RNS Number:7491J
Highway Insurance Holdings PLC
08 April 2003
7 April 2003
Highway Insurance 2002 Preliminary Results
As indicated in the announcement made on 12 March 2003, Highway Insurance
Holdings Plc (Highway) is today publishing its full preliminary audited results
for 2003. The data relating to New London Capital's syndicate participations
that were not available in March have now been included in the statement that
follows.
As a result of the reinsurance arrangements that were put in place at the
beginning of 1999, Highway shareholders have no direct economic interests in the
results of New London Capital's syndicate participations. The additional data
now being reported therefore has no impact on Highway's profit or loss that
remains unchanged from that reported on 12 March.
- more -
HIGHWAY INSURANCE HOLDINGS Plc
Preliminary Group Results 2002
2002 2001
Operating profit* from continuing operations before amortisation costs #21.4 million #9.2 million
Operating profit* #15.9 million #12.6 million
Operating ratio on continuing operations 93.7% 102.9%
Profit before tax and exceptional items #13.5 million #10.5 million
Earnings per share - continuing business before exceptional items 6.9p 3.4p
Final dividend 1.68p 1.60p
Full year dividend 2.48p 2.40p
Highlights
* Highway has outperformed the UK motor insurance market
* Operating ratio on continuing operations of 93.7% (2001: 102.9%)
* Operating profit* up from #12.6 million to #15.9 million
* Expense ratio reduced to 21.1% (2001: 24.9%) compared with the latest
published market expense ratio of 27.8%
* Positive investment returns despite falling market
* Exit from Lloyd's and initial FSA close supervisory period completed
* General trading conditions remain positive
* 2003 gross premium limit increased by 22% to #320 million
* Appointment of Richard Gamble and David Barker as Non-Executive Directors
* Proposed final dividend increased by 5% to 1.68p per share (2000: 1.6p)
* Based on long term investment rate of return, before exceptional items and tax
Commenting on these results, Ross Dunlop, Executive Chairman said:
"I believe that 2002 was a watershed year for Highway and its shareholders. We
have taken significant steps to improve the quality of the business by
strengthening management, investing in better systems and reducing costs. We are
therefore prepared to cope with conditions and circumstances affecting UK motor
insurance which are likely to become more challenging as the cycle progresses."
For more information:
Highway Insurance: 01277 266573
Ross Dunlop Chairman
Andrew Gibson CEO
Ian Patrick Finance Director
Bell Pottinger First Financial:
Roger Carroll 0207 861 3838
Chairman's Statement
When I took over the Chairmanship in July last year we constructed a plan to
ensure that 2002 would become a watershed in the fortunes of Highway's
shareholders. The plan contained both top-down and bottom-up components. Our
top-down approach took in our withdrawal from Lloyd's, our exit from New
Millennium Technologies (NMT) and the closure of our former head office in
Bishopsgate. It also involved the successful completion of our initial three-
year FSA close supervisory period for Highway Insurance Company Limited
(HighCo), together with a fundamental reassessment of how we manage our
investment funds. From the bottom-up we promoted those who were actually running
the business to the positions that accorded with the responsibility they
discharged on the Company's behalf. The objective was to make Highway the lowest
cost producer for its position on the value chain. Over the period we have
introduced a simplified product range, administered through a new core
processing IT system, which incorporates the transmission of data via Electronic
Data Interchange (EDI).
All of these initiatives involved additional expenditure during the year,
greater detail regarding which is dealt with in the CEO's Report and the
Financial Review. Each one will contribute towards our ongoing policy of
tightening costs, streamlining processes and improving the quality of our
business model. All are steps towards Highway's basic modus operandi that aims
to ally sound, yet imaginative management with the most efficient systems.
Highway enters 2003 with a business focused on UK motor insurance, administered
by a FSA regulated subsidiary HighCo, and distributed through an up-rated broker
network via improved product and systems. We believe we are therefore better
equipped to compete, in our chosen areas of risk selection, on the principal
criteria which governs the creation of the bulk of motor insurance contracts -
price.
To date the Highway model has been restricted to competing solely around price.
Whilst we believe that we have a competitive edge within this part of the value
chain, it is also illustrative of quite how plain our product offering is and
how little opportunity we have to add value to each of our sales. Moreover, we
are aware that the constituency of the UK motor market may continue to change,
either by consolidation or by the continuing evolution of new business models
predicated with category killer instincts in mind.
At Highway we have taken the opportunity to reconsider where we could enhance
our model to extend our position over the value chain. We have pursued this aim
without recourse to substantial commitments regarding both capital and human
resources. As a result we have developed two businesses, Highway Premium Finance
(financing annual insurance premiums) and Crusader (accident management). The
aim is to generate a non-risk income stream, garnered by achieving a higher
degree of mutual inclusivity on the sale of a Highway motor policy with each of
these two products.
In addition we have increased our investment in Elite Insurance Brokers from 30%
to 75% for an outlay of #300,000. Elite is a small broker with whom we have had
a close relationship for some years. It has a specialisation in motorcycles,
though it carries a small book in both private car and commercial vehicles. This
acquisition gives us a platform in integrated distribution, and affords us a
step up the learning curve on the value chain.
Financial Results
Given the considerable changes made to the business the results we have
achieved for 2002 are satisfactory. The comparatives with 2001 are not overly
helpful because of the distortions that affected the pattern and levels of
business written in 2002, re-organisation costs of #1.2 million charged to the
profit and loss account and the change made in reducing our long-term rate of
return expectations. In addition we incurred a #12.1 million write off in
respect of our investment in NMT.
Nonetheless, we have made progress in underlying terms. Benefits of the
additional costs incurred in 2002 will begin to contribute to increased
profitability in 2003 and beyond. Accordingly we are proposing to increase our
final dividend by 5% to 1.68 pence per share (2001 - 1.6p) which is being
financed entirely from reserves. This increase should not however be taken as a
declaration of intent on a future progressive dividend policy. We regard the
dividend as a charge on shareholders' equity, where in 2002 our proposed payment
would represent a charge of 6.6% which is somewhat higher than the sector
average. The dividend increase should be viewed as a reflection of our
confidence in the steps taken to improve the business and to compensate those
shareholders who have continued to support the business. The dividend will be
payable on 11 June 2003 to shareholders on the register on 22 April 2003.
Board
With the completion of our three year close supervisory period for HighCo
coinciding with our Lloyd's exit at the end of 2002, it was clear that the
Boards of Highway and HighCo should have non-executives in common with each
other.
We are very pleased that Judy Kellie and John Stoker, both Directors of HighCo,
have recently joined the parent company board. Both have considerable insurance
expertise, Judy in marketing and John in re-insurance. Each of these areas is
becoming more important for us going forward. At the same time, Highway
Directors, David Coleridge and Allen Thomas agreed to join the Board of HighCo.
To facilitate these changes Keith Bradley and Graham Kennedy generously agreed
to step down from the Highway Board. Both had served the Company with
distinction for many years and were always enormously supportive. Simultaneously
Quin Lovis and Gilles Avenel resigned from the HighCo Board, having seen us
through our three year FSA supervision. They all depart with my greatest thanks
for their efforts on shareholders' behalf.
In addition I am delighted that Richard Gamble and David Barker have agreed to
join us as Directors on both Boards. Both were formerly with Royal & Sun
Alliance (RSA), Richard as CEO and David as Investment Director. It is an
enormous compliment to Highway that two such experienced insurance professionals
have agreed to help us in the development of the business. Richard, who has a
finance background, also held senior positions at British Airways and has
considerable experience in insurance broking from his days at Lowndes Lambert.
David, an actuary by profession, will be of great value advising and overseeing
the management of our insurance fund which today is worth some #290 million.
Lastly, we have invited Stuart Davies our Claims Director to join the parent
company board. Stuart, who has a finance background has been with Highway for
ten years and has operated in a variety of roles, including Finance Director of
HighCo.
The Future
Looking ahead there are two key considerations that will impact on the future of
our business and its profitability. The first concerns underwriting margins and
investment returns, the second the possible consolidation of the UK motor
insurance industry.
Over the last thirty years, high inflation has helped generate high nominal
investment returns. This in turn subsidised poor underwriting practices and
chronically inefficient process systems. General insurers became investment led,
de-emphasising underwriting disciplines. Business was written for cash flow.
While such a phenomenon persisted, profits were easily generated. However, as
this trend expired and eventually reversed the pincer effect of poorer
investment returns combined with operating ratios stubbornly in excess of 100%
had the potential to be very painful. Short-term premium rate increases could
only ameliorate this squeeze, not compensate for it.
The recent decline in shareholders' funds from insurance company balance sheets
globally is estimated to exceed US $200 billion. Even allowing for the
fundraisings of the past eighteen months, the industry is woefully
undercapitalised compared to its position three years ago when virtually every
class of premium was much cheaper.
These issues would suggest that unless expectations for future investment
returns improve dramatically, the insurance industry should proceed with some
caution before reducing premium rates. Such caution will be justified to
maintain underwriting discipline, since industry costs overall are still too
high. Balance sheet restoration will become mandatory for survival. Claims and
administration cost reduction will become a priority and carriers will seek to
improve the quality of their business written. For these reasons our view is
that the shape of the current insurance cycle will show a lengthening in
comparison with those of the recent past.
We continue to invest our insurance fund, that today totals #290 million, in
fixed interest instruments. Our priority is to preserve the capital value of our
funds to protect our underwriting book from capital adequacy issues that could
restrict our ability in writing business. We must therefore accept a return
commensurate with this fairly risk averse approach. However, we are
investigating investment strategies that could enhance our return potential,
without extending the risk profile we are prepared to countenance.
The second consideration is based around the likelihood of industry
consolidation, together with an assessment of the ground rules that affect and
therefore govern the profitability of all companies in the sector.
The UK motor insurance market covers gross premiums of #11.5bn, of which 60% is
still distributed through intermediaries. Six major insurers dominate,
controlling 70% of the market. The balance is made up by an additional 15 or so
participants who have individual market shares of between 1% and 4%. For an
industry whose key selling proposition is based around price and therefore
lowest costs, the present status quo would appear unsustainable. Predominantly,
scale will prevail, as will some smaller players who have been inventive in
developing business models which accrete value and are low cost producers.
Highway has sufficient business volume to warrant the necessary investment in
the most modern and productive systems. It has the capacity to write substantial
additional business, is low cost and is seeking to enhance its business model.
It therefore possesses the capability of being a consolidator of the UK motor
industry, though larger industry players may view Highway as a consolidation
play.
My final point of observation for the industry regards the post modernist
culture of complaint, blame and compensation which appears to be a blight on UK
society blown here from the US. In the UK we now have a judicial system with a
willingness to sanction ever-increasing settlements over an ever-widening range
of claims. It is not therefore surprising that a raft of lawyers would rather
channel their efforts in to retrospective re-determination of legal insurance
contracts, tempting the public with the "no win no fee" advertisements on
television.
There is one point which is particularly germane to this issue. Most insurers
are happy to settle genuine claims where cover has been provided; the quid pro
quo is that the quantum of risk is agreed at the time the policy is contracted.
At the moment this is not the case. On exchange of contract for insurance,
insurers are likely to see 90% of the total liability, with the remaining 10%
"evolving" by precedent over the term of the claims settlement process.
Eventually insurers will see an opportunity to 'price in' the unseen part of the
liability, and as they seek to improve the quality of their underwriting book,
to 'price out' some customer groupings. At such a stage the motor insurance
buying public will be confronted with what has from its point of view become a
minus sum game. Insurance, like all goods and services, comes at a price, where
part of the implicit assumption is to ensure that the business endures, so that
claims are met and "renewals" are offered. The capacity of the industry to pay
claims should not be viewed as limitless, and the insured public should realise
it will pay in the end.
Staff
My statement would not be complete without mention of all our staff, who have
coped admirably with all the changes which have confronted them in the past
twelve months. Their support and enthusiasm in modernising the business has been
marvellous. I thank all of them and Andrew Gibson, together with the rest of the
executive team, for the progress we have been able to achieve in improving the
business for our shareholders.
We have taken some important and significant steps in 2002, which I expect to be
reflected in a more successful year in 2003. Given our resources and market
position, we have appropriate plans to deal with market conditions as they
change. However, we remain fully committed to the main thrust of our strategy,
which has to be good implementation.
Ross Dunlop
Executive Chairman
8 April 2003
Chief Executive's Report
2002 has been a year of renewal for Highway. We set out to address three broad
objectives, namely to:
* enhance our franchise as a leading broker-only motor insurer;
* utilise better our assets by driving out any unnecessary costs and
inefficiencies from the business; and
* take full advantage of the current favourable trading environment.
I believe that we made great strides in achieving these aims during the year and
the business is much improved as a result. Our many achievements would not have
been possible without the tremendous effort of our people. Their dedication and
commitment has been exemplary.
Financial Performance
Financial performance is split between our continuing motor insurance operations
and discontinued operations comprising a household insurance account and
Autofirst, a French personal lines operation, both of which were closed at the
start of the year.
For 2002, we have produced what we consider to be a satisfactory financial
result. Operating profit from continuing operations, based on the longer-term
investment rate of return, before exceptional items and amortisation, was #21.4
million (2001: #9.2 million). The operating ratio from continuing operations
reduced to 93.7% from 102.9% in 2001.
Profit before tax on continuing operations, excluding exceptional items was
#17.7 million (2001: #6.8 million). Including discontinued operations and, after
accounting for the exceptional write-off of the investment in New Millennium
Technologies and the costs of restructuring the head-office, profit before tax
was #0.3 million (2001: #10.5 million).
Operational Review Of 2002
In the ensuing paragraphs I describe the principal operational changes that were
implemented during 2002 that have resulted in a more robust business.
We completed the implementation of GIOS, our new core processing IT system, in
January. The new system has been the platform from which we have been able to
enhance our business processes and, for example, develop electronic trading
facilities with our distribution network. We were the first UK users of GIOS;
the system is now fully installed and I am confident that over time it will
become the system of choice for UK motor insurers. During the same month we also
completed the installation of FRESH, a new broker accounting and reconciliation
system.
In January, we closed the Stockport and Chatham underwriting offices. This was
in addition to the closure of our Bristol office in 2001. These closures and
other initiatives reduced our headcount from over 750 to under 600. Cost control
is key to our future success and we will continue to develop the most efficient
business that we can.
During the first quarter, the claims department introduced competency testing
and an enhanced branch audit process. These have helped identify training and
development requirements in this key area of our business whilst enabling
members of staff to progress through the new grading structure.
In April, we raised #25 million in new equity. Following the capital raising, I
was subsequently appointed CEO. Chris Hill and Ian Patrick also joined the board
of our holding company as Underwriting Director and Finance Director
respectively.
At the same time we renamed the group Highway. Our business is now focused
exclusively on motor insurance and it made little sense having the listed
holding company called something different from its principal trading
subsidiary.
At the end of June we closed our City office and relocated our registered office
and head-office functions to Brentwood. The office relocation and senior
management changes will save us #1.5 million per annum from 2003. The one-off
cost of the restructuring was #1.2 million.
On 1 July we launched a new private car product, Highway Choice. This replaced
13 existing Highway private car products. Choice took six months to develop
using the latest actuarial rating techniques and provides a more sophisticated
rating engine that gives us the ability to select more accurately the risks that
we want. Choice has been very well received by our brokers.
In July we also began piloting our fraud detection capabilities including Voice
Stress Analyser, cognitive interviewing techniques and Hunter, a fraud database.
The ABI estimates that fraud costs the UK insurance industry over #2 billion per
annum. Highway is at the forefront of fraud prevention and detection and we
intend to continue to lead the market in this area.
We completed our first year using the Claims Outcome Advisor (COA) system. COA
is an expert system that assists us to settle and reserve personal injury
claims. Our initial review indicates that we have successfully reduced general
damage costs by some 14%. Another claims change that is improving the bottom
line is the outsourcing of the negotiation of third party legal cost. This
initiative is estimated to be generating average savings of approximately 27% on
each invoice presented which is a significant improvement on the savings
achieved in prior years.
By October we had developed full-cycle private car Electronic Data Interchange
(EDI) facilities with the five software houses that support the vast majority of
UK personal lines brokers. This process allows transactions collected by our
brokers to be sent to us and processed automatically without the need for
clerical input. EDI greatly accelerates processing, is more accurate and
improves cash flow. In January approximately 25% of our new business was
received electronically. Today the figure is almost 80% and is increasing. This
initiative allowed us to close the Edinburgh underwriting office and reduce
staff count further to 557 today. As a result we expect to reduce operating
costs by #1 million in 2003 and by #2 million in 2004 and subsequent years.
In November we also announced the outcome of a detailed review of our
underwriting process. In particular, we introduced a new operating structure
that separates processing from broker management. Our new structure will help us
control costs whilst providing an improved service to brokers and policyholders.
In December, the FSA confirmed that, as HighCo has now successfully completed
three years trading, it is no longer regarded as a new insurance company and it
will therefore benefit from a lower solvency requirement going forward.
New Millennium Technologies
Ockham had made an investment in the New Millennium Technologies (NMT) software
business in 1999 when its previous supporters, including a number of insurers
and brokers, withdrew. Although NMT was a much-improved business, and had made a
number of new sales, it was still some way from break-even. It had tried to
attract new investors but had not achieved this. We announced in November,
therefore, that we would no longer support NMT after the end of the 2002
calendar year as we needed to preserve our resources to invest in our core
underwriting business.
Lloyd's Exit
Lloyd's is an expensive, complicated and risky environment in which to operate.
Lloyd's levies and subscriptions cost somewhere between 2.5% to 3% of premium
income per annum. Lloyd's three year accounting convention and other accounting
policies inhibit transparency and prevent a direct comparison with the majority
of other UK personal lines insurers. Finally, within the Lloyd's environment,
all insurers are linked via the mutuality of the Lloyd's Central Fund. In 2002,
for example, Highway paid a levy of 1% of premium income underwritten at Lloyd's
to replenish the Central Fund following the events of 11 September 2001 albeit
that we have never written insurance business in North America.
In November we agreed with Lloyd's that 2002 would be our last year and in 2003
we would underwrite exclusively through Highway Insurance Company Limited, our
FSA regulated insurance company.
Highway has increasingly benefited from lower operating costs since HighCo was
established for the 2000 underwriting year. These cost reductions have increased
annually as an increasing proportion of our business has been transferred from
Lloyd's to HighCo. The exit from Lloyd's will, however, generate further cost
savings of around #1.5 million in 2003 and this will rise to #2 million per
annum thereafter.
Outlook
We are well set to continue to benefit from the positive trading conditions, an
increased premium capacity and a more robust business.
Underwriting
Following our exit from Lloyd's and the capital raising completed in the first
half of 2002 we will have an underwriting limit of #320 million of gross
premiums in 2003. This is a 22% increase on our total premium income limit and
means that we will not have to rely on co-insurance to the same extent as we did
in 2002.
Highway Premium Limit by Underwriting Entity
# millions 2003 2002 2001
Highway Insurance Company 285 116 87
Syndicate 2037 (Highway's corporate syndicate) - 59 156
Syndicate 37 (third party Lloyd's names) - 8 74
Co and Reinsurance arrangements 35 80 26
320 263 343
The rate of premium increase slowed in 2002 when compared to the previous three
years as the UK motor market returned to profitability. We achieved increases of
approximately 8% in 2002 following increases of 15% in 2001, 17% in 2000 and 21%
in 1999.
Going forward we expect premiums to continue to increase albeit at a more modest
rate than that seen over the last few years. There is no new capital entering
the UK motor market and consolidation continues to reduce the number of
underwriters. At the same time many insurers are continuing to experience
difficulties with falling asset bases and increasing liabilities from non-motor
activities. These factors, together with greater market discipline, should
continue to help us to achieve further premium rate increases.
On 1 January 2003 we launched our new Commercial Vehicle product, Highway CV
Choice. This product again consolidates and replaces a number of existing
Highway offerings and it also provides a more sophisticated rating engine.
Highway CV Choice supports electronic trading with the leading broker software
houses from 1 February 2003. Our motorcycle product is being similarly
redeveloped and upgraded and the new product will be available from 1 May 2003.
Distribution
Brokers and other intermediaries continue to control over 60% of the #11.5
billion UK motor insurance market. We are committed to the broker market and
have little current intention of developing our brand with the end-consumer. In
this way, Highway is an invisible insurer, content to stand behind the brand of
others, underwriting as part of a panel of insurers selecting only those risks
that we believe we can write profitably.
Highway's business is currently placed via a diverse distribution base
comprising some 2,000 individual outlets. Brokers include:
* major chains such as Swintons, Budget, Endsleigh and A Plan;
* telesales and Internet operators such as The AA and Kwik Fit;
* niche operators providing non-standard insurance to young drivers and
coverages for modified or specialist vehicles;
* direct underwriters who refer non-core business;
* affinity schemes.
Our underwriters understand and manage closely our brokers. In this way we can
maximise these relationships to ensure the most beneficial and profitable
outcome for both parties.
We believe that technology such as the Internet and the development of brands
will ensure that intermediaries have a continuing strong role in the
distribution of personal lines products and Highway is well set to continue to
benefit from these trading arrangements.
Claims
Claims cost inflation continues to be an issue for the market and for 2003 will
probably outstrip increases in premium rates. Although accidental damage and
theft costs are increasing at modest rates in-line with retail price inflation,
personal injury costs and their related legal expenses continue to run ahead of
this level. The rate of increase is, however, showing signs of slowing and
although National Health costs have been increased from January 2003 this
change, is for once, not retrospective and should only affect claims arising
after this date. We are further encouraged by the recent decision to introduce
fixed legal fees for road traffic accident cases valued up to #10,000. We
believe that this will limit the costs of some of the worse protagonists within
the market and also allow for greater consistency in the reserving and pricing
processes.
Going forward we will continue to focus our activities on controlling the key
claim cost drivers whilst providing an above average level of service. These
include frequency, severity and settlement time. Our claims frequency has
improved following the introduction of the new Highway Choice private car
product in July. Our fraud prevention and detection procedures will help us to
control average claims costs and we are introducing new workflow processes that
will help to reduce further average claims settlement times.
Operating Expenses
In 2002 Highway had an expense ratio of 21.1% of premium income. This compares
favourably with the latest published market expense ratio for the 2001 year of
27.8%. Cost control is a key business objective. We expect the cost savings
already in the pipeline following the introduction of electronic trading, the
closure of the Bishopsgate head office and our exit from Lloyd's to allow us to
reduce costs further in the future as we trend to lowest cost producer status.
Investments
Highway's investment funds totalled #267 million at 31 December 2002. These
funds have increased to #290 million today following an increase in the capital
base of HighCo in early 2003. Highway's investment funds are expected to
continue to grow as a result of the positive trading conditions and our
increased premium income limits.
Over the last two years we have benefited from a conservative investment policy
that has avoided exposure to equities. We have therefore produced positive total
returns when many of our competitors have produced losses.
In today's economic climate, however, historic investment yields are probably
unattainable. We must therefore maintain a strict discipline to underwrite for
profit; an objective that the UK motor market has failed to achieve for a number
of years. This will reduce our reliance on investment income where our objective
will be to maximise returns whilst protecting the underlying capital.
Non-risk Income
In order to augment our underwriting returns and to support our broker trading
partners, we are continuing to develop our interests in businesses that extend
our reach across the personal lines insurance value chain. Two of these
operations: Crusader and Highway Premium Finance operated profitably throughout
2002.
Crusader is an accident management business that provides services to those
involved in non-fault accidents. Highway owns 60% of the share capital of
Crusader with the minority interest owned jointly by management and one of our
producing brokers. During 2002, Crusader has made good progress in developing
its client base and made a contribution of #0.5m to pre-tax profits before
minority interests.
Highway Premium Finance is a wholly owned subsidiary that provides premium-
financing facilities to brokers placing personal lines products. By 31 December
2002, Highway Premium Finance had made loans totalling #12.1 million and had
made a contribution to pre-tax profits of #0.2 million.
In the early part of 2003 we have also made an investment of #300,000 to extend
our ownership of Elite, primarily a specialist motorcycle broker, from 30% to
75%. This is a modest but significant investment for Highway and one through
which we will seek to develop further our knowledge of the retail marketplace.
Overall 2002 was a busy and productive year. We have made satisfactory operating
profits and achieved an operating ratio of 93.7% from continuing operations that
is better than our cross-cycle target of 98%. Our expense ratio on continuing
activities has reduced to 21.1% from 24.9% in 2001. Investment returns were
positive when many insurers lost money on the stock market. We have again
outperformed the market whilst continuing to make significant progress in
developing our business.
We start 2003 with more underwriting capacity and lower costs and I am confident
that we will continue to make the best of all available opportunities.
ANDREW GIBSON
Chief Executive Officer
8 April 2003
Financial Review
Accounting Presentation
In 2002, Highway's motor insurance business was underwritten in parallel through
two Syndicates at Lloyd's (Syndicate 37 and Syndicate 2037) and Highway
Insurance Company Limited ("HighCo"), together with co-insurance arrangements.
The capital for Syndicate 37 was provided solely by third-party Lloyd's Names.
The capital for Syndicate 2037 was provided exclusively by Highway.
Under FSA rules, HighCo must produce its accounts on a one year earned premium
GAAP basis. As HighCo represents a significant part of our business and from 1
January 2003 replaced Syndicate 2037, we have again adopted this accounting
policy for all of our motor insurance underwriting.
One year earned premium data is not available for the participations by our
subsidiary New London Capital ("NLC") on Lloyd's syndicates managed by third
parties so these participations are accounted for on a three year funded basis.
However, following the reinsurance protections put in place in early 1999,
Ockham has no direct economic interest in the results of NLC's underwriting; so,
although NLC continues to report here under the Lloyd's three year accounting
convention, this has little financial significance.
Financial Results
The year to 31 December 2002 has seen Highway continue to make significant
progress and increase operating profits by 26%.
The operating result, based on the long term investment rate of return before
exceptional items, was #15.9 million (2001: #12.6 million). Profit before tax
and exceptional items was #13.5 million (2001: #10.5 million). This result
equates to an after tax return on equity of 16.1% (2001: 13.2%) excluding the
exceptional items.
The following activities have been treated as discontinued: the Household and
French books and the NLC syndicate participations.
The results from continuing operations excluding the exceptional items can be
analysed as follows:
# millions 2002 2001
Net earned premiums 146.1 170.5
Underwriting result 10.5 (4.9)
Long term investment return 14.1 15.9
Reported technical result 24.6 11.0
Other income 4.2 5.3
Other charges (7.9) (6.9)
Non-underwriting investment return (0.9) (0.7)
Operating profit based on long term rate of return 19.9 8.7
Short term investment fluctuation (2.3) (1.9)
Reported profit before tax 17.7 6.8
Tax (5.3) (2.2)
Reported profit after tax 12.4 4.6
Earnings per share 6.9p 3.4p
Highway - Financial Performance
The technical result for Highway Insurance for the year was a profit on
continuing activities of #24.6 million compared to #11.0 million in 2001. This
result equates to an operating ratio on continuing operations of 93.7% for 2002,
a significant improvement over the 102.9% achieved in 2001.
# millions 2002 2001
Gross premiums written 129.1 220.1
Net premiums written 119.5 195.6
Net earned premiums 146.1 170.5
Net claims incurred (105.9) (133.0)
Loss ratio 72.6% 78.0%
Net operating expenses (30.9) (42.4)
Expense ratio 21.1% 24.9%
Long term investment return 14.1 15.9
Other Technical Income 1.2 -
Published technical result 24.6 11.0
Operating ratio 93.7% 102.9%
Written Premiums
Highway's share of written premiums fell in the year, following the replacement
of a reinsurance gearing arrangement with co-insurance. Business ceded to the
co-insurer does not appear as part of the Group's written premiums. Commission
arising from the co-insurance of #1.2 million appears as Other Technical Income.
Expense Ratio
Highway trades with one of the lowest expense ratios in the UK personal lines
insurance market. 2002 saw a significant transfer of Highway's business out of
Lloyd's into HighCo, where we can save up to 3% of premium income per annum on
regulatory costs. 2003 will see the completion of this process as all of
Highway's business is written in HighCo. Further cost saving initiatives are
planned.
Investment Income
Net investment income received for the year was #11.4 million against #14.3
million. Income was reduced as a result of falling fixed interest yields. During
the year, against the backdrop of falling markets, we maintained very
conservative investment guidelines and did not invest in the equity market. The
portfolio consisted only of gilts, high-grade corporate bonds, certificates of
deposit and cash with an overall maturity of around six months.
Investment income received is analysed below:
# millions 2002 2001
Long-term return on insurance funds 14.7 17.1
Adjustment for actual yield received (2.4) (2.1)
Actual return on investment funds 12.3 15.0
Investment return on non-insurance funds (0.9) (0.7)
Total investment return achieved 11.4 14.3
On a longer-term basis, we now anticipate a return of 5.5% per annum from our
managed investment portfolios. This is a reduction from a rate of 6.5% used in
the past. The investment income credited to the technical account based on the
long term rate of return of 5.5% was #14.8 million in 2002. The 2001 figure of
#17.1 million is not restated and is still based on a 6.5% rate of return. On a
similar basis the 2001 figure would reduce to #14.4 million.
In 2002, the overall investment yields achieved were 4.56% for HighCo (2001:
5.64%) and 4.68% for Syndicate 2037 (2001: 5.63%). The difference in yield from
5.5% is charged to the consolidated profit and loss account as a short-term
fluctuation in investment return. This difference was a loss of #2.4 million
compared with #2.1 million in 2001.
In 2002, the profit and loss account also showed net interest payable from non-
underwriting funds of #0.9 million. Highway has utilised greater amounts of debt
in 2002, the costs of which offset any investment income earned on non-insurance
funds.
Non-risk Income
Crusader is our uninsured loss recovery business that provides accident
management services to those involved in non-fault road traffic accidents.
Crusader is 60% owned by Highway with the remainder held by staff and one of
Highway's principal producing brokers. For 2002, Crusader produced a profit
before tax of #0.5 million. The income and costs of Crusader are consolidated
fully within the financial statements and are included within Other Income and
Other Charges within the Profit and Loss Account
2002 also saw the first full year's trading for our instalment plan business,
Highway Premium Finance. It produced a profit before tax of #0.2 million.
Central Costs
Highway's central costs include the Group's central administrative and support
functions and the costs of the central management team. The costs are those
retained by Highway net of expenditure allocated to managing agencies and Names.
During the year the former head office in Bishopsgate was closed and the
management team was reorganised. One-off costs of the exit from Bishopsgate and
management change totalled #1.2 million but these initiatives are expected to
save around #1.5 million annually from 2003.
The detailed figures which exclude the exceptional restructuring costs are set
out below:
# 000s 2002 2001
Property and other costs 476 820
Irrecoverable VAT 161 140
Central management costs 1,556 1,817
Professional and consultancy cost 422 465
Other central costs 112 441
2,727 3,683
Taxation
The tax charge for the year on continuing operations was 30.1%. The tax credit
on discontinued operations was above the standard rate of 30% as a result of the
release of provisions against deferred tax.
Dividends
The directors have proposed a final dividend of 1.68p per share (2001: 1.6p)
payable on 11 June 2003 to shareholders on the register on 22 April 2003. Taken
together with the interim dividend of 0.8p per share (2001: 0.8p), total
dividends for the year are 2.48p per share (2.4p).
Balance Sheet
The Balance Sheet presented within the financial statements consolidates the
assets and liabilities of Syndicate 2037, Highway Insurance Company Limited and
the NLC syndicates with other directly held corporate assets. For clarity the
Balance Sheet is replicated below summarising the main headings and including
Syndicate 2037 and Highway Insurance Company Limited as single separate lines.
# million 2002 2001
Goodwill 3.5 3.3
Tangible fixed assets 1.2 1.9
Investment in own shares 2.5 2.6
Group assets used as funds at Lloyd's 19.7 18.3
Other financial investments and cash balances 9.4 4.1
Net other assets 5.3 17.3
Term debt (35.0) (33.0)
Interest in HighCo 71.2 52.4
Interest in managed syndicate (2.3) (7.7)
75.5 59.2
Following the Placing and Open Offer completed in April that raised #23.2
million after expenses, Shareholders' funds have increased to #75.3 million from
#58.9 million after providing for the proposed final dividend. Net assets were
equivalent to 37.3p per share at 31 December 2002 (2001: 46.1p).
During the year the Group agreed a new #50 million term debt facility with
Lloyds TSB and Credit Lyonnais. At 31 December 2002, #35 million of the facility
had been drawn. The balance of the facility was utilised in January 2003 and
used to increase the capitalisation of HighCo.
Pension Commitments
The Group has assessed its pension commitments in accordance with FRS17. This
methodology compares the market value of the pension fund assets with the
discounted value of the projected liabilities using a corporate bond discount
rate of 5.5%. The aggregate net of tax shortfall at the end of 2002 was
approximately #11.5 million.
The defined benefit pension scheme is closed with the exception of 91 members of
staff who were in the scheme and aged over 50 on 1 January 2001. All other
members of staff have the opportunity to participate in a defined contribution
pension scheme.
Further initiatives are ongoing to reduce the shortfall.
IAN PATRICK
Finance Director
8 April 2003
Highway Insurance Holdings Plc
Group Profit and Loss Account - Technical Account
for the year ended 31 December 2002
2002 2001
Continuing Discont'd Total Total
#000 #000 #000 #000
Gross premiums written 129,064 4,901 133,965 236,582
Outward reinsurance premiums (9,545) (2,317) (11,862) (94,134)
Net premiums written 119,519 2,584 122,103 142,448
Change in gross unearned premiums 31,309 6,518 37,827 (28,484)
Change in unearned outward reinsurance (4,738) (431) (5,169) 1,648
premiums
Change in net unearned premiums 26,571 6,087 32,658 (26,836)
Net earned premiums 146,090 8,671 154,761 115,612
Allocated investment return transferred
from the non-technical account 14,127 1,657 15,784 21,624
Other technical income 1,218 - 1,218 -
Total technical income 161,435 10,328 171,763 137,236
Gross claims paid (147,989) (19,900) (167,889) (208,035)
Reinsurers' share 19,006 7,852 26,858 47,684
Net paid claims (128,983) (12,048) (141,031) (160,351)
Change in claims provision (33,519) 14,858 (18,661) 141,340
Reinsurers' share 56,556 (11,466) 45,090 (55,711)
Change in the provision for claims 23,037 3,392 26,429 85,629
Net claims incurred (105,946) (8,656) (114,602) (74,722)
Net operating expenses (30,873) (5,172) (36,045) (47,890)
Total technical charges (136,819) (13,828) (150,647) (122,612)
Balance on the technical account 24,616 (3,500) 21,116 14,624
Highway Insurance Holdings Plc
Group Profit and Loss Account - Non Technical Account
for the year ended 31 December 2002
Before 2002 2001
Exceptional Exceptional Discont'd Total Total
Notes #000 #000 #000 #000 #000
Balance on the technical account 24,616 - (3,500) 21,116 14,624
Net investment return on a longer-
term rate of return basis
Investment Income 10,932 - 1,518 12,450 18,829
Short term fluctuations in 2,284 - 139 2,423 2,131
investment
return
Net longer term investment return
transferred to the technical (14,127) - (1,657) (15,784) (21,624)
account
Other income 2 4,196 - 4 4,200 6,109
Total income 27,901 - (3,496) 24,405 20,069
Other charges including value 7,953 - 517 8,470 7,461
adjustments
19,948 - (4,013) 15,935 12,608
Operating profit based on longer 3 19,948 - (4,013) 15,935 12,608
term investment return before
exceptional items
Loss arising from investment in NMT - (12,071) - (12,071) -
Restructuring costs - (1,178) - (1,178) -
Operating profit based on longer
term investment return 19,948 (13,249) (4,013) 2,686 12,608
Short term fluctuations in (2,284) - (139) (2,423) (2,131)
investment
return
Profit on ordinary activities 17,664 (13,249) (4,152) 263 10,477
before
taxation
Taxation on profit on ordinary 4 (5,318) 405 2,207 (2,706) (3,300)
activities
(Loss)/profit on ordinary 12,346 (12,844) (1,945) (2,443) 7,177
activities
after taxation
Minority Interest (138) - - (138) (396)
(Loss)/profit for the financial 12,208 (12,844) (1,945) (2,581) 6,781
year
Dividends 5 4,911 - - 4,911 2,986
Retained (loss)/profit for the 7,297 (12,844) (1,945) (7,492) 3,795
financial
year
Earnings per share
Basic 6 6.9p (7.2p) (1.1p) (1.4p) 5.4p
Diluted 6 6.9p (7.2p) (1.1p) (1.4p) 5.4p
Highway Insurance Holdings Plc
Group Balance Sheet
as at 31 December 2002
2002 2001
Notes #000 #000
Assets
Intangible assets 3,498 3,331
Investments
Other financial investments 11 278,117 270,680
Deposits with ceding 1 60
undertakings
Reinsurers' share of technical provisions
Provision for unearned reinsurance premiums 4,912 10,081
Claims outstanding 105,331 67,469
110,243 77,550
Debtors
Debtors arising out of direct insurance operations 43,506 89,058
Debtors arising out of reinsurance operations 11,645 19,503
Other debtors - amounts falling due within one year 20,242 13,345
Other debtors - amounts falling due after more than
one year 6,161 15,447
81,554 137,353
Other assets
Tangible assets 6,420 1,904
Cash at bank and in hand 11 30,275 24,300
Investment in own shares 2,492 2,557
39,187 28,761
Prepayments and accrued income 6,606 8,406
Deferred acquisition costs 13,582 14,202
Total assets 532,788 540,343
Highway Insurance Holdings Plc
Group Balance Sheet
as at 31 December 2002
2002 2001
Notes #000 #000
Liabilities
Capital and reserves
Called-up share capital 7 40,323 25,578
Share premium account 8 16,277 7,210
Merger reserve 8 39,221 39,221
Other reserves 8 1,640 1,640
Profit and loss account 8 (22,196) (14,704)
Total shareholders' funds - equity 75,265 58,945
Minority interest - equity 254 236
Total capital & reserves 75,519 59,181
Technical provisions
Provision for unearned premium 78,510 116,338
Claims outstanding 307,934 299,288
386,444 415,626
Creditors
Deposits from reinsurers - 2
Creditors arising out of direct insurance operations 15,509 2,685
Creditors arising out of reinsurance operations 5,879 6,436
Due to credit institutions - 1,567
Other creditors - amounts falling due within one year 9,929 17,100
Other creditors - amounts falling due after one year 35,845 34,137
67,162 61,927
Accruals and deferred income 3,663 3,609
Total liabilities 532,788 540,343
Highway Insurance Holdings Plc
Group Cash Flow Statement
for the year to 31 December 2002
2002 2001
Note #000 #000
Net cash (outflow)/inflow from operating activities 9 (1,927) 3,542
Servicing of finance
Dividends paid to minorities (120) -
Interest element of finance lease payments (38) -
(158) -
Taxation
Corporation tax (paid)/received (948) 852
Capital expenditure and financial investment
Purchase of tangible fixed assets (5,938) (396)
Sale of tangible fixed assets 126 312
Purchase of syndicate capacity (642) -
(6,454) (84)
Equity dividends paid (3,124) (4,437)
Financing
Issue of ordinary share capital 25,000 -
Expenses of issue (1,638) -
Capital element of finance leases and hire purchase contracts (322) -
Drawdown of bank loan 2,000 11,000
25,040 11,000
Net cash inflow 12,429 10,873
Cash flows were invested as follows:
Increase/(decrease) in cash holdings 11 5,975 (102,379)
Net portfolio investments
Financial investments 12 6,454 113,252
Net investment of cash flows 12,429 10,873
Notes to the Financial Statements
1. Basis of consolidation
The preliminary announcement is extracted from the accounts of Highway Insurance
Holdings PLC ("the Company") and its subsidiary undertakings for the year to 31
December 2002. The statutory accounts for the group were approved by the Board
on 7 April 2003. An unqualified audit report was issued on the same day. The
financial statements for the year ended 31 December 2002 have not yet been
delivered to the Registrar.
The comparative figures for 31 December 2001 have been abridged from the
financial statements for the year to that date, except as restated for certain
balance sheet items, which have been delivered to the Registrar and upon which
the auditors' report was unqualified and did not include a statement under
Section 237(2) or (3) of the Companies Act 1985.
Ockham Corporate Limited, Highway Corporate Capital Limited and Highway
Insurance Company Limited participate in the Highway Insurance business managed
by the Group. The accounts have been prepared on an annual accounting basis for
these participations.
The New London Capital corporate members participate on syndicates managed by
other agents. These participations are accounted for on a three year funded
basis, under which the excess of premiums written and attributable net
investment return over claims and expenses paid in respect of contracts
incepting in an accounting period ("the underwriting year") is carried forward
as a technical provision until the end of the third year from the inception of
the underwriting year. Consequently no profit is recognised in respect of an
underwriting year until that time. Where any syndicate underwriting year is
expected to make a loss, the loss is recognised as soon as it is foreseen.
In accordance with Lloyd's practice, the underwriting year is normally
recognised as closed after three years of development, at which time any profits
are distributed. Each underwriting year of account is considered separately for
the purpose of determining any aggregate net profit or loss.
In preparing the financial statements for the current year, the group has
adopted FRS 19 'Deferred Tax' and the transitional arrangements of FRS17
'Retirement Benefits' relating to accounting periods ending on or after 22 June
2002. The adoption of FRS 19 has resulted in a change in accounting policy for
deferred tax. Deferred tax is recognised on a full provision basis in accordance
with the accounting policy described below. Previously, deferred tax was
provided for on a partial provision basis, whereby provision was made on all
timing differences to the extent that they were expected to reverse in the
future without replacement. It is not considered that the adoption of FRS19 has
had an impact on the current and prior year tax charge or balance sheet.
Accounting Convention
The audited financial statements have been prepared in accordance with Section
255A of, and Schedule 9A to, the Companies Act 1985 ("the Act") as reflected in
the ICAEW Technical Release 1/99 "Accounting by Lloyd's Corporate Capital
Vehicles", and in accordance with applicable accounting standards. The Statement
of Recommended Practice on Accounting for Insurance Business issued by the
Association of British Insurers in December 1998 has been adopted.
No profit and loss account is presented for the Company as permitted by
section 230 of the Act.
The balance sheet of the Company has been prepared in accordance with
section 226 of, and Schedule 4 to, the Act.
Premiums
Gross written premiums represent premiums on business incepting during the
period together with adjustments to premiums written in previous periods. The
provision for unearned premiums represents that part of gross premiums written
which is estimated to be earned after the balance sheet date. Outward
reinsurance premiums are accounted for in the same accounting period as the
gross premiums to which they relate.
Claims
For business accounted for on a one year basis provision is made for claims
incurred during the period, whether or not reported.
Unexpired risk provisions
A provision for unexpired risks is made when it is anticipated that unearned
premiums will be insufficient to meet future claims and claims settlement
expenses of business in force at the end of the period. The provision for
unexpired risks is included in the technical provisions in the balance sheet.
Deferred acquisition costs
Acquisition costs, comprising commission and other costs related to the
acquisition of insurance contracts, are deferred to the extent that they are
attributable to premiums unearned at the balance sheet date.
2. Other Income
2002 2001
#000 #000
Continuing operations:
Lloyd's underwriting agency fees 2,317 2,604
Lloyd's underwriting profit commission - 439
Other commissions and fees - Non-risk 1,879 2,217
income
Total continuing operations 4,196 5,260
Discontinued operations:
Lloyd's underwriting profit commission 4 149
Other commissions and fees - Overrider - 700
Total discontinued operations 4 849
4,200 6,109
3. Operating Profit
2002 2001
#000 #000
Operating profit based on longer term investment return
before exceptional items
Continuing operations:
Insurance agencies and corporate members of 20,873 10,384
Lloyd's
Central costs (925) (1,700)
19,948 8,684
Discontinued operations:
Insurance agencies and corporate members of (3,796) 4,284
Lloyd's
Central costs (217) (360)
(4,013) 3,924
15,935 12,608
Discontinued operations consist of the French and Household books of business,
the insurance results for the NLC syndicates and the run-off costs associated
with the Sturge managing agencies.
4. Taxation on profit on ordinary activities
2002 2001
#000 #000
UK Corporation tax
Current tax on profits for the year (153) (410)
Adjustments in respect of prior years (61) (874)
Current tax charge (214) (1,284)
Current year (4,345) (2,016)
Adjustments in respect of prior years 1,853 -
Deferred tax charge (2,492) (2,016)
(2,706) (3,300)
UK corporation tax has been provided at 30% (2001: 30%).
The movement in deferred tax was credited to the deferred tax asset.
5. Dividends
2002 2001
#000 #000
Interim paid of 0.8p per Highway share (2001: 0.8p per share) 1,581 994
Final proposed of 1.68p per Highway share (2001: 1.6p per share) 3,330 1,992
4,911 2,986
6. Earnings per share
2002 2001
#000 #000
(Loss)/profit for the financial year (2,581) 6,781
Number of shares Number of shares
Weighted number of shares in issue excluding LTIP shares 177,990,624 124,514,670
Basic (loss)/profit per share (1.4p) 5.4p
Diluted (loss)/profit share (1.4p) 5.4p
7. Called up Share Capital
Number of 2002 Number of 2001
shares #000 shares #000
Company
Ordinary 20p shares
Authorised 274,999,998 55,000 149,999,998 30,000
Allotted, issued and fully paid 201,615,316 40,323 127,887,576 25,578
8. Reserves
Share premium Capital Merger reserve Other reserves Profit and Loss
account redemption
reserve
#000 #000 #000 #000 #000
Group - Corporate
Undertakings
At 1 January 2002 - 7,911 710 37,810 1,640 (14,704)
as previously
reported
Prior year adjustment (701) (710) 1,411 - -
At 1 January 2002 - 7,210 - 39,221 1,640 (14,704)
as restated
Retained loss for the - - - - (7,492)
financial year
Placing & open offer 10,508 - - - -
Placing expenses (1,638) - - - -
Scrip issue final 93 - - - -
dividend 2001
Scrip issue interim 104 - - - -
dividend 2002
At 31 December 2002 16,277 - 39,221 1,640 (22,196)
The restatement of reserves at 1 January 2002 reflects the alignment of Group
reserves to those of the parent company.
9. Reconciliation of operating profit to net cash inflow from operating
activities
2002 2001
#000 #000
Operating profit 263 10,477
Depreciation 1,465 642
Amortisation 475 472
Change in market values - (increase)/decrease (924) 1,867
Sale of tangible fixed assets 53 -
Amortisation of investment in own shares 65 -
Write-off debtor in New Millennium Technologies 6,663 -
Debtors - decrease/(increase) 16,372 (14,512)
Creditors - (decrease)/increase (26,359) 4,723
Provisions for other risks and charges - decrease - (127)
Net cash (outflow)/inflow from operating activities (1,927) 3,542
10. Movement in opening and closing portfolio investments net of financing
2002 2001
#000 #000
Net cash increase/(decrease) in the year 5,975 (102,379)
Cash flow - bank loan (2,000) (11,000)
Cash flow - portfolio investments 6,454 113,252
Cash flow - finance lease (360) -
Net movement arising from cashflows 10,069 (127)
Changes in market value 924 (1,867)
Non cash changes 223 830
Total movement in portfolio investments net of financing 11,216 (1,164)
Portfolio at 1 January 262,370 263,534
Portfolio net of financing at 31 December 273,586 262,370
11. Movement in cash and portfolio investments
1 January Cash Changes to Non cash 31 December
2002 flow Market value changes 2002
#000 #000 #000 #000 #000
Net cash:
Cash 16,678 13,518 - - 30,196
Cash held in Premium 7,622 (7,543) - - 79
Trust Funds
24,300 5,975 - - 30,275
Other financial investments 270,680 6,513 924 - 278,117
Deposits with ceding undertakings 60 (59) - - 1
Bank loan (33,000) (2,000) - - (35,000)
Other loan (500) - - - (500)
Finance lease 830 (360) - 223 693
Total 262,370 10,069 924 223 273,586
12. Net cash inflow on portfolio investments
2002 2001
#000 #000
Interest bearing deposits held as security by the Corporation of Lloyd's 1,471 (10,815)
Shares and other variable-yield securities and unit in unit trusts (949) (3,139)
Debt securities and other fixed income securities (126,550) 127,268
Deposits with credit institutions 136,412 (136)
Deposits with ceding undertakings (59) 46
Other (3,871) 28
6,454 113,252
END
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