Ecclesiastical Insurance Office PLC 06 September 2005 ECCLESIASTICAL INSURANCE OFFICE PLC INTERIM ANNOUNCEMENT OF RESULTS FOR THE PERIOD ENDED 30 JUNE 2005 INTERIM REPORT The Interim Report has been prepared in accordance with International Financial Reporting Standards (IFRS). An explanation of the impact of IFRS on comparative results and financial position at 30 June 2004 is set out in note 8 of this statement. Net earned premiums under IFRS relate to general insurance and long term business products together with participating investment products. Within the total, the continued process of business realignment, some easing of premium rates in certain areas and the one-off effect of a change in reinsurance arrangements in Canada in 2004 have contributed to a reduction of 3.6% in general insurance net earned premiums (2004: 9.4% increase). The corresponding reduction in gross written premiums is 0.8% (2004: 0.2% increase). Despite increased numbers of large losses, underwriting results for general insurance remain strong with a profit of £17.7m (2004: £21.6m). In financial services, new business sales through Ecclesiastical Life were up by 24% on the industry standard measure (2004: 10% increase). The profit after tax was £2.6m (2004: £0.1m). The net investment return rose to £45.7m (2004: £19.8m) comprising an increase in fair value gains of £22.4m (2004: £1.2m) and increased investment income of £23.3m (2004: £18.6m). Shareholders' equity has continued to rise strongly to reach £260.0m (2004: £162.7m). The increase is driven by growth in retained profits and net proceeds of £22.4m from the issue in April 2005 of 19 million 8.625% Non-Cumulative Irredeemable Preference shares. The directors are confident that the strong results will be maintained in the short term subject to no exceptional adverse development in claims experience. The company has an exposure to losses affecting churches and other insured property, estimated at £2.0m after reinsurance, from the tornado that hit parts of Birmingham in July. Graham Doswell Group Chief Executive CONSOLIDATED SUMMARY INCOME STATEMENT 30.06.05 30.06.04 6 Months 6 Months £000 £000 Net earned premiums 118,545 122,780 Fees and commission income 15,438 13,800 Other operating income 248 169 Net investment return 45,749 19,822 --------- --------- Total revenue 179,980 156,571 --------- --------- Claims and change in insurance liabilities (81,134) (89,962) Reinsurance recoveries 12,474 23,668 Fees, commissions and other acquisition costs (31,490) (32,137) Other operating and administrative expenses (27,484) (24,794) Change in provisions for investment contract liabilities (2,349) (1,729) --------- --------- Total operating expenses (129,983) (124,954) --------- --------- Operating profit 49,997 31,617 Finance costs (241) (974) Charitable grant to ultimate parent undertaking (2,200) (2,050) Transfers to the unallocated divisible surplus (5,430) (2,238) --------- --------- Profit before income tax 42,126 26,355 Income tax expense (12,509) (9,444) --------- --------- Profit for the financial period attributable to equity holders 29,617 16,911 --------- --------- All the amounts above are in respect of continuing operations. CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE 30.06.05 30.06.04 6 Months 6 Months £000 £000 Gain/(loss) on currency translation differences 1,719 (1,927) --------- --------- Net income/(expense) recognised directly in equity 1,719 (1,927) Profit for the period after income tax 29,617 16,911 --------- --------- Total recognised income and expense for the period 31,336 14,984 --------- --------- CONSOLIDATED BALANCE SHEET 30.06.05 30.06.04 £000 £000 Assets Goodwill and other intangible assets 4,585 6,381 Deferred acquisition costs 30,058 29,744 Deferred tax assets 1,048 462 Pension assets 13,040 7,664 Property, plant and equipment 8,141 7,004 Investment property 23,677 16,985 Financial investments 744,741 643,681 Reinsurers' share of contract provisions 146,165 139,051 Current tax recoverable 767 - Other assets 97,273 95,419 Cash and cash equivalents 168,389 138,875 --------- --------- Total assets 1,237,884 1,085,266 --------- --------- Equity Share capital 74,277 39,027 Share premium account 3,792 352 Retained earnings & other reserves 181,960 123,312 --------- --------- Total shareholders' equity 260,029 162,691 --------- --------- Liabilities Insurance contract provisions 756,504 722,245 Unallocated divisible surplus 19,595 12,877 Investment contract liabilities 44,609 39,410 Borrowings 4,421 20,688 Provisions for other liabilities and charges 5,927 7,728 Retirement benefit obligations 6,282 6,008 Deferred tax liabilities 33,248 24,994 Current tax liabilities 10,854 10,289 Deferred income 15,878 14,615 Other liabilities 37,743 31,601 Net asset value attributable to unitholders 42,794 32,120 --------- --------- Total liabilities 977,855 922,575 --------- --------- --------- --------- Total equity and liabilities 1,237,884 1,085,266 --------- --------- CONSOLIDATED CASHFLOW STATEMENT 30.06.05 30.06.04 6 Months 6 Months £000 £000 Cash generated from operating activities 31,621 34,523 Income tax paid (7,869) (1,888) --------- --------- Net cash from operating activities 23,752 32,635 --------- --------- Cash flows from investing activities Net purchases of property, plant and equipment (1,616) (481) Net purchases of intangible assets (446) (452) Net (purchases)/sales of financial investments (46,722) 7,621 --------- --------- Net cash used in investing activities (48,784) 6,688 --------- --------- Cash flows from financing activities Proceeds from the issue of preference shares 22,440 - Reduction of the outstanding liability relating to a finance lease (374) (244) Dividends paid to company's shareholders (2,081) (1,078) Interest paid (241) (974) --------- --------- Net cash used in financing activities 19,744 (2,296) --------- --------- --------- --------- Net (decrease)/increase in cash and cash equivalents (5,288) 37,027 --------- --------- Cash and cash equivalents at the beginning of the period 172,194 103,507 Exchange gains/(losses) on cash and cash equivalents 1,483 (1,659) --------- --------- Cash and cash equivalents at the end of the period 168,389 138,875 --------- --------- NOTES TO THE INTERIM ANNOUNCEMENT OF RESULTS FOR THE PERIOD ENDED 30 JUNE 2005 1. General Information The group results for the 6 month period to 30 June 2005 and 30 June 2004 are unaudited, but have been reviewed by Deloitte & Touche LLP whose report forms part of this announcement. This announcement was approved by the Board of Directors on 6 September 2005. 2. Accounting Policies The interim report has been prepared in accordance with the recognition and measurement criteria of IFRS and the disclosure requirements of the Listing Rules. The group has not chosen early adoption of IAS34, Interim financial reporting. The company has prepared this interim report using the same accounting policies and methods of computation as published in the IFRS transitional information on 6 September 2005. This transitional information document also contains reconciliations of the opening and closing balance sheets and financial performance for 2004 and is available from the company's website at www.ecclesiastical.co.uk. Due to continuing development and interpretation of the IFRS framework, there is a possibility that the directors may determine that some changes to these policies are necessary when preparing the full annual financial statements for the first time in accordance with IFRSs as adopted for use in the European Union (EU). An explanation of the impact of IFRS on the comparative results and financial position at 30 June 2004 is presented in note 8. 3. Movement in Equity 30.06.05 30.06.04 6 Months 6 Months £000 £000 Opening equity 208,745 149,195 Total recognised income and expense for the year 31,336 14,984 Dividends (see note 4) (2,492) (1,488) Increase in share capital (see note 5) 22,440 - --------- --------- Total equity attributable to shareholders 260,029 162,691 --------- --------- 4. Dividends Dividends paid on the 8.625% Non-Cumulative Irredeemable Preference shares amounted to £2.1m (2004: £1.1m). A net interim dividend of 0.292p (2004: 0.292p) per share on the Ordinary share capital was declared on 21 June 2005. This will be paid on 30 September 2005 and will cost £0.4m (2004: £0.4m). This dividend is paid to the company's immediate holding company, Ecclesiastical Insurance Group plc. 5. Share Capital On 26 April 2005 the company made a further issue of 19 million 8.625% Non-Cumulative Irredeemable Preference shares of £1 each. The difference between the consideration of £22.4m and the total nominal value of £19.0m has been credited to the share premium account. 6. Events after the balance sheet date On 28 July 2005 the company approved a redesignation of the entire class of 10% Redeemable Second Cumulative Preference shares into, principally, new 8.625% Non-Cumulative Irredeemable Preference shares on the basis of £9 nominal of irredeemables for every £10 nominal of 10% Redeemable Second Cumulative Preference shares. 7. Holding company The ultimate holding company is Allchurches Trust Limited, a company limited by guarantee and a registered charity. 8. Restatement of financial information under International Financial Reporting Standards From 2005, the group will prepare consolidated financial statements in accordance with IFRS as adopted by the EU. The first annual report under IFRS will be for 2005. The restated financial information explains how the group's reported performance and financial position are affected by the transition to IFRS. It has been prepared using the group's accounting policies under IFRS and forms the comparatives for this interim report. Reconcilations of the opening and closing balance sheets and financial performance for year end 2004 are contained in a document published on the company's website at www.ecclesiastical.co.uk. The group's consolidated balance sheet at 30 June 2004, the consolidated income statement and the consolidated statement of recognised income and expense for the period ended 30 June 2004 ('the IFRS financial information') have been prepared in accordance with IFRS issued by the International Accounting Standards Board ('IASB') and endorsed by the European Commission to be effective for 2005 year ends. The IFRS themselves remain subject to possible amendment by interpretative guidance from the IASB or other external bodies and are therefore subject to change prior to publication of the group's full IFRS financial statements in 2006. The United Kingdom Generally Accepted Accounting Practice ('UK GAAP') financial information contained in this report does not constitute statutory accounts as defined in section 240 of the Companies Act 1985. Moreover under IFRS, only a complete set of financial statements comprising a balance sheet, income statement, statement of recognised income and expense and cashflow statement, together with comparative information and explanatory notes can provide a fair presentation of the group's financial position, results of operations and cashflow. The group is required to determine its IFRS accounting policies and apply them retrospectively to establish its opening balance sheet at 1 January 2004 under IFRS. However, IFRS 1, First-Time Adoption of International Financial Reporting Standards ('IFRS 1') allows a number of exemptions on adoption of IFRS for the first time. The Group has taken advantage of the following transitional arrangements: Cumulative translation differences Cumulative translation differences of foreign operations have not been restated on an IFRS basis. These are deemed to be zero at the date of transition (1 January 2004). Employee defined benefit obligations All cumulative actuarial gains and losses have been recognised in equity at the date of transition to IFRS. Business combinations For business combinations before 1 January 2004 the group has elected not to apply the provisions of IFRS 3, Business Combinations ('IFRS 3'), retrospectively. Accordingly no adjustments have been made for historical business combinations. The group has not taken advantage of the exemption from the requirement to restate comparative information in the first year of adoption of IFRS for the following: - IAS 32, Financial Instruments: Disclosure and Presentation ('IAS 32') - IAS 39, Financial Instruments: Recognition and Measurement ('IAS 39') - IFRS 4, Insurance Contracts ('IFRS 4'). Reconciliation of the Consolidated Balance Sheet as at 30 June 2004: Previously Reported Restated under Total under UK GAAP adjustments IFRS £000 £000 £000 Assets Goodwill and other intangible assets 1,880 4,501 6,381 Deferred acquisition costs 28,041 1,703 29,744 Deferred tax assets - 462 462 Pension asset - 7,664 7,664 Property, plant and equipment 8,334 (1,330) 7,004 Investment property 19,499 (2,514) 16,985 Financial investments 588,228 55,453 643,681 Assets held to cover linked liabilities 44,190 (44,190) - Reinsurers' share of contract provisions 139,051 - 139,051 Other assets 95,781 (362) 95,419 Cash and cash equivalents 122,188 16,687 138,875 --------- --------- --------- Total assets 1,047,192 38,074 1,085,266 --------- --------- --------- Equity Share capital 58,277 (19,250) 39,027 Share premium account 352 - 352 Retained earnings & other reserves 116,658 6,654 123,312 --------- --------- --------- Total shareholders' equity 175,287 (12,596) 162,691 --------- --------- --------- Liabilities Insurance contract provisions 779,320 (57,075) 722,245 Unallocated divisible surplus 12,444 433 12,877 Investment contract liabilities - 39,410 39,410 Borrowings - 20,688 20,688 Provisions for other liabilities and charges 1,565 6,163 7,728 Retirement benefit obligations - 6,008 6,008 Deferred tax liabilities 17,369 7,625 24,994 Current tax liabilities 10,349 (60) 10,289 Deferred income - 14,615 14,615 Other liabilities 50,858 (19,257) 31,601 Net asset value attributable to unitholders - 32,120 32,120 --------- --------- --------- Total liabilities 871,905 50,670 922,575 --------- --------- --------- --------- --------- --------- Total equity and liabilities 1,047,192 38,074 1,085,266 --------- --------- --------- Analysis of the IFRS adjustments to the Consolidated Balance Sheet as at 30 June 2004: Opening Investment Insurance Financial Employee Sub-total balance changes changes instruments benefits (carried sheet forward) adjustment (Note I) (Note II) (Note III) (Note IV) £000 £000 £000 £000 £000 £000 Assets Goodwill and other intangible assets 5,238 - - - - 5,238 Deferred acquisition costs 1,730 - - - - 1,730 Deferred tax assets 784 - - - - 784 Pension asset 7,257 - - - 407 7,664 Property, plant and equipment (2,248) - - - - (2,248) Investment property (2,526) (3) - - - (2,529) Financial investments 55,459 (4,319) - - - 51,140 Assets held to cover linked liabilities (40,903) - - - - (40,903) Reinsurers' share of contract provisions - - - - - - Current tax recoverable 37 - - - - 37 Other assets (2,044) - - - - (2,044) Cash and cash equivalents 14,863 32 - - - 14,895 --------------------------------------------------------------------- Total assets 37,647 (4,290) - - 407 33,764 --------------------------------------------------------------------- Sub-total Goodwill Taxation Consolidation Other Total (brought of additional adjustments adjustments forward) entities (Note V) (Note VI) (Note VII) (Note VIII) £000 £000 £000 £000 £000 £000 Assets (continued) Goodwill and other intangible assets 5,238 209 - - (946) 4,501 Deferred acquisition costs 1,730 - - - (27) 1,703 Deferred tax assets 784 - (322) - - 462 Pension asset 7,664 - - - - 7,664 Property, plant and equipment (2,248) - - - 918 (1,330) Investment property (2,529) - - - 15 (2,514) Financial investments 51,140 - - 961 3,352 55,453 Assets held to cover linked liabilities (40,903) - - - (3,287) (44,190) Reinsurers' share of contract provisions - - - - - - Current tax recoverable 37 - - (37) - - Other assets (2,044) - 203 1,671 (192) (362) Cash and cash equivalents 14,895 - - 1,792 - 16,687 ---------------------------------------------------------------------- Total assets (continued) 33,764 209 (119) 4,387 (167) 38,074 ---------------------------------------------------------------------- Opening Investment Insurance Financial Employee Sub-total balance changes changes instruments benefits (carried sheet forward) adjustment (Note I) (Note II) (Note III) (Note IV) £000 £000 £000 £000 £000 £000 Equity Share capital (19,250) - - - - (19,250) Share premium account - - - - - - Retained earnings & other reserves 8,705 (3,961) 1,837 - 201 6,782 ---------------------------------------------------------------------- Total shareholders' equity (10,545) (3,961) 1,837 - 201 (12,468) ---------------------------------------------------------------------- Sub-total Goodwill Taxation Consolidation Other Total (brought of additional adjustments adjustments forward) entities (Note V) (Note VI) (Note VII) (Note VIII) £000 £000 £000 £000 £000 £000 Equity (continued) Share capital (19,250) - - - - (19,250) Share premium account - - - - - - Retained earnings & other reserves 6,782 209 (1,293) 965 (9) 6,654 ---------------------------------------------------------------------- Total shareholders' equity (continued) (12,468) 209 (1,293) 965 (9) (12,596) ---------------------------------------------------------------------- Opening Investment Insurance Financial Employee Sub-total balance changes changes instruments benefits (carried sheet forward) adjustment (Note I) (Note II) (Note III) (Note IV) £000 £000 £000 £000 £000 £000 Liabilities Insurance contract provisions (53,375) - (3,582) - - (56,957) Unallocated divisible surplus 402 (329) - - - 73 Investment contract liabilities 37,638 - 1,772 - - 39,410 Borrowings 20,776 - - - - 20,776 Provisions for other liabilities and charges 4,768 - - - - 4,768 Retirement benefit obligations 5,722 - - - 286 6,008 Deferred tax liabilities 7,165 - - - - 7,165 Current tax liabilities (452) - - - - (452) Deferred income 13,351 - (27) - - 13,324 Other liabilities (16,536) - - - (80) (16,616) Net asset value attributable to unitholders 28,733 - - - - 28,733 --------------------------------------------------------------------- Total liabilities 48,192 (329) (1,837) - 206 46,232 --------------------------------------------------------------------- --------------------------------------------------------------------- Total equity and liabilities 37,647 (4,290) - - 407 33,764 --------------------------------------------------------------------- Sub-total Goodwill Taxation Consolidation Other Total (brought of additional adjustments adjustments forward) entities (Note V) (Note VI) (Note VII) (Note VIII) £000 £000 £000 £000 £000 £000 Liabilities (continued) Insurance contract provisions (56,957) - - - (118) (57,075) Unallocated divisible surplus 73 - 360 - - 433 Investment contract liabilities 39,410 - - - - 39,410 Borrowings 20,776 - - - (88) 20,688 Provisions for other liabilities and charges 4,768 - - - 1,395 6,163 Retirement benefit obligations 6,008 - - - - 6,008 Deferred tax liabilities 7,165 - 463 - (3) 7,625 Current tax liabilities (452) - 351 41 - (60) Deferred income 13,324 - - - 1,291 14,615 Other liabilities (16,616) - - (6) (2,635) (19,257) Net asset value attributable to unitholders 28,733 - - 3,387 - 32,120 --------------------------------------------------------------------- Total liabilities (continued) 46,232 - 1,174 3,422 (158) 50,670 --------------------------------------------------------------------- --------------------------------------------------------------------- Total equity and liabilities (continued) 33,764 209 (119) 4,387 (167) 38,074 --------------------------------------------------------------------- Reconciliation of the Consolidated Income Statement for the period ended 30 June 2004: Notes Revenue Expenses Profit after tax £000 £000 £000 As reported under UK GAAP 142,295 (112,137) 21,190 Investment changes I (4,277) 329 (3,948) Insurance changes II (1,398) 3,235 1,837 Financial Instruments III - (910) (910) Employee benefits IV - 200 200 Goodwill V - 209 209 Taxation VI - (360) (1,293) Consolidation of additional entities VII 3,411 (2,331) 965 Other adjustments VIII 16,540 (18,451) (1,339) --------- --------- --------- As reported under IFRS 156,571 (130,216) 16,911 --------- --------- --------- Notes to the reconciliation of the Consolidated Balance Sheet at 30 June 2004 and the Consolidated Income Statement for the period ended 30 June 2004 The UK GAAP balance sheet has been presented in a format consistent with IFRS. The only significant change in heading is that the fund for future appropriations is now renamed the unallocated divisible surplus. The basis for the material adjustments between UK GAAP and IFRS is as follows: I. Investment changes Under UK GAAP investments are measured at current value with gains and losses reflected in the income statement except for certain debt and other fixed income securities which are held at amortised cost. IAS 39 restricts the use of amortised cost and, as a result, the group's investments in debt and equity securities will be valued at fair value. The fair value for listed investments is calculated using bid prices rather than the mid-market value used under UK GAAP. The net impact of the above change in valuation basis is a decrease in shareholders' equity of £4.2m as at 30 June 2004. Profit after tax decreases by £3.9m for the period ended 30 June 2004. Under UK GAAP investment properties include owner occupied property, and are valued net of realisation costs. Revaluation gains are recognised in the income statement. Under IFRS, owner occupied properties are included in property, plant and equipment, with revaluation gains recognised in a revaluation reserve in shareholders' equity. Under IFRS, investment property