Hiscox Regulatory News (HSX)

Hiscox Ltd interim results

For the six months ended 30 June 2019

"A positive result in a changing market"

Highlights

·; Gross premiums written up 7% in constant currency, with all business segments growing.

·; Profit before tax up 3% to $168 million, driven by a good investment return of 4.8% annualised.

·; Interim dividend up 4% to 13.75¢.

·; The Group experienced a higher volume of claims in the first half of 2019 than the same period last year.

·; Reserves have been strengthened for prior-year claims from Typhoon Jebi, Hurricane Michael and the risk excess book, as industry loss estimates have increased.

·; Retail growth has moderated as planned, due to on-going discipline in US private company directors and officers' (D&O) business and as Hiscox UK adapts to new IT systems.

·; Hiscox Re and Hiscox London Market are capitalising on opportunities as they arise, as pricing momentum continues to build.

Bronek Masojada, Chief Executive Officer, Hiscox Ltd, commented:

"Hiscox delivered a profit of $168 million for the first half despite a more challenging claims experience. Looking ahead, with six consecutive quarters of rate growth in some Lloyd's business, the market is in a better position than it has been for some time. In Retail, we will continue to invest in our infrastructure and marketing to drive sustainable growth. Our strategy of diversification gives us options."

ENDS

For further information

Notes to editors

About The Hiscox Group

Hiscox is a global specialist insurer, headquartered in Bermuda and listed on the London Stock Exchange (LSE:HSX). Our ambition is to be a respected specialist insurer with a diverse portfolio by product and geography. We believe that building balance between catastrophe-exposed business and less volatile local specialty business gives us opportunities for profitable growth throughout the insurance cycle. It's a long-standing strategy which in 2018 saw the business deliver a profit before tax of $137.4 million in a challenging year for insurers.

The Hiscox Group employs over 3,300 people in 14 countries, and has customers worldwide. Through the retail businesses in the UK, Europe, Asia and the US, we offer a range of specialist insurance for professionals and business customers as well as homeowners. Internationally traded, bigger ticket business and reinsurance is underwritten through Hiscox London Market and Hiscox Re & ILS.

Our values define our business, with a focus on people, quality, courage and excellence in execution. We pride ourselves on being true to our word and our award-winning claims service is testament to that. For more information, visit www.hiscoxgroup.com.

Chairman's statement 

I am pleased to report that the Group has delivered a pre-tax profit of $168.0 million (2018: $162.7 million) and grown gross premiums written by 4.9% to $2,337.5 million (2018: $2,228.8 million) in the first six months of 2019. Every business segment grew and Hiscox Retail was once again the main profit generator, albeit in a more active period for claims. In aggregate we have experienced favourable reserve development, however there have been some adverse movements on industry losses and reserve strengthening in some exited lines. The effects of these have been more than offset by strong investment returns, as we have benefited from financial market movements in the first half.

In Retail, growth has moderated as we exercise discipline in US private company directors and officers' (D&O), and implement new systems and ways of working in the UK. In our London Market business, market losses and renewed discipline in Lloyd's are putting upward pressure on rates, and the picture looks more positive than this time last year. In reinsurance, where rate improvement had been more sporadic in the first quarter, we have seen good price increases on loss-affected risks in the second quarter and are finding opportunities in the retrocession market, where reduced capacity has significantly improved rates.

As ever, the results of the half year are no indication of the results of the full year, so as we approach hurricane season there is still potential for the wind to blow us off course.

Results

The result to 30 June 2019 was a pre-tax profit of $168.0 million (2018: $162.7 million). Gross premiums written increased by 4.9% to $2,337.5 million (2018: $2,228.8 million), or 6.8% in constant currency. Net earned premiums were $1,313.8 million (2018: $1,277.9 million). The combined ratio was 98.8% (2018: 87.9%). Earnings per share were 51.2 cents (2018: 52.2 cents) or 39.6 pence (2018: 38.0 pence) and net assets per share reduced to 817.0 cents (2018: 833.7 cents) or 641.9 pence (2018: 633.7 pence). The annualised return on equity was 13.3% (2018: 13.3%).

As mentioned in the recent trading update, the Group has made an additional tax provision for the half year with an impact of $58 million. This is presented as a prior-year adjustment and does not affect the current year results. This additional tax provision includes a reappraisal of how Hiscox has invested in and classified marketing activity historically. The Group does not expect any further charges to arise and re-affirms its current guidance of 10-12% on its effective tax rate.

Dividend, balance sheet and capital management

The Board is pleased to announce an interim dividend per share of 13.75 cents, representing a 3.8% increase on the 2018 interim dividend. The record date for the dividend will be 9 August 2019 and the payment date will be 11 September 2019.

The Board proposes to offer a scrip alternative subject to the terms and conditions of Hiscox Ltd's 2019 Scrip Dividend Scheme. The last date for receipt of Scrip elections will be 16 August 2019 and the reference price will be announced on 27 August 2019.

Further details on the dividend election process and Scrip alternative can be found on the investor relations section of our corporate website, www.hiscoxgroup.com.

Rates

In Hiscox Retail, rates have been broadly flat. In the UK, competition in commercial lines is being balanced out by improved household rates, where a prevalence of escape of water claims continue to place upward pressure on prices in the market.

In Hiscox London Market, we have seen good rate momentum, with rates up approximately 5% across the portfolio, helped by the Lloyd's Decile 10 directive and the cumulative impact of two consecutive years of large market losses. We have seen most pronounced increases in US public company D&O, cargo, marine hull, major property and household.

In Hiscox Re & ILS, rates are up approximately 6% across the portfolio with increases confined generally to loss-affected accounts, as an abundance of capital continues to dampen a widespread market turn. During the April renewals, when the majority of Japanese business renews, we achieved rate increases of 8% overall, while in June, when a lot of Florida-based wind-exposed business renews, rates increased by 12%. We continue to see opportunities in the retrocession market, where reduced capacity combined with several years of losses is contributing to material rate-hardening.

Claims

As mentioned in our recent trading update, the insurance market has seen continued deterioration from 2018 catastrophe events, including Typhoon Jebi in Japan and Hurricane Michael in Florida. The scale of deterioration has been significant, with industry loss estimates having increased materially since these events. As a result, the Group has strengthened reserves for prior-year claims from Typhoon Jebi, Hurricane Michael and for the risk excess book. The combined impact of reserve strengthening for these events is approximately $40 million net. Last year, the Group benefited from prior-year releases from Hurricanes Harvey, Irma and Maria, which totalled $25 million, however we did not have that same benefit this year.

The Group has also strengthened reserves for some exited classes, including healthcare, by $10 million. Reserving for other prior year attritional and large losses amounts to $53 million.

After a particularly benign start to 2018, our retail businesses have encountered a more normal loss experience so far this year, and we expect this to continue in the second half. This includes a higher volume of claims in US D&O for private companies, where we have reduced our exposure and continue to do so. We expect the full year combined ratio for Hiscox Retail to be at the top end of our 90-95% range.

Reserve releases for the first half were $26 million (2018: $154 million), and we expect second half reserve releases to be below $100 million (2018: $168 million). Our prudent approach to reserving has not changed.

Hiscox Retail

Hiscox Retail comprises all our retail businesses around the world; Hiscox UK, Hiscox Europe, Hiscox USA, Hiscox Special Risks and Hiscox Asia. In this segment, our specialist knowledge and retail products differentiate us and our on-going investment in the brand helps us build a strong market position. Hiscox Retail is the single biggest segment in the Group and delivered most of the profit for the Group in the first half.

Hiscox UK

Hiscox UK provides commercial insurance for small- and medium-sized businesses as well as personal lines cover, including high-value household, fine art and luxury motor.

While gross premiums written reduced by 1.7% to $378.5 million (2018: $385.2 million), the business grew by 4.3% in constant currency.

Our broker business had a challenging 2018 as it adapted to a new system with new ways of working, which impacted growth. In the first half of this year we have made good progress, with service levels improving and work on track to be completed by the year-end. However, as we have previously said, growth will remain subdued until these changes are fully embedded.

The direct-to-consumer market remains competitive, particularly in commercial lines. Despite this we are operating in healthy niche markets and have been able to grow premiums by around 10%. Our investment in marketing continues to differentiate us, and we will look to build on the success of our campaigns in the second half.

Cyber is still a growth area for the Group and in March we launched a new and enhanced product called CyberClear at an event attended by over 350 brokers and business partners. The new product provides market-leading protection to our UK customers and we are proud that it has been rated the most comprehensive cyber insurance policy for SMEs as the first and only policy to receive a 100% score in the Insurance Times Cyber Product Report.

Bob Thaker transferred from Hiscox Asia to take up the role of Hiscox UK CEO during the period. After over four years leading our business in Asia, the UK is already benefiting from his experience of building a business in a competitive market with high customer expectations.

Hiscox Europe

Hiscox Europe provides personal lines cover, including high-value household, fine art and classic car; as well as commercial insurance for small- and medium-sized businesses.

Hiscox Europe is doing very well and delivered a strong performance, with gross premiums written growing by 9.0% to $245.1 million (2018: $224.8 million¹), or 17.0% in constant currency. The business has benefited from the transfer of Hiscox Ireland and a number of European underwriting partnerships from Hiscox UK to Hiscox Europe as part of our previously mentioned Brexit-related structural changes.

Spain and Germany are again the main drivers of growth, with professional indemnity and cyber - where we are maintaining our leadership position - performing particularly well.

Hiscox Spain is benefiting especially from the 'MyHiscox' broker extranet which we rolled out in 2018 across Europe. The team is also looking at a number of partnership opportunities in the technology and insurtech space.

In Hiscox Germany, we launched our new CyberClear product in the second quarter, which has been well received by the market. We are growing our team in Munich and will expand our footprint in Germany with new offices in Berlin and Stuttgart later in the year.

Hiscox Benelux experienced good growth in the first half, with art and private client and commercial lines performing well. In classic car, work is under way to strengthen our presence with new offerings for the classic car segment, such as a new motor liability solution. Our online broker business also continues to perform well in The Netherlands, and the roll-out of the 'MyHiscox' portal will continue in Belgium later this year with cyber and professional indemnity solutions.

In Hiscox France, partnerships with well-known financial institutions continue to be an important distribution channel, and we are adding new products such as cyber to existing relationships.

Following Hiscox Ireland's transfer into Hiscox Europe, we have increased our local presence in Dublin, with new office space and new hires, and the team has settled in well to their new home within the Group.

Hiscox USA

Hiscox USA underwrites small- to mid-market commercial risks through brokers and directly to businesses online and over the telephone. We also partner with other insurers who sell Hiscox products.

Gross premiums written increased by 3.1% to $437.1 million (2018: $423.9 million), driven by growth in our direct and partnerships division where we now have over 320,000 customers. Our marketing and brand-building efforts are critical to powering our growth, and we intend to increase our marketing spend in the second half.

In the broker channel, we remain disciplined, focusing on profitable sectors and not chasing premium at the expense of quality. For example, strong competition in the cyber market means we are being selective and growing cautiously. In D&O, we are doing what we said we would and remain on-track to shrink the book by more than half in response to increased claims volumes and rate inadequacy in the market. This action is necessary and will improve profitability in the longer term. We have taken similar corrective action to improve profitability in media and entertainment, as previously disclosed, and this work is also progressing as planned.

As we said previously, we expect growth for Hiscox USA to trend towards the mid-point of our 5-15% target range for our retail businesses in the second half.

The long-term opportunity for our US business is significant, and with our share of less than 1% of a highly-fragmented market, we are still early in our journey.

Hiscox Special Risks

Hiscox Special Risks underwrites kidnap and ransom, security risks, personal accident, classic car, jewellery and fine art. Hiscox Special Risks has teams in London, Guernsey, Cologne, Munich, Paris, New York, Los Angeles and Miami.

Gross premiums written reduced by 4.0% to $67.0 million (2018: $69.8 million) during the first half of the year. Over 30% of Special Risks' business comes from multi-year policies, which is reflected in these figures. On an underlying basis, growth was stable.

In kidnap and ransom, market conditions remain challenging, with increased competition and pricing pressure. Our expertise and relationships in this area are helping us to maintain our leadership position in the market.

Our Security Incident Response (SIR) product continues to perform well and during the period we launched an enhanced version that provides additional protection for business integrity risks such as bribery and corruption, embezzlement and financial statement fraud. The product now covers 19 additional insured events and we will continue to evolve it in line with the ever-changing risk and security landscape.

Recent political tensions with Iran have resulted in a heightened state of alert for marine clients travelling in the Gulf. In response to this, within a week, the team developed and delivered to market a new product that focuses specifically on providing crisis management support and loss of hire indemnity if a vessel is detained or seized. New insurance products rightly come under a lot of scrutiny and need to go through a robust product governance process before launch, so I am delighted that we have been able to respond swiftly and provide real value for our clients when they need it most.

Hiscox Asia

Our brand in Asia, DirectAsia, is a direct-to-consumer business in Singapore and Thailand that sells predominantly motor insurance, acquired by Hiscox in April 2014.

The business achieved gross premiums written of $26.9 million (2018: $9.3 million) during the first half of the year. Excluding an adjustment for premium written via an agency into Hiscox Insurance Company (Bermuda) Limited, gross premiums written were $18.6 million (2018: $13.4 million). Both Singapore and Thailand have had consecutive record-breaking months for car and motorcycle insurance sales, driven by the success of new partnerships, and we continue to seek similar partnerships with like-minded businesses.

With Bob Thaker's return to the UK, we have appointed a new Managing Director, Sirinthip (Celine) Chotithamaporn. Celine has been instrumental in launching two start-ups in Thailand and has significant insurance experience, including most recently as President and CEO of Allianz Thailand. Her expertise will be valuable as we focus on reaching scale and we are delighted to have her on board.

Hiscox London Market

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

Gross premiums written in Hiscox London Market increased by 5.6% to $484.6 million (2018: $458.7 million), or 6.6% in constant currency.

Rate improvements driven by the Lloyd's Decile 10 directive, of which we have been great supporters, and recent market losses, has led to good growth in many of our core lines including D&O, cargo, marine hull, major property and household. We continue to lead consortia for general liability, flood and product recall which gives us additional scale and prominence in the market.

Like others in the market, Hiscox London Market has been impacted by a deteriorating loss experience from Hurricane Michael, where assignment of benefits - a practice where insureds can pass on the claims recovery rights to a more aggressive third party - has challenged the market in Florida. Legislation to reform the practice was passed in April, and we hope will provide more stability in the market and fairer outcomes for customers.

In May, we launched a new CyberClear product for the London Market with a first-of-its-kind experiential event on the underwriting floor at Lloyd's. 'The Cube' aimed to test the market's cyber knowledge, and attracted more than 150 brokers and underwriters.

In terrorism, our new malicious attack product has been well received by the market. It provides cover for property damage, business interruption, loss of attraction and crisis management assistance in an event involving a vehicle, explosive device or hand-held weapon.

Our adoption of Placing Platform Ltd (PPL), part of the Lloyd's Target Operating Model work to move to digital trading, remains on track and we are currently placing over half of all syndicate risks in this way. We continue to work closely with our broker partners to meet the ambitious targets for the remainder of this year.

Hiscox Re & ILS

The Hiscox Re & ILS segment comprises the Group's reinsurance businesses in London and Bermuda and insurance-linked security (ILS) activity written through Hiscox ILS.

Gross premiums written grew by 6.5% to $698.3 million (2018: $655.6 million), or 7.6% in constant currency.

While we are seeing some positive rate momentum, particularly in those lines hardest hit by two consecutive years of losses, this is dampened by the continued abundance of reinsurance capacity available from traditional and alternative sources. We have responded rationally, growing in wildfire liability where we have seen rate increases of up to 200%, and managing wildfire-exposed property business where rates in some cases have not responded in line with our view of the risk.

In the risk excess book, we are reducing our exposure on the bottom end of programmes and pushing for more risk-reflective pricing, particularly in risk aggregate where we have seen heavy losses and some underperformance in recent years.

Like others in the market, we have seen some deterioration in claims resulting from Typhoon Jebi, the most powerful typhoon to hit Japan, as severe winds impacted an area of high-value construction ahead of the upcoming Olympic Games and Rugby World Cup. This has caused an unusually large number of claims and increased repair costs due to demand surge.

In Hiscox ILS, our funds have performed in line with expectations. In January, we started writing business to our new fund, the Kiskadee Latitude Fund, which gives investors access to a more diverse portfolio of insurance and reinsurance risks with less focus on pure property catastrophe risk. Assets under management are currently at $1.6 billion.

Investments

The investment return for the first six months of 2019 is $147.5 million (2018: $19.8 million), 4.8% (2018: 0.7%) on an annualised basis before derivatives and fees. Assets under management at 30 June 2019 were $6,367 million (2018: $6,460 million).

After the sharp reversal in conditions towards the end of 2018, markets have been bullish so far in 2019. Global equity markets are up around 16%, where developed markets have outperformed their emerging counterparts year-to-date. Short-dated corporate bonds spreads have fallen by around one-third from recent highs, meaning returns from credit have also been strong. Market behaviour seems at odds with a background of slowing growth and geopolitical tensions such as the US-China trade stand-off, but statements by policymakers seem to explain the apparent dichotomy.

US government bond yields have fallen year-to-date, adding to fixed income returns. This has been driven by a significant shift in policymaker behaviour. Where 2018 was mainly a story of central banks tightening and removing stimulus, 2019 has been the opposite. A year ago, the US Federal Reserve was expected to raise interest rates two or three times in 2019, however they now appear unlikely to raise rates for the remainder of 2019 and the markets are pricing in several cuts. Likewise, the European Central Bank was preparing to unwind its quantitative easing programme, but has now stated its intention to restart stimulus. The targeted long-term refinancing operations, to provide liquidity to banks and support the European economy, are due to be restarted, and further cuts to interest rates and more quantitative easing have not been ruled out.

The risk-on/risk-off environment, where asset returns tend to move together, appears to remain in place. Such volatile environments can be difficult to navigate as they have a tendency to change rapidly and diversifying assets are hard to identify. We remain cautious on our expectations for investment return, keeping risk assets at modest levels (7.5%) and a relatively high allocation to cash at 17.4%, with scope to re-invest as circumstances allow.

Marketing

We now have more than one million retail customers, and our investment in marketing has been a key driver of this growth, by building brand awareness and differentiating us in our key markets. This year we will invest up to $90 million in marketing and brand-building (2018: $69.7 million), mainly in the UK and USA, where we still see significant growth opportunities.

During the first half of the year, we launched our biggest ever integrated campaign in the USA, featuring our first ever US TV advertisements. The 'Barcode' campaign is the latest in our 'Encourage Courage' brand series aimed at small businesses, and is supported by a $12 million brand-building investment. We are using highly targeted TV, radio, digital and press for the campaign, including well-known media outlets such as The Wall Street Journal, in addition to sponsorship of Major League Baseball and tailored adverts to mark Small Business Week and International Women's Day.

In the UK, we have focused our activities on cyber to help drive brand awareness and affinity. We partnered with Brompton Bikes to produce 'The Hack' video campaign, which brought to life what a cyber attack could look like in the real world, and has achieved more than 25 million views to date.

In both Thailand and Singapore, new marketing campaigns and partnerships helped us to achieve several record-breaking months for car and motorbike policy sales in the first half.

Richard Watson

As previously announced, Richard Watson, our Group Chief Underwriting Officer and Hiscox Ltd Board member, will retire at the end of the year after 33 years at Hiscox. He will be sorely missed in these roles but I am pleased we will continue to benefit from his expertise as a Non Executive Director of Hiscox Syndicates Ltd and as Chairman of Hiscox Re & ILS.

When Richard joined Hiscox in 1986, we were fewer than 30 people underwriting around £80 million of business. He has been central to many of Hiscox's successes over the years; first as named Underwriter of Syndicate 33, then as CEO of Hiscox Global Markets (as we called our entire Lloyd's-based business at the time), CEO of Hiscox USA, and finally as Group Chief Underwriting Officer and a Director of Hiscox Ltd. He has had a remarkable career in insurance, starting off as a broker at Sedgwick's, before joining us as a political risks underwriter. He mastered many lines of business at Hiscox and has always been a guardian of the Hiscox culture. Most recently, he has championed our diversity and inclusion efforts and seen us make good progress in this area.

I have enjoyed working with Richard immensely and profited from his sound judgement and forthright opinions. I would like to thank him for his outstanding contribution to Hiscox and look forward to working with him in his new roles.

Leadership changes can be disruptive, which is why we spend a great deal of time planning for succession throughout the business. A new Chief Underwriting Officer for the Group will be announced in due course.

Outlook

At the full year, I talked about the volume of change impacting the business and our expectation that would continue in 2019.

In Retail, embedding our new IT systems and ways of working has taken more time than we had hoped but the alternative would have been to be strangled by legacy systems as so many of the banks have been. As the year progresses, the UK is resolving its issues and the USA is benefiting from the UK's experience. Such infrastructure is essential for an efficient multi-channel approach, where our products are available for customers to purchase however they choose - whether that is through a broker, online, over the telephone or via an intermediary. We will continue to invest in marketing to build our retail businesses.

In big-ticket lines, we are very supportive of Lloyd's and their drive for positive change. The market must become a more efficient and modern place to operate or it will slowly wither on the vine. Such choices are made easier when there is no choice. I am pleased that our senior leaders are taking an active role in initiatives such as PPL which will define the market's future. The positive momentum for rates in big-ticket lines is good news, and although the benefits will be gradual we are ready to make the most of the opportunities as they arise.

I would like to take this opportunity to thank our employees, shareholders and business partners for their support, and look forward to a productive second half.

Robert Childs

Chairman

29 July 2019

Additional performance measures

The Group uses, throughout its financial publications, additional performance measures (APMs) in addition to the figures that are prepared in accordance with International Financial Reporting Standards (IFRS). The Group believes that these measures provide useful information to enhance the understanding of its financial performance. These APMs are profit excluding foreign exchange gains/(losses), premium growth in local currency, combined claims and expense ratios, return on equity, net asset value per share and reserve releases. These are common measures used across the industry, and allow the reader of the half year report to compare across peer companies. The APMs should be viewed as complementary to, rather than a substitute for, the figures prepared in accordance with IFRS.

- Profit excluding foreign exchange gains/(losses)

This represents the profit for the period after deducting foreign exchange gains or adding back foreign exchange losses in the relevant period. This enables the reader of these financial statements, and the Group, to measure the comparability of underlying profitability without the foreign exchange volatility. To obtain the value, the reader of these financial statements should remove the foreign exchange gains/(losses), as identified in the income statement, from the profit for the period.

- Premium growth in local currency

Gross premiums written, as reported in the consolidated income statement, is measured in the underlying currency and compared to prior years on a constant currency rate basis. This eliminates the impact exchange fluctuations have on the result and therefore allows a direct comparison between years. This is performed on a business unit basis and gives an accurate indication of premium growth compared to prior years.

- Combined claims and expense ratios 

The combined claims and expense ratios are common measures enabling comparability across the insurance industry, that measure the relevant underwriting profitability of the business by reference to its costs as a proportion of its net earned premium. The Group calculates the combined ratio as if the Group owned all of the business, including the 27.5% (30 June 2018: 27.4%; 31 December 2018: 27.4%) of Syndicate 33 that the Group does not own (Group-controlled income). The Group does this to enable comparability from period to period as the business mix may change in a segment between insurance carriers, and this enables the Group to measure all of its underwriting businesses on an equal measure. The calculation is discussed further in note 6, operating segments. The combined ratio excluding foreign exchange gains/(losses) is calculated as the sum of the claims ratio and the expense ratio.

- Return on Equity (ROE)

The ROE percentage is common within the financial services industry, and the Group uses ROE as one of its key performance metrics. While the measure enables the company to compare itself against other peer companies in the immediate industry, it is also a key measure internally where it is used to compare the profitability of business segments, and underpins the performance-related pay and share-based payment structures, as discussed within the remuneration policy report in the Annual Report and Accounts. The ROE is shown in note 8, along with an explanation of the calculation.

- Net asset value (NAV) per share 

The Group uses NAV per share as one of its key performance metrics, including using the movement of NAV per share in the calculation of the options vesting of awards granted under performance share plans (PSP) from 2018 onwards. This is a widely used key measure for management and also for users of the financial statements to provide comparability across peers in the market. Net asset value (NAV) per share is shown in note 7, along with an explanation of the calculation.

- Reserve releases

Reserve releases are a measure of favourable development on claims reserves that existed at the prior balance sheet date. It enables the users of the financial statements to compare and contrast the Group's performance relative to peer companies. The Group maintains a prudent approach to reserving, to help mitigate the uncertainty within the reserve estimates. The release is calculated as the movement in ultimate losses on prior accident years between the current and prior-year balance sheet date, as shown in note 13, as the result of better than expected outcomes of the estimates booked at the prior-period close.

Condensed consolidated interim income statement

For the six month period ended 30 June 2019

* See note 2.2 for further details

The notes to the condensed consolidated interim financial statements are an integral part of this document.

Condensed consolidated interim statement of comprehensive income

For the six month period ended 30 June 2019

* See note 2.2 for further details

The notes to the condensed consolidated interim financial statements are an integral part of this document.

Condensed consolidated interim balance sheet

At 30 June 2019

* See note 2.2 for further details

The notes to the condensed consolidated interim financial statements are an integral part of this document.

Condensed consolidated interim statement of changes in equity

For the six month period ended 30 June 2019

Condensed consolidated interim statement of changes in equity

For the six month period ended 30 June 2018

* See note 2.2 for further details

Condensed consolidated interim statement of changes in equity

For the year ended 31 December 2018

* See note 2.2 for further details

The notes to the condensed consolidated interim financial statements are an integral part of this document.

Condensed consolidated interim cash flow statement

For the six month period ended 30 June 2019

* See note 2.2 for further details

** Following a review, prior year comparatives have been re-presented. Scrip dividend amounts at 30 June 2018 of $5.5m have been removed from these line items. This does not result in any change to net cash flows from financing activities.

The notes to the condensed consolidated interim financial statements are an integral part of this document.

Notes to the condensed consolidated interim financial statements

1. General information

Hiscox Ltd (the 'Company') is a public limited company registered and domiciled in Bermuda. The condensed consolidated interim financial statements for the Company as at, and for the six months ended, 30 June 2019 comprise the Company and its subsidiaries (together referred to as the 'Group') and the Group's interest in associates. The Chairman's statement accompanying these condensed consolidated interim financial statements forms the Interim Management Report for the half year ended 30 June 2019.

The Directors of Hiscox Ltd are listed in the Group's 2018 Report and Accounts. A list of current Directors is maintained and available for inspection at the registered office of the Company located at 4th Floor, Wessex House, 45 Reid Street, Hamilton, HM 12, Bermuda.

2. Basis of preparation

These condensed consolidated interim financial statements for the six months to 30 June 2019 have been prepared in accordance with IAS 34 Interim Financial Reporting, as endorsed by the European Union, and the Disclosure Rules and Transparency Rules issued by the Financial Conduct Authority.

The accounting policies applied in the condensed consolidated interim financial statements are the same as those applied in Hiscox Ltd's 2018 consolidated financial statements except for the changes described below.

These condensed consolidated interim financial statements are unaudited but have been reviewed by the auditor, PricewaterhouseCoopers Ltd. They should be read in conjunction with the audited consolidated financial statements of the Group as at, and for the year ended, 31 December 2018.

In preparing these condensed consolidated interim financial statements, management make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates. The significant judgements made by Management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements as at and for the year ended 31 December 2018.

After making enquiries, the Directors have an expectation that the Company and the Group have adequate resources to continue in operational existence over a period of at least 12 months from the date of approval of the condensed consolidated interim financial statements. For this reason, they continue to adopt the going concern basis in preparing the condensed consolidated interim financial statements.

Items included in the financial statements of each of the Group's entities are measured in the currency of the primary economic environment in which that entity operates ('the functional currency'). The condensed consolidated interim financial statements are stated in US Dollars which is the Group's presentation currency. Except where otherwise indicated, all amounts presented in the financial statements are in US Dollars millions ($m) rounded to the nearest hundred thousand Dollars.

These condensed consolidated interim financial statements were approved on behalf of the Board of Directors by the Chief Executive, Bronek Masojada and the Chairman, Robert Childs. Accordingly, the Interim Statement 2019 was approved for issue on Monday, 29 July 2019.

2.1. New and amended accounting standards adopted by the Group

The following accounting standard is effective for annual periods beginning on or after 1 January 2019 and has been applied in preparing these interim condensed consolidated financial statements:

IFRS 16 Leases

IFRS 16 supersedes IAS 17 Leases and sets out the principles for the recognition, measurement, presentation and disclosure of leases. IFRS 16 requires lessees to account for leases under a single on-balance sheet model. Lessor accounting under IFRS 16 is substantially unchanged from IAS 17. Lessors will continue to classify leases as either operating or finance leases using similar principles as in IAS 17. Therefore, IFRS 16 did not have an impact for leases where the Group is the lessor.

The Group has adopted IFRS 16 retrospectively from 1 January 2019, but has not restated comparatives for the 2018 reporting period, as permitted under the specific transitional provisions in the standard. The reclassifications and the adjustments arising from the new leasing rules are therefore recognised in the opening balance sheet on 1 January 2019.

On adoption of IFRS 16, the Group recognised lease liabilities in relation to leases which had previously been classified as 'operating leases' under the principles of IAS 17 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using applicable incremental borrowing rates as of 1 January 2019.

2. Basis of preparation (continued)

2.1. New and amended accounting standards adopted by the Group (continued)

The associated right-of-use assets were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the balance sheet as at 31 December 2018. There were no onerous lease contracts that would have required an adjustment to the right-of-use assets at the date of initial application.

The Group has elected not to reassess whether a contract is, or contains a lease at the date of initial application. Instead, for contracts entered into before the transition date, the Group relied on its assessment made applying the previous accounting guidance.

In addition, the Group has opted to use the recognition exemptions for lease contracts that, at the commencement date,

·; have a lease term of 12 months or less and do not contain a purchase option (short-term leases), and

·; lease contracts for which the underlying asset is of low value (low-value assets).

Payments associated with short-term leases and leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss.

The impact on the consolidated balance sheet as at 1 January 2019 is shown below:

The undiscounted future minimum payments disclosed under the prior standard at 31 December 2018 were $87.0 million. The impact of discounting was $6.3 million, the short term leases, for which an exemption was applied, amounted to $1.9 million. The resulting total lease liability recognised as at 1 January 2019 under IFRS 16 is $78.8 million.

Impact on the condensed consolidated income statement for the six months ended 30 June 2019:

The depreciation expenses from right-of-use assets (operating expenses) and interest expense on the lease liabilities (finance costs) under IFRS 16 in the first six month 2019 were $1.1 million higher than the amount of operating lease expenses under IAS 17.

Impact on the condensed consolidated cash flow statement for the six months ended 30 June 2019:

Compared with the previous accounting for operating leases under IAS 17, the application of the new standard affects the classification of cash flows. In prior years, operating lease payments were presented as operating cash flows. Lease payments are now split into payments of principal that are presented as financing cash flows, and payments of interest that are presented as operating cash flows. Payments related to leases for the period ending 30 June 2019 amounting to $6.8 million, which under IAS 17 would be classified as operating leases, are presented under cash flows from financing activities. Additionally, the interest expense on the lease liabilities calculated under IFRS 16 amounting to $0.9m is presented under cash flows from operating activities.

2.2. Prior period adjustments

In 2019, the Group has made an additional tax provision relating to reappraisal of uncertain tax positions, the most significant one relates to a classification of marketing activity affecting a historical tax position.

This has been presented as a prior period adjustment and has led to a decrease in profit after tax of $10.1 million in 2018 (HY18: $5.1 million) and a decrease in opening retained earnings for 2018 of $51.2 million with a decrease in closing equity at 31 December 2018 of $58.1 million. The impact on the condensed consolidated income statement, balance sheet, equity and cash flow statements are shown in the tables below.

2. Basis of preparation (continued)

2.2. Prior period adjustments (continued)

2. Basis of preparation (continued)

2.2. Prior period adjustments (continued)

The impact on the condensed consolidated interim cash flow statement is limited to a decrease in profit before tax and a corresponding increase in changes in other assets and liabilities within net cash flows from operating activities of $1.8 million for the year ended 31 December 2018 and $0.9 million for six months ended 30 June 2018.

3. Financial, insurance and other risk management

The Group's financial, insurance and other risk management objectives and policies are consistent with that disclosed in note 3 of the full consolidated financial statements as at, and for the year ended, 31 December 2018, except for the currency risk discussed below. The principal risks and uncertainties are unchanged and may be summarised as underwriting risk, reserving risk, reliability of fair values, equity price risk, interest rate risk, liquidity risk, credit risk, currency risk, capital risk and tax risk. The Group recognises that following the decision of the UK to leave the European Union, it may continue to face greater volatility in credit, currency and liquidity risk whilst uncertainty remains.

The Group continues to monitor all aspects of its financial risk appetite and the resultant exposure taken with caution, and has consequently suffered insignificant defaults on investments held, and other third-party balances during the period under review.

As detailed in note 16, the Group's investment allocation is broadly comparable to that at 31 December 2018 as outlined in the Group Report and Accounts. The Group also continues to be mindful of the processes required for establishing the reliability of fair values obtained for some classes of financial assets affected by ongoing periods of diminished liquidity. In order to assist users, the Group has disclosed the measurement attributes of its investment portfolio in a fair value hierarchy in note 17 in accordance with IFRS 13 Fair Value Measurement.

The Group remains susceptible to fluctuations in rates of foreign exchange, in particular between US Dollars and Sterling. The estimated impact of a 10% strengthening or weakening of Sterling against the US Dollar on profit before tax:

This analysis assumes that all other variables, in particular interest rates, remain constant and that the underlying valuation of assets and liabilities in their base currency is unchanged.

Strong treasury management has ensured that the Group's balance sheet remains well capitalised and its operations are financed to accommodate foreseen liquidity demands together with a high level of capital sufficient to meet future catastrophe obligations even if difficult investment market conditions were to prevail for a period of time.

4. Seasonality and weather

Historically, the Group's most material exposure to catastrophe losses on certain lines of business such as reinsurance inwards and marine and major property risk have been greater during the second half of the calendar year, broadly in line with the most active period of the North Atlantic hurricane season. In contrast, a majority of gross premium income written in these lines of business occurs during the first half of the calendar year. The Group actively participates in many regions and if any catastrophic events do occur, it is likely that the Group will share some of the market's losses. Consequently, the potential for significantly greater volatility in expected returns remains during the second half of the year. Details of the Group's recent exposures to these classes of business are disclosed in the Group's 2018 Report and Accounts.

5. Related-party transactions

Transactions with related parties during the period are consistent in nature and scope with those disclosed in note 33 of the Group's 2018 Report and Accounts.

6. Operating segments

The Group's operating segment reporting follows the organisational structure and management's internal reporting systems, which form the basis for assessing the financial reporting performance of, and allocation of resource to each business segment.

In the first half of 2019, the Group has reviewed the segmental presentation of financial information it requires to assess performance and allocate resources. To further align to how the Group manages its investments through a centralised investment function, and the basis for internal performance incentivisation, the Group has changed the method of allocation of the investment result to the reportable operating segments. Previously this was presented based on investment returns recognised by legal entities that made up the segments, and this is now allocated to each segment based on:

·; attributed capital at the beginning of the year under the Group's capital allocation methodology; and

·; weighted average insurance liabilities net of reinsurance.

There is no impact on the consolidated investment result and following this change, the comparative figures in the segmental reporting have been re-presented.

The Group's four primary business segments are identified as follows:

Hiscox Retail brings together the results of the UK and Europe, and Hiscox International being the USA, Special Risks and Asia retail business divisions.

Hiscox UK and Europe underwrite personal and commercial lines of business through Hiscox Insurance Company Limited and Hiscox Société Anonyme, together with the fine art and non-US household insurance business written through Syndicate 33. In addition, Hiscox UK includes elements of specialty and international employees and officers' insurance written by Syndicate 3624. Hiscox Europe excludes the kidnap and ransom business written by Hiscox Société Anonyme.

Hiscox International comprises the specialty and fine art lines written through Hiscox Insurance Company (Guernsey) Limited, and the motor business written via DirectAsia, together with US commercial, property and specialty business written by Syndicate 3624 and Hiscox Insurance Company Inc. via the Hiscox USA business division. It also includes the European kidnap and ransom business written by Hiscox Société Anonyme and Syndicate 33.

Hiscox London Market comprises the internationally traded insurance business written by the Group's London-based underwriters via Syndicate 33, including lines in property, marine and energy, casualty and other specialty insurance lines, excluding the kidnap and ransom business. In addition, the segment includes elements of business written by Syndicate 3624 being auto physical damage and aviation business.

Hiscox Re & ILS is the reinsurance division of the Hiscox Group, combining the underwriting platforms in Bermuda and London. The segment comprises the performance of Hiscox Insurance Company (Bermuda) Limited, excluding the internal quota share arrangements, with the reinsurance contracts written by Syndicate 33. In addition, the healthcare and casualty reinsurance contracts written in the Bermuda hub on Syndicate capacity are also included. The segment also includes the performance and fee income from the ILS funds, along with the gains and losses made as a result of the Group's investment in the funds.

Corporate Centre comprises finance costs and administrative costs associated with Group management activities. Corporate Centre also includes the majority of foreign currency items on economic hedges and intragroup borrowings. These relate to certain foreign currency items on economic hedges and intragroup borrowings. The segment includes results from run-off portfolios where the Group has ceded all insurance risks to a third-party reinsurer.

All amounts reported below represent transactions with external parties only. In the normal course of trade, the Group's entities enter into various reinsurance arrangements with one another. The related results of these transactions are eliminated on consolidation and are not included within the results of the segments. This is consistent with the information used by the chief operating decision-maker when evaluating the results of the Group. Performance is measured based on each reportable segment's profit before tax.

6. Operating segments (continued)

6. Operating segments (continued)

6. Operating segments (continued)

* See note 2.2 for further details

** Re-presented to reflect change in method of allocation of the investment result to reportable operating segments.

The impact as at 30 June 2018 amounted to increases of $6.2 million in Hiscox Retail, $0.8 million in Hiscox London Market and $0.8 million in Hiscox Re & ILS and a decrease in Corporate Centre of $7.8 million. The impact as at 31 December 2018 amounted to an increase of $10.4 million in Hiscox Retail, and decreases of $2.5 million in Hiscox London Market, $5.5 million in Hiscox Re & ILS and $2.4 million in Corporate Centre. See page 14 for further details.

*** The Group's percentage participation in Syndicate 33 can fluctuate from year to year and consequently, presentation of the ratios at the 100% level removes any distortions arising therefrom.

^ The combined ratio is made up of the aggregation of the claims ratio, the expense ratio and the impact of foreign exchange. The claims ratio is calculated as claims and claim adjustment expenses, net of reinsurance, as a proportion of net premiums earned. The expense ratio is calculated as the total of expenses for the acquisition of insurance contracts, and operational expenses as a proportion of net premiums earned. The foreign exchange impact ratio is calculated as the foreign exchange gains or losses as a proportion of net premiums earned. All ratios are calculated using the 100% results and excludes a run-off portfolio where the Group has ceded all insurance risks to a third party (re)insurer included within Corporate Centre.

6. Operating segments (continued)

7. Net asset value (NAV) per share

*See note 2.2 for further details

The NAV per share is based on 284,193,001 shares (30 June 2018: 283,638,511; 31 December 2018: 282,886,319), being the shares in issue at 30 June, less those held in treasury and those held by the Group Employee Benefit Trust. Net tangible assets comprise total equity excluding intangible assets. The NAV per share expressed in pence is 641.9 pence (30 June 2018: 633.6 pence; 31 December 2018: 626.9 pence).

8. Return on equity (ROE)

*See note 2.2 for further details

The ROE is calculated by using profit for the period divided by the adjusted opening total equity. The adjusted opening total equity represents the equity on 1 January of the relevant year as adjusted for time-weighted aspects of capital distributions and issuing of shares or treasury share purchases during the period. The time-weighted positions are calculated on a daily basis with reference to the proportion of time from the transaction to the end of the period. The Company annualises the ROE by using a standard compound formula for the half-year periods, being the profit for the period divided by the adjusted opening total equity, to the power of two to annualise for a full-year comparison.

9. Investment result

i. Analysis of investment result

The total investment result for the Group before taxation comprises:

9. Investment result (continued)

ii. Investment return

10. Other income and operational expenses