Final Results

RNS Number : 5018O

Hiscox Ltd

09 March 2009

Hiscox Ltd

Full year results for the year ended 31 December 2008

Hamilton, Bermuda (9 March 2009) - Hiscox Ltd (LSE:HSX), the international specialist insurer, today announces full year results for the year ended 31 December 2008.

'A robust result'

	2008	2007
Gross premiums written	£1,147.4m	£1,198.9m
Net premiums earned	£953.0m	£965.2m
Profit before tax	£105.2m	£237.2m
Profit before tax and certain foreign currency items*	£156.2m	£237.2m
Earnings per share	18.8p	48.4p
Total dividend per share for year	12.75p	12.0p
Net asset value per share	258.1p	209.5p
Group combined ratio	76.1%	84.4%
Group combined ratio excluding foreign exchange	91.9%	85.5%
Return on equity	9.2%	28.8%
Return on equity excluding certain foreign currency items*	16.4%	28.8%

Financial highlights

Profit before tax £105.2m (2007: £237.2m)
Profit before tax excluding certain foreign currency items* £156.2m (2007: £237.2m)
Total dividend for the year increased by 6.25% to 12.75p (2007: 12.0p)
Net assets per share increased by 23.2% to 258.1p (2007: 209.5p)
Excellent combined ratio of 76.1% (2007: 84.4%) or 91.9% (2007: 85.5%) excluding foreign exchange
Investment return of -1.3% (2007: 5.4%)
Return on equity of 9.2% (2007: 28.8%) or 16.4% (2007: 28.8%) excluding certain foreign currency items*
Strong balance sheet after share repurchases of £63m at average price 221.7p.

* excludes foreign currency items on economic hedges and intragroup borrowings

Operational highlights

Rates increasing in reinsurance, marine and energy, and stable elsewhere
Expansion in the USA: five new offices opened and 43 additional staff recruited
Capacity of Syndicate 33 increased to £750m (2008: £700m)
New Syndicate 3624 created with £80m capacity
Good opportunities to continue to grow a balanced business internationally.

Robert Hiscox, Chairman of Hiscox Ltd, commented:

'This is a robust performance, especially in view of the near-collapse of the financial markets and the third most expensive hurricane on record. Rates in our markets are increasing selectively, especially in reinsurance which is a third of our book, so conditions are good for our existing and new teams to continue to grow a profitable balanced business.'

Copies of the Chairman's statement, Chief Executive's report and the Group's financial information as at 31 December 2008 are attached.

For further information:

Hiscox Ltd

Robin Mehta	+1 441 278 8300
Kylie O'Connor, Head of Communications, London	+44 (0) 20 7448 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 the USA.

For further information, visit www.hiscox.com

Chairman's statement

2008 was a year that will be written about for decades to come, and it was a good year for Hiscox to show the robustness of its business. Global Markets' underwriting was tested by the third most expensive hurricane on record but the reinsurance account still made a decent profit; the regional business continued to grow in size and profitability, and the worldwide financial collapse stress tested our investment portfolio beyond any expert forecast and a very small investment loss was a fair result, with currency movements adding substantially to our profits and assets.

In the 2008 interim report I wrote that it seemed surreal to be announcing record profits when the share price was so low. Our sector was subsequently re-rated, and the appraisal was valid. We had not followed the banks into speculating heavily on borrowed money, and we had continued to price risk and to monitor our liabilities to the best of our ability, using the best models available but aware of their frailty. We had in our corporate memory the agonies Lloyd's suffered in the early 1990's from the spiral of reinsurance liabilities and the seemingly unquantifiable liabilities from asbestosis and pollution, and we had learnt.

A great asset of the insurance industry is that feast always follows famine. After big losses there is a shortage of capital and supply so we can put rates up and recoup our losses. Conversely, the curse of the industry is the ease of entry, with an instant inflow of capital when we get the rates into profit territory. The last quarter of 2008 saw a firming in rates in some of our key areas (particularly reinsurance which is a third of our book) and a stabilisation in others, but this time there is a global shortage of capital, which means we should be able to charge the right rate for some time to come.

Results

The result for the year ended 31 December 2008 was a profit of £105.2 million (2007: £237.2 million) on a gross written premium income of £1,147.4 million (2007: £1,198.9 million). The combined ratio was 76.1% (2007: 84.4%). Earnings per share on profit after tax were 18.8p (2007: 48.4p) and net assets per share increased by 23% to 258.1p (2007: 209.5p). Return on equity was 9.2% (2007: 28.8%).

Dividend and capital management

The Board proposes a final dividend of 8.5p (2007: 8p) making a total dividend for the year of 12.75p (2007: 12p), an increase of 6.25%. This will be paid on 16 June 2009 to shareholders on the register at the close of business on 15 May 2009. We have always advocated a progressive dividend policy and being able to cover an increased dividend after such a difficult year is extremely satisfying.

During 2008 we bought in 28,300,742 shares for a total of £62,866,000 (an average price of 221.7p per share). Our balance sheet is strong and sufficient for our current plans. We like to use our capital as fully as is prudent to keep the returns to shareholders as high as possible. Interestingly, we last raised capital through a rights issue in 2005 raising £170 million net, since when we have returned £207 million to shareholders through dividends and share buy-backs.

The current state of the market

The market overall is solid and healthy. There is comment that rates are not rising fast everywhere, but much as I enjoy surging rates following a big loss, underwriters do tend to push prices too high which attracts new capital. And if rates are pushed too high, they have to come down and the momentum of the insurance cycle starts to swing down. Rates are being put up selectively, capital is tight, our current combined ratio is 91.9% stripping out currency distortions, so market conditions are profitable and improving. The better underwriters can make good money at these rates so we do not want to push them up faster which will just help the weaker ones.

The current state of our business

I leave it to Bronek, our inestimable CEO who runs the company with remarkable passion and ability, to comment on the business in detail. Conditions at Hiscox are better than good. Our time honoured strategy has been to write internationally traded big ticket and catastrophe business (through Global Markets and Bermuda principally), and balance it with regional, smaller business in the UK, Europe and the USA.

The Global Markets division has recently expanded in the US with the acquisition of some highly talented people and new offices have been opened. We have long abandoned the Lloyd's business model of sitting in the Room waiting for business to come from around the world which is no longer sustainable. Bermuda has a bigger share of the world reinsurance market than London, and our operation here in Bermuda showed us the viability and efficiency of underwriting electronically, even on a small island 600 miles from anywhere. Bermuda benefits from advantageous tax and regulatory regimes, and also from being closer to the USA. Human relationships and proximity remain a key factor in doing business, so we have opened, or are opening, offices selectively across the USA, in addition to our Global Markets presence in London and Paris.

Those offices will also be used to increase the distribution of our regional businesses which are growing strongly in the USA, having also attracted new talented people. The regional businesses in the UK and mainland Europe have built on their strong foundations, had a good year and should continue to be a growing asset with the potential of steady profits.

Our direct household and small commercial business in the UK had good growth in 2008 and will be helped this year by our new marketing campaign.

Investments

An investment return of -1.3% is a fair one, even a good one, in the circumstances of the worst year on record for most types of investment. Our staple diet consists of bonds, and trying to squeeze an extra point or two of yield could have led us into the toxic products that have done so much damage. However, we have only had one insolvency so far, a relatively small investment in Lehman Brothers bonds; otherwise we have marked to market, and as low as some of those valuations are, the instruments are all paying their coupons and heading for redemption.

The Board

Carol Franklin Engler retired from the Board during the year having served nine years. Carol brought an underwriter's eye to our deliberations with an uncanny talent for pricking balloons. She also had Human Resources experience, which together with her other outside activities made her an extremely effective director. I would like to thank her for her valuable contribution through a period of great change.

We have been joined by Gunnar Stokholm and Ernst Jansen, both of whom have vital experience of building international insurance businesses. They bring considerable underwriting knowledge as well as international business experience to our strategic planning and Board discussions.

The future

All areas of the company have good possibilities of profitable growth and there is a great feeling of dynamism throughout. We have taken on some excellent new people. I would like to thank them for joining us, and also thank the existing staff in all areas of the business for making Hiscox an exciting and constantly challenging environment.

Change is the price of survival, and the change at Hiscox over the last decade from a Lloyd's agency to a group of international insurance companies has been dramatic. We have a balanced business both geographically and in our products; we have a dominant position in many of our specialisms; we are building a strong brand, and most important, we have first class people devoted to doing first class business in a first class way. We will continue to build on our strong foundations during the forthcoming very difficult economic conditions, and then should flourish enormously when the world comes out of recession.

Robert Hiscox

9 March 2009

Chief Executive's report

In 2008 our strategy of building balance paid off for the business and for shareholders. A rigorous approach to underwriting saw us shrink our international big ticket and reinsurance product lines. At the same time we continued to invest in our domestic market businesses in the UK, Europe and USA. These actions allowed us to generate sufficient underwriting profit which together with our foreign exchange gains, have produced a good result, despite the ravages of the toughest investment environment in living memory.

We now see opportunity ahead of us. Recent market turbulence has severely affected some of our competitors and we have seized the opportunity to attract good staff - particularly in the US.

Group performance

The pre-tax profit for the year was £105.2 million (2007: £237.2 million). Gross written premium shrank to £1,147.4 million (2007: £1,198.9 million). Earnings per share are 18.8p (2007: 48.4p). Return on equity was 9.2% (2007: 28.8%) and net asset value per share increased to 258.1p (2007: 209.5p). Net tangible assets increased to 244.9p (2007: 199.3p). Dividends increase to 12.75p (2007: 12p). These results were achieved despite a very challenging investment environment, which saw investment returns on financial assets falling to a loss of £27.6 million, in contrast to a positive contribution of £100.8 million in 2007.

The significant appreciation in net asset value reflects both our profit and the impact of the dollar strengthening. At the end of the year, £603 million of shareholders' funds were held in US Dollars.

Hiscox Global Markets

Hiscox Global Markets underwrites a mix of big ticket international and reinsurance business, and specialty business where deep expertise in specific product lines draws the business to London. All of these lines take advantage of the Lloyd's brand and licence network. During the year Global Markets showed exceptional discipline in shrinking in almost all its areas, rather than writing business at the wrong price. The rewards of this approach are shown in its ability to generate a profit despite losses from Hurricanes Ike and Gustav. At a trading level Global Markets benefited from the strength in the US Dollar. This was an advantage this year but could present a future challenge if Sterling strengthens.

	2008	2007
	£m	£m
Gross premiums written	586.5	676.5
Net premiums earned	477.8	552.2
Underwriting profit	41.6	119.8
Investment result	(5.8)	46.6
Foreign exchange	108.5	4.5
Other income/expenses	(3.8)	(15.3)
Profit before tax	140.5	155.6
Combined ratio	68.5%	81.7%
Combined ratio excluding foreign exchange	94.5%	82.5%

Our Reinsurance area had a great year despite the run of large risk losses which affected the market in the first half and the impact of Hurricanes Ike and Gustav into the second half. The team's performance benefited from the commutation of the Panther Re sidecar, which saw Hiscox assuming the risk of all losses occurring after 31 January 2009. We replaced Panther with a Lloyd's sidecar Cougar Syndicate 6104 and other reinsurances. January renewals saw an increase in the rates in the US. We have expanded our writings slightly but expect to expand further as the year develops, as we expect rates to rise generally as the year progresses.

The property team underwrites our catastrophe exposed primary property business, together with some international homeowner and small business insurance. The team suffered in the hurricanes but delivered a positive result overall, helped by releases on older years, including some arising out of the positive settlement of claims relating to the events of September 11, 2001. We are pursuing our subrogation actions relating to these and other claims with vigour.

Our Global Errors and Omissions business was created this year to bring together our expertise in the technology and media fields with that in the broader error and omission field. The team had a difficult year as they dealt with a series of large claims. Rates in this area need to rise - and until they do we will continue to take a very cautious approach.

The Specialty Division, which brings together Political Risks, Aviation War, Terrorism, Contingency, Kidnap & Ransom and Bloodstock, had a good year. Hiscox's deep expertise attracts business. The key challenge for this team is to continue to draw business into London as businesses - including Hiscox - build their capability in domestic markets.

Marine and Energy, unsurprisingly, had an unprofitable year. They were in the front line for both Hurricanes Ike and Gustav. The losses sustained were within our expectations. Rates in the Gulf will have to rise significantly if the class is to be underwritten profitably there.

In addition to disciplined underwriting, the Global Markets team has recognised that business no longer flows to London as a right, and in 2007 invested in creating teams who were located mainly in Paris and New York. Since September, Global Markets has taken advantage of the disruption caused by the financial crises by recruiting people and working with our USA business to open new offices in Boston, Kansas City, Lexington and Miami. We expect to open a further office in Los Angeles this year. This expanded footprint will enable us to underwrite our specialist lines locally in the US domestic market.

The growth of the business outside London brings with it inevitable conflict with those brokers, and indeed those underwriters, who are entirely London centric. Growth and activity in the US has not diminished our commitment to the London Market and we will seek to expand in both areas. The key to success in London is a continued investment by Hiscox, and the market as a whole, in efficiency and improving infrastructure. In 2008 Global Markets worked on a project to replace its core underwriting system. The project was due to be delivered in the second half of the year but, as seems inevitable when dealing with projects of this scale and complexity, completion is now expected in the first half of 2009. Once this new system is in place, we will be investing in connecting to the newly announced Lloyd's Exchange, as we believe that over time it is in everyone's interest that underwriting moves to a more electronic environment. If the London Market as a whole is able to achieve this it is our belief that it will continue to be the vibrant centre of the international insurance industry.

When planning for Global Markets in 2009 we initially announced a reduction in the size of Syndicate 33, however in response to market changes we have reconsidered our plans. We have increased the size of Syndicate 33 to £750 million (2008: £700 million) and renewed the Cougar Syndicate 6104 which is supported entirely by third-party capital at the increased level of £43 million (2008: £34 million). In addition we created Syndicate 3624 with a capacity of £80 million which is completely capitalised by Hiscox. Syndicate 3624 will provide capacity for all the new lines of business which we are planning to underwrite in the US, most of the business already generated by Hiscox USA and 50% of the technology and media business. These structures introduce an element of complexity into our business, but give us greater flexibility in planning our business expansion.

Hiscox UK and Hiscox Europe

Our commitment to growing our domestic businesses in the UK and mainland Europe paid off in 2008. We saw strong growth in both divisions and much stronger underwriting performance. Looking at each in turn:

		Hiscox UK		Hiscox Europe
	2008	2007	2008	2007
	£m	£m	€m	€m
Gross premiums written	261.9	229.2	120.3	107.4
Net premiums earned	227.3	190.4	110.8	91.5
Underwriting profit	36.8	16.0	25.1	21.8
Investment result	(2.8)	15.9	(11.6)	3.6
Foreign exchange	9.3	0.7	0.1	(0.2)
Other income/expenses	(14.4)	(15.4)	(19.8)	(22.6)
Profit/(loss) before tax	28.9	17.2	(6.2)	2.6
Combined ratio	85.0%	98.8%	95.6%	100.9%

Hiscox UK saw growth of 14.3% to £261.9 million (2007: £229.2 million). Growth was strong in all areas, but we are particularly pleased with developments in our specialty commercial area and the new motor business which was launched in 2008. The successful launch of our luxury motor product demonstrates that people value quality insurance. We have continued to invest in the UK Direct business, which has made good progress. The brand building which has supported this business has had benefits not only here, but for the Group as a whole.

The high net worth team have done well to increase rates and consequently profitability during the year. The progress in top and bottom line by Hiscox UK was achieved despite the decision to put the broker channel mid net worth household product into run-off. Our personal lines strategy is to serve the richest ten percent of the population in their personal insurance needs, with the bulk of the richest five percent being served through the broker market and the rest dealing with Hiscox direct if they wish. We believe this strategy makes good sense for customers, our broker partners and us.

Hiscox Europe saw growth of 12.0% in the year as a whole and a strong improvement in underwriting profit in local currency. France and Belgium continued to deliver good profits and Germany and the Netherlands made substantial improvements to their performance year on year. The progress of the business reflects our decision to focus our efforts in those countries where we already have offices in order to drive economies of scale. To drive this point home we have set a target of a gap of ten percent between the rate of growth of expenses and revenues. We achieved this in 2007 and came close in 2008. Of particular note in Europe is the turnaround in Germany. Some tough decisions were made to end relations with brokers who had produced poor quality business, allowing the team to focus on more productive relationships. The Netherlands has seen a real growth in scale with very little increase in expense, with a consequent positive impact on the bottom line. Spain has new leadership in place.

Hiscox International

Hiscox International comprises our businesses in Bermuda, Guernsey and the domestic USA team. Each business faced quite different challenges in the year and I review them in turn below:

Hiscox Bermuda faced difficult market conditions affecting the reinsurance market. Their response, rightly, was to shrink their top line significantly. Third-party reinsurance reduced to $211.7 million (2007: $297.3 million). The team also had to deal with the impact of Hurricanes Ike and Gustav. Despite this the business had a positive underwriting result. During the year we began a specialty reinsurance business centred in Bermuda. The financial crises and improving market meant our capital could be better employed elsewhere and regrettably the business was closed during December.

Charles Dupplin, currently Chairman of Hiscox's Art and Private Client division and Director of Mergers and Acquisitions, will succeed Rob Childs as Chief Executive of Hiscox Bermuda. Charles will take up this new role in April 2009, subject to regulatory approval. As previously announced, Rob Childs will return to the UK towards the end of April 2009. He will continue in his roles as Group Director of Underwriting and Chairman of Hiscox USA and he will also serve as an internal non-executive of Hiscox Bermuda. In the last three years our team in Bermuda, led by Rob, has built a vibrant business from nothing. I would like to thank Rob for his leadership. With Charles at the helm, I am confident that our Bermuda business will continue to develop.

Hiscox Guernsey had another good year. It grew its core Kidnap and Ransom and Fine Art accounts and responded rapidly with new products to the piracy threat on the Horn of Africa. It is this fast response to market conditions which sets this team apart from its competitors. We have a great business development team based in London and have now created a Miami office as a gateway to South America. Opportunities abound.

Hiscox USA continued on its journey to build a specialist business in the USA. Top line grew 32% to $59.2 million (2007: $44.7 million) and the result was close to break even. The team continues to gain scale and build reputation amongst brokers. It has also taken advantage of the financial market turmoil to recruit new staff. New team members joined in New York and Lexington (where we have now opened an office) and members of the current team will relocate to Miami and the West Coast this year to build our local presence. The key constraint in the USA is the time taken to get rate and forms approved by the state regulators. We currently have 15 products going through this process.

Claims

Effective claims management is essential to provide good customer service. As we expand we have been careful to make sure that our claims standards are preserved.

We have continued to invest in claims operations, including the strengthening of complex claims management capability for big ticket businesses in Global Markets and Bermuda and in developing our service culture to our policyholders in our retail operations. In the UK we settle ten percent of our UK property claims in one day and 45% in 30 days.

In 2008, our claims teams settled our two largest historic outstanding claims. This required long and sensitive discussions with the assureds and it is to the team's credit that this was achieved while still retaining positive relationships with those clients.

Operations and IT

With the relentless advance of technology, Operations and IT are now central to the business. Ten years ago if our IT collapsed we could continue to trade, but this is no longer the case. Our core infrastructure is based in the UK and France, removing the Group's dependence for communications on our London office. The resilience of these new arrangements was tested during 2008 and our systems worked well.

We have also significantly improved our online response times and service in the UK which is critical to the direct customer experience.

We appointed Michael Gould as Chief Operating Officer during the year and he has already improved operating disciplines. This includes more rigour in prioritising and managing projects, as well as developing consistent operational measures to track the Group's performance.

Investments

2008 was the year of investment challenges. We achieved a return across the portfolio of -1.3%. There is no need to comment on the global crisis as many more informed commentators are busy doing so at length elsewhere. Suffice to say, I am delighted that even though we have a small negative return, we still enter 2009 with 98.7% of our funds intact and, thanks to good relative investment performance and a great underwriting performance, our balance sheet is unimpaired. Many of our competitors can only dream of being in this position. This provides a stable foundation on which we can build the underwriting business in 2009.

In addition to the upheaval and volatility in the financial market, 2008 saw equivalent volatility in the currency exchange market and in the course of the year the US Dollar fluctuated from 1.99 opening to 1.44 closing.

Hiscox holds assets to match its insurance liabilities in original currencies, thereby reducing the impact of volatile exchange rates and making active use of shareholders' funds. The majority of the net assets are in US Dollars and as the Dollar strengthened during the year, the decision was made to lock in some of the resulting gains by entering into economic hedge contracts to protect against further fluctuations. As the year progressed the Dollar strengthened further and the additional underlying gain was offset by the cost of the hedge. As a result of accountancy rules, this cost of £42.5 million was taken through the profit and loss account, while the underlying gain of £151.2 million was taken directly to the balance sheet.

Further FX gains arose in the trading accounts during the course of 2008. Together these contributed £57 million to our reported profits (2007: £7 million) net of foreign exchange on economic hedges and intragroup borrowings.

Balance Sheet and Ratings

Total shareholders' funds grew to £951.0 million (2007: £824.3 million). On a per share basis this is equal to net assets per share of 258.1p (2007: 209.5p) and net tangible assets per share of 244.9p (2007: 199.3p). We continue to see building per share asset value as a key performance metric as we think that over time it is the most important factor driving our share price.

In 2008 loss reserves grew to £1.8 billion (2007: £1.2 billion). This includes our loss estimates of net $175 million for Hurricanes Ike and Gustav. Total reserve releases during the course of the year amounted to £123 million (2007: £60 million). This release is larger than previous years as two of our biggest outstanding historic claims were settled during the period.

During the course of the year Hiscox has benefited from a series of positive rating agency decisions. On 18 September 2008 A.M.Best announced an upgrade to the financial strength rating of Hiscox Insurance Company (Bermuda) Limited, Hiscox Insurance Company (UK) Limited and Hiscox Insurance Company (Guernsey) Limited to A (Excellent) from A- (Excellent). It has also affirmed a financial strength rating of A for Hiscox Syndicate 33 and Hiscox Insurance Company Inc. The outlook for the rating is stable. In December, Standard & Poor's also upgraded their rating for Hiscox Insurance Company Limited to A (Strong).

These rating actions reflect the strength of Hiscox's diversified global portfolio and give us a competitive benefit in the new, more cautious world in which we operate. A key to retaining this balance is the need to balance the rewards from underwriting with the risks. We plan to continue to run our business so that it can survive a 1 in 250 catastrophic year. Of course we measure this by drawing on our extensive modelling capability, but as recent events show, models are inevitably flawed and we will continue to supplement the model output with instinct and pragmatic business judgement.

Capturing opportunities

In the middle of the year we thought the market would continue to soften and that Hiscox would continue to invest in its regional business to offset the planned reduction of the big ticket insurance and reinsurance businesses. The financial crises which broke in mid September changed our view.

Overnight we went from defence to offence. We expanded our US domestic presence through the recruitment of 43 staff and the opening of five new offices. Our ambition is to build Hiscox into a top ten surplus lines market and a respected specialist player in the US admitted market.

In addition to the domestic US opportunities, we believe that there will be material benefits to our London operations as insureds re-discover the benefits of the subscription market where risks are shared between many participants. Our levels of expertise mean that Hiscox is a 'must visit' business in London - and we aim to keep it that way.

We see these opportunities continuing for some time as the global capital shortage means that there is unlikely to be a flood of new capital into the industry. In addition many capital raisings will be focused on repairing damage to balance sheets with little net additional capital entering the industry.

People

Insurance continues to be a business where the key ingredient to success is the people within the business. Our staff have had a great year. There is inevitable nervousness when so much turmoil abounds, but they stuck to their knitting and delivered great business development, underwriting, investment and operations performance.

What is also pleasing is the way individuals have chosen to move and travel in order to build the business. Many members of staff spend huge proportions of their time on the road travelling to see brokers and producers both within their home countries and around the world. Others are learning new languages in order to be more effective and others are volunteering to move temporarily - and in some cases permanently - to help Hiscox take advantage of new opportunities.

It is these attitudes, sacrifices and day to day performance which gives Hiscox the strength and agility to respond to challenging markets. I am deeply grateful to all of our staff for this.

Conclusion

2008 will be remembered as one of the most challenging in history for the world economy, and 2009 is shaping up in the same vein. I hope I am not tempting fate by saying that whilst we are acutely aware of the dangers in this crisis, we believe that there are good opportunities ahead for Hiscox and that success in capturing them will bring considerable benefits to policyholders, staff and shareholders.

Bronek Masojada

9 March 2009

CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2008

	Notes	2008 Results excluding foreign currency items on economic hedges and intragroup borrowings £000	2008 Foreign currency items on economic hedges and intragroup borrowings (note 21) £000	2008 Total £000	2007 Total £000
Income
Gross premiums written	4	1,147,364	-	1,147,364	1,198,949
Outward reinsurance premiums		(216,900)	-	(216,900)	(224,039)
Net premiums written	4	930,464	-	930,464	974,910
Gross premiums earned		1,171,511	-	1,171,511	1,179,444
Premiums ceded to reinsurers		(218,491)	-	(218,491)	(214,254)
Net premiums earned	4	953,020	-	953,020	965,190

Investment result - financial assets	7	(27,632)	-	(27,632)	100,787
Investment result - derivatives	14	(10,438)	(42,540)	(52,978)	(1,110)
Other revenues	9	19,858	-	19,858	19,044
Revenue		934,808	(42,540)	892,268	1,083,911
Expenses
Claims and claim adjustment expenses, net of reinsurance		(479,380)	-	(479,380)	(423,365)
Expenses for the acquisition of insurance contracts		(252,868)	-	(252,868)	(264,570)
Administration expenses		(83,198)	-	(83,198)	(76,813)
Other expenses	9	(76,499)	-	(76,499)	(82,269)
Foreign exchange gains / (losses)		118,218	(8,463)	109,755	8,401
Total expenses		(773,727)	(8,463)	(782,190)	(838,616)

Results of operating activities		161,081	(51,003)	110,078	245,295
Finance costs		(5,158)	-	(5,158)	(8,177)
Share of profit of associates after tax		260	-	260	81
Profit before tax		156,183	(51,003)	105,180	237,199
Tax expense	18	(30,255)	(4,117)	(34,372)	(45,951)
Profit for the year (all attributable to owners of the Company)		125,928	(55,120)	70,808	191,248

Earnings per share on profit attributable to owners of the Company
Basic	19	18.8p	48.4p
Diluted	19	18.1p	46.8p

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2008, AFTER TAX

	2008 Results excluding foreign currency items on economic hedges and intragroup borrowings £000	2008 Foreign currency items on economic hedges and intragroup borrowings (note 21) £000	2008 Total £000	2007 Total £000

Profit for the year	125,928	(55,120)	70,808	191,248
Other comprehensive income
Currency translation differences (net of tax of £nil (2007: £nil))	71,008	80,171	151,179	(4,269)
Net investment hedge (net of tax £(238,000) (2007: £420,000))	(597)	-	(597)	1,400
Total other comprehensive income	70,411	80,171	150,582	(2,869)
Total Comprehensive income recognised (all attributable to owners of Company)	196,339	25,051	221,390	188,379

In order to permit a fuller understanding of the current year's results and specifically the impact of certain foreign currency items, the Group has elected to present additional columns on the consolidated income statement and the consolidated statement of comprehensive income. No material items of this nature arose in the prior year and the comparative 2007 results are therefore unaffected (note 21).

The related notes 1 to 21 are an integral part of this document.

CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2008

	Notes	2008 £000	2007 £000
Assets

Intangible assets		48,557	40,452
Property, plant and equipment		19,668	19,378
Investments in associates		7,200	1,502
Deferred acquisition costs		131,130	123,081
Financial assets carried at fair value	12	2,081,772	1,747,827
Reinsurance assets	11	487,720	280,088
Loans and receivables including insurance receivables	13	494,315	385,222
Current tax		26,289	-
Cash and cash equivalents	15	440,622	302,742
Total assets		3,737,273	2,900,292

Equity and liabilities

Shareholders' equity
Share capital		20,067	19,898
Share premium		9,418	4,955
Contributed surplus		352,078	398,834
Currency translation reserve		107,317	(43,265)
Retained earnings		462,146	443,882
Total equity (all attributable to owners of the Company)		951,026	824,304

Employee retirement benefit obligations		-	-
Deferred tax		68,649	9,751
Insurance liabilities	16	2,277,416	1,713,887
Financial liabilities	12	143,350	91,764
Current tax		-	24,711
Trade and other payables	17	296,832	235,875
Total liabilities		2,786,247	2,075,988
Total equity and liabilities		3,737,273	2,900,292

The related notes 1 to 21 are an integral part of this document.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

	Notes	Share Capital £000	Share Premium £000	Contributed Surplus £000	Currency Translation Reserve £000	Retained Earnings £000	Total £000

Balance at 1 January 2007		19,694	-	442,425	(40,396)	260,362	682,085
Total recognised comprehensive income/(expense) for the year (all attributable to owners of the Company)		-	-	-	(2,869)	191,248	188,379
Employee share options:
Equity settled share based payments		-	-	-	-	5,689	5,689
Proceeds from shares issued		204	4,955	-	-	-	5,159
Purchase of own shares held in treasury		-	-	-	-	(11,343)	(11,343)
Deferred tax		-	-	-	-	(2,074)	(2,074)
Dividends paid to owners of the Company	20	-	-	(43,591)	-	-	(43,591)
Balance at 31 December 2007		19,898	4,955	398,834	(43,265)	443,882	824,304
Total recognised comprehensive income/(expense) for the year (all attributable to owners of the Company)		-	-	-	150,582	70,808	221,390
Employee share options:
Equity settled share based payments		-	-	-	-	5,269	5,269
Excess tax benefit on share based payments		-	-	-	-	883	883
Proceeds from shares issued		169	4,463	-	-	-	4,632
Purchase of own shares held in treasury		-	-	-	-	(62,866)	(62,866)
Purchase of own shares held in trust		-	-	-	-	(2,200)	(2,200)
Deferred tax		-	-	-	-	6,370	6,370
Dividends paid to owners of the Company	20	-	-	(46,756)	-	-	(46,756)
Balance at 31 December 2008		20,067	9,418	352,078	107,317	462,146	951,026

The related notes 1 to 21 are an integral part of this document.

CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2008

	2008 £000	2007 £000
Profit before tax	105,180	237,199
Adjustments for:
Interest and equity dividend income	(92,227)	(90,205)
Interest expense	5,158	8,177
Net fair value losses on financial investments, derivatives and borrowings	180,085	687
Non-cash movement in retirement benefit scheme obligation	-	(3,801)
Depreciation	5,323	4,917
Charges in respect of share based payments	5,269	5,689
Other non-cash movements	(766)	(3,571)
Effect of exchange rate fluctuations on cash presented separately	(62,086)	2,930

Changes in operational assets and liabilities:
Insurance and reinsurance contracts	281,633	133,951
Financial assets	(284,069)	(489,745)
Other assets and liabilities	(10,474)	31,112
Cash flows from operations	133,026	(162,660)
Interest received	89,608	85,435
Equity dividends received	2,619	4,770
Interest paid	(5,327)	(8,243)
Current tax paid	(18,982)	(42,823)
Net cash flows from operating activities	200,944	(123,521)
Cash outflow from the acquisition of subsidiary	(3,137)	(11,133)
Cash outflow from the sale of subsidiaries	(42)	(936)
Cash outflow from the acquisition of associates	(5,438)	(1,273)
Cash flows from the purchase of property, plant and equipment	(4,521)	(7,789)
Cash flows from the purchase of intangible assets	(3,530)	(2,500)
Net cash flows from investing activities	(16,668)	(23,631)
Proceeds from the issue of ordinary shares	4,632	5,159
Cash flows from the purchase of own shares including those arising on share buy-back programme	(65,066)	(11,343)
Dividends paid to owners of the Company	(46,756)	(43,591)
Net repayments of borrowings and financial liabilities	(1,292)	(272)
Net cash flows from financing activities	(108,482)	(50,047)
Net increase / (decrease) in cash and cash equivalents	75,794	(197,199)
Cash and cash equivalents at 1 January	302,742	502,871
Net increase in cash and cash equivalents	75,794	(197,199)
Effect of exchange rate fluctuations on cash and cash equivalents	62,086	(2,930)
Cash and cash equivalents at 31 December	440,622	302,742

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 cash flow.

Included within cash and cash equivalents held by the Group are balances totalling £47,094,000 (2007: £53,336,000) not available for immediate use by the Group outside of the Lloyd's Syndicate within which they are held.

The related notes 1 to 21 are an integral part of this document.

NOTES TO THE FINANCIAL STATEMENTS

1. General information

The financial information set out in this statement is extracted from the Group's consolidated financial statements for the year ended 31 December 2008. The auditors have reported on those 2008 financial statements which include comparative amounts for 2007. Their report was unqualified.

The Hiscox Group, which is headquartered in Hamilton, Bermuda, comprises Hiscox Ltd (the 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 and reinsurance services to its clients worldwide. It has operations in Bermuda, the UK, Europe, Guernsey and the USA and employs over 950 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 its annual audited financial information in accordance with Section 4.1 of the Disclosure and Transparency Rules and the Listing Rules, both issued by the Financial Services Authority (FSA), in addition to the Bermuda Companies Act 1981. The first two pronouncements issued by the FSA require the Group to prepare financial statements which comprise the consolidated income statement, the consolidated statement of comprehensive income, the

consolidated balance sheet, the consolidated statement of changes in equity, the consolidated cash flow statement and the related notes 1 to 21 in accordance with International Financial Reporting Standards ('IFRS') as adopted by the European Union.

The consolidated financial statements for the year ended 31 December 2008 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 Board of Directors on 9 March 2009.

2. Significant accounting policies

The principal accounting policies applied in the preparation of these consolidated Group financial statements are set out below. The most critical individual components of these financial statements that involve the highest degree of judgement or significant assumptions and estimations are identified at note 2.22.

2.1 Statement of compliance

The consolidated financial statements have been prepared in accordance with IFRS as adopted by the European Union and in accordance with the provisions of the Bermuda Companies Act 1981.

Since 2002, the standards adopted by the International Accounting Standards Board have been referred to as 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 for insurance contracts, namely accounting principles generally accepted in the UK.

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 assets included in the measurement of the employee retirement benefit obligation, and certain financial instruments including derivative instruments and financial liabilities 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 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 which was the year of adoption. The number of years of data presented was increased from seven in the prior year, to eight 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 consolidated financial statements reflect the early adoption of IFRS 8 Operating Segments, which was first adopted in the prior year. IFRS 8 is a disclosure standard concerning the designation and presentation of operating segment information and therefore had no impact on the reported primary financial statements or financial position of the Group.

The Group has financial assets of over £2.5 billion. The portfolio is predominantly invested in liquid short dated bonds and cash to ensure significant liquidity to the Group and to reduce risk from the financial markets. In addition the Group has significant borrowing facilities.

The Group writes a balanced book of insurance and reinsurance business spread by product and geography. The Directors believe that the current reinsurance and insurance markets are favourable and that the Group is well placed to trade in these markets whilst successfully managing its business risks.

After making enquiries, the directors have a reasonable expectation that the company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts.

Standards and interpretations relevant to the Group published and effective or early adopted at 1 January 2008

IAS 1 Presentation of financial statements

The IASB published the revised IAS 1 Presentation of financial statements on September 6, 2007 with an effective date of 1 January 2009. The Group early adopted on 1 January 2008. The revised standard is as a result of Phase A of the IASB's financial statement presentation project, the objective of which is to enhance the usefulness of information presented in a complete set of financial statements.

The main change required by the revised standard is the introduction of 'total comprehensive income' which requires the presentation of changes in non owner equity in either one statement, the statement of comprehensive income, or two statements, the income statement and a statement showing the profit or loss and all components of other comprehensive income. The revised standard also requires other minor changes in the presentation of financial statements.

The Group has not presented a consolidated balance sheet at the beginning of the earliest comparative accounting period, 1 January 2007, as no retrospective restatements, reclassifications, or changes in accounting policy have occurred.

IFRIC 14, IAS 19 The Limit on Defined Benefit Asset, Minimum Funding Requirements and their Interaction

The International Financial Reporting Interpretations Committee (IFRIC) published IFRIC 14, IAS 19 The Limit on Defined Benefit Asset, Minimum Funding Requirements and their Interaction on 5 July 2007 with an effective date for annual periods beginning on or after 1 January 2008. The interpretation clarifies when refunds or reductions in future contributions in relation to defined benefit assets are available and also provides guidance on the impact of minimum funding requirements on such assets. The Group has applied the interpretation from 1 January 2008 with no impact on the carrying amount of the defined benefit pension scheme asset or on the financial results of the Group.

Amendments to IFRS 2 Share-based Payment

Amendments to IFRS 2 Share-based Payment were published on 17 January 2008 with an effective date of 1 January 2009 with early application permitted. The amended standard clarifies the definition of vesting conditions and introduces the term of 'non-vesting' conditions which are conditions which are other than service or performance conditions. Non-vesting conditions are reflected in the measurement of the grant date fair value of the awards. There is no requirement to reflect a true up for any differences arising between expected and actual outcome due to failure to meet non-vesting conditions. The amendment has no material impact on the Group's financial results.

Standards and interpretations published but not yet effective

Amendments to IAS 23 Borrowing Costs

Amendments to IAS 23 Borrowing Costs, was published on 29 March 2007 and is applicable from 1 January 2009. The amendment makes it compulsory to capitalise borrowing costs relating to qualifying assets and removes the option to expense such costs. The amendment excludes eligible assets measured at fair value from the revised standard's scope of application. The amendment has no material impact on the Group's financial results.

Amendments to IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements - Puttable Financial Instruments and Obligations Arising on liquidation

Amendments to IAS 32 and IAS 1 were published on 14 February 2008 and are effective for annual periods beginning on 1 January 2009. The amendment to IAS 32 will exempt some financial instruments, which would usually be considered equity, from the financial liability classification. The exemption is available to financial instruments that have particular features and meet specific conditions. The application of the amended standard will have limited impact on the Group.

2.3 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. Generally this occurs when the Group obtains a shareholding of more than half of the voting rights of an entity. In assessing control, potential voting rights that are currently exercisable or convertible are taken into account. Management also exercise significant judgement about any actual or perceived control acquired indirectly, through normal commercial dealings with entities of a special purpose nature. The Group does not undertake any such arrangements with such entities where control of that entity would be acquired. 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 Limited underwrites as a corporate member of Lloyd's on the main syndicates managed by Hiscox Syndicates Limited (the 'main managed syndicates' numbered 33 and, commencing 1 January 2009, 3624). 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 this main Syndicate have been included in the financial statements. The Group manages the underwriting of, but does not participate as a member of, Syndicate 6104 at Lloyd's which provides reinsurance to Syndicate 33 on a normal commercial basis. Consequently, aside from the receipt of managing agency fees and defined profit commissions as appropriate, the Group has no share in the assets, liabilities or transactions of Syndicate 6104, nor is it controlled. The position and performance of that Syndicate is therefore not included in the Group's financial statements.

The Group uses the acquisition 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 together with directly attributable transaction costs, equity instruments issued and liabilities incurred or assumed at the date of exchange. 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.

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. In accordance with IAS 21, foreign currency gains and losses on intragroup monetary assets and liabilities may not fully eliminate on consolidation when the intragroup monetary item concerned is transacted between two group entities that have different functional currencies.

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 with associates are eliminated against the investment in the associate. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

2.4 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 Sterling with the exception of the entities operating in France, Germany, the Netherlands and Belgium whose functional currency is Euros, those subsidiary 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 IAS 39 effective net investment hedges or when the underlying balance is deemed to form part of the Group's net investment in a subsidiary operation and is unlikely to be settled in the foreseeable future. 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.

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.

2.5 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.

2.6 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 generally accepted accounting principles.

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 recoverable amount 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.

State authorisation licences acquired in business combinations are recognised initially at their fair value. 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 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.

2.7 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, comprising debt and fixed income securities, equities and shares in unit trusts and deposits with credit institutions, 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 measured 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 the minority of 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 included 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.

2.8 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.

2.9 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.

(a) 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 cash flows and asset usage and/or recoverability;

- the likelihood of accelerated obsolescence arising from the development of new technologies and products; and

- the disintegration of the active market(s) to which the asset is related.

(b) 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;

- adverse economic or regulatory conditions that may restrict future cash flows and asset recoverability; and

- the withdrawal of any guarantee from statutory funds or sovereign agencies implicitly supporting the asset.

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.

2.10 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 (see note 2.17).

2.11 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 owners on consolidation. Where such shares are subsequently sold, reissued or otherwise disposed of, any consideration received is included in equity attributable to the Company's owners, net of any directly attributable incremental transaction costs and the related tax effects.

2.12 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 fair value movements on derivative instruments not formally designated for hedge accounting treatment. The Group's share of the results 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.

2.13 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. Overrider and profit commissions earned on ceded reinsurance are also included within premiums. Premiums are stated before the deduction of brokerage and commission but net of taxes and duties levied. Premiums are recognised as revenue (premiums earned) proportionally over the period of coverage except where time does not approximate to the pattern of risk, where previous claims information and other factors determine revenue recognition. 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.

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 insurance contracts as the related 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 assessment of the amount that can be recovered from the action against the liable third party.

2.14 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 is 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.

2.15 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 plan 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 plan 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 plans, 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 amount recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognised actuarial gains or losses and past service costs. Plan assets exclude any insurance contracts issued by the Group. To the extent that a surplus emerges on the defined benefit obligation, it is only recognisable on the asset side of the balance sheet when it is probable that future economic benefits will be recovered by the scheme sponsor in the form of refunds or reduced future contributions. The Group is not currently required to make ongoing, regular contributions and does not foresee future refunds with sufficient probability for the scheme's current reported surplus to be recognised as an asset on the balance sheet.

Actuarial gains and losses are only recognised when the net cumulative unrecognised actuarial gains and losses for each individual plan at the end of the previous accounting period exceeds 10% of the higher of the defined benefit obligation and the fair value of the plan assets at that date. Such actuarial gains or losses falling outside of this 10% corridor are charged or credited to income over the employees' expected average remaining working lives.

Past service costs are recognised immediately in income, unless the changes to the pension plan 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.

(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.

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 the 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, then 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 the 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 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 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.

2.16 Financial liabilities

Financial liabilities are initially measured at fair value. The Group's borrowings are financial liabilities and were previously designated on inception as being held at fair value through profit or loss if they were 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.

In the prior year and up to 6 May 2008 (when all existing borrowings were repaid in full), borrowings were consequently remeasured at fair value at each balance sheet date, 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 formed part of a designated hedge accounting relationship in which case certain changes in value were recognised directly in equity (see notes 2.17 and 10). All borrowings drawn after 6 May 2008 are now remeasured at amortised cost at each balance sheet date thereafter using the effective interest method. Any difference between the remeasured amortised cost carrying amount and the ultimate redemption amount is recognised in the income statement over the period of the borrowings.

2.17 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 ongoing basis. This effectiveness testing is re-performed at each period end to ensure that the hedge remains highly effective.

The Group hedged elements of its net investment in certain foreign entities through foreign currency borrowings that qualified for hedge accounting from 3 January 2007 until their repayment on 6 May 2008; accordingly gains or losses on retranslation are recognised in equity to the extent that the hedge relationship was effective during this period. Accumulated gains or losses will be recycled to the income statement only when the foreign operation is disposed of. The ineffective portion of any hedge is recognised immediately in the income statement.

2.18 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.

2.19 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.

2.20 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.

2.21 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.

2.22 Use of critical estimates, judgements and assumptions

The preparation of financial statements requires the use of significant estimates, judgements and assumptions. The Directors consider the accounting policies for determining insurance liabilities, the valuation of investments, the valuation of retirement benefit scheme 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, judgements 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 Group's 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 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 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 when relevant, and are also updated for expectations of prospective future developments. Although the possibility exists for material changes in insurance liabilities 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.

The Group carries its financial investments at fair value through profit or loss with fair value determined using published price quotations in the most active financial markets in which the assets trade.

During periods of economic distress and diminished liquidity, the ability to obtain quoted bid prices may be reduced and as such as a greater degree of judgment is required in obtaining the most reliable source of valuation.

With regard to employee retirement benefit scheme obligations, the amounts disclosed in these consolidated financial statements are sensitive to judgemental assumptions regarding mortality, inflation, investment returns and interest rates on corporate bonds, many of which have been subject to specific recent volatility. This complex set of economic variables may be expected to influence the liability obligation element of the reported net balance amount to a greater extent than the reported value of the scheme assets element. For example, if the recent cuts in official UK interest rates are replicated with lower yields emerging in UK corporate bond indices, a significant uplift may occur in the reported net scheme deficit through the reduced effect of discounting outweighing any expected appreciation in asset values.

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.

2.23 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 4 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.

Net asset value per share and return on equity measures, disclosed at notes 5 and 6, are likewise considered to be additional performance measures.

3. Financial risk

Fair value

In order to present useful information on the inputs used to measure fair value, the Group has classified its financial instruments as at 31 December 2008 using the fair value hierarchy as issued by the IASB in its exposure draft on Improving Disclosures about Financial Instruments, Proposed amendments to IFRS 7.

The fair value hierarchy classifies financial instruments into Level 1 to Level 3 based on the significance of the inputs used in measuring their fair value with Level 1 being the most reliable. The levels within the fair value hierarchy are defined as follows:-

Level 1 - Quoted prices in active markets for the same instrument

Level 2 - Quoted prices in active markets for similar assets or liabilities or other valuation techniques for which all significant inputs are based on observable market data.

Level 3 - Valuation techniques for which any significant input is not based on observable market data.

	Level 1	Level 2	Level 3	Total
	£000	£000	£000	£000

Debt and fixed income securities	605,222	1,323,377	-	1,928,599
Equities and share in unit trusts	2,043	122,282	539	124,864
Deposits with credit institutions	22,392	-	5,877	28,269
Derivative instrument assets	-	-	40	40
Total	629,657	1,445,659	6,456	2,081,772

The level within the hierarchy that a financial instrument is placed is based on the lowest level of any input that is significant to its fair value measurement.

Where a valuation technique is used, the Group selects inputs using the most reliable source of data and where possible observable market data. The models used to measure fair value in these cases may not be the same across the industry and as such fair value measurements may differ.

Credit risk

The Group mitigates credit counterparty risk by concentrating debt and fixed income investments in high quality instruments, including a particular emphasis on government gilts issued mainly by European Union and North American countries.

An analysis of the Group's major exposures to counterparty credit risk excluding loans and receivables, based on Standard & Poor's or equivalent rating, is presented below:

				Other/not
As at 31 December 2008	AAA	AA	A	rated	Total
	£000	£000	£000	£000	£000

Debt and fixed income securities	1,471,797	179,416	172,832	104,554	1,928,599
Deposits with credit institutions	4,146	11,800	12,323	-	28,269
Derivative financial assets	-	40	-	-	40
Reinsurance assets	6,896	278,685	175,756	26,383	487,720
Cash and cash equivalents	54,227	330,246	56,010	139	440,622
Total	1,537,066	800,187	416,921	131,076	2,885,250

As at 31 December 2007				Other/not
	AAA	AA	A	rated	Total
	£000	£000	£000	£000	£000

Debt and fixed income securities	1,116,903	106,754	158,157	62,718	1,444,532
Deposits with credit institutions	35,911	501	107,462	-	143,874
Derivative financial assets	-	-	-	-	-
Reinsurance assets	15,309	134,475	120,536	9,768	280,088
Cash and cash equivalents	97,816	173,755	31,166	5	302,742
Total	1,265,939	415,485	417,321	72,491	2,171,236

An analysis of the Group's debt and fixed income securities at 31 December by class is detailed below:

	2008 %	2007 %

Government issued bonds and instruments	35	26
Agency and Government supported debt	17	9
Asset backed securities	10	16
Mortgage backed instruments - Agency	8	7
Mortgage backed instruments - Non-Agency	8	13
Corporate bonds	20	27
Lloyd's and money market deposits	2	2

Liquidity risk

A significant proportion of the Group's investments are in highly liquid assets which could be converted to cash in a prompt fashion and at minimal expense. The deposits with credit institutions largely comprise short dated certificates for which an active market exists and which the Group can easily access. The Group's exposure to equities is concentrated on shares and funds that are traded on internationally recognised stock exchanges.

The main focus of the investment portfolio is on high quality short duration debt and fixed income securities, and cash. There are no significant holdings of investments with specific repricing dates. Notwithstanding the regular interest receipts and also the Group's ability to liquidate these securities and the majority of its other financial instrument assets, for cash in a prompt and reasonable manner, the contractual maturity profile of the fair value of these securities at 31 December was as follows :

	Debt and	Deposits	Derivative	Cash and
	fixed income	with credit	financial	cash	2008	2007
	securities	institutions	assets	equivalents	Total	Total
	£000	£000	£000	£000	£000	£000

Less than one year	196,839	28,269	40	440,622	665,770	611,931
Between one and two years	593,371	-	-	-	593,371	385,986
Between two and five years	669,819	-	-	-	669,819	563,052
Over five years	407,273	-	-	-	407,273	282,110
Perpetual notes and other non-dated instruments	61,297	-	-	-	61,297	48,069
Total	1,928,599	28,269	40	440,622	2,397,530	1,891,148

4. Operating segments

The Group's four operating segments are:

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., Hiscox Insurance Company (Bermuda) Limited and the ALTOHA sub-group.

Corporate Centre comprises the investment return, finance costs and administrative costs associated with Group management activities. In respect of the current year under review, Corporate Centre also includes the majority of foreign currency items on economic hedges and intragroup borrowings. These relate to certain foreign currency items on economic hedges and intragroup borrowings, further details of which are given at note 21. Corporate Centre forms a reportable segment due to its investment activities which earn significant external coupon revenues.

All amounts reported below represent transactions with external parties only, with all inter-segment amounts eliminated.

Performance is measured based on each reportable segment's profit before tax.

a) Profit before tax by segment

		Year ended 31 December 2008
	Global		UK and		Corporate
	Markets		Europe	International	Centre	Total
	£000		£000	£000	£000	£000

Gross premiums written	586,458		354,899	206,007	-	1,147,364
Net premiums written	425,056		328,744	176,664	-	930,464
Net premiums earned	477,814		302,418	172,788	-	953,020

Investment result - financial assets*	(5,785)		(11,935)	(8,114)	(1,798)	(27,632)
Investment result - derivatives	-		(10,483)	-	(42,495)	(52,978)
Other revenues	15,606		2,929	1,323	-	19,858
Revenue	487,635		282,929	165,997	(44,293)	892,268

Claims and claim adjustment expenses, net of reinsurance	(275,679)		(129,889)	(73,812)	-	(479,380)
Expenses for the acquisition of insurance contracts	(137,379)		(74,625)	(40,864)	-	(252,868)
Administration expenses	(23,157)		(46,228)	(13,813)	-	(83,198)
Other expenses	(19,149)		(33,042)	(14,112)	(10,196)	(76,499)
Foreign exchange gains / (losses)	108,536		32,507	(22,291)	(8,997)	109,755
Total expenses	(346,828)		(251,277)	(164,892)	(19,193)	(782,190)

Results of operating activities	140,807		31,652	1,105	(63,486)	110,078
Finance costs including interest expense	(273)		(35)	(186)	(4,664)	(5,158)
Share of profit of associates after tax	-		-	-	260	260
Profit before tax	140,534		31,617	919	(67,890)	105,180
*Includes interest received of £89,608,000

		Year ended 31 December 2007
	Global		UK and		Corporate
	Markets		Europe	International	Centre	Total
	£000		£000	£000	£000	£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 - financial assets*	46,617		18,343	23,915	11,912	100,787
Investment result - derivatives	-		-	-	(1,110)	(1,110)
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	(27,292)		(33,509)	(8,613)	(12,855)	(82,269)
Foreign exchange gains / (losses)	4,462		3,817	2,509	(2,387)	8,401
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 including interest expense	-		-	(82)	(8,095)	(8,177)
Share of profit of associate after tax	-		-	-	81	81
Profit before tax	155,572		21,817	69,104	(9,294)	237,199
*Includes interest received of £85,435,000

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 there from.

			Year ended 31 December 2008
	Global	UK and		Corporate
	Markets	Europe	International	Centre	Total
	£000	£000	£000	£000	£000

Gross premiums written	803,189	371,511	215,040	-	1,389,740
Net premiums written	580,806	344,101	183,798	-	1,108,705
Net premiums earned	653,090	316,791	179,340	-	1,149,221

Investment result - financial assets	(7,933)	(11,970)	(8,149)	(1,798)	(29,850)
Investment result - derivatives	-	(10,483)	-	(42,495)	(52,978)
Other revenues	23	2,929	35	-	2,987
Claims and claim adjustment expenses, net of reinsurance	(377,626)	(132,838)	(77,038)	-	(587,502)
Expenses for the acquisition of insurance contracts	(188,724)	(79,474)	(41,868)	-	(310,066)
Administration expenses	(31,245)	(46,933)	(14,082)	-	(92,260)
Other expenses	(19,531)	(33,042)	(13,589)	(10,196)	(76,358)
Foreign exchange gains / (losses)	169,713	34,152	(22,291)	(8,997)	172,577
Results of operating activities	197,767	39,132	2,358	(63,486)	175,771

			Year ended 31 December 2007

	Global	UK and		Corporate
	Markets	Europe	International	Centre	Total
	£000	£000	£000	£000	£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 - financial assets	64,552	19,161	23,915	11,912	119,540
Investment result - derivatives	-	-	-	(1,110)	(1,110)
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	(28,739)	(33,510)	(8,105)	(12,855)	(83,209)
Foreign exchange gains / (losses)	5,881	4,160	2,509	(2,387)	10,163
Results of operating activities	207,395	26,399	66,058	(1,280)	298,572

Segment results at the 100% level presented above differ from those presented at the Group's share at note 4(a) solely as a result of the Group not owning 100% of the capacity of Syndicate 33 at Lloyd's.

100 % Ratio analysis		Year ended 31 December 2008
	Global Markets	UK and Europe	International	Corporate Centre	Total
Claims ratio (%)	57.8	41.9	43.0	-		51.1
Expense ratio (%)	36.7	50.3	38.8	-		40.8
Combined ratio excluding foreign exchange impact (%)	94.5	92.2	81.8	-		91.9
Foreign exchange impact (%)	(26.0)	(10.7)	12.4	-		(15.8)
Combined ratio (%)	68.5	81.5	94.2	-		76.1

		Year ended 31 December 2007
	Global Markets	UK and Europe	International	Corporate Centre	Total
Claims ratio (%)	45.1	45.6	40.1	-	44.5
Expense ratio (%)	37.4	54.3	36.8	-	41.0
Combined ratio excluding foreign exchange impact (%)	82.5	99.9	76.9	-	85.5
Foreign exchange impact (%)	(0.8)	(1.7)	(1.5)	-	(1.1)
Combined ratio (%)	81.7	98.2	75.4	-	84.4

The combined ratio is an underwriting ratio and as such the costs of the Corporate Centre are not included in the total combined ratio calculation.

The impacts on profit before tax of a 1% change in each component of the segmental combined ratios are:

	Year to 31 December 2008				Year ended 31 December 2007
	Global	UK and		Corporate	Global	UK and		Corporate
	Markets	Europe	International	Centre	Markets	Europe	International	Centre
	£000	£000	£000	£000	£000	£000	£000	£000
At 100% level
1% change in claims or expense ratio	6,531	3,168	1,793	-	7,660	2,598	1,695	-
At Group level
1% change in claims or expense ratio	4,778	3,024	1,728	-	5,522	2,483	1,646	-

5. Net asset value per share

		2008		2007

	Net asset value		Net asset value
	(total equity)	NAV per share	(total equity)	NAV per share
	£000	p	£000	p

Net asset value	951,026	258.1	824,304	209.5
Net tangible asset value	902,469	244.9	783,852	199.3

The net asset value per share is based on 368,477,595 shares (2007: 393,386,041), being the adjusted number of shares in issue at 31 December. Net tangible assets comprise total equity excluding intangible assets.

6. Return on equity

	2008	2007
	£000	£000

Profit for the period	70,808	191,248
Opening shareholders' equity	824,304	682,085
Adjusted for time weighted impact of:
- Distribution and other movements in capital	(55,700)	(18,029)
Adjusted opening shareholders' equity	768,604	664,056
Annualised return on equity (%)	9.2	28.8

Profit for the period excluding foreign currency items on economic hedges and intragroup borrowings	125,928	191,248

Annualised return on equity excluding foreign currency items on economic hedges and intragroup borrowings (%)	16.4	28.8

7. Investment result

The result for the Group before taxation comprises :

	2008 £000	2007 £000
Investment income including interest receivable	94,678	90,259
Net realised gains on financial assets at fair value through profit or loss	4,743	10,105
Net fair value (losses)/gains on financial assets at fair value through profit or loss	(127,053)	423

Investment result - financial assets	(27,632)	100,787
Fair value gains / (losses) on derivative instruments and borrowings (note 14)	(52,978)	(1,110)
Total result	(80,610)	99,677

Investment expenses are presented within other expenses (note 9).

8. Analysis of return on financial investments

The weighted average return on financial investments for the year by currency was:

	2008 %	2007 %
Sterling	(0.1)	4.9
US Dollar	(2.5)	5.5
Other	0.4	3.6

Investment yields

	Global Markets		UK and Europe		International		Corporate Centre		2008 Total
	£000	%	£000	%	£000	%	£000	%	£000	%

Debt and fixed income securities	(8,288)	(0.9)	7,367	3.4	(7,490)	(2.3)	4,384	5.4	(4,027)	(0.3)
Equities and shares in unit trusts	-	-	(25,529)	(41.9)	(5,552)	(16.2)	(7,186)	(18.0)	(38,267)	(28.4)
Deposits with credit institutions/cash and cash equivalents	2,503	4.2	6,227	5.0	4,928	2.8	1,004	2.6	14,662	3.7
	(5,785)	(0.6)	(11,935)	(3.0)	(8,114)	(1.5)	(1,798)	(1.1)	(27,632)	(1.3)

	Global Markets		UK and Europe		International		Corporate Centre		2007 Total
	£000	%	£000	%	£000	%	£000	%	£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

9. Other revenues and expenses

	2008 £000	2007 £000
Agency related income	5,324	4,626
Profit commission	14,382	10,468
Other income	152	3,950
Other revenues	19,858	19,044
Managing agency expenses	19,513	28,870
Overseas underwriting agency expenses	28,787	23,811
Connect agency expenses	13,343	14,492
Investment expenses	1,899	1,250
Other Group expenses including central overheads	12,957	13,846
Other expenses	76,499	82,269

10. Net foreign exchange gains / (losses)

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

	2008 £000	2007 £000
Exchange gains recognised in the consolidated income statement	109,755	8,401
Exchange gains / (losses) classified as a separate component of equity	150,582	(2,869)
Total exchange gains reported for the year	260,337	5,532

The above excludes profits or losses on foreign exchange derivative contracts which are included within the investment result and are outlined in note 14.

Overall impact of foreign exchange related items before tax

	2008
	Economic hedges
	and intragroup	2008
	borrowings	Other	2008	2007
	£000	£000	£000	£000
Consolidated income statement
Derivative losses on foreign exchange contracts included within investment return	(42,540)	(10,123)	(52,663)	(1,110)

Net unearned premiums and deferred acquisition costs adjustment*	-	50,525	50,525	14,438
Foreign exchange losses on intragroup borrowings	(8,463)	-	(8,463)	-
Other foreign exchange gains / (losses)	-	67,693	67,693	(6,037)
	(8,463)	118,218	109,755	8,401
Impact of foreign exchange related items in consolidated income statement	(51,003)	108,095	57,092	7,291

*Net unearned premiums and deferred acquisition cost adjustment arises as a result of a foreign exchange mismatch caused by those items being translated only at the historical exchange prevailing at the original transaction date and not retranslated again at the year end rate.

11. Reinsurance assets

	2008	2007
	£000	£000
Reinsurers' share of insurance liabilities	495,251	283,414
Provision for non-recovery and impairment	(7,531)	(3,326)
Reinsurance assets (note 16)	487,720	280,088
The amounts expected to be recovered before and after one year, based on historic experiences, are estimated as follows:
Within one year	238,472	147,987
After one year	249,248	132,101
	487,720	280,088

Amounts due from reinsurers in respect of outstanding premiums and claims already paid by the Group are included in loans and receivables (note 13). The Group recognised a loss during the year of £4,205,000 (2007: gain of £452,000) in respect of impaired balances.

12. Financial assets and liabilities

Financial assets are measured at their bid price values, with all changes from one accounting period to the next being recorded through the income statement, except in the case of unlisted equity investments, and borrowing instruments that formed part of a designated hedge accounting relationship from 3 January 2007 to 6 May 2008 as provided for by IAS 39.

	2008	2007
	£000	£000
Debt and fixed income securities	1,928,599	1,444,532
Equities and shares in unit trusts	124,864	159,421
Deposits with credit institutions	28,269	143,874
Total investments	2,081,732	1,747,827
Derivative instrument assets (note 14)	40	-
Total financial assets carried at fair value	2,081,772	1,747,827

	2008	2007
	£000	£000
Borrowings from credit institutions	90,278	91,764
Derivative instrument liabilities (note 14)	53,072	-
Total financial liabilities	143,350	91,764

Investments at 31 December are denominated in the following currencies at their fair value:

	2008 %	2007 %

Sterling	17.8	23.1
US Dollars	68.7	65.1
Euro and other currencies	13.5	11.8

13. Loans and receivables including insurance receivables

	2008	2007
	£000	£000
Gross receivables arising from insurance and reinsurance contracts	441,752	329,156
less provision for impairment	(560)	(1,392)
Net receivables arising from insurance and reinsurance contracts	441,192	327,764

Due from contract holders, brokers, agents and intermediaries	274,470	201,157
Due from reinsurance operations	166,722	126,607
Prepayments and accrued income	441,192 7,948	327,764 9,562
Other loans and receivables:
Net profit commission receivable	11,959	13,850
Accrued interest	9,480	9,003
Share of Syndicate's other debtors balances	13,546	12,705
Other debtors including related party amounts	10,190	12,338
Total loans and receivables including insurance receivables	494,315	385,222

There is no significant concentration of credit risk with respect to loans and receivables, as the Group has a large number of internationally dispersed debtors. The Group has recognised a gain of £832,000 (2007: loss of £517,000) for the impairment of receivables during the year ended 31 December 2008.

14. Derivative financial instruments

The Group entered into both exchange-traded and over the counter derivative contracts for a number of purposes during 2008. The Group had the right and intention to settle all contracts on a net basis. The assets and liabilities of these contracts at 31 December 2008 all mature within one year of the balance sheet date and are detailed below:

	Gross Contract notional amount	Fair value of assets	Fair value of liabilities	Net balance sheet position
Derivative contract assets included on balance sheet	000	£000	£000	£000
Event linked future contracts	US$80	474	434	40
	Gross Contract notional amount	Fair value of assets	Fair value of liabilities	Net balance sheet position
Derivative contract liabilities included on balance sheet	000	£000	£000	£000
Foreign exchange option collar contracts	US$600,000	-	42,540	42,540
Foreign exchange forward contracts	€68,680	-	10,532	10,532
		-	53,072	53,072

The Group had no derivative assets or liabilities at 31 December 2007.

Foreign exchange option collar contracts

During 2008 the Group benefited from a significant uplift in net asset value due to the appreciation of the US dollar to Pound Sterling exchange rate which increased the translated values of its net investments in Bermuda and Guernsey insurance operations. During September and October 2008 the US dollar fluctuated significantly and in order to protect the majority of the exchange gains earned to date the Group progressively hedged the risk of subsequent US dollar weakness impacting this capital by entering into a series of currency option collar contracts. These over the counter instruments have no initial purchase cost and consist of covered call and protective put options which essentially protect the Group against material downside movements in US Dollar to Pound Sterling exchange rate whilst at the same time limiting further participation in material US Dollar strengthening beyond an upper cap. The Group made a loss on these contracts of £42,540,000 (2007: £1,842,000) as included in notes 7 and 21. The related exchange gains earned on the retranslation of the underlying net investments concerned was £67,591,000 and is included within the overall gain of £151,179,000 recognised in other comprehensive income.

Foreign exchange forward contracts

During 2008 the Group entered into a series of conventional over the counter forward contracts in order to secure translation gains made on Euro denominated monetary assets which had been subject to significant appreciation in value since 31 December 2007. The contracts required the Group to forward sell a fixed amount of Euros for Pound sterling at pre-agreed future exchange rates. The Group made a loss on these forward contracts of £10,123,000 (2007: gain of £732,000). An opposite exchange gain of £10,163,000 was earned on the retranslation of the underlying assets concerned.

There was no initial purchase cost associated with these instruments.

Event linked future contracts

In June 2008 the Group commenced trading event linked future contracts which are transacted on the Chicago Climate Futures Exchange. The contracts have fixed maturity dates and are structured such that cash inflows are binary in nature and are triggered by the occurrence of specific natural events in specific geographical zones which cause pre-determined losses to the insurance industry in excess of a specified amount. The Group itself does not have to suffer losses to receive a payment once the industry loss strike amount on each contract has been reached. Consequently the contracts are not accounted for as insurance contracts in accordance with IFRS 4.

The Group made a gain on event linked future contracts of £45,000 (2007: £nil).

Interest rate future contracts

In August 2008 the Group commenced short selling a number of Pound sterling government bond futures and Euro sovereign futures to informally hedge substantially all of the interest rate risk on a specific long portfolio of Sterling and Euro denominated corporate bonds. All positions taken were closed out before maturity using offsetting trades and no closing assets or liabilities existed at 31 December 2008. The contracts are exchange traded. The Group made a loss on these futures contracts of £360,000 (2007: £nil).

15. Cash and cash equivalents

	2008	2007
	£000	£000
Cash at bank and in hand	353,542	236,417
Short-term bank deposits	87,080	66,325
	440,622	302,742

The Group holds its cash deposits with a well diversified range of banks and financial institutions.

16. Insurance liabilities and reinsurance assets

	2008	2007
	£000	£000
Gross
Claims reported and loss adjustment expenses	885,905	642,252
Claims incurred but not reported	881,823	573,635
Unearned premiums	509,688	498,000
Total insurance liabilities, gross	2,277,416	1,713,887

Recoverable from reinsurers
Claims reported and loss adjustment expenses	180,406	137,868
Claims incurred but not reported	245,897	84,804
Unearned premiums	61,417	57,416
Total reinsurers' share of insurance liabilities	487,720	280,088

Net
Claims reported and loss adjustment expenses	705,499	504,384
Claims incurred but not reported	635,926	488,831
Unearned premiums	448,271	440,584
Total insurance liabilities, net	1,789,696	1,433,799

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 2008 and 2007 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	2008	Total
	£000	£000	£000	£000	£000	£000	£000	£000	£000
Estimate of ultimate claims costs as adjusted for foreign exchange*:
at end of accident year	749,648	437,736	493,451	748,759	1,253,261	643,855	864,188	1,210,449	6,401,347
one year later	727,993	463,447	507,499	831,151	1,387,438	616,072	774,105	-	5,307,705
two years later	810,021	472,577	477,146	793,273	1,399,169	593,856	-	-	4,546,042
three years later	836,914	455,747	491,699	749,948	1,378,982	-	-	-	3,913,290
four years later	881,684	451,206	487,718	753,543	-	-	-	-	2,574,151
five years later	877,676	423,579	475,401	-	-	-	-	-	1,776,656
six years later	876,086	419,824	-	-	-	-	-	-	1,295,910
seven years later	877,941	-	-	-	-	-	-	-	877,941
Current estimate of cumulative claims	877,941	419,824	475,401	753,543	1,378,982	593,856	774,105	1,210,449	6,484,101
Cumulative payments to date	(780,967)	(359,868)	(399,294)	(594,416)	(1,114,832)	(409,844)	(384,814)	(274,981)	(4,319,016)
Liability recognised at 100% level	96,974	59,956	76,107	159,127	264,150	184,012	389,291	935,468	2,165,085
Liability recognised in respect of prior accident years at 100% level									109,247
Total gross liability to external parties at 100% level									2,274,332

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

Accident year	2001	2002	2003	2004	2005	2006	2007	2008	Total
	£000	£000	£000	£000	£000	£000	£000	£000	£000

Current estimate of cumulative claims	877,941	419,824	475,401	753,543	1,378,982	593,856	774,105	1,210,449	6,484,101
Less:Attributable to external Names	(218,191)	(86,594)	(106,885)	(174,815)	(346,205)	(123,730)	(150,454)	(240,694)	(1,447,568)
Group's share of current ultimate claims estimate	659,750	333,230	368,516	578,728	1,032,777	470,126	623,651	969,755	5,036,533

Cumulative payments to date	(780,967)	(359,868)	(399,294)	(594,416)	(1,114,832)	(409,844)	(384,814)	(274,981)	(4,319,016)
Less:Attributable to external Names	192,092	71,607	87,967	139,519	282,694	83,531	63,755	44,032	965,197
Group's share of cumulative payments	(588,875)	(288,261)	(311,327)	(454,897)	(832,138)	(326,313)	(321,059)	(230,949)	(3,353,819)

Liability for 2001 to 2008 accident years recognised on Group's balance sheet	70,875	44,969	57,189	123,831	200,639	143,813	302,592	738,806	1,682,714
Liability for accident years before 2001 recognised on Group's balance sheet									85,014
Total Group liability to external parties included in balance sheet - gross**									1,767,728

* The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2008.

** This represents the claims element of the Group's insurance liabilities.

Insurance claims and claims expenses reserves - net at 100% level

Accident year	2001	2002	2003	2004	2005	2006	2007	2008	Total
	£000	£000	£000	£000	£000	£000	£000	£000	£000
Estimate of ultimate claims costs as adjusted for foreign exchange*:
at end of accident year	358,257	296,566	391,129	626,722	731,748	569,946	748,640	837,864	4,560,872
one year later	403,105	323,581	413,586	685,423	841,506	562,952	680,514	-	3,910,667
two years later	483,139	335,648	374,738	657,714	839,043	544,493	-	-	3,234,775
three years later	526,027	306,962	385,991	616,453	811,585	-	-	-	2,647,018
four years later	513,333	299,838	377,204	617,474	-	-	-	-	1,807,849
five years later	497,218	283,553	370,818	-	-	-	-	-	1,151,589
six years later	490,038	277,270	-	-	-	-	-	-	767,308
seven years later	492,765	-	-	-	-	-	-	-	492,765
Current estimate of cumulative claims	492,765	277,270	370,818	617,474	811,585	544,493	680,514	837,864	4,632,783
Cumulative payments to date	(410,138)	(232,148)	(302,448)	(478,701)	(594,658)	(375,785)	(317,957)	(232,079)	(2,943,914)
Liability recognised at 100% level	82,627	45,122	68,370	138,773	216,927	168,708	362,557	605,785	1,688,869
Liability recognised in respect of prior accident years at 100% level									45,329
Total net liability to external parties at 100% level									1,734,198

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

Accident year	2001	2002	2003	2004	2005	2006	2007	2008	Total
	£000	£000	£000	£000	£000	£000	£000	£000	£000

Current estimate of cumulative claims	492,765	277,270	370,818	617,474	811,585	544,493	680,514	837,864	4,632,783
Less:Attributable to external Names	(116,349)	(54,903)	(82,082)	(143,775)	(195,548)	(114,412)	(133,508)	(165,857)	(1,006,434)
Group's share of current ultimate claims estimate	376,416	222,367	288,736	473,699	616,037	430,081	547,006	672,007	3,626,349

Cumulative payments to date	(410,138)	(232,148)	(302,448)	(478,701)	(594,658)	(375,785)	(317,957)	(232,079)	(2,943,914)
Less:Attributable to external Names	93,966	43,464	64,586	112,341	142,587	77,956	54,658	34,627	624,185
Group's share of cumulative payments	(316,172)	(188,684)	(237,862)	(366,360)	(452,071)	(297,829)	(263,299)	(197,452)	(2,319,729)

Liability for 2001 to 2008 accident years recognised on Group's balance sheet	60,244	33,683	50,874	107,339	163,966	132,252	283,707	474,555	1,306,620
Liability for accident years before 2001 recognised on Group's balance sheet									34,805
Total net liability to external parties included in the balance sheet**									1,341,425

* The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2008.

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

Movement in insurance claims liabilities and reinsurance claims assets

	2008	2008	2008	2007	2007	2007
	Gross	Reinsurance	Net	Gross	Reinsurance	Net
Year ended 31 December	£000	£000	£000	£000	£000	£000
Total at beginning of year	(1,215,887)	222,672	(993,215)	(1,128,329)	265,073	(863,256)
Claims and loss adjustment expenses for the year	(698,471)	219,091	(479,380)	(498,568)	75,203	(423,365)
Cash paid for claims settled in the year	549,106	(117,582)	431,524	452,235	(131,505)	320,730
Exchange differences and other movements	(402,476)	102,122	(300,354)	(41,225)	13,901	(27,324)
Total at end of year	(1,767,728)	426,303	(1,341,425)	(1,215,887)	222,672	(993,215)

Claims reported and loss adjustment expenses	(885,905)	180,406	(705,499)	(642,252)	137,868	(504,384)
Claims incurred but not reported	(881,823)	245,897	(635,926)	(573,635)	84,804	(488,831)
Total at end of year	(1,767,728)	426,303	(1,341,425)	(1,215,887)	222,672	(993,215)

The insurance claims expense reported in the consolidated income statement is comprised as follows:

	2008	2008	2008	2007	2007	2007
	Gross	Reinsurance	Net	Gross	Reinsurance	Net
	£000	£000	£000	£000	£000	£000
Current year claims and loss adjustment expenses	(828,940)	226,808	(602,132)	(562,223)	78,953	(483,270)
(Under)/over provision in respect of prior year claims and loss adjustment expenses	130,469	(7,717)	122,752	63,655	(3,750)	59,905
Total claims and claims handling expense	(698,471)	219,091	(479,380)	(498,568)	75,203	(423,365)

17. Trade and other payables

	2008	2007
	£000	£000
Creditors arising out of direct insurance operations	35,089	30,353
Creditors arising out of reinsurance operations	175,134	114,317
	210,223	144,670

Obligations under finance leases	439	457
Share of Syndicate's other creditors' balances	2,714	2,681
Social security and other taxes payable	10,919	4,067
Other creditors	9,493	13,704
	23,565	20,909
Reinsurers' share of deferred acquisition costs	4,994	5,639
Accruals and deferred income	58,050	64,657
Total	296,832	235,875

The amounts expected to be settled after one year of the balance sheet date primarily relate to finance leases and the Group's provision of sabbatical leave employee benefits.

18. Tax expense

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

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

	2008	2007
	£000	£000
Current tax (credit) / expense	(32,341)	26,891
Deferred tax expense	66,713	19,060

	34,372	45,951

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:

	2008	2007
	£000	£000
Profit before tax	105,180	237,199

Tax calculated at the standard corporation tax rate applicable in the UK* of 28.5% (2007: 30%)**	29,976	71,160
Effects of:
Expenses not deductible for tax purposes	(1,259)	(1,296)
Group entities subject to overseas tax at lower rates	14,771	(24,843)
Tax losses for which no deferred tax asset is recognised	260	1,092
Other items	1,480	(2,064)
Change of deferred tax rate	(653)	(1,374)
Prior year tax adjustments	(10,203)	3,276

Tax charge for the period	34,372	45,951

* The principal charge to current tax arises in respect of the Group's UK subsidiaries.

**The UK corporation tax rate changed from 30% to 28% on 1 April 2008.

19. 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

	2008	2007
Profit attributable to the Company's equity holders (£000)	70,808	191,248
Weighted average number of ordinary shares (thousands)	377,506	395,308
Basic earnings per share (pence per share)	18.8p	48.4p

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.

	2008	2007
Profit attributable to Company's equity holders (£000)	70,808	191,248

Weighted average number of ordinary shares in issue (thousands)	377,506	395,308
Adjustments for share options (thousands)	13,351	13,530
Weighted average number of ordinary shares for diluted earnings per share (thousands)	390,857	408,838
Diluted earnings per share (pence per share)	18.1p	46.8p

Diluted earnings per share has been calculated after taking account of 13,003,000 (2007: 13,014,000) options and awards under employee share option and performance plan schemes and 348,000 (2007: 516,000) options under SAYE schemes.

20. Dividends paid to owners of the Company

	2008	2007
	£000	£000
Interim dividend for the year ended :
- 31 December 2008 of 4.25p (net) per share	15,615	-
- 31 December 2007 of 4.0p (net) per share	-	15,868
Final dividend for the year ended :
- 31 December 2007 of 8.0p (net) per share	31,141	-
- 31 December 2006 of 7.0p (net) per share	-	27,723
	46,756	43,591

A final dividend in respect of 2008 of 8.5p per share, amounting to a total dividend of 12.75p for the year, is to be proposed at the Annual General Meeting on 3 June 2009. These financial statements do not reflect this final dividend as a distribution or liability in accordance with IAS 10 Events after the reporting period.

21. Foreign currency items on economic hedges and intragroup borrowings

The Group has separately highlighted two separate charges on the consolidated income statement to enable readers to obtain a fuller understanding of their impact and that of related amounts recognised directly in other comprehensive income.

		Consolidated
	Consolidated	statement	Total
	income	comprehensive	economic
	Statement	income	impact
	2008	2008	2008
	£000	£000	£000
Unrealised losses on foreign currency derivative contracts used to manage retranslation risk associated with the net investment in Bermuda and Guernsey insurance operations	(42,540)	-	(42,540)
Retranslation gain on managed net investment in Bermuda and Guernsey insurance operations	-	67,591	67,591
Unrealised translation (losses) / gains on intragroup borrowings	(12,580)	12,580	-

Total (losses) / gains recognised	(55,120)	80,171	25,051

The Group recorded unrealised losses of £42,540,000 before and after tax in respect of US Dollar currency option collar contracts which were contracted in September and October 2008 to serve as informal hedges of part of the Group's net investment in its Bermuda and Guernsey insurance operations. The translated Pound Sterling value of the US Dollar capital held in these operations appreciated significantly during the year generating currency translation gains. The collar contracts acquired enabled the Group to largely protect approximately £47,568,000 of 2008 foreign exchange gains earned up to the dates at which the contracts were effected, at zero initial cost. The US Dollar continued to strengthen subsequent to the purchase of the derivatives generating further translation gains of £67,591,000. The unrealised losses are therefore viewed by the Directors as economically linked to the underlying currency translation gains recognised separately within total comprehensive income. Formal hedge accounting designation was not achievable due to the specific effectiveness requirements of IAS 39.

Foreign exchange losses of £8,463,000 before tax (£12,580,000 after tax) were recorded on certain loan arrangements, denominated in US Dollars, between Group companies. In most cases, as one party to each arrangement has a functional currency other than the US Dollar, foreign exchange losses arise which are not eliminated through the income statement on consolidation. Implicit offsetting gains are reflected instead on retranslation of counterparty company's closing balance sheet through other comprehensive income and into the Group's currency translation reserve within equity.

Note:

The Annual Report and Accounts for 2008 will be available to shareholders no later than 29 April 2009. 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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