• Final dividend increased 36 per cent, making a total dividend of 7.0p per share for the year (2004: 5.0p per share)
Bronislaw Edmund Masojada Chief Executive (Aged 44) Bronek Masojada joined the Group in 1993. From 1989 to 1993 he was employed by McKinsey and Co. He was a member of the team that advised Lloyd’s during the Rowland Taskforce in 1991, and in the preparation of the first Lloyd’s Business Plan in 1993. Bronek served as Chairman of the Lloyd’s Underwriting Agents Association from 1998 to 2001, and is currently a Deputy Chairman of Lloyd’s and immediate past President of The Insurance Institute of London. He is Non Executive Director of Ins-sure Holdings Limited.
Current business Our Global Markets business did well to achieve a combined ratio of 99.9 per cent and a small profit considering the battering it took from the hurricanes. This was helped by the book of specialist regional business written by them which balanced, to an extent, the volatility of the reinsurance account and the big ticket London Market business. Income was steady as they were cutting back their income and exposure during 2005 in the areas where rates were falling, in line with our policy of reducing income when rates reduce and going for it when prices rise. As I said above, this all changed by the year end due to the hurricanes and they were able to take advantage of better rates during the renewal season.
The amounts for all periods prior to 2004 are those previously published on a UK GAAP basis, the Group’s primary reporting framework at that time. The figures reported for 2004 and 2005 are prepared in accordance with IFRSs as adopted by the EU. The main differences arising on the Group’s transition to IFRSs are outlined at note 3 to the financial statements.
Carrier Hiscox Europe primarily uses the Hiscox Insurance Company Limited as its risk carrier. Hiscox Insurance Company Limited has a comprehensive set of licences allowing it to trade throughout the European Union.
This expansion outside the London Market has been concentrated on core specialty product lines where Hiscox has leading expertise. The underlying philosophy has been to start and grow organically as far as possible, complemented by small strategic acquisitions.
Syndicate 33 trades through the Lloyd’s worldwide licences and rating. It also benefits from the Lloyd’s brand. Lloyd’s has an A (excellent) rating from A.M. Best and A (strong) from Standard & Poor’s. The geographical and currency split is shown below.
• The combined ratio increased to 99.9 per cent (2004: 90.9 per cent).
Cash flows for 2005 Net cash inflow from operating activities during the year was £18.9 million (2004: £38.5 million), reflecting a strong contribution from the growing and increasingly profitable insurance company and investment income generated from Group cash and investments. Cash flow from Syndicate 33 was good, with few payments being made for the 2005 hurricane losses in the year although there were some outgoings on the 2004 hurricane losses. The Rights Issue resulted in a net inflow of £170 million and US$208 million was drawn from the US$225 million loan facility to capitalise the new insurance company in Bermuda.
Sub-total 965,254 795,206 Perpetual notes and other non-dated instruments 63,541 38,757
• qualifying quota shares – these are reinsurance arrangements that allow the Group to increase the amount of premium it writes in strong markets.
The models are concentrated specifically on the particular product lines, market conditions and risk appetite of each entity. If the FSA considers an ICA to be inadequate, it can require the entity to maintain an increased capital safeguard. The Directors are also required to certify that the Group has complied, in all material aspects, with the provisions of the Interim Prudential Sourcebook and the Integrated Prudential Sourcebook (PRU) for insurers.
Hiscox plc Report and Accounts 2005 31 31 December 31 December £m £m
The appetite for all aspects of risk is set by the main Board and cascaded down into the Group’s operations through a well designed structure of management committees. These committees are assigned specific areas of focus, such as underwriting, loss modelling, reinsurance purchase and security, investments and claims reserving.
Catastrophe and systemic insurance losses In common with other insurers, the Group’s earnings can be affected by unpredictable events and circumstances. These may include, but are not limited to, conditions such as natural and other catastrophes, legal developments, social change and the emergence of latent risks. Such events could create significant levels of losses if the Group’s underwriting models, aggregation tools and policy wordings do not prevent unplanned concentrations of risk, both in geographical regions and types of policy.
In addition, neither Hiscox Insurance Company Limited nor Hiscox Insurance Company (Guernsey) Limited has incurred bad debt expenses of any significance for the period covered in the table below.
Hiscox is also a member of the Lloyd’s Community programme, which supports local initiatives concerning education, training, enterprise and regeneration.
This local hospice, which provides respite and care for children and young people not expected to live into adulthood, is the beneficiary of much of the staff’s charitable fundraising.
Embedded risk management framework The Directors are responsible for maintaining a sound system of internal control to safeguard shareholders’ investment and the Company’s assets, and for reviewing its effectiveness. This covers all aspects of risk including insurance risk, market risk, credit risk, operational risk, liquidity risk, social, environmental and ethical risk.
Internal Audit is also responsible for making recommendations at all levels where risk management may be usefully improved and for reporting the acceptance and implementation of significant recommendations to the Audit Committee. This function independently tracks and reports to the Audit Committee on the implementation of its own recommendations and those of the external auditors.
Awards were also made during the year under the Sharesave Scheme and the International Sharesave Scheme. These schemes provide a medium-term incentive available to all staff. Awards depend upon the amount employees elect to save out of their salary, subject to the maximum figure under the rules. There are no performance criteria for these schemes.
In order to ensure employees’ interests are aligned with shareholders’, the Remuneration Committee regularly reviews the terms and conditions of share incentive grants made to employees. The 2003 review resulted in the Remuneration Committee proposing changes to the terms and conditions applying to future grants of options under the Option Schemes and awards under the Performance Share Plan and these amendments were approved and adopted on 22 June 2004. Consequently awards earned under these schemes are currently running with two different sets of terms and conditions.
Principal activity and business review The Company is a holding company for subsidiaries involved in the business of insurance in the UK and overseas.
Directors The names and details of the individuals who served as Directors of the Company during the year (including those offering themselves for re-election) are set out on pages 4 and 5. Stephen Hall was the Senior Independent Director during the year under review but retired on 31 December 2005. Anthony Howland Jackson succeeded him as the Senior Independent Director on 1 January 2006. The Board are grateful for the significant contribution that Stephen Hall has made to the Group’s development.
Adoption of International Financial Reporting Standards In accordance with European Union (‘EU’) law (IAS Regulation EC 1606/2002), the consolidated financial statements included in this report have been prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as adopted by the EU. This is the first year that the Group has adopted IFRSs as the basis for reporting its consolidated results.
The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the parent Company and enable them to ensure that its financial statements comply with the Companies Act 1985. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
Earnings per share on profit attributable to equity shareholders of the Company 50 Hiscox plc Report and Accounts 2005
– all cumulative actuarial gains and losses arising on employee benefit schemes to 1 January 2004 have been recognised in equity at 1 January 2004
In March 2004, the IASB issued IFRS 4 Insurance Contracts which specifies the financial reporting for insurance contracts by an insurer. The standard is only the first phase in the IASB’s insurance contract project and as such is only a stepping stone to phase II, introducing limited improvements to accounting for insurance contracts. Accordingly, to the extent that IFRS 4 does not specify the recognition or measurement of insurance contracts, transactions reported in these consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the UK.
Interest received, together with the receipt of dividends on equity investments (including those payable by subsidiary undertakings) are presented within cash flows from operational activities.
The Group’s exposure to insurance risk arises from the possibility that an insured event occurs, and a claim is subsequently submitted by the insured for payment. The Group considers insurance risk at an individual contract level, and also from a portfolio perspective where the risks assumed in similar classes of policies are aggregated and the exposure evaluated in light of historical portfolio experience and prospective factors.
– utilising sophisticated computer modelling tools to simulate catastrophes and measure the resultant potential losses before and after reinsurance
– monitoring legal developments and amending the wording of policies when necessary
Events which can generate claims on these contracts include burglary, acts of vandalism, fires, flooding and storm damage. Losses can be predicted with a good degree of certainty as the locations of the assets covered, and the individual levels of security taken by owners, are relatively static from one year to the next. The losses associated with these contracts tend to be of a higher frequency and lower severity than the marine and other major property assets covered above.
Less than one year 167,175 309,353 37,936 36,461 Between one and two years 295,897 135,032 22,169 28,785 Between three and five years 327,522 255,723 31,182 29,952 Over five years 174,660 95,098 2,004 –
5 Segmental information continued The primary segment results for the year are as follows: (a) Profit before tax by segment Year to 31 December 2005 Year to 31 December 2004
Return on investments (note 8) 50,287 34,458 Fair value gains/(losses) on derivative instruments (note 21) (6,404) 1,348
Net additions to investment portfolio 246,892 224,305 2,556 34,957 Net fair value gains/(losses) 10,155 6,015 4,807 3,239
The Group and the Company have the right and intention to settle the above contracts on a net basis. Consequently, only the net asset or liability is recognised in the balance sheet as detailed in note 19.
Employee share option scheme – proceeds from shares issued 2,407 120 1,926
Current estimate of cumulative claims 780,660 393,389 411,662 718,460 1,061,574 3,365,745
The Company recharges all pension related expenses to the individual operating subsidiaries that benefit from the services of the Group’s employees.
Share options The conditions of exercise of the Approved and Unapproved share options is described on page 42.
2. Return of the form of proxy will not preclude a member from attending the Meeting and voting in person.
Expense ratio Net operating expenses as percentage of net earned premiums.