Final Results

Hiscox Ltd 12 March 2007 Hiscox Ltd Preliminary results for the year ended 31 December 2006 'Record profits after substantial investment in the future' Hiscox Ltd, the specialist insurer, today announces preliminary results for the year ended 31 December 2006. 2006 2005 Gross written premiums Â£1,126.2m Â£861.2m Net earned premiums Â£888.8m Â£693.3m Profit before tax Â£201.1m Â£70.2m Earnings per share 41.7p 15.6p Final dividend per share 7.0p 4.75p Net asset value per share 173.2p 147.7p Group combined ratio 88.3% 96.0% Return on equity 28.9% 12.8% Financial highlights â€¢ Record pre-tax profits up 186% to Â£201.1m (2005: Â£70.2m) â€¢ Earnings per share on profit after tax up 167% to 41.7p (2005: 15.6p) â€¢ Final dividend of 7p per share (2005:4.75p) making 10p for the full year, an increase of 43% (2005: 7p) â€¢ Dividend of 12p per share targeted for 2007 â€¢ Gross written premium income increased 30.8% to Â£1,126.2m (2005: Â£861.2m) â€¢ Hiscox Global Markets business made a very strong pre-tax profit of Â£116.6m (2005: Â£20.7m) with a combined ratio of 89.0% (2005: 99.9%) â€¢ Hiscox International increased pre-tax profits to Â£51.9m (2005: Â£6.2m) with a combined ratio of 62.2% (2005: 91.3%) â€¢ Hiscox UK and Hiscox Europe delivered pre-tax profits of Â£32.6m (2005: Â£43.4m) after investing significantly in advertising and the further expansion of the company's regional network. Operational highlights â€¢ Redomicile to Bermuda completed â€¢ New operations, Hiscox Bermuda and Hiscox USA, made excellent starts â€¢ Panther Re, the first Lloyd's market sidecar, was launched substantially increasing Syndicate 33's catastrophe reinsurance underwriting capacity â€¢ Our investment in marketing in the UK, which featured our first ever TV advertising campaign, improved brand awareness and drove up demand Robert Hiscox, Chairman, Hiscox Ltd, commented: 'It has been a very good year for Hiscox. Our decision to increase our catastrophe reinsurance book by opening in Bermuda after two bad catastrophe years and with every pundit forecasting more disasters, has paid off handsomely. In addition, our retail businesses continue to grow in the UK, Europe and the USA. 'We will continue to focus on our specialist business lines around the world, aiming to build a balanced overall account with sustainable profitability.' Copies of the Chairman's statement, Chief Executive's report and the Group's financial information as at 31 December 2006 are attached. Ends For further information: Hiscox Ltd Robin Mehta, Company Secretary +1 44 1278 8300 Sebastian St John Clarke, Head of Communications, London +44 (0) 20 7448 6458 Maitland Philip Gawith +44 (0) 20 7379 5151 Suzanne Bartch +44 (0) 20 7379 5151 Notes to editors About Hiscox Hiscox, headquartered in Bermuda, is a specialist insurance group listed on the London Stock Exchange. There are three main underwriting parts of the Group - Hiscox Global Markets, Hiscox UK and Europe, and Hiscox International. Hiscox Global Markets 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. Hiscox UK and Hiscox Europe offer a range of specialist insurance for professionals and business customers, as well as high net worth individuals. Hiscox International includes operations in Bermuda, Guernsey and the USA. For further information, visit www.hiscox.com Chairman's Statement This is my first report as Chairman of Hiscox Ltd, the new Bermudian holding company of the Hiscox Group. It is pleasing to report a record profit for the Group, helped by a benign hurricane season (despite all the forecasts to the contrary) which contributed to an excellent result by our Global Markets division and our new insurance company in Bermuda. The timing was right to make a substantial investment in the future growth and prosperity of our regional businesses, which have shown a solid performance in 2006 after considerable marketing spend and start-up costs. Results The results for the year ending 31 December 2006 were a record profit before tax of Â£201.1 million (2005: Â£70.2 million). Gross written premium increased 30.8 per cent to Â£1,126.2 million (2005: Â£861.2 million) and net earned premium increased 28.2 per cent to Â£888.8 million (2005: Â£693.3 million). The combined ratio was 88.3 per cent (2005: 96.0 per cent). Earnings per share on profit after tax increased by 167 per cent to 41.7p (2005: 15.6p) and net assets per share increased by 17.3 per cent to 173.2p (2005: 147.7p). Return on equity increased to 28.9 per cent (2005: 12.8 per cent). Dividend In 2005, the Board proposed dividends totalling 9p for the year. The exceptional profit has led the Board to propose, subject to shareholders' approval, a final dividend of 7p (2005: 4.75p) making a total distribution for the year of 10p (2005: 7p), an increase of 43 per cent. This will be paid on 5 June 2007 to shareholders on the register on 4 May 2007. The Board also agreed that we would target a total dividend of not less than 12p for 2007 subject to adequate profitability and shareholders' approval. We will maintain a policy of steady dividend growth if possible. I quite understand the desire of shareholders to get a tangible return from the business, especially as they have regularly provided money to us when required. But this is a capital hungry business. We have to have around 50% of our turnover in readily realisable assets. When this is combined with our strategy of a wide spread of geographical distribution initiatives and the need to have a US admitted insurer, we currently have an obvious good use of capital as we expand. If in the future we contract and have surplus capital, we will of course consider buying back shares or other similar capital reduction initiatives. The ambition We want Hiscox to be a highly respected international specialist insurance and reinsurance company. The respect of our investors will be earned by the return on their investment; the respect of our customers will be earned by our intelligent covering of their risks backed by immaculate and cost-effective service; the respect of our peers will be earned by the overall quality of all parts of the business. All that will be achieved by employing the best people, admired for their energy, discipline, integrity and instinct. It will be achieved consistently by balancing the risks we take between volatile international catastrophe business with more steady local and regional business, and by focusing on specific areas in which we are expert. Progress so far As always I will highlight a few salient points leaving the detail to the Chief Executive's report which follows. The major corporate event of 2006 was the successful redomicile to Bermuda. Bermuda is a thriving commercial and intellectual insurance centre and it feels a natural progression for Hiscox, with over 70 per cent of its business emanating from outside the UK, to be headquartered there. During the year we also launched the first sidecar in Lloyd's for our Syndicate 33 giving it the ability to write $180 million more reinsurance premium. We also led the reform of the Lloyd's Market to electronic trading through the so-called G6 initiative. Commercially, a key event was the non-event of catastrophic hurricanes which boosted our Global Markets and Hiscox Bermuda results. Our new ventures in Bermuda, writing catastrophe reinsurance, and in the USA writing regional business had very successful first years. In the UK regional arena we continued our major marketing drive to increase brand awareness and the flow of business from all sources. We also opened new offices in the UK and continental Europe. Hiscox Global Markets It is easy to say that our great result was due to the lack of hurricane damage, but it took strong nerve at the time for the Global Markets team in London to write the same exposure as the previous year despite every weather forecaster prophesying another truly catastrophic year of storms. Feast followed famine. A substantial profit was made despite having to cover a considerable deficit from increased claims coming in during the year from the 2005 hurricanes. The multiple storms and the extraordinary damage in 2005 gave valid reasons for our not being able to forecast the arrival of those late claims. We have learnt from them and will factor them into future forecasting. Rates have remained properly high for reinsurance and insurance exposed to natural catastrophes. Climate change is at the top of most agendas, and we are not assuming that last year's lack of catastrophes is the new norm. But most competitors want to balance their obviously risky exposure with less risky, so rates are under pressure elsewhere. The decision of the State of Florida to write a substantial proportion of the reinsurance of domestic insurers in the State may reduce income to us and other reinsurers. The Governor of Florida was appalled that the insurance industry had made an estimated $3 billion in Florida in 2006, ignoring the fact that it suffered losses in the state of $26 billion in the previous two years. It will be interesting to see who buys reinsurance from the State with the political conditions attached and with no Federal guarantee. Global Markets also writes a good, steady book of regional business to balance in part their catastrophe account, giving a measure of stability within what is by its nature a volatile division. Hiscox International This section covers our operations in Bermuda, our new USA venture and Guernsey. Bermuda writes catastrophe exposed business, whereas Hiscox USA and Guernsey write non-catastrophe regional and retail business. A good balance. Hiscox Bermuda had a perfect start. It wrote its budgeted income but did not have the budgeted claims. Again, it must be remembered that the forecasts for the year were very gloomy, but like the traditional naval officers of old, they sailed to the sound of gunfire to great benefit. Our new venture in Armonk, New York which started in March 2006 completed a storming first year well ahead of original budget. Hiscox Guernsey maintained its excellent record and truly is a jewel in our crown. Hiscox UK and Europe Our regional business in the UK and Europe made solid progress. In the UK, the prices weakened in several large books of business and our underwriters let our more optimistic competitors take them from us. Our core accounts have filled the gap and expanded, showing good growth where we want it most, and we expect further progress from the renewed marketing spend this year. Competition is strong, but we have many years of experience and specialist expertise in our core products. We also have excellent relationships with brokers, especially with those who realise that the cheapest price is often the most expensive for the clients if it does not buy them the cover they need. Our direct account almost doubled its income and obviously benefited from the advertising campaign. The campaign also greatly helped brokers sell our policies, with fewer customers asking 'who is Hiscox?' Our offices in Continental Europe achieved a profit for the third year running, and during the year additional country representative offices were opened in Portugal and Sweden. We retain our focus on our specialist areas of business, but believe in a wide spread of distribution outlets as local business is placed locally, especially in Europe where regions within countries are like separate countries. Investments The investment return is an essential part of the underwriting business. We have had interest rates steadily reducing from 15 per cent in 1990 to 3 per cent recently which has been a constant squeeze on our profits. Interest rates of 15 per cent have a terrible effect on underwriting standards as the investment return swamps the losses from bad underwriting. (Insurance companies were regularly described as investment trusts with an expensive habit.) The squeeze has been good for underwriting standards as they have been fully exposed, so it is a healthier market as a result. However, the recent interest rate increases to over 5 per cent has given a steady and meaningful increase to our basic profitability, with the good underwriters doing better than the bad as the better you underwrite the more money you have to invest. We need to preserve our capital. We have needed every penny of it and any fall would mean a reduction in our underwriting, so the investment of it has been conservative. We will continue to try to squeeze every drop of return within that prudent stance. People This business is only people, capital and computers. Computers do what people program them to do, and capital is freely available to the best people. So the only way we will achieve our ambition is to employ the best people, train them thoroughly and keep them motivated. I think we have excellent people throughout the Group and I am truly grateful to them for taking Hiscox to where it is today. I must make special mention of Bronek Masojada, the Chief Executive, who leads the company with indefatigable energy and commercial acumen, and of Robert Childs, the Chief Underwriting Officer, who moved to Bermuda to help oversee the running of the Group from there, and is also CEO of the Bermudian company and Chairman of the US operation. Finally Change at Hiscox is constant - and vital. It is essential that we constantly adapt to the changing world outside our business, and keep ahead of our competitors. This year we are running a bigger group of international businesses around the world from Bermuda. We have the same strategy of balance which has served us well in the last few years. If competition reduces rates on our international book, our investment in the long-term growth of our more steady regional businesses will truly come to the fore. It has been a year of wonderful profits. It has also been a year of investment in the future. The market looks as challenging as ever, but we have the people and the tools to achieve our ambition. Robert Hiscox Chief Executive's Report Overview In 2006 Hiscox focused on five initiatives to grow both the short and long term profitability of the Group. First, we commenced underwriting through our new Bermudian reinsurance business whilst simultaneously growing our existing reinsurance business in London. Second, we opened for business in the USA. Third, we launched a brand building campaign in the UK, including our first TV commercials. Fourth, we focused on the development of our sales skills in Europe. Finally, we moved our domicile to Bermuda. Our tactics in reinsurance in Bermuda and London and the sales focus in Europe have paid off immediately. The creation of Hiscox USA and the UK marketing campaign have required an investment of almost Â£20 million which will pay dividends for the Group over a longer time period. All of these efforts propelled the Group to record revenue and profits - both on an absolute and a per share basis. Net assets per share have grown to record levels as well. Looking forward we expect the market to get trickier during the course of this year - rates will be attractive in aggregate but discipline will be required to ensure we underwrite the right risks at the right price. We believe that our long-term strategy of balancing retail business with volatile risks will continue to serve us well in this environment. We see great opportunities in our retail activities in Europe, the UK and the USA. The investments we have made this year will help them in their drive to develop organically. If, however, we can find attractive businesses to acquire at the right price, we will do so. Hiscox Bermuda will expand its underwriting this year, making the transition from a start-up to an established player on the Island. Hiscox Global Markets is seeking to widen its access to the market. It is developing hub offices in Paris and New York and working with competitors to launch peer to peer electronic trading initiatives. We will be tested as we seek to do all of this but success in our endeavours will generate continued profits to the benefit of shareholders and staff. Group performance The pre-tax profit for the year was Â£201.1 million (2005: Â£70.2 million). This is a record performance for the Group. Total revenues controlled by the Group grew by 27.3 per cent to Â£1,407 million (2005: Â£1,105 million). Hiscox Ltd's share of this grew by 30.8 per cent to Â£1,126.2 million (2005: Â£861.2 million) which equals 286.9p per share (2005: 277.1p per share). Dividends for the year have been increased to 10p per share (2005: 7p per share). Our record results are in part due to the good fortune of a low loss year, and in part due to our decision to expand our catastrophe reinsurance writings significantly. This was a brave decision when it was made in late 2005 and I would like to thank shareholders for supporting us in this course - both with their words and with their money. I hope that they feel adequately rewarded by these results. Hiscox Global Markets This business division uses the global licences, distribution network and credit rating available at Lloyd's to serve clients around the world. Seventy per cent of the business is more volatile big ticket reinsurance, marine, energy and other international property and liability business. The remainder is less volatile, smaller ticket business which provides the division with some balance. Richard Watson took over as Managing Director of the division at the end of 2005. Under Richard's leadership the division has maximised its revenues to take advantage of the re-rating that occurred in some lines of business after the hurricanes of 2005. Gross written premiums increased 24.3 per cent to Â£689.9 million (2005: Â£555.2 million) and the division made a pre-tax profit of Â£116.6 million (2005: Â£20.7 million) with a combined ratio of 89.0 per cent (2005: 99.9 per cent). This record result has contributed materially to the Group's performance. Looking at the major business units of the division in turn: â€¢ Our London based reinsurance team took full advantage of the opportunity created by the strong rating environment. They expanded their business to Â£209.7 million (2005: Â£160.9 million) excluding inwards reinstatement premiums. During the course of the year we worked with W L Ross & Co to create a special purpose reinsurance vehicle, Panther Re, (the 'sidecar') which will write a 40 per cent pro-rata share of this division's property catastrophe business in 2007. This was a first for the Lloyd's market. The team will benefit from the increased market presence the sidecar gives them and will receive a ceding commission and a profit commission based on actual performance. Rates in the reinsurance area remain attractive, despite the flow of underwriting capacity into this area over the past 12 months. â€¢ The large property, terrorism, marine and offshore energy teams all had a good year. Aggregate income grew to Â£254.3 million (2005: Â£213.4 million). Rating trends vary across these lines of business. Energy rates are firm following losses in the Gulf of Mexico last year and we continue to have an appetite for this area - albeit supported by quota-share reinsurance. Marine hull rates are under some pressure and we do not anticipate growth in this area. Rates for large property risks continue to increase and we are doing more business. Terrorism rates are under pressure as new entrants look to expand into areas not affected by natural catastrophes. â€¢ Technology, Media and Telecoms (TMT) has had another good year - with good profitability and increased distribution. Distribution initiatives include a focus on the Indian market and the recruitment and training of local underwriters in the USA, UK and European regional offices. At the end of the year the global professional indemnity account was brought under the management of the TMT leadership. We expect that this overlap will lead to shared underwriting discipline and better marketing. â€¢ Our Specialty team includes personal accident, kidnap and ransom, bloodstock and cancellation and abandonment business. It also writes some high value household and other smaller property business in the USA. Other than the household and property area, rates in this business have remained steady and we have enjoyed another profitable year. The household and smaller property business saw much increased rates after the 2005 hurricanes. Again we kept our nerve in the face of the unprecedented market losses in 2005 and have prospered as a result of maintaining our involvement. Looking forward, the Global Markets division is working on several related challenges which include broadening its access to worldwide insurance business and using technology to deliver better service. At the moment most of the Division's business arrives in London via Lloyd's brokers, presenting risks in the form of paper proposal forms to underwriters at boxes at Lloyd's. The team is working on electronic peer to peer trading initiatives which will allow brokers around the world to submit business electronically. This will be supported by a trading floor which we are building in our London office. Global Markets has also widened its access to new business that has not always come into London by establishing two hub offices - one in Paris and the other in New York. These hubs and the e-trading approaches have already contributed in excess of $75 million of revenue to Global Markets. We expect that this will grow materially in the years ahead. Hiscox International This business division was created during 2005 to cover our activities in the USA, Bermuda and Guernsey. It has had a great year - becoming a driver of both revenues and profits for the Group. Total revenues for the division were Â£151.3 million (2005: Â£43.7 million), profits were Â£51.9 million (2005: Â£6.2 million) with a combined ratio of 62.2 per cent (2005: 91.3 per cent). In 2005 all the revenues and profits came from Hiscox Guernsey, however during 2006 all the units were fully active. â€¢ Hiscox Bermuda was capitalised with $500 million in December 2005. Around $300 million was raised by a Rights Issue, with the balance coming from debt facilities. Robert Childs, Chief Executive of Bermuda, set out to write $165 million of third party property catastrophe reinsurance business from a standing start sourced from Bermuda. He and his team surpassed this by writing $171 million. Balancing this business were the internal quota share arrangements which allowed the other businesses in the Group to expand their own activities. Bottom line results were outstanding, reflecting the absence of significant catastrophes and Hiscox Bermuda's attractive business mix. This strong start means that Hiscox Bermuda is well positioned to take advantage of the continuing favourable market environment. â€¢ Hiscox USA opened for business in March 2006. Ed Donnelly, President of Hiscox USA, set out to underwrite $15 million of business in the first year of operation. The actual income achieved was $25 million. The significant investment we are making to equip this business properly has impacted on profitability but has provided solid foundations on which to grow going forwards. At the moment, Hiscox USA's business is placed on commercial third party terms with Syndicate 33. We would ideally like to acquire a carrier to allow Hiscox USA to develop as a separately capitalised entity. â€¢ Hiscox Guernsey continues its excellent performance. Steve Camm, Underwriting Director in Guernsey, has worked to expand the office's core product lines of kidnap and ransom insurance and other related lines such as fine art, personal accident and terrorism insurance. Hiscox Insurance Company (Guernsey) Limited was awarded an A- rating this year by AM Best. This reflects both its excellent track record and the quota share reinsurance relationship it has with Hiscox Bermuda. Hiscox UK and Hiscox Europe Hiscox UK and Hiscox Europe have expanded their revenues during the year. Their reduction in profitability reflects the outstanding year they had in 2005 and the decision to invest substantially in both businesses at a time when global big ticket and reinsurance rates were high - making a bigger investment than if they had been stand alone entities. The performance of each unit is reviewed below: â€¢ Hiscox UK has seen its top line grow to Â£226.3 million (2005: Â£207.3 million) with profits down to Â£31.9 million (2005: Â£40.4 million). The combined ratio was 95.0 per cent (2005: 84.1 per cent). The fall in our combined ratio and profits is in part due to the large increase in marketing expenditure during the year. Steve Langan, Managing Director of Hiscox UK, joined us in October 2005 and has had a good first year. He has brought marketing skill and knowledge to the business, making sure that our Â£10 million increase in marketing budget was wisely used. The main focus to date of our marketing efforts has been on the Art and Private Client business. It remains a market leader, but we feel that we can expand our penetration, particularly through the direct and partnership channels. We are also working with some major brokers to help them reshape their ability to serve private client customers by using some of our direct capabilities. We saw strong growth in our Professions and Specialty Commercial area, particularly in our core target market of small and very small commercial businesses. Our confidence in the performance of these two areas has allowed us to resist some of the untenable requests put to us by intermediaries and we have walked away from business rather than write it on inappropriate terms. In 2007 we will continue with our marketing push, which we intend to broaden to ensure it supports both our commercial and our personal lines activities. The external environment is competitive, but we expect that our specialist focus will continue to insulate us in part from rate deteriorations. â€¢ Hiscox Europe has enjoyed a third year of aggregate profitability. Revenues rose to Â£58.7 million (2005: Â£55.0 million) with profits of Â£0.7 million (2005: Â£3.0 million). The combined ratio reduced to 98.7 per cent (2005: 99.7 per cent), closer to our target range of 95 per cent to 98 per cent. Marc van der Veer, Managing Director of Hiscox Europe, has led a drive to build a sales focused culture which has reaped rewards. Aggregate revenues have grown despite the need to cancel and re-underwrite some business to deal with the problems of the past. Europe has reached critical mass in aggregate, but results in individual countries are still volatile reflecting their smaller individual scale. France deserves special mention for its consistent performance. It has shown us what we can expect when each country achieves appropriate scale. Looking forward we will continue to expand our business in the countries where we are currently active. We opened offices in Lyon and Cologne during the year, moving our strategy from a 'flag in capital cities' to deeper penetration in countries in which we are already present. We expect to open more regional offices in France and Germany during the course of 2007. Claims, Operations and IT At Hiscox we aim to pay valid claims fast and with a smile. Client surveys suggest that to date we are achieving this reputation in their eyes. In order to ensure this continues as the Group grows we have appointed Jeremy Pinchin, previously Head of Claims at Lloyd's, to lead this area. Jeremy is leading a program of skill building amongst staff, segmentation of our approach to claims and further automation. These will ensure that claims attitude and payment continues to support the Hiscox brand. Efficient operations are a cornerstone for any insurance business. We have begun a multi-year investment process to replace our core Global Market systems, allowing for global product management and sharing of risks around the world. The Operations team are also the change agents in the move to e-trading. In our retail areas we continue to automate and eliminate waste. As pricing pressures continue, efficiency gains can offset, in part, some of the margin pressure we will face. Investments Invested assets in the Group grew to Â£1.74 billion (2005: Â£1.65 billion). During the year we retained our conservative stance on both equities and bonds as we wanted to ensure we preserved our available capital to support underwriting. The total return across the portfolio was Â£78.5 million (excluding derivative gains), equal to a 4.6 per cent return on average invested assets. Our investments are supervised by the team at Hiscox Investment Management. They also look after Â£170 million of funds for third party investors. Our specialist financial funds had another good year, beating their benchmarks and earning performance fees. Balance sheet Net assets grew to 173.2p per share (2005: 147.7p) and tangible net assets grew to 164.8p per share (2005: 139.3p). For once we had a relatively quiet year on the financing front as we concentrated on making sure the capital we raised at the end of 2005 was put to good work. The most material financing activity was the arrangement of standby letters of credit so that Hiscox Bermuda could meet US funding requirements in the event of a large loss. We hedged the net capital supporting our Bermudian activities so that we have not been affected by the weakness of the dollar. The gains on these derivatives have largely offset the non-cash losses we suffered in our accounts due to the obscure way in which deferred acquisition costs and unearned premiums are not re-valued under IFRS. We hope that in time the accounting standard setters will listen to the practical views of those who manage businesses rather than the theoreticians in their think tanks. On 31 December 2006 we closed our final salary pension scheme to future accrual. This has resulted in a Â£7 million charge to this year's income statement. All active members who left the pension scheme joined the defined contribution scheme which has been in place for new joiners since 1 January 2001. The business has generated, and we hope will continue to generate, a healthy cash flow. In the past our strategy has always been to reduce gearing as the insurance market softens. However financial markets are throwing up interesting financing tools which allow for longer term debt than we have previously arranged. We will be working during 2007 to establish the optimal balance sheet mix for the market conditions we expect to prevail over the next several years. In order to ensure we have sufficient flexibility we will be seeking shareholder approval to amend our bylaws to allow us to buy back shares into treasury. People The delivery of our ambitious business plan has put stresses and strains on all our staff. As the business grows the leadership challenge is being shared by more and more people. During 2006 we launched management training initiatives which cover the needs of an individual from the time they begin to manage others to the time they lead a division of the Group. This will complement our existing program for underwriting and professional training and personal development. For the past four years Hiscox has been one of the 'Top 100' places to work in the UK Sunday Times survey. We were not in the final 100 this year - in part no doubt due to the pension changes. We remain committed to being a well regarded place to work and hope that we will receive this level of recognition again in the future. Current trading During January the insurance industry was impacted by two external events - Windstorm Kyrill and legislative changes in Florida. Windstorm Kyrill blew through the UK and Continental Europe. This was a small net loss to our retail businesses in the UK and Europe. Our reinsurance account was also affected. Based on a market loss of $5 billion we expect the overall net cost of Windstorm Kyrill to the Group will be approximately Â£25 million. In early February the State of Florida decided to double the amount of hurricane losses it will 'nationalise' to $28 billion per event. The exact impact that this will have on the market is not yet clear, though the reduction of demand will inevitably put some pressure on prices elsewhere. We are fortunate that we have a broader book of business with Florida personal lines reinsurance business only comprising 1.69 per cent of our controlled premium income last year, so the proportionate impact on Hiscox will be less than others. For the Hiscox book of business, rates in aggregate remain at attractive levels, though this disguises different trends in different parts of the account. Rates in catastrophe exposed lines have climbed to new peaks, whilst rates in non-catastrophe exposed lines are under pressure. We will therefore need to be more discriminatory in our underwriting, giving the good insured the reduction they deserve, but holding firm where the record is poor or exposure is growing. Conclusion Over the past two years the Hiscox Group has changed from a London focused business to a specialist business with a substantial global reach, delivering record results. Reflecting this change it is now domiciled in Bermuda. This evolution has been achieved largely by organic growth with substantial investments in building new businesses, supported at critical times with capital from shareholders. The market outlook is attractive but will become more challenging. Strong discipline will be required in deciding which risks to underwrite and which business initiatives to pursue. We believe that our strategy of balancing retail and volatile risks will give us the flexibility to make the right choices for the benefit of the business and its owners. Bronek Masojada CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2006 2006 2005 Notes Â£000 Â£000 Income Gross premiums written 3 1,126,164 861,174 Outward reinsurance premiums (150,767) (179,938) ------------------------------------------------------------------------------ Net premiums written 3 975,397 681,236 ------------------------------------------------------------------------------ Gross premiums earned 1,033,585 879,344 Premiums ceded to reinsurers (144,757) (186,045) ------------------------------------------------------------------------------ Net premiums earned 3 888,828 693,299 Investment result 4 105,550 43,883 Other income 6 15,858 81,297 ------------------------------------------------------------------------------ Net revenue 1,010,236 818,479 Expenses Claims and claim adjustment expenses, net of reinsurance (382,341) (457,025) Expenses for the acquisition of insurance contracts (225,849) (199,979) Administration expenses (76,533) (41,197) Other expenses 6 (115,057) (46,973) ------------------------------------------------------------------------------ Total expenses (799,780) (745,174) ------------------------------------------------------------------------------ Results of operating activities 210,456 73,305 ------------------------------------------------------------------------------ Finance costs (9,404) (3,334) Share of profit of associates 10 250 ------------------------------------------------------------------------------ Profit before tax 201,062 70,221 Tax expense 15 (37,216) (21,591) ------------------------------------------------------------------------------ Profit for the year (all attributable to equity shareholders of the Company) 163,846 48,630 ------------------------------------------------------------------------------ Earnings per share on profit attributable to equity shareholders of the Company Basic 17 41.7p 15.6p Diluted 17 40.5p 15.1p The related notes 1 to 18 are an integral part of this document. CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2006 2006 2005 Notes Â£000 Â£000 Assets Intangible assets 33,212 33,099 Property, plant and equipment 13,821 12,128 Investments in associates 28 18 Deferred acquisition costs 117,115 106,747 Financial assets carried at fair value 9 1,241,910 1,237,778 Loans and receivables including insurance receivables 10 446,272 436,981 Reinsurance assets 8 302,772 506,376 Cash and cash equivalents 12 502,871 413,759 ------------------------------------------------------------------------------- Total assets 2,658,001 2,746,886 ------------------------------------------------------------------------------- Equity and Liabilities Shareholders' equity Share capital 19,694 19,570 Share premium - 401,365 Contributed surplus 442,425 - Other reserves (40,396) 38,789 Retained earnings 260,362 118,289 ------------------------------------------------------------------------------- Total equity 682,085 578,013 ------------------------------------------------------------------------------- Employee retirement benefit obligations 16 3,801 16,677 Deferred Tax 8,467 15,193 Insurance liabilities 13 1,594,101 1,723,000 Financial liabilities carried at fair value 9 93,929 126,246 Current tax 20,793 16,581 Trade and other payables 14 254,825 271,176 ------------------------------------------------------------------------------- Total liabilities 1,975,916 2,168,873 ------------------------------------------------------------------------------- Total equity and liabilities 2,658,001 2,746,886 ------------------------------------------------------------------------------- The related notes 1 to 18 are an integral part of this document. Currency Capital Share Share Contributed Merger Translation Redemption Retained Capital Premium Surplus Reserve Reserve Reserve Earnings Total Notes Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Balance at 1 January 2005 14,685 234,267 - 4,723 (468) 33,244 82,375 368,826 Currency translation differences - - - - 1,290 - - 1,290 ----------------------------------------------------------------------------------------------------------------------- Net income/(expense) recognised directly in equity - - - - 1,290 - - 1,290 Profit for the year - - - - - - 48,630 48,630 ----------------------------------------------------------------------------------------------------------------------- Total recognised income for year - - - - 1,290 - 48,630 49,920 Employee share options: Equity settled share based payments - - - - - - 2,059 2,059 Deferred tax release on share based payments - - - - - - 1,950 1,950 Proceeds from shares issued 67 1,522 - - - - - 1,589 Rights Issue of equity shares 4,818 171,550 - - - - - 176,368 Expenses related to Rights Issue of equity shares - (5,974) - - - - - (5,974) Change in own shares - - - - - - 192 192 Dividends to shareholders 18 - - - - - - (16,917) (16,917) ----------------------------------------------------------------------------------------------------------------------- Balance at 31 December 2005 19,570 401,365 - 4,723 822 33,244 118,289 578,013 Currency translation differences - - - - (41,218) - - (41,218) ----------------------------------------------------------------------------------------------------------------------- Net income/(expense) recognised directly in equity - - - - (41,218) - - (41,218) Profit for the year - - - - - - 163,846 163,846 ----------------------------------------------------------------------------------------------------------------------- Total recognised income for year - - - - (41,218) - 163,846 122,628 Employee share options: Equity settled share based payments - - - - - - 5,238 5,238 Deferred tax release on share based payments - - - - - - 3,367 3,367 Proceeds from shares issued 124 2,829 264 - - - - 3,217 Transfer on reverse acquisition 2.3 - (404,194) 442,161 (4,723) - (33,244) - - Change in own shares - - - - - - 50 50 Dividends to shareholders 18 - - - - - - (30,428) (30,428) ----------------------------------------------------------------------------------------------------------------------- Balance at 31 December 2006 19,694 - 442,425 - (40,396) - 260,362 682,085 ----------------------------------------------------------------------------------------------------------------------- CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2006 CONSOLIDATED GROUP 2006 2005 Â£000 Â£000 Profit before tax 201,062 70,221 Adjustments for: Interest and equity dividend income (70,243) (48,072) Net (gains)/losses on financial assets (9,422) 4,289 Retirement benefit contributions paid in excess of charges (12,876) (18,041) Depreciation 3,898 3,281 Charges in respect of share based payments 5,238 2,059 Other non-cash charges 10,955 690 Changes in operational assets and liabilities: Insurance and reinsurance contracts 45,426 212,462 Financial assets 1,311 (256,280) Other assets and liabilities (17,953) 13,048 ------------------------------------------------------------------------------ Cash flows from operations 157,396 (16,343) Interest received 68,644 46,844 Equity dividends received 1,599 1,228 Interest paid (9,416) (2,573) Current tax paid (36,363) (10,239) ------------------------------------------------------------------------------ Net cash flows from operating activities 181,860 18,917 Cash flows from the acquisition and sale of subsidiaries and associates - 3,750 Cash flows from the purchase of property, plant and equipment (5,452) (4,474) Cash flows from the purchase of intangible assets (300) (3,277) Loans repaid by related parties - 1,580 ------------------------------------------------------------------------------ Net cash flows from investing activities (5,752) (2,421) Proceeds from the issue of ordinary shares 3,217 171,983 Proceeds from the sale of treasury shares 50 192 Dividends paid to company's shareholders (30,428) (16,917) Proceeds from borrowings - 121,133 Repayments of borrowings (14,334) (102) ------------------------------------------------------------------------------ Net cash flows from financing activities (41,495) 276,289 ------------------------------------------------------------------------------ Net increase in cash and cash equivalents 134,613 292,785 ------------------------------------------------------------------------------ Cash and cash equivalents at 1 January 413,759 119,563 Net increase in cash and cash equivalents 134,613 292,785 Effect of exchange rate fluctuations on cash and cash equivalents (45,501) 1,411 ------------------------------------------------------------------------------ Cash and cash equivalents at 31 December 502,871 413,759 ------------------------------------------------------------------------------ The purchase, maturity and disposal of financial assets is part of the Group's insurance activities and is therefore classified as an operating cashflow. The purchase, maturity and disposal of derivative contracts is also classified as an operating cashflow. Included within cash and cash equivalents held by the Group are balances totalling Â£41,304,000 (2005: Â£50,313,000) not available for use by the Group which are held within the Lloyd's Syndicate. The related notes 1 to 18 are an integral part of this document. NOTES TO THE FINANCIAL STATEMENTS 1 General information The Hiscox Group, which is headquartered in Hamilton, Bermuda, comprises Hiscox Ltd (the parent Company, referred to herein as the 'Company') and its subsidiaries (collectively, the 'Hiscox Group' or the 'Group'). The Group relocated its parent Company domicile during the year from the United Kingdom to Bermuda. The Group provides insurance, reinsurance and investment management services to its clients worldwide. It has operations in the UK, Europe, USA and Bermuda and employs over 700 people worldwide. The Company is registered and domiciled in Bermuda and on 12 December 2006, its ordinary shares were listed on the London Stock Exchange. As such it is required to prepare financial information in accordance with the Bermuda Companies Act 1981, which permits the Group to prepare financial statements which comprise the consolidated income statement, the consolidated balance sheet, the consolidated statement of changes in equity, the consolidated cash flow statement and the related notes in accordance with International Financial Reporting Standards ('IFRS'). Accordingly, the financial information has been prepared in accordance with Bermuda Law. The consolidated financial statements for the year ended 31 December 2006 comprise all of the Group's subsidiary companies and the Group's interest in associates. All amounts relate to continuing operations. The financial statements were approved for issue by the Directors on 12 March 2007. 2 Significant accounting policies The principal accounting policies applied in the preparation of these consolidated Group financial statements are set out below. 2.1 Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards and in accordance with the provisions of the Bermuda Companies Act 1981. The Group's consolidated financial statements for the prior financial year were published in accordance with those International Financial Reporting Standards adopted for use in the European Union. No adjustments are necessary to the amounts measured previously therein, for their inclusion as comparatives in these consolidated financial statements. Since 2002, the standards adopted by the IASB have been referred to as 'International Financial Reporting Standards' (IFRS). The standards from prior years continue to bear the title 'International Accounting Standards' (IAS). Insofar as a particular standard is not explicitly referred to, the two terms are used in these financial statements synonymously. Compliance with IFRS includes the adoption of interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC). In March 2004, the IASB issued IFRS 4 Insurance Contracts which specifies the financial reporting for insurance contracts by an insurer. The standard is only the first phase in the IASB's insurance contract project and as such is only a stepping stone to phase II, introducing limited improvements to accounting for insurance contracts. Accordingly, to the extent that IFRS 4 does not specify the recognition or measurement of insurance contracts, transactions reported in these consolidated financial statements have been prepared in accordance with another comprehensive body of accounting principles, namely accounting principles generally accepted in the UK at the date of transition to IFRS. 2.2 Basis of preparation The financial statements are presented in Pounds Sterling and are rounded to the nearest thousand unless otherwise stated. They are prepared on the historical cost basis except that pension scheme plan assets included in the measurement of the employee retirement benefit obligation and financial instruments at fair value through profit or loss, are measured at fair value. Employee retirement benefit obligations are determined using actuarial analysis. The balance sheet of the Group is presented in order of increasing liquidity. The accounting policies have been applied consistently by all Group entities, to all periods presented, solely for the purpose of producing the consolidated Group financial statements. The Group elected to apply the transitional arrangements contained in IFRS 4 that permitted the disclosure of only five years of data in claims development tables, in the year ended 31 December 2005 which was the year of adoption. The number of years of data presented was increased to six in the current financial year, and will be increased in each succeeding additional year, up to a maximum of ten years, if material outstanding claims exist for such periods. The Directors have considered recently published IFRS, new interpretations and amendments to existing standards that are mandatory to the Group's accounting periods commencing on or after 1 January 2007 and which have not been subject to early adoption. The main developments that are expected to be of relevance to forthcoming financial years are: - IFRS 7 Financial Instruments: Disclosures, and a complementary amendment to IAS 1 Presentation of Financial Statements - Capital Disclosures (effective for accounting periods beginning on or after 1 January 2007). IFRS 7 introduces additional minimum disclosure requirements regarding exposures to risk arising from financial instruments. The amendment to IAS 1 introduces minimum disclosures about the level of an entity's capital and how it manages that capital. The Directors' current assessment is that the main additional disclosures arising from the application of these developments from 1 January 2007 will be more detailed sensitivity analysis to market risk, and additional capital management disclosures. - IFRS 8 Operating Segments (effective for accounting periods beginning on or after 1 January 2009). IFRS 8 will result in a number of amendments to the Group's presentation of segmental reporting such that users will be able to appraise summary segment results on an operational basis consistent with that used by management. - IFRIC 10 Interim Financial Reporting and Impairment (effective for accounting periods beginning on or after 1 November 2006). IFRIC 10 prohibits the impairment losses recognised in an interim period on goodwill and investments in equity instruments and in financial assets carried at cost to be reversed at a subsequent balance sheet date. The Group will apply IFRIC 10 from 1 January 2007 but it is not expected to have any significant impact on the Group's financial statements. 2.3 New holding company Hiscox Ltd was incorporated under the laws of Bermuda on 6 September 2006. With effect from 12 December 2006, under a scheme of arrangement involving a share exchange with the members of Hiscox plc, the Company became the new holding company of the Hiscox Group. Throughout the period from incorporation to 12 December 2006, Hiscox Ltd was a shell company with no material revenues or assets and therefore did not constitute a 'business' as defined by IFRS 3 Business Combinations. Consequently, due to the relative values of both Companies, the shareholders of Hiscox plc immediately before the share exchange acquired, in effect, 100% of the enlarged share capital of Hiscox Ltd on completion of the transaction. In order to appropriately reflect the substance of the transaction outlined above, the new holding Company has been accounted for using the reverse acquisition principles outlined in IFRS 3. Consequently, Hiscox plc is deemed to be the acquirer for accounting purposes and the legal parent Company, Hiscox Ltd, is treated as a subsidiary whose identifiable assets and liabilities are incorporated into the Group at fair value. The Group's consolidated financial statements are issued in the name of the legal parent Company, Hiscox Ltd. However, as a consequence of applying reverse acquisition accounting, the results for the year ended 31 December 2006 represent a continuation of the consolidated activities of Hiscox plc for the year ended 31 December 2006 plus those of Hiscox Ltd from 12 December 2006 to 31 December 2006. The consolidated balance sheet at 31 December 2006 reflects the issued share capital and contributed surplus of Hiscox Ltd. The comparative figures are those of Hiscox plc as originally reported for the year ended 31 December 2005. In accordance with Bermuda law the previously reported share premium, merger reserve and capital redemption reserve are presented as contributed surplus. The comparative earnings per share amounts are not altered by the application guidance of IFRS 3. 2.4 Basis of consolidation (a) Subsidiaries Subsidiaries are those entities controlled by the Group. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that are currently exercisable or convertible are taken into account. The consolidated financial statements include the assets, liabilities and results of the Group up to 31 December each year. The financial statements of subsidiaries are included in the consolidated financial statements only from the date that control commences until the date that control ceases. 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 but not joint liability of underwriting members at Lloyd's for the transactions of Syndicates in which they participate, the Group's attributable share of the transactions, assets and liabilities of the Syndicate has been included in the financial statements. The Group uses the purchase method of accounting to account for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group's share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement. (b) Associates Associates are those entities in which the Group has significant influence but not control over the financial and operating policies. The consolidated financial statements include the Group's share of the total recognised gains and losses of associates on an equity accounted basis from the date that significant influence commences until the date that significant influence ceases. The Group's share of its associates' post-acquisition profits or losses after tax is recognised in the income statement each period, and its share of the movement in the associates' net assets is reflected in the investments' carrying values in the balance sheet. When the Group's share of losses equals or exceeds the carrying amount of the associate, the carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred obligations in respect of the associate. (c) Transactions eliminated on consolidation Intragroup balances, transactions and any unrealised gains arising from intragroup transactions are eliminated in preparing the consolidated financial statements. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Unrealised gains arising from transactions with associates are eliminated to the extent of the Group's interest in the entity. Unrealised gains arising from transactions in associates are eliminated against the investment in the associate. 2.5 Foreign currency translation (a) Functional and presentational currency Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the 'functional currency'). The functional currency of all individual entities in the Group is deemed to be Sterling with the exception of the entities operating in France, Germany, the Netherlands and Belgium whose functional currency is Euros, those entities operating from the USA and Bermuda whose functional currency is US Dollars, and Hiscox Insurance Company (Guernsey) Limited whose functional currency is also US Dollars. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the retranslation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying net investment hedges. Non-monetary items carried at historical cost are translated in the balance sheet at the exchange rate prevailing on the original transaction date. Non-monetary items measured at fair value are translated using the exchange rate ruling when the fair value was determined. (c) Group companies The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: (i) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet. (ii) income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the date of the transactions). (iii) all resulting exchange differences are recognised as a separate component of equity. When a foreign operation is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as the foreign entity's assets and liabilities and are translated at the closing rate. 2.6 Property, plant and equipment Property, plant and equipment are stated at historical cost less depreciation and any impairment loss. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Land and Artwork assets are not depreciated as they are deemed to have indefinite useful economic lives. Depreciation on other assets is calculated using the straight-line method to allocate their cost or revalued amounts, less their residual values, over their estimated useful lives, as follows: - Buildings 50 years - Vehicles 3 years - Short leasehold fixtures and fittings 10-15 years - Furniture, fittings and equipment 3-15 years The assets' residual values and useful lives are reviewed at each balance sheet date and adjusted if appropriate. An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the income statement. 2.7 Intangible assets (a) Goodwill Goodwill represents amounts arising on acquisition of subsidiaries and associates. In respect of acquisitions that have occurred since 1 January 2004, goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of the net identifiable assets of the acquired subsidiary or associate at the acquisition date. In respect of acquisitions prior to this date, goodwill is included on the basis of its deemed cost, which represents the amount recorded under previous GAAP. Goodwill on acquisition of subsidiaries is included in intangible assets. Goodwill on acquisition of associates is included in investments in associates. Goodwill is not amortised but is tested annually for impairment and carried at cost less accumulated impairment losses. The impairment review process examines whether or not the carrying value of the goodwill attributable to individual cash generating units exceeds its implied value. Any excess of goodwill over the implied value arising from the review process indicates impairment. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. (b) Syndicate capacity The cost of purchasing the Group's participation in the Lloyd's insurance Syndicates is not amortised but is tested annually for impairment and is carried at cost less accumulated impairment losses. Having considered the future prospects of the London insurance market, the Board believe that the Group's ownership of Syndicate capacity will provide economic benefits over an indefinite number of future periods. (c) Rights to intangible customer contractual relationships Costs directly attributable to securing rights to customer contract relationships are recognised as an intangible asset where they can be identified separately and measured reliably and it is probable that they will be recovered by directly related future profits. These costs are amortised over the useful economic life which is deemed to be 20 years and are carried at cost less accumulated amortisation and impairment losses. (d) Computer software Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring into use the specific software. These costs are amortised over the expected useful life of the software of three years on a straight-line basis. Internally developed computer software is only capitalised where the cost can be measured reliably, the Group intends to and has adequate resources to complete development and where the computer software will yield future economic benefits in excess of the costs incurred. 2.8 Investments The Group has classified financial investments as a) financial assets designated at fair value through profit or loss, and b) loans and receivables. Management determines the classification of its financial investments at initial recognition. The decision by the Group to designate all financial investments other than loans and receivables at fair value through profit or loss reflects the fact that the investment portfolios are managed, and their performance evaluated, on a fair value basis. Regular way purchases and sales of investments are accounted for at the date of trade. Financial investments are derecognised when the right to receive cash flows from them expires or where they have been transferred and the Group has also transferred substantially all risks and rewards of ownership. Fair value for securities quoted in active markets is the bid price exclusive of transaction costs. For instruments where no active market exists, fair value is determined by referring to recent transactions and other valuation factors including the discounted value of expected future cash flows. Fair value changes are recognised immediately within the investment result line in the income statement. (a) Financial assets at fair value through profit or loss A financial asset is classified into this category at inception if it is managed and evaluated on a fair value basis in accordance with documented strategy, if acquired principally for the purpose of selling in the short-term, or if it forms part of a portfolio of financial assets in which there is evidence of short-term profit taking. (b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted on an active market. Receivables arising from insurance contracts are also classified in this category and are reviewed for impairment as part of the impairment review of loans and receivables. Loans and receivables are carried at amortised cost less any provision for impairment in value. 2.9 Cash and cash equivalents The Group has classified cash deposits and short-term highly liquid investments as cash and cash equivalents. These assets are readily convertible into known amounts of cash and are subject to inconsequential changes in value. Cash equivalents are financial investments with less than three months to maturity at the date of acquisition. 2.10 Impairment of assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually or whenever there is an indication of impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Objective factors that are considered when determining whether a non-monetary asset (such as an intangible asset or item of property, plant and equipment) or group of non-monetary assets may be impaired include, but are not limited to, the following: - adverse economic, regulatory or environmental conditions that may restrict future cashflows and asset usage and/or recoverability; - the likelihood of accelerated obsolescence arising from the development of new technologies and products; - the disintegration of the active market(s) to which the asset is related. Objective factors that are considered when determining whether a monetary asset or group of monetary assets may be impaired include, but are not limited to, the following: - negative rating agency announcements in respect of investment issuers, reinsurers and debtors; - significant reported financial difficulties of investment issuers, reinsurers and debtors; - actual breaches of credit terms such as persistent late payments or actual default; - the disintegration of the active market(s) in which a particular asset is traded or deployed; and - adverse economic or regulatory conditions that may restrict future cash flows and asset recoverability. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately unless the relevant asset was carried previously at a revalued amount and where the original revaluation had been recognised directly in equity. 2.11 Derivative financial instruments Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently valued at their fair value at each balance sheet date. Fair values are obtained from quoted market values, and if these are not available, valuation techniques including option pricing models as appropriate. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. For derivatives not formally designated as a hedging instrument, fair value changes are recognised immediately in the income statement. Changes in the value of derivative and other financial instruments formally designated as hedges of net investments in foreign operations are recognised in the currency translation reserve to the extent they are effective; gains or losses relating to the ineffective portion of the hedging instruments are recognised immediately in the consolidated income statement. The Group had no financial instruments designated for hedge accounting during the current and prior financial year. 2.12 Own shares Where any Group company purchases the parent Company's equity share capital (own shares), the consideration paid, including any directly attributable incremental costs (net of income taxes), is deducted from equity attributable to the Company's equity holders. Where such shares are subsequently sold, reissued or otherwise disposed of, any consideration received is included in equity attributable to the Company's equity holders, net of any directly attributable incremental transaction costs and the related income tax effects. 2.13 Net revenue Net revenue comprises insurance premiums earned, net of reinsurance, together with profit commission, investment returns, agency fees and other income inclusive of foreign exchange gains. The Group's share of the result of associates is reported separately. The accounting policies for insurance premiums are outlined below. Profit commission, investment income and other sources of income are recognised on an accruals basis. 2.14 Insurance contracts (a) Classification The Group issues short-term casualty and property insurance contracts that transfer significant insurance risk. Such contracts may also transfer a limited level of financial risk. (b) Recognition and measurement Gross premiums written comprise premiums on business incepting in the financial year together with adjustments to estimates of premiums written in prior accounting periods. Estimates are included for pipeline premiums and an allowance is also made for cancellations. Premiums are stated before the deduction of brokerage and commission but net of taxes and duties levied. Premiums are recognised as revenue (earned premiums) proportionally over the period of coverage. The portion of premium received on in-force contracts that relates to unexpired risks at the balance sheet date is reported as the unearned premium liability. Claims and associated expenses are charged to profit or loss as incurred based on the estimated liability for compensation owed to contract holders or third parties damaged by the contract holders. They include direct and indirect claims settlement costs and arise from events that have occurred up to the balance sheet date even if they have not yet been reported to the Group. The Group does not discount its liabilities for unpaid claims. Liabilities for unpaid claims are estimated using the input of assessments for individual cases reported to the Group and statistical analysis for the claims incurred but not reported, and an estimate of the expected ultimate cost of more complex claims that may be affected by external factors e.g. court decisions. (c) Deferred acquisition costs ('DAC') Commissions and other direct and indirect costs that vary with and are related to securing new contracts and renewing existing contracts are capitalised as deferred acquisition costs. All other costs are recognised as expenses when incurred. The DAC is amortised over the terms of the policies as premium is earned. (d) Liability adequacy test At each balance sheet date, liability adequacy tests are performed by each segment of the Group to ensure the adequacy of the contract liabilities net of related DAC. In performing these tests, current best estimates of future contractual cash flows and claims handling and administration expenses, as well as investment income from assets backing such liabilities, are used. Any deficiency is immediately charged to profit or loss initially by writing-off DAC and by subsequently establishing a provision for losses arising from liability adequacy tests ('the unexpired risk provision'). Any DAC written-off as a result of this test cannot subsequently be reinstated. (e) Outwards reinsurance contracts held Contracts entered into by the Group, with reinsurers, under which the Group is compensated for losses on one or more insurance or reinsurance contracts and that meet the classification requirements for insurance contracts, are classified as insurance contracts held. Contracts that do not meet these classification requirements are classified as financial assets. The benefits to which the Group is entitled under outwards reinsurance contracts are recognised as reinsurance assets. These assets consist of short-term balances due from reinsurers (classified within loans and receivables) as well as longer-term receivables (classified as reinsurance assets) that are dependent on the expected claims and benefits arising under the related reinsured insurance contracts. Reinsurance liabilities primarily comprise premiums payable for 'outwards' reinsurance contracts. These amounts are recognised in profit or loss proportionally over the period of the contract. Receivables and payables are recognised when due. The Group assesses its reinsurance assets on a regular basis and if there is objective evidence, after initial recognition, of an impairment in value, the Group reduces the carrying amount of the reinsurance asset to its recoverable amount and recognises the impairment loss in the income statement. (f) Receivables and payables related to insurance contracts Receivables and payables are recognised when due. These include amounts due to and from agents, brokers and insurance contract holders. If there is objective evidence that the insurance receivable is impaired, the Group reduces the carrying amount of the insurance receivable accordingly and recognises the impairment loss in profit or loss. (g) Salvage and subrogation reimbursements Some insurance contracts permit the Group to sell property acquired in settling a claim (i.e. salvage). The Group may also have the right to pursue third parties for payment of some or all costs (i.e. subrogation). Estimates of salvage recoveries are included as an allowance in the measurement of the insurance liability for claims and salvage property is recognised in other assets when the liability is settled. The allowance is the amount that can reasonably be recovered from the disposal of the property. Subrogation reimbursements are also considered as an allowance in the measurement of the insurance liability for claims and are recognised in other assets when the liability is settled. The allowance is the assessment of the amount that can be recovered from the action against the liable third party. 2.15 Deferred tax Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, if the deferred income tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss, it is not recognised. Deferred tax is determined using tax rates and laws that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability settled. Deferred tax assets are recognised to the extent that it is probable that the future taxable profit will be available against which the temporary differences can be utilised. Deferred tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the Group controls the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. 2.16 Employee benefits (a) Pension obligations The Group operated both defined contribution and defined benefit pension schemes during the year under review. The defined benefit scheme closed to future accrual with effect from 31 December 2006 and active members were offered membership of the defined contribution scheme from 1 January 2007. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity and has no further obligation beyond the agreed contribution rate. A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependant on one or more factors such as age, years of service and compensation. For defined contribution plans, the Group pays contributions to publicly or privately administered pension insurance plans on a contractual basis. The Group has no further payments obligations once the contributions have been paid. The contributions are recognised as an employee benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available. The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognised actuarial gains or losses and past service costs. Plan assets exclude any insurance contracts issued by the Group. Until curtailment, actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to income over the employees' expected average remaining working lives. In addition, until curtailment, actuarial gains and losses are only recognised when the net cumulative unrecognised actuarial gains and losses for each individual plan at the end of the previous accounting period exceeds 10% of the higher of the defined benefit obligation and the fair value of the plan assets at that date. On curtailment, all unrecognised actuarial gains or losses are recognised in the income statement where relevant. Past service costs are recognised immediately in income, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past service costs are amortised on a straight-line basis over the vesting period. Rights to reimbursement from other parties participating in the Lloyd's Syndicate of some of the expenditure required to settle the defined benefit obligation are recognised as a component of the income statement charge or credit and within receivables in accordance with the policies outlined at 2.8 (b) above. (b) Other long-term employee benefits The Group provides sabbatical leave to employees on completion of a minimum service period of ten years. The present value of the expected costs of these benefits is accrued over the period of employment. (c) Share based compensation The Group operates a number of equity settled share based employee compensation plans. These include both approved and unapproved share option schemes together with the Group's save as you earn ('SAYE') schemes. The fair value of the employee services received, measured at grant date, in exchange for the grant of awards is recognised as an expense with the corresponding credit being recorded in retained earnings within equity. The total amount to be expensed over the vesting period is determined by reference to the fair value of the awards granted, excluding the impact of any non market vesting conditions (e.g. profitability or net asset growth targets). Non market vesting conditions are included in assumptions about the number of awards that are expected to become exercisable. At each balance sheet date the Group revises its estimates of the number of awards that are expected to vest. It recognises the impact of the revision of original estimates, if any, in the income statement, and a corresponding adjustment to equity, over the remaining vesting period. When the terms and conditions of an equity settled share based employee compensation plan are modified, and the expense to be recognised increases as a result of the modification, the increase is recognised evenly over the remaining vesting period. When a modification reduces the expense to be recognised, there is no adjustment recognised and the pre-modification expense continues to be applied. The proceeds received net of any directly attributable transaction costs are credited to share capital and share premium when share options are exercised. In accordance with the transitional provisions of IFRS 2, only share based awards granted or modified after 7 November 2002 but not yet vested at the date of adoption of IFRS, are required to be included in the calculations. (d) Termination benefits Termination benefits are payable when employment is terminated before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to either: terminating the employment of current employees according to a detailed formal plan without the possibility of withdrawal; or providing termination benefits as a result of an offer made to encourage voluntary redundancy. (e) Profit sharing and bonus plans The Group recognises a liability and an expense for bonuses and profit sharing, based on a formula that takes into consideration the profit attributable to the Company's shareholders after certain adjustments. The Group recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation. (f) Accumulating compensation benefits The Group recognises a liability and an expense for accumulating compensation benefits (e.g. holiday entitlement), based on the additional amount that the Group expects to pay as a result of the unused entitlement accumulated at the balance sheet date. 2.17 Borrowings Borrowings are financial liabilities and are designated on inception as being held at fair value through profit or loss if they are managed and evaluated on a fair value basis in accordance with a documented strategy or if it eliminates or significantly reduces a measurement or recognition inconsistency. Financial liabilities are consequently measured at fair value at each balance sheet date thereafter, using observable market interest rate data for similar instruments, with all changes in value from one accounting period to the next reflected in the income statement. 2.18 Finance costs Finance costs consist of interest charges accruing on the Group's borrowings and bank overdrafts together with commission fees charged in respect of letters of credit. Arrangement fees in respect of financing arrangements are charged over the life of the related facilities. 2.19 Provisions The Group is subject to various insurance related assessments and guarantee fund levies. Provisions are recognised where there is a present obligation (legal or constructive) as a result of a past event that can be measured reliably and it is probable that an outflow of economic benefits will be required to settle that obligation. 2.20 Leases Leases in which significantly all of the risks and rewards of ownership are transferred to the Group are classified as finance leases. At the commencement of the lease term, finance leases are recognised as assets and liabilities at the lower of the fair value of the asset and the present value of the minimum lease payments. The minimum lease payments are apportioned between finance charges and repayments of the outstanding liability, finance charges being charged to each period of the lease term so as to produce a constant rate of interest on the outstanding balance of the liability. All other leases are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. 2.21 Dividend distribution Dividend distribution to the Company's shareholders is recognised as a liability in the Group's financial statements in the period in which the dividends are approved. 2.22 Use of critical estimates and assumptions The Directors consider the accounting policies for determining insurance liabilities, amounts denominated in foreign currencies, the valuation of investments, the recognition of premiums and the valuation of retirement benefit obligations as being most critical to an understanding of the Group's result and position. The inherent uncertainty of insurance risk requires the Group to make estimates and assumptions that affect the reported amounts of assets and liabilities at the balance sheet date. The most significant area of uncertainty in the financial statements relates to insurance claim liabilities of the Group and the related loss adjustment expenses. Estimates and judgements are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable in the circumstances. There are several sources of uncertainty that need to be considered in the estimation of the liabilities that the Group will ultimately pay for valid claims. These include but are not restricted to: inflation; changes in legislation; changes in the Group's claims handling procedures; and discordant judicial opinions which extend the Group's coverage of risk beyond that envisaged at the time of original policy issuance. The Group seeks to gather corroborative evidence from all relevant sources before making judgements as to eventual outcome of claims, particularly those under litigation, which have occurred and have been notified to the Group but which remain unsettled at the balance sheet date. Note 13 in this document provides a greater analysis of the main methods used by the Group when formulating estimates of the insurance claims liabilities at each balance sheet date. With regard to employee retirement benefit obligations, the assets, liabilities and charges disclosed are sensitive to assumptions regarding mortality, interest rates, inflation and investment returns. 3. Segmental Information At 31 December 2006, the Group was managed on a worldwide basis in three primary business segments: - Global Markets and Corporate Centre comprises the results of Syndicate 33, excluding Syndicate 33's specie, fine art, UK regional events coverage, non-US household business and the underwriting results of Hiscox Inc. It also includes the investment return and administrative costs associated with the Company and other Group management activities. - UK and Europe comprises the results of Hiscox Insurance Company Limited, the results of Syndicate 33's specie, fine art, UK regional events coverage and non-US household business, together with the income and expenses arising from the Group's retail agency activities in the UK and in continental Europe. - International comprises the results of Hiscox Insurance Company (Guernsey) Limited, Hiscox Inc. and Hiscox Insurance Company (Bermuda) Limited. This segmentation reflects the internal operational structure within the Group and how the business units are strategically managed to offer different products and services, with different risk profiles, to specific customer groups. All revenue sources are captured by one of the three business segments shown above. The primary segment results for the year, presented in operational reporting format, are as follows: a) Profit before tax by segment Year to 31 December 2006 Year to 31 December 2005 Global Global Markets & Markets & Corporate UK and Corporate UK and Centre Europe International Total Centre Europe Corporate Total Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 ----------------------------------------------------------------------------------------------------------------------- Gross premiums written 689,912 284,946 151,306 1,126,164 555,183 262,271 43,720 861,174 Net premiums written 587,315 250,661 137,421 975,397 417,128 235,276 28,832 681,236 Net premiums earned 549,284 246,071 93,473 888,828 428,334 241,603 23,362 693,299 ----------------------------------------------------------------------------------------------------------------------- Investment result based on longer term rates of return 38,786 18,169 13,109 70,064 36,181 14,300 1,632 52,113 Net claims incurred (256,949) (109,488) (15,904) (382,341) (347,865) (108,498) (662) (457,025) Acquisition costs (142,139) (74,773) (27,478) (244,390) (118,546) (81,827) (18,380) (218,753) Administrative expenses (35,149) (33,212) (8,172) (76,533) (14,342) (24,571) (2,284) (41,197) Foreign exchange gains / (losses) (39,577) (1,693) 2,916 (38,354) 55,060 2,362 (162) 57,260 ----------------------------------------------------------------------------------------------------------------------- Trading result 114,256 45,074 57,944 217,274 38,822 43,369 3,506 85,697 Agency and other income 5,007 23,639 421 29,067 8,376 22,640 2,469 33,485 Profit commission 5,332 - - 5,332 7,357 - - 7,357 Short term investment return fluctuations 29,757 2,389 3,340 35,486 (15,252) 6,081 (70) (9,241) Other expenses (28,448) (38,461) (9,794) (76,703) (15,253) (28,740) - (43,993) ----------------------------------------------------------------------------------------------------------------------- Operating result 125,904 32,641 51,911 210,456 24,050 43,350 5,905 73,305 Finance costs (9,368) - (36) (9,404) (3,334) - - (3,334) Associates result 10 - - 10 - - 250 250 ----------------------------------------------------------------------------------------------------------------------- Profit before tax 116,546 32,641 51,875 201,062 20,716 43,350 6,155 70,221 ----------------------------------------------------------------------------------------------------------------------- The longer term rates of return are calculated based on a 6% return on equities and 4% for all other investments including cash. These rates are applied to the average value of investments held in each class during the current and prior financial year. b) 100% level underwriting results by segment The Group's wholly owned subsidiary, Hiscox Syndicates Limited, oversees the operation of Syndicate 33 at Lloyd's. The Group's percentage participation in Syndicate 33 can fluctuate from year to year and consequently presentation of the results at the 100% level removes any distortions arising therefrom. Year to 31 December 2006 Year to 31 December 2005 Global Global Markets & Markets & Corporate UK and Corporate UK and Centre Europe International Total Centre Europe International Total Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 000 Â£000 ----------------------------------------------------------------------------------------------------------------------- Gross premiums written 950,169 302,043 154,999 1,407,211 786,347 274,886 43,720 1,104,953 Net premiums written 809,973 265,342 141,114 1,216,429 584,132 245,823 28,832 858,787 Net premiums earned 766,053 260,457 94,794 1,121,304 626,784 256,472 23,362 906,618 ----------------------------------------------------------------------------------------------------------------------- Investment result based on longer term rates of return 53,620 19,032 13,109 85,761 51,287 14,300 1,632 67,219 Net claims incurred (357,632) (118,421) (16,597) (492,650) (504,042) (115,659) (662) (620,363) Acquisition costs (201,056) (79,376) (27,763) (308,195) (174,189) (87,501) (18,380) (280,070) Administrative expenses (66,804) (33,821) (8,172) (108,797) (30,777) (25,385) (2,284) (58,446) Foreign exchange gains / (losses) (58,664) (2,330) 2,916 (58,078) 83,887 3,536 - 87,423 ----------------------------------------------------------------------------------------------------------------------- Trading result based on longer term rates of return 135,517 45,541 58,287 239,345 52,950 45,763 3,668 102,381 ----------------------------------------------------------------------------------------------------------------------- 100 % Ratio analysis Year to 31 December 2006 Year to 31 December 2005 Global Global Markets & Markets & Corporate UK and Corporate UK and Centre Europe International Total Centre Europe International Total ----------------------------------------------------------------------------------------------------------------------- Claims ratio (%) 54.6 45.5 17.5 49.3 70.8 45.1 2.8 61.8 Expense ratio (%) 34.4 50.2 44.7 39.0 29.1 41.8 88.5 34.2 ----------------------------------------------------------------------------------------------------------------------- Combined ratio (%) 89.0 95.7 62.2 88.3 99.9 86.9 91.3 96.0 ----------------------------------------------------------------------------------------------------------------------- In calculating the claims and expenses ratios the Group has applied an estimated allocation of the exchange gains and losses to each category. The impact on profit before tax of a 1% change in each component of the segmental combined ratios are: Year to 31 December 2006 Year to 31 December 2005 Global Global Markets/ UK and Markets/ UK and Group Europe International Group Europe International Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 ----------------------------------------------------------------------------------------------------------------------- At 100% level 1% change in claims or expense ratio 7,661 2,605 948 6,268 2,565 234 ----------------------------------------------------------------------------------------------------------------------- At Group level 1% change in claims or expense ratio 5,493 2,461 935 4,289 2,416 234 ----------------------------------------------------------------------------------------------------------------------- c) Net asset value per share Year to 31 December 2006 Year to 31 December 2005 Net asset NAV per share Net asset NAV per share value p value p Â£000 Â£000 ----------------------------------------------------------------------------------------------------------------------- Net asset value 682,085 173.2 578,013 147.7 Net tangible asset value 648,873 164.8 544,914 139.3 ----------------------------------------------------------------------------------------------------------------------- The net asset value per share is based on 393,725,396 shares (2005: 391,216,294), being the adjusted number of shares in issue at 31 December. There is no impact on the comparative amount for the application of reverse acquisition accounting (note 2.3). 4. Investment result The total investment return for the Group comprises : 2006 2005 Â£000 Â£000 Investment income including interest receivable 75,526 48,172 Net realised losses on financial assets at fair value through profit or loss (5,731) (8,040) Net fair value gains on financial assets at fair value through profit or loss 8,721 10,155 ----------------------------------------------------------------------------------------------------------------------- Return on investments (note 5) 78,516 50,287 Fair value gains/(losses) on derivative instruments 27,034 (6,404) ----------------------------------------------------------------------------------------------------------------------- Total return on financial assets 105,550 43,883 ----------------------------------------------------------------------------------------------------------------------- Investment expenses are presented within other operating expenses (note 6). 5. Analysis of return on investments The return on investments for the year by currency was: 2006 2005 % % -------------------------------------------------------------------------------- Sterling 5.4 6.1 US Dollar 4.8 2.5 Other 2.2 2.2 -------------------------------------------------------------------------------- The return on investments for the year by asset class was: Global Markets and 2006 Corporate Centre UK and Europe International Total Â£000 % Â£000 % Â£000 % Â£000 % Debt and fixed income securities at fair value through profit or loss 33,263 4.1 8,509 3.6 323 2.6 42,095 4.0 Equities and shares in unit trusts at fair value through profit or loss 5,314 10.4 7,189 10.2 1,014 17.6 13,517 10.6 Deposits with credit institutions/cash and cash equivalents 2,932 3.7 4,860 4.3 15,112 4.9 22,904 4.6 ----------------------------------------------------------------------------------------------------------------------- 41,509 4.4 20,558 4.9 16,449 5.1 78,516 4.6 ----------------------------------------------------------------------------------------------------------------------- Global Markets and 2005 Corporate Centre UK and Europe International Total Â£000 % Â£000 % Â£000 % Â£000 % Debt and fixed income securities at fair value through profit or loss 20,627 2.9 5,992 4.4 114 1.7 26,733 3.1 Equities and shares in unit trusts at fair value through profit or loss 4,294 10.8 7,524 15.2 460 10.8 12,278 13.1 Deposits with credit institutions/cash and cash equivalents 3,855 2.9 6,434 4.4 987 3.5 11,276 3.7 ----------------------------------------------------------------------------------------------------------------------- 28,776 3.2 19,950 6.0 1,561 4.0 50,287 4.0 ----------------------------------------------------------------------------------------------------------------------- 6. Other income and expenses 2006 2005 Â£000 Â£000 Agency related income 5,027 3,044 Profit commission 5,332 9,807 Exchange gains - 57,420 Other income 5,499 11,026 -------------------------------------------------------------------------------- Other income 15,858 81,297 -------------------------------------------------------------------------------- Managing agency expenses 17,258 9,869 Underwriting agency expenses 32,147 19,886 Connect agency expenses 12,547 6,135 Exchange losses 38,354 - Investment expenses 1,306 1,013 Other Group expenses including depreciation and amortisation 13,445 10,070 -------------------------------------------------------------------------------- Other expenses 115,057 46,973 -------------------------------------------------------------------------------- 7. Employee benefit expense The aggregate remuneration and associated costs were: 2006 2005 Â£000 Â£000 Wages and salaries 58,568 37,581 Social security costs 7,512 6,124 Share based payments cost of options granted to Directors and employees 5,238 2,059 Pension costs - defined contribution 1,689 825 Pension costs - net expense arising on defined benefit plan (note 16) 12,180 4,047 -------------------------------------------------------------------------------- 85,187 50,636 -------------------------------------------------------------------------------- The average monthly number of staff employed by the Group was 637 (2005: 514) comprising 270 underwriting and 367 administrative staff (2005: 190 and 324 respectively). Of the total remuneration shown above, an amount of Â£20,780,000 (2005: Â£14,433,000) was recharged to the Syndicate managed by Hiscox Syndicates Limited. 8. Reinsurance assets 2006 2005 Â£000 Â£000 Reinsurers' share of insurance liabilities 306,550 514,248 Provision for non recovery and impairment (3,778) (7,872) -------------------------------------------------------------------------------- 302,772 506,376 -------------------------------------------------------------------------------- Amounts due from reinsurers in respect of outstanding premiums and claims already paid by the Group are included in loans and other receivables (note 10). The Group recognised a gain during the year of Â£4,094,000 (2005: Â£1,811,000) in respect of the recovery and reversal of previously impaired amounts. 9. Financial assets and liabilities carried at fair value Financial assets and liabilities are all measured at their bid price fair values and ask price fair values respectively, with all changes from one accounting period to the next being recorded through the income statement as provided for by IAS 39. i) Analysis of financial assets at fair value through profit or loss 2006 2005 Â£000 Â£000 Debt and fixed income securities 1,043,669 1,028,795 Equities and shares in unit trusts 141,841 119,407 Deposits with credit institutions 54,715 89,576 -------------------------------------------------------------------------------- Total investments 1,240,225 1,237,778 Derivative instrument assets (note 11) 1,685 - -------------------------------------------------------------------------------- 1,241,910 1,237,778 -------------------------------------------------------------------------------- ii) Analysis of financial liabilities at fair value through profit or loss 2006 2005 Â£000 Â£000 Borrowings from credit institutions 92,852 121,190 Derivative instrument liabilities (note 11) 1,077 5,056 -------------------------------------------------------------------------------- 93,929 126,246 -------------------------------------------------------------------------------- iii) Investment and cash allocation 2006 2005 Â£000 % Â£000 % -------------------------------------------------------------------------------- Debt and fixed income securities 1,043,669 59.9 1,028,795 62.3 Equities and shares in unit trusts 141,841 8.1 119,407 7.2 Deposits with credit institutions/cash and cash equivalents 557,586 32.0 503,335 30.5 -------------------------------------------------------------------------------- 1,743,096 1,651,537 -------------------------------------------------------------------------------- iv) Investment and cash allocation by currency 2006 2005 % % -------------------------------------------------------------------------------- Sterling 31.6 29.9 US Dollars 55.6 57.5 Euro and other currencies 12.8 12.6 -------------------------------------------------------------------------------- 10. Loans and receivables including insurance receivables 2006 2005 Â£000 Â£000 Gross receivables arising from insurance and reinsurance contracts 356,354 351,051 less provision for non recovery and impairment (875) (1,018) -------------------------------------------------------------------------------- Net receivables arising from insurance and reinsurance contracts 355,479 350,033 -------------------------------------------------------------------------------- Due from contract holders, brokers, agents and intermediaries 280,694 302,571 Due from reinsurance operations 74,785 47,462 -------------------------------------------------------------------------------- 355,479 350,033 Other loans and receivables: Prepayments and accrued income 6,746 8,632 Net profit commission receivable 14,443 17,410 Accrued interest 6,065 6,943 Right to reimbursement of defined benefit obligation 1,163 5,462 Share of Syndicate's other debtors balances 44,316 40,579 Other debtors including related party amounts 18,060 7,922 -------------------------------------------------------------------------------- Total loans and receivables including insurance receivables 446,272 436,981 -------------------------------------------------------------------------------- 11. Derivative financial instruments The Group's derivative instruments are used to hedge several economic relationships including the foreign exchange volatility arising from translating the net investments in, and results of, subsidiary companies with different functional currencies, and the foreign exchange impact of insurance business denominated in foreign currencies. During the current and prior financial year, the Group has not elected to denominate any derivative contracts as formal hedging instruments and, as a consequence, has not applied the hedge accounting provisions of IAS 39 Financial Instruments: Recognition and Measurement. At 31 December 2006 the net fair value position of the Group's derivative exposure on foreign exchange cylinder option contracts was a financial asset of Â£1,685,000 (2005: liability of Â£4,892,000 included within financial liabilities). The Group recognised gains totalling Â£6,577,000 in respect of these contracts in the current year (2005: loss of Â£6,240,000). No expense or charges were incurred in the acquisition of the derivative contracts (2005: Â£nil). 2006 2005 Contract Fair Fair Contract Fair Fair notional value of value of notional value of value of amounts assets liabilities amounts assets liabilities US$000 Â£000 Â£000 US$000 Â£000 Â£000 Foreign exchange cylinder option contracts expiring: Within one year 50,000 1,700 15 160,000 297 4,010 Between one and five years - - - 50,000 472 1,651 ----------------------------------------------------------------------------------------------------------------------- Total at 31 December 50,000 1,700 15 210,000 769 5,661 ----------------------------------------------------------------------------------------------------------------------- Foreign exchange forward contract expiring: Within one year 293,000 - 1,077 292,689 - 164 ----------------------------------------------------------------------------------------------------------------------- Total at 31 December 293,000 - 1,077 292,689 - 164 ----------------------------------------------------------------------------------------------------------------------- The Group had the right and intention to settle each of the above contracts on a net basis at 31 December 2005. Consequently the net liability was recognised in the 2005 balance sheet. The Group also entered into foreign exchange forward contracts during the current and prior year primarily to manage the net investment in the Bermudian operation and currency exposures related to the proceeds from the Rights Issue. The contract outstanding at the balance sheet date requires the Group to sell US$293,000,000 (2005: US$292,689,000) at an agreed future rate to Pound Sterling at a fixed date within one year of the balance sheet date. At 31 December 2006, the fair value position of the contract outstanding to the Group was a liability of Â£1,077,000 (2005: Â£164,000). The Group recognised gains totalling Â£20,457,000 in respect of these contracts in the current year (2005: loss of Â£164,000). 12. Cash and cash equivalents 2006 2005 Â£000 Â£000 Cash at bank and in hand 142,200 370,165 Short-term bank deposits 360,671 43,594 -------------------------------------------------------------------------------- 502,871 413,759 -------------------------------------------------------------------------------- The short term bank deposits of the Group has an original maturity of three months or less. The carrying amount of these assets approximates to their fair value. 13. Insurance liabilities and reinsurance assets 2006 2005 Â£000 Â£000 Gross Claims reported and loss adjustment expenses 703,159 815,307 Claims incurred but not reported 425,170 507,186 Unearned premiums 465,772 400,507 -------------------------------------------------------------------------------- Total insurance liabilities, gross 1,594,101 1,723,000 -------------------------------------------------------------------------------- Recoverable from reinsurers Claims reported and loss adjustment expenses 214,148 281,746 Claims incurred but not reported 50,925 186,054 Unearned premiums 37,699 38,576 -------------------------------------------------------------------------------- Total reinsurers' share of insurance liabilities 302,772 506,376 -------------------------------------------------------------------------------- Net Claims reported and loss adjustment expenses 489,011 533,561 Claims incurred but not reported 374,245 321,132 Unearned premiums 428,073 361,931 -------------------------------------------------------------------------------- Total insurance liabilities, net 1,291,329 1,216,624 -------------------------------------------------------------------------------- The gross claims reported, the loss adjustment expenses liabilities and the liability for claims incurred but not reported are net of expected recoveries from salvage and subrogation. The amounts for salvage and subrogation at the end of 2006 and 2005 are not material. Claims development tables The development of insurance liabilities provides a measure of the Group's ability to estimate the ultimate value of claims. The Group analyses actual claims development compared with previous estimates on an accident year basis. This exercise is performed to include the liabilities of Syndicate 33 at the 100% level regardless of the Group's actual level of ownership, which has increased significantly over the last six years. Analysis at the 100% level is required in order to avoid distortions arising from reinsurance to close arrangements which subsequently increase the Group's share of ultimate claims for each accident year three years after the end of that accident year. The top half of each table illustrates how estimates of ultimate claim costs for each accident year have changed at successive year ends. The bottom half reconciles cumulative claim costs to the amounts still recognised as liabilities. A reconciliation of the liability at the 100% level to the Group's share, as included in the balance sheet, is also shown. Insurance claims and claims expenses reserves - gross at 100% Accident year 2001 2002 2003 2004 2005 2006 Total Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 ----------------------------------------------------------------------------------------------------------------------- Estimate of ultimate claims costs as adjusted for foreign exchange*: at end of accident year 584,594 354,025 393,710 588,360 957,095 505,542 3,383,326 one year later 570,042 375,217 401,846 649,915 1,056,674 - 3,053,694 two years later 629,080 381,274 377,883 614,305 - - 2,002,542 three years later 648,468 367,076 388,264 - - - 1,403,808 four years later 683,400 363,443 - - - - 1,046,843 five years later 680,365 - - - - - 680,365 Current estimate of cumulative claims 680,365 363,443 388,264 614,305 1,056,674 505,542 3,608,593 Cumulative payments to date (530,063) (266,737) (264,799) (393,401) (526,250) (116,794) (2,098,044) ----------------------------------------------------------------------------------------------------------------------- Liability recognised at 100% level 150,302 96,706 123,465 220,904 530,424 388,748 1,510,549 Liability recognised in respect of prior accident years at 100% level 28,689 ----------------------------------------------------------------------------------------------------------------------- Total gross liability to external parties at 100% level 1,539,238 ----------------------------------------------------------------------------------------------------------------------- Reconciliation of 100% disclosures above to Group's share - gross Accident year 2001 2002 2003 2004 2005 2006 Total Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 ----------------------------------------------------------------------------------------------------------------------- Current estimate of cumulative claims 680,365 363,443 388,264 614,305 1,056,674 505,542 3,608,593 Attributable to external names (211,422) (93,162) (107,196) (177,085) (285,104) (103,814) (977,783) ----------------------------------------------------------------------------------------------------------------------- Group share of current ultimate claims estimate 468,943 270,281 281,068 437,220 771,570 401,728 2,630,810 Cumulative payments to date (530,063) (266,737) (264,799) (393,401) (526,250) (116,794) (2,098,044) Attributable to external names 159,859 63,138 69,510 115,202 141,797 20,347 569,853 ----------------------------------------------------------------------------------------------------------------------- Group share of cumulative payments (370,204) (203,599) (195,289) (278,199) (384,453) (96,447) (1,528,191) Liability for 2001 to 2006 accident years recognised on Group's balance sheet 98,739 66,682 85,779 159,021 387,117 305,281 1,102,619 Liability for accident years before 2001 recognised on Group's balance sheet - - - - - - 25,710 ----------------------------------------------------------------------------------------------------------------------- Total Group liability to external parties included in balance sheet - gross** 1,128,329 ----------------------------------------------------------------------------------------------------------------------- * The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2006. ** This represents the claims element of the Group's insurance liabilities. Insurance claims and claims expenses reserves - net at 100% Accident year 2001 2002 2003 2004 2005 2006 Total Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 ----------------------------------------------------------------------------------------------------------------------- Estimate of ultimate claims costs as adjusted for foreign exchange*: at end of accident year 287,548 236,498 306,099 491,109 571,081 450,286 2,342,621 one year later 323,118 257,998 321,054 534,718 653,143 - 2,090,031 two years later 381,780 264,783 296,203 514,606 - - 1,457,372 three years later 313,712 250,729 306,634 - - - 871,075 four years later 403,887 245,056 - - - - 648,943 five years later 391,767 - - - - - 391,767 Current estimate of cumulative claims 391,767 245,056 306,634 514,606 653,143 450,286 2,561,492 Cumulative payments to date (329,036) (175,157) (211,058) (318,682) (291,425) (105,412) (1,430,770) ----------------------------------------------------------------------------------------------------------------------- Liability recognised at 100% level 62,731 69,899 95,576 195,924 361,718 344,874 1,130,722 Liability recognised in respect of prior accident years at 100% level 44,684 ----------------------------------------------------------------------------------------------------------------------- Total net liability to external parties at 100% level 1,175,406 ----------------------------------------------------------------------------------------------------------------------- Reconciliation of 100% disclosures above to Group's share - net Accident year 2001 2002 2003 2004 2005 2006 Total Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 ----------------------------------------------------------------------------------------------------------------------- Current estimate of cumulative claims 391,767 245,056 306,634 514,606 653,143 450,286 2,561,492 Attributable to external names (114,746) (60,478) (83,802) (148,811) (168,326) (92,735) (668,898) ----------------------------------------------------------------------------------------------------------------------- Group share of current ultimate claims estimate 277,021 184,578 222,832 365,795 484,817 357,551 1,892,594 Cumulative payments to date (329,036) (175,157) (211,058) (318,682) (291,425) (105,412) (1,430,770) Attributable to external names 93,414 38,284 53,905 93,099 72,324 18,729 369,755 ----------------------------------------------------------------------------------------------------------------------- Group share of cumulative payments (235,622) (136,873) (157,153) (225,583) (219,101) (86,683) (1,061,015) Liability for 2001 to 2006 accident years recognised on Group's balance sheet 41,399 47,705 65,679 140,212 265,716 270,868 831,579 Liability for accident years before 2001 recognised on Group's balance sheet - - - - - - 31,677 ----------------------------------------------------------------------------------------------------------------------- Total net liability to external parties included in the balance sheet** 863,256 ----------------------------------------------------------------------------------------------------------------------- * The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2006. ** This represents the claims element of the Group's insurance liabilities and reinsurance assets. Movement in insurance claims liabilities and reinsurance claims assets 2006 2006 2006 2005 2005 2005 Gross Reinsurance Net Gross Reinsurance Net Year ended 31 December Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 ----------------------------------------------------------------------------------------------------------------------- Total at beginning of year (1,322,493) 467,800 (854,693) (830,681) 195,730 (634,951) Claims and claims handling expense for the year (395,497) 13,156 (382,341) (810,678) 353,653 (457,025) Cash paid for claims settled in the year 504,656 (193,527) 311,129 391,710 (109,904) 281,806 Exchange differences and other movements 85,005 (22,356) 62,649 (72,844) 28,321 (44,523) ----------------------------------------------------------------------------------------------------------------------- Total at end of year (1,128,329) 265,073 (863,256) (1,322,493) 467,800 (854,693) ----------------------------------------------------------------------------------------------------------------------- Notified claims (703,159) 214,148 (489,011) (815,307) 281,746 (533,561) Incurred but not reported (425,170) 50,925 (374,245) (507,186) 186,054 (321,132) ----------------------------------------------------------------------------------------------------------------------- Total at end of year (1,128,329) 265,073 (863,256) (1,322,493) 467,800 (854,693) ----------------------------------------------------------------------------------------------------------------------- The insurance claims expense reported in the consolidated income statement is comprised as follows: 2006 2006 2006 2005 2005 2005 Gross Reinsurance Net Gross Reinsurance Net Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 ----------------------------------------------------------------------------------------------------------------------- Current year claims and loss adjustment expenses (353,895) 3,275 (350,620) (785,128) 322,278 (462,850) (Under)/over provision in respect of prior year claims and loss adjustment expenses (41,602) 9,881 (31,721) (25,550) 31,375 5,825 ----------------------------------------------------------------------------------------------------------------------- Total claims and claims handling expense (395,497) 13,156 (382,341) (810,678) 353,653 (457,025) ----------------------------------------------------------------------------------------------------------------------- 14. Trade and other payables 2006 2005 Â£000 Â£000 Creditors arising out of direct insurance operations 33,473 30,945 Creditors arising out of reinsurance operations 126,319 150,947 -------------------------------------------------------------------------------- 159,792 181,892 -------------------------------------------------------------------------------- Obligations under finance leases 442 449 Share of Syndicate's other creditors balances 15,481 34,331 Reinsurers' share of deferred acquisition costs 6,529 2,496 Social security and other taxes payable 5,846 6,191 Other creditors 8,049 12,255 -------------------------------------------------------------------------------- 36,347 55,722 -------------------------------------------------------------------------------- Accruals and deferred income 58,686 33,562 -------------------------------------------------------------------------------- 254,825 271,176 -------------------------------------------------------------------------------- 15. Taxation The amounts charged in the consolidated income statement comprise the following: 2006 2005 Â£000 Â£000 Current tax expense 8,770 22,564 Deferred tax expense/(credit) 28,446 (973) -------------------------------------------------------------------------------- 37,216 21,591 -------------------------------------------------------------------------------- The tax expense on the Group's profit before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the consolidated companies as follows: 2006 2005 Â£000 Â£000 Profit before tax 201,062 70,221 -------------------------------------------------------------------------------- Tax calculated at the standard corporation tax rate applicable in the UK* of 30% (2005:30%) 60,319 21,067 Effects of: Expenses not deductible for tax purposes 652 687 Income not subject to tax (10,264) (113) Group entities subject to overseas tax at lower rates (18,121) (2,535) Tax losses for which no deferred tax asset has been recognised 4,351 1,011 Prior year tax adjustments 354 1,821 Other items (75) (347) -------------------------------------------------------------------------------- Tax charge for the period 37,216 21,591 -------------------------------------------------------------------------------- * The principal charge to current tax arises in respect of the Group's UK subsidiaries. 16. Employee retirement benefit obligations The gross amount recognised in the Group balance sheet is determined as follows: 2006 2005 Â£000 Â£000 Present value of funded obligations 137,461 137,533 Fair value of plan assets (133,660) (101,409) -------------------------------------------------------------------------------- Present value of unfunded obligations 3,801 36,124 Unrecognised actuarial losses - (19,447) -------------------------------------------------------------------------------- Gross liability in the balance sheet 3,801 16,677 -------------------------------------------------------------------------------- Included within loans and receivables for the Group (note 10) is a right to reimbursement of Â£1,163,000 (2005: Â£5,462,000) recoverable from third party names in Syndicate 33 representing their contribution to funding the defined benefit scheme obligation. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. A full actuarial valuation is performed on a triennial basis and updated at each intervening balance sheet date by the actuaries. The last full actuarial valuation was performed at 31 December 2006. The present value of the defined benefit obligation is determined by discounting the estimated future cash flows using interest rates of AA rated corporate bonds that have terms to maturity that approximate the terms of the related pension liability. The plan assets are invested as follows: At 31 December 2006 2005 Â£000 Â£000 Equities 98,738 81,577 Debt and fixed income securities 10,098 4,993 Cash 24,824 14,839 -------------------------------------------------------------------------------- Closing fair value of scheme assets 133,660 101,409 -------------------------------------------------------------------------------- The amounts recognised in the Group's income statement are as follows: 2006 2005 Â£000 Â£000 Current service cost 4,191 2,916 Interest cost 6,397 5,228 Expected return on plan assets (6,431) (4,767) Net actuarial losses including curtailment charges recognised during the year 7,355 - Past service cost 668 670 -------------------------------------------------------------------------------- Total included in staff costs 12,180 4,047 -------------------------------------------------------------------------------- The actual return on plan assets was Â£12,911,000 (2005: Â£15,531,000). The movement in liability recognised in the Group's balance sheet is as follows: 2006 2005 Â£000 Â£000 At beginning of year 16,677 34,718 Total expense charged in the income statement 12,180 4,047 Contributions paid (25,056) (22,088) --------------------------------------------------------------------------------- At end of year 3,801 16,677 -------------------------------------------------------------------------------- A reconciliation of the fair value of the scheme assets is as follows: 2006 2005 Â£000 Â£000 Opening fair value of scheme assets 101,409 65,020 Expected return on scheme assets 6,431 4,767 Difference between expected and actual return on scheme assets 6,480 10,764 Contributions by the employer 25,056 22,048 Benefits paid (5,716) (1,190) -------------------------------------------------------------------------------- Closing fair value of scheme assets 133,660 101,409 -------------------------------------------------------------------------------- A reconciliation of the present value of funded obligations of the scheme is as follows: 2006 2005 Â£000 Â£000 Benefit obligation at beginning of year 137,533 99,229 Current service cost 4,191 2,916 Interest cost 6,397 5,228 Actuarial (gains)/losses (5,917) 30,680 Benefits paid from plan (5,716) (1,190) Curtailments and amendments 973 670 -------------------------------------------------------------------------------- Closing present value of funded obligations 137,461 137,533 -------------------------------------------------------------------------------- The Group's actuaries have based their assessment on the most recent mortality data available which suggests that the average pensionable period in which benefits will be paid to members is 26 years (2005: 26 years). The other principal actuarial assumptions used in determining the defined benefit scheme's obligation were as follows: 2006 2005 % % Discount rate 5.10 4.75 Expected return on plan assets 6.09 5.79 Future salary increases 4.30 4.00 Inflation assumption 3.30 3.00 Pension increases 3.30 3.00 -------------------------------------------------------------------------------- During the year the Group contributed to the defined benefit scheme at the rate of 33.3% (2005: 22.6%) of pensionable salaries. Additional contributions of Â£20,570,000 were paid during 2006 (2005: Â£19,400,000) to reduce the deficit. The Group has agreed that further additional contributions will be made. 61% of the deficit calculated is recharged to Syndicate 33. The expected return on plan assets is based on historical data and management's expectations of long-term future returns. 17. Earnings per share Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of shares in issue during the year, excluding ordinary shares purchased by the Group and held as own shares. The earnings per share amounts are not impacted by applying the application guidance of IFRS3 in relation to the reverse acquisition of Hiscox Ltd. Basic 2006 2005 Profit attributable to the Company's equity holders (Â£000) 163,846 48,630 Weighted average number of ordinary shares (thousands) 392,558 310,797 Basic earnings per share (pence per share) 41.7p 15.6p -------------------------------------------------------------------------------- Diluted Diluted earnings per share is calculated adjusting for the assumed conversion of all dilutive potential ordinary shares. The Company has one category of dilutive potential ordinary shares, share options. For the share options, a calculation is made to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Company's shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share options. 2006 2005 Profit attributable to Company's equity holders (Â£000) 163,846 48,630 -------------------------------------------------------------------------------- Weighted average number of ordinary shares in issue (thousands) 392,558 310,797 Adjustments for share options (thousands) 12,449 12,283 -------------------------------------------------------------------------------- Weighted average number of ordinary shares for diluted earnings per share (thousands) 405,007 323,080 -------------------------------------------------------------------------------- Diluted earnings per share (pence per share) 40.5p 15.1p --------------------------------------------------------------------------------- Diluted earnings per share has been calculated after taking account of 11,806,000 (2005: 11,829,000) options under employee share schemes and 643,000 (2005: 454,000) options under SAYE schemes. 18. Dividends 2006 2005 Â£000 Â£000 -------------------------------------------------------------------------------- Interim dividend for the year ended : - 31 December 2005 of 2.25p (net) per share - 6,631 - 31 December 2006 of 3.0p (net) per share 11,790 - Final dividend for the year ended : - 31 December 2004 of 3.5p (net) per share - 10,286 - 31 December 2005 of 4.75p (net) per share 18,638 - -------------------------------------------------------------------------------- 30,428 16,917 -------------------------------------------------------------------------------- A final dividend in respect of 2006 of 7p per share, amounting to a total dividend of 10p for the year, is to be proposed at the Annual General Meeting on 23 May 2007. These financial statements do not reflect this final dividend as a distribution or liability in accordance with IAS 10 Events after the Balance Sheet Date. Notes: 1. The financial information set out in this statement is extracted from the Group's consolidated financial statements for the year ended 31 December 2006. The auditors have reported on those 2006 financial statements which includes comparative amounts for 2005. Their report was unqualified. 2. The Annual Report and Accounts for 2006 will be posted to shareholders no later than 23 April 2007. Copies of the Report may be obtained by writing to the Company Secretary, Hiscox Ltd, Canon's Court, 22 Victoria Street, Hamilton HM12, Bermuda. This information is provided by RNS The company news service from the London Stock Exchange

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