IFRS

Hiscox PLC 26 July 2005 HISCOX PLC ANNOUNCEMENT IFRS Restated Consolidated Financial Information for the year ended 31 December 2004 Hiscox plc is today publishing its audited restated consolidated financial information for the year ended 31 December 2004 under International Financial Reporting Standards (IFRS). This announcement sets out the key changes to the profit and loss account and the balance sheet under IFRS. The restated consolidated financial information for 2004 is attached. Overview UK GAAP IFRS Change Change £000 £000 £000 Year ended 31 December 2004 Gross premium revenue 759,556 847,524 87,968 12% Net premium revenue 642,429 714,852 72,423 11% Results of operating activities before tax 78,621 91,109 12,488 16% Profit before tax 77,034 89,522 12,488 16% Profit for the year 54,574 63,948 9,374 17% Basic earnings per share 18.7p 21.9p 3.2p 17% Shareholders' equity at 31 December 2004 371,599 368,826 -2,773 -0.7% Net asset value per share 126.7p 125.7p -1.0p -0.8% Return on equity* 17.6% 20.6% 3.0% 17% *Based on opening shareholder funds adjusted for subsequent capital flows. The main adjustments are: • Goodwill is no longer amortised. • Syndicate capacity is recognised at cost and no longer amortised. • Investments continue to be marked to market through the profit and loss account. • Foreign exchange uses daily transactional rates; non-monetary items e.g. unearned premium and deferred acquisitions costs are not retranslated at period end. • Equalisation provision is included within shareholders' equity. • The retirement benefit obligation is included within net assets, net of sums due from third parties. • Employee benefits, including share based payments, are charged through the profit and loss account. - ends - For further information: Hiscox plc Bronek Masojada Chief Executive 020 7448 6012 Stuart Bridges Finance Director 020 7448 6013 Fiona Fong Director of Communications 020 7448 6447 The Maitland Consultancy Suzanne Bartch 020 7399 5151 About Hiscox Hiscox plc is a specialist insurance group listed on the London Stock Exchange where it has a market capitalization of circa £500 million. There are three main underwriting parts of the Group - Global Markets, UK and International Retail. The Global Markets business underwrites, via Syndicate 33, mainly internationally traded business in the London Market - generally large or complex business which needs to be shared with other insurers or needs the international licences of Lloyd's. The UK business offers a wide range of specialist insurance for professionals and business customers, as well as high net worth individuals. It has regional offices in Birmingham, Glasgow, Leeds, Maidenhead and Colchester. The European business has offices in Paris, Amsterdam, Munich, Brussels and Guernsey and writes mainly high value household business and some specialist professional indemnity business. Guernsey underwrites kidnap and ransom business and fine art. For further information, go to www.hiscox.com HISCOX PLC - RESTATED CONSOLIDATED FINANCIAL INFORMATION FOR THE YEAR ENDED 31 DECEMBER 2004 UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS HIGHLIGHTS Introduction All European Union listed companies, including Hiscox plc, are required to adopt International Financial Reporting Standards ('IFRS') for accounting periods beginning on or after 1 January 2005. In January 2004 the Committee of European Securities Regulators published a recommendation 'Preparing for the Implementation of International Financial Reporting Standards'. The recommendation sets out a series of best-practice steps for providing information to the market on the effect of the transition to IFRS. In accordance with the recommendations Hiscox plc has chosen to publish the restated consolidated financial information for the year ended 31 December 2004, including the restated preliminary IFRS opening balance sheet at 1 January 2004, thus removing some of the uncertainty around the adoption of IFRS. The Board acknowledges its responsibility for the preparation of the restated consolidated financial information which has been prepared in accordance with IFRS adopted for use by the EU and policies expected to be adopted when the Board prepares the Group's first set of IFRS financial statements for the year ended 31 December 2005. The Board approved the restated consolidated financial information at its meeting on 25 July 2005. The restated consolidated financial information has been prepared in accordance with IFRS issued by the International Accounting Standards Board (IASB) and currently endorsed by the European Commission effective for 2005 year ends ('the Standards'). The Standards themselves are evolving and are subject to possible amendment by interpretative guidance from the IASB, emerging practice or other external bodies. Accordingly, the interpretation of the Standards to be applied may be subject to change prior to the publication of the Group's first IFRS results in March 2006. In addition, the IASB has divided the development of a standard for accounting for insurance contracts into two phases. Phase I of the standard, which culminated in the publication of IFRS 4 'Insurance Contracts' in March 2004, allows insurers to continue to apply most of the existing accounting policies for insurance contracts. Phase II of the project addresses recognition and measurement of insurance contracts. The IASB's original project plan stated that it would aim to complete an exposure draft by June 2005. However, in February 2005 a revised project plan was issued stating that the initial output of the project would be a discussion paper focussing on the key issues that determine the direction of the project. This discussion paper was not expected before the end of 2005 and could quite possibly be much later. An exposure draft developed from this would be at least 18 months later and a standard would take at least another 12 months. Accordingly it is unlikely that there will be any change to the accounting for insurance contracts until 2009 at the earliest. A summary of the significant IFRS accounting policies adopted by Hiscox plc in preparing the restated consolidated financial information is included on page 14. The restated consolidated financial information has been audited by KPMG Audit plc. A copy of their opinion can be found on page 21. The restated consolidated financial information for the year ended 31 December 2004, opening balance sheet at 1 January 2004 and the financial information contained in this document do not constitute statutory accounts of the Group within the meaning of Section 240 of the Companies Act 1985. The statutory accounts for the year ended 31 December 2004, which were prepared under UK GAAP, have been reported on by the Company's auditors and delivered to the registrar of companies. The report of the auditors was unqualified and did not contain statements under section 237(2) or (3) of the Companies Act 1985. Overview IFRS UK GAAP £000 £000 Year ended 31 December 2004 Gross premium revenue 847,524 759,556 Net premium revenue 714,852 642,429 Results of operating activities before tax 91,109 78,621 Profit before tax 89,522 77,034 Profit for the year 63,948 54,574 Basic earnings per share 21.9p 18.7p Return on equity 20.6% 17.6% Shareholders equity at 31 December 2004 368,826 371,599 Net asset value per share 125.7p 126.7p Summary Consolidated Balance Sheet 31 December 1 January 2004 2004 £000 £000 Assets Property, plant and equipment 10,691 7,750 Intangible assets including intangible insurance assets 139,959 125,957 Investment in affiliated and associated enterprises 1,109 519 Financial assets 1,308,213 1,067,150 Reinsurance contract receivables 238,871 253,691 Current income tax asset - 2,739 Cash and cash equivalents 119,563 102,712 ---------- -------- Total assets 1,818,406 1,560,518 ---------- -------- Equity and Liabilities Shareholders' equity Share capital 14,685 14,565 Share premium 234,267 232,341 Translation reserve (468) - Other reserves 37,967 37,967 Reserve for own shares (473) (686) Retained earnings 82,848 30,498 ---------- -------- Total equity 368,826 314,685 ---------- -------- Insurance contracts 1,246,903 1,060,662 Interest bearing loans and borrowings 57 477 Trade and other payables 145,530 149,715 Deferred income tax 14,517 1,645 Employee benefit obligations 34,718 33,334 Current income tax liabilities 7,855 - ---------- -------- Total liabilities 1,449,580 1,245,833 ---------- -------- Total equity and liabilities 1,818,406 1,560,518 ---------- -------- Summary Consolidated Income Statement 2004 £000 Income Insurance premium revenue 847,524 Insurance premium ceded to reinsurers (132,672) ---------- Net premium revenue 714,852 Investment return 34,432 Other revenues 15,112 ---------- Net income 764,396 ---------- Expenses Claims and claim adjustment expenses 382,619 Expenses for the acquisition of insurance contracts 169,678 Expenses for marketing, administration and asset management services rendered 47,692 Other operating costs and expenses 73,298 ---------- Total expenses 673,287 ---------- Results of operating activities 91,109 Finance costs (1,977) Share of profit / (loss) of associates 390 ---------- Profit before tax 89,522 Income tax expense (25,574) ---------- Profit for the year 63,948 ---------- Earnings per share for profit attributable to the equity holders of the Company during the year Basic 21.9p Diluted 21.7p ---------- Summary Consolidated Statement of Changes in Equity Reserves Share Share Translation Other For Own Retained Capital Premium Reserve Reserves Shares Earnings Total £000 £000 £000 £000 £000 £000 £000 Balance at 1 January 2004 under UK GAAP 14,565 232,341 - 37,967 (686) 45,650 329,837 Changes in accounting policy - - - - - (15,152) (15,152) -------- -------- -------- -------- -------- -------- -------- Restated balance at 1 January 2004 14,565 232,341 - 37,967 (686) 30,498 314,685 Currency translation differences - - (468) - - - (468) -------- -------- -------- -------- -------- -------- -------- Net income (expenses) recognised directly in equity - - (468) - - - (468) Profit for the year - - - - - 63,948 63,948 -------- -------- -------- -------- -------- -------- -------- Total recognised income for 2004 - - (468) - - 63,948 63,480 Employee share options: Proceeds from shares issued 120 1,926 - - - - 2,046 Equity settled share-based payments - - - - - 1,194 1,194 Change in own shares - - - - 213 41 254 Dividends to shareholders - - - - - (12,833) (12,833) -------- -------- -------- -------- -------- -------- -------- Balance at 31 December 2004 14,685 234,267 (468) 37,967 (473) 82,848 368,826 -------- -------- -------- -------- -------- -------- -------- Summary Consolidated Cash Flow Statement 2004 £000 Profit for the year, including minority interests in earnings Cash generated from operations 266,671 Interest paid (1,409) Income tax paid (206) ----------- Net cash flows from operating activities 265,056 Cash flows from the acquisition and sale of consolidated enterprises (1,091) Cash flows from the sale / (purchase) of property, plant and equipment (5,565) Cash flows from the sale / (purchase) of intangible assets (3,406) Cash flows from the acquisition, sale and maturities of other investments (226,533) Loans repaid by / (granted to) related parties 320 ----------- Net cash used in investing activities (236,275) Issue of ordinary shares 2,046 Sale / (purchase) of treasury shares 254 Dividends paid to Company's shareholders (12,833) Proceeds from borrowings - Repayments of borrowings (521) ----------- Net cash used in financing activities (11,054) ----------- Net increase in cash and cash equivalents 17,727 ----------- Cash and cash equivalents at 1 January 102,712 Net increase in cash and cash equivalents 17,727 Effect of exchange rate fluctuations on cash and cash equivalents (876) ----------- Cash and cash equivalents at 31 December 119,563 ----------- Included in cash and cash equivalents held by the Group are balances totalling £35,835,000 (2004 : £27,841,000) not available for use by the Group which are held within the Lloyd's Syndicate. Explanation of Transition to IFRS In preparing the restated consolidated financial information, the Group has adjusted amounts reported previously in financial statements prepared in accordance with its old basis of accounting (UK GAAP). An explanation of how the transition from previous GAAP to IFRS has affected the Group's financial position, financial performance and cash flows is set out in the following tables and the notes that accompany the tables. Analysis of adjustments to the balance sheet as a result of the transition to IFRS 31 December 2004 Effect of UK transition Notes GAAP to IFRS IFRS £'000 £'000 £'000 Assets Property, plant and equipment 10,663 28 10,691 Intangible assets including intangible insurance assets 1, 7 138,390 1,569 139,959 Investments in associates 1,109 - 1,109 Financial assets 2 1,399,200 (90,987) 1,308,213 Reinsurance contracts 7 238,256 615 238,871 Current income tax assets - - - Cash and cash equivalents 2 61,332 58,231 119,563 -------- --------- ---------- Total assets 1,848,950 (30,544) 1,818,406 -------- --------- ---------- Equity Share capital 14,685 - 14,685 Share premium 234,267 - 234,267 Translation reserve - (468) (468) Other reserves 37,967 - 37,967 Reserves for own shares (473) - (473) Retained earnings 85,153 (2,305) 82,848 -------- --------- ---------- Total equity 371,599 (2,773) 368,826 -------- --------- ---------- Liabilities Insurance contracts 4, 7 1,290,936 (44,033) 1,246,903 Financial liabilities 57 - 57 Trade and other payables 5, 6 153,242 (7,712) 145,530 Deferred income tax liabilities 3 25,261 (10,744) 14,517 Retirement benefit obligations 6 - 34,718 34,718 Current income tax liabilities 7,855 - 7,855 -------- --------- ---------- Total liabilities 1,477,351 (27,771) 1,449,580 -------- --------- ---------- -------- --------- ---------- Total equity and liabilities 1,848,950 (30,544) 1,818,406 -------- --------- ---------- 1 January 2004 Effect of UK transition Notes GAAP to IFRS IFRS £'000 £'000 £'000 Assets Property, plant and equipment 7,742 8 7,750 Intangible assets including intangible insurance assets 1, 7 123,570 2,387 125,957 Investments in associates 519 - 519 Financial assets 2 1,159,275 (92,125) 1,067,150 Reinsurance contracts 7 252,187 1,504 253,691 Current income tax assets 2,739 - 2,739 Cash and cash equivalents 2 52,945 49,767 102,712 -------- --------- ---------- Total assets 1,598,977 (38,459) 1,560,518 -------- --------- ---------- Equity Share capital 14,565 - 14,565 Share premium 232,341 - 232,341 Translation reserve - - - Other reserves 37,967 - 37,967 Reserves for own shares (686) - (686) Retained earnings 45,650 (15,152) 30,498 -------- --------- ---------- Total equity 329,837 (15,152) 314,685 -------- --------- ---------- Liabilities Insurance contracts 4, 7 1,097,637 (36,975) 1,060,662 Financial liabilities 477 - 477 Trade and other payables 5, 6 155,523 (5,808) 149,715 Deferred income tax liabilities 3 15,503 (13,858) 1,645 Retirement benefit obligations 6 - 33,334 33,334 Current income tax liabilities - - - -------- --------- ---------- Total liabilities 1,269,140 (23,307) 1,245,833 -------- --------- ---------- -------- --------- ---------- Total equity and liabilities 1,598,977 (38,459) 1,560,518 -------- --------- ---------- Analysis of adjustments to equity as a result of the transition to IFRS Total Intangible Financial Income Insurance Equity Assets Assets Tax Contracts UK GAAP (Note 1) (Note 2) (Note 3) (Note 4) £000 £000 £000 £000 £000 Balance at 1 January 2004 329,837 - - - - Changes in accounting policy - 4,830 (184) 1,182 11,507 -------- -------- -------- ------- -------- Restated balance at 1 January 2004 329,837 4,830 (184) 1,182 11,507 Currency translation differences (412) - - - - -------- -------- -------- ------- -------- Net income (expenses) recognised directly in equity (412) - - - - Profit for the year 54,574 1,453 987 554 1,052 -------- -------- -------- ------- -------- Total recognised income for 2004 54,162 1,453 987 554 1,052 Employee share options: Proceeds from shares issued 2,046 - - - - Equity settled - - - - - share-based payments Change in own shares 254 - - - - Dividends to shareholders (14,700) - - - - -------- -------- -------- ------- -------- Balance at 31 December 2004 371,599 6,283 803 1,736 12,559 -------- -------- -------- ------- -------- Dividend Employee Rates of Total Recognition Benefits Exchange Other Equity (Note 5) (Note 6) (Note 7) Adjustments IFRS £000 £000 £000 £000 £000 Balance at 1 January 2004 - - - - 329,837 Changes in accounting policy 8,414 (28,691) (12,375) 165 (15,152) -------- -------- -------- -------- -------- Restated balance at 1 January 2004 8,414 (28,691) (12,375) 165 314,685 Currency translation differences - - (56) - (468) -------- -------- -------- -------- -------- Net income (expenses) recognised directly in equity - - (56) - (468) Profit for the year - 1,768 3,046 514 63,948 -------- -------- -------- -------- -------- Total recognised income for 2004 - 1,768 2,990 514 63,480 Employee share options: Proceeds from shares issued - - - - 2,046 Equity settled share-based payments - 1,194 - - 1,194 Change in own shares - - - - 254 Dividends to shareholders 1,867 - - - (12,833) -------- -------- -------- -------- -------- Balance at 31 December 2004 10,281 (25,729) (9,385) 679 368,826 -------- -------- -------- -------- -------- Analysis of adjustments to the income statement as a result of the transition to IFRS Intangible Financial Income Insurance Assets Assets Tax Contracts UK GAAP (Note 1) (Note 2) (Note 3) (Note 4) £000 £000 £000 £000 £000 Income Insurance premium revenue 759,556 - - - - Insurance premium ceded to reinsurers (117,127) - - - - -------- -------- -------- ------- ------- Net premium revenue 642,429 - - - - Investment result 31,999 - 1,410 - - Other revenues 14,527 - - - - -------- -------- -------- ------- ------- Net income 688,955 - 1,410 - - -------- -------- -------- ------- ------- Expenses Claims and claim adjustment expenses (355,852) - - - - Other costs and expenses (254,482) 1,453 - - 1,503 -------- -------- -------- ------- ------- Total expenses (610,334) 1,453 - - 1,503 -------- -------- -------- ------- ------- Results of operating activities 78,621 1,453 1,410 - 1,503 Finance costs (1,977) - - - - Share of profit / (loss) of associates 390 - - - - -------- -------- -------- ------- ------- Profit before tax 77,034 1,453 1,410 - 1,503 Income tax expense (22,460) - (423) 554 (451) -------- -------- -------- ------- ------- Profit for the year 54,574 1,453 987 554 1,052 -------- -------- -------- ------- ------- Earnings per share Basic 18.7p 0.5p 0.3p 0.2p 0.4p Diluted 18.5p 0.5p 0.3p 0.2p 0.4p Return on equity (%) (Note 8) 17.6 0.5 0.3 0.2 0.3 Dividend Employee Rates of Total Recognition Benefits Exchange Other Equity (Note 5) (Note 6) (Note 7) Adjustments IFRS £000 £000 £000 £000 £000 Income Insurance premium revenue - - 89,368 (1,400) 847,524 Insurance premium ceded to reinsurers - - (16,102) 557 (132,672) -------- -------- -------- -------- -------- Net premium revenue - - 73,266 (843) 714,852 Investment result - - 1,023 - 34,432 Other revenues - (852) 1,437 15,112 -------- -------- -------- -------- -------- Net income - - 73,437 594 764,396 -------- -------- -------- -------- -------- Expenses Claims and claim adjustment expenses - - (24,214) (2,553) (382,619) Other costs and expenses - 3,038 (44,873) 2,693 (290,668) -------- -------- -------- -------- -------- Total expenses - 3,038 (69,087) 140 (673,287) -------- -------- -------- -------- -------- Results of operating activities - 3,038 4,350 734 91,109 Finance costs - - - - (1,977) Share of profit /(loss) - - - - 390 of associates -------- -------- -------- -------- -------- Profit before tax - 3,038 4,350 734 89,522 Income tax expense - (1,270) (1,304) (220) (25,574) -------- -------- -------- -------- -------- Profit for the year - 1,768 3,046 514 63,948 -------- -------- -------- -------- -------- Earnings per share Basic 0.0p 0.6p 1.0p 0.2p 21.9p Diluted 0.0p 0.6p 1.0p 0.2p 21.7p Return on equity (%) 0.0 0.6 1.0 0.1 20.6 (Note 8) The principal changes which have a material impact on either net assets or profit for the year are explained further below: 1.Intangible assets Goodwill Goodwill acquired in a business combination is no longer amortised but is tested for impairment on at least an annual basis. Up to 31 December 1997, under UK GAAP goodwill arising on the acquisition of subsidiaries was written off directly to reserves in the year of acquisition. From 1 January 1998, in accordance with FRS 10 Goodwill and intangible assets, goodwill was capitalised and amortised on a straight-line basis over its useful economic life which was deemed to be 20 years. Any goodwill previously amortised or written-off has not been reinstated on adoption of IFRS and thus the value of goodwill has been taken as the carrying amount on adoption. Syndicate capacity In accordance with IAS 38 Intangible Assets, the useful lives of all of the Group's recognised intangible assets have been reviewed on adoption of IFRS. Following this review it has been concluded that syndicate capacity has an indefinite useful life and so will no longer be amortised but will be subject to an at least annual impairment test. Syndicate capacity previously amortised has been reinstated on adoption of IFRS. 2.Financial assets Valuation In the Group's UK GAAP financial statements, financial assets are stated at their current value. For listed investments, comprising those quoted on the London and other international stock exchanges, current value was deemed to be the mid-market prices on the balance sheet date, or on the last stock exchange trading day before the balance sheet date. All realised or unrealised gains and losses were taken to the income statement. For the purposes of measuring financial assets under IAS 39 Financial Instruments : Recognition and Measurement all financial assets are classified into the following four categories : (a) Financial assets at fair value through income; (b) Held-to-maturity investments; (c) Loans and receivables; and (d) Available-for-sale financial assets. A full review of the Group's investments has been performed as part of the adoption of IFRS and all equities and debt securities have been classified as financial assets at fair value through the income statement. The accounting for this category of financial asset is similar to the Group's previous accounting policy under UK GAAP. However, under IFRS listed investments are valued at bid price on the balance sheet date, or on the last stock exchange trading day before the balance sheet date. Derivative financial instruments The Group has entered into a number of foreign exchange contracts in order to manage its exposure to business denominated in a currency other than its presentational currency. In accordance with IAS 39 these contracts have been recognised in the balance sheet at their fair value. Cash and cash equivalents In the Group's UK GAAP financial statements deposits with credit institutions were included within investments. These deposits were predominantly composed of short dated certificates of deposit. Under IFRS cash equivalents are included with cash at bank and in hand as cash and cash equivalents. IAS 7 Cash Flow Statements defines cash equivalents as short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. An investment normally qualifies as a cash equivalent only when it has a short maturity of three months or less from the date of acquisition. All certificates of deposit which meet this criteria have been disclosed as cash equivalents in the IFRS balance sheet. This adjustment has no impact on shareholders' funds or profit after tax. 3.Income tax Current income tax was provided in the UK GAAP financial statements for amounts expected to be paid (or recovered) using the tax rates and laws that had been enacted or substantially enacted at the balance sheet date. Deferred income tax was recognised in respect of all timing differences, with certain exceptions, that had originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax or a right to pay less tax in the future had occurred at the balance sheet date. Timing differences are differences between the Group's taxable profits and its results as stated in the UK GAAP financial statements that arise from the inclusion of gains and losses in tax assessments in periods different from those in which they are recognised in the financial statements. Deferred income tax was measured at the average tax rates that are expected to apply in periods in which the timing differences are expected to reverse. The Group did not discount its UK GAAP deferred tax assets or liabilities. IAS 12 Income Taxes takes a balance sheet approach with deferred income tax being calculated, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is determined using tax rates and laws that have been enacted or substantively enacted by the balance sheet date and are expected to apply in periods in which the timing differences are expected to reverse. IAS 12 explicitly states that deferred tax assets and liabilities shall not be discounted. 4.Insurance contracts Equalisation provision In the UK GAAP financial statements an equalisation provision was established for Hiscox Insurance Company Limited in accordance with the requirements of PRU 7.5 of the Integrated Prudential Sourcebook (Insurance and other amendments) Instrument 2004. This provision, which was in addition to the provisions required to meet the anticipated ultimate cost of settlement of outstanding claims at the balance sheet date, was required by Schedule 9A to the Companies Act 1985 to be included within technical provisions at the balance sheet date notwithstanding that it does not represent liabilities at the balance sheet date. Under IFRS 4, provisions for possible future claims arising from insurance contracts that are not in existence at the reporting date (such as catastrophe and equalisation provisions) are not recognised. 5.Dividend recognition Under UK GAAP dividends are recognised in the income statement in the period to which they relate irrespective of when they are declared and approved. IAS 10 Events after the Balance Sheet Date does not allow the recognition of dividends to holders of equity instruments after the balance sheet date because they do not meet the criteria of a present obligation in IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Accordingly only dividends declared (i.e. appropriately authorised and no longer at the discretion of the Group) are recognised in the income statement. 6.Employee benefits Retirement benefit obligations Under IAS 19 Employee Benefits the present value of the defined benefit obligation is matched against the fair value of the plan assets out of which the obligations are to be settled directly and other unrecognised actuarial gains and losses. The resulting pension scheme asset or liability is recognised in the balance sheet. Previously under UK GAAP the assets and liabilities of defined benefit pension schemes were off-balance sheet items which were only disclosed by way of a footnote. Under SSAP 24 Accounting for Pension Costs, pension contributions were charged to the income statement so as to spread the cost of pensions over employees' working lives with the Group. Differences between these amounts charged and payments made to the Group's pension schemes were treated as an asset or liability in the UK GAAP balance sheet. The standard also allows the recognition of a right to reimbursement from other parties of some of the expenditure required to settle the defined benefit obligation. Accordingly the Group has recognised in the restated consolidated financial information income and a corresponding asset of £7,345,000 representing the share of the defined benefit obligation paid or payable by third party capital providers on Syndicate 33. Share-based payments IFRS 2 Share-based Payment requires the recognition of an expense representing the fair value of employee services rendered in exchange for the grant of options. The amount to be expensed has been determined by reference to the fair value of the options granted. The impact of any non-market vesting conditions is not included in the calculation of the fair value but is included in the assumptions about the number of options that are expected to become exercisable. The fair value is expensed over the vesting period which is three years for all of the Group's share option schemes. In accordance with the transitional arrangements contained in the standard, only share options granted after 7 November 2002 but not yet vested at 1 January 2005 were included in the calculations. Sabbatical leave After ten years of service, all permanent employees of the Group are eligible to take an eight week paid sabbatical leave. The present value of the cost of this compensated absence is expensed in the income statement over the period of service in accordance with IAS 19. 7.Rates of exchange Functional currency The functional currency is the currency of the primary economic environment in which an entity operates. The functional currency of all entities in the Group has been deemed to be Sterling with the exception of the entities operating in France, Germany, Holland and Benelux whose functional currency is Euros and Hiscox Insurance Company (Guernsey) Limited whose functional currency is US Dollars. IAS 21 The Effects of Changes in Foreign Exchange Rates requires that foreign currency transactions are recorded, on initial recognition in the functional currency, by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction. Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition in the functional currency during the period or in previous financial statements are recognised in the income statement when they arise. Under IFRS unearned premium and deferred acquisition costs are non monetary assets and liabilities and accordingly are not retranslated from the historic rates. Presentational currency The presentational currency of the Group, which is the currency used in the presentation of the consolidated financial statements, is Sterling. The results and financial position of those entities whose functional currency is not Sterling have been translated to the presentational currency as follows : • All assets and liabilities are translated at the closing rate at the balance sheet date; • Income and expenses are translated at the exchange rates prevailing on the dates of transactions; and • All resulting exchange differences are recognised as a separate component of equity. Previously under UK GAAP, investments in foreign enterprises were translated using the net investment method which applies the closing rate to all assets and liabilities and income and expenses. All resulting exchange differences were similarly taken to reserves. Daily transactional rates As part of the system improvements made on adoption of IFRS the Group has moved to daily transactional rates of exchange as it believes that this provides more accurate financial information. The only exception to this is for business whose functional currency is not denominated in pounds Sterling for which average monthly rates continue to be adopted for the translation into the presentational currency. Disclosure All exchange differences arising on the retranslation of monetary assets and liabilities to functional currency at the balance sheet date have been taken to the income statement and included in other operating costs and expenses. Under UK GAAP these differences were included on a line by line basis throughout the income statement 8.Return on equity Return on equity is calculated as the profit on ordinary activities after tax divided by opening shareholders' funds adjusted for the time weighted impact of additional capital raised or repurchased and distributions of capital to shareholders including dividends. Significant Accounting Policies The significant accounting policies applied in the preparation of the restated consolidation financial information are set out below. Hiscox plc (the parent company, referred to as the 'Company') and its subsidiaries (collectively, the Hiscox Group or the 'Group') provide insurance, reinsurance and investment management to its clients and others worldwide. It has operations in the UK, US and mainland Europe and employs over 500 people. The Company is a limited liability company incorporated and domiciled in the United Kingdom and has a primary listing on the London Stock Exchange. 1.Statement of compliance The purpose of the restated consolidated financial information is to establish the financial position, results of operations and cash flows of the Group necessary to provide comparative information expected to be included in the Group's first complete set of IFRS financial statements for the year ended 31 December 2005. The restated consolidated financial information does not itself include comparative financial information for the prior period. The restated consolidated financial information has been prepared in accordance with the standards issued by the International Accounting Standards Board (IASB) and currently endorsed by the European Commission. The Standards themselves are evolving and are subject to possible amendment by interpretative guidance from the IASB, emerging practice or other external bodies. Accordingly, the Standards to be applied may be subject to change prior to the publication of the Group's first IFRS results in March 2006. Since 2002, the standards adopted by the IASB have been referred to as 'International Financial Reporting Standards' (IFRS). The standards from prior years continue to bear the title 'International Accounting Standards' (IAS). Insofar as a particular standard is not explicitly referred to, the two terms are used in this financial information synonymously. 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 or other IFRS do not specify the recognition or measurement of insurance contracts, transactions reported in the restated consolidated financial information have been accounted for in accordance with the Companies Act 1985 and the Statement of Recommended Practice issued by the Association of British Insurers in November 2003. 2.Basis of preparation The restated consolidated financial information are presented in pounds Sterling, rounded to the nearest thousand. They are prepared on the historical cost basis as modified by the revaluation of land and buildings and financial assets and financial liabilities (including derivative financial assets) at fair value through the income statement. The Company has taken advantage of the following exemptions set out in IFRS 1 First-time Adoption of International Financial Reporting Standards: • IFRS 3 Business Combinations has not been applied retrospectively to business combinations that occurred before 1 January 2004. Accumulated amortisation on goodwill arising before 1 January 2004 has not, therefore, been reversed; • All cumulative actuarial gains and losses arising on employee benefit schemes to 1 January 2004 have been recognised in equity at 1 January 2004; • Cumulative translation differences for all foreign operations are deemed to be zero at 1 January 2004; and • The provisions of IFRS 2 Share-based payments to equity settled awards granted on or before 7 November 2002, or to awards granted after that date but vesting prior to 1 January 2005. The Company has not taken advantage of the exemptions within IFRS 1 that allow comparative information presented in the first year of adoption of IFRS not to comply with IAS 32 Financial Instruments: Disclosure and Presentation, IAS 39 Financial Instruments: Recognition and Measurement and IFRS 4 Insurance Contracts. The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the year in which the estimate is revised if the revision affects only that year, or in the year of the revision and future years if the revision affects both current and future years. The restated consolidated financial information is based on the UK GAAP financial statements approved by the board on 16 March 2005 and adjusted to comply with IFRS. In accordance with IFRS 1 there have been no adjustments to the estimates made at the time of the preparation of the UK GAAP financial statements. The accounting policies set out below have been applied consistently to all years presented in the restated consolidated financial information. 3.Basis of consolidation 3.1 Subsidiaries Subsidiaries are those entities (including special purpose entities) controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the restated consolidated financial information from the date that control commences until the date that control ceases. The Group uses the purchase method of accounting to account for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group's share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement. 3.2 Associates Associates are those entities in which the Group has the power to have significant influence, but not control, over the financial and operating policies. The restated consolidated financial information includes the Group's share of the total recognised income or expense of associates on an equity accounted basis from the date that significant influence commences until the date that significant influence ceases. When the Group's share of losses equals or exceeds the carrying amount of the associate, the carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred obligations in respect of the associate. 3.3 Transactions eliminated on consolidation Intragroup balances, transactions and any unrealised gains arising from intragroup transactions are eliminated in preparing the restated consolidated financial information. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Unrealised gains arising from transactions with associates are eliminated to the extent of the Group's interest in the entity. Unrealised losses are also eliminated but only to the extent that there is no evidence of impairment of the asset transferred. 4.Foreign currency translation 4.1 Functional and presentational currency Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the 'functional currency'). The restated consolidated financial information is presented in thousands of pounds Sterling, which is the Group's presentation currency. 4.2 Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges. All such foreign exchange gains and losses have been disclosed within other operating costs and expenses including exchange gains and losses arising on the retranslation of outstanding claims and the related reinsurance asset. 4.3 Group companies The Group's mainland European subsidiaries and the insurance company in Guernsey have a functional currency different from the presentation currency, being Euros and US Dollars respectively. The results and financial position of all these entities are translated into the presentation currency as follows : (i) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; (ii)income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the date of the transactions); and (iii)all resulting exchange differences are recognised as a separate component of equity. When a foreign operation is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as the foreign entity's assets and liabilities and are translated at the closing rate. All other Group entities have a Sterling functional currency. 5.Property, plant and equipment Land and buildings are shown at fair value, based on periodic, but at least triennial, valuations by external independent appraisers, less subsequent depreciation for buildings. Any accumulated depreciation at the date of revaluation is eliminated against the gross carrying amount of the asset, and the net amount is restated to the revalued amount of the asset. Increases in the carrying amount arising on revaluation of land and buildings are credited to the revaluation surplus in equity. Decreases that offset previous increases of the same asset are charged against fair value reserves directly in equity; all other decreases are charged to the income statement. Each year, the difference between depreciation based on the revalued carrying amount of the asset charged to the income statement and depreciation based on the asset's original cost, net of any related deferred income tax, is transferred from the revaluation surplus to retained earnings. All other property, plant and equipment are stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Cost may also include transfers from equity of any gains or losses on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment. Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost or revalued amounts to their residual values over their estimated useful lives, as follows : Buildings 50 years Vehicles 3 years Furniture, fittings and equipment Fixtures and fittings 15 years Furniture and equipment 10 years Computer equipment 3 years The assets' residual values and useful lives are reviewed at each balance sheet date and adjusted if appropriate. An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the income statement. When revalued assets are sold, the amounts included in the revaluation surplus are transferred to retained earnings. 6.Intangible assets 6.1 Goodwill Goodwill represents amounts arising on acquisition of subsidiaries and associates. In respect of acquisitions that have occurred since 1 January 2004, goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of the net identifiable assets of the acquired subsidiary / associate at the acquisition date. In respect of acquisitions prior to this date, goodwill is included on the basis of its deemed cost, which represents the amount recorded under UK GAAP. The classification and accounting treatment of business combinations that occurred prior to 1 January 2004 has not been reconsidered in preparing the Group's opening IFRS balance sheet at 1 January 2004. Goodwill on acquisition of subsidiaries is included in intangible assets. Goodwill on acquisition of associates is included in investments in associates. Goodwill arising on acquisition is not amortised but is tested annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. 6.2 Syndicate capacity Syndicate capacity is not amortised but is tested annually for impairment and carried at cost less accumulated impairment losses. 6.3 Contractual customer relationships - rights to receive investment management fees Incremental costs directly attributable to securing rights to receive fees for investment management services are recognised as an intangible asset where they can be identified separately and measured reliably and it is probable that they will be recovered. The asset represents the Group's contractual right to benefit from providing investment management services. The asset is tested annually for impairment and carried at cost less accumulated impairment losses. 6.4 Computer software Acquired computer software licences with an initial cost of over £100,000 are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised over the expected useful life of the software of three to five years. Internally developed computer software is only capitalised where the cost can be measured reliably, the Group intends to and has adequate resources to complete development and the computer software will generate future economic benefits. 7.Investments The Group has classified its investments as financial assets at fair value through income and loans and receivables. Management determines the classification of its investments at initial recognition and re-evaluates this at every reporting date. The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active, the Group establishes fair value by using other valuation techniques. These include the use of recent arm's length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis and option pricing models. 7.1 Financial assets at fair value through income A financial asset is classified into this category at inception if acquired principally for the purpose of selling in the short term, if it forms part of a portfolio of financial assets in which there is evidence of short term profit taking, or if so designated by management. Derivatives are also classified as held for trading unless they are designated as hedges. 7.2 Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted on an active market. Receivables arising from insurance contracts are also classified in this category and are reviewed for impairment as part of the impairment review of loans and receivables. 8.Impairment of assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). 9.Derivative financial investments Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently valued at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. For derivatives not designated as a hedging instrument, fair value changes are recognised immediately in the income statement. 10.Treasury or own shares Where any Group company purchases the Company's equity share capital (treasury or own shares), the consideration paid, including any directly attributable incremental costs (net of income taxes), is deducted from equity attributable to the Company's equity holders. Where such shares are subsequently sold, reissued or otherwise disposed of, any consideration received is included in equity attributable to the Company's equity holders, net of any directly attributable incremental transaction costs and the related income tax effects. 11.Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. 12.Insurance contracts 12.1 Classification The Group issues short term casualty and property insurance contracts that transfer insurance risk or financial risk or both. Insurance contracts are those contracts that transfer significant insurance risk. Such contracts may also transfer financial risk. 12.2 Premiums For all short term insurance contracts, premiums are recognised as revenue (earned premiums) proportionally over the period of coverage. The portion of premium received on in-force contracts that relates to unexpired risks at the balance sheet date is reported as the unearned premium liability. Premiums are shown before deduction of commission. 12.3 Claims and claim adjustment expenses Claims and claim adjustment expenses are charged to income as incurred based on the estimated liability for compensation owed to contract holders or third parties damaged by the contract holders. They include direct and indirect claims settlement costs and arise from events that have occurred up to the balance sheet date even if they have not yet been reported to the Group. The Group does not discount its liabilities for unpaid claims. Liabilities for unpaid claims are estimated using the assessment for individual cases reported to the Group, statistical analysis of the claims incurred but not reported and estimates of the expected ultimate cost of more complex claims that may be affected by external factors e.g. court decisions. 12.4 Deferred acquisition costs ('DAC') Commissions and other acquisition costs that vary with and are related to securing new contracts and renewing existing contracts are capitalised as an intangible asset. All other costs are recognised as expenses when incurred. The DAC is amortised over the terms of the policies as premium is earned. 12.5 Liability adequacy test At each balance sheet date, liability adequacy tests are performed to ensure the adequacy of the contract liabilities net of related DAC. In performing these tests, current best estimates of future contractual cash flows and claims handling and administration expenses, as well as investment income from assets backing such liabilities, are used. Any deficiency is immediately charged to profit or loss initially by writing off related DAC and by subsequently establishing a provision for losses arising from liability adequacy tests ('the unexpired risk provision'). Any DAC written off as a result of this test cannot subsequently be reinstated. 12.6 Reinsurance contracts held Contracts entered into by the Group with reinsurers under which the Groups is compensated for losses on one or more contracts issued by the Group and that meet the classification requirements for insurance contracts are classified as reinsurance contracts held. Insurance contracts entered into by the Group under which the contract holder is another insurer or reinsurer ('inwards reinsurance') are included within insurance contracts. The benefits to which the Group is entitled under its reinsurance contracts held are recognised as reinsurance assets. These assets consist of short term balances due from reinsurers (classified within loans and receivables) as well as longer term receivables (classified as reinsurance assets) that are dependent on the expected claims and benefits arising under the related reinsured insurance or reinsurance contracts. Reinsurance liabilities are primarily premiums payable for reinsurance contracts and are charged as an expense over the period of coverage provided. The Group assesses its reinsurance assets on a regular basis and if there is objective evidence that the reinsurance asset is impaired the Group reduces the carrying amount of the reinsurance asset to its recoverable amount and recognises the impairment loss in the income statement. 12.7 Receivables and payables related to insurance contracts Receivables and payables are recognised when due. These include amounts due to and from agents, brokers and insurance contract holders. If there is objective evidence that the insurance receivable is impaired, the Group reduces the carrying amount of the insurance receivable accordingly and recognises the impairment loss in the income statement. 12.8 Salvage and subrogation reimbursements Some insurance contracts permit the Group to sell property acquired in settling a claim (salvage). The Group may also have the right to pursue third parties for payment of some or all costs (subrogation). Estimates of salvage recoveries are included as an allowance in the measurement of the insurance liability for claims and salvage property is recognised in other assets when the liability is settled. The allowance is the amount that can reasonably be recovered from the disposal of the property. Subrogation reimbursements are also considered as an allowance in the measurement of the insurance liability for claims and are recognised in other assets when the liability is settled. The allowance is the assessment of the amount that can be recovered from the action against the liable third party. 13.Deferred income tax Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the restated consolidated financial information. However, if the deferred income tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss, it is not accounted for. Deferred income tax is determined using tax rates and laws that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that the future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the Group controls the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. 14.Employee benefits 14.1 Pension obligations The Group operates both defined benefit and defined contribution pension schemes. A defined benefit plan is a pension plan that defines the amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity. The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognised actuarial gains or losses and past service costs. Plan assets exclude any insurance contracts issued by the Group. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash flows using interest rates of AA rated UK corporate bonds and that have terms to maturity that approximate the terms of the related pension liability. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to income over the employees' expected average remaining working lives. Past service costs arising in the period are recognised immediately in income, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past service costs are amortised on a straight-line basis over the vesting period. For defined contribution plans, the Group pays contributions to publicly or privately administered pension insurance plans on a contractual basis. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as employee benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available. 14.2 Other long term employee benefits The Group provides sabbatical to its employees on completing a minimum service period of ten years. The expected costs of this benefit are accrued over the period of employment. 14.3 Share based compensation The Group operates an equity settled share based compensation plan. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted, excluding the impact of any non market vesting conditions e.g. profitability or net asset growth targets. Non market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. At each balance sheet date, the Group revises its estimates of the number of options that are expected to become exercisable. It recognises the impact of the revision of original estimates, if any, in the income statement, and a corresponding adjustment to equity over the remaining vesting period. The proceeds received net of any directly attributable transaction costs are credited to share capital and share premium when the options are exercised. 14.4 Termination benefits Termination benefits are payable when employment is terminated before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to either: terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal; or providing termination benefits as a result of an offer made to encourage voluntary redundancy. 14.5 Profit sharing and bonus plans The Group recognises a liability and an expense for bonuses where contractually obliged or where there is a past practice that has created a constructive obligation. 14.6 Accumulating compensation benefits The Group recognises a liability and an expense for accumulating compensation benefits e.g. holiday entitlement, based on the additional amount that the Group expects to pay as a result of the unused entitlement accumulated at the balance sheet date. 15.Provisions The Group is subject to various insurance related assessments or guarantee fund levies. Related provisions are provided where there is a present obligation (legal or constructive) as a result of a past event. 16.Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the Group are classified as finance leases. At the commencement of the lease term, finance leases are recognised as assets and liabilities at the lower of the fair value of the asset and the present value of the minimum lease payments. The minimum lease payments are apportioned between finance charges and repayment of the outstanding liability, finance charges being charged to each period of the lease term so as to produce a constant rate of interest on the outstanding balance of the liability. All other leases are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. 17.Dividend distribution Dividend distribution to the Company's shareholders is recognised as a liability in the Group's financial statements in the period in which the dividends are declared by the Company and where applicable approved by the Company's shareholders. Special Purpose Audit Report of KPMG Audit Plc to Hiscox plc ('the Company') on its Restated Consolidated Financial Information for the year ended 31 December 2004 under International Financial Reporting Standards ('IFRS') In accordance with the terms of our engagement letter dated 16 June 2005, we have audited the accompanying summary consolidated balance sheet of Hiscox plc ('the Company') as at 31 December 2004, and the related summary consolidated statements of income, changes in equity and cash flows for the year then ended and the related significant accounting policies ('the restated consolidated financial information') set out on pages 4 to 20. Respective responsibilities of directors and KPMG Audit Plc As described on page 3, the directors of the Company have accepted responsibility for the preparation of the restated consolidated financial information which have been prepared as part of the Company's conversion to IFRS. Our responsibilities, as independent auditors, are established in the United Kingdom by the Auditing Practices Board, our profession's ethical guidance and the terms of our engagement. Under the terms of engagement we are required to report to you our opinion as to whether the restated consolidated financial information has been properly prepared, in all material respects, in accordance with the accounting policies note to the restated consolidated financial information. We also report to you if, in our opinion, we have not received all the information and explanations we require for our audit. We read the other information accompanying the restated consolidated financial information and consider whether it is consistent with the restated consolidated financial information. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the restated consolidated financial information. Our report has been prepared for the Company solely in connection with the Company's conversion to IFRS. Our report was designed to meet the agreed requirements of the Company determined by the Company's needs at the time. Our report should not therefore be regarded as suitable to be used or relied on by any party wishing to acquire rights against us other than the Company for any purpose or in any context. Any party other than the Company who chooses to rely on our report (or any part of it) will do so at its own risk. To the fullest extent permitted by law, KPMG Audit Plc will accept no responsibility or liability in respect of our report to any other party. Basis of audit opinion We conducted our audit having regard to Auditing Standards issued by the UK Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the restated consolidated financial information. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the restated consolidated financial information, and of whether the significant accounting policies are appropriate to the Company's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the restated consolidated financial information are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the restated consolidated financial information. Emphasis of matters Without qualifying our opinion, we draw your attention to the following matters: • The significant accounting policies note to the restated consolidated financial information explains why the accompanying restated consolidated financial information may require adjustment before their inclusion as comparative information in the IFRS financial statements for the year ending 31 December 2005 when the Company prepares its first IFRS financial statements. • As described in the significant accounting policies note to the restated consolidated financial information, as part of its conversion to IFRS, the Company has prepared the restated consolidated financial information for the year ended 31 December 2004 to establish the financial position, results of operations and cash flows of the Company necessary to provide the comparative financial information expected to be included in the Company's first complete set of IFRS financial statements for the year ending 31 December 2005. The restated consolidated financial information does not themselves include comparative financial information for the prior period. • As explained in the significant accounting policies note, in accordance with IFRS 1 First-time Adoption of International Financial Reporting Standards, no adjustments have been made for any changes in estimates made at the time of approval of the UK Generally Accepted Accounting Practices financial statements on which the restated consolidated financial information is based. Opinion In our opinion, the accompanying restated consolidated financial information for the year ended 31 December 2004 has been prepared, in all material respects, in accordance with the basis set out in the significant accounting policies note, which describes how IFRS have been applied under IFRS 1, including the assumptions made by the directors of the Company about the standards and interpretations expected to be effective, and the policies expected to be adopted, when they prepare the first complete set of consolidated IFRS financial statements of the Company for the year ending 31 December 2005. KPMG Audit Plc Chartered accountants Registered Auditor 8 Salisbury Square London EC4Y 8BB 25 July 2005 This information is provided by RNS The company news service from the London Stock Exchange

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