RNS Number:4296P
Highway Insurance Holdings PLC
05 September 2003
Highway Insurance Holdings Plc
Highway House, 171 Kings Road, Brentwood, Essex, CM14 4EJ
Telephone: 01277 263636 Fax: 01277 264089
Interim Results
Six Months to 30 June 2003
2003 2002
Gross written premiums #121.3 million #41.4 million
Technical result #9.4 million #8.9 million
Operating profit* #6.5 million #5.9 million
Profit before tax #4.7 million #5.1 million
Earnings per share 1.6p 2.3p
Interim dividend 0.8p 0.8p
Highlights
* First period trading exclusively as FSA insurance company following
exit from Lloyd's
* New product range, Highway Choice, fully rolled-out for private car,
commercial vehicle and motor cycle
* Operating profit* up from #5.9 million to #6.5 million
* Investment funds exceed #300 million
* Investment income received #7.1 million increased from #6.9 million
despite falling yields
* Review of investment strategy finalised, new mandates to be awarded
shortly
* Interim dividend 0.8p per share
*Based on long term investment rate of return, before exceptional items and tax
Executive Chairman Ross Dunlop said the company's performance was 'creditable'
when set against extremely competitive market conditions, the rising cost of
personal injury claims and falling investment returns generally. He said that
the results demonstrated the importance of the cost control and streamlining
initiatives the company undertook during 2002.
Mr Dunlop added that he expected the 'shape and quality' of the company's
business to improve once Highway's new product range, Highway Choice, was 'fully
embedded' by mid-2004. Highway Choice is a rationalisation of the company's
personal motor products and uses electronic data interchange (EDI) technology to
provide brokers with instant access to Highway's products and quotations.
An analysts' meeting will be held at 10.00 a.m. today at 11-12 Bury Street,
London, EC3.
For more information call:
Highway
Ross Dunlop, Executive Chairman 01277 266573
Andrew Gibson, Chief Executive 01277 266576
FWD
Adrian Beeby 020 7623 2368
07879 403564
Chairman's Statement
Following the considerable efforts devoted to the reorganisation of the business
last year operating profits are marginally ahead of the corresponding period.
Here three factors have combined to restrict the progress we have achieved in
profit terms.
Firstly, market conditions are now certainly more competitive than for some
years. As a consequence we have chosen not to attempt to retrieve the full
extent of the business we were forced to forego when capital constrained in
2002.
Secondly, our industry faces personal injury claims which continue to inflate at
circa 7 per cent per annum. These are our largest claims expense by some
margin. At the same time the cost of re-insurance, our biggest single purchase,
has risen significantly in line with the market.
Lastly, the return on our investment fund, which is the largest contributor to
profit, has declined again, because of the directional alignment with UK base
rates.
Flat pricing, rising costs and a reduction in contribution add up to a set of
figures where much of the gloss has been knocked off. Nevertheless this is a
creditable performance in the circumstances and underlines the importance of our
efforts and initiatives last year. Moreover, the period also covered the
evolvement of our new product range, Highway Choice, which employs more
assiduous risk selection. When Choice becomes fully embedded in our book by the
middle of next year both the shape and the quality of our business will have
improved.
Of the three factors I have highlighted, we are limited in terms of what we are
able to do with regard to the first two. We are targeting a further reduction
in expense levels and improving our processes to agree and fix valid claims
early. Our judgement is to resist chasing business despite the temptation of
securing additional cash flow via an increased count in policyholders. In the
very short term the result is to amortise our costs over a reduced level of
premium income.
It is in the area concerning investment return that we have the greatest scope
to respond to changing market conditions. Our investment policy over the last
three years saw us invested exclusively in very short duration UK fixed interest
paper. This stance protected our capital and meant that we avoided equity
markets. However, we were at the same time forced to accept a return which
followed the same declining path as UK base rates.
This same investment policy may not serve us as adequately in the coming years.
Further declines in base rates would be most unhelpful to our profitability
while extending the maturity profile within fixed interest and diversification
into equities carry extended risks. Our major issue as a smaller insurer is
that we have no investment department to make such 'calls' for us. We therefore
need a partnering arrangement with investment professionals who will allocate
our assets and then manage each class.
We have therefore redrawn the requirements of our insurance funds. Our emphasis
has been on protecting the downside of the business by preserving capital. We
have abandoned benchmarks and are targeting an annual overall return of 550
basis points, consistent with our long run expectations. We have insisted that
our portfolio is run on the basis that the risk and volatility is not really any
greater than before. We expect to award appropriate mandates very shortly.
In the final analysis, Highway's business is a mutually inclusive relationship
between an insurer and an investment operation. The dynamic between the two has
shifted in the last three years to a different level and as yet shows no sign of
stabilising. It would therefore not be responsible for us to take undue risk
with either side of this equation. We need to maintain an appropriate balance
to satisfy the needs of both our policyholders and our shareholders.
Such a change of course in investment policy is part of a rebalancing exercise
adjusting to difference circumstances. We aim to safeguard the interests of our
policyholders by protecting our capital. At the same time we are seeking to
achieve a marginal increase in our absolute investment return to a level which
warrants our existence as a business and justifies the 6.6 per cent charge on
shareholders funds, which is appropriated as dividend.
These steps are designed to ensure that the business endures in this period of
flat pricing and reduced investment returns. We believe that such a course is
pragmatic and will be welcomed by shareholders.
Ross Dunlop
Executive Chairman
5 September 2003
Group Profit and Loss Account
For the 6 months ended 30 June 2003
Based on unaudited figures
Technical Account - General Business
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2003 2002 2002
Total Total Total
Note #000 #000 #000
Gross premiums written 121,303 41,403 133,965
Outward reinsurance premiums (20,042) (2,747) (11,862)
Net premiums written 101,261 38,656 122,103
Change in gross unearned premiums (35,318) 3,505 37,827
Change in unearned outward reinsurance premiums 10,563 (5,899) (5,169)
Change in net unearned premiums (24,755) 37,606 32,658
Net earned premiums 76,506 76,262 154,761
Allocated investment return transferred from the 2 8,439 7,086 15,784
non-technical account
Other technical income 598 417 1,218
Total technical income 85,543 83,765 171,763
Gross claims paid (77,517) (82,440) (167,889)
Reinsurers' share 10,706 10,314 26,858
Net paid claims (66,811) (72,126) (141,031)
Change in claims provision 16,392 (43,147) (18,661)
Reinsurers' share (8,725) 56,969 45,090
Change in the provision for claims 7,667 13,822 26,429
Net claims incurred (59,144) (58,304) (114,602)
Net operating expenses (17,042) (16,515) (36,045)
Total technical charges (76,186) (74,819) (150,647)
Balance on the technical account 9,357 8,946 21,116
Group Profit and Loss Account
For the 6 months ended 30 June 2003
Based on unaudited figures
Non - Technical Account
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2003 2002 2002
Total Total Total
Note #000 #000 #000
Balance on the technical account 9,357 8,946 21,116
Net investment return on a longer term rate of
return basis
Investment income 2 5,754 6,138 12,450
Short term fluctuations in investment return 2 1,819 784 2,423
Net longer term investment return transferred to the
technical account 2 (8,439) (7,086) (15,784)
Other income 1,126 2,250 4,200
Total income 9,617 11,032 24,405
Other charges including value adjustments 3,090 4,560 8,470
Operating profit based on longer term investment
return before exceptional items
6,527 6,472 15,935
Loss arising from investment in NMT - (12,071)
Restructuring costs - (542) (1,178)
Operating profit based on longer term investment 6,527 5,930 2,686
return
Short term fluctuations in investment return 2 (1,819) (784) (2,423)
Profit on ordinary activities before taxation 4,708 5,146 263
Taxation on profit on ordinary activities (1,412) (1,544) (2,706)
Profit/(loss) on ordinary activities after taxation 3,296 3,602 (2,443)
Minority interest (117) (69) (138)
Profit/(loss) for the financial year 3,179 3,533 (2,581)
Dividends 3 1,586 1,576 4,911
Retained profit/(loss) for the financial period 1,593 1,957 (7,492)
Earnings per share
Basic 1.6p 2.3p (1.4p)
Diluted 1.6p 2.3p (1.4p)
Group Statement of Total Recognised Gains and Losses
There were no recognised gains and losses in the period other than those
recognised in the profit and loss account.
Group Balance Sheet
At 30 June 2003
Based on unaudited figures
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2003 2002 2002
Assets #000 #000 #000
Intangible assets 3,423 3,224 3,498
Investments
Other financial investments 291,880 213,442 278,117
Deposits with ceding undertakings 1 60 1
Reinsurers' share of technical provisions
Provision for unearned reinsurance premiums 15,475 4,183 4,912
Claims outstanding 96,605 153,274 105,331
112,080 157,457 110,243
Debtors
Debtors arising out of direct insurance operations - intermediaries 58,971 44,150 43,506
Debtors arising out of reinsurance operations 7,763 19,417 11,645
Other debtors - amounts falling due within one year 21,027 19,776 20,242
Other debtors - amounts falling due after more than one year 4,747 15,004 6,161
92,508 98,347 81,554
Other assets
Tangible assets 6,062 1,360 6,420
Cash at bank and in hand 27,812 140,887 30,275
Investment in own shares 2,389 2,557 2,492
36,263 144,804 39,187
Prepayments and accrued income 16,375 19,794 6,606
Deferred acquisition costs 20,209 15,573 13,582
Total assets 572,739 652,701 532,788
Group Balance Sheet
At 30 June 2003 (continued)
Based on unaudited figures
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2003 2002 2002
Liabilities Note #000 #000 #000
Capital and reserves
Called up share capital 8 40,323 40,071 40,323
Share premium account 8 16,277 16,079 16,277
Merger reserve 8 39,221 39,221 39,221
Other reserves 8 1,640 1,640 1,640
Profit and loss account 8 (20,603) (12,747) (22,196)
Total shareholders' funds - equity 76,858 84,264 75,265
Minority interest - equity 8 371 305 254
Total capital and reserves 77,229 84,569 75,519
Technical provisions
Provision for unearned premiums 113,828 72,905 78,510
Claims outstanding 291,541 417,194 307,934
405,369 490,099 386,444
Creditors
Deposits from reinsurers - 2 -
Creditors arising out of direct insurance 5,281 7,738 15,509
operations
Creditors arising out of reinsurance operations 4,636 6,436 5,879
Due to credit institutions - 1,567 -
Other creditors - amounts falling due within one 20,988 20,437 9,929
year
Other creditors - amounts falling due after one 50,671 35,950 35,845
year
81,576 72,130 67,162
Accruals and deferred income 8,565 5,903 3,663
Total liabilities 572,739 652,701 532,788
Group Cash Flow Statement
for the 6 months ended 30 June 2003
Based on unaudited figures
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2003 2002 2002
Note #000 #000 #000
Net cash inflow/(outflow) from operating activities 4 1,119 (14,843) 273
Servicing of finance
Dividends paid to minorities - - (120)
Interest paid (1,310) (977) (2,200)
Interest element of finance lease payments (18) (20) (38)
(1,328) (997) (2,358)
Taxation
Corporation tax paid - (666) (948)
Capital expenditure and financial investment
Purchase of intangible fixed assets (194) - -
Purchase of tangible fixed assets (191) (38) (5,938)
Sale of tangible fixed assets (8) 97 126
Purchase of syndicate capacity - - (642)
(393) 59 (6,454)
Equity dividends paid (3,330) - (3,124)
Financing
Issue of ordinary share capital - 25,000 25,000
Expenses of issue - (1,638) (1,638)
Capital element of finance leases and hire purchase (156) (166) (322)
contracts
Drawdown of bank loan 15,000 2,000 2,000
14,844 25,196 25,040
Net cash flow 10,912 8,749 12,429
Cash flows were invested as follows
(Decrease)/increase in cash holdings 6 (2,463) 116,587 5,975
Net portfolio investments
Financial investments 7 13,375 (107,838) 6,454
Net investment of cash flows 10,912 8,749 12,429
Notes to the financial statements
for the 6 months ended 30 June 2003
1. Principal accounting policies
The Interim Financial Statements for the half years ended 30 June are unaudited.
The Interim Group Results include the performance of Highway Insurance
Holdings Plc and its subsidiary undertakings. The results for the half year
ended 30 June 2003 have, except in respect of non-managed syndicates, been
prepared using accounting policies consistent with those adopted in the audited
financial statements for the year ended 31 December 2002 and have been reviewed
by the auditors whose independent review report is set out in this document.
The comparative figures for 31 December 2002 have been abridged from the
financial statements for the year to that date upon which the auditors' report
was unqualified and did not include a statement under Section 237(2) or (3) of
the Companies Act 1985.
Basis of consolidation
The consolidated financial statements comprise the accounts of Highway Insurance
Holdings Plc ("the Company") and its subsidiary undertakings for the six months
ended 30 June 2003.
Ockham Corporate Limited, Highway Corporate Capital Limited and Highway
Insurance Company Limited participate in the Highway Insurance business managed
by the Group. The accounts have been prepared on an annual accounting basis for
these participations.
The New London Capital corporate members of Lloyd's underwrite on syndicates
managed by other agents, the accounting information in respect of those
syndicates is provided by the respective managing agents, through an information
exchange facility operated by Lloyd's at 31 December. As no information is
available the technical account presented in respect of the six months ended 30
June 2003 and 2002 does not include the results of the non-managed syndicates.
As the economic benefit of these syndicates has been fully re-insured the
Directors believe that this treatment will have no material effect on the result
for the period.
The Group balance sheet includes the assets and liabilities of Group companies
including the subsidiaries' share of the assets and liabilities of syndicates on
which they participate. For non-managed syndicates these amounts are based on
assets and liabilities at 31 December 2002 (six months ended 30 June 2002 based
on information provided at 31 December 2001).
Premiums
Gross written premiums represent premiums on business incepting during the
period together with adjustments to premiums written in previous periods. The
provision for unearned premiums represents that part of gross premiums written
which is estimated to be earned after the balance sheet date. Outward
reinsurance premiums are accounted for in the same accounting period as the
premiums to which they relate.
Notes to the financial statements
for the 6 months ended 30 June 2003 (continued)
1. Principal accounting policies (continued)
Claims
Claims incurred include all losses occurring during the year, whether reported
or not, related handling costs and any adjustments to claims outstanding from
previous years. Outstanding claims provisions are based on the estimated
ultimate cost of all claims incurred but not settled at balance sheet date,
whether reported or not, together with related claims handling expenses.
Unexpired risk provisions
A provision for unexpired risks is made when it is anticipated that unearned
premiums will be insufficient to meet future claims and claims settlement
expenses of business in force at the end of the period.
Acquisition costs
Acquisition costs, comprising commission and other costs related to the
acquisition of new insurance contracts, are deferred to the extent that they are
attributable to premiums unearned at the balance sheet date.
Investment income
Net investment return comprises investment income - including related gains and
losses, unrealised gains and losses on investments, investment expenses and
interest payable. The longer term return on investments owned by the underlying
syndicates, together with the longer term return generated by the Funds at
Lloyd's which support the underwriting activities, initially allocated to the
non-technical account, is transferred from that account to the technical
account. The actual net investment return from other activities is included
within the non-technical account as part of operating profit. The difference
between the longer term return allocated to the technical account and the actual
return achieved on the underlying assets is recorded in the non-technical
account as 'Short term fluctuations in investment return'.
Notes to the financial statements
for the 6 months ended 30 June 2003 (continued)
2. Net Investment Income
6 months 6 months
ended ended Year ended
30 June 2003 30 June 31 December
2002 2002
#000 #000 #000
Investment income 7,917 7,425 9,673
Realised gains on investments - - 4,776
Unrealised (losses)/gains on investments (325) (281) 923
7,592 7,144 15,372
Losses on realisation of investments (447) (181) (1,052)
Interest paid (1,391) (825) (1,870)
Net investment income 5,754 6,138 12,450
Analysed as:
6 months 6 months
ended ended Year ended
30 June 2003 30 June 31 December
2002 2002
#000 #000 #000
Underwriting investment income on a long term rate of return
basis transferred to technical account 8,439 7,086 15,784
Non-underwriting investment income 525 661 959
Loan interest payable (1,391) (825) (1,870)
Net investment return 7,573 6,922 14,873
Short term fluctuations in investment return (1,819) (784) (2,423)
Total investment income 5,754 6,138 12,450
The transfer to the technical account represents the estimated long-term rate of
return of 5.5% (30 June 2002: 5.5%, 31 December 2002: 5.5%) applied to the
investment assets and solvency capital held by the Group's insurance businesses.
The longer-term rate of return is based on a combination of historical
experience and current expectations for each category of investment.
The longer-term rates of return used were:
6 months 6 months
ended ended Year ended
30 June 2003 30 June 31 December
2002 2002
% % %
Debt securities and other fixed income securities 5.5 5.5 5.5
Deposits with credit institutions 5.5 5.5 5.5
Notes to the financial statements
for the 6 months ended 30 June 2003 (continued)
3. Dividends
The directors have declared an interim dividend of 0.8p per share (2002 - 0.8p
per share), which will be paid on 14 November 2003 to shareholders on the
register at the close of business on 19 September 2003.
4. Reconciliation of operating profit to net cash inflow/
(outflow) from operating activities
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2003 2002 2002
#000 #000 #000
Operating profit 4,708 5,146 263
Depreciation 549 402 1,465
Amortisation 269 238 475
Interest on borrowings 1,358 845 1,886
Changes in market value - increase (388) (440) (924)
Sale of tangible fixed assets 8 83 53
Amortisation of investment in own shares 103 - 65
Write-off of debtor in New Millennium Technologies - - 6,663
Debtors - decrease/(increase) (30,617) (20,102) 16,355
Creditors - increase/(decrease) 25,129 (1,015) (26,028)
Net cash inflow/(outflow) from operating activities 1,119 (14,843) 273
5. Movement in opening and closing portfolio investments net of
financing
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2003 2002 2002
#000 #000 #000
Net cash (decrease)/increase in the period (2,463) 116,587 5,975
Cash flow - bank loan (15,000) (2,000) (2,000)
Cash flow - portfolio investments 13,375 (107,838) 6,454
Cash flow - finance lease (174) (186) (360)
Net movement arising from cashflows (4,262) 6,563 10,069
Changes in market value 388 440 924
Non cash changes - - 223
Total movement in portfolio investments net of financing (3,874) 7,003 11,216
Portfolio net of financing at 1 January 273,586 262,370 262,370
Portfolio net of financing at 30 June/31 December 269,712 269,373 273,586
Notes to the financial statements
for the 6 months ended 30 June 2003 (continued)
6. Movement in cash and portfolio investments
1 January Changes to 30 June
2003 Cash flow market value 2003
#000 #000 #000 #000
Net cash:
Cash 30,196 (2,463) - 27,733
Cash held in Premium Trust Funds 79 - - 79
30,275 (2,463) - 27,812
Other financial investments 278,117 13,375 388 291,880
Deposits with ceding undertakings 1 - - 1
Bank loan (35,000) (15,000) - (50,000)
Other loan (500) - - (500)
Finance leases and hire purchase contracts 693 (174) - 519
Total 273,586 (4,262) 388 269,712
7. Net cash inflow on portfolio investments
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2003 2002 2002
#000 #000 #000
Interest bearing deposits held as security by the Corporation of 22 - 1,471
Lloyd's
Shares and other variable-yield securities and units in unit trusts - - (949)
Debt securities and other fixed income securities 116,499 (136,023) (126,550)
Deposits with credit institutions (103,146) 28,185 136,412
Deposits with ceding undertakings - - (59)
Other - - (3,871)
Total 13,375 (107,838) 6,454
8. Shareholders' funds
Share Profit and
Share premium Merger Other loss account Minority
Capital account reserve reserves Interest Total
#000 #000 #000 #000 #000 #000 #000
Group
At 1 January 2003 40,323 16,277 39,221 1,640 (22,196) 254 75,519
Retained profit for the period - - - - 1,593 117 1,710
At 30 June 2003 40,323 16,277 39,221 1,640 (20,603) 371 77,229
Independent review report by KPMG Audit Plc to Highway Insurance Holdings Plc
We have been engaged by the Company to review the financial information set out
in the consolidated profit and loss account, consolidated balance sheet,
consolidated cash flow statement and the supplementary notes. 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 the terms of our
engagement to assist the Company in meeting the requirements of the Listing
Rules of the Financial Services Authority. Our review has been undertaken so
that we might state to the Company those matters we are required to state to it
in this report and for no other purpose. To the fullest extent permitted by
law, we do not accept or assume responsibility to anyone other than the Company
for our review work, for this report, or for the conclusion we have reached.
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 they
are to be changed in the next annual accounts in which case any changes, and the
reasons for them, are to be disclosed.
Review Work Performed
We conducted our review in accordance with guidance contained in Bulletin 1999/
4: Review of interim financial information, issued by the Auditing Practices
Board for use in the United Kingdom. A review consists principally of making
enquiries of group 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 is substantially less
in scope than an audit performed in accordance with Auditing Standards 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 2003.
KPMG Audit Plc
Chartered Accountants
London
5 September 2003
This information is provided by RNS
The company news service from the London Stock Exchange
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