11th Sep 2006 07:02
Hiscox PLC11 September 2006 Hiscox plc Interim Results for the six months ended 30 June 2006 "Strong growth for the group and a good start for our two new ventures inBermuda and the USA." HY 2006 HY 2005Gross premiums written £625.1 million £437.2 millionProfit before tax £61.3 million £88.1 millionEarnings per share 12.1p 20.2pDividend per share 3.0p 2.25pNet asset value per share 149.8p 143.3pCombined ratio 93.2% 83.5% Highlights • Gross premiums written increased 43% to £625.1 million • Profit before tax of £61.3 million • Profit before tax excluding currency exchange movements £64.7 million (2005: £51.2m) • Group combined ratio adjusted for currency exchange on unearned premiums and deferred acquisition costs 89.5% (2005: 89.6%) • Strong start for Hiscox Bermuda and Hiscox USA • Global Markets achieving high rates for catastrophe exposed risks • Increase in demand for UK household and commercial insurance following additional advertising spend • Planned re-domicile to Bermuda anticipated to yield long-term benefits. Robert Hiscox, Chairman Hiscox plc, commented: "It was a good first half with strong growth fuelled by high rates for allbusiness exposed to catastrophes, helped by steady growth from our retailnon-catastrophe business. The successful start of our new ventures in Bermudaand the USA have strengthened our strategy of international spread, and balancebetween high-risk and low-risk specialist insurance." This summary should be read in conjunction with the detailed announcement whichfollows. For further information: Hiscox plcRobert Hiscox Chairman 020 7448 6011Bronek Masojada Chief Executive 020 7448 6012Stuart Bridges Finance Director 020 7448 6013 MaitlandPhilip Gawith 020 7379 5151Suzanne Bartch 020 7379 5151 Notes to editors About Hiscox plc Hiscox plc is a specialist insurance group listed on the London Stock Exchange.There are three main underwriting parts of the Group - Hiscox Global Markets,Hiscox UK and Europe, and Hiscox International. Hiscox Global Marketsunderwrites mainly internationally traded business in the London Market -generally large or complex business which needs to be shared with other insurersor needs the international licences of Lloyd's. Hiscox UK and Hiscox Europeoffer a range of specialist insurance for professionals and business customers,as well as high net worth individuals. Hiscox International includes offshoreoperations in Bermuda and Guernsey and Hiscox USA. For further information, visit www.hiscox.com Chairman's Statement The first half of 2006 has seen considerable growth in premium income togetherwith strong starts by our two new ventures, Hiscox Bermuda and Hiscox USA, inArmonk, NY. Our well-received TV advertising campaign in the UK has strengtheneddemand for our specialist products through all channels. We now have anexcellent well-balanced and international spread of distribution channels tocontinue to grow the business profitably in its specialist areas. ResultsThe results for the half-year to 30th June 2006 were a profit before tax of£61.3 million (2005: £88.1m). Gross written premium income increased 43% to£625.1 million (2005: £437.2m) and net earned income increased 16% to £401.7million (2005: £345.7m). The group combined ratio was 93.2% (2005: 83.5%).Earnings per share were 12.1p (2005: 20.2p) and net assets per share rose to149.8p (2005: 143.3p). DividendThe Board stated at the 2005 year-end that it would recommend a total dividendof 9.0p for 2006 subject to profitability. We will pay an interim dividend of 3.0p(net) per ordinary share (2005: 2.25p) on 23rd October 2006 to shareholders onthe register at the close of business on 29th September 2006. Overall commentThe profit of the group is up year on year without currency exchange movements.The currency impact this half year was a small loss of £3.4 million comparedwith a substantial gain of £36.9 million during the same period in 2005. Thisunderlying improvement was achieved despite considerable investment in start-upcosts and advertising spend, but these will yield strong returns in the future.The increase in written premium income is highly satisfactory. The increase inearned premium is less than the written premium due to the usual accountingdelay in a growing account and also to the underwriters of catastrophe businessdelaying commitment as rates were rising. This should improve earnings in thesecond half of the year. I am writing this as always in the middle of the wind season so do not want tosay anything that will look ridiculous in a few weeks time, but even if MotherNature does choose to subject us to the same onslaught as in 2005, thecatastrophe account should do better than last year as we have received muchmore money for the same risk. The rates for business in obvious catastrophezones have strengthened throughout the period, but this has been offset byincreasing competition for non-catastrophe exposed business. Overall, however,conditions are good. Our strategy remains to underwrite the more volatile big risk and catastrophebusiness through Lloyd's in London and through Hiscox Bermuda, and to balance itwith less volatile retail business through our regional offices in the UK andEurope, through Guernsey and the USA, and through our direct operations. InternationalOur International business covers our new operations in Bermuda and the USA, aswell as our established operation in Guernsey. Hiscox Bermuda was boosted by having Robert Childs, our Chief UnderwritingOfficer, as its leader. (I was always told that rule number one for opening anoverseas office was don't, and if you chose to break rule one, rule number twowas to send one of your most senior people as it is the most difficult thing youwill ever do. We have obeyed rule two to great benefit). Hiscox Bermuda is ontarget to write its annual budget of $325 million. Hiscox USA, led by Ed Donnelly, opened for business in March 2006 and has gotoff to a storming start. Ed has recruited an impressive team and has alreadyincreased his annual forecast for this year from $15 million to $25 million. Iknow it does not sound a lot compared with $325 million for Bermuda, but retailbusiness has to be won by relatively small premium by small premium. Itsadvantage is less volatility in risk and retention. We definitely believe thatthis is an acorn which will grow into a substantial oak tree. Hiscox Guernsey produced another excellent profit which helped to give theinternational division an overall combined ratio of 83.9% despite start-upcosts. Global MarketsThis division underwrites London Market risks and the bigger retail risks andthose international retail risks for which we need to use the Lloyd's licences.Its catastrophe book is written in addition to the Hiscox Bermuda book, whichwidens the spread of the account and balances the risk across the Group. This division's results are dominated by its catastrophe book and, as weannounced in our recent trading statement, last year's hurricanes have producedmore claims during the period. Overall our reserves were flat despitestrengthening the hurricane reserves by about £10 million, predominantly forHurricane Wilma. The combined ratio was 93.3% (2005: 80.5%) on an increased written premiumincome of £390.8 million (2005: £287.2m). Earned income at £256.1 million (2005: £217.2m) has increased less than written premium due to the accounting delayfrom strong growth and the underwriters waiting to write reinsurance business untillater in the period. This has, together with the currency movement, increased thecombined ratio. The earnings should, of course, show through more strongly in the second half. The London Market is still the principal centre for internationally tradedrisks, and our underwriters get a very good showing of the business that comesto London. We also have Global Market offices in the USA and Paris to market ourglobal underwriting abilities more widely. Rates are strong for any risks exposed to catastrophes but competition isgrowing fiercer for other risks. Fortunately we have specialist books ofbusiness built up over many years which insulate us to an extent, but the cycleis interestingly split with some rates going down and some up. As announced recently, we are in discussions with investors on the formation ofan independent reinsurer (a 'sidecar') to reinsure exclusively the Syndicate 33catastrophe account. This would allow us to expand our capacity for thisbusiness next year whilst controlling our risk. UK and EuropeThis division covers our retail business in UK and Europe together with some ofour international art and specie account. Specie business is the insurance ofvaluable commodities such as cash and gold, which we underwrite with the artaccount. The UK figures in the period have been affected by some large specielosses which together with the advertising spend increased the combined ratio to95.2% (2005: 90.2%). The UK combined written premium income was up 8.8% to£112.2 million (2005: £103.1m) but in that overall figure, the Direct accountgrew 75% and the Specie account reduced by 57%. Competition has increased and put pressure on the rates. (We are reaching thestage in the cycle when Chief Executives state in public that their company willnot reduce rates, while demanding in private more income from their troops. Thetroops cut the rates). However, our commercial products are sufficientlyspecialist to make entry into the market by foolish and uneconomic competitorsdifficult. We have also concentrated on smaller risks where there is lesscompetition. In art and household business, we have an established reputationand expertise and we do not compete on price alone but with our rapid serviceand sympathetic claims payment as well. The great majority of our business comes through brokers. In addition, we havedeveloped a growing direct account for both household and commercial policieswith good underlying underwriting margins before start-up and marketing costs. Once the direct operation had proved itself in its technology and underwriting,the time came to step up the marketing, culminating in the UK televisionadvertising earlier this year which is being repeated during September. Demandsurged following the last run of advertisements, and has settled 50% above thepre-campaign level. Brokers also reported a greater ease of selling ourpolicies, so, combined with the strengthening of the Hiscox brand, the earlystages of this campaign have proved a great success. Our direct activitiescomplement our broker account. More and more clients want to buy directinsurance and our policies must be available to those who want them throughwhatever channel they choose. Some brokers are using our direct technology tomarket smaller risks, which we believe is the future. Our European income was static but remained profitable. The new Europeanmanagement is strengthening the teams and progress will be made. InvestmentsWe achieved an annualised return on investments of 3.3% in the period despitedifficult bond and equity markets in May and June. Cash and investments havegrown by 35% to £1,678 million at 30 June 2006 (2005: £1,239m) augmented by ourrights issue, increased borrowings and strong cashflow from trading. We continueto keep the portfolio balanced taking relatively little risk with short durationand high credit quality on the bonds and a continued weighting of 7-8% inequities. Our investment in Bermuda has been retained in cash and short datedbonds to protect the capital there and the US dollar exposure hedged to limitany effects on group net assets. The investment policy has served us well in theperiod as interest rates in major currencies rose. We will take increased riskin the portfolio where we believe the reward is justified but are currentlyhappy to sit and wait for advantageous conditions. Re-domicileIn 2005 when we established Hiscox Bermuda we stated that as such a substantialamount of the Group's business could originate from the Bermudan and US marketsit may be in shareholders' interests to move the domicile of Hiscox's parentcompany to Bermuda. Since then the Board has been examining this proposal andfollowing the completion of detailed work, the Board has concluded that thereare significant advantages in moving the Group's domicile to Bermuda. Accordingly the Board has approved a corporate re-organisation which willintroduce a new Bermuda domiciled holding company, Hiscox Ltd ("New HiscoxBermuda") for the Group. In effect a shareholder will receive new shares in New HiscoxBermuda in place of the equilavent number of their existing shares in Hiscox plc.New Hiscox Bermuda will be listed on the Official List of the London Stock Exchange in place of Hiscox plc and is expected to replace Hiscox plc as a member of theFTSE 250 Index. It is not expected that Hiscox's existing dividend policy would be affected andshareholders would have the right to elect to receive UK sourced dividends. Thecorporate re-organisation should also be neutral in tax terms for UK residentshareholders. The re-domicile is subject to a number of regulatory approvals. A circularsetting out how the corporate re-organisation will be effected will be sent toshareholders in due course. ConclusionHiscox Bermuda and Hiscox USA have added two more solid building blocks to thefoundations of the Group. Our existing foundation blocks of Global Markets, UK(including direct), Europe and Guernsey are all in robust shape. A move of ourdomicile to Bermuda should increase the earnings and add to our internationalstatus. Creative underwriting, combined with efficient service and rapid andfair claims settlement, are together building a distinctive brand which will besupported by strong marketing in the second half of the year. I wrote in lastyear's full year results that I was confident that we were entering a new era ofprofitable growth, and my confidence remains undiminished. Robert HiscoxChairman 11 September 2006 Condensed consolidated interim income statementfor the six month period ended 30 June 2006 6 months to 6 months to Year to 30 June 2006 30 June 2005 31 Dec 2005 Notes (unaudited) (unaudited) (audited) £000 £000 £000 ------------------------------------------------------------------------------IncomeGross premiums written 625,152 437,160 861,174Net premiums written 504,703 345,047 681,236Net premiums earned 401,662 345,668 693,299------------------------------------------------------------------------------- Investment return 7 44,375 20,368 43,883Other revenues 8 6,876 52,095 81,297-------------------------------------------------------------------------------Net revenue 452,913 418,131 818,479--------------------------------------------------------------------------------ExpensesClaims and claim adjustmentexpenses, net of reinsurance 10 (198,050) (186,207) (457,025)Expenses for the acquisitionof insurance contracts (107,989) (99,378) (199,979)Administration expenses (26,970) (17,779) (41,197)Other costs and expenses 8 (53,736) (25,789) (46,973)--------------------------------------------------------------------------------Total expenses (386,745) (329,153) (745,174)--------------------------------------------------------------------------------Results of operating activities 66,168 88,978 73,305Finance costs 9 (4,824) (1,009) (3,334)Share of profit /(loss) of associates after tax 5 151 250--------------------------------------------------------------------------------Profit before tax 61,349 88,120 70,221Tax expense (14,029) (27,040) (21,591)--------------------------------------------------------------------------------Profit for the period (allattributable to equityshareholders of the Company) 47,320 61,080 48,630-------------------------------------------------------------------------------- Earnings per share on attributable shareholdersof the CompanyBasic 11 12.1p 20.2p 15.6pDiluted 11 11.9p 20.0p 15.1p The notes of the condensed consolidated interim financial statements are anintegral part of this document. Condensed consolidated interim balance sheetat 30 June 2006 Notes 30 June 2006 30 June 2005 31 Dec 2005 (unaudited) (unaudited) (audited) £000 £000 £000 ------------------------------------------------------------------------------ AssetsIntangible assets 33,016 32,370 33,099Property, plant andequipment 12,891 10,837 12,128Investments in associates 23 1,013 18Deferred acquisitioncosts 128,898 114,875 106,747Financial assets 13 1,210,543 1,037,993 1,237,778Loans and receivablesincluding insurance receivables 464,522 330,996 436,981Deferred tax 13,129 - -Reinsurance contract receivables 435,094 290,342 506,376Cash and cash equivalents 13 467,904 200,919 413,759------------------------------------------------------------------------------Total assets 2,766,020 2,019,345 2,746,886------------------------------------------------------------------------------ Equity and liabilitiesShareholders' equityShare capital 19,649 14,717 19,570Share premium 403,259 234,899 401,365Other reserves 16,705 37,823 38,789Retained earnings 148,750 134,246 118,289------------------------------------------------------------------------------Total equity 588,363 421,685 578,013------------------------------------------------------------------------------ Employee retirementbenefit obligations 17,308 25,964 16,677Deferred tax - 33,322 15,193Insurance contracts 1,769,644 1,373,869 1,723,000Financialliabilities 115,064 2,167 126,246Current tax 44,264 12,750 16,581Trade and other payables 231,377 149,588 271,176------------------------------------------------------------------------------Total liabilities 2,177,657 1,597,660 2,168,873------------------------------------------------------------------------------Total equity and liabilities 2,766,020 2,019,345 2,746,886------------------------------------------------------------------------------ The notes to the condensed consolidated interim financial statements are anintegral part of this document. Condensed consolidated interim statement of changes in equityfor the six month period ended 30 June 2006 Currency Capital Share Share Merger translation redemption Retained 2006 2005 Capital Premium Reserve reserve reserve earnings Total Total (unaudited)(unaudited)(unaudited) (unaudited) (unaudited)(unaudited)(unaudited)(unaudited) £000 £000 £000 £000 £000 £000 £000 £000------------------------------------------------------------------------------------------------ Balance at 1January 19,570 401,365 4,723 822 33,244 118,289 578,013 368,826Currencytranslationdifferences - - - (22,084) - - (22,084) 324-------------------------------------------------------------------------------------------------Net incomerecogniseddirectly inequity - - - (22,084) - - (22,084) 324Profit forthe period - - - - - 47,320 47,320 61,080------------------------------------------------------------------------------------------------ Total recognisedincome forthe period - - - (22,084) - 47,320 25,236 61,404 Employee shareoptions :Equity settledshare-based - - - - - 1,780 1,780 825paymentsProceeds from 79 1,894 - - - - 1,973 664shares issuedChange in own - - - - - - - 252sharesDividends toequity shareholders(note 12) - - - - - (18,639) (18,639) (10,286)-------------------------------------------------------------------------------------------------Balance at30 June 19,649 403,259 4,723 (21,262) 33,244 148,750 588,363 421,685------------------------------------------------------------------------------------------------ The notes to the condensed consolidated interim financial statements are anintegral part of this document. Condensed consolidated interim cash flow statementfor the six month period ended 30 June 2006 Notes 6 months to 6 months to Year to 30 June 2006 30 June 2005 31 Dec 2005 (unaudited) (unaudited) (audited) £000 £000 £000-------------------------------------------------------------------------------Profit before tax 61,349 88,120 70,221Interest and equitydividends received (33,339) (22,236) (48,072)Net (gains)/losseson financial assets 4,967 (836) 4,289Retirement benefitcharges in excessof contributions paid 631 (8,754) (18,041)Depreciation 1,800 1,534 3,281Charges in respectof share based payments 1,780 826 2,059Other non-cash charges (24,618) (481) 690Changes in operational assetsand liabilities:Insurance andreinsurancecontracts 69,019 71,650 212,462Financial assets 16 19,844 (54,259) (256,280)Other assets and liabilities (20,819) (493) 13,048------------------------------------------------------------------------------Cash generated fromoperations 80,614 75,071 (16,343)Interest received 32,892 20,907 46,844Equity dividendsreceived 447 1,329 1,228Interest paid (2,409) (774) (2,573)Current tax paid (14,668) (3,339) (10,239)-------------------------------------------------------------------------------Net cash flows from operatingactivities 96,876 93,194 18,917Cash flows from the acquisitionand sale of subsidiaries andassociates - - 3,750Cash flows from the sale/(purchase)of property, plant and equipment (2,534) (1,530) (4,474)Cash flows from the purchase ofintangible assets - (2,401) (3,277)Loans repaid by related parties - - 1,580------------------------------------------------------------------------------Net cash used in investing activities (2,534) (3,931) (2,421)Proceeds from the issue of ordinaryshares 1,973 664 171,983Proceeds from the sale of treasuryshares - 252 192Dividends paid to company'sshareholders 12 (18,639) (10,286) (16,917)Proceeds from borrowings - - 121,133Repayments of borrowings (319) (233) (102)--------------------------------------------------------------------------------Net cash flows from financingactivities (16,985) (9,603) 276,289------------------------------------------------------------------------------Net increase in cash and cashequivalents 77,357 79,660 292,785------------------------------------------------------------------------------Cash and cash equivalents at 1January 413,759 119,563 119,563Net increase in cash and cashequivalents 77,357 79,660 292,785Effect of exchange rate fluctuationson cash and cash equivalents (23,212) 1,696 1,411------------------------------------------------------------------------------Cash and cash equivalentsat end of period 467,904 200,919 413,759------------------------------------------------------------------------------- The notes to the condensed consolidated interim financial statements are anintegral part of this document. Notes to the condensed consolidated interim financial statements 1 Reporting entity Hiscox plc (the "Company") is a public limited company incorporated anddomiciled in Great Britain. The condensed consolidated interim financialstatements for the company as at, and for the six months ended, 30 June 2006comprise the Company and its subsidiaries (together referred to as the "Group")and the Group's interest in associates. 2 Basis of preparation These condensed consolidated interim financial statements have been prepared inaccordance with the Listing Rules issued by the Financial Services Authority.The information presented herein does not include all of the disclosurestypically required for full consolidated financial statements. Consequentlythese financial statements should be read in conjunction with the fullconsolidated financial statements of the Group as at, and for the year ended, 31December 2005 which are available from the Company's registered office at 1Great St Helen's, London,EC3A 6HX or at www.hiscox.com. Except where otherwiseindicated, all amounts are presented in pounds Sterling, rounded to the nearestthousand. The condensed consolidated interim financial statements for the 30 June 2006 and30 June 2005 periods are unaudited but have been subject to a review by theindependent auditors. The unaudited condensed consolidated interim financialstatements, and the comparative information as at, and for the year ended, 31December 2005, presented herein do not constitute statutory accounts of theGroup within the meaning of Section 240 of the Companies Act 1985. The independent auditors have reported on the Group's full consolidatedfinancial statements as at, and for the year ended, 31 December 2005. The reportof the independent auditors was not qualified and did not contain a statementunder section 237 (2) or (3) of the Companies Act 1985. These condensed consolidated interim financial statements were approved by theBoard of Directors on 11 September 2006. 3 Accounting policies The accounting policies applied in these condensed consolidated interimfinancial statements are consistent with those applied by the Group in itsconsolidated financial statements as at, and for the year ended, 31 December2005 which were prepared in accordance with International Financial ReportingStandards as endorsed by the European Union. Certain reclassifications have beenmade to the 30 June 2005 prior period amounts and segment disclosures to conformto the presentation in the Group's 2005 Annual Report and to the current periodpresentation. These reclassifications have no impact on previously reportedResults of operating activities or Profit before tax. The accounting policiesapplied in these condensed consolidated interim financial statements are alsoconsistent with those that the Group expects to apply for the year ending 31December 2006. The Group has not adopted IAS 34 Interim Financial Reporting. 4 Financial risk management The Group's financial risk management objectives and policies are consistentwith that disclosed in the full consolidated financial statements as at, and forthe year ended, 31 December 2005. 5 Segment information The Group is managed and reported on a worldwide basis in three primary businesssegments as follows: - Global Markets and Corporate Centre comprises the results of Syndicate 33,excluding Syndicate 33's specie, fine art and non-US household business. It alsoincludes the investment return and administrative costs associated with theparent company and other Group management activities. - UK and Europe comprises the results of Hiscox Insurance Company Limited, theresults of Syndicate 33's specie, fine art and non-US household business,together with the income and expenses arising from the Group's retail agencyactivities in the UK and in continental Europe. - International comprises the results of Hiscox Insurance Company (Guernsey)Limited and Hiscox Insurance Company (Bermuda) Limited which commencedunderwriting on 1 January 2006. This segment also includes the activities of theUS agency, Hiscox Inc which commenced operations in March 2006. This segmentation reflects the internal operational structure within the Groupand how the business units are strategically managed to offer different productsand services, with different risk profiles, to specific customer groups. Allrevenue sources are captured by one of the three business segments shownabove. All results arise from continuing activities. The segmental results for the 6 months to 30 June 2006, presented in operationalreporting format, were as follows: 6 Months to 30 June 2006 (unaudited)------------------------------------------------------------------------------- Global Markets and Corporate UK and Centre Europe International Total £000 £000 £000 £000 ------------------------------------------------------------------------------ Gross premiums written 390,807 139,457 94,888 625,152Net premiums written 311,311 117,043 76,349 504,703Net premiums earned 256,133 115,127 30,402 401,662------------------------------------------------------------------------------Investment return based onlonger term rates of return 19,192 9,100 6,339 34,631Net claims incurred (137,389) (50,888) (9,773) (198,050)Acquisition costs (67,081) (38,486) (11,707) (117,274)Administrative expenses (12,593) (11,242) (3,135) (26,970)Other income / (expenses) (20,151) (1,159) 788 (20,522)-------------------------------------------------------------------------------Trading result 38,111 22,452 12,914 73,477Agency and other income 2,030 12,530 471 15,031Profit commission 1,130 - - 1,130Short-term investment returnfluctuations 10,564 (1,320) 500 9,744Other expenses (7,284) (19,889) (6,041) (33,214)-------------------------------------------------------------------------------Operating result 44,551 13,773 7,844 66,168Finance costs (4,824) - - (4,824)Associate result 5 - - 5------------------------------------------------------------------------------Profit before tax 39,732 13,773 7,844 61,349------------------------------------------------------------------------------ Global Markets and Corporate UK and Centre Europe International Total------------------------------------------------------------------------------100% level net combined ratio (%) 93.3 95.2 83.9 93.2------------------------------------------------------------------------------ 6 Months to 30 June 2005 (unaudited)------------------------------------------------------------------------------- Global Markets and Corporate UK and Centre Europe International Total £000 £000 £000 £000 ------------------------------------------------------------------------------ Gross premiums written 287,192 129,613 20,355 437,160Net premiums written 217,257 114,918 12,872 345,047Net premiums earned 217,200 118,559 9,909 345,668------------------------------------------------------------------------------Investment return based onlonger term rates of return 17,245 6,928 93 24,266Net claims incurred (129,650) (56,365) (192) (186,207)Acquisition costs (59,601) (40,181) (8,110) (107,892)Administrative expenses (7,974) (9,582) (1,075) (18,631)Other income / (expenses) 38,806 840 404 40,050------------------------------------------------------------------------------Trading result 76,026 20,199 1,029 97,254Agency and other income 8,207 11,090 169 19,466Profit commission 2,744 - - 2,744Short-term investment returnfluctuations (7,249) 3,374 (23) (3,898)Other expenses (13,681) (12,907) - (26,588)-------------------------------------------------------------------------------Operating result 66,047 21,756 1,175 88,978Finance costs (1,009) - - (1,009)Associates result - - 151 151------------------------------------------------------------------------------Profit before tax 65,038 21,756 1,326 88,120------------------------------------------------------------------------------ Global Markets and Corporate UK and Centre Europe International Total ------------------------------------------------------------------------------ 100% level net combined ratio (%) 80.5 90.2 90.6 83.5------------------------------------------------------------------------------ Year to 31 December 2005 (audited)------------------------------------------------------------------------------- Global Markets and Corporate UK and Centre Europe International Total £000 £000 £000 £000 ------------------------------------------------------------------------------ Gross premiums written 555,183 262,271 43,720 861,174Net premiums written 417,128 235,276 28,832 681,236Net premiums earned 428,334 241,603 23,362 693,299-------------------------------------------------------------------------------Investment return based onlonger term rates of return 36,181 14,300 1,632 52,113Net claims incurred (347,865) (108,498) (662) (457,025)Acquisition costs (118,546) (81,827) (18,380) (218,753)Administrative expenses (14,342) (24,571) (2,284) (41,197)Other income / (expenses) 55,060 2,362 (162) 57,260------------------------------------------------------------------------------Trading result 38,822 43,369 3,506 85,697Agency and other income 8,376 22,640 2,469 33,485Profit commission 7,357 - - 7,357Short-term investment returnfluctuations (15,252) 6,081 (70) (9,241)Other expenses (15,253) (28,740) - (43,993)-------------------------------------------------------------------------------Operating result 24,050 43,350 5,905 73,305Finance costs (3,334) - - (3,334)Associates result - - 250 250------------------------------------------------------------------------------Profit before tax 20,716 43,350 6,155 70,221------------------------------------------------------------------------------ Global Markets and Corporate UK and Centre Europe International Total------------------------------------------------------------------------------100% level net combined ratio (%) 99.9 86.9 91.3 96.0------------------------------------------------------------------------------ The longer term rates of return are calculated based on 6% return on equitiesand 4% for all other investments including cash. These rates are applied to theaverage value of investments held in each class during the current and priorfinancial period. 6 Return on equity 6 months to 6 months to Year to 31 30 June 2006 30 June 2005 Dec 2005 (unaudited) (unaudited) (audited) £000 £000 £000 -------------------------------------------------------------------------- Profit for the period 47,320 61,080 48,630Opening shareholders'equity 578,013 368,826 368,826Adjusted for the time weightedimpact of:- Rights issue - - 15,510- Distributions and othermovements in capital (205) (78) (5,285)-------------------------------------------------------------------------------Adjusted openingshareholders' equity 577,808 368,748 379,051------------------------------------------------------------------------------Annualised return onequity (%) 17.0% 35.9% 12.8% 7 Investment result i) Analysis of investment result 6 months to 6 months to Year to 31 30 June 2006 30 June 2005 Dec 2005 (unaudited) (unaudited) (audited) £000 £000 £000 ----------------------------------------------------------------------------- Investment income includinginterest receivable 35,128 22,657 48,172Net realised gains/(losses)on investment at fair valuethrough income (7,185) (1,629) (8,040)Net fair value gains/(losses)on investment at fair valuethrough income (795) 2,465 10,155Net realised gains onderivative instruments 18,091 - -Net fair value gains/(losses)on derivative instrumentsand financial liabilities (864) (3,125) (6,404)-------------------------------------------------------------------------------Total returns on financialassets 44,375 20,368 43,883-------------------------------------------------------------------------------The majority of the Group's foreign exchange cylindrical collar derivativesclosed during June 2006, at nil overall cost. At 31 December 2005 the fair valueof all such contracts that were closed out before 30 June 2006 was a liabilityof £3,713,000. The Group also realised £14,214,000 from the closing out of foreign exchangeforward derivatives during the period to 30 June 2006. These contracts provide apartial hedge of the Group's net investment in its Bermudan operation but do notcurrently qualify for the formal hedge accounting treatment permitted under IAS39 Financial Instruments: Recognition and Measurement. Further details areprovided at note 15. Investment expenses are presented within other operating expenses (note 8). ii) Annualised investment yields 6 months to 6 months to Year to 30 June 2006 30 June 2005 31 Dec 2005 (unaudited) (unaudited) (audited) Return Yield Return Yield Return Yield ----------------------------------------------------------------------------- £000 % £000 % £000 % Debt and fixed incomesecurities at fair valuethrough income 13,852 2.8 15,268 3.6 26,733 3.1Equities and shares in unittrusts at fair valuethrough income 2,702 4.4 3,789 9.0 12,278 13.1Deposits with creditinstitutions/cash and cashequivalents 10,594 4.0 4,436 4.6 11,276 3.7----------------------------------------------------------------------------- 27,148 3.3 23,493 4.1 50,287 4.0----------------------------------------------------------------------------- 8 Other income and expenses 6 months to 30 6 months to 30 Year to 31 June 2006 June 2005 Dec 2005 (unaudited) (unaudited) (audited) £000 £000 £000-------------------------------------------------------------------------------- Agency related income 3,175 2,527 3,044Profitcommission 1,130 2,744 9,807Exchange gains(note 15) - 40,050 57,420Other income 2,571 6,774 11,026------------------------------------------------------------------------------Other income 6,876 52,095 81,297------------------------------------------------------------------------------ Managingagencyexpenses 4,235 10,022 9,869Underwritingagencyexpenses 19,303 10,905 19,886Connect agencyexpenses 6,360 1,682 6,135Exchangelosses 20,522 - -Investmentexpenses 640 571 1,013Other groupexpenses 2,676 2,609 10,070-------------------------------------------------------------------------------Other expenses 53,736 25,789 46,973------------------------------------------------------------------------------- 9 Finance costs 6 months to 30 6 months to 30 Year to 31 June 2006 June 2005 Dec 2005 (unaudited) (unaudited) (audited) £000 £000 £000 ------------------------------------------------------------------------------ Interest and expensesassociated with bankborrowings and lettersof credit 4,806 996 3,302Interest chargesarising on financeleases 18 13 32------------------------------------------------------------------------------ 4,824 1,009 3,334------------------------------------------------------------------------------- The Group drew down £137,500,000 on a syndicated letter of credit facility on 7November 2005 to support its underwriting operations. On 5 December 2005, theGroup drew down US$208,000,000 of its term and revolving credit facility tosupport the investment in the new Bermudan operations. 10 Claims and claim adjustment expenses 6 months to 30 6 months to 30 Year to 31 June 2006 June 2005 Dec 2005 (unaudited) (unaudited) (audited) £000 £000 £000 ------------------------------------------------------------------------------ Gross insuranceclaims and claimadjustment expenses (221,005) (236,078) (810,678)Insurance claimsrecovered fromreinsurers 22,955 49,871 353,653-------------------------------------------------------------------------------Net insurance claims and claim adjustmentexpenses (198,050) (186,207) (457,025)------------------------------------------------------------------------------- 11 Earnings per share Basic Basic earnings per share is calculated by dividing the profit attributable toequity holders of the Company by the weighted average number of ordinary sharesin issue during the period, excluding ordinary shares purchased by the Group andheld as own shares. 6 months to 6 months to Year to 31 30 June 2006 30 June 2005 Dec 2005 (unaudited) (unaudited) (audited)------------------------------------------------------------------------------Profit attributable to the Company'sequity holders (£000) 47,320 61,080 48,630Weighted average number of ordinaryshares (thousands) 392,125 302,754 310,797Basic earnings per share (pence pershare) 12.1p 20.2p 15.6p------------------------------------------------------------------------------- The comparative weighted average number of shares in issue for the 6 months to30 June 2005 has been adjusted for the effects of the Rights issue in November2005. Diluted Diluted earnings per share is calculated by adjusting the weighted averagenumber of ordinary shares outstanding to assume conversion of all dilutivepotential ordinary shares. The Company has one category of dilutive potentialordinary shares, share options. For the share options, a calculation is made todetermine the number of shares that could have been acquired at fair value(determined as the average annual market share price of the Company's shares)based on the monetary value of the subscription rights attached to outstandingshare options. The number of shares calculated as above is compared with thenumber of shares that would have been issued assuming the exercise of the shareoptions. 6 months to 6 months to Year to 30 June 30 June 31 Dec 2006 2005 2005 (unaudited) (unaudited) (audited)-----------------------------------------------------------------------------Profit attributable to the Company'sequity holders (£000) 47,320 61,080 48,630-----------------------------------------------------------------------------Weighted average number of ordinaryshares in issue (thousands) 392,125 302,754 310,797Adjustment for share options (thousands) 6,772 3,263 12,283-----------------------------------------------------------------------------Weighted average number of ordinaryshares for diluted earnings per share(thousands) 398,897 306,017 323,080-----------------------------------------------------------------------------Diluted earnings per share (pence pershare) 11.9p 20.0p 15.1p------------------------------------------------------------------------------Diluted earnings per share has been calculated after taking account ofoutstanding options under both employee share schemes and also SAYE schemes. 12 Dividends 6 months to 30 6 months to 30 Year to June 2006 June 2005 31 Dec 2005 (unaudited) (unaudited) (audited) £000 £000 £000 ---------------------------------------------------------------------------- Final dividend for the year ended: - 31 December 2005 of 4.75p(net) per share 18,639 - -- 31 December 2004 of 3.5p(net) per share - 10,286 10,286Interim dividend for the year ended:- 31 December 2005 of 2.25p(net) per share - - 6,631------------------------------------------------------------------------------- 18,639 10,286 16,917------------------------------------------------------------------------------- An interim dividend of 3.00p (net) per ordinary share has been declared payableon 23 October 2006 to shareholders registered on 29 September 2006 in respect ofthe six months to 30 June 2006 (30 June 2005: 2.25p (net) per ordinary share).The dividend was approved by the Board on 4 September 2006 and accordingly hasnot been included as a distribution or liability in this interim consolidatedfinancial information in accordance with IAS 10 Events after the Balance SheetDate. 13 Financial assets and liabilities i) Analysis of financial assets at fair value through income 30 June 2006 30 June 2005 31 Dec 2005 (unaudited) (unaudited) (audited) £000 £000 £000------------------------------------------------------------------------------- Debt and fixedincomesecurities 1,010,472 865,005 1,028,795Equities andshares in unittrusts 131,515 93,427 119,407Deposits withcreditinstitutions 67,967 79,561 89,576------------------------------------------------------------------------------Investments 1,209,954 1,037,993 1,237,778Derivativefinancialassets 589 - ------------------------------------------------------------------------------- 1,210,543 1,037,993 1,237,778------------------------------------------------------------------------------ ii) Analysis of financial liabilities at fair value through income 30 June 2006 30 June 2005 31 Dec 2005 (unaudited) (unaudited) (audited) £000 £000 £000------------------------------------------------------------------------------ Short-term borrowing fromcredit institutions 112,378 390 121,190Derivative financialliabilities 2,686 1,777 5,056------------------------------------------------------------------------------- 115,064 2,167 126,246------------------------------------------------------------------------------ The face value of the Group's short term borrowings from credit institutions at30 June 2006 was £112,432,000 (30 June 2005: £390,000; 31 December 2005: £120,930,000). The Group's borrowings at 31 December 2005 and 30 June 2006 served as a partial hedge of its net investment in the new Bermudan operation. However, the Group has not applied the hedge accounting treatment permitted under IAS 39Financial Instruments: Recognition and Measurement. Consequently, the foreignexchange gain of £8,498,000 (31 December 2005: loss of £120,000) and fair valuegain of £54,000 (31 December 2005: £nil) arising during 2006 are both recognisedin the interim income statement. iii) Investment and cash allocation 30 June 2006 30 June 2005 31 Dec 2005 (unaudited) (unaudited) (audited) £000 % £000 % £000 % ----------------------------------------------------------------------------------------Debt and fixed incomesecurities 1,010,472 60.3 865,005 69.8 1,028,795 62.3Equities and shares inunit trusts 131,515 7.8 93,427 7.5 119,407 7.2Deposits with creditinstitutions/cash andcash equivalents 535,871 31.9 280,480 22.7 503,335 30.5----------------------------------------------------------------------------------------- 1,677,858 1,238,912 1,651,537---------------------------------------------------------------------------------- iv) Investment and cash allocation by currency 30 June 2006 30 June 2005 31 Dec 2005 (unaudited) (unaudited) (audited) % % % ------------------------------------------------------------------------------- Sterling 34.6 36.4 29.9US Dollars 52.9 49.5 57.5Euro and other currencies 12.5 14.1 12.6 14 Net asset value per share 30 June 2006 30 June 2005 31 Dec 2005 (unaudited) (unaudited) (audited) Net asset NAV Net asset NAV Net asset NAV value per share value per share value per share £000 pence £000 pence £000 pence --------------------------------------------------------------------------------------- Net assetvalue 588,363 149.8 421,685 143.3 578,013 147.7Net tangibleasset value 555,347 141.4 389,315 132.3 544,914 139.3--------------------------------------------------------------------------------------The net asset value per share is based on 392,795,000 shares (30 June 2005:294,193,000; 31 December 2005: 391,216,000), being the adjusted number of sharesin issue at each reference date. 15 Impact of foreign exchange related items 6 months to 30 6 months to 30 Year to June 2006 June 2005 31 Dec 2005 (unaudited) (unaudited) (audited) £000 £000 £000 ---------------------------------------------------------------------------- Income statementDerivative gains/(losses)on foreign exchange hedgecontracts includedwithin investmentreturn 17,172 (3,125) (6,404)-------------------------------------------------------------------------------- Unearned Premium anddeferred acquisitioncosts adjustment (15,436) 20,903 22,401Foreign exchangegains/(losses)on borrowingshedging the Bermudanassets 8,498 - (120)Other foreign exchangegains/(losses) (13,584) 19,147 35,139-------------------------------------------------------------------------------- Impact of foreignexchange related itemson income statement (3,350) 36,925 51,016------------------------------------------------------------------------------- Balance sheet Foreignexchange differencesrecognised directly inequity (22,084) 324 1,290-------------------------------------------------------------------------------- Overall impact of foreignexchange related itemson net assets (25,434) 37,249 52,306------------------------------------------------------------------------------- Profit before taxProfit before tax 61,349 88,120 70,221Unearned premium anddeferred acquisitioncosts adjustment 15,436 (20,903) (22,401)-------------------------------------------------------------------------------- Adjusted profit before tax 76,785 67,217 47,820------------------------------------------------------------------------------- 100% level combined ratio 93.2% 83.5% 96.0% 100% level combined ratio (after unearned premium anddeferred acquisitioncosts adjustment) 89.5% 89.6% 99.6% 16 Cash and cash equivalents The purchase, maturity and disposal of financial assets is part of the Group'sinsurance activities and is therefore classified as an operating cash flow. Included within cash and cash equivalents held by the Group are balancestotaling £43,718,000 (30 June 2005: £54,259,000; 31 December 2005: £50,313,000)not available for use by the Group which are held within the Lloyd's Syndicate. Independent Review Report by KPMG Audit Plc to Hiscox plc Introduction We have been engaged by the Company to review the financial information for thesix months ended 30 June 2006 which comprise the condensed consolidated interimincome statement, condensed consolidated interim balance sheet, condensedconsolidated interim statement of changes in equity, condensed consolidatedinterim cash flow statement and related notes 1 to 16. We have read the otherinformation contained in the interim report and considered whether it containsany apparent misstatements or material inconsistencies with the financialinformation. This report is made solely to the Company in accordance with the terms of ourengagement to assist the Company in meeting the requirements of the ListingRules of the Financial Services Authority. Our review has been undertaken sothat we might state to the Company those matters we are required to state to itin this report and for no other purpose. To the fullest extent permitted by law,we do not accept or assume responsibility to anyone other than the Company forour review work, for this report, or for the conclusions we have reached. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by, the directors. The directorsare responsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority which require that the accountingpolicies and presentation applied to the interim figures should be consistentwith those applied in preparing the preceding annual accounts except where theyare to be changed in the next annual accounts in which case any changes, and thereasons for them, are to be disclosed. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4: Review of interim financial information issued by the Auditing PracticesBoard for use in the United Kingdom. A review consists principally of makingenquiries of Group management and applying analytical procedures to thefinancial information and underlying financial data and, based thereon,assessing whether the accounting polices and presentation have been consistentlyapplied unless otherwise disclosed. A review excludes audit procedures such astests of controls and verification of assets, liabilities and transactions.It is substantially less in scope than an audit performed in accordance withInternational Statements on Auditing (UK and Ireland) and therefore provides alower level of assurance than an audit. Accordingly we do not express an auditopinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 June 2006. KPMG Audit PlcLondon 11 September 2006 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Hiscox