Final dividend 8p per share (2006:7p) making 12p for the full year, an increase of 20% (2006:10p)
Hiscox USA – acquired American Live Stock, a major milestone towards building a strong US domestic business
handling combined with slick operations to build a profitable book such as ours. Our direct business which offers household and small commercial policies, is nearing critical mass and profitability. The income rose by 72% and the number of policies to 54,000, aided by the advertising campaigns which also helped sell policies through brokers and strengthen the brand.
This theGlobal Markets team in London and the Bermuda team did extremely well.
As announced in late 2007, we expect Hiscox Global Markets to shrink by at least 20% in 2008 as we remain committed to our goal of seeking profit over volume.
£17.2m HiscoxUK pre-tax profit £4.6m Hiscox Europe pre-tax profit £100.8m Investment return
Current trading In our planning process we assumed that rates in the big ticket area would bemost under pressure, followed by reinsurance with thespecialty and retail businessesbeing least affected.These assumptions caused us to announce an anticipated 20% reduction in premiumsunderwrittenbyHiscoxGlobalMarkets,with Hiscox Bermuda following this lead. To date, renewals have largely met our initial price expectations other than in large property and energy risks. Here price reductions have exceeded our plans and we have revised down our expectations in these areas.We have seen good progress in our retail business areas.
Customers from all parts of the globe place their more complicated or larger business with Hiscox through the Lloyd’s and Bermudian insurance markets. In these markets we underwrite a variety of risks from reinsurance and terrorism to contingency.
Hiscox has a 5* rating (the highest possible) fromDefaqto, the independent market researchers, for the most comprehensive cover for its 505 and 506UK home and contents policies. Our 606 home and contents policy has a Premier rating (the highest possible) fromDefaqto for high net worth products.
Aside from investing activities and the payment of acquisition and operating costs, theGroup’s principal cash requirements are primarily for the settlement of insurance claims, to pay for reinsurance cover, to settle fiscal tax liabilities, to service and reduce borrowings and to distribute dividends to shareholders.
publicity. As capacity levels in the market fall, prices inevitably rise until the point where the cycle of irrational pricing may begin again.
Robust contingency strategies are in place for bothworkspace recovery and back up of data centres and communications.
External Non Executive Directorships No external appointment may be accepted by an Executive Director where such appointment may give rise to a conflict of interest.
The Pound Sterling equivalent of the total was £321,000 (2006: £55,000). *Sir Mervyn Pedelty receives £10,000 for serving on a UK subsidiary board.
was paid on1October 2007 by Hiscox Ltd in respect of the year ended 31December 2007.
Cash and cash equivalents at 1 January 502,871 413,759 Net increase in cash and cash equivalents (197,199) 134,613 Effect of exchange rate fluctuations on cash and cash equivalents (2,930) (45,501)
2 Significant accounting policies continued 2.3 Change of holding company in prior year continued
The Group uses the purchase method of accounting to account for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement.
Items included in the financial statements of each of theGroup’s entities aremeasured using the currency of the primary economic environment in which the entity operates (the ‘functional currency’). The functional currency of all individual entities in theGroup is deemed to be Sterlingwith the exception of the entities operating in France, Germany, the Netherlands andBelgiumwhose functional currency is Euros, those entities operating from the USA andBermudawhose functional currency is USDollars, andHiscox InsuranceCompany (Guernsey) Limitedwhose functional currency is also USDollars.
Financial assets are de-recognised when the right to receive cash flows from them expires or where they have been transferred and theGroup has also transferred substantially all risks and rewards of ownership.
2 Significant accounting policies continued 2.8 Financial investments including loans and receivables continued (a)Financial assetsat fair value throughprofit or loss
TheGroup operated a defined contribution arrangement for all active employees during the year under review. The defined benefit scheme closed to future accrual with effect from 31December 2006 and active members were offered membership of the defined contribution arrangement from 1 January 2007.
2.20 Provisions TheGroup is subject to various insurance related assessments and guarantee fund levies. Provisions are recognised where there is a present obligation (legal or constructive) as a result of a past event that can bemeasured reliably and it is probable that an outflow of economic benefits will be required to settle that obligation.
TheGroup enters into contracts that directly accept and transfer insurance risk, which in turn necessarily creates exposure to financial and other classes of risk. Consequently, Hiscox is fundamentally concernedwith the identificationandmanagementofall significant risks.
at 1 January 2008 £m £m a%of GWP a%of NWP industry loss £ billion years
Notes to the financial statements continued 3Management of risk continued 3.1 Insurance risk continued Estimated concentrationof gross andnet insurance liabilities onbalance sheet by territory coverageof premiumwritten
3Management of risk continued 3.3 Capital riskmanagement continued Capitalmodelling and regulation continued 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: Insurers (IPRU(INS)), the Integrated Prudential Sourcebook for Insurers (INSPRU) andGeneral Prudential Sourcebook (GENPRU) when completing the ICA return.
For Syndicate 33, the ICA process produces a result that is uplifted by Lloyd’s to identify the capital required to hold the A rating. The strong control and risk management environment, together with the sophistication of the modelling, have produced a capital ratio below that suggested under the previous risk-based capital regime.
In addition to the ICAmodelling process, the EU InsuranceGroup’s Directiveof1998,asamendedby theFinancialGroup’sDirective (FGD), compels insurancecompanies that aremembersof a group to consider thesolvencymarginof their ultimateparentcompany.This consideration must refer to thesurplus assets of the ultimate parent’s related insurers, reinsurers, intermediateholdingcompaniesandother regulatedentities.
Management have identified theGroup’s operating segments in line with its internal organisation, which recognises the differences in products and services, customer groupings and geographical areas in addition to the discrete major legal entities of theGroup.
TheGroup’s four operating segments arising on the adoption of IFRS 8 are therefore identified as follows: GlobalMarkets comprises the results of Syndicate 33, excludingSyndicate33’s fineart,UK regional events coverage, non-US household business and underwriting result ofHiscox Inc. It includes the results of the larger retail TMTbusinesswritten byHiscox InsuranceCompany Limited. UKand Europe comprises the results of Hiscox Insurance Company Limited, the results of Syndicate 33’s fine art, UK regional events coverage and non-US household business, together with the income and expenses arising from theGroup’s retail agency activities in the UK and in continental Europe. It excludes the results of the larger retail TMT business written by Hiscox Insurance Company Limited.
Segment results at the 100% level presented above differ from those presented at theGroup’s share at note 4(a) solely as a result of theGroup not owning 100%of the capacity of Syndicate 33 at Lloyd’s.
Unearned premiums and deferred acquisition costs adjustment 14,438 (25,511) Foreign exchange gains on borrowings for economic hedging of Hiscox Insurance Company (Bermuda) Limited – 14,121 Other foreign exchange losses (6,037) (26,964)
Impact of foreign exchange related items on consolidated income statement 7,291 (11,320)
**Foreign exchange differences recognised directly in equity during 2007 include £1,400,000 of losses arising on the retranslation of a portion of theGroup’s net investment in its Bermudian andGuernsey subsidiaries, which are entirely offset by corresponding gains of the same amount on the retranslation of certain foreign currency borrowings designated for hedge accounting (2006: £nil recognised in equity on foreign currency borrowings). Further details are provided at note 18 to these financial statements.
At 31December 1,747,827 1,240,225 19 Loans and receivables including insurance receivables
Gross receivables arising from insurance and reinsurance contracts 329,156 356,354 Less provision for impairment (1,392) (875)
Due from contract holders, brokers, agents and intermediaries 201,157 280,694 Due from reinsurance operations 126,607 74,785
Total Group liability to external parties included in balance sheet – gross** 1,215,887
Liability recognised in respect of prior accident years at 100% level 34,156
Group’s share of cumulative payments (233,057) (149,840) (180,448) (266,344) (301,516) (194,843) (112,766) (1,438,814)
Total net liability to external parties included in the balance sheet* 993,215 *This represents the claims element of theGroup’s insurance liabilities and reinsurance assets.
The tax expense on theGroup’s profit before tax differs from the theoretical amount that would arise using the average tax rate applicable to profits of the consolidated companies as follows: Profit before tax 237,199 201,062
Weighted average number of ordinary shares for diluted earnings per share (thousands) 408,838 405,007
The contingent consideration with regard to ALTOHA Inc. is provisional and dependent on certain criteria including the non-emergence of any material unidentified pre-acquisition liabilities over a period of two years from the date of acquisition up to 16 August 2009.
The total fair value of the consideration received was £420,000. The net assets disposed at the date of sale totalled £420,000 and included cash and cash equivalents of £1,236,000.
33 Contingencies and guarantees TheGroup’s subsidiaries are like most other insurers, continuously involved in legal proceedings, claims and litigation in the normal course of business. TheGroup does not believe that such actions will have a material effect on its profit or loss and financial condition.
Obligations under finance leases It is theGroup’s policy to lease certain of its motor vehicles under finance lease arrangements. The leases have a typical term of three years and are on a fixed repayment basis with a final lump sum component at the end of each agreement should theGroup decide to acquire ownership of the vehicle. Interest rates are fixed at the contract commencement date. TheGroup’s obligations under leases are secured by the lessors’ charges over the leased assets.
Year of account The year to which risk is allocated and to which all premiums and claims in respect of that risk are attributed. The year of account of a risk is determined by the calendar year in which it incepts. A syndicate year of account is normally closed by reinsurance at the end of 36months.