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Group Profit and Loss Account


									                             Highway Insurance Holdings Plc
                      Highway House, 171 Kings Road, Brentwood, Essex CM14 4EJ
                            Telephone: 01277 263636 Fax: 01277 262666
                                       DX 96150-Brentwood 2

                          HIGHWAY INSURANCE HOLDINGS Plc
                                       Preliminary Group Results 2005

                                                                                         2005                   2004

             Net insurance premium revenue                                £242.9 million            £225.6 million

             Profit before tax                                              £27.3 million                £21.2 million

             Operating ratio                                                           96.3%                   97.5%

             Expense ratio                                                             20.0%                   20.9%

             Investment funds                                                £395 million                £383 million

             Investment income                                              £27.5 million                £24.3 million

             Earnings per share                                                          9.7p                    7.4p

             Final dividend                                                              3.7p                   1.85p

             Full year dividend                                                          5.3p                   2.65p


•   Strong financial performance: 33% pre-tax return on opening net assets

•   Profit before tax up 29% to £27.3 million

•   Absolute return investment strategy generated 7.28%

•   Net assets £88.3 million (2004: £83.8 million) after accounting for IAS19 pension position

•   Successful first full year for Highway Retail Division now controlling nearly 180,000 policies

•   General trading conditions remain challenging

•   Proposed full year dividend increased by 100% to 5.30p per share (2004: 2.65p)

                           Registered Office: Highway House, 171 Kings Road, Brentwood, Essex CM14 4EJ
                                                  Registered No. 2998217 England
Commenting on these results, Ross Dunlop, Executive Chairman said:

“I am pleased with another solid improvement in Highway’s performance. We have retained
underwriting discipline in a competitive motor insurance market; we have successfully grown our
Broking operations and have outperformed with our investment fund.

“Our aim in 2006 is to hold our position, to develop further distribution skills in our broking business,
and a closer alignment with our underwriting operation. As always we shall look to enhance
management systems and make the operations more efficient. I am confident that we can achieve
these objectives in the coming year, building a better quality business, and generating value for

For more information:

Highway Insurance:                           01277 266573

       Ross Dunlop

M: Communications                            020 7153 1540

       Nick Fox

An analysts’ meeting will be held at 10:00 a.m. on 8 March 2005 at M: Communications, 1 Ropemaker
Street, London, EC2Y 9HT.

                                                                                              Page 2
                           CHAIRMAN’S STATEMENT


I am pleased to announce a solid improvement in Highway’s operating performance in 2005.
Pre-tax profits have advanced to £27.3m or 9.7 pence per share (2004 £21.2m, 7.4 pence per
share), a return on Shareholders Funds of 33%. At the interim results the Board outlined its
intention to pay a total dividend of at least 5p for the year, and we are pleased to propose a
final dividend of 3.7p making a total of 5.3p for the year, a 100% increase over 2.65p in 2004. It
is equivalent to an 11% charge on shareholder’s equity and is, I believe, a return with an
adequate risk premium.

Divisional Operating Performance

Insurance Operations
We have retained underwriting discipline in a market for motor insurance that remains very
competitive. Nevertheless, we have maintained our overall write for the year. Pressure
continues to be exerted on prices by old participants seeking to re-enter the market, together
with a series of relentless advertising campaigns from new entrants. Expenses, particularly on
personal injury claims and reinsurance have risen. These conditions have impacted the loss

We had anticipated most of these trends. To ameliorate the effect, we targeted business with a
lower claims frequency and, as we do on an ongoing basis, reduction of our expenses. These
initiatives when allied to a profitable run off of our back years have enabled us to remain on
track to achieve our target combined ratio of 97% through the cycle.

Investment Operations
Our investment partners Banque Syz and Union Bancaire Privée (UBP) together achieved a
return of 728 basis points from our investment fund of £395m, or £28m. The return was roughly
75 basis points ahead of the 2004 return and represents an increased contribution of circa £3m.

2005 was Highway’s second full year in partnership with the Geneva private banks, each of
whom has responsibility for dynamic asset allocation within broad parameters decided by
Highway’s Investment Committee. Both UBP and Syz have done exactly what was demanded
by the mandate. Judicious shifts in asset allocation, in a year which was more propitious to
equity markets than had generally been expected, generated some further superior return.
Given our propensity for overall portfolio risk being no greater than that of short bonds, the
returns are commendable. Highway and its shareholders should be more than satisfied with
the result.

Broking Operations
During 2005 we continued to build our distribution business, making our third acquisition of
MRB in October. Our three broking businesses aggregated have a turnover of £17m and
handle nearly 180,000 policies.         Customers are sourced from directories, specialist
publications, strategic partnerships and, increasingly, via the internet.

Our objectives with this division are threefold.

To integrate the business processes of the three brokers in a divisional structure, incorporating
industry best practice. To optimise the value-add potential of owning customers, looking

                                                                                       Page 3
increasingly to incorporate an underwriting relationship with Highway. To enhance our
customer service capabilities to achieve policy growth. These steps will enable the Company to
extend its position on the value chain and give us some protection against further fade in the
third party distributed sector of the motor insurance market.

During the year we encountered opportunities to make significant progress in policy count
growth. While this was a boon, which occurred a little earlier than we might have expected, the
promotional costs associated with the move had the effect of reducing the budgeted divisional
profit from £1m to £700,000.

Ian Patrick, our finance director, has resigned from the Company to pursue another opportunity
in the Insurance sector with a private group. Ian has been a strong member of the team and
we have started a search to find a new finance director. Ian will leave the Board and the Group
on 31 March 2006.

In addition, now that Highway has been piloted into rather calmer water, three of our Non-
Executive Directors John Stoker, David Coleridge and Allen Thomas have decided they can
now leave the Board. John helped us establish our FSA regulated subsidiary in 2000. Allen
served as your Chairman between 1996-2002. David, another former Chairman, has the
longest association with the Company starting from the days of the Sturge Group. David also
served as Chairman of Lloyd’s of London in probably the roughest period of its history in 1991
and 1992, where the Corporation was desperately in need of the sort of calm and stabilisation
which could only be provided by someone with his presence and stature.

During this period, which included two marathon length AGM’s, he handled shocked and angry
names with a degree of kindness, sympathy and tolerance such that most would have believed
the responsibility was his personally. Not many would be able or willing to manage such a feat.
Few more worthy or noble acts in the history of the City of London have ever gone quite so
unrecognised. All three non-executive directors served your Company with great distinction for
many years. They will be leaving the Board at the next Annual General Meeting. On behalf of
shareholders I wish them well.

Significant Owners
The re-rating of our shares which followed our interim figures in September 2005 has seen the
reduction in ownership of our two largest shareholders, J.O. Hambro Capital Management and
Fidelity, who at one stage combined owned nearly 30% of Highway. Both are value investors
who supported the Company through its reorganisation phase. Neither should it be forgotten
that without their leadership in the re-financing of the business in April 2002, Highway could
well have failed.

In September 2005, Aberforth, doubled their shareholding to 11% and are now our largest
owner. We continue to work with them and all our other shareholders to generate value.

Industry Outlook
Although most of the participants of the UK motor insurance market may have realised the folly
of an out and out price war, annual purchase of the product means that it only needs one player
with too much zeal to bring a degree of ongoing disorder to the market.

At a gross level there are carriers who, having left the market after disastrous underwriting
experiences years ago, have returned. Inevitably their aim is market share, and equally
inevitably their weaponry is price. Similarly, at a net level, there are new entrants with
apparently lower cost models who are attempting to achieve scale through relentless
advertising campaigns. Both cause disruption to an industry where the majority of the

                                                                                    Page 4
participants are trying to maintain underwriting discipline. Behaviour such as this may not be
completely unrelated to the fact that, overall, the industry has not returned an underwriting profit
since 1994.

Automatic progress from here should not be taken as a given. The more obvious and
straightforward remedies to restore the fortunes of the business have already been taken. Our
insurance operations have been stabilised and are prudently accounted for. However
maintaining our overall write at acceptable prices is tough in the current market. Our
investment operations in Geneva have served us well, particularly last year, when markets
were kinder to us than we might have hoped. In addition the risk averse nature of our mandate
may dictate that the 2005 return was towards the top end of what we should reasonably expect.
Our broking operation is at a fledgling stage and its progress is required to be more
evolutionary than revolutionary in the near term.

Our aim in 2006 is to hold our position, to develop further distribution skills in our broking
business, and a closer alignment with our underwriting operation. As always we shall look to
enhance management systems and make the operations more efficient. I am confident that we
can achieve these objectives in the coming year, building a better quality business, and
generating value for shareholders.

Lastly it should not be forgotten that nothing would be possible without the loyalty and
dedication of our staff and managers. I thank them all for the success the Company achieved
in 2005.

Ross Dunlop
Executive Chairman
7 March 2006

                                                                                         Page 5
                                        BUSINESS REVIEW
2005 was a year in which Highway made significant progress. Profit before tax increased 29% to
£27.3 million (2004 £21.2 million). This result equates to a return on opening equity of 33%.

Our Insurance Division produced a strong result with further improvements in combined ratio against a
background of difficult conditions in the motor market. Our new investment strategy again proved its
worth with market leading returns. Our distribution business, which was created in mid-2004, ended
2005 as Britain’s twelfth largest general insurance broker with nearly 180,000 customers after a year of
significant organic and acquired growth.

And once again Highway’s people produced this great result despite the distraction and uncertainty of
being in takeover talks through late 2004 and early 2005.

Group Consolidated Income Statement

Gross insurance premium revenue in 2005 was up 2.5% at £258.4 million (2004: £252.1 million). Fee
and commission income was up 161% at £19.3 million (2004: £7.4 million). Profit after tax was up £4.8
million at £19.5 million (2004: £14.7 million). Earnings per share were 9.7p (2004: 7.4p).

The result by business area is summarised below:

                                                                                       2005      2004
£ millions                         Insurance   Claims       Retail       Unallocated   Total     Total

Net insurance premium revenue         242.9          -           -                -     242.9    225.6
Fees and commission income              1.6        1.4        16.5            (0.2)      19.3      7.4*
Investment income                       26.5            -            -          1.0      27.5      24.3
Net insurance claims incurred        (185.4)            -            -             - (185.4) (172.6)
Operating expenses                    (48.8)            -   (15.8)            (8.1)    (72.7)    (58.7)*
Investment expenses                    (2.1)            -            -             -     (2.1)     (1.7)
Finance costs                          (0.5)            -            -        (1.7)      (2.2)     (3.1)
Profit before tax                       34.2       1.4          0.7           (9.0)      27.3      21.2

* Excludes adjustment for inter-group commission income £0.8 million (2004: £0.3 million)
  Excludes reallocation of amortisation charges out of unallocated.

                                                                                                           Page 6

The Motor Insurance Division produced a profit of £34.2 million up 24% from £27.5 million in 2004.
This result equates to an operating ratio 96.3% against 97.5% in 2004.

£ millions                                                               2005       2004
Gross premiums written                                                     253.7     246.6
Net premiums written                                                       238.7     233.5
Net insurance premium revenue                                              243.0     225.1
Net claims incurred                                                      (185.4)    (172.4)
Loss ratio                                                                76.3%     76.6%
Net operating expenses                                                    (48.9)     (47.0)
Expense ratio                                                             20.0%     20.9%
Investment return                                                           24.4      21.9
Other income                                                                 1.6      (0.1)
Finance costs                                                               (0.5)          -
Published result                                                            34.2      27.5
Operating ratio                                                           96.3%     97.5%

The story of 2005 has been that of sticking to the formula that has been successful in previous years
against a background of increasingly difficult market conditions. Across all our markets premium rates
have at best been unchanged or at worst weakened. Our underwriters have maintained their discipline
and continued to write only for profit. Our Choice range of products, with their more selective
approach, have continued to return a consistent, profitable result whilst also reducing levels of claims
frequency. We maintain a presence in a broad range of market segments, enabling us to select the
best business in each.

2005 Net Written Premium analysed by class
Private car - comprehensive                                  26%
Private car - non-comprehensive                              16%
Specialist                                                   15%
Small CV & trucks - comprehensive                            18%
Small CV & trucks – non-comprehensive                         6%
Motorcycle                                                    5%
Fleets & Motor Trade                                         14%

Market claims inflation continues to run well ahead of rate increases. Our claims people are focussed
on fighting for every pound and through the introduction of a number of initiatives have been successful
in holding claims cost inflation below market levels. We are working to improve the customer
experience as they go through our claims process.

A key differentiator of Highway for many years has been that it is a low cost operator. We have
continued to work in 2005 on streamlining our business and increasing the amount of business
transacted electronically. Over 90% of business comes in this way and we are working to get to 100%.

Market conditions in 2006 are expected to remain soft. The challenges for us are to continue to grow
our book of business by broadening the range of business written; ensuring that we are fully
represented in the fast growing internet market place and to give a positive customer experience every

                                                                                               Page 7
time. We will address each of these while maintaining our approach of underwriting, claims and cost

Investment Income

Highway once again enjoyed strong returns from its growing investment portfolio in 2005. Investment
income rose 13% during the year to £27.5 million up from £24.3 million in 2004. Returns at 7.28% for
the managed sterling portfolio were 80 bps up from 2004 and well ahead of our previous benchmark,
the Merrill Lynch 1-3 year index, which produced only 4.98%. Year-end funds under management
were £395 million up from £383 million in 2004. Funds under management at December 2005 are 4.5
times net assets.

Actual returns against Merrill Lynch 1-3yr              Highway         ML 1-3yr
Two months ended 31 December 2003                         1.51%           1.25%
Twelve months ended 31 December 2004                      6.48%          4.64%
Twelve months ended 31 December 2005                      7.28%          4.98%

Funds under management (net of debt)                   £ millions
2001                                                          246
2002                                                          253
2003                                                          288
2004                                                          338
2005                                                          367

Highway has run its absolute return strategy since November 2003. Our objectives are simple: first
and foremost to preserve capital and secondly to make a reasonable return from our largest asset.
Having understood our objectives the managers have considerable flexibility in how they apply the
mandate. They run conservative well diversified portfolios and attempt to identify the asset classes
with the best risk adjusted return at any given time. Our risk appetite is no greater than with our
previous strategy.

Asset allocation
Cash                                                        24%
Fixed Income                                                44%
Special Situations                                          10%
Hedge Funds                                                 22%


The Retail Division was created with the objective of developing a substantial distribution business.
We wanted to generate a significant proportion of the Insurance Divisions customers through retail.
Our strategy was to acquire and consolidate brokers and to produce sustained organic growth. Our
short term targets are to manage 250,000 policies and generate £5 milllion of profit by end 2007. The
Division effectively started on 1 July 2004 with the acquisition of A Quote which was then followed by
the purchase of Direct Motorline on 1 October.

2005 has been the Divisions first full year of trading. Much of our focus during the year has been on
driving synergies through combining back office, sharing best practice and leveraging our growing size
to ensure the best deals for our customers. This helped to create organic growth of over 35%.

On 1 October the Group acquired MRB Insurance Brokers who trade as 1st Quote and with it a further
60,000 customers. Total policy count today totals nearly 180,000 customers placing the Division
twelfth largest personal lines broker in the UK.

                                                                                            Page 8
The internet as a distribution channel for motor insurance has come of age over the last year as
broadband has become commonplace in Britain’s homes. Highway is in the vanguard of distribution
via the internet with new business sales originating from the internet up 50% in 2005.

2006 will see further integration of the broking businesses and the Division will concentrate on
increasing the value of customers to Highway. This strategy will be achieved in two main drives.
Firstly, by increasing the annual income derived from each customer and extending the life of those
customers. Secondly, employing Retail’s distribution skills and developing strategic partnerships to
ensure that more Highway policies are sold by the Division.


2005 has been a year of steady progress for Highway’s claims management business following the
setting up of two new joint ventures in 2004. The contribution from claims management of £1.4 million
was up 14% from £1.2 million in 2004. Work will continue in 2006 to improve the efficiency and
customer experience within this business.

Pension Commitments

Depending upon the measure you choose 2005 has either been a good year or a disappointing year
for our pension scheme. Our high equity exposure drove an investment return of 20.6% during the
year. The scheme assets increased by £9.5 million to £70.1 million. Yet under the IAS 19: Employee
Benefits measure the scheme has had a difficult year with the net pension liability increasing from £3.0
million to £11.1 million.

To understand the IAS 19 measure it is important to understand how it is calculated. Simplistically to
make an estimate of the position of a pension scheme you need to make judgements on three pieces
of information – future investment income, the amount that pension payments will inflate by and
mortality. IAS 19 is very prescriptive about the first two factors and requires that these are derived
from market rates rather than being an estimate based upon the circumstances of the scheme.

The typical index used to derive future investment returns is the iBoxx Sterling AA rated 15 year+
corporate bond index. The table below shows the movement in the index over the last seven years.

iBoxx £ AA Corp 15 yr + (at 31 December)
1999                                                       6.42%
2000                                                       6.09%
2001                                                       5.93%
2002                                                       5.57%
2003                                                       5.36%
2004                                                       5.29%
2005                                                       4.73%

As can be seen this index has shown considerable volatility in the period peaking at 6.96% in August
2000 before falling to low of 4.73% at December 2005. It is noteworthy that between 31 October and
31 December 2005 the index fell 30bps. There is some flexibility in setting the discount rate and we
have used this in settling for 5%. This is, of course, still a full two percentage points below the 7%
return that is anticipated from our new investment strategy and over three percentage points below the
actual annual return achieved by the fund over the last decade.

The derived long run inflation rate which is calculated as the difference between gilt and index linked
yields has been similarly variable moving between 2.4% and 3% at the last five year ends. Demand
has pushed index-linked gilts yields to a six year low which has created the high in derived inflation.

                                                                                             Page 9
Again the movement in yield has pushed the assumed inflation factor up to 2.9% which is above our
long run forecast of 2.5%-2.75%.

Research into life expectancy has identified that people are living longer. To reflect this in producing
our IAS 19 numbers we have increased our mortality assumption from the previous PA92 unadjusted
table to the short cohort. We understand this to be the best estimate of mortality for our scheme. The
short cohort means that a 60 year old male is expected to live a further 25.9 years against only 21.2
under the PA92 unadjusted table.

The table below summarises the movement in the key assumptions between last year end and this and
the impact of those changes. The table also sets out the position on the assumption of 6% and 7%
investment return and long-term inflation of 2.75%.

                                 2004      Improved       Higher        Lower        6%         7%
                           assumptions            life   inflation    discount    return     return
                                         expectancy                       rate
       Inflation                2.5%            2.5%        2.9%         2.9%      2.75%     2.75%
       Discount rate            5.4%            5.4%        5.4%         5.0%       6.0%      7.0%
       Mortality              Base 92           Short       Short        Short      Short     Short
                                               cohort      cohort       cohort     cohort    cohort
       Surplus/(Deficit)        £4.0m        (£5.5m)     (£9.7m)     (£15.8m)    (£0.2m)    £10.3m


The proposed final dividend of 3.7p per share gives a total dividend of 5.3p per share which represents
an increase of 100% (2004: 2.65p). The dividend will be payable on 17 May 2006 to shareholders on
the register on 17 March 2006. Dividend cover is 1.8 times.

Balance Sheet

The Group enjoys a robust Balance Sheet. £16.25 million of the senior debt facility was repaid during
the year leaving only £20 million of bank debt utilised. Letter of credit utilisation was also reduced by
£6.1 million to £3.9 million. The Insurance Division has an excess of solvency capital such that it could
significantly increase its premium write without the need for additional capital. The Group has sufficient
resources available to fund the Retail Divisions development plans.


My thanks go to Highway’s people all of whom have contributed to our success in 2005.

Group Finance & Operations Director
7 March 2006

                                                                                                  Page 10
Highway Insurance Holdings Plc
Consolidated Income Statement
For the year ended 31 December 2005
                                                    Year ended      Year ended
                                                   31 December    31 December
                                                          2005            2004
                                            Note          £000            £000

Gross insurance premium revenue                        258,444        252,122
Premiums ceded to reinsurers                           (15,514)       (26,561)
Net insurance premium revenue                          242,930        225,561

Fee and commission income                               18,483          7,091
Investment income                                       27,452         24,284
Net income                                             288,865        256,936

Claims incurred                                       (176,410)      (217,515)
Reinsurers’ share of claims incurred                    (9,013)         44,964
Net insurance claims incurred                         (185,423)      (172,551)

Underwriting and policy acquisition costs              (45,896)       (45,278)
Administrative expenses                                (26,055)       (13,080)
Investment expenses                                     (2,097)        (1,738)
Operating profit                                         29,394         24,289

Finance costs                                           (2,137)        (3,049)
Profit before income taxes                    2         27,257         21,240

Income taxes                                  3         (7,771)        (6,536)
Profit for the year                                     19,486         14,704

Attributable to:
Equity holders of the parent                            19,486         14,668
Minority interests                                           -             36
Profit for the year                                     19,486         14,704

Earnings per share
Basic                                         4           9.7p            7.4p
Diluted                                       4           9.4p            7.4p

Dividend per share:
Paid                                          5           1.6p          0.80p
Proposed                                      5           3.7p          1.85p
Dividend (paid and proposed)                  5         10,607          5,286

                                                                                 Page 11
Highway Insurance Holdings Plc
Consolidated Statement of Recognised Income and Expense
For the year ended 31 December 2005
                                                                  Year ended      Year ended
                                                                 31 December    31 December
                                                                        2005            2004
                                                          Note          £000            £000

Pension scheme actuarial (losses)/gains                              (11,884)         1,984
Deferred tax on pension scheme actuarial losses/(gains)                 3,565         (595)
Net income recognised directly in equity                              (8,319)         1,389

Profit for the year                                                   19,486         14,704

Total recognised income and expense for the year            7         11,167         16,093

Attributable to:
Equity holders of the parent                                          11,167         16,057
Minority interests                                                         -             36
Total recognised income and expense for the year            7         11,167         16,093

                                                                                               Page 12
Highway Insurance Holdings Plc
Consolidated Balance Sheet
As at 31 December 2005
                                            Year ended      Year ended
                                           31 December    31 December
                                                  2005            2004
                                    Note          £000            £000

Property, plant and equipment                    2,391          1,331
Intangible assets
     - Deferred acquisition costs               20,158         19,731
     - Other intangible assets                  23,115         17,843
Financial assets                               313,856        283,271
Reinsurance assets                              90,556        136,170
Deferred tax assets                                906              -
Insurance and other receivables                 85,012         79,161
Cash and cash equivalents                       90,915        104,810
Total assets                          2        626,909        642,317

Insurance contract provisions                 (440,507)      (472,391)
Financial liabilities                          (35,600)       (50,269)
Insurance and other payables                   (41,507)       (29,073)
Employee benefit obligations                   (15,980)        (4,475)
Deferred tax liabilities                              -        (2,317)
Current tax liabilities                         (4,976)           (42)
Total liabilities                     2       (538,570)      (558,567)

Net assets                                      88,339         83,750

Shareholders’ equity
Share capital                         7         40,666          40,666
Share premium                         7         17,953          16,483
Reserve for own shares                7         (2,397)        (2,533)
Other reserve                         7         39,221          40,861
Retained earnings                     7         (7,104)       (11,727)
Total shareholders’ equity                      88,339          83,750

                                                                         Page 13
Highway Insurance Holdings Plc
Consolidated Cash Flow Statement
For the year ended 31 December 2005
                                                               Year ended       Year ended
                                                              31 December     31 December
                                                                     2005             2004
                                                       Note          £000             £000

Cash flows from operating activities
Profit before income taxes                                          27,257         21,240
Depreciation of property, plant and equipment                          726             763
Amortisation of other intangible assets                              3,272           1,906
Amortisation of deferred acquisition costs                          43,124         44,053
Fair value gains on financial assets                              (13,752)         (2,517)
Loss/(gain) on sale of property, plant and equipment                     62            (21)
Interest expense                                                     2,229           2,463
Gain on disposal of subsidiary undertaking                                -            (26)
Equity settled share based payment expense                             116               24
Exchange gain on borrowings                                          (277)                -
Additional contributions in excess of service cost                     (23)            (23)
Expected return on net assets of pension scheme                      (356)           (379)
                                                                    62,378         67,483

Net purchase of financial assets                                  (16,473)        (75,234)
Decrease/(increase) in assets                                        4,140        (34,060)
(Decrease)/increase in liabilities                                (23,679)          27,887
                                                                    26,366        (13,924)

Interest paid                                                      (2,914)         (1,875)
Income taxes paid                                                  (3,192)               -

Net cash inflow/(outflow) from operating activities                20,260         (15,799)

Cash flows from investing activities
Proceeds from sale of property plant and equipment                      68              39
Disposal of subsidiary, net of cash disposed of                          -             354
Acquisition of subsidiaries, net of cash acquired                  (9,445)         (7,579)
Acquisition of property plant and equipment                        (1,501)           (391)
Development expenditure                                            (1,096)           (841)
Acquisition of customer relationships                                (174)               -
Loans advanced                                                           -         (2,000)
Net cash used in investing activities                             (12,148)        (10,418)

Cash flows from financing activities
Proceeds from issue of subordinated note                                 -           8,496
Repayment of borrowing                                            (16,250)        (13,750)
Payment of finance lease liabilities                                  (36)           (246)
Equity dividends paid                                              (6,902)         (4,916)
Redemption of loan note                                              (240)               -
Dividends paid to minorities                                             -           (160)
Net cash used in financing activities                             (23,428)        (10,576)

Net decrease in cash and cash equivalents                         (15,316)        (36,793)
Cash and cash equivalents at 1 January                            100,459         137,252
Cash and cash equivalents at end of year                            85,143        100,459

                                                                                              Page 14
Cash and cash equivalents include the following for the purposes of the cash flow statement:

                                                             Year ended       Year ended
                                                            31 December     31 December
                                                                   2005             2004
                                                                   £000             £000

 Cash and cash equivalents                                        90,915        104,810
 Bank overdrafts                                                  (5,772)        (4,351)
                                                                  85,143        100,459

                                                                                           Page 15
Highway Insurance Holdings Plc
Notes to the Consolidated Financial Statements
For the year ended 31 December 2005

1.     Principal accounting policies

The preliminary announcement is extracted from the accounts of Highway Insurance Holdings Plc ("the
Company") and its subsidiary undertakings for the year ended 31 December 2005. The statutory
accounts for the Group were approved by the Board on 7 March 2006. An unqualified audit report was
issued on the same day. The financial statements for the year ended 31 December 2005 have not yet
been delivered to the Registrar.

The financial information for 2004 is derived from the IFRS restatement document published by the
Company on 5 August 2005. Consequently the 2004 comparative information published herein does
not constitute the statutory accounts of the Company for that year. The auditors have reported on the
original 2004 UK GAAP accounts; their report was unqualified and did not include a statement under
Section 237(2) or (3) of the Companies Act 1985.

a) Statement of compliance
The consolidated financial statements of the Group have been prepared and approved by the directors
in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European
Union (EU). These are the Group’s first consolidated financial statements under IFRS and IFRS 1 has
been applied.

The Group has applied all IFRSs and interpretations adopted by the EU at the date the financial
statements were authorised by the directors. The Group has early adopted the amendments to IAS 39,
The Fair Value Option and IAS 19, Actuarial Gains and Losses, Group Plans and Disclosures in these
financial statements. IFRS 7, Financial Instruments: Disclosures, the application of this standard which
is effective for accounting periods beginning on or after 1 January 2007 would not have affected the
balance sheet or income statement, but would have resulted in changes to the disclosures about
financial instruments and insurance contracts.

b) Basis of preparation
The financial statements are presented in pounds sterling, rounded to the nearest thousand. They are
prepared on the historical cost basis except that the following assets and liabilities are stated at their
fair value; derivative financial instruments and financial instruments designated at fair value through
profit or loss.

The preparation of financial statements in conformity with IFRS requires management to make
judgements, estimates and assumptions that affect the application of policies and reported amounts of
assets and liabilities, income and expenses. The estimates and associated assumptions are based on
historical experience and various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis of making the judgements about carrying values of
assets and liabilities that are not readily apparent from other sources. Actual results may differ from
these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to
accounting estimates are recognised in the period in which the estimate is revised if the revision affects
only that year, or in the year of the revision and future years if the revision affects both current and
future years.

                                                                                              Page 16
The accounting policies set out below have been applied consistently to all years presented in these
consolidated financial statements and in preparing an opening IFRS balance sheet at 1 January 2004
for the purposes of the transition to IFRSs.

The accounting policies have been applied consistently by Group entities.

c) Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and entities
controlled by the Company (its subsidiaries). Control exists when the Group has the power, directly or
indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its
activities. The financial results of subsidiaries are included in the consolidated financial statements
from the date that control commences until the date that control ceases.

Intra-group balances and any unrealised gains and losses or income and expenses arising from intra-
group transactions are eliminated in preparing the consolidated financial statements.

d) Insurance contracts
The Group currently underwrites motor insurance through Highway Insurance Company Limited its
FSA regulated insurance company. All contracts written by the Group meet the definition of insurance
contracts in IFRS 4, Insurance Contracts.

Gross written premiums represent premiums on business incepting during the year, irrespective of
whether they relate in whole or in part to a later year, together with adjustments to premiums written in
previous years.

The provision for unearned premiums represents that part of gross premiums written which is
estimated to be earned after the balance sheet date.

Outward reinsurance premiums are accounted for in the same accounting year as the gross premiums
to which they relate.

Claims incurred include all losses occurring during the year, whether reported or not, related handling
costs and any adjustments to claims outstanding from previous years.

Outstanding claims provisions are based on the estimated ultimate cost of all claims incurred but not
settled at the balance sheet date, whether reported or not, together with related claims handling

Insurance contract provisions
Claims outstanding
The ultimate cost of outstanding claims including IBNR is estimated using a range of standard actuarial
claims projection techniques, such as the Chain Ladder and Bornhuetter-Ferguson methods. Such
methods extrapolate the development of paid and incurred claims, average cost per claim and ultimate
claim numbers for each underwriting year, based upon observed development of earlier years and
expected loss ratios.

Provisions are calculated allowing for reinsurance recoveries and a separate asset is recorded for the
reinsurers' share, having regard to collectability.

Whilst the directors consider that the gross provisions for claims and the related reinsurance recoveries
are fairly stated on the basis of the information currently available to them, the ultimate liability will vary
as a result of subsequent information and events and may result in significant adjustments to the
amount provided. Adjustments to the amounts of claims provisions established in prior years are

                                                                                                   Page 17
reflected in the financial statements for the period in which the adjustments are made, and are
disclosed separately if material. The methods used, and the estimates made, are reviewed regularly.

Unexpired risk provision
A provision for unexpired risks is made when it is anticipated that unearned premiums will be
insufficient to meet future claims and claims settlement expenses of business in force at the end of the
period after deduction of any acquisition costs deferred. The provision for unexpired risks is calculated
after taking into account the relevant investment return on assets held to back insurance contract
liabilities. This test meets the minimum requirements for liability adequacy test under IFRS 4,
Insurance Contracts.

Underwriting and policy acquisition costs
Underwriting and policy acquisition costs, comprising commission and other costs related to the
acquisition of new insurance contracts and the renewal of existing contracts. They are deferred over
the period in which the related premium is earned and to the extent that they are recoverable against
future margins.

e) Segment reporting
A segment is a distinguishable component of the Group that is engaged either in providing products or
services (business segment), or in providing products or services within a particular economic
environment (geographical segment), which is subject to risks and rewards that are different from
those of other segments. The Group’s primary segments are business segments.

f) Revenue
Investment income
Investment income comprises dividends, interest, realised and unrealised gains and losses on assets
held at fair value through profit and loss.

Fair value realised gains and losses are calculated as the difference between the net sales proceeds
and fair value at acquisition.

Fair value unrealised gains and losses are calculated as the difference between the current fair value
at balance sheet date and fair value at acquisition, adjusted for previously recognised unrealised gains
and losses of those financial assets disposed of in the accounting period.

Dividend income is recognised when the right to receive payment is established.

Fee and commission income
Fee and commission income is measured at the fair value of the consideration received or receivable
and represents amounts receivable for services provided in the normal course of business, net of
discounts, VAT and other sales related taxes.

Income is recognised in the accounting period in which the service is provided.

g) Expenses
Operating expenses
The Group's operations include the control and payment of expenses, some of which relate to and are
recharged to managed syndicates. The costs are charged to the profit and loss account as incurred.

                                                                                             Page 18
2.     Segment reporting
Segment information is presented in respect of the Group's business segments only as the Group
operates within one geographical segment, this being the UK. The primary format, business
segments, is based on the Group's internal management reporting structure.

Inter-segment pricing is determined on an arm’s length basis.

Segment results include items directly attributable to a segment as well as those that can be allocated
on a reasonable basis.

The Group comprises the following business segments:
•          Insurance: this includes the underwriting and investment results from the Group’s Insurance
•          Claims: this includes income derived from the Group’s claims management arrangements;
•          Retail: this includes the results of the Group’s insurance brokers;
•          Unallocated: this includes the expenses incurred by the Group’s corporate businesses.

Segment result for the 12 months ended 31 December 2005:

                               Insurance   Claims       Retail   Unallocated     Eliminations      Total
                                    £000     £000        £000           £000             £000      £000

    Gross written premium        253,619         -           -             -                -    253,619

    Net insurance premium        242,930         -           -             -                -    242,930
    Fee and commission             1,580     1,400     16,477          (171)                -     19,286
    Inter-segment sales                -         -          -             -             (803)      (803)
    Investment income             26,764         -         73           615                       27,452
    Segment revenue              271,274     1,400     16,550           444             (803)    288,865

    Net insurance claims
         incurred              (185,423)         -           -             -               -    (185,423)
    Underwriting and policy     (47,784)         -           -             -             803     (46,981)
         acquisition costs
    Administration expenses            -         -    (15,575)       (5,396)                -    (20,971)
    Investment expense           (2,097)         -           -             -                -     (2,097)
    Segment operating profit     35,970      1,400         975       (4,952)                -      33,393

    Finance costs                  (479)         -           -       (1,658)                -     (2,137)
    Depreciation                       -         -       (172)         (555)                -       (727)
    Amortisation                 (1,444)     (105)     (1,723)             -                -     (3,272)
    Segment result               34,047      1,295       (920)       (7,165)                -     27,257

                                                                                                     Page 19
Segment result for the year ended 31 December 2004:

                                 Insurance      Claims     Retail   Unallocated       Eliminations        Total
                                      £000        £000     £000           £000               £000         £000

 Gross written premium            247,324             -         -               -                 -    247,324

 Net insurance premium             225,561            -         -               -                 -    225,561
 Fee and commission                   (96)       2,245     4,650           590                    -      7,389
 Inter-segment sales                     -           -         -             -              (298)        (298)
 Investment income                  23,329           -        34           921                  -       24,284
 Segment revenue                   248,794       2,245     4,684         1,511              (298)      256,936

 Net insurance claims
      incurred                   (172,551)            -         -               -               -     (172,551)
 Underwriting and policy          (46,541)            -         -               -             298      (46,243)
      acquisition costs
 Administration expenses                 -     (1,015)    (4,830)       (3,601)                   -     (9,446)
 Investment expenses               (1,738)           -          -             -                   -     (1,738)
 Segment operating profit          27,964        1,230      (146)       (2,090)                   -     26,958

 Finance costs                           -            -        -        (3,049)                   -     (3,049)
 Depreciation                            -            -     (36)          (727)                   -       (763)
 Amortisation                      (1,206)         (53)    (647)              -                   -     (1,906)
 Segment result                    26,758        1,177     (829)        (5,866)                   -     21,240

Segment assets and liabilities for the year ended 31 December 2005:

                                             Insurance    Claims       Retail       Unallocated          Total
                                                  £000      £000        £000               £000          £000
 Segment assets
 Property, plant and equipment                       -         -       1,245              1,146          2,391
 Intangible assets                              28,407       473      14,393                  -         43,273
 Financial assets                              308,395         -           -              5,461        313,856
 Reinsurance assets                             90,556         -           -                  -         90,556
 Insurance and other receivables                53,169     1,737      14,747             15,359         85,012
 Cash and cash equivalents                      89,233         -         897                785         90,915
 Total segment assets                          569,760     2,210      31,282             22,751        626,003
 Deferred tax assets                                                                                       906
 Total assets                                                                                          626,909

 Segment liabilities
 Insurance contract provisions                 440,507         -           -                  -        440,507
 Financial liabilities                          15,069         -           -             20,531         35,600
 Employee benefit obligations                        -         -           -             15,980         15,980
 Insurance and other payables                   21,424     (802)       9,192             11,693         41,507
 Total segment liabilities                     477,000     (802)       9,192             48,204        533,594
 Current tax liabilities                                                                                 4,976
 Total liabilities                                                                                     538,570

 Capital expenditure                             1,096          -     10,470                658         12,224

                                                                                                           Page 20
Segment assets and liabilities for the year ended 31 December 2004:

                                             Insurance     Claims   Retail    Unallocated         Total
                                                  £000       £000   £000            £000          £000
 Segment assets
 Property, plant and equipment                      -           -      158          1,173        1,331
 Intangible assets                             28,328         578    8,668              -       37,574
 Financial assets                             281,343           -        -          1,928      283,271
 Reinsurance assets                           136,170           -        -              -      136,170
 Insurance and other receivables               97,893       1,340    7,667       (27,739)       79,161
 Cash and cash equivalents                    101,836                (417)          3,391      104,810
 Total assets                                 645,570       1,918   16,076       (21,247)      642,317

 Segment liabilities
 Insurance contract provisions                472,391          -         -              -      472,391
 Financial liabilities                         13,512          -         -         36,757       50,269
 Employee benefit obligations                       -          -         -          4,475        4,475
 Insurance and other payables                  72,904        201     6,216       (50,248)       29,073
 Total segment liabilities                    558,807        201     6,216        (9,016)      556,208
 Deferred tax liabilities                                                                        2,317
 Current tax liabilities                                                                            42
 Total liabilities                                                                             558,567

 Capital expenditure                                 841     631     9,479             378      11,329

Segment assets and liabilities do not include current or deferred tax balances.

Capital expenditure comprises additions to property, plant and equipment and intangible assets,
including additions resulting from acquisitions through business combinations.

3.      Income taxes

                                                                         Year ended            Year ended
                                                                        31 December          31 December
                                                                               2005                  2004
                                                                               £000                  £000

 Current tax expense
 Current year                                                                 7,570                    57
 Adjustments in respect of prior years                                          418                 (131)
                                                                              7,988                  (74)

 Deferred tax expense
 Origination and reversal of temporary differences                           (1,079)               1,186
 Benefit of tax losses recognised                                              1,721               5,781
 Adjustments in respect of prior years                                         (859)               (357)
                                                                               (217)               6,610

 Total income tax expense                                                     7,771                6,536

                                                                                                            Page 21
4.     Earnings per share
(a) Basic earnings per share
Basic earnings per share is calculated by dividing the profit attributable to ordinary shareholders by the
weighted average number of ordinary shares in issue during the year, excluding ordinary shares
purchased by the Company and held as treasury shares.

                                                                    Year ended      Year ended
                                                                   31 December    31 December
                                                                          2005            2004
                                                                          £000            £000

 Profit attributable to ordinary shareholders                           19,486          14,704

 Weighted average number of ordinary shares in issue (basic)
 Issued ordinary shares at 1 January                                   203,332         201,615
 Effect of own shares held                                              (3,188)         (3,303)
 Effect of shares issued in July 2004                                         -             359
 Effect of shares issued in October 2004                                      -             253
 Weighted average number of ordinary shares at 31 December             200,144         198,924

 Basic earnings per share                                                 9.7p            7.4p

(b) Diluted earnings per share
Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares
outstanding to assume conversion of all potential dilutive ordinary shares. The Group’s earnings per
share is diluted by the effects of outstanding share options, conditional share awards and outstanding
share warrants.

                                                                    Year ended      Year ended
                                                                   31 December    31 December
                                                                          2005            2004
                                                                          £000            £000

 Profit attributable to ordinary shareholders                           19,486          14,704

 Weighted average number of ordinary shares in issue (diluted)
 Weighted average number of ordinary shares at 31 December             200,144         198,924
 Adjustment for share options                                            7,000               -
 Adjustment for conditional share awards                                    90               -
 Adjustment for share warrants                                           1,000           1,000
 Weighted average number of ordinary shares for diluted earnings
     per share                                                         208,234         199,924

 Diluted earnings profit per share                                        9.4p            7.4p

                                                                                                  Page 22
5.   Dividends
Amounts recognised as distributions to equity holders in the period:

                                                                                Year ended           Year ended
                                                                               31 December         31 December
                                                                                      2005                 2004
                                                                                      £000                 £000

 Final dividend for the year ended 31 December 2003 of 1.68p per share                         -          3,330
 Interim dividend for the six months ended 30 June 2004 of 0.8p per share                      -          1,586
 Final dividend for the year ended 31 December 2004 of 1.85p per share                     3,700              -
 Interim dividend for the six months ended 30 June 2005 of 1.6p per share                  3,202              -
 Total                                                                                     6,902          4,916

The proposed final dividend of 3.7p per share amounting to £7,405,000 has been declared. As the final
dividend had not been approved, by the Board at the balance sheet date it has not been included as a
liability as at 31 December 2005.

6.    Retirement benefit schemes
The Group has two pension schemes, a defined contribution plan and a defined benefit plan.

The defined contribution plan covers the majority of the Group’s employees and directors.

The defined benefit plan is closed to all employees other than those who were aged over 50 years of
age as at 30 June 2001. The funds of the plan are controlled by trustees and are administered

The most recent actuarial valuation of plan assets and the present value of the defined benefit
obligation was carried out at 31 December 2002. The present value of the defined benefit obligation
and the related service cost were measured using the projected unit credit method.

The main financial assumptions used to calculate plan liabilities are:

                                                                       At 31 December          At 31 December
                                                                                 2005                    2004
                                                                                   %                       %

 Discount rate                                                                      5.00                 5.40
 Mortality                                                                  Short cohort              Base 92
 Expected return on plan assets                                                     6.30                 6.40
 Future salary increases                                                            2.90                 2.50
 Future pension increases                                                           2.90                 2.50
 Proportion of employees opting for early retirement                                 Nil                   Nil

The Group recognises in full actuarial gains and losses over members’ future working lives through the
statement of recognised income and expense.

The amounts recognised in the balance sheet in respect of the defined benefit plan is as follows:

                                                                                   2005                    2004
                                                                                   £000                    £000

 Present value of defined benefit obligation                                     86,116                  65,096
 Fair value of plan assets                                                     (70,136)                (60,621)
 Total employee benefit liability                                                15,980                   4,475

                                                                                                                 Page 23
7    Capital and reserves
Reconciliation of movement in capital and reserves

Attributable to equity holders of the parent
                                                    Share   Reserve
                                        Share    premium    for own      Other     Retained
                                       capital    account    shares    reserve     earnings     Total
                                         £000        £000      £000       £000         £000     £000

 At 1 January 2004                     40,323      16,277    (2,557)   40,861       (22,868)   72,036
 Total recognised income and expense                                                  16,057   16,057
 Shares issued                            343        206           -         -             -      549
 Appropriation to the Highway Share
      Incentive Plan                        -           -         24        -              -        24
 Equity dividends paid                      -           -          -        -        (4,916)   (4,916)
 At 31 December 2004                   40,666      16,483    (2,533)   40,861       (11,727)   83,750

 At 1 January 2005                     40,666      16,483    (2,533)   40,861       (11,727)   83,750
 Total recognised income and expense        -           -          -         -        11,167   11,167
 Reallocation of other reserve              -       1,470         20   (1,490)             -        -
 Share scheme expenses                      -           -          -         -           208      208
 Appropriation to the Highway Share
      Incentive Plan                        -           -        116        -              -       116
 Write back share warrant expense           -           -          -    (150)            150         -
 Equity dividends paid                      -           -          -        -        (6,902)   (6,902)
 At 31 December 2005                   40,666      17,953    (2,397)   39,221        (7,104)   88,339

Share capital
                                                               2005                             2004
Company                                Number of shares        £000      Number of shares       £000

Ordinary 20p shares:
Authorised                                   274,999,998     55,000              274,999,998   55,000
Allotted, issued and fully paid              203,331,668     40,666              203,331,668   40,666

Under the Placing and Open Offer Agreement of 12 March 2002, Warrants to subscribe for 1 million
ordinary 20p shares in Highway Insurance Holdings Plc were issued to Numis Securities Limited.
These Warrants can be exercised at 34.5p per share at any time between the admission date of 12
April 2002 and the fifth anniversary thereof.

Reserve for own shares
The reserve for the Company’s own shares comprises the cost of the Company’s shares held by the
Group. At 31 December 2005, the Group held 3,187,721 (2004: 3,302,930) of the Company’s shares.

Other reserve
The other reserve relates to the Group’s merger in December 1998 with New London Capital plc.

                                                                                                    Page 24

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