RNS Number:9909Q
Benfield Group Limited
08 September 2005
8 September 2005
BENFIELD GROUP LIMITED
Interim Results for the Six Months to 30 June 2005
Benfield Group Limited ("Benfield" or "the Group"), the reinsurance and risk
intermediary, today announces its interim results for the six months ended 30
June 2005.
Financial Highlights
* Group operating revenue #196.2m (H1 2004: #204.9m(1)) - at constant
rates of exchange(2) operating revenue was down 1.8%.
* Group trading result (3) #82.0m (H1 2004: #95.5m(1)) - at constant
rates of exchange(2) the trading result decreased by 10.0%.
* Group trading margin(4) 41.8% (H1 2004: 46.6%(1)).
* Profit before tax #72.3m (H1 2004: #80.6m (1)) - profit before tax and
exceptional items #74.8m (H1 2004: #88.3m(1)).
* Basic earnings per share 20.0p (H1 2004: 21.5p(1)).
* Diluted earnings per share 17.8p (H1 2004: 19.5p(1)) - adjusted diluted
earnings per share(5) 18.5p (H1 2004: 21.5p).
* 11.0m shares (#28.8m) have been bought back by Benfield since September
2004.
* Interim dividend 3.5p per share (H1 2004: 3.5p).
Operational Highlights
* Significant new business wins in both US and International Divisions.
* Continued expansion in regions and sectors targeted for growth.
* Investment to capture opportunities in reinsurance broking proceeding as
planned.
* Corporate risk insurance broking start-up progressing well.
(1) 2004 comparatives have been restated to reflect the adoption of
International Financial Reporting Standards (IFRS) as described in note 3.
(2) Constant rates of exchange assume conversion of 2005 results at the exchange
rates achieved in 2004.
(3) Trading result comprises operating profit from continuing operations before
amortisation of intangible assets, depreciation of tangible fixed assets and
exceptional items (see note 4).
(4) Trading margin represents trading result as a percentage of operating
revenue.
(5) Adjusted for exceptional items.
Grahame Chilton, Chief Executive of Benfield, commented: "Last year we
recognised that the market upheaval following the regulatory investigations into
some of our competitors presented us with an exceptional opportunity to invest
for the future growth of the business. An entrepreneurial attitude combined with
a willingness to take a longer term view has been at the heart of Benfield's
successful development so far and I am confident that it will prove so again.
As previously highlighted, market dislocation had an adverse impact on our US
business in the first three months of 2005. However, since then we have seen a
steady improvement in new business flow which augurs well for the future.
Benfield's business model, founded on customer advocacy and transparency, is
proving increasingly attractive to insurance and reinsurance buyers seeking an
alternative approach.
Current market conditions remain challenging, but our strategy for further
strengthening reinsurance production and servicing capabilities and our new
venture in corporate risk insurance broking are both progressing well."
Results of Operations
H1 2005 H1 2004 Growth as Growth Constant
#m #m Reported Currency
--------- ------- -------- -------
-------
Operating revenue
International 115.9 121.3 -4.5% -2.6%
United States 78.4 80.7 -2.9% +0.5%
Corporate 1.9 2.9
--------- -------
Group
operating
revenue 196.2 204.9 -4.2% -1.8%
--------- -------
Trading result
International 52.9 62.6 -15.5% -11.8%
United States 36.6 41.1 -10.9% -7.0%
Corporate -7.5 -8.2
--------- -------
Group Trading
Result 82.0 95.5 -14.1% -10.0%
--------- -------
Trading margin
International 45.6% 51.6%
United States 46.7% 50.9%
Group trading
margin 41.8% 46.6%
Contacts:
Grahame Chilton, Chief Executive Benfield +44 (0) 20 7578 7000
John Whiter, Chief Financial Officer Benfield +44 (0) 20 7578 7000
Analysts & Investors
Julianne Jessup Benfield +44 (0) 20 7578 7425
Rob Bailhache Financial Dynamics +44 (0) 20 7269 7200
Media
David Bogg Benfield +44 (0) 20 7522 4016
Peter Rigby/David Haggie Haggie Financial +44 (0) 20 7417 8989
Benfield is the world's leading independent reinsurance intermediary and risk
advisory business. Its customers include most of the world's major insurance and
reinsurance companies as well as Government entities and global corporations.
Benfield employs over 1,800 people based in more than 30 locations worldwide.
The company is listed on the London Stock Exchange under the ticker symbol BFD.
For further information please go to www.benfieldgroup.com.
Operational Review
Changes in the competitive landscape for insurance and reinsurance are providing
strategic opportunities for Benfield to invest in its reinsurance production and
marketing capabilities, both in the US and International Divisions. Accordingly,
as previously announced, Benfield plans to make an investment of approximately
#12 million in people and infrastructure to capture opportunities arising out of
the current reinsurance market environment. The Group also plans to make a net
investment of approximately #8 million during 2005 in the development of a
corporate risk insurance broking business focused on the marine, energy, and
power sectors.
Both of these investment strategies are progressing well. As at 30 June 2005,
a substantial number of additional producers and other staff had been recruited
in selected areas of the core reinsurance business. As well as a continued
emphasis on areas already targeted for growth such as global casualty,
there has been a focus on strengthening capabilities in locations and specialist
sectors which offer attractive development prospects. The corporate risk insurance
broking operation is also making good progress in line with its business plan,
with dedicated offices now established in London, New York and Houston.
By the end of June 2005, significant progress had been made in attracting new
people to the team and the programme of carefully targeted recruitment continues.
As expected, the costs associated with these investments have had an adverse
effect on the interim results and will also impact the full year results. Net
operating expenses before exceptional items increased by 6.1% to #120.3 million
(H1 2004: #113.4 million). The investment in reinsurance recruitment and the net
investment in developing a corporate risk broking business will have a greater
impact in the second half of 2005. Excluding this investment of approximately
#20 million, Benfield continues to anticipate underlying expense growth of 6%
for the full year in 2005.
As previously stated, significant additional revenue generation is not
anticipated from these investments until 2006 and 2007. However, Benfield
remains confident that its carefully targeted expansion will significantly
enhance the Group's prospects over the medium term.
As previously announced, Rod Fox has returned from leave of absence to assist
John Lapsley and the management team in the development phase of the corporate
risk business. In addition, in order to concentrate fully on this new role, Rod
Fox has resigned from the Benfield Group Limited Board with effect from 8
September 2005.
The reinsurance market continues to soften, with pricing down between 5% and 10%
in non-loss affected major catastrophe areas and up to 20% in some regions. In
many sectors, however, declining reinsurance prices have yet to make inroads on
the current high levels of retention chosen by many cedants, making it a
challenging environment in which to generate short term growth. Nevertheless
there has been continued good progress in some of the areas targeted for
expansion in both the International and US divisions. The reported result for
the Group was again adversely affected by the strength of sterling against the
US dollar.
International Division
International revenue decreased by 4.5% to #115.9 million (H1 2004: #121.3
million), a decrease of 2.6% at constant rates of exchange. Net costs increased
by 7.3% to #63.0 million (H1 2004: #58.7 million) and the International trading
margin decreased from 51.6% to 45.6%.
International revenue for the first half of 2005 was adversely affected by a
change in renewal dates for certain accounts, which has shifted some expected
revenue into the second half of the year. The increase in expenses reflects the
cost of previous investments in new teams and individuals together with
additional recruitment as part of the overall growth strategy announced in June.
Areas previously targeted for investment, such as Continental Europe, Australia
and the Global Facultative business, again made good progress, while softening
market conditions made revenue growth across the division more difficult. Global
Specialty revenue continued to be adversely affected by high levels of retention
in the first half of 2005 although this decline had levelled off by the end of
the period.
Dominic Christian was appointed Chief Executive of the International Division in
July 2005. He had been head of the Global Speciality business since 1997 and
following his appointment to the Board in September 2004 he had been working
closely with David Spiller in the leadership of the International Division.
Market dislocation has had a favourable impact on Benfield's competitive
position, particularly in the UK. For example, Benfield recently won a major
UK-based account which had been put up for competitive tender for the first time
in twenty years. In Europe and some other regions such as Japan, demand for
catastrophe cover continues to increase, driven by more stringent regulatory and
rating agency capital requirements. Benfield continues to make targeted
investment in increasing capabilities in market sectors and territories where
further growth opportunities have been identified.
US Division
US revenue decreased by 2.9% to #78.4 million (H1 2004: #80.7 million). At
constant rates of exchange, revenue increased by 0.5%. Net costs increased by
5.6% to #41.8 million (H1 2004: #39.6 million). The US trading margin decreased
from 50.9% to 46.7%.
As previously disclosed, US revenue production in the first half of 2005 was
adversely affected by short-term market disruption resulting from the various
regulatory investigations of the insurance industry which commenced in October
2004. At the same time a combination of continued softening in rates and high
levels of retention in some market sectors also made revenue growth difficult to
achieve. However, as anticipated, the competitive climate appears to be moving
in Benfield's favour in the wake of the investigations.
During the first half of 2005, the US Division benefited from increased demand
for catastrophe cover in Florida following the hurricane losses in 2004. In
particular Benfield was appointed the lead broker on the principal catastrophe
reinsurance programme for Florida hurricane exposures. In line with the Groups
stated strategy, the US division continues to take advantage of market
disruption to make targeted investments in new teams and key individuals. For
example, Benfield has further invested in its US casualty capabilities to
enhance the production of new casualty business. Overall, towards the end of the
first half of 2005, the US Division saw more new business opportunities and also
achieved a higher success rate on these opportunities than in the same period of
2004.
In June 2005, Benfield announced the appointment of Paul Karon, formerly
President and Chief Operating Officer of Benfield Inc., as Chief Executive
Officer of the US Division. Paul had previously been Chief Operating Officer of
the Division.
While there remains a high degree of dislocation in the US reinsurance market,
the pipeline of new business opportunities has begun to recover and the US
Division has made a number of substantial new business wins. Moreover, the
stable revenue Benfield achieved on a constant currency basis reflects the
strength of the Group's business proposition given the sharp decreases in
reinsurance broking revenues reported across the industry.
Corporate Division
The Corporate Division result mainly reflects expenses that are incurred at head
office level in connection with the provision of central services. In addition,
the costs arising from the investment in the corporate risk insurance broking
business are included, although these were not significant in the first half of
the year. Overall, net costs decreased by #1.7 million to #9.4 million (H1 2004:
#11.1 million), reflecting the Group's ongoing commitment to managing expenses.
Dividend
The Board has declared an interim dividend of 3.5p (H1 2004: 3.5p) to be paid on
15 November 2005 to shareholders on the register on 14 October 2005.
Foreign Exchange
The Group's principal foreign currency exposure is to US dollars, arising from
the results of the US Division, and from revenues earned by the International
Division. Approximately 42% of the International Division's revenues were US
dollar denominated in the period. The Group results are sensitive to the impact
of movements in the US dollar/pounds sterling exchange rate, with a 1 cent
movement equating to approximately a #0.7m movement in trading result, prior to
the impact of any foreign exchange hedging activity.
For the six months ended 30 June 2005, the Group achieved a rate of US$1.84 (H1
2004: US$1.76) in respect of dollars earned in the UK. Income earned in the US
was translated at an average rate of US$1.88 (H1 2004: US$1.81).
Balance Sheet
Net assets increased by #35.6 million to #209.0 million as at 30 June 2005,
demonstrating the continued strength of the Group's balance sheet.
Share Buyback Programme and Employee Share Dealing Facility
In September 2004, Benfield announced the allocation of up to #40 million to a
share buyback programme over an 18 month period. To date #28.8 million has been
utilised to buy back 11.0 million shares.
The next employee and Director lock-up release will occur on 18 September 2005
and Benfield proposes to operate a Common Share Dealing Facility on 20 September
2005 to enable employees to sell their eligible shares on that date.
Outlook
Market dislocation following the regulatory upheavals of late 2004 remains very
much in evidence and Benfield expects this to continue for at least the next 12
months. It is too early to assess the full impact of Hurricane Katrina but the
substantial losses expected from this event are likely to encourage an upward
trend in insurance and reinsurance pricing. However, the current combination of
unprecedented changes in the industry with softening market conditions is a
challenging environment and as previously disclosed, Benfield expects revenue
for the full year to be flat in 2005 compared to 2004.
Benfield's unique market position as the leading independent reinsurance and
risk intermediary is founded on continuous investment based on a long-term
approach to the business. As previously stated, Benfield is prepared to incur
short-term impact on profit and margin to improve growth prospects. Accordingly,
given the planned #20 million investment in the business, reported trading
profit for the full year in 2005 is expected to be lower than in 2004. However,
Benfield is well positioned to exploit the many new business opportunities
which, as expected, are now emerging following the investigations instigated by
the New York Attorney General. The Group remains confident that this carefully
targeted expansion will significantly enhance the outlook over the medium term.
-------- -------
Notes 6 months to 30 6 months to 30
June 2005 June 2004
#'000 #'000
--------- ---------
Commission and
fees 192,523 201,063
Interest income 3,700 3,809
--------- ---------
Total revenue 4 196,223 204,872
Other operating income - 2,471
Operating expenses (116,728) (119,572)
Depreciation, amortisation and
impairment charges (6,028) (3,974)
--------- ---------
Operating profit 73,467 83,797
--------- ---------
Analysed as:
--------- ---------
Trading result 4 81,987 95,451
Depreciation, amortisation and
impairment charges (6,028) (3,974)
Exceptional items 5 (2,492) (7,680)
--------- ---------
Operating profit 73,467 83,797
Finance income 1,866 103
Finance costs (2,174) (2,322)
Share of losses of associated
undertakings (825) (985)
--------- ---------
Profit before taxation 72,334 80,593
Taxation 6 (27,419) (30,865)
--------- ---------
Profit for the
period 44,915 49,728
========= =========
Attributable to:
Equity holders of the Company 44,864 49,664
Minority interest 51 64
--------- ---------
44,915 49,728
========= =========
Earnings per 1p common share
Basic 8 20.01p 21.53p
Diluted 8 17.84p 19.47p
========= =========
-------- ------- -------
Notes At 30 June At 30 June At 31 December
2005 2004 2004
#'000 #'000 #'000
---------- ---------- ----------
ASSETS
Non-current assets
Goodwill 157,349 157,515 151,943
Intangible assets 5,784 5,898 6,318
Property, plant and
equipment 9,438 10,840 9,368
Investments in
associated undertakings 32 451 32
Available-for- sale financial
assets 24,411 3,504 19,663
Deferred tax assets 6,177 7,526 8,881
---------- ---------- ----------
203,191 185,734 196,205
---------- ---------- ----------
Current assets
Trade and other receivables 9 90,870 96,032 37,283
Available-for- sale financial
assets 14,495 11,239 16,030
Derivative financial
instruments 542 2,350 2,231
Current tax recoverable - 27 3,146
Cash and cash equivalents 59,219 146,924 84,668
---------- ---------- ----------
165,126 256,572 143,358
Fiduciary available-for-
sale financial assets 16,625 27,656 15,615
Fiduciary cash and cash
equivalents 242,899 219,636 141,590
---------- ---------- ----------
424,650 503,864 300,563
---------- ---------- ----------
LIABILITIES
Current liabilities
Trade and other payables 10 38,101 43,757 47,191
Insurance broking creditors 259,524 247,292 157,205
Borrowings 27,433 30,124 24,987
Current tax liabilities 42,265 41,933 31,735
Retirement benefit obligations 365 397 365
Provisions 11 1,112 7,590 1,462
---------- ---------- ----------
368,800 371,093 262,945
---------- ---------- ----------
Net current assets 55,850 132,771 37,618
---------- ---------- ----------
Non-current liabilities
Trade and other payables 10 3,480 1,215 2,877
Borrowings 39,559 66,658 53,121
Deferred tax liabilities 5,555 6,353 2,819
Provisions 11 1,447 2,556 1,646
---------- ---------- ----------
50,041 76,782 60,463
---------- ---------- ----------
Net assets 209,000 241,723 173,360
========== ========== ==========
SHAREHOLDERS' EQUITY
Share capital 2,343 2,429 2,355
Share premium 137,326 133,697 136,585
Treasury shares (10,264) (10,353) (10,284)
Fair value and other reserves 99,571 99,022 99,576
Exchange reserves 529 (918) (4,880)
Retained earnings (20,905) 17,564 (50,341)
---------- ---------- ----------
Total shareholders' equity 12 208,600 241,441 173,011
Minority interest in equity 400 282 349
---------- ---------- ----------
Total equity 209,000 241,723 173,360
========== ========== ==========
-------- --------
6 months to 30 6 months to 30
June 2005 June 2004
#'000 #'000
--------- ---------
Currency translation adjustments 5,409 (918)
Fair value losses on revaluation
of available for sale assets (29) (900)
--------- ---------
Net income/(expense) recognised
directly in equity 5,380 (1,818)
Profit for the period 44,915 49,728
--------- ---------
Total recognised income
for the period 50,295 47,910
========= =========
6 months to 30 June 2005 6 months to 30 June 2004
Corporate Fiduciary Corporate Fiduciary
cash cash Total cash cash Total
#'000 #'000 #'000 #'000 #'000 #'000
Cash flows
from operating
activities
Cash generated from
operations (note 13) 17,506 97,819 115,325 15,992 50,550 66,542
Interestreceived 3,700 - 3,700 3,809 - 3,809
Taxation paid (8,291) - (8,291) (7,299) - (7,299)
Net cash generated by
operating activities 12,915 97,819 110,734 12,502 50,550 63,052
Cash flows
from investing
activities
Acquisition of
subsidiaries,
net of cash acquired - - - (183) - (183)
Proceeds from
disposal of
subsidiaries - - - (539) - (539)
Purchases of
intangible assets (1,156) - (1,156) (772) - (772)
Purchases of
property,
plant and
equipment (1,586) - (1,586) (2,722) - (2,722)
Proceeds from
sale of property,
plant and equipment 26 - 26 214 - 214
Increase in
investments in
associates (925) - (925) - - -
Proceeds from
disposal of
associate 100 - 100 - - -
Purchases of
available for
sale financial assets (4,169) (1,009) (5,178) - - -
Proceeds from sale of
available-for-
sale financial assets 1,064 - 1,064 33,560 9,549 43,109
Dividends
received 1,866 - 1,866 103 - 103
Net cash (used
in)/generated
from investing
activities (4,780) (1,009) (5,789) 29,661 9,549 39,210
Cash flows
from financing
activities
Net proceeds
from issue of
common shares 749 - 749 412 - 412
Proceeds from
sale of own shares - - - 1,705 - 1,705
Repurchase of
common shares (6,356) - (6,356) - - -
Proceeds from
borrowings - - - 1,951 - 1,951
Repayments of
borrowings (13,306) - (13,306) (134) - (134)
Finance costs (2,140) - (2,140) (2,072) - (2,072)
Dividends paid
to Company's
shareholders (15,254) - (15,254) (13,689) - (13,689)
Net cash used
in financing
activities (36,307) - (36,307) (11,827) - (11,827)
Net increase
in cash and bank
overdrafts (28,172) 96,810 68,638 30,336 60,099 90,435
Cash and bank
overdrafts at
beginning of
period 84,668 141,590 226,258 117,038 163,546 280,584
Exchange
gains/(losses)
on cash and bank
overdrafts 2,723 4,499 7,222 (450) (4,009) (4,459)
Cash and bank
overdrafts at
end of period 59,219 242,899 302,118 146,924 219,636 366,560
1. BASIS OF PREPARATION
The unaudited results for the six months ended 30 June 2005 have been prepared
in accordance with the accounting policies that are expected to be used in the
Group's annual financial statements for the year ending 31 December 2005. These
accounting policies are based on International Financial Reporting Standards
(IFRS) issued by the International Accounting Standards Board (IASB) and as
adopted or expected to be adopted by the European Commission (EC) to be
effective for 2005 year ends. Due to the continuing work of the IASB and
possible amendments to the interpretive guidance, the Group's accounting
policies and consequently the information presented may change prior to the
publication of the Group's first annual financial statements under IFRS.
The Group has elected to apply policies based on the recently issued amendment
to IAS 19, which permits actuarial gains and losses to be recognised outside the
Income Statement in the Statement of Recognised Income and Expense. It is
expected that the amendment will be endorsed by the EC in time for adoption in
the Group's 2005 full year results.
The principal accounting policies adopted in preparing these financial
statements are set out in note 2.
The Company's consolidated financial statements were prepared in accordance with
UK Generally Accepted Accounting Principles (UK GAAP) until 31 December 2004.
Consequently certain accounting, valuation and presentational methods previously
applied under UK GAAP have been amended to comply with IFRS. The comparative
figures in respect of 2004 are restated to reflect these adjustments.
Reconciliations and descriptions of the effect of the transition from UK GAAP to
IFRS on the Group's results are provided in Note 3.
These consolidated interim financial accounts have been prepared under the
historic cost convention as modified by the revaluation of available-for-sale
investments and derivative financial instruments.
2. ACCOUNTING POLICIES
Basis of consolidation
The consolidated financial statements include the financial information of the
Company, its subsidiary undertakings and the Group's interests in associated
undertakings. The profits and losses of subsidiary undertakings and the Group's
interests in the results of associated undertakings are included from the
effective date of acquisition until the effective date of disposal.
An undertaking is regarded as a subsidiary undertaking if the Group has control
over its operating and financial policies, generally determined by the ownership
of more than 50% of the voting stock of the investee. Undertakings over which
the Group has the ability to exercise significant influence, generally
determined by ownership of between 20% and 50% of the voting stock of the
investee, are accounted for under the equity method of accounting as associated
undertakings.
Benfield Group Limited became the ultimate holding company of the Group under a
scheme of arrangement on 23 October 2002 pursuant to a court approved scheme of
arrangement (the "Scheme of Arrangement"). The Scheme of Arrangement has been
accounted for as a group reconstruction in accordance with the principles of
merger accounting.
IFRS 3 requires the purchase method of accounting to be adopted for all
subsidiary acquisitions. However, situations where the combining entities are
controlled by the same party or parties both before and after the combination
are outside the scope of IFRS 3 and there is no specific standard or
interpretation under IFRS on the accounting treatment for such arrangements. It
is therefore necessary for the directors to select the most appropriate policy
to apply to the arrangement.
Under the Scheme of Arrangement, a class of shareholder previously with limited
voting rights received common shares of 1p each in the Company with full voting
rights. In all other respects, the Scheme of Arrangement did not alter the
relative rights of each shareholder. This class of shareholder held
approximately 1% of the shares of Benfield Holdings Limited prior to the Scheme
of Arrangement and the conversion of these shares to common shares of 1p each
with voting rights did not materially change their rights or the relative rights
of the other shareholders. Consequently, the Directors considered that to record
the Scheme of Arrangement as an acquisition by the Company, to attribute fair
values to the assets and liabilities of Benfield Holdings Limited and to reflect
only the post Scheme of Arrangement consolidated results of the Group within
this consolidated financial information would fail to give a fair presentation
of the Group's consolidated results and financial position.
Accordingly, having regard to the overriding requirement of IAS 1 for the
consolidated financial statements to give a fair presentation of the Group's
results and financial position, the Directors adopted merger accounting
principles in respect of the Scheme of Arrangement in drawing up the financial
statements underlying these consolidated financial statements.
Except as stated above, business combinations have been accounted for by the
purchase method of accounting.
Commission and fees
The Group generates revenue principally from commissions and fees associated
with placing reinsurance contracts and programmes, which includes commissions
and fees arising from the provision of risk advisory and related services.
Revenues from commissions and fees relating to fixed or minimum premiums on
reinsurance contracts and programmes placed are recognised at the point at which
placement services are substantially complete. Revenues from commissions and
fees on adjustments to minimum premiums, binding authorities and treaties are
recognised on a periodic basis when the consideration due is confirmed by third
parties. Commission rebates payable to ceding companies are accrued, where
necessary, on an estimated basis, as the related brokerage revenue is
recognised. Fees for claims, risk advisory services and other services that are
billed separately are recognised as these services are rendered.
Where contractual obligations exist for the performance of post placement
activities and the cost of these activities is not expected to be covered by
future revenues, a relevant proportion of revenue received on placement is
deferred and recognised over the period during which these activities are
performed.
Interest income
Interest income is recognised as earned and includes interest earned on cash
flows arising from the settlement of insurance broking debtors and creditors. As
interest income forms an integral part of the Group's operating activities it is
included in operating revenue.
Lease commitments
The rentals payable under operating leases are charged on a straight-line basis
to the income statement over the period of the leases.
Where a leasehold property becomes surplus to the Group's foreseeable business
requirements, provision is made for the expected future net cost of the property
taking account of the duration of the lease and any recovery of cost achievable
from subletting.
Share-based compensation
The cost of awards to employees that take the form of shares or rights to shares
is measured by the fair value of the equity instrument awarded at the date of
grant, and is recognised in the income statement over the vesting period of the
award, with a corresponding increase in equity.
The fair value of share options awarded is calculated using option pricing
models excluding the impact of non-market performance conditions. Non-market
performance conditions are reflected in the assumptions of the number of options
expected to vest, which is revised at each balance sheet date.
Pension scheme contributions
Pension scheme contributions to the Group's money purchase schemes are charged
to the income statement in the period to which they relate.
Defined benefit plans operated by certain subsidiary undertakings at the date of
their acquisition have been wound up or are in the process of termination. Until
closure the expected costs of providing pensions under these schemes has been
calculated periodically by professionally qualified actuaries using valuations
based on the projected unit method. Any surplus or deficit determined by the
fair value of the assets of the plans and the present value of the defined
benefit obligations is recognised in the Group's balance sheet. Actuarial gains
and losses are recognised in full in the period in which they occur in the
Statement of Recognised Income and Expense.
Taxation
The charge for taxation is based on the result for the period at current rates
of tax and takes into account deferred tax.
Deferred tax is recognised in respect of all temporary differences between the
carrying value of assets and liabilities for reporting purposes and the amounts
charged or credited for tax purposes. Deferred tax is calculated at the rate of
tax expected to apply when the liability is settled or the asset is realised. A
deferred tax asset is only recognised to the extent that it is probable that
future taxable profits will be available against which the asset can be
utilised. Deferred liabilities are only offset against deferred tax assets
within the same taxable entity or qualifying local tax group where there is both
the legal right and the intention to settle on a net basis or to realise the
asset and settle the liability simultaneously.
Deferred tax is provided on temporary differences arising on investments in
subsidiaries and associates, except where the Group controls the timing of the
reversal of the temporary difference and it is probable that the temporary
difference will not reverse in the foreseeable future.
Dividend distribution
Equity dividends payable to the Company's shareholders are recognised as a
liability in the period in which the dividends are approved by the shareholders
for the final dividend or approved by the directors for the interim dividend.
Foreign currency translation
Items included in the financial statements of each of the Group's entities are
measured using the currency of the primary economic environment in which the
entity operates (the "functional currency").
Transactions in currencies other than the functional currency are recorded at
the rates of exchange prevailing at the date of the transaction. Monetary assets
and liabilities in currencies other than the functional currency are translated
at the rates of exchange prevailing at the balance sheet date and the related
translation gains and losses are reported in the consolidated income statement.
Non-monetary assets and liabilities carried at fair value that are denominated
in foreign currencies are translated at the rates prevailing when the fair value
was determined.
On consolidation, the results of overseas businesses are translated into pounds
sterling, the Company's functional and presentation currency, at the average
rates of exchange applicable to the relevant period. The assets and liabilities
of the overseas businesses are translated into pounds sterling at the exchange
rates ruling at the balance sheet date. Exchange differences arising on
translating the net assets or liabilities of overseas businesses and on the
translation of their results are recognised as a separate component of equity.
The cumulative translation differences are taken to the income statement on
disposal of the overseas business.
Goodwill and fair value adjustments arising on the acquisition of a foreign
operation are treated as assets and liabilities of the foreign entity and
translated at the closing rate.
Goodwill
When a business is acquired, fair values are attributed to its separately
identifiable assets and liabilities at the date of acquisition. Goodwill
represents the difference between the fair value of the purchase consideration
and the fair value of the separable net assets acquired.
For acquisitions prior to 1 January 1998, any goodwill arising has been written
off to reserves on consolidation. Following the adoption of IFRS this goodwill
remains written of to reserves and no adjustment will be made on subsequent
disposal. For acquisitions completed on or after the 1 January 1998 and before 1
January 2004, goodwill is stated on the balance sheet at its amortised net book
value. For acquisitions completed since 1st January 2004, goodwill is initially
recorded on the balance sheet at cost.
Goodwill is tested annually for impairment and is recorded net of accumulated
impairment losses. Goodwill is allocated to cash-generating units for the
purposes of impairment testing. Cash generating units represent the lowest level
of geographical and business segment combinations that the Group uses for
internal reporting purposes.
The gain or loss on disposal of an entity includes the carrying amount of any
goodwill relating to the entity sold.
Intangible Assets
Acquired software licenses are capitalised on the basis of costs incurred to
acquire and bring to use the specific software. These costs are amortised over
their estimated useful lives.
Costs associated with developing or maintaining computer software programmes are
recognised as an expense as incurred. Costs that are directly associated with
the production of identifiable and unique software products controlled by the
Group, that relate to the Group's long-term information technology
infrastructure on a continuing use basis, are recognised as intangible assets.
Direct costs include the software development employee costs and an appropriate
portion of relevant overheads. Computer software development costs recognised as
assets are amortised over their estimated useful lives (not exceeding three
years).
Property, plant and equipment
Property, plant and equipment assets are stated at cost less accumulated
depreciation. Depreciation is calculated so as to write off the cost of such
assets on a straight-line basis over their estimated useful lives at the
following annual rates:
Freehold property Up to 2%
Leasehold property 2% or over the life of the lease, if lower
Fixtures, fittings, furniture and equipment 20% to 25%
Computer hardware 20% to 50%
Motor vehicles 20%
Available-for-sale-financial assets
Available-for-sale financial assets, which included investments in listed and
unlisted securities, are included at fair value unless it is not possible, due
to their nature, to determine a fair value. In these circumstances they are held
at cost less provision for impairment. Any subsequent unrealised gains and
losses arising from changes in fair value are recognised in equity. When
available-for-sale investments are sold or impaired, the accumulated fair value
adjustments are recognised in the income statement as gains and losses.
Impairment of assets
Assets that have an indefinite useful life are not subject to amortisation and
are tested annually for impairment. Assets subject to amortisation or
depreciation are reviewed for impairment if events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable.
To the extent that the carrying amount exceeds the recoverable amount, which is
the higher of net realisable value and value in use, the asset is written down
to its recoverable amount. Net realisable value is the estimated amount at which
an asset can be disposed of, less any direct selling costs. Value in use is the
estimate of the discounted future cash flows generated from the asset's
continued use, including those resulting from its ultimate disposal. For the
purposes of assessing value in use, assets are grouped at the lowest levels for
which there are separately identifiable cash flows.
Employee share ownership trusts
The Benfield Employee Benefit Trust, the Benfield 1998 Employee Benefit Trust,
the Greig Fester Group Employee (Guernsey) Trust (1990) and the Greig Fester
Group 1993 Employee (Guernsey) Trust own equity shares in the Company. These
investments in the Company's own shares (Treasury shares) are held at cost and
are included as a deduction from shareholders' equity. Purchases, sales and
transfers of treasury shares are disclosed as changes in shareholders' equity.
The assets and liabilities of the trusts are included in the Group's
consolidated balance sheet.
Insurance broking assets and liabilities
Reinsurance brokers normally act as agents in placing the risks of insurance
companies with reinsurers and as such, generally are not liable as principals
for amounts arising from such transactions. Accordingly, receivables arising
from insurance broking transactions are not included within the assets and
liabilities of the Group except for fee and commission receivables earned on
these transactions.
Reinsurance intermediaries are entitled to retain the investment income on
fiduciary cash and investments arising from insurance broking transactions.
Consequently, these amounts are included under a separate heading within assets
on the balance sheet with the corresponding payable included as a liability.
Borrowings
Borrowings are classified as current liabilities unless the Group has an
unconditional right to defer settlement of the liability for at least 12 months
after the balance sheet date.
Preference shares, which are mandatorily redeemable on a specific date, are
classified as liabilities. The non-discretionary dividends on these preference
shares are recognised in the income statement as part of finance costs.
Provisions
A provision is recognised when there is a present obligation, whether legal or
constructive, as a result of a past event for which it is probable that a
transfer of economic benefits will be required to settle the obligation and a
reliable estimate can be made of the amount of the obligation.
Financial instruments
The Group uses derivative financial instruments to manage exposure to foreign
exchange risks. These include forward foreign exchange contracts and option
foreign exchange contracts, arranged in respect of forecast brokerage income.
These contracts are initially recognised at fair value on the balance sheet with
subsequent changes in the fair value recorded as they are incurred within the
income statement, unless the contract is designated and maintained in a hedge
relationship. Changes in the fair value of derivatives that are part of an
effective hedge relationship are recognised in hedging reserves, a component of
equity. Previously deferred gains and losses held in hedging reserves are
transferred to the income statement in the same periods during which the
forecasted transaction being hedged is recognised in the income statement.
Changes in the fair value arising from ineffectiveness in the hedge relationship
are recognised in the income statement in the period in which they arise.
When a hedging contract expires or is sold, or where a hedge no longer meets the
criteria for hedge accounting, the cumulative deferred gain or loss on the
instrument will remain in hedging reserves until the forecasted transaction is
recognised in the income statement. If the forecasted transaction is no longer
expected to occur, the cumulative deferred gain or loss is immediately
transferred from hedging reserves to the income statement.
Other derivative financial instruments are initially recognised at fair value on
the balance sheet with subsequent changes in the fair value recorded as they are
incurred within the income statement.
Critical accounting estimates and judgements
Preparation of the consolidated financial statements requires certain estimates
and assumptions to be made concerning future events that may affect the reported
amounts in the financial statements and accompanying notes. Estimates and
judgements are continually evaluated and are based on historical experience and
other factors, including expectations of future events that are believed to be
reasonable. Consequently, the actual results can differ from these estimates.
3. TRANSITION TO IFRS
Basis of transition to IFRS
The Group adopted IFRS on 1 January 2005, accordingly the Group's financial
statements for the year ended 31 December 2005 will be the first annual
financial statements to comply with IFRS. The Group has prepared its opening
IFRS balance sheet as at 1 January 2004, being the effective date of transition
to IFRS. These interim financial accounts have been prepared as described in
Note 1.
Transitional provisions for the first time adoption of IFRS are set out in IFRS
1, "First-time adoption of International Financial Reporting Standards". IFRS 1
allows companies adopting IFRS for the first time to apply certain exemptions
from the full retrospective application of IFRS. The relevant exemptions
available to the Group and its options selected are as follows:
a) Business combinations exemption
Business combinations that took place prior to the 1 January 2004 transition
date have not been restated and are included in the results at their book value
as at that date.
b) Cumulative translation differences
IAS 21, "The effects of changes in foreign exchange rates", requires translation
differences to be recorded in a separate exchange reserve rather than as part of
retained earnings as required by UK GAAP. IFRS 1 allows an exemption from
calculating the cumulative translation differences on the historical
retranslation of net assets of foreign subsidiaries. The Group has elected to
take advantage of this exemption and has set the foreign currency translation
reserve to zero as at the date of transition to IFRS.
c) Financial instruments
A first time adopter of IFRS is permitted to apply IAS 32, "Financial
Instruments: Disclosure and Presentation", and IAS 39, "Financial Instruments:
Recognition and Measurement", prospectively from 1 January 2005. However, the
Group has elected not to take this exemption, but has instead applied the
standards retrospectively to all periods presented so as to present the result
of each period on a consistent basis.
d) Employee benefits exemption
The Group has elected to recognise all cumulative actuarial gains and losses as
at 1 January 2004. The Group has also chosen the option available for subsequent
actuarial gains and losses to be recognised immediately in the Statement of
Recognised Income and Expenses.
e) Share-based payment transaction exemption
The Group has adopted IFRS 2, "Share-based payments", for all employee share
awards granted since 7 November 2002. As permitted under IFRS 2, no adjustment
is made for awards granted prior to that date.
Restatement summary
Net Income Equity
31 31
30 June December 1 January 30 June December
2004 2004 2004 2004 2004
#'000 #'000 #'000 #'000 #'000
As previously presented
under UK GAAP 72,173 54,744 197,561 239,403 183,280
Reversal of proposed
ordinary dividends payable - - 13,819 31,270 15,691
Revision of charge for
share-based payments (5,067) (8,269) - - -
Recognition of provision for
post-employment benefits on
a projected unit credit
method basis 29 59 (279) (263) (246)
Reversal of goodwill amortisation 4,356 8,670 - 4,359 8,418
Reclassificati on of
non-equity financial instruments (1,263) (2,526) (39,370) (39,433) (39,496)
Recognition of derivative
financial instruments at
fair values (20,465) (20,549) 22,111 1,645 1,562
Restatement of financial
assets to fair value - - 4,206 3,334 3,829
Deferred tax adjustments (35) (70) (70) 1,408 322
As reported under IFRS 49,728 32,059 197,978 241,723 173,360
Recognition of dividends (IAS 10)
Under UK GAAP, proposed dividends in respect of an accounting period are
recognised as a liability at the balance sheet date. Under IAS 10, "Events after
the balance sheet date", dividends proposed are only recognised as a liability
when the shareholders have approved their distribution, or for the interim
dividend, when approved by the board.
The final dividend proposed at 31 December 2003 has been reversed in the opening
balance sheet and recognised in the year ended 31 December 2004. Similarly, the
interim and special dividends proposed at 30 June 2004 and the final dividend
proposed at 31 December 2004 have been reversed and recognised in the subsequent
periods.
Share-based payments (IFRS 2)
Under UK GAAP, the cost of awards to employees in the form of shares or rights
to shares was charged over the period to which the employee's performance
related. The charge was based on the intrinsic value, being the fair value of
the shares at the date of grant, reduced by any consideration payable by the
employee. IFRS 2, "Share based payments", requires the cost to be measured by
the fair value of the equity instrument awarded at the date of grant, and is
recognised over the vesting period of the award.
Application of IFRS 2 results in an additional pre-tax charge in the income
statement of #6,580,000 and #8,732,000 and deferred tax credit of #1,513,000 and
#463,000 for the six months ended 30 June 2004 and year ended 31 December 2004
respectively.
These charges include an adjustment for awards made under the 2002 Incentive
Plan to certain key employees in respect of services provided prior to the
Company's Initial Public Offering. In accordance with UK GAAP the charge for
these awards was recognised in full at the date of grant, as they relate to
prior services and have no performance criteria, resulting in an exceptional
item operating expense of #22,432,000. Under IFRS, the fair value of these
awards is being spread over the 12 to 36 month vesting period from the date of
grant resulting in a pre-tax charge of #5,871,000 and #8,542,000 for the six
months ended 30 June 2004 and the year ended 31 December 2004 respectively.
These charges are classified as exceptional as they are considered material and
in relation to a non-recurring event.
Employee benefits (IAS 19)
The Group has operated only one defined benefit arrangement since the transition
date and this scheme was closed to further accrual of benefits in December 2001.
Under UK GAAP the Group followed the transitional rules of FRS 17, "Retirement
benefits", whereby only disclosure of the net defined benefit scheme pension
deficit was required, along with disclosure of the changes in the net deficit
that would be taken through the income statement. IAS 19, "Employee Benefits",
requires any surplus or deficit to be recognised on the balance sheet with
changes in the net surplus/deficit being charged to the income statement.
On transition the deficit disclosed under FRS17 has been recognised in the
balance sheet resulting in a reduction in net assets of #279,000.
Goodwill amortisation (IFRS 3)
Under UK GAAP, goodwill was capitalised and amortised over its estimated useful
economic life. Under IFRS 3,"Business combinations", goodwill is no longer
amortised but instead tested for impairment on an annual basis. In accordance
with the transition exemption noted above, goodwill has been frozen at its
carrying value as at 1 January 2004 and the amortisation previously charged
under UK GAAP since that date has been reversed.
The amortisation of goodwill arising under UK GAAP totalling #4,359,000 and
#8,418,000 for six months ended 30 June 2004 and year ended 31 December 2004
respectively has therefore been reversed on transition to IFRS.
Financial instruments (IAS 32 & IAS 39)
The Group has elected to adopt IAS 32, "Financial Instruments: Disclosure and
Presentation", and IAS 39, "Financial Instruments: Recognition and Measurement"
retrospectively from the date of transition.
Non-equity financial instruments
Under IAS 32, preference shares that are not redeemable or that are redeemable
solely at the option of the issuer, are classified as equity. Where the terms of
issuance require the issuer to redeem preference shares for a fixed or
determinable amount at a fixed or determinable future date, or where the holder
has the option of redemption, these shares are classified as liabilities and the
dividends paid on these shares classified as a finance cost.
On transition #39,370,000 has been reclassified as a financial liability and
deducted from shareholders funds in relation to the Company's Cumulative
Redeemable Convertible Preference Shares ("CRCPs"). Within the income statement,
CRCP dividends totalling #1,263,000 and #2,526,000 for the six months to 30 June
2004 and the year to 31 December 2004 respectively have been reclassified from
dividends to finance costs.
Derivative and hedge accounting
IAS 39 requires all derivative financial instruments to be recorded at fair
market value with changes taken to the income statement. There was no such
requirement under UK GAAP and consequently derivative financial instruments were
accounted for as cash flows arising from these instruments occured.
If certain criteria are met, financial instruments may be designated as part of
a cash flow hedge relationship. As a result of this treatment, changes in the
fair value of the financial instrument can be deferred to equity until the
hedged transaction occurs. There were no designated hedge relationships during
the periods presented.
The fair value of derivative instruments on the date of transition including the
associated deferred tax was #22,111,000 representing an increase in equity at
that date. Included within that balance was #19,678,000 in respect of Montpelier
Re Holdings Limited warrants which were sold in February 2004. Under UK GAAP,
the increase in fair value of the warrants was recognised in full at the time of
disposal resulting in an exceptional gain of #29,105,000. The application of
IAS 39 results in the recognition of part of the increase in fair value in prior
periods. Consequently, for the year ended 31 December 2004 this gain was reduced
by #28,111,000.
Valuation of financial assets
Under UK GAAP, fixed asset investments are stated at cost less provisions for
impairment. Current assets investments are stated at lower of cost and directors
estimated valuation or market value, if listed. IAS 39 requires all financial
instruments to be accounted for at either fair value or amortised cost depending
on their classification.
All investments of the Group during the periods presented have been classified
as 'Available-for-sale' and as such are measured at fair value, when this can be
determined, with changes that value being recognised in equity. This has
resulted in an increase in equity of #4,206,000, #3,334,000 and #3,829,000 at 1
January 2004, 30 June 2004 and 31 December 2004 respectively. Available for sale
financial assets continue to be stated at cost less any provision for impairment
when fair value can not be determined.
Reclassification of software costs (IAS 36)
Under UK GAAP, software was classified as tangible fixed assets. Under IAS 36,
"Fixed assets other than acquired goodwill and investments", where software is
not an integral part of related hardware, computer software costs should be
capitalised as an intangible.
Accordingly, computer software and capitalised software development costs have
been reclassified from property, plant and equipment to intangibles. The net
book value of these assets was #6,176,000, #5,898,000 and #6,318,000 at 1
January 2004, 30 June 2004 and 31 December 2004 respectively. Within the income
statement, depreciation on these assets of #1,853,000 and #3,712,000 for the six
months to 30 June 2004 and the year to 31 December 2004 respectively, have been
reclassified as amortisation. There is no impact on net income or net assets as
a result of this reclassification.
De-recognition of insurance broking debtors (IAS 32 & IAS 39)
Reinsurance brokers normally act as agents in placing the risks of insurance
companies with reinsurers and as such, generally are not liable as principals
for amounts arising from such transactions. Notwithstanding such legal
relationships, receivables, payables and fiduciary cash arising from insurance
broking transactions were previously included within the assets and liabilities
of the Group.
Under IFRS, a financial asset should not be recognised when an obligation to
transfer the cash flows arising from the asset is assumed and substantially all
risks and rewards are transferred. There is an obligation on the group to
transfer cash flows arising from insurance broking debtors in respect of
premiums and claims. Furthermore, the risk and rewards in respect of these
assets does not lie with the Group, which has no obligation to pay these amounts
until the cash is received. Consequently, other than amounts due as commissions
and fees, insurance broking debtors are no longer recognised in the balance
sheet.
Reinsurance intermediaries are entitled to retain the investment income on
fiduciary cash and investments arising from insurance broking transactions.
Consequently, these amounts are included under a separate heading within assets
on the balance sheet with the corresponding payable included as a liability.
On transition, #3,742,087,000 of insurance debtors has been de-recognised along
with the corresponding balance represented by insurance creditors. There is no
impact on net income or net assets as a result of this de-recognition.
Changes to cash flow statement (IAS 7)
The adoption of IFRS does not affect the Group's underlying cash flows. However
the presentation of the cash flow statement differs from that required under UK
GAAP. IFRS requires the cash flows of the Group to be analysed between operating
activities, investing activities and financing activities.
Following the de-recognition of insurance broking debtors, the Group has decided
to separately disclose fiduciary cash and financial assets from its own
("Corporate") assets on the balance sheet. In addition, a columnar presentation
has been adopted for the cash flow statement in order that the impact of
movements in insurance broking
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