Interim Results
Hiscox PLC
12 September 2005
Hiscox plc
Interim Results for the six months ended 30 June 2005
'A strong half-year'
HY 2005 HY 2004
Gross premiums written £437.2 million £489.0 million
Profit before tax £88.1 million £60.3 million
Earnings per share 20.8p 14.9p
Dividend per share 2.25p 1.5p
Net asset value per share 143.3p 120.2p
Combined ratio 83.5% 84.6%
Highlights
• Record pre-tax profit up 46% to £88.1 million
• Interim dividend increased 50% to 2.25p (net per share)
• Annualised return on equity of 36%
• Strategy of expansion in UK and international businesses succeeding
- UK profits doubled to £21.1 million
- Increased international profits from £0.5 to £3.0 million
• New senior appointments to management team
Robert Hiscox, Chairman Hiscox plc, commented:
'A strong first half-year with highly satisfactory increases in profit from our
UK and international businesses. We have a spread of flourishing business
opportunities outside the London Market in our specialist areas and new good
people to help run them. Hurricane Katrina may well halt the slide in rates in
the London Market and will definitely strengthen reinsurance rates. A time of
great possibilities for Hiscox.'
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
Hiscox plc is a specialist insurance group listed on the London Stock Exchange
where it has a market capitalisation of circa £550 million. There are three main
underwriting parts of the Group - Syndicate 33 at Lloyd's, UK Retail and
International Retail business. Syndicate 33 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 offers a wide range of specialist insurance for
professionals and business customers, as well as high net worth individuals. It
has regional offices in Birmingham, Glasgow, Leeds, Maidenhead and Colchester.
The International Retail business has offices in Paris, Amsterdam, Brussels,
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 2005
The results for the half-year to 30 June 2005 were a record pre-tax profit of
£88.1 million (2004: £60.3m). The group written premium income for the period
was £437.2 million (2004: £489.0m) and the net earned premium income was £345.7
million (2004: £349.7m). The group combined ratio was 83.5% (2004: 84.6%) .
Earnings per share were 20.8p (2004: 14.9p) and the net assets per share rose to
143.3p (2004: 120.2p).
Dividend
The interim dividend is increased to 2.25p (net) per ordinary share (2004: 1.5p)
and will be paid on 24 October 2005 to shareholders on the register at the close
of business on 30 September 2005. This 50% uplift is a material increase to bring
the interim dividend more in line with the underlying profitability of the company.
Overall comment
We have had a strong first half with good underwriting helped by few large
losses, good investment conditions and favourable exchange rates. Overall market
conditions remained above average, but were increasingly competitive in the
London Market where the high rates charged in recent years continue to fall in
areas where there is strong competition. Despite Hurricane Katrina's
impact on our catastrophe book, underwriting is still healthily profitable,
reserves are prudently set, the old years are benign, and positive cash flow is
giving us more to invest at slightly higher interest rates.
Our strategy for some time has been to build our retail businesses to counteract
the cyclicality and volatility of our London Market business: the market
conditions today are exactly those for which that strategy was formed. The
profits from our underwriting in the UK have more than doubled in this half-year
and we are focussed on continuing that trend. We have developed a network of 6
offices in the UK, and 5 in mainland Europe. We are opening an office in the USA
where we will concentrate on a specialist book of stable small to medium sized
business. We have also stepped up the marketing of our direct business having
established a satisfactory underwriting and business model for it.
Our retail business expansion is designed to complement, not replace, our London
Market underwriting for which we retain a great appetite. Losses such as
Hurricane Katrina strengthen the need for catastrophe and major risk insurance,
and there are always opportunities for profit where others fear to tread. We
have shown discipline in reducing the amount of London Market business and the
basic business remains well priced. We expect and budget for catastrophes. It is
a bonus if we are not hit by any, but last year we suffered an epic run of
hurricanes and our London Market business remained profitable. We are ready to
make the most of any opportunities that arise from the turmoil following this
major loss.
Global Markets
This division underwrites London Market risks and retail business from around
the world. London Market risks with big premiums are most competed for by
international competitors, by new capital and also by brokers, with the
resultant pressure on prices. The cycle is sadly alive and well in the large
risk sector so a drop in premium income is to be expected. However, there are
definitely still opportunities for intelligent and creative underwriting for
clients who appreciate that cheapest is not always best. The division achieved a
combined ratio of 82.8% (2004: 82.4%) which leaves a substantial margin for the
perils of the second half year.
As always, I am writing this report in the eye of the hurricane season, this
time as Hurricane Katrina has just ravaged New Orleans and the surrounding area
with tragic loss of life and also serious damage to off-shore oil installations.
This is a large catastrophe to the insurance market which will have an effect on
catastrophe and energy rates, and maybe other commercial rates in the US
We write a book of catastrophe business which has been very profitable over the
past decade. Unlike other classes which have attritional losses slowly leading
to a combined ratio perhaps in the region of 90%, the catastrophe book can be
loss free until the big one happens. Therefore the big loss to us is not
necessarily an overall loss in excess of the premium income, but it does attract
great publicity. We buy reinsurance to keep the accumulated loss within budgeted
boundaries. It is too soon to quantify accurately the exact cost to us of
Hurricane Katrina, but our estimate based on current information is a loss of
£55 million which is within our expected net loss from a major Gulf of Mexico
hurricane. Given the likely upward effect on rates, we anticipate that we will
not reduce the premium limit for Syndicate 33 to £650 million for 2006 as
previously announced, but will keep the current £775 million limit in place.
The advantage of being able to use the Lloyd's platform is that we can
underwrite business virtually worldwide using its licences, credit rating and
brand and with great capital efficiency. However, there is no reason for us to
sit and wait in Lloyd's for business to be shown to us. That was a very
effective business model when Lloyd's brokers scoured the world for business and
brought it all back to London, and we kept costs low by underwriting from one
place with shared back-office costs. Now local markets are stronger and local
business is increasingly placed locally and it tends to be the most volatile,
catastrophic or very large business that comes to London. To increase our spread
of medium-sized business, we have been joined in the USA by Ed Donnelly who has
an excellent underwriting track record. He is opening an office there to find
and underwrite business that does not come to London.
UK and European Businesses
UK Retail has performed very well with a combined ratio of 81.6% (2004: 89.3%)
on a small increase in income. We are clearly selling at the right price, so we
need to sell more. Marketing for our direct business is growing in success and
has an effective spin-off in awareness of the Hiscox brand which helps the whole
group. We have just appointed Steve Langan, who has a strong marketing
background, to be head of Hiscox UK and Group Marketing.
European Retail has achieved a combined ratio of 95.4% (2004: 103.8%) which
justifies our faith in this market which we believe has great potential. Again
we have strengthened our management team with Marc van der Veer, who also has an
excellent track record in our business, joining us to lead the expansion of our
European businesses.
Investments
Slightly higher UK interest rates, a good equity market and the strong cashflows
from all areas of the business generating a larger investment pool have
increased our investment return to £22.9m for the six months (2004: £8.7m). We
continue to keep the portfolio balanced taking relatively little risk with short
duration and high credit quality on the bond portfolios and wait patiently for
opportunities.
Conclusion
The largest division in our group, Global Markets, has sensibly reduced its
income but opportunities will arise following Hurricane Katrina. We
constantly seek new ways of finding business through our regional and overseas
offices, and the new office in the USA should tap into a huge market where we
have always done business and have considerable expertise.
Outside the London Market our regional business through brokers in the UK
continues to grow its profits, while our direct marketing campaign is producing
good quality business which would be uneconomic to underwrite (or broke) through
conventional channels. Our European offices have come of age and should show
increased growth and profitability.
We have worked on new technology to improve the costs of writing retail business
through brokers and this is now proving a success, reducing costs and increasing
distribution. We have been joined by strong new leaders for our operations and
IT departments which are a vital part of our future and we have also recently
announced that Jeremy Pinchin, recently head of claims at Lloyd's, is joining to
lead our claims teams and increase our commitment to that crucially important
area.
Given that this business is only as good as its people, it is highly
satisfactory to be able to report the addition of a number of very high quality
individuals. They have joined what we all believe to be a business on the
threshold of a new era. We have worked hard in recent years to develop new
distribution channels to access new profitable business and new technology to
process it efficiently. We will not flinch from underwriting a sensible
catastrophe book as it is capable of substantial profit, and the best margins
are to be found in areas others fear. But we will also continue to build the
fundamental profitability of the group in retail and other non-catastrophe
areas, so that when the catastrophe occurs we will have decent, growing
profitability, and when it doesn't, we will do very well indeed.
Robert Hiscox
Chairman, Hiscox plc
12 September 2005
Summary Consolidated Income Statement
for the six month period ended 30 June 2005
Notes 6 months to 6 months to Year to
30 June 2005 30 June 2004 31 Dec 2004
(unaudited) Restated* Restated*
(unaudited) (audited)
£000 £000 £000
------------------------------------------------------------------------------
Income
Gross premiums written 437,160 489,038 816,609
Net premiums written 345,047 396,457 704,085
Net premiums earned 345,668 349,663 714,852
-------------------------------------------------------------------------------
Investment return 6 22,922 8,654 33,084
Other operating income 7 48,970 8,883 15,112
------------------------------------------------------------------------------
Net income 417,560 367,200 763,048
------------------------------------------------------------------------------
Expenses
Claims and claim
adjustment expenses (186,207) (159,939) (382,063)
Expenses for the
acquisition of insurance
contracts (99,378) (91,733) (177,960)
Expenses for marketing,
administration and
asset management
services rendered (17,779) (20,972) (43,198)
Other operating
costs and expenses 7 (25,218) (33,283) (68,718)
--------------------------------------------------------------------------------
Total expenses (328,582) (305,927) (671,939)
--------------------------------------------------------------------------------
Results of operating activities 88,978 61,273 91,109
Finance costs (1,009) (988) (1,977)
Share of profit of associates 151 19 390
-------------------------------------------------------------------------------
Profit before tax 88,120 60,304 89,522
Income tax expense (27,040) (17,041) (25,574)
-------------------------------------------------------------------------------
Profit for the period 61,080 43,263 63,948
-------------------------------------------------------------------------------
Earnings per share:
- Basic, based on profit
for the period 3 20.8p 14.9p 21.9p
- Diluted, based on profit
for the period 3 20.6p 14.7p 21.7p
* Restated for the adoption of International Financial Reporting Standards.
See note 12.
Summary Consolidated Balance Sheet
at 30 June 2005
Notes 30 June 30 June 2004 31 Dec 2004
2005 Restated* Restated*
(unaudited) (unaudited) (audited)
£000 £000 £000
-------------------------------------------------------------------------------
Assets
Property, plant and equipment 10,837 11,442 10,691
Intangible assets 32,370 26,583 29,989
Deferred acquisition costs 114,875 117,919 109,970
Investments in associated
enterprises 1,013 742 1,109
Financial assets 9 1,368,989 1,230,287 1,308,213
Reinsurance contract
receivables 290,342 270,847 238,871
Cash and cash equivalents 200,919 92,748 119,563
--------------------------------------------------------------------------------
Total assets 2,019,345 1,750,568 1,818,406
--------------------------------------------------------------------------------
Equity and liabilities
Shareholders' equity
Share capital 14,717 14,581 14,685
Share premium 234,899 232,658 234,267
Currency translation reserve (144) (473) (468)
Other reserves 37,967 37,967 37,967
Retained earnings 134,246 65,453 82,375
------------------------------------------------------------------------------
Total equity 421,685 350,186 368,826
Liabilities
Insurance contracts 1,373,869 1,198,360 1,246,903
Financial liabilities 2,167 1,598 57
Trade and other payables 149,588 150,889 145,530
Deferred tax liabilities 33,322 13,884 14,517
Employee benefit obligations 25,964 33,851 34,718
Current tax liabilities 12,750 1,800 7,855
------------------------------------------------------------------------------
Total liabilities 1,597,660 1,400,382 1,449,580
------------------------------------------------------------------------------
Total equity and liabilities 2,019,345 1,750,568 1,818,406
------------------------------------------------------------------------------
Net asset value per share 5 143.3p 120.2p 125.7p
* Restated for the adoption of International Financial Reporting Standards. See
note 12.
Consolidated Statement of Changes in Equity
for the six month period ended 30 June 2005
Currency
Share Share Translation Other Retained 2005 2004
Capital Premium Reserve Reserves Earnings Total Total
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
£000 £000 £000 £000 £000 £000 £000
-------------------------------------------------------------------------------------------------------------
Balance at 1
January 14,685 234,267 (468) 37,967 82,375 368,826 314,685
Currency
translation
differences - - 324 - - 324 (473)
-------------------------------------------------------------------------------------------------------------
Net income
recognised
directly in
equity - - 324 - - 324 (473)
Profit for
the period - - - - 61,080 61,080 43,263
-------------------------------------------------------------------------------------------------------------
Total recognised
income for
the period - - 324 - 61,080 61,404 42,790
Employee share
options :
Proceeds from
shares issued 32 632 - - - 664 333
Equity settled
share-based - - - - 825 825 472
payments
Change in own shares - - - - 252 252 356
Dividends paid
to shareholders - - - - (10,286) (10,286) (8,450)
-------------------------------------------------------------------------------------------------------------
Balance at
30 June 14,717 234,899 (144) 37,967 134,246 421,685 350,186
------------------------------------------------------------------------------------------------------------
Summary Consolidated Cash Flow Statement
for the six month period ended 30 June 2005
Notes 6 months to 6 months to Year to
30 June 2005 30 June 2004 31 Dec 2004
(unaudited) Restated* Restated*
£000 (unaudited) (audited)
£000 £000
-------------------------------------------------------------------------------
Cash generated from
operations 11 97,307 3,939 40,138
Interest paid (774) (879) (1,409)
Current tax paid (3,339) (263) (206)
--------------------------------------------------------------------------------
Net cash flows from
operating activities 93,194 2,797 38,523
Cash flows from the
acquisition and sale of
consolidated enterprises - (200) (1,091)
Cash flows from the
purchase of property, plant
and equipment (1,530) (5,001) (5,565)
Cash flows from the
purchase of intangible
assets (2,401) - (3,406)
Loans repaid by related
parties - 320 320
-------------------------------------------------------------------------------
Net cash used in investing
activities (3,931) (4,881) (9,742)
Proceed from the issue of
ordinary shares 664 333 2,046
Proceeds from the sale of
treasury shares 252 356 254
Proceeds from borrowings - 1,121 -
Repayments of borrowings (233) (42) (521)
Dividends paid to Company's
shareholders (10,286) (8,450) (12,833)
--------------------------------------------------------------------------------
Net cash used in financing activities (9,603) (6,682) (11,054)
--------------------------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents 79,660 (8,766) 17,727
------------------------------------------------------------------------------
Cash and cash equivalents
at beginning of period 119,563 102,712 102,712
Net increase (decrease) in
cash and cash equivalents 79,660 (8,766) 17,727
Effect of exchange rate
fluctuations on cash and
cash equivalents 1,696 (1,198) (876)
--------------------------------------------------------------------------------
Cash and cash equivalents
at end of period 200,919 92,748 119,563
-------------------------------------------------------------------------------
* Restated for the adoption of International Financial Reporting Standards.
See note 12.
Cash flows from operating activities are stated net of cash outflows of
£54,259,000 (30 June 2004 : £131,271,000; 31 December 2004: £230,913,000) from
the acquisition, sale and maturity of investments which form part of the
operating assets of the Group.
Segment Information - by business division
6 months to 30 June 2005 (unaudited)
London
Market/ UK International
Group Retail Business Total
£000 £000 £000 £000
------------------------------------------------------------------------------
Gross premiums written 306,168 84,093 46,899 437,160
Net premiums written 233,279 75,031 36,737 345,047
Net premiums earned 235,743 77,661 32,264 345,668
------------------------------------------------------------------------------
Investment return 13,157 7,271 2,494 22,922
Net claims incurred (143,808) (31,921) (10,478) (186,207)
Acquisition costs (66,620) (24,424) (16,848) (107,892)
Administrative expenses (8,125) (7,746) (2,760) (18,631)
Other technical income (expenses) 36,977 645 (697) 36,925
-------------------------------------------------------------------------------
Trading result 67,324 21,486 3,975 92,785
Agency and other income 8,207 1,306 9,953 19,466
Profit commission 2,744 - - 2,744
Asset management services and
other expenses (13,410) (1,682) (10,925) (26,017)
-------------------------------------------------------------------------------
Results of operating activities 64,865 21,110 3,003 88,978
Finance costs (1,009) - - (1,009)
Share of profit of associates 151 - - 151
-------------------------------------------------------------------------------
Profit before tax 64,007 21,110 3,003 88,120
------------------------------------------------------------------------------
London UK International
Market Retail Business Total
100% level net combined ratio (%) 82.8% 81.6% 95.4% 83.5%
-------------------------------------------------------------------------------
'London Market / Group' comprises Hiscox plc's share of the results of Syndicate
33 and the results of non-underwriting entities of the Group, net of any
business written between Group companies.
'UK Retail' comprises all of the UK retail business of Hiscox Insurance Company
Limited, together with the result of the online agency business (Hiscox Connect
Limited).
'International Business' comprises the results of Hiscox Insurance Company
(Guernsey) Limited, the results of the Hiscox overseas agencies and the
underwriting results of the international retail business written by Hiscox
Insurance Company Limited.
6 months to 30 June 2004 (unaudited)
London
Market/ UK International
Group Retail Business Total
£000 £000 £000 £000
-------------------------------------------------------------------------------
Gross premiums written 364,424 79,024 45,590 489,038
Net premiums written 295,317 68,095 33,045 396,457
Net premiums earned 256,343 64,105 29,215 349,663
------------------------------------------------------------------------------
Investment return 4,642 3,084 928 8,654
Net claims incurred (120,532) (28,325) (11,082) (159,939)
Acquisition costs (64,299) (19,850) (15,839) (99,988)
Administrative expenses (10,492) (9,094) (2,149) (21,735)
Other technical income (expenses) (13,124) 62 (1,254) (14,316)
-------------------------------------------------------------------------------
Trading result 52,538 9,982 (181) 62,339
Agency and other income 3,459 989 10,430 14,878
Profit commission 3,909 - 3 3,912
Asset management services and
other expenses (9,414) (672) (9,770) (19,856)
-------------------------------------------------------------------------------
Results of operating activities 50,492 10,299 482 61,273
Finance costs (988) - - (988)
Share of profit of associates 19 - - 19
-------------------------------------------------------------------------------
Profit before tax 49,523 10,299 482 60,304
-------------------------------------------------------------------------------
London UK International
Market Retail Business Total
100% level net combined ratio (%) 82.4% 89.3% 103.8% 84.6%
-------------------------------------------------------------------------------
Year to 31 December 2004 (unaudited)
London
Market/ UK International
Group Retail Business Total
£000 £000 £000 £000
-------------------------------------------------------------------------------
Gross premiums written 549,458 174,128 93,023 816,609
Net premiums written 485,538 149,778 68,769 704,085
Net premiums earned 517,497 136,380 60,975 714,852
-------------------------------------------------------------------------------
Investment return 18,902 11,202 2,980 33,084
Net claims incurred (292,389) (65,682) (23,992) (382,063)
Acquisition costs (120,275) (42,283) (32,434) (194,992)
Administrative expenses (19,234) (18,251) (4,025) (41,510)
Other technical income (expenses) (32,996) 50 368 (32,578)
-------------------------------------------------------------------------------
Trading result 71,505 21,416 3,872 96,793
Agency and other income 7,138 2,019 21,134 30,291
Profit commission 3,539 - (31) 3,508
Asset management services and
other expenses (16,187) (2,155) (21,141) (39,483)
--------------------------------------------------------------------------------
Results of operating activities 65,995 21,280 3,834 91,109
Finance costs (1,977) - - (1,977)
Share of profit of associates 390 - - 390
-------------------------------------------------------------------------------
Profit before tax 64,408 21,280 3,834 89,522
-------------------------------------------------------------------------------
London UK International
Market Retail Business Total
100% level net combined ratio (%) 92.1% 92.5% 98.5% 92.6%
------------------------------------------------------------------------------
Notes to the Interim Accounts
1 Basis of preparation and audit status
European Union ('EU') law (IAS Regulation EC 1606/2002) requires that the next
annual consolidated financial statements of the Company, for the year ending 31
December 2005 be prepared in accordance with International Financial Reporting
Standards (IFRSs) adopted for use in the EU ('adopted IFRSs').
This interim consolidated financial information has been prepared on the basis
of the recognition and measurement requirements of IFRSs in issue that either
are endorsed by the EU and effective (or available for early adoption) at 31
December 2005 or are expected to be endorsed and effective (or available for
early adoption) at 31 December 2005, the Group's first annual reporting date at
which it is required to use adopted IFRSs.
The adopted IFRSs that will be effective (or available for early adoption) in
the annual financial statements for the year ending 31 December 2005 are still
subject to change and to additional interpretations and therefore cannot be
determined with certainty. Accordingly, the accounting policies for that annual
period will be determined finally only when the annual financial statements are
prepared for the year ending 31 December 2005.
The interim consolidated financial information for the 2005 and 2004 half years
are unaudited but have been subject to a review by the independent auditors.
The unaudited interim consolidated financial information and the comparative
figures for the year ended 31 December 2004 contained within, do not constitute
statutory accounts of the Group within the meaning of Section 240 of the Companies
Act 1985.
The independent auditors have reported on the Statutory Report and Accounts for
the year ended 31 December 2004 prepared under UK GAAP, their report was not
qualified and did not contain a statement under Section 237(2) or (3) of the
Companies Act 1985. The independent auditors have also issued a special purpose
audit report on the restated consolidated financial information for the year
ended 31 December 2004 under IFRSs (as presented as comparatives in this interim
report). Their report was included in the restated consolidated financial
information that was published on 26 July 2005 and is available on the Company's
website www.hiscox.com.
2 Accounting Policies
This interim consolidated financial information has been prepared in accordance
with the accounting policies stated in the restated consolidated financial
information that was published on 26 July 2005, which is available on the
Company's website www.hiscox.com.
A summary of the key differences between IFRS and UK GAAP is presented in note 12.
3 Earnings per share
6 months to 30 June 2005 (unaudited)
Average
number EPS
Earnings of shares per share
£000 000 p
Basic, based on profit for the
period 61,080 293,788 20.8
Diluted, based on profit for the
period 61,080 297,051 20.6
6 months to 30 June 2004 (unaudited)
Average
number EPS
Earnings of shares per share
£000 000 p
Basic, based on profit for the
period 43,263 291,006 14.9
Diluted, based on profit for the
period 43,263 294,458 14.7
Year to 31 December 2004 (audited)
Average
number EPS
Earnings of shares per share
£000 000 p
Basic, based on profit for the
period 63,948 291,755 21.9
Diluted, based on profit for the
period 63,948 295,130 21.7
Diluted earnings per share has been calculated after taking into account
3,263,000 (30 June 2004: 3,452,000; 31 December 2004: 3,375,000) employee
share options.
4 Return on equity
6 months to Year to
6 months to 30 June 2004 31 Dec 2004
30 June 2005 Restated Restated
(unaudited) (unaudited) (audited)
£000 £000 £000
------------------------------------------------------------------------------
Profit for the period 61,080 43,263 63,948
Opening shareholders' equity 368,826 314,685 314,685
Adjusted for the time weighted
impact of :
Distributions of capital (170) (92) (5,085)
Changes in own shares 92 14 113
-------------------------------------------------------------------------------
Adjusted opening shareholders' equity 368,748 314,607 309,713
-------------------------------------------------------------------------------
Annualised return on equity (%) 35.9% 29.4% 20.6%
5 Net asset value per share
6 months to 30 June 2005 (unaudited)
Net asset Number of NAV
value shares* per share
£000 000 p
Net asset value 421,685 294,193 143.3
Net tangible asset value 389,315 294,193 132.3
6 months to 30 June 2004 (unaudited)
Net asset Number of NAV
value shares* per share
£000 000 p
Net asset value 350,186 291,216 120.2
Net tangible asset value 323,603 291,216 111.1
Year to 31 December 2004 (audited)
Net asset Number of NAV
value shares* per share
£000 000 p
Net asset value 368,826 293,306 125.7
Net tangible asset value 338,837 293,306 115.5
* The number of shares outstanding at the period end as adjusted for own shares held.
6 Investment Return
i) Analysis of investment return
6 months to Year to
6 months to 30 June 2004 31 Dec 2004
30 June 2005 Restated Restated
(unaudited) (unaudited) (audited)
£000 £000 £000
------------------------------------------------------------------------------
Investment income 22,657 17,148 35,051
Net realised gains (losses) on
financial assets (1,629) (5,910) (6,608)
Net unrealised gains (losses) on
financial assets at fair value
through income 2,465 (1,780) 6,015
Investment expenses (571) (804) (1,374)
-------------------------------------------------------------------------------
22,922 8,654 33,084
------------------------------------------------------------------------------
ii) Annualised investment yields
6 months to Year to
6 months to 30 June 2004 31 Dec 2004
30 June 2005 Restated Restated
(unaudited) (unaudited) (unaudited)
Return Yield Return Yield Return Yield
£000 % £000 % £000 %
-------------------------------------------------------------------------------
Debt securities at fair value
through income 14,874 3.5 5,692 1.8 19,088 2.7
Equities at fair value through
income 3,729 8.9 933 2.2 8,529 10.3
Deposits with credit
institutions/cash and
cash equivalents 4,319 4.5 2,029 2.4 5,467 2.9
-------------------------------------------------------------------------------
22,922 4.0 8,654 2.0 33,084 3.4
-------------------------------------------------------------------------------
7 Other operating income (expenses)
6 months to Year to
6 months to 30 June 2004 31 Dec 2004
30 June 2005 Restated Restated
(unaudited) (unaudited) (unaudited)
£000 £000 £000
------------------------------------------------------------------------------
Agency and other income 8,511 4,166 6,212
Profit commission 2,744 3,912 3,508
Exchange gains 36,925 - -
Other technical income 790 680 3,087
Other income - 125 2,305
------------------------------------------------------------------------------
Other operating income 48,970 8,883 15,112
------------------------------------------------------------------------------
Managing agency expenses 10,022 7,146 7,447
Overseas underwriting agency
expenses 10,905 9,750 21,141
Connect agency expenses 1,682 672 2,155
Exchange losses - 14,316 34,228
Other Group expenses 2,609 1,399 3,747
-------------------------------------------------------------------------------
Other operating expenses 25,218 33,283 68,718
-------------------------------------------------------------------------------
8 Dividends
6 months to 6 months to Year to
30 June 2005 30 June 2004 31 Dec 2004
(unaudited) Restated Restated
(unaudited) (audited)
£000 £000 £000
------------------------------------------------------------------------------
Final divided for the year ended:
31 December 2004 of 3.5p (net) per share 10,286 - -
31 December 2003 of 2.9p (net) per share - 8,450 8,450
Interim divided for the year ended:
31 December 2004 of 1.5p (net) per share - - 4,383
------------------------------------------------------------------------------
10,286 8,450 12,833
------------------------------------------------------------------------------
An interim dividend of 2.25p (net) per ordinary share has been declared payable
on 24 October 2005 to shareholders registered on 30 September 2005 in respect of
the six months to 30 June 2005 (30 June 2004 : 1.5p (net) per ordinary share).
The dividend was approved by the Board on 6 September 2005 and accordingly has
not been included as a distribution or liability in this interim consolidated
financial information in accordance with IAS10 'Events after the Balance Sheet
Date'.
9 Financial Assets
(i) Analysis of financial assets
30 June 2004 31 Dec 2004
30 June 2005 Restated Restated
(unaudited) (unaudited) (unaudited)
£000 £000 £000
-----------------------------------------------------------------------------
Debt securities at fair value
through income 865,005 740,319 833,963
Equities at fair value through
income 93,427 78,069 86,783
Deposits with credit
institutions 79,561 55,604 58,637
-----------------------------------------------------------------------------
Investments 1,037,993 873,992 979,383
Trade and other receivables 330,996 356,295 327,482
Derivative financial instruments - - 1,348
-----------------------------------------------------------------------------
1,368,989 1,230,287 1,308,213
-----------------------------------------------------------------------------
(ii) Investment and cash allocation
30 June 2005 30 June 2004 31 Dec 2004
(unaudited) Restated Restated
(unaudited) (unaudited)
£000 % £000 % £000 %
------------------------------------------------------------------------------
Debt securities at fair
value through income 865,005 69.8% 740,319 76.6% 833,963 75.9%
Equities at fair value
through income 93,427 7.5% 78,069 8.1% 86,783 7.9%
Deposits with credit
institutions / cash and
cash equivalents 280,480 22.7% 148,352 15.3% 178,200 16.2%
------------------------------------------------------------------------------
1,238,912 966,740 1,098,946
------------------------------------------------------------------------------
(iii) Investment allocation by currency
30 June 2005 30 June 2004 31 Dec 2004
(unaudited) Restated Restated
(unaudited) (unaudited)
% % %
Sterling 36.4 38.4 36.5
Dollars 49.5 49.1 46.2
Euro and other currencies 14.1 12.5 17.3
10 100% Level Combined Ratio
The underwriting activities which are managed by the Group are shown below at
the 100% level regardless of ownership of capacity. All ratios disclosed are
calculated by reference to net premiums earned. Under previously reported UK
GAAP figures the net expense ratio was calculated by reference to net premiums
written. The net combined ratio remains as the total of the net claims and net
expense ratios.
6 months to 30 June 2005 (unaudited)
London UK International
Market Retail Business Total
£000 £000 £000 £000
-----------------------------------------------------------------------------
Net premiums earned 348,014 77,661 32,264 457,939
------------------------------------------------------------------------------
Net claims incurred 218,469 31,921 10,478 260,868
Net claims ratio (%) 62.8% 41.1% 32.5% 57.0%
-------------------------------------------------------------------------------
Net expenses 69,545 31,525 20,305 121,375
Net expense ratio (%) 20.0% 40.5% 62.9% 26.5%
--------------------------------------------------------------------------------
Investment return 14,799 7,271 2,494 24,564
-------------------------------------------------------------------------------
Trading result 74,799 21,486 3,975 100,260
-------------------------------------------------------------------------------
Net combined ratio (%) 82.8% 81.6% 95.4% 83.5%
-------------------------------------------------------------------------------
6 months to 30 June 2004 (unaudited)
London UK International
Market Retail Business Total
£000 £000 £000 £000
-------------------------------------------------------------------------------
Net premiums earned 393,918 64,105 29,215 487,238
------------------------------------------------------------------------------
Net claims incurred 184,568 28,325 11,082 223,975
Net claims ratio (%) 46.9% 44.2% 37.9% 46.0%
-------------------------------------------------------------------------------
Net expenses 139,968 28,882 19,242 188,092
Net expense ratio (%) 35.5% 45.1% 65.9% 38.6%
-------------------------------------------------------------------------------
Investment return 3,111 3,084 928 7,123
-------------------------------------------------------------------------------
Trading result 72,493 9,982 (181) 82,294
-------------------------------------------------------------------------------
Net combined ratio (%) 82.4% 89.3% 103.8% 84.6%
-------------------------------------------------------------------------------
Year to 31 December 2004 (unaudited)
London UK International
Market Retail Business Total
£000 £000 £000 £000
------------------------------------------------------------------------------
Net premiums earned 795,190 136,380 60,975 992,545
------------------------------------------------------------------------------
Net claims incurred 450,241 65,682 23,992 539,915
Net claims ratio (%) 56.6% 48.2% 39.3% 54.4%
-----------------------------------------------------------------------------
Net expenses 282,354 60,484 36,091 378,929
Net expense ratio (%) 35.5% 44.3% 59.2% 38.2%
------------------------------------------------------------------------------
Investment return 16,257 11,202 2,980 30,439
------------------------------------------------------------------------------
Trading result 78,852 21,416 3,872 104,140
------------------------------------------------------------------------------
Net combined ratio (%) 92.1% 92.5% 98.5% 92.6%
-------------------------------------------------------------------------------
11 Cash generated from operations
6 months to Year to
6 months to 30 June 2004 31 Dec 2004
30 June 2005 Restated Restated
(unaudited) (unaudited) (unaudited)
£000 £000 £000
------------------------------------------------------------------------------
Profit before tax 88,120 60,304 89,522
Realised and unrealised
investment (gains) losses (836) 7,690 593
Depreciation 1,534 1,420 2,932
Charges in respect of
retirement benefits (8,754) 517 1,384
Charges in respect of
employee share schemes 826 472 1,194
Foreign exchange (gains)
losses on cash and cash
equivalents (1,696) 1,198 876
Other non-cash transactions 1,215 498 428
Changes in operational assets and
liabilities :
Deferred acquisition costs (4,905) (18,545) (10,596)
Trade and other receivables (3,401) (16,083) (24,169)
Insurance and reinsurance
contracts 76,555 97,437 204,187
Trade and other payables 2,908 302 4,700
Investments (54,259) (131,271) (230,913)
-------------------------------------------------------------------------------
Cash generated from
operations 97,307 3,939 40,138
-------------------------------------------------------------------------------
12 Explanation of transition to IFRSs
The principles underpinning the Group's first-time adoption of IFRSs are
described in the restated consolidated financial information for the year ended
31 December 2004 published on 26 July 2005. The restated consolidated financial
information contained reconciliations of equity at 1 January 2004 (date of
transition to IFRSs) and at 31 December 2004 (date of last UK GAAP financial
statements) and also the reconciliation of profit for 2004, as required by IFRS
1 'First-time Adoption of International Financial Reporting Standards'. It also
sets out the significant accounting policies applied by the Group under IFRSs.
Reconciliations of profit after tax and total equity are included below to
enable a comparison of the comparative information included in this interim
consolidated financial information with those published in previous financial
periods.
Reconciliation of profit after tax from IFRS to UK GAAP
Notes 6 months to Year to
30 June 2004 31 Dec 2004
(unaudited) (audited)
£000 £000
----------------------------------------------------------------------------
Profit after tax under IFRS 43,263 63,948
Amortisation of intangible assets 12a (725) (1,453)
Valuation of financial assets 12b (45) (987)
Income tax 12c (974) (554)
Insurance contracts 12d (783) (1,442)
Employee benefits 12f (224) (1,768)
Rates of exchange 12g (4,927) (3,046)
Other adjustments (7) (124)
-------------------------------------------------------------------------------
Profit after tax under UK GAAP 35,578 54,574
-------------------------------------------------------------------------------
Reconciliation of total equity from IFRS to UK GAAP
Notes 30 June 2004 31 Dec 2004
(unaudited) (audited)
£000 £000
------------------------------------------------------------------------------
Total equity under IFRS 350,186 368,826
Intangible assets 12a (5,555) (6,283)
Financial assets 12b 139 (803)
Income tax 12c (2,156) (1,736)
Insurance contracts 12d (12,316) (12,975)
Dividend recognition 12e (4,374) (10,281)
Employee benefits 12f 27,996 25,729
Rates of exchange 12g 7,462 9,385
Other adjustments (147) (263)
-------------------------------------------------------------------------------
Total equity under UK GAAP 361,235 371,599
------------------------------------------------------------------------------
The principal changes on either profit for the period or total equity are
explained further below:
(a) Intangible assets
Goodwill
Goodwill acquired in a business combination is no longer amortised but is tested
for impairment on at least an annual basis. Up to 31 December 1997, under UK
GAAP goodwill arising on the acquisition of subsidiaries was written off
directly to reserves in the year of acquisition. From 1 January 1998, in
accordance with FRS 10 'Goodwill and intangible assets', goodwill was
capitalised and amortised on a straight-line basis over its useful economic life
which was deemed to be 20 years. Any goodwill previously amortised or
written-off has not been reinstated on adoption of IFRS and thus the value of
goodwill has been taken as the carrying amount on adoption.
Syndicate capacity
In accordance with IAS 38 'Intangible Assets', the useful lives of all of the
Group's recognised intangible assets have been reviewed on adoption of IFRS.
Following this review it has been concluded that syndicate capacity has an
indefinite useful life and so will no longer be amortised but will be subject to
an at least annual impairment test. Syndicate capacity previously amortised has
been reinstated on adoption of IFRS.
(b) Financial assets
Valuation
In the Group's previously reported UK GAAP financial statements, financial
assets were stated at their current value. For listed investments, comprising
those quoted on the London and other international stock exchanges, current
value was deemed to be the mid-market prices on the balance sheet date, or on
the last stock exchange trading day before the balance sheet date. All realised
or unrealised gains and losses were taken to the income statement.
For the purposes of measuring financial assets under IAS 39 'Financial
Instruments : Recognition and Measurement' all financial assets are classified
into the following four categories :
(i) Financial assets at fair value through income;
(ii) Held-to-maturity investments;
(iii) Loans and receivables; and
(iv) Available-for-sale financial assets.
A full review of the Group's investments has been performed as part of the
adoption of IFRS and all equities and debt securities have been classified as
financial assets at fair value through the income statement. The accounting for
this category of financial asset is similar to the Group's previous accounting
policy under UK GAAP. However, under IFRS listed investments are valued at bid
price on the balance sheet date, or on the last stock exchange trading day
before the balance sheet date.
Derivative financial instruments
The Group has entered into a small number of foreign exchange contracts in order
to manage its exposure to business denominated in a currency other than its
presentational currency. In accordance with IAS 39 these contracts have been
recognised in the balance sheet at their fair value.
(c) Income tax
Current income tax was provided in the Group's previously reported UK GAAP
financial statements for amounts expected to be paid (or recovered) using the
tax rates and laws that had been enacted or substantively enacted at the balance
sheet date.
Deferred income tax was recognised in respect of all timing differences, with
certain exceptions, that had originated but not reversed at the balance sheet
date where transactions or events that result in an obligation to pay more tax
or a right to pay less tax in the future had occurred at the balance sheet date.
Timing differences are differences between the Group's taxable profits and its
results as stated in the UK GAAP financial statements that arise from the
inclusion of gains and losses in tax assessments in periods different from those
in which they are recognised in the financial statements. Deferred income tax
was measured at the average tax rates that are expected to apply in periods in
which the timing differences are expected to reverse. The Group did not discount
its UK GAAP deferred tax assets or liabilities.
IAS 12 'Income Taxes' takes a balance sheet approach with deferred income tax
being calculated, using the liability method, on temporary differences arising
between the tax bases of assets and liabilities and their carrying amounts in
the consolidated financial statements. Deferred income tax is determined using
tax rates and laws that have been enacted or substantively enacted by the
balance sheet date and are expected to apply in periods in which the timing
differences are expected to reverse. IAS 12 explicitly states that deferred tax
assets and liabilities shall not be discounted.
(d) Insurance contracts
Equalisation provision
In the Group's previously reported UK GAAP financial statements an equalisation
provision was established for Hiscox Insurance Company Limited in accordance
with the requirements of PRU 7.5 of the Integrated Prudential Sourcebook
(Insurance and other amendments) Instrument 2004. This provision, which was in
addition to the provisions required to meet the anticipated ultimate cost of
settlement of outstanding claims at the balance sheet date, was required by
Schedule 9A to the Companies Act 1985 to be included within technical provisions
at the balance sheet date notwithstanding that it does not represent liabilities
at the balance sheet date.
Under IFRS 4 'Insurance Contracts', provisions for possible future claims
arising from insurance contracts that are not in existence at the reporting date
(such as catastrophe and equalisation provisions) are not recognised.
(e) Dividend recognition
Under UK GAAP dividends are recognised in the income statement in the period to
which they relate irrespective of when they are declared and approved. IAS 10
'Events after the Balance Sheet Date' does not allow the recognition of
dividends to holders of equity instruments after the balance sheet date because
they do not meet the criteria of a present obligation in IAS 37 'Provisions,
Contingent Liabilities and Contingent Assets'. Accordingly only dividends
declared (i.e. appropriately authorised and no longer at the discretion of the
Group) are recognised in the statement of changes in equity.
(f) Employee benefits
Retirement benefit obligations
Under IAS 19 'Employee Benefits' the present value of the defined benefit
obligation is matched against the fair value of the plan assets out of which the
obligations are to be settled directly and other unrecognised actuarial gains
and losses. The resulting pension scheme asset or liability is recognised in the
balance sheet. Actuarial gains and losses arising from experience adjustments
and changes in actuarial assumptions are charged or credited to income over the
employees' expected average remaining working lives. Past service costs arising
in the period are recognised immediately in income, unless the changes to the
pension plan are conditional on the employees remaining in service for a
specified period of time (the vesting period). In this case, the past service
costs are amortised on a straight-line basis over the vesting period.
Previously under UK GAAP the assets and liabilities of defined benefit pension
schemes were off-balance sheet items which were only disclosed by way of a
footnote. Under SSAP 24 'Accounting for Pension Costs', pension contributions
were charged to the income statement so as to spread the cost of pensions over
employees' working lives with the Group. Differences between these amounts
charged and payments made to the Group's pension schemes were treated as an
asset or liability in the UK GAAP balance sheet.
The standard also allows the recognition of a right to reimbursement from other
parties of some of the expenditure required to settle the defined benefit
obligation.
Share-based payments
IFRS 2 'Share-based Payment' requires the recognition of an expense representing
the fair value of employee services rendered in exchange for the grant of
options. The amount to be expensed has been determined by reference to the fair
value of the options granted. The impact of any non-market vesting conditions is
not included in the calculation of the fair value but is included in the
assumptions about the number of options that are expected to become exercisable.
The fair value is expensed over the vesting period which is three years for all
of the Group's share option schemes.
In accordance with the transitional arrangements contained in the standard, only
share options granted after 7 November 2002 but not yet vested at 1 January 2005
were included in the calculations.
Sabbatical leave
After ten years of service, all permanent employees of the Group are eligible to
take an eight week paid sabbatical leave. The present value of the cost of this
compensated absence is expensed in the income statement over the period of
service in accordance with IAS 19.
(g) Rates of exchange
Functional currency
The functional currency is the currency of the primary economic environment in
which an entity operates. The functional currency of all entities in the Group
has been deemed to be Sterling with the exception of the entities operating in
France, Germany, Holland and Benelux whose functional currency is Euros and
Hiscox Insurance Company (Guernsey) Limited whose functional currency is US
Dollars.
IAS 21 'The Effects of Changes in Foreign Exchange Rates' requires that foreign
currency transactions are recorded, on initial recognition in the functional
currency, by applying to the foreign currency amount the spot exchange rate
between the functional currency and the foreign currency at the date of the
transaction. Exchange differences arising on the settlement of monetary items or
on translating monetary items at rates different from those at which they were
translated on initial recognition in the functional currency during the period
or in previous financial statements are recognised in the income statement when
they arise.
Under IFRS all monetary assets and liabilities are retranslated at the
prevailing rates of exchange at the closing balance sheet date. Unearned premium
and deferred acquisition costs are non monetary assets and liabilities and
accordingly are not retranslated from the historic rates.
Presentational currency
The presentational currency of the Group, which is the currency used in the
presentation of the consolidated financial statements, is Sterling. The results
and financial position of those entities whose functional currency is not
Sterling have been translated to the presentational currency as follows :
• All assets and liabilities are translated at the closing rate at the
balance sheet date;
• Income and expenses are translated at the exchange rates prevailing on
the dates of transactions; and
• All resulting exchange differences are recognised as a separate
component of equity.
Previously under UK GAAP, investments in foreign enterprises were translated
using the net investment method which applies the closing rate to all assets and
liabilities and income and expenses. All resulting exchange differences were
similarly taken to reserves.
Daily transactional rates
As part of the system improvements made on adoption of IFRS the Group has moved
to daily transactional rates of exchange as it believes that this provides more
accurate financial information. The only exception to this is for business whose
functional currency is not denominated in pounds Sterling for which average
monthly rates continue to be adopted for the translation into the presentational
currency.
Independent 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 2005 which comprise the summary consolidated income
statement, the summary consolidated balance sheet, the consolidated statement of
changes in equity, the summary consolidated cash flow statement, segment
information and related notes 1 to 12, all prepared on an International Financial
Reporting Standards (IFRS) basis. 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 not 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.
As disclosed in note 1 to the financial information, the next annual financial
statements of the Group will be prepared in accordance with IFRSs adopted for
use in the European Union. The accounting policies that have been adopted in
preparing the financial information are consistent with those that the directors
currently intend to use in the next annual financial statements. There is,
however, a possibility that the directors may determine that some changes to
these policies are necessary when preparing the full annual financial statements
for the first time in accordance with those IFRSs adopted for use by the
European Union.
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.
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 2005.
KPMG Audit Plc
London
12 September 2005
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