There is still too much capacity in the insurance world, some of it new from hedge funds and the like. The reinsurance market is more stable than the insurance market as there are fewer well rated reinsurers and more disciplined adherence to catastrophe models. In the insurance market, we daily walk away from risks where uneducated
2011 also saw the launch of our US direct commercial offering aimed at start ups and small businesses. We have been building the brand in the US through traditional and digital marketing. We have been using social media in the form of a branded entertainment web TV series called Leap Year, aimed at budding entrepreneurs which has been watched by over four million viewers. The series won a coveted Digital Luminary award for branded entertainment in the company of brands like Yahoo and NASA. We have also entered into marketing partnerships with GEICO and other major insurers, a real testament to the quality of the products we have on offer. We sold over 6,000 policies direct to consumers by the end of the year. The trend remains positive and we will continue to invest further in this fledgling business in 2012.
Actively managed business mix Total Group controlled premium December 2011: £1,664m (Year-on-year change in original currency)
How would you describe Hiscox’s reinsurance business? Most of our business is property reinsurance but we also underwrite a small amount of marine, personal accident and casualty reinsurance. We focus on ‘short-tail’ risks, where claims occurrence and development are more immediate and are therefore more easily quantifiable, giving us greater certainty.
Can you explain what the Hiscox view of risk is? Essentially it’s our view of the underlying exposures we have on our book. It reflects the underwriting risk appetite defined by the Group’s executive management. The view is formulated by our Catastrophe Management Team, which I chair, and which comprises the head of modeling, our climate science research manager and a number of our senior underwriters. We calculate our accumulated exposure to potential major disasters, such as a US hurricane or a Japanese earthquake, by running our numbers through our customised catastrophe models. That process produces a very specific loss number that we expect our underwriters’ books to not exceed in a major catastrophe.
This has been a challenging year in the investment markets, with the Group’s investments producing a return of 0.9% (2010: 3.6%).
Hiscox has a well diversified portfolio by product and geography to help balance any catastrophe exposure. We have a clearly defined appetite for underwriting risk, which dictates our business plan. To ensure that our risk appetite is not exceeded we maintain disciplined underwriting, regularly monitor our exposures to, and aggregations of risk in particular places closely and buy reinsurance to limit our losses from disasters. We adapt our business plan, target products and reinsurance programme to ensure our book of business is well diversified. This enables us to maximise the expected risk return profile on the whole portfolio and offset potential losses on more volatile accounts. The quality of our underwriting models and our capability to accurately measure our aggregate exposure are key to managing this risk. Our underwriters are given incentives to make sound decisions that are aligned with the Group’s overall strategic objectives and risk appetite. Clear limits are also placed on their authority. We regularly review our policy wordings in the light of legal developments to ensure the Group’s exposure is restricted, as far as possible, to those risks identified in the policy at the time it was issued. Both our underwriting staff and independent risk specialists use
Identifying, planning for and controlling emerging risks is an important part of our risk management activity across all aspects of our business, including underwriting, operations and strategy. We make a significant effort to try to identify material emerging threats to the Group. It is a core responsibility of each of our risk committees and we believe we take all reasonable steps to minimise the likelihood and impact of emerging risks and to prepare for them in case they occur.
At Hiscox several core values guide our business. These are: to challenge convention, to act with integrity at all times, to have respect for all our business partners, to have courage, to do everything to the highest quality and to excel in the service we provide. These values underpin a reputation we have earned for integrity and decent behaviour in everything we do, which we firmly believe is good for the morale of staff and for the results of the business.
Cougar Syndicate 6104 Cougar Syndicate 6104 was set up under a limited tenancy agreement for the 2008 year of account with an initial capacity of £34 million. It is wholly backed by external Names and takes a pure year of account quota share of Syndicate 33’s international property catastrophe reinsurance account. The arrangement has been extended through to the 2012 year of account and Cougar Syndicate 6104’s capacity was increased to £39 million, from £37 million.
Richard Gillingwater joined Hiscox in December 2010. He is Dean of Cass Business School. He spent a decade at Kleinwort Benson, before moving to and eventually becoming joint Head of Corporate Finance for BZW, a division of Barclays Bank. When that became Credit Suisse First Boston, he became Chairman of European Investment Banking. In 2003 he became Chief Executive and later Chairman of the Shareholder Executive. Richard is a Non Executive Director of SSE plc and Non Executive Chairman of CDC Group plc.
Registered office Wessex House 45 Reid Street Hamilton HM 12 Bermuda
Shareholding guidelines We strongly believe that senior managers within Hiscox should be aligned with Hiscox shareholders by owning a reasonable number of Hiscox shares.
‘Base’ refers to base salary for the year. ‘Share incentive scheme’ is the estimated value at award of the Performance Share Plan awards made during the year.
(e) Computer software Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring into use the specific software. These costs are amortised over the expected useful life of the software of between three and five years on a straightline basis.
Legislation concerning the determination of taxation assets and liabilities is complex and continually evolving. In preparing the Group’s financial statements, the Directors 2.18 Finance costs Finance costs consist of interest charges accruing on the Group’s borrowings and bank overdrafts together with commission fees charged in respect of Letters of Credit. Arrangement fees in respect of financing arrangements are charged over the life of the related facilities.
The Group also manages underwriting risk by purchasing reinsurance. Reinsurance protection such as excess of loss cover is purchased at an entity level and is also considered at an overall Group level to mitigate the effect of catastrophes and unexpected concentrations of risk. However, the scope and type of reinsurance protection purchased may change depending on the extent and competitiveness of cover available in the market.
The majority of the Group’s insurance risks are short tail and, based on historical claims experience, significant claims are normally notified and settled within 12 to 24 months of the insured event occurring. Those claims taking the longest time to develop and settle typically relate to casualty risks where legal complexities occasionally develop regarding the insured’s alleged omissions or negligence. The length of time required to obtain definitive legal judgements and make eventual settlements exposes the Group to a degree of reserving risk in an inflationary environment.
The allocation of equity risk is not heavily confined to any one market index so as to reduce the Group’s exposure to individual sensitivities. A 10% downward correction in equity prices at 31 December 2011 would have been expected to reduce Group equity and profit after tax for the year by approximately £15.0 million (2010: £13.1 million) assuming that the only area impacted was equity financial assets. A 10% upward movement is estimated to have an equal but opposite effect.
The Board ensures that the use and allocation of capital are given a primary focus in all significant operational actions. With that in mind, the Group has developed and embedded sophisticated capital modeling tools within its business. These join together short-term and longterm business plans and link divisional aspirations with the Group’s overall strategy. The models provide the basis of the allocation of capital to different businesses and business lines, as well as the regulatory and rating agency capital processes.
Debt and fixed income securities 39,464 4.2 9,586 2.6 22,078 3.6 11,106 4.7 82,234 3.7 Equities and shares in unit trusts – – 6,079 11.6 4,468 9.0 5,025 13.4 15,572 11.1 Deposits with credit institutions/
Foreign exchange forward contracts During the current and prior year the Group entered into a series of conventional over the counter forward contracts in order to secure translation gains made on Euro, US Dollar and other non Pound Sterling denominated monetary assets. The contracts require the Group to forward sell a fixed amount of the relevant currency for Pound Sterling at pre-agreed future exchange rates. The Group made a loss on these forward contracts of £84,000 (2010: gain of £1,522,000) as included in note 7. The opposite exchange gain is included within financial investments.
Employee share option scheme – proceeds from shares issued 139 3,969 – Dividends to owners of the Company – – (58,460)
Estimates of ultimate claims are adjusted each reporting period to reflect emerging claims experience. Changes in expected claims may result in a reduction or an increase in the ultimate claim costs and a release or an increase in reserves in the period in which the change occurs.
Estimate of ultimate claims costs as adjusted for foreign exchange* at end of accident year eight years later 383,247 429,429 – – – – – – – – 812,676 nine years later 384,727 – – – – – – – – – 384,727 Current estimate of cumulative claims
Liability for 2002 to 2011 accident years recognised on Group’s balance sheet
The Group sought legal confirmation, and we have confirmed that CPI revaluation in deferment is used for contracted out members from 1 January 2011. Contracted in members retain their link to RPI as well as for all pension in payment increases.
The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit actuarial cost method. A formal full actuarial valuation is performed on a triennial basis, most recently at 31 December 2008, and updated at each intervening balance sheet date by the actuaries. The triennial actuarial valuation at 31 December 2011 is currently being completed. The present value of the defined benefit obligation is determined by discounting the estimated future cash flows using interest rates of AA rated corporate bonds that have terms to maturity that approximate to the terms of the related pension liability.
Discount rate 4.90 5.40 Expected return on scheme assets 5.80 6.40 Inflation assumption (RPI) 3.10 3.60 Inflation assumption (CPI) 2.30 – Pension increases 3.10 3.60
The total future aggregate minimum lease rentals receivable by the Group as lessor under non-cancellable operating property leases are as follows: No later than one year 373 275 Later than one year and no later than five years 246 344 Later than five years – –
(a) Syndicate 33 at Lloyd’s Hiscox Syndicates Limited, a wholly owned subsidiary of the Company, received management fees and profit commissions for providing a range of management services to Syndicate 33.
Value of services provided by Hiscox Syndicates Limited to Syndicate 33 32,276 44,538