusiness a member can underwrite. The rate of return by investment currency is shown below: Rate of return 2006 2005 % %GB pounds 4.1 4.7US dollar 4.5 2.6Canadian dollar 3.9 2.1Blended rate of return 4.4 3.7 11. Fees and commission income 2006 2005 £'000 £'000Agency fees receivable from non-group capital providers 3,332 3,138Profit commission 4,515 11,152Recharges to non-group capital providers 14,658 14,759Total fees and commission income 22,505 29,049 A proportion of the total expenses incurred by the managing agency is charged tothe non-group capital providers of each syndicate. Profit commission for 2006includes amounts receivable from Lloyd's years of account 2004 of £3,909,059 and2005 of £31,505, third party commission income due to Belgian Marine InsurersS.A. of £552,906, and other profit commission of £21,256. The 2005 profitcommission relates to amounts receivable from Lloyd's years of account 2003 of£9,137,179 and 2004 of 1,970,800, and other profit commission of £44,265. 12. Other income Note 2006 2005 £'000 £'000Gain on enhanced pension transfer value initiatives 39 3,125 3,167Other 85 99Total other income 3,210 3,266 13. Finance costs 2006 2005 £'000 £'000Bank facility fees 1,054 873Net cost of defined benefit pension scheme 39 127 473Loan Interest 490 -Total finance costs 1,671 1,346 14. Operating and administrative expense 2006 2005 £'000 £'000Net operating expenses 97,390 73,506Corporate and administrative expenses 33,319 25,570Total expenses 130,709 99,076 Note 2006 2005 £'000 £'000Acquisition costs 101,268 82,614Movement in deferred acquisition costs (7,405) (10,511)Expenses recovered from quota share reinsurers (17,372) (11,579)Staff costs 15 20,140 14,642Profit related bonus element 15 9,130 3,958Profit commission 15 138 1,243Auditors remuneration 17 1,158 976Depreciation charge 22 430 659Amortisation charge 23 2,528 1,796Other administrative expenses 20,694 15,278Total expenses 130,709 99,076 R J Kiln & Co Limited, the managing agency, recharges a proportion of costs itincurs back to the syndicates and the Kiln Group companies. Net operatingexpenses represent the Kiln Group's share of costs incurred by the syndicateswhereas corporate and administrative expenses have been allocated by themanaging agent to Group companies. The above table is an analysis of the natureof the expenses allocated to the Kiln Group companies. Profit commission relatesto the proportion of total profit commission receivable surrendered to theunderwriters. Auditors remuneration within the 2005 comparative excludes further assuranceservices relating to the 2005 rights issue as this has been charged to the SharePremium Account. 15. Staff costs and other employee related costs Particulars of employee costs (including directors) are set out below: Note 2006 2005 £'000 £'000Salaries and bonuses 15,766 11,365Social security costs 2,793 1,426Defined contribution pension costs 1,581 1,851 14 20,140 14,642Profit related bonus element 14, 16 9,130 3,958Profit commission 14 138 1,243Total staff and other employee related costs 29,408 19,843 The average monthly number of persons employed by the Group during the year was212; 148 non-syndicate and 64 syndicate staff (2005: 166; 112 non-syndicateand 54 syndicate). Many employees of the Group companies work predominately on the affairs of Groupsyndicates; of the staff costs reported above, £6,046,000 (2005: £5,434,000) isdirectly attributable to Group syndicates and has been borne by them. Social security costs include national insurance payable by the group on profitrelated pay. 16. Performance Related Remuneration (PRR) PRR comprises 1) 6.2% of total remuneration excluding PRR 2) an element ofprofit commission received and 3) a Profit Related Bonus Element (PRBE). Thisthird element (PRBE) of the performance related remuneration pool received (seeaccounting policy h) is calculated as 20% of Kiln plc's Group profit before taxin excess of 10% of opening shareholders' equity, and is recognised in theaccounts over the employment period to vesting, with the first instalmentcharged in the current financial year. The total amount charged for the three elements described above in thesefinancial statements is £8,991,608 (2005: £5,338,695). This comprises twocomponents being the contingent liability brought forward now chargeable plusthe element of the 2006 financial year's PRR computed as described above andchargeable to the current period, less any amounts related to leavers and notnow payable. As at the balance sheet date the contingent liability is £5,400,532 (2005:£2,107,000). For the purposes of PRBE, profit before tax is adjusted to exclude non-recurringincome and the non-monetary item adjustment in note 18. Employee Co-investment Plan (COIP) If invited by the group remuneration committee, selected staff can elect toallocate an element of their PRR to a matching share option scheme. Options overordinary shares in Kiln plc can be taken up to a maximum of 10% of the overallPRR award for each financial year. An offer in respect of the 2006 financialyear will be made in March 2007 (2005 financial year offer: £154,271). Thecharge will be recognised over the 5 year vesting period of the options. Theamount charged in 2006 is £46,281 (2005: nil). 17. Auditor's remuneration 2006 2005 £'000 £'000 Fees payable to the company's auditor for the audit of the company's annual 128 132accounts Fees payable to the company's auditor and its associates for other services: The auditing of accounts of associates of the company pursuant to 487 376legislation Fees relating to prior year 266 237 881 745 Other services pursuant to legislation 50 50 Other services relating to taxation 99 117 Services relating to information technology - 29 Services relating to corporate finance transactions entered into or proposed 128 - to be entered into by or on behalf of the company and its associates All other services - 35 Total auditors' remuneration 1,158 976 The 2005 other assurance services of £35,000 relates to business review advice. Costs relating to the 2005 rights issue of £154,000 were charged to the sharepremium account. Included within the auditing of accounts of associates of the company pursuantto legislation is syndicate audit remuneration which includes those fees paid onbehalf of third party capital support to the syndicates. 18. Foreign exchange (losses)/gains 2006 2005 £'000 £'000Net gains/(losses) on settlement of foreign currency transactions 1,135 (1,609)Revaluation of closing balance sheet (2,306) 5,071Non-Monetary item adjustment - Unearned premium reserve and (7,213) 4,128deferred acquisition costsTotal foreign exchange (losses)/gains (8,384) 7,590 Exchange Rates 31 December 2006 31 December 2005AverageUS dollar 1.84 1.82Canadian dollar 2.09 2.21 ClosingUS dollar 1.96 1.72Canadian dollar 2.28 2.01 19. Income tax expense Current year tax charge Note 2006 2005 £'000 £'000Current TaxUK corporation tax on profits of the year 18,608 11,730Adjustments in respect of prior periods (407) 1,279Total current tax 26 18,201 13,009 Deferred TaxOrigination / (reversal) of temporary differences 2,332 (10,379)Total deferred tax 26 2,332 (10,379) Income tax expense reported in consolidated income statement 20,533 2,630 2006 2005 £'000 £'000Deferred TaxIncome tax expense reported in consolidated statement of 26 92 (3,701)recognised income and expense Reconciliation of total tax charge 2006 2005 £'000 £'000Profit on ordinary activities before tax 64,145 8,455 Profit on ordinary activities before tax multiplied by the standard rate of 19,244 2,536corporation tax of 30% (2005: 30%) Expenses permanently disallowable 1,705 173UK dividend income not taxable (171) (226)Movement in realised and unrealised gains on investments not currently (38) (3)relievableAccelerated tax relief on syndicate capacity (223) (52)Effect of higher tax rates in US 748 (760)Associates share of operating results (325) (317)Adjustments in respect of prior periods (407) 1,279 Total tax charge for year 20,533 2,630 20. Basic and diluted earnings per share Basic earnings per ordinary share has been calculated by dividing the profitafter taxation of £43,612,000 by 291,416,368, the weighted average number ofordinary shares outstanding throughout the year. The dilutive effect of shareoptions represents 40,299 shares and therefore the diluted earnings per sharehas been calculated by dividing the profit after taxation by 291,456,667 shares. 2006 2005 £'000 £'000Profit after tax attributable to ordinary equity holders of Kiln plc (Basic 43,612 5,825and Diluted EPS profit) Reconciliation of denominators used in calculating Basic and Diluted Earnings No. No.Per ShareWeighted average number of ordinary shares - Basic Earnings Per Share 291,378,328 203,965,084Weighted average of Share Issue - Belmarine acquisition 38,040 -Weighted average of Rights Issue - 8,861,069 Weighted average number of ordinary shares - Basic Earnings Per Share 291,416,368 212,826,153Dilutive effect of share options 40,299 38,848Weighted average number of ordinary shares - Diluted Earnings Per Share 291,456,667 212,865,001 Earnings per ordinary shareBasic 14.97p 2.74pDiluted 14.96p 2.74p 21. Effect of RITC and Gearing Quota Share changes to premiums and claims The income statement recognises that element of the RITC which relates tochanges in syndicate participation and this is included in the current period.The effect of these changes on premiums is outlined below. There is no effect onprofit before tax. 2006 2005Effect of RITC and Gearing Quota Share £'000 £'000 Gross Written Premiums 429,146 353,024 Net Written Premiums Per Income Statement 291,431 242,546 Gearing Quota Share 50,604 37,836 RITC (3,773) 7,668 338,262 288,050Earned premiums, net of reinsurance Per Income Statement 272,278 221,569 Gearing Quota Share 42,691 32,176 RITC (3,773) 7,668 311,196 261,413Claims incurred net of reinsurance Per Income Statement 116,810 167,280 Gearing Quota Share 17,402 25,931 RITC (3,773) 7,668 130,439 200,879 The RITC adjustments relate to the overall increase in Kiln's ownership ofcapacity in Lloyd's years of account (YOA) 2002 and 2003. The RITC from YOA 2002being reinsured into YOA 2003 is recognised in the reinsurance premiums inKiln's financial year 2005. Similarly, the RITC from YOA 2003 reinsured intoYOA 2004 is required to be recognised in the 2006 financial statements. 22. Property, plant and equipment At the balance sheet date, commitments outstanding to purchase items of officefurniture and fittings and hardware amounted to nil. Office Computer Motor Land & Total furniture hardware vehicles Buildings Note Owned Owned Owned Owned Owned £'000 £'000 £'000 £'000 £'000Book costAt 1 January 2006 1,953 2,903 - - 4,856Assets acquired through 7 128 16 130 316 590business combinationsAdditions 92 213 - - 305Disposals (17) - - - (17)At 31 December 2006 2,156 3,132 130 316 5,734 Less depreciationAt 1 January 2006 (1,592) (2,546) - - (4,138)Charge for the year 14 (156) (240) (26) (8) (430)Accumulated depreciation on 15 - - - 15disposalsAt 31 December 2006 (1,733) (2,786) (26) (8) (4,553) Net Book Value 31 December 423 346 104 308 1,1812006 Office Computer Motor Land & Total furniture hardware vehicles Buildings Note Owned Owned Owned Owned £'000 £'000 £'000 £'000 £'000Book costAt 1 January 2005 1,809 2,599 - - 4,408Additions 144 304 - - 448 At 31 December 2005 1,953 2,903 - - 4,856 Less depreciationAt 1 January 2005 (1,265) (2,214) - - (3,479)Charge for the year 14 (327) (332) - - (659) At 31 December 2005 (1,592) (2,546) - - (4,138) Net Book Value 31 December 361 357 - - 7182005 23. Intangible assets Syndicate Computer Goodwill Total Capacity Software Note £'000 £'000 £'000 £'000CostAt 1 January 2006 14,873 10,236 - 25,109Assets acquired through business 7 - 1 5,192 5,193combinations Additions 3,722 3,295 - 7,017At 31 December 2006 18,595 13,532 5,192 37,319 Less amortisationAt 1 January 2006 - (5,594) - (5,594)Amortisation in period 14 - (2,528) - (2,528)At 31 December 2006 - (8,122) - (8,122) Net book value 31 December 2006 18,595 5,410 5,192 29,197 Syndicate Computer Goodwill Total Capacity Software Note £'000 £'000 £'000 £'000CostAt 1 January 2005 12,781 6,471 - 19,252 Additions 2,311 3,765 - 6,076Disposals (194) - - (194) Write off (25) - - (25)At 31 December 2005 14,873 10,236 - 25,109 Less amortisationAt 1 January 2005 - (3,798) - (3,798)Amortisation in period 14 - (1,796) - (1,796)At 31 December 2005 - (5,594) - (5,594) Net book value 31 December 2005 14,873 4,642 - 19,515 An analysis of goodwill is shown below: 2006 2005 £'000 £'000Belgian Marine Insurers S.A. 4,157 -Kiln Asia Limited 1,035 - 5,192 - Capacity is retained on Syndicates 510, 807 and 308. The future income streamsfrom these capacities benefit the corporate members and are expected to arisefor the foreseeable future. These assets are consequently deemed to have anindefinite life. Each syndicate is assessed separately as a cash generating unit for impairmenttesting purposes. The recoverable amounts have been determined based on a valuein use calculation using cash flow projections based on financial budgetsapproved by management covering a five-year period. The discount rate applied tothe net cash flow projections is 10% (2005: 10%). There is no indication that syndicates 510, 807 and 308 are impaired. There isno participation in Syndicate 557 from 1 January 2006. Carrying amount of syndicate capacity 510 807 308 Total £'000 £'000 £'000 £'000At 31 December 2006 17,196 1,339 60 18,595 At 31 December 2005 13,495 1,309 69 14,873 Key assumptions used in value in use calculation for 31 December 2006 and 31December 2005 The following describes each key assumption on which management has based itscash flow projections to undertake impairment testing of the syndicate capacity. Business volumes - business volumes for future years are projected to be thesame as the current year. Budgeted loss ratios - the basis used to determine the value assigned to thebudgeted loss ratios is the current projected loss ratio as computed by theunderwriters and as adjusted for the anticipated pricing effects of theunderwriting cycle. Reinsurance arrangements - the reinsurance arrangements are projected to be thesame in future years as the current year's arrangements. The assumed growth after five years is zero. Goodwill Goodwill is measured by reference to the original cost of the acquisition lessany accumulated impairment charges. Each acquisition is assessed separately as acash generating unit for impairment testing purposes. This impairment test isperformed annually or whenever there is an indication that the cash generatingunit may be impaired. 24. Deferred acquisition costs 2006 2005 £'000 £'000At 1 January 46,076 38,363Cost deferred during the year 42,635 38,614Amortisation charge for the year (38,091) (30,901)At 31 December 50,620 46,076 2006 2005 £'000 £'000Current deferred acquisition costs 44,662 40,653Non current deferred acquisition costs 5,958 5,423 50,620 46,076 25. Investment in associated undertakings 2006 2005 £'000 £'000W. R. Berkley London Finance Ltd and W. R. Berkley London 11,375 10,290Holdings LtdInternational Marine (Underwriting Agency) Ltd 1,263 1,054Total investment in associates 12,638 11,344 The investments in associated undertakings for 2006 and 2005 are non current. W. R. Berkley London Finance Limited and W.R. Berkley London Holdings Limited Kiln plc holds 20% of the issued share capital of W. R. Berkley London FinanceLimited, and 20% of the equity share capital of W. R. Berkley London HoldingsLimited, an insurance holding company. In addition, Kiln plc holds £7,200,0007.65% loan notes issued by W. R. Berkley London Finance Limited. Both companiesare incorporated in Great Britain. Note 2006 On acquisition £'000 £'000Carrying amount 11,375 8,800Loan notes 28 7,200 7,200Total investment in W R Berkley 18,575 16,000 Note 2005 On acquisition £'000 £'000Carrying amount 10,290 8,800Loan notes 28 7,200 7,200Total investment in W R Berkley 17,490 16,000 W. R. Berkley London Finance Limited holds 100% of the issued non-votingpreference shares in W. R. Berkley London Holdings Limited. W. R. Berkley London Holdings Limited owns 100% of the ordinary shares in W. R.Berkley Insurance (Europe), Limited, an FSA regulated specialist casualtyinsurance company writing business in the London market. W. R. Berkley London Finance Limited and W. R. Berkley London Holdings Limitedhave an accounting date of 31 December. The group's share of the results of associated companies is analysed as follows: 2006 2005 £'000 £'000100%Total revenue 60,249 58,788Profit on ordinary activities before tax 7,450 7,272 Kiln shareTotal revenue 12,050 11,758 Profit on ordinary activities before tax 1,490 1,454Taxation (405) (396)Share of result for the period 1,085 1,058 Total revenue is earned premiums net of reinsurance. The balance sheet valuation is as follows: 2006 2005 £'000 £'000 Cost of shares 8,800 8,800Share in the result brought forward 1,490 432Share in the result for the period 1,085 1,058Carrying amount of investment in associate 11,375 10,290 The share of net assets is as follows: 2006 2005 £'000 £'000100%Total assets 368,962 344,560Total liabilities (237,087) (218,110) 131,875 126,450Group shareCurrent assets 20,787 22,072Non current assets 53,005 46,840Current liabilities (47,417) (43,622)Share of associates net assets 26,375 25,2902003 start-up expenses written off (Share Premium Account) (600) (600)Net assets attributable to non-voting preference shares (14,400) (14,400)Net share of associates net assets 11,375 10,290 International Marine (Underwriting Agency) Limited In 2005 R J Kiln & Co Limited, itself a wholly owned subsidiary of Kiln plc,acquired 33% of International Marine (Underwriting Agency) Limited whichspecialises in marine and marine cargo insurance business and has an accountingdate of 31 December. The beneficial owner is Syndicate 510 and all profits orlosses are passed on to the capital providers supporting this syndicate. R JKiln & Co Limited is entitled to appoint one of the four directors of the boardof the company. On 13 September 2006, R J Kiln & Co Limited and the John Cahill Group announcedthe launch of a new joint venture company in Lloyd's Asia dedicated tounderwriting Asian marine business: Kiln Marine Singapore Pte Ltd. The jointventure company is a subsidiary of International Marine (Underwriting Agency)Limited, and business is written on behalf of Syndicate 510. 26. Tax assets and liabilities Current tax liability Note 2006 2005 £'000 £'000Current tax liability at 1 January 7,689 4,748Amounts charged to the income statement 19 18,201 13,009UK tax paid during the year (14,572) (6,650)Overseas tax paid during the year - (3,418)Current tax liability at 31 December 11,318 7,689 Deferred tax asset 2006 2005 £'000 £'000Accelerated capital allowances 486 378Expenses to be relieved in future periods 6,381 4,007Overseas tax paid on account 5,552 4,436Deferred tax asset at 31 December 12,419 8,821 Deferred tax liabilities 2006 2005 £'000 £'000Underwriting results and other income taxable in future periods 9,039 5,146Tax relief for cost of syndicate capacity 1,459 630Deferred tax liability at 31 December 10,498 5,776 Net deferred tax asset 2006 2005 £'000 £'000Net deferred tax asset/(liability) at 1 January 3,045 (8,069)Income statement charge 19 (2,332) 10,379Statement of recognised income and expenses charge 19 92 (3,701)Overseas tax paid on account 1,116 4,436Net deferred tax asset at 31 December 1,921 3,045 In 2005, in estimating deferred tax liabilities relating to underwriting profitstaxable in future years a blended rate of 33% was applied to reflect US tax at35% relievable through double tax relief against UK corporation tax at a rate of30%. As the proportion of underwriting profits subject to US tax is anticipatedto reduce in future years, the deferred tax liability at 31 December 2006 hasbeen provided at the UK corporation tax rate of 30%. The group has an unrecognised deferred tax asset of £2,033,422 (2005:£2,033,422) arising as a result of capital losses of £6,778,073 (2005:£6,778,073). This can only be offset against future capital gains and has notbeen recognised in these financial statements. The loss has no expiry date. 27. Prepayments and accrued income 2006 2005 £'000 £'000Prepayments 1,471 393Accrued interest 2,764 1,868Accrued profit commission 5,867 17,386Total prepayments and accrued income 10,102 19,647 The carrying amount for all prepayments and accrued interest is expected to berealised within a year from the balance sheet date. Of the total accrued profitcommission £4,588,000 will be realised within one year and £1,279,000 after morethan one year (2005: £15,789,000 within one year and £1,597,000 after one year). 28. Financial investments 2006 2005 Note £'000 £'000At fair valueEquity securities: Unlisted 1,222 1,419Debt securities: Government securities 187,465 214,090 Listed debt securities 48,418 30,572 Certificates of deposit 19,047 26,914Total financial investments at fair value through the income 256,152 272,995statement At costLoan note 25 7,200 7,200Total financial investments 263,352 280,195 All listed investments are recognised securities on exchanges around the world.All investments valued at cost approximate to fair value. Financial investments include corporate investments held by group companies andthe group's share of syndicate assets. The corporate investments can be furtheranalysed between Funds at Lloyd's and other investments. 2006 Corporate Syndicate investments investments Total Funds at Other Lloyd's £'000 £'000 £'000 £'000 Debt securities and other fixed income securities 55,618 28,917 7,200 19,501Government securities 187,465 11,643 - 175,822Unlisted investments 20,269 19,047 1,222 -Fair value at 31 December 2006 263,352 59,607 8,422 195,323 2005 Corporate Syndicate investments investments Total Funds at Other Lloyd's £'000 £'000 £'000 £'000 Debt securities and other fixed income securities 37,772 12,571 7,200 18,001Government securities 214,090 50,945 - 163,145Unlisted investments 28,333 26,914 1,419 -Fair value at 31 December 2005 280,195 90,430 8,619 181,146 2006 2005 £'000 £'000Current financial investments 78,715 120,464Non current financial investments 184,637 159,731 263,352 280,195 Current financial investments are comprised of all Funds at Lloyd's andsyndicate investments that mature in less than one year from the balance sheetdate. All other investments are classified as non-current. 29. Insurance receivables 2006 2005 £'000 £'000Due from agents, brokers and intermediaries 77,439 73,158Due from reinsurers 133,175 98,312Total insurance receivables 210,614 171,470 2006 2005 £'000 £'000Current insurance receivables 163,692 143,080Non current insurance receivables 46,922 28,390 210,614 171,470 30. Other assets Note 2006 2005 £'000 £'000Deposits with ceding undertakings 132 140Pension Trust asset 39 1,829 5,000Other debtors 21,131 12,333 23,092 17,473 2006 2005 £'000 £'000Current other assets 18,715 6,953Non current other assets 4,377 10,520 23,092 17,473 31. Cash and cash equivalents Note 2006 2005 £'000 £'000Cash at bank and in hand 181,775 46,339Short-term bank deposits 60,868 174,354 242,643 220,693Bank loans and overdrafts 32 (282) (156) 242,361 220,537 All deposits are subject to an average variable interest rate of 5.1% (2005:4.3%) and have an average maturity of 1 day (2005: 1 day). The carrying amountsdisclosed above reasonably approximate fair values at year end. 32. Interest-bearing loans and borrowings Note Effective interest Maturity 2006 2005 rate % £'000 £'000Current 31Bank Overdrafts On demand 282 156 Non - CurrentUS$65,000,000 US $ 3 month 2036 32,503 -subordinated notes LIBOR +3.1% 32,785 156 Subordinated notes On 11 October 2006 and 20 November 2006, US$35,000,000 and US$30,000,000Floating Rate Subordinated Notes were issued. These loans are unsecured and arerepayable in full in 2036. Kiln plc has the right to redeem the Notes in wholeor in part, on any interest payment date on or after the interest payment datefalling in December 2011. These notes are counted as Lower Tier 2 for capitalpurposes. Bank Overdrafts This relates to technical overdrafts where unpresented charges at the balancesheet date give a technical overdraft but, as the charges are unpresented, noactual overdraft is recorded by the bank, nor are any charges incurred. 33. Share capital 2006 2005 £'000 £'000Authorised Ordinary shares - 400,000,000 (2005: 400,000,000) shares at 1p each 4,000 4,000Allotted, called up and fully paid Ordinary shares - 291,378,328 (2005: 291,378,328) shares at 1p each 2,914 2,914 On 28 November 2005 the authorised share capital was increased to £4 million bythe creation of 100,000,000 ordinary shares of 1p each ranking pari passu in allrespects with the existing ordinary shares. In November 2005, a cash rights issue of 87,413,244 shares was issued fromallotted, called up and fully paid capital in connection with a capital increasefor cash. The new shares were offered to existing shareholders at a ratio of 3:7at a price of 87p per share. Expenses for the capital increase amounted to£3,669,000. 34. Group reserves Share Retained Total premium earnings account Other reserves Capital Merger Other redemption reserves reserve reserve £'000 £'000 £'000 £'000 £'000 £'000 Balances at 1 January 2006 165,782 270 1,824 21,488 23,480 212,844Transfer to retained earnings - - - (21,488) 21,488 -Share options Co-investment plan - - - 46 - 46Total recognised income and - - - - 43,388 43,388expense for the yearDividends - - - - (8,741) (8,741)Rights Issue Expenses (9) - - - - (9) Balances at 31 December 2006 165,773 270 1,824 46 79,615 247,528 Share Other reserves Retained Total premium account earnings Capital Merger Other redemption reserves reserve reserve £'000 £'000 £'000 £'000 £'000 £'000 Balances at 1 January 2005 94,275 270 1,824 21,488 16,785 134,642Total recognised income andexpense for the year - - - - 13,630 13,630Dividends - - - - (6,935) (6,935)Rights Issue 71,507 - - - - 71,507 Balances at 31 December 2005 165,782 270 1,824 21,488 23,480 212,844 Nature and purpose of Group reserves Share premium account The share premium account represents the difference between the price at whichshare issues are offered and the authorised share price. Expenses capitalised inrelation to such issues are charged against this account. Capital redemption reserve The capital redemption reserve was created to maintain the company's capitalfollowing the company's restructure in 1998 and the acquisition of its ownshares. Merger and other reserves The merger and other reserves were created specifically in 1998 to account forthe share capital transactions of a company restructure. The merger reserveaccounted for Kiln plc's acquisition of Kiln Capital plc, the considerationbeing by issue of ordinary shares whereas the other reserve relates to therecognition of share premium of Kiln Capital plc by Kiln plc upon their mergerin 1998. On 26 July 2006, the High Court approved the cancellation of the share premiumaccount of Kiln Capital plc. Accordingly, £21,488,000 was transferred from otherreserves to retained earnings and are available as distributable reserves to theparent company. Share options of £46,000 relating to the Co-investment Plan were recognised in2006. Retained earnings Retained earnings represent the cumulative profit retained by the group aftertaxation and dividends. Also included in retained earnings are the actuarialgains and losses not recognised in profit and loss but included in the statementof recognised income and expense. 35. Return on Equity 2006 2005 £'000 £'000Profit after tax 43,612 5,825Opening shareholders' equity 215,758 136,682Return on opening equity 20.2% 4.3% Return on equity is calculated as the profit on ordinary activities after taxattributable to equity shareholders divided by opening shareholders' equity. 36. Dividends Amounts recognised as distributions to equity shareholders in the period: 2006 2005 £'000 £'000 Final dividend for the year ended 31 December 2005 of 2.0p (2004: 2.4p) 5,828 4,895Interim dividend for the year ended 31 December 2006 of 1.0p (2005: 1.0p) 2,913 2,040 8,741 6,935Proposed for approval by shareholders at the Annual General Meeting:Final dividend for the year ended 31 December 2006 of 3.0p (2005 2.0p) 8,759 5,828 The final dividend for the year ended 31 December 2006 will be recognised in the2007 financial statements. The final dividend will be paid on all ordinaryshares in issue on the record date of 20 April 2007, which will include allshares issued for the acquisition of Belmarine as disclosed in note 41. 37. Insurance contract assets and liabilities Insurance contract assets and liabilities may be analysed as follows 2006 2005 Insurance Reinsurance Net Insurance Reinsurance Net contract assets contract assets liabilities liabilities £'000 £'000 £'000 £'000 £'000 £'000 Provision for reported claims 206,791 (82,593) 124,198 307,171 (155,168) 152,003Provision for claims incurred but notreported (IBNR) 105,367 (22,078) 83,289 150,979 (60,406) 90,573Total claims reported and IBNRprovision 312,158 (104,671) 207,487 458,150 (215,574) 242,576Provision for unearned premiums 178,850 (47,445) 131,405 147,036 (35,443) 111,593Total insurance contract liabilities 491,008 (152,116) 338,892 605,186 (251,017) 354,169 The provision for claims reported by policy holders and claims incurred but notyet reported (IBNR) may be analysed as follows. Note 2006 2005 Insurance Reinsurance Net Insurance Reinsurance Net contract assets contract assets liabilities liabilities £'000 £'000 £'000 £'000 £'000 £'000 At 1 January 458,150 (215,574) 242,576 279,782 (138,873) 140,909Claims incurred in the currentyear of account 78,434 (18,111) 60,323 267,189 (136,251) 130,938Movement on claims incurred inprior open years of account 51,663 853 52,516 63,570 (2,759) 60,811Claims paid during the year 9 (250,043) 114,535 (135,508) (183,175) 75,777 (107,398)Foreign exchange adjustments (26,046) 13,626 (12,420) 30,784 (13,468) 17,316At 31 December 312,158 (104,671) 207,487 458,150 (215,574) 242,576 The provision for unearned premiums may be analysed as follows. Note 2006 2005 Insurance Reinsurance Net Insurance Reinsurance Net contract assets contract assets liabilities liabilities £'000 £'000 £'000 £'000 £'000 £'000 At 1 January 147,036 (35,443) 111,593 123,007 (36,485) 86,522Premiums written in the year 8 429,146 (137,715) 291,431 353,024 (110,478) 242,546Premiums earned during the (395,047) 122,769 (272,278) (334,100) 112,531 (221,569)yearForeign exchange adjustment (2,285) 2,944 659 5,105 (1,011) 4,094At 31 December 178,850 (47,445) 131,405 147,036 (35,443) 111,593 The gross and reinsurer's share of unearned premiums relate to the open years ofaccounts and are therefore all current. This information is provided by RNS The company news service from the London Stock ExchangeMORE TO FOLLOW
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| Date | Source | Headline | |
|---|---|---|---|
| 7th Mar 2008 | 5:00 pm | RNS | Delisting |
| 6th Mar 2008 | 4:00 pm | RNS | Director/PDMR Shareholding |
| 29th Feb 2008 | 1:07 pm | RNS | Syndicate results |
| 13th Feb 2008 | 6:28 pm | RNS | Results of SGM |
| 8th Feb 2008 | 5:35 pm | RNS | Director/PDMR Shareholding |
| 22nd Jan 2008 | 4:12 pm | RNS | Results of the SGM |
| 16th Jan 2008 | 12:48 pm | RNS | Holding(s) in Company |
| 16th Jan 2008 | 11:09 am | RNS | Rule 8.3- Kiln Ltd |
| 15th Jan 2008 | 10:54 am | RNS | Rule 8.1/8.3 - Kiln Ltd |
| 11th Jan 2008 | 5:09 pm | RNS | Holding(s) in Company |
| 11th Jan 2008 | 12:00 pm | RNS | Shareholder circular |
| 10th Jan 2008 | 1:03 pm | RNS | Rule 8.1/8.3 - Kiln Ltd |
| 4th Jan 2008 | 9:43 am | RNS | Holding(s) in Company |
| 2nd Jan 2008 | 4:52 pm | RNS | Holding(s) in Company |
| 28th Dec 2007 | 2:45 pm | RNS | Rule 8.3- Kiln Ltd |
| 14th Dec 2007 | 7:01 am | RNS | Recommended Cash Acquisition |
| 12th Dec 2007 | 9:45 am | RNS | Relevant securities in issue |
| 11th Dec 2007 | 2:56 pm | RNS | Share Price Movement |
| 6th Dec 2007 | 3:41 pm | RNS | Holding(s) in Company |
| 22nd Nov 2007 | 11:30 am | RNS | Trading Statement |
| 6th Nov 2007 | 5:30 pm | RNS | Proposed return of capital |
| 13th Sep 2007 | 4:51 pm | RNS | Holding(s) in Company |
| 5th Sep 2007 | 7:02 am | RNS | Interim Results |
| 22nd Aug 2007 | 10:49 am | RNS | Updated Syndicate Forecasts |
| 20th Aug 2007 | 12:33 pm | RNS | Holding(s) in Company |
| 16th Aug 2007 | 12:07 pm | RNS | Investment Update |
| 18th Jul 2007 | 4:30 pm | RNS | Presentation to analysts |
| 6th Jul 2007 | 7:00 am | RNS | 2008 business plans |
| 28th Jun 2007 | 4:30 pm | RNS | Future reporting dates |
| 25th Jun 2007 | 10:08 am | RNS | Company reorganisation |
| 6th Jun 2007 | 1:15 pm | RNS | Holding(s) in Company |
| 31st May 2007 | 5:07 pm | RNS | Reorganisation Completed |
| 31st May 2007 | 10:48 am | RNS | Holding(s) in Company |
| 24th May 2007 | 4:39 pm | RNS | Holding(s) in Company |
| 21st May 2007 | 10:56 am | RNS | Director/PDMR Shareholding |
| 21st May 2007 | 8:00 am | RNS | Cancellation |
| 18th May 2007 | 3:48 pm | RNS | Result of Court Hearing |
| 16th May 2007 | 4:22 pm | RNS | Director/PDMR Shareholding |
| 16th May 2007 | 12:16 pm | RNS | AGM Statement |
| 16th May 2007 | 7:01 am | RNS | Trading Statement |
| 10th May 2007 | 3:24 pm | RNS | Annual Information Update |
| 30th Apr 2007 | 4:42 pm | RNS | Holding(s) in Company |
| 24th Apr 2007 | 5:31 pm | RNS | Interest in Shares |
| 16th Apr 2007 | 11:58 am | RNS | EGM Statement |
| 13th Apr 2007 | 4:42 pm | RNS | Annual Report and Accounts |
| 4th Apr 2007 | 4:15 pm | RNS | Holding(s) in Company |
| 3rd Apr 2007 | 12:32 pm | RNS | Voting Rights and Capital |
| 23rd Mar 2007 | 5:05 pm | RNS | Posting of Documents |
| 23rd Mar 2007 | 9:19 am | RNS | Notice of Results |
| 13th Mar 2007 | 5:49 pm | RNS | Directors Shareholding |
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