23 Mar 2006 07:02
Kiln PLC23 March 2006 Part 2 Kiln plc 31 December 2005 Consolidated IFRS basis Consolidated Income Statementfor the year ended 31 December 2005 2005 2004 Note £'000 £'000Gross written premiums 7 353,024 313,528 Net written premiums 242,546 186,113Change in the provision for unearned premiums - (20,977) (4,821) Net insurance premium revenue 7 221,569 181,292Net insurance claims incurred 8 (167,280) (95,139)Investment income from underwriting assets 9 7,522 4,796Net operating expenses 13 (73,506) (55,192) (Loss)/Profit from underwriting operations (11,695) 35,757 Investment income from non-underwriting assets 9 6,103 4,902Fees and commission income 10 29,049 27,380Other income 11 3,266 131Finance costs 12 (1,346) (1,699)Corporate and administrative expenses 13 (25,570) (25,866)Foreign exchange gains/(losses) 17 7,590 (3,443)Share of operating results after tax of associated company 23 1,058 785 Profit on ordinary activities before taxation 8,455 37,947Income tax expense 18 (2,630) (12,099)Profit after tax attributable to the equity shareholders 5,825 25,848 Earnings per ordinary share - Basic 19 2.74p 12.15pDiluted 19 2.74p 12.14p All earnings are from continuing operations. Subsequent to 31 December 2005, the directors proposed a final dividend for 2005of 2p (final 2004: 2.4p) per ordinary share, £5,827,566 (final 2004:£4,895,162). This will be accounted for as an appropriation of retained earningsin the full year ending 31 December 2006. The interim and final dividend for the year 2005 is 3p (2004: 3p). Consolidated Statement of Recognised Income and Expenses For the year ended 31 December 2005 2005 2004 Note £'000 £'000 Actuarial gains/(losses) on pension scheme 37 (2,692) (1,643)Retirement benefit asset recognised 37 14,198 -Tax on items taken to equity 37 (3,701) 493 Net income/(expense) recognised directly in equity 7,805 (1,150)Profit for the period 5,825 25,848 Total recognised income and expense for the period 13,630 24,698 Consolidated balance sheet As at 31 December 2005 2005 2004 Note £'000 £'000AssetsProperty, plant and equipment 20 718 929Intangible assets 21 19,515 15,454Deferred acquisition costs 22 46,076 38,363 Investments in associated undertaking 23 11,344 9,232Deferred tax asset 24 8,821 10,575Retirement benefit obligation reimbursement right 37 10,013 -Reinsurance assets 35 251,017 175,358Prepayments and accrued income 25 19,647 15,213Financial investments Derivative investments 26 49 3,620 Financial investments at fair value through profit and loss 27 280,146 185,325Insurance receivables 28 171,470 156,670Other assets 29 17,473 6,493Cash and cash equivalents 30 220,693 152,302Total assets 1,056,982 769,534 Shareholders' EquityCalled up share capital - ordinary shares 31 2,914 2,040Share premium 32 165,782 94,275Retained earnings 32 23,480 16,785Other reserves 32 23,582 23,582Total shareholders' equity 215,758 136,682 LiabilitiesRetirement benefit obligation 37 19,986 28,313Deferred tax liabilities 24 5,776 18,644Insurance contract liabilities 35 605,186 402,789Current taxes 24 7,689 4,748Financial liabilities Other insurance financial liabilities 38 178,904 155,501 Other liabilities 39 23,527 22,839 Bank loans and overdrafts 30 156 18Total liabilities 841,224 632,852 Total equity and liabilities 1,056,982 769,534 Consolidated cash flow statementFor the year ended 31 December 2005 2005 2004 Note £'000 £'000 Net cash from / (used in) operating activities 41 (11,319) 72,569 Investing activitiesPurchase of intangible assets (6,036) (938)Disposal of intangible assets 122 -Purchase of property, plant and equipment (448) (646)Interest received 15,380 11,031Investment in associate (1,054) -Inflows from other investments - 129Net cash from investing activities 7,964 9,576 Financing activitiesFacility fees on letters of credit (680) (404)Issue of ordinary share capital 76,050 -Expenses incurred in rights issue (2,653) -Dividends paid to company's shareholders 34 (6,935) (2,040)Decrease in loans - (63)Net cash from / (used in) financing activities 65,782 (2,507) Net increase in cash and cash equivalents 62,427 79,638Effect of exchange rate changes on cash and cash equivalents 5,826 (168)Cash and cash equivalents at beginning of year 152,284 72,814Net cash and cash equivalents at end of year 30 220,537 152,284 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 within this preliminary announcement ofKiln plc for the year ended 31 December 2005 were authorised for issue inaccordance with a resolution of the directors on 22 March 2006. Kiln plc is alimited company incorporated in the UK whose shares are publicly traded. 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 consolidated financial statements have been prepared in accordance withInternational Financial Reporting Standards (IFRS) as adopted for use by theEuropean Union as they apply to the financial statements of the group for theyear ended 31 December 2005 applied in accordance with the provisions of theCompanies Act 1985. The consolidated financial statements are also consistentwith International Financial Reporting Standards issued by the IASB. Thispreliminary announcement does not contain sufficient information to fully complywith IFRS's. The Company intends to publish full financial statements thatcomply with IFRS in April 2006. The financial statements are also compiled on a going concern basis. The amendments to IAS19 Employee Benefits effective 1 January 2006 have beenearly adopted. The following have been issued but not early adopted and management do notbelieve this will have a material financial impact on the financial statementsas their requirements are only for additional disclosures. • IAS1 Capital Disclosures effective 1 January 2007. • The amendments to IAS39 Financial instruments: Recognition and Measurement. • IAS39/IFR4: Financial Guarantee Contracts effective 1 January 2006. • IFRS7 Financial instruments: Disclosures effective 1 January 2007. • The amendment to IAS21 Effect of Changes in Foreign Exchange Rates effective 1 January 2006. IFRS6: Exploration for and Evaluation of Mineral Resources and InternationalFinancial Reporting Interpretations Committee (IFRIC) Interpretations 5, 6, 7, 8and 9 issued in 2005 are not relevant to the Group's activities. In accordance with IFRS4 'Insurance Contract', the group continues to applyexisting accounting policies to its insurance contracts. The disclosures required by IFRS1 concerning the transition from UK GAAP to IFRSare given in note 47. 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 2005. 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, balances and unrealised gains on transactionsbetween group companies are eliminated. With the exception of Kiln Trustees Limited all companies listed in note 40 areconsolidated into the Kiln Plc group financial statements. Kiln Trustees Limitedis controlled by elected trustees who manage the trust's affairs and actindependently of the group. 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 undertaking Investment in W. R. Berkley Insurance (Europe), 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. Earned premiums duringthe period are translated at the current period's average exchange rates. Theprovision for unearned premium at the year end comprises the proportion ofpremium estimated to be earned after the balance sheet date. This is calculatedusing the daily pro rata method over the expected earning pattern over theperiod of the risk. 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 Profit commissions are receivable when the relevant Lloyd's year of accountcloses, normally after three years, and are received in cash when thesyndicate's financial statements are dispatched to the capital 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 Lloyds' year of account.Profit commission is not therefore recognised in the opening year of account.50% of the estimated ultimate profit commission balance is recognised in itssecond year of account, and the balance of profit commission to 100% isrecognised in its third 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: a) Investment income from non-underwriting assets includes interest income using the effective interest rate method. b) Net gains and losses on the movement of the fair value of investments. c) Fees and recharges are earned from the activities of the managing agency.Managing Agents fees are calculated as a levy on the stamp of each syndicate andearned on an instalment basis. The managing agency incurs the operating,corporate and administrative expenses of the group and allocates costs to thesyndicates on an apportionment basis. The recharge relating to the non-groupparticipants are recovered from the syndicates. d) Other income includes the gain on the enhanced transfer value initiativesrelating to the group defined benefit pension fund. e) Dividends received and receivable are recognised when due. c. Foreign currency translation (a) Functional currency of the parent 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 and presentationcurrency. (b) 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) such asunearned premium reserves and deferred acquisition costs are translated in thebalance sheet at the exchange rate prevailing at the date of the originaltransaction (ie inception date of the insurance policy). In order to hedge its exposure to certain foreign exchange risks, the groupenters into forward contracts and options (see (m) below for details of thegroup's accounting policies in respect of such financial instruments). (c) Group companies The results and financial position of Kiln South Africa (Proprietary) Limited,the only group entity which has a functional currency different from thepresentation currency, is translated into the presentation currency as follows: (i) assets and liabilities are translated at the closing rate at the balancesheet date; (ii) income and expenses are translated at average exchange rates; and (iii) all resulting exchange differences are recognised in the statement ofrecognised 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 that this can be measured reliably. Gearing Quota-share reinsurance contract Kiln Underwriting Limited, Kiln Underwriting (807) Limited and Kiln Underwriting(308) Limited have in place a number of whole account quota-share reinsuranceagreements. The reinsurers participate in their share of the net underwritingresults arising from those companies' participations in one or more syndicates.Other key aspects of the agreements are that the companies may receive a feebased on underwriting capacity and profit commission where the reinsurersparticipate in a profit on the business written. Amounts payable or receivableare 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. 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 from thesyndicates 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 third element of PRR, being the Performance Related Bonus Element (PRBE),(see note 15) inclusive of employer's national insurance contributions, may bepayable to staff based on Group profitability and eligible staff fulfillingcertain vesting criteria. It is calculated as 20% of Kiln plc's group profitbefore tax in excess of 10% of opening shareholders' equity and is recognised inthe accounts over the employment period to vesting, with the first instalmentcharged to the financial year in which the profit is made. Future amountspayable under PRBE and not recognised in these financial statements are reportedin the notes to the statements as contingent liabilities. The analysis of thecurrent and future charge is disclosed in note 15. The group has set up an Employee Co-investment Plan (COIP) based on an option totake as ordinary shares of Kiln plc, one third of the final year's instalment ofeach year's PRR award. 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 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 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. k. Intangible assets Purchased syndicate capacity is recognised as having an indefinite usefuleconomic life and is therefore not amortised. 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. All intangible assets are subject to an annual impairment review. The amount ofany impairment is recognised directly in the income statement. l. 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. m. Financial investments All financial investments are designated at fair value through profit and lossat inception. These are initially recorded fair value and subsequentlyremeasured at fair value through the income statements. 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's activities expose it to the financial risks of changes in foreigncurrency exchange rates. The Group uses foreign exchange contracts to hedgethese exposures. The Group does not use derivative financial instruments forspeculative or trading purposes. Derivatives are initially recognised at fairvalue on the date on which a derivative contract is entered into and aresubsequently valued at their fair value as determined by reference to the valueat the expected maturity date. Changes in fair value of derivative financial instruments do not qualify forhedge accounting under IAS 39 and are recognised in the income statement as theyarise. n. Derecognition of financial assets and financial liabilities A financial asset shall be derecognised when the contractual right to receivecash flows expires or when the asset is transferred. A financial liability isderecognised once the obligation under the liability is discharged, cancelled orexpires. o. 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. p. Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprisecash at bank and other short-term highly liquid investments with a maturity ofthree months or less from the date of acquisition and bank overdrafts. q. 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. r. 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 yet 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 IBNR is generally subject to a greater degree of uncertaintythan the estimation of the cost of settling claims already notified to thecompany, where more information about the claim event is generally available.Claims IBNR may often not be apparent to the insurer until many years after theevent giving rise to the claims has happened. Classes of business where the IBNRproportion of the total reserve is high will typically display greatervariations between initial estimates and final outcomes because of the greaterdegree of difficulty of estimating these reserves. Classes of business whereclaims are typically reported relatively quickly after the claim event tend todisplay lower levels of volatility. In calculating the estimated cost of unpaidclaims the company uses a variety of estimation techniques, generally based uponstatistical 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 slow down the development and/or recording of paid or incurred claims compared with the 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. s. 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 Group has taken advantage of the amended IAS19 paragraphs 93 A-D which is torecognise gains and losses in the statement of recognised income and expenses infull in the period in which they occur. The retirement benefit obligation recognised in the balance sheet represents thepresent value of the defined benefit obligation and as reduced by the fair valueof scheme assets. Any asset resulting from this calculation is limited to pastservice cost, plus the present value of available refunds and reductions infuture contributions 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. Kiln considers that the credit riskassociated with the Lloyd's syndicates is low and that therefore it is virtuallycertain that the syndicates will reimburse this amount in accordance with theadvised actuarial funding plan. t. Provision for other financial liabilities 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. u. Finance and operating 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. A finance lease is alease that transfers substantially all the risks and rewards incidental toownership of an asset whereas an operating lease is a lease other than a financelease. Rentals payable under operating leases are charged to the income statement on astraight-line basis over the lease terms. Assets held under finance leases areincluded at cost under tangible fixed assets. Cost is determined as thecapitalised value of minimum lease payments as at the commencement of the lease.The assets are depreciated over the lease terms. The capital element of futurepayments is treated as a liability and the interest element is charged to theprofit and loss account. v. Shareholders' equity Incremental costs directly attributable to the issue of shares are shown as adeduction in equity from the proceeds through share premium account. Dividends on ordinary shares are recognised in the period in which they are paidto the shareholders. w. Investments in associates An associate is an entity over which the Group is in a position to exercisesignificant influence, but not control or joint control, through participationin the financial and operating policy decisions of the investee. The results and assets and liabilities of associates are incorporated in thesefinancial statements using the equity method of accounting. The investment in associate is carried in the balance sheet at cost pluspost-acquisition changes in the Group's share of net assets of the associate,less any impairment of value. The income statement reflects the share of theresults of operations of the associate. 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. Losses may provide evidence of an impairment of the asset transferredin which case appropriate provision is made for impairment. x. 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. y. Current, non current disclosure Except for items noted below, for each asset and liability line item thatcombines amounts expected to be recovered or settled within twelve months afterthe balance sheet date are classified as current at the balance sheet date andthe remaining balance as non current. 2. Use of critical accounting estimates and judgements in applying accountingpolicies 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 experience bearing in mind the 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 (r) above.claims (IBNR) Pension Full description in note 37 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. The treatment of earning of reinstatement premiums represents a change in theprevious recognition pattern where the original premium and reinstatementpremium both earned over the original policy period. The previous policy wasadopted to remain in line with Lloyd's requirements which now allow for a widerrange of earnings patterns. The financial effect of this is a change inestimating increased premium and increased outwards reinsurance premium includedin these financial statements. 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. Profits or losses arising from underwriting operations exclude theeffects of movements in exchange rates and which are noted separately; foreignexchange exposures are managed centrally by the group not by the underwriters. A geographical analysis of net insurance revenue and investments is alsoprovided as this is the basis on which the Group reports its secondary segmentalinformation. Consolidated Income Statement by Business Segments Technical result year ended 31 December 2005 Marine Aviation Life, Reinsurance Property Total Accident Underwriting & Health £'000 £'000 £'000 £'000 £'000 £'000Gross 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)Profit/(loss) from underwritingoperations excluding investmentincome 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 Consolidation Group Underwriting Agency Undertakings Adjustments £'000 £'000 £'000 £'000 £'000 £'000Profit from underwritingoperations excluding investmentincome (28,095) - - - 8,878 (19,217)Investment income fromunderwriting assets 7,522 - - - - 7,522 Profit from underwriting operations (20,573) - - - 8,878 (11,695)Investment 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 8,455 Income 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 Income Statement by Business Segments Technical result year ended 31 December 2004 Marine Aviation Life, Reinsurance Property Total Accident Underwriting & Health £'000 £'000 £'000 £'000 £'000 £'000 Gross written premiums 45,581 19,260 29,895 47,297 171,495 313,528Net written premiums 30,995 13,636 22,526 14,544 104,412 186,113Change in the provision forunearned premiums 2,609 (720) (1,001) 4,486 (10,195) (4,821) Net insurance premium revenue 33,604 12,916 21,525 19,030 94,217 181,292Net insurance claims incurred (15,929) (2,252) (9,467) (5,142) (62,349) (95,139)Net operating expenses (9,200) (1,452) (9,929) (4,231) (30,380) (55,192)Profit from underwritingoperations excluding investmentincome 8,475 9,212 2,129 9,657 1,488 30,961 All net insurance premium revenue has arisen from external customers. Profit & Loss year ended 31 December 2004 Total Managing Associated Kiln plc Consolidation Group Underwriting Agency Undertakings Adjustments £'000 £'000 £'000 £'000 £'000 £'000Profit from underwritingoperations excluding investmentincome 22,812 - - - 8,149 30,961Investment income fromunderwriting assets 4,796 - - - - 4,796 Profit from underwriting 27,608 - - - 8,149 35,757operationsInvestment income from nonunderwriting activities 3,177 463 551 711 - 4,902 Fees and commission income 563 34,966 - - (8,149) 27,380Other income - 131 - - - 131Finance costs - (6) - (1,693) - (1,699)Corporate and administrativeexpenses (1,308) (17,654) - (6,904) - (25,866) Foreign exchange gains/(losses) (6,446) - - 3,003 - (3,443)Share of operating results ofassociated companies - - 785 - - 785 Profit on ordinary activitiesbefore taxation 23,594 17,900 1,336 (4,883) - 37,947 Income tax expense (8,580) (4,915) (165) 1,561 - (12,099)Profit after tax attributableto the equity shareholders 15,014 12,985 1,171 (3,322) - 25,848 Analysis by geographical segments The geographical region 'other countries' combines Africa, Middle East,Australasia, South America with worldwide risks. £'000 UK Other Europe NAFTA Region Asia Other Countries Total31 December 2005Net insurance premiumrevenue 24,493 28,943 106,970 17,890 43,273 221,569Segment assets 31,722 44,926 873,219 20,015 87,100 1,056,982Capital expenditure 6,330 - - - - 6,330 £'000 UK Other Europe NAFTA Region Asia Other Countries Total31 December 2004Net insurance premiumrevenue 20,742 22,323 87,878 14,189 36,160 181,292Segment assets 23,096 32,708 635,745 14,572 63,413 769,534Capital expenditure 959 - - - - 959 Agency income (fees and profit commission) and the result of associatedundertakings are earned in the United Kingdom. The North American Free Trade Agreement (NAFTA) includes USA, Canada and Mexico. Currency split The settlement currency for gross premiums written by the Kiln syndicates issplit approximately as follows: 2005 2004 US dollars 60% 60%GB pounds 34% 35%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. The basis for the calculation ofthe expense ratio has been changed from net written premiums to earned premiums,net of reinsurance. This calculation method has been changed to align to otherglobal insurance markets. Year to Year to 31 December 2005 31 December 2004 £'000 £'000Gross written premiums 863,810 798,381Net written premiums 703,384 609,968Change in the provision for unearned premiums: (54,802) (36,604)Earned premiums, net of reinsurance 648,582 573,364Investment return from underwriting assets 21,595 12,076Claims incurred net of reinsurance (516,761) (303,885)Net commissions (166,991) (134,466)Operating expenses (52,128) (52,686)Net operating expenses (219,119) (187,152)Profit/(loss) from underwriting operations (65,703) 94,403Claims ratio (%) 80% 53%Commission ratio (%) 26% 24%Expense ratio (%) 8% 9%Combined ratio % 114% 86% Definitions Claims ratio Net incurred claims as a percentage of net earned premium Expense and commission ratio Net operating expenses adjusted for deferred acquisition costs, as a percentage of net earned premium Combined ratio Claims ratio plus expense and commission ratio Net earned premium Earned premium net of outwards reinsurance but gross of all policy acquisition costs Sensitivities The following table show the impact a 1% change in either the claims,commission, expense and hence the combined ratio would have on the underwritingprofit. All ratios are calculated using the same denominator being earnedpremiums, net of reinsurance. Year to Year to 31 December 2005 31 December 2004 £'000 £'000For the syndicates at 100% level 6,486 5,734At Group level 2,216 1,813 5. Group participation in managed syndicates Syndicate 2005 Group % of total 2004 Group % of total Group owned capacity Group owned capacity capacity capacity £'000 £'000 Life 308 5,508 57.1% 4,306 86.2%Combined 510 225,971 41.4% 207,577 40.9%Non- Marine 557 2,500 5.2% 12,760 23.2%Non-Marine 807 45,693 45.7% 38,308 33.8%Total 279,672 39.7% 262,951 38.7% Of the Group owned capacity above, the following is supplied by gearing quotashare reinsurers. Corporate capital vehicles participation in syndicates 2005 GQS as a % of 2004 GQS as a % of GQS element of Group capacity GQS element of Group capacity Group capacity Group capacitySyndicate £'000 £'000 Life 308 1,507 27.4% 1,658 38.5%Combined 510 17,500 7.7% 15,500 7.5%Non- Marine 557 - - - -Non-Marine 807 16,250 35.6% 16,250 42.4%Total 35,257 12.6% 33,408 12.7% 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, converting US dollars at the closingrate of 1.72, is as follows:- Gross Net £'m £'m100% Kiln managed syndicates 552 229Kiln plc 203 77 This note explains the methodology which was adopted in arriving at estimates ofthe Kiln managed syndicates' gross and net losses arising out of the UShurricanes, the assumptions upon which those estimates have been based and therisk factors which could affect those estimates. a) Methodology The following methodology was adopted in analysing the exposures: • classes of business which have potential exposure to losses arising out of the US hurricanes were identified and, where appropriate, reviewed on a risk by risk basis; • exposures which either were not considered to be material or did not relate directly to the US hurricanes were not analysed on a risk by risk basis; • an estimate of the gross loss was established for each relevant risk using information from placing brokers, clients, and output from various risk modelling tools, combined with our own judgement; • on the inwards reinsurance account an estimate of the applicable inwards reinstatement premium was also established based upon each estimated inwards claim; and • reinsurance protections were then reviewed in order to calculate the anticipated reinsurance recoveries and outwards reinstatement premiums. Due regard was taken of co-insurance, coverage restrictions and previous reinsurance erosion from any earlier events. b) Assumptions For the purpose of calculating the amount of the syndicates' anticipated lossesfrom the US hurricanes, the following assumptions were used: • all offshore and onshore damage caused by Hurricane Katrina, including the flooding of New Orleans, constitutes one event for the purposes of recovery of losses under both inwards and outwards reinsurances; • flood exclusions within property policies will be duly applied when losses thereunder are determined; • given the specific characteristics of the onshore damage caused by Hurricane Katrina, the usual process of allocating losses as between wind and flood undertaken by loss adjusters following most hurricanes will tend towards a general inflation of the wind loss; • onshore claims from Hurricane Katrina will be exacerbated by the length of time it has taken for insureds to return to their properties; • the combination of three hurricanes causing severe damage in the southern United States, with two of the hurricanes in particular affecting the same region, will have an inflationary effect upon claims costs relating to the repair of property damage. c) Risk factors Due to the complex nature of the claims expected to arise as a result of the UShurricanes there can be no certainty as to the ultimate liabilities and losseswhich will be incurred by the syndicates. In particular the following factorsshould be borne in mind: i. Methodology and assumptions The methodology set out in section (a) above may ultimately prove to beinappropriate and/or the assumptions set out in section (b) above may prove tobe 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 will not materially affect their overall net loss. iii. Inwards reinsurance business The process of establishing estimates of losses emanating from inwards insurancebusiness is more subjective than establishing estimates of losses from directinsurance business. This is because (particularly in the period immediatelyfollowing the loss) less reliance can be placed upon loss information which isreceived via insurance companies than upon information received directly frominsureds. iv. Delayed reporting of losses Allowance has been made in the estimation of losses for the late reporting oflosses which has been caused, in the case of Hurricane Katrina, by the inabilityof insureds to return promptly to their properties and, in the case of all thehurricanes, by the levels of demand for loss adjusters. It will be some timebefore losses are more fully reported and it is possible that the full effect ofthe delayed reporting has not been taken into account in our current estimates. v. Legal action It is possible that legal action may be pursued either by individuals or on aclass action 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. Should such action besuccessful then this may have an adverse impact on the amount of the lossescurrently estimated. vi. 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 syndicates' net losses. vii. Exchange rate risk The losses arising from the US Hurricanes are predominantly payable in USdollars. In stating Kiln Underwriting Limited's estimated losses in sterling anexchange rate of £1:US$1.72, has been used being the 2005 year end exchangerate. Any subsequent changes in the level of estimated or actual net lossesarising from the hurricanes will also be translated at the end of the relevantyear at the appropriate exchange rate. An adverse change in the US dollar ratefrom the 2005 year end rate could result in a proportionate increase in the netinsurance liabilities arising from the US hurricanes. 7. Net insurance premium revenue Note 2005 2004 £'000 £'000Gross premium revenueGross written premiums 353,024 313,528Gross change in unearned premium provision (18,924) (1,416)Total gross premium revenue 334,100 312,112 Reinsurers' share of gross premium revenueTotal reinsurers' share of gross written premiums (110,478) (127,415)Reinsurers' share of change in unearned premium provision (2,053) (3,405)Total reinsurers' share gross premium revenue (112,531) (130,820) Total net insurance revenue 35 221,569 181,292 During the year, the Group did not assume or cede any reinsurance policies thatresulted in a profit or loss on inception. 8. Net claims incurred Note 2005 2004 £'000 £'000Gross claims paidTotal gross claims paid 183,175 123,367Reinsurers' share of gross claims paid (75,777) (36,240)Total net claims paid 35 107,398 87,127 Gross change in insurance liabilitiesGross change in outstanding claims 160,143 64,697Reinsurers' share of change in outstanding claims (100,261) (56,685)Total net change in insurance liabilities 59,882 8,012 Total net claims incurred 167,280 95,139 9. Investment income 2005 2004 £'000 £'000 Interest on investments and cash 8,368 6,448Net fair value gains/(losses) on investments from underwriting (846) (1,652)assetsInvestment income from underwriting assets 7,522 4,796 Interest on investments and cash 6,257 5,913Dividends on unlisted investments 755 -Net fair value gains/(losses) on investments from (909) (1,011)non-underwriting assetsInvestment income from non-underwriting assets 6,103 4,902 Total investment income 13,625 9,698 An analysis of the investment income by investment type is shown below: Rate of return 2005 2004 2005 2004 % % £'000 £'000Syndicate investments 3.0 1.9 7,522 4,796Funds at Lloyds: Fixed interest and cash 5.0 4.6 2,600 2,766Corporate investments 4.4 4.8 3,503 2,136Total investment income 3.7 2.3 13,625 9,698 Corporate investments include income, gains and losses from unlisted investmentsand loan notes issued by associated companies. Funds at Lloyd's is the capitalrequired by Lloyd's to support the amount of insurance business a member canunderwrite. 10. Fees and commission income 2005 2004 £'000 £'000 Agency fees received from non-group participants 3,138 3,649Profit commission 11,152 10,266Recharges to non-group participants 14,759 13,465Total fees and commission income 29,049 27,380 A proportion of the total expenses incurred by the managing agency are chargedto the non-group participants of each syndicate. 11. Other income Note 2005 2004 £'000 £'000 Gain on enhanced transfer value initiatives 37 3,167 -Other 99 131Total other income 3,266 131 12. Finance costs 2005 2004 £'000 £'000 Bank facility fees and interest 873 405Net cost of defined benefit pension scheme 37 473 1,294Total finance costs 1,346 1,699 13. Operating and administrative expense 2005 2004 £'000 £'000 Net operating expenses 73,506 55,192Corporate and administrative expenses 25,570 25,866Total expenses 99,076 81,058 Note 2005 2004 £'000 £'000 Acquisition costs 82,614 59,531Movement in deferred acquisition costs (10,511) (3,040)Expenses recovered from quota share reinsurers (11,579) (14,056)Staff costs 14 14,642 15,022Profit related remuneration 14, 15 3,958 4,605Profit commission 14 1,243 1,459Auditors remuneration 16 976 715Depreciation charge 20 659 816Amortisation charge 21 1,796 1,633Other administration expenses 15,278 14,373Total expenses 99,076 81,058 R J Kiln & Co Limited, the managing agency, recharges the costs it incurs to thesyndicates and the Kiln Group companies. Net operating expenses represent theKiln Group's share of costs incurred by the syndicates whereas corporate andadministrative costs have been allocated directly by the managing agent. Theabove table is an analysis of the nature of the costs allocated to the KilnGroup companies. Profit commission relates to the proportion of total profitcommission receivable surrendered to the underwriters. Auditors remuneration excludes further assurance services relating to the rightsissue as this has been charged to the Share Premium Account. 14. Staff costs and other employee related costs Particulars of employees (including directors) are set out below: Note 2005 2004 £'000 £'000 Salaries and bonuses 11,365 10,856Social security costs 1,426 2,670Defined contribution pension costs 1,851 1,496 13 14,642 15,022Profit related remuneration 13, 15 3,958 4,605Profit commission 13 1,243 1,459Total staff and other employee related costs 19,843 21,086 The average monthly number of persons employed by the Group during the year was166; 112 non-syndicate and 54 syndicate staff (2004: 162; 109 non-syndicate and53 syndicate). Many of the persons employed by the Group companies work predominately on theaffairs of Group syndicates, and of the staff costs reported above, £5,434,000(2004: £6,416,000) is directly attributable to Group syndicates and has beenborne by them. 15. Performance Related Remuneration (PRR) PRR comprises 1) 7.5% of total payroll 2) an element of profit commission and 3)a Profit Related Bonus Element (PRBE). This third element (PRBE) of theperformance related remuneration pool (see accounting policy h) which iscalculated as 20% of Kiln Plc's Group profit before tax in excess of 10% ofopening shareholders' funds, is recognised in the accounts over the employmentperiod to vesting, with the first instalment charged in the current financialyear. The table below shows the timing of the charging to Income of PRBE to date. Atany balance sheet date there is PRBE which could become payable but which hasnot, at that date, been recognised in either the Income statement or BalanceSheet. This is explained in the accounting policy (h) above. PRBE Costs £'000 Based on profits in financial year 2002 1,941 2003 5,552 2004 6,321 2005 Nil IFRS charge to income Total charged Year to Year to Year to Year to Year to 31 December 31 December 31 December 31 December 31 December 2002 2003 2004 2005 2006 £'000 £'000 £'000 £'000 £'000 2002 1,941 647 647 647 - -2003 5,552 - 1,850 1,851 1,851 -2004 6,321 - - 2,107 2,107 2,1072005 Nil - - - - -Charge to Income 647 2,497 4,605 3,958 PRBE liability at Balance Sheetdate contingent on futureemployment 6,065 2,107 Full details of the PRBE scheme are given in the remuneration report. Employee Co-investment Plan (COIP) If invited by the Remuneration Committee, selected staff can elect to allocateone third of their final tranche of the PRR to a matching share option scheme.Options over ordinary shares in Kiln plc can be taken to a maximum of 10% of theoverall PRR award. An offer in respect of the 2005 financial year was made inMarch 2006 and the maximum amount likely to be awarded is £200,000. 16. Auditors' remuneration 2005 2004 £'000 £'000 Remuneration for audit of Kiln plc and subsidiaries 220 279Remuneration for syndicate audit 575 406Total audit fees 795 685Other assurance services charged to income statement 181 30Total audit fees 976 715 Other assurance services charged to income statement of £181,000 (2004: £30,000)comprise £117,000 taxation including Rights Issue tax matters, £35,000 for thebusiness review advice and £29,000 assurance work as new system development. The2004 other assurance services relate to £16,000 IFRS training, £13,000 foradvice on the Kiln pension scheme and £1,000 for other services. Costs relating to the rights issue of £154,000 have been charged to the SharePremium Account. The syndicate audit remuneration includes those fees paid on behalf of thirdparty capital support to the syndicates. From 2005, Ernst & Young audit both thegroup and the syndicates. In 2004 the group audit was undertaken byPricewaterhouseCoopers and the syndicate audits by Ernst & Young. Theremuneration for other assurance services stated for 2004 relate toPricewaterhouseCoopers. 17. Foreign exchange gains/(losses) 2005 2004 £'000 £'000 Net gains/(losses) on forward exchange hedges (1,609) 3,003Revaluation of closing balance sheet monetary items 9,199 (6,446)Total foreign exchange gains/(losses) 7,590 (3,443) Exchange Rates 31 December 2005 31 December 2004 31 December 2003AverageUS dollar 1.82 1.83 1.64Canadian dollar 2.21 2.38 2.29 ClosingUS dollar 1.72 1.92 1.79Canadian dollar 2.01 2.30 2.31 18. Income tax expense Current year tax charge Note 2005 2004 £'000 £'000Current TaxUK corporation tax on profits of the year 11,730 4,562Adjustments in respect of prior periods 1,279 194Total current tax 24 13,009 4,756 Deferred TaxOrigination / (reversal) of temporary differences (10,379) 8,258Losses available for offset against future taxable income - (915)Total deferred tax 24 (10,379) 7,343 Income tax expense reported in consolidated income statement 2,630 12,099 2005 2004 £'000 £'000Deferred TaxIncome tax expense reported in consolidated statement of 24recognised income and expenses (3,701) 493 Reconciliation of tax charge 2005 2004 £'000 £'000 Profit / (loss) on ordinary activities before tax 8,455 37,947Less associates share of operating results (1,058) (785)Profit / (loss) on ordinary activities before tax and of associates share of 7,397 37,162operating results Profit / (loss) on ordinary activities at 30% (2004: 30%) 2,219 11,149 Expenses permanently disallowable 173 49UK dividend income not taxable (226) -Movement in realised and unrealised losses on investments not currently (3) 1,042relievableMovement on accelerated capital allowances (52) (264)Effect of higher tax rates in US (760) 844Adjustments in respect of prior periods 1,279 194Tax losses carried forward - (915) Total tax charge for year 2,630 12,099 Factors that may affect future tax charge Significant tax losses are also held on the tax capital account in respect oflosses on disposal of equities. These losses are only relievable against profitsfrom other equity based items on the tax capital account and consequently nodeferred tax asset has been recognised. 19. Basic and diluted earnings per share Basic earnings per ordinary share has been calculated by dividing the profitafter taxation of £5,825,000 by 212,826,153, the weighted average number ofordinary shares in issue throughout the year. The dilutive effect of shareoptions represents 38,848 shares and therefore the diluted earnings per sharehas been calculated by dividing the profit after taxation by 212,865,001 shares. The weighted average number of shares has increased by 8,861,069 due to a rightsissue effective from 25 November 2005 representing an impact of 0.12p per shareon both the basic and diluted EPS. IAS33 Earnings per Share has also been applied to the comparative period. Restated 2005 2004 £'000 £'000 Profit after tax attributable to ordinary equity holders of Kiln Plc (Basic and 5,825 25,848Diluted EPS profit) Reconciliation of denominators used in calculating Basic and Diluted Earnings Per No. No.ShareWeighted average number of ordinary shares - Basic Earnings Per Share 203,965,084 203,965,084Weighted average of Rights Issue 8,861,069 8,861,069Weighted average number of ordinary shares - Basic Earnings Per Share 212,826,153 212,826,153Dilutive effect of share options 38,848 27,537Weighted average number of ordinary shares - Diluted Earnings Per Share 212,865,001 212,853,690 RestatedBasic 2.74p 12.15pDiluted 2.74p 12.14p The 2004 earnings per share calculation includes the effect of the rights issuein order to be comparable with 2005. 20. Property and equipment At the balance sheet date, commitments outstanding to purchase items of officefurniture and fittings and hardware amounted to nil. Office furniture Computer hardware Total Note Owned Leased Owned £'000 £'000 £'000 £'000Book CostAt 1 January 2005 1,629 180 2,599 4,408Additions 144 - 304 448At 31 December 2005 1,773 180 2,903 4,856 Less DepreciationAt 1 January 2005 (1,085) (180) (2,214) (3,479)Charge for the period 13 (327) - (332) (659) At 31 December 2005 (1,412) (180) (2,546) (4,138) Net Book Value 31 December 2005 361 - 357 718 Office furniture Computer hardware Total Note Owned Leased Owned £'000 £'000 £'000 £'000Book CostAt 1 January 2004 1,311 180 2,261 3,752Additions 305 13 339 657Disposals - - (1) (1) At 31 December 2004 1,616 193 2,599 4,408 Less DepreciationAt 1 January 2004 (769) (143) (1,751) (2,663)Charge for the year 13 (314) (39) (463) (816)At 31 December 2004 (1,083) (182) (2,214) (3,479) Net Book Value 31 December 2004 533 11 385 929 The finance lease has been fully discharged and there are no further financialobligations. 21. Intangible assets Capacity has been acquired on Syndicates 510, 807,308 and 557. The future incomestreams from these capacities benefit the corporate members and are expected toarise for the foreseeable future. These assets are consequently deemed to havean indefinite life. Each is assessed separately as a cash generating unit for impairment testingpurposes. The recoverable amounts have been determined based on a value in usecalculation using cash flow projections based on financial budgets approved bymanagement covering a five-year period. The discount rate applied to the netcash flow projections is 10% (2004: 10%). Syndicates 510, 807 and 308 require no impairment provision. The net remainingcarrying value of £24,521 after disposals of Syndicate 557 has been written offduring the year, where capacity ownership decreased from 5% in 2005 to zero in2006. As there is no participation in Syndicate 557 from 1 January 2006, this isthe reason for the impairment. Carrying amount of syndicate capacity 510 807 308 557 Total £'000 £'000 £'000 £'000 £'000At 31 December 2005 13,495 1,309 69 - 14,873 At 31 December 2004 11,224 1,309 73 175 12,781 Key assumptions used in value in use calculation for 31 December 2005 and 31December 2004 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 projected by theunderwriters adjusted for the anticipated pricing effects of the underwritingcycle. Reinsurance arrangements - the reinsurance arrangements are projected to be thesame in future years as the current arrangements. The assumed growth after five years is zero. Syndicate Capacity Computer Software Total £'000 £'000 £'000CostAt 1 January 2005 12,781 6,471 19,252Additions 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 - (1,796) (1,796)At 31 December 2005 - (5,594) (5,594) Net Book Value 31 December 2005 14,873 4,642 19,515 CostAt 1 January 2004 13,416 5,533 18,949Additions - 938 938Disposals (635) - (635)At 31 December 2004 12,781 6,471 19,252 Less AmortisationAt 1 January 2004 - (2,165) (2,165)Amortisation in period - (1,633) (1,633)At 31 December 2004 - (3,798) (3,798) Net Book Value 31 December 2004 12,781 2,673 15,454 The amortisation charge for the period has been included in Corporate andAdministrative expenses. 22. Deferred acquisition costs 2005 2004 £'000 £'000 At 1 January 38,363 30,650Cost deferred during the year 38,614 32,125Amortisation charge for the year (30,901) (24,412)At 31 December 46,076 38,363 The deferred acquisition costs relate to the open years of accounts and aretherefore all current. 23. Investment in associated undertakings 2005 2004 £'000 £'000 W. R. Berkley London Finance Ltd and W. R. Berkley London 10,290 9,232Holdings LtdInternational Marine (Underwriting Agency) Ltd 1,054 -Total investment in associates 11,344 9,232 The investment in associated undertakings for 2005 and 2004 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 Holdings Limited, an insurance holding company. Inaddition, Kiln plc holds £7,200,000 7.65% loan notes issued by W. R. BerkleyLondon Finance Limited. Both companies are incorporated in Great Britain. Note 2005 On acquisition £'000 £'000 Carrying amount 10,290 8,800Loan notes 27 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: 2005 2004 £'000 £'000100%Total revenue 58,788 43,857Profit/(Loss) on ordinary activities before tax 7,272 5,605 Kiln shareTotal revenue 11,758 8,771 Profit/(Loss) on ordinary activities before tax 1,454 1,121Taxation (396) (336)Share of result for the period 1,058 785 The balance sheet valuation is as follows: 2005 2004 £'000 £'000 Cost of shares 8,800 8,800Share in the result brought forward 432 (353)Share in the result for the period 1,058 785Carrying amount of investment in associate 10,290 9,232 The share of net assets is as follows: 2005 2004 £'000 £'000100%Total assets 344,560 237,315Total liabilities (218,110) (116,155) 126,450 121,160Group shareCurrent assets 22,072 6,991Non current assets 46,840 40,472Current liabilities (43,622) (23,231)Share of associates net assets 25,290 24,2322003 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 10,290 9,232 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. Kiln isentitled to appoint one of the four directors of the board of the company. 24. Tax assets and liabilities Current tax liability Note 2005 2004 £'000 £'000 Current tax liability/(asset) at 1 January 4,748 (8)Amounts charged to the income statement 18 13,009 4,756UK tax paid during the year (6,650) -Overseas tax paid during the year (3,418) -Current tax liability at 31 December 7,689 4,748 Deferred tax asset 2005 2004 £'000 £'000 Tax losses carried forward - 1,053Accelerated capital allowances 378 291Expenses to be relieved in future periods 4,007 9,231Overseas tax paid on account 4,436 -Deferred tax asset at 31 December 8,821 10,575 Deferred tax liabilities 2005 2004 £'000 £'000 Underwriting results and profit commission taxable in future 5,146 18,184periodsTax relief for cost of syndicate capacity 630 460Deferred tax liability at 31 December 5,776 18,644 Net deferred tax asset/(liability) 2005 2004 £'000 £'000At 1 January (8,069) (1,219)Income statement charge 18 10,379 (7,343)Statement of recognised income and expenses charge 18 (3,701) 493Overseas tax paid on account 4,436 -At 31 December 3,045 (8,069) A significant portion of future underwriting profits is subject to US tax,currently at 35%. Double taxation relief will be received to the extent of theUK corporation tax rate, currently at 30%. In estimating deferred taxliabilities relating to underwriting results, a blended rate of 33% has beenused. If a rate of 30% had been applied the deferred tax liability shown abovewould be £467,843 lower (2004: £1,653,112 lower). The group has an unrecognised deferred tax asset of £2,033,422 (2004:£2,033,422) arising as a result of capital losses of £6,778,073 (2004:£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. 25. Prepayments and accrued income 2005 2004 £'000 £'000 Prepayments 393 269Accrued interest 1,868 1,389Accrued profit commission 17,386 13,555Total prepayments and accrued income 19,647 15,213 The carrying amount for prepayments and accrued interest is expected to berealised within a year from the balance sheet date. Of the total accrued profitcommission £15,788,000 will be realised within one year and £1,597,000 more thanone year. 26. Derivative financial investments 2005 2004 Contract Fair Value Contract Fair Value Amount Asset Amount Assets US$'000 £'000 US$'000 £'000 Forward foreign exchange contracts 17,000 (39) 30,000 2,108Option foreign exchange contracts 30,000 88 50,000 1,512Total foreign exchange hedges 47,000 49 80,000 3,620 Details of the instruments used for foreign exchange exposure management on theanticipated US dollar profit remittances are: At 31 December 2005 Lloyds Year of Account Amount Hedged Delivery Date Type of instrument2003 USD 30 million 30th June 2006 Options structure2003 USD 12 million 30th June 2006 Forward contract2003 USD 5 million 30th June 2006 Forward contract At 31 December 2004 Lloyds Year of Account Amount Hedged Delivery Date Type of instrument2002 USD 30 million 30th June 2005 Forward contract2002 USD 20 million 30th June 2005 Options structure2003 USD 30 million 30th June 2006 Options structure The carrying amount for the foreign exchange hedges calculated at fair valuewill mature within a year from the balance sheet date. 27. Financial investments 2005 2004 Note £'000 £'000At fair valueEquity securities: Unlisted 1,419 1,749Debt securities: Listed 263,041 167,782 Loan note 23 7,200 7,200 Government securities 8,486 8,594Total financial investments at fair value through the income 280,146 185,325statement All listed investments are recognised securities on exchanges around the world. 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. 2005 Corporate Syndicate Total investments investments Funds at Other Lloyd's £'000 £'000 £'000 £'000 Debt securities and other fixed income securities 269,692 81,395 7,200 181,097Government securities 9,035 9,035 - -Unlisted investments 1,419 - 1,419 -Fair value at 31 December 2005 280,146 90,430 8,619 181,097 2004 Corporate Syndicate Total investments investments Funds at Other Lloyd's £'000 £'000 £'000 £'000 Debt securities and other fixed income securities 174,982 48,200 7,200 119,582Government securities 8,594 8,594 - -Unlisted investments 1,749 - 1,749 -Fair value at 31 December 2004 185,325 56,794 8,949 119,582 2005 2004 £'000 £'000 Current financial investments 120,415 87,736Non current financial investments 159,731 97,589 280,146 185,325 28. Insurance receivables 2005 2004 £'000 £'000 Due from agents, brokers and intermediaries 73,158 44,876Due from reinsurers 98,312 111,794Total insurance receivables 171,470 156,670 2005 2004 £'000 £'000 Current insurance receivables 143,080 107,622Non current insurance receivables 28,390 49,048 171,470 156,670 29. Other assets Note 2005 2004 £'000 £'000 Deposits with ceding undertakings 140 512Pension Trust asset 37 5,000 -Other debtors 12,333 5,981 17,473 6,493 2005 2004 £'000 £'000 Current other assets 6,953 3,619Non current other assets 10,520 2,874 17,473 6,493 30. Cash and cash equivalents 2005 2004 £'000 £'000 Cash at bank and in hand 46,339 50,231Short-term bank deposits 174,354 102,071 220,693 152,302Bank loans and overdrafts (156) (18) 220,537 152,284 All deposits are subject to an average variable interest rate of 4.0% (2004:2.5%) and have an average maturity of 1 day (2004: 1 day). The carrying amountsdisclosed above reasonably approximate fair values at year end. 31. Share capital 2005 2004 £'000 £'000Authorised Ordinary shares - 300,000,000 (2004: 300,000,000) shares at 1p each 3,000 3,000Allotted, called up and fully paid Ordinary shares - 291,378,328 (2004: 203,965,084) shares at 1p each 2,914 2,040 In November 2005, a cash rights issue of 87,413,244 shares were 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 of which £2,653,000 has been paid and £1,016,000 are accrued at theyear end. 32. Consolidated statement of changes in equity Group reserves Share premium Other reserves Retained Total account earnings Capital Merger Other redemption reserve reserves reserve £'000 £'000 £'000 £'000 £'000 £'000 Balances at 1 January 2005 94,275 270 1,824 21,488 16,785 134,642 Total recognised income andexpenses 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 Group reserves Share premium Other reserves Retained Total account earnings Capital Merger Other redemption reserves reserve reserve £'000 £'000 £'000 £'000 £'000 £'000 Balances at 1 January 2004 94,275 270 1,824 21,488 (5,873) 111,984 Total recognised income and 24,698 24,698expenses for the year - - - -Dividends - - - - (2,040) (2,040) Balances at 31 December 2004 94,275 270 1,824 21,488 16,785 134,642 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 shares whereas the other reserve relates to the transfer ofshare premium from Kiln Capital plc to Kiln plc. 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 expenses. 33. Return on Equity 2005 2004 £'000 £'000Profit after Tax 5,825 25,848Opening Shareholders equity 136,682 114,024Return on opening equity 4.3% 22.7% Return on equity is calculated as the profit on ordinary activities after taxattributable to equity shareholders divided by opening shareholders' equity. InNovember 2005 a cash rights issue increased shareholders equity at 31 December2005 by £72,381,000. 34. Dividends Amounts recognised as distributions to equity shareholders in the period: 2005 2004 £'000 £'000 Final dividend for the year ended 31 December 2004 of 2.4p (2003 of 0.4p) 4,895 816 Interim dividend for the year ended 31 December 2005 of 1.0p (2004 of 0.6p) 2,040 1,224 (2004: xx p) per share 6,935 2,040 The final dividend for the year ended 31 December 2005 of 2.0p (£5,827,566) willbe recognised in the 2006 financial statements. 35. Insurance contract assets and liabilities Insurance contract assets and liabilities may be analysed as follows 2005 2004 Insurance Reinsurance Net Insurance Reinsurance Net contract assets contract assets liabilities liabilities £'000 £'000 £'000 £'000 £'000 £'000 Provision for reported claims 307,171 (155,168) 152,003 156,463 (114,775) 41,688Provision for claims incurredbut not reported (IBNR) 150,979 (60,406) 90,573 123,319 (24,098) 99,221Total claims reported and IBNRprovision 458,150 (215,574) 242,576 279,782 (138,873) 140,909Provision for unearned premiums 147,036 (35,443) 111,593 123,007 (36,485) 86,522Total insurance contracts 605,186 (251,017) 354,169 402,789 (175,358) 227,431liabilities The provision for claims reported by policy holders and claims incurred but notyet reported (IBNR) may be analysed as follows. Note 2005 2004 Insurance Reinsurance Net Insurance Reinsurance Net contract assets contract assets liabilities liabilities £'000 £'000 £'000 £'000 £'000 £'000 At 1 January 279,782 (138,873) 140,909 258,355 (121,613) 136,742Claims incurred in the currentyear of account 267,189 (136,251) 130,938 123,402 (44,601) 78,801Movement on claims incurred inprior open years of account 63,570 (2,759) 60,811 35,708 (14,328) 21,380Claims paid during the year 8 (183,175) 75,777 (107,398) (123,367) 36,240 (87,127)Foreign exchange adjustments 30,784 (13,468) 17,316 (14,316) 5,429 (8,887)At 31 December 458,150 (215,574) 242,576 279,782 (138,873) 140,909 The provision for unearned premiums may be analysed as follows. Note 2005 2004 Insurance Reinsurance Net Insurance Reinsurance Net contract assets contract assets liabilities liabilities £'000 £'000 £'000 £'000 £'000 £'000 At 1 January 123,007 (36,485) 86,522 125,236 (47,028) 78,208Premiums written in the year 7 353,024 (110,478) 242,546 313,528 (127,415) 186,113Premiums earned during the year (334,100) 112,531 (221,569) (312,112) 130,820 (181,292)Foreign exchange adjustment 5,105 (1,011) 4,094 (3,645) 7,138 3,493At 31 December 147,036 (35,443) 111,593 123,007 (36,485) 86,522 The gross and reinsurer's share of unearned premiums relate to the open years ofaccounts and are therefore all current. 36. Insurance contracts liabilities and reinsurance assets - assumptions,sensitivities and claims development Assumption regarding delegated authority business A significant proportion of the business written by Kiln is under delegatedauthority facilities where cover holders write a portfolio of risks which attachto the master facility. The use of accounting estimates and judgements inapplying accounting policies is described in note 2. The underwriter estimateshow much business will attach to a facility based on information provided by thebroker and using experience bearing in mind the conditions of the market. Theestimate of premium attaching is updated on a regular basis. It is assumed thatrisks attaching to the master facility incept evenly across the period of thefacility. Written premium is defined to be incepted business only and thereforeonly that proportion of risks that have incepted to the master facility by thebalance sheet date are reported within written premium in these accounts. Each underlying risk is earned in accordance with the earning pattern of theclass of business. The approach to the reporting of written and earned delegated authority premiumhas been consistently applied year on year. Underwriting year of account to ultimate 100% level The underwriting business is predominantly managed within Kiln on anunderwriting year of account basis. Under this basis all business written tomaster policies incepting within each calendar year is written on behalf ofcapital providers supporting that year of account. The following claimsdevelopment table is therefore prepared at the 100% syndicate level on anunderwriting year of account basis. All years reported are translated at 2005year end exchange rates for consistency. Kiln currently do not hold data to report a five year accident year claimsdevelopment table. As the change to one year accounting becomes moreestablished it is expected that the business could move to management on anaccident year basis and data is now being recorded to enable the production of acomprehensive accident year claims development table in the future. Gross Underwriting YearEstimate of 100% managed 2001 and prior 2002 2003 2004 2005 TotalUltimate claims at end of: £m £m £m £m £m £m Year 1 1,780.2 326.0 387.1 546.8 882.6Year 2 1,783.2 259.4 370.0 598.7Year 3 1,758.5 239.0 344.1Year 4 1,756.6 235.0Year 5 1,748.0Less: Claims paid 1,571.5 192.1 257.7 298.6 98.0 Future claims - - - 23.6 196.1Outstanding claims reserves 176.5 42.9 86.4 276.5 588.5Kiln corporate share 66.4 16.4 33.4 109.9 232.1 458.2 Net of Reinsurance Underwriting YearEstimate of 100% managed 2001 and 2002 2003 2004 2005 Total priorUltimate claims at end of: £m £m £m £m £m £mYear 1 1,261.9 230.1 286.9 409.2 573.8Year 2 1,250.8 185.2 259.8 416.7Year 3 1,227.6 167.0 229.9Year 4 1,227.1 163.2Year 5 1,222.8Less: Claims paid 1,126.4 138.3 164.7 207.8 75.5 Future claims - - - 15.8 191.4Outstanding claims reserves 96.4 24.9 65.2 193.1 306.9Kiln corporate share 35.8 9.5 22.8 67.6 106.9 242.6 Future claims represent claims on events which have not occurred at the balancesheet date. These claims will be charged against premiums reported as unearnedpremium at the balance sheet date. The corporate members' share of outstanding claims reserves reconciles to theGroup balance sheet outstanding claims reserve for the relevant years ofaccount. Details of the split between reported claims and IBNR are found in note35. 2003 Account 2003 was a very good year for business, the final result showed that conditionswere better than initially anticipated, even after review at the end of thesecond year. A prudent reserving policy resulted in a slight downwardsadjustment in claims forecasts both at the end of the second and third year ofdevelopment. The latest release resulted in an improvement of £11.3 million tothe Kiln corporate members. 2004 Account 2004 was adversely affected by a worse than average hurricane season whichaccount for the comparatively high claims forecasts at year one compared to the2003 account. This deteriorated in year two due to the effect of the bad 2005hurricane season on 2004 premium earned during calendar year 2005. Thedeterioration to Kiln corporate members was £3 million. 37. Pension benefit obligation The company provides pensions for its eligible employees through the R J Kiln &Co Limited Pension and Assurance Scheme (the scheme). The assets of the schemeare held in a separate trustee-administered fund. 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. During 2005, the companycontributed to a money purchase arrangement. The company continues to manage thepension 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 1 January 2005 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 current Scheme Actuary, Clair Gemmell, BSc, FFA,of HSBC Actuaries and Consultants Limited. The best estimate of the deficitfunding contribution to the plan for 2006 calendar year is an amount of £2.2m(2005 £2.2m) of which £1.1m would be borne by Kiln 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 R J KilnPension scheme and the 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 expectedreturns set out below. Summary of the Kiln Group pension scheme 31 December 2005 31 December 2004 £'000 £'000 Present value of assets 42,438 37,361Present value of obligations (62,424) (65,674)Gross deficit in the scheme (19,986) (28,313) Of which allocated to syndicates 16,716 - Kiln group share of syndicate deficit (6,703) -R J Kiln share of deficit (3,270) -Gross deficit attributable to the Kiln group (9,973) (28,313)Deferred tax credit 2,844 8,494Net deficit attributable to the Kiln group (7,129) (19,819)Pension Trust asset 29 5,000 -Balance (2,129) (19,819) This balance represents the residual deficit funding attributable to Kiln groupafter the tax credit under the current actuarial assumptions. The Pension Trustis described below. Analysis of the amount recognised in the Income Statement 31 December 2005 31 December 2004 £'000 £'000 Interest on benefit obligation (3,542) (3,366)Expected return on pension assets 2,594 2,301Employer's current service cost - (229)100% impact (948) (1,294)Kiln share Included in finance costs 12 (473) (1,294) Enhanced Transfer Value InitiativesDistribution from pension scheme assets (7,656) -Reduction in pension scheme liabilities 15,474 -Enhanced payments paid direct to members by Kiln (1,335) -NIC paid on cash to members (165)100% impact 6,318 -Kiln share Included in other income 11 3,167 - Analysis of the amounts recognised in the Statement of Recognised Income andExpenses 31 December 2005 31 December 2004 £'000 £'000 Actual return less expected return on scheme assets 4,079 590Changes in assumptions underlying the present value of scheme (10,012) (2,660)liabilitiesExperience gain/(loss) arising on the scheme's liabilities 538 427Actuarial gain/(loss) (5,395) (1,643)Deferred tax 1,619 493100% Net actuarial gain/(loss) (3,776) (1,150) Net cumulative actuarial gains/(losses) - 100% (4,926) (1,150) Kiln share gross of deferred tax (2,692) (1,643)Deferred tax 767 493Kiln share (1,925) (1,150) Gross pension deficit as at 1 January 2005 28,313 - Of which 83.64% allocated to the managed syndicate balance 23,681 - sheets 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 gains/(losses) (2,692) (1,643)Gross retirement benefit asset recognised 14,198 -Deferred tax on above (3,701) 493Included in SORIE 7,805 (1,150) Actuarial gains/(losses) which arose over the year have been recognisedimmediately in the Statement of Recognised Income and Expenses. Reconciliation of Present Value of Plan Liabilities and Assets Value at Value at 31 December 2005 31 December 2004 £'000 £'000 Change in present value of defined benefit obligationOpening defined benefit obligation 65,674 62,318Employer's current service cost - 229Interest on obligation 3,542 3,366Actuarial (gains) / losses on obligations 9,474 2,233Liabilities extinguished on enhanced transfer value (15,474) -initiativesBenefits paid (792) (2,472)Present value of plan liabilities at end of year 62,424 65,674 Change in fair value of plan assetsOpening fair value of plan assets 37,361 35,369Expected return on plan assets 2,594 2,301Actuarial gains / (losses) on plan assets 4,079 590Assets distributed on enhanced transfer value initiatives (7,656) -Contributions by employer 6,852 1,573Benefits paid (792) (2,472)Fair value of plan assets at end of year 42,438 37,361 Retirement benefit obligation (19,986) (28,313)Related deferred tax asset 5,996 8,494Net pension liability (13,990) (19,819) Managed syndicates' balance sheets As from 1 January 2005, Kiln has allocated a proportion of the scheme deficit tothe managed syndicates' balance sheets. This gives rise to an asset relating toamounts recoverable from the third parties' share of the syndicate's deficit.The amounts as at 31 December 2005 and the calculation methodology is shownbelow: 31 December 2005Relevant proportion of deficit allocated to Syndicates % Syndicate share Kiln group share of allocation £'000 Syndicate 308 2.658% (303) Syndicate 510 62.563% (5,183) Syndicate 557 5.759% (60) Syndicate 807 12.657% (1,157) 83.637% (6,703)R J Kiln share 16.363% (3,270)Total Kiln group share of gross obligation (9,973)Retirement benefit obligation recoverable from third (10,013)partiesGross deficit in the scheme 100.000% (19,986) Reconciliation of reimbursement right asset £'000Opening reimbursement right asset at 1 January 2005 14,198Net movement in actuarial (gains)/losses 2,703Gain on enhanced transfer value initiative (3,151)Interest on obligation 1,775Expected return on plan assets (1,300)Share of contributions paid (4,212) Closing reimbursement right asset 10,013 Analysis of defined benefit obligation 31 December 2005 31 December 2004 £'000 £'000 Present value of Funded Obligations 62,424 65,674Present value of Unfunded Obligations - - 62,424 65,674 Assets in the Plan and the Expected Rates of Return Actual rate of Long-term rate of Value at 31 December return return expected 2005 2004 2005 2004 2005 2004 % % % % £'000 £'000Equities 22.7% 10.7% 7.75% 8.00% 22,486 20,501Fixed Interest Bonds 11.5% 8.1% 4.80% 5.40% 19,626 16,016Cash 4.7% 4.4% 4.50% 4.00% 326 844Total market value of assets 6.36% 6.80% 42,438 37,361 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 scheme does not invest in financial instruments issued by, or any propertiesused by the Kiln Group and its associates. 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 2005 31 December 2004 (per annum) (per annum) % %Financial assumptionsRate of increase in salaries 5.00 5.00Rate of increase of pensions in payment -benefits accrued prior to 1 May 1999: 5.00 5.00 -benefits accrued after 1 May 1999: 2.50 3.00Rate of revaluation of deferred pensions in excess of 5.00 5.00GMPDiscount rate 4.80 5.40Inflation assumption 2.50 3.00 History of experience gains and losses 2005 2004 2003 2002 £'000 £'000 £'000 £'000 Present value of assets 42,438 37,361 35,369 31,698Present value of liabilities (62,424) (65,674) (62,318) (59,146)Surplus or (deficit) in plan (19,986) (28,313) (26,949) (27,448) Difference between the expected and actual return onscheme assets:Amount 4,079 590 2,238 (6,787)percentage of scheme assets 10% 2% 6% (21%) Experience gain/(loss) on scheme liabilities:Amount 538 427 (554) 615percentage of present value of the scheme liabilities 1% 1% (1%) 1% The Pension Trust R J Kiln & Co Limited, in common with many companies with a Defined Benefit (DB)Pension Scheme, has a deficit o-n the scheme's overall funding. Rather than takethe traditional route of relying solely o-n increased funding and movements inthe financial markets, Kiln is also tackling the deficit having established aPension Trust. This approach will enable the company to fulfil its obligationsto the scheme at the same time as allowing it access to the funds if and whenthe scheme moves from a funding deficit to a surplus. Funding is made in to theTrust periodically. The level of this funding will be determined by reference tothe overall net pension scheme deficit on the balance sheet. The Pension Trustreceived an initial funding of £5m during 2005, representing the discountedvalue of future deficit funding payments from R J Kiln to the scheme, net of theimputed tax credit. 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, and use, for example, a SIPP or GPPP. In recognition ofthis opportunity for greater personal control over pension assets, the companyhas begun a series of initiatives broadly grouped under a project entitled theEnhanced Transfer Value Initiatives ('ETV'). This gives individuals theopportunity of leaving the DB scheme and having their ETV paid either in cash orto another pension arrangement. The company offered to certain scheme populations their 100% transfer value plusa small premium. Where accepted, a member leaves the scheme and all futureliabilities for that member are fully extinguished and the scheme's obligationsdecrease accordingly. The ETV exercise began in 2005 with a population ofdeferred pensioners and will cover progressively the majority of members. Thescheme's obligations extinguished are valued by reference to the discount rateat the closing year end balance sheet date. 38. Other insurance financial liabilities 2005 2004 £'000 £'000Trade creditors: Arising out of direct insurance operations 11,256 3,573 Arising out of reinsurance operations 119,411 146,158Deposits from reinsurers (OCAs) 48,237 5,770 178,904 155,501 All amounts repayable are due and expected to be paid within the next 12 monthsand the carrying value approximates fair value. 39. Other liabilities 2005 2004 £'000 £'000 Accrued expenses and deferred income 14,986 17,355Other creditors 8,541 5,484 23,527 22,839 All amounts repayable are due and expected to be paid within the next 12 monthsand the carrying value approximates fair value. 40. Investment in Subsidiary undertakings The following companies are directly and wholly-owned by Kiln plc and registeredin England and Wales: Status R J Kiln & Co Limited A registered Lloyd's underwriting agent. Active Kiln Capital plc Provides dedicated corporate capital exclusively to those Active syndicates managed by R J Kiln, through its sole subsidiary, Kiln Underwriting Limited. Kiln Underwriting (807) Limited A corporate member at Lloyd's set up as a vehicle for Active third party capital. The capacity owned is fully reinsured. Kiln Underwriting (308) Limited A corporate member at Lloyd's set up as a vehicle for Active third party capital. The capacity owned is fully reinsured. Kiln Underwriting (807) No. 2 A corporate member at Lloyd's. DormantLimited Kiln Underwriting (510) Limited A corporate member at Lloyd's. Dormant Kiln Insurance Services Limited Kiln Insurance Services Limited is a service company set Active up to provide administrative services to other companies, including companies within the Kiln group. The following companies are wholly-owned subsidiaries of the above directlyowned companies and are registered in England and Wales: Kiln Underwriting Limited A corporate member of Lloyd's. Active Kiln Trustees Limited Acts as a trustee for trusts in relation to the issued Active share capital of Kiln and its subsidiaries and does not transact with the group. Kiln Trustee Company Limited Kiln Trustee Company Limited is the trustee of the Kiln Active Pension Trust. There are no transactions with the group other than that explained in note 37. R J Kiln & Co (No. 1) Limited A dormant shelf company Dormant R J Kiln & Co (No. 2) Limited A dormant shelf company Dormant In addition, the following company is a wholly owned subsidiary registered inSouth Africa: Kiln South Africa (Proprietary) A non-profit making service company for motor, personal ActiveLimited accident, household and commercial lines insurance principally for Kiln Combined Syndicate 510. 41. Cash generated from operating activities 2005 2004 £'000 £'000Net profit (loss) before taxation 8,455 37,947Adjustments for:Depreciation and amortisation charge including profit/(loss) on 2,511 3,077disposalsShare of associated undertaking's result (1,058) (785)Disposal of investment in Anton Holdings - (129)Effect of exchange rate changes on cash and cash equivalents (5,826) 168Change in debtors (111,346) (13,867)Change in creditors 187,390 (1,425)Net (purchases)/sales of investments (93,005) 55,552Fair value (gains)/losses 1,755 2,663Interest receivable (15,380) (11,031)Interest payable 680 399Tax paid 14,505 -Net cash from operating activities (11,319) 72,569 Professional advisers Stockbrokers and joint financial advisersNumis Securities LimitedCheapside House139 CheapsideLondonEC2V 6LH Joint financial advisersLexicon Partners LimitedNo. 1 Paternoster SquareLondonEC4M 7DX Investment managersThreadneedle Asset Management Limited60 St Mary AxeLondonEC3A 8JQ Newton Investment Management Limited71 Queen Victoria StreetLondonEC4V 4DR SolicitorsNorton RoseKempson HouseCamomile StreetLondonEC3A 7AN AuditorsErnst & Young LLP1 More London PlaceLondon SE1 2AF RegistrarsLloyds TSB RegistrarsThe CausewayWorthingWest SussexBN99 6DA Registered office106 Fenchurch StreetLondonEC3M 5NRRegistered number 2949032 END This information is provided by RNS The company news service from the London Stock Exchange
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Don't have an account? Click here to register.Final Results - Part 2
| 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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