Kin Group Regulatory News (KIN)

13 Mar 2007 07:03

Kiln PLC13 March 2007 PART 2 38. Insurance contracts liabilities and reinsurance assets - assumptions,sensitivities and claims development Assumption regarding delegated authority business A significant proportion of the business written by the Kiln syndicates is underdelegated authority facilities where coverholders write a portfolio of riskswhich attach to the master facility. The use of accounting estimates andjudgements in applying accounting policies is described in note 2. Underwriting year of account to ultimate, 100% managed syndicate level The Group's underwriting business is predominantly managed on an underwritingyear of account basis. Under this basis all business written to master policiesincepting in each calendar year is written on behalf of capital providerssupporting that year of account. The following claims development table is therefore prepared at the 100%syndicate level on an underwriting year of account basis. It is disclosed toprovide information about the Group's ability to provide a robust estimate ofthe ultimate claims cost. All years reported are translated at 2006 year endexchange rates for consistency. Future claims represent the underwriters' view on claims on events which havenot yet been incurred at the balance sheet date. These claims will be chargedagainst premiums reported as unearned premium at the balance sheet date. Gross before reinsurance Underwriting YearEstimate of 100% managed 2001 and prior 2002 2003 2004 2005 2006ultimate claims at end of: £m £m £m £m £m £m Year 1 1,663.8 300.3 355.9 500.3 794.7 382.7Year 2 1,667.3 240.1 338.5 545.9 783.8Year 3 1,644.2 220.7 314.6 528.1Year 4 1,642.1 217.5 311.7Year 5 1,634.0 213.3Year 6 1,611.8Less: Claims paid 1,490.7 185.9 262.2 421.5 444.2 31.8 Future claims - - - - 20.5 215.6Outstanding claims reserves 121.1 27.4 49.5 106.6 319.1 135.3Kiln corporate share 48.1 11.1 19.9 42.7 128.7 61.6Kiln corporate share total 312.1 Net of reinsurance Underwriting YearEstimate of 100% managed 2001 and prior 2002 2003 2004 2005 2006ultimate claims at end of: £m £m £m £m £m £m Year 1 1,189.9 212.2 264.0 375.8 522.1 349.4Year 2 1,179.9 171.7 238.5 382.0 511.2Year 3 1,157.7 154.8 221.2 367.6Year 4 1,156.9 151.1 218.4Year 5 1,152.6 148.6Year 6 1,143.1Less: Claims paid 1,083.8 130.7 180.2 277.5 276.8 29.2 Future claims - - - - 19.6 200.6Outstanding claims reserves 59.3 17.9 38.2 90.1 214.8 119.6Kiln corporate share 22.8 7.2 15.3 36.0 87.4 54.3Kiln corporate share total 223.0 The corporate members' share of outstanding claims reserves, less amounts due toGearing Quota Share providers, is disclosed in note 37. A sensitivity analysis has been applied by adjusting total gross and netoutstanding claims reserves by 1%. This indicates that an increase in gross andnet outstanding claims reserves of 1% at the corporate share level would resultin £3.1 million more gross reserves and £2.3 million more net reserves beingreported. A decrease in gross and net outstanding claims reserves of 1% at thecorporate level would result in £3.1 million less gross reserves and £2.3million less net reserves being reported. The profit effect at the net leveli.e. net of reinsurance is £2.3 million. 2003 & prior accounts The 2003 & prior accounts have run off positively in the aggregate, reflectingthe Group's conservative approach to reserving. 2004 account 2004 was adversely affected by a worse than average hurricane season, and thedeterioration in year two was due to the effect of the 2005 hurricane season on2004 premium earned during calendar year 2005. The surplus of reserves in yearthree was driven primarily by a release of £7.6 million (£3.1 million at theKiln Corporate Member level) from the Property division and a release of £4.0million (£1.6 million at the Kiln Corporate Member level) from the Marinedivision. 2005 account 2005 was affected by the US hurricanes Katrina, Rita and Wilma, which accountsfor the comparatively high claims forecasts at year one compared to the 2004account. The surplus in year two was driven primarily by releases made by theReinsurance and Accident & Health divisions. Pension benefit obligation The company provides a defined benefit pension for eligible employees throughthe R J Kiln Pension and Assurance Scheme (the scheme). The assets of the schemeare held in a separate trustee-administered fund. During 2006, the companycontributed to a money purchase arrangement. A pension benefit obligation arises in respect of the defined benefit (DB)funded scheme which was closed to all staff from 1 May 2003 and under which nofurther years of service obligations can accrue. The company continues to managethe pension scheme deficit through a series of initiatives which are describedbelow. The timetable for these initiatives is as follows: 19 January 2001 No new DB members, new staff take a defined contribution (DC) pension or a personal pension 30 April 2003 DB scheme closed to DB members. No further benefits can accrue. All DB staff transferred to the DC scheme 31 December 2004 The company establishes a Pension Trust, details below 2005 and 2006 Allocation to the syndicates of their portion of the scheme deficit, details below. The company begins a series of enhanced transfer value initiatives, details below Prior to the closing of the scheme, the DB scheme provided benefits on the basisof one forty-fifth of final salary for each year of pensionable employment. A 5%rate of revaluation of deferred pensions is the subject of a legal underpin andmay not therefore be changed without individual scheme member consent. The company currently contributes to the DB scheme an amount equal to thecontribution recommended by the Scheme Actuary. The best estimate of the deficitfunding contribution to the scheme for the 2007 calendar year is an amount of£1,500,000 of which £866,000 would be borne by the Group. Recharge to syndicates The syndicates that Kiln manages have been charged for their share of thepension deficit. At the Kiln Group level, the consolidated pension deficitliability now comprises two components: the gross liability to the scheme andthe amount recoverable from the syndicates. The right to reimbursement from the third party Names has been recognised as aseparate asset on Kiln's balance sheet. In all other respects, thisreimbursement right has been treated as a scheme asset. Accordingly, whererelevant, the disclosures below recognise this asset. As the recharge to thesyndicates is directly proportioned to the underlying pension scheme deficit,the expected return on the reimbursement asset directly mirrors the returns andexpenses of the scheme set out below. Summary of the Kiln Group pension scheme 31 December 2006 31 December 2005 £'000 £'000Present value of assets 33,679 42,438Present value of obligations (37,337) (62,424)Gross deficit in the scheme (3,658) (19,986) Of which allocated to syndicates 3,059 16,716 Kiln group share of syndicate deficit (1,349) (6,703)R J Kiln & Co Limited share of deficit (599) (3,270)Gross deficit attributable to the Kiln group (1,948) (9,973)Deferred tax credit 533 2,844Net deficit attributable to the Kiln group (1,415) (7,129)Pension Trust asset 30 1,829 5,000Balance 414 (2,129) The positive balance for 2006 equates to full coverage of the residual deficitfunding attributable to the Kiln Group after the tax credit and under thecurrent actuarial assumptions. The Pension Trust is described further below. Analysis of the amount recognised in the Income Statement 31 December 2006 31 December 2005 £'000 £'000Interest on benefit obligation (2,964) (3,542)Expected return on pension assets 2,726 2,594Employer's current service cost - -100% impact (238) (948)Movement in reimbursement right asset 111 475Kiln group share included in finance costs 13 (127) (473) Enhanced Transfer Value InitiativesDistribution from pension scheme assets (17,919) (7,656)Reduction in pension scheme liabilities 25,223 15,474Enhanced payments paid direct to members by Kiln (1,596) (1,335)NIC paid on cash to members (204) (165)100% impact 5,504 6,318Kiln group share included in other income 12 3,125 3,167 Analysis of the amounts recognised in the Statement of Recognised Income andExpense 31 December 2006 31 December 2005 £'000 £'000Gross actuarial gain/(loss)Actual return less expected return on scheme assets (2,044) 4,079Changes in assumptions underlying the present value of scheme 1,577 (10,012)liabilitiesExperience gain/(loss) arising on the scheme's liabilities (109) 538Actuarial loss (576) (5,395)Deferred tax 173 1,619100% Net actuarial loss (403) (3,776) Gross actuarial loss, 100% level (576) (5,395)Movement in reimbursement right asset 269 2,703Gross actuarial loss, Kiln group share (307) (2,692)Deferred tax 92 767Kiln group share (215) (1,925) Net cumulative actuarial losses, 100% level (5,329) (4,926) Net cumulative actuarial losses, Kiln group share (3,290) (3,075) Retirement benefit asset recognised Gross pension deficit as at 1 January - 28,313 Of which 83.64% allocated to the managed syndicate balance - 23,681sheets Elimination of amounts related to: Kiln Underwriting Limited (net of deferred tax) - (8,781) Kiln Underwriting (807) Limited and Kiln Underwriting (308) - (702)Limited - 14,198 Net deferred tax effect - (4,468) Retirement benefit asset - 9,730 Gross actuarial losses (307) (2,692)Gross retirement benefit asset recognised - 14,198Deferred tax on above 92 (3,701)Included in SORIE (215) 7,805 Actuarial gains/ (losses) which arose over the year have been recognisedimmediately in the Statement of Recognised Income and Expense. From 1 January 2005, Kiln allocated a proportion of the scheme deficit to themanaged syndicates, which gave rise to an asset relating to amounts recoverablefrom the third parties share of the syndicate deficit. The initial recognitionof this asset was taken through the Statement of Recognised Income and Expensein 2005. Any movement in this asset is now taken through the relevant line ofthe income statement. Reconciliation of Present Value of Plan Liabilities and Assets Value at Value at 31 December 2006 31 December 2005 £'000 £'000Change in present value of defined benefit obligationOpening defined benefit obligation 62,424 65,674Interest on obligation 2,964 3,542Actuarial (gains) / losses on obligations (1,468) 9,474Liabilities extinguished on enhanced transfer value (25,223) (15,474)initiativesBenefits paid (1,360) (792)Present value of plan liabilities at end of year 37,337 62,424 Change in fair value of plan assetsOpening fair value of plan assets 42,438 37,361Expected return on plan assets 2,726 2,594Actuarial gains / (losses) on plan assets (2,044) 4,079Assets distributed on enhanced transfer value initiatives (17,919) (7,656)Contributions by employer 9,838 6,852Benefits paid (1,360) (792)Fair value of plan assets at end of year 33,679 42,438 Retirement benefit obligation (3,658) (19,986)Related deferred tax asset 1,097 5,996Net pension liability (2,561) (13,990) Managed syndicates' balance sheets As from 1 January 2005, Kiln has allocated a proportion of the scheme deficit tothe managed syndicates' balance sheets as a result of which the Group hasrecognised an asset representing the right to recover a portion of the deficitfrom the third party members of the syndicates. The amounts as at 31 December2006 and the calculation methodology is shown below: 31 December 2006 31 December 2005Relevant proportion of deficit allocated to % Syndicate share Kiln group share Kiln group shareSyndicates of allocation of allocation £'000 £'000 Syndicate 308 2.658% (54) (303) Syndicate 510 62.563% (1,078) (5,183) Syndicate 557 5.759% - (60) Syndicate 807 12.657% (217) (1,157) 83.637% (1,349) (6,703)R J Kiln share 16.363% (599) (3,270)Total Kiln group share of gross obligation (1,948) (9,973)Retirement benefit obligation recoverable (1,710) (10,013)from third partiesGross deficit in the scheme 100.000% (3,658) (19,986) Reconciliation of reimbursement right asset 31 December 31 December 2006 2005 £'000 £'000 Closing reimbursement right asset at 31 December 10,013 14,198Movement due to changes in the Group's share of Capacity (670) -Opening reimbursement right asset at 1 January 9,343 14,198Net movement in actuarial (gains)/losses 269 2,703Gain on enhanced transfer value initiatives (3,243) (3,151)Interest on obligation 1,385 1,775Expected return on plan assets (1,274) (1,300)Share of contributions paid by third parties (4,770) (4,212) Closing reimbursement right asset at 31 December 1,710 10,013 Analysis of defined benefit obligation 31 December 2006 31 December £'000 2005 £'000Present value of funded obligations 37,337 62,424 37,337 62,424 Assets in the Plan and the Expected Rates of Return Actual rate of Long-term rate of Value at 31 December return return expected 2006 2005 2006 2005 2006 2005 % % % % £'000 £'000Equities 4.3% 22.7% N/A 7.75% - 22,486Fixed interest bonds (0.2%) 11.5% 5.25% 4.80% 33,627 19,626Cash 4.2% 4.7% 4.50% 4.50% 52 326Total market value of assets 33,679 42,438 The long-term rate of return is based on historical long-term performance forequities and cash. The long-term rate of return for bonds is based on theinterest rate on a selection of corporate bonds with a duration of greater than15 years, the average period for the current active members to become deferredmembers of the scheme. The actual return on plan assets was £682,000 (2005:£6,673,000). The scheme does not invest in financial instruments issued by, or any propertiesused by the Kiln Group and its associates. The scheme sold all equities held in2006 and reinvested in fixed interest bonds. Principle actuarial assumptions Under IAS19, the valuation of the liability amount by the Scheme Actuary hasbeen estimated using appropriate actuarial techniques and major assumptions asset out below: 31 December 2006 31 December 2005 (per annum) (per annum) % %Financial assumptionsRate of increase of pensions in payment -benefits accrued prior to 1 May 1999: 5.00 5.00 -benefits accrued after 1 May 1999: 2.75 2.50Rate of revaluation of deferred pensions in excess of 5.00 5.00GMPDiscount rate 5.25 4.80Inflation assumption 2.75 2.50 History of experience gains and losses 2006 2005 2004 2003 2002 £'000 £'000 £'000 £'000 £'000Present value of assets 33,679 42,438 37,361 35,369 31,698Present value of liabilities (37,337) (62,424) (65,674) (62,318) (59,146)Surplus or (deficit) in plan (3,658) (19,986) (28,313) (26,949) (27,448) Difference between the expected and actualreturn on scheme assets:Amount (2,044) 4,079 590 2,238 (6,787)percentage of scheme assets (6%) 10% 2% 6% (21%) Experience gain/(loss) on schemeliabilities:Amount (109) 538 427 (554) 615percentage of present value of the scheme (0.3%) 1% 1% (1%) 1%liabilities The Pension Trust The Pension Trust enables the company to fulfil its obligations to the Scheme atthe same time as allowing it access to the funds if and when the Scheme movesfrom a funding deficit to a surplus. Funding is made to and from the Trustperiodically. The level of this funding is determined by reference to theoverall net pension scheme deficit on the balance sheet. The Pension Trustreceived an initial funding of £5 million during 2005 with a net release of £3.3million in 2006 to reflect the success of the enhanced transfer value exercisesin reducing the overall deficit. Enhanced Transfer Value Initiatives 'A'-Day gives individuals more flexibility in their pension arrangements.Individuals' circumstances may make it more attractive to have full control overtheir pension assets. In recognition of this opportunity for greater personalcontrol over pension assets, the company made a series of offers to membersbroadly grouped under a project entitled the enhanced transfer value (ETV)initiatives. Individuals had the opportunity of leaving the DB scheme and havingtheir ETV paid either in cash or to another pension arrangement. The company offered to certain scheme populations their 100% transfer value plusa small premium. Where accepted, a member left the scheme and all futureliabilities for that member were fully extinguished and the scheme's obligationsdecreased accordingly. The scheme's obligations extinguished are valued byreference to the discount rate at the closing year end balance sheet date. 39. Cash generated from operating activities 2006 2005 £'000 £'000 Net profit before taxation 64,145 8,455Adjustments for:Depreciation and amortisation charge including profit on disposals 2,227 2,511Share of associated undertaking's result (1,085) (1,058)Effect of exchange rate changes on cash and cash equivalents 5,563 (5,826)Change in debtors 64,139 (111,346)Change in creditors (124,044) 216,400Net sales / (purchases) of investments 15,685 (93,005)Fair value losses 1,213 1,755Interest and dividends receivable (23,210) (15,380)Interest payable 1,054 680Tax paid (14,572) (14,505)Net cash from operating activities (8,885) (11,319) The movements in debtors and creditors are largely explained by the effects ofthe 2005 hurricanes. Claims outstanding at the 12 month stage of the 2005 yearof account were £168 million more than at the 12 month stage for the 2006 yearof account. Similarly, reinsurance recoveries on claims were £110 million higherfor the 2005 year of account than for 2006 at the 12 month stage. 40. Events after the balance sheet date On 13 March 2007, Kiln plc announced its intention to effect a corporatereorganisation involving the redomicilation of the holding company to Bermuda byway of a Scheme of Arrangement under section 425 of the Companies Act 1985. TheScheme envisages (1) the cancellation of the issued share capital, share premiumaccount and capital redemption reserve of Kiln plc (2) a one-for-one exchange ofthe Kiln plc ordinary shares with ordinary shares in a new Bermuda incorporatedcompany named Kiln Ltd, the new holding company of the Kiln Group (3) theadmission to the Official List of the London Stock Exchange of Kiln Ltd in theplace of Kiln plc. Shortly after the Scheme effective date, certain Kiln Groupassets will be transferred to Kiln Re, a newly incorporated Bermudian subsidiaryof Kiln Ltd, which will operate as a class 3 Bermudian reinsurer. A SchemeProspectus and Circular will be sent to shareholders on or around 23 March 2007and lodged with the Financial Services Authority, which will explain thetransaction in greater detail. On 5 January 2007, 523,911 ordinary shares of 1 pence each were issued in partconsideration for the acquisition of Belgian Marine Insurers S.A. The ordinaryshares will rank pari passu with the existing issued ordinary shares of theCompany. Following the admission of these shares to the Official List of theLondon Stock Exchange, the enlarged issued share capital of the Company was291,902,239. The new shares were offered at 108p per share based on the marketvalue of the shares at the date of issuance. The shares are eligible for the2006 final dividend. Application has been made to the London Stock Exchange for the listing of 54,612ordinary shares of 1 pence each in the Company in respect of vendorconsideration shares issued pursuant to the acquisition of Belgian MarineInsurers S.A. The ordinary shares will be admitted to the Official List of theLondon Stock Exchange and trading will commence on 14 March 2007. The ordinaryshares will rank pari passu with the existing issued ordinary shares of theCompany. Following the admission of these shares, the enlarged issued sharecapital of the Company will be 291,956,851. The shares are eligible for the 2006final dividend. Chaucer Syndicate Limited (CSL), Kiln plc and Kiln Underwriting Limited (KUL)entered into a termination agreement dated 13 February 2007 under which therights and obligations of the above parties set out in a Reinsurance to CloseAdministration and Management Agreement dated 8 March 2006 (the MarchAgreement), and relating to syndicate 1204, were terminated. CSL then paid thesum of £43,854 to KUL in full and final settlement of all amounts due under theMarch Agreement. CSL has also discharged and released Kiln plc from a guaranteeof £500,000 provided by Kiln plc under the sale and purchase agreement inrespect of syndicate 1204 entered into by CSL with Kiln plc and RJ Kiln & CoLimited on 18 December 2003. The financial information set out above does not constitute the Company'sstatutory accounts for the year ended 31 December 2005 or 2006. Statutoryaccounts for 2005 have been delivered to the Registrar of Companies and thosefor 2006 will be delivered following the Company's Annual General Meeting. Thestatutory accounts for 2006 will be finalised on the basis of the financialinformation presented by the directors in the preliminary announcement. Theauditors have reported on the 2005 accounts; their report was unqualified anddid not contain statements under Section 237(2) or (3) of the Companies Act1985. 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