Interim Results
Hiscox PLC
17 September 2003
HISCOX PLC
Interim Results for the six months to 30 June 2003
'A strong half year'
2003 2002
Gross written premiums £590.6 million £442.3 million
Pre tax profit £31.5 million £3.9 million
Operating profit (based on longer term £26.4 million £10.8 million
investment return)
Earnings per share 7.6p 1.4p
Dividend per share (net) 1.3p 1.2p
Net asset value per share (before 108.6p 92.4p
equalisation provision)
Combined ratio 95.9% 101.5%
Combined ratio without increase in WTC 77.3% 101.5%
reserves
Highlights
•Pre-tax profit up 708% to £31.5 million (2002: £3.9 million), operating
profit up 144% to £26.4 million (2002: £10.8 million).
•Interim dividend increased to 1.3p per share.
•Hiscox plc gross written premium income up 34% to £590.6 million (2002:
£442.3 million).
•Group combined ratio has improved significantly to 95.9% (2002: 101.5%).
•Net asset value per share (before equalisation provision) up 18% to
108.6p (2002: 92.4p).
•Exceptional performance from Lloyd's Syndicate 33. Gross written premium
applicable to Hiscox plc up 38% to £471.7 million (2002: £342.5 million).
Operating profit up 270% to £15.9 million (2002: £4.3 million). London
Market conditions very positive and expected to remain so.
•UK Retail made a significant contribution with pre-tax profit up 163% to
£10.0 million (2002: £3.8 million). Gross written premiums up 17% to £78.0
million (2002: £66.8 million). Rates in our commercial business continue to
rise.
•International Retail delivered a pre-tax profit of £2.6 million from a
loss of £0.7 million in June 2002. Gross written premiums increased 24% to
£40.9 million (2002: £33.1 million). Mainland Europe business now
profitable.
Robert Hiscox, Chairman Hiscox plc, commented:
'A strong first half, with all sections of the business performing well.
Syndicate 33 in Lloyd's has exceptional figures ahead of most of its peers in
the market. Outside Lloyd's, our retail business has had another strong
performance in the UK and broken into profit in mainland Europe. Rates are still
rising overall, conditions in the markets we are in look very positive, so the
opportunities for profitable growth are there and we intend to take them.'
This summary should be read in conjunction with the detailed announcement which
follows.
For further information:
Hiscox plc
Robert Hiscox Chairman 020 7448 6011
Bronek Masojada Chief Executive 020 7448 6012
Stuart Bridges Finance Director 020 7448 6013
The Maitland Consultancy
Philip Gawith 020 7379 5151
Suzanne Bartch 020 7379 5151
Notes to editors
1. Hiscox plc is a specialist insurance group listed on the London Stock
Exchange where it has a market capitalisation of circa £450 million. There
are three main underwriting parts of the Group - Syndicate 33 at Lloyd's, UK
Retail and International Retail business. Syndicate 33 had a premium income
of £726 million in 2002. It underwrites mainly internationally traded
business in the London Market - generally large or complex business which
needs to be shared with other insurers or needs the international licences
of Lloyd's. The UK Retail business had a premium income of £148 million in
2002. It offers a wide range of specialist insurance for professionals and
business customers, as well as high net worth individuals. It has regional
offices in Birmingham, Glasgow, Leeds and Maidenhead. The International
Retail business had a premium income of £67 million in 2002. It has offices
in Paris, Amsterdam, Munich and Guernsey. The European offices write mainly
high value household business and some specialist professional indemnity
business. The Guernsey office underwrites kidnap and ransom business and
fine art.
Chairman's Statement
Hiscox plc Interim Statement 2003
Results
Hiscox plc recorded a pre-tax profit of £31.5 million (2002: £3.9 million) for
the six months to 30 June 2003 and an operating profit of £26.4 million (2002:
£10.8 million). Group premium income for the period increased by 34% to £590.6
million (2002: £442.3 million). Earnings per share (based on the profit after
tax) were 7.6p (2002: 1.4p). Net asset value per share (before equalisation
provision) was 108.6p (2002: 92.4p). Group combined ratio was 95.9% (2002:
101.5%) which would have reduced to 77.3% without the increase in the WTC
reserves.
Dividend
In accordance with the Board's progressive dividend policy, we have increased
the interim dividend to 1.3p per ordinary share (2002: 1.2p per share). This
will be paid on 27 October 2003 to shareholders on the register at the close of
business on 3 October 2003.
Overall Comment
All sections of the group performed well, with the UK Retail and International
Operations making substantial strides towards fulfilling our long term strategic
objective to balance the volatility of London Market business with more steady
retail business. However, the main excitement is still in the London Market and
the Hiscox Syndicate 33 has continued to show exceptional growth and profits.
The next few years should remain full of opportunity for the Syndicate as we
believe market conditions will remain positive for some time to come.
London Market
6 months ended
30 June
2003 2002
£m £m
Gross Written Premium 471.7 342.5 up 38%
Pre Tax Profit 18.9 0.9 up 2000%
Combined ratio (%) 99.3 103.7
Combined ratio without increase in WTC 74.9 103.7
reserves
These excellent results and the satisfactory ratio are struck after the
substantial increase in reserves by Syndicate 33 for the World Trade Center loss
in 2001 (WTC) announced in the period. It was decided to increase the reserves
to the full amount of notifications, $588 million, from the previous reserves of
$475 million. Claims continue to settle below notifications and we continue to
take no account of any possible success in litigation against those with any
responsibility for the loss, but we wished to rid ourselves of any perceived
uncertainty as to the level of WTC reserves. The net cost of the increase to
Hiscox plc was £40 million. The Syndicate's underlying combined ratio without
the increase in WTC reserves was 74.9%.
At the half-year in 2001, Syndicate 33 had a gross premium income of £380
million. Two traumatic years on from the WTC tragedy the premium income has
nearly doubled to £724.3 million. A surge in premium income at the wrong time
means your prices are too low and disaster beckons. This surge has been achieved
at exactly the right time in strong market conditions. The pure 2002 year of
account figures are showing the lowest loss ratio since our available records
begin in 1946, and 2003 has started well although I always hate talking about an
account in its infancy and during the wind season.
These conditions will not last for ever, nor should they. The London Market is
an opportunist market which flourishes to the sound of gunfire, and struggles to
the sound of violins. Some of the more aggressive rate rises following the WTC
tragedy were overdone, and reality dictates that some rates should reduce. But
the full orchestra of violins is a long way off. International insurers and
reinsurers are still licking their wounds and the investment markets and low
interest rates will keep the emphasis on profitable underwriting for a good few
years. Figures from the USA show that in 2002, $17.3 billion of new money was
invested into the US insurance industry, premiums grew 14% with claims only
growing 3% but the industry's surplus fell $4.4 billion (the third consecutive
annual fall). Whether this is due to black holes being filled or their current
rates being inadequate matters little - there is no sensible commercial reason
for them to reduce rates.
The rates in Syndicate 33's markets are stable at a high level or rising. Some
headline rate reductions are more than balanced by opportunities in areas where
rates are rising as capacity is still in short supply.
The Syndicate will continue to offer creative underwriting in its international
markets, strengthened by the experiences of the last few years, and from the
base of a strong, revitalised Lloyd's.
UK Retail
6 months ended
30 June
2003 2002
£m £m
Gross Written Premium 78.0 66.8 up 17%
Pre Tax Profit 10.0 3.8 up 163%
Combined ratio (%) 90.6 96.4
UK Retail, through the Hiscox Insurance Company, made another highly
satisfactory contribution to group profits. We continue to focus on two main
areas of business: specialty commercial and affluent personal lines. These are
substantial markets in which we have as yet relatively small penetrations so the
focus can remain until we find another class in which to specialise. The
advantage of specialisation is that we can be big, expert and efficient in our
chosen fields and rival the biggest of our competitors in them.
Retail business does not come in big chunks as business does in the London
Market but has to be won at a local level piece by piece. The hard work involved
in building the book is, however, rewarded by better stability and retention. We
have offices in London, Birmingham, Glasgow, Leeds and Maidenhead which,
together with our direct internet business, reach all parts of the UK. Hiscox
arrived in the regions at the right time as insurance cover was being withdrawn
by wounded competitors and I believe we were welcomed by the local brokers. By
focusing on our specialist areas we have offered stability with creative
solutions to the insurance problems of brokers and their clients and will
continue so to do. Rates have stabilised in property but continue to rise in
some liability areas. Great efforts will be made to increase the distribution of
our products.
International Retail
6 months ended
30 June
2003 2002
£m £m
Gross Written Premium 40.9 33.1 up 24%
Pre Tax Profit 2.6 (0.7) up £3.3m
Combined ratio (%) 90.2 103.3
Overall, our overseas operations (which underwrite business for both Syndicate
33 and the Hiscox Insurance Company) made a significantly increased profit.
Guernsey produced another good profit, as did our small operation in the
Republic of Ireland. To this was added a welcome profit from the continental
European offices - a satisfactory step towards our objective to be a leading
pan-European specialist insurer. We have offices in Belgium, France, Germany and
the Netherlands, and links with operations in other European countries. There is
a massive market there in which we have now established a good name and critical
mass, and the next few years should show further substantial growth in volume
and profits.
Hiscox Insurance Company
6 months ended
30 June
2003 2002
£m £m
Gross Written Premium 98.8 81.5 up 21%
Pre Tax Profit 11.3 1.7 up 565%
Combined ratio (%) 91.8 100.3
Hiscox Insurance Company's income comprises all of UK Retail and part of
International Retail. The combined ratio at 91.8% is arguably too low given our
target of 95% - 98% but I, for one, am not going to argue with it! It gives us a
margin to step up marketing and distribution efforts to find and win more
business.
Investments
Hiscox plc's invested assets grew to £738.1 million from £623.8 million and
produced returns of 7% on fixed interest assets and 14% on equities. This
exceeded the long term annual rate of return which was lowered on 1 January 2003
to 4% for fixed interest securities and 6% for equities (2002: 6% and 7%). This
was done to reflect lower interest rates and expected returns from equities.
(The reduction in the assumed long-term rates reduced the level of operating
profits by £6.2 million).
Through our Hiscox Investment Management subsidiary we are now supervising the
investment of the £1 billion of investments for the group and Syndicate 33, and
also managing five OEIC Sub-Funds specialising in insurance and financial
stocks.
Finally
A good report of a strong half-year. All parts of the business have made
extremely positive strides, encouraging us greatly in our determination to build
a first rate, balanced specialist insurer. Syndicate 33 has grabbed the recent
opportunities in the London Market with great verve and vigour. In our retail
business, we favour organic growth but this does take investment and time. Our
only major retail acquisition, the Hiscox Insurance Company in 1996, had to be
turned round and built up but is now a strong provider of profit. Our
international operations have been started from the ground, and after a few
years of investment are now making money with tremendous growth potential.
We believe that these excellent market conditions will remain longer than some
pessimists are forecasting. The insurance cycle is of course alive and well, but
long received market wisdom is that the insurance market goes up the lift and
then down the stairs, whereas the Stock Market goes down the lift and then up
the stairs. Our rating indices show that we are still going up in the lift. When
it stops rising, there will be a slow decline which will be mitigated by cheaper
and more available reinsurance.
So, given normal loss patterns, we will continue to enjoy strong trading
conditions for a good few years to come during which we will grow our profits
and net assets by winning new business through creative underwriting and great
service, by selective acquisitions in our specialist areas and by attracting the
best people to work with us.
Robert Hiscox, Chairman
17 September 2003
Consolidated Profit and Loss Account
for the six month period ended 30 June 2003
Note 6 months to 6 months to Year to
30 June 30 June 31 December
2003 2002 2002
(unaudited) (unaudited) (audited)
£000 £000 £000
Gross premiums written 590,632 442,373 676,705
Net premiums written 440,294 247,984 416,144
Net premiums earned 266,912 185,258 385,129
Trading profit, before 36,845 19,280 50,814
movement in equalisation
provision
Trading profit, after 35,205 17,885 48,111
movement in equalisation
provision
Investment income 6 16,439 8,675 21,413
Unrealised gains/(losses) 6 4,557 (1,583) (4,425)
on investments
Investment expenses and 6 (718) (353) (809)
charges ---------- --------- ----------
Actual investment 20,278 6,739 16,179
return
Allocated investment 6 (13,553) (12,231) (27,643)
return transferred to the ---------- --------- ----------
technical account
Short term fluctuations 6 6,725 (5,492) (11,464)
in investment return
Other income 8,035 2,727 10,119
Other expenses (18,466) (11,186) (26,451)
---------- --------- ----------
Profit on ordinary 31,499 3,934 20,315
activities before tax ---------- --------- ----------
Comprising:
Operating profit based on 26,414 10,821 34,482
longer term investment
return - continuing
activities
Short term fluctuations 6 6,725 (5,492) (11,464)
in investment return
Movement in equalisation (1,640) (1,395) (2,703)
provision ---------- --------- ----------
31,499 3,934 20,315
Tax on profit on ordinary (9,449) (1,141) (6,340)
activities ---------- --------- ----------
Profit on ordinary 22,050 2,793 13,975
activities after tax
Dividends - interim paid 4 (3,824) (2,299) (2,299)
and payable
final payable - - (6,914)
---------- --------- ----------
(3,824) (2,299) (9,213)
---------- --------- ----------
Retained profit for the 18,226 494 4,762
period ---------- --------- ----------
Note 6 months to 6 months to Year to
30 June 30 June 31 December
2003 2002 2002
(unaudited) (unaudited) (audited)
£000 £000 £000
Earnings per share:
Basic, based on 3 6.4p 3.8p 11.3p
operating profit after
tax (on longer term
investment return)
Basic, based on profit 3 7.6p 1.4p 6.6p
on ordinary activities
after tax
Diluted, based on 3 7.5p 1.4p 6.5p
profit on ordinary
activities after tax
Consolidated Statement of Total Recognised Gains and Losses
for the six month period ended 30 June 2003
6 months to 6 months to Year to
30 June 30 June 31 December
2003 2002 2002
(unaudited) (unaudited) (audited)
£000 £000 £000
Profit on ordinary activities 22,050 2,793 13,975
after tax
Exchange differences taken to 157 51 (50)
reserves --------- --------- ---------
Total recognised gains and 22,207 2,844 13,925
losses --------- --------- ---------
Consolidated Balance Sheet
at 30 June 2003
Note 30 June 30 June 31 December
2003 2002 2002
(unaudited) (unaudited) (audited)
£000 £000 £000
Assets
Goodwill 6,457 6,782 6,617
Other intangible assets 15,966 16,308 16,469
Land and buildings 415 425 420
Other financial 640,440 378,195 502,944
investments
Reinsurers' share of 2 347,887 454,412 320,783
technical provisions
Debtors 570,523 590,134 345,517
Other assets 7,442 6,709 7,119
Cash at bank and in 99,025 67,321 121,196
hand
Prepayments and accrued 154,860 119,857 97,240
income --------- --------- ---------
Total assets 1,843,015 1,640,143 1,418,305
--------- --------- ---------
Liabilities
Capital and reserves
Called up share capital 14,540 9,635 14,459
Share premium account 231,903 124,624 230,585
Merger reserve 4,723 4,723 4,723
Capital redemption 33,244 33,244 33,244
reserve
Profit and loss account 15,674 (6,876) (2,709)
--------- --------- ---------
Shareholders' funds 300,084 165,350 280,302
attributable to equity --------- --------- ---------
interests
Technical provisions 2 1,192,668 1,244,471 919,959
Equalisation provision 15,572 12,624 13,932
Creditors 291,951 209,365 169,729
Provisions for other - 1,742 -
risks and charges
Accruals and deferred 42,740 6,591 34,383
income --------- --------- ---------
Total liabilities 1,843,015 1,640,143 1,418,305
--------- --------- ---------
Net asset value (before 108.6 92.4 101.7
equalisation provision) --------- --------- ---------
pence per share
Consolidated Cash Flow Statement
for the six month period ended 30 June 2003
6 months to 6 months to Year to
30 June 30 June 31 December
2003 2002 2002
(unaudited) (unaudited) (audited)
£000 £000 £000
Net cash inflow/(outflow) from 6,131 10,753 45,069
general business
Net shareholders' cash inflow/ (7,712) (23,037) (23,037)
(outflow) from Lloyd's --------- --------- ---------
business
Net cash inflow/(outflow) from (1,581) (12,284) 22,032
operating activities
Servicing of finance (1,312) (602) (1,709)
Taxation recovered/(paid) - 1,048 777
Capital expenditure (1,609) (713) (3,569)
Equity dividends paid (6,963) - (2,299)
Financing 1,292 (2,011) 108,539
--------- --------- ---------
(10,173) (14,562) 123,771
--------- --------- ---------
Cash flows were invested as
follows:
Increase/(decrease) in cash (20,343) (1,062) 25,288
holding
Net portfolio investment:
Shares and units in unit 37,605 2,748 19,911
trusts
Debt securities and other fixed 54,096 34,097 10,314
income securities
Deposits with credit (81,531) (50,345) 68,265
institutions
Other investments - - (7)
--------- --------- ---------
Net investment of cash flows (10,173) (14,562) 123,771
--------- --------- ---------
Reconciliation of operating profit to net cash inflow/(outflow) from
operating activities:
£000 £000 £000
Operating profit before 26,414 10,821 34,482
taxation and after
interest, based on
longer term investment
return
Depreciation and 1,975 1,617 3,422
amortisation of fixed
assets
Increase in general insurance 12,028 7,788 22,254
technical provisions,
net of reinsurance
Increase/(decrease) in 15,477 14,516 13,238
amounts owed to agents
(Increase)/decrease in (27,546) (7,197) (3,729)
amounts owed by agents
(Increase)/decrease (23,012) (5,253) (1,024)
in other debtors
Increase/(decrease) 16,223 (5,539) 2,721
in other creditors
Realised and unrealised (5,321) 2,139 4,841
investment (gains)/losses
Short term fluctuations 6,725 (5,492) (11,464)
in investment return
Interest expense 922 564 1,432
Cash received from/(paid to) (7,712) (23,037) (23,037)
Lloyd's business
(Profits)/losses relating to (17,020) (3,017) (21,034)
Lloyd's business
Other non-cash transactions (734) (194) (70)
--------- --------- ---------
Net cash inflow/(outflow) from (1,581) (12,284) 22,032
operating activities
--------- --------- ---------
Segmental Information - by business division
6 months to 30 June 2003(unaudited)
London UK International Total
Market/Group Retail Business £000
£000 £000 £000
Profit on ordinary
activities before
taxation - by business
division
Gross premiums written 471,703 77,999 40,930 590,632
Net premiums written 346,496 66,886 26,912 440,294
Net premiums earned 178,679 63,844 24,389 266,912
Investment return based 9,057 3,298 1,198 13,553
on longer term rate of
return
Net claims incurred (118,311) (30,949) (8,279) (157,539)
Acquisition costs (45,149) (17,745) (14,385) (77,279)
Administration (4,619) (10,196) (268) (15,083)
expenses
Other technical income/ 81 - - 81
(expenses) -------- -------- --------- --------
Trading result 19,738 8,252 2,655 30,645
Agency and other 3,221 145 8,491 11,857
income
Profit commission 2,378 - - 2,378
Expenses (7,821) (614) (8,387) (16,822)
Loan interest (922) - - (922)
Goodwill and capacity (702) - (20) (722)
amortization -------- -------- --------- --------
Operating profit based 15,892 7,783 2,739 26,414
on longer term
investment return
Short term fluctuations 3,041 3,361 323 6,725
in investment return
Movement in equalisation - (1,186) (454) (1,640)
provision -------- -------- --------- --------
Profit on ordinary 18,933 9,958 2,608 31,499
activities before ======== ======== ========= ========
taxation
London UK Retail International Total
Market Business
100% level combined 99.3% 90.6% 90.2% 95.9%
ratio ======== ======== ========= ========
Segmental Information - by business division (continued)
6 months to 30 June 2002(unaudited)
London UK Retail International Total
Market/ Business
Group
£000 £000 £000 £000
Profit on ordinary
activities before
taxation - by business
division
Gross premiums 342,479 66,821 33,073 442,373
written
Net premiums written 170,479 58,312 19,193 247,984
Net premiums earned 108,906 59,302 17,050 185,258
Investment return based 6,931 4,172 1,128 12,231
on longer term rate of
return
Net claims incurred (66,905) (31,402) (5,908) (104,215)
Acquisition costs (37,546) (17,199) (12,324) (67,069)
Administration (4,668) (8,123) (99) (12,890)
expenses
Other technical income/ (902) - - (902)
(expenses) -------- -------- --------- --------
Trading result 5,816 6,750 (153) 12,413
Agency and other 2,123 37 6,867 9,027
income
Profit commission 567 - - 567
Expenses (2,946) (411) (6,534) (9,891)
Loan interest (587) - - (587)
Goodwill and capacity (686) - (22) (708)
amortisation -------- -------- --------- --------
Operating profit based 4,287 6,376 158 10,821
on longer term
investment return
Short term fluctuations (3,404) (1,608) (480) (5,492)
in investment return
Movement in - (1,006) (389) (1,395)
equalisation
provision ------- -------- --------- --------
Profit/(loss) on 883 3,762 (711) 3,934
ordinary activities ======== ======== ========= ========
before taxation
London Market UK International Total
Retail Business
100% level combined 103.7% 96.4% 103.3% 101.5%
ratio ======== ======== ========= ========
Segmental Information - by business division (continued)
Year to 31 December 2002(audited)
London UK International Total
Market/ Retail Business
Group
£000 £000 £000 £000
Profit on ordinary
activities before
taxation - by business
division
Gross premiums written 461,766 147,583 67,356 676,705
Net premiums written 251,433 123,243 41,468 416,144
Net premiums earned 227,922 119,988 37,219 385,129
Investment return based 16,803 8,729 2,111 27,643
on longer term rate of
return
Net claims incurred (138,789) (62,565) (10,997) (212,351)
Acquisition costs (69,029) (34,232) (25,243) (128,504)
Administration (7,045) (19,202) (1,222) (27,469)
expenses
Other technical income/ (3,856) - - (3,856)
(expenses) -------- -------- --------- --------
Trading result 26,006 12,718 1,868 40,592
Agency and other 4,499 120 12,286 16,905
income
Profit commission 3,237 - 200 3,437
Expenses (9,712) (1,178) (12,718) (23,608)
Loan interest (1,432) - - (1,432)
Goodwill and capacity (1,370) - (42) (1,412)
amortisation -------- -------- --------- --------
Operating profit based 21,228 11,660 1,594 34,482
on longer term
investment return
Short term fluctuations (7,739) (3,135) (590) (11,464)
in investment return
Movement in equalisation - (2,104) (599) (2,703)
provision -------- -------- --------- --------
Profit on ordinary 13,489 6,421 405 20,315
activities before ======== ======== ========= ========
taxation
London Market UK International Total
Retail Business
100% level combined 94.1% 96.0% 97.5% 94.8%
ratio
Net asset value per share
6 months to 30 June 2003 (unaudited)
Net asset value Number NAV
£000 of shares* per share
000 p
Net asset value 300,084 290,786 103.2
Net asset value (before 315,656 290,786 108.6
equalisation provision)
Net tangible asset value 277,661 290,786 95.5
Net tangible asset value 293,233 290,786 100.8
(before equalisation provision)
6 months to 30 June 2002(unaudited)
Net asset value Number NAV
£000 of shares* per share
000 p
Net asset value 165,350 192,696 85.8
Net asset value (before 177,974 192,696 92.4
equalisation provision)
Net tangible asset value 142,260 192,696 73.8
Net tangible asset value 154,884 192,696 80.4
(before equalisation provision)
Year to 31 December 2002(audited)
Net asset value Number NAV
£000 of shares* per share
000 p
Net asset value 280,302 289,177 96.9
Net asset value (before 294,234 289,177 101.7
equalisation provision)
Net tangible asset value 257,216 289,177 88.9
Net tangible asset value 271,148 289,177 93.8
(before equalisation provision)
*The number of shares is the number of shares in issue as at 30 June or 31
December of the relevant financial period.
The number of shares as at 30 June 2002 has not been adjusted for the impact of
the Rights Issue. If it had been, the number of shares would have increased to
202,331,000. Accordingly, the net asset values per share disclosed above for
June 2002 would have reduced. The net asset value (before equalisation
provision) per share of 92.4p would have been restated to 88.0p. All the other
disclosed net asset values per share for June 2002 would have been adjusted in a
similar manner.
NOTES TO THE INTERIM ACCOUNTS
1. Basis of preparation
The unaudited interim accounts have been prepared on the basis of accounting
policies consistent with those set out in the Group's 2002 Report and Accounts.
In accordance with the provisions relating to insurance companies under Schedule
9a of the Companies Act 1985, the accounts include the transactions, assets and
liabilities of Syndicate 33 on which certain subsidiary companies participate as
corporate members of Lloyd's, accounted for on an annual basis.
The unaudited interim statements, the comparative figures for the year ended 31
December 2002 and the financial information contained in these interim results,
do not constitute statutory accounts of the Group within the meaning of Section
240 of the Companies Act 1985.
The auditors have reported on the Report and Accounts for the year ended 31
December 2002, their report was not qualified and did not contain a statement
under Section 237(2) or (3) of the Companies Act 1985.
2. World Trade Center
The Group's exposure to losses arising from the terrorist attack of 11 September
2001 arises almost entirely from its participation on Syndicate 33. Hiscox
Insurance Company and the international operations of Hiscox have had a
negligible loss from this event. The situation is unprecedented and as such,
even two years after the event, the extent of the gross and net loss to the
Group is difficult to assess with the degree of confidence which is usual for
property insurance losses; facts or circumstances will come to light which may
affect these estimates. Provision has been made in these financial statements
for the current level of notifications resulting in a net loss to Hiscox plc of
£80 million (31 December 2002: £40 million) at £1:$1.65. This takes no account
of any potential subrogation.
The Group has exposure to WTC losses on a number of non-liability accounts, in
particular direct property, risk excess, catastrophe and aviation hull. There is
no significant liability exposure.
Since the initial review carried out in October 2001 no new losses have been
identified. Syndicate 33 has reserved the loss at its current level of
notifications which amounted to US$588 million at 31 August 2003 (28 February
2003: US$591 million). The 31 December 2002 reserve of US$475 million was after
an appropriate discount or premium to individual notifications based on Hiscox's
past experience of large property losses and additional information received.
Whilst claims continue to settle lower than the notifications level, they are
taking longer to settle than originally anticipated based on settlement patterns
experienced on previous large property losses. Consequently, in order to
eliminate uncertainty, the directors have increased the reserves to the current
level of notifications.
Based on notified losses Syndicate 33's net loss provided has increased to
approximately US$245 million. In arriving at this estimate it has been assumed
that the terrorist attack in New York City on 11 September 2001 was one
occurrence and also that the aircraft impacts on the WTC are one occurrence in
respect of the property losses.
As at 31 August 2003 Syndicate 33 had paid US$374 million of the gross loss and
recovered US$223 million from reinsurers. This includes payment to Silverstein,
on the basis of one occurrence, for the WTC property. The courts in the USA have
not yet ruled on occurrence. Syndicate 33 has had no need to make a cash call.
As part of our required funding of the US Trust Funds, a further US$30 million
of cash advances and letters of credit had also been received from reinsurers at
31 August 2003. These recoveries of US$253 million at 31 August represent 74% of
the expected total recoveries of approximately US$343 million. 72% of the
remaining balance of approximately US$90 million is due from reinsurers rated A
grade or better.
Syndicate 33 has held its bad debt provision on reinsurance recoveries from the
WTC loss at US$7.5 million despite the decrease in receivables since the year
end. No reinsurer on our programme has yet refused to pay a claim through
insolvency. It has been assumed that no major reinsurer will fail.
3. Earnings per share
Earnings per share on operating profit are based on the operating profit after
taxation of £18,490,000 (2002: £7,575,000) and on the average number of shares
in issue during the current period of 289,436,000 (2002: 201,172,000).
Earnings per share on ordinary activities are based on the profit after taxation
of £22,050,000 (2002: £2,793,000) and on the average number of shares in issue
during the current period of 289,436,000 (2002: 201,172,000).
Fully diluted earnings per share on ordinary activities are based on the profit
after taxation of £22,050,000 (2002: £2,793,000) and on the average number of
shares in issue during the period of 293,878,000 (2002: 203,410,000), taking
into account the options outstanding under the Employee Share Option Schemes.
4. Dividends
An interim dividend of 1.3p (net) per Ordinary Share has been declared payable
on 27 October 2003 to shareholders registered on 3 October 2003 in respect of
the six months to 30 June 2003 (30 June 2002 : 1.2p (net) per ordinary share).
5. 100% Level Technical Account - by business division
The underwriting activities which are managed by the Group are shown below at
the 100% level regardless of ownership of capacity.
6 months to 30 June 2003(unaudited)
London Market UK International Total
Retail Business
£000 £000 £000 £000
Gross premiums 724,340 77,999 40,930 843,269
written
Net premiums 532,659 66,886 26,912 626,457
written
Net premiums 280,695 63,844 24,389 368,928
earned -------- -------- --------- --------
Net claims 191,839 30,949 8,279 231,067
incurred -------- -------- --------- --------
Claims ratio (%) 68.3% 48.5% 33.9% 62.6%
-------- -------- --------- --------
Commission 126,970 17,949 14,873 159,792
Operating expenses 38,161 10,196 268 48,625
Movement in deferred (84,218) (204) (488) (84,910)
acquisition costs -------- -------- --------- --------
Net expenses 80,913 27,941 14,653 123,507
-------- -------- --------- --------
Commission ratio (%) 23.8% 26.9% 55.3% 25.5%
Operating expense 7.2% 15.2% 1.0% 7.8%
ratio (%) -------- -------- --------- --------
Expense ratio (%) 31.0% 42.1% 56.3% 33.3%
-------- ------- --------- --------
Net longer term 9,086 3,298 1,198 13,582
investment return -------- -------- --------- --------
Technical profit 17,029 8,252 2,655 27,936
-------- -------- --------- --------
Combined ratio (%) 99.3% 90.6% 90.2% 95.9%
-------- -------- --------- --------
5. 100% Level Technical Account - by business division (continued)
6 months to 30 June 2002(unaudited)
London Market UK International Total
Retail Business
£000 £000 £000 £000
Gross premiums 541,139 66,821 33,073 641,033
written
Net premiums 267,705 58,312 19,193 345,210
written
Net premiums earned 177,052 59,302 17,050 253,404
-------- -------- --------- --------
Net claims incurred 109,922 31,402 5,908 147,232
-------- -------- --------- --------
Claims ratio (%) 62.1% 53.0% 34.7% 58.1%
-------- ------ ------ ------
Commission 91,715 17,174 13,066 121,955
Operating expenses 19,568 8,123 99 27,790
Movement in deferred (42,837) 25 (742) (43,554)
acquisition costs -------- -------- --------- --------
Net expenses 68,446 25,322 12,423 106,191
-------- -------- --------- --------
Commission ratio (%) 34.3% 29.5% 68.1% 35.3%
Operating expense 7.3% 13.9% 0.5% 8.1%
ratio (%) -------- -------- --------- --------
Expense ratio (%) 41.6% 43.4% 68.6% 43.4%
-------- -------- --------- --------
Net longer term 7,496 4,172 1,128 12,796
investment return -------- -------- --------- --------
Technical profit/ 6,180 6,750 (153) 12,777
(loss) -------- -------- --------- --------
Combined ratio (%) 103.7% 96.4% 103.3% 101.5%
-------- -------- --------- --------
6. Investment Return
a) The total actual investment return comprises:
6 months to 6 months to Year to
30 June 30 June 31 December
2003 2002 2002
(unaudited) (unaudited) (audited)
£000 £000 £000
Investment return on funds at
Lloyd's and other corporate
funds:
Investment income 4,202 2,111 4,590
Unrealised gains/(losses) on 1,054 (982) (2,939)
investments
Realised gains/(losses) on 1,028 (238) (244)
investments --------- --------- ---------
6,284 891 1,407
--------- --------- ---------
Investment return on syndicate
funds:
Investment income 5,336 2,298 7,057
Realised gains/(losses) on 1,279 837 1,827
investments --------- --------- ---------
6,615 3,135 8,884
--------- --------- ---------
Investment return on insurance
company funds:
Investment income 4,858 3,985 8,354
Unrealised gains/(losses) on 3,503 (601) (1,486)
investments
Realised gains/(losses) on (264) (318) (171)
investments --------- --------- ---------
8,097 3,066 6,697
--------- --------- ---------
Investment management expenses (718) (353) (809)
--------- --------- ---------
Total investment return 20,278 6,739 16,179
--------- --------- ---------
Allocation to the technical (13,553) (12,231) (27,643)
account based on the longer term --------- --------- ---------
rate
Short term fluctuations in 6,725 (5,492) (11,464)
investment return retained in --------- --------- ---------
the non-technical account
b) Longer term investment return
The longer term return is based on a combination of historical experience and
current expectations for each category of investments. The longer term return is
calculated by applying the following yields to the weighted average of each
category of assets.
6 months to 6 months to Year to
30 June 30 June 31 December
2003 2002 2002
(unaudited) (unaudited) (audited)
% % %
Shares and units in unit 6.0 7.0 7.0
trusts
Debt securities and other fixed 4.0 6.0 6.0
interest securities
Deposits with credit 4.0 6.0 6.0
institutions
For the six months ended 30 June 2003, the directors revised their current
expectations of the long term rates following a review of current market
conditions and investment performance. If these long term rates had not been
revised in the period, operating profit would have been £6.2 million higher.
c) Comparison of longer term investment return with actual returns
The actual return on investments is compared below with the longer term
investment return.
6 months ended 30 June 2003(unaudited)
Funds at Share of Insurance Total
Lloyd's and Syndicate Company
other
Corporate
Assets
£000 % £000 % £000 % £000
Actual investment
return:
Shares and units 2,409 12.6 - - 1,980 14.8 4,389
in unit trusts
Debt securities 2,719 7.2 5,281 4.9 5,170 9.3 13,170
and other fixed
interest
securities
Deposits with 916 2.7 1,010 3.1 793 3.2 2,719
credit ------- ------- ------- -------
institutions
6,044 6,291 7,943 20,278
Longer term
investment return:
Shares and units 1,150 6.0 - 6.0 669 6.0 1,819
in unit trusts
Debt securities 1,513 4.0 4,295 4.0 2,232 4.0 8,040
and other fixed
interest
securities
Deposits with 1,337 4.0 1,324 4.0 1,033 4.0 3,694
credit ------- ------- ------- -------
institutions
4,000 5,619 3,934 13,553
------- ------- ------- -------
Short term 2,044 672 4,009 6,725
fluctuations in ------- ------- ------- -------
investment return
6 months ended 30 June 2002(unaudited)
Funds at Share of Insurance Total
Lloyd's Syndicate Company
and other
Corporate
Assets
£000 % £000 % £000 % £000
Actual
investment
return:
Shares and (856) (5.8) 151 10.0 (476) (5.8) (1,181)
units in unit
trusts
Debt securities 949 6.9 2,730 4.0 2,822 5.2 6,501
and other fixed
interest
securities
Deposits with 739 3.6 110 3.7 570 3.2 1,419
credit ------- ------- ------ --------
institutions
832 2,991 2,916 6,739
Longer term
investment
return:
Shares and 1,034 7.0 106 7.0 568 7.0 1,708
units in unit
trusts
Debt securities 826 6.0 4,095 6.0 3,214 6.0 8,135
and other fixed
interest
securities
Deposits with 1,246 6.0 180 6.0 962 6.0 2,388
credit
institutions
Other
------- ------- ------ --------
3,106 4,381 4,744 12,231
------- ------- ------ --------
Short term (2,274) (1,390) (1,828) (5,492)
fluctuations in ------- ------- ------ --------
investment
return
REVIEW REPORT BY KPMG AUDIT PLC TO HISCOX PLC
Introduction
We have been engaged by the Company to review the financial information for the
six months ended 30 June 2003 which comprises the consolidated profit and loss
account, the consolidated statement of total recognised gains and losses, the
consolidated balance sheet, the consolidated cash flow statement, the segmental
information and related notes 1 to 6. We have read the other information
contained in the interim report and considered whether it contains any apparent
misstatements or material inconsistencies with the financial information.
This report is made solely to the Company in accordance with the terms of our
engagement to assist the Company in meeting the requirements of the Listing
Rules of the Financial Services Authority. Our review has been undertaken so
that we might state to the Company those matters we are required to state to it
in this report and for no other purpose. To the fullest extent permitted by law,
we do accept or assume responsibility to anyone other than the Company for our
review work, for this report, or for the conclusions we have reached.
Directors' responsibilities
The interim report, including the financial information contained therein, is
the responsibility of, and has been approved by, the directors. The directors
are responsible for preparing the interim report in accordance with the Listing
Rules of the Financial Services Authority which require that the accounting
policies and presentation applied to the interim figures should be consistent
with those applied in preparing the preceding annual accounts except where they
are to be changed in the next annual accounts in which case any changes, and the
reasons for them, are to be disclosed.
Review work performed
We conducted our review in accordance with guidance contained in Bulletin 1999/
4: Review of interim financial information issued by the Auditing Practices
Board for use in the United Kingdom. A review consists principally of making
enquiries of Group management and applying analytical procedures to the
financial information and underlying financial data and, based thereon,
assessing whether the accounting polices and presentation have been consistently
applied unless otherwise disclosed. A review is substantially less in scope than
an audit performed in accordance with Auditing Standards and therefore provides
a lower level of assurance than an audit. Accordingly we do not express an audit
opinion on the financial information.
Fundamental uncertainty
In forming our review conclusion, we have considered the adequacy of the
disclosures made in the financial information concerning the material exposure
that the Group faces to the terrorist attack in the United States of America on
11 September 2001. Details of the circumstances relating to this uncertainty are
described in note 2.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 30 June 2003.
KPMG Audit Plc
London
17 September 2003
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