Interim Results

RNS Number : 4887B

Hiscox Ltd

18 August 2008

 



Hiscox Ltd

Interim results for the six months ended 30 June 2008

Record half year profit

Hamilton, Bermuda (18 August 2008) - Hiscox Ltd (LSE:HSX), the international specialist insurer, today announces interim results for the half year ended 30 June 2008.  

	H1 2008	H1 2007
Gross premiums written	£639.4m	£733.0m
Net premiums earned	£486.8m	£471.9m
Profit before tax	£109.2m	£105.6m
Earnings per share	21.7p	20.3p
Interim dividend per share	4.25p	4.0p
Net asset value per share	222.1p	185.4p
Group combined ratio	79.7%	84.8%
Return on equity	21.8%	24.8%

Financial highlights 

• Record interim pre-tax profits of £109.2m (2007: £105.6m)

• Gross written premiums down by 12.8% to £639.4m (2007: £733.0m) in line with disciplined underwriting policy

• Group combined ratio 79.7% (2007: 84.8%); improved combined ratio in each division

• Earnings per share on profit after tax up 6.9% to 21.7p (2007: 20.3p) 

• Interim dividend increased by 6.25% to 4.25p per share (2007: 4.0p) 

• Return on equity 21.8% (2007: 24.8%)

• Active capital management, including share buy-backs totalling £73.7m and debt reduction of US $182m

Operational highlights

• Hiscox Global Markets - profit before tax £80.4m (2007: £87.5m) - highly disciplined underwriting in the face of softening rate environment

• Hiscox International - profit before tax up 67.7% to £20.3m (2007: £12.1m) - Bob Forness to join Bermudian business and set up new specialist team to complement existing property catastrophe business

• Hiscox UK and Hiscox Europe - profit before tax more than doubled to £16.3m (2007: £6.6m) with GWP increasing by 14.6% as increased concentration on commercial lines generates profitable growth

• Positive investment return in challenging conditions from a high quality and well diversified investment portfolio with strong liquidity

Robert Hiscox, Chairman, Hiscox Ltd, commented: 

'We have done what we said we would do. We have reduced our exposure in internationally traded business in the face of competitive rating, but still succeeded in lowering the combined ratio. We have increased our income and profit in our regional businesses. We have repaid capital to our shareholders by buying back shares and increasing the dividend.  

'Our well-diversified specialist businesses round the world have the ability and the opportunities to make profits whatever the state of the market.' 

For further information

Interim results will be presented to investors and analysts at 09.00 (UK time) on Monday 18 August 2008 at Hiscox, 1 Great St Helen's, London EC3A 6HX. This presentation will be broadcast live on the Hiscox website www.hiscox.com. Prior to the event the presentation slides will be available to download from the Hiscox home page.  

A recording of the presentation and question and answer session will be available on the Hiscox website from 12.00 (UK time) on the day. This facility will be available until 18 September 2008. 

Contacts            

Hiscox Ltd
Robin Mehta, Company Secretary, Bermuda	[phone]
Jennifer Crowl, Director of Communications, London	[phone]
Maitland	[phone]
Suzanne Bartch
Richard Farnsworth

Notes to editors  

About Hiscox 

Hiscox, headquartered in Bermuda, is an international 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, and tailored products for high net worth individuals. Hiscox International includes operations in Bermuda, Guernsey and USA. Hiscox Insurance Company Limited, Hiscox Underwriting Limited and Hiscox Syndicates Ltd are regulated by the Financial Services Authority. For further information, visit www.hiscox.com.

Chairman's interim statement 2008

It is very pleasing (and slightly surreal) to be able to announce record half year results when the financial markets are in turmoil, and our rating by the stock-market is so low. There was a strong performance from all divisions, and a positive investment result which is an achievement given the buffeting many investments (even the short dated and highly rated ones we favour) have had in the recent market turmoil. I realise that the share price reflects the future, not the past. Yes, insurance rates are reducing in some areas of our business, but we are well able to find profitable business and continue to walk away from inadequately rated business, and yes, we have investments in asset-backed bonds and the like, but we have not had a single bond default and we are getting much better returns to maturity than in recent years. I believe that we have a strong and profitable future.

Results 

Record profits before tax for the half year to 30 June 2008 of £109.2 million (2007: £105.6 million), an increase of 3.4%, despite a weaker investment return. Gross written premiums have decreased as forecast to £639.4 million (2007: £733.0 million) as the reductions in larger premium business are not fully offset by the good growth in our regional business. Net earned premium increased to £486.8 million (2007: £471.9 million) as we benefited from the premium written in the strong 2007 rating environment. The combined ratio reduced to 79.7% (2007: 84.8%). Earnings per share increased to 21.7p (2007: 20.3p) and net assets per share rose to 222.1p (2007: 185.4p), an increase of 19.8%. We are in the middle of the hurricane season and the financial markets remain challenging, but a strong start to the year bodes well for the full year.

Dividend, balance sheet and capital management

In line with our policy of progressive dividend increases, the Board has approved an increase in the interim dividend of 6.25% to 4.25p per share (2007: 4p per share) which will be paid on 29 September 2008 to shareholders on the register at the close of business on 28 August 2008. 

The Group is in a strong financial position with no significant changes to the balance sheet since the 2007 year end.  During the first six months our strong cashflow enabled us to repay the existing loan of US $182 million in full. We also refinanced our bank facilities, increasing them to £350 million, lengthening the duration to five years on the cash facility and improving the terms. These facilities were provided by our existing syndicate of relationship banks.

We have effectively exceeded our £150 million capital repayment programme with an annual dividend payment of £47 million, the buy-back of 32.4 million shares at an average price of 226.9p for a total of £73.7 million, and the repayment of US $182 million of bank debt.  We will continue to buy back shares as suitable opportunities arise within the constraints of our capital needs and taking into account the uncertainty in the financial markets.

Overall comment

When the absurd lending practices of the banks and their games of pass the parcel of their debts to each other came to the natural conclusion of the credit crunch, I thought that the insurance industry might be the ultimate recipient of much of the pain from the dud investments as they were dressed up as high-yielding bonds, the staple diet of insurance companies. But in general the insurance industry's ability to price risk saved it, and to date there has been less damage than expected - except to sentiment as investors assume the worst.

We are in the risk business, and now that risk is being more realistically priced in fixed interest markets, we are able to invest at more attractive prices and better yields. We have suffered from falls in bond valuations, but have not had a single default. However, if the worst happened and we do suffer some minor defaults, the cost is nothing compared with a major hurricane or other loss to the underwriting side of the business.

Underwriting is seeing the usual and predictable rate reductions after two very profitable years, but it was ever thus. As forecast previously, we are reducing income and exposure to ensure we take a measured amount of risk. Our strategy of focus on specialist classes with geographical spread gives us opportunities to concentrate on and grow in areas where there is less competition and better pricing.

Hiscox Global Markets

This division uses the global licences, distribution network and credit rating available through Lloyd's to serve clients throughout the world. It has underwriting bases in London, Paris, New York and San Francisco.

Profit before tax	£80.4 million (2007: £87.5 million)
Gross premiums written	£344.3 million (2007: £423.7 million)
Combined ratio	75.7% (2007: 75.9%)

After two good catastrophe-free years, reinsurance rates are under pressure. We said we would underwrite with discipline and walk away from prices which did not reflect the risk, and this we have done at the expense of the top line. Better to make money on a smaller income than to lose money on an increased turnover; or in my usual words, profit is sanity, turnover vanity.

The first half year has been full of large individual losses around the world, most notably in the large property, mining and energy sectors. Market estimates of these losses currently exceed US $6 billion in aggregate. We had reduced our exposure in this area, but if prices rise again as a result of these losses, we shall re-enter the market with full force.

Once again I am writing this in the middle of the wind season, and Mother Nature likes to be unpredictable. What we can do to make our result more predictable is to focus hard on analysing our catastrophe exposure and the price we are getting for it and tailor it to produce a profit in the expectation of realistic wind losses, remaining acutely aware of the deficiencies of theoretical models. We have reduced our exposure and income but reinsurance rates continue to be healthy and we will continue to seek good profits in this area.

With the obvious markets of internationally traded catastrophe and big risk insurance business under pressure, we are working hard to expand in our more specialist areas.  

We announced recently that we were examining the possibility of starting up a new wholly owned syndicate at Lloyd's to underwrite business from our wholly owned distribution network. We are in active discussions with Lloyd's, the FSA and the external capital providers of Syndicate 33 and are hopeful that the new syndicate can be formed for the 2009 year.

Hiscox International

This division covers Bermuda, the USA and Guernsey.  

Profit before tax	£20.3 million (2007: £12.1 million)
Gross premiums written	£117.0 million (2007: £154.0 million)
Combined ratio	84.6% (2007: 95.3%)

As planned, Bermuda has reduced its income by around 36% reducing exposure as rates reduce. Bob Forness and his team are joining Hiscox to form a new division to underwrite custom made reinsurance products. He will also be taking over as CEO of our Bermuda subsidiary from Robert Childs who will be returning to London. Robert will retain his roles as Chief Underwriting Officer of the Group and head of our International business area. 

Hiscox USA is now well established and the integration of American Live Stock Inc. is nearly complete. As licenses are obtained we will be writing admitted specialist commercial business (in addition to the existing admitted animal mortality business) in the second half of the year. Income grew by 59% in the first half (but from a small base) and the combined operation is nearing break-even. 

Guernsey has produced another excellent profit.  

Hiscox UK and Europe

This segment covers our regional businesses throughout the UK and mainland Europe.    

Profit before tax	£16.3 million (2007: £6.6 million)
Gross premiums written	£178.0 million (2007: £155.3 million)
Combined ratio	86.3% (2007: 103.8%)

These are strong underwriting results dampened by negative investment returns due to a large proportion of the Group's equities being held in this division. The market is as competitive as ever but we continue to offer our excellent products at the right price.

In the UK, we focus on High Net Worth personal lines (now including motor) and commercial insurance for small and medium sized professional businesses. The addition of luxury car insurance has started well, and in the household business we have decided to put all our resources behind our higher net worth offerings and to write the mid net worth direct only through internet and telephone. The narrower the blade the deeper it goes. 

Our specialist commercial business is written both through brokers and direct and is forging ahead successfully generating a solid underwriting result at the half year. We focus on small risks which are less competed for and less exposed to the softening market. 

We continue to build the brand with our second TV advertising campaign of the year in August. This continues to generate good business with growth of our direct household area up nearly 52% at the half year. Our marketing campaign also benefits the broker market not only from the fast increasing brand awareness but also by reinforcing the message that we sell on service and not price. 

Europe continues its contribution as we experienced extremely satisfactory growth in profitability across all classes of business and we are pleased with the results generated in all countries. This performance has been delivered by both healthy increases in gross written premium and an improvement in productivity as well as favourable foreign exchange. We believe that the new concentration on commercial risks, particularly in small businesses, will generate sustained profitable growth.

Investments

Assets under management at 30 June 2008 totalled £1,931 million (2007: £1,823 million) and the yield for the half year was 0.8% (2007: 2.6%), giving an investment return of £17.3 million (2007: £46.8 million). The assets have reduced from £2,051 million at the year end due largely to the repayment of debt and the share repurchase programme. 

The modest (but positive) investment return reflects the challenging conditions that prevailed during the period. Although we further reduced our allocation to equities we suffered nonetheless from the weakness in markets but by a smaller amount than the general indices. The bond markets, where the bulk of our assets are invested, continued to be volatile with certain sectors being disrupted by illiquidity and credit concerns. We have not suffered a single default and are now taking advantage of the dislocation in pricing to make some opportunistic allocations to slightly higher risk, but also higher return, investments.

Much debate exists about mark to market valuations where turmoil exists in markets and forced selling depresses prices. As these assets mature the discounts reverse so we look more to the yield to maturity we will earn given the high quality of our asset portfolio. For us, as for any insurance company, liquidity of the portfolio is key and over the last few years we have avoided investing in complex structured products due to our concerns over liquidity of these products in uncertain markets - a concern that the current markets have borne out. Our fixed interest portfolios mature at an average rate of £100 million a quarter over the next two years, approximately 60% of the total fixed interest portfolio. Added to over £300 million of available bank facilities this gives us very strong liquidity.  

Outlook

We have spent the last few profitable years investing in businesses internationally with the intention of balancing the more volatile cycle and results of internationally traded business. Our regional network has more than doubled their aggregate profits, and that includes two major areas, the UK direct business and the new USA business, still in loss but working fast towards profit. Their time has come to prove the strategy and to provide sustainable profits.  

We will continue to focus hard in areas of business in which we specialise, distributing our products electronically and through our growing international network. The first half of the year has been excellent and there is no reason why the second half should not be good barring the extraordinary. We are determined to keep growing our regional businesses in volume and profit, and to make reasonable profits in our internationally trading businesses whatever the state of the market, keeping our tinder dry and our capital intact to surge again when the rates turn up, as we did in 2002 and 2006. 

Robert Hiscox

18 August 2008

Condensed consolidated interim income statement 

for the six month period ended 30 June 2008

		6 months to	6 months to	Year to
	Notes	30 June 2008	30 June 2007	31 Dec 2007
		£000	£000	£000
Income
Gross premiums written	7	639,360	733,029	1,198,949
Outward reinsurance premiums		(125,413)	(185,887)	(224,039)
Net premiums written		513,947	547,142	974,910
Gross premiums earned		574,934	579,598	1,179,444
Premiums ceded to reinsurers		(88,111)	(107,746)	(214,254)
Net premiums earned		486,823	471,852	965,190
Investment result	9	17,276	46,761	99,677
Other revenues	10	8,381	8,514	19,044
Revenue		512,480	527,127	1,083,911
Expenses
Claims and claim adjustment expenses, net of reinsurance	12	(206,980)	(216,612)	(423,365)
Expenses for the acquisition of insurance contracts		(125,792)	(126,271)	(264,570)
Administration expenses		(38,750)	(40,574)	(76,813)
Other expenses	10	(28,219)	(33,983)	(73,868)
Total expenses		(399,741)	(417,440)	(838,616)
Results of operating activities		112,739	109,687	245,295
Finance costs	11	(3,556)	(4,201)	(8,177)
Share of profit of associates after tax		38	76	81
Profit before tax		109,221	105,562	237,199
Tax expense		(24,869)	(25,550)	(45,951)
Profit for the period (all attributable to equity shareholders of the Company)		84,352	80,012	191,248

Earnings per share on profit attributable to shareholders of the Company
Basic	13	21.7p	20.3p	48.4p
Diluted	13	20.9p	19.6p	46.8p

The notes to the condensed consolidated interim financial statements are an integral part of this document.

Condensed consolidated interim balance sheet

at 30 June 2008

		30 June 2008	30 June 2007	31 Dec 2007
	Notes	£000	£000	£000
Assets
Intangible assets	19	41,547	33,122	40,452
Property, plant and equipment		21,035	13,962	19,378
Investment in associates		4,924	104	1,502
Deferred acquisition costs		137,496	146,529	123,081
Financial assets carried at fair value	15	1,639,526	1,501,900	1,747,827
Loans and receivables including insurance receivables		442,319	481,534	385,222
Reinsurance assets	17	315,510	371,602	280,088
Cash and cash equivalents		291,554	321,309	302,742
Total assets		2,893,911	2,870,062	2,900,292
Equity and liabilities
Shareholders' equity
Share capital		19,989	19,829	19,898
Share premium		7,254	3,227	4,955
Contributed surplus		367,693	414,698	398,834
Currency translation reserve		(45,193)	(45,611)	(43,265)
Retained earnings		467,835	342,807	443,882
Total equity (all attributable to equity shareholders of the Company)		817,578	734,950	824,304
Employee retirement benefit obligations		-	3,452	-
Deferred tax		34,136	12,102	9,751
Insurance liabilities	17	1,824,711	1,803,903	1,713,887
Financial liabilities carried at fair value	15	19	91,000	91,764
Current tax		11,736	23,863	24,711
Trade and other payables		205,731	200,792	235,875
Total liabilities		2,076,333	2,135,112	2,075,988
Total equity and liabilities		2,893,911	2,870,062	2,900,292

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 2008

						June
	Share	Share	Contributed	Currency	Retained	2008
	capital	premium	surplus	translation reserve	earnings	Total
	£000	£000	£000	£000	£000	£000
Balance at 1 January	19,898	4,955	398,834	(43,265)	443,882	824,304
Currency translation differences	-	-	-	(1,093)	-	(1,093)
Net investment hedge	-	-	-	(835)	-	(835)
Net income / (expense) recognised directly in equity	-	-	-	(1,928)	-	(1,928)
Profit for the period	-	-	-	-	84,352	84,352
Total recognised income / (expense) for the period	-	-	-	(1,928)	84,352	82,424
Employee share options :
Equity settled share-based payments	-	-	-	-	2,778	2,778
Deferred tax transfer on shared based payments	-	-	-	-	(2,749)	(2,749)
Proceeds from shares issued	91	2,299	-	-	-	2,390
Purchase of own shares held in treasury	-	-	-	-	(60,428)	(60,428)
Dividends to external shareholders (note 14)	-	-	(31,141)	-	-	(31,141)
Balance at 30 June 2008	19,989	7,254	367,693	(45,193)	467,835	817,578

						June
	Share	Share	Contributed	Currency	Retained	2007
	capital	premium	surplus	translation reserve	earnings	Total
	£000	£000	£000	£000	£000	£000
Balance at 1 January	19,694	-	442,425	(40,396)	260,362	682,085
Currency translation differences	-	-	-	(7,072)	-	(7,072)
Net investment hedge	-	-	-	1,857	-	1,857
Net income / (expense) recognised directly in equity	-	-	-	(5,215)	-	(5,215)
Profit for the period	-	-	-	-	80,012	80,012
Total recognised income / (expense) for the period	-	-	-	(5,215)	80,012	74,797
Employee share options :
Equity settled share-based payments	-	-	-	-	2,787	2,787
Deferred tax transfer on shared based payments	-	-	-	-	(354)	(354)
Proceeds from shares issued	135	3,227	-	-	-	3,362
Dividends to external shareholders (note 14)	-	-	(27,727)	-	-	(27,727)
Balance at 30 June 2007	19,829	3,227	414,698	(45,611)	342,807	734,950

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 2008

	Notes	6 months to  30 June 2008	6 months to  30 June 2007	Year to  31 Dec 2007
		£000	£000	£000
Profit before tax		109,221	105,562	237,199
Adjustments for:
Interest and equity dividend income		(42,169)	(40,928)	(90,205)
Interest expense		3,556	4,201	8,177
Net fair value (gains)/losses on financial investments, derivatives and borrowings		33,428	(4,166)	687
Non-cash movement in retirement benefit obligation		-	(349)	(3,801)
Depreciation		2,402	2,067	4,917
Charges in respect of share based payments		2,778	2,787	5,689
Other non-cash movements		(5,393)	457	(641)
Changes in operational assets and liabilities:
Insurance and reinsurance contracts		2,745	25,989	133,951
Financial assets		74,873	(256,902)	(489,745)
Other assets and liabilities		(28,551)	(3,397)	31,112
Cash flows from operations		152,890	(164,679)	(162,660)
Interest received		40,441	40,007	85,435
Equity dividends received		1,727	921	4,770
Interest paid		(4,023)	(4,516)	(8,243)
Current tax paid		(16,208)	(19,199)	(42,823)
Net cash flows from operating activities		174,827	(147,466)	(123,521)
Cash outflow from the acquisition of subsidiary	19	(1,225)	-	(11,133)
Cash outflow from the sale of subsidiary	19	-	-	(936)
Cash outflow from acquisition of associates		(3,384)	-	(1,273)
Cash flows from the sale/(purchase) of property, plant and equipment		(4,009)	(2,419)	(7,789)
Cash flows from the purchase of intangible assets		-	-	(2,500)
Net cash flows from investing activities		(8,618)	(2,419)	(23,631)
Proceeds from the issue of ordinary shares		2,390	3,362	5,159
Cash flow from the purchase of own shares including those arising on share buy-back program		(60,428)	-	(11,343)
Dividends paid to Company's shareholders	14	(31,141)	(27,727)	(43,591)
Repayments of financial liabilities		(92,382)	(59)	(272)
Net cash flows from financing activities		(181,561)	(24,424)	(50,047)
Net decrease in cash and cash equivalents		(15,352)	(174,309)	(197,199)
Cash and cash equivalents at 1 January		302,742	502,871	502,871
Net decrease in cash and cash equivalents		(15,352)	(174,309)	(197,199)
Effect of exchange rate fluctuations on cash and cash equivalents		4,164	(7,253)	(2,930)
Cash and cash equivalents at end of period	20	291,554	321,309	302,742

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 Ltd (the 'Company') is a public limited company registered and domiciled in Bermuda. The condensed consolidated interim financial statements for the company as at, and for the six months ended, 30 June 2008 comprise the Company and its subsidiaries (together referred to as the 'Group') and the Group's interest in associates. The Chairman's statement accompanying these condensed consolidated interim financial statements forms the Interim Management Report for the half year ended 30 June 2008.

The Directors of Hiscox Ltd are listed in the 2007 Report and Accounts. A list of current Directors is maintained and available for inspection

at the registered office of the company located at 4th Floor, Wessex House, 45 Reid Street, Hamilton, Bermuda HM 12. There have been no changes in the composition of the Board of Directors during the period under review.

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 2007 which are available from the Company's registered office or at www.hiscox.com. Except where otherwise indicated, all amounts are presented in Pounds Sterling, rounded to the nearest thousand.

The independent auditors have reported on the Group's full consolidated financial statements as at, and for the year ended, 31 December 2007. The report of the independent auditors was not qualified. The amounts presented for the 30 June 2008 and 30 June 2007 period are unaudited.

These condensed consolidated interim financial statements were approved by the Board of Directors on 18 August 2008.

3 Accounting policies and methods of computation

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 2007 which were prepared in accordance with International Financial Reporting Standards issued by the IASB. The consolidated financial statements as at, and for the year ended, 31 December 2007 were also compliant with those International Financial Reporting Standards adopted by the European Union. IAS 34 Interim Financial Reporting as adopted by the European Union has been adopted in this Interim Report. 

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 2008.

4 Financial, Insurance and other risk management

The Group's financial, insurance and other risk management objectives and policies are consistent with that disclosed in note 3 of the full consolidated financial statements as at, and for the year ended, 31 December 2007. The principal risks and uncertainties are unchanged and may be summarised as insurance risk, equity price risk, interest rate risk, liquidity risk, credit risk, currency risk, capital risk and operational risk.

Since the onset of global concerns regarding sub prime and credit issues during Autumn 2007, the Group has been mindful of the ongoing dislocation in specific asset classes and their resultant impact on investment markets and the solvency of counterparties more generally. The Group continues to monitor all aspects of its financial risk appetite and the resultant exposure taken with caution, and has consequently suffered no defaults on investments held during the period under review. As detailed in note 15, the Group's investment allocation is broadly comparable to that at 31 December 2007 as outlined in the Report and Accounts, although a slightly greater weighting in corporate bonds has occurred within portfolios to avail of attractive yield opportunities. The Group also continues to be mindful of the processes required for establishing the reliability of fair values obtained for some classes of financial assets affected by ongoing periods of diminished liquidity. Such conditions may continue through the second half of the year. 

Profitable trading and strong treasury management has ensured that the Group's balance sheet remains strongly capitalised and its operations are resiliently financed to accommodate foreseen liquidity demands together with a high level of capital cover to meet any future catastrophe obligations even if difficult investment market conditions prevail for an extended period of time.

5 Related party transactions

Transactions with related parties during the period are consistent in nature and scope with those disclosed in note 36 of the Group's 2007 Report and Accounts.

6 Seasonality and weather

Historically the Group's most material exposure to catastrophe losses on certain lines of business such as reinsurance inwards and marine and major property risk have been greater during the second half of the calendar year, broadly in line with the most active period of the North Atlantic hurricane season. In contrast a majority of gross premium income written in these lines of business occurs during the first half of the calendar year. The Group has deliberately reduced its participation in these lines of business for the current year under review although still actively participates in many regions and if any catastrophic events do occur, it is likely that the Group will share some of the market's losses. Consequently, the potential for significantly greater volatility in expected returns remains during the second half of the year. Details of the Group's recent exposures to these classes of business are disclosed in note 3 of the Group's 2007 Report and Accounts.

7 Operating Segments

Management have identified the Group's operating segments in line with its internal organisation, which recognises the differences in products and services, customer groupings and geographical areas in addition to the discrete major legal entities of the Group. There have been no changes in reportable segments during the period under review.

The Group's four operating segments are identified as follows:

• Global Markets comprises the results of Syndicate 33, excluding Syndicate 33's fine art, UK regional events coverage, non-US household business and underwriting result of Hiscox Inc. It includes the results of the larger retail TMT business written by Hiscox Insurance Company Limited.  

• UK and Europe comprises the results of Hiscox Insurance Company Limited, the results of Syndicate 33's  fine art, UK regional events coverage and non-US household business, together with the income and expenses arising from the Group's retail agency activities in the UK and in continental Europe. It excludes the results of the larger retail TMT business written by Hiscox Insurance Company Limited.

• International comprises the results of Hiscox Insurance Company (Guernsey) Limited, Hiscox Inc., Hiscox Insurance Company (Bermuda) Limited and ALTOHA sub-group which was acquired on 16 August 2007.

• Corporate Centre comprises the investment return and administrative costs associated with the Group management activities. Corporate Centre forms a reportable segment due to its investment activities which earn significant external revenues.

Information regarding the Group's operating segments is presented below. The comparative amounts for the prior half year have been restated to conform to the requirements of IFRS 8. There is no change to those numbers previously reported, with only segmental assets being reported in addition. 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.

				6 Months ended 30 June 2008
	Global	UK and		Corporate
	Markets	Europe	International	Centre	Total
	£000	£000	£000	£000	£000
Gross premiums written	344,341	178,038	116,981	-	639,360
Net premiums written	249,252	163,772	100,923	-	513,947
Net premiums earned	259,491	143,189	84,143	-	486,823
Investment result	13,792	(2,900)	6,556	(172)	17,276
Other revenue	6,379	1,092	906	4	8,381
Revenue	279,662	141,381	91,605	(168)	512,480
Claims and claim adjustment expenses, net of reinsurance	(107,779)	(57,964)	(41,237)	-	(206,980)
Expenses for the acquisition of insurance contracts	(69,439)	(36,337)	(20,016)	-	(125,792)
Administration expenses	(11,143)	(21,582)	(6,025)	-	(38,750)
Other expenses	(10,948)	(9,184)	(3,924)	(4,163)	(28,219)
Total expenses	(199,309)	(125,067)	(71,202)	(4,163)	(399,741)
Results of operating activities	80,353	16,314	20,403	(4,331)	112,739
Finance costs including interest expenses	-	-	(93)	(3,463)	(3,556)
Share of profit of associates after tax	-	-	-	38	38
Profit before tax	80,353	16,314	20,310	(7,756)	109,221
100% ratio analysis
Claims ratio (%)	41.2	39.7	50.0	-	42.1
Expense ratio (%)	34.5	46.6	34.6	-	37.6
Combined ratio (%)	75.7	86.3	84.6	-	79.7
Total assets before intragroup items and eliminations	1,971,336	681,025	780,381	803,028	4,235,770
Intragroup assets and eliminations					(1,341,859)
Total assets					2,893,911

				6 Months ended 30 June 2007
	Global	UK and		Corporate
	Markets	Europe	International	Centre	Total
	£000	£000	£000	£000	£000
Gross premiums written	423,685	155,353	153,991	-	733,029
Net premiums written	288,163	134,780	124,199	-	547,142
Net premiums earned	270,367	118,946	82,539	-	471,852
Investment result	18,128	11,406	9,453	7,774	46,761
Other revenues	5,752	1,356	368	1,038	8,514
Revenue	294,247	131,708	92,360	8,812	527,127
Claims and claim adjustment expenses, net of reinsurance	(100,485)	(58,963)	(57,164)	-	(216,612)
Expenses for the acquisition of insurance contracts	(76,471)	(32,324)	(17,476)	-	(126,271)
Administration expenses	(16,617)	(19,709)	(4,248)	-	(40,574)
Other expenses	(13,165)	(14,111)	(1,278)	(5,429)	(33,983)
Total expenses	(206,738)	(125,107)	(80,166)	(5,429)	(417,440)
Results of operating activities	87,509	6,601	12,194	3,383	109,687
Finance costs including interest expenses	(35)	-	(83)	(4,083)	(4,201)
Share of profit of associates after tax	-	-	-	76	76
Profit before tax	87,474	6,601	12,111	(624)	105,562
100% ratio analysis
Claims ratio (%)	40.2	48.8	68.1	-	46.2
Expense ratio (%)	35.7	55.0	27.2	-	38.6
Combined ratio (%)	75.9	103.8	95.3	-	84.8
Total assets before intragroup items and eliminations	1,694,314	611,923	592,340	842,703	3,741,280
Intragroup assets and eliminations					(871,218)
Total assets					2,870,062

				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	46,617	18,343	23,915	10,802	99,677
Other revenues	11,996	2,672	1,216	3,160	19,044
Revenue	610,818	269,363	189,768	13,962	1,083,911
Claims and claim adjustment expenses, net of reinsurance	(246,876)	(115,032)	(61,457)	-	(423,365)
Expenses for the acquisition of insurance contracts	(157,718)	(65,423)	(41,429)	-	(264,570)
Administration expenses	(27,822)	(37,399)	(11,592)	-	(76,813)
Other expenses	(22,830)	(29,692)	(6,104)	(15,242)	(73,868)
Total expenses	(455,246)	(247,546)	(120,582)	(15,242)	(838,616)
Results of operating activities	155,572	21,817	69,186	(1,280)	245,295
Finance costs including interest expenses	-	-	(82)	(8,095)	(8,177)
Share of profit of associates after tax	-	-	-	81	81
Profit before tax	155,572	21,817	69,104	(9,294)	237,199
100% ratio analysis
Claims ratio (%)	44.3	45.6	40.1	-	44.0
Expense ratio (%)	37.4	52.6	35.3	-	40.4
Combined ratio (%)	81.7	98.2	75.4	-	84.4
Total assets before intragroup items and eliminations	1,655,238	661,147	668,913	800,932	3,786,230
Intragroup assets and eliminations					(885,938)
Total assets					2,900,292

8 Return on equity

	6 months to	6 months to	Year to
	30 June 2008	30 June 2007	31 Dec 2007
	£000	£000	£000
Profit for the period	84,352	80,012	191,248
Opening shareholders' equity	824,304	682,085	682,085
Adjusted for the time weighted impact of:
- Distribution and other movements in capital	(11,222)	268	(18,029)
Adjusted opening shareholders' equity	813,082	682,353	664,056
Annualised return on equity (%)	21.8%	24.8%	28.8%

9 Investment result

i) Analysis of investment result

	6 months to	6 months to	Year to
	30 June 2008	30 June 2007	31 Dec 2007
	£000	£000	£000
Investment income including interest receivable	46,497	42,595	90,259
Net realised gains/(losses) on financial investments at fair value through profit or loss	4,207	11	10,105
Net fair value gains/(losses) on financial investments at fair value through profit or loss	(34,249)	5,265	423
Return on financial investments	16,455	47,871	100,787
Net fair value gains/(losses) on derivative instruments and financial liabilities	821	(1,110)	(1,110)
Total result	17,276	46,761	99,677

Investment expenses are presented within other operating expenses (note 10).

Further details regarding the Group's reduced investment result during the current period under review are provided in the Chairman's statement accompanying these financial statements.

ii) Annualised investment yields

	6 months to 30 June 2008		6 months to 30 June 2007		Year to 31 Dec 2007
	Return	Yield	Return	Yield	Return	Yield
	£000	%	£000	%	£000	%
Debt and fixed income securities	20,407	2.8	22,201	4.0	70,688	5.5
Equities and shares in unit trusts	(12,686)	(16.8)	10,516	13.5	6,959	4.1
Deposits with credit institutions/cash and cash equivalents	8,734	4.2	15,154	5.3	23,140	5.4
	16,455	1.6	47,871	5.3	100,787	5.4

10 Other revenues and expenses

	6 months to	6 months to	Year to
	30 June 2008	30 June 2007	31 Dec 2007
	£000	£000	£000
Profit commission	5,780	5,225	10,468
Agency related and other income	2,601	3,289	8,576
Other revenues	8,381	8,514	19,044
Managing agency expenses	13,316	5,505	28,870
Overseas underwriting agency expenses	9,965	9,774	23,811
Connect agency expenses	7,994	6,717	14,492
Net foreign exchange (gains)/losses	(9,594)	7,980	(8,401)
Investment expenses	798	606	1,250
Other Group expenses including central overheads	5,740	3,401	13,846
Other expenses	28,219	33,983	73,868

11 Finance costs

	6 months to	6 months to	Year to
	30 June 2008	30 June 2007	31 Dec 2007
	£000	£000	£000
Interest and expenses associated with bank borrowings and letters of credit	3,538	4,166	8,123
Interest charges arising on finance leases	18	35	54
	3,556	4,201	8,177

On 6 May 2008 the Group made an early repayment of $182,000,000, for the singular settlement of all principal amounts outstanding under its $225,000,000 term loan facility with Lloyds TSB Bank (as agent for a syndicate of banks). On 7 May 2008 the Group entered into a new agreement with the same syndicate of banks, replacing the old facility. Under this facility the Group may draw up to £350,000,000 in a combination of cash and Letter of Credit Facilities provided that the cash portion does not at any time exceed £200,000,000. On 9 May 2008, £137,500,000 of the facility was drawn, and remains outstanding, in the form of an irrecoverable standby Letter of Credit Facility to support the company's consolidated underwriting activities. The balance of the facility remains undrawn. The Group has given a fixed and floating charge over certain consolidated assets as a guarantee to the syndicate of banks who are providing this facility.

12 Claims and claim adjustment expenses

	6 months to	6 months to	Year to
	30 June 2008	30 June 2007	31 Dec 2007
	£000	£000	£000
Gross insurance claims and claim adjustment expenses	(250,915)	(267,175)	(498,568)
Insurance claims recovered from reinsurers	43,935	50,563	75,203
Net insurance claims and claim adjustment expenses	(206,980)	(216,612)	(423,365)

The net claims and claim adjustment expense reported above is net of a release of £66m of reserves established in prior reporting periods (30 June 2007: £43m; 31 December 2007: £60m)

The development of net claims reserves by accident years are detailed below.

Insurance claims and claims expenses reserves - net at 100% 

Accident year ending 31 December	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**	288,942	239,445	309,353	495,127	575,101	452,876	597,817	320,269	3,278,930
one period later**	324,826	261,068	324,270	538,192	656,320	450,548	555,031	-	3,110,255
two periods later**	382,828	267,811	299,189	517,861	652,416	452,485	-	-	2,572,590
three periods later**	414,911	253,445	309,865	484,705	633,923	-	-	-	2,096,849
four periods later**	405,956	247,758	300,559	480,673	-	-	-	-	1,434,946
five periods later**	393,752	237,739	305,669	-	-	-	-	-	937,160
six periods later**	390,099	235,411	-	-	-	-	-	-	625,510
seven periods later**	384,921	-	-	-	-	-	-	-	384,921
Current estimate of cumulative claims	384,921	235,411	305,669	480,673	633,923	452,485	555,031	320,269	3,368,382
Cumulative payments to date	(316,389)	(192,940)	(236,446)	(364,954)	(429,506)	(271,214)	(208,096)	(40,730)	(2,060,275)
Liability recognised at 100% level	68,532	42,471	69,223	115,719	204,417	181,271	346,935	279,539	1,308,107
Liability recognised in respect of prior accident years at 100% level									28,731
Total net liability to external parties at 100% level									1,336,838

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	384,921	235,411	305,669	480,673	633,923	452,485	555,031	320,269	3,368,382
Attributable to external names	(87,648)	(44,695)	(65,485)	(108,282)	(147,749)	(91,740)	(106,204)	(58,845)	(710,648)
Group share of current ultimate claims estimate	297,273	190,716	240,184	372,391	486,174	360,745	448,827	261,424	2,657,734
Cumulative payments to date	(316,389)	(192,940)	(236,446)	(364,954)	(429,506)	(271,214)	(208,096)	(40,730)	(2,060,275)
Attributable to external names	69,128	33,935	47,802	82,864	99,359	52,365	31,370	6,242	423,065
Group share of cumulative payments	(247,261)	(159,005)	(188,644)	(282,090)	(330,147)	(218,849)	(176,726)	(34,488)	(1,637,210)
Liability for 2001 to 2008 accident years recognised on Group's balance sheet	50,012	31,711	51,540	90,301	156,027	141,896	272,101	226,936	1,020,524
Liability for accident years before 2001 recognised on Group's balance sheet	-	-	-	-	-	-	-	-	21,835
Total net liability to external parties included in the balance sheet†									1,042,359

* The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 30 June 2008.

** With the exception of the most recent development data for each accident year, which only relates to the 6 months ending 30 June 2008, the term period refers to one full calendar year.

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

13 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 in treasury as own shares.

	6 months to 30 June 2008	6 months to 30 June 2007	Year to  31 Dec 2007
Profit attributable to the Company's equity holders (£000)	84,352	80,012	191,248
Weighted average number of ordinary shares (thousands)	389,488	394,915	395,308
Basic earnings per share (pence per share)	21.7p	20.3p	48.4p

Diluted

Diluted earnings per share is calculated by adjusting the assumed conversion of all dilutive potential ordinary shares. The Company has one category of dilutive potential ordinary shares, share options and awards. 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 2008	30 June 2007	31 Dec 2007
Profit attributable to the Company's equity holders (£000)	84,352	80,012	191,248
Weighted average number of ordinary shares (thousands)	389,488	394,915	395,308
Adjustment for share options (thousands)	13,193	13,868	13,530
Weighted average number of ordinary shares for diluted earnings per share (thousands)	402,681	408,783	408,838
Diluted earnings per share (pence per share)	20.9p	19.6p	46.8p

Diluted earnings per share has been calculated after taking account of outstanding options under both employee share schemes  and also SAYE schemes.

14 Dividends

	6 months to	6 months to	Year to
	30 June 2008	30 June 2007	31 Dec 2007
	£000	£000	£000
Final dividend for the year ended:
- 31 December 2006 of 7.0p (net) per share	-	27,727	27,723
- 31 December 2007 of 8.0p (net) per share	31,141	-	-
Interim dividend for the year ended:
- 31 December 2007 of 4.0p (net) per share	-	-	15,868
	31,141	27,727	43,591

An interim dividend of 4.25p (net) per ordinary share has been declared payable on 29 September 2008 to shareholders registered on 28 August 2008 in respect of the six months to 30 June 2008 (30 June 2007: 4.0p (net) per ordinary share). The dividend was approved by the Board on 18 August 2008 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.

15 Financial assets and liabilities

i) Analysis of financial assets carried at fair value 

	30 June 2008 £000	30 June 2007 £000	31 Dec 2007 £000
Debt and fixed income securities	1,456,712	1,194,332	1,444,532
Equities and shares in unit trusts	131,442	183,886	159,421
Deposits with credit institutions	50,840	123,682	143,874
Total investments	1,638,994	1,501,900	1,747,827
Derivative financial assets	532	-	-
Total	1,639,526	1,501,900	1,747,827

ii) Analysis of financial liabilities carried at fair value 

	30 June 2008 £000	30 June 2007   £000	31 Dec 2007   £000
Short-term borrowing from credit institutions	-	91,000	91,764
Derivative financial liabilities	19	-	-
Total	19	91,000	91,764

iii) Investment and cash allocation

	30 June 2008		30 June 2007		31 Dec 2007
	£000	%	£000	%	£000	%
Debt and fixed income securities	1,456,712	75.5	1,194,332	65.5	1,444,532	70.4
Equities and shares in unit trusts	131,442	6.8	183,886	10.1	159,421	7.8
Deposits with credit institutions/cash and cash equivalents	342,394	17.7	444,991	24.4	446,616	21.8
Total	1,930,548		1,823,209		2,050,569

iv) Investment and cash allocation by currency

	30 June 2008  %	30 June 2007    %	31 Dec 2007    %
Sterling	27.0	28.7	25.7
US Dollars	59.7	59.6	61.4
Euro and other currencies	13.3	11.7	12.9

16 Net asset value per share

	30 June 2008		30 June 2007		31 Dec 2007
	Net asset  value £000	NAV per share pence	Net asset  value £000	NAV per share pence	Net asset  value £000	NAV per share pence
Net asset value	817,578	222.1	734,950	185.4	824,304	209.5
Net tangible asset value	776,031	210.8	701,828	177.1	783,852	199.3

The net asset value per share is based on 368,139,361 shares (30 June 2007: 396,387,797; 31 December 2007: 393,386,041), being the adjusted number of shares in issue at each reference date. Net tangible assets comprise total shareholders equity excluding intangible assets.

17 Insurance liabilities and reinsurance assets

	30 June 2008 £000	30 June 2007  £000	31 Dec 2007  £000
Gross
Claims outstanding	1,262,454	1,179,644	1,215,887
Unearned premiums	562,257	624,259	498,000
Total insurance liabilities, gross	1,824,711	1,803,903	1,713,887
Recoverable from reinsurers
Claims outstanding	220,095	248,090	222,672
Unearned premiums	95,415	123,512	57,416
Total reinsurers' share of insurance liabilities	315,510	371,602	280,088
Net
Claims outstanding	1,042,359	931,554	993,215
Unearned premiums	466,842	500,747	440,584
Total insurance liabilities, net	1,509,201	1,432,301	1,433,799

18 Impact of foreign exchange related items

	6 months to	6 months to	Year to
	30 June 2008	30 June 2007	31 Dec 2007
	£000	£000	£000
Consolidated Income statement
Derivative gains/(losses) on foreign exchange hedge contracts included within investment return	514	(1,110)	(1,110)
Unearned premium and deferred acquisition costs adjustment	(849)	4,356	14,438
Other foreign exchange gains/(losses)	10,443	(12,336)	(6,037)
Impact of foreign exchange related items on income statement	10,108	(9,090)	7,291
Balance sheet
Foreign exchange differences recognised directly in equity	(1,928)	(5,215)	(2,869)
Overall impact of foreign exchange related items on net assets	8,180	(14,305)	4,422

19 Business combinations

On 16 August 2007 the Group acquired 100% of Altoha Inc in the USA. The provisional purchase price recognised at 31 December 2007 was £29,052,000 and the initial net cash outflow made up to 31 December 2007 was £11,133,000. The final purchase amount was determined during the current period under review and a further cash outflow was made of £1,225,000 with a related addition made to intangible assets.

The Group disposed of its 100% interest in Hiscox Investment Management Limited on 5 December 2007. This company did not constitute a discontinued operation due to the relatively insignificant revenues and net assets involved and no profit or loss arose on the transaction.

20 Condensed consolidated interim cash flow statement

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. 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 £69,388,000 (30 June 2007: £51,409,000; 31 December 2007: £53,336,000) not available for use by the Group outside of the Lloyd's Syndicate within which they are held.

Directors' responsibility statement

The Directors confirm that the Chairman's statement and condensed consolidated interim financial statements have been prepared in accordance with IAS 34 as adopted by the European Union and the Interim Statement includes a fair review of the information required by sections 4.2.7 R and 4.2.8 R of the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority, being:

1) an indication of important events during the first six months of the current financial year and their impact on the condensed, consolidated interim financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year; and

2) related party transactions that have taken place in the first six months of the current year and that have materially affected the consolidated financial position or performance of Hiscox Ltd during that period, and any changes in the related party transactions described in the last annual report that could have such a material effect.

The individuals responsible for authorising the responsibility statement on behalf of the Board are the Chairman, RRS Hiscox and the Group Finance Director, SJ Bridges. The statements were approved for issue on 18 August 2008.

 

END

 

 

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