Transcript Document

Preliminary Results
Year ending 31 December 2005
David Mann – Chairman
Barbara Merry - Chief Executive
Jamie MacDiarmid - Finance Director
Adrian Walker - Active Underwriter
March 2006
Agenda
 Introduction
David Mann

Key Points
Barbara Merry

Overview of Business
Barbara Merry

Financial Performance
Jamie MacDiarmid

Catastrophe Impact
Adrian Walker

Underwriting Review
Adrian Walker

Summary
Barbara Merry

Questions
2
Key Points
 A challenging year for Hardy on a number of fronts

Peter Hardy retired as Chairman; David Mann appointed
 Distraction and cost of the Omega approach

Profit before tax of £7.474m (2004: £8.937m)

Overall underwriting portfolio performed well

Result marred by hurricane losses in second half

Combined ratio of 92.7% (2004: 94.3%) and excluding hurricane Katrina
82.2%

Cash flow strong: dividend of 8.25p proposed
29 years of unbroken profitability in Lloyd’s
3
Overview of Business
4
Syndicate 382 characteristics
 Diversification of the portfolio
- a balanced book: tested in 2005

Focus on profit, not volume

Management of underwriting risk:
- Leading risks so as to influence price
- Underwriting a predominantly short tail account
- Control of exposures
- Underwriting without the purchase of high levels of reinsurance

Management of reserving risk
- prudence and consistency of reserving approach
a profitable and secure long-term investment
5
Business Mix
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
Aviation
Catastrophe XoL
Non Marine incl all other
first class security
e
06
20
05
20
04
20
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
95
19
94
19
19
93
0%
Cargo & Specie
Marine
War & Political risks
6
Performance
Pre-Tax Profit (£m)
Gross Written Premiums (£m)
16000
120000
14000
100000
Dividend
80000
60000
40000
20000
2000
10
0
5
2005
2004
2003
Final
30
2002
0
Special
25
2005
4000
15
2004
20
2003
6000
2002
25
2001
8000
2000
10000
30
2001
EPS (p)
35
2000
2005
2004
2003
2002
2001
2000
0
12000
Combined Ratio %
100
95
90
20
85
15
Full
year
10
Atrium
gain
5
75
2005
2004
2003
where others see risk, Hardy sees opportunity
2002
70
2001
NB. 2004 and 2005 values are reported under
IFRS.
2000 to 2003 are reported under UK GAAP.
2000
2005
2004
2003
2002
2001
2000
0
80
7
Financial Performance
8
Preliminary Highlights
Full Year
2005
£’000
Full year
2004
£’000
111,276
87,281
Profit before tax
7,474
8,937
Claims ratio
64.1%
57.7%
Expense ratio
28.6%
36.6%
Combined ratio
92.7%
94.3%
Basic earnings per share
15.3p
27.9p
Post tax return on equity
8.3%
14.7%
67,592
64,847
Net assets per share
191p
184p
Net tangible assets per share
164p
157p
Final dividend per share
8.25p
8.25p
-
25p
Gross written premium
Shareholders’ funds
Special dividend
9
Group Performance
Full Year
2005
£’000
Full Year
2004
£’000
Underwriting year 2005 (2004)
(5,315)
(5,688)
Underwriting year 2004 (2003)
6,603
5,798
Underwriting years 2003 (2002) & prior
4,963
3,777
Total
6,251
3,887
Investment return
5,043
3,618
-
4,358
Other income
803
947
Total income
12,097
12,810
Other charges
(4,623)
(3,873)
7,474
8,937
Return on Atrium investment
Profit before tax
10
Investments and Cash Equivalents
31 December
2005
£’000
31 December
2004
£’000
Group Share Of Syndicate Assets
Fixed interest
33,343
21,616
Deposits
35,230
29,031
TOTAL
68,573
50,647
Group Assets Supporting Underwriting
Fixed interest
Deposits
25,072
16,391
12,763
12,701
TOTAL
37,835
29,092
Group Free Investments
Equity based investments
12,335
8,936
67
217
4,662
8,513
TOTAL
17,064
17,666
TOTAL
123,472
97,405
Foreign exchange contracts
Deposits
11
2005 Catastrophe Impact
12
2005 Catastrophe Impact
Gross
£’000
Net
£’000
1,585
491
10,279
6,210
2,930
2,281
Total
14,794
8,982
Rita
2,101
1,779
Wilma
3,903
1,105
20,798
11,866
Katrina
- Marine
- Cat XL
- Direct property
All catastrophes
Hardy has a policy of robust reserving
13
Underwriting cycle – Relative Performance
35.0%
30.0%
25.0%
20.0%
Return on capacity
15.0%
10.0%
5.0%
0.0%
1
2
3
4
5
6
7
8
(5.0%)
(10.0%)
(15.0%)
(20.0%)
(25.0%)
Cycle year
Hardy cycle (1986 - 1993)
Hardy cycle (1994 - 2001)
Hardy average
Lloyd's cycle (1986 - 1993)
Lloyd's cycle (1994 - 2001)
Lloyd's average
market leader where pricing can be influenced
14
100%
80%
60%
40%
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
0%
1977
20%
1975
Settlement Ratio as % of Net Premium
Underwriting cycle – Settlement Ratios
Years of Account
to 3 years development
to 5 years development
Cumulative development to 31/12/2005
market leader where pricing can be influenced
15
Underwriting Overview
16
Aviation
Net Premium & Ultimate Net Loss Ratios (UNLR)
Key points

Senior Underwriter: Mervyn Sugden – 30 years’
experience at Hardy
25
100%
90%
millions
20

Helicopters comprise 60% of the premium
80%
income to the aviation account
70%
15
60%
50%
10
40%

30%
5
have expertise
20%
10%
0
0%
1993
1995
1997
1999
2001
2003
Generating good profits in niches where we

General aviation rates holding up better than
2005
airline
Aviation Net Premium
Aviation UNLR

Acceptable profit margins achieved in 2005

Similar approach for 2006
actively managing throughout the market’s cycles
17
Marine: Hull
Hull - Key points
millions
Net Premium & Ultimate Net Loss Ratios
9
8
7

Senior Underwriter: Adrian Walker

Market leader in fishing vessels, loss of hire
160%
and harbour craft
140%
120%
6
5
4
3
100%
80%
60%
40%
2
1
0
20%
0%
1993
1995
1997
1999
Marine Net Premium
2001
2003
Marine UNLR

Rating scale approach to underwriting

Bluewater hull – still competitive

Brownwater satisfactory

2006 looks promising

Energy book being expanded
2005
specialist risks less prone to competitive pressures
18
Marine: Cargo & Specie
Cargo & Specie - Key points

Net Premium & Ultimate Net Loss Ratios
Senior Underwriter: Edward Barker – 13 years
millions
experience with Hardy
25
120%
20
100%
80%
15

Core account for many years

Broad range of cargoes insured, also jewellers
60%
10
block, fine art and collections
40%
5
20%
0
0%
1993
1995
1997
1999
Cargo Net Premium
2001
2003
2005

Stable market since 2002

Expect to maintain profit margins without
Cargo UNLR
cutting back income

Team strengthened with appointment of Gary
Chick, a specialist specie underwriter
specialist risks less prone to competitive pressures
19
Non-Marine: Catastrophe Excess of Loss
Key points
millions
Net Premium & Ultimate Net Loss Ratios
10
9
8
7
6
5
4
3
2
1
0
160%

Senior underwriter: Henry Glasse

Volatile market but positive returns across
140%
the cycle
120%
100%
80%

2004 and 2005 suffered from hurricane
60%
experience
40%
20%
0%
1993
1995
1997
1999
Cat XL Net Premium
2001
2003
Cat XL UNLR
2005

2006 under review and participation will
depend on cost and availability of
reinsurance
solutions for difficult and unusual risks
20
Non-Marine: All Other
Key points
Net Premium & Ultimate Net Loss Ratios
25
140%
120%
millions
20
100%
15
80%
10
60%
40%
5
20%
0
0%
1993
1995
1997
1999
Non Marine Net Premium
2001
2003
2005

Influenced by hurricane activity in 2004/5

More diversification over the last 3 years
–
Direct Property (UK / Europe) – Tim Bartleet
–
Accident & Health – Henry Glasse
–
Financial Institutions – Adrian Daws
–
Political Risk & Trade Credit – George Doughty
–
Conveyancing – Roy Partington
–
Most recently, International Direct / Fac
Non Marine UNLR
Property – Richard Ikin
solutions for difficult and unusual risks
21
Summary
22
Summary
 2006 underwriting capacity £110m: if market changes, we will write more
 Operational review completed following appointment of new Chairman
 Continue to seek new niche lines to strengthen business and diversify underwriting
portfolio - international direct and facultative property account recently added
 Will now also work on improving the efficiency of the existing book of business
 Line sizes will be increased where we have a strong market footprint
 Market is competitive but not irrational in pricing terms so opportunities for
managed growth exist
 Hardy’s balance sheet is strong and will support growth
experts in pricing risk with focus on profit not volume
23
Appendices
 Executive directors
 Non-executive directors
 Strong reserves
 Business led by Hardy
24
Executive Directors
Barbara Merry – Chief Executive




Director of the other Hardy group companies
On Board of Lloyd’s Market Association
Corporation of Lloyd's - 14 years. General Manager in the regulatory division
1984: chartered accountant
Jamie MacDiarmid – Finance Director
 Joined Board in 1 October 2003
 KPMG: manager in insurance sector
Adrian Walker – Active Underwriter
 Non-executive director on Board prior to becoming active underwriter (2001)
 Formerly underwriter for syndicate 902 (AJ Walker & Others)
25
Non-Executive Directors
David Mann – non-executive chairman


A Board member of Hardy’s subsidiary company, Hardy (Underwriting Agencies)
Ltd since November 2004
Formerly the active underwriter of non-marine syndicate 435, which was managed
by D P Mann Ltd (“DPL”). DPL was acquired by General Re in 1998 and changed
its name to Faraday Underwriting Ltd in 2001
Peter Hardy - non-executive director
 Formerly active underwriter of Hardy
 Worked in the Lloyd's market since 1959
Ian Ivory - non-executive director
 Founded two investment management companies (Ivory & Sime, Stewart Ivory)
 Member of Lloyd’s for 18 years
Barbara Thomas - non-executive director
 Appointed 17 March 2004
 Currently deputy Chairman of Friends’ Provident plc and of Financial Reporting
Council
 Previously a commissioner of US Securities & Exchange Commission
26
Strong Reserves
 Current underwriting results routinely supplemented by releases of back year reserves where
proven to be unnecessary
 Reserving approach relies on a variety of statistical methods, supplemented by underwriter
judgement. In addition, the reserves which we establish are rigorously challenged by our
professional actuarial advisers
 Our reserves are accordingly robust, at high confidence levels
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Year 4
851
1,641
754
438
582
786
602
366
924
707
Year 5
590
113
212
487
865
1,196
280
880
346
Year 6
54
478
1,268
826
602
289
361
282
Year 7
197
404
247
360
204
313
412
Year 8
241
754
631
385
127
153
Year 9
302
99
503
271
179
Year 10
127
148
348
2
Year 11
61
180
174
Year 12
105
(37)
Year 13
(312)
27
Business led by Hardy
Class of business
% Lead
Aviation
51
Cargo & specie
26
Marine hull
67
Non-marine
23
Financial institutions
25
Direct property
26
39
OVERALL
28