Interim Results

Hiscox PLC 11 September 2006 Hiscox plc Interim Results for the six months ended 30 June 2006 'Strong growth for the group and a good start for our two new ventures in Bermuda and the USA.' HY 2006 HY 2005 Gross premiums written Â£625.1 million Â£437.2 million Profit before tax Â£61.3 million Â£88.1 million Earnings per share 12.1p 20.2p Dividend per share 3.0p 2.25p Net asset value per share 149.8p 143.3p Combined ratio 93.2% 83.5% Highlights â€¢ Gross premiums written increased 43% to Â£625.1 million â€¢ Profit before tax of Â£61.3 million â€¢ Profit before tax excluding currency exchange movements Â£64.7 million (2005: Â£51.2m) â€¢ Group combined ratio adjusted for currency exchange on unearned premiums and deferred acquisition costs 89.5% (2005: 89.6%) â€¢ Strong start for Hiscox Bermuda and Hiscox USA â€¢ Global Markets achieving high rates for catastrophe exposed risks â€¢ Increase in demand for UK household and commercial insurance following additional advertising spend â€¢ Planned re-domicile to Bermuda anticipated to yield long-term benefits. Robert Hiscox, Chairman Hiscox plc, commented: 'It was a good first half with strong growth fuelled by high rates for all business exposed to catastrophes, helped by steady growth from our retail non-catastrophe business. The successful start of our new ventures in Bermuda and the USA have strengthened our strategy of international spread, and balance between high-risk and low-risk specialist insurance.' This summary should be read in conjunction with the detailed announcement which follows. For further information: Hiscox plc Robert Hiscox Chairman 020 7448 6011 Bronek Masojada Chief Executive 020 7448 6012 Stuart Bridges Finance Director 020 7448 6013 Maitland Philip Gawith 020 7379 5151 Suzanne Bartch 020 7379 5151 Notes to editors About Hiscox plc Hiscox plc 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 offshore operations in Bermuda and Guernsey and Hiscox USA. For further information, visit www.hiscox.com Chairman's Statement The first half of 2006 has seen considerable growth in premium income together with strong starts by our two new ventures, Hiscox Bermuda and Hiscox USA, in Armonk, NY. Our well-received TV advertising campaign in the UK has strengthened demand for our specialist products through all channels. We now have an excellent well-balanced and international spread of distribution channels to continue to grow the business profitably in its specialist areas. Results The results for the half-year to 30th June 2006 were a profit before tax of Â£61.3 million (2005: Â£88.1m). Gross written premium income increased 43% to Â£625.1 million (2005: Â£437.2m) and net earned income increased 16% to Â£401.7 million (2005: Â£345.7m). The group combined ratio was 93.2% (2005: 83.5%). Earnings per share were 12.1p (2005: 20.2p) and net assets per share rose to 149.8p (2005: 143.3p). Dividend The Board stated at the 2005 year-end that it would recommend a total dividend of 9.0p for 2006 subject to profitability. We will pay an interim dividend of 3.0p (net) per ordinary share (2005: 2.25p) on 23rd October 2006 to shareholders on the register at the close of business on 29th September 2006. Overall comment The profit of the group is up year on year without currency exchange movements. The currency impact this half year was a small loss of Â£3.4 million compared with a substantial gain of Â£36.9 million during the same period in 2005. This underlying improvement was achieved despite considerable investment in start-up costs and advertising spend, but these will yield strong returns in the future. The increase in written premium income is highly satisfactory. The increase in earned premium is less than the written premium due to the usual accounting delay in a growing account and also to the underwriters of catastrophe business delaying commitment as rates were rising. This should improve earnings in the second half of the year. I am writing this as always in the middle of the wind season so do not want to say anything that will look ridiculous in a few weeks time, but even if Mother Nature does choose to subject us to the same onslaught as in 2005, the catastrophe account should do better than last year as we have received much more money for the same risk. The rates for business in obvious catastrophe zones have strengthened throughout the period, but this has been offset by increasing competition for non-catastrophe exposed business. Overall, however, conditions are good. Our strategy remains to underwrite the more volatile big risk and catastrophe business through Lloyd's in London and through Hiscox Bermuda, and to balance it with less volatile retail business through our regional offices in the UK and Europe, through Guernsey and the USA, and through our direct operations. International Our International business covers our new operations in Bermuda and the USA, as well as our established operation in Guernsey. Hiscox Bermuda was boosted by having Robert Childs, our Chief Underwriting Officer, as its leader. (I was always told that rule number one for opening an overseas office was don't, and if you chose to break rule one, rule number two was to send one of your most senior people as it is the most difficult thing you will ever do. We have obeyed rule two to great benefit). Hiscox Bermuda is on target to write its annual budget of $325 million. Hiscox USA, led by Ed Donnelly, opened for business in March 2006 and has got off to a storming start. Ed has recruited an impressive team and has already increased his annual forecast for this year from $15 million to $25 million. I know it does not sound a lot compared with $325 million for Bermuda, but retail business has to be won by relatively small premium by small premium. Its advantage is less volatility in risk and retention. We definitely believe that this is an acorn which will grow into a substantial oak tree. Hiscox Guernsey produced another excellent profit which helped to give the international division an overall combined ratio of 83.9% despite start-up costs. Global Markets This division underwrites London Market risks and the bigger retail risks and those international retail risks for which we need to use the Lloyd's licences. Its catastrophe book is written in addition to the Hiscox Bermuda book, which widens the spread of the account and balances the risk across the Group. This division's results are dominated by its catastrophe book and, as we announced in our recent trading statement, last year's hurricanes have produced more claims during the period. Overall our reserves were flat despite strengthening the hurricane reserves by about Â£10 million, predominantly for Hurricane Wilma. The combined ratio was 93.3% (2005: 80.5%) on an increased written premium income of Â£390.8 million (2005: Â£287.2m). Earned income at Â£256.1 million (2005: Â£217.2m) has increased less than written premium due to the accounting delay from strong growth and the underwriters waiting to write reinsurance business until later in the period. This has, together with the currency movement, increased the combined ratio. The earnings should, of course, show through more strongly in the second half. The London Market is still the principal centre for internationally traded risks, and our underwriters get a very good showing of the business that comes to London. We also have Global Market offices in the USA and Paris to market our global underwriting abilities more widely. Rates are strong for any risks exposed to catastrophes but competition is growing fiercer for other risks. Fortunately we have specialist books of business built up over many years which insulate us to an extent, but the cycle is interestingly split with some rates going down and some up. As announced recently, we are in discussions with investors on the formation of an independent reinsurer (a 'sidecar') to reinsure exclusively the Syndicate 33 catastrophe account. This would allow us to expand our capacity for this business next year whilst controlling our risk. UK and Europe This division covers our retail business in UK and Europe together with some of our international art and specie account. Specie business is the insurance of valuable commodities such as cash and gold, which we underwrite with the art account. The UK figures in the period have been affected by some large specie losses which together with the advertising spend increased the combined ratio to 95.2% (2005: 90.2%). The UK combined written premium income was up 8.8% to Â£112.2 million (2005: Â£103.1m) but in that overall figure, the Direct account grew 75% and the Specie account reduced by 57%. Competition has increased and put pressure on the rates. (We are reaching the stage in the cycle when Chief Executives state in public that their company will not reduce rates, while demanding in private more income from their troops. The troops cut the rates). However, our commercial products are sufficiently specialist to make entry into the market by foolish and uneconomic competitors difficult. We have also concentrated on smaller risks where there is less competition. In art and household business, we have an established reputation and expertise and we do not compete on price alone but with our rapid service and sympathetic claims payment as well. The great majority of our business comes through brokers. In addition, we have developed a growing direct account for both household and commercial policies with good underlying underwriting margins before start-up and marketing costs. Once the direct operation had proved itself in its technology and underwriting, the time came to step up the marketing, culminating in the UK television advertising earlier this year which is being repeated during September. Demand surged following the last run of advertisements, and has settled 50% above the pre-campaign level. Brokers also reported a greater ease of selling our policies, so, combined with the strengthening of the Hiscox brand, the early stages of this campaign have proved a great success. Our direct activities complement our broker account. More and more clients want to buy direct insurance and our policies must be available to those who want them through whatever channel they choose. Some brokers are using our direct technology to market smaller risks, which we believe is the future. Our European income was static but remained profitable. The new European management is strengthening the teams and progress will be made. Investments We achieved an annualised return on investments of 3.3% in the period despite difficult bond and equity markets in May and June. Cash and investments have grown by 35% to Â£1,678 million at 30 June 2006 (2005: Â£1,239m) augmented by our rights issue, increased borrowings and strong cashflow from trading. We continue to keep the portfolio balanced taking relatively little risk with short duration and high credit quality on the bonds and a continued weighting of 7-8% in equities. Our investment in Bermuda has been retained in cash and short dated bonds to protect the capital there and the US dollar exposure hedged to limit any effects on group net assets. The investment policy has served us well in the period as interest rates in major currencies rose. We will take increased risk in the portfolio where we believe the reward is justified but are currently happy to sit and wait for advantageous conditions. Re-domicile In 2005 when we established Hiscox Bermuda we stated that as such a substantial amount of the Group's business could originate from the Bermudan and US markets it may be in shareholders' interests to move the domicile of Hiscox's parent company to Bermuda. Since then the Board has been examining this proposal and following the completion of detailed work, the Board has concluded that there are significant advantages in moving the Group's domicile to Bermuda. Accordingly the Board has approved a corporate re-organisation which will introduce a new Bermuda domiciled holding company, Hiscox Ltd ('New Hiscox Bermuda') for the Group. In effect a shareholder will receive new shares in New Hiscox Bermuda in place of the equilavent number of their existing shares in Hiscox plc. New Hiscox Bermuda will be listed on the Official List of the London Stock Exchange in place of Hiscox plc and is expected to replace Hiscox plc as a member of the FTSE 250 Index. It is not expected that Hiscox's existing dividend policy would be affected and shareholders would have the right to elect to receive UK sourced dividends. The corporate re-organisation should also be neutral in tax terms for UK resident shareholders. The re-domicile is subject to a number of regulatory approvals. A circular setting out how the corporate re-organisation will be effected will be sent to shareholders in due course. Conclusion Hiscox Bermuda and Hiscox USA have added two more solid building blocks to the foundations of the Group. Our existing foundation blocks of Global Markets, UK (including direct), Europe and Guernsey are all in robust shape. A move of our domicile to Bermuda should increase the earnings and add to our international status. Creative underwriting, combined with efficient service and rapid and fair claims settlement, are together building a distinctive brand which will be supported by strong marketing in the second half of the year. I wrote in last year's full year results that I was confident that we were entering a new era of profitable growth, and my confidence remains undiminished. Robert Hiscox Chairman 11 September 2006 Condensed consolidated interim income statement for the six month period ended 30 June 2006 6 months to 6 months to Year to 30 June 2006 30 June 2005 31 Dec 2005 Notes (unaudited) (unaudited) (audited) Â£000 Â£000 Â£000 ------------------------------------------------------------------------------ Income Gross premiums written 625,152 437,160 861,174 Net premiums written 504,703 345,047 681,236 Net premiums earned 401,662 345,668 693,299 ------------------------------------------------------------------------------- Investment return 7 44,375 20,368 43,883 Other revenues 8 6,876 52,095 81,297 ------------------------------------------------------------------------------- Net revenue 452,913 418,131 818,479 -------------------------------------------------------------------------------- Expenses Claims and claim adjustment expenses, net of reinsurance 10 (198,050) (186,207) (457,025) Expenses for the acquisition of insurance contracts (107,989) (99,378) (199,979) Administration expenses (26,970) (17,779) (41,197) Other costs and expenses 8 (53,736) (25,789) (46,973) -------------------------------------------------------------------------------- Total expenses (386,745) (329,153) (745,174) -------------------------------------------------------------------------------- Results of operating activities 66,168 88,978 73,305 Finance costs 9 (4,824) (1,009) (3,334) Share of profit /(loss) of associates after tax 5 151 250 -------------------------------------------------------------------------------- Profit before tax 61,349 88,120 70,221 Tax expense (14,029) (27,040) (21,591) -------------------------------------------------------------------------------- Profit for the period (all attributable to equity shareholders of the Company) 47,320 61,080 48,630 -------------------------------------------------------------------------------- Earnings per share on attributable shareholders of the Company Basic 11 12.1p 20.2p 15.6p Diluted 11 11.9p 20.0p 15.1p The notes of the condensed consolidated interim financial statements are an integral part of this document. Condensed consolidated interim balance sheet at 30 June 2006 Notes 30 June 2006 30 June 2005 31 Dec 2005 (unaudited) (unaudited) (audited) Â£000 Â£000 Â£000 ------------------------------------------------------------------------------ Assets Intangible assets 33,016 32,370 33,099 Property, plant and equipment 12,891 10,837 12,128 Investments in associates 23 1,013 18 Deferred acquisition costs 128,898 114,875 106,747 Financial assets 13 1,210,543 1,037,993 1,237,778 Loans and receivables including insurance receivables 464,522 330,996 436,981 Deferred tax 13,129 - - Reinsurance contract receivables 435,094 290,342 506,376 Cash and cash equivalents 13 467,904 200,919 413,759 ------------------------------------------------------------------------------ Total assets 2,766,020 2,019,345 2,746,886 ------------------------------------------------------------------------------ Equity and liabilities Shareholders' equity Share capital 19,649 14,717 19,570 Share premium 403,259 234,899 401,365 Other reserves 16,705 37,823 38,789 Retained earnings 148,750 134,246 118,289 ------------------------------------------------------------------------------ Total equity 588,363 421,685 578,013 ------------------------------------------------------------------------------ Employee retirement benefit obligations 17,308 25,964 16,677 Deferred tax - 33,322 15,193 Insurance contracts 1,769,644 1,373,869 1,723,000 Financial liabilities 115,064 2,167 126,246 Current tax 44,264 12,750 16,581 Trade and other payables 231,377 149,588 271,176 ------------------------------------------------------------------------------ Total liabilities 2,177,657 1,597,660 2,168,873 ------------------------------------------------------------------------------ Total equity and liabilities 2,766,020 2,019,345 2,746,886 ------------------------------------------------------------------------------ The notes to the condensed consolidated interim financial statements are an integral part of this document. Condensed consolidated interim statement of changes in equity for the six month period ended 30 June 2006 Currency Capital Share Share Merger translation redemption Retained 2006 2005 Capital Premium Reserve reserve reserve earnings Total Total (unaudited)(unaudited)(unaudited) (unaudited) (unaudited)(unaudited)(unaudited)(unaudited) Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 ------------------------------------------------------------------------------------------------ Balance at 1 January 19,570 401,365 4,723 822 33,244 118,289 578,013 368,826 Currency translation differences - - - (22,084) - - (22,084) 324 ------------------------------------------------------------------------------------------------- Net income recognised directly in equity - - - (22,084) - - (22,084) 324 Profit for the period - - - - - 47,320 47,320 61,080 ------------------------------------------------------------------------------------------------ Total recognised income for the period - - - (22,084) - 47,320 25,236 61,404 Employee share options : Equity settled share-based - - - - - 1,780 1,780 825 payments Proceeds from 79 1,894 - - - - 1,973 664 shares issued Change in own - - - - - - - 252 shares Dividends to equity shareholders (note 12) - - - - - (18,639) (18,639) (10,286) ------------------------------------------------------------------------------------------------- Balance at 30 June 19,649 403,259 4,723 (21,262) 33,244 148,750 588,363 421,685 ------------------------------------------------------------------------------------------------ The notes to the condensed consolidated interim financial statements are an integral part of this document. Condensed consolidated interim cash flow statement for the six month period ended 30 June 2006 Notes 6 months to 6 months to Year to 30 June 2006 30 June 2005 31 Dec 2005 (unaudited) (unaudited) (audited) Â£000 Â£000 Â£000 ------------------------------------------------------------------------------- Profit before tax 61,349 88,120 70,221 Interest and equity dividends received (33,339) (22,236) (48,072) Net (gains)/losses on financial assets 4,967 (836) 4,289 Retirement benefit charges in excess of contributions paid 631 (8,754) (18,041) Depreciation 1,800 1,534 3,281 Charges in respect of share based payments 1,780 826 2,059 Other non-cash charges (24,618) (481) 690 Changes in operational assets and liabilities: Insurance and reinsurance contracts 69,019 71,650 212,462 Financial assets 16 19,844 (54,259) (256,280) Other assets and liabilities (20,819) (493) 13,048 ------------------------------------------------------------------------------ Cash generated from operations 80,614 75,071 (16,343) Interest received 32,892 20,907 46,844 Equity dividends received 447 1,329 1,228 Interest paid (2,409) (774) (2,573) Current tax paid (14,668) (3,339) (10,239) ------------------------------------------------------------------------------- Net cash flows from operating activities 96,876 93,194 18,917 Cash flows from the acquisition and sale of subsidiaries and associates - - 3,750 Cash flows from the sale/(purchase) of property, plant and equipment (2,534) (1,530) (4,474) Cash flows from the purchase of intangible assets - (2,401) (3,277) Loans repaid by related parties - - 1,580 ------------------------------------------------------------------------------ Net cash used in investing activities (2,534) (3,931) (2,421) Proceeds from the issue of ordinary shares 1,973 664 171,983 Proceeds from the sale of treasury shares - 252 192 Dividends paid to company's shareholders 12 (18,639) (10,286) (16,917) Proceeds from borrowings - - 121,133 Repayments of borrowings (319) (233) (102) -------------------------------------------------------------------------------- Net cash flows from financing activities (16,985) (9,603) 276,289 ------------------------------------------------------------------------------ Net increase in cash and cash equivalents 77,357 79,660 292,785 ------------------------------------------------------------------------------ Cash and cash equivalents at 1 January 413,759 119,563 119,563 Net increase in cash and cash equivalents 77,357 79,660 292,785 Effect of exchange rate fluctuations on cash and cash equivalents (23,212) 1,696 1,411 ------------------------------------------------------------------------------ Cash and cash equivalents at end of period 467,904 200,919 413,759 ------------------------------------------------------------------------------- The notes to the condensed consolidated interim financial statements are an integral part of this document. Notes to the condensed consolidated interim financial statements 1 Reporting entity Hiscox plc (the 'Company') is a public limited company incorporated and domiciled in Great Britain. The condensed consolidated interim financial statements for the company as at, and for the six months ended, 30 June 2006 comprise the Company and its subsidiaries (together referred to as the 'Group') and the Group's interest in associates. 2 Basis of preparation These condensed consolidated interim financial statements have been prepared in accordance with the Listing Rules issued by the Financial Services Authority. The information presented herein does not include all of the disclosures typically required for full consolidated financial statements. Consequently these financial statements should be read in conjunction with the full consolidated financial statements of the Group as at, and for the year ended, 31 December 2005 which are available from the Company's registered office at 1 Great St Helen's, London,EC3A 6HX or at www.hiscox.com. Except where otherwise indicated, all amounts are presented in pounds Sterling, rounded to the nearest thousand. The condensed consolidated interim financial statements for the 30 June 2006 and 30 June 2005 periods are unaudited but have been subject to a review by the independent auditors. The unaudited condensed consolidated interim financial statements, and the comparative information as at, and for the year ended, 31 December 2005, presented herein do not constitute statutory accounts of the Group within the meaning of Section 240 of the Companies Act 1985. The independent auditors have reported on the Group's full consolidated financial statements as at, and for the year ended, 31 December 2005. The report of the independent auditors was not qualified and did not contain a statement under section 237 (2) or (3) of the Companies Act 1985. These condensed consolidated interim financial statements were approved by the Board of Directors on 11 September 2006. 3 Accounting policies The accounting policies applied in these condensed consolidated interim financial statements are consistent with those applied by the Group in its consolidated financial statements as at, and for the year ended, 31 December 2005 which were prepared in accordance with International Financial Reporting Standards as endorsed by the European Union. Certain reclassifications have been made to the 30 June 2005 prior period amounts and segment disclosures to conform to the presentation in the Group's 2005 Annual Report and to the current period presentation. These reclassifications have no impact on previously reported Results of operating activities or Profit before tax. The accounting policies applied in these condensed consolidated interim financial statements are also consistent with those that the Group expects to apply for the year ending 31 December 2006. The Group has not adopted IAS 34 Interim Financial Reporting. 4 Financial risk management The Group's financial risk management objectives and policies are consistent with that disclosed in the full consolidated financial statements as at, and for the year ended, 31 December 2005. 5 Segment information The Group is managed and reported on a worldwide basis in three primary business segments as follows: - Global Markets and Corporate Centre comprises the results of Syndicate 33, excluding Syndicate 33's specie, fine art and non-US household business. It also includes the investment return and administrative costs associated with the parent company and other Group management activities. - UK and Europe comprises the results of Hiscox Insurance Company Limited, the results of Syndicate 33's specie, fine art 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. - International comprises the results of Hiscox Insurance Company (Guernsey) Limited and Hiscox Insurance Company (Bermuda) Limited which commenced underwriting on 1 January 2006. This segment also includes the activities of the US agency, Hiscox Inc which commenced operations in March 2006. This segmentation reflects the internal operational structure within the Group and how the business units are strategically managed to offer different products and services, with different risk profiles, to specific customer groups. All revenue sources are captured by one of the three business segments shown above. All results arise from continuing activities. The segmental results for the 6 months to 30 June 2006, presented in operational reporting format, were as follows: 6 Months to 30 June 2006 (unaudited) ------------------------------------------------------------------------------- Global Markets and Corporate UK and Centre Europe International Total Â£000 Â£000 Â£000 Â£000 ------------------------------------------------------------------------------ Gross premiums written 390,807 139,457 94,888 625,152 Net premiums written 311,311 117,043 76,349 504,703 Net premiums earned 256,133 115,127 30,402 401,662 ------------------------------------------------------------------------------ Investment return based on longer term rates of return 19,192 9,100 6,339 34,631 Net claims incurred (137,389) (50,888) (9,773) (198,050) Acquisition costs (67,081) (38,486) (11,707) (117,274) Administrative expenses (12,593) (11,242) (3,135) (26,970) Other income / (expenses) (20,151) (1,159) 788 (20,522) ------------------------------------------------------------------------------- Trading result 38,111 22,452 12,914 73,477 Agency and other income 2,030 12,530 471 15,031 Profit commission 1,130 - - 1,130 Short-term investment return fluctuations 10,564 (1,320) 500 9,744 Other expenses (7,284) (19,889) (6,041) (33,214) ------------------------------------------------------------------------------- Operating result 44,551 13,773 7,844 66,168 Finance costs (4,824) - - (4,824) Associate result 5 - - 5 ------------------------------------------------------------------------------ Profit before tax 39,732 13,773 7,844 61,349 ------------------------------------------------------------------------------ Global Markets and Corporate UK and Centre Europe International Total ------------------------------------------------------------------------------ 100% level net combined ratio (%) 93.3 95.2 83.9 93.2 ------------------------------------------------------------------------------ 6 Months to 30 June 2005 (unaudited) ------------------------------------------------------------------------------- Global Markets and Corporate UK and Centre Europe International Total Â£000 Â£000 Â£000 Â£000 ------------------------------------------------------------------------------ Gross premiums written 287,192 129,613 20,355 437,160 Net premiums written 217,257 114,918 12,872 345,047 Net premiums earned 217,200 118,559 9,909 345,668 ------------------------------------------------------------------------------ Investment return based on longer term rates of return 17,245 6,928 93 24,266 Net claims incurred (129,650) (56,365) (192) (186,207) Acquisition costs (59,601) (40,181) (8,110) (107,892) Administrative expenses (7,974) (9,582) (1,075) (18,631) Other income / (expenses) 38,806 840 404 40,050 ------------------------------------------------------------------------------ Trading result 76,026 20,199 1,029 97,254 Agency and other income 8,207 11,090 169 19,466 Profit commission 2,744 - - 2,744 Short-term investment return fluctuations (7,249) 3,374 (23) (3,898) Other expenses (13,681) (12,907) - (26,588) ------------------------------------------------------------------------------- Operating result 66,047 21,756 1,175 88,978 Finance costs (1,009) - - (1,009) Associates result - - 151 151 ------------------------------------------------------------------------------ Profit before tax 65,038 21,756 1,326 88,120 ------------------------------------------------------------------------------ Global Markets and Corporate UK and Centre Europe International Total ------------------------------------------------------------------------------ 100% level net combined ratio (%) 80.5 90.2 90.6 83.5 ------------------------------------------------------------------------------ Year to 31 December 2005 (audited) ------------------------------------------------------------------------------- Global Markets and Corporate UK and Centre Europe International Total Â£000 Â£000 Â£000 Â£000 ------------------------------------------------------------------------------ Gross premiums written 555,183 262,271 43,720 861,174 Net premiums written 417,128 235,276 28,832 681,236 Net premiums earned 428,334 241,603 23,362 693,299 ------------------------------------------------------------------------------- Investment return based on longer term rates of return 36,181 14,300 1,632 52,113 Net claims incurred (347,865) (108,498) (662) (457,025) Acquisition costs (118,546) (81,827) (18,380) (218,753) Administrative expenses (14,342) (24,571) (2,284) (41,197) Other income / (expenses) 55,060 2,362 (162) 57,260 ------------------------------------------------------------------------------ Trading result 38,822 43,369 3,506 85,697 Agency and other income 8,376 22,640 2,469 33,485 Profit commission 7,357 - - 7,357 Short-term investment return fluctuations (15,252) 6,081 (70) (9,241) Other expenses (15,253) (28,740) - (43,993) ------------------------------------------------------------------------------- Operating result 24,050 43,350 5,905 73,305 Finance costs (3,334) - - (3,334) Associates result - - 250 250 ------------------------------------------------------------------------------ Profit before tax 20,716 43,350 6,155 70,221 ------------------------------------------------------------------------------ Global Markets and Corporate UK and Centre Europe International Total ------------------------------------------------------------------------------ 100% level net combined ratio (%) 99.9 86.9 91.3 96.0 ------------------------------------------------------------------------------ The longer term rates of return are calculated based on 6% return on equities and 4% for all other investments including cash. These rates are applied to the average value of investments held in each class during the current and prior financial period. 6 Return on equity 6 months to 6 months to Year to 31 30 June 2006 30 June 2005 Dec 2005 (unaudited) (unaudited) (audited) Â£000 Â£000 Â£000 -------------------------------------------------------------------------- Profit for the period 47,320 61,080 48,630 Opening shareholders' equity 578,013 368,826 368,826 Adjusted for the time weighted impact of: - Rights issue - - 15,510 - Distributions and other movements in capital (205) (78) (5,285) ------------------------------------------------------------------------------- Adjusted opening shareholders' equity 577,808 368,748 379,051 ------------------------------------------------------------------------------ Annualised return on equity (%) 17.0% 35.9% 12.8% 7 Investment result i) Analysis of investment result 6 months to 6 months to Year to 31 30 June 2006 30 June 2005 Dec 2005 (unaudited) (unaudited) (audited) Â£000 Â£000 Â£000 ----------------------------------------------------------------------------- Investment income including interest receivable 35,128 22,657 48,172 Net realised gains/(losses) on investment at fair value through income (7,185) (1,629) (8,040) Net fair value gains/(losses) on investment at fair value through income (795) 2,465 10,155 Net realised gains on derivative instruments 18,091 - - Net fair value gains/(losses) on derivative instruments and financial liabilities (864) (3,125) (6,404) ------------------------------------------------------------------------------- Total returns on financial assets 44,375 20,368 43,883 ------------------------------------------------------------------------------- The majority of the Group's foreign exchange cylindrical collar derivatives closed during June 2006, at nil overall cost. At 31 December 2005 the fair value of all such contracts that were closed out before 30 June 2006 was a liability of Â£3,713,000. The Group also realised Â£14,214,000 from the closing out of foreign exchange forward derivatives during the period to 30 June 2006. These contracts provide a partial hedge of the Group's net investment in its Bermudan operation but do not currently qualify for the formal hedge accounting treatment permitted under IAS 39 Financial Instruments: Recognition and Measurement. Further details are provided at note 15. Investment expenses are presented within other operating expenses (note 8). ii) Annualised investment yields 6 months to 6 months to Year to 30 June 2006 30 June 2005 31 Dec 2005 (unaudited) (unaudited) (audited) Return Yield Return Yield Return Yield ----------------------------------------------------------------------------- Â£000 % Â£000 % Â£000 % Debt and fixed income securities at fair value through income 13,852 2.8 15,268 3.6 26,733 3.1 Equities and shares in unit trusts at fair value through income 2,702 4.4 3,789 9.0 12,278 13.1 Deposits with credit institutions/cash and cash equivalents 10,594 4.0 4,436 4.6 11,276 3.7 ----------------------------------------------------------------------------- 27,148 3.3 23,493 4.1 50,287 4.0 ----------------------------------------------------------------------------- 8 Other income and expenses 6 months to 30 6 months to 30 Year to 31 June 2006 June 2005 Dec 2005 (unaudited) (unaudited) (audited) Â£000 Â£000 Â£000 -------------------------------------------------------------------------------- Agency related income 3,175 2,527 3,044 Profit commission 1,130 2,744 9,807 Exchange gains (note 15) - 40,050 57,420 Other income 2,571 6,774 11,026 ------------------------------------------------------------------------------ Other income 6,876 52,095 81,297 ------------------------------------------------------------------------------ Managing agency expenses 4,235 10,022 9,869 Underwriting agency expenses 19,303 10,905 19,886 Connect agency expenses 6,360 1,682 6,135 Exchange losses 20,522 - - Investment expenses 640 571 1,013 Other group expenses 2,676 2,609 10,070 ------------------------------------------------------------------------------- Other expenses 53,736 25,789 46,973 ------------------------------------------------------------------------------- 9 Finance costs 6 months to 30 6 months to 30 Year to 31 June 2006 June 2005 Dec 2005 (unaudited) (unaudited) (audited) Â£000 Â£000 Â£000 ------------------------------------------------------------------------------ Interest and expenses associated with bank borrowings and letters of credit 4,806 996 3,302 Interest charges arising on finance leases 18 13 32 ------------------------------------------------------------------------------ 4,824 1,009 3,334 ------------------------------------------------------------------------------- The Group drew down Â£137,500,000 on a syndicated letter of credit facility on 7 November 2005 to support its underwriting operations. On 5 December 2005, the Group drew down US$208,000,000 of its term and revolving credit facility to support the investment in the new Bermudan operations. 10 Claims and claim adjustment expenses 6 months to 30 6 months to 30 Year to 31 June 2006 June 2005 Dec 2005 (unaudited) (unaudited) (audited) Â£000 Â£000 Â£000 ------------------------------------------------------------------------------ Gross insurance claims and claim adjustment expenses (221,005) (236,078) (810,678) Insurance claims recovered from reinsurers 22,955 49,871 353,653 ------------------------------------------------------------------------------- Net insurance claims and claim adjustment expenses (198,050) (186,207) (457,025) ------------------------------------------------------------------------------- 11 Earnings per share Basic Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the period, excluding ordinary shares purchased by the Group and held as own shares. 6 months to 6 months to Year to 31 30 June 2006 30 June 2005 Dec 2005 (unaudited) (unaudited) (audited) ------------------------------------------------------------------------------ Profit attributable to the Company's equity holders (Â£000) 47,320 61,080 48,630 Weighted average number of ordinary shares (thousands) 392,125 302,754 310,797 Basic earnings per share (pence per share) 12.1p 20.2p 15.6p ------------------------------------------------------------------------------- The comparative weighted average number of shares in issue for the 6 months to 30 June 2005 has been adjusted for the effects of the Rights issue in November 2005. Diluted Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume 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. 6 months to 6 months to Year to 30 June 30 June 31 Dec 2006 2005 2005 (unaudited) (unaudited) (audited) ----------------------------------------------------------------------------- Profit attributable to the Company's equity holders (Â£000) 47,320 61,080 48,630 ----------------------------------------------------------------------------- Weighted average number of ordinary shares in issue (thousands) 392,125 302,754 310,797 Adjustment for share options (thousands) 6,772 3,263 12,283 ----------------------------------------------------------------------------- Weighted average number of ordinary shares for diluted earnings per share (thousands) 398,897 306,017 323,080 ----------------------------------------------------------------------------- Diluted earnings per share (pence per share) 11.9p 20.0p 15.1p ------------------------------------------------------------------------------ Diluted earnings per share has been calculated after taking account of outstanding options under both employee share schemes and also SAYE schemes. 12 Dividends 6 months to 30 6 months to 30 Year to June 2006 June 2005 31 Dec 2005 (unaudited) (unaudited) (audited) Â£000 Â£000 Â£000 ---------------------------------------------------------------------------- Final dividend for the year ended: - 31 December 2005 of 4.75p (net) per share 18,639 - - - 31 December 2004 of 3.5p (net) per share - 10,286 10,286 Interim dividend for the year ended: - 31 December 2005 of 2.25p (net) per share - - 6,631 ------------------------------------------------------------------------------- 18,639 10,286 16,917 ------------------------------------------------------------------------------- An interim dividend of 3.00p (net) per ordinary share has been declared payable on 23 October 2006 to shareholders registered on 29 September 2006 in respect of the six months to 30 June 2006 (30 June 2005: 2.25p (net) per ordinary share). The dividend was approved by the Board on 4 September 2006 and accordingly has not been included as a distribution or liability in this interim consolidated financial information in accordance with IAS 10 Events after the Balance Sheet Date. 13 Financial assets and liabilities i) Analysis of financial assets at fair value through income 30 June 2006 30 June 2005 31 Dec 2005 (unaudited) (unaudited) (audited) Â£000 Â£000 Â£000 ------------------------------------------------------------------------------- Debt and fixed income securities 1,010,472 865,005 1,028,795 Equities and shares in unit trusts 131,515 93,427 119,407 Deposits with credit institutions 67,967 79,561 89,576 ------------------------------------------------------------------------------ Investments 1,209,954 1,037,993 1,237,778 Derivative financial assets 589 - - ------------------------------------------------------------------------------ 1,210,543 1,037,993 1,237,778 ------------------------------------------------------------------------------ ii) Analysis of financial liabilities at fair value through income 30 June 2006 30 June 2005 31 Dec 2005 (unaudited) (unaudited) (audited) Â£000 Â£000 Â£000 ------------------------------------------------------------------------------ Short-term borrowing from credit institutions 112,378 390 121,190 Derivative financial liabilities 2,686 1,777 5,056 ------------------------------------------------------------------------------- 115,064 2,167 126,246 ------------------------------------------------------------------------------ The face value of the Group's short term borrowings from credit institutions at 30 June 2006 was Â£112,432,000 (30 June 2005: Â£390,000; 31 December 2005: Â£120,930,000). The Group's borrowings at 31 December 2005 and 30 June 2006 served as a partial hedge of its net investment in the new Bermudan operation. However, the Group has not applied the hedge accounting treatment permitted under IAS 39 Financial Instruments: Recognition and Measurement. Consequently, the foreign exchange gain of Â£8,498,000 (31 December 2005: loss of Â£120,000) and fair value gain of Â£54,000 (31 December 2005: Â£nil) arising during 2006 are both recognised in the interim income statement. iii) Investment and cash allocation 30 June 2006 30 June 2005 31 Dec 2005 (unaudited) (unaudited) (audited) Â£000 % Â£000 % Â£000 % ---------------------------------------------------------------------------------------- Debt and fixed income securities 1,010,472 60.3 865,005 69.8 1,028,795 62.3 Equities and shares in unit trusts 131,515 7.8 93,427 7.5 119,407 7.2 Deposits with credit institutions/cash and cash equivalents 535,871 31.9 280,480 22.7 503,335 30.5 ----------------------------------------------------------------------------------------- 1,677,858 1,238,912 1,651,537 ---------------------------------------------------------------------------------- iv) Investment and cash allocation by currency 30 June 2006 30 June 2005 31 Dec 2005 (unaudited) (unaudited) (audited) % % % ------------------------------------------------------------------------------- Sterling 34.6 36.4 29.9 US Dollars 52.9 49.5 57.5 Euro and other currencies 12.5 14.1 12.6 14 Net asset value per share 30 June 2006 30 June 2005 31 Dec 2005 (unaudited) (unaudited) (audited) Net asset NAV Net asset NAV Net asset NAV value per share value per share value per share Â£000 pence Â£000 pence Â£000 pence --------------------------------------------------------------------------------------- Net asset value 588,363 149.8 421,685 143.3 578,013 147.7 Net tangible asset value 555,347 141.4 389,315 132.3 544,914 139.3 -------------------------------------------------------------------------------------- The net asset value per share is based on 392,795,000 shares (30 June 2005: 294,193,000; 31 December 2005: 391,216,000), being the adjusted number of shares in issue at each reference date. 15 Impact of foreign exchange related items 6 months to 30 6 months to 30 Year to June 2006 June 2005 31 Dec 2005 (unaudited) (unaudited) (audited) Â£000 Â£000 Â£000 ---------------------------------------------------------------------------- Income statement Derivative gains/(losses) on foreign exchange hedge contracts included within investment return 17,172 (3,125) (6,404) -------------------------------------------------------------------------------- Unearned Premium and deferred acquisition costs adjustment (15,436) 20,903 22,401 Foreign exchange gains/(losses) on borrowings hedging the Bermudan assets 8,498 - (120) Other foreign exchange gains/(losses) (13,584) 19,147 35,139 -------------------------------------------------------------------------------- Impact of foreign exchange related items on income statement (3,350) 36,925 51,016 ------------------------------------------------------------------------------- Balance sheet Foreign exchange differences recognised directly in equity (22,084) 324 1,290 -------------------------------------------------------------------------------- Overall impact of foreign exchange related items on net assets (25,434) 37,249 52,306 ------------------------------------------------------------------------------- Profit before tax Profit before tax 61,349 88,120 70,221 Unearned premium and deferred acquisition costs adjustment 15,436 (20,903) (22,401) -------------------------------------------------------------------------------- Adjusted profit before tax 76,785 67,217 47,820 ------------------------------------------------------------------------------- 100% level combined ratio 93.2% 83.5% 96.0% 100% level combined ratio (after unearned premium and deferred acquisition costs adjustment) 89.5% 89.6% 99.6% 16 Cash and cash equivalents The purchase, maturity and disposal of financial assets is part of the Group's insurance activities and is therefore classified as an operating cash flow. Included within cash and cash equivalents held by the Group are balances totaling Â£43,718,000 (30 June 2005: Â£54,259,000; 31 December 2005: Â£50,313,000) not available for use by the Group which are held within the Lloyd's Syndicate. Independent Review Report by KPMG Audit Plc to Hiscox plc Introduction We have been engaged by the Company to review the financial information for the six months ended 30 June 2006 which comprise the condensed consolidated interim income statement, condensed consolidated interim balance sheet, condensed consolidated interim statement of changes in equity, condensed consolidated interim cash flow statement and related notes 1 to 16. 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. This report is made solely to the Company in accordance with the terms of our engagement to assist the Company in meeting the requirements of the Listing Rules of the Financial Services Authority. Our review has been undertaken so that we might state to the Company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached. 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 polices and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit performed in accordance with International Statements on Auditing (UK and Ireland) and therefore provides a lower level of assurance than an audit. Accordingly we do not express an audit opinion on the financial information. 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 2006. KPMG Audit Plc London 11 September 2006 This information is provided by RNS The company news service from the London Stock Exchange

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