Those offices will also be used to increase the distribution of our regional businesses which are growing strongly in the USA, having also attracted new talented people. The regional businesses in the UK and mainland Europe have built on their strong foundations, had a good year and should continue to be a growing asset with the potential of steady profits.
Chief Executive’s report In 2008 our strategy of building balance paid off for the business and for shareholders. A rigorous approach to underwriting saw us shrink our international big ticket and reinsurance product lines. At the same time we continued to invest in our domestic market businesses in the UK, Europe and USA. These actions allowed us to generate sufficient underwriting profit which together with our foreign exchange gains, have produced a good result, despite the ravages of the toughest investment environment in living memory.
The high net worth team have done well to increase rates and consequently profitability during the year. The progress in top and bottom line by Hiscox UK was achieved despite the decision to put the broker channel mid net worth household product into run-off. Our personal lines strategy is to serve the richest 10% of the population in their personal insurance needs, with the bulk of the richest 5% being served through the broker market and the rest dealing with Hiscox direct if they wish. We believe this strategy makes good sense for customers, our broker partners and us.
Hiscox International Hiscox International comprises our businesses in Bermuda, Guernsey and the domestic USA team. Each business faced quite different challenges in the year and I review them in turn below: Hiscox Bermuda faced difficult market conditions affecting the reinsurance market. Their response, rightly, was to shrink their top line significantly. Third-party reinsurance reduced to $211.7 million (2007: $297.3 million). The team also had to deal with the impact of Hurricanes Ike and Gustav. Despite this the business had a positive underwriting result. During the year we began a specialty reinsurance business centred in Bermuda. The financial crises and improving market meant our capital could be better employed elsewhere and regrettably the business was closed during December.
Investments 2008 was the year of investment challenges. We achieved a return across the portfolio of -1.3%. There is no need to comment on the global crisis as many more informed commentators are busy doing so at length elsewhere. Suffice to say, I am delighted that even though we have a small negative return, we still enter 2009 with 98.7% of our funds intact and, thanks to good relative investment performance and a great underwriting performance, our balance sheet is unimpaired. Many of our competitors can only dream of being in this position. This provides a stable foundation on which we can build the underwriting business in 2009.
USA Armonk (New York) Boston Chicago Geneva (Illinois) Kansas City (Missouri) Lexington (Kentucky) Los Angeles* New York City Miami San Francisco
Profit before tax was therefore reduced to £2.7 million (2007: £4.6 million).
Group invested assets £2,522.4m £2,050.6m 19Group financial performance Hiscox Ltd Report and Accounts 2008 £2.5bn Invested assets
Emerging risks Being able to identify and plan for unexpected events has become an increasingly important component of our business cycle management. Emerging risk identification and control is therefore a core part of risk management activities in relation to all aspects of our business, including underwriting, operational and strategic. Significant efforts are made, including obtaining external expertise, to try to identify any threats to the business either actual of potential. For example, a change in US legislation may result in unintended risks being underwritten, or may require us to cease business in certain US States. We take all reasonable steps to minimise the likelihood and impact of such events and to be prepared for their occurrence.
Stuart John Bridges Group Finance Director (Aged 48) Stuart Bridges joined Hiscox in 1999. He is a chartered accountant and has held posts in various financial service companies in the UK and US, including Henderson Global Investors. He is Chairman of the Business Advisory Board of the Institute of Chartered Accountants in England and Wales, a member of the Financial Regulation and Taxation Committee of the Association of British Insurers and Vice-chairman of the Lloyd’s Market Association Finance Committee.
Sir Mervyn Pedelty Senior Independent Director and Chairman of the Remuneration and Nomination Committee (Aged 60) Sir Mervyn Pedelty joined Hiscox in 2005. He was previously the Chief Executive and an Executive Director of The Co-operative Bank plc (from 1997 until his retirement in 2004) and also of Co-operative Financial Services Limited and the Co-operative Insurance Society Limited (from 2002 to 2004). He was a Director of the Association of British Insurers (from 2002 to 2004) and is a former Council Member of the British Bankers’ Association. Sir Mervyn is a Chartered Accountant and a Chartered Banker. His other current appointments include: Independent Director of Friends Provident plc, Chairman of the FTSE4 Good Policy Committee, a Director of Performances Birmingham Limited and a Senior Adviser to Permira Advisers LLP.
The Remuneration and Nomination Committee The Remuneration and Nomination Committee comprises Andrea Rosen as acting chair in Sir Mervyn Pedelty’s absence together with Daniel Healy, Ernst Jansen, Dr James King, Gunnar Stokholm and Dirk Stuurop. It meets a minimum of two times a year to deal with appointments to the Board and to recommend a framework of executive remuneration.
The sections in this report entitled ‘Annual cash incentives’, ‘Share incentive schemes’, ‘Remuneration of Executive Directors’ and ‘Pensions’ have been audited by KPMG. The remainder of the report is unaudited.
Individual salaries are set by taking into account all of the above as well as individual performance and skills.
Save as You Earn The sharesave scheme and international sharesave scheme are offered to all employees and currently have a 60% participation.
By order of the Board Robin Mehta, Secretary Wessex House, 45 Reid Street, Hamilton HM12, Bermuda 44 Directors’ report/Directors’ responsibilities statement Hiscox Ltd Report and Accounts 2008
In addition to our audit of the consolidated financial statements, the Directors have engaged us to audit the information in the Directors’ remuneration report that is described as having been audited, which the Directors have decided to prepare (in addition to that required to be prepared) as if the Company were required to comply with the requirements of Schedule 7A to the UK Companies Act 1985.
Share of profit of associates after tax 17 260 – 260 81
The Group assesses its reinsurance assets on a regular basis and if there is objective evidence, after initial recognition, of an impairment in value, the Group reduces the carrying amount of the reinsurance asset to its recoverable amount and recognises the impairment loss in the income statement.
Loans and receivables including insurance receivables 127,702 290,523 64,748 11,342 494,315 Current tax 26,289 – – – 26,289
Loans and receivables including insurance receivables 158,151 168,889 48,280 9,902 385,222
The FGD has been applied in the UK through INSPRU and GENPRU. In accordance with these provisions, the parent company’s solvency margin consideration became a minimum capital requirement for the Group from 31 December 2006 onwards. The estimated regulatory capital position of the Group under FGD at 31 December 2008 was
The following charges are included within the consolidated income statement: Year to 31 December 2008 Year to 31 December 2007
At Group level 1% change in claims or expense ratio 4,778 3,024 1,728 – 5,522 2,483 1,646 –
Fees in respect of the defined benefit pension scheme: Total auditors’ remuneration expense 943 701 *Other fees relate primarily to corporate advisory and financial reporting consulting services. Non-audit services with fees greater than £50,000 must be pre-approved by the Audit Committee which is composed solely of independent Non Executive Directors.
Employee share option scheme – proceeds from shares issued 204 4,955 – Dividends to owners of the Company – – (43,591)
The amounts expected to be recovered and settled before and after one year, based on historical experience, are estimated as follows: Within one year 995,454 844,570 After one year 794,242 589,229
Notes to the financial statements continued 26 Insurance liabilities and reinsurance assets continued 26.1 Insurance contracts assumptions (a) Process used to decide on assumptions The risks associated with insurance contracts and in particular with casualty insurance contracts are complex and subject to a number of variables that complicate quantitative sensitivity analysis. Delays in the notification of claims necessitate the holding of significant reserves for liabilities that may only emerge a number of accounting periods later.
The following guarantees have also been issued: (a) Hiscox Ltd and Hiscox Insurance Company (Bermuda) Limited have entered into a deed of covenant in respect of a subsidiary, Hiscox Dedicated Corporate Member Limited, to meet the subsidiaries’ obligations to Lloyd’s. The total guarantee given by these companies under this deed of covenant (subject to limited exceptions) amounts to £138,831,798 (2007: £118,831,798). The obligations in respect of this deed of covenant are secured by a fixed and floating charge over certain of the investments and other assets of the Company in favour of Lloyd’s. Lloyd’s has a right to retain the income on the charged investments in circumstances where it considers there to be a risk that the covenant might need to be called and may be met in full.
The finance lease obligations to which the Group is committed include the following minimum lease payments: Current liabilities due for settlement within one year 246 246 Non-current liabilities due for settlement after one year and no later than five years 223 261