6 Chairman’s Statement 12 Chief Executive’s Report 23 Directors and Advisors 24 Corporate Governance 25 Remuneration Report 27 Directors’ Report 29 Report of the Independent Auditor 30 Consolidated Profit and Loss Account, Technical Account – General Business 31 Consolidated Profit and Loss Account, Non-Technical Account 32 Consolidated Balance Sheet 34 Company Balance Sheet 35 Consolidated Cash Flow Statement 36 Notes to the Accounts 59 Notes to the Consolidated Cash Flow Statement 61 Notice of Annual General Meeting
With rates rising rapidly and terms and conditions tightening we are anticipating an excellent trading environment over the next few years.
We have achieved £205.6 million of retail income to balance the Lloyd’s business.
• London Market conditions excellent. Syndicate 33 experiencing significant growth in 2002 with reduced exposure. Rate increases continue rising trend
• Continued growth of the Hiscox Insurance Company – GWP up 29% to £164m, combined ratio 97.8%
London Market Direct Property, Construction, Terrorism, Energy, Marine Hull and Cargo, Liability, Political Risks, Specie, Enterprise Risk £233.2m
Affluent Personal Lines Fine Art, Kidnap and Ransom, Yachts, Bloodstock, Aviation, High Value Household, Contingency, Personal Accident £291.9m
But two of them are. Two members of our Space and Satellite underwriting team were rocket scientists. Focus and specialist expertise reduces the risk and enhances the potential profit.
Our retail business, led by the Hiscox Insurance Company (Hisco), has grown healthily, and our Lloyd’s Syndicate 33 is now benefiting from the surge of business to the London Market following the WTC.
In the unlikely event that Syndicate 33’s loss increases by a further $100m and assuming there are no additional reinsurance recoveries, the net cost to Hiscox plc would increase by approximately £35 million. We do not believe this will happen. Against any loss will be set the proceeds from subrogation against other responsible parties and the profit from the balance of the account, including the profit from the extra £60 million of premium income written after September 11 in 2001.
Hiscox Syndicate 33 at Lloyd’s Syndicate 33 has had some poor years, better than the average in Lloyd’s but not up to our standards. After steadily reducing our managed capacity from £437 million in 1995 to £360 million in 1998 due to weak prices, we kept it there until 2002 when we have increased it to £504 million to take advantage of the excellent market conditions.
Without the effects of September 11 we would be announcing a healthy increase on last year’s profit. As it is, the subsequent trading environment is allowing us to build a larger, less volatile and better balanced portfolio. All indications point to a profitable future.
Our current projections are that the premium income for the 2002 account will be in excess of £600 million (net of brokerage), and we will place the surplus over our capacity limit of £504 million with reinsurers with good security.
“Syndicate 33 has been able to reduce its exposure per risk whilst substantially increasing its income from a less volatile, better balanced portfolio. In other words, much more money for much less risk”
Lloyd’s Lloyd’s has lost a considerable amount of money again. By 1999, we had sold the spread capacity on other syndicates and our sister company, Roberts & Hiscox Ltd, had stopped acting as a members agent and closed down that business.
The insurance industry The property and casualty insurance industry has taken a real battering from weak underwriting on the back of easy investment gains in recent years, culminating in the savage September 11 losses. We always seem to be hit hardest when the coffers are empty at the bottom of the cycle.
“The strategy of building a business outside Lloyd’s is working well and has an exciting future. Hisco is turning out to be an excellent balance to the Lloyd’s business”
• London Market Direct This is the other account significantly affected by the WTC attack. Our primary exposure is to property – both the main building and the surrounding buildings. As with reinsurance, we are experiencing substantial rate rises. Underwriting direct insurance business requires an experienced team and good relationships with brokers across the world. This places Hiscox at a competitive advantage to new start-ups. We took advantage of the rating increases immediately post September 11 to grow the business in the last quarter of 2001. We expect to see significant further growth in this area in the year ahead. One of the areas we are focussing on is insurance against terrorist exposures. Global capacity for this class has diminished, and drawing on our experience of competing with Pool Re in the UK, we are now writing controlled exposures in other territories.
• ATMT Our experienced underwriting team is able, subject to strict guidelines, to underwrite business both on behalf of Syndicate 33 and Hiscox Insurance
*Includes business written by Hiscox Insurance Company and Hiscox Insurance Company (Guernsey) Ltd, net of internal quota share reinsurance
• Affluent Personal Lines Across the Group insuring affluent individuals continues to grow and we are active in building our distribution, particularly in the UK and Europe. In the UK, profit margins are returning to reasonable levels, but further work is required in Europe. Affluent Personal Lines are a core target market for the Group, but not at any price. We have withdrawn from the yacht market, as pricing is inadequate. We have included within our affluent personal lines segment our Affinity business which is now focussed on the mass affluent market. We reach this market through relationships with our traditional insurance broker partners, and also through alternative distribution routes such as IFAs, Hiscox Online our internet business, and via workplace marketing through professional firms. We have withdrawn from Property Owners insurance as this did not fit our long-term focus for the retail business.
Equalisation provision, exceptional items and (11.3) 0.5 Short term investment fluctuations
Our medium term goal is that we grow the retail business to comprise 50% of the whole. In the short term, however, we expect that Syndicate 33 will grow faster than the retail side – reflecting the rapid price movements currently being experienced – but our overall strategic goal remains unchanged. Over the long term a stable base of retail business will smooth our more volatile earnings from Syndicate 33.
Group financial performance The Group operating result, based on the longer term rates of return, reflects a loss of £21.2m (2000: profit £3.0m). The Group pre-tax result is a loss of £32.5m (2000: profit £3.5m) and after tax is a loss of £23.1m (2000: profit £5.4m). The Group combined ratio increased to 109.9% (2000: 103.1%). The results are broken down in Table 2 and are commented on below: • Continued growth in operating profits within our UK insurance company and our international businesses from £6.8m to £8.7m mitigated the losses of £29.9m from our Lloyd’s business. The Lloyd’s business result includes our WTC losses which total approximately £30m. Other income less expenses has increased to a net cost of £5.0m (2000: £3.9m). Overall the operating result was a loss of £21.2m.
• The underlying investment return was less than the longer term rate used in determining operating profit by £8.7m (2000: £1m greater). Contributions to the government mandated Equalisation Provision increased to £2.6m (2000: £2.3m), reflecting the ongoing growth of our business. There were no exceptional gains (2000: £1.8m). The negative contribution of £11.3m from these areas contributed to our pre-tax loss of £32.5m. We take account of a tax credit of £9.4m to reach our final post tax loss of £23.1m.
The 2001 combined ratio for Syndicate 33 deteriorated to 115.9%, (2000: 105.9%). Excluding WTC, the ratio would have been 98.4%, showing the improving underlying trend. The expense
UK Our UK business has performed very well. We have grown the aggregate premium income by 23% to £143.6m. The combined ratio has improved to operating profit (2000: £6.1m). This business has two core areas – affluent personal lines and professional insurances. Both have done well.
Professional insurances grew significantly at attractive combined ratios, and the affluent personal lines account increased its rates to bring its combined ratio to more acceptable levels.
Retail businesses Our retail business is conducted through a variety of legal entities. The most important of these are the Hiscox Insurance Company (Hisco) in the UK, Hiscox Insurance Company (Guernsey)
“Strong growth and healthy profits – a good year for the retail business”
We have also worked at reducing our expense levels. We have made good incremental progress, both in our own expenses and external brokerage. Our ambition remains to grow the business significantly, but we cannot expect it to double in size and retain our core administration and customer support services in London. Plans for a Business Centre outside London are under consideration. This will allow us to provide better services to our brokers and clients in a more cost-effective way.
Guernsey Our business in Guernsey has two parts. The first is the provision of insurance for international customers and the second is the location of our group captive, which we established in 2000. The insurance business performed well, with continued growth at attractive profit margins. The captive was adversely affected by the WTC, so in aggregate, profits have declined marginally to £1.2m (2000: £1.4m).
During 2001, the businesses increased their gross written premiums |to £20.3m, a growth of 97%. £2.2m of the growth is as a result of the acquisition of the Construction and General Guarantee Insurance Company (CGGI) in Ireland, with the balance coming from organic growth. In continental Europe organic growth, together with the movement of some expenses to London, gave us an improved local agency result of a loss of £0.3m (2000: loss of £0.7m). Our combined ratio in Europe increased to 114.6% (2000: 111.1%). A large part of this increase was due to losses caused by storm damage to mainly German holiday homes located in Majorca.
During 2001, the Group’s own financial investments grew to £344.2m from £263.6m and cash to £62.5m from £38.5m. £59.5m of this was due to positive cash flow within both Syndicate 33 and Hiscox Insurance Company. The balance came from the net proceeds of our fund raising less outgoings elsewhere in the Group. We earned a total return of £9.9m on these funds. Our bond funds generated a total return above our longterm rate of 6%, but weakness in the equity markets contributed to under performance of this component, leading to a negative short-term fluctuation of £8.7m.
Balance sheet Hiscox supports its balance sheet through a mixture of equity, letters of credit from banks secured on Group assets, and risk-sharing letters of credit from some major European insurers. Up to 2000 this allowed us to support the continued expansion of the Group. However, strong underlying growth,
Conclusion Last year I said that we had the wind at our backs. If I continue the yachting analogy, we were hit during 2001 by a freak squall. The yacht has now returned to an upright position, and instead of running with just a mainsail and a jib, has hoisted a spinnaker as well. We are powering ahead and making the most of the market conditions now at hand.
Excellent products still need marketing. We used a successful viral internet marketing campaign to promote Hiscox Online.
23 Directors and Advisors 24 Corporate Governance 25 Remuneration Report 27 Directors’ Report 29 Report of the Independent Auditor 30 Consolidated Profit and Loss Account, Technical Account – General Business 31 Consolidated Profit and Loss Account, Non-Technical Account 32 Consolidated Balance Sheet 34 Company Balance Sheet 35 Consolidated Cash Flow Statement 36 Notes to the Accounts 59 Notes to the Consolidated Cash Flow Statement 61 Notice of Annual General Meeting
Anthony Howland Jackson (Aged 61)*†F‡^ Anthony Howland Jackson was previously Chairman of Bain Hogg plc and Deputy Chairman of Aon UK Holdings Limited. He is a member of Lloyd’s Regulatory Board and Chairman of The General Insurance Standards Council. He joined the Group on 8 May 1997.
Derek Nigel Donald Netherton (Aged 57)*F‡^ Derek Netherton was previously a Director of J. Henry Schroder & Co. Limited and is currently a Director of Next plc, Greggs plc, Plantation & General Investments plc and St James’s Place Capital plc. He is a member of the Supervisory Board of the Schroder Exempt Property Unit Trust. He joined the Group on 6 August 1999.
Robert Ralph Scrymgeour Hiscox Chairman (Aged 59)^ Robert Hiscox joined the Group in 1965. He was Deputy Chairman of Lloyd’s between 1993 and 1995.
Stuart John Bridges Group Finance Director (Aged 41) Stuart Bridges is a qualified chartered accountant, who joined the Group at the start of 1999. He has held posts in various financial service companies including Henderson Investors plc.
A key component in this respect is the Group’s internal audit function, which is tasked with assessing the adequacy and appropriateness of the system and advising on its development.
The Board regularly reviews the effectiveness of the system, taking assurance from both internal audit and operational managers. The directors also conduct an annual review, which is both retrospective and forward-looking.
• Monitoring – Senior executives monitor on a regular basis a range of timely financial and non-financial operating information. Department heads are required to explain significant matters and variances.
The Conflicts Committee comprises four independent non-executive directors and the Group Compliance Officer. It meets as and when required. Should a conflict of interest arise between Syndicate 33 and a Hiscox related company, there is a formal procedure to refer the matter to this Committee.
In addition to this direct communication, information is continually provided to shareholders via analysts, journalists and the Hiscox website.
The annual report and accounts are sent to all shareholders, and further copies are available directly from Hiscox, via the FT report and accounts service, or through the Hiscox website.
The Combined Code Hiscox is committed to high standards of corporate governance.
The Board of Directors The Board comprises four executive directors and four independent nonexecutive directors, including a senior independent director. Brief biographical details for each member of the Board are provided on page 23.
The Board’s committees The Board has appointed and authorised a number of committees to manage aspects of the Group’s affairs. Each committee operates within established terms of reference and each chairman reports directly to the Board.
The Audit Committee comprises four independent non-executive directors. It meets four times a year to assist the Board on matters of financial reporting, risk management, internal control and regulatory compliance. The internal and
Exchanged options Under the terms of the offers to purchase Hiscox Holdings Ltd and Economic Insurance Holdings Ltd in July 1996 the Company offered to exchange existing options held in the shares of those companies for options on Hiscox plc shares. As a result of this offer, exchanged options were issued to thirty-eight employees and former employees of those companies. The interests of executive directors in such exchanged options is shown in note 26 to the accounts.
The Group has three share option schemes which were set up for this purpose.
Awards were also made during the year under the Sharesave Scheme. This scheme provides a medium-term incentive available to all UK staff. Awards depend upon the amount employees are prepared to save out of their salary subject to the maximum figure under the rules.
The UK Sharesave Scheme is not available to overseas employees. In order to give overseas employees access to a scheme on similar terms, a new international sharesave scheme has been set up subject to shareholder approval. Details of the new scheme, for which shareholder approval is sought at Resolution 9 on page 61, are shown on page 26.
The Remuneration Committee is very pleased with the commitment shown by employees in the future of the Group.
of the award if the Group’s operating EPS (note 14) over a 3 year period ending on the 31 December 2004 has increased by 35% (“the maximum target”); b) No award will vest unless the increase in the Group’s operating EPS over the period equals or exceeds 15% (“the base target”) at which point 40% of the award will vest; and; c) An award will vest on a straight line basis if the operating EPS growth is between the base target and the maximum target.
This report sets out the remuneration policies for the Group’s senior executives, including the executive directors. It should be read in conjunction with the details of directors’ remuneration on pages 51 to 55. The members of the Remuneration Committee are identified on page 23.
Bonuses The Remuneration Committee believes that a significant portion of the total remuneration should be attained through an incentive bonus which links rewards directly with performance. A bonus pool is created based on the business profits generated by the major divisions of the Group. This pool is utilised to award annual bonuses to all staff including executive directors based upon the performance of their business area. The actual amount to be paid to executive directors is determined by the Remuneration Committee based on an assessment of their individual performance. The Remuneration Committee also reviews and confirms the recommendations of management regarding the award of bonuses to senior managers and staff.
Sharesave Scheme will rank equally with all other ordinary shares of the Company for the time being in issue.
7 Limits on the International Sharesave Scheme The number of shares which may be issued on the exercise of options granted under the International Sharesave Scheme or under any of the Company’s other employee share schemes in any ten year period may not exceed 10% of the issued ordinary share capital of the Company from time to time.
On the grant of an option, the Board may also designate it a “phantom option,” in which case, on the exercise of the option, only the cash equivalent will be payable to the participant.
years after the date of adoption of the International Sharesave Scheme. Options are not transferable.
4 Exercise price The exercise price under an option will be determined by the Board before the option is granted. The exercise price will not be less than 80% of the middle-market quotation of an ordinary share as derived from the London Stock Exchange Daily Official List on the day preceding five dealing days before the date on which invitations to apply for options are sent out. If that day falls outside the period of 30 days ending with the day on which options are granted, the exercise price will be not less than 80% of the middle-market quotation of an ordinary share on the last dealing day before the day on which the options are granted or such other dealing day as may be agreed with the Inland Revenue for the purposes of the UK Sharesave Scheme.
Early exercise of options is also permitted in the exceptional circumstances of a takeover, reconstruction or winding up of the Company.
6 Rights attaching to shares All ordinary shares allotted on the exercise of options under the International
1 General The International Sharesave Scheme has been designed to replicate the Hiscox Sharesave Scheme (“the UK Sharesave Scheme”) for non-UK employees.
2 Eligibility All employees and full time directors of the Company who are employed outside the UK and who have been employed by the Company for six months prior to the end of the Company’s last financial year (or for such other period not exceeding five years as the Board may determine) are eligible to participate in the International Sharesave Scheme. The Board have a discretion to nominate employees who do not satisfy the above conditions to participate in the International Sharesave Scheme.
For example, in addition to the Hiscox Foundation’s charitable activities, we participated in a number of other charitable fund raising events during the year.
We have also continued with our scheme at Virginia Primary School in Tower Hamlets where staff assist pupils with their reading development, we finance after hours tuition and assist in the school’s governance.
Our Art Café has also held a number of exhibitions of young artists.
Payment of creditors It is the policy of the Group to agree terms of payment for its business transactions with its suppliers.
The business is focused on maintaining and improving standards of customer service and personnel policies which enhance the capability of staff through the implementation of training and development programmes, particularly in relation to technology.
Community involvement The involvement of Hiscox in the local community has continued this year, thanks to the strong support of our employees.
The review of the year and future developments are described further in the Chairman’s Statement and the Chief Executive’s Report.
Financial results The results for the year are shown in the profit and loss account on pages 30 and 31.
Dividends No interim dividend (2000: 1.2p per share) was paid in respect of the year ended 31 December 2001. The directors do not recommend the payment of a final dividend (2000: 2.3p per share).
Directors The names of the directors of the Company at the date of this report are listed on page 23. Details of their interests in the shares of the Company are set out in note 26 to the accounts. IN Thomson retired from the board of directors on 4 July 2001. SJ Bridges, RS Childs and C Franklin Engler will retire by rotation in accordance with the Articles of Association at the Annual General Meeting and, being eligible, will offer themselves for re-election as directors.
Hiscox plc Report and Accounts 200128 nominal value of £481,681.40, representing 5.0% of the issued ordinary share capital as at 26 April 2002. This authority will terminate no later than fifteen months after the date of the Annual General Meeting.
Auditors A resolution for the re-appointment of KPMG Audit Plc as auditor of the Company is to be proposed at the forthcoming Annual General Meeting.
as an ordinary resolution, seeks to obtain approval for the Remuneration Report as set out on pages 25 and 26 of this Report and Accounts.
Resolution 10, which will be proposed as a special resolution, seeks to renew the authority conferred on the Board to issue equity securities of the Company for cash without application of the preemption rights provided by Section 89 of the Companies Act 1985. Other than in connection with a rights or scrip dividend issue, the authority contained in this resolution will be limited to an aggregate
Resolution 8, which will be proposed *4,690,000 of AN Foster’s non-beneficial shareholding is held by a trust and is also included in RRS Hiscox’s beneficial shareholding. Hiscox Trustees Ltd is the trustee of the Hiscox plc Group employee share ownership plan trust (ESOP) and is interested in 170,311 ordinary shares in the Company. IN Thomson, AN Foster and RRS Hiscox are potential beneficiaries of the ESOP and are deemed to have an interest in these shares.
Statement of directors’ responsibilities United Kingdom Company law requires the directors to prepare financial statements for each financial year that give a true and fair view of the state of affairs of the Company and of the Group as at the end of the financial year and of the profit or loss of the Group for that period. In preparing those financial statements, the directors are required to: a) select suitable accounting policies and apply them consistently, except where changes are necessary to comply with new legal and accounting requirements; b) make judgements and estimates that are reasonable and prudent; c) state whether applicable accounting standards have been followed, subject to any material departures disclosed in the financial statements; and d) prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company and the Group will continue in business. The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the 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.
Fundamental uncertainty In forming our opinion, we have considered the adequacy of disclosures made in note 4 to the financial statements concerning the uncertainty over the material exposure that the Group faces to the terrorist attack in the United States of America on 11 September 2001. In view of the significance of this uncertainty we consider that it should be drawn to your attention but our opinion is not qualified in this respect.
Opinion In our opinion the financial statements give a true and fair view of the state of affairs of the Company and the Group as at 31 December 2001 and of the loss of the Group for the year then ended and have been properly prepared in accordance with the Companies Act 1985.
Respective responsibilities of directors and auditors The directors are responsible for preparing the Annual Report. As described on page 28 this includes responsibility for preparing the financial statements in accordance with applicable United Kingdom law and accounting standards. Our responsibilities, as independent auditors, are established in the United Kingdom by statute, the Auditing Practices Board, the Listing Rules of the Financial Services Authority, and by our profession’s ethical guidance.
Change in the gross provision for unearned premiums (77,806) (23,838) Change in the provision for unearned premiums, reinsurers’ share 9,428 4,601
Allocated investment income transferred from the non-technical account 9(a), 9(c) 18,562 16,222
Consolidated Profit and Loss Account Technical Account – General Business for the year ended 31 December 2001
Investment income 9(a) 15,005 14,688 Net realised gains/(losses) on investments 9(a) 126 238 Unrealised gains/(losses) on investments 9(a) (4,703) 3,005 Investment management expenses and charges 9(a) (560) (666)
Comprising: Operating (loss)/profit based on longer term investment return 5(d) (21,220) 2,950 Short term fluctuations in investment return 9(a), 9(c) (8,694) 1,043 Exceptional item: sale of long term business – 846 Exceptional item: sale of non-managed Lloyd’s capacity – 957 Movement in equalisation provision 5(d), 8 (2,582) (2,309)
In accordance with the amendment to Financial Reporting Standard (‘FRS’) 3 “Reporting financial performance” in relation to the revaluation of investments, no note of historical cost profits or losses has been prepared as the Group’s only material gains and losses on assets relate to the holding and disposal of investments.
Consolidated Profit and Loss Account Non-Technical Account for the year ended 31 December 2001
Reinsurers’ share of technical provisions Provision for unearned premiums 39,166 27,197
Capital and reserves Called up share capital 24, 25(a) 9,633 7,400 Share premium account 25(a) 124,612 72,474 Merger reserve 25(a) 4,723 4,723 Capital redemption reserve 25(a) 33,244 33,244 Profit and loss account 25(a) (7,421) 15,721
Creditors: amounts falling due within one year Creditors arising out of direct insurance operations 45,850 75,547 Creditors arising out of reinsurance operations 72,608 87,123 Other creditors including taxation and social security 21 42,444 30,775
Fixed assets Tangible assets 19(a) 381 346 Investment in subsidiary undertakings 19(b) 115,457 115,457
Capital and reserves Called up share capital 24, 25(b) 9,633 7,400 Share premium account 25(b) 124,612 72,474 Merger reserve 25(b) 58,970 58,970 Capital redemption reserve 25(b) 33,244 33,244 Capital reserve 25(b) 351 1,078 Profit and loss account 25(b) 9,163 7,475
Cash Flow Statement Net cash inflow from general business 15,295 40,019 Net shareholders’ cash (outflow)/inflow from Lloyd’s business 32(d) (12,489) 1,284
Net cash flow from operating activities 32(a) 2,806 41,303 Interest paid 32(e) (680) (982) Taxation paid (499) (6,654) Capital expenditure 32(e) (2,774) (4,394) Acquisitions and disposals 32(e) 1,380 846 Equity dividends paid (3,453) (4,982)
3(d) Claims Claims incurred in respect of general business consist of claims and claims handling expenses paid during the financial year, together with the movement in the provision for outstanding claims and future claims handling expenses.
3 Accounting policies The following principal accounting policies have been applied consistently in dealing with items which are considered material in relation to the Group’s financial statements.
The Group has adopted FRS17 “Retirement Benefits” and FRS18 “Accounting Policies” during the year. The adoption of FRS17 has had no material impact on the current year’s results, as only the transitional disclosure requirements have been included. The adoption of FRS18 has required more detailed disclosure of the Group’s accounting policies.
2 Basis of consolidation The consolidated financial statements include the assets, liabilities and results of the Company and its subsidiary undertakings up to 31 December each year. Profits or losses of subsidiary undertakings sold or acquired during the period are included in the consolidated results up to the date of disposal or from the date of acquisition.
3(m) Other intangible assets Other intangible assets are the cost of purchasing the Group’s participation in Lloyd’s insurance syndicates. In accordance with FRS 10, this capacity is capitalised at cost in the balance sheet and amortised over its useful economic life which the directors consider to not exceed 20 years.
Investments in foreign enterprises are translated using the net investment method. All exchange profits or losses arising on the translation of these investments are taken to reserves.
3(i) Investment return All investment return is recognised in the non-technical account.
Realised gains or losses represent the difference between net sales proceeds and purchase price.
3(f) Equalisation provision An equalisation provision has been established and calculated in accordance with the requirements of the Insurance Companies (Reserves) Act 1995 to mitigate exceptionally high loss ratios for classes of business displaying a high degree of claims volatility.
The current total estimated gross loss to Syndicate 33 is approximately $440 million. Syndicate 33 expects to recover from its reinsurance protections approximately $350 million, net of reinstatement premiums payable to reinsurers to reinstate cover for future losses, resulting in a net loss of approximately $90 million to Syndicate 33. In arriving at this estimate it has been assumed that the terrorist attack in New York City on 11 September 2001 was one occurrence and also that the aircraft impacts on the WTC are one occurrence. In the unlikely event that Syndicate 33’s loss increases by a further $100 million, and assuming there are no further reinsurance recoveries, the net cost to Hiscox plc would increase by approximately £35 million.
As at 31 March 2002, 97% of Syndicate 33’s WTC reinsurance is placed with counterparties which are rated A grade or better and 65% of the total is placed with companies rated AA or AAA.
As part of the process for the setting of the loss reserves included in these accounts, the directors have undertaken a comprehensive review of the Group’s exposures in respect of insurance and reinsurance policies issued by Syndicate 33 to identify all those exposed directly or indirectly to losses from the events of 11 September 2001. No material new exposures have been identified during the last six months. This review has been supplemented by details of the notifications received from the Lloyd’s Claims Office which amounted to $543 million as at 31 March 2002. Hiscox has considered the insureds’ computations of their own losses. The directors of Hiscox plc believe that the insureds’ computations are likely to prove unreliable. Hiscox has estimated what the directors believe is an appropriate discount or premium on these notifications, based on their past experience of large property losses and additional information received.
The reserve required for the Group’s direct property exposure is sensitive to assumptions about the quantum of property damage and business interruption costs and to the legal issues relating to the cover provided by certain insurance policies. In reserving for these claims, the directors have taken account of settlement patterns experienced on previous large property losses, where final claims settlements are usually considerably lower than initial market estimates.
Hiscox largely participates on the higher layers of risk excess policies. In certain cases, the property damage element of the claim falls well below the excess point. Certain market notifications relating to these property reinsurances have been made on a total loss basis which are without merit on the basis of information which is currently available. The directors consider it likely that in such cases, the 3(o) Pension costs Pension contributions in respect of defined benefit schemes are charged against profits, with pension surpluses and deficits allocated over the remaining service periods of current employees. Differences between the amounts charged to the profit and loss account and payments made to the pension schemes are treated as assets or liabilities in the balance sheet.
3(p) Leases Where the Group enters into a lease which entails taking substantially all the risks and rewards of ownership of an asset, the lease is treated as a ‘finance lease’. The asset is recorded in the balance sheet as a tangible fixed asset and is depreciated over its estimated useful life or the term of the lease, whichever is shorter. Future instalments under such leases, net of finance charges, are included within creditors. Rentals payable are apportioned between the finance element, which is charged to the profit and loss account, and the capital element which reduces the outstanding obligation for future instalments.
3(q) Taxation Investment income is shown exclusive of any tax credit and the current tax charge similarly excludes any tax credit on investment income.
Hiscox plc Report and Accounts 200138 Hiscox plc Report and Accounts 2001
Fire and other damage to property 169,675 (198,735) (56,767) 71,685 (14,142)
*Before longer term investment return, other technical income and movement in equalisation provision.
Movement in deferred acquisition costs (8,420) (2,778) (2,528) (13,726) 14,568 (1,603) (1,541) 11,424
Net longer term investment return 11,362 7,093 1,062 19,517 10,278 6,433 661 17,372 *Before movement in equalisation provision.
Technical (loss)/profit for 100% of continuing operations (Note 5b) (46,820) (6,734)
Notional share attributable to Group at current level of capacity ownership (25,051) (96) Adjustments to reflect lower levels of capacity in prior years: Investment return on Group underwriting capital 4,479 4,893 Amounts applicable to quota share reinsurers* 1,324 – Conversion scheme adjustment – 1,184
Trading (loss)/profit for Group share of continuing operations (Note 5d) (16,182) 5,983 *For the 2001 year of account, the Group owned 60% of the Syndicate. 7% of that capacity was reinsured to two leading European reinsurers via a quota share arrangement.
Business/ Insurance International 2001 Business/ Insurance International 2000 Group* Company Operations Total Group* Company Operations Total
Investment return, based on longer term rate of return 10,407 7,093 1,062 18,562 9,128 6,433 661 16,222
Profit/(loss) on ordinary activities before taxation (33,908) 254 1,158 (32,496) (3,624) 5,820 1,291 3,487
Net assets *Including Hiscox Dedicated Corporate Member Ltd, Hiscox Syndicates Ltd, Hiscox Select A to J, Hiscox Investment Management Ltd and Hiscox plc. **Based on longer term investment return, before movement in equalisation provision and elimination of inter company transactions.
Net asset value per share 2001 2001 2001 2000 2000 2000
Equalisation provisions are established in accordance with the requirements of the Insurance Companies (Reserves) Act 1995. These provisions, which are in addition to the provisions required to meet the anticipated ultimate cost of settlement of outstanding claims at the balance sheet date, are required by Schedule 9A to the Companies Act 1985 to be included within technical provisions at the balance sheet date notwithstanding that they do not represent liabilities at the balance sheet date. This has had the effect of reducing shareholders’ funds by £11,229,000 (2000: £8,647,000). The movement in equalisation provision during the year resulted in a decrease in the technical account and the Group profit before taxation of £2,582,000 (2000: £2,309,000).
Investment return on syndicate funds: Investment income 5,045 4,660 Realised gains/(losses) on investments 1,404 498
Allocation to the technical account based on the longer term rate (18,562) (16,222)
The longer term return is based on a combination of historical experience and current expectations for each category of investments. The longer term return is calculated by applying the following yields to the weighted average of each category of assets.
Shares and units in unit trusts 7.0 7.0 Debt securities and other fixed interest securities 6.0 6.0 Deposits with credit institutions 6.0 6.0
Actual investment return: Shares and units in unit trusts 213 0.9 574 15.7 447 2.5 1,234 Debt securities and other fixed interest securities 2,897 7.7 3,142 6.1 6,991 9.8 13,030
Remuneration – Other fees paid to the auditor and its associates 360 333 66 28 12 Employees’ Remuneration Their aggregate remuneration and associated costs were: Wages and salaries 18,753 17,600 Social security costs 2,348 1,922 Other pension costs 3,046 2,529
Basic, based on operating (loss)/profit after tax (on longer term investment return) (15,090) 148,665 (10.2) 5,054 142,472 3.5 Basic, based on (loss)/profit on ordinary activities after tax (23,107) 148,665 (15.5) 5,430 142,472 3.8 Diluted, based on (loss)/profit on ordinary activities after tax* (23,107) 148,665 (15.5) 5,430 144,577 3.8 *In accordance with FRS 14 “Earnings per share”, potential ordinary shares are only included in the calculation of diluted loss/earnings per share to the extent that they are dilutive ie those that on conversion to ordinary shares would decrease net profit per share or increase net loss from continuing operations.
Loss/earnings per share has also been calculated based on the operating (loss)/profit before exceptional items and after taxation as the directors believe this loss/earnings per share figure provides a better indication of operating performance.
The reconciliation of basic loss/earnings per share based on (loss)/profit on ordinary activities after tax to basic loss/earnings per share based on operating (loss)/profit after tax is as follows: LPS EPS
Basic based on (loss)/profit on ordinary activities after tax (15.5) 3.8 Short term fluctuations in investment return 4.1 (0.5) Exceptional items – (0.9) Movement in equalisation provision 1.2 1.1
Diluted loss/earnings per share has been calculated taking into account nil (2000: 1,816,000) options under employee share schemes and nil (2000: 289,000) options under SAYE share schemes.
Other intangible assets represent the cost of acquiring syndicate capacity at the Lloyd’s auctions.
None of the freehold land and buildings were occupied by the Group for its own use during the current financial year.
Market Market Market Market Value Cost Value Cost Value Cost Value Cost
Shares and units in unit trusts 26,732 25,294 3,594 1,510 15,723 15,304 46,049 42,108 Debt securities and other fixed income securities 30,130 30,356 102,690 102,192 83,336 83,745 216,156 216,293 *Includes an investment in an associated undertaking.
Of the above investments, all of the shares and units in unit trusts, and all the debt securities and other fixed income securities are listed on a recognised stock exchange.
Net book value at 31 December 2001 2,461 3,650 907 7,018
Net book value at 31 December 2000 888 3,972 1,272 6,132
Assets held under finance leases account for £1,261,000 of the net book value of the assets above (2000: £1,455,000). The total depreciation for the period relating to these assets amounted to £357,000 (2000: £430,000).
For details of principal subsidiary undertakings see note 31. Debt securities Shares and and other Deposits units in fixed income with credit unit trusts securities institutions Other Total
22 Creditors: Amounts falling due after more than one year Group Group Company Company
At 1 January 2001: Ordinary shares of 5p each 148,000,785 7,400
At 31 December 2001: Ordinary shares of 5p each 192,667,249 9,633
Issued Share Capital Profit Share- ShareShare Premium Merger Redemption Capital and Loss holders’ holders’
Exercises of share options (note 26) 10 133 – – – – 143 84 Shares issued from open offer 2,223 52,005 – – – – 54,228 3,525 Exchange differences taken to reserves – – – – – (35) (35) 50 Retained (loss)/profit for the year – – – – – (23,107) (23,107) 318
Total Total Total Issued Share Capital Profit Share- ShareShare Premium Merger Redemption Capital and Loss holders’ holders’
No directors exercised their share options during the year (2000: nil).
The total remuneration of the highest paid director was: Salaries, benefits and bonus 267 286 Accrued pension at end of the year on the defined benefit scheme (per annum) 171 159 d)
(i) Directors’ share interests 5p Ordinary Shares 5p Ordinary Shares 5p Ordinary Shares 5p Ordinary Shares
†These figures are stated net of a total of 533,436 share options which lapsed during the year ended 31 December 2001.
The interests of directors and employees under the SAYE share option schemes of the Group are set out below: No. of No. of options at No. of No. of options at Exercise Market price Date from 1 January options options 31December Price at date of which Expiry 2001† granted exercised 2001 £ exercise exercisable date
† These figures are stated net of 667,017 SAYE share options which lapsed during the year.
The Company has taken advantage of the exemptions conferred in UITF 17 “Employee share schemes” in relation to the charging of notional losses to the profit and loss account.
The aggregate gains made by the directors on exercise of the above options (based on market price at date of exercise less the exercise price) was £nil (2000: £nil). The market price of Hiscox plc shares at 31 December 2001 was 155.5p. The highest and lowest values of Hiscox shares during 2001 was 226p and 72.5p (2000: 144p and 83p).
The following conditional awards have been made under the performance share plan: No. of No. of shares at No. of shares at Date from 1 January shares 31 December which Expiry 2001† awarded 2001 exercisable date
† These figures are stated net of a total of 80,000 shares awarded which lapsed during the year ended 31 December 2001.
The scheme is invested primarily in a unitised fund held with Fidelity Pension Management. The split of assets and funding position at 31 December 2001, measured in accordance with the requirements of FRS 17, were as follows: Equities and properties 37,262 Bonds 6,399 Cash 2,949
Current position at 31 December 2001 164,791 Pension (asset)/liability on a SSAP24 basis 276 Pension asset/(liability) on a FRS17 basis (9,233)
The total pension charge for the year amounted to £2,856,000 (2000: £2,351,000) of which £1,696,000 was recharged to managed syndicates (2000: £1,759,000).
29 Lease Commitments a) Operating Leases The Group has the following commitments under operating leases: Land and Land and buildings Other Total buildings Other Total
Operating leases which expire: From two to five years inclusive 681 57 738 845 370 1,215
b) Finance Leases The finance lease obligations to which the Group is committed are: In one year or less 648 753 Between two and five years 394 762 30 Related Parties The operations listed below are related parties within the definition of FRS 8. 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 in which Hiscox Dedicated Corporate Member Limited and the corporate member subsidiaries of Hiscox Select Insurance Fund PLC participated.
The value of services provided to the syndicate in the year was as follows: Services provided by Hiscox Syndicates Limited to the undertakings below: Balances due to the Hiscox Group at the balance sheet dates were as follows: Due from respective related parties as at 31 December: Hiscox plc Report and Accounts 2001 5757
a) Reconciliation of operating (loss)/profit to net cash inflow from operating activities: £000 £000
Operating (loss)/profit before taxation after interest, based on longer term investment return (21,220) 2,950 Depreciation and amortisation of fixed assets 3,274 2,959 Increase in general insurance technical provisions, net of reinsurance 37,115 23,451 Increase/(decrease) in amounts owed to agents (6,280) 20,794 (Increase)/decrease in amounts owed by agents (4,713) (34,634) (Increase)/decrease in other debtors (35,779) 780 Increase/(decrease) in other creditors 12,775 11,061 Cash transferred (to)/from Lloyd’s business (note d) (12,489) 1,284 Realised and unrealised investment (gains)/losses 5,991 (2,690) Short term fluctuations in investment return (8,694) 1,043 Interest expense 1,099 951 (Profits)/losses relating to Lloyd’s business 31,641 12,866 Other non-cash transactions 86 488
Net cash inflow from operating activities 2,806 41,303 b) Movement in opening and closing portfolio investments net of financing Notes £000 £000
Total portfolio investments net of financing at 31 December 403,654 299,925 c) Cash flows of the long term business £000 £000
Premiums received – 89 Claims paid – (605) Net portfolio investments – 436 Other net cash flows – (94) Taxation – (809)
Net cash flow before retention and transfers out of the fund – (983) Schedule 2c transfer of long term business – (18,889)
Net cash flow before retention and transfer from/(to) the Group 44,546 32,222 Transfer from/(to) the Group 12,489 (1,284)
Hiscox plc Report and Accounts 2001 59Hiscox plc Report and Accounts 2001 5959
Capital expenditure Payments to acquire tangible fixed assets (2,772) (429) Receipts from sales of tangible fixed assets 4 60 Payments to acquire intangible fixed assets (6) (4,025)
Acquisitions and disposals Net cash proceeds on sale of long term business – 846 Payments to acquire investment in associated undertaking (199) – Acquisition of subsidiary undertaking (2,527) – Net cash and investments acquired with subsidiary 4,106 –
Financing Proceeds from share issues* 54,371 3,609 New bank loan 1,378 285 Capital element of finance leases (381) (549)
Net cash flow from financing 55,368 3,345 *Net of expenses of £1,779,633 (2000: £nil).
Changes Changes to At 1 Jan in other market value At 31 Dec f) Movement in cash, portfolio investments 2001 Cash flow business and currencies 2001
Cash at bank and in hand 38,466 6,369 17,685 – 62,520 Shares and units in unit trusts 53,710 (1,937) (1,042) (4,682) 46,049 Debt securities and other fixed income securities 169,118 2,792 44,109 137 216,156
e si g n e d a n d p ro d u c e d b y
(ii) the allotment of ordinary shares for cash otherwise than pursuant to paragraph (i) up to an aggregate nominal amount of £481,681.40.
agreement before the expiration or revocation of the authority which would or might require relevant securities to be allotted after the expiration or revocation of this authority and the directors may allot relevant securities in pursuance of any such offer or agreement notwithstanding the expiry or revocation of this authority.
8) That the Remuneration Report contained within the Report and Accounts for the year ended 31 December 2001 be approved. 9) That the Hiscox International Sharesave Scheme be approved, the main features of which are summarised in the Remuneration report on pages 25 and 26, and that the directors be authorised to do all such acts and things as may be necessary or desirable to carry the same into effect and to make such changes as they may consider appropriate for that purpose.