Final Results

Hiscox PLC 26 March 2003 PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2002 'A STRONG RETURN TO PROFITS' 2002 2001 Gross written premiums Â£676.7 million Â£548.9 million Operating profit/(loss) Â£34.5 million Â£(21.2) million Pre tax profit/(loss) Â£20.3 million Â£(32.5) million Profit/(loss) after tax Â£14.0 million Â£(23.1) million Earnings/(loss) per share based on 11.3p (9.7)p operating profit/(loss) after tax Final dividend 2.4p per share Nil Net asset value per share (before 101.7p 91.4p equalisation provision) HIGHLIGHTS â€¢ Rapid turnround to operating profit Â£34.5 million (2001: Â£21.2m loss). Pre-tax profit Â£20.3 million (2001: Â£32.5m loss). â€¢ Group combined loss ratio 94.8% (2001: 109.9%). â€¢ Hiscox plc gross written premium income up 23% to Â£676.7 million. â€¢ Group controlled gross written premium income up 21% to Â£941.3 million. â€¢ Excellent performance from Lloyd's Syndicate 33. Gross written premium applicable to Hiscox plc up 35% to Â£461.8 million (2001: Â£343.2m). Operating profit Â£21.2 million (2001: Â£29.4m loss). 2003 capacity increased to Â£842 million from Â£504 million. â€¢ London Market conditions continue very firm. â€¢ UK Retail operating profit up 54% to Â£11.7 million (2001: Â£7.6m). Gross written premium Â£148 million (2001: Â£144m). Product range expansion and broadening of distribution continues in 2003. â€¢ International Retail business operating profit Â£1.6 million (2001:Â£0.6m). Gross written premium Â£67.4 million (2001: Â£62.1m). New opportunities for expansion as competitors withdraw. â€¢ Retail rates in both areas continue to rise. â€¢ Successful rights issue raised Â£110 million (net of expenses) to fund expansion. Capital committed and leveraged. â€¢ Final dividend of 2.4p. Robert Hiscox, Chairman Hiscox plc, commented: 'This is a strong result. Syndicate 33 had an exceptional year, with skilful underwriting being rewarded with very low losses. Our retail business increased its profit and has great growth opportunities. We have excellent people, we have the capital and all our markets are strongly in our favour. The future looks good.' Copies of the Chairman's statement, Chief Executive's report and the Group's financial statements as at 31 December 2002 are attached. FOR FURTHER INFORMATION: HISCOX PLC Robert Hiscox Chairman 020 7448 6011 Bronek Masojada Chief Executive 020 7448 6012 Stuart Bridges Finance Director 020 7448 6013 THE MAITLAND CONSULTANCY Philip Gawith 020 7379 5151 Suzanne Bartch 020 7379 5151 NOTES TO EDITORS 1. Hiscox plc is a specialist insurance group listed on the London Stock Exchange where it has a market capitalisation of circa Â£450 million. There are three main underwriting parts of the Group - Syndicate 33 at Lloyd's, UK Retail and International Retail business. Syndicate 33 had a premium income of Â£726 million in 2002. It underwrites mainly internationally traded business in the London Market - generally large or complex business which needs to be shared with other insurers or needs the international licences of Lloyd's. The UK Retail business had a premium income of Â£148 million in 2002. It offers a wide range of specialist insurance for professionals and business customers, as well as high net worth individuals. It has regional offices in Birmingham, Glasgow, Leeds and Maidenhead. The International Retail business had a premium income of Â£67 million in 2002. It has offices in Paris, Amsterdam, Munich and Guernsey. The European offices write mainly high value household business and some specialist professional indemnity business. The Guernsey office underwrites kidnap and ransom business and fine art. 2. Hiscox plc has also made a separate announcement today releasing the 2000 Account Result and 2001 Open Year Forecast for Syndicate 33. CHAIRMAN'S STATEMENT RESULT The result for the year ending 31 December 2002 is a rapid and welcome return to profit. The operating profit was Â£34.5 million (2001: Â£21.2m loss) and the pre-tax profit of Â£20.3 million (2001: Â£32.5m loss). The gross premium income controlled by the Group rose to Â£941.3 million (2001: Â£780.0m), and the gross premium income applicable to Hiscox plc increased to Â£676.7 million (2001: Â£548.9m). Hiscox plc benefits from fees and profit commission earned on the income written for third parties. 2002 was an exceptional year for our Lloyd's Syndicate 33. Such major losses that occurred during the year, especially in the marine market, were in the main avoided by the syndicate. Our underwriters kept their nerve after 9/11 and increased the premium income dramatically. The resulting 2002 profit has more than covered the poor run-off of some of the earlier years. There was another satisfactory profit from our UK retail division and from our overseas operations. CAPITAL RAISING With the interim results in September 2002 we announced a rights issue. In the event, Â£110 million (net of expenses) was provided by shareholders on a 1 for 2 basis at 120p per share. Our largest shareholder, the Chubb Corporation, did not participate. This, together with other shareholders who were not able to participate, meant that around 50% of the shares had to be placed with new shareholders or with existing ones in excess of their pro-rata share. The fact that all shares were taken up was a great show of support and we are determined to justify it with good returns. DIVIDEND The directors propose a final dividend of 2.40p net (2001: nil) per ordinary share making a total distribution for the year of 3.54p (2001: nil). This is a small increase on the amount paid in 2000, and on the larger amount of shares in issue this year. The dividend will be paid on 30 June 2003 to shareholders on the register on 22 April 2003. HISCOX SYNDICATE 33 AT LLOYD'S The result this year is dominated by the excellent performance of Syndicate 33 in 2002. The performance and results for 1998-2000 were below the standards we set for ourselves (albeit better than the Lloyd's average). 2001 would have been back on track if it were not for the WTC loss, and 2002 has had the best calendar year underwriting loss ratios in my working life. I am seriously proud of the work done by Robert Childs and his team. Battered by poor results and then smacked by 9/11, the Syndicate 33 underwriters went straight back to the floor of Lloyd's and underwrote into the ensuing bull market with tremendous skill and courage. They added an extra Â£65 million income to the last three months of 2001, then continued the expansion in the 2002 year of account, writing around Â£850 million of premiums at 2002 monitoring rates of exchange. We increased the capacity of the Syndicate for 2003 to Â£842 million (2002: Â£504m) and Hiscox plc provides 65% of it. WTC We have increased the net reserve for this loss to Hiscox plc by Â£10 million. Our Syndicate 33 gross reserve has increased by $35 million to $475 million of which $275 million had been paid by 28 February 2003. Gross notifications have increased from $576 million as at 30 August 2002 to $591 million. There is obviously a spotlight on the WTC loss as it is the biggest individual loss we and others have ever incurred. However, Syndicate 33 has a number of large losses at any one time, and occasional catastrophes covering a multitude of losses, some of which are settled below expectations and some above. What matters is to get our overall reserves for the business right. UK RETAIL The UK Retail business made a highly satisfactory operating profit of Â£11.7 million (2001: Â£7.6m). The premium income increased to Â£147.6 million (2001: Â£143.6m) despite jettisoning some non-core business. Sian Fisher and her team are demonstrating discipline and self-control in focusing on their two main areas of business; speciality commercial and affluent personal lines. This specialisation gives them expertise and clout in the market. The brokers produce the vast majority of our business and our stability in turbulent times should increase the flow of their business to us. We continue to concentrate on organic growth with small add-on acquisitions of books of business that fit into our two core areas. Our Internet business grows rapidly and I believe that it will be a major earner in the future as people get used to buying insurance online. The strategy of growing the retail business outside Lloyd's is well on track and will pay even more handsome dividends in the future if the Lloyd's business has to be cut back when the cycle turns. INTERNATIONAL RETAIL BUSINESS Overall, our overseas operations made an operating profit of Â£1.6 million (2001: Â£0.6m). The Hiscox Insurance Co (Guernsey) made another excellent profit, as did our small venture in Ireland. Our three offices in Europe (France, Germany and the Netherlands) increased their aggregate income to Euros 45 million. They have now reached critical mass; they have excellent staff; market conditions are in their favour with rates up and the competition withdrawing, so I am confident that Europe will produce a good return in the future. LLOYD'S As the new chairman, Lord Levene, so elegantly put it, Lloyd's is one of the few certainties in a very uncertain insurance world at present. The extensive housekeeping done in the crisis years and completed in 1996, resulting in the reserves for all losses prior to 1993 being thoroughly scrutinised and then centralised into Equitas, has insulated the Lloyd's Market from the recent deterioration in old year losses hitting the rest of the insurance industry. Business has poured back into the London Market as the worldwide insurance industry, with very few exceptions, suffers from a shortage of capital and courage. Lloyd's is fulfilling its role as the hub of the international market. MARKET TRENDS How long will the bull market last? The established international insurance market remains in disarray. We are in the time-honoured position in the insurance cycle when current underwriting figures are excellent, but the losses and under-reserving of the past are eroding or destroying profits. There remains a delicious shortage of capacity and risk appetite for insurance, and an increasing demand for reinsurance due to shortage of capital. Traditionally, one of the curses of the insurance industry has been the ease of entry that allows new entrants to soften hard markets and fuel the downturn. However, this bottom of the cycle has had low interest rates and a difficult investment climate. This has not only limited the inflow of new capital - the $30 billion estimated to have been fed in is nowhere near the $200 billion estimated to have been eaten by losses and capital erosion - but is also forcing insurance companies to focus on underwriting returns, and to stop being investment trusts with an expensive habit. This concentration on decent returns from underwriting should prolong the hard market for a good few years longer than would be the case with higher interest rates and easier investment markets. With our background training in Lloyd's, where underwriting has always been paramount as the shareholders' funds were held by the Names, and where proper reserving has been vital due to the annual venture, we are able to take full advantage of the hard market. CORPORATE GOVERNANCE Most of those in government and regulation have very little practical business experience. It is easy for them to believe that a proper board of directors will stop all corporate scandals, and that there is a simple formula for the perfect board. Anyone who has been in the business battlefield will know that what you need are people with integrity, good judgement and commonsense (why did anyone call it common when it is so rare?). And they need to be united in the pursuit of profit for shareholders, not split into formulaic groups. Some will get better the longer they serve, and some will run out of steam after a while. Good directors will act on behalf of the Company whatever their perceived conflicts. There can be no rigid rules as long as we deal with human beings. I have no objection to the Government regularly asking an individual or group to set down one view of how businesses should be run. It can be a useful guide. But when it goes beyond a guide and becomes a code that must be followed, it can be destructive. Form will dominate substance. And the tick-box activities of the burgeoning proxy agencies that use no intelligence but just recommend votes slavishly according to blind obedience to the various reports are a complete abrogation of responsibility of any shareholder who uses them. Businesses need directors who help to guide the company into profit and away from danger, and also shareholders who can spot good business people from bad. PEOPLE We are lucky to have excellent non-executive directors and a board membership that complies with the recent Higgs Report, so my remarks above are without an axe to grind. We also have a wonderful staff throughout the Company. I have always believed that if we treat each other with respect and kindness, we will be a better company and one that will be a pleasure to deal with and thereby more profitable. I was therefore extremely gratified that Hiscox plc came 10th in the recent Sunday Times '100 Best Companies to Work for' list, above any other financial services company. Given the poor results we have had in previous years and the stress of the insurance business when losses thud in, it was a considerable achievement. I would like to thank everyone at Hiscox, and wish them the rewards that their recent endeavours deserve. FINALLY Hiscox plc last year underwrote almost Â£1 billion income. It also reached the FTSE 250 which we know was due to the decline of others as well as our rise in value. However, we will keep striving to grow the business organically with small incremental acquisitions, avoiding the black holes of major acquisitions, and to give good returns to our shareholders. We have felt strongly supported by them during the recent hard times and now it is payback time. There is only one way of building a first class company and that is through profits. We will all focus 100% on producing them. Robert Hiscox Chairman 26 March 2003 CHIEF EXECUTIVE'S REVIEW OVERVIEW A strong rating environment, selective underwriting and good claims experience have contributed to a swift return to profit in 2002. The proceeds of our Â£110 million (net of expenses) rights issue have grown our balance sheet, and allowed us to expand our underwriting in 2003. We will be able to continue to take advantage of current market conditions. Hiscox continues to grow as a leading insurer of specialty commercial and affluent personal lines customers. By focusing on a few well defined areas, we can provide excellent products and services to our customers and their brokers. It is this focus and responsiveness to the needs of our clients that has allowed us to grow our aggregate gross written premium so significantly this year. BUSINESS TRENDS The controlled gross premium income in the Group has grown to Â£941.3 million, an increase of 21%. Rating conditions are good across all lines of business. In our Syndicate business, rates remain firm. In our retail business, rates have increased, but not by the same degree as the syndicate business. Hiscox Insurance Company achieved a combined ratio of 97.9% (2001: 97.8%) - the third successive year of sub 98% combined ratio. Since 1997 we have grown this business at a compound rate of 18.8% per annum. Achieving growth with good combined ratios makes Hiscox Insurance Company a top quartile performer. Hiscox focuses on a number of well defined business areas. Current trends in each are reviewed below: â€¢ Affluent Personal Lines: In our Syndicate business, we have significantly grown our US business with local managing general agents. This is a great current opportunity, but it may shrink in the future once domestic US companies return to this segment. In our retail business we are seeing good growth, mostly driven by rating increases, though we expect that this year we will see policy count growth as well. The UK Property owners book which we exited at the beginning of 2002 has now run off. The retreat from personal lines business by some of our major competitors, particularly in mainland Europe, is benefiting us and should enable us to reinforce our market position in the forthcoming year. â€¢ Professional Insurances: In the retail business we focus on the insurance of service based firms. We continue to invest in this business, and are benefiting both from organic policy count growth and from rate increases. In the UK, growth has been particularly strong. Late last year we acquired the renewal rights to Denham Direct and we have decided to provide underwriting capacity to several underwriting agencies. In Europe we are just beginning to develop business in this area. In the syndicate, the business is mainly US focused serving major law firms. We are benefiting from the significant rate rises and capacity withdrawals within the professional indemnity market. â€¢ Aerospace, Technology, Media and Telecommunications (ATMT): Our base of ATMT business continues to broaden. It has previously been dominated by aerospace business, but it is now also building a book of US and UK technology business. The problems of the media account, due to the often perverse outcomes of libel actions, have now been addressed, and prospects look good. During the forthcoming year we will be putting effort into expanding this book into the rest of Europe. â€¢ London Market Reinsurance: This area saw rate increases taking place even ahead of the tragic events of 9/11. Rates have remained firm to increasing throughout 2002, and we have been able to expand our book. 2002 was marked by an absence of any insured catastrophes - but two narrow misses by hurricanes reminded us why customers purchase reinsurance. â€¢ London Market Insurance: This has been an area of expansion. We have provided capacity to the market at a time when many domestic players around the world have been reeling. A very good start to the 2002 underwriting year has been offset by deterioration of an old marine loss and an old energy liability loss. Prospectively, I expect that this area will be a significant profit generator. GROUP FINANCIAL PERFORMANCE Group after-tax profits were Â£14.0 million (2001: Â£23.1m loss), equal to earnings per share of 6.6p (2001: loss per share of 14.8p). At a pre-tax operating level profits were Â£34.5 million (2001: Â£21.2m loss). The Group combined ratio improved from 109.9% to 94.8%. These substantial improvements reflect the higher rates, selective underwriting and lower claims that we referred to earlier. This year each part of the Group contributed to the achievement of our operating profit. Our Lloyd's business contributed Â£21.2 million, our UK Retail business contributed Â£11.7 million and our International businesses contributed Â£1.6 million. In all cases this was a better performance than in the previous year. Our operating profit was Â£34.5 million and our pre-tax profit is Â£20.3 million (2001: Â£32.5m loss). The difference between these results is due to contributions to the government mandated equalisation provision and to negative short term fluctuations in our investment portfolio. In 2002 we contributed Â£2.7 million (2001: Â£2.6m) to the equalisation provision. Our total return from our investment portfolio was Â£16.2 million (2001: Â£9.9m), but, in difficult markets, this was below our expected return based on long term rates. This caused a negative fluctuation of Â£11.4 million, (2001: Â£8.7m). Our Group pre-tax return on equity available at the start of the year based on operating profit was 20.9% (2001: -15.9%). On after-tax profits this is equivalent to 8.5% (2001: -17.3%). LLOYD'S BUSINESS Our Lloyd's business comprises Hiscox plc's share of the results of Syndicate 33 at Lloyd's, together with profit commission and fees earned from third party capital. Also included are certain corporate expenses not allocated to other parts of the Group. It has had a good year. Controlled gross written premiums have grown to Â£726 million (2001: Â£574m). Hiscox plc's share of this income has grown by 35% to Â£461.8 million (2001 Â£343.2m). This growth in income reflects the continued increase in business written post the events of 9/11 and a slight increase in the ownership of Syndicate 33 to 63% (2001: 60%). Better terms and conditions and fewer losses have all translated to the combined ratio improving to 94.1% (2001: 115.9%). This represents a good start and we expect further improvement. We have increased our net reserve for WTC by Â£10 million for three reasons. First, as the claim from a telecommunications client has developed, more physical damage losses have been reported than we anticipated. Second, we have increased our bad debt provision, reflecting the downgrades of a number of reinsurers during the year. To date, however, no reinsurer on our programme has failed to pay a claim as a result of insolvency. Third, as part of the closing of Syndicate 33's 2000 year of account, we have felt it prudent to increase the reserve on a claim from a transportation client which fell on that year. Syndicate 33 began 2002 with a capacity of Â£504 million (2001: Â£360m). By the end of the year we had effectively increased this to Â£706 million with the help of qualifying quota share reinsurances provided to us from a range of leading international reinsurers, including Berkshire Hathaway and Chubb. These quota share reinsurers pay Syndicate 33 a fee and a profit commission in return for Syndicate 33 underwriting business on their behalf. We welcome their support. We initially planned to increase Syndicate 33's capacity for 2003 by 40% to Â£706 million (2002: Â£504m). In November we agreed with supporting capital providers to increase our capacity to Â£842 million. Qualifying quota shares allow us considerable flexibility to take advantage of market opportunities as, under current Lloyd's rules, we could seek approval to increase these reinsurances to a maximum of Â£336 million. UK RETAIL The UK retail business comprises the results of business written within Hiscox Insurance Company in the UK, together with the results of our direct activities. This aggregate business has had another good year with operating profit growing to Â£11.7 million (2001: Â£7.6m). Gross written premium has increased to Â£147.6 million (2001: Â£143.6m), despite the non-renewal of the Â£8.2 million property owners business. The combined ratio has remained at a market leading level of 96% (2001: 95.4%). At this level of performance our goal is to grow the business without compromising our underwriting standards. We currently serve less than 5% of our target markets, so we believe that our growth opportunities are huge. Last year we launched a Professional Insurances Portfolio that enables us to insure the full package of insurance required by small and medium sized service based businesses. This focus on specialty commercial business is in keeping with the overall strategy of the Hiscox Group. Looking forward to 2003, we expect to update our affluent personal line products -again broadening our product range. Both of these developments will allow us to serve better the two market segments on which we focus. During the year our direct business made rapid progress. This business is focused on 'mass affluent' personal lines customers. We distribute policies direct by telephone and on the internet (www.hiscoxonline.com), also to employees of 44 companies through their intranets and through partnerships with financial institutions. At the end of February 2003 we served 4,400 policyholders. A development during the course of this year will be the implementation of extranet technology to allow us to provide our partner brokers with more efficient underwriting and claims systems. This will be linked to the creation of a service centre in Colchester. Both of these developments will help us improve our cost position over time. INTERNATIONAL RETAIL BUSINESS This covers all the business written by Hiscox Insurance Company (Guernsey) Ltd., the business written by Hiscox Insurance Company in Europe and the results of our local underwriting agencies. In aggregate the business unit has performed well. Hiscox Guernsey has made another excellent profit. Our team there continues to underwrite more policies and has maintained its income despite a reduction in the size of risk they are willing to underwrite. This has brought the added advantage of better balance to the portfolio. Our mainland Europe business has had considerably improved results, almost halving its loss. Our combined ratio reduced to 111.3% (2001: 115.4%). This is not yet at our long term target, but we expect to see further progress as the individual offices gain scale. Our French operations traded profitably despite a large fine art loss in the first half of the year. German rates are improving, so as these increases earn through, its results should improve. In Benelux, we need to gain further economies of scale. Our Irish business had another good year. We believe that there are huge opportunities for profitable growth in the whole of Europe. INVESTMENT MANAGEMENT Our investment management business has two roles within the Group. First and foremost, it supervises the external managers who have day to day responsibility for the investment of our assets. Second, it manages a small range of funds - such as the Hiscox Insurance Portfolio - which focus on sectors where we feel our detailed knowledge of the financial services industry can add value. Total managed assets grew to Â£790.4 million (2001: Â£521.0m), of which Hiscox plc's share stood at Â£623.8 million at the end of 2002 (2001: Â£406.7m). This growth reflects the impact of our capital raising, the positive cashflow from our businesses and retained profit. This year we achieved a total return of 3.5% across those assets attributable to Hiscox plc (2001: 3.2%). This was below our assumed long term rates of return, causing a negative fluctuation of Â£11.4 million (2001: Â£8.7m). We have reduced our long term investment return targets for 2003 to 4% for bonds and 6% for equities. Third party assets under management grew to Â£93.7 million (2001: Â£55.5m). Part of this growth was due to the acquisition of the business of Eldon Capital Management. Eldon brought an additional Â£45.8 million of third party funds to Hiscox; more importantly, its financial sector expertise reinforces our insurance focus and its experienced staff provide good succession for the management of Hiscox plc's own assets. BALANCE SHEET The most important balance sheet event during the course of the year was the rights issue in November 2002 which raised Â£110 million net of expenses. At the year end our net asset value, before equalisation provision was 101.7 p per share (2001: 91.4p per share), and our tangible net assets value, before equalisation provision was 93.8p per share (2001: 79.0p per share). During the year we also renewed a letter of credit facility that is used to provide funds at Lloyd's to support our underwriting on Syndicate 33. The letter of credit was renewed at a level of Â£137.5m. We are grateful for the support of our bankers who have allowed us to expand our underwriting at the most attractive point in the insurance cycle. PEOPLE This year two individuals who have played an important role in the development of Hiscox are due to retire. The first is Nicholas Thomson, underwriter of Syndicate 33 from 1977 to 1993 and the Director of Underwriting for the Group until 2001. Nick embodies our underwriting culture - rational decision making and a strong sense of discipline. Over the past 2 years Nick has been developing computer based training programmes for the Group so that we can retain his knowledge forever. David Truby, our group compliance officer, also retires after 20 years of service. David has advised all of us as we have sought to ensure that Hiscox adapts to the changing regulatory environment. I would like to thank them for their endeavours. Hiscox remains as good as its people. Nick and David are being followed by many other individuals of strength and quality. We further developed our training schemes this year, and it is pleasing to see them becoming part of the landscape at Hiscox. We were particularly pleased to be nominated 10th in the annual Sunday Times '100 Best Companies to Work for' list. This is a great achievement. Finally, I would like to thank all of our staff. The past few years in insurance have been particularly difficult. Some of our businesses have performed well throughout the downturn and others have had to be restructured and refocused to return to profitability. This has taken commitment and resilience by many - and it is great to see the results of their labours being reflected in Group profits. We all are energised to ensure that this continues in the future. CONCLUSION The year has seen the business forging ahead. Using my usual yachting analogy, we have been sailing with a mainsail, jib and spinnaker and have taken full advantage of the conditions. The rights issue has allowed us to increase our level of business, effectively replacing our spinnaker with a bigger and better one. We will continue to surge forward in the year ahead. Bronek Masojada Chief Executive Officer 26 March 2003 FINANCIAL STATEMENTS CONSOLIDATED PROFIT AND LOSS ACCOUNTTECHNICAL ACCOUNT - GENERAL BUSINESS FOR THE YEAR ENDED 31 DECEMBER 2002 Notes 2002 2001 Â£000 Â£000 Earned premiums, net of reinsurance Gross premiums written 5 676,705 548,926 Outward reinsurance premiums (260,561) (136,349) Net premiums written 416,144 412,577 Change in the gross provision for unearned premiums (95,366) (77,806) Change in the provision for unearned premiums, reinsurers' 64,351 9,428 share Change in the net provision for unearned premiums (31,015) (68,378) Earned premiums, net of reinsurance 5 385,129 344,199 Allocated investment income transferred from the non-technical 5,6 27,643 18,562 account Claims incurred, net of reinsurance Claims paid: Gross amount (290,008) (253,041) Reinsurers' share 149,981 113,463 Net claims paid (140,027) (139,578) Change in the provision for claims: Gross amount 35,869 (247,646) Reinsurers' share (108,193) 154,469 Change in the net provision for claims: (72,324) (93,177) Claims incurred, net of reinsurance 4,5 (212,351) (232,755) Other technical income 5 - 1,324 Net operating expenses (145,751) (141,362) Other technical charges 5 (3,856) - Movement in equalisation provision 5 (2,703) (2,582) Balance on the technical account 48,111 (12,614) CONSOLIDATED PROFIT AND LOSS ACCOUNT NON-TECHNICAL ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2002 Notes 2002 2001 Â£000 Â£000 Balance on the technical account 48,111 (12,614) Investment return 6 21,413 15,131 Unrealised gains/(losses) on investments 6 (4,425) (4,703) Investment management expenses and charges 6 (809) (560) 6 16,179 9,868 Allocated investment return transferred to the technical 6 (27,643) (18,562) account Short term fluctuations in investment return 6 (11,464) (8,694) Other income 10,119 3,333 Other expenses (26,451) (14,521) Profit/(loss) on ordinary activities before tax 5 20,315 (32,496) Comprising: Operating profit/(loss) based on longer term investment return 5 34,482 (21,220) Short term fluctuations in investment return 5,6 (11,464) (8,694) Movement in equalisation provision 5 (2,703) (2,582) 5 20,315 (32,496) Tax on profit/(loss) on ordinary activities (6,340) 9,389 Profit/(loss) on ordinary activities after tax 13,975 (23,107) Dividends - Interim paid (2,299) - Dividends - Final payable (6,914) - Retained profit/(loss) for the year 4,762 (23,107) Earnings/(loss) per share: - Adjusted basic, based on operating profit/(loss) after tax 7 11.3p (9.7)p (on longer term investment return) - Basic, based on profit/(loss) on ordinary activities after 7 6.6p (14.8)p tax - Diluted, based on profit/(loss) on ordinary activities after 7 6.5p (14.8)p tax All operations of the Group are continuing. In accordance with the amendment to Financial Reporting Standard ('FRS') 3,'Reporting Financial Performance', no note of historical cost profits or losses has been prepared as the Group's only material gains and losses on assets relate to the holding and disposal of investments. CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES Notes 2002 2001 Â£000 Â£000 Profit/(loss) on ordinary activities after tax 13,975 (23,107) Exchange differences taken to reserves (50) (35) Total recognised gains and losses 13,925 (23,142) CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2002 Notes 2002 2001 Â£000 Â£000 Assets Intangible assets Goodwill 6,617 6,997 Other intangible assets 16,469 16,800 23,086 23,797 Investments Land and buildings 420 430 Other financial investments 8 502,944 344,402 503,364 344,832 Reinsurers' share of technical provisions Provision for unearned premiums 102,608 39,166 Claims outstanding 218,175 333,358 320,783 372,524 Debtors Debtors arising out of direct insurance operations 199,372 130,689 Debtors arising out of reinsurance operations 98,412 168,320 Other debtors 47,733 51,933 345,517 350,942 Other assets Tangible assets 7,119 7,018 Cash at bank and in hand 121,196 62,520 128,315 69,538 Prepayments and accrued income Accrued interest 2,643 2,221 Deferred acquisition costs 83,784 66,699 Other prepayments and accrued income 10,813 5,637 97,240 74,557 Total assets 1,418,305 1,236,190 CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2002 Notes 2002 2001 Â£000 Â£000 Liabilities Capital and reserves Called up share capital 10 14,459 9,633 Share premium account 10 230,585 124,612 Merger reserve 10 4,723 4,723 Capital redemption reserve 10 33,244 33,244 Profit and loss account 10 (2,709) (7,421) Shareholders' funds attributable to equity interests 10 280,302 164,791 Technical provisions Provision for unearned premiums 351,594 258,124 Claims outstanding 568,365 616,164 Equalisation provision 13,932 11,229 933,891 885,517 Provisions for other risks and charges - 926 Creditors Creditors arising out of direct insurance operations 65,423 45,850 Creditors arising out of reinsurance operations 67,892 72,608 Other creditors including taxation and social security 36,414 42,838 169,729 161,296 Accruals and deferred income 34,383 23,660 Total liabilities 1,418,305 1,236,190 CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2002 Notes 2002 2001 Â£000 Â£000 Net cash inflow from general business 45,069 15,295 Net shareholders' cash outflow from Lloyd's business c) (23,037) (12,489) Net cash flow from operating activities a) 22,032 2,806 Servicing of finance d) (1,709) (680) Taxation recovered/(paid) 777 (499) Capital expenditure d) (3,569) (2,774) Acquisitions and disposals d) - 1,380 Equity dividends paid (2,299) (3,453) Financing d) 108,539 55,368 123,771 52,148 Cash flows were invested as follows: Increase in cash holding e) 25,288 6,369 Net portfolio investment: Shares and units in unit trusts e) 19,911 (1,937) Debt securities and other fixed income securities e) 10,314 2,792 Deposits with credit institutions e) 68,265 44,924 Other investments e) (7) - Net investment of cash flows 123,771 52,148 NOTES TO THE FINANCIAL STATEMENTS 1. BASIS OF PREPARATION The financial statements of the Group have been prepared in accordance with applicable accounting standards as at 31 December 2002 and under historical cost accounting rules, modified by the revaluation of investments. The financial statements have been prepared in accordance with the provisions set out in Section 255 of, and Schedule 9A to, the Companies Act 1985. The Group has adopted all material recommendations of the revised Statement of Recommended Practice 'Accounting for Insurance Business' issued by the Association of British Insurers in December 1998. Financial Reporting Standard 19 'Deferred Tax' was published by the ASB in December 2000 and replaced the existing Statement of Standard Accounting Practice on deferred tax. FRS19 is effective for the year ended 31 December 2002. The adoption of FRS19 has had no material impact on the current or prior years' results. Results are determined on an annual basis. 2. BASIS OF CONSOLIDATION The consolidated financial statements include the assets, liabilities and results of the Company and its subsidiary undertakings up to 31 December each year. Profits or losses of subsidiary undertakings sold or acquired during the period are included in the consolidated results up to the date of disposal or from the date of acquisition, where acquisition accounting was adopted. Hiscox Dedicated Corporate Member Limited and the subsidiaries of Hiscox Select Holdings Limited underwrite as corporate members of Lloyd's on the syndicate managed by Hiscox Syndicates Limited (the 'managed syndicate'). In view of the several liability of underwriting members at Lloyd's for the transactions of syndicates in which they participate, the attributable share of the transactions, assets and liabilities of the syndicate has been included in the financial statements. 3. ACCOUNTING POLICIES The following principal accounting policies have been applied consistently in dealing with items which are considered material in relation to the Group's financial statements. a. Premiums For business written by the managed syndicate, written premiums comprise premiums on contracts incepting during the financial year. For all other business, written premiums comprise the premiums on contracts entered into during the accounting period, irrespective of whether they relate in whole or in part to a later accounting period. Written premiums are disclosed gross of commission payable to intermediaries and exclude taxes and duties levied on premiums. Premiums written include estimates for 'pipeline' premiums and adjustments to premiums written in prior accounting periods. Outward reinsurance premiums are accounted for in the same accounting period as the premiums for the related direct insurance or inwards reinsurance business. b. Unearned premiums The provision for unearned premium comprises the proportion of gross premiums written which is estimated to be earned in the following or subsequent financial years, computed separately for each insurance contract using the daily pro-rata method. Where the incidence of risk varies during the period covered by the contract, the provision is calculated taking into account the risk profile of the contracts. c. Acquisition costs Acquisition costs comprise all direct and indirect costs arising from the acquisition of insurance contracts. Deferred acquisition costs represent the proportion of acquisition costs incurred which corresponds to the proportion of gross premiums written which are unearned at the balance sheet date. d. Claims Claims incurred in respect of general business consist of claims and claims handling expenses paid during the financial year, together with the movement in the provision for outstanding claims and future claims handling expenses. Outstanding claims comprise provisions for the estimated cost of settling all claims incurred but unpaid up to the balance sheet date whether reported or not, together with related claims handling expenses. Anticipated reinsurance recoveries, and estimates of salvage and subrogation recoveries, are disclosed separately as assets. Whilst the directors consider that the gross provision 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 amounts provided. Adjustments to the amounts of claims provisions established in prior years are reflected in the financial statements for the period in which the adjustments are made. The provision for outstanding claims is actuarially calculated using the Chain Ladder and Bornhuetter-Ferguson methods. In exceptional cases the required provision is calculated with reference to the actual exposures. There is close communication between the actuaries and underwriters and allowance is made for the rating environment. Ultimate claims are projected both gross and net of reinsurance using reinsurance recovery rates based on historical experience, adjusted for the current reinsurance programme. e. Unexpired risk Provision is made for unexpired risks arising from general business where the expected value of the claims and expenses attributable to the unexpired periods of policies in force at the balance sheet date exceeds the unearned premiums provision in relation to such policies after the deduction of any acquisition costs deferred. The provision for unexpired risks is calculated separately by classes of business which are managed together, after taking into account relevant investment return. f. Equalisation provision An equalisation provision has been established and calculated in accordance with the requirements of Chapter 6 of the Interim Prudential Sourcebook for Insurers to mitigate exceptional high loss ratios for classes of business displaying a high degree of claims volatility. g. Investments Investments are stated at their current value. Listed investments comprise those quoted on the London and other International Stock Exchanges. These investments are stated at mid-market prices on the balance sheet date, or on the last stock exchange trading day before the balance sheet date. h. Investment return All investment return is recognised in the non-technical account. Dividends on ordinary shares are recognised as income on the date the ordinary shares are marked ex-dividend. Other investment income and interest receivable are included in income on an accruals basis. Realised gains or losses on investments represent the difference between net sales proceeds and their purchase price or their valuation at the commencement of the year. Unrealised gains and losses on investments represent the difference between the current value of investments at the balance sheet date and their purchase price or their valuation at the commencement of the year. The movement in unrealised investment gains / losses includes an adjustment for previously recognised unrealised gains / losses on investments disposed of in the accounting period. i. Allocation of investment return An allocation is made from the non-technical account to the general business technical account based on the longer term investment return on investments supporting the general insurance technical provisions and all the relevant shareholders' funds. The longer term investment return is an estimate of the long term trend investment return for Hiscox plc and its subsidiaries, together with the Hiscox Managed Syndicate, having regard to past performance, current trends and future expectations. j. Depreciation Depreciation is provided to write off the cost less the estimated residual value of tangible assets on a straight-line basis over their estimated useful economic lives or length of lease, if less, as follows: Short leasehold, fixtures and fittings 10 - 15 years Computer hardware and software 3 - 5 years Motor vehicles 3 years All other tangible fixed assets 4 years k. Goodwill Goodwill arising on acquisition of subsidiaries has been written off directly to reserves in the year of acquisition up to 31 December 1997. From 1 January 1998 in accordance with FRS 10 'Goodwill and intangible assets', goodwill arising on acquisitions, being the difference between the fair value of the purchase consideration and the fair value of net assets acquired, is capitalised in the balance sheet and amortised on a straight-line basis over its useful economic life which is considered to not exceed 20 years. Provision is made for any impairment. On disposal or termination of a business acquired up to 31 December 1997, any related goodwill previously written off directly to reserves is written back through the profit and loss account as part of the profit or loss on disposal. On the disposal or termination of a business since 1 January 1998, the profit or loss on disposal or termination is calculated after charging the unamortised amount of any related goodwill. l. Other intangible assets Other intangible assets are the cost of purchasing the Group's participation in Lloyd's insurance syndicates. In accordance with FRS 10, this capacity is capitalised at cost in the balance sheet and amortised over its useful economic life which the directors consider to not exceed 20 years. Provision is made for any impairment. m. Rates of exchange Assets, liabilities, revenues and costs denominated in foreign currencies are recorded at the rates of exchange ruling at the dates of the transactions. At the balance sheet date, monetary assets and liabilities are translated at the year end rates of exchange. Any exchange profits or losses arising on the translation of foreign currency amounts relating to underwriting are taken directly to the technical account. Other exchange profits or losses are taken directly to the non-technical account. Investments in foreign enterprises are translated using the net investment method. All exchange profits or losses arising on the translation of these investments are taken to reserves. n. Pension costs Pension contributions in respect of defined benefit schemes are charged against profits, with pension surpluses and deficits allocated over the remaining service periods of current employees. Differences between the amounts charged to the profit and loss account and payments made to the pension schemes are treated as assets or liabilities in the balance sheet. Pension contributions for defined contribution schemes are charged to the profit and loss account on an accruals basis. The Group has adopted FRS17 'Retirement Benefits'. This has had no material impact on the current year's results as only the transitional disclosure requirements have been included. o. Leases Where the Group enters into a lease which entails taking substantially all the risks and rewards of ownership of an asset, the lease is treated as a 'finance lease'. The asset is recorded in the balance sheet as a tangible fixed asset and is depreciated over its estimated useful life or the term of the lease, whichever is shorter. Future instalments under such leases, net of finance charges, are included within creditors. Rentals payable are apportioned between the finance element, which is charged to the profit and loss account, and the capital element which reduces the outstanding obligation for future instalments. All other leases are accounted for as 'operating leases' and the rental charges are charged to the profit and loss account on a straight-line basis over the period of the lease. p. Taxation Current tax, including UK corporation tax and foreign tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax is recognised in respect of all timing differences, except for which no provision is permissable as explained below, that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the balance sheet date. Timing differences are differences between the Group's taxable profits and its results as stated in the financial statements that arise from the inclusion of gains and losses in tax assessments in periods different from those in which they are recognised in the financial statements. A net deferred tax asset is regarded as recoverable and therefore recognised only when, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted. Deferred tax is not recognised when fixed assets are revalued unless by the balance sheet date there is a binding agreement to sell the revalued assets and the gain or loss expected to arise on sale has been recognised in the financial statements. Neither is deferred tax recognised when fixed assets are sold and it is more likely than not that the taxable gain will be rolled over, being charged to tax only if and when the replacement assets are sold. Deferred tax is recognised in respect of the retained earnings of overseas subsidiaries and associates only to the extent that, at the balance sheet date, dividends have been accrued as receivable or a binding agreement to distribute past earnings in future has been entered into by the subsidiary or associate. Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse, based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax is measured on a non-discounted basis. 4. WORLD TRADE CENTER (WTC) The Group's exposure to losses arising from the terrorist attack of 11 September 2001 arises almost entirely from its participation on Syndicate 33. Hiscox Insurance Company and the international operations of Hiscox have had a negligible loss from this event. The situation is unprecedented and as such, even eighteen months after the event, the extent of the gross and net loss to the Group is difficult to assess with the degree of confidence which is usual for property insurance losses; facts or circumstances will come to light which may affect these estimates. The current projected estimate of net loss to Hiscox plc is Â£40 million (2001: Â£30 million) for which provision has been made in these financial statements. This takes no account of any potential subrogation. The Group has exposure to WTC losses on a number of non-liability accounts, in particular direct property, risk excess, catastrophe and aviation hull. There is no significant liability exposure. As at 28 February 2003 US$ 275 million, 58% of the estimated overall loss, had been paid. This includes payment to Silverstein, on the basis of one occurrence, for the WTC property. The courts in the USA have not yet ruled on occurrence. Syndicate 33 has had no need to make a cash call. As part of the process for the setting of the loss reserves included in these accounts, the directors have again carried out a comprehensive review of the Group's exposures in respect of insurance and reinsurance policies issued by Syndicate 33 to identify all those exposed directly or indirectly to losses from the events of 11 September 2001. Since the initial review carried out in October 2001 no further losses have been identified which were not identified at that time. This review has been supplemented by details of the notifications received from the XChanging Claims Services (formerly the Lloyd's Claims Office) which amounted to US$591 million as at 28 February 2003 (31 March 2002: US$543 million). Hiscox has considered the insureds' computations of their own losses. The directors of Hiscox plc believe that the insureds' computations are likely to prove unreliable. Hiscox has estimated what the directors believe is an appropriate discount or premium to these notifications, based on their past experience of large property losses and additional information received. The reserve required for the Group's direct property exposure is sensitive to assumptions about the quantum of property damage and business interruption costs and to the legal issues relating to the cover provided by certain insurance policies. In reserving for these claims, the directors have taken account of settlement patterns experienced on previous large property losses, where final claims settlements are usually considerably lower than initial market estimates, and the experience to date on settlement of WTC losses. Hiscox largely participates on the higher layers of risk excess policies. In certain cases, the property damage element of the claim falls well below the excess point. Most market notifications relating to these property reinsurances have been made on a total loss basis which are without merit on the basis of information which is currently available. The directors consider it likely that, in such cases, the final settlement will fall below the excess point so that Hiscox will incur no loss. The directors have nevertheless, where appropriate, established a precautionary reserve in these cases on the assumption that a part payment may be made, although this may be lower than the notification which is for a total loss on the layer. The extent to which losses arise from property risk excess and catastrophe reinsurance policies vary, particularly if a wide definition of business interruption is adopted. Provision has been made for property and business interruption losses known to have occurred in the immediate vicinity of the WTC. Remoter losses have not been provided for. The current total estimated gross loss to Syndicate 33 is approximately US$475 million (2001: US$440 million). The increase from the previous year end is for three reasons: a) An increase in bad debt provision to reflect the rating downgrades of a number of the reinsurers in the year. b) An increase in a claim from a telecommunications company where our original assessment, based on limited information, has been revised . It was considered that the greater part of the claim was likely to be generated from business interruption which we discerned was likely to be much inflated. The claim has developed however with a much larger proportion of physical damage losses than we originally estimated. In line with our normal reserving practice we have therefore increased our reserve. c) An increase in the loss on a transportation company where as part of closing the 2000 year of account we have taken the loss at the notified amount. We believe however that this loss could well settle below its current market estimate. The reinsurance program continued to respond to the increase in the property claims described in b) and c) above. Due to the sequence of actual payments, net recoveries remain similar to last year. Syndicate 33's net loss has increased to approximately US$125 million (2001: US$90 million). In arriving at this estimate it has been assumed that the terrorist attack in New York City on 11 September 2001 was one occurrence and also that the aircraft impacts on the WTC are one occurrence in respect of the property losses. In the unlikely event that Syndicate 33's loss increases by, for example, a further US$100 million, and assuming there are no further reinsurance recoveries, the net cost to Hiscox plc would increase by approximately Â£35 million. As at 28 February 2003 Syndicate 33 had paid US$275 million of the gross loss and recovered US$165 million from reinsurers. As part of our required funding of the US Trust Funds, a further US$56 million of cash advances and letters of credit had also been received from reinsurers at 28 February 2003. These recoveries of US$221 million at 28 February 2003 represent 63% of the expected total recoveries of approximately US$350 million. 84% of the remaining balance of approximately US$129 million is due from reinsurers, including US$23 million due from Lloyd's, rated A grade or better. Syndicate 33 has increased its bad debt provision on reinsurance recoveries from the WTC loss to US$7.5 million (2001: US$4.5 million). This results from the downgrade in rating of a number of the reinsurers during the year. No reinsurer on our programme has yet refused to pay a claim through insolvency. It has been assumed that no major reinsurer will fail. 5. SEGMENTAL INFORMATION a. 100% level technical account by business division 2002 2002 2002 2002 London UK International Total Market Retail Business Â£000 Â£000 Â£000 Â£000 Gross premiums written 726,315 147,583 67,356 941,254 Net premiums written 392,746 123,243 41,468 557,457 Net premiums earned 367,422 119,988 37,219 524,629 Net claims incurred 229,225 62,565 10,997 302,787 Claims ratio (%) 62.4% 52.1% 29.5% 57.7% Commissions 92,048 34,814 26,957 153,819 Operating expenses 32,585 19,202 1,222 53,009 Movement in DAC 1,509 (582) (1,714) (787) Net expenses 126,142 53,434 26,465 206,041 Commission ratio (%) 23.4% 28.3% 65.0% 27.6% Operating expense ratio (%) 8.3% 15.6% 3.0% 9.5% Expense ratio (%) 31.7% 43.9% 68.0% 37.1% Net longer term investment 18,726 8,729 2,111 29,566 return Technical profit/(loss)* 30,781 12,718 1,868 45,367 Combined ratio (%) 94.1% 96.0% 97.5% 94.8% *Before movement in equalisation provision. The impact of a 1% change in the combined ratios of each business division on technical profit/(loss) are: 2002 2002 2002 London UK International Market Retail Business Â£000 Â£000 Â£000 At 100% level 1% change in claims ratio 3,674 1,200 372 1% change in expense ratio 3,927 1,232 415 At Group level 1% change in claims ratio 2,015 1,200 372 1% change in expense ratio 2,154 1,232 415 2001 2001 2001 2001 London UK International Total Market Retail Business Â£000 Â£000 Â£000 Â£000 Gross premiums written 574,339 143,550 62,147 780,036 Net premiums written 412,100 121,830 40,444 574,374 Net premiums earned 343,555 112,171 34,554 490,280 Net claims incurred 288,344 58,212 9,385 355,941 Claims ratio (%) 83.9% 51.9% 27.2% 72.6% Commissions 100,307 35,672 27,395 163,374 Operating expenses 31,752 17,382 1,894 51,028 Movement in DAC (8,420) (1,843) (3,463) (13,726) Net expenses 123,639 51,211 25,826 200,676 Commission ratio (%) 24.3% 29.3% 67.7% 28.4% Operating expense ratio (%) 7.7% 14.2% 4.7% 8.9% Expense ratio (%) 32.0% 43.5% 72.4% 37.3% Net longer term investment 11,362 6,222 1,933 19,517 return Technical profit/(loss)* (57,066) 8,970 1,276 (46,820) Combined ratio (%) 115.9% 95.4% 99.6% 109.9% *Before movement in equalisation provision. The impact of a 1% change in the combined ratios of each business division on technical profit/(loss) are: 2001 2001 2001 London UK International Market Retail Business Â£000 Â£000 Â£000 At 100% level 1% change in claims ratio 3,436 1,122 346 1% change in expense ratio 4,121 1,218 404 At Group level 1% change in claims ratio 1,828 1,122 346 1% change in expense ratio 2,192 1,218 404 The additional segmental information above, by business division, has been added this year to reflect the way the Group manages its business. In prior years, the segmental information was disclosed only by reporting entity. This disclosure can be found in note 5(b). Key differences are as follows: 'London Market' comprises the results of Syndicate 33 and the Hiscox Captive net of any business written between Group companies. Previously the results of Syndicate 33 were reported within 'Managed Syndicate' excluding the Hiscox Captive. 'UK Retail' comprises all of the UK retail underwriting results of Hiscox Insurance Company Limited. Previously the underwriting results of the UK retail business were reported in 'Insurance Company' together with the underwriting results of the International retail business written by Hiscox Insurance Company Limited. 'International Business' comprises the results of Hiscox Insurance Company (Guernsey) Limited, the results of the Hiscox overseas agencies and the underwriting results of the International retail business written by Hiscox Insurance Company Limited. Previously, the results of Hiscox Insurance Company (Guernsey) Limited and the results of the Hiscox overseas agencies, together with the Hiscox Captive, were included within 'International Operations'. b. 100% level technical account by reporting entity 2002 2002 2002 2002 Managed Insurance International Total Syndicate Company Operations Â£000 Â£000 Â£000 Â£000 Gross premiums written 721,971 176,423 42,860 941,254 Net premiums written 388,967 144,154 24,336 557,457 Net premiums earned 363,643 136,900 24,086 524,629 Net claims incurred 225,958 73,327 3,502 302,787 Claims ratio (%) 62.1% 53.6% 14.5% 57.7% Commissions 92,048 44,056 17,715 153,819 Operating expenses 32,577 19,926 506 53,009 Movement in DAC 1,509 (2,177) (119) (787) Net expenses 126,134 61,805 18,102 206,041 Commission ratio (%) 23.7% 30.5% 72.8% 27.6% Operating expense ratio 8.3% 13.8% 2.1% 9.5% (%) Expense ratio (%) 32.0% 44.3% 74.9% 37.1% Net longer term investment 18,726 9,987 853 29,566 return Technical profit/(loss)* 30,277 11,755 3,335 45,367 Combined ratio (%) 94.1% 97.9% 89.4% 94.8% *Before movement in equalisation provision. 2001 2001 2001 2001 Managed Insurance International Total Syndicate Company Operations Â£000 Â£000 Â£000 Â£000 Gross premiums written 567,303 163,861 48,872 780,036 Net premiums written 406,752 139,166 28,456 574,374 Net premiums earned 338,207 126,578 25,495 490,280 Net claims incurred 282,152 67,461 6,328 355,941 Claims ratio (%) 83.4% 53.3% 24.8% 72.6% Commissions 100,307 43,087 19,980 163,374 Operating expenses 31,691 18,842 495 51,028 Movement in DAC (8,420) (2,778) (2,528) (13,726) Net expenses 123,578 59,151 17,947 200,676 Commission ratio (%) 24.7% 31.0% 70.2% 28.4% Operating expense ratio (%) 7.8% 13.5% 1.8% 8.9% Expense ratio (%) 32.5% 44.5% 72.0% 37.3% Net longer term investment 11,362 7,093 1,062 19,517 return Technical profit/(loss)* (56,161) 7,059 2,282 (46,820) Combined ratio (%) 115.9% 97.8% 96.8% 109.9% *Before movement in equalisation provision. c. Reconciliation of 100% level technical results to Group results 2002 2001 Â£000 Â£000 Technical profit/(loss) for 100% of continuing 45,367 (46,820) operations (note 5a,5b) Notional share attributable to Group at current level of 35,724 (25,051) capacity ownership Adjustments to reflect lower levels of capacity in prior years 2000 (1999)year of account 2,404 1,065 2001 (2000) year of account 159 2,001 Investment return on Group underwriting capital 6,161 4,479 Amounts applicable to quota share reinsurers* (3,856) 1,324 Trading profit/(loss) for Group share of continuing 40,592 (16,182) operations - aligned capacity (note 5d, 5e) *For the 2002 year of account, the Group owned 63% (2001: 60%) of the Syndicate. 8% (2001: 7%) of that capacity was reinsured to three leading European reinsurers via a quota share arrangement. d. Profit on ordinary activities before taxation - by business division 2002 2002 2002 2002 London UK International Total Market/Group Retail Business Â£000 Â£000 Â£000 Â£000 Gross premiums written 461,766 147,583 67,356 676,705 Net premiums earned 227,922 119,988 37,219 385,129 Net longer term investment 16,803 8,729 2,111 27,643 return Net claims incurred (138,789) (62,565) (10,997) (212,351) Acquisition costs (69,029) (34,232) (25,243) (128,504) Administrative expenses (7,045) (19,202) (1,222) (27,469) Other technical income/ (3,856) - - (3,856) (charges) Trading result * 26,006 12,718 1,868 40,592 Other income and expenses (4,778) (1,058) (274) (6,110) Operating profit/(loss) 21,228 11,660 1,594 34,482 Short term fluctuations in (7,739) (3,135) (590) (11,464) investment return Equalisation provision - (2,104) (599) (2,703) Pre tax profit/(loss) 13,489 6,421 405 20,315 2001 2001 2001 2001 London Market/Group UK International Total Business Retail Â£000 Â£000 Â£000 Â£000 Gross premiums written 343,229 143,550 62,147 548,926 Net premiums earned 197,474 112,171 34,554 344,199 Net longer term investment 10,407 6,222 1,933 18,562 return Net claims incurred (165,158) (58,212) (9,385) (232,755) Acquisition costs (64,514) (33,829) (23,932) (122,275) Administrative expenses (5,961) (17,382) (1,894) (25,237) Other technical income/ 1,324 - - 1,324 (charges) Trading result* (26,428) 8,970 1,276 (16,182) Other income and expenses (2,986) (1,397) (655) (5,038) Operating profit/(loss) (29,414) 7,573 621 (21,220) Short term fluctuations in (3,990) (3,670) (1,034) (8,694) investment return Equalisation provision - (2,221) (361) (2,582) Pre tax profit/(loss) (33,404) 1,682 (774) (32,496) *Based on longer term investment return, before movement in equalisation provision and elimination of inter company transactions. The additional segmental information provided above, by business division, has been added this year to reflect the way the Group manages its business. In prior years, the segmental information was disclosed only by reporting entity. This disclosure can be found in note 5(e). Key differences are as follows: 'London Market/Group' comprises Hiscox plc's share of the results of Syndicate 33, the results of the Hiscox Captive and the results of the non-underwriting entities of the Group, net of any business written between Group companies. Previously, Hiscox plc's share of the results of Syndicate 33 and the results of the non-underwriting entities, excluding the Hiscox Captive, were included in 'Lloyd's Business/Group'. 'UK Retail' comprises all of the UK retail business of Hiscox Insurance Company Limited together with the results of the online agency business (Hiscox Connect Limited). Previously, the results of the UK retail business were reported in 'Insurance Company' together with the underwriting results of the International retail business. The results of Hiscox Connect Limited were previously included in 'Lloyd's Business/Group'. 'International Business' comprises the results of Hiscox Insurance Company (Guernsey) Limited, the results of the Hiscox overseas agencies and the underwriting results of the International retail business written by Hiscox Insurance Company Limited. Previously, the results of Hiscox Insurance Company (Guernsey) Limited and the results of the Hiscox overseas agencies, together with the Hiscox Captive, were included within 'International Operations'. e. Profit on ordinary activities before taxation - by reporting entity 2002 2002 2002 2002 Lloyd's Insurance International Total Operations Business/ Company Group Â£000 Â£000 Â£000 Â£000 Gross premiums written 457,422 176,423 42,860 676,705 Net premiums earned 224,143 136,900 24,086 385,129 Net longer term investment 16,803 9,987 853 27,643 return Net claims incurred (135,522) (73,327) (3,502) (212,351) Acquisition costs (69,029) (41,879) (17,596) (128,504) Administrative expenses (7,037) (19,926) (506) (27,469) Other technical income/(charges) (3,856) - - (3,856) Trading result * 25,502 11,755 3,335 40,592 Other income and expenses (5,836) (42) (232) (6,110) Operating profit/(loss) 19,666 11,713 3,103 34,482 Short term fluctuations in (7,804) (3,587) (73) (11,464) investment return Equalisation provision - (2,703) - (2,703) Pre tax profit/(loss) 11,862 5,423 3,030 20,315 2001 2001 2001 2001 Lloyd's Insurance International Total Operations Business/ Company Group Â£000 Â£000 Â£000 Â£000 Gross premiums written 336,193 163,861 48,872 548,926 Net premiums earned 192,126 126,578 25,495 344,199 Net longer term investment 10,407 7,093 1,062 18,562 return Net claims incurred (158,966) (67,461) (6,328) (232,755) Acquisition costs (64,514) (40,309) (17,452) (122,275) Administrative expenses (5,900) (18,842) (495) (25,237) Other technical income 1,324 - - 1,324 Trading result * (25,523) 7,059 2,282 (16,182) Other income and expenses (4,395) (39) (604) (5,038) Operating profit/(loss) (29,918) 7,020 1,678 (21,220) Short-term fluctuations in (3,990) (4,184) (520) (8,694) investment return Equalisation provision - (2,582) - (2,582) Pre tax profit/(loss) (33,908) 254 1,158 (32,496) *Based on longer term investment return, before movement in equalisation provision and elimination of inter company transactions. f) Net asset value per share 2002 2002 2002 Net asset value Number of shares* NAV Â£000 000 per share p Net asset value 280,302 289,177 96.9 Net asset value (before equalisation provision) 294,234 289,177 101.7 Net tangible asset value 257,216 289,177 88.9 Net tangible asset value (before equalisation 271,148 289,177 93.8 provision) 2001 2001 2001 Net asset value Number of shares* NAV Â£000 000 per share p Net asset value 164,791 192,667 85.5 Net asset value (before equalisation provision) 176,020 192,667 91.4 Net tangible asset value 140,994 192,667 73.2 Net tangible asset value (before equalisation 152,223 192,667 79.0 provision) *The number of shares is the number of shares in issue as at 31 December of the relevant financial year. 6. INVESTMENT RETURN a. Actual investment return 2002 2001 Â£000 Â£000 Investment return on funds at Lloyd's and other corporate funds Investment income 4,590 3,507 Unrealised gains/(losses) on investments (2,939) (2,775) Realised gains/(losses) on investments (244) 115 1,407 847 Investment return on syndicate funds Investment income 7,057 5,045 Realised gains/(losses) on investments 1,827 1,404 8,884 6,449 Investment return on insurance company funds Investment income 8,354 6,453 Unrealised gains/(losses) on investments (1,486) (1,928) Realised gains/(losses) on investments (171) (1,393) 6,697 3,132 Investment management expenses (809) (560) Total investment return 16,179 9,868 Allocation to the technical account based on the longer (27,643) (18,562) term rate Short term fluctuations in investment return retained in (11,464) (8,694) the non-technical account b. Longer term investment return The longer term return is based on a combination of historical experience and current expectations for each category of investments. The longer term return is calculated by applying the following yields to the weighted average of each category of assets. 2002 2001 % % Shares and units in unit trusts 7.0% 7.0 Debt securities and other fixed interest securities 6.0% 6.0 Deposits with credit institutions 6.0% 6.0 c. Comparison of longer term investment return with actual returns 2002 2002 2002 2002 Funds at Lloyd's and other Share of Syndicate Insurance Company Total Corporate Assets Â£000 % Â£000 % Â£000 % Â£000 Actual investment return Shares and units in unit (2,764) (9.5%) 138 10.1% (2,006) (9.6%) (4,632) trusts Debt and other fixed 2,101 7.7% 7,008 5.2% 7,162 6.7% 16,271 interest securities Deposits with credit 1,963 3.4% 1,333 3.2% 1,244 3.2% 4,540 institutions 1,300 8,479 6,400 16,179 Longer term investment return Shares and units in unit 1,951 7.0% 95 7.0% 1,304 7.0% 3,350 trusts Debt and other fixed 1,632 6.0% 8,031 6.0% 6,346 6.0% 16,009 interest securities Deposits with credit 3,431 6.0% 2,516 6.0% 2,337 6.0% 8,284 institutions 7,014 10,642 9,987 27,643 Short term fluctuations in (5,714) (2,163) (3,587) (11,464) investment return 2001 2001 2001 2001 Funds at Lloyd's and Share of Syndicate Insurance Company Total other Corporate Assets Â£000 % Â£000 % Â£000 % Â£000 Actual investment return Shares and units in unit (2,028) (7.2) 302 8.1 (2,394) (10.4) (4,120) trusts Debt and other fixed 1,904 6.1 3,992 6.6 4,237 5.6 10,133 interest securities Deposits with credit 807 2.9 1,983 5.8 1,065 5.1 3,855 institutions 683 6,277 2,908 9,868 Longer term investment return Shares and units in unit 1,985 7.0 260 7.0 1,608 7.0 3,853 trusts Debt and other fixed 1,864 6.0 3,609 6.0 4,380 6.0 9,853 interest securities Deposits with credit 1,692 6.0 2,059 6.0 1,105 6.0 4,856 institutions 5,541 5,928 7,093 18,562 Short term fluctuations in (4,858) 349 (4,185) (8,694) investment return 6. EARNINGS/(LOSS) PER SHARE 2002 2002 2002 Earnings Average number of EPS shares Â£000 P 000 Adjusted basic, based on operating profit/(loss) 23,720 210,350 11.3 after tax Basic, based on profit/(loss) on ordinary 13,975 210,350 6.6 activities after tax Diluted, based on profit/(loss) on ordinary 13,975 214,407 6.5 activities after tax 2001 2001 2001 Loss Average number of LPS shares ** Â£000 P 000 Adjusted basic, based on operating profit/(loss) (15,090) 156,098 (9.7) after tax Basic, based on profit/(loss) on ordinary (23,107) 156,098 (14.8) activities after tax Diluted, based on profit/(loss) on ordinary (23,107) 156,098 (14.8) activities after tax * *In accordance with FRS14 'Earnings per share', potential ordinary shares are only included in the calculation of diluted earnings/loss per share to the extent that they are dilutive i.e. those that on conversion to ordinary shares would decrease net profit per share or increase net loss from continuing operations. ** The average number of shares and hence the loss per share for 2001 have been restated to reflect the impact on capital arising from the Rights Issue in September 2002. Earnings/loss per share has also been calculated based on the operating profit/loss before exceptional items and after taxation as the directors believe this earnings/loss per share figure provides a better indication of operating performance. The reconciliation of basic earnings/loss per share to basic loss/earnings per share based on operating profit/(loss) after tax is as follows: 2002 2001 EPS LPS p p Basic based on profit/(loss) on ordinary activities 6.6 (14.8) after tax Short term fluctuations in investments 3.8 3.9 Movement in equalisation provision 0.9 1.2 Adjusted basic based on operating profit/(loss) after 11.3 (9.7) tax Diluted earnings/loss per share has been calculated taking into account the following options under employee share schemes. 2002 2001 No. No. 000 000 Basic weighted average number of shares 210,350 156,098 Employee share options 2,941 - SAYE share options 1,116 - Diluted weighted average number of shares 214,407 156,098 7. OTHER FINANCIAL INVESTMENTS Funds at Lloyd's Share of Syndicate Insurance Company 2002 and other Corporate Assets Total Market Value Market Value Market Value Market Value Â£000 Â£000 Â£000 Â£000 Shares and units in unit 28,151 - 27,587 55,738 trusts Debt and other fixed 27,496 172,312 98,463 298,271 interest securities Deposits with credit 93,659 1,448 53,406 148,513 institutions Other 422 - - 422 149,728 173,760 179,456 502,944 Funds at Lloyd's Share of Syndicate Insurance Company 2001 and other Corporate Assets Total Market Value Market Value Market Value Market Value Â£000 Â£000 Â£000 Â£000 Shares and units in unit 26,732 3,594 15,723 46,049 trusts Debt and other fixed 30,130 102,690 83,336 216,156 interest securities Deposits with credit 31,008 3,062 47,887 81,957 institutions Other 240 - - 240 88,110 109,346 146,946 344,402 8. PENSIONS During the year, the Group contributed to the two sections of the Hiscox defined benefit pension scheme. A full actuarial valuation was carried out at 1 January 2000 by a qualified independent actuary. This valuation has been updated on an FRS 17 basis as at 31 December 2002 by a qualified independent actuary. The split of assets and funding position at 31 December 2002, measured in accordance with the requirements of FRS17, were as follows: Â£000 Equities and properties 30,935 Bonds 10,037 Cash 2,561 Total market value of assets 43,533 Present value of scheme liabilities (77,258) Surplus/(deficit) (33,725) Related deferred tax (liability)/asset 10,118 Surplus/(deficit) in the scheme - pension asset/(liability) (23,607) Where a deficit needs to be funded, a proportion of the additional contributions will be recharged to Syndicate 33 in accordance with the Group's normal recharging procedures. 9. RECONCILIATION OF MOVEMENT IN SHAREHOLDERS' FUNDS Share Capital Share Premium Merger Capital Profit and Total Reserve Reserve Redemp-tion Loss Account Share-holders' Reserve Funds Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 At 1 January 2002 9,633 124,612 4,723 33,244 (7,421) 164,791 Exercise of share options 8 156 - - - 164 Shares issued as part of 4,818 105,817 - - - 110,635 Rights Issue Exchange differences taken - - - - (50) (50) to reserves Retained profit for the - - - - 4,762 4,762 year At 31 December 2002 14,459 230,585 4,723 33,244 (2,709) 280,302 NOTES TO THE CASH FLOW STATEMENT a. Reconciliation of operating profit/(loss) to net cash inflow from operating activities 2002 2001 Â£000 Â£000 Operating profit/(loss) before taxation after interest, 34,482 (21,220) based on longer term investment return Depreciation and amortisation of fixed assets 3,422 3,274 Increase in general insurance technical provision, net of 22,254 37,115 reinsurance Increase/(decrease) in amounts owed to agents 13,238 (6,280) (Increase)/decrease in amounts owed by agents (3,729) (4,713) (Increase)/decrease in other debtors (1,024) (35,779) Increase/(decrease) in other creditors 2,721 12,775 Cash received from Lloyd's business (note c) (23,037) (12,489) Realised and unrealised investment (gains)/ losses 4,841 5,991 Short term fluctuations in investment return (11,464) (8,694) Interest expense 1,432 1,099 (Profits)/losses relating to Lloyd's business (21,034) 31,641 Other non-cash transactions (70) 86 Net cash inflow from operating activities 22,032 2,806 b. Movement in opening and closing portfolio investments net of financing 2002 2001 Â£000 Â£000 Net cash inflow/(outflow) for the period 25,288 6,369 Portfolio investments 98,483 45,779 Decrease/(increase) in loans 2,626 (905) Movement arising from cash flows 126,397 51,243 Movement in Lloyd's business (note c) 95,975 57,035 Changes in market value and exchange rate effects (2,717) (4,549) Increase in portfolio investments net of financing 219,655 103,729 Total portfolio investments net of financing at 1 403,654 299,925 January Total portfolio investments net of financing at 31 623,309 403,654 December c. Cash flows of the Lloyd's business 2002 2001 Â£000 Â£000 Premiums received, net of reinsurance 254,365 124,051 Claims paid, net of reinsurance (80,382) (52,881) Net portfolio investments 6,652 6,011 Other net cash flows (107,697) (32,635) Net cash flow before retention and transfer from/(to) 72,938 44,546 the Group Transfer from/(to) the Group 23,037 12,489 Cash retained in the Lloyd's business 95,975 57,035 d. Analysis of cash flows for headings netted in the cash flow statement 2002 2001 Â£000 Â£000 Servicing of finance Interest paid (1,644) (559) Interest paid element of finance leases (65) (121) (1,709) (680) Capital expenditure Payments to acquire tangible fixed assets (2,470) (2,772) Receipts from sales of tangible fixed assets (398) 4 Payments to acquire intangible fixed assets (701) (6) (3,569) (2,774) Acquisitions and disposals Payments to acquire investment in associated undertaking - (199) Acquisition of subsidiary undertaking - (2,527) Net cash and investments acquired with subsidiary - 4,106 - 1,380 Financing Proceeds from share issues * 110,799 54,371 New bank loan - 1,378 Repayment of bank loan (2,038) - Capital element of finance leases (222) (381) 108,539 55,368 Portfolio investment Purchase of shares and units in unit trusts 19,911 8,402 Purchase of debt securities and fixed interest 175,765 120,564 securities Sale of shares and units in unit trusts - (10,339) Sale of debt securities and fixed interest securities (165,451) (117,772) Increase/(decrease) in deposits with credit institutions 68,265 44,924 Increase/(decrease) in other investments (7) - 98,483 45,779 *Net of expenses of Â£4,986,413 (2001 : Â£1,779,633). e. Movement in cash, portfolio investments and financing * At 1 Jan Cash flow Changes in Changes to At 31 Dec other business market value and 2002 currencies 2002 Â£000 Â£000 Â£000 Â£000 Â£000 Cash at bank and in hand 62,520 25,288 33,388 - 121,196 Shares and units in unit trusts 46,049 19,911 (3,732) (6,490) 55,738 Debt securities and other fixed 216,156 10,314 67,931 3,870 298,271 interest securities Deposits with credit institutions 81,957 68,265 (1,612) (97) 148,513 Other investments 73 (7) - (12) 54 Loans due within one year (2,059) 2,038 - - (21) Finance leases (1,042) 588 - - (454) Total 403,654 126,397 95,975 (2,729) 623,297 * These balances include amounts relating to syndicate participations but exclude participations in associated undertakings of Â£368,000 (2001: Â£167,000). f. Scope of cash flow The consolidated cash flow statement excludes cash flows relating to underwriting on Lloyd's syndicates. NOTES: 1. The financial information set out in this statement is extracted from the Company's statutory accounts for the years ended 31 December 2002 and 2001. The financial information for 2001 is derived from the statutory accounts for 2001 which have been delivered to the registrar of companies. The auditors have reported on the 2002 and 2001 accounts; their reports made reference to a fundamental uncertainty in respect of the Group's exposure to the terrorist attack in the United States of America on 11 September 2001. However they are unqualified and do not contain a statement under section 237(2) or (3) or the Companies Act 1985. The statutory accounts for 2002 will be delivered to the registrar of companies following the Company's annual general meeting. 2. The Annual Report and Accounts for 2002 will be posted to shareholders no later than 20 May 2002 and will be delivered to the Registrar of Companies following the Annual General Meeting on 24 June 2002. Copies of the Report may be obtained by writing to the Company Secretary, Hiscox plc, 1 Great St Helen's, London EC3A 6HX. This information is provided by RNS The company news service from the London Stock Exchange

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