Interim Results
Hiscox PLC
10 September 2002
Hiscox plc
Interim results for the six months to 30 June 2002
Highlights of the first six months:
Lloyd's Business Insurance Company International Total
Group Operations
6 months ended 30 June 2002 2001 2002 2001 2002 2001 2002 2001
£m £m £m £m £m £m £m £m
Gross written premium 338.6 218.5 81.5 73.8 22.2 20.8 442.3 313.1
Operating profit 4.2 (0.1) 4.9 3.2 1.7 1.7 10.8 4.8
Pre-tax profit 0.7 (0.3) 1.7 0.0 1.5 1.7 3.9 1.4
Earnings per share
Basic 1.5p 0.7p
Dividends per share (net) 1.2p -
Net assets before 178.0 145.3
equalisation provision (£m)
Net assets per share before 92.4p 98.0p
equalisation provision
• Group gross premium income up 41.3 per cent. to £442.3 million (2001:
£313.1 million) with combined ratio 101.5 per cent. (2001: 102.2 per cent.)
• Group operating profit up to £10.8 million (2001: £4.8 million)
• Pre tax profit up 172 per cent. to £3.9 million (2001: £1.4 million)
• Syndicate 33 premium income up 44.6 per cent. to £549.4 million (2001:
£380.0 million). Hiscox's share up 55.0 per cent. to £338.6 million (2001:
£218.5 million). Combined ratio 103.5 per cent. (2001: 104.9 per cent.).
Excellent trading conditions in the London Market
• Hiscox Insurance Company gross premium income up 10.5 per cent. to £81.5
million (2001: £73.8 million). Combined loss ratio 100.3 per cent. (2001:
99.1 per cent.)
• International Operations premium income increased by 6.7 per cent. to
£22.2 million (2001: £20.8 million) with operating profit steady at £1.7
million (2001: £1.7 million)
• Interim dividend of 1.2p per share
Robert Hiscox, Chairman of Hiscox plc, commented:
'Conditions in the London Market are superb. Hiscox is taking full advantage
with income well up and the loss ratio in the 2002 year of account in Syndicate
33 the lowest on record. Our retail business continues to thrive and the Hiscox
group as a whole is making great strides towards its goal to be a pre-eminent
speciality insurer.'
This summary should be read in conjunction with the detailed announcement which
follows.
For further information please contact:
Hiscox plc
Robert Hiscox/Bronek Masojada/ Stuart Bridges Tel: 020 7448 6000
The Maitland Consultancy
Philip Gawith/Suzanne Bartch Tel: 020 7379 5151
Chairman's Statement
The results for Hiscox plc ('Hiscox' or the 'Company') for the six months to 30
June 2002 are an operating profit of £10.8 million (2001: £4.8 million) and a
pre-tax profit of £3.9 million (2001: £1.4 million). Group premium income for
the period increased by 41.3 per cent. to £442.3 million (2001: £313.1 million).
Dividend
The Board decided that trading conditions merited a return to dividends and an
interim dividend of 1.2p per ordinary share (2001: nil) has been declared,
returning to the level paid in 2000. This will be paid on 24 October 2002 to
Shareholders on the register at the close of business on 27 September 2002.
Strategy
The ambition remains to build a balanced property and casualty underwriting
business. The strategy is to specialise in areas in which we have expertise and
where profits can be made. We are building the retail side of the business
through the Hiscox Insurance Company and our overseas operations to balance the
London Market business. However, conditions in the London Market are currently
the strongest for many years and we are taking full advantage of them through
Syndicate 33 at Lloyd's, so the major growth this year is in that side of the
business.
Syndicate 33 at Lloyd's
Gross premium income for the period is up 44.6 per cent. to £549.4 million
(2001: £380.0 million). Hiscox's share is up 55.0 per cent. to £338.6 million
(2001: £218.5 million). The combined ratio is down to 103.5 per cent. (2001:
104.9 per cent.)
Business is flowing to London as it fulfils its role as the prime market for
internationally traded insurance. In our experience business will always be
placed locally by preference, but if it cannot be, then London is the leading
alternative. As our competitors worldwide are suffering from an unprecedented
lack of risk appetite, our underwriters at Lloyd's are using their
entrepreneurial skills to make the traditional feast follow the famine.
As usual, I am writing this in the middle of the hurricane season so I would be
holding myself hostage to fortune to be too bullish. However, Syndicate 33 has
increased its income substantially in the first six months of 2002 compared with
2001 and the year has had an excellent start with very few claims. In addition,
our market share is up. Such a good start to the year would make a catastrophic
wind or earthquake much less painful, and it is a relief to be back at the mercy
of Mother Nature and not of man-made catastrophes as we have reduced our
exposure to terrorism.
Not only have premiums been increased substantially, but we have been reducing
exposure. Although in turn we have had to pay more for our reinsurance and
retain more exposure per risk or per catastrophe, we are nonetheless benefiting
from these increased premiums for less risk.
We own 63 per cent. of the capacity of Syndicate 33. We do not at present intend
to make a general offer for the balance, but are happy to underwrite for third
party capital, acquiring such capacity as is sold at auction for a reasonable
price.
World Trade Center
At 31 March 2002, we had advices of losses from the World Trade Center of US$543
million which we believed would reduce to an ultimate loss of US$440 million
gross, US$90 million net after reinsurance and £30 million to Hiscox plc. The
trend since has gone up as expected with the gross advices increasing a small
amount to US$576 million, at 30 August 2002. We are maintaining our net loss
position.
Expenses
The surge in income to Syndicate 33 has not been matched by an increase in staff
numbers or expenses. In 1998 the Syndicate employed 182 people to underwrite
£261.9 million in the first six months; in 2002 it has underwritten £549.4
million with 153 people.
The future
We believe that business conditions are likely to remain strong for some time in
the London Market. Worldwide insurers have problems from the past eating at
their vitals (such as asbestosis, directors and officers insurance, World Trade
Center, mould in the USA and employers' liability in the UK) which should keep
existing players constrained, and the difficult investment conditions should
discourage the arrival of new money. We believe that reinsurance prices may have
reached a ceiling in certain areas, but the market for insurance should remain
strong. Insurance is our main business, and as we both buy and underwrite
reinsurance, the effect of competition for it is less important to us. We
support the reforms at Lloyd's and believe the newly appointed Chairman will
bring an objective view to the future of the market.
Hiscox Insurance Company (HIC)
HIC has increased its income by 10.5 per cent. to £81.5 million. The increase
without discontinued lines would have been 22.3 per cent. The combined loss
ratio at the half year was 100.3 per cent. (2001: 99.1 per cent.) which should,
with normal loss expectancy, lead to the full year being within our target range
of 95-98 per cent. The UK combined ratio was 96.3 per cent. (2001: 97.6 per
cent.). The company continues to focus on the insurance of personal property of
affluent individuals and insurance of service-based businesses and professional
firms. At the beginning of the year we narrowed that focus by exiting the
insurance of property owners portfolios and commercial schemes as we felt our
capital would be better deployed in our specialist areas.
We have had to pay more for reinsurance and have had to run more risk, so it has
been important to focus the book on our preferred middle band, avoiding large
individual exposures or smaller commodity risks with catastrophe potential
without the profit to merit them.
The UK regional offices in Glasgow, Leeds and Birmingham have increased their
income by 37 per cent. to £11.4 million and HIC now has 32 per cent. of its
income coming from regional offices in the UK and mainland Europe. We hope to
continue this expansion which we believe will give us a solid base of local
business.
We consider the vital barometer of the underwriting business to be cash flow.
The investment and cash balances are up from £153.7 million to £164.2 million
over the period.
Overseas business
Our International Operations, comprising the Guernsey operations and the
European agencies, have made an operating profit overall of £1.7 million (2001:
£1.7 million).
As underwriting businesses, the European agencies have increased their premium
income by 28 per cent. to £14.7 million but the loss ratios are still not good.
They have suffered the problems endemic in all small accounts of suffering large
losses before the book is big enough, from catastrophes such as the French
storms in December 1999 and then the wind in Majorca last year to a large
individual art theft this year. They are increasing volume and rates which will
drive down their expense ratios and enable them to afford reasonably foreseeable
losses. We still prefer to grow the European business organically and have
confidence in the talent of our staff in those offices and consider that they
are sound investments for the future. We believe that there is a huge market for
our specialist lines in Europe and we are establishing a good name there and are
confident that profitable growth will follow.
The Hiscox Insurance Company (Guernsey) Limited ('HICG') has made another
healthy profit on a slightly reduced income due to timing of premium payments.
The Irish office in Dublin which specialises in construction bonds produced
another steady profit.
Investments
The investment return on Group funds for the period of £6.7 million (2001: £6.2
million) was below the assumed long-term rate. It was a difficult period for all
asset classes, but our chosen fund managers performed relatively well. The
average asset split was fixed interest 81.2 per cent., equities 9.1 per cent.,
property 3.1 per cent. and cash 6.6 per cent.
Technical funds representing the cash flow from underwriting are invested in
short dated fixed interest securities and cash. For the half year we have
returned just under 2 per cent. and should be in line to meet our full year
target.
Funds supporting underwriting are invested in a broader range of assets
including fixed interest, equities and property. All asset classes made a
positive return for the period apart from equities. The loss on equities
represented less than 1 per cent. of total Group funds.
The cash flow from underwriting to the Syndicate and HIC is significantly
stronger than in recent years, which is consistent with improving market
conditions.
Rights Issue
The Board today announced a rights issue. A prospectus containing details of the
rights issue will be posted to shareholders of the Company as soon as
practicable.
Finally
In the last year end report I said that I was looking forward to the next few
years with relish. The first six months of 2002 have exceeded my expectations
and my enthusiasm and optimism, together with that of my colleagues, for the
future of this business remains undiminished.
Robert Hiscox
10 September 2002
Consolidated Profit and Loss Account
for the six month period ended 30 June 2002
Note 6 months to 6 months to 30 Year to
30 June 2002 June 2001 31 December 2001
(unaudited) (unaudited) (audited)
£000 £000 £000
Gross premiums written 442,373 313,132 548,926
Net premiums earned 185,258 152,370 344,199
Trading profit/(loss), before movement in 19,280 10,732 (10,032)
equalisation provision
Trading profit/(loss), after movement in 17,885 9,400 (12,614)
equalisation provision
Investment income 6 8,394 7,979 15,005
Realised gains/(losses) on investments 6 281 369 126
Unrealised gains/(losses) on investments 6 (1,583) (1,787) (4,703)
Investment expenses and charges 6 (353) (332) (560)
6,739 6,229 9,868
Allocated investment return transferred to the 6 (12,231) (8,240) (18,562)
technical account
Short term fluctuations in investment return 6 (5,492) (2,011) (8,694)
Other income 2,727 2,165 3,333
Other expenses (11,186) (8,108) (14,521)
Profit/(loss) on ordinary activities before 3,934 1,446 (32,496)
tax
Comprising:
Operating profit/(loss) based on longer term 10,821 4,789 (21,220)
investment return - continuing activities
Short term fluctuations in investment return 6 (5,492) (2,011) (8,694)
Movement in equalisation provision (1,395) (1,332) (2,582)
3,934 1,446 (32,496)
Tax on profit/(loss) on ordinary activities (1,141) (433) 9,389
Profit/(loss) on ordinary activities after tax 2,793 1,013 (23,107)
Dividends - interim paid and payable 4 (2,299) - -
- final payable - - -
(2,299) - -
Retained profit/(loss) for the period 494 1,013 (23,107)
Note 6 months to 30 6 months to 30 Year to
June 2002 June 2001 31 December 2001
(unaudited) (unaudited) (audited)
£000 £000 £000
Earnings/loss per share:
- Basic, based on operating profit/(loss)
after tax (on longer term investment 3 4.0p 2.3p (10.2)p
return)
- Basic, based on profit/(loss) on
ordinary activities after tax 3 1.5p 0.7p (15.5)p
- Diluted, based on profit/(loss) on 3
ordinary activities after tax 1.4p 0.7p (15.5)p
Consolidated Statement of Total Recognised Gains and Losses
for the six month period ended 30 June 2002
6 months to 30 6 months to Year to
June 30 June 31 December
2002 2001 2001
(unaudited) (unaudited) (audited)
£000 £000 £000
Profit/(loss) on ordinary activities after tax 2,793 1,013 (23,107)
Exchange differences taken to reserves 51 86 (35)
Total recognised gains and losses 2,844 1,099 (23,142)
Consolidated Balance Sheet
at 30 June 2002
30 June 2002 30 June 2001 31 December 2001
(unaudited) (unaudited) (audited) £000
£000 £000
Note
Assets
Goodwill 6,782 7,809 6,997
Other intangible assets 16,308 17,286 16,800
Land and buildings 425 434 430
Other financial investments 378,195 241,270 344,402
Reinsurers' share of technical provisions 2 454,412 293,269 372,524
Debtors 590,134 375,757 335,735
Other assets 6,709 6,768 7,018
Cash at bank and in hand 67,321 38,703 62,520
Prepayments and accrued income 119,857 81,437 89,764
Total assets 1,640,143 1,062,733 1,236,190
Liabilities
Capital and reserves
Called up share capital 9,635 7,410 9,633
Share premium account 124,624 72,603 124,612
Merger reserve 4,723 4,723 4,723
Capital redemption reserve 33,244 33,244 33,244
Profit and loss account (6,876) 16,820 (7,421)
Shareholders' funds attributable to equity 165,350 134,800 164,791
interests
Technical provisions 2 1,244,471 789,132 874,288
Equalisation provision 12,624 10,473 11,229
Creditors 209,365 122,448 161,296
Provisions for other risks and charges 1,742 53 926
Accruals and deferred income 6,591 5,827 23,660
Total liabilities 1,640,143 1,062,733 1,236,190
Net asset value (before equalisation 92.4 98.0 91.4
provision) pence per share
Consolidated Cash Flow Statement
for the six month period ended 30 June 2002
6 months to 6 months to Year to
30 June 2002 30 June 2001 31 December 2001
(unaudited) (unaudited) (audited)
£000 £000 £000
Net cash inflow/(outflow) from general 10,753 (685) 15,295
business
Net shareholders' cash inflow/(outflow) from
Lloyd's business (23,037) (12,489) (12,489)
Net cash inflow/(outflow) from operating (12,284) (13,174) 2,806
activities
Interest paid (602) (609) (680)
Taxation recovered/(paid) 1,048 (1,014) (499)
Capital expenditure (713) (1,370) (2,774)
Acquisitions - 1,312 1,380
Equity dividends paid - - (3,453)
Financing (2,011) (463) 55,368
(14,562) (15,318) 52,148
Cash flows were invested as follows:
Increase/(decrease) in cash holding (1,062) 7,246 6,369
Net portfolio investment:
Shares and units in unit trusts 2,748 7,687 (1,937)
Debt securities and other fixed income 34,097 (10,900) 2,792
securities
Deposits with credit institutions (50,345) (19,351) 44,924
Net investment of cash flows (14,562) (15,318) 52,148
Reconciliation of operating profit/(loss) to net cash inflow/(outflow) from
operating activities:
£000 £000 £000
Operating profit/(loss) before taxation and after
interest, based on longer term investment return 10,821 4,789 (21,220)
Depreciation and amortisation of fixed assets 1,617 1,534 3,274
Increase in general insurance technical 7,788 18,743 37,115
provisions, net of reinsurance
Increase/(decrease) in amounts owed to agents 14,516 5,324 (6,280)
(Increase)/decrease in amounts owed by agents (7,197) (20,689) (4,713)
(Increase)/decrease in other debtors (5,253) (9,644) (35,779)
Increase/(decrease) in other creditors (5,539) (212) 12,775
Realised and unrealised investment (gains)/losses 2,139 1,993 5,991
Short term fluctuations in investment return (5,492) (2,011) (8,694)
Interest expense 564 681 1,099
Cash received from/(paid to) Lloyd's business (23,037) (12,489) (12,489)
(Profits)/losses relating to Lloyd's business (3,017) (1,157) 31,641
Other non-cash transactions (194) (36) 86
Net cash inflow/(outflow) from operating (12,284) (13,174) 2,806
activities
Segmental Information
6 months to 30 June 2002 (unaudited)
Lloyd's
Business/ Insurance International
Group Company Operations Total
£000 £000 £000 £000
Profit/(loss) on ordinary activities before
taxation
Gross premiums written 338,623 81,536 22,214 442,373
Net premiums earned 108,012 65,903 11,343 185,258
Investment return based on longer term rate 6,931 4,744 556 12,231
of return
Net claims incurred (65,773) (37,195) (1,247) (104,215)
Acquisition costs (37,546) (20,509) (9,014) (67,069)
Administration expenses (4,668) (7,995) (227) (12,890)
Other technical income/(expenses) (902) - - (902)
Trading result 6,054 4,948 1,411 12,413
Agency and other income 2,160 - 6,867 9,027
Profit commission 567 - - 567
Expenses (3,357) - (6,534) (9,891)
Loan interest (587) - - (587)
Goodwill and capacity amortisation (686) (22) - (708)
Operating profit/(loss) 4,151 4,926 1,744 10,821
Short term fluctuations in investment return (3,420) (1,828) (244) (5,492)
Equalisation provision - (1,395) - (1,395)
Pre tax profit/(loss) 731 1,703 1,500 3,934
Net assets
Tangible assets 66,402 73,562 2,296 142,260
Intangible assets 22,356 734 - 23,090
Total 88,758 74,296 2,296 165,350
Managed Insurance International
Syndicate Company Operations Total
100% level combined ratio 103.5% 100.3% 90.1% 101.5%
6 months to 30 June 2001 (unaudited)
Lloyd's
Business/ Insurance International
Group Company Operations Total
£000 £000 £000 £000
Profit/(loss) on ordinary activities
before taxation
Gross premiums written 218,503 73,801 20,828 313,132
Net premiums earned 84,484 58,020 9,866 152,370
Investment return based on longer term 4,469 3,452 319 8,240
rate of return
Net claims incurred (52,672) (31,518) (19) (84,209)
Acquisition costs (30,889) (18,848) (8,484) (58,221)
Administration expenses (2,977) (7,899) (237) (11,113)
Other technical income/(expenses) (747) - 85 (662)
Trading result 1,668 3,207 1,530 6,405
Agency and other income 1,949 - 4,465 6,414
Profit commission 78 - - 78
Expenses (2,408) - (4,337) (6,745)
Loan interest (681) - - (681)
Goodwill and capacity amortisation (682) - - (682)
Operating profit/(loss) (76) 3,207 1,658 4,789
Short term fluctuations in investment (174) (1,853) 16 (2,011)
return
Equalisation provision - (1,332) - (1,332)
Pre tax profit/(loss) (250) 22 1,674 1,446
Net assets
Tangible assets 55,943 53,351 411 109,705
Intangible assets 25,095 - - 25,095
Total 81,038 53,351 411 134,800
Managed Insurance International
Syndicate Company Operations Total
100% level combined ratio 104.9% 99.1% 88.1% 102.2%
Year to 31 December 2001 (audited)
Lloyd's
Business/ Insurance International
Group Company Operations
£000 £000 £000 Total
£000
Profit/(loss) on ordinary activities before
taxation
Gross premiums written 336,193 163,861 48,872 548,926
Net premiums earned 192,126 126,578 25,495 344,199
Investment return based on longer term rate
of return 10,407 7,093 1,062 18,562
Net claims incurred (158,966) (67,461) (6,328) (232,755)
Acquisition costs (64,514) (40,309) (17,452) (122,275)
Administration expenses (5,900) (18,842) (495) (25,237)
Other technical income/(expenses) 1,324 - - 1,324
Trading result (25,523) 7,059 2,282 (16,182)
Agency and other income 3,173 1 6,150 9,324
Profit commission 159 - - 159
Expenses (5,258) - (6,754) (12,012)
Loan interest (1,099) - - (1,099)
Goodwill and capacity amortisation (1,370) (40) - (1,410)
Operating profit/(loss) (29,918) 7,020 1,678 (21,220)
Short term fluctuations in investment return (3,990) (4,184) (520) (8,694)
Equalisation provision - (2,582) - (2,582)
Pre tax profit/(loss) (33,908) 254 1,158 (32,496)
Net assets
Tangible assets 68,599 72,727 (332) 140,994
Intangible assets 23,043 754 - 23,797
Total 91,642 73,481 (332) 164,791
Managed Insurance International
Syndicate Company Operations Total
100% level combined ratio 115.9% 97.8% 96.8% 109.9%
Net asset value per share
6 months to 30 June 2002 (unaudited)
Net asset Number of NAV
value shares* per share
£000 000 p
Net asset value 165,350 192,696 85.8
Net asset value (before equalisation provision) 177,974 192,696 92.4
Net tangible asset value 142,260 192,696 73.8
Net tangible asset value (before equalisation 154,884 192,696 80.4
provision)
6 months to 30 June 2001 (unaudited)
Net asset Number NAV
value of shares* per share
£000 000 p
Net asset value 134,800 148,200 91.0
Net asset value (before equalisation provision) 145,273 148,200 98.0
Net tangible asset value 109,705 148,200 74.0
Net tangible asset value (before equalisation 120,178 148,200 81.1
provision)
Year to 31 December 2001 (audited)
Net asset Number NAV
value of shares* per share
£000 000 p
Net asset value 164,791 192,667 85.5
Net asset value (before equalisation provision) 176,020 192,667 91.4
Net tangible asset value 140,994 192,667 73.2
Net tangible asset value (before equalisation 152,223 192,667 79.0
provision)
*The number of shares is the number of shares in issue as at 30 June or 31
December of the relevant financial period.
Notes to Interim Accounts
1. Basis of preparation
Except for the adoption of Financial Reporting Standard ('FRS') 19 'Deferred
Tax' during the period, the unaudited interim accounts have been prepared on the
basis of accounting policies consistent with those set out in the Group's 2001
Report and Accounts. The adoption of FRS 19 has had no material impact on the
current period's results.
In accordance with the provisions relating to insurance companies under Schedule
9a of the Companies Act 1985, the accounts include the transactions, assets and
liabilities of Syndicate 33 on which certain subsidiary companies participate as
corporate members of Lloyd's, accounted for on an annual basis.
The unaudited interim statements, the comparative figures for the year ended 31
December 2001 and the financial information contained in these interim results,
do not constitute statutory accounts of the Group within the meaning of Section
240 of the Companies Act 1985.
The auditors have reported on the Report and Accounts for the year ended 31
December 2001, their report was not qualified and did not contain a statement
under Section 237(2) or (3) of the Companies Act 1985.
2. World Trade Center
The Group's exposure to losses arising from the terrorist attack of 11 September
2001 arises almost entirely from its participation in Syndicate 33. HIC and HICG
have had a negligible loss from this event. The situation is unprecedented and
as such the extent of the gross and net loss to the Group is difficult to assess
with the degree of confidence which is usual for insurance losses; facts or
circumstances will come to light which may affect these estimates. The current
projected estimate of net loss to Hiscox is £30 million for which provision was
made in the 2001 financial statements.
The Group has exposure to losses on a number of non-liability accounts, in
particular direct property, risk excess, catastrophe and aviation hull. Aviation
hull losses have already largely been settled. There is no significant liability
exposure.
As part of the process for the setting of the loss reserves, the directors have
undertaken a comprehensive review of the Group's exposure in respect of
insurance and reinsurance policies issued by Syndicate 33 to identify all those
exposed directly or indirectly to losses from the events of 11 September 2001.
This review has been supplemented by details of the notifications received from
the XChanging Claims Services (formerly the Lloyd's Claims Office) which
amounted to US$576 million as at 30 August 2002. Hiscox has considered the
insureds' computations of their own losses. The directors of Hiscox plc believe
that the insureds' computations are likely to prove unreliable. Hiscox has
estimated what the directors believe is an appropriate discount or premium to
these notifications, based on their past experience of large property losses and
additional information received.
The reserve required for the Group's direct property exposure is sensitive to
assumptions about the quantum of property damage and business interruption costs
and to the legal issues relating to the cover provided by certain insurance
policies. In reserving for these claims, the directors have taken account of
settlement patterns experienced on previous large property losses, where final
claims settlements are usually considerably lower than initial market estimates.
Hiscox largely participates on the higher layers of risk excess policies. In
certain cases, the property damage element of the claim falls well below the
excess point. Certain market notifications relating to these property
reinsurances have been made on a total loss basis which are without merit on the
basis of information which is currently available. The directors consider it
likely that in such cases, the final settlement will fall below the excess point
so that Hiscox will incur no loss. The directors have nevertheless, where
appropriate, established a precautionary reserve in these cases on the
assumption that a part payment may be made, although this may be lower than the
notification which is for a total loss on the layer.
The extent to which losses arise from property risk excess and catastrophe
reinsurance policies vary, particularly if a wide definition of business
interruption is adopted. Provision has been made for property and business
interruption losses known to have occurred in the immediate vicinity of the WTC.
Remoter losses have not been provided for.
The current total estimated gross loss to Syndicate 33 is approximately US$440
million. Syndicate 33 expects to recover from its reinsurance protections
approximately US$350 million, net of reinstatement premiums payable to
reinsurers to reinstate cover for future losses, resulting in a net loss of
approximately US$90 million to Syndicate 33. In arriving at this estimate it has
been assumed that the terrorist attack in New York City on 11 September 2001 was
one occurrence and also that the aircraft impacts on the WTC are one occurrence
in respect of the property losses. In the unlikely event that Syndicate 33's
loss increases by a further US$100 million, and assuming there are no further
reinsurance recoveries, the net cost to Hiscox plc would increase by
approximately £35 million. No account has been taken for any potential
subrogation.
As at 30 August 2002, 97 per cent. of Syndicate 33's WTC reinsurance is placed
with counterparties which are rated A grade or better and 64 per cent. of the
total is placed with companies rated AA or AAA. 89 per cent. of this reinsurance
is placed outside Lloyd's. Syndicate 33 has made a general provision for bad
debts of US$4.5 million against their reinsurance recoveries in relation to the
WTC losses. It has been assumed that no major reinsurer will fail. Syndicate 33
has already collected 38 per cent. of this reinsurance in the form of letters of
credit or cash advances as part of our required funding of the US Trust Funds.
Syndicate 33 has had no need to make a cash call.
3. Earnings per share
Earnings per share on operating profit are based on the operating profit after
taxation of £7,575,000 (2001: £3,353,000) and on the average number of shares in
issue during the current period of 191,592,000 (2001: 146,052,550).
Earnings per share on ordinary activities are based on the profit after taxation
of £2,793,000 (2001: £1,013,000) and on the average number of shares in issue
during the current period of 191,592,000 (2001: 146,052,550).
Fully diluted earnings per share on ordinary activities are based on the profit
after taxation of £2,793,000 (2001: £1,013,000) and on the average number of
shares in issue during the period of 193,724,000 (2001: 148,084,399), taking
into account the options outstanding under the Employee Option Schemes.
4. Dividends
An interim dividend of 1.2p (net) per Ordinary Share has been declared payable
on 24 October 2002 to shareholders registered on 27 September 2002 in respect of
the six months to 30 June 2002 (30 June 2001: Nil per Ordinary Share).
5. 100 per cent. level Technical Account
The underwriting activities which are managed by the Group are shown below at
the 100 per cent. level regardless of ownership of capacity.
6 months to 30 June 2002 (unaudited)
Managed Insurance International Total
Syndicate Company £000 Operations £000 £000
£000
Gross premiums written 549,381 81,536 22,214 653,131
Net premiums written 266,523 67,574 11,113 345,210
Net premiums earned 176,158 65,903 11,343 253,404
Net claims incurred 108,790 37,195 1,247 147,232
Claims ratio (%) 61.8% 56.4% 11.0% 58.1%
Commission 91,715 21,673 8,567 121,955
Operating expenses 19,568 7,995 227 27,790
Movement in deferred acquisition costs (42,837) (1,164) 447 (43,554)
Net expenses 68,446 28,504 9,241 106,191
Commission ratio (%) 34.4% 32.1% 77.1% 35.3%
Operating expense ratio (%) 7.3% 11.8% 2.0% 8.1%
Expense ratio (%) 41.7% 43.9% 79.1% 43.4%
Net longer term investment return 7,496 4,744 556 12,796
Technical profit/(loss) 6,418 4,948 1,411 12,777
Combined ratio (%) 103.5% 100.3% 90.1% 101.5%
6 months to 30 June 2001 (unaudited)
Managed Insurance International
Syndicate Company Operations Total
£000 £000 £000 £000
Gross premiums written 380,046 73,801 20,828 474,675
Net premiums written 211,654 65,597 11,244 288,495
Net premiums earned 153,021 58,020 9,866 220,907
Net claims incurred 97,062 31,518 19 128,599
Claims ratio (%) 63.4% 54.3% 0.2% 58.2%
Commission 70,251 21,510 9,641 101,402
Operating expenses 17,519 7,899 237 25,655
Movement in deferred acquisition costs (26,014) (2,662) (1,157) (29,833)
Net expenses 61,756 26,747 8,721 97,224
Commission ratio (%) 33.2% 32.8% 85.8% 35.1%
Operating expense ratio (%) 8.3% 12.0% 2.1% 8.9%
Expense ratio (%) 41.5% 44.8% 87.9% 44.0%
Net longer term investment return 6,085 3,452 319 9,856
Technical profit/(loss) 288 3,207 1,445 4,940
Combined ratio (%) 104.9% 99.1% 88.1% 102.2%
6. Investment return
(a) The total actual investment return comprises:
6 months to 6 months to Year to
30 June 2002 30 June 2001 31 December 2001
(unaudited) (unaudited) (audited)
£000 £000 £000
Investment return on funds at Lloyd's and other
corporate funds:
Investment income 2,111 1,882 3,507
Unrealised gains/(losses) on investments (982) (412) (2,775)
Realised gains/(losses) on investments (238) 73 115
891 1,543 847
Investment return on syndicate funds:
Investment income 2,298 2,728 5,045
Realised gains/(losses) on investments 837 575 1,404
3,135 3,303 6,449
Investment return on insurance company funds:
Investment income 3,985 3,369 6,453
Unrealised gains/(losses) on investments (601) (1,375) (1,928)
Realised gains/(losses) on investments (318) (279) (1,393)
3,066 1,715 3,132
Investment management expenses (353) (332) (560)
Total investment return 6,739 6,229 9,868
Allocation to the technical account based on (12,231) (8,240) (18,562)
the longer term rate
Short term fluctuations in investment return (5,492) (2,011) (8,694)
retained in the non-technical account
(b) Longer term investment return
The longer term return is based on a combination of historical experience and
current expectations for each category of investments. The longer term return is
calculated by applying the following yields to the weighted average of each
category of assets.
6 months to 6 months to Year to 31
30 June 30 June December
2002 2001 2001
(%) (%) (%)
Shares and units in unit trusts 7.0 7.0 7.0
Debt securities and other fixed interest 6.0 6.0 6.0
securities
Deposits with credit institutions 6.0 6.0 6.0
(c) Comparison of longer term investment return with actual returns
The actual return on investments is compared below with the longer term
investment return.
6 months to 30 June 2002 (unaudited)
Funds at Lloyd's and
other Corporate Assets Share of Syndicate Insurance Company Total
£000 % £000 % £000 % £000
Actual investment return:
Shares and units in unit (856) (5.8) 151 10.0 (476) (5.8) (1,181)
trusts
Debt securities and other 949 6.9 2,730 4.0 2,822 5.2 6,501
fixed interest securities
Deposits with credit 739 3.6 110 3.7 570 3.2 1,419
institutions
832 2,991 2,916 6,739
Longer term investment
return:
Shares and units in unit 1,034 7.0 106 7.0 568 7.0 1,708
trusts
Debt securities and other 826 6.0 4,095 6.0 3,214 6.0 8,135
fixed interest securities
Deposits with credit 1,246 6.0 180 6.0 962 6.0 2,388
institutions
3,106 4,381 4,744 12,231
Short term fluctuations
in investment return (2,274) (1,390) (1,828) (5,492)
6 months to 30 June 2001 (unaudited)
Funds at Lloyd's and
other Corporate Assets Share of Syndicate Insurance Company Total
£000 % £000 % £000 % £000
Actual investment return:
Shares and units in unit 232 1.6 96 5.9 (772) (6.4) (444)
trusts
Debt securities and other 682 4.3 1,842 8.2 2,094 5.5 4,618
fixed interest securities
Deposits with credit 522 4.2 394 3.9 277 5.1 1,193
institutions
Other - 0.0 862 12.2 - 0.0 862
1,436 3,194 1,599 6,229
Longer term investment
return:
Shares and units in unit 1,040 7.0 114 7.0 850 7.0 2,004
trusts
Debt securities and other 944 6.0 1,345 6.0 2,292 6.0 4,581
fixed interest securities
Deposits with credit 739 6.0 606 6.0 310 6.0 1,655
institutions
Other - 0.0 - 0.0 - 0.0 -
2,723 2,065 3,452 8,240
Short term fluctuations
in investment return (1,287) 1,129 (1,853) (2,011)
Independent Review Report by KPMG Audit Plc to Hiscox plc
Introduction
We have been instructed by the Company to review the financial information for
the six months ended 30 June 2002 which comprises the consolidated profit and
loss account, the consolidated statement of total recognised gains and losses,
the consolidated balance sheet, the consolidated cash flow statement, the
segmental information and related notes 1 to 6. We have read the other
information contained in the interim report and considered whether it contains
any apparent misstatements or material inconsistencies with the financial
information.
Directors' responsibilities
The interim report, including the financial information contained therein, is
the responsibility of, and has been approved by, the directors. The directors
are responsible for preparing the interim report in accordance with the Listing
Rules of the Financial Services Authority which require that the accounting
policies and presentation applied to the interim figures should be consistent
with those applied in preparing the preceding annual accounts except where they
are to be changed in the next annual accounts in which case any changes, and the
reasons for them, are to be disclosed.
Review work performed
We conducted our review in accordance with guidance contained in Bulletin 1999/
4: Review of interim financial information issued by the Auditing Practices
Board for use in the United Kingdom. A review consists principally of making
enquiries of Group management and applying analytical procedures to the
financial information and underlying financial data and, based thereon,
assessing whether the accounting policies and presentation have been
consistently applied unless otherwise disclosed. A review is substantially less
in scope than an audit performed in accordance with Auditing Standards and
therefore provides a lower level of assurance than an audit. Accordingly we do
not express an audit opinion on the financial information.
Fundamental uncertainty
In forming our review conclusion, we have considered the adequacy of the
disclosures made in the financial information concerning the material exposure
that the Group faces to the terrorist attack in the United States of America on
11 September 2001. Details of the circumstances relating to this uncertainty are
described in note 2.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 30 June 2002.
KPMG Audit Plc
Chartered Accountants
London
10 September 2002
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