Financial review - Chief Financial Officer's report
Accounting & disclosure
Changes in accounting and disclosure
As I mentioned in last year's report, companies are required to report under International Financial Reporting Standards (IFRS) from 1 January 2005 onwards. For Royal & SunAlliance that meant that our 2004 full year accounts were the last to be prepared under UK Generally Accepted Accounting Principles (UK GAAP) and these accounts for 2005 are the first to be prepared under IFRS. All the 2004 numbers included in this report have been restated on an IFRS basis.
While such a significant change in accounting basis can make it harder to understand how a business is really performing, I believe that the move to IFRS, combined with changes in disclosure we have initiated ourselves, will make it easier to see how we are performing.
Further detail on the changes to IFRS are set out in note 1 - First time adoption of International Financial Reporting Standards. However, I have set our below what I see as the key impacts of the conversion to IFRS and the changes in disclosure we have made.
Firstly, in the balance sheet the main change is the treatment of the pension fund deficit. This change is primarily a matter of accounting presentation. Under UK GAAP the pension deficit was previously disclosed solely in a note to the accounts, whereas under IFRS the deficit is now included in the balance sheet. For Royal & SunAlliance the net of tax pension deficit included in the balance sheet at 31 December 2005 was £370m, down from £544m in 2004.
On the income statement the main change is the treatment of the investment return. We have replaced our previous policy, of using the assumed longer term investment return, with showing the actual investment return earned during the period. This is a simple but significant change. Our profits now reflect what we are actually earning from the investment portfolio. As a consequence of this change, our profit after tax will be less volatile and a much more relevant measure of how we have performed in the year.
In addition, as part of the increased disclosure of IFRS we have set out for the first time, loss development tables in note 20 - Insurance contract liabilities. These show how the claims for each financial year since 2001 have matured and show how we are reserving for our liabilities. The tables will be updated on an annual basis and provide an insight into our claims experience. Finally, two downsides to IFRS are firstly that we can no longer provide a five year financial summary as we are not able to show UK GAAP and IFRS numbers in the same table. Secondly, the statutory disclosure does not provide clear insights into our business, hence we have persisted with a management classification of the financials.
It is worth emphasising that the change to IFRS does not change how the business is run. In terms of monitoring our performance, the key measures are much the same under UK GAAP or IFRS and these are set out in the table below:
| Key measure | What does it show? |
|---|---|
| Net written premiums | The amount of business we are writing |
| Combined operating ratio (COR) | The margin we are making |
| Operating result | The underlying profitability of our business |
| Profit after tax | The final, bottom line result for the period |
If you would like more detail on the changes to IFRS there are two presentations on our website, in the Investor Relations section, that we gave to the market on the conversion to IFRS at the beginning of 2005.
Other disclosures
We now split the result between the Core Group (UK, International, Scandinavia and Group Re) and the US reflecting the way we manage the Group. This was not part of the conversion to IFRS but is how we look at and manage the business and is, I believe, more helpful in understanding the Group's results.
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