Interim Results

RNS Number : 4887B
Hiscox Ltd
18 August 2008
 



Hiscox Ltd

Interim results for the six months ended 30 June 2008


Record half year profit


HamiltonBermuda (18 August 2008) - Hiscox Ltd (LSE:HSX), the international specialist insurer, today announces interim results for the half year ended 30 June 2008.  



H1 2008

H1 2007

Gross premiums written

£639.4m

£733.0m

Net premiums earned

£486.8m

£471.9m

Profit before tax

£109.2m

£105.6m

Earnings per share

 21.7p

20.3p

Interim dividend per share

4.25p

4.0p

Net asset value per share 

222.1p

185.4p

Group combined ratio

79.7%

84.8%

Return on equity

21.8%

24.8%


Financial highlights 


  • Record interim pre-tax profits of £109.2m (2007: £105.6m)

  • Gross written premiums down by 12.8% to £639.4m (2007: £733.0m) in line with disciplined underwriting policy

  • Group combined ratio 79.7% (2007: 84.8%); improved combined ratio in each division

  • Earnings per share on profit after tax up 6.9% to 21.7p (2007: 20.3p) 

  • Interim dividend increased by 6.25% to 4.25p per share (2007: 4.0p) 

  • Return on equity 21.8% (2007: 24.8%)

  • Active capital management, including share buy-backs totalling £73.7m and debt reduction of US $182m


Operational highlights


  • Hiscox Global Markets - profit before tax £80.4m (2007: £87.5m) - highly disciplined underwriting in the face of softening rate environment

  • Hiscox International - profit before tax up 67.7% to £20.3m (2007: £12.1m) - Bob Forness to join Bermudian business and set up new specialist team to complement existing property catastrophe business

  • Hiscox UK and Hiscox Europe - profit before tax more thadoubled to £16.3m (2007: £6.6m) with GWP increasing by 14.6% as increased concentration on commercial lines generates profitable growth

  • Positive investment return in challenging conditions from a high quality and well diversified investment portfolio with strong liquidity


Robert Hiscox, Chairman, Hiscox Ltd, commented: 


'We have done what we said we would do. We have reduced our exposure in internationally traded business in the face of competitive rating, but still succeeded in lowering the combined ratio. We have increased our income and profit in our regional businesses. We have repaid capital to our shareholders by buying back shares and increasing the dividend.  


'Our well-diversified specialist businesses round the world have the ability and the opportunities to make profits whatever the state of the market.' 


For further information

Interim results will be presented to investors and analysts at 09.00 (UK time) on Monday 18 August 2008 at Hiscox, 1 Great St Helen's, London EC3A 6HX. This presentation will be broadcast live on the Hiscox website www.hiscox.com. Prior to the event the presentation slides will be available to download from the Hiscox home page.  


A recording of the presentation and question and answer session will be available on the Hiscox website from 12.00 (UK time) on the day. This facility will be available until 18 September 2008


Contacts            


Hiscox Ltd


Robin Mehta, Company Secretary, Bermuda

+1 441 278 8300

Jennifer Crowl, Director of Communications, London

+44 (0) 20 7 448 6494



Maitland

+44 (0) 20 7379 5151

Suzanne Bartch


Richard Farnsworth 




Notes to editors  


About Hiscox 

Hiscox, headquartered in Bermuda, is an international specialist insurance group listed on the London Stock Exchange. There are three main underwriting parts of the Group - Hiscox Global Markets, Hiscox UK and Europe and Hiscox International. Hiscox Global Markets underwrites mainly internationally traded business in the London Market - generally large or complex business which needs to be shared with other insurers or needs the international licences of Lloyd's. Hiscox UK and Hiscox Europe offer a range of specialist insurance for professionals and business customers, and tailored products for high net worth individuals. Hiscox International includes operations in Bermuda, Guernsey and USA. Hiscox Insurance Company Limited, Hiscox Underwriting Limited and Hiscox Syndicates Ltd are regulated by the Financial Services Authority. For further information, visit www.hiscox.com.


 

 

 

Chairman's interim statement 2008

It is very pleasing (and slightly surreal) to be able to announce record half year results when the financial markets are in turmoil, and our rating by the stock-market is so low. There was a strong performance from all divisions, and a positive investment result which is an achievement given the buffeting many investments (even the short dated and highly rated ones we favour) have had in the recent market turmoil. I realise that the share price reflects the future, not the past. Yes, insurance rates are reducing in some areas of our business, but we are well able to find profitable business and continue to walk away from inadequately rated business, and yes, we have investments in asset-backed bonds and the like, but we have not had a single bond default and we are getting much better returns to maturity than in recent years. I believe that we have a strong and profitable future.


Results 

Record profits before tax for the half year to 30 June 2008 of £109.2 million (2007: £105.6 million), an increase of 3.4%, despite a weaker investment return. Gross written premiums have decreased as forecast to £639.4 million (2007: £733.0 million) as the reductions in larger premium business are not fully offset by the good growth in our regional business. Net earned premium increased to £486.8 million (2007: £471.9 million) as we benefited from the premium written in the strong 2007 rating environment. The combined ratio reduced to 79.7% (2007: 84.8%). Earnings per share increased to 21.7p (2007: 20.3p) and net assets per share rose to 222.1p (2007: 185.4p), an increase of 19.8%. We are in the middle of the hurricane season and the financial markets remain challenging, but a strong start to the year bodes well for the full year.


Dividend, balance sheet and capital management

In line with our policy of progressive dividend increases, the Board has approved an increase in the interim dividend of 6.25% to 4.25p per share (2007: 4p per share) which will be paid on 29 September 2008 to shareholders on the register at the close of business on 28 August 2008

 

The Group is in a strong financial position with no significant changes to the balance sheet since the 2007 year end.  During the first six months our strong cashflow enabled us to repay the existing loan of US $182 million in full. We also refinanced our bank facilities, increasing them to £350 million, lengthening the duration to five years on the cash facility and improving the terms. These facilities were provided by our existing syndicate of relationship banks.


We have effectively exceeded our £150 million capital repayment programme with an annual dividend payment of £47 million, the buy-back of 32.4 million shares at an average price of 226.9p for a total of £73.7 million, and the repayment of US $182 million of bank debt.  We will continue to buy back shares as suitable opportunities arise within the constraints of our capital needs and taking into account the uncertainty in the financial markets.


Overall comment

When the absurd lending practices of the banks and their games of pass the parcel of their debts to each other came to the natural conclusion of the credit crunch, I thought that the insurance industry might be the ultimate recipient of much of the pain from the dud investments as they were dressed up as high-yielding bonds, the staple diet of insurance companies. But in general the insurance industry's ability to price risk saved it, and to date there has been less damage than expected - except to sentiment as investors assume the worst.


We are in the risk business, and now that risk is being more realistically priced in fixed interest markets, we are able to invest at more attractive prices and better yields. We have suffered from falls in bond valuations, but have not had a single default. However, if the worst happened and we do suffer some minor defaults, the cost is nothing compared with a major hurricane or other loss to the underwriting side of the business.


Underwriting is seeing the usual and predictable rate reductions after two very profitable years, but it was ever thus. As forecast previously, we are reducing income and exposure to ensure we take a measured amount of risk. Our strategy of focus on specialist classes with geographical spread gives us opportunities to concentrate on and grow in areas where there is less competition and better pricing.


Hiscox Global Markets

This division uses the global licences, distribution network and credit rating available through Lloyd's to serve clients throughout the world. It has underwriting bases in LondonParisNew York and San Francisco.


Profit before tax

£80.4 million (2007: £87.5 million)

Gross premiums written

£344.3 million (2007: £423.7 million)

Combined ratio

75.7% (2007: 75.9%)


After two good catastrophe-free years, reinsurance rates are under pressure. We said we would underwrite with discipline and walk away from prices which did not reflect the risk, and this we have done at the expense of the top line. Better to make money on a smaller income than to lose money on an increased turnover; or in my usual words, profit is sanity, turnover vanity.


The first half year has been full of large individual losses around the world, most notably in the large property, mining and energy sectors. Market estimates of these losses currently exceed US $6 billion in aggregate. We had reduced our exposure in this area, but if prices rise again as a result of these losses, we shall re-enter the market with full force.


Once again I am writing this in the middle of the wind season, and Mother Nature likes to be unpredictable. What we can do to make our result more predictable is to focus hard on analysing our catastrophe exposure and the price we are getting for it and tailor it to produce a profit in the expectation of realistic wind losses, remaining acutely aware of the deficiencies of theoretical models. We have reduced our exposure and income but reinsurance rates continue to be healthy and we will continue to seek good profits in this area.


With the obvious markets of internationally traded catastrophe and big risk insurance business under pressure, we are working hard to expand in our more specialist areas.  


We announced recently that we were examining the possibility of starting up a new wholly owned syndicate at Lloyd's to underwrite business from our wholly owned distribution network. We are in active discussions with Lloyd's, the FSA and the external capital providers of Syndicate 33 and are hopeful that the new syndicate can be formed for the 2009 year.


Hiscox International

This division covers Bermuda, the USA and Guernsey.  


Profit before tax

£20.3 million (2007: £12.1 million)

Gross premiums written

£117.0 million (2007: £154.0 million)

Combined ratio

84.6% (2007: 95.3%)


As planned, Bermuda has reduced its income by around 36% reducing exposure as rates reduce. Bob Forness and his team are joining Hiscox to form a new division to underwrite custom made reinsurance products. He will also be taking over as CEO of our Bermuda subsidiary from Robert Childs who will be returning to London. Robert will retain his roles as Chief Underwriting Officer of the Group and head of our International business area. 


Hiscox USA is now well established and the integration of American Live Stock Inc. is nearly complete. As licenses are obtained we will be writing admitted specialist commercial business (in addition to the existing admitted animal mortality business) in the second half of the year. Income grew by 59% in the first half (but from a small base) and the combined operation is nearing break-even. 


Guernsey has produced another excellent profit.  


Hiscox UK and Europe

This segment covers our regional businesses throughout the UK and mainland Europe.    


Profit before tax

£16.3 million (2007: £6.6 million)

Gross premiums written

£178.0 million (2007: £155.3 million)

Combined ratio

86.3% (2007: 103.8%)


These are strong underwriting results dampened by negative investment returns due to a large proportion of the Group's equities being held in this division. The market is as competitive as ever but we continue to offer our excellent products at the right price.


In the UK, we focus on High Net Worth personal lines (now including motor) and commercial insurance for small and medium sized professional businesses. The addition of luxury car insurance has started well, and in the household business we have decided to put all our resources behind our higher net worth offerings and to write the mid net worth direct only through internet and telephone. The narrower the blade the deeper it goes. 


Our specialist commercial business is written both through brokers and direct and is forging ahead successfully generating a solid underwriting result at the half year. We focus on small risks which are less competed for and less exposed to the softening market. 


We continue to build the brand with our second TV advertising campaign of the year in August. This continues to generate good business with growth of our direct household area up nearly 52% at the half year. Our marketing campaign also benefits the broker market not only from the fast increasing brand awareness but also by reinforcing the message that we sell on service and not price. 


Europe continues its contribution as we experienced extremely satisfactory growth in profitability across all classes of business and we are pleased with the results generated in all countries. This performance has been delivered by both healthy increases in gross written premium and an improvement in productivity as well as favourable foreign exchange. We believe that the new concentration on commercial risks, particularly in small businesses, will generate sustained profitable growth.


Investments

Assets under management at 30 June 2008 totalled £1,931 million (2007: £1,823 million) and the yield for the half year was 0.8% (2007: 2.6%), giving an investment return of £17.3 million (2007: £46.8 million). The assets have reduced from £2,051 million at the year end due largely to the repayment of debt and the share repurchase programme. 


The modest (but positive) investment return reflects the challenging conditions that prevailed during the period. Although we further reduced our allocation to equities we suffered nonetheless from the weakness in markets but by a smaller amount than the general indices. The bond markets, where the bulk of our assets are invested, continued to be volatile with certain sectors being disrupted by illiquidity and credit concerns. We have not suffered a single default and are now taking advantage of the dislocation in pricing to make some opportunistic allocations to slightly higher risk, but also higher return, investments.


Much debate exists about mark to market valuations where turmoil exists in markets and forced selling depresses prices. As these assets mature the discounts reverse so we look more to the yield to maturity we will earn given the high quality of our asset portfolio. For us, as for any insurance company, liquidity of the portfolio is key and over the last few years we have avoided investing in complex structured products due to our concerns over liquidity of these products in uncertain markets - a concern that the current markets have borne out. Our fixed interest portfolios mature at an average rate of £100 million a quarter over the next two years, approximately 60% of the total fixed interest portfolio. Added to over £300 million of available bank facilities this gives us very strong liquidity.  


Outlook

We have spent the last few profitable years investing in businesses internationally with the intention of balancing the more volatile cycle and results of internationally traded business. Our regional network has more than doubled their aggregate profits, and that includes two major areas, the UK direct business and the new USA business, still in loss but working fast towards profit. Their time has come to prove the strategy and to provide sustainable profits.  


We will continue to focus hard in areas of business in which we specialise, distributing our products electronically and through our growing international network. The first half of the year has been excellent and there is no reason why the second half should not be good barring the extraordinary. We are determined to keep growing our regional businesses in volume and profit, and to make reasonable profits in our internationally trading businesses whatever the state of the market, keeping our tinder dry and our capital intact to surge again when the rates turn up, as we did in 2002 and 2006. 


Robert Hiscox

18 August 2008

 


Condensed consolidated interim income statement 

for the six month period ended 30 June 2008




6 months to 

6 months to

Year to

Notes

30 June 2008

30 June 2007

31 Dec 2007


£000

£000

£000

Income





Gross premiums written

7

639,360

733,029

1,198,949

Outward reinsurance premiums


(125,413)

(185,887)

(224,039)

Net premiums written


513,947

547,142

974,910


Gross premiums earned


574,934

579,598

1,179,444

Premiums ceded to reinsurers


(88,111)

(107,746)

(214,254)

Net premiums earned


486,823

471,852

965,190






Investment result

9

17,276

46,761

99,677

Other revenues

10

8,381

8,514

19,044

Revenue


512,480

527,127

1,083,911

Expenses





Claims and claim adjustment expenses, net of reinsurance

12

(206,980)

(216,612)

(423,365)

Expenses for the acquisition of insurance contracts


(125,792)

(126,271)

(264,570)

Administration expenses


(38,750)

(40,574)

(76,813)

Other expenses

10

(28,219)

(33,983)

(73,868)

Total expenses


(399,741)

(417,440)

(838,616)

Results of operating activities


112,739

109,687

245,295

Finance costs

11

(3,556)

(4,201)

(8,177)

Share of profit of associates after tax


38

76

81

Profit before tax


109,221

105,562

237,199

Tax expense


(24,869)

(25,550)

(45,951)

Profit for the period (all attributable to equity shareholders of the Company)


84,352

80,012

191,248

 

 

 

 

 

 

 

 

 

 


 

 

 

 

 

Earnings per share on profit attributable to shareholders of the Company





Basic

13

21.7p

   20.3p

48.4p

Diluted

13

20.9p

   19.6p

46.8p



The notes to the condensed consolidated interim financial statements are an integral part of this document.



Condensed consolidated interim balance sheet

at 30 June 2008








30 June 2008

30 June 2007

31 Dec 2007

Notes

£000

£000

£000






Assets





Intangible assets

19

41,547

33,122

40,452

Property, plant and equipment


21,035

13,962

19,378

Investment in associates


4,924

104

1,502

Deferred acquisition costs


137,496

146,529

123,081

Financial assets carried at fair value

15

1,639,526

1,501,900

1,747,827

Loans and receivables including insurance receivables


442,319

481,534

385,222

Reinsurance assets

17

315,510

371,602

280,088

Cash and cash equivalents


291,554

321,309

302,742

Total assets


2,893,911

2,870,062

2,900,292






Equity and liabilities





Shareholders' equity





Share capital


19,989

19,829

19,898

Share premium


7,254

3,227

4,955

Contributed surplus


367,693

414,698

398,834

Currency translation reserve


(45,193)

(45,611)

(43,265)

Retained earnings


467,835

342,807

443,882

Total equity (all attributable to equity shareholders of the Company)


817,578

734,950

824,304

Employee retirement benefit obligations


-

3,452

-

Deferred tax


34,136

12,102

9,751

Insurance liabilities

17

1,824,711

1,803,903

1,713,887

Financial liabilities carried at fair value

15

19

91,000

91,764

Current tax 


11,736

23,863

24,711

Trade and other payables


205,731

200,792

235,875

Total liabilities


2,076,333

2,135,112

2,075,988

Total equity and liabilities


2,893,911

2,870,062

2,900,292


The notes to the condensed consolidated interim financial statements are an integral part of this document.


Condensed consolidated interim statement of changes in equity

for the six month period ended 30 June 2008














   


   








June


Share

Share

Contributed

Currency

Retained

2008


capital

premium

surplus

translation reserve

earnings

Total


£000

£000

£000

£000

    £000

£000








Balance at 1 January

19,898

4,955

398,834

(43,265)

443,882

824,304

Currency translation differences

-

-

-

(1,093)

-

(1,093)

Net investment hedge

-

-

-

(835)

-

(835)

Net income / (expense) recognised directly in equity

-

-

-

(1,928)

-

(1,928)

Profit for the period

-

-

-

-

84,352

84,352

Total recognised income / (expense) for the period

-

-

-

(1,928)

84,352

82,424








Employee share options :







Equity settled share-based payments

-

-

-

-

2,778

2,778

Deferred tax transfer on shared based payments

-

-

-

-

(2,749)

(2,749)

Proceeds from shares issued

91

2,299

-

-

-

2,390

Purchase of own shares held in treasury

-

-

-

-

(60,428)

(60,428)

Dividends to external shareholders (note 14)

-

-

(31,141)

-

-

(31,141)

Balance at 30 June 2008

19,989

7,254

367,693

(45,193)

467,835

817,578
















   


   








June


Share

Share

Contributed

Currency

Retained

2007


capital

premium

surplus

translation reserve

earnings

Total


£000

£000

£000

£000

    £000

£000








Balance at 1 January

19,694

-

442,425

(40,396)

260,362

682,085

Currency translation differences

-

-

-

(7,072)

-

(7,072)

Net investment hedge

-

-

-

1,857

-

1,857

Net income / (expense) recognised directly in equity

-

-

-

(5,215)

-

(5,215)

Profit for the period

-

-

-

-

80,012

80,012

Total recognised income / (expense) for the period

-

-

-

(5,215)

80,012

74,797








Employee share options :







Equity settled share-based payments

-

-

-

-

2,787

2,787

Deferred tax transfer on shared based payments

-

-

-

-

(354)

(354)

Proceeds from shares issued

135

3,227

-

-

-

3,362

Dividends to external shareholders (note 14)

-

-

(27,727)

-

-

(27,727)

Balance at 30 June 2007

19,829

3,227

414,698

(45,611)

342,807

734,950


The notes to the condensed consolidated interim financial statements are an integral part of this document.



Condensed consolidated interim cash flow statement

for the six month period ended 30 June 2008


Notes

6 months to 

30 June 2008

6 months to

 30 June 2007

Year to

 31 Dec 2007


£000

£000

£000

Profit before tax


109,221

105,562

237,199

Adjustments for:





Interest and equity dividend income


(42,169)

(40,928)

(90,205)

Interest expense


3,556

4,201

8,177

Net fair value (gains)/losses on financial investments, derivatives and borrowings


33,428

(4,166)

687

Non-cash movement in retirement benefit obligation 


-

(349)

(3,801)

Depreciation


2,402

2,067

4,917

Charges in respect of share based payments


2,778

2,787

5,689

Other non-cash movements


(5,393)

457

(641)

Changes in operational assets and liabilities:





Insurance and reinsurance contracts


2,745

25,989

133,951

Financial assets


74,873

(256,902)

(489,745)

Other assets and liabilities


(28,551)

(3,397)

31,112

Cash flows from operations


152,890

(164,679)

(162,660)

Interest received


40,441

40,007

85,435

Equity dividends received


1,727

921

4,770

Interest paid


(4,023)

(4,516)

(8,243)

Current tax paid


(16,208)

(19,199)

(42,823)

Net cash flows from operating activities


174,827

(147,466)

(123,521)

Cash outflow from the acquisition of subsidiary

19

(1,225)

-

(11,133)

Cash outflow from the sale of subsidiary

19

-

-

(936)

Cash outflow from acquisition of associates


(3,384)

-

(1,273)

Cash flows from the sale/(purchase) of property, plant and equipment


(4,009)

(2,419)

(7,789)

Cash flows from the purchase of intangible assets


-

-

(2,500)

Net cash flows from investing activities


(8,618)

(2,419)

(23,631)

Proceeds from the issue of ordinary shares


2,390

3,362

5,159

Cash flow from the purchase of own shares including those arising on share buy-back program


(60,428)

-

(11,343)

Dividends paid to Company's shareholders

14

(31,141)

(27,727)

(43,591)

Repayments of financial liabilities


(92,382)

(59)

(272)

Net cash flows from financing activities


(181,561)

(24,424)

(50,047)

Net decrease in cash and cash equivalents


(15,352)

(174,309)

(197,199)

Cash and cash equivalents at 1 January


302,742

502,871 

502,871

Net decrease in cash and cash equivalents


(15,352)

(174,309)

(197,199)

Effect of exchange rate fluctuations on cash and cash equivalents


4,164

(7,253)

(2,930)

Cash and cash equivalents at end of period

20

291,554

321,309

302,742

 

The notes to the condensed consolidated interim financial statements are an integral part of this document.



Notes to the condensed consolidated interim financial statements


Reporting entity


Hiscox Ltd (the 'Company') is a public limited company registered and domiciled in Bermuda. The condensed consolidated interim financial statements for the company as at, and for the six months ended, 30 June 2008 comprise the Company and its subsidiaries (together referred to as the 'Group') and the Group's interest in associates. The Chairman's statement accompanying these condensed consolidated interim financial statements forms the Interim Management Report for the half year ended 30 June 2008.

 

The Directors of Hiscox Ltd are listed in the 2007 Report and Accounts. A list of current Directors is maintained and available for inspection

at the registered office of the company located at 4th FloorWessex House, 45 Reid StreetHamilton, Bermuda HM 12. There have been no changes in the composition of the Board of Directors during the period under review.


Basis of preparation


These condensed consolidated interim financial statements have been prepared in accordance with the Listing Rules issued by the Financial Services Authority. The information presented herein does not include all of the disclosures typically required for full consolidated financial statements. Consequently these financial statements should be read in conjunction with the full consolidated financial statements of the Group as at, and for the year ended, 31 December 2007 which are available from the Company's registered office or at www.hiscox.com. Except where otherwise indicated, all amounts are presented in Pounds Sterling, rounded to the nearest thousand.


The independent auditors have reported on the Group's full consolidated financial statements as at, and for the year ended, 31 December 2007. The report of the independent auditors was not qualified. The amounts presented for the 30 June 2008 and 30 June 2007 period are unaudited.


These condensed consolidated interim financial statements were approved by the Board of Directors on 18 August 2008.


Accounting policies and methods of computation


The accounting policies applied in these condensed consolidated interim financial statements are consistent with those applied by the Group in its consolidated financial statements as at, and for the year ended, 31 December 2007 which were prepared in accordance with International Financial Reporting Standards issued by the IASB. The consolidated financial statements as at, and for the year ended, 31 December 2007 were also compliant with those International Financial Reporting Standards adopted by the European Union. IAS 34 Interim Financial Reporting as adopted by the European Union has been adopted in this Interim Report. 


The accounting policies applied in these condensed consolidated interim financial statements are also consistent with those that the Group expects to apply for the year ending 31 December 2008.


Financial, Insurance and other risk management


The Group's financial, insurance and other risk management objectives and policies are consistent with that disclosed in note 3 of the full consolidated financial statements as at, and for the year ended, 31 December 2007. The principal risks and uncertainties are unchanged and may be summarised as insurance risk, equity price risk, interest rate risk, liquidity risk, credit risk, currency risk, capital risk and operational risk.


Since the onset of global concerns regarding sub prime and credit issues during Autumn 2007, the Group has been mindful of the ongoing dislocation in specific asset classes and their resultant impact on investment markets and the solvency of counterparties more generally. The Group continues to monitor all aspects of its financial risk appetite and the resultant exposure taken with caution, and has consequently suffered no defaults on investments held during the period under review. As detailed in note 15, the Group's investment allocation is broadly comparable to that at 31 December 2007 as outlined in the Report and Accounts, although a slightly greater weighting in corporate bonds has occurred within portfolios to avail of attractive yield opportunities. The Group also continues to be mindful of the processes required for establishing the reliability of fair values obtained for some classes of financial assets affected by ongoing periods of diminished liquiditySuch conditions may continue through the second half of the year. 


Profitable trading and strong treasury management has ensured that the Group's balance sheet remains strongly capitalised and its operations are resiliently financed to accommodate foreseen liquidity demands together with a high level of capital cover to meet any future catastrophe obligations even if difficult investment market conditions prevail for an extended period of time.


Related party transactions


Transactions with related parties during the period are consistent in nature and scope with those disclosed in note 36 of the Group's 2007 Report and Accounts.


Seasonality and weather


Historically the Group's most material exposure to catastrophe losses on certain lines of business such as reinsurance inwards and marine and major property risk have been greater during the second half of the calendar year, broadly in line with the most active period of the North Atlantic hurricane season. In contrast a majority of gross premium income written in these lines of business occurs during the first half of the calendar year. The Group has deliberately reduced its participation in these lines of business for the current year under review although still actively participates in many regions and if any catastrophic events do occur, it is likely that the Group will share some of the market's losses. Consequently, the potential for significantly greater volatility in expected returns remains during the second half of the year. Details of the Group's recent exposures to these classes of business are disclosed in note 3 of the Group's 2007 Report and Accounts.


Operating Segments


Management have identified the Group's operating segments in line with its internal organisation, which recognises the differences in products and services, customer groupings and geographical areas in addition to the discrete major legal entities of the Group. There have been no changes in reportable segments during the period under review.


The Group's four operating segments are identified as follows:


  • Global Markets comprises the results of Syndicate 33, excluding Syndicate 33's fine artUK regional events coverage, non-US household business and underwriting result of Hiscox Inc. It includes the results of the larger retail TMT business written by Hiscox Insurance Company Limited.  

  • 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. It excludes the results of the larger retail TMT business written by Hiscox Insurance Company Limited.

  • International comprises the results of Hiscox Insurance Company (Guernsey) Limited, Hiscox Inc., Hiscox Insurance Company (Bermuda) Limited and ALTOHA sub-group which was acquired on 16 August 2007.

  • Corporate Centre comprises the investment return and administrative costs associated with the Group management activities. Corporate Centre forms a reportable segment due to its investment activities which earn significant external revenues.


Information regarding the Group's operating segments is presented below. The comparative amounts for the prior half year have been restated to conform to the requirements of IFRS 8. There is no change to those numbers previously reported, with only segmental assets being reported in addition. All amounts reported below represent transactions with external parties only, with all inter-segment amounts eliminated. Performance is measured based on each reportable segment's profit before tax.







6 Months ended 30 June 2008








 

Global

UK and

 

Corporate

 

 

Markets

Europe

International

Centre

Total

 

£000

£000

£000

£000

£000

Gross premiums written

344,341

178,038

116,981

-

639,360

Net premiums written

249,252

163,772

100,923

-

513,947

Net premiums earned

259,491

143,189

84,143

-

486,823







Investment result

13,792

(2,900)

6,556

(172)

17,276

Other revenue

6,379

1,092

906

4

8,381

Revenue

279,662

141,381

91,605

(168)

512,480

Claims and claim adjustment expenses, net of reinsurance

(107,779)

(57,964)

(41,237)

-

(206,980)

Expenses for the acquisition of insurance contracts

(69,439)

(36,337)

(20,016)

-

(125,792)

Administration expenses

(11,143)

(21,582)

(6,025)

-

(38,750)

Other expenses

(10,948)

(9,184)

(3,924)

(4,163)

(28,219)

Total expenses

(199,309)

(125,067)

(71,202)

(4,163)

(399,741)

Results of operating activities

80,353

16,314

20,403

(4,331)

112,739

Finance costs including interest expenses

-

-

(93)

(3,463)

(3,556)

Share of profit of associates after tax

-

-

-

38

38

Profit before tax

80,353

16,314

20,310

(7,756)

109,221

100% ratio analysis






Claims ratio (%)

41.2

39.7

50.0

-

42.1

Expense ratio (%)

34.5

46.6

34.6

-

37.6

Combined ratio (%)

75.7

86.3

84.6

-

79.7

Total assets before intragroup items and eliminations

1,971,336

681,025

780,381

803,028

4,235,770

Intragroup assets and eliminations





(1,341,859)

Total assets





2,893,911







6 Months ended 30 June 2007








Global

UK and


Corporate



Markets

Europe

International

Centre

Total


£000

£000

£000

£000

£000

Gross premiums written

423,685

155,353

153,991

-

733,029

Net premiums written

288,163

134,780

124,199

-

547,142

Net premiums earned

270,367

118,946

82,539

-

471,852







Investment result

18,128

11,406

9,453

7,774

46,761

Other revenues

5,752

1,356

368

1,038

8,514

Revenue

294,247

131,708

92,360

8,812

527,127

Claims and claim adjustment expenses, net of reinsurance

(100,485)

(58,963)

(57,164)

-

(216,612)

Expenses for the acquisition of insurance contracts

(76,471)

(32,324)

(17,476)

-

(126,271)

Administration expenses

(16,617)

(19,709)

(4,248)

-

(40,574)

Other expenses

(13,165)

(14,111)

(1,278)

(5,429)

(33,983)

Total expenses

(206,738)

(125,107)

(80,166)

(5,429)

(417,440)

Results of operating activities

87,509

6,601

12,194

3,383

109,687

Finance costs including interest expenses

(35)

-

(83)

(4,083)

(4,201)

Share of profit of associates after tax

-

-

-

76

76

Profit before tax

87,474

6,601

12,111

(624)

105,562

100% ratio analysis






Claims ratio (%)

40.2

48.8

68.1

-

46.2

Expense ratio (%)

35.7

55.0

27.2

-

38.6

Combined ratio (%)

75.9

103.8

95.3

-

84.8

Total assets before intragroup items and eliminations

1,694,314

611,923

592,340

842,703

3,741,280

Intragroup assets and eliminations





(871,218)

Total assets





2,870,062








Year ended 31 December 2007







 

Global

UK and

 

Corporate

 

 

Markets

Europe

International

Centre

Total

 

£000

£000

£000

£000

£000

 

Gross premiums written

 

676,464

 

302,273

 

220,212

 

-

 

1,198,949

Net premiums written

524,683

265,001

185,226

-

974,910

Net premiums earned


552,205

248,348

164,637

-

965,190







Investment result

46,617

18,343

23,915

10,802

99,677

Other revenues

11,996

2,672

1,216

3,160

19,044

Revenue

610,818

269,363

189,768

13,962

1,083,911

Claims and claim adjustment expenses, net of reinsurance

(246,876)

(115,032)

(61,457)

-

(423,365)

Expenses for the acquisition of insurance contracts

(157,718)


(65,423)

(41,429)

-

(264,570)

Administration expenses

(27,822)

(37,399)

(11,592)

-

(76,813)

Other expenses

(22,830)

(29,692)

(6,104)

(15,242)

(73,868)

Total expenses

(455,246)

(247,546)

(120,582)

(15,242)

(838,616)

Results of operating activities

155,572

21,817

69,186

(1,280)

245,295

Finance costs including interest expenses

-

-

(82)

(8,095)

(8,177)

Share of profit of associates after tax

-

-

-

81

81

Profit before tax

155,572

21,817

69,104

(9,294)

237,199

100% ratio analysis






Claims ratio (%)

44.3

45.6

40.1

  -

44.0

Expense ratio (%)

37.4

52.6

35.3

  -

40.4

Combined ratio (%)

81.7

98.2

75.4

  -

84.4

Total assets before intragroup items and eliminations

1,655,238

661,147

668,913

800,932

3,786,230

Intragroup assets and eliminations





(885,938)

Total assets





2,900,292




Return on equity


6 months to

6 months to

Year to 


30 June 2008

30 June 2007

31 Dec 2007


£000

£000

£000

Profit for the period

84,352

80,012

191,248

Opening shareholders' equity

824,304

682,085

682,085

Adjusted for the time weighted impact of:




- Distribution and other movements in capital

(11,222)

268

(18,029)

Adjusted opening shareholders' equity

813,082

682,353

664,056

Annualised return on equity (%)

21.8%

24.8%

28.8%


Investment result

i) Analysis of investment result


6 months to

6 months to

Year to 


30 June 2008

30 June 2007

31 Dec 2007


£000

£000

£000

Investment income including interest receivable

46,497

42,595

90,259

Net realised gains/(losses) on financial investments at fair value through profit or loss

4,207

11

10,105

Net fair value gains/(losses) on financial investments at fair value through profit or loss

(34,249)

5,265

423

Return on financial investments

16,455

47,871

100,787

Net fair value gains/(losses) on derivative instruments and financial liabilities

821

(1,110)

(1,110)

Total result

17,276

46,761

99,677

Investment expenses are presented within other operating expenses (note 10).

Further details regarding the Group's reduced investment result during the current period under review are provided in the Chairman's statement accompanying these financial statements.

ii) Annualised investment yields


6 months to

30 June 2008

6 months to

30 June 2007

Year to

31 Dec 2007


Return

Yield

Return

Yield

Return

Yield


£000

%

£000

%

£000

%

Debt and fixed income securities

20,407

2.8

22,201

4.0

70,688

5.5

Equities and shares in unit trusts

(12,686)

(16.8)

10,516

13.5

6,959

4.1

Deposits with credit institutions/cash and cash equivalents

8,734

4.2

15,154

5.3

23,140

5.4


16,455

1.6

47,871

5.3

100,787

5.4


10 Other revenues and expenses


6 months to

6 months to

Year to 


30 June 2008

30 June 2007

31 Dec 2007


£000

£000

£000





Profit commission

5,780

5,225

10,468

Agency related and other income

2,601

3,289

8,576

Other revenues

8,381

8,514

19,044





Managing agency expenses

13,316

5,505

28,870

Overseas underwriting agency expenses

9,965

9,774

23,811

Connect agency expenses

7,994

6,717

14,492

Net foreign exchange (gains)/losses

(9,594)

7,980

(8,401)

Investment expenses

798

606

1,250

Other Group expenses including central overheads

5,740

3,401

13,846

Other expenses

28,219

33,983

73,868


11 Finance costs



6 months to

6 months to 

Year to


30 June 2008

30 June 2007

31 Dec 2007


£000

£000

£000





Interest and expenses associated with bank borrowings and letters of credit

3,538

4,166

8,123

Interest charges arising on finance leases

18

35

54


3,556

4,201

8,177


On 6 May 2008 the Group made an early repayment of $182,000,000, for the singular settlement of all principal amounts outstanding under its $225,000,000 term loan facility with Lloyds TSB Bank (as agent for a syndicate of banks). On 7 May 2008 the Group entered into a new agreement with the same syndicate of banks, replacing the old facility. Under this facility the Group may draw up to £350,000,000 in a combination of cash and Letter of Credit Facilities provided that the cash portion does not at any time exceed £200,000,000. On May 2008, £137,500,000 of the facility was drawn, and remains outstanding, in the form of an irrecoverable standby Letter of Credit Facility to support the company's consolidated underwriting activities. The balance of the facility remains undrawn. The Group has given a fixed and floating charge over certain consolidated assets as a guarantee to the syndicate of banks who are providing this facility.


12 Claims and claim adjustment expenses


6 months to  

6 months to  

Year to


30 June 2008

30 June 2007

31 Dec 2007


£000

£000

£000

Gross insurance claims and claim adjustment expenses

(250,915)

(267,175)

(498,568)

Insurance claims recovered from reinsurers

43,935

50,563

75,203

Net insurance claims and claim adjustment expenses

(206,980)

(216,612)

(423,365)

The net claims and claim adjustment expense reported above is net of a release of £66m of reserves established in prior reporting periods (30 June 2007: £43m; 31 December 2007: £60m)

The development of net claims reserves by accident years are detailed below.



Insurance claims and claims expenses reserves - net at 100% 


Accident year ending 31 December

2001

2002

2003

2004

2005

2006

2007

2008

Total


£000

£000

£000

£000

£000

£000

£000

£000

£000

Estimate of ultimate claims costs as adjusted for foreign exchange*:










at end of accident year**

288,942

239,445

309,353

495,127

575,101

452,876

597,817

320,269

3,278,930

one period later**

324,826

261,068

324,270

538,192

656,320

450,548

555,031

-

3,110,255

two periods later**

382,828

267,811

299,189

517,861

652,416

452,485

-

-

2,572,590

three periods later**

414,911

253,445

309,865

484,705

633,923

-

-

-

2,096,849

four periods later**

405,956

247,758

300,559

480,673

-

-

-

-

1,434,946

five periods later**

393,752

237,739

305,669

-

-

-

-

-

937,160

six periods later**

390,099

235,411

-

-

-

-

-

-

625,510

seven periods later**

384,921

-

-

-

-

-

-

-

384,921











Current estimate of cumulative claims

384,921

235,411

305,669

480,673

633,923

452,485

555,031

320,269

3,368,382

Cumulative payments to date

(316,389)

(192,940)

(236,446)

(364,954)

(429,506)

(271,214)

(208,096)

(40,730)

(2,060,275)

Liability recognised at 100% level

68,532

42,471

69,223

115,719

204,417

181,271

346,935

279,539

1,308,107











Liability recognised in respect of prior accident years at 100% level









28,731

Total net liability to external parties at 100% level









1,336,838


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


Accident year

2001

2002

2003

2004

2005

2006

2007

2008

Total


£000

£000

£000

£000

£000

£000

£000

£000

£000











Current estimate of cumulative claims

384,921

235,411

305,669

480,673

633,923

452,485

555,031

320,269

3,368,382

Attributable to external names

(87,648)

(44,695)

(65,485)

(108,282)

(147,749)

(91,740)

(106,204)

(58,845)

(710,648)

Group share of current ultimate claims estimate

297,273

190,716

240,184

372,391

486,174

360,745

448,827

261,424

2,657,734





















Cumulative payments to date

(316,389)

(192,940)

(236,446)

(364,954)

(429,506)

(271,214)

(208,096)

(40,730)

(2,060,275)

Attributable to external names

69,128

33,935

47,802

82,864

99,359

52,365

31,370

6,242

423,065

Group share of cumulative payments

(247,261)

(159,005)

(188,644)

(282,090)

(330,147)

(218,849)

(176,726)

(34,488)

(1,637,210)











Liability for 2001 to 2008 accident years recognised on Group's balance sheet 

 

50,012

31,711

51,540

90,301

156,027

141,896

272,101

226,936

1,020,524

Liability for accident years before 2001 recognised on Group's balance sheet

-

-

-

-

-

-

-

-

21,835

Total net liability to external parties included in the balance sheet









1,042,359

* The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 30 June 2008.

** With the exception of the most recent development data for each accident year, which only relates to the 6 months ending 30 June 2008, the term period refers to one full calendar year.

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


13 Earnings per share

Basic

Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the period, excluding ordinary shares purchased by the Group and held in treasury as own shares.



6 months to

30 June 2008

6 months to

30 June 2007 

Year to

 31 Dec 2007

Profit attributable to the Company's equity holders (£000)

84,352

80,012

191,248

Weighted average number of ordinary shares (thousands)

389,488

394,915

395,308

Basic earnings per share (pence per share)

21.7p

20.3p

48.4p


Diluted

Diluted earnings per share is calculated by adjusting the assumed conversion of all dilutive potential ordinary shares. The Company has one category of dilutive potential ordinary shares, share options and awards. 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.



6 months to

6 months to

Year to


30 June 2008

30 June 2007

31 Dec 2007

Profit attributable to the Company's equity holders (£000)

84,352

80,012

191,248

Weighted average number of ordinary shares (thousands)

389,488

394,915

395,308

Adjustment for share options (thousands)

13,193

13,868

13,530

Weighted average number of ordinary shares for diluted earnings per share (thousands)

402,681

408,783

408,838

Diluted earnings per share (pence per share)

20.9p

19.6p

46.8p

Diluted earnings per share has been calculated after taking account of outstanding options under both employee share schemes  and also SAYE schemes.


14 Dividends


6 months to 

6 months to 

Year to  


30 June 2008

30 June 2007

31 Dec 2007


£000

£000

£000

Final dividend for the year ended:




31 December 2006 of 7.0p (net) per share

-

27,727

27,723

31 December 2007 of 8.0p (net) per share

31,141

-

-

Interim dividend for the year ended:




31 December 2007 of 4.0p (net) per share

-

-

15,868


31,141

27,727

43,591

An interim dividend of 4.25p (net) per ordinary share has been declared payable on 29 September 2008 to shareholders registered on 28 August 2008 in respect of the six months to 30 June 2008 (30 June 20074.0p (net) per ordinary share). The dividend was approved by the Board on 18 August 2008 and accordingly has not been included as a distribution or liability in this interim consolidated financial information in accordance with IAS 10 Events after the Balance Sheet Date.


15 Financial assets and liabilities

i) Analysis of financial assets carried at fair value 






30 June 2008

£000


30 June 2007

£000

31 Dec 2007

£000





Debt and fixed income securities

1,456,712

1,194,332

1,444,532

Equities and shares in unit trusts

131,442

183,886

159,421

Deposits with credit institutions

50,840

123,682

143,874

Total investments

1,638,994

1,501,900

1,747,827

Derivative financial assets

532

-

-

Total

1,639,526

1,501,900

1,747,827


ii) Analysis of financial liabilities carried at fair value 





30 June 2008

£000


30 June 2007

  £000

31 Dec 2007

  £000





Short-term borrowing from credit institutions

-

91,000

91,764

Derivative financial liabilities

19

-

-

Total

19

91,000

91,764


iii) Investment and cash allocation


30 June 2008

30 June 2007   

31 Dec 2007   


 £000

%

£000

%

£000

%








Debt and fixed income securities

1,456,712

75.5

1,194,332

65.5

1,444,532

70.4

Equities and shares in unit trusts

131,442

6.8

183,886

10.1

159,421

7.8

Deposits with credit institutions/cash and cash equivalents

342,394

17.7

444,991

24.4

446,616

21.8

Total

1,930,548


1,823,209


2,050,569



iv) Investment and cash allocation by currency






30 June 2008 

%


30 June 2007 

  %

31 Dec 2007 

  %





Sterling

27.0

28.7

25.7

US Dollars

59.7

59.6

61.4

Euro and other currencies

13.3

11.7

12.9


16 Net asset value per share





30 June 2008

30 June 2007   

31 Dec 2007   


Net asset

 value

£000

NAV

per share

pence

Net asset 

value

£000

NAV

per share

pence

Net asset

 value

£000

NAV

per share

pence








Net asset value

817,578

222.1

734,950

185.4

824,304

209.5

Net tangible asset value

776,031

210.8

701,828

177.1

783,852

199.3

The net asset value per share is based on 368,139,361 shares (30 June 2007396,387,797; 31 December 2007393,386,041), being the adjusted number of shares in issue at each reference date. Net tangible assets comprise total shareholders equity excluding intangible assets.


17 Insurance liabilities and reinsurance assets



30 June 2008 £000

30 June 2007 

£000

31 Dec 2007 

£000





Gross




Claims outstanding

1,262,454

1,179,644

1,215,887

Unearned premiums

562,257

624,259

498,000

Total insurance liabilities, gross

1,824,711

1,803,903

1,713,887

Recoverable from reinsurers




Claims outstanding

220,095

248,090

222,672

Unearned premiums

95,415

123,512

57,416

Total reinsurers' share of insurance liabilities

315,510

371,602

280,088

Net




Claims outstanding

1,042,359

931,554

993,215

Unearned premiums

466,842

500,747

440,584

Total insurance liabilities, net

1,509,201

1,432,301

1,433,799


18 Impact of foreign exchange related items


6 months to 

6 months to 

Year to  


30 June 2008

30 June 2007

31 Dec 2007


£000

£000

£000





Consolidated Income statement




Derivative gains/(losses) on foreign exchange hedge contracts included within investment return

514

(1,110)

(1,110)





Unearned premium and deferred acquisition costs adjustment

(849)

4,356

14,438

Other foreign exchange gains/(losses)

10,443

(12,336)

(6,037)

Impact of foreign exchange related items on income statement

10,108

(9,090)

7,291

Balance sheet




Foreign exchange differences recognised directly in equity

(1,928)

(5,215)

(2,869)

Overall impact of foreign exchange related items on net assets

8,180

(14,305)

4,422


19 Business combinations

On 16 August 2007 the Group acquired 100% of Altoha Inc in the USA. The provisional purchase price recognised at 31 December 2007 was £29,052,000 and the initial net cash outflow made up to 31 December 2007 was £11,133,000. The final purchase amount was determined during the current period under review and a further cash outflow was made of £1,225,000 with a related addition made to intangible assets.

The Group disposed of its 100% interest in Hiscox Investment Management Limited on 5 December 2007. This company did not constitute a discontinued operation due to the relatively insignificant revenues and net assets involved and no profit or loss arose on the transaction.


20 Condensed consolidated interim cash flow statement

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 £69,388,000 (30 June 2007: £51,409,00031 December 2007: £53,336,000) not available for use by the Group outside of the Lloyd's Syndicate within which they are held.



Directors' responsibility statement


The Directors confirm that the Chairman's statement and condensed consolidated interim financial statements have been prepared in accordance with IAS 34 as adopted by the European Union and the Interim Statement includes a fair review of the information required by sections 4.2.7 R and 4.2.8 R of the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority, being:


1) an indication of important events during the first six months of the current financial year and their impact on the condensed, consolidated interim financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year; and


2) related party transactions that have taken place in the first six months of the current year and that have materially affected the consolidated financial position or performance of Hiscox Ltd during that period, and any changes in the related party transactions described in the last annual report that could have such a material effect.


The individuals responsible for authorising the responsibility statement on behalf of the Board are the Chairman, RRS Hiscox and the Group Finance Director, SJ Bridges. The statements were approved for issue on 18 August 2008.



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