RNS Number:4793I
BRIT Insurance Holdings PLC
05 September 2006
PRESS RELEASE
FOR IMMEDIATE RELEASE
5 September 2006
BRIT INSURANCE HOLDINGS PLC
Interim results for the six months ending 30 June 2006
Underwriting profit at record levels
Brit Insurance Holdings PLC, the UK-domiciled international general insurer and
reinsurer, today announces interim results for the six months ending 30 June
2006.
FINANCIAL HIGHLIGHTS
* Gross written premiums up 2.6% to #695.3m (2005 H1: #677.4m)
* Net earned premiums up 16.0% to #522.2m (2005 H1: #450.0m)
* Profit before tax and foreign exchange movements on non-monetary items
#118.5m (2005 H1: #102.5m)
* Profit before tax #106.0m (2005 H1: #112.2m)
* Earnings per share 23.0p (2005 H1: 24.3p)
* Interim dividend of 7.5p per share payable on 24 November 2006 to
shareholders on the register on 27 October 2006. The shares will go
ex-dividend on 25 October 2006. First dividend declared under new dividend
policy announced earlier this year
* Net tangible assets per share 209.0p (December 2005: 195.3p)
OPERATIONAL HIGHLIGHTS
* Underwriting profit up 38.4% to #92.0m (2005 H1: #66.5m), a record half
year underwriting performance for the Group
* Improved Group combined ratio 82.4% (2005 H1: 87.4%)
* London Market Underwriting Centre - record combined ratio of 80.6%;
gross written premiums up 19.4%
* UK Underwriting Centre - regional office network complete; combined
ratio an excellent 84.8%; gross written premiums down 13.1%
* Reinsurance Underwriting Centre - significant peak zone aggregate
reduction; gross written premiums down 1.9%; combined ratio 82.1%
* Reserve releases #23.5m (2005 H1: #30.7m)
Dane Douetil, Chief Executive Officer of Brit Insurance Holdings PLC, said: "A
record underwriting performance has been achieved, helped by a particularly
benign claims environment during the first six months. We have also achieved our
goal of rebalancing our underwriting portfolio with the aim of having less
volatility in our results. We have been able to do this by lowering our
exposures to peak zone catastrophe claims while at the same time increasing our
overall premium volumes in areas offering attractive returns; I am pleased by
the quality of our underwriting as shown in the combined ratios in all three
underwriting centres and by our continued commitment to operational improvement
in support of our organic growth.
"We have ambitious and challenging targets. Market conditions remain
satisfactory overall and we look forward to achieving our goals for the second
half of the year and beyond."
For further information, please contact
Dane Douetil, Chief Executive Officer, Brit Insurance Holdings PLC 020 7984 8500
David Haggie/Peter Rigby, Haggie Financial 020 7417 8989
There will be a presentation to analysts at Brit Insurance's office at 55
Bishopsgate at 9.30am today
An audio webcast of the analysts' presentation will be available on our website
www.britinsurance.com tomorrow.
Notes to Editors
Brit Insurance is a major UK-based general insurance and reinsurance group
writing both UK and international business
As at 31 August 2006, Brit Insurance was the fifth largest UK-primary-listed
non-life insurer and the 214th largest UK-listed company overall. It is a member
of the FTSE 250. Its shares and subordinated bonds are listed on the London
Stock Exchange. They have market capitalisations of #887m and #144m
respectively, giving a total market capitalisation of #1.03bn.
Its principal subsidiary, Brit Insurance Limited ("BIL") wrote 50.6% of the
Group's ongoing business in the six months to 30 June 2006, with the balance
written by its wholly owned Lloyd's Syndicate (Syndicate 2987).
Brit Insurance is financially strong; BIL's financial strength ratings have been
reaffirmed in 2006 by Fitch as A+ (Strong) and A M Best as A (Excellent), in
each case with stable outlook.
Brit Insurance: Our Business
Brit Insurance is a major UK-based general insurance and reinsurance group
writing both UK and international business.
As at 31 August 2006, Brit Insurance was the fifth largest UK-primary-listed
non-life insurer and the 214th largest UK-listed company overall. It is a member
of the FTSE 250. Its shares and subordinated bonds are listed on the London
Stock Exchange. They have market capitalisations of #887m and #164m
respectively, giving a total market capitalisation of #1.05bn.
Its principal subsidiary, Brit Insurance Limited ("BIL") wrote 50.6% of the
Group's ongoing business in the six months to 30 June 2006, with the balance
written by its wholly owned Lloyd's Syndicate (Syndicate 2987).
Brit Insurance is financially strong; BIL's financial strength ratings have been
reaffirmed in 2006 by Fitch as A+ (Strong) and A M Best as A (Excellent), in
each case with stable outlook.
STRATEGY
GROUP STRATEGY
Our goals are to be:
* a top five UK insurer
* recognised for our financial strength
* the best in our industry for customer service
* the insurer that is best able to attract, train and retain quality people
We want to be seen for and recognised as having: Integrity, Security, Expertise.
These brand values are what will make Brit Insurance our customers' Stronger
Option.
FINANCIAL STRATEGY
Our Group's strategic vision is to improve the economic well-being and quality
of life of our stakeholders - investors, policyholders and employees. To achieve
this vision our goal is to build on our current position and to become a top
quartile insurance sector performer in every respect - through our returns to
shareholders, our product offerings, our underwriting and asset allocation
skills, our customer service and our success at being an employer of choice.
Brit Insurance's aim is profitable growth while working within its risk appetite
constraints:
* Premium growth target: #2bn plus by 2010 (ie 10% plus average growth
each year)
* Across cycle return on equity target: 6% over risk-free rate
* Risk appetite constraints: Aggregate exposure to any one event or series
of events (Realistic Disaster Scenarios) set by the Board in the light of
market conditions with the aim of producing good returns while reducing
volatility; inwards reinsurance premiums less than 25% of total premium;
long-tail business less than 40% of total premium; Lloyd's business less
than 50% of total premium.
OVERVIEW
The first six months of 2006 witnessed both top-line growth in line with
expectations and an increased underwriting result over the same period in 2005;
pre-tax profit was reduced by the performance of the investment and currency
markets.
We are investing for the future, and continue to strengthen both senior and
middle management so that the business is built on ever stronger foundations to
position us to fulfil our growth aspirations.
We regard our target to grow the Group's gross written premium to #2bn by 2010
as challenging but achievable, bearing in mind that it can be dangerous to grow
an insurance business too quickly at the expense of quality and profit.
The reduction in catastrophe aggregates and the diversification programme which
we have successfully implemented and continue to develop should produce less
volatile earnings over time. However, it is never possible to predict insurance
results accurately for any single period.
We look forward to the remainder of 2006 and beyond with confidence.
FINANCIAL AND OPERATIONAL HIGHLIGHTS
Gross Premiums Written 2002 2003 2004 2005 2006
#'m #'m #'m #'m #'m
1 Jan to 30 Jun 397.3 666.2 778.5 677.4 695.3
1 Jul to 31 Dec 265.4 349.5 308.2 525.1
1 Jan to 31 Dec 662.7 1,015.7 1,086.7 1,202.5
Net Earned Premiums 2002 2003 2004 2005 2006
#'m #'m #'m #'m #'m
1 Jan to 30 Jun 121.5 286.4 412.5 450.0 522.2
1 Jul to 31 Dec 203.8 385.0 444.9 492.5
1 Jan to 31 Dec 325.3 671.4 857.4 942.5
Investment return 2002 2003 2004 2005 2006
#'m #'m #'m #'m #'m
1 Jan to 30 Jun (1.6) 18.8 22.2 61.2 37.0
1 Jul to 31 Dec 9.2 23.9 53.9 60.6
1 Jan to 31 Dec 7.6 42.7 76.1 121.8
Underwriting profit 2002 2003 2004 2005 2006
#'m #'m #'m #'m #'m
1 Jan to 30 Jun 5.5 22.4 58.6 66.5 92.0
1 Jul to 31 Dec 19.1 33.9 5.3 (104.0)
1 Jan to 31 Dec 24.6 56.3 63.9 (37.5)
Profit Before Tax 2002 2003 2004 2005 2006
#'m #'m #'m #'m #'m
1 Jan to 30 Jun (4.3) 31.0 69.7 112.2 106.0
1 Jul to 31 Dec 14.3 46.6 46.4 (49.8)
1 Jan to 31 Dec 10.0 77.6 116.1 62.4
Earnings Per Share 2002 2003 2004 2005 2006
p p p p p
1 Jan to 30 Jun (3.8) 8.4 15.8 24.4 23.0
1 Jul to 31 Dec 7.1 11.3 10.4 (9.5)
1 Jan to 31 Dec 3.3 19.7 26.2 14.8
Net Assets 30.06.02 31.12.02 30.06.03 31.12.03 30.06.04 31.12.04 30.06.05 31.12.05 30.06.06
#'m #'m #'m #'m #'m #'m #'m #'m #'m
Net tangible
assets 244.5 445.5 585.8 627.5 637.8 643.5 696.5 638.5 684.2
Net intangible
assets 24.9 30.8 79.4 70.0 75.6 79.2 84.0 86.2 87.0
Total net
assets 269.4 476.3 665.2 697.5 713.4 722.7 780.5 724.7 771.2
Net
tangible
assets per
share (pence) 171.6 178.8 180.5 193.3 196.4 198.2 214.5 195.3 209.0
Figures for 2002 and 2003 are stated in accordance with UK GAAP; figures for
2004 and subsequent years are stated in accordance with IFRS. All per share
figures reflect the 2006 share consolidation.
FINANCIAL HIGHLIGHTS
* Gross written premiums up 2.6% to #695.3m (2005 H1: #677.4m)
* Net earned premiums up 16.0% to #522.2m (2005 H1: #450.0m)
* Profit before tax and foreign exchange movements on non-monetary items
#118.5m (2005 H1: #102.5m)
* Profit before tax #106.0m (2005 H1: #112.2m)
* Earnings per share 23.0p (2005 H1: 24.3p)
* Interim dividend of 7.5p per share payable on 24 November 2006 to
shareholders on the register on 27 October 2006. The shares will go
ex-dividend on 25 October 2006. First dividend declared under new dividend
policy announced earlier this year
* Net tangible assets per share 209.0p (December 2005: 195.3p)
OPERATIONAL HIGHLIGHTS
* Underwriting profit up 38.4% to #92.0m (2005 H1: #66.5m), a record
half year underwriting performance for the Group
* Improved Group combined ratio 82.4% (2005 H1: 87.4%)
* London Market Underwriting Centre - record combined ratio of 80.6%;
gross written premiums up 19.4%
* UK Underwriting Centre - regional office network complete; combined
ratio an excellent 84.8%; gross written premiums down 13.1%
* Reinsurance Underwriting Centre - significant peak zone aggregate
reduction; gross written premiums down 1.9%; combined ratio 82.1%
* Reserve releases #23.5m (2005 H1: #30.7m)
PERFORMANCE: UNDERWRITING
REVIEW
The quality and diversity of our underwriting remains our core attribute,
reflected in our increasing underwriting result in terms of both premium volume
and profitability. Our underwriting profits are up 38.4% in H1 2006 to #92.0m.
Overall pre-tax profits are some 5.5% down on 2005 due to less favourable
investment and currency markets and the UPR/DAC foreign exchange adjustment.
As forecast at the time of publication of our full-year results in March 2006,
our premium growth has come from the London Market Underwriting Centre (19.4%).
The current competitive nature of the UK market has led to us scaling back
premium in this area by 13.1%. In the Reinsurance Underwriting Centre we have
reduced premium volumes as part of the Group's broader strategy of peak zone
catastrophe risk reduction and in anticipation of new catastrophe models'
increased recognition of risk.
Claims frequency and severity have been particularly benign in the first half of
2006. There remains a meaningful element of potential seasonality in our
reported profits because the US windstorm season is largely concentrated into
the second half of a calendar year. While we are less exposed to US wind and
other catastrophe events than we were last year, it remains a material variable
in determining the full year result.
The table below shows a summary of the peak zone risk aggregate reductions
achieved since 30 September 2005.
Class of Business Contribution to Reduction in Reduction in
2005 gross exposure exposure
hurricane claims 1 January 2006 1 July 2006
% % %
Catastrophe
Retrocessional 23 42 96
Property
Reinsurance 32 26 30
US Property
Direct 21 - 30
Energy Offshore 17 - 42
Other 7 - -
------------
Total 100
-------------------- ------------ ------------ ------------
An estimated 12% of the Group's gross written premiums are exposed to natural
catastrophes (2005: 18%). For a notional US$50bn US windstorm, our 2006
Realistic Disaster Scenario modelling shows that our gross claims would be down
by approximately 60% compared with Hurricane Katrina. To take a single class of
business as a further example, our property treaty reinsurance account shows "as
if" reductions of 43% in gross claims on a repeat of Hurricane Katrina, 40% on a
repeat of Hurricanes Katrina, Rita, and Wilma and a 64% reduction in gross
claims on a notional repeat of the four major US windstorms of 2004.
RESERVING
Prior year reserves have again proved robust in aggregate with an overall
release of #23.5m. Within this overall figure we have strengthened the overall
claims estimate for the 2005 hurricanes net of reinstatement premiums by #42.0m.
This has been driven principally by offshore energy and the reclassification of
Rita to a market loss in excess of US$5bn and of Wilma to a market loss in
excess of US$10bn, resulting in several industry loss warranties in our
retrocessional account being triggered. We no longer underwrite retrocessional
industry loss warranties or Gulf of Mexico catastrophe exposed energy business.
Reserve movements in 6 months to 30.06.06
Underwriting Centre Class 30.06.06 30.06.05 31.12.05
#'m #'m #'m
London Market Accident & Financial (2.9) 3.6 9.4
Aerospace 6.0 3.7 7.5
Casualty 8.1 8.3 22.6
Marine (5.4) 3.2 11.5
Property 10.0 6.9 15.1
-------- -------- --------
15.8 25.7 66.1
-------- -------- --------
Reinsurance Property 6.7 (3.3) 2.0
Retrocessional (19.1) (5.5) (6.2)
Marine (4.2) (1.0) (2.1)
Casualty (1.3) 2.6 0.5
Aviation 0.8 0.3 0.8
-------- -------- --------
(17.1) (6.9) (5.0)
-------- -------- --------
UK Property 10.5 8.2 12.3
Casualty 2.9 3.3 4.1
Motor 3.1 3.4 8.8
Liability 9.5 (2.5) 18.4
-------- -------- --------
26.0 12.4 43.6
-------- -------- --------
Other (1.2) (0.5) 6.1
-------- -------- --------
Total 23.5 30.7 110.8
--------------------- -------------- -------- -------- --------
OUTLOOK
The underwriting centres are at different points in their respective pricing
cycles. There are clear pricing and growth opportunities in Reinsurance, which
are partly constrained by our own catastrophe risk appetite. We will grow our UK
business at the appropriate time, but not in the current under-priced
environment. The near term opportunity for growth is in the London Market.
PERFORMANCE: UNDERWRITING - MARKET CONDITIONS
As can be seen from the rating indices below, rates have increased significantly
for US-wind exposed catastrophe risks while remaining stable or showing modest
reductions from historically high levels in many other classes. While headline
risk pricing remains an important metric, we also closely monitor any changes in
the terms and conditions associated with the prices and in most areas these
remain robust. As in previous years, we emphasise that these indices are to be
read with caution. They are based on underwriters' estimates of rate changes,
including adjustments to terms and conditions, and relate to renewal business
only, since this represents the business on which we have the best year-on-year
data.
UK UNDERWRITING CENTRE
Premium Rating Index (Year 2000 as base year)
31 December 31 December 31 December 31 December 31 December 31 December 30 June 2006
2000 2001 2002 2003 2004 2005
Property 100 104 123 132 131 130 126
Casualty N/A N/A 100 130 129 120 120
Motor 100 108 115 120 122 111 106
Liability N/A 100 200 286 284 257 230
LONDON MARKET UNDERWRITING CENTRE
Premium Rating Index (Year 2000 as base year)
31 December 31 December 31 December 31 December 31 December 31 December 30 June 2006
2000 2001 2002 2003 2004 2005
Accident &
Financial n/a 100 131 142 147 150 157
Aerospace 100 158 202 237 260 268 260
Casualty 100 122 207 288 303 301 293
Marine 100 112 144 156 160 171 182
Property 100 112 150 155 152 151 172
REINSURANCE UNDERWRITING CENTRE
Premium Rating Index (Year 2000 as base year)
31 December 31 December 31 December 31 December 31 December 31 December 30 June 2006
2000 2001 2002 2003 2004 2005
Property - USA
and Canada 100 110 149 154 155 159 204
Property -
International 151 151 163
Property -
Retrocessional 100 110 132 120 117 126 n/a
Marine 100 115 171 179 183 193 287
Casualty 100 115 182 215 230 228 233
Aviation 100 100 167 159 139 128 128
PERFORMANCE: UNDERWRITING - UK UNDERWRITING CENTRE
REVIEW
12m ended 6m ended 12m ended 6m ended 12m ended 6m ended
31.12.03 30.06.04 31.12.04 30.06.05 31.12.05 30.06.06
#'m #'m #'m #'m #'m #'m
Gross written premium:
Property 69.0 68.8 73.3 38.3 79.6 35.6
Casualty 39.6 22.9 37.3 19.2 35.6 19.3
Motor 113.0 51.1 105.6 46.2 89.9 39.5
Liability 87.8 82.7 129.2 64.8 112.8 52.1
Total 309.4 225.5 345.4 168.5 317.9 146.5
Net earned
premium 221.2 156.6 301.0 142.9 302.6 126.3
Underwriting
profit 2.7 9.4 24.5 23.0 65.6 19.2
Profit before
tax 16.1 17.6 54.3 45.2 112.3 30.4
Claims ratio 71.4% 72.3% 68.1% 60.6% 55.8% 56.4%
Expense Ratio 23.9% 22.2% 23.9% 23.7% 22.6% 28.4%
Combined Ratio 95.3% 94.5% 92.0% 84.3% 78.4% 84.8%
In the light of an increasingly competitive market environment in the six months
to June 2006, we have held to our strategy of avoiding short-term price-cut-led
growth and our book has remained largely unchanged. The combined ratio is 84.8%
(30 June 2005: 84.3%).
Disciplined underwriting in face of these market pressures has resulted in a
reduction in written premiums of some 13.1% compared with the same period last
year. There were, however, exceptions to this trend. For instance, the UK
Package account showed a strong increase on the prior year's performance and
Motor Special Risks has proved a growth area reflecting the broadening of the
broker base and increased automation of trading.
OUTLOOK
Our intention to grow our UK division significantly and profitably over the next
five years remains unaltered, although in the short term this will be difficult
to achieve. We continue to seek out opportunities wherever we can in the current
difficult conditions, whilst continuing to invest in the future to ensure that
we can capitalise fully once these conditions improve. Our Reading office opened
in March and completed our current plans to establish a presence in major
economic zones throughout the UK.
As indicated in our premium rating index, prices are continuing to fall. Our own
expectations, matched by those of some market commentators, suggest for some
lines of business, that upwards rating movements will be evident in 2007.
PERFORMANCE: UNDERWRITING - LONDON MARKET UNDERWRITING CENTRE
REVIEW
12m ended 6m ended 12m ended 6m ended 12m ended 6m ended
31.12.03 30.06.04 31.12.04 30.06.05 31.12.05 30.06.06
#'m #'m #'m #'m #'m #'m
Gross written premium:
Accident &
Financial 114.0 107.8 123.3 100.0 188.4 112.3
Aerospace 61.5 10.1 28.6 3.8 11.1 11.2
Casualty 114.5 63.0 112.1 65.0 128.0 85.9
Marine 81.3 61.0 80.0 65.4 115.7 76.4
Property 97.0 87.0 87.6 60.2 115.4 65.7
-------- -------- -------- -------- -------- --------
Total 468.3 328.9 431.6 294.4 558.6 351.5
-------- -------- -------- -------- -------- --------
Net earned
premium 285.4 169.9 367.4 197.5 412.1 266.3
Underwriting
profit 10.4 26.3 28.2 36.5 (0.8) 51.5
Profit before tax 29.8 33.9 57.4 59.0 44.2 66.3
Claims ratio 62.1% 50.9% 58.0% 48.5% 63.8% 43.2%
Expense Ratio 29.5% 37.6% 34.5% 36.3% 38.2% 37.4%
Combined Ratio 91.6% 88.5% 92.5% 84.8% 102.0% 80.6%
The London Market Underwriting Centre has showed sustained growth in gross
written premiums of 19.4% compared with the corresponding period in 2005. On a
compound basis over the past 3 years growth has been in excess of 18% per annum.
As well as good growth during the first half the Underwriting Centre was also
able to improve its combined ratio to 80.6% (30 June 2005 84.8%), its best
result to date.
This premium growth has been partially due to increased rates following the US
wind affected catastrophe classes, specifically US property. In this regard we
have consciously chosen to reduce our aggregate exposure, and by careful risk
selection we have improved the profile of the account whilst retaining premium
levels. Examples of this proactive management include reducing excess flood
exposure in certain areas of Florida (FEMA zones A & V) within 2 miles of the
coast by more than 50% and reducing Louisiana, Mississippi and Alabama exposures
by 48% at 30 June 2006. All of this increases our spread and diversity. In
addition, we have purchased increased reinsurance for our US Property account.
We have withdrawn from writing off-shore energy business within the Gulf of
Mexico to avoid further correlation with our on-shore writing. Although rates
have risen strongly, we are still not convinced that the industry's risk
management and the lead insurers' ability to respond to major events reflect the
increasing volatility inherent within the industry. We remain active in the
off-shore energy market outside of the Gulf of Mexico, for which rates are also
hardening and where the risk correlation with our other books of business is
much lower.
The remainder of our premium growth has come from opportunities in
non-catastrophe correlating classes. We have, for example, achieved 82.7% growth
in Medical Expenses and 9.9% in Financial Institutions.
The Underwriting Centre employs 40 lead underwriters under Mike Sibthorpe. In
addition, we have established under Richard Webster a business development team
of four. This unit, whilst a resource for underwriters on the one hand, plays a
proactive role in enhancing the Group's relationship management and
communications within the London Market.
OUTLOOK
Our 2007 business plans show further growth consistent with that of recent
years. However, profitability is the key focus for our underwriters. The London
Market Underwriting Centre has a diversity of geography and product line and not
all lines in the product range show the same opportunities for profit and
growth. On balance, rates, terms and conditions continue to be favourable to
underwriters. Our diversity is the key to achieving profitable growth in this
division and to achieve #1bn of gross written premium by 2010.
PERFORMANCE: UNDERWRITING - REINSURANCE UNDERWRITING CENTRE
REVIEW
12m ended 6m ended 12m ended 6m ended 12m ended 6m ended
31.12.03 30.06.04 31.12.04 30.06.05 31.12.05 30.06.06
#'m #'m #'m #'m #'m #'m
Gross written premium:
Property 102.9 93.0 133.3 97.0 140.8 96.2
Property -
Retrocessional 41.9 26.3 42.7 30.1 63.3 14.1
Marine 2.0 10.0 7.1 6.7 12.0 9.0
Casualty 55.1 43.3 60.9 49.3 73.3 75.0
Aviation 19.9 14.0 36.0 32.0 39.4 16.8
-------- -------- -------- -------- -------- --------
Total 221.8 186.6 280.0 215.1 328.8 211.1
-------- -------- -------- -------- -------- --------
Net earned
premium 150.3 80.2 179.9 107.0 224.2 129.4
Underwriting
profit/(loss) 50.7 23.2 9.0 3.6 (103.5) 23.1
Profit/(loss)
before tax 61.9 26.7 23.2 14.2 (81.1) 31.9
Claims ratio 39.9% 46.7% 68.5% 71.9% 119.8% 54.5%
Expense Ratio 25.8% 27.8% 26.6% 27.2% 28.5% 27.6%
Combined Ratio 65.7% 74.5% 95.1% 99.1% 148.3% 82.1%
The reinsurance industry has seen radical change in market dynamics, driven by
the hurricane losses of 2004 and 2005 and major revisions to the generally
adopted catastrophe models and the rating agencies' analysis. We and our
competitors have re-examined our approach to the whole sector.
The Reinsurance Division has continued its strategy of reducing peak zone
aggregate exposures in a drive to reduce the overall volatility of the Group's
results. Property Catastrophe aggregate reductions have been notable across our
key territories of the USA, Europe, Japan and Australia. Aggregate reductions
across the Reinsurance Division have included:
- Non-renewal of the Property Catastrophe Retrocession portfolio for 2006
- Withdrawal from Caribbean Property Treaty business in late 2005
- Reductions in Property Treaty total sum insured aggregates in the
USA, Europe, Japan and Australia
- Reduced gross aggregates for Marine XL business in the Gulf of Mexico
Outward reinsurance protection has been purchased on a worldwide basis for the
relevant portfolios.
Price increases in the specific sectors impacted by the 2004 and 2005 losses
(notably US wind exposed business) have been substantial. As yet the
International Property Treaty account has not reacted in the same way.
Loss-impacted Marine XL programmes have seen substantial rises during the first
half of 2006 whilst Casualty Treaty rating levels remain broadly flat.
During the half year we investigated options for a catastrophe retrocessional
"sidecar" vehicle, using principally third party capital for this specific class
of business. It is now clear that there was insufficient investor demand for a
pure retrocessional underwriting product but we continue to explore potential
variations, possibly involving a broader mix of reinsurance classes, for 2007
and we believe this kind of capital structure will become increasingly used over
time in reinsurance markets globally.
OUTLOOK
We anticipate International Property Treaty prices to increase to a level more
consistent with US business, as our competitors realise the differential in
relative pricing levels between the two market places. The need for sound
underwriting judgement and prudent aggregate management remains the key to
success going forward, a fact that will be further exacerbated by the likely
paucity of available retrocession protection in the coming year. Nevertheless
our broad-based, multi-class offering, allied to our team of experienced
underwriters gives us confidence in the future as we take advantage of the
opportunities that will be presented along the way.
PERFORMANCE: INVESTMENTS
REVIEW
The Group's total investment return for the half year was #37.0m (30 June 2005:
#61.2m).
Total invested assets were approximately constant at #2,382.5m (31 December 2005
#2,373.7m). Positive cash flow from new business was balanced by claims
payments in respect of the hurricanes of 2004 and 2005, the final 2005 dividend
payment and the partial redemption of the Unsecured Loan Stock.
As previously, some 90% of our investment portfolio remains in a mixture of cash
and short duration, high quality fixed income securities. Both Sterling and US
dollar interest rates rose some 70 basis points in the half year. If it
continues, this trend augurs well for future levels of investment return, but it
has a short term effect of a mark-to-market unrealised loss on the current bond
portfolio. In the half year we recorded unrealised losses on the bond portfolio
of #12.8m.
83% of the Group's investments are managed by subsidiaries of Equity Investment
Partners ("EIP"), in which the Group owns a 41% stake. Discussions continue
with a number of parties with a view to the potential sale of this stake. While
investment returns remain central to the Group's profitability, we have decided
that the Group does not need to own its investment manager and is not deriving
value in its share price from doing so; and that EIP's own future growth may be
faster under new ownership.
As can be seen from the following tables having outperformed the benchmarks for
our asset classes in 2005, we have performed largely in line with the benchmarks
in the first half of 2006, given our asset mix and the duration of our bond
portfolio.
Asset Allocation 30.06.06 30.06.05 31.12.05
#m #m #m
Equities 199.6 205.1 219.0
Bonds 1,741.0 1,482.1 1,626.6
Cash and deposits 440.3 339.9 526.6
Derivatives and assets held for sale 1.6 0.0 1.5
-------- -------- --------
Total 2,382.5 2,027.1 2,373.7
-------- -------- --------
Bonds, cash and deposits currency mix 30.06.06 30.06.05 31.12.05
% % %
Sterling 59.5 71.8 62.9
US Dollar 29.5 22.1 28.2
Euro 7.2 4.4 6.1
Other 3.8 1.7 2.8
-------- -------- --------
Total 100.0 100.0 100.0
-------- -------- --------
Sterling fixed income performance 6m ended 6m ended 12m ended
(Absolute return for period) 30.06.06 30.06.05 31.12.05
% % %
Group's Sterling fixed income performance 1.33 3.31 5.36
1 month sterling LIBID 2.24 2.37 4.72
1 year gilts 1.83 2.17 4.57
5 year gilts 0.65 3.34 4.98
US dollar fixed income performance 6m ended 6m ended 12m ended
30.06.06 30.06.05 31.12.05
% % %
Group's US dollar fixed income performance 1.18 1.02 1.87
1 month dollar LIBID 2.31 1.31 3.18
0-1 year US Treasury Note Index 1.60 1.06 2.84
1-3 year US Treasury Bond Index 1.04 0.97 1.67
Equity returns 6m ended 6m ended 12m ended
30.06.06 30.06.05 31.12.05
% % %
The Group's equities 5.65 9.92 27.10
FT All Share Index 5.77 8.14 20.91
FTSE 100 5.42 8.46 19.63
Bond portfolio duration 30.06.06 30.06.05 31.12.05
Yrs Yrs Yrs
Sterling 1.93 1.85 1.57
US Dollar 1.73 1.97 1.40
Euro 1.67 1.65 1.40
CAD 1.35 1.40 1.48
Bond portfolio credit ratings 30.06.06 30.06.05 31.12.05
% % %
Government 42.0 58.0 49.0
AAA 16.0 15.0 14.0
AA 28.0 18.0 26.0
A 14.0 9.0 11.0
Total 100.0 100.0 100.0
OUTLOOK
The recent increase in interest rates appears likely to result in increased bond
returns over the medium term.
Furthermore, the indications are that the current range of rate rises in the UK
and the USA are at or near their peak, which should strengthen the Group's
investment return during the remainder of 2006.
CUSTOMERS
CLAIMS
Our claims management performance has again been of the highest quality and has
continued to be recognised by our peers in terms of awards. For its response to
the US windstorms of 2005, the team has this year received the Major Loss Award
at the British Insurance Awards Ceremony.
There are two principal reasons why we place, as a group, so much emphasis on
the claims function. First, it is vital that claims are managed and adjusted
professionally because they represent by far the largest cost for an insurer.
Secondly, the prompt and efficient handling and payment of claims is the key
customer service which an insurer offers, ultimately building brand and
goodwill.
In areas which do not allow us to conduct or delegate claims control and service
to our satisfaction, we are prepared to reduce or withdraw from writing the
business. An example in this half year has been Gulf of Mexico Offshore Energy
Catastrophe business.
Brit Insurance directly handles an average of 6,700 new claims notifications and
40,000 reserve movements from our clients every month, in addition to claims
handled by our international coverholders and third party administators and
audited by the Brit Insurance Claims team. Every claim is an opportunity for us
to support our clients and brokers utilising Brit Insurance's significant
expertise in third party defence, balance sheet protection, loss minimisation,
restoration and business continuity. Our objective is to ensure fair, equitable
and speedy resolution of covered claims and to this end our focus for 2006 and
2007 is to build upon excellence in worldwide field adjustment with accurate and
meaningful measurement of our own performance.
Complaints about Claims, as defined by the FSA and Lloyd's reportable complaints
are at a rate of 6.9 per 1,000 claims handled (0.69%). All complaints are
handled via Brit Insurance's Customer Relations team and in the 6 months to 30
June 2006 a third of complaints have been resolved directly through Customer
Relations. 91% of complaints resolved by the regulator have been found in Brit
Insurance's favour. The three main causes of complaint are "settlement amount",
"delay" and "repudiation of a claim".
BRAND
We have, in the first six months of the year, continued to develop our name and
brand awareness both within the insurance market and more generally. This is of
particular benefit to our growing London Market and UK businesses, where name
recognition is so important.
We have continued to advertise in the insurance trade press, focusing on our
responsiveness and expertise. We will continue to use the 'Your Stronger Option'
strap line and reinforce our three key values: integrity, security and
expertise.
Our emphasis on using sports sponsorship allows us to associate with other
leading-name brands and provide first-class facilities for building individual
relationships with our intermediaries and clients. Following the success of the
Brit Insurance Oval sponsorship which coincided with the Ashes cricket success
of 2005, the Group has extended this contract until 2010 - thus including, inter
alia, the 2009 Ashes series. Our other sports sponsorship activities, notably
the four National Hunt Brit Insurance Novice Hurdles races, which culminated at
the Cheltenham Festival in March, and the Super Series Squash Finals, which we
sponsored for the fourth time this year, have continued to enhance awareness of
Brit Insurance. Both received extensive broadcast and print media coverage.
On 10 July 2006, Brit Insurance sponsored a charity cricket match between
Pakistan and an International XI at the Brit Insurance Oval in aid of the
earthquake relief effort in Pakistan. The 20,000 crowd were entertained by some
of world cricket's biggest names, including a full-strength Pakistan team and an
International XI captained by Rahul Dravid and also including Sachin Tendulkar
and Brian Lara, three of the leading world cricket stars of their generation.
The evening raised over #250,000, which included a #100,000 donation from Brit
Insurance.
OPERATIONS
BUSINESS PROCESS
Following the appointment of Kathy Lisson as Chief Operating Officer in
September 2005 and her promotion to the Group Board in April 2006, a number of
other senior appointments have been made as we look to strengthen our overall
operations platform to position ourselves strategically to:
*Lead industry-wide process reform
*Grow our book of business substantially over the coming years
*Decrease operational dependency on central functions conducted by Lloyd's
and London Market Bureaux as our business mix becomes more heavily weighted
to the broader, non-bureau, company market
*Win new business on the back of service quality and operational
efficiency
*Integrate efficiently any acquisitions should the opportunities arise
Group Operations has embarked on an internal change programme to streamline and
enhance the services offered to the Group in support of the strategic vision.
This has included a reorganisation of the teams to emphasise the focus on
day-to-day operations in business processing and IT as well as creating a new
strategy and change delivery capability. Our commitment to customer service and
continuous improvement will be underpinned by the centralisation of key
back-office processes to streamline delivery and improve the quality of
information across the business.
We are making a significant investment in technology to support enhanced online
access, including the electronic sharing of information with brokers,
marketplaces and key suppliers, and to deliver greater flexibility and
speed-to-market for new products. A new capability will be developed to leverage
our comprehensive management information and to drive key business decisions.
It remains our strongly held opinion that the insurance industry, and
particularly the subscription market, is undergoing a process of rapid and
fundamental change to its structures and processes; and that it is important for
the Group to build and maintain the right processes, infrastructure and controls
so that these features become a competitive advantage to Brit Insurance in the
marketplace. In short, we intend to be in a position that we can treat these
market changes as an opportunity rather than a challenge.
In January 2006, Dane Douetil succeeded former Lloyd's Chief Executive Nick
Prettejohn as Chair of the Market Reform Group ("MRG"). The MRG is the ultimate
body responsible for process reform and modernisation in the London insurance
market. It oversees the London subscription market's response to the FSA
challenge for a substantial improvement in the degree of contract certainty by
the end of 2006. The Group is also driving the market's electronic claims file
initiative and the implementation of new accounting and settlement processes.
PEOPLE
Staff survey
Our success will be largely driven by our ability to attract, train and retain
the best talent at all levels within the Group. As part of a holistic HR plan,
we again decided to measure our performance in this area through an employee
survey, which consisted of 69 questions. We received an excellent 72% response
rate. The overall results have been communicated to all staff and meetings have
also been held with department heads to explain the result for their areas.
Focus groups have been formed to examine further the key issues identified. The
survey asked staff to express agreement or disagreement with a number of
statements and some of the key responses are as follows:
Statement Respondents agreeing or Brit Benchmark supplied by
strongly agreeing score* survey agency*
(%)
I can see how
my department
contributes to
Brit Insurance's 92 4.21 n/a
success
I am trusted
to get on
with my job,
without feeling
over-managed 89 4.21 4.20
I can rely
on other people
in my team 87 4.13 4.12
I would
recommend
Brit Insurance
as a good
company
to work for 86 4.11 3.70
I have a
pleasant
working
environment 86 4.07 3.63
Overall, I
am satisfied
working for
Brit Insurance 83 3.95 n/a
Brit Insurance
values its
employees 82 3.95 n/a
*A 5-point scale was used, with 5 indicating very high levels of agreement or
satisfaction. A mean of over 4 is regarded as excellent and above 3.5 is
regarded as good.
Bonus scheme
For a number of years Brit Insurance has promoted a strong team ethic and
culture, including collective incentivisation of underwriting and other staff
within a single Group bonus pool based on Group profitability.
This bonus pool is split between a Group element (for being part of a successful
team) and a Personal element (for individual merit). For the 2006 bonus year,
greater emphasis will be placed on the Personal element. This will enable Brit
Insurance better to incentivise and reward individual employees who have
demonstrated exceptional performance.
FINANCIAL MANAGEMENT
We have been active in our financial management in the half year, within a
consistent philosophy of financial strength and prudence.
EXPENSES
30.06.06 30.06.05 31.12.05
#'m #'m #'m
Commission costs 124.7 97.2 207.4
Group management expenses 62.6 51.1 100.8
Total 187.3 148.3 308.2
The commission cost ratio for the period was 23.9% (30 June 2005: 21.7%). This
increase reflects a change in business mix during the period, with Catastrophe
Retrocessional business being replaced by a mix of other classes with higher
associated acquisition costs.
Group management expenses totalled #62.6m (30 June 2005: #51.1m), the equivalent
to a total management expense ratio of 12.0% (30 June 2005: 11.3%). The main
categories of expense movement between the period ending 30 June 2006 and the
period ending 30 June 2005 were as follows:
----------------------- ------------ ------------ -------------
6 months ended 30.06.06 6 months ended 30.06.05 12 months ended 31.12.05
Expenses Ratio Expenses Ratio Expenses Ratio
#'m % #'m % #'m %
----------------------- ------- ------ ------- ------- ------- -------
Staff costs 33.3 6.4 29.1 6.5 49.5 5.3
Accommodation
costs 2.9 0.6 2.9 0.7 5.7 0.6
Foreign
exchange 2.4 0.5 - - - -
Legal &
professional
charges 5.2 1.0 1.9 0.4 6.2 0.7
IT costs 3.7 0.7 3.4 0.8 4.7 0.5
Regulatory
levies and
charges 6.4 1.2 7.2 1.6 14.8 1.6
Other 8.7 1.7 6.6 1.4 19.9 2.1
------- ------ ------- ------- ------- -------
Expenses
before
commissions 62.6 12.0 51.1 11.4 100.8 10.7
Commission
costs 124.7 23.9 97.2 21.7 207.4 22.0
------- ------ ------- ------- ------- -------
Total expenses 187.3 35.9 148.3 33.1 308.2 32.7
------- ------ ------- ------- ------- -------
Insurance
related
expenses 46.7 8.9 36.4 8.1 83.3 8.8
Commission
costs 124.7 23.9 97.2 21.7 207.4 22.0
------- ------ ------- ------- ------- -------
Insurance
expenses and
insurance
ratios 171.4 32.8 133.6 29.8 290.7 30.8
Group overheads 15.9 3.1 14.7 3.3 17.5 1.9
------- ------ ------- ------- ------- -------
Total expenses 187.3 35.9 148.3 33.1 308.2 32.7
------- ------ ------- ------- ------- -------
------------------------ ------- ------ ------- ------- ------- -------
A foreign exchange loss for the period of #2.4m is included in these expenses.
This is equivalent to a 0.5% increase in the expense ratio. The foreign exchange
profit for the same period last year of #10.4m was included in other income.
Headcount
During 2006, the headcount of the Group has increased by 9.3%, from 601 to 657,
in line with expectations. Staff turnover remains low at 4%.
Growth has occurred across the organisation, with emphasis on Group Operations
in London. This follows the re-organisation of this division to strengthen our
operations platform, enabling Brit Insurance to take advantage of future
opportunities and to support the Group's strategic vision for profitable growth.
Expansion has occurred in other support areas too. For instance, within Finance,
credit control staff have increased by nine, following the decision to
repatriate certain outsourced functions. This will lead to an ongoing net cost
saving for the Group as well as increased integration.
---------------- -------------- --------------
30.06.06 31.12.05
Division No. % No. %
Underwriting - London Market 81 12.3% 80 13.3%
Underwriting - Reinsurance 28 4.3% 28 4.7%
Underwriting - UK 148 22.5% 143 23.8%
Underwriting - Other 3 0.5% 3 0.5%
-------- -------- -------- --------
Underwriting - Total 260 39.6% 254 42.3%
Claims 110 16.7% 105 17.5%
Advisory 15 2.3% 18 3.0%
Corporate Development 24 3.7% 21 3.5%
Finance 57 8.7% 49 8.2%
Group Services 13 2.0% 10 1.7%
Operations, IT and Actuarial 118 17.9% 84 14.0%
Other 23 3.5% 25 4.2%
-------- -------- -------- --------
620 94.4% 566 94.2%
RI3K 37 5.6% 35 5.8%
-------- -------- -------- --------
657 100.0% 601 100.0%
---------------- -------- -------- -------- --------
---------------- -------------- --------------
30.06.06 31.12.205
No. % No. %
Location
Birmingham 12 1.8% 11 1.8%
Bristol 8 1.2% 7 1.2%
Darlington 29 4.4% 28 4.7%
Glasgow 11 1.7% 9 1.5%
Ilford 122 18.6% 119 19.8%
Leeds 10 1.5% 11 1.8%
London 416 63.3% 371 61.7%
Manchester 10 1.6% 10 1.7%
Reading 2 0.3% 0 0.0%
-------- -------- -------- --------
620 94.4% 566 94.2%
RI3K 37 5.6% 35 5.8%
-------- -------- -------- --------
657 100.0% 601 100.0%
---------------- -------- -------- -------- --------
RISK MANAGEMENT
The Group continues to monitor and develop its analytical techniques for all
major categories of risk - insurance, market, credit, liquidity, operational and
group risk. During the six months the Group took delivery of new risk management
software plus updated industry disaster modelling software. In addition, the
Group has continued to develop its own proprietary 'blast zone' software for
monitoring certain high value peak zone war and terrorism property exposures in
real time and in more detail than would be possible using commercially available
systems and traditional zip code analysis.
RATINGS
BIL's financial strength ratings have again been reaffirmed in August 2006 at A+
(Strong) by Fitch and A (Excellent) by A M Best, in each case with stable
outlook.
This is consistent with our target rating range. We believe any rating of AA or
higher would reduce our return on equity because the additional capital required
to achieve and maintain such a rating would, in our opinion, not lead to a
commensurate increase in the quantity and quality of premiums and conversely, in
our opinion, any rating below A- would result in a material reduction in the
quality and quantity of business written.
The ratings of our subordinated debt issues have also remained stable in the
period; they are four "notches" below the financial strength rating of the
principal subsidiary, which is in line with standard rating agency methodology.
REGULATORY CAPITAL
We have recently agreed our capital requirements for BIL with the FSA for the
next couple of years, further to our initial agreement of these measures in
2004.
SHARE CONSOLIDATION
As announced at the time of the publication of our final results in March 2006,
the Group consolidated its share capital on the basis of one new share for three
existing shares held at close of business on 12 May 2006. All 'per share'
figures in these interim statements, including comparatives, have been restated
to reflect this change.
FINANCING AND REFINANCING
During the half year, as foreshadowed at the time of our subordinated debt issue
in December 2005, we made a tender offer for the Group's 8.5% subordinated
unsecured loan stock 2008 ('ULS') at a price of 109p per #1 nominal of stock
including accrued interest. The level of acceptances of the offer, plus a small
number of subsequent on-market purchases at the same price, led to the purchase
and cancellation of 20,573,132 units at a total price of #22.4m. This was an
overall take-up of 51.0% and removed some gearing which is now so near to
maturity that, although subordinated, was being given no credit in our key
capital calculations.
DEFINED BENEFIT PENSION FUND
As we stated in December 2005, the Group has made an additional contribution of
#2m in the first half of 2006 towards reducing its pension fund deficit. These
additional contributions are intended to increase to #5m per annum from 2007;
the reason for this stepped profile of additional contributions is that there
are limits on the quantum of additional contributions that attract immediate tax
relief. Because of the additional contribution and rising bond rates, partially
offset by lower than expected investment return, the pension fund deficit as
calculated under IAS 19 fell in the half year from #22.8m to #19.5m.
With effect from May 2006, Matthew Scales, Group Finance Director, stepped down
as a trustee of the Brit Group Services Retirement Benefit Scheme and Antony
Usher, Group Financial Controller, has been appointed in his place.
DISTRIBUTABLE RESERVES
During the half year we completed the High Court Scheme to transfer #180m from
the share premium account to the capital reorganisation reserve, to enhance
capital management flexibility.
FOREIGN EXCHANGE
The Group's overall foreign exchange policy is to remain broadly matched in
terms of assets and liabilities in its four biggest currencies - Sterling, US
dollars, Euros and Canadian dollars.
Following the hurricane activity of late 2005, the Group had a net "short"
position in US dollars. In line with the above policy, the Group decided to
purchase dollars over an extended period rather than immediately, in order to
take advantage of the dollar exchange rate which we expected to weaken. An
option to purchase US$200m at 1.72 was purchased at a cost of #2.1m to allow the
dollar purchases to be conducted over time and to protect against any loss in
the event of dollar strengthening.
30.06.06 30.06.05 31.12.05
#m #m #m
Exchange profit/(loss) excluding UPR/DAC
adjustment 10.1 0.7 (9.7)
UPR/DAC exchange adjustment (12.5) 9.7 21.3
Profit/(loss) on exchange (2.4) 10.4 11.6
Under International Financial Reporting Standards, while most foreign currency
balances are translated to Sterling at the prevailing balance sheet rate,
"non-monetary items" (principally deferred acquisition costs and unearned
premium reserve) are translated at historic rates. This causes exchange
differences to be reported in the financial statements even when the overall
economic position, including non-monetary items, is neutral. The effect of this
treatment was to reduce 2006 half year profit by #12.5m while increasing the
comparative period by #9.7m, a total "swing" of #22.2m.
REINSURANCE PURCHASE AND RECOVERIES
For this half year our reinsurance spend as a percentage of gross written
premiums remained constant compared with the same period last year (30 June
2006: 24.5%; 30 June 2005 24.6%), reflecting our decision to purchase cover for
2006 on a basis comparable with prior years.
Our reinsurance recoverables by financial strength rating are as follows:
30.06.06 30.06.05 31.12.05
% % %
AAA 0.5 0.7 0.4
AA 23.1 20.0 29.7
A 64.5 71.9 62.6
BBB and below 4.4 0.3 2.1
Not rated 7.5 7.1 5.2
Total 100.0 100.0 100.0
FINANCING GROWTH
Following the equity capital raisings of 2001 to 2003, the Group has grown its
premiums to utilise that capital, as shown by the following table:
Ratio of gross written premium to closing net tangible assets
2002 2003 2004 2005 2006
% % % % %
1 Jan to 30 Jun 89.2 106.2 121.0 106.1 101.6
1 Jul to 31 Dec 59.6 55.7 47.9 82.2
1 Jan to 31 Dec 148.8 161.9 168.9 188.3
One of the principal objectives of the Group's revised dividend policy, which is
to seek in the absence of unforeseen circumstances to pay 50% of earnings over
time, subject to a minimum of 15p per new share, is to allow a sufficient level
of retained earnings to finance the Group's stated medium term growth ambitions.
It is also expected that, as the Group grows its capital and its premium
written, it would seek to raise additional long-term subordinated debt in order
to keep gearing in the desired ratio of 20 to 30% of net tangible assets.
Condensed Consolidated Income Statement
for the 6 months ended 30 June 2006
6 months ended 6 months ended 12 months ended
Note 30 June 2006 30 June 2005 31 December
2005
#'000 #'000 #'000
-------------------------- ------ ----------- ----------- ------------
Revenue
Gross premiums written 695,265 677,364 1,202,503
Less premiums ceded to
reinsurers (170,393) (166,850) (231,616)
-------------------------- ------ ----------- ----------- ------------
Premiums written, net
of reinsurance 524,872 510,514 970,887
Gross amount of change
in provision for
unearned premiums (74,588) (125,456) (29,078)
Reinsurers' share of
change in provision
for unearned premiums 71,897 65,027 738
-------------------------- ------ ----------- ----------- ------------
Net change in
provision for unearned
premiums (2,691) (60,429) (28,340)
-------------------------- ------ ----------- ----------- ------------
Earned premiums, net
of reinsurance 522,181 450,085 942,547
-------------------------- ------ ----------- ----------- ------------
Fees, commissions and
other income 3 348 11,549 13,434
Investment income 4 48,053 40,660 85,504
Net realised
gains/(losses)
recorded in the income
statement 5 4,916 (3,057) 2,595
Net fair value
(losses)/gains
recorded in the income
statement (15,931) 23,580 33,729
-------------------------- ------ ----------- ----------- ------------
Total revenue 559,567 522,817 1,077,809
-------------------------- ------ ----------- ----------- ------------
Expenses
Claims incurred:
Claims paid:
Gross amount (358,915) (212,527) (487,687)
Reinsurers' share 153,295 58,844 87,358
-------------------------- ------ ----------- ----------- ------------
Claims paid, net of
reinsurance (205,620) (153,683) (400,329)
Change in the provision for
claims:
Gross amount 71,459 (102,931) (604,564)
Reinsurers' share (124,628) (2,996) 303,499
-------------------------- ------ ----------- ----------- ------------
Net change in the
provision for claims (53,169) (105,927) (301,065)
Claims incurred, net
of reinsurance (258,789) (259,610) (701,394)
Acquisition costs (140,613) (111,800) (247,067)
Other operating
expenses (46,644) (36,521) (61,142)
-------------------------- ------ ----------- ----------- ------------
Total expenses
excluding finance
costs (446,046) (407,931) (1,009,603)
-------------------------- ------ ----------- ----------- ------------
Operating profit 113,521 114,886 68,206
Finance costs (7,873) (2,748) (5,941)
Share of profit after
tax of associated
undertakings 380 59 138
-------------------------- ------ ----------- ----------- ------------
Profit on ordinary
activities before tax 106,028 112,197 62,403
Income tax expense 6(i) (31,567) (33,689) (14,771)
-------------------------- ------ ----------- ----------- ------------
Profit attributable to
equity holders of the
parent 74,461 78,508 47,632
-------------------------- ------ ----------- ----------- ------------
Basic earnings per
share (pence per
share) (restated) 7 22.99p 24.43p 14.80p
Diluted earnings per
share (pence per
share) (restated) 7 22.87p 23.47p 14.76p
Condensed Consolidated Statement of Recognised Income and Expense
for the 6 months ended 30 June 2006
6 months ended 6 months ended 12 months ended
Note 30 June 2006 30 June 2005 31 December
2005
#'000 #'000 #'000
--------------------------- ------ ----------- ---------- ------------
Foreign exchange
translation
differences (760) - -
Actuarial
gains/(losses) on
defined benefit
pension scheme 1,343 (1,637) (3,901)
Tax on items taken to
equity 6(ii) (403) 491 1,170
--------------------------- ------ ----------- ---------- ------------
Net income/(expense)
recognised directly in
equity 180 (1,146) (2,731)
Profit for the period 74,461 78,508 47,632
--------------------------- ------ ----------- ---------- ------------
Total recognised income and
expense for the period
attributable to equity
holders of the parent 74,641 77,362 44,901
--------------------------- ------ ----------- ---------- ------------
Condensed Consolidated Balance Sheet
as at 30 June 2006
Note 30 June 2006 30 June 2005 31 December
2005
#'000 #'000 #'000
--------------------------- ------- ---------- ---------- ------------
Assets
Property, plant and equipment 8,587 3,480 8,236
Intangible assets:
Goodwill 8 70,991 70,991 70,991
Syndicate participations 8 - 251 -
Software 8 15,962 12,712 15,250
Deferred acquisition costs 137,095 142,793 125,097
Investments in associated undertakings 9 10,258 1,301 -
Deferred taxation 2,137 - 1,648
Reinsurance contracts 10 586,433 405,367 653,182
Financial investments 11 1,941,082 1,687,143 1,845,710
Trade and other receivables 12 747,533 609,919 597,883
Assets held for sale 1,080 - 1,380
Cash and cash equivalents 13 440,292 339,957 526,638
--------------------------- ------- ---------- ---------- ------------
Total assets 3,961,450 3,273,914 3,846,015
--------------------------- ------- ---------- ---------- ------------
Liabilities and Equity
Liabilities
Insurance contracts 10 2,538,897 2,150,803 2,596,660
Employee benefits 19,548 20,003 22,818
Borrowings 14 174,099 51,944 194,213
Current taxation 33,822 19,126 14,263
Deferred taxation - 20,037 -
Provisions 483 533 489
Trade and other payables 15 423,427 230,928 292,912
--------------------------- ------- ---------- ---------- ------------
Total liabilities 3,190,276 2,493,374 3,121,355
--------------------------- ------- ---------- ---------- ------------
Equity
Called up share capital 16 & 18 245,571 243,552 245,236
Share premium account 18 134,738 311,208 314,758
Capital redemption reserve 18 586 586 586
Equity portion of convertible debt 18 - 1,681 -
Translation reserve 18 (760) - -
Capital reorganisation reserve 18 180,000 - -
Own shares 18 (7,526) (7,488) (7,550)
Retained earnings 18 218,565 231,001 171,630
--------------------------- ------- ---------- ---------- ------------
Total equity attributable to equity
holders of the parent 771,174 780,540 724,660
--------------------------- ------- ---------- ---------- ------------
--------------------------- ------- ---------- ---------- ------------
Total liabilities and equity 3,961,450 3,273,914 3,846,015
--------------------------- ------- ---------- ---------- ------------
Condensed Consolidated Cash Flow Statement
for the 6 months ended 30 June 2006
6 months ended 6 months ended 12 months ended
Note 30 June 2006 30 June 2005 31 December
2005
#'000 #'000 #'000
------------------------- ----- ------------ ------------ ------------
Cash generated from
operations
Cash flows provided by
operating activities 19 60,250 159,269 337,460
Income tax paid (12,900) (2) (6,954)
Interest paid (1,198) (2,443) (5,303)
Interest received 46,780 39,404 82,727
Dividends received 1,273 1,256 2,777
------------------------- ----- ------------ ------------ ------------
Net cash inflows from
operating activities 94,205 197,484 410,707
------------------------- ----- ------------ ------------ ------------
------------------------- ----- ------------ ------------ ------------
Cash flows from investing
activities
Net purchase of
investments (117,027) (452,895) (595,646)
Purchase of property,
plant and equipment
and related exchange
adjustments (1,485) (633) (6,408)
Purchase of intangible assets (2,563) (6,272) (10,278)
Proceeds from disposal
of property, plant and
equipment 2 - 10
Repayment of loan from
assets held for sale /
associated undertakings 300 352 352
------------------------- ----- ------------ ------------ ------------
Net cash outflows from
investing activities (120,773) (459,448) (611,970)
------------------------- ----- ------------ ------------ ------------
------------------------- ----- ------------ ------------ ------------
Cash flows from financing
activities
Proceeds from
exercised share options 932 88 655
Equity dividends paid (29,198) (19,305) (48,462)
Net proceeds from
issue of lower tier
two debt - - 147,054
Repurchase of
unsecured loan stock (22,425) - -
Acquisition of own
shares for employee
incentive schemes (40) (45) (107)
------------------------- ----- ------------ ------------ ------------
Net cash
(outflows)/inflows
from financing
activities (50,731) (19,262) 99,140
------------------------- ----- ------------ ------------ ------------
Net decrease in cash
and cash equivalents (77,299) (281,226) (102,123)
Cash and cash
equivalents at
beginning of the
period 526,638 610,969 610,969
Effect of exchange
rate fluctuations on
cash and cash
equivalents (9,047) 9,363 17,792
------------------------- ----- ------------ ------------ ------------
Cash and cash
equivalents at end of
the period 13 440,292 339,106 526,638
------------------------- ----- ------------ ------------ ------------
Notes to the Financial Statements
1 Accounting policies
The interim condensed financial statements for the six months ended 30 June 2006
have not been audited, nor have the interim condensed financial statements for
the equivalent period in 2005. The interim condensed financial statements have
been prepared in accordance with accounting policies that are consistent with
prior accounting periods and those that the directors anticipate will be
complied with in the annual financial statements.
The statutory accounts for the year ended 31 December 2005, prepared under IFRS,
have been reported on by the Group's auditors, Ernst & Young LLP, and delivered
to the Registrar of Companies. The report of the auditors was unqualified and
did not contain statements under section 237(2) or (3) of the Companies Act
1985. The comparative figures provided for the 12 months ended 31 December
2005 are based on the Group's statutory accounts.
The interim condensed financial statements do not constitute statutory accounts
of the Group within the meaning of Section 240 of the Companies Act 1985.
Basis of preparation
The Group's condensed consolidated income statement, condensed consolidated
statement of recognised income and expense, condensed consolidated balance sheet
and condensed consolidated cash flow statement have been prepared using
accounting policies that are in accordance with IFRS and those parts of the
Companies Act 1985 applicable to companies reporting under IFRS. IFRS comprises
standards issued by the International Accounting Standards Board ("IASB") and
interpretations issued by the International Financial Reporting Interpretations
Committee ("IFRIC") and as adopted by the EU.
In accordance with IFRS 4, "Insurance Contracts", the Group continues to apply
existing accounting policies to its insurance contracts. Applying existing
accounting policies includes complying with the recommendations of the Statement
of Recommended Practice on Accounting for Insurance Businesses issued by the
Association of British Insurers in December 2005. However the Group has the
option to make improvements to its policies if the changes make the financial
statements more relevant to decision making needs of the users.
Basis of consolidation
The consolidated financial statements include the accounts of the Company, its
subsidiaries and the Group's participation in Lloyd's syndicates' assets,
liabilities, revenues and expenses. Subsidiaries are those entities (including
special purpose entities) in which the Group directly or indirectly has the
power to govern the operating and financial policies in order to gain economic
benefits and includes the Group's Employee Benefit Trusts and its open ended
investment company ("OEIC"). The financial statements of subsidiaries are
prepared for the same reporting year as the parent company. Consolidation
adjustments are made to convert subsidiary accounts prepared under UK GAAP into
IFRS so as to remove any dissimilar accounting policies that may exist.
Subsidiaries are consolidated from the date control is transferred to the Group
and cease to be consolidated from the date control is transferred out. All
significant inter-company balances, profits and transactions are eliminated.
Shares held by third parties in the Group's OEIC are treated as a liability to
the Group.
Associated undertakings are those entities over which the Group has the power to
exercise significant influence but not control. The Group's investment in
associated undertakings is accounted for under the equity method of accounting
whereby associated undertakings are carried in the balance sheet at cost plus
post-acquisition changes in the Group's share of net assets of the associate,
less any impairment in value. The Group's investment in associated undertakings
also includes goodwill identified on acquisition less any accumulated impairment
loss. The income statement reflects the Group's share of the post-acquisition
results of operations of the associated undertakings. The financial statements
of associated undertakings are prepared for the same reporting year as the
parent company.
2 Segmental information
6 months ended 30 June 2006
London Market Reinsurance UK
Underwriting Underwriting Underwriting Other Total Other
Centre Centre Centre underwriting underwriting RI3K corporate Total
#'000 #'000 #'000 #'000 #'000 #'000 #'000 #'000
----------- --------- -------- -------- -------- -------- ------ ------- -------
Gross premiums
written 351,518 211,071 146,511 (13,835) 695,265 - - 695,265
Less premiums
ceded to
reinsurers (87,358) (59,073) (26,297) 2,335 (170,393) - - (170,393)
----------- --------- -------- -------- -------- -------- ------ ------- -------
Premiums
written,
net of
reinsurance 264,160 151,998 120,214 (11,500) 524,872 - - 524,872
Gross earned
premiums 309,581 165,458 142,286 3,352 620,677 - - 620,677
Reinsurers'
share (43,271) (36,095) (15,958) (3,172) (98,496) - - (98,496)
----------- --------- -------- -------- -------- -------- ------ ------- -------
Earned
premiums,
net of
reinsurance 266,310 129,363 126,328 180 522,181 - - 522,181
Fees,
commissions
and other
income - - - - - 278 70 348
Investment
income, net
realised
gains
and net fair
value gains 14,826 8,812 11,173 (276) 34,535 4 2,499 37,038
----------- --------- -------- -------- -------- -------- ------ ------- -------
Total revenue 281,136 138,175 137,501 (96) 556,716 282 2,569 559,567
----------- --------- -------- -------- -------- -------- ------ ------- -------
Gross claims
incurred (133,831) (77,614) (71,583) (4,428) (287,456) - - (287,456)
Reinsurers'
share 18,637 7,085 374 2,571 28,667 - - 28,667
----------- --------- -------- -------- -------- -------- ------ ------- -------
Claims
incurred,
net of
reinsurance (115,194) (70,529) (71,209) (1,857) (258,789) - - (258,789)
Acquisition
costs -
commission (75,669) (25,056) (23,799) (179) (124,703) - - (124,703)
Acquisition
costs - other (8,000) (3,807) (4,103) - (15,910) - - (15,910)
Other
insurance
related
expenses (15,932) (6,849) (8,035) - (30,816) - - (30,816)
Other
expenses - - - - - (2,273) (13,555) (15,828)
----------- --------- -------- -------- -------- -------- ------ ------- -------
Total
expenses
excluding
finance
costs (214,795) (106,241) (107,146) (2,036) (430,218) (2,273) (13,555) (446,046)
----------- --------- -------- -------- -------- -------- ------ ------- -------
Operating
profit/
(loss) 66,341 31,934 30,355 (2,132) 126,498 (1,991) (10,986) 113,521
----------- --------- -------- -------- -------- -------- ------ ------- -------
Finance (7,873)
costs
Share of
profit of
associated
undertakings 380
-------
Profit on
ordinary
activities
before tax 106,028
Income tax
expense (31,567)
-------
Profit
attributable
to equity
holders of the
parent 74,461
-------
Claims ratio 43.2% 54.5% 56.4% 49.6%
Expense ratio 37.4% 27.6% 28.4% 32.8%
Combined ratio 80.6% 82.1% 84.8% 82.4%
6 months ended 30 June 2005
London Market Reinsurance UK
Underwriting Underwriting Underwriting Other Total Other
Centre Centre Centre underwriting underwriting RI3K corporate Total
#'000 #'000 #'000 #'000 #'000 #'000 #'000 #'000
----------- --------- -------- -------- -------- -------- ------ ------- -------
Gross
premiums
written 294,398 215,072 168,501 (607) 677,364 - - 677,364
Less
premiums
ceded to
reinsurers (84,214) (56,193) (26,582) 139 (166,850) - - (166,850)
----------- --------- -------- -------- -------- -------- ------ ------- -------
Premiums
written, net
of reinsurance 210,184 158,879 141,919 (468) 510,514 - - 510,514
Gross earned
premiums 250,274 139,404 158,503 3,727 551,908 - - 551,908
Reinsurers'
share (52,829) (32,405) (15,606) (983) (101,823) - - (101,823)
----------- --------- -------- -------- -------- -------- ------ ------- -------
Earned
premiums,
net of
reinsurance 197,445 106,999 142,897 2,744 450,085 - - 450,085
Fees,
commissions
and other
income 6,442 2,613 682 - 9,737 1,024 788 11,549
Investment
income, net
realised
gains
and net fair
value gains 22,501 10,608 22,148 - 55,257 2 5,924 61,183
----------- --------- -------- -------- -------- -------- ------ ------- -------
Total revenue 226,388 120,220 165,727 2,744 515,079 1,026 6,712 522,817
----------- --------- -------- -------- -------- -------- ------ ------- -------
Gross claims
incurred (136,539) (88,543) (89,024) (1,352) (315,458) - - (315,458)
Reinsurers'
share 40,797 11,622 2,397 1,032 55,848 - - 55,848
----------- --------- -------- -------- -------- -------- ------ ------- -------
Claims
incurred,
net of
reinsurance (95,742) (76,921) (86,627) (320) (259,610) - - (259,610)
Acquisition
costs -
commission (54,613) (18,532) (23,424) (647) (97,216) - - (97,216)
Acquisition
costs - other (6,525) (4,061) (3,998) - (14,584) - - (14,584)
Other
insurance
related
expenses (10,517) (6,545) (6,444) 1,658 (21,848) - - (21,848)
Other expenses - - - - - (2,919) (11,754) (14,673)
----------- --------- -------- -------- -------- -------- ------ ------- -------
Total expenses
excluding
finance costs (167,397) (106,059) (120,493) 691 (393,258) (2,919) (11,754) (407,931)
----------- --------- -------- -------- -------- -------- ------ ------- -------
Operating
profit/(loss) 58,991 14,161 45,234 3,435 121,821 (1,893) (5,042) 114,886
----------- --------- -------- -------- -------- -------- ------ ------- -------
Finance costs (2,748)
Share of
profit of
associated
undertakings 59
-------
Profit on
ordinary
activities
before tax 112,197
Income tax
expense (33,689)
-------
Profit
attributable
to equity
holders of the
parent 78,508
-------
Claims ratio 48.5% 71.9% 60.6% 57.7%
Expense ratio 36.3% 27.2% 23.7% 29.7%
Combined ratio 84.8% 99.1% 84.3% 87.4%
12 months ended 31 December 2005
London Market Reinsurance UK
Underwriting Underwriting Underwriting Other Total Other
Centre Centre Centre underwriting underwriting RI3K corporate Total
#'000 #'000 #'000 #'000 #'000 #'000 #'000 #'000
----------- --------- -------- -------- -------- -------- ------ ------- --------
Gross premiums
written 558,568 328,807 317,862 (2,734) 1,202,503 - - 1,202,503
Less
premiums
ceded to
reinsurers (112,447) (100,716) (18,486) 33 (231,616) - - (231,616)
----------- --------- -------- -------- -------- -------- ------ ------- --------
Premiums
written, net
of reinsurance 446,121 228,091 299,376 (2,701) 970,887 - - 970,887
Gross earned
premiums 522,570 322,315 323,897 4,643 1,173,425 - - 1,173,425
Reinsurers'
share (110,434) (98,116) (21,302) (1,026) (230,878) - - (230,878)
----------- --------- -------- -------- -------- -------- ------ ------- --------
Earned
premiums,
net of
reinsurance 412,136 224,199 302,595 3,617 942,547 - - 942,547
Fees,
commissions
and other
income 7,408 4,786 317 (368) 12,143 1,775 (484) 13,434
Investment
income, net
realised
gains
and net fair
value gains 44,949 22,374 46,651 135 114,109 7 7,712 121,828
----------- --------- -------- -------- -------- -------- ------ ------- --------
Total revenue 464,493 251,359 349,563 3,384 1,068,799 1,782 7,228 1,077,809
----------- --------- -------- -------- -------- -------- ------ ------- --------
Gross claims
incurred (448,809) (460,036) (182,206) (1,200) (1,092,251) - - (1,092,251)
Reinsurers'
share 185,836 191,479 13,219 323 390,857 - - 390,857
----------- --------- -------- -------- -------- -------- ------ ------- --------
Claims
incurred net
of reinsurance (262,973) (268,557) (168,987) (877) (701,394) - - (701,394)
Acquisition
costs -
commission (117,313) (43,946) (45,207) (971) (207,437) - - (207,437)
Acquisition
costs - other (19,235) (9,592) (10,803) - (39,630) - - (39,630)
Other
insurance
related
expenses (20,791) (10,384) (12,262) (239) (43,676) - - (43,676)
Other expenses - - - - - (5,274) (12,192) (17,466)
----------- --------- -------- -------- -------- -------- ------ ------- --------
Total expenses
excluding
finance costs (420,312) (332,479) (237,259) (2,087) (992,137) (5,274) (12,192) (1,009,603)
----------- --------- -------- -------- -------- -------- ------ ------- --------
Operating
profit/(loss) 44,181 (81,120) 112,304 1,297 76,662 (3,492) (4,964) 68,206
----------- --------- -------- -------- -------- -------- ------ ------- --------
Finance costs (5,941)
Share of
profit of
associated
undertakings 138
--------
Profit on
ordinary
activities
before tax 62,403
Income tax
expense (14,771)
--------
Profit
attributable
to equity
holders of the
parent 47,632
--------
Claims ratio 63.8% 119.8% 55.8% 74.4%
Expense ratio 38.2% 28.5% 22.6% 30.8%
Combined ratio 102.0% 148.3% 78.4% 105.2%
3 Fees, commissions and other income
6 months ended 6 months ended 12 months ended
30 June 2006 30 June 2005 31 December
2005
#'000 #'000 #'000
-------------------------------------- ---------- ---------- ----------
Electronic infrastructure design
and development 278 1,024 1,775
Other fees and commissions 70 95 32
Exchange gains - 10,430 11,627
-------------------------------------- ---------- ---------- ----------
348 11,549 13,434
-------------------------------------- ---------- ---------- ----------
In accordance with International Accounting Standard 1 "Presentation of
Financial Statements", exchange gains and losses are presented on a net basis.
They are reported within revenue where they result in a net gain and within
expenses where they result in a net loss. The exchange losses for the 6 months
ended 30 June 2006 amounted to #2,369,000.
4 Investment income
6 months ended 6 months ended 12 months ended
30 June 2006 30 June 2005 31 December
2005
#'000 #'000 #'000
-------------------------------------- ---------- ---------- ----------
Financial investments at fair value
through the profit and loss:
Dividend income 1,273 1,256 2,777
Interest income 37,138 29,965 57,304
Interest income on cash and cash equivalents 9,642 9,439 25,423
-------------------------------------- ---------- ---------- ----------
48,053 40,660 85,504
-------------------------------------- ---------- ---------- ----------
5 Net realised gains/(losses) recorded in the income statement
6 months ended 6 months ended 12 months ended
30 June 2006 30 June 2005 31 December
2005
#'000 #'000 #'000
-------------------------------------- ---------- ---------- ----------
Realised appreciation/(depreciation)
on investments 4,914 (3,057) 2,610
Profit/(loss) on sale of property,
plant and equipment 2 - (15)
-------------------------------------- ---------- ---------- ----------
4,916 (3,057) 2,595
-------------------------------------- ---------- ---------- ----------
6 Income tax expense
(i) Tax charged to income statement
6 months ended 6 months ended 12 months ended
30 June 2006 30 June 2005 31 December
2005
#'000 #'000 #'000
-------------------------------- ---------- ---------- -----------
Current tax:
-------------------------------- ---------- ---------- -----------
For the period (32,459) (17,726) (19,900)
Adjustments in respect of prior years - 54 139
-------------------------------- ---------- ---------- -----------
Total current tax (32,459) (17,672) (19,761)
-------------------------------- ---------- ---------- -----------
Deferred tax:
Origination and reversal of timing
differences 892 (16,017) 4,990
-------------------------------- ---------- ---------- -----------
Total tax charged to income statement (31,567) (33,689) (14,771)
-------------------------------- ---------- ---------- -----------
(ii) Tax (charged) / credited to equity
6 months ended 6 months ended 12 months ended
30 June 2006 30 June 2005 31 December
2005
#'000 #'000 #'000
-------------------------------- ---------- ---------- -----------
Deferred tax (403) 491 1,170
-------------------------------- ---------- ---------- -----------
(iii) Tax reconciliation
The tax on the Group's profits before tax differs from the theoretical amount that would arise from using the current
standard rate for corporation tax applicable in the UK of 30% (2005: 30%) as follows:
6 months ended 6 months ended 12 months ended
30 June 2006 30 June 2005 31 December
2005
#'000 #'000 #'000
--------------------------------- ----------- ---------- -----------
Profit on ordinary activities before tax 106,028 112,197 62,403
--------------------------------- ----------- ---------- -----------
Tax calculated at standard rate for
corporation tax (31,809) (33,659) (18,721)
Expenses not deductible for tax purposes (363) (1,348) (638)
Equity dividends not subject to corporation tax 382 315 833
Underwriting results not previously recognised for tax purposes - (252) (60)
Overseas associated undertaking result 114 - -
Utilisation of previously unrecognised deferred tax assets on
capital losses and capital allowances 109 1,201 3,676
Adjustments to tax charge in respect of prior years - 54 139
--------------------------------- ----------- ---------- -----------
(31,567) (33,689) (14,771)
--------------------------------- ----------- ---------- -----------
7 Earnings per share
The calculations of the basic and diluted earnings per share are based on the following figures :
6 months ended 6 months ended 12 months ended
30 June 2006 30 June 2005 31 December
2005
#'000 #'000 #'000
-------------------------------- ---------- ---------- -----------
Profit on ordinary activities after tax 74,461 78,508 47,632
Dilutive post tax effect on profits:
Convertible unsecured
subordinated loan stock - 1,449 -
-------------------------------- ---------- ---------- -----------
Diluted profit on ordinary activities
after tax 74,461 79,957 47,632
-------------------------------- ---------- ---------- -----------
6 months ended 6 months ended 12 months ended
30 June 2006 30 June 2005 31 December
2005
Number Number Number
(restated) (restated)
-------------------------------- ---------- ---------- -----------
Basic weighted average number of shares 323,936,820 321,357,822 321,769,255
Dilutive potential ordinary shares:
Convertible unsecured subordinated loan stock - 18,563,950 -
Employee share options 1,642,826 788,682 888,762
-------------------------------- ---------- ---------- -----------
Diluted weighted average number of shares 325,579,646 340,710,454 322,658,017
-------------------------------- ---------- ---------- -----------
The Company undertook a consolidation of its share capital on 12 May 2006, such
that the shareholders received one ordinary 75p share for every three ordinary
25p shares owned as at that date.
The comparative numbers of shares have accordingly been restated for the periods
to 30 June 2005 and 31 December 2005 to reflect this consolidation.
In accordance with International Accounting Standard 33 "Earnings per Share",
convertible unsecured subordinated loan stock and employee share options have
only been treated as dilutive when their conversion to ordinary shares would
decrease earnings per share or increase loss per share from continuing
operations. The convertible unsecured subordinated loan stock issued by the
Group ceased to be convertible on 21 November 2005 and thereafter changed its
name to unsecured subordinated loan stock.
8 Intangible assets
Syndicate
Goodwill Participations Software Total
#'000 #'000 #'000 #'000
------------------------ ---------- ---------- ---------- -----------
Cost:
At 1 January 2005 80,408 9,025 12,613 102,046
Additions - - 6,272 6,272
------------------------ ---------- ---------- ---------- -----------
At 30 June 2005 80,408 9,025 18,885 108,318
At 1 January 2005 80,408 9,025 12,613 102,046
Additions - - 10,278 10,278
Disposals - - (3,388) (3,388)
------------------------ ---------- ---------- ---------- -----------
At 31 December 2005 80,408 9,025 19,503 108,936
At 1 January 2006 80,408 9,025 19,503 108,936
Additions - - 2,563 2,563
------------------------ ---------- ---------- ---------- -----------
At 30 June 2006 80,408 9,025 22,066 111,499
Amortisation:
At 1 January 2005 9,417 8,523 4,941 22,881
Charge for the period - 251 1,232 1,483
------------------------ ---------- ---------- ---------- -----------
At 30 June 2005 9,417 8,774 6,173 24,364
At 1 January 2005 9,417 8,523 4,941 22,881
Charge for the year - 502 2,700 3,202
Disposals - - (3,388) (3,388)
------------------------ ---------- ---------- ---------- -----------
At 31 December 2005 9,417 9,025 4,253 22,695
At 1 January 2006 9,417 9,025 4,253 22,695
Charge for the period - - 1,851 1,851
------------------------ ---------- ---------- ---------- -----------
At 30 June 2006 9,417 9,025 6,104 24,546
Carrying amount:
At 30 June 2005 70,991 251 12,712 83,954
At 31 December 2005 70,991 - 15,250 86,241
At 30 June 2006 70,991 - 15,962 86,953
9 Investments in associated undertakings
30 June 30 June 31 December
2006 2005 2005
#'000 #'000 #'000
--------------------------------------------- ------- ------- --------
EPIC Investment Partners Limited - 1,301 -
Ebix Inc 10,258 - -
--------------------------------------------- ------- ------- --------
10,258 1,301 -
--------------------------------------------- ------- ------- --------
The Group owns 33.6% of the ordinary share capital of Ebix Inc, which became an
associated undertaking on 4 January 2006 following the appointment of a Brit
representative onto the board of directors. Ebix Inc is a company incorporated
and registered in the United States.
The movement in the Group's investment in Ebix Inc is as follows:
Ebix Inc
#'000
--------------------------------------------- -------
Transferred from financial investments on 4 January 2006 10,638
Foreign exchange revaluation (760)
Share of profit after tax in the period 380
--------------------------------------------- -------
Balance as at 30 June 2006 10,258
--------------------------------------------- -------
10 Insurance and reinsurance contracts
30 June 30 June 31 December
2006 2005 2005
#'000 #'000 #'000
----------------------------------- ---------- ---------- ----------
Gross
Insurance contracts
Claims reported and loss adjustment
expenses 1,020,637 662,182 1,050,175
Claims incurred but not reported 839,678 793,070 942,490
----------------------------------- ---------- ---------- ----------
1,860,315 1,455,252 1,992,665
Unearned premiums 678,582 695,551 603,995
----------------------------------- ---------- ---------- ----------
Total insurance contracts 2,538,897 2,150,803 2,596,660
----------------------------------- ---------- ---------- ----------
Recoverable from reinsurers
Reinsurance contracts
Claims reported and loss adjustment
expenses 311,920 172,294 355,861
Claims incurred but not reported 163,250 115,450 256,810
Impairment provision (21,835) (8,854) (20,690)
----------------------------------- ---------- ---------- ----------
453,335 278,890 591,981
Unearned premiums 133,098 126,477 61,201
----------------------------------- ---------- ---------- ----------
Total reinsurance contracts 586,433 405,367 653,182
----------------------------------- ---------- ---------- ----------
Net
Claims reported and loss adjustment
expenses 708,717 489,888 694,314
Claims incurred but not reported 676,428 677,620 685,680
Impairment provision 21,835 8,854 20,690
----------------------------------- ---------- ---------- ----------
1,406,980 1,176,362 1,400,684
Unearned premiums 545,484 569,074 542,794
----------------------------------- ---------- ---------- ----------
Net insurance and reinsurance
contracts 1,952,464 1,745,436 1,943,478
----------------------------------- ---------- ---------- ----------
11 Financial investments
30 June 30 June 31 December
2006 2005 2005
#'000 #'000 #'000
----------------------------------- ---------- ---------- ----------
Shares and other variable-yield
securities :
Listed 199,080 205,908 218,025
Unlisted 500 1,739 993
Debt securities and other fixed
income securities :
Listed 1,371,143 1,008,501 1,156,168
Certificates of deposit 369,874 471,001 470,418
----------------------------------- ---------- ---------- ----------
1,940,597 1,687,149 1,845,604
Derivative financial instruments 485 (6) 106
----------------------------------- ---------- ---------- ----------
1,941,082 1,687,143 1,845,710
----------------------------------- ---------- ---------- ----------
12 Trade and other receivables
30 June 30 June 31 December
2006 2005 2005
#'000 #'000 #'000
------------------------- ------- ------------ -------- -------- --------
Trade debtors 16,618 36,280 14,020
Arising out of direct
insurance operations 330,324 139,618 304,885
Arising out of reinsurance
operations 365,483 397,561 240,036
Prepayments 6,600 8,029 10,775
Accrued income 28,247 16,723 17,717
Other debtors 261 11,708 10,450
------------------------- ------- ------------ -------- -------- --------
747,533 609,919 597,883
------------------------- ------- ------------ -------- -------- --------
All amounts are due within one year of the balance sheet date.
13 Cash and cash equivalents
30 June 30 June 31 December
2006 2005 2005
#'000 #'000 #'000
------------------------- ------- ------------ -------- -------- --------
Cash at bank and on deposit 429,481 324,497 475,963
Cash equivalents 10,811 15,460 50,675
------------------------- ------- ------------ -------- -------- --------
440,292 339,957 526,638
------------------------- ------- ------------ -------- -------- --------
Included in cash and cash equivalents are amounts totalling #181,919,000 (30
June 2005: #174,720,000) (31 December 2005: #187,926,000) not available for use
by the Group which are held within the Lloyd's syndicates and as Funds at
Lloyd's.
For the purposes of the consolidated cash flow statement, cash and cash
equivalents consist of the amount stated in that balance sheet category less any
bank overdrafts included within borrowings.
30 June 30 June 31 December
2006 2005 2005
#'000 #'000 #'000
------------------------- -------- -------- --------
Cash and cash equivalents as 440,292 339,957 526,638
above
Bank overdrafts (Note 14) - (851) -
------------------------- -------- -------- --------
Cash and cash equivalents per
consolidated cash flow
statement 440,292 339,106 526,638
------------------------- -------- -------- --------
14 Borrowings
30 June 30 June 31 December
Effective 2006 2005 2005
Maturity interest rate % #'000 #'000 #'000
-------------------------- -------- ----------- ------- ------- ---------
Current
Bank overdrafts On demand Base Rate + 1.5 - 851 -
Non-current
8.5% unsecured subordinated
loan stock ("ULS") 2008 9.50 19,052 42,956 38,644
US dollar
floating rate
unsecured
subordinated
loan notes 2034 US dollar 3 7,926 8,137 8,508
month LIBOR +
3.5
Lower Tier Two
subordinated
debt 2030 6.84 147,121 - 147,061
------------------------------ -------- ----------- ------- ------- ---------
174,099 51,944 194,213
------------------------------ -------- ----------- ------- ------- ---------
On 12 January 2006, the Group announced a tender offer to purchase all of the
outstanding ULS at 109p including accrued interest for every #1 nominal amount
of ULS. 19,584,970 ULS units were validly tendered and following subsequent
market purchases of 988,162 units at 109p, 19,736,551 ULS units remain
outstanding as at 30 June 2006.
15 Trade and other payables
30 June 30 June 31 December
2006 2005 2005
#'000 #'000 #'000
----------------------------- -------- ---------- -------- -------- ---------
Trade creditors 6,995 10,661 8,465
Arising out of direct
insurance 209,399 11,194 83,828
operations
Arising out of reinsurance
operations 166,638 177,256 163,639
Other taxes and social
security costs 1,140 1,077 1,087
Shares held by third parties -
CF 22,125 12,417 17,444
Epic Investment Funds
Accruals and deferred income 16,691 12,119 12,122
Other creditors 439 6,204 6,327
----------------------------- -------- ---------- -------- -------- ---------
423,427 230,928 292,912
----------------------------- -------- ---------- -------- -------- ---------
All amounts are payable within one year of the balance sheet date.
16 Share capital
30 June 30 June 31 December
2006 2005 2005
Number Number Number
(restated) (restated)
------------------------------------- --------- -------- ---------
Number of ordinary shares of 75p each,
allotted, issued and fully paid:
Opening balance 326,980,768 324,690,621 324,690,621
Exercised share options 446,923 42,061 312,667
Converted unsecured subordinated
loan stock - 3,927 1,977,480
------------------------------------- --------- --------- ---------
Closing balance 327,427,691 324,736,609 326,980,768
------------------------------------- --------- --------- ---------
The Company undertook a consolidation of its share capital on 12 May 2006, such
that the shareholders received one ordinary 75p share for every three ordinary
25p shares owned as at that date.
The comparative numbers of shares have been restated for the periods to 30 June
2005 and 31 December 2005 to reflect this consolidation.
17 Equity dividends
6 months ended 6 months ended 12 months ended
30 June 2006 30 June 2005 31 December
2005
#'000 #'000 #'000
-------------------------------- ---------- ---------- -----------
Final 2004 dividend paid -
6.0p per ordinary share
(restated) - 19,305 19,305
First 2005 interim
dividend paid - 9.0p per
ordinary share (restated) - - 29,157
Final 2005 dividend paid -
9.0p per ordinary share
(restated) 29,198 - -
-------------------------------- ---------- ---------- -----------
29,198 19,305 48,462
-------------------------------- ---------- ---------- -----------
The Company had distributable reserves of #22,194,000 at 30 June 2006 (30 June
2005: #62,389,000) (31 December 2005: #59,765,000).
Pursuant to an order of the High Court, on 29 March 2006 the Company's share
premium account was reduced by #180,000,000. This amount has been credited to a
capital reorganisation reserve which will be treated as undistributable until
such time as either:
(i) amounts sufficient to guarantee payment of (a) the interest and capital
payable to the holders of the outstanding 8.5% unsecured subordinated loan stock
2008 in the period up to and including 31 December 2008; and (b) the interest
and capital payable to the holders of the outstanding US dollar floating rate
unsecured subordinated loan notes 2034 in the period up to and including 15
August 2009, are deposited in separate accounts on terms approved by the Court;
or
(ii) the trustees of the 8.5% unsecured subordinated loan stock 2008 and the
collateral manager of the US dollar floating rate unsecured subordinated loan
notes, being the only creditors of the Company who have not consented to the
reduction of the share premium account of the Company, so consent.
The Directors in their meeting dated 4 September 2006 approved the payment of an
interim dividend of 7.5p per share for the year ended 31 December 2006 to all
shareholders registered at 27 October 2006. Based on the number of shares in
issue as at 4 September 2006, but excluding those owned by the Group's Employee
Benefit Trust which has waived its entitlement to dividends, this would amount
to #24,337,000 and will be paid on 24 November 2006.
The dividends per share have been restated to reflect the share consolidation
referred to in Note 16.
18 Reconciliation of movements in equity
For the 6 months ended 30 June 2006
Total
equity
Called attributable
up Share Capital Trans- Capital to
share premium redemption lation reorgan- Own Retained share-
capital account reserve reserve isation shares earinings holders
Note #'000 #'000 #'000 #'000 #'000 #'000 #'000 #'000
------------- ----- ------ ------- ------- ------- -------- ------ ------- ------
Balance at 1
January 2006 245,236 314,758 586 - - (7,550) 171,630 724,660
Arising in the
period:
Foreign
exchange
translation
differences - - - (760) - - - (760)
Actuarial
gains on
defined
benefit
pension scheme - - - - - - 1,343 1,343
Tax on items
taken directly
to or
transferred
from equity - - - - - - (403) (403)
Profit for the
period - - - - - - 74,461 74,461
------------- ----- ------ ------- ------- ------- -------- ------ ------- ------
Total
recognised
income and
expense for
the period - - - (760) - - 75,401 74,641
------------- ----- ------ ------- ------- ------- -------- ------ ------- ------
Acquisition of
own shares - - - - - (40) - (40)
Vesting of own
shares - - - - - 64 - 64
Equity
dividends 17 - - - - - - (29,198) (29,198)
Share-based
payments - - - - - - 732 732
Exercised
share options 335 597 - - - - - 932
Capital
reorganisation - (180,000) - - 180,000 - - -
Premium on
repurchase of
unsecured
subordinated
loan stock - (617) - - - - - (617)
------------- ----- ------ ------- ------- ------- -------- ------ ------- ------
Balance at 30
June 2006 245,571 134,738 586 (760) 180,000 (7,526) 218,565 771,174
------------- ----- ------ ------- ------- ------- -------- ------ ------- ------
Following an application to the High Court, the Company was permitted to
transfer an amount from the share premium account to a capital reorganisation
reserve of #180,000,000. This capital reorganisation became effective on 29
March 2006. Further information is provided in Note 17.
For the 6 months ended 30 June 2005
Note Called up share Share premium Capital Equity portion Own shares Retained Total equity
capital account redemption of convertible earnings attributable to
reserve debt shareholders
#'000 #'000 #'000 #'000 #'000 #'000 #'000
-------------- ------ ------ ------- -------- -------- ------- ------- ---------
Balance at 1
January 2005 243,518 311,145 586 1,681 (7,493) 173,223 722,660
Arising in the
period:
Actuarial
losses on
defined
benefit
pension scheme - - - - - (1,637) (1,637)
Tax on items
taken directly
to or
transferred
from equity - - - - - 491 491
Profit for the
period - - - - - 78,508 78,508
-------------- ------ ------ ------- -------- -------- ------- ------- ---------
Total
recognised
income and
expense for
the period - - - - - 77,362 77,362
-------------- ------ ------ ------- -------- -------- ------- ------- ---------
Acquisition of
own shares - - - - (45) - (45)
Vesting of own
shares - - - - 50 - 50
Equity
dividends 17 - - - - - (19,305) (19,305)
Share-based
payments - - - - - 494 494
Exercised
share options 31 57 - - - - 88
Converted
unsecured
subordinated
loan stock 3 6 - - - - 9
Acquisition of
further 8.4%
of RI3K Ltd - - - - - (773) (773)
-------------- ------ ------ ------- -------- -------- ------- ------- ---------
Balance at 30
June 2005 243,552 311,208 586 1,681 (7,488) 231,001 780,540
-------------- ------ ------ ------- -------- -------- ------- ------- ---------
For the 12 months ended 31 December 2005
Note Called up share Share premium Capital Equity portion Own shares Retained Total equity
capital account redemption of convertible earnings attributable to
reserve debt shareholders
#'000 #'000 #'000 #'000 #'000 #'000 #'000
-------------- ------ ------- ------- -------- -------- ------ ------- ---------
Balance at 1
January 2005 243,518 311,145 586 1,681 (7,493) 173,223 722,660
Arising in the
year:
Actuarial
losses on
defined
benefit
pension scheme - - - - - (3,901) (3,901)
Tax on items
taken directly
to or
transferred
from equity - - - - - 1,170 1,170
Profit for the
year - - - - - 47,632 47,632
-------------- ------ ------- ------- -------- -------- ------ ------- ---------
Total
recognised
income and
expense for
the year - - - - - 44,901 44,901
-------------- ------ ------- ------- -------- -------- ------ ------- ---------
Acquisition of
own shares - - - - (107) - (107)
Vesting of own
shares - - - - 50 - 50
Equity
dividends 17 - - - - - (48,462) (48,462)
Share-based
payments - - - - - 1,060 1,060
Exercised
share options 235 420 - - - - 655
Converted
unsecured
subordinated
loan stock 1,483 3,193 - - - - 4,676
Expiry of loan
stock
conversion
period (1,681) 1,681 -
Acquisition of
further 8.4%
of RI3K Ltd - - - - - (773) (773)
-------------- ------ ------- ------- -------- -------- ------ ------- ---------
Balance at 31
December 2005 245,236 314,758 586 - (7,550) 171,630 724,660
-------------- ------ ------- ------- -------- -------- ------ ------- ---------
19 Cash flows provided by operating activities
6 months ended 6 months ended 12 months ended
30 June 2006 30 June 2005 31 December
2005
#'000 #'000 #'000
----------------------------- ------------ ------------ ------------
Operating profit 113,521 114,886 68,206
Adjustments for non-cash
movements:
Realised and unrealised
investment losses/(gains) 11,017 (20,523) (36,339)
(Profit)/loss on sale of
property, plant and
equipment (2) - 15
Amortisation of
underwriting capacity - 251 502
Amortisation of software 1,851 1,232 2,700
Depreciation of property,
plant and equipment and
related exchange
adjustments 1,134 674 1,669
Foreign exchange
(gains)/losses on
financing items (612) 570 969
Foreign exchange
losses/(gains) on cash and
cash equivalents 9,047 (9,363) (17,792)
Charges in respect of
employee share schemes 732 494 1,060
Charges in respect of
retirement benefits (1,927) (105) 447
Interest income (46,780) (39,404) (82,727)
Dividend income (1,273) (1,256) (2,777)
Vesting of own shares 64 - -
Finance costs on borrowing (4,369) - -
Changes in working capital:
Deferred acquisition costs (11,998) (30,860) (13,164)
Trade and other
receivables (149,650) (110,547) (98,511)
Insurance and reinsurance
contracts 8,986 212,705 410,747
Trade and other payables 130,515 40,515 102,499
Provisions (6) - (44)
----------------------------- ------------ ------------ ------------
Cash flows provided by
operating activities 60,250 159,269 337,460
----------------------------- ------------ ------------ ------------
Independent review report to Brit Insurance Holdings PLC
Introduction
We have been instructed by the Company to review the financial information for
the six months ended 30 June 2006 which comprises the Condensed consolidated
income statement, Condensed consolidated statement of recognised income and
expense, Condensed consolidated balance sheet, Condensed consolidated cash flow
statement and the related notes 1 to 19. We have read the other information
contained in the interim report and considered whether it contains any apparent
misstatements or material inconsistencies with the financial information.
This report is made solely to the Company in accordance with guidance contained
in Bulletin 1999/4 'Review of interim financial information' issued by the
Auditing Practices Board. To the fullest extent permitted by law, we do not
accept or assume responsibility to anyone other than the Company, for our work,
for this report, or for the conclusions we have formed.
Directors' responsibilities
The interim report, including the financial information contained therein, is
the responsibility of, and has been approved by, the Directors. The Directors
are responsible for preparing the interim report in accordance with the Listing
Rules of the Financial Services Authority which require that the accounting
policies and presentation applied to the interim figures should be consistent
with those applied in preparing the preceding annual accounts except where any
changes, and the reasons for them, are disclosed.
Review work performed
We conducted our review in accordance with guidance contained in Bulletin 1999/4
issued by the Auditing Practices Board. A review consists principally of making
enquiries of management and applying analytical procedures to the financial
information and underlying financial data and based thereon, assessing whether
the accounting policies and presentation have been consistently applied unless
otherwise disclosed. A review excludes audit procedures such as tests of
controls and verification of assets, liabilities and transactions. It is
substantially less in scope than an audit performed in accordance with
International Standards on Auditing (UK and Ireland) and therefore provides a
lower level of assurance than an audit. Accordingly we do not express an audit
opinion on the financial information.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 30 June 2006.
Ernst & Young LLP
London
4 September 2006
This information is provided by RNS
The company news service from the London Stock Exchange
END
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