Hiscox 2014 preliminary results

For further information

Hiscox Ltd
Jeremy Pinchin, Group Company Secretary	+1 441 278 8300
Kylie O'Connor, Head of Group Communications, London	+44 (0)20 7448 6656
Brunswick
Tom Burns	+44 (0)20 7404 5959

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 divisions in the Group - Hiscox Retail (which includes Hiscox UK and Europe, Hiscox Guernsey, Hiscox USA and subsidiary brand, DirectAsia), Hiscox London Market and Hiscox Re. Through its retail businesses in the UK, Europe and the US Hiscox offers a range of specialist insurance for professionals and business customers, as well as homeowners. Hiscox underwrites internationally traded, bigger ticket business and reinsurance through Hiscox London Market and Hiscox Re.

 

For further information, visit  www.hiscoxgroup.com.

 

Chairman's statement

 

I am able to report another strong result for the Hiscox Group, a pre-tax profit of £231.1 million (2013: £244.5 million). We have done well in difficult markets by maintaining discipline in both our underwriting and investment portfolio, and pursuing our strategy of building balance through diversity of product, geography and distribution.

 

While the double whammy of burgeoning capital and fewer losses has put pressure on bigger ticket rates, we have continued to invest in the retail businesses in the UK, Europe, the US, Guernsey and more recently in Asia. Our London Market team has dug out nuggets of profitable business against tough competition. Hiscox Re, our reinsurance arm, has adapted swiftly, developing new products and opportunities to engage customers.

 

Results

 

The results for the year ending 31 December 2014 were a profit before tax of £231.1 million (2013: £244.5 million). Gross written premium increased by 3.3% to £1,756.3 million (2013: £1,699.5 million). The combined ratio was 83.9% (2013: 83.0%). Earnings per share increased to 67.4p (2013: 66.3p) and the net asset value per share increased by 15% to 462.5p (2013: 402.2p). Return on equity was 17.1% (2013: 19.3%).

 

Dividend, balance sheet and capital management

 

The Board has proposed that a special distribution be made of 60.0p per share (amounting to approximately £192.0 million) to include 15.0p per share instead of a final dividend. The total dividend for 2014 is equal to 22.5p per share (2013: 21.0p), an increase of 7.1%. The return of capital will be made using a similar scheme to last year and will again be accompanied by a share consolidation. Full details will be set out in a circular to be despatched to Hiscox shareholders on or around 3 March 2015. This is now the third successive year in which we have been able to return capital to shareholders and again I say that this is a tactic for the circumstances we are in, not a long-term strategy to return capital every year.

 

Investments

 

Given the continued challenging markets, and relatively cautious approach, we are content with our investment result of £56.4 million (2013: £58.9 million), which equates to a return of 1.8% (2013: 1.9%).

 

Our bias towards short-term bond investments provides something of a constraint in current markets but it is driven by the desire not to suffer losses when bond yields rise.

 

Our performance was improved by our risk assets, which produced a pleasing return of 7.6%. However, we do not believe it is appropriate to take excessive risks in search of higher yields, as our investments are mainly earmarked to pay claims and support our business, although we continue to look for appropriate opportunities in the equity markets. In 2015, we are planning for a continuation of the same market conditions that have produced low, but still positive, returns for us in recent years.

 

The changing market

The ongoing low interest rates and benign claims experience continues to attract new capital to our markets, putting pressure on brokers and insurers. In my opinion, the new sources of capital are here to stay. They have become accustomed to operating in our business, so I think they are unlikely to move on (as perhaps some hope they will) when rewards improve in other parts of the capital markets.

 

Squeezed margins and consolidation have put pressure on old relationships. Our response has been to support brokers through collaborative product innovation and improved processes, focussing on expertise and service to help their clients. We also continue to explore and support new distribution channels. Over many years we have built a powerful direct-to-consumer business, which we are replicating in different countries. Alongside this, our broker e-trading capabilities, our involvement in specialist underwriting agency White Oak, our support of new facilities and our recent bolt-on acquisitions, all give us access to a broader portfolio of risks.

 

In the face of strong headwinds, one can see a clear divergence of strategy in the market with some companies growing big ticket business and some contracting. Our underwriting strategy combines underwriting rigour with an eye for opportunity and is designed to manage all stages of the insurance cycle: we plan for the soft market conditions we are experiencing. We believe that when margins reduce you take your foot off the accelerator and when they increase you push down hard. We also believe that our strategy of persistently investing and building the retail businesses as a counter weight to the more volatile lines continues to be the right one.

 

The Board

 

It has been nearly nine years since we created the Hiscox Ltd board, and according to UK corporate governance directors potentially cease to be independent after nine years' service. As such, a number of our original Board members will be stepping down during the year. These include Dr James King, Andrea Rosen and Dan Healy. I am particularly pleased our businesses in Bermuda and the US will continue to benefit from James and Dan's sage counsel as they continue to serve the Group on our subsidiary Boards. I would also like to express my deep gratitude to Andrea for the many valuable contributions she has made to the Company over the last nine years.

 

In preparation for this we have conducted an external search to recruit two replacements and are recommending to shareholders the appointment of Lynn Carter and Anne MacDonald to our Board.  Lynn Carter will bring 38 years' experience in the banking industry, most recently as President of Capital One Bank, while Anne held the position of Chief Marketing Officer at four different Fortune 100 companies including Travelers and PepsiCo. These appointments support our focus on retail growth and brand building.

 

In addition, Richard Gillingwater Senior Independent Director, who joined the board in 2010 will step down after the AGM due to his new commitments at Scottish and Southern Energy as well as Henderson Global Investors. The Group has benefited greatly from Richard's acumen and measured approach and I wish him all the best in his new role at SSE.

 

Finally

 

We continue to recruit, train and motivate the best people. Their desire to do the right thing, however hard, is what makes our customers want to do business with us. I am thankful to everyone at Hiscox for their diligence and for the ongoing support of our customers.

 

I recently visited our York office, having the week before returned from visiting our new office in Singapore. I was inspired by the enthusiasm and drive of the young teams and the commitment and intellect of the leadership in both places. It is pleasing to see that Hiscox businesses, from Singapore, to Atlanta and York all reflect the same values and determination to succeed.

 

During my time at Hiscox I have seen our strategy, those same values and that determination tested in battle - and prevail. In turbulent times we have delivered profitable organic growth and returned extra capital to shareholders. I expect the strong headwinds to continue but our course will not change; it has already brought the business, our staff and our shareholders success, and I believe will bring greater rewards in the future.

 

 

 

Robert Childs

2 March 2015

2014 Chief Executive's report

 

I am pleased to report a profit before tax of £231.1 million (2013: £244.5 million), a return on equity of 17.1% (2013: 19.3%) and revenue growth of  3.3% to £1,756 million (2013: £1,699 million) - a credible performance in current market conditions. This result reflects the continued good progress of our retail businesses which, for the first time account for over half of Hiscox Ltd's gross written premiums. Our US business contributed materially to this, growing organically by 24.1% to over $360 million. Hiscox UK and Europe all delivered record profits. Our London Market business has made a good margin and grown in a difficult market. Our reinsurance business has had a tremendous year and acquitted itself well in challenging pricing circumstances, receiving ongoing support from our quota share partners and attracting new investors to our insurance linked funds which are now on track to reach $500 million in assets under management.

 

With these results, we have announced a capital return of 60 pence per share, comprising a special distribution of 45 pence per share and a further 15 pence per share instead of a final dividend. The total capital return is equal to approximately £192 million. I am pleased that for another year our business is strong enough to allow this return of capital and at the same time we are able to invest in talent, infrastructure, small acquisitions and new opportunities.

 

Market challenges remain - pricing pressure due to the absence of large losses, a flood of capital into reinsurance, technological change putting pressure on infrastructure, and low investment returns due to ongoing financial repression. Our long term strategy is showing its mettle, and our options - in terms of products, distribution routes and geographies - allows us to adapt and continue to deliver good returns to shareholders.

 

 

Hiscox Retail

 

We began growing our specialty retail business outside Lloyd's in 1989, with an initial focus on high net worth homes. It reached £2 million in its first year. Since then we have broadened the product offering, entered new countries and built new distribution channels. Hiscox Retail now comprises over half of the Group's gross written premium - £891.1 million in total (2013: £819.4 million). Over the last 10 years it has grown at 12.8% compound, and yet we are still a small participant in most of the segments we target. In 2014 it contributed profits of £78.1 million (2013: £61.2 million), enough to cover the equivalent of the final dividend for the Group. The combined ratio improved slightly to 93.5% (2013: 94.3%). The scale, steady profits and brand value of this segment truly differentiate Hiscox in the insurance marketplace.

 

Hiscox Retail comprises Hiscox UK and Europe, and Hiscox International. I review them in turn below:

 

Hiscox UK and Europe

 

This division provides personal lines cover - from high-value households, fine art and collectibles to luxury motor - and commercial insurance for small and medium sized businesses, typically operating in white-collar industries. These products are distributed via brokers, through a growing network of partnerships, and direct to the consumer.

 

Our retail businesses in the UK and Europe delivered record profits of £73.3 million (2013: £56.4 million) despite serious floods in the UK - and hailstorms, windstorms and floods in Europe.

 

Hiscox UK and Ireland

Hiscox UK and Ireland increased gross written premiums by 5.5% to £435.0 million (2013: £412.4 million) with strong growth in areas where margins are good and reductions in less profitable business. It achieved a combined ratio of 88.6%, at the better end of our normal expectations.

 

The first half of the year was dominated by floods in South East England where we have a concentration of customers. As always, our claims team delivered an exceptional service, meaning we were able to close 92% of claims on average within eight weeks of being reported. The floods highlighted issues with the Government's Flood Re scheme, which was particularly unfavourable for many of our insureds. We led an active campaign throughout the year to change this and were pleased that some of our concerns have been addressed.

 

In the second half of the year we launched a series of new and refreshed products including Data and Cyber Risks, and Personal Accident cover, which are showing positive early signs. These innovations have contributed to a particularly good year for the UK broker business.

 

We always look at opportunities to develop a market-leading position in our chosen areas of specialism and we have made a series of small acquisitions to this end. We acquired Event Assured in September, consolidating our position as market leaders in insurance for small events, conferences and exhibitions. Today we announce completion of our acquisition of R&Q Marine Services, a managing general agent specialising in yachts and general marine leisure which underwrites on behalf of other insurers. We will now combine their knowledge with our distribution and marketing capability to serve more customers in our target segments.

 

We are seeing some success with Hiscox Private Clients, our tied agency through which we sell high net worth home insurance direct to customers. This complements our highly successful direct to consumer mid-net worth home and small commercial business products. Through these direct operations we serve over 124,000 customers and we still have plenty of room to grow.

 

A major achievement in the year was the delivery (on time and relatively close to budget) of the first phase of our £50 million programme to renew the IT infrastructure that underpins our retail operations. We are already seeing benefits in improved customer experience and higher sales for phase one which supports our direct home business. We are now working on phase two which will renew the infrastructure for our direct commercial business. This should be completed by the end of 2015. At the same time we have in-sourced our home and commercial customer experience centres - all of which will improve service and customer retention, accelerating our growth. We now have over 120 staff in York, and by the end of 2015 they will be housed in a new office which has room to cater for further expansion.

 

In the autumn, after a two year break, we returned to TV with a new home advertisement supported by cinema, print and poster campaigns. This has generated a great deal of new interest with calls, website visits and sales all increasing by over 30% during the campaign.

 

 

Hiscox Europe

Our European business had an excellent year, growing gross written premiums by 8.5% to €190.8 million (2013: €175.8 million). It delivered a combined ratio of 94.1%, including marketing costs of €4 million (or 2% on the combined ratio) as we begin the process of building a direct business in Europe. This is a good performance in the toughest economy in which we operate.

 

Each part of our European operation has performed well, benefiting from a focused business plan and improved expense management. Our partnerships with other financial services providers such as BBVA, Crédit Agricole, ABN AMRO and Generali who distribute our specialist products to their customers have helped our commercial business grow to almost €100 million. We have also invested in expertise, allowing us to develop products for software developers, radiologists, laboratories and equestrian centres.

 

Our Art and Private Client business in Europe has had a welcome return to growth and remained profitable despite the most severe weather related claims for the past five years. Hailstorms, windstorms and severe rain particularly affected Belgium and Netherlands, but we now have the scale to absorb these losses.

 

Germany performed especially well, reflecting the benefits of a consistent strategy, stable team and established broker relationships. Spain also had a good year, despite its ongoing economic difficulties thanks to committed, ambitious leadership.

 

Europe is benefiting from improving scale. We continue steadily to improve our expense ratio through our EuroFit project, which involves local process improvements and the concentration of functions in our shared service centre in Lisbon. A success during the year was the in-sourcing of our escape of water claims (a particular challenge in France) from a third-party to our team in Lisbon, resulting in lower costs and higher client satisfaction.

 

Our direct-to-consumer small business products in France and Germany are benefiting from more investment as they follow of our direct strategy in the UK and USA. Although the French and German direct businesses are still relatively in their infancy, with a total premium of only €4 million, we think the market opportunity is there and that with the right sustained investment we will build good direct businesses.

 

 

Hiscox International

 

This division comprises Hiscox Guernsey, Hiscox USA and DirectAsia. Its revenues grew by 15.7% to £301.1 million (2013: £260.3 million) and it achieved a combined ratio of 100.1% (2013: 98.5%). This good growth demonstrates there are still many opportunities for us across the world.

 

Hiscox Guernsey

During the year we formed the Hiscox Special Risks division, bringing together different teams from across the Group that focus on special risks, including kidnap and ransom, private client fine art and executive security, in a structure designed to boost local and global collaboration. Led from Hiscox Guernsey, Hiscox Special Risks has additional teams in London, Munich, Paris, New York, Los Angeles and Miami. We also underwrite personal accident, terrorism and fine art risks from Guernsey. In December 2014, we expanded our Miami operation recruiting additional staff and acquiring the renewal rights to a book of Latin American business.

 

Despite operating in highly competitive lines, Hiscox Special Risks has a well-earned reputation for expertise and service giving an element of stability to this business. Clients also benefit from our exclusive arrangement with security experts Control Risks.

 

Hiscox USA

Our US business had another year of strong growth. Gross written premiums increased by 24.1% to $367.6 million (2013: $296.2 million) with the broker business making a profit for the second year in a row. The professional liability products were a growth engine and provide a counterweight to other areas still in the investment stage.

 

Commercial property is under pressure, with double-digit rate reductions so we remain disciplined in this area. In all other lines, rates remain broadly flat. Media and entertainment is an area where we are investing, with IT infrastructure and an enhanced suite of products. The small business direct and partnerships division continue to forge ahead, with year-on-year growth of 75% and over 80,000 policies now in force. It is approaching scale.

 

The team has also been busy bringing other new products to market. New financial services and general liability lines, a new cyber deception endorsement and the roll-out of Hiscox Pro - the overarching name for our suite of profession's products - all give us opportunities. These have been welcomed by the market and are delivering promising early results.

 

Our investment in marketing and focus on differentiation in a crowded marketplace remains important to us, and during the year we launched a brand building campaign under the theme of 'Encourage Courage'. Celebrating Hiscox as an insurer that understands the challenges of building a business and the value in taking risk, the campaign is already resonating well with staff, brokers and customers. We expect to make a multi-year investment in the brand to support and drive the growth of our business in the US.

 

DirectAsia

Early in the year, Hiscox completed the acquisition of DirectAsia, a direct-to-consumer operation in Singapore, Hong Kong and Thailand. DirectAsia sells predominantly motor insurance with ancillary lines in travel. The business was acquired for $55 million, plus an earn out we would be happy to achieve and brought with it net assets of $23 million. DirectAsia uses the same IT platform that we are installing elsewhere in the Group and has good underwriting capabilities and customer service ability. We recognised a challenger business similar to Hiscox in a geography we are keen to explore.

 

The business is progressing as expected. Gross written premiums for the year were US$29.5 million, a 15.2% increase year-on-year (2013: US$25.6 million). The premium income for the period of our ownership was US$ 22 million.

 

Our key contribution to DirectAsia so far has been to bring our broader marketing knowledge. We have seconded staff and hired a new Chief Marketing Officer. We have also laid the groundwork for TV advertising for the first time in Thailand, part of a sustained campaign supported by print and social media marketing. It launched in January 2015 and initial results are encouraging.

 

Hiscox London Market

 

This segment uses the global licenses, distribution network and credit rating available through Lloyd's to insure clients throughout the world.

 

Our London Market businesses delivered a profit of £62.6 million (2013: £63.1 million), and increased gross written premiums by 9.0% to £510.8 million (2013: £468.6 million). It achieved a combined ratio of 84.2% (2013: 81.4%), with good underwriting and a favourable claims environment combining to generate another strong result.

 

All areas contributed to growth and we were able to maintain our core renewal book while finding new business opportunities. We remain restlessly ambitious, considering new lines of business and distribution routes at the same time as navigating the choppy waters that come with squeezed margins, a changing distribution landscape and an influx of apparently insatiable capital. The current consolidation phase among our competitors will create opportunity, either as brokers seek to avoid over-concentration of their placements or individuals seek to build their careers in human-sized businesses.

 

Looking at each division in turn:

 

Property

Our property division includes US and international commercial property, power and mining risks and US catastrophe exposed personal lines traded in the London Market.

 

Growth in property was led by small-ticket household and commercial business which is written through binding authorities with long standing US partners. It benefited from the allocation of additional catastrophe aggregate as we reduced our exposure in our reinsurance business. It is not without risk however, and we paid a number of claims on homes affected by Hurricane Odile which hit the Mexican Baja Peninsula in September. Big-ticket property business remains challenging, with a competitive renewal season, and we expect these conditions to worsen over time. As a result we will remain selective in the risks we write.

 

Marine and energy

Against a backdrop of challenging trading conditions, the team has worked hard to maintain the account. Within upstream energy, ratings have been strained due to a lack of meaningful losses, while within marine lines our disciplined approach enabled us still to seek out reasonable margins despite rates being broadly flat. The Costa Concordia saga reflects the challenges of large claims. The cost to the industry grew above expectations during the claim, so we were pleased to make a small release at the year-end vindicating our cautious initial reserving.

 

London is the global centre for marine and energy risks, but we cannot assume this will continue forever. The team has taken important steps towards realising new opportunities in emerging markets including hiring an on-the-ground agent in Brazil to build a local Hiscox marketing presence. It has also participated on the Willis Global 360 facility. This facility allows us to see a broader spread of business while maintaining underwriting integrity, and we aim to grow it in 2015.

 

Casualty

The casualty division continues to be a bright spot, performing well and growing, albeit from a small base. We bolstered the team during the year with some hires within directors and officers' and casualty reinsurance, and they are now producing a steady stream of business. It has also been pleasing to see stable rates in errors and omissions, a core part of the casualty account after many years of deterioration. We expect this area to become a significant pillar of the portfolio in time, so it is encouraging to see our investment in talent paying off.

 

Aerospace and specialty

This division includes our aviation, space, contingency, terrorism, kidnap and ransom, political risks and personal accident business.

 

An unprecedented number of claims - from the tragic losses of Malaysian Airlines flights MH17 and MH370 and AirAsia flight QZ8501, to the damage and destruction of 18 aircraft at Libya's Tripoli airport - kept the aviation market in the headlines over the year, with industry losses exceeding $1 billion. A combination of good luck and careful underwriting meant that we avoided many of the non-war losses, though events at Tripoli airport did cost us £2.3 million. Despite industry expectations that the market would harden, the year concluded with rates in broadly the same place as they were at the start of 2014. In 2015, we expect to maintain the account, while being ready to explore any opportunities that may arise.

 

In the rest of the division, we achieved good margins, despite the rating environment being variable. In some lines this has been no mean feat. For example the political unrest surrounding Russia and the Ukraine and the subsequent impact of sanctions has been keenly felt within our political risks book. We have invested in people, expanding both our personal accident and contingency teams.

 

In terrorism, intense competition and a move towards facilities (bundling risks to facilitate placement) are having a negative effect. We were happy to step into the gap that was created by the US Congress's failure to promptly renew its Terrorism Risk Insurance Programme Reauthorisation Act (TRIPRA), providing certainty to customers with material city-centre property exposures.

 

Alternative distribution

The ways in which business reaches our London teams continue to change and evolve as brokers seek greater efficiency and technology allows different, more effective means of communicating. The role of the alternative distribution division is to facilitate innovation, drawing on all the resources of the London Market business. Its biggest business is the underwriting of specialist automotive and equipment, including extended warranty. In this we support White Oak, a specialist in this area. This relationship has grown over time to now represent 25% of our London Market Insurance revenues. Our acquisition of a 10% stake in White Oak and appointment of our Chief Underwriting Officer to its Board underscores the significance of this business to us.

 

We are also grasping new opportunities, including multi-lines Lloyd's consortia, quota-share treaties and binding authorities. Such arrangements give partners access to our capital and expertise in exchange for access to business we might not have otherwise seen. We remain open to other non-traditional ways of distributing products underwritten by our teams in London.

 

Hiscox Re

 

The Hiscox Re segment comprises the Group's reinsurance businesses across the world. It has had a tremendous year, not only in terms of its contribution to the Group's profits, but also in the way it has adapted to the changing dynamic in the global reinsurance industry. Profits were £105.6 million (2013: £129.0 million) despite our revenues declining by 13.9% to £354.3 million (2013: £411.5 million) as we continued our disciplined response to the challenging pricing environment. The combined ratio was 49.8% (2013: 58.9%). The last two years reflect an almost complete absence of large losses due not only to low industry-wide losses, but also good risk selection by our teams.

 

We formed the Hiscox Re division in mid-2013, bringing teams in London, Paris and Bermuda under common leadership. Since then they have forged a strong identity in the eyes of clients and brokers, reflecting the reality of a business which can commit over $200 million to the right risk. The team has developed innovative new products, setting them apart from the industry. Popular products have included Risk Aggregate Protection, Second Event Catastrophe Aggregate Trigger covers, Quarterly Aggregate Protection and Cyber Aggregate Excess of Loss. These have created more opportunities for conversations with clients, brought in over $30 million in new premium and enhanced existing relationships. The team will continue to develop new products as it charts a course through a market where pricing is challenging.

 

The way capital is deployed in the reinsurance industry is changing. For many years we have used quota share support from industry partners to increase our ability to commit material sums to support clients within traditional structures. We expect this to continue for many years as clients' value the stability the traditional approach brings. At the same time we are adapting to changing sources of capital. Our Kiskadee family of insurance linked funds will, in its second year of operation, attract $500 million in capital. We see opportunities to grow these funds, and other ILS products, further as investors become more comfortable with taking both insurance and reinsurance risks.

 

Hiscox Re has also broadened its focus by continuing to invest in specialty, healthcare and casualty reinsurance. These three lines of business are growing steadily, with the right degree of caution. Combined, they exceeded $60 million premium income in 2014 and we expect this growth to continue.

 

Looking forward, the critical uncertainty is catastrophe reinsurance pricing. Rates fell at the important 1/1 renewals by approximately 12.5%, in line with our expectations. This marks the third consecutive year that prices have reduced. The great advantage that Hiscox Re has over its competitors is that the Hiscox Group is not over-reliant on this piece of the pie. This means that our reinsurance team can remain disciplined, reducing volume if necessary, secure in the knowledge as a Group we have many opportunities elsewhere. For instance, we have already re-allocated catastrophe aggregate from reinsurance to our small ticket property insurance team where pricing is now more attractive. It also means that cedants see Hiscox as a secure partner that will pay claims in adverse circumstances. The reinsurance industry has had three years without any material claims, over six years since a major Gulf of Mexico windstorm, and almost 10 years without a major Florida hurricane. This will inevitably change and when it does, Hiscox Re has a full team of talented people and diverse sources of capital to expand as the opportunity presents itself.

 

 

Claims

 

2014 is a year that will be remembered for its devastating aviation losses. Our exposure to these events - from the loss of Malaysia Airlines MH370 and MH17, AirAsia flight QZ8501 and the loss of the Air Algérie flight to Mali, to the destruction at Libya's Tripoli airport - was limited, reserved at net $6.8 million. We also reserved $6.8 million for the passenger ferry that caught fire in the Adriatic Sea, resulting in the tragic loss of life.

 

It was a relatively benign year for large scale natural catastrophes, and a quiet hurricane season resulted in no material losses outside of the $12.5 million reserved for Hurricane Odile which hit the Mexican peninsula in September. In Europe, severe floods, windstorms and hailstone events during the first half of the year affected our customers in the UK, Belgium and the Netherlands. Our reserving for these events stands at £8.8 million for the UK and €5.3 million for Belgium and the Netherlands. We also reserved $7.2m for February's severe snowstorms in Japan.

 

We are here to pay claims when the worst happens, so it is always pleasing to receive external recognition for the quality of our teams and the fair and fast treatment that our customers experience. Nine out of ten people that insure their property with us in the UK say they would recommend us to their friends and family, and in the London Market Gracechurch survey we achieved the second highest ranking for overall customer satisfaction. We do not rest on our laurels however and continue to strive for ways to work better, faster and even more effectively for our customers.

 

Reserve releases of £172 million were up from £140 million last year, as we maintain a cautious approach.

 

Marketing

 

During 2014 we increased marketing spend across the Group by 3.9% to £ 31.8 million (2013: £30.6million). The vast majority of our marketing efforts are focused on our direct-to-customer operations in the UK, the US and Europe. We have also invested significantly in marketing our newly acquired Asian operations, DirectAsia. Our investment in broker channel marketing continued, where we marketed direct to brokers, or we helped them market to their customers. A small amount was also spent on corporate sponsorships, mainly supporting art related activities but also growing our presence in York.

 

Our marketing has been instrumental in building the Hiscox brand, communicating what we do to an ever wider audience, building awareness of Hiscox and ultimately driving sales. The benefits have been felt most in the UK where it has had a positive impact on the direct, retail broker and even our Lloyd's activities. As we spend more in other locations I believe we will see similar broad business benefits.

 

 

Operations and IT

 

Our operations and IT capability has benefited greatly from investment and effective leadership, and we have made good progress in several important areas. Our project to replace the core underwriting, policy administration and claims systems supporting our retail businesses continues. The first phase of implementation, for our UK direct home system, launched successfully on time and almost on budget in October and this has already doubled our online conversion rates and increased sales. The next stage is the migration of our direct commercial activities.

 

In Europe our 'EuroFit' programme is still succeeding in accelerating growth whilst driving down the combined expense ratio. We continue to expand our European Service Centre in Lisbon and to implement changes that simplify our business and processes. This includes investing in our online quoting platforms for brokers.

 

In the US our operations team has focused on building scalable infrastructure, streamlining operational processes and automating some simple underwriting. A major focus was smaller directors and officers' risks where we halved the question set and in 2015 we will be rolling this out to other areas.

 

In the London Market, we have become more engaged in driving market-wide improvements. The most notable success was our involvement in the London Market Group's London Matters report which quantified the market's position, its opportunities and threats in a way that had not been done before. The report garnered government interest and gave new direction to the market modernisation programme. We are also seeing value in our participation on several key project boards, focused on the delivery of a single electronic trading platform for the market and an overhaul of back office functions for improved efficiency.

 

At the Digital Insurance and Technology Awards, our IT team was recognised with four awards - Digital Project Team of the Year, Outsourcing Partner of the Year, Green Insurance IT Initiative and CIO of the Year for Stéphane Flaquet. This is well deserved recognition of a team which has done well.

 

Investments

 

As in 2013 the expectations for the year's investment result were relatively modest and, given a cautious approach, we are content with the performance for 2014. Our investments before derivatives made £56.4 million (2013: £58.9 million) equating to a return of 1.8% (2013: 1.9%). A bias to short duration bond portfolios driven by a desire not to lose money when yields rise as well as the short tail nature of our liabilities meant that, at 1.5%, the return from the bond allocation was quite low. Once again the dollar and sterling bond markets, where the majority of our assets are invested, confounded expectation and with the benefit of hindsight, it would have been a good year to own longer dated securities. Our returns were boosted however by the performance of our risk assets. In the context of volatile and challenging markets they produced a more than acceptable return of 7.6%. 2014 saw very divergent performance within stock markets and sectors and it is gratifying that on average the funds that we supported avoided many of the pitfalls and beat their benchmarks by a good margin.

 

The wait for higher interest rates is proving to be longer than expected. However, to the extent that we have learned to live with low but positive returns of late, we are planning for the same in 2015. We remain unconvinced that now is the time to stretch for yield in the fixed income arena and, if anything, recent bouts of illiquidity have reaffirmed this view. The majority of our cash and bonds are there to pay claims and support our business and, although we are prepared to take investment risk, as in underwriting we seek to do so at the right price. We continue to see the best opportunities for this in the equity market from time to time.

 

Capital management

 

We have announced a capital return of 60 pence per share with these results, approximately equal to £192 million in total. Including this amount, in the past 10 years Hiscox has returned a net total of £857 million to shareholders through progressive dividends, share buy backs and capital returns. At the same time we have grown shareholder's funds from £369 million to £1,262 million, post this capital return. Over the same time period we have grown our top line by a compound 8.0% per annum.

 

We far prefer to invest in opportunities to support organic growth or make small acquisitions. Over the past 12 months we have made 4 acquisitions to support areas as diverse as contingency, yachts and kidnap and ransom. This includes our announcement today of the acquisition of R&Q Marine Services. We are always on the look-out for opportunities which strengthen our position in specialty areas.

 

 

Outlook

 

At Hiscox we have pursued a strategy of diversification for over 20 years. Our mantra of steadily building our retail business (through product innovation, geographic expansion and occasional small acquisition) - to allow our big ticket businesses to expand and shrink in line with their market opportunities - has worked and we believe will continue to work. In 2014, for the first time, our aggregate specialist retail business will account for over 50% of Hiscox Ltd's gross written premium.  Its growth, combined with growth in the London Market Insurance business, has offset the declining income in our reinsurance business. As a result, our Group profits, while heavily influenced by big-ticket insurance and reinsurance results (and we love it that they can do so well) are not wholly dependent on these areas as the only source of profits. Our retail businesses make material profits as well.

 

At the same time, we have been successful at adapting to the changing market. The way capital is provided to reinsurance is changing. Our response to this change, the Kiskadee Funds, has grown to almost $500 million, from nothing two years ago. Our US business is on course to reach $500 million in revenues by 2016, making us a recognised contender in the US specialty market. The brand building we have done in the UK, which is now slowly extending to Europe and the US, means we have an identity few other insurers can match. We have taken the bold step (and delivered on phase one) of ripping out old technology to replace it with new, rather than papering over the cracks. We are not standing still.

 

Thanks to all these efforts we have the fire power to set our own course, and are not being blown around by industry headwinds. It means that we have credible opportunities to develop our business and make money even in the tough times that lay ahead for some parts of our business.

 

 

Bronek Masojada

2 March 2015

 

Consolidated income statement

For the year ended 31 December 2014

			2014 Total	2013 Total
		Note	£000	£000
Income
Gross premiums written		4	1,756,260	1,699,478
Outward reinsurance premiums			(412,850)	(328,364)
Net premiums written		4	1,343,410	1,371,114
Gross premiums earned			1,674,982	1,598,879
Premiums ceded to reinsurers			(358,723)	(315,568)
Net premiums earned		4	1,316,259	1,283,311
Investment result		7	56,212	59,809
Other revenues		9	19,956	20,905
Revenue			1,392,427	1,364,025
Expenses
Claims and claim adjustment expenses			(645,145)	(572,440)
Reinsurance recoveries			113,477	53,161
Claims and claim adjustment expenses, net of reinsurance		17	(531,668)	(519,279)
Expenses for the acquisition of insurance contracts			(318,616)	(305,777)
Operational expenses		9	(310,853)	(276,965)
Foreign exchange gains/(losses)			4,974	(9,890)
Total expenses			(1,156,163)	(1,111,911)
Results of operating activities			236,264	252,114
Finance costs			(6,418)	(7,176)
Share of profit/(loss) from associates after tax			1,229	(400)
Profit before tax			231,075	244,538
Tax expense		19	(14,923)	(6,780)
Profit for the year (all attributable to owners of the Company)			216,152	237,758
Earnings per share on profit attributable to owners of the Company
Basic		20	67.4p	66.3p
Diluted		20	64.5p	63.5p

The related notes 1 to 23 are an integral part of this document.

Consolidated statement of comprehensive income

For the year ended 31 December 2014, after tax

 

 

		2014 Total	2013 Total
		£000	£000
Profit for the year		216,152	237,758
Other comprehensive income
Items never reclassified to profit and loss
Remeasurements of the employee retirement benefit obligation		(22,759)	9,775
Income tax relating to components of other comprehensive income		5,470	(2,865)
		(17,289)	6,910
Items that may be reclassified to profit and loss:
Exchange differences on translating foreign operations		34,019	(2,030)
Income tax relating to components of other comprehensive income		-	-
		34,019	(2,030)
Other comprehensive income net of tax		16,730	4,880
Total comprehensive income for the year (all attributable to owners of the Company)		232,882	242,638

The related notes 1 to 23 are an integral part of this document.

 

Consolidated balance sheet

At 31 December 2014

					2014	2013
				Note	£000	£000
Assets
Intangible assets					105,946	72,720
Property, plant and equipment					29,497	20,219
Investment in associates					10,670	7,754
Deferred tax					33,490	32,123
Deferred acquisition costs					230,373	197,628
Financial assets carried at fair value				12	2,828,847	2,585,054
Reinsurance assets				11	525,345	458,822
Loans and receivables including insurance receivables				13	556,259	493,419
Current tax asset					8,031	3,530
Cash and cash equivalents				16	650,651	564,375
Total assets					4,979,109	4,435,644
Equity and liabilities
Shareholders' equity
Share capital					19,913	20,854
Share premium					10,417	4,953
Contributed surplus					89,864	89,864
Currency translation reserve					56,700	22,681
Retained earnings					1,276,446	1,271,109
Total equity (all attributable to owners of the Company)					1,453,340	1,409,461
Non controlling interest					866	-
Total equity					1,454,206	1,409,461
Employee retirement benefit obligation					32,166	4,366
Deferred tax					26,390	75,946
Insurance liabilities				17	2,835,199	2,609,121
Financial liabilities				12	7,109	229
Current tax					32,379	32,383
Trade and other payables				18	591,660	304,138
Total liabilities					3,524,903	3,026,183
Total equity and liabilities					4,979,109	4,435,644
The related notes 1 to 23 are an integral part of this document.

 

Consolidated statement of changes in equity

For the year ended 31 December 2014

		Share capital	Share premium	Contributed surplus	Currency translation reserve	Retained earnings	Non controlling interest	Total
	Note	£000	£000	£000	£000	£000	£000	£000
Balance at 1 January 2013		20,703	41,313	245,005	24,711	1,033,634	-	1,365,366
Profit for the year (all attributable to owners of the company)		-	-	-	-	237,758	-	237,758
Other comprehensive income/(expense) net of tax (all attributable to owners of the company)		-	-	-	(2,030)	6,910	-	4,880
Employee share options:
Equity settled share based payments		-	-	-	-	12,523	-	12,523
Proceeds from shares issued		133	3,990	-	-	-	-	4,123
Deferred and current tax on employee share options		-	-	-	-	5,030	-	5,030
B Share Scheme:
Return of capital, special distribution	21	-	(42,453)	(107,718)	-	-	-	(150,171)
Final dividend equivalent	21	-	-	(47,423)	-	-	-	(47,423)
Scrip dividends	21	18	2,103	-	-	-	-	2,121
Dividends paid to owners of the Company	21	-	-	-	-	(24,746)	-	(24,746)
Balance at 31 December 2013		20,854	4,953	89,864	22,681	1,271,109	-	1,409,461
Profit for the year (all attributable to owners of the company)		-	-	-	-	216,152	-	216,152
Other comprehensive income/(expense) net of tax (all attributable to owners of the company)		-	-	-	34,019	(17,289)	-	16,730
Employee share options:
Equity settled share based payments		-	-	-	-	14,439	-	14,439
Proceeds from shares issued		74	2,669	-	-	-	-	2,743
Deferred and current tax on employee share options		-	-	-	-	1,874	-	1,874
C/D Share Scheme:
Return of capital, special distribution	21	-	(35)	-	-	(126,049)	-	(126,084)
Final dividend equivalent	21	-	-	-	-	(49,728)	-	(49,728)
Share consolidation and sub division		(1,032)	1,032	-	-	-	-	-
Shares purchased by Trust		-	-	-	-	(10,593)	-	(10,593)
Acquisition of DirectAsia		-	-	-	-	-	866	866
Scrip dividends	21	17	1,798	-	-	-	-	1,815
Dividends paid to owners of the Company	21	-	-	-	-	(23,469)	-	(23,469)
Balance at 31 December 2014		19,913	10,417	89,864	56,700	1,276,446	866	1,454,206

The related notes 1 to 23 are an integral part of this document

 

Consolidated statement of cash flows

For the year ended 31 December 2014

			2014	2013
		Note	£000	£000
Profit before tax			231,075	244,538
Adjustments for:
Interest and equity dividend income			(45,146)	(42,571)
Interest expense			6,418	7,176
Net fair value gains on financial assets			(12,121)	(14,847)
Depreciation and amortisation			12,857	9,650
Charges in respect of share based payments			14,439	12,523
Profit from sale of subsidiaries			-	(1,536)
Other non-cash movements			(497)	925
Effect of exchange rate fluctuations on cash presented separately			6,740	491
Changes in operational assets and liabilities:
Insurance and reinsurance contracts			174,158	70,576
Financial assets carried at fair value			(171,076)	(170,817)
Financial liabilities carried at fair value			6,880	(72)
Other assets and liabilities			(27,943)	(527)
Cash flows from operations			195,784	115,509
Interest received			43,292	41,494
Equity dividends received			1,702	789
Interest paid			(5,990)	(5,229)
Cash paid to the defined benefit pension scheme			(200)	(1,800)
Current tax (paid)/received			(62,563)	(39,712)
Cash flows from subscriptions received in advance			169,928	4,848
Net cash flows from operating activities			341,953	115,879
Cash flows from the sale and purchase of subsidiaries			(2,627)	20,940
Cash flows from the sale and purchase of associates			(1,687)	600
Cash flows from the purchase of property, plant and equipment			(11,727)	(4,545)
Cash flows from the purchase of intangible assets			(27,580)	(9,594)
Net cash flows from investing activities			(43,621)	7,401
Proceeds from the issue of ordinary shares			2,743	4,123
Shares repurchased			(10,593)	-
Distributions made to owners of the Company		21	(197,466)	(220,219)
Net cash flows from financing activities			(205,316)	(216,096)
Net increase/(decrease) in cash and cash equivalents			93,016	(92,796)
Cash and cash equivalents at 1 January			564,375	657,662
Net increase/(decrease) in cash and cash equivalents			93,016	(92,796)
Effect of exchange rate fluctuations on cash and cash equivalents			(6,740)	(491)
Cash and cash equivalents at 31 December			650,651	564,375
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 totaling £142,617,000 (2013: £113,312,000) not available for immediate use by the Group outside of the Lloyd's Syndicate within which they are held. Additionally, cash and cash equivalents includes £169,928,000 (2013: £4,848,000) for subscriptions received in advance by the Kiskadee Diversified and Select ILS funds that remain un-invested at 31 December 2014.   The related notes 1 to 23 are an integral part of this document.

Notes to the financial statements

1. General information

The financial information set out in this statement is extracted from the Group's consolidated financial statements for the year ended 31 December 2014. The auditors have reported on those 2014 financial statements which include comparative amounts for 2013. Their report was unqualified. The Hiscox Group, which is headquartered in Hamilton, Bermuda, comprises Hiscox Ltd (the parent Company, referred to herein as the 'Company') and its subsidiaries (collectively, the 'Hiscox Group' or the 'Group'). For the period under review the Group provided insurance and reinsurance services to its clients worldwide. It has operations in Bermuda, the UK, Europe, Asia and USA with over 1,800 staff. The Company is registered and domiciled in Bermuda and on 12 December 2006 its ordinary shares were listed on the London Stock Exchange. As such it is required to prepare its annual audited financial information in accordance with Section 4.1 of the Disclosure and Transparency Rules and the Listing Rules, both issued by the Financial Conduct Authority (FCA), in addition to the Bermuda Companies Act 1981. The first two pronouncements issued by the FCA require the Group to prepare financial statements which comprise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated balance sheet, the consolidated statement of changes in equity, the consolidated statement of cash flows and the related notes 1 to 23 in accordance with International Financial Reporting Standards ('IFRS') adopted by the European Union. The consolidated financial statements for the year ended 31 December 2014 include all of the Group's subsidiary companies and the Group's interest in associates. All amounts relate to continuing operations. The financial statements were approved for issue by the Board of Directors on 2 March 2015.

2. Significant accounting policies

Except as described below, the accounting policies applied in these consolidated financial statements are consistent with the prior year. The consolidated financial statements as at, and for the year ended 31 December 2014 were compliant with International Financial Reporting Standards as adopted by the European Union and in accordance with the provisions of the Bermuda Companies Act 1981.

Changes in accounting policies   (a)   IFRS 7 : Offsetting Financial Assets and Financial Liabilities (amendments to IAS32) The amendments clarify that the rights of set-off must not only be legally enforceable in the normal course of business, but must also be enforceable in the event of default and the event of bankruptcy or insolvency of all of the counterparties to the contract, including the reporting entity itself. The amendments also clarify that rights of set-off must not be contingent on a future event. The amendment has no material impact on the financial statements   (b) IFRIC 21 : Levies Charged by Public Authorities on Entities that Operate in a Specific Market IFRIC 21 provides guidance on when to recognise a liability for a levy imposed by a government, both for levies that are accounted for in accordance with IAS37 Provisions, Contingent Liabilities and Contingent Assets and those where the timing and amount of the levy is certain. The adoption of the interpretation has not had a material impact on the financial statements.

 

2.1. Statement of compliance

The consolidated financial statements have been prepared in accordance with IFRS as adopted by the European Union and in accordance with the provisions of the Bermuda Companies Act 1981. Since 2002, the standards adopted by the International Accounting Standards Board have been referred to as IFRS. The standards from prior years continue to bear the title 'International Accounting Standards' (IAS). Insofar as a particular standard is not explicitly referred to, the two terms are used in these financial statements synonymously. Compliance with IFRS includes the adoption of interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC). The Group currently applies IFRS 4 Insurance Contracts which specifies the financial reporting for insurance contracts by an insurer. The standard was issued by the IASB as the first phase in their project to develop a comprehensive standard for insurance contracts. Accordingly, to the extent that IFRS 4 does not specify the recognition or measurement of insurance contracts, transactions reported in these consolidated financial statements have been prepared in accordance with another comprehensive body of accounting principles for insurance contracts, namely accounting principles generally accepted in the UK. In June 2013, the IASB issued their second exposure draft for Phase II of the insurance contracts project. The exposure draft in its current form will require a number of significant changes to the measurement of insurance contracts and as such adoption of a final standard in a form similar to the exposure draft will likely have a significant impact on the results of the Group. In addition, the IASB has stated they will allow approximately three full years from the date of any final standard to actual implementation, therefore 2019 is likely to be the earliest date for the adoption. We continue to monitor the progress of the project.

2.2. Basis of preparation

The financial statements are presented in Pounds Sterling and are rounded to the nearest thousand unless otherwise stated. They are compiled on a going concern basis and prepared on the historical cost basis except that pension scheme assets included in the measurement of the employee retirement benefit obligation, and financial instruments including derivative instruments, are measured at fair value. Employee retirement benefit obligations are determined using actuarial analysis. The balance sheet of the Group is presented in order of increasing liquidity. The accounting policies have been applied consistently by all Group entities and to all periods presented, solely for the purpose of producing the consolidated Group financial statements. The Group has financial assets and cash of over £3.2 billion, excluding the assets held by the Kiskadee Diversified and Select Funds. The portfolio is predominantly invested in liquid short dated bonds and cash to ensure significant liquidity to the Group and to reduce risk from the financial markets. In addition the Group has significant borrowing facilities in place. The Group writes a balanced book of insurance and reinsurance business spread by product and geography. As such, the Directors believe that the Group is well placed to manage its business risk and continue to trade successfully. As explained in note 4, during 2013 the Group restructured its reinsurance business written by the London, Bermuda and Paris teams and combined them into one operating unit, Hiscox Re. In addition we introduced a single management structure for UK and Europe and brought all retail business under one umbrella. From January 2014 the Group commenced reporting and monitoring its performance along these new reporting lines. The results of 2013 have been restated in the appropriate notes to the consolidated financial statements.   The Directors therefore have an expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and Accounts.

2.3. Reporting of additional performance measures

The Directors consider that the claims ratio, expense ratio and combined ratio measures reported in respect of operating segments and the Group overall at note 4 provide useful information regarding the underlying performance of the Group's businesses. These measures are widely recognised by the insurance industry and are consistent with internal performance measures reviewed by senior management including the chief operating decision maker. However, these three measures are not defined within the IFRS framework and body of standards and interpretations and therefore may not be directly comparable with similarly titled additional performance measures reported by other companies. Net asset value per share and return on equity measures, disclosed at notes 5 and 6, are likewise considered to be additional performance measures.

 

3. Financial risk
Credit risk The Group mitigates counterparty credit risk by concentrating debt and fixed income investments in high quality instruments, including a particular emphasis on government gilts issued mainly by North American countries and the European Union. The Group has a £9.2 million exposure to sovereign debt in Spain and Italy.   An analysis of the Group's major exposures to counterparty credit risk excluding loans and receivables, based on Standard & Poor's or equivalent rating, is presented below:
As at 31 December 2014					AAA	AA			A				Other / non-rated		Total
					£000	£000			£000				£000		£000
Debt and fixed income securities					726,822	999,298			508,734				291,325		2,526,179
Deposits with credit institutions					-	3,482			19,296				3,607		26,385
Reinsurance assets					53,960	182,558			262,520				26,307		525,345
Cash and cash equivalents					64,260	5,050			577,834				3,507		650,651
Total					845,042	1,190,388			1,368,384				324,746		3,728,560
Amounts attributable to largest single counterparty					164,004	335,676			256,758				12,475
As at 31 December 2013					AAA	AA			A				Other / non-rated		Total
					£000	£000			£000				£000		£000
Debt and fixed income securities					654,602	1,143,308			310,642				227,277		2,335,829
Deposits with credit institutions					-	4,292			1,802				146		6,240
Reinsurance assets					12,020	149,759			269,353				27,690		458,822
Cash and cash equivalents					132,415	86,436			344,868				656		564,375
Total					799,037	1,383,795			926,665				255,769		3,365,266
Amounts attributable to largest single counterparty					115,430	517,997			110,198				7,050
The largest counterparty exposure within AAA rating at 31 December 2014 and 2013 is the German Government.  For the AA rating it is with the US Treasury at both 31 December 2014 and 2013.  A significant proportion of 'other/non-rated' assets are rated BBB and BB at 31 December 2014 and 2013. At 31 December 2014 and 2013, the Group held no material debt and fixed income securities that were past due or impaired beyond their reported fair values. For the current period and prior period, the Group did not experience any material defaults on debt securities.   The Group's AAA rated reinsurance assets include fully collateralised positions at 31 December 2014 and 2013.
An analysis of the Group's debt and fixed income securities at 31 December by class is detailed below:
											2014			2013
											%			%
Government issued bonds and instruments											30			41
Agency and government supported debt											12			9
Asset backed securities											9			10
Mortgage backed instruments - agency											4			5
Mortgage backed instruments - non-agency											2			3
Mortgage backed instruments - commercial											6			3
Corporate bonds											34			26
Lloyd's deposits and bond funds											3			3
Within the fixed income portfolios, which include debt securities, deposits with credit institutions and cash equivalent assets, there are exposures to a range of government borrowers, on either a direct or guaranteed basis, and banking institutions. The Group, together with its investment managers, closely manages its geographical exposures across government issued and supported debt.
Liquidity risk A significant proportion of the Group's investments are in highly liquid assets which could be converted to cash in a prompt fashion and at minimal expense. The deposits with credit institutions largely comprise short-dated certificates for which an active market exists and which the Group can easily access. The Group's exposure to equities is concentrated on shares and funds that are traded on internationally recognised stock exchanges.   The main focus of the investment portfolio is on high-quality short duration debt and fixed income securities, and cash. There are no significant holdings of investments with specific repricing dates. Notwithstanding the regular interest receipts and also the Group's ability to liquidate these securities and the majority of its other financial instrument assets for cash in a prompt and reasonable manner, the contractual maturity profile of the fair value of these securities at 31 December was as follows:
		Debt and fixed income securities		Deposits with credit institutions				Cash and cash equivalents				2014 total			2013 total
		£000		£000				£000				£000			£000
Less than one year		465,868		25,507				650,651				1,142,026			1,129,902
Between one and two years		529,526		-				-				529,526			517,064
Between two and five years		1,052,013		878				-				1,052,891			846,583
Over five years		421,616		-				-				421,616			332,822
Lloyd's deposits		57,156		-				-				57,156			80,073
Total		2,526,179		26,385				650,651				3,203,215			2,906,444
The Group's equities and shares in unit trusts and other non-dated instruments have no contractual maturity terms but could also be liquidated in an orderly manner for cash in a prompt and reasonable time frame within one year of the balance sheet date.
4. Operating segments
The Group's operating segment reporting follows the organisational structure and management's internal reporting systems, which form the basis for assessing the financial reporting performance of, and allocation of resource to each business segment. During 2013 the Group restructured its reinsurance business written by the London, Bermuda and Paris teams and combined them into one operating unit, Hiscox Re. In addition we introduced a single management structure for UK and Europe and brought all retail business under one umbrella. From January 2014 the Group commenced reporting and monitoring its performance along these new reporting lines.   The changes from the 2013 structure comprised: ·      separating the London Market business unit into insurance and reinsurance lines, forming the London Market Insurance division and combining the reinsurance business with Hiscox Bermuda to make Hiscox Re; ·      bringing together Hiscox UK and Europe with Hiscox Guernsey, Hiscox US and the newly acquired DirectAsia business to form Hiscox Retail; ·      the Corporate Centre division has remained unchanged.   As a consequence of the change in reportable segments, the corresponding operating results and combined ratios for earlier periods presented have been restated on a comparable basis. There is no impact to the overall profit before tax or the net asset value of the Group for prior periods.   The Group's four revised primary business segments are identified as follows: ·      Hiscox Retail brings together the results of the UK and Europe, and Hiscox International being the US, Guernsey and Asia retail business divisions. Hiscox UK and Europe underwrite European personal and commercial lines of business through Hiscox Insurance Company Limited, together with the fine art and non-US household insurance business written through Syndicate 33. In addition, the UK includes elements of specialty and international employees and officers' insurance written by Syndicate 3624. Hiscox International comprises the specialty and fine art lines written through Hiscox Insurance Company (Guernsey) Limited, and the motor business written via DirectAsia, together with US commercial, property and specialty business written by Syndicate 3624 and Hiscox Insurance Company Inc. via the Hiscox USA business division. ·      Hiscox London Market comprises the internationally traded insurance business written by the Group's London-based underwriters via Syndicate 33, including lines in property, marine and energy, casualty and other specialty insurance lines. In addition, the segment includes elements of business written by Syndicate 3624 being auto physical damage, auto extended warranty and aviation business. ·      Hiscox Re is the Reinsurance division of the Hiscox Group, combining the underwriting platforms in Bermuda, London and Paris. The segment comprises the performance of Hiscox Insurance Company (Bermuda) Limited, excluding the internal quota share arrangements, with the reinsurance contracts written by Syndicate 33. In addition, the healthcare and casualty reinsurance contracts written in the Bermuda hub on Syndicate capacity are also included. The segment also captures the performance of Kiskadee, the Hiscox Group's Insurance Linked Securities business. ·      Corporate Centre comprises the investment return, finance costs and administrative costs associated with Group management activities. Corporate Centre also includes the majority of foreign currency items on economic hedges and intragroup borrowings. These relate to certain foreign currency items on economic hedges and intragroup borrowings, further details of these can be found in note 13 of the consolidated financial statements. Corporate Centre forms a reportable segment due to its investment activities which earn significant external returns.   All amounts reported below represent transactions with external parties only.  In the normal course of trade, the Group's entities enter into various reinsurance arrangements with one another.  The related results of these transactions are eliminated on consolidation and are not included within the results of the segments.  This is consistent with the information used by the chief operating decision maker when evaluating the results of the Group.  Performance is measured based on each reportable segment's profit before tax.
a.	Profit before tax by segment
Year ended 31 December 2014
			Hiscox Retail	Hiscox London Market			Hiscox Re			Corporate  centre				Total
			£000	£000			£000			£000				£000
Gross premiums written			891,115	510,825			354,320			-				1,756,260
Net premiums written			825,878	336,895			180,637			-				1,343,410
Net premiums earned			790,721	332,497			193,041			-				1,316,259
Investment result			25,934	8,719			9,348			12,211				56,212
Other revenues			6,643	6,283			6,777			253				19,956
Revenue			823,298	347,499			209,166			12,464				1,392,427
Claims and claim adjustment expenses, net of reinsurance			(325,806)	(159,864)			(45,998)			-				(531,668)
Expenses for the acquisition of insurance contracts			(205,748)	(93,569)			(19,299)			-				(318,616)
Operational expenses			(209,213)	(40,597)			(39,623)			(21,420)				(310,853)
Foreign exchange losses			(5,121)	9,044			2,682			(1,631)				4,974
Total expenses			(745,888)	(284,986)			(102,238)			(23,051)				(1,156,163)
Results of operating activities			77,410	62,513			106,928			(10,587)				236,264
Finance costs			-	(46)			(1,365)			(5,007)				(6,418)
Share of (loss)/profit of associates after tax			655	182			-			392				1,229
Profit before tax			78,065	62,649			105,563			(15,202)				231,075
Year ended 31 December 2013 restated
			Hiscox Retail	Hiscox London Market			Hiscox Re			Corporate  centre				Total
			£000	£000			£000			£000				£000
Gross premiums written			819,388	468,587			411,503			-				1,699,478
Net premiums written			751,144	359,941			260,029			-				1,371,114
Net premiums earned			711,081	303,251			268,979			-				1,283,311
Investment result			19,134	6,262			14,381			20,032				59,809
Other revenues			7,841	6,426			5,485			1,153				20,905
Revenue			738,056	315,939			288,845			21,185				1,364,025
Claims and claim adjustment expenses, net of reinsurance			(299,781)	(136,788)			(82,710)			-				(519,279)
Expenses for the acquisition of insurance contracts			(188,414)	(86,108)			(31,255)			-				(305,777)
Operational expenses			(184,348)	(27,981)			(41,027)			(23,609)				(276,965)
Foreign exchange (losses)/gains			(3,911)	(1,873)			(3,308)			(798)				(9,890)
Total expenses			(676,454)	(252,750)			(158,300)			(24,407)				(1,111,911)
Results of operating activities			61,602	63,189			130,545			(3,222)				252,114
Finance costs			-	(45)			(1,563)			(5,568)				(7,176)
Share of loss of associates after tax			(423)	-			-			23				(400)
Profit before tax			61,179	63,144			128,982			(8,767)				244,538
The Group's wholly owned subsidiary, Hiscox Syndicates Limited, oversees the operation of Syndicate 33 at Lloyd's. The Group's percentage participation in Syndicate 33 can fluctuate from year to year and consequently presentation of the results at the 100% level removes any distortions arising therefrom.
b.	100% operating results by segment
Year ended 31 December 2014
			Hiscox Retail	Hiscox London Market			Hiscox Re			Corporate centre				Total
			£000	£000			£000			£000				£000
Gross premiums written			914,372	647,094			421,599			-				1,983,065
Net premiums written			844,471	434,133			215,534			-				1,494,138
Net premiums earned			808,876	427,342			229,343			-				1,465,561
Investment result			26,191	11,722			10,364			12,211				60,488
Other revenues			2,618	-			1,136			253				4,007
Claims and claim adjustment expenses, net of reinsurance			(330,554)	(202,670)			(50,434)			-				(583,658)
Expenses for the acquisition of insurance contracts			(211,407)	(120,417)			(23,760)			-				(355,584)
Operational expenses			(208,961)	(49,242)			(44,048)			(21,420)				(323,671)
Foreign exchange (losses)/gains			(5,196)	12,713			4,080			(1,631)				9,966
Results of operating activities			81,567	79,448			126,681			(10,587)				277,109
Year ended 31 December 2013 restated
			Hiscox Retail	Hiscox London Market			Hiscox Re			Corporate centre				Total
			£000	£000			£000			£000				£000
Gross premiums written			841,251	595,932			486,938			-				1,924,121
Net premiums written			768,518	447,819			303,520			-				1,519,857
Net premiums earned			728,361	388,867			318,086			-				1,435,314
Investment result			19,290	8,575			15,180			20,032				63,077
Other revenues			5,418	-			1,832			1,153				8,403
Claims and claim adjustment expenses, net of reinsurance			(303,326)	(168,990)			(98,379)			-				(570,695)
Expenses for the acquisition of insurance contracts			(193,659)	(109,453)			(38,463)			-				(341,575)
Operational expenses			(185,772)	(33,594)			(45,627)			(23,609)				(288,602)
Foreign exchange (losses)/gains			(4,034)	(4,444)			(4,947)			(798)				(14,223)
Results of operating activities			66,278	80,961			147,682			(3,222)				291,699
100% ratio analysis
Year ended 31 December 2014
			Hiscox Retail	Hiscox London Market			Hiscox Re			Corporate centre				Total
Claims ratio (%)			40.9	47.4			22.0			-				39.8
Expense ratio (%)			52.0	39.8			29.6			-				44.9
Combined ratio excluding foreign exchange impact (%)			92.9	87.2			51.6			-				84.7
Foreign exchange impact (%)			0.6	(3.0)			(1.8)			-				(0.8)
Combined ratio (%)			93.5	84.2			49.8			-				83.9
Year ended 31 December 2013 restated
			Hiscox Retail	Hiscox London Market			Hiscox Re			Corporate  centre				Total
Claims ratio (%)			41.6	43.5			30.9			-				39.8
Expense ratio (%)			52.1	36.8			26.4			-				42.3
Combined ratio excluding foreign exchange impact (%)			93.7	80.3			57.3			-				82.1
Foreign exchange impact (%)			0.6	1.1			1.6			-				0.9
Combined ratio (%)			94.3	81.4			58.9			-				83.0

 

 

The impacts on profit before tax of a 1% change in each component of the segmental combined ratios are:
	Year to 31 December 2014							Year ended 31 December 2013 restated
	Hiscox Retail	Hiscox London Market	Hiscox Re		Corporate  centre			Hiscox Retail		Hiscox London Market			Hiscox Re		Corporate  centre
	£000	£000	£000		£000			£000		£000			£000		£000
At 100% level
1% change in claims or expense ratio	8,089	4,273	2,293		-			7,284		3,889			3,181		-
At Group level
1% change in claims or expense ratio	7,907	3,325	1,930		-			7,111		3,033			2,690		-
5. Net asset value per share
						2014						2013
						Net asset value (total equity)			NAV per share			Net asset value (total equity)			NAV per share
						£000			p			£000			p
Net asset value						1,454,206			462.5			1,409,461			402.2
Net tangible asset value						1,348,260			428.8			1,336,741			381.4
The net asset value per share is based on 314,419,567 shares (2013: 350,460,458), being the adjusted number of shares in issue at 31 December. Net tangible assets comprise total equity excluding intangible assets.
6. Return on equity
											2014			2013
											£000			£000
Profit for the year (all attributable to owners of the Company)											216,152			237,758
Opening shareholders' equity											1,409,461			1,365,366
Adjusted for the time weighted impact of capital distributions and issuance of shares											(142,812)			(134,580)
Adjusted opening shareholders' equity											1,266,649			1,230,786
Annualised return on equity (%)											17.1			19.3
7. Investment result
The total investment result for the Group before taxation comprises:											2014			2013
											£000			£000
Investment income including interest receivable											45,146			42,571
Net realised (losses)/gains on financial investments at fair value through profit or loss											(1,055)			2,391
Net fair value gains on financial investments at fair value through profit or loss											12,264			13,962
Investment result - financial assets											56,355			58,924
Fair value (losses)/gains on derivative financial instruments and borrowings (note 14)											(143)			885
Total result											56,212			59,809

 

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

 

8. Analysis of return on financial investments
i. The weighted average return on financial investments for the year by currency, based on monthly asset values, was:
									2014		2013
									%		%
Sterling									2.7		3.4
US Dollar									1.5		1.5
Other									1.5		0.7
ii. Investment return:
								2014		2013
								£000	%	£000		%
Debt and fixed income securities								36,714	1.5	17,105		0.7
Equities and shares in unit trusts								17,604	7.6	39,289		18.3
Deposits with credit institutions/cash and cash equivalents								2,037	0.4	2,530		0.5
								56,355	1.8	58,924		1.9
9. Other revenues and operational expenses
									2014			2013
									£000			£000
Agency related income									8,060			7,100
Profit commission									9,965			9,161
Other underwriting income									1,136			1,832
Other income									795			2,812
Other revenues									19,956			20,905
Wages and salaries									108,622			101,780
Social security costs									19,551			20,498
Pension cost - defined contribution									8,112			6,593
Pension cost - defined benefit									660			1,000
Share based payments									14,439			12,523
Marketing expenses									31,829			30,550
Investment expenses									4,192			3,833
Depreciation, amortisation and impairment									12,857			9,650
Other expenses									110,591			90,538
Operational expenses									310,853			276,965
10. Net foreign exchange gains/(losses)
The net foreign exchange gains/(losses) for the year include the following amounts:
									2014		2013
									£000		£000
Exchange gains/(losses) recognised in the consolidated income statement									4,974		(9,890)
Exchange gains/(losses) classified as a separate component of equity									34,019		(2,030)
Overall impact of foreign exchange related items on net assets									38,993		(11,920)
The above excludes profits or losses on foreign exchange derivative contracts which are included within the investment result and are outlined in note 14
Net unearned premiums and deferred acquisition costs are treated as non-monetary items in accordance with IFRS. As a result, a foreign exchange mismatch arises caused by these items being earned at historical rates of exchange prevailing at the original transaction date whereby resulting claims are retranslated at the end of each period. The impact of this mismatch on the income statement is shown below.
									2014		2013
									£000		£000
Opening balance sheet impact of non-retranslation of non-monetary items									(4,790)		(2,674)
Gain/(loss) included within profit representing the non-retranslation of non-monetary items									6,398		(2,116)
Closing balance sheet impact of non-retranslation of non-monetary items									1,608		(4,790)
11. Reinsurance assets
									2014		2013
									£000		£000
Reinsurers' share of insurance liabilities									526,085		459,603
Provision for non-recovery and impairment									(740)		(781)
Reinsurance assets (note 17)									525,345		458,822
Amounts due from reinsurers in respect of outstanding premiums and claims already paid by the Group are included in loans and receivables (note 13). The Group recognised a gain during the year of £41,000 (2013: £217,000) in respect of impaired balances.
12. Financial assets and liabilities
Financial assets are measured at their bid price values, with all changes from one accounting period to the next being recorded through the income statement.
									2014		2013
									£000		£000
Debt and fixed income securities									2,526,179		2,335,829
Equities and shares in unit trusts									252,916		223,024
Deposits with credit institutions									26,385		6,240
Total investments									2,805,480		2,565,093
Insurance linked fund									22,888		19,917
Derivative financial instruments (note 14)									479		44
Total financial assets carried at fair value									2,828,847		2,585,054

 

				2014	2013
				£000	£000
Third-party investment in Kiskadee Funds				7,033	-
Derivative financial instruments (note 14)				76	229
Total financial liabilities carried at fair value				7,109	229
The Group has made a total investment of $30.0 million into the Third Point Reinsurance Opportunities Fund ('the Fund'), $13.2 million in 2012 and an additional $16.8 million in 2013. During the year the Fund made a gain of $2.8 million (2013: $2.9 million). The Fund specialises in catastrophe reinsurance opportunities and is classified by the Group as an insurance linked fund. The Group submitted a full redemption effective 1 January 2015, after notification was received that the Fund will be winding down. During January 2015, $12.7 million was received as the first redemption payment and the remaining $23.0 million was issued as redemption shares which will pay out when the underlying contracts expire at 30 June 2015. The Group participates in a quota share arrangement with Third Point Re Cat Ltd, a wholly-owned reinsurance entity of the Fund. During the year, contracts with a premium of $2.1 million were ceded to the entity (2013: $3.3 million).
Investments at 31 December are denominated in the following currencies at their fair value:
				2014	2013
				£000	£000
Sterling				653,126	633,631
US Dollars				1,823,380	1,618,494
Euro and other currencies				328,974	312,968
Total investments				2,805,480	2,565,093
13. Loans and receivables including insurance receivables
				2014	2013
				£000	£000
Gross receivables arising from insurance and reinsurance contracts				482,641	422,405
Provision for impairment				(2,131)	(1,282)
Net receivables arising from insurance and reinsurance contracts				480,510	421,123
Due from contract holders, brokers, agents and intermediaries				349,955	302,820
Due from reinsurance operations				130,555	118,303
				480,510	421,123
Prepayments and accrued income				9,068	6,754
Other loans and receivables:
Net profit commission receivable				25,116	18,905
Accrued interest				9,448	9,463
Share of Syndicate's other debtors balances				12,952	12,192
Other debtors including related party amounts				19,165	24,982
Total loans and receivables including insurance receivables				556,259	493,419
There is no significant concentration of credit risk with respect to loans and receivables, as the Group has a large number of internationally dispersed debtors. The Group has recognised a loss of £849,000 (2013: loss of £296,000) for the impairment of receivables during the year ended 31 December 2014. The carrying amounts disclosed above are reasonably approximate to the fair value at the reporting date.
14. Derivative financial instruments
The Group entered into both exchange-traded and over-the-counter derivative contracts for a number of purposes during 2014. The Group had the right and intention to settle each contract on a net basis. The assets and liabilities of these contracts at 31 December 2014 all mature within one year of the balance sheet date and are detailed below.   31 December 2014
		Gross contract notional amount	Fair value of assets	Fair value of liabilities	Net balance sheet position
Derivative financial instrument included on balance sheet		£000	£000	£000	£000
Foreign exchange forward contracts		25,875	479	(76)	403
Interest rate futures contracts		31,421	-	-	-
Credit default swaps		1,639	-	-	-
The foreign exchange forward contracts are represented by gross fair value of assets and liabilities as detailed below
Gross fair value of assets			19,596	3,003	22,599
Gross fair value of liabilities			(19,117)	(3,079)	(22,196)
Total			479	(76)	403
31 December 2013
		Gross contract notional amount	Fair value of assets	Fair value of liabilities	Net balance sheet position
Derivative financial instrument included on balance sheet		£000	£000	£000	£000
Foreign exchange forward contracts		26,793	44	(229)	(185)
Interest rate futures contracts		37,083	-	-	-
Credit default swaps		-	-	-	-
The foreign exchange forward contracts are represented by gross fair value of assets and liabilities as detailed below
Gross fair value of assets			7,622	15,686	23,308
Gross fair value of liabilities			(7,578)	(15,915)	(23,493)
Total			44	(229)	(185)
All derivative contracts settle within three months of the year end. Foreign exchange forward contracts During the current and prior year the Group entered into a series of conventional over the counter forward contracts in order to secure translation gains made on Euro, US Dollar and other non-Pound Sterling denominated monetary assets. The contracts require the Group to forward sell a fixed amount of the relevant currency for Pound Sterling at pre-agreed future exchange rates. The Group made a gain on these forward contracts of £1,941,000 (2013: loss of £77,000) as included in note 7. The opposite exchange gain is included within financial investments. There was no initial purchase cost associated with these instruments. Interest rate future contracts During the year the Group continued short selling a number of government bond futures and sovereign futures denominated in a range of currencies to informally hedge substantially all of the interest rate risk on specific long portfolios of the matching currencies denominated corporate bonds. All contracts are exchange traded and the Group made a loss on these futures contracts of £2,078,000 (2013: gain of £1,175,000) as included in note 7. Equity index options The Group did not purchase equity options during 2014. During 2013 the Group purchased and disposed of an equity index option to protect against a decline in equity prices. The Group made a loss of £213,000 on this contract.
15. Fair value measurements In accordance with IFRS 13 : Fair value measurements, the  fair value of financial instruments based on a three-level fair value hierarchy that reflects the significance of the inputs used in measuring the fair value is provided below.
As at 31 December 2014		Level 1	Level 2	Level 3	Total
Financial assets		£000	£000	£000	£000
Debt and fixed income securities		682,940	1,843,239	-	2,526,179
Equities and shares in unit trusts		-	239,238	13,678	252,916
Deposits with credit institutions		26,385	-	-	26,385
Insurance linked fund		-	-	22,888	22,888
Derivative financial instruments		-	479	-	479
Total		709,325	2,082,956	36,566	2,828,847
Financial liabilities
Third-party investment in Kiskadee Funds		-	-	7,033	7,033
Derivative financial instruments		-	76	-	76
Total		-	76	7,033	7,109
As at 31 December 2013		Level 1	Level 2	Level 3	Total
Financial assets		£000	£000	£000	£000
Debt and fixed income securities		875,882	1,459,947	-	2,335,829
Equities and shares in unit trusts		-	208,960	14,064	223,024
Deposits with credit institutions		6,240	-	-	6,240
Insurance linked fund		-	-	19,917	19,917
Derivative financial instruments		-	44	-	44
Total		882,122	1,668,951	33,981	2,585,054
Financial liabilities
Derivative financial instruments		-	229	-	229
Total		-	229	-	229