BusinessCorporate FinanceInsurance sector warned of IFRS volatility

Insurance sector warned of IFRS volatility

Impact of IFRS4 on volatility in accounts has yet to be felt, warn life insurance companies and analysts

Life insurance companies and analysts have warned the sector is set for a
year of volatility and profit fluctuations because of international financial
reporting standards.

Designed specifically for insurance companies, IFRS4 was introduced last
year, but companies and analysts remain concerned about the volatility insurance
groups are experiencing in their accounts as a result of the standard.

In September 2005, three Lloyd’s of London insurers – Amlin, Beazley and SVB
– announced interim results significantly ahead of market expectations due to
IFRS.

The companies’ respective share prices surged accordingly at the time, but
analysts are warning that IFRS could create negative earnings swings of a
similar scale.

‘The impact of IFRS4 on company accounts still remains to be seen,’ said
Standard & Poor’s credit analyst Rob Jones. ‘There is still concern about
profit volatility as a result of the mismatch between liabilities and the assets
behind these liabilities.’

Jones added that any shifts in interest rates would push volatility to
uncomfortable levels, which could provoke a less benign market reaction to
fluctuations in profits.

The standard requires insurance groups to account for liabilities on an
amortised cost basis, while assets are accounted for at fair value. This
mismatch causes volatility in profits from period to period, which makes
profitability difficult to predict.

Numis insurance analyst Richard Gradidge said it would take time for analysts
to make a full assessment of the additional volatility. ‘We need to strip the
volatility out of forecasts, but it is going to take a full year to do that,’ he
said.

The IASB is currently working on a revised standard, IFRS4 phase II, which
will aim to remove the volatility from company accounts. But the revised
standard is only due for release in 2010 at the earliest.

‘Until the standard is finalised there is going to be uncertainty because of
the mismatching. It is not optimal to have to wait for five or six years for a
more meaningful standard,’ Jones said.

In its industry report on the insurance sector, Standard & Poor’s called
on the industry to explain the fluctuations caused by IFRS in their regulatory
filings.

‘We expect that the extensive footnote disclosures that will accompany the
2005 financial statements will be widely appreciated by all users, especially in
the areas of underlying assumptions, sensitivity analysis, and risk-management
practices,’ a team of Standard & Poor’s analysts said.

COMPANY REPORTS

Hilton Group beds down latest sale plans, as publisher Highbury House is
dragged into administration

FTSE100
Online gaming company PartyGaming updates the market tomorrow
with a fourth quarter trading update. Analysts are expecting an increase in
player numbers from 52,000 in November to more than 80,000 over Christmas. The
group may also respond to speculation that it is eyeing Isle of Man-based rival
Poker Stars.

Accounts of industrial supplier Wolseley for the five months
up to the end of December are expected to receive a boost of £8m. In a trading
statement, the group said it had settled an outstanding claim with French
customs authorities that would benefit its trading profits. Wolseley added that
it had increased its gearing to 65%.

Leisure giant Hilton Group holds an EGM today to discuss the
proposed sale of its hotel and leisure division, Hilton International, to Hilton
Hotels. Hilton International will be sold for about £3.3bn which, when added to
the proceeds of the recent sale of 16 UK Hilton International hotels, will raise
a total of about £3.7bn for the hotels and related assets. Upon completion, it
is planned that Hilton Group plc will be renamed Ladbrokes plc

AIM
Highbury House Communications
, the magazine publisher, has been dragged
into administration with debts in excess of £40m. The publisher has been touted
as a potential target for Remnant Media. Administrator Ernst & Young has
already sold Highbury’s IT magazines to Imagine Publishing (for an estimated
£7m) and Highbury Nexus was sold to Brush Colour for £1m). Remnant is a possible
buyer of the group’s remaining titles.

The finance director of Edinburgh-based oil and gas company Melrose
Resources
sold off a large batch of shares last week to take home close
on half a million pounds. James M Munro Sutherland sold 103,655 Melrose shares
at a price of 410p to earn £424,986. In its interim results, released in
September, Melrose saw turnover soar from to $47m (£26.3m) from $14.2m, while
pre-tax profits jumped to $22.7m from $6m.

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