Final Results

Hiscox PLC 16 April 2002 HISCOX PLC PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2001 'MARKET CONDITIONS ARE EXCELLENT, WITH RATES UP AND EXPOSURE DOWN' 2001 2000 Gross written premiums £548.9 million £384.7 million Operating (loss)/profit £(21.2) million £3.0 million Pre tax (loss)/profit £(32.5) million £3.5 million (Loss)/Profit after tax £(23.1) million £5.4 million (Loss)/Earnings per share (10.2)p 3.5p based on operating (loss)/profit after tax Final dividend - 2.3p Net asset value per share (before 91.4p 96.1p equalisation provision) HIGHLIGHTS • Hiscox plc gross written premium income (GWP) up 43% to £549m. • Group managed GWP up 29% to £780m. • London Market conditions excellent. Syndicate 33 experiencing significant growth in 2002 with reduced exposure. Rate increases continue rising trend. • Continued growth of the Hiscox Insurance Company - GWP up 29% to £164m, combined ratio 97.8%. • £54m raised to finance expansion. • Strategy of balancing London Market business with regional retail business working well. Robert Hiscox, Chairman Hiscox plc, commented: 'The strategy remains the same. The Hiscox Insurance Company leads our expansion outside Lloyd's with good growth and underwriting results. Our Lloyd's Syndicate 33 is enjoying a very strong market and is growing income with less risk. Given any normal pattern of losses, the next few years should show healthy profits'. Copies of the Chairman's statement, Chief Executive's report and the Group's financial statements as at 31 December 2001 are attached. FOR FURTHER INFORMATION: Hiscox plc Robert Hiscox Chairman 020 7448 6011 Bronek Masojada Chief Executive 020 7448 6012 Stuart Bridges Finance Director 020 7448 6013 Alex Gordon Shute Press Office 020 7448 6609 The Maitland Consultancy Philip Gawith 020 7379 5151 Suzanne Bartch 020 7379 5151 CHAIRMAN'S STATEMENT The result for the year ending 31st December 2001 is an operating loss of £21.2 million (2000: profit £3.0m) and a pre-tax loss of £32.5 million (2000: profit £3.5m). The gross premium income controlled by the Group increased to £780.0 million (2000: £603.3m), and the gross premium income applicable to Hiscox plc increased to £548.9 million (2000: £384.7m). The result is dominated by losses from the terrorist attack on 11th September on the World Trade Center (WTC). Without that tragic event, we would this year be announcing a reasonable increase on last year's operating profit and a further move towards a decent return on equity. Our retail business, led by the Hiscox Insurance Company (Hisco), has grown healthily, and our Lloyd's Syndicate 33 is now benefiting from the surge of business to the London Market following the WTC. However, we acknowledge that the recent results of Hiscox plc have not been good. We have explanations but no excuses as our ambition is to defeat the down cycles however severe they are and we take no pride in the fact that others have fared worse. We will do better. Current figures show that we are back on track and with better margins and a much higher premium income proper returns should be made in the very near future. Bronek Masojada reports on the business in detail in his CEO's report that follows. I will just highlight some of the important issues of the year and comment on the future. WTC We have not altered our estimate of the final loss to Syndicate 33 from the WTC of $440 million gross, reduced to $90 million after reinsurance recoveries (or approximately £30 million to Hiscox plc). This is based on a detailed analysis of each claim, and on one total loss being paid to the leaseholder. Uncertainties remain. The site is still being cleared and in some cases the loss adjusters are not yet able to make accurate assessments of business interruption losses. At 31st March 2002 we had received notifications of claims from our insurance and reinsurance accounts totalling $543 million and the US Trust Funds have been appropriately funded. The flow of property claims has now virtually halted. It is our experience that the physical loss following a very large property loss is nearly always exaggerated immediately after the event. It is the liability losses (in which we have no material involvement) that traditionally take years to settle and grow with time. In the unlikely event that Syndicate 33's loss increases by a further $100m and assuming there are no additional reinsurance recoveries, the net cost to Hiscox plc would increase by approximately £35 million. We do not believe this will happen. Against any loss will be set the proceeds from subrogation against other responsible parties and the profit from the balance of the account, including the profit from the extra £60 million of premium income written after September 11th in 2001. HISCOX SYNDICATE 33 AT LLOYD'S Syndicate 33 has had some poor years, better than the average in Lloyd's but not up to our standards. After steadily reducing our managed capacity from £437 million in 1995 to £360 million in 1998 due to weak prices, we kept it there until 2002 when we have increased it to £504 million to take advantage of the excellent market conditions. Prior to the WTC loss, conditions were improving satisfactorily and I said in last year's report that they were better than they had been for years. Post WTC, the withdrawal of risk appetite by reinsurers and thereby insurers caused a leap in the cycle with rates rising rapidly and terms and conditions tightening. Syndicate 33 has been able to reduce its exposure per risk whilst substantially increasing its income from a less volatile, better balanced portfolio. In other words, much more money for much less risk. Our current projections are that the premium income for the 2002 account will be in excess of £600 million (net of brokerage), and we will place the surplus over our capacity limit of £504 million with reinsurers with good security. Given a normal run of claims, the current rates being obtained should yield a very acceptable profit. HISCOX INSURANCE COMPANY (HISCO) Hisco continues its steady progress. The combined loss ratio for 2001 of 97.8% (2000: 97.7%) was within our target of 95% to 98%, with the gross premium income up to £163.9 million (2000: £127.3 million). The UK combined ratio was 95.4% which was highly satisfactory. A reinforcement of the health of Hisco is the inflow of cash. Hisco started the year with technical reserves (Warren Buffett's 'float') of £120.5 million, and ended the year with £152.7 million despite having paid out a considerable sum to settle some old pre-acquisition fully reserved liabilities. The reason for the low combined ratio for Hisco, apart from having a committed and talented staff, is focus. Hisco focuses on two main areas: higher net worth personal insurances, from the aspiring young executive to the really rich, and commercial insurances of service-based professional firms and media and technology companies. The focus means we are big and expert in the areas in which we specialise, even if we are small as a company in comparison with some of our giant competitors. The strategy of building a business outside Lloyd's is working well and has an exciting future. Being small and nimble has two enormous advantages. One, decisions can be implemented immediately, and it is much more fun to work in than being a small cog in a huge wheel. Two, communication is easier, and staff can feel that they are making a significant contribution every time they conclude a successful transaction or reduce an expense. Hisco is turning out to be an excellent balance to the Lloyd's business. INTERNATIONAL BUSINESS Our Guernsey office continues to thrive and produce good profits. Our new acquisition in Dublin has made a good profit and has performed ahead of expectations . Our offices in France, Germany, Ireland, the Netherlands and Belgium increased their combined premium income to £20.3 million (2000: £10.3 million). They were not profitable overall this year but continue to grow towards critical mass. After the extraordinary storms in France in December 2000, in 2001 the Balearic Islands were hit by a storm which did considerable damage to the houses of Germans insured there by our German office. We remain convinced that lateral expansion into mainland Europe has enormous potential, but we and they are well aware that we must make a profit from each of those offices. I am confident that we will. CORPORATE EVENTS We raised £54 million in a placing of our shares in December 2001. We are extremely grateful to our shareholders who put in the extra money so willingly and we will use it well. DIVIDEND The Board decided that having raised new money, with market conditions giving us fantastic opportunities to use every penny of capital, and having made a loss, that we should not pay a dividend out of the 2001 accounts. We expect to resume the dividend payments when profits return this year. LLOYD'S Lloyd's has lost a considerable amount of money again. By 1999, we had sold the spread capacity on other syndicates and our sister company, Roberts & Hiscox Ltd, had stopped acting as a members agent and closed down that business. Losses at Lloyd's allow reforms which have never been possible during good times so we now have a good opportunity to finish the rationalisation of the market. If it is to remain a mutual bourse, it needs strong leadership to impose strict underwriting disciplines and low expenses, and we welcome the new proposals to strengthen the management of the franchise. The current Chief Executive has the right ideas and he has our support. THE INSURANCE INDUSTRY The property and casualty insurance industry has taken a real battering from weak underwriting on the back of easy investment gains in recent years, culminating in the savage September 11th losses. We always seem to be hit hardest when the coffers are empty at the bottom of the cycle. However, the consolidation of the reinsurance industry into five major players is arguably a good thing as it will bring sensible price stability. Cheap reinsurance offered to weak insurers always fuels the stupid price-cutting and lack of discipline in the down cycle. Similarly, the consolidation of the insurance industry, combined with the withdrawal from property and casualty insurance by some large composite competitors, gives us remaining players a great opportunity to get it right. We are now able to pick the right business and charge the right price. If we combine that with better use of technology to reduce costs, the future will be good. PEOPLE We have learnt a great deal during the recent difficult years. We have made losses in Lloyd's and will carry the scars for a good many years. Syndicate 33 was losing money when I joined it in 1965, and I so hated the experience that we made money through every downturn until this one. We have all hated these recent losses. We took early action to get the Syndicate back on track and I hope it is a good thirty years before it happens again, if it ever does. We have a very skilful and battle hardened team led by Robert Childs. They have my thanks for pulling it together in very hard times. We also have an excellent team in Hisco led by Sian Fisher with solid experience in running an insurance company outside the London Market and turning it from losses (not made by us) into profits. I would like to thank them and ask for more of the same. And behind all the underwriting are some dedicated support staff who make the underwriting possible. As I say every year, and I say it because I mean it, we are only as good as our people, and I think we have the best. FINALLY The setback this year to our recovery towards a decent return to shareholders is intensely disappointing, especially as it was caused by a deliberate and malevolent act. Not every loss is foreseeable. We spend a great amount of time and research analysing disaster scenarios, and two jets colliding over lower Manhattan was one such. Despite the fact that we did not foresee that it would be done so explosively, the resulting loss has been manageable, if extremely painful. There will always be the possibility of losses of unexpected magnitude, and we must make sufficient margins over a period of time to cover them. We should reach around £1 billion of managed gross premium income this year. I know turnover is vanity and profit is sanity, but the rates we are achieving make good profits most likely if we have any normal pattern of losses. The strategy is balanced growth, both in building the retail business to balance the London Market wholesale business, and within both business areas. We now basically have a better balance at higher rates, with a highly talented and motivated staff determined to keep it that way and to grow Hiscox plc into the premier UK based insurer, rewarding shareholders with proper returns. I am looking forward to the next few years with relish. Robert Hiscox Chairman 16 April 2002 CHIEF EXECUTIVE'S REVIEW OVERVIEW As Robert said in his Chairman's statement, 2001 has been dominated by the tragic events of September 11th. The human tragedy and its associated financial cost overshadow all achievements in the year. For Hiscox the year began well with further progress by our retail business and a near breakeven result from our Lloyd's business at the half year. At the full year, the cost of WTC has led to a significant overall loss. This setback has had an inevitable positive impact on the rating environment and opportunities for profit in the year ahead. My report gives an overview of the Group's operations, first in terms of business developments by market segment for the total premium income controlled by Hiscox, followed by detailed commentary on financial performance of components of the Group. BUSINESS TRENDS BY SEGMENT During the year the controlled premium income of the Group grew to £780.0m, an increase of 29.3%. Rating increases have been a significant, though not the sole, driver of this growth. Rates were rising in both our retail areas and our Lloyd's business in the first half of the year. The events of September 11th led to rapid rate rises which we exploited, expanding both our London Market Reinsurance and Direct accounts. The trends in the retail area were only marginally affected by the September 11th attack, and rate increases account for only a third of our growth. The balance has been split equally between organic growth and acquisition. We expect the higher rating levels to prevail for some time, with some areas seeing further increases, though not at the pace experienced to date. In each major business segment, business trends and expectations differ, so I comment on them individually below: • LONDON MARKET REINSURANCE ACCOUNT: Reinsurance rates began increasing at the beginning of 2001. This allowed us to begin expanding the account. The attack on the World Trade Center has caused significant losses. Our exposure is mainly to the reinsurance of property and associated business interruption. The impact of this event has been twofold. It has led to significantly higher rates on January renewals, but these rates have drawn in additional capital to this segment - particularly new start-ups based in Bermuda. There are concerns about future pricing trends but, to date, our experience is that demand continues to exceed supply and prices remain firm. We expect this account to grow significantly in the year ahead. • LONDON MARKET DIRECT ACCOUNT: This is the other account significantly affected by the WTC attack. Our primary exposure is to property - both the main building and the surrounding buildings. As with reinsurance, we are experiencing substantial rate rises. Underwriting direct insurance business requires an experienced team and good relationships with brokers across the world. This places Hiscox at a competitive advantage to new start-ups. We took advantage of the rating increases immediately post September 11th to grow the business in the last quarter of 2001. We expect to see significant further growth in this area in the year ahead. One of the areas we are focussing on is insurance against terrorist exposures. Global capacity for this class has diminished, and drawing on our experience of competing with Pool Re in the UK, we are now writing controlled exposures in other territories. • AEROSPACE, TECHNOLOGY, MEDIA AND TELECOMS: Our experienced underwriting team is able, subject to strict guidelines, to underwrite business both on behalf of Syndicate 33 and Hiscox Insurance Company. In the retail area, we have raised our profile with the sponsorship of Tech Track 100 - an award to the 100 fastest growing technology companies in the UK. We already insure 25 of the prize winners, but clearly have an opportunity for further expansion. Growth of our retail technology account has offset the decline in the retail media account where we have suffered from the legal lottery surrounding libel in the UK. In Lloyd's we are now the major lead for space business. Aerospace income reduced relative to last year, as there were fewer satellites launched. We expect this business unit to grow as, despite the dotcom bust, businesses are realising that they need protection of the sort we can offer. • AFFLUENT PERSONAL LINES: Across the Group insuring affluent individuals continues to grow and we are active in building our distribution, particularly in the UK and Europe. In the UK, profit margins are returning to reasonable levels, but further work is required in Europe. Affluent Personal Lines are a core target market for the Group, but not at any price. We have withdrawn from the yacht market, as pricing is inadequate. We have included within our affluent personal lines segment our Affinity business which is now focussed on the mass affluent market. We reach this market through relationships with our traditional insurance broker partners, and also through alternative distribution routes such as IFA's, Hiscox Online our internet business, and via workplace marketing through professional firms. We have withdrawn from Property Owners insurance as this did not fit our long-term focus for the retail business. • PROFESSIONAL INSURANCES: Our UK book has grown well, with the introduction of a broader product range to cover not just liability areas, but a client's property coverages as well. It is taking time to sell this new concept to clients and their brokers, but we anticipate success. In the Syndicate we are insuring a select group of US professional firms. Retail business, written through our insurance companies, continues to comprise 26% of the controlled premium income (2000: 26%). Hiscox plc owns 60% of Syndicate 33, retail comprises 39% of Hiscox plc's business. Our medium term goal is that we grow the retail business to comprise 50% of the whole. In the short term, however, we expect that Syndicate 33 will grow faster than the retail side - reflecting the rapid price movements currently being experienced - but our overall strategic goal remains unchanged. Over the long term a stable base of retail business will smooth our more volatile earnings from Syndicate 33. GROUP FINANCIAL PERFORMANCE The Group operating result, based on the longer term rates of return, reflects a loss of £21.2m (2000: profit £3.0m). The Group pre-tax result is a loss of £32.5m (2000: profit £3.5m) and after tax is a loss of £23.1m (2000: profit £5.4m). The Group combined ratio increased to 109.9% (2000: 103.1%). Worthy of note is: • Continued growth in operating profits within our UK insurance company and our international businesses from £6.8m to £8.7m mitigated the losses of £29.9m from our Lloyd's business. The Lloyd's business result includes our WTC losses which total approximately £30m. Other income less expenses has increased to a net cost of £5.0m (2000: £3.9m). Overall the operating result was a loss of £21.2m. • The underlying investment return was less than the longer term rate used in determining operating profit by £8.7m (2000: £1m greater). Contributions to the government mandated Equalisation Provision increased to £2.6m (2000: £2.3m), reflecting the ongoing growth of our business. There were no exceptional gains (2000: £1.8m). The negative contribution of £11.3m from these areas contributed to our pre-tax loss of £32.5m. We take account of a tax credit of £9.4m to reach our final post tax loss of £23.1m. The operating performance of the Group reflects the underlying performance in our core business areas - our Lloyd's business and our Retail business. I review these in detail below. LLOYD'S BUSINESS Our Lloyd's business comprises Hiscox plc's share of the underwriting conducted through Syndicate 33, with fees and profit commissions earned on managing the business and investment returns on the capital supporting the business. The gross premium received by Syndicate 33 in 2001 in total grew by 29% to £574m. This growth is due to two separate business decisions. At the start of the year, in anticipation of a firmer rating environment we began expanding our book - focussing on those areas where rapidly increasing rates meant good prospects for profit. Post WTC, we sought to take advantage of the step change in the rating environment by writing a further £60m of premium. In order to do this we requested and received specific regulatory clearance. Expansion has continued into 2002. In our business planning we anticipated increasing our underwriting by 40%. At the time of writing we anticipate exceeding this and are working to put in place qualifying quota share reinsurance arrangements to allow us to underwrite a further £100m of premium income. Given the current rating environment and with a normal loss pattern, we anticipate that this underwriting will yield a healthy profit. The 2001 combined ratio for Syndicate 33 deteriorated to 115.9%, (2000: 105.9%). Excluding WTC, the ratio would have been 98.4%, showing the improving underlying trend. The expense ratio has improved from 46.5% to 32.5% as we have benefited from the economies of scale in the growing business and we have retained more premium income. Other income declined compared with 2000 as 2000 benefited from a one-off fee from the unwinding of a name's conversion scheme inherited with the Hiscox Select acquisition. Loan interest and amortisation costs grew marginally during the year as we drew on our letters of credit used for funds at Lloyd's. The events of September 11th have tested the Syndicate's claims paying ability. Under US insurance regulation Syndicate 33 is required to lodge monies in trust funds in the USA to meet anticipated claims. In total it has lodged $283m in the USA for WTC. Syndicate 33 met this requirement from its own resources, supported by existing bank facilities and reinsurance arrangements. I would like to thank all those banks and reinsurers who supported us. RETAIL BUSINESSES Our retail business is conducted through a variety of legal entities. The most important of these are the Hiscox Insurance Company (Hisco) in the UK, Hiscox Insurance Company (Guernsey) Ltd and underwriting agencies in France, Germany, Holland and Ireland. UK Our UK business has performed very well. We have grown the aggregate premium income by 23% to £143.6m. The combined ratio has improved to 95.4% (2000: 96.4%), leading to a £9.1m operating profit (2000: £6.1m). This business has two core areas - affluent assureds and professional insurances. Both have done well. Professional insurances grew significantly at attractive combined ratios, and the affluent personal lines account increased its rates to bring its combined ratio to more acceptable levels. During 2000 we began to build a branch network, acquiring offices in Birmingham and Glasgow to complement our existing Leeds office. We were well placed to benefit from the collapse of the Independent Insurance Company during the course of last year, acquiring teams and expanding our regional business. Regional brokers want to see our presence in their markets and we are pleased to serve them. We have also worked at reducing our expense levels. We have made good incremental progress, both in our own expenses and external brokerage. Our ambition remains to grow the business significantly, but we cannot expect it to double in size and retain our core administration and customer support services in London. Plans for a Business Centre outside London are under consideration. This will allow us to provide better services to our brokers and clients in a more cost-effective way. GUERNSEY Our business in Guernsey has two parts. The first is the provision of insurance for international customers and the second is the location of our group captive, which we established in 2000. The insurance business performed well, with continued growth at attractive profit margins. The captive was adversely affected by the WTC, so in aggregate, profits have declined marginally to £1.2m (2000: £1.4m). EUROPE Our European business is conducted through our underwriting agencies which underwrite on behalf of both Syndicate 33 and Hiscox Insurance Company. During 2001, the businesses increased their gross written premiums to £20.3m, a growth of 97%. £2.2m of the growth is as a result of the acquisition of the Construction and General Guarantee Insurance Company (CGGI) in Ireland, with the balance coming from organic growth. In continental Europe organic growth, together with the movement of some expenses to London, gave us an improved local agency result of a loss of £0.3m (2000: loss of £0.7m). Our combined ratio in Europe increased to 114.6% (2000: 111.1%). A large part of this increase was due to losses caused by storm damage to mainly German holiday homes located in Majorca. Developing business from scratch is a huge challenge to our local teams. They pit their nimbleness and responsiveness against much larger local players to develop our business. In the year ahead we will be working both to deliver further growth, and to improve the underlying underwriting performance. INVESTMENT MANAGEMENT At Hiscox we oversee the management of £599m of financial assets. £528m of this represents financial assets attributable to Hiscox plc and Syndicate 33. These funds are managed by external fund managers, supervised by our team at Hiscox Investment Management (HIM). The balance represents funds managed for third party investors. HIM manages the Hiscox Insurance Portfolio, a specialist sub-fund of the S&F Hiscox Open Ended Investment Company. During the year this fund grew from £31.6m to £52.2m. Its total return during the year was 1.4%, putting it fourth out of 266 International Equity Funds (Source: Micropal). This is a second consecutive year of outstanding performance. During 2001, the Group's own financial investments grew to £344.2m from £263.6m and cash to £62.5m from £38.5m. £59.5m of this was due to positive cash flow within both Syndicate 33 and Hiscox Insurance Company. The balance came from the net proceeds of our fund raising less outgoings elsewhere in the Group. We earned a total return of £9.9m on these funds. Our bond funds generated a total return above our long-term rate of 6%, but weakness in the equity markets contributed to under performance of this component, leading to a negative short-term fluctuation of £8.7m. FRS17 In preparation for the introduction of FRS 17, the actuarial valuation of the Hiscox Pension fund was updated on a FRS17 basis. As at 31 December 2001, this showed scheme liabilities of £59.8m and assets of £46.6m, a shortfall of £9.2m (net of tax). The board has taken action to address the pension shortfall with certain of the terms of the Defined Benefit plan being altered during the course of 2001. With effect from 1 January 2001, all new Hiscox employees become members of a Defined Contribution Pension Plan. BALANCE SHEET Hiscox supports its balance sheet through a mixture of equity, letters of credit from banks secured on Group assets, and risk-sharing letters of credit from some major European insurers. Up to 2000 this allowed us to support the continued expansion of the Group. However, strong underlying growth, particularly in Hiscox Insurance Company, was beginning to require further capital. Post WTC, the Group raised £54m net of expenses to strengthen our overall balance sheet position. £20m of the funds raised have been allocated to Hisco, £20m has been allocated to support our underwriting on Syndicate 33, with the balance available at Group level. PEOPLE A service based business such as Hiscox is only as good as its people. In difficult conditions they have worked hard to drive the Group forward and I would like to thank them for their efforts and commitment. A deliberate act of terrorism has diminished the immediate financial effect of their endeavours, but I expect that in the near future the Group's results will show a proper reflection of their individual and team achievements and we will be able to reward them appropriately. As an employer, asking for commitment from our staff is insufficient. We need to invest in our staff in return. During the year we made significant progress with the introduction of a structured training programme for all staff. This covers underwriting, management and leaderships skills and professional development. Nicholas Thomson, who was previously Group Director of Underwriting, has led the development of a series of computer based underwriting training courses which are truly world class. These endeavours will help ensure that Hiscox remains an employer of choice and delivers its promise to train and develop all of our staff. CONCLUSION Last year I said that we had the wind at our backs. If I continue the yachting analogy, we were hit during 2001 by a freak squall. The yacht has now returned to an upright position, and instead of running with just a mainsail and a jib, has hoisted a spinnaker as well. We are powering ahead and making the most of the market conditions now at hand. Bronek Masojada Chief Executive Officer 16 April 2002 FINANCIAL STATEMENTS CONSOLIDATED PROFIT AND LOSS ACCOUNT (UNAUDITED)TECHNICAL ACCOUNT - GENERAL BUSINESS FOR THE YEAR ENDED 31 DECEMBER 2001 Notes 2001 2000 £000 £000 EARNED PREMIUMS, NET OF REINSURANCE Gross premiums written 5 548,926 384,736 Outward reinsurance premiums (136,349) (124,049) Net premiums written 412,577 260,687 Change in the gross provision for unearned premiums (77,806) (23,838) Change in the provision for unearned premiums, 9,428 4,601 reinsurer's share Change in the net provision for unearned premiums (68,378) (19,237) Earned premiums, net of reinsurance 344,199 241,450 ALLOCATED INVESTMENT INCOME TRANSFERRED FROM THE 5,6 18,562 16,222 NON-TECHNICAL ACCOUNT CLAIMS INCURRED, NET OF REINSURANCE Claims paid: Gross amount (253,041) (220,628) Reinsurers' share 113,463 104,887 Net claims paid (139,578) (115,741) Change in the provision for claims: Gross amount (247,646) (20,181) Reinsurers' share 154,469 8,556 Change in the net provision for claims: (93,177) (11,625) Claims incurred, net of reinsurance 4, 5 (232,755) (127,366) Other technical income 5 1,324 1,184 Net operating expenses (141,362) (120,462) Movement in equalisation provision 5 (2,582) (2,309) BALANCE ON THE TECHNICAL ACCOUNT (12,614) 8,719 CONSOLIDATED PROFIT AND LOSS ACCOUNT (UNAUDITED) NON-TECHNICAL ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2001 Notes 2001 2000 £000 £000 Balance on the technical account (12,614) 8,719 Investment income 6 15,005 14,688 Net realised gains/(losses) on investments 6 126 238 Unrealised gains/(losses) on investments 6 (4,703) 3,005 Investment management expenses and charges 6 (560) (666) 6 9,868 17,265 Allocated investment return transferred to the 6 (18,562) (16,222) technical account Short term fluctuations in investment return 6 (8,694) 1,043 Other income 3,333 8,340 Other expenses (14,521) (14,615) (LOSS)/PROFIT ON ORDINARY ACTIVITIES BEFORE TAX (32,496) 3,487 Comprising: Operating (loss)/profit based on longer term investment 5 (21,220) 2,950 return Short term fluctuations in investment return 5,6 (8,694) 1,043 Exceptional item: sale of long term business 5 - 846 Exceptional item: profit on sale of non aligned Lloyd's 5 - 957 capacity Movement in equalisation provision 5 (2,582) (2,309) 5 (32,496) 3,487 Tax on (loss)/profit on ordinary activities 9,389 1,943 (LOSS)/PROFIT ON ORDINARY ACTIVITIES AFTER TAX (23,107) 5,430 Dividends - Interim paid - (1,708) Dividends - Final payable - (3,404) (5,112) RETAINED PROFIT/(LOSS) FOR THE YEAR (23,107) 318 Loss/earnings per share: - Basic, based on operating (loss)/profit after tax (on 7 (10.2)p 3.5p longer term investment return) - Basic, based on (loss)/profit on ordinary activities 7 (15.5)p 3.8p after tax - Diluted, based on (loss)/profit on ordinary 7 (15.5)p 3.8p activities after tax All operations of the Group are continuing. In accordance with the amendment to Financial Reporting Standard ('FRS') 3,'Reporting Financial Performance', no note of historical cost profits or losses has been prepared as the Group's only material gains and losses on assets relate to the holding and disposal of investments. CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES (UNAUDITED) Notes 2001 2000 £000 £000 (Loss)/profit on ordinary activities after tax (23,107) 5,430 Exchange differences taken to reserves (35) 50 Total recognised gains and losses (23,142) 5,480 CONSOLIDATED BALANCE SHEET (UNAUDITED)AT 31 DECEMBER 2001 Notes 2001 2000 £000 £000 ASSETS INTANGIBLE ASSETS Goodwill 6,997 6,634 Other intangible assets 16,800 17,773 23,797 24,407 INVESTMENTS Land and buildings 430 437 Other financial investments 8 344,402 263,655 344,832 264,092 REINSURERS' SHARE OF TECHNICAL PROVISIONS Provision for unearned premiums 39,166 27,197 Claims outstanding 4 333,358 148,746 372,524 175,943 DEBTORS Debtors arising out of direct insurance operations 130,689 135,830 Debtors arising out of reinsurance operations 168,320 65,662 Other debtors 36,726 47,407 335,735 248,899 OTHER ASSETS Tangible assets 7,018 6,132 Cash at bank and in hand 62,520 38,466 69,538 44,598 PREPAYMENTS AND ACCRUED INCOME Accrued interest 2,221 2,465 Deferred acquisition costs 66,699 51,721 Other prepayments and accrued income 20,844 5,199 89,764 59,385 TOTAL ASSETS 1,236,190 817,324 CONSOLIDATED BALANCE SHEET (UNAUDITED)AT 31 DECEMBER 2001 Notes 2001 2000 £000 £000 LIABILITIES CAPITAL AND RESERVES Called up share capital 10 9,633 7,400 Share premium account 10 124,612 72,474 Merger reserve 10 4,723 4,723 Capital redemption reserve 10 33,244 33,244 Profit and loss account 10 (7,421) 15,721 SHAREHOLDERS' FUNDS ATTRIBUTABLE TO EQUITY INTERESTS 10 164,791 133,562 TECHNICAL PROVISIONS Provision for unearned premiums 258,124 167,596 Claims outstanding 4 616,164 303,352 Equalisation provision 11,229 8,647 885,517 479,595 Provisions for other risks and charges 926 655 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR Creditors arising out of direct insurance operations 45,850 75,547 Creditors arising out of reinsurance operations 72,608 87,123 Other creditors including taxation and social security 42,444 30,775 160,902 193,445 CREDITORS: AMOUNTS FALLING DUE AFTER ONE YEAR Other creditors 394 762 Accruals and deferred income 23,660 9,305 TOTAL LIABILITIES 1,236,190 817,324 CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED)FOR THE YEAR ENDED 31 DECEMBER 2001 Notes 2001 2000 £000 £000 Net cash inflow from general business 15,295 40,019 Net shareholders' cash (outflow)/inflow from Lloyd's d) (12,489) 1,284 business Net cash flow from operating activities a) 2,806 41,303 Interest paid e) (680) (982) Taxation paid (499) (6,654) Capital expenditure e) (2,774) (4,394) Acquisitions and disposals e) 1,380 846 Equity dividends paid (3,453) (4,982) Financing e) 55,368 3,345 52,148 28,482 CASH FLOWS WERE INVESTED AS FOLLOWS: Increase/(decrease) in cash holding f) 6,369 895 Net portfolio investment: Shares and units in unit trusts f) (1,937) 18,019 Debt securities and other fixed income securities f) 2,792 (19,132) Deposits with credit institutions f) 44,924 28,891 Other investments f) - (191) Net investment of cash flows 52,148 28,482 NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PREPARATION The financial statements of the Group have been prepared in accordance with applicable accounting standards as at 31 December 2001 and under the historical cost accounting rules, modified by the revaluation of investments. The financial statements have been prepared in accordance with the provisions set out in Section 255 of, and Schedule 9A to, the Companies Act 1985, as amended by the Companies Act 1985 (Insurance Companies Accounts) Regulations 1993. The Group has adopted all material recommendations of the revised Statement of Recommended Practice 'Accounting for Insurance Business' issued by the Association of British Insurers in December 1998. The Group has adopted FRS17 'Retirement Benefits' and FRS18 'Accounting Policies' during the year. The adoption of FRS17 has had no material impact on the current year's results, as only the transitional disclosure requirements have been included. The adoption of FRS18 has required more detailed disclosure of the Group's accounting policies. Results are determined on an annual basis, except for the results of the underwriting participations of the Hiscox Select subsidiaries on non-managed syndicates which are accounted for on a three-year basis. This is because of accounting practices at Lloyd's whereby this data is not available on an annual basis for most non-managed syndicates. 2. BASIS OF CONSOLIDATION The consolidated financial statements include the assets, liabilities and results of the Company and its subsidiary undertakings up to 31 December each year. Profits or losses of subsidiary undertakings sold or acquired during the period are included in the consolidated results up to the date of disposal or from the date of acquisition. Hiscox Dedicated Corporate Member Limited underwrites as a corporate member of Lloyd's on the syndicate managed by Hiscox Syndicates Limited (the 'managed syndicate'). Subsidiaries of Hiscox Select Holdings Limited underwrite as corporate members of Lloyd's on the managed syndicate as well as on other non-Hiscox managed syndicates. In view of the several liability of underwriting members at Lloyd's for the transactions of syndicates in which they participate, the attributable share of the transactions, assets and liabilities of the syndicates has been included in the financial statements. 3. ACCOUNTING POLICIES The following principal accounting policies have been applied consistently in dealing with items which are considered material in relation to the Group's financial statements. a. Premiums Written premiums comprise the premiums on contracts entered into during the accounting period, irrespective of whether they relate in whole or in part to a later accounting period. Written premiums are disclosed gross of commission payable to intermediaries and exclude taxes and duties levied on premiums. Premiums written include adjustments to premiums written in prior accounting periods and estimates for 'pipeline' premiums. Outward reinsurance premiums are accounted for in the same accounting period as the premiums for the related direct insurance or inwards reinsurance business. b. Unearned premiums For general business accounted for on the annual basis, the provision for unearned premium comprises the proportion of gross premiums written which is estimated to be earned in the following or subsequent financial years, computed separately for each insurance contract using the daily pro-rata method. Where the incidence of risk varies during the period covered by the contract, the provision is calculated taking into account the risk profile of the contracts. c. Acquisition costs Acquisition costs comprise all direct and indirect costs arising from the acquisition of insurance contracts. Deferred acquisition costs represent the proportion of acquisition costs incurred which corresponds to the proportion of gross premiums written which is unearned at the balance sheet date. d. Claims Claims incurred in respect of general business consist of claims and claims handling expenses paid during the financial year together with the movement in the provision for outstanding claims and future claims handling expenses. Outstanding claims comprise provisions for the estimated cost of settling all claims incurred but unpaid up to the balance sheet date whether reported or not, together with related claims handling expenses. Anticipated reinsurance recoveries, and estimates of salvage and subrogation recoveries, are disclosed separately as assets. Whilst the directors consider that the gross provision for claims and the related reinsurance recoveries are fairly stated on the basis of the information currently available to them, the ultimate liability will vary as a result of subsequent information and events and may result in significant adjustments to the amounts provided. Adjustments to the amounts of claims provisions established in prior years are reflected in the financial statements for the period in which the adjustments are made. The provision for outstanding claims is actuarially calculated using the Chain Ladder and Bornhuetter-Ferguson methods. In exceptional cases the required provision is calculated with reference to the actual exposures. There is close communication between the actuaries and underwriters and allowance is made for the rating environment. Ultimate claims are projected both gross and net of reinsurance using reinsurance recovery rates based on historical experience adjusted for the current reinsurance programme. e. Unexpired risk Provision is made for unexpired risks arising from general business where the expected value of the claims and expenses attributable to the unexpired periods of policies in force at the balance sheet date exceeds the unearned premiums provision in relation to such policies after the deduction of any acquisition costs deferred. The provision for unexpired risks is calculated separately by classes of business which are managed together, after taking into account relevant investment return. f. Equalisation provision An equalisation provision has been established and calculated in accordance with the requirements of the Insurance Companies (Reserves) Act 1995 to mitigate exceptionally high loss ratios for classes of business displaying a high degree of claims volatility. g. Hiscox Select non-managed syndicate participations These participations are accounted for on a three-year basis and have been calculated according to the provisions of Schedule 9A to the Companies Act 1985 as follows: The excess of premiums written over claims and expenses paid in respect of business commencing in an underwriting year is carried forward as a technical provision as part of outstanding claims. Premiums include a provision for 'pipeline' premiums. Profits arising from underwriting are normally recognised at the end of the second year following the end of the underwriting year when the underwriting account is usually closed by reinsurance into the following year of account. The payment of a reinsurance to close premium does not eliminate the liability of the closed year for outstanding claims. If the reinsuring syndicate was unable to meet its obligations, and other elements of the Lloyd's chain of security were to fail, then the closed underwriting account would have to settle outstanding claims. The directors consider that the likelihood of such a failure of the reinsurance to close is remote, and consequently the reinsurance to close has been deemed to settle liabilities outstanding at the closure of an underwriting account. When appropriate, provision is made for losses in respect of open underwriting years on a syndicate by syndicate basis. Syndicate investment income is accounted for on a receivable basis. Interest income is accrued up to the relevant 31 December. Syndicate investments and cash are held on a pooled basis, the return from which is allocated to underwriting years proportionately to the funds contributed by the year. Investment income and all investment gains and losses relating to syndicate investments and cash are included in the non-technical account, with an allocation made to the technical account as described in section 3(j). h. Investments Investments are stated at their current value. Listed investments comprise those quoted on the London and other International Stock Exchanges. These investments are stated at mid-market prices on the balance sheet date, or on the last stock exchange trading day before the balance sheet date. i. Investment return All investment return is recognised in the non-technical account. Dividends on ordinary shares are recognised as income on the date the ordinary shares are marked ex-dividend. Other investment income and interest receivable are included in income on an accruals basis. Realised gains or losses represent the difference between net sales proceeds and purchase price. Unrealised gains and losses on investments represent the difference between the current value of investments at the balance sheet date and their purchase price. The movement in unrealised investment gains / losses includes an adjustment for previously recognised unrealised gains / losses on investments disposed of in the accounting period. j. Allocation of investment return An allocation is made from the non-technical account to the general business technical account of the longer term investment return on investments supporting the general insurance technical provisions and all the relevant shareholders' funds. The longer term investment return is an estimate of the long term trend investment return for Hiscox plc and its subsidiaries, together with the Hiscox Managed Syndicate, having regard to past performance, current trends and future expectations. k. Depreciation Depreciation is provided to write off the cost less the estimated residual value of tangible assets on a straight-line basis over their estimated useful economic lives or length of lease, if less, as follows: Fixtures and fittings 10 - 15 years Computer software and hardware 3 - 5 years Motor vehicles 3 years All other fixed assets 4 years l. Goodwill Goodwill arising on acquisition of subsidiaries has been written off directly to reserves in the year of acquisition up to 31 December 1997. From 1 January 1998 in accordance with FRS 10, goodwill arising on acquisitions, being the difference between the fair value of the purchase consideration and the fair value of net assets acquired, is capitalised in the balance sheet and amortised on a straight line basis over its useful economic life which is considered to be 20 years. m. Other intangible assets Other intangible assets are the cost of purchasing the Group's participation in Lloyd's insurance syndicates. In accordance with FRS 10, this capacity is capitalised at cost in the balance sheet and amortised over its useful economic life which the directors consider to be 20 years. n. Rates of exchange Assets, liabilities, revenues and costs denominated in foreign currencies are recorded at the rates of exchange ruling at the dates of the transactions. At the balance sheet date, monetary assets and liabilities are translated at the year end rates of exchange. Any exchange profits or losses arising are taken directly to the profit and loss account. Investments in foreign enterprises are translated using the net investment method. All exchange profits or losses arising on the translation of these investments are taken to reserves. o. Pension costs Pension payments are charged against profits, with pension surpluses and deficits allocated over the remaining service periods of current employees. Differences between the amounts charged to the profit and loss account and payments made to the pension schemes are treated as assets or liabilities in the balance sheet. p. Leases Where the Group enters into a lease which entails taking substantially all the risks and rewards of ownership of an asset, the lease is treated as a 'finance lease'. The asset is recorded in the balance sheet as a tangible fixed asset and is depreciated over its estimated useful life or the term of the lease, whichever is shorter. Future instalments under such leases, net of finance charges, are included within creditors. Rentals payable are apportioned between the finance element, which is charged to the profit and loss account, and the capital element which reduces the outstanding obligation for future instalments. All other leases are accounted for as 'operating leases' and the rental charges are charged to the profit and loss account. q. Taxation Investment income is shown exclusive of any tax credit and the current tax charge similarly excludes any tax credit on investment income. Deferred taxation, calculated on the liability method, is provided on all material timing differences to the extent that it is probable that the liability will crystallise. 4. WORLD TRADE CENTER The Group's exposure to losses arising from the terrorist attack of 11 September 2001 arises almost entirely from its participation on Syndicate 33. Hiscox Insurance Company and the International Operations of Hiscox have had a negligible loss from this event. The situation is unprecedented and as such the extent of the gross and net losses to the Group is difficult to assess with the degree of confidence which is usual for insurance losses; facts or circumstances will come to light which may affect these estimates. The current projected estimate of net loss to Hiscox plc is £30 million for which provision has been made in these financial statements. This takes no account of any potential subrogation. The Group has exposure to WTC losses on a number of non-liability accounts, in particular direct property, risk excess, catastrophe and aviation hull. Aviation hull losses have already largely been settled. There is no significant liability exposure. As part of the process for the setting of the loss reserves included in these accounts, the directors have undertaken a comprehensive review of the Group's exposures in respect of insurance and reinsurance policies issued by Syndicate 33 to identify all those exposed directly or indirectly to losses from the events of 11 September 2001. No material new exposures have been identified during the last six months. This review has been supplemented by details of the notifications received from the Lloyd's Claims Office which amounted to $543m as at 31 March 2002. Hiscox has considered the insureds' computations of their own losses. The directors of Hiscox plc believe that the insureds' computations are likely to prove unreliable. Hiscox has estimated what the directors believe is an appropriate discount or premium on these notifications, based on their past experience of large property losses and additional information received. The reserve required for the Group's direct property exposure is sensitive to assumptions about the quantum of property damage and business interruption costs and to the legal issues relating to the cover provided by certain insurance policies. In reserving for these claims, the directors have taken account of settlement patterns experienced on previous large property losses, where final claims settlements are usually considerably lower than initial market estimates. Hiscox largely participates on the higher layers of risk excess policies. In certain cases, the property damage element of the claim falls well below the excess point. Certain market notifications relating to these property reinsurances have been made on a total loss basis which are without merit on the basis of information which is currently available. The directors consider it likely that in such cases, the final settlement will fall below the excess point so that Hiscox will incur no loss. The directors have nevertheless, where appropriate, established a precautionary reserve in these cases on the assumption that a part payment may be made, although this may be lower than the notification which is for a total loss on the layer. The extent to which losses arise from property risk excess and catastrophe reinsurance policies vary, particularly if a wide definition of business interruption is adopted. Provision has been made for property and business interruption losses known to have occurred in the immediate vicinity of the WTC. Remoter losses have not been provided for. The current total estimated gross loss to Syndicate 33 is approximately US$440 million. Syndicate 33 expects to recover from its reinsurance protections approximately US$ 350 million, net of reinstatement premiums payable to reinsurers to reinstate cover for future losses, resulting in a net loss of approximately US$ 90 million to Syndicate 33. In arriving at this estimate it has been assumed that the terrorist attack in New York City on 11 September 2001 was one occurrence and also that the aircraft impacts on the WTC are one occurrence. In the unlikely event that the Syndicate 33's loss increases by a further $100m and assuming there are no further reinsurance recoveries, the net cost to Hiscox plc would increase by approximately £35m. As at 31 March 2002, 97% of Syndicate 33's WTC reinsurance is placed with counterparties which are rated A grade or better and 65% of the total is placed with companies rated AA or AAA. 89% of this reinsurance is placed outside Lloyd's. Syndicate 33 has made a general provision for bad debts of US$ 4.5 million against their reinsurance recoveries in relation to the WTC losses. It has been assumed that no major reinsurer will fail. Syndicate 33 has already collected 38% of this reinsurance in the form of letters of credit or cash advances as part of our required funding of the US Trust Funds. Syndicate 33 has had no need to make a cash call. 5. SEGMENTAL INFORMATION a. 100% LEVEL TECHNICAL ACCOUNT 2001 2001 2001 2001 Managed Insurance Interna-tional Total Syndicate Company Operations £000 £000 £000 £000 Gross written premium 590,652 163,861 48,872 803,385 Net written premium 406,752 139,166 28,456 574,374 Net earned premium 338,207 126,578 25,495 490,280 Net claims incurred 282,152 67,461 6,328 355,941 Claims ratio (%) 83.4% 53.3% 24.8% 72.6% Commissions 100,307 43,087 19,980 163,374 Expenses 31,691 18,842 495 51,028 Movement in DAC (8,420) (2,778) (2,528) (13,726) Net expenses 123,578 59,151 17,947 200,676 Expense ratio (%) 32.5% 44.5% 72.0% 37.3% Net longer term investment 11,362 7,093 1,062 19,517 return Technical profit/(loss)* (56,161) 7,059 2,282 (46,820) Combined ratio (%) 115.9% 97.8% 96.8% 109.9% *Before movement in equalisation provision. The impact of a 1% change in the combined ratios of each business division on technical profit are: 2001 2001 2001 Managed Insurance International Syndicate Company Operations £000 £000 £000 At 100% level 1% change in claims ratio 3,382 1,266 255 1% change in expense ratio 4,068 1,392 285 At Group level 1% change in claims ratio 1,799 1,266 255 1% change in expense ratio 2,164 1,392 285 2000 2000 2000 2000 Managed Insurance Interna-tional Total Syndicate Company Operations £000 £000 £000 £000 Gross written premium 457,213 127,347 31,866 616,426 Net written premium 247,592 111,597 16,863 376,052 Net earned premium 257,403 100,995 15,133 373,531 Net claims incurred 152,772 52,998 20 205,790 Claims ratio (%) 59.4% 52.5% 0.1% 55.1% Commissions 86,202 35,561 14,859 136,622 Expenses 28,861 14,931 9 43,801 Movement in DAC 14,568 (1,603) (1,541) 11,424 Net expenses 129,631 48,889 13,327 191,847 Expense ratio (%) 46.5% 45.2% 88.2% 48.0% Net longer term investment 10,278 6,433 661 17,372 return Technical profit/(loss)* (14,722) 5,541 2,447 (6,734) Combined ratio (%) 105.9% 97.7% 88.3% 103.1% *Before movement in equalisation provision. The impact of a 1% change in the combined ratios of each business division on technical profit are: 2000 2000 2000 Managed Insurance International Syndicate Company Operations £000 £000 £000 At 100% level 1% change in claims ratio 2,574 1,010 151 1% change in expense ratio 2,476 1,116 169 At Group level 1% change in claims ratio 1,357 1,010 151 1% change in expense ratio 1,305 1,116 169 b. RECONCILIATION OF 100% LEVEL TECHNICAL RESULTS TO GROUP RESULTS - ALIGNED CAPACITY 2001 2000 £000 £000 Technical (loss)/profit for 100% of continuing (46,820) (6,734) operations (note 5a) Notional share attributable to Group at current level of (25,051) (96) capacity ownership Adjustments to reflect lower levels of capacity in prior years 1999 (1998)year of account 1,065 (500) 2000 (1999) year of account 2,001 502 Investment return on Group underwriting capital 4,479 4,893 Amounts applicable to quota share reinsurers* 1,324 - Conversion scheme adjustment - 1,184 Trading (loss)/profit for Group share of continuing (16,182) 5,983 operations - aligned capacity (note 5c) *For the 2001 year of account, the Group owned 60% of the Syndicate. 7% of that capacity was reinsured to two leading European reinsurers via a quota share arrangement. c. PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION 2001 2001 2001 2001 Lloyd's Insurance International Total Business/ Company Operations Group £000 £000 £000 £000 Gross written premium 336,193 163,861 48,872 548,926 Net earned premium 192,126 126,578 25,495 344,199 Net longer term investment 10,407 7,093 1,062 18,562 return Net claims incurred (158,966) (67,461) (6,328) (232,755) Acquisition costs (64,514) (40,309) (17,452) (122,275) Expenses (5,900) (18,842) (495) (25,237) Other technical income 1,324 - - 1,324 Trading result * Aligned result (25,523) 7,059 2,282 (16,182) Non-aligned result - - - - Other income and expenses (4,395) (39) (604) (5,038) Operating profit/(loss) (29,918) 7,020 1,678 (21,220) Exceptional Items - - - - Short-term fluctuations in (3,990) (4,184) (520) (8,694) investment return Equalisation provision - (2,582) - (2,582) Pre tax profit/(loss) (33,908) 254 1,158 (32,496) 2000 2000 2000 2000 Lloyd's Insurance International Total Business/ Company Operations Group £000 £000 £000 £000 Gross written premium 225,523 127,347 31,866 384,736 Net earned premium 125,322 100,995 15,133 241,450 Net longer term investment 9,128 6,433 661 16,222 return Net claims incurred (74,348) (52,998) (20) (127,366) Acquisition costs (58,776) (33,958) (13,318) (106,052) Expenses (3,561) (14,931) (9) (18,501) Long term business result 1,184 - - 1,184 Trading result * Aligned result (2,005) 5,541 2,447 5,983 Non-aligned result 954 - - 954 Other income and expenses (2,766) - (1,221) (3,987) Operating profit/(loss) (3,817) 5,541 1,226 2,950 Exceptional Items 957 846 - 1,803 Short-term fluctuations in (764) 1,742 65 1,043 investment return Equalisation provision - (2,309) - (2,309) Pre tax profit/(loss) (3,624) 5,820 1,291 3,487 * Based on longer term investment return, before movement in equalisation provision and elimination of inter company transactions. NET ASSET VALUE PER SHARE 2001 2001 2001 Net asset value Number of shares* NAV £000 000 per share p Net asset value 164,791 192,667 85.5 Net asset value (before equalisation provision) 176,020 192,667 91.4 Net tangible asset value 140,994 192,667 73.2 Net tangible asset value (before equalisation 152,223 192,667 79.0 provision) 2000 2000 2000 Net asset value Number of shares* NAV £000 000 per share p Net asset value 133,562 148,001 90.2 Net asset value (before equalisation provision) 142,209 148,001 96.1 Net tangible asset value 109,155 148,001 73.8 Net tangible asset value (before equalisation 117,802 148,001 79.6 provision) *The number of shares is the number of shares in issue as at 31 December of the relevant financial year. 6. INVESTMENT RETURN a. ACTUAL INVESTMENT RETURN 2001 2000 £000 £000 Investment return on funds at Lloyd's and other corporate funds Investment income 3,507 3,636 Unrealised gains/(losses) on investments (2,775) 1,631 Realised gains/(losses) on investments 115 (944) 847 4,323 Investment return on syndicate funds Investment income 5,045 4,660 Realised gains/(losses) on investments 1,404 498 6,449 5,158 Investment return on insurance company funds Investment income 6,453 6,392 Unrealised gains/(losses) on investments (1,928) 1,374 Realised gains/(losses) on investments (1,393) 684 3,132 8,450 Investment management expenses (560) (666) Total investment return 9,868 17,265 Allocation to the technical account based on the longer (18,562) (16,222) term rate Short-term fluctuations in investment return retained in (8,694) 1,043 the non-technical account b. ACTUAL INVESTMENT RETURN The longer term return is based on a combination of historical experience and current expectations for each category of investments. The longer term return is calculated by applying the following yields to the weighted average of each category of assets. 2001 2000 % % Shares and units in unit trusts 7.0 7.0 Debt securities and other fixed interest securities 6.0 6.0 Deposits with credit institutions 6.0 6.0 c. COMPARISON OF LONGER TERM INVESTMENT RETURN WITH ACTUAL RETURNS 2001 2001 Funds at Lloyd's and other Share of Syndicate Corporate Assets £000 % £000 % Actual investment return Shares and units in unit trusts (2,028) (7.2) 302 8.1 Debt and other fixed income 1,904 6.1 3,992 6.6 securities Deposits with credit 807 2.9 1,983 5.8 institutions Other - - - - 683 6,277 Longer term investment return Shares and units in unit trusts 1,985 7.0 260 7.0 Debt and other fixed income 1,864 6.0 3,609 6.0 securities Deposits with credit 1,692 6.0 2,059 6.0 institutions Other - - - - 5,541 5,928 Short term fluctuations in (4,858) 349 investment return 2001 2001 Insurance Company Total £000 % £000 Actual investment return Shares and units in unit trusts (2,394) (10.4) (4,120) Debt and other fixed income 4,237 5.6 10,133 securities Deposits with credit 1,065 5.1 3,855 institutions Other - - - 2,908 9,868 Longer term investment return Shares and units in unit trusts 1,608 7.0 3,853 Debt and other fixed income 4,380 6.0 9,853 securities Deposits with credit 1,105 6.0 4,856 institutions Other - - - 7,093 18,562 Short term fluctuations in (4,185) (8,694) investment return 2000 2000 Funds at Lloyd's and Share of Syndicate other Corporate Assets £000 % £000 % Actual investment return Shares and units in unit trusts 213 0.9 574 15.7 Debt and other fixed income securities 2,897 7.7 3,142 6.1 Deposits with credit institutions 1,014 5.7 945 4.1 Other - - 305 3.9 4,124 4,966 Longer term investment return Shares and units in unit trusts 1,740 7.0 256 7.0 Debt and other fixed income securities 2,264 6.0 3,072 6.0 Deposits with credit institutions 1,062 6.0 1,395 6.0 Other - - - - 5,066 4,723 Short term fluctuations in (942) 243 investment return 2000 2000 Insurance Company Total £000 % £000 Actual investment return Shares and units in unit trusts 447 2.5 1,234 Debt and other fixed income securities 6,991 9.8 13,030 Deposits with credit institutions 737 5.1 2,696 Other - - 305 8,175 17,265 Longer term investment return Shares and units in unit trusts 1,268 7.0 3,264 Debt and other fixed income securities 4,294 6.0 9,630 Deposits with credit institutions 871 6.0 3,328 Other - - - 6,433 16,222 Short term fluctuations in 1,742 1,043 investment return 7. LOSS/EARNINGS PER SHARE 2001 2001 2001 Loss/ Average number of LPS shares Earnings p 000 £000 Basic, based on operating (loss)/profit after (15,090) 148,665 (10.2) tax Basic, based on (loss)/profit on ordinary (23,107) 148,665 (15.5) activities after tax Diluted, based on (loss)/profit on ordinary (23,107) 148,665 (15.5) activities after tax* 2000 2000 2000 Earnings Average number of EPS shares £000 P 000 Basic, based on operating profit after tax 5,054 142,472 3.5 Basic, based on profit on ordinary activities 5,430 142,472 3.8 after tax Diluted, based on profit on ordinary activities 5,430 144,577 3.8 after tax* *In accordance with FRS14 'Earnings per share', potential ordinary shares are only included in the calculation of diluted loss/earnings per share to the extent that they are dilutive i.e. those that on conversion to ordinary shares would decrease net profit per share or increase net loss from continuing operations. The reconciliation of basic loss/earnings per share to basic loss/earnings per share based on operating (loss)/profit after tax is as follows: 2001 2000 LPS EPS p p Basic (15.5) 3.8 Short term movements in investments 4.1 (0.5) Exceptional items - (0.9) Movement in equalisation provision 1.2 1.1 Basic based on operating (loss)/profit after tax (10.2) 3.5 Loss/earnings per share has also been calculated based on the operating loss/profit before exceptional items and after taxation as the directors believe this loss/earnings per share figure provides a better indication of operating performance. Diluted loss/earnings per share has been calculated taking into account the following options under employee share schemes. 2001 2000 No. No. 000 000 Basic weighted average number of shares 148,665 142,472 Employee share options - 1,816 SAYE share options - 289 Total 148,665 144,577 8. OTHER FINANCIAL INVESTMENTS Funds at Lloyd's Share of Syndicate Insurance Company 2001 and other Corporate Assets Total Market Value Market Value Market Value Market Value £000 £000 £000 £000 Shares and units in unit 26,732 3,594 15,723 46,049 trusts Debt and other fixed income 30,130 102,690 83,336 216,156 securities Deposits with credit 31,008 3,062 47,887 81,957 institutions Other* 240 - - 240 88,110 109,346 146,946 344,402 *includes an investment in an associated undertaking Funds at Lloyd's Share of Syndicate Insurance Company 2000 and other Corporate Assets Total Market Value Market Value Market Value Market Value £000 £000 £000 £000 Shares and units in unit trusts 28,387 4,346 20,977 53,710 Debt and other fixed income securities 32,831 57,468 78,819 169,118 Deposits with credit institutions 17,970 4,576 16,005 38,551 Other 73 2,203 - 2,276 79,261 68,593 115,801 263,655 9. PENSIONS During the year, the Group contributed to two defined benefit pension schemes. A full actuarial valuation of these schemes was carried out at 1 January 2000 by a qualified independent actuary. This valuation has been updated on an FRS 17 basis as at 31 December 2001. The split of assets and funding position at 31 December 2001, measured in accordance with the requirements of FRS17, were as follows: £000 Equities and properties 37,262 Bonds 6,399 Cash 2,949 Total market value of assets 46,610 Present value of scheme liabilities (59,800) Surplus/(deficit) (13,190) Related deferred tax (liability)/credit 3,957 Surplus/(deficit) in the scheme - pension asset/(liability) (9,233) Where a deficit needs to be funded, a proportion of the additional contributions will be recharged to Syndicate 33 in accordance with the Group's normal recharging procedures. 10. RECONCILIATION OF MOVEMENT IN SHAREHOLDERS' FUNDS Share Capital Share Premium Merger Capital Profit and Total Reserve Res-erve Redemp-tion Loss Account Share-holders' £000 Reserve £000 £000 £000 £000 Funds £000 At 1 January 2001 7,400 72,474 4,723 33,244 15,721 133,562 Exercise of share options 10 133 - - - 143 Shares issued from open 2,223 52,005 - - - 54,228 offer Exchange differences taken - - - - (35) (35) to reserves Retained (loss)/profit for - - - - (23,107) (23,107) the year At 31 December 2001 9,633 124,612 4,723 33,244 (7,421) 164,791 Notes to the Cash Flow Statement (unaudited) a. RECONCILIATION OF OPERATING (LOSS)/PROFIT TO NET CASH INFLOW FROM OPERATING ACTIVITIES 2001 2000 £000 £000 Operating (loss)/profit before taxation after interest (21,220) 2,950 Depreciation and amortisation of fixed assets 3,274 2,959 Increase in general insurance technical provision, net of 37,115 23,451 reinsurance Increase/(decrease) in amounts owed to agents (6,280) 20,794 (Increase)/decrease in amounts owed by agents (4,713) (34,634) (Increase)/decrease in other debtors (35,779) 780 Increase/(decrease) in other creditors 12,775 11,061 Cash received from Lloyd's business (note d) (12,489) 1,284 Realised and unrealised investment (gains)/ losses 5,991 (2,690) Short term fluctuations in investment return (8,694) 1,043 Interest expense 1,099 951 Losses/(profits) relating to Lloyd's business 31,641 12,866 Other non-cash transactions 86 488 Net cash inflow from operating activities 2,806 41,303 b. MOVEMENT IN OPENING AND CLOSING PORTFOLIO INVESTMENTS NET OF FINANCING 2001 2000 £000 £000 Net cash inflow/(outflow) for the period 6,369 895 Portfolio investments 45,779 27,587 Decrease/(increase) in loans (905) 129 Movement arising from cash flows 51,243 28,611 Movement in long-term and Lloyd's business 57,035 10,177 Changes in market value and exchange rate effects (4,549) 6,881 Increase in portfolio investments net of financing 103,729 45,669 Total portfolio investments net of financing at 1 299,925 254,256 January Total portfolio investments net of financing at 31 403,654 299,925 December c. CASH FLOWS OF THE LONG TERM BUSINESS 2001 2000 £000 £000 Premiums received - 89 Claims paid - (605) Net portfolio investments - 436 Other net cash flows - (94) Taxation - (809) Net cash flow before retention and transfers out of the - (983) fund Schedule 2c transfer of long term business - (18,889) Cash retained in long-term business - (19,872) d. CASH FLOWS OF THE LLOYD'S BUSINESS 2001 2000 £000 £000 Premiums received 124,051 201,740 Claims paid (52,881) (90,052) Net portfolio investments 6,011 5,238 Other net cash flows (32,635) (84,704) Net cash flow before retention and transfer from/(to) 44,546 32,222 the Group Transfer from/(to) the Group 12,489 (1,284) Cash retained in the Lloyd's business 57,035 30,938 e. ANALYSIS OF CASH FLOWS FOR HEADINGS NETTED IN THE CASH FLOW STATEMENT 2001 2000 £000 £000 Servicing of finance Interest paid (559) (784) Interest paid element of finance leases (121) (198) (680) (982) Capital expenditure Payments to acquire tangible fixed assets (2,772) (429) Receipts from sales of tangible fixed assets 4 60 Payments to acquire intangible fixed assets (6) (4,025) (2,774) (4,394) Acquisitions and disposals Net cash proceeds on sale of long term business - 846 Payments to acquire investment in associated undertaking (199) - Acquisition of subsidiary undertaking (2,527) - Net cash and investments acquired with subsidiary 4,106 - 1,380 846 Financing Proceeds from share issues 54,371 3,609 New bank loan 1,378 285 Capital element of finance leases (381) (549) 55,368 3,345 Portfolio investment Purchase of shares and units in unit trusts 8,402 18,143 Sale of shares and units in unit trusts (10,339) (124) Purchase of debt securities and fixed income securities 120,564 143,244 Sale of debt securities and fixed income securities (117,772) (162,376) Increase/(decrease) in deposits with credit institutions 44,924 28,891 Increase/(decrease) in other investments - (191) 45,779 27,587 f. MOVEMENT IN CASH, PORTFOLIO INVESTMENTS AND FINANCING At 1 Jan Cash flow Changes in Changes to At 31 Dec other business market value 2001 and curren-cies 2001 £000 £000 £000 £000 £000 Cash at bank and in hand 38,466 6,369 17,685 - 62,520 Shares and units in unit trusts 53,710 (1,937) (1,042) (4,682) 46,049 Debt securities and other fixed 169,118 2,792 44,109 137 216,156 income securities Deposits with credit institutions 38,551 44,924 (1,514) (4) 81,957 Other investments 2,276 - (2,203) - 73 Loans due within one year (681) (1,378) - - (2,059) Finance leases (1,515) 473 - - (1,042) Total 299,925 51,243 57,035 (4,549) 403,654 g. SCOPE OF CASH FLOW The consolidated cash flow statement excludes cash flows relating to underwriting on Lloyd's syndicates. NOTES: 1. The financial information set out in this statement does not constitute the Company's statutory accounts for the years ended 31 December 2000 or 2001. The financial information for 2000 is derived from the statutory accounts for 2000, which have been delivered to the registrar of companies. The auditors have reported on the 2000 accounts; their report was unqualified and did not contain a statement under section 237(2) or (3) or the Companies Act 1985. The statutory accounts for 2001 will be finalised on the basis of the financial information presented by the directors in this preliminary announcement and will be delivered to the registrar of companies following the Company's annual general meeting. 2. The audited Annual Report and Accounts for 2001 will be posted to shareholders no later than 31 May 2002 and will be delivered to the Registrar of Companies following the Annual General Meeting on 2 July 2002. Copies of the Report may be obtained by writing to the Company Secretary, Hiscox plc, 1 Great St Helen's, London EC3A 6HX. 16 APRIL 2002 This information is provided by RNS The company news service from the London Stock Exchange

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