Hiscox Regulatory News (HSX)

Hiscox Ltd full year results

For the year ended 31 December 2013

"A very good year."

Capital return

· Capital return of 50.0p per share, approximately £178 million, by way of C/D share scheme combined with share consolidation

· Includes final dividend equivalent of 14.0p taking total dividend for the year to 21.0p, an increase of 16.7% (2012: 18.0p)

· Additional special distribution of 36.0p per share.

Highlights

· Gross written premiums grew by 8.5%.

· Hiscox London Market delivered excellent profit of £116.0 million (2012: £121.9 million)

· Hiscox UK provides another solid performance, with profits of £45.4 million (2012: £45.2 million)

· Hiscox Europe returns record profits of £10.9 million (2012: £3.9 million)

· Hiscox USA continues good premium growth, up by 31.1% to £189.5 million (2012: £144.5 million)

· Formed Hiscox Re, our combined reinsurance teams in London, Paris and Bermuda

Bronek Masojada, Chief Executive of Hiscox Ltd, commented:

"2013 was a very good year for Hiscox. Our long term strategy of building local retail businesses in Europe, the UK, Guernsey and the US to balance internationally traded business in London and Bermuda continues to deliver. We are excited about the opportunities we see in many retail markets where we have room to grow profitably. In our big ticket areas, discipline and opportunism will guide us."

\* The comparative information has been restated for the adoption of IAS 19 (2011). See note 2 for details

For further information

Notes to editors

About Hiscox

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

For further information, visit www.hiscoxgroup.com.

Chairman's statement

In my first full-year statement as Chairman, it is pleasing to report an excellent underwriting result and the second highest profit for the Group. A benign hurricane season and sound underwriting contributed to the very good results, with every area performing well. Our reinsurance and London market insurance benefited from the lack of US hurricanes, and also underwrote well to minimise losses from the European and Calgary storms. Our regional businesses in the UK, Europe, Guernsey and USA have also reaped the rewards of sustained investments in both infrastructure and marketing.

The plan has not changed with the passing of the baton from the previous Chairman to me. We aim to expand our regional businesses continuously, whilst growing the bigger ticket businesses when margins are high, or contracting when those margins reduce. We will maintain the same strategy of balance that has served us so well over time.

Results

The results for the year ending 31 December 2013 were a profit before tax of £244.5 million (2012: £217.5 million). Gross written premium increased by 8.5 per cent to £1,699.5 million (2012: £1,565.8 million) and net earned premium increased 7.1 per cent to £1,283.3 million (2012: £1,198.6 million). The combined ratio was 83.0 per cent (2012: 85.5 per cent). Earnings per share increased by 24.9 per cent to 66.3 pence (2012: 53.1 pence) and the tangible net asset value per share increased by 16.0 per cent to 381.4 pence (2012: 328.7 pence). Return on equity increased to 19.3 per cent (2012: 17.1 per cent).

Dividend, balance sheet and capital management

The Board has reviewed the capital requirements of the Group for the coming year and has proposed that a special distribution of 36.0p per share (amounting to approximately £128 million), should be made. This represents two successive years where we have been able to share our success with shareholders with an additional capital return. We do not promise a third.

Following the distribution, the Group's capital levels will be similar to those of the opening balance sheet, post the 2013 capital return, which will have a favourable impact on both the Group premium to capital gearing ratio and return on capital, whilst still providing sufficient headroom above existing internal and external capital needs. This proposed return of capital will be made by way of a C/D share scheme, which is a variation of the B share scheme used in 2013, and as in the previous year, will be combined with a share consolidation.

In addition, a sum of 14.0p per share will be paid instead of a final dividend for the year ended 31 December 2013 as part of the C/D share scheme. This amount, together with the interim dividend of 7.0p per share, represents a total dividend for 2013 equal to 21.0p per share (2012: 18.0p), an increase of 16.7%, in line with our policy of progressive dividend growth. As a result of this amount being paid as part of the C/D Share Scheme, a scrip dividend alternative will not be offered to shareholders.

Full details of the proposed return of capital and final dividend equivalent will be set out in a circular expected to be despatched to Hiscox shareholders on or around 25 February 2014.

Investments

Traditionally many in our industry have relied on investment income for more than half their overall profits. However, the persistence of low interest rates has shifted the balance between underwriting and investment income. Our investment strategy remains cautious: we will not take undue risk, preferring modest investment returns alongside better underwriting results to fuel profits. Our investments delivered a return of 1.9% (2012: 3.1%) which is good, given the challenging year in bond markets, and was driven by our allocation to risk assets, principally equities. A return to higher interest rates will be welcome, but given the more likely long road to normality, it seems that bond investors will have the wind in their faces for another year, and we will remain patient.

The market and our opportunities

So much of the punditry this year has been about the growth of the ILS (Insurance Linked Securities) market and its effect on reinsurers and pricing. Competition has increased but as a respected leader in reinsurance we have been able to maintain our share of well-rated business. Reducing margins are a big issue for businesses that have no alternative to reinsurance. Although we are not immune, we are in the fortunate position of being able to reduce lines of business where this competition impinges and grow in areas where it does not.

We have organised the two reinsurance teams under a single leader to face the new challenges of today and we have also formed our own ILS fund to deploy both our own and others' capital.

Our success in Reinsurance has rather overshadowed the London Market Insurance business which has quietly been doing very well. With its new leadership we feel it is well placed to continue to grow in 2014.

In Hiscox UK, Hiscox Europe and Hiscox USA, our market share in our chosen specialist lines is still small and we see many opportunities for growth. We are investing heavily in our direct-to-consumer businesses in the UK, Europe and USA as we aim to take advantage of the growing trend to purchase insurance direct, online and over the phone. In 2013, 50% of our customers in the UK and USA (160,000 householders and businesses) chose to buy cover directly from us. In 2013, the Group spent £30 million on marketing, and plan for the same this year. Under the leadership of Steve Langan our investment in marketing has built a recognised and respected consumer brand in the UK and we are making good headway in other markets.

People and future

As I write this, the windows of my office are rattling in the wind, rivers are rising and the media is reporting the polar vortex freeze in the USA. Events such as these remind us of the importance of insurance and delivering on our promise to our customers. We issue a promise to pay, and it is only when a claim is made that we truly prove our worth.

When we surveyed our employees this year about life at Hiscox, 95% said they believed in our values and 92% were proud to work here. When I first started at Hiscox in 1986 we employed 18 people in the London Market only. Today we employ over 1,600 skilled and determined people around the world and they are the future of this business. We have been setting our ambitions for the next ten years and believe it is essential that our employees continue to keep the Hiscox values at our core. To reach our ambitious targets, we are asking more of our employees; more courage and great entrepreneurship delivered with Hiscox's characteristic spirit. I am very proud to work with such talented people and thank them for their sterling efforts this year.

Finally

We have underwritten and sold well. We continue to strive for world class service and to delight our customers when they make a claim. We have also had good luck but we have taken our chances when they were presented. However we cannot presume that the elements in 2014 will be as kind to us as they were in 2013, already we have seen extreme weather events, freezes in the US and floods in the UK. We can rely on core skills to drive profitability. Opportunities abound across our retail businesses in UK, Europe and USA and we have great people taking advantage of them. We are not complacent and will continue to invest for the future, both in markets and in infrastructure, and we relish the challenges ahead.

Robert Childs

24 February 2013

2014 Chief Executive's report

I am pleased to report a profit before tax of £244.5 million (2012: £217.5 million) and a return on equity of 19.3% (2012: 17.1%). The improved profit was the result of better performance within our European and US businesses, coupled with continued good performances from our UK, Guernsey, London Market and Bermuda businesses. Our long-term strategy of building locally traded specialist retail business to balance our internationally traded business continues to deliver.

With these results, we have announced a capital return of 50p per share, equal to approximately £178 million in total. We are fortunate that our business is strong enough both to allow this return of capital whilst simultaneously investing in new opportunities.

The insurance market is currently facing many challenges. Alternative sources of capital have entered the reinsurance market putting pressure on pricing, while central banks' policies of financial repression are keeping investment returns low. Thanks to our long-term strategy we have choices - in product, distribution and geography - which should allow us to continue to deliver good results in a changing world.

Hiscox London Market

Our London Market businesses delivered another excellent profit of £116.0 million (2012: £121.9 million), and increased gross written premiums by 4.4% to £668.2 million (2012: £640.0 million). It achieved a combined ratio of 75.4% (2012: 75.5%), driven by a relative lack of natural catastrophes and good underwriting.

During the year we separated our London Market business into insurance and reinsurance lines. Our aim has been to give these different product areas more dedicated leadership, providing greater focus on the changing market conditions and the opportunities they produce.

London Market Insurance

The London Market Insurance lines of property, marine and energy, casualty, aerospace and specialty have consistently delivered excellent profits over the last ten years and in 2013 they delivered another good result.

In April, Paul Lawrence was promoted to Chief Underwriting Officer of Hiscox London Market and, together with his more focused leadership team, he has brought new energy and a business development mindset which is already bearing fruit.

Business in the London Market has always been placed either on a stand-alone, risk-by-risk basis, or grouped together to facilitate placement. There has been a lot of controversy surrounding facilities in the London Market this year as the market has seen an increase in their number and size. We have a lot of experience writing them in the US where business has been routinely placed in this way. We believe that facilities can be underwritten profitably provided we have underwriting control, a right to say no and realistic commissions. If these conditions are satisfied, then we expect facilities to play a role in 2014's business expansion plans.

Looking at each division in turn:

Property

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

A lack of natural catastrophes and a refocus of the business have delivered an excellent result for our big-ticket commercial and household property lines. We have grown our small binding authority business, which is still carrying rate increases, whilst maintaining our larger big-ticket business at reasonable rates.

Our terrorism business had a strong year, as a young energetic team took the reins. It was recognised by its peers with the accolade of 'Underwriting Team of the Year' at the Insurance Day London Market Awards. Drawing on new hires with global security and front-line counter terrorism experience, we created a Counter Terrorism Advisory team which assists clients with risk management and prevention. This supplements our relationship with Control Risks and consolidates our market leading position.

Marine and energy

The marine and energy team delivered another good profit. The marine hull team have worked hard to improve profitability in a lack lustre market and delivered an exceptional result. Pressure was felt in energy lines as fewer construction projects and more oil companies looking to self insure, led to reduced demand. In 2014, we are focused on building opportunities in emerging markets such as Brazil.

The Costa Concordia market loss continues to deteriorate as leading edge salvage operations go on at insurer's expense. Thanks to astute reinsurance purchasing, our results were not affected by the continually increasing market loss. We have seen an improvement in terms and prices at the renewal of the International Group of P&I Clubs in February, as the market adjusts as a result of ever growing salvage costs.

We launched an online product for marine employers' liability, accessible to retail brokers in the US. It has already generated £1 million in premium, a good start, and developed technology which we expect to put to use in other London Market lines.

Casualty

In casualty we have seen some firming of rates, but it is by no means a hard market. We continue to pick our way through, marrying good underwriting with our core appetite to deliver a strong result. We have ambitions to play a significant part in the London Market directors and officers' (D&O) arena, writing US and some international business. We have bolstered our team with some senior hires during the year. We now have the ability to offer a full suite of products across a broad range of markets, professions and risks including lawyers, architects and engineers, healthcare, technology risks, miscellaneous errors and omissions (E&O), management liability, and privacy. We have also created a consortium with another Lloyd's insurer, creating significant D&O capacity, and increasing the attractiveness of Lloyd's to the US market.

Aerospace and specialty

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

The aviation market has seen significant downward pressure on major airline accounts. Our underwriters remain disciplined, walking away from poorly rated business, seeking growth by developing products which combine aviation with our terrorism capabilities. The space market has suffered around $700 million of satellite losses during the year, which we largely avoided. We expect this will have a positive impact on rates.

Our political risks team have had a good year despite the challenging times. The team is looking at ways to leverage their expertise and underwrite outside the Lloyd's market, potentially using licences available to our insurance companies.

Contingency continues to be a small jewel in our crown, delivering another good result. The personal accident team developed a new product which will cover top European football clubs for financial loss when star players suffer long-term injury or illness. This has already generated headlines and we hope will generate good incremental revenues.

Alternative distribution

It is a perception, though a slightly unfair one, that Lloyd's underwriters sit at Lloyd's waiting for business. Our underwriters are frequent travellers visiting existing brokers and seeking new agents who will send business to London. We have created a new division that combines technology with this desire to travel to bring new opportunities to London. The marine employers' liability product referred to earlier is a case in point.

Through our relationship with White Oak, a specialist automotive and equipment underwriting agency, we provide extended warranty cover against sudden and unforeseen mechanical breakdown for cars, trucks and other heavy machinery. Our business with White Oak has grown rapidly over recent years and now represents 24% of our London Market Insurance gross written premium. This type of indemnity does not include endemic failure or product recall. During the year White Oak launched a scheme in China (in conjunction with local Chinese carrier Ping-An) which will become one of the largest Chinese deals in the London Market. We also cover fire, theft and collision (FTC) for heavy machinery used within agriculture, construction and forestry businesses globally, providing first party coverage to the client's vehicle only.

We expect that the importance of this division will grow, bringing new opportunities to the other parts of the London Market team.

London Market Reinsurance

The reinsurance team trading in London has performed well. Premiums reduced slightly as the team exercised discipline in the face of price declines at the June and July renewals. Our marine, catastrophe, pro-rata and retro books performed well. Our risk excess book suffered from the Rio Tinto, YPF/La Plata, Dietz and Watson events. Aggregate profits remained strong. During the year we brought together the leadership of the London and Paris reinsurance teams which comprise the London Market Reinsurance business with the teams in Bermuda, to underwrite as Hiscox Re from January 2014, giving us greater presence in an evolving market. This consolidates our expertise, capacity and market profile under the leadership of Jeremy Pinchin. The teams underwrote a combined £411.5 million of reinsurance premium during 2013, making Hiscox a top tier player.

Hiscox International

Hiscox International comprises our activities in Bermuda, Guernsey and the United States. Gross written premiums grew by 12.9% to £472.1 million (2012: £418.3 million) driven by good growth in Hiscox USA. Profit before tax increased to £80.9 million (2012: £62.7 million) and the combined ratio improved to 81.0% from (2012: 89.2%).

Hiscox Bermuda

Hiscox Bermuda had another good year, with premiums growing by 5.6% to £211.9 million (2012: £200.7 million), with good growth in our healthcare business. Profits remained strong.

As expected, reinsurance rates at the important 1 January renewals were down by approximately 16%. Given the aggressive nature of competition from both traditional and new sources of capital, our reinsurance business will shrink in 2014 as we continue to prioritise quality clients who value our underwriting, brand and balance sheet.

Third party capital partners are very important to the Group and we have good support from quota share partners and Syndicate Names. In 2014 they are backing Hiscox Re at a record level. We continue to explore new opportunities in the Insurance Linked Securities (ILS) space, and through Kiskadee we launched a number of collateralised reinsurance funds during the year. We have deployed $110 million of capital - less than we had expected as we are seeing signs that capital markets investors are being more disciplined than some traditional reinsurers. We believe that over time, our record of prioritising profit over volume will win a following in this new investor base, and our support from them will grow.

Hiscox Guernsey

In Guernsey we underwrite fine art, kidnap and ransom (including piracy) and terrorism, supported by broking teams in London and Miami. Premium income reduced slightly to £70.8 million (2012: £73.0 million). Profits have grown strongly through a combination of disciplined underwriting and fewer claims. We have benefitted from subrogation recoveries from other insurers on prior-year claims and the absence of large fine art losses. The team is not resting on its laurels and is investing in more talent in Miami and London to expand distribution on a stand-alone basis and in partnership with local insurers and brokers.

Hiscox USA

Our US business had another year of strong growth. Gross written premiums grew by 31.1% to £189.5 million (2012: £144.5 million) with progress across all major areas. Losses reduced materially as we grew towards scale and benefited from a positive development of reserves.

Our wholesale business which includes property and professional liability lines grew by 20% and made a good profit. Our specialty business grew by 22% but profitability was mixed. Strong performance in kidnap and ransom, media, technology and terrorism was offset by more challenging performance in construction, and the still nascent D&O and entertainment businesses. We refocused our underwriting appetite in construction and adjusted our pricing in D&O, we expect this to drive better performance in 2014.

Our small business proposition, which we sell direct and through partnerships, grew by 140%; we now have over 50,000 small business customers, and are selling over 1,000 policies a week. We continue to explore new distribution opportunities and launched a portal to wholesale brokers during the year. Brand building continues, with campaigns in San Diego, Austin and Boston. In time these efforts will benefit the entire US business.

The rating environment in the US is mixed. Overall rates remain healthy, with slight upward pressure in some casualty lines, and downward pressure in property. We are very pleased with our fast growing US business and expect that, absent significant catastrophe losses, it will make a small profit in 2014.

Hiscox UK and Hiscox Europe

Our retail businesses in the UK and Europe delivered a record profit of £56.4 million (2012: £49.1 million). Gross written premiums grew by 10.2% to £559.1 million (2012: £507.5 million). The combined ratio improved to 92.6% (2012: 94.4%).

We have built our retail businesses by understanding local markets and bringing Lloyd's style flexible underwriting and thinking to local brokers. As part of the evolution of Hiscox, Steve Langan, previously Managing Director of Hiscox UK, became Managing Director of Hiscox UK and Europe. Pierre Olivier-Desaulle remains Managing Director of Hiscox Europe, reporting to Steve, and we created two new divisions in the UK, one for the broker channel and one for direct. The Managing Directors of these two divisions report to Steve. The restructure will allow customer insight, alternative distribution approaches, new products and good marketing practices to be shared more easily - all part of the ongoing 'retailisation' of our business.

Hiscox UK

Hiscox UK had another excellent year and grew gross written premiums by 9.9% to £412.4 million (2012: £375.2 million). The business had profits of £45.4 million (2012: £45.2 million) with a combined ratio of 90.7% (2012: 92.1%).

The business benefitted from our continued investment in marketing and a focus on solid underwriting. It had a charmed first 11 months, as the weather had been benign until mid-December while the few major weather events, such as the St Jude's day storm in October had little impact. The heavy rain and consequent flooding in December changed this. Our clients suffered extensive damage to their homes both from driving rain and flooding and we responded quickly. A post bag of thank-you letters in January is testament to the fact that dealing with the Hiscox claims team is succour in troubled times.

Our high net worth household business was tested by the floods and has performed well. Its market reputation meant that client retention remained strong and it had its best new business premium for ten years. Our professions and specialty commercial book also made good progress and a new technology insurance portfolio offering that responds to the growing prevalence of breach of contract claims was launched. Our underwriting relationship with Dual, an independent managing general agent, had a testing year and we have agreed changes to underwriting appetite which should see better performance in the future. Our partnerships business had a good year, retaining all of its existing partnerships as well as securing five new ones including the Royal Institute of British Architects and the Royal College of General Practitioners. Our new tied agency Hiscox Private Client is doing well.

We are also establishing a strong presence in York, where we are creating a purpose built multi-function office. We now have 70 people based in our temporary office, working within our Customer Experience Centre, Hiscox Underwriting Centre and IT. In December we received planning consent for the permanent building, and construction will commence in the first half of 2014.

Hiscox Europe

Our European business had an outstanding year, generating a record profit of £10.9 million (2012: £3.9 million), despite £3m investment in marketing to support our fledging direct businesses in France and Germany. It had solid growth of 10.9% to £146.7 million (2012: £132.3 million), with new business up by 14% driven by commercial lines in Germany and France.  After shrinking for several years, our high net worth business in Europe also returned to growth.

Hiscox Europe continues to lead the way in devising alternative distribution deals, in which we sell our specialist products through larger financial institutions. This year we added France's Crédit Agricole to our list of partners. Work continues to reduce expenses across Europe, with a simplified referral process, greater use of pre-priced proposal forms and an operating model which ensures that underwriters are able to focus on business development and underwriting larger risks, with smaller risks and renewals handled by office-based teams. We expect a continued steady improvement in expenses, maintaining our profit performance.

In Germany we launched direct-to-consumer small business insurance. Aimed at businesses in knowledge-based professions including IT, management and business consulting, it matches our existing offering in France and complements the German broker channel. As in the US and UK, we expect that in time the marketing expenditure required to build our French and German brands will benefit all distribution channels.

Our market positions in mainland Europe are small compared with our UK position and the quality of our offering is reflected by strong growth despite tough economic conditions, so we expect continued profitable growth and development in mainland Europe.

Claims

2013 was a relatively benign year for large scale catastrophe losses. Despite the market increasing reserves for the Costa Concordia our net loss has reduced slightly to US$19 million. For the first 11 months we did not experience material losses as a result of extreme weather events, such as the Central European floods, the Calgary storm in Canada, the St Jude's day storm which hit the UK and Europe, and typhoon Haiyan which battered the Philippines. This clearly changed in the UK with the period of sustained rain and flooding which began in mid-December. We reserved £11 million for UK flood claims in December. UK flood and storm losses have continued into January and February. We expect to reserve a further £5 million to cover these losses.

Our commitment to pay claims fairly, fast and with a smile remains at the heart of our business. We have built claims teams that lead the market and it is gratifying to receive external recognition of this. Our London Market business was ranked in the top three for claims in a recent Gracechurch survey and our UK team was recognised with a number of industry awards; 'UK Claims Excellence Awards' at the Insurance Times Claims Excellence Awards and 'Personal Lines Claims Team of the Year' at Post Magazine's Claims Awards.

Whilst reserve releases of £140 million were down from £152 million last year, they continue to reflect Hiscox's cautious reserving approach.

The UK Government and the insurance industry are currently working on the creation of Flood Re to provide mutualised insurance cover. Hiscox supports the overall initiative but feel that current plans are unfair and unworkable. At the moment rented properties, leasehold properties, homes built after 2009 and H/I band council tax homes are being excluded from the mutual. The excluded will also have to pay a levy to fund Flood Re, but would be unable to purchase subsidised insurance from Flood Re, even though their neighbours and other bands would be able to. It has been widely reported that the levy would be £10.50 per residential property. This is highly misleading; it will actually be 2.2% of premium paid and we estimate that Band H homes will pay 20 times more than the average home in Britain. We are calling on the Government to work with us to find a solution to ensure that either these groups are included in Flood Re, or that they are excluded fully - both in payment and benefit. Floods are one of the most traumatic claims we see, a flood doesn't discriminate and neither should the Government.

Marketing

During 2013 we spent £30.6 million on marketing across the Group, an increase from £26.3 million in 2012. Most of this was spent promoting our direct-to-customer operations in the UK, the US, France and Germany. The balance was spent on broker channel marketing; either marketing to brokers, or helping them market to their customers. A small amount was also spent on corporate sponsorships, mainly supporting art related activities.

Our marketing activity has been instrumental in building the Hiscox brand, communicating what we do to an ever broader audience, building awareness of Hiscox and ultimately driving sales. Its benefits have been most felt in the UK where it has had a positive impact not only on the direct channel, but also in the retail broker channel, and even in our Lloyd's activities. As we spend more in other geographies I believe we will see similar broad business benefits.

Operations and IT

Efficient operations and sound IT is the backbone which supports the day-to-day activities of every part of our Group. During 2013 we made progress on a number of inter-related projects which will benefit different divisions within the Group.

During the year we successfully insourced the service centre dealing with our UK direct home insurance clients. This involved hiring 35 people to staff a newly formed Customer Experience Centre in York. This process went very smoothly and we are now considering its extension to other lines of business.

We also began a project to replace the core underwriting, policy administration and claims systems supporting our retail businesses. The current core system is over 20 years old, so it has performed well, but its time is now up. We are working under the slogan 'simplicity is the ultimate sophistication' and we expect to complete the first phase of implementation, for our UK direct home system, this year. In time we expect to replace the entire UK retail infrastructure, and then that of our European businesses. The total cost of the project in the UK is expected to be £45 million spent over a period of 4 to 5 years.

In Europe our 'Get Fit' programme is gaining traction. This is based on a foundation of lean manufacturing principles and we are slowly seeing our European expense ratio reducing. This programme is continuing in 2014 and should help underpin growing profitability of our European broker channel business.

In the US our operations team have been working hard to support the 30% growth. This has seen further investment in our Atlanta and Virginia Beach service centres.

In our London Market activities we are very dependent on shared services which support Lloyd's, the company market and the brokers. At the beginning of 2013 we took the decision to become more engaged in driving improvement across the market, and we now have representatives on several key committees. Involvement in market reform can at times be a frustrating process, but we feel that we can play a role in leading the market for the benefit of all.

Investments

Hiscox's investment income has historically accounted for about half of the Group's profits, but this was never going to be the case in 2013 given the harsh investment climate and our excellent underwriting result. Our investments, before derivatives, made £58.9 million (2012: £92.7 million) equating to a return of 1.9% (2012: 3.1%). We had expected our return to be lower than in 2012, but 1.9% can qualify as better than expected in the world of financial recession in which we are investing. The return from our bond portfolios was much lower than in 2012, but this was as forecast. It has been a challenging time for most fixed income investors, and indeed 2013 turned out to be one of the more volatile years in these markets. It was a good year to be short duration, and our caution has resulted in a low, but positive contribution.

Our exposure to risk assets made a significant contribution to the investment performance this year, and a number of our UK-focused funds produced particularly strong returns. We started 2013 with a weighting to risk assets of 6.2% and trimmed this slightly after the strong run in May, but this has now moved up to 7.1%.

Our overall asset allocation did not change very much during the year. We built up our cash levels towards the end of 2013 and we are happy to have money in the bank ahead of a year where bonds markets face headwinds and equities are unlikely to maintain their recent performance. Central bankers' reaffirmation that short-term interest rates were set to stay low for some time has meant our return expectations from our bond portfolios remain modest. Our overall investment income in 2014 is expected to be dependent on the performance of our risk asset portfolio. Although short dated bonds may be similarly valued to a year ago, the same cannot be said of equities. Current valuations and an uncertain outlook for corporate earnings means we will continue to closely monitor our exposure. Patience and prudence still lie at the heart of our investment strategy but with some appetite for risk in asset classes where valuation seems more reasonable.

Capital management

We have announced today a capital return of 50p per share, equal to approximately £178 million. This is composed of a 36p per share capital return and a further amount of 14p in place of a final dividend. This will take total capital back to £1,231 million, slightly more than our level at the start of 2013, post the capital return in March of last year.

This is the second year in a row of such a capital return, but we do not believe that this is a pattern. We are working hard to deploy as much capital as possible in sectors where we can earn returns in excess of our cost of capital, but we think the right decision is to return capital not properly deployed, after retaining a prudent buffer, to shareholders. The Board will continue to keep this balance under review.

Our people

2013 was a year that saw substantial changes in Hiscox's leadership and structure. Robert Hiscox retired as Chairman in February 2013 and was succeeded by Robert Childs, who was previously our Chief Underwriter. Richard Watson, Rob's successor as Chief Underwriter was appointed to the Board in May.

We have also made progress in areas less visible to shareholders. We are steadily appointing a second tier of management who will in the future be candidates to assume the most senior leadership roles within Hiscox. In the broader organisation 39% of promotions were filled by internal candidates. We want Hiscox to be a great place to work and grow for the ambitious and talented - so I am delighted that we have filled so many roles from within.

Structural and role changes always have the potential to upset a business, so it is a testament to the robustness of Hiscox and the drive to succeed amongst all our staff that we flourished this year. I would like to thank all staff for the role they played in achieving this - but know that they remain hungry for further progress and success.

Outlook

During 2013 we used the change of Chairman to initiate a process to define our ambitions for the years ahead. This process considered the more conventional strategic questions of products, markets and customers, as well as the type of firm we aspire to be in the future.

The good news from a shareholder perspective is that the strategic work suggests that the insurance markets and customer segments we already serve are sufficiently large enough, and our current market shares small enough, to allow us to double the size of business we have today through organic growth. We also believe that we can create further growth opportunities through judicious hiring of talented people or teams, or through small acquisitions which serve as a base for further development.

The conversation with our staff showed them to have the ambition to capture this strategic opportunity whilst wanting to retain the values that have guided Hiscox to date. However, we realise that we all need to grow personally if we are to develop Hiscox in this way. We have therefore committed Hiscox to living our values of courage, quality, integrity, excellence in execution and humanity. We have also challenged each member of staff to acknowledge that "what got us here, won't get us there" and to accept that delivering on each of our personal growth agenda's is the key to unlocking the business growth opportunities.

For me personally, after 20 years at Hiscox, this process has been hugely energising. My colleagues and I remain restlessly ambitious to grow and develop Hiscox.

Bronek Masojada

24 February 2014

Consolidated income statement

For the year ended 31 December 2013

\* The comparative information has been restated for the adoption of IAS 19 (2011). See note 2 for details

The related notes 1 to 22 are an integral part of this document.

Consolidated statement of comprehensive income

For the year ended 31 December 2013, after tax

\* The comparative information has been restated for the adoption of IAS 19 (2011). See note 2 for details.

The related notes 1 to 22 are an integral part of this document.

Consolidated balance sheet

At 31 December 2013

Consolidated statement of changes in equity

For the year ended 31 December 2013

Consolidated statement of cash flows

For the year ended 31 December 2013

Notes to the financial statements

The impact of the change is as follows:

Impact to the financial statements of the adoption of IAS19 (2011)

Total comprehensive income

b) Fair value measurements

IFRS 13 establishes a single framework for measuring fair value and making disclosures about fair value measurements, when such measurements are required or permitted by other IFRSs. In particular, it unifies the definition of fair value as the price at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants at the measurement date.

In accordance with the transitional provisions of IFRS 13, the Group has applied the new fair value measurement guidance prospectively. The change had no significant impact on the measurement of the Group's assets and liabilities

(c) Presentation of items of other comprehensive income

As a result of the amendments to IAS 1, the Group has modified the presentation of items of other comprehensive income in its consolidated statement of comprehensive income, to present separately items that would be reclassified to profit or loss in the future from those that would never be. Exchange differences on translating foreign operations have been classified as an item that may be subsequently reclassified on the basis that this reclassification would arise if the operation was sold, although it does not necessarily reflect managements' intention. Comparative information has also been re-presented accordingly.

The adoption of the amendment to IAS 1 has no impact on the recognised assets, liabilities and comprehensive income of the Group.

(d) Subsidiaries

As a result of IFRS 10, the Group has changed its accounting policy for determining whether it has control over and consequently whether it consolidates its investees. IFRS 10 introduces a new control model that focuses on whether the Group has power over an investee, exposure or rights to variable returns from its involvement with the investee and ability to use its power to affect those returns.

The Group reassessed the control conclusion for its investees at 1 January 2013 and no changes in control conclusions were made.

(e) Joint arrangements

As a result of IFRS 11, the Group has changed its accounting policy for its interests in joint arrangements. Under IFRS 11, the Group classifies its interests in joint arrangements as either joint operating or joint ventures depending on the Group's rights to the assets and obligations for the liabilities of the arrangements. When making this assessment the Group considers the structure of the arrangements, the legal form of any separate vehicles, the contractual terms of the arrangement and other facts and circumstances. Previously the structure of the arrangement was the sole focus of classification.

The Group has re-evaluated its involvement in the only arrangement which could be considered joint, the participation in Syndicate 33 and concluded that it is outside the scope of both IFRS 10 and IFRS 11. The Group will therefore continue to only consolidate its 72.5% share of Syndicate 33.

Included in the bank debt table above are £213 million in relation to holdings in debt securities and £6 million held as deposits with credit institutions.