6th Sep 2005 07:04
BRIT Insurance Holdings PLC06 September 2005 PRESS RELEASE FOR IMMEDIATE RELEASE 6 September 2005 BRIT INSURANCE HOLDINGS PLC Record interim results for third consecutive year Brit Insurance Holdings PLC ("Brit" or the "Group"), the UK general insurancegroup, today announces record interim results for the six months ending 30 June2005. HIGHLIGHTS • Profit before tax £112.2m, up 61.0%. • Earnings per share 8.1p, up 54.8%. • Group combined ratio 87.4%. • Premium growth over recent years reflected in strong earnings growthand good returns. • Full year gross written premium expected to be ahead of 2004. • Excellent investment performance of £59.8m, up 169.4%. • Dividend of 3p per share payable in November 2005. • Potential return of cash to shareholders, subject to CULS conversion,market and other conditions. Dane Douetil, Chief Executive Officer of Brit Insurance Holdings PLC, said: "Itis a real pleasure to announce excellent record results in the first InterimStatement since becoming Chief Executive. Pre-tax profits of £112.2m reflectthe benefits of the significant restructuring of the Group post 9/11, with asingle minded focus on underwriting for our own account. This first half of the year has been helped by better than expected investmentperformance and a relatively favourable loss environment. It was unlikely thatwe would see such benign conditions in the second half of the year and HurricaneKatrina has shown this to be the case. However, we remain optimistic for thefuture and look forward with confidence. Recent catastrophes such as Hurricane Katrina serve as a sharp reminder of theneed to maintain underwriting and pricing discipline. We believe these eventswill extend the duration of the hard market. We have recently strengthened Brit at both executive and non-executive levelsand I believe we have the management team in place to continue deliveringexcellent returns to our shareholders. The insurance industry is going through huge change which we welcome. We arethoroughly prepared for it and are confident of reaping significant benefit froma more transparent, efficient and ultimately better market place." 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's office at 55 Bishopsgate at12 noon today An audio webcast of the analysts' presentation will be available on our websitewww.britinsurance.com this afternoon. Notes to Editors • Brit is a major UK-based general insurance and reinsurance groupwriting both UK and international business • Brit's shares are listed on the London Stock Exchange; it is a memberof the FTSE 250 • It is the 3rd largest of 17 UK-listed non-life insurers with a marketcapitalisation of £877m at 31 August 2005. • It operates via a single underwriting platform spanning both Lloyd'sand non-Lloyd's distribution and regulation; less than half of its business iswritten via Lloyd's • It is financially strong. Its principal subsidiary is rated A+(Strong) by Fitch Ratings and A (Excellent) by AM Best; both ratings haverecently been reaffirmed • Brit owns and manages the 8th largest Lloyd's syndicate with £500mcapacity for 2005 • Brit owns 100% of its principal subsidiaries and all the capacity onits active underwriting syndicate INTERIM STATEMENT INTRODUCTION The first half of 2005 has been extremely profitable and we have been able toreport record results yet again. We are pleased to report profits before tax of £112.2m (2004: £69.7m) up 61% andearnings per share of 8.14p (2004: 5.26p) up 54.8%. These are excellent figuresand reflect the single minded focus of the Group on its underwriting activities. The Group has also produced improved investment returns for the period andthis bodes well for the second half. Although our risk exposure is weighted towards the second half of the year, theperiod for peak windstorm activity, we view the future with confidence. UNDERWRITING RESULTS AND MARKET CONDITIONS Brit is organised into three customer-facing underwriting centres: LondonMarket, Reinsurance and UK. Each centre has access to our two regulatoryunderwriting platforms - Brit Insurance Limited ('BIL'), our insurance companyoutside Lloyd's and Syndicate 2987 at Lloyd's. Within these three centres weunderwrite more than 70 sub-classes of business, giving us a widespreadportfolio and allowing us to flex our business mix and manage changes in marketconditions at the 'micro-cycle' level. The first half of 2005 saw some price pressure across most lines of business.As yet, this weakening of rates is on the whole more gradual, and coming off ahigher base, than we have experienced in earlier insurance down-cycles. Anumber of industry-wide factors appear to be dampening the down-cycle at thisstage compared with earlier cycles, including: • Low investment returns across fixed income and equity markets, meaning that acceptable returns on equity are only possible with a combined ratio well under 100%. • More professional management in the industry as a whole, equipped with better and much faster management information systems. • Improved capital and risk management within the industry and more effective regulation. • The legacy issues affecting some major insurers and reinsurers resulting in pressure to maintain pricing. We are encouraged by these industry trends but remain cautious and vigilant forany signs of heavier price-cutting in our markets. Claims frequency and severity has been low during the first half of 2005 thougheach of our underwriting centres was impacted by Northern European WindstormErwin which led to gross incurred claims of £20.6m, or £15.7m net of reinsurancerecoveries and reinstatements. It is as yet too early to predict the full outcome of the US windstorm season,though since June we have already seen significant hurricane activity, inparticular Hurricane Katrina. Whilst it is too early to determine accuratelythe Group's exposure to Hurricane Katrina due to time and complexity of theloss, our well publicised Realistic Disaster Scenarios (as set out later in thisstatement) gives an indicative US Windstorm loss of £82.4m. We have set out below a premium index and brief narrative on the underwritinghighlights in each of our three underwriting centres. The index charts shouldbe viewed with some caution as they are to an extent subjective. It is also important to note that our annual patterns of written premium havechanged and are now more evenly spread across the year. This is for a number ofreasons including changes in our business mix and in the timing of recognitionof income from delegated authorities. Therefore, although our half-year grosswritten premium shows a reduction compared with 2004, we expect full-year grosswritten premiums to be ahead of 2004. Gross written premium by length of tail 30.06.2005 30.06.2004 31.12.2004 £'m % £'m % £'m %Short 335.0 49.5 374.6 48.2 521.6 48.0Medium 132.2 19.5 119.4 15.3 189.1 17.4Long 210.2 31.0 284.5 36.5 376.0 34.6 677.4 778.5 1,086.7 Gross written premium by currency 30.06.2005 30.06.2004 31.12.2004 £'m % £'m % £'m %GBP 317.0 46.8 405.3 52.1 521.7 48.0EUR 32.3 4.8 66.2 8.5 115.7 10.7USD 309.1 45.6 287.5 36.9 417.6 38.4CAN 19.0 2.8 19.5 2.5 31.7 2.9 677.4 778.5 1,086.7 Premium Index by Underwriting Centre Rate Movements Premium Index (Year 2000 as base year) 2000 2001 2002 2003 2004 June 2005 London Market Underwriting CentreAccident & Financial Division N/A 100 131 142 147 149Aerospace Division 100 158 202 237 260 270Casualty Division 100 122 207 288 303 297Marine Division 100 112 144 156 159 163Property Division 100 112 150 155 152 149 Reinsurance Underwriting CentreProperty - USA and Canada Division 100 110 149 154 155 157Property - International Division 151 150Property - Retrocessional Division 100 110 132 120 117 117Marine Division 100 115 171 179 183 193Casualty Division 100 115 182 215 230 229Aviation Division 100 100 167 159 139 128 UK Underwriting CentreProperty Division 100 104 123 132 131 130Casualty Division N/A N/A 100 130 129 128Motor Division 100 108 115 120 122 115Liability Division N/A 100 200 286 284 254 The indices are based on the underwriters' estimates of the rate movementsexperienced by their business. The indices are subjective as they are calculated using judgement to estimatethe effect of changes in terms and conditions as well as changes in premium "renewal business only". Divisional Analysis 30 June 2005 London Reinsurance UK Other TOTAL Market £m £m £m £m £m Gross written premium 294.4 215.1 168.5 (0.6) 677.4Net earned premium 197.5 107.0 142.9 2.7 450.1Underwriting result 30.1 0.9 22.4 3.4 56.8 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% 30 June 2004 London Reinsurance UK Other TOTAL Market £m £m £m £m £m Gross written premium 328.9 186.6 225.5 37.5 778.5Net earned premium 169.9 80.2 156.6 5.8 412.5Underwriting result 19.5 20.5 8.7 (0.3) 48.4 Claims ratio 50.9% 46.7% 72.3% 58.7%Expense Ratio 37.6% 27.8% 22.2% 29.6%Combined Ratio 88.5% 74.5% 94.5% 88.3% 31 December 2004 London Reinsurance UK Other TOTAL Market £m £m £m £m £m Gross written premium 431.6 280.0 345.4 29.7 1,086.7Net earned premium 361.9 182.4 301.0 9.2 854.5Underwriting result 24.8 7.6 25.1 1.3 58.8 Claims ratio 58.9% 69.5% 68.1% 64.5%Expense Ratio 34.3% 26.3% 23.6% 28.6%Combined Ratio 93.2% 95.8% 91.7% 93.1% The claims ratio is calculated as follows: (claims incurred net of reinsurance +changes in other technical provisions)/earned premiums net of reinsurance. The expense ratios are calculated as follows: (acquisition costs + otherinsurance related expenses)/earned premiums net of reinsurance. London Market Underwriting Centre: This continued to be our largest underwritingcentre by premium volume and Brit maintained its strong market position,including leading a good share of its business. Business written has exceededbudget with good growth in earned premiums. As the rating index demonstrates, anumber of lines of business have experienced pricing reductions, though marineand aerospace business is still strengthening in price. We continue to beselective on liability lines. Reinsurance Underwriting Centre: The hiring of a new team has contributed tothe Reinsurance Underwriting Centre exceeding its premium income budget. Rateshave held particularly firm in lines of business which were most affected by theUS hurricanes of 2004 though elsewhere there has been some price competition butas yet on a disciplined basis across the market. Windstorm Erwin caused lossactivity during the period, although this was within our expectations for suchevents. UK Underwriting Centre: The development of Brit's newest underwriting centrehas continued to progress well with emphasis being placed on developing ourregional network, local relationships and infrastructure requirements. Wecontinue to recruit quality people around the regions. Our product offering, while based around the UK small and medium enterprise corerequirements of motor, property, employers' and public liability, has beenenhanced by the development both of combined package policy and by the manyspecialist lines of business written in our London Market Underwriting Centre. It is generally a feature of a softening market that more business becomesavailable in the UK regional markets and we have been positioning our businessfor this expected development. RISK MANAGEMENT, CLAIMS AND RESERVING Management of insurance risk Peer review and management controls - through its underwriting committee andpeer review processes, the Group closely monitors the quantity, quality andpricing of insurance risks written. Incentivisation - underwriters' incentives, like those of all employees andexecutive directors, are aligned to shareholders' interests. They are derivedfrom a mixture of share incentives and a cash bonus which operates at a groupprofit level, rather than by individual or department. This encourages a strongteam ethic. Capital allocation - each class of business is given an initial annual limit ofrisk capital based on centrally determined rates which take into account thedifferent risk characteristics of that class; as market conditions change withinthe year such capital can be internally exchanged between classes via theunderwriting committee. During the first six months of 2005 there were 33internal trades representing £63m of risk capital. Centralised reinsurance purchasing - this takes into account the need to limitaggregate insurance risk and the perceived creditworthiness of each reinsurer,while also recognising that the Group's business mix already imports an elementof natural spread and positive diversification into our results. Control of aggregate exposures across classes to a single risk - the followingtable sets out the Realistic Disaster Scenarios based on the Group's insuranceportfolio and based on annualised earthquake event probabilities of 1:200 andwindstorms of 1:100; as in previous years, the overall risk appetite has beenlimited to a gross loss before reinsurance recoverable of 30% of gross premiumsnet of brokerage ('GNP') and a net loss after reinsurance recoverable of thelower of 20% of capital or 10% of GNP. These internally set risk limits aremuch stricter than those set by the Lloyd's Franchise Board. The Group modelsin excess of 30 different disaster scenarios of which the top 4 results, as ofAugust 2005, are as follows: Realistic Disaster Scenarios Annualised Gross loss GNP Net loss GNP Group Capital probability £m % £m % % US windstorm 1:100 284.2 26.2 82.4 7.6 11.6California earthquake 1:200 344.4 31.7 * 89.8 8.3 12.6European windstorm 1:100 289.6 26.7 80.3 7.4 11.3Japanese earthquake 1:200 274.8 25.3 70.9 6.5 10.0 Group's risk appetite 30.0 10.0 20.0 * Reduces below 30% after taking into account cash collateralisation. Reserving The Group's policy is to reserve prudently both for notified events and forestimates of claims incurred but not reported ('IBNR'); the Group takes comfortin the prudence of its estimating techniques from the following: • External scrutiny and benchmarking from a number of actuarial and other advisers and industry sources. • A robust reserving track record: Brit has not needed to make material increases to reserves for the major losses since, and including, the US terror attack of September 2001. Claims The Group seeks to agree and settle claims promptly in order to: • Minimise claims handling costs. • Achieve certainty of past results and provide a reliable guide forfuture business pricing • Build its reputation and brand with brokers and customers, for whomany significant insurance event can otherwise be very disruptive to theirbusiness or personal affairs. The Group has undertaken a major review of its claims function since 2003,including separating the function from underwriting and appointing Bob Foster,former Head of THG Group as senior independent manager. In recognition of our initiatives in this area, the Group won Claims Team of theYear in the 2004 Insurance Day Awards. BUSINESS PROCESS The Group sets the highest standards of integrity, service and efficiency in itsdealing with all its customers, brokers and other counterparties. Brit is achampion of contract certainty, now being introduced as a requirement by theFSA. It places itself at the forefront of current initiatives to improve theefficiency and effectiveness of our industry. For example, this year, followingon from being Chairman of the Lloyd's Market Association's Market ProcessesCommittee, Dane Douetil was elected by his peers as Chairman of the Lloyd'sMarket Association with a clear brief to drive industry reform. The Group continues to improve its business process in order to: • Maximise customer and broker service and satisfaction. • Position itself as a winner in the environment of substantial legal and regulatory change that is upon our industry, arising from the initiatives of New York State Attorney General, Eliot Spitzer, and the FSA concerning industry practices, transparency and contract certainty at inception (all of which we fully endorse), combined with the new regulatory capital rules and IFRS accounting. BALANCE SHEET MANAGEMENT Balance Sheet Strength Our balance sheet management philosophy is to maintain a high "A" credit ratingto attract good quality business from brokers and their clients; and to buildlong term shareholder value based on a quality insurance portfolio. We limit our risk gearing and investment duration, and maintain high levels ofcapital and liquidity. We are: • Well capitalised to write our current level of business after takinginto account projected growth in reserves from new business, especially fromlonger tail classes of business. • Well positioned to pay claims promptly following any significant largeinsured event • Financially and operationally equipped to take advantage of marketopportunity. Within this context we seek to achieve the best possible shareholder returnsboth from underwriting and investment income. Financial strength rating maintained and improved over recent years BIL's financial strength rating is currently A+ (Strong) with Fitch Ratings andA (Excellent) with A.M. Best, in each case with stable outlook. This hasimproved with both agencies over the past five years, against a market trend ofoverall reductions in financial strength ratings. We manage the credit risk associated with purchased reinsurance by concentratingour exposures on highly rated carriers as follows: Reinsurance recoverable by financial strength rating 30.06.05 30.06.04 31.12.04 % % % AAA 0.7 0.8 1.2AA 20.0 30.2 21.3A 71.9 62.2 69.1BBB and below 0.3 1.2 0.4Not rated 7.1 5.6 8.0 100.0 100.0 100.0 As well as having reference to external ratings, Brit conducts its own internalrating reviews of all major counterparties, including brokers, cover-holders andreinsurers. Proactive Financial Management Within its conservative financial management policies Brit has been at theforefront of innovation in financial and capital management. In 2004 BIL was a member of the pilot study for the FSA's new capital rules,which focus on the Enhanced Capital Requirement ('ECR') and Individual CapitalAssessment ('ICA'). We constructed a bespoke model to look at all our mainareas of risk (insurance, investment, counterparty, liquidity and operational)and their correlations and in so doing we thoroughly reviewed our riskmanagement framework overall. We announced in September 2004 that our ICAcalculation had been accepted by the FSA and were, as far as we are aware, thefirst company to gain such approval. The final conversion date for our convertible unsecured subordinated loan stockis 31 October 2005, after which any unconverted stock is redeemable in December2008. There is £45.1m nominal currently outstanding. The Group believes it isalready relatively ungeared in comparison to its peers, its regulatory andrating agency constraints and its optimal capital mix in terms of weightedaverage cost of capital. To the extent that the CULS convert, the effect wouldbe to de-gear the Group further, possibly as low as 2% gearing. Accordingly, subject to market and other conditions, the Board is activelyconsidering options for re-gearing and the optimal capital mix for the Group'sbusiness. These options may include some form of return of cash to shareholders In the absence of unforeseen circumstances, the Board intends to give afurther update in the next quarter. IFRS IFRS has had minimal impact on our balance sheet. By removing some of thenon-cash charges (e.g. amortisation and equalisation) in certain respects itshows our earnings more transparently and favourably. However, by treating theunearned premium reserve and deferred acquisition costs as non-monetary items,it also imparts a higher degree of volatility. At the pre-tax profit level, ourIFRS results for the first half of 2005 are approximately 16 per cent betterthan they would have been if prepared under our previous accounting policies. £9.7m of the improvement in profit before tax represents foreign exchangedifferences on non-monetary items, i.e. unearned premium reserve and deferredacquisition costs. We are working with the insurance industry and the auditprofession to discuss whether the accounting treatment of these items is themost appropriate one. DIVIDEND AND DIVIDEND POLICY Brit is pleased to announce a dividend of 3p per share with an ex-dividend dateof 2 November, a record date of 4 November and a payment date of 25 November,2005. We intend to continue with a full year dividend payment of a minimum of 70% ofUK GAAP post tax profits, notwithstanding the move to IFRS. There are a numberof reasons why it is not yet appropriate to switch to a dividend policy linkedto IFRS profitability, notably: • IFRS-reported profitability tends to be more volatile, both up anddown, than UK GAAP; we are not generally in favour of increasing dividendvolatility. • The Group's subsidiaries still report under UK GAAP and thereforetheir ability to upstream dividends and cash to the parent company will still bebased on UK GAAP. INVESTMENTS The Group's assets are managed on a total return basis. The Group's total exposure to equities (excluding pension fund assets) islimited to a maximum 30% of net tangible assets. The remainder is invested incash and bonds. Performance Group invested assets totalled £2,027.1m as at 30 June 2005 (30 June 2004£1,628.7m). Investment returns were excellent in the half year at £59.8m (30June 2004 £22.2m). The sterling fixed income portfolio performance exceeded both the "cash" and allthe 1-3 year maturity bond (including those which consist solely of AA or Arated corporate bonds), returning 3.31% in the half year. The US$ fixed incomeportfolio returned 1.0% for the half year. The equity portfolios have also performed very well for the first 6 months. Theoverall return for the half year totalled £17.4m (9.9%) which exceeded the FTSE100, FTSE 250 and All Share indices. Asset Allocation 30.06.05 30.06.04 31.12.04 £m £m £m Equities 205.1 170.0 172.1Bonds 1,482.1 919.0 1,041.6Cash and deposits 339.9 539.7 629.2Total 2,027.1 1,628.7 1,842.9 Bonds, cash and deposits currency mix 30.06.05 30.06.04 31.12.04 % % % Sterling 71.8 58.1 64.6US Dollar 22.1 34.0 26.4Euro 4.4 5.8 7.1Other 1.7 2.1 1.9 Sterling fixed income performance 30.06.05 % The Group's sterling investments 3.311 month sterling LIBID 2.371 year gilts 2.175 year gilts 3.34 US dollar fixed income performance 30.06.05 % The Group's dollar investments 1.021 month dollar LIBID 1.311 year treasuries 1.065 year treasuries 0.97 Equity returns 30.06.05 % The Group's equities 9.92FT All Share Index 8.14FTSE 100 8.46 Bond portfolio duration 30.06.05 30.06.04 31.12.04 Yrs Yrs Yrs Sterling 1.85 0.88 0.94US Dollar 1.97 1.40 1.51Euro 1.65 0.10 0.20CAD 1.40 1.41 1.47 Bond portfolio credit ratings 30.06.05 30.06.04 31.12.04 % % % Government 58 47 50AAA 15 25 22AA 18 20 20A 9 7 8BBB 0 1 0Other 0 0 0Total 100 100 100 BRAND We continue to build our brand and via several parallel strategies: • Targeted sponsorship campaigns with the specific purpose of enhancing name awareness in the UK business community and the public at large • Continued excellence in broker and client service in all areas, especially in delivering reliable timely quotations for new business and in the payment of claims • Industry leadership through involvement of a number of our senior personnel on industry working groups • A continuous programme of staff relations, investor relations and broker and customer relationship management During the period Brit has continued its sponsorship of a number of sportsevents, most notably its association with Surrey County Cricket Club and TheBrit Insurance Oval Ground. In 2005 we are benefiting from an estimated totalof 300 hours of television coverage of relevant events for Brit, including: • The final Ashes Test vs Australia. • Two one-day internationals. • Twenty20 semi-final and finals day. • Selected county matches involving Surrey CCC in the various domestic competitions. In addition to television coverage there is further exposure via written andother media, and entertainment facilities for our key customers and otherstakeholders. This year Brit has also sponsored two cricket matches for the benefit of victimsof last year's Asian Tsunami, the first in January in New Zealand, raisingNZ$1.2m, and the second in June at the Brit Insurance Oval, raising in excess of£1.0m. OUR PEOPLE Brit's aim is to recruit, train and retain high quality staff. Brit offers ademanding but rewarding and fulfilling working environment that encouragesdedicated indviduals to flourish. Headcount In the six months ended 30 June 2005, the total headcount of the group hasincreased by 6% to 512 employees. The UK division has been the main focus areafor recruitment and now represents 26.6% of the total workforce. Recruitment and retention Brit has a staff turnover of 3.9% (excluding retirements and redundancies).This compares favourably with the UK labour turnover rate reported for 2004 of15.7%. New people and new roles In 2005 we have made a number of new appointments at senior level, both bypromotion and external recruitment. Dane Douetil became Chief Executive Officer in April having previously beenDeputy CEO. Dane has been with the Group since 1999. Peter Hazell, who joined the Board as a Non-Executive Director in 2004, was thisyear appointed Chairman of the Audit Committee, a role he also holds at UK CoalPLC and Smith & Williamson Holdings Limited. He is Chairman of the ArgentGroup. He was formerly Managing Partner of PricewaterhouseCoopers with specificadditional expertise in consulting and corporate finance. Cees Schrauwers, formerly Partner of Coopers & Lybrand and Managing Director ofCommercial Union UK and Aviva International, has joined the Board as aNon-Executive Director and is also a member of the Audit Committee. Kathy Lisson will join the Group on 26 September 2005 as Chief OperatingOfficer. Kathy joins us from Barclays PLC, where she was OperationalTransformation Director. She has also been a Board member of IntelligentProcessing Solutions Ltd., the largest processor of cheques in the UK. Prior toworking with Barclays, Kathy was at Bank of Montreal. Mike Sibthorpe has been promoted to the Group's Executive Management Committeeand has been appointed Active Underwriter of Syndicate 2987. Mike is also Headof the London Market Underwriting Centre. He joined the Group in 1999 and washighly instrumental in its transformation from an investment company into aninsurance group. He is formerly of Eagle Star. Jonathan Turner has joined the Group from QBE to take on the role of ReinsuranceUnderwriting Director. Jon joins after 15 years with QBE where he experienced avariety of Underwriting & Underwriting Management roles most latterly that ofUnderwriting Director of the Treaty Division. Matthew Wilson, who has been with the Group since 1999 has, in addition to hisresponsibilities as Property Divisional Director, assumed responsibility for theGroup's Space Underwriting. Brit is a world leader in this field. Richard Webster recently joined the group from R.K. Carvill & Co. Ltd asBusiness Development Director London Market. Mike Smith, formerly Senior Vice President and Director of Wordings at MarshGlobal Broking has recently joined Brit to head up its expanding technicalwordings team covering all classes of business. Mike will play a key role inthe Group's overall commitment to excellence in the area of policies and policywordings, particularly in the implementation of the market contract certaintyinitiative in line with FSA requirements. Paul Gildersleeves, former senior insurance/financial services banker at HSBCand Numis, has joined the Group as Deputy Finance Director and Head of InvestorRelations. Nigel Bennett, former Head of European Fixed Income at the Royal Bank ofScotland, has joined as Group Treasurer to monitor the risks and performance ofthe investment portfolios. SUMMARY AND OUTLOOK Our strategic goal is to deliver shareholder value through a combination ofcapital growth and distributions by achieving long term growth in income andprofits based on sound prudent principles of financial and business managementwhich should reduce the volatility of our results and the risk of loss. In pursuing this strategy we will seek to: • Strengthen further our position as one of the leading UK-based generalinsurers. • Continue to provide excellent customer security and service. • Take advantage of market opportunities, especially those arising fromcurrent industry change dynamics, while remaining wary of acquisitions,especially those involving significant reserve risk. • Further grow our UK division which we expect to be less cyclical thanLondon Market and Reinsurance. • Watch and manage the cycle across all 3 underwriting centres and all70 classes of business. • Monitor and optimise investment return within specified riskparameters via asset allocation techniques. This has been, by any standards, an excellent half year with record profits. The second half will raise some challenges including potential furthercatastrophe loss from the US windstorm season and elsewhere, continued downwardpressure on rates in some areas and a potentially less rewarding investmentenvironment. The recent US windstorms, especially Hurricane Katrina lead to a significantprice hardening particularly in certain areas of the reinsurance and marinemarkets. Brit is extremely well positioned for the opportunities that thisprice hardening represents. We remain optimistic that our commitment to building a quality business based onthe right financial model, the right processes and the right people willcontinue to deliver good value to all our stakeholders and reward ourshareholders. We are continuing to position the group to be a winner as theindustry evolves in this exciting period of change. Consolidated Income Statementfor the 6 months ended 30 June 2005 6 months ended 6 months ended 12 months ended Note 30 June 2005 30 June 2004 31 December 2004Income £'000 £'000 £'000 Gross premiums written 677,364 778,544 1,086,731Less premiums ceded to reinsurers (166,850) (152,532) (176,300)Premiums written net of reinsurance 510,514 626,012 910,431 Gross amount of change in provision for unearned premiums (125,456) (285,921) (63,599)Reinsurers' share of change in provision for unearned 65,027 72,367 7,642premiumsNet change in provision for unearned premiums (60,429) (213,554) (55,957)Net change in other technical provisions - - (5,254)Earned premiums, net of reinsurance 450,085 412,458 849,220 Fees, commissions and other income 3 11,549 11,349 9,439Investment income 4 59,753 22,204 73,307 Total income 521,387 446,011 931,966 Expenses Claims incurred:Claims paid:Gross amount (212,527) (73,221) (309,077)Reinsurers' share 58,844 17,101 57,293Net claims paid (153,683) (56,120) (251,784) Change in the provision for claims:Gross amount (102,931) (194,623) (361,621)Reinsurers' share (2,996) 8,769 67,760Net change in the provision for claims (105,927) (185,854) (293,861) Claims incurred net of reinsurance (259,610) (241,974) (545,645)Acquisition costs (111,800) (97,912) (211,902)Other operating expenses (35,091) (34,150) (53,454) Total expenses (406,501) (374,036) (811,001) Operating profit 114,886 71,975 120,965 Finance costs (2,748) (2,482) (5,205)Share of profit after tax of associated undertakings 59 174 348 Profit on ordinary activities before tax 112,197 69,667 116,108 Income tax expense 5(i) (33,689) (18,778) (31,642) Profit on ordinary activities after tax 78,508 50,889 84,466 Basic earnings per share (pence per share) 6 8.14p 5.26p 8.73pDiluted earnings per share (pence per share) 6 7.82p 5.12p 8.54p Consolidated Statement of Recognised Income and Expensefor the 6 months ended 30 June 2005 6 months ended 6 months ended 12 months ended 30 June 2005 30 June 2004 31 December 2004 £'000 £'000 £'000 Actuarial (losses)/gains on defined benefit pension scheme (1,637) 414 (2,938)Tax on items taken to equity 5(ii) 491 (124) 881Net (expense)/income recognised directly in equity (1,146) 290 (2,057)Profit for the period 78,508 50,889 84,466Total recognised income and expense for the period 77,362 51,179 82,409 Consolidated Balance Sheetas at 30 June 2005 Note 30 June 2005 30 June 2004 31 December 2004Assets £'000 £'000 £'000 Intangible assets: Syndicate participations 7 251 1,369 502 Software 7 12,712 3,198 7,672 Goodwill 7 70,991 70,991 70,991Property, plant and equipment 3,480 3,404 3,522Investments in associated undertakings 1,301 1,420 1,594Reinsurance contracts 8 405,367 453,901 326,901Financial investments 9 1,687,143 1,089,050 1,213,725Deferred acquisition costs 142,793 155,774 111,933Taxation - 1,045 -Deferred taxation - 6,053 -Trade and other receivables 10 609,919 715,832 499,372Cash and cash equivalents 11 339,957 539,697 629,190 Total assets 3,273,914 3,041,734 2,865,402 Liabilities Insurance contracts 8 2,150,803 2,023,896 1,859,632Employee benefits 20,003 15,043 18,470Borrowings 12 51,944 65,414 68,449Taxation 19,126 - 1,456Deferred taxation 20,037 - 4,512Provisions for other risks and charges 533 598 533Trade and other payables 13 230,928 223,412 189,690 Total liabilities 2,493,374 2,328,363 2,142,742 Equity Called up share capital 15 & 16 243,552 243,518 243,518Share premium account 16 311,208 311,144 311,145Capital redemption reserve 16 586 586 586Equity portion of convertible debt 16 1,681 1,681 1,681Employee incentive reserve 16 1,232 383 738Investment in own shares 16 (7,488) (4,577) (7,493)Retained earnings 16 229,769 160,636 172,485 Total equity 780,540 713,371 722,660 Total liabilities and equity 3,273,914 3,041,734 2,865,402 Consolidated Cash Flow Statementfor the 6 months ended 30 June 2005 6 months ended 6 months ended 12 months ended Note 30 June 2005 30 June 2004 31 December 2004 £'000 £'000 £'000 Cash flows from operating activities Cash flows provided by operating activities 17 200,078 296,279 520,873 Income tax (paid)/recovered (2) 418 1,621Interest paid (2,592) (2,340) (2,758) Net cash flows provided by operating activities 197,484 294,357 519,736 Cash flows from investing activities Change in investments (452,895) (83,967) (188,833)Purchase of property, plant and equipment (633) (560) (1,559)Purchase of intangible assets (6,272) (2,612) (8,178)Proceeds from disposal of property, plant and - 387 402equipmentInvestments in associated undertakings - (341) (341)Repayment of loan from/(loan to) associated 352 (652) (652)undertakings Net cash used in investing activities (459,448) (87,745) (199,161) Cash flows from financing activities Proceeds from exercised share options 88 8 9Equity dividends paid (19,305) (19,381) (38,762)Net proceeds from issue of floating rate notes - 7,984 7,984Repayment of bank loan - - (15,000)Acquisition of own shares for employee incentive (45) (452) (2,750)schemes Net cash used in financing activities (19,262) (11,841) (48,519) Net (decrease)/increase in cash and cash equivalents (281,226) 194,771 272,056Cash and cash equivalents at January 1 610,969 348,279 348,279Effect of exchange rate fluctuations on cash and cash 9,363 (3,353) (9,366)equivalentsCash and cash equivalents at end of period 11 339,106 539,697 610,969 Notes to the Financial Statements 1 Accounting policies The financial statements for the six months ended 30 June 2005 have not beenaudited, nor have the financial statements for the equivalent period in 2004.The financial statements have been prepared in accordance with InternationalFinancial Reporting Standards ("IFRS") adopted for use by the European Union ("EU") and accounting policies expected to be adopted by the Group when itprepares its first set of IFRS financial statements for the year ended 31December 2005. The statutory accounts for the year ended 31 December 2004, prepared under UKGAAP, have been reported on by the Group's former auditor, Mazars LLP, anddelivered to the registrar of companies. The report of the auditors wasunqualified and did not contain statements under section 237(2) or (3) of theCompanies Act 1985. The comparative figures provided for the 12 months ended 31December 2004 are based on the Group's statutory accounts after restatementsrequired following the change from UK GAAP to IFRS. The interim financial statements do not constitute statutory accounts of theGroup within the meaning of Section 240 of the Companies Act 1985. First time adoption of International Financial Reporting Standards In common with other European listed companies, the Group is required to prepareits consolidated financial statements for the year ending 31 December 2005 inaccordance with International Financial Reporting Standards ("IFRS") endorsed bythe European Commission ("EC"). The Group has accordingly restated itspreviously reported 2004 consolidated results and financial position. The Group is required to determine its IFRS accounting policies and in generalapply them retrospectively to establish its opening balance sheet under IFRS.However, IFRS 1, "First-time adoption of International Financial ReportingStandards" has a number of required exceptions and allowed exemptions onadoption of IFRS for the first time. The Group has taken advantage of thefollowing exemptions: Business combinations Brit has elected to apply IFRS 3 "Business Combinations" to all businesscombinations entered into from 1 January 2003. Accordingly, all businesscombinations from this date have been restated. Share-based payment plans The provisions of IFRS 2 "Share-based payments" have not been applied to optionsand awards granted on or before 7 November 2002 or to those granted after thisdate which had vested by 1 January 2005. Employee defined benefit obligations All cumulative actuarial gains and losses have been recognised in equity at thedate of transition to IFRS. Designation of previously recognised financial assets IAS 39, "Financial Instruments: Recognition and Measurement" permits a financialasset to be designated on initial recognition as a financial asset at fair valuethrough profit or loss. The Group has taken advantage of an exemption todesignate previously recognised assets as held at fair value through profit orloss at the date of transition. Basis of preparation The Group's consolidated opening and closing IFRS balance sheet, theconsolidated income statement, the consolidated cash flow statement andstatement of recognised income and expense, have been prepared in accordancewith IFRS, which comprise standards and interpretations issued by theInternational Accounting Standards Board ("IASB") and as adopted by the EC to beeffective for 2005 year ends. Due to the continuing work of the IASB and possible amendments to theinterpretive guidance, the Group's accounting policies and consequently theinformation presented may change prior to the publication of the Group's resultsunder IFRS in March 2006. The Group has adopted the amendments to IAS 39, "The Fair Value Option"published by the IASB in June 2005 and the amendment to IAS 19, "EmployeeBenefits" published in December 2004 permitting the recognition of all actuarialgains and losses immediately in equity through the statement of recognisedincome and expense. These amendments are expected to be endorsed by the ECduring 2005. In accordance with IFRS 4, "Insurance Contracts", the Group continues to applyexisting accounting policies to its insurance contracts but has the option tomake improvements to its policies if the changes make the financial statementsmore relevant to decision making needs of the users. Certain amounts recorded in the IFRS financial information include estimates andassumptions made by management, particularly about insurance liability reserves,investment valuations, interest rates and other factors. Actual results maydiffer from the estimates made. Where estimates had previously been made underUK GAAP, consistent estimates (after adjustments to reflect any difference inaccounting policies) have been made on transition to IFRS. Judgements affectingthe Group's balance sheet have not been revisited with the benefit of hindsight.It is possible that certain of the above pronouncements will not be endorsed bythe EU before the end of 2005 in which case there will be changes to theseaccounting policies when preparing the 2005 Annual Report and Accounts. 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. The financial statements of subsidiaries are prepared forthe same reporting year as the parent company. Consolidation adjustments aremade to convert subsidiary accounts prepared under UK GAAP into IFRS so as toremove any dissimilar accounting policies that may exist. Subsidiaries areconsolidated from the date control is gained. All significant inter-companybalances, profits and transactions are eliminated. Associated undertakings are those entities over which the Group has significantinfluence but not control. The Group's investment in associated undertakings isaccounted for under the equity method of accounting whereby associatedundertakings are carried in the balance sheet at cost plus post-acquisitionchanges in the group's share of net assets of the associate, less any impairmentin value. The Group's investment in associates also includes goodwill identifiedon acquisition less any accumulated impairment loss. The income statementreflects the Group's share of the results of operations of the associate. Product classification Insurance contracts are those contracts that transfer significant insurance riskat the inception of the contract. Contracts that do not transfer significantinsurance risk are investment contracts. Insurance risk is transferred when aninsurer agrees to compensate a policyholder if a specified uncertain futureevent adversely affects the policyholder. Other accounting policies (i) Insurance contracts a) Premiums Premiums written relate to business incepted during the year, together with anydifferences between booked premiums for prior years and those previouslyaccrued, and include estimates of premiums due but not yet receivable ornotified, less an allowance for cancellations. Premiums are accreted to earningson a pro rata basis over the term of the related policy, except for thosecontracts where the period of risk differs significantly from the contractperiod. In these circumstances, premiums are recognised over the period of riskin proportion to the amount of insurance protection provided. Premiums are shownnet of premium taxes and other levies on premiums. b) Deferred acquisition costs Acquisition costs represent commission and other variable costs that relate tothe securing of new contracts and the renewing of existing contracts. They aredeferred over the period in which the related premiums are earned. c) Claims incurred Claims incurred comprise claims and claims handling costs paid in the year andchanges in the provisions for outstanding claims, including provisions forclaims incurred but not reported and related expenses, together with anyadjustments to claims from prior years. Claims handling costs are mainly thoseexternal costs related to the negotiation and settlement of claims. d) Outstanding claims provisions Claims outstanding represent the estimated ultimate cost of settling all claims(including direct and indirect claims settlement costs) arising from eventswhich have occurred up to the balance sheet date, including provision for claimsincurred but not reported, less any amounts paid in respect of those claims. TheGroup does not discount its liabilities for unpaid claims. e) Provision for unearned premiums The proportion of written premiums that relate to unexpired terms of policies inforce at the balance sheet date is deferred as a provision for unearnedpremiums, generally calculated on a time apportioned basis. The movement in theprovision is taken to the income statement in order that revenue is recognisedover the period of the risk. f) Provision for unexpired risks Provision is made for any deficiencies arising when unearned premiums, net ofassociated deferred acquisition costs, are insufficient to meet expected claimsand expenses after taking into account future investment return on theinvestments supporting the unearned premiums provision and unexpired risksprovision. The expected claims are calculated having regard to events that haveoccurred up to the balance sheet date. g) Liability adequacy tests At each balance sheet date, liability adequacy tests are performed, employingthe current estimates of future cash flows under its insurance contracts. If asa result of these tests, the carrying amount of the Group's insuranceRelated Shares:
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