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Hiscox Ltd (HSX)

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Monday 30 July, 2012

Hiscox Ltd

Half Yearly Report

RNS Number : 7465I
Hiscox Ltd
30 July 2012
 



 

 

 

30 July 2012

 

Hiscox Ltd

Interim results for the six months ended 30 June 2012

 

"A healthy profit"

 


H1 2012

H1 2011

Gross premiums written     

£906.4m

£847.5m

Net premiums earned

£567.8m

£554.7m

Profit before tax

£125.8m

(£85.6)m

Earnings per share

32.0p

(22.8)p

Interim dividend per share

6.0p

5.1p

Net asset value per share

339.3p

296.3p

Group combined ratio

81.7%

116.9%

Return on equity (annualised)

20.9%

(13.3)%

 

 

Highlights

·     Interim pre-tax profit of £125.8 million (2011: loss £85.6 million), a welcome return to profit after the unprecedented level of catastrophes in 2011.

·     Gross written premiums increased by 7.0% to £906.4 million (2011: £847.5 million) with targeted growth in areas where rates are rising.

·     Interim dividend increased by 17.6% to 6.0p (2011: 5.1p).

·     Group combined ratio 81.7% (2011: 116.9%).

·     Net asset value per share 339.3p (2011: 296.3p).

·     Catastrophe reserves holding steady.

·     Investment return of 3.1% annualised (2011: 2.0% annualised).

·     Robert Childs to succeed Robert Hiscox as Chairman.

 

Robert Hiscox, Chairman, Hiscox Ltd, commented:

"This has been a very good first half, not only due to the lack of catastrophes, but also from careful risk selection and growth in the right areas.  All our businesses continue to underwrite with great skill and to search for new opportunities in new markets, backed by strong marketing.  I am thoroughly enjoying my last year with the hand on the tiller."  

 

Commenting on the appointment of the new Chairman, Richard Gillingwater, Senior Independent Director, said:

 

"The Board conducted a thorough search and assessed a number of candidates. We concluded that Robert Childs is the outstanding candidate to succeed Robert Hiscox. Taking and managing risk is the core business of an insurer, and we believe that Robert's expertise in risk management and the continuity he will provide as Chairman of the Board will be of great benefit to our shareholders and policyholders alike. Mindful of the UK Corporate Governance Code, the Board consulted with the company's major shareholders, holding about 30% of the company's shares, who unanimously supported our view."

 

ENDS



Contacts

 

Hiscox

Charles Dupplin, Company Secretary, Bermuda            +1 441 278 8300

Kylie O'Connor, Head of Communications, London        +44 (0) 20 7448 6656

 

Brunswick                                                                       +44 (0)20 7404 5959

Tom Burns

 

 

 

Notes to editors

About Hiscox

Hiscox, headquartered in Bermuda, is an international specialist insurance group listed on the London Stock Exchange (LSE:HSX). There are three main underwriting parts of the Group - Hiscox London Market, Hiscox UK and Europe and Hiscox International. Hiscox London Market underwrites mainly internationally traded business in the London Market - generally large or complex business which needs to be shared with other insurers or needs the international licences of Lloyd's. Hiscox UK and Hiscox Europe offer a range of specialist insurance for professionals and business customers, as well as high net worth individuals. Hiscox International includes operations in Bermuda, Guernsey and USA.  For further information, visit www.hiscox.com.



Chairman's statement

A pre-tax profit of £125.8 million for the first six months of this year is a welcome return to our profitable course after the battering we and the insurance industry received from Mother Nature last year.  As ever, I am writing this on the eve of the US hurricane season, but this year we enter it in good shape.

Results

The half-year result to 30 June 2012 was a pre-tax profit of £125.8 million (2011: £85.6 million loss). Gross written premiums rose by 7.0% to £906.4 million (2011: £847.5 million). Net earned premiums were £567.8 million (2011: £554.7 million). The Group net combined ratio was 81.7% (2011: 116.9%). Earnings per share increased to 32.0p (2011: -22.8p) and net assets per share grew to 339.3p (2011: 296.3p).  The return on equity was 20.9% (2011: -13.3%).

Dividend, balance sheet and capital management

The board of Hiscox Ltd proposes to pay an interim dividend for 2012 of 6.0p per share (2011: 5.1p) an increase of 17.6%.  This increase is intended to bring the interim dividend back into line with our goal to pay one third of the annual total at the interim stage.  The record date for the dividend will be 10 August and the payment date will be 19 September. 

The board proposes to offer again a scrip dividend alternative in respect of the interim dividend, subject to the terms and conditions of Hiscox Ltd's Scrip Dividend Alternative. A circular will be sent to shareholders with details of the scrip dividend on 13 August. The final date for making elections in order to be eligible to receive new shares in respect of the interim dividend will be 29 August 2012.

Net asset value per share has increased by 14.5% since June 2011, or 4.9% from the year end, and the balance sheet remains strong.

Overall Comment

Our reinsurance teams in London and Bermuda have benefited from the low incidence of catastrophes or large losses during the period and taken advantage of higher rates in selective areas. The retail businesses in the UK and Europe have both had some bad weather losses, but have demonstrated their core strength by turning in a reasonable profit even after increased marketing spend.  The US business is developing strongly and Guernsey continues to shine.

Our UK businesses were distracted during the period by preparations for Solvency ll.  The chorus of complaints to the regulators has had an effect and their demands have ameliorated to some extent.  Sense must prevail and I hope we can make the processes which Solvency II requires an intrinsic part of our risk management without them stripping us of the use of intuition and common-sense.  After all, no model could ever have predicted the amount of rain falling this year in the UK and tipping down outside my window as I write.        

 

Rates

Rates for US property catastrophe reinsurance grew in excess of 10% in the first quarter, and then between 0-5% in the second quarter.  Japanese earthquake catastrophe rates have doubled since the Tohoku Earthquake, and Japanese wind rates rose by between 10-30% at the April renewals. 

Large casualty business is still under pressure, but rates are continuing to improve in internationally traded property lines.      

In other specialty insurance lines rates are generally flat, with some under continuing downward pressure.

People

Since I announced in February my retirement as chairman in February 2013, the Nominations Committee has conducted a rigorous search for a new Chairman.  Outside consultants searched from within and outside the company and a shortlist was produced.  Ultimately, the Board accepted the Nominations Committee's recommendation of our current Chief Underwriting Officer and member of the Board of Hiscox Ltd, Robert Childs.

I know that the UK Corporate Governance Code favours an independent chairman.  However, I agree with the recommendation of the Nominations Committee as do the major shareholders who were consulted. The Board believes that Robert Childs has the strength of character, the commercial experience and the detailed knowledge of our business that will make him an excellent Chairman of the Board.  He was the active underwriter of our Lloyd's Syndicate 33, he then started and built our businesses in Bermuda and the US, and he has recently had an oversight role covering all the underwriting in the Group as Chief Underwriting Officer.

During consultation, the question was asked whether he can move from reporting to the CEO to having the CEO report to him.  I believe that in underwriting matters he has been in effect the ultimate arbiter, and underwriting is our business, and I know (and have witnessed) that he has the strength to insist if need be.  Another question was can he move from executive to non-executive (if any chairman can be deemed non-executive).  Well, I have seen him go from CEO of Bermuda and Executive Chairman of Hiscox US to an oversight role, and his Chief Underwriting Officer role is an oversight role in the main, so I am confident that he can and will.

Finally, if I am to leave my life's work and my family's financial health in the hands of others, I feel safe in the knowledge that the chairman at the head of the table has an incisive knowledge of the risks in our business, and is unlikely to allow foolishness to take place.  A few more insiders at the helms of some other financial institutions in the City might have stopped some of the idiocy that occurred.

I am also pleased to announce that Jeremy Pinchin has been appointed Chief Executive of Hiscox Bermuda and Group Company Secretary as of 14 August taking over from Charles Dupplin who will be returning to the UK.  Charles performed these roles for the past three years and certainly made his mark in Bermuda.  Jeremy joined us in 2005 as Group Claims Director and he will also continue to oversee group claims.

Hiscox London Market

This division uses the global licences, distribution network and credit rating available through Lloyd's to insure clients throughout the world.

Profit before tax                       £69.5 million (2011: £26.6 million loss)

Gross written premiums         £371.3 million (2011: £349.0 million)

Combined ratio                       68.4% (2011: 113.9%)

Hiscox London Market had an extremely low combined ratio due to the absence of catastrophe losses and through avoidance of attritional losses from the considerable number of weather events in the US and the earthquake in Italy.  This resulted in an excellent first half profit of £69.5 million. Premium income grew by 6.4% with growth in terrorism, upstream energy, commercial property and aviation, and a stable income in other lines.  Terrorism business is ahead of budget due to our continued strong focus on the class and increased new business from the Middle East and North Africa.  Rates remain strong in political risks business.  After several years of pulling back whilst rates were falling, the property division is once again growing, with well-rated business coming from the US as well as loss impacted areas such as New Zealand. 

The gross premium income of the reinsurance division grew 2% year-on-year. Increased writings of Japanese catastrophe business were offset by the non-renewal of certain inwards proportional treaties, and the (welcome) lack of reinstatement premiums due to the absence of catastrophe losses.  Rates on the core US catastrophe reinsurance account remain strong.  

Hiscox UK

This division writes personal insurances (high value households, art, luxury motor, and associated risks) and commercial insurances for small to medium businesses which in the main rely on their brains (rather than infrastructure) to make money.  It also specialises in insuring technology and media companies.  All three areas made profits in the period.

Profit before tax                       £15.8 million (2011: £25.2 million)

Gross written premiums         £184.0 million (2011: £182.9 million)

Combined ratio                       95.2% (2011: 87.9%)

Premium income was marginally ahead of last year despite our previously announced withdrawal from two underwriting partnerships as they had not lived up to expectations. We replaced the lost income through strong growth in the specialty commercial business.

Despite the appalling weather there have been fewer than expected flood or cancellation losses, but we have made an appropriate reserve in case of late notifications.  We do specialise in event cancellation, so the underwriters are to be congratulated for avoiding the high profile outdoor events which have had to be cancelled.  We will cover such events at a fair price, but others have had a lower definition of 'fair'.  However, we did suffer our largest-ever residential fire where the fire started on the top floor of a house in London, but the efforts of the fire brigade to put the fire out swamped the rest of the house with water - a regrettably common experience in household fires.  

The direct to consumer business continues to grow and we have returned to TV advertising in the UK with a message on our values and service.  The campaign has already had a measurable impact on how people view Hiscox, and we hope that our target insureds will choose a trustworthy and principled insurer over the cheapest.  We are acutely aware that proclaiming that we will adhere to strong ethical and service standards means we must perform to a high level or be deservedly condemned.

We have long regarded excellent service and the swift and fair settlement of claims to be our core product. Insurance is a promise to pay and only when a customer makes a claim can that promise be tested. So it is very pleasing that our efforts have been recognized by winning the Customer Care Award at the prestigious British Insurance Awards.   

Hiscox Europe

This division's core business is much the same as the UK's: household, and specialist commercial accounts.  It also underwrites larger fine art risks, technology and media risks and kidnap and ransom insurance.

Profit before tax                       £0.6 million (2011: £0.1 million)

Gross written premiums         £84.0 million (2011: £80.6 million)

Combined ratio                       102.1% (2011: 100.2%)

A profit of £0.6 million is a fair result, considering that France was hit by a severe winter freeze and our Benelux household book experienced higher-than-normal claims activity, mainly from armed burglary.   

Hiscox Europe's premium income rose slightly, with art and household business remaining flat but good growth in professional liability and specialty commercial lines.  

We continue to distribute through financial institutions. Some banks and composite insurers understand the benefits of giving their clients access to a specialist insurer rather than trying to build expertise themselves in a product which may never be a core part of their business.  To that end, Hiscox France has forged a new relationship with Generali France to provide high-value household cover to its clients.

Hiscox International

This division comprises our Bermuda, USA and Guernsey units.

Profit before tax                       £46.2 million (2011: £82.2 million loss)

Gross written premium           £267.2 million (2011: £234.9 million)

Combined ratio                       78.7% (2011: 160.1%)

Hiscox Bermuda

Hiscox Bermuda underwrites catastrophe reinsurance and healthcare business.

The division made a healthy profit thanks to the absence of catastrophe losses and grew by 11.4% helped by the steep rise in rates that followed last year's series of very large natural disasters. Rates for Japanese earthquake excess of loss business have doubled since the Tohoku Earthquake, and Bermuda has quadrupled its income in this area.  We had followed our usual practice of gently withdrawing as rates drop and others wish to take our place, and then increasing rapidly when the inevitable loss drives prices up and wounded competitors away.

In Bermuda and London we are currently underwriting a book of catastrophe business on behalf of Aviva, but following their recent reorganisation they will not be renewing this quota share arrangement next year.  We are working to replace them as it is commercially sensible for us to be able to use our specialist expertise for others, and for our partners to gain profitable diversification if they are not involved in this area.

Hiscox Guernsey

Hiscox Guernsey underwrites kidnap and ransom, as well as personal accident, terrorism and fine art risks.

Guernsey has for long been one of the jewels in our crown and it continues to perform well. The team has concentrated on expanding its distribution in the Middle East and Far East. They have remained cautious about the piracy market, choosing to underwrite only those risks which they regard as being sensibly priced.

Hiscox USA

Hiscox USA underwrites a book of small commercial business to wholesale brokers, and larger specialist business mainly to retail brokers.  It also sells cover directly to small commercial businesses through the internet.

Hiscox USA continues to benefit from the decisions we made two years ago to narrow its product range and focus its distribution channels to better effect. It saw good top-line growth of 29.1%, with particularly strong performances in construction, terrorism and management liability.  The expense ratio continues to improve as the business grows and is better than plan.

We continue to invest in developing our brand in the US and have been accelerating our marketing efforts to promote our direct-to-consumer business.  This includes the second season of our branded web series Leap Year http://www.youtube.com/theleapyeartv which has had over one million views since June. These efforts are having a positive effect with weekly sales three times 2011 levels on a year-on-year basis. This business is performing well and recently expanded to include coverage for allied health professionals, which expands our target appetite by over two million small businesses.  New distribution and marketing partnerships are also helping drive sales. 

Investments

Assets under management at 30 June 2012 totalled £2,989 million (2011: £2,859 million) and the annualised return was 3.1% (2011: 2.0%) leading to an investment return on financial assets of £44.5 million (2011: £27.6 million).  In the world of low interest rates that we currently operate in, this can be considered as a creditable result.

Once again investment markets have been prone to bouts of "risk on" or "risk off" sentiment with moments of financial or political stress being countered by central bank action or political compromise.  As a result of the improved tone in the first quarter our non-government bonds recovered sharply from their year end weakness and contributed to a better than expected result from the bond portfolios.  Our allocation to equities provided a useful additional return.  The second quarter proved less productive as worries over Spain and Greece tested nerves once again.  The bonds essentially earned their yield and risk assets trimmed some of their earlier gains.  For the first six months, the return from our bonds of 1.5% far exceeded the short dated government bond benchmark of a paltry 0.2%. 

Economic uncertainty, volatile capital markets and sovereign debt issues remain a feature of the investment landscape. The latest concerns over the outlook for economic growth have driven yields in many bond markets to historic lows with, in some cases, investors having to settle for a negative return on their money.  Against this background our asset allocation has remained largely unchanged albeit that cash levels have increased following distributions from Syndicate 33 and due to a high level of cash equivalents in some of the bond portfolios.  The allocations to cash and highly rated Government securities provide substantial liquidity but we retain a good weighting to corporate bonds in order to earn some extra yield from solvent borrowers.  Our conservative stance still precludes investment in higher yielding European sovereign debt and entails close monitoring of the banks we have exposure to in the bond and money markets.  We continue to view equities as an asset class which is likely to generate capital gains over the medium term and would be inclined to add more if good opportunities occur as they did last autumn.

A return to normalised interest rates and more stable equity markets appears to be some way off and our expectation for investment returns are accordingly relatively modest for the time being.

Outlook

Investment returns have traditionally been a large part of the return for us and the insurance industry.  Now that they are so much reduced, our underwriting skill will be even more essential in the near future.  Reinsurance rates are healthy and property rates in some areas are rising.  Otherwise in our retail books life remains competitive, but it always has been and we have specialist products and volume which enables us to compete and grow profitably.  As usual, we wait to see what Mother Nature throws at us in the second half, but given nothing absolutely extraordinary happens, I believe I will be handing over to Robert next February the chairmanship of a very healthy business.

 

Robert Hiscox

30 July 2012



Condensed consolidated interim income statement

for the six month period ended 30 June 2012

 


 

 

 

 

Note

6 months to

30 June 2012

6 months to

 30 June 2011

Year to

  31 Dec 2011


£000

£000

£000

Income





Gross premiums written

7

906,443

847,451

1,449,219

Outward reinsurance premiums


(204,934)

(179,890)

(275,208)

Net premiums written


701,509

667,561

1,174,011

 

Gross premiums earned


701,568

688,207

1,428,954

Premiums ceded to reinsurers


(133,795)

(133,539)

(283,947)

Net premiums earned


567,773

554,668

1,145,007






Investment result

10

44,687

25,463

24,495

Other revenues

11

7,067

7,625

17,322

Revenue


619,527

587,756

1,186,824

Expenses





Claims and claim adjustment expenses, net of reinsurance


(232,571)

(438,350)

(697,898)

Expenses for the acquisition of insurance contracts


(133,663)

(127,417)

(269,792)

Operational expenses

11

(118,108)

(100,600)

(203,204)

Foreign exchange (losses)/gains

19

(4,452)

(3,547)

7,816

Total expenses


(488,794)

(669,914)

(1,163,078)

Results of operating activities


130,733

(82,158)

23,746

Finance costs

12

(4,490)

(3,500)

(6,698)

Share of (loss)/profit of associates after tax


(441)

62

223

Profit/(loss) before tax


125,802

(85,596)

17,271

Tax (expense)/credit

13

(1,011)

(1,445)

4,001

Profit/(loss) for the period (all attributable to owners of the Company)


124,791

(87,041)

21,272

 

Earnings per share on profit attributable to owners of the Company





Basic

15

32.0p

(22.8)p

5.5p

Diluted

15

30.7p

(22.8)p

5.3p

 

 

The notes to the condensed consolidated interim financial statements are an integral part of this document.

 

 

 

Condensed consolidated interim statement of comprehensive income

For the six month period ended 30 June 2012, after tax

 



6 months to

30 June 2012

£000

6 months to

 30 June 2011

£000

Year to

  31 Dec 2011

£000

Profit/(loss) for the period


124,791

 

(87,041)

21,272






Other comprehensive income

Currency translation (losses)/gains (net of tax of £nil)


(8,399)

(8,550)

11,060

Total other comprehensive (loss)/income


(8,399)

                   (8,550)

11,060

Total comprehensive income/(loss) recognised (all attributable to owners of Company)


116,392

(95,591)

32,332

 

 

The notes to the condensed consolidated interim financial statements are an integral part of this document.

 

 

 

Condensed consolidated interim balance sheet

at 30 June 2012

 


 

 

 

 

Note

30 June 2012

30 June 2011 

 

 31 Dec 2011


£000

£000

£000






Assets





Intangible assets


68,690

64,882

67,552

Property, plant and equipment


18,063

18,578

18,155

Investment in associates


5,938

6,188

6,380

Deferred tax


25,152

14,077

25,748

Deferred acquisition costs


181,169

172,668

150,050

Financial assets carried at fair value

17

2,321,163

2,368,069

2,368,636

Reinsurance assets

14

518,972

530,661

492,515

Loans and receivables including insurance receivables


606,788

636,636

507,722

Current tax asset


3,445

-

69,436

Cash and cash equivalents


680,231

502,954

516,547

Total assets


4,429,611

4,314,713

4,222,741






Equity and liabilities





Shareholders' equity





Share capital


20,623

20,494

20,563

Share premium


35,325

29,294

32,086

Contributed surplus


245,005

245,005

245,005

Currency translation reserve


52,118

40,907

60,517

Retained earnings


979,120

810,765

897,728

Total equity (all attributable to owners of the Company)


1,332,191

1,146,465

1,255,899






Deferred tax


140,635

19,776

152,447

Insurance liabilities

14

2,647,977

2,672,123

2,500,260

Financial liabilities

17

219

75,061

-

Current tax


4,917

21,550

-

Trade and other payables


303,672

379,738

314,135

Total liabilities


3,097,420

3,168,248

2,966,842

Total equity and liabilities


4,429,611

4,314,713

4,222,741

 

The notes to the condensed consolidated interim financial statements are an integral part of this document. 

 

Condensed consolidated interim statement of changes in equity

for the six month period ended 30 June 2012

 


 

Share

capital

 

Share

premium

 

 

Contributed surplus

 

Currency translation reserve

 

                     Retained

earnings

Total


£000

£000

£000

£000

                    £000

£000








Balance at 1 January 2012

20,563

32,086

245,005

60,517

897,728

1,255,899

Total recognised comprehensive income/(expense) for the period (all attributable to owners of the Company)

-

-

-

(8,399)

124,791

116,392








Employee share options :







      Equity settled share based payments

-

-

-

-

2,952

2,952

      Proceeds from shares issued

32

962

-

-

-

994

Deferred tax

-

-

-

-

255

255

Shares issued in relation to Scrip Dividend

28

2,277

-

-

-

2,305

Dividends paid to owners of the Company (note 16)

-

-

-

-

(46,606)

(46,606)

Balance at 30 June 2012

20,623

35,325

245,005

52,118

979,120

1,332,191

 

 

The notes to the condensed consolidated interim financial statements are an integral part of this document.

 

 

Condensed consolidated interim statement of changes in equity

for the six month period ended 30 June 2011

 


 

Share

capital

 

Share

premium

 

 

Contributed surplus

 

Currency translation reserve

 

                     Retained

earnings

Total


£000

£000

£000

£000

                    £000

£000








Balance at 1 January 2011

20,297

15,800

245,005

49,457

935,555

1,266,114

Total recognised comprehensive expense for the period (all attributable to owners of the Company)

-

 

-

-

(8,550)

(87,041)

(95,591)








Employee share options :







      Equity settled share based payments

-

-

-

-

4,620

4,620

      Proceeds from shares issued

36

1,347

-

-

-

1,383

Deferred tax

-

-

-

-

1,742

1,742

Shares issued in relation to Scrip Dividend

161

12,147

-

-

-

12,308

Dividends paid to owners of the Company (note 16)

-

-

-

   -

(44,111)

(44,111)

Balance at 30 June 2011

20,494

29,294

245,005

40,907

810,765

1,146,465

 

 

The notes to the condensed consolidated interim financial statements are an integral part of this document.

 

 

 

 

Condensed consolidated interim cash flow statement

for the six month period ended 30 June 2012


Note

6 months to

30 June 2012

6 months to

 30 June 2011

Year to

 31 Dec 2011


£000

£000

£000

Profit/(Loss)  before tax


125,802

(85,596)

17,271

Adjustments for:





Interest and equity dividend income


(23,206)

(27,431)

(50,333)

Interest expense

12

4,490

3,500

6,698

Net fair value (gains)/losses on financial assets


(19,578)

15,876

30,878

Depreciation and amortisation


3,244

4,671

8,098

Charges in respect of share based payments


2,952

4,620

8,677

Other non-cash movements


440

(67)

(1,070)

Effect of exchange rate fluctuations on cash presented separately


5,214

(680)

(1,451)

Changes in operational assets and liabilities:





Insurance and reinsurance contracts


(28,703)

201,640

138,667

Financial assets carried at fair value


55,496

60,642

78,501

Financial liabilities carried at fair value


219

396

(457)

Other assets and liabilities


8,039

(19,777)

(18,888)

Cash flows from operations


134,409

157,794

216,591

Interest received


28,006

26,724

50,244

Equity dividends received


934

707

1,531

Interest paid


(5,792)

(3,271)

(6,163)

Current tax received/(paid)


58,935

(33,793)

(4,003)

Net cash flows from operating activities


216,492

148,161

258,200

Cash flow from the sale and purchase of associates


-

723

729

Cash flows from the purchase of property, plant and equipment


(735)

(590)

(2,561)

Cash flows from the purchase of intangible assets


(3,552)

(6,160)

(9,992)

Net cash flows from investing activities

(4,287)

(6,027)

(11,824)

Proceeds from the issue of ordinary shares


994

1,383

3,215

Dividends paid to owners of the Company

16

(44,301)

(31,803)

(50,512)

Net  increase/(repayments) of borrowings


-

54,543

(20,000)

Net cash flows from financing activities


(43,307)

24,123

(67,297)

Net increase  in cash and cash equivalents


168,898

166,257

179,079

Cash and cash equivalents at 1 January


516,547

336,017

336,017

Net  increase in cash and cash equivalents


168,898

166,257

179,079

Effect of exchange rate fluctuations on cash and cash equivalents


(5,214)

680

1,451

Cash and cash equivalents at end of period

20

680,231

502,954

516,547

The notes to the condensed consolidated interim financial statements are an integral part of this document.

 

 

 

 

 

Notes to the condensed consolidated interim financial statements

 

1 Reporting entity

Hiscox Ltd (the 'Company') is a public limited company registered and domiciled in Bermuda. The condensed consolidated interim financial statements for the Company as at, and for the six months ended, 30 June 2012 comprise the Company and its subsidiaries (together referred to as the 'Group') and the Group's interest in associates. The Chairman's statement accompanying these condensed interim financial statements forms the Interim Management Report for the half year ended 30 June 2012.

The Directors of Hiscox Ltd are listed in the Group's 2011 Report and Accounts. A list of current Directors is maintained and available for inspection at the registered office of the Company located at 4th Floor, Wessex House, 45 Reid Street, Hamilton, Bermuda HM 12.

2 Basis of preparation

These condensed consolidated interim financial statements have been prepared in accordance with the Listing Rules issued by the Financial Services Authority. The information presented herein does not include all of the disclosures typically required for full consolidated financial statements. Consequently these financial statements should be read in conjunction with the full consolidated financial statements of the Group as at, and for the year ended, 31 December 2011 which are available from the Company's registered office or at www.hiscox.com. Except where otherwise indicated, all amounts are presented in Pounds Sterling and rounded to the nearest thousand.

After making enquiries, the Directors have an expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason the condensed consolidated interim financial statements have been prepared on a going concern basis and are prepared on the historical cost basis except that pension scheme assets included in the measurement of the employee retirement benefit obligation, and certain financial instruments including derivative instruments are measured at fair value.

Taxes on income for the interim period are accrued using the estimated effective tax rate that would be applicable to estimated  total annual earnings.

The independent auditors have reported on the Group's full consolidated financial statements as at, and for the year ended, 31 December 2011. The report of the independent auditors was not qualified. The amounts presented for the 30 June 2012 and 30 June 2011 periods are unaudited.

These condensed consolidated interim financial statements were approved by the Board of Directors on 30 July 2012.

3   Accounting policies and methods of computation

The accounting policies applied in these condensed consolidated interim financial statements are consistent with those applied by the Group in its consolidated financial statements as at, and for the year ended, 31 December 2011. The consolidated financial statements as at, and for the year ended, 31 December 2011 were compliant with International Financial Reporting Standards as adopted by the European Union and in accordance with the provisions of the Bermuda Companies Act 1981. The Interim Report is compliant with IAS 34 Interim Financial Reporting as adopted by the European Union.

4   Financial, Insurance and other risk management

The Group's financial, insurance and other risk management objectives and policies are consistent with that disclosed in note 3 of the full consolidated financial statements as at, and for the year ended, 31 December 2011. The principal risks and uncertainties are unchanged and may be summarised as insurance risk, equity price risk, interest rate risk, liquidity risk, credit risk, currency risk, capital risk and operational risk.

As the significant strains on the Euro countries continue and the remnants of the credit issues of 2007 and 2008 linger on, the Group has been mindful of the ongoing dislocation in specific asset classes and their impact on investment markets and the solvency of counterparties more generally. The Group continues to monitor all aspects of its financial risk appetite and the resultant exposure taken with caution, and has consequently suffered insignificant defaults on investments held during the period under review.

The table in 17v) shows the Group's position at 30 June 2012 for all government issued or supported debt and all bank issued debt by country. The Group has no direct government exposure to Portugal, Italy, Ireland, Greece or Spain. The bank debt exposure to Spain is rated A and to that in Italy is rated BBB.

As detailed in note 17, the Group's investment allocation is broadly comparable to that at 31 December 2011 as outlined in the Group Report and Accounts. The Group also continues to be mindful of the processes required for establishing the reliability of fair values obtained for some classes of financial assets affected by ongoing periods of diminished liquidity. In order to assist users, the Group has disclosed the measurement attributes of its investment portfolio in a fair value hierarchy in note 18 in accordance with the Amendments to IFRS 7, Financial Instruments: Disclosures.

The Group remains susceptible to fluctuations in rates of foreign exchange, in particular between Pound Sterling and the US Dollar.

Strong treasury management has ensured that the Group's balance sheet remains well capitalised and its operations are financed to accommodate foreseen liquidity demands together with a high level of capital sufficient to meet future catastrophe obligations even if difficult investment market conditions were to prevail for a period of time.

 

5   Seasonality and weather

Historically the Group's most material exposure to catastrophe losses on certain lines of business such as reinsurance inwards and marine and major property risk have been greater during the second half of the calendar year, broadly in line with the most active period of the North Atlantic hurricane season. In contrast a majority of gross premium income written in these lines of business occurs during the first half of the calendar year. The Group actively participates in many regions and if any catastrophic events do occur, it is likely that the Group will share some of the market's losses. Consequently, the potential for significantly greater volatility in expected returns remains during the second half of the year. Details of the Group's recent exposures to these classes of business are disclosed in note 3 of the Group's 2011 Report and Accounts.

 

6   Related party transactions

Transactions with related parties during the period are consistent in nature and scope with those disclosed in note 38 of the Group's 2011 Report and Accounts.

 

7   Operating Segments

The Group's operating segments consist of four segments which recognise the differences between products and services, customer groupings and geographical areas. Financial information is used in this format by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The format is representative of the management structure of the segments.

 

The Group's four operating segments are:

London Market comprises the results of Syndicate 33, excluding the results of fine art, UK regional events coverage and non US household business which is included within the results of the UK and Europe.  It also includes the fire and aviation businesses from Syndicate 3624 and the larger TMT business written by Hiscox Insurance Company Limited.  In addition, it excludes an element of kidnap and ransom and terrorism included in UK and Europe.

UK and Europe comprises the results of Hiscox Insurance Company Limited, the results of Syndicate 33's fine art, UK regional events coverage and non US household business, together with the income and expenses arising from the Group's retail agency activities in the UK and continental Europe. In addition, it includes the European errors and omissions business from Syndicate 3624. It also includes an element of kidnap and ransom and terrorism written in Syndicate 33. It excludes the results of the larger TMT business written by Hiscox Insurance Company Limited.

International comprises the results of Hiscox Insurance Company (Guernsey) Limited, Hiscox Insurance Company (Bermuda) Limited, Hiscox Inc., Hiscox Insurance Company Inc. and Syndicate 3624 excluding the European errors and omissions, fire and aviation business.

Corporate Centre comprises the investment return, finance costs and administrative costs associated with Group management activities. Corporate Centre also includes the majority of foreign currency items on economic hedges and intragroup borrowings. These relate to certain foreign currency items on economic hedges and intragroup borrowings, further details of these can be found in note 13 of the Group's Report and Accounts for the year ended 31 December 2011. Corporate Centre forms a reportable segment due to its investment activities which earn significant external coupon revenues.

 

 






6 Months ended 30 June 2012

 


London

Market

£000

UK and

Europe

£000

 

International

£000

Corporate

Centre

          £000

 

Total

£000

Gross premiums written

371,250

267,980

267,213

-

906,443

Net premiums written

246,337

256,129

199,043

-

701,509

Net premiums earned

186,665

234,886

146,222

-

567,773

Investment result

13,975

7,895

15,010

7,807

44,687

Other revenues

2,914

1,640

2,139

374

7,067

Revenue

203,554

244,421

163,371

8,181

619,527

Claims and claim adjustment expenses, net of reinsurance

(64,728)

(117,002)

(50,841)

-

(232,571)

Expenses for the acquisition of insurance contracts

(44,093)

(55,316)

(34,254)

-

(133,663)

Operational expenses

(24,078)

(52,170)

(33,161)

(8,699)

(118,108)

Foreign exchange (losses)/gains

(681)

(3,531)

1,353

(1,593)

(4,452)

Total expenses

(133,580)

(228,019)

(116,903)

(10,292)

(488,794)

Results of operating activities

69,974

16,402

46,468

(2,111)

130,733

Finance costs

(514)

-

(227)

(3,749)

(4,490)

Share of profit of associates after tax

-

-

(42)

(399)

(441)

Profit before tax

69,460

16,402

46,199

(6,259)

125,802

100% ratio analysis






Claims ratio (%)

32.7

49.8

34.3

-

39.6

Expense ratio (%)

35.4

45.7

45.3

-

41.6

Combined ratio excluding foreign exchange impact (%)

68.1

95.5

79.6

-

81.2

Foreign exchange impact (%)

0.3

1.5

(0.9)

-

0.5

Combined ratio (%)

68.4

97.0

78.7

-

81.7

Total assets before intragroup items and eliminations

 

2,581,556

1,068,667

1,520,983

1,145,443

6,316,649

Intragroup items and eliminations





(1,887,038)

Total assets





4,429,611

 

 

  

 






6 Months ended 30 June 2011


London

Market

£000

UK and

Europe

£000

 

International

£000

Corporate

Centre

          £000

 

Total

£000

Gross premiums written

348,993

263,510

234,948

-

847,451

Net premiums written

237,975

248,810

180,776

-

667,561

Net premiums earned

192,793

215,341

146,534

-

554,668

Investment result

8,174

5,806

8,067

3,416

25,463

Other revenues

4,008

1,748

1,869

-

7,625

Revenue

204,975

222,895

156,470

3,416

587,756

Claims and claim adjustment expenses, net of reinsurance

(158,544)

(102,235)

(177,571)

-

(438,350)

Expenses for the acquisition of insurance contracts

(43,173)

(50,737)

(33,507)

-

(127,417)

Operational expenses

(18,998)

(47,193)

(28,309)

(6,100)

(100,600)

Foreign exchange (losses)/gains

(10,194)

2,569

895

3,183

(3,547)

Total expenses

(230,909)

(197,596)

(238,492)

(2,917)

(669,914)

Results of operating activities

(25,934)

25,299

(82,022)

499

(82,158)

Finance costs

(680)

-

(209)

(2,611)

(3,500)

Share of profit of associates after tax

-

-

-

62

62

(Loss) / profit before tax

(26,614)

25,299

(82,231)

(2,050)

(85,596)

100% ratio analysis






Claims ratio (%)

82.7

47.2

118.9

-

78.8

Expense ratio (%)

26.9

45.3

41.8

-

36.9

Combined ratio excluding foreign exchange impact (%)

109.6

92.5

160.7

-

115.7

Foreign exchange impact (%)

4.3

(1.2)

(0.6)

-

1.2

Combined ratio (%)

113.9

91.3

160.1

-

116.9

Total assets before intragroup items and eliminations

 

2,432,419

936,321

1,438,769

1,066,178

5,873,687

Intragroup items and eliminations





(1,558,974)

Total assets





4,314,713

 

 

 

 






Year ended 31 December 2011

 


London

Market

£000

UK and

Europe

£000

 

International

£000

Corporate

Centre

                  £000

 

Total

£000

Gross premiums written

585,441

498,006

365,772

-

1,449,219

Net premiums written

 

413,390

472,608

288,013

-

1,174,011

Net premiums earned

418,764

448,594

277,649

-

1,145,007

Investment result

8,782

7,248

6,313

2,152

24,495

Other revenues

9,858

3,938

3,311

215

17,322

Revenue

437,404

459,780

287,273

2,367

1,186,824

Claims and claim adjustment expenses, net of reinsurance

(238,026)

(207,018)

(252,854)

-

(697,898)

Expenses for the acquisition of insurance contracts

(99,257)

(106,300)

(64,235)

-

(269,792)

Operational expenses

(39,685)

(94,985)

(56,229)

(12,305)

(203,204)

Foreign exchange gains/(losses)

(1,507)

(25)

(3,097)

12,445

7,816

Total expenses

(378,475)

(408,328)

(376,415)

140

(1,163,078)

Results of operating activities

58,929

51,452

(89,142)

2,507

23,746

Finance costs

(1,308)

-

(399)

(4,991)

(6,698)

Share of profit of associates after tax

-

-

65

158

223

Profit before tax

57,621

51,452

(89,476)

(2,326)

17,271

100% ratio analysis






Claims ratio (%)

56.6

46.3

89.9

-

60.2

Expense ratio (%)

32.5

44.7

42.9

-

39.1

Combined ratio excluding foreign exchange impact (%)

89.1

91.0

132.8

-

99.3

Foreign exchange impact (%)

-

-

1.1

-

0.2

Combined ratio (%)

89.1

91.0

133.9

-

99.5

Total assets before intragroup items and eliminations

 

2,259,574

958,646

1,461,951

1,091,609

5,771,780

Intragroup items and eliminations





(1,549,039)

Total assets





4,222,741

 

 

  

8     Net asset value per share


30 June 2012

30 June 2011   

31 Dec 2011       

 

Net asset

value

(total equity)

£000

NAV

per share

pence

Net asset

value

(total equity)

£000

NAV

per share

pence

Net asset

 value

(total equity)

£000

NAV

per share

pence

 







Net asset value

1,332,191

339.3

1,146,465

296.3

1,255,899

323.5

Net tangible asset value

1,263,501

321.8

1,081,583

279.6

1,188,347

306.1

The net asset value per share is based on 392,591,402 shares (30 June 2011: 386,863,124; 31 December 2011: 388,233,074), being the adjusted number of shares in issue at each reference date. Net tangible assets comprise total equity excluding intangible assets.

 

9   Return on equity

 

 

 

 

 

6 months to 30 June 2012

£000

 

6 months to 30 June 2011

            £000

Year to

 31 Dec 2011£000

 




Profit/(loss) for the period

124,791

(87,041)

21,272

Opening shareholders' equity

1,255,899

1,266,114

1,266,114

Adjusted for the time weighted impact of capital distributions and issuance of shares

(2,489)

(1,970)

(14,025)

Adjusted opening shareholders' equity

1,253,410

1,264,144

1,252,089

Annualised return on equity (%)

20.9

(13.3)

1.7

 

 

10 Investment result

i)    Analysis of investment result

 

 

 

The total investment result for the Group before taxation comprises:

 

6 months to 30 June 2012

£000

 

6 months to 30 June 2011

            £000

Year to

31 Dec 2011

         £000

 




Investment income including interest receivable

23,206

27,431

50,333

Net realised gains on financial investments at fair value through profit or loss

1,761

13,908

5,040

Net fair value gains/(losses) on financial investments at fair value through profit or loss

19,530

(13,749)

(29,431)

Investment result - financial assets

44,497

27,590

25,942

Fair value gains/(losses) on derivative financial instruments

190

(2,127)

(1,447)

Total result

44,687

25,463

24,495

Investment expenses are presented within other expenses (note 11).

ii)   Annualised investment yields


     6 months to

30 June 2012

6 months to

30 June 2011   

               Year to

31 Dec 2011     

 

Return

 £000

Yield

%

Return

£000

Yield

%

Return

£000

Yield

%

 







Debt and fixed income securities

33,230

3.0

23,779

2.1

29,933

1.3

Equities and shares in unit trusts

9,602

10.9

2,668

3.7

(5,935)

(3.8)

Deposits with credit institutions/cash and cash equivalents

1,665

0.7

1,143

0.6

1,944

0.4


44,497

3.1

27,590

2.0

25,942

0.9

 

  

11 Other revenues and operational expenses

 

 

 

 

 

6 months to 30 June 2012

£000

 

6 months to 30 June 2011

         £000

Year to

31 Dec 2011

         £000

 




Agency related income

3,695

3,478

6,769

Profit commission

2,167

3,462

7,383

Other underwriting income, catastrophe bonds

365

599

1,006

Other income

840

86

2,164

Other revenues

7,067

7,625

17,322

Wages and salaries

43,975

32,191

69,185

Social security costs

6,886

5,157

12,930

Pension cost - defined contribution

2,959

2,805

5,724

Pension cost - defined benefit

-

-

1,700

Share based payments

2,952

4,620

8,677

Other expenses

44,876

39,672

73,575

Marketing expenses

11,700

9,799

19,955

Investment expenses

1,516

1,685

3,360

Depreciation and amortisation

3,244

4,671

8,098

Operational expenses

118,108

100,600

203,204

 

12 Finance costs

 

 

 

 

 

6 months to 30 June 2012

£000

 

6 months to 30 June 2011

         £000

Year to

31 Dec 2011

         £000

 




Interest and expenses associated with bank borrowings

2,044

1,493

1,960

Interest and charges associated with Letters of Credit

2,186

1,613

3,933

Interest charges on experience account

260

393

804

Interest charges arising on finance leases

-

1

1


4,490

3,500

6,698

As at 30 June 2012, the total amount drawn by way of Letter of Credit to support the Funds at Lloyd's requirement was $340 million (30 June 2011: $340 million, 31 December 2011: $340 million).

 

 

 13  Tax expense

The Company and its subsidiaries are subject to enacted tax laws in the jurisdictions in which they are incorporated and domiciled.

The amounts charged in the condensed consolidated income statement comprise the following:

 

 

 

 

 

6 months to

30 June 2012

£000

6 months to

30 June 2011

£000

Year to
31 Dec 2011

£000

Current tax




Expense for the year

11,972

25,348

380

Adjustments in respect of prior years

-

-

(95,809)

Total current tax

11,972

25,348

(95,429)





Deferred tax




Expense/(credit) for the year

(5,219)

(22,606)

17,090

Adjustments in respect of prior years

-

11

77,992

Effect of rate change

(5,742)

(1,308)

(3,654)

Total deferred tax

(10,961)

(23,903)

91,428

Total tax charged / (credited) to the income statement

1,011

1,445

(4,001)

The Group records its income tax expense based on the expected effective rate for the full year.

 

14    Insurance liabilities and reinsurance assets

 

 

 

 

 

30 June 2012 £000

 

30 June 2011

            £000

31 Dec 2011

             £000

 




Gross




Claims and loss adjustment expenses outstanding

1,845,635

1,941,986

1,902,571

Unearned premiums

802,342

730,137

597,689

Total insurance liabilities, gross

2,647,977

2,672,123

2,500,260

Recoverable from reinsurers




Claims and loss adjustment expenses outstanding

366,821

395,855

412,828

Unearned premiums

152,151

134,806

79,687

Total reinsurers' share of insurance liabilities

518,972

530,661

492,515

Net




Claims and loss adjustment expenses outstanding

1,478,814

1,546,131

1,489,743

Unearned premiums

650,191

595,331

518,002

Total insurance liabilities, net

2,129,005

2,141,462

2,007,745

Net claims and claim adjustment expenses include releases of £116m (30 June 2011: £95m, 31 December 2011: £199m) of  reserves established in prior reporting periods.

 

The development of net claims reserves by accident years are detailed below.

 

  

Insurance claims and claims expenses reserves - net at 100%

 

Accident year ending 31 December **

2003

 

2004

2005

2006

2007

2008

2009

2010

2011

2012

Total


£000

£000

£000

£000

£000

£000

£000

£000

£000

Estimate of ultimate claims costs as adjusted for foreign exchange*:












at end of accident year**

364,167

581,476

685,709

533,992

696,124

778,588

689,559

812,934

1,027,103

393,827

6,563,479

one period later**

384,497

635,731

788,315

525,082

633,113

695,754

580,092

714,042

935,211

-

5,891,837

two periods later**

350,012

610,560

779,204

508,025

613,224

692,571

553,682

707,841

-

-

4,815,119

three periods later**

360,758

572,557

754,053

465,263

581,366

652,867

555,115

-

-

-

3,941,979

four periods later**

351,695

573,481

743,650

481,773

577,729

649,650

-

-

-

-

3,377,978

five periods later**

346,946

558,093

744,062

469,534

572,341

-

-

-

-

-

2,690,976

six periods later**

342,876

558,372

722,743

469,105

-

-

-

-

-

-

2,093,096

seven periods later**

331,503

542,271

718,436

-

-

-

-

-

-

-

1,592,210

eight periods later**

323,331

542,747

-

-

-

-

-

-

-

-

866,078

nine periods later**

328,129

-

-

-

-

-

-

-

-

-

328,129













Current estimate of cumulative claims

328,129

542,747

718,436

469,105

572,341

649,650

555,115

707,841

935,211

393,827

5,872,402

Cumulative payments to date

(320,777)

(500,542)

(671,511)

(415,574)

(476,606)

(503,793)

(429,001)

(409,631)

(381,799)

(60,625)

(4,169,859)

Liability recognised at 100% level

7,352

42,205

46,925

53,531

95,735

145,857

126,114

298,210

553,412

333,202

1,702,543

Liability recognised in respect of prior accident years at 100% level











73,886

Total net liability to external parties at 100%






1,776,429

 

Reconciliation of 100% disclosures above to Group's share - net

 

Accident year

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Total


£000

£000

£000

£000

£000

£000

£000

£000

£000

£000

£000













Current estimate of cumulative claims

328,129

542,747

718,436

469,105

572,341

649,650

555,115

707,841

935,211

393,827

5,872,402

Less:

attributable to external Names

(72,104)

(128,337)

(176,046)

(97,928)

(115,607)

(118,747)

(89,472)

(102,019)

(121,899)

(46,927)

(1,069,086)

Group share of current ultimate claims estimate

256,025

414,410

542,390

371,177

456,734

530,903

465,643

605,822

813,312

346,900

4,803,316

























Cumulative payments to date

(320,777)

(500,542)

(671,511)

(415,574)

(476,606)

(503,793)

(429,001)

(409,631)

(381,799)

(60,625)

(4,169,859)

Less: attributable to external Names

70,549

117,723

162,226

85,145

92,794

85,785

66,905

54,396

47,055

8,093

790,671

Group share of cumulative payments

(250,228)

(382,819)

(509,285)

(330,429)

(383,812)

(418,008)

(362,096)

(355,235)

(334,744)

(52,532)

(3,379,188)













Liability for 2001 to 2011 accident years recognised on Group's balance sheet

5,797

31,591

33,105

40,748

72,922

112,895

103,547

250,587

478,568

294,368

1,424,128

Liability for accident years before 2001 recognised on Group's balance sheet











54,686

 

Total Group liability to external parties included in the balance sheet, net




1,478,814

* The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 30 June 2012.

** With the exception of the most recent development data for each accident year, which only relates to the 6 months ending 30 June 2012, the term period refers to one full calendar year.

This represents the claims element of the Group's insurance liabilities and reinsurance assets.

 

 

 15   Earnings per share

Basic

Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the period, excluding ordinary shares purchased by the Group and held in treasury as own shares.

 

 

 

 

6 months to

30 June 2012

6 months to

30 June 2011

        

 

Year to  

 31 Dec 2011

Profit/(loss) for the period attributable to owners of the Company (£000)

124,791

(87,041)

21,272

Weighted average number of ordinary shares in issue (thousands)

389,772

381,999

383,602

Basic earnings per share (pence per share)

32.0p

(22.8)p

5.5p

Diluted

Diluted earnings per share is calculated by adjusting the assumed conversion of all dilutive potential ordinary shares. The Company has one category of dilutive potential ordinary shares, share options and awards. For the share options, a calculation is made to determine 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 outstanding share options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share options. If the inclusion of potentially issuable shares would decrease the loss per share, the potentially issuable shares are excluded from the diluted earnings per share calculation.

 

 

 

 

6 months to

30 June 2012

6 months to

30 June 2011

Year to  

31 Dec 2011

Profit/(loss) for the period attributable to owners of the Company (£000)

124,791

(87,041)

21,272

Weighted average number of ordinary shares in issue (thousands)

389,772

381,999

383,602

Adjustment for share options (thousands)

16,306

-

15,610

Weighted average number of ordinary shares for diluted earnings per share

(thousands)

406,078

381,999

399,212

Diluted earnings per share (pence per share)

30.7p

(22.8)p

5.3p

Diluted earnings per share has been calculated after taking account of outstanding options under both employee share schemes  and also SAYE schemes.

 

16   Dividends paid to owners of the Company

 

 

 

 

 

6 months to 30 June 2012

£000

 

6 months to 30 June 2011

         £000

Year to

31 Dec 2011

         £000

 




Final dividend for the year ended:




- 31 December 2011 of 11.9p (net) per share

46,606

-

-

Interim dividend for the year ended:




- 31 December 2011 of 5.1p (net) per share

-

-

19,738

Final dividend for the year ended:




- 31 December 2010 of 11.5p (net) per share

-

44,111

44,111


46,606

44,111

63,849

The final dividend for the year ended 31 December 2011 was part paid in scrip dividend. 562,194 shares were issued for the scrip dividend, with £44,301,000 being paid in cash.

An interim dividend of 6.0p (net) per ordinary share has been declared payable on 19 September 2012 to shareholders registered on 10 August 2012 in respect of the six months to 30 June 2012 (30 June 2011: 5.1p (net) per ordinary share). A scrip dividend alternative will be offered to the owners of the Company. The dividend was approved by the Board on 25 July 2012 and accordingly has not been included as a distribution or liability in this interim consolidated financial information in accordance with IAS 10 Events after the balance sheet date.

 

  

17  Financial assets and liabilities

i)    Analysis of financial assets carried at fair value

 

 

 

 

 

30 June 2012

£000

 

30 June 2011

            £000

31 Dec 2011

               £000

 




Debt and fixed income securities

2,115,527

2,195,319

2,170,588

Equities and shares in unit trusts

181,946

155,283

173,432

Deposits with credit institutions

11,352

5,717

12,848

Total investments

2,308,825

2,356,319

2,356,868

Catastrophe bonds

12,338

11,674

11,639

Derivative financial instruments

-

76

129

Total financial assets carried at fair value

2,321,163

2,368,069

2,368,636

 

ii)   Analysis of financial liabilities

 

 

 

 

 

30 June 2012

£000

 

30 June 2011

            £000

31 Dec 2011

               £000

 




Borrowing from credit institutions carried at amortised cost

-

75,000

-

Derivative financial instruments

219

61

-

Total financial liabilities

219

75,061

-

 

iii)     Investment and cash allocation

 

 

 

 

30 June 2012

30 June 2011   

31 Dec 2011      

 

 £000

%

£000

%

£000

%

 







Debt and fixed income securities

2,115,527

70.8

2,195,319

76.8

2,170,588

75.6

Equities and shares in unit trusts

181,946

6.1

155,283

5.4

173,432

6.0

Deposits with credit institutions/cash and cash equivalents

691,583

23.1

508,671

17.8

529,395

18.4

Total

2,989,056


2,859,273


2,873,415


 

iv)        Investment and cash allocation by currency

 

 

 

 

 

30 June 2012

%

 

30 June 2011

                 %

31 Dec 2011

                    %

 




Sterling

21.5

24.0

21.7

US Dollars

68.3

61.6

67.5

Euro and other currencies

10.2

14.4

10.8

 

 

v)         Analysis of government issued and supported debt and bank issued debt by geographic location

 







Bank debt





Government Issued

Government supported

Sub-total

Senior

Sub-ordinated

Sub-total

Total



£000

£000

£000

£000

£000

£000

£000

United States of America


395,444

218,275

613,719

67,972

1,340

69,312

683,031

United Kingdom


271,475

18,320

289,795

39,269

2,961

42,230

332,025

Australia


-

11,743

11,743

9,856

300

10,156

21,899

Belgium


23,504

1,563

25,067

-

-

-

25,067

Canada


21,294

40,915

62,209

25,123

2,740

27,863

90,072

Denmark


-

7,786

7,786

876

-

876

8,662

Finland


250

9,591

9,841

-

-

-

9,841

France


23,546

12,250

35,796

13,858

482

14,340

50,136

Germany


10,835

41,848

52,683

3,632

-

3,632

56,315

Italy


-

-

-

3,482

-

3,482

3,482

Netherlands


34,002

8,509

42,511

7,324

735

8,059

50,570

New Zealand


-

269

269

1,694

-

1,694

1,963

Norway


-

5,561

5,561

2,530

-

2,530

8,091

South Korea


2,766

-

2,766

-

-

-

2,766

Spain


-

-

-

1,505

-

1,505

1,505

Sweden


2,218

2,156

4,374

10,867

-

10,867

15,241

Switzerland


-

-

-

11,593

-

11,593

11,593

Supranational


-

27,520

27,520

-

-

-

27,520

Other


342

598

940

1,515

-

1,515

2,455

Total


785,676

406,904

1,192,580

201,096

8,558

209,654

1,402,234

 

Included above are £1,204m in relation to debt securities and £198m in relation to cash equivalents, having a maturity of less than three months at the time of purchase.

The Group's exposure to bank debt issued by Spain is rated A and to that in Italy is rated BBB.

 

18    Fair value measurements

In accordance with the Amendments to IFRS 7 Financial Instruments: Disclosures,  the fair value of financial instruments based on a three-level fair value hierarchy that reflects the significance of the inputs used in measuring the fair value is set out below:

 

 

 

 

As at 30 June 2012

Level 1

£000

Level 2

£000

Level 3

£000

Total

£000

 





Debt and fixed income securities

591,268

1,524,259

-

2,115,527

Equities and shares in unit trusts   

-

170,461

11,485

181,946

Deposits with credit institutions

11,352

-

-

11,352

Catastrophe bonds

-

12,338

-

12,338

Total      

602,620

1,707,058

11,485

2,321,163




 

 

 

As at 30 June 2011

Level 1

£000

Level 2

£000

Level 3

£000

Total

£000

Debt and fixed income securities

447,163

1,748,156

-

2,195,319

Equities and shares in unit trusts   

70

147,000

8,213

155,283

Deposits with credit institutions

5,717

-

-

5,717

Catastrophe bonds

-

11,674

-

11,674

Derivative financial instruments      

-

76

-

76

Total      

452,950

1,906,906

8,213

2,368,069






 

 

As at 31 December 2011

Level 1

£000

Level 2

£000

Level 3

£000

Total

£000

Debt and fixed income securities

500,672

1,669,916

-

2,170,588

Equities and shares in unit trusts   

-

162,806

10,626

173,432

Deposits with credit institutions

12,848

-

-

12,848

Catastrophe bonds

-

11,639

-

11,639

Derivative financial instruments

-

129

-

129

Total      

513,520

1,844,490

10,626

2,368,636

 

 

As at 30 June 2012, the Group had derivative financial liabilities of £219,000 which are classified as level 2 (30 June 2011: £61,000, 31 December 2011: £nil).

 

The levels of the fair value hierarchy are defined by the standard as follows:

- Level 1 - fair values measured using quoted prices (unadjusted) in active markets for identical instruments,

- Level 2 - fair values measured using directly or indirectly observable inputs or other similar valuation techniques for which all   significant inputs are based on observable market data,

- Level 3 - fair values measured using valuation techniques for which significant inputs are not based on market observable data.

The fair values of the Group's financial assets are based on prices provided by investment managers who obtain market data from numerous independent pricing services. The pricing services used by the investment managers obtain actual transaction prices for securities that have quoted prices in active markets. For those securities which are not actively traded, the pricing services use common market valuation pricing models. Observable inputs used in common market valuation pricing models include, but are not limited to, broker quotes, credit ratings, interest rates and yield curves, prepayment speeds, default rates and other such inputs which are available from market sources.

 

The fair value of the Group's investment in catastrophe bonds is based on quoted market prices or, where such prices are not available, by reference to broker or underwriter bid indications.

 

Investments in mutual funds comprise a portfolio of stock investments in trading entities which are invested in various quoted investments. The fair value of shares in unit trusts are based on the net asset value of the fund reported by independent pricing sources or the fund manager.

 

Included within Level 1 of the fair value hierarchy are Government bonds, Treasury bills and exchange traded equities which are measured based on quoted prices.

 

Level 2 of the hierarchy contains US Government Agencies, Corporate Securities, Asset Backed Securities and Mortgage Backed Securities and Catastrophe bonds. The fair value of these assets are based on the prices obtained from both investment managers and investment custodians as discussed above. The Group records the unadjusted price provided and validates the price through a number of methods including a comparison of the prices provided by the investment managers with the investment custodians and the valuation used by external parties to derive fair value. Quoted prices for US Government Agencies and Corporate Securities are based on a limited number of transactions for those securities and as such the Group considers these instruments to have similar characteristics as those instruments classified as Level 2. Also included within Level 2 are units held in traditional long funds and long and short special funds and over the counter derivatives, including event linked future contracts.

 

Level 3 contains investments in a limited partnership and unquoted equity securities which have limited observable inputs on which to measure fair value. Unquoted equities are carried at cost which is deemed to be comparable to fair value. The effect of changing one or more of the inputs used in the measurement of fair value of these instruments to another reasonably possible assumption would not be significant and no further analysis has been performed.


In certain cases, the inputs used to measure the fair value of a financial instrument may fall into different levels within the fair value hierarchy. In this instance, the fair value of the instrument in its entirety is classified based on the lowest level of input that is significant to the fair value measurement.

During the period, there were no significant transfers made between Level 1 and Level 2 of the fair value hierarchy.  In addition, there were no significant movements in the Level 3 assets from 31 December 2011.

 

 

19    Impact of foreign exchange related items

The net foreign exchange (losses)/gains for the year include the following amounts:

 

 

 

 

 

6 months to 30 June 2012

£000

 

6 months to 30 June 2011

           £000

Year to 31 Dec 2011

            £000

Exchange (losses)/gains recognised in the consolidated income statement

(4,452)

(3,547)

7,816

Exchange (losses)/gains classified as a separate component of equity

(8,399)

(8,550)

11,060

Overall impact of foreign exchange related items on net assets

(12,851)

(12,097)

18,876

The above excludes profit or losses on foreign exchange derivative contracts which are included within the investment result.

Net unearned premiums and deferred acquisition costs are treated as non monetary items in accordance with IFRS.  As a result, a foreign exchange mismatch arises caused by these items being translated at historical rates of exchange prevailing at the original transaction date and not being retranslated at the end of each period.  The impact of this mismatch on the income statement is shown below.

 

 

 

 

6 months to 30 June 2012

£000

 

6 months to 30 June 2011

         £000

Year to 31 Dec 2011

         £000

Opening balance sheet impact of non retranslation of non monetary items

2,144

(1,251)

(1,251)

(Loss)/gain included within profit representing the non retranslation on non monetary items

(1,532)

2,759

3,395

Closing balance sheet impact of non retranslation of non monetary items

612

1,508

2,144

 

20    Condensed consolidated interim cash flow statement

The purchase, maturity and disposal of financial assets is part of the Group's insurance activities and is therefore classified as an operating cash flow. The purchase, settlement and disposal of derivative contracts is also classified as an operating cash flow.

Included within cash and cash equivalents held by the Group are balances totalling £56,458,000 (30 June 2011: £82,690,000; 31 December 2011: £77,203,000) not available for use by the Group outside of the Lloyd's Syndicates within which they are held.

 

 

Directors' responsibility statement

 

The Directors confirm, to the best of our knowledge, that the Chairman's statement and condensed consolidated interim financial statements have been prepared in accordance with IAS 34 as adopted by the European Union and the Interim Statement includes a fair review of the information required by sections 4.2.7R and 4.2.8R of the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority, being:

 

1)    an indication of important events during the first six months of the current financial year and their impact on the condensed consolidated interim financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year;  and

2)    related party transactions that have taken place in the first six months of the current year and that have materially affected  the consolidated financial position or performance of Hiscox Ltd during that period, and any changes in the related party transactions described in the last annual report that could have such a material effect.

 

The individuals responsible for authorising the responsibility statement on behalf of the Board are the Chairman, RRS Hiscox and the Group Finance Director, SJ Bridges. The statements were approved for issue on 30 July 2012.

 


This information is provided by RNS
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