Kin Group Regulatory News (KIN)

12 Sep 2006 07:02

Kiln PLC12 September 2006 Kiln plc Kiln plc, the specialist Lloyd's insurance group, announces £24.3 millionpre-tax interim profits Financial summary Half year Half year to 30 to 30 June 2006 June 2005 Gross written premiums £230.8 m £195.1 mProfit before tax excluding FX effect on non-monetary £28.4m £30.4mitemsProfit before tax £24.3 m £34.0 mEarnings per share 5.59p 11.24pAnnualised return on equity 15.1% 33.5%Interim dividend 1p per share 1p per share Operational highlights • Net earned premiums £121.2 million (2005: £100.0 million) • Rates up 18% (31 August 2006 compared with 31 August 2005) • Strengthened and broadened management team • Initiatives have reduced the gross pension deficit from £30.5 million at June 2005 to £2.5 million • Managed syndicates delivering a combined ratio of 88% and a claims ratio of 49% (2005: 83% and 49% respectively) Outlook • Capacity at Lloyd's for 2007 approximately £1 billion; capital to be fully deployed in 2007 • Continuing hard market in Kiln's chosen areas of expertise Commenting on these results, chief executive officer Edward Creasy said: 'The first half of 2006 has been another profitable six months for Kiln, withprofit before tax of £24.3 million. We had a good start to the year andimprovements in the rating environment accelerated in the second quarter. Theprofits to 30 June provide a good foundation for the balance of the year. We have announced our intention to increase our overall capacity at Lloyd's toapproximately £1 billion for 2007. This demonstrates our belief that next yearwill continue to offer Kiln excellent opportunities to exploit its competitiveadvantages to produce good returns for shareholders.' 12 September 2006 Enquiries:Kiln plc Tel: 020 7886 9000Edward Creasy, Chief Executive OfficerPeter Haynes, Chief Financial OfficerKate Rogers, Head of Communications College Hill Tel: 020 7457 2020Tony FriendRoddy Watt Chairman's report The first half of 2006 has been another profitable six months for Kiln, withprofit before tax for the period to 30 June at £24.3 million (2005: £34.0million). As 2005 demonstrated, our risk exposure tends to be weighted heavilytowards the second half of the calendar year. Nevertheless, the profits to 30June, which delivered earnings per share for the half year of 5.59p (2005:11.24p), provide a good foundation for the balance of the year. Shareholders'equity increased by £10.8 million to £226.5 million since December 2005. The six month result is satisfactory, although the numbers have been affected bytwo significant factors that have reduced the profit from the record levelsachieved in 2005. The 2005 result was bolstered by a foreign exchange gain of£6.3 million. The weakening dollar and the volatility inherent in IAS reportingof foreign exchange differences caused an equivalent loss of £2.7 million in thefirst half of 2006, thus accounting for a deterioration of £9 million whencompared to the previous year. Additionally, we recognised £3.6 million lessprofit commission revenue in the first half of 2006 than we had in theequivalent period of 2005. The combination of these factors served to reduceprofits by £12.6 million when compared to 2005. This figure is partially offsetby £3.1 million of income recognised as a result of the successful reduction ofthe pension deficit, and £2.5 million of increased investment income. 2005 delivered some hard realities in the shape of the severe hurricane season;nonetheless it has resulted in substantial improvements in the currentunderwriting environment. At the time of writing on 12 September 2006, thisyear's hurricane season has not proved as active as some predicted although weare taking nothing for granted. Following the hurricanes last year, Kiln movedto take best advantage of the new rating environment that prevailed, and oursuccessful rights issue at the end of last year helped us to do so on behalf ofour shareholders. The financial impact of the enhanced trading conditionscurrently being experienced by Kiln is not fully reflected in this statement,which gives grounds for optimism for the second half of the year. In line with our established intention to maintain the dividend at or above 3pper share throughout the insurance business cycle, we are declaring an interimdividend of 1p per share (2005: 1p) to be paid on 17 November 2006 toshareholders on the register on 20 October 2006. As was the case last year, theinterim dividend is set at a third of the previous year's full year level; thisis a practice that we intend to continue in the future, unless exceptionalcircumstances dictate otherwise. Looking to the future, I see good opportunities available to Kiln for the 2007calendar year. Lloyd's capital structure, the diversification inherent in ourunderwriting portfolio, an environment of broad price increases in our chosenclasses of business and a conservative approach to accepting risk in catastropheprone areas are all significant factors contributing to our ability to manageour underwriting risk effectively. This will allow us to offset the increase involatility of risk projected by the modelling agencies and continue into 2007with approximately the same ratio of capital to premium as we hold for 2006. Nick CoshChairman12 September 2006 Chief executive officer's report Gross written premium in the first half of 2006 at £230.8 million showed an18.3% increase on the 2005 equivalent figure of £195.1 million. This was adirect result of Kiln's increased participation in Syndicate 510.Proportionately we accepted a smaller percentage of our annually budgetedpremium income for the first half of the 2006 calendar year than we did in 2005,in anticipation of being offered improved prices during the third and fourthquarters. The strength of the 1 July renewals demonstrated the soundness of thisapproach, and we expect prices to improve further during the latter half of theyear and into 2007. The managed syndicates' combined ratio for the first half of 2006 stands at 88%(2005: 83%) and the claims ratio at 49% is identical to the equivalent 2005figure. The first half of the year saw its fair share of large loss advices,mainly related to individual rather than catastrophic events. Our estimates ofloss from the 2005 hurricane season remain within the forecast range previouslyprovided. The increase in the combined ratio is primarily as a result of increases in boththe operating and acquisition expense ratios. The operating ratio has increasedas a result of Kiln's higher contribution to the Central Fund Levy and interestpaid on advances received from reinsurers in respect of last year's catastrophelosses. The acquisition ratio has been affected by a reduction in commission andprofit commission related fees from our proportional reinsurers which previouslyhad been offset against acquisition costs. During the first half of 2006, our investment income has increased sharply by40% to £8.7 million, based upon an annualised yield of 3.2%, unchanged from lastyear, but on increased investment balances. As a result of all these factors, these six month figures result in arespectable return on equity of 15.1% (2005: 33.5%) and earnings per share of5.59p (2005: 11.24p). Underwriting environment Following the unusually severe hurricane season of 2005, Kiln positioned itselfto take best advantage of the changed business environment. Although priceshardened at the beginning of 2006, increases were not initially as strong as wehad predicted, except in some areas of the retrocessional market. Only duringthe second quarter of 2006 has the effect of the 2005 hurricanes been fullyfelt, as the extent of the tightening reinsurance market became apparent andprice rises steepened. Although prices have so far failed to move significantlyelsewhere, the acceleration of price increases on classes of business and ingeographic areas directly affected by the hurricanes has been such that ouroverall 2006 Premium Rating Index has now surpassed our expectations for theyear. The Kiln portfolio of risks includes many of those classes which haveresponded most dramatically, such as US property business, reinsurance andoffshore energy, which together account for almost half of our underwritingportfolio. Kiln Premium Rating Index June June June 2006/2005 2006/2004 2006/2003 % % % Accident & Health 100.0 99.9 104.1Property 117.0 114.4 112.6Reinsurance 134.8 132.6 130.4Marine 134.5 135.6 128.5Aviation 97.8 96.9 92.5Syndicate 510 Total 120.3 118.4 116.1 This slower-than-expected increase in pricing in the early months of 2006 hashad a number of consequences. First, it has meant that most of the impact ofthese increases has yet to be seen; only a small proportion of the inwardspremiums earned in the first half of this year will have been affected by theincreases achieved to date, although some of the earlier price rises applied bythe retrocessional market will already be showing through in increased earnedoutwards reinsurance premiums. Second, it suggests that the start of 2007 willbenefit from a further round of strong price rises as the market brings businessrenewing at that time into line with the higher pricing levels that have beenprevalent from mid-2006 onwards At the same time as pursuing the opportunities presented by these hardeningmarkets, Kiln also took steps to manage the perceived increased volatilityinherent in the changed climatic environment. Our underwriting strategy oftaking on short tail, specialist insurance risk remains consistent, but in thatcontext we have revised our approach to risk appetite in the light of theincreased volatility to which we, along with the rest of the market, nowconsider ourselves to be exposed. Given the increased frequency and severity ofUS hurricanes that is now expected, we have reduced our exposure to US coastalrisk. We have similarly reduced the amount of risk we accept from our customersin areas which we believe are particularly exposed to storm surge in conjunctionwith the most severe hurricanes. Prices on some of the business that we havedeclined as a result of this policy have understandably seen the most dramaticincreases of all, but we do not believe they necessarily represent the bestvalue in the context of return on the capital which would be required to takethem onto our books. As well as reducing the exposure we assume, we have madesome changes to our reinsurance buying; in general we now have more protectionagainst very severe catastrophe losses and, although the effect of increasedpricing and increased retentions on the business we write is to lessen thepotential impact of smaller catastrophe losses, the output from our capitalmodelling process has led us to buy some protection against the increasedfrequency risk associated with certain medium-sized catastrophes. Managing our catastrophe exposures in this selective way, at a time when pricescontinue to rise, has meant that we have been able to increase premium volume ina disciplined manner while achieving a reduction in the number of risks that weare writing in most of our classes of business. In such a market, where priceshave only recently begun to respond fully to the impact of last year's events,we believe that a further round of pricing adjustments is now inevitable in themonths to come; this in turn should give rise to additional opportunities for uswhich are in keeping with the measured approach we are adopting. Pension fund deficit reduction When we announced our full year results for 2005 we reported on a number ofmeasures under way designed to reduce the deficit in the company's definedbenefit pension scheme. This deficit peaked at £30.5 million in 2005 and, as aresult of initiatives taken over the last 12 months, now stands at £2.5 million.In June 2006 we completed an exercise in which we offered enhanced transfervalues to members of the pension scheme, for which we achieved a 90% take up invalue terms. At the same time as offering enhanced benefits to our members, theexercise has achieved greater future stability for our balance sheet and henceour shareholders and we believe that we have arrived at a solution that benefitsall stakeholders. The latest actions we have taken in our strategy to reduce thepension fund deficit mean that the overall gross deficit in Kiln's definedbenefit pension fund is now £2.5 million of which £1.3 million is held on Kiln'sbalance sheet after recognising an asset receivable from third party members ofKiln managed syndicates. At the end of 2005, the overall gross deficit in thepension fund was just under £20 million. As the future pension obligationsextinguished were more than net assets paid out, £3.1 million has beenrecognised as income in these financial statements. Process modernisation Kiln continues to work with other leading companies in the Lloyd's market - thegroup known as G6 - to increase the tempo for modernisation of the way businessis conducted in the Lloyd's market. Our long term future as a competitive andattractive insurance market depends on the success of this work and the need forboth the Lloyd's Franchise and Franchisees to drive the fundamental changesnecessary to improve process efficiency. Considerable progress has been madeover the last six months, and this remains a strategic priority for ourbusiness. Management team Kiln continues to grow and develop and we are have made two senior appointmentsso far in 2006. Andrew Hitchcox joined the company in June as chief actuary andrisk officer in which role he will develop and refine Kiln's approach to capitalmodelling and risk management. Andrew, who has over twenty years of actuarialexperience, is a well known figure in the profession and the London market andhis expertise will complement and strengthen the management team. Roger Bickmorejoined the company in August in the newly created role of head of businessdevelopment, in which he will spearhead Kiln's drive to develop new and existingmarkets and sources of business. These two appointments demonstrate Kiln'scontinuing commitment to building on its strong reputation. The future We continue to pursue opportunities to increase the proportion of our ownershipof the underwriting capacity of Syndicate 510.This allows us to maximise returnsfor our shareholders from our core business skill: our ability to analyse, priceand accept specialist insurance and reinsurance risk. In addition, we arecontinually exploring alternative platforms from which to deploy third partycapital to provide us with more scale as an international insurance operationand enhance shareholder returns. In view of the current underwritingenvironment, we have announced our intention to increase our overall capacity atLloyd's to over £1 billion for 2007. This move is evidence of our belief thatnext year will continue to offer Kiln excellent opportunities to exploit itscompetitive advantages to produce good returns for our shareholders. Edward CreasyChief executive officer12 September 2006 Consolidated Income Statementfor the six months ended 30 June 2006 Six months to Six months to Year to 30 June 2006 30 June 2005 31 December 2005 (unaudited) (unaudited) (audited) Note £'000 £'000 £'000 Gross written premiums 230,815 195,069 353,024 Net written premiums 148,509 131,804 242,546Change in the provision for unearned premiums (27,264) (31,827) (20,977) Net insurance premium revenue 121,245 99,977 221,569Net insurance claims incurred (62,143) (44,262) (167,280)Investment income from underwriting assets 4 4,500 3,484 7,522Net operating expenses 6 (42,339) (32,950) (73,506) Profit/(Loss) from underwriting operations 21,263 26,249 (11,695) Investment income from non-underwriting assets 4 4,194 2,684 6,103Fees and commission income 9,838 13,812 29,049Other income 5 3,134 37 3,266Finance costs (694) (422) (1,346)Corporate and administrative expenses 6 (11,023) (15,182) (25,570)Foreign exchange (losses)/gains 8 (2,738) 6,298 7,590Share of operating results after tax of 353 535 1,058associated company Profit on ordinary activities before taxation 24,327 34,011 8,455Income tax expense 9 (8,028) (11,083) (2,630) Profit after tax attributable to the equityshareholders 16,299 22,928 5,825 Earnings per ordinary share Basic 10 5.59p 11.24p 2.74pDiluted 10 5.59p 11.24p 2.74p All earnings are from continuing operations. Subsequent to 30 June 2006, the directors proposed an interim dividend for 2006of 1.0p (interim 2005: 1.0p) per ordinary share, £2,913,783 (interim 2005:£2,039,651). This will be accounted for as an appropriation of retained earningsin the full year ending 31 December 2006. Consolidated Statement of Recognised Income and ExpensesFor the six months ended 30 June 2006 Six months to Six months to Year to 30 June 2006 30 June 2005 31 December 2005 (unaudited) (unaudited) (audited) Note £'000 £'000 £'000 Actuarial gains/(losses) on pension scheme 16 435 (1,273) (2,692)Retirement benefit asset recognised 16 - 14,198 14,198Tax on items taken to equity 16 (130) (4,086) (3,701) Net income recognised directly in equity 305 8,839 7,805Profit for the period 16,299 22,928 5,825 Total recognised income for the period 16,604 31,767 13,630 Consolidated balance sheetAs at 30 June 2006 30 June 2006 30 June 2005 31 December 2005 (unaudited) (unaudited) (audited) Note £'000 £'000 £'000AssetsProperty, plant and equipment 395 760 718Intangible assets 21,008 15,431 19,515Deferred acquisition costs 59,753 50,397 46,076Investments in associated undertakings 11,698 9,767 11,344Deferred tax asset 1,791 6,122 8,821Retirement benefit obligation reimbursement right 16 1,170 15,295 10,013Reinsurance assets 15 222,600 169,765 251,017Prepayments and accrued income 5,002 12,207 19,647Financial investments Derivative investments 11 - 432 49 Financial investments at fair value through profit 11 317,512 206,107 280,146and lossInsurance receivables 244,251 206,081 171,470Other assets 25,193 16,481 17,473Cash and cash equivalents 154,504 169,476 220,693 Total assets 1,064,877 878,321 1,056,982 Shareholders' EquityCalled up share capital - ordinary shares 2,914 2,040 2,914Share premium 165,773 94,275 165,782Retained earnings 34,256 43,657 23,480Other reserves 23,582 23,582 23,582 Total shareholders' equity 13 226,525 163,554 215,758 LiabilitiesRetirement benefit obligation 16 2,503 30,503 19,986Deferred tax liabilities 720 21,363 5,776Insurance contract liabilities 15 590,420 433,015 605,186Current taxes 4,326 12,746 7,689Financial liabilities Other insurance financial liabilities 217,752 192,433 178,904 Other liabilities 22,138 24,707 23,527 Bank loans and overdrafts 493 - 156 Total liabilities 838,352 714,767 841,224 Total equity and liabilities 1,064,877 878,321 1,056,982 Consolidated cash flow statementFor the six months ended 30 June 2006 Six months to Six months to Year to 30 June 2006 30 June 2005 31 December 2005 (unaudited) (unaudited) (audited) Note £'000 £'000 £'000 Net cash (used in) / from operating activities 17 (65,825) 8,616 (11,319) Investing activitiesPurchase of intangible assets (1,768) (732) (6,036)Disposal of intangible assets - - 122Purchase of property, plant and equipment (79) (210) (448)Interest received 11,136 6,417 15,380Investment in associate - - (1,054) Net cash from investing activities 9,289 5,475 7,964 Financing activitiesFacility fees on letters of credit (363) (340) (680)Issue of ordinary share capital - - 76,050Expenses incurred in rights issue (1,025) - (2,653)Dividends paid to company's shareholders (5,828) - (6,935) Net cash (used in)/ from financing activities (7,216) (340) 65,782 Net (decrease)/increase in cash and cash equivalents (63,752) 13,751 62,427Effect of exchange rate changes on cash and cash (2,774) 3,441 5,826equivalentsCash and cash equivalents at beginning of period 220,537 152,284 152,284 Net cash and cash equivalents at end of period 154,011 169,476 220,537 1. Accounting policies 1.1 Group and its operations The interim consolidated financial statements of Kiln plc for the six monthsended 30 June 2006 were authorised for issue in accordance with a resolution ofthe directors on 11 September 2006. Kiln plc is a limited company incorporatedin 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. 1.2 Basis of preparation and accounting policies Basis of preparation The interim consolidated financial statements have been prepared usingaccounting policies that are in accordance with International FinancialReporting Standards (IFRS) as adopted for use by the European Union as theyapply to the financial statements of the Group for the six months ended 30 June2006 applied in accordance with the provisions of the Companies Act 1985. Theaccounting policies are also consistent with IFRS issued by the IASB. The interim consolidated financial statements do not include all the informationand disclosures required in the annual financial statements, and should be readin conjunction with the Group's annual financial statements as at 31 December2005. The financial information for the year ended 31 December 2005 in this InterimReport does not constitute statutory accounts for the period as defined insection 240 of the Companies Act 1985. Statutory accounts for the year ended 31December 2005 have been delivered to the Registrar of Companies. The auditorshave reported on those accounts; their report was unqualified and did notcontain statements under section 237 (2) or (3) of the Companies Act 1985. Significant accounting policies The accounting policies adopted in the preparation of the interim consolidatedfinancial statements are consistent with those followed in the preparation ofthe Group's annual financial statements for the year ended 31 December 2005. Basis of consolidation The interim consolidated financial statements incorporate the financialstatements of the company, and entities controlled by the company (itssubsidiaries), for the six months ended 30 June 2006. Certain subsidiaryundertakings underwrite as corporate members of Lloyd's on syndicates managed bythe Group. The Group's share of the transactions, assets and liabilitiesrelating to syndicate participation is included in the consolidated financialstatements. Inter-company transactions, balances and unrealised gains on transactionsbetween Group companies are eliminated. 2. 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. Consolidated Income Statement by Business Segments Six months ended 30 June 2006 Marine Aviation Life, Reinsurance Property Total Accident Underwriting & Health £'000 £'000 £'000 £'000 £'000 £'000 Gross written premiums 39,422 12,877 17,539 44,230 116,747 230,815 Net written premiums 30,974 9,510 10,203 18,156 79,666 148,509Change in the provision forunearned premiums (9,319) (430) 2,825 (7,450) (12,890) (27,264) Net insurance premium revenue 21,655 9,080 13,028 10,706 66,776 121,245Net insurance claims incurred (12,190) (3,070) (5,040) (5,629) (36,214) (62,143) Net operating expenses (7,061) (2,293) (5,725) (2,372) (24,888) (42,339) Profit from underwritingoperations excluding investmentincome 2,404 3,717 2,263 2,705 5,674 16,763 All net insurance premium revenue has arisen from external customers. Profit & Loss period ended 30 June 2006 Total Managing Associated Kiln plc Eliminations Group Underwriting Agency Undertakings £'000 £'000 £'000 £'000 £'000 £'000Profit from underwritingoperations excluding investmentincome 15,076 - - - 1,687 16,763Investment income fromunderwriting assets 4,500 - - - - 4,500 Profit from underwriting 19,576 - - - 1,687 21,263operationsInvestment income from nonunderwriting activities 2,697 542 273 2,618 (1,936) 4,194Fees and commission income 31 11,996 - - (2,189) 9,838Other income - 1,215 - 36 1,883 3,134Finance costs (1,935) (287) - (365) 1,893 (694)Corporate and administrativeexpenses (456) (9,054) - (1,513) - (11,023)Foreign exchange gains/(losses) (3,497) (5) - 764 - (2,738)Share of operating results ofassociated companies - - 353 - - 353 Profit on ordinary activitiesbefore taxation 16,416 4,407 626 1,540 1,338 24,327Income tax expense (5,699) (1,384) (82) (462) (401) (8,028) Profit after tax attributableto the Equity shareholders 10,717 3,023 544 1,078 937 16,299 Consolidated Income Statement by Business Segments Six months ended 30 June 2005 Marine Aviation Life, Reinsurance Property Total Accident Underwriting & Health £'000 £'000 £'000 £'000 £'000 £'000 Gross written premiums 26,962 10,619 22,438 39,060 95,990 195,069 Net written premiums 19,372 6,124 17,823 25,584 62,901 131,804Change in the provision forunearned premiums (4,683) 1,300 (3,939) (10,158) (14,347) (31,827) Net insurance premium revenue 14,689 7,424 13,884 15,426 48,554 99,977Net insurance claims incurred (6,594) (3,183) (4,975) (4,760) (24,750) (44,262)Net operating expenses (5,562) (1,992) (6,878) (3,040) (15,478) (32,950) Profit from underwritingoperations excluding investmentincome 2,533 2,249 2,031 7,626 8,326 22,765 All net insurance premium revenue has arisen from external customers. Profit & Loss period ended 30 June 2005 Total Managing Associated Kiln plc Eliminations Group Underwriting Agency Undertakings £'000 £'000 £'000 £'000 £'000 £'000Profit from underwritingoperations excluding investmentincome 19,237 - - - 3,528 22,765Investment income fromunderwriting assets 3,484 - - - - 3,484 Profit from underwriting 22,721 - - - 3,528 26,249operationsInvestment income from nonunderwriting activities 2,009 434 273 570 (602) 2,684Fees and commission income - 17,340 - - (3,528) 13,812Other income - 37 - - - 37Finance costs (592) (81) - (339) 590 (422)Corporate and administrativeexpenses (564) (9,741) - (4,877) - (15,182)Foreign exchange gains/(losses) 7,585 - - (1,287) - 6,298Share of operating results ofassociated companies - - 535 - - 535 Profit on ordinary activitiesbefore taxation 31,159 7,989 808 (5,933) (12) 34,011Income tax expense (10,894) (2,309) (82) 2,198 4 (11,083) Profit after tax attributableto the Equity shareholders 20,265 5,680 726 (3,735) (8) 22,928 Currency split The settlement currency for gross premiums written by the Kiln syndicates issplit approximately as follows: 2006 2005 US dollars 62% 60%GB pounds 33% 34%Canadian dollars 5% 6% 3. 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. Six months to Six months to Year to 30 June 2006 30 June 2005 31 December 2005 (unaudited) (unaudited) (audited) £'000 £'000 £'000 Gross written premiums 512,181 482,310 863,810 Net written premiums 385,863 397,201 703,384Change in the provision for unearned premiums: (64,037) (94,412) (54,802)Earned premiums, net of reinsurance 321,826 302,789 648,582 Investment return from underwriting assets 12,032 10,244 21,595 Claims incurred net of reinsurance (159,009) (148,587) (516,761) Net acquisition costs (89,008) (75,357) (166,991)Operating expenses (39,607) (27,519) (48,528)Net operating expenses (128,615) (102,876) (215,519) Profit/(loss) from underwriting operations 46,234 61,570 (62,103) Claims ratio (%) 49% 49% 80% Acquisition ratio (%) 27% 25% 26% Expense ratio (%) 12% 9% 7% Combined ratio % 88% 83% 113% Definitions Claims ratio Net incurred claims as a percentage of net earned premium Expense ratio Operating expenses as a percentage of net earned premium Acquisition ratio Net acquisition costs as a percentage of net earned premium Combined ratio Claims ratio plus expense and acquisition ratios Net earned premium Earned premium net of outwards reinsurance but gross of all policy acquisition costs Operating expenses have been adjusted to exclude the additional contributionsrelating to costs of the Enhanced Transfer Exercises described in Note 16. Theseexercises are not part of Kiln's ongoing business and the costs have thereforebeen excluded from expenses. Had they been included the expense ratio at thehalf year would have been higher by 3% (2005 full year: 1%). 4. Investment income Six months to Six months to Year to 30 June 2006 30 June 2005 31 December 2005 (unaudited) (unaudited) (audited) £'000 £'000 £'000 Interest on investments and cash 5,925 3,617 8,368Net fair value losses on investments from underwriting assets (1,425) (133) (846) Investment income from underwriting assets 4,500 3,484 7,522 Interest on investments and cash 5,148 2,705 6,257Dividends on unlisted investments - - 755Net fair value losses on investments from non-underwriting (954) (21) (909)assets Investment income from non-underwriting assets 4,194 2,684 6,103 Total investment income 8,694 6,168 13,625 An analysis of the investment income by investment type is shown below: Rate of return Six months to 30 Six months to Year to 31 Six months to Six months to Year to 31 June 2006 30 June 2005 December 2005 30 June 2006 30 June 2005 December 2005 (unaudited) (unaudited) (audited) (unaudited) (unaudited) (audited) % % % £'000 £'000 £'000 Syndicate 1.5 1.5 3.0 4,500 3,484 7,522investmentsFunds at Lloyd's:Fixed interest andcash 1.7 2.7 5.0 1,500 1,240 2,600Corporate 2.0 2.1 4.4 2,694 1,444 3,503investments Total investmentincome 1.6 1.6 3.7 8,694 6,168 13,625 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. 5. Other income Note Six months to Six months to Year to 30 June 2006 30 June 2005 31 December 2005 (unaudited) (unaudited) (audited) £'000 £'000 £'000 Gain on enhanced pension transfer value 16 3,061 - 3,167initiativesOther 73 37 99 Total other income 3,134 37 3,266 6. Operating and administrative expenses Six months to 30 Six months to 30 Year to June 2006 June 2005 31 December 2005 (unaudited) (unaudited) (audited) £'000 £'000 £'000 Net operating expenses 42,339 32,950 73,506Corporate and administrative expenses 11,023 15,182 25,570 Total expenses 53,362 48,132 99,076 Six months to 30 Six months to 30 Year to June 2006 June 2005 31 December 2005 (unaudited) (unaudited) (audited) £'000 £'000 £'000 Acquisition costs 52,487 44,457 82,614Movement in deferred acquisition costs (12,455) (12,902) (10,511)Expenses recovered from quota share reinsurers (7,096) (5,255) (11,579)Staff costs 8,161 7,707 14,642Performance related remuneration 365 4,175 3,958Profit commission 2 509 1,243Auditors remuneration 585 315 976Depreciation charge 403 376 659Amortisation charge 1,005 739 1,796Other administration expenses 9,905 8,011 15,278 Total expenses 53,362 48,132 99,076 7. Performance Related Remuneration (PRR) PRR comprises 1) 6.2% of total remuneration excluding PRR 2) an element ofprofit commission and 3) a Profit Related Bonus Element (PRBE). The thirdelement (PRBE) of the performance related remuneration pool is calculated as 20%of Kiln plc's Group profit before tax in excess of 10% of opening shareholders'equity. The PRR is recognised in the accounts over the employment period tovesting, with the first instalment charged in the current financial year. The amount charged for PRR in these financial statements is £365,000 (2005:£4,175,000) and comprises of two components being the contingent liabilitybrought forward now chargeable plus the PRR computed as described above andchargeable to the current period. As at the balance sheet date the contingent liability is £2,816,000 (2005:£6,282,000). For the purposes of PRBE, profit before tax is adjusted to exclude non-recurringincome and the foreign exchange impact of non-monetary items. Employee Co-investment Plan (COIP) If invited by the remuneration committee, selected staff can elect to allocatean element of their PRR to a matching share option scheme. Options over ordinaryshares in Kiln plc can be taken to a maximum of 10% of the overall PRR award foreach financial year. An offer in respect of the 2005 financial year was made inMarch 2006 of £154,271. The amount charged in this period is £15,427 (2005:nil). 8. Foreign exchange (losses)/gains Six months to 30 Six months to 30 Year to June 2006 June 2005 31 December 2005 (unaudited) (unaudited) (audited) £'000 £'000 £'000 Net gains/(losses) on forward exchange hedges 1,135 (1,293) (1,609)(Losses)/gains on retranslation of closing balancesheet monetary items (3,873) 7,591 9,199 Total foreign exchange (losses)/gains (2,738) 6,298 7,590 Exchange Rates 30 June 2006 30 June 2005 31 December 2005AverageUS dollar 1.80 1.87 1.82Canadian dollar 2.03 2.31 2.21 ClosingUS dollar 1.85 1.79 1.72Canadian dollar 2.06 2.20 2.01 9. Income tax expense Current year tax charge Six months to Six months to Year to 30 June 2006 30 June 2005 31 December 2005 (unaudited) (unaudited) (audited) £'000 £'000 £'000Current TaxUK corporation tax on profits of the period 8,350 7,999 11,730Adjustments in respect of prior periods 2,181 - 1,279 Total current tax 10,531 7,999 13,009 Deferred TaxOrigination / (reversal) of temporary differences (2,503) 3,084 (10,379) Total deferred tax (2,503) 3,084 (10,379) Income tax expense reported in consolidated incomestatement 8,028 11,083 2,630 Six months to Six months to Year to 30 June 2006 30 June 2005 31 December 2005 (unaudited) (unaudited) (audited) £'000 £'000 £'000Deferred TaxIncome tax expense reported in consolidated statementof recognised income and expenses (130) ( 4,086) (3,701) Factors that may affect future tax charge Tax losses of £6.7 million are 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. 10. Basic and diluted earnings per share Basic earnings per ordinary share has been calculated by dividing the profitafter taxation of £16,299,000 by 291,378,328, the weighted average number ofordinary shares in issue throughout the period. The dilutive effect of shareoptions represents 36,741 shares and therefore the diluted earnings per sharehas been calculated by dividing the profit after taxation by 291,415,069 shares. Six months to Six months to Year to 30 June 2006 30 June 2005 31 December 2005 (unaudited) (unaudited) (audited) £'000 £'000 £'000 Profit after tax attributable to ordinary equity holdersof Kiln Plc (Basic and Diluted EPS profit) 16,299 22,928 5,825 Reconciliation of denominators used in calculating Basic No. No. No.and Diluted Earnings Per Share Weighted average number of ordinary shares - Basic 291,378,328 203,965,084 203,965,084Earnings Per Share Weighted average of Rights Issue - - 8,861,069 Weighted average number of ordinary shares - Basic 291,378,328 203,965,084 212,826,153Earnings Per Share Dilutive effect of share options 36,741 29,576 38,848 Weighted average number of ordinary shares - Diluted 291,415,069 203,994,660 212,865,001Earnings Per Share Basic 5.59p 11.24p 2.74pDiluted 5.59p 11.24p 2.74p 11. Financial investments 30 June 2006 30 June 2005 31 December 2005 (unaudited) (unaudited) (audited) £'000 £'000 £'000At fair valueEquity securities: Unlisted 1,442 1,992 1,419Debt securities: Listed 283,834 196,915 262,492 Loan note 7,200 7,200 7,200 Government securities 25,036 - 9,035 Total financial investments at fair value through theincome statement 317,512 206,107 280,146 Derivative financial investments - 432 49 All derivative financial investments have been closed out by 30 June 2006. 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. As at 30 June 2006 Total Corporate investments Syndicate investments Funds at Other Lloyd's £'000 £'000 £'000 £'000 Debt securities and other fixed income securities 291,034 94,501 7,200 189,333Government securities 25,036 25,036 - -Unlisted investments 1,442 - 1,442 - Fair value at 30 June 2006 317,512 119,537 8,642 189,333 As at 30 June 2005 Total Corporate investments Syndicate investments Funds at Other Lloyd's £'000 £'000 £'000 £'000 Debt securities and other fixed income securities 204,115 49,510 7,200 147,405Government securities - - - -Unlisted investments 1,992 - 1,992 - Fair value at 30 June 2005 206,107 49,510 9,192 147,405 As at 31 December 2005 Total Corporate investments Syndicate 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 12. Return on Equity Six months to Six months to Year to 30 June 2006 30 June 2005 31 December 2005 (unaudited) (unaudited) (audited) £'000 £'000 £'000 Profit after tax 16,299 22,928 5,825Opening Shareholders' equity 215,758 136,682 136,682Annualised return on opening equity 15.1% 33.5% 4.3% Return on equity is calculated as the profit on ordinary activities after taxattributable to equity shareholders divided by opening shareholders' equity. 13. Consolidated statement of changes in equity Six months to Six months to Year to 30 June 2006 30 June 2005 31 December 2005 (unaudited) (unaudited) (audited) £'000 £'000 £'000 Balance at 1 January 215,758 136,682 136,682Total recognised income and expenses for the period 16,604 31,767 13,630Dividend (5,828) (4,895) (6,935)Rights issue (9) - 72,381 Closing shareholders' equity 226,525 163,554 215,758 14. Dividends Amounts recognised as distributions to equity shareholders in the period: Six months to Six months to Year to 30 June 2006 30 June 2005 31 December 2005 (unaudited) (unaudited) (audited) £'000 £'000 £'000 Final dividend for the year ended 31 December 2004 of 2.4p - 4,895 4,895Interim dividend for the year ended 31 December 2005 of - - 2,0401.0pFinal dividend for the year ended 31 December 2005 of 2.0p 5,828 - - 5,828 4,895 6,935 The interim dividend for the six months ended 30 June 2006 of 1.0p (£2,913,783)will be recognised in the 2006 year end financial statements. 15. Insurance contract assets and liabilities Insurance contract assets and liabilities may be analysed as follows 30 June 2006 30 June 2005 (unaudited) (unaudited) Insurance Reinsurance Net Insurance Reinsurance Net contract contract liabilities assets liabilities assets £'000 £'000 £'000 £'000 £'000 £'000 Provision for reported claims 254,933 (113,301) 141,632 186,787 (105,659) 81,128Provision for claims incurredbut not reported (IBNR) 122,240 (35,901) 86,339 79,478 (15,767) 63,711 Total claims reported andIBNR provision 377,173 (149,202) 227,971 266,265 (121,426) 144,839 Provision for unearned 213,247 (73,398) 139,849 166,750 (48,339) 118,411premiums Total insurance contracts 590,420 (222,600) 367,820 433,015 (169,765) 263,250liabilities 31 December 2005 (audited) Insurance Reinsurance Net contract assets liabilities £'000 £'000 £'000 Provision for reported claims 307,171 (155,168) 152,003Provision for claims incurred but not reported (IBNR) 150,979 (60,406) 90,573 Total claims reported and IBNR provision 458,150 (215,574) 242,576 Provision for unearned premiums 147,036 (35,443) 111,593 Total insurance contracts liabilities 605,186 (251,017) 354,169 The provision for claims reported by policy holders and claims incurred but notyet reported (IBNR) may be analysed as follows. Six months to 30 June 2006 Six months to 30 June 2005 (unaudited) (unaudited) Insurance Reinsurance Net Insurance Reinsurance Net contract contract liabilities assets liabilities assets £'000 £'000 £'000 £'000 £'000 £'000 At 1 January 458,150 (215,574) 242,576 279,782 (138,873) 140,909 Claims incurred in thecurrent year of account 23,032 (5,244) 17,788 22,138 (3,775) 18,363Movement on claims incurredin prior open years of account 52,669 (4,388) 48,281 33,290 (3,716) 29,574Claims paid during the period (134,380) 67,570 (66,810) (77,480) 28,311 (49,169)Foreign exchange adjustments (22,298) 8,434 (13,864) 8,535 (3,373) 5,162 At 30 June 377,173 (149,202) 227,971 266,265 (121,426) 144,839 Year to 31 December 2005 (audited) Insurance Reinsurance Net contract liabilities assets £'000 £'000 £'000 At 1 January 279,782 (138,873) 140,909 Claims incurred in the current year of account 267,189 (136,251) 130,938Movement on claims incurred in prior open years of account 63,570 (2,759) 60,811Claims paid during the year (183,175) 75,777 (107,398)Foreign exchange adjustments 30,784 (13,468) 17,316 At 31 December 458,150 (215,574) 242,576 The provision for unearned premiums may be analysed as follows. Six months to 30 June 2006 Six months to 30 June 2005 (unaudited) (unaudited) Insurance Reinsurance Net Insurance Reinsurance Net contract contract liabilities assets liabilities assets £'000 £'000 £'000 £'000 £'000 £'000 At 1 January 147,036 (35,443) 111,593 123,007 (36,485) 86,522 Premiums written in 230,815 (82,306) 148,509 195,069 (63,265) 131,804the periodPremiums earned (165,195) 43,950 (121,245) (151,259) 51,282 (99,977)during the periodForeign exchange 591 401 992 (67) 129 62adjustment At 30 June 213,247 (73,398) 139,849 166,750 (48,339) 118,411 Year to 31 December 2005 (audited) Insurance Reinsurance Net contract liabilities assets £'000 £'000 £'000 At 1 January 123,007 (36,485) 86,522 Premiums written in the year 353,024 (110,478) 242,546Premiums earned during the year (334,100) 112,531 (221,569)Foreign exchange adjustment 5,105 (1,011) 4,094 At 31 December 147,036 (35,443) 111,593 The gross and reinsurer's share of unearned premiums relate to the open years ofaccounts and are therefore all current. 16. Pension benefit obligation Summary of the Kiln Group pension scheme 30 June 2006 30 June 2005 31 December 2005 £'000 £'000 £'000 Fair value of assets 33,184 39,794 42,438Present value of obligations (35,687) (70,297) (62,424) Gross deficit in the scheme (2,503) (30,503) (19,986) Of which allocated to syndicates 2,093 25,295 16,716 Kiln Group share of syndicate deficit (923) (10,217) (6,703)R J Kiln share of deficit (410) (4,991) (3,270) Gross deficit attributable to the Kiln Group (1,333) (15,208) (9,973)Deferred tax credit 365 4,336 2,844 Net deficit attributable to the Kiln Group (968) (10,872) (7,129)Pension Trust asset 1,106 - 5,000 Balance 138 (10,872) (2,129) This balance equates to full coverage of the residual deficit fundingattributable to Kiln Group after the tax credit under the current actuarialassumptions. The Pension Trust is described below. Analysis of the amount recognised in the Income Statement Note 30 June 2006 30 June 2005 31 December 2005 £'000 £'000 £'000Enhanced Transfer Value InitiativesDistribution from pension scheme assets (17,809) - (7,656)Reduction in pension scheme liabilities 25,001 - 15,474Enhanced payments paid direct to members by (1,579) - (1,335)KilnNIC paid on cash to members (202) - (165) 100% impact 5,411 - 6,318 Kiln share Included in other income 5 3,061 - 3,167 Analysis of the amounts recognised in the Statement of Recognised Income andExpenses 30 June 2006 30 June 2005 31 December 2005 £'000 £'000 £'000 Gross actuarial gains/(losses) 435 (1,273) (2,692)Gross retirement benefit asset recognised - 14,198 14,198Deferred tax on above (130) (4,086) (3,701) Included in SORIE 305 8,839 7,805 Actuarial gains/(losses) which arose over the period have been recognisedimmediately in the Statement of Recognised Income and Expenses. Managed syndicates' balance sheets As from 1 January 2005, Kiln has allocated a proportion of the scheme deficit tothe managed syndicates' balance sheets as a result of which the Group hasrecognised an asset representing the right to recover a proportion of thedeficit from the third party members of the syndicates. This gives rise to anasset relating to amounts recoverable from the third parties' share of thesyndicate's deficit. The amounts as at 30 June 2006 and the calculationmethodology is shown below: 30 June 2006Relevant proportion of deficit allocated to Syndicates % Syndicate share Kiln group share of allocation £'000 Syndicate 308 2.658% 37 Syndicate 510 62.563% 737 Syndicate 557 5.759% - Syndicate 807 12.657% 149 83.637% 923R J Kiln share 16.363% 410 Total Kiln Group share of gross obligation 1,333Retirement benefit obligation recoverable from third 1,170parties Gross deficit in the scheme 100.00% 2,503 Reconciliation of reimbursement right asset £'000Closing reimbursement right asset at 31 December 2005 10,013Movement due to change in the Group's capacity ownership (670)Opening reimbursement right asset at 1 January 2006 9,343Net movement in the period (8,173)Closing reimbursement right asset at 30 June 2006 1,170 Principal 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: 30 June 2006 30 June 2005 31 December 2005 (per annum) (per annum) (per annum) % % %Financial assumptionsRate of increase in salaries 5.00 5.00 5.00Rate of increase of pensions in payment -benefits accrued prior to 1 May 1999: 5.00 5.00 5.00 -benefits accrued after 1 May 1999: 2.75 2.50 2.50Rate of revaluation of deferred pensions in excess of GMP 5.00 5.00 5.00Discount rate 5.25 5.10 4.80Inflation assumption 2.75 2.50 2.50 The Pension Trust The Pension Trust enables the company to fulfil its obligations to the scheme atthe same time as allowing it access to the funds if and when the scheme movesfrom a funding deficit to a surplus. Funding is made to and from the Trustperiodically. The level of this funding is determined by reference to theoverall net pension scheme deficit on the balance sheet. The Pension Trustreceived an initial funding of £5 million during 2005 with a release of £4million in 2006 to reflect the success of the Enhanced Transfer Value exercisesin reducing the overall deficit. 17. Cash generated from operating activities 30 June 2006 30 June 2005 31 December 2005 £'000 £'000 £'000 Net profit before taxation 24,327 34,011 8,455Adjustments for:Depreciation and amortisation charge including profit/(loss) onacquisitions and disposals 678 1,134 2,511Share of associated undertaking's result (353) (535) (1,058)Effect of exchange rate changes on cash and cash equivalents 2,774 (3,441) (5,826)Change in debtors (35,376) (62,304) (111,346)Change in creditors (1,330) 63,422 216,400Net purchases of investments (39,696) (17,748) (93,005)Fair value losses 2,379 154 1,755Interest receivable (11,136) (6,417) (15,380)Interest payable 363 340 680Tax paid (8,455) - (14,505)Net cash (used in)/from operating activities (65,825) 8,616 (11,319) 18. Events after the balance sheet date Share premium account On the 26 July 2006, the High Court approved the cancellation of the SharePremium account of Kiln Capital plc. Accordingly, £21.48 million has beentransferred to the distributable reserves of Kiln Capital plc on that date andhence to the distributable reserves available to the parent company. Banking facilities The board of Kiln plc approved new banking facilities of £80 million on 5September 2006. This facility, which is guaranteed by Kiln Capital plc and KilnUnderwriting Limited, is available to support underwriting at Lloyd's throughthe issuance of committed Letters of Credit up to a maximum of £80 million(2005: £50 million); up to £40 million of the facility is available as asub-limit (2005: £15 million) for working capital borrowings (Revolving CreditFacility). At the balance sheet date, Kiln has a £40 million Letter of Creditdeposited as Funds at Lloyd's and there have been no drawings of the RevolvingCredit Facility. INDEPENDENT REVIEW REPORT TO KILN PLC Introduction We have been instructed by the company to review the financial information forthe six months ended 30 June 2006 which comprises the Consolidated IncomeStatement, Consolidated Balance Sheet, Consolidated Cash Flow Statement,Consolidated Statement of Recognised Income and Expense, and the related notes 1to 18. We have read the other information contained in the interim report andconsidered whether it contains any apparent misstatements or materialinconsistencies with the financial information. This report is made solely to the company in accordance with guidance containedin Bulletin 1999/4 'Review of interim financial information' issued by theAuditing Practices Board. To the fullest extent permitted by law, we do notaccept or assume responsibility to anyone other than the company, for our work,for this report, or for the conclusions we have formed. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by, the directors. The directorsare responsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority which require that the accountingpolicies and presentation applied to the interim figures should be consistentwith those applied in preparing the preceding annual accounts except where anychanges, and the reasons for them, are disclosed. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4issued by the Auditing Practices Board. A review consists principally of makingenquiries of management and applying analytical procedures to the financialinformation and underlying financial data and based thereon, assessing whetherthe accounting policies and presentation have been consistently applied, unlessotherwise disclosed. A review excludes audit procedures such as tests ofcontrols and verification of assets, liabilities and transactions. It issubstantially less in scope than an audit performed in accordance withInternational Standards on Auditing (UK and Ireland) and therefore provides alower level of assurance than an audit. Accordingly we do not express an auditopinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 June 2006. Ernst & Young LLPLondon12 September 2006 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 This information is provided by RNS The company news service from the London Stock Exchange