About the Hiscox Group 1 Corporate highlights 2 Why invest in Hiscox?
Governance and remuneration 21 Risk management 26 Corporate responsibility 28 Insurance carriers 32 Board of Directors 34 Corporate governance 37 Directors’ remuneration report 46 Directors’ report 47 Directors’ responsibilities statement
Financial summary 48 Independent auditors’ report 49 Consolidated income statement 49 Consolidated statement of comprehensive income 50 Consolidated balance sheet 51 Consolidated statement of changes in equity 52 Consolidated statement of cash flows 53 Notes to the consolidated financial statements 100 Five year summary
We have written off the cost of building businesses against the profits of the day, and those businesses are now in many cases yielding a handsome return. Our UK and European regional offices are now an indispensable and profitable part of our distribution, and I believe our US offices will be so too when they reach critical mass. Our direct business in the UK now makes good money and has enormous growth potential. Our new direct offering in the US –
We had built a rating for this and were trading successfully when the competition decided to under-cut our rates by about 50%. At the same time, the pirates doubled their demands.
We are positive about the future. We have entered a new underwriting partnership with Dual, an established MGA, where we have taken a 25% share of their existing book of business. We also expect to see our direct business continue to develop.
Our experience is that good underwriting decisions like these, although painful to execute in the short-term, serve the business well over the long-term. We will return to serve customers with our previous risk appetite when our competitors, who have made this segment uneconomic, retreat nursing their losses, as they inevitably will. As regards our non-catastropheexposed activities, during the year we entered the mechanical equipment insurance market through a relationship with a respected underwriting team.
We expect that in time we will see a repeat of the success we enjoy in the UK.
December freeze in the UK and, finally, the beginning of the Australian floods. Throughout this succession of calamities our claims teams have paid claims with the utmost efficiency and effectiveness. We strongly believe that a claim paid fairly and fast creates a competitive advantage, and judging by customer feedback we largely achieve this goal.
Horizon is minimal thanks to a single sound underwriting decision. Our US catastropheexposed property portfolio has shrunk thanks to a team exercising discipline. Our UK art and private client business has performed well despite some terrible weather and thanks to brave underwriting decisions going against the market trend. Our European art and private client business has improved the quality of its business thanks to co-ordinated actions over an extended period. Our claims teams make difficult decisions every day – whether resolving a coverage dispute between terrorism and property insurers without the client being adversely affected or dealing with many personal difficulties arising from the UK freeze. It is our ambition to ensure that Hiscox remains a place where the individual makes the difference no matter how much we grow – and with the quality and dedication of the staff who work for us across the globe I feel confident that this ethos will continue to be central to our business.
In September, Hiscox conducted its third global employee engagement survey. The survey, which was open to all permanent members of staff, looked at how committed employees feel to Hiscox, their managers, their teams and their role.
Net asset value per share grew by 11.2% to 332.7p (2009: 299.2p) supported in part by the continued strength of the US Dollar. The Group maintains a progressive dividend policy and total dividend per share rose by 10% to 16.5p (2009: 15.0p).
Business Continuity Committee which is chaired by the Chief Operations Officer. Each committee has a specific remit, such as underwriting risk, reinsurance purchase, investment risk, claims reserving or business continuity. Senior management responsibilities are clearly defined together with reporting lines and the execution of delegated responsibilities is closely monitored by the Board and its committees. This monitoring, supported by financial and non-financial management information, assesses performance against agreed targets and objectives, as well as the risks to achieving these objectives and the effectiveness of the measures in place to manage these risks. In parallel with these direct risk management processes, there is a dedicated risk management function which, in conjunction with Internal Audit and the Group risk committees, monitors and reviews the effectiveness of risk management activities throughout the organisation and reports to the
The major risks that the Group faces are presented below categorised as either ‘principal’
The US Dollar is the Group’s largest underwriting currency. The Group’s policy is to match US
Where appropriate a percentage of the capital will be held in the currency matching that of the underlying business written. Net currency positions are closely monitored and currency hedging transactions are entered into where this is considered advantageous in the light of anticipated movements in exchange rates.
and limits and extensive vetting, monitoring, and auditing of compliance thereof.
The Group’s experience of bad debts arising from its reinsurance arrangements has been minimal.
Hiscox regularly updates its partner brokers of new developments at Hiscox and in the insurance industry.
The Group recognises that through this conduct it is more likely to achieve business success and therefore create additional value for its shareholders. Hiscox strives for the highest standards of corporate governance while striving to remain, in essence, a non-bureaucratic organisation. An effective and firm system of internal controls ensures that risks are managed within acceptable limits, but not at the expense of innovation or speed of response.
Habitat for Humanity ‘builds’, volunteering their time and labour for homes in various stages of completion. The Habitat for Humanity initiative gave Hiscox USA employees a chance to have a direct positive impact on their respective communities. Hiscox is a member of the Lloyd’s
Governance Code, all Directors are required to submit themselves for re-appointment at the Annual General Meeting of the Company.
Conflicts of interest may arise from time to time because Syndicate 33, Syndicate 3624 and
Bonus pools are then calculated for each major business division and line of business based on the performance of that division against the
Plan is a value of 200% of basic salary. The highest actual grant awarded in 2010 was 195%
We strongly believe that senior managers within Hiscox should be aligned with Hiscox shareholders by owning a reasonable number of Hiscox shares.
Increase/ (decrease) in transfer value of accrued benefi t during the year
In our opinion: the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as at 31 December 2010, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial
Employee share options: Equity settled share based payments – – – – 9,000 9,000
Effect of exchange rate fluctuations on cash presented separately (508) 30,844
Group financial statements are set out below. The most critical individual components of these financial statements that involve the highest degree of judgement or significant assumptions and estimations are identified at note 2.22.
Disclosure and Presentations, Classification of Rights Issues. The amendment changes the definition of a financial liability in order to classify rights issues as equity instruments in cases where such rights are given pro rata to all of the existing owners of the same class of an entity’s non derivative equity instruments. The amendment is effective for annual periods beginning on or after 1 February 2010. Adoption of this standard will have no impact on the financial position of the Group.
Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the income statement.
Group has also transferred substantially all risks and rewards of ownership.
Profit commission is calculated and accrued based on the results of the managed syndicate.
The Group issues short-term casualty and property insurance contracts that transfer significant insurance risk. Such contracts may also transfer a limited level of financial risk.
The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. For derivatives not formally designated as a hedging instrument, fair value changes are recognised immediately in the income statement. Changes in the value of derivatives and other financial instruments formally designated as hedges of net investments in foreign operations are recognised in the currency translation reserve to the extent they are effective; 2 Significant accounting policies continued 2.9 Impairment of assets continued
benefits (e.g. holiday entitlement), based on the additional amount that the Group expects to pay as a result of the unused entitlement accumulated at the balance sheet date.
Arrangement fees in respect of financing arrangements are charged over the life of the related facilities.
The Directors consider that the claims ratio, expense ratio and combined ratio measures reported in respect of operating segments and the Group overall at note 4 provide useful information regarding the underlying performance of the Group’s businesses.
Overleaf is a summary of the gross and net insurance liabilities for each category split by country of risk.
However, the Group’s exposure is more focused towards marine and professional and technological liability risks rather than human bodily injury risks, which are only
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 2010 would have been expected to reduce
An analysis of the Group’s major exposures to counterparty credit risk excluding loans and receivables, based on Standard & Poor’s or equivalent rating, is presented below: As at 31 December 2010 Note AAA
At 31 December 2010 the Group held no material debt and fixed income assets that were past due or impaired beyond their reported fair values, either for the current period under review or on a cumulative basis (2009: £nil). For the current period and prior period, the Group did not experience any material defaults on debt securities.
As investment markets move past various trigger levels, management actions could include selling investments, changing investment portfolio allocation and taking other protective action.
The Group’s capital requirements are managed both centrally and at a regulated entity level. The assessed capital requirement for the business placed through
Syndicate are converted to annually accounted figures using earnings patterns that are consistent with those for the underlying Syndicate business.
Adjustments are made within the claims reserving methodologies to remove distortions in the historical claims development patterns from large or isolated claims not expected to re-occur in the future.
Total net liability to external parties at 100% level 26 Insurance liabilities and reinsurance assets continued 26.1 Insurance contracts assumptions continued
Group’s balance sheet 28,126 **This represents the claims element of the Group’s insurance liabilities and reinsurance assets.
(Under)/over provision in respect of prior year claims and loss adjustment expenses 131,054 1,800 132,854 216,894 (77,518) 139,376
Subject to shareholder approval at the forthcoming Annual General Meeting on 8 June 2011, a scrip dividend alternative to a cash dividend is to be offered to the owners of the Company. These financial statements do not reflect this dividend as a distribution or liability in accordance with IAS 10 Events after the reporting period.