Hiscox 2013 preliminary results

RNS Number : 7416A

Hiscox Ltd

24 February 2014

 



Hiscox Ltd full year results

For the year ended 31 December 2013

"A very good year."

	2013	2012 restated*
Gross premiums written	£1,699.5m	£1,565.8m
Net premiums earned	£1,283.3m	£1,198.6m
Profit before tax	£244.5m	£217.5m
Earnings per share	66.3p	53.1p
Total dividend per share for year	21.0p	18.0p
Net asset value per share	402.2p	346.4p
Group combined ratio	83.0%	85.5%
Return on equity	19.3%	17.1%
Investment return	1.9%	3.1%
Reserve releases	£140m	£152m

Capital return

·      Capital return of 50.0p per share, approximately £178 million,  by way of C/D share scheme combined with share consolidation

·      Includes final dividend equivalent of 14.0p taking total dividend for the year to 21.0p, an increase of 16.7% (2012: 18.0p)

·      Additional special distribution of 36.0p per share.

Highlights

·      Gross written premiums grew by 8.5%.

·      Hiscox London Market delivered excellent profit of £116.0 million (2012: £121.9 million)

·      Hiscox UK provides another solid performance, with profits of £45.4 million (2012: £45.2 million)

·      Hiscox Europe returns record profits of £10.9 million (2012: £3.9 million)

·      Hiscox USA continues good premium growth, up by 31.1% to £189.5 million (2012: £144.5 million)

·      Formed Hiscox Re, our combined reinsurance teams in London, Paris and Bermuda

Bronek Masojada, Chief Executive of Hiscox Ltd, commented:

"2013 was a very good year for Hiscox. Our long term strategy of building local retail businesses in Europe, the UK, Guernsey and the US to balance internationally traded business in London and Bermuda continues to deliver. We are excited about the opportunities we see in many retail markets where we have room to grow profitably. In our big ticket areas, discipline and opportunism will guide us."

*The comparative information has been restated for the adoption of IAS 19 (2011). See note 2 for details

For further information

Hiscox Ltd
Jeremy Pinchin, Group Company Secretary	[phone]
Kylie O'Connor, Head of Group Communications, London	[phone]
Brunswick
Tom Burns, Fiona Micallef-Eynaud	[phone]

Notes to editors

About Hiscox

Hiscox, the international specialist insurer, is headquartered in Bermuda and listed on the London Stock Exchange (LSE:HSX). There are three main underwriting parts of the Group - Hiscox London Market, Hiscox UK and Europe and Hiscox International. Hiscox London Market underwrites internationally traded business in the London Market - generally large or complex business which needs to be shared with other insurers or needs the international licences of Lloyd's. Hiscox UK and Hiscox Europe offer a range of specialist insurance for professionals and business customers, as well as high net worth individuals. Hiscox International includes operations in Bermuda, Guernsey and USA.

For further information, visit www.hiscoxgroup.com.

Chairman's statement

In my first full-year statement as Chairman, it is pleasing to report an excellent underwriting result and the second highest profit for the Group. A benign hurricane season and sound underwriting contributed to the very good results, with every area performing well. Our reinsurance and London market insurance benefited from the lack of US hurricanes, and also underwrote well to minimise losses from the European and Calgary storms. Our regional businesses in the UK, Europe, Guernsey and USA have also reaped the rewards of sustained investments in both infrastructure and marketing.

The plan has not changed with the passing of the baton from the previous Chairman to me. We aim to expand our regional businesses continuously, whilst growing the bigger ticket businesses when margins are high, or contracting when those margins reduce. We will maintain the same strategy of balance that has served us so well over time.

Results

The results for the year ending 31 December 2013 were a profit before tax of £244.5 million (2012: £217.5 million). Gross written premium increased by 8.5 per cent to £1,699.5 million (2012: £1,565.8 million) and net earned premium increased 7.1 per cent to £1,283.3 million (2012: £1,198.6 million). The combined ratio was 83.0 per cent (2012: 85.5 per cent). Earnings per share increased by 24.9 per cent to 66.3 pence (2012: 53.1 pence) and the tangible net asset value per share increased by 16.0 per cent to 381.4 pence (2012: 328.7 pence). Return on equity increased to 19.3 per cent (2012: 17.1 per cent).

Dividend, balance sheet and capital management

The Board has reviewed the capital requirements of the Group for the coming year and has proposed that a special distribution of 36.0p per share (amounting to approximately £128 million), should be made. This represents two successive years where we have been able to share our success with shareholders with an additional capital return. We do not promise a third. 

Following the distribution, the Group's capital levels will be similar to those of the opening balance sheet, post the 2013 capital return, which will have a favourable impact on both the Group premium to capital gearing ratio and return on capital, whilst still providing sufficient headroom above existing internal and external capital needs. This proposed return of capital will be made by way of a C/D share scheme, which is a variation of the B share scheme used in 2013, and as in the previous year, will be combined with a share consolidation.

In addition, a sum of 14.0p per share will be paid instead of a final dividend for the year ended 31 December 2013 as part of the C/D share scheme. This amount, together with the interim dividend of 7.0p per share, represents a total dividend for 2013 equal to 21.0p per share (2012: 18.0p), an increase of 16.7%, in line with our policy of progressive dividend growth. As a result of this amount being paid as part of the C/D Share Scheme, a scrip dividend alternative will not be offered to shareholders.

Full details of the proposed return of capital and final dividend equivalent will be set out in a circular expected to be despatched to Hiscox shareholders on or around 25 February 2014.

Investments

Traditionally many in our industry have relied on investment income for more than half their overall profits. However, the persistence of low interest rates has shifted the balance between underwriting and investment income. Our investment strategy remains cautious: we will not take undue risk, preferring modest investment returns alongside better underwriting results to fuel profits. Our investments delivered a return of 1.9% (2012: 3.1%) which is good, given the challenging year in bond markets, and was driven by our allocation to risk assets, principally equities. A return to higher interest rates will be welcome, but given the more likely long road to normality, it seems that bond investors will have the wind in their faces for another year, and we will remain patient.      

The market and our opportunities

So much of the punditry this year has been about the growth of the ILS (Insurance Linked Securities) market and its effect on reinsurers and pricing. Competition has increased but as a respected leader in reinsurance we have been able to maintain our share of well-rated business. Reducing margins are a big issue for businesses that have no alternative to reinsurance. Although we are not immune, we are in the fortunate position of being able to reduce lines of business where this competition impinges and grow in areas where it does not.

We have organised the two reinsurance teams under a single leader to face the new challenges of today and we have also formed our own ILS fund to deploy both our own and others' capital.

Our success in Reinsurance has rather overshadowed the London Market Insurance business which has quietly been doing very well. With its new leadership we feel it is well placed to continue to grow in 2014.

In Hiscox UK, Hiscox Europe and Hiscox USA, our market share in our chosen specialist lines is still small and we see many opportunities for growth. We are investing heavily in our direct-to-consumer businesses in the UK, Europe and USA as we aim to take advantage of the growing trend to purchase insurance direct, online and over the phone. In 2013, 50% of our customers in the UK and USA (160,000 householders and businesses) chose to buy cover directly from us. In 2013, the Group spent £30 million on marketing, and plan for the same this year. Under the leadership of Steve Langan our investment in marketing has built a recognised and respected consumer brand in the UK and we are making good headway in other markets. 

People and future

As I write this, the windows of my office are rattling in the wind, rivers are rising and the media is reporting the polar vortex freeze in the USA. Events such as these remind us of the importance of insurance and delivering on our promise to our customers. We issue a promise to pay, and it is only when a claim is made that we truly prove our worth.

When we surveyed our employees this year about life at Hiscox, 95% said they believed in our values and 92% were proud to work here.  When I first started at Hiscox in 1986 we employed 18 people in the London Market only.  Today we employ over 1,600 skilled and determined people around the world and they are the future of this business.  We have been setting our ambitions for the next ten years and believe it is essential that our employees continue to keep the Hiscox values at our core. To reach our ambitious targets, we are asking more of our employees; more courage and great entrepreneurship delivered with Hiscox's characteristic spirit. I am very proud to work with such talented people and thank them for their sterling efforts this year.

Finally

We have underwritten and sold well. We continue to strive for world class service and to delight our customers when they make a claim. We have also had good luck but we have taken our chances when they were presented.  However we cannot presume that the elements in 2014 will be as kind to us as they were in 2013, already we have seen extreme weather events, freezes in the US and floods in the UK. We can rely on core skills to drive profitability. Opportunities abound across our retail businesses in UK, Europe and USA and we have great people taking advantage of them. We are not complacent and will continue to invest for the future, both in markets and in infrastructure, and we relish the challenges ahead.

Robert Childs

24 February 2013

2014 Chief Executive's report

I am pleased to report a profit before tax of £244.5 million (2012: £217.5 million) and a return on equity of 19.3% (2012: 17.1%). The improved profit was the result of better performance within our European and US businesses, coupled with continued good performances from our UK, Guernsey, London Market and Bermuda businesses.  Our long-term strategy of building locally traded specialist retail business to balance our internationally traded business continues to deliver.

With these results, we have announced a capital return of 50p per share, equal to approximately £178 million in total.  We are fortunate that our business is strong enough both to allow this return of capital whilst simultaneously investing in new opportunities.

The insurance market is currently facing many challenges.  Alternative sources of capital have entered the reinsurance market putting pressure on pricing, while central banks' policies of financial repression are keeping investment returns low.  Thanks to our long-term strategy we have choices - in product, distribution and geography - which should allow us to continue to deliver good results in a changing world.

Hiscox London Market

Our London Market businesses delivered another excellent profit of £116.0 million (2012: £121.9 million), and increased gross written premiums by 4.4% to £668.2 million (2012: £640.0 million). It achieved a combined ratio of 75.4% (2012: 75.5%), driven by a relative lack of natural catastrophes and good underwriting.

During the year we separated our London Market business into insurance and reinsurance lines. Our aim has been to give these different product areas more dedicated leadership, providing greater focus on the changing market conditions and the opportunities they produce.

London Market Insurance

The London Market Insurance lines of property, marine and energy, casualty, aerospace and specialty have consistently delivered excellent profits over the last ten years and in 2013 they delivered another good result.

In April, Paul Lawrence was promoted to Chief Underwriting Officer of Hiscox London Market and, together with his more focused leadership team, he has brought new energy and a business development mindset which is already bearing fruit.

Business in the London Market has always been placed either on a stand-alone, risk-by-risk basis, or grouped together to facilitate placement.  There has been a lot of controversy surrounding facilities in the London Market this year as the market has seen an increase in their number and size.  We have a lot of experience writing them in the US where business has been routinely placed in this way. We believe that facilities can be underwritten profitably provided we have underwriting control, a right to say no and realistic commissions.  If these conditions are satisfied, then we expect facilities to play a role in 2014's business expansion plans.

Looking at each division in turn:

Property

Our property division includes US and international commercial property, power and mining risks, US catastrophe exposed personal lines as well as terrorism traded in the London Market.

A lack of natural catastrophes and a refocus of the business have delivered an excellent result for our big-ticket commercial and household property lines.  We have grown our small binding authority business, which is still carrying rate increases, whilst maintaining our larger big-ticket business at reasonable rates.

Our terrorism business had a strong year, as a young energetic team took the reins. It was recognised by its peers with the accolade of 'Underwriting Team of the Year' at the Insurance Day London Market Awards.  Drawing on new hires with global security and front-line counter terrorism experience, we created a Counter Terrorism Advisory team which assists clients with risk management and prevention.  This supplements our relationship with Control Risks and consolidates our market leading position.

Marine and energy

The marine and energy team delivered another good profit.  The marine hull team have worked hard to improve profitability in a lack lustre market and delivered an exceptional result. Pressure was felt in energy lines as fewer construction projects and more oil companies looking to self insure, led to reduced demand. In 2014, we are focused on building opportunities in emerging markets such as Brazil.

The Costa Concordia market loss continues to deteriorate as leading edge salvage operations go on at insurer's expense.  Thanks to astute reinsurance purchasing, our results were not affected by the continually increasing market loss.  We have seen an improvement in terms and prices at the renewal of the International Group of P&I Clubs in February, as the market adjusts as a result of ever growing salvage costs.

We launched an online product for marine employers' liability, accessible to retail brokers in the US.  It has already generated £1 million in premium, a good start, and developed technology which we expect to put to use in other London Market lines.

Casualty

In casualty we have seen some firming of rates, but it is by no means a hard market. We continue to pick our way through, marrying good underwriting with our core appetite to deliver a strong result. We have ambitions to play a significant part in the London Market directors and officers' (D&O) arena, writing US and some international business.  We have bolstered our team with some senior hires during the year. We now have the ability to offer a full suite of products across a broad range of markets, professions and risks including lawyers, architects and engineers, healthcare, technology risks, miscellaneous errors and omissions (E&O), management liability, and privacy. We have also created a consortium with another Lloyd's insurer, creating significant D&O capacity, and increasing the attractiveness of Lloyd's to the US market.

Aerospace and specialty

This division includes our aviation, space, contingency, kidnap and ransom, political risks and personal accident business.

The aviation market has seen significant downward pressure on major airline accounts.  Our underwriters remain disciplined, walking away from poorly rated business, seeking growth by developing products which combine aviation with our terrorism capabilities. The space market has suffered around $700 million of satellite losses during the year, which we largely avoided. We expect this will have a positive impact on rates.

Our political risks team have had a good year despite the challenging times.  The team is looking at ways to leverage their expertise and underwrite outside the Lloyd's market, potentially using licences available to our insurance companies. 

Contingency continues to be a small jewel in our crown, delivering another good result.  The personal accident team developed a new product which will cover top European football clubs for financial loss when star players suffer long-term injury or illness.  This has already generated headlines and we hope will generate good incremental revenues.

Alternative distribution

It is a perception, though a slightly unfair one, that Lloyd's underwriters sit at Lloyd's waiting for business.  Our underwriters are frequent travellers visiting existing brokers and seeking new agents who will send business to London.  We have created a new division that combines technology with this desire to travel to bring new opportunities to London.  The marine employers' liability product referred to earlier is a case in point.

Through our relationship with White Oak, a specialist automotive and equipment underwriting agency, we provide extended warranty cover against sudden and unforeseen mechanical breakdown for cars, trucks and other heavy machinery. Our business with White Oak has grown rapidly over recent years and now represents 24% of our London Market Insurance gross written premium. This type of indemnity does not include endemic failure or product recall.  During the year White Oak launched a scheme in China (in conjunction with local Chinese carrier Ping-An) which will become one of the largest Chinese deals in the London Market.  We also cover fire, theft and collision (FTC) for heavy machinery used within agriculture, construction and forestry businesses globally, providing first party coverage to the client's vehicle only.

We expect that the importance of this division will grow, bringing new opportunities to the other parts of the London Market team.

London Market Reinsurance

The reinsurance team trading in London has performed well. Premiums reduced slightly as the team exercised discipline in the face of price declines at the June and July renewals. Our marine, catastrophe, pro-rata and retro books performed well. Our risk excess book suffered from the Rio Tinto, YPF/La Plata, Dietz and Watson events. Aggregate profits remained strong. During the year we brought together the leadership of the London and Paris reinsurance teams which comprise the London Market Reinsurance business with the teams in Bermuda, to underwrite as Hiscox Re from January 2014, giving us greater presence in an evolving market. This consolidates our expertise, capacity and market profile under the leadership of Jeremy Pinchin. The teams underwrote a combined £411.5 million of reinsurance premium during 2013, making Hiscox a top tier player.

Hiscox International

Hiscox International comprises our activities in Bermuda, Guernsey and the United States. Gross written premiums grew by 12.9% to £472.1 million (2012: £418.3 million) driven by good growth in Hiscox USA. Profit before tax increased to £80.9 million (2012: £62.7 million) and the combined ratio improved to 81.0% from (2012: 89.2%).

Hiscox Bermuda

Hiscox Bermuda had another good year, with premiums growing by 5.6% to £211.9 million (2012: £200.7 million), with good growth in our healthcare business.  Profits remained strong.

As expected, reinsurance rates at the important 1 January renewals were down by approximately 16%.  Given the aggressive nature of competition from both traditional and new sources of capital, our reinsurance business will shrink in 2014 as we continue to prioritise quality clients who value our underwriting, brand and balance sheet.

Third party capital partners are very important to the Group and we have good support from quota share partners and Syndicate Names. In 2014 they are backing Hiscox Re at a record level.  We continue to explore new opportunities in the Insurance Linked Securities (ILS) space, and through Kiskadee we launched a number of collateralised reinsurance funds during the year.  We have deployed $110 million of capital - less than we had expected as we are seeing signs that capital markets investors are being more disciplined than some traditional reinsurers. We believe that over time, our record of prioritising profit over volume will win a following in this new investor base, and our support from them will grow.

Hiscox Guernsey

In Guernsey we underwrite fine art, kidnap and ransom (including piracy) and terrorism, supported by broking teams in London and Miami.  Premium income reduced slightly to £70.8 million (2012: £73.0 million). Profits have grown strongly through a combination of disciplined underwriting and fewer claims.  We have benefitted from subrogation recoveries from other insurers on prior-year claims and the absence of large fine art losses. The team is not resting on its laurels and is investing in more talent in Miami and London to expand distribution on a stand-alone basis and in partnership with local insurers and brokers.

Hiscox USA

Our US business had another year of strong growth. Gross written premiums grew by 31.1% to £189.5 million (2012: £144.5 million) with progress across all major areas. Losses reduced materially as we grew towards scale and benefited from a positive development of reserves.

Our wholesale business which includes property and professional liability lines grew by 20% and made a good profit. Our specialty business grew by 22% but profitability was mixed.  Strong performance in kidnap and ransom, media, technology and terrorism was offset by more challenging performance in construction, and the still nascent D&O and entertainment businesses.  We refocused our underwriting appetite in construction and adjusted our pricing in D&O, we expect this to drive better performance in 2014.

Our small business proposition, which we sell direct and through partnerships, grew by 140%; we now have over 50,000 small business customers, and are selling over 1,000 policies a week. We continue to explore new distribution opportunities and launched a portal to wholesale brokers during the year.  Brand building continues, with campaigns in San Diego, Austin and Boston.  In time these efforts will benefit the entire US business.

The rating environment in the US is mixed. Overall rates remain healthy, with slight upward pressure in some casualty lines, and downward pressure in property. We are very pleased with our fast growing US business and expect that, absent significant catastrophe losses, it will make a small profit in 2014.

Hiscox UK and Hiscox Europe

Our retail businesses in the UK and Europe delivered a record profit of £56.4 million (2012: £49.1 million).  Gross written premiums grew by 10.2% to £559.1 million (2012: £507.5 million).  The combined ratio improved to 92.6% (2012: 94.4%).

We have built our retail businesses by understanding local markets and bringing Lloyd's style flexible underwriting and thinking to local brokers. As part of the evolution of Hiscox, Steve Langan, previously Managing Director of Hiscox UK, became Managing Director of Hiscox UK and Europe.  Pierre Olivier-Desaulle remains Managing Director of Hiscox Europe, reporting to Steve, and we created two new divisions in the UK, one for the broker channel and one for direct. The Managing Directors of these two divisions report to Steve. The restructure will allow customer insight, alternative distribution approaches, new products and good marketing practices to be shared more easily - all part of the ongoing 'retailisation' of our business.

Hiscox UK

Hiscox UK had another excellent year and grew gross written premiums by 9.9% to £412.4 million (2012: £375.2 million). The business had profits of £45.4 million (2012: £45.2 million) with a combined ratio of 90.7% (2012: 92.1%).

The business benefitted from our continued investment in marketing and a focus on solid underwriting. It had a charmed first 11 months, as the weather had been benign until mid-December while the few major weather events, such as the St Jude's day storm in October had little impact. The heavy rain and consequent flooding in December changed this. Our clients suffered extensive damage to their homes both from driving rain and flooding and we responded quickly.  A post bag of thank-you letters in January is testament to the fact that dealing with the Hiscox claims team is succour in troubled times.

Our high net worth household business was tested by the floods and has performed well. Its market reputation meant that client retention remained strong and it had its best new business premium for ten years. Our professions and specialty commercial book also made good progress and a new technology insurance portfolio offering that responds to the growing prevalence of breach of contract claims was launched. Our underwriting relationship with Dual, an independent managing general agent, had a testing year and we have agreed changes to underwriting appetite which should see better performance in the future. Our partnerships business had a good year, retaining all of its existing partnerships as well as securing five new ones including the Royal Institute of British Architects and the Royal College of General Practitioners. Our new tied agency Hiscox Private Client is doing well.

We are also establishing a strong presence in York, where we are creating a purpose built multi-function office.  We now have 70 people based in our temporary office, working within our Customer Experience Centre, Hiscox Underwriting Centre and IT. In December we received planning consent for the permanent building, and construction will commence in the first half of 2014.

Hiscox Europe

Our European business had an outstanding year, generating a record profit of £10.9 million (2012: £3.9 million), despite £3m investment in marketing to support our fledging direct businesses in France and Germany.  It had solid growth of 10.9% to £146.7 million (2012: £132.3 million), with new business up by 14% driven by commercial lines in Germany and France.  After shrinking for several years, our high net worth business in Europe also returned to growth.

Hiscox Europe continues to lead the way in devising alternative distribution deals, in which we sell our specialist products through larger financial institutions. This year we added France's Crédit Agricole to our list of partners. Work continues to reduce expenses across Europe, with a simplified referral process, greater use of pre-priced proposal forms and an operating model which ensures that underwriters are able to focus on business development and underwriting larger risks, with smaller risks and renewals handled by office-based teams. We expect a continued steady improvement in expenses, maintaining our profit performance.

In Germany we launched direct-to-consumer small business insurance. Aimed at businesses in knowledge-based professions including IT, management and business consulting, it matches our existing offering in France and complements the German broker channel. As in the US and UK, we expect that in time the marketing expenditure required to build our French and German brands will benefit all distribution channels.

Our market positions in mainland Europe are small compared with our UK position and the quality of our offering is reflected by strong growth despite tough economic conditions, so we expect continued profitable growth and development in mainland Europe.

Claims

2013 was a relatively benign year for large scale catastrophe losses. Despite the market increasing reserves for the Costa Concordia our net loss has reduced slightly to US$19 million. For the first 11 months we did not experience material losses as a result of extreme weather events, such as the Central European floods, the Calgary storm in Canada, the St Jude's day storm which hit the UK and Europe, and typhoon Haiyan which battered the Philippines. This clearly changed in the UK with the period of sustained rain and flooding which began in mid-December. We reserved £11 million for UK flood claims in December.  UK flood and storm losses have continued into January and February.  We expect to reserve a further £5 million to cover these losses.

Our commitment to pay claims fairly, fast and with a smile remains at the heart of our business.  We have built claims teams that lead the market and it is gratifying to receive external recognition of this.  Our London Market business was ranked in the top three for claims in a recent Gracechurch survey and our UK team was recognised with a number of industry awards; 'UK Claims Excellence Awards' at the Insurance Times Claims Excellence Awards and 'Personal Lines Claims Team of the Year' at Post Magazine's Claims Awards.

Whilst reserve releases of £140 million were down from £152 million last year, they continue to reflect Hiscox's cautious reserving approach.

The UK Government and the insurance industry are currently working on the creation of Flood Re to provide mutualised insurance cover.  Hiscox supports the overall initiative but feel that current plans are unfair and unworkable.  At the moment rented properties, leasehold properties, homes built after 2009 and H/I band council tax homes are being excluded from the mutual.  The excluded will also have to pay a levy to fund Flood Re, but would be unable to purchase subsidised insurance from Flood Re, even though their neighbours and other bands would be able to. It has been widely reported that the levy would be £10.50 per residential property. This is highly misleading; it will actually be 2.2% of premium paid and we estimate that Band H homes will pay 20 times more than the average home in Britain.  We are calling on the Government to work with us to find a solution to ensure that either these groups are included in Flood Re, or that they are excluded fully - both in payment and benefit.  Floods are one of the most traumatic claims we see, a flood doesn't discriminate and neither should the Government.

Marketing

During 2013 we spent £30.6 million on marketing across the Group, an increase from £26.3 million in 2012.  Most of this was spent promoting our direct-to-customer operations in the UK, the US, France and Germany. The balance was spent on broker channel marketing; either marketing to brokers, or helping them market to their customers.  A small amount was also spent on corporate sponsorships, mainly supporting art related activities.

Our marketing activity has been instrumental in building the Hiscox brand, communicating what we do to an ever broader audience, building awareness of Hiscox and ultimately driving sales. Its benefits have been most felt in the UK where it has had a positive impact not only on the direct channel, but also in the retail broker channel, and even in our Lloyd's activities.  As we spend more in other geographies I believe we will see similar broad business benefits.

Operations and IT

Efficient operations and sound IT is the backbone which supports the day-to-day activities of every part of our Group.  During 2013 we made progress on a number of inter-related projects which will benefit different divisions within the Group.

During the year we successfully insourced the service centre dealing with our UK direct home insurance clients.  This involved hiring 35 people to staff a newly formed Customer Experience Centre in York. This process went very smoothly and we are now considering its extension to other lines of business.

We also began a project to replace the core underwriting, policy administration and claims systems supporting our retail businesses.  The current core system is over 20 years old, so it has performed well, but its time is now up. We are working under the slogan 'simplicity is the ultimate sophistication' and we expect to complete the first phase of implementation, for our UK direct home system, this year. In time we expect to replace the entire UK retail infrastructure, and then that of our European businesses.  The total cost of the project in the UK is expected to be £45 million spent over a period of 4 to 5 years.

In Europe our 'Get Fit' programme is gaining traction. This is based on a foundation of lean manufacturing principles and we are slowly seeing our European expense ratio reducing. This programme is continuing in 2014 and should help underpin growing profitability of our European broker channel business.

In the US our operations team have been working hard to support the 30% growth. This has seen further investment in our Atlanta and Virginia Beach service centres.

In our London Market activities we are very dependent on shared services which support Lloyd's, the company market and the brokers.  At the beginning of 2013 we took the decision to become more engaged in driving improvement across the market, and we now have representatives on several key committees.  Involvement in market reform can at times be a frustrating process, but we feel that we can play a role in leading the market for the benefit of all.

Investments

Hiscox's investment income has historically accounted for about half of the Group's profits, but this was never going to be the case in 2013 given the harsh investment climate and our excellent underwriting result. Our investments, before derivatives, made £58.9 million (2012: £92.7 million) equating to a return of 1.9% (2012: 3.1%). We had expected our return to be lower than in 2012, but 1.9% can qualify as better than expected in the world of financial recession in which we are investing. The return from our bond portfolios was much lower than in 2012, but this was as forecast. It has been a challenging time for most fixed income investors, and indeed 2013 turned out to be one of the more volatile years in these markets. It was a good year to be short duration, and our caution has resulted in a low, but positive contribution.

Our exposure to risk assets made a significant contribution to the investment performance this year, and a number of our UK-focused funds produced particularly strong returns. We started 2013 with a weighting to risk assets of 6.2% and trimmed this slightly after the strong run in May, but this has now moved up to 7.1%.

Our overall asset allocation did not change very much during the year. We built up our cash levels towards the end of 2013 and we are happy to have money in the bank ahead of a year where bonds markets face headwinds and equities are unlikely to maintain their recent performance. Central bankers' reaffirmation that short-term interest rates were set to stay low for some time has meant our return expectations from our bond portfolios remain modest.  Our overall investment income in 2014 is expected to be dependent on the performance of our risk asset portfolio. Although short dated bonds may be similarly valued to a year ago, the same cannot be said of equities. Current valuations and an uncertain outlook for corporate earnings means we will continue to closely monitor our exposure.  Patience and prudence still lie at the heart of our investment strategy but with some appetite for risk in asset classes where valuation seems more reasonable.

Capital management

We have announced today a capital return of 50p per share, equal to approximately £178 million.  This is composed of a 36p per share capital return and a further amount of 14p in place of a final dividend.  This will take total capital back to £1,231 million, slightly more than our level at the start of 2013, post the capital return in March of last year. 

This is the second year in a row of such a capital return, but we do not believe that this is a pattern.  We are working hard to deploy as much capital as possible in sectors where we can earn returns in excess of our cost of capital, but we think the right decision is to return capital not properly deployed, after retaining a prudent buffer, to shareholders.  The Board will continue to keep this balance under review.

Our people

2013 was a year that saw substantial changes in Hiscox's leadership and structure.  Robert Hiscox retired as Chairman in February 2013 and was succeeded by Robert Childs, who was previously our Chief Underwriter.  Richard Watson, Rob's successor as Chief Underwriter was appointed to the Board in May.    

We have also made progress in areas less visible to shareholders.  We are steadily appointing a second tier of management who will in the future be candidates to assume the most senior leadership roles within Hiscox.  In the broader organisation 39% of promotions were filled by internal candidates.  We want Hiscox to be a great place to work and grow for the ambitious and talented - so I am delighted that we have filled so many roles from within.

Structural and role changes always have the potential to upset a business, so it is a testament to the robustness of Hiscox and the drive to succeed amongst all our staff that we flourished this year.  I would like to thank all staff for the role they played in achieving this - but know that they remain hungry for further progress and success.

Outlook

During 2013 we used the change of Chairman to initiate a process to define our ambitions for the years ahead.  This process considered the more conventional strategic questions of products, markets and customers, as well as the type of firm we aspire to be in the future.

The good news from a shareholder perspective is that the strategic work suggests that the insurance markets and customer segments we already serve are sufficiently large enough, and our current market shares small enough, to allow us to double the size of business we have today through organic growth. We also believe that we can create further growth opportunities through judicious hiring of talented people or teams, or through small acquisitions which serve as a base for further development.

The conversation with our staff showed them to have the ambition to capture this strategic opportunity whilst wanting to retain the values that have guided Hiscox to date. However, we realise that we all need to grow personally if we are to develop Hiscox in this way. We have therefore committed Hiscox to living our values of courage, quality, integrity, excellence in execution and humanity.  We have also challenged each member of staff to acknowledge that "what got us here, won't get us there" and to accept that delivering on each of our personal growth agenda's is the key to unlocking the business growth opportunities.

For me personally, after 20 years at Hiscox, this process has been hugely energising. My colleagues and I remain restlessly ambitious to grow and develop Hiscox.

Bronek Masojada

24 February 2014

Consolidated income statement

For the year ended 31 December 2013

			2013 Total	2012 Total restated*
		Note	£000	£000
Income
Gross premiums written		4	1,699,478	1,565,819
Outward reinsurance premiums			(328,364)	(297,679)
Net premiums written		4	1,371,114	1,268,140
Gross premiums earned			1,598,879	1,487,859
Premiums ceded to reinsurers			(315,568)	(289,238)
Net premiums earned		4	1,283,311	1,198,621
Investment result		7	59,809	92,424
Other revenues		9	20,905	13,930
Revenue			1,364,025	1,304,975
Expenses
Claims and claim adjustment expenses			(572,440)	(719,792)
Reinsurance recoveries			53,161	180,966
Claims and claim adjustment expenses, net of reinsurance		17	(519,279)	(538,826)
Expenses for the acquisition of insurance contracts			(305,777)	(283,615)
Operational expenses		9	(276,965)	(235,872)
Foreign exchange losses			(9,890)	(20,173)
Total expenses			(1,111,911)	(1,078,486)
Results of operating activities			252,114	226,489
Finance costs			(7,176)	(8,605)
Share of loss from associates after tax			(400)	(430)
Profit before tax			244,538	217,454
Tax expense		19	(6,780)	(9,428)
Profit for the year (all attributable to owners of the Company)			237,758	208,026
Earnings per share on profit attributable to owners of the Company
Basic		20	66.3p	53.1p
Diluted		20	63.5p	51.0p

*The comparative information has been restated for the adoption of IAS 19 (2011). See note 2 for details

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

Consolidated statement of comprehensive income

For the year ended 31 December 2013, after tax

		2013 Total	2012 Total restated*
		£000	£000
Profit for the year		237,758	208,026
Other comprehensive income
Items never reclassified to profit and loss
Remeasurements of the employee retirement benefit obligation		9,775	(2,069)
Income tax relating to components of other comprehensive income		(2,865)	173
		6,910	(1,896)
Items that may be reclassified to profit and loss:
Exchange differences on translating foreign operations		(2,030)	(35,806)
Income tax relating to components of other comprehensive income		-	-
		(2,030)	(35,806)
Other comprehensive income/(loss) net of tax		4,880	(37,702)
Total comprehensive income for the year (all attributable to owners of the Company)		242,638	170,324

*The comparative information has been restated for the adoption of IAS 19 (2011). See note 2 for details.

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

Consolidated balance sheet

At 31 December 2013

			2013	2012
				restated*
		Note	£000	£000
Assets
Intangible assets			72,720	69,617
Property, plant and equipment			20,219	18,055
Investment in associates			7,754	9,054
Deferred tax			32,123	25,608
Deferred acquisition costs			197,628	166,041
Financial assets carried at fair value		12	2,585,054	2,406,269
Reinsurance assets		11	458,822	540,389
Loans and receivables including insurance receivables		13	493,419	492,064
Current tax asset			3,530	1,513
Cash and cash equivalents		16	564,375	657,662
Total assets			4,435,644	4,386,272
Equity and liabilities
Shareholders' equity
Share capital			20,854	20,703
Share premium			4,953	41,313
Contributed surplus			89,864	245,005
Currency translation reserve			22,681	24,711
Retained earnings			1,271,109	1,033,634
Total equity (all attributable to owners of the Company)			1,409,461	1,365,366
Employee retirement benefit obligation			4,366	16,907
Deferred tax			75,946	134,473
Insurance liabilities		17	2,609,121	2,596,612
Financial liabilities		12	229	301
Current tax			32,383	6,998
Trade and other payables		18	304,138	265,615
Total liabilities			3,026,183	3,020,906
Total equity and liabilities			4,435,644	4,386,272
*The comparative information has been restated for the adoption of IAS 19 (2011). See note 2 for details. The related notes 1 to 22 are an integral part of this document.

Consolidated statement of changes in equity

For the year ended 31 December 2013

		Share capital	Share premium	Contributed surplus	Currency translation reserve	Retained earnings	Total
	Note	£000	£000	£000	£000	£000	£000
Balance at 1 January 2012, as previously reported		20,563	32,086	245,005	60,517	897,728	1,255,899
Impact of change in accounting policy		-	-	-	-	(11,376)	(11,376)
Restated balance at    1 January 2012*		20,563	32,086	245,005	60,517	886,352	1,244,523
Total recognised comprehensive income for the year (all attributable to owners of the company)		-	-	-	(35,806)	206,130	170,324
Employee share options:
Equity settled share based payments		-	-	-	-	6,135	6,135
Proceeds from shares issued		52	1,649	-	-	-	1,701
Deferred and current tax on employee share options		-	-	-	-	5,190	5,190
Scrip dividends	21	88	7,578	-	-	-	7,666
Dividends paid to owners of the Company	21	-	-	-	-	(70,173)	(70,173)
Restated balance at 31 December 2012*		20,703	41,313	245,005	24,711	1,033,634	1,365,366
Total recognised comprehensive income for the year (all attributable to owners of the Company)		-	-	-	(2,030)	244,668	242,638
Employee share options:
Equity settled share based payments		-	-	-	-	12,523	12,523
Proceeds from shares issued		133	3,990	-	-	-	4,123
Deferred and current tax on employee share options		-	-	-	-	5,030	5,030
B Share Scheme:
Return of capital, special distribution	21	-	(42,453)	(107,718)	-	-	(150,171)
Final dividend equivalent	21	-	-	(47,423)	-	-	(47,423)
Scrip dividends	21	18	2,103	-	-	-	2,121
Dividends paid to owners of the Company	21	-	-	-	-	(24,746)	(24,746)
Balance at 31 December 2013		20,854	4,953	89,864	22,681	1,271,109	1,409,461
*The comparative information has been restated for the adoption of IAS 19 (2011). See note 2 for details. The related notes 1 to 22 are an integral part of this document.

Consolidated statement of cash flows

For the year ended 31 December 2013

			2013	2012 restated*
		Note	£000	£000
Profit  before tax			244,538	217,454
Adjustments for:
Interest and equity dividend income			(42,571)	(45,699)
Interest expense			7,176	8,605
Net fair value gains on financial assets			(14,847)	(37,654)
Depreciation and amortisation			9,650	7,833
Charges in respect of share based payments			12,523	6,135
Profit from sale of subsidiaries			(1,536)	-
Other non-cash movements			925	1,963
Effect of exchange rate fluctuations on cash presented separately			491	9,481
Changes in operational assets and liabilities:
Insurance and reinsurance contracts			70,576	(8,245)
Financial assets carried at fair value			(170,817)	(49,377)
Financial liabilities carried at fair value			(72)	301
Other assets and liabilities			4,321	13,596
Cash flows from operations			120,357	124,393
Interest received			41,494	51,743
Equity dividends received			789	1,631
Interest paid			(5,229)	(7,256)
Cash paid to the pension fund			(1,800)	(1,800)
Current tax (paid)/received			(39,712)	56,403
Net cash flows from operating activities			115,899	225,114
Cash flows from the sale and purchase of subsidiaries			20,940	-
Cash flows from the sale and purchase of associates			600	(3,104)
Cash flows from the purchase of property, plant and equipment			(4,545)	(3,103)
Cash flows from the purchase of intangible assets			(9,594)	(7,505)
Net cash flows from investing activities			7,401	(13,712)
Proceeds from the issue of ordinary shares			4,123	1,701
Distributions paid to owners of the Company		21	(220,219)	(62,507)
Net cash flows from financing activities			(216,096)	(60,806)
Net (decrease)/increase  in cash and cash equivalents			(92,796)	150,596
Cash and cash equivalents at 1 January			657,662	516,547
Net (decrease)/increase in cash and cash equivalents			(92,796)	150,596
Effect of exchange rate fluctuations on cash and cash equivalents			(491)	(9,481)
Cash and cash equivalents at 31 December			564,375	657,662
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 totaling £113,312,000 (2012: £86,168,000) not available for immediate use by the Group outside of the Lloyd's Syndicate within which they are held. The related notes 1 to 22 are an integral part of this document. *The comparative information has been restated for the adoption of IAS 19 (2011). See note 2 for details.

Notes to the financial statements

1. General information

The financial information set out in this statement is extracted from the Group's consolidated financial statements for the year ended 31 December 2013. The auditors have reported on those 2013 financial statements which include comparative amounts for 2012. Their report was unqualified. The Hiscox Group, which is headquartered in Hamilton, Bermuda, comprises Hiscox Ltd (the parent Company, referred to herein as the 'Company') and its subsidiaries (collectively, the 'Hiscox Group' or the 'Group'). For the period under review the Group provided insurance and reinsurance services to its clients worldwide. It has operations in Bermuda, the UK, Europe, and USA and employs over 1,600 people. The Company is registered and domiciled in Bermuda and on 12 December 2006 its ordinary shares were listed on the London Stock Exchange. As such it is required to prepare its annual audited financial information in accordance with Section 4.1 of the Disclosure and Transparency Rules and the Listing Rules, both issued by the Financial Conduct Authority (FCA), in addition to the Bermuda Companies Act 1981. The first two pronouncements issued by the FCA require the Group to prepare financial statements which comprise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated balance sheet, the consolidated statement of changes in equity, the consolidated  statement of cash flows and the related notes 1 to 22 in accordance with International Financial Reporting Standards ('IFRS') adopted by the European Union. The consolidated financial statements for the year ended 31 December 2013 include all of the Group's subsidiary companies and the Group's interest in associates. All amounts relate to continuing operations. The financial statements were approved for issue by the Board of Directors on 24 February 2014.

2. Significant accounting policies

Except as described below, the accounting policies applied in these consolidated financial statements are consistent with the prior year. The consolidated financial statements as at, and for the year ended 31 December 2013 were compliant with International Financial Reporting Standards as adopted by the European Union and in accordance with the provisions of the Bermuda Companies Act 1981.

Changes in accounting policies (a) Defined benefit plans As a result of the adoption of IAS 19 (2011), the Group has changed its accounting policy with respect to the recognition of defined benefit obligations on the balance sheet and the basis for determining the income or expense relating to it. Under IAS 19 (2011), the option to apply the corridor method has been removed and the Group must recognise the full unfunded obligation/(surplus scheme assets) on the balance sheet. In addition, the Group is now required to calculate the net interest expense/(income) for the period on the net defined benefit liability/(asset) by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period. Previously the Group determined interest income on plan assets based on their long-term rate of expected return.

The impact of the change is as follows:

Impact to the financial statements of the adoption of IAS19 (2011)

	31 December 2011			31 December 2012			31 December 2013
	Previously reported £000	Adjustment £000	Restated £000	Previously reported £000	Adjustment £000	Restated £000	Pre  accounting policy change £000	Adjustment £000	Reported £000
Total assets	4,222,741	-	4,222,741	4,386,272	-	4,386,272	4,435,644	-		4,435,644
Total liabilities	(2,966,842)	(11,376)	(2,978,218)	(3,007,888)	(13,018)	(3,020,906)	(3,022,877)	(3,306)		(3,026,183)
Total equity	1,255,899	(11,376)	1,244,523	1,378,384	(13,018)	1,365,366	1,412,767	(3,306)		1,409,461

Total comprehensive income

	Year to 31 December 2012			Year to 31 December 2013
	Previously reported £000	Adjustment £000	Restated £000	Pre accounting policy change £000	Adjustment £000	Reported £000
Profit before tax	217,124	330	217,454	241,772	2,766	244,538
Tax (expense)/credit	(9,352)	(76)	(9,428)	(6,816)	36	(6,780)
Profit for the period	207,772	254	208,026	234,956	2,802	237,758
Other comprehensive income	(35,806)	(1,896)	(37,702)	(2,030)	6,910	4,880
Total comprehensive income	171,966	(1,642)	170,324	232,926	9,712	242,638

b) Fair value measurements

IFRS 13 establishes a single framework for measuring fair value and making disclosures about fair value measurements, when such measurements are required or permitted by other IFRSs. In particular, it unifies the definition of fair value as the price at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants at the measurement date.

In accordance with the transitional provisions of IFRS 13, the Group has applied the new fair value measurement guidance prospectively. The change had no significant impact on the measurement of the Group's assets and liabilities

(c) Presentation of items of other comprehensive income

As a result of the amendments to IAS 1, the Group has modified the presentation of items of other comprehensive income in its consolidated statement of comprehensive income, to present separately items that would be reclassified to profit or loss in the future from those that would never be. Exchange differences on translating foreign operations have been classified as an item that may be subsequently reclassified on the basis that this reclassification would arise if the operation was sold, although it does not necessarily reflect managements' intention. Comparative information has also been re-presented accordingly.

The adoption of the amendment to IAS 1 has no impact on the recognised assets, liabilities and comprehensive income of the Group.

(d) Subsidiaries

As a result of IFRS 10, the Group has changed its accounting policy for determining whether it has control over and consequently whether it consolidates its investees. IFRS 10 introduces a new control model that focuses on whether the Group has power over an investee, exposure or rights to variable returns from its involvement with the investee and ability to use its power to affect those returns.

The Group reassessed the control conclusion for its investees at 1 January 2013 and no changes in control conclusions were made.

(e) Joint arrangements

As a result of IFRS 11, the Group has changed its accounting policy for its interests in joint arrangements. Under IFRS 11, the Group classifies its interests in joint arrangements as either joint operating or joint ventures depending on the Group's rights to the assets and obligations for the liabilities of the arrangements. When making this assessment the Group considers the structure of the arrangements, the legal form of any separate vehicles, the contractual terms of the arrangement and other facts and circumstances. Previously the structure of the arrangement was the sole focus of classification.

The Group has re-evaluated its involvement in the only arrangement which could be considered joint, the participation in Syndicate 33 and concluded that it is outside the scope of both IFRS 10 and IFRS 11. The Group will therefore continue to only consolidate its 72.5% share of Syndicate 33.

2.1. Statement of compliance

The consolidated financial statements have been prepared in accordance with IFRS as adopted by the European Union and in accordance with the provisions of the Bermuda Companies Act 1981. Since 2002, the standards adopted by the International Accounting Standards Board have been referred to as IFRS. The standards from prior years continue to bear the title 'International Accounting Standards' (IAS). Insofar as a particular standard is not explicitly referred to, the two terms are used in these financial statements synonymously. Compliance with IFRS includes the adoption of interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC). The Group currently applies IFRS 4 Insurance Contracts which specifies the financial reporting for insurance contracts by an insurer. The standard was issued by the IASB as the first phase in their project to develop a comprehensive standard for insurance contracts. Accordingly, to the extent that IFRS 4 does not specify the recognition or measurement of insurance contracts, transactions reported in these consolidated financial statements have been prepared in accordance with another comprehensive body of accounting principles for insurance contracts, namely accounting principles generally accepted in the UK. In July 2013, the IASB issued their second exposure draft for Phase II of the insurance contracts project. The exposure draft in its current form will require a number of significant changes to the measurement of insurance contracts and as such adoption of a final standard in a form similar to the exposure draft will likely have a significant impact on the results of the Group. In addition, the IASB has stated they will allow approximately three full years from the date of any final standard to actual implementation, therefore 2018 is likely to be the earliest date for the adoption. We continue to monitor the progress of the project.

2.2. Basis of preparation

The financial statements are presented in Pounds Sterling and are rounded to the nearest thousand unless otherwise stated. They are compiled on a going concern basis and prepared on the historical cost basis except that pension scheme assets included in the measurement of the employee retirement benefit obligation, and financial instruments including derivative instruments, are measured at fair value. Employee retirement benefit obligations are determined using actuarial analysis. The balance sheet of the Group is presented in order of increasing liquidity. The accounting policies have been applied consistently by all Group entities and to all periods presented, solely for the purpose of producing the consolidated Group financial statements. The Group has financial assets and cash of over £3.1 billion. The portfolio is predominantly invested in liquid short dated bonds and cash to ensure significant liquidity to the Group and to reduce risk from the financial markets. In addition the Group has significant borrowing facilities in place. The Group writes a balanced book of insurance and reinsurance business spread by product and geography. As such, the Directors believe that the Group is well placed to manage its business risk and continue to trade successfully. The Directors therefore have an expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and Accounts.

2.3. Reporting of additional performance measures

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

3. Financial risk
Credit risk The Group mitigates counterparty credit risk by concentrating debt and fixed income investments in high quality instruments, including a particular emphasis on government gilts issued mainly by North American countries and the European Union, excluding those from Portugal, Ireland and Greece. An analysis of the Group's major exposures to counterparty credit risk excluding loans and receivables, based on Standard & Poor's or equivalent rating, is presented below:
As at 31 December 2013						AAA			AA				A			Other / non-rated				Total
						£000			£000				£000			£000				£000
Debt and fixed income securities						654,602			1,143,308				310,642			227,277				2,335,829
Deposits with credit institutions						-			4,292				1,802			146				6,240
Reinsurance assets						12,020			149,759				269,353			27,690				458,822
Cash and cash equivalents						132,415			86,436				344,868			656				564,375
Total						799,037			1,383,795				926,665			255,769				3,365,266
Amounts attributable to largest single counterparty						115,430			517,997				110,198			7,050
As at 31 December 2012						AAA			AA				A			Other / non-rated				Total
						£000			£000				£000			£000				£000
Debt and fixed income securities						816,153			834,671				369,528			174,514				2,194,866
Deposits with credit institutions						900			-				12,303			-				13,203
Reinsurance assets						16,714			153,440				340,711			29,524				540,389
Cash and cash equivalents						149,291			77,090				429,949			1,332				657,662
Total						983,058			1,065,201				1,152,491			205,370				3,406,120
Amounts attributable to largest single counterparty						209,847			489,070				106,502			5,398
The largest counterparty exposure within AAA rating at 31 December 2013 is the German Government and at 31 December 2012 it was with the UK Treasury.  For the AA rating it is with the US Treasury at both 31 December 2013 and 2012.  A significant proportion of 'other/non-rated' assets are rated BBB and BB at 31 December 2013 and 2012.  The Group's AAA rated reinsurance assets include fully collateralized positions at 31 December 2013 and 2012. At 31 December 2013 and 2012, the Group held no material debt and fixed income securities that were past due or impaired beyond their reported fair values, either for the current period under review or on a cumulative basis. For the current period and prior period, the Group did not experience any material defaults on debt securities.
An analysis of the Group's debt and fixed income securities at 31 December by class is detailed below:
														2013				2012
														%				%
Government issued bonds and instruments														41				34
Agency and government supported debt														9				12
Asset backed securities														10				10
Mortgage backed instruments - agency														5				7
Mortgage backed instruments - non-agency														3				3
Mortgage backed instruments - commercial														3				3
Corporate bonds														26				27
Lloyd's deposits and bond funds														3				4
Within the fixed income portfolios, which include debt securities, deposits with credit institutions and cash equivalent assets, there are exposures to a range of government borrowers, on either a direct or guaranteed basis, and banking institutions. The Group, together with its investment managers, closely manages its geographical exposures across government issued and supported debt.
The positions at 31 December 2013 and 2012 in respect of government issued and supported debt are shown in the table below. The Group has no direct government exposure to Portugal, Ireland or Greece.
	Year to 31 December 2013										Year to 31 December 2012
	Government issued		Government supported				Total				Government issued				Government supported				Total
	£000		£000				£000				£000				£000				£000
United States of America	499,409		97,797				597,206				489,070				120,991				610,061
United Kingdom	290,332		5,911				296,243				209,847				23,083				232,930
Australia	-		1,976				1,976				-				8,921				8,921
Austria	1,420		-				1,420				-				-				-
Belgium	2,333		-				2,333				-				-				-
Canada	1,236		41,473				42,709				17,297				31,373				48,670
Denmark	-		265				265				-				4,384				4,384
Finland	10,170		-				10,170				7,003				2,197				9,200
France	941		2,232				3,173				6,551				1,531				8,082
Germany	84,905		29,441				114,346				109,871				51,806				161,677
Italy	3,818		-				3,818				-				-				-
Netherlands	60,962		3,690				64,652				-				12,329				12,329
Norway	-		462				462				3,118				-				3,118
Supranationals	-		33,453				33,453				-				25,645				25,645
South Korea	-		-				-				2,614				209				2,823
Spain	2,499		1,271				3,770				-				-				-
Sweden	1,691		421				2,112				2,191				1,133				3,324
Other	2,500		1,161				3,661				1,474				-				1,474
Total	962,216		219,553				1,181,769				849,036				283,602				1,132,638
Included above are £1,180 million (2012: £1,012 million) in relation to holdings in debt securities, none (2012: £10 million) are held as deposits with credit institutions and £2 million (2012: £111 million) held as cash equivalents, having a maturity of less than three months at the time of purchase. Of the amount held as cash equivalents, £1 million (2012: £75 million) is held with the US Treasury, £1 million (2012 : £nil ) is held with the French Government and there is no holding  (2012: £35 million) with the UK Government. Additionally, the geographical location and credit quality of individual bank borrowers are closely monitored. An analysis of the Group's exposure to bank counterparties by country and credit rating held at 31 December 2013 and 2012 is detailed below. Bank debt held by the Group is mostly senior unsecured and covered bonds. The subordinated bonds are all classed as lower tier 2 capital.
Bank debt														31 December 2013
	Senior													Sub-ordinated
	AAA	AA		A			BBB			Sub-total		A		BBB		B			Sub-total			Total
	£000	£000		£000			£000			£000		£000		£000		£000			£000			£000
United States of America	-	1,942		70,392			3,451			75,785		314		2,506		-			2,820			78,605
United Kingdom	6,605	3,654		12,473			2,367			25,099		-		1,312		-			1,312			26,411
Australia	2,373	12,395		1,720			-			16,488		-		-		-			-			16,488
Canada	9,022	8,085		11,933			146			29,186		208		-		-			208			29,394
Denmark	720	-		-			-			720		-		-		-			-			720
France	634	-		18,788			-			19,422		-		-		-			-			19,422
Germany	732	-		1,025			-			1,757		-		-		-			-			1,757
Italy	-	-		-			1,925			1,925		-		-		-			-			1,925
Japan	-	-		2,071			-			2,071		-		-		-			-			2,071
Netherlands	2,938	11,026		3,299			-			17,263		-		803		-			803			18,066
New Zealand	662	1,660		-			-			2,322		-		-		-			-			2,322
Norway	1,695	-		-			-			1,695		-		-		-			-			1,695
Sweden	1,860	5,958		5,699			-			13,517		-		-		-			-			13,517
Switzerland	1,203	1,200		3,400			-			5,803		-		-		-			-			5,803
Other	-	186		-			340			526		-		-		-			-			526
Total	28,444	46,106		130,800			8,229			213,579		522		4,621		-			5,143			218,722

Included in the bank debt table above are £213 million in relation to holdings in debt securities and £6 million held as deposits with credit institutions.

Bank debt													31 December 2012
		Senior									Sub-ordinated
		AAA	AA			A		BBB	Sub-total		A	BBB		B	Sub-total			Total
		£000	£000			£000		£000	£000		£000	£000		£000	£000			£000
United States of America		-	-			65,651		1,311	66,962		603	-		-	603			67,565
United Kingdom		10,632	4,375			12,948		-	27,955		303	894		1,394	2,591			30,546
Australia		1,102	7,829			-		-	8,931		-	-		-	-			8,931
Canada		12,066	4,973			15,090		-	32,129		1,828	823		-	2,651			34,780
Denmark		349	-			537		-	886		-	-		-	-			886
France		1,364	292			8,373		-	10,029		-	-		-	-			10,029
Germany		-	-			1,712		-	1,712		-	-		-	-			1,712
Netherlands		1,893	3,516			4,751		-	10,160		-	765		-	765			10,925
New Zealand		662	637			-		-	1,299		-	-		-	-			1,299
Norway		1,704	-			1,059		-	2,763		-	-		-	-			2,763
Spain		-	-			-		614	614		-	-		-	-			614
Sweden		1,853	6,723			6,432		-	15,008		-	-		-	-			15,008
Switzerland		-	-			8,833		-	8,833		-	-		-	-			8,833
Other		-	190			304		495	989		-	-		-	-			989
Total		31,625	28,535			125,690		2,420	188,270		2,734	2,482		1,394	6,610			194,880
Included in the bank debt table above, are £192 million in relation to holdings in debt securities and £3 million held as deposits with credit institutions.
Liquidity risk A significant proportion of the Group's investments are in highly liquid assets which could be converted to cash in a prompt fashion and at minimal expense. The deposits with credit institutions largely comprise short-dated certificates for which an active market exists and which the Group can easily access. The Group's exposure to equities is concentrated on shares and funds that are frequently traded on internationally recognised stock exchanges. The main focus of the investment portfolio is on high-quality short duration debt and fixed income securities, and cash. There are no significant holdings of investments with specific repricing dates. Notwithstanding the regular interest receipts and also the Group's ability to liquidate these securities and the majority of its other financial instrument assets, for cash in a prompt and reasonable manner, the contractual maturity profile of the fair value of these securities at 31 December was as follows:
				Debt and fixed income securities			Deposits with credit institutions				Cash and cash equivalents			2013 total			2012 total
				£000			£000				£000			£000			£000
Less than one year				561,656			3,871				564,375			1,129,902			1,168,277
Between one and two years				515,116			1,948				-			517,064			468,475
Between two and five years				846,162			421				-			846,583			808,791
Over five years				332,822			-				-			332,822			349,761
Lloyd's deposits				80,073			-				-			80,073			70,427
Total				2,335,829			6,240				564,375			2,906,444			2,865,731
The Group's equities and shares in unit trusts and other non-dated instruments have no contractual maturity terms but could also be liquidated in an orderly manner for cash in a prompt and reasonable time frame within one year of the balance sheet date.
4. Operating segments
The Group's operating segments consist of four segments which recognise the differences between products and services, customer groupings and geographical areas.  Financial information is used in this format by the chief operating decision maker in deciding how to allocate resources and in assessing performance.  The format is representative of the management structure of the segments. The Group's four operating segments are: London Market comprises the results of Syndicate 33, excluding the results of fine art and non US household business which is included within the results of UK and Europe. It also includes the auto physical damage and warranty businesses and aviation business from Syndicate 3624. In addition, it excludes an element of kidnap and ransom and terrorism included in UK and Europe. UK and Europe comprises the results of Hiscox Insurance Company Limited, the results of Syndicate 33's fine art and non US household business, together with the income and expenses arising from the Group's retail agency activities in the UK and in continental Europe. In addition, it includes the European errors and omissions and specialty UK businesses from Syndicate 3624. It also includes an element of kidnap and ransom and terrorism written in Syndicate 33. International comprises the results of Hiscox Insurance Company (Guernsey) Limited, Hiscox Insurance Company (Bermuda) Limited, Hiscox Inc., Hiscox Insurance Company Inc., and Syndicate 3624 excluding the European errors and omissions, aviation, auto physical damage and warranty and specialty UK businesses. Corporate Centre comprises the investment return, finance costs and administrative costs associated with Group management activities. Corporate Centre also includes the majority of foreign currency items on economic hedges and intragroup borrowings. These relate to certain foreign currency items on economic hedges and intragroup borrowings, further details of which are given at note 22. Corporate Centre forms a reportable segment due to its investment activities which earn significant external coupon revenues. All amounts reported below represent transactions with external parties only.  In the normal course of trade, the Group's entities enter into various reinsurance arrangements with one another.  The related results of these transactions are eliminated on consolidation and are not included within the results of the segments.  This is consistent with the information used by the chief operating decision maker when evaluating the results of the Group.  Performance is measured based on each reportable segment's profit before tax.
a.	Profit before tax by segment
Year ended 31 December 2013
					London Market			UK and Europe		International			Corporate  centre			Total
					£000			£000		£000			£000			£000
Gross premiums written					668,240			559,089		472,149			-			1,699,478
Net premiums written					474,990			529,719		366,405			-			1,371,114
Net premiums earned					433,497			508,438		341,376			-			1,283,311
Investment result					8,873			18,227		12,677			20,032			59,809
Other revenues					10,063			3,191		6,498			1,153			20,905
Revenue					452,433			529,856		360,551			21,185			1,364,025
Claims and claim adjustment expenses, net of reinsurance					(178,304)			(223,196)		(117,779)			-			(519,279)
Expenses for the acquisition of insurance contracts					(105,207)			(121,525)		(79,045)			-			(305,777)
Operational expenses					(48,670)			(124,954)		(79,732)			(23,609)			(276,965)
Foreign exchange losses					(3,123)			(3,408)		(2,561)			(798)			(9,890)
Total expenses					(335,304)			(473,083)		(279,117)			(24,407)			(1,111,911)
Results of operating activities					117,129			56,773		81,434			(3,222)			252,114
Finance costs					(1,083)			-		(525)			(5,568)			(7,176)
Share of (loss)/profit of associates after tax					-			(423)		-			23			(400)
Profit before tax					116,046			56,350		80,909			(8,767)			244,538
Year ended 31 December 2012, restated*
					London Market			UK and Europe		International			Corporate  centre			Total
					£000			£000		£000			£000			£000
Gross premiums written					640,042			507,522		418,255			-			1,565,819
Net premiums written					462,397			479,861		325,882			-			1,268,140
Net premiums earned					419,026			476,945		302,650			-			1,198,621
Investment result					26,973			17,754		29,202			18,495			92,424
Other revenues					7,115			2,136		3,992			687			13,930
Revenue					453,114			496,835		335,844			19,182			1,304,975
Claims and claim adjustment expenses, net of reinsurance					(176,253)			(222,562)		(140,011)			-			(538,826)
Expenses for the acquisition of insurance contracts					(97,853)			(112,487)		(73,275)			-			(283,615)
Operational expenses					(45,606)			(111,074)		(62,233)			(16,959)			(235,872)
Foreign exchange (losses)/gains					(10,187)			(1,647)		3,113			(11,452)			(20,173)
Total expenses					(329,899)			(447,770)		(272,406)			(28,411)			(1,078,486)
Results of operating activities					123,215			49,065		63,438			(9,229)			226,489
Finance costs					(1,319)			-		(697)			(6,589)			(8,605)
Share of loss of associates after tax					-			-		(64)			(366)			(430)
Profit before tax					121,896			49,065		62,677			(16,184)			217,454
*The comparative information has been restated for the adoption of IAS 19 (2011). See note 2 for details.
The Group's wholly owned subsidiary, Hiscox Syndicates Limited, oversees the operation of Syndicate 33 at Lloyd's. The Group's percentage participation in Syndicate 33 can fluctuate from year to year and consequently presentation of the results at the 100% level removes any distortions arising there from.
b.	100% operating results by segment
Year ended 31 December 2013
					London Market			UK and Europe		International			Corporate centre			Total
					£000			£000		£000			£000			£000
Gross premiums written					870,936			574,034		479,151			-			1,924,121
Net premiums written					606,288			541,298		372,271			-			1,519,857
Net premiums earned					568,269			520,321		346,724			-			1,435,314
Investment result					12,035			18,276		12,734			20,032			63,077
Other revenues					-			2,703		4,547			1,153			8,403
Claims and claim adjustment expenses, net of reinsurance					(226,175)			(225,700)		(118,820)			-			(570,695)
Expenses for the acquisition of insurance contracts					(135,760)			(126,234)		(79,581)			-			(341,575)
Operational expenses					(58,947)			(126,254)		(79,792)			(23,609)			(288,602)
Foreign exchange (losses)/gains					(7,330)			(3,549)		(2,546)			(798)			(14,223)
Results of operating activities					152,092			59,563		83,266			(3,222)			291,699
Year ended 31 December 2012, restated*
					London Market			UK and Europe		International			Corporate centre			Total
					£000			£000		£000			£000			£000
Gross premiums written					844,330			523,405		424,189			-			1,791,924
Net premiums written					601,736			491,992		330,941			-			1,424,669
Net premiums earned					549,603			489,453		307,206			-			1,346,262
Investment result					36,842			18,283		29,590			18,495			103,210
Other revenues					-			2,097		2,453			687			5,237
Claims and claim adjustment expenses, net of reinsurance					(221,637)			(230,740)		(141,154)			-			(593,531)
Expenses for the acquisition of insurance contracts					(125,810)			(117,955)		(74,751)			-			(318,516)
Operational expenses					(54,091)			(111,810)		(61,162)			(16,543)			(243,606)
Foreign exchange (losses)/gains					(13,372)			(1,711)		3,138			(11,452)			(23,397)
Results of operating activities					171,535			47,617		65,320			(8,813)			275,659
*The comparative information has been restated for the adoption of IAS 19 (2011). See note 2 for details.
100% ratio analysis
Year ended 31 December 2013
					London Market			UK and Europe		International			Corporate  centre			Total
Claims ratio (%)					39.8			43.4		34.3			-			39.8
Expense ratio (%)					34.3			48.5		46.0			-			42.3
Combined ratio excluding foreign exchange impact (%)					74.1			91.9		80.3			-			82.1
Foreign exchange impact (%)					1.3			0.7		0.7			-			0.9
Combined ratio (%)					75.4			92.6		81.0			-			83.0
Year ended 31 December 2012
					London Market			UK and Europe		International			Corporate  centre			Total
Claims ratio (%)					40.3			47.2		46.0			-			44.1
Expense ratio (%)					32.8			46.9		44.2			-			40.5
Combined ratio excluding foreign exchange impact (%)					73.1			94.1		90.2			-			84.6
Foreign exchange impact (%)					2.4			0.3		(1.0)			-			0.9
Combined ratio (%)					75.5			94.4		89.2			-			85.5

The impacts on profit before tax of a 1% change in each component of the segmental combined ratios are:
	Year to 31 December 2013							Year ended 31 December 2012
	London Market	UK and Europe	International		Corporate  centre			London Market		UK and Europe			International		Corporate  centre
	£000	£000	£000		£000			£000		£000			£000		£000
At 100% level
1% change in claims or expense ratio	5,683	5,203	3,467		-			5,496		4,895			3,072		-
At Group level
1% change in claims or expense ratio	4,335	5,084	3,414		-			4,190		4,769			3,027		-
5. Net asset value per share
						2013						2012
						Net asset value (total equity)			NAV per share			Net asset value (total equity) restated*			NAV per share restated*
						£000			p			£000			p
Net asset value						1,409,461			402.2			1,365,366			346.4
Net tangible asset value						1,336,741			381.4			1,295,749			328.7
*The comparative information has been restated for the adoption of IAS 19 (2011). See note 2 for details. The net asset value per share is based on 350,460,458 shares (2012: 394,200,249), being the adjusted number of shares in issue at 31 December. Net tangible assets comprise total equity excluding intangible assets.
6. Return on equity
											2013			2012 restated*
											£000			£000
Profit for the year (all attributable to owners of the Company)											237,758			208,026
Opening shareholders' equity											1,365,366			1,244,523
Adjusted for the time weighted impact of capital distributions and issuance of shares											(134,580)			(28,095)
Adjusted opening shareholders' equity											1,230,786			1,216,428
Annualised return on equity (%)											19.3			17.1
*The comparative information has been restated for the adoption of IAS 19 (2011). See note 2 for details.
7. Investment result
The total investment result for the Group before taxation comprises:											2013			2012
											£000			£000
Investment income including interest receivable											42,571			45,699
Net realised gains on financial investments at fair value through profit or loss											2,391			9,071
Net fair value gains on financial investments at fair value through profit or loss											13,962			37,920
Investment result - financial assets											58,924			92,690
Fair value gains/(losses) on derivative financial instruments and borrowings (note 14)											885			(266)
Total result											59,809			92,424

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

8. Analysis of return on financial investments
i. The weighted average return on financial investments for the year by currency, based on monthly asset values, was:
								2013		2012
								%		%
Sterling								3.4		3.6
US Dollar								1.5		3.2
Other								0.7		1.8
ii. Investment return:
Year ended 31 December 2013
	London Market		UK and Europe		International		Corporate Centre		Total
	£000	%	£000	%	£000	%	£000	%	£000		%
Debt and fixed income securities	8,326	0.9	3,192	0.7	2,748	0.3	2,839	1.3	17,105		0.7
Equities and shares in unit trusts	-	-	14,246	20.9	7,882	10.9	17,161	23.2	39,289		18.3
Deposits with credit institutions/cash and cash equivalents	330	0.7	806	0.7	1,148	0.5	246	0.2	2,530		0.5
	8,656	0.9	18,244	2.8	11,778	1.0	20,246	4.7	58,924		1.9
Year ended 31 December 2012
	London Market		UK and Europe		International		Corporate Centre		Total
	£000	%	£000	%	£000	%	£000	%	£000		%
Debt and fixed income securities	26,813	3.5	8,585	1.9	19,191	2.5	7,990	3.9	62,579		2.8
Equities and shares in unit trusts	-	-	8,288	13.8	8,580	14.0	10,106	16.6	26,974		14.8
Deposits with credit institutions/cash and cash equivalents	242	0.2	796	0.7	1,700	0.6	399	0.4	3,137		0.5
	27,055	3.1	17,669	2.8	29,471	2.7	18,495	5.1	92,690		3.1
9. Other revenues and operational expenses
								2013			2012 restated*
								£000			£000
Agency related income								7,100			5,866
Profit commission								9,161			5,532
Other underwriting income - insurance linked fund								1,832			1,123
Other income								2,812			1,409
Other revenues								20,905			13,930
Wages and salaries								101,780			88,294
Social security costs								20,498			15,299
Pension cost - defined contribution								6,593			6,117
Pension cost - defined benefit								1,000			1,054
Share based payments								12,523			6,135
Marketing expenses								30,550			26,251
Investment expenses								3,833			3,543
Depreciation, amortisation and impairment								9,650			7,833
Other expenses								90,538			81,346
Operational expenses								276,965			235,872
*The comparative information has been restated for the adoption of IAS 19 (2011). See note 2 for details.
10. Net foreign exchange losses
The net foreign exchange gains for the year include the following amounts:
								2013		2012
								£000		£000
Exchange losses recognised in the consolidated income statement								(9,890)		(20,173)
Exchange losses classified as a separate component of equity								(2,030)		(35,806)
Overall impact of foreign exchange related items on net assets								(11,920)		(55,979)
The above excludes profits or losses on foreign exchange derivative contracts which are included within the investment result and are outlined in note 14.
Net unearned premiums and deferred acquisition costs are treated as non-monetary items in accordance with IFRS. As a result, a foreign exchange mismatch arises caused by these items being earned at historical rates of exchange prevailing at the original transaction date whereby resulting claims are retranslated at the end of each period. The impact of this mismatch on the income statement is shown below.
								2013		2012
								£000		£000
Opening balance sheet impact of non-retranslation of non-monetary items								(2,674)		2,144
Loss included within profit representing the non-retranslation of non-monetary items								(2,116)		(4,818)
Closing balance sheet impact of non-retranslation of non-monetary items								(4,790)		(2,674)
11. Reinsurance assets
								2013		2012
								£000		£000
Reinsurers' share of insurance liabilities								459,603		541,387
Provision for non-recovery and impairment								(781)		(998)
Reinsurance assets (note 17)								458,822		540,389
Amounts due from reinsurers in respect of outstanding premiums and claims already paid by the Group are included in loans and receivables (note 13). The Group recognised a gain during the year of £217,000 (2012: loss of £91,000) in respect of impaired balances.
12. Financial assets and liabilities
Financial assets are measured at their bid price values, with all changes from one accounting period to the next being recorded through the income statement.
								2013		2012
								£000		£000
Debt and fixed income securities								2,335,829		2,194,866
Equities and shares in unit trusts								223,024		190,029
Deposits with credit institutions								6,240		13,203
Total investments								2,565,093		2,398,098
Insurance linked fund								19,917		8,098
Derivative financial instruments (note 14)								44		73
Total financial assets carried at fair value								2,585,054		2,406,269

												2013		2012
												£000		£000
Derivative financial instruments (note 14)												229		301
Total financial liabilities												229		301
The Group has made a total investment of $30.0 million into the Third Point Reinsurance Opportunities Fund ('the Fund'), $13.2 million in 2012 and an additional $16.8 million in 2013. During the year the Fund made a gain of $2.9 million. The Fund is subject to a one year lock up from the balance sheet date.  The Fund specialises in catastrophe reinsurance opportunities and is classified by the Group as an insurance linked fund. The Group participates in a quota share arrangement with Third Point Re Cat Ltd, a wholly-owned reinsurance entity of the Fund. During the year, contracts with a premium of $3.3 million were ceded to the entity.
Investments at 31 December are denominated in the following currencies at their fair value:
												2013		2012
												£000		£000
Sterling												633,631		523,212
US Dollars												1,618,494		1,579,677
Euro and other currencies												312,968		295,209
Total investments												2,565,093		2,398,098
13. Loans and receivables including insurance receivables
												2013		2012
												£000		£000
Gross receivables arising from insurance and reinsurance contracts												422,405		425,720
Provision for impairment												(1,282)		(986)
Net receivables arising from insurance and reinsurance contracts												421,123		424,734
Due from contract holders, brokers, agents and intermediaries												302,820		295,892
Due from reinsurance operations												118,303		128,842
												421,123		424,734
Prepayments and accrued income												6,754		10,345
Other loans and receivables:
Net profit commission receivable												18,905		7,295
Accrued interest												9,463		9,120
Share of Syndicate's other debtors balances												12,192		13,138
Other debtors including related party amounts												24,982		27,432
Total loans and receivables including insurance receivables												493,419		492,064
There is no significant concentration of credit risk with respect to loans and receivables, as the Group has a large number of internationally dispersed debtors. The Group has recognised a loss of £296,000 (2012: loss of £30,000) for the impairment of receivables during the year ended 31 December 2013.
14. Derivative financial instruments
The Group entered into both exchange-traded and over-the-counter derivative contracts for a number of purposes during 2013. The Group had the right and intention to settle each contract on a net basis. The assets and liabilities of these contracts at 31 December 2013 all mature within one year of the balance sheet date and are detailed below. 31 December 2013
					Gross contract notional amount			Fair value of assets				Fair value of liabilities		Net balance sheet position
Derivative financial instrument included on balance sheet					£000			£000				£000		£000
Foreign exchange forward contracts					26,793			44				229		185
Interest rate futures contracts					37,083			-				-		-
Total					63,876			44				229		185
31 December 2012
					Gross contract notional amount			Fair value of assets				Fair value of liabilities		Net balance sheet position
Derivative financial instrument included on balance sheet					£000			£000				£000		£000
Foreign exchange forward contracts					17,755			73				301		228
Interest rate futures contracts					36,655			-				-		-
Total					54,410			73				301		228
All derivative contracts settle within three months of the year end. Foreign exchange forward contracts During the current and prior year the Group entered into a series of conventional over the counter forward contracts in order to secure translation gains made on Euro, US Dollar and other non-Pound Sterling denominated monetary assets. The contracts require the Group to forward sell a fixed amount of the relevant currency for Pound Sterling at pre-agreed future exchange rates. The Group made a loss on these forward contracts of £77,000 (2012: gain of £71,000) as included in note 7. The opposite exchange gain is included within financial investments. There was no initial purchase cost associated with these instruments. Interest rate future contracts During the year the Group continued short selling a number of government bond futures and sovereign futures denominated in a range of currencies to informally hedge substantially all of the interest rate risk on specific long portfolios of the matching currencies denominated corporate bonds. All contracts are exchange traded and the Group made a gain on these futures contracts of £1,175,000 (2012: loss of £337,000) as included in note 7. Equity index options During the year the Group purchased and disposed of an equity index option to protect against a decline in equity prices. The Group made a loss of  £213,000 on this contract. No such instruments were purchased in 2012.
15. Fair value measurements In accordance with IFRS 13 : Fair value measurements, the  fair value of financial instruments based on a three-level fair value hierarchy that reflects the significance of the inputs used in measuring the fair value is provided below.
As at 31 December 2013					Level 1			Level 2				Level 3		Total
Financial assets					£000			£000				£000		£000
Debt and fixed income securities					875,882			1,459,947				-		2,335,829
Equities and shares in unit trusts					-			208,960				14,064		223,024
Deposits with credit institutions					6,240			-				-		6,240
Insurance linked fund					-			-				19,917		19,917
Derivative financial instruments					-			44				-		44
Total					882,122			1,668,951				33,981		2,585,054
Financial liabilities
Derivative financial instruments					-			229				-		229
As at 31 December 2012					Level 1			Level 2				Level 3		Total
Financial assets					£000			£000				£000		£000
Debt and fixed income securities					718,393			1,476,473				-		2,194,866
Equities and shares in unit trusts					-			176,494				13,535		190,029
Deposits with credit institutions					13,203			-				-		13,203
Insurance linked fund					-			-				8,098		8,098
Derivative financial instruments					-			73				-		73
Total					731,596			1,653,040				21,633		2,406,269
Financial liabilities
Derivative financial instruments					-			301				-		301
The levels of the fair value hierarchy are defined by the standard as follows: Level 1 - fair values measured using quoted prices (unadjusted) in active markets for identical instruments, Level 2 - fair values measured using directly or indirectly observable inputs or other similar valuation techniques for which all significant inputs are based on observable market data, Level 3 - fair values measured using valuation techniques for which significant inputs are not based on market observable data. The fair value of the Group's financial assets are based on prices provided by investment managers who obtain market data from numerous independent pricing services. The pricing services used by the investment manager obtain actual transaction prices for securities that have quoted prices in active markets. For those securities which are not actively traded, the pricing services use common market valuation pricing models. Observable inputs used in common market valuation pricing models include, but are not limited to, broker quotes, credit ratings, interest rates and yield curves, prepayment speeds, default rates and other such inputs which are available from market sources. Investments in mutual funds comprise a portfolio of stock investments in trading entities which are invested in various quoted investments. The fair value of shares in unit trusts are based on the net asset value of the fund as reported by independent pricing sources or the fund manager. Included within Level 1 of the hierarchy are Government bonds, Treasury bills and exchange traded equities which are measured based on quoted prices. Level 2 of the hierarchy contains U.S Government agencies, corporate securities, asset backed securities and mortgage backed securities. The fair value of these assets is based on prices obtained from both investment managers and investment custodians as discussed above. The Group records the unadjusted price provided and validates the price through a number of methods, including a comparison of the prices provided by the investment managers with the investment custodians and the valuation used by external parties to derive fair value. Quoted prices for US Government agencies and corporate securities are based on a limited number of transactions for those securities and as such the Group considers these instruments to have similar characteristics of those instruments classified as Level 2. Also included within Level 2 are units held in traditional long funds and long and short special funds and over the counter derivatives. Level 3 contains investments in a limited partnership, unquoted equity securities and an insurance linked fund which have limited observable inputs on which to measure fair value. Unquoted equities are carried at cost which is deemed to be comparable to fair value. The effect of changing one or more inputs used in the measurement of fair value of these instruments to another reasonably possible assumption would not be significant and no further analysis has been performed. The Group invested into the insurance linked fund in December 2012, which is subject to a two-year lock up period. The fund specialises in catastrophe reinsurance opportunities. The fair value of the fund is estimated to be the net asset value reported by the fund administrator at the balance sheet date. This net asset value is based on the fair value of the underlying insurance contracts in the fund which are sensitive to estimates of insurance losses that have occurred. A change in these loss estimates could have a material impact to the valuation of the fund. In certain cases, the inputs used to measure the fair value of a financial instrument may fall into more than one level within the fair value hierarchy. In this instance, the fair value of the instrument in its entirety is classified based on the lowest level of input that is significant to the fair value measurement. During the year, there were no  transfers made between Level 1 and Level 2 of the fair value hierarchy. The following table sets forth a reconciliation of opening and closing balances for financial instruments classified under Level 3 of the fair value hierarchy:
31 December 2013
					Equities and shares in unit trusts				Insurance linked fund					Total
					£000				£000					£000
Balance at 1 January					13,535				8,098					21,633
Fair value gains or losses through profit or loss*					575				1,832					2,407
Foreign exchange losses					(91)				(762)					(853)
Purchases					522				10,749					11,271
Settlements					(477)				-					(477)
Closing balance					14,064				19,917					33,981
Unrealised gains and losses in the year on securities held at the end of the year					484				1,070					1,554
31 December 2012
					Equities and shares in unit trusts				Insurance linked fund					Total
					£000				£000					£000
Balance at 1 January					10,626				-					10,626
Fair value gains or losses through profit or loss*					2,707				-					2,707
Foreign exchange losses					(120)				-					(120)
Purchases					322				8,098					8,420
Settlements					-				-					-
Closing balance					13,535				8,098					21,633
Unrealised gains and losses in the year on securities held at the end of the year					2,587				-					2,587
*Fair value gains/(losses) are included within the investment result in the income statement
16. Cash and cash equivalents
												2013		2012
												£000		£000
Cash at bank and in hand												389,773		428,454
Short-term deposits												174,602		229,208
												564,375		657,662
The Group holds its cash deposits with a well diversified range of banks and financial institutions. Cash includes overnight deposits. Short-term deposits include debt securities with an original maturity date of less than three months and money market funds.
17. Insurance liabilities and reinsurance assets
												2013		2012
												£000		£000
Gross
Claims reported and claims adjustment expenses												829,548		932,604
Claims incurred but not reported												1,023,514		1,000,300
Unearned premiums												756,059		663,708
Total insurance liabilities, gross												2,609,121		2,596,612
Recoverable from reinsurers
Claims reported and claims adjustment expenses												146,946		192,311
Claims incurred but not reported												213,000		261,128
Unearned premiums												98,876		86,950
Total reinsurers' share of insurance liabilities												458,822		540,389
Net
Claims reported and claims adjustment expenses												682,602		740,293
Claims incurred but not reported												810,514		739,172
Unearned premiums												657,183		576,758
Total insurance liabilities, net												2,150,299		2,056,223
The gross claims reported, the claims adjustment expenses liabilities and the liability for claims incurred but not reported are net of expected recoveries from salvage and subrogation. The amounts for salvage and subrogation at the end of 2013 and 2012 are not material. Claims development tables The development of insurance liabilities provides a measure of the Group's ability to estimate the ultimate value of claims. The Group analyses actual claims development compared with previous estimates on an accident year basis. This exercise is performed to include the liabilities of Syndicate 33 at the 100% level regardless of the Group's actual level of ownership, which has increased significantly over the last nine years. Analysis at the 100% level is required in order to avoid distortions arising from reinsurance to close arrangements which subsequently increase the Group's share of ultimate claims for each accident year three years after the end of that accident year. The top half of each table illustrates how estimates of ultimate claim costs for each accident year have changed at successive year ends. The bottom half reconciles cumulative claim costs to the amounts still recognised as liabilities. A reconciliation of the liability at the 100% level to the Group's share, as included in the balance sheet, is also shown.
Insurance claims and claims expenses reserves - gross at 100% level
Accident year	2004	2005	2006	2007		2008	2009	2010		2011		2012	2013	Total
	£000	£000	£000	£000		£000	£000	£000		£000		£000	£000	£000
Estimate of ultimate claims costs as adjusted for foreign exchange*:
at end of accident year	669,683	1,115,254	579,792	777,725		1,075,246	821,808	993,242		1,272,160		1,057,677	860,336	9,222,923
one year later	741,762	1,233,202	554,120	692,889		911,663	684,966	854,945		1,163,253		956,751	-	7,793,551
two years later	707,882	1,235,091	533,799	657,347		889,343	628,608	802,475		1,113,121		-	-	6,567,666
three years later	669,729	1,217,671	504,109	670,383		852,447	622,191	788,438		-		-	-	5,324,968
four years later	672,545	1,212,057	514,148	663,326		817,827	619,368	-		-		-	-	4,499,271
five years later	655,268	1,213,309	504,085	634,675		786,340	-	-		-		-	-	3,793,677
six years later	658,520	1,170,751	491,353	619,324		-	-	-		-		-	-	2,939,948
seven years later	640,592	1,163,901	486,178	-		-	-	-		-		-	-	2,290,671
eight years later	630,910	1,164,824	-	-		-	-	-		-		-	-	1,795,734
nine years later	623,578	-	-	-		-	-	-		-		-	-	623,578
Current estimate of cumulative claims	623,578	1,164,824	486,178	619,324		786,340	619,368	788,438		1,113,121		956,751	860,336	8,018,258
Cumulative payments to date	(581,083)	(1,128,863)	(461,655)	(556,886)		(714,632)	(516,440)	(554,758)		(787,871)		(455,925)	(158,503)	(5,916,616)
Liability recognised at 100% level	42,495	35,961	24,523	62,438		71,708	102,928	233,680		325,250		500,826	701,833	2,101,642
Liability recognised in respect of prior accident years at 100% level														93,803
Total gross liability to external parties at 100% level														2,195,445
* The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2013.

Reconciliation of 100% disclosures above to Group's share - gross
Accident year	2004	2005	2006	2007	2008	2009	2010	2011		2012	2013	Total
	£000	£000	£000	£000	£000	£000	£000	£000		£000	£000	£000
Current estimate of cumulative claims	623,578	1,164,824	486,178	619,324	786,340	619,368	788,438	1,113,121		956,751	860,336	8,018,258
Less: attributable to external Names	(145,499)	(292,189)	(100,864)	(119,230)	(148,068)	(103,053)	(120,013)	(158,108)		(131,968)	(104,918)	(1,423,910)
Group's share of current ultimate claims estimate	478,079	872,635	385,314	500,094	638,272	516,315	668,425	955,013		824,783	755,418	6,594,348
Cumulative payments to date	(581,083)	(1,128,863)	(461,655)	(556,886)	(714,632)	(516,440)	(554,758)	(787,871)		(455,925)	(158,503)	(5,916,616)
Less: attributable to external Names	134,229	283,690	95,160	106,356	133,828	86,459	78,328	112,633		58,277	14,448	1,103,408
Group share of cumulative payments	(446,854)	(845,173)	(366,495)	(450,530)	(580,804)	(429,981)	(476,430)	(675,238)		(397,648)	(144,055)	(4,813,208)
Liability for 2004 to 2013 accident years recognised on Group's balance sheet	31,225	27,462	18,819	49,564	57,468	86,334	191,995	279,775		427,135	611,363	1,781,140
Liability for accident years before 2004 recognised on Group's balance sheet												71,922
Total Group liability to external parties included in the balance sheet - gross												1,853,062
* This represents the claims element of the Group's insurance liabilities.

Insurance claims and claims expenses reserves - net at 100% level
Accident year	2004	2005	2006	2007	2008	2009		2010	2011		2012	2013		Total
	£000	£000	£000	£000	£000	£000		£000	£000		£000	£000		£000
Estimate of ultimate claims costs as adjusted for foreign exchange*:
at end of accident year	559,842	660,040	517,414	680,166	757,136	683,265		802,051	996,862		781,705	753,417		7,191,898
one year later	611,085	757,346	509,141	617,800	676,350	573,442		707,446	931,322		697,198	-		6,081,130
two years later	587,133	747,643	492,373	597,711	672,768	547,761		667,677	885,364		-	-		5,198,430
three years later	551,161	723,583	450,795	568,939	634,949	549,023		652,239	-		-	-		4,130,689
four years later	552,022	713,700	467,885	564,330	603,046	544,501		-	-		-	-		3,445,484
five years later	537,492	714,416	456,356	539,510	596,807	-		-	-		-	-		2,844,581
six years later	537,690	693,885	449,501	535,782	-	-		-	-		-	-		2,216,858
seven years later	522,515	685,539	449,521	-	-	-		-	-		-	-		1,657,575
eight years later	514,753	677,940	-	-	-	-		-	-		-	-		1,192,693
nine years later	508,214	-	-	-	-	-		-	-		-	-		508,214
Current estimate of cumulative claims	508,214	677,940	449,521	535,782	596,807	544,501		652,239	885,364		697,198	753,417		6,300,983
Cumulative payments to date	(483,049)	(641,647)	(426,434)	(481,637)	(532,496)	(453,616)		(471,033)	(630,636)		(348,061)	(144,813)		(4,613,422)
Liability recognised at 100% level	25,165	36,293	23,087	54,145	64,311	90,885		181,206	254,728		349,137	608,604		1,687,561
Liability recognised in respect of prior accident years at 100% level														78,555
Total net liability to external parties at 100%														1,766,116
*The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2013.
Reconciliation of 100% disclosures above to Group's share - net
Accident year	2004	2005	2006	2007	2008	2009	2010		2011		2012	2013	Total
	£000	£000	£000	£000	£000	£000	£000		£000		£000	£000	£000
Current estimate of cumulative claims	508,214	677,940	449,521	535,782	596,807	544,501	652,239		885,364		697,198	753,417	6,300,983
Less: attributable to external Names	(119,054)	(162,485)	(93,072)	(103,305)	(105,043)	(82,481)	(87,825)		(114,578)		(79,588)	(83,221)	(1,030,652)
Group's share of current ultimate claims estimate	389,160	515,455	356,449	432,477	491,764	462,020	564,414		770,786		617,610	670,196	5,270,331
Cumulative payments to date	(483,049)	(641,647)	(426,434)	(481,637)	(532,496)	(453,616)	(471,033)		(630,636)		(348,061)	(144,813)	(4,613,422)
Less: attributable to external Names	112,426	153,620	87,338	91,517	91,581	68,299	58,794		83,872		35,549	11,729	794,725
Group share of cumulative payments	(370,623)	(488,027)	(339,096)	(390,120)	(440,915)	(385,317)	(412,239)		(546,764)		(312,512)	(133,084)	(3,818,697)
Liability for 2004 to 2013 accident years recognised on Group's balance sheet	18,537	27,428	17,353	42,357	50,849	76,703	152,175		224,022		305,098	537,112	1,451,634
Liability for accident years before 2004 recognised on Group's balance sheet													41,482
Total Group liability to external parties included in the balance sheet - net													1,493,116
** This represents the claims element of the Group's insurance liabilities and reinsurance assets.

Movement in insurance claims liabilities and reinsurance claims assets
Year ended 31 December
			2013			2012
	Gross	Reinsurance	Net	Gross	Reinsurance	Net
	£000	£000	£000	£000	£000	£000
Total at beginning of year	(1,932,904)	453,439	(1,479,465)	(1,902,571)	412,828	(1,489,743)
Claims and claims adjustment expenses for the year	(572,440)	53,161	(519,279)	(719,792)	180,966	(538,826)
Cash paid for claims settled in the year	640,505	(147,926)	492,579	614,723	(124,685)	490,038
Exchange differences and other movements	11,777	1,272	13,049	74,736	(15,670)	59,066
Total at end of year	(1,853,062)	359,946	(1,493,116)	(1,932,904)	453,439	(1,479,465)
Claims reported and claims adjustment expenses	(829,548)	146,946	(682,602)	(932,604)	192,311	(740,293)
Claims incurred but not reported	(1,023,514)	213,000	(810,514)	(1,000,300)	261,128	(739,172)
Total at end of year	(1,853,062)	359,946	(1,493,116)	(1,932,904)	453,439	(1,479,465)

The insurance claims expense reported in the consolidated income statement is comprised as follows:
Year ended 31 December
			2013			2012
	Gross	Reinsurance	Net	Gross	Reinsurance	Net
	£000	£000	£000	£000	£000	£000
Current year claims and claims adjustment expenses	(761,179)	101,561	(659,618)	(930,635)	239,912	(690,723)
Over provision in respect of prior year claims and claims adjustment expenses	188,739	(48,400)	140,339	210,843	(58,946)	151,897
Total claims and claims handling expense	(572,440)	53,161	(519,279)	(719,792)	180,966	(538,826)
18. Trade and other payables
					2013	2012
					£000	£000
Creditors arising out of direct insurance operations					15,364	15,606
Creditors arising out of reinsurance operations					130,814	130,605
					146,178	146,211
Share of Syndicate's other creditors' balances					8,230	10,239
Social security and other taxes payable					14,764	8,649
Other creditors					12,900	9,037
					35,894	27,925
Reinsurers' share of deferred acquisition costs					23,479	18,340
Accruals and deferred income					98,587	73,139
Total					304,138	265,615
19. Tax expense
The Company and its subsidiaries are subject to enacted tax laws in the jurisdictions in which they are incorporated and domiciled. The amounts charged in the consolidated income statement comprise the following:
					2013	2012 restated*
					£000	£000
Current tax expense					72,425	18,724
Deferred tax credit					(65,645)	(9,296)
Total tax charged to the income statement					6,780	9,428
*The comparative information has been restated for the adoption of IAS 19 (2011). See note 2 for details.
20. Earnings per share
Basic
Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of shares in issue during the year, excluding ordinary shares purchased by the Group and held in treasury as own shares.
					2013	2012 restated*
Profit for the year attributable to the Company's equity holders (£000)					237,758	208,026
Weighted average number of ordinary shares (thousands)					358,652	391,592
Basic earnings per share (pence per share)					66.3p	53.1p
Diluted
Diluted earnings per share is calculated adjusting for the assumed conversion of all dilutive potential ordinary shares. The Company has one category of dilutive potential ordinary shares, share options. For the share options, a calculation is made to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Company's shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share options.
					2013	2012 restated*
Profit for the year attributable to Company's equity holders (£000)					237,758	208,026
Weighted average number of ordinary shares in issue (thousands)					358,652	391,592
Adjustments for share options (thousands)					15,860	16,427
Weighted average number of ordinary shares for diluted earnings per share (thousands)					374,512	408,019
Diluted earnings per share (pence per share)					63.5p	51.0p
Diluted earnings per share has been calculated after taking account of 15,131,711  (2012: 15,915,875) options and awards under employee share option and performance plan schemes and 728,284 (2012: 510,925) options under SAYE schemes.

*The comparative information has been restated for the adoption of IAS 19 (2011). See note 2 for details.

21. Dividends paid to owners of the Company
				2013	2012
				£000	£000
Interim dividend for the year ended :
-  31 December 2013 of 7.0p (net) per share				24,746	-
-  31 December 2012 of 6.0p (net) per share				-	23,567
Final dividend for the year ended :
-  31 December 2011 of 11.9p (net) per share				-	46,606
				24,746	70,173
The final dividend for the year ended 31 December 2012 was paid as part of the B Share Scheme. 395,188,526 B Shares of 50p each were issued, of which 12p per share was in lieu of a final dividend for a cash value of £47,423,000. The final dividend for 2011 and interim dividends for 2012 and 2013 were either paid as cash or issued as a scrip dividend at the option of the shareholder. The final dividend for the year ended 31 December 2011 was paid in cash of £44,301,000 and 562,194 shares for the scrip dividend. The interim dividend for the year ended 31 December 2013 was paid in cash of £22,625,000 (2012: £18,206,000) and 324,261 shares for the scrip dividend (2012: 1,196,214). Subject to shareholder approval at the forthcoming Extraordinary General Meeting on 18 March 2014, the Board proposes to pay a 14.0p per ordinary share final dividend for the year ended 31 December 2013.  Together with the interim dividend of 7.0p per ordinary share, this represents a total dividend for 2013 of 21.0p per ordinary share.  In addition, the Board proposes to pay a special distribution of 36p per ordinary share.  Such amounts will be paid by way of a C/D share scheme.  A scrip dividend alternative will not be offered to shareholders. 22. Foreign currency items on intragroup borrowings The Group has loan arrangements denominated in US Dollars and Euros, in place between certain Group companies.  In most cases, as one party to each arrangement has a functional currency other than the US Dollar or the Euro, foreign exchange gains or losses arise which are not eliminated through the income statement on consolidation. Implicit offsetting losses or gains are reflected instead on retranslation of the counterparty company's closing balance sheet through other comprehensive income and into the Group's currency translation reserve within equity.
Impact as at 31 December 2013
	Consolidated income statement 2013		Consolidated other comprehensive income 2013		Total impact on equity 2013
	£000		£000		£000
Unrealised translation (losses)/gains on intragroup borrowings	(849)		849		-
Total (losses)/gains recognised	(849)		849		-
Impact as at 31 December 2012
	Consolidated income statement 2012		Consolidated other comprehensive income 2012		Total  impact on equity 2012
	£000		£000		£000
Unrealised translation gains/(losses) on intragroup borrowings	891		(891)		-
Total gains/(losses) recognised	891		(891)		-
Note: The Annual Report and Accounts for 2013 will be available to shareholders no later than 17 March 2014. Copies of the Report may be obtained by writing to the Company Secretary, Hiscox Ltd, Wessex House, 45 Reid Street, Hamilton HM12, Bermuda. A copy of this and other announcements can be found at www.hiscox.com.

 

END

 

 

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