Hiscox 2012 preliminary results

RNS Number : 5369Y

Hiscox Ltd

25 February 2013

 

Monday 25 February 2013

Hiscox Ltd

Full year results for the year ended 31 December 2012

"A very good year"

	2012	2011
Gross premiums written	£1,565.8m	£1,449.2m
Net premiums earned	£1,198.6m	£1,145.0m
Profit before tax	£217.1m	£17.3m
Earnings per share	53.1p	5.5p
Total dividend per share for year	18.0p	17.0p
Net asset value per share	349.7p	323.5p
Group combined ratio	85.5%	99.5%
Return on equity	16.9%	1.7%
Investment return	3.1%	0.9%
Reserve releases	£152m	£199m

Capital return

Capital return of £200 million (50.0p per share including final dividend) by way of B share scheme

·      Final dividend equivalent of 12.0p taking total dividend for the year to 18.0p, an increase of 5.9% (2011: 17.0p)

·      Additional special distribution of 38.0p per share (approx. £150 million) combined with share consolidation

Operational highlights

·      Robert Childs replaces Robert Hiscox as Chairman on 26 February 2013; Richard Watson now Chief Underwriting Officer

·      Hiscox London Market profit of £121.9 million (2011: £57.6 million) with contributions across all lines

·      Hiscox Bermuda delivered a pleasing profit despite Superstorm Sandy

·      UK retail business delivers another good profit of £45.2 million (2011: £49.0 million)

·      Hiscox USA revenues grew by 32.6% to $230.5 million. US Direct business increased by over 200% to nearly $10.0 million GWP with strong continued growth prospects

Robert Hiscox, Chairman of Hiscox Ltd, commented:

"In my last year as Chairman we have made a very good profit despite the second costliest storm on record and a challenging investment market. As a result we are in a position to return capital to shareholders while retaining a strong capital base. The Group not only has a balanced account with great prospects, but more important, has excellent people led by a talented and experienced management team. The future looks as exciting as the past has been for me."

For further information:
Hiscox Ltd
Jeremy Pinchin, Group Company Secretary Kylie O’Connor, Head of Group Communications, London	[phone] [phone]
Brunswick
Tom Burns Clemmie Raynsford	[phone]

Notes to editors

About Hiscox

Hiscox, the international specialist insurer, is headquartered in Bermuda and listed on the London Stock Exchange (LSE:HSX). There are three main underwriting parts of the Group - Hiscox London Market, Hiscox UK and Europe and Hiscox International. Hiscox London Market underwrites 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 USA.

For further information, visit www.hiscox.com

Chairman's statement

It is a nostalgic moment to be writing my last Chairman's Report, and pleasing to be able to announce a solid profit. The year had its catastrophic moments, but as we grow bigger and more balanced, we can absorb Mother Nature's punches and the vicissitudes of accidents and criminal acts with greater ease.

Since I announced last year that I would be stepping down as Chairman, I have been asked to look back over my years in the insurance world and have enjoyed the memories of growing the business from days of buccaneering in a lawless market place, through the Lloyd's crisis and recently through stronger and stricter strait-jackets of rules and regulations. But I get greater pleasure from looking forward at the future opportunities for this business as it moves into its next era. I would not be stepping down if I were not absolutely sure that the business is in great shape and the next generation are more than qualified to take it to the next level.

Results

The result for the year ending 31 December 2012 was a profit before tax of £217.1 million (2011: £17.3 million) on a gross written premium income of £1,565.8 million (2011: £1,449.2 million). The combined ratio was 85.5% (2011: 99.5%). Earnings per share were 53.1p (2011:5.5p) and the net assets per share rose to 349.7p (2011: 323.5p). The return on equity was 16.9% (2011:1.7%).

Dividend, balance sheet and capital management

The Board has reviewed the capital requirements of the Group for the coming year and has proposed that a special distribution of 38.0p per share (amounting to approximately £150 million), should be made. This will reduce capital levels close to those of the 2012 opening balance sheet, effectively distributing all of this year's profit to shareholders which will have a favourable impact on both the Group premium to capital gearing ratio and return on capital, whilst still providing sufficient headroom above existing internal and external capital needs. This proposed return of capital will be made by way of a B share scheme and will be combined with a share consolidation.

In addition, a sum of 12.0p per share will be paid instead of a final dividend for the year ended 31 December 2012 as part of the B share scheme. This amount, together with the interim dividend of 6.0p per share, represents a total dividend for 2012 equal to 18.0p per share (2011:17.0p), an increase of 5.9%, in line with our policy of progressive dividend growth. As a result of this amount being paid as part of the B Share Scheme, a scrip dividend alternative will not be offered to shareholders.

Full details of the proposed return of capital and final dividend equivalent will be set out in a circular expected to be despatched to Hiscox shareholders on or around 26 February 2013.

The business

As ever, Bronek will comment in detail in his following report on the various business activities. I would like to comment on the current state of the business that I have helped develop over the last 48 years and its future opportunities.

The basic underwriting strategy

When I stopped underwriting for our Lloyd's Syndicate in 1988, the 'retail' account of relatively simple insurance business was 50% of the portfolio, the balance being internationally traded reinsurance and large insurance business. That balance remains roughly the same to this day, albeit over a larger and more diverse Group.

We have created insurance companies in the UK, Guernsey and the US to underwrite the simpler business, and one in Bermuda to augment our strong reinsurance presence.  We have the huge advantage of all our underwriters being able to use one of our local companies if suitable or Lloyd's with its great brand, financial strength and worldwide licences.

Catastrophe and Internationally traded business

The core profit earner remains our founding London Market business.  I believe that London will retain its prominence in the world of internationally traded business, and that Lloyd's will be the strongest magnet in that market.

The catastrophe and major loss business currently looks very volatile with international political unrest and more disturbed weather patterns. This is an opportunity for us as it keeps demand up and the weaker competitors away.

Bermuda is a great addition to our involvement in that business and they and London work in parallel to widen the distribution and to grow diversified accounts.

We will continue to study the alternative risk transfer methods that are being developed and use them or write them, depending on the price levels.

The London Market division also writes a successful balancing book of non-catastrophe business in London and through other offices worldwide.

Retail insurance business

The accounts that we call 'retail' business are very close to my heart as when I underwrote at the box, I built up those accounts leaving the larger risks to my partner Nicholas Thomson. I always thought that the retail accounts were worth building up for their stability. In 1988 we set about widening our distribution to non-Lloyd's brokers and into Europe, and later in 1996 we bought an insurance company to take the retail account. We paid £28 million for the company (including a £6 million premium over assets) which seemed a high price, and I remember being warned by our investment banker that we were betting the bank. It is highly satisfactory to see the UK and European businesses make a profit of nearly £50 million this year. A pretty good investment.

The growing retail accounts are very important to us as they give stability to our profitability and add real value as steady profits are rated at a greater multiple. We have invested heavily into them both in terms of money and effort as we believe them to be core to our building a balanced and steadily more valuable business.

Overseas expansion

We first expanded the retail account into Europe, starting in 1993, and it has taken time to reach critical size. It is easy to see Europe as one geographical area when it is immensely different in the business practices in each country despite 38 years of efforts to create a Single Market.  We are winning there and the next few years should see a steady increase in profitability.

Next we set up our Guernsey operation which has been a huge success and will remain a hub for some of our accounts.

Bermuda followed and that too has been very successful. Robert Childs, who is due to take over from me as Chairman, set up the Bermuda company, and proceeded shortly afterwards to open our US offices. We have made a big commitment to the US and I am very excited at the possibilities.

We are well aware of the graveyard of businesses which have expanded overseas, so having expanded in the sophisticated (but battered) economies of Europe and the US, we will consider any expansion east or to other emerging economies with great caution. It will happen when the right opportunity arises.

Marketing

I have always firmly believed that if you are good at what you do you should make every effort to spread that good news to potential clients. I think our marketing has done just that and I must congratulate Steve Langan who heads our UK retail side and masterminds our worldwide marketing. It has made us stand out from the crowd, has given us standards to live up to, has pulled in a great amount of business and has been a very good investment.

IT

I bore my colleagues by banging on that we should be an IT company with insurance attached, not an insurance company which uses IT. We are good at underwriting which we have done overall successfully for 112 years, but the next era will be dominated by IT, from an increasing competitive advantage from management information, especially in calculating underwriting rates, to distribution of policies. The company with the best IT and the ability to use it well will win.

Investments

Investment income has contributed on average 50% of our profits in the past, but today's low interest rates make that impossible in the near future without phenomenal risk taking. The low returns from the bulk of our portfolio of Government bonds give little protection against the potential volatility from any risk assets we own. David Astor, our Chief Investment Officer, works tirelessly to eke extra yield without undue risk and has nearly hit that 50% this year despite difficult conditions.

Insurance politics

The year has seen us conquer the burden of Solvency ll and I think achieve greater harmony with our regulator, freeing us up to get on with making money. The financial burden of the implementation of Solvency ll on us and the industry has been considerable. After 48 years of assessing risks, which is what underwriting is, it was surreal to have a one size fits all model for assessing the risks in the business inflicted on us in minute detail by actuarially driven regulators, combined with corporate governance diktats imposing huge expectations on non-executive directors combined with an extra layer of risk assessment staffing.

The FSA is about to be split in two into prudential and conduct supervision under the Bank of England with the duty to ensure we are able to pay claims when they fall due. I could wish that we had one regulator to form a relationship with and not two as there is always a fear of duplication or of something falling between the two stools, but we are where we are. We need effective regulation as the whole industry suffers when an insurer misbehaves or becomes insolvent. The FSA has taken virtually all self-regulation away from our industry which means that by definition we are invigilated and regulated by people with little or no trading experience in our business. We need good regulation, and to help the regulator I wish that all entities involved in general insurance, from the ABI, the International Underwriters Association, the Chartered Insurance Association and  Lloyd's, would form a General Insurance Body to be a strong lobby and, to an extent, a self-regulating body. We in the industry know when a competitor is going to go bust as we trade against them and see the folly; we ought to have a system of warning the regulator. And we desperately need a strong lobby to fight for us in the corridors of power. For instance, when a very senior politician starts attacking the insurance industry for its performance over flood damage, someone needs to hit back very hard with the truth.

The next era

I set out to run an honest business, to choose the best people to help me run the business, and to pick honest and careful clients who we would treat with great integrity and efficiency.  The ability to pick the right people is to me the most important talent in all of life. My first major delegation was to Nicholas Thomson who was a brilliant underwriter and we owe him a huge debt of gratitude for the strong underwriting discipline he instilled. The next major delegation was to Bronek Masojada who joined in 1993 as Managing Director to help run the company and took the reins as CEO in 2000. Like an Oscar winner I would like to mention a whole host of others who have been indispensable, especially Alec Foster who handled our Lloyd's members in the early days and invested all our money so wisely, but space does not permit.

We have spent the last era building businesses both inside and outside Lloyd's and I believe we have developed some very strong future profit generators to add to our existing international and retail businesses. I hand over to Robert Childs (who has done incredibly valuable work at Hiscox for 26 years) and the top team with a happy heart. I have had fantastic fun building the business, and it will be just as enjoyable watching the success in the next era.

Robert Hiscox

25 February 2013

2012 Chief Executive's report

Fires, storms and floods are the everyday experience of insurance companies. 2011 was exceptional in its severity so in comparison 2012 felt like a more normal loss experience, despite it being the third most expensive year on record for major catastrophes. We dealt with record flood activity in the UK, Superstorm Sandy in the US, fine art thefts in Europe, fires in substantial properties across the world and the sinking of Costa Concordia. A profit of £217.1 million (2011: £17.3 million) and return on equity of 16.9% (2011: 1.7%) is therefore a good result and was driven by a combination of good underwriting performance and an excellent (for current market conditions) investment return. Our aim is to make good profits in years such as 2012, small profits in poor years (as we saw in 2011) and exceptional profits in very low loss frequency years.

Our strategy remains to build balance and diversification within the business. We saw good growth in the London Market, Bermuda and particularly the United States. Profits flowed from our London Market, UK, Bermuda and Guernsey businesses, offsetting the ongoing investment in the United States.

Hiscox London Market

Hiscox London Market business remains a powerhouse. Exceptional underwriting and a well diversified portfolio have delivered a profit of £121.9 million (2011: £57.6 million) with every division contributing.  Gross premium income grew by 9.3% to £640.0 million (2011: £585.4 million). The business achieved a combined ratio of 75.5% (2011: 89.1%) despite Superstorm Sandy and some large individual claims such as Costa Concordia. I review each division in turn below.

·      Reinsurance: The many catastrophes of 2011 provided significant opportunities in 2012 as rates doubled in some loss affected areas. We increased market share in Japan and maintained a good position in other territories. The team delivered a very strong result despite the impact of Superstorm Sandy which we reserved for the Group as a whole at a net £90 million.

We continue to underwrite catastrophe business in London and Bermuda on behalf of third parties. It is a profitable use of our expertise and gives our partners valuable diversification.  For several years we have been underwriting a book on behalf of Aviva and this quota share arrangement came to an end in 2012. Aviva have been a good partner, and whilst we are sorry to see the end of the relationship we have more than replaced their support with capital from other sources - a testament to our team's reputation and track record.

Market conditions remained attractive at the important 1 January renewals, with rates flat to positive in the key North American territories and softening in international markets. Overall reinsurance rates are still healthy.

·      Property: Our Property division delivered a good profit. It grew strongly in US small commercial, personal and onshore energy lines and was only marginally affected by Superstorm Sandy. The fire, theft and collision insurance book performed less well. This business tends to be less catastrophe exposed and so should be a source of stable profits within the division. We will be working hard to achieve this in 2013.

·      Global Response: The Global Response team serves clients around the world, covering personnel and property for kidnap and ransom, terrorism, war and political violence risks. 2012 proved to be calmer than 2011 and this has produced a strong result. The market in which we operate requires a high degree of service and responsiveness, and our team continues to deliver to the highest standards, maintaining our market leading position. The world remains a volatile place, and companies are increasingly looking to protect their assets. We have the expertise and are well placed to help.

·      Marine and Energy: The team had a good year with profits and growth in offshore energy more than offsetting the Costa Concordia loss which is expected to settle at net $20 million. To the wider industry this loss has deteriorated, mainly due to the rising costs of removing the wreck. As the world becomes more environmentally conscious this type of expense will continue to increase, and we expect this to be reflected in future premiums for marine liability and related risks. In addition our offshore energy team have performed exceptionally well.

Marine liability insurance is one of the oldest risks in the London Market and is proving to be at the cutting edge of modernisation for Hiscox. We have given retail brokers the ability to place smaller risks quickly and cost effectively directly with us online and this investment in e-trading has delivered modest premiums in 2012 which we expect to grow in 2013. We will also be looking to trade in this manner in other lines of business.

·      Casualty: The casualty market remains a challenging place and we continue to reduce our lines as the rates on offer remain inadequate. We do, however, believe that ultimately economic sanity will prevail and the market will inevitably harden. In preparation, during the course of 2012 we recruited several senior staff to build on our existing team. The division has performed well at the bottom-line, as we have benefited from releases in prior years - demonstrating our prudent approach to reserving.

·      Aviation and Space: Both lines continue to make steady profitable progress. Pricing in the aviation market remains challenging, but our risk selection and hence loss experience has remained exemplary, so results are very acceptable for our second year of underwriting this class of business. There has been increased launch activity in the space market leading to slightly higher volumes. As the global economy continues to depend on more support from extraterrestrial services, we believe this business will grow steadily over time.

Our London Market business has a global remit. It makes use of the Lloyd's brand name and licences to write business located around the world. Lloyd's is making steady progress to enhance its own licence network, and we at Hiscox are supportive of all efforts to expand the range of licences the market has for  both reinsurance and insurance. We are particularly supportive of licensing which allows us to trade from London without the costs of teams on the ground. In 2012 we saw the benefit of doing this with the significant expansion of our Japanese and Thai reinsurance exposures, and the insurance support we were able to give the New Zealand economy to enable the rebuilding of Christchurch. All of this business was underwritten from London, backed by extensive visits to local clients and brokers. We hope that as regulators get more parochial they will remember the benefits of accessing global expertise and capital, and will not restrict our ability to trade in this way.

Hiscox UK and Hiscox Europe

In 1987 we took our first step into UK retail business (or local specialty insurance) moving into Continental Europe in 1993. By 2012 our businesses had expanded materially, writing premium income of £507.5 million (2011: £498.0 million) and delivering a profit of £49.1 million (2011: £51.5 million). There is plenty of room to grow in these markets and I remain confident that we have the products, expertise and brand to continue to expand.

·      Hiscox UK. Our UK business made another excellent profit of £45.2 million (2011: £49.0 million) despite spending more on marketing and paying record flood losses. The business benefited from a good investment return and good underwriting. Growth in commercial product lines offset the cancellation of two high net worth underwriting partnerships, resulting in an increase in revenues of 2.2% to £375.2 million (2011: £367.1 million). The progress in our core lines is set out below:

The high net worth business delivered a strong profit despite the largest single loss in its history - a London house fire. Premium income shrank slightly reflecting the previously announced withdrawal from two partnerships which did not live up to expectations. We also experienced the greatest level of flood activity in our history, paying claims to the value of £14 million in flood and storm losses. You only find out the worth of your insurer when you make a claim so it is pleasing that during this busy year our team lived up to its reputation for excellence, winning 'The British Insurance Awards Customer Care' accolade. In the competitive luxury motor market we reached maturity with a second year of profit, our service and brand setting the team apart.

Our professions, speciality commercial, and technology lines have made good progress. We launched five new professional indemnity products during the year specifically for the unique risks professions such as facilities managers and interior and garden designers face. These products have sold well, filling a real customer need. Recessionary related claims have not been as severe as we had expected.

The direct business continues to propel the brand. We increased our marketing spend in the year by £4 million and returned to TV with an advertising campaign that promotes our ethos of trust, honesty and fair customer service. An unexpected outcome has been the strength with which our broker partners have identified with this message, reinforcing our relationships. The direct household products have been held back by challenges within our online platform hampering our flexibility in pricing. We are investing in 2013 and beyond to address this. Our commercial products continue to move ahead despite an increasingly competitive market. Again the brand and our service reputation are real differentiators. Competitors can copy our wordings, but these more intangible elements are real protective moats to our business.

In 2013 Hiscox UK has a big agenda. Distribution for the insurance market has evolved over the years; it is no longer as black and white as broker versus direct. We are launching a tied agency to address gaps in our current model, working direct and in partnership with specialist commercial brokers who don't have in-house private client expertise but who want to offer a Hiscox home insurance policy to their clients. We also announced our plans to open a multi-function office in York during 2013, with progressive in-sourcing of some of our direct customer service centres. We have had effective relationships with our outsourcing partners for over a decade, but we feel that the next stage in our journey requires greater control over critical aspects of our customer service.

·      Hiscox Europe. Our European business has reached its fourth consecutive year of profitability. Revenues have grown by 5.9% to €160.4 million (2011: €151.4), though only 1.1% to £132.3 million when looked at in sterling. Profits grew to £3.9 million (2011: £2.4 million) despite increased marketing spend to support our French direct business. The combined ratio rose to 100.9% (2011: 100.5%), with improved investment returns driving the profit. Combined ratios and returns on equity are being challenged by the European economy and issues of scale.

The combined ratio challenges have come from two fronts. First we have seen some recession related claims; jewellery thefts in public places, aggressive home invasions, and some large fine art thefts. The second is our expense ratio. This is driven by increased marketing expenditure to support the growing direct business in France, and also an increasing focus on smaller ticket business. This business is attractive from a loss ratio perspective, but initially it does drive up operating cost. We will be working in 2013 to re-engineer our business to bring this ratio down.

We continue to see opportunity in Europe. Partnerships with major financial institutions have performed well and are expanding from their commercial focus to high net worth personal lines. We also expect in time to see the broader brand benefit from our direct activities. We were on French TV for the first time ever in 2012. This supported our small direct business, and is also, reflecting our UK experience, driving brand recognition and perception in the broker channel. We will be launching a direct business in Germany in 2013, and I am confident that in time, the German and French business will replicate the success we enjoy in the UK.

Hiscox International

Hiscox international comprises our activities in Bermuda, Guernsey and the United States. In aggregate they had a good year, though obviously not as positive as it might have been without Superstorm Sandy which materially impacted both our Bermudian and United States businesses. Each of the three business's progress is discussed below.

·      Hiscox Bermuda. Our main focus in Bermuda is on reinsurance with an emerging presence in healthcare. Revenues grew by 11.5% to $318.1 million (2011: $285.2 million). Profits grew substantially despite the cost of Superstorm Sandy. This performance reflects strong growth in the reinsurance business with a focus on areas like Japan, Thailand and Australia which were particularly affected by natural catastrophes in 2011. Healthcare made steady progress.

The reinsurance market is evolving and we must change with it. New forms of capital are entering the industry, selling collateralised policies or buying catastrophe bonds issued by cedents like Hiscox, in competition with traditional markets. For a number of years we have invested in a small portfolio of catastrophe bonds issued by cedents. In 2012 we invested in a fund managed by Third Point Reinsurance Investment Management Ltd and took a stake in the firm. After all, a catastrophe bond is no more than a reinsurance contract and a bond investment linked together. We will also be ceding tailored portfolios of catastrophe reinsurance exposure to the fund. We need to adapt as the market adapts and this helps us to do so.

·    Hiscox Guernsey. This business underwrites kidnap and ransom, piracy, fine art, terrorism and personal accident insurance. It delivered a very good profit even though revenues declined by 8.5% to £73.0 million (2011: £79.8 million). This is due to a disciplined approach to underwriting piracy and business that was previously signed in three year deals to take advantage of good terms, prices and conditions. The team continues to concentrate on expanding its distribution into new territories.

·      Hiscox USA. Our US business made excellent progress during the year. Revenues grew by 32.6% to reach $230.5 million (2011: $173.8 million), with strong growth across every office and in every product. The business was performing well ahead of plan at the bottom line until Superstorm Sandy. We suffered losses on our construction account with most other areas escaping relatively unscathed. As they mature our professional liability accounts are developing well - a reflection of early prudent reserving. During the year we launched 'Hiscox One', a one-stop modular insurance cover for film and television productions. It is the first integrated product on the market and has been received well. The direct business continued to expand, reaching almost $10 million in premium income (2011: $3 million) with some exciting prospects in store for 2013. We will continue to market the products online in 2013, and test brand advertising on billboards, specialist publications and other print media in Austin and San Diego, with the aim to accelerate growth in these key markets.

The US business is on track and we continue to invest in driving it to success. Our ambition is that the broker channel business will be profitable in 2013, assuming a normal loss year. The ongoing marketing investment in the direct business will hold back profitability in the short-term, but as we grow in knowledge and experience in the US we anticipate more rapid success.

Claims

When you sell insurance, claims are something you anticipate and plan for and at Hiscox we pride ourselves on settling our client's claims swiftly and fairly. As highlighted at the start of my report we had a busy year. Costa Concordia and Superstorm Sandy hit the headlines, but there was lots of other activity.  2012 was a year of dramatic weather in the UK and Hiscox UK received 1,500 storm and flood claims with related claims paid of £14 million, nearly five times the previous year.

Handling claims well requires a balance of thorough process and controls as well as an ability to deal with claimants and their brokers. During the year we completed the implementation of a new claims management solution for Hiscox London Market which has transformed the way we do claims in that area, leading to better decision making, enhanced productivity and improved indemnity costs. In a 2012 independent survey of claims brokers we continued to score favourably for broker satisfaction and with the enhancements in service that the new system will allow, we are hopeful that our perception in the market will improve further in the year ahead. In our UK and European businesses, customer satisfaction with our claims handling has continued to improve, and effective claims handling continues to set us apart in the market.

Hiscox's cautious reserving philosophy is again reflected in reserve releases of £152 million, down from releases of £199 million in 2011.

Operations and IT

The key ingredients for a successful insurer are capital, good people and effective IT. IT is a significant expenditure for the Group and is likely to increase in the short to medium term with the objective of improving distribution and service. In 2012 we developed a Group IT strategy, providing a clear roadmap for activity over the next five years.

The day-to-day delivery of services to brokers, customers and within the Group is continually improving. As the company grows, we can never be satisfied and will continue to look at ways to improve processes and minimize expenses. We have undertaken various lean management initiatives across the Group in 2012 including: improving how we operate our small commercial insurance lines in Europe, introducing a client focused underwriting centre in the US and significantly increasing the amount of time underwriters spend on broker activity in the UK through the creation of virtual teams aligned to each UK region. Each of these steps has progressively improved service reliability and predictability. In 2013 the focus will be on using the momentum of 2012 to maintain service whilst reducing cost.

Investments

Hiscox's focus on property related insurance means that our invested assets, when measured relative to our premium income, are lower than the industry average. Despite this, investment income has historically accounted for about 50% of our profits. We began the year with cautious expectations given the low interest rate environment and our view that a lot could have gone wrong during the year. However, our worst fears were not realised and, with a fair wind from central banks, the investment result exceeded our expectations - and accounted for 42.6% of our profits, only just below the longer term average. We achieved a total return of £92.7 million before derivatives equating to a yield of 3.1% (2011: £25.9 million, 0.9%).

Our asset allocation changed little during the year. In the bond portfolios, duration was kept short and a healthy weighting towards non government bonds was maintained. We made some alterations to the selection of equity and hedge fund managers but our overall exposure remained constant at around 6% of assets. With the words and actions of central bankers reassuring investors that interest rates would be kept low and a financial upheaval, particularly in Europe, would not be tolerated, a 'risk on' mentality eventually prevailed. This served us well as non government bonds and equities were much in demand.  Our bond portfolios all beat their benchmarks and benefited from the narrowing of credit spreads and, unlike the previous year, there was not much opportunity cost to being short duration. The risk assets portfolio produced particularly strong returns both in absolute terms and relative to market indices.

Whilst the investment world may look a safer place in 2013, plenty of uncertainty still exists and the portfolio is cautiously positioned overall both from a duration and credit quality standpoint. After such a favourable period for bonds, the yield to maturity of our portfolios has declined over the year and our expectation of returns from them in 2013 is therefore correspondingly reduced. We do, however, retain an appetite for sensible risk, hence our continued allocation to equities. We feel they offer a better risk reward ratio than exists in the higher yielding bond and structured credit strategies where we continue to resist temptation.

Capital management

We announced today a special distribution of approximately £150 million, equal to 38p per share, which is on top of the final dividend equivalent of 12p. This takes our total capital back to approximately the level at the start of 2012. A lot of detailed analysis has been done to support this decision, but in essence we feel that we started the year in a strong capital position, and looking forward we can see that our prospective profits will generate enough capital to support our growth so that there was no need to retain our after-tax profits for the year.

Our leadership and our people

As announced 12 months ago Robert Hiscox steps down as Chairman with the presentation of these results. Robert's record of successful leadership is unparalleled in the insurance industry and his contribution has rightly been recognised publicly over the year. When Robert took the reins at Hiscox in 1970 annual revenues amounted to £2.3 million; this has grown to £1.6 billion in 2012. Robert has accepted the role of Honorary President and we look forward to his ongoing sage counsel.

The board undertook a thorough selection process in recruiting Robert's successor. I am delighted that they have chosen Robert Childs, our Chief Underwriter who has been with us for 26 years. This decision has been greeted very warmly within Hiscox and the industry.

There is a great benefit to having someone who knows the detail of our business in the role of Chairman. The greatest risk to the prosperity of our business is the success of its underwriting. In insurance the premiums are visible whilst the risks only become visible when the claims occur - when it is too late to change course. As the banks have shown, even the most sophisticated systems cannot adequately surface some critical risks on a timely basis. As Chairman, Robert Childs will have the enormous advantage of understanding where the risks lie, which ones are easy to measure and monitor and which will rely on judgement and feel. He also has the experience of dealing with a huge industry loss and knows that reacting in the right way is often the determinant of success in these tough situations.

Beyond the more visible Chairman's succession, we have made some other senior executive moves. In June Richard Watson returned from the US where he served as Chief Executive to become Deputy Chief Underwriting Officer and he now succeeds Robert Childs as Group Chief Underwriting Officer. Richard made a major contribution to shaping our US business, setting it on a successful path. His experience managing the London Market business and a more retail environment in the US makes him well placed to oversee our underwriting culture. Ben Walter replaced Richard Watson as Chief Executive of Hiscox USA. Ben joined us two years ago as Chief Operating Officer of Hiscox USA from the fund management industry. Gary Head, the Chief Underwriting Officer of Hiscox UK has moved to the US to serve as its Chief Underwriting Officer. Charles Dupplin returned to the UK from Bermuda where he served as Chief Executive of Hiscox Bermuda, and Group Company Secretary. He will continue as Head of M&A and Special Projects, a role he had in Bermuda, but which received less attention with his other responsibilities. Jeremy Pinchin has succeeded Charles as CEO of Hiscox Bermuda and Company Secretary, whilst remaining Group Head of Claims. All of these moves have entailed personal challenges for the individuals and their families and I am grateful for the sacrifices they have made to help us build our business.

The broad Hiscox team make their contributions in many roles, geographies and disciplines. It is the dedication to excellence that builds our reputation as a Group. Our excellent marketing can deliver the message, but I am always personally gratified to be complimented on a claim paid well, a risk well underwritten or a recruitment process thoughtfully handled. These are all the result of individual decisions well executed - the personal standards of each person involved shining through. Our many staff deserve our thanks and it is great that their efforts have been justly rewarded in good performance.

Outlook

As I said at the start of my statement, 2012 was a more normal year for the global industry after the challenges of 2011. That means that we do not expect material upward or downwards pressure in pricing.  Reinsurance pricing is up slightly in areas closest to recent losses - in the US East Coast, Japan and parts of Asia. In the US domestic market there are reports of slight upward movement in some areas for the second year in a row. Parts of the UK are very competitive, whilst others are benign, so our aggregate expectation is for a stable pricing environment where good risk selection, good underwriting and good service will be rewarded. Investment returns will likely trend down reflecting the broader financial market.

Looking further ahead than 12 months I believe we have the ability to materially grow the size of our business within the classes and geographies in which we currently operate. In our most developed retail market, the UK high net worth area, we still have only single digit market share, so the opportunity here is significant, not to mention the opportunities in other territories. Our retail commercial market share is even smaller, and our direct businesses have just begun. In our internationally traded businesses we are a smallish player other than in a few very specific segments, so again we have the opportunity to grow and develop. Expansion of our geographic footprint could also create new opportunities.

As I enter my twentieth year at Hiscox, I remain enthusiastic and optimistic for the opportunities ahead. I remain impatient and unsatisfied that we have not captured more of them already - a trait I have had bred into me by Robert Hiscox - and I am sure that with a steady determined focus on winning clients one at a time we will continue to grow our business profitably to the satisfaction of clients, staff and shareholders.

Bronek Masojada

25 February 2013

CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2012

		Note	2012 Total £000		2011 Total £000
Income
Gross premiums written		4	1,565,819		1,449,219
Outward reinsurance premiums			(297,679)		(275,208)
Net premiums written		4	1,268,140		1,174,011
Gross premiums earned			1,487,859		1,428,954
Premiums ceded to reinsurers			(289,238)		(283,947)
Net premiums earned		4	1,198,621		1,145,007
Investment result		7	92,424		24,495
Other revenues		9	13,930		17,322
Revenue			1,304,975		1,186,824
Expenses
Claims and claim adjustment expenses, net of reinsurance		17	(538,826)		(697,898)
Expenses for the acquisition of insurance contracts			(283,615)		(269,792)
Operational expenses		9	(236,202)		(203,204)
Foreign exchange (losses)/gains			(20,173)		7,816
Total expenses			(1,078,816)		(1,163,078)
Results of operating activities			226,159		23,746
Finance costs			(8,605)		(6,698)
Share of (loss)/profit of associates after tax			(430)		223
Profit before tax			217,124		17,271
Tax (expense) /credit		19	(9,352)		4,001
Profit for the year (all attributable to owners of the Company)			207,772		21,272

Earnings per share on profit attributable to owners of the Company
Basic		20	53.1p		5.5p
Diluted		20	50.9p		5.3p

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2012, AFTER TAX

			2012 Total £000		2011 Total £000
Profit for the year			207,772		21,272
Other comprehensive (loss)/income
Currency translation (losses)/gains (net of tax of £nil (2011: £nil))			(35,806)		11,060
Total other comprehensive (loss)/income			(35,806)		11,060
Total comprehensive income recognised for the year (all attributable to owners of Company)			171,966		32,332

The related notes 1 to 22 are an integral part of this document.

CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2012

	Note	2012 £000	2011 £000
Assets
Intangible assets		69,617	67,552
Property, plant and equipment		18,055	18,155
Investments in associates		9,054	6,380
Deferred tax		25,608	25,748
Deferred acquisition costs		166,041	150,050
Financial assets carried at fair value	12	2,406,269	2,368,636
Reinsurance assets	11	540,389	492,515
Loans and receivables including insurance receivables	13	492,064	507,722
Current tax asset		1,513	69,436
Cash and cash equivalents	16	657,662	516,547
Total assets		4,386,272	4,222,741
Equity and liabilities
Shareholders' equity
Share capital		20,703	20,563
Share premium		41,313	32,086
Contributed surplus		245,005	245,005
Currency translation reserve		24,711	60,517
Retained earnings		1,046,652	897,728
Total equity (all attributable to owners of the Company)		1,378,384	1,255,899
Employee retirement benefit obligations		-	-
Deferred tax		138,362	152,447
Insurance liabilities	17	2,596,612	2,500,260
Financial liabilities	12	301	-
Current tax		6,998	-
Trade and other payables	18	265,615	314,135
Total liabilities		3,007,888	2,966,842
Total equity and liabilities		4,386,272	4,222,741

The related notes 1 to 22 are an integral part of this document.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

		Note	Share Capital £000	Share Premium £000	Contributed Surplus £000	Currency Translation Reserve £000	Retained Earnings £000	Total £000
Balance at 1 January 2011			20,297	15,800	245,005	49,457	935,555	1,266,114
Total recognised comprehensive income for the year (all attributable to owners of the Company)			-	-	-	11,060	21,272	32,332
Employee share options:
Equity settled share based payments			-	-	-	-	8,677	8,677
Proceeds from shares issued			91	3,124	-	-	-	3,215
Deferred tax			-	-	-	-	(3,927)	(3,927)
Scrip dividends			175	13,162	-	-	-	13,337
Dividends paid to owners of the Company		21	-	-	-	-	(63,849)	(63,849)
Balance at 31 December 2011			20,563	32,086	245,005	60,517	897,728	1,255,899
Total recognised comprehensive income for the year (all attributable to owners of the Company)			-	-	-	(35,806)	207,772	171,966
Employee share options:
Equity settled share based payments			-	-	-	-	6,135	6,135
Proceeds from shares issued			52	1,649	-	-	-	1,701
Deferred tax			-	-	-	-	5,190	5,190
Scrip dividends			88	7,578	-	-	-	7,666
Dividends paid to owners of the Company		21	-	-	-	-	(70,173)	(70,173)
Balance at 31 December 2012			20,703	41,313	245,005	24,711	1,046,652	1,378,384

The related notes 1 to 22 are an integral part of this document.

CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2012

		2012 £000	2011 £000
Profit before tax		217,124	17,271
Adjustments for:
Interest and equity dividend income		(45,699)	(50,333)
Interest expense		8,605	6,698
Net fair value (gains) / losses on financial assets		(37,654)	30,878
Depreciation and amortisation		7,833	8,098
Charges in respect of share based payments		6,135	8,677
Other non-cash movements		1,239	(1,070)
Effect of exchange rate fluctuations on cash presented separately		9,481	(1,451)
Changes in operational assets and liabilities:
Insurance and reinsurance contracts		(8,245)	138,667
Financial assets carried at fair value		(49,377)	78,501
Financial liabilities carried at fair value		301	(457)
Other assets and liabilities		12,850	(18,888)
Cash flows from operations		122,593	216,591
Interest received		51,743	50,244
Equity dividends received		1,631	1,531
Interest paid		(7,256)	(6,163)
Current tax received / (paid)		56,403	(4,003)
Net cash flows from operating activities		225,114	258,200
Cash flows from the sale and purchase of associates		(3,104)	729
Cash flows from the purchase of property, plant and equipment		(3,103)	(2,561)
Cash flows from the purchase of intangible assets		(7,505)	(9,992)
Net cash flows from investing activities		(13,712)	(11,824)
Proceeds from the issue of ordinary shares		1,701	3,215
Dividends paid to owners of the Company		(62,507)	(50,512)
Net repayments of borrowings		-	(20,000)
Net cash flows from financing activities		(60,806)	(67,297)
Net increase in cash and cash equivalents		150,596	179,079
Cash and cash equivalents at 1 January		516,547	336,017
Net increase in cash and cash equivalents		150,596	179,079
Effect of exchange rate fluctuations on cash and cash equivalents		(9,481)	1,451
Cash and cash equivalents at 31 December		657,662	516,547

The purchase, maturity and disposal of financial assets is part of the Group's insurance activities and is therefore classified as an operating cash flow. The purchase, maturity and disposal of derivative contracts is also classified as an operating cash flow. Included within cash and cash equivalents held by the Group are balances totalling £86,168,000 (2011: £77,203,000) not available for immediate use by the Group outside of the Lloyd's Syndicate within which they are held.

The related notes 1 to 22 are an integral part of this document.

HISCOX LTD – PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2012

 

NOTES TO THE FINANCIAL STATEMENTS

1. General information

The financial information set out in this statement is extracted from the Group's consolidated financial statements for the year ended 31 December 2012. The auditors have reported on those 2012 financial statements which include comparative amounts for 2011. Their report was unqualified.

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'). For the period under review the Group provided insurance and reinsurance services to its clients worldwide. It has operations in Bermuda, the UK, Europe, and USA and employs over 1,400 people.

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 its annual audited financial information in accordance with Section 4.1 of the Disclosure and Transparency Rules and the Listing Rules, both issued by the Financial Services Authority (FSA), in addition to the Bermuda Companies Act 1981. The first two pronouncements issued by the FSA require the Group to prepare financial statements which comprise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated balance sheet, the consolidated statement of changes in equity, the consolidated cash flow statement and the related notes 1 to 22 in accordance with International Financial Reporting Standards ('IFRS') adopted by the European Union.

The consolidated financial statements for the year ended 31 December 2012 include 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 Board of Directors on 25 February 2013.

2. Significant accounting policies

The accounting policies adopted are consistent with those of the previous financial year. There were no new or amended Standards and Interpretations issued by the IASB and endorsed by the EU as of 1 January 2012 that would have a material impact on the Group.

A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after 1 January 2012, and have not been applied in preparing these consolidated financial statements.

IAS 19: Employee Benefits (2011) is due to be in effect from 1 January 2013. The amendments require immediate recognition of actuarial gains and losses in other comprehensive income and to eliminate the corridor method that the Group currently operates. In addition, net interest income or expense is required to be calculated using the discount rate used to measure the defined benefit asset or liability. The key impact of adopting the amendments to IAS 19 for the year ended 31 December 2012 would have been to recognise a liability of £16.9m.

IFRS 9: Financial Instruments sets out the recognition and measurement requirements for financial instruments and some contracts to buy or sell non-financial items. The IASB has broken the project into three phases, classification and measurement, impairment methodology and hedge accounting. The IASB continues to add to the standard as it completes the various phases of its project and it will eventually form a complete replacement for IAS 39: Financial Instruments Recognition and Measurement.

IFRS 9 (2010) Financial Instruments: Classification and Measurement is due to be effective from 1 January 2015. Under the standard, a financial asset is measured at amortised cost if it is held within a business model whose objective is to hold assets to collect contractual cash flows and its cash flows are solely payments of principal and interest. All other financial assets are measured at fair value, with changes in fair value recognised in profit or loss 'FVTPL', except for some equity investments for which changes in fair value are recognised in other comprehensive income.

An exposure draft containing amendments to the standard was released in November 2012. It introduces a third measurement category, under which a financial asset is required to be measured at fair value through other comprehensive income 'FVOCI' if its cash flows are solely payments of principal and interest and are held in a business model in which assets are managed both in order to collect contractual cash flows and for sale. The existing option to measure an asset at FVTPL in order to reduce an accounting mismatch would be available for financial assets that would otherwise be mandatorily measured at FVOCI.

The adoption of IFRS 9 will have an effect on the classification and measurement of the Group's financial assets.

IFRS 10: Consolidated financial statements is effective for annual periods beginning 1 January 2014, with retrospective application. It replaces the portion of IAS 27: Consolidated and separate financial statements that addresses the accounting for consolidated financial statements. IFRS revises the definition of 'control', the key factor in determining whether an entity is consolidated.

The adoption of IFRS 10 is not expected to have an effect on the Group's consolidated financial statements.

IFRS 11: Joint arrangements is effective for annual periods beginning 1 January 2014, with retrospective application. It replaces IAS 31: Interests in joint ventures and SIC-13: Jointly-controlled entities - non-monetary contributions by venturers. The standard clarifies the definition of a joint arrangement and uses the principle of control in IFRS 10 to define joint control. The standard is not expected to have a significant impact on the consolidated financial statements of the Group.

IFRS 12: Disclosure of interests in other entities is effective for annual periods beginning 1 January 2014, with retrospective application. It includes all of the disclosures that were previously included in IAS 27 related to consolidated financial statements, as well as all of the disclosures that were previously included in IAS 31 and IAS 28: Investment in associates. A number of new disclosures are also required, including the judgements made by management in determining whether it controls an entity. The standard will impact the disclosures made by the Group in respect of its interests in subsidiaries, joint arrangements and associates on adoption.

As a result of the issuance of IFRS 10, IFRS 11 and IFRS 12, consequential amendments have been made to IAS 27 and IAS 28. IAS 27 now contains requirements only relating to separate financial statements, while the amendments to IAS 28 incorporate the accounting for joint ventures. Both standards are effective for annual periods beginning on or after 1 January 2014. The adoption of these standards is not expected to have an effect on the Group's consolidated financial statements.

IFRS 13: Fair value measurement is effective for annual periods beginning 1 January 2013 and is to be applied prospectively. The standard defines fair value, sets out in a single IFRS a framework for measuring fair value, and requires disclosures about fair value measurements. The standard will impact the disclosures in respect of fair value measurement on adoption.

IAS 1 (amended): Presentation of Financial Statements is effective for annual periods beginning 1 July 2012. The amendment will require a change in the presentation of items of other comprehensive income, requiring companies to group together items within other comprehensive that may be reclassified to the profit or loss section of the income statement. Upon adoption, the amendment will result in changes to the presentation of the Group's other comprehensive income.

2.1 Statement of compliance

The consolidated financial statements have been prepared in accordance with IFRS as adopted by the European Union and in accordance with the provisions of the Bermuda Companies Act 1981.

Since 2002, the standards adopted by the International Accounting Standards Board have been referred to as 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 for insurance contracts, namely accounting principles generally accepted in the UK.

In July 2010 the IASB published an exposure draft for Phase II of the insurance contracts project. The exposure draft proposes a number of significant changes to the measurement of insurance contracts and as such, adoption of a final standard in a form similar to the exposure draft will likely have a significant impact on the results of the Group.

Since the original exposure draft, further amendments have been made to the standard. As a result, the IASB has also stated they will allow at least three full years from the date of any final standard to actual implementation, therefore 2018 is likely to be the earliest date for the adoption of a new standard.

We continue to monitor the progress of the project.

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 compiled on a going concern basis and prepared on the historical cost basis except that pension scheme assets included in the measurement of the employee retirement benefit obligation, and financial instruments including derivative instruments, 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 and to all periods presented, solely for the purpose of producing the consolidated Group financial statements.

The Group has financial assets and cash of over £3.06 billion. The portfolio is predominantly invested in liquid short dated bonds and cash to ensure significant liquidity to the Group and to reduce risk from the financial markets. In addition the Group has significant borrowing facilities in place.

The Group writes a balanced book of insurance and reinsurance business spread by product and geography. As such, the Directors believe that the Group is well placed to manage its business risk and continue to trade successfully.

The Directors therefore have an expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and Accounts.

2.3 Reporting of additional performance measures

The Directors consider that the claims ratio, expense ratio and combined ratio measures reported in respect of operating segments and the Group overall at note 4 provide useful information regarding the underlying performance of the Group's businesses. These measures are widely recognised by the insurance industry and are consistent with internal performance measures reviewed by senior management including the chief operating decision maker. However, these three measures are not defined within the IFRS framework and body of standards and interpretations and therefore may not be directly comparable with similarly titled additional performance measures reported by other companies. Net asset value per share and return on equity measures, disclosed at notes 5 and 6, are likewise considered to be additional performance measures.

3. Financial risk

Credit risk

The Group mitigates counterparty credit risk by concentrating debt and fixed income investments in high quality instruments, including a particular emphasis on government gilts issued mainly by European Union and North American countries.

An analysis of the Group's major exposures to counterparty credit risk excluding loans and receivables, based on Standard & Poor's or equivalent rating, is presented below:

As at 31 December 2012	AAA £000	AA £000	A £000	Other / non-rated £000	Total £000
Debt and fixed income securities	816,153	834,671	369,528	174,514	2,194,866
Deposits with credit institutions	900	-	12,303	-	13,203
Catastrophe bonds	-	-	-	-	-
Reinsurance assets	16,714	153,440	340,711	29,524	540,389
Cash and cash equivalents	149,291	77,090	429,949	1,332	657,662
Total	983,058	1,065,201	1,152,491	205,370	3,406,120
Amounts attributable to largest single counterparty	209,847	489,070	106,502	5,398

As at 31 December 2011	AAA £000	AA £000	A £000	Other / non-rated £000	Total £000
Debt and fixed income securities	767,709	808,076	400,257	194,546	2,170,588
Deposits with credit institutions	2,500	-	10,088	260	12,848
Catastrophe bonds	-	-	-	11,639	11,639
Reinsurance assets	27,682	181,862	262,709	20,262	492,515
Cash and cash equivalents	157,395	41,094	316,843	1,215	516,547
Total	955,286	1,031,032	989,897	227,922	3,204,137
Amounts attributable to largest single counterparty	211,465	267,442	54,235	13,216

The largest counterparty exposure within AAA rating at both 31 December 2012 and 2011 is with the UK Treasury and for AA rating is with the US Treasury. A significant proportion of 'other/non-rated' assets are rated BBB and BB at 31 December 2012 and 31 December 2011. The reinsurance assets classified as AAA rated include collateralised reinsurance arrangements.

At 31 December 2012 and 2011, the Group held no material debt and fixed income securities that were past due or impaired beyond their reported fair values, either for the current period under review or on a cumulative basis. For the current period and prior period, the Group did not experience any material defaults on debt securities.

An analysis of the Group's debt and fixed income securities at 31 December by class is detailed below:

				2012 %	2011 %
Government issued bonds and instruments				34	23
Agency and Government supported debt				12	25
Asset backed securities				10	11
Mortgage backed instruments - Agency				7	6
Mortgage backed instruments - Non-Agency				3	5
Mortgage backed instruments - Commercial				3	-
Corporate bonds				27	27
Lloyd's deposits and bond funds				4	3

Within the fixed income portfolios, which include debt securities, deposits with credit institutions and cash equivalent assets, there are exposures to a range of government borrowers, on either a direct or guaranteed basis, and banking institutions. The Group, together with its investment managers, closely manages its geographical exposures across government issued and supported debt.

The positions at 31 December 2012 and 2011 in respect of government issued and supported debt are shown in the table below. The Group has no direct government exposure to Portugal, Italy, Ireland, Greece or Spain.

					Year to 31 December 2012					Year to 31 December 2011
			Government issued £000			Government Supported £000	Total £000	Government issued £000			Government Supported £000	Total £000
United States of America			489,070			120,991	610,061	302,605			269,048	571,653
United Kingdom			209,847			23,083	232,930	208,235			81,699	289,934
Australia			-			8,921	8,921	-			13,975	13,975
Belgium			-			-	-	-			1,537	1,537
Canada			17,297			31,373	48,670	-			58,380	58,380
Denmark			-			4,384	4,384	-			5,158	5,158
Finland			7,003			2,197	9,200	6,380			3,985	10,365
France			6,551			1,531	8,082	4,015			16,533	20,548
Germany			109,871			51,806	161,677	92,414			36,205	128,619
Netherlands			-			12,329	12,329	-			24,539	24,539
Norway			3,118			-	3,118	-			6,035	6,035
New Zealand			-			-	-	-			584	584
Supranationals			-			25,645	25,645	-			30,135	30,135
South Korea			2,614			209	2,823	2,833			-	2,833
Sweden			2,191			1,133	3,324	2,307			3,494	5,801
Other			1,474			-	1,474	338			141	479
Total			849,036			283,602	1,132,638	619,127			551,448	1,170,575

Included above are £1,012 million (2011: £1,049 million) in relation to holdings in debt securities, £10 million (2011: £nil) held as deposits with credit institutions and £111 million (2011: £122 million) held as cash equivalents, having a maturity of less than three months at the time of purchase. Of the amount held as cash equivalents, £35 million (2011: £114 million) is held with the UK Government and £75 million (2011: £nil) with the US Treasury.

Additionally, the geographical location and credit quality of individual bank borrowers are closely monitored. An analysis of the Group's exposure to bank counterparties by country and credit rating held at 31 December 2012 and 2011 is detailed below. Bank debt held by the Group is mostly senior unsecured and covered bonds. The subordinated bonds are all classed as lower tier 2 capital.

Bank debt														31 December 2012
				Senior					Subordinated
		AAA	AA		A	BBB	Sub-total	A		BBB			B	Sub-total	Total
		£000	£000		£000	£000	£000	£000		£000			£000	£000	£000
United States of America		-	-		65,651	1,311	66,962	603		-			-	603	67,565
United Kingdom		10,632	4,375		12,948	-	27,955	303		894			1,394	2,591	30,546
Australia		1,102	7,829		-	-	8,931	-		-			-	-	8,931
Canada		12,066	4,973		15,090	-	32,129	1,828		823			-	2,651	34,780
Denmark		349	-		537	-	886	-		-			-	-	886
France		1,364	292		8,373	-	10,029	-		-			-	-	10,029
Germany		-	-		1,712	-	1,712	-		-			-	-	1,712
Netherlands		1,893	3,516		4,751	-	10,160	-		765			-	765	10,925
Norway		1,704	-		1,059	-	2,763	-		-			-	-	2,763
New Zealand		662	637		-	-	1,299	-		-			-	-	1,299
Spain		-	-		-	614	614	-		-			-	-	614
Sweden		1,853	6,723		6,432	-	15,008	-		-			-	-	15,008
Switzerland		-	-		8,833	-	8,833	-		-			-	-	8,833
Other		-	190		304	495	989	-		-			-	-	989
Total		31,625	28,535		125,690	2,420	188,270	2,734		2,482			1,394	6,610	194,880

Included in the bank debt table above, are £192 million in relation to holdings in debt securities and £3 million held as deposits with credit institutions.

Bank debt													31 December 2011
				Senior						Subordinated
		AAA	AA		A	BBB	B	Sub-total	A		BBB		Sub-total	Total
		£000	£000		£000	£000	£000	£000	£000		£000		£000	£000
United States of America		-	-		73,615	2,723	-	76,338	-		1,372		1,372	77,710
United Kingdom		319	8,505		23,912	-	-	32,736	3,327		1,148		4,475	37,211
Australia		-	7,314		295	-	-	7,609	-		-		-	7,609
Belgium		-	-		3,429	-	-	3,429	-		-		-	3,429
Canada		1,241	12,240		7,840	604	-	21,925	2,884		-		2,884	24,809
Denmark		-	-		1,544	-	-	1,544	-		-		-	1,544
Finland		-	1,518		-	-	-	1,518	-		-		-	1,518
France		3,889	4,750		7,573	-	-	16,212	712		-		712	16,924
Germany		-	-		3,720	-	-	3,720	-		-		-	3,720
Italy		-	-		-	4,294	-	4,294	-		319		319	4,613
Netherlands		2,329	7,348		6,415	-	-	16,092	691		-		691	16,783
Norway		130	-		378	-	1,431	1,939	-		-		-	1,939
New Zealand		-	2,768		-	-	-	2,768	-		-		-	2,768
Spain		928	-		1,920	-	-	2,848	-		-		-	2,848
Sweden		-	6,359		4,733	-	-	11,092	-		-		-	11,092
Switzerland		-	-		11,597	-	-	11,597	-		-		-	11,597
Other		-	-		594	429	-	1,023	-		-		-	1,023
Total		8,836	50,802		147,565	8,050	1,431	216,684	7,614		2,839		10,453	227,137

Included in the bank debt table above, are £222 million in relation to holdings in debt securities and £5 million held as cash equivalents.

Liquidity risk

A significant proportion of the Group's investments are in highly liquid assets which could be converted to cash in a prompt fashion and at minimal expense. The deposits with credit institutions largely comprise short dated certificates for which an active market exists and which the Group can easily access. The Group's exposure to equities is concentrated on shares and funds that are frequently traded on internationally recognised stock exchanges.

The main focus of the investment portfolio is on high quality short duration debt and fixed income securities, and cash. There are no significant holdings of investments with specific repricing dates. Notwithstanding the regular interest receipts and also the Group's ability to liquidate these securities and the majority of its other financial instrument assets, for cash in a prompt and reasonable manner, the contractual maturity profile of the fair value of these securities at 31 December was as follows

		Debt and fixed income securities £000	Deposits with credit institutions £000	Cash and cash equivalents £000	2012 Total £000	2011 Total £000
Less than one year		497,658	12,957	657,662	1,168,277	1,082,200
Between one and two years		468,475	-	-	468,475	487,678
Between two and five years		808,545	246	-	808,791	822,245
Over five years		349,761	-	-	349,761	265,897
Other non-dated instruments		70,427	-	-	70,427	53,602
Total		2,194,866	13,203	657,662	2,865,731	2,711,622

The Group's equities and shares in unit trusts and other non-dated instruments have no contractual maturity terms but could also be liquidated in an orderly manner for cash in a prompt and reasonable time frame within one year of the balance sheet date.

4. Operating segments

The Group's operating segments consist of four segments which recognise the differences between products and services, customer groupings and geographical areas.  Financial information is used in this format by the chief operating decision maker in deciding how to allocate resources and in assessing performance.  The format is representative of the management structure of the segments.

The Group's four operating segments are:

London Market comprises the results of Syndicate 33, excluding the results of fine art, UK regional events coverage and non US household business which is included within the results of UK and Europe. It also includes the fire and aviation businesses from Syndicate 3624, and the larger TMT business written by Hiscox Insurance Company Limited. In addition, it excludes an element of kidnap and ransom and terrorism included in UK and Europe.

UK and Europe comprises the results of Hiscox Insurance Company Limited, the results of Syndicate 33's 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. In addition, it includes the European errors and omissions business from Syndicate 3624. It excludes the results of the larger retail TMT business written by Hiscox Insurance Company Limited. It also includes an element of kidnap and ransom and terrorism written in Syndicate 33.

International comprises the results of Hiscox Insurance Company (Guernsey) Limited, Hiscox Insurance Company (Bermuda) Limited, Hiscox Inc., Hiscox Insurance Company Inc., and Syndicate 3624 excluding the European errors and omissions, fire and aviation businesses.

Corporate Centre comprises the investment return, finance costs and administrative costs associated with Group management activities. Corporate Centre also includes the majority of foreign currency items on economic hedges and intragroup borrowings. These relate to certain foreign currency items on economic hedges and intragroup borrowings, further details of which are given at note 22. Corporate Centre forms a reportable segment due to its investment activities which earn significant external coupon revenues.

All amounts reported below represent transactions with external parties only.  In the normal course of trade, the Group's entities enter into various reinsurance arrangements with one another.  The related results of these transactions are eliminated on consolidation and are not included within the results of the segments.  This is consistent with the information used by the chief operating decision maker when evaluating the results of the Group.  Performance is measured based on each reportable segment's profit before tax.

a) Profit before tax by segment

					Year ended 31 December 2012
	London Market £000					UK and Europe £000	International £000	Corporate Centre £000	Total £000
Gross premiums written	640,042					507,522	418,255	-	1,565,819
Net premiums written	462,397					479,861	325,882	-	1,268,140
Net premiums earned	419,026					476,945	302,650	-	1,198,621
Investment result*	26,973					17,754	29,202	18,495	92,424
Other revenues	7,115					2,136	3,992	687	13,930
Revenue	453,114					496,835	335,844	19,182	1,304,975
Claims and claim adjustment expenses, net of reinsurance	(176,253)					(222,562)	(140,011)	-	(538,826)
Expenses for the acquisition of insurance contracts	(97,853)					(112,487)	(73,275)	-	(283,615)
Operational expenses	(45,606)					(111,074)	(62,233)	(17,289)	(236,202)
Foreign exchange (losses)/gains	(10,187)					(1,647)	3,113	(11,452)	(20,173)
Total expenses	(329,899)					(447,770)	(272,406)	(28,741)	(1,078,816)
Results of operating activities	123,215					49,065	63,438	(9,559)	226,159
Finance costs	(1,319)					-	(697)	(6,589)	(8,605)
Share of (loss) / profit of associates after tax	-					-	(64)	(366)	(430)
Profit before tax	121,896					49,065	62,677	(16,514)	217,124
*Includes interest received of £50,811,000

					Year ended 31 December 2011
	London Market £000					UK and Europe £000	International £000	Corporate Centre £000	Total £000
Gross premiums written	585,441					498,006	365,772	-	1,449,219
Net premiums written	413,390					472,608	288,013	-	1,174,011
Net premiums earned	418,764					448,594	277,649	-	1,145,007
Investment result*	8,782					7,248	6,313	2,152	24,495
Other revenues	9,858					3,938	3,311	215	17,322
Revenue	437,404					459,780	287,273	2,367	1,186,824
Claims and claim adjustment expenses, net of reinsurance	(238,026)					(207,018)	(252,854)	-	(697,898)
Expenses for the acquisition of insurance contracts	(99,257)					(106,300)	(64,235)	-	(269,792)
Operational expenses	(39,685)					(94,985)	(56,229)	(12,305)	(203,204)
Foreign exchange gains/(losses)	(1,507)					(25)	(3,097)	12,445	7,816
Total expenses	(378,475)					(408,328)	(376,415)	140	(1,163,078)
Results of operating activities	58,929					51,452	(89,142)	2,507	23,746
Finance costs	(1,308)					-	(399)	(4,991)	(6,698)
Share of profit of associates after tax	-					-	65	158	223
Profit before tax	57,621					51,452	(89,476)	(2,326)	17,271
*Includes interest received of £48,802,000

b) 100% operating 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 there from.

			Year ended 31 December 2012
	London Market £000	UK and Europe £000	International £000	Corporate Centre £000	Total £000
Gross premiums written	844,330	523,405	424,189	-	1,791,924
Net premiums written	601,736	491,992	330,941	-	1,424,669
Net premiums earned	549,603	489,453	307,206	-	1,346,262
Investment result	36,842	18,283	29,590	18,495	103,210
Other revenues	-	2,097	2,453	687	5,237
Claims and claim adjustment expenses, net of reinsurance	(221,637)	(230,740)	(141,154)	-	(593,531)
Expenses for the acquisition of insurance contracts	(125,810)	(117,955)	(74,751)	-	(318,516)
Operational expenses	(54,091)	(111,810)	(61,162)	(17,289)	(244,352)
Foreign exchange (losses)/gains	(13,372)	(1,711)	3,138	(11,452)	(23,397)
Results of operating activities	171,535	47,617	65,320	(9,559)	274,913

			Year ended 31 December 2011
	London Market £000	UK and Europe £000	International £000	Corporate Centre £000	Total £000
Gross premiums written	779,261	514,075	370,168	-	1,663,504
Net premiums written	543,696	487,609	292,640	-	1,323,945
Net premiums earned	555,533	463,706	283,138	-	1,302,377
Investment result	12,024	7,399	6,503	2,152	28,078
Other revenues	1,553	3,380	1,990	215	7,138
Claims and claim adjustment expenses, net of reinsurance	(314,517)	(214,609)	(254,627)	-	(783,753)
Expenses for the acquisition of insurance contracts	(130,593)	(111,624)	(65,127)	-	(307,344)
Operational expenses	(50,182)	(95,946)	(56,245)	(12,305)	(214,678)
Foreign exchange gains/(losses)	72	90	(3,103)	12,445	9,504
Results of operating activities	73,890	52,396	(87,471)	2,507	41,322

Segment results at the 100% level presented above differ from those presented at the Group's share at note 4(a) solely as a result of the Group not owning 100% of the capacity of Syndicate 33 at Lloyd's.

100 % Ratio analysis		Year ended 31 December 2012
	London Market	UK and Europe	International	Corporate Centre	Total
Claims ratio (%)	40.3	47.2	46.0	-		44.1
Expense ratio (%)	32.8	46.9	44.2	-		40.5
Combined ratio excluding foreign exchange impact (%)	73.1	94.1	90.2	-		84.6
Foreign exchange impact (%)	2.4	0.3	(1.0)	-		0.9
Combined ratio (%)	75.5	94.4	89.2	-		85.5

		Year ended 31 December 2011
	London Market	UK and Europe	International	Corporate Centre	Total
Claims ratio (%)	56.6	46.3	89.9	-	60.2
Expense ratio (%)	32.5	44.7	42.9	-	39.1
Combined ratio excluding foreign exchange impact (%)	89.1	91.0	132.8	-	99.3
Foreign exchange impact (%)	-	-	1.1	-	0.2
Combined ratio (%)	89.1	91.0	133.9	-	99.5

The impacts on profit before tax of a 1% change in each component of the segmental combined ratios are:

	Year to 31 December 2012				Year ended 31 December 2011
	London Market £000	UK and Europe £000	International £000	Corporate Centre £000	London Market £000	UK and Europe £000	International £000	Corporate Centre £000
At 100% level
1% change in claims or expense ratio	5,496	4,895	3,072	-	5,555	4,637	2,831	-
At Group level
1% change in claims or expense ratio	4,190	4,769	3,027	-	4,188	4,486	2,776	-

5. Net asset value per share

		2012			2011
	Net asset value	NAV per		Net asset value	NAV per
	(total equity)	share		(total equity)	share
	£000	p		£000	p
Net asset value	1,378,384	349.7		1,255,899	323.5
Net tangible asset value	1,308,767	332.0		1,188,347	306.1

The net asset value per share is based on 394,200,249 shares (2011: 388,233,074), being the adjusted number of shares in issue at 31 December. Net tangible assets comprise total equity excluding intangible assets.

6. Return on equity

				2012	2011
				£000	£000
Profit for the year (all attributable to owners of the Company)				207,772	21,272
Opening shareholders' equity				1,255,899	1,266,114
Adjusted for the time weighted impact of capital distribution and issuance of shares				(28,095)	(14,025)
Adjusted opening shareholders' equity				1,227,804	1,252,089
Annualised return on equity (%)				16.9	1.7

7. Investment result

The total result for the Group before taxation comprises

		2012 £000		2011 £000
Investment income including interest receivable		45,699		50,333
Net realised gains on financial investment at fair value through profit or loss		9,071		5,040
Net fair value gains/(losses) on financial investment at fair value through profit or loss		37,920		(29,431)
Investment result - financial assets		92,690		25,942
Fair value (losses)/gains on derivative instruments and borrowings (note 14)		(266)		(1,447)
Total result		92,424		24,495

Investment expenses are presented within other expenses (note 9).

8. Analysis of return on financial investments

(i)     The weighted average return on financial investments for the year by currency, based on monthly asset values, was:

		2012 %		2011 %
Sterling		3.6		1.0
US Dollar		3.2		0.6
Other		1.8		1.6

(ii) Investment return

Year ended 31 December 2012
	London Market		UK and Europe		International		Corporate Centre		Total
	£000	%	£000	%	£000	%	£000	%	£000	%
Debt and fixed income securities	26,813	3.5	8,585	1.9	19,191	2.5	7,990	3.9	62,579	2.8
Equities and shares in unit trusts	-	-	8,288	13.8	8,580	14.0	10,106	16.6	26,974	14.8
Deposits with credit institutions/cash and cash equivalents	242	0.2	796	0.7	1,700	0.6	399	0.4	3,137	0.5
	27,055	3.1	17,669	2.8	29,471	2.7	18,495	5.1	92,690	3.1

Year ended 31 December 2011
	London Market		UK and Europe		International		Corporate Centre		Total
	£000	%	£000	%	£000	%	£000	%	£000	%
Debt and fixed income securities	9,477	1.1	7,642	1.8	10,846	1.6	1,968	0.9	29,933	1.3
Equities and shares in unit trusts	-	-	(1,168)	(2.4)	(4,392)	(9.3)	(375)	(0.9)	(5,935)	(3.8)
Deposits with credit institutions/cash and cash equivalents	225	0.4	725	1.0	868	0.4	126	0.2	1,944	0.4
	9,702	1.1	7,199	1.3	7,322	0.8	1,719	0.5	25,942	0.9

9. Other revenues and operational expenses

	2012 £000	2011 £000
Agency related income	5,866	6,769
Profit commission	5,532	7,383
Other underwriting income - catastrophe bonds	1,123	1,006
Other income	1,409	2,164
Other revenues	13,930	17,322
Wages and salaries	88,294	69,185
Social security cost	15,299	12,930
Pension cost - defined contribution	6,117	5,724
Pension cost - defined benefit	1,800	1,700
Share based payments	6,135	8,677
Marketing expenses	26,251	19,955
Investment expenses	3,543	3,360
Depreciation, amortisation and impairment	7,833	8,098
Other expenses	80,930	73,575
Operational expenses	236,202	203,204

10. Net foreign exchange (losses)/gains

The net foreign exchange gains for the year include the following amounts:

		2012 £000		2011 £000
Exchange (losses)/gains recognised in the consolidated income statement		(20,173)		7,816
Exchange (losses)/gains classified as a separate component of equity		(35,806)		11,060
Overall impact of foreign exchange related items on net assets		(55,979)		18,876

The above excludes profits or losses on foreign exchange derivative contracts which are included within the investment result and are outlined in note 14.

Net unearned premiums and deferred acquisition costs are treated as non monetary items in accordance with IFRS. As a result, a foreign exchange mismatch arises caused by these items being earned at historical rates of exchange prevailing at the original transaction date whereby resulting claims are retranslated at the end of each period. The impact of this mismatch on the income statement is shown below.

		2012 £000		2011 £000
Opening balance sheet impact of non retranslation of non monetary items		2,144		(1,251)
(Loss)/gain included within profit representing the non retranslation of non monetary items		(4,818)		3,395
Closing balance sheet impact of non retranslation of non monetary items		(2,674)		2,144

11. Reinsurance assets

		2012		2011
		£000		£000
Reinsurers' share of insurance liabilities		541,387		493,422
Provision for non-recovery and impairment		(998)		(907)
Reinsurance assets (note 17)		540,389		492,515

Amounts due from reinsurers in respect of outstanding premiums and claims already paid by the Group are included in loans and receivables (note 13). The Group recognised a loss during the year of £91,000 (2011: gain of £52,000) in respect of impaired balances.

12. Financial assets and liabilities

Financial assets are measured at their bid price values, with all changes from one accounting period to the next being recorded through the income statement.

		2012		2011
		£000		£000
Debt and fixed income securities		2,194,866		2,170,588
Equities and shares in unit trusts		190,029		173,432
Deposits with credit institutions		13,203		12,848
Total investments		2,398,098		2,356,868
Insurance linked fund		8,098		-
Catastrophe bonds		-		11,639
Derivative financial instruments (note 14)		73		129
Total financial assets carried at fair value		2,406,269		2,368,636

		2012		2011
		£000		£000
Derivative financial instruments (note 14)		301		-
Total financial liabilities		301		-

On 27 December 2012, the Group invested $13.2 million into the Third Point Reinsurance Opportunities Fund ('the Fund'), representing a 32% non-voting interest holding, subject to a two-year initial lock up period. The Group has committed to invest an additional $16.8 million into the Fund which is payable on demand. The Fund specialises in catastrophe reinsurance opportunities and is classified by the Group as an insurance linked fund. The Group has entered into a quota share arrangement with Third Point Re Cat Ltd., a wholly-owned reinsurance entity of the Fund. No contracts have been ceded to the entity as of 31 December 2012.

Investments at 31 December are denominated in the following currencies at their fair value:

	2012 %	2011 %
Sterling	21.8	21.7
US Dollars	65.9	67.5
Euro and other currencies	12.3	10.8

13. Loans and receivables including insurance receivables

		2012		2011
		£000		£000
Gross receivables arising from insurance and reinsurance contracts		425,720		429,676
Provision for impairment		(986)		(956)
Net receivables arising from insurance and reinsurance contracts		424,734		428,720
Due from contract holders, brokers, agents and intermediaries		295,892		299,879
Due from reinsurance operations		128,842		128,841
Prepayments and accrued income		424,734 10,345		428,720 8,387
Other loans and receivables:
Net profit commission receivable		7,295		13,792
Accrued interest		9,120		10,149
Share of Syndicate's other debtors balances		13,138		19,726
Other debtors including related party amounts		27,432		26,948
Total loans and receivables including insurance receivables		492,064		507,722

There is no significant concentration of credit risk with respect to loans and receivables, as the Group has a large number of internationally dispersed debtors. The Group has recognised a loss of £30,000 (2011: gain of £85,000) for the impairment of receivables during the year ended 31 December 2012.

14. Derivative financial instruments

The Group entered into both exchange-traded and over the counter derivative contracts for a number of purposes during 2012. The Group had the right and intention to settle each contract on a net basis. The assets and liabilities of these contracts at 31 December 2012 all mature within one year of the balance sheet date and are detailed below:

31 December 2012

		Gross contract notional amount		Fair value of assets		Fair value of liabilities		Net balance sheet position
Derivative financial instrument included on balance sheet		£000		£000		£000		£000
Foreign exchange forward contracts		17,755		73		301		228
Interest rate futures contracts		36,655		-		-		-
Total		54,410		73		301		228

31 December 2011

		Gross contract notional amount		Fair value of assets		Fair value of liabilities		Net balance sheet position
Derivative financial instrument assets included on balance sheet		£000		£000		£000		£000
Foreign exchange forward contracts		22,552		12,662		12,533		129
Total		22,552		12,662		12,533		129

31 December 2011

		Gross contract notional amount		Fair value of assets		Fair value of liabilities		Net balance sheet position
Derivative financial instrument liabilities included on balance sheet		£000		£000		£000		£000
Interest rate futures contracts		37,156		-		-		-
Total		37,156		-		-		-

All derivative contracts settle within three months of the year end.

Foreign exchange forward contracts

During the current and prior year the Group entered into a series of conventional over the counter forward contracts in order to secure translation gains made on Euro, US Dollar and other non Pound Sterling denominated monetary assets. The contracts require the Group to forward sell a fixed amount of the relevant currency for Pound Sterling at pre-agreed future exchange rates. The Group made a gain on these forward contracts of £71,000 (2011: loss of £84,000) as included in note 7. The opposite exchange gain is included within financial investments.

There was no initial purchase cost associated with these instruments.

Interest rate future contracts

During the year the Group continued short selling a number of government bond futures and sovereign futures denominated in a range of currencies to informally hedge substantially all of the interest rate risk on specific long portfolios of the matching currencies denominated corporate bonds. All contracts are exchange traded and the Group made a loss on these futures contracts of £337,000 (2011: loss of £1,796,000) as included in note 7.

Equity index futures

During the prior year, the Group purchased a number of equity index futures in order to hedge equity market exposure pending the acquisition of shares in unit trusts. All contracts were exchange traded and the Group made a profit of £433,000 in 2011 as included in note 7. No such futures were purchased in 2012.

15. Fair value measurements

In accordance with the Amendments to IFRS 7 Financial Instruments: Disclosures the fair value of financial instruments based on a three-level fair value hierarchy that reflects the significance of the inputs used in measuring the fair value is provided below.

As at 31 December 2012		Level 1	Level 2	Level 3	Total
Financial assets		£000	£000	£000	£000
Debt and fixed income securities		718,393	1,476,473	-	2,194,866
Equities and share in unit trusts		-	176,494	13,535	190,029
Deposits with credit institutions		13,203	-	-	13,203
Catastrophe bonds		-	-	-	-
Insurance linked fund		-	-	8,098	8,098
Derivative instrument assets		-	73	-	73
Total		731,596	1,653,040	21,633	2,406,269

Financial liabilities
Derivative financial instruments		-	301	-	301

As at 31 December 2011		Level 1	Level 2	Level 3	Total
Financial assets		£000	£000	£000	£000
Debt and fixed income securities		500,672	1,669,916	-	2,170,588
Equities and share in unit trusts		-	162,806	10,626	173,432
Deposits with credit institutions		12,848	-	-	12,848
Catastrophe bonds		-	11,639	-	11,639
Insurance linked fund		-	-	-	-
Derivative instrument assets		-	129	-	129
Total		513,520	1,844,490	10,626	2,368,636

Financial liabilities
Derivative financial instruments		-	-	-	-

The levels of the fair value hierarchy are defined by the standard as follows:

Level 1 - fair values measured using quoted prices (unadjusted) in active markets for identical instruments,

Level 2 - fair values measured using directly or indirectly observable inputs or other similar valuation techniques for which all

significant inputs are based on observable market data,

Level 3 - fair values measured using valuation techniques for which significant inputs are not based on market observable data.

The fair value of the Group's financial assets are based on prices provided by investment managers who obtain market data from numerous independent pricing services. The pricing services used by the investment manager obtain actual transaction prices for securities that have quoted prices in active markets. For those securities which are not actively traded, the pricing services use common market valuation pricing models. Observable inputs used in common market valuation pricing models include, but are not limited to, broker quotes, credit ratings, interest rates and yield curves, prepayment speeds, default rates and other such inputs which are available from market sources.

The fair values of the Group's investments in catastrophe bonds are based on quoted market prices or where such prices are not available, by reference to broker or underwriter bid indications.

Investments in mutual funds comprise a portfolio of stock investments in trading entities which are invested in various quoted investments. The fair value of shares in unit trusts are based on the net asset value of the fund as reported by independent pricing sources or the fund manager.

Included within Level 1 of the hierarchy are Government bonds, Treasury bills and exchange traded equities which are measured based on quoted prices.

Level 2 of the hierarchy contains U.S Government Agencies, Corporate Securities, Asset Backed Securities, Mortgage Backed Securities and Catastrophe bonds. The fair value of these assets are based on prices obtained from both investment managers and investment custodians as discussed above. The Group records the unadjusted price provided and validates the price through a number of methods, including a comparison of the prices provided by the investment managers with the investment custodians and the valuation used by external parties to derive fair value. Quoted prices for US Government Agencies and Corporate Securities are based on a limited number of transactions for those securities and as such the Group considers these instruments to have similar characteristics of those instruments classified as Level 2. Also included within Level 2 are units held in traditional long funds and long and short special funds and over the counter derivatives.

Level 3 contains investments in a limited partnership and unquoted equity securities and an insurance linked fund which have limited observable inputs on which to measure fair value. Unquoted equities are carried at cost which is deemed to be comparable to fair value. The Group invested into the insurance linked fund in December 2012, which is subject to a two-year lock up period. The fund specialises in catastrophe reinsurance opportunities. The effect of changing one or more inputs used in the measurement of fair value of these instruments to another reasonably possible assumption would not be significant and no further analysis has been performed.

In certain cases, the inputs used to measure the fair value of a financial instrument may fall into more than one level within the fair value hierarchy. In this instance, the fair value of the instrument in its entirety is classified based on the lowest level of input that is significant to the fair value measurement.

During the year, there were no significant transfers made between Level 1 and Level 2 of the fair value hierarchy.

The following table sets forth a reconciliation of opening and closing balances for financial instruments classified under Level 3 of the fair value hierarchy:

			Equities and shares in unit trusts	Insurance linked fund	Total
31 December 2012			£000	£000	£000
Balance at 1 January			10,626	-	10,626
Total gains or losses through profit or loss*			2,587	-	2,587
Purchases			322	8,098	8,420
Settlements			-	-	-
Closing balance			13,535	8,098	21,633
Unrealised gains and losses in the year on securities held at the end of the year			2,587	-	2,587

			Equities and shares in unit trusts	Insurance linked fund	Total
31 December 2011			£000	£000	£000
Balance at 1 January			6,926	-	6,926
Total gains or losses through profit or loss*			1,242	-	1,242
Purchases			3,002	-	3,002
Settlements			(544)	-	(544)
Closing balance			10,626	-	10,626
Unrealised gains and losses in the year on securities held at the end of the year			1,242	-	1,242

*Total gains/(losses) are included within the investment result in the income statement

16. Cash and cash equivalents

		2012		2011
		£000		£000
Cash at bank and in hand		428,454		258,927
Short-term deposits		229,208		257,620
		657,662		516,547

The Group holds its cash deposits with a well diversified range of banks and financial institutions. Cash includes overnight deposits. Short-term deposits include debt securities with an original maturity date of less than three months and money-market fund.

17. Insurance liabilities and reinsurance assets

		2012		2011
		£000		£000
Gross
Claims reported and claims adjustment expenses		932,604		938,498
Claims incurred but not reported		1,000,300		964,073
Unearned premiums		663,708		597,689
Total insurance liabilities, gross		2,596,612		2,500,260
Recoverable from reinsurers
Claims reported and claims adjustment expenses		192,311		187,973
Claims incurred but not reported		261,128		224,855
Unearned premiums		86,950		79,687
Total reinsurers' share of insurance liabilities		540,389		492,515
Net
Claims reported and claims adjustment expenses		740,293		750,525
Claims incurred but not reported		739,172		739,218
Unearned premiums		576,758		518,002
Total insurance liabilities, net		2,056,223		2,007,745

The gross claims reported, the claims 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 2012 and 2011 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 eight 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% level

Accident year	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012	Total
	£000	£000	£000	£000	£000	£000	£000	£000	£000	£000	£000
Estimate of ultimate claims costs as adjusted for foreign exchange*:
at end of accident year	451,232	677,420	1,132,098	586,952	785,828	1,089,977	830,500	999,343	1,305,556	1,068,466	8,927,372
one year later	462,982	750,898	1,252,403	560,426	700,297	924,155	691,660	858,866	1,177,441	-	7,379,128
two years later	435,298	716,648	1,254,360	539,926	664,529	901,688	635,020	805,499	-	-	5,952,968
three years later	448,028	678,079	1,236,690	509,990	677,008	864,069	628,871	-	-	-	5,042,735
four years later	442,618	681,010	1,231,059	519,672	670,233	828,996	-	-	-	-	4,373,588
five years later	432,405	663,389	1,232,155	509,716	641,088	-	-	-	-	-	3,478,753
six years later	427,914	666,685	1,188,963	496,764	-	-	-	-	-	-	2,780,326
seven years later	417,794	648,433	1,182,120	-	-	-	-	-	-	-	2,248,347
eight years later	413,874	638,611	-	-	-	-	-	-	-	-	1,052,485
nine years later	413,545	-	-	-	-	-	-	-	-	-	413,545
Current estimate of cumulative claims	413,545	638,611	1,182,120	496,764	641,088	828,996	628,871	805,499	1,177,441	1,068,466	7,881,401
Cumulative payments to date	(380,930)	(603,815)	(1,137,927)	(456,744)	(551,708)	(705,187)	(490,583)	(508,862)	(612,544)	(211,444)	(5,659,744)
Liability recognised at 100% level	32,615	34,796	44,193	40,020	89,380	123,809	138,288	296,637	564,897	857,022	2,221,657
Liability recognised in respect of prior accident years at 100% level											107,975
Total gross liability to external parties at 100% level								2,329,632

*The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2012.

Reconciliation of 100% disclosures above to Group's share - gross

Accident year	2003	2004	2005	2006		2007	2008	2009	2010	2011	2012	Total
	£000	£000	£000	£000		£000	£000	£000	£000	£000	£000	£000
Current estimate of cumulative claims	413,545	638,611	1,182,120	496,764		641,088	828,996	628,871	805,499	1,177,441	1,068,466	7,881,401
Less:Attributable to external Names	(92,227)	(149,455)	(297,239)	(104,031)		(124,512)	(158,706)	(104,563)	(122,246)	(167,408)	(151,799)	(1,472,186)
Group's share of current ultimate claims estimate	321,318	489,156	884,881	392,733		516,576	670,290	524,308	683,253	1,010,033	916,667	6,409,215
Cumulative payments to date	(380,930)	(603,815)	(1,137,927)		(456,744)	(551,708)	(705,187)	(490,583)	(508,862)	(612,544)	(211,444)	(5,659,744)
Less:Attributable to external Names	83,632	140,725	286,497	94,183		105,597	131,908	81,998	69,254	86,192	21,317	1,101,303
Group's share of cumulative payments	(297,298)	(463,090)	(851,430)	(362,561)		(446,111)	(573,279)	(408,585)	(439,608)	(526,352)	(190,127)	(4,558,441)
Liability for 2003 to 2012 accident years recognised on Group's balance sheet	24,020	26,066	33,451	30,172		70,465	97,011	115,723	243,645	483,681	726,540	1,850,774
Liability for accident years before 2003 recognised on Group's balance sheet												82,130
Total Group liability to external parties included in balance sheet - gross**												1,932,904

** This represents the claims element of the Group's insurance liabilities.

Insurance claims and claims expenses reserves - net at 100% level

Accident year	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012	Total
	£000	£000	£000	£000	£000	£000	£000	£000	£000	£000	£000
Estimate of ultimate claims costs as adjusted for foreign exchange*:
at end of accident year	355,725	566,426	668,943	522,105	683,708	762,679	681,858	800,335	1,016,675	790,001	6,848,455
one year later	375,233	618,704	768,212	513,824	622,394	681,434	573,182	705,854	940,543	-	5,799,380
two years later	342,232	594,381	758,222	497,020	603,148	677,599	547,415	665,628	-	-	4,685,645
three years later	352,920	557,991	733,810	455,123	572,223	639,340	548,086	-	-	-	3,859,493
four years later	343,372	558,860	724,053	471,721	568,043	608,530	-	-	-	-	3,274,579
five years later	338,539	544,064	724,336	460,025	543,510	-	-	-	-	-	2,610,474
six years later	334,976	544,245	703,604	453,022	-	-	-	-	-	-	2,035,847
seven years later	323,900	528,724	695,163	-	-	-	-	-	-	-	1,547,787
eight years later	316,035	520,847	-	-	-	-	-	-	-	-	836,882
nine years later	321,250	-	-	-	-	-	-	-	-	-	321,250
Current estimate of cumulative claims	321,250	520,847	695,163	453,022	543,510	608,530	548,086	665,628	940,543	790,001	6,086,580
Cumulative payments to date	(313,107)	(487,971)	(644,541)	(420,041)	(471,241)	(508,311)	(422,048)	(445,819)	(502,022)	(182,459)	(4,397,560)
Liability recognised at 100% level	8,143	32,876	50,622	32,981	72,269	100,219	126,038	219,809	438,521	607,542	1,689,020
Liability recognised in respect of prior accident years at 100% level											65,222
Total net liability to external parties at 100% level										1,754,242

*The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2012.

Reconciliation of 100% disclosures above to Group's share - net

Accident year	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012	Total
	£000	£000	£000	£000	£000	£000	£000	£000	£000	£000	£000
Current estimate of cumulative claims	321,250	520,847	695,163	453,022	543,510	608,530	548,086	665,628	940,543	790,001	6,086,580
Less:Attributable to external Names	(70,288)	(122,336)	(167,281)	(94,653)	(106,623)	(109,893)	(86,099)	(90,474)	(121,073)	(97,137)	(1,065,857)
Group's share of current ultimate claims estimate	250,962	398,511	527,882	358,369	436,887	498,637	461,987	575,154	819,470	692,864	5,020,723
Cumulative payments to date	(313,107)	(487,971)	(644,541)	(420,041)	(471,241)	(508,311)	(422,048)	(445,819)	(502,022)	(182,459)	(4,397,560)
Less:Attributable to external Names	68,282	113,935	154,537	86,235	90,960	87,609	64,676	58,138	65,136	18,319	807,827
Group's share of cumulative payments	(244,825)	(374,036)	(490,004)	(333,806)	(380,281)	(420,702)	(357,372)	(387,681)	(436,886)	(164,140)	(3,589,733)
Liability for 2003  to 2012 accident years recognised on Group's balance sheet	6,137	24,475	37,878	24,563	56,606	77,935	104,615	187,473	382,584	528,724	1,430,990
Liability for accident years before 2003 recognised on Group's balance sheet											48,475
Total Group liability to external parties included in the balance sheet - net **											1,479,465

** This represents the claims element of the Group's insurance liabilities and reinsurance assets.

Movement in insurance claims liabilities and reinsurance claims assets

			2012				2011
	Gross	Reinsurance	Net		Gross	Reinsurance	Net
Year ended 31 December	£000	£000	£000		£000	£000	£000
Total at beginning of year	(1,902,571)	412,828	(1,489,743)		(1,706,404)	374,193	(1,332,211)
Claims and claims adjustment expenses for the year	(719,792)	180,966	(538,826)		(830,368)	132,470	(697,898)
Cash paid for claims settled in the year	614,723	(124,685)	490,038		650,510	(95,433)	555,077
Exchange differences and other movements	74,736	(15,670)	59,066		(16,309)	1,598	(14,711)
Total at end of year	(1,932,904)	453,439	(1,479,465)		(1,902,571)	412,828	(1,489,743)
Claims reported and claims adjustment expenses	(932,604)	192,311	(740,293)		(938,498)	187,973	(750,525)
Claims incurred but not reported	(1,000,300)	261,128	(739,172)		(964,073)	224,855	(739,218)
Total at end of year	(1,932,904)	453,439	(1,479,465)		(1,902,571)	412,828	(1,489,743)

The insurance claims expense reported in the consolidated income statement is comprised as follows:

			2012				2011
	Gross	Reinsurance	Net		Gross	Reinsurance	Net
Year ended 31 December	£000	£000	£000		£000	£000	£000
Current year claims and claims adjustment expenses	(930,635)	239,912	(690,723)		(1,126,667)	229,314	(897,353)
(Under)/over provision in respect of prior year claims and claims adjustment expenses	210,843	(58,946)	151,897		296,299	(96,844)	199,455
Total claims and claims handling expense	(719,792)	180,966	(538,826)		(830,368)	132,470	(697,898)

18. Trade and other payables

		2012		2011
		£000		£000
Creditors arising out of direct insurance operations		15,606		58,346
Creditors arising out of reinsurance operations		130,605		152,866
		146,211		211,212
Share of Syndicate's other creditors' balances		10,239		4,856
Social security and other taxes payable		8,649		10,640
Other creditors		9,037		14,939
		27,925		30,435
Reinsurers' share of deferred acquisition costs		18,340		15,641
Accruals and deferred income		73,139		56,847
Total		265,615		314,135

19. Tax expense

The Company and its subsidiaries are subject to enacted tax laws in the jurisdictions in which they are incorporated and domiciled.

The amounts charged in the consolidated income statement comprise the following:

	2012	2011
	£000	£000
Current tax expense/(credit)	18,724	(95,429)
Deferred tax (credit)/expense	(9,372)	91,428
Total tax expense/(credit)	9,352	(4,001)

During 2011 the group's Lloyd's corporate member, Hiscox Dedicated Corporate Member Ltd, changed its tax filing position on the timing of the deduction for tax purposes of member-level reinsurance premiums. Consequently, a prior year current tax adjustment has arisen and results in a closing current tax debtor. Equally, deductions for member-level reinsurance premiums which were previously deferred for tax, and formed part of the deferred tax balance have been taken in earlier years, and no longer form part of the deferred tax balance.

A permanent difference arises as a result of the difference in UK effective tax rate between the earlier and later years.

20.  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 shares in issue during the year, excluding ordinary shares purchased by the Group and held in treasury as own shares.

		2012		2011
Profit attributable to the Company's equity holders (£000)		207,772		21,272
Weighted average number of ordinary shares (thousands)		391,592		383,602
Basic earnings per share (pence per share)		53.1p		5.5p

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.

		2012		2011
Profit attributable to Company's equity holders (£000)		207,772		21,272
Weighted average number of ordinary shares in issue (thousands)		391,592		383,602
Adjustments for share options (thousands)		16,427		15,610
Weighted average number of ordinary shares for diluted earnings per share (thousands)		408,019		399,212
Diluted earnings per share (pence per share)		50.9p		5.3p

Diluted earnings per share has been calculated after taking account of 15,915,875  (2011: 15,029,986) options and awards under employee share option and performance plan schemes and 510,925 (2011: 579,518) options under SAYE schemes.

21. Dividends paid to owners of the Company

		2012		2011
		£000		£000
Interim dividend for the year ended :
- 31 December 2012 of 6.0p (net) per share		23,567		-
- 31 December 2011 of 5.1p (net) per share		-		19,738
Final dividend for the year ended :
- 31 December 2011 of 11.9p (net) per share		46,606		-
- 31 December 2010 of 11.5p (net) per share		-		44,111
		70,173		63,849

The final and interim dividends were paid in either cash or issued as a scrip dividend at the option of the shareholder. The final dividend for the year ended 31 December 2011 was paid in cash of £44,301,000 (2010: £31,803,000) and 562,194 shares for the scrip dividend (2010: 3,227,459).

The interim dividend for the year ended 31 December 2012 was paid in cash of £18,206,000 (2011: £18,709,000) and 1,196,214 shares for the scrip dividend (2011: 276,006).

Subject to shareholder approval at the forthcoming Extraordinary General Meeting on 28 March 2013, the Board proposes to pay 12p per ordinary share instead of a final dividend for the year ended 31 December 2012.  Together with the interim dividend of 6p per ordinary share, this represents a total dividend for 2012 of 18p per ordinary share.  In addition, the Board proposes to pay a special distribution of 38p per ordinary share.  Such amounts will be paid by way of a B share scheme.  A scrip dividend alternative will not be offered to shareholders.

22. Foreign currency items on intragroup borrowings

The Group have loan arrangements, denominated in US Dollars and Euros, in place between certain group companies.  In most cases, as one party to each arrangement has a functional currency other than the US Dollar or the Euro, foreign exchange losses arise which are not eliminated through the income statement on consolidation. Implicit offsetting gains are reflected instead on retranslation of the counterparty company's closing balance sheet through other comprehensive income and into the Group's currency translation reserve within equity.

Impact as at 31 December 2012

	Consolidated income statement 2012 £000	Consolidated  other comprehensive income 2012 £000	Total economic impact 2012 £000
Unrealised translation gains/(losses) on intragroup borrowings	891	(891)	-
Total gains/(losses) recognised	891	(891)	-

Impact as at 31 December 2011

	Consolidated income statement 2011 £000	Consolidated  other comprehensive income 2011 £000	Total economic impact 2011 £000
Unrealised translation  (losses)/gains  on intragroup borrowings	(4,540)	4,540	-
Total (losses)/gains recognised	(4,540)	4,540	-

Note:

The Annual Report and Accounts for 2012 will be available to shareholders no later than 18 March 2013. Copies of the Report may be obtained by writing to the Company Secretary, Hiscox Ltd, Wessex House, 45 Reid Street, Hamilton HM12, Bermuda. A copy of this and other announcements can be found at www.hiscox.com.

 

END

 

 

FR UUOUROWAUUUR