RNS Number:6399S
Highway Insurance Holdings PLC
09 March 2007
Highway Insurance Holdings Plc
Preliminary Group Results 2006
2006 2005
Gross written premium #241.3m #253.7m
Profit before tax #19.1m #27.3m
Operating ratio 98.9% 96.4%
Expense ratio 21.1% 20.1%
Investment return 5.89% 7.28%
Investment funds #409.7m #395.0m
Earnings per share (Basic) 6.7p 9.7p
Final dividend 3.9p 3.7p
Full year dividend 5.5p 5.3p
Highlights
* In tough market conditions we have maintained underwriting discipline at
the expense of a 5% reduction in gross written premium against 2005
* Profit before tax of #19.1m (2005: #27.3m)
* 22% pre-tax return on opening shareholders equity
* Full year dividend increased to 5.5p per share (2005: 5.3p)
* 5.89% net investment return on managed funds (2005: 7.28%)
* Net assets #93.0m (2005: #88.3m) after accounting for IAS 19 pension
position
* 20% organic policy growth in Highway Retail Division, now controlling over
200,000 policies
* General trading conditions remain challenging but with clear signs of an
upturn in rates
Commenting on these results, Richard Gamble, Executive Chairman said:
"Whilst conditions in the motor insurance markets remain challenging, there are
now some clear signs that the upturn is emerging. Highway has maintained a
consistent reserving policy throughout the cycle and is well positioned to
increase underwriting volumes as the cycle turns. Our Retail business now has
the potential to make a substantial contribution to the value of the Group. I am
therefore optimistic that we will see increased returns in 2007."
For more information:
Highway Insurance 01277 266298
Richard Gamble Executive Chairman
Arthur Milton Group Finance Director
M: Communications
Nick Fox 020 7153 1540
Caroline Villiers 020 7153 1521
An analysts' meeting will be held at 9:00 a.m. on 9 March 2007 at M:
Communications, 1 Ropemaker Street, London, EC2Y 9HT.
Chairman's statement
The motor insurance market continues to be challenging and I am pleased to
report that we have achieved a stronger performance in the second half of the
year resulting in profits before tax of #19.1m and an after tax earnings per
share of 6.7p (2005: #27.3m, 9.7p). This represents a return on opening
shareholders equity of 22%.
This has been achieved in spite of some of our competitors writing business to
gain market share, and against an investment market where fixed interest
investment returns, due to the accounting standard adopted, are suppressed by
rising interest rates.
In consequence of this result we will propose a final dividend for the year of
3.9p, which gives a full year dividend of 5.5p, an increase on the 5.3p paid for
2005.
Insurance
Soft market conditions prevailed in the first half of the year. Whilst modest
market increases started to come through as the year progressed, marking the
advent of more promising conditions ahead, these were neither soon enough nor
large enough to have a material impact on the 2006 result. Our approach through
the year has been to maintain small but regular rate increases to ensure
profitability, which caused us to sacrifice 9% of volume in the first half when
rates were weakest, but enabled us to generate growth in the second half as
rates became stronger. Gross written premium ended only 5% lower than 2005.
The lack of premium increases in 2006, coupled with continuing claims cost
inflation, resulted in our operating ratio moving from 96.4% for the financial
year 2005 to 98.9% in 2006. I believe this result is a creditable one at this
stage of the underwriting cycle, which will compare very favourably with the
motor market average, and is further evidence that our strategy is both sound
and sustainable.
During the year our underwriters have concentrated on maintaining a targeted
approach to underwriting and risk selection, allowing us to retain better
quality business while shedding volume in some of the poorer performing areas,
particularly the fleet and non-comprehensive markets. We have also focused on
strengthening our broker relationships, to ensure continuing development and
profitability within the business. In particular, development of specific
products with our Retail Division has enabled them to become the sixth largest
supplier to Highway Insurance by the year end (2005: eighth).
Claims cost inflation continues unabated, averaging 5% in the market across
claims as a whole, but much higher on larger personal injury cases. We have a
number of programmes in place to proactively manage our spend and, as a result,
we have experienced no increase in the average cost of settling claims in 2006.
The launch of our new in-house claims management operation in April has
delivered savings in repair costs as well as improved customer service.
We continue to operate a robust claims reserving strategy, maintaining a prudent
margin where uncertainty exists.
Retail
Our Retail Division has achieved revenues of #24.6m for the year up from #16.5m
in 2005. This reflects a full year contribution from MRB acquired in October
2005 and strong organic growth of 20% in the year. With 2007 revenues now
expected to exceed #25m we have created the twelfth largest personal lines
broker in the UK.
Our policy book has grown organically from 173,000 policies at 31 December 2005
to 207,000 policies at 31 December 2006. We have achieved cumulative organic
growth of 80,000 policies on the businesses acquired in 2004 and 2005. With
values of policy books now constantly rising this represents a strengthening in
the underlying embedded value of the business.
During the year we made significant progress in integrating the businesses
acquired and on 31 December 2006 we merged our three businesses into a single
legal entity renamed Hero Insurance Services Ltd.
The divisional result of #2.9m (2005: #0.7m) includes an exceptional investment
gain of #2.4m on disposal of our non core investment in the French broking
business Autofirst SA and is after incurring #0.5m of exceptional costs in
integrating the acquired businesses.
The Division has continued to source an increasing proportion of new customers
from the Internet. It has also researched and developed a number of substantial
opportunities which will come on stream in 2007, in particular price comparison
sites and strategic partners which produce new business enquiries.
Investment performance
Our external investment managers achieved a return of 5.89% (net of investment
expenses) for the year compared to a net return of 7.28% in 2005. Taking into
account the gain on the disposal of Autofirst SA, investment income was #27.1m
compared to #27.5m in 2005.
The result reflects a strong performance from equities and hedge funds offset by
weak returns on the fixed income portfolio where "mark to market" accounting
recognises losses when interest rates rise. Our 2006 net yield on the fixed
income portfolio of 1.74% (2005: 5.26%) compares to a yield exceeding 5.2% pa
that would be achieved by holding the portfolio to maturity.
This investment result represents another year of strong performance for our
absolute return investment strategy, and a return that we expect to be at the
upper end of insurance industry returns for 2006.
Growth in investment funds continued with an increase of #14.7m in the year to
#409.7m notwithstanding a repayment of #10m of bank debt.
The Board
In my Interim report for 2006 I outlined a number of changes to the Board which
were made in the year and that Andrew Gibson would return to the Group as Chief
Executive in due course. I can now confirm that after fulfilling existing
contractual obligations, he will commence in this role on 1 April 2007 and I
will then become Non-executive Chairman.
Outlook
Whilst conditions in the motor insurance markets remain challenging, there are
now some clear signs that the upturn is emerging. Highway has maintained a
consistent reserving policy throughout the cycle and is well positioned to
increase underwriting volumes as the cycle turns. Our Retail business now has
the potential to make a substantial contribution to the value of the Group. I am
therefore optimistic that we will see increased returns in 2007.
I would like to thank the Brokers for their support and the management and staff
for their efforts during what has been a challenging year, and know that we can
look forward to 2007 with confidence.
Richard Gamble
Executive Chairman
8 March 2007
Business Review
Following an exceptional result in 2005, reduced profitability in 2006 reflects
the extremely competitive market conditions prevailing during the year and the
reduced fixed interest investment returns. Nevertheless our 2006 performance and
profitability remain at the upper end of market returns and reflect a very
credible shareholder return at the bottom of the underwriting cycle.
We have ended the year with motor premium rates showing modest increases and
clear signs of a continued upturn in the underwriting cycle. Throughout the year
we have maintained the same philosophy to claims reserving as we did in 2005 and
previous years. Given this position the Board has confidence in proposing an
increase in the dividend for the year to 5.5p from the 5.3p for 2005.
Profit before tax was #19.1m (2005: #27.3m). This result equates to a return on
opening shareholders equity of 22%.
Our Insurance Division produced a very commendable operating ratio of 98.9%
(2005: 96.4%) against a background where we expect many motor insurer ratios to
be in excess of 100%. Our absolute return investment strategy, now in its third
year of operation again produced market-leading returns in a year where fixed
interest returns were suppressed by rising interest rates.
Our Retail Division, which was created by three acquisitions from mid-2004,
achieved 20% organic growth during the year expanding its book from 173,000 to
207,000 policies. In little over two years we have created Britain's twelfth
largest general insurance broker with 2007 revenues now expected to exceed #25m.
The result for the year includes some non-recurring items. In September 2006 we
sold a non core investment in Autofirst SA, a French broking business, recording
a net investment gain of #2.4m. Additionally, our Retail Division incurred #0.5m
of integration costs in merging the businesses acquired.
Group consolidated income statement
Gross insurance premium revenue in 2006 showed a 7.7% reduction at #238.6m
(2005: #258.4m). Fee and commission income was up 30% at #25.1m (2005: #19.3m).
Profit before tax was #19.1m (2005: #27.3m). Earnings per share were 6.7p (2005:
9.7p).
The result by business area is summarised below:
# millions Insurance Claims Retail Unallocated 2006 2005
Total Total
Net insurance premium revenue 227.7 - - - 227.7 242.9
Fees and commission income (0.2) 0.7 24.6 - 25.1 19.3
Investment income 23.5 - 2.2 1.4 27.1 27.5
Net insurance claims incurred (177.1) - - - (177.1) (185.4)
Operating expenses (48.0) (0.1) (23.9) (7.8) (79.8) (72.7)
Investment expenses (2.6) - - - (2.6) (2.1)
Finance costs (0.5) - - (0.8) (1.3) (2.2)
Profit before tax 2006 22.8 0.6 2.9 (7.2) 19.1 27.3
Profit before tax 2005 34.2 1.4 0.7 (9.0) 27.3
6
Underwriting
The Insurance Division produced a profit of #22.8m against #34.2m in 2005. This
reflects lower results for both underwriting and investment. The underwriting
operating ratio increased to 98.9% against 96.4% in 2005.
# millions 2006 2005
Gross premiums written 241.3 253.7
Net premiums written 230.8 238.7
Net insurance premium revenue 227.7 242.9
Net claims incurred (177.1) (185.4)
Loss ratio 77.8% 76.3%
Net operating expenses (48.0) (48.8)
Expense ratio 21.1% 20.1%
Investment return 20.9 24.4
Other income (0.2) 1.6
Finance costs (0.5) (0.5)
Profit before tax 22.8 34.2
Operating ratio 98.9% 96.4%
2006 saw motor premium rates under continuing competitive pressure in the first
half year with modest rate increases being achieved on all product lines in the
second half. Our underwriters have maintained their discipline and continued to
write only for profit, and in particular have sought to reduce our exposure in
large fleets where market pricing has been least sensible, and elements of
non-comprehensive business which have a disproportionate propensity for large
claims. Our general approach has been to maintain small regular rate increases
and this has inevitably led to a small reduction in premium volume compared to
2005.
2006 Business split by net written premium 2006 2005
Private car - comprehensive 34% 26%
Private car - non-comprehensive 13% 16%
Specialist 14% 15%
Small CV & trucks - comprehensive 18% 18%
Small CV & trucks - non-comprehensive 4% 6%
Motorcycle 4% 5%
Fleets & motor trade 13% 14%
Market claims inflation continues to run ahead of rate increases. Our claims
people actively manage all aspects of our supply chain to counter this trend,
ensuring Highway has the best suppliers, technologies and business arrangements
in place to control costs, and ensuring service standards continue to improve.
Through this approach, Highway claims cost inflation has been kept below market
levels.
A key differentiator of Highway for many years has been that it is a low cost
operator, and this is a feature which we recognise as vital to our ongoing
success. In early 2006, we rationalised our claims operation by closing our
Chatham office, relocating the work into existing branches at Brentwood and
Ipswich.
We believe 2007 will mark the start of the recovery in the underwriting cycle,
and we are geared up to take advantage of it. We have made refinements to our
pricing, we have a continually improving customer perception, claims management
is consistent, innovative and focused, and this is all underpinned by a strong
distribution network.
Investment income
Highway once again enjoyed strong returns from its investment portfolio albeit
in more difficult conditions for the fixed interest portfolio than in 2005.
Investment income for the year was #27.1m compared to #27.5m in 2005. This
included a gain of #2.4m on disposal of a non core investment in the French
broking business, Autofirst SA. It also includes a net loss for the year of
#1.1m (net loss on holding from inception #0.7m) on the large US hedge fund,
Amaranth International, which incurred substantial losses in September 2006 on
account of imprudent natural gas future positions taken by a single trader.
Returns of 5.89% for 2006 achieved by our investment managers for the managed
sterling portfolio compare to 7.28% in 2005 and are ahead of our previous
benchmark, the Merrill Lynch 1-3 year index, which produced only 3.04%.
The increase in bank base rates in 2006 from 4.5% to 5% impacted fixed income
performance where bond market values decline with rising rates. Accordingly the
overall yield on our fixed income book was 1.74% compared to 5.26% in 2005. In
line with a number of our competitors we have adopted an accounting policy for
our investment portfolio of "fair value through profit or loss" which requires
the fixed income book to be included at market value. Underlying this policy our
investment managers have the option of trading the portfolio where a benefit can
be achieved or holding bonds to maturity where this is appropriate. Whilst fair
value accounting produces a low yield for the year, our fixed income book has an
average duration around 2.7 years and would produce a yield exceeding 5.2% pa in
the event that the portfolio was held to maturity.
Our hedge fund portfolio produced a yield of 12.03% for the year given rising
equity markets, in spite of Amaranth International. The portfolio is highly
diversified across 63 funds with an expectation that it will under perform
equities in rising markets but with less volatility within the fund.
The special situations portfolio is predominantly equities but includes some
fixed interest and cash. The overall return for the year from our special
situations portfolio was 14.63%, and on the equity content within the portfolio
our managers exceeded the FTSE All Share Index return of 16.75%.
Yield Yield Allocation Allocation
Asset yield and allocation 2006 2005 2006 2005
Cash 4.18% 4.33% 19% 24%
Fixed income 1.74% 5.26% 45% 44%
Special situations 14.63% 20.05% 11% 10%
Hedge funds 12.03% 9.37% 25% 22%
Total 5.89% 7.28% 100% 100%
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%
Twelve months ended 31 December 2006 5.89% 3.04%
Year-end funds under management were #409.7m up from #395.0m in 2005,
notwithstanding a repayment of #10m of bank debt. Funds benefited by #10.9m from
the proceeds of two old reinsurance contracts commuted in the year. Funds net of
debt are:
Funds under management (net of debt) #m
2001 246
2002 253
2003 288
2004 338
2005 367
2006 392
Highway has run its absolute return strategy since November 2003. Our objectives
are 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
remains cautious, with a strong emphasis on value preservation. However, our
strategy permits our investment managers to add value successfully where
opportunities permit.
Retail
The Retail Division commenced in mid 2004 with the acquisitions of A Quote and
Direct Motorline followed by the acquisition of MRB Insurance Brokers in October
2005. This year has been the first full year of trading for the combined
businesses and includes a significant degree of activity to integrate the
businesses acquired. On 31 December 2006 we merged all three businesses into a
single legal entity renamed Hero Insurance Services Ltd and will use the "Hero"
name, supplemented by the existing trading names A Quote and 1st Quote, in
building a brand for the future.
Much of our focus during the year has been in integrating the businesses
acquired with a wide-ranging change programme and the results include #0.5m of
restructuring costs that will not recur.
Our objective for Hero is to develop a substantial distribution business whilst
leveraging this to increase the value of customers acquired to the Highway
Group. Our strategy is to acquire and consolidate brokers and to produce
sustained organic growth with a short term target of 250,000 policies by end
2007. During 2006 the Division has achieved almost 20% organic growth ending the
year at 207,000 policies, an increase of 34,000 policies in the year. The
businesses brought together to form the Retail Division controlled 127,000
policies at the time of acquisition which means we have achieved a cumulative
organic growth of 80,000 policies. This represents a strong increase in embedded
value for the business although the initial marketing spend strain of achieving
it has depressed profitability in the current year in favour of future profits.
Claims
The contribution from claims management of #0.6m is down from #1.4m in 2005. The
shortfall is attributable to the cancellation of a major repairer and car hire
contract in March 2006 and includes a compensation payment of #0.4m. We have
replaced the contract with our own network of approved repairers achieving in
excess of a 20% reduction in average repair costs which is reflected in the
underwriting segment. We have implemented new car hire arrangements from October
2006 and in May 2006 secured improved terms over salvage disposal.
Pensions
The Group's defined benefit scheme is a closed scheme with the exception of 18
members of staff who were members of the scheme and aged over 50 at 30 June
2001. All other staff have the opportunity to participate in defined
contribution schemes.
The investment strategy of the defined benefit scheme was changed at the end of
June 2006. The Trustees' new strategy is to invest in a range of asset classes
with the objective of delivering an absolute return in excess of that on cash
and to use derivative investments (a "swap overlay") to protect the scheme's
finances, so far as is possible, against changes in interest rates and price
inflation.
The Trustees' overall investment objective is to obtain a rate of return (net of
investment management charges) that is 2.5% p.a. in excess of the return
available on securities that broadly match the term and nature of the scheme's
future benefit payments within a risk budget the Trustees consider to be
appropriate.
The scheme has achieved an overall return of 9.62% in the year. The pension fund
deficit in the year reduced to #9.4m (net of tax) from #11.1m in 2005.
Dividend
The proposed final dividend of 3.9p per share gives a total dividend of 5.5p per
share which represents an increase of 3.8% (2005: 5.3p). Subject to shareholder
approval at the AGM on 9 May 2007, the dividend will be payable on 16 May 2007
to shareholders on the register on 23 March 2007. The shares will be quoted
ex-dividend from 21 March 2007.
Balance sheet
The Group enjoys a robust Balance Sheet and repaid #10m of the senior debt
facility during the year leaving only #10m of the facility utilised.
Arthur Milton
Group Finance Director
8 March 2007
Highway Insurance Holdings Plc
Consolidated income statement
For the year ended 31 December 2006
2006 2005
Note #000 #000
238,640 258,444
Gross insurance premium revenue
Premiums ceded to reinsurers (10,895) (15,514)
Net insurance premium revenue 227,745 242,930
Fee and commission income 23,930 18,483
Investment income 27,080 27,452
Net income 278,755 288,865
Claims incurred (188,115) (176,410)
Reinsurers' share of claims incurred 10,970 (9,013)
Net insurance claims incurred (177,145) (185,423)
Underwriting and policy acquisition costs (46,811) (47,993)
Administrative expenses (31,752) (23,958)
Investment expenses (2,599) (2,097)
Operating profit 20,448 29,394
Finance costs (1,380) (2,137)
Profit before income taxes 19,068 27,257
Income taxes 4 (5,395) (7,771)
Profit for the year attributable to
equity shareholders
13,673 19,486
Earnings per share:
Basic 5 6.7p 9.7p
Diluted 5 6.5p 9.3p
Dividend per share:
Paid 6 1.6p 1.6p
Proposed 6 3.9p 3.7p
Dividend (interim - paid) 6 3,235 3,202
Dividend (final - proposed) 6 7,950 7,443
Highway Insurance Holdings Plc
Consolidated statement of recognised income and expense
For the year ended 31 December 2006
2006 2005
Note #000 #000
Pension scheme actuarial gains/(losses) 1,185 (11,884)
Deferred tax on pension scheme actuarial (gains)/losses (356) 3,565
Net income/( expense) recognised directly in equity 829 (8,319)
Profit for the year attributable to equity shareholders 13,673 19,486
Total recognised income and expense for the year
attributable to equity shareholders
8 14,502 11,167
Highway Insurance Holdings Plc
Consolidated balance sheet
As at 31 December 2006
2006 2005
Note #000 #000
Assets
Property, plant and equipment 2,236 2,391
Intangible assets
Deferred acquisition costs 20,550 20,158
Other intangible assets 20,218 23,115
Financial assets 225,787 313,856
Reinsurance assets 74,521 90,556
Deferred tax assets 801 906
Insurance and other receivables 64,582 85,012
Cash and cash equivalents 191,009 90,915
Total assets 599,704 626,909
Liabilities
Insurance contract provisions (434,719) (440,507)
Financial liabilities (24,093) (35,600)
Insurance and other payables (32,187) (41,507)
Employee benefit obligations 7 (13,483) (15,980)
Current tax liabilities (2,244) (4,976)
Total liabilities (506,726) (538,570)
Net assets 92,978 88,339
Shareholders' equity
Share capital 8 40,866 40,666
Share premium 8 18,098 17,953
Other reserve 8 39,221 39,221
Retained earnings 8 (5,207) (9,501)
Total shareholders' equity 8 92,978 88,339
Approved by the Board and signed on its behalf on 8 March 2007 by:
Richard Gamble Arthur Milton
Executive Chairman Group Finance Director
Highway Insurance Holdings Plc
Consolidated cash flow statement
For the year ended 31 December 2006
2006 2005
Note #000 #000
Cash flows from operating activities
Profit before income taxes 19,068 27,257
Depreciation of property, plant and equipment 1,020 726
Amortisation of other intangible assets 3,121 3,272
Amortisation of deferred acquisition costs 41,217 43,124
Fair value loss/(gains) on financial assets 4,335 (13,752)
Gain on sale of property, plant and equipment 2 62
Interest expense 1,452 2,229
Equity settled share based payment expense 33 116
Exchange gain on borrowings (111) (277)
Additional contributions in excess of service cost (808) (23)
Expected return on net assets of pension scheme (504) (356)
68,825 62,378
Net sale/(purchase) of financial assets 83,771 (16,473)
(Increase)/decrease in assets (5,099) 4,140
Decrease in liabilities (14,667) (23,679)
132,830 26,366
Interest paid (1,458) (2,914)
Income taxes paid (8,445) (3,192)
Net cash inflow from operating activities 122,927 20,260
Cash flows from investing activities
Proceeds from sale of property, plant and equipment 55 68
Acquisition of subsidiaries, net of cash acquired - (9,445)
Acquisition of property, plant and equipment (922) (1,501)
Development expenditure - (1,096)
Acquisition of customer relationships (157) (174)
Net cash used in investing activities (1,024) (12,148)
Cash flows from financing activities
Issue of share capital 345 -
Repayment of borrowing (10,000) (16,250)
Payment of finance lease liabilities (26) (36)
Equity dividends paid (10,678) (6,902)
Redemption of loan note - (240)
Net cash used in financing activities (20,359) (23,428)
Net increase/(decrease) in cash and cash equivalents 101,544 (15,316)
Cash and cash equivalents at 1 January 85,143 100,459
Cash and cash equivalents at end of year 186,687 85,143
Cash and cash equivalents include the following for the purpose of the cash flow
statement:
Cash and cash equivalents 191,009 90,915
Bank overdrafts (4,322) (5,772)
Total 186,687 85,143
Highway Insurance Holdings Plc
Notes to the consolidated financial statements
For the year ended 31 December 2006
1. General information
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 2006. The statutory accounts for the Group were approved by the
Board on 8 March 2007. An unqualified audit report was issued on the same day.
The financial statements for the year ended 31 December 2006 have not yet been
delivered to the Registrar.
2. Significant accounting policies
a) Statement of compliance
The Group financial statements have been prepared and approved by the directors
in accordance with International Financial Reporting Standards (IFRSs) as
adopted by the European Union (EU). The Company has elected to prepare its
parent company financial statements in accordance with UK GAAP.
At the date of authorisation of these financial statements IFRS 7 Financial
Instruments: Disclosures, was in issue but effective for accounting periods
beginning on or after 1 January 2007. The directors believe that the adoption of
IFRS 7 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 adopted IFRSs
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.
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.
Certain Group subsidiaries underwrote as corporate members of Lloyd's of London
until 1999. In view of the several liability of underwriting members at Lloyd's
for transactions of syndicates in which they participate, only the attributable
share of transactions, assets and liabilities of that syndicate have been
included in the financial statements.
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.
Reinsurers' share of claims incurred includes reinsurance recoveries received
during the year plus the estimated ultimate recoveries of all claims incurred
but not settled at the balance sheet date.
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 method. 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.
IBNR provisions and provisions for outstanding claims are initially estimated at
a gross level and a separate calculation is carried out to estimate the size of
reinsurance recoveries.
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 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
the liability adequacy test under IFRS 4, Insurance Contracts.
Impairment
Reinsurance assets are assessed for impairment at each balance sheet date. An
asset is deemed impaired if there is objective evidence, as a result of an event
that occurred after its initial recognition, that the Group may not recover all
amounts due, and that the event has a reliably measurable impact on the amounts
that the Group will receive from the reinsurer.
Underwriting and policy acquisition costs
Underwriting and policy acquisition costs, comprise commission and other costs
related to the acquisition of new insurance contracts and the renewal of
existing contracts. These costs are deferred over the period in which the
related premium is earned and to the extent that they are recoverable against
future margins.
Deferred acquisition costs are amortised over the estimated term of the
insurance contract to which they relate.
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) Other 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) Other 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. These costs are
charged to the profit and loss account as incurred.
Financing costs
Financing costs comprise interest payable on borrowings calculated using the
effective interest method. Finance costs are recognised in the income
statement.
Income tax
Income tax on the profit or loss for the year comprises current and deferred
tax. Income tax is recognised in the income statement except to the extent that
it relates to items recognised directly in equity, in which case it is
recognised in equity.
Current tax is the expected tax payable on the taxable income for the year,
using tax rates enacted or substantially enacted at the balance sheet date, and
any adjustment to tax payable in respect of previous years.
Deferred tax is provided using the balance sheet liability method, providing for
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for taxation purposes.
Deferred tax liabilities are generally recognised for all taxable temporary
differences and deferred tax assets are recognised to the extent that it is
probable that future taxable profits will be available against which the asset
can be utilised. Deferred tax assets are reduced to the extent that it is no
longer probable that the related tax benefit will be realised.
The amount of deferred tax provided is based on the expected manner of
realisation or settlement of the carrying amount of assets and liabilities,
using tax rates enacted or substantively enacted at the balance sheet date.
3. 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 year ended 31 December 2006:
Insurance Claims Retail Unallocated Eliminations Total
#000 #000 #000 #000 #000 #000
Gross written premium 241,327 - - - - 241,327
Net insurance premium
revenue
227,745 - - - - 227,745
Fee and commission income
(179) 643 24,607 42 - 25,113
Inter-segment sales - - - - (1,183) (1,183)
Investment income 23,668 - 2,552 860 - 27,080
Segment revenue 251,234 643 27,159 902 (1,183) 278,755
Net insurance claims (177,145) - - - (177,145)
incurred
-
Underwriting and policy
acquisition costs (46,903) - - - 1,183 (45,720)
Administration expenses - (49) (23,605) (5,048) - (28,702)
Investment expense (2,599) - - - - (2,599)
Segment operating profit 24,587 594 3,554 (4,146) - 24,589
Finance costs (544) - - (836) - (1,380)
Depreciation - - (329) (691) - (1,020)
Amortisation (1,524) (105) (1,492) - - (3,121)
Segment result 22,519 489 1,733 (5,673) - 19,068
Segment result for the year 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
revenue 242,930 - - - - 242,930
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
acquisition costs (47,784) - - - 803 (46,981)
Administration expenses - - (15,575) (5,396) - (20,971)
Investment expenses (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 assets and liabilities for the year ended 31 December 2006:
Insurance Claims Retail Unallocated Total
#000 #000 #000 #000 #000
Segment assets
Property, plant and equipment - - 1,384 852 2,236
Intangible assets 27,275 368 13,125 - 40,768
Financial assets 225,287 - - 500 225,787
Reinsurance assets 74,521 - - - 74,521
Insurance and other receivables 62,034 1,416 (9,561) 10,693 64,582
Cash and cash equivalents 168,667 - 2,965 19,377 191,009
Total segment assets 557,784 1,784 7,913 31,422 598,903
Deferred tax assets 801
Total assets 599,704
Segment liabilities
Insurance contract provisions 434,719 - - - 434,719
Financial liabilities 13,593 - - 10,500 24,093
Employee benefit obligations - - - 13,483 13,483
Insurance and other payables 22,003 695 8,430 1,059 32,187
Total segment liabilities 470,315 695 8,430 25,042 504,482
Current tax liabilities 2,244
Total liabilities 506,726
Capital expenditure - - 748 398 1,146
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 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.
4. Income taxes
(a) Recognised in the income statement
2006 2005
#000 #000
Current tax expense
Current year 5,460 7,570
Adjustments in respect of prior years 252 418
5,712 7,988
Deferred tax expense
Origination and reversal of temporary differences (359) (1,079)
Benefit of tax losses recognised - 1,721
Adjustments in respect of prior years 42 (859)
(317) (217)
Total 5,395 7,771
(b) Reconciliation of effective tax rate
2006 2005
#000 #000
Profit before income taxes 19,068 27,257
Income tax using the domestic corporation tax rate 5,720 8,177
Effects of:
Expenses not deductible for tax purposes 189 258
Tax exempt revenues (730) (5)
Other differences (78) (218)
Tax underprovided in previous years 294 (441)
Tax charge for the period 5,395 7,771
The weighted average applicable tax rate was 30% (2005: 30%).
(c) Deferred tax recognised directly in equity
2006 2005
#000 #000
Relating to pensions scheme actuarial (gains)/losses (356) 3,565
5. 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.
2006 2005
#000 #000
Profit attributable to ordinary shareholders 13,673 19,486
Weighted average number of ordinary shares in issue (Basic)
Issued ordinary shares at 1 January 203,332 203,332
Effect of own shares held (538) (3,188)
Effect of shares issued 12 March 2006 805 -
Weighted average number of ordinary shares at 31 December 203,599 200,144
Basic earnings per share 6.7p 9.7p
(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.
2006 2005
#000 #000
Profit attributable to ordinary shareholders 13,673 19,486
Weighted average number of ordinary shares in issue (Diluted)
Weighted average number of ordinary shares at 31 December 203,599 200,144
Adjustment for share options 3,500 8,500
Adjustment for conditional share awards 2,144 90
Adjustment for share warrants - 1,000
Weighted average number of ordinary shares for diluted earnings per share 209,243 209,734
Diluted earnings per share 6.5p 9.3p
6. Dividends
Amounts recognised as distributions to equity holders in the period:
2006 2005
#000 #000
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
Final dividend for the year ended 31 December 2005 of 3.7p per share 7,443 -
Interim dividend for the six months ended 30 June 2006 of 1.6p per share 3,235 -
Total 10,678 6,902
The proposed final dividend of 3.9p per share amounting to #7,950,000 has been
declared. As the final dividend had not been approved at the balance sheet date
it has not been included as a liability as at 31 December 2006.
7. 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 2005.
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
2006 2005
% %
Discount rate 5.20 5.00
Mortality Short cohort Short cohort
Expected return on plan assets 6.90 6.30
Future salary increases 3.00 2.90
Future pension increases 3.00 2.90
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:
2006 2005
#000 #000
Present value of defined benefit obligation 87,247 86,116
Fair value of plan assets (73,764) (70,136)
Total employee benefit liability 13,483 15,980
8. Capital and reserves
Reconciliation of movement in capital and reserves
Attributable to equity holders of the parent
Share
Share premium Other Retained
capital account reserve earnings Total
#000 #000 #000 #000 #000
At 1 January 2005 40,666 16,483 40,861 (14,260) 83,750
Total recognised income and expense - - - 11,167 11,167
Reallocation of other reserve - 1,470 (1,490) 20 -
Share based payments - - - 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 39,221 (9,501) 88,339
At 1 January 2006 40,666 17,953 39,221 (9,501) 88,339
Total recognised income and expense - - - 14,502 14,502
Share based payments - - - 437 437
Issue of shares 200 145 - - 345
Appropriation to the Highway Share Incentive Plan - - - 33 33
Equity dividends paid - - - (10,678) (10,678)
At 31 December 2006 40,866 18,098 39,221 (5,207) 92,978
Share capital
2006 2005
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 204,331,668 40,866 203,331,668 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 were exercised on 9
March 2006 for a consideration of #345,000.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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