Final Results

Hiscox Ltd 03 March 2008 HISCOX Ltd Preliminary results for the year ended 31 December 2007 'Another record result' 2007 2006 Gross written premiums Â£1,198.9m Â£1,126.2m Net earned premiums Â£965.2m Â£888.8m Profit before tax Â£237.2m Â£201.1m Earnings per share 48.4p 41.7p Total dividend per share for year 12.0p 10.0p Net asset value per share 209.5p 173.2p Group combined ratio 84.4% 89.1% Return on equity 28.8% 28.9% Financial highlights â€¢ Record pre-tax profits up 18% to Â£237.2m (2006: Â£201.1m) â€¢ Gross written premiums up 6.5% to Â£1,198.9m (2006: Â£1,126.2m) â€¢ Group combined ratio improves to 84.4% (2006: 89.1%) â€¢ Earnings per share on profit after tax up 16.1% to 48.4p (2006: 41.7p) â€¢ Final dividend 8p per share (2006: 7p) making 12p for the full year, an increase of 20% (2006: 10p) â€¢ Return on equity 28.8% (2006: 28.9%) â€¢ Active capital management Operational highlights â€¢ Excellent year for Hiscox Global Markets - profits increased to Â£155.6m (2006: Â£90.7m) â€¢ Hiscox UK and Hiscox Europe - good top line growth of 13.7% to Â£302.3m (2006: Â£265.8m) with profits of Â£21.8m (2006: Â£33.1m) despite the impact of Windstorm Kyrill and the UK floods â€¢ Hiscox International - another successful year with profits up 33.2% to Â£69.1m (2006: Â£51.9m) â€¢ Hiscox USA - acquired American Live Stock, a major milestone towards building a strong US domestic business â€¢ Regional business relatively stable in the softening market with good growth prospects. Robert Hiscox, Chairman, Hiscox Ltd, commented: 'This is another record result driven primarily by the excellent performance of our Global Markets and Bermuda businesses. We will continue to develop our UK and international network to distribute our specialist products which will provide further stability to the Group.' Copies of the Chairman's statement, Chief Executive's report and the Group's financial information as at 31 December 2007 are attached. For further information: Hiscox Ltd Robin Mehta +1 441 278 8300 Kylie O'Connor, Head of Communications, London +44 (0) 20 7 448 6656 Maitland +44 (0) 20 7379 5151 Suzanne Bartch Richard Farnsworth Notes to editors About Hiscox Hiscox, headquartered in Bermuda, is a specialist insurance group listed on the London Stock Exchange. There are three main underwriting parts of the Group - Hiscox Global Markets, Hiscox UK and Europe, and Hiscox International. Hiscox Global Markets 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 After a record result in 2006, I am delighted to announce a further record in 2007. We took full advantage of the strong rates for international reinsurance in London and Bermuda, added some gearing from our sidecar 'Panther', and with disciplined underwriting, skilful avoidance of various market losses and some help from Mother Nature, were handsomely rewarded. Our regional businesses in the UK, Europe and the USA continued to grow, with the UK making a good profit despite the storms and floods. Our strategy of growing stable regional businesses will now become more valuable as some international rates fall following two years with relatively light catastrophes. Results The result for the year ended 31 December 2007 was a record profit of Â£237.2 million (2006: Â£201.1 million). Gross written premium income increased 6.5% to Â£1,198.9 million (2006: Â£1,126.2 million) with net earned premium increasing 8.6% to Â£965.2 million (2006: Â£888.8 million). This was despite a weak dollar exchange rate persisting throughout 2007. The combined ratio was 84.4% (2006: 89.1%). Earnings per share on profit after tax increased 16.1% to 48.4p (2006: 41.7p) and net assets per share rose 21% to 209.5p per share (2006: 173.2p). Return on equity was 28.8% (2006: 28.9%). Dividend and capital management In March 2007, the Board proposed a total dividend of 12p for 2007. Subject to shareholders' approval, we will pay a final dividend of 8p (2006: 7p) making a total distribution for the year of 12p (2006: 10p) an increase of 20%. This will be paid on 17 June 2008 to shareholders on the register on 16 May 2008. Our dividend policy going forward is to increase the dividend year-on-year as we believe a growing income is well received by shareholders and a main plank of equity investment. This year's record result has generated additional capital at a time when we have reduced the 2008 capacity of our Lloyd's Syndicate 33 by 20%. On top of the annual dividend of around Â£50 million, we have announced a buy-back of our shares to treasury of up to Â£50 million and repayment of debt of Â£50 million, making an effective capital repayment of Â£150 million. Our business needs capital to support underwriting and to build the network of regional businesses. We have made regular small acquisitions but prices have been driven very high. If the sub-prime crisis and the competitive insurance conditions reduce the profitability and the expectations of some attractive businesses we will need capital to be able to buy if the right opportunity arises. Review of the year Our ambition remains to be a highly respected international specialist insurance and reinsurance company, built on a portfolio balanced between volatile international catastrophe business and more steady local and regional business. During the last year we made significant progress in strengthening the Group. As usual I will highlight some salient points of the year under review and leave Bronek Masojada to report in more detail. 2007 was another cracking year for the international catastrophe exposed business. It always sounds easy in retrospect to write a book of catastrophe business when the catastrophes have not occurred, but it isn't. It requires extremely careful analysis of exposures and sensible purchase of reinsurance, combined with the ability to secure shares of the most attractive business. This the Global Markets team in London and the Bermuda team did extremely well. 2007 was a year of good progress on the regional side of the business. Hiscox UK made a profit despite being assaulted by Windstorm Kyrill in January and floods in June and July. The household book lost money but enhanced its reputation by excelling in the management of claims. Household insurance is thought by the majority of buyers to be a commodity purchase - all policies are the same so it is only price that matters. It is extraordinary that people who would normally never buy the cheapest will cover the risk of losing their most precious assets with a cheap and often unread policy. Well you find out how good your policy is when you have a claim, and we set out to prove that a Hiscox policy is altogether better - and I believe that we succeeded. The commercial side of Hiscox UK showed the benefit of balance and its superb underwriting profits kept UK profitable. It has built up an excellent book in the small professional businesses area with intelligent cover and efficient processes. There is less competition for small risks which require a distinct skill in underwriting and claims handling combined with slick operations to build a profitable book such as ours. Our direct business which offers household and small commercial policies, is nearing critical mass and profitability. The income rose by 72% and the number of policies to 54,000, aided by the advertising campaigns which also helped sell policies through brokers and strengthen the brand. Hiscox Europe increased premium income by 25% and had a third year of profit despite losses from Windstorm Kyrill which bodes well for the future as we increase our product range. Hiscox USA established a firm foothold and the acquisition of the American Live Stock Insurance Company, now renamed Hiscox Insurance Company Inc., will give us the ability to market our policies on an admitted basis in addition to the surplus lines basis using Hiscox Syndicate 33 at Lloyd's. Hiscox Guernsey had another brilliant year. The market The insurance cycle is alive and definitely kicking and it would appear that some insurers are, as usual, suffering from rapid and severe memory loss. (How can they forget 2005 when years of premiums were wiped out?) Rates are reducing rapidly in obvious areas where there are large premiums to be competed for and the lust for non-catastrophe exposed business is turning underwriting discipline to jelly. I sometimes wonder whether underwriters who have made a 10% profit and then reduce rates by 10% think they are going to make 9%, instead of the obvious NIL. Any management, including the management of Lloyd's, who sees a rising income in an area of falling rates ought to ask serious questions. It was disappointing to see the capacity of Lloyd's reducing only 2% for 2008 (an actual increase at constant exchange rates) when most of the seasoned underwriters like us were reducing by 20%. The sub-prime crisis After a period of grace during which the banks had re-established a reputation for financial discipline, control of risk and expertise in passing that risk off to others (and insurers were widely assumed to have taken the risk off them), there is a measure of schadenfreude in their current turmoil. Critics have wondered why the insurance industry has been unable to quantify its losses almost immediately after major catastrophes, telling us that the banks can mark to market every night and know their exact exposure at any time. Not so, it would appear. It is a serious crisis, the full extent of which I do not think we have yet seen. In our underwriting books we have a very limited exposure which we have reserved fully. I comment on our investment portfolios below. Investments The end of 2007 (and the beginning of 2008) has been a challenging period for investing. However, our policy of focusing on high quality, short duration bonds has kept us away from the structured products that have done so much damage in the financial world. We have a negligible exposure to certain sub-prime securities, all of which remain AAA rated. At the end of last year we reduced our equity exposure from 10% of overall funds to 7.8% and that has helped during the weak market in early 2008. We expect opportunities to emerge from the current turbulence and a more normal relationship between risk and reward to return. People We have continued to seek, recruit, train and motivate the best people. There is a spirit which pervades throughout all our offices which is made up of a desire to do an excellent job with drive, efficiency and integrity. I think that because of this customers want to do business with Hiscox. I am very grateful to everyone at Hiscox for what they have built over the last few years culminating in the excellent results over the last two. The future We are building a long-term business and our senior management have experience of several down-cycles. We have spent 15 years investing considerable money in building an international network to distribute our specialist products. This will mitigate the effect of this part of the cycle. Our Global Markets and Bermuda businesses are most affected by the cycle and they will let those with short memories take the business off them if the price is not right. There is still plenty of good business at fair prices so they have budgeted to make a good profit in 2008. Reinsurance prices are relatively firm, so those who are reducing insurance premiums to unrealistic levels will be squeezed by expensive reinsurance and less income to pay losses. Our regional businesses are showing healthy growth. We believe that we have demonstrated that our household policies give superior cover backed by great service. Our specialist commercial policies have a strong following in their markets and have much further to go. We have built many advantages into our business over the last few years which will benefit us greatly in the years to come. Our residence in Bermuda gives us considerable strategic advantages and a more global perspective. Our international spread of offices lead to business opportunities not available to us before, and give our staff increased choices in their careers. We have a great group of people with a wide range of skills in international and regional business with a network of offices and contacts throughout the world. The market may be testing in the next few years but we have been building towards this moment and I am confident that we will prosper. Robert Hiscox Chief Executive's report Overview Our Chairman Robert Hiscox has always advised us to 'advance to the sound of gunfire, retreat when the Sirens call'. In 2007 we followed this advice. Significant parts of our business advanced, particularly in reinsurance in London and Bermuda, but also in our smaller ticket businesses in the UK, USA and Europe. The result of this has been a record level of controlled gross written premium, record profits on both an absolute and per share basis and a 20% increase in dividend per share. We are also hearing the Sirens of a market in downturn and in 2008 we will retreat tactically. Across the Group market conditions are becoming tougher but with variability in pricing trends by line of business. Our business strategy has long been set to take account of this environment. We are shrinking significantly in the areas such as international big ticket business where we see most pressure on pricing, shrinking moderately in areas like reinsurance which are less affected, and expanding in the US, UK and European domestic markets where our specialist focus protects us from the extremes of market competition. Group performance The pre-tax profit for the year was Â£237.2 million (2006: Â£201.1 million). Gross written premium grew to Â£1,198.9 million, an increase of 6.5% (2006: Â£1,126.2 million), which equals Â£3.04 per share (2006: Â£2.86). Earnings per share are 48.4p (2006: 41.7p). Return on equity was 28.8% (2006: 28.9%). Dividends per share have increased 20% to 12p per share (2006: 10p). This excellent performance was achieved despite Â£68 million from the catastrophes which affected our business. Hiscox is most well-known for its expertise in the high net worth arena, but it is our balance of business that gave us the flexibility to deliver this record result while still investing in the future. The decision to expand in reinsurance in both London and Bermuda, combined with a strong performance in big ticket international business, generated record returns and we invested in both our UK direct business and the USA. Hiscox Global Markets Hiscox Global Markets underwrites a mix of bigger ticket international business where the Lloyd's licences provide market access, and smaller ticket specialty business which comes to London for both historic and relationship reasons. Richard Watson led it to a stunning year. Gross written premiums were Â£676.5 million (2006: Â£709.1 million) and profits surged to Â£155.6 million (2006: Â£90.7 million). The combined ratio improved to 81.7% (2006: 90.1%). The growth in profits was due to an excellent performance by the reinsurance, property and specialty teams. Our marine and global errors and omissions teams all made solid contributions. â€¢ The reinsurance area expanded significantly in the year, with the added capacity of a special purpose re-insurer Panther Re, which was capitalised by W L Ross & Co. Growth in a year that turned out to have very few insured natural catastrophes has been a major contributor to the Group's growth in profits. In October last year Panther Re and Syndicate 33 agreed that their successful reinsurance partnership covering the 2007 year of account would not be renewed for 2008. We commuted our contract with Panther Re in January 2008 in a deal which brought benefits to both parties. In place of Panther Re we created the smaller Cougar Syndicate at Lloyd's which is capitalised by a mix of individual and Corporate Names. Initially set up for one year, Cougar Syndicate has a capacity of Â£34.6 million. Although we expect our reinsurance writings to reduce as rates are easing, we will write enough well rated business to satisfy both Cougar and ourselves. â€¢ The property team underwrite all of our catastrophe exposed primary property and property binder business. They had a good year as modest expansion and few losses led to a significant profit contribution. We have moved the reinsurance protections of this business towards a quota share structure, creating partnerships to share both risk and reward. â€¢ Under the specialty banner we bring together a range of areas such as bloodstock, contingency, kidnap and ransom, terrorism, personal accident and political risks. The division had an almost static top line but improved combined ratios led to a good performance. It is the specialty division which provides a fair degree of balance of non-correlated business to Hiscox Global Markets and the Group, so it is an area we will cherish as market conditions deteriorate. â€¢ The marine area saw a reduction in overall premium written as we responded to declining rates, particularly in upstream energy. Combined ratios remained good, but the smaller level of income led to slightly lower profitability overall. â€¢ Our global errors and omissions division was created from the merger of our technology, media and telecommunications teams and our global professional indemnity teams. Bigger ticket professional indemnity is an area where many catastrophe focused players are expanding - seeking illusory 'non-correlating' business - forgetting that it is only worth doing if it remains profitable. The division has shown great discipline, shrinking in those areas where rates are under most pressure, allowing it to deliver a good result. We remain committed to the area, particularly its more specialist niches, and will expand when the rates return to better levels. Hiscox Global Markets has invested in building underwriting teams outside London. We have established hubs in Paris and in New York to give brokers greater choice in the way they access Hiscox. As well as business which comes to London, we can also serve those brokers who, for whatever reason, decide to place their business in their local market. At Hiscox we have regarded front line underwriters as our 'fighter pilots', but just like real pilots, their tools are becoming ever-more sophisticated and a greater range of skills need to be brought to bear before a risk is underwritten. Over the last several years we have invested significantly in our modelling capability with a focus on both aggregate management and risk pricing. This year we recruited a further three pricing actuaries to expand our strong analytical team. We believe that the enhanced transparency and greater understanding that the analytics give us, when combined with real management action, will make us more effective in dealing with the softer market that lies ahead. As announced in late 2007, we expect Hiscox Global Markets to shrink by at least 20% in 2008 as we remain committed to our goal of seeking profit over volume. Hiscox International Hiscox International comprises our business in Bermuda, the USA and Guernsey. It had another successful year. Gross written premium grew to Â£220.2 million (2006: Â£151.3 million) and the combined ratio 75.4% (2006: 62.7%). Profits grew to Â£69.1 million (2006: Â£51.9 million). This improvement was driven by a good performance in each business. â€¢ Hiscox Bermuda had a great year. Robert Childs led his team to expand their external reinsurance book by 60% to Â£148.7 million (2006: Â£93.0 million). This expansion, coupled with a year of low loss frequency, generated a combined ratio of 56.7% and allowed the profits to flow. In 2008 we expect the business to shrink as the team shows the same discipline in softer markets as it did in expanding at the right time. â€¢ Hiscox Guernsey had another good year under the leadership of Steve Camm and Rob Davies. Gross written premium remained virtually flat at Â£49.1 million (2006: Â£48.6 million). Profits remained strong. Our Guernsey team continues to drive the expansion of our worldwide kidnap and ransom business. During the year we acquired a portfolio of this business from AON, which is made up of Latin American risks from third party intermediaries. We also recruited another team based in New York. These two teams will build our relationships with local retail brokers - injecting a stronger growth element into this business. â€¢ Hiscox USA had a step change in size this year. Led by Ed Donnelly, premiums grew 130% to Â£22.4 million (2006: Â£9.7 million). Our team expanded to 88 people. During the year we acquired The American Live Stock Insurance Company. It contributed Â£3 million to this year's business. We have renamed it Hiscox Insurance Company Inc. and will use it as our admitted market platform for the USA. This represents a major milestone in our desire to build a strong US domestic platform. We will retain its profitable animal mortality business and will continue to use the American Live Stock brand in this specialist area. We now have four offices supporting our USA domestic operations in Armonk, Chicago, Manhattan and Geneva, Illinois. In time, we aim to acquire additional businesses or teams who can support the growth of our US domestic business. Hiscox UK and Hiscox Europe Despite challenging conditions our businesses in both the UK and Europe delivered good top line growth with gross written premiums increasing by 13.7% to Â£302.3 million (2006: Â£265.8 million). Aggregate profits fell to Â£21.8 million (2006: Â£33.1 million), and the combined ratio was 98.2% (2006: 96.2%) reflecting the impact of Windstorm Kyrill and the UK floods. â€¢ Hiscox UK, led by Steve Langan, produced profits despite several catastrophe events. It has grown gross written premiums 10.7% to Â£229.2 million (2006: Â£207.1 million) though profits have fallen to Â£17.2 million (2006: Â£32.4 million). The decline has been due to the impact of Windstorm Kyrill, the UK floods in June and July and further investment in our UK marketing campaign. UK property rates had been low for some time and, in part due to the impact of the floods, we are now seeing rates firm. Our marketing campaign continues to show returns. Brand awareness almost trebled in 18 months and customer numbers for the direct business grew to 54,000. The professions and specialty commercial area focuses on knowledge-based businesses employing 250 or fewer staff. Over several years we have developed specific products for firms active in this sector and are building our market presence. This year we began marketing these liability and property products to firms employing 10 or fewer staff via the internet. These smaller firms increasingly use the internet to purchase insurance and Hiscox is able to serve their specialist needs. One of the consequences of the UK floods and Windstorm Kyrill has been the need to restructure Hiscox UK's reinsurance programme as it is no longer economic to continue unchanged. In 2008 we have decided to increase the deductible on our catastrophe programme to Â£10 million from its previous level of Â£1 million. â€¢ Hiscox Europe, led by Marc van der Veer, produced a fourth year of profits and growth. Gross written premiums grew 24.5% to reach Â£73.1 million (2006: Â£58.7 million) and profits increased to Â£4.6 million (2006: Â£0.7 million). The profit improvement includes the benefit of a stronger Euro exchange rate, but even excluding this we are ahead year-on-year. This was achieved despite some serious losses as a result of Windstorm Kyrill. During the year we opened an office in Hamburg and in 2008 we opened another in Bordeaux. We remain committed to growth in the territories where we are currently active. Europe has very good loss ratios, and it is through growth and efficiency gains that we expect profits to improve. Claims Two years ago we appointed Jeremy Pinchin as Group Claims Director. Since then, Jeremy has been working in a systematic way with the senior claims team to enhance our claims promise. We have been investing in the operational and technical robustness of our claims function given the growth of key business areas and increased geographic spread. The claims team's work was put to the test this year and they passed with flying colours. In the UK, we received many plaudits for the outstanding service which we gave to many policyholders following the UK floods. Across the Group, claims staff often work in tough situations to return our policyholders to normality as soon as possible. They enhance our reputation of paying valid claims fast. Operations and IT As our business grows and develops our IT infrastructure becomes ever more central to our operations. In order to increase our operational resilience to external physical events we moved all the Group's core infrastructure to external data centres in suburban London and Paris during 2007. During 2008 we will begin a significant project to migrate our systems onto a new operating platform allowing us to discard older technologies and move to a single system across the Group. The project, which will take around three years and cost Â£25 million, will enhance operational efficiencies by providing easier access to risk data. The system is designed to support any future growth the Group may experience. Investments Invested assets in the Group grew to Â£2.05 billion (2006: Â£1.74 billion). Investment income grew to Â£100.8 million (2006: Â£78.5 million), a return of 5.4% (2006: 4.6%) on average funds. We have managed to avoid the worst damage from the sub-prime crisis affecting the world. We remain predominantly invested in cash and short duration bonds and have more than sufficient liquidity to meet most eventualities. As the world faces this unprecedented situation we are certain that opportunities will arise. We have made an initial investment in corporate bonds with lower credit ratings than our customary AAA, with a duration of up to five years. We are prepared to hold the bonds purchased to maturity accepting the mark to market volatility as we believe the returns will be more attractive with this approach. During the course of the year we accepted an offer from the management of Hiscox Investment Management to purchase a majority of the shares of this business. They have renamed themselves HIM Capital and we wish them well in their venture. We retain access to the knowledge of Alec Foster, HIM Capital's Chairman and the overseer of our Group funds for many years, under a consultancy contract. David Astor has succeeded Alec as our in-house overseer of the third party fund managers who have day to day responsibility for investing our funds. Balance sheet Net assets per share grew to 209.5p per share (2006: 173.2p) and tangible net assets grew to 199.3p per share (2006: 164.8p). On the financing front we had a quiet year. We considered issuing longer term debt but the market turmoil that began in the summer made this inadvisable. Our healthy profits and measured growth have led us to consider our own optimal balance sheet structure. The need to have a taut balance sheet has to be balanced against the inevitable increase in exposure to external shocks as the insurance pricing cycle turns. We believe we have struck the right balance in the Â£100 million capital management programme which we announced in December. Â£50 million will be spent buying back shares in the market and a further Â£50 million will be spent repaying debt. In addition, we will be returning almost Â£50 million to shareholders this year through our dividend. At the end of February 2008 we have spent Â£14.1 million buying back 5.4 million shares into treasury. The average price paid was 258.7p per share. People Hiscox's performance is the result of the efforts of all of our staff. My thanks go to them all. Including, underwriters and business developers who grew our business at the right price, claims staff who deliver our promise and IT and operations who hold the business together (sometimes with few resources and dated systems). Many went the extra mile to make this result a reality. Hiscox is committed to continue to equip our staff with the skills required for the changing times. In the year ahead there will be greater emphasis on training for underwriting in a soft market, adapting broker relationship management to the market and continuing with our leadership development programmes. We feel that if our staff have the best skills, they will deploy them to their own and the business benefit. Current trading In our planning process we assumed that rates in the big ticket area would be most under pressure, followed by reinsurance with the specialty and retail businesses being least affected. These assumptions caused us to announce an anticipated 20% reduction in premiums underwritten by Hiscox Global Markets, with Hiscox Bermuda following this lead. To date, renewals have largely met our initial price expectations other than in large property and energy risks. Here price reductions have exceeded our plans and we have revised down our expectations in these areas. We have seen good progress in our retail business areas. Conclusion Over the past decade we have built Hiscox from a largely Lloyd's and London focused insurance business to a global business with a specialty focus active in multiple regions of the world. This achievement stands us in good stead as we enter a tougher pricing environment. We will continue to balance our retail and volatile risks, giving us the resilience and firepower to respond to the crises and opportunities which will inevitably emerge, to the benefit of the business and its owners. Bronek Masojada HISCOX LTD - PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2007 CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2007 2007 2006 Notes Â£000 Â£000 Income Gross premiums written 3 1,198,949 1,126,164 Outward reinsurance premiums (224,039) (150,767) -------------------------------------------------------------------------------- Net premiums written 3 974,910 975,397 -------------------------------------------------------------------------------- Gross premiums earned 1,179,444 1,033,585 Premiums ceded to reinsurers (214,254) (144,757) -------------------------------------------------------------------------------- Net premiums earned 3 965,190 888,828 Investment result 4 99,677 105,550 Other revenues 6 19,044 15,692 -------------------------------------------------------------------------------- Revenue 1,083,911 1,010,070 Expenses Claims and claim adjustment expenses, net of reinsurance (423,365) (382,341) Expenses for the acquisition of insurance contracts (264,570) (235,797) Administration expenses (76,813) (76,533) Other expenses 6 (73,868) (104,943) -------------------------------------------------------------------------------- Total expenses (838,616) (799,614) -------------------------------------------------------------------------------- Results of operating activities 245,295 210,456 -------------------------------------------------------------------------------- Finance costs (8,177) (9,404) Share of profit of associates after tax 81 10 -------------------------------------------------------------------------------- Profit before tax 237,199 201,062 Tax expense 15 (45,951) (37,216) -------------------------------------------------------------------------------- Profit for the year (all attributable to equity shareholders of the Company) 191,248 163,846 -------------------------------------------------------------------------------- Earnings per share on profit attributable to equity shareholders of the Company Basic 17 48.4p 41.7p Diluted 17 46.8p 40.5p The related notes 1 to 18 are an integral part of this document. CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2007 2007 2006 Notes Â£000 Â£000 Assets Intangible assets 40,452 33,212 Property, plant and equipment 19,378 13,821 Investments in associates 1,502 28 Deferred acquisition costs 123,081 117,115 Financial assets carried at fair value 9 1,747,827 1,241,910 Loans and receivables including insurance receivables 10 385,222 446,272 Reinsurance assets 8 280,088 302,772 Cash and cash equivalents 12 302,742 502,871 -------------------------------------------------------------------------------- Total assets 2,900,292 2,658,001 -------------------------------------------------------------------------------- Equity and liabilities Shareholders' equity Share capital 19,898 19,694 Share premium 4,955 - Contributed surplus 398,834 442,425 Other reserves (43,265) (40,396) Retained earnings 443,882 260,362 -------------------------------------------------------------------------------- Total equity (all attributable to equity shareholders of the Company) 824,304 682,085 -------------------------------------------------------------------------------- Employee retirement benefit obligations 16 - 3,801 Deferred tax 9,751 8,467 Insurance liabilities 13 1,713,887 1,594,101 Financial liabilities carried at fair value 9 91,764 93,929 Current tax 24,711 20,793 Trade and other payables 14 235,875 254,825 -------------------------------------------------------------------------------- Total liabilities 2,075,988 1,975,916 -------------------------------------------------------------------------------- Total equity and liabilities 2,900,292 2,658,001 -------------------------------------------------------------------------------- The related notes 1 to 18 are an integral part of this document. HISCOX LTD - PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2007 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Currency Capital Share Share Contributed Merger Translation Redemption Retained Capital Premium Surplus Reserve Reserve Reserve Earnings Total Notes Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Balance at 1 January 2006 19,570 401,365 - 4,723 822 33,244 118,289 578,013 Currency translation differences - - - - (41,218) - - (41,218) ------------------------------------------------------------------------------------------------------------------------ Net expense recognised directly in equity - - - - (41,218) - - (41,218) Profit for the year - - - - - - 163,846 163,846 ------------------------------------------------------------------------------------------------------------------------ Total recognised income/(expens e) for year - - - - (41,218) - 163,846 122,628 Employee share options: Equity settled share based payments - - - - - - 5,238 5,238 Deferred tax release on share based payments - - - - - - 3,367 3,367 Proceeds from shares issued 124 2,829 264 - - - - 3,217 Transfer on reverse acquisition 2.3 - (404,194) 442,161 (4,723) - (33,244) - - Change in own shares held in treasury - - - - - - 50 50 Dividends to external shareholders 18 - - - - - - (30,428) (30,428) ------------------------------------------------------------------------------------------------------------------------ Balance at 31 December 2006 19,694 - 442,425 - (40,396) - 260,362 682,085 Currency translation differences - - - - (4,269) - - (4,269) Net investment hedge - - - - 1,400 - - 1,400 ------------------------------------------------------------------------------------------------------------------------ Net expense recognised directly in equity - - - - (2,869) - - (2,869) Profit for the year - - - - - - 191,248 191,248 ------------------------------------------------------------------------------------------------------------------------ Total recognised income/(expens e) for year - - - - (2,869) - 191,248 188,379 Employee share options: Equity settled share based payments - - - - - - 5,689 5,689 Deferred tax transfer on share based payments - - - - - - (2,074) (2,074) Proceeds from shares issued 204 4,955 - - - - - 5,159 Change in own shares held in treasury - - - - - - (11,343) (11,343) Dividends to external shareholders 18 - - (43,591) - - - - (43,591) ------------------------------------------------------------------------------------------------------------------------ Balance at 31 December 2007 19,898 4,955 398,834 - (43,265) - 443,882 824,304 ------------------------------------------------------------------------------------------------------------------------ HISCOX LTD - PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2007 CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2007 CONSOLIDATED GROUP 2007 2006 Â£000 Â£000 Profit before tax 237,199 201,062 Adjustments for: Interest and equity dividend income (90,205) (70,243) Interest expense 8,177 9,404 Net losses/(gains) on financial investments, derivatives and borrowings 687 (9,422) Non-cash movement in retirement benefit scheme obligation (3,801) (12,876) Depreciation 4,917 3,898 Charges in respect of share based payments 5,689 5,238 Other non-cash movements (641) 1,551 Changes in operational assets and liabilities: Insurance and reinsurance contracts 133,951 45,426 Financial assets (489,745) 1,311 Other assets and liabilities 31,112 (17,953) -------------------------------------------------------------------------------- Cash flows from operations (162,660) 157,396 Interest received 85,435 68,644 Equity dividends received 4,770 1,599 Interest paid (8,243) (9,416) Current tax paid (42,823) (36,363) -------------------------------------------------------------------------------- Net cash flows from operating activities (123,521) 181,860 Cash outflow from acquisition of subsidiary (11,133) - Cash outflow from disposal of subsidiary (936) - Cash outflow from acquisition of associates (1,273) - Cash flows from the purchase of property, plant and equipment (7,789) (5,452) Cash flows from the purchase of intangible assets (2,500) (300) -------------------------------------------------------------------------------- Net cash flows from investing activities (23,631) (5,752) Proceeds from the issue of ordinary shares 5,159 3,217 Cash flows from the (purchase)/sale of treasury shares (11,343) 50 Dividends paid to Company's shareholders (43,591) (30,428) Repayments of borrowings and financial liabilities (272) (14,334) -------------------------------------------------------------------------------- Net cash flows from financing activities (50,047) (41,495) -------------------------------------------------------------------------------- Net (decrease)/increase in cash and cash equivalents (197,199) 134,613 -------------------------------------------------------------------------------- Cash and cash equivalents at 1 January 502,871 413,759 Net (decrease) /increase in cash and cash equivalents (197,199) 134,613 Effect of exchange rate fluctuations on cash and cash equivalents (2,930) (45,501) -------------------------------------------------------------------------------- Cash and cash equivalents at 31 December 302,742 502,871 -------------------------------------------------------------------------------- The purchase, maturity and disposal of financial assets is part of the Group's insurance activities and is therefore classified as an operating cashflow. The purchase, maturity and disposal of derivative contracts is also classified as an operating cashflow. Included within cash and cash equivalents held by the Group are balances totalling Â£53,336,000 (2006: Â£41,304,000) not available for immediate use by the Group outside of the Lloyd's Syndicate within which they are held. HISCOX LTD - PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2007 NOTES TO THE FINANCIAL STATEMENTS The financial information set out in this statement is extracted from the Group's consolidated financial statements for the year ended 31 December 2007. The auditors have reported on those 2007 financial statements which include comparative amounts for 2006. Their report was unqualified. 1. General information The Hiscox Group, which is headquartered in Hamilton, Bermuda, comprises Hiscox Ltd (the legal parent Company, referred to herein as the 'Company') and its subsidiaries (collectively, the 'Hiscox Group' or the 'Group'). For the period under review the Group provided insurance, reinsurance and investment management services to its clients worldwide. It has operations in Bermuda, the UK, Europe, USA and employs over 800 people. The Company is registered and domiciled in Bermuda and on 12 December 2006, its ordinary shares were listed on the London Stock Exchange. As such it is required to prepare financial information in accordance with the Bermuda Companies Act 1981, which permits the Group to prepare financial statements which comprise the consolidated income statement, the consolidated balance sheet, the consolidated statement of changes in equity, the consolidated cash flow statement and the related notes in accordance with International Financial Reporting Standards ('IFRS'). Accordingly, the financial information has been prepared in accordance with Bermuda Law. The consolidated financial statements for the year ended 31 December 2007 include all of the Group's subsidiary companies and the Group's interest in associates. All amounts relate to continuing operations. The financial statements were approved for issue by the Directors on 3 March 2008. 2. Significant accounting policies The principal accounting policies applied in the preparation of these consolidated Group financial statements are set out below. 2.1 Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards and in accordance with the provisions of the Bermuda Companies Act 1981. Since 2002, the standards adopted by the IASB have been referred to as 'International Financial Reporting Standards' (IFRS). The standards from prior years continue to bear the title 'International Accounting Standards' (IAS). Insofar as a particular standard is not explicitly referred to, the two terms are used in these financial statements synonymously. Compliance with IFRS includes the adoption of interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC). In March 2004, the IASB issued IFRS 4 Insurance Contracts which specifies the financial reporting for insurance contracts by an insurer. The standard is only the first phase in the IASB's insurance contract project and as such is only a stepping stone to phase II, introducing limited improvements to accounting for insurance contracts. Accordingly, to the extent that IFRS 4 does not specify the recognition or measurement of insurance contracts, transactions reported in these consolidated financial statements have been prepared in accordance with another comprehensive body of accounting principles, namely accounting principles generally accepted in the UK at the date of transition to IFRS. 2.2 Basis of preparation The financial statements are presented in Pounds Sterling and are rounded to the nearest thousand unless otherwise stated. They are compiled on a going concern basis and prepared on the historical cost basis except that pension scheme plan assets included in the measurement of the employee retirement benefit obligation and financial instruments at fair value through profit or loss are measured at fair value. Employee retirement benefit obligations are determined using actuarial analysis. The balance sheet of the Group is presented in order of increasing liquidity. The accounting policies have been applied consistently by all Group entities, to all periods presented, solely for the purpose of producing the consolidated Group financial statements. The comparative amounts reported herein for the year ending 31 December 2006 have been extracted from the previously published report for that period, but have been adjusted for reclassification of certain minor overseas agency underwriting expenses and commissions from 'other expenses' and 'other revenues' to 'expenses for the acquisition of insurance contracts', and for the Group's revised presentation of segment information (note 3). The effect of the reclassification of the aforementioned expenses and commissions is to increase the previously reported 'expenses for the acquisition of insurance contracts' for the year ended 31 December 2006 by Â£9,948,000. Simultaneous identical reductions have been made in total to 'other expenses' and 'other revenues'. These presentational adjustments have no impact on the Group's previously reported result from operating activities, profit before tax or shareholders' equity. The directors believe that the amended classification of these expenses and commissions provides a more appropriate presentation of their operating nature. The Group elected to apply the transitional arrangements contained in IFRS 4 that permitted the disclosure of only five years of data in claims development tables, in the year ended 31 December 2005. The number of years of data presented was increased from six in the prior year to seven in the current financial year, and will be increased in each succeeding additional year up to a maximum of ten years if material outstanding claims exist for such periods. The Group adopted IFRS 7 Financial Instruments: Disclosures, and a corresponding amendment to IAS 1 Presentation of Financial Statements - Capital Disclosures on 1 January 2007. The consolidated financial statements also reflect the early adoption of IFRS 8 Operating segments from that date. IFRS 8 is a disclosure standard concerning the designation and presentation of operating segment information and therefore has no impact on the reported primary financial statements or financial position of the Group. Four IFRIC interpretations became effective for financial reporting purposes during the year under review, however their adoption has not resulted in any changes to the Group's stated accounting policies. The Directors have considered recently published IFRS, new interpretations and amendments to existing standards that are mandatory to the Group's accounting periods commencing on or after 1 January 2008 and which have not been subject to early adoption. With the exception of recent revisions to IFRS 3 Business Combinations, which generally require transaction costs on business combinations to be accounted for separately as period costs by way of an immediate charge to the income statement rather than being capitalised as part of the overall cost of combination for goodwill purposes, the Directors' current assessment is that adoption of these changes will necessitate minor presentational changes only. 2.3 Change of holding company in prior year On 12 December 2006 Hiscox Ltd replaced Hiscox plc as the Group's holding company by way of a share for share exchange. Hiscox Ltd was incorporated under the laws of Bermuda on 6 September 2006. For the period from incorporation to 12 December 2006, Hiscox Ltd was a shell company with no material revenues or assets and did not constitute a 'business' as defined by IFRS 3 Business Combinations. Consequently, due to the relative values of both Companies, the shareholders of Hiscox plc immediately before the share exchange acquired, in effect, 100% of the enlarged share capital of Hiscox Ltd on completion of the transaction. In order to appropriately reflect the substance of the transaction outlined above, the new holding Company was accounted for using the reverse acquisition principles outlined in IFRS 3. Consequently, Hiscox plc was deemed to be the acquirer for accounting purposes and the legal parent Company, Hiscox Ltd, was treated as a subsidiary whose identifiable assets and liabilities are incorporated into the Group at fair value. The Group's consolidated financial statements are issued in the name of the legal parent Company, Hiscox Ltd. However, as a consequence of applying reverse acquisition accounting, the results for the year ended 31 December 2006 represented a continuation of the consolidated activities of Hiscox plc for the year ended 31 December 2006 plus those of Hiscox Ltd from 12 December 2006. In accordance with Bermuda law the Group's previously reported share premium, merger reserve and capital redemption reserve were presented as contributed surplus at 31 December 2006. Contributed surplus is a distributable reserve. 2.4 Basis of consolidation (a) Subsidiaries Subsidiaries are those entities controlled by the Group. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that are currently exercisable or convertible are taken into account. The consolidated financial statements include the assets, liabilities and results of the Group up to 31 December each year. The financial statements of subsidiaries are included in the consolidated financial statements only from the date that control commences until the date that control ceases. Hiscox Dedicated Corporate Member underwrites as a corporate member of Lloyd's on the Syndicate managed by Hiscox Syndicates Limited (the 'managed Syndicate'). In view of the several but not joint liability of underwriting members at Lloyd's for the transactions of Syndicates in which they participate, the Group's attributable share of the transactions, assets and liabilities of the Syndicate has been included in the financial statements. The Group uses the purchase method of accounting to account for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group's share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement. (b) Associates Associates are those entities in which the Group has significant influence but not control over the financial and operating policies. Significant influence is generally identified with a shareholding of between 20% and 50% of an entity's voting rights. The consolidated financial statements include the Group's share of the total recognised gains and losses of associates on an equity accounted basis from the date that significant influence commences until the date that significant influence ceases. The Group's share of its associates' post-acquisition profits or losses after tax is recognised in the income statement each period, and its share of the movement in the associates' net assets is reflected in the investments' carrying values in the balance sheet. When the Group's share of losses equals or exceeds the carrying amount of the associate, the carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred obligations in respect of the associate. (c) Transactions eliminated on consolidation Intragroup balances, transactions and any unrealised gains arising from intragroup transactions are eliminated in preparing the consolidated financial statements. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Unrealised gains arising from transactions with associates are eliminated to the extent of the Group's interest in the entity. Unrealised gains arising from transactions in associates are eliminated against the investment in the associate. 2.5 Foreign currency translation (a) Functional and presentational currency Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the 'functional currency'). The functional currency of all individual entities in the Group is deemed to be Pounds Sterling with the exception of the entities operating in France, Germany, the Netherlands and Belgium whose functional currency is Euros, those entities operating from the USA and Bermuda whose functional currency is US Dollars, and Hiscox Insurance Company (Guernsey) Limited whose functional currency is also US Dollars. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the retranslation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying net investment hedges. Non-monetary items carried at historical cost are translated in the balance sheet at the exchange rate prevailing on the original transaction date. Non-monetary items measured at fair value are translated using the exchange rate ruling when the fair value was determined. (c) Group companies The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: (i) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet. (ii) income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the date of the transactions). (iii) all resulting exchange differences are recognised as a separate component of equity. When a foreign operation is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as the foreign entity's assets and liabilities and are translated at the closing rate. 2.6 Property, plant and equipment Property, plant and equipment are stated at historical cost less depreciation and any impairment loss. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance items are charged to the income statement during the financial period in which they are incurred. Land and Artwork assets are not depreciated as they are deemed to have indefinite useful economic lives. The cost of leasehold improvements is amortised over the unexpired term of the underlying lease or the estimated useful life of the asset, whichever is shorter. Depreciation on other assets is calculated using the straight-line method to allocate their cost or revalued amounts, less their residual values, over their estimated useful lives. The rates applied are as follows: - Buildings 50 years - Vehicles 3 years - Leasehold improvements including fixtures and fittings 10-15 years - Furniture, fittings and equipment 3-15 years The assets' residual values and useful lives are reviewed at each balance sheet date and adjusted if appropriate. An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the income statement. 2.7 Intangible assets (a) Goodwill Goodwill represents amounts arising on acquisition of subsidiaries and associates. In respect of acquisitions that have occurred since 1 January 2004, goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of the net identifiable assets of the acquired subsidiary or associate at the acquisition date. In respect of acquisitions prior to this date, goodwill is included on the basis of its deemed cost, which represents the amount recorded under previous GAAP. Goodwill on acquisition of subsidiaries is included in intangible assets. Goodwill on acquisition of associates is included in investments in associates. Goodwill is not amortised but is tested annually for impairment and carried at cost less accumulated impairment losses. The impairment review process examines whether or not the carrying value of the goodwill attributable to individual cash generating units exceeds its implied value. Any excess of goodwill over the implied value arising from the review process indicates impairment. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. (b) Syndicate capacity The cost of purchasing the Group's participation in the Lloyd's insurance Syndicates is not amortised but is tested annually for impairment and is carried at cost less accumulated impairment losses. Having considered the future prospects of the London insurance market, the Board believe that the Group's ownership of Syndicate capacity will provide economic benefits over an indefinite number of future periods. (c) State authorisation licenses State authorisation licenses are stated at historical cost. The asset is not amortised, as the Board considers that economic benefits will accrue to the Group over an indefinite number of future periods, but is tested annually for impairment, and any accumulated impairment losses recognised are deducted from the historical cost amount to produce the net balance sheet carrying amount. (d) Rights to intangible customer contractual relationships Costs directly attributable to securing the intangible rights to customer contract relationships are recognised as an intangible asset where they can be identified separately and measured reliably and it is probable that they will be recovered by directly related future profits. These costs are amortised on a straight-line basis over the useful economic life which is deemed to be 20 years and are carried at cost less accumulated amortisation and impairment losses. (e) Computer software Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring into use the specific software. These costs are amortised over the expected useful life of the software of between three and five years on a straight-line basis. Internally developed computer software is only capitalised where the cost can be measured reliably, the Group intends to and has adequate resources to complete development and where the computer software will yield future economic benefits in excess of the costs incurred. 2.8 Financial assets including loans and receivables The Group has classified financial assets as a) financial assets designated at fair value through profit or loss, and b) loans and receivables. Management determines the classification of its financial investments at initial recognition. The decision by the Group to designate all financial investments other than loans and receivables at fair value through profit or loss reflects the fact that the investment portfolios are managed, and their performance evaluated, on a fair value basis. Regular way purchases and sales of investments are accounted for at the date of trade. Financial assets are initially recognised at fair value. Subsequent to initial recognition financial assets are recognised as described below. Financial assets are de-recognised when the right to receive cash flows from them expires or where they have been transferred and the Group has also transferred substantially all risks and rewards of ownership. Fair value for securities quoted in active markets is the bid price exclusive of transaction costs. For instruments where no active market exists, fair value is determined by referring to recent transactions and other valuation factors including the discounted value of expected future cash flows. Fair value changes are recognised immediately within the investment result line in the income statement. (a) Financial assets at fair value through profit or loss A financial asset is classified into this category at inception if it is managed and evaluated on a fair value basis in accordance with documented strategy, if acquired principally for the purpose of selling in the short-term, or if it forms part of a portfolio of financial assets in which there is evidence of short-term profit taking. (b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted on an active market. Receivables arising from insurance contracts are also classified in this category and are reviewed for impairment as part of the impairment review of loans and receivables. Loans and receivables are carried at amortised cost less any provision for impairment in value. 2.9 Cash and cash equivalents The Group has classified cash deposits and short-term highly liquid investments as cash and cash equivalents. These assets are readily convertible into known amounts of cash and are subject to inconsequential changes in value. Cash equivalents are financial investments with less than three months to maturity at the date of acquisition. 2.10 Impairment of assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually or whenever there is an indication of impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Non-financial assets Objective factors that are considered when determining whether a non-financial asset (such as goodwill, an intangible asset or item of property, plant and equipment) or group of non-financial assets may be impaired include, but are not limited to, the following: - adverse economic, regulatory or environmental conditions that may restrict future cashflows and asset usage and/or recoverability; - the likelihood of accelerated obsolescence arising from the development of new technologies and products; - the disintegration of the active market(s) to which the asset is related. Financial assets Objective factors that are considered when determining whether a financial asset or group of financial assets may be impaired include, but are not limited to, the following: - negative rating agency announcements in respect of investment issuers, reinsurers and debtors; - significant reported financial difficulties of investment issuers, reinsurers and debtors; - actual breaches of credit terms such as persistent late payments or actual default; - the disintegration of the active market(s) in which a particular asset is traded or deployed; and - adverse economic or regulatory conditions that may restrict future cash flows and asset recoverability. Impairment loss An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior periods. A reversal of an impairment loss is recognised as income immediately. Impairment losses recognised in respect of goodwill are not subsequently reversed. 2.11 Derivative financial instruments Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently valued at their fair value at each balance sheet date. Fair values are obtained from quoted market values, and if these are not available, valuation techniques including option pricing models as appropriate. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. For derivatives not formally designated as a hedging instrument, fair value changes are recognised immediately in the income statement. Changes in the value of derivative and other financial instruments formally designated as hedges of net investments in foreign operations are recognised in the currency translation reserve to the extent they are effective; gains or losses relating to the ineffective portion of the hedging instruments are recognised immediately in the consolidated income statement. The Group had no derivative instruments designated for hedge accounting during the current and prior financial year. 2.12 Own shares Where any Group company purchases the parent Company's equity share capital (own shares), the consideration paid, including any directly attributable incremental costs (net of income taxes), is deducted from equity attributable to the Company's equity shareholders. Where such shares are subsequently sold, reissued or otherwise disposed of, any consideration received is included in equity attributable to the Company's equity shareholders, net of any directly attributable incremental transaction costs and the related income tax effects. 2.13 Revenue Revenue comprises insurance premiums earned on the rendering of insurance protection, net of reinsurance, together with profit commission, investment returns, agency fees and other income inclusive of foreign exchange gains on instruments not formally designated for hedge accounting treatment. The Group's share of the result of associates is reported separately. The accounting policies for insurance premiums are outlined below. Profit commission, investment income and other sources of income are recognised on an accruals basis net of any discounts and amounts such as sales based taxes collected on behalf of third parties. 2.14 Insurance contracts (a) Classification The Group issues short-term casualty and property insurance contracts that transfer significant insurance risk. Such contracts may also transfer a limited level of financial risk. (b) Recognition and measurement Gross premiums written comprise premiums on business incepting in the financial year together with adjustments to estimates of premiums written in prior accounting periods. Estimates are included for pipeline premiums and an allowance is also made for cancellations. Premiums are stated before the deduction of brokerage and commission but net of taxes and duties levied. Premiums are recognised as revenue (earned premiums) proportionally over the period of coverage. The portion of premium received on in-force contracts that relates to unexpired risks at the balance sheet date is reported as the unearned premium liability. Claims and associated expenses are charged to profit or loss as incurred based on the estimated liability for compensation owed to contract holders or third parties damaged by the contract holders. They include direct and indirect claims settlement costs and arise from events that have occurred up to the balance sheet date even if they have not yet been reported to the Group. The Group does not discount its liabilities for unpaid claims. Liabilities for unpaid claims are estimated using the input of assessments for individual cases reported to the Group and statistical analysis for the claims incurred but not reported, and an estimate of the expected ultimate cost of more complex claims that may be affected by external factors e.g. court decisions. (c) Deferred acquisition costs ('DAC') Commissions and other direct and indirect costs that vary with and are related to securing new contracts and renewing existing contracts are capitalised as deferred acquisition costs. All other costs are recognised as expenses when incurred. DAC are amortised over the terms of the policies as premium is earned. (d) Liability adequacy test At each balance sheet date, liability adequacy tests are performed by each segment of the Group to ensure the adequacy of the contract liabilities net of related DAC. In performing these tests, current best estimates of future contractual cash flows and claims handling and administration expenses, as well as investment income from assets backing such liabilities, are used. Any deficiency is immediately charged to profit or loss initially by writing-off DAC and by subsequently establishing a provision for losses arising from liability adequacy tests ('the unexpired risk provision'). Any DAC written-off as a result of this test cannot subsequently be reinstated. (e) Outwards reinsurance contracts held Contracts entered into by the Group, with reinsurers, under which the Group is compensated for losses on one or more insurance or reinsurance contracts and that meet the classification requirements for insurance contracts, are classified as insurance contracts held. Contracts that do not meet these classification requirements are classified as financial assets. The benefits to which the Group is entitled under 'outwards' reinsurance contracts are recognised as reinsurance assets. These assets consist of short-term balances due from reinsurers (classified within loans and receivables) as well as longer-term receivables (classified as reinsurance assets) that are dependent on the expected claims and benefits arising under the related reinsured insurance contracts. Reinsurance liabilities primarily comprise premiums payable for 'outwards' reinsurance contracts. These amounts are recognised in profit or loss proportionally over the period of the contract. Receivables and payables are recognised when due. The Group assesses its reinsurance assets on a regular basis and if there is objective evidence, after initial recognition, of an impairment in value, the Group reduces the carrying amount of the reinsurance asset to its recoverable amount and recognises the impairment loss in the income statement. (f) Receivables and payables related to insurance contracts Receivables and payables are recognised when due. These include amounts due to and from agents, brokers and insurance contract holders. If there is objective evidence that the insurance receivable is impaired, the Group reduces the carrying amount of the insurance receivable accordingly and recognises the impairment loss in profit or loss. (g) Salvage and subrogation reimbursements Some insurance contracts permit the Group to sell property acquired in settling a claim (i.e. salvage). The Group may also have the right to pursue third parties for payment of some or all costs (i.e. subrogation). Estimates of salvage recoveries are included as an allowance in the measurement of the insurance liability for claims and salvage property is recognised in other assets when the liability is settled. The allowance is the amount that can reasonably be recovered from the disposal of the property. Subrogation reimbursements are also considered as an allowance in the measurement of the insurance liability for claims and are recognised in other assets when the liability is settled. The allowance is the amount that can reasonably be recovered from the action against the liable third party. 2.15 Deferred tax Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, if the deferred income tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss, it is not recognised. Deferred tax is determined using tax rates and laws that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability settled. Deferred tax assets are recognised to the extent that it is probable that the future taxable profit will be available against which the temporary differences can be utilised. Deferred tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the Group controls the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. 2.16 Employee benefits (a) Pension obligations The Group operated both defined contribution and defined benefit pension schemes during the year under review. The defined benefit scheme closed to future accrual with effect from 31 December 2006 and active members were offered membership of the defined contribution scheme from 1 January 2007. A defined contribution scheme is a pension plan under which the Group pays fixed contributions into a separate entity and has no further obligation beyond the agreed contribution rate. A defined benefit scheme is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. For defined contribution schemes, the Group pays contributions to publicly or privately administered pension insurance plans on a contractual basis. The contributions are recognised as an employee benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available. The liability recognised in the balance sheet in respect of defined benefit pension schemes is the present value of the defined benefit obligation at the balance sheet date less the fair value of scheme assets, together with adjustments for unrecognised actuarial gains or losses and past service costs. Scheme assets exclude any insurance contracts issued by the Group. Until curtailment, actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to income over the employees' expected average remaining working lives. In addition, until curtailment, actuarial gains and losses are only recognised when the net cumulative unrecognised actuarial gains and losses for each individual scheme at the end of the previous accounting period exceeds 10% of the higher of the defined benefit obligation and the fair value of the scheme assets at that date. On curtailment, all unrecognised actuarial gains or losses are recognised in the income statement where relevant. Past service costs are recognised immediately in income, unless the changes to the pension scheme are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past service costs are amortised on a straight-line basis over the vesting period. Rights to reimbursement from other parties participating in the Lloyd's Syndicate of some of the expenditure required to settle the defined benefit obligation are recognised as a component of the income statement charge or credit and on the balance sheet in accordance with the policies outlined at 2.8 (b) above. (b) Other long-term employee benefits The Group provides sabbatical leave to employees on completion of a minimum service period of ten years. The present value of the expected costs of these benefits is accrued over the period of employment. In determining this liability, consideration is given to future increases in salary levels, experience with employee departures and periods of service. (c) Share based compensation The Group operates a number of equity settled share based employee compensation plans. These include both the approved and unapproved share option schemes, and the Group's performance share plans, outlined in the Directors' remuneration report together with the Group's save as you earn ('SAYE') schemes. The fair value of the employee services received, measured at grant date, in exchange for the grant of awards is recognised as an expense with the corresponding credit being recorded in retained earnings within equity. The total amount to be expensed over the vesting period is determined by reference to the fair value of the awards granted, excluding the impact of any non market vesting conditions (e.g. profitability or net asset growth targets). Non market vesting conditions are included in assumptions about the number of awards that are expected to become exercisable. At each balance sheet date, the Group revises its estimates of the number of awards that are expected to vest. It recognises the impact of the revision of original estimates, if any, in the income statement, and a corresponding adjustment to equity, over the remaining vesting period. When the terms and conditions of an equity settled share based employee compensation plan are modified, and the expense to be recognised increases as a result of the modification, the increase is recognised evenly over the remaining vesting period. When a modification reduces the expense to be recognised, there is no adjustment recognised and the pre-modification expense continues to be applied. The proceeds received net of any directly attributable transaction costs are credited to share capital and share premium when share options are exercised. In accordance with the transitional arrangements of IFRS 2, only share based awards granted or modified after 7 November 2002 but not yet vested at the date of adoption of IFRS, are required to be included in the calculations. (d) Termination benefits Termination benefits are payable when employment is terminated before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to either: terminating the employment of current employees according to a detailed formal plan without the possibility of withdrawal; or providing termination benefits as a result of an offer made to encourage voluntary redundancy. (e) Profit sharing and bonus plans The Group recognises a liability and an expense for bonuses and profit sharing, based on a formula that takes into consideration the profit attributable to the Company's shareholders after certain adjustments. The Group recognises a provision where a contractual obligation to employees exists or where there is a past practice that has created a constructive obligation. (f) Accumulating compensation benefits The Group recognises a liability and an expense for accumulating compensation benefits (e.g. holiday entitlement), based on the additional amount that the Group expects to pay as a result of the unused entitlement accumulated at the balance sheet date. 2.17 Borrowings Borrowings are financial liabilities and are designated on inception as being held at fair value through profit or loss if they are managed and evaluated on a fair value basis in accordance with a documented strategy, or if they eliminate or significantly reduce a measurement or recognition inconsistency. Borrowings are initially measured at fair value with all incremental transaction costs expensed immediately. Borrowings are then consequently measured at fair value at each balance sheet date thereafter, using observable market interest rate data for similar instruments, with all changes in value from one accounting period to the next reflected in the income statement unless they form part of a designated hedge accounting relationship in which case certain changes in value are recognised directly in equity. 2.18 Net investment hedge accounting In order to qualify for hedge accounting, the group is required to document in advance the relationship between the item being hedged and the hedging instrument. The Group is also required to document and demonstrate an assessment of the relationship between the hedged item and the hedging instrument, which shows that the hedge will be highly effective on an on-going basis. This effectiveness testing is re-performed at each period end to ensure that the hedge remains highly effective. The Group hedges elements of its net investment to certain foreign entities through foreign currency borrowings that qualify for hedge accounting; accordingly gains or losses on retranslation are recognised in equity to the extent that the hedge relationship is effective. Accumulated gains or losses are recycled to the income statement only when the foreign operation is disposed of. The ineffective portion of any hedges is recognised immediately in the income statement. 2.19 Finance costs Finance costs consist of interest charges accruing on the Group's borrowings and bank overdrafts together with commission fees charged in respect of letters of credit. Arrangement fees in respect of financing arrangements are charged over the life of the related facilities. 2.20 Provisions The Group is subject to various insurance related assessments and guarantee fund levies. Provisions are recognised where there is a present obligation (legal or constructive) as a result of a past event that can be measured reliably and it is probable that an outflow of economic benefits will be required to settle that obligation. 2.21 Leases a) Hiscox as lessee Leases in which significantly all of the risks and rewards of ownership are transferred to the Group are classified as finance leases. At the commencement of the lease term, finance leases are recognised as assets and liabilities at the lower of the fair value of the asset and the present value of the minimum lease payments. The minimum lease payments are apportioned between finance charges and repayments of the outstanding liability, finance charges being charged to each period of the lease term so as to produce a constant rate of interest on the outstanding balance of the liability. All other leases are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. b) Hiscox as lessor Rental income from operating leases is recognised on a straight line basis over the term of the relevant contractual agreement. 2.22 Dividend distribution Dividend distribution to the Company's shareholders is recognised as a liability in the Group's financial statements in the period in which the dividends are approved. 2.23 Use of critical estimates and assumptions The Directors consider the accounting policies for determining insurance liabilities, amounts denominated in foreign currencies, the valuation of investments, the valuation of retirement benefit obligations and the determination of current and deferred tax assets and liabilities as being most critical to an understanding of the Group's result and position. The inherent uncertainty of insurance risk requires the Group to make estimates and assumptions that affect the reported amounts of insurance and reinsurance assets and liabilities at the balance sheet date. This is the most significant area of potential uncertainty in the financial statements. There are several sources of uncertainty that need to be considered in the estimation of the insurance liabilities that the Group will ultimately pay for valid claims. These include but are not restricted to: inflation; changes in legislation; changes in the Group's claims handling procedures; and discordant judicial opinions which extend the Group's coverage of risk beyond that envisaged at the time of original policy issuance. The Group seeks to gather corroborative evidence from all relevant sources before making judgements as to the eventual outcome of claims, particularly those under litigation, which have occurred and have been notified to the Group but remain unsettled at the balance sheet date. Estimates are continually evaluated based on entity specific historical experience and contemporaneous developments observed in the wider industry and are also updated for expectations of prospective future developments. Although the possibility exists for material changes in insurance liability reserve estimates to have a critical impact on the Group's reported performance and financial position, it is anticipated that the scale and diversity of the Group's portfolio of insurance business considerably lessens the likelihood of this occurring. With regard to employee retirement benefit obligations, the assets, liabilities and charges disclosed in these consolidated financial statements are sensitive to assumptions regarding mortality, interest rates, inflation, investment returns and interest rates on corporate bonds, the latter of which has been subject to specific recent volatility. Legislation concerning the determination of taxation assets and liabilities is complex and continually evolving. In preparing the Group's financial statements, the Directors estimate taxation assets and liabilities after taking appropriate professional advice. The determination and finalisation of agreed taxation assets and liabilities may not occur until several years after the balance sheet date and consequently the final amounts payable or receivable may differ from those presently recorded in these financial statements. 2.24 Reporting of additional performance measures The Directors consider that the claims ratio, expense ratio and combined ratio measures reported in respect of operating segments and the Group overall at note 3 provide useful information regarding the underlying performance of the Group's businesses. These measures are widely recognised by the insurance industry and are consistent with internal performance measures reviewed by senior management including the chief operating decision maker. However, these three measures are not defined within the IFRS framework and body of standards and interpretations and therefore may not be directly comparable with similarly titled additional performance measures reported by other companies. 3. Segmental information The Group adopted IFRS 8 Operating segments with effect from 1 January 2007. The Group also made minor changes to the structure of its internal organisation during the year under review. As a consequence of both events, minor changes have occurred in the identification of the Group's reportable segments from the prior year. Previously IAS 14 Segment reporting, (the predecessor standard to IFRS 8) resulted in the Group identifying and reporting disaggregated primary statement information for two sets of reportable segments, whose designation was based on the dissimilarity of risks and rewards in the Group's operations, and geographical location. Segment information is now required to be presented with singular reference to the basis of those regular internal reports about the separate components of the Group that inform the chief operating decision maker and which are used in the assessment of financial performance and allocation of resources. Management have identified the Group's operating segments in line with its internal organisation, which recognises the differences in products and services, customer groupings and geographical areas in addition to the discrete major legal entities of the Group. The Group's four operating segments arising on the adoption of IFRS 8 are therefore identified as follows: - Global Markets comprises the results of Syndicate 33, excluding Syndicate 33's fine art, UK regional events coverage, non-US household business and underwriting result of Hiscox Inc. It includes the results of the larger retail TMT business written by Hiscox Insurance Company Limited. - 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 in continental Europe. It excludes the results of the larger retail TMT business written by Hiscox Insurance Company Limited. - International comprises the results of Hiscox Insurance Company (Guernsey) Limited, Hiscox Inc and Hiscox Insurance Company (Bermuda) Limited. - Corporate Centre comprises the investment return and administrative costs associated with the Company and other Group management activities. Corporate centre forms a reportable segment due to its investment activities which earn significant external revenues. The four operating segments newly identified above, and the undernoted financial information related thereto, differ from the three primary business segments disclosed in the prior year, in three main ways: - The Group's central functions are now separately identified as the Corporate Centre segment, with a greater proportion of central revenues and expenses now being allocated to individual operating segments where appropriate. Previously all central revenues and expenses were included with the Global Markets business within a single reportable segment. This is a change arising from the adoption of IFRS 8. - The Group's specie business, all of which is written in Syndicate 33, is now presented within the Global Markets segment and not within the UK and Europe segment as previously reported. This is a change arising from minor amendments made to the Group's internal organisation during the year. - The Global Markets segment also now includes all of the Group's larger TMT risks. In prior years, those risks underwritten by Hiscox Insurance Company Limited were reported in the UK and Europe segment. This is a change arising from minor amendments made to the Group's internal organisation during the year. Information regarding the Group's operating segments is presented below. The comparative amounts for the prior year have been restated to conform to the requirements of IFRS 8. The comparative amounts have also been restated to reflect the reclassification of certain agency commissions and expenses outlined at note 2.2 above. All amounts reported below represent transactions with external parties only, with all inter-segment amounts eliminated. Performance is measured based on each reportable segments' profit before tax. a) Profit before tax by segment Year ended 31 December 2007 Global UK and Corporate Markets Europe International Centre Total Â£000 Â£000 Â£000 Â£000 Â£000 Gross premiums written 676,464 302,273 220,212 - 1,198,949 Net premiums written 524,683 265,001 185,226 - 974,910 Net premiums earned 552,205 248,348 164,637 - 965,190 ------------------------------------------------------------------------------------- Investment result* 46,617 18,343 23,915 10,802 99,677 Other revenues 11,996 2,672 1,216 3,160 19,044 ------------------------------------------------------------------------------------- Revenue 610,818 269,363 189,768 13,962 1,083,911 ------------------------------------------------------------------------------------- Claims and claim adjustment expenses, net of reinsurance (246,876) (115,032) (61,457) - (423,365) Expenses for the acquisition of insurance contracts (157,718) (65,423) (41,429) - (264,570) Administration expenses (27,822) (37,399) (11,592) - (76,813) Other expenses (22,830) (29,692) (6,104) (15,242) (73,868) ------------------------------------------------------------------------------------- Total expenses (455,246) (247,546) (120,582) (15,242) (838,616) ------------------------------------------------------------------------------------- Results of operating activities 155,572 21,817 69,186 (1,280) 245,295 Finance costs - - (82) (8,095) (8,177) Share of profit of associates after tax - - - 81 81 ------------------------------------------------------------------------------------- Profit before tax 155,572 21,817 69,104 (9,294) 237,199 ------------------------------------------------------------------------------------- *Includes interest received of Â£85,435,000 Year ended 31 December 2006 Global UK and Corporate Markets Europe International Centre Total Â£000 Â£000 Â£000 Â£000 Â£000 Gross premiums written 709,080 265,778 151,306 - 1,126,164 Net premiums written 603,562 234,414 137,421 - 975,397 Net premiums earned 567,490 227,865 93,473 - 888,828 ------------------------------------------------------------------------------------- Investment result* 33,123 19,327 16,449 36,651 105,550 Other revenues 6,878 4,931 421 3,462 15,692 ------------------------------------------------------------------------------------- Revenue 607,491 252,123 110,343 40,113 1,010,070 ------------------------------------------------------------------------------------- Claims and claim adjustment expenses, net of reinsurance (271,120) (95,317) (15,904) - (382,341) Expenses for the acquisition of insurance contracts (145,458) (62,861) (27,478) - (235,797) Administration expenses (37,001) (31,360) (8,172) - (76,533) Other expenses (62,933) (29,473) (6,878) (5,659) (104,943) ------------------------------------------------------------------------------------- Total expenses (516,512) (219,011) (58,432) (5,659) (799,614) ------------------------------------------------------------------------------------- Results of operating activities 90,979 33,112 51,911 34,454 210,456 Finance costs (312) - (36) (9,056) (9,404) Share of profit of associate after tax - - - 10 10 ------------------------------------------------------------------------------------- Profit before tax 90,667 33,112 51,875 25,408 201,062 ------------------------------------------------------------------------------------- *Includes interest received of Â£68,644,000 b) 100% operating results by segment The Group's wholly owned subsidiary, Hiscox Syndicates Limited, oversees the operation of Syndicate 33 at Lloyd's. The Group's percentage participation in Syndicate 33 can fluctuate from year to year and consequently presentation of the results at the 100% level removes any distortions arising therefrom. Year ended 31 December 2007 Global UK and Corporate Markets Europe International Centre Total Â£000 Â£000 Â£000 Â£000 Â£000 Gross premiums written 932,251 316,017 227,576 - 1,475,844 Net premiums written 722,209 276,967 191,219 - 1,190,395 Net premiums earned 765,959 259,841 169,465 - 1,195,265 ------------------------------------------------------------------------------------ Investment result 64,552 19,161 23,915 10,802 118,430 Other revenues 2,665 2,672 500 3,160 8,997 Claims and claim adjustment expenses, net of reinsurance (345,318) (118,418) (67,938) - (531,674) Expenses for the acquisition of insurance contracts (222,965) (69,428) (42,375) - (334,768) Administration expenses (34,640) (38,079) (11,913) - (84,632) Other expenses (22,858) (29,350) (5,596) (15,242) (73,046) ------------------------------------------------------------------------------------ Results of operating activities 207,395 26,399 66,058 (1,280) 298,572 ------------------------------------------------------------------------------------ Year ended 31 December 2006 Global UK and Corporate Markets Europe International Centre Total Â£000 Â£000 Â£000 Â£000 Â£000 Gross premiums written 971,174 281,038 154,999 - 1,407,211 Net premiums written 827,424 247,891 141,114 - 1,216,429 Net premiums earned 786,471 240,039 94,794 - 1,121,304 ------------------------------------------------------------------------------------ Investment result 54,207 19,886 16,449 36,651 127,193 Other revenues - 4,931 1,480 3,462 9,873 Claims and claim adjustment expenses, net of reinsurance (377,006) (99,047) (16,597) - (492,650) Expenses for the acquisition of insurance contracts (204,579) (67,259) (27,763) - (299,601) Administration expenses (43,798) (31,872) (8,172) - (83,842) Other expenses (83,135) (32,783) (6,878) (5,659) (128,455) ------------------------------------------------------------------------------------ Results of operating activities 132,160 33,895 53,313 34,454 253,822 ------------------------------------------------------------------------------------ 100 % Ratio analysis Year ended 31 December 2007 Global UK and Corporate Markets Europe International Centre Total Â£000 Â£000 Â£000 Â£000 Â£000 Claims ratio (%) 44.3 45.6 40.1 - 44.0 Expense ratio (%) 37.4 52.6 35.3 - 40.4 ------------------------------------------------------------------------------------ Combined ratio (%) 81.7 98.2 75.4 - 84.4 ------------------------------------------------------------------------------------ Year ended 31 December 2006 Global UK and Corporate Markets Europe International Centre Total Â£000 Â£000 Â£000 Â£000 Â£000 Claims ratio (%) 55.7 41.3 17.5 - 49.3 Expense ratio (%) 34.4 54.9 45.2 - 39.8 ------------------------------------------------------------------------------------ Combined ratio (%) 90.1 96.2 62.7 - 89.1 ------------------------------------------------------------------------------------ In calculating the claims and expenses ratios the Group has applied an estimated allocation of the exchange gains and losses to each category. The impact on profit before tax of a 1% change in each component of the segmental combined ratios are: Year to 31 December 2007 Year ended 31 December 2006 Global UK and Corporate Global UK and Corporate Markets Europe International Centre Markets Europe International Centre Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 At 100% level 1% change in claims or expense ratio 7,660 2,598 1,695 - 7,865 2,400 948 - --------------------------------------------------------------------------------------------------- At Group level 1% change in claims or expense ratio 5,522 2,483 1,646 - 5,675 2,279 935 - --------------------------------------------------------------------------------------------------- c) Net asset value per share Year to 31 December 2007 Year ended 31 December 2006 Net asset value Net asset value (total equity) NAV per share (total equity) NAV per share Â£000 p Â£000 p ----------------------------------------------------------------------------------------------- Net asset value 824,304 209.5 682,085 173.2 Net tangible asset value 783,852 199.3 648,873 164.8 ----------------------------------------------------------------------------------------------- The net asset value per share is based on 393,386,041 shares (2006: 393,725,396), being the adjusted number of shares in issue at 31 December. There is no impact on the comparative amount for the application of reverse acquisition accounting (note 2.3). 4. Investment result The total investment return for the Group comprises : 2007 2006 Â£000 Â£000 Investment income including interest receivable 90,259 75,526 Net realised gains/(losses) on financial assets at fair value through profit or loss 10,105 (5,731) Net fair value gains on financial assets at fair value through profit or loss 423 8,721 -------------------------------------------------------------------------------- Return on investments (note 5) 100,787 78,516 Fair value gains/(losses) on derivative instruments and borrowings (1,110) 27,034 -------------------------------------------------------------------------------- Total result 99,677 105,550 -------------------------------------------------------------------------------- Investment expenses are presented within other expenses (note 6). 5. Analysis of return on investments The return on investments for the year by currency was: 2007 2006 % % -------------------------------------------------------------------------------- Sterling 4.9 5.4 US Dollar 5.5 4.8 Other 3.6 2.2 -------------------------------------------------------------------------------- The return on investments for the year by asset class was: UK and Corporate 2007 Global Markets Europe International Centre Total Â£000 % Â£000 % Â£000 % Â£000 % Â£000 % Debt and fixed income securities 43,802 5.2 9,599 5.6 11,553 6.1 5,734 6.1 70,688 5.5 Equities and shares in unit trusts - - 1,131 1.3 2,181 9.1 3,647 6.4 6,959 4.1 Deposits with credit institutions/ cash and cash equivalents 2,815 4.9 7,613 5.5 10,181 5.2 2,531 6.5 23,140 5.4 ------------------------------------------------------------------------------------------------------------------------ 46,617 5.2 18,343 4.6 23,915 5.9 11,912 6.3 100,787 5.4 ------------------------------------------------------------------------------------------------------------------------ UK and Corporate 2006 Global Markets Europe International Centre Total Â£000 % Â£000 % Â£000 % Â£000 % Â£000 % Debt and fixed income securities 30,518 4.2 7,601 3.3 323 2.6 3,653 4.0 42,095 4.0 Equities and shares in unit trusts 194 9.9 6,994 9.9 1,014 17.6 5,315 10.4 13,517 10.6 Deposits with credit institutions/ cash and cash equivalents 2,411 3.8 4,732 4.2 15,112 4.9 649 3.9 22,904 4.6 ------------------------------------------------------------------------------------------------------------------------ 33,123 4.2 19,327 4.6 16,449 5.1 9,617 5.8 78,516 4.6 ------------------------------------------------------------------------------------------------------------------------ 6. Other revenues and expenses 2007 2006 Â£000 Â£000 Agency related income 4,626 4,861 Profit commission 10,468 5,332 Other income 3,950 5,499 -------------------------------------------------------------------------------- Other revenues 19,044 15,692 -------------------------------------------------------------------------------- Managing agency expenses 28,870 17,258 Underwriting agency expenses 23,811 22,033 Connect agency expenses 14,492 12,547 Net foreign exchange (gains)/losses (8,401) 38,354 Investment expenses 1,250 1,306 Other Group expenses including depreciation and amortisation 13,846 13,445 -------------------------------------------------------------------------------- Other expenses 73,868 104,943 -------------------------------------------------------------------------------- 7. Employee benefit expense The aggregate remuneration and associated costs were: 2007 2006 Â£000 Â£000 Wages and salaries, including holiday pay and sabbatical leave charges 68,135 58,568 Social security costs 8,909 7,512 Share based payments cost of options granted to Directors and employees 5,689 5,238 Pension costs - defined contribution 7,256 1,689 Pension costs - net movement arising on defined benefit schemes (3,801) 12,180 -------------------------------------------------------------------------------- 86,188 85,187 -------------------------------------------------------------------------------- The average monthly number of staff employed by the Group was 804 (2006: 637) comprising 301 underwriting and 503 administrative staff (2006: 270 and 367 respectively). Of the total remuneration shown above, an amount of Â£19,838,000 (2006: Â£20,780,000) was recharged to the Syndicate managed by Hiscox Syndicates Limited. 8. Reinsurance assets 2007 2006 Â£000 Â£000 Reinsurers' share of insurance liabilities 283,414 306,550 Provision for non recovery and impairment (3,326) (3,778) -------------------------------------------------------------------------------- 280,088 302,772 -------------------------------------------------------------------------------- Amounts due from reinsurers in respect of outstanding premiums and claims already paid by the Group are included in loans and receivables (note 10). The Group recognised a gain during the year of Â£452,000 (2006: Â£4,094,000) in respect of impaired balances. 9. Financial assets and liabilities carried at fair value i) Analysis of financial assets at fair value through profit or loss 2007 2006 Â£000 Â£000 Debt and fixed income securities 1,444,532 1,043,669 Equities and shares in unit trusts 159,421 141,841 Deposits with credit institutions 143,874 54,715 -------------------------------------------------------------------------------- Total investments 1,747,827 1,240,225 Derivative instrument assets (note 11) - 1,685 -------------------------------------------------------------------------------- 1,747,827 1,241,910 -------------------------------------------------------------------------------- ii) Analysis of financial liabilities at fair value through profit or loss 2007 2006 Â£000 Â£000 Borrowings from credit institutions 91,764 92,852 Derivative instrument liabilities (note 11) - 1,077 -------------------------------------------------------------------------------- 91,764 93,929 -------------------------------------------------------------------------------- iii) Investment and cash allocation by currency 2007 2006 % % -------------------------------------------------------------------------------- Sterling 25.4 31.6 US Dollars 62.0 55.6 Euro and other currencies 12.6 12.8 -------------------------------------------------------------------------------- 10. Loans and receivables including insurance receivables 2007 2006 Â£000 Â£000 Gross receivables arising from insurance and reinsurance contracts 329,156 356,354 less provision for impairment (1,392) (875) -------------------------------------------------------------------------------- Net receivables arising from insurance and reinsurance contracts 327,764 355,479 -------------------------------------------------------------------------------- Due from contract holders, brokers, agents and intermediaries 201,157 280,694 Due from reinsurance operations 126,607 74,785 -------------------------------------------------------------------------------- 327,764 355,479 Prepayments and accrued income 9,562 6,746 Other loans and receivables: Net profit commission receivable 13,850 14,443 Accrued interest 9,003 6,065 Right to reimbursement of defined benefit obligation - 1,163 Share of Syndicate's other debtors balances 12,705 44,316 Other debtors including related party amounts 12,338 18,060 -------------------------------------------------------------------------------- Total loans and receivables including insurance receivables 385,222 446,272 -------------------------------------------------------------------------------- 11. Derivative financial instruments Derivative financial instruments are used on occasion to hedge certain economic relationships including the foreign exchange volatility arising from translating the net investments in, and results of, subsidiary companies with different functional currencies, and the foreign exchange impact of insurance business denominated in foreign currencies. During the current and prior financial year, the Group has not elected to denominate any derivative contracts as formal hedging instruments and, as a consequence, has not applied the hedge accounting provisions of IAS 39 Financial Instruments: Recognition and Measurement in respect of these contracts. At 31 December 2007 the Group had no derivative exposure on foreign exchange cylinder option contracts (2006: financial asset with net fair value of Â£1,685,000). The Group recognised gains totalling Â£317,000 in respect of these contracts in the current year (2006: Â£6,577,000). No expense or charges were incurred in the acquisition of the derivative contracts (2006: Â£nil). The Group also entered into conventional foreign exchange forward and option contracts during the current and prior year primarily to manage the net investment in the Bermudian operation and currency exposures. The contract outstanding at the prior balance sheet date required the Group to sell US$293,000,000 at an agreed future rate to Pounds Sterling at a fixed date within one year of that balance sheet date. At 31 December 2007, this contract had been closed out and a gain recognised of Â£732,000. Other contracts opened and closed during the current year resulted in a loss of Â£2,159,000 being recognised. The Group had no outstanding derivative exposures at 31 December 2007. 2007 2006 Contract Fair Fair Contract Fair Fair notional value of value of notional value of value of amounts assets liabilities amounts assets liabilities US$000 Â£000 Â£000 US$000 Â£000 Â£000 Foreign exchange cylinder option contracts expiring: Within one year - - - 50,000 1,700 15 Between one and five years - - - - - - ------------------------------------------------------------------------------------------------------ Total at 31 December - - - 50,000 1,700 15 ------------------------------------------------------------------------------------------------------ Foreign exchange forward contract expiring: Within one year - - - 293,000 - 1,077 ------------------------------------------------------------------------------------------------------ Total at 31 December - - - 293,000 - 1,077 ------------------------------------------------------------------------------------------------------ 12. Cash and cash equivalents 2007 2006 Â£000 Â£000 Cash at bank and in hand 236,417 142,200 Short-term bank deposits 66,325 360,671 -------------------------------------------------------------------------------- 302,742 502,871 -------------------------------------------------------------------------------- 13. Insurance liabilities and reinsurance assets 2007 2006 Â£000 Â£000 Gross Claims reported and loss adjustment expenses 642,252 703,159 Claims incurred but not reported 573,635 425,170 Unearned premiums 498,000 465,772 -------------------------------------------------------------------------------- Total insurance liabilities, gross 1,713,887 1,594,101 -------------------------------------------------------------------------------- Recoverable from reinsurers Claims reported and loss adjustment expenses 137,868 214,148 Claims incurred but not reported 84,804 50,925 Unearned premiums 57,416 37,699 -------------------------------------------------------------------------------- Total reinsurers' share of insurance liabilities 280,088 302,772 -------------------------------------------------------------------------------- Net Claims reported and loss adjustment expenses 504,384 489,011 Claims incurred but not reported 488,831 374,245 Unearned premiums 440,584 428,073 -------------------------------------------------------------------------------- Total insurance liabilities, net 1,433,799 1,291,329 -------------------------------------------------------------------------------- The gross claims reported, the loss adjustment expenses liabilities and the liability for claims incurred but not reported are net of expected recoveries from salvage and subrogation. The amounts for salvage and subrogation at the end of 2007 and 2006 are not material. Claims development tables The development of insurance liabilities provides a measure of the Group's ability to estimate the ultimate value of claims. The Group analyses actual claims development compared with previous estimates on an accident year basis. This exercise is performed to include the liabilities of Syndicate 33 at the 100% level regardless of the Group's actual level of ownership, which has increased significantly over the last six years. Analysis at the 100% level is required in order to avoid distortions arising from reinsurance to close arrangements which subsequently increase the Group's share of ultimate claims for each accident year three years after the end of that accident year. The top half of each table illustrates how estimates of ultimate claim costs for each accident year have changed at successive year ends. The bottom half reconciles cumulative claim costs to the amounts still recognised as liabilities. A reconciliation of the liability at the 100% level to the Group's share, as included in the balance sheet, is also shown. Insurance claims and claims expenses reserves - gross at 100% level Accident year 2001 2002 2003 2004 2005 2006 2007 Total Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 ---------------------------------------------------------------------------------------------------------- Estimate of ultimate claims costs as adjusted for foreign exchange *: at end of accident year 582,662 355,086 394,954 588,662 954,388 505,750 685,965 4,067,467 one year later 567,633 376,185 402,951 649,510 1,053,059 488,644 - 3,537,982 two years later 625,822 382,234 379,055 619,682 1,057,875 - - 3,064,668 three years later 645,088 368,115 389,528 584,437 - - - 1,987,168 four years later 681,204 364,306 383,093 - - - - 1,428,603 five years later 678,172 345,767 - - - - - 1,023,939 six years later 675,393 - - - - - - 675,393 Current estimate of cumulative claims 675,393 345,767 383,093 584,437 1,057,875 488,644 685,965 4,221,174 Cumulative payments to date (550,166) (289,047) (298,855) (434,005) (735,891) (261,989) (153,523) (2,723,476) ---------------------------------------------------------------------------------------------------------- Liability recognised at 100% level 125,227 56,720 84,238 150,432 321,984 226,655 532,442 1,497,698 Liability recognised in respect of prior accident years at 100% level 73,845 ---------------------------------------------------------------------------------------------------------- Total gross liability to external parties at 100% level 1,571,543 ---------------------------------------------------------------------------------------------------------- Reconciliation of 100% disclosures above to Group's share - gross Accident year 2001 2002 2003 2004 2005 2006 2007 Total Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 ---------------------------------------------------------------------------------------------------------------- Current estimate of cumulative claims 675,393 345,767 383,093 584,437 1,057,875 488,644 685,965 4,221,174 Less:Attributable to external names (172,846) (72,228) (88,261) (137,166) (274,629) (96,871) (129,038) (971,039) ---------------------------------------------------------------------------------------------------------------- Group's share of current ultimate claims estimate 502,547 273,539 294,832 447,271 783,246 391,773 556,927 3,250,135 Cumulative payments to date (550,166) (289,047) (298,855) (434,005) (735,891) (261,989) (153,523) (2,723,476) Less:Attributable to external names 137,450 57,683 66,166 105,140 192,672 49,447 23,560 632,118 ---------------------------------------------------------------------------------------------------------------- Group's share of cumulative payments (412,716) (231,364) (232,689) (328,865) (543,219) (212,542) (129,963) (2,091,358) Liability for 2001 to 2007 accident years recognised on Group's balance sheet 89,831 42,175 62,143 118,406 240,027 179,231 426,964 1,158,777 Liability for accident years before 2001 recognised on Group's balance sheet - - - - - - - 57,110 ---------------------------------------------------------------------------------------------------------------- Total Group liability to external parties included in balance sheet - gross** 1,215,887 ---------------------------------------------------------------------------------------------------------------- * The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2007. ** This represents the claims element of the Group's insurance liabilities and excludes unearned premium reserves. Insurance claims and claims expenses reserves - net at 100% level Accident year 2001 2002 2003 2004 2005 2006 2007 Total Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 -------------------------------------------------------------------------------------------------------- Estimate of ultimate claims costs as adjusted for foreign exchange *: at end of accident year 287,895 237,401 307,137 492,147 572,367 450,018 593,001 2,939,966 one year later 323,583 258,930 322,020 535,338 653,704 447,659 - 2,541,234 two years later 381,384 265,650 297,150 515,172 649,302 - - 2,108,658 three years later 413,320 251,537 307,699 481,864 - - - 1,454,420 four years later 404,236 245,892 298,719 - - - - 948,847 five years later 392,112 235,466 - - - - - 627,578 six years later 388,403 - - - - - - 388,403 Current estimate of cumulative claims 388,403 235,466 298,719 481,864 649,302 447,659 593,001 3,094,414 Cumulative payments to date (302,120) (183,245) (229,114) (350,961) (398,400) (241,053) (133,857) (1,838,750) -------------------------------------------------------------------------------------------------------- Liability recognised at 100% level 86,283 52,221 69,605 130,903 250,902 206,606 459,144 1,255,664 Liability recognised in respect of prior accident years at 100% level 34,156 -------------------------------------------------------------------------------------------------------- Total net liability to external parties at 100% level 1,289,820 -------------------------------------------------------------------------------------------------------- Reconciliation of 100% disclosures above to Group's share - net Accident year 2001 2002 2003 2004 2005 2006 2007 Total Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Current estimate of cumulative claims 388,403 235,466 298,719 481,864 649,302 447,659 593,001 3,094,414 Less:Attributable to external names (93,570) (47,506) (67,445) (114,287) (160,471) (90,264) (113,637) (687,180) --------------------------------------------------------------------------------------------------------------- Group's share of current ultimate claims estimate 294,833 187,960 231,274 367,577 488,831 357,395 479,364 2,407,234 Cumulative payments to date (302,120) (183,245) (229,114) (350,961) (398,400) (241,053) (133,857) (1,838,750) Less:Attributable to external names 69,063 33,405 48,666 84,617 96,884 46,210 21,091 399,936 --------------------------------------------------------------------------------------------------------------- Group's share of cumulative payments (233,057) (149,840) (180,448) (266,344) (301,516) (194,843) (112,766) (1,438,814) Liability for 2001 to 2007 accident years recognised on Group's balance sheet 61,776 38,120 50,826 101,233 187,315 162,552 366,598 968,420 Liability for accident years before 2001 recognised on Group's balance sheet - - - - - - - 24,795 --------------------------------------------------------------------------------------------------------------- Total net liability to external parties included in the balance sheet** 993,215 --------------------------------------------------------------------------------------------------------------- * The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2007. ** This represents the claims element of the Group's insurance liabilities and reinsurance assets and excludes unearned premium reserves. Movement in insurance claims liabilities and reinsurance claims assets 2007 2007 2007 2006 2006 2006 Year ended 31 Gross Reinsurance Net Gross Reinsurance Net December Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 ---------------------------------------------------------------------------------------------- Total at beginning of year (1,128,329) 265,073 (863,256) (1,322,493) 467,800 (854,693) Claims and claims handling expense for the year (498,568) 75,203 (423,365) (395,497) 13,156 (382,341) Cash paid for claims settled in the year 452,235 (131,505) 320,730 504,656 (193,527) 311,129 Exchange differences and other movements (41,225) 13,901 (27,324) 85,005 (22,356) 62,649 ---------------------------------------------------------------------------------------------- Total at end of year (1,215,887) 222,672 (993,215) (1,128,329) 265,073 (863,256) ---------------------------------------------------------------------------------------------- Notified claims (642,252) 137,868 (504,384) (703,159) 214,148 (489,011) Incurred but not reported (573,635) 84,804 (488,831) (425,170) 50,925 (374,245) ---------------------------------------------------------------------------------------------- Total at end of year (1,215,887) 222,672 (993,215) (1,128,329) 265,073 (863,256) ---------------------------------------------------------------------------------------------- The insurance claims expense reported in the consolidated income statement is comprised as follows: 2007 2007 2007 2006 2006 2006 Gross Reinsurance Net Gross Reinsurance Net Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 ------------------------------------------------------------------------------------------- Current year claims and loss adjustment expenses (562,223) 78,953 (483,270) (353,895) 3,275 (350,620) (Under)/over provision in respect of prior year claims and loss adjustment expenses 63,655 (3,750) 59,905 (41,602) 9,881 (31,721) ------------------------------------------------------------------------------------------- Total claims and claims handling expense (498,568) 75,203 (423,365) (395,497) 13,156 (382,341) ------------------------------------------------------------------------------------------- 14. Trade and other payables 2007 2006 Â£000 Â£000 Creditors arising out of direct insurance operations 30,353 33,473 Creditors arising out of reinsurance operations 114,317 126,319 -------------------------------------------------------------------------------- 144,670 159,792 -------------------------------------------------------------------------------- Obligations under finance leases 457 442 Share of Syndicate's other creditors balances 2,681 15,481 Social security and other taxes payable 4,067 5,846 Other creditors 13,704 8,049 -------------------------------------------------------------------------------- 20,909 29,818 -------------------------------------------------------------------------------- Reinsurers' share of deferred acquisition costs 5,639 6,529 Accruals and deferred income 64,657 58,686 -------------------------------------------------------------------------------- 235,875 254,825 -------------------------------------------------------------------------------- 15. Tax expense The amounts charged in the consolidated income statement comprise the following: 2007 2006 Â£000 Â£000 Current tax expense 26,891 8,770 Deferred tax expense 19,060 28,446 -------------------------------------------------------------------------------- 45,951 37,216 -------------------------------------------------------------------------------- The tax expense on the Group's profit before tax differs from the theoretical amount that would arise using the average tax rate applicable to profits of the consolidated companies as follows: 2007 2006 Â£000 Â£000 Profit before tax 237,199 201,062 -------------------------------------------------------------------------------- Tax calculated at the standard corporation tax rate applicable in the UK* of 30% (2006: 30%) 71,160 60,319 Effects of: Expenses not deductible for tax purposes (1,296) 652 Income not subject to tax - (10,264) Group entities subject to overseas tax at lower rates (24,843) (18,121) Tax losses for which no deferred tax asset is recognised 1,092 4,351 Prior year tax adjustments 3,276 354 Change of deferred tax rate (1,374) - Other items (2,064) (75) -------------------------------------------------------------------------------- Tax charge for the period 45,951 37,216 -------------------------------------------------------------------------------- * The principal charge to current tax arises in respect of the Group's UK subsidiaries. 16. Employee retirement benefit obligations The gross amount recognised in the Group balance sheet is determined as follows: 2007 2006 Â£000 Â£000 Present value of funded obligations 106,793 137,461 Fair value of scheme assets (127,576) (133,660) -------------------------------------------------------------------------------- Present value of unfunded obligations (20,783) 3,801 Unrecognised net actuarial gains 18,817 - Unrecognised surplus deemed irrecoverable 1,966 - -------------------------------------------------------------------------------- Gross liability in the balance sheet - 3,801 -------------------------------------------------------------------------------- The unrecognised net actuarial gains are the net cumulative gains and losses on the scheme's obligations and underlying assets. Included within loans and receivables for the Group (note 10) at 31 December 2006 was a right to reimbursement of Â£1,163,000 (2007: Â£nil) recoverable from third party names in Syndicate 33 representing their contribution to funding the defined benefit scheme obligation. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. A formal full actuarial valuation is performed on a triennial basis, most recently at 31 December 2005, and updated at each intervening balance sheet date by the actuaries. The present value of the defined benefit obligation is determined by discounting the estimated future cash flows using interest rates of AA rated corporate bonds that have terms to maturity that approximate the terms of the related pension liability. The scheme assets are invested as follows: At 31 December 2007 2006 Â£000 Â£000 Equities 57,716 98,738 Debt and fixed income assets 69,702 10,098 Cash 158 24,824 -------------------------------------------------------------------------------- Closing fair value of scheme assets 127,576 133,660 -------------------------------------------------------------------------------- During the current year under review a series of changes to the scheme's investment mix were executed by Trustees so as to achieve a greater degree of protection against interest rate volatility following the scheme's closure. These changes resulted in the majority of the scheme's debt and fixed income assets at 31 December 2007 now being held through the ownership of equity units in liability managed credit funds issued by Standard Life Assurance Limited which invest in a broad spread of high quality corporate bonds with derivatives used in controlled conditions to extend durations in some cases. The amounts recognised in the Group's income statement are as follows: 2007 2006 Â£000 Â£000 Current service cost 200 4,191 Interest cost 6,657 6,397 Expected return on scheme assets (7,711) (6,431) Net actuarial losses including curtailment charges recognised during the year - 7,355 Past service cost - 668 Settlement gain recognised (4,913) - Effect of deemed irrecoverability of surplus 1,966 - -------------------------------------------------------------------------------- Total included in staff costs (3,801) 12,180 -------------------------------------------------------------------------------- The reduction in current service cost is attributable to the scheme's closure to future accrual on 31 December 2006. The actual return on scheme assets was Â£7,786,000 (2006: Â£12,911,000). The movement in liability recognised in the Group's balance sheet is as follows: 2007 2006 Â£000 Â£000 At beginning of year 3,801 16,677 Total expense charged/(credited) in the income statement of the Group (3,801) 12,180 Contributions paid - (25,056) -------------------------------------------------------------------------------- At end of year - 3,801 -------------------------------------------------------------------------------- A reconciliation of the fair value of the scheme assets is as follows: 2007 2006 Â£000 Â£000 Opening fair value of scheme assets 133,660 101,409 Expected return on scheme assets 7,711 6,431 Difference between expected and actual return on scheme assets 75 6,480 Contributions by the employer - 25,056 Settlements with scheme members (11,687) - Benefits paid (2,183) (5,716) -------------------------------------------------------------------------------- Closing fair value of scheme assets 127,576 133,660 -------------------------------------------------------------------------------- A reconciliation of the present value of funded obligations of the scheme is as follows: 2007 2006 Â£000 Â£000 Benefit obligation at beginning of year 137,461 137,533 Current service cost 200 4,191 Interest cost 6,657 6,397 Actuarial gains (18,742) (5,917) Benefits paid from scheme (2,183) (5,716) Curtailments and amendments - 973 Settlements with scheme members (16,600) - -------------------------------------------------------------------------------- Closing present value of funded obligations 106,793 137,461 -------------------------------------------------------------------------------- A summary of the scheme's recent experience is shown below: 2007 2006 2005 2004 Â£000 Â£000 Â£000 Â£000 Experience (losses)/gains on scheme liabilities 2,783 (3,310) (1,223) 992 Experience gains on scheme assets 75 6,480 10,764 1,316 -------------------------------------------------------------------------------- Assumptions regarding future mortality experience are set based on professional advice, published statistics and actual experience. The average life expectancy in years of a pensioner retiring at age 60 at the balance sheet date is as follows: 2007 2006 Male member 24.5 yrs 24.5 yrs Female member 27.6 yrs 27.6 yrs -------------------------------------------------------------------------------- The average life expectancy in years of a pensioner retiring at age 60, 15 years after the balance sheet date is as follows: 2007 2006 Male member 25.6 yrs 25.6 yrs Female member 28.6 yrs 28.6 yrs -------------------------------------------------------------------------------- The other principal actuarial assumptions used in determining the defined benefit scheme's obligation were as follows: 2007 2006 % % Discount rate 5.80 5.10 Expected return on scheme assets 6.09 6.09 Future salary increases 4.60 4.30 Inflation assumption 3.60 3.30 Pension increases 3.60 3.30 -------------------------------------------------------------------------------- During the year the Group made no contributions to the defined benefit scheme (2006: contribution rate of 33.3% of pensionable salaries). No additional contributions were paid during 2007 (2006: Â£20,570,000). The Group has agreed that further additional contributions will be made if necessary although no contributions are currently expected to be made in 2008 given the current level of underlying scheme surplus. 61% of the surplus or deficit calculated is recharged or refunded to Syndicate 33. The expected return on scheme assets is based on historical data and management's expectations of long-term future returns. 17. Earnings per share Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of shares in issue during the year, excluding ordinary shares purchased by the Group and held in treasury as own shares. Basic 2007 2006 Profit attributable to the Company's equity holders (Â£000) 191,248 163,846 Weighted average number of ordinary shares (thousands) 395,308 392,558 Basic earnings per share (pence per share) 48.4p 41.7p -------------------------------------------------------------------------------- Diluted Diluted earnings per share is calculated adjusting for the assumed conversion of all dilutive potential ordinary shares. The Company has one category of dilutive potential ordinary shares, share options. 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. 2007 2006 Profit attributable to Company's equity holders (Â£000) 191,248 163,846 -------------------------------------------------------------------------------- Weighted average number of ordinary shares in issue (thousands) 395,308 392,558 Adjustments for share options (thousands) 13,530 12,449 -------------------------------------------------------------------------------- Weighted average number of ordinary shares for diluted earnings per share (thousands) 408,838 405,007 -------------------------------------------------------------------------------- Diluted earnings per share (pence per share) 46.8p 40.5p -------------------------------------------------------------------------------- Diluted earnings per share has been calculated after taking account of 13,014,000 (2006: 11,806,000) awards and options under employee share option and performance plan schemes and 516,000 (2006: 643,000) options under SAYE schemes. 18. Dividends paid to external shareholders 2007 2006 Â£000 Â£000 -------------------------------------------------------------------------------- Interim dividend for the year ended : - 31 December 2006 of 3.0p(net) per share - 11,789 - 31 December 2007 of 4.0p (net) per share 15,868 - Final dividend for the year ended : - 31 December 2005 of 4.75p (net) per share - 18,639 - 31 December 2006 of 7.0p (net) per share 27,723 - -------------------------------------------------------------------------------- 43,591 30,428 -------------------------------------------------------------------------------- A final dividend in respect of 2007 of 8p per share, amounting to a total dividend of 12p for the year, is to be proposed at the Annual General Meeting on 4 June 2008. These financial statements do not reflect this final dividend as a distribution or liability in accordance with IAS 10 Events after the Balance Sheet Date. Following approval at the Annual General Meeting, the final dividend will be paid on 17 June 2008 to shareholders on the register on 16 May 2008. Note: The Annual Report and Accounts for 2007 will be available to shareholders no later than 29 April 2008. Copies of the Report may be obtained by writing to the Company Secretary, Hiscox Ltd, Wessex House, 45 Reid Street, Hamilton HM12, Bermuda. This information is provided by RNS The company news service from the London Stock Exchange

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