Hiscox 2012 preliminary results

Monday 25 February 2013

Hiscox Ltd

Full year results for the year ended 31 December 2012

"A very good year"

Capital return

Capital return of £200 million (50.0p per share including final dividend) by way of B share scheme

·      Final dividend equivalent of 12.0p taking total dividend for the year to 18.0p, an increase of 5.9% (2011: 17.0p)

·      Additional special distribution of 38.0p per share (approx. £150 million) combined with share consolidation

Operational highlights

·      Robert Childs replaces Robert Hiscox as Chairman on 26 February 2013; Richard Watson now Chief Underwriting Officer

·      Hiscox London Market profit of £121.9 million (2011: £57.6 million) with contributions across all lines

·      Hiscox Bermuda delivered a pleasing profit despite Superstorm Sandy

·      UK retail business delivers another good profit of £45.2 million (2011: £49.0 million)

·      Hiscox USA revenues grew by 32.6% to $230.5 million. US Direct business increased by over 200% to nearly $10.0 million GWP with strong continued growth prospects

Robert Hiscox, Chairman of Hiscox Ltd, commented:

"In my last year as Chairman we have made a very good profit despite the second costliest storm on record and a challenging investment market. As a result we are in a position to return capital to shareholders while retaining a strong capital base. The Group not only has a balanced account with great prospects, but more important, has excellent people led by a talented and experienced management team. The future looks as exciting as the past has been for me."

Notes to editors

About Hiscox

Hiscox, the international specialist insurer, is headquartered in Bermuda and listed on the London Stock Exchange (LSE:HSX). There are three main underwriting parts of the Group - Hiscox London Market, Hiscox UK and Europe and Hiscox International. Hiscox London Market underwrites internationally traded business in the London Market - generally large or complex business which needs to be shared with other insurers or needs the international licences of Lloyd's. Hiscox UK and Hiscox Europe offer a range of specialist insurance for professionals and business customers, as well as high net worth individuals. Hiscox International includes operations in Bermuda, Guernsey and USA.

For further information, visit www.hiscox.com

Chairman's statement

It is a nostalgic moment to be writing my last Chairman's Report, and pleasing to be able to announce a solid profit. The year had its catastrophic moments, but as we grow bigger and more balanced, we can absorb Mother Nature's punches and the vicissitudes of accidents and criminal acts with greater ease.

Since I announced last year that I would be stepping down as Chairman, I have been asked to look back over my years in the insurance world and have enjoyed the memories of growing the business from days of buccaneering in a lawless market place, through the Lloyd's crisis and recently through stronger and stricter strait-jackets of rules and regulations. But I get greater pleasure from looking forward at the future opportunities for this business as it moves into its next era. I would not be stepping down if I were not absolutely sure that the business is in great shape and the next generation are more than qualified to take it to the next level.

Results

The result for the year ending 31 December 2012 was a profit before tax of £217.1 million (2011: £17.3 million) on a gross written premium income of £1,565.8 million (2011: £1,449.2 million). The combined ratio was 85.5% (2011: 99.5%). Earnings per share were 53.1p (2011:5.5p) and the net assets per share rose to 349.7p (2011: 323.5p). The return on equity was 16.9% (2011:1.7%).

Dividend, balance sheet and capital management

The Board has reviewed the capital requirements of the Group for the coming year and has proposed that a special distribution of 38.0p per share (amounting to approximately £150 million), should be made. This will reduce capital levels close to those of the 2012 opening balance sheet, effectively distributing all of this year's profit to shareholders which will have a favourable impact on both the Group premium to capital gearing ratio and return on capital, whilst still providing sufficient headroom above existing internal and external capital needs. This proposed return of capital will be made by way of a B share scheme and will be combined with a share consolidation.

In addition, a sum of 12.0p per share will be paid instead of a final dividend for the year ended 31 December 2012 as part of the B share scheme. This amount, together with the interim dividend of 6.0p per share, represents a total dividend for 2012 equal to 18.0p per share (2011:17.0p), an increase of 5.9%, in line with our policy of progressive dividend growth. As a result of this amount being paid as part of the B Share Scheme, a scrip dividend alternative will not be offered to shareholders.

Full details of the proposed return of capital and final dividend equivalent will be set out in a circular expected to be despatched to Hiscox shareholders on or around 26 February 2013.

The business

As ever, Bronek will comment in detail in his following report on the various business activities. I would like to comment on the current state of the business that I have helped develop over the last 48 years and its future opportunities.

The basic underwriting strategy

When I stopped underwriting for our Lloyd's Syndicate in 1988, the 'retail' account of relatively simple insurance business was 50% of the portfolio, the balance being internationally traded reinsurance and large insurance business. That balance remains roughly the same to this day, albeit over a larger and more diverse Group.

We have created insurance companies in the UK, Guernsey and the US to underwrite the simpler business, and one in Bermuda to augment our strong reinsurance presence.  We have the huge advantage of all our underwriters being able to use one of our local companies if suitable or Lloyd's with its great brand, financial strength and worldwide licences.

Catastrophe and Internationally traded business

The core profit earner remains our founding London Market business.  I believe that London will retain its prominence in the world of internationally traded business, and that Lloyd's will be the strongest magnet in that market.

The catastrophe and major loss business currently looks very volatile with international political unrest and more disturbed weather patterns. This is an opportunity for us as it keeps demand up and the weaker competitors away.

Bermuda is a great addition to our involvement in that business and they and London work in parallel to widen the distribution and to grow diversified accounts.

We will continue to study the alternative risk transfer methods that are being developed and use them or write them, depending on the price levels.

The London Market division also writes a successful balancing book of non-catastrophe business in London and through other offices worldwide.

Retail insurance business

The accounts that we call 'retail' business are very close to my heart as when I underwrote at the box, I built up those accounts leaving the larger risks to my partner Nicholas Thomson. I always thought that the retail accounts were worth building up for their stability. In 1988 we set about widening our distribution to non-Lloyd's brokers and into Europe, and later in 1996 we bought an insurance company to take the retail account. We paid £28 million for the company (including a £6 million premium over assets) which seemed a high price, and I remember being warned by our investment banker that we were betting the bank. It is highly satisfactory to see the UK and European businesses make a profit of nearly £50 million this year. A pretty good investment.

The growing retail accounts are very important to us as they give stability to our profitability and add real value as steady profits are rated at a greater multiple. We have invested heavily into them both in terms of money and effort as we believe them to be core to our building a balanced and steadily more valuable business.

Overseas expansion

We first expanded the retail account into Europe, starting in 1993, and it has taken time to reach critical size. It is easy to see Europe as one geographical area when it is immensely different in the business practices in each country despite 38 years of efforts to create a Single Market.  We are winning there and the next few years should see a steady increase in profitability.

Next we set up our Guernsey operation which has been a huge success and will remain a hub for some of our accounts.

Bermuda followed and that too has been very successful. Robert Childs, who is due to take over from me as Chairman, set up the Bermuda company, and proceeded shortly afterwards to open our US offices. We have made a big commitment to the US and I am very excited at the possibilities.

We are well aware of the graveyard of businesses which have expanded overseas, so having expanded in the sophisticated (but battered) economies of Europe and the US, we will consider any expansion east or to other emerging economies with great caution. It will happen when the right opportunity arises.

Marketing

I have always firmly believed that if you are good at what you do you should make every effort to spread that good news to potential clients. I think our marketing has done just that and I must congratulate Steve Langan who heads our UK retail side and masterminds our worldwide marketing. It has made us stand out from the crowd, has given us standards to live up to, has pulled in a great amount of business and has been a very good investment.

IT

I bore my colleagues by banging on that we should be an IT company with insurance attached, not an insurance company which uses IT. We are good at underwriting which we have done overall successfully for 112 years, but the next era will be dominated by IT, from an increasing competitive advantage from management information, especially in calculating underwriting rates, to distribution of policies. The company with the best IT and the ability to use it well will win.

Investments

Investment income has contributed on average 50% of our profits in the past, but today's low interest rates make that impossible in the near future without phenomenal risk taking. The low returns from the bulk of our portfolio of Government bonds give little protection against the potential volatility from any risk assets we own. David Astor, our Chief Investment Officer, works tirelessly to eke extra yield without undue risk and has nearly hit that 50% this year despite difficult conditions.

Insurance politics

The year has seen us conquer the burden of Solvency ll and I think achieve greater harmony with our regulator, freeing us up to get on with making money. The financial burden of the implementation of Solvency ll on us and the industry has been considerable. After 48 years of assessing risks, which is what underwriting is, it was surreal to have a one size fits all model for assessing the risks in the business inflicted on us in minute detail by actuarially driven regulators, combined with corporate governance diktats imposing huge expectations on non-executive directors combined with an extra layer of risk assessment staffing.

The FSA is about to be split in two into prudential and conduct supervision under the Bank of England with the duty to ensure we are able to pay claims when they fall due. I could wish that we had one regulator to form a relationship with and not two as there is always a fear of duplication or of something falling between the two stools, but we are where we are. We need effective regulation as the whole industry suffers when an insurer misbehaves or becomes insolvent. The FSA has taken virtually all self-regulation away from our industry which means that by definition we are invigilated and regulated by people with little or no trading experience in our business. We need good regulation, and to help the regulator I wish that all entities involved in general insurance, from the ABI, the International Underwriters Association, the Chartered Insurance Association and  Lloyd's, would form a General Insurance Body to be a strong lobby and, to an extent, a self-regulating body. We in the industry know when a competitor is going to go bust as we trade against them and see the folly; we ought to have a system of warning the regulator. And we desperately need a strong lobby to fight for us in the corridors of power. For instance, when a very senior politician starts attacking the insurance industry for its performance over flood damage, someone needs to hit back very hard with the truth.

The next era

I set out to run an honest business, to choose the best people to help me run the business, and to pick honest and careful clients who we would treat with great integrity and efficiency.  The ability to pick the right people is to me the most important talent in all of life. My first major delegation was to Nicholas Thomson who was a brilliant underwriter and we owe him a huge debt of gratitude for the strong underwriting discipline he instilled. The next major delegation was to Bronek Masojada who joined in 1993 as Managing Director to help run the company and took the reins as CEO in 2000. Like an Oscar winner I would like to mention a whole host of others who have been indispensable, especially Alec Foster who handled our Lloyd's members in the early days and invested all our money so wisely, but space does not permit.

We have spent the last era building businesses both inside and outside Lloyd's and I believe we have developed some very strong future profit generators to add to our existing international and retail businesses. I hand over to Robert Childs (who has done incredibly valuable work at Hiscox for 26 years) and the top team with a happy heart. I have had fantastic fun building the business, and it will be just as enjoyable watching the success in the next era.

Robert Hiscox

25 February 2013

2012 Chief Executive's report

Fires, storms and floods are the everyday experience of insurance companies. 2011 was exceptional in its severity so in comparison 2012 felt like a more normal loss experience, despite it being the third most expensive year on record for major catastrophes. We dealt with record flood activity in the UK, Superstorm Sandy in the US, fine art thefts in Europe, fires in substantial properties across the world and the sinking of Costa Concordia. A profit of £217.1 million (2011: £17.3 million) and return on equity of 16.9% (2011: 1.7%) is therefore a good result and was driven by a combination of good underwriting performance and an excellent (for current market conditions) investment return. Our aim is to make good profits in years such as 2012, small profits in poor years (as we saw in 2011) and exceptional profits in very low loss frequency years.

Our strategy remains to build balance and diversification within the business. We saw good growth in the London Market, Bermuda and particularly the United States. Profits flowed from our London Market, UK, Bermuda and Guernsey businesses, offsetting the ongoing investment in the United States.

Hiscox London Market

Hiscox London Market business remains a powerhouse. Exceptional underwriting and a well diversified portfolio have delivered a profit of £121.9 million (2011: £57.6 million) with every division contributing.  Gross premium income grew by 9.3% to £640.0 million (2011: £585.4 million). The business achieved a combined ratio of 75.5% (2011: 89.1%) despite Superstorm Sandy and some large individual claims such as Costa Concordia. I review each division in turn below.

·      Reinsurance: The many catastrophes of 2011 provided significant opportunities in 2012 as rates doubled in some loss affected areas. We increased market share in Japan and maintained a good position in other territories. The team delivered a very strong result despite the impact of Superstorm Sandy which we reserved for the Group as a whole at a net £90 million.

We continue to underwrite catastrophe business in London and Bermuda on behalf of third parties. It is a profitable use of our expertise and gives our partners valuable diversification.  For several years we have been underwriting a book on behalf of Aviva and this quota share arrangement came to an end in 2012. Aviva have been a good partner, and whilst we are sorry to see the end of the relationship we have more than replaced their support with capital from other sources - a testament to our team's reputation and track record.

Market conditions remained attractive at the important 1 January renewals, with rates flat to positive in the key North American territories and softening in international markets. Overall reinsurance rates are still healthy.

·      Property: Our Property division delivered a good profit. It grew strongly in US small commercial, personal and onshore energy lines and was only marginally affected by Superstorm Sandy. The fire, theft and collision insurance book performed less well. This business tends to be less catastrophe exposed and so should be a source of stable profits within the division. We will be working hard to achieve this in 2013.

·      Global Response: The Global Response team serves clients around the world, covering personnel and property for kidnap and ransom, terrorism, war and political violence risks. 2012 proved to be calmer than 2011 and this has produced a strong result. The market in which we operate requires a high degree of service and responsiveness, and our team continues to deliver to the highest standards, maintaining our market leading position. The world remains a volatile place, and companies are increasingly looking to protect their assets. We have the expertise and are well placed to help.

·      Marine and Energy: The team had a good year with profits and growth in offshore energy more than offsetting the Costa Concordia loss which is expected to settle at net $20 million. To the wider industry this loss has deteriorated, mainly due to the rising costs of removing the wreck. As the world becomes more environmentally conscious this type of expense will continue to increase, and we expect this to be reflected in future premiums for marine liability and related risks. In addition our offshore energy team have performed exceptionally well.

Marine liability insurance is one of the oldest risks in the London Market and is proving to be at the cutting edge of modernisation for Hiscox. We have given retail brokers the ability to place smaller risks quickly and cost effectively directly with us online and this investment in e-trading has delivered modest premiums in 2012 which we expect to grow in 2013. We will also be looking to trade in this manner in other lines of business.

·      Casualty: The casualty market remains a challenging place and we continue to reduce our lines as the rates on offer remain inadequate. We do, however, believe that ultimately economic sanity will prevail and the market will inevitably harden. In preparation, during the course of 2012 we recruited several senior staff to build on our existing team. The division has performed well at the bottom-line, as we have benefited from releases in prior years - demonstrating our prudent approach to reserving.

·      Aviation and Space: Both lines continue to make steady profitable progress. Pricing in the aviation market remains challenging, but our risk selection and hence loss experience has remained exemplary, so results are very acceptable for our second year of underwriting this class of business. There has been increased launch activity in the space market leading to slightly higher volumes. As the global economy continues to depend on more support from extraterrestrial services, we believe this business will grow steadily over time.

Our London Market business has a global remit. It makes use of the Lloyd's brand name and licences to write business located around the world. Lloyd's is making steady progress to enhance its own licence network, and we at Hiscox are supportive of all efforts to expand the range of licences the market has for  both reinsurance and insurance. We are particularly supportive of licensing which allows us to trade from London without the costs of teams on the ground. In 2012 we saw the benefit of doing this with the significant expansion of our Japanese and Thai reinsurance exposures, and the insurance support we were able to give the New Zealand economy to enable the rebuilding of Christchurch. All of this business was underwritten from London, backed by extensive visits to local clients and brokers. We hope that as regulators get more parochial they will remember the benefits of accessing global expertise and capital, and will not restrict our ability to trade in this way.

Hiscox UK and Hiscox Europe

In 1987 we took our first step into UK retail business (or local specialty insurance) moving into Continental Europe in 1993. By 2012 our businesses had expanded materially, writing premium income of £507.5 million (2011: £498.0 million) and delivering a profit of £49.1 million (2011: £51.5 million). There is plenty of room to grow in these markets and I remain confident that we have the products, expertise and brand to continue to expand.

·      Hiscox UK. Our UK business made another excellent profit of £45.2 million (2011: £49.0 million) despite spending more on marketing and paying record flood losses. The business benefited from a good investment return and good underwriting. Growth in commercial product lines offset the cancellation of two high net worth underwriting partnerships, resulting in an increase in revenues of 2.2% to £375.2 million (2011: £367.1 million). The progress in our core lines is set out below:

The high net worth business delivered a strong profit despite the largest single loss in its history - a London house fire. Premium income shrank slightly reflecting the previously announced withdrawal from two partnerships which did not live up to expectations. We also experienced the greatest level of flood activity in our history, paying claims to the value of £14 million in flood and storm losses. You only find out the worth of your insurer when you make a claim so it is pleasing that during this busy year our team lived up to its reputation for excellence, winning 'The British Insurance Awards Customer Care' accolade. In the competitive luxury motor market we reached maturity with a second year of profit, our service and brand setting the team apart.

Our professions, speciality commercial, and technology lines have made good progress. We launched five new professional indemnity products during the year specifically for the unique risks professions such as facilities managers and interior and garden designers face. These products have sold well, filling a real customer need. Recessionary related claims have not been as severe as we had expected.

The direct business continues to propel the brand. We increased our marketing spend in the year by £4 million and returned to TV with an advertising campaign that promotes our ethos of trust, honesty and fair customer service. An unexpected outcome has been the strength with which our broker partners have identified with this message, reinforcing our relationships. The direct household products have been held back by challenges within our online platform hampering our flexibility in pricing. We are investing in 2013 and beyond to address this. Our commercial products continue to move ahead despite an increasingly competitive market. Again the brand and our service reputation are real differentiators. Competitors can copy our wordings, but these more intangible elements are real protective moats to our business.

In 2013 Hiscox UK has a big agenda. Distribution for the insurance market has evolved over the years; it is no longer as black and white as broker versus direct. We are launching a tied agency to address gaps in our current model, working direct and in partnership with specialist commercial brokers who don't have in-house private client expertise but who want to offer a Hiscox home insurance policy to their clients. We also announced our plans to open a multi-function office in York during 2013, with progressive in-sourcing of some of our direct customer service centres. We have had effective relationships with our outsourcing partners for over a decade, but we feel that the next stage in our journey requires greater control over critical aspects of our customer service.

·      Hiscox Europe. Our European business has reached its fourth consecutive year of profitability. Revenues have grown by 5.9% to €160.4 million (2011: €151.4), though only 1.1% to £132.3 million when looked at in sterling. Profits grew to £3.9 million (2011: £2.4 million) despite increased marketing spend to support our French direct business. The combined ratio rose to 100.9% (2011: 100.5%), with improved investment returns driving the profit. Combined ratios and returns on equity are being challenged by the European economy and issues of scale.

The combined ratio challenges have come from two fronts. First we have seen some recession related claims; jewellery thefts in public places, aggressive home invasions, and some large fine art thefts. The second is our expense ratio. This is driven by increased marketing expenditure to support the growing direct business in France, and also an increasing focus on smaller ticket business. This business is attractive from a loss ratio perspective, but initially it does drive up operating cost. We will be working in 2013 to re-engineer our business to bring this ratio down.

We continue to see opportunity in Europe. Partnerships with major financial institutions have performed well and are expanding from their commercial focus to high net worth personal lines. We also expect in time to see the broader brand benefit from our direct activities. We were on French TV for the first time ever in 2012. This supported our small direct business, and is also, reflecting our UK experience, driving brand recognition and perception in the broker channel. We will be launching a direct business in Germany in 2013, and I am confident that in time, the German and French business will replicate the success we enjoy in the UK.

Hiscox International

Hiscox international comprises our activities in Bermuda, Guernsey and the United States. In aggregate they had a good year, though obviously not as positive as it might have been without Superstorm Sandy which materially impacted both our Bermudian and United States businesses. Each of the three business's progress is discussed below.

·      Hiscox Bermuda. Our main focus in Bermuda is on reinsurance with an emerging presence in healthcare. Revenues grew by 11.5% to $318.1 million (2011: $285.2 million). Profits grew substantially despite the cost of Superstorm Sandy. This performance reflects strong growth in the reinsurance business with a focus on areas like Japan, Thailand and Australia which were particularly affected by natural catastrophes in 2011. Healthcare made steady progress.

The reinsurance market is evolving and we must change with it. New forms of capital are entering the industry, selling collateralised policies or buying catastrophe bonds issued by cedents like Hiscox, in competition with traditional markets. For a number of years we have invested in a small portfolio of catastrophe bonds issued by cedents. In 2012 we invested in a fund managed by Third Point Reinsurance Investment Management Ltd and took a stake in the firm. After all, a catastrophe bond is no more than a reinsurance contract and a bond investment linked together. We will also be ceding tailored portfolios of catastrophe reinsurance exposure to the fund. We need to adapt as the market adapts and this helps us to do so.

·    Hiscox Guernsey. This business underwrites kidnap and ransom, piracy, fine art, terrorism and personal accident insurance. It delivered a very good profit even though revenues declined by 8.5% to £73.0 million (2011: £79.8 million). This is due to a disciplined approach to underwriting piracy and business that was previously signed in three year deals to take advantage of good terms, prices and conditions. The team continues to concentrate on expanding its distribution into new territories.

·      Hiscox USA. Our US business made excellent progress during the year. Revenues grew by 32.6% to reach $230.5 million (2011: $173.8 million), with strong growth across every office and in every product. The business was performing well ahead of plan at the bottom line until Superstorm Sandy. We suffered losses on our construction account with most other areas escaping relatively unscathed. As they mature our professional liability accounts are developing well - a reflection of early prudent reserving. During the year we launched 'Hiscox One', a one-stop modular insurance cover for film and television productions. It is the first integrated product on the market and has been received well. The direct business continued to expand, reaching almost $10 million in premium income (2011: $3 million) with some exciting prospects in store for 2013. We will continue to market the products online in 2013, and test brand advertising on billboards, specialist publications and other print media in Austin and San Diego, with the aim to accelerate growth in these key markets.

The US business is on track and we continue to invest in driving it to success. Our ambition is that the broker channel business will be profitable in 2013, assuming a normal loss year. The ongoing marketing investment in the direct business will hold back profitability in the short-term, but as we grow in knowledge and experience in the US we anticipate more rapid success.

Claims

When you sell insurance, claims are something you anticipate and plan for and at Hiscox we pride ourselves on settling our client's claims swiftly and fairly. As highlighted at the start of my report we had a busy year. Costa Concordia and Superstorm Sandy hit the headlines, but there was lots of other activity.  2012 was a year of dramatic weather in the UK and Hiscox UK received 1,500 storm and flood claims with related claims paid of £14 million, nearly five times the previous year.

Handling claims well requires a balance of thorough process and controls as well as an ability to deal with claimants and their brokers. During the year we completed the implementation of a new claims management solution for Hiscox London Market which has transformed the way we do claims in that area, leading to better decision making, enhanced productivity and improved indemnity costs. In a 2012 independent survey of claims brokers we continued to score favourably for broker satisfaction and with the enhancements in service that the new system will allow, we are hopeful that our perception in the market will improve further in the year ahead. In our UK and European businesses, customer satisfaction with our claims handling has continued to improve, and effective claims handling continues to set us apart in the market.

Hiscox's cautious reserving philosophy is again reflected in reserve releases of £152 million, down from releases of £199 million in 2011.

Operations and IT

The key ingredients for a successful insurer are capital, good people and effective IT. IT is a significant expenditure for the Group and is likely to increase in the short to medium term with the objective of improving distribution and service. In 2012 we developed a Group IT strategy, providing a clear roadmap for activity over the next five years.

The day-to-day delivery of services to brokers, customers and within the Group is continually improving. As the company grows, we can never be satisfied and will continue to look at ways to improve processes and minimize expenses. We have undertaken various lean management initiatives across the Group in 2012 including: improving how we operate our small commercial insurance lines in Europe, introducing a client focused underwriting centre in the US and significantly increasing the amount of time underwriters spend on broker activity in the UK through the creation of virtual teams aligned to each UK region. Each of these steps has progressively improved service reliability and predictability. In 2013 the focus will be on using the momentum of 2012 to maintain service whilst reducing cost.

Investments

Hiscox's focus on property related insurance means that our invested assets, when measured relative to our premium income, are lower than the industry average. Despite this, investment income has historically accounted for about 50% of our profits. We began the year with cautious expectations given the low interest rate environment and our view that a lot could have gone wrong during the year. However, our worst fears were not realised and, with a fair wind from central banks, the investment result exceeded our expectations - and accounted for 42.6% of our profits, only just below the longer term average. We achieved a total return of £92.7 million before derivatives equating to a yield of 3.1% (2011: £25.9 million, 0.9%).

Our asset allocation changed little during the year. In the bond portfolios, duration was kept short and a healthy weighting towards non government bonds was maintained. We made some alterations to the selection of equity and hedge fund managers but our overall exposure remained constant at around 6% of assets. With the words and actions of central bankers reassuring investors that interest rates would be kept low and a financial upheaval, particularly in Europe, would not be tolerated, a 'risk on' mentality eventually prevailed. This served us well as non government bonds and equities were much in demand.  Our bond portfolios all beat their benchmarks and benefited from the narrowing of credit spreads and, unlike the previous year, there was not much opportunity cost to being short duration. The risk assets portfolio produced particularly strong returns both in absolute terms and relative to market indices.

Whilst the investment world may look a safer place in 2013, plenty of uncertainty still exists and the portfolio is cautiously positioned overall both from a duration and credit quality standpoint. After such a favourable period for bonds, the yield to maturity of our portfolios has declined over the year and our expectation of returns from them in 2013 is therefore correspondingly reduced. We do, however, retain an appetite for sensible risk, hence our continued allocation to equities. We feel they offer a better risk reward ratio than exists in the higher yielding bond and structured credit strategies where we continue to resist temptation.

Capital management

We announced today a special distribution of approximately £150 million, equal to 38p per share, which is on top of the final dividend equivalent of 12p. This takes our total capital back to approximately the level at the start of 2012. A lot of detailed analysis has been done to support this decision, but in essence we feel that we started the year in a strong capital position, and looking forward we can see that our prospective profits will generate enough capital to support our growth so that there was no need to retain our after-tax profits for the year.

Our leadership and our people

As announced 12 months ago Robert Hiscox steps down as Chairman with the presentation of these results. Robert's record of successful leadership is unparalleled in the insurance industry and his contribution has rightly been recognised publicly over the year. When Robert took the reins at Hiscox in 1970 annual revenues amounted to £2.3 million; this has grown to £1.6 billion in 2012. Robert has accepted the role of Honorary President and we look forward to his ongoing sage counsel.

The board undertook a thorough selection process in recruiting Robert's successor. I am delighted that they have chosen Robert Childs, our Chief Underwriter who has been with us for 26 years. This decision has been greeted very warmly within Hiscox and the industry.

There is a great benefit to having someone who knows the detail of our business in the role of Chairman. The greatest risk to the prosperity of our business is the success of its underwriting. In insurance the premiums are visible whilst the risks only become visible when the claims occur - when it is too late to change course. As the banks have shown, even the most sophisticated systems cannot adequately surface some critical risks on a timely basis. As Chairman, Robert Childs will have the enormous advantage of understanding where the risks lie, which ones are easy to measure and monitor and which will rely on judgement and feel. He also has the experience of dealing with a huge industry loss and knows that reacting in the right way is often the determinant of success in these tough situations.

Beyond the more visible Chairman's succession, we have made some other senior executive moves. In June Richard Watson returned from the US where he served as Chief Executive to become Deputy Chief Underwriting Officer and he now succeeds Robert Childs as Group Chief Underwriting Officer. Richard made a major contribution to shaping our US business, setting it on a successful path. His experience managing the London Market business and a more retail environment in the US makes him well placed to oversee our underwriting culture. Ben Walter replaced Richard Watson as Chief Executive of Hiscox USA. Ben joined us two years ago as Chief Operating Officer of Hiscox USA from the fund management industry. Gary Head, the Chief Underwriting Officer of Hiscox UK has moved to the US to serve as its Chief Underwriting Officer. Charles Dupplin returned to the UK from Bermuda where he served as Chief Executive of Hiscox Bermuda, and Group Company Secretary. He will continue as Head of M&A and Special Projects, a role he had in Bermuda, but which received less attention with his other responsibilities. Jeremy Pinchin has succeeded Charles as CEO of Hiscox Bermuda and Company Secretary, whilst remaining Group Head of Claims. All of these moves have entailed personal challenges for the individuals and their families and I am grateful for the sacrifices they have made to help us build our business.

The broad Hiscox team make their contributions in many roles, geographies and disciplines. It is the dedication to excellence that builds our reputation as a Group. Our excellent marketing can deliver the message, but I am always personally gratified to be complimented on a claim paid well, a risk well underwritten or a recruitment process thoughtfully handled. These are all the result of individual decisions well executed - the personal standards of each person involved shining through. Our many staff deserve our thanks and it is great that their efforts have been justly rewarded in good performance.

Outlook

As I said at the start of my statement, 2012 was a more normal year for the global industry after the challenges of 2011. That means that we do not expect material upward or downwards pressure in pricing.  Reinsurance pricing is up slightly in areas closest to recent losses - in the US East Coast, Japan and parts of Asia. In the US domestic market there are reports of slight upward movement in some areas for the second year in a row. Parts of the UK are very competitive, whilst others are benign, so our aggregate expectation is for a stable pricing environment where good risk selection, good underwriting and good service will be rewarded. Investment returns will likely trend down reflecting the broader financial market.

Looking further ahead than 12 months I believe we have the ability to materially grow the size of our business within the classes and geographies in which we currently operate. In our most developed retail market, the UK high net worth area, we still have only single digit market share, so the opportunity here is significant, not to mention the opportunities in other territories. Our retail commercial market share is even smaller, and our direct businesses have just begun. In our internationally traded businesses we are a smallish player other than in a few very specific segments, so again we have the opportunity to grow and develop. Expansion of our geographic footprint could also create new opportunities.

As I enter my twentieth year at Hiscox, I remain enthusiastic and optimistic for the opportunities ahead. I remain impatient and unsatisfied that we have not captured more of them already - a trait I have had bred into me by Robert Hiscox - and I am sure that with a steady determined focus on winning clients one at a time we will continue to grow our business profitably to the satisfaction of clients, staff and shareholders.

Bronek Masojada

25 February 2013