Interim Results

Beazley Group PLC 24 September 2003 24 September 2003 Beazley Group plc Interim Results for the six months ended 30 June 2003 Maiden underwriting results show a highly satisfactory start Beazley Group plc ('Beazley'), one of the Lloyd's market leaders, reports good interim profits in its first year, and a highly promising outlook. Highlights Beazley Group • Gross written premiums £162m • Pre-tax profits £2.5m • Earnings per share 0.7p • Interim dividend of 0.25p • Prospects very good Highlights managed syndicates • Gross written premiums increased by 51% • Claims ratio reduced to 41% • Combined ratio of 80% Commenting on Beazley's maiden interim results, Chief Executive Andrew Beazley said: 'The underlying business is performing well, with the net earned premium at the level expected, given that underwriting only commenced on 1 January. Trading conditions remain good. We are underwriting a higher volume of business which is good quality, and the outlook for the future is very promising.' Enquiries Beazley Group plc Tel: 020 7667 0623 Andrew Beazley Andrew Horton Finsbury Tel: 020 7251 3801 Melanie Gerlis Nicola Hobday Interim Results Statement This interim statement is the first time the Group has reported to shareholders since it began underwriting on syndicate 2623. Beazley Furlonge continues to manage Syndicates 623 and 2623 with a combined capacity of £660 million for 2003. The Group has a 50% share of the 2003 underwriting commencing from 1st January 2003 with all business shared on a pro rata basis. The Board is delighted with the ongoing performance of our underwriting teams. A 51% growth in gross written premiums (between the 6 months to June 2003 and 6 months to June 2002) and improvement in the combined ratio of the managed syndicates demonstrates the strength of our underlying business. Overall Results Profit before tax of £2.5m (2002 2nd half loss £1.2m) reflects a satisfactory start to the new operation and the overall business performance is in accordance with our expectations at the time of the IPO last November. Net asset value per share has increased to 64p. The Beazley Group commenced underwriting at the beginning of the year and has net written premiums of £161m but net earned premiums of only £28m as a result of the earnings pattern. The results will not fully reflect the earnings of the business written and it will take over 12 months for the earnings to be fully recognised. Managed Syndicate result The combined ratio of the managed syndicates has reduced to 80%. This is indicative of a 2002 underwriting year relatively free of catastrophic losses contributing to the substantial improvement in combined ratio where profits have been recognised as the exposure has reduced. The forecast for the 2001 year of account remains unchanged at breakeven including our expectation of the ultimate loss for the World Trade Centre. Managed Syndicate Financial Results 6 months to 6 months to Year to 30 June 2003 30th June 2002 31 December 2002 £m £m £m Gross premiums written 351 232 438 Net premiums written 222 139 289 Net premiums earned 136 136 292 Net claims incurred 56 80 174 Total expenses 74 48 102 Profit/(loss) for the period 11 9 22 Claims ratio 41% 60% 60% Expense ratio 39% 38% 34% Combined ratio 80% 98% 94% Trading Conditions Overall trading conditions continue to be good. Rate increases achieved for the first six months are 13%, coming on top of increases in 2002 of 33%. Premium rates remain at a level that should generate healthy underwriting profits. We believe the greatest opportunities lie in Specialty Lines as the market conditions improve following the recognition of under pricing as the industry has strengthened its reserves and as competition has reduced. Departmental analysis 6 months to 6 months to Year to 30 June 2003 30 June 2002 31 December 2002 Gross Gross Gross premium Claims premium Claims premium Claims written Ratio written Ratio written Ratio £m % £m % £m % Specialty 145 63 71 73 166 80 Property 98 31 87 55 145 41 Reinsurance 69 25 47 50 67 68 Marine 39 47 28 57 60 55 Specialty Lines Significant growth is being achieved in this area as the market correction continues. We have achieved vertical growth within the team with the recruitment of D&O and Healthcare specialists. This is further evidence of our continued strategy of expansion in lines of business in which the syndicate has greatest experience and expertise. Rate increases of 29% in the first 6 months of this year are justification of our commitment to this exciting area and further increases are anticipated next year. Property Group Our ability to take advantage of excellent trading conditions has resulted in further growth of 13% in gross written premiums. We have invested in our skill base, through the recruitment of a specialist UK market underwriting team, to take continued advantage of the favourable market. We have achieved overall rate increases of 7% for the period although US risk managed property premium rates are facing competitive pressures. This has been achieved against a backdrop of abnormally low losses experienced during 2002. Reinsurance Overall rate increases of 4% were achieved in the period showing that rating levels are at least being maintained or even increased. The growth in the account is in line with the overall growth of managed syndicates. The improved claims ratio reflects the recognition of profits following a relatively catastrophe free year in 2002. Marine We are continuing to expand our cargo and energy accounts following the recruitment of specialist underwriting teams this year. Further rate increases of 11% have been achieved to date with the expectation that the market will continue to tighten. Capital resources Since the placing in November 2002, £132m of the £137m net proceeds has been used to support the underwriting of the Beazley Group for 2003. We currently underwrite capacity of £330m, 50% of the overall managed capacity, and we expect to write premiums that will effectively utilise this capacity. The capacity of the combined syndicates is planned to increase by 11.6% to £736.5m for the 2004 underwriting year, increasing Beazley's capacity to at least £368m. The additional capital required for the increased capacity will be funded through our existing bank resources. Investments Total funds under management have increased from £137m to £180m as the funds from our underwriting activities have increased. We are maintaining a conservative investment strategy in the medium term limiting duration and credit risk. Dividend The Board is pleased to report that it has decided that trading conditions merit the payment of a maiden interim dividend of 0.25p per ordinary share (2002 - nil). This will be paid on 28 November 2003 to shareholders on the register at the close of business on 7 November 2003. Board Changes This is the first time we have reported to you under the Chairmanship of Jonathan Agnew. Joseph Sargent was Chairman from 1993 to June 2003 and we are delighted that Joseph has agreed to continue to be a non-executive director of the Board and we look forward to his further contributions. We welcome Andy Pomfret (non executive director and chairman of the Audit Committee) and Andrew Horton (Finance Director) to the Board; their experience will further strengthen the management of the Group. Outlook Taking the portfolio as a whole we expect premium rates to increase for both 2003 and 2004. Trading conditions remain good and rates are at levels that should provide healthy underwriting returns. All lines of our business have excellent positions in their respective markets and we face the future with confidence. The overall business is growing as expected and we will deliver long-term value to our shareholders. Andrew Beazley Chief Executive officer 24 September 2003 Consolidated Profit and Loss Account 6 months ended 30 June 2003 Technical account - general business 6 months ended 6 months ended 6 months ended 30 June 2003 (unaudited) 30 June 2002 (unaudited) 31 December 2002 (audited) £'000 £'000 £'000 Note Earned premiums, net of reinsurance Gross premiums written 161,625 - - Outward reinsurance premiums (57,905) - - ---------- ----------- ------------ 103,720 Net premiums written - - Change in the gross provision for unearned premiums (119,325) - - ---------- ----------- ------------ Change in the gross provision for unearned premiums, reinsurers' share 43,908 ---------- ----------- ------------ (75,417) - - ---------- ----------- ------------ Net earned premiums 28,303 - - ---------- ----------- ------------ Investment return transferred from the non technical account 3 3,647 - - Claims paid Gross amount (652) - - Reinsurers' share 1 - - ---------- ----------- ------------ (651) - - Change in the provision for claims Gross amount (26,786) - - Reinsurers' share 11,538 - - ---------- ----------- ------------ (15,248) - - Claims incurred, net of reinsurance (15,899) - - ---------- ----------- ------------ Net operating expenses 5 (13,370) - - Balance on the technical account for general business 2,681 - - ---------- ----------- ------------ Consolidated Profit and Loss Account 6 months ended 30 June 2003 Non-technical account 6 months ended 6 months ended 6 months ended 30 June 2003 (unaudited) 30 June 2002 (unaudited) 31 December 2002 (audited) £'000 £'000 £'000 Note Balance on the technical account for general business 2,681 - - Investment income 3,206 - 724 Unrealised losses on investments (98) - - Realised losses on investments (29) - - Investment management expenses and charges (333) - - ----------- ----------- ------------ 2,746 - 724 Allocated investment return transferred to the general business technical account (3,647) - - ----------- ----------- ------------ (901) - 724 Other income 4 8,325 2,176 3,187 Other charges: - ordinary items (7,562) (1,580) (3,141) - exceptional items - - (1,933) ----------- ----------- ------------ Profit/(loss) before tax 2 2,543 596 (1,163) Analysis of profit/(loss) before tax Group operating profit/(loss) based on longer term investment return 2,212 441 (1,635) Share of operating profit in associate 1,232 155 472 ----------- ----------- ------------ 3,444 596 (1,163) Short term fluctuation in investment return (901) - - ----------- ----------- ------------ 2,543 596 (1,163) ----------- ----------- ------------ 6 months ended 6 months ended 6 months ended 30 June 2003 (unaudited) 30 June 2002 (unaudited) 31 December 2002 (audited) £'000 £'000 £'000 Taxation: - on ordinary activities (496) (276) 21 - on associate's profit (370) (47) (112) - on exceptional items - - 180 ----------- ----------- ----------- Profit/ (loss) after tax 1,677 273 (1,074) Dividends proposed (574) - - ----------- ----------- ------------ Retained profit/ (loss) for the financial year 1,103 273 (1,074) ----------- ----------- ------------ Basic earnings per share (pence per share) 0.7p n/a (1.7)p ----------- ----------- ------------ Diluted earnings per share (pence per share) 0.7p n/a (1.7)p ----------- ----------- ------------ The group's turnover and expenses all relate to the continuing operations. There were no recognised gains or losses during the period other than those passing through the profit and loss account. Consolidated Balance Sheet as at 30 June 2003 At 30 June 2003 At 30 June 2002 At 31 December 2002 (unaudited) (unaudited) (audited) £'000 £'000 £'000 Note Assets Intangible assets 6,096 6,440 6,268 --------- --------- ---------- 6,096 6,440 6,268 Investments Debt securities and other fixed income securities 132,249 - 132,398 Investment in associated undertaking 6,105 4,911 5,242 Current asset investments - 84 - Other financial investments 20 20 20 --------- --------- ---------- 138,374 5,015 137,660 Reinsurers' share of technical provisions Provision for unearned premiums 43,167 - - Claims outstanding 11,347 - - --------- --------- ---------- 54,514 - - Debtors Debtors arising out of direct insurance operations 67,151 - - Debtors arising out of reinsurance operations 5,634 - - Other debtors 1,839 731 1,239 --------- --------- ---------- 74,624 731 1,239 Other assets Cash at bank and in hand 47,947 781 4,990 --------- --------- ---------- Prepayments and accrued income Deferred acquisition costs 20,365 - - Other prepayments and accrued income 11,253 1,063 2,339 --------- --------- ---------- 31,618 1,063 2,339 --------- --------- ---------- Total assets 353,173 14,030 152,496 ========= ========= ========== Consolidated Balance Sheet as at 30 June 2003 - continued At 30 June 2003 At 30 June 2002 At 31 December 2002 (unaudited) (unaudited) (audited) £'000 £'000 £'000 Note Liabilities Capital and reserves Called up share capital 11,474 504 11,474 Share premium 132,377 - 132,377 Merger reserve 1,675 1,675 1,675 Profit and loss reserve 2 485 456 (618) --------- --------- ---------- 146,011 2,635 144,908 Technical Provisions Provision for unearned premiums 117,327 - - Claims outstanding 26,373 - - --------- --------- ---------- 143,700 - - Creditors Creditors arising out of direct insurance operations 42,748 - - Creditors arising out of reinsurance operations 1,850 - - Other creditors (including taxation and social security) 10,805 10,719 5,552 --------- --------- ---------- 55,403 10,719 5,552 --------- --------- ---------- Accruals and deferred income 7,453 676 2,036 --------- --------- ---------- Loans 606 - - --------- --------- ---------- Total liabilities 353,173 14,030 152,496 --------- --------- ---------- Net tangible assets per share 61p n/a 60p Net asset value per share 64p n/a 63p --------- --------- ---------- Consolidated Cash Flow Statement 6 months ended 30 June 2003 6 months ended 6 months ended 6 months ended 30 June 2003 (unaudited) 30 June 2002 (unaudited) 31 December 2002 (audited) £'000 £'000 £'000 Note Net cash inflow from 7 operating activities 42,583 891 (1,604) Return on investment and servicing of finance Interest received - 6 694 Interest paid - (232) (1,172) Taxation Corporation tax paid (232) (147) (1) Capital Expenditure & Financial Investment Management of liquid resources - - - Purchase of fixed asset investments - - (132,398) Financing Increase/ (decrease) in debt 606 (500) (4,657) Issue of ordinary shares - 112 143,347 Cash flows were invested as follows: ----------- ---------- ------------ Increase/ (decrease) in cash holdings 42,957 130 4,209 =========== =========== ============ Reconciliation of the movement in shareholders' funds Profit/(loss) for the financial period 1,677 273 (1,074) Dividends (574) - - ----------- ----------- ------------ Retained profit/(loss) for the financial period 1,103 273 (1,074) ----------- ----------- ------------ Proceeds from issue of shares net of issue costs - - 143,347 ----------- ----------- ------------ Net addition/(reduction) to shareholders' funds 1,103 273 142,273 Opening shareholders' funds 144,908 2,362 2,635 ----------- ----------- ------------ Closing shareholders' funds 146,011 2,635 144,908 =========== =========== ============ Notes to the Financial Statements For the 6 months ended 30 June 2003 Principal accounting policies 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. They also comply with Section 255A of, and Schedule 9A to the Companies Act 1985. The interim accounts do not constitute statutory accounts of the Group within the meaning of Section 240 of the Companies Act 1985. The auditors have reported on the Report and Accounts for the six months ended 31 December 2002, their report was not qualified and did not contain a statement under Section 237(2) or (3) of the Companies Act 1985. The following accounting policies have been applied consistently in dealing with items which are considered material to the financial information. 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. Earned premiums represent premiums written adjusted for the change in the provision for unearned premiums. Unearned premiums The provision for unearned premiums represents the proportion of gross premium written and the applicable reinsurers' share, which is estimated to relate to exposures in subsequent financial periods. 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 statistical techniques 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 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. Statistical techniques are used to assist in making these estimates. 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 original provisions are made in the financial period in which the need for a further provision becomes apparent. Acquisition costs Acquisition costs comprise brokerage, staff and staff related costs of the underwriters acquiring the business, and premium levy. Premium levy is an additional central levy on all members of Lloyd's underwriting in 1997 and subsequent years of account to ensure adequate funding of the Lloyd's central guarantee fund. The proportion of acquisition costs incurred in respect of unearned premiums is deferred at the balance sheet date and recognised in later periods when the related premiums are earned. Syndicate expenses Because of the nature of the Syndicate, the Group provides the infrastructure which enables the Syndicate to operate. The Group recharges the Syndicate for the services provided including its share of depreciation of fixed assets; salaries, wages and other costs of employment including pensions; and lease rental payments. Syndicate expenses recharged are recognised on an accruals basis. Managing agents fees and profit commission Managing agents fees and profit commission are paid to Beazley Furlonge Limited as the managing agent of the Syndicate, and are based on Members' capacity and profits respectively, and are recognised on an accrual basis. Members' personal expenses Members' personal expenses include central fund contributions and Lloyd's subscription charges. Investments All investments are stated at their market value at the balance sheet date. Investment income, interest receivable and investment management expenses are included in the profit and loss account on an accruals basis. Unrealised gains and losses on investments represent the difference between the current value of investments at the balance sheet date and their purchase price. Realised gains and losses represent the difference between net sales proceeds and purchase price. On disposals during the accounting period, an adjustment is made for previously recognised unrealised gains and losses. 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. In Syndicate 2623's case, all the investments are held for underwriting purposes. 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 on the balance sheet date. Pension costs The expected cost of providing pensions is recognised in accordance with SSAP 24 on a systematic and rational basis over the period from which the benefit from the employee's service is derived. Contributions are assessed in accordance with advice of a qualified actuary, using the projected unit method of funding. Foreign exchange Premium trust funds are maintained in Sterling, US dollars and Canadian dollars. Monetary assets and liabilities expressed in US dollars and Canadian dollars are translated at rates of exchange ruling at the balance sheet date. Revenues and costs denominated in US dollars and Canadian dollars are recorded at average exchange rates. Transactions denominated in foreign currencies are recovered in the local currency or the actual exchange rates as at the date of the transaction. All differences arising on the translation of the foreign currency accounts are dealt with in the non-technical account. Notes to the Financial Statements 1. Change to accounting policy These 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 that Act. The effect of this change to the results of the Group is minimal. 2. Segmental Analysis 6 months ended 6 months ended 6 months ended 30 June 2003 (unaudited) 30 June 2002 (unaudited) 31 December 2002 (audited) £'000 £'000 £'000 Profit/loss before taxation Underwriting and investment 2,681 - - Managing agencies 585 177 148 Share of operating profit in associates 1,232 155 472 Other Group income and expenses (1,955) 264 (1,783) ----------- ----------- ------------ Total 2,543 596 (1,163) ----------- ----------- ------------ Net assets Underwriting and investment 138,300 - 132,418 Managing agencies and related activities 1,606 (2,276) 7,248 Investment in associates 6,105 4,911 5,242 ----------- ----------- ------------ Total 146,011 2,635 144,908 ----------- ----------- ------------ In the profit and loss account, the income and costs of the managing agency are reported within 'other income and 'other charges'. 3. Investment return on funds at Lloyds and other corporatefunds The investment return transferred to the technical account represents the estimated long term rate of return applied to the Group's investments assets, the managed syndicates and Funds at Lloyds. The long term rates were established having regard to historic asset performance and current and prospective bond yields. The long term rates of return used for both funds at Lloyds and syndicate funds were: Fixed interest - sterling 5% - US dollar 4% 4. Fees and other income £'000 £'000 £'000 Profit commissions 6,160 1,354 759 Agency fees 931 684 1,440 ---------- ---------- ----------- Other income (including share of profit in associated companies) 1,234 138 988 ---------- ---------- ----------- 8,325 2,176 3,187 ---------- ---------- ----------- All of the profit commission recognised in this period is payable to directors and employees under the terms of the pre-IPO agreement. 5.Net Operating Expenses 6 months ended 6 months ended 6 months ended 30 June 2003 (unaudited) 30 June 2002 (unaudited) 31 December 2002 (audited) £'000 £'000 £'000 Brokerage and other business acquisition expenses 26,616 - - Change in deferred acquisition costs (19,201) - - Administration expenses 5,955 - - ----------- ---------- ------------ 13,370 - - ----------- ---------- ------------ 6. Earnings per share The calculation of basic earnings per share is based on earnings of £1,677,000 (2002 n/a) being the profit for the period and on 229.48 million (2002 n/a) shares, being the weighted average number of shares in issue during the period. The diluted earnings per share is based on earnings of £1,677,000 (2002 n/a) and on 229.51 million (2002 n/a) ordinary shares. 7. Reconciliation of operating profit to net cash inflow/ outflow from operating activity 6 months ended 6 months ended 6 months ended 30 June 2003 (unaudited) 30 June 2002 (unaudited) 31 December 2002 (audited) £'000 £'000 £'000 Profit before tax on ordinary activities 2,543 596 (1,163) Amortisation of goodwill 172 172 172 (Increase) in investments (714) (154) (247) (Increase)/decrease in debtors (102,663) (701) 1,784 Decrease in reinsurer's share of technical provision (54,514) - - Increase/(decrease) in creditors 54,059 978 (2,150) Increase in technical provisions 143,700 - - ----------- ---------- ------------ Net cash inflow from operating activities 42,583 891 (1,604) ----------- ---------- ------------ 8. Comparative figures Comparative figures are provided for the 6 months ended 31 December 2002 because the last published results for the Group were for this period. This was because the accounting reference date was changed to 31 December during 2003 so as to coincide with the accounting reference date of Syndicate 2623. The Group formerly made up its accounts to 30 June in each year. Independent review report by KPMG Audit Plc to Beazley Group Plc Introduction We have been engaged by the company to review the financial information for the six months ended 30 June 2003 which comprises the consolidated profit and loss account, consolidated balance sheet, consolidated cash flow statement and the related notes. We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information. This report is made solely to the company in accordance with the terms of our engagement to assist the company in meeting the requirements of the Listing Rules of the Financial Services Authority. Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached. Directors' responsibilities The interim report, including the financial information contained therein, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the interim report in accordance with the Listing Rules which require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual accounts except where they are to be changed in the next annual accounts in which case any changes, and the reasons for them, are to be disclosed. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/ 4: Review of interim financial information issued by the Auditing Practices Board for use in the United Kingdom. A review consists principally of making enquiries of management and applying analytical procedures to the financial information and underlying financial data and, based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review is substantially less in scope than an audit performed in accordance with Auditing Standards and therefore provides a lower level of assurance than an audit. Accordingly we do not express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 30 June 2003. KPMG Audit Plc Chartered Accountants Registered Auditor London 24 September 2003 This information is provided by RNS The company news service from the London Stock Exchange

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