Final Results

Hiscox PLC 22 March 2004 PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2003 'A RECORD YEAR' 2003 2002 Gross written premiums Â£797.4 million Â£676.7 million Profit before tax Â£83.4 million Â£20.7 million Profit after tax Â£60.5 million Â£14.4 million Earnings per share 20.9p 6.9p Final dividend per share 2.9p 2.4p Net asset value per share 119.1p 101.8p (before equalisation provision) HIGHLIGHTS â€¢ Record pre-tax profit of Â£83.4 million. â€¢ Group combined loss ratio, excluding WTC, 79.3% (2002: 91.8%). â€¢ Hiscox plc gross written premium income up 18% to Â£797.4 million. â€¢ Net earned premium up 42% to Â£547.5 million. â€¢ Post-tax return on capital of 21.7% (2002: 8.7%). â€¢ Final dividend increased 21% to 2.9p per share. â€¢ Exceptional 12 months for Lloyd's Syndicate 33, with a firm year end renewal season. Gross written premium applicable to Hiscox plc up 17% to Â£541.4 million (2002: Â£461.8 million). Profit before tax of Â£64.5 million (2002: Â£13.9 million). â€¢ UK Retail showed steady growth with gross written premium of Â£174.6 million (2002: Â£147.6 million) and profit before tax of Â£18.5 million (2002: Â£6.4 million). â€¢ A strong outlook for 2004 which has started well. London Market prices and retail rates remain firm. A robust pipeline of earnings is expected to continue to flow through from previous years. Robert Hiscox, Chairman Hiscox plc, commented: 'It is a great pleasure to report record profits and solid growth. Healthy earnings will continue to flow through from these good years and 2004 has started well. We will grow the business and its profitability by disciplined underwriting and by searching for new business in our chosen specialist areas.' Copies of the Chairman's statement, Chief Executive's review and the Group's financial information as at 31 December 2003 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 Fiona Fong Director of Communications 020 7448 6447 THE MAITLAND CONSULTANCY Philip Gawith 020 7379 5151 Suzanne Bartch 020 7379 5151 NOTES TO EDITORS Hiscox plc is a specialist insurance group listed on the London Stock Exchange where it has a market capitalisation of circa Â£475 million. There are three main underwriting parts of the Group - Syndicate 33 at Lloyd's, UK Retail and International Retail business. Syndicate 33 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 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 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. CHAIRMAN'S STATEMENT The result for the year ending 31 December 2003 is a record pre-tax profit of Â£83.4 million (2002: Â£20.7million) and an operating profit of Â£77.1 million (2002: Â£34.6 million). The gross premium income underwritten by the Group rose to Â£1,083.2 million (2002: Â£941.3 million), and the gross premium income applicable to Hiscox plc increased to Â£797.4 million (2002: Â£676.7 million). These profits were earned after a further provision of Â£40 million during the year for the World Trade Center (WTC) losses. The combined ratio of the Group was 87.2% or 79.3% without the additional reserve for WTC (2002: 94.8% or 91.8% without WTC). A strong investment performance exceeded our long-term benchmark making the real pre-tax profit better than the operating profit by Â£6.3 million. Positive cashflow helped and total assets (shareholders' funds and technical insurance funds) rose to Â£826.2 million. Net Assets per share increased to 119.1p (2002: 101.8p) and earnings per share, on operating profit after tax, rose to 19.3p (2002: 11.3p). DIVIDEND We have a progressive dividend policy, with an ambition of steady dividend growth throughout the insurance cycle. This means showing restraint during very profitable times in order to be able to maintain the growth in dividend, if possible, in less profitable times. In line with this policy, the Board recommends a final dividend of 2.9p net per ordinary share, making a total distribution for the year of 4.20p (2002: 3.54p), an increase of 19% on 2002. This will be paid on 28 June 2004 to shareholders on the register on 23 April 2004. PEOPLE The profits and dividend have been made by all our staff and I want to thank them right at the beginning. Shareholders provide the capital to back the endeavours of the staff, and the staff use their brains to provide the best possible insurance products and service to make profits. Capital, people and goodwill are all we have in the insurance industry, and the people make the goodwill. We constantly need good people, so if you are, or if you know, a good person who wants to work in a vibrant, growing insurance company - please get in touch. AMBITION AND STRATEGY The ambition remains to build a highly respected and profitable specialist insurer. The strategy also remains the same - to underwrite internationally traded risks and London Market speciality business through the Hiscox Syndicate 33 at Lloyd's, and balance it with European retail business written outside Lloyd's, mainly through the Hiscox Insurance Company. The strategy has not changed for many years. Syndicate 33 always wrote a retail book to complement the more volatile catastrophe book and still does. It was among the first to form a service company to underwrite retail business to regional brokers in 1989, and we were the first Lloyd's company to acquire a general insurance company to underwrite retail business outside Lloyd's in 1996. There is no doubt that internationally traded business will come under pressure first, so we are increasing our emphasis on building the more stable retail book in and out of Lloyd's. The Board allocates capital where the best use of it can be made. We have recently put the maximum resource behind Syndicate 33: now endeavours outside Lloyd's could yield the best return. Bronek Masojada will cover the business in detail in his report which follows. I will just make a few comments. LLOYD'S SYNDICATE 33 2003 was another exceptional year for Syndicate 33 with a total profit of Â£87 million on a gross income of Â£827 million (2002: Â£726 million). I cannot emphasise enough my admiration for Rob Childs and his team who have increased the income dramatically in the period following the ghastly experience of September 11th 2001, not only showing great spirit in adversity, but also producing some of the best figures in the history of the syndicate. It was ever true that feast always follows famine in the insurance world for those who keep their nerve. Prices overall remained firm during the year-end renewal season, so given the usual caveats against exceptional losses, 2004 should show another strong result. There was competition for some property risks, but liability premiums continued to increase. The earnings flow from these good years will be felt for the next few years, but we fully understand that the challenge will be to continue to produce good returns should foolish competition return. This we will do by disciplined underwriting and by hunting outside the London Market for good business. Gone are the days when we would sit patiently in Lloyd's waiting for business to be shown to us by Lloyd's Brokers. Our underwriters are searching for new distribution channels and using internet technology to underwrite business overseas. UK RETAIL UK Retail showed good steady growth of 18% to Â£174.6 million, on which it made a pre-tax profit of Â£18.5 million. A convincing vindication of our retail thrust. We continue to focus on two classes of business, one commercial and one personal. First, the insurance of professionals, not only of their liability for mistakes made (Professional Indemnity) but also of other liabilities (such as Employment liability), and property risks associated with their businesses (such as office contents). Second, the personal insurances of High Net Worth individuals and families. We have four offices outside London in Glasgow, Leeds, Birmingham and Maidenhead. Local business is mostly placed locally and the distribution of insurance is still very much influenced by relationships. Our offices are vital links into regional markets and we will allocate more resources to them this year. INTERNATIONAL RETAIL Our two chosen specialities of High Net Worth and Professional Indemnity are also the focus of our international business. Our mainland European offices have grown in volume terms by 53% but have made a loss of Â£1.9 million (2002: Â£1.7 million) due to acquisition and new office costs. During the year we absorbed the High Net Worth business from Chubb Europe and wrote off the acquisition costs in the first year, and opened an office in Brussels to service a good proportion of that business. I am putting my head on the block that Europe has an enormous potential for us. The time to invest in expansion there is now while the rest of the Group is flourishing, to reap the reward when conditions here get tighter. Guernsey continued to provide excellent service to brokers and made Â£2.3 million (2002: Â£2.1m). THE CYCLE We fully expect competition to increase in the future as some of our competitors regain their capital and courage, but the foreseeable future remains very exciting. The year end showed good disciplined underwriting in the market. We have taken full advantage of the wonderful market conditions, but what we want and what our shareholders want is to make decent returns over the whole cycle. The near future looks good as the rates are at a very profitable level and competition is sensible. Looking further out, I think that margins will stay healthier for longer than usual for three reasons. First, reinsurance is expensive and hard to buy, and it is the false comfort of cheap reinsurance which is the main seducer of underwriters into weak underwriting. Second, interest rates are still low which keeps the focus on profitable underwriting. Third, old liabilities continue to eat at our established rivals whilst we are sheltered from all old liabilities by Equitas which reinsured all the liabilities of Lloyd's prior to 1993. A word of praise is due to Equitas which continues to provide solid results considering the constant bad news on asbestosis and other latent disease losses. We compete on service and underwriting skill, not just on price. If you compete on price alone, you die. Underwriting discipline is absolutely key, as is good underwriting data. We have plenty of both and will apply them rigorously. We made money throughout at least three full cycles between 1967 and 1997, and I believe that the current underwriters are cleverer than we were, and they are supported (and monitored) by infinitely more sophisticated data. LLOYD'S Lloyd's (and I mean the franchise, not the businesses using it) is as healthy as I have ever known it. Strong leadership from the Chairman and Chief Executive and direction from the Franchise Board give great comfort. I do not like mutualisation in insurance - we decline the bad risk, the other syndicate writes it and we end up paying. However, I am happy to accept it in Lloyd's to be able to use the global licences and brand. I am absolutely behind all efforts to keep the market disciplined and to stop potentially loss-making syndicates before they threaten us. Lloyd's syndicates should be the elite of the insurance world. However, whilst margins are high and profits are being made, there is little urgency to finish the reform of the capital structure. The annual venture remains a great handicap to the businesses in the market. On the Lloyd's three year accounting basis, I should be doing a long explanation of our underwriting in 2001 of which the result is now being settled by Lloyd's Names. We are in fact leaving the 2001 year of account open due to the uncertainty caused by the World Trade Center litigation. We feel we must do this for equity between Names who have different participations in the 2001 and subsequent accounts. We would not have to leave it open if the syndicate had one on-going capital supplier. I hope that the Chairman Lord Levene will swing his eighteen inch guns round to the annual venture before long, and persuade the individual Names and the spread corporate investors to become sensible shareholders for their sakes and that of the market. They add a layer of cost to us which will be a serious handicap when margins get tighter. FINALLY Much as I thrive on adversity, it is a pleasure to report a period of solid growth and dramatic increase in profitability after the traumas of the recent years. I know that commentators on our business want to see regular rabbits popping out of hats and surprising new initiatives. Our strategy remains the same and we laid the foundations for it years ago. In this strong market we are focussing hard on growing in our core areas and time spent on grand new projects or acquisitions would distract us. We never dismiss acquisitions, but they have traditionally been a graveyard in insurance. We search for good people and books of business to add to the quality of our existing business without bringing a legacy of problems. We continue to strive to maximise the use of technology to cut costs and widen our distribution net. This is my 40th year at Hiscox and I feel that we have just begun. Following Warren Buffett's rationale 'it is hard to teach a new dog old tricks', I hope that the Board and shareholders will allow me to enjoy the next few years (unfortunately not another 40) which I believe will be rewarding for all of us. CHIEF EXECUTIVE'S REPORT 2003 was a great year for Hiscox. An exceptional performance by our London Market divisions was the primary contributor to profit growth. The other more retail focused divisions within the Group have also made a good contribution. Our ratings indices remain high and market conditions continue to be attractive. The old adage of rates going up in the lift and coming down via the stairs remains true. This gives us confidence that we will see continued strong performance from the London Market. Over the next several years we plan to concentrate our growth in our retail divisions both inside and outside Lloyd's. Group profits achieved this year give us the ability to continue to strengthen our balance sheet and to fund organic growth without recourse to shareholders. GROUP STRATEGY Our strategy is to build a profitable leading speciality insurer. We are achieving this by focussing on specific markets, and then developing our position to become a meaningful player within them. We actively allocate our capital within our chosen markets where we see opportunities to earn the best returns. In the past year our strategy has allowed us to grow our controlled gross written premium by Â£141.9 million to Â£1,083.2 million - a growth of 15%. The majority of premium growth has come from the London Market divisions where the movement in rates have been most favourable. Our retail businesses continue to perform well year-on-year and in 2003 Hiscox Insurance Company achieved a combined ratio of 93.6%. Our future strategy is to build the retail constituent of the business as we believe that this brings balance to our business. Retail business underwritten either through Syndicate 33 or Hiscox Insurance Company now accounts for 40 per cent of the Group's controlled gross written premium. We plan to grow this business by deploying a mixture of technology-based distribution, international travel to visit clients and brokers and serving local markets through our office network. We expect to reduce our presence in London Market segments as rates soften, though we expect this to happen less rapidly than many doomsayers predict. We are determined to retain margin over market share. In the medium term, this may lead to a reduction in gross written premium of the Group, but we believe that this focus on profitable underwriting is in the long-term interests of our shareholders. TRADING CONDITIONS Rating conditions remain firm across most of our business. However, we remain alert to market trends. Trading conditions and prospects in each of our divisions are reviewed briefly below: HIGH NET WORTH PERSONAL LINES Our primary activity in this retail segment is the insurance of the homes, personal possessions and fine art of high net worth individuals. In the UK our business grew and performed well. We are adding more resources to this area as we seek to consolidate and extend our market leadership. In mainland Europe, acquisition of the renewal rights of a portfolio of high net worth clients from Chubb is building critical mass. The Kidnap and Ransom and Fine Art accounts, which are mainly underwritten through Syndicate 33, had a good year. PROFESSIONAL INSURANCES Our focus and expertise in this retail segment remains primarily on insuring the emerging professions, rather than the more traditional occupations. We have an in-depth knowledge of the specific risks of professions such as advertising agencies, management consultants and recruitment firms and continue to develop our position within these markets. In the UK this business continued to grow strongly and performed well. We are expanding our professional insurances activity into Germany, and aim to launch in France during the course of the year. AEROSPACE TECHNOLOGY MEDIA AND TELECOMMUNICATIONS We operate a speciality team to underwrite global aerospace, technology, media and telecommunications business wherever it is located. Market conditions remain good. A key challenge is to build our distribution capability to access these broad markets. We are currently accessing US business by extensive travel to see local brokers. During the course of this year we will launch a US focussed e-commerce platform which will sit in brokers' offices and be able to provide quotes online. This will allow us to provide these brokers with better service. We have been successful in the UK in using local offices as the distribution point to access business and referring it to London for underwriting by the speciality team. We have begun replicating this approach through our French office. LONDON MARKET INSURANCE This sector experienced the greatest premium rises following the tragic events of September 2001. We are now seeing some price reductions in the big ticket international property areas where price rises were the most marked. Rates for smaller and medium sized property coverages remain attractive. The small ticket property insurance conducted in the USA through managing general agents has been a real winner. During the January 2004 renewal season, we reduced the number of these relationships, to focus on those with the most expertise and professionalism. In certain marine and liability classes rates continue to rise and we will expand in these classes. In aggregate rates across the division's business are attractive and good profits can be made, but we are alert to every nuance of change in rates, terms and conditions to ensure that we decline business rather than underwrite it on unattractive terms. LONDON MARKET REINSURANCE The rating environment remains good. In a few secondary areas prices have weakened to some extent, but in the core global hot-spots, such as Florida, conditions remain firm. Market discipline is being supported by the introduction of more refined data modelling techniques across the industry. Reinsurance programmes which are under-priced relative to the technical rate calculated using this new modelling approach are not being placed. The ongoing strength of the reinsurance market is a good trend as reducing reinsurance costs are always the precursor of a softer market. GROUP FINANCIAL PERFORMANCE In 2003 the Group achieved a pre-tax profit of Â£83.4 million, an increase of 302 per cent over the previous year. Operating profits, calculated before taking into account short term fluctuations in investment income and equalisation provisions, were Â£77.1 million, an increase of 123 per cent over 2002. Earnings per share were 20.9p per share (2002: 6.9p per share). Our post-tax return on shareholders' equity was 21.7% (2002: 8.7%). LLOYD'S BUSINESS This business consists of our share of the profits of Syndicate 33, fees and profit commissions from third party capital and the return on the capital which supports the business. The progress in performance year-on-year has been exceptional, with operating profits almost trebling to Â£61.5 million (2002: Â£21.3 million). This division achieved a combined ratio of 85.8% (2002: 94.1%). These results represent a significant out-performance of the Lloyd's market as a whole. This strong result was achieved after taking into account an increase in the World Trade Center reserve announced in the first half of the year which cost Hiscox plc Â£40 million. Since this announcement the aggregate notifications have reduced by $36 million to $552 million. This reduction is in line with our expectations following our experience in large property claims where we have the majority of our exposure. Our reserve is struck on a one loss scenario for the events of September 11. Insurers are currently in court against the WTC leaseholder and we expect a preliminary resolution of the issue in 2004. The Syndicate's 2001 year of account has not been closed due to the uncertainties that surround the final settlement of the WTC claim. We expect that we will have a much clearer picture by this time next year, and we plan to close the syndicate then. To date the discipline shown in the markets in which our Lloyd's business competes, the low interest rate environment and the expensiveness of reinsurance give us confidence that the hard market will last longer than many doubters believe. UK RETAIL The UK Retail business delivered a very strong performance. Gross written premium increased to Â£174.6 million (2002: Â£147.6 million), operating profits grew to Â£15.0 million (2002: Â£11.6 million) and the combined ratio improved to 90.3% (2002: 96.0%). This result was achieved through a combination of good underwriting and a catastrophe-free year. We have now completed our programme of building regional offices across the UK. Our presence in Glasgow, Leeds, Birmingham and Maidenhead gives us good geographical coverage from which to build and consolidate our position in the retail market. Despite the advances in modern communications our experience has been that a local presence helps build relationships and market knowledge. During the course of the year we will be moving our fledgling Business Centre team from London to our newly acquired building in Colchester. We also expect to increase resources in the high net worth personal lines team. Part of the additional resources will be a new IT system which should enhance both our brokers' and Hiscox's efficiency. Hiscox Connect, our online and telephone business, has made good progress. We are building major corporate relationships with organisations such as the Yorkshire Bank and are generating lots of enquires for our brokers. INTERNATIONAL OPERATIONS This segment covers business written in mainland Europe and through our insurance company in Guernsey. In aggregate, this business unit has had a reasonable year. Hiscox Guernsey sustained its excellent performance. Our team continued to expand their book of business, particularly in the Fine Art area. In our operations in mainland Europe we have seen a combined ratio improvement and growth at the top line, but challenges remain. We are beginning to develop scale following acquisition of the Chubb high net worth renewal rights. Our operation in France is profitable and we are just below breakeven in Germany. Benelux is the only market where we currently lack sufficient scale. The market opportunities abroad are abundant and our goal is to be as successful in Europe as we are in the UK. INVESTMENT MANAGEMENT Our investment management business, Hiscox Investment Management, has two functions within the company. First and foremost it supervises the external managers who have day to day responsibility for the investment of our funds. Secondly, it manages a small range of specialist financial funds, including the Hiscox Insurance Portfolio. Our focus is purely on the financial sector where our detailed knowledge can add value to investment strategies. In aggregate, our Group investments had a good year. Some effective asset allocation shifts into high yield corporate bonds and equities in the first quarter of the year were key drivers to the strong performance. We expect more subdued investment returns in 2004 as the high yield bond segment has been reduced. Our specialist third party financial funds which are managed in-house performed well yet again. The funds under management increased by 35% which includes a 53% increase in the Hiscox Insurance Portfolio Fund. BALANCE SHEET Shareholders' funds have grown from Â£279 million to Â£330 million. Net Asset Value per share before equalisation provision is 119.1p per share (2002: 101.8p per share). Tangible Net Asset Value before equalisation provision is 111.7p per share (2002: 93.8p per share). The Group has a standby letter of credit facility of Â£137.5 million which supports its activities. The business is well funded presently. Over the next two to three years we plan to use retained earnings to reduce the size of our letter of credit. This will allow our aggregate balance sheet to grow and catch up with the surge in premium income experienced over the last several years. PEOPLE I would like to thank all our staff for their endeavours over the last several years. The results are testament to their hard work and energy. Unlike Shackleton who offered small wages, bitter cold and constant danger when he advertised for staff to join him on his famous journey, we seek to offer market competitive rewards and stimulating and demanding roles within our firm. Overall our staff feel rewarded by this approach and we were delighted to be recognised externally by a second appearance in the Sunday Times Top 100 Companies to Work For, and to be rated top amongst financial services businesses. OUTLOOK 2003 was an excellent year for Hiscox. Looking forward, we expect our London Market divisions to continue to generate good profits for the Group. The steady growth of the Retail divisions will enable us to sustain our profitability. FINANCIAL STATEMENTS Consolidated Profit and Loss Account Technical Account - General Business for the year ended 31 December 2003 2003 2002 Notes Â£000 Â£000 Earned premiums, net of reinsurance Gross premiums written 7 797,380 676,705 Outward reinsurance premiums (136,414) (260,561) ---------- ---------- Net premiums written 7 660,966 416,144 Change in the gross provision for unearned premiums (74,902) (95,366) Change in the provision for unearned premiums, reinsurers' share (38,613) 64,351 ---------- ---------- Change in the net provision for unearned premiums (113,515) (31,015) ---------- ---------- Earned premiums, net of reinsurance 7 547,451 385,129 ---------- ---------- Allocated investment income transferred from the non-technical account 7,8 30,583 27,643 Claims incurred, net of reinsurance Claims paid: Gross amount (275,227) (290,008) Reinsurers' share 90,327 149,981 ---------- ---------- Net claims paid (184,900) (140,027) Change in the provision for claims: Gross amount (61,545) 35,869 Reinsurers' share (41,876) (108,193) ---------- ---------- Change in the net provision for claims: (103,421) (72,324) ---------- ---------- Claims incurred, net of reinsurance 4,7 (288,321) (212,351) ---------- ---------- Net operating expenses (186,039) (145,751) Other technical charges 7 (1,265) (3,856) Movement in equalisation provision 7 (2,506) (2,703) ---------- ---------- Balance on the technical account - general business 99,903 48,111 ---------- ---------- Consolidated Profit and Loss Account Non-Technical Account for the year ended 31 December 2003 2003 2002 Restated* Notes Â£000 Â£000 Balance on the technical account - general 99,903 48,111 business Investment return 8 32,154 21,413 Unrealised gains/(losses) on investments 8 8,026 (4,103) Investment expenses and charges 8 (805) (809) ---------- ---------- 8 39,375 16,501 Allocated investment return transferred to the technical account 8 (30,583) (27,643) ---------- ---------- Short term fluctuations in investment return 8 8,792 (11,142) Other income 12,582 10,119 Other charges (37,869) (26,349) ---------- ---------- Profit on ordinary activities before tax 7 83,408 20,739 Comprising: Operating profit based on longer term investment 7 77,122 34,584 return Short term fluctuations in investment return 7,8 8,792 (11,142) Movement in equalisation provision 7 (2,506) (2,703) ---------- ---------- 7 83,408 20,739 Tax on profit on ordinary activities (22,917) (6,340) ---------- ---------- Profit on ordinary activities after tax 60,491 14,399 ---------- ---------- Dividends - Interim paid (3,830) (2,299) Dividends - Final payable (8,414) (6,914) ---------- ---------- Retained profit for the year 48,247 5,186 ---------- ---------- Earnings per share: Adjusted basic, based on operating profit after tax (on longer term investment return) 10 19.3p 11.3p Basic, based on profit on ordinary activities after tax 10 20.9p 6.9p Diluted, based on profit on ordinary activities after tax 10 20.6p 6.7p * Restated for the adoption of UITFs 37 and 38. See note 5. 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 2003 2002 Restated* Notes Â£000 Â£000 Profit on ordinary activities after tax 60,491 14,399 Exchange differences taken to reserves (155) (50) ---------- ---------- Total recognised gains and losses for the year 60,336 14,349 ---------- Prior year restatement 5 169 ---------- Total recognised gains and losses 60,505 ---------- * Restated for the adoption of UITFs 37 and 38. See note 5. Consolidated Balance Sheet at 31 December 2003 2003 2002 Restated* Notes Â£000 Â£000 Assets Intangible assets Goodwill 6,240 6,617 Other intangible assets 15,513 16,469 ---------- ---------- 21,753 23,086 Investments Land and buildings 410 420 Other financial investments 11 773,289 501,774 ---------- ---------- 773,699 502,194 Reinsurers' share of technical provisions Provision for unearned premiums 63,004 102,608 Claims outstanding 189,183 218,175 ---------- ---------- 252,187 320,783 Debtors Debtors arising out of direct insurance 251,026 199,372 operations Debtors arising out of reinsurance operations 53,878 98,412 Other debtors 12 71,155 47,733 ---------- ---------- 376,059 345,517 Other assets Tangible assets 7,332 7,119 Cash at bank and in hand 52,945 121,196 ---------- ---------- 60,277 128,315 Prepayments and accrued income Accrued interest 3,079 2,643 Deferred acquisition costs 101,817 83,784 Other prepayments and accrued income 10,106 10,813 ---------- ---------- 115,002 97,240 ---------- ---------- Total assets 1,598,977 1,417,135 ---------- ---------- Consolidated Balance Sheet at 31 December 2003 2003 2002 Restated* Notes Â£000 Â£000 Liabilities Capital and reserves Called up share capital 13 14,565 14,459 Share premium account 13 232,341 230,585 Merger reserve 13 4,723 4,723 Capital redemption reserve 13 33,244 33,244 Reserve for own shares 13 (686) (1,339) Profit and loss account 13 45,650 (2,540) ---------- ---------- Shareholders' funds attributable to equity interests 329,837 279,132 ---------- ---------- Technical provisions Provision for unearned premiums 424,379 351,594 Claims outstanding 656,820 568,365 Equalisation provision 16,438 13,932 ---------- ---------- 1,097,637 933,891 Provisions for other risks and charges 14 15,503 - Creditors Creditors arising out of direct insurance operations 35,229 65,423 Creditors arising out of reinsurance operations 62,491 67,892 Other creditors including taxation and social security 15 28,414 36,414 ---------- ---------- 126,134 169,729 Accruals and deferred income 29,866 34,383 ---------- ---------- Total liabilities 1,598,977 1,417,135 ---------- ---------- * Restated for the adoption of UITFs 37 and 38. See note 5. Consolidated Cash Flow Statement for the year ended 31 December 2003 2003 2002 Restated* Notes Â£000 Â£000 Net cash inflow from general business 31,300 45,171 Net shareholders' cash outflow from Lloyd's 17c (7,712) (23,037) business ---------- ---------- Net cash flow from operating activities 17a 23,588 22,134 Servicing of finance 17d (2,233) (1,709) Taxation recovered/(paid) (59) 777 Capital expenditure 17d (3,052) (3,569) Acquisitions and disposals 17d (50) - Equity dividends paid (10,744) (2,299) Financing 17d 2,910 108,437 ---------- ---------- 10,360 123,771 ---------- ---------- Cash flows were invested as follows: (Decrease)/increase in cash holding 17e (25,608) 25,288 Net portfolio investment: Shares and units in unit trusts 17e 44,586 19,911 Debt securities and other fixed interest 17e 59,657 10,314 securities Deposits with credit institutions 17e (68,275) 68,265 Other investments 17e - (7) ---------- ---------- Net investment of cash flows 10,360 123,771 ---------- ---------- * Restated for the adoption of UITFs 37 and 38. See note 5. 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 2003 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 recommendations of the revised Statement of Recommended Practice 'Accounting for Insurance Business' issued by the Association of British Insurers in December 1998. 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 for the Group is actuarially calculated utilising both Chain Ladder and Bornhuetter-Ferguson methods. There is close communication between the actuaries and underwriters and allowance is made for the rating environment. The Chain Ladder method is adopted where sufficient development data is available in order to produce estimates of the ultimate claims and premiums by actuarial reserving group and underwriting year or year of account for the managed syndicate. This methodology produces optimal estimates when a large claims development history is available and the claims development patterns throughout the earliest years are stable. Where losses in the earliest underwriting years or years of account have yet to fully develop, a 'tail' arises on the reserving data i.e. a gap between the current stage of development and the fully developed amount. The Chain Ladder methodology is used to calculate average development factors which, by fitting these development factors to a curve, allows an estimate to be made of the potential claims development expected between the current and the fully developed amount, known as a 'tail reserve'. This tail reserve is added to the current reserve position to calculate the total reserve required. The Bornhuetter-Ferguson method is predominantly employed to produce ultimate loss estimates when there is little development data available e.g. in relation to more recent underwriting years or years of account. The Bornhuetter-Ferguson method is based on the Chain Ladder approach but utilises estimated ultimate loss ratios. In exceptional cases the required provision is calculated with reference to the actual exposures. Ultimate premium and claims amounts are projected both gross and net of reinsurance using reinsurance recovery rates based on historical experience, adjusted for the current reinsurance programme. Reinsurance recoveries from Qualifying Quota Share arrangements entered into for the 2002 and 2003 years of account have been calculated separately. Reinsurance security is monitored continuously throughout the year involving both external sources, such as Standard & Poor's and A M Best's rating information on reinsurers and internal sources. Reinsurer default rates are applied to the expected future reinsurance recoveries to determine a suitable level of bad debt provision. Adjustments are made within the reserving methodology to allow for expected significant movements to the figures not actually processed by 31 December 2003 and also to remove distortions in the historical claims development patterns from large claims not expected to reoccur in the future. The reserving methodology in relation to the World Trade Center is described in more detail in note 4 to the accounts. The reserves determined for the managed syndicate are converted to annually accounted figures using earning patterns that are consistent with those for the underlying syndicate business. (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 to the profit and loss account so as to spread the cost of pensions over employees' working lives with the Group. 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 the transitional disclosure requirements of FRS17 'Retirement Benefits'. This has had no material impact on the current year's results. (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 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. (q)Own shares The Company follows the accounting treatment required by UITF 37 for the purchase and sale of own shares. For own shares held in the Employee Share Ownership Plan Trust (ESOP), the Company has adopted the accounting treatment required by UITF 38. In accordance with UITFs 37 and 38, consideration paid for own shares is deducted in arriving at shareholders' funds. No gain or loss is recognised in the profit and loss account or statement of total recognised gains and losses on the purchase, sale or cancellation of own shares. Consideration paid or received for the purchase or sale of own shares are shown as separate amounts in the reconciliation of movements in shareholders' funds. 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 more than two years 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. Provision has been made in these financial statements, based on the 30 June 2003 gross notifications of US$588 million, resulting in a net loss to Hiscox plc of Â£75 million at Â£1:$1.79 (30 June 2003: Â£80 million at Â£1:$1.65, 31 December 2002: Â£40 million at Â£1:$1.61). This takes no account of any potential subrogation. The gross reserves at 31 December 2002 of US$475 million were set after an appropriate discount or premium to individual notifications based on Hiscox's past experience of large property losses and additional information received. Whilst claims continue to settle lower than the notifications level, they are taking longer to settle than originally anticipated, based on settlement patterns experienced on previous large property losses. Consequently, in order to eliminate uncertainty, the directors increased the reserves in June 2003 to the level of notifications at that time. As at 29 February 2004, gross notifications had reduced to US$552 million after adjusting for a US$15 million reduction on the loss for a transportation company which remains subject to market agreement. This would result in a net loss to Hiscox plc of approximately Â£65 million at Â£1:$1.79. 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. Syndicate 33's net loss provided is approximately US$245 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 that the aircraft impacts on the WTC are one occurrence in respect of the property losses. As at 29 February 2004, Syndicate 33 had paid US$426 million of the gross loss and recovered US$279 million from reinsurers. 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 our required funding of the US Trust Funds, a further US$22 million of cash advances and letters of credit had also been received from reinsurers at 29 February 2004. These recoveries of US$301 million at 29 February 2004 represent 88% of the expected total recoveries of approximately US$343 million. 89% of the remaining balance of approximately US$42 million is due from reinsurers rated A grade or better. Syndicate 33 has reduced its bad debt provision on reinsurance recoveries from the WTC loss to US$4.5 million following successful commutations. 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. Prior year restatement During the year, the Company adopted UITF Abstract 37 relating to purchases and sales of own shares and UITF Abstract 38 relating to own shares held in an ESOP Trust. In order to comply with these Abstracts, it was necessary for the Company to make an adjustment to its opening reserves, including the creation of a separate reserve for Own Shares, and to restate the 2002 profit and loss account and closing balance sheet for 2002. The impact of these adjustments is to decrease opening shareholders' funds for the year ended 31 December 2002 by Â£1,492,000. The impact on the profit and loss account and other reserves for the year ended 31 December 2002 is to increase profits by Â£424,000 and to debit the reserve for own shares by Â£102,000. The cumulative net impact on opening shareholders' funds for the year ended 31 December 2003 is a reduction of Â£1,170,000. The impact of the adjustment on the basic earnings per share for 2002 is an increase of 0.3 pence per share. The impact on 2002's net asset value per share is an increase of 0.1 pence per share. This restatement has been made in respect of 1,094,334 own shares held at 31 December 2002 by a subsidiary undertaking, Hiscox Holdings Limited, and 255,466 own shares held in an ESOP Trust. At 31 December 2003, the number of own shares held was 406,884 by Hiscox Holdings Limited and 255,466 in the ESOP Trust. 6.International Financial Reporting Standards All European Union listed companies are required to adopt International Financial Reporting Standards ('IFRS') for accounting periods beginning on or after 1 January 2005, which will include comparative information for 2004. The Group has initiated a project to implement the conversion from UK GAAP to IFRS and to ensure that this happens within the required timescales. The standards and proposed standards issued as exposure drafts such as ED 5 Insurance Contracts are themselves evolving and undergoing improvements. ED 5 does currently propose fundamental changes to the recognition of profit on insurance contracts. These changes are not expected to require adoption until 2007 at the earliest. The Group's IFRS working party, which includes representation from its external auditors, is monitoring the ongoing developments in IFRS and determining and implementing appropriate actions. 7. Segmental information a)100% level technical account by business division 2003 2003 2003 2003 London UK International Total Market Retail Business Â£000 Â£000 Â£000 Â£000 Gross premiums written 827,293 174,551 81,387 1,083,231 Net premiums written 702,396 145,726 56,777 904,899 Net premiums earned 571,243 132,189 48,452 751,884 Net claims incurred 316,285 65,141 18,633 400,059 Claims ratio (%) 55.4% 49.3% 38.4% 53.2% Commission 153,221 36,755 31,384 221,360 Operating expenses 60,664 23,092 2,545 86,301 Movement in DAC (32,362) (1,525) (2,938) (36,825) -------- -------- --------- -------- Net expenses 181,523 58,322 30,991 270,836 Commission ratio (%) 21.8% 25.2% 55.3% 24.5% Operating expense ratio (%) 8.6% 15.8% 4.5% 9.5% Expense ratio (%) 30.4% 41.0% 59.8% 34.0% Net longer term investment 21,779 7,281 2,631 31,691 return -------- -------- --------- -------- Technical profit* 95,214 16,007 1,459 112,680 -------- -------- --------- -------- Combined ratio (%) 85.8% 90.3% 98.2% 87.2% *Before movement in equalisation provision. The impact of a 1% change in the combined ratios of each business division on technical profit are: 2003 2003 2003 London UK International Market Retail Business Â£000 Â£000 Â£000 At 100% level 1% change in claims ratio 5,712 1,322 485 1% change in expense ratio 7,024 1,457 568 --------- -------- ---------- At Group level 1% change in claims ratio 3,513 1,322 485 1% change in expense ratio 4,631 1,457 568 --------- -------- ---------- 2002 2002 2002 2002 London UK International Market Retail Business Total 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 return 18,726 8,729 2,111 29,566 -------- -------- --------- -------- Technical profit* 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 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 --------- -------- --------- 'London Market' comprises the results of Syndicate 33 and the Hiscox Captive net of any business written between Group companies. 'UK Retail' comprises all of the UK retail underwriting results of 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. b) Reconciliation of 100% level technical results to Group results 2003 2002 Â£000 Â£000 Technical profit for 100% of continuing operations (note 112,680 45,367 7a) ---------- ---------- Notional share attributable to Group at current level of capacity ownership 79,718 35,724 Adjustments to reflect lower levels of capacity in prior years 2001 (2000) year of account 2,628 2,404 2002 (2001) year of account (1,443) 159 Investment return on corporate assets 7,162 6,161 Amounts applicable to quota share reinsurers* (1,265) (3,856) ---------- ---------- Trading profit for Group share of continuing operations (note 7c) 86,800 40,592 ---------- ---------- *For the 2003 year of account, the Group owned 65% (2002: 63%) of the Syndicate. For the 2002 year of account, 8% of the capacity (2001 year of account : 7%) was reinsured to three leading European reinsurers via a quota share arrangement. c)Profit on ordinary activities before taxation - by business division 2003 2003 2003 2003 London UK International Total Market/Group Retail Business Â£000 Â£000 Â£000 Â£000 Gross premiums written 541,442 174,551 81,387 797,380 Net premiums written 458,463 145,726 56,777 660,966 ---------- ---------- ---------- ---------- Net premiums earned 366,810 132,189 48,452 547,451 Net longer term investment 20,671 7,281 2,631 30,583 return Net claims incurred (204,547) (65,141) (18,633) (288,321) Acquisition costs (94,882) (35,230) (28,446) (158,558) Administrative expenses (17,453) (23,092) (2,545) (43,090) Other technical charges (1,265) - - (1,265) ---------- ---------- ---------- ---------- Trading result * 69,334 16,007 1,459 86,800 Other income and expenses (7,789) (992) (897) (9,678) ---------- ---------- ---------- ---------- Operating profit 61,545 15,015 562 77,122 ---------- ---------- ---------- ---------- Short term fluctuations in investment return 2,913 5,238 641 8,792 Equalisation provision - (1,730) (776) (2,506) ---------- ---------- ---------- ---------- Pre tax profit 64,458 18,523 427 83,408 ---------- ---------- ---------- ---------- 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 written 251,433 123,243 41,468 416,144 ---------- ---------- ---------- ---------- Net premiums earned 227,922 119,988 37,219 385,129 Net longer term 16,803 8,729 2,111 27,643 investment return Net claims incurred (138,789) (62,565) (10,997) (212,351) Acquisition costs (69,029) (34,232) (25,243) (128,504) Administrative (7,045) (19,202) (1,222) (27,469) expenses Other technical (3,856) - - (3,856) charges ---------- ---------- ---------- ---------- Trading result* 26,006 12,718 1,868 40,592 Other income and (4,676) (1,058) (274) (6,008) expenses ---------- ---------- ---------- ---------- Operating profit 21,330 11,660 1,594 34,584 ---------- ---------- ---------- ---------- Short term fluctuations in (7,417) (3,135) (590) (11,142) investment return Equalisation - (2,104) (599) (2,703) provision ---------- ---------- ---------- ---------- Pre tax profit 13,913 6,421 405 20,739 ---------- ---------- ---------- ---------- *Based on longer term investment return, before movement in equalisation provision and elimination of inter company transactions. '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. '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). 'International Business' comprises the results of Hiscox Insurance Company (Guernsey) Limited, the results of the Hiscox overseas agencies and the International retail business written by Hiscox Insurance Company Limited. d) Net asset value per share 2003 2003 2003 Net asset Number of NAV value shares* per share Â£000 000 p Net asset value 329,837 290,630 113.5 Net asset value (before equalisation 346,275 290,630 119.1 provision) Net tangible asset value 308,084 290,630 106.0 Net tangible asset value (before equalisation provision) 324,522 290,630 111.7 2002 2002 2002 Net asset Number of NAV value shares* per share Restated Restated Restated Â£000 000 p Net asset value 279,132 287,827 97.0 Net asset value (before equalisation provision) 293,064 287,827 101.8 Net tangible asset value 256,046 287,827 89.0 Net tangible asset value (before equalisation provision) 269,978 287,827 93.8 *The number of shares is the adjusted number of shares in issue as at 31 December of the relevant financial year. 8. Investment return a)Actual investment return 2003 2002 Restated Â£000 Â£000 Investment return on funds at Lloyd's and other corporate funds Investment income 8,591 4,590 Unrealised gains/(losses) on investments 1,778 (2,617) Realised gains/(losses) on investments 1,026 (244) ---------- ---------- 11,395 1,729 Investment return on syndicate funds Investment income 12,656 7,057 Realised gains/(losses) on investments 974 1,827 ---------- ---------- 13,630 8,884 Investment return on insurance company funds Investment income 9,955 8,354 Unrealised gains/(losses) on investments 6,248 (1,486) Realised gains/(losses) on investments (1,048) (171) ---------- ---------- 15,155 6,697 Investment expenses and charges (805) (809) ---------- ---------- Total investment return 39,375 16,501 Allocation to the technical account based on the longer term rate (30,583) (27,643) ---------- ---------- Short term fluctuations in investment return retained in the non-technical account 8,792 (11,142) ---------- ---------- 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. 2003 2002 % % Shares and units in unit trusts 6.0 7.0 Debt securities and other fixed interest securities 4.0 6.0 Deposits with credit institutions 4.0 6.0 c)Comparison of longer term investment return with actual returns Investment yield is calculated using the weighted average value of investments during the year. Funds at Lloyd's Share of Syndicate Insurance 2003 and other Corporate Company Total Assets Â£000 % Â£000 % Â£000 % Â£000 Actual investment return Shares and units in unit trusts 7,196 16.1 - - 9,736 19.9 16,932 Debt and other fixed interest securities 2,408 3.1 11,418 4.0 3,591 3.8 17,417 Deposits with credit institutions 1,496 2.8 1,863 4.0 1,667 3.3 5,026 -------- -------- ------ -------- 11,100 13,281 14,994 39,375 Longer term investment return Shares and units in unit trusts 2,674 6.0 - 6.0 2,931 6.0 5,605 Debt and other fixed interest securities 3,136 4.0 11,651 4.0 3,778 4.0 18,565 Deposits with credit institutions 2,527 4.0 1,858 4.0 2,028 4.0 6,413 -------- -------- ------- -------- 8,337 13,509 8,737 30,583 -------- -------- -------- -------- Short term fluctuations in investment return 2,763 (228) 6,257 8,792 -------- -------- -------- -------- Funds at Lloyd's Share of Syndicate Insurance 2002 and other Corporate Company Total Assets Restated Restated Â£000 % Â£000 % Â£000 % Â£000 Actual investment return Shares and units in unit trusts (2,442) (8.8) 138 10.1 (2,006) (9.6) (4,310) Debt and other fixed interest securities 2,101 7.7 7,008 5.2 7,162 6.7 16,271 Deposits with credit institutions 1,963 3.4 1,333 3.2 1,244 3.2 4,540 -------- -------- -------- -------- 1,622 8,479 6,400 16,501 Longer term investment return Shares and units in unit trusts 1,951 7.0 95 7.0 1,304 7.0 3,350 Debt and other fixed interest securities 1,632 6.0 8,031 6.0 6,346 6.0 16,009 Deposits with credit institutions 3,431 6.0 2,516 6.0 2,337 6.0 8,284 -------- -------- -------- ------- 7,014 10,642 9,987 27,643 -------- -------- -------- -------- Short term fluctuations in investment return (5,392) (2,163) (3,587) (11,142) -------- ------- -------- -------- d)Impact of a 1% change in the longer term rates of investment return on operating profit The impact of a 1% change in the longer term rates of investment return for each category of asset by segment on operating profit is: Funds at 2003 Lloyd's and other Share of Insurance Corporate Syndicate Company Total Assets Â£000 Â£000 Â£000 Â£000 Shares and units in unit trusts 446 - 489 935 Debt and other fixed interest securities 784 2,913 945 4,642 Deposits with credit institutions 632 464 507 1,603 Funds at 2002 Lloyd's and other Share of Insurance Corporate Syndicate Company Total Assets Â£000 Â£000 Â£000 Â£000 Shares and units in unit trusts 279 14 186 479 Debt and other fixed interest securities 272 1,339 1,058 2,669 Deposits with credit institutions 572 419 390 1,381 9. Employees' remuneration Their aggregate remuneration and associated costs were: 2003 2002 Â£000 Â£000 Wages and salaries 32,011 24,012 Social security costs 3,915 3,195 Other pension costs 3,417 3,934 ---------- --------- 39,343 31,141 ---------- --------- The average number of staff employed by the Group was 412 (2002: 367), comprising 141 underwriting and 271 administrative staff (2002: 118 and 249 respectively). Of the total remuneration shown above, an amount of Â£12,206,000 was recharged to the syndicate managed by Hiscox Syndicates Limited (2002: Â£12,343,000). 10. Earnings per share 2003 2003 2003 Average number of Earnings Shares EPS Â£000 000 p Adjusted basic, based on operating profit after tax 55,929 289,790 19.3 Basic, based on profit on ordinary activities after tax 60,491 289,790 20.9 Diluted, based on profit on ordinary activities after tax* 60,491 293,462 20.6 2002 2002 2002 Average number of Earnings Shares EPS Restated Restated Restated Â£000 000 P Adjusted basic, based on operating profit after tax 23,822 210,095 11.3 Basic, based on profit on ordinary activities after tax 14,399 210,095 6.9 Diluted, based on profit on ordinary activities after tax * 14,399 214,152 6.7 *In accordance with FRS14 'Earnings per share', potential ordinary shares are only included in the calculation of diluted earnings per share to the extent that they are dilutive i.e. those that on conversion to ordinary shares would decrease net profit per share from continuing operations. Earnings per share has also been calculated based on the operating profit after taxation as the directors believe this earnings per share figure provides a better indication of operating performance. The reconciliation of basic earnings per share to adjusted basic earnings per share based on operating profit after tax is as follows: 2003 2002 EPS EPS Restated p p Basic based on profit on ordinary activities after tax 20.9 6.9 Short term fluctuations in investment return (2.2) 3.5 Movement in equalisation provision 0.6 0.9 -------- ---------- Adjusted basic based on operating profit after tax 19.3 11.3 -------- ---------- Diluted earnings per share has been calculated taking into account the following options under employee share schemes. 2003 2002 No. No. Restated 000 000 Basic weighted average number of shares 289,790 210,095 Employee share options 2,579 2,941 SAYE share options 1,093 1,116 Diluted weighted average number of shares 293,462 214,152 11. Other financial investments Funds at Share of Insurance 2003 Lloyd's and Syndicate Company Total other Corporate Assets Market Value Market Value Market Value Market Value Â£000 Â£000 Â£000 Â£000 Shares and units in unit trusts 54,505 - 57,442 111,947 Debt and other fixed interest securities 82,261 397,507 99,702 579,470 Deposits with credit institutions 27,350 2,581 51,368 81,299 Other 573 - - 573 ---------- ---------- ---------- ---------- 164,689 400,088 208,512 773,289 ---------- ---------- ---------- ---------- Funds at Share of Insurance 2002 Lloyd's and Syndicate Company Total other Corporate Assets Market Value Market Value Market Value Market Value Restated Restated Â£000 Â£000 Â£000 Â£000 Shares and units in unit trusts 26,981 - 27,587 54,568 Debt and other fixed interest securities 27,496 172,312 98,463 298,271 Deposits with credit institutions 93,659 1,448 53,406 148,513 Other 422 - - 422 ---------- ---------- ---------- ---------- 148,558 173,760 179,456 501,774 ---------- ---------- ---------- ---------- 12. Other debtors 2003 2002 Â£000 Â£000 Taxation recoverable 2,739 - Deferred tax asset - 12,824 Net profit commission receivable 7,918 2,772 Other debtors 7,355 6,971 Share of syndicate's overseas deposits 27,679 20,396 Share of syndicate's other debtor balances 25,464 4,770 --------- --------- 71,155 47,733 --------- --------- 13. Reconciliation of Movement in Shareholders' funds Share Share Merger Capital Capital Premium Reserve Redemption Reserve Reserve Â£000 Â£000 Â£000 Â£000 At 1 January 2003 14,459 230,585 4,723 33,244 Prior year restatement (see note 5) - - - - -------- ------- -------- --------- At 1 January 2003 (restated) 14,459 230,585 4,723 33,244 -------- ------- -------- --------- Exercise of share options 106 1,756 - - UITF 37 adjustment - - - - Exchange differences taken to - - - - reserves Retained profit for the year - - - - -------- ------- -------- --------- At 31 December 2003 14,565 232,341 4,723 33,244 -------- ------- -------- --------- Reserve on Profit and Total Own Loss Share Shares Account holders' Funds Â£000 Â£000 Â£000 At 1 January 2003 - (2,709) 280,302 Prior year restatement (see note 5) (1,339) 169 (1,170) -------- ------- -------- At 1 January 2003 (restated) (1,339) (2,540) 279,132 -------- ------- -------- Exercise of share options - - 1,862 UITF 37 adjustment 653 98 751 Exchange differences taken to reserves - (155) (155) Retained profit for the year - 48,247 48,247 -------- ------- -------- At 31 December 2003 (686) 45,650 329,837 -------- ------- -------- 14. Provisions for other risks and charges Deferred tax Â£000 At 1 January 2003 - Adjustment to provisions during the year 15,503 ----------- At 31 December 2003 15,503 ----------- There is no unprovided deferred tax liability. 15. Other creditors including taxation and social security 2003 2002 Â£000 Â£000 Proposed final dividend 8,414 6,914 Taxation payable - 2,730 Amounts owed to credit institutions 477 21 Obligations under finance leases 255 454 Other creditors 11,621 11,396 Share of syndicate's other creditor balances 7,647 14,899 --------- --------- 28,414 36,414 --------- --------- 16. Pensions contributions During the year, the Group contributed to the two sections of the Hiscox defined benefit pension scheme. The funds of the scheme are administered by trustees and are independent of the Group's finances. The adequacy of the pension funds is assessed by triennial valuations carried out by independent actuaries. The Group also contributed to a defined contribution scheme introduced 1 January 2001 for all staff joining the Group. The total pension charge for the year amounted to Â£2,911,000 (2002: Â£3,409,000). Defined benefit schemes A full actuarial valuation was carried out at 31 December 2002 by a qualified independent actuary. The valuation was updated on an FRS17 basis as at 31 December 2003 by a qualified independent actuary. The major assumptions used by the actuary were, in nominal terms, as follows: 2003 2002 2001 Rate of increase in salaries 3.80% pa 3.25% pa 3.50% pa Rate of increase in RPI linked pensions in 2.80% pa 2.25% pa 2.50% pa payment Rate of increase of pensions in deferment 2.80% pa 2.25% pa 2.50% pa Discount rate 5.40% pa 5.50% pa 6.00% pa Inflation assumption 2.80% pa 2.25% pa 2.50% pa The scheme is invested primarily in unitised funds held with Fidelity Pension Management. The split of assets, their expected rate of return and the funding position at 31 December 2003, measured in accordance with the requirements of FRS17, were as follows: 2003 2003 2002 2002 2001 2001 % Â£000 % Â£000 % Â£000 Equities and properties 6.75 36,831 6.50 30,935 7.00 37,262 Bonds 5.00 9,512 4.75 10,037 5.25 6,399 Cash 3.75 11,859 4.00 2,561 4.00 2,949 ------- ------- ------- Total market value of assets 58,202 43,533 46,610 Present value of scheme liabilities (91,536) (77,258) (59,800) ------- ------- ------- Surplus/(deficit) (33,334) (33,725) (13,190) Related deferred tax (liability)/asset 10,000 10,118 3,957 ------- ------- ------- Surplus/(deficit) in the scheme (23,334) (23,607) (9,233) - pension asset/(liability) The impact on the net assets and retained profits of the Group at 31 December 2003 of adopting FRS17 would be: Net assets Â£000 Current position at 31 December 2003 329,837 Pension (asset)/liability on a SSAP24 basis (5,310) Pension asset/(liability) on a FRS17 basis (23,334) --------- Restated position at 31 December 2003 301,193 --------- During the year the Group has contributed to the scheme at the rate of 23.1% of pensionable salaries plus an additional contribution of Â£7,000,000. From 1 January 2004, the Group is making contributions to the scheme at the rate of 22.6% of pensionable salaries plus an additional contribution of Â£2,766,000 per annum. 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. 17. Notes to the Cash Flow Statement a) Reconciliation of operating profit to net cash inflow from operating activities 2003 2002 Restated Â£000 Â£000 Operating profit before taxation after interest, based on longer term investment return 77,122 34,584 Depreciation and amortisation of fixed assets 4,125 3,422 Increase in general insurance technical provisions, net of reinsurance 43,482 22,254 Increase/(decrease) in amounts owed to agents (2,591) 13,238 (Increase)/decrease in amounts owed by agents (11,295) (3,729) (Increase)/decrease in other debtors (24,979) (1,024) Increase/(decrease) in other creditors 482 2,721 Cash transferred (to)/from Lloyd's business (note c) (7,712) (23,037) Realised and unrealised investment (gains)/ losses (8,004) 4,519 Short term fluctuations in investment return 8,792 (11,142) Interest expense 1,946 1,432 (Profits)/losses relating to Lloyd's business (56,516) (21,034) Other non-cash transactions (1,264) (70) ----------- ----------- Net cash inflow from operating activities 23,588 22,134 ----------- ----------- b) Movement in opening and closing portfolio investments net of financing 2003 2002 Restated Â£000 Â£000 Net cash inflow/(outflow) for the period (25,608) 25,288 Portfolio investments 35,968 98,483 Decrease/(increase) in loans (257) 2,626 ----------- ----------- Movement arising from cash flows 10,103 126,397 Movement in Lloyd's business (note c) 182,711 95,975 Changes in market value and exchange rate effects 10,042 (2,407) ----------- ----------- Increase in portfolio investments net of financing 202,856 219,965 ----------- ----------- Total portfolio investments net of financing at 622,127 402,162 1 January ----------- ----------- Total portfolio investments net of financing at 31 December 824,983 622,127 ----------- ----------- c) Cash flows of the Lloyd's business 2003 2002 Â£000 Â£000 Premiums received, net of reinsurance 442,742 254,365 Claims paid, net of reinsurance (104,587) (80,382) Net portfolio investments 12,055 6,652 Other net cash flows (175,211) (107,697) ----------- ----------- Net cash flow before retention and transfer from/(to) the Group 174,999 72,938 Transfer from/(to) the Group 7,712 23,037 ----------- ----------- Cash retained in the Lloyd's business 182,711 95,975 ----------- ----------- d) Analysis of cash flows for headings netted in the cash flow statement 2003 2002 Restated Servicing of finance Â£000 Â£000 Interest paid (2,194) (1,644) Interest paid element of finance leases (39) (65) ----------- ----------- (2,233) (1,709) ----------- ----------- Capital expenditure Payments to acquire tangible fixed assets (2,935) (2,470) Receipts from sales of tangible fixed assets - (398) Payments to acquire intangible fixed assets (117) (701) ----------- ----------- (3,052) (3,569) ----------- ----------- Acquisitions and disposals Payments to acquire investment in associated undertaking (50) - Acquisition of subsidiary undertaking - - Net cash and investments acquired with subsidiary - - ----------- ----------- (50) - ----------- ----------- Financing Proceeds from share issues * 1,862 110,799 (Payments)/receipts relating to own shares 751 (102) New bank loan 456 - Repayment of bank loan - (2,038) Capital element of finance leases (159) (222) ----------- ----------- 2,910 108,437 ----------- ----------- Portfolio investment Purchase of shares and units in unit trusts 74,316 19,911 Purchase of debt securities and fixed interest securities 301,303 175,765 Sale of shares and units in unit trusts (29,730) - Sale of debt securities and fixed interest securities (241,646) (165,451) Increase/(decrease) in deposits with credit institutions (68,275) 68,265 Increase/(decrease) in other investments - (7) ----------- ----------- 35,968 98,483 ----------- ----------- * Net of expenses of Â£nil (2002 : Â£4,986,413). e) Movement in cash, portfolio investments and financing * At 1 Jan Cash flow Changes Changes At 31 Dec 2003 in other to market 2003 business value and currencies Restated Â£000 Â£000 Â£000 Â£000 Â£000 Cash at bank and in hand 121,196 (25,608) (42,643) - 52,945 Shares and units in unit trusts 54,568 44,586 - 12,793 111,947 Debt securities and other fixed interest securities 298,271 59,657 224,221 (2,679) 579,470 Deposits with credit institutions 148,513 (68,275) 1,133 (72) 81,299 Other investments 54 - - - 54 Loans due within one year (21) (456) - - (477) Finance leases (454) 199 - - (255) -------- -------- -------- -------- -------- Total 622,127 10,103 182,711 10,042 824,983 -------- -------- -------- -------- -------- * These balances include amounts relating to syndicate participations but exclude participations in associated undertakings of Â£519,000 (2002: Â£368,000). 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 2003 and 2002. The financial information for 2002 is derived from the statutory accounts for 2002 which have been delivered to the registrar of companies. The auditors have reported on the 2003 and 2002 accounts; their reports were unqualified and do not contain a statement under section 237(2) or (3) or the Companies Act 1985. The statutory accounts for 2003 will be delivered to the registrar of companies following the Company's annual general meeting. 2. The Annual Report and Accounts for 2003 will be posted to shareholders no later than 10 May 2004 and will be delivered to the Registrar of Companies following the Annual General Meeting on 22 June 2004. 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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