RNS Number:4539Z
Highway Insurance Holdings PLC
08 March 2006
HIGHWAY INSURANCE HOLDINGS Plc
Preliminary Group Results 2005
2005 2004
Net insurance premium revenue #242.9 million #225.6 million
Profit before tax #27.3 million #21.2 million
Operating ratio 96.3% 97.5%
Expense ratio 20.0% 20.9%
Investment funds #395 million #383 million
Investment income #27.5 million #24.3 million
Earnings per share 9.7p 7.4p
Final dividend 3.7p 1.85p
Full year dividend 5.3p 2.65p
Highlights
* Strong financial performance: 33% pre-tax return on opening net assets
* Profit before tax up 29% to #27.3 million
* Absolute return investment strategy generated 7.28%
* Net assets #88.3 million (2004: #83.8 million) after accounting for
IAS19 pension position
* Successful first full year for Highway Retail Division now controlling
nearly 180,000 policies
* General trading conditions remain challenging
* Proposed full year dividend increased by 100% to 5.30p per share
(2004: 2.65p)
Commenting on these results, Ross Dunlop, Executive Chairman said:
"I am pleased with another solid improvement in Highway's performance. We have
retained underwriting discipline in a competitive motor insurance market; we
have successfully grown our Broking operations and have outperformed with our
investment fund.
"Our aim in 2006 is to hold our position, to develop further distribution skills
in our broking business, and a closer alignment with our underwriting operation.
As always we shall look to enhance management systems and make the operations
more efficient. I am confident that we can achieve these objectives in the
coming year, building a better quality business, and generating value for
shareholders."
For more information:
Highway Insurance: 01277 266573
Ross Dunlop
M: Communications 020 7153 1540
Nick Fox
An analysts' meeting will be held at 10:00 a.m. on 8 March 2005 at M:
Communications, 1 Ropemaker Street, London, EC2Y 9HT.
CHAIRMAN'S STATEMENT
Results
I am pleased to announce a solid improvement in Highway's operating performance
in 2005. Pre-tax profits have advanced to #27.3m or 9.7 pence per share (2004
#21.2m, 7.4 pence per share), a return on Shareholders Funds of 33%. At the
interim results the Board outlined its intention to pay a total dividend of at
least 5p for the year, and we are pleased to propose a final dividend of 3.7p
making a total of 5.3p for the year, a 100% increase over 2.65p in 2004. It is
equivalent to an 11% charge on shareholder's equity and is, I believe, a return
with an adequate risk premium.
Divisional Operating Performance
Insurance Operations
We have retained underwriting discipline in a market for motor insurance that
remains very competitive. Nevertheless, we have maintained our overall write
for the year. Pressure continues to be exerted on prices by old participants
seeking to re-enter the market, together with a series of relentless advertising
campaigns from new entrants. Expenses, particularly on personal injury claims
and reinsurance have risen. These conditions have impacted the loss ratio.
We had anticipated most of these trends. To ameliorate the effect, we targeted
business with a lower claims frequency and, as we do on an ongoing basis,
reduction of our expenses. These initiatives when allied to a profitable run
off of our back years have enabled us to remain on track to achieve our target
combined ratio of 97% through the cycle.
Investment Operations
Our investment partners Banque Syz and Union Bancaire Privee (UBP)
together achieved a return of 728 basis points from our investment fund of
#395m, or #28m. The return was roughly 75 basis points ahead of the 2004 return
and represents an increased contribution of circa #3m.
2005 was Highway's second full year in partnership with the Geneva private
banks, each of whom has responsibility for dynamic asset allocation within broad
parameters decided by Highway's Investment Committee. Both UBP and Syz have
done exactly what was demanded by the mandate. Judicious shifts in asset
allocation, in a year which was more propitious to equity markets than had
generally been expected, generated some further superior return. Given our
propensity for overall portfolio risk being no greater than that of short bonds,
the returns are commendable. Highway and its shareholders should be more than
satisfied with the result.
Broking Operations
During 2005 we continued to build our distribution business, making our third
acquisition of MRB in October. Our three broking businesses aggregated have a
turnover of #17m and handle nearly 180,000 policies. Customers are sourced from
directories, specialist publications, strategic partnerships and, increasingly,
via the internet.
Our objectives with this division are threefold.
To integrate the business processes of the three brokers in a divisional
structure, incorporating industry best practice. To optimise the value-add
potential of owning customers, looking increasingly to incorporate an
underwriting relationship with Highway. To enhance our customer service
capabilities to achieve policy growth. These steps will enable the Company to
extend its position on the value chain and give us some protection against
further fade in the third party distributed sector of the motor insurance
market.
During the year we encountered opportunities to make significant progress in
policy count growth. While this was a boon, which occurred a little earlier than
we might have expected, the promotional costs associated with the move had the
effect of reducing the budgeted divisional profit from #1m to #700,000.
Board
Ian Patrick, our finance director, has resigned from the Company to pursue
another opportunity in the Insurance sector with a private group. Ian has been
a strong member of the team and we have started a search to find a new finance
director. Ian will leave the Board and the Group on 31 March 2006.
In addition, now that Highway has been piloted into rather calmer water, three
of our Non-Executive Directors John Stoker, David Coleridge and Allen Thomas
have decided they can now leave the Board. John helped us establish our FSA
regulated subsidiary in 2000. Allen served as your Chairman between 1996-2002.
David, another former Chairman, has the longest association with the Company
starting from the days of the Sturge Group. David also served as Chairman of
Lloyd's of London in probably the roughest period of its history in 1991 and
1992, where the Corporation was desperately in need of the sort of calm and
stabilisation which could only be provided by someone with his presence and
stature.
During this period, which included two marathon length AGM's, he handled shocked
and angry names with a degree of kindness, sympathy and tolerance such that most
would have believed the responsibility was his personally. Not many would be
able or willing to manage such a feat. Few more worthy or noble acts in the
history of the City of London have ever gone quite so unrecognised. All three
non-executive directors served your Company with great distinction for many
years. They will be leaving the Board at the next Annual General Meeting. On
behalf of shareholders I wish them well.
Significant Owners
The re-rating of our shares which followed our interim figures in September 2005
has seen the reduction in ownership of our two largest shareholders, J.O. Hambro
Capital Management and Fidelity, who at one stage combined owned nearly 30% of
Highway. Both are value investors who supported the Company through its
reorganisation phase. Neither should it be forgotten that without their
leadership in the re-financing of the business in April 2002, Highway could well
have failed.
In September 2005, Aberforth, doubled their shareholding to 11% and are now our
largest owner. We continue to work with them and all our other shareholders to
generate value.
Industry Outlook
Although most of the participants of the UK motor insurance market may have
realised the folly of an out and out price war, annual purchase of the product
means that it only needs one player with too much zeal to bring a degree of
ongoing disorder to the market.
At a gross level there are carriers who, having left the market after disastrous
underwriting experiences years ago, have returned. Inevitably their aim is
market share, and equally inevitably their weaponry is price. Similarly, at a
net level, there are new entrants with apparently lower cost models who are
attempting to achieve scale through relentless advertising campaigns. Both
cause disruption to an industry where the majority of the participants are
trying to maintain underwriting discipline. Behaviour such as this may not be
completely unrelated to the fact that, overall, the industry has not returned an
underwriting profit since 1994.
Summary
Automatic progress from here should not be taken as a given. The more obvious
and straightforward remedies to restore the fortunes of the business have
already been taken. Our insurance operations have been stabilised and are
prudently accounted for. However maintaining our overall write at acceptable
prices is tough in the current market. Our investment operations in Geneva have
served us well, particularly last year, when markets were kinder to us than we
might have hoped. In addition the risk averse nature of our mandate may dictate
that the 2005 return was towards the top end of what we should reasonably
expect. Our broking operation is at a fledgling stage and its progress is
required to be more evolutionary than revolutionary in the near term.
Our aim in 2006 is to hold our position, to develop further distribution skills
in our broking business, and a closer alignment with our underwriting operation.
As always we shall look to enhance management systems and make the operations
more efficient. I am confident that we can achieve these objectives in the
coming year, building a better quality business, and generating value for
shareholders.
Lastly it should not be forgotten that nothing would be possible without the
loyalty and dedication of our staff and managers. I thank them all for the
success the Company achieved in 2005.
Ross Dunlop
Executive Chairman
7 March 2006
BUSINESS REVIEW
2005 was a year in which Highway made significant progress. Profit before tax
increased 29% to #27.3 million (2004 #21.2 million). This result equates to a
return on opening equity of 33%.
Our Insurance Division produced a strong result with further improvements in
combined ratio against a background of difficult conditions in the motor market.
Our new investment strategy again proved its worth with market leading
returns. Our distribution business, which was created in mid-2004, ended 2005
as Britain's twelfth largest general insurance broker with nearly 180,000
customers after a year of significant organic and acquired growth.
And once again Highway's people produced this great result despite the
distraction and uncertainty of being in takeover talks through late 2004 and
early 2005.
Group Consolidated Income Statement
Gross insurance premium revenue in 2005 was up 2.5% at #258.4 million (2004:
#252.1 million). Fee and commission income was up 161% at #19.3 million (2004:
#7.4 million). Profit after tax was up #4.8 million at #19.5 million (2004:
#14.7 million). Earnings per share were 9.7p (2004: 7.4p).
The result by business area is summarised below:
# millions 2005 2004
Insurance Claims Retail Unallocated Total Total
Net insurance premium revenue 242.9 - - - 242.9 225.6
Fees and commission income 1.6 1.4 16.5 (0.2) 19.3 7.4 *
Investment income 26.5 - - 1.0 27.5 24.3
Net insurance claims incurred (185.4) - - - (185.4) (172.6)
Operating expenses (48.8) - (15.8) (8.1) (72.7) (58.7) *
Investment expenses (2.1) - - - (2.1) (1.7)
Finance costs (0.5) - - (1.7) (2.2) (3.1)
Profit before tax 34.2 1.4 0.7 (9.0) 27.3 21.2
* Excludes adjustment for inter-group commission income #0.8 million (2004: #0.3
million)
Excludes reallocation of amortisation charges out of unallocated.
Underwriting
The Motor Insurance Division produced a profit of #34.2 million up 24% from
#27.5 million in 2004. This result equates to an operating ratio 96.3% against
97.5% in 2004.
# millions 2005 2004
Gross premiums written 253.7 246.6
Net premiums written 238.7 233.5
Net insurance premium revenue 243.0 225.1
Net claims incurred (185.4) (172.4)
Loss ratio 76.3% 76.6%
Net operating expenses (48.9) (47.0)
Expense ratio 20.0% 20.9%
Investment return 24.4 21.9
Other income 1.6 (0.1)
Finance costs (0.5) -
Published result 34.2 27.5
Operating ratio 96.3% 97.5%
The story of 2005 has been that of sticking to the formula that has been
successful in previous years against a background of increasingly difficult
market conditions. Across all our markets premium rates have at best been
unchanged or at worst weakened. Our underwriters have maintained their
discipline and continued to write only for profit. Our Choice range of
products, with their more selective approach, have continued to return a
consistent, profitable result whilst also reducing levels of claims frequency.
We maintain a presence in a broad range of market segments, enabling us to
select the best business in each.
2005 Net Written Premium analysed by class
Private car - comprehensive 26%
Private car - non-comprehensive 16%
Specialist 15%
Small CV & trucks - comprehensive 18%
Small CV & trucks - non-comprehensive 6%
Motorcycle 5%
Fleets & Motor Trade 14%
Market claims inflation continues to run well ahead of rate increases. Our
claims people are focussed on fighting for every pound and through the
introduction of a number of initiatives have been successful in holding claims
cost inflation below market levels. We are working to improve the customer
experience as they go through our claims process.
A key differentiator of Highway for many years has been that it is a low cost
operator. We have continued to work in 2005 on streamlining our business and
increasing the amount of business transacted electronically. Over 90% of
business comes in this way and we are working to get to 100%.
Market conditions in 2006 are expected to remain soft. The challenges for us
are to continue to grow our book of business by broadening the range of business
written; ensuring that we are fully represented in the fast growing internet
market place and to give a positive customer experience every time. We will
address each of these while maintaining our approach of underwriting, claims and
cost control.
Investment Income
Highway once again enjoyed strong returns from its growing investment portfolio
in 2005. Investment income rose 13% during the year to #27.5 million up from
#24.3 million in 2004. Returns at 7.28% for the managed sterling portfolio were
80 bps up from 2004 and well ahead of our previous benchmark, the Merrill Lynch
1-3 year index, which produced only 4.98%. Year-end funds under management were
#395 million up from #383 million in 2004. Funds under management at December
2005 are 4.5 times net assets.
Actual returns against Merrill Lynch 1-3yr Highway ML 1-3yr
Two months ended 31 December 2003 1.51% 1.25%
Twelve months ended 31 December 2004 6.48% 4.64%
Twelve months ended 31 December 2005 7.28% 4.98%
Funds under management (net of debt) # millions
2001 246
2002 253
2003 288
2004 338
2005 367
Highway has run its absolute return strategy since November 2003. Our
objectives are simple: first and foremost to preserve capital and secondly to
make a reasonable return from our largest asset. Having understood our
objectives the managers have considerable flexibility in how they apply the
mandate. They run conservative well diversified portfolios and attempt to
identify the asset classes with the best risk adjusted return at any given time.
Our risk appetite is no greater than with our previous strategy.
Asset allocation
Cash 24%
Fixed Income 44%
Special Situations 10%
Hedge Funds 22%
Retail
The Retail Division was created with the objective of developing a substantial
distribution business. We wanted to generate a significant proportion of the
Insurance Divisions customers through retail. Our strategy was to acquire and
consolidate brokers and to produce sustained organic growth. Our short term
targets are to manage 250,000 policies and generate #5 milllion of profit by end
2007. The Division effectively started on 1 July 2004 with the acquisition of A
Quote which was then followed by the purchase of Direct Motorline on 1 October.
2005 has been the Divisions first full year of trading. Much of our focus
during the year has been on driving synergies through combining back office,
sharing best practice and leveraging our growing size to ensure the best deals
for our customers. This helped to create organic growth of over 35%.
On 1 October the Group acquired MRB Insurance Brokers who trade as 1st Quote and
with it a further 60,000 customers. Total policy count today totals nearly
180,000 customers placing the Division twelfth largest personal lines broker in
the UK.
The internet as a distribution channel for motor insurance has come of age over
the last year as broadband has become commonplace in Britain's homes. Highway
is in the vanguard of distribution via the internet with new business sales
originating from the internet up 50% in 2005.
2006 will see further integration of the broking businesses and the Division
will concentrate on increasing the value of customers to Highway. This strategy
will be achieved in two main drives. Firstly, by increasing the annual income
derived from each customer and extending the life of those customers. Secondly,
employing Retail's distribution skills and developing strategic partnerships to
ensure that more Highway policies are sold by the Division.
Claims
2005 has been a year of steady progress for Highway's claims management business
following the setting up of two new joint ventures in 2004. The contribution
from claims management of #1.4 million was up 14% from #1.2 million in 2004.
Work will continue in 2006 to improve the efficiency and customer experience
within this business.
Pension Commitments
Depending upon the measure you choose 2005 has either been a good year or a
disappointing year for our pension scheme. Our high equity exposure drove an
investment return of 20.6% during the year. The scheme assets increased by #9.5
million to #70.1 million. Yet under the IAS 19: Employee Benefits measure the
scheme has had a difficult year with the net pension liability increasing from
#3.0 million to #11.1 million.
To understand the IAS 19 measure it is important to understand how it is
calculated. Simplistically to make an estimate of the position of a pension
scheme you need to make judgements on three pieces of information - future
investment income, the amount that pension payments will inflate by and
mortality. IAS 19 is very prescriptive about the first two factors and requires
that these are derived from market rates rather than being an estimate based
upon the circumstances of the scheme.
The typical index used to derive future investment returns is the iBoxx Sterling
AA rated 15 year+ corporate bond index. The table below shows the movement in
the index over the last seven years.
iBoxx # AA Corp 15 yr + (at 31 December)
1999 6.42%
2000 6.09%
2001 5.93%
2002 5.57%
2003 5.36%
2004 5.29%
2005 4.73%
As can be seen this index has shown considerable volatility in the period
peaking at 6.96% in August 2000 before falling to low of 4.73% at December 2005.
It is noteworthy that between 31 October and 31 December 2005 the index fell
30bps. There is some flexibility in setting the discount rate and we have used
this in settling for 5%. This is, of course, still a full two percentage points
below the 7% return that is anticipated from our new investment strategy and
over three percentage points below the actual annual return achieved by the fund
over the last decade.
The derived long run inflation rate which is calculated as the difference
between gilt and index linked yields has been similarly variable moving between
2.4% and 3% at the last five year ends. Demand has pushed index-linked gilts
yields to a six year low which has created the high in derived inflation. Again
the movement in yield has pushed the assumed inflation factor up to 2.9% which
is above our long run forecast of 2.5%-2.75%.
Research into life expectancy has identified that people are living longer. To
reflect this in producing our IAS 19 numbers we have increased our mortality
assumption from the previous PA92 unadjusted table to the short cohort. We
understand this to be the best estimate of mortality for our scheme. The short
cohort means that a 60 year old male is expected to live a further 25.9 years
against only 21.2 under the PA92 unadjusted table.
The table below summarises the movement in the key assumptions between last year
end and this and the impact of those changes. The table also sets out the
position on the assumption of 6% and 7% investment return and long-term
inflation of 2.75%.
2004 Improved life Higher Lower 6% return 7% return
assumptions expectancy inflation discount
rate
Inflation 2.5% 2.5% 2.9% 2.9% 2.75% 2.75%
Discount rate 5.4% 5.4% 5.4% 5.0% 6.0% 7.0%
Mortality Base 92 Short cohort Short Short cohort Short Short
cohort cohort cohort
Surplus/(Deficit) #4.0m (#5.5m) (#9.7m) (#15.8m) (#0.2m) #10.3m
Dividend
The proposed final dividend of 3.7p per share gives a total dividend of 5.3p per
share which represents an increase of 100% (2004: 2.65p). The dividend will be
payable on 17 May 2006 to shareholders on the register on 17 March 2006.
Dividend cover is 1.8 times.
Balance Sheet
The Group enjoys a robust Balance Sheet. #16.25 million of the senior debt
facility was repaid during the year leaving only #20 million of bank debt
utilised. Letter of credit utilisation was also reduced by #6.1 million to #3.9
million. The Insurance Division has an excess of solvency capital such that it
could significantly increase its premium write without the need for additional
capital. The Group has sufficient resources available to fund the Retail
Divisions development plans.
People
My thanks go to Highway's people all of whom have contributed to our success in
2005.
IAN PATRICK
Group Finance & Operations Director
7 March 2006
Highway Insurance Holdings Plc
Consolidated Income Statement
For the year ended 31 December 2005
Year ended Year ended
31 December 31 December
2005 2004
Note #000 #000
Gross insurance premium revenue 258,444 252,122
Premiums ceded to reinsurers (15,514) (26,561)
Net insurance premium revenue 242,930 225,561
Fee and commission income 18,483 7,091
Investment income 27,452 24,284
Net income 288,865 256,936
Claims incurred (176,410) (217,515)
Reinsurers' share of claims incurred (9,013) 44,964
Net insurance claims incurred (185,423) (172,551)
Underwriting and policy acquisition costs (45,896) (45,278)
Administrative expenses (26,055) (13,080)
Investment expenses (2,097) (1,738)
Operating profit 29,394 24,289
Finance costs (2,137) (3,049)
Profit before income taxes 2 27,257 21,240
Income taxes 3 (7,771) (6,536)
Profit for the year 19,486 14,704
Attributable to:
Equity holders of the parent 19,486 14,668
Minority interests - 36
Profit for the year 19,486 14,704
Earnings per share
Basic 4 9.7p 7.4p
Diluted 4 9.4p 7.4p
Dividend per share:
Paid 5 1.6p 0.80p
Proposed 5 3.7p 1.85p
Dividend (paid and proposed) 5 10,607 5,286
Highway Insurance Holdings Plc
Consolidated Statement of Recognised Income and Expense
For the year ended 31 December 2005
Year ended Year ended
31 December 31 December
2005 2004
Note #000 #000
Pension scheme actuarial (losses)/gains (11,884) 1,984
Deferred tax on pension scheme actuarial losses/(gains) 3,565 (595)
Net income recognised directly in equity (8,319) 1,389
Profit for the year 19,486 14,704
Total recognised income and expense for the year 7 11,167 16,093
Attributable to:
Equity holders of the parent 11,167 16,057
Minority interests - 36
Total recognised income and expense for the year 7 11,167 16,093
Highway Insurance Holdings Plc
Consolidated Balance Sheet
As at 31 December 2005
Year ended Year ended
31 December 31 December
2005 2004
Note #000 #000
Assets
Property, plant and equipment 2,391 1,331
Intangible assets
- Deferred acquisition costs 20,158 19,731
- Other intangible assets 23,115 17,843
Financial assets 313,856 283,271
Reinsurance assets 90,556 136,170
Deferred tax assets 906 -
Insurance and other receivables 85,012 79,161
Cash and cash equivalents 90,915 104,810
Total assets 2 626,909 642,317
Liabilities
Insurance contract provisions (440,507) (472,391)
Financial liabilities (35,600) (50,269)
Insurance and other payables (41,507) (29,073)
Employee benefit obligations (15,980) (4,475)
Deferred tax liabilities - (2,317)
Current tax liabilities (4,976) (42)
Total liabilities 2 (538,570) (558,567)
Net assets 88,339 83,750
Shareholders' equity
Share capital 7 40,666 40,666
Share premium 7 17,953 16,483
Reserve for own shares 7 (2,397) (2,533)
Other reserve 7 39,221 40,861
Retained earnings 7 (7,104) (11,727)
Total shareholders' equity 88,339 83,750
Highway Insurance Holdings Plc
Consolidated Cash Flow Statement
For the year ended 31 December 2005
Year ended Year ended
31 December 31 December
2005 2004
Note #000 #000
Cash flows from operating activities
Profit before income taxes 27,257 21,240
Depreciation of property, plant and equipment 726 763
Amortisation of other intangible assets 3,272 1,906
Amortisation of deferred acquisition costs 43,124 44,053
Fair value gains on financial assets (13,752) (2,517)
Loss/(gain) on sale of property, plant and equipment 62 (21)
Interest expense 2,229 2,463
Gain on disposal of subsidiary undertaking - (26)
Equity settled share based payment expense 116 24
Exchange gain on borrowings (277) -
Additional contributions in excess of service cost (23) (23)
Expected return on net assets of pension scheme (356) (379)
62,378 67,483
Net purchase of financial assets (16,473) (75,234)
Decrease/(increase) in assets 4,140 (34,060)
(Decrease)/increase in liabilities (23,679) 27,887
26,366 (13,924)
Interest paid (2,914) (1,875)
Income taxes paid (3,192) -
Net cash inflow/(outflow) from operating activities 20,260 (15,799)
Cash flows from investing activities
Proceeds from sale of property plant and equipment 68 39
Disposal of subsidiary, net of cash disposed of - 354
Acquisition of subsidiaries, net of cash acquired (9,445) (7,579)
Acquisition of property plant and equipment (1,501) (391)
Development expenditure (1,096) (841)
Acquisition of customer relationships (174) -
Loans advanced - (2,000)
Net cash used in investing activities (12,148) (10,418)
Cash flows from financing activities
Proceeds from issue of subordinated note - 8,496
Repayment of borrowing (16,250) (13,750)
Payment of finance lease liabilities (36) (246)
Equity dividends paid (6,902) (4,916)
Redemption of loan note (240) -
Dividends paid to minorities - (160)
Net cash used in financing activities (23,428) (10,576)
Net decrease in cash and cash equivalents (15,316) (36,793)
Cash and cash equivalents at 1 January 100,459 137,252
Cash and cash equivalents at end of year 85,143 100,459
Cash and cash equivalents include the following for the purposes of the cash
flow statement:
Year ended Year ended
31 December 31 December
2005 2004
#000 #000
Cash and cash equivalents 90,915 104,810
Bank overdrafts (5,772) (4,351)
85,143 100,459
Highway Insurance Holdings Plc
Notes to the Consolidated Financial Statements
For the year ended 31 December 2005
1. Principal accounting policies
The preliminary announcement is extracted from the accounts of Highway Insurance
Holdings Plc ("the Company") and its subsidiary undertakings for the year ended
31 December 2005. The statutory accounts for the Group were approved by the
Board on 7 March 2006. An unqualified audit report was issued on the same day.
The financial statements for the year ended 31 December 2005 have not yet been
delivered to the Registrar.
The financial information for 2004 is derived from the IFRS restatement document
published by the Company on 5 August 2005. Consequently the 2004 comparative
information published herein does not constitute the statutory accounts of the
Company for that year. The auditors have reported on the original 2004 UK GAAP
accounts; their report was unqualified and did not include a statement under
Section 237(2) or (3) of the Companies Act 1985.
a) Statement of compliance
The consolidated financial statements of the Group have been prepared and
approved by the directors in accordance with International Financial Reporting
Standards (IFRSs) as adopted by the European Union (EU). These are the Group's
first consolidated financial statements under IFRS and IFRS 1 has been applied.
The Group has applied all IFRSs and interpretations adopted by the EU at the
date the financial statements were authorised by the directors. The Group has
early adopted the amendments to IAS 39, The Fair Value Option and IAS 19,
Actuarial Gains and Losses, Group Plans and Disclosures in these financial
statements. IFRS 7, Financial Instruments: Disclosures, the application of this
standard which is effective for accounting periods beginning on or after 1
January 2007 would not have affected the balance sheet or income statement, but
would have resulted in changes to the disclosures about financial instruments
and insurance contracts.
b) Basis of preparation
The financial statements are presented in pounds sterling, rounded to the
nearest thousand. They are prepared on the historical cost basis except that the
following assets and liabilities are stated at their fair value; derivative
financial instruments and financial instruments designated at fair value through
profit or loss.
The preparation of financial statements in conformity with IFRS requires
management to make judgements, estimates and assumptions that affect the
application of policies and reported amounts of assets and liabilities, income
and expenses. The estimates and associated assumptions are based on historical
experience and various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis of making the judgements
about carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised in the period in which the
estimate is revised if the revision affects only that year, or in the year of
the revision and future years if the revision affects both current and future
years.
The accounting policies set out below have been applied consistently to all
years presented in these consolidated financial statements and in preparing an
opening IFRS balance sheet at 1 January 2004 for the purposes of the transition
to IFRSs.
The accounting policies have been applied consistently by Group entities.
c) Basis of consolidation
The consolidated financial statements incorporate the financial statements of
the Company and entities controlled by the Company (its subsidiaries). Control
exists when the Group has the power, directly or indirectly, to govern the
financial and operating policies of an entity so as to obtain benefits from its
activities. The financial results of subsidiaries are included in the
consolidated financial statements from the date that control commences until the
date that control ceases.
Intra-group balances and any unrealised gains and losses or income and expenses
arising from intra-group transactions are eliminated in preparing the
consolidated financial statements.
d) Insurance contracts
The Group currently underwrites motor insurance through Highway Insurance
Company Limited its FSA regulated insurance company. All contracts written by
the Group meet the definition of insurance contracts in IFRS 4, Insurance
Contracts.
Premiums
Gross written premiums represent premiums on business incepting during the year,
irrespective of whether they relate in whole or in part to a later year,
together with adjustments to premiums written in previous years.
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 year as
the gross premiums to which they relate.
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 the balance sheet date, whether reported or
not, together with related claims handling expenses.
Insurance contract provisions
Claims outstanding
The ultimate cost of outstanding claims including IBNR is estimated using a
range of standard actuarial claims projection techniques, such as the Chain
Ladder and Bornhuetter-Ferguson methods. Such methods extrapolate the
development of paid and incurred claims, average cost per claim and ultimate
claim numbers for each underwriting year, based upon observed development of
earlier years and expected loss ratios.
Provisions are calculated allowing for reinsurance recoveries and a separate
asset is recorded for the reinsurers' share, having regard to collectability.
Whilst the directors consider that the gross provisions for claims and the
related reinsurance recoveries are fairly stated on the basis of the information
currently available to them, the ultimate liability will vary as a result of
subsequent information and events and may result in significant adjustments to
the amount provided. Adjustments to the amounts of claims provisions
established in prior years are reflected in the financial statements for the
period in which the adjustments are made, and are disclosed separately if
material. The methods used, and the estimates made, are reviewed regularly.
Unexpired risk provision
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 after deduction of any
acquisition costs deferred. The provision for unexpired risks is calculated
after taking into account the relevant investment return on assets held to back
insurance contract liabilities. This test meets the minimum requirements for
liability adequacy test under IFRS 4, Insurance Contracts.
Underwriting and policy acquisition costs
Underwriting and policy acquisition costs, comprising commission and other costs
related to the acquisition of new insurance contracts and the renewal of
existing contracts. They are deferred over the period in which the related
premium is earned and to the extent that they are recoverable against future
margins.
e) Segment reporting
A segment is a distinguishable component of the Group that is engaged either in
providing products or services (business segment), or in providing products or
services within a particular economic environment (geographical segment), which
is subject to risks and rewards that are different from those of other segments.
The Group's primary segments are business segments.
f) Revenue
Investment income
Investment income comprises dividends, interest, realised and unrealised gains
and losses on assets held at fair value through profit and loss.
Fair value realised gains and losses are calculated as the difference between
the net sales proceeds and fair value at acquisition.
Fair value unrealised gains and losses are calculated as the difference between
the current fair value at balance sheet date and fair value at acquisition,
adjusted for previously recognised unrealised gains and losses of those
financial assets disposed of in the accounting period.
Dividend income is recognised when the right to receive payment is established.
Fee and commission income
Fee and commission income is measured at the fair value of the consideration
received or receivable and represents amounts receivable for services provided
in the normal course of business, net of discounts, VAT and other sales related
taxes.
Income is recognised in the accounting period in which the service is provided.
g) Expenses
Operating expenses
The Group's operations include the control and payment of expenses, some of
which relate to and are recharged to managed syndicates. The costs are charged
to the profit and loss account as incurred.
2. Segment reporting
Segment information is presented in respect of the Group's business segments
only as the Group operates within one geographical segment, this being the UK.
The primary format, business segments, is based on the Group's internal
management reporting structure.
Inter-segment pricing is determined on an arm's length basis.
Segment results include items directly attributable to a segment as well as
those that can be allocated on a reasonable basis.
The Group comprises the following business segments:
* Insurance: this includes the underwriting and investment results from the
Group's Insurance Division;
* Claims: this includes income derived from the Group's claims management
arrangements;
* Retail: this includes the results of the Group's insurance brokers;
* Unallocated: this includes the expenses incurred by the Group's corporate
businesses.
Segment result for the 12 months ended 31 December 2005:
Insurance Claims Retail Unallocated Eliminations Total
#000 #000 #000 #000 #000 #000
Gross written premium 253,619 - - - - 253,619
Net insurance premium 242,930 - - - - 242,930
revenue
Fee and commission income 1,580 1,400 16,477 (171) - 19,286
Inter-segment sales - - - - (803) (803)
Investment income 26,764 - 73 615 27,452
Segment revenue 271,274 1,400 16,550 444 (803) 288,865
Net insurance claims (185,423) - - - - (185,423)
incurred
Underwriting and policy (47,784) - - - 803 (46,981)
acquisition costs
Administration expenses - - (15,575) (5,396) - (20,971)
Investment expense (2,097) - - - - (2,097)
Segment operating profit 35,970 1,400 975 (4,952) - 33,393
Finance costs (479) - - (1,658) - (2,137)
Depreciation - - (172) (555) - (727)
Amortisation (1,444) (105) (1,723) - - (3,272)
Segment result 34,047 1,295 (920) (7,165) - 27,257
Segment result for the year ended 31 December 2004:
Insurance Claims Retail Unallocated Eliminations Total
#000 #000 #000 #000 #000 #000
Gross written premium 247,324 - - - - 247,324
Net insurance premium 225,561 - - - - 225,561
revenue
Fee and commission income (96) 2,245 4,650 590 - 7,389
Inter-segment sales - - - - (298) (298)
Investment income 23,329 - 34 921 - 24,284
Segment revenue 248,794 2,245 4,684 1,511 (298) 256,936
Net insurance claims
incurred (172,551) - - - - (172,551)
Underwriting and policy (46,541) - - - 298 (46,243)
acquisition costs
Administration expenses - (1,015) (4,830) (3,601) - (9,446)
Investment expenses (1,738) - - - - (1,738)
Segment operating profit 27,964 1,230 (146) (2,090) - 26,958
Finance costs - - - (3,049) - (3,049)
Depreciation - - (36) (727) - (763)
Amortisation (1,206) (53) (647) - - (1,906)
Segment result 26,758 1,177 (829) (5,866) - 21,240
Segment assets and liabilities for the year ended 31 December 2005:
Insurance Claims Retail Unallocated Total
#000 #000 #000 #000 #000
Segment assets
Property, plant and equipment - - 1,245 1,146 2,391
Intangible assets 28,407 473 14,393 - 43,273
Financial assets 308,395 - - 5,461 313,856
Reinsurance assets 90,556 - - - 90,556
Insurance and other receivables 53,169 1,737 14,747 15,359 85,012
Cash and cash equivalents 89,233 - 897 785 90,915
Total segment assets 569,760 2,210 31,282 22,751 626,003
Deferred tax assets 906
Total assets 626,909
Segment liabilities
Insurance contract provisions 440,507 - - - 440,507
Financial liabilities 15,069 - - 20,531 35,600
Employee benefit obligations - - - 15,980 15,980
Insurance and other payables 21,424 (802) 9,192 11,693 41,507
Total segment liabilities 477,000 (802) 9,192 48,204 533,594
Current tax liabilities 4,976
Total liabilities 538,570
Capital expenditure 1,096 - 10,470 658 12,224
Segment assets and liabilities for the year ended 31 December 2004:
Insurance Claims Retail Unallocated Total
#000 #000 #000 #000 #000
Segment assets
Property, plant and equipment - - 158 1,173 1,331
Intangible assets 28,328 578 8,668 - 37,574
Financial assets 281,343 - - 1,928 283,271
Reinsurance assets 136,170 - - - 136,170
Insurance and other receivables 97,893 1,340 7,667 (27,739) 79,161
Cash and cash equivalents 101,836 (417) 3,391 104,810
Total assets 645,570 1,918 16,076 (21,247) 642,317
Segment liabilities
Insurance contract provisions 472,391 - - - 472,391
Financial liabilities 13,512 - - 36,757 50,269
Employee benefit obligations - - - 4,475 4,475
Insurance and other payables 72,904 201 6,216 (50,248) 29,073
Total segment liabilities 558,807 201 6,216 (9,016) 556,208
Deferred tax liabilities 2,317
Current tax liabilities 42
Total liabilities 558,567
Capital expenditure 841 631 9,479 378 11,329
Segment assets and liabilities do not include current or deferred tax balances.
Capital expenditure comprises additions to property, plant and equipment and
intangible assets, including additions resulting from acquisitions through
business combinations.
3. Income taxes
Year ended Year ended
31 December 31 December
2005 2004
#000 #000
Current tax expense
Current year 7,570 57
Adjustments in respect of prior years 418 (131)
7,988 (74)
Deferred tax expense
Origination and reversal of temporary differences (1,079) 1,186
Benefit of tax losses recognised 1,721 5,781
Adjustments in respect of prior years (859) (357)
(217) 6,610
Total income tax expense 7,771 6,536
4. Earnings per share
(a) Basic earnings per share
Basic earnings per share is calculated by dividing the profit attributable to
ordinary shareholders by the weighted average number of ordinary shares in issue
during the year, excluding ordinary shares purchased by the Company and held as
treasury shares.
Year ended Year ended
31 December 31 December
2005 2004
#000 #000
Profit attributable to ordinary shareholders 19,486 14,704
Weighted average number of ordinary shares in issue (basic)
Issued ordinary shares at 1 January 203,332 201,615
Effect of own shares held (3,188) (3,303)
Effect of shares issued in July 2004 - 359
Effect of shares issued in October 2004 - 253
Weighted average number of ordinary shares at 31 December 200,144 198,924
Basic earnings per share 9.7p 7.4p
(b) Diluted earnings per share
Diluted earnings per share is calculated by adjusting the weighted average
number of ordinary shares outstanding to assume conversion of all potential
dilutive ordinary shares. The Group's earnings per share is diluted by the
effects of outstanding share options, conditional share awards and outstanding
share warrants.
Year ended Year ended
31 December 31 December
2005 2004
#000 #000
Profit attributable to ordinary shareholders 19,486 14,704
Weighted average number of ordinary shares in issue (diluted)
Weighted average number of ordinary shares at 31 December 200,144 198,924
Adjustment for share options 7,000 -
Adjustment for conditional share awards 90 -
Adjustment for share warrants 1,000 1,000
Weighted average number of ordinary shares for diluted earnings
per share 208,234 199,924
Diluted earnings profit per share 9.4p 7.4p
5. Dividends
Amounts recognised as distributions to equity holders in the period:
Year ended Year ended
31 December 31 December
2005 2004
#000 #000
Final dividend for the year ended 31 December 2003 of 1.68p per share - 3,330
Interim dividend for the six months ended 30 June 2004 of 0.8p per share - 1,586
Final dividend for the year ended 31 December 2004 of 1.85p per share 3,700 -
Interim dividend for the six months ended 30 June 2005 of 1.6p per share 3,202 -
Total 6,902 4,916
The proposed final dividend of 3.7p per share amounting to #7,405,000 has been
declared. As the final dividend had not been approved, by the Board at the
balance sheet date it has not been included as a liability as at 31 December
2005.
6. Retirement benefit schemes
The Group has two pension schemes, a defined contribution plan and a defined
benefit plan.
The defined contribution plan covers the majority of the Group's employees and
directors.
The defined benefit plan is closed to all employees other than those who were
aged over 50 years of age as at 30 June 2001. The funds of the plan are
controlled by trustees and are administered externally.
The most recent actuarial valuation of plan assets and the present value of the
defined benefit obligation was carried out at 31 December 2002. The present
value of the defined benefit obligation and the related service cost were
measured using the projected unit credit method.
The main financial assumptions used to calculate plan liabilities are:
At 31 December At 31 December
2005 2004
% %
Discount rate 5.00 5.40
Mortality Short cohort Base 92
Expected return on plan assets 6.30 6.40
Future salary increases 2.90 2.50
Future pension increases 2.90 2.50
Proportion of employees opting for early retirement Nil Nil
The Group recognises in full actuarial gains and losses over members' future
working lives through the statement of recognised income and expense.
The amounts recognised in the balance sheet in respect of the defined benefit
plan is as follows:
2005 2004
#000 #000
Present value of defined benefit obligation 86,116 65,096
Fair value of plan assets (70,136) (60,621)
Total employee benefit liability 15,980 4,475
7 Capital and reserves
Reconciliation of movement in capital and reserves
Attributable to equity holders of the parent
Share Reserve
Share premium for own Other Retained
capital account shares reserve earnings Total
#000 #000 #000 #000 #000 #000
At 1 January 2004 40,323 16,277 (2,557) 40,861 (22,868) 72,036
Total recognised income and expense 16,057 16,057
Shares issued 343 206 - - - 549
Appropriation to the Highway Share
Incentive Plan - - 24 - - 24
Equity dividends paid - - - - (4,916) (4,916)
At 31 December 2004 40,666 16,483 (2,533) 40,861 (11,727) 83,750
At 1 January 2005 40,666 16,483 (2,533) 40,861 (11,727) 83,750
Total recognised income and expense - - - - 11,167 11,167
Reallocation of other reserve - 1,470 20 (1,490) - -
Share scheme expenses - - - - 208 208
Appropriation to the Highway Share
Incentive Plan - - 116 - - 116
Write back share warrant expense - - - (150) 150 -
Equity dividends paid - - - - (6,902) (6,902)
At 31 December 2005 40,666 17,953 (2,397) 39,221 (7,104) 88,339
Share capital
2005 2004
Company Number of shares #000 Number of shares #000
Ordinary 20p shares:
Authorised 274,999,998 55,000 274,999,998 55,000
Allotted, issued and fully paid 203,331,668 40,666 203,331,668 40,666
Under the Placing and Open Offer Agreement of 12 March 2002, Warrants to
subscribe for 1 million ordinary 20p shares in Highway Insurance Holdings Plc
were issued to Numis Securities Limited. These Warrants can be exercised at
34.5p per share at any time between the admission date of 12 April 2002 and the
fifth anniversary thereof.
Reserve for own shares
The reserve for the Company's own shares comprises the cost of the Company's
shares held by the Group. At 31 December 2005, the Group held 3,187,721 (2004:
3,302,930) of the Company's shares.
Other reserve
The other reserve relates to the Group's merger in December 1998 with New London
Capital plc.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR JRMRTMMJMBJF
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