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Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
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Highway Ins. | LSE:HWY | London | Ordinary Share | GB0006561137 | ORD 20P |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|---|---|
0.00 | 0.00% | 73.50 | 0.00 | 01:00:00 |
Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
---|---|---|---|---|---|
0 | 0 | N/A | 0 |
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 FR JPMPTMMMMBPR
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