US senate forces accounts rethink on RSA

Royal & SunAlliance is facing a radical change to the way it accounts for its asbestos reserve provisions because of a proposed amendment to US legislation.

Link: McCreevy meets IASB board in London

The amended version of Senate Bill 2290, also known as the Fairness in Asbestos Injury Resolution Act, aims to set up a trust fund financed by the insurance industry and other stakeholders, and will change the way compensation is paid to workers exposed to asbestos-related diseases.

The bill’s advocates say it will allow asbestos-related claims to be settled from the trust fund, instead of going through potentially long and complex court cases.

Royal & SunAlliance, however, is concerned how this new method of settlement will affect its business. The insurer has set aside provisions, net of reinsurance, of more than £1bn specifically for asbestos claims, £433m of which is allocated specifically to US risks.

The company said: ‘There can be no assurance that the amended Senate Bill 2290, if ultimately passed, and the amount and timing of any payments by the group to the trust established thereunder, would not have a material adverse effect on the group’s consolidated financial position, results of operations or cashflows.’

The possibility of Royal & SunAlliance having to arrange extra finance for asbestos claims comes hot on the heels of a year when it had to strengthen its capital position.

The company delivered a group operating profit of £188m for the 2004 financial year, down from the £196m reported for 2003, and had to work hard to ensure it complied with the new capital measures of the FSA.

The insurer undertook a number of actions to deliver a £600m surplus on its enhanced capital requirement, raising £450m of upper tier II capital and rewording its e500m (£349m) Eurobond. Last year, it also made a ‘strategic exit’ from its UK and Scandinavian life businesses to boost its capital position and focus on its work as a general insurer.

Group CEO Andy Haste said these moves had been key goals for the business in 2004. ‘We have successfully delivered many of our strategic objectives; we have exited the life industry and realised our long-term goal of becoming a focused general insurer,’ he said.

The group hopes that the capital strengthening will help to improve its credit ratings, which in turn will help it to grow business. It currently holds an A- rating with Standard & Poor’s and AM Best.

‘The ability of the group to write certain types of general insurance business is dependent on the maintenance of the appropriate credit ratings from the rating agencies,’ Royal & SunAlliance said.

‘Any worsening in the ratings would have an adverse impact on the ability of the group to write certain types of general insurance business.’

COMPANY REPORTS
IFRS helps push up asset values at AMEC, while cash-rich Greggs plans £50m spending programme

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IAS10 will increase net assets at AMEC by £20m. Reporting pre-tax profits to December 2004 up 5% to £118.1m, the construction and engineering company revealed the effect of the switch to international financial reporting standards. IAS19 on employee benefits will also result in a net post-tax pension adjustment of £20m. AMEC said it did not believe there would be a material impact on the income statements from applying IFRS but said there would be more volatility.

Construction group Balfour Beatty has said that the principal effect of IFRS on its account will come from the reclassification of preference shares as debt and the treatment of an IAS19 pension deficit as a balance sheet item. Turnover to December 2004 rose 13% to £4.1bn. Pre-tax profits before goodwill charges and exceptionals rose £150m, up 15%.

Group 4 Securicor has disclosed that it has £1.26bn worth of borrowing facilities, including a £1bn multi-currency credit taken out to finance the group’s 2004 merger. £800m of this is a ‘five-year committed revolving facility’. The difference is a ‘364-day committed revolving facility’ that can be converted into a term loan for a further 12 months. At constant exchange rates the company reported earnings before interest, tax and amortisation of £216m for 2004, up from £186.1m in 2003.

Bakers Greggs delivered a record pre-tax profit of £46.7m for the 2004 financial year, increasing profits by 15.3%. The company also improved its net cash position from £46.7m 2003 to £62.6m in 2004. Managing director Michael Darrington is now planning a £50m capital expenditure programme to further enhance profitability.

Property company Bovis Homes is preparing to take its transition to IFRS one step further than most companies by restating its 2003 accounts under the new standards, as well as its 2004 accounts. The group said it wanted to present two years of trend data using IFRS ‘to facilitate a better understanding of the results which will be published for the year ending 31 December 2005’. The group reported an 18% increase in pre-tax profits, which improved from £123m in 2003 to £145.2m in 2004.