Profit fall of £1.07m and 7% decline in turnover blamed on weakness of dollar, soft markets, and benign hurricane season

THB, which this week saw its takeover bid for Lloyd's broker PWS collapse, has released its belated interim results for 2007.

Profit before tax for the six months to 31 October was £0.32m (down £1.07m from £1.4m in 2006), while earnings per share were 0.72p (down 3p from 3.72p in 2006).

In an announcement to the Stock Exchange on Wednesday it said the professional cost incurred in the failed PWS transaction were expected to be approximately £1m, and it would not therefore hit year-end financial forecasts.

The Chairman's report read as follows:


• Profit before tax £1.07 million lower on turnover down 7%

• Earnings per share from continuing operations 76% lower

I have to report a disappointing result for the first half of the year caused by the difficult trading conditions currently affecting our industry:

• the persistent weakness of the US dollar;

• softening markets across all classes of business; and

• unusually, a second consecutive benign hurricane season in the southern states of America.

In spite of this result, THB remains focused on shareholder value for the longer term. The Company is equipped to ride the turbulence in its core markets and, with low gearing, will continue to pursue an acquisition strategy.

Results and dividend

Profit before tax on continuing operations for the six months to 31 October 2007 was £0.32 million (2006: £1.4 million) on fees and commissions of £12.9 million (2006: £13.8 million). Fully diluted earnings per share were 0.72p, down from 3.72p restated for last year.

In view of current trading conditions, the Board has taken a prudent approach and has declared an interim dividend of 1.25p per share (2006: 1.9p), payable on 15 February 2008 to shareholders on the register on 1 February 2008. The Board will consider restoring the dividend to prior year levels in light of the full year result.

Review of performance

As is widely known, 2007 saw softening rates in all insurance markets, most notably in US catastrophe (CAT), an important market for THB. Following the devastating effects of Hurricane Katrina in 2005, the underlying cost of US CAT reinsurance increased dramatically, reaching a high in July 2006. Since then, the marked absence of hurricanes making US landfall in both 2006 and 2007 has resulted in rapidly declining rates. Rates for US CAT insurance were further depressed by an injection of US$4 billion of new CAT capacity from the Florida Hurricane Catastrophe Fund.

In the first quarter of the year, US CAT renewals looked positive for THB and London insurers appeared more competitive than the US domestic market. This trend reversed rapidly thereafter with domestic carriers aggressively pursuing market share and we have seen business lost from London as a result. The strength of THB’s relationships in this specialist market, however, has equipped the Group to weather these conditions. A smaller element of many risks has been retained in London, on markedly lower pricing, but THB has not lost any key accounts and, so, is well placed to benefit when capacity reduces and the market turns.

The exaggerated impact of surplus insurance capacity on US property rates has also been reflected in the rating trend for all THB’s other classes of business. Nonetheless, in spite of declining rates generally, I am pleased to report encouraging progress in our previously acquired FiSure business towards a break-even position, in line with our projections for this operation. This new team provides a range of directors’ and officers’ and other fiduciary insurance particularly to the financial services industry.

The motor fleet sector remains one of THB’s core strengths, both within the Lloyd’s Broker and the Provincial Wholesale operation. Motor fleet rates have softened further in the period under review, but there are hopeful signs that this may be reaching the bottom of the cycle. The Retail division also faces soft rates and tough competition, but enjoyed significant new business wins in the first half, especially in security and motor sport, and retained all its major accounts.

The Provincial Wholesale division, comprising both Risk Solutions and Risk Management businesses and the newly-acquired Cardinus, increased its revenue in the period, although investment in new systems for the risk management proposition adversely affected the overall result. THB Risk Management has implemented a new on-line system to streamline processes for fleet driver assessment and in-vehicle training, eliminating duplication of data entry and improving management information for the benefit of the business and its clients. These and other operational changes are expected to deliver improved margins and booking figures, preparing the risk management business for anticipated volume growth. THB Risk Management has just received accreditation, under new EU regulations effective September 2008, to deliver mandatory driver training for passenger carrying vehicle and light goods vehicle drivers and their operators. The new EU regulations will require hundreds of thousands of bus, coach, minibus and lorry drivers to undertake compulsory training and represent a major boost to this market. THB Risk Management is one of the first companies in the UK to be accredited.

Faced with tough market conditions, the management of THB have continued the process of refinement of the business, to focus on specialist sectors with growth potential. As a result, the personal lines division, which has formed part of THB’s Lloyd’s broker for over 20 years, was sold to another insurance broker, Norman Butcher & Jones, in October 2007.

Costs are under close review and the period saw considerable investment in process improvement, both to streamline procedures and to enable THB to participate fully in London market reform. This expenditure significantly impacted the result for the period, but will deliver efficiency gains in future. The delivery of these gains and further cost containment measures will be pursued relentlessly over the months ahead.

Acquisition strategy

As I indicated in our last Annual Report, the Board took a conscious decision, following the sale of THB’s Provincial Retail division to Towergate in December 2006, to retain a level of overheads to support a larger business, in anticipation of acquisition activity. The sale enables THB to refocus its management and financial resources on markets which, in the medium-to-long term, offer better growth prospects.

o Cardinus

THB acquired the entire share capital of Cardinus Limited in August 2007 for £2.84 million in cash and shares, plus additional consideration dependent on future performance. Cardinus, a supplier of specialist online risk assessment and e-learning products in the area of health and safety, extends and strengthens THB's existing occupational road risk management proposition. Cardinus has an exceptional blue-chip client list and we believe there will be significant cross-selling opportunities within the Group, not least with THB Risk Management. Indeed the two organisations had been working together successfully for some time before the acquisition, undoubtedly aiding the integration process which has been progressing well. The role of risk management across all sectors of the UK economy is becoming increasingly valued, so this acquisition is a timely enhancement to THB’s offering to take advantage of a growing market.


On 15 January 2008, the Board terminated negotiations with PWS Holdings plc for the acquisition by THB of the Lloyd’s broking business of PWS International Ltd and overseas interests of the PWS group. It was a disappointment for THB to withdraw at an advanced stage in the negotiations, in view of the international presence of PWS and the excellent strategic fit, but the legal complexities involved appeared incapable of timely resolution.

THB will continue to focus its acquisition plans on the London market, where we are exploring a number of interesting opportunities.

Other developments

The Board announces the launch of Unicorn Underwriting Limited (“Unicorn”), a new division outside its core broking operation. Unicorn, which has received FSA authorisation, will not itself provide risk capital, but will operate as a separate company, providing underwriting services as agent for a number of insurers. THB’s ability to offer binding authorities and to take on underwriting authority in specialist areas has long been a key service to insurers. The establishment of Unicorn differentiates this separate capability and highlights our plans to develop further this valued service. Unicorn includes our successful bloodstock underwriting team who have transferred from our Lloyd’s broker and started trading as an independent operation from the beginning of January 2008. This team provides an excellent base, but there is a clear objective to attract skilled underwriting professionals to grow a balanced portfolio of products.


The outlook for rates remains unclear. We take some encouragement from recent signs of a slight upturn in motor fleet rates, which historically have led the market in turning, but the general consensus is that improvements are likely to be slow and steady throughout 2008 with no wider recovery of rates until 2009 at the earliest. Although the US dollar has come off a 20-year low at $2.12, it remains weak and economic conditions suggest this will persist. This exposure is managed by an active hedging programme, which takes advantage wherever possible of short term recovery in the USD/GBP rate.

While market conditions continue to pose a challenge, it is clear to me that the underlying strength of the business remains in its people and their determination to win new business and develop new opportunities, adapting to all market circumstances. Our trading to date this year has been affected by the cyclical factors outlined earlier, although the cause of the principal difficulty, low hurricane activity leading to lower CAT rates, does offer the prospect of unbudgeted revenue based on the underwriting performance of the CAT book. However, notwithstanding that THB’s profitability is significantly biased to the second half of the year, we are unlikely to recover the ground lost in the first half of the year.

Our broking teams and support staff have continued to show an outstanding level of commitment and motivation, for which I thank them sincerely, and our senior management team has committed itself with zeal to a programme for profitable growth which is equally important for the future success of the Group.

THB has invested significantly over recent years in growth opportunities – in financial lines, professional indemnity and UK commercial teams, as well as the Cardinus acquisition outlined above, in process reform and additional office space in London to accommodate an enlarged operation. The THB management team will be challenged over the next two years to deliver on the promise implicit in these initiatives. In addition, acquisition opportunities in the London insurance market will continue to be actively pursued and the Board will provide more information to shareholders as plans develop.