26th Jul 2005 07:01
Hiscox PLC26 July 2005 HISCOX PLC ANNOUNCEMENT IFRS Restated Consolidated Financial Information for the year ended 31 December 2004 Hiscox plc is today publishing its audited restated consolidated financialinformation for the year ended 31 December 2004 under International FinancialReporting Standards (IFRS). This announcement sets out the key changes to theprofit and loss account and the balance sheet under IFRS. The restated consolidated financial information for 2004 is attached. Overview UK GAAP IFRS Change Change £000 £000 £000Year ended 31 December 2004Gross premium revenue 759,556 847,524 87,968 12%Net premium revenue 642,429 714,852 72,423 11%Results of operating activities before tax 78,621 91,109 12,488 16%Profit before tax 77,034 89,522 12,488 16%Profit for the year 54,574 63,948 9,374 17%Basic earnings per share 18.7p 21.9p 3.2p 17% Shareholders' equity at 31 December 2004 371,599 368,826 -2,773 -0.7%Net asset value per share 126.7p 125.7p -1.0p -0.8%Return on equity* 17.6% 20.6% 3.0% 17%*Based on opening shareholder funds adjusted for subsequent capital flows. The main adjustments are:• Goodwill is no longer amortised.• Syndicate capacity is recognised at cost and no longer amortised.• Investments continue to be marked to market through the profit and loss account.• Foreign exchange uses daily transactional rates; non-monetary items e.g. unearned premium and deferred acquisitions costs are not retranslated at period end.• Equalisation provision is included within shareholders' equity.• The retirement benefit obligation is included within net assets, net of sums due from third parties.• Employee benefits, including share based payments, are charged through the profit and loss account. - ends - For further information: Hiscox plcBronek Masojada Chief Executive 020 7448 6012Stuart Bridges Finance Director 020 7448 6013Fiona Fong Director of Communications 020 7448 6447 The Maitland ConsultancySuzanne Bartch 020 7399 5151 About Hiscox Hiscox plc is a specialist insurance group listed on the London Stock Exchangewhere it has a market capitalization of circa £500 million. There are three mainunderwriting parts of the Group - Global Markets, UK and International Retail.The Global Markets business underwrites, via Syndicate 33, mainlyinternationally traded business in the London Market - generally large orcomplex business which needs to be shared with other insurers or needs theinternational licences of Lloyd's. The UK business offers a wide range ofspecialist insurance for professionals and business customers, as well as highnet worth individuals. It has regional offices in Birmingham, Glasgow, Leeds,Maidenhead and Colchester. The European business has offices in Paris,Amsterdam, Munich, Brussels and Guernsey and writes mainly high value householdbusiness and some specialist professional indemnity business. Guernseyunderwrites kidnap and ransom business and fine art. For further information, goto www.hiscox.com HISCOX PLC - RESTATED CONSOLIDATED FINANCIAL INFORMATIONFOR THE YEAR ENDED 31 DECEMBER 2004UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS HIGHLIGHTS IntroductionAll European Union listed companies, including Hiscox plc, are required to adoptInternational Financial Reporting Standards ('IFRS') for accounting periodsbeginning on or after 1 January 2005. In January 2004 the Committee of European Securities Regulators published arecommendation 'Preparing for the Implementation of International FinancialReporting Standards'. The recommendation sets out a series of best-practicesteps for providing information to the market on the effect of the transition toIFRS. In accordance with the recommendations Hiscox plc has chosen to publishthe restated consolidated financial information for the year ended 31 December2004, including the restated preliminary IFRS opening balance sheet at 1 January2004, thus removing some of the uncertainty around the adoption of IFRS. The Board acknowledges its responsibility for the preparation of the restatedconsolidated financial information which has been prepared in accordance withIFRS adopted for use by the EU and policies expected to be adopted when theBoard prepares the Group's first set of IFRS financial statements for the yearended 31 December 2005. The Board approved the restated consolidated financialinformation at its meeting on 25 July 2005. The restated consolidated financial information has been prepared in accordancewith IFRS issued by the International Accounting Standards Board (IASB) andcurrently endorsed by the European Commission effective for 2005 year ends ('theStandards'). The Standards themselves are evolving and are subject to possibleamendment by interpretative guidance from the IASB, emerging practice or otherexternal bodies. Accordingly, the interpretation of the Standards to be appliedmay be subject to change prior to the publication of the Group's first IFRSresults in March 2006. In addition, the IASB has divided the development of a standard for accountingfor insurance contracts into two phases. Phase I of the standard, whichculminated in the publication of IFRS 4 "Insurance Contracts" in March 2004,allows insurers to continue to apply most of the existing accounting policiesfor insurance contracts. Phase II of the project addresses recognition and measurement of insurancecontracts. The IASB's original project plan stated that it would aim to completean exposure draft by June 2005. However, in February 2005 a revised project planwas issued stating that the initial output of the project would be a discussionpaper focussing on the key issues that determine the direction of the project.This discussion paper was not expected before the end of 2005 and could quitepossibly be much later. An exposure draft developed from this would be at least18 months later and a standard would take at least another 12 months.Accordingly it is unlikely that there will be any change to the accounting forinsurance contracts until 2009 at the earliest. A summary of the significant IFRS accounting policies adopted by Hiscox plc inpreparing the restated consolidated financial information is included on page 14. The restated consolidated financial information has been audited by KPMG Auditplc. A copy of their opinion can be found on page 21. The restated consolidated financial information for the year ended 31 December2004, opening balance sheet at 1 January 2004 and the financial informationcontained in this document do not constitute statutory accounts of the Groupwithin the meaning of Section 240 of the Companies Act 1985. The statutoryaccounts for the year ended 31 December 2004, which were prepared under UK GAAP,have been reported on by the Company's auditors and delivered to the registrarof companies. The report of the auditors was unqualified and did not containstatements under section 237(2) or (3) of the Companies Act 1985. Overview IFRS UK GAAP £000 £000Year ended 31 December 2004Gross premium revenue 847,524 759,556Net premium revenue 714,852 642,429Results of operating activities before tax 91,109 78,621Profit before tax 89,522 77,034Profit for the year 63,948 54,574Basic earnings per share 21.9p 18.7pReturn on equity 20.6% 17.6%Shareholders equity at 31 December 2004 368,826 371,599Net asset value per share 125.7p 126.7p Summary Consolidated Balance Sheet 31 December 1 January 2004 2004 £000 £000AssetsProperty, plant and equipment 10,691 7,750Intangible assets including intangible insuranceassets 139,959 125,957Investment in affiliated and associated enterprises 1,109 519Financial assets 1,308,213 1,067,150Reinsurance contract receivables 238,871 253,691Current income tax asset - 2,739Cash and cash equivalents 119,563 102,712 ---------- --------Total assets 1,818,406 1,560,518 ---------- --------Equity and LiabilitiesShareholders' equityShare capital 14,685 14,565Share premium 234,267 232,341Translation reserve (468) -Other reserves 37,967 37,967Reserve for own shares (473) (686)Retained earnings 82,848 30,498 ---------- --------Total equity 368,826 314,685 ---------- -------- Insurance contracts 1,246,903 1,060,662Interest bearing loans and borrowings 57 477Trade and other payables 145,530 149,715Deferred income tax 14,517 1,645Employee benefit obligations 34,718 33,334Current income tax liabilities 7,855 - ---------- --------Total liabilities 1,449,580 1,245,833 ---------- --------Total equity and liabilities 1,818,406 1,560,518 ---------- -------- Summary Consolidated Income Statement 2004 £000Income Insurance premium revenue 847,524Insurance premium ceded to reinsurers (132,672) ----------Net premium revenue 714,852Investment return 34,432Other revenues 15,112 ----------Net income 764,396 ----------ExpensesClaims and claim adjustment expenses 382,619Expenses for the acquisition of insurance contracts 169,678Expenses for marketing, administration and asset management services rendered 47,692 Other operating costs and expenses 73,298 ----------Total expenses 673,287 ----------Results of operating activities 91,109Finance costs (1,977)Share of profit / (loss) of associates 390 ----------Profit before tax 89,522Income tax expense (25,574) ----------Profit for the year 63,948 ----------Earnings per share for profit attributable to the equity holders ofthe Company during the yearBasic 21.9pDiluted 21.7p ---------- Summary Consolidated Statement of Changes in Equity Reserves Share Share Translation Other For Own Retained Capital Premium Reserve Reserves Shares Earnings Total £000 £000 £000 £000 £000 £000 £000 Balance at 1January 2004under UK GAAP 14,565 232,341 - 37,967 (686) 45,650 329,837 Changes inaccountingpolicy - - - - - (15,152) (15,152) -------- -------- -------- -------- -------- -------- --------Restatedbalance at 1January 2004 14,565 232,341 - 37,967 (686) 30,498 314,685 Currencytranslationdifferences - - (468) - - - (468) -------- -------- -------- -------- -------- -------- --------Net income(expenses)recogniseddirectlyinequity - - (468) - - - (468) Profit forthe year - - - - - 63,948 63,948 -------- -------- -------- -------- -------- -------- --------Totalrecognisedincome for2004 - - (468) - - 63,948 63,480 Employeeshare options:Proceeds fromshares issued 120 1,926 - - - - 2,046 Equitysettledshare-based payments - - - - - 1,194 1,194 Change inown shares - - - - 213 41 254 Dividends toshareholders - - - - - (12,833) (12,833) -------- -------- -------- -------- -------- -------- --------Balance at31 December 2004 14,685 234,267 (468) 37,967 (473) 82,848 368,826 -------- -------- -------- -------- -------- -------- -------- Summary Consolidated Cash Flow Statement 2004 £000Profit for the year, including minority interests in earningsCash generated from operations 266,671Interest paid (1,409)Income tax paid (206) -----------Net cash flows from operating activities 265,056Cash flows from the acquisition and sale of consolidated enterprises (1,091)Cash flows from the sale / (purchase) of property, plant andequipment (5,565)Cash flows from the sale / (purchase) of intangible assets (3,406)Cash flows from the acquisition, sale and maturities of otherinvestments (226,533)Loans repaid by / (granted to) related parties 320 -----------Net cash used in investing activities (236,275)Issue of ordinary shares 2,046Sale / (purchase) of treasury shares 254Dividends paid to Company's shareholders (12,833)Proceeds from borrowings -Repayments of borrowings (521) -----------Net cash used in financing activities (11,054) -----------Net increase in cash and cash equivalents 17,727 -----------Cash and cash equivalents at 1 January 102,712Net increase in cash and cash equivalents 17,727Effect of exchange rate fluctuations on cash and cash equivalents (876) -----------Cash and cash equivalents at 31 December 119,563 ----------- Included in cash and cash equivalents held by the Group are balances totalling£35,835,000 (2004 : £27,841,000) not available for use by the Group which areheld within the Lloyd's Syndicate. Explanation of Transition to IFRS In preparing the restated consolidated financial information, the Group hasadjusted amounts reported previously in financial statements prepared inaccordance with its old basis of accounting (UK GAAP). An explanation of how thetransition from previous GAAP to IFRS has affected the Group's financialposition, financial performance and cash flows is set out in the followingtables and the notes that accompany the tables. Analysis of adjustments to the balance sheet as a result of the transition toIFRS 31 December 2004 Effect of UK transition Notes GAAP to IFRS IFRS £'000 £'000 £'000AssetsProperty, plant and equipment 10,663 28 10,691Intangible assets includingintangibleinsurance assets 1, 7 138,390 1,569 139,959Investments in associates 1,109 - 1,109Financial assets 2 1,399,200 (90,987) 1,308,213Reinsurance contracts 7 238,256 615 238,871Current income tax assets - - -Cash and cash equivalents 2 61,332 58,231 119,563 -------- --------- ----------Total assets 1,848,950 (30,544) 1,818,406 -------- --------- ----------EquityShare capital 14,685 - 14,685Share premium 234,267 - 234,267Translation reserve - (468) (468)Other reserves 37,967 - 37,967Reserves for own shares (473) - (473)Retained earnings 85,153 (2,305) 82,848 -------- --------- ----------Total equity 371,599 (2,773) 368,826 -------- --------- ----------LiabilitiesInsurance contracts 4, 7 1,290,936 (44,033) 1,246,903Financial liabilities 57 - 57Trade and other payables 5, 6 153,242 (7,712) 145,530Deferred income tax liabilities 3 25,261 (10,744) 14,517Retirement benefit obligations 6 - 34,718 34,718Current income tax liabilities 7,855 - 7,855 -------- --------- ----------Total liabilities 1,477,351 (27,771) 1,449,580 -------- --------- ---------- -------- --------- ----------Total equity and liabilities 1,848,950 (30,544) 1,818,406 -------- --------- ---------- 1 January 2004 Effect of UK transition Notes GAAP to IFRS IFRS £'000 £'000 £'000AssetsProperty, plant and equipment 7,742 8 7,750Intangible assets includingintangibleinsurance assets 1, 7 123,570 2,387 125,957Investments in associates 519 - 519Financial assets 2 1,159,275 (92,125) 1,067,150Reinsurance contracts 7 252,187 1,504 253,691Current income tax assets 2,739 - 2,739Cash and cash equivalents 2 52,945 49,767 102,712 -------- --------- ----------Total assets 1,598,977 (38,459) 1,560,518 -------- --------- ----------EquityShare capital 14,565 - 14,565Share premium 232,341 - 232,341Translation reserve - - -Other reserves 37,967 - 37,967Reserves for own shares (686) - (686)Retained earnings 45,650 (15,152) 30,498 -------- --------- ----------Total equity 329,837 (15,152) 314,685 -------- --------- ----------LiabilitiesInsurance contracts 4, 7 1,097,637 (36,975) 1,060,662Financial liabilities 477 - 477Trade and other payables 5, 6 155,523 (5,808) 149,715Deferred income tax liabilities 3 15,503 (13,858) 1,645Retirement benefit obligations 6 - 33,334 33,334Current income tax liabilities - - - -------- --------- ----------Total liabilities 1,269,140 (23,307) 1,245,833 -------- --------- ---------- -------- --------- ----------Total equity and liabilities 1,598,977 (38,459) 1,560,518 -------- --------- ---------- Analysis of adjustments to equity as a result of the transition to IFRS Total Intangible Financial Income Insurance Equity Assets Assets Tax Contracts UK GAAP (Note 1) (Note 2) (Note 3) (Note 4) £000 £000 £000 £000 £000Balance at 1 January2004 329,837 - - - -Changes in accountingpolicy - 4,830 (184) 1,182 11,507 -------- -------- -------- ------- --------Restated balance at 1January 2004 329,837 4,830 (184) 1,182 11,507Currency translationdifferences (412) - - - - -------- -------- -------- ------- --------Net income (expenses)recogniseddirectly in equity (412) - - - -Profit for the year 54,574 1,453 987 554 1,052 -------- -------- -------- ------- --------Total recognisedincome for 2004 54,162 1,453 987 554 1,052Employee share options:Proceeds from sharesissued 2,046 - - - -Equity settled - - - - -share-based paymentsChange in own shares 254 - - - -Dividends toshareholders (14,700) - - - - -------- -------- -------- ------- --------Balance at 31 December2004 371,599 6,283 803 1,736 12,559 -------- -------- -------- ------- -------- Dividend Employee Rates of Total Recognition Benefits Exchange Other Equity (Note 5) (Note 6) (Note 7) Adjustments IFRS £000 £000 £000 £000 £000Balance at 1 January2004 - - - - 329,837 Changes inaccounting policy 8,414 (28,691) (12,375) 165 (15,152) -------- -------- -------- -------- --------Restated balance at1 January 2004 8,414 (28,691) (12,375) 165 314,685Currency translationdifferences - - (56) - (468) -------- -------- -------- -------- --------Net income(expenses) recogniseddirectly in equity - - (56) - (468)Profit for the year - 1,768 3,046 514 63,948 -------- -------- -------- -------- --------Total recognisedincome for 2004 - 1,768 2,990 514 63,480Employee share options:Proceeds from sharesissued - - - - 2,046Equity settledshare-based payments - 1,194 - - 1,194Change in own shares - - - - 254Dividends toshareholders 1,867 - - - (12,833) -------- -------- -------- -------- --------Balance at 31December 2004 10,281 (25,729) (9,385) 679 368,826 -------- -------- -------- -------- -------- Analysis of adjustments to the income statement as a result of the transition toIFRS Intangible Financial Income Insurance Assets Assets Tax Contracts UK GAAP (Note 1) (Note 2) (Note 3) (Note 4) £000 £000 £000 £000 £000IncomeInsurance premiumrevenue 759,556 - - - -Insurance premium cededto reinsurers (117,127) - - - - -------- -------- -------- ------- -------Net premium revenue 642,429 - - - -Investment result 31,999 - 1,410 - -Other revenues 14,527 - - - - -------- -------- -------- ------- -------Net income 688,955 - 1,410 - - -------- -------- -------- ------- -------ExpensesClaims and claimadjustment expenses (355,852) - - - -Other costs and expenses (254,482) 1,453 - - 1,503 -------- -------- -------- ------- -------Total expenses (610,334) 1,453 - - 1,503 -------- -------- -------- ------- -------Results of operatingactivities 78,621 1,453 1,410 - 1,503Finance costs (1,977) - - - -Share of profit / (loss)of associates 390 - - - - -------- -------- -------- ------- -------Profit before tax 77,034 1,453 1,410 - 1,503Income tax expense (22,460) - (423) 554 (451) -------- -------- -------- ------- -------Profit for the year 54,574 1,453 987 554 1,052 -------- -------- -------- ------- -------Earnings per shareBasic 18.7p 0.5p 0.3p 0.2p 0.4pDiluted 18.5p 0.5p 0.3p 0.2p 0.4pReturn on equity (%)(Note 8) 17.6 0.5 0.3 0.2 0.3 Dividend Employee Rates of Total Recognition Benefits Exchange Other Equity (Note 5) (Note 6) (Note 7) Adjustments IFRS £000 £000 £000 £000 £000IncomeInsurance premiumrevenue - - 89,368 (1,400) 847,524Insurance premiumceded toreinsurers - - (16,102) 557 (132,672) -------- -------- -------- -------- --------Net premium revenue - - 73,266 (843) 714,852Investment result - - 1,023 - 34,432Other revenues - (852) 1,437 15,112 -------- -------- -------- -------- --------Net income - - 73,437 594 764,396 -------- -------- -------- -------- --------ExpensesClaims and claimadjustment expenses - - (24,214) (2,553) (382,619)Other costs and expenses - 3,038 (44,873) 2,693 (290,668) -------- -------- -------- -------- --------Total expenses - 3,038 (69,087) 140 (673,287) -------- -------- -------- -------- --------Results ofoperating activities - 3,038 4,350 734 91,109Finance costs - - - - (1,977)Share of profit /(loss) - - - - 390of associates -------- -------- -------- -------- --------Profit before tax - 3,038 4,350 734 89,522Income tax expense - (1,270) (1,304) (220) (25,574) -------- -------- -------- -------- --------Profit for the year - 1,768 3,046 514 63,948 -------- -------- -------- -------- --------Earnings per shareBasic 0.0p 0.6p 1.0p 0.2p 21.9pDiluted 0.0p 0.6p 1.0p 0.2p 21.7pReturn on equity (%) 0.0 0.6 1.0 0.1 20.6(Note 8) The principal changes which have a material impact on either net assets orprofit for the year are explained further below: 1.Intangible assets GoodwillGoodwill acquired in a business combination is no longer amortised but is testedfor impairment on at least an annual basis. Up to 31 December 1997, under UKGAAP goodwill arising on the acquisition of subsidiaries was written offdirectly to reserves in the year of acquisition. From 1 January 1998, inaccordance with FRS 10 Goodwill and intangible assets, goodwill was capitalisedand amortised on a straight-line basis over its useful economic life which wasdeemed to be 20 years. Any goodwill previously amortised or written-off has notbeen reinstated on adoption of IFRS and thus the value of goodwill has beentaken as the carrying amount on adoption. Syndicate capacityIn accordance with IAS 38 Intangible Assets, the useful lives of all of theGroup's recognised intangible assets have been reviewed on adoption of IFRS.Following this review it has been concluded that syndicate capacity has anindefinite useful life and so will no longer be amortised but will be subject toan at least annual impairment test. Syndicate capacity previously amortised hasbeen reinstated on adoption of IFRS. 2.Financial assets ValuationIn the Group's UK GAAP financial statements, financial assets are stated attheir current value. For listed investments, comprising those quoted on theLondon and other international stock exchanges, current value was deemed to bethe mid-market prices on the balance sheet date, or on the last stock exchangetrading day before the balance sheet date. All realised or unrealised gains andlosses were taken to the income statement. For the purposes of measuring financial assets under IAS 39 FinancialInstruments : Recognition and Measurement all financial assets are classifiedinto the following four categories : (a) Financial assets at fair value through income;(b) Held-to-maturity investments;(c) Loans and receivables; and(d) Available-for-sale financial assets. A full review of the Group's investments has been performed as part of theadoption of IFRS and all equities and debt securities have been classified asfinancial assets at fair value through the income statement. The accounting forthis category of financial asset is similar to the Group's previous accountingpolicy under UK GAAP. However, under IFRS listed investments are valued at bidprice on the balance sheet date, or on the last stock exchange trading daybefore the balance sheet date. Derivative financial instrumentsThe Group has entered into a number of foreign exchange contracts in order tomanage its exposure to business denominated in a currency other than itspresentational currency. In accordance with IAS 39 these contracts have beenrecognised in the balance sheet at their fair value. Cash and cash equivalentsIn the Group's UK GAAP financial statements deposits with credit institutionswere included within investments. These deposits were predominantly composed ofshort dated certificates of deposit. Under IFRS cash equivalents are includedwith cash at bank and in hand as cash and cash equivalents. IAS 7 Cash FlowStatements defines cash equivalents as short-term, highly liquid investmentsthat are readily convertible to known amounts of cash and which are subject toan insignificant risk of changes in value. An investment normally qualifies as acash equivalent only when it has a short maturity of three months or less fromthe date of acquisition. All certificates of deposit which meet this criteriahave been disclosed as cash equivalents in the IFRS balance sheet. Thisadjustment has no impact on shareholders' funds or profit after tax. 3.Income taxCurrent income tax was provided in the UK GAAP financial statements for amountsexpected to be paid (or recovered) using the tax rates and laws that had beenenacted or substantially enacted at the balance sheet date. Deferred income tax was recognised in respect of all timing differences, withcertain exceptions, that had originated but not reversed at the balance sheetdate where transactions or events that result in an obligation to pay more taxor 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 itsresults as stated in the UK GAAP financial statements that arise from theinclusion of gains and losses in tax assessments in periods different from thosein which they are recognised in the financial statements. Deferred income taxwas measured at the average tax rates that are expected to apply in periods inwhich the timing differences are expected to reverse. The Group did not discountits UK GAAP deferred tax assets or liabilities. IAS 12 Income Taxes takes a balance sheet approach with deferred income taxbeing calculated, using the liability method, on temporary differences arisingbetween the tax bases of assets and liabilities and their carrying amounts inthe consolidated financial statements. Deferred income tax is determined usingtax rates and laws that have been enacted or substantively enacted by thebalance sheet date and are expected to apply in periods in which the timingdifferences are expected to reverse. IAS 12 explicitly states that deferred taxassets and liabilities shall not be discounted. 4.Insurance contracts Equalisation provisionIn the UK GAAP financial statements an equalisation provision was establishedfor Hiscox Insurance Company Limited in accordance with the requirements of PRU7.5 of the Integrated Prudential Sourcebook (Insurance and other amendments)Instrument 2004. This provision, which was in addition to the provisionsrequired to meet the anticipated ultimate cost of settlement of outstandingclaims at the balance sheet date, was required by Schedule 9A to the CompaniesAct 1985 to be included within technical provisions at the balance sheet datenotwithstanding that it does not represent liabilities at the balance sheetdate. Under IFRS 4, provisions for possible future claims arising from insurancecontracts that are not in existence at the reporting date (such as catastropheand equalisation provisions) are not recognised. 5.Dividend recognitionUnder UK GAAP dividends are recognised in the income statement in the period towhich they relate irrespective of when they are declared and approved. IAS 10Events after the Balance Sheet Date does not allow the recognition of dividendsto holders of equity instruments after the balance sheet date because they donot meet the criteria of a present obligation in IAS 37 Provisions, ContingentLiabilities and Contingent Assets. Accordingly only dividends declared (i.e.appropriately authorised and no longer at the discretion of the Group) arerecognised in the income statement. 6.Employee benefits Retirement benefit obligationsUnder IAS 19 Employee Benefits the present value of the defined benefitobligation is matched against the fair value of the plan assets out of which theobligations are to be settled directly and other unrecognised actuarial gainsand losses. The resulting pension scheme asset or liability is recognised in thebalance sheet. Previously under UK GAAP the assets and liabilities of definedbenefit pension schemes were off-balance sheet items which were only disclosedby way of a footnote. Under SSAP 24 Accounting for Pension Costs, pensioncontributions were charged to the income statement so as to spread the cost ofpensions over employees' working lives with the Group. Differences between theseamounts charged and payments made to the Group's pension schemes were treated asan asset or liability in the UK GAAP balance sheet. The standard also allows the recognition of a right to reimbursement from otherparties of some of the expenditure required to settle the defined benefitobligation. Accordingly the Group has recognised in the restated consolidatedfinancial information income and a corresponding asset of £7,345,000representing the share of the defined benefit obligation paid or payable bythird party capital providers on Syndicate 33. Share-based paymentsIFRS 2 Share-based Payment requires the recognition of an expense representingthe fair value of employee services rendered in exchange for the grant ofoptions. The amount to be expensed has been determined by reference to the fairvalue of the options granted. The impact of any non-market vesting conditions isnot included in the calculation of the fair value but is included in theassumptions 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 allof the Group's share option schemes. In accordance with the transitional arrangements contained in the standard, onlyshare options granted after 7 November 2002 but not yet vested at 1 January 2005were included in the calculations. Sabbatical leaveAfter ten years of service, all permanent employees of the Group are eligible totake an eight week paid sabbatical leave. The present value of the cost of thiscompensated absence is expensed in the income statement over the period ofservice in accordance with IAS 19. 7.Rates of exchange Functional currencyThe functional currency is the currency of the primary economic environment inwhich an entity operates. The functional currency of all entities in the Grouphas been deemed to be Sterling with the exception of the entities operating inFrance, Germany, Holland and Benelux whose functional currency is Euros andHiscox Insurance Company (Guernsey) Limited whose functional currency is USDollars. IAS 21 The Effects of Changes in Foreign Exchange Rates requires that foreigncurrency transactions are recorded, on initial recognition in the functionalcurrency, by applying to the foreign currency amount the spot exchange ratebetween the functional currency and the foreign currency at the date of thetransaction. Exchange differences arising on the settlement of monetary items oron translating monetary items at rates different from those at which they weretranslated on initial recognition in the functional currency during the periodor in previous financial statements are recognised in the income statement whenthey arise. Under IFRS unearned premium and deferred acquisition costs are non monetaryassets and liabilities and accordingly are not retranslated from the historicrates. Presentational currencyThe presentational currency of the Group, which is the currency used in thepresentation of the consolidated financial statements, is Sterling. The resultsand financial position of those entities whose functional currency is notSterling 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 translatedusing the net investment method which applies the closing rate to all assets andliabilities and income and expenses. All resulting exchange differences weresimilarly taken to reserves. Daily transactional ratesAs part of the system improvements made on adoption of IFRS the Group has movedto daily transactional rates of exchange as it believes that this provides moreaccurate financial information. The only exception to this is for business whosefunctional currency is not denominated in pounds Sterling for which averagemonthly rates continue to be adopted for the translation into the presentationalcurrency. DisclosureAll exchange differences arising on the retranslation of monetary assets andliabilities to functional currency at the balance sheet date have been taken tothe income statement and included in other operating costs and expenses. UnderUK GAAP these differences were included on a line by line basis throughout theincome statement 8.Return on equityReturn on equity is calculated as the profit on ordinary activities after taxdivided by opening shareholders' funds adjusted for the time weighted impact ofadditional capital raised or repurchased and distributions of capital toshareholders including dividends. Significant Accounting Policies The significant accounting policies applied in the preparation of the restatedconsolidation financial information are set out below. Hiscox plc (the parent company, referred to as the "Company") and itssubsidiaries (collectively, the Hiscox Group or the "Group") provide insurance,reinsurance and investment management to its clients and others worldwide. Ithas operations in the UK, US and mainland Europe and employs over 500 people. The Company is a limited liability company incorporated and domiciled in theUnited Kingdom and has a primary listing on the London Stock Exchange. 1.Statement of complianceThe purpose of the restated consolidated financial information is to establishthe financial position, results of operations and cash flows of the Groupnecessary to provide comparative information expected to be included in theGroup's first complete set of IFRS financial statements for the year ended 31December 2005. The restated consolidated financial information does not itselfinclude comparative financial information for the prior period. The restated consolidated financial information has been prepared in accordancewith the standards issued by the International Accounting Standards Board (IASB)and currently endorsed by the European Commission. The Standards themselves areevolving and are subject to possible amendment by interpretative guidance fromthe IASB, emerging practice or other external bodies. Accordingly, the Standardsto be applied may be subject to change prior to the publication of the Group'sfirst IFRS results in March 2006. Since 2002, the standards adopted by the IASB have been referred to as'International Financial Reporting Standards' (IFRS). The standards from prioryears continue to bear the title 'International Accounting Standards' (IAS).Insofar as a particular standard is not explicitly referred to, the two termsare used in this financial information synonymously. In March 2004, the IASB issued IFRS 4 Insurance Contracts which specifies thefinancial reporting for insurance contracts by an insurer. The standard is onlythe first phase in the IASB's insurance contract project and as such is only astepping stone to phase II introducing limited improvements to accounting forinsurance contracts. Accordingly, to the extent that IFRS 4 or other IFRS do notspecify the recognition or measurement of insurance contracts, transactionsreported in the restated consolidated financial information have been accountedfor in accordance with the Companies Act 1985 and the Statement of RecommendedPractice issued by the Association of British Insurers in November 2003. 2.Basis of preparationThe restated consolidated financial information are presented in poundsSterling, rounded to the nearest thousand. They are prepared on the historicalcost basis as modified by the revaluation of land and buildings and financialassets and financial liabilities (including derivative financial assets) at fairvalue through the income statement. The Company has taken advantage of the following exemptions set out in IFRS 1First-time Adoption of International Financial Reporting Standards: • IFRS 3 Business Combinations has not been applied retrospectively to business combinations that occurred before 1 January 2004. Accumulated amortisation on goodwill arising before 1 January 2004 has not, therefore, been reversed;• All cumulative actuarial gains and losses arising on employee benefit schemes to 1 January 2004 have been recognised in equity at 1 January 2004;• Cumulative translation differences for all foreign operations are deemed to be zero at 1 January 2004; and• The provisions of IFRS 2 Share-based payments to equity settled awards granted on or before 7 November 2002, or to awards granted after that date but vesting prior to 1 January 2005. The Company has not taken advantage of the exemptions within IFRS 1 that allowcomparative information presented in the first year of adoption of IFRS not tocomply with IAS 32 Financial Instruments: Disclosure and Presentation, IAS 39Financial Instruments: Recognition and Measurement and IFRS 4 InsuranceContracts. The preparation of financial statements in conformity with IFRS requiresmanagement to make judgements, estimates and assumptions that affect theapplication of policies and reported amounts of assets and liabilities, incomeand expenses. The estimates and associated assumptions are based on historicalexperience and various other factors that are believed to be reasonable underthe circumstances, the results of which form the basis of making the judgementsabout carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis.Revisions to accounting estimates are recognised in the year in which theestimate is revised if the revision affects only that year, or in the year ofthe revision and future years if the revision affects both current and futureyears. The restated consolidated financial information is based on the UK GAAPfinancial statements approved by the board on 16 March 2005 and adjusted tocomply with IFRS. In accordance with IFRS 1 there have been no adjustments tothe estimates made at the time of the preparation of the UK GAAP financialstatements. The accounting policies set out below have been applied consistently to allyears presented in the restated consolidated financial information. 3.Basis of consolidation 3.1 SubsidiariesSubsidiaries are those entities (including special purpose entities) controlledby the Company. Control exists when the Company has the power, directly orindirectly, to govern the financial and operating policies of an entity so as toobtain benefits from its activities. In assessing control, potential votingrights that presently are exercisable or convertible are taken into account. Thefinancial statements of subsidiaries are included in the restated consolidatedfinancial information from the date that control commences until the date thatcontrol ceases. The Group uses the purchase method of accounting to account for the acquisitionof subsidiaries. The cost of an acquisition is measured as the fair value of theassets given, equity instruments issued and liabilities incurred or assumed atthe date of exchange, plus costs directly attributable to the acquisition.Identifiable assets acquired and liabilities and contingent liabilities assumedin a business combination are measured initially at their fair values at theacquisition date, irrespective of the extent of any minority interest. Theexcess of the cost of acquisition over the fair value of the Group's share ofthe identifiable net assets acquired is recorded as goodwill. If the cost ofacquisition is less than the fair value of the net assets of the subsidiaryacquired, the difference is recognised directly in the income statement. 3.2 AssociatesAssociates are those entities in which the Group has the power to havesignificant influence, but not control, over the financial and operatingpolicies. The restated consolidated financial information includes the Group'sshare of the total recognised income or expense of associates on an equityaccounted basis from the date that significant influence commences until thedate that significant influence ceases. When the Group's share of losses equalsor exceeds the carrying amount of the associate, the carrying amount is reducedto nil and recognition of further losses is discontinued except to the extentthat the Group has incurred obligations in respect of the associate. 3.3 Transactions eliminated on consolidationIntragroup balances, transactions and any unrealised gains arising fromintragroup transactions are eliminated in preparing the restated consolidatedfinancial information. Unrealised losses are also eliminated unless thetransaction provides evidence of an impairment of the asset transferred. Unrealised gains arising from transactions with associates are eliminated to theextent of the Group's interest in the entity. Unrealised losses are alsoeliminated but only to the extent that there is no evidence of impairment of theasset transferred. 4.Foreign currency translation 4.1 Functional and presentational currencyItems included in the financial statements of each of the Group's entities aremeasured using the currency of the primary economic environment in which theentity operates (the 'functional currency'). The restated consolidated financialinformation is presented in thousands of pounds Sterling, which is the Group'spresentation currency. 4.2 Transactions and balancesForeign currency transactions are translated into the functional currency usingthe exchange rates prevailing at the dates of the transactions. Foreign exchangegains and losses resulting from the settlement of such transactions and from thetranslation at year end exchange rates of monetary assets and liabilitiesdenominated in foreign currencies are recognised in the income statement, exceptwhen deferred in equity as qualifying cash flow hedges. All such foreignexchange gains and losses have been disclosed within other operating costs andexpenses including exchange gains and losses arising on the retranslation ofoutstanding claims and the related reinsurance asset. 4.3 Group companiesThe Group's mainland European subsidiaries and the insurance company in Guernseyhave a functional currency different from the presentation currency, being Eurosand US Dollars respectively. The results and financial position of all theseentities are translated into the presentation currency as follows : (i) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;(ii)income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the date of the transactions); and(iii)all resulting exchange differences are recognised as a separate component of equity. When a foreign operation is sold, such exchange differences are recognised inthe income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreignentity are treated as the foreign entity's assets and liabilities and aretranslated at the closing rate. All other Group entities have a Sterling functional currency. 5.Property, plant and equipmentLand and buildings are shown at fair value, based on periodic, but at leasttriennial, valuations by external independent appraisers, less subsequentdepreciation for buildings. Any accumulated depreciation at the date ofrevaluation is eliminated against the gross carrying amount of the asset, andthe net amount is restated to the revalued amount of the asset. Increases in thecarrying amount arising on revaluation of land and buildings are credited to therevaluation surplus in equity. Decreases that offset previous increases of thesame asset are charged against fair value reserves directly in equity; all otherdecreases are charged to the income statement. Each year, the difference betweendepreciation based on the revalued carrying amount of the asset charged to theincome statement and depreciation based on the asset's original cost, net of anyrelated deferred income tax, is transferred from the revaluation surplus toretained earnings. All other property, plant and equipment are stated at historical cost lessdepreciation. Historical cost includes expenditure that is directly attributableto the acquisition of the items. Cost may also include transfers from equity ofany gains or losses on qualifying cash flow hedges of foreign currency purchasesof property, plant and equipment. Subsequent costs are included in the asset's carrying amount or recognised as aseparate asset, as appropriate, only when it is probable that future economicbenefits associated with the item will flow to the Group and the cost of theitem can be measured reliably. All other repairs and maintenance are charged tothe income statement during the financial period in which they are incurred. Land is not depreciated. Depreciation on other assets is calculated using thestraight-line method to allocate their cost or revalued amounts to theirresidual values over their estimated useful lives, as follows : Buildings 50 yearsVehicles 3 yearsFurniture, fittings and equipment Fixtures and fittings 15 years Furniture and equipment 10 years Computer equipment 3 years The assets' residual values and useful lives are reviewed at each balance sheetdate and adjusted if appropriate. An asset's carrying amount is written down immediately to its recoverable amountif the asset's carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with carryingamount. These are included in the income statement. When revalued assets aresold, the amounts included in the revaluation surplus are transferred toretained earnings. 6.Intangible assets 6.1 GoodwillGoodwill represents amounts arising on acquisition of subsidiaries andRelated Shares:
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