RNS Number:8883P
Kiln PLC
18 September 2003
KILN plc
Interim Results for the six months ended 30 June 2003
Kiln plc, the specialist Lloyd's insurance business, announces interim results
for the six months ended 30 June 2003 which show an exceptionally strong first
half with results exceeding profits for the full year 2002.
HIGHLIGHTS
* Profit before tax #15.0m (2002: #3.5m, increase of 329 per cent)
* Technical Result #18.6m profit (2002: #8.1m, increase of 130 per cent)
* Combined ratio reduced to 75 per cent with claims ratio of 43 per cent
* Earnings per share 5.03p (2002: 2.39p, up 110 per cent)
* Interim dividend of 0.2p per share (2002: nil)
* Gross written premiums #241.3m (2002: #197.1m, increase of 23 per cent)
* 12 month return on equity 12.9 per cent
* Market pricing robust across all areas of specialisation
* Investment in W. R. Berkley (Europe) Limited in July
Edward Creasy, Chief Executive Officer, Kiln plc, commented:
'These excellent results reflect the strength and depth of our underwriting
teams and their ability to make the most of what continues to be a most
favourable business environment. In the first half of the year, we have seen a
further improvement on already excellent underwriting results, and rates are
holding firm. This adds up to an extremely promising outlook'.
18 September 2003
Enquiries:
Kiln plc Tel: 020 7886 9000
Edward Creasy, Chief Executive Officer
Peter Haynes, Chief Financial Officer
College Hill Tel: 020 7457 2020
James Henderson
There will be a presentation for analysts today at 10.30 am at Kiln plc, 106
Fenchurch Street, London EC3M 5NR.
Chairman's statement
Strong underwriting conditions have continued to prevail in the first six months
of this year. Kiln's combined ratio for the first half has continued to improve
to a market leading 75 per cent and the results for the six months show a profit
before tax of #15m, which is an increase of 329 per cent on the same period last
year. These factors, together with the diversification into the liability market
through our investment in W. R. Berkley (Europe) Limited, all add up to a
successful first half-year.
In the light of these strong results, we have decided to pay an interim dividend
of 0.2 pence per share payable to shareholders on the register at the close of
business on 24th October 2003. This is a modest dividend, as we remain committed
to the principle of retaining capital within the business to ensure that we take
full advantage of the current strong underwriting conditions.
We have continued our strategy of diversifying risk and broadening our platform
through our 20 per cent investment in W. R. Berkley (Europe) Limited. We
financed this investment through a new Lloyds TSB line of credit facility, which
avoided the need to invite shareholders to provide further capital.
I am pleased that David Woods has joined us as a non-executive Director in
August. David is a former Chief Executive of Scottish Provident, a Fellow of the
Institute of Actuaries and is currently Chairman of Royal Liver Assurance
Limited. His experience in financial services management at the highest level
will be of significant value as we develop Kiln.
The outlook for the full year, barring any major catastrophes, is expected to
follow the same trend as the first six months.
Ian Percy
Chairman
18th September 2003
Chief Executive Officer's report
Highlights of the interim results
* Profit before tax #15.0m (2002: #3.5m, increase of 329 per cent)
* Technical Result #18.6m profit (2002: #8.1m, increase of 130 per cent)
* Combined ratio reduced to 75 per cent with claims ratio of 43 per cent
* Earnings per share 5.03p (2002: 2.39p, up 110 per cent)
* Interim dividend of 0.2p per share (2002: nil)
* Gross written premiums #241.3m (2002: #197.1m, increase of 23 per cent)
* 12 month return on equity 12.9 per cent
* Market pricing robust across all areas of specialisation
* Investment in W. R. Berkley (Europe) Limited in July
Kiln has made profits before tax of #15 million in the first half of 2003, an
increase which is not only more than four times greater than the return for the
same period last year (2002: #3.5 million), but also nearly
43 per cent up on the full year results for 2002. Kiln has had a reputation for
performing well in a soft market, but these excellent results show that we can
also deliver first class returns in the decidedly hard market of the last six
months. The claims ratio - already one of the lowest in the market - continued
its steady downward progression, falling this year from 55 per cent for 2002 to
43 per cent to date.
Ratio Interim Interim Interim Interim Interim
June 1999 June 2000 June 2001 June 2002 June 2003
Claims 89 77 69 58 43
Expenses 33 33 34 37 32
Combined 122 110 103 95 75
Underwriting review
Rates are holding firm across the board and premiums continue to increase year
on year in most areas of specialisation where Kiln's strengths lie. For example,
our Premium Rating Index for renewals for our largest syndicate, Syndicate 510,
shows the following increases in pricing for 2003 business over that for 2002:
Syndicate 510 Division % increase 2003 on 2002
Accident & Health 8.46
Property 5.25
Marine 12.21
Aviation 4.25
Reinsurance 2.67
Taking together all the syndicates managed by Kiln, gross written premium volume
is up on last year, and we are seeing growth across all our underwriting
operations. This reflects the further widespread improvements in 2003
underwriting terms and indicates the success that we are having in utilising the
extra underwriting capacity that we put in place towards the end of last year to
support our managed syndicates.
We have recently conducted a comprehensive review of the reserves associated
with the World Trade Center loss, and current reserves remain consistent with
the initial estimates released the week after 11th September 2001.
Chief Executive Officer's report continued
Investment and liquidity
Kiln's consolidated funds, which are made up of our share of the syndicates'
funds and our own funds, totalled #296 million (#272 million at the year-end
2002). In the half year to June 2003, we restructured the funds used to support
our trading at Lloyd's, and rationalised our fund management relationships. As
part of this process, we sold our equity portfolio, and our funds are now
predominately in cash or short dated debt with a high credit rating.
Also in the period, we entered into a strategic banking relationship with Lloyds
TSB, negotiating a #30 million Letter of Credit. This allowed us to release cash
to fund the #16.6 million investment in W. R. Berkley (Europe) Limited, and the
remainder contributed to balance sheet liquidity. The level of gearing at 25 per
cent of shareholder funds is commensurate with market conditions at this stage
of the insurance cycle.
W. R. Berkley (Europe) Limited
The twenty per cent investment that we made in W. R. Berkley (Europe) Limited,
announced in June, was a significant step in support of our strategy to build a
portfolio of differentiated specialist underwriting income streams. W. R.
Berkley (Europe) Limited, which opened its doors for business in July of this
year, is a specialist casualty insurance provider based in London, focusing
initially on professional indemnity insurance. This is an attractive market in
its own right, but has the added benefit for Kiln of operating in a different
insurance cycle from our core property-related insurance business, thus
diversifying our risk exposure.
Current trading and outlook
The results for the first half of 2003 are a welcome reflection of the strength
of Kiln's performance, and demonstrate the soundness of our strategy. Our claims
ratio of 43 per cent shows the excellence of our underwriting, positioning us
well ahead of the Lloyd's average. We continue to focus on underwriting for
profit, matching capital and capacity to the market and the quality of
underwriting returns. As long as the portfolio is not affected by a major
catastrophic loss, I look forward with confidence to the full year results. The
nature of the Lloyd's accounting process means that the excellent returns we are
achieving today will continue to flow through to our accounts over the coming
two years as profit commission is recognised from our Lloyd's Managing Agency
activities. This pipeline of discrete profit gives us an excellent foundation on
which to continue to develop our strategy.
Edward Creasy
Chief Executive Officer
18th September 2003
Profit and loss account
Consolidated technical account - general business
Six months Six months Year to
to 30th June to 30th June to 31st December
2003 2002 2002
(unaudited) (unaudited) (audited)
#'000 #'000 #'000
Gross premiums written 241,278 197,071 268,558
Earned premiums, net of reinsurance
Net written premiums 162,612 140,654 186,577
Change in net unearned premiums (84,395) (71,865) (10,797)
Net earned premiums 78,217 68,789 175,780
Allocated investment return transferred
from the non-technical account 6,221 5,009 10,480
Net claims incurred (33,472) (37,380) (98,586)
Net operating expenses (32,397) (28,308) (66,828)
Balance on the technical account 18,569 8,110 20,846
Profit and loss account
Consolidated non-technical account
Six months Six months Year
to 30th June to 30th June to 31st December
2003 2002 2002
(unaudited) (unaudited) (audited)
Note #'000 #'000 #'000
Balance on the technical account 18,569 8,110 20,846
Net investment return (2) 2,983 1,699 3,481
Investment return transferred to the general
business technical account (2) (6,221) (5,009) (10,480)
Other income (4) 12,083 9,042 17,403
Other expenses (4) (12,375) (10,387) (20,720)
Profit before tax and exceptional items 15,039 3,455 10,530
Operating profit based on longer-term
investment return 18,297 6,862 17,706
Short-term fluctuations in investment return (2) (3,258) (3,407) (7,176)
Profit before tax 15,039 3,455 10,530
Taxation (4,785) (973) (4,602)
Profit after tax 10,254 2,482 5,928
Dividends (408) - (1,020)
Retained profit for the period 9,846 2,482 4.908
Earnings per share (pence) - basic 5.03 2.39 3.77
Earnings per share (pence) - diluted 5.03 2.39 3.77
Consolidated statement of total recognised
gains and losses
Six months Six months Year
to 30th June to 30th June to 31st December
2003 2002 2002
(unaudited) (unaudited) (audited)
#'000 #'000 #'000
Profit for the financial period 10,254 2,482 5,928
Total recognised gains and losses 10,254 2,482 5,928
Reconciliation of movement in consolidated
shareholders' funds
Six months Six months Year
to 30th June to 30th June to 31st December
2003 2002 2002
(unaudited) (unaudited) (audited)
#'000 #'000 #'000
Balance at 1st January 108,600 56,504 56,504
Dividend (408) - (1,020)
Total gains arising in the period 10,254 2,482 5,928
Share capital issued net of expenses - 47,239 47,188
Balance at 30th June (at 31st December) 118,446 106,225 108,600
Consolidated balance sheet
30th June 30th June 31st December
2003 2002 2002
(unaudited) (unaudited) (audited)
Note #'000 #'000 #'000
Assets
Intangible assets (6) 11,003 11,719 11,348
Tangible fixed assets 5,300 4,062 4,740
Financial investments (7) 251,833 165,035 233,841
Reinsurers' share of provision for unearned
premiums 68,739 62,613 34,375
Reinsurance recoveries on outstanding claims 106,331 106,537 124,130
Debtors 246,789 217,720 168,282
Prepayments and accrued income 76,977 56,822 34,013
Cash at bank and in hand 43,776 105,912 38,536
Total assets 810,748 730,420 649,265
Capital and reserves
Share capital 2,040 2,040 2,040
Share premium account 94,275 94,326 94,275
Capital redemption reserve 270 270 270
Merger reserves 1,824 1,824 1,824
Other reserves 21,488 21,488 21,488
Profit and loss account (1,451) (13,723) (11,297)
Total equity shareholders' funds 118,446 106,225 108,600
Liabilities
Provision for unearned premiums 244,257 214,805 125,498
Gross outstanding claims 273,039 247,584 287,097
Creditors arising out of insurance business 130,540 137,761 117,379
Other creditors including tax, social security
and other provisions 44,466 24,045 10,691
Total liabilities 692,302 624,195 540,665
Total equity shareholders' funds and liabilities 810,748 730,420 649,265
Net assets per share 58.1p 52.1p 53.2p
Consolidated cash flow statement
for the six months ended 30 June 2002
Six months to Six months to Year to
30th June 30th June 31st December
2003 2002 2002
(unaudited) (unaudited) (audited)
Note #' 000 #' 000 #' 000
Net cash inflow from operating activities (8) 23,053 51,718 56,854
Servicing of finance (352) (31) (141)
Taxation (101) 495 498
Capital expenditure and receipts
- Purchase of tangible fixed assets (1,260) (1,048) (2,315)
- Sale of tangible fixed asset - 90 91
Acquisitions and disposals
- Disposal of syndicate capacity - - 213
- Acquisition of syndicate capacity - - (76)
Equity dividends paid (1,020) - -
Financing
- Decrease in borrowings (111) (36) (663)
- Receipts from issue of Shares - 50,200 50,200
- Expenses relating to issue of Shares - (2,961) (3,012)
Cash available for investment 20,209 98,427 101,649
Cash flows were invested as follows:
Movement in cash holdings 5,290 53,131 (13,349)
Net portfolio investment 14,919 45,296 114,998
Net investment of cash flows 20,209 98,427 101,649
Notes to the financial statements
(1) Basis of preparation and accounting policies
These interim results, which do not constitute statutory accounts, have been
prepared in accordance with Section 255A of, and Schedule 9A to, the Companies
Act 1985, and with the Statement of Recommended Practice on Accounting for
Insurance Business issued by the Association of British Insurers ("the ABI
SORP") dated December 1998.
The audited accounts for the year ended 31st December 2002, extracts of which
are included in this interim report, have been delivered to the Registrar of
Companies and received an unqualified audit report. Copies of this report are
available from the company secretary at the registered office, 106 Fenchurch
Street, London, EC3M 5NR.
These interim results for the six months ended 30th June 2003 have been
prepared on a basis consistent with the accounting policies set out in the
audited accounts for the year ended 31st December 2002.
(2) Investment return
In calculating the longer-term investment return the following rates of return
have been applied.
Six months to Six months to Year end to
30th June 30th June 31st December
2003 2002 2002
Equities 7.0% 7.0% 7.0%
Fixed interest securities - corporate investments 5.0% 5.0% 5.0%
Fixed interest securities - managed syndicates 5.0% 5.0% 5.0%
The operating result represents the profit before tax that would be achieved
using the longer-term investment return. An analysis of the actual and
longer-term rate of return is shown below.
June 2003 June 2003 June 2002 June 2002 December 2002 December 2002
Actual Longer-term Actual Longer-term Actual Longer-term
rate rate rate
#' 000 #' 000 #' 000 #' 000 #'000 #'000
Syndicate investments and cash 2,641 5,255 3,084 3,823 6,604 8,267
Funds at Lloyd's :
Equities (407) 257 (1,872) 702 (4,364) 1,240
Fixed interest 744 709 551 484 1,641 973
Total technical account 2,978 6,221 1,763 5,009 3,881 10,480
Corporate equities (quoted) 5 20 (64) 97 (399) 178
2,983 6,241 1,699 5,106 3,482 10,658
Short-term fluctuation in
investment return (3,258) (3,407) (7,176)
(3) Analysis of underwriting result before investment return
Six months ended 30th June 2003
Gross Gross Gross Gross Re- Under-
premiums premiums claims operating insurance writing
written earned incurred expenses balance result
#'000 #'000 #'000 #'000 #'000 #'000
International non-marine
Accident & health 17,904 11,293 (5,126) (3,982) (2,112) 73
Fire & other damage to property 109,398 58,605 (26,038) (21,590) (5,307) 5,670
Other international non-marine 17,517 10,720 (8,614) (2,568) (992) (1,454)
Total international non-marine 144,819 80,618 (39,778) (28,140) (8,411) 4,289
International reinsurance 45,764 11,088 (414) (5,824) (422) 4,428
Marine, Aviation & Transport 40,958 24,121 (9,270) (7,932) (3,137) 3,782
UK Motor 804 2,490 (338) (442) (744) 966
Pecuniary loss 6,612 3,108 (2,093) (276) (1,539) (800)
Life 2,321 1,094 (423) (418) (440) (187)
Reinsurance to close - - - - - -
Total 241,278 122,519 (52,316) (43,032) (14,693) 12,478
Six months ended 30th June 2002
Gross Gross Gross Gross Re- Under-
premiums premiums claims operating insurance writing
written earned incurred expenses balance result
#'000 #'000 #'000 #'000 #'000 #'000
International non-marine
Accident & health 14,514 7,162 (4,124) (2,414) (1,406) (782)
Fire & other damage to property 80,692 20,388 (9,094) (9,620) (21) 1,653
Other international non-marine 16,252 7,624 (6,609) (1,294) (1,168) (1,447)
Total international non-marine 111,458 35,174 (19,827) (13,328) (2,595) (576)
International reinsurance 47,126 29,035 (9,407) (7,738) (9,509) 2,381
Marine, Aviation & Transport 30,817 22,214 (14,518) (4,393) (1,634) 1,669
UK Motor 2,645 8,681 (5,334) (1,809) (1,318) 220
Pecuniary loss 3,567 3,095 (2,176) (727) (541) (349)
Life 1,458 485 (152) (90) (264) (21)
Reinsurance to close - - - - - -
Total 197,071 98,684 (51,414) (28,085) (15,861) 3,324
Analysis of underwriting result before investment return continued
Year ended 31st December 2002
Gross Gross Gross Gross Re-
premiums premiums claims operating insurance Under-
written earned incurred expenses balance writing
(restated) result
#'000 #'000 #'000 #'000 #'000 #'000
International non-marine
Accident & health 26,593 26,699 (11,359) (10,365) (3,281) 1,694
Fire & other damage to property 105,475 97,273 (44,578) (32,060) (12,554) 8,081
Other international non-marine 19,965 20,541 (15,694) (6,500) 1,235 (418)
Total international non-marine 152,033 144,513 (71,631) (48,925) (14,600) 9,357
International reinsurance 49,065 43,683 (9,373) (11,031) (20,042) 3,237
Marine, Aviation & Transport 48,601 41,937 (23,680) (14,413) (6,975) (3,131)
UK Motor 1,760 10,245 (9,847) (1,762) 827 (537)
Pecuniary loss 7,564 9,660 (6,114) (1,784) (203) 1,559
Life 1,788 1,692 (240) (943) (326) 183
Reinsurance to close 7,747 7,747 (13,501) - 5,754 -
Total 268,558 259,477 (134,386) (78,858) (35,565) 10,668
The group entered into a quota-share reinsurance agreement to support its
underwriting at Lloyd's initially commencing 1st January 2000. Similar contracts
are in place for all open years of account. The reinsurers support their share
of Funds at Lloyd's by a letter of credit. The reinsurers share in the net
result of the group's underwriting activities after taking into account
investment income, and syndicate and personal expenses. The group also receives
a fee, and potentially profit commission, in respect of these transactions.
As the arrangement is that of a profit participation settled by a single payment
the accrued net quota-share reinsurance result due to (or from) reinsurers is
treated as an operating expense (or reduction in operating expense) within the
consolidated technical account.
(4) Other income and expenses non technical account
30th June 2003 30th June 2002 31st December 2002
(unaudited) (unaudited) (audited)
Income Expenses Income Expenses Income Expenses
#' 000 #' 000 #' 000 #' 000 #' 000 #' 000
Agency fees 1,629 - 1,211 - 2,439 -
Profit commission 2,046 221 268 (2) 466 210
Expenses recharged 7,316 7,316 7,379 7,379 13,018 13,018
Corporate administration costs - 3,410 - 2,489 - 4,858
Profit related remuneration - 1,083 - 175 - 1,941
Other income and expenses 1,091 - 184 - 1,480 -
Amortisation of capacity - 345 - 346 - 693
Total 12,083 12,375 9,042 10,387 17,403 20,720
(5) 100% technical results of managed syndicates
The group technical result is derived from its participation in the syndicates
managed. The table below sets out the 100% technical results of these
syndicates on an annual accounting basis.
Six months Six months Year
to 30th June to 30th June to 31st December
2003 2002 2002
(unaudited) (unaudited) (unaudited)
#' 000 #' 000 #' 000
Gross premiums written 655,358 485,754 652,111
Net earned premiums 199,668 167,000 383,012
Investment income from underwriting 5,886 6,363 13,852
Net claims incurred (86,061) (96,594) (208,733)
Net operating expenses (66,047) (62,053) (145,973)
Investment expenses and charges (54) (109) (438)
Technical profit 53,393 14,607 41,720
Claims ratio % 43% 58% 55%
Expense ratio % 32% 37% 36%
Combined ratio % 75% 95% 91%
Definitions
Claims ratio Net incurred claims as a percentage of net earned
premium
Expense ratio Net expenses before adjusting for the change in
deferred acquisition costs as a percentage of net
written premium
Combined ratio Claims ratio plus expense ratio
Net written premium Written premium net of outwards reinsurance but
gross of all policy acquisition costs
(6) Intangible assets
At 30th June 2003, intangible assets of #11,003,000 comprised the cost of
purchasing syndicate capacity, #13,856,000, less accumulated amortisation of
#2,853,000. Syndicate capacity is amortised over 20 years.
(7) Financial investments
All investments are listed on recognised securities exchanges apart from the
unlisted investments. The directors of the company believe that these unlisted
investments, which are stated at cost, have not suffered any permanent
diminution in value.
30th June 2003 Corporate Syndicate
(unaudited) investments investments
Funds at Other
Lloyd's
#' 000 #' 000 #' 000 #' 000
Debt securities and other fixed income securities 209,082 41,153 - 167,929
Cash, money markets, and short-term deposits held
within investment funds 42,565 31,805 - 10,760
Unlisted investments 186 - 186 -
Market value at the end of period 251,833 72,958 186 178,689
30th June 2002 Corporate investments Syndicate
(unaudited) investments
Funds at Other
Lloyd's
#' 000 #' 000 #' 000 #' 000
Shares and other variable-yield securities and
units in unit trusts 33,472 17,996 2,658 12,818
Debt securities and other fixed income securities 107,839 19,814 - 88,025
Cash, money markets, and short-term deposits held
within investment funds 23,282 3,627 - 19,655
Unlisted investments 442 - 442 -
Market value at the end of period 165,035 41,437 3,100 120,498
31st December 2002 Corporate investments Syndicate
(audited) investments
Funds at Other
Lloyd's
#' 000 #' 000 #' 000 #' 000
Shares and other variable-yield securities and
units in unit trusts 22,488 11,470 1,769 9,249
Debt securities and other fixed income securities 155,826 19,683 - 136,143
Cash, money markets, and short-term deposits held
within investment funds 55,340 42,540 568 12,232
Unlisted investments 187 - 187 -
Market value at the end of period 233,841 73,693 2,524 157,624
(8) Reconciliation of profit before taxation to net cash inflow from operating activities
Six months Six months Year
to 30th June to 30th June to 31st December
2003 2002 2002
(unaudited) (unaudited) (audited)
#'000 #' 000 #' 000
Net profit before taxation 15,039 3,455 10,530
Depreciation and Amortisation charge including
profit on disposals 1,045 940
Interest on borrowings 352 64 141
Unrealised (gain) loss on investments (3,072) 2,174 3,069
Change in debtors less creditors 9,689 45,085 41,351
Net cash inflow from operations 23,053 51,718 56,854
This information is provided by RNS
The company news service from the London Stock Exchange
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