Interim / Quarterly Report • Jun 30, 2011
Interim / Quarterly Report
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4th Floor Wessex House 45 Reid Street Hamilton HM 12 Bermuda
T +1 441 278 8300 F +1 441 278 8301 E [email protected] www.hiscox.com
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Chairman's statement Condensed consolidated interim income statement Condensed consolidated interim statement of comprehensive income
Condensed consolidated interim balance sheet
Condensed consolidated interim statement of changes in equity
This interim statement may contain forward looking statements based on current expectations of, and assumptions made by, the Group's management. The Group is exposed to a multitude of risks and uncertainties and therefore cannot accept any obligation to publicly revise or update forward looking statements as a result of future events or the emergence of new information regarding past events, except to the extent legally required. Therefore undue reliance should not be placed on any forward looking statements.
Return on equity annualised (13.3)% (2010: 14.8%)
Interim pre-tax loss of £85.6 million (2010: profit £97.2 million), reflecting the costliest year ever for the industry.
Record profit for UK business of £25.2 million (2010: £15.6 million) with gross written premiums up by 8.8%.
Interim dividend increased to 5.1p (2010: 5.0p) in line with progressive dividend policy.
Investment return of 1.0% for the half year, 2.0% annualised, (2010: 1.7%, 3.5% annualised).
US catastrophe reinsurance rates are improving, with average rate rises of 10% and substantially higher rises in loss affected areas.
Reinsurance cover materially unimpaired.
High quality claims service recognised within the UK and London Market businesses.
Net asset value p per share
A pre-tax loss of £85.6 million following a tumultuous first six months when nature, accidents and human error or malevolence have thrown an unprecedented variety of losses at us is a reasonable result in the circumstances. 2011 is reported to be the most expensive catastrophe year to the insurance industry on record after just six months, worse than the full twelve months of 2005, the previous highest on record. The strategy of building retail businesses to soften the blows of such a period is vindicated by a sterling result from our UK regional business. We will continue to build the European and US regional businesses to add their contribution.
The London Market and Bermuda have obviously been hit hardest, and I am writing this as usual at the start of the US wind season, but rates are rising in the affected areas and a further loss in the second half of the year should accelerate that rise. History tells us that feast always follows famine in the insurance business.
The result for the half year to 30 June 2011 was a pre-tax loss of £85.6 million (2010: £97.2 million profit). Gross written premiums reduced to £847.5 million (2010: £904.3 million). Net earned premiums were £554.7 million (2010: £592.7 million). The Group combined ratio rose to 116.9% (2010: 93.6%). Earnings per share fell to a loss of 22.8p (2010: +20.9p) and net assets per share reduced to 296.3p (2010: 318.9p).
The board of Hiscox Ltd proposes to pay an interim dividend for 2011 of 5.1p per share (2010: 5.0p) in line with our policy of progressive dividend growth. The record date for the dividend will be 12
August 2011 and the dividend will be payable on 21 September 2011.
As with the final 2010 dividend, the board of Hiscox Ltd proposes to offer a scrip dividend alternative in respect of the interim dividend, on and subject to the terms and conditions of Hiscox Ltd's Scrip Dividend Alternative. The scrip reference share price will be announced on 15 August 2011. The final date for electing to join Hiscox Ltd's Scrip Dividend Alternative in order to be eligible to receive new shares in respect of the interim dividend will be 31 August 2011.
The terms and conditions of Hiscox Ltd's Scrip Dividend Alternative, including how to join the scheme, are contained in the circular dated 14 March 2011 which is available to view on Hiscox Ltd's website www.hiscox.com.
The net asset value per share was reduced by the loss, the weakness of the Dollar on our capital held in Dollars in Bermuda and Guernsey and of course by the payment of the dividend since the year end.
The first six months have been notable for the variety and size of losses the industry has faced. On top of earthquakes in New Zealand and Japan, the industry suffered losses from floods in Australia and the worst tornadoes on record in the US. We have reserved £210 million for catastrophe events in the first half (2010: £110 million) which we trust will stand the test of time as has been true of our reserving in recent years. We have also suffered from some large attritional losses across the Group, including moving oil platforms, repatriation from the unrest in North Africa, fine art losses and some recessionary related claims in the UK.
Excellence in the rapid and fair payment of claims is a differentiator we strive to achieve. This period has been one of the busiest the Hiscox claims team has ever experienced, so it is pleasing that their high performance has been recognised by the industry. Our UK business won the Personal and Commercial Claims
Team of the Year 2011, awarded by Post Magazine. The Syndicate claims team were placed in the top three for managing claims in a recent Gracechurch survey of London Market brokers. Despite the most active first half ever for catastrophe claims, Hiscox is managing to process reinsurance claims in two days.
This division uses the global licences, distribution network and credit rating available through Lloyd's to serve clients throughout the world.
| Loss before tax | £26.6 million (2010: profit £69.8 million) |
|---|---|
| Gross written premiums |
£349.0 million (2010: £383.1 million) |
| Combined ratio | 113.9% (2010: 82.2%) |
| Combined ratio | before monetary FX 109.6% (2010: 90.7%) |
The large catastrophe reinsurance losses were mitigated by strong profits in the insurance lines
Reinsurance makes up 42% of Hiscox London Market and this is dominated by our catastrophe excess of loss account. We reduced this account by 26% in January due to rate reductions. The catastrophes reversed the decline with rate increases averaging 10% and substantially higher in affected areas, and in May and June we underwrote 20% more than last year demonstrating the underwriters' nimble reaction to market conditions. We are well prepared to benefit from changes in other markets.
Rates in our insurance lines are mixed; there is some upward pressure in property and energy lines, though rates are broadly flat elsewhere and we continue to see small reductions in a few areas such as terrorism. The offshore energy market has been seriously impacted by a number of significant losses including storm damage to a North-Sea Floating Production, Storage and Offloading unit (FPSO), the Gryphon Alpha. The insured loss is estimated at up to US\$950 million (with a net impact to Hiscox estimated to be around
£14 million) and this is expected to increase upward pricing pressure for energy classes. Rates in big-ticket professional indemnity lines continue to disappoint, and we have continued to reduce our writings appropriately.
The kidnap and ransom, and political risks lines have paid significant claims through their crisis management services to corporate clients repatriating employees to safety from those regions affected by Arab Spring unrest resulting in a hardening of rates and a tightening of conditions.
In 2002 Robert Childs began a legal challenge to recover money from the airlines operating the planes involved in the September 11 attacks on the World Trade Center, with a successful conclusion this year. Most of the recovery goes to our reinsurers, but we have received US\$9 million net with potential for some further recovery.
We have increased our 2012 capacity for Syndicate 33 to £1 billion from £900 million in 2011, to take advantage of hardening conditions.
This division's core products are high value household insurances, including luxury motor, as well as commercial insurances for small to medium businesses which in the main use their brains to make money as opposed to infrastructure, and some specialist technology and media. All three areas made profits in the period.
| Profit before tax | £25.2 million (2010: £15.6 million) |
|---|---|
| Gross written premiums |
£182.9 million (2010: £168.1 million) |
| Combined ratio | 87.9% (2010: 91.8%) |
A record half year profit despite competitive conditions, with steady growth of 8.8%. Our ambition is to make money whatever the state of the market and this we have achieved by concentrating on good underwriting backed by great service and our powerful brand. Rates are
being increased by some competitors in commodity areas which could lead to increases flowing through to our specialist areas in future. Even if they do not, we have winning products and service which will win orders at our price.
Direct business grew 17% and is making good profits. Now we have reached critical mass, the future looks very robust with opportunities to sell added products to a large and good client base.
As always, we walked away from weakly rated business, especially traditional liability business such as accountants, solicitors and IFAs.
We continued to invest in our brand and in the Reputation Institute UK Pulse survey for 2011, Hiscox was rated at the upper level of financial services brands in the UK. Hiscox scores particularly well in products and services, performance and governance. We will continue to leverage our knowledge and expertise in brand and marketing as we expand in Europe and the US.
This division's core business is much the same as the UK - household and specialist commercial accounts. Also written are larger fine art risks, technology and media risks and kidnap and ransom insurance, sometimes in partnership with the London Market division.
| Profit before tax | £0.1 million (2010: £4.0 million) |
|---|---|
| Gross written premiums |
£80.6 million (2010: £80.1 million) |
| Combined ratio | 100.2% (2010: 96.8%) |
Europe suffered some large losses (un-correlated again) but this time managed to break even. One was a theft of paintings from a museum in Holland, and there is the usual strong likelihood that they will be recovered as they are unsaleable in the open market; another was a large kidnap claim and the third was a technology loss. The European teams are expanding in the fine art, technology and kidnap and
ransom accounts in which the Group has a strong specialisation. These are specialist and profitable areas for the Group, and will benefit the European teams greatly as they grow, but will cause a measure of volatility until the accounts are larger.
Our core household and small commercial businesses did well. The household business benefited from some firm underwriting decisions which have caused the loss of some business and a reduction in income of 12%, but the account returned to profit. Growth in other product lines resulted in a modest overall 4% increase (in local currency) for Europe at the top line.
The small direct operation in France which sells commercial liability products to businesses with 0-10 employees is growing steadily. The team is leveraging our direct experience in the UK, and is about to embark on a brand building campaign later in the year.
This division comprises our Bermuda, USA and Guernsey units.
| Loss before tax | £82.2 million |
|---|---|
| (2010: £6.4 million) | |
| Gross written premium |
£234.9 million (2010: £273.1 million) |
| Combined ratio | 160.1% (2010: 114.0%) |
| Combined ratio |
before monetary FX 160.7% (2010: 106.8%)
Bermuda: Bermuda underwrites a reinsurance catastrophe account (Bermuda is the largest reinsurance market in the world) and healthcare business.
Gross written premiums declined by 9.3% as we walked away from weaker rates earlier in the year. The catastrophes have had an expected impact, and with rates already rising and signs of capacity constraints in some affected areas, the outlook is promising for opportunities in the second half. The small healthcare book is growing slowly and profitably.
continued
Guernsey: Guernsey underwrites kidnap and ransom, personal accident and fine art business.
Premium income grew slightly by 2.3% driven by demand for our personal accident and non-marine kidnap and ransom products. As mentioned above in the London Market report, conditions and rates in kidnap and ransom are improving following a volatile period. We suffered a large fine art loss where a painting was damaged in transit.
In June this business celebrated US\$ 1 billion aggregate of premium since it was formed in 1998, a huge achievement and throughout that time it has been a significant profit contributor to the Group.
USA: Hiscox USA underwrites a book of small commercial business to wholesale brokers, and larger specialist business mainly to retail brokers. In late 2010 it launched a direct internet-based offering for small commercial businesses.
There is a good story from Hiscox USA. We narrowed our range of products in 2010 to concentrate on fewer specialist lines, given weak market conditions in those we exited, and focused our distribution channels to better effect, resulting in improved ratios this year. Premium income reduced 15.0% (which is less than budgeted), but the expense ratio improved – a very satisfactory vindication of the actions taken. Underwriting is good, but we need to grow to keep improving the expense ratio which is always true for our start-up operations.
Our new and unique direct business for small commercial businesses is growing satisfactorily and developing brand awareness among SME's. When we are fully satisfied that the IT is totally robust we will put our foot on the marketing accelerator. All indications show a substantial appetite for our offering.
Assets under management at 30 June 2011 totalled £2,859 million (2010: £2,705 million) and the annualised return was 2.0% (2010: 3.5%) leading to an investment return on financial assets of £27.6 million (2010: £46.6 million). With only meagre income continuing to be available from cash and short dated government bonds, the investment portfolio has delivered the result that we expected.
We began the year with a conservative ambition to beat cash returns by being prepared to take some credit and equity risk but little interest rate risk. This worked particularly well in the early part of the year as confidence grew that a sustainable economic recovery in developed markets was underway. However, more recent data, combined with events in Europe and Japan, suggested that this was a false dawn and prompted an unexpected decline in government bond yields, renewed volatility in riskier assets and lower profits from the portfolio in May and June. With the authorities in our main markets of the UK and the US apparently determined to keep interest rates low whilst tolerating a degree of inflation, real returns from cash and bonds are likely to remain unexciting for the balance of the year. Nevertheless, we remain wary of strategies to enhance yield and mindful of the damage that can be done to bond portfolios in a less benign environment. This caution extends to an ongoing avoidance of the sovereign debt of Greece, Ireland, Italy, Portugal and Spain.
Our allocation to equities and hedge funds during the period was largely unchanged and added value to the portfolio overall. Whilst the same cannot be said for many fixed income investments, equities in general appear reasonably valued. However, the outlook for equity markets is far from certain with further volatility to be expected and some scope for earnings disappointment in 2012 if the low growth world implied by bond markets persists. Group cash levels have drifted up recently as a result of distributions from Syndicate 33, but
this should prove temporary as we still believe that our bond managers will beat cash. With the future of the Euro zone in the balance, and, as I write, the US on the verge of a technical default, capital preservation remains our priority and patience is required.
We have suffered extraordinary losses during the period, but that which does not destroy you makes you stronger, and we are definitely stronger. We need tough times in the catastrophe reinsurance arena to keep the fainthearted at bay and to stop foolish competition from some commodity players. We have preached discipline for years and have proved that discipline by cutting back the reinsurance account recently. Our reinsurance protection is virtually entirely intact, we are now facing much better rates and the underwriters are seizing the opportunities.
In our insurance and retail areas, some are making good money despite fierce competition, and others are making good gross underwriting profits and climbing remorselessly towards net profit when they reach critical mass. The brand is very strong in the UK. We have had over a million hits on our promotional web TV series in the US (www.leapyear-hiscox.tv), aimed at young entrepreneurs, which is a strong start to brand recognition there, and in Europe we are due to expand our marketing shortly. We are patient starters of businesses, some of which are in healthy profit and the others heading there.
Over the whole group, our product is providing intelligent solutions to clients' risks, and more importantly, paying claims and repairing insureds after loss, and this we have done well.
Robert Hiscox Chairman 1 August 2011
| 6 months to | 6 months to 30 June 2011 30 June 2010 31 Dec 2010 |
Year to | ||
|---|---|---|---|---|
| Note | £000 | £000 | £000 | |
| Income | ||||
| Gross premiums written | 7 | 847,451 | 904,326 | 1,432,674 |
| Outward reinsurance premiums | (179,890) | (220,627) | (301,047) | |
| Net premiums written | 667,561 | 683,699 | 1,131,627 | |
| Gross premiums earned | 688,207 | 735,218 | 1,435,118 | |
| Premiums ceded to reinsurers | (133,539) | (142,469) | (303,960) | |
| Net premiums earned | 554,668 | 592,749 | 1,131,158 | |
| Investment result | 10 | 25,463 | 50,749 | 100,249 |
| Other revenues | 11 | 7,625 | 10,595 | 22,079 |
| Revenue | 587,756 | 654,093 | 1,253,486 | |
| Expenses | ||||
| Claims and claim adjustment expenses, net of reinsurance | (438,350) | (324,909) | (570,997) | |
| Expenses for the acquisition of insurance contracts | (127,417) | (147,217) | (269,891) | |
| Operational expenses | 11 | (100,600) | (103,728) | (206,403) |
| Foreign exchange (losses)/gains | 19 | (3,547) | 22,022 | 15,484 |
| Total expenses | (669,914) | (553,832) (1,031,807) | ||
| Results of operating activities | (82,158) | 100,261 | 221,679 | |
| Finance costs Share of profit/(loss) of associates after tax |
12 | (3,500) 62 |
(3,179) 70 |
(10,090) (223) |
| (Loss)/profit before tax Tax expense |
13 | (85,596) (1,445) |
97,152 (18,542) |
211,366 (32,566) |
| (Loss)/profit for the period (all attributable to owners of the Company) | (87,041) | 78,610 | 178,800 | |
| Earnings per share on profit attributable to owners of the Company | ||||
| Basic | 15 | (22.8)p | 20.9p | 47.2p |
| Diluted | 15 | (22.8)p | 20.0p | 45.4p |
The notes to the condensed consolidated interim financial statements are an integral part of this document.
| 6 months to £000 |
6 months to 30 June 2011 30 June 2010 31 Dec 2010 £000 |
Year to £000 |
|
|---|---|---|---|
| (Loss)/profit for the period Other comprehensive income |
(87,041) | 78,610 | 178,800 |
| Currency translation (losses)/gains (net of tax of £nil) | (8,550) | 34,363 | 11,729 |
| Total other comprehensive (loss)/income | (8,550) | 34,363 | 11,729 |
| Total comprehensive (loss)/income recognised (all attributable to owners of Company) | (95,591) | 112,973 | 190,529 |
The notes to the condensed consolidated interim financial statements are an integral part of this document.
| 30 June | 30 June 31 December 2011 2010 |
|||
|---|---|---|---|---|
| Note | £000 | £000 | 2010 £000 |
|
| Assets | ||||
| Intangible assets | 64,882 | 53,283 | 64,108 | |
| Property, plant and equipment | 18,578 | 19,230 | 19,742 | |
| Investments in associates | 6,188 | 7,388 | 6,886 | |
| Deferred tax | 14,077 | 19,049 | 14,077 | |
| Deferred acquisition costs | 172,668 | 172,685 | 142,736 | |
| Financial assets carried at fair value | 17 | 2,368,069 | 2,361,504 | 2,459,107 |
| Reinsurance assets | 14 | 530,661 | 586,905 | 462,765 |
| Loans and receivables including insurance receivables | 636,636 | 622,020 | 485,414 | |
| Cash and cash equivalents | 502,954 | 357,544 | 336,017 | |
| Total assets | 4,314,713 | 4,199,608 | 3,990,852 | |
| Equity and liabilities Shareholders' equity Share capital Share premium Contributed surplus Currency translation reserve Retained earnings |
20,494 29,294 245,005 40,907 810,765 |
20,267 14,864 264,023 72,091 830,956 |
20,297 15,800 245,005 49,457 935,555 |
|
| Total equity (all attributable to owners of the Company) | 1,146,465 | 1,202,201 | 1,266,114 | |
| Deferred tax | 19,776 | 34,186 | 45,421 | |
| Insurance liabilities | 14 | 2,672,123 | 2,528,114 | 2,279,867 |
| Financial liabilities | 17 | 75,061 | 239 | 20,457 |
| Current tax | 21,550 | 59,516 | 29,995 | |
| Trade and other payables | 379,738 | 375,352 | 348,998 | |
| Total liabilities | 3,168,248 | 2,997,407 | 2,724,738 | |
| Total equity and liabilities | 4,314,713 | 4,199,608 | 3,990,852 |
The notes to the condensed consolidated interim financial statements are an integral part of this document.
| Share capital £000 |
Share premium £000 |
Contributed surplus £000 |
Currency translation reserve £000 |
Retained earnings £000 |
Total £000 |
|
|---|---|---|---|---|---|---|
| Balance at 1 January 2011 | 20,297 | 15,800 | 245,005 | 49,457 | 935,555 | 1,266,114 |
| Total recognised comprehensive income/(expense) | ||||||
| for the period (all attributable to owners of the Company) | – | – | – | (8,550) | (87,041) | (95,591) |
| Employee share options: | ||||||
| Equity settled share based payments | – | – | – | – | 4,620 | 4,620 |
| Proceeds from shares issued | 36 | 1,347 | – | – | – | 1,383 |
| Deferred tax | – | – | – | – | 1,742 | 1,742 |
| Shares issued in relation to Scrip Dividend | 161 | 12,147 | – | – | – | 12,308 |
| Dividends paid to owners of the Company (note 16) | – | – | – | – | (44,111) | (44,111) |
| Balance at 30 June 2011 | 20,494 | 29,294 | 245,005 | 40,907 | 810,765 | 1,146,465 |
| Share capital £000 |
Share premium £000 |
Contributed surplus £000 |
Currency translation reserve £000 |
Retained earnings £000 |
Total £000 |
|
|---|---|---|---|---|---|---|
| Balance at 1 January 2010 | 20,158 | 11,831 | 303,465 | 37,728 | 748,104 | 1,121,286 |
| Total recognised comprehensive income/(expense) | ||||||
| for the period (all attributable to owners of the Company) | – | – | – | 34,363 | 78,610 | 112,973 |
| Employee share options: | ||||||
| Equity settled share based payments | – | – | – | – | 5,991 | 5,991 |
| Proceeds from shares issued | 109 | 3,033 | – | – | – | 3,142 |
| Deferred tax | – | – | – | – | (1,749) | (1,749) |
| Dividends paid to owners of the Company (note 16) | – | – | (39,442) | – | – | (39,442) |
| Balance at 30 June 2010 | 20,267 | 14,864 | 264,023 | 72,091 | 830,956 | 1,202,201 |
The notes to the condensed consolidated interim financial statements are an integral part of this document.
| Note | 6 months to £000 |
6 months to 30 June 2011 30 June 2010 31 Dec 2010 £000 |
Year to £000 |
|
|---|---|---|---|---|
| (Loss)/profit before tax | (85,596) | 97,152 | 211,366 | |
| Adjustments for: | ||||
| Interest and equity dividend income | (27,431) | (32,351) | (61,606) | |
| Interest expense | 12 | 3,500 | 3,179 | 10,909 |
| Net fair value losses/(gains) on financial assets Depreciation and amortisation |
15,876 4,671 |
(14,150) 3,062 |
(25,672) 7,065 |
|
| Charges in respect of share based payments | 4,620 | 5,991 | 8,047 | |
| Other non-cash movements | (67) | (812) | 1,323 | |
| Effect of exchange rate fluctuations on cash presented separately | (680) | (2,890) | (508) | |
| Changes in operational assets and liabilities: | ||||
| Insurance and reinsurance contracts | 201,640 | 163,754 | 141,646 | |
| Financial assets carried at fair value | 60,642 | 117,029 | (2,527) | |
| Financial liabilities carried at fair value | 396 | – | 82 | |
| Other assets and liabilities | (19,777) | (68,906) | (23,704) | |
| Cash flows from operations | 157,794 | 271,058 | 265,602 | |
| Interest received | 26,724 | 31,422 | 60,332 | |
| Equity dividends received | 707 | 929 | 1,274 | |
| Interest paid | (3,271) | (2,532) | (4,628) | |
| Current tax paid | (33,793) | (27,314) | (51,580) | |
| Net cash flows from operating activities | 148,161 | 273,563 | 271,000 | |
| Cash flow from acquisition of subsidiaries | – | – | (3,662) | |
| Cash flow from sale and purchase of associates | 723 | – | 468 | |
| Cash flows from the purchase of property, plant and equipment | (590) | (1,147) | (3,462) | |
| Cash flows from the purchase of intangible assets | (6,160) | (2,809) | (15,591) | |
| Net cash flows from investing activities | (6,027) | (3,956) | (22,247) | |
| Proceeds from the issue of ordinary shares | 1,383 | 3,142 | 4,108 | |
| Dividends paid to owners of the Company | 16 | (31,803) | (39,442) | (58,460) |
| Net increase/(repayments) of borrowings | 54,543 | (138,300) | (118,539) | |
| Net cash flows from financing activities | 24,123 | (174,600) | (172,891) | |
| Net increase in cash and cash equivalents | 166,257 | 95,007 | 75,862 | |
| Cash and cash equivalents at 1 January | 336,017 | 259,647 | 259,647 | |
| Net increase in cash and cash equivalents | 166,257 | 95,007 | 75,862 | |
| Effect of exchange rate fluctuations on cash and cash equivalents | 680 | 2,890 | 508 | |
| Cash and cash equivalents at end of period | 20 | 502,954 | 357,544 | 336,017 |
The notes to the condensed consolidated interim financial statements are an integral part of this document.
Hiscox Ltd (the 'Company') is a public limited company registered and domiciled in Bermuda. The condensed consolidated interim financial statements for the Company as at, and for the six months ended, 30 June 2011 comprise the Company and its subsidiaries (together referred to as the 'Group') and the Group's interest in associates. The Chairman's statement accompanying these condensed interim financial statements forms the Interim Management Report for the half year ended 30 June 2011.
The Directors of Hiscox Ltd are listed in the Group's 2010 Report and Accounts. A list of current Directors is maintained and available for inspection at the registered office of the Company located at 4th Floor, Wessex House, 45 Reid Street, Hamilton HM 12, Bermuda.
These condensed consolidated interim financial statements have been prepared in accordance with the Listing Rules issued by the Financial Services Authority. The information presented herein does not include all of the disclosures typically required for full consolidated financial statements. Consequently these financial statements should be read in conjunction with the full consolidated financial statements of the Group as at, and for the year ended, 31 December 2010 which are available from the Company's registered
office or at www.hiscox.com. Except where otherwise indicated, all amounts are presented in Pounds Sterling and rounded to the nearest thousand.
After making enquiries, the Directors have an expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason the condensed consolidated interim financial statements have been prepared on a going concern basis and are prepared on the historical cost basis except that pension scheme assets included in the measurement of the employee retirement benefit obligation, and certain financial instruments including derivative instruments are measured at fair value.
Taxes on income for the interim period are accrued using the estimated effective tax rate that would be applicable to estimated total annual earnings.
The independent auditors have reported on the Group's full consolidated financial statements as at, and for the year ended, 31 December 2010. The report of the independent auditors was not qualified. The amounts presented for the 30 June 2011 and 30 June 2010 periods are unaudited.
These condensed consolidated interim financial statements were approved by the Board of Directors on 1 August 2011.
The accounting policies applied in these condensed consolidated interim financial statements are consistent with those
applied by the Group in its consolidated financial statements as at, and for the year ended, 31 December 2010. The consolidated financial statements as at, and for the year ended, 31 December 2010 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. The Interim Report is compliant with IAS 34 Interim Financial Reporting as adopted by the European Union.
The Group's financial, insurance and other risk management objectives and policies are consistent with that disclosed in note 3 of the full consolidated financial statements as at, and for the year ended, 31 December 2010. The principal risks and uncertainties are unchanged and may be summarised as insurance risk, equity price risk, interest rate risk, liquidity risk, credit risk, currency risk, capital risk and operational risk.
Since the onset of global concerns regarding sub prime and credit issues during Autumn 2007, the Group has been mindful of the ongoing dislocation in specific asset classes and their resultant impact on investment markets and the solvency of counterparties more generally. The Group continues to monitor all aspects of its financial risk appetite and the resultant exposure taken with caution, and has consequently suffered insignificant defaults on investments held during the period under review.
As detailed in note 17, the Group's investment allocation is broadly comparable to that at 31 December 2010 as outlined in the Group Report and Accounts. The Group also continues to be mindful of the processes required for establishing the reliability of fair values obtained for some classes of financial assets affected by ongoing periods of diminished liquidity. In order to assist users, the Group has disclosed the measurement attributes of its investment portfolio in a fair value hierarchy in note 18 in accordance with the Amendments to IFRS 7, Financial Instruments: Disclosures.
The Group remains susceptible to fluctuations in rates of foreign exchange. In particular between Pound Sterling and the US Dollar.
Strong treasury management has ensured that the Group's balance sheet remains well capitalised and its operations are financed to accommodate foreseen liquidity demands together with a high level of capital sufficient to meet future catastrophe obligations even if difficult investment market conditions were to prevail for a period of time.
Historically the Group's most material exposure to catastrophe losses on certain lines of business such as reinsurance inwards and marine and major property risk have been greater during the second half of the calendar year, broadly in line with the most active period of the North Atlantic hurricane season. In contrast a majority of gross premium income written in these lines of business occurs during the first half of the calendar year. The Group actively participates in many regions and if any catastrophic events do occur, it is likely that the Group will share some of the market's losses. Consequently, the potential for significantly greater volatility in expected returns remains during the second half of the year. Details of the Group's recent exposures to these classes of business are disclosed in note 3 of the Group's 2010 Report and Accounts.
Transactions with related parties during the period are consistent in nature and scope with those disclosed in note 38 of the Group's 2010 Report and Accounts.
The Group's operating segments consist of four segments which recognise the differences between products and services, customer groupings and geographical areas. Financial information is used in this format by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The format is representative of the management structure of the segments.
The Group's four operating segments are:
| 6 months to 30 June 2011 | 6 months to 30 June 2010 | Year to 31 December 2010 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| London Market £000 |
UK and £000 |
Europe International £000 |
Corporate Centre £000 |
Total £000 |
London Market £000 |
UK and £000 |
Europe International £000 |
Corporate Centre £000 |
Total £000 |
London Market £000 |
UK and £000 |
Europe International £000 |
Corporate Centre £000 |
Total £000 |
|
| Gross premiums written Net premiums written Net premiums earned |
348,993 237,975 192,793 |
263,510 248,810 215,341 |
234,948 180,776 146,534 |
– – – |
847,451 667,561 554,668 |
383,072 246,412 216,787 |
248,165 234,595 210,105 |
273,089 202,692 165,857 |
– – – |
904,326 683,699 592,749 |
572,748 389,581 396,096 |
454,692 428,032 422,180 |
405,235 314,014 312,882 |
– – – |
1,432,674 1,131,627 1,131,158 |
| Investment result Other revenues |
8,174 4,008 |
5,806 1,748 |
8,067 1,869 |
3,416 – |
25,463 7,625 |
25,004 6,675 |
5,746 1,139 |
12,938 2,774 |
7,061 7 |
50,749 10,595 |
39,068 12,054 |
17,244 3,671 |
27,624 5,836 |
16,313 518 |
100,249 22,079 |
| Revenue | 204,975 | 222,895 | 156,470 | 3,416 | 587,756 | 248,466 | 216,990 | 181,569 | 7,068 | 654,093 | 447,218 | 443,095 | 346,342 | 16,831 | 1,253,486 |
| Claims and claim adjustment expenses, net of reinsurance Expenses for the acquisition of insurance contracts Operational expenses Foreign exchange (losses)/gains |
(158,544) (43,173) (18,998) (10,194) |
(102,235) (50,737) (47,193) 2,569 |
(177,571) (33,507) (28,309) 895 |
– – (6,100) 3,183 |
(438,350) (127,417) (100,600) (3,547) |
(120,393) (56,501) (22,257) 20,893 |
(99,618) (50,469) (42,807) (4,487) |
(104,898) (40,247) (31,194) (11,426) |
– – (7,470) 17,042 |
(324,909) (147,217) (103,728) 22,022 |
(195,570) (92,832) (44,733) 11,669 |
(213,001) (99,069) (89,440) (1,972) |
(162,426) (77,990) (59,419) (2,610) |
– – (12,811) 8,397 |
(570,997) (269,891) (206,403) 15,484 |
| Total expenses | (230,909) | (197,596) | (238,492) | (2,917) | (669,914) | (178,258) | (197,381) | (187,765) | 9,572 | (553,832) | (321,466) | (403,482) | (302,445) | (4,414) (1,031,807) | |
| Results of operating activities Finance costs Share of profit of associates after tax |
(25,934) (680) – |
25,299 – – |
(82,022) (209) – |
499 (2,611) 62 |
(82,158) (3,500) 62 |
70,208 (382) – |
19,609 (6) – |
(6,196) (225) – |
16,640 (2,566) 70 |
100,261 (3,179) 70 |
125,752 (4,392) – |
39,613 (9) – |
43,897 (433) (323) |
12,417 (5,256) 100 |
221,679 (10,090) (223) |
| (Loss)/profit before tax | (26,614) | 25,299 | (82,231) | (2,050) | (85,596) | 69,826 | 19,603 | (6,421) | 14,144 | 97,152 | 121,360 | 39,604 | 43,141 | 7,261 | 211,366 |
| 100% ratio analysis | |||||||||||||||
| Claims ratio (%) Expense ratio (%) |
82.7 26.9 |
47.2 45.3 |
118.9 41.8 |
– – |
78.8 36.9 |
55.3 35.4 |
46.6 44.3 |
64.4 42.4 |
– – |
54.8 40.0 |
48.3 33.5 |
50.2 44.6 |
53.2 43.2 |
– – |
50.1 39.7 |
| Combined ratio excluding foreign exchange impact (%) Foreign exchange impact (%) |
109.6 4.3 |
92.5 (1.2) |
160.7 (0.6) |
– – |
115.7 1.2 |
90.7 (8.5) |
90.9 2.2 |
106.8 7.2 |
– – |
94.8 (1.2) |
81.8 (2.1) |
94.8 0.5 |
96.4 0.9 |
– – |
89.8 (0.5) |
| Combined ratio (%) | 113.9 | 91.3 | 160.1 | – | 116.9 | 82.2 | 93.1 | 114.0 | – | 93.6 | 79.7 | 95.3 | 97.3 | – | 89.3 |
| Combined ratio excluding non monetary foreign exchange impact (%) | 115.1 | 91.7 | 160.1 | – | 117.6 | 83.9 | 92.5 | 114.0 | – | 94.3 | 79.7 | 95.3 | 97.3 | – | 89.3 |
| Total assets before intragroup items and eliminations | 2,432,419 | 936,321 | 1,438,769 | 1,066,178 | 5,873,687 | 2,510,171 | 851,520 | 1,296,982 | 985,991 | 5,644,664 | 2,254,502 | 904,637 | 1,287,689 | 996,864 | 5,443,692 |
| Intragroup items and eliminations | (1,558,974) | (1,445,056) | (1,452,840) | ||||||||||||
| Total assets | 4,314,713 | 4,199,608 | 3,990,852 |
| Net asset value (total equity) £000 |
30 June 2011 NAV pence |
Net asset value per share (total equity) £000 |
30 June 2010 NAV pence |
Net asset value per share (total equity) £000 |
31 Dec 2010 NAV per share pence |
|
|---|---|---|---|---|---|---|
| Net asset value | 1,146,465 | 296.3 | 1,202,201 | 318.9 | 1,266,114 | 322.7 |
| Net tangible asset value | 1,081,583 | 279.6 | 1,148,918 | 304.7 | 1,202,006 | 315.8 |
The net asset value per share is based on 386,863,124 shares (30 June 2010: 377,003,655; 31 December 2010: 380,613,336), being the adjusted number of shares in issue at each reference date. Net tangible assets comprise total equity excluding intangible assets.
| 6 months to £000 |
6 months to 30 June 2011 30 June 2010 31 Dec 2010 £000 |
Year to £000 |
|
|---|---|---|---|
| (Loss)/profit for the period Opening shareholders' equity |
(87,041) 1,266,114 |
78,610 1,121,286 |
178,800 1,121,286 |
| Adjusted for the time weighted impact of capital distributions and issuance of shares | (1,970) | (19,485) | (34,820) |
| Adjusted opening shareholders' equity | 1,264,144 | 1,101,801 | 1,086,466 |
| Annualised return on equity (%) | (13.3) | 14.8 | 16.5 |
| i) Analysis of investment result | 6 months to | 6 months to | Year to |
|---|---|---|---|
| The total investment result for the Group before taxation comprises: | £000 | 30 June 2011 30 June 2010 31 Dec 2010 £000 |
£000 |
| Investment income including interest receivable | 27,431 | 31,001 | 61,606 |
| Net realised gains on financial investments at fair value through profit or loss | 13,908 | 5,598 | 12,971 |
| Net fair value (losses)/gains on financial investments at fair value through profit or loss | (13,749) | 10,001 | 24,272 |
| Investment result - financial assets | 27,590 | 46,600 | 98,849 |
| Fair value (losses)/gains on derivative financial instruments | (2,127) | 4,149 | 1,400 |
| Total result | 25,463 | 50,749 | 100,249 |
Investment expenses are presented within other expenses (note 11). Included within fair value (losses)/gains on derivative instruments above, are derivative (losses)/gains on foreign exchange contracts.
| ii) Annualised investment yields | 6 months to 30 June 2011 |
6 months to 30 June 2010 |
Year to 31 Dec 2010 |
|||
|---|---|---|---|---|---|---|
| Return £000 |
Yield % |
Return £000 |
Yield % |
Return £000 |
Yield % |
|
| Debt and fixed income securities | 23,779 | 2.1 | 48,738 | 4.4 | 82,234 | 3.7 |
| Equities and shares in unit trusts | 2,668 | 3.7 | (2,679) | (3.9) | 15,572 | 11.1 |
| Deposits with credit institutions/cash and cash equivalents | 1,143 | 0.6 | 541 | 0.3 | 1,043 | 0.3 |
| 27,590 | 2.0 | 46,600 | 3.5 | 98,849 | 3.6 |
| 11 Other revenues and expenses | 6 months to £000 |
6 months to 30 June 2011 30 June 2010 31 Dec 2010 £000 |
Year to £000 |
|---|---|---|---|
| Agency related income | 3,478 | 2,351 | 6,816 |
| Profit commission | 3,462 | 6,549 | 10,616 |
| Other underwriting income, catastrophe bonds | 599 | 323 | 1,280 |
| Other income | 86 | 1,372 | 3,367 |
| Other revenues | 7,625 | 10,595 | 22,079 |
| Wages and salaries | 32,191 | 40,026 | 80,359 |
| Social security costs | 5,157 | 5,459 | 13,689 |
| Pension cost - defined contribution | 2,805 | 2,704 | 5,209 |
| Pension cost - defined benefit | – | – | 1,700 |
| Share based payments | 4,620 | 5,038 | 8,047 |
| Other expenses | 39,672 | 39,417 | 74,668 |
| Marketing expenses | 9,799 | 6,526 | 11,863 |
| Investment expenses | 1,685 | 1,496 | 3,803 |
| Depreciation and amortisation | 4,671 | 3,062 | 7,065 |
| Operational expenses | 100,600 | 103,728 | 206,403 |
| 6 months to £000 |
6 months to 30 June 2011 30 June 2010 31 Dec 2010 £000 |
Year to £000 |
|
|---|---|---|---|
| Interest and expenses associated with bank borrowings | 1,493 | 1,556 | 3,117 |
| Interest and charges associated with Letters of Credit | 1,613 | 1,617 | 3,216 |
| Interest charges on experience account | 393 | – | 3,748 |
| Interest charges arising on finance leases | 1 | 6 | 9 |
| 3,500 | 3,179 | 10,090 |
As at 30 June 2011, the total amount drawn by way of Letter of Credit to support the Funds at Lloyd's requirement was \$340 million (30 June 2010: \$225 million, 31 December 2010: \$165 million).
The Company and its subsidiaries are subject to enacted tax laws in the jurisdictions in which they are incorporated and domiciled. The amounts charged in the condensed consolidated income statement comprise the following:
| 6 months to £000 |
6 months to 30 June 2011 30 June 2010 31 Dec 2010 £000 |
Year to £000 |
|
|---|---|---|---|
| Current tax | |||
| Expense for the year Adjustments in respect of prior years |
25,348 – |
60,750 – |
58,228 (1,062) |
| Total current tax | 25,348 | 60,750 | 57,166 |
| Deferred tax | |||
| Credit for the year | (22,606) | (42,208) | (22,532) |
| Adjustments in respect of prior years | 11 | – | (691) |
| Effect of rate change | (1,308) | – | (1,377) |
| Total deferred tax | (23,903) | (42,208) | (24,600) |
| Total tax charged to the income statement | 1,445 | 18,542 | 32,566 |
The Group records its income tax expense based on the expected effective rate for the full year.
| 30 June 2011 30 June 2010 31 Dec 2010 £000 |
|---|
| 1,706,404 |
| 573,463 |
| 2,279,867 |
| 374,193 |
| 88,572 |
| 462,765 |
| 1,332,211 |
| 484,891 |
| 1,817,102 |
Net claims and claim adjustment expenses include releases of £95m (30 June 2010: £93m, 31 December 2010: £133m) of reserves established in prior reporting periods.
The development of net claims reserves by accident years are detailed below:
| Accident year ending 31 December** |
2002 £000 |
2003 £000 |
2004 £000 |
2005 £000 |
2006 £000 |
2007 £000 |
2008 £000 |
2009 £000 |
2010 £000 |
2011 £000 |
Total £000 |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Estimate of ultimate claims costs as adjusted for foreign exchange*: |
|||||||||||
| at end of accident year** 274,783 362,007 576,830 680,891 532,362 694,392 771,723 689,890 805,337 634,091 | 6,022,306 | ||||||||||
| one period later** | 299,889 381,891 629,808 781,680 523,322 631,919 689,481 603,600 798,549 | – | 5,340,139 | ||||||||
| two periods later** | 310,051 347,868 604,931 771,174 506,221 612,843 680,565 572,589 | – | – | 4,406,242 | |||||||
| three periods later** | 286,443 358,813 567,594 746,230 462,697 569,359 653,094 | – | – | – | 3,644,230 | ||||||
| four periods later* | 279,884 349,458 568,429 736,043 478,769 555,315 | – | – | – | – | 2,967,898 | |||||
| five periods later** | 266,400 344,505 553,521 737,124 454,774 | – | – | – | – | – | 2,356,324 | ||||
| six periods later** | 260,393 340,882 556,043 743,431 | – | – | – | – | – | – | 1,900,749 | |||
| seven periods later** | 265,673 340,568 549,319 | – | – | – | – | – | – | – | 1,155,560 | ||
| eight periods later** | 254,371 337,252 | – | – | – | – | – | – | – | – | 591,623 | |
| nine periods later** | 254,127 | – | – | – | – | – | – | – | – | – | 254,127 |
| Current estimate of cumulative claims Cumulative payments |
254,127 337,252 549,319 743,431 454,774 555,315 653,094 572,589 798,549 634,091 | 5,552,541 | |||||||||
| to date | (233,341) (316,163) (475,146) (649,114) (400,095) (465,585) (499,675) (360,861) (266,105) (54,031) (3,720,116) | ||||||||||
| Liability recognised at 100% level Liability recognised in |
20,786 | 21,089 | 74,173 | 94,317 | 54,679 | 89,730 153,419 211,728 532,444 580,060 | 1,832,425 | ||||
| respect of prior accident years at 100% level |
58,259 | ||||||||||
| Total net liability to external parties at 100% level |
1,890,684 |
* The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 30 June 2011. ** With the exception of the most recent development data for each accident year, which only relates to the six months ending 30 June 2011, the term period refers to one full calendar year.
| Accident year | 2002 £000 |
2003 £000 |
2004 £000 |
2005 £000 |
2006 £000 |
2007 £000 |
2008 £000 |
2009 £000 |
2010 £000 |
2011 £000 |
Total £000 |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Current estimate of cumulative claims Less: attributable to external Names |
254,127 337,252 549,319 743,431 454,774 555,315 653,094 572,589 798,549 634,091 | 5,552,541 (49,335) (74,165) (125,596) (180,778) (94,715) (110,557) (120,400) (92,059) (121,102) (86,784) (1,055,491) |
|||||||||
| Group share of current ultimate claims estimate |
204,792 263,087 423,723 562,653 360,059 444,758 532,694 480,530 677,447 547,307 | 4,497,050 | |||||||||
| Cumulative payments to date Less: attributable to |
(233,341) (316,163) (475,146) (649,114) (400,095) (465,585) (499,675) (360,861) (266,105) (54,031) (3,720,116) | ||||||||||
| external Names | 43,922 | 68,827 110,187 156,130 | 82,103 | 89,728 | 83,987 | 52,553 | 32,998 | 5,697 | 726,132 | ||
| Group share of cumulative payments |
(189,419) (247,336) (364,959) (492,984) (317,992) (375,857) (415,688) (308,308) (233,107) (48,334) (2,993,984) | ||||||||||
| Liability for 2002 to 2011 accident years recognised on Group's balance sheet Liability for accident years before 2002 recognised on Group's balance sheet |
15,373 | 15,751 | 58,764 | 69,669 | 42,067 | 68,901 117,006 172,222 444,340 498,973 | 1,503,066 43,065 |
||||
| Total Group liability to external parties included in the balance sheet, net† |
1,546,131 |
† This represents the claims element of the Group's insurance liabilities and reinsurance assets.
Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the period, excluding ordinary shares purchased by the Group and held in treasury as own shares.
| 6 months to | 6 months to 30 June 2011 30 June 2010 31 Dec 2010 |
Year to | |
|---|---|---|---|
| (Loss)/profit for the period attributable to owners of the Company (£000) | (87,041) | 78,610 | 178,800 |
| Weighted average number of ordinary shares in issue (thousands) | 381,999 | 375,956 | 379,064 |
| Basic earnings per share (pence per share) | (22.8)p | 20.9p | 47.2p |
Diluted earnings per share is calculated by adjusting the assumed conversion of all dilutive potential ordinary shares. The Company has one category of dilutive potential ordinary shares, share options and awards. For the share options, a calculation is made to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Company's shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share options. If the inclusion of potentially issuable shares would decrease the loss per share, the potentially issuable shares are excluded from the diluted earnings per share calculation.
| 6 months to | 6 months to 30 June 2011 30 June 2010 31 Dec 2010 |
Year to | |
|---|---|---|---|
| Profit for the period attributable to owners of the Company (£000) | (87,041) | 78,610 | 178,800 |
| Weighted average number of ordinary shares in issue (thousands) Adjustment for share options (thousands) |
381,999 – |
375,956 17,313 |
379,064 14,662 |
| Weighted average number of ordinary shares for diluted earnings per share (thousands) | 381,999 | 393,269 | 393,726 |
| Diluted earnings per share (pence per share) | (22.8)p | 20.0p | 45.4p |
Diluted earnings per share has been calculated after taking account of outstanding options under both employee share schemes and also SAYE schemes.
| 6 months to £000 |
6 months to 30 June 2011 30 June 2010 31 Dec 2010 £000 |
Year to £000 |
|
|---|---|---|---|
| Final dividend for the year ended: | |||
| 31 December 2010 of 11.5p (net) per share | 44,111 | – | – |
| Interim dividend for the year ended: | |||
| 31 December 2010 of 5.0p (net) per share | – | – | 19,018 |
| Second interim dividend for the year ended: | |||
| 31 December 2009 of 10.5p (net) per share | – | 39,442 | 39,442 |
| 44,111 | 39,442 | 58,460 |
The final dividend for the year ended 31 December 2010 was part paid in scrip dividend. 3,227,459 shares were issued for the scrip dividend, with £31,803,000 being paid in cash.
An interim dividend of 5.1p (net) per ordinary share has been declared payable on 21 September 2011 to shareholders registered on 12 August 2011 in respect of the six months to 30 June 2011 (30 June 2010: 5.0p (net) per ordinary share). A scrip dividend alternative will be offered to the owners of the Company. The dividend was approved by the Board on 27 July 2011 and accordingly has not been included as a distribution or liability in this interim consolidated financial information in accordance with IAS 10 Events after the balance sheet date.
| £000 | 30 June 2011 30 June 2010 31 Dec 2010 £000 |
£000 | |
|---|---|---|---|
| Debt and fixed income securities Equities and shares in unit trusts Deposits with credit institutions |
2,195,319 155,283 5,717 |
2,199,561 139,635 7,839 |
2,284,513 154,862 4,280 |
| Total investments | 2,356,319 | 2,347,035 | 2,443,655 |
| Catastrophe bonds Derivative instruments |
11,674 76 |
14,071 398 |
15,452 – |
| Total financial assets carried at fair value | 2,368,069 | 2,361,504 | 2,459,107 |
| £000 | 30 June 2011 30 June 2010 31 Dec 2010 £000 |
£000 | |
|---|---|---|---|
| Borrowings from credit institutions carried at amortised cost Derivative financial instruments |
75,000 61 |
– 239 |
20,000 457 |
| Total financial liabilities | 75,061 | 239 | 20,457 |
| £000 | 30 June 2011 % |
£000 | 30 June 2010 % |
£000 | 31 Dec 2010 % |
|
|---|---|---|---|---|---|---|
| Debt and fixed income securities | 2,195,319 76.8 | 2,199,561 81.3 | 2,284,513 82.2 | |||
| Equities and shares in unit trusts | 155,283 | 5.4 | 139,635 | 5.2 | 154,862 | 5.6 |
| Deposits with credit institutions/cash and cash equivalents | 508,671 17.8 | 365,383 13.5 | 340,297 12.2 | |||
| Total | 2,859,273 | 2,704,579 | 2,779,672 |
| % | 30 June 2011 30 June 2010 31 Dec 2010 % |
% | |
|---|---|---|---|
| Sterling | 24.0 | 26.6 | 26.3 |
| US Dollars | 61.6 | 63.1 | 63.4 |
| Euro and other currencies | 14.4 | 10.3 | 10.3 |
In accordance with the Amendments to IFRS 7 Financial Instruments: Disclosures, 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 set out below:
| As at 30 June 2011 | Level 1 £000 |
Level 2 £000 |
Level 3 £000 |
Total £000 |
|---|---|---|---|---|
| Debt and fixed income securities | 447,163 | 1,748,156 | – | 2,195,319 |
| Equities and shares in unit trusts | 70 | 147,000 | 8,213 | 155,283 |
| Deposits with credit institutions | 5,717 | – | – | 5,717 |
| Catastrophe bonds | – | 11,674 | – | 11,674 |
| Derivative financial instruments | – | 76 | – | 76 |
| Total | 452,950 | 1,906,906 | 8,213 | 2,368,069 |
| As at 30 June 2010 | Level 1 £000 |
Level 2 £000 |
Level 3 £000 |
Total £000 |
| Debt and fixed income securities | 483,947 | 1,715,614 | – | 2,199,561 |
| Equities and shares in unit trusts | 174 | 134,519 | 4,942 | 139,635 |
| Deposits with credit institutions | 7,839 | – | – | 7,839 |
| Catastrophe bonds | – | 14,071 | – | 14,071 |
| Derivative financial instruments | – | 398 | – | 398 |
| Total | 491,960 | 1,864,602 | 4,942 | 2,361,504 |
| As at 31 December 2010 | Level 1 £000 |
Level 2 £000 |
Level 3 £000 |
Total £000 |
| Debt and fixed income securities | 516,528 | 1,767,985 | – | 2,284,513 |
| Equities and shares in unit trusts | 70 | 147,866 | 6,926 | 154,862 |
| Deposits with credit institutions | 4,280 | – | – | 4,280 |
| Catastrophe bonds | – | 15,452 | – | 15,452 |
| Total | 520,878 | 1,931,303 | 6,926 | 2,459,107 |
As at 30 June 2011, the Group had derivative financial liabilities of £61,000 which are classified as level 2 (30 June 2010: £239,000, 31 December 2010: £457,000).
The levels of the fair value hierarchy are defined by the standard as follows:
The fair values of the Group's financial assets are based on prices provided by investment managers who obtain market data from numerous independent pricing services. The pricing services used by the investment managers obtain actual transaction prices for securities that have quoted prices in active markets. For those securities which are not actively traded, the pricing services use common market valuation pricing models. Observable inputs used in common market valuation pricing models include, but are not limited to, broker quotes, credit ratings, interest rates and yield curves, prepayment speeds, default rates and other such inputs which are available from market sources.
The fair value of the Group's investment in catastrophe bonds is based on quoted market prices or, where such prices are not available, by reference to broker or underwriter bid indications.
Investments in mutual funds comprise a portfolio of stock investments in trading entities which are invested in various quoted investments. The fair value of shares in unit trusts are based on the net asset value of the fund reported by independent pricing sources or the fund manager.
Included within Level 1 of the fair value hierarchy are Government bonds, Treasury bills and exchange traded equities which are measured based on quoted prices.
Level 2 of the hierarchy contains US Government Agencies, Corporate Securities, Asset Backed Securities and Mortgage Backed Securities and Catastrophe bonds. The fair value of these assets are based on the prices obtained from both investment managers and investment custodians as discussed above. The Group records the unadjusted price provided and validates the price through a number of methods including a comparison of the prices provided by the investment managers with the investment custodians and the valuation used by external parties to derive fair value. Quoted prices for US Government Agencies and Corporate Securities are based on a limited number of transactions for those securities and as such the Group considers these instruments to have similar characteristics as those instruments classified as Level 2. Also included within Level 2 are units held in traditional long funds and long and short special funds and over the counter derivatives, including event linked future contracts.
Level 3 contains investments in a limited partnership and unquoted equity securities which have limited observable inputs on which to measure fair value. Unquoted equities are carried at cost which is deemed to be comparable to fair value. The effect of changing one or more of the inputs used in the measurement of fair value of these instruments to another reasonably possible assumption would not be significant and no further analysis has been performed.
In certain cases, the inputs used to measure the fair value of a financial instrument may fall into different levels within the fair value hierarchy. In this instance, the fair value of the instrument in its entirety is classified based on the lowest level of input that is significant to the fair value measurement.
During the period, there were no significant transfers made between Level 1 and Level 2 of the fair value hierarchy. In addition, there were no significant movements in the Level 3 assets from 31 December 2010.
The net foreign exchange (losses)/gains for the year include the following amounts:
| 6 months to £000 |
6 months to 30 June 2011 30 June 2010 31 Dec 2010 £000 |
Year to £000 |
|
|---|---|---|---|
| Exchange (losses)/gains recognised in the consolidated income statement Exchange (losses)/gains classified as a separate component of equity |
(3,547) (8,550) |
22,022 34,363 |
15,484 11,729 |
| Overall impact of foreign exchange related items on net assets | (12,097) | 56,385 | 27,213 |
The above excludes profit or losses on foreign exchange derivative contracts which are included within the investment result.
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 translated at historical rates of exchange prevailing at the original transaction date and not being retranslated at the end of each period. The impact of this mismatch on the income statement is shown overleaf.
| £000 | 6 months to 6 months to 30 June 2011 30 June 2010 31 Dec 2010 £000 |
Year to £000 |
|
|---|---|---|---|
| Opening balance sheet impact of non retranslation of non monetary items Gain/(loss) included within profit representing the non retranslation of non monetary items |
(1,251) 2,759 |
(3,207) 5,136 |
(3,207) 1,956 |
| Closing balance sheet impact of non retranslation of non monetary items | 1,508 | 1,929 | (1,251) |
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, settlement and disposal of derivative contracts is also classified as an operating cash flow.
Included within cash and cash equivalents held by the Group are balances totalling £82,690,000 (30 June 2010: £78,428,000; 31 December 2010: £63,447,000) not available for use by the Group outside of the Lloyd's Syndicates within which they are held.
The Directors confirm, to the best of our knowledge, that the Chairman's statement and condensed consolidated interim financial statements have been prepared in accordance with IAS 34 as adopted by the European Union and the Interim Statement includes a fair review of the information required by sections 4.2.7R and 4.2.8R of the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority, being:
The individuals responsible for authorising the responsibility statement on behalf of the Board are the Chairman, RRS Hiscox and the Group Finance Director, SJ Bridges. The statements were approved for issue on 1 August 2011.
We have been engaged by the company to review the condensed consolidated interim financial statements in the Interim Statement for the six months ended 30 June 2011 which comprises the condensed consolidated interim income statement, the condensed consolidated interim statement of comprehensive income, the condensed consolidated interim balance sheet, the condensed consolidated interim statement of changes in equity, the condensed consolidated interim cash flow statement and related explanatory notes. We have read the other information contained in the Interim Statement and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.
This report is made solely to the company in accordance with the terms of our engagement to assist the company in meeting the requirement of the Disclosure and Transparency Rules ('the DTR') of the UK's Financial Services Authority ('the UK FSA'). Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached.
The Interim Statement is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the Interim Statement in accordance with the DTR of the UK FSA.
As disclosed in note 3, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the EU. The condensed set of financial statements included in this Interim Statement has been prepared in accordance with IAS 34, Interim Financial Reporting, as adopted by the EU.
Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the Interim Statement based on our review.
We conducted our review in accordance with International Standard on Review Engagements 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the Interim Statement for the six months ended 30 June 2011 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FSA.
KPMG Hamilton Bermuda 1 August 2011
Neither an audit nor a review provides assurance on the maintenance and integrity of the Group's website, including controls used to achieve this, and in particular whether any changes may have occurred to the financial statements since first published. These matters are the responsibility of the directors but no control procedures can provide absolute assurance in this area. Legislation in Bermuda and in the United Kingdom governing the preparation and dissemination of financial statements differs from legislation in other jurisdictions.
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