Hiscox Regulatory News (HSX)

Hiscox Ltd full year results

For the year ended 31 December 2015

"A good year"

Highlights

· Strong premium growth of 10.7% from across the Group, with retail businesses now generating 50% of income.

· Each division delivered good profits through careful risk selection, growth in profitable niches and an absence of natural catastrophes.

· Investment in the Hiscox brand continues to deliver, with retail customers now exceeding 600,000.

· Hiscox London Market continues to grow profitably, benefiting from new teams in complementary specialty lines.

· Hiscox Re performing well with Kiskadee Investment Managers' AUM on track to reach US$1 billion in 2016 after its second year of operation.

· A second interim dividend of 32.0p per share comprised of a special dividend of 16.0p and a final dividend equivalent of 16.0p, bringing the year's total distribution to 40.0p. Going forward the Group will retain a greater proportion of earnings to fund the growth opportunities we see.

Bronek Masojada, Chief Executive of Hiscox Ltd, commented:

"Our strategy continues to deliver good growth with our retail businesses contributing 50% of income. We have established profitable operations in everything from direct-to-consumer small business insurance to ILS fund management. This diversity sets us apart and gives us options."

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

For further information, visit www.hiscoxgroup.com.

Chairman's statement

The Hiscox Group delivered a very healthy profit of £216.1 million (2014: £231.1 million) in 2015 with some help from a benevolent Mother Nature.

Our industry has enjoyed a long period of reduced catastrophic activity. The effect has been to attract more capital, and thus competition resulting in reduced prices. This is more keenly felt on accounts that attract larger premiums. We are prepared for this; we have a proven strategy of balancing the bigger-ticket with the smaller retail business. Our diverse product range sold across a wide geographic area means we are well placed to thrive in this environment.

Our retail operations have grown profitably and now account for half the Group's income, reaping the rewards of our long-term investment in the Hiscox brand. Our London Market business has also had a strong year, exercising prudence and adding new teams in complementary specialty lines. Here we have benefited from the fallout from the recent M&A activity. Hiscox Re, with its focus on product development combined with technical strength and good underwriting, has done well, again delivering good profits. And Kiskadee, our Insurance Linked Securities (ILS) business, is on track to reach US$1 billion of funds in 2016.

Results

The result for the year ending 31 December 2015 was a very good profit before tax of £216.1 million (2014: £231.1 million). Gross written premium increased by 10.7% to £1,944.2 million (2014: £1,756.3 million). The combined ratio was 85.0% (2014: 83.9%). Earnings per share increased to 72.8p (2014: 67.4p) and the net asset value per share increased by 17.8% to 545.0p (2014: 462.5p). Return on equity was 16.0% (2014: 17.1%).

Dividend and capital

The Board has declared a second interim dividend of 32.0p per share (to be paid on 7 April 2016 to shareholders on the register at 11 March 2016), which comprises a final dividend equivalent of 16.0p per share (2014: 15.0p), taking the total ordinary dividend per share for the year to 24.0p, an increase of 1.5p (2014: 22.5p) and; an additional return of capital of 16.0p per share (2014: 45.0p). On this occasion the Directors have decided not to offer a scrip alternative.

This is the fourth successive year we have been able to return additional capital to shareholders. As previously communicated to the market however, returning capital to shareholders is not a long-term strategy and going forward the focus will be on pursuing opportunities for profitable growth. The Group continues to maintain a progressive core dividend policy.

In 2015 we raised £275 million via a subordinated debt issue. As Tier 2 capital it will support our ratings and also give us capital flexibility underpinning our 2016 business plans and beyond. As an inaugural issue it was competitively priced and the support was flattering.

Investments

After another challenging year for both bond and equity investment, characterised by low yields and volatility in many asset classes, we view our investment return of £33.7 million (2014: £56.4 million) to be satisfactory. This equates to a return of 1.0% (2014: 1.8%) of total assets under management.

It has never been our style to take excessive risk with our investment portfolio, particularly given the uncertainty and lack of liquidity which prevails in many investment markets. Our priority remains that of capital preservation over appreciation and whilst our portfolio of predominantly short-term bonds offers only modest upside, it reflects the nature of our liabilities and should limit the volatility of our portfolio overall. We have always been prepared to take some risk in the portfolio and we maintain an allocation to equity and hedge funds which we think is appropriate over the longer term despite more frequent outbreaks of short-term turbulence. The outlook for 2016 seems no clearer and we are planning for another year of similar returns.

Cyber opportunity

Cyber attack is mainly about theft of data or malicious damage by electronic means. This can lead to a whole series of consequences from reputational damage to manufacturing plants breaking down, and worse. As such it is definitely the province of insurers, and shouldn't be left up to governments (as has been suggested). We have the underwriting expertise to address the issues and for over 15 years we have worked hard to provide our customers with responsive cover. Cuthbert Heath, the great twentieth century innovator of our industry, would have relished the challenge and so do we.

Market stress test

We are actively seeking a consensus amongst peers as well as our regulators to ensure an effective response to a disaster hitting the London market. Post-World Trade Centre, we responded to clients' needs, paying valid claims and writing more profitable business post-loss. We think it is necessary to organise a market stress test "dry run" in 2016 to test the decision making processes and speed of response of all relevant parties. This is essential if London is to maintain its pre-eminence in global specialty insurance.

The Board

During 2015 a number of the original Hiscox Ltd Board retired; namely Dr James King, Andrea Rosen and Dan Healy having each completed nine years' service (the point at which the UK Corporate Governance Code deems them not independent). Richard Gillingwater, who joined the Board in 2010, stood down due to his new commitments at Scottish and Southern Energy as well as Henderson Global Investors. They have served the business well and I would like to thank them all for their wisdom and guidance.

Two new members of the Board bring a wealth of retail financial services and marketing experience; Lynn Carter and Anne MacDonald support our focus on retail growth and brand building. In November we announced the appointment of our new Senior Independent Director and Chairman of the Remuneration Committee, Colin Keogh, who has had a long career in the financial services sector.

In August we said farewell to Stuart Bridges who left after 16 years as our Chief Financial Officer. Stuart made a significant contribution to the Group. He joined in 1999 when our gross written premium was £241 million and shareholder funds were £134 million. By the time he left our market cap had risen to £2.5 billion, and we delivered a total shareholder return of 16.1% per annum. Stuart played an important role in our growth, guiding our financial strategy through the challenges of overseas expansion, testing investment markets and increasing regulation. I would like to thank him for all he has achieved for Hiscox.

People

During the year we were very happy to celebrate twenty years of operating in France and Germany, as well as ten years in Spain, USA and Bermuda. Our European business has matured into a profitable and growing part of the company against a backdrop of economic difficulty. The US and Bermudian businesses are profitable and have grown substantially. When I am travelling to any of these locations I am struck by the enthusiasm of our people and their desire to do a great job. Across the Group, we work hard to maintain our culture and also encourage employee ownership. I am proud and grateful for the talent and dedication our brand attracts.

Outlook

Although the result was in some part due to clement weather internationally, our strategy has once again proved itself in challenging conditions. For the best part of three decades we have sought to strike a balance between big-ticket wholesale exposures and smaller, less volatile retail risks; creating diversity in product, distribution and geography in order to grow despite market conditions. The Hiscox Group is now the only specialist insurer with established operations in all forms of insurance markets - from a direct-to-consumer offering, to a significant ILS fund management business and everything in between.

Treacherous currents and difficult headwinds will increasingly prevail in the years ahead and our experience tells us that catastrophes can occur at any time. As the operating environment gets tougher however, we believe our strategy will continue to give us profitable opportunities as we continue on our independent path with focus and discipline.

Robert Childs

29 February 2016

Chief Executive's report

It is pleasing to report a profit before tax of £216.1 million (2014: £231.1 million), a return on equity of 16.0% (2014: 17.1%) and premium growth of 10.7% to £1,944.2 million (2014: £1,756.3 million). Our good results are allowing us to pay a second interim dividend of 32.0p per share, which comprises a final dividend equivalent of 16.0p and a special dividend of 16.0p, bringing the year's total distribution to 40.0p. We do not expect the capital washing around our industry to go away in 2016, but we feel confident that the differentiated products in our retail businesses around the world will allow us to grow where margins are attractive, and we will use our retained earnings to fund the solvency capital this expansion requires.

Our US business, entering its tenth year of operation in 2016, contributed significantly to the Group's growth in 2015, increasing premiums by 21.5% and delivering a healthy profit. Hiscox London Market demonstrated its adaptability with growth of 14.6% and good profits. Hiscox Re continued to evolve whilst making a material profit contribution, with Kiskadee, our Insurance Linked Securities business, expected to manage US$1 billion by the end of 2016. Hiscox UK, Hiscox Europe and Hiscox Guernsey have all had a good year, with good progress shown in DirectAsia.

It was not a loss-free year for our industry, or Hiscox. We, like others, have benefited from the absence of major natural catastrophes. Our attritional claims were broadly in line with past years, and our skilled underwriting teams avoided material impact from some of the larger industry losses such as the explosions in Tianjin in China, tornado and freeze-related claims in the US, floods in the UK and mining related collapses in South America. In total these cost us a modest £25.1 million.

Hiscox Retail

Our specialist retail operations differentiate us from others in our sector who have grown out of London and Bermuda. The current competitive pressures have prompted many of them to try to replicate what we have achieved, but we have the considerable advantage of having begun this journey in 1989, with an initial focus on high net worth homes. Since then we have launched new lines of personal and commercial insurance, entered other countries, built great teams and invested heavily in our brand. Hiscox Retail now comprises half of the Group's gross written premium: £975.6 million in total (2014: £891.1 million). We began investing in commercial insurances for small and medium sized businesses in 1994; at £580.7 million it is now the single biggest segment in the Group.

In aggregate our retail businesses generated substantial profits: £73.3 million in 2015, slightly down on 2014's £78.1 million. This is due partly to our increased marketing expenditure which rose by £12.7 million to £44.5 million (2014: £31.8 million). These costs are taken to this year's profit and loss account, but their benefit accrues over many years; supporting not just our retail businesses, but the Group as a whole.

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

Hiscox UK and Europe

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

Our retail businesses in the UK and Europe made profits of £64.9 million (2014: £73.3 million). Claims within the UK and European businesses were benign for the majority of the year which encouraged us to boost our marketing expenditure by £4 million above plan. This looked like a sensible decision until December when storms Desmond, Eva and Frank hit the UK. The impact of these events on our business is estimated at £10 million. Europe enjoyed a record year in Euro terms thanks to strong underlying performance, augmented by a single significant prior year release. Exchange rate movements mean that this performance is not reflected in our Sterling result.

Hiscox UK and Ireland

Hiscox UK and Ireland grew gross written premiums 1.9% to £443.3 million (2014: £435.0 million). Good growth across most lines offset a reduction of £23 million in income from commercial partnerships as we rebalanced the portfolio towards more profitable lines.

Brokers are our most important distribution channel, accounting for just under 80% of our UK business. We support them with disciplined, but creative, underwriting solutions and a focus on delivering good service via our network of offices in Birmingham, Colchester, Dublin, Glasgow, Leeds, London, Maidenhead, Manchester and York. The broker channel achieved good retention of 87% and grew by 7.6%.

During the year, we saw a six-fold increase in demand for our cyber and data insurance product for small businesses. We also acquired RH Classics, a leading classic car insurance specialist, which broadens our capabilities and gives us access to a new group of customers.

Our marketing reach means we receive many enquiries from customers whose needs are outside of our underwriting appetite. In 2016, we are creating a managing general agent to underwrite these risks on behalf of other insurers, providing them with a flow of business and us with fees and profit commission.

At the end of the year we celebrated the opening of our new office in York, on time and on budget. Housing over 250 employees, with room for further expansion, this is the hub of our direct-to-consumer operations and represents our high ambitions for this business. This office was off to a strong start on day one, as the team beat their sales targets and served our customers brilliantly; a testament to our motivated and talented people. However, we did have a heart-stopping moment in December when swathes of York flooded and water crept towards our office. Thanks to our dedicated staff, all of whom were able to get to the office on the worst affected day, and a cannily built overflow tank, we were able to provide uninterrupted service to all of our flood-affected customers.

We have for several years been progressively in-sourcing all of our direct customer sales and service functions and moving our direct business to a new IT platform. These projects are all now complete, and after such a sustained period of investing in infrastructure, the UK direct business will now focus on profitable growth, increasing scale and improving its expense ratio.

Hiscox Europe

Hiscox Europe grew gross written premiums by 7.8% to €205.6 million (2014: €190.8 million) and achieved a combined ratio of 92.2% (2014: 94.1%), with a good performance in all product lines and from Spain, Germany and Benelux in particular. 

During the year, Hiscox Specialty Commercial was launched in France and Germany. This suite of products broadens our liability and property offering to small businesses. We hope to replicate the success we have experienced in the UK and early signs have been very positive. Our cyber product in Germany and the Netherlands has also done particularly well, as demand grows and customer preparedness to buy increases. Alternative distribution, via broker schemes, and partnerships with other organisations is growing in importance. In Spain, participation in a number of contingency and personal accident managing general agencies is generating good growth.

Not everything went to plan. One of our priorities was to accelerate the growth of our Franco German direct commercial business through a significant marketing investment. We achieved growth of over 20% to €5 million, but the returns were not commensurate with the cost. We have decided that the pan-European experiment did not work and will be pursuing a less ambitious path in 2016. A key part of this is transforming the direct business to one which can also support the broker and partnership channels, and is managed and led at a local level.

Our European Service Centre in Lisbon is operating well. It now performs up to 90% of transactions, representing a key step to reducing our European expense base.

Our European business offers opportunities for steady growth despite the Eurozone's travails. In 2016, we will explore opportunities in the classic car market, look to grow the commercial and partnership business, and continue to use segmentation to drive productivity and efficiency.

Hiscox International

This division comprises Hiscox USA, Hiscox Guernsey and DirectAsia. Its revenues grew by 26.4% to £380.5 million (2014: £301.1 million) and it achieved a combined ratio of 97.9% (2014: 100.1%). Hiscox USA was the biggest contributor to the division's growth and profit improvement.

Hiscox USA

Hiscox USA primarily underwrites small-to-middle market commercial risks through brokers, other insurers and directly to businesses (either online or over the telephone). It delivered another stellar performance in 2015, with gross written premiums increasing by 21.5% in local currency to US$446.6 million (2014: US$367.6 million), and a strong profit. This result was helped by a stable claims environment, discipline on commissions and good expense management.

Our core professional liability and small commercial products continue to drive growth. During the year the team honed its underwriting strategy in order to grow its footprint and retain its competitive edge in the directors and officers', technology errors and omissions (E&O) and general liability product lines. We also made good progress in entertainment, enhancing Hiscox One, the first integrated E&O, property and workers compensation offering for entertainment professionals.

The cyber market in the US is experiencing rapid growth with many new market entrants. We believe the marketplace will ultimately favour those carriers that possess the most experience in servicing these risks. We have been underwriting US cyber for 15 years but will not rest on our laurels. In 2016 we will launch an updated, comprehensive but simply-designed cyber product that reinforces our market position as a leading specialist insurer.

Our direct-to-consumer operations continue to grow apace, with policies in force now numbering over 120,000. Direct and partnership small business insurance is now our single biggest US line of business, and marketing has been an important component of its success. We are developing our brand around the strapline 'Encourage Courage'. To promote this we have sponsored the Tough Mudder fitness challenge across the US and created the Courageous Leaders web series. We hope that, in time, our US brand presence will match that of our UK business.

In 2016 we celebrate ten years of Hiscox USA. It has achieved critical mass, now provides the Group with a robust and sustainable profit stream, and has delivered 18% compound organic growth in the last five years. We have established teams of experts in key states, including an exploratory team in Dallas in 2015, and a growing brand. We will not stop there; we see real opportunities despite competitive markets, and will continue investing in new talent, IT and our brand in 2016.

Hiscox Guernsey

Hiscox Guernsey comprises our Guernsey-based kidnap and ransom, private fine art and executive security underwriting operations with sales offices in London and Miami.

Across the globe, market conditions remain very competitive. Premiums decreased slightly by 1.9% to US$103.6 million (2014: US$105.6 million). A new team in Miami is driving growth, offsetting reductions elsewhere. An investment in IT is also paying off. Our business partners are increasingly looking for e-trading solutions, and our new platform delivers a more efficient process between producers, brokers and underwriters.

We have combined the different teams from across the Group that focus on special risks, including kidnap and ransom, private client fine art and executive security, into a single structure which is now branded Hiscox Special Risks. Led from Guernsey, the division will include teams in London, Munich, Paris, New York, Los Angeles and Miami. We believe that will allow us to provide better service and up-to-date products to corporate and personal customers in the increasingly volatile world in which we live.

DirectAsia

In early 2014 Hiscox acquired DirectAsia, a direct-to-consumer business with operations in Singapore, Hong Kong and Thailand that sells predominantly motor insurance. The business is developing as expected.

Singapore performed solidly in a competitive pricing environment. Hong Kong made good progress too, despite the challenges of a small motor insurance market and low average premiums. We continue to make particularly good progress in Thailand, where we see strong growth potential and where our brand-building work has been well received. Investment in a new TV campaign, supported by print and social media marketing, has moved brand awareness to 37%, driving 500% growth in premium income.

DirectAsia has clear priorities, a strong plan, and a growing customer base. As anticipated, Hiscox's disciplined approach to underwriting and focus on brand-building has complemented the existing expertise within the team.

Hiscox London Market

Our London Market business delivered a strong profit of £59.9 million (2014: £62.6 million), and increased gross written premiums by 14.6% to £585.2 million (2014: £510.8 million). Much of this increase reflects exchange rate fluctuations, with premium growth being 8.5% on a constant currency basis. The business achieved a combined ratio of 85.7% (2014: 84.2%) a good result despite the impact of price reductions. Its biggest source of growth came through our partner White Oak, a specialist automotive and equipment underwriter. It contributed 5.0% of growth, while new products and teams delivered 4.2% and core London Market lines reduced by 0.7%.

The London Market remains competitive. Customers are getting used to lower prices and brokers are fighting to increase their declining margin. Our response is to continue improving our relationship with brokers, supporting facilities and quota-share agreements where we have the right degree of underwriting control and we see margin.

Hiscox London Market has also benefited from market dislocation resulting from M&A activity, as leading underwriting talent joins our ranks. This has allowed us to strengthen our existing cargo team and establish new teams in product recall, and US general liability in London, and property in Miami.

Looking at each division in turn:

Property

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

This area had another excellent year due to careful risk selection and a general lack of catastrophes. We focused on retaining small-ticket commercial and household business, written through binding authorities with long-standing US partners. Continuing pressure on big-ticket traded business meant the team needed to remain extremely disciplined as it dealt with market challenges and looked for new opportunities. The launch of flood cover for the newly deregulated US market is one example of such an opportunity. The private sector can offer wider terms and coverage than the government-backed National Flood Insurance Program, giving consumers a more accurately priced and responsive product. It is ironic that London Market firms have an appetite for flood exposure, whilst in the UK the Government has pushed the domestic industry to create a mutualised and distorted approach to tackling this risk.

Marine and Energy

Challenging trading conditions continue to depress the marine and energy market and our business in this sector shrank by 12.2%. Upstream energy was already under pressure but the substantial drop in the price of oil has further affected this account as pressure grows on clients' budgets. The team has actively reduced exposure where the margins are unreasonable. Our marine and energy liability business did well to maintain its position in 2015, mainly due to our increased appetite as market conditions held up. However given overall conditions, we expect existing marine and energy lines to reduce in future, except for cargo business which has been reinvigorated with some new hires.

Casualty

This business grew by over 39% as a result of our investment in new talent and new lines of business over a number of years. During the year, the team launched a new cyber product that covers medium-to-large sized businesses for extortion threats and cyber breaches. The directors and officers' team won 'Underwriting Team of the Year' at the 2015 Insurance Day awards. A new team was also brought on board to focus on US general liability.

Aerospace and Specialty

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

Despite a series of aviation losses in recent years, including the Germanwings and Metrojet disasters in 2015, this market is under extreme pricing pressure. The team is navigating their way through turbulent conditions with opportunities seized in the more profitable manufacturers and airports business. Our political risks business has been hit by falling oil prices and political unrest in Ukraine, where we reserved claims for net £16 million at year end.

Our terrorism business has felt the impact of facilities in the market where brokers are bundling risks together to make them easier to place. We participated where we saw margin and opportunity.

The personal accident team recruited last year is making a strong impact, delivering profitable growth in a specialist line we are keen to lead. Similarly, our new product recall team has made a good start. Other lines including contingency and kidnap and ransom are holding steady and delivering strong profits driven by good risk selection.

Alternative Distribution

Adapting to changes in distribution is key in the current environment. The role of the alternative distribution division is to facilitate innovation in the use of technology and specialist data to serve different markets. Its biggest business is the underwriting of specialist automotive and equipment, including extended warranty through White Oak. This business now represents 28% of our London Market income. Given its importance we increased our equity stake in White Oak from 10% to 30% in 2015, and continue to have representation on its Board.

Hiscox MGA

Early in 2015, we acquired R&Q Marine Services, the mega-yacht and general marine leisure managing general agent. This furthers our capabilities to meet the needs of high net worth customers and acts as a vehicle through which we can act for Hiscox and other London-based carriers where the client's requirements exceed our risk appetite. We have re-branded the business Hiscox MGA and included within it our Miami-based terrorism and fine art teams. Our Miami offering has expanded to include property underwritten for Hiscox and others, and in 2016 we will include Middle East terrorism and a south of France-based yacht underwriter.

Our London Market business remains a cornerstone of expertise, energy and profit within Hiscox, but it is one player among many and so at times depends on the broader market's centrality and collaboration. We are supportive at a conceptual level of the London Market Group's (LMG) efforts to promote London and modernise its infrastructure. We are not idle bystanders; several of our senior executives serve on various committees that help shape the LMG's initiatives and in 2016 I will be joining a London Market Target Operating Model steering committee to drive a focus on implementing a few narrow priorities. I am delighted it will be chaired by Inga Beale, CEO of Lloyd's, as we believe that Lloyd's has the responsibility, financial resources, accountability and power to lead the London Market - not for its own benefit, but for the benefit of all.

Hiscox Re

Hiscox Re largely comprises the Group's reinsurance businesses across the world and Insurance Linked Security (ILS) activity.

Hiscox Re had an impressive year, delivering a 46.6% combined ratio (2014: 49.8%) as the team avoided some of the larger losses that impacted the market. The business grew by 8.2% to £383.4 million (2014: £354.3 million), 2.9% in local currency. Good growth in international, specialty and healthcare, along with income from Kiskadee, helped to offset the reductions in US property catastrophe reinsurance. We've experienced another year of low losses, a combination of fewer catastrophes and the team's strong risk selection. The benign claims environment continues to put pressure on rates. Last year's important 1/1 renewals saw rates fall by 12% and this year they fell again by 5%.

Our focus on product innovation is paying off, adding US$70 million in premium since the start of 2015. This includes new cyber products and takeout quota shares which either expand a clients' original product or support an existing business when internal appetites are reached. Product development has evolved, it is about asking how we can help support clients' broad aims and responding from there.

We continue to leverage third party capital through quota share arrangements (with other insurers) and through ILS activity (with capital markets investors). This gives us the ability to remain agile and relevant as we can offer larger lines and bespoke reinsurance solutions to a broad spectrum of clients.

In two years, our ILS business including our flagship Kiskadee funds has grown to be a significant brand in the market. In 2015, we also launched Cardinal Re Ltd, a Bermuda-domiciled Special Purpose Insurer designed to transform collateralised insurance and reinsurance risk into a security more suited for capital market investors. Kiskadee Investment Managers' assets under management are on track to reach US$1 billion in 2016.

Claims

Claims are where all our promises to customers are tested. When faced with storms Desmond, Eva and Frank in the UK, our claims team responded with typical effectiveness. Staff from the new major and complex loss team, visited those insureds who were most severely impacted by the storms, providing help with alternative accommodation and emergency payments. The October storms in the South of France proved to be equally destructive and the positive feedback from the claims management demonstrated that the Hiscox service and efficiency is provided consistently across our teams.

In the London Market, Hiscox was ranked number one by brokers in the 2015 Gracechurch annual survey of claims performance, for overall best service. Hiscox UK was awarded 'personal lines claims initiative of the year' at the Insurance Times' Claims Excellence Awards 2015, in recognition of our team's improvement of customer satisfaction from the already high level of 95% to 98% as part of our effort to create customers for life.

Reserve releases of £205.9 million were up from £172.2 million last year. This demonstrates our continued cautious approach to reserving, with the majority of the release coming from shorter tail lines and the earlier years of longer tail lines where we are confident that we will not be subject to any further claims development.

Marketing

In 2015 we spent £44.5 million on marketing and brand-building activity across the Group (2014: £31.8 million). This was focused on our key retail businesses with incremental marketing investment accelerating the growth of our direct-to-consumer lines across the world. In the UK we have succeeded in establishing Hiscox as a retail brand. Our on-going 'small and the brave' small business campaign is maintaining brand awareness at a historic high of 76% and our home marketing has helped to deliver an 82% increase in new direct home customers. Our ambition is to replicate this in our other direct businesses. Our USA marketing campaign 'Encourage Courage' and our 'Where Happier Matters' campaign in Asia are all steps towards this goal.

We continue to support the arts through corporate sponsorship such as Sculpture in the City, and on growing our presence in York to support wider activities that celebrate our new office and promote us as a major local employer.

IT

As Hiscox grows, having an efficient reliable infrastructure is becoming ever more important. In early 2016 we reached the halfway point in the replacement of our UK retail systems with the launch of our new UK direct commercial platform. With all of our UK direct business now operating from this platform, we should see the same benefits across direct commercial that we saw when direct home migrated to the platform last year - sharper pricing, better customer responsiveness and greater efficiency. This £45 million, four year programme remains broadly on track and work is well underway to adapt the system for the next phase, UK broker channel commercial.

We are also beginning the process of looking at system replacement in both the USA and mainland Europe, and we expect to make decisions on when and how to move to new operating platforms for these businesses during the course of 2016. In addition to these large projects, work has been undertaken to strengthen our cyber defenses.

Keeping our existing IT estate functional and operational is the less visible part of our IT team's work, but they have performed this task well.

Investments

We have accepted in recent years that the contribution of investment income to the Group's profits is likely to be lower than that which prevailed before the financial crisis. As such we have set out our stall to accept what the market will reasonably give us from a conservative portfolio based around cash and short term bonds with a small allocation to risk assets which over time should provide some extra growth. With the year now behind us it is clear that income from these asset classes was hard to come by and in that context our result for 2015 is acceptable. Our investments, before derivatives, made £33.7 million (2014: £56.4 million) equating to a return of 1.0% (2014: 1.8%). The outcome in recent years has been boosted by capital gains; from bonds in some years, equities in others and occasionally both. In 2015 there were few tailwinds and the bond returns of 0.9% were much closer to the yields on the underlying portfolios. Our risk assets portfolio delivered 4.0% which is lower than of late but still represents a useful contribution to the overall result. It was another year where successful stock and sector selection made a difference and on the whole the funds that we are invested in avoided the energy, mining and mineral sectors which did most of the damage to the benchmark indices.

If 2015 was relatively benign in the insurance world, the same cannot be said for investments. Not only are we learning to live with structurally lower interest rates but there is also a marked pick up in outbreaks of volatility. Who remembers the Swiss devaluation at the beginning of the year and the Greek crisis of the summer? These have now given way to the consequences of an unexpected decline in commodity prices and the reality of a slowing China transitioning from an economy driven by exports to one of domestic consumption. The cracks have been papered over by the support of Central Banks since the financial crisis but there is a growing feeling that they are reacting to events rather than anticipating them. With this volatility comes illiquidity and we are more aware than ever that we must be prepared, in the case of bonds, to hold what we own to maturity and in the case of equities to accept periods of negative returns. In an increasingly short term world we need to take a long-term view. The early weeks of 2016 have seen sharp declines in equity prices as well as weakness in the higher-yielding areas of the bond market that we have avoided since 2011. Our priority as ever with the investment portfolio is to pay claims and support the business but we do have some dry powder should the current turmoil throw up some compelling opportunities.

Capital management

At the start of 2015 we returned £192 million of capital to shareholders. We have today announced that we will be returning 16.0p per share in addition to our normal dividend. Cumulative dividends and capital returns since 2012 will then total £750 million. This year we are retaining a greater proportion of our earnings so that we can fund the growth that we can foresee in our retail business.

In 2015 we completed a subordinated debt issue which raised £275 million of debt. This counts towards Tier 2 capital for rating agency purposes. We have used the proceeds of the bond issue to reduce the drawn portion of our Group letter of credit from US$529.5 million to US$71.9 million. We have reduced our group Letter of Credit to US$500 million and will regard it as a standby facility to be utilised in the event of a rapid hardening of the market following a large event or to provide short-term capital flexibility in response to other events such as exchange rate movements. In our experience, responding rapidly to market dislocations is key to success and the Letter of Credit will give us the flexibility to do so, whilst having a low cost when undrawn.

Solvency II came into effect on 1 January 2016. Hiscox's Lloyd's business received internal model approval as part of the Lloyd's internal model approval process. Our UK carrier is operating using the standard formula. At a Group level we have both our own Hiscox economic capital model, and as a Bermuda-domiciled and regulated group, the Bermuda Solvency Capital Requirement. Our available group capital resources remain comfortably above our regulatory requirement.

The board is committed to being well-capitalised relative to regulatory capital models, but also has to meet clients expectations as to rating. Our goal is to be a mid-point of the 'A' range on Standard & Poor's or 'A' on A.M Best. This gives us protection from the minimum level we need to trade in the most credit sensitive parts of our business. The capital requirements for this level of rating are more conservative than the regulatory requirements, hence the comfortable buffer held.

Outlook

In 2015 good sector selection, good underwriting and good fortune delivered good results for shareholders. We cannot count on good fortune at every turn, so in 2016 we will focus on sector selection, disciplined underwriting, marketing to drive profitable growth, and expense discipline. Our bigger-ticket businesses are more likely to retreat, with growth coming from our new teams and in specialty retail across the world. To this we will add a focus on efficiency as we reap the benefits of investments made in the UK, scale economies in the US, and expense discipline elsewhere. Our breadth of capability will set us apart in what will be a challenging environment.

Bronek Masojada

29 February 2016

Consolidated income statement

For the year ended 31 December 2015

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

Consolidated statement of comprehensive income

For the year ended 31 December 2015

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

Consolidated balance sheet

At 31 December 2015

Consolidated statement of changes in equity

For the year ended 31 December 2015

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

Consolidated statement of cash flows

For the year ended 31 December 2015

Notes to the consolidated financial statements