12th Sep 2005 07:01
Hiscox PLC12 September 2005 Hiscox plc Interim Results for the six months ended 30 June 2005 "A strong half-year" HY 2005 HY 2004Gross premiums written £437.2 million £489.0 millionProfit before tax £88.1 million £60.3 millionEarnings per share 20.8p 14.9pDividend per share 2.25p 1.5pNet asset value per share 143.3p 120.2pCombined ratio 83.5% 84.6% Highlights • Record pre-tax profit up 46% to £88.1 million • Interim dividend increased 50% to 2.25p (net per share) • Annualised return on equity of 36% • Strategy of expansion in UK and international businesses succeeding - UK profits doubled to £21.1 million- Increased international profits from £0.5 to £3.0 million • New senior appointments to management team Robert Hiscox, Chairman Hiscox plc, commented: "A strong first half-year with highly satisfactory increases in profit from ourUK and international businesses. We have a spread of flourishing businessopportunities outside the London Market in our specialist areas and new goodpeople to help run them. Hurricane Katrina may well halt the slide in rates inthe London Market and will definitely strengthen reinsurance rates. A time ofgreat possibilities for Hiscox." This summary should be read in conjunction with the detailed announcement whichfollows. For further information: Hiscox plc Robert Hiscox Chairman 020 7448 6011Bronek Masojada Chief Executive 020 7448 6012Stuart Bridges Finance Director 020 7448 6013 The Maitland Consultancy Philip Gawith 020 7379 5151Suzanne Bartch 020 7379 5151 Notes to editors Hiscox plc is a specialist insurance group listed on the London Stock Exchangewhere it has a market capitalisation of circa £550 million. There are three mainunderwriting parts of the Group - Syndicate 33 at Lloyd's, UK Retail andInternational Retail business. Syndicate 33 underwrites mainly internationallytraded business in the London Market - generally large or complex business whichneeds to be shared with other insurers or needs the international licences ofLloyd's. The UK Retail business offers a wide range of specialist insurance forprofessionals and business customers, as well as high net worth individuals. Ithas regional offices in Birmingham, Glasgow, Leeds, Maidenhead and Colchester.The International Retail business has offices in Paris, Amsterdam, Brussels,Munich and Guernsey. The European offices write mainly high value householdbusiness and some specialist professional indemnity business. The Guernseyoffice underwrites kidnap and ransom business and fine art. Chairman's statement 2005 The results for the half-year to 30 June 2005 were a record pre-tax profit of£88.1 million (2004: £60.3m). The group written premium income for the periodwas £437.2 million (2004: £489.0m) and the net earned premium income was £345.7million (2004: £349.7m). The group combined ratio was 83.5% (2004: 84.6%) .Earnings per share were 20.8p (2004: 14.9p) and the net assets per share rose to143.3p (2004: 120.2p). Dividend The interim dividend is increased to 2.25p (net) per ordinary share (2004: 1.5p)and will be paid on 24 October 2005 to shareholders on the register at the close of business on 30 September 2005. This 50% uplift is a material increase to bring the interim dividend more in line with the underlying profitability of the company. Overall comment We have had a strong first half with good underwriting helped by few largelosses, good investment conditions and favourable exchange rates. Overall marketconditions remained above average, but were increasingly competitive in theLondon Market where the high rates charged in recent years continue to fall inareas where there is strong competition. Despite Hurricane Katrina'simpact on our catastrophe book, underwriting is still healthily profitable,reserves are prudently set, the old years are benign, and positive cash flow isgiving us more to invest at slightly higher interest rates. Our strategy for some time has been to build our retail businesses to counteractthe cyclicality and volatility of our London Market business: the marketconditions today are exactly those for which that strategy was formed. Theprofits from our underwriting in the UK have more than doubled in this half-yearand we are focussed on continuing that trend. We have developed a network of 6offices in the UK, and 5 in mainland Europe. We are opening an office in the USAwhere we will concentrate on a specialist book of stable small to medium sizedbusiness. We have also stepped up the marketing of our direct business havingestablished a satisfactory underwriting and business model for it. Our retail business expansion is designed to complement, not replace, our LondonMarket underwriting for which we retain a great appetite. Losses such asHurricane Katrina strengthen the need for catastrophe and major risk insurance,and there are always opportunities for profit where others fear to tread. Wehave shown discipline in reducing the amount of London Market business and thebasic business remains well priced. We expect and budget for catastrophes. It isa bonus if we are not hit by any, but last year we suffered an epic run ofhurricanes and our London Market business remained profitable. We are ready tomake the most of any opportunities that arise from the turmoil following thismajor loss. Global Markets This division underwrites London Market risks and retail business from aroundthe world. London Market risks with big premiums are most competed for byinternational competitors, by new capital and also by brokers, with theresultant pressure on prices. The cycle is sadly alive and well in the largerisk sector so a drop in premium income is to be expected. However, there aredefinitely still opportunities for intelligent and creative underwriting forclients who appreciate that cheapest is not always best. The division achieved acombined ratio of 82.8% (2004: 82.4%) which leaves a substantial margin for theperils of the second half year. As always, I am writing this report in the eye of the hurricane season, thistime as Hurricane Katrina has just ravaged New Orleans and the surrounding areawith tragic loss of life and also serious damage to off-shore oil installations.This is a large catastrophe to the insurance market which will have an effect oncatastrophe and energy rates, and maybe other commercial rates in the US We write a book of catastrophe business which has been very profitable over thepast decade. Unlike other classes which have attritional losses slowly leadingto a combined ratio perhaps in the region of 90%, the catastrophe book can beloss free until the big one happens. Therefore the big loss to us is notnecessarily an overall loss in excess of the premium income, but it does attractgreat publicity. We buy reinsurance to keep the accumulated loss within budgetedboundaries. It is too soon to quantify accurately the exact cost to us ofHurricane Katrina, but our estimate based on current information is a loss of £55 million which is within our expected net loss from a major Gulf of Mexicohurricane. Given the likely upward effect on rates, we anticipate that we willnot reduce the premium limit for Syndicate 33 to £650 million for 2006 aspreviously announced, but will keep the current £775 million limit in place. The advantage of being able to use the Lloyd's platform is that we canunderwrite business virtually worldwide using its licences, credit rating andbrand and with great capital efficiency. However, there is no reason for us tosit and wait in Lloyd's for business to be shown to us. That was a veryeffective business model when Lloyd's brokers scoured the world for business andbrought it all back to London, and we kept costs low by underwriting from oneplace with shared back-office costs. Now local markets are stronger and localbusiness is increasingly placed locally and it tends to be the most volatile,catastrophic or very large business that comes to London. To increase our spreadof medium-sized business, we have been joined in the USA by Ed Donnelly who hasan excellent underwriting track record. He is opening an office there to findand underwrite business that does not come to London. UK and European Businesses UK Retail has performed very well with a combined ratio of 81.6% (2004: 89.3%)on a small increase in income. We are clearly selling at the right price, so weneed to sell more. Marketing for our direct business is growing in success andhas an effective spin-off in awareness of the Hiscox brand which helps the wholegroup. We have just appointed Steve Langan, who has a strong marketingbackground, to be head of Hiscox UK and Group Marketing. European Retail has achieved a combined ratio of 95.4% (2004: 103.8%) whichjustifies our faith in this market which we believe has great potential. Againwe have strengthened our management team with Marc van der Veer, who also has anexcellent track record in our business, joining us to lead the expansion of ourEuropean businesses. Investments Slightly higher UK interest rates, a good equity market and the strong cashflowsfrom all areas of the business generating a larger investment pool haveincreased our investment return to £22.9m for the six months (2004: £8.7m). Wecontinue to keep the portfolio balanced taking relatively little risk with shortduration and high credit quality on the bond portfolios and wait patiently foropportunities. Conclusion The largest division in our group, Global Markets, has sensibly reduced itsincome but opportunities will arise following Hurricane Katrina. Weconstantly seek new ways of finding business through our regional and overseasoffices, and the new office in the USA should tap into a huge market where wehave always done business and have considerable expertise. Outside the London Market our regional business through brokers in the UKcontinues to grow its profits, while our direct marketing campaign is producinggood quality business which would be uneconomic to underwrite (or broke) throughconventional channels. Our European offices have come of age and should showincreased growth and profitability. We have worked on new technology to improve the costs of writing retail businessthrough brokers and this is now proving a success, reducing costs and increasingdistribution. We have been joined by strong new leaders for our operations andIT departments which are a vital part of our future and we have also recentlyannounced that Jeremy Pinchin, recently head of claims at Lloyd's, is joining tolead our claims teams and increase our commitment to that crucially importantarea. Given that this business is only as good as its people, it is highlysatisfactory to be able to report the addition of a number of very high qualityindividuals. They have joined what we all believe to be a business on thethreshold of a new era. We have worked hard in recent years to develop newdistribution channels to access new profitable business and new technology toprocess it efficiently. We will not flinch from underwriting a sensiblecatastrophe book as it is capable of substantial profit, and the best marginsare to be found in areas others fear. But we will also continue to build thefundamental profitability of the group in retail and other non-catastropheareas, so that when the catastrophe occurs we will have decent, growingprofitability, and when it doesn't, we will do very well indeed. Robert HiscoxChairman, Hiscox plc12 September 2005 Summary Consolidated Income Statementfor the six month period ended 30 June 2005 Notes 6 months to 6 months to Year to 30 June 2005 30 June 2004 31 Dec 2004 (unaudited) Restated* Restated* (unaudited) (audited) £000 £000 £000------------------------------------------------------------------------------IncomeGross premiums written 437,160 489,038 816,609Net premiums written 345,047 396,457 704,085Net premiums earned 345,668 349,663 714,852------------------------------------------------------------------------------- Investment return 6 22,922 8,654 33,084Other operating income 7 48,970 8,883 15,112------------------------------------------------------------------------------Net income 417,560 367,200 763,048------------------------------------------------------------------------------ExpensesClaims and claim adjustment expenses (186,207) (159,939) (382,063)Expenses for theacquisition of insurancecontracts (99,378) (91,733) (177,960)Expenses for marketing,administration andasset management services rendered (17,779) (20,972) (43,198)Other operatingcosts and expenses 7 (25,218) (33,283) (68,718)--------------------------------------------------------------------------------Total expenses (328,582) (305,927) (671,939)--------------------------------------------------------------------------------Results of operating activities 88,978 61,273 91,109Finance costs (1,009) (988) (1,977)Share of profit of associates 151 19 390-------------------------------------------------------------------------------Profit before tax 88,120 60,304 89,522Income tax expense (27,040) (17,041) (25,574)-------------------------------------------------------------------------------Profit for the period 61,080 43,263 63,948------------------------------------------------------------------------------- Earnings per share: - Basic, based on profit for the period 3 20.8p 14.9p 21.9p- Diluted, based on profit for the period 3 20.6p 14.7p 21.7p * Restated for the adoption of International Financial Reporting Standards. See note 12. Summary Consolidated Balance Sheetat 30 June 2005 Notes 30 June 30 June 2004 31 Dec 2004 2005 Restated* Restated* (unaudited) (unaudited) (audited) £000 £000 £000-------------------------------------------------------------------------------AssetsProperty, plant and equipment 10,837 11,442 10,691Intangible assets 32,370 26,583 29,989Deferred acquisition costs 114,875 117,919 109,970Investments in associatedenterprises 1,013 742 1,109Financial assets 9 1,368,989 1,230,287 1,308,213Reinsurance contract receivables 290,342 270,847 238,871Cash and cash equivalents 200,919 92,748 119,563--------------------------------------------------------------------------------Total assets 2,019,345 1,750,568 1,818,406-------------------------------------------------------------------------------- Equity and liabilitiesShareholders' equityShare capital 14,717 14,581 14,685Share premium 234,899 232,658 234,267Currency translation reserve (144) (473) (468)Other reserves 37,967 37,967 37,967Retained earnings 134,246 65,453 82,375------------------------------------------------------------------------------Total equity 421,685 350,186 368,826 LiabilitiesInsurance contracts 1,373,869 1,198,360 1,246,903Financial liabilities 2,167 1,598 57Trade and other payables 149,588 150,889 145,530Deferred tax liabilities 33,322 13,884 14,517Employee benefit obligations 25,964 33,851 34,718Current tax liabilities 12,750 1,800 7,855------------------------------------------------------------------------------Total liabilities 1,597,660 1,400,382 1,449,580------------------------------------------------------------------------------Total equity and liabilities 2,019,345 1,750,568 1,818,406------------------------------------------------------------------------------Net asset value per share 5 143.3p 120.2p 125.7p * Restated for the adoption of International Financial Reporting Standards. Seenote 12. Consolidated Statement of Changes in Equityfor the six month period ended 30 June 2005 Currency Share Share Translation Other Retained 2005 2004 Capital Premium Reserve Reserves Earnings Total Total (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) £000 £000 £000 £000 £000 £000 £000 -------------------------------------------------------------------------------------------------------------Balance at 1January 14,685 234,267 (468) 37,967 82,375 368,826 314,685Currencytranslationdifferences - - 324 - - 324 (473)-------------------------------------------------------------------------------------------------------------Net incomerecogniseddirectly inequity - - 324 - - 324 (473)Profit forthe period - - - - 61,080 61,080 43,263-------------------------------------------------------------------------------------------------------------Total recognisedincome forthe period - - 324 - 61,080 61,404 42,790 Employee shareoptions : Proceeds from shares issued 32 632 - - - 664 333 Equity settled share-based - - - - 825 825 472 paymentsChange in own shares - - - - 252 252 356Dividends paidto shareholders - - - - (10,286) (10,286) (8,450)-------------------------------------------------------------------------------------------------------------Balance at30 June 14,717 234,899 (144) 37,967 134,246 421,685 350,186------------------------------------------------------------------------------------------------------------ Summary Consolidated Cash Flow Statementfor the six month period ended 30 June 2005 Notes 6 months to 6 months to Year to 30 June 2005 30 June 2004 31 Dec 2004 (unaudited) Restated* Restated* £000 (unaudited) (audited) £000 £000------------------------------------------------------------------------------- Cash generated fromoperations 11 97,307 3,939 40,138Interest paid (774) (879) (1,409)Current tax paid (3,339) (263) (206)--------------------------------------------------------------------------------Net cash flows fromoperating activities 93,194 2,797 38,523Cash flows from theacquisition and sale ofconsolidated enterprises - (200) (1,091)Cash flows from thepurchase of property, plantand equipment (1,530) (5,001) (5,565)Cash flows from thepurchase of intangibleassets (2,401) - (3,406)Loans repaid by relatedparties - 320 320-------------------------------------------------------------------------------Net cash used in investingactivities (3,931) (4,881) (9,742)Proceed from the issue ofordinary shares 664 333 2,046Proceeds from the sale oftreasury shares 252 356 254Proceeds from borrowings - 1,121 -Repayments of borrowings (233) (42) (521)Dividends paid to Company'sshareholders (10,286) (8,450) (12,833)--------------------------------------------------------------------------------Net cash used in financing activities (9,603) (6,682) (11,054)--------------------------------------------------------------------------------Net increase (decrease) incash and cash equivalents 79,660 (8,766) 17,727------------------------------------------------------------------------------Cash and cash equivalentsat beginning of period 119,563 102,712 102,712Net increase (decrease) incash and cash equivalents 79,660 (8,766) 17,727Effect of exchange ratefluctuations on cash andcash equivalents 1,696 (1,198) (876)--------------------------------------------------------------------------------Cash and cash equivalentsat end of period 200,919 92,748 119,563------------------------------------------------------------------------------- * Restated for the adoption of International Financial Reporting Standards. See note 12. Cash flows from operating activities are stated net of cash outflows of£54,259,000 (30 June 2004 : £131,271,000; 31 December 2004: £230,913,000) fromthe acquisition, sale and maturity of investments which form part of the operating assets of the Group. Segment Information - by business division 6 months to 30 June 2005 (unaudited) London Market/ UK International Group Retail Business Total £000 £000 £000 £000------------------------------------------------------------------------------ Gross premiums written 306,168 84,093 46,899 437,160Net premiums written 233,279 75,031 36,737 345,047Net premiums earned 235,743 77,661 32,264 345,668------------------------------------------------------------------------------ Investment return 13,157 7,271 2,494 22,922 Net claims incurred (143,808) (31,921) (10,478) (186,207)Acquisition costs (66,620) (24,424) (16,848) (107,892)Administrative expenses (8,125) (7,746) (2,760) (18,631)Other technical income (expenses) 36,977 645 (697) 36,925-------------------------------------------------------------------------------Trading result 67,324 21,486 3,975 92,785 Agency and other income 8,207 1,306 9,953 19,466Profit commission 2,744 - - 2,744Asset management services andother expenses (13,410) (1,682) (10,925) (26,017)-------------------------------------------------------------------------------Results of operating activities 64,865 21,110 3,003 88,978 Finance costs (1,009) - - (1,009)Share of profit of associates 151 - - 151-------------------------------------------------------------------------------Profit before tax 64,007 21,110 3,003 88,120------------------------------------------------------------------------------ London UK International Market Retail Business Total 100% level net combined ratio (%) 82.8% 81.6% 95.4% 83.5%------------------------------------------------------------------------------- "London Market / Group" comprises Hiscox plc's share of the results of Syndicate33 and the results of non-underwriting entities of the Group, net of anybusiness written between Group companies. "UK Retail" comprises all of the UK retail business of Hiscox Insurance CompanyLimited, together with the result of the online agency business (Hiscox ConnectLimited). "International Business" comprises the results of Hiscox Insurance Company(Guernsey) Limited, the results of the Hiscox overseas agencies and theunderwriting results of the international retail business written by HiscoxInsurance Company Limited. 6 months to 30 June 2004 (unaudited) London Market/ UK International Group Retail Business Total £000 £000 £000 £000------------------------------------------------------------------------------- Gross premiums written 364,424 79,024 45,590 489,038Net premiums written 295,317 68,095 33,045 396,457Net premiums earned 256,343 64,105 29,215 349,663------------------------------------------------------------------------------ Investment return 4,642 3,084 928 8,654 Net claims incurred (120,532) (28,325) (11,082) (159,939)Acquisition costs (64,299) (19,850) (15,839) (99,988)Administrative expenses (10,492) (9,094) (2,149) (21,735)Other technical income (expenses) (13,124) 62 (1,254) (14,316)-------------------------------------------------------------------------------Trading result 52,538 9,982 (181) 62,339 Agency and other income 3,459 989 10,430 14,878Profit commission 3,909 - 3 3,912Asset management services andother expenses (9,414) (672) (9,770) (19,856)-------------------------------------------------------------------------------Results of operating activities 50,492 10,299 482 61,273 Finance costs (988) - - (988)Share of profit of associates 19 - - 19-------------------------------------------------------------------------------Profit before tax 49,523 10,299 482 60,304------------------------------------------------------------------------------- London UK International Market Retail Business Total 100% level net combined ratio (%) 82.4% 89.3% 103.8% 84.6%------------------------------------------------------------------------------- Year to 31 December 2004 (unaudited) London Market/ UK International Group Retail Business Total £000 £000 £000 £000 ------------------------------------------------------------------------------- Gross premiums written 549,458 174,128 93,023 816,609Net premiums written 485,538 149,778 68,769 704,085Net premiums earned 517,497 136,380 60,975 714,852------------------------------------------------------------------------------- Investment return 18,902 11,202 2,980 33,084 Net claims incurred (292,389) (65,682) (23,992) (382,063)Acquisition costs (120,275) (42,283) (32,434) (194,992)Administrative expenses (19,234) (18,251) (4,025) (41,510)Other technical income (expenses) (32,996) 50 368 (32,578)-------------------------------------------------------------------------------Trading result 71,505 21,416 3,872 96,793 Agency and other income 7,138 2,019 21,134 30,291Profit commission 3,539 - (31) 3,508Asset management services andother expenses (16,187) (2,155) (21,141) (39,483)--------------------------------------------------------------------------------Results of operating activities 65,995 21,280 3,834 91,109 Finance costs (1,977) - - (1,977)Share of profit of associates 390 - - 390-------------------------------------------------------------------------------Profit before tax 64,408 21,280 3,834 89,522------------------------------------------------------------------------------- London UK International Market Retail Business Total 100% level net combined ratio (%) 92.1% 92.5% 98.5% 92.6%------------------------------------------------------------------------------ Notes to the Interim Accounts 1 Basis of preparation and audit status European Union ('EU') law (IAS Regulation EC 1606/2002) requires that the nextannual consolidated financial statements of the Company, for the year ending 31December 2005 be prepared in accordance with International Financial ReportingStandards (IFRSs) adopted for use in the EU ("adopted IFRSs"). This interim consolidated financial information has been prepared on the basisof the recognition and measurement requirements of IFRSs in issue that eitherare endorsed by the EU and effective (or available for early adoption) at 31December 2005 or are expected to be endorsed and effective (or available forearly adoption) at 31 December 2005, the Group's first annual reporting date atwhich it is required to use adopted IFRSs. The adopted IFRSs that will be effective (or available for early adoption) inthe annual financial statements for the year ending 31 December 2005 are stillsubject to change and to additional interpretations and therefore cannot bedetermined with certainty. Accordingly, the accounting policies for that annualperiod will be determined finally only when the annual financial statements areprepared for the year ending 31 December 2005. The interim consolidated financial information for the 2005 and 2004 half yearsare unaudited but have been subject to a review by the independent auditors. The unaudited interim consolidated financial information and the comparativefigures for the year ended 31 December 2004 contained within, do not constitutestatutory accounts of the Group within the meaning of Section 240 of the CompaniesAct 1985. The independent auditors have reported on the Statutory Report and Accounts forthe year ended 31 December 2004 prepared under UK GAAP, their report was notqualified and did not contain a statement under Section 237(2) or (3) of theCompanies Act 1985. The independent auditors have also issued a special purposeaudit report on the restated consolidated financial information for the yearended 31 December 2004 under IFRSs (as presented as comparatives in this interimreport). Their report was included in the restated consolidated financialinformation that was published on 26 July 2005 and is available on the Company'swebsite www.hiscox.com. 2 Accounting Policies This interim consolidated financial information has been prepared in accordancewith the accounting policies stated in the restated consolidated financialinformation that was published on 26 July 2005, which is available on theCompany's website www.hiscox.com. A summary of the key differences between IFRS and UK GAAP is presented in note 12. 3 Earnings per share 6 months to 30 June 2005 (unaudited) Average number EPS Earnings of shares per share £000 000 p Basic, based on profit for theperiod 61,080 293,788 20.8Diluted, based on profit for theperiod 61,080 297,051 20.6 6 months to 30 June 2004 (unaudited) Average number EPS Earnings of shares per share £000 000 p Basic, based on profit for theperiod 43,263 291,006 14.9Diluted, based on profit for theperiod 43,263 294,458 14.7 Year to 31 December 2004 (audited) Average number EPS Earnings of shares per share £000 000 p Basic, based on profit for theperiod 63,948 291,755 21.9Diluted, based on profit for theperiod 63,948 295,130 21.7 Diluted earnings per share has been calculated after taking into account 3,263,000 (30 June 2004: 3,452,000; 31 December 2004: 3,375,000) employeeshare options. 4 Return on equity 6 months to Year to 6 months to 30 June 2004 31 Dec 2004 30 June 2005 Restated Restated (unaudited) (unaudited) (audited) £000 £000 £000------------------------------------------------------------------------------ Profit for the period 61,080 43,263 63,948Opening shareholders' equity 368,826 314,685 314,685Adjusted for the time weightedimpact of : Distributions of capital (170) (92) (5,085) Changes in own shares 92 14 113-------------------------------------------------------------------------------Adjusted opening shareholders' equity 368,748 314,607 309,713------------------------------------------------------------------------------- Annualised return on equity (%) 35.9% 29.4% 20.6% 5 Net asset value per share 6 months to 30 June 2005 (unaudited) Net asset Number of NAV value shares* per share £000 000 p Net asset value 421,685 294,193 143.3Net tangible asset value 389,315 294,193 132.3 6 months to 30 June 2004 (unaudited) Net asset Number of NAV value shares* per share £000 000 p Net asset value 350,186 291,216 120.2Net tangible asset value 323,603 291,216 111.1 Year to 31 December 2004 (audited) Net asset Number of NAV value shares* per share £000 000 p Net asset value 368,826 293,306 125.7Net tangible asset value 338,837 293,306 115.5 * The number of shares outstanding at the period end as adjusted for own shares held. 6 Investment Returni) Analysis of investment return 6 months to Year to 6 months to 30 June 2004 31 Dec 2004 30 June 2005 Restated Restated (unaudited) (unaudited) (audited) £000 £000 £000------------------------------------------------------------------------------ Investment income 22,657 17,148 35,051Net realised gains (losses) onfinancial assets (1,629) (5,910) (6,608)Net unrealised gains (losses) onfinancial assets at fair valuethrough income 2,465 (1,780) 6,015Investment expenses (571) (804) (1,374)------------------------------------------------------------------------------- 22,922 8,654 33,084------------------------------------------------------------------------------ ii) Annualised investment yields 6 months to Year to 6 months to 30 June 2004 31 Dec 2004 30 June 2005 Restated Restated (unaudited) (unaudited) (unaudited) Return Yield Return Yield Return Yield £000 % £000 % £000 %------------------------------------------------------------------------------- Debt securities at fair valuethrough income 14,874 3.5 5,692 1.8 19,088 2.7Equities at fair value throughincome 3,729 8.9 933 2.2 8,529 10.3Deposits with creditinstitutions/cash and cash equivalents 4,319 4.5 2,029 2.4 5,467 2.9------------------------------------------------------------------------------- 22,922 4.0 8,654 2.0 33,084 3.4------------------------------------------------------------------------------- 7 Other operating income (expenses) 6 months to Year to 6 months to 30 June 2004 31 Dec 2004 30 June 2005 Restated Restated (unaudited) (unaudited) (unaudited) £000 £000 £000 ------------------------------------------------------------------------------ Agency and other income 8,511 4,166 6,212Profit commission 2,744 3,912 3,508Exchange gains 36,925 - -Other technical income 790 680 3,087Other income - 125 2,305------------------------------------------------------------------------------Other operating income 48,970 8,883 15,112------------------------------------------------------------------------------ Managing agency expenses 10,022 7,146 7,447Overseas underwriting agencyexpenses 10,905 9,750 21,141Connect agency expenses 1,682 672 2,155Exchange losses - 14,316 34,228Other Group expenses 2,609 1,399 3,747-------------------------------------------------------------------------------Other operating expenses 25,218 33,283 68,718------------------------------------------------------------------------------- 8 Dividends 6 months to 6 months to Year to 30 June 2005 30 June 2004 31 Dec 2004 (unaudited) Restated Restated (unaudited) (audited) £000 £000 £000 ------------------------------------------------------------------------------ Final divided for the year ended: 31 December 2004 of 3.5p (net) per share 10,286 - -31 December 2003 of 2.9p (net) per share - 8,450 8,450Interim divided for the year ended:31 December 2004 of 1.5p (net) per share - - 4,383------------------------------------------------------------------------------ 10,286 8,450 12,833------------------------------------------------------------------------------ An interim dividend of 2.25p (net) per ordinary share has been declared payableon 24 October 2005 to shareholders registered on 30 September 2005 in respect ofthe six months to 30 June 2005 (30 June 2004 : 1.5p (net) per ordinary share).The dividend was approved by the Board on 6 September 2005 and accordingly hasnot been included as a distribution or liability in this interim consolidatedfinancial information in accordance with IAS10 'Events after the Balance SheetDate'. 9 Financial Assets (i) Analysis of financial assets 30 June 2004 31 Dec 2004 30 June 2005 Restated Restated (unaudited) (unaudited) (unaudited) £000 £000 £000 ----------------------------------------------------------------------------- Debt securities at fair valuethrough income 865,005 740,319 833,963Equities at fair value throughincome 93,427 78,069 86,783Deposits with creditinstitutions 79,561 55,604 58,637-----------------------------------------------------------------------------Investments 1,037,993 873,992 979,383Trade and other receivables 330,996 356,295 327,482Derivative financial instruments - - 1,348----------------------------------------------------------------------------- 1,368,989 1,230,287 1,308,213----------------------------------------------------------------------------- (ii) Investment and cash allocation 30 June 2005 30 June 2004 31 Dec 2004 (unaudited) Restated Restated (unaudited) (unaudited) £000 % £000 % £000 %------------------------------------------------------------------------------ Debt securities at fairvalue through income 865,005 69.8% 740,319 76.6% 833,963 75.9%Equities at fair valuethrough income 93,427 7.5% 78,069 8.1% 86,783 7.9%Deposits with creditinstitutions / cash andcash equivalents 280,480 22.7% 148,352 15.3% 178,200 16.2%------------------------------------------------------------------------------ 1,238,912 966,740 1,098,946------------------------------------------------------------------------------ (iii) Investment allocation by currency 30 June 2005 30 June 2004 31 Dec 2004 (unaudited) Restated Restated (unaudited) (unaudited) % % % Sterling 36.4 38.4 36.5Dollars 49.5 49.1 46.2Euro and other currencies 14.1 12.5 17.3 10 100% Level Combined Ratio The underwriting activities which are managed by the Group are shown below atthe 100% level regardless of ownership of capacity. All ratios disclosed arecalculated by reference to net premiums earned. Under previously reported UKGAAP figures the net expense ratio was calculated by reference to net premiumswritten. The net combined ratio remains as the total of the net claims and netexpense ratios. 6 months to 30 June 2005 (unaudited) London UK International Market Retail Business Total £000 £000 £000 £000----------------------------------------------------------------------------- Net premiums earned 348,014 77,661 32,264 457,939------------------------------------------------------------------------------ Net claims incurred 218,469 31,921 10,478 260,868 Net claims ratio (%) 62.8% 41.1% 32.5% 57.0%------------------------------------------------------------------------------- Net expenses 69,545 31,525 20,305 121,375 Net expense ratio (%) 20.0% 40.5% 62.9% 26.5%-------------------------------------------------------------------------------- Investment return 14,799 7,271 2,494 24,564-------------------------------------------------------------------------------Trading result 74,799 21,486 3,975 100,260-------------------------------------------------------------------------------Net combined ratio (%) 82.8% 81.6% 95.4% 83.5%------------------------------------------------------------------------------- 6 months to 30 June 2004 (unaudited) London UK International Market Retail Business Total £000 £000 £000 £000------------------------------------------------------------------------------- Net premiums earned 393,918 64,105 29,215 487,238------------------------------------------------------------------------------ Net claims incurred 184,568 28,325 11,082 223,975 Net claims ratio (%) 46.9% 44.2% 37.9% 46.0%------------------------------------------------------------------------------- Net expenses 139,968 28,882 19,242 188,092 Net expense ratio (%) 35.5% 45.1% 65.9% 38.6%------------------------------------------------------------------------------- Investment return 3,111 3,084 928 7,123-------------------------------------------------------------------------------Trading result 72,493 9,982 (181) 82,294-------------------------------------------------------------------------------Net combined ratio (%) 82.4% 89.3% 103.8% 84.6%------------------------------------------------------------------------------- Year to 31 December 2004 (unaudited) London UK International Market Retail Business Total £000 £000 £000 £000------------------------------------------------------------------------------ Net premiums earned 795,190 136,380 60,975 992,545------------------------------------------------------------------------------ Net claims incurred 450,241 65,682 23,992 539,915 Net claims ratio (%) 56.6% 48.2% 39.3% 54.4%----------------------------------------------------------------------------- Net expenses 282,354 60,484 36,091 378,929 Net expense ratio (%) 35.5% 44.3% 59.2% 38.2%------------------------------------------------------------------------------ Investment return 16,257 11,202 2,980 30,439------------------------------------------------------------------------------Trading result 78,852 21,416 3,872 104,140------------------------------------------------------------------------------Net combined ratio (%) 92.1% 92.5% 98.5% 92.6%------------------------------------------------------------------------------- 11 Cash generated from operations 6 months to Year to 6 months to 30 June 2004 31 Dec 2004 30 June 2005 Restated Restated (unaudited) (unaudited) (unaudited) £000 £000 £000 ------------------------------------------------------------------------------ Profit before tax 88,120 60,304 89,522Realised and unrealisedinvestment (gains) losses (836) 7,690 593Depreciation 1,534 1,420 2,932Charges in respect ofretirement benefits (8,754) 517 1,384Charges in respect ofemployee share schemes 826 472 1,194Foreign exchange (gains)losses on cash and cashequivalents (1,696) 1,198 876Other non-cash transactions 1,215 498 428 Changes in operational assets andliabilities :Deferred acquisition costs (4,905) (18,545) (10,596)Trade and other receivables (3,401) (16,083) (24,169)Insurance and reinsurancecontracts 76,555 97,437 204,187Trade and other payables 2,908 302 4,700Investments (54,259) (131,271) (230,913)-------------------------------------------------------------------------------Cash generated fromoperations 97,307 3,939 40,138------------------------------------------------------------------------------- 12 Explanation of transition to IFRSs The principles underpinning the Group's first-time adoption of IFRSs aredescribed in the restated consolidated financial information for the year ended31 December 2004 published on 26 July 2005. The restated consolidated financialinformation contained reconciliations of equity at 1 January 2004 (date oftransition to IFRSs) and at 31 December 2004 (date of last UK GAAP financialstatements) and also the reconciliation of profit for 2004, as required by IFRS1 'First-time Adoption of International Financial Reporting Standards'. It alsosets out the significant accounting policies applied by the Group under IFRSs. Reconciliations of profit after tax and total equity are included below toenable a comparison of the comparative information included in this interimconsolidated financial information with those published in previous financialperiods. Reconciliation of profit after tax from IFRS to UK GAAP Notes 6 months to Year to 30 June 2004 31 Dec 2004 (unaudited) (audited) £000 £000 ---------------------------------------------------------------------------- Profit after tax under IFRS 43,263 63,948Amortisation of intangible assets 12a (725) (1,453)Valuation of financial assets 12b (45) (987)Income tax 12c (974) (554)Insurance contracts 12d (783) (1,442)Employee benefits 12f (224) (1,768)Rates of exchange 12g (4,927) (3,046)Other adjustments (7) (124)-------------------------------------------------------------------------------Profit after tax under UK GAAP 35,578 54,574------------------------------------------------------------------------------- Reconciliation of total equity from IFRS to UK GAAP Notes 30 June 2004 31 Dec 2004 (unaudited) (audited) £000 £000------------------------------------------------------------------------------ Total equity under IFRS 350,186 368,826Intangible assets 12a (5,555) (6,283)Financial assets 12b 139 (803)Income tax 12c (2,156) (1,736)Insurance contracts 12d (12,316) (12,975)Dividend recognition 12e (4,374) (10,281)Employee benefits 12f 27,996 25,729Rates of exchange 12g 7,462 9,385Other adjustments (147) (263)-------------------------------------------------------------------------------Total equity under UK GAAP 361,235 371,599------------------------------------------------------------------------------ The principal changes on either profit for the period or total equity are explained further below: (a) Intangible assets Goodwill Goodwill acquired in a business combination is no longer amortised but is 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 wascapitalised and amortised on a straight-line basis over its useful economic lifewhich was deemed to be 20 years. Any goodwill previously amortised orwritten-off has not been reinstated on adoption of IFRS and thus the value ofgoodwill has been taken as the carrying amount on adoption. Syndicate capacity In 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. (b) Financial assets Valuation In the Group's previously reported UK GAAP financial statements, financialassets were stated at their current value. For listed investments, comprisingthose quoted on the London and other international stock exchanges, currentvalue was deemed to be the mid-market prices on the balance sheet date, or onthe last stock exchange trading day before the balance sheet date. All realisedor unrealised gains and losses 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 : (i) Financial assets at fair value through income;(ii) Held-to-maturity investments;(iii) Loans and receivables; and(iv) Available-for-sale financial assets. A full review of the Group's investments has been performed as part of 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 instruments The Group has entered into a small number of foreign exchange contracts in order to manage its exposure to business denominated in a currency other than itspresentational currency. In accordance with IAS 39 these contracts have beenrecognised in the balance sheet at their fair value. (c) Income tax Current income tax was provided in the Group's previously reported UK GAAPfinancial statements for amounts expected to be paid (or recovered) using thetax rates and laws that had been enacted or substantively enacted at the balancesheet 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. (d) Insurance contracts Equalisation provision In the Group's previously reported UK GAAP financial statements an equalisationprovision was established for Hiscox Insurance Company Limited in accordancewith the requirements of PRU 7.5 of the Integrated Prudential Sourcebook(Insurance and other amendments) Instrument 2004. This provision, which was inaddition to the provisions required to meet the anticipated ultimate cost ofsettlement of outstanding claims at the balance sheet date, was required bySchedule 9A to the Companies Act 1985 to be included within technical provisionsat the balance sheet date notwithstanding that it does not represent liabilitiesat the balance sheet date. Under IFRS 4 'Insurance Contracts', provisions for possible future claimsarising from insurance contracts that are not in existence at the reporting date(such as catastrophe and equalisation provisions) are not recognised. (e) Dividend recognition Under UK GAAP dividends are recognised in the income statement in the period towhich they relate irrespective of when they are declared and approved. IAS 10'Events after the Balance Sheet Date' does not allow the recognition ofdividends to holders of equity instruments after the balance sheet date becausethey do not meet the criteria of a present obligation in IAS 37 'Provisions,Contingent Liabilities and Contingent Assets'. Accordingly only dividendsdeclared (i.e. appropriately authorised and no longer at the discretion of theGroup) are recognised in the statement of changes in equity. (f) Employee benefits Retirement benefit obligations Under IAS 19 'Employee Benefits' the present value of the defined 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. Actuarial gains and losses arising from experience adjustmentsand changes in actuarial assumptions are charged or credited to income over theemployees' expected average remaining working lives. Past service costs arisingin the period are recognised immediately in income, unless the changes to thepension plan are conditional on the employees remaining in service for aspecified period of time (the vesting period). In this case, the past servicecosts are amortised on a straight-line basis over the vesting period. Previously under UK GAAP the assets and liabilities of defined benefit pensionschemes were off-balance sheet items which were only disclosed by way of afootnote. Under SSAP 24 'Accounting for Pension Costs', pension contributionswere charged to the income statement so as to spread the cost of pensions overemployees' working lives with the Group. Differences between these amountscharged and payments made to the Group's pension schemes were treated as anasset 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. Share-based payments IFRS 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 leave After 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. (g) Rates of exchange Functional currency The 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 all monetary assets and liabilities are retranslated at theprevailing rates of exchange at the closing balance sheet date. Unearned premiumand deferred acquisition costs are non monetary assets and liabilities andaccordingly are not retranslated from the historic rates. Presentational currency The 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 rates As 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. 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 2005 which comprise the summary consolidated incomestatement, the summary consolidated balance sheet, the consolidated statement ofchanges in equity, the summary consolidated cash flow statement, segment information and related notes 1 to 12, all prepared on an International FinancialReporting Standards (IFRS) basis. We have read the other information contained inthe interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information. This report is made solely to the Company in accordance with the terms of 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. As disclosed in note 1 to the financial information, the next annual financialstatements of the Group will be prepared in accordance with IFRSs adopted foruse in the European Union. The accounting policies that have been adopted inpreparing the financial information are consistent with those that the directorscurrently intend to use in the next annual financial statements. There is,however, a possibility that the directors may determine that some changes tothese policies are necessary when preparing the full annual financial statementsfor the first time in accordance with those IFRSs adopted for use by theEuropean Union. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4: Review of interim financial information issued by the Auditing 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 is substantially less in scope thanan audit performed in accordance with Auditing Standards and therefore providesa lower 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 2005. KPMG Audit PlcLondon 12 September 2005 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Hiscox