Final Results

Beazley Group PLC 23 March 2004 23 March 2004 Beazley Group plc Preliminary results for the 12 months ended 31 December 2003 Beazley Group plc ('Beazley'), one of the Lloyd's market leaders, today announces its preliminary results. Highlights Group â€¢ First results from the 2003 underwriting year â€¢ Profit before tax Â£17.1m (2002: loss Â£1.2m) â€¢ Net assets of Â£153.4m (2002: Â£144.9m), 67p net assets per share (2002: 63p) â€¢ Earnings per share 5.2p (2002: loss 1.7p) â€¢ Final dividend of 0.5p per share, taking total for year to 0.75p per share â€¢ Approved capacity for 2004 of Â£741m (2003: Â£660m) of which Beazley Group supports Â£397m (2003: Â£330m) Managed Syndicates â€¢ Gross premiums written of Â£708m (2002: Â£438m) â€¢ Net premiums earned of Â£401m (2002: Â£292m) â€¢ Substantially improved combined ratio 82% (2002: 94%) â€¢ 11% year-on-year renewal rate increase for 2003, 21% in Specialty Lines â€¢ Volume of transactions underwritten up 39% to 13,188 (2002: 9,461) Andrew Beazley, Chief Executive said: 'Beazley is delivering on its promises and we look forward to continuing to consolidate on our growth. We are writing an increasing proportion of medium tail, specialty line, business to take advantage of the favourable rating environment in this market. We expect the strong underwriting environment to continue to support healthy returns.' Contacts Beazley Group plc Tel: 020 7667 0623 Andrew Beazley Andrew Horton Nicholas Furlonge Finsbury Tel: 020 7251 3801 Melanie Gerlis Nicola Hobday Chairman's statement 2003 has been an excellent year for the group. We have successfully delivered against all of the targets which we set ourselves at the beginning of the year. The capital raised at the end of 2002 has been fully utilised, supporting the group's share of our total managed capacity of Â£660m. We believe we have had no difficulty in writing good, disciplined profitable business up to this capacity. Our profit before tax for the year was in line with expectations at Â£17.1m. Net assets per share have grown to 67p and our earnings per share were 5.2p, from which the board is proposing a final dividend of 0.5p. This, together with the interim dividend of 0.25p per share, brings the total dividend for 2003 to 0.75p per share. In line with our commitment at the time of the initial public offering we have commenced paying dividends. The final dividend of 0.5p will be paid on 25 June 2004 to shareholders on the register on 28 May 2004. We expect that dividends will increase significantly in respect of the years from 2005 as the first year of account underwriting profits for the group, 2003, are released from Lloyd's. Our managed syndicate results for 2003 show a healthy profit of Â£47m. Although the elements of these results which are derived from periods before 2003 are not included within the group results, these syndicate results demonstrate the historical quality of our underwriting. Total premiums written in 2003 amount to Â£708m, 62% more than the Â£438m written in 2002. Net premiums written increased by 88% to Â£544m, the claims ratio reduced to 49% following a catastrophe free 2002 and the combined ratio dropped to 82% from 94% in 2003. Both our 2001 and 2002 year of account ultimate loss ratios have held steady. We have achieved a break even result for the 2001 year of account and the forecast ultimate World Trade Center (WTC) loss remains unchanged. Our 2002 year of account is expected to return a profit on stamp capacity of 11.0% which is a modest reduction on earlier forecasts caused by the depreciation of the dollar against sterling in the fourth quarter of 2003. Our 2003 year of account has started well and at this early stage we expect a return on stamp capacity of between 8% and 15%. Our strategy is to build on the depth of expertise which we have in the four areas of business in which we operate. We have reviewed many new business opportunities in 2003 and have continued to apply our disciplined approach to analysing these opportunities. This has meant that quite a few were turned down as they did not meet our internal criteria. We have been able to capitalise on the current market conditions with growth across all lines of our business. Strongest growth occurred in the Specialty Lines business where rates continue to increase and where we have been able to grow our business through the recruitment of experienced specialists. 2003 has seen further strengthening of the board. As mentioned last year, Joe Sargent who had been chairman since 1993 retired as chairman but continues as a non-executive director. I was appointed chairman in June 2003 and, on behalf of the board, would like to thank Joe for his very significant contribution to the company as a private business and in overseeing its transition to a listed company. Andy Pomfret, the finance director of Rathbone Brothers plc, was appointed to the board in June 2003 as a non-executive director and has become chairman of the audit committee. Andrew Horton was appointed to the board at the same time as finance director. Both Andy and Andrew have had many years experience in the financial services industry outside the insurance world and their experience is already enhancing the board and the management of the group. Arthur Manners has stepped down from the board but continues to be responsible for key projects as a director of Beazley Furlonge Limited, the managing agency. Beazley prides itself on the enthusiasm, energy and professionalism of its employees. This has been demonstrated more clearly than ever in a year of such growth and opportunity. We are in a unique position; we have a business with an excellent track record and reputation, we are in an environment where good underwriting profits can be achieved, we have employees who are totally committed and we continue with our disciplined approach to underwriting both in terms of reserving and selection of business which we underwrite. Chief Executive's review Market overview I would like to start by making several observations about our market. Since 2001, seven of the world's larger reinsurers have experienced rating downgrades. During this period, in which we have seen continuing rating downgrades of both insurers and reinsurers, both Beazley and Lloyd's ratings have been stable. The brand reputations of both organisations continue to go from strength to strength. We have been able to demonstrate steady growth as a result of our balanced portfolio. Some of the markets in which we operate, particularly the professional indemnity account, are continuing to experience rate increases. We are growing our business in these areas. For those sectors that are easing we are forecasting reductions in overall premium, but will concentrate on core, profitable, sustainable business. In a climate of low investment returns, we continued to focus on maintaining a high quality asset portfolio. We maintained our conservative investment strategy throughout 2003. We have seen an overall strengthening of market reserves, particularly within the property and casualty market in the USA, primarily in relation to asbestos claims. In addition many insurers and reinsurers have added to their provisions in respect of the 1997 to 2001 accident years. Our historic reserving record compares well and it should be noted that the group has minimal exposure to losses prior to 1 January 2003. We welcome the long awaited enhancements to the regulatory environment within the UK insurance industry although these are not expected to have a material impact on the day-to-day operation of the group. Our goals and objectives What makes Beazley different? The strategy of developing our specialist approach to underwriting. It is our aim to build on our expertise in existing lines through vertical growth and continued sound risk management. We believe this approach is fundamental to the continued management of our growth and exposures. Specialist approach We manage our business through our four underwriting departments: Specialty Lines, Property Group, Marine and Reinsurance. Our strong reputation enables us to retain and grow a high calibre skilled staff-base in all four teams and has allowed us to expand our underwriting lines during the year. In particular, we have recruited additional expert underwriters to expand our large risk professional indemnity, directors and officers (D&O) and healthcare business within the Specialty Lines team. Similar expansion was made through the addition of cargo and energy underwriting teams within the Marine department. 2003 also saw the full effect of the expansion of the UK property team within the Property Group. These areas of focus are lines of business in which we already have a history of underwriting. It was considered the right time to build these sources of business. The effect of this expansion increased the Property Group's gross premiums written from Â£145m in 2002 to Â£188m in 2003. The Specialty Lines' gross premiums written also increased from Â£166m in 2002 to Â£341m in 2003. Similarly, the growth in the cargo and energy helped to increase Marine's gross premiums written account over the same period from Â£60m to Â£88m in 2003. An established flow of business One of our key assets is our strong relationship with a complex distribution network of brokers. Through development and reinforcement of the Beazley brand since 1986 and consistent focus on meeting the requirements of brokers and clients internationally, our position as a market leader continues to be as strong as ever. Producers Over the last 14 months, we have recruited 'producer' underwriters within both the Property and the Specialty Lines departments. The producers work directly with the underwriters and Lloyd's brokers to identify the availability and appetite in the market for new business. This has enabled us to generate further business from existing networks and to access newer markets and opportunities that previously remained untapped. One such opportunity is the consolidation of the regional brokerage community in the USA and the continued formation of nationwide firms. Such organisations have a greater interest in accessing international insurers such as ourselves to provide alternative products for their clients. Close to clients We will continue our existing strategy of frequently meeting with brokers and clients, particularly during periods of increased industry consolidation. Through ongoing review of our existing relationships and contacts, we are able to ensure that we remain up to date in our understanding of all the issues our business partners face. An experienced management and underwriting team The majority of our management team have worked together since 1993. Five of our directors have an underwriting background with an average of 26 years experience and have been with the group for over 10 years. While the group is new to the stock market, the directors have a proven track record of successfully managing the group results throughout the market cycle. This means being able to shrink, maintain or grow the business at the right points in the cycle and also to move quickly into areas of opportunity as and when they arise. We have further strengthened our management team with the addition of Andrew Horton and Andy Pomfret who have taken the roles of group finance director and of audit committee chairman and non-executive director, respectively. Both complement our existing executive skill-set, bringing new competencies to the group. We employ high quality, experienced claims managers to ensure all claims are dealt with as fully and professionally as possible. Our people At Beazley, our people are our most important asset. It is our strategy to recruit high-quality, experienced personnel. Over the last two years, we have grown significantly from 50 people in January 2002 to 135 people in December 2003. We attract highly talented people due to our reputation as a growing, innovative and successful group. This enables us to maintain our flat structure and continue growing our business through our specialist approach to underwriting. We are able to respond to changes in the market, the regulatory environment and the needs of our customers. Training and development within the group is considered core to our future success. Ongoing training of all our employees is aligned with both the individual's objectives and the strategic objectives of the organisation. This ensures that we retain high calibre staff at all levels. Underwriting + claims = service We place great importance on our claims processes. We employ high quality, experienced claims managers to ensure all claims are dealt with as fully and professionally as possible. The claims teams are integrated within the underwriting teams. In having claims managers working directly with underwriters we are able to respond more efficiently and rapidly. We believe this service is key to promoting long-term relationships with clients. Cutting-edge risk management Risk management within the group is integrated into the day-to-day control processes. Underwriting, reserving, credit, liquidity, reputation and operational risks remain management focus. Consistent with prior years, the board has set a benchmark tolerance of 15% of capacity for a 1 in 250 year USA catastrophe on a net basis. We manage our exposures to within this capacity and monitor new exposure areas as they arise. We continually review our risk modelling to ensure that it is based on the latest available parameters. To manage our underwriting, we assign maximum gross and net line sizes by underwriter by risk. We vary the limit according to the nature of the business being underwritten and the experience of the underwriter. These limits can only be exceeded if appropriately authorised. In addition to tight underwriting controls, we employ peer review across a select quantity of our underwriting decisions. This review is intended to challenge underwriting decisions and ensure that our decisions are robust. A recent addition to our risk management 'kit' includes a financial modelling Dynamic Financial Analysis (DFA) tool. It helps analyse reinsurance efficiencies and the frequency and distribution of potential loss events against planned financial results at both a line of business and managed syndicate basis. This enables us to assess the effectiveness of our reinsurance programmes and form the basis of our capital allocation methodology. Outsourcing Our commitment to being specialists at underwriting is demonstrated in our continued strategy to outsource non-core business activities including information technology, data entry, training and asset management. Outsourcing such activities enables us to concentrate on our core competencies. These outsourced activities are managed by key operations personnel to ensure that continuous high-quality services are maintained. Operating structure Beazley Furlonge Limited (BFL) is the principal operating subsidiary that manages the underwriting operations. As a Lloyd's managing agency, BFL derives its operating revenue from agency fees charged to the underwriting members participating on both syndicates, and from profit commission that is based on the underwriting results of syndicate 623. Agency fees currently amount to 0.6% of capacity and profit commission 17.5% of the net profit of the syndicate. Beazley Underwriting Limited participates as the sole underwriting member of syndicate 2623. This syndicate has underwritten in parallel with syndicate 623 from 1 January 2003. Under the parallel syndicate arrangement, BFL manages both syndicates 2623 and 623 as a single underwriting unit. All premiums, claims and any reinsurance to close of a prior year of account will be split between the syndicates pro rata to each syndicate's underwriting capacity for the relevant year of account, resulting in identical risk profiles and underwriting profitability levels. For the 2003 year, the split of business between the two syndicates is 50/50 for syndicates 2623 and 623 respectively. For the 2004 year, the split of business is 54% for 2623 and 46% for 623 as the group was able to take a larger proportion of the total managed syndicate. The Beazley Group has limited exposure to prior year issues because of the limited participation on 2002 and prior years. Value creating activities Innovation We are constantly looking toward alternative methods of binding business in order to respond to the ever changing environment and ensure consistent strong returns to shareholders. Accessibility is integral to our business strategy. We look at ways to improve the way we do business. Beazley is a founding partner with Kinnect (previously known as Project Blue Mountain). Kinnect is a Lloyd's initiative which will allow Beazley to capture and transfer risk information swiftly and securely with the market. Much of the technology for achieving connection to Kinnect is now in place. We are continually upgrading the Beazley internet and intranet websites, and adding new products to Eazypro, our e-trading platform. Recently Eazypro incorporated the Employee Practices Liability (EPL) line of business. The group continues to make available cutting edge software and hardware for all staff for both trading and operational activities. The benefit of our Lloyd's association and our supply chain Lloyd's is a key global player and a strong brand name. Beazley benefits from this association both practically and strategically. On a practical level, the Lloyd's association maintains licences enabling us to underwrite business in markets across the world. Strategically, we benefit through the trading partner relationship and the key influence Lloyd's has over the London insurance market. This association enhances the Beazley brand. The introduction of the Franchise Board will help ensure profitability and consistency for the Lloyd's brand. The volume and nature of business introduced to the Lloyd's market is strongly linked to its credit rating. Lloyd's Standard & Poors (S&P) credit rating has recently been affirmed at A- (Excellent). Quote: The core strategies and competencies of the group remain unchanged. This is reflected in our continued growth and profitability. New opportunities Beazley has always been open to exploring new opportunities that align with the group's risk tolerance and strategic objectives. The additional profile produced by the flotation has increased the flow of new offerings. Financial performance Overview and results Managed syndicates results 2003 2002 2001 2000 On an annual accounted basis Â£m Â£m Â£m Â£m Gross premiums written 708 438 355 187 Net premiums written 544 289 269 129 Net premiums earned 401 292 179 115 Net claims incurred (197) (174) (134) (67) Net operating expenses (165) (102) (71) (47) Profit/(loss) for the period 47 22 (17) 10 Claims ratio 49% 60% 75% 58% Expense ratio 33% 34% 33% 39% Combined ratio 82% 94% 108% 97% Overview and results While syndicate operations have been managed by Beazley for 17 years, this is the first full year whereby the underwriting results of syndicate 2623 are reflected directly within the Beazley Group plc (the group) operating result. The group manages both syndicate 623 and 2623 (referred to on a combined basis as the managed syndicates). It is principally the underwriting result of syndicate 2623 that makes up the group operating result. Of the premiums written by syndicate 2623 only 50% was earned in 2003. The remainder will be earned in 2004 and 2005. The group made a pre tax profit of Â£17.1m which translates after tax to an earnings per share of 5.2p. Due to the different earning patterns of the four businesses making up the group and the group only having one year of written premiums, it is difficult to assess the underlying business performance on this basis. This will be easier for the group in 2004 as there will be two years that have an impact on the group's profits. To give some understanding as to how the total business has performed, the table above shows the managed syndicate results - the performance of both syndicates 623 and 2623. This shows that in 2003, profit for the managed syndicates has more than doubled to Â£47m (2002: Â£22m) and that the combined ratio has fallen to 82% (2002: 94%). The managed syndicates' gross premium and profit growth from 2002 to 2003 can be attributed to several factors, including the rate increases on renewal business and a continuing relatively low loss climate. Rate increases within the Specialty Lines department account for a substantial proportion of the overall growth, with the average rate increase on renewal business for the year of 21%. Across all departments, this rate increase is 11%. In addition to the organic premium growth, expansion has been made through the recruitment of key specialist underwriters within the Specialty Lines, Property and Marine departments. Capacity structure The relatively flat capacity growth during the period from 1995 to 1999 reflects Beazley's underwriting discipline during soft underwriting conditions. Growth seen in more recent years reflects the group's ability to optimise hardening market conditions. Managed syndicate capacity has increased from Â£660m in the 2003 year of account to Â£741m for the 2004 year of account. This continuing capacity growth is intended to take advantage of continuing market correction and opportunities, particularly within some of the specialty liability lines. Beazley's return on capacity has been relatively stable over the years when compared with the Lloyd's average return on capacity over the same period. Syndicate capital The different sources of capital up until the end of 2002 comprise individual names, controlled corporate members and third party corporate members. The Beazley Group had a limited participation up until the end of 2002 in syndicate 623. In view of the market opportunities, the group had participation through syndicate 2623 of Â£330m in 2003 (representing 50% of the total capacity managed by the group). The group now has a participation of Â£397m (54%) of the 2004 approved total capacity of Â£741m through syndicate 2623. Capital requirements Through the evolving regulatory environment, the Financial Services Authority (FSA) is reviewing the minimum level of capital required. The minimum capital requirement presently specified by Lloyd's and applied to the syndicates', known as the Funds at Lloyd's (FAL) is set at 40%. While there remains uncertainty as to the specific impact the changes to the capital requirements will have, the general market perception is that there will be upward pressure. The group funded its Â£330m of capacity in 2003 through the deposit of Â£132m of FAL using the funds raised at the IPO in 2002. The group has banking facilities in place which would enable the group to increase its FAL by up to Â£30m in future years, of which Â£18m has been used in 2004 to support the group's increased capacity. The same facility permits using up to Â£10m for syndicate working capital purposes. The group's current level of gearing is low; it is likely that extra bank financing would be available if required. Reinsurance Reinsurance is an integral part of the group's underwriting and risk management strategy. Relationships have been developed over many years with reinsurers to provide the business with appropriate reinsurance protections. This enables the group to increase its gross position while keeping its retained exposure within the risk parameters set by the board. Reinsurance security is very important to us and we have developed a vigorous process of vetting counterparty risk which includes obtaining third party advice together with an internal review by the reinsurance security committee. Investments The group earns investment income on both its FAL and its operating cash flows. Investment income was Â£5.7m for the group. Funds available for investment within the syndicate grew during the year; particularly during the latter half. FAL has been invested for the entire year. The group has maintained its conservative investment policy of investment grade fixed interest securities with six months duration. We are currently planning a modest change to the historic investment strategy, placing approximately 10% of the invested funds in alternative assets (high yield bonds, equities and hedge funds). We intend to achieve this by the end of 2004 to provide incremental yields to the portfolio. Dividends The board is proposing a final dividend of 0.5p which with the interim dividend of 0.25p per share, brings the total dividend for 2003 to 0.75p per share. The payment of dividends is dependent upon both profits and cash flow so it is anticipated that dividends will increase significantly from the year ended 2005 as the first year of account profits for the group (2003) are released from Lloyd's. Outlook The outlook for 2004 is positive for the different classes of business that we underwrite. London continues to see an increasing flow of business and rating levels in all our areas are at a level which we believe can deliver good underwriting profits. In 2004 we shall start to see the earnings potential of the group as we consolidate on the growth we have achieved in recent years. We will have profits coming through in 2004 on business undertaken in both 2003 and 2004. Specialist underwriting Specialty Lines Underwriting results 31 December 2003 31 December 2002 31 December 2001 (managed syndicates) Â£m Â£m Â£m Gross premiums written 341 166 152 Net premiums written 260 79 111 Net premiums earned 162 93 77 Claims ratio 63% 80% 72% Rate increase achieved 21% 38% 13% Percentage of lead business 77% 77% 68% Profile Specialty Lines is led by Johnny Rowell and in 2003 the team accounted for 48% of the syndicates' total gross premiums written. It is organised into three focus areas: large risks; programme and small risks; and political and contingency. Although considered to be challenging by underwriting standards, these areas offer higher margins and benefit from the depth of knowledge and experience the specialty underwriting group brings to bear. Market overview The department has maximised both its leadership position and market conditions to generate significant growth with good profit potential in its chosen lines of business in 2003. Whilst focusing primarily on professional indemnity insurance, it maintains a diverse geographic and demographic base including a substantial proportion of business originating in the US excess and surplus market. Overall, the environment has been very favourable for both premium and claims and we expect this to continue well into 2004. The large risks group, which underwrites professional indemnity insurance, directors and officers' liability and healthcare professional indemnity, nearly tripled its gross written premium from 2002 to 2003. The professional indemnity area began to reap the benefits of a US focused business development programme and was able to combine a high renewal rate with substantial rate increases. New underwriting talent in directors and officers liability and healthcare professional indemnity also contributed to the expansion. All areas of programme and small risks showed very healthy premium growth in 2003. Significant gains were made in the employment practices liability and professional indemnity insurance originating in the USA, and both international and the UK sourced liability business showed strong growth overall. Similar positive results are projected for 2004. Political and contingency total premium was flat in 2003. Weakened global trade and a reduced number of new ventures restricted the number of risks available in the market generally. Additionally, the hard market in other areas depressed the premium funds available for the more specialist, non-compulsory coverages. The outlook for 2004 is positive as the global economy shows signs of recovery and the group has added a producer underwriter to increase the flow of business we target. Outlook for 2004 Whilst there is some evidence of rate increases slowing, we expect to achieve respectable increases in most of our lines of business and anticipate high renewal levels as well as opportunities for new business. Our recruiting efforts have brought talent to the group who will make meaningful contributions in 2004 in underwriting, claims management and business development. Strategies Superior specialist underwriting is the cornerstone of Specialty Lines' strategy. Our business development activities ensure we have the quality and selection of risks to achieve profitable growth. We will also actively manage our client relationships, distribution channels and claims in order to maximise profitability. Value creating activities The success of the team is attributable to the high calibre of its team members. It is our objective to recruit the best in the industry and retain our staff by providing the environment and tools for excellent performance. Property Group Underwriting results 31 December 2003 31 December 2002 31 December 2001 (managed syndicates) Â£m Â£m Â£m Gross premiums written 188 145 123 Net premiums written 153 115 108 Net premiums earned 131 114 66 Claims ratio 37% 41% 72% Rate increase achieved 4% 27% 20% Percentage of lead business 53% 51% 51% Profile The Property Group is led by Jonathan Gray and in 2003 accounted for 27% of the syndicate's total gross premiums written. Our highly developed knowledge of the property industry, together with our lead capability, enables us to provide insurance products to a worldwide market ranging from large corporate accounts to homeowners. Market overview Market conditions in the property sector continued to be very good during 2003, with terms and conditions remaining very favourable. During the second half of the year, and in particular the fourth quarter, increased competition due to excess capacity and an absence of major loss activity have resulted in a softening of rates in most territories, with the USA experiencing the highest reductions, albeit from historically high levels. Loss activity in 2003 has been very low despite a number of natural catastrophes in the second half of the year, notably hurricanes Fabian and Isabel, typhoon Maemi and the wildfires in Southern California. We do not expect losses from these events to be material to the group. Outlook for 2004 We expect rates to come under increasing pressure, especially on the larger premium accounts written within the open market corporate account. However, it should be noted that rates are coming off from historically high levels. We also expect brokers' orders in London to be cut back as competition increases in the local markets. The above factors will lead to a reduction in premium in the open market corporate account. We are forecasting growth however, in the covers account and in the homeowners' and jewellers' block accounts where we expect rates to remain strong. Strategies Within our core competencies we aim to utilise our lead capabilities to access the highest quality business and provide a consistent approach to our clients, many have been with us for over a decade. With a broad book of profitable established business we are focused in achieving profits in all areas. During 2003 we recruited a UK commercial team. The team has over forty years of experience within UK property insurance and is a respected lead for the class specialising in writing medium to large commercial business. They have been successful in developing the account with their existing producers and by capitalising on the strength of the Beazley brand. Within UK homeowners we have continued to grow our high net worth account during 2003. For 2004 there will be further growth in the UK homeowners account due to the addition of a substantial established book of business. We were also able to grow our covers (where we have delegated our underwriting) account during 2003 and managed to achieve rate increases in all areas. In September 2003 we recruited a producer underwriter to generate further business from existing networks and relationships and to access new markets. We will look to create opportunities by cross selling across Beazley. The producer works closely with underwriters and key brokers. Value creating activities The team has the expertise and experience to provide consistent management of both price and capacity. We spend considerable time travelling and meeting with our clients and brokers and believe that by understanding our customers' businesses, we can find solutions to their needs. The team emphasises service as a means to product enhancement and achieves this through being responsive and having excellent underwriting skills that are accompanied by in-house technical support. Marine Underwriting results 31 December 2003 31 December 2002 31 December 2001 (managed syndicates) Â£m Â£m Â£m Gross premiums written 88 60 38 Net premiums written 66 46 31 Net premiums earned 47 39 17 Claims ratio 29% 55% 63% Rate increase achieved 10% 16% 11% Percentage of lead business 53% 51% 57% Profile The marine team is led by Clive Washbourn and in 2003 accounted for 12% of the managed syndicate's gross premiums written. Since 1998 our highly developed knowledge of the marine and energy sector, together with lead capability, has enabled us to provide clients with comprehensive and competitive risk solutions. Market overview Following strong rate rises in 2002, underwriting conditions have stabilised in most classes and remain favourable. During 2003 we were able to achieve rate rises across much of the portfolio. The prospects for underwriting returns continue to look favourable in the medium term. 2003 was relatively quiet in terms of high profile losses in the marine market. Notable incidents included the 'Tasman Spirit' pollution incident off the coast of Pakistan that will impact the market through the International group of P&I associations programme. Damage to the port of Pusan during typhoon Maemi is another significant 2003 catastrophe. However, we do not expect losses from these events to impact the group. Outlook for 2004 The marine account has continued to grow across much of the portfolio during 2003 with the cargo and specie and energy accounts seeing the greatest expansion. The arrival of an established cargo and specie team in September made a significant contribution to fourth quarter premiums written. The team has been working together since 1989 and are regarded as leaders in the cargo market. To further capitalise upon current underwriting conditions in the energy market, in March 2003 we recruited a specialist underwriter to lead this class. Whilst it is not anticipated that rating conditions will see material increases at this stage, this account will be further developed during 2004. This will primarily be by participating in high quality risks known to the underwriting team which were not available to the group during the first quarter of 2003. Over the past year the marine account has broadened its spread of risk. Through growth and expertise we have cemented our position as a market leader. This in turn has led to us being offered a number of quality accounts that we have not been shown in former years. The majority of our portfolio will continue to consist of individual risks underwritten by the underwriting team at the box although we shall continue to investigate and develop opportunities to transact business through e-trading and service companies. We have embraced internet trading opportunities and have seen, during 2003, increased business flows through the e-trading portals of several of the dominant brokers. Strategies With the new teams established we anticipate expansion in 2004. Both the cargo and the energy teams are being shown a portfolio that is well known to them and where they have had previous historical involvement together with some business that is new to the market. Value creating activities We seek to utilise our leading market position and the knowledge of the sector to access the highest quality business. This combined with selective underwriting allows us to write a profitable account of business whilst limiting the potential downside to our capital providers in the event of catastrophic losses. Whilst we have always been specialists we feel that we have recently strengthened our base. In the last year we have complemented the team and now have a broader spectrum of expertise covering most areas of the marine account. Reinsurance Underwriting results 31 December 2003 31 December 2002 31 December 2001 (managed syndicates) Â£m Â£m Â£m Gross premiums written 91 67 42 Net premiums written 65 49 18 Net premiums earned 62 46 18 Claims ratio 54% 68% 105% Rate increase achieved 4% 44% 14% Percentage of lead business 27% 20% 21% Profile The reinsurance team is led by Neil Maidment and represents 13% of the managed syndicate's 2003 gross premiums written. We have been a leading provider of protection for insurance companies worldwide for 18 years. The team specialises in writing property catastrophe, property risk excess and casualty catastrophe and maintains an established lead profile in the market. Market overview Underwriting conditions remained positive during 2003 in the property catastrophe and risk and casualty catastrophe reinsurance markets. After three years of rate increases beginning 2000 and accelerating post WTC in 2001, rate change was more modest in 2003 with an average increase of 4% achieved on the renewal portfolio. Large individual risk loss activity was low, as in 2002, but natural catastrophe market losses increased significantly particularly in the USA where 2003 was the third costliest year for catastrophe losses since 1994. The renewal retention ratio remained high in 2003 and we successfully increased both our share and our profile on target business. Dislocation in the market has presented considerable opportunities for underwriters to write business at improved rates and with increased deductibles. Western Europe, in particular Germany, France and Italy have yielded the most opportunities along with Australia and Canada. Central and Eastern Europe remains an area of potential development. As in previous years, the department's main exposures outside of the USA emanate from the UK and Japan where Beazley has an established lead profile. Outlook for 2004 The team intends to take advantage of its position in the Lloyd's market during the current cycle, through consolidation and targeted development particularly in Europe, thus, increasing the portfolio efficiency. The January 2004 renewal season demonstrated a slight easing in market conditions. However, rates, terms and conditions are expected to remain at a level that will allow Beazley to continue to promote our strengths with both brokers and clients alike. To this end the estimated premiums for 2004 will build upon the structured growth and profit achieved in 2003. Strategies The team will continue to advance our long-term objective of developing a well diversified portfolio focusing on larger non-life insurance markets. Modelled data is now the norm within the market and we remain at the forefront of developments in this area, actively employing IT capabilities that surpass market standards. The effectiveness of our modelling and analytical expertise has led to improved catastrophe management and capacity utilisation. We attach particular importance to client visits and meetings in order to develop a proper understanding of each risk. Value creating activities The reinsurance team is recognised as a leading writer of the class and has built strong access through a range of brokers. The team is known for its ability to provide long-term continuity and enjoys a reputation for handling claims efficiently, enabling settlements to be made promptly. Consolidated profit and loss account Technical account - general business for the year ended 31 December 2003 Year ended Six months 31 ended December 31 December 2003 2002 Notes Â£'000 Â£'000 ------------------------------------------------------------------------------ Earned premiums, net of reinsurance Gross premiums written 5 333,615 - Outward reinsurance premiums (68,932) - ------------------------------------------------------------------------------ Net premiums written 264,683 - Change in the gross provision for unearned premiums (165,620) - Change in the provision for unearned premiums, reinsurers' share 32,743 - ------------------------------------------------------------------------------ Change in the net provision for unearned premiums (132,877) - ------------------------------------------------------------------------------ Earned premiums, net of reinsurance 131,806 - ------------------------------------------------------------------------------ Allocated investment return transferred from the non-technical account 7 8,740 - ------------------------------------------------------------------------------ Claims incurred, net of reinsurance Claims paid: Gross amount (5,808) - Reinsurers' share 159 - Net claims paid (5,649) - Change in the provision for claims: Gross amount (99,570) - Reinsurers' share 27,575 - ------------------------------------------------------------------------------ Change in the net provision for claims (71,995) - ------------------------------------------------------------------------------ Claims incurred, net of reinsurance (77,644) - ------------------------------------------------------------------------------ Net operating expenses 6 (43,035) - ------------------------------------------------------------------------------ Balance on the technical account 5 19,867 - ------------------------------------------------------------------------------ All operations of the Group are continuing Consolidated profit and loss account Non-technical account for the year ended 31 December 2003 2003 2002 Notes Â£'000 Â£'000 ------------------------------------------------------------------------------ Balance on the technical account 19,867 - ------------------------------------------------------------------------------ Investment income 6,670 724 Unrealised gains/(losses) on investments (682) - Investment expenses and charges (250) - ------------------------------------------------------------------------------ 5,738 - Allocated investment return transferred to the technical account 7 (8,740) - ------------------------------------------------------------------------------ (3,002) - Other income 8 11,245 3,187 Other charges: - Ordinary items 9 (10,993) (3,141) - Exceptional items - (1,933) ------------------------------------------------------------------------------ (10,993) (5,074) ------------------------------------------------------------------------------ Profit/(loss) on ordinary activities before tax 17,117 (1,163) ------------------------------------------------------------------------------ Comprising: Operating profit/(loss) based on longer term investment return 5 18,732 (1,635) Share of operating profit of associate 1,387 472 Short term fluctuations in investment return (3,002) - ------------------------------------------------------------------------------ Tax on profit/(loss) Ordinary activities 12 (5,295) (91) Exceptional item - 180 ------------------------------------------------------------------------------ Profit/(loss) on ordinary activities after tax 11,822 (1,074) ------------------------------------------------------------------------------ Dividends - interim paid (574) - Dividends - final payable (1,148) - ------------------------------------------------------------------------------ 13 (1,722) - ------------------------------------------------------------------------------ Retained profit/(loss) for the period 10,100 (1,074) ------------------------------------------------------------------------------ Earnings/loss per share: - Basic, based on profit/(loss) on ordinary activities after tax 14 5.2p (1.7p) - Diluted, based on profit/(loss) on ordinary activities after tax 14 5.2p (1.7p) Statement of historical cost profits and losses In accordance with the amendment to Financial Reporting Standards ('FRS') 3 'Reporting financial performance', no note of historical cost profits or losses has been prepared as the group's only material gains and losses on assets relate to the holding and disposal of investments. Consolidated statement of total recognised gains and losses for the year ended 31 December 2003 Year ended Six months 31 ended December 31 December 2003 2002 Â£'000 Â£'000 ------------------------------------------------------------------------------ Profit/(loss) on ordinary activities after tax 11,822 (1,074) Exchange differences taken to reserves (1,623) - ------------------------------------------------------------------------------ Total recognised gains and losses 10,199 (1,074) ------------------------------------------------------------------------------ Balance sheet at 31 December 2003 2003 2002 Group Company Group Company Notes Â£'000 Â£'000 Â£'000 Â£'000 ------------------------------------------------------------------------------ Assets Intangible assets 15 7,065 1,141 6,268 - ------------------------------------------------------------------------------ Investments Investment in associated undertaking 1,212 - 5,242 - Investments in subsidiary undertaking - 5,083 - 5,083 Other financial investments 241,043 131,700 132,418 132,397 ------------------------------------------------------------------------------ 16 242,255 136,783 137,660 137,480 ------------------------------------------------------------------------------ Reinsurers' share of technical provisions Provisions for unearned premiums 20 30,968 - - - Claims outstanding 20 25,775 - - - ------------------------------------------------------------------------------ 56,743 - - - ------------------------------------------------------------------------------ Debtors Debtors arising out of direct insurance operations 17 58,780 - - - Debtors arising out of reinsurance 17 19,851 - - - operations Other debtors 18 1,621 8,038 1,239 1,639 ------------------------------------------------------------------------------ 80,252 8,038 1,239 1,639 ------------------------------------------------------------------------------ Other assets Cash at bank and in hand 19,407 419 4,990 4,558 ------------------------------------------------------------------------------ Prepayments and accrued income Accrued interest 170 - 471 - Deferred acquisition costs 30,484 - - - Other prepayments and accrued income 9,282 175 1,868 496 ------------------------------------------------------------------------------ Total assets 445,658 146,556 152,496 144,173 ------------------------------------------------------------------------------ 2003 2002 Group Company Group Company Notes Â£'000 Â£'000 Â£'000 Â£'000 Liabilities Capital and reserves Called up share capital 22 11,474 11,474 11,474 11,474 Share premium account 132,377 132,377 132,377 132,377 Merger reserve 1,675 - 1,675 - Profit and loss account 7,859 234 (618) (1,057) ------------------------------------------------------------------------------ Shareholders' funds attributable to equity interests 23 153,385 144,085 144,908 142,794 ------------------------------------------------------------------------------ Technical provisions Provision for unearned premiums 20 155,765 - - - Claims outstanding 20 93,436 - - - ------------------------------------------------------------------------------ Deferred Tax 21 3,506 - - - ------------------------------------------------------------------------------ Creditors Creditors arising out of direct insurance operations 135 - - - Creditors arising out of reinsurance operations 28,334 - - - Amounts owed to credit - - - - institutions Other creditors including taxation and social security 19 3,564 2,143 5,522 1,203 ------------------------------------------------------------------------------ Accruals and deferred income 7,533 328 2,066 176 ------------------------------------------------------------------------------ Total liabilities 445,658 146,556 152,496 144,173 ------------------------------------------------------------------------------ Consolidated cash flow statement for the year ended 31 December 2003 Year ended Six months 31 ended December 31 December 2003 2002 Notes Â£'000 Â£'000 Net cash flow from operating activities 24 125,848 (1,604) Servicing of finance: - Interest received - 694 - Interest paid - (1,172) Taxation recovered/(paid) (1,091) (1) Capital expenditure - purchase of syndicate capacity (1,141) - Equity dividends paid (574) - (Decrease) in debt - (4,657) Issue of ordinary shares - 143,347 ------------------------------------------------------------------------------ Net cash flows 123,042 136,607 ------------------------------------------------------------------------------ Cash flows were invested as follows: Increase/(decrease) in cash holdings 25 14,417 4,209 Increase/(decrease) in debt securities and other fixed asset investments 25 108,625 132,398 ------------------------------------------------------------------------------ Net investment cash flows 25 123,042 136,607 ------------------------------------------------------------------------------ Notes to the financial statements 1. Basis of preparation The financial information has been prepared in accordance with applicable accounting standards and under the historical cost convention rules, modified by the revaluation of investments, and in compliance with the Statement of Recommended Practice, 'Accounting for Insurance Business' issued by the Association of British Insurers in December 1998 ('the ABI SORP'). The annual basis of accounting as described in the ABI SORP has been adopted. The group also complies with section 255A of, and schedule 9A to the Companies Act 1985. The financial information contained in these preliminary financial statements does not constitute statutory accounts of the group within the meaning of section 240 of the Companies Act 1985. Statutory accounts for the year ended 31 December 2003 have been delivered to the Registrar of Companies and statutory accounts for the year ended 31 December 2003 will be delivered in due course. The auditors have reported on the accounts, their report was not qualified and did not contain a statement under section 237(2) or (3) of the Companies Act 1985. The balance sheet of the parent company is prepared in accordance with the provisions of section 226 of, and schedule 4 to, the Companies Act 1985. 2. Basis of consolidation The consolidated financial statements include the assets, liabilities and results of the company and its subsidiary undertakings up to 31 December each year. Profits or losses of subsidiary undertakings sold or acquired during the period are included in the consolidated results up to the date of disposal or from the date of acquisition, where acquisition accounting was adopted. Certain group subsidiaries underwrite as corporate members of Lloyd's on the syndicate managed by Beazley Furlonge Limited (the 'managing agent'). In view of the several liability of underwriting members at Lloyd's for the transactions of syndicates in which they participate, the attributable share of the transactions, assets and liabilities of the syndicate has been included in the financial statements. 3. Accounting policies a. Change to the accounting policy The group financial statements have been prepared in accordance with section 255A of, and schedule 9A to the Companies Act 1985. Previous financial statements were prepared in accordance with Schedule 4 to the Companies Act 1985. There is no impact of the change in accounting policy on the group results. This change in accounting policy is required to reflect the technical underwriting balances from the group's participation on syndicate 2623 from 1 January 2003 in accordance with the ABI SORP. b. Premiums Gross premiums written represent premiums on business incepting in the financial year together with adjustments to premiums written in previous accounting periods and estimates for pipeline premiums. Gross premiums written are stated before deduction of commissions but net of taxes, duties levied on premiums and other deductions. c. Unearned premiums A provision for unearned premiums is made which represents that part of the gross premiums written, and reinsurers' share of premiums written, that is estimated will be earned in the following financial periods. It is calculated using the daily pro rata method where the premium is apportioned over the period of risk. d. Acquisition costs Acquisition costs comprise brokerage, staff and staff related costs of the underwriters acquiring the business, and premium levy. The proportion of acquisition costs issued in respect of unearned premiums is deferred at the balance sheet date and recognised in later periods when the related premiums are earned. e. Claims Claims incurred represent the cost of claims and claims handling expenses paid during the financial year, together with the movement in provisions for outstanding claims, claims incurred but not reported (IBNR) and future claims handling provisions. Reinsurance recoveries are accounted for in the same period as the incurred claims for the related business. The provision for claims comprises amounts set aside for claims advised and IBNR. The IBNR amount is based on estimates calculated using widely accepted statistical techniques (e.g. 'chain ladder') which are reviewed annually by external consulting actuaries. The techniques generally use projections, based on past experience of the development of claims over time, to form a view on the likely ultimate claims to be experienced. For more recent underwriting, regard is given to the variations in the business portfolio accepted and the underlying terms and conditions. Thus, the critical assumptions used when estimating claims provisions are that the past experience is a reasonable predictor of likely future claims development and that the rating and other models used to analyse current business are a fair reflection of the likely level of ultimate claims to be incurred. The reinsurers' share of provisions for claims is based on calculated amounts for outstanding claims and projections for IBNR, net of estimated irrecoverable amounts having regard to the reinsurance programme in place for the class of business, the claims experience for the year and the current security rating of the reinsurance companies involved. Every effort is made to ensure that all claims incurred are adequately provided for but adjustments may be necessary in later periods as a result of subsequent information and events. Any adjustments to claims provisions established in prior years are made in the financial period in which the need for a further provision becomes apparent. f. Investments Listed group investments are stated at market value. Other group investments are stated at directors' valuation. Investment income, interest receivable and investment management expenses on these items are included in the profit and loss account on an accruals basis. All gains and losses on group investments representing the difference between the current value of investments at the balance sheet date and their purchase price are taken to the profit and loss Realised gains and losses on group interests representing the difference between net sales proceeds and purchase price are accounted for in the non-technical account. On disposals during the accounting period, an adjustment is made for previously recognised unrealised gains and losses. Investments included in the company balance sheet are stated at market value or directors' valuation. To the extent that unrealised gains are made on these investments these are taken to a revaluation reserve. Investments in subsidiary undertakings received in the company's own balance sheet are stated at cost less premiums for any impairment. g. Allocation of investment return All of the investment returns arising in the year are reported in the non-technical account. In accordance with the ABI SORP, a transfer is made from the non-technical account to the technical account which represents the income earned on the investments held for underwriting purposes to reflect the longer term rate of return on the group/ syndicate investment funds. In Beazley Group's case, all the investments are held for underwriting purposes. The long-term rate of return is an estimate of the long-term investment return for each relevant category of asset with regard to past performance, current trends and expectations as to future income, taking into account economic and investment forecasts. h. Goodwill Purchased goodwill (representing the excess of the fair value of the consideration given over the fair value of the separable net assets acquired) arising on consolidation in respect of acquisitions is capitalised. Positive goodwill is amortised to nil by equal annual instalments over the directors' estimate of its useful economic life, 20 years. Provision is made for any impairment. i. Other intangible assets Other intangible assets are the cost of purchasing the group's participation in syndicate 2623. In accordance with FRS 10, this capacity is capitalised at cost in the balance sheet and amortised over its useful economic life which the directors consider to not exceed 20 years. Provision is made for any impairment. j. Rates of exchange Profit and loss transactions have been translated into sterling at the average rate of exchange for the period. Assets and liabilities included on the balance sheet have been translated into sterling at the rate of exchange at the balance sheet date. Any differences arising from this conversion have been taken into the profit and loss reserve via the statement of total recognised gains and losses. k. Pension costs Pension contributions in respect of defined benefit schemes are charged against profits, with pension surpluses and deficits allocated over the remaining service periods of current employees. Pension contributions for defined contribution schemes are charged to the profit and loss account on an accrual basis. l. Leases Rentals payable under operating leases are charged on a straight line basis over the term of the lease. m. Taxation Current tax, including UK corporation tax and foreign tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date. n. Deferred taxation Except where otherwise required by accounting standards, full provision without discounting is made for all timing differences which have arisen but not reversed at the balance sheet date. 4. World Trade Center As the group commenced underwriting through syndicate 2623 on 1 January 2003, the directors estimate there to be no material impact on results or provisions arising from the terrorist attacks in the USA on 11 September 2001. 5. Segmental analysis An analysis of the total operating profit and net assets of the group is as follows: Year ended Six months 31 ended December 31 December 2003 2002 Â£'000 Â£'000 ------------------------------------------------------------------------------ Operating profit/(loss) Underwriting at Lloyd's 11,223 - Managing agency 1,135 328 Other group income and expenses 6,374 (1,963) ------------------------------------------------------------------------------ Total operating profit/(loss) 18,732 (1,635) ------------------------------------------------------------------------------ Net assets Underwriting at Lloyd's 150,939 138,708 Managing agency and related activities 1,233 958 Investment in associate 1,213 5,242 ------------------------------------------------------------------------------ 153,385 144,908 ------------------------------------------------------------------------------ An analysis of the balance on the technical account of the group (syndicate 2623 only) is as follows: 2003 ------------------------------------------------------------------------------ Marine Property Specialty Lines Reinsurance Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 ------------------------------------------------------------------------------ Gross premiums written 41,865 93,009 155,321 43,420 333,615 Net premiums written 33,477 77,731 119,053 34,422 264,683 Net earned premiums 12,606 37,879 54,096 27,225 131,806 Investment income 728 2,035 5,044 933 8,740 Net claims (5,328) (18,144) (37,465) (16,707) (77,644) Expenses (5,100) (11,678) (18,642) (7,615) (43,035) ------------------------------------------------------------------------------ Balance on technical account 2,906 10,092 3,033 3,836 19,867 ------------------------------------------------------------------------------ Claims ratio 42% 48% 69% 61% 59% Expense ratio 32% 31% 29% 31% 30% Combined ratio 74% 79% 98% 92% 89% 6. Net operating expenses Year ended Six months 31 ended December 31 December 2003 2002 Â£'000 Â£'000 ------------------------------------------------------------------------------ Acquisition costs 63,985 - Change in deferred acquisition costs (32,203) - Administrative expenses 11,253 - ------------------------------------------------------------------------------ 43,035 - ------------------------------------------------------------------------------ 7. Investment return a. The total actual investment return before taxation comprises: Year ended Six months 31 ended December 31 December 2003 2002 Â£'000 Â£'000 ------------------------------------------------------------------------------ Investment return on funds at Lloyd's and other corporate funds: Investment income 5,924 565 Unrealised gains/(losses) on investments (406) 18 Realised gains/(losses) on investments (292) - ------------------------------------------------------------------------------ 5,226 583 ------------------------------------------------------------------------------ Investment return on syndicate funds: Investment income 1,102 Unrealised gains/(losses) on investments (276) Realised gains/(losses) on investments (64) ------------------------------------------------------------------------------ 762 ------------------------------------------------------------------------------ Investment management expenses (250) - ------------------------------------------------------------------------------ Total investment return 5,738 583 ------------------------------------------------------------------------------ Allocation to the technical account based on the longer term rate (8,740) ------------------------------------------------------------------------------ Short term fluctuations in investment return retained in the non-technical account (3,002) ------------------------------------------------------------------------------ b. Longer term investment return The longer term return is based on a combination of historical experience and current expectations for each category of investments. The longer term return is calculated by applying the following yields to the weighted average of each category of assets. 2003 2002 % % ------------------------------------------------------------------------------ Debt securities and other fixed interest securities - Sterling 5 n/a - Dollar 4 n/a 8. Other income Year ended Six months 31 ended December 31 December 2003 2002 Â£'000 Â£'000 ------------------------------------------------------------------------------ Profit commissions 7,979 759 Agency fees 1,908 1,440 Other income (including share of profit in associated companies) 1,358 988 ------------------------------------------------------------------------------ 11,245 3,187 ------------------------------------------------------------------------------ Included within profit commission recognised in this period is Â£6,256,000 payable to the directors and employees under the terms of the pre-IPO agreement. 9. Other charges The operating profit is stated after charging: Year ended Six months 31 ended December 31 December 2003 2002 Â£'000 Â£'000 ------------------------------------------------------------------------------ Amortisation of goodwill 344 172 Auditors remuneration - Company audit fee 64 30 - Group audit fee 61 58 - Tax service 38 36 - Non-audit service 189 - Other operating leases (group/2623 share) 420 14 Exceptional item in respect of public listing - 1,933 ------------------------------------------------------------------------------ Included within the Exceptional item in 2002, are fees of Â£764,000 paid to KPMG Audit plc in respect of services provided in connection with the capital raising. Included in the administrative expenses of the syndicate are audit fees of Â£48,000. 10. Directors and employees Year ended Six months 31 ended December 31 December 2003 2002 Â£'000 Â£'000 ------------------------------------------------------------------------------ Payroll costs (all in payroll, including non-executive directors) Wages and salaries 9,381 3,507 Short-term incentive payments 5,500 1,510 Social security 1,774 339 Pension costs 1,216 922 ------------------------------------------------------------------------------ 17,871 6,278 ------------------------------------------------------------------------------ Recharged to syndicate 623 (6,992) (4,394) ------------------------------------------------------------------------------ 10,879 1,884 ------------------------------------------------------------------------------ 11. Employee information The average number of persons employed by the group, including directors, was: Year ended Six months 31 ended December 31 December 2003 2002 Â£'000 Â£'000 ------------------------------------------------------------------------------ Underwriting 52 34 Administrative 70 40 ------------------------------------------------------------------------------ 122 74 ------------------------------------------------------------------------------ 12. Taxation on ordinary activities Year ended Six months 31 ended December 31 December 2003 2002 Â£'000 Â£'000 ------------------------------------------------------------------------------ UK company tax Current tax on income for the year 1,369 - Adjustments in respect of prior periods (27) 14 ------------------------------------------------------------------------------ Total current tax 1,342 14 ------------------------------------------------------------------------------ Deferred tax (see note 21) Origination and reversal of timing differences 3,536 (244) Share of associated tax 417 141 ------------------------------------------------------------------------------ Tax on profit on ordinary activities 5,295 (89) ------------------------------------------------------------------------------ Factors affecting the current tax charge The corporation tax charge differs from the standard rate of corporation tax due to the timing difference explained below: Profit before tax 17,117 (1,163) ------------------------------------------------------------------------------ Current tax at 30% (2002: 30%) 5,135 (349) Effects of: - Underwriting result (2,110) - - Expenses not deductible for tax 83 195 - Accelerated capital allowances (5) (2) - Profit commission timing difference (1,317) 104 - Associated company share of profits (417) - - Amortisation - 52 ------------------------------------------------------------------------------ Current tax on income for the year 1,369 - ------------------------------------------------------------------------------ 13. Dividends paid and proposed Year ended Six months 31 ended December 31 December 2003 2002 Â£'000 Â£'000 ------------------------------------------------------------------------------ Interim dividend of 0.25p per share paid (2002: nil) 574 - Final dividend of 0.5p per share (2002: nil) 1,148 - ------------------------------------------------------------------------------ Total dividend of 0.75p per share (2002: nil) 1,722 - ------------------------------------------------------------------------------ 14. Earnings per ordinary share Year ended Six months 31 ended December 31 December 2003 2002 Â£'000 Â£'000 ------------------------------------------------------------------------------ Basic 5.2p (1.7p) Diluted 5.2p (1.7p) The calculation of basic earnings per share is based on earnings of Â£11,822,000, being the profit for the year on 229.48 million shares, being the weighted average number of shares in issue during the period. The diluted earnings per share is based on earnings of Â£11,822,000 and on 229.55 million ordinary shares. 15. Intangible fixed assets Goodwill Syndicate Total capacity purchased Â£'000 Â£'000 Â£'000 ------------------------------------------------------------------------------ Cost 1 January 2003 6,881 - 6,881 Additions for the year - 1,141 1,141 ------------------------------------------------------------------------------ At 31 December 2003 6,881 1,141 8,022 ------------------------------------------------------------------------------ Amortisation 1 January 2003 613 - 613 Charge for the year 344 - 344 ------------------------------------------------------------------------------ At 31 December 2003 957 - 957 ------------------------------------------------------------------------------ Net book value 31 December 2003 5,924 1,141 7,065 31 December 2002 6,268 - 6,268 16. Investments 2003 2002 Market Value Cost Market Value Cost Â£'000 Â£'000 Â£'000 Â£'000 ------------------------------------------------------------------------------- Group Associated undertakings(a) 1,212 - 5,242 5,000 Debt securities & other fixed interest securities (b) 241,043 241,525 132,418 131,836 ------------------------------------------------------------------------------- 242,255 241,525 137,660 136,836 ------------------------------------------------------------------------------- Of which Listed 240,523 241,005 131,897 131,316 Unlisted 1,732 520 5,763 5,520 ------------------------------------------------------------------------------- 242,255 241,525 137,660 136,836 ------------------------------------------------------------------------------- Company Subsidiary undertakings 5,083 5,083 5,083 5,083 Debt securities & other fixed interest securities 131,700 132,213 132,397 131,816 ------------------------------------------------------------------------------- 136,783 137,296 137,480 136,899 ------------------------------------------------------------------------------- Of which Listed 131,200 131,713 131,897 131,316 Unlisted 5,583 5,583 5,583 5,583 ------------------------------------------------------------------------------- 136,783 137,296 137,480 136,899 ------------------------------------------------------------------------------- a. Associated undertakings: Brought forward value of subsidiary 5,242 5,000 4,911 5,000 Share of profit retained by associated undertakings 1,387 - 472 - Tax on shares of profits retained by associated undertakings (417) - (141) - Netting off of brought forward creditor (5,000) (5,000) - - ------------------------------------------------------------------------------- 1,212 - 5,242 5,000 ------------------------------------------------------------------------------- Beazley Finance Limited has been treated as an associated company as the directors of Beazley Group plc are represented on the board of Beazley Finance Limited and take a role in the day-to-day running of the company. They are therefore in a position to exert significant influence. Beazley Furlonge Holdings Limited owns 5,000,000 ordinary shares in Beazley Finance Limited, the holding company of Beazley Dedicated Limited, a dedicated corporate member of syndicate 623. This shareholding represents 22.7% of the entire share capital of Beazley Finance Limited. Beazley Furlonge Holdings Limited has guaranteed a letter of credit of Â£2m to support underwriting of Beazley Dedicated Limited on syndicate 623. The proportion of profits receivable by the group is determined by agreement between Aon (the majority shareholder in Beazley Finance Limited) and the group and varies by year of account. In 2003, the directors have reduced the carrying value of the investment in associate by Â£5m, through netting down the Â£5m uncalled share capital creditor. This liability would only have been called if the 2002 year of account was loss making. At this stage of the account this outcome is considered remote. Beazley Dedicated Limited participates in syndicate 623 for all years of account up to 2002. Reflected in these accounts is the forecast for the 2002 year of account together with the results of Beazley Finance Limited to 31 December 2003. b. Subsidiary undertakings - unlisted Country of Class of share Proportion held Nature of incorporation business and operation -------------------------------------------------------------------------------- Beazley Furlonge Holdings Limited England Ordinary 100% Intermediate holding company Beazley Furlonge Limited England Ordinary 100% Lloyd's underwriting agents BFHH Limited England Ordinary 100% Dormant from 30 June 1994 Beazley Investments Limited England Ordinary 100% Investment company Beazley Corporate Member Limited England Ordinary 100% Underwriting at Lloyd's Beazley Dedicated No. 2 Limited England Ordinary 100% Underwriting at Lloyd's Global Two Limited England Ordinary 100% Underwriting at Lloyd's Beazley Underwriting Limited England Ordinary 100% Underwriting at Lloyd's Beazley Management Limited England Ordinary 100% Intermediate management company Beazley Staff Underwriting Limited England Ordinary 100% Underwriting at Lloyd's During 2001, the group incorporated two corporate members, allocating to them capacity for participation in syndicate 623 for the 2002 year of account. Capacity held % of total Â£ capacity ------------------------------------------------------------------------------ Global Two Limited 12,000,000 3.7% Santam Corporate Limited 17,500,000 5.4% Funds at Lloyd's to support these companies' underwriting are provided by investing companies who have option agreements in place with the group. These agreements give the investors the opportunity to purchase the entire share capital of the corporate member and the group the option to require the purchase of the entire share capital. - Santam Limited exercised its option to purchase the share capital of Santam Corporate Limited on 3 September 2002 and has received Lloyd's approval for this transaction. - The group's investment in Global Two Limited has been included in the consolidated balance sheet at the lower of cost and net realisable value. - The assets, liabilities and results of Global Two Limited have not been consolidated: - Due to the existence of the group's option and quota share agreement with Gerling Global General and Reinsurance Limited. - Because the subsidiary has not previously been consolidated in the group's accounts. - The assets, liabilities and results of Santam Corporate Limited have not been consolidated: - Because Santam Limited exercised their option to purchase the share capital of Santam Limited on 3 September 2002. - Because the subsidiary has not previously been consolidated in the groups' accounts. c. Other fixed asset investments Funds at Lloyd's Funds have been lodged with Lloyd's of London to support syndicate 2623 via its corporate member Beazley Underwriting Limited as follows: 2003 2002 Â£'000 Â£'000 Debt securities and other fixed interest securities 131,200 131,897 Letters of credit* 19,500 - ------------------------------------------------------------------------------ 150,700 131,897 ------------------------------------------------------------------------------ * Of the Â£19.5m letter of credit Â£17.5m has been provided to support the underwriting of syndicate 2623 and Â£2m to support the underwriting of Beazley Staff Underwriting Limited. Collateralised guarantee at Lloyds TSB plc An amount of Â£500,000 (31 December 2002: Â£500,000) has been deposited with Lloyds TSB bank as collateral for that banks guarantee of a subsidiary's solvency position with Lloyd's of London. ENAM Management Company Inc. Beazley Furlonge Holdings owns one share in a non-profit making company incorporated in the USA known as ENAM Management Company Inc. The company is owned 75% by Lloyd's managing agents and 25% by R K Carvill (International Holdings) Ltd. ENAM Management Company Inc. is not involved in any form of risk carrying and is a vehicle designed to bring together markets which may be interested in Specialty Programmes. It has the objective of bringing additional business into Lloyd's by reducing the acquisition costs. 17. Debtors arising out of Direct Insurance Operations and Reinsurance Operations 2003 2002 Â£'000 Â£'000 ------------------------------------------------------------------------------ Group Debtors arising out of direct insurance operations 58,780 - Debtors arising out of reinsurance operations 19,851 - ------------------------------------------------------------------------------ 78,631 - ------------------------------------------------------------------------------ All insurance debtors relate to business transacted with brokers and intermediaries. 18. Other debtors 2003 2002 Group Company Group Company Â£'000 Â£'000 Â£'000 Â£'000 ----------------------------------------------------------------------------- Amounts due from group companies - 7,243 - 1,289 Amounts due from associated undertakings 313 8 390 1 Other debtors 1,308 787 849 349 ----------------------------------------------------------------------------- 1,621 8,038 1,239 1,639 ----------------------------------------------------------------------------- Included within other debtors is a debtor greater than one year of Â£413,000 (2002: Â£575,000) in respect of loans to employees. 19. Creditors: amounts falling due within one year 2003 2002 Group Company Group Company Â£'000 Â£'000 Â£'000 Â£'000 ------------------------------------------------------------------------------ Called up share capital not paid - 5,000 - Amount due to associated undertakings 40 3 - 992 Corporation tax payable 444 144 - Proposed dividend (note 13) 1,148 1,148 - - Other creditors and social security 1,932 992 378 211 ------------------------------------------------------------------------------ 3,564 2,143 5,522 1,203 ------------------------------------------------------------------------------ 20. Technical provisions Unearned Claims premium outstanding reserve Total Â£'000 Â£'000 Â£'000 ------------------------------------------------------------------------------ 31 December 2003 Gross 93,436 155,765 249,201 Reinsurance (25,775) (30,968) (56,743) ------------------------------------------------------------------------------ Net 67,661 124,797 192,458 ------------------------------------------------------------------------------ 31 December 2002 Gross - - - Reinsurance - - - ------------------------------------------------------------------------------ Net - - - ------------------------------------------------------------------------------ Movement Gross 93,436 155,765 249,201 Reinsurance (25,775) (30,968) (56,743) ------------------------------------------------------------------------------ Net 67,661 124,797 192,458 ------------------------------------------------------------------------------ 21. Deferred tax 2003 2002 Â£'000 Â£'000 ------------------------------------------------------------------------------ Group Opening (asset)/liability for deferred tax (30) (276) Additions during the year 3,536 246 ------------------------------------------------------------------------------ Closing (asset)/liability for deferred tax 3,506 (30) ------------------------------------------------------------------------------ The deferred tax liability is attributable to timing differences arising on the following: Underwriting Other timing Total results differences Â£'000 Â£'000 Â£'000 ------------------------------------------------------------------------------ At 1 January 2003 (12) (18) (30) Deferred tax charge for the year 3,531 5 3,536 ------------------------------------------------------------------------------ At 31 December 2003 3,519 (13) 3,506 ------------------------------------------------------------------------------ 22. Share capital 2003 2002 Authorised Allotted and Authorised Allotted and called-up called-up Â£'000 Â£'000 Â£'000 Â£'000 ------------------------------------------------------------------------------ 300,000,000 ordinary shares of 5p each 15,000 11,474 15,000 11,474 23. Reconciliation of movement in shareholders' funds Issued share Share premium Merger reserve Profit and loss Total Total capital reserve 2003 2003 account 2003 shareholders' shareholders' funds funds 2003 2003 2002 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 ---------------------------------------------------------------------------------------------------- Group Balance brought forward 11,474 132,377 1,675 (618) 144,908 2,635 Retained profit/(loss) for the period - - - 10,100 10,100 (1,074) Foreign exchange profit/(loss) - - - (1,623) (1,623) - Issue of shares - - - - - 10,969 Share premium on issue of shares - - - - - 139,030 Capitalised listing costs - - - - - (6,652) ---------------------------------------------------------------------------------------------------- Shareholders' funds at end of period 11,474 132,377 1,675 7,859 153,385 144,908 ---------------------------------------------------------------------------------------------------- Company Balance brought forward 11,474 132,377 - (1,057) 142,794 648 Retained profit/(loss) for the period - - - 1,291 1,291 (1,201) Issue of shares - - - - - 10,969 Share premium on issue of shares - - - - - 139,030 Capitalised listing costs - - - - (6,652) ---------------------------------------------------------------------------------------------------- Shareholders' funds at end of period 11,474 132,377 - 234 144,085 142,794 ---------------------------------------------------------------------------------------------------- As permitted by section 230 of the Companies Act 1985, no profit and loss account of the parent company is presented. The profit after taxation for the company for the year was Â£3,012,800 (2002: loss after tax Â£1,201,000). 24. Reconciliation of operating profit to net cash inflow from operating activities Year ended 31 Six months December ended 31 December 2003 2002 Â£'000 Â£'000 ------------------------------------------------------------------------------ Operating profit before tax based on longer term rate of investment return 20,119 (1,704) Amortisation of goodwill 344 172 Short-term fluctuations in investment return (3,002) - Share in profit of associate (1,387) - (Increase) in debtors (116,610) (1,155) (Increase) in reinsurers share of technical provision (56,743) - Increase in creditors 35,549 1,083 Increase in technical provisions 249,201 - Effect of foreign exchange rate changes (1,623) - ------------------------------------------------------------------------------ 125,848 (1,604) ------------------------------------------------------------------------------ 25. Analysis of net funds/(debt) 2002 Cash flow 2003 Â£'000 Â£'000 Â£'000 ------------------------------------------------------------------------------ Cash at bank and in hand 4,990 14,417 19,407 Debt securities and fixed interest investments 132,418 108,625 241,043 ------------------------------------------------------------------------------ 137,408 123,042 260,450 ------------------------------------------------------------------------------ 26. Pension commitments Beazley Furlonge Limited operates a funded pension scheme ('the Beazley Furlonge Limited Pension Scheme') providing benefits based on final pensionable pay, with contributions being charged to the profit and loss account so as to spread the cost of pensions over employees' working lives with the company. The contributions are determined by a qualified actuary using the projected unit method and the most recent valuation was at 31 December 2003. The assumptions which have the most significant effect on the results of the valuation are those relating to the rate of return on investments and the rates of increase in salaries and pensions. The investment return used was 6.3% (31 December 2002: 5.6%), the rate of earnings increase used was 4.3% (31 December 2002: 4.0%) and the rate of pension increase used was 2.3% (31 December 2002: 2.0%). The most recent actuarial valuation showed that the market value of the scheme's assets was Â£5,311,000 at 31 December 2003 (31 December 2002: Â£3,829,000) and that the market value of those assets represented 71% (31 December 2002: 61%) of the benefits that had accrued to members on an ongoing basis, after allowing for expected future increases in earnings. The contributions of the company have been estimated at 21% (31 December 2002: 21%) of earnings. The pension charge for the period was Â£734,000 (year to 31 December 2002: Â£544,000). Each year substantially all of the pension costs are recharged to syndicate 623 and 2623. Whilst the company continues to account for pension costs in accordance with Statement of Standard Accounting Practice 24 'Accounting for Pension costs', under Financial Reporting Standard 17 'Retirement benefits' the following transitional disclosures are required. The valuation of the scheme was calculated by the actuary on a Financial Reporting Standard 17 'Retirement benefits', basis as at 31 December 2003, 31 December 2002, and 30 June 2002. The major assumptions used in these valuations were: 31 December 2003 31 December 2002 30 June 2002 ------------------------------------------------------------------------------ Rate of increase in salaries 4.3% 4.0% 4.5% Rate of increase in pensions 2.3% 2.0% 2.5% Discount rate applied to scheme liabilities 5.8% 5.5% 6.0% Inflation assumption 2.3% 2.0% 2.5% The assumptions used by the actuary are the best estimates chosen from a range of possible actuarial assumptions which, due to the timescale covered, may not necessarily be borne out in practice. Scheme assets The fair value of the scheme's assets, which are not intended to be realised in the short-term and may be subject to significant change before they are realised, and the present value of the scheme's liabilities, which are derived from cash flow projections over long periods and thus inherently uncertain, were: Long Value at Long Value at Long Value at term rate 31 December term rate 31 December term rate 30 June of return 2003 of return 2002 of return 2002 2003 Â£'000 2002 Â£'000 2002 Â£'000 Equities 6.8% 4,113 6.5% 2,572 7.3% 3,133 Bonds 4.8% 1,123 4.5% 705 5.3% 563 Cash 2.8% 75 2.5% 552 0.0% - ------------------------------------------------------------------------------------------------- Fair value of assets 5,311 3,829 3,696 Present value of scheme's liabilities (7,430) (6,240) (5,309) ------------------------------------------------------------------------------------------------- Gross pension liability (2,119) (2,411) (1,613) Deferred tax asset arising on pension liability - - 484 ------------------------------------------------------------------------------------------------- Net pension liability (2,119) (2,411) (1,129) ------------------------------------------------------------------------------------------------- The amount of this net pension liability would have a consequential effect on the group's reserves. Movement in deficit during the year: Value at Value at 31 Value at 31 December 2003 December 2002 30 June 2002 Â£'000 Â£'000 Â£'000 ------------------------------------------------------------------------------ Deficit in the scheme at the beginning of year (2,411) (1,613) (621) Current service cost (753) (287) (710) Contributions paid 734 544 565 Past service cost - - - Other finance income/(cost) (110) (21) 19 Actuarial gain/(loss) 421 (1,034) (866) ------------------------------------------------------------------------------ Deficit in the scheme at end of year (2,119) (2,411) (1,613) ------------------------------------------------------------------------------ Analysis of amounts included in other finance income/(costs): Expected return on pension scheme assets 233 140 277 Interest on pension scheme liabilities (343) (161) (258) ------------------------------------------------------------------------------ (110) (21) 19 ------------------------------------------------------------------------------ Analysis of amount which would have been recognised in statement of total recognised gains and losses: 31 December 31 December 30 June 2002 2003 2002 Â£'000 Â£'000 Â£'000 ------------------------------------------------------------------------------ Actual return less expected return on scheme assets 514 (551) (890) Experience gains arising on scheme liabilities (93) (475) 24 Changes in assumptions underlying the present value of scheme liabilities - (8) - ------------------------------------------------------------------------------ Actuarial loss recognised in statement of total recognised gains and losses 421 (1,034) (866) ------------------------------------------------------------------------------ From 1 April 2001 to 10 August 2002, no benefits accrued under the scheme. During this period, Beazley Furlonge Limited participated in the Lloyd's Superannuation Fund ('LSF') and employees accrued benefits under the LSF. Beazley Furlonge Limited terminated its participation in the LSF on 10 August 2002. Beazley Furlonge Limited has confirmed to those of its employees who participated in the LSF that they will be granted continuous pensionable service in the scheme in respect of the period of participation in the LSF. The liability in respect of this period of service is included in the FRS 17 valuation at 31 December 2003. The market value of the estimated transfer value at that date was included in the market value of the scheme's assets in the FRS 17 valuation. The cost to the scheme of providing continuous service using the actuarial valuation basis has been estimated at Â£772,000 as at 1 January 2004. The proposed transfer payment from the LSF has not yet been confirmed but the trustees of the LSF have indicated that it could be in the region of Â£400,000. The directors of Beazley Furlonge Limited are in discussion with the trustees of the LSF to determine the amount required to be transferred. In anticipation of any potential shortfall in the expected transfer amount requested from the trustees of the LSF, Beazley Furlonge Limited has agreed with the trustees of the scheme that the scheme should be properly funded. Once the transfer value from the LSF has been agreed, Beazley Furlonge Limited will agree with the trustees of the scheme a contribution schedule over the next three years to address the deficit. The impact of the shortfall on the FRS 17 valuation would be to reduce the market value of the scheme's assets at 31 December 2003 by up to Â£496,000. 27. Contingent liabilities and financial commitments At 31 December 2003 Beazley Group plc has given a fixed and floating charge over its assets to Lloyds TSB plc in respect of the loans taken out to finance the purchase of the shares of Beazley Furlonge Holdings Limited and has agreed to guarantee the obligation of Beazley Furlonge Limited in respect of its obligation to Lloyds TSB plc. The group has guaranteed the Â£2m letter of credit issued to Beazley Dedicated Limited which is used as Funds at Lloyd's for underwriting. A subsidiary company entered into a leasehold tenancy agreement on 11 January 2002 in respect of 1 Aldgate, replacing an old lease on the premises which expired in March 2002. In February 2003, the company entered into a new lease to take an additional floor on the premises, the terms of which are concurrent with the existing lease. As at 31 December 2003 the company was committed to make rental payments amounting in the aggregate to Â£2,717,145 in respect of the remaining 3 year period of tenancy to the first break clause (31 December 2002: Â£2,632,647). Annual operating lease commitments under non-cancellable operating leases are as follows: 2003 2002 Land and Land and buildings Other buildings Other Â£'000 Â£'000 Â£'000 Â£'000 ------------------------------------------------------------------- Group Operating leases which expire: - Within one year - 37 - 73 - In the second to fifth 906 90 653 50 years inclusive - Over five years - - - - ------------------------------------------------------------------- 906 127 653 123 ------------------------------------------------------------------- The company has no operating lease commitments. This information is provided by RNS The company news service from the London Stock Exchange

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