Chubb Insurance Company of Europe SE. Annual report and financial statements for the year ended 31 December 2012

Transcription

1 Chubb Insurance Company of Europe SE Annual report and financial statements for the year ended 31 December 2012

2 Company information Members of the Administrative Organ Directors M Casella, Chief Executive J Degnan C Giles, Chairman P Haywood I Hutchinson K O Shiel R Spiro B Van Der Vossen S Wood Secretary R Munro Registered number SE13 Registered office 106 Fenchurch Street London EC3M 5NB United Kingdom Website Chubb Group of Insurance Companies Chubb Insurance Company of Europe SE ( CICE, company, we, us, our ) is an indirect, wholly-owned subsidiary of The Chubb Corporation and a member of the Chubb Group of Insurance Companies ( Chubb ). The Chubb Group of Insurance Companies is the marketing term used to describe several separately incorporated insurance companies under the common ownership of The Chubb Corporation. The Chubb Corporation is listed on the New York Stock Exchange [NYSE: CB] and, together with its subsidiaries, employs approximately 10,000 people throughout North America, Europe, Latin America, Asia and Australia. For more information regarding The Chubb Corporation, including a listing of the insurers in the Chubb Group of Insurance Companies, visit Forward-looking information Some of the statements in this report may be considered forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995 (PSLRA). These forward-looking statements are made pursuant to the safe harbour provisions of the PSLRA and include statements regarding CICE s ability to manage its business through the expected economic environment; our approach to getting adequate rates; the expansion of our Consumer and Personal Lines businesses; our ability to develop specialised products; our ability to reach producers across Europe and our ability to meet the challenges ahead of us. Such statements speak only as of the date of this report and are not guarantees of future performance. Various risks and uncertainties may cause actual results to differ materially. These risks and uncertainties include those discussed in the filings that The Chubb Corporation makes with the U.S. Securities and Exchange Commission. Neither the company nor The Chubb Corporation assumes any obligations to update such forward-looking statements.

3 Contents 01 Highlights summary 02 Chief Executive s statement 04 Business review 09 Directors report 15 Independent auditor s report 17 Profit and loss account 19 Statement of total recognised gains and losses 20 Balance sheet 22 Notes to the financial statements 63 Branch details

4 Highlights summary Reported another year of profitability with a profit before tax of 67.8m which includes a one-off charge of 30 million for a change in the deferred acquisition cost estimation methodology and 44 million of lower favourable prior period development than in Continued recognition as a leading insurance company as evidenced by independent research, awards and accolades. Maintained strong financial strength ratings. Key performance indicators Net premiums written 590.1m 610.9m Net loss ratio % 53.4% Net expense ratio % 35.9% Net combined ratio 98.2% 89.3% Profit before tax 67.8m 164.0m Total assets 2,893.2m 2,991.8m Shareholders funds 933.4m 982.6m 1 Based on net claims incurred as a percentage of net earned premiums 2 Based on net operating expenses incurred (excluding deferred acquisition costs) as a percentage of net written premiums 01

5 Chief Executive s statement Statement by Michael Casella, President & Chief Executive Officer of Chubb Insurance Company of Europe SE I am pleased to report on CICE s results for 2012 and to provide an overview of our plans for CICE 2012 Performance In 2012 CICE achieved a profit before tax of 67.8m (2011: 164.0m) and a net combined ratio of 98.2% (2011: 89.3%). These are solid results when viewed in the context of a significant one-off charge relating to the deferred policy acquisition costs and the trends impacting the European insurance sector. Our shareholders funds of 933.4m (2011: 982.6m) and our financial strength ratings are further evidence of our strong financial position. In terms of the European insurance sector trends, less favourable prior year development in 2012 compared to previous years impacted industry profitability results. Furthermore, the economic uncertainty in the Eurozone and historically low interest rates were contributing factors affecting insurance sector margins in While 2012 was certainly a challenging year, CICE managed these issues with professionalism and adherence to our tried and trusted business model. As discussed below, we believe that the underlying positive dynamics of both our new business and renewal portfolios leave us well positioned to move forward. The Euro s weakness against the Pound in 2012 was a key factor in explaining the reduction in our 2012 net premium to 590.1m (2011: 610.9m). Excluding currency fluctuation, the 2012 net premium was broadly flat compared to the previous year. Underwriting discipline has continued to define our culture as we were focused on bottom line profitability rather than growth for growth s sake. Obtaining rate is fundamentally important to enhancing margin so it was encouraging to see the nascent upward movement on rate in 2012, albeit in the low single digits and in limited areas. I would highlight here our continued product specialisation as an additional lever to enhance our profitability. An historic strength of Chubb, product specialisation not only provides our customers with superior coverage in our chosen niches but gives us the flexibility to select and underwrite the high quality accounts from a risk profile basis. Our Commercial and Specialty businesses improved their specialised product offerings in 2012 to enhance both our reputation and ultimately our margin. Our mission to diversify our Accident & Health (A&H) portfolio was ahead of schedule with growth in our initiative to access individual A&H consumers through sponsoring organisations and affinity groups. There was further success for A&H in 2012 as the team was a double award winner at the Post Magazine Underwriting Service Awards; a fitting tribute to our expertise and service delivery. Similarly, our Personal Lines business was once again voted the Number One for Service in independent research conducted amongst brokers in Strong premium growth, product enhancements and continued independent recognition as a leading insurer in the United Kingdom all led to a very good year for our Personal Lines business. 02

6 Chief Executive s Statement We have made very good progress in driving efficiency through the business, not just in 2012 but over the past few years. We have standardised processing across many of our product lines and are making effective use of our cored facilities and service centres. Such activity ultimately means cost savings. These savings have allowed us to reinvest in the European business. Finally, I would like to acknowledge the work undertaken by many teams at CICE in 2012 on the preparation for Solvency II. Although much work remains, CICE s solid capital base and diversified premium portfolio mean we are confident in our preparedness for the implementation of Solvency II. CICE in 2013 We will continue to provide the broad coverage, claims handling and service which our customers expect from Chubb. The Chubb value proposition continues to differentiate us from the market whether it is the quality and breadth of our policy coverages or the fairness employed to manage our customers claims. We have made excellent progress in aligning our value proposition to the different needs of our customers but the fundamental principles of the Chubb difference will remain the same for all. Risk selection, pricing and terms & conditions are more critical now than ever before. We will seek rate increases on those accounts where changes in the risk profile, exposure and loss history require us to do so. We analyse our portfolio so that we can make informed decisions on rate adequacy by industry segment and per account. CICE s best possible preparatory efforts for the ever changing market conditions are to make resource choices based on facts and building the most efficient processes possible. In this regard, there will be continued focus on our Consumer and Personal Lines businesses so that they can build on their success. Our Commercial and Specialty businesses will concentrate their attention on further product specialisation within their chosen customer and industry segments. Furthermore, we are making solid progress in assessing the technology options for managing our small business portfolio. We are seeing growth with the independent brokers across Europe which is in part due to our efforts to close the last mile to the independent broker by investing in our distributed workforce outside of the large cities, where we were previously underrepresented. We will continue in this effort so that we are in the best possible position to support the different needs of our customers and brokers going forward. Conclusion In 2012 CICE remained true to what makes us industry leaders: underwriting and claims expertise underpinned by outstanding service. The quality of our staff makes this possible. Their talent is clearly evidenced in the awards and accolades we continue to win across Europe. We have an exceptionally strong brand which is apparent across our entire European business. I would like to take this opportunity to thank our staff for their contributions to our achievements. I have every confidence that 2013 will be another successful year for CICE. Michael Casella Member of the Administrative Organ Chief Executive 14 March

7 Business review Overview CICE produced a profit before tax for the year of 67.8m (2011: 164.0m) and at the end of the year reported shareholders funds of 933.4m (2011: 982.6m) after paying dividends of 65.0m during Underwriting performance CICE s insurance operations are managed in three strategic business units, namely Chubb Commercial Insurance, Chubb Specialty Insurance and Chubb Personal Insurance. Chubb Commercial Insurance provides property, casualty and marine insurance for businesses, tailored to meet the needs of specific industries. It also provides innovative products in niche areas such as environmental, life sciences and event cancellation insurance. Chubb Specialty Insurance underwrites a broad range of liability insurance including Errors & Omissions Liability (E&O), Directors & Officers Liability (D&O), Crime insurance and Employment Practice Liability. Coverage is designed to meet the demands of a wide range of industries. Chubb Personal Insurance consists of two sub-groups, Personal Lines and Accident & Health. Chubb s Personal Lines, operating from the UK, is a leading insurer of high net worth and ultra high net worth individuals and families with significant assets to protect and who demand superior coverage and service. Chubb Accident & Health primarily offers general accident policies to organisations that cover their employees in the event of an accident. In 2010 we began expanding our capabilities to access individual A&H consumers through sponsoring organisations and affinity groups. In doing so we not only work with a sponsor, but also a number of well-regarded marketing firms and third party administrators that complement our infrastructure and skill set. A key performance indicator for insurance business is the combined ratio, which compares the cost of losses and expenses to premiums for the year. A reduction in the combined ratio therefore represents an improvement in underwriting profitability while an increase represents a deterioration. The graph below shows the company s net combined ratios with their loss and expense components over the last 5 years. The increase in net combined ratio in 2012 is primarily driven by 44 million of lower favourable prior period development than in

8 Business Review Net combined ratio % 84.1% 84% 89.3% 98.2% % 53.4% 50.7% 49.1% 60.2% % 33.4% 34.9% 35.9% 38.0% Net combined ratio Net loss ratio 2 Net expense ratio figures represent the merged results of Chubb Insurance Company of Europe SA and Chubb Insurance Company of Europe plc, the companies that merged to form Chubb Insurance Company of Europe SE. 2 Based on net claims incurred as a percentage of net earned premiums 3 Based on net operating expenses incurred (excluding deferred acquisition costs) as a percentage of net written premiums 05

9 Business Review Results by insurance class The company s gross premium written and net underwriting result analysed by the accounting classes defined by UK companies legislation are shown in the table below. Direct insurance: Gross Net Gross Net premium underwriting premium underwriting written result written result Accident and health 79,760 1,425 81,367 (3,484) Motor (third-party liability) 4,983 2,937 5,747 (4,179) Motor (other classes) 20,384 (2,896) 20,516 2,372 Marine, aviation and transport 20,539 4,636 22, Fire & other damage to property 154,005 (9,651) 160,875 (13,046) Third-party liability 332,918 2, ,254 97,608 Credit and suretyship 1, ,556 1,746 Assistance 1, , Miscellaneous 73,583 (19,949) 90,604 (4,760) 688,311 (19,757) 726,505 77,734 Reinsurance acceptances 11,723 4,215 11,624 (1,682) 700,034 (15,542) 738,129 76,052 The net underwriting result, before investment income, equalisation provision and other charges, as shown on the General Business Technical Account, was a loss of 15.5m (2011: profit of 76.0m). The 2012 underwriting result was impacted by a 30.2m oneoff charge arising from a change in the methodology for calculating deferred acquisition costs. The underlying business was profitable but profit margins remained under pressure during a period of continued sluggish economic recovery in Europe. Gross written premiums by strategic business unit Total reported gross premiums decreased by 5.2% in the year (2011: decrease of 5.0%). Excluding the effect of currency translation, gross premiums decreased by 3.0%. Our Commercial and Specialty businesses in Europe pressed hard in those areas where rate improvements were needed and targeted poor performing sections of the portfolio for re-underwriting. This has yielded success in some areas where the market was beginning to respond, but we also recognised that the discipline we employed in the underwriting process may lead to certain business not being retained. 06

10 Business Review The growth of new business has also been limited as we emphasised the underlying quality and profitability of our existing portfolio over the achievement of growth. Personal Lines demonstrated improved profitability while also achieving strong growth. We generated these results despite challenges posed by the weak economy and increased competition in the high net worth arena. Results for Chubb Accident & Health business were impacted by growth in our initiative to access individual A&H consumers through sponsoring organisations and affinity groups offset by changes that arose from underwriting evaluations of the business we wrote in the more established Group Accident & Health book. Claims and prior year reserve movements Net claims incurred for 2012 were 361.6m (2011: 340.7m). The company s insurance portfolio is well diversified and is not significantly exposed to non-european catastrophe events. Estimates of claims outstanding are subject to the outcome of future events. Consequently, changes in estimates are unavoidable given that loss trends vary and time is required for changes in trends to be recognized and confirmed. During 2012, the company experienced overall favourable development of 27.0m on net claims outstanding established as at the previous year end. This compares with favourable development of 71.4m in This year s favourable development was principally in our Directors & Officers and General Liability business within the third-party liability statutory class. Reinsurance Reinsurance is purchased in support of our underwriting strategy to minimise the impact of very large losses and catastrophes. In 2012, total reinsurance costs represented 15.7% of gross premiums (2011: 17.2%). The cost reduction in 2012 was driven by our decision to purchase less insured-specific reinsurance coverage such as captive and facultative covers. The underlying cost of our treaty protection remained flat for 2012 and 2011 at just over 9% of gross premiums. Results by geographical region Our portfolio of business is well balanced across the main geographical regions in which we operate in Europe, with all regions contributing to the profitability of the company. Profit before tax United Kingdom & Ireland 37,535 97,691 Southern Europe 27,160 53,171 Northern Europe 3,057 13,164 67, ,026 07

11 Business Review Investments Total investments at 31 December 2012 were 2,376.3m (2011: 2,413.9m). A total of 2,180.3m (2011: 2,265.4m) of the portfolio was invested in fixed income government and corporate securities of which 95% (2011: 96%) were rated AA or better as at 31 December Within the investment portfolio, 2.9% (2011: 3.5%) was held in private equity limited partnership schemes. The investment portfolio is managed to mitigate currency and liquidity risk by generally maintaining investments in those currencies in which the company has loss reserves and other liabilities at the appropriate level of liquidity. The reduction in the investment portfolio was due primarily to dividends paid to the company s parent during the year of 65.0m. The investment income for the year was 108.3m (2011: 85.6m). While underlying interest income is lower, the total investment return in the profit and loss account in 2012 was higher than 2011 due to significant realised gains from both the bond portfolio and the equity limited partnership schemes. Our investment management objectives continue to be to generate a stable investment income stream from a conservative investment base with sufficient liquidity to meet the ongoing obligations of the insurance operations. Expenses The ratio of expenses to premiums written for the company was 38.0% (2011: 35.9%). The increase over the 2011 ratio arose primarily through growth in Personal Lines and Accident & Health which are subject to higher commission rates. Capital strength The company is required by the United Kingdom s Financial Services Authority (FSA) to undertake an Individual Capital Assessment (ICA), which is a risk based determination of the capital required to meet all of its financial liabilities with a confidence level of 99.5%. Our Risk and Compliance team uses a toolset for identifying and assessing operational risks which is embedded in all teams across our European operations. This risk quantification process operates alongside stochastic modelling to generate a comprehensive financial analysis of the impact our insurance business has on capital requirements. As in past years, the company has determined that its available capital exceeded the ICA model requirement and was also sufficient to support our current financial strength ratings. The company continues preparation for the forthcoming Solvency II capital adequacy regime. 08

12 Directors report of Chubb Insurance Company of Europe SE The directors present their report and financial statements for the year ended 31 December Principal activity The principal activity of the company is the underwriting of specialist lines of general insurance. The company is an indirect, wholly-owned subsidiary of The Chubb Corporation. Results and dividends Results The company produced a profit on ordinary activities before tax of 67.8m for the year ended 31 December 2012 (2011: 164.0m). A review of the company s results and key performance indicators are provided in the Highlights summary, Chief Executive s statement and Business review. Dividends The company paid dividends during the year of 65.0m which represented payment of the dividends recommended as a final dividend for the previous year. For 2012, the directors recommend a final dividend of 40.0m. Risk and capital management Risk management The management of the company s risks is governed by the risk management policy of the board of directors, which sets out responsibility and accountability for risk management within the company. In line with Chubb s enterprise risk management programme, the company has a defined appetite or tolerance in relation to key areas of risk. The company s risk management framework embeds within the business a consistent approach to the identification, assessment, mitigation, monitoring and reporting of risk. The framework encompasses all of the significant classes of identified risk to which the company is exposed, namely insurance, operational, credit, market, liquidity and group risk. Through the framework each of the specific risks faced by the company is allocated to one or more individuals within our organisation for management. These individuals are responsible for ensuring the appropriate controls are in place to keep the risk within the defined appetite or tolerance thresholds. The risk management framework is designed to be a reliable source of risk quantification data to support the company s assessment of its capital resource requirements. 09

13 Directors report of Chubb Insurance Company of Europe SE Capital management The company is committed to ensuring it maintains prudent levels of capital resources to support the business operations and initiatives and the risks which arise from them. These resources provide protection for policyholders, and other interested parties. Policyholders, reinsurers and other interested parties consider the rating of the company by independent rating agencies as important in assessing the financial strength of the company. Thus, the company monitors the capital resources that it requires in order to ensure they are sufficient to maintain our existing financial strength ratings from the appropriate rating agencies. The company maintained its ratings throughout the year and has continued to maintain the ratings since the balance sheet date. The company is also obliged to ensure its capital resources meet regulatory capital requirements. The company is required by the United Kingdom s Financial Services Authority ( FSA ) to undertake an Individual Capital Assessment ( ICA ), which is a risk based determination of the capital required to meet all of its financial liabilities with a confidence level of 99.5%. The company has determined the level of capital required on this basis and has elected to maintain capital resources which exceed this regulatory requirement and are supportive of our existing financial strength ratings. All of the classes of risk faced by the company have been quantified within its ICA. Insurance, operational and group risk are described below. Given their relevance to the assets the company holds to meet its capital requirements, credit, market and liquidity risk are discussed in note 2 to the financial statements, which deals with financial instruments. Capital resources, for the purposes of the ICA, are taken as net assets before deduction of the equalisation provision, less any inadmissible assets as prescribed by the FSA rules and any assets provided as Funds at Lloyd s on behalf of Chubb Capital Ltd, a fellow Chubb group company and the corporate member of Chubb Syndicate As at 31 December 2012, these capital resources amounted to 817.5m (2011: 891.2m). The European Union s Solvency II directive will require regulated firms across Europe to meet further requirements in relation to risk and capital management. The company is committed to, and actively engaged in evolving its practice in this area, to meet those requirements as they unfold between now and when the directive comes into force. Insurance risk Insurance risk arises from fluctuations in the frequency and/or severity of claims. Consistent with Chubb s operating philosophy, the company mitigates this risk by maintaining underwriting discipline throughout its operations. This policy is supported by each strategic business units underwriting guidelines, expertise and appropriate authority limits. These guidelines are updated regularly to reflect developments in the nature of the insurance risks being underwritten. The company also uses a reinsurance programme to manage its insurance risk by providing cover against certain large exposures. Operational risk Operational risk can arise where a company suffers a loss as a result of inadequate or failed internal processes. This could be as a result of people s actions, system processes or external events. The company mitigates this risk through ensuring that material operational risks are identified and controls are adopted to limit these risks. 10

14 Directors report of Chubb Insurance Company of Europe SE Group risk Group risk is defined as detriment to the company arising from actions taken at an ultimate parent company level or from the actions of another subsidiary of that ultimate parent. Group risk is inherent in any multinational organisation and primarily arises from inconsistencies between the laws and regulations to which the various members of the organisation are subject. In particular, the company is subject to the laws of the countries in which it operates in Europe, while The Chubb Corporation is subject to the laws and regulations of the United States of America (including states and territories thereof). The company mitigates this risk through open communication in appropriate committees and other forums through which decision makers are advised of the potential impact that group policy and decisions may have, and how this may be addressed. Directors The following served as directors from 1 January 2012 to the date of this report unless otherwise indicated: M Casella J Degnan C Giles P Haywood I Hutchinson K O Shiel R Spiro B Van Der Vossen S Wood (appointed 27 July 2012) Employees Equal opportunities The company is fully committed to equal opportunities. The equal opportunities policy applies to all aspects of employment, including recruitment and selection, performance management, dismissal, training and development opportunities, promotion, pay, and terms and conditions of employment. The company s employees are diverse and have been chosen for their experience, potential and skills regardless of gender, gender reassignment, sexual orientation, marital status, age, race, colour, nationality, ethnic origin, religion/religious belief or disability. Health and safety The company assigns great importance to the health, safety and welfare of its employees and others on its premises. The company has a health and safety policy in place which is the responsibility of the facilities manager. 11

15 Directors report of Chubb Insurance Company of Europe SE Employee communication and involvement The company facilitates open and regular communication with its employees with the intention of keeping them well informed about the company and Chubb, in particular with regard to its operations in Europe ( Chubb Europe ). Chubb Europe s internal intranet is used as a medium to communicate company and group news, external markets information, financial results, business priorities and other useful information. Employees are also kept well informed about Chubb Europe s strategic direction and financial results through staff events, messages from senior management, branch and department update meetings and a quarterly newsletter. The company participates in Chubb Europe s European Works Council ( EWC ) which has been in existence since 1999 and enables management to inform and consult employees about management decisions, thus supporting two-way communication. The purpose of the EWC is to serve as a consultative body, supporting communication between staff and senior management. Performance management The company has a structured performance management process in place and individual employee performance is directly linked to their financial rewards. Senior managers are eligible to participate in The Chubb Corporation s long-term stock incentive plan. Charitable donations During the year, the company made charitable donations of 42,801 (2011: 105,037). These included donations above 2,000 to Asthma UK, UNICEF and Salisbury Cathedral for general charitable purposes. Branches Details of the company s underwriting branches are shown on the Branch Details page. Policy and practice on payment of creditors The company s policy is to agree terms of payment when entering into transactions with suppliers and then pay those suppliers accordingly. The trade creditor days of the company as at 31 December 2012, calculated in accordance with statutory regulations, was 17 days (2011: 24 days). 12

16 Directors report of Chubb Insurance Company of Europe SE Statement of Directors responsibilities The directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations. The Companies Act 2006 requires the directors to prepare financial statements for each financial period. Under that law the directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). The financial statements are required by law to give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period. In preparing those financial statements, the directors are required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; state whether applicable United Kingdom Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the company and to enable them to ensure that the financial statements comply with the Companies Act They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company s website, Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Statement of disclosure of information to the auditors So far as each person who was a director at the date of approving this report is aware, there is no relevant audit information, being information needed by the auditor in connection with preparing its report, of which the auditor is unaware. Having made enquiries of fellow directors and the company s auditor, each director has taken all the steps that he is obliged to take as a director in order to make himself aware of any relevant audit information and to establish that the auditor is aware of that information. Indemnities for Directors The company participates in a group insurance policy organised by The Chubb Corporation, which provides third party indemnity for the benefit of the directors of the company with respect to their directorships of a subsidiary of The Chubb Corporation. 13

17 Directors report of Chubb Insurance Company of Europe SE Reappointment of auditor In accordance with section 485 of the Companies Act 2006, a resolution will be proposed at the Annual General Meeting for the reappointment of Ernst & Young LLP as the auditor of the company. On behalf of the board R Munro Member of the Administrative Organ Secretary 14 March 2013 Company Registration Number: SE13 14

18 Independent auditor s report to the members of Chubb Insurance Company of Europe SE We have audited the financial statements of Chubb Insurance Company of Europe SE for the year ended 31 December 2012 which comprise the Profit and Loss Account, the Statement of Total Recognised Gains and Losses, the Balance Sheet and the related notes 1 to 31. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), having regard to the statutory requirement for insurance companies to maintain equalisation provisions. The nature of equalisation provisions, the amounts set aside at 31 December 2012, and the effect of the movement in those provisions during the year on shareholders funds, the balance on the general business technical account and profit before tax, are disclosed in note 24. This report is made solely to the company s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act Our audit work has been undertaken so that we might state to the company s members those matters we are required to state to them in an auditor s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and auditors As explained more fully in the Statement of Directors Responsibilities set out on page 13, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board s Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the company s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report and financial statements to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. 15

19 Independent auditor s report Opinion on financial statements In our opinion the financial statements: give a true and fair view of the state of the company s affairs as at 31 December 2012 and of its profit for the year then ended; have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and have been prepared in accordance with the requirements of the Companies Act Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Directors Report for the financial year for which the financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or the financial statements are not in agreement with the accounting records and returns; or certain disclosures of directors remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit. Michael Purrington (Senior statutory auditor) for and on behalf of Ernst & Young LLP, Statutory Auditor London March 2013 Notes 1. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company s website, the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the web site. 2. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 16

20 Profit and LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2012 Technical account general business Notes Earned premiums, net of reinsurance Gross premiums written 3 700, ,129 Outwards reinsurance premiums (109,912) (127,273) Net premiums written 590, ,856 Change in the gross provision for unearned premiums 11,032 23,854 Change in the provision for unearned premiums, reinsurers share (509) 3,227 Change in unearned premiums, net of reinsurance 10,523 27,081 Earned premiums, net of reinsurance 600, ,937 Total technical income 600, ,937 Claims incurred, net of reinsurance 4 Claims paid, gross amount 389, ,271 Claims paid, reinsurers share (52,618) (28,612) Net claims paid 337, ,659 Change in the provision for claims, gross amount 11,323 (34,184) Change in the provision for claims, reinsurers share 13,194 7,274 Change in the provision for claims, net of reinsurance 24,517 (26,910) Claims incurred, net of reinsurance 361, ,749 Net operating expenses 5 254, ,136 Change in the equalisation provision 24 4,188 2,722 Total technical charges 620, ,607 Balance on the general business technical account (19,730) 73,330 17

21 Profit and loss account for the year ended 31 December 2012 Non-technical account The above results are all derived from continuing operations. Notes Balance on the general business technical account (19,730) 73,330 Investment return Investment income ,270 85,645 Unrealised (losses) / gains on investments 10 (4,356) 13,274 Investment expenses and charges 10 (2,367) (2,826) Net investment return on defined benefits pension scheme 10, Investment return 102,406 96,845 Other charges 11 (14,924) (6,149) Profit on ordinary activities before tax 67, ,026 Tax on profit on ordinary activities 12 (37,939) (63,647) Profit for the financial year 29, ,379 18

22 Statement of total recognised gains and losses for the year ended 31 December 2012 Notes Profit for the financial year 29, ,379 Other recognised gains and losses Actuarial losses on defined benefits pension schemes 26 (4,468) (10,611) Unrealised (losses) / gains on investments 10 (8,961) 68,317 Foreign currency translation (losses) / gains (4,222) 1,752 Other recognised (losses) / gains before tax (17,651) 59,458 Tax credit / (charge) on other recognised gains and losses 12 2,726 (13,210) Other recognised (losses) / gains after tax (14,925) 46,248 Total recognised gains relating to the year 14, ,627 Note of historical profits and losses Gains and losses arising from using fair value accounting for financial instruments are not required to be included in a note of historical profits and losses. There are no other differences between the profit for the financial year stated above and its historical cost equivalent. 19

23 Balance sheet as at 31 December 2012 Assets Notes Intangible assets Investments Other financial investments 14 2,376,343 2,413,933 Reinsurers share of technical provisions Provision for unearned premiums 37,479 38,960 Claims outstanding 212, , , ,722 Debtors Debtors arising out of direct insurance operations , ,873 Debtors arising out of reinsurance operations 39,317 42,050 Other debtors 16 36,489 13, , ,376 Other assets Tangible assets 18 3,274 3,532 Cash at bank and in hand ,286 3,719 Prepayments and accrued income Accrued interest and rent 28,801 34,942 Deferred acquisition costs 53,206 85,858 Other prepayments and accrued income 2,018 2,236 84, ,036 Total assets 2,893,179 2,991,786 20

24 Balance sheet as at 31 December 2012 Liabilities Notes Capital and reserves Called up share capital 19 2,849 2,849 Share premium account , ,938 Reserves , ,179 Profit and loss account ,794 (52,347) Equity shareholders funds , ,619 Technical provisions Provision for unearned premiums 302, ,220 Claims outstanding 1,493,633 1,525,654 Equalisation provision 24 18,278 14,091 1,814,216 1,862,965 Provisions for other risks 25 48,254 31,230 Creditors Creditors arising out of direct insurance operations 16,507 20,980 Creditors arising out of reinsurance operations 31,191 37,929 Other creditors including taxation and social security 27 30,097 32,810 77,795 91,719 Accruals and deferred income 29 19,508 23,253 Total liabilities 2,893,179 2,991,786 The financial statements on pages 17 to 61 were approved by the board of directors and were signed on its behalf by: S Wood Member of the Administrative Organ Director 14 March 2013 Company Registration Number: SE13 21

25 Notes to the financial statements for the year ended 31 december Accounting policies Basis of preparation The financial statements have been prepared in accordance with section 6 of, and Schedule 3 to, the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 pursuant to section 396 of the Companies Act The financial statements have also been prepared in accordance with applicable United Kingdom accounting standards and comply with the Statement of Recommended Practice on Accounting for Insurance Business issued by the Association of British Insurers in December 2005 as amended in December The company has taken advantage of the exemption given to subsidiary companies in Financial Reporting Standard 1 (Revised) from the preparation of a cash flow statement. Underwriting Gross premiums Gross written premiums represent premiums on direct insurance and reinsurance assumed contracts that incepted during the period, together with adjustments made in the period to premiums written in prior accounting periods. Gross premiums are shown before deduction of brokerage and commission due to intermediaries but net of taxes and duties levied on premiums. Premium debtors Premiums receivable which are outstanding at the balance sheet date are shown as debtors less any amounts not considered to be collectable. Estimates are included for pipeline premiums, being premium amounts due but not yet received or notified to the company by intermediaries. Provision for unearned premiums Written premiums are recognised as earned premiums proportionally over the period of the coverage of the policy. Premiums that have been written but not yet earned are shown in the provision for unearned premiums. 22

26 Claims Claims incurred represent the claims and claims handling costs paid in the period, together with the movement in provision for claims outstanding, less any salvage or other similar recoveries. The provision for claims outstanding represents the estimated ultimate cost of all claims notified but not settled by the balance sheet date and includes provisions for reported outstanding claims, claims incurred but not reported ( IBNR ) and claims handling costs. There is inherent uncertainty, due to the nature of insurance underwriting, as to the ultimate cost of claims. Therefore, subsequent information and events may result in the ultimate cost of claims being different, perhaps substantially, to the amounts previously provided. Adjustments of this nature are reflected in the period that the subsequent information becomes known or the subsequent event occurs. Provision for claims outstanding estimation techniques As a result of this inherent uncertainty in the ultimate cost of claims, a variety of different actuarial techniques are used to estimate the provision for claims outstanding. These techniques include using the following statistical analyses: (a) the development of claims on more mature accident years to estimate the claims development on less mature accident years; (b) the development of claim numbers and average cost per claims on more mature accident years to estimate the claims development on less mature accident years; (c) expected loss ratios for each accident year taking into account underwriting factors that may be particularly pertinent to that year, for instance, price changes, changes in business mix, market conditions, policy coverage, etc; and (d) techniques that involve using a mixture of the above analyses such as the Bornheutter-Ferguson method which uses a combination of claims development and expected loss ratios, where claims development is given more weight as an accident year matures. These analyses for each line of business take into account whether the period of time between the occurrence of the claim, the claim being notified to the company and the claim being resolved is considered to be short or long for that line of business. Large claims, that can distort the above analyses, may be extracted from the main data, analysed and projected separately. In deriving a best estimate for the provision for claim outstanding, the company considers the techniques that are most appropriate to the line of business and accident year. Unexpired risks At the balance sheet date, an assessment is made of whether the cost of claims and expenses arising after the end of the financial period, in respect of contracts concluded before that date, are expected to exceed the provision for unearned premiums (net of any deferred acquisition costs) and any premiums still receivable under these contracts. In this event, a provision for unexpired risks is made after offsetting surpluses and deficits arising from lines of business which are managed together and after taking into account relevant future investment income. 23

27 Equalisation provision An equalisation provision has been calculated in accordance with chapter 1.4 of the Prudential Sourcebook for Insurers issued by the Financial Services Authority. The amount provided does not represent a liability as it is in addition to the provision required to meet the anticipated ultimate cost of settlement of outstanding claims at the balance sheet, but notwithstanding this, it is required to be included within technical provisions by the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 pursuant to section 396 of the Companies Act Reinsurance ceded Premiums ceded on outward reinsurance contracts are accounted for in the same accounting period as the premiums for the direct or reinsurance assumed business. Reinsurance recoveries on gross claims paid are recognised based on amounts to be reimbursed under reinsurance contracts that provide for recoveries of contractually defined portions of gross claims paid by the company. As at the balance sheet date, reinsurance recoveries due on gross claims paid are shown in debtors arising out of reinsurance operations, less any receipts from those reinsurers as at that date and any amounts not considered to be collectable. Reinsurance recoveries on gross claims outstanding are estimated based on the amounts expected to be recovered on those gross claims under the programme of reinsurance contracts that have been arranged by the company, less any amounts not considered to be recoverable. Deferred acquisition costs Acquisition costs are the costs of acquiring new contracts or renewing existing contracts. These costs comprise commission and other related expenses. The determination of which other related expenses are eligible to be included as deferrable acquisition costs is based on an annual review of such expenses as part of the accounting estimation process. Acquisition costs eligible for deferral relating to premiums written that have yet to be earned at the balance sheet date, are deferred and shown as deferred acquisition costs. Subsequently, these deferred acquisition costs are charged to the profit and loss account as the unearned premiums to which the deferred costs relate become earned. The review of the estimation process in 2012 led to a change in the methodology, the impact of this change on the results for the year is shown in note 5. 24

28 Financial assets The company classifies its financial assets as either financial assets at fair value through the profit and loss account, available for sale financial assets or loans and receivables. All financial assets are initially recognised at fair value; their subsequent measurement is discussed below. Investments Investments in private equity limited partnerships are classified as financial assets at fair value through the profit and loss account as they are managed, and their performance evaluated, on a fair value basis including unrealised gains and losses. Investments in bonds, short term deposits and unit trusts that invest predominately in bonds and short term deposits are classified as available for sale financial assets. Bond purchases and sales are recognised at trade date. Both financial assets at fair value through the profit and loss account and available for sale financial assets are subsequently re-appraised to their fair value at each balance sheet date. Where there is an active market for these investments, fair value is based upon quoted prices using bid price. Where there is not an active market, but other market data is observable for these investments, fair value is based upon that market data using expected bid price. Where there is neither an active market nor any other observable market data, for instance, for such financial assets as investments in private equity limited partnerships, these are initially carried at cost as the best estimate of fair value and are adjusted thereafter whenever events or changes in circumstances indicate that the carrying amount may not approximate to fair value. In these circumstances, fair value is calculated using the most appropriate valuation technique. For financial assets at fair value through the profit and loss account, these fair value adjustments are shown as unrealised gains and losses in the profit and loss account whereas, for available for sale financial assets, these fair value adjustments are shown as unrealised gains and losses in the statement of total recognised gain and losses. Impairment losses on available for sale financial assets are recognised in the profit and loss account if there has been an event that has had a negative impact on the expected future cash flows of the asset and the fair value of the asset is below its amortised cost. Other receivables Other receivables are classified as loans and other receivables. Loans and other receivables are carried at amortised cost less any provision for impairment arising from uncollectibility. 25