14th Mar 2005 07:02
Hiscox PLC14 March 2005 PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2004 "ANOTHER STRONG PERFORMANCE" Hiscox plc, the specialist insurer, today announces preliminary results for theyear ended 31 December 2004. 2004 2003Gross written premiums £778.9m £797.4mNet earned premiums £642.4m £547.5mOperating profit £86.3m £77.1m(based on longer term investment return)Profit before tax £77.0m £83.4mEarnings per share 18.7p 20.9pFinal dividend per share 3.5p 2.9pNet asset value per share(before equalisationprovision) 132.8p 119.1pGroup combined ratio 93.0% 87.2%Post-tax return on capital 16.5% 21.7% Highlights • Record operating profit of £86.3 million, after £70 million impact of 2004 hurricane season. • Final dividend increased 21%, making a total dividend of 5.0p per share for the year (2003: 4.2p per share). • A strong performance across the group: - London Market business increased operating profit to £63.5 million (2003: £61.5 million) with a combined ratio of 92.9% (2003: 85.8%) - UK Retail increased operating profit to £18.8 million (2003: £15.0 million) with a combined ratio of 89.8% (2003: 90.3%) - International Retail increased operating profit to £4.0 million (2003: £0.6 million) with a combined ratio of 97.9% (2003: 98.2%). • Market conditions in 2005 are more competitive but still attractive in aggregate. • The growth of retail businesses to complement the more volatile London Market business has continued successfully, and will show real value in the next stage of the underwriting cycle. Robert Hiscox, Chairman Hiscox plc, commented: " This is another strong result (in fact a record operating profit) especiallyconsidering the impact of the hurricanes during the year. It is another step inour ambition to grow a highly respected and pre-eminent specialist insurer. Our established strategy of building a well spread specialist book of retailbusinesses to complement the more volatile London Market business, together withdisciplined underwriting, should bring real benefit in the next stage in thecycle." Copies of the Chairman's statement, Chief Executive's review and the Group'sfinancial information as at 31 December 2004 are attached. For further information: Hiscox plc Robert Hiscox Chairman 020 7448 6011Bronek Masojada Chief Executive 020 7448 6012Stuart Bridges Finance Director 020 7448 6013Fiona Fong Director of Communications 020 7448 6447 The Maitland Consultancy Philip Gawith 020 7379 5151Suzanne Bartch 020 7379 5151 Notes to editors Hiscox plc is a specialist insurance group listed on the London Stock Exchangewhere it has a market capitalisation of circa £500 million. There are three mainunderwriting parts of the Group - Syndicate 33 at Lloyd's, UK Retail andInternational Retail. Syndicate 33 underwrites mainly internationally tradedbusiness in the London Market - generally large or complex business which needsto be shared with other insurers or needs the international licences of Lloyd's.The UK Retail business offers a wide range of specialist insurance forprofessionals and business customers, as well as high net worth individuals. Ithas regional offices in Birmingham, Glasgow, Leeds, Maidenhead and Colchester.The International Retail business has offices in Paris, Amsterdam, Munich,Brussels and Guernsey. The European offices write mainly fine art, high valuehousehold business and some specialist professional indemnity business. TheGuernsey office underwrites fine art business and kidnap and ransom. Hiscox isthe largest specialist fine art and high net worth insurer in Europe. Forfurther information, go to www.hiscox.com Chairman's Statement ResultsThe results for the year ending 31st December 2004 are a pre-tax profit of £77.0million (2003: £83.4 million) and an operating profit of £86.3 million (2003:£77.1 million). The net assets per share have increased to 132.8p per share(2003: 119.1p per share) and the earnings per share on profit after tax were18.7p per share (2003: 20.9p). The gross premium income underwritten by the Group was £1,051.1 million (2003:£1,083.2 million), and the gross premium income applicable to Hiscox plc was£778.9 million (2003: £797.4 million). It is pleasing to report another solid profit (in fact a record operatingprofit) despite an unusually turbulent year of natural catastrophes. Itincreases the net assets behind the shares and enables us to increase thedividend. We remain on course in our determination to build a highly respected,pre-eminent specialist insurance group, but the upward path of profits and topline growth will not always be smooth given the nature of the insurancebusiness. We can, however, hope to increase the dividend steadily to reward longterm holders of our shares. DividendThe Board recommends a final dividend of 3.5p (net) per share (2003: 2.9p per share),making a total distribution of 5.0p per share for the year, an increase of 19 per cent on 2003. This will be paid on 27th June 2005 to shareholders on the register on 15th April 2005. We remain committed to a progressive dividendpolicy. A policy of total distribution would be very harmful as the group has anobvious need of capital, and any dividend policy geared to a percentage ofprofits would be destabilising for long term shareholders and encouragevolatility in the shares. Current BusinessThe group has grown in strength and depth over the year. Our strategy ofbuilding a strong regional book of retail business to balance the more volatileLloyd's business continues to succeed. We are also growing our direct account tosupplement brokered business. We are not in competition with brokers as we areconcentrating on smaller accounts which are uneconomic for brokers, and dealingwith clients who wish to place their insurances direct with an insurer. Our Lloyd's Syndicate 33 absorbed substantial losses from the four hurricaneswhich hit Florida during the year but still made a similar profit to last year,an unthinkable result a few years ago. This was achieved by good underwriting,but also indicates the strength of rates last year in the international market.There is obviously pressure on some of the best rated business as there alwayswill be, but the renewal season went well. We are back in a normal insurancemarket after a short period of extraordinary shortage of capacity which enabledvery high prices to be charged. Underwriting discipline is the key, backed by aconstant search for profitable business and control of expenses. We continue toadhere to the old truth that turnover is vanity, profit sanity. If Lloyd'sbusiness gets too competitive we are able to concentrate our resources on theretail business. Our retail businesses are concentrating on growth in our existing officesoutside London (five in the UK and six overseas). They are now well establishedand we expect them to be an important part of our future. The only regionalexpansion during the year was the transfer of a member of staff to Madrid todevelop our Spanish business, and we are working towards opening an office inthe USA. 40% of our business comes from the USA, and a considerable proportionof it is retail business written by Managing General Agents. Our underwriterstravel extensively to the USA and it seems sensible to have staff establishedthere to service existing clients and find new ones. Business conditions are good. There is no doubt that rates have been high andmany deserved to be reduced. The problem is that momentum gathers, and brokersget used to reducing rates and underwriters get used to cutting them. I willstate, as all Chairmen and Chief Executives will, that we will exercisediscipline and refuse to reduce rates to uneconomic levels. No sensible leadercould say anything different. Most then demand growth from their staff, seemingto ignore that the only way you can grow is by winning business off thecompetition, and virtually the only way to do that is to quote a reducedpremium. Many underwriting businesses monitor changes in rates at renewal, andannounce small reduction percentages so the Chief Executive is happy thatdiscipline reigns and that it is the others who are cutting rates. But do theymonitor the amount they cut the existing rates of other insurers to win newbusiness? This Chairman and our Chief Executive and Chief Underwriter are acutely aware ofall the tricks and traps in the cycle. We have a team at the top who have beenup and down and up the cycle a few times, and we know that remaining up whenothers are down is deeply satisfying and good for the shareholders. Disciplineis the key. The difference with this cycle and others is that reinsurance, whichnormally leads and encourages the downward spiral of rates, is remaining firmand hard to buy. This should keep direct underwriters realistic as they will notbe able to pass the results of bad underwriting on to their reinsurers. RegulationI am devoted to rigorous and sensible regulation aimed at maintaining thesolvency of general insurers. We lose business to suicidal rate cutters and thenhave to help pay for their abandoned policyholders after their inevitableinsolvency. So I accept a rigorous analysis of our underwriting and reserving bythose who understand the business. On the rest of our commercial activities, my view is that there should bedraconian penalties for dishonesty or gross negligence in running a business,but far fewer petty rules for all. I am not surprised that removing road signsreduces accidents. If businesses were forced to use their own instinct, moralsense and common sense in managing their enterprises instead of ticking boxes inobedience to 'one size fits all' corporate governance rules, I am sure that fewer mishaps would occur and honest profits would be higher. Our business is heavily scrutinised by the FSA, with an added layer of Lloyd'sregulation on top and another of corporate governance rules from various bodies.The Lloyd's rules are packed with prescriptive little directives. On the otherhand, the FSA's rulebook is very principles-based which leaves us crying outoccasionally for a prescriptive rule, rather than trying to guess what willsatisfy them. The occasional road-sign is very useful. As an example, despiteall the instructions on how to run our business from all those entities, it hastaken Mr Spitzer from New York to put the spotlight on the inappropriate mannerin which the whole insurance industry handles remuneration, with brokersnegotiating their remuneration from underwriters instead of their clients, withthe obvious pressures and conflicts. A golden opportunity has arisen to changethe structure of our industry for the benefit of all, but the FSA stands back. We will continue to work with our insurance brokers to bring transparency andcommercial common sense to how we do business together, but we are dealing witha very disparate group of businesses and it would be of enormous benefit if theFSA joined in to bring some common standards. When you think of all the time andmoney spent on regulation and corporate governance, it is amazing that reformhas to come from New York, and that all the brains in the FSA and the ABI do notimmediately take up the challenge. But it is much easier for them to fuss aboutincreasing the size of our Report and Accounts with pages of information thatbear little relation to our capability to make sensible business decisions. PeopleDespite the burden of regulation and a year of extraordinary losses, everyone atHiscox has worked with cheerful, vibrant efficiency and made a substantialprofit. The atmosphere and spirit throughout the group is a credit to all whowork in it, as is the profit, and I would like to thank them sincerely. The futureI offer six good reasons why I believe we have a strong future. Insurance is a great business. Everybody has to have it, there is never ashortage of demand, and as the world prospers, as life becomes more complicatedand as litigation sadly grows, so does the need for insurance. We have a talented group of people with stable senior management, all of whomare committed to growing a top quality insurance business. We have the wonderful advantage of being able to use Lloyd's for internationallytraded business and our regional offices and companies for local retailbusiness. We focus on our specialist areas (both of business and geographically)which have substantial growth potential and we stick to our knitting. We are developing a strong brand to increase demand for our products boththrough brokers and through our growing direct business. We have no legacy problems whereas the need to bolster reserves is eating awayat the established insurance industry. The management is aligned with shareholders and is determined to achieve longterm growth in profitability leading to steadily increasing dividends, growth innet assets and earnings per share, and a higher share price. Robert HiscoxChairman, Hiscox plc14 March 2005 Chief Executive's Report Overview2004 was another good year for Hiscox. Our Lloyd's business produced anotherstrong result, despite the severity of natural catastrophes. Our UK business hasalso performed well, with an improved underlying combined ratio, and ourInternational business, particularly Mainland Europe, has made good progress. Market conditions are changing. The ability to make profit easily in all classeswill disappear over the next 24 months. Risk selection and underwriting focuswill be the key to continued success. Our ability to move our focus from bigticket international business, to smaller retail business, distributed throughour 11 offices gives us an edge. Our talented and experienced team have seencycles before, so we are confident we can adapt to this market. Our underlyingprofitability will allow us to build our balance sheet, reduce gearing, acquirethe balance of Syndicate 33 on a gradual basis and fund incremental expansionwithout recourse to shareholders. Group StrategyOur Group strategy remains unchanged. Our goal is to build a profitablespecialty insurer, focused on specific product lines and geographic markets.With this specialist focus, we ensure that we can meet and exceed clients' needsand expectations. We continue to focus on markets where our flexibility andagility gives us a distinct advantage over larger competitors whose scale worksagainst them. Within this strategy our long term focus has been to build oursmaller ticket retail business - in the UK, Europe, and globally throughSyndicate 33 - to balance the more volatile bigger ticket business we writesolely through Syndicate 33 at Lloyd's. We are succeeding in this goal. Retail business now represents over 40 per centof the Group's controlled premium income, an increase from 25 per cent in 1994,and is now larger than the entire Group was in 1994. To extend this strategyduring the year, we opened our business centre in Colchester and allocatedadditional resources to our UK Regional offices. We expect to continue thisretail focus in 2005. In line with our desire to grow as a specialty insurer andto find new opportunities, we are planning to open an office in the USA in thenear future. Hiscox already receives 40 per cent of its business from thismarket. By having a local presence we should be able to identify new demands andbrokers, and to complement our business through the traditional London brokers. Trading ConditionsMarket conditions remained favourable in 2004. Prices were reasonable in allareas of our business with softening most prevalent in those areas where rateshad risen to exceptionally high levels. 2005 has started well. Rates on renewalbusiness remain acceptable but there is more pressure with new business where,in some areas, we are seeing competitors offer rates close to breakeven levels. The trends in each of our divisions are reviewed below: Art & Private ClientsWe created this division last year, bringing the underwriting of this importantarea under common management. The benefits of this have been to unify andsimplify the interface with brokers, and to ensure that we are able tounderwrite large fine art and household risks through all of our Europeanoffices as well as our Lloyd's operation. There has been increasing competitionin the market in London as some of the international giants appear to beunderwriting in this area as a hobby without proper oversight and discipline. Inthe face of increasing competition in London, we have intensified our efforts inthe UK Regions and are developing our European business. In addition, welaunched a reinvigorated 'Fine Art by Hiscox' product, which will help us growour stand-alone fine art book on a pan-European basis. We had a limitedinvolvement in the fire at the Momart storage facility, the industry's largestinsured art loss since 1991. Our Executive Household team provides high value household and contentsinsurance for customers direct or through partnerships with professionalassociations and commercial organisations. It has had a good year, growingthrough both channels. We are embarking on higher profile marketing activities in 2005 to stimulate newbusiness for both our broker and direct channels. SpecialtyThis team focuses on contingency, kidnap and ransom, personal accident,bloodstock and American managing general agents servicing homeowners and smallcommercial businesses. Rates have remained stable. Our kidnap and ransom teamcontinues to lead the world, benefiting from their long term partnership withthe Control Risks Group. Our homeowners and small commercial book was impactedby the windstorms in Florida. We expect to obtain rating increases on theserisks as they come up for renewal in the early part of 2005. In early 2005 we purchased Insurex Expo-Sure, a UK-based underwriting agencywhich provides insurance for events, conferences and exhibitions. Theacquisition builds upon an existing long-term relationship with Insurex, and hasmuch potential for future growth. We plan to use our regional and Europeanoffices as a distribution network for smaller risks, and our large business teamin London with their extensive experience of insuring international events tounderwrite larger risks. Professions and Specialty CommercialThis division continues to focus on professional firms and emerging advisory andservice-led businesses in the UK. We provide coverage for errors and omissionsand are expanding our portfolio to cover associated commercial risks relating toboth property and liability exposures. Our primary target is the small andsmallest firms in this target market. We have market-leading expertise inproviding these insurances, both in terms of underwriting knowledge and inprocessing skills and efficiency. Whilst we have the expertise to underwrite larger traditional risks, there hasbeen significant pricing pressure in this area and we have deliberately avoidedthis market segment over the last 12 months. Instead, our renewed focus onsmaller business risks has achieved growth both in London and in the UK Regions.We are also developing our capacity in this area in Europe and I expect it tobecome a strong contributor to the business in the years ahead. In the UK we will be launching a new professional indemnity product targetingthe smallest firms and individual freelance consultants. This will be ano-frills version of our existing professional indemnity product and will beavailable through a number of distribution channels. Aerospace, Technology, Media and TelecommunicationsThe trading environment in these segments remains reasonable. During 2004 wesuccessfully expanded our technology, media and telecommunication client baseoutside London to the UK Regions, the USA and France. This growth has beenachieved by a combination of local deployment of underwriters, more globaltravel by the team and the introduction of a new e-commerce system which isencouraging greater business flow from the USA. Despite competition in the UKfrom the international players, our worldwide reputation in these sectorscontinues to grow. This is based upon our focus on risk management and apro-active claims team which draws upon a huge wealth of experience in thissector when assisting our clients with their claims. London MarketThis division underwrites marine hull and liability, offshore energy, terrorism,international professional indemnity and political risks. The teams within thisdivision continue to adapt to market changes in their individual areas. Ourterrorism team is a market leader, with the ability to underwrite significantrisks from around the world, and an e-commerce platform which allows us tounderwrite smaller risks on a distributed basis. In the marine hull andliability area, rates remain reasonable, although we are seeing some evidence ofirrational behaviour in some international markets. The marine account benefitedfrom the acquisition of renewal rights for business placed with MarlboroughUnderwriting Agency. This allowed us to renew £11 million of business on goodterms. The offshore energy and energy liability team has performed well in 2004.Despite the impact of Hurricane Ivan which caused one of the biggest losses inthe sector on record, they have delivered a small overall profit. This resultreflects skill in creating a balanced book and discipline in the face of pricingpressure. The professional indemnity team delivered controlled growth in 2004, takingadvantage of our position in this market. Our intention in 2005 is to focus onsmaller less competitive risks where we see continued opportunity. Reinsurance & Major PropertyThis team focuses on various classes of reinsurance on both an excess of lossand pro-rata basis, and the insurance of major industrial and commercialproperty. Rates in reinsurance continue to offer good margins. The fourhurricanes which made landfall in the USA tested the nerve of the industry, andreminded us all that risk should only be assumed at the right price. During theDecember renewal season, reinsurance rates in the US were stable overall, withprices for risks in Florida increasing, with reductions occurring elsewhere.International catastrophe reinsurance rates have been under pressure as a resultof over-capacity. Unfortunately, this is driven as much by older professionalfirms as by new entrants. We are now reducing the large pro-rata reinsuranceaccount created between 2001 and 2003 as some of the underlying rates arebeginning to ease. The reinsurance market is now seeing the benefits from the introduction ofimproved natural perils statistical modeling over the last decade. This isbringing greater discipline and transparency to the market. Hiscox combined themajor property team with the reinsurance team this year in order to embed andapply this modeling and statistical expertise consistently over the two areas.As stated last year, big ticket property rates are under significant pressure asthe market is showing insufficient discipline in applying technical knowledge topricing. In 2005 we will be reducing our property line size to ensure that weare not over exposed in a softer market. We intend continuing with our selectiveapproach to risks, shedding business as necessary, motivated by the convictionthat discipline will pay off over time. Group Financial PerformanceIn 2004 the Group achieved an operating profit of £86.3 million (2003: £77.1million). This is a good performance especially as it has been achieved in one of the worst years ever for insured natural catastrophes. The net costof the four hurricanes to Hiscox plc was £70 million. Pre-tax profits were £77.0million (2003: £83.4 million). The lower pre-tax profit reflects the fact thatin 2004 the actual investment return was less than the assumed longer term rateof return. In 2003 it was higher. Hiscox plc had an after-tax return on openingequity of 16.5 per cent (2003: 21.7 per cent). Earnings per share on the basisof profit after tax were 18.7p (2003: 20.9p). Our net asset value beforeequalisation provisions at the year end was 132.8p per share (2003: 119.1p).These results all reflect a credible performance. Hiscox Insurance Company which comprises the UK and European retail businesses,achieved gross written premium of £231.4 million (2003: £218.7 million) and anoperating profit of £19.6 million (2003: £14.5 million). Its combined ratio was92.6 per cent (2003: 93.6 per cent). London MarketThis business consists of our share of the profits of Syndicate 33, fees andprofit commission from third party capital and the return on the capital whichsupports the business. Operating profits of £63.5 million were achieved (2003:£61.5 million). This business performed exceptionally well considering it borethe brunt of the weather-related catastrophes which impacted our business. Thecombined ratio was 92.9 per cent (2003: 85.8 per cent). We do not expect our Lloyd's business to grow in aggregate over the short termand, as announced, we have planned for a capacity of £775 million in 2005 (2004:£846 million). However, Hiscox plc will benefit from the sustained strong ratingenvironment and from its increased ownership of Syndicate 33. During the auctionseason we increased our ownership of Syndicate 33's 2005 capacity to 71 per cent(2004: 65 per cent). In the medium term, we expect our Lloyd's business tobenefit once we have established the US office, as we plan initially to useLloyd's security for this operation. UK RetailOur UK Retail Business achieved an increase in operating profit to £18.8 million(2003: £15.0 million). Gross written premium grew to £175.7 million (2003:£174.6 million), despite the loss of a £20 million book of commodity business.The combined ratio was an excellent 89.8 per cent (2003: 90.3 per cent) betterthan our target of 95-98 per cent. We see continued potential to expand thisbusiness. We have opened a business centre in Colchester and expect to open abranch office there during the course of 2005. Our direct business continues togrow and during the year hit the 10,000 customer mark. It has been particularlysuccessful in building a customer base from partnership relationships with majorfinancial institutions and membership organisations. International RetailThis area includes the business written in our mainland European offices andthrough our insurance company in Guernsey. In aggregate they had a significantlybetter year. Hiscox Guernsey has continued to sustain its excellent performanceachieving an operating profit of £2.8 million (2003: £2.3 million). Thiscontinued performance reflects our leading position in the worldwide kidnap andransom market. Our offices in mainland Europe delivered a much improvedperformance, achieving an operating profit of £1.2 million (2003: £1.7 millionloss) and an improved combined ratio of 102.1 per cent (2003: 107.4 per cent).We are not yet satisfied with this level of performance, but the trend is in theright direction. Our strategy is to build on the footholds we have created inour existing markets and to gain economies of scale. During 2005, we will beseeking to broaden our product range drawing on the lessons that we have learntin the UK. Investment ManagementHiscox plc's invested assets grew by £236 million to £1,062 million during theyear and produced a return of £32 million (2003: £39 million). The increase incashflows from the strong underwriting market meant that there was more moneyinvested but 2004 presented a difficult investment market. This wasparticularly so in US fixed interest where a substantial proportion of ourassets are invested. Interest rates in the US continued at their low level andrather than take on more risk in search of higher yield, we adopted aconservative strategy, investing with a short duration. As a result ourinvestment returns were below our assumed long term rate of return, producing anoverall return for the year of 3.3 per cent. We increased our exposure toequities at the beginning of the year, having sold the majority of the highyield debt portfolio. The strong rally in equities at the end of the yearproduced a return on equities for the year of 10.2 per cent. Through our Hiscox Investment Management subsidiary we now manage the investmentof £1.6 billion against £1.2 billion a year ago. We supervise fund managers,both in the UK and USA, who invest our group assets. Our specialist FinancialFunds, which we manage ourselves, produced positive returns for all four fundsin the year. The US Financial Fund had its tenth anniversary in November, whichover the decade produced a compound return of 14.7 per cent p.a. Balance SheetShareholders funds have grown from £330 million to £372 million. Net assets pershare before equalisation provisions at the end of year were at 132.8p (2003:119.1p). This performance is key to driving shareholder value as this underlyingasset value provides strong support to our share price. Cash and financialassets within our controlled group grew to £1.4 billion (2003: £1.1 billion),demonstrating the overall financial health of the group. We have continued withour stand by Letter of Credit of £137.5 million. We plan to re-finance thisduring the course of 2005. We expect to use our retained earnings over the nextseveral years to decrease our balance sheet leverage, to provide us with thefinancial flexibility to acquire the balance of Syndicate 33 and to fundincremental expansion. International Financial Reporting StandardsIn common with all listed companies within the European Union, the Hiscox plcconsolidated accounts will be prepared in accordance with InternationalFinancial Reporting Standards (IFRS), with effect from the 2005 financial year.2004 results will be restated for IFRS in the summer of 2005 and results for thefirst half of 2005 will be under IFRS. PeopleAn insurance company can be described as no more than a pile of cash and a bunchof good people. Cash is a commodity; it is the good people that distinguishesHiscox from others. These results reflect the hard work and endeavours of the500 people who work within our organisation. We were pleased to again be ratedas one of the Top 100 Companies to Work For, in the annual Sunday Times survey. Insurance can sometimes be a cruel business, with actual results not alwaysreflecting the hard work or the skill of the people in the business. Despite theinevitable disappointments arising from the hurricanes and other large losses,our staff remain positive and driven. We will never be complacent about what wehave achieved and the challenge for all of us is to keep developing the businessand finding new pockets of opportunity despite a softening market. We alsorealise that there will be moments when winning will be saying no to a piece ofbusiness. Turning business away is always difficult, but it is a challenge towhich we will rise. OutlookIn the short-term, we expect our Lloyd's business to reduce as we retain a focuson disciplined and profitable underwriting. Growth will be achieved throughdeveloping our retail businesses where there is strong appetite for ourspecialist products and through increased ownership of the syndicate's capacity. The insurance world is returning to normal. Price increases driven by fear are athing of the past. Prices remain at attractive levels in aggregate, but clearlyas the cycle develops certain areas will be less attractive than others. Hiscoxis well placed to continue to deliver in this environment through the quality ofour products and people and our consistent strategic focus. The Hiscoxmanagement team has been stable and has worked together through more than onecycle. We have not forgotten the lessons of the past, but are not bound by them.We will continue to strive to deliver a continuous growth in the value of thebusiness over the time that lies ahead. Bronek MasojadaChief Executive, Hiscox plc14 March 2005 FINANCIAL STATEMENTS Consolidated Profit and Loss AccountTechnical Account - General Business for the year ended 31 December 2004 2004 2003 Notes £000 £000 Earned premiums, net of reinsurance Gross premiums written 4c 778,893 797,380Outward reinsurance premiums (97,327) (136,414) ---------- ----------Net premiums written 4c 681,566 660,966Change in the gross provision for unearned premiums (19,337) (74,902)Change in the provision for unearned premiums,reinsurers' share (19,800) (38,613) ---------- ----------Change in the net provision for unearned premiums (39,137) (113,515) ---------- ----------Earned premiums, net of reinsurance 4c 642,429 547,451 ---------- ----------Allocated investment income transferred from the 5a,5cnon-technical account 39,799 30,583 Claims incurred, net of reinsurance Claims paid:Gross amount (220,274) (275,227)Reinsurers' share 39,201 90,327 ---------- ----------Net claims paid (181,073) (184,900)Change in the provision for claims:Gross amount (183,540) (61,545)Reinsurers' share 8,761 (41,876) ---------- ----------Change in the net provision for claims (174,779) (103,421) ---------- ----------Claims incurred, net of reinsurance 4c (355,852) (288,321) ---------- ----------Net operating expenses (215,328) (186,039)Other technical income/(charges) 4c 1,650 (1,265)Movement in equalisation provision 4c (1,503) (2,506) ---------- ----------Balance on the technical account - general 111,195 99,903business ---------- ---------- Consolidated Profit and Loss AccountNon-Technical Account for the year ended 31 December 2004 2004 2003 Notes £000 £000Balance on the technical account - general 111,195 99,903businessInvestment return 5a 27,118 32,154Unrealised gains/(losses) on investments 5a 5,968 8,026Investment expenses and charges 5a (1,087) (805) ---------- ---------- 5a, 5c 31,999 39,375Allocated investment return transferred to the 5a, 5ctechnical account (39,799) (30,583) ---------- ----------Short term fluctuations in investment return 5a, 5c (7,800) 8,792Other income 13,267 12,582Other charges (39,628) (37,869) ---------- ----------Profit on ordinary activities before tax 4c 77,034 83,408Comprising:Operating profit based on longer term investment 4c 86,337 77,122returnShort term fluctuations in investment return 5a, 5c (7,800) 8,792Movement in equalisation provision 4c (1,503) (2,506) ---------- ---------- 77,034 83,408Tax on profit on ordinary activities (22,460) (22,917) ---------- ----------Profit on ordinary activities after tax 54,574 60,491 ---------- ----------Dividends - Interim paid (4,419) (3,830)Dividends - Final payable (10,281) (8,414) ---------- ----------Retained profit for the year 10 39,874 48,247 ---------- ----------Earnings per share:- Adjusted basic, based on operating profit aftertax (on longer term investment return) 7 21.0p 19.3p - Basic, based on profit on ordinary activitiesafter tax 7 18.7p 20.9p - Diluted, based on profit on ordinary activitiesafter tax 7 18.5p 20.6p All operations of the Group are continuing. In accordance with the amendment to Financial Reporting Standard ('FRS') 3,"Reporting Financial Performance" in relation to the revaluation of investments,no note of historical cost profits or losses has been prepared as the Group'sonly material gains and losses on assets relate to the holding and disposal ofinvestments. Consolidated Statement of Total Recognised Gains and Lossesfor the year ended 31 December 2004 2004 2003 Notes £000 £000Profit on ordinary activities after tax 54,574 60,491Exchange differences taken to reserves (412) (155) ---------- ----------Total recognised gains and losses for the year 54,162 60,336 ---------- ---------- Consolidated Balance Sheetat 31 December 2004 2004 2003 Notes £000 £000 Assets Intangible assets Goodwill 5,804 6,240Other intangible assets 17,782 15,513 ---------- ---------- 23,586 21,753Investments Land and buildings 2,925 410Other financial investments 8 1,001,225 773,289 ---------- ---------- 1,004,150 773,699Reinsurers' share of technical provisions Provision for unearned premiums 42,526 63,004Claims outstanding 195,730 189,183 ---------- ---------- 238,256 252,187Debtors Debtors arising out of direct insurance operations 258,135 251,026Debtors arising out of reinsurance operations 33,793 53,878Other debtors 9 93,528 71,155 ---------- ---------- 385,456 376,059Other assets Tangible assets 7,738 7,332Cash at bank and in hand 61,332 52,945 ---------- ---------- 69,070 60,277Prepayments and accrued income Accrued interest 5,428 3,079Deferred acquisition costs 114,803 101,817Other prepayments and accrued income 8,201 10,106 ---------- ---------- 128,432 115,002 ---------- ----------Total assets 1,848,950 1,598,977 ---------- ---------- Consolidated Balance Sheetat 31 December 2004 2004 2003 Notes £000 £000Liabilities Capital and reserves Called up share capital 10 14,685 14,565Share premium account 10 234,267 232,341Merger reserve 10 4,723 4,723Capital redemption reserve 10 33,244 33,244Reserve for own shares 10 (473) (686)Profit and loss account 10 85,153 45,650 ---------- ----------Shareholders' funds attributable to equityinterests 10 371,599 329,837 ---------- ----------Technical provisions Provision for unearned premiums 442,314 424,379Claims outstanding 830,681 656,820Equalisation provision 17,941 16,438 ---------- ---------- 1,290,936 1,097,637Provisions for other risks and charges 11 25,261 15,503 Creditors Creditors arising out of direct insuranceoperations 28,399 35,229Creditors arising out of reinsurance operations 60,339 62,491Other creditors including taxation and socialsecurity 12 43,702 28,414 ---------- ---------- 132,440 126,134 Accruals and deferred income 28,714 29,866 ---------- ----------Total liabilities 1,848,950 1,598,977 ---------- ---------- Consolidated Cash Flow Statementfor the year ended 31 December 2004 2004 2003 Notes £000 £000Net cash inflow from general business 74,930 31,300Net shareholders' cash outflow from Lloyd's business 14c - (7,712) ---------- ----------Net cash flow from operating activities 14a 74,930 23,588Servicing of finance 14d (1,384) (2,233)Taxation recovered/(paid) (206) (59)Capital expenditure 14d (8,851) (3,052)Acquisitions and disposals 14d (1,091) (50)Equity dividends paid (12,833) (10,744)Financing 14d 1,779 2,910 ---------- ---------- 52,344 10,360 ---------- ----------Cash flows were invested as follows:Increase/(decrease) in cash holding 14e 393 (25,608)Net portfolio investment:Shares and units in unit trusts 14e (30,490) 44,586Debt securities and other fixed interest 14e 46,070 59,657securitiesDeposits with credit institutions 14e 36,371 (68,275) ---------- ----------Net investment of cash flows 52,344 10,360 ---------- ---------- Notes to the Financial Statements 1. Basis of preparation The financial statements of the Group have been prepared in accordance withapplicable accounting standards as at 31 December 2004 and under historical costaccounting rules, modified by the revaluation of investments. The financial statements have been prepared in accordance with the provisionsset out in Section 255 of, and Schedule 9A to, the Companies Act 1985. The Grouphas adopted all material recommendations of the Statement of RecommendedPractice "Accounting for Insurance Business" issued by the Association ofBritish Insurers in November 2003. Results are determined on an annual basis. 2. Basis of consolidation The consolidated financial statements include the assets, liabilities andresults of the Company and its subsidiary undertakings up to 31 December eachyear. Profits or losses of subsidiary undertakings sold or acquired during theperiod are included in the consolidated results up to the date of disposal orfrom the date of acquisition, where acquisition accounting was adopted.Hiscox Dedicated Corporate Member Limited and the subsidiaries of Hiscox SelectHoldings Limited underwrite as corporate members of Lloyd's on the syndicatemanaged by Hiscox Syndicates Limited (the "managed syndicate"). In view of theseveral liability of underwriting members at Lloyd's for the transactions ofsyndicates in which they participate, the attributable share of thetransactions, assets and liabilities of the syndicate has been included in thefinancial statements. 3. Accounting policies The following principal accounting policies have been applied consistently indealing with items which are considered material in relation to the Group'sfinancial statements. (a) PremiumsFor business written by the managed syndicate, written premiums comprisepremiums on contracts incepting during the financial year. For all otherbusiness, written premiums comprise the premiums on contracts entered intoduring the accounting period, irrespective of whether they relate in whole or inpart to a later accounting period. Written premiums are disclosed gross ofcommission payable to intermediaries and exclude taxes and duties levied onpremiums. Premiums written include estimates for 'pipeline' premiums and adjustments topremiums written in prior accounting periods. Outward reinsurance premiums areaccounted for in the same accounting period as the premiums for the relateddirect insurance or inwards reinsurance business. (b) Unearned premiumsThe provision for unearned premium comprises the proportion of gross premiumswritten which is estimated to be earned in the following or subsequent financialyears, computed separately for each insurance contract using the daily pro-ratamethod. Where the incidence of risk varies during the period covered by thecontract, the provision is calculated taking into account the risk profile ofthe contracts. (c) Acquisition costsAcquisition costs comprise all direct and indirect costs arising from theacquisition of insurance contracts. Deferred acquisition costs represent the proportion of acquisition costsincurred which corresponds to the proportion of gross premiums written which areunearned at the balance sheet date. (d) ClaimsClaims incurred in respect of general business consist of claims and claimshandling expenses paid during the financial year, together with the movement inthe provision for outstanding claims and future claims handling expenses. Outstanding claims comprise provisions for the estimated cost of settling allclaims incurred but unpaid up to the balance sheet date whether reported or not,together with related claims handling expenses. Anticipated reinsurancerecoveries, and estimates of salvage and subrogation recoveries, are disclosedseparately as assets. Whilst the directors consider that the gross provision for claims and therelated reinsurance recoveries are fairly stated on the basis of the informationcurrently available to them, the ultimate liability will vary as a result ofsubsequent information and events and may result in significant adjustments tothe amounts provided. Adjustments to the amounts of claims provisionsestablished in prior years are reflected in the financial statements for theperiod in which the adjustments are made. The provision for outstanding claims for the Group is actuarially calculatedutilising both Chain Ladder and Bornhuetter-Ferguson methods. There is closecommunication between the actuaries and underwriters and allowance is made forthe rating environment. The Chain Ladder method is adopted where sufficient development data isavailable in order to produce estimates of the ultimate claims and premiums byactuarial reserving group and underwriting year or year of account for themanaged syndicate. This methodology produces optimal estimates when a largeclaims development history is available and the claims development patternsthroughout the earliest years are stable. Where losses in the earliest underwriting years or years of account have yet tofully develop, a 'tail' arises on the reserving data i.e. a gap between thecurrent stage of development and the fully developed amount. The Chain Laddermethodology is used to calculate average development factors which, by fittingthese development factors to a curve, allows an estimate to be made of thepotential claims development expected between the current and the fullydeveloped amount, known as a 'tail reserve'. This tail reserve is added to thecurrent reserve position to calculate the total reserve required. The Bornhuetter-Ferguson method is predominantly employed to produce ultimateloss estimates when there is little development data available e.g. in relationto more recent underwriting years or years of account. The Bornhuetter-Fergusonmethod is based on the Chain Ladder approach but utilises estimated ultimateloss ratios. In exceptional cases the required provision is calculated withreference to the actual exposures. Ultimate premium and claims amounts are projected both gross and net ofreinsurance using reinsurance recovery rates based on historical experience,adjusted for the current reinsurance programme. Reinsurance recoveries fromQualifying Quota Share arrangements entered into for the 2002 and 2003 years ofaccount have been calculated separately. Reinsurance security is monitored continuously throughout the year involvingboth external sources, such as Standard & Poor's and A M Best's ratinginformation on reinsurers and internal sources. Reinsurer default rates areapplied to the expected future reinsurance recoveries to determine a suitablelevel of bad debt provision. Adjustments are made within the reserving methodology to allow for expectedsignificant movements to the figures not actually processed by 31 December 2004and also to remove distortions in the historical claims development patternsfrom large claims not expected to reoccur in the future. The reserves determined for the managed syndicate are converted to annuallyaccounted figures using earning patterns that are consistent with those for theunderlying syndicate business. (e) Unexpired riskProvision is made for unexpired risks arising from general business where theexpected value of the claims and expenses attributable to the unexpired periodsof policies in force at the balance sheet date exceeds the unearned premiumsprovision in relation to such policies after the deduction of any acquisitioncosts deferred. The provision for unexpired risks is calculated separately byclasses of business which are managed together, after taking into accountrelevant investment return. (f) Equalisation provisionAn equalisation provision has been established and calculated in accordance withthe requirements within PRU 7.5 of the Integrated Prudential Sourcebook(Insurers and other amendments) Instrument 2004 to mitigate exceptionally highloss ratios for classes of business displaying a high degree of claimsvolatility. (g)InvestmentsInvestments are stated at their current value. Listed investments comprise thosequoted on the London and other International Stock Exchanges. These investmentsare stated at mid-market prices on the balance sheet date, or on the last stockexchange trading day before the balance sheet date. (h) Investment returnAll investment return is recognised in the non-technical account. Dividends onordinary shares are recognised as income on the date the ordinary shares aremarked ex-dividend. Other investment income and interest receivable are includedin income on an accruals basis. Realised gains or losses on investments represent the difference between netsales proceeds and their purchase price or their valuation at the commencementof the year. Unrealised gains and losses on investments represent the difference between thecurrent value of investments at the balance sheet date and their purchase priceor their valuation at the commencement of the year. The movement in unrealisedinvestment gains / losses includes an adjustment for previously recognisedunrealised gains / losses on investments disposed of in the accounting period. (i) Allocation of investment returnAn allocation is made from the non-technical account to the general businesstechnical account based on the longer term investment return on investmentssupporting the general insurance technical provisions and all the relevantshareholders' funds. The longer term investment return is an estimate of thelong term trend investment return for Hiscox plc and its subsidiaries, togetherwith the Hiscox managed syndicate, having regard to past performance, currenttrends and future expectations. (j) DepreciationDepreciation is provided to write off the cost less the estimated residual valueof tangible assets on a straight-line basis over their estimated useful economiclives or length of lease, if less, as follows: Freehold property 50 yearsShort leasehold, fixtures and fittings 10 - 15 yearsComputer hardware and software 3 - 5 yearsMotor vehicles 3 yearsAll other tangible fixed assets 4 years (k)GoodwillGoodwill arising on acquisition of subsidiaries has been written off directly toreserves in the year of acquisition up to 31 December 1997. From 1 January 1998in accordance with FRS 10 "Goodwill and intangible assets", goodwill arising onacquisitions, being the difference between the fair value of the purchaseconsideration and the fair value of net assets acquired, is capitalised in thebalance sheet and amortised on a straight-line basis over its useful economiclife which is considered to not exceed 20 years. Provision is made for anyimpairment. On disposal or termination of a business acquired up to 31 December 1997, anyrelated goodwill previously written off directly to reserves is written backthrough the profit and loss account as part of the profit or loss on disposal.On the disposal or termination of a business since 1 January 1998, the profit orloss on disposal or termination is calculated after charging the unamortisedamount of any related goodwill. (l) Other intangible assetsOther intangible assets are the cost of purchasing the Group's participation inLloyd's insurance syndicates. In accordance with FRS 10, this capacity iscapitalised at cost in the balance sheet and amortised over its useful economiclife which the directors consider to not exceed 20 years. Provision is made forany impairment. (m) Rates of exchangeAssets, liabilities, revenues and costs denominated in foreign currencies arerecorded at the rates of exchange ruling at the dates of the transactions. Atthe balance sheet date, monetary assets and liabilities are translated at theyear end rates of exchange. Any exchange profits or losses arising on thetranslation of foreign currency amounts relating to underwriting are takendirectly to the technical account. Other exchange profits or losses are takendirectly to the non-technical account. Investments in foreign enterprises are translated using the net investmentmethod. All exchange profits or losses arising on the translation of theseinvestments are taken to reserves. (n)Pension costsPension contributions in respect of defined benefit schemes are charged to theprofit and loss account so as to spread the cost of pensions over employees'working lives with the Group. Differences between the amounts charged to theprofit and loss account and payments made to the pension schemes are treated asassets or liabilities in the balance sheet. Pension contributions for defined contribution schemes are charged to the profitand loss account on an accruals basis. The Group has adopted the transitional disclosure requirements of FRS17"Retirement Benefits". This has had no impact on the current year's results. (o) LeasesWhere the Group enters into a lease which entails taking substantially all therisks and rewards of ownership of an asset, the lease is treated as a 'financelease'. The asset is recorded in the balance sheet as a tangible fixed asset andis depreciated over its estimated useful life or the term of the lease,whichever is shorter. Future instalments under such leases, net of financecharges, are included within creditors. Rentals payable are apportioned betweenRelated Shares:
Hiscox