Interim Results

5th Sep 2006 07:03

BRIT Insurance Holdings PLC05 September 2006 PRESS RELEASEFOR IMMEDIATE RELEASE5 September 2006 BRIT INSURANCE HOLDINGS PLC Interim results for the six months ending 30 June 2006 Underwriting profit at record levels Brit Insurance Holdings PLC, the UK-domiciled international general insurer andreinsurer, today announces interim results for the six months ending 30 June2006. FINANCIAL HIGHLIGHTS • Gross written premiums up 2.6% to £695.3m (2005 H1: £677.4m) • Net earned premiums up 16.0% to £522.2m (2005 H1: £450.0m) • Profit before tax and foreign exchange movements on non-monetary items £118.5m (2005 H1: £102.5m) • Profit before tax £106.0m (2005 H1: £112.2m) • Earnings per share 23.0p (2005 H1: 24.3p) • Interim dividend of 7.5p per share payable on 24 November 2006 to shareholders on the register on 27 October 2006. The shares will go ex-dividend on 25 October 2006. First dividend declared under new dividend policy announced earlier this year • Net tangible assets per share 209.0p (December 2005: 195.3p) OPERATIONAL HIGHLIGHTS • Underwriting profit up 38.4% to £92.0m (2005 H1: £66.5m), a record half year underwriting performance for the Group • Improved Group combined ratio 82.4% (2005 H1: 87.4%) • London Market Underwriting Centre - record combined ratio of 80.6%; gross written premiums up 19.4% • UK Underwriting Centre - regional office network complete; combined ratio an excellent 84.8%; gross written premiums down 13.1% • Reinsurance Underwriting Centre - significant peak zone aggregate reduction; gross written premiums down 1.9%; combined ratio 82.1% • Reserve releases £23.5m (2005 H1: £30.7m) Dane Douetil, Chief Executive Officer of Brit Insurance Holdings PLC, said: "Arecord underwriting performance has been achieved, helped by a particularlybenign claims environment during the first six months. We have also achieved ourgoal of rebalancing our underwriting portfolio with the aim of having lessvolatility in our results. We have been able to do this by lowering ourexposures to peak zone catastrophe claims while at the same time increasing ouroverall premium volumes in areas offering attractive returns; I am pleased bythe quality of our underwriting as shown in the combined ratios in all threeunderwriting centres and by our continued commitment to operational improvementin support of our organic growth. "We have ambitious and challenging targets. Market conditions remainsatisfactory overall and we look forward to achieving our goals for the secondhalf of the year and beyond." For further information, please contact Dane Douetil, Chief Executive Officer, Brit Insurance Holdings PLC 020 7984 8500David Haggie/Peter Rigby, Haggie Financial 020 7417 8989 There will be a presentation to analysts at Brit Insurance's office at 55Bishopsgate at 9.30am today An audio webcast of the analysts' presentation will be available on our websitewww.britinsurance.com tomorrow. Notes to Editors Brit Insurance is a major UK-based general insurance and reinsurance groupwriting both UK and international business As at 31 August 2006, Brit Insurance was the fifth largest UK-primary-listednon-life insurer and the 214th largest UK-listed company overall. It is a memberof the FTSE 250. Its shares and subordinated bonds are listed on the LondonStock Exchange. They have market capitalisations of £887m and £144mrespectively, giving a total market capitalisation of £1.03bn. Its principal subsidiary, Brit Insurance Limited ("BIL") wrote 50.6% of theGroup's ongoing business in the six months to 30 June 2006, with the balancewritten by its wholly owned Lloyd's Syndicate (Syndicate 2987). Brit Insurance is financially strong; BIL's financial strength ratings have beenreaffirmed in 2006 by Fitch as A+ (Strong) and A M Best as A (Excellent), ineach case with stable outlook. Brit Insurance: Our Business Brit Insurance is a major UK-based general insurance and reinsurance groupwriting both UK and international business. As at 31 August 2006, Brit Insurance was the fifth largest UK-primary-listednon-life insurer and the 214th largest UK-listed company overall. It is a memberof the FTSE 250. Its shares and subordinated bonds are listed on the LondonStock Exchange. They have market capitalisations of £887m and £164mrespectively, giving a total market capitalisation of £1.05bn. Its principal subsidiary, Brit Insurance Limited ("BIL") wrote 50.6% of theGroup's ongoing business in the six months to 30 June 2006, with the balancewritten by its wholly owned Lloyd's Syndicate (Syndicate 2987). Brit Insurance is financially strong; BIL's financial strength ratings have beenreaffirmed in 2006 by Fitch as A+ (Strong) and A M Best as A (Excellent), ineach case with stable outlook. STRATEGY GROUP STRATEGY Our goals are to be: • a top five UK insurer • recognised for our financial strength • the best in our industry for customer service • the insurer that is best able to attract, train and retain quality people We want to be seen for and recognised as having: Integrity, Security, Expertise. These brand values are what will make Brit Insurance our customers' StrongerOption. FINANCIAL STRATEGY Our Group's strategic vision is to improve the economic well-being and qualityof life of our stakeholders - investors, policyholders and employees. To achievethis vision our goal is to build on our current position and to become a topquartile insurance sector performer in every respect - through our returns toshareholders, our product offerings, our underwriting and asset allocationskills, our customer service and our success at being an employer of choice. Brit Insurance's aim is profitable growth while working within its risk appetiteconstraints: • Premium growth target: £2bn plus by 2010 (ie 10% plus average growth each year) • Across cycle return on equity target: 6% over risk-free rate • Risk appetite constraints: Aggregate exposure to any one event or series of events (Realistic Disaster Scenarios) set by the Board in the light of market conditions with the aim of producing good returns while reducing volatility; inwards reinsurance premiums less than 25% of total premium; long-tail business less than 40% of total premium; Lloyd's business less than 50% of total premium. OVERVIEW The first six months of 2006 witnessed both top-line growth in line withexpectations and an increased underwriting result over the same period in 2005;pre-tax profit was reduced by the performance of the investment and currencymarkets. We are investing for the future, and continue to strengthen both senior andmiddle management so that the business is built on ever stronger foundations toposition us to fulfil our growth aspirations. We regard our target to grow the Group's gross written premium to £2bn by 2010as challenging but achievable, bearing in mind that it can be dangerous to growan insurance business too quickly at the expense of quality and profit. The reduction in catastrophe aggregates and the diversification programme whichwe have successfully implemented and continue to develop should produce lessvolatile earnings over time. However, it is never possible to predict insuranceresults accurately for any single period. We look forward to the remainder of 2006 and beyond with confidence. FINANCIAL AND OPERATIONAL HIGHLIGHTS Gross Premiums Written 2002 2003 2004 2005 2006 £'m £'m £'m £'m £'m 1 Jan to 30 Jun 397.3 666.2 778.5 677.4 695.31 Jul to 31 Dec 265.4 349.5 308.2 525.11 Jan to 31 Dec 662.7 1,015.7 1,086.7 1,202.5 Net Earned Premiums 2002 2003 2004 2005 2006 £'m £'m £'m £'m £'m 1 Jan to 30 Jun 121.5 286.4 412.5 450.0 522.21 Jul to 31 Dec 203.8 385.0 444.9 492.51 Jan to 31 Dec 325.3 671.4 857.4 942.5 Investment return 2002 2003 2004 2005 2006 £'m £'m £'m £'m £'m 1 Jan to 30 Jun (1.6) 18.8 22.2 61.2 37.01 Jul to 31 Dec 9.2 23.9 53.9 60.61 Jan to 31 Dec 7.6 42.7 76.1 121.8 Underwriting profit 2002 2003 2004 2005 2006 £'m £'m £'m £'m £'m 1 Jan to 30 Jun 5.5 22.4 58.6 66.5 92.01 Jul to 31 Dec 19.1 33.9 5.3 (104.0)1 Jan to 31 Dec 24.6 56.3 63.9 (37.5) Profit Before Tax 2002 2003 2004 2005 2006 £'m £'m £'m £'m £'m 1 Jan to 30 Jun (4.3) 31.0 69.7 112.2 106.01 Jul to 31 Dec 14.3 46.6 46.4 (49.8)1 Jan to 31 Dec 10.0 77.6 116.1 62.4 Earnings Per Share 2002 2003 2004 2005 2006 p p p p p 1 Jan to 30 Jun (3.8) 8.4 15.8 24.4 23.01 Jul to 31 Dec 7.1 11.3 10.4 (9.5)1 Jan to 31 Dec 3.3 19.7 26.2 14.8 Net Assets 30.06.02 31.12.02 30.06.03 31.12.03 30.06.04 31.12.04 30.06.05 31.12.05 30.06.06 £'m £'m £'m £'m £'m £'m £'m £'m £'m Net tangible assets 244.5 445.5 585.8 627.5 637.8 643.5 696.5 638.5 684.2 Net intangible assets 24.9 30.8 79.4 70.0 75.6 79.2 84.0 86.2 87.0 Total net assets 269.4 476.3 665.2 697.5 713.4 722.7 780.5 724.7 771.2 Nettangibleassets per share (pence) 171.6 178.8 180.5 193.3 196.4 198.2 214.5 195.3 209.0 Figures for 2002 and 2003 are stated in accordance with UK GAAP; figures for2004 and subsequent years are stated in accordance with IFRS. All per sharefigures reflect the 2006 share consolidation. FINANCIAL HIGHLIGHTS • Gross written premiums up 2.6% to £695.3m (2005 H1: £677.4m) • Net earned premiums up 16.0% to £522.2m (2005 H1: £450.0m) • Profit before tax and foreign exchange movements on non-monetary items £118.5m (2005 H1: £102.5m) • Profit before tax £106.0m (2005 H1: £112.2m) • Earnings per share 23.0p (2005 H1: 24.3p) • Interim dividend of 7.5p per share payable on 24 November 2006 to shareholders on the register on 27 October 2006. The shares will go ex-dividend on 25 October 2006. First dividend declared under new dividend policy announced earlier this year • Net tangible assets per share 209.0p (December 2005: 195.3p) OPERATIONAL HIGHLIGHTS • Underwriting profit up 38.4% to £92.0m (2005 H1: £66.5m), a record half year underwriting performance for the Group • Improved Group combined ratio 82.4% (2005 H1: 87.4%) • London Market Underwriting Centre - record combined ratio of 80.6%; gross written premiums up 19.4% • UK Underwriting Centre - regional office network complete; combined ratio an excellent 84.8%; gross written premiums down 13.1% • Reinsurance Underwriting Centre - significant peak zone aggregate reduction; gross written premiums down 1.9%; combined ratio 82.1% • Reserve releases £23.5m (2005 H1: £30.7m) PERFORMANCE: UNDERWRITING REVIEW The quality and diversity of our underwriting remains our core attribute,reflected in our increasing underwriting result in terms of both premium volumeand profitability. Our underwriting profits are up 38.4% in H1 2006 to £92.0m.Overall pre-tax profits are some 5.5% down on 2005 due to less favourableinvestment and currency markets and the UPR/DAC foreign exchange adjustment. As forecast at the time of publication of our full-year results in March 2006,our premium growth has come from the London Market Underwriting Centre (19.4%).The current competitive nature of the UK market has led to us scaling backpremium in this area by 13.1%. In the Reinsurance Underwriting Centre we havereduced premium volumes as part of the Group's broader strategy of peak zonecatastrophe risk reduction and in anticipation of new catastrophe models'increased recognition of risk. Claims frequency and severity have been particularly benign in the first half of2006. There remains a meaningful element of potential seasonality in ourreported profits because the US windstorm season is largely concentrated intothe second half of a calendar year. While we are less exposed to US wind andother catastrophe events than we were last year, it remains a material variablein determining the full year result. The table below shows a summary of the peak zone risk aggregate reductionsachieved since 30 September 2005. Class of Business Contribution to Reduction in Reduction in 2005 gross exposure exposure hurricane claims 1 January 2006 1 July 2006 % % % CatastropheRetrocessional 23 42 96PropertyReinsurance 32 26 30US PropertyDirect 21 - 30Energy Offshore 17 - 42Other 7 - - ------------Total 100-------------------- ------------ ------------ ------------ An estimated 12% of the Group's gross written premiums are exposed to naturalcatastrophes (2005: 18%). For a notional US$50bn US windstorm, our 2006Realistic Disaster Scenario modelling shows that our gross claims would be downby approximately 60% compared with Hurricane Katrina. To take a single class ofbusiness as a further example, our property treaty reinsurance account shows "asif" reductions of 43% in gross claims on a repeat of Hurricane Katrina, 40% on arepeat of Hurricanes Katrina, Rita, and Wilma and a 64% reduction in grossclaims on a notional repeat of the four major US windstorms of 2004. RESERVING Prior year reserves have again proved robust in aggregate with an overallrelease of £23.5m. Within this overall figure we have strengthened the overallclaims estimate for the 2005 hurricanes net of reinstatement premiums by £42.0m.This has been driven principally by offshore energy and the reclassification ofRita to a market loss in excess of US$5bn and of Wilma to a market loss inexcess of US$10bn, resulting in several industry loss warranties in ourretrocessional account being triggered. We no longer underwrite retrocessionalindustry loss warranties or Gulf of Mexico catastrophe exposed energy business. Reserve movements in 6 months to 30.06.06 Underwriting Centre Class 30.06.06 30.06.05 31.12.05 £'m £'m £'m London Market Accident & Financial (2.9) 3.6 9.4 Aerospace 6.0 3.7 7.5 Casualty 8.1 8.3 22.6 Marine (5.4) 3.2 11.5 Property 10.0 6.9 15.1 -------- -------- -------- 15.8 25.7 66.1 -------- -------- -------- Reinsurance Property 6.7 (3.3) 2.0 Retrocessional (19.1) (5.5) (6.2) Marine (4.2) (1.0) (2.1) Casualty (1.3) 2.6 0.5 Aviation 0.8 0.3 0.8 -------- -------- -------- (17.1) (6.9) (5.0) -------- -------- -------- UK Property 10.5 8.2 12.3 Casualty 2.9 3.3 4.1 Motor 3.1 3.4 8.8 Liability 9.5 (2.5) 18.4 -------- -------- -------- 26.0 12.4 43.6 -------- -------- -------- Other (1.2) (0.5) 6.1 -------- -------- --------Total 23.5 30.7 110.8--------------------- -------------- -------- -------- -------- OUTLOOK The underwriting centres are at different points in their respective pricingcycles. There are clear pricing and growth opportunities in Reinsurance, whichare partly constrained by our own catastrophe risk appetite. We will grow our UKbusiness at the appropriate time, but not in the current under-pricedenvironment. The near term opportunity for growth is in the London Market. PERFORMANCE: UNDERWRITING - MARKET CONDITIONS As can be seen from the rating indices below, rates have increased significantlyfor US-wind exposed catastrophe risks while remaining stable or showing modestreductions from historically high levels in many other classes. While headlinerisk pricing remains an important metric, we also closely monitor any changes inthe terms and conditions associated with the prices and in most areas theseremain robust. As in previous years, we emphasise that these indices are to beread with caution. They are based on underwriters' estimates of rate changes,including adjustments to terms and conditions, and relate to renewal businessonly, since this represents the business on which we have the best year-on-yeardata. UK UNDERWRITING CENTRE Premium Rating Index (Year 2000 as base year) 31 December 31 December 31 December 31 December 31 December 31 December 30 June 2006 2000 2001 2002 2003 2004 2005 Property 100 104 123 132 131 130 126Casualty N/A N/A 100 130 129 120 120Motor 100 108 115 120 122 111 106Liability N/A 100 200 286 284 257 230 LONDON MARKET UNDERWRITING CENTRE Premium Rating Index (Year 2000 as base year) 31 December 31 December 31 December 31 December 31 December 31 December 30 June 2006 2000 2001 2002 2003 2004 2005 Accident &Financial n/a 100 131 142 147 150 157Aerospace 100 158 202 237 260 268 260Casualty 100 122 207 288 303 301 293Marine 100 112 144 156 160 171 182Property 100 112 150 155 152 151 172 REINSURANCE UNDERWRITING CENTRE Premium Rating Index (Year 2000 as base year) 31 December 31 December 31 December 31 December 31 December 31 December 30 June 2006 2000 2001 2002 2003 2004 2005Property - USAand Canada 100 110 149 154 155 159 204Property -International 151 151 163Property -Retrocessional 100 110 132 120 117 126 n/aMarine 100 115 171 179 183 193 287Casualty 100 115 182 215 230 228 233Aviation 100 100 167 159 139 128 128 PERFORMANCE: UNDERWRITING - UK UNDERWRITING CENTRE REVIEW 12m ended 6m ended 12m ended 6m ended 12m ended 6m ended 31.12.03 30.06.04 31.12.04 30.06.05 31.12.05 30.06.06 £'m £'m £'m £'m £'m £'m Gross written premium:Property 69.0 68.8 73.3 38.3 79.6 35.6Casualty 39.6 22.9 37.3 19.2 35.6 19.3Motor 113.0 51.1 105.6 46.2 89.9 39.5Liability 87.8 82.7 129.2 64.8 112.8 52.1 Total 309.4 225.5 345.4 168.5 317.9 146.5 Net earnedpremium 221.2 156.6 301.0 142.9 302.6 126.3Underwritingprofit 2.7 9.4 24.5 23.0 65.6 19.2Profit beforetax 16.1 17.6 54.3 45.2 112.3 30.4Claims ratio 71.4% 72.3% 68.1% 60.6% 55.8% 56.4%Expense Ratio 23.9% 22.2% 23.9% 23.7% 22.6% 28.4%Combined Ratio 95.3% 94.5% 92.0% 84.3% 78.4% 84.8% In the light of an increasingly competitive market environment in the six monthsto June 2006, we have held to our strategy of avoiding short-term price-cut-ledgrowth and our book has remained largely unchanged. The combined ratio is 84.8%(30 June 2005: 84.3%). Disciplined underwriting in face of these market pressures has resulted in areduction in written premiums of some 13.1% compared with the same period lastyear. There were, however, exceptions to this trend. For instance, the UKPackage account showed a strong increase on the prior year's performance andMotor Special Risks has proved a growth area reflecting the broadening of thebroker base and increased automation of trading. OUTLOOK Our intention to grow our UK division significantly and profitably over the nextfive years remains unaltered, although in the short term this will be difficultto achieve. We continue to seek out opportunities wherever we can in the currentdifficult conditions, whilst continuing to invest in the future to ensure thatwe can capitalise fully once these conditions improve. Our Reading office openedin March and completed our current plans to establish a presence in majoreconomic zones throughout the UK. As indicated in our premium rating index, prices are continuing to fall. Our ownexpectations, matched by those of some market commentators, suggest for somelines of business, that upwards rating movements will be evident in 2007. PERFORMANCE: UNDERWRITING - LONDON MARKET UNDERWRITING CENTRE REVIEW 12m ended 6m ended 12m ended 6m ended 12m ended 6m ended 31.12.03 30.06.04 31.12.04 30.06.05 31.12.05 30.06.06 £'m £'m £'m £'m £'m £'m Gross written premium:Accident &Financial 114.0 107.8 123.3 100.0 188.4 112.3Aerospace 61.5 10.1 28.6 3.8 11.1 11.2Casualty 114.5 63.0 112.1 65.0 128.0 85.9Marine 81.3 61.0 80.0 65.4 115.7 76.4Property 97.0 87.0 87.6 60.2 115.4 65.7 -------- -------- -------- -------- -------- --------Total 468.3 328.9 431.6 294.4 558.6 351.5 -------- -------- -------- -------- -------- -------- Net earnedpremium 285.4 169.9 367.4 197.5 412.1 266.3Underwritingprofit 10.4 26.3 28.2 36.5 (0.8) 51.5Profit before tax 29.8 33.9 57.4 59.0 44.2 66.3Claims ratio 62.1% 50.9% 58.0% 48.5% 63.8% 43.2%Expense Ratio 29.5% 37.6% 34.5% 36.3% 38.2% 37.4%Combined Ratio 91.6% 88.5% 92.5% 84.8% 102.0% 80.6% The London Market Underwriting Centre has showed sustained growth in grosswritten premiums of 19.4% compared with the corresponding period in 2005. On acompound basis over the past 3 years growth has been in excess of 18% per annum. As well as good growth during the first half the Underwriting Centre was alsoable to improve its combined ratio to 80.6% (30 June 2005 84.8%), its bestresult to date. This premium growth has been partially due to increased rates following the USwind affected catastrophe classes, specifically US property. In this regard wehave consciously chosen to reduce our aggregate exposure, and by careful riskselection we have improved the profile of the account whilst retaining premiumlevels. Examples of this proactive management include reducing excess floodexposure in certain areas of Florida (FEMA zones A & V) within 2 miles of thecoast by more than 50% and reducing Louisiana, Mississippi and Alabama exposuresby 48% at 30 June 2006. All of this increases our spread and diversity. Inaddition, we have purchased increased reinsurance for our US Property account. We have withdrawn from writing off-shore energy business within the Gulf ofMexico to avoid further correlation with our on-shore writing. Although rateshave risen strongly, we are still not convinced that the industry's riskmanagement and the lead insurers' ability to respond to major events reflect theincreasing volatility inherent within the industry. We remain active in theoff-shore energy market outside of the Gulf of Mexico, for which rates are alsohardening and where the risk correlation with our other books of business ismuch lower. The remainder of our premium growth has come from opportunities innon-catastrophe correlating classes. We have, for example, achieved 82.7% growthin Medical Expenses and 9.9% in Financial Institutions. The Underwriting Centre employs 40 lead underwriters under Mike Sibthorpe. Inaddition, we have established under Richard Webster a business development teamof four. This unit, whilst a resource for underwriters on the one hand, plays aproactive role in enhancing the Group's relationship management andcommunications within the London Market. OUTLOOK Our 2007 business plans show further growth consistent with that of recentyears. However, profitability is the key focus for our underwriters. The LondonMarket Underwriting Centre has a diversity of geography and product line and notall lines in the product range show the same opportunities for profit andgrowth. On balance, rates, terms and conditions continue to be favourable tounderwriters. Our diversity is the key to achieving profitable growth in thisdivision and to achieve £1bn of gross written premium by 2010. PERFORMANCE: UNDERWRITING - REINSURANCE UNDERWRITING CENTRE REVIEW 12m ended 6m ended 12m ended 6m ended 12m ended 6m ended 31.12.03 30.06.04 31.12.04 30.06.05 31.12.05 30.06.06 £'m £'m £'m £'m £'m £'m Gross written premium:Property 102.9 93.0 133.3 97.0 140.8 96.2Property -Retrocessional 41.9 26.3 42.7 30.1 63.3 14.1Marine 2.0 10.0 7.1 6.7 12.0 9.0Casualty 55.1 43.3 60.9 49.3 73.3 75.0Aviation 19.9 14.0 36.0 32.0 39.4 16.8 -------- -------- -------- -------- -------- -------- Total 221.8 186.6 280.0 215.1 328.8 211.1 -------- -------- -------- -------- -------- --------Net earnedpremium 150.3 80.2 179.9 107.0 224.2 129.4Underwritingprofit/(loss) 50.7 23.2 9.0 3.6 (103.5) 23.1Profit/(loss)before tax 61.9 26.7 23.2 14.2 (81.1) 31.9Claims ratio 39.9% 46.7% 68.5% 71.9% 119.8% 54.5%Expense Ratio 25.8% 27.8% 26.6% 27.2% 28.5% 27.6%Combined Ratio 65.7% 74.5% 95.1% 99.1% 148.3% 82.1% The reinsurance industry has seen radical change in market dynamics, driven bythe hurricane losses of 2004 and 2005 and major revisions to the generallyadopted catastrophe models and the rating agencies' analysis. We and ourcompetitors have re-examined our approach to the whole sector. The Reinsurance Division has continued its strategy of reducing peak zoneaggregate exposures in a drive to reduce the overall volatility of the Group'sresults. Property Catastrophe aggregate reductions have been notable across ourkey territories of the USA, Europe, Japan and Australia. Aggregate reductionsacross the Reinsurance Division have included: - Non-renewal of the Property Catastrophe Retrocession portfolio for 2006 - Withdrawal from Caribbean Property Treaty business in late 2005 - Reductions in Property Treaty total sum insured aggregates in the USA, Europe, Japan and Australia - Reduced gross aggregates for Marine XL business in the Gulf of Mexico Outward reinsurance protection has been purchased on a worldwide basis for therelevant portfolios. Price increases in the specific sectors impacted by the 2004 and 2005 losses(notably US wind exposed business) have been substantial. As yet theInternational Property Treaty account has not reacted in the same way.Loss-impacted Marine XL programmes have seen substantial rises during the firsthalf of 2006 whilst Casualty Treaty rating levels remain broadly flat. During the half year we investigated options for a catastrophe retrocessional"sidecar" vehicle, using principally third party capital for this specific classof business. It is now clear that there was insufficient investor demand for apure retrocessional underwriting product but we continue to explore potentialvariations, possibly involving a broader mix of reinsurance classes, for 2007and we believe this kind of capital structure will become increasingly used overtime in reinsurance markets globally. OUTLOOK We anticipate International Property Treaty prices to increase to a level moreconsistent with US business, as our competitors realise the differential inrelative pricing levels between the two market places. The need for soundunderwriting judgement and prudent aggregate management remains the key tosuccess going forward, a fact that will be further exacerbated by the likelypaucity of available retrocession protection in the coming year. Neverthelessour broad-based, multi-class offering, allied to our team of experiencedunderwriters gives us confidence in the future as we take advantage of theopportunities that will be presented along the way. PERFORMANCE: INVESTMENTS REVIEW The Group's total investment return for the half year was £37.0m (30 June 2005:£61.2m). Total invested assets were approximately constant at £2,382.5m (31 December 2005£2,373.7m). Positive cash flow from new business was balanced by claimspayments in respect of the hurricanes of 2004 and 2005, the final 2005 dividendpayment and the partial redemption of the Unsecured Loan Stock. As previously, some 90% of our investment portfolio remains in a mixture of cashand short duration, high quality fixed income securities. Both Sterling and USdollar interest rates rose some 70 basis points in the half year. If itcontinues, this trend augurs well for future levels of investment return, but ithas a short term effect of a mark-to-market unrealised loss on the current bondportfolio. In the half year we recorded unrealised losses on the bond portfolioof £12.8m. 83% of the Group's investments are managed by subsidiaries of Equity InvestmentPartners ("EIP"), in which the Group owns a 41% stake. Discussions continuewith a number of parties with a view to the potential sale of this stake. Whileinvestment returns remain central to the Group's profitability, we have decidedthat the Group does not need to own its investment manager and is not derivingvalue in its share price from doing so; and that EIP's own future growth may befaster under new ownership. As can be seen from the following tables having outperformed the benchmarks forour asset classes in 2005, we have performed largely in line with the benchmarksin the first half of 2006, given our asset mix and the duration of our bondportfolio. Asset Allocation 30.06.06 30.06.05 31.12.05 £m £m £m Equities 199.6 205.1 219.0Bonds 1,741.0 1,482.1 1,626.6Cash and deposits 440.3 339.9 526.6Derivatives and assets held for sale 1.6 0.0 1.5 -------- -------- --------Total 2,382.5 2,027.1 2,373.7 -------- -------- -------- Bonds, cash and deposits currency mix 30.06.06 30.06.05 31.12.05 % % % Sterling 59.5 71.8 62.9US Dollar 29.5 22.1 28.2Euro 7.2 4.4 6.1Other 3.8 1.7 2.8 -------- -------- --------Total 100.0 100.0 100.0 -------- -------- -------- Sterling fixed income performance 6m ended 6m ended 12m ended(Absolute return for period) 30.06.06 30.06.05 31.12.05 % % % Group's Sterling fixed income performance 1.33 3.31 5.361 month sterling LIBID 2.24 2.37 4.721 year gilts 1.83 2.17 4.575 year gilts 0.65 3.34 4.98 US dollar fixed income performance 6m ended 6m ended 12m ended 30.06.06 30.06.05 31.12.05 % % % Group's US dollar fixed income performance 1.18 1.02 1.871 month dollar LIBID 2.31 1.31 3.180-1 year US Treasury Note Index 1.60 1.06 2.841-3 year US Treasury Bond Index 1.04 0.97 1.67 Equity returns 6m ended 6m ended 12m ended 30.06.06 30.06.05 31.12.05 % % % The Group's equities 5.65 9.92 27.10FT All Share Index 5.77 8.14 20.91FTSE 100 5.42 8.46 19.63 Bond portfolio duration 30.06.06 30.06.05 31.12.05 Yrs Yrs Yrs Sterling 1.93 1.85 1.57US Dollar 1.73 1.97 1.40Euro 1.67 1.65 1.40CAD 1.35 1.40 1.48 Bond portfolio credit ratings 30.06.06 30.06.05 31.12.05 % % % Government 42.0 58.0 49.0AAA 16.0 15.0 14.0AA 28.0 18.0 26.0A 14.0 9.0 11.0 Total 100.0 100.0 100.0 OUTLOOK The recent increase in interest rates appears likely to result in increased bondreturns over the medium term. Furthermore, the indications are that the current range of rate rises in the UKand the USA are at or near their peak, which should strengthen the Group'sinvestment return during the remainder of 2006. CUSTOMERS CLAIMS Our claims management performance has again been of the highest quality and hascontinued to be recognised by our peers in terms of awards. For its response tothe US windstorms of 2005, the team has this year received the Major Loss Awardat the British Insurance Awards Ceremony. There are two principal reasons why we place, as a group, so much emphasis onthe claims function. First, it is vital that claims are managed and adjustedprofessionally because they represent by far the largest cost for an insurer.Secondly, the prompt and efficient handling and payment of claims is the keycustomer service which an insurer offers, ultimately building brand andgoodwill. In areas which do not allow us to conduct or delegate claims control and serviceto our satisfaction, we are prepared to reduce or withdraw from writing thebusiness. An example in this half year has been Gulf of Mexico Offshore EnergyCatastrophe business. Brit Insurance directly handles an average of 6,700 new claims notifications and40,000 reserve movements from our clients every month, in addition to claimshandled by our international coverholders and third party administators andaudited by the Brit Insurance Claims team. Every claim is an opportunity for usto support our clients and brokers utilising Brit Insurance's significantexpertise in third party defence, balance sheet protection, loss minimisation,restoration and business continuity. Our objective is to ensure fair, equitableand speedy resolution of covered claims and to this end our focus for 2006 and2007 is to build upon excellence in worldwide field adjustment with accurate andmeaningful measurement of our own performance. Complaints about Claims, as defined by the FSA and Lloyd's reportable complaintsare at a rate of 6.9 per 1,000 claims handled (0.69%). All complaints arehandled via Brit Insurance's Customer Relations team and in the 6 months to 30June 2006 a third of complaints have been resolved directly through CustomerRelations. 91% of complaints resolved by the regulator have been found in BritInsurance's favour. The three main causes of complaint are "settlement amount","delay" and "repudiation of a claim". BRAND We have, in the first six months of the year, continued to develop our name andbrand awareness both within the insurance market and more generally. This is ofparticular benefit to our growing London Market and UK businesses, where namerecognition is so important. We have continued to advertise in the insurance trade press, focusing on ourresponsiveness and expertise. We will continue to use the 'Your Stronger Option'strap line and reinforce our three key values: integrity, security andexpertise. Our emphasis on using sports sponsorship allows us to associate with otherleading-name brands and provide first-class facilities for building individualrelationships with our intermediaries and clients. Following the success of theBrit Insurance Oval sponsorship which coincided with the Ashes cricket successof 2005, the Group has extended this contract until 2010 - thus including, interalia, the 2009 Ashes series. Our other sports sponsorship activities, notablythe four National Hunt Brit Insurance Novice Hurdles races, which culminated atthe Cheltenham Festival in March, and the Super Series Squash Finals, which wesponsored for the fourth time this year, have continued to enhance awareness ofBrit Insurance. Both received extensive broadcast and print media coverage. On 10 July 2006, Brit Insurance sponsored a charity cricket match betweenPakistan and an International XI at the Brit Insurance Oval in aid of theearthquake relief effort in Pakistan. The 20,000 crowd were entertained by someof world cricket's biggest names, including a full-strength Pakistan team and anInternational XI captained by Rahul Dravid and also including Sachin Tendulkarand Brian Lara, three of the leading world cricket stars of their generation.The evening raised over £250,000, which included a £100,000 donation from BritInsurance. OPERATIONS BUSINESS PROCESS Following the appointment of Kathy Lisson as Chief Operating Officer inSeptember 2005 and her promotion to the Group Board in April 2006, a number ofother senior appointments have been made as we look to strengthen our overalloperations platform to position ourselves strategically to: •Lead industry-wide process reform •Grow our book of business substantially over the coming years •Decrease operational dependency on central functions conducted by Lloyd's and London Market Bureaux as our business mix becomes more heavily weighted to the broader, non-bureau, company market •Win new business on the back of service quality and operational efficiency •Integrate efficiently any acquisitions should the opportunities arise Group Operations has embarked on an internal change programme to streamline andenhance the services offered to the Group in support of the strategic vision.This has included a reorganisation of the teams to emphasise the focus onday-to-day operations in business processing and IT as well as creating a newstrategy and change delivery capability. Our commitment to customer service andcontinuous improvement will be underpinned by the centralisation of keyback-office processes to streamline delivery and improve the quality ofinformation across the business. We are making a significant investment in technology to support enhanced onlineaccess, including the electronic sharing of information with brokers,marketplaces and key suppliers, and to deliver greater flexibility andspeed-to-market for new products. A new capability will be developed to leverageour comprehensive management information and to drive key business decisions. It remains our strongly held opinion that the insurance industry, andparticularly the subscription market, is undergoing a process of rapid andfundamental change to its structures and processes; and that it is important forthe Group to build and maintain the right processes, infrastructure and controlsso that these features become a competitive advantage to Brit Insurance in themarketplace. In short, we intend to be in a position that we can treat thesemarket changes as an opportunity rather than a challenge. In January 2006, Dane Douetil succeeded former Lloyd's Chief Executive NickPrettejohn as Chair of the Market Reform Group ("MRG"). The MRG is the ultimatebody responsible for process reform and modernisation in the London insurancemarket. It oversees the London subscription market's response to the FSAchallenge for a substantial improvement in the degree of contract certainty bythe end of 2006. The Group is also driving the market's electronic claims fileinitiative and the implementation of new accounting and settlement processes. PEOPLE Staff survey Our success will be largely driven by our ability to attract, train and retainthe best talent at all levels within the Group. As part of a holistic HR plan,we again decided to measure our performance in this area through an employeesurvey, which consisted of 69 questions. We received an excellent 72% responserate. The overall results have been communicated to all staff and meetings havealso been held with department heads to explain the result for their areas.Focus groups have been formed to examine further the key issues identified. Thesurvey asked staff to express agreement or disagreement with a number ofstatements and some of the key responses are as follows: Statement Respondents agreeing or Brit Benchmark supplied by strongly agreeing score* survey agency* (%)I can see howmy departmentcontributes to Brit Insurance's 92 4.21 n/asuccess I am trustedto get onwith my job,without feeling over-managed 89 4.21 4.20 I can relyon other people in my team 87 4.13 4.12 I would recommendBrit Insurance as a good companyto work for 86 4.11 3.70 I have apleasantworkingenvironment 86 4.07 3.63 Overall, Iam satisfiedworking for Brit Insurance 83 3.95 n/a Brit Insurancevalues its employees 82 3.95 n/a *A 5-point scale was used, with 5 indicating very high levels of agreement orsatisfaction. A mean of over 4 is regarded as excellent and above 3.5 isregarded as good. Bonus scheme For a number of years Brit Insurance has promoted a strong team ethic andculture, including collective incentivisation of underwriting and other staffwithin a single Group bonus pool based on Group profitability. This bonus pool is split between a Group element (for being part of a successfulteam) and a Personal element (for individual merit). For the 2006 bonus year,greater emphasis will be placed on the Personal element. This will enable BritInsurance better to incentivise and reward individual employees who havedemonstrated exceptional performance. FINANCIAL MANAGEMENT We have been active in our financial management in the half year, within aconsistent philosophy of financial strength and prudence. EXPENSES 30.06.06 30.06.05 31.12.05 £'m £'m £'m Commission costs 124.7 97.2 207.4Group management expenses 62.6 51.1 100.8Total 187.3 148.3 308.2 The commission cost ratio for the period was 23.9% (30 June 2005: 21.7%). Thisincrease reflects a change in business mix during the period, with CatastropheRetrocessional business being replaced by a mix of other classes with higherassociated acquisition costs. Group management expenses totalled £62.6m (30 June 2005: £51.1m), the equivalentto a total management expense ratio of 12.0% (30 June 2005: 11.3%). The maincategories of expense movement between the period ending 30 June 2006 and theperiod ending 30 June 2005 were as follows: ----------------------- ------------ ------------ ------------- 6 months ended 30.06.06 6 months ended 30.06.05 12 months ended 31.12.05 Expenses Ratio Expenses Ratio Expenses Ratio £'m % £'m % £'m %----------------------- ------- ------ ------- ------- ------- ------- Staff costs 33.3 6.4 29.1 6.5 49.5 5.3Accommodationcosts 2.9 0.6 2.9 0.7 5.7 0.6Foreignexchange 2.4 0.5 - - - -Legal &professionalcharges 5.2 1.0 1.9 0.4 6.2 0.7IT costs 3.7 0.7 3.4 0.8 4.7 0.5Regulatorylevies andcharges 6.4 1.2 7.2 1.6 14.8 1.6Other 8.7 1.7 6.6 1.4 19.9 2.1 ------- ------ ------- ------- ------- -------Expensesbeforecommissions 62.6 12.0 51.1 11.4 100.8 10.7Commissioncosts 124.7 23.9 97.2 21.7 207.4 22.0 ------- ------ ------- ------- ------- -------Total expenses 187.3 35.9 148.3 33.1 308.2 32.7 ------- ------ ------- ------- ------- ------- Insurancerelatedexpenses 46.7 8.9 36.4 8.1 83.3 8.8Commissioncosts 124.7 23.9 97.2 21.7 207.4 22.0 ------- ------ ------- ------- ------- -------Insuranceexpenses andinsuranceratios 171.4 32.8 133.6 29.8 290.7 30.8Group overheads 15.9 3.1 14.7 3.3 17.5 1.9 ------- ------ ------- ------- ------- -------Total expenses 187.3 35.9 148.3 33.1 308.2 32.7 ------- ------ ------- ------- ------- ------- ------------------------ ------- ------ ------- ------- ------- ------- A foreign exchange loss for the period of £2.4m is included in these expenses.This is equivalent to a 0.5% increase in the expense ratio. The foreign exchangeprofit for the same period last year of £10.4m was included in other income. Headcount During 2006, the headcount of the Group has increased by 9.3%, from 601 to 657,in line with expectations. Staff turnover remains low at 4%. Growth has occurred across the organisation, with emphasis on Group Operationsin London. This follows the re-organisation of this division to strengthen ouroperations platform, enabling Brit Insurance to take advantage of futureopportunities and to support the Group's strategic vision for profitable growth. Expansion has occurred in other support areas too. For instance, within Finance,credit control staff have increased by nine, following the decision torepatriate certain outsourced functions. This will lead to an ongoing net costsaving for the Group as well as increased integration. ---------------- -------------- -------------- 30.06.06 31.12.05Division No. % No. %Underwriting - London Market 81 12.3% 80 13.3%Underwriting - Reinsurance 28 4.3% 28 4.7%Underwriting - UK 148 22.5% 143 23.8%Underwriting - Other 3 0.5% 3 0.5% -------- -------- -------- --------Underwriting - Total 260 39.6% 254 42.3%Claims 110 16.7% 105 17.5%Advisory 15 2.3% 18 3.0%Corporate Development 24 3.7% 21 3.5%Finance 57 8.7% 49 8.2%Group Services 13 2.0% 10 1.7%Operations, IT and Actuarial 118 17.9% 84 14.0%Other 23 3.5% 25 4.2% -------- -------- -------- -------- 620 94.4% 566 94.2%RI3K 37 5.6% 35 5.8% -------- -------- -------- -------- 657 100.0% 601 100.0%---------------- -------- -------- -------- -------- ---------------- -------------- -------------- 30.06.06 31.12.205 No. % No. %LocationBirmingham 12 1.8% 11 1.8%Bristol 8 1.2% 7 1.2%Darlington 29 4.4% 28 4.7%Glasgow 11 1.7% 9 1.5%Ilford 122 18.6% 119 19.8%Leeds 10 1.5% 11 1.8%London 416 63.3% 371 61.7%Manchester 10 1.6% 10 1.7%Reading 2 0.3% 0 0.0% -------- -------- -------- -------- 620 94.4% 566 94.2%RI3K 37 5.6% 35 5.8% -------- -------- -------- -------- 657 100.0% 601 100.0%---------------- -------- -------- -------- -------- RISK MANAGEMENT The Group continues to monitor and develop its analytical techniques for allmajor categories of risk - insurance, market, credit, liquidity, operational andgroup risk. During the six months the Group took delivery of new risk managementsoftware plus updated industry disaster modelling software. In addition, theGroup has continued to develop its own proprietary 'blast zone' software formonitoring certain high value peak zone war and terrorism property exposures inreal time and in more detail than would be possible using commercially availablesystems and traditional zip code analysis. RATINGS BIL's financial strength ratings have again been reaffirmed in August 2006 at A+(Strong) by Fitch and A (Excellent) by A M Best, in each case with stableoutlook. This is consistent with our target rating range. We believe any rating of AA orhigher would reduce our return on equity because the additional capital requiredto achieve and maintain such a rating would, in our opinion, not lead to acommensurate increase in the quantity and quality of premiums and conversely, inour opinion, any rating below A- would result in a material reduction in thequality and quantity of business written. The ratings of our subordinated debt issues have also remained stable in theperiod; they are four "notches" below the financial strength rating of theprincipal subsidiary, which is in line with standard rating agency methodology. REGULATORY CAPITAL We have recently agreed our capital requirements for BIL with the FSA for thenext couple of years, further to our initial agreement of these measures in2004. SHARE CONSOLIDATION As announced at the time of the publication of our final results in March 2006,the Group consolidated its share capital on the basis of one new share for threeexisting shares held at close of business on 12 May 2006. All 'per share'figures in these interim statements, including comparatives, have been restatedto reflect this change. FINANCING AND REFINANCING During the half year, as foreshadowed at the time of our subordinated debt issuein December 2005, we made a tender offer for the Group's 8.5% subordinatedunsecured loan stock 2008 ('ULS') at a price of 109p per £1 nominal of stockincluding accrued interest. The level of acceptances of the offer, plus a smallnumber of subsequent on-market purchases at the same price, led to the purchaseand cancellation of 20,573,132 units at a total price of £22.4m. This was anoverall take-up of 51.0% and removed some gearing which is now so near tomaturity that, although subordinated, was being given no credit in our keycapital calculations. DEFINED BENEFIT PENSION FUND As we stated in December 2005, the Group has made an additional contribution of£2m in the first half of 2006 towards reducing its pension fund deficit. Theseadditional contributions are intended to increase to £5m per annum from 2007;the reason for this stepped profile of additional contributions is that thereare limits on the quantum of additional contributions that attract immediate taxrelief. Because of the additional contribution and rising bond rates, partiallyoffset by lower than expected investment return, the pension fund deficit ascalculated under IAS 19 fell in the half year from £22.8m to £19.5m. With effect from May 2006, Matthew Scales, Group Finance Director, stepped downas a trustee of the Brit Group Services Retirement Benefit Scheme and AntonyUsher, Group Financial Controller, has been appointed in his place. DISTRIBUTABLE RESERVES During the half year we completed the High Court Scheme to transfer £180m fromthe share premium account to the capital reorganisation reserve, to enhancecapital management flexibility. FOREIGN EXCHANGE The Group's overall foreign exchange policy is to remain broadly matched interms of assets and liabilities in its four biggest currencies - Sterling, USdollars, Euros and Canadian dollars. Following the hurricane activity of late 2005, the Group had a net "short"position in US dollars. In line with the above policy, the Group decided topurchase dollars over an extended period rather than immediately, in order totake advantage of the dollar exchange rate which we expected to weaken. Anoption to purchase US$200m at 1.72 was purchased at a cost of £2.1m to allow thedollar purchases to be conducted over time and to protect against any loss inthe event of dollar strengthening. 30.06.06 30.06.05 31.12.05 £m £m £mExchange profit/(loss) excluding UPR/DACadjustment 10.1 0.7 (9.7)UPR/DAC exchange adjustment (12.5) 9.7 21.3Profit/(loss) on exchange (2.4) 10.4 11.6 Under International Financial Reporting Standards, while most foreign currencybalances are translated to Sterling at the prevailing balance sheet rate,"non-monetary items" (principally deferred acquisition costs and unearnedpremium reserve) are translated at historic rates. This causes exchangedifferences to be reported in the financial statements even when the overalleconomic position, including non-monetary items, is neutral. The effect of thistreatment was to reduce 2006 half year profit by £12.5m while increasing thecomparative period by £9.7m, a total "swing" of £22.2m. REINSURANCE PURCHASE AND RECOVERIES For this half year our reinsurance spend as a percentage of gross writtenpremiums remained constant compared with the same period last year (30 June2006: 24.5%; 30 June 2005 24.6%), reflecting our decision to purchase cover for2006 on a basis comparable with prior years. Our reinsurance recoverables by financial strength rating are as follows: 30.06.06 30.06.05 31.12.05 % % %AAA 0.5 0.7 0.4AA 23.1 20.0 29.7A 64.5 71.9 62.6BBB and below 4.4 0.3 2.1Not rated 7.5 7.1 5.2Total 100.0 100.0 100.0 FINANCING GROWTH Following the equity capital raisings of 2001 to 2003, the Group has grown itspremiums to utilise that capital, as shown by the following table: Ratio of gross written premium to closing net tangible assets 2002 2003 2004 2005 2006 % % % % % 1 Jan to 30 Jun 89.2 106.2 121.0 106.1 101.61 Jul to 31 Dec 59.6 55.7 47.9 82.21 Jan to 31 Dec 148.8 161.9 168.9 188.3 One of the principal objectives of the Group's revised dividend policy, which isto seek in the absence of unforeseen circumstances to pay 50% of earnings overtime, subject to a minimum of 15p per new share, is to allow a sufficient levelof retained earnings to finance the Group's stated medium term growth ambitions.It is also expected that, as the Group grows its capital and its premiumwritten, it would seek to raise additional long-term subordinated debt in orderto keep gearing in the desired ratio of 20 to 30% of net tangible assets. Condensed Consolidated Income Statementfor the 6 months ended 30 June 2006 6 months ended 6 months ended 12 months ended Note 30 June 2006 30 June 2005 31 December 2005 £'000 £'000 £'000-------------------------- ------ ----------- ----------- ------------RevenueGross premiums written 695,265 677,364 1,202,503Less premiums ceded toreinsurers (170,393) (166,850) (231,616)-------------------------- ------ ----------- ----------- ------------Premiums written, netof reinsurance 524,872 510,514 970,887 Gross amount of changein provision forunearned premiums (74,588) (125,456) (29,078)Reinsurers' share ofchange in provisionfor unearned premiums 71,897 65,027 738-------------------------- ------ ----------- ----------- ------------Net change inprovision for unearnedpremiums (2,691) (60,429) (28,340)-------------------------- ------ ----------- ----------- ------------Earned premiums, netof reinsurance 522,181 450,085 942,547-------------------------- ------ ----------- ----------- ------------ Fees, commissions andother income 3 348 11,549 13,434Investment income 4 48,053 40,660 85,504Net realisedgains/(losses)recorded in the incomestatement 5 4,916 (3,057) 2,595Net fair value(losses)/gainsrecorded in the incomestatement (15,931) 23,580 33,729-------------------------- ------ ----------- ----------- ------------Total revenue 559,567 522,817 1,077,809-------------------------- ------ ----------- ----------- ------------ ExpensesClaims incurred:Claims paid:Gross amount (358,915) (212,527) (487,687)Reinsurers' share 153,295 58,844 87,358-------------------------- ------ ----------- ----------- ------------Claims paid, net ofreinsurance (205,620) (153,683) (400,329) Change in the provision forclaims:Gross amount 71,459 (102,931) (604,564)Reinsurers' share (124,628) (2,996) 303,499-------------------------- ------ ----------- ----------- ------------Net change in theprovision for claims (53,169) (105,927) (301,065) Claims incurred, netof reinsurance (258,789) (259,610) (701,394)Acquisition costs (140,613) (111,800) (247,067)Other operatingexpenses (46,644) (36,521) (61,142) -------------------------- ------ ----------- ----------- ------------Total expensesexcluding financecosts (446,046) (407,931) (1,009,603)-------------------------- ------ ----------- ----------- ------------ Operating profit 113,521 114,886 68,206 Finance costs (7,873) (2,748) (5,941)Share of profit aftertax of associatedundertakings 380 59 138 -------------------------- ------ ----------- ----------- ------------Profit on ordinaryactivities before tax 106,028 112,197 62,403 Income tax expense 6(i) (31,567) (33,689) (14,771) -------------------------- ------ ----------- ----------- ------------Profit attributable toequity holders of theparent 74,461 78,508 47,632-------------------------- ------ ----------- ----------- ------------ Basic earnings pershare (pence pershare) (restated) 7 22.99p 24.43p 14.80p Diluted earnings pershare (pence pershare) (restated) 7 22.87p 23.47p 14.76p Condensed Consolidated Statement of Recognised Income and Expensefor the 6 months ended 30 June 2006 6 months ended 6 months ended 12 months ended Note 30 June 2006 30 June 2005 31 December 2005 £'000 £'000 £'000 --------------------------- ------ ----------- ---------- ------------ Foreign exchangetranslationdifferences (760) - -Actuarialgains/(losses) ondefined benefitpension scheme 1,343 (1,637) (3,901)Tax on items taken toequity 6(ii) (403) 491 1,170--------------------------- ------ ----------- ---------- ------------Net income/(expense)recognised directly inequity 180 (1,146) (2,731)Profit for the period 74,461 78,508 47,632--------------------------- ------ ----------- ---------- ------------Total recognised income andexpense for the periodattributable to equityholders of the parent 74,641 77,362 44,901--------------------------- ------ ----------- ---------- ------------ Condensed Consolidated Balance Sheetas at 30 June 2006 Note 30 June 2006 30 June 2005 31 December 2005 £'000 £'000 £'000--------------------------- ------- ---------- ---------- ------------AssetsProperty, plant and equipment 8,587 3,480 8,236Intangible assets:Goodwill 8 70,991 70,991 70,991Syndicate participations 8 - 251 -Software 8 15,962 12,712 15,250Deferred acquisition costs 137,095 142,793 125,097Investments in associated undertakings 9 10,258 1,301 -Deferred taxation 2,137 - 1,648Reinsurance contracts 10 586,433 405,367 653,182Financial investments 11 1,941,082 1,687,143 1,845,710Trade and other receivables 12 747,533 609,919 597,883Assets held for sale 1,080 - 1,380Cash and cash equivalents 13 440,292 339,957 526,638--------------------------- ------- ---------- ---------- ------------Total assets 3,961,450 3,273,914 3,846,015--------------------------- ------- ---------- ---------- ------------ Liabilities and Equity LiabilitiesInsurance contracts 10 2,538,897 2,150,803 2,596,660Employee benefits 19,548 20,003 22,818Borrowings 14 174,099 51,944 194,213Current taxation 33,822 19,126 14,263Deferred taxation - 20,037 -Provisions 483 533 489Trade and other payables 15 423,427 230,928 292,912--------------------------- ------- ---------- ---------- ------------Total liabilities 3,190,276 2,493,374 3,121,355--------------------------- ------- ---------- ---------- ------------ EquityCalled up share capital 16 & 18 245,571 243,552 245,236Share premium account 18 134,738 311,208 314,758Capital redemption reserve 18 586 586 586Equity portion of convertible debt 18 - 1,681 -Translation reserve 18 (760) - -Capital reorganisation reserve 18 180,000 - -Own shares 18 (7,526) (7,488) (7,550)Retained earnings 18 218,565 231,001 171,630--------------------------- ------- ---------- ---------- ------------Total equity attributable to equity holders of the parent 771,174 780,540 724,660--------------------------- ------- ---------- ---------- ------------ --------------------------- ------- ---------- ---------- ------------Total liabilities and equity 3,961,450 3,273,914 3,846,015--------------------------- ------- ---------- ---------- ------------ Condensed Consolidated Cash Flow Statementfor the 6 months ended 30 June 2006 6 months ended 6 months ended 12 months ended Note 30 June 2006 30 June 2005 31 December 2005 £'000 £'000 £'000------------------------- ----- ------------ ------------ ------------Cash generated fromoperations Cash flows provided byoperating activities 19 60,250 159,269 337,460 Income tax paid (12,900) (2) (6,954)Interest paid (1,198) (2,443) (5,303)Interest received 46,780 39,404 82,727Dividends received 1,273 1,256 2,777------------------------- ----- ------------ ------------ ------------Net cash inflows fromoperating activities 94,205 197,484 410,707------------------------- ----- ------------ ------------ ------------ ------------------------- ----- ------------ ------------ ------------Cash flows from investingactivities Net purchase ofinvestments (117,027) (452,895) (595,646)Purchase of property,plant and equipmentand related exchangeadjustments (1,485) (633) (6,408)Purchase of intangible assets (2,563) (6,272) (10,278)Proceeds from disposalof property, plant andequipment 2 - 10Repayment of loan fromassets held for sale /associated undertakings 300 352 352 ------------------------- ----- ------------ ------------ ------------Net cash outflows frominvesting activities (120,773) (459,448) (611,970)------------------------- ----- ------------ ------------ ------------ ------------------------- ----- ------------ ------------ ------------Cash flows from financingactivities Proceeds fromexercised share options 932 88 655Equity dividends paid (29,198) (19,305) (48,462)Net proceeds fromissue of lower tiertwo debt - - 147,054Repurchase ofunsecured loan stock (22,425) - -Acquisition of ownshares for employeeincentive schemes (40) (45) (107)------------------------- ----- ------------ ------------ ------------Net cash(outflows)/inflowsfrom financingactivities (50,731) (19,262) 99,140------------------------- ----- ------------ ------------ ------------ Net decrease in cashand cash equivalents (77,299) (281,226) (102,123)Cash and cashequivalents atbeginning of theperiod 526,638 610,969 610,969Effect of exchangerate fluctuations oncash and cashequivalents (9,047) 9,363 17,792------------------------- ----- ------------ ------------ ------------Cash and cashequivalents at end ofthe period 13 440,292 339,106 526,638------------------------- ----- ------------ ------------ ------------ Notes to the Financial Statements 1 Accounting policies The interim condensed financial statements for the six months ended 30 June 2006have not been audited, nor have the interim condensed financial statements forthe equivalent period in 2005. The interim condensed financial statements havebeen prepared in accordance with accounting policies that are consistent withprior accounting periods and those that the directors anticipate will becomplied with in the annual financial statements. The statutory accounts for the year ended 31 December 2005, prepared under IFRS,have been reported on by the Group's auditors, Ernst & Young LLP, and deliveredto the Registrar of Companies. The report of the auditors was unqualified anddid not contain statements under section 237(2) or (3) of the Companies Act1985. The comparative figures provided for the 12 months ended 31 December2005 are based on the Group's statutory accounts. The interim condensed financial statements do not constitute statutory accountsof the Group within the meaning of Section 240 of the Companies Act 1985. Basis of preparation The Group's condensed consolidated income statement, condensed consolidatedstatement of recognised income and expense, condensed consolidated balance sheetand condensed consolidated cash flow statement have been prepared usingaccounting policies that are in accordance with IFRS and those parts of theCompanies Act 1985 applicable to companies reporting under IFRS. IFRS comprisesstandards issued by the International Accounting Standards Board ("IASB") andinterpretations issued by the International Financial Reporting InterpretationsCommittee ("IFRIC") and as adopted by the EU. In accordance with IFRS 4, "Insurance Contracts", the Group continues to applyexisting accounting policies to its insurance contracts. Applying existingaccounting policies includes complying with the recommendations of the Statementof Recommended Practice on Accounting for Insurance Businesses issued by theAssociation of British Insurers in December 2005. However the Group has theoption to make improvements to its policies if the changes make the financialstatements more relevant to decision making needs of the users. Basis of consolidation The consolidated financial statements include the accounts of the Company, itssubsidiaries and the Group's participation in Lloyd's syndicates' assets,liabilities, revenues and expenses. Subsidiaries are those entities (includingspecial purpose entities) in which the Group directly or indirectly has thepower to govern the operating and financial policies in order to gain economicbenefits and includes the Group's Employee Benefit Trusts and its open endedinvestment company ("OEIC"). The financial statements of subsidiaries areprepared for the same reporting year as the parent company. Consolidationadjustments are made to convert subsidiary accounts prepared under UK GAAP intoIFRS so as to remove any dissimilar accounting policies that may exist.Subsidiaries are consolidated from the date control is transferred to the Groupand cease to be consolidated from the date control is transferred out. Allsignificant inter-company balances, profits and transactions are eliminated.Shares held by third parties in the Group's OEIC are treated as a liability tothe Group. Associated undertakings are those entities over which the Group has the power toexercise significant influence but not control. The Group's investment inassociated undertakings is accounted for under the equity method of accountingwhereby associated undertakings are carried in the balance sheet at cost pluspost-acquisition changes in the Group's share of net assets of the associate,less any impairment in value. The Group's investment in associated undertakingsalso includes goodwill identified on acquisition less any accumulated impairmentloss. The income statement reflects the Group's share of the post-acquisitionresults of operations of the associated undertakings. The financial statementsof associated undertakings are prepared for the same reporting year as theparent company. 2 Segmental information 6 months ended 30 June 2006 London Market Reinsurance UK Underwriting Underwriting Underwriting Other Total Other Centre Centre Centre underwriting underwriting RI3K corporate Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000----------- --------- -------- -------- -------- -------- ------ ------- -------Gross premiums written 351,518 211,071 146,511 (13,835) 695,265 - - 695,265Less premiumsceded to reinsurers (87,358) (59,073) (26,297) 2,335 (170,393) - - (170,393)----------- --------- -------- -------- -------- -------- ------ ------- -------Premiums written, net of reinsurance 264,160 151,998 120,214 (11,500) 524,872 - - 524,872 Gross earnedpremiums 309,581 165,458 142,286 3,352 620,677 - - 620,677 Reinsurers'share (43,271) (36,095) (15,958) (3,172) (98,496) - - (98,496)----------- --------- -------- -------- -------- -------- ------ ------- -------Earnedpremiums,net of reinsurance 266,310 129,363 126,328 180 522,181 - - 522,181 Fees,commissionsand otherincome - - - - - 278 70 348 Investmentincome, netrealisedgainsand net fair value gains 14,826 8,812 11,173 (276) 34,535 4 2,499 37,038----------- --------- -------- -------- -------- -------- ------ ------- -------Total revenue 281,136 138,175 137,501 (96) 556,716 282 2,569 559,567----------- --------- -------- -------- -------- -------- ------ ------- ------- Gross claimsincurred (133,831) (77,614) (71,583) (4,428) (287,456) - - (287,456)Reinsurers'share 18,637 7,085 374 2,571 28,667 - - 28,667----------- --------- -------- -------- -------- -------- ------ ------- -------Claimsincurred,net of reinsurance (115,194) (70,529) (71,209) (1,857) (258,789) - - (258,789) Acquisitioncosts -commission (75,669) (25,056) (23,799) (179) (124,703) - - (124,703) Acquisitioncosts - other (8,000) (3,807) (4,103) - (15,910) - - (15,910) Otherinsurancerelatedexpenses (15,932) (6,849) (8,035) - (30,816) - - (30,816) Other expenses - - - - - (2,273) (13,555) (15,828)----------- --------- -------- -------- -------- -------- ------ ------- ------- Totalexpensesexcluding finance costs (214,795) (106,241) (107,146) (2,036) (430,218) (2,273) (13,555) (446,046)----------- --------- -------- -------- -------- -------- ------ ------- ------- Operatingprofit/ (loss) 66,341 31,934 30,355 (2,132) 126,498 (1,991) (10,986) 113,521----------- --------- -------- -------- -------- -------- ------ ------- ------- Finance (7,873)costsShare ofprofit ofassociatedundertakings 380 -------Profit onordinaryactivitiesbefore tax 106,028 Income taxexpense (31,567) -------Profitattributableto equityholders of theparent 74,461 ------- Claims ratio 43.2% 54.5% 56.4% 49.6%Expense ratio 37.4% 27.6% 28.4% 32.8%Combined ratio 80.6% 82.1% 84.8% 82.4% 6 months ended 30 June 2005 London Market Reinsurance UK Underwriting Underwriting Underwriting Other Total Other Centre Centre Centre underwriting underwriting RI3K corporate Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000----------- --------- -------- -------- -------- -------- ------ ------- -------Grosspremiums written 294,398 215,072 168,501 (607) 677,364 - - 677,364 Lesspremiumsceded to reinsurers (84,214) (56,193) (26,582) 139 (166,850) - - (166,850)----------- --------- -------- -------- -------- -------- ------ ------- -------Premiumswritten, netof reinsurance 210,184 158,879 141,919 (468) 510,514 - - 510,514 Gross earnedpremiums 250,274 139,404 158,503 3,727 551,908 - - 551,908 Reinsurers'share (52,829) (32,405) (15,606) (983) (101,823) - - (101,823)----------- --------- -------- -------- -------- -------- ------ ------- ------- Earnedpremiums,net of reinsurance 197,445 106,999 142,897 2,744 450,085 - - 450,085 Fees,commissionsand otherincome 6,442 2,613 682 - 9,737 1,024 788 11,549 Investmentincome, netrealisedgainsand net fair value gains 22,501 10,608 22,148 - 55,257 2 5,924 61,183----------- --------- -------- -------- -------- -------- ------ ------- -------Total revenue 226,388 120,220 165,727 2,744 515,079 1,026 6,712 522,817 ----------- --------- -------- -------- -------- -------- ------ ------- ------- Gross claimsincurred (136,539) (88,543) (89,024) (1,352) (315,458) - - (315,458) Reinsurers'share 40,797 11,622 2,397 1,032 55,848 - - 55,848----------- --------- -------- -------- -------- -------- ------ ------- -------Claimsincurred,net of reinsurance (95,742) (76,921) (86,627) (320) (259,610) - - (259,610) Acquisitioncosts -commission (54,613) (18,532) (23,424) (647) (97,216) - - (97,216) Acquisitioncosts - other (6,525) (4,061) (3,998) - (14,584) - - (14,584) Otherinsurancerelatedexpenses (10,517) (6,545) (6,444) 1,658 (21,848) - - (21,848) Other expenses - - - - - (2,919) (11,754) (14,673) ----------- --------- -------- -------- -------- -------- ------ ------- -------Total expensesexcluding finance costs (167,397) (106,059) (120,493) 691 (393,258) (2,919) (11,754) (407,931) ----------- --------- -------- -------- -------- -------- ------ ------- ------- Operatingprofit/(loss) 58,991 14,161 45,234 3,435 121,821 (1,893) (5,042) 114,886 ----------- --------- -------- -------- -------- -------- ------ ------- ------- Finance costs (2,748) Share ofprofit ofassociatedundertakings 59 -------Profit onordinaryactivitiesbefore tax 112,197 Income taxexpense (33,689) -------Profitattributableto equityholders of theparent 78,508 ------- Claims ratio 48.5% 71.9% 60.6% 57.7%Expense ratio 36.3% 27.2% 23.7% 29.7%Combined ratio 84.8% 99.1% 84.3% 87.4% 12 months ended 31 December 2005 London Market Reinsurance UK Underwriting Underwriting Underwriting Other Total Other Centre Centre Centre underwriting underwriting RI3K corporate Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000----------- --------- -------- -------- -------- -------- ------ ------- --------Gross premiums written 558,568 328,807 317,862 (2,734) 1,202,503 - - 1,202,503 Lesspremiumsceded to reinsurers (112,447) (100,716) (18,486) 33 (231,616) - - (231,616)----------- --------- -------- -------- -------- -------- ------ ------- --------Premiumswritten, netof reinsurance 446,121 228,091 299,376 (2,701) 970,887 - - 970,887 Gross earnedpremiums 522,570 322,315 323,897 4,643 1,173,425 - - 1,173,425 Reinsurers'share (110,434) (98,116) (21,302) (1,026) (230,878) - - (230,878)----------- --------- -------- -------- -------- -------- ------ ------- --------Earnedpremiums,net of reinsurance 412,136 224,199 302,595 3,617 942,547 - - 942,547 Fees,commissionsand otherincome 7,408 4,786 317 (368) 12,143 1,775 (484) 13,434 Investmentincome, netrealisedgainsand net fair value gains 44,949 22,374 46,651 135 114,109 7 7,712 121,828----------- --------- -------- -------- -------- -------- ------ ------- --------Total revenue 464,493 251,359 349,563 3,384 1,068,799 1,782 7,228 1,077,809----------- --------- -------- -------- -------- -------- ------ ------- -------- Gross claimsincurred (448,809) (460,036) (182,206) (1,200) (1,092,251) - - (1,092,251) Reinsurers'share 185,836 191,479 13,219 323 390,857 - - 390,857----------- --------- -------- -------- -------- -------- ------ ------- -------- Claimsincurred netof reinsurance (262,973) (268,557) (168,987) (877) (701,394) - - (701,394) Acquisitioncosts -commission (117,313) (43,946) (45,207) (971) (207,437) - - (207,437) Acquisitioncosts - other (19,235) (9,592) (10,803) - (39,630) - - (39,630) Otherinsurancerelatedexpenses (20,791) (10,384) (12,262) (239) (43,676) - - (43,676) Other expenses - - - - - (5,274) (12,192) (17,466) ----------- --------- -------- -------- -------- -------- ------ ------- --------Total expensesexcluding finance costs (420,312) (332,479) (237,259) (2,087) (992,137) (5,274) (12,192) (1,009,603) ----------- --------- -------- -------- -------- -------- ------ ------- -------- Operatingprofit/(loss) 44,181 (81,120) 112,304 1,297 76,662 (3,492) (4,964) 68,206 ----------- --------- -------- -------- -------- -------- ------ ------- --------Finance costs (5,941) Share ofprofit ofassociatedundertakings 138 --------Profit onordinaryactivitiesbefore tax 62,403 Income taxexpense (14,771) --------Profitattributableto equityholders of theparent 47,632 -------- Claims ratio 63.8% 119.8% 55.8% 74.4% Expense ratio 38.2% 28.5% 22.6% 30.8% Combined ratio 102.0% 148.3% 78.4% 105.2% 3 Fees, commissions and other income 6 months ended 6 months ended 12 months ended 30 June 2006 30 June 2005 31 December 2005 £'000 £'000 £'000-------------------------------------- ---------- ---------- ---------- Electronic infrastructure designand development 278 1,024 1,775Other fees and commissions 70 95 32Exchange gains - 10,430 11,627-------------------------------------- ---------- ---------- ---------- 348 11,549 13,434-------------------------------------- ---------- ---------- ---------- In accordance with International Accounting Standard 1 "Presentation ofFinancial Statements", exchange gains and losses are presented on a net basis.They are reported within revenue where they result in a net gain and withinexpenses where they result in a net loss. The exchange losses for the 6 monthsended 30 June 2006 amounted to £2,369,000. 4 Investment income 6 months ended 6 months ended 12 months ended 30 June 2006 30 June 2005 31 December 2005 £'000 £'000 £'000-------------------------------------- ---------- ---------- ----------Financial investments at fair valuethrough the profit and loss:Dividend income 1,273 1,256 2,777Interest income 37,138 29,965 57,304Interest income on cash and cash equivalents 9,642 9,439 25,423-------------------------------------- ---------- ---------- ---------- 48,053 40,660 85,504-------------------------------------- ---------- ---------- ---------- 5 Net realised gains/(losses) recorded in the income statement 6 months ended 6 months ended 12 months ended 30 June 2006 30 June 2005 31 December 2005 £'000 £'000 £'000-------------------------------------- ---------- ---------- ----------Realised appreciation/(depreciation) on investments 4,914 (3,057) 2,610Profit/(loss) on sale of property, plant and equipment 2 - (15)-------------------------------------- ---------- ---------- ---------- 4,916 (3,057) 2,595-------------------------------------- ---------- ---------- ---------- 6 Income tax expense (i) Tax charged to income statement 6 months ended 6 months ended 12 months ended 30 June 2006 30 June 2005 31 December 2005 £'000 £'000 £'000-------------------------------- ---------- ---------- -----------Current tax:-------------------------------- ---------- ---------- -----------For the period (32,459) (17,726) (19,900)Adjustments in respect of prior years - 54 139-------------------------------- ---------- ---------- -----------Total current tax (32,459) (17,672) (19,761)-------------------------------- ---------- ---------- ----------- Deferred tax:Origination and reversal of timingdifferences 892 (16,017) 4,990-------------------------------- ---------- ---------- -----------Total tax charged to income statement (31,567) (33,689) (14,771)-------------------------------- ---------- ---------- ----------- (ii) Tax (charged) / credited to equity 6 months ended 6 months ended 12 months ended 30 June 2006 30 June 2005 31 December 2005 £'000 £'000 £'000-------------------------------- ---------- ---------- -----------Deferred tax (403) 491 1,170-------------------------------- ---------- ---------- ----------- (iii) Tax reconciliation The tax on the Group's profits before tax differs from the theoretical amount that would arise from using the currentstandard rate for corporation tax applicable in the UK of 30% (2005: 30%) as follows: 6 months ended 6 months ended 12 months ended 30 June 2006 30 June 2005 31 December 2005 £'000 £'000 £'000--------------------------------- ----------- ---------- -----------Profit on ordinary activities before tax 106,028 112,197 62,403--------------------------------- ----------- ---------- ----------- Tax calculated at standard rate forcorporation tax (31,809) (33,659) (18,721)Expenses not deductible for tax purposes (363) (1,348) (638)Equity dividends not subject to corporation tax 382 315 833Underwriting results not previously recognised for tax purposes - (252) (60)Overseas associated undertaking result 114 - -Utilisation of previously unrecognised deferred tax assets oncapital losses and capital allowances 109 1,201 3,676Adjustments to tax charge in respect of prior years - 54 139--------------------------------- ----------- ---------- ----------- (31,567) (33,689) (14,771)--------------------------------- ----------- ---------- ----------- 7 Earnings per share The calculations of the basic and diluted earnings per share are based on the following figures : 6 months ended 6 months ended 12 months ended 30 June 2006 30 June 2005 31 December 2005 £'000 £'000 £'000-------------------------------- ---------- ---------- -----------Profit on ordinary activities after tax 74,461 78,508 47,632Dilutive post tax effect on profits:Convertible unsecuredsubordinated loan stock - 1,449 --------------------------------- ---------- ---------- -----------Diluted profit on ordinary activitiesafter tax 74,461 79,957 47,632-------------------------------- ---------- ---------- ----------- 6 months ended 6 months ended 12 months ended 30 June 2006 30 June 2005 31 December 2005 Number Number Number (restated) (restated)-------------------------------- ---------- ---------- -----------Basic weighted average number of shares 323,936,820 321,357,822 321,769,255Dilutive potential ordinary shares:Convertible unsecured subordinated loan stock - 18,563,950 -Employee share options 1,642,826 788,682 888,762-------------------------------- ---------- ---------- -----------Diluted weighted average number of shares 325,579,646 340,710,454 322,658,017-------------------------------- ---------- ---------- ----------- The Company undertook a consolidation of its share capital on 12 May 2006, suchthat the shareholders received one ordinary 75p share for every three ordinary25p shares owned as at that date. The comparative numbers of shares have accordingly been restated for the periodsto 30 June 2005 and 31 December 2005 to reflect this consolidation. In accordance with International Accounting Standard 33 "Earnings per Share",convertible unsecured subordinated loan stock and employee share options haveonly been treated as dilutive when their conversion to ordinary shares woulddecrease earnings per share or increase loss per share from continuingoperations. The convertible unsecured subordinated loan stock issued by theGroup ceased to be convertible on 21 November 2005 and thereafter changed itsname to unsecured subordinated loan stock. 8 Intangible assets Syndicate Goodwill Participations Software Total £'000 £'000 £'000 £'000------------------------ ---------- ---------- ---------- -----------Cost:At 1 January 2005 80,408 9,025 12,613 102,046Additions - - 6,272 6,272------------------------ ---------- ---------- ---------- -----------At 30 June 2005 80,408 9,025 18,885 108,318 At 1 January 2005 80,408 9,025 12,613 102,046Additions - - 10,278 10,278Disposals - - (3,388) (3,388)------------------------ ---------- ---------- ---------- -----------At 31 December 2005 80,408 9,025 19,503 108,936 At 1 January 2006 80,408 9,025 19,503 108,936Additions - - 2,563 2,563------------------------ ---------- ---------- ---------- -----------At 30 June 2006 80,408 9,025 22,066 111,499 Amortisation:At 1 January 2005 9,417 8,523 4,941 22,881Charge for the period - 251 1,232 1,483------------------------ ---------- ---------- ---------- -----------At 30 June 2005 9,417 8,774 6,173 24,364 At 1 January 2005 9,417 8,523 4,941 22,881Charge for the year - 502 2,700 3,202Disposals - - (3,388) (3,388)------------------------ ---------- ---------- ---------- -----------At 31 December 2005 9,417 9,025 4,253 22,695 At 1 January 2006 9,417 9,025 4,253 22,695Charge for the period - - 1,851 1,851------------------------ ---------- ---------- ---------- -----------At 30 June 2006 9,417 9,025 6,104 24,546 Carrying amount:At 30 June 2005 70,991 251 12,712 83,954At 31 December 2005 70,991 - 15,250 86,241At 30 June 2006 70,991 - 15,962 86,953 9 Investments in associated undertakings 30 June 30 June 31 December 2006 2005 2005 £'000 £'000 £'000--------------------------------------------- ------- ------- --------EPIC Investment Partners Limited - 1,301 -Ebix Inc 10,258 - ---------------------------------------------- ------- ------- -------- 10,258 1,301 ---------------------------------------------- ------- ------- -------- The Group owns 33.6% of the ordinary share capital of Ebix Inc, which became anassociated undertaking on 4 January 2006 following the appointment of a Britrepresentative onto the board of directors. Ebix Inc is a company incorporatedand registered in the United States. The movement in the Group's investment in Ebix Inc is as follows: Ebix Inc £'000--------------------------------------------- -------Transferred from financial investments on 4 January 2006 10,638Foreign exchange revaluation (760)Share of profit after tax in the period 380--------------------------------------------- -------Balance as at 30 June 2006 10,258--------------------------------------------- ------- 10 Insurance and reinsurance contracts 30 June 30 June 31 December 2006 2005 2005 £'000 £'000 £'000----------------------------------- ---------- ---------- ----------GrossInsurance contractsClaims reported and loss adjustmentexpenses 1,020,637 662,182 1,050,175Claims incurred but not reported 839,678 793,070 942,490----------------------------------- ---------- ---------- ---------- 1,860,315 1,455,252 1,992,665Unearned premiums 678,582 695,551 603,995----------------------------------- ---------- ---------- ----------Total insurance contracts 2,538,897 2,150,803 2,596,660----------------------------------- ---------- ---------- ---------- Recoverable from reinsurersReinsurance contractsClaims reported and loss adjustmentexpenses 311,920 172,294 355,861Claims incurred but not reported 163,250 115,450 256,810Impairment provision (21,835) (8,854) (20,690)----------------------------------- ---------- ---------- ---------- 453,335 278,890 591,981Unearned premiums 133,098 126,477 61,201----------------------------------- ---------- ---------- ----------Total reinsurance contracts 586,433 405,367 653,182----------------------------------- ---------- ---------- ---------- NetClaims reported and loss adjustmentexpenses 708,717 489,888 694,314Claims incurred but not reported 676,428 677,620 685,680Impairment provision 21,835 8,854 20,690----------------------------------- ---------- ---------- ---------- 1,406,980 1,176,362 1,400,684Unearned premiums 545,484 569,074 542,794----------------------------------- ---------- ---------- ----------Net insurance and reinsurancecontracts 1,952,464 1,745,436 1,943,478----------------------------------- ---------- ---------- ---------- 11 Financial investments 30 June 30 June 31 December 2006 2005 2005 £'000 £'000 £'000----------------------------------- ---------- ---------- ----------Shares and other variable-yieldsecurities : Listed 199,080 205,908 218,025Unlisted 500 1,739 993 Debt securities and other fixedincome securities : Listed 1,371,143 1,008,501 1,156,168 Certificates of deposit 369,874 471,001 470,418----------------------------------- ---------- ---------- ---------- 1,940,597 1,687,149 1,845,604 Derivative financial instruments 485 (6) 106----------------------------------- ---------- ---------- ---------- 1,941,082 1,687,143 1,845,710----------------------------------- ---------- ---------- ---------- 12 Trade and other receivables 30 June 30 June 31 December 2006 2005 2005 £'000 £'000 £'000------------------------- ------- ------------ -------- -------- --------Trade debtors 16,618 36,280 14,020Arising out of directinsurance operations 330,324 139,618 304,885Arising out of reinsuranceoperations 365,483 397,561 240,036Prepayments 6,600 8,029 10,775Accrued income 28,247 16,723 17,717Other debtors 261 11,708 10,450------------------------- ------- ------------ -------- -------- -------- 747,533 609,919 597,883------------------------- ------- ------------ -------- -------- -------- All amounts are due within one year of the balance sheet date. 13 Cash and cash equivalents 30 June 30 June 31 December 2006 2005 2005 £'000 £'000 £'000------------------------- ------- ------------ -------- -------- --------Cash at bank and on deposit 429,481 324,497 475,963Cash equivalents 10,811 15,460 50,675------------------------- ------- ------------ -------- -------- -------- 440,292 339,957 526,638------------------------- ------- ------------ -------- -------- -------- Included in cash and cash equivalents are amounts totalling £181,919,000 (30June 2005: £174,720,000) (31 December 2005: £187,926,000) not available for useby the Group which are held within the Lloyd's syndicates and as Funds atLloyd's. For the purposes of the consolidated cash flow statement, cash and cashequivalents consist of the amount stated in that balance sheet category less anybank overdrafts included within borrowings. 30 June 30 June 31 December 2006 2005 2005 £'000 £'000 £'000------------------------- -------- -------- --------Cash and cash equivalents as 440,292 339,957 526,638aboveBank overdrafts (Note 14) - (851) -------------------------- -------- -------- --------Cash and cash equivalents perconsolidated cash flow statement 440,292 339,106 526,638------------------------- -------- -------- -------- 14 Borrowings 30 June 30 June 31 December Effective 2006 2005 2005 Maturity interest rate % £'000 £'000 £'000-------------------------- -------- ----------- ------- ------- ---------CurrentBank overdrafts On demand Base Rate + 1.5 - 851 - Non-current8.5% unsecured subordinatedloan stock ("ULS") 2008 9.50 19,052 42,956 38,644 US dollarfloating rateunsecuredsubordinatedloan notes 2034 US dollar 3 7,926 8,137 8,508 month LIBOR + 3.5Lower Tier Twosubordinateddebt 2030 6.84 147,121 - 147,061------------------------------ -------- ----------- ------- ------- --------- 174,099 51,944 194,213------------------------------ -------- ----------- ------- ------- --------- On 12 January 2006, the Group announced a tender offer to purchase all of theoutstanding ULS at 109p including accrued interest for every £1 nominal amountof ULS. 19,584,970 ULS units were validly tendered and following subsequentmarket purchases of 988,162 units at 109p, 19,736,551 ULS units remainoutstanding as at 30 June 2006. 15 Trade and other payables 30 June 30 June 31 December 2006 2005 2005 £'000 £'000 £'000----------------------------- -------- ---------- -------- -------- ---------Trade creditors 6,995 10,661 8,465Arising out of directinsurance 209,399 11,194 83,828operationsArising out of reinsuranceoperations 166,638 177,256 163,639Other taxes and socialsecurity costs 1,140 1,077 1,087Shares held by third parties -CF 22,125 12,417 17,444Epic Investment FundsAccruals and deferred income 16,691 12,119 12,122Other creditors 439 6,204 6,327----------------------------- -------- ---------- -------- -------- --------- 423,427 230,928 292,912----------------------------- -------- ---------- -------- -------- --------- All amounts are payable within one year of the balance sheet date. 16 Share capital 30 June 30 June 31 December 2006 2005 2005 Number Number Number (restated) (restated)------------------------------------- --------- -------- ---------Number of ordinary shares of 75p each,allotted, issued and fully paid:Opening balance 326,980,768 324,690,621 324,690,621Exercised share options 446,923 42,061 312,667Converted unsecured subordinatedloan stock - 3,927 1,977,480------------------------------------- --------- --------- ---------Closing balance 327,427,691 324,736,609 326,980,768------------------------------------- --------- --------- --------- The Company undertook a consolidation of its share capital on 12 May 2006, suchthat the shareholders received one ordinary 75p share for every three ordinary25p shares owned as at that date. The comparative numbers of shares have been restated for the periods to 30 June2005 and 31 December 2005 to reflect this consolidation. 17 Equity dividends 6 months ended 6 months ended 12 months ended 30 June 2006 30 June 2005 31 December 2005 £'000 £'000 £'000-------------------------------- ---------- ---------- -----------Final 2004 dividend paid -6.0p per ordinary share(restated) - 19,305 19,305First 2005 interimdividend paid - 9.0p perordinary share (restated) - - 29,157Final 2005 dividend paid -9.0p per ordinary share(restated) 29,198 - --------------------------------- ---------- ---------- ----------- 29,198 19,305 48,462-------------------------------- ---------- ---------- ----------- The Company had distributable reserves of £22,194,000 at 30 June 2006 (30 June2005: £62,389,000) (31 December 2005: £59,765,000). Pursuant to an order of the High Court, on 29 March 2006 the Company's sharepremium account was reduced by £180,000,000. This amount has been credited to acapital reorganisation reserve which will be treated as undistributable untilsuch time as either: (i) amounts sufficient to guarantee payment of (a) the interest and capitalpayable to the holders of the outstanding 8.5% unsecured subordinated loan stock2008 in the period up to and including 31 December 2008; and (b) the interestand capital payable to the holders of the outstanding US dollar floating rateunsecured subordinated loan notes 2034 in the period up to and including 15August 2009, are deposited in separate accounts on terms approved by the Court;or (ii) the trustees of the 8.5% unsecured subordinated loan stock 2008 and thecollateral manager of the US dollar floating rate unsecured subordinated loannotes, being the only creditors of the Company who have not consented to thereduction of the share premium account of the Company, so consent. The Directors in their meeting dated 4 September 2006 approved the payment of aninterim dividend of 7.5p per share for the year ended 31 December 2006 to allshareholders registered at 27 October 2006. Based on the number of shares inissue as at 4 September 2006, but excluding those owned by the Group's EmployeeBenefit Trust which has waived its entitlement to dividends, this would amountto £24,337,000 and will be paid on 24 November 2006. The dividends per share have been restated to reflect the share consolidationreferred to in Note 16. 18 Reconciliation of movements in equity For the 6 months ended 30 June 2006 Total equity Called attributable up Share Capital Trans- Capital to share premium redemption lation reorgan- Own Retained share- capital account reserve reserve isation shares earinings holders Note £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000------------- ----- ------ ------- ------- ------- -------- ------ ------- ------ Balance at 1January 2006 245,236 314,758 586 - - (7,550) 171,630 724,660Arising in theperiod:Foreignexchangetranslationdifferences - - - (760) - - - (760)Actuarialgains ondefinedbenefitpension scheme - - - - - - 1,343 1,343Tax on itemstaken directlyto ortransferredfrom equity - - - - - - (403) (403)Profit for theperiod - - - - - - 74,461 74,461------------- ----- ------ ------- ------- ------- -------- ------ ------- ------ Totalrecognisedincome andexpense forthe period - - - (760) - - 75,401 74,641------------- ----- ------ ------- ------- ------- -------- ------ ------- ------ Acquisition ofown shares - - - - - (40) - (40)Vesting of ownshares - - - - - 64 - 64Equitydividends 17 - - - - - - (29,198) (29,198)Share-basedpayments - - - - - - 732 732Exercisedshare options 335 597 - - - - - 932Capitalreorganisation - (180,000) - - 180,000 - - -Premium onrepurchase ofunsecuredsubordinatedloan stock - (617) - - - - - (617)------------- ----- ------ ------- ------- ------- -------- ------ ------- ------ Balance at 30June 2006 245,571 134,738 586 (760) 180,000 (7,526) 218,565 771,174------------- ----- ------ ------- ------- ------- -------- ------ ------- ------ Following an application to the High Court, the Company was permitted totransfer an amount from the share premium account to a capital reorganisationreserve of £180,000,000. This capital reorganisation became effective on 29March 2006. Further information is provided in Note 17. For the 6 months ended 30 June 2005 Note Called up share Share premium Capital Equity portion Own shares Retained Total equity capital account redemption of convertible earnings attributable to reserve debt shareholders £'000 £'000 £'000 £'000 £'000 £'000 £'000-------------- ------ ------ ------- -------- -------- ------- ------- ---------Balance at 1January 2005 243,518 311,145 586 1,681 (7,493) 173,223 722,660Arising in theperiod:Actuariallosses ondefinedbenefitpension scheme - - - - - (1,637) (1,637)Tax on itemstaken directlyto ortransferredfrom equity - - - - - 491 491Profit for theperiod - - - - - 78,508 78,508-------------- ------ ------ ------- -------- -------- ------- ------- ---------Totalrecognisedincome andexpense forthe period - - - - - 77,362 77,362-------------- ------ ------ ------- -------- -------- ------- ------- ---------Acquisition ofown shares - - - - (45) - (45)Vesting of ownshares - - - - 50 - 50Equitydividends 17 - - - - - (19,305) (19,305)Share-basedpayments - - - - - 494 494Exercisedshare options 31 57 - - - - 88Convertedunsecuredsubordinatedloan stock 3 6 - - - - 9Acquisition offurther 8.4%of RI3K Ltd - - - - - (773) (773)-------------- ------ ------ ------- -------- -------- ------- ------- ---------Balance at 30June 2005 243,552 311,208 586 1,681 (7,488) 231,001 780,540-------------- ------ ------ ------- -------- -------- ------- ------- --------- For the 12 months ended 31 December 2005 Note Called up share Share premium Capital Equity portion Own shares Retained Total equity capital account redemption of convertible earnings attributable to reserve debt shareholders £'000 £'000 £'000 £'000 £'000 £'000 £'000 -------------- ------ ------- ------- -------- -------- ------ ------- ---------Balance at 1January 2005 243,518 311,145 586 1,681 (7,493) 173,223 722,660Arising in theyear:Actuariallosses ondefinedbenefitpension scheme - - - - - (3,901) (3,901)Tax on itemstaken directlyto ortransferredfrom equity - - - - - 1,170 1,170Profit for theyear - - - - - 47,632 47,632-------------- ------ ------- ------- -------- -------- ------ ------- ---------Totalrecognisedincome andexpense forthe year - - - - - 44,901 44,901-------------- ------ ------- ------- -------- -------- ------ ------- ---------Acquisition ofown shares - - - - (107) - (107)Vesting of ownshares - - - - 50 - 50Equitydividends 17 - - - - - (48,462) (48,462)Share-basedpayments - - - - - 1,060 1,060Exercisedshare options 235 420 - - - - 655Convertedunsecuredsubordinatedloan stock 1,483 3,193 - - - - 4,676Expiry of loanstockconversionperiod (1,681) 1,681 -Acquisition offurther 8.4%of RI3K Ltd - - - - - (773) (773)-------------- ------ ------- ------- -------- -------- ------ ------- ---------Balance at 31December 2005 245,236 314,758 586 - (7,550) 171,630 724,660-------------- ------ ------- ------- -------- -------- ------ ------- --------- 19 Cash flows provided by operating activities 6 months ended 6 months ended 12 months ended 30 June 2006 30 June 2005 31 December 2005 £'000 £'000 £'000 ----------------------------- ------------ ------------ ------------Operating profit 113,521 114,886 68,206 Adjustments for non-cashmovements:Realised and unrealisedinvestment losses/(gains) 11,017 (20,523) (36,339)(Profit)/loss on sale ofproperty, plant andequipment (2) - 15Amortisation ofunderwriting capacity - 251 502Amortisation of software 1,851 1,232 2,700Depreciation of property,plant and equipment andrelated exchangeadjustments 1,134 674 1,669Foreign exchange(gains)/losses onfinancing items (612) 570 969Foreign exchangelosses/(gains) on cash andcash equivalents 9,047 (9,363) (17,792)Charges in respect ofemployee share schemes 732 494 1,060Charges in respect ofretirement benefits (1,927) (105) 447Interest income (46,780) (39,404) (82,727)Dividend income (1,273) (1,256) (2,777)Vesting of own shares 64 - -Finance costs on borrowing (4,369) - - Changes in working capital:Deferred acquisition costs (11,998) (30,860) (13,164)Trade and otherreceivables (149,650) (110,547) (98,511)Insurance and reinsurancecontracts 8,986 212,705 410,747Trade and other payables 130,515 40,515 102,499Provisions (6) - (44)----------------------------- ------------ ------------ ------------Cash flows provided byoperating activities 60,250 159,269 337,460----------------------------- ------------ ------------ ------------ Independent review report to Brit Insurance Holdings PLC Introduction We have been instructed by the Company to review the financial information forthe six months ended 30 June 2006 which comprises the Condensed consolidatedincome statement, Condensed consolidated statement of recognised income andexpense, Condensed consolidated balance sheet, Condensed consolidated cash flowstatement and the related notes 1 to 19. We have read the other informationcontained in the interim report and considered whether it contains any apparentmisstatements or material inconsistencies with the financial information. This report is made solely to the Company in accordance with guidance containedin Bulletin 1999/4 'Review of interim financial information' issued by theAuditing Practices Board. To the fullest extent permitted by law, we do notaccept or assume responsibility to anyone other than the Company, for our work,for this report, or for the conclusions we have formed. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by, the Directors. The Directorsare responsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority which require that the accountingpolicies and presentation applied to the interim figures should be consistentwith those applied in preparing the preceding annual accounts except where anychanges, and the reasons for them, are disclosed. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4issued by the Auditing Practices Board. A review consists principally of makingenquiries of management and applying analytical procedures to the financialinformation and underlying financial data and based thereon, assessing whetherthe accounting policies and presentation have been consistently applied unlessotherwise disclosed. A review excludes audit procedures such as tests ofcontrols and verification of assets, liabilities and transactions. It issubstantially less in scope than an audit performed in accordance withInternational Standards on Auditing (UK and Ireland) and therefore provides alower level of assurance than an audit. Accordingly we do not express an auditopinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 June 2006. Ernst & Young LLPLondon4 September 2006 This information is provided by RNS The company news service from the London Stock Exchange

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