★ Hiscox plc gross written premium income up 23% to £676.7 million
★ Group controlled gross written premium income up 21% to £941.3 million
Gross written premium £148 million (2001: £144m). Product range expansion and broadening of distribution continues in 2003
Bond transaction for a Lloyd's syndicate. The $33 million private placement provided Hiscox
THE result for the year ending 31 December 2002 is a rapid and welcome return to profit. The operating profit was £34.5 million (2001: £21.2m loss) and the pre-tax profit was £20.3 million (2001: £32.5m loss). The gross premium income controlled by the Group rose to £941.3 million (2001: £780.0m), and the gross premium income applicable to Hiscox plc increased to £676.7 million (2001: £548.9m). Hiscox plc benefits from fees and profit commission earned on the income written for third parties.
CAPITAL RAISING With the interim results in September 2002 we announced a rights issue. In the event, £110 million (net of expenses) was provided by shareholders on a 1 for 2 basis at 120p per share. Our largest shareholder, the Chubb Corporation, did not participate. This, together with other shareholders who were not able to participate, meant that around 50% of the shares had to be placed with new shareholders or with existing ones in excess of their pro-rata share. The fact that all shares were taken up was a great show of support and we are determined to justify it with good returns.
WTC We have increased the net reserve for this loss to Hiscox plc by £10 million. Our Syndicate 33 gross reserve has increased by $35 million to $475 million, of which $275 million had been paid by 28 February 2003. Gross notifications have increased from $576 million to $591 million. There is obviously a spotlight on the WTC loss as it is the biggest individual loss we and others have ever incurred. However, Syndicate 33 has a number of large losses at any one time, and occasional catastrophes covering a multitude of losses, some of which are settled below expectations and some above. What matters is to get our overall reserves for the business right.
Lloyd’s is fulfilling its role as the hub of the world insurance market
MARKET TRENDS How long will the bull market last? The established international insurance market remains in disarray. We are in the time-honoured position in the insurance cycle when current underwriting figures are excellent, but the losses and under-reserving of the past are eroding or destroying profits. There remains a delicious shortage of capacity and risk appetite for insurance, and an increasing demand for reinsurance due to shortage of capital.
However, this bottom of the cycle has had low interest rates and a difficult investment climate. This has not
only limited the inflow of new capital – the $30 billion estimated to have been fed in is nowhere near the $200 billion estimated to have been eaten by losses and capital erosion – but is also forcing insurance companies to focus on underwriting returns, and to stop being investment trusts with an expensive habit. This concentration on decent returns from underwriting should prolong the hard market for a good few years longer than would be the case with higher interest rates and easier investment markets. With our background training in Lloyd’s, where underwriting has always been paramount as the shareholders ’ funds were held by the Names, and where proper reserving has been vital due to the annual venture, we are able to take full advantage of the hard market.
CORPORATE GOVERNANCE Most of those in government and regulation have very little practical business experience. It is easy for them to believe that a proper board of directors will stop all corporate scandals, and that there is a simple formula for the perfect board. Anyone who has been in the business battlefield will know that what you need are people with integrity, good judgement and common sense (why did anyone call it common when it is so rare?). And they need to be united in the pursuit of profit for shareholders, not split into formulaic groups. Some will get better the longer they serve, and some will run out of steam after a while. Good directors will act on behalf of the Company whatever their perceived conflicts. There can be no rigid rules as long as we deal with human beings.
FINALLY Hiscox plc last year underwrote almost £1 billion income. It also reached the FTSE 250 which we know was due to the decline of others as well as our rise in value. However, we will keep striving to grow the business organically with small incremental acquisitions, avoiding the black holes of major acquisitions, and to give good returns to our shareholders. We have felt strongly supported by them during the recent hard times and now it is payback time. There is only one way of building a first class company and that is through profits. We will all focus 100% on producing them.
Our return to profit and our increase in gross written premium in 2002 is the combined result of our long experience, underwriting wisdom, strategic focus and the courage to take advantage of world market conditions
The proceeds of our £110 million (net of expenses) rights issue have grown our balance sheet, and allowed us to expand our underwriting in 2003. We will be able to continue to take advantage of current market conditions.
BUSINESS TRENDS The controlled gross premium income in the Group has grown to £941.3 million, an increase of 21%. Rating conditions are good across all lines of business. In our Syndicate business, as shown in chart 1, rates remain firm. In our retail business, as shown in chart 2, rates have increased, but not by the same degree as the syndicate business.
Fine Art, Kidnap & Ransom, Yachts, Bloodstock, High Value Household, Mass Affluent, Contingency, Personal Accident
– Aerospace, Technology, Media and Telecommunications (ATMT): Our base of ATMT business continues to broaden. It has previously been dominated by aerospace business, but it is now also building a book of US and UK technology business. The problems of the media account, due to the often perverse outcomes of libel actions, have now been addressed, and prospects look good. During the forthcoming year we will be putting effort into expanding this book into the rest of Europe.
– London Market Reinsurance: This area saw rate increases taking place even ahead of the tragic events of 9/11. Rates have remained firm to increasing throughout
Hiscox is a leader in professional insurance solutions for the media and advertising industry 2002, and we have been able to expand our book. 2002 was marked by an absence of any insured catastrophes – but two narrow misses by hurricanes reminded us why customers purchase reinsurance.
– London Market Insurance: This has been an area of expansion. We have provided capacity to the market at a time when many domestic players around the world have been reeling. A very good start to the 2002 underwriting year has been offset by deterioration of an old marine loss and an old energy liability loss. Prospectively, I expect that this area will be a significant profit generator.
A.M. Best affirmed the financial strength rating of A- (Excellent) of Hiscox Insurance Company, while Standard & Poor’s affirmed its rating of triple-‘B’-plus (Good) and has upgraded the outlook from stable to positive.
Our operating profit was £34.5 million and our pretax profit is £20.3 million (2001: £32.5m loss). The difference between these results is due to contributions to the government mandated equalisation provision and to negative short term fluctuations in our investment portfolio. In 2002 we contributed £2.7 million (2001: £2.6m) to the equalisation provision. Our total return from our investment portfolio was £16.2 million (2001: £9.9m), but, in difficult markets, this was below our expected return based on long term rates. This caused a negative fluctuation of £11.4 million, (2001: £8.7m).
Our Group pre-tax return on equity available at the start of the year based on operating profit was 20.9% (2001: -15.9%). On after-tax profits this is equivalent to
Hiscox insures clients against the impact of criminal activity, ranging from burglary through to kidnap and ransom
Trading result 26.0 (26.4) Other income less expenses (2.0) (0.5) Loan interest and capacity amortization (2.8) (2.5)
GROUP FINANCIAL PERFORMANCE Group after-tax profits were £14.0 million (2001: £23.1m loss), equal to earnings per share of 6.6p (2001: loss per share of 14.8p). At a pre-tax operating level, profits were £34.5 million (2001: £21.2m loss). The Group combined ratio improved from 109.9% to 94.8%. These substantial improvements reflect the higher rates, selective underwriting and lower claims that we referred to earlier.
whether in the nation’s top galleries or the homes of private collectors
UK RETAIL The UK retail business comprises the results of business written within Hiscox Insurance Company in the UK, together with the results of our direct activities. Table 3
Professor - Can you explain to us how Hiscox is using an “Extranet” to provide insurance in the United States of America?
Lucy, and one which perfectly illustrates how Hiscox is applying innovation to provide a better service and develop its business.
MARVELLOUS new invention which enables computing machines to be linked together with great security at great distances - even between continents!
Imagine that an American businessman visits his insurance broker to obtain insurance protection for his company's buildings against acts of terrorism.
Hiscox's innovative new solution provides swift access to capacity for terrorism insurance, with a very clear and straightforward policy wording.
Firstly, the broker programs his computing machine with the client's insurance requirements.
Atlantic Ocean by means of electrical impulses along an undersea telegraph cable.
The quotation is instantly relayed back to the United States and, if this is accepted by the client, a policy can be issued - all within ten minutes!
P R O F E S S O R B R AY N E
During the year our direct business made rapid progress. This business is focused on ‘mass affluent’ personal lines customers. We distribute policies direct by telephone and on the internet (www.hiscoxonline.com), also to employees of 44 companies through their intranets and through partnerships with financial institutions. At the end of February 2003 we had served 4,400 policyholders.
Our mainland Europe business has had considerably improved results, almost halving its loss. Our combined ratio reduced to 111.3% (2001: 115.4%). This is not yet at our long term target, but we expect to see further progress as the individual offices gain scale. Our French operations traded profitably despite a large fine art loss in the first half of the year. German rates are improving, so
Total managed assets grew to £790.4 million (2001: £521.0m), of which Hiscox plc’s share stood at £623.8 million at the end of 2002 (2001: £406.7m). This growth reflects the impact of our capital raising, the positive cash flow from our businesses and retained profit. This year we achieved a total return of 3.5% across those assets attributable to Hiscox plc (2001: 3.2%). This was below our assumed long term rates of return, causing a negative fluctuation of £11.4 million (2001: £8.7m). We have reduced our long term investment return targets for 2003 as these increases earn through, its results should improve. In Benelux, we need to gain further economies of scale. Our Irish business had another good year. We believe that there are huge opportunities for profitable growth in the whole of Europe.
niche areas of insurance, such as fine art and high value homes. We have now added business insurance to our range of specialisms with great success. Our expertise in providing indemnity insurance to meet the special needs of professions such as communications and I.T. has put Hiscox at the forefront of this fast-growing area.
to 4% for bonds and 6% for equities. Table 5 summarises this position.
PEOPLE This year, two individuals who have played an important role in the development of Hiscox are due to retire. The first is Nicholas Thomson, underwriter of Syndicate 33 from 1977 to 1993 and the Director of Underwriting for the Group until 2001. Nick embodies our underwriting culture – rational decision making and a strong sense of
Hiscox remains as good as its people. Nick and David are being followed by many other individuals of strength and quality. We further developed our training schemes this year, and it is pleasing to see them becoming part of the landscape at Hiscox. We were particularly pleased to be nominated tenth in the annual Sunday Times ‘100 Best Companies to Work For’ list. This is a great achievement.
Registrars Northern Registrars Limited Northern House Penistone Road Fenay Bridge Huddersfield HD8 0LA
Carol Franklin Engler (Aged 51) Carol Franklin Engler is a partner in Vorausdenken. She was the Chief Executive Officer of the World Wide Fund for Nature in Switzerland until the end of 2001. From 1979 to 1999 she was employed by Swiss Re in a variety of roles including Head of the Aviation Department and Head of Human Resources. She is currently a non-executive director of Citron plc. She joined the Group on 12 August 1999.
The Nominations Committee now comprises one executive director and all the non-executive directors. It meets as and when required to deal with appointments to the Board. It did not meet during the year.
The executive directors communicate and meet directly with shareholders and analysts throughout the year, and do not limit this to the period following the
RISK MANAGEMENT CULTURE Hiscox’s culture of open communication and delegated responsibility allows this framework of embedded risk management to function well throughout the organisation.
Internal audit is also responsible for making recommendations at all levels where risk management may be usefully improved and for reporting the acceptance and implementat ion of s ignificant recommendations to the Audit Committee.
RISK COMMITTEE This high-level committee, chaired by the Chief Executive, is responsible for monitoring all the risk management activities operating within the organisation and reporting significant issues to the Board and the Audit Committee.
It also has an important role to play in promoting and developing good risk management practice as well as identifying emerging risks and recommending appropriate risk management strategies.
The committee receives information from the internal audit function as well as conducting its own reviews at strategic, tactical and operational levels.
KEY STRATEGIC RISK AREAS The Risk Committee has identified for the Board four key strategic risk areas which, together with supporting analyses, enable the Board to review with each executive director the risks they are responsible for managing: • Financial risks – including capital, thirdparty default and economic risks, managed by, for example, scenario analysis, reinsurance security limits and monitoring, credit control measures, investment controls, cash flow monitoring and currency exposure hedging.
During the year, adjustments were approved by the Board to the number of awards and options in issue to take account of the recent Rights Issue and Open Offer and Placing. These adjustments were consistent with the preferred methodology set out in the Inland Revenue Share Schemes Manual and were based on the method of calculating the theoretical ex-rights price set out in Financial Reporting Standard 14 “Earnings per share”. Approval has been received from the Inland Revenue for the adjustments to all the approved schemes and the Company’s auditors have provided confirmation that the adjustments are fair and reasonable for those schemes that required such a confirmation.
PENSIONS The non-contributory defined benefit Hiscox Pension Scheme has two sections. The first section provides benefits that accrue at the rate of one sixtieth for each year of service up to retirement age 60 for employees as well as former members of the Economic Insurance Holdings Ltd scheme. The other section provides benefits that accrue at the rate of one thirtieth for each year of service up to retirement age 60 for senior executives as well as former members of The Hiscox Holdings Ltd scheme. At 1 January 2001, Hiscox introduced a non-contributory business profits of the Group, based on the year’s accounting result, exceed a return on equity linked to the longer term rate of return. Similarly the bonus pools allocated to each major business division are calculated based on the business profits generated by that division. This pool is utilised to award annual bonuses to all staff including executive directors based upon the performance of their business area and upon their individual performance. In this way, the bonus scheme aligns the interests of employees with shareholders. The actual amount to be paid to executive directors is determined by the Remunerat ion Committee based on an assessment of their individual performance against objectives. The Remuneration Committee also reviews and confirms the recommendations of management regarding the award of bonuses to senior managers and staff.
The Group has also implemented a performance share plan for senior executives to complement the existing long term incentive arrangements. No awards were made during the year under this plan. The targets applicable to the awards made in previous years were subject to the following operational earnings per share (“EPS”)
None of the Committee has any personal financial interest (other than as shareholders ), conflicts of interests arising from cross-directorships or day-to-day involvement in running the business . The Committee makes recommendations to the Board. No director plays a part in any discussion about his or her own remuneration.
REMUNERATION POLICY The Remuneration Committee recommends to the Board a framework of executive remuneration and its cost. The Committee will also determine on the Board’s behalf the specific remuneration packages for each of the executive directors, including pension rights and any compensation payments.
REMUNERATION ELEMENTS There are four components to the remuneration package: base salary and benefits, annual cash bonuses, long term incentive arrangements and pensions.
BASE SALARY AND BENEFITS The Remuneration Committee utilises the services of independent consultants, including independent reports published by Watson Wyatt and IDS (Incomes Data Services Limited), in its consideration of what comparable companies are paying and in setting annual salaries and other benefits. Using this information as a benchmark, and taking into account current economic and operational conditions, salary levels are determined for each individual which take into account experience, skills, development and performance.
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 when the
NON-EXECUTIVE DIRECTORS Non-executive directors receive an annual fee in respect of their Board and Board committee duties. The fees are reviewed, but not necessarily increased, annually and are set by the Board to attract individuals with a broad range of relevant skills and experience. The non-executive directors receive no other benefits.
The following graph shows the Company’s performance, measured by total shareholder return, compared with the performance of the FTSE All Share Insurance Index, also measured by total shareholder return. The FTSE All Share Insurance Index has been selected for this comparison because it is the most representative index for measuring the performance of the insurance market in which Hiscox participates.
Total shareholder return of Hiscox plc against the FTSE ASX Insurance Index
We were pleased that, for the second consecutive year, Hiscox received the Plat inum Award with Special Commendation from the Corporation of London as part of its Clean City Scheme Awards, which puts it in the top 6 of the 727 companies rated. These awards are given as part of an annual scheme run by the Corporation to recognise the efforts of companies in the City in reducing, recycling and reusing waste, in order to support the sustainable use of raw materials. Each company’s building is judged by a panel of officers from the Corporation, public sector and private industry on the efforts it is making, its approach to recycling and its innovation in dealing with waste.
– Employee policies: The Company has a clearly stated aim to be an employer of choice recognised for its people excellence. This influences all of its employment policies. Our people genuinely make a difference and therefore we have to attract the best employees, enable them to perform to an excellent standard and to contribute to the development of the business, reward them on their level of contribution and provide an environment in which they can enjoy their work.
The directors have pleasure in submitting their annual report and financial statements for the year ended 31 December 2002.
FINANCIAL RESULTS The results for the year are shown in the profit and loss account on pages 32 and 33.
DIRECTORS The names of the directors of the Company throughout the year and 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 25 to the accounts. RRS Hiscox, AGC Howland Jackson and DND Netherton 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.
GOING CONCERN After making enquiries, the directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the accounts.
– Our core values: Underpinning the Hiscox culture is a set of core values, which determine the standard of behaviour Hiscox expects from all of its employees. These core values, which include integrity, quality, efficiency and respect, are intended to guide everything Hiscox does in its business and they determine the way in which
Resolution 9, which will be proposed as an ordinary resolution, seeks to obtain approval for the Remuneration Report as set out on pages 26 and 27 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 pre-emption 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 nominal value of £723,058.60, representing 5.0% of the issued ordinary share capital as at 26 March 2003. This authority will terminate no later than fifteen months after the date of the Annual General Meeting.
The Group made no political contributions during the year (2001: £nil). Donations to the Hiscox Foundation, which is a UK registered charity, amounted to £25,000 (2001: £25,000). The policy of the Hiscox Foundation is to assist and improve education, the arts and independent living for disabled and disadvantaged members of society.
Corporation of London to keep abreast of best practices with regard to the environment and to exchange ideas with other like-minded companies.
In 2002, Jupiter Asset Management’s Socially Responsible Investment (SRI) team assessed the extent to which Hiscox incorporates environmental and social risks into the underwriting process. Feedback from Jupiter confirmed that because we have started to include these issues into some of our underwriting, we demonstrate sector leadership in our immediate peer group of listed Lloyd’s Underwriters. As a result, Hiscox was deemed to be suitable for a selection of Jupiter’s SRI funds on environmental and social grounds.
For example, in addi t ion 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 numeracy development, and where we finance after hours tuition and assist in the school’s governance. We also provide mentors for students at Morpeth School in Tower Hamlets.
By order of the Board SJ Bridges Secretary 1 Great St Helen’s London EC3A 6HX
% of total Number of shares Number of shares Hiscox plc
Chubb Investment Services Ltd 54,529,566 – 54,529,566 18.9 Fidelity International Limited 27,300,209 – 27,300,209 9.4
Landsdowne Partners Limited Partnership 10,530,000 – 10,530,000 3.6 Morgan Stanley Securities Limited 9,808,297 – 9,808,297 3.4
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 2002 and of the profit of the Group for the year then ended; and
We review whether the statement on pages 24 and 25 reflects the Company’s compliance with the seven provisions of the Combined Code specified for our review by the Listing Rules, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures.
We have audited the financial statements on pages 32 to 64. We have also audited the information included by cross reference within the directors’ remuneration report that is described as having been audited.
The directors are responsible for preparing the Annual Report and the directors’ remuneration report. As described on page 30 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.
We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the part of the directors’ remuneration report to be audited have been properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the directors’ report is not consistent with the financial statements, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors’ remunerat ion and transactions with the Group is not disclosed.
Earned premiums, net of reinsurance Gross premiums written 5(d) 676,705 548,926 Outward reinsurance premiums (260,561) (136,349)
Change in the gross provision for unearned premiums (95,366) (77,806) Change in the provision for unearned premiums, reinsurers’ share 64,351 9,428
Change in the provision for claims: Gross amount 35,869 (247,646) Reinsurers’ share (108,193) 154,469
Allocated investment return transferred to the technical account 9(a), 9(c) (27,643) (18,562)
Dividends – Interim paid (2,299) – Dividends – Final payable (6,914) –
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 Statement of Total Recognised Gains and Losses for the year ended 31 December 2002
Prepayments and accrued income Accrued interest 2,643 2,221 Deferred acquisition costs 83,784 66,699 Other prepayments and accrued income 10,813 5,637
Capital and reserves Called up share capital 23, 24(a) 14,459 9,633 Share premium account 24(a) 230,585 124,612 Merger reserve 24(a) 4,723 4,723 Capital redemption reserve 24(a) 33,244 33,244 Profit and loss account 24(a) (2,709) (7,421)
The financial statements were approved by the Board of directors on 26 March 2003 and were signed on its behalf by: RRS Hiscox, Chairman SJ Bridges, Finance Director
Capital and reserves Called up share capital 23, 24(b) 14,459 9,633 Share premium account 24(b) 230,585 124,612 Merger reserve 24(b) 58,970 58,970 Capital redemption reserve 24(b) 33,244 33,244 Capital reserve 24(b) (1,269) 351 Profit and loss account 24(b) 7,532 9,163
3(f) Equalisation provision An equalisation provision has been established and calculated in accordance with the requirements of Chapter 6 of the Interim Prudential Sourcebook for Insurers to mitigate exceptionally high loss ratios for classes of business displaying a high degree of claims volatility.
– Group: Investments are stated at their current value. Listed investments comprise those quoted on the London and other International Stock Exchanges. These investments are stated at mid-market prices on the balance sheet date, or on the last stock exchange trading day before the balance sheet date.
– Company: Investments in group undertakings and associates are stated at cost less provisions for impairment in value.
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.
Premiums written include estimates for “pipeline” premiums and adjustments to premiums written in prior accounting periods. Outward reinsurance premiums are accounted for in the same accounting period as the premiums for the related direct insurance or inwards reinsurance business.
Financial Report ing Standard 19 “Deferred Tax” was published by the Accounting Standards Board in December 2000 and replaced the existing Statement of Standard Accounting Practice on deferred tax. FRS19 is effective for the year ended 31 December 2002. The adoption of FRS19 has required more detailed disclosure in the notes to the accounts but has had no material impact on the current or prior years’ results.
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, where acquisition accounting was adopted.
Deferred tax is recognised in respect of all timing differences, except for which no provision is permissible as explained below, that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the balance sheet date. Timing differences are differences between the Group’s taxable profits and its results as stated in the financial statements that arise from the inclusion of gains and losses in tax assessments in periods different from those in which they are recognised in the financial statements.
Deferred tax is recognised in respect of the retained earnings of overseas subsidiaries and associates only to the extent that, at the balance sheet date, dividends have been accrued as receivable or a binding agreement to distribute past earnings in future has been entered into by the 3(h) Investment return All investment return is recognised in the non-technical account.
Unrealised gains and losses on investments represent the difference between the current value of investments at the balance sheet date and their purchase price or their valuation at the commencement of the year. The movement in unrealised investment gains/losses includes an adjustment for previously recognised unrealised gains/losses on investments disposed of in the accounting period.
3(i) Allocation of investment return An allocation is made from the non-technical account to the general business technical account based on the longer term investment return on investments supporting the general insurance technical provisions and all the relevant shareholders’ funds. The longer term investment return is an estimate of the long term trend investment return for Hiscox plc and its subsidiaries, together with the Hiscox managed syndicate, having regard to past performance, current trends and future expectations.
3(j) Depreciation Depreciation is provided to write off the cost less the estimated residual value of tangible assets on a straight-line basis over their estimated useful economic lives or length of lease, if less, as follows: Short leasehold, fixtures and fittings 10–15 years Computer hardware and software 3–5 years Motor vehicles 3 years All other tangible fixed assets 4 years 3(k) Goodwill Goodwill arising on the acquisition of subsidiaries has been written off directly to reserves in the year of acquisition up to 31 December 1997. From 1 January 1998, in accordance with FRS 10 “Goodwill and intangible assets”, goodwill arising on acquisitions, being the difference between the fair value of the purchase consideration and the fair value of net assets acquired, is capitalised in the balance sheet and amortised on a straight-line basis over its useful economic life which is considered to not exceed 20 years. Provision is made for any impairment.
3(m) Rates of exchange Assets, liabilities, revenues and costs denominated in foreign currencies are recorded at the rates of exchange ruling at the dates of the transactions. At the balance sheet date, monetary assets and liabilities are translated at the year-end rates of exchange. Any exchange profits or losses arising on the translation of foreign currency amounts relating to underwriting are taken directly to the technical account. Other exchange profits or losses are taken directly to the non-technical account.
3(o) 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
a much larger proportion of physical damage losses than we originally estimated. In line with our normal reserving practice we have therefore increased our reserve.
c) An increase in the loss on a transportation company where as part of closing the 2000 year of account we have taken the loss at the notified amount. We believe however that this loss could well settle below its current market estimate.
As at 28 February 2003 Syndicate 33 had paid US$275 million of the gross loss and recovered US$165 million from reinsurers. As part of our required funding of the US Trust Funds, a further US$56 million of cash advances and letters of credit had also been received from reinsurers at 28 February 2003. These recoveries of US$221 million at 28 February 2003 represent 63% of the expected total recoveries of approximately US$350 million. 84% of the remaining balance of approximately US$129 million is due from reinsurers, including US$23 million due from Lloyd’s, rated A grade or better.
Syndicate 33 has increased its bad debt provision on reinsurance recoveries from the WTC loss to US$7.5 million (2001: US$4.5 million). This results from the downgrade in rating of a number of the reinsurers during the year. No reinsurer on our programme has yet refused to pay a claim through insolvency. It has been assumed that no major reinsurer will fail.
mated what the directors believe is an appropriate discount or premium to 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, and the experience to date on settlement of WTC losses.
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. Most 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 final settlement will fall below the excess point so that Hiscox will incur no loss. The directors have nevertheless, where appropriate, established a precautionary reserve in these cases on the assumption that a part payment may be made, although this may be lower than the notification which is for a total loss on the layer.
4 WORLD TRADE CENTER The Group’s exposure to losses arising from the terrorist attack of 11 September 2001 arises almost entirely from its participation on Syndicate 33. Hiscox Insurance Company and the international operations of Hiscox have had a negligible loss from this event. The situation is unprecedented and as such, even 18 months after the event, the extent of the gross and net loss to the Group is difficult to assess with the degree of confidence which is usual for property insurance losses; facts or circumstances will come to light which may affect these estimates. The current projected estimate of net loss to Hiscox plc is £40 million (2001: £30 million), for which provision has been made in these financial statements. This takes no account of any potential subrogation.
Movement in deferred acquisition costs 1,509 (582) (1,714) (787) (8,420) (1,843) (3,463) (13,726)
Net longer term investment return 18,726 8,729 2,111 29,566 11,362 6,222 1,933 19,517 *Before movement in equalisation provision.
The impact of a 1% change in the combined ratios of each business division on technical profit/(loss) are: London UK International London UK International Market Retail Business Market Retail Business
“UK Retail” comprises all of the UK retail underwriting results of Hiscox Insurance Company Limited. Previously, the underwriting results of the UK retail business were reported in “Insurance Company”, together with the underwriting results of the International retail business written by Hiscox Insurance Company Limited.
5 SEGMENTAL INFORMATION continued b) 100% level technical account by reporting entity
The underwriting activities which are managed by the Group are shown below at the 100% level regardless of ownership of capacity: Managed Insurance International 2002 Managed Insurance International 2001 Syndicate Company Operations Total Syndicate Company Operations Total
Movement in deferred acquisition costs 1,509 (2,177) (119) (787) (8,420) (2,778) (2,528) (13,726)
Net longer term investment return 18,726 9,987 853 29,566 11,362 7,093 1,062 19,517 *Before movement in equalisation provision.
Trading profit/(loss) for Group share of continuing operations (Note 5d, 5e) 40,592 (16,182)
*For the 2002 year of account, the Group owned 63% (2001: 60%) of the Syndicate. 8% (2001: 7%) of that capacity was reinsured to three leading European reinsurers via a quota share arrangement.
d) Profit on ordinary activities before taxation – by business division
Other technical income/(charges) (3,856) – – (3,856) 1,324 – – 1,324
The additional segmental information provided above, by business division, has been added this year to the Report and Accounts to reflect the way the Group manages its business. In prior years’ Report and Accounts, the segmental information was disclosed only by reporting entity. This disclosure can be found in note 5(e). Key differences are as follows: “London Market/Group” comprises Hiscox plc’s share of the results of Syndicate 33, the results of the Hiscox Captive and the results of the non-underwriting entities of the Group, net of any business written between Group companies. Previously, Hiscox plc’s share of the results of Syndicate 33 and the results of the non-underwriting entities, excluding the Hiscox Captive, were included in “Lloyd’s Business/Group”.
5 SEGMENTAL INFORMATION continued e) Profit on ordinary activities before taxation – by reporting entity
Business/ Insurance International 2002 Business/ Insurance International 2001 Group Company Operations Total Group Company Operations Total
Investment return, based on longer term rate of return 16,803 9,987 853 27,643 10,407 7,093 1,062 18,562
Short term fluctuations in investment return (7,804) (3,587) (73) (11,464) (3,990) (4,184) (520) (8,694) Movement in equalisation provision – (2,703) – (2,703) – (2,582) – (2,582)
f) Net asset value per share 2002 2002 2002 2001 2001 2001
Net asset Number NAV Net asset Number NAV value of shares* per share value of shares* per share
Net asset value (before equalisation provision) 294,234 289,177 101.7 176,020 192,667 91.4
Net tangible asset value (before equalisation provision) 271,148 289,177 93.8 152,223 192,667 79.0 *The number of shares is the number of shares in issue as at 31 December of the relevant financial year.
The number of shares as at 31 December 2001 has not been adjusted for the impact of the Rights Issue. If it had been, the number of shares would have increased to 202,300,000. Accordingly, the net asset values disclosed above for 2001 would have reduced. The net asset value (before equalisation provision) per share of 91.4p would have been restated to 87.0p. All the other disclosed net asset values per share for 2001 would have been adjusted in a similar manner.
The figures in respect of Lloyd’s business relate to closed years of account at 1 January 2002 only.
Acquisition costs 156,103 133,924 Change in deferred acquisition costs (3,299) (13,677) Reinsurance commission (34,522) (4,122) Administrative expenses 27,469 25,237 8 EQUALISATION PROVISION
a) The total actual investment return before taxation comprises: Investment return on funds at Lloyd’s and other corporate funds: Investment income 4,590 3,507 Unrealised gains/(losses) on investments (2,939) (2,775) Realised gains/(losses) on investments (244) 115
Short term fluctuations in investment return retained in the non-technical account (11,464) (8,694)
Actual investment return: Shares and units in unit trusts (2,764) (9.5) 138 10.1 (2,006) (9.6) (4,632) Debt securities and other fixed interest securities 2,101 7.7 7,008 5.2 7,162 6.7 16,271
Funds at Lloyd’s 2001 2001 and other Share of Insurance 2001 Corporate Assets Syndicate Company Total
Longer term investment return credited to operating profit/(loss) and to the general business technical account 94,945 75,373 Actual investment return included in profit/(loss) on ordinary activities in the non-technical account 74,419 73,541
Fees payable to the auditors and its associates (exclusive of VAT)
Other non-audit services* Work performed in relation to: – Rights Issue/Open Offer 190 69% 200 48% – Conversion scheme – – 20 5% – Chubb bid – – 75 18% – Other corporate projects – – 21 5%
The average monthly number of staff employed by the Group was 367 (2001: 363), comprising 118 underwriting and 249 administrative staff (2001: 123 and 240 respectively). Of the total remuneration shown above, an amount of £12,343,000 was re-charged to the syndicate managed by Hiscox Syndicates Limited (2001: £11,421,000).
Adjusted basic, based on operating profit/(loss) after tax (on longer term investment return) 23,720 210,350 11.3 (15,090) 156,098 (9.7) Basic, based on profit/(loss) on ordinary activities after tax 13,975 210,350 6.6 (23,107) 156,098 (14.8) Diluted, based on profit/(loss) on ordinary activities after tax* 13,975 214,407 6.5 (23,107) 156,098 (14.8)
*In accordance with FRS 14 “Earnings per share”, potential ordinary shares are only included in the calculation of diluted earnings/loss per share to the extent that they are dilutive i.e. those that on conversion to ordinary shares would decrease net profit per share or increase net loss from continuing operations.
**The average number of shares and hence the loss per share for 2001 have been restated to reflect the impact on capital arising from the Rights Issue in September 2002.
Basic based on profit/(loss) on ordinary activities after tax 6.6 (14.8) Short term fluctuations in investment return 3.8 3.9 Movement in equalisation provision 0.9 1.2
Diluted earnings/loss per share has been calculated taking into account 2,941,000 (2001: nil) options under employee share schemes and 1,116,000 (2001: nil) options under SAYE share schemes.
Current tax UK corporation tax on profits/(losses) of the period 4,531 525 Foreign tax 301 9
The differences between the total current tax shown above and the amount calculated by applying the standard rate of UK corporation tax to the profit/(loss) on ordinary activities before tax is as follows: Profit/(loss) on ordinary activities before tax 20,315 (32,496)
There is a deferred tax asset unprovided of £1,955,000 for the Group. £1,413,000 of the unprovided tax asset is in respect of the unrealised loss arising within the holdings of shares and units in unit trusts. The balance relates to losses carried forward, of which £486,000 relates to overseas companies.
The Company has a deferred tax asset unprovided of £501,000 at the year-end, of which £445,000 relates to the unrealised loss arising within the holdings of shares and units in unit trusts. The balance relates to excess management expenses brought forward from earlier years.
Net book value at 31 December 2001 6,997 b) Other intangible assets £000
Charge for the year – 10 10 Disposals – – –
Shares and units in unit trusts 28,151 30,503 – – 27,587 30,038 55,738 60,541 Debt securities and other fixed interest securities 27,496 26,945 172,312 170,168 98,463 98,064 298,271 295,177
Of the above investments, equities with a market value of £1,945,000 and all the debt securities and other fixed interest securities are listed on a recognised stock exchange.
The total market value of investments purchased and disposed of in the year was £795,415,000 (2001: £303,094,000) and £634,345,000 (2001: £217,965,000) respectively.
Assets held under finance leases account for £434,000 of the net book value of the assets above (2001: £1,261,000). The total depreciation for the period relating to these assets amounted to £235,000 (2001: £357,000).
Cost at 31 December 2002 498 b) Investment in subsidiary undertakings £000 £000
For details of principal subsidiary undertakings, see note 30. Debt securities Shares and and other Deposits units in fixed interest with credit unit trusts securities institutions Other Total
22 PROVISION FOR OTHER RISKS AND CHARGES Group Group Group Company
Authorised – Ordinary shares of 5p each 26 September 2002 creation of new shares as part of Rights Issue 150,000,000 7,500
Exercise of approved and unapproved share options 80,581 4 Exercise of SAYE share options 78,328 4 New shares issued as part of Rights Issue 96,350,527 4,818 96,350,527 shares were issued at a price of 120.0p per share on 22 October 2002 as part of the Rights Issue. The mid-market price of Hiscox plc shares at close on 27 September 2002 was 140.0p.
Non-executive directors b) Pension Entitlements The pension entitlements of the directors in relation to the Hiscox defined benefit scheme were as follows: Increase in accrued Total accrued Transfer value of the Transfer value of Transfer value of Increase in transfer pension pension at increase in accrued accrued pension at accrued pension at value of accrued during the year 31 Dec 2002 pension 1 Jan 2002 31 Dec 2002 benefit during the year
Notes The pension entitlement shown is that which would be paid annually on retirement based on service to the end of the year. The increase in accrued pension for the year excludes any increase for inflation. The transfer value has been calculated on the basis of actuarial advice in accordance with Actuarial Guidance Note GN11: Retirement Benefit Schemes – Transfer Values. No contractual contributions were due or have been paid by the directors during the year.
One director exercised his share options during the year (2001: nil).
The share options disclosed below include replacement options in Hiscox plc relating to Hiscox Holdings Ltd and Hiscox Insurance Holdings Ltd share options granted prior to acquisition by Hiscox plc, plus options under the Hiscox plc Approved and Unapproved Share Options Schemes.
During the year,adjustments were approved by the Board to the number of options in issue and the exercise prices to take account of the recent Rights Issue and Open Offer and Placing. These adjustments were consistent with the preferred methodology set out in the Inland Revenue Share Schemes Manual and were based on the method of calculating the theoretical ex-rights price set out in Financial Reporting Standard 14 “Earnings per share”. Approval has been received from the Inland Revenue for the adjustments to all the approved schemes and the Company’s auditors have provided confirmation that the adjustments are fair and reasonable for those schemes that required such a confirmation.
The Company has taken advantage of the exemptions conferred in UITF 17 “Employee share schemes” in relation to the charging of notional costs to the profit and loss account.
During the year, adjustments were approved by the Board to the number of awards in issue to take account of the recent Rights Issue and Open Offer and Placing. These adjustments were consistent with the preferred methodology set out in the Inland Revenue Share Schemes Manual and were based on the method of calculating the theoretical ex-rights price set out in Financial Reporting Standard 14 “Earnings per share”. The Company’s auditors have provided confirmation that the adjustments are fair and reasonable.
Defined benefit schemes A full actuarial valuation was carried out at 1 January 2000 by a qualified independent actuary. The valuation was updated on an FRS 17 basis as at 31 December 2002 by a qualified independent actuary.
Analysis of the amount that would have been charged to operating profit/(loss) under FRS17
Current service cost 3,149 Past service cost – Gain/(loss) on settlements and curtailments –
Expected return on pension scheme assets 3,147 Interest on pension scheme liabilities (3,671)
Actual return less expected return on pension scheme asset (8,809) Experience gains and losses arising on the scheme liabilities (4,868) Changes in assumptions underlying the present value of the scheme liabilities (6,142)
Difference between the expected and actual return on scheme assets: Percentage of scheme assets 20% Experience gains and losses on scheme liabilities: Percentage of the present value of scheme liabilities 6% Total actuarial gain in the statement of total recognised gains and losses: Percentage of the present value of scheme liabilities 26%
Defined contribution scheme At 1 January 2001, Hiscox introduced a non-contributory defined contribution scheme for all staff joining the Group.
The total pension charge for the year amounted to £3,409,000 (2001: £2,856,000) of which £1,814,000 was recharged to managed syndicates (2001: £1,696,000).
Operating leases which expire: From two to five years inclusive 681 – 681 681 57 738
Net cash inflow/(outflow) for the period 31(e) 25,288 6,369 Portfolio investments 31(e) 98,483 45,779 Decrease/(increase) in loans 31(e) 2,626 (905)
Movement arising from cash flows 126,397 51,243 Movement in long term and Lloyd’s business 31(c), 31(e) 95,975 57,035 Changes in market value and exchange rate effects 31(e) (2,717) (4,549)
Total portfolio investments net of financing at 1 January 403,654 299,925
Total portfolio investments net of financing at 31 December 623,309 403,654 c) Cash flows of the Lloyd’s business £000 £000
Premiums received, net of reinsurance 254,365 124,051 Claims paid, net of reinsurance (80,382) (52,881) Net portfolio investments 6,652 6,011 Other net cash flows (107,697) (32,635)
d) Analysis of cash flows for headings netted in the cash flow statement £000 £000
Servicing of finance Interest paid (1,644) (559) Interest paid element of finance leases (65) (121)
Acquisitions and disposals 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* 110,799 54,371 New bank loan – 1,378 Repayment of bank loan (2,038) – Capital element of finance leases (222) (381)
Portfolio investment Purchase of shares and units in unit trusts 19,911 8,402 Purchase of debt securities and other fixed interest securities 175,765 120,564 Sale of shares and units in unit trusts – (10,339) Sale of debt securities and other fixed interest securities (165,451) (117,772) Increase/(decrease) in deposits with credit institutions 68,265 44,924 Increase/(decrease) in other investments (7) –
*These balances include amounts relating to syndicate participations, but exclude participations in associated undertakings of £368,000 (2001: £167,000).
The consolidated cash flow statement excludes cash flows relating to underwriting on Lloyd’s syndicates.
Operating profit/(loss) before taxation 34,482 (21,220) 2,950 5,427 12,195 Short term fluctuations in investment return (11,464) (8,694) 1,043 (3,672) 2,260 Exceptional items – – 1,803 – 2,535
Profit/(loss) on ordinary activities before taxation 20,315 (32,496) 3,487 112 15,251
Cash at bank and in hand 121,196 62,520 38,466 27,602 43,868
***Profit on ordinary activities after taxation as a percentage of opening shareholders’ funds.
SPECIAL RESOLUTION 10) That the directors be empowered (in addition to all existing authorities) pursuant to Section 95 of the Act to allot equity securities (as defined in Section 94 of the Act) for cash pursuant to the authority conferred by Resolution 7 as if Section 89(1) of the Act did not apply to the allotment. This power will expire fifteen months after the date of the passing of this Resolution, but the Company may before such expiry make an offer or agreement which would or might require equity securities to be allotted after the expiry of this power and the directors may allot equity securities in pursuance of that offer or agreement as if the authority conferred by this resolution had not expired provided that this power is limited to: (i) allotments of equity securities where such securities have been offered (whether by way of a rights issue, open offer or otherwise) to holders of ordinary shares in proportion (as nearly as may be) to their existing holdings of ordinary shares but subject to the directors having a right to make such exclusions or other arrangements in connection with the offer as they deem necessary or expedient: (a) to deal with equity securities representing fractional entitlements; and (b) to deal with legal or practical problems under the laws of, or the requirements of any recognised regulatory body or any stock exchange, in any territory; and
(ii) the allotment of ordinary shares for cash otherwise than pursuant to paragraph (i) up to an aggregate nominal amount of £723,058.60.
Notice is hereby given that the Annual General Meeting of Hiscox plc will be held at 1 Great St Helen’s London EC3A 6HX on 24 June 2003 at 11.00 am for the following purposes: ORDINARY BUSINESS 1) To receive the accounts of the company for the year ended 31 December 2002 together with the directors’ and auditors’ reports thereon.
To re-appoint the following who retire as directors in accordance with the Articles of Association: 2) RRS Hiscox 3) AGC Howland Jackson 4) DND Netherton 5) To re-appoint KPMG Audit Plc as auditors of the Company to hold office from the conclusion of this meeting until the conclusion of the next general meeting of the Company at which accounts are laid. 6) To authorise the directors to determine the level of auditors’ remuneration. 7) To declare a final dividend for the year ended 31 December 2002 of 2.4 pence per ordinary share payable to shareholders on the register at the close of business on
Hiscox plc, 1 Great St Helen’s, London EC3A 6HX, United Kingdom
Or visit our website at www.hiscox.com *Shares bought on or after this date will not qualify for t he dividend.
**Shareholders must be on our re gister on this date to receive a di vidend.