Final Results

Hiscox PLC 13 March 2006 Monday 13 March 2006 For immediate release HISCOX PLC Preliminary Results for the year ended 31 December 2005 'Balanced book pays dividends' Hiscox plc, the specialist insurer, today announces preliminary results for the year ended 31 December 2005. 2005 2004 Gross written premiums £861.2m £816.6m Net earned premiums £693.3m £714.9m Profit before tax £70.2m £89.5m Earnings per share 15.6p 21.3p Final dividend per share 4.75p 3.5p Net asset value per share 147.7p 125.7p Group combined ratio 96.0% 92.6% Return on equity 12.8% 20.6% Highlights • Pre-tax profit of £70.2 million, after £165 million net loss from 2005 hurricane season • Final dividend increased 36%, making a total dividend of 7.0p per share for the year (2004: 5.0p per share) • Hiscox Global Markets business profitable at £20.7 million pre-tax (2004: £67.8 million) with a combined ratio of 99.9% (2004: 90.9%) despite hurricane losses • Hiscox UK and Hiscox Europe made a strong profit of £43.4 million pre-tax (2004: £18.9 million) with a combined ratio of 86.9% (2004: 98.0%) • Hiscox International increased operating profit to £6.2 million (2004: £2.9 million) with a combined ratio of 91.3% (2004: 92.0%) • Hiscox Bermuda formed, financed by successful £170.0 million rights issue (net of expenses). Robert Hiscox, Chairman Hiscox plc, commented: 'Our past investment in regional expansion has helped the Group make a very satisfactory profit despite the many catastrophes in 2005. Our new investments in Bermuda and the USA give us an even wider geographic spread, with growing books of regional specialist business to balance our internationally traded business. I am confident of further profitable growth.' Copies of the Chairman's statement, Chief Executive's review and the Group's financial information as at 31 December 2005 are attached. For further information: Hiscox plc Robert Hiscox Chairman 020 7448 6011 Bronek Masojada Chief Executive 020 7448 6012 Stuart Bridges Finance Director 020 7448 6013 The Maitland Consultancy Philip Gawith 020 7379 5151 Suzanne Bartch 020 7379 5151 Notes to editors Hiscox plc is a specialist insurance group listed on the London Stock Exchange where it has a market capitalisation of circa £980 million. 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 offshore operations in Bermuda and Guernsey and our new business in the USA. For further information, go to www.hiscox.com Chairman's statement Results The result for the year ending 31 December 2005 is a pre-tax profit of £70.2 million (2004: £89.5 million). The net assets per share increased to 147.7p per share (2004: 125.7p per share) and the earnings per share on profit after tax were 15.6p per share (2004: 21.3p per share). The gross premium income underwritten was £1,105.0 million (2004: £1,110.9 million), of which £861.2 million (2004: £816.6 million) was applicable to Hiscox plc. We thought that 2004 was a turbulent year, but 2005 well surpassed it with 400 catastrophic natural and man-made events officially recorded causing an estimated $83 billion of insured damage. The four hurricanes in the US and the Caribbean included Katrina, the most expensive in history. In the circumstances, a profit of £70.2 million (after a net loss of £165 million from the hurricanes) is satisfactory, and made possible by our strategy of building a book of regional specialist business (sometimes called 'retail' business) to balance the global business written in London (and Bermuda in future) that can be buffeted by catastrophes. Dividend As recommended at the time of our rights issue, in November 2005, the final dividend, subject to shareholders' approval, will be 4.75p per share (2004: 3.5p per share) making a total distribution for the year of 7p (2004: 5p), an increase of 40% on the previous year. This will be paid on 26 June 2006 to shareholders on the register on 21 April 2006. We have always had a policy of steadily increasing the dividend, but it had fallen behind the growth of the company in recent years. With a little persuasion from our long-term institutional shareholders, we also agreed that we would target a total dividend of 9p for 2006 subject to adequate profitability and shareholders' approval. Corporate events The hurricanes of 2005 stopped the slide in rates in those lines of business affected by the losses and generally stiffened the resolve of underwriters in some other areas. In order to take advantage of the improved conditions in one of our core areas, international reinsurance, we raised £170.0 million through a rights issue to help create Hiscox Bermuda, which was formed in time for the end of year renewal season. Bermuda is now a prime market for international reinsurance and large internationally traded business, and Hiscox Bermuda will widen the distribution of our skill in those areas. The new venture will write reinsurances of some of our specialist regional business as well direct reinsurance to give a properly balanced account. Robert Childs, our Group Chief Underwriting Officer, has moved to Bermuda which shows his and our commitment to the new venture. He will also oversee our new project to underwrite more regional business in the USA through our new operation Hiscox USA led by Ed Donnelly. Current business Our Global Markets business did well to achieve a combined ratio of 99.9% and a small profit considering the battering it took from the hurricanes. This was helped by the book of specialist regional business written by them which balanced, to an extent, the volatility of the reinsurance account and the big ticket London Market business. Income was steady as they were cutting back their income and exposure during 2005 in the areas where rates were falling, in line with our policy of reducing income when rates reduce and going for it when prices rise. As I said above, this all changed by the year end due to the hurricanes and they were able to take advantage of better rates during the renewal season. Going forward, the Global Markets account written in London will be complemented by Hiscox Bermuda which will widen the spread of the account. Our reinsurance and big ticket account will always be vulnerable to extreme weather catastrophes and any run of substantial losses. This is why both in London and Bermuda, and throughout the rest of the group, we seek to write a balancing account of specialist business. The success story of the year was our specialist regional business in the UK which achieved a combined ratio of 84.1%. We are clearly selling good products at a fair price, so to sell more and accelerate our growth we intend to increase our marketing substantially in 2006. Our European offices turned in a decent profit this year and Guernsey made its usual excellent result. Since 1989 we have spent considerable management time and money on building a regional presence throughout the UK and Europe, and now in the USA. The investment is paying off with the UK showing highly satisfactory results and Europe showing strong potential. The USA is a new venture with proven management that has succeeded in the past and I am sure will do so again. The market Bermuda is the focus of much attention at the moment as it has now outgrown the London Market in reinsurance. It resembles the Lloyd's of old in its entrepreneurial spirit, speed of reaction and swift and sensible regulation. Brokers find it very user friendly. Meanwhile Lloyd's has produced another plan to be the optimal platform and has just announced the appointment of a new chief executive. In 1991, in the Rowland Task Force report on Lloyd's, the worst statistic for me was that Lloyd's underwriters paid brokers higher commission than any other insurance company, but brokers made less money dealing with it than any other insurance company. Fifteen years later, after three changes of chief executive and much talk of optimal platforms and a fortune spent on a scrapped IT system, the same statistic probably still applies. The current chairman has done a great job facing outwards with foreign regulators, the government and PR, but he now needs to face inwards with his new CEO and simplify market processes and the capital structure or Lloyd's will wither away. The future We have a vision of building a highly respected international specialist insurer, and we have been laying strong foundations for some time in different areas on which we can now develop strong businesses. Bermuda will give us a better spread of London Market type business. The UK regions have enormous scope for growth in their specialist areas as do the European offices. Our direct business grows healthily and will benefit from more advertising. Forty percent of our business currently comes from the world's biggest insurance market, the USA, and we now have Hiscox USA to add a portfolio of smaller business to give balance. The Hiscox brand The extra marketing and advertising in 2006 should not only give a powerful boost to our direct business which continues to grow well, but is aimed to increase awareness of our brand across all sectors of insurance we want to underwrite. In a world where insurance is often seen as a commodity which sells on price alone, we want Hiscox to be a premium brand which reflects our values of integrity and quality of product and service. Any insurer can issue a standard policy, but we want to be trusted to provide superior service around our policies - flexible underwriting giving the policyholders the cover they need rather than the cover we want to give them, flexible, rapid and fair settlement of claims and cracking good service to all who come into contact with Hiscox. We want to be chosen because we offer quality, not the cheapest price. People Bronek's report shows the business in great detail, and I think it is a great credit to him and the team he has gathered round him. Bronek joined a small private Lloyd's agency in 1993 since when his dynamism, intellect and vision have led a very focussed but well spread expansion in the public arena. I know it is unfashionable for a Chief Executive to spend more than a couple of years in the post, but I consider many of them just mercenaries who join with a huge signing on fee, demand a loyalty bonus to stay, and then leave with a huge pay-off when they are found to be wanting. I prefer executives (and shareholders) who feel like long-term owners of the business and want to build it well into the future. All the staff at Hiscox contribute with cheerful enthusiasm as we strive to create a great business, and I am very grateful to them. They are a pleasure to work with. Finally I am sometimes embarrassed that Hiscox has been alive since 1901 and is still relatively small compared with some other new coming shooting stars. However, I think that its longevity does show a long-term dedication to the business and a will not to give up before the job is done. To use the hackneyed metaphor, we are running a marathon, not a sprint. The exciting thing is that we all feel that we have only just begun. Every day brings a new challenge, right now with new businesses in the USA and Bermuda, new offices in the UK and Europe, new technology to harness and new business processes to reduce cost, which makes it constantly interesting and invigorating. We have great people and a better spread of business than ever before, and I am confident that we are entering a new era of profitable growth. Robert Hiscox Chief Executive's report Overview 2005 was the year in which Hiscox demonstrated the strength of our strategy of balance. For the last decade we have been steadily building our businesses outside the Lloyd's market and have created a spread between globally traded and specialist regional risks. This meant that after the market wide impact of Hurricanes Katrina, Rita and Wilma we were in a position to create Hiscox Bermuda, allowing us to participate in this growing market. Strategy Hiscox has had a consistent vision over the past decade, to build a respected specialist insurer recognised for the quality of its people, products and service, and its strong financial performance. In our journey we have applied the following key principles: 1. Recruit and retain quality people and reward them fairly 2. Maintain a clear preference for profitability over size 3. Focus on specialist products backed by first class service 4. Balance the volatility of the London Market with specialist regional business 5. Broaden distribution to access new markets 6. Increase efficiency and reduce intermediation costs. It is this consistent vision that has allowed us to grow steadily, moving from a single location in 1993 to 17 offices across three continents, building regional specialist businesses and growing market capitalisation from £15 million in 1993 to almost £1 billion, with the share price rising from 33p to today's level. I believe the current shape of our business can drive the development of the Group for the next decade. We aim to build significant businesses in the UK, Europe and the USA which will focus on specialist regional risks, with local underwriters and local customer service and claims payment. Hiscox Guernsey will focus on specialist regional business for international customers. Hiscox Global Markets in London and Hiscox Bermuda will underwrite internationally traded reinsurance and big ticket business in these locations, but will use the rest of the Hiscox network for marketing and business development. Group Performance The pre-tax profit this year of £70.2 million (2004: £89.5 million) is equal to 15.6p per share (2004: 21.3p per share). This profit, should be judged in the context of the most expensive year of natural catastrophes ever in the history of our industry. Total revenues were £861.2 million (2004: £816.6 million). The small increase in premium reflects our disciplined underwriting in the face of declining prices in global traded risks and certain regional classes offset by increased ownership of Syndicate 33. Hurricanes Katrina, Rita and Wilma had a market changing impact on certain classes and areas, and this will give us the opportunity to grow in 2006. The precise opportunity will vary across the different divisions within the Group. Conditions in each division's market, their past financial performance and their prospects are reviewed below. Hiscox Global Markets This division uses the global licences and distribution network available to those who underwrite at Lloyd's to reach brokers and customers located around the world. The majority of its business is reinsurance, major property and other large international risks. The remainder is specialist business which provides the division with some balance. Gross written premium increased to £555.2 million (2004: £511.5 million) and the division made a pre-tax profit of £20.7 million. The overwhelming financial events of the year which affected this division were the hurricanes. These cost us US$730 million on a gross basis and US$285 million net of reinsurance. The impact to Hiscox plc was to reduce pre-tax profit by £85 million. Our prudent purchase of reinsurance has significantly mitigated our loss, but we have very limited cover remaining for these events. This is not surprising after the biggest insured event in the history of insurance and the most expensive year of insured natural catastrophes ever. A profitable result, albeit assisted by a significant exchange rate gain, is an outstanding achievement for a business active in this segment. Many of its competitors are on their knees. This result vindicates our strategy of building balanced businesses even at a divisional level, and reflects a great performance by the underwriting team. The rating environment for the lines of business within Hiscox Global Markets remains robust. The hurricane season has put upward pressure on prices for reinsurance and London Market business affected by the storms. There were significant price rises on the South East Coast of America and other flood or hurricane prone coastal areas, some small rises elsewhere in the US and the UK, and very few rises and some falls elsewhere in the world. In 2006 we plan to take advantage of the higher prices while reducing our exposure in the Gulf of Mexico. In the specialist areas, business has remained profitable and significant price rises are not expected. During 2005 our broker partners continued to restructure their businesses as they responded to the changes wrought by Elliot Spitzer, the New York Attorney General. We in turn are responding in two ways: • First, we are establishing Hiscox Global Markets business development and marketing teams in Paris, New York and San Francisco. Underwriting expertise will remain concentrated in London. Initial indications are that this will pay off with an increased flow of attractive business. • Second, we are leading the development of greater electronic trading capabilities. The demise of Kinnect, the electronic operating platform sponsored by Lloyd's, has meant that businesses like Hiscox have to decide how to reduce the cost of trading in Lloyd's themselves. Hiscox is working with five other major managing agents (a group known as G6) to do this. There have been many initiatives of this sort which have failed in the past, but we are determined to succeed. Hiscox Global Markets remains our core business. At the end of the year Richard Watson assumed leadership of the unit. Richard has been with Hiscox for 20 years and has had experience in underwriting most classes of Hiscox business during his career. Richard's disciplined underwriting skills and leadership capability will ensure that Hiscox Global Markets adapts to the changing market environment in ways which maximise our profits within reasonable risk parameters. Hiscox UK and Hiscox Europe These two divisions focus on selling personal and commercial products to similar customers in different countries. In personal lines both businesses aim to insure the wealthiest 5% of the population - seeking clients who are 'rich, careful and honest'. On the commercial side, they seek to insure service based businesses with 50 or fewer employees or 'professionally run professional firms'. Prices in our specialist regional businesses remain attractive. Rates have reduced slightly over the past 12 months, but we believe that they are still at reasonable levels. Hiscox UK Hiscox UK is the most mature area of business we have built outside of Lloyd's in the last decade. It had a stunning 2005. Gross written premium remained static at £207.3 million (2004: £212.1 million) with a combined ratio of 84.1% (2004: 96.8%) and pre-tax profits of £40.4 million (2004: £17.5 million). The muted top line growth reflects our focus on profits over volume. In 2005 we reduced our participation in the UK solicitors' professional indemnity market - a drop of £14 million of written premiums - but this underwriting discipline will be rewarded at the bottom line. The UK business has made a greater profit than the original cost of purchasing it in 1996. We must remember the result is assisted by the absence of any significant natural catastrophes in the UK over the past 12 months. Mother Nature decided to focus on the USA and, as a Group, we have benefited from our geographic spread. We remain a market leader in the art and private client areas and are becoming a leader in the insurance of small services based businesses. Our business is sold overwhelmingly through brokers. In 2005 we launched an electronic platform to support both of these products with brokers. Feedback has been excellent and we expect that over time the electronic placing will allow brokers to do more business with us, lowering both their and our costs. Our direct business is making steady progress as an increasing number of clients become more comfortable purchasing their home and contents insurance and their commercial insurance over the internet and telephone. In 2006 we plan to increase our advertising to stimulate demand in both direct and brokered business. Steve Langan became Managing Director of Hiscox UK during the year. Steve joins us from Diageo where his experience in consumer marketing and leading businesses should ensure that our efforts in building the Hiscox brand to grow the business are well rewarded. Hiscox Europe Hiscox Europe has repaid the support we have given it. It made pre-tax profits of £3.0 million (2004: £1.4 million), with a combined ratio of 99.7% (2004: 103.2%) and revenues of £55.0 million (2004: £55.7 million). These good results have been at the expense of top line growth as in 2005 our focus has been on improving the underwriting and reducing operational costs. Having achieved that, in 2006 we can concentrate on growth. In May last year we employed Marc Van der Veer, an experienced Directors and Officers underwriter, to become Managing Director of this business unit. We have subsidiaries in France, Germany and the Benelux and Marc and his team will be focused on developing major businesses in these countries. We do serve other European markets in Spain, Portugal and Sweden on a small scale, managed out of London and served through partnerships with local brokers with local Hiscox representation. Over the longer term these relationships may become stepping stones for greater activity in these countries. Our ambition is for Hiscox Europe to reach a similar scale and profit as Hiscox UK. In 2006 we will be focussing on developing a sales culture to demonstrate that the choice is not between growth and profit, but that both can be achieved in Europe. Hiscox International Hiscox International covers our offshore activities in Guernsey and Bermuda, and our nascent business in the United States. The division made a pre-tax profit of £6.2 million (2004: £2.9 million), achieved a combined ratio of 91.3%, (2004: 92.0%) and had revenues of £43.7 million (2004: £37.3 million). All the profit in this division was made by Hiscox Guernsey as the other two businesses only commenced underwriting in 2006. Hiscox Guernsey has been in operation for 7 years. It has grown from a very small beginning, formed because particular business could no longer be written in Lloyd's, to a major financial institution in Guernsey. Hiscox Bermuda was created in November last year and funded with the proceeds of our rights issue and bank debt to take advantage of the improving market conditions following the impact of the 2005 catastrophes. We had to move fast and the regulatory authorities in Bermuda, our shareholders, bankers and brokers, were very supportive for which I would like to thank them. Hiscox Bermuda is led by Rob Childs, Group Chief Underwriting Officer, who was previously Managing Director of Hiscox Global Markets. Rob's leadership reflects the seriousness with which we take this opportunity and the role that we feel Bermuda can play in our future. At the end of February 2006, Hiscox Bermuda had gross committed income of US$155 million of which US$46 million was to external clients and the balance reinsurance support of other Group companies. We believe we are on track to achieve the full year target of US$325 million announced at the time of the rights issue. Hiscox USA is still at an early stage of its development and officially opens in March. Ed Donnelly is busy getting licences and building his team. Investment management The fair value of all financial investments and cash holdings under Group management at 31 December 2005 (including the Group's share of syndicate assets) was £1,651.5 million (2004: £1,100.3 million). During 2005 these funds generated a return of £50.3 million (2004: £34.5 million). Group investment policy concentrates on making good absolute returns for an acceptable risk. This focus on absolute returns ensures that even in poor investment years we have the necessary capital to underwrite. We ensure that this goal is reached through modelling of likely returns, backed by the judgement of our internal and external fund managers. We also have an explicit guide that the technical reserves of the Group should be invested in bonds, and no more than 50% of capital to support underwriting may be invested in 'risk' assets such as equities and property. Due to the short-tail nature of the insurance risks we underwrite and the unknown loss dates, we do not attempt to match asset and liability duration. We do however remain matched in currency between our anticipated liabilities and assets. The Group's funds are overseen by our team at Hiscox Investment Management (HIM). The HIM team supervise our external fund managers. In addition to this supervisory role the team also manages £165 million in 6 specialist funds for third party investors. The Hiscox Insurance Portfolio, managed by Alec Foster has performed outstandingly over the past 5 years. Alec remains as Managing Director and David Astor became the Group Investment Officer during the year. Since joining Hiscox in 2002, David has run three financial funds, each of which has significantly outperformed its benchmarks since launch. The Hiscox US Financial Fund has beaten the Standard & Poor's 500 index by 55% since launch in 1994. We have had superior returns in our specialist areas which should help our ambition to grow the third party funds under management. In 2005 we launched two new funds, the Hiscox Global Financials Fund in October and the Aramus Financials Fund for Clariden Bank in Switzerland in December. These funds have already attracted over £42 million since launch. Balance Sheet During the course of the year net assets per share grew to 147.7p per share (2004: 125.7p per share). Tangible net assets grew to 139.3p per share (2004: 115.5p per share). The critical financing events of the year were the rights issue to fund Hiscox Bermuda, and the arrangement of various facilities. In November the rights issue raised £170.0 million through the issue of shares at 183p per share. We received strong support from shareholders. Senior management invested net new money. It is good to receive such strong support from internal and external stakeholders. We also raised a debt facility of $225 million from a consortium of leading banks. The same syndicate also supported a refinancing of our £137.5 million letter of credit. At the time of the rights issue we announced that as such a substantial amount of the Group's business could originate from the Bermudan and US markets the board was considering a potential redomicile of the parent company to Bermuda. This work is ongoing. The balance sheet includes a liability of £16.7 million in respect of the pension fund. The investment return for 2005 on the fund was 19.4% however increased mortality rates and a decline in the long bond rates late in the year increased the liabilities by 38.6%. We will continue to invest well and make further contributions to reduce the deficit. People It is often thought that to enter the insurance business, all that is needed is a pile of money and a bunch of people. Newcomers often underestimate the difference that quality motivated staff can make. We believe passionately in attracting, developing and retaining good people, allowing them to use their brains to make a difference - as one new employee said when comparing Hiscox with a former employer, 'at Hiscox I feel that I have been hired to use my brain, not in spite of having one'. The reward for creating an environment like this is a motivated team - and external recognition for the fourth consecutive year as one of the Sunday Times 100 Best Companies to Work For. Conclusion 2006 is a year of challenges. Rates are at an attractive level so our ambition is to grow the business. During 2005 we created the business shape which I believe has the potential to take Hiscox forward with steady growth and profitability for Hiscox UK, Europe, Guernsey and USA, balancing the more opportunistic expansion and contraction required within Hiscox Global Markets and Hiscox Bermuda. Over time this should create substantial value for our shareholders. Bronek Masojada CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2005 2005 2004 Notes £000 £000 Income Gross premiums written 3 861,174 816,609 Outward reinsurance premiums (179,938) (112,524) -------- -------- Net premiums written 3 681,236 704,085 -------- -------- Insurance premiums earned 879,344 847,524 Insurance premiums ceded to reinsurers (186,045) (132,672) -------- -------- Net premiums earned 3 693,299 714,852 Investment result 4 43,883 35,806 Other income 6 81,297 15,112 -------- -------- Net revenue 818,479 765,770 -------- -------- Expenses Claims and claim adjustment expenses, net of (457,025) (382,063) reinsurance Expenses for the acquisition of insurance (199,979) (177,960) contracts Administration expenses (41,197) (43,198) Other operating expenses 6 (46,973) (71,440) -------- -------- Total expenses (745,174) (674,661) -------- -------- Results of operating activities 73,305 91,109 Finance costs (3,334) (1,977) Share of profit of associates 250 390 -------- -------- Profit before tax 70,221 89,522 Tax expense 15 (21,591) (25,574) -------- -------- Profit for the year (all attributable to equity 48,630 63,948 shareholders of the parent) -------- -------- Earnings per share on profit attributable to the equity shareholders Basic (restated for the effects 17 15.6p 21.3p of the rights issue) Diluted (restated for the effects of 17 15.1p 21.0p the rights issue) -------- -------- CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2005 2005 2004 Notes £000 £000 Assets Intangible assets 33,099 29,989 Property, plant and equipment 12,128 10,691 Investments in associates 18 1,109 Deferred acquisition costs 106,747 109,970 Financial assets 9 1,237,778 980,731 Loans and receivables including 10 436,981 327,482 insurance receivables Reinsurance contract receivables 8 506,376 238,871 Cash and cash equivalents 12 413,759 119,563 ------- -------- Total assets 2,746,886 1,818,406 ------- -------- Equity and Liabilities Shareholders' equity Share capital 19,570 14,685 Share premium 401,365 234,267 Other reserves 38,789 37,499 Retained earnings 118,289 82,375 ------- -------- Total equity 578,013 368,826 ------- -------- Employee retirement benefit obligations 16 16,677 34,718 Deferred tax 15,193 14,517 Insurance contracts 13 1,723,000 1,246,903 Financial liabilities 9 126,246 57 Current tax 16,581 7,855 Trade and other payables 14 271,176 145,530 ------- -------- Total liabilities 2,168,873 1,449,580 ------- -------- Total equity and liabilities 2,746,886 1,818,406 ------- -------- Currency Capital Share Share Merger Translation Redemption Retained Capital Premium Reserve Reserve Reserve Earnings Total Notes £000 £000 £000 £000 £000 £000 £000 Balance at 1 January 2004 14,565 232,341 4,723 - 33,244 29,812 314,685 Currency translation differences - - - (468) - - (468) ----- -------- -------- -------- -------- -------- -------- Net income/(expenses)recognised - - - (468) - - (468) directly in equity Profit for the year - - - - - 63,948 63,948 ----- -------- -------- -------- -------- -------- -------- Total recognised income for the year - - - (468) - 63,948 63,480 Employee share options: Equity settled share based payments - - - - - 1,194 1,194 Proceeds from shares issued 120 1,926 - - - - 2,046 Change in own shares - - - - - 254 254 Dividends to shareholders 18 - - - - - (12,833) (12,833) ----- -------- -------- -------- -------- -------- -------- Balance at 31 December 2004 14,685 234,267 4,723 (468) 33,244 82,375 368,826 Currency translation differences - - - 1,290 - - 1,290 ----- -------- -------- -------- -------- -------- -------- Net income (expenses)recognised - - - 1,290 - - 1,290 directly in equity Profit for the year - - - - - 48,630 48,630 ----- -------- -------- -------- -------- -------- -------- Total recognised income for the 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 - (5,974) - - - - (5,974) of equity shares 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 ----- -------- -------- -------- -------- -------- -------- HISCOX PLC - PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2005 CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2005 2005 2004 CONSOLIDATED GROUP £000 £000 Profit before tax 70,221 89,522 Interest received (46,844) (33,069) Net (gains)/losses on financial assets 4,289 593 Retirement benefit charges in excess of (18,041) 1,384 contributions paid Depreciation 3,281 2,934 Charges in respect of share based payments 2,059 1,194 Other non-cash charges 690 1,302 Changes in operational assets and liabilities: Insurance and reinsurance contracts 212,462 193,591 Financial assets (256,280) (230,913) Other assets and liabilities 13,048 (19,469) ------- ------- Cash generated from operations (15,115) 7,069 Interest received 46,844 33,069 Interest paid (2,573) (1,409) Current tax paid (10,239) (206) ------- ------- Net cash flows from operating activities 18,917 38,523 Cash flows from the acquisition and sale of 3,750 (1,091) subsidiaries and associates Cash flows from the sale / (purchase) of property, plant and equipment (4,474) (5,565) Cash flows from the purchase of intangible assets (3,277) (3,406) Loans repaid by related parties 1,580 320 ------- ------- Net cash used in investing activities (2,421) (9,742) Proceeds from the issue of ordinary shares 171,983 2,046 Net cash flows from transactions in own shares 192 254 Dividends paid to company's shareholders (16,917) (12,833) Proceeds from borrowings 121,133 - Repayments of borrowings (102) (521) ------- ------- Net cash flows from financing activities 276,289 (11,054) ------- ------- Net increase in cash and cash equivalents 292,785 17,727 ------- ------- Cash and cash equivalents at 1 January 119,563 102,712 Net increase in cash and cash equivalents 292,785 17,727 Effect of exchange rate fluctuations on cash and 1,411 (876) cash equivalents ------- ------- Cash and cash equivalents at 31 December 413,759 119,563 ------- ------- The purchase, maturity and disposal of financial assets is part of the group's insurance activities and is therefore classified as an operating cashflow. HISCOX PLC - PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2005 NOTES 1. Accounting Policies and Explanation of transition to IFRSs as adopted by the EU These preliminary results have been prepared in accordance with IFRSs as adopted by the EU on the basis of the accounting policies as set out in the restated consolidated financial information that was published on 26 July 2005, which is available on the company's website www.hiscox.com. In preparing opening IFRS balance sheets, the group has adjusted amounts reported previously in financial statements prepared in accordance with its previous basis of accounting (UK GAAP). An explanation of how the transition from UK GAAP to IFRSs has affected the group's consolidated financial position, financial performance and cash flows is also set out in the IFRS restatement information published by the group on 26 July 2005 which is available to view at www.hiscox.com. 2. Use of critical estimates and assumptions 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 the 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 the eventual outcome of claims, particularly those under litigation, which have occurred and been notified to the group but remain unsettled at the balance sheet date. The directors consider the accounting policies for determining insurance liabilities, amounts denominated in foreign currencies, valuation of investments and recognition of premiums as being most critical to an understanding of the group and company's result and position. 3. Segmental Information The group is managed and reported on a worldwide basis in three primary business segments as follows: - Global Markets and Corporate Centre comprises the results of Syndicate 33, excluding Syndicate 33's specie, fine art and non-US household business. It also includes the investment return and administrative costs associated with the parent 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 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 and Hiscox Insurance Company (Bermuda) Limited which commenced underwriting on 1 January 2006. This segment also includes the activities of the group's newly formed US agency, Hiscox Inc. 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 segment results for the year are as follows: a) Profit before tax by segment Year to 31 December 2005 Year to 31 December 2004 Global Global Markets & Markets & corporate UK and Corporate UK and Centre Europe International Total Centre Europe International Total £000 £000 £000 £000 £000 £000 £000 £000 ------- -------- ------- ------ ------ ------ -------- ------- Gross premiums written 555,183 262,271 43,720 861,174 511,491 267,801 37,317 816,609 Net premiums written 417,128 235,276 28,832 681,236 451,517 233,103 19,465 704,085 Net premiums earned 428,334 241,603 23,362 693,299 483,958 212,368 18,526 714,852 ------- -------- ------- ------ ------ ------ -------- ------- Investment result based 36,181 14,300 1,632 52,113 28,011 11,374 414 39,799 on longer term rates of return Net claims incurred (347,865) (108,498) (662) (457,025) (268,695) (113,161) (207) (382,063) Acquisition costs (118,546) (81,827) (18,380) (218,753) (108,726) (70,537) (15,729) (194,992) Administrative expenses (14,342) (24,571) (2,284) (41,197) (18,211) (24,197) (450) (42,858) Other income/(expenses) 55,060 2,362 (162) 57,260 (32,996) 1,067 (649) (32,578) ------- -------- ------- ------ ------ ------ -------- ------- Trading result 38,822 43,369 3,506 85,697 83,341 16,914 1,905 102,160 Agency and other 8,376 22,640 2,469 33,485 7,138 22,535 618 30,291 income Profit commission 7,357 - - 7,357 3,539 (31) - 3,508 Short term investment (15,252) 6,081 (70) (9,241) (8,044) 2,733 (56) (5,367) return fluctuations Other expenses (15,253) (28,740) - (43,993) (16,187) (23,296) - (39,483) ------- -------- ------- ------ ------ ------ -------- ------- Operating result 24,050 43,350 5,905 73,305 69,787 18,855 2,467 91,109 Finance costs (3,334) - - (3,334) (1,977) - - (1,977) Associates result - - 250 250 - - 390 390 ------- -------- ------- ------ ------ ------ -------- ------- Profit before tax 20,716 43,350 6,155 70,221 67,810 18,855 2,857 89,522 ------- -------- ------- ------ ------ ------ -------- ------- 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 Year to 31 December 2005 Year to 31 December 2004 Global Global Markets & Markets & Corporate UK and Corporate UK and Centre Europe International Total Centre Europe International Total £000 £000 £000 £000 £000 £000 £000 £000 ------- ------- --------- ------ ------ ------ -------- ------ Gross premiums written 786,347 274,886 43,720 1,104,953 785,513 288,092 37,317 1,110,922 Net premiums written 584,132 245,823 28,832 858,787 760,966 251,340 19,465 1,031,771 Net premiums earned 626,784 256,472 23,362 906,618 743,645 230,374 18,526 992,545 ------- ------- --------- ------ ------ ------ -------- ------ Investment result based 51,287 14,300 1,632 67,219 34,018 11,374 414 45,806 on longer term rates of return Net claims incurred (504,042) (115,659) (662) (620,363) (412,874) (126,834) (207) (539,915) Acquisition costs (174,189) (87,501) (18,380) (280,070) (175,018) (76,558) (15,729) (267,305) Administrative (30,777) (25,385) (2,284) (58,446) (30,106) (25,531) (450) (56,087) expenses Other 83,887 3,536 - 87,423 (55,955) 1,067 (649) (55,537) income/(expenses) ------- ------- --------- ------ ------ ------ -------- ------ Trading result based 52,950 45,763 3,668 102,381 103,710 13,892 1,905 119,507 on longer term rates of return ------- ------- --------- ------ ------ ------ -------- ------ 100 % Ratio analysis Year to 31 December 2005 Year to 31 December 2004 Global Global Markets & Markets & Corporate UK and Corporate UK and Centre Europe International Total Centre Europe International Total -------- -------- -------- ------- ------- ------- -------- ------- Claims ratio (%) 70.8 45.1 2.8 61.8 72.9 55.1 1.1 67.5 Expense ratio (%) 29.1 41.8 88.5 34.2 18.0 42.9 90.9 25.1 -------- -------- -------- ------- ------- ------- -------- ------- Combined ratio (%) 99.9 86.9 91.3 96.0 90.9 98.0 92.0 92.6 -------- -------- -------- ------- ------- ------- -------- ------- In calculating the claims and expense ratios the Group has applied an estimated allocation of the exchange gains and losses to each category. The impact of a 1% change in each component of the segmental combined ratios are: Year to 31 December 2005 Year to 31 December 2004 Global Global Markets & Markets & Corporate UK and Corporate UK and Centre Europe International Centre Europe International £000 £000 £000 £000 £000 £000 -------- -------- -------- ------- -------- -------- At 100% level 1% change in claims 6,268 2,565 234 7,436 2,304 185 or expense ratio -------- -------- -------- ------- -------- -------- At Group level 1% change in claims 4,289 2,416 234 4,826 2,124 185 or expense ratio -------- -------- -------- ------- -------- -------- c) Net asset value per share Year to 31 December 2005 Year to 31 December 2004 Net asset value per share Net asset value per share £000 p £000 p ------- ------- ------- ------ Net asset value 578,013 147.7 368,826 125.7 Net tangible asset value 544,914 139.3 338,837 115.5 The net asset value per share is based on 391,216,294 shares (2004 : 293,305,922). 4. Investment result The total investment return before taxation comprises : 2005 2004 £000 £000 Investment income including interest receivable 48,172 35,051 Net realised gains/(losses) on financial assets at fair (8,040) (6,608) value through income Net fair value gains/(losses) on financial assets at fair 10,155 6,015 value through income ------- ------- Return on investments (note 5) 50,287 34,458 Fair value gains/(losses) on derivative instruments (6,404) 1,348 ------- ------- Total return on financial assets 43,883 35,806 ------- ------- 5. Analysis of return on investments The return on investments for the year by currency, net of investment expenses and charges, was: ------- ------- 2005 2004 % % ------- ------- Sterling 6.1 5.5 US Dollar 2.5 1.6 Other 2.2 2.8 ------- ------- The return on investments by asset class for the year was: Global Markets and 2005 Corporate Centre UK and Europe International Total £000 % £000 % £000 % £000 % Debt and fixed income securities 20,627 2.9 5,992 4.4 114 1.7 26,733 3.1 at fair value through income Equities and shares in unit trusts 4,294 10.8 7,524 15.2 460 10.8 12,278 13.1 at fair value through income Deposits with credit institutions/ 3,855 2.9 6,434 4.4 987 3.5 11,276 3.7 cash and cash equivalents ------- ----- ------- ----- ------- ------ ------ ------ 28,776 3.2 19,950 6.0 1,561 4.0 50,287 4.0 ------- ----- ------- ----- ------- ------ ------ ------ Global Markets and 2004 Corporate Centre UK and Europe International Total £000 % £000 % £000 % £000 % Debt and fixed income securities 14,703 2.6 5,473 4.9 - - 20,176 2.9 at fair value through income Equities and shares in unit trusts 3,409 9.0 4,853 11.2 309 5.7 8,571 10.3 at fair value through income Deposits with credit institutions/ 1,799 2.3 3,863 3.6 49 1.3 5,711 3.0 cash and cash equivalents ------- ----- ------- ----- ------- ------ ------ ------ 19,911 2.9 14,189 5.6 358 3.9 34,458 3.6 ------- ----- ------- ----- ------- ------ ------ ------ 6. Other operating income and expenses 2005 2004 £000 £000 Agency related income 3,044 6,212 Profit commission 9,807 3,508 Exchange gains 57,420 - Other income 11,026 5,392 ------- ------- Other income 81,297 15,112 ------- ------- Managing agency expenses 9,869 7,447 Overseas underwriting agency expenses 19,886 21,101 Connect agency expenses 6,135 2,155 Exchange losses - 35,576 Investment expenses 1,013 1,374 Other group expenses 10,070 3,787 ------- ------- Other operating expenses 46,973 71,440 ------- ------- 7. Employee benefit expense The aggregate remuneration and associated costs were: 2005 2004 £000 £000 Wages and salaries, including holiday pay and sabbatical 37,581 31,900 leave charges Social security costs 6,124 4,645 Share based payments cost of options granted to directors 2,059 1,194 and employees Pension costs - defined contribution 825 669 Pension costs - net expense arising on defined benefit plan 4,047 4,457 ------- ------- 50,636 42,865 ------- ------- The average monthly number of staff employed by the group was 514 (2004: 446) comprising 190 underwriting and 324 administrative staff (2004: 154 and 292 respectively). Of the total remuneration shown above, an amount of £14,433,000 (2004: £13,697,000) was recharged to the syndicate managed by Hiscox Syndicates Limited. 8. Reinsurance assets 2005 2004 £000 £000 Reinsurers' share of insurance liabilities 514,248 248,554 Provision for non recovery and impairment (7,872) (9,683) ------- ------- Total assets arising from reinsurance contracts 506,376 238,871 ------- ------- Amounts due from reinsurers in respect of claims already paid by the group on the contracts that are reinsured are included in loans and other receivables (note 10). 9. Financial assets and liabilities Financial assets and liabilities are all measured at their bid price fair values with all changes from one accounting period to the next being recorded through the income statement as provided for by IAS 39. 2005 2004 Fair Value Fair Value £000 £000 Debt and fixed income securities 1,028,795 833,963 Equities and shares in unit trusts 119,407 86,783 Deposits with credit institutions 89,576 58,637 ------- ------- Total investments 1,237,778 979,383 Derivative instrument assets (note 11) - 1,348 ------- ------- Total financial assets 1,237,778 980,731 ------- ------- 2005 2004 Fair Value Fair Value £000 £000 Short term borrowings from credit institutions 121,190 57 Derivative instrument liabilities (note 11) 5,056 - ------- ------- Total financial liabilities 126,246 57 ------- ------- Investments at 31 December are denominated in the following currencies: 2005 2004 £000 £000 Debt and fixed income securities Sterling 266,771 224,628 US Dollars 598,834 462,166 Euro and other currencies 163,190 147,169 ------- ------- 1,028,795 833,963 ------- ------- Equities and shares in unit trusts Sterling 93,916 63,787 US Dollars 24,990 22,996 Euro and other currencies 501 - ------- ------- 119,407 86,783 ------- ------- Deposits with credit institutions Sterling 89,455 58,637 US Dollars - - Euro and other currencies 121 - ------- ------- 89,576 58,637 ------- ------- 1,237,778 979,383 ------- ------- The table below illustrates the movements in financial assets during the year: Group 2005 2004 £000 £000 ------- ------- At 1 January 980,731 750,411 Net additions to investment portfolio 246,892 224,305 Net fair value gains/(losses) 10,155 6,015 ------- ------- At 31 December 1,237,778 980,731 ------- ------- 10. Loans and receivables a) Group 2005 2004 £000 £000 Gross receivables arising from insurance and reinsurance 351,051 258,424 contracts less provision for non recovery and impairment (1,018) (869) ------- ------- Net receivables arising from insurance and reinsurance 350,033 257,555 contracts ------- ------- Due from contract holders, brokers, agents and 302,571 223,167 intermediaries Due from reinsurance operations 47,462 34,388 ------- ------- 350,033 257,555 Other loans and receivables: Prepayments and accrued income 8,632 8,201 Net profit commission receivable 17,410 11,458 Accrued interest 6,943 5,428 Right to reimbursement of defined benefit obligation 5,462 7,345 Share of syndicate's other debtors balances 40,579 33,735 Other debtors including related party amounts 7,922 3,760 ------- ------- Total loans and receivables including insurance 436,981 327,482 receivables ------- ------- 11. Derivative financial instruments The group entered into a small number of foreign exchange cylindrical collar contracts in order to manage their exposure to a business denominated in a currency other than their presentational currency. At 31 December 2005 the net fair value position of the group's derivative exposure on these contracts was a financial liability of £4,892,000 (2004: asset of £1,348,000, included within financial assets). There were no expenses or charges incurred in the acquisition of the derivative contracts (2004: £nil). There were no realised gains or losses in the current or prior financial year. 2005 2004 Contract Fair Fair Contract Fair Fair notional value of value of notional value of value of amounts assets liabilities amounts assets liabilities US$000 £000 £000 US$000 £000 £000 Foreign exchange cylinder option contracts expiring: Within one year 160,000 297 4,010 - - - Between one and five years 50,000 472 1,651 75,000 2,126 778 After five years - - - - - - ------- ------ ------- ------- ------ ------ Total at 31 December 210,000 769 5,661 75,000 2,126 778 ------- ------ ------- ------- ------ ------ The group has the right and intention to settle the above contracts on a net basis. The group also entered into a foreign exchange forward contract during the year in order to manage the net investment in the Bermuda operation and currency exposures related to the proceeds raised from the rights issue. The contract requires the group to sell 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 2005, the fair value position of this contract to the group was a liability of £164,000 (2004: £nil). 12. Cash and cash equivalents 2005 2004 £000 £000 Cash at bank and in hand 370,165 61,332 Short-term bank deposits 43,594 58,231 ------- ------- 413,759 119,563 ------- ------- The short term 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 (a) 2005 2004 £000 £000 Gross Claims reported and loss adjustment expenses 815,307 478,050 Claims incurred but not reported 507,186 352,631 Unearned premiums 400,507 416,222 ------- ------- Total insurance liabilities, gross 1,723,000 1,246,903 ------- ------- Recoverable from reinsurers Claims reported and loss adjustment expenses 281,746 125,186 Claims incurred but not reported 186,054 70,544 Unearned premiums 38,576 43,141 ------- ------- Total reinsurers' share of insurance liabilities 506,376 238,871 ------- ------- Net Claims reported and loss adjustment expenses 533,561 352,864 Claims incurred but not reported 321,132 282,087 Unearned premiums 361,931 373,081 ------- ------- Total insurance liabilities, net 1,216,624 1,008,032 ------- ------- 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 2005 and 2004 are not material. (b) Claims developments 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 five 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 - gross at 100% level Accident year 2001 2002 2003 2004 2005 Total £000 £000 £000 £000 £000 £000 Estimate of ultimate claims costs as adjusted for foreign exchange*: At end of accident year 665,949 378,178 423,768 645,822 1,061,574 3,175,291 One year later 651,191 402,673 436,832 718,460 - 2,209,156 Two years later 721,274 408,262 411,662 - - 1,541,198 Three years later 743,075 393,389 - - - 1,136,464 Four years later 780,660 - - - - 780,660 Current estimate of cumulative claims 780,660 393,389 411,662 718,460 1,061,574 3,365,745 Cumulative payments to date (570,122) (262,890) (258,532) (357,584) (151,147) (1,600,275) ------- ------- ------- ------- ------- -------- Liability recognised at 100% level 210,538 130,499 153,130 360,876 910,427 1,765,470 Liability in respect of prior years at 100% level 82,193 ------- ------- ------- ------- ------- -------- Total liability at 100% level 1,847,663 ------- ------- ------- ------- ------- -------- Reconciliation of amounts disclosed at 100% level to liability disclosed in the group's balance sheet Accident year 2001 2002 2003 2004 2005 Total £000 £000 £000 £000 £000 £000 Current estimate of cumulative claims 780,660 393,389 411,662 718,460 1,061,574 3,365,745 Attributable to external names (244,919) (101,987) (114,132) (206,100) (282,883) (950,021) ------- ------- ------- ------- ------- -------- Group share of current estimate of cumulative 535,741 291,402 297,530 512,360 778,691 2,415,724 claims Cumulative payments to date (570,122) (262,890) (258,532) (357,584) (151,147) (1,600,275) Attributable to external names 172,850 62,572 68,215 104,519 37,275 445,431 ------- ------- ------- ------- ------- -------- Group share of cumulative payments (397,272) (200,318) (190,317) (253,065) (113,872) (1,154,844) Liability for 2001 to 2005 accident years 138,469 91,084 107,213 259,295 664,819 1,260,880 recognised on group's balance sheet Liability for accident years before 2001 - - - - - 61,613 recognised on group's balance sheet ------- ------- ------- ------- ------- -------- Total group liability - gross 1,322,493 ------- ------- ------- ------- ------- -------- * The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2005. Insurance claims - net at 100% level Accident year 2001 2002 2003 2004 2005 Total £000 £000 £000 £000 £000 £000 Estimate of ultimate claims costs as adjusted for foreign exchange*: At end of accident year 334,022 252,224 334,122 540,776 645,835 2,106,979 One year later 375,679 273,613 352,261 570,186 - 1,571,739 Two years later 446,385 287,307 323,048 - - 1,056,740 Three years later 485,328 267,929 - - - 753,257 Four years later 472,594 - - - - 472,594 Current estimate of cumulative claims 472,594 267,929 323,048 570,186 645,835 2,279,592 Cumulative payments to date (312,926) (167,841) (212,095) (294,764) (127,075) (1,114,701) ------- ------- ------- ------- ------- -------- Liability recognised at 100% level 159,668 100,088 110,953 275,422 518,760 1,164,891 Liability in respect of prior years 26,576 at 100% level ------- ------- ------- ------- ------- -------- Total liability at 100% level 1,191,467 ------- ------- ------- ------- ------- -------- Reconciliation of amounts disclosed at 100% level to liability disclosed in the group's balance sheet Accident year 2001 2002 2003 2004 2005 Total £000 £000 £000 £000 £000 £000 Current estimate of cumulative claims 472,594 267,929 323,048 570,186 645,835 2,279,592 Attributable to external names (141,884) (67,615) (88,449) (163,364) (164,110) (625,422) ------- ------- ------- ------- ------- -------- Group share of current estimate of cumulative claims 330,710 200,314 234,599 406,822 481,725 1,654,170 Cumulative payments to date (312,926) (167,841) (212,095) (294,764) (127,075) (1,114,701) Attributable to external names 89,168 37,092 55,841 87,187 31,202 300,490 ------- ------- ------- ------- ------- -------- Group share of cumulative payments (223,758) (130,749) (156,254) (207,577) (95,873) (814,211) Liability for 2001 to 2005 accident years recognised 106,952 69,565 78,345 199,245 385,852 839,959 on group's balance sheet Liability for accident years before 2001 recognised - - - - - 14,734 on group's balance sheet ------- ------- ------- ------- ------- -------- Total group liability - net 854,693 ------- ------- ------- ------- ------- -------- 14. Trade and other payables and deferred income 2005 2004 £000 £000 Creditors arising out of direct insurance operations 30,945 28,399 Creditors arising out of reinsurance operations 150,947 60,368 ------- ------- 181,892 88,767 ------- ------- Obligations under finance leases 449 370 Share of syndicate's other creditors balances 34,331 16,641 Reinsurers' share of deferred acquisition costs 2,496 4,552 Social security and other taxes payable 6,191 5,458 Other creditors 12,255 3,040 ------- ------- 55,722 30,061 ------- ------- Accruals and deferred income 33,562 26,702 ------- ------- Total 271,176 145,530 ------- ------- 15. Taxation The amounts charged in the income statement comprise the following: 2005 2004 £000 £000 Current tax expense 22,564 12,702 Deferred tax expense (973) 12,872 ------- --------- 21,591 25,574 ------- --------- The tax expense on the 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: 2005 2004 £000 £000 Profit before tax 70,221 89,522 ------- --------- Tax calculated at the standard UK corporation tax rate of 21,067 26,857 30% (2004:30%) Effects of: Expenses not deductible for tax purposes 687 3,822 Income not subject to tax (113) (3,221) Foreign tax, income tax and excess tax on controlled foreign (2,535) (536) companies Tax losses for which no deferred tax asset has been 1,011 112 recognised Prior year current tax 1,632 1,615 Prior year deferred tax 189 (1,736) Other items (347) (1,339) ------- --------- Tax charge for the period 21,591 25,574 ------- --------- 16. Retirement benefit obligations The gross amount recognised in the balance sheet is determined as follows: 2005 2004 £000 £000 Present value of funded obligations 137,533 99,229 Fair value of plan assets (101,409) (65,020) ------- ------- Present value of unfunded obligations 36,124 34,209 Unrecognised actuarial gains / (losses) (19,447) 509 Unrecognised past service cost - - ------- ------- Gross liability in the balance sheet 16,677 34,718 ------- ------- Included within loans and receivables (note 10) is a right to reimbursement of £5,462,000 (2004: £7,345,000) 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 actuarial 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 2005. 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: 2005 2004 At 31 December £000 £000 Equities and Property 81,577 58,497 Debt and fixed income securities 4,993 4,750 Cash 14,839 1,773 ------- ------- 101,409 65,020 ------- ------- The amounts recognised in the income statement are as follows: 2005 2004 £000 £000 Current service cost 2,916 2,997 Interest cost 5,228 4,921 Expected return on plan assets (4,767) (3,461) Net actuarial (gains) / losses recognised during the year - - Past service cost 670 - ------- ------- Total included in staff costs (note 7) 4,047 4,457 ------- ------- The actual return on plan assets was £15,531,000 (2004: £4,777,000). The movement in liability recognised in the balance sheet is as follows: 2005 2004 £000 £000 At beginning of year 34,718 33,334 Total expense charged in the income statement 4,047 4,457 Contributions paid (22,088) (3,073) ------- ------- At end of year 16,677 34,718 ------- ------- 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. The other principal actuarial assumptions used in determining the defined benefit scheme's obligation were as follows: 2005 2004 Discount rate 4.75% 5.40% Expected return on plan assets 5.79% 5.85% Future salary increases 4.00% 3.80% Inflation assumption 3.00% 2.80% Pension increases 3.00% 2.80% During the year the group contributed to the defined benefit scheme at the rate of 22.6% (2004: 22.6%) of pensionable salaries. Additional contributions of £19,400,000 were paid during 2005 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. 17. Earnings per share Basic Basic earnings per share is calculated by dividing the profit attributable to equity holders of the company by the weighted average number of ordinary shares in issue during the year, excluding ordinary shares purchased by the company and held as own shares. 2005 2004 Profit attributable to equity holders (£000) 48,630 63,948 Weighted average number of ordinary shares in issue after 310,797 300,653 adjustment for the rights issue (thousands) Basic earnings per share (pence per share) restated for 15.6p 21.3p the effects of the rights issue Diluted Diluted earnings per share is calculated adjusting the weighted average number of ordinary shares outstanding to assume 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. 2005 2004 Profit attributable to equity holders (£000) 48,630 63,948 ------- ------- Weighted average number of ordinary shares in issue 310,797 300,653 after adjustment for the rights issue (thousands) Adjustments for share options (thousands) 12,283 3,375 ------- ------- Weighted average number of ordinary shares for diluted 323,080 304,028 earnings per share (thousands) ------- ------- Diluted earnings per share (pence per share) restated for 15.1p 21.0p the effects of the rights issue ------- ------- Diluted earnings per share has been calculated taking into 11,829,000 (2004: 2,435,000) options under employee share schemes and 454,000 (2004: 940,000) options under SAYE schemes. 18. Dividends 2005 2004 £000 £000 ------- ------- Interim dividend for the year ended : - 31 December 2004 of 1.5p (net) per share - 4,383 - 31 December 2005 of 2.25p (net) per share 6,631 - Final dividend for the year ended : - 31 December 2003 of 2.9p (net) per share - 8,450 - 31 December 2004 of 3.5p (net) per share 10,286 - ------- ------- 16,917 12,833 ------- ------- A final dividend in respect of 2005 of 4.75 pence per share, amounting to a total dividend of 7 pence for the year, is to be proposed at the Annual General Meeting on 20 June 2006. These financial statements do not reflect this final dividend as a distribution or liability in accordance with IAS10 'Events after the Balance Sheet Date' Notes: 1. The financial information set out in this statement is extracted from the statutory accounts for the year ended 31 December 2005. The financial information for 2004 is derived from the IFRS restatement document published by the Group on 26 July 2005. Consequently the 2004 comparative information published herein does not constitute the statutory accounts of the Group for that year. The auditors have reported on the 2005 and the original 2004 UK GAAP accounts; their reports were unqualified and do not contain a statement under section 237(2) or (3) or the Companies Act 1985. The statutory accounts for 2005 will be delivered to the registrar of companies following the Annual General Meeting. 2. The Annual Report and Accounts for 2005 will be posted to shareholders no later than 8 May 2006 and will be delivered to the Registrar of Companies following the Annual General Meeting on 20 June 2006. Copies of the Report may be obtained by writing to the Company Secretary, Hiscox plc, 1 Great St Helen's, London EC3A 6HX. This information is provided by RNS The company news service from the London Stock Exchange

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