Full year results for the year ended 31 December 2009

Hamilton, Bermuda (1 March 2010) – Hiscox Ltd (LSE: HSX), the international specialist insurer, today announces its full year results for the year ended 31 December 2009.

An exceptional year

	2009	2008
Gross premiums written	£1,435.4m	£1,147.4m
Net premiums earned	£1,098.1m	£928.1m
Profit before tax	£320.6m	£105.2m
Profit after tax	£280.5m	£70.8m
Earnings per share	75.2p	18.8p
Total dividend per share for year	15.0p	12.75p
Net asset value per share	299.2p	258.1p
Group combined ratio excluding foreign exchange	82.2%	91.6%
Group combined ratio	86.0%	75.3%
Return on equity	30.1%	9.2%

Financial highlights

• Profit before tax £320.6 million (2008: £105.2 million)
• Profit after tax £280.5 million (2008: £70.8 million): 12.5% effective tax rate
• Earnings per share 75.2p (2008: 18.8p)
• Investment return 7.2% (2008: -1.3%)
• Total dividend for the year increased by 17.6% to 15.0p (2008: 12.75p)
• Net assets per share increased by 15.9% to 299.2p (2008: 258.1p)
• Combined ratio of 86.0% (2008: 75.3%) or 82.2% (2008: 91.6%) excluding foreign exchange impact
• Return on equity of 30.1% (2008: 9.2%)

Operational highlights

• Insurance rates broadly stable and still very attractive in Reinsurance.
• Retail and specialty businesses continue to grow.
• Ongoing investment in UK marketing benefits Group.

Robert Hiscox, Chairman of Hiscox Ltd, commented:

“A record profit after continued investment in developing our UK brand and building our US business is a very happy result.”

ENDS

For further information:

Hiscox Ltd

Charles Dupplin, Group Company Secretary	+1 441 278 8300
Kylie O’Connor, Head of Group Communications, London	+44 (0) 20 7448 6656
Maitland	+44 (0) 20 7379 5151
Philip Gawith
Anthony Silverman

Notes to editors

About Hiscox

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

For further information, visit www.hiscox.com.

Chairman’s statement

It is an enormous pleasure to report a gross profit of £320.6 million – three times last year’s profit and considerably higher than the previous record of £237 million in 2007. I know that Mother Nature was kind, but my definition of luck is when preparation meets opportunity, and our catastrophe underwriters did an immense amount of preparation and research to underwrite a carefully controlled exposure which could benefit from a benign catastrophe period, but not hurt us if nature turned vicious. I also believe that the stability of the general insurance industry during the recent banking bubble deserved a reward.

The investments yielded a cracking result.

And our strategy of growing our specialist retail businesses internationally to balance the catastrophe accounts continued apace.

Results
The result for the year ending 31 December was a profit before tax of £320.6 million (2008: £105.2 million) on a gross written premium income of £1,435.4 million (2008: £1,147.4 million). The combined ratio was 86.0% (2008: 75.3%). The combined ratio on a like for like basis excluding foreign exchange distortions was 82.2% (2008: 91.6%). Earnings per share on profits after tax were 75.2p (2008: 18.8p), and net assets per share increased to 299.2p (2008: 258.1p). The return on equity was 30.1% (2008: 9.2%).

Dividend and capital management
The Board proposes to pay a second interim dividend of 10.5p on 29 March 2010 to shareholders on the register on 5 March 2010 in place of a final dividend, making total dividends for the year of 15.0p (2008: 12.75p).

We remain prepared to buy back our shares if the share price drops to an unrealistic level. We are pleased we did not do a rights issue last year but decided to sweat our capital and avoid dilution. This excellent profit has allowed us to pay an increased dividend, added sufficient capital for our current plans, and enabled us to set aside a buffer of capital to maintain appropriate capital ratios in case of reduced investment income in 2010.

The insurance market
In my half year statement in 2007 I wrote that it seemed surreal to be announcing record results when our shares were rated so lowly. There was then a re-rating of the general insurance sector, but suspicion and malaise seems to have crept in again. Commentators seem cynical about our prospects and the insurance industry as a whole is valued at less than book value. Hiscox is rated at a small premium to assets and a ridiculously low multiple of earnings.

I agree that the general insurance industry has been blighted by poor underwriting in the past when investment profits were easier to make and underwriting didn’t seem to matter too much. In my youth insurance companies were described as investment trusts with an expensive habit. But the investment market is now offering slim pickings, so underwriting – our basic trade – matters totally, and there are firm signs that managements appreciate that fact. Reinsurance underwriting is dominated by models which we know are not right, but which impose a discipline and are an indispensable guide. The great attraction of the general insurance business is that everyone has to buy it; in fact, more and more so as governments continue to impose countless regulations, any breach of which can lead to litigation. Demand for our products is continuous; it is up to us to price them properly and to supply products which customers want at that price.

During 2009 we implemented a new marketing campaign to attract our chosen customers and to continue to strengthen the brand. We want people to reach for a Hiscox policy because they trust it to perform better than standard commodity products. We are differentiating ourselves from the herd which will build value for shareholders.

Since I have been at Hiscox we have grown from a premium income of around £3 million to nearly £1.5 billion, and from profits of a few thousand to £300 million. Not in a straight line of either income or profit as the nature of our business is to absorb the unpredictable from others, but I can guarantee you that this business has the determination and talent to continue that profitable growth.

The Hiscox businesses
As usual, I leave it to the CEO, Bronek Masojada, to report in detail the progress of our spreading but very focussed businesses. In brief, our catastrophe reinsurance underwriting in Bermuda and London was extremely profitable which enabled us to continue to invest in our US start-ups and our direct business. Our UK business demonstrated strong profitable growth, Europe had a tough first half but recovered well in the second, and Guernsey was outstanding as usual. We have made a major investment in the US and it was extremely gratifying to see the core Errors and Omissions account, which Ed Donnelly joined in 2006 to build, coming into profit.

To return to the valuation of insurance companies, I can understand that the volatility of earnings from the catastrophe account makes a valuation based on earnings difficult. Conversely, our strategy of building more stable specialist accounts should be valued much more highly if they can demonstrate sustainable earnings which I believe some have and the others will.

In the meantime, we will strive to continue to add to the net assets year-on-year which will inevitably drive the share price up over time.

People
First I must record our sadness at the recent death of our senior independent non-executive director, Sir Mervyn Pedelty. He was a huge asset to our business through his knowledge and business acumen, and his warm and humorous personality made him a real pleasure to work with. Life was more fun and interesting when Sir Mervyn was around.

Our inestimable CEO, Bronek Masojada, leads an excellent team at the top, and the talent stretches throughout the company. Over the years we have steadily been able to attract better talent, and the current frailty of the banks and the political attacks on them will help us by making more talent available. We are acutely aware that we are only as good as the people who work here, and it has been gratifying that our conscious efforts to be an employer of choice for the best people continues to be rewarded. We have great teams throughout the group and I am deeply grateful to them not only for this great profit but for being so inspirational to work with.

Outlook
As I have said, there is more discipline in our industry than at any time in my long career. It is of course not perfect, but the general insurance industry and Lloyd’s in particular have performed excellently through the financial chaos of the last few years. I just hope that the regulators and government will appreciate the industry’s conservatism and value, and not wound it with some collateral damage from its current bank bashing.

The Hiscox Group has a solid core of profitable businesses which, over the last few years, have enabled us to invest in creating exciting new ventures which will each become core profit earners and bring great value to shareholders. I admire the restless search for new methods of selling our specialist products. The world belongs to the discontented; we will never be satisfied; the profitable growth will continue.

Robert Hiscox
1 March 2010

Chief Executive’s report

In 2009 we made a pre tax profit of £320.6 million – the best result in the Group’s history. Good underwriting and top-class investment management drove this result, helped by the absence of any major catastrophes. Our record profit has not come by sacrificing the future growth of the Group -- in 2009 we continued to invest in building our brand in the UK and rapidly expanding our US operations.

Our strategy is to establish operations in Europe, the UK and the US that focus on our core specialty products to balance our more volatile business written in London and Bermuda. This strategy works: in 2005 when Hurricanes Katrina, Rita and Wilma drove some of our competitors deep into the red we made a healthy profit thanks to the contribution of our specialty businesses.

The market outlook for 2010 is positive, though with lower expected investment returns and the easing of rates it will probably not be as good a vintage as 2009. We will seek to grow in those specialist areas where margin remains strong and we will maintain our commitment to reinsurance

Group Performance
In 2009 our pre tax profit was £320.6 million (2008: £105.2 million). Gross written premium grew by 25.1% to £1,435.4 million (2008: £1,147.4 million). Part of this growth was driven by exchange rate fluctuations and in constant exchange rate terms our gross written premium grew by 5.6%. Return on equity was 30.1% (2008: 9.2%) and our net asset value increased to 299.2p (2008: 258.1p).

The dividend has been increased to 15.0p (2008: 12.75p). Over the past five years our dividend has risen by 16.5% compounded, and we have returned £114 million, net of a £176 million capital raising, to investors.

I review the individual performance of our business units below:

Hiscox London Market
Hiscox London Market was again the main profit generator in the Group, contributing £179.9 million (2008: £137.0 million). This was achieved through underwriting £663.0 million of business (2008: £545.9 million).

The London Market business is managed through five divisions whose performance is reviewed below:

• Reinsurance: Our reinsurance business performed well yet again. Having made a profit in 2008 despite the impact of Hurricane Ike, it is not surprising that it made a very good return in a year largely free of major losses. Our expertise in reinsurance is widely recognised, reflected by the fact that a number of third party capital providers have chosen us to underwrite on their behalf. In 2009 Syndicate 6104 – a syndicate funded entirely by third party capital -- supported us. This support has been extended into 2010. We have a number of similar arrangements with other insurance companies. Overall, reinsurance prices softened in the January renewals, although I believe that in 2010 we will see rates largely similar to or better than those in 2008-- a year in which we achieved a good result despite the impact of Hurricane Ike.
• Specialty: This division underwrites a spread of specialist risks: personal accident, bloodstock, kidnap and ransom, terrorism, political risks and aviation war. Good performance across most of these lines was offset by political risk losses, largely due to credit defaults. We took a very cautious approach early in the year in reserving for these claims in view of the continuing fragile state of the global economy. There is a possibility, however, that, as conditions improve, these political risk losses may reduce, which is what we experienced in the last big financial crisis in 1998. In keeping with our belief that you should advance to the sound of gun fire we expect to expand our political risk underwriting this year as client demand and pricing increases due to the turbulent global economic situation.
• Marine and energy: This division had a good year. Energy rates rose in 2009 following Hurricane Ike. We were able to take advantage of these rates and better terms to write a larger book of business and have been well rewarded for doing so in 2010.
• Property: Our primary focus is on catastrophe exposed property for global companies, homeowners and small businesses. Rates have been under pressure and we expect to reduce the size of this account significantly. In 2010 this reduction will be partially offset by a scheme to underwrite mechanical equipment – a non-cat area which we expect will serve us well.
• Casualty: Our London team now focuses on professional indemnity written in Lloyd’s and their results exclude the technology and media book which is now accounted for as part of Hiscox USA. We have shrunk as rates have come under pressure and have taken a cautious reserving approach in view of the economic climate. We have, however, had a net benefit from releases on prior underwriting years.

The division saw a change of leadership during the year. Richard Watson got the year off to a great start before moving to the USA to head up our business there. Russell Merrett, who led our Reinsurance business for the last four years, was promoted to lead the division. He has settled into the role well. We took advantage of this management change to focus the division on serving those brokers – large and small –­ who bring business to London, instead of being distracted by opportunities in other regions. London has recently experienced a renaissance as an insurance market and we see plenty of opportunities to grow our business with London brokers in the years ahead.

Hiscox UK and Hiscox Europe – specialty retail
Our specialist retail businesses in the UK and mainland Europe grew well in 2009. In underwriting terms, the UK had a very good year, while Europe did not.

• Hiscox UK: In the UK we saw premium growth of 16.1% to £304.0million (2008: £261.9 million). Growth was particularly strong in fine art due to the acquisition of some global polices insured in London. The professions and specialty commercial business has continued to develop and for the first time it now exceeds the size of the UK focused art and private client business. The UK direct business continued to see strong growth and is near breakeven net of all its marketing costs.
• Our substantial marketing investment over the past four years, masterminded by Steve Langan, has turned Hiscox into a recognised consumer brand in the UK, one known not only for the quality of its products but also for its claims management. Of our household claimants 92% reported that they were either “satisfied” or “very satisfied” with the claims service they received. Our success has also been recognised by brokers. In a 2009 award voted for by independent brokers, we were named Insurance Times’ “Commercial Insurer of the Year” for the third year running, and also won the title of “General Insurer of the Year” at the British Insurance Awards.
• We are not resting on our laurels. In 2010, we will seek to grow our direct business further, pushing it into profit. We foresee a tougher claims environment in some sectors as professional firms get blamed for their customer’s recession related misfortunes. Prices will have to rise to reflect this.
• Hiscox Europe: 2009 was a disappointing year for Europe, in spite of premium growth of 6.8% to €131.6 million (2008 : €123.2 million). Its underwriting performance in 2009 was significantly worse than 2008, due to a series of unconnected large losses. In 2009, after a few poor years, our German operation succeeded in making a profit through a rigorous re-underwriting of its high net worth book and new focus on expanding in commercial lines.
• We have been building a business in Europe for the past decade, but we know that the ROE – the return on effort that is – is below expectations. Pierre-Olivier Desaulle, who we appointed Managing Director of Hiscox Europe during the year, will inject new energy into the operation. As MD of Hiscox France since 2000 he grew it 6 fold and delivered sustainable profits. The European Management Team is focused on repeating this success across the continent.

Hiscox International
Hiscox International comprises our businesses located in Bermuda, Guernsey and the United States of America. The businesses faced quite different challenges in 2009:

• Bermuda had a fantastic year. Its primary focus is property catastrophe insurance. After shrinking its top line in 2008, it responded aggressively to the rebounding rates and grew by 24.2% to $262.9 million (2008: $211.7 million). We also created a healthcare insurance and reinsurance team, who will focus on catastrophic exposures in the medical sector. In addition, we are building a small portfolio of catastrophe bonds issued by insurers and others. As this is an alternative route to assuming catastrophe risk we regard this as an extension of our reinsurance underwriting business and consider it when we look at our aggregate exposure to insurance events. During the year Charles Dupplin assumed leadership of Hiscox Bermuda from Robert Childs, its founding CEO. Robert and a small team went to Bermuda in late 2005. Since then Hiscox Bermuda has underwritten $943 million of premium income, generated significant profits and grown the balance sheet from $500 million (of which $200 million was borrowed) to $1 billion before paying a dividend to the Group at the end of 2009. This is a fantastic achievement and one for which we are all very grateful.

• Hiscox Guernsey had another good year. Its focus is on kidnap and ransom, piracy, fine art and terrorism. Premiums grew considerably, particularly in the piracy sector, due to the increased threat around the Horn of Africa. Our success is a reflection of both our risk appetite and our excellent client service. Our team in Guernsey are able to provide a quote, confirm cover, issue a policy and collect the premium in a few hours. This is a testament to the good cooperation between their underwriting and operations teams. Looking forward we see Guernsey continuing to be the leader for the Group in the kidnap and ransom and piracy areas. The Guernsey fine art book saw a small reduction in size due to the reduction in values of insured works.

• Hiscox USA saw a year of dramatic expansion. We took advantage of the broader financial difficulties in 2008 and set out on an ambitious plan to attract quality staff. We were able to hire seasoned experts in inland marine, property, construction, terrorism, kidnap and ransom and media, among other lines. We also opened new offices in Los Angeles, Boston, Miami, Atlanta and Kansas City, and expanded our existing offices in San Francisco, Chicago, New York City and Armonk. In all we recruited 84 people, pushing our total headcount up to 184 people.
  
  In order to provide the clarity of focus to accompany our big investment, we created a single US business, merging the New York based London Market activities with our smaller ticket Professional Lines business. Richard Watson has moved to the US to head up the overall business. Ed Donnelly continues as President of our activities and will drive forward our specialist lines and all of our branch offices. Under Ed’s leadership our smaller ticket Professional Lines activities reached breakeven in 2008, and we believe that working together, Ed and Richard will build a very successful business.
  
  We have also worked hard to develop new products for both the surplus lines and the admitted market. In the surplus lines market there is great flexibility in pricing and wording. In the admitted market advance approval of rates, forms and underwriting guidelines is required in each US state before launching a new product. Gaining approval has taken far longer than we had anticipated, but we are making steady progress.
  
  Although Hiscox US grew its top line to $162.1 million, up 24.6% (2008: $130.1 million), this growth was less than we had budgeted, as the anticipated upturn in the US domestic market did not occur. Our response has been to call a temporary halt to expanding our product range and to focus in 2010 on marketing those products we have already developed. We are confident this is the right way to improve the underlying financial performance of the business.

Investment returns
In 2009 we made a tremendous return on our investments. David Astor, our Chief Investment Officer, steered our portfolio very effectively through the financial crisis and kept his nerve when many others panicked. His courage was rewarded with an outstanding investment income result of £182.8 million, a return of 7.2% on invested assets (2008: -£27.6 million; -1.3%). This was achieved by maintaining a well spread portfolio, comprising corporate bonds, quality mortgage securities, an allocation to risk assets and a safe allocation to cash and Government bonds. Our caution towards complex products helped us to avoid the worst in 2008 and, as our portfolio recovered in 2009 we saw much better returns. We expect interest rates to remain low for at least the next year. With this in mind, we have reduced the duration of our Government bond portfolio but continue to retain a good allocation to credit, mostly through corporate bonds and to some exposure to mortgage and asset backed products. Whatever we do, we do not expect, in a world of 0.5% to 1.0% returns on short term government bonds, to see an investment return this year of the same level that we enjoyed in 2009.

Claims
In 2009 we handled a higher volume of claims than in 2008, reflecting our growing retail business. In addition to this everyday business, the team have also been working harder on recoveries, subrogating against third parties and making a major contribution to Hiscox UK’s ‘Get Fit’ efficiency programme. They have achieved all of this while maintaining very high levels of customer satisfaction. In 2010 we will make a significant investment in upgrading our claims handling systems for the London Market. Hiscox is a supporter of the move to electronic claims, but current systems require multiple data entry. We will be addressing this obvious inefficiency. A source of deep concern to us is the new Lloyd’s Claims Transformation Project. We support the move to choice of service provider on more complex claims, but we believe strongly that Lloyd’s customers expect a centralised, coordinated approach to enable their non complex, standard claims to be paid speedily and efficiently. We fear the new scheme has the potential to create a damaging free-for-all in claims that threatens to tarnish the Lloyd’s brand. We have objected to this aspect of the scheme from inception and we hope that sense will prevail before its final implementation.

Operations and IT
The future efficiency and competitiveness of this business depends on effective IT and efficient operations. Michael Gould, our Group COO, and his team have replaced our 15 year-old London Market system during 2009. During 2010 we will continue to invest in the new system, to make all of the post-implementation tweaks and improvements that our underwriters and operations people have requested. We are also designing and developing a new system for our retail businesses which will be first tested in Guernsey and then implemented across all our retail activities. This will make it easier to roll out new products and drive down our expense ratio. As part of the development process Michael will be driving us to adopt lean processes – applying manufacturing concepts to the operating approach of our business.

Capital management
The financial crisis has graphically illustrated how success in financial services depends on balancing expected return against perceived risk, while holding sufficient capital to protect against disaster. The challenge for outsiders is that while insurers’ revenue and capital are very visible, the amount of risk they are taking is not. We have tried to make our risk profile clear to shareholders by publishing our expected losses using Realistic Disaster Scenarios promulgated by Lloyd’s and by publishing a ‘box plot and whisker’ chart on our website and annual report presentation. The ‘box plot’ chart gives the likely range of possible losses for Hiscox from a major industry events.

The individual catastrophic losses are examined alongside an analysis of all the Group’s expected losses, as well as our forecast investment returns and expenses, to arrive at a comprehensive view of our risk profile.

This picture of our risk profile enables us to have a debate on our risk appetite, which is then agreed by the Board. Everyone is aware that if our expected underwriting margins fall or forecast investment returns decrease we are confronted with a choice: either we are forced to take less risk or we need to have more capital.

In 2010 we expect our investment returns are likely to be much lower than in 2009. On the underwriting side we expect prices will remain at attractive levels. Therefore, in order to allow us to continue to take the same risk in 2010 as we did in 2009, we need to hold more capital in the business. This means that in 2010 the level of capital we will hold against our premium income will increase.

We look at this balance of expected return, risk and capital every quarter and make minor course adjustments accordingly. Once a year, ahead of the 1 January renewal season we have a major review of our risk strategy and, if required, make our major course corrections then.

People
Insurance remains a business in which intellectual capital is as important as financial capital as a prerequisite for success. That we were able to reshuffle our senior management in 2009 without having to look outside to fill any of these roles is a testament to the growing strength of our management cadre. This greater strength is what gives me confidence that we will be able to continue to improve our performance as the Group grows and develops.

We have continued to invest in training and development and we are always on the lookout for high quality recruits. In 2009 we relaunched our graduate recruitment programme, and, as a result of the meltdown in other parts of the financial sector, we recruited slightly more graduates than we had expected. The programme is continuing in 2010.

Conclusion and outlook
We are optimistic for the year ahead. 2009 was a great year, combining excellent underwriting profits and investment returns. 2010 may not be as memorable a harvest but has good prospects, despite the continuing fallout from the financial markets crisis and the deepest global recession in living memory. We expect to see modest growth thanks to the expansion of our retail activities in Europe, the UK and the USA and, provided major losses fall within our expectations, we expect to continue to deliver good returns for our shareholders and staff.

Bronek Masojada
1 March 2010

For the full regulatory statement