Final Results

Hiscox PLC 14 March 2005 PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2004 'ANOTHER STRONG PERFORMANCE' Hiscox plc, the specialist insurer, today announces preliminary results for the year ended 31 December 2004. 2004 2003 Gross written premiums Â£778.9m Â£797.4m Net earned premiums Â£642.4m Â£547.5m Operating profit Â£86.3m Â£77.1m (based on longer term investment return) Profit before tax Â£77.0m Â£83.4m Earnings per share 18.7p 20.9p Final dividend per share 3.5p 2.9p Net asset value per share (before equalisation provision) 132.8p 119.1p Group combined ratio 93.0% 87.2% Post-tax return on capital 16.5% 21.7% Highlights â€¢ Record operating profit of Â£86.3 million, after Â£70 million impact of 2004 hurricane season. â€¢ Final dividend increased 21%, making a total dividend of 5.0p per share for the year (2003: 4.2p per share). â€¢ A strong performance across the group: - London Market business increased operating profit to Â£63.5 million (2003: Â£61.5 million) with a combined ratio of 92.9% (2003: 85.8%) - UK Retail increased operating profit to Â£18.8 million (2003: Â£15.0 million) with a combined ratio of 89.8% (2003: 90.3%) - International Retail increased operating profit to Â£4.0 million (2003: Â£0.6 million) with a combined ratio of 97.9% (2003: 98.2%). â€¢ Market conditions in 2005 are more competitive but still attractive in aggregate. â€¢ The growth of retail businesses to complement the more volatile London Market business has continued successfully, and will show real value in the next stage of the underwriting cycle. Robert Hiscox, Chairman Hiscox plc, commented: ' This is another strong result (in fact a record operating profit) especially considering the impact of the hurricanes during the year. It is another step in our ambition to grow a highly respected and pre-eminent specialist insurer. Our established strategy of building a well spread specialist book of retail businesses to complement the more volatile London Market business, together with disciplined underwriting, should bring real benefit in the next stage in the cycle.' Copies of the Chairman's statement, Chief Executive's review and the Group's financial information as at 31 December 2004 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£500 million. There are three main underwriting parts of the Group - Syndicate 33 at Lloyd's, UK Retail and International Retail. 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, Maidenhead and Colchester. The International Retail business has offices in Paris, Amsterdam, Munich, Brussels and Guernsey. The European offices write mainly fine art, high value household business and some specialist professional indemnity business. The Guernsey office underwrites fine art business and kidnap and ransom. Hiscox is the largest specialist fine art and high net worth insurer in Europe. For further information, go to www.hiscox.com Chairman's Statement Results The results for the year ending 31st December 2004 are a pre-tax profit of Â£77.0 million (2003: Â£83.4 million) and an operating profit of Â£86.3 million (2003: Â£77.1 million). The net assets per share have increased to 132.8p per share (2003: 119.1p per share) and the earnings per share on profit after tax were 18.7p per share (2003: 20.9p). The gross premium income underwritten by the Group was Â£1,051.1 million (2003: Â£1,083.2 million), and the gross premium income applicable to Hiscox plc was Â£778.9 million (2003: Â£797.4 million). It is pleasing to report another solid profit (in fact a record operating profit) despite an unusually turbulent year of natural catastrophes. It increases the net assets behind the shares and enables us to increase the dividend. We remain on course in our determination to build a highly respected, pre-eminent specialist insurance group, but the upward path of profits and top line growth will not always be smooth given the nature of the insurance business. We can, however, hope to increase the dividend steadily to reward long term holders of our shares. Dividend The Board recommends a final dividend of 3.5p (net) per share (2003: 2.9p per share),making a total distribution of 5.0p per share for the year, an increase of 19 per cent on 2003. This will be paid on 27th June 2005 to shareholders on the register on 15th April 2005. We remain committed to a progressive dividend policy. A policy of total distribution would be very harmful as the group has an obvious need of capital, and any dividend policy geared to a percentage of profits would be destabilising for long term shareholders and encourage volatility in the shares. Current Business The group has grown in strength and depth over the year. Our strategy of building a strong regional book of retail business to balance the more volatile Lloyd's business continues to succeed. We are also growing our direct account to supplement brokered business. We are not in competition with brokers as we are concentrating on smaller accounts which are uneconomic for brokers, and dealing with clients who wish to place their insurances direct with an insurer. Our Lloyd's Syndicate 33 absorbed substantial losses from the four hurricanes which hit Florida during the year but still made a similar profit to last year, an unthinkable result a few years ago. This was achieved by good underwriting, but also indicates the strength of rates last year in the international market. There is obviously pressure on some of the best rated business as there always will be, but the renewal season went well. We are back in a normal insurance market after a short period of extraordinary shortage of capacity which enabled very high prices to be charged. Underwriting discipline is the key, backed by a constant search for profitable business and control of expenses. We continue to adhere to the old truth that turnover is vanity, profit sanity. If Lloyd's business gets too competitive we are able to concentrate our resources on the retail business. Our retail businesses are concentrating on growth in our existing offices outside London (five in the UK and six overseas). They are now well established and we expect them to be an important part of our future. The only regional expansion during the year was the transfer of a member of staff to Madrid to develop our Spanish business, and we are working towards opening an office in the USA. 40% of our business comes from the USA, and a considerable proportion of it is retail business written by Managing General Agents. Our underwriters travel extensively to the USA and it seems sensible to have staff established there to service existing clients and find new ones. Business conditions are good. There is no doubt that rates have been high and many deserved to be reduced. The problem is that momentum gathers, and brokers get used to reducing rates and underwriters get used to cutting them. I will state, as all Chairmen and Chief Executives will, that we will exercise discipline and refuse to reduce rates to uneconomic levels. No sensible leader could say anything different. Most then demand growth from their staff, seeming to ignore that the only way you can grow is by winning business off the competition, and virtually the only way to do that is to quote a reduced premium. Many underwriting businesses monitor changes in rates at renewal, and announce small reduction percentages so the Chief Executive is happy that discipline reigns and that it is the others who are cutting rates. But do they monitor the amount they cut the existing rates of other insurers to win new business? This Chairman and our Chief Executive and Chief Underwriter are acutely aware of all the tricks and traps in the cycle. We have a team at the top who have been up and down and up the cycle a few times, and we know that remaining up when others are down is deeply satisfying and good for the shareholders. Discipline is the key. The difference with this cycle and others is that reinsurance, which normally leads and encourages the downward spiral of rates, is remaining firm and hard to buy. This should keep direct underwriters realistic as they will not be able to pass the results of bad underwriting on to their reinsurers. Regulation I am devoted to rigorous and sensible regulation aimed at maintaining the solvency of general insurers. We lose business to suicidal rate cutters and then have to help pay for their abandoned policyholders after their inevitable insolvency. So I accept a rigorous analysis of our underwriting and reserving by those who understand the business. On the rest of our commercial activities, my view is that there should be draconian penalties for dishonesty or gross negligence in running a business, but far fewer petty rules for all. I am not surprised that removing road signs reduces accidents. If businesses were forced to use their own instinct, moral sense and common sense in managing their enterprises instead of ticking boxes in obedience to 'one size fits all' corporate governance rules, I am sure that fewer mishaps would occur and honest profits would be higher. Our business is heavily scrutinised by the FSA, with an added layer of Lloyd's regulation on top and another of corporate governance rules from various bodies. The Lloyd's rules are packed with prescriptive little directives. On the other hand, the FSA's rulebook is very principles-based which leaves us crying out occasionally for a prescriptive rule, rather than trying to guess what will satisfy them. The occasional road-sign is very useful. As an example, despite all the instructions on how to run our business from all those entities, it has taken Mr Spitzer from New York to put the spotlight on the inappropriate manner in which the whole insurance industry handles remuneration, with brokers negotiating their remuneration from underwriters instead of their clients, with the obvious pressures and conflicts. A golden opportunity has arisen to change the structure of our industry for the benefit of all, but the FSA stands back. We will continue to work with our insurance brokers to bring transparency and commercial common sense to how we do business together, but we are dealing with a very disparate group of businesses and it would be of enormous benefit if the FSA joined in to bring some common standards. When you think of all the time and money spent on regulation and corporate governance, it is amazing that reform has to come from New York, and that all the brains in the FSA and the ABI do not immediately take up the challenge. But it is much easier for them to fuss about increasing the size of our Report and Accounts with pages of information that bear little relation to our capability to make sensible business decisions. People Despite the burden of regulation and a year of extraordinary losses, everyone at Hiscox has worked with cheerful, vibrant efficiency and made a substantial profit. The atmosphere and spirit throughout the group is a credit to all who work in it, as is the profit, and I would like to thank them sincerely. The future I offer six good reasons why I believe we have a strong future. Insurance is a great business. Everybody has to have it, there is never a shortage of demand, and as the world prospers, as life becomes more complicated and as litigation sadly grows, so does the need for insurance. We have a talented group of people with stable senior management, all of whom are committed to growing a top quality insurance business. We have the wonderful advantage of being able to use Lloyd's for internationally traded business and our regional offices and companies for local retail business. We focus on our specialist areas (both of business and geographically) which have substantial growth potential and we stick to our knitting. We are developing a strong brand to increase demand for our products both through brokers and through our growing direct business. We have no legacy problems whereas the need to bolster reserves is eating away at the established insurance industry. The management is aligned with shareholders and is determined to achieve long term growth in profitability leading to steadily increasing dividends, growth in net assets and earnings per share, and a higher share price. Robert Hiscox Chairman, Hiscox plc 14 March 2005 Chief Executive's Report Overview 2004 was another good year for Hiscox. Our Lloyd's business produced another strong result, despite the severity of natural catastrophes. Our UK business has also performed well, with an improved underlying combined ratio, and our International business, particularly Mainland Europe, has made good progress. Market conditions are changing. The ability to make profit easily in all classes will disappear over the next 24 months. Risk selection and underwriting focus will be the key to continued success. Our ability to move our focus from big ticket international business, to smaller retail business, distributed through our 11 offices gives us an edge. Our talented and experienced team have seen cycles before, so we are confident we can adapt to this market. Our underlying profitability will allow us to build our balance sheet, reduce gearing, acquire the balance of Syndicate 33 on a gradual basis and fund incremental expansion without recourse to shareholders. Group Strategy Our Group strategy remains unchanged. Our goal is to build a profitable specialty insurer, focused on specific product lines and geographic markets. With this specialist focus, we ensure that we can meet and exceed clients' needs and expectations. We continue to focus on markets where our flexibility and agility gives us a distinct advantage over larger competitors whose scale works against them. Within this strategy our long term focus has been to build our smaller ticket retail business - in the UK, Europe, and globally through Syndicate 33 - to balance the more volatile bigger ticket business we write solely through Syndicate 33 at Lloyd's. We are succeeding in this goal. Retail business now represents over 40 per cent of the Group's controlled premium income, an increase from 25 per cent in 1994, and is now larger than the entire Group was in 1994. To extend this strategy during the year, we opened our business centre in Colchester and allocated additional resources to our UK Regional offices. We expect to continue this retail focus in 2005. In line with our desire to grow as a specialty insurer and to find new opportunities, we are planning to open an office in the USA in the near future. Hiscox already receives 40 per cent of its business from this market. By having a local presence we should be able to identify new demands and brokers, and to complement our business through the traditional London brokers. Trading Conditions Market conditions remained favourable in 2004. Prices were reasonable in all areas of our business with softening most prevalent in those areas where rates had risen to exceptionally high levels. 2005 has started well. Rates on renewal business remain acceptable but there is more pressure with new business where, in some areas, we are seeing competitors offer rates close to breakeven levels. The trends in each of our divisions are reviewed below: Art & Private Clients We created this division last year, bringing the underwriting of this important area under common management. The benefits of this have been to unify and simplify the interface with brokers, and to ensure that we are able to underwrite large fine art and household risks through all of our European offices as well as our Lloyd's operation. There has been increasing competition in the market in London as some of the international giants appear to be underwriting in this area as a hobby without proper oversight and discipline. In the face of increasing competition in London, we have intensified our efforts in the UK Regions and are developing our European business. In addition, we launched a reinvigorated 'Fine Art by Hiscox' product, which will help us grow our stand-alone fine art book on a pan-European basis. We had a limited involvement in the fire at the Momart storage facility, the industry's largest insured art loss since 1991. Our Executive Household team provides high value household and contents insurance for customers direct or through partnerships with professional associations and commercial organisations. It has had a good year, growing through both channels. We are embarking on higher profile marketing activities in 2005 to stimulate new business for both our broker and direct channels. Specialty This team focuses on contingency, kidnap and ransom, personal accident, bloodstock and American managing general agents servicing homeowners and small commercial businesses. Rates have remained stable. Our kidnap and ransom team continues to lead the world, benefiting from their long term partnership with the Control Risks Group. Our homeowners and small commercial book was impacted by the windstorms in Florida. We expect to obtain rating increases on these risks as they come up for renewal in the early part of 2005. In early 2005 we purchased Insurex Expo-Sure, a UK-based underwriting agency which provides insurance for events, conferences and exhibitions. The acquisition builds upon an existing long-term relationship with Insurex, and has much potential for future growth. We plan to use our regional and European offices as a distribution network for smaller risks, and our large business team in London with their extensive experience of insuring international events to underwrite larger risks. Professions and Specialty Commercial This division continues to focus on professional firms and emerging advisory and service-led businesses in the UK. We provide coverage for errors and omissions and are expanding our portfolio to cover associated commercial risks relating to both property and liability exposures. Our primary target is the small and smallest firms in this target market. We have market-leading expertise in providing these insurances, both in terms of underwriting knowledge and in processing skills and efficiency. Whilst we have the expertise to underwrite larger traditional risks, there has been significant pricing pressure in this area and we have deliberately avoided this market segment over the last 12 months. Instead, our renewed focus on smaller business risks has achieved growth both in London and in the UK Regions. We are also developing our capacity in this area in Europe and I expect it to become a strong contributor to the business in the years ahead. In the UK we will be launching a new professional indemnity product targeting the smallest firms and individual freelance consultants. This will be a no-frills version of our existing professional indemnity product and will be available through a number of distribution channels. Aerospace, Technology, Media and Telecommunications The trading environment in these segments remains reasonable. During 2004 we successfully expanded our technology, media and telecommunication client base outside London to the UK Regions, the USA and France. This growth has been achieved by a combination of local deployment of underwriters, more global travel by the team and the introduction of a new e-commerce system which is encouraging greater business flow from the USA. Despite competition in the UK from the international players, our worldwide reputation in these sectors continues to grow. This is based upon our focus on risk management and a pro-active claims team which draws upon a huge wealth of experience in this sector when assisting our clients with their claims. London Market This division underwrites marine hull and liability, offshore energy, terrorism, international professional indemnity and political risks. The teams within this division continue to adapt to market changes in their individual areas. Our terrorism team is a market leader, with the ability to underwrite significant risks from around the world, and an e-commerce platform which allows us to underwrite smaller risks on a distributed basis. In the marine hull and liability area, rates remain reasonable, although we are seeing some evidence of irrational behaviour in some international markets. The marine account benefited from the acquisition of renewal rights for business placed with Marlborough Underwriting Agency. This allowed us to renew Â£11 million of business on good terms. The offshore energy and energy liability team has performed well in 2004. Despite the impact of Hurricane Ivan which caused one of the biggest losses in the sector on record, they have delivered a small overall profit. This result reflects skill in creating a balanced book and discipline in the face of pricing pressure. The professional indemnity team delivered controlled growth in 2004, taking advantage of our position in this market. Our intention in 2005 is to focus on smaller less competitive risks where we see continued opportunity. Reinsurance & Major Property This team focuses on various classes of reinsurance on both an excess of loss and pro-rata basis, and the insurance of major industrial and commercial property. Rates in reinsurance continue to offer good margins. The four hurricanes which made landfall in the USA tested the nerve of the industry, and reminded us all that risk should only be assumed at the right price. During the December renewal season, reinsurance rates in the US were stable overall, with prices for risks in Florida increasing, with reductions occurring elsewhere. International catastrophe reinsurance rates have been under pressure as a result of over-capacity. Unfortunately, this is driven as much by older professional firms as by new entrants. We are now reducing the large pro-rata reinsurance account created between 2001 and 2003 as some of the underlying rates are beginning to ease. The reinsurance market is now seeing the benefits from the introduction of improved natural perils statistical modeling over the last decade. This is bringing greater discipline and transparency to the market. Hiscox combined the major property team with the reinsurance team this year in order to embed and apply this modeling and statistical expertise consistently over the two areas. As stated last year, big ticket property rates are under significant pressure as the market is showing insufficient discipline in applying technical knowledge to pricing. In 2005 we will be reducing our property line size to ensure that we are not over exposed in a softer market. We intend continuing with our selective approach to risks, shedding business as necessary, motivated by the conviction that discipline will pay off over time. Group Financial Performance In 2004 the Group achieved an operating profit of Â£86.3 million (2003: Â£77.1 million). This is a good performance especially as it has been achieved in one of the worst years ever for insured natural catastrophes. The net cost of the four hurricanes to Hiscox plc was Â£70 million. Pre-tax profits were Â£77.0 million (2003: Â£83.4 million). The lower pre-tax profit reflects the fact that in 2004 the actual investment return was less than the assumed longer term rate of return. In 2003 it was higher. Hiscox plc had an after-tax return on opening equity of 16.5 per cent (2003: 21.7 per cent). Earnings per share on the basis of profit after tax were 18.7p (2003: 20.9p). Our net asset value before equalisation provisions at the year end was 132.8p per share (2003: 119.1p). These results all reflect a credible performance. Hiscox Insurance Company which comprises the UK and European retail businesses, achieved gross written premium of Â£231.4 million (2003: Â£218.7 million) and an operating profit of Â£19.6 million (2003: Â£14.5 million). Its combined ratio was 92.6 per cent (2003: 93.6 per cent). London Market This business consists of our share of the profits of Syndicate 33, fees and profit commission from third party capital and the return on the capital which supports the business. Operating profits of Â£63.5 million were achieved (2003: Â£61.5 million). This business performed exceptionally well considering it bore the brunt of the weather-related catastrophes which impacted our business. The combined ratio was 92.9 per cent (2003: 85.8 per cent). We do not expect our Lloyd's business to grow in aggregate over the short term and, as announced, we have planned for a capacity of Â£775 million in 2005 (2004: Â£846 million). However, Hiscox plc will benefit from the sustained strong rating environment and from its increased ownership of Syndicate 33. During the auction season we increased our ownership of Syndicate 33's 2005 capacity to 71 per cent (2004: 65 per cent). In the medium term, we expect our Lloyd's business to benefit once we have established the US office, as we plan initially to use Lloyd's security for this operation. UK Retail Our UK Retail Business achieved an increase in operating profit to Â£18.8 million (2003: Â£15.0 million). Gross written premium grew to Â£175.7 million (2003: Â£174.6 million), despite the loss of a Â£20 million book of commodity business. The combined ratio was an excellent 89.8 per cent (2003: 90.3 per cent) better than our target of 95-98 per cent. We see continued potential to expand this business. We have opened a business centre in Colchester and expect to open a branch office there during the course of 2005. Our direct business continues to grow and during the year hit the 10,000 customer mark. It has been particularly successful in building a customer base from partnership relationships with major financial institutions and membership organisations. International Retail This area includes the business written in our mainland European offices and through our insurance company in Guernsey. In aggregate they had a significantly better year. Hiscox Guernsey has continued to sustain its excellent performance achieving an operating profit of Â£2.8 million (2003: Â£2.3 million). This continued performance reflects our leading position in the worldwide kidnap and ransom market. Our offices in mainland Europe delivered a much improved performance, achieving an operating profit of Â£1.2 million (2003: Â£1.7 million loss) and an improved combined ratio of 102.1 per cent (2003: 107.4 per cent). We are not yet satisfied with this level of performance, but the trend is in the right direction. Our strategy is to build on the footholds we have created in our existing markets and to gain economies of scale. During 2005, we will be seeking to broaden our product range drawing on the lessons that we have learnt in the UK. Investment Management Hiscox plc's invested assets grew by Â£236 million to Â£1,062 million during the year and produced a return of Â£32 million (2003: Â£39 million). The increase in cashflows from the strong underwriting market meant that there was more money invested but 2004 presented a difficult investment market. This was particularly so in US fixed interest where a substantial proportion of our assets are invested. Interest rates in the US continued at their low level and rather than take on more risk in search of higher yield, we adopted a conservative strategy, investing with a short duration. As a result our investment returns were below our assumed long term rate of return, producing an overall return for the year of 3.3 per cent. We increased our exposure to equities at the beginning of the year, having sold the majority of the high yield debt portfolio. The strong rally in equities at the end of the year produced a return on equities for the year of 10.2 per cent. Through our Hiscox Investment Management subsidiary we now manage the investment of Â£1.6 billion against Â£1.2 billion a year ago. We supervise fund managers, both in the UK and USA, who invest our group assets. Our specialist Financial Funds, which we manage ourselves, produced positive returns for all four funds in the year. The US Financial Fund had its tenth anniversary in November, which over the decade produced a compound return of 14.7 per cent p.a. Balance Sheet Shareholders funds have grown from Â£330 million to Â£372 million. Net assets per share before equalisation provisions at the end of year were at 132.8p (2003: 119.1p). This performance is key to driving shareholder value as this underlying asset value provides strong support to our share price. Cash and financial assets within our controlled group grew to Â£1.4 billion (2003: Â£1.1 billion), demonstrating the overall financial health of the group. We have continued with our stand by Letter of Credit of Â£137.5 million. We plan to re-finance this during the course of 2005. We expect to use our retained earnings over the next several years to decrease our balance sheet leverage, to provide us with the financial flexibility to acquire the balance of Syndicate 33 and to fund incremental expansion. International Financial Reporting Standards In common with all listed companies within the European Union, the Hiscox plc consolidated accounts will be prepared in accordance with International Financial Reporting Standards (IFRS), with effect from the 2005 financial year. 2004 results will be restated for IFRS in the summer of 2005 and results for the first half of 2005 will be under IFRS. People An insurance company can be described as no more than a pile of cash and a bunch of good people. Cash is a commodity; it is the good people that distinguishes Hiscox from others. These results reflect the hard work and endeavours of the 500 people who work within our organisation. We were pleased to again be rated as one of the Top 100 Companies to Work For, in the annual Sunday Times survey. Insurance can sometimes be a cruel business, with actual results not always reflecting the hard work or the skill of the people in the business. Despite the inevitable disappointments arising from the hurricanes and other large losses, our staff remain positive and driven. We will never be complacent about what we have achieved and the challenge for all of us is to keep developing the business and finding new pockets of opportunity despite a softening market. We also realise that there will be moments when winning will be saying no to a piece of business. Turning business away is always difficult, but it is a challenge to which we will rise. Outlook In the short-term, we expect our Lloyd's business to reduce as we retain a focus on disciplined and profitable underwriting. Growth will be achieved through developing our retail businesses where there is strong appetite for our specialist products and through increased ownership of the syndicate's capacity. The insurance world is returning to normal. Price increases driven by fear are a thing of the past. Prices remain at attractive levels in aggregate, but clearly as the cycle develops certain areas will be less attractive than others. Hiscox is well placed to continue to deliver in this environment through the quality of our products and people and our consistent strategic focus. The Hiscox management team has been stable and has worked together through more than one cycle. We have not forgotten the lessons of the past, but are not bound by them. We will continue to strive to deliver a continuous growth in the value of the business over the time that lies ahead. Bronek Masojada Chief Executive, Hiscox plc 14 March 2005 FINANCIAL STATEMENTS Consolidated Profit and Loss Account Technical Account - General Business for the year ended 31 December 2004 2004 2003 Notes Â£000 Â£000 Earned premiums, net of reinsurance Gross premiums written 4c 778,893 797,380 Outward reinsurance premiums (97,327) (136,414) ---------- ---------- Net premiums written 4c 681,566 660,966 Change in the gross provision for unearned premiums (19,337) (74,902) Change in the provision for unearned premiums, reinsurers' share (19,800) (38,613) ---------- ---------- Change in the net provision for unearned premiums (39,137) (113,515) ---------- ---------- Earned premiums, net of reinsurance 4c 642,429 547,451 ---------- ---------- Allocated investment income transferred from the 5a,5c non-technical account 39,799 30,583 Claims incurred, net of reinsurance Claims paid: Gross amount (220,274) (275,227) Reinsurers' share 39,201 90,327 ---------- ---------- Net claims paid (181,073) (184,900) Change in the provision for claims: Gross amount (183,540) (61,545) Reinsurers' share 8,761 (41,876) ---------- ---------- Change in the net provision for claims (174,779) (103,421) ---------- ---------- Claims incurred, net of reinsurance 4c (355,852) (288,321) ---------- ---------- Net operating expenses (215,328) (186,039) Other technical income/(charges) 4c 1,650 (1,265) Movement in equalisation provision 4c (1,503) (2,506) ---------- ---------- Balance on the technical account - general 111,195 99,903 business ---------- ---------- Consolidated Profit and Loss Account Non-Technical Account for the year ended 31 December 2004 2004 2003 Notes Â£000 Â£000 Balance on the technical account - general 111,195 99,903 business Investment return 5a 27,118 32,154 Unrealised gains/(losses) on investments 5a 5,968 8,026 Investment expenses and charges 5a (1,087) (805) ---------- ---------- 5a, 5c 31,999 39,375 Allocated investment return transferred to the 5a, 5c technical account (39,799) (30,583) ---------- ---------- Short term fluctuations in investment return 5a, 5c (7,800) 8,792 Other income 13,267 12,582 Other charges (39,628) (37,869) ---------- ---------- Profit on ordinary activities before tax 4c 77,034 83,408 Comprising: Operating profit based on longer term investment 4c 86,337 77,122 return Short term fluctuations in investment return 5a, 5c (7,800) 8,792 Movement in equalisation provision 4c (1,503) (2,506) ---------- ---------- 77,034 83,408 Tax on profit on ordinary activities (22,460) (22,917) ---------- ---------- Profit on ordinary activities after tax 54,574 60,491 ---------- ---------- Dividends - Interim paid (4,419) (3,830) Dividends - Final payable (10,281) (8,414) ---------- ---------- Retained profit for the year 10 39,874 48,247 ---------- ---------- Earnings per share: - Adjusted basic, based on operating profit after tax (on longer term investment return) 7 21.0p 19.3p - Basic, based on profit on ordinary activities after tax 7 18.7p 20.9p - Diluted, based on profit on ordinary activities after tax 7 18.5p 20.6p All operations of the Group are continuing. In accordance with the amendment to Financial Reporting Standard ('FRS') 3, 'Reporting Financial Performance' in relation to the revaluation of investments, 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 for the year ended 31 December 2004 2004 2003 Notes Â£000 Â£000 Profit on ordinary activities after tax 54,574 60,491 Exchange differences taken to reserves (412) (155) ---------- ---------- Total recognised gains and losses for the year 54,162 60,336 ---------- ---------- Consolidated Balance Sheet at 31 December 2004 2004 2003 Notes Â£000 Â£000 Assets Intangible assets Goodwill 5,804 6,240 Other intangible assets 17,782 15,513 ---------- ---------- 23,586 21,753 Investments Land and buildings 2,925 410 Other financial investments 8 1,001,225 773,289 ---------- ---------- 1,004,150 773,699 Reinsurers' share of technical provisions Provision for unearned premiums 42,526 63,004 Claims outstanding 195,730 189,183 ---------- ---------- 238,256 252,187 Debtors Debtors arising out of direct insurance operations 258,135 251,026 Debtors arising out of reinsurance operations 33,793 53,878 Other debtors 9 93,528 71,155 ---------- ---------- 385,456 376,059 Other assets Tangible assets 7,738 7,332 Cash at bank and in hand 61,332 52,945 ---------- ---------- 69,070 60,277 Prepayments and accrued income Accrued interest 5,428 3,079 Deferred acquisition costs 114,803 101,817 Other prepayments and accrued income 8,201 10,106 ---------- ---------- 128,432 115,002 ---------- ---------- Total assets 1,848,950 1,598,977 ---------- ---------- Consolidated Balance Sheet at 31 December 2004 2004 2003 Notes Â£000 Â£000 Liabilities Capital and reserves Called up share capital 10 14,685 14,565 Share premium account 10 234,267 232,341 Merger reserve 10 4,723 4,723 Capital redemption reserve 10 33,244 33,244 Reserve for own shares 10 (473) (686) Profit and loss account 10 85,153 45,650 ---------- ---------- Shareholders' funds attributable to equity interests 10 371,599 329,837 ---------- ---------- Technical provisions Provision for unearned premiums 442,314 424,379 Claims outstanding 830,681 656,820 Equalisation provision 17,941 16,438 ---------- ---------- 1,290,936 1,097,637 Provisions for other risks and charges 11 25,261 15,503 Creditors Creditors arising out of direct insurance operations 28,399 35,229 Creditors arising out of reinsurance operations 60,339 62,491 Other creditors including taxation and social security 12 43,702 28,414 ---------- ---------- 132,440 126,134 Accruals and deferred income 28,714 29,866 ---------- ---------- Total liabilities 1,848,950 1,598,977 ---------- ---------- Consolidated Cash Flow Statement for the year ended 31 December 2004 2004 2003 Notes Â£000 Â£000 Net cash inflow from general business 74,930 31,300 Net shareholders' cash outflow from Lloyd's business 14c - (7,712) ---------- ---------- Net cash flow from operating activities 14a 74,930 23,588 Servicing of finance 14d (1,384) (2,233) Taxation recovered/(paid) (206) (59) Capital expenditure 14d (8,851) (3,052) Acquisitions and disposals 14d (1,091) (50) Equity dividends paid (12,833) (10,744) Financing 14d 1,779 2,910 ---------- ---------- 52,344 10,360 ---------- ---------- Cash flows were invested as follows: Increase/(decrease) in cash holding 14e 393 (25,608) Net portfolio investment: Shares and units in unit trusts 14e (30,490) 44,586 Debt securities and other fixed interest 14e 46,070 59,657 securities Deposits with credit institutions 14e 36,371 (68,275) ---------- ---------- Net investment of cash flows 52,344 10,360 ---------- ---------- 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 2004 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 Statement of Recommended Practice 'Accounting for Insurance Business' issued by the Association of British Insurers in November 2003. 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 2004 and also to remove distortions in the historical claims development patterns from large claims not expected to reoccur in the future. 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 within PRU 7.5 of the Integrated Prudential Sourcebook (Insurers and other amendments) Instrument 2004 to mitigate exceptionally 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: Freehold property 50 years 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 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 Group 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 Group 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. Segmental information a) 100% level technical account by business division 2004 2004 2004 2004 London UK International Total Market Retail Business Â£000 Â£000 Â£000 Â£000 Gross premiums written 784,097 175,699 91,320 1,051,116 Net premiums written 709,301 151,349 67,892 928,542 Net premiums earned 681,959 137,932 60,090 879,981 Net claims incurred 411,915 63,122 24,538 499,575 Claims ratio (%) 60.4% 45.8% 40.8% 56.8% Commission 174,987 37,528 34,877 247,392 Operating expenses 55,541 29,086 3,902 88,529 Movement in DAC (18,004) (3,408) (3,199) (24,611) -------- -------- --------- -------- Net expenses 212,524 63,206 35,580 311,310 Commission ratio (%) 24.7% 24.8% 51.4% 26.7% Operating expense ratio (%) 7.8% 19.2% 5.7% 9.5% Expense ratio (%) 32.5% 44.0% 57.1% 36.2% Net longer term investment 34,018 8,598 3,190 45,806 return -------- -------- --------- -------- Technical profit* 91,538 20,202 3,162 114,902 -------- -------- --------- -------- Combined ratio (%) 92.9% 89.8% 97.9% 93.0% *Before movement in equalisation provision. The impact of a 1% change in the combined ratios of each business division on technical profit are: 2004 2004 2004 London UK International Market Retail Business Â£000 Â£000 Â£000 At 100% level 1% change in claims ratio 6,820 1,379 601 1% change in expense ratio 7,093 1,513 679 --------- -------- ---------- At Group level 1% change in claims ratio 4,461 1,379 601 1% change in expense ratio 4,651 1,513 679 --------- -------- ---------- 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% Commissions 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 --------- -------- --------- '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 2004 2003 Â£000 Â£000 Technical profit for 100% of continuing operations (note 4a) 114,902 112,680 ---------- ---------- Notional share attributable to Group at current level of capacity ownership 84,283 79,718 Adjustments to reflect lower levels of capacity in prior years 2001 year of account (221) 2,628 2002 year of account 199 (1,443) 2003 year of account 30 - Investment return on corporate assets 6,421 7,162 Amounts applicable to quota share reinsurers* 1,650 (1,265) ---------- ---------- Trading profit for Group share of continuing operations (note 4c) 92,362 86,800 ---------- ---------- *For the 2004 year of account, the Group owned 65% (2003: 65%) 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 2004 2004 2004 2004 London UK International Total Market/Group Retail Business Â£000 Â£000 Â£000 Â£000 Gross premiums written 511,874 175,699 91,320 778,893 Net premiums written 462,325 151,349 67,892 681,566 ---------- ---------- ---------- ---------- Net premiums earned 444,407 137,932 60,090 642,429 Net longer term investment return 28,011 8,598 3,190 39,799 Net claims incurred (268,192) (63,122) (24,538) (355,852) Acquisition costs (116,340) (34,120) (31,678) (182,138) Administrative expenses (20,538) (29,086) (3,902) (53,526) Other technical income / (charges) 1,650 - - 1,650 ---------- ---------- ---------- ---------- Trading result * 68,998 20,202 3,162 92,362 Other income and expenses (5,437) (1,416) 828 (6,025) ---------- ---------- ---------- ---------- Operating profit based on longer term investment return 63,561 18,786 3,990 86,337 ---------- ---------- ---------- ---------- Short term fluctuations in investment return (10,205) 2,604 (199) (7,800) Equalisation provision - (882) (621) (1,503) ---------- ---------- ---------- ---------- Pre tax profit 53,356 20,508 3,170 77,034 ---------- ---------- ---------- ---------- 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 return 20,671 7,281 2,631 30,583 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 based on longer term investment return 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 ---------- ---------- ---------- ---------- *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 2004 2004 2004 Net asset Number of NAV value Shares* Per share Â£000 000 p Net asset value 371,599 293,306 126.7 Net asset value (before equalisation provision) 389,540 293,306 132.8 Net tangible asset value 348,013 293,306 118.7 Net tangible asset value (before equalisation provision) 365,954 293,306 124.8 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 provision) 346,275 290,630 119.1 Net tangible asset value 308,084 290,630 106.0 Net tangible asset value (before equalisation provision) 324,522 290,630 111.7 *The number of shares is the number of adjusted shares in issue as at 31 December of the relevant financial year. 5. Investment return a) Actual investment return 2004 2003 Â£000 Â£000 Investment return on funds at Lloyd's and other corporate funds Investment income 6,940 8,591 Unrealised gains/(losses) on investments 2,828 1,778 Realised gains/(losses) on investments (868) 1,026 ---------- ---------- 8,900 11,395 Investment return on syndicate funds Investment income 15,204 12,656 Realised gains/(losses) on investments (4,974) 974 ---------- ---------- 10,230 13,630 Investment return on insurance company funds Investment income 11,582 9,955 Unrealised gains/(losses) on investments 3,140 6,248 Realised gains/(losses) on investments (766) (1,048) ---------- ---------- 13,956 15,155 Investment expenses and charges (1,087) (805) ---------- ---------- Total investment return 31,999 39,375 Allocation to the technical account based on the longer term rate (39,799) (30,583) ---------- ---------- Short term fluctuations in investment return retained in the non-technical account (7,800) 8,792 ---------- ---------- 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. 2004 2003 % % Shares and units in unit trusts 6.0 6.0 Debt securities and other fixed interest securities 4.0 4.0 Deposits with credit institutions 4.0 4.0 c) Comparison of longer term investment return with actual return Investment yield is calculated using the weighted average value of investments during the year. Funds at Lloyd's and Share of other Corporate Syndicate Assets Â£000 % Â£000 % Actual investment return Shares and units in unit trusts 3,674 9.4 - - Debt and other fixed interest securities 4,333 4.5 8,433 1.8 Deposits with credit institutions 747 2.0 1,231 1.9 -------- ------- -------- -------- 8,754 9,664 Longer term investment return Shares and units in unit trusts 2,339 6.0 - 6.0 Debt and other fixed interest securities 3,888 4.0 19,013 4.0 Deposits with credit institutions 1,532 4.0 2,577 4.0 -------- ------- -------- -------- 7,759 21,590 -------- ------- -------- -------- Short term fluctuations in investment return 995 (11,926) -------- ------- -------- -------- 2004 Insurance Company Total Â£000 % Â£000 % Actual investment return Shares and units in unit trusts 4,774 11.0 8,448 10.2 Debt and other fixed interest securities 5,306 4.7 18,072 2.6 Deposits with credit institutions 3,501 4.2 5,479 2.9 -------- ------- -------- -------- 13,581 31,999 Longer term investment return Shares and units in unit trusts 2,604 6.0 4,943 6.0 Debt and other fixed interest securities 4,480 4.0 27,381 4.0 Deposits with credit institutions 3,366 4.0 7,475 4.0 -------- ------- -------- -------- 10,450 39,799 -------- ------- -------- -------- Short term fluctuations in investment return 3,131 (7,800) -------- ------- -------- -------- Funds at Lloyd's and other Corporate Share of Assets Syndicate Â£000 % Â£000 % Actual investment return Shares and units in unit trusts 7,196 16.1 - - Debt and other fixed interest securities 2,408 3.1 11,418 4.0 Deposits with credit institutions 1,496 2.8 1,863 4.0 -------- ------- -------- -------- 11,100 13,281 Longer term investment return Shares and units in unit trusts 2,674 6.0 - 6.0 Debt and other fixed interest securities 3,136 4.0 11,651 4.0 Deposits with credit institutions 2,527 4.0 1,858 4.0 -------- ------- -------- -------- 8,337 13,509 -------- ------- -------- -------- Short term fluctuations in investment return 2,763 (228) -------- ------- -------- -------- Insurance 2003 Company Total Â£000 % Â£000 % Actual investment return Shares and units in unit trusts 9,736 19.9 16,932 18.1 Debt and other fixed interest securities 3,591 3.8 17,417 3.8 Deposits with credit institutions 1,667 3.3 5,026 3.2 -------- ------- -------- -------- 14,994 39,375 Longer term investment return Shares and units in unit trusts 2,931 6.0 5,605 6.0 Debt and other fixed interest securities 3,778 4.0 18,565 4.0 Deposits with credit institutions 2,028 4.0 6,413 4.0 -------- ------- -------- -------- 8,737 30,583 -------- ------- -------- -------- Short term fluctuations in investment return 6,257 8,792 -------- ------- -------- -------- 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 2004 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 390 - 434 824 Debt and other fixed interest securities 972 4,753 1,120 6,845 Deposits with credit institutions 383 644 842 1,869 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 6. Employees' remuneration Their aggregate remuneration and associated costs were: 2004 2003 Â£000 Â£000 Wages and salaries 31,730 32,011 Social security costs 4,645 3,915 Other pension costs 4,219 3,417 ---------- --------- 40,594 39,343 ---------- --------- The average number of staff employed by the Group was 446 (2003: 412), comprising 154 underwriting and 292 administrative staff (2003: 141 and 271 respectively). Of the total remuneration shown above, an amount of Â£13,697,000 was recharged to the syndicate managed by Hiscox Syndicates Limited (2003: Â£12,206,000). The Group operates an Inland Revenue approved SAYE employee share option scheme and has taken advantage of the exemption given in UITF Abstract 17 'Employer share schemes' from recognising a charge in the profit and loss account for the discount on the options. 7. Earnings per share 2004 2004 2004 Average number of Earnings shares EPS Â£000 000 p Adjusted basic, based on operating profit after tax 61,165 291,755 21.0 Basic, based on profit on ordinary activities after tax 54,574 291,755 18.7 Diluted, based on profit on ordinary activities after tax* 54,574 295,130 18.5 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 *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: 2004 2003 Earnings EPS Earnings EPS Â£000 p Â£000 p Basic based on profit on ordinary activities after tax 54,574 18.7 60,491 20.9 Short term fluctuations in investment return 5,526 1.9 (6,378) (2.2) Movement in equalisation provision 1,065 0.4 1,816 0.6 ------ ---- ------ ----- Adjusted basic, based on operating profit after tax 61,165 21.0 55,929 19.3 ------ ---- ------ ----- Diluted earnings per share has been calculated taking into account the following options under employee share schemes. 2004 2003 No. No. 000 000 Basic weighted average number of shares 291,755 289,790 Employee share options 2,435 2,579 SAYE share options 940 1,093 ------- ------- Diluted weighted average number of shares 295,130 293,462 ------- ------- 8. Other financial investments a) Funds at Share of Insurance 2004 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 42,044 - 44,750 86,794 Debt and other fixed interest securities 100,604 570,106 125,687 796,397 Deposits with credit institutions 6,446 1,589 108,836 116,871 Other 1,163 - - 1,163 ---------- ---------- ---------- ---------- 150,257 571,695 279,273 1,001,225 ---------- ---------- ---------- ---------- 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 ---------- ---------- ---------- ---------- b) Other financial investments by currency 2004 Sterling US Dollar Other Total Â£000 Â£000 Â£000 Â£000 Shares and units in unit trusts 63,794 23,000 - 86,794 Debt and other fixed interest securities 221,343 441,264 133,790 796,397 Deposits with credit institutions 109,962 1,589 5,320 116,871 Other 1,163 - - 1,163 ---------- ---------- ---------- ---------- 396,262 465,853 139,110 1,001,225 ---------- ---------- ---------- ---------- 2003 Sterling US Dollar Other Total Â£000 Â£000 Â£000 Â£000 Shares and units in unit trusts 73,451 38,496 - 111,947 Debt and other fixed interest securities 192,031 305,991 81,448 579,470 Deposits with credit institutions 78,853 345 2,101 81,299 Other 573 - - 573 ---------- ---------- ---------- ---------- 344,908 344,832 83,549 773,289 ---------- ---------- ---------- ---------- 9. Other debtors 2004 2003 Â£000 Â£000 Taxation recoverable - 2,739 Net profit commission receivable 11,458 7,918 Other debtors 10,628 7,355 Share of syndicate's overseas deposits 37,707 27,679 Share of syndicate's other debtor balances 33,735 25,464 --------- --------- 93,528 71,155 --------- --------- 10. Reconciliation of movement in shareholders' funds Issued Share Capital share premium Merger redemption capital reserve reserve reserve Â£000 Â£000 Â£000 Â£000 At 1 January 2004 14,565 232,341 4,723 33,244 ------- -------- -------- --------- Exercise of share options 120 1,926 - - Acquisition and disposal of own - - - - shares Exchange differences taken to - - - - reserves Retained profit for the year - - - - ------- -------- -------- --------- At 31 December 2004 14,685 234,267 4,723 33,244 ------- -------- -------- --------- Reserve Profit Total for own and loss share- shares account holders' funds Â£000 Â£000 Â£000 At 1 January 2004 (686) 45,650 329,837 -------- -------- -------- Exercise of share options - - 2,046 Acquisition and disposal of own shares 213 41 254 Exchange differences taken to reserves - (412) (412) Retained profit for the year - 39,874 39,874 -------- -------- -------- At 31 December 2004 (473) 85,153 371,599 -------- -------- -------- 11. Provisions for other risks and charges Deferred tax Â£000 At 1 January 2004 15,503 Adjustment to provisions during the year 9,758 ------ At 31 December 2004 25,261 ------ There is no unprovided deferred tax liability. 12. Other creditors including taxation and social security 2004 2003 Â£000 Â£000 Proposed final dividend 10,281 8,414 Taxation payable 7,855 - Amounts owed to credit institutions 57 477 Obligations under finance leases 370 255 Other creditors 8,498 11,621 Share of syndicate's other creditor balances 16,641 7,647 --------- --------- 43,702 28,414 --------- --------- 13. Pensions contributions During the year, the Group contributed to the two sections of the Hiscox defined benefit pension scheme. The Group also contributed to a defined contribution scheme introduced on 1 January 2001 for all staff joining the Group. The total pension charge for Hiscox plc for the year on a SSAP 24 basis amounted to Â£2,809,000 (2003: Â£2,183,000). Defined benefit scheme A qualified independent actuary carried out a full actuarial valuation as at 31 December 2002 and updated that valuation on an FRS 17 basis as at 31 December 2004. The major assumptions used by the actuary were, in nominal terms, as follows: 2004 2003 2002 2001 %pa %pa %pa %pa Rate of increase in salaries 3.80 3.80 3.25 3.50 Rate of increase in RPI linked pensions in payment 2.80 2.80 2.25 2.50 Rate of increase of pensions in deferment 2.80 2.80 2.25 2.50 Discount rate 5.30 5.40 5.50 6.00 Inflation assumption 2.80 2.80 2.25 2.50 The split of assets, their expected rate of return and the funding position of the entire defined benefit scheme at 31 December 2004, measured in accordance with the requirements of FRS17, were as follows: 2004 2004 2003 2003 % Â£000 % Â£000 Equities and properties 6.50 58,497 6.75 36,831 Bonds 4.75 4,750 5.00 9,512 Cash 4.75 1,773 3.75 11,859 ------- ------- -------- -------- Total market value of assets 65,020 58,202 Present value of scheme liabilities (99,229) (91,536) ------- ------- -------- -------- Deficit (34,209) (33,334) Related deferred tax asset 10,263 10,000 ------- ------- -------- -------- Deficit in the scheme - pension liability (23,946) (23,334) ------- ------- -------- -------- 2002 2002 2001 2001 % Â£000 % Â£000 Equities and properties 6.50 30,935 7.00 37,262 Bonds 4.75 10,037 5.25 6,399 Cash 4.00 2,561 4.00 2,949 ------- ------- -------- -------- Total market value of assets 43,533 46,610 Present value of scheme liabilities (77,258) (59,800) ------- ------- -------- -------- Deficit (33,725) (13,190) Related deferred tax asset 10,118 3,957 ------- ------- -------- -------- Deficit in the scheme - pension liability (23,607) (9,233) ------- ------- -------- -------- 14. Notes to the Consolidated Cash Flow Statement a) Reconciliation of operating profit to net cash inflow from operating activities 2004 2003 Â£000 Â£000 Operating profit before taxation after interest, based on longer term investment return 86,337 77,122 Depreciation and amortisation of fixed assets 4,405 4,125 Increase in general insurance technical provisions, net of reinsurance 56,019 43,482 Increase/(decrease) in amounts owed to agents (4,708) (2,591) (Increase)/decrease in amounts owed by agents (4,670) (11,295) (Increase)/decrease in other debtors (14,687) (24,979) Increase/(decrease) in other creditors (162) 482 Cash transferred (to)/from Lloyd's business (note c) - (7,712) Realised and unrealised investment (gains)/ losses (4,333) (8,004) Short term fluctuations in investment return (7,800) 8,792 Interest expense 1,952 1,946 (Profits)/losses relating to Lloyd's business (36,472) (56,516) Other non-cash transactions (951) (1,264) ---------- --------- Net cash inflow from operating activities 74,930 23,588 ---------- --------- b) Movement in opening and closing portfolio investments net of financing 2004 2003 Â£000 Â£000 Net cash inflow/(outflow) for the period 393 (25,608) Portfolio investments 51,951 35,968 Decrease/(increase) in loans 305 (257) ---------- --------- Movement arising from cash flows 52,649 10,103 Movement in Lloyd's business (note c) 184,574 182,711 Changes in market value and exchange rate effects (1,185) 10,042 ---------- --------- Increase in portfolio investments net of financing 236,038 202,856 ---------- --------- Total portfolio investments net of financing at 1 January 824,983 622,127 ---------- --------- Total portfolio investments net of financing at 31 December 1,061,021 824,983 ---------- --------- c) Cash flows of the Lloyd's business 2004 2003 Â£000 Â£000 Premiums received, net of reinsurance 470,267 442,742 Claims paid, net of reinsurance (124,154) (104,587) Net portfolio investments 14,249 12,055 Other net cash flows (175,788) (175,211) ---------- --------- Net cash flow before retention and transfer from/(to) the Group 184,574 174,999 Transfer from/(to) the Group - 7,712 ---------- --------- Cash retained in the Lloyd's business 184,574 182,711 ---------- --------- d) Analysis of cash flows for headings netted in the cash flow statement 2004 2003 Â£000 Â£000 Servicing of finance Interest paid (1,359) (2,194) Interest paid element of finance leases (25) (39) ---------- ---------- (1,384) (2,233) ---------- ---------- Capital expenditure Payments to acquire tangible fixed assets (3,080) (2,935) Payments to acquire land and buildings (2,985) - Receipts from sales of tangible fixed assets - - Receipts from sales of land and buildings 500 - Payments to acquire intangible fixed assets (3,286) (117) ---------- ---------- (8,851) (3,052) ---------- ---------- Acquisitions and disposals Payments to acquire investment in associated undertaking (200) (50) Net cash proceeds on disposal of a business 675 - Net cash and investments disposed of on disposal of a business (1,566) - ---------- ---------- (1,091) (50) ---------- ---------- Financing Proceeds from share issues 2,046 1,862 (Payments)/receipts relating to own shares 254 751 New bank loan - 456 Repayment of bank loan (420) - Capital element of finance leases (101) (159) ---------- ---------- 1,779 2,910 ---------- ---------- Portfolio investment Purchase of shares and units in unit trusts 65,899 74,316 Purchase of debt securities and fixed interest securities 277,925 301,303 Sale of shares and units in unit trusts (96,389) (29,730) Sale of debt securities and fixed interest securities (231,855) (241,646) Increase/(decrease) in deposits with credit institutions 36,371 (68,275) ---------- ---------- 51,951 35,968 ---------- ---------- e) Movement in cash, portfolio investments and financing * At 1 Jan Cash flow Changes Changes At 31 Dec 2004 in other to market 2004 business value and currencies Â£000 Â£000 Â£000 Â£000 Â£000 Cash at bank and in hand 52,945 393 7,994 - 61,332 Shares and units in unit trusts 111,947 (30,490) - 5,337 86,794 Debt securities and other fixed interest securities 579,470 46,070 177,572 (6,715) 796,397 Deposits with credit institutions 81,299 36,371 (992) 193 116,871 Other investments 54 - - - 54 -------- -------- -------- -------- ---------- 825,715 52,344 184,574 (1,185) 1,061,448 Loans due within one year (477) 420 - - (57) Finance leases (255) (115) - - (370) -------- -------- -------- -------- ----------- Total 824,983 52,649 184,574 (1,185) 1,061,021 -------- -------- -------- -------- ----------- * These balances include amounts relating to syndicate participations but exclude participations in associated undertakings of Â£1,109,000 (2003: Â£519,000). 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 2004 and 2003. The financial information for 2003 is derived from the statutory accounts for 2003 which have been delivered to the registrar of companies. The auditors have reported on the 2004 and 2003 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 2004 will be delivered to the registrar of companies following the Company's Annual General Meeting. 2. The Annual Report and Accounts for 2004 will be posted to shareholders no later than 9 May 2005 and will be delivered to the Registrar of Companies following the Annual General Meeting on 21 June 2005. 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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