Total dividend per share for year (p) – increased by 17.6% 15.0 12.75
In a 2009 award voted for by independent brokers, Hiscox UK was named Insurance Times’ ‘Commercial Lines Insurer of the Year’ for the third year running. We were also awarded ‘General Insurer of the Year’ at the British Insurance Awards 2009.
* Results from our monthly customer satisfaction survey for customers telephoning one of our UK-based contact centres.
The insurance market In my half year statement in 2007 I wrote that it seemed surreal to be announcing record results when our shares were rated so lowly. There was then a re-rating of the general insurance sector, but suspicion and malaise seems to have crept in again. Commentators seem cynical about our prospects and the insurance industry as a whole is valued at less than book value. Hiscox is rated at a small premium to assets and a ridiculously low multiple of earnings.
The Hiscox businesses As usual, I leave it to the CEO, Bronek Masojada, to report in detail the progress of our spreading but very focused businesses.
It is an enormous pleasure to report a gross profit of £320.6 million – three times last year’s profit and considerably higher than the previous record of £237 million in 2007. I know that Mother Nature was kind, but my definition of luck is when preparation meets opportunity, and our catastrophe underwriters did an immense amount of preparation and research to underwrite a carefully controlled exposure which could benefit from a benign catastrophe period, but not hurt us if nature turned vicious. I also believe that the stability of the general insurance industry during the recent banking bubble deserved a reward.
Dividend and capital management The Board proposes to pay a second interim dividend of 10.5p on 29 March 2010 to shareholders on the register on 5 March 2010 in place of a final dividend, making total dividends for the year of 15.0p (2008: 12.75p).
In brief, our catastrophe reinsurance underwriting in Bermuda and London was extremely profitable which enabled us to continue to invest in our US start-ups and our direct business. Our UK business demonstrated strong profitable growth, Europe had a tough first half but recovered well in the second, and Guernsey was outstanding as usual. We have made a major investment in the US and it was extremely gratifying to see the core errors and omissions account, which Ed Donnelly joined in 2005 to build, coming into profit.
In the meantime, we will strive to continue to add to the net assets year-on-year which will inevitably drive the share price up over time.
Glob al err or s an d om iss ion s 6% Large property
In 2009 we made a pre-tax profit of £320.6 million – the best result in the Group’s history. Good underwriting and top-class investment management drove this result, helped by the absence of anymajor catastrophes. Our record profit has not come by sacrificing the future growth of the Group – in 2009 we continued to invest in building our brand in the UK and rapidly expanding our US operations.
Our strategy is to establish operations in Europe, the UK and the US that focus on our core specialty products to balance our more volatile business written in London and Bermuda. This strategy works: in 2005 when Hurricanes Katrina, Rita and Wilma drove some of our competitors deep into the red we made a healthy profit thanks to the contribution of our specialty businesses.
N o v 6 Chief Executive’s report Hiscox Ltd Report and Accounts 2009
Group performance In 2009 our pre-tax profit was £320.6 million (2008: £105.2 million). Gross written premium grew by 25.1% to £1,435.4 million (2008: £1,147.4 million). Part of this growth was driven by exchange rate fluctuations and in constant exchange rate terms our gross written premium grew by 5.6%. Return on equity was 30.1% (2008: 9.2%) and our net asset value increased
The London Market business is managed through five divisions whose performance is reviewed below: Reinsurance: Our reinsurance business performed well yet again. Having made a profit in 2008 despite the impact of Hurricane Ike, it is not surprising that it made a very good return in a year largely free of major losses. Our expertise in reinsurance is widely recognised, reflected by the fact that a number of third-party capital providers have chosen us to underwrite on their behalf. In 2009 Syndicate 6104 – a syndicate funded entirely by third-party capital – supported us. This support has been extended into 2010. We have a number of similar arrangements with other insurance companies. Overall, reinsurance prices softened in the January renewals, although I believe that in 2010 we will see rates largely similar to or better than those in 2008 – a year in which we achieved a good result despite the impact of Hurricane Ike.
Specialty: This division underwrites a spread of specialist risks: personal accident, bloodstock, kidnap and ransom, terrorism, political risks and aviation war. Good performance across most of these lines was offset by political risk losses, largely due to credit defaults. We took a very cautious approach early in the year in reserving for these claims in view of the continuing fragile state of the global economy. There is a possibility, however, that, as conditions improve, these political risk losses may reduce, which is what we experienced in the last big financial crisis in 1998. In keeping with our belief that you should advance to the sound of gunfire we expect to expand our political risk underwriting this year as client demand and pricing increases due to the turbulent global economic situation.
Hiscox UK and Hiscox Europe – specialty retail Our specialist retail businesses in the UK and mainland Europe grew well in 2009. In underwriting terms, the UK had a very good year, while Europe did not.
Hiscox UK: In the UK we saw premium growth of 16.1% to £304.0 million (2008: £261.9 million). Growth was particularly strong in fine art due to the acquisition of some global polices insured in London. The professions and specialty commercial business has continued to develop and for the first time it now exceeds the size of the UK focused art and private client business. The UK direct business continued to see strong growth and is near break even net of all its marketing costs.
Our substantial marketing investment over the past four years, masterminded by Steve Langan, has turned Hiscox into a recognised consumer brand in the UK, one known not only for the quality of its products but also for its claims management. Of our household claimants 92% reported that they were either ‘satisfied’ or ‘very satisfied’ with the claims service they received. Our success has also been recognised by brokers. In a 2009 award voted for by independent brokers, we were named Insurance Times’ ‘Commercial
London has recently experienced a renaissance as an insurance market and we see plenty of opportunities to grow our business with Londonbrokers in the years ahead.
We are not resting on our laurels. In 2010, we will seek to grow our direct business further, pushing it into profit. We foresee a tougher claims environment in some sectors as professional firms get blamed for their customers’ recession-related misfortunes. Prices will have to rise to reflect this.
We have been building a business in Europe for the past decade, but we know that the ROE – the return on effort that is – is below expectations. Pierre-Olivier Desaulle, who we appointed Managing Director of Hiscox Europe during the year, will inject new energy into the operation. As MD of Hiscox France since 2000 he grew it six-fold and delivered sustainable profits. The European Management Team is focused on repeating this success across the continent.
Hiscox International Hiscox International comprises our businesses located in Bermuda, Guernsey and the US. The businesses faced quite different challenges in 2009: Bermuda: Had a fantastic year. Its primary focus is property catastrophe insurance. After shrinking its top line in 2008, it responded aggressively to the rebounding rates and grew by 24.2% to $262.9 million (2008: $211.7 million). We also created a healthcare insurance and reinsurance team, who will focus on catastrophic exposures in the medical sector. In addition, we are building a small portfolio of catastrophe bonds issued by insurers and others. As this is an alternative route to assuming catastrophe risk we regard this as an extension of our reinsurance underwriting business and consider it when we look at our aggregate exposure to insurance events. During the year Charles Dupplin assumed leadership of Hiscox Bermuda from Robert Childs, its founding CEO. Robert and a small team went to Bermuda in late 2005. Since then Hiscox Bermuda has underwritten $943 million of premium income, generated significant profits and grown the balance sheet from $500 million (of which $200 million was borrowed) to $1 billion before paying a dividend to the Group at the end of 2009. This is a fantastic achievement and one for which we are all very grateful.
In order to provide the clarity of focus to accompany our big investment, we created a single US business, merging the New York based London Market activities with our smaller ticket professional lines business. Richard Watson has moved to the US to head up the overall business. Ed Donnelly continues as President of our activities and will drive forward our specialist lines and all of our branch offices. Under Ed’s leadership our smaller ticket professional lines activities reached break even in 2008, and we believe that working together, Ed and Richard will build a very successful business.
Although Hiscox USA grew its top line to million), this growth was less than we had budgeted, as the anticipated upturn in the US domestic market did not occur. Our response has been to call a temporary halt to expanding our product range and to focus in 2010 on marketing those products we have already developed. We are confident this is the right way to improve the underlying financial performance of the business.
This picture of our risk profile enables us to have a debate on our risk appetite, which is then agreed by the Board. Everyone is aware that if our expected underwriting margins fall, or forecast investment returns decrease, we are confronted with a choice: either we are forced to take less risk or we need to have more capital.
We look at this balance of expected return, risk and capital every quarter and make minor course adjustments accordingly. Once a year, ahead of the 1 January renewal season, we have a major review of our risk strategy and, if required, make our major course corrections then.
People Insurance remains a business in which intellectual capital is as important as financial capital as a prerequisite for success. That we were able to reshuffle our senior management in 2009 without having to look outside to fill any of these roles is a testament to the growing strength of our management cadre. This greater strength is what gives me confidence that we will be able to continue to improve our performance as the Group grows and develops.
Europe Amsterdam Bordeaux Brussels Cologne Dublin Hamburg Lisbon Lyon Madrid Munich Paris Stockholm
USA Armonk (New York) Atlanta Boston Chicago Geneva (Illinois) Kansas City (Missouri) Lexington (Kentucky) Los Angeles Miami New York City San Francisco
Capacity Hiscox increased the 2010 capacity for Syndicate 33 to £1 billion (2009: £750 million); Cougar Syndicate 6104 to £45 million (2009: £43 million); and Syndicate 3624, which is a wholly owned syndicate, to £150 million (2009: £80 million).
Hiscox Bermuda Hiscox Bermuda underwrites a variety of reinsurance business including catastrophe, risk excess of loss, and healthcare insurance, as well as providing Group capital support.
Hiscox Guernsey Hiscox Guernsey specialises in fine art, kidnap and ransom, terrorism and piracy insurance.
Hiscox UK and Europe Hiscox UK and Europe underwrite local specialty insurance from 20 different regional centres across Europe. Business is sourced mainly through brokers however some household and commercial products are offered directly to the customer via internet and telephone.
Locations UK – Birmingham, Colchester, Glasgow, Leeds, London, Maidenhead, Manchester. Europe – Amsterdam, Bordeaux, Brussels, Cologne, Dublin, Hamburg, Lisbon, Lyon, Madrid, Munich, Paris, Stockholm.
David Bruce Deputy Managing Director, Hiscox London Market Head of Specialty, Hiscox London Market
The unique personality of Hiscox is expressed through our employees to our clients. We want customers to find us intelligent but not intellectual, bold but not arrogant, thought provoking but not patronising, different while being straightforward, positive but not pushy, contemporary not stuffy, sophisticated but not superior.
1. Recruit the best Hiscox aims to fill posts by recruiting internally, where possible. Because we strive to attract and retain the best people, we believe we have the ideal candidates for many jobs already working in the firm. We also want to stretch our people so they can reach their full potential. In 2009, 118 new appointments were either internal promotions or recommendations from current employees. When we do recruit talent from outside, we ensure that they go through a thorough assessment. In 2009, we recruited ten graduate trainees into the UK. In 2010, we plan to extend this to Bermuda and continental Europe. This combined with our very successful internship scheme will provide us with another source of talent to fill senior roles in the future. The average number of candidates seen for each job we filled in 2009 was four.
2. Develop excellence Hiscox has a unique underwriting training programme developed by some of our very 14 People Hiscox Ltd Report and Accounts 2009 experienced underwriters. The training, which aims to reinforce Hiscox’s underwriting standards, includes how to underwrite profitably across the cycle and the importance of learning the lessons of history when assessing risks. We also want to instill in our underwriters a restless curiosity, to challenge convention and not simply to accept a practice because that is the way it has always been done in the past. A total of 338 delegates completed this training programme in 2009.
The Hiscox Partnership Senior staff members who have made an important contribution to the Group’s success may be appointed as a Hiscox Partner. The Hiscox Partnership, which numbers up to 5% of the total number of staff, is informed of all the strategic decisions and facts and figures of the Group, which enables them to influence the direction and performance of the Group. They also act as mentors to talented young people and ensure that we are operating in a way which is consistent with our values everywhere in the Group. In 2009 five new Partners were appointed.
The idea behind it is simple: if employees feel very engaged they are more likely to stay and deliver their very best for the company. Being able to measure levels of commitment enables Hiscox to identify areas where it can improve performance and boost staff retention.
The survey shows Hiscox enjoys high employee engagement and we consistently outscore the global benchmark set against 113 organisations across 58 countries. Our intent to stay rating was better than 95% of other firms.
A good underwriting result combined with a strong investment return due to the rally in the investment markets, contributed to the Group’s record profits.
Included within the Group’s profits are foreign exchange losses of £25.6 million reversing part of the £109.8 million gain recorded in the prior year. In addition, inherent within the underwriting result is the foreign exchange impact of the non retranslation of non monetary items. This resulted in a loss for the year of £53.2 million (2008: £36.1 million gain). Retranslation of non monetary items at year end rates of exchange
Adjusted number of shares in issue (m) 374.8 368.5 **excluding derivative assets and catastrophe bonds.
Hiscox London Market Hiscox London Market comprises the results of Syndicate 33, excluding the result of fine art, UK regional events coverage and non US household business which is included within the results of UK and Europe. In addition, it excludes the larger TMT business which is allocated to the International segment and an element of kidnap and ransom and terrorism included in UK and Europe.
Gross premiums written increased by million) reflecting the strength of the US Dollar exchange rate. In original currency, gross premiums written were comparable with the prior year as rates in reinsurance and marine and energy increased, offset by our deliberate reduction in certain areas where rates were less favourable including US property.
A positive investment return of £80.9 million (2008: £5.5 million negative) was recognised as the Group benefited from the rally in the markets.
Profit before tax for the year decreased to £20.5 million (2008: £31.8 million).
Hiscox International Hiscox International comprises the results of Hiscox Insurance Company (Guernsey) Limited, Hiscox Insurance Company (Bermuda) Limited, Syndicate 3624, Hiscox Inc. and Hiscox Insurance Company Inc.. It also includes the results of the larger TMT business written by Hiscox Insurance Company Limited and Syndicate 33.
Gross premiums written increased by million). Growth in original currency was 22.0% reflecting increased rates and levels of reinsurance written in Bermuda, increased demand for piracy products in Guernsey and our continued expansion in the US.
The investment return increased significantly to £57.8 million profit (2008: £8.4 million loss) consistent with the overall increase in the total investment return for the Group.
The expense ratio deteriorated by 7.7% to 45.6% as a result of continued expansion costs to take advantage of opportunities in the US.
Hiscox Corporate Centre Hiscox Corporate Centre comprises the investment return, finance costs and administration costs associated Group management activities. Corporate centre also includes the majority of foreign currency items on economic hedges and intragroup borrowings.
The investment result improved significantly to £9.2 million profit (2008: £1.8 million loss), an improvement experienced across all segments. Total expenses including certain foreign exchange items have decreased by 54.7% to £8.7 million (2008: £19.2 million). Included within foreign exchange gains of £10.3 million (2008: £9.0 million loss) is the foreign currency impact on certain intragroup loan balances.
The resulting loss before tax in Corporate Centre improved significantly to £4.0 million (2008: £67.9 million). In the prior year, the Group recorded a derivative loss of £42.5 million in protecting currency translation gains recognised directly in equity.
Total net cash outflows for the year were £150.1 million (2008: inflow £75.8 million).
The outflow for the year is driven mainly by the settlement of 2008 losses, payment of expenses, the payment of dividends and the settlement of the derivative contracts which were outstanding at the end of 2008. In addition, the decrease also represents the strategic decision by the Group to increase its returns by investing surplus cash balances into its fixed interest portfolio.
The Group has a secured revolving credit facility for a total of £350 million which may be drawn by way of cash or Letter of Credit or a combination thereof providing that the cash portion does not exceed £200 million. The facility may be drawn in any foreign currency at the request of the Group. As at 31 December 2009, $225 million was drawn by way of Letter of Credit and £138 million by way of cash (2008: £137.5 million and $130.0 million respectively).
Solvency II Solvency II is the new solvency regime for all EU insurers and reinsurer which is due to come into effect from 2012. The new regime aims to implement solvency requirements that are consistent across all member states and which better reflect the risks that insurers and reinsurers face.
The new regime is based on a three-pillar approach as follows: Pillar 1 – Quantitative requirements Pillar 2 – Government and risk management requirements Pillar 3 – Disclosure and transparency requirements.
A working group has been established to lead the implementation of the new regime and a comprehensive implementation plan is in place with performance and execution ongoing. Many of the qualitative requirements already form an integral part of the Group’s risk management framework and a gap analysis has been performed in order to identify those areas which may require small incremental changes.
The last two years have witnessed dramatic events in the investment world. Each one, in a very different way, has turned out to be extremely interesting and indeed challenging. Having survived 2008, there was no let up in early 2009, as volatility and uncertainty continued to grip markets. Whilst there was temptation to de-risk further during the periods of greatest uncertainty, the robustness of our balance sheet and the strength of cashflows from the bond portfolio meant that such a move was not required. Additionally, rigorous stress testing and monitoring of the underlying securities confirmed that the prices available in the market for many of our bonds bore little relevance to their fundamental value. Throughout the year payments of principal and interest were as expected. It is therefore pleasing to report that the Group has benefited from holding on to those securities that were heavily discounted in value at the end of 2008 and into the first quarter of 2009. What has been more of a surprise is the speed at which they have returned towards par, making up for most of last year’s losses. This, of course, has been made possible by the extraordinary monetary conditions that have prevailed and the scale of Government measures deployed in order to restore liquidity and confidence in the various markets.
As a degree of calm and rationality has been restored, improved valuations for securitised bonds boosted our US Dollar portfolios. Similarly, financial bonds in our Sterling and Euro portfolios recovered once it became clear that the authorities were unlikely to let strategically important banks fail. This did not 20 Group investments Hiscox Ltd Report and Accounts 2009 stop prices for subordinated paper being marked down, but our exposure to the lower parts of the capital structure was minimal.
Major risks The major risks that the Group faces are presented below. Detailed information on the major risks and uncertainties impacting the Group’s financial statements is set out in note 3 to the financial statements.
Insurance Catastrophe and systemic insurance losses The Group continues to underwrite significant risks in geographical regions that are prone to natural peril. This business remains a compelling proposition for the Group since it is capable of returning good margins over the medium to long-term as the occurrence of catastrophes averages out. As with similar insurers, the Group’s earnings are affected by unpredictable external events such as natural and other catastrophes, legal developments, social and economic change and the emergence of latent risks. Such events can create significant levels of underwriting losses. The Group manages its exposure to these risks through having a clearly defined risk appetite which dictates the business plan and is realised through disciplined underwriting, close and continuous monitoring of exposures and aggregations, and a prudent and disciplined reinsurance purchase programme to cap losses from risk concentrations.
Of critical importance is the quality of our underwriting models and risk aggregation capability. Incentives ensure that underwriting staff make sound and objective judgements that are aligned with the Group’s overall strategic objectives and risk appetite. Clear authority limits are also in place that are regularly reviewed and monitored. Policy wordings are reviewed regularly by specialists and legal experts in the light of legal developments to ensure that the Group’s exposure is restricted, as far as possible, to those risks identified at the time of policy issuance. The modelling and monitoring tools are used both in the underwriting process and by independent risk specialists. They are used to design the insurance and reinsurance programmes and control the business underwritten to ensure that the risk profiles of contracts match the exposures for which the programmes were devised.
Aggregation and modelling resources are shared across the Group. Subsidiaries and locations worldwide therefore employ the same sophisticated standard of modelling tools tailored to the characteristics of each specific market. We also run realistic disaster scenario projections on a subsidiary and consolidated basis in order to estimate the potential loss across all books of business following a range of specific events. We adjust our business plan, target products and reinsurance programme to deliver a well-diversified book. This enables us to maximise expected risk/return on the portfolio as a whole and offset potential losses on the more volatile accounts.
Competition and the insurance cycle In our markets, Hiscox competes against major international groups with similar offerings. At times, a minority of these groups may choose to underwrite for cash flow or market share purposes at prices that sometimes fall short of the break even technical price. The Group is firm in its resolve to reject business that is unlikely to generate underwriting profits. Accepting insurance risk below the technical price is detrimental to the industry’s prospects, since it drives the prevailing rates in the market lower to the point where business failures occur, insurers’ capital is destroyed, customers receive sub-optimal service and the industry suffers from negative publicity. As capacity levels in the market fall, prices inevitably rise until the point where the cycle of irrational pricing may begin again. In common with all insurers, the Group is exposed to this price volatility. Prolonged periods of low premium rating levels or high levels of competition in the insurance markets are likely to have a negative impact on the Group’s financial performance.
Mutualisation is a related risk arising from the phenomenon of pricing cycles in the industry. The Group is required to contribute towards the obligations of other financial institutions who fail. Syndicates 33 and 3624 contribute to the New Central Fund operated by the Council of Lloyd’s, and in the UK certain Hiscox entities contribute to the Financial Services Compensation Scheme (FSCS). Insurance companies may be asked to contribute to the recent claims on the FSCS from the banking industry, currently funded by the Treasury. Any such requests depend on the final level of claims from deposit holders (net of asset recoveries), the period of repayment demanded by the Treasury and the ability of the banks to make such repayments.The Group participates in many industry bodies, associations and task-force initiatives in order to monitor developments and influence their strategic direction. In particular, the continued involvement of the Group’s executives in the reshaping of the Lloyd’s market underscores that commitment.
Reserving The Group establishes provisions for unpaid claims, defence costs and related expenses to cover its ultimate liability in respect of both reported claims and incurred but not reported (IBNR) claims. These provisions take into account both the Group’s and the industry’s experience of similar business, historical trends in reserving patterns, loss payments and pending levels of unpaid claims and awards, as well as any potential changes in historic rates arising from market or economic conditions. Details of the actuarial and statistical methods and assumptions used to calculate reserves are set out in note 27 to the financial statements. The provision estimates are subject to rigorous review and challenge by senior management from all areas of the business and the final provision is approved by the reserving committees. The provision is set above the expected or mean reserve requirement to minimise the risk that actual claims exceed the amount provided.
Credit Reinsurance counterparties The Group purchases reinsurance protection to limit its exposure to single claims and the aggregation of claims from catastrophic events. The Group places reinsurance with companies that it believes are strong financially and operationally. Credit exposures to these companies are closely managed by the Reinsurance Security Committee (RSC), which is chaired by the Group Finance Director. All reinsurers used must be approved by the RSC following an internal assessment of the company’s financial strength, trading record, payment history, outlook and organisational structure, in addition to credit ratings granted by external agents. Approved reinsurers are monitored continuously to identify potential deteriorations as early as possible. Monitoring procedures include consideration of public information produced by reinsurers; the Group’s experience of the reinsurers and their behaviour in the marketplace; and analysis from external consultants and from rating agencies. Credit limits are set for approved reinsurers both at a Hiscox Group level and for each underwriting subsidiary based on a defined risk appetite. The Group’s experience of bad debts arising from its reinsurance arrangements has been minimal.
Emerging risks Being able to identify and plan for unexpected events has become an increasingly important component of our business cycle management. Emerging risk identification and control is therefore a core part of risk management activity in relation to all aspects of our business, including underwriting, operations and strategy. Significant efforts are made, including obtaining external expertise, to try to identify any threats to the business either actual or potential. For example, a change in US legislation may result in unintended risks being underwritten, or may require us to cease business in certain US states. The identification of emerging risks is a core agenda item in each Risk Committee. We take all reasonable steps to minimise the likelihood and impact of such events and to be prepared for their occurrence.
Capital The Group manages capital rigorously in order to maximise its return on capital whilst maintaining sufficient levels of financial resources to absorb unexpected losses and meet the requirements of regulators and rating agencies. Accurate measurement of potential losses under various scenarios is a critical aspect of our business planning and capital management cycle. Potential losses are calculated regularly using the most sophisticated modelling techniques available supported by stress and scenario assessments. We invest heavily in the most up-to-date risk management techniques and in expert staff to ensure our procedures and analyses remain second to none.
Investments and foreign exchange Investment policy The investment policy is designed to maximise returns within the overall risk appetite of the Group which stipulates a one in 100 year loss tolerance. The overriding philosophy with the Group’s assets is not to lose money or to put at risk the Group’s capacity to underwrite. Short-term interest rates are likely to remain at historically low levels throughout 2010. As a result the possibility of losing money with a portfolio consisting of any assets other than cash or short-term Government securities is statistically greater than normal. Consequently the Board has agreed, in current market conditions, to set aside extra capital to support the recommended asset allocation and to provide a buffer against possible investment losses during the year.
Technical funds, the investments held for the payment of future claims, are primarily invested in high quality bonds and cash.
Due to the short-tail nature of the Group’s insurance liabilities, the aim is not to match the duration of the assets and liabilities precisely. Benchmarks are instead set for the fixed income fund managers which approximate the payment profile of the claims as well as providing the managers with some flexibility to enhance returns.
Foreign exchange The US Dollar is the Group’s largest underwriting currency. The Group’s policy is to match US Dollar insurance liabilities with investments held in the same currency in order to minimise the effect of currency fluctuations. Whilst the Group’s functional and reporting currency is Sterling, a significant proportion of the Group’s operational cost base is located in the US and Europe, and movements in foreign exchange rates may have a material adverse effect on its financial performance and position. In addition the capital base of the Bermuda, Guernsey and US insurance companies are in US Dollars. Where appropriate a percentage of the capital will be held in the currency matching that of the underlying business being written. Net currency positions are closely monitored and currency hedging transactions are entered into where this is considered advantageous in the light of anticipated movements in exchange rates. Further details of the Group’s investment profile and its management of currency risks are provided in notes 3 and 20 to the financial statements.
Third, our investment policy recognises that some investments may need to be realised before maturity or at short notice and hence a high proportion of investments must be held in liquid assets. This minimises the risk of loss in the event of having to sell assets quickly. Using these measures we believe the likelihood of being unable to meet our liabilities, or of incurring excessive costs in doing so, to be extremely remote.
ua ke b n m ar ke t lo ss ye ar re tu rn p er io d
ua ke 0b n m ar ke t lo ss ye ar re tu rn p er io d
Hiscox’s commitment to responsible business practices is reflected: In the marketplace Dealing with business partners Insurance brokers are an important Hiscox stakeholder, and Hiscox endeavours to have good relationships with them to create a competitive advantage in the marketplace. Clear communication is key to good relations and Hiscox regularly sends partner brokers updates (electronically or in hard copy) to keep them informed of developments at Hiscox and in the industry.
Dealing with investors In keeping with its policy of open and transparent communication, Hiscox reports both its half and full year results to its investors via a series of presentations as well as ensuring all relevant Group financial information is available on its website. In addition, senior management and key employees meet investors and analysts throughout the year to explain and take questions on the Group financial performance and business strategy.
Culture The Hiscox culture is underpinned by a set of core values that determine the standard of behaviour expected of employees. These core values – challenge convention, integrity, respect, courage, quality and excellence in execution – guide everything that Hiscox does in its business. With this conduct, the Group recognises that it is more likely to achieve business success and create value for its shareholders. Hiscox strives for the highest standards of corporate governance while being
In the community Hiscox donated £1,171,000 to charities in 2009. As the Group expands internationally, it has been recruiting local staff wherever possible, developing a rapport with the local community and making a direct contribution to the local economy. The Group has maintained its involvement in its local communities with the strong support of its employees. In Bermuda, Hiscox supports the Bermuda Sunshine League which is a transitional living facility for children removed from unstable living environments and gives employees the opportunity to contribute their time and effort to children who require adult role models and a semblance of stability. Hiscox is a member of the Lloyd’s Community Programme, which supports local initiatives concerning education, training, enterprise and regeneration. In London, the Reading Partners Scheme has continued, through which staff assist pupils at the Elizabeth Selby Infants School in Tower Hamlets. Employees also mentor students at Morpeth School in Tower Hamlets.
Supporting the arts The Group continues to support the Bermuda Masterworks Foundation, which aims to repatriate artworks by Bermudian artists or featuring Bermuda landscapes/seascapes.
In the environment The way customers conduct their business is of paramount importance to the Group. Hiscox’s approach to underwriting their risks will take into account customers’ attitudes to all aspects of their business, including care of the environment.
The Group’s efforts were rewarded by a Clean City Award from the City of London Corporation, which aims to promote good waste management practices and encourage waste minimisation, reuse and recycling.
Syndicate 33 Hiscox can trace its origins in the Lloyd’s Market to 1901. Today, Hiscox Syndicate 33 is one of the largest composite syndicates at Lloyd’s, and has an A.M. Best syndicate rating of A (Excellent). Syndicate 33 underwrites a mixture of reinsurance, major property and energy business, as well as a range of specialty lines including contingency, technology and media risks among others. The business is mainly property-related short-tail business; there is little exposure to aviation or motor business. Syndicate 33 trades through the Lloyd’s worldwide licences and ratings. It also benefits from the Lloyd’s brand. Lloyd’s has an A (Excellent) rating from A.M. Best, an A+ (Strong) from Standard & Poor’s, and an A+ (Strong) rating from Fitch.
The geographical and currency splits are shown to the right. One of the main advantages of trading through Lloyd’s is the considerably lower capital ratios that are available due to the diversification of business written in Syndicate 33 and in Lloyd’s as a whole. For 2010 Syndicate 33 has a capital requirement ratio of approximately 43% of Syndicate capacity. The size of the Syndicate is increased or reduced according to the strength of the insurance environment in its main classes. At present, Hiscox owns approximately 72.5% of the Syndicate, with 27.5% being owned by third party Lloyd’s Names. Hiscox receives a fee and a profit commission of approximately 17.5% of profit on the element it does not own.
For the 2010 year of account, Syndicate 33’s capacity has been increased from £750 million to £1 billion, primarily to reflect the strengthening US Dollar.
Syndicate 3624 Syndicate 3624 is a wholly owned syndicate which began underwriting for the 2009 year of account with an underwriting capacity of £80 million. Syndicate 3624 writes certain business lines including the US E&O account written through the Hiscox underwriting agency in Armonk, New York and a 50% quota share of Syndicate 33’s TMT business written by Hiscox owned underwriting agencies. Syndicate 3624 has a capital requirement ratio of 69% of syndicate capacity. Total underwriting capacity of Syndicate 3624 has been increased to £150 million for the 2010 year of account.
Hiscox Insurance Company has licences throughout Europe. It is the primary insurance vehicle used by the UK and mainland Europe offices for their business. The success of the reshaped portfolio can be seen in the chart below.
Hiscox Insurance Company Limited has achieved average compound growth in gross premiums written of 14.5% from 1997 to 2009, despite discontinuing almost all of its original business. It has also significantly improved its combined ratio.
Hiscox Guernsey has an A.M. Best rating of A (Excellent). At the end of 2009, net assets exceeded $28 million (2008: $23 million).
Hiscox Insurance Company Inc. Hiscox Insurance Company Inc. was acquired by the Group in July 2007 through the purchase of the then parent holding company ALTOHA, Inc.
Hiscox Insurance Company Inc. is rated A (Excellent) by A.M. Best. At the end of 2009, net assets exceeded $56 million (2008: $52 million).
Daniel Maurice Healy Non Executive Director and Chairman of the Audit Committee (Aged 67) Daniel Healy joined Hiscox in 2006. He was appointed Executive Vice President and Chief Financial Officer of North Fork Bancorporation in 1992 and a member of its Board of Directors in 2000. He was a partner with KPMG LLP before joining North Fork. He was the Managing Partner of the San José, California and Long Island, New York offices and held other positions in that firm during his tenure. He is Chairman of Herald National Bank and he holds Board positions with KBW, Inc. and Harlem RBI, a not-for-profit organisation. He is also a senior adviser to Permira Advisers LLC, an international private equity firm.
Executive Directors Robert Ralph Scrymgeour Hiscox Chairman (Aged 67) Robert Hiscox joined Hiscox in 1965 and has been Chairman of the main holding company of Hiscox since its incorporation in 1973. He was Deputy Chairman of Lloyd’s between 1993 and 1995. He is a Non Executive Director of Grainger Trust plc, and AGICM Ltd.
Stuart John Bridges Group Finance Director (Aged 49) Stuart Bridges joined Hiscox in 1999. He is a Chartered Accountant and has held posts in various financial service companies in the UK and US, including Henderson Global Investors. He is Chairman of the Business Advisory Board of the Institute of Chartered Accountants in England and Wales, a member of the Financial Regulation and Taxation Committee of the Association of British Insurers and Vice-chairman of the Lloyd’s Market Association Finance Committee.
Ernst Robert Jansen Non Executive Director (Aged 61) Ernst Jansen joined Hiscox in 2008. He held several Managing Director positions in the European chemical industry between 1980 and 1990. He was an Executive Director then Vice Chairman of Eureko B.V. between 1992 and 2007. Following retirement he became an adviser to the Executive Board and is a member of the Supervisory Board of a number of Eureko operating companies.
Sir Mervyn Pedelty Senior Independent Director and Chairman of the Remuneration and Nomination Committee (deceased) Sir Mervyn Pedelty joined Hiscox in 2005. He was previously the Chief Executive and an Executive Director of The Co-operative Bank plc (from 1997 until his retirement in 2004) and also of Co-operative Financial Services Limited and the Co-operative Insurance Society Limited (from 2002 to 2004). He was a Director of the Association of British Insurers (from 2002 to 2004) and was a former Council Member of the British Bankers’ Association. Sir Mervyn was a Chartered Accountant and a Chartered Banker. His other recent appointments included: Independent Director of Friends Provident plc, Chairman of the FTSE4 Good Policy Committee, a Director of Performances Birmingham Limited and a Senior Adviser to Permira Advisers LLP.
Overview and basis of reporting Hiscox Ltd (‘the Company’) is the Bermudian domiciled holding company for the Group. The Company is listed on the London Stock Exchange’s main market for listed securities. The corporate governance framework for companies registered in Bermuda is established by the Company’s constitution together with Companies Act legislation.
The Board of Directors The Board comprises four Executive Directors and seven independent Non Executive Directors, including a Senior Independent Director. Biographical details for each member of the Board are provided on pages 32 to 33.
The Board meets at least four times a year and operates within established Terms of Reference. It is supplied with appropriate and timely information to enable it to review business strategy, trading performance, business risks and opportunities. The Board of Hiscox Ltd met four times during the year. The Board considers all the Non Executive Directors to be independent within the meaning of the Combined Code as there are no relationships or circumstances which would interfere with the exercise of their independent judgement.
The Board retains ultimate authority for high level strategic and management decisions including: setting Group strategy, approving significant mergers or acquisitions, approving the financial statements, declaration of the interim dividends and recommendation of the final dividend, approving Group business plans and budgets, approving major new areas of business, approving capital raising, approving any bonus or rights issues of share capital, setting Group investment guidelines, approving the Directors’ remuneration, approving significant expenditure or projects, and approving the issue of share options. The Board has, however, authorised the boards of the trading entities and business divisions to manage their respective operational affairs, to the extent that Company Board level approval is not required.
recent and relevant financial experience. The Audit Committee meets at least three times a year to assist the Board on matters of financial reporting, risk management and internal control. The Audit Committee monitors the scope, results and cost effectiveness of the internal and external audit functions, the independence and objectivity of the external auditors, and the nature and extent of non-audit work undertaken by the external auditors together with the level of related fees. The internal and external auditors have unrestricted access to the Audit Committee. All non-audit work undertaken by the Group’s external auditors with fees greater than £50,000 must be pre-approved by the Audit Committee. KPMG has confirmed to the Audit Committee that in its opinion it remains independent. The Committee is satisfied that this is the case.
The Remuneration and Nomination Committee The Remuneration and Nomination Committee comprises Daniel Healy, Ernst Jansen, Dr James King, Andrea Rosen, Gunnar Stokholm, Dirk Stuurop and until his death Sir Mervyn Pedelty. It was chaired, until his death, by Sir Mervyn Pedelty, with Andrea Rosen as alternate, and is now chaired by Andrea Rosen. It meets a minimum of two times a year to deal with appointments to the Board and to recommend a framework of executive remuneration.
The Directors’ remuneration report is presented on pages 37 to 44.
Risk Committees There are a number of committees within the Group which have been established to oversee specific risk areas, including underwriting, reserving, reinsurance credit, liquidity, broker credit, business continuity and investments. A Group risk committee ensures risk management activities are effective and integrated. These committees comprise Directors of the Company and its subsidiaries and relevant senior employees.
The Chief Executive held one-to-one meetings with each of the Executive Directors to discuss their performance over the year and to set targets for the year ahead.
Shareholder communications The Executive Directors communicate and meet directly with shareholders and analysts throughout each year, and do not limit this to the period following the release of financial results or other significant announcements.
Remuneration and Nomination Committee The Remuneration and Nomination Committee meets at least twice a year. The members of the Committee for 2009 were Sir Mervyn Pedelty (Chairman), Andrea Rosen (Acting Chairman), Daniel Healy, Dr James King, Dirk Stuurop, Ernst Jansen and Gunnar Stokholm.
The Committee is provided with data and has access to advice from Towers Perrin, independent remuneration consultants. The Company also uses the Watson Wyatt compensation benchmarking reports. Towers Perrin and Watson Wyatt have now merged to form ‘Towers Watson’. Towers Watson provide no other services to the Company.
Remuneration policy The remuneration philosophy is to provide rewards that are competitive in every country in which Hiscox operates and that are consistent with our overall reward principles: competitive base pay; benefits which encourage health and security for the individual and his or her family but are not excessive and are consistent at all levels of the organisation; an annual bonus scheme which enables employees to earn attractive bonuses for generating good levels of return on equity; to encourage share ownership at all levels of the organisation and require it at senior levels; and contracts and notice periods that are in line with acceptable market practice but limit severance payments made on termination.
The Remuneration and Nomination Committee regularly reviews our remuneration approach and, particularly in the context of the current remuneration environment, will do so again this year.
Remuneration elements The elements of remuneration at Hiscox are: fixed reward (base salary, benefits and retirement benefits), and variable reward (annual cash incentives (bonuses) and share incentive schemes).
Base salary Base salaries are reviewed annually. The Remuneration and Nomination Committee takes into account inflation rate movements by country, market data provided by its own consultants, Towers Perrin, and the competitive position of Hiscox salaries (based on the Watson Wyatt salary reports), in order to set the overall salary budget.
When approving Executive Directors’ salaries, the Remuneration and Nomination Committee takes into account rates of inflation, performance, and competitive positioning of salaries as informed by Watson Wyatt data and other publicly available reports.
In 2009, Executive Directors’ salaries increased by 1.6% overall. Executive Directors did not receive a salary increase in the 2010 salary review.
The payment of larger bonuses is normally deferred over a three-year period as follows.
Bonus above £100,000 50% of bonus taken Bonus above €150,000 in year one Bonus above $200,000 Balance of bonus split 50% in year two, and 50% in year three
Performance Share Plan Restricted share awards or nil cost option awards (depending on the appropriate practice by country) are made to Executive Directors and other senior managers at the discretion of the Remuneration and Nomination Committee. Awards under this plan were made in 2009 and the Remuneration and Nomination Committee has also agreed to make awards under this plan in 2010. The maximum annual award to an individual under the Performance Share Plan is a value of 200% of basic salary. The highest actual grant awarded in 2009 was 193% of basic salary.
‘Base’ refers to base salary for the year. ‘Annual cash incentive’ is the annual amount allocated from the profit bonus pool. ‘Share incentive scheme’ is the estimated value at award of the Performance Share Plan awards made during the year.
Remuneration of Non Executive Directors Non Executive Directors receive an annual fee in respect of their Board appointments together with additional compensation for their further duties in relation to Board committees. All amounts are denominated in US Dollars. The structure of the fees paid are detailed below: The fees in relation to Hiscox Ltd for the year were: Hiscox Ltd Total Total
Number of Number of Market price awards at Number of Number of Number of awards at at date of 1 January awards awards awards 31 December exercise Date from 2009 granted lapsed exercised 2009 £ which released
Share capital Details of the structure of the Company’s share capital and changes in the share capital during the year are disclosed in note 25 to the consolidated financial statements.
One of our Directors, Sir Mervyn Pedelty, died in January 2010. Sir Mervyn had been the Chairman of the Remuneration and Nomination Committee and Senior Independent Director of Hiscox Ltd since redomicile.
Political and charitable contributions The Group made no political contributions during the year (2008: £nil). Charitable donations totalled £1,171,000 (2008: £717,000) of which £1,000,000 (2008: £500,000) was donated to the Hiscox Foundation, a UKregistered charity. The policy of the Hiscox Foundation is to assist and improve education, the arts and independent living for disabled and disadvantaged members of society. Further information concerning the Group’s charitable activities is contained in the report on Corporate responsibility on page 27.
The Directors have pleasure in submitting their Annual Report and financial statements for the year ended 31 December 2009.
Principal activity and business review The Company is a holding company for subsidiaries involved in the business of insurance in Bermuda, the US, the UK, Guernsey and Europe. An analysis of the development and performance of the business can be found within the Chief Executive’s report on pages 5 to 11. A description of the major risks can be found in the risk management section on pages 21 to 25.
Financial results The Group achieved a pre-tax profit for the year of £320.6 million (2008: £105.2 million). Detailed results for the year are shown in the consolidated income statement on page 48, and also within the Group financial performance section on pages 15 to 19.
Going concern A review of the financial performance of the Group is set out on pages 15 to 19. The financial position of the Group, its cash flows and borrowing facilities are included therein. In addition, note 3 to the financial statements provides a detailed discussion on the risks which are inherent to the Group’s business and how those risks are managed.
After making enquiries, the Directors have an 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.
5p Ordinary Shares 5p Ordinary Shares 5p Ordinary Shares 5p Ordinary Shares number of shares number of shares number of shares number of shares beneficial non-beneficial beneficial non-beneficial
Annual General Meeting The notice of Annual General Meeting, to be held at the Elbow Beach Hotel, 60 South Shore Road, Paget PG04, Bermuda on 9 June 2010 at 10.00am (2.00pm (BST)), is contained in a separate circular to shareholders enclosed with this report.
The Directors responsible for authorising the responsibility statement on behalf of the Board are the Chairman, RRS Hiscox, and the Group Finance Director, SJ Bridges. The statements were approved for issue on 1 March 2010.
We have audited the accompanying consolidated financial statements of Hiscox Ltd (‘the Company’) on pages 48 to 99 which comprise the consolidated balance sheet as at 31 December 2009, and the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes.
In addition to our audit of the consolidated financial statements, the Directors have engaged us to audit the information in the Directors’ remuneration report that is described as having been audited, which the Directors have decided to prepare (in addition to that required to be prepared) as if the Company were required to comply with the requirements of Section 421 of the UK Companies Act 2006.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements and the part of the Directors’ remuneration report to be audited.
Opinion In our opinion: the consolidated financial statements give a true and fair view of the consolidated financial position of the Company as at 31 December 2009, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the EU; and the part of the Directors’ remuneration report which we were engaged to audit has been properly prepared in accordance with Schedule 7A to the UK Companies Act 1985, as if those requirements were to apply to the Company.
Share of profit of associates after tax 17 118 260 – 260
Results excluding Foreign currency foreign currency items on economic items on economic hedges and hedges and intragroup 2009 intragroup borrowings 2008 Total borrowings (note 14) Total
Profit for the year 280,497 125,928 (55,120) 70,808 Other comprehensive income Currency translation differences (net of tax of £nil (2008: £nil)) (69,589) 71,008 80,171 151,179 Net investment hedge (net of tax of £nil (2008: £(238,000))) – (597) – (597)
Total comprehensive income recognised for the year (all attributable to owners of the Company) 210,908 196,339 25,051 221,390
Property, plant and equipment 16 22,244 19,668 Investments in associates 17 7,318 7,200
Total equity (all attributable to owners of the Company) 1,121,286 951,026
Current tax 26,080 – Trade and other payables 28 339,483 312,906
The consolidated Group financial statements were approved by the Board of Directors on 1 March 2010 and signed on its behalf by: RRS Hiscox Chairman
Purchase of own shares held in treasury – – – – – – Purchase of own shares held in trust – – – – – –
Dividends paid to owners of the Company 33 – – (48,613) – – (48,613)
Changes in operational assets and liabilities: Insurance and reinsurance contracts (58,366) 281,633 Financial assets carried at fair value (338,556) (284,069) Financial liabilities carried at fair value (52,533) – Other assets and liabilities 36,560 (10,474)
Cash outflow from the acquisition of subsidiary 34 – (3,137) Cash outflow from the sale of subsidiaries 35 – (42) Cash outflow from the acquisition of associates 17 – (5,438) Cash flows from the purchase of property, plant and equipment (8,802) (4,521) Cash flows from the purchase of intangible assets (2,911) (3,530)
Proceeds from the issue of ordinary shares 25 2,504 4,632 Cash flows from the purchase of own shares including those arising on share buy-back programme 26 – (65,066) Dividends paid to owners of the Company 33 (48,613) (46,756) Net receipts/(repayments) of borrowings 47,721 (1,292)
Cash and cash equivalents at 1 January 440,622 302,742 Net increase in cash and cash equivalents (150,131) 75,794 Effect of exchange rate fluctuations on cash and cash equivalents (30,844) 62,086
The accounting policies have been applied consistently by all Group entities, to all periods presented, solely for the purpose of producing the consolidated Group financial statements.
During 2009, the IASB intensified its efforts to complete Phase II of its Insurance Contracts project. There were a number of key decisions made regarding the measurement approaches to be considered for inclusion within the new standard and the IASB is currently deciding on the detailed attributes of each approach. The aim of the IASB is to publish an Exposure Draft in the first half of 2010 and the final standard in 2011. The Group continues to monitor the progress of the project in order to assess any potential impact of the new standard on its results.
The Group elected to apply the transitional arrangements contained in IFRS 4 that permitted the disclosure of only five years of data in claims development tables, in the year ended 31 December 2005 which was the year of adoption. The number of years of data presented was increased from eight in the prior year, to nine in the current financial year, and will be increased in 2010 up to a maximum of ten years if material outstanding claims exist for such periods.
The Group has financial assets and cash of over £2.6 billion. The portfolio is predominantly invested in liquid short-dated bonds and cash to ensure significant liquidity to the Group and to reduce risk from the financial markets. In addition the Group has significant borrowing facilities in place.
The accounting policies adopted are consistent with those of the previous financial year except as follows: The Group has adopted, for the first time, the following new and amended Standards and Interpretations issued by the IASB and endorsed by the EU as of 1 January 2009.
Amendments to IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures (Amendment) Amendments to IFRS 7 Financial Instruments: Disclosure Amendments to IAS 32 Financial Instrument: Presentation and IAS 1 Presentation of Financial Statements Puttable Financial Instruments and Obligations Arising on Liquidation Amendments to IAS 23 Borrowing Costs Improvements to IFRS
Amendments to IAS 39 Financial Instruments: Recognition and measurement and IFRS 7 Financial Instruments: Disclosures (Amendment) The amendments to IAS 39 and IFRS 7 were issued in response to the global market credit crisis in October 2008. The standard was effective retrospectively from 1 July 2008 to 1 November 2008. Thereafter, retrospective application was not permitted.
Improvements to IFRSs Improvements to IFRSs is an annual process which has been undertaken by the IASB with the view of removing inconsistencies and clarifying wording within the standards. In May 2008, the IASB issued the first in the series of these amendments with separate transitional arrangements for each standard. The following lists the main applicable improvements which have been adopted by the Group from 1 January 2009: IFRS 7 Financial Instruments: Disclosures: removes the reference to ‘total interest income’ as a component of finance costs. This had no impact on the Group’s accounting policy or financial position as this was already applied.
IAS 8 Accounting Policies: clarifies that only implementation guidance that is an integral part of an IFRS is mandatory when selecting accounting policies. This had no impact on the Group’s accounting policy or financial position as this was already applied.
Notes to the consolidated financial statements continued 2 Significant accounting policies continued 2.2 Basis of preparation continued
IAS 16 Property, Plant and Equipment: replaces the term ‘net selling price’ with ‘fair value less costs to sell’. The Group has amended its accounting policy accordingly which did not result in any change in the financial position.
IAS 19 Employee Benefits: revised the definition of ‘past service costs’ to include reductions in benefits related to past services and to exclude the deduction in benefits related to future services that arise from plan amendments. The term ‘return on plan assets’ was revised to exclude plan administration costs if they have already been included in the actuarial assumptions. In addition, the definition of ‘short-term’ and ‘other long-term’ employee benefits was amended to focus on the point in time at which a liability is due to be settled. Finally, the reference to the recognition of contingent liabilities has been deleted. The amendment had no impact on the accounting policy and financial position of the Group as the definitions were consistent with the amendment.
IFRS 9, Part I reduces the classification and measurement categories of financial instruments to two, being fair value or amortised cost. To classify financial assets as amortised cost they must have basic loan features and be managed on a contractual yield basis. In addition, the classification must also be based on the business model as ‘determined by key management personnel’. The new standard currently does not address how to measure financial liabilities and the IASB are currently considering including credit risk in measuring financial liabilities. It is expected to issue final requirements for this in 2010.
In view of the several but not joint liability of underwriting members at Lloyd’s for the transactions of syndicates in which they participate, the Group’s attributable share of the transactions, assets and liabilities of these Syndicates has been included in the financial statements. The Group manages the underwriting of, but does not participate as a member of, Syndicate 6104 at Lloyd’s which provides reinsurance to Syndicate 33 on a normal commercial basis. Consequently, aside from the receipt of managing agency fees and defined profit commissions as appropriate, the Group has no share in the assets, liabilities or transactions of Syndicate 6104, nor is it controlled. The position and performance of that Syndicate is therefore not included in the Group’s financial statements.
(c) Transactions eliminated on consolidation Intragroup balances, transactions and any unrealised gains arising from intragroup transactions are eliminated in preparing the consolidated financial statements. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. In accordance with IAS 21, foreign currency gains and losses on intragroup monetary assets and liabilities may not fully eliminate on consolidation when the intragroup monetary item concerned is transacted between two Group entities that have different functional currencies.
2.4 Foreign currency translation (a) Functional and presentational currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the ‘functional currency’). The functional currency of all individual entities in the Group is deemed to be Sterling with the exception of the entities operating in France, Germany, the Netherlands and Belgium whose functional currency is Euros, those subsidiary entities operating from the US and Bermuda whose functional currency is US Dollars, Hiscox Insurance Company (Guernsey) Limited and Syndicate 3624 whose functional currency is also US Dollars.
Non-monetary items carried at historical cost are translated in the balance sheet at the exchange rate prevailing on the original transaction date. Non-monetary items measured at fair value are translated using the exchange rate ruling when the fair value was determined.
Goodwill on acquisition of subsidiaries is included in intangible assets. Goodwill on acquisition of associates is included in investments in associates. Goodwill is not amortised but is tested annually for impairment and carried at cost less accumulated impairment losses. The impairment review process examines whether or not the carrying value of the goodwill attributable to individual cash generating units exceeds its implied value. Any excess of goodwill over the recoverable amount arising from the review process indicates impairment. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.
Notes to the consolidated financial statements continued 2 Significant accounting policies continued 2.6 Intangible assets continued
Internally developed computer software is only capitalised where the cost can be measured reliably, the Group intends to and has adequate resources to complete development, and where the computer software will yield future economic benefits in excess of the costs incurred.
Fair value for securities quoted in active markets is the bid price exclusive of transaction costs. For instruments where no active market exists, fair value is determined by referring to recent transactions and other valuation factors including the discounted value of expected future cash flows. Fair value changes are recognised immediately within the investment result line in the income statement. An analysis of fair values of financial instruments and further details as to how they are measured are provided in note 23.
2 Significant accounting policies continued 2.9 Impairment of assets continued (c) Impairment loss continued amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units).
(g) Salvage and subrogation reimbursements Some insurance contracts permit the Group to sell property acquired in settling a claim (i.e. salvage). The Group may also have the right to pursue third-parties for payment of some or all costs (i.e. subrogation). Estimates of salvage recoveries are included as an allowance in the measurement of the insurance liability for claims and salvage property is recognised in other assets when the liability is settled. The allowance is the amount that can reasonably be recovered from the disposal of the property.
2.14 Deferred tax Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, if the deferred income tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss, it is not recognised. Deferred tax is determined using tax rates and laws that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Deferred tax assets are recognised to the extent that it is probable that the future taxable profit will be available against which the temporary differences can be utilised. Deferred tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the Group controls the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
2 Significant accounting policies continued 2.15 Employee benefits continued (c) Share based compensation continued compensation plan are modified, and the expense to be recognised increases as a result of the modification, then the increase is recognised evenly over the remaining vesting period. When a modification reduces the expense to be recognised, there is no adjustment recognised and the pre-modification expense continues to be applied. The proceeds received net of any directly attributable transaction costs are credited to share capital and share premium when the options are exercised.
In accordance with the transitional arrangements of IFRS 2 only share based awards granted or modified after 7 November 2002, but not yet vested at the date of adoption of IFRS, are included in the calculations.
2.22 Use of critical estimates, judgements and assumptions The preparation of financial statements requires the use of significant estimates, judgements and assumptions. The Directors consider the accounting policies for determining insurance liabilities, the valuation of investments, the valuation of retirement benefit scheme obligations and the determination of current and deferred tax assets and liabilities as being most critical to an understanding of the Group’s result and position.
The inherent uncertainty of insurance risk requires the Group to make estimates, judgements and assumptions that affect the amounts of insurance and reinsurance assets and liabilities reported in the balance sheet date. This includes estimates for losses incurred but not reported. This is the most significant area of potential uncertainty in the Group’s financial statements.
Notes to the consolidated financial statements continued 2 Significant accounting policies continued 2.22 Use of critical estimates, judgements and assumptions continued of risk beyond that envisaged at the time of original policy issuance. The Group seeks to gather corroborative evidence from all relevant sources before making judgements as to the eventual outcome of claims, particularly those under litigation, which have occurred and been notified to the Group but remain unsettled at the balance sheet date.
Consequently, as the Group therefore has the capacity to invest and hold a significant proportion of assets to maturity if required, it has the ability for many of its ultimate cash flows to remain relatively immune to short-term, technically driven accounting losses in fair value terms.
The delegation of underwriting authority to specific individuals, both internally and externally, is subject to regular review. All underwriting staff and binding agencies are set strict parameters in relation to the levels and types of business they can underwrite, based on individual levels of experience and competence. These parameters cover areas such as the maximum sums insured per insurance contract, maximum gross written premiums and maximum aggregated exposures per geographical zone and risk class. Monthly meetings are held between the Chief Underwriting Officer and a specialist central analysis and review team in order to monitor claim development patterns and discuss individual underwriting issues as they arise. The Chief Underwriting Officer also holds weekly video conference meetings with this team to discuss interim underwriting matters.
Reinsurance inwards The Group’s reinsurance inwards acceptances are primarily focused on large commercial property, homeowner and marine and crop exposures held by other insurance companies predominantly in North America and other developed economies. This business is characterised more by large claims arising from individual events or catastrophes than the high frequency, low severity attritional losses associated with certain other business written by the Group. Multiple insured losses can periodically arise out of a single natural or man-made occurrence. The main circumstances that result in claims against the reinsurance inwards book are conventional catastrophes, such as earthquakes or storms, and other events including fires and explosions. The occurrence and impact of these events are very difficult to model over the short-term which complicates attempts to anticipate loss frequencies on an annual basis. In those years where there is a low incidence of severe catastrophes, loss frequencies on the reinsurance inwards book can be relatively low.
A significant proportion of the reinsurance inwards business provides cover on an excess of loss basis for individual events. The Group agrees to reimburse the cedant once their losses exceed a minimum level.
Estimated concentration of gross and net Types of insurance risk in the Group insurance liabilities on balance sheet by Property – Property – Casualty –
Consequently the frequency and severity of reinsurance inwards claims is related not only to the number of significant insured events that occur but also to their individual magnitude. If numerous catastrophes occurred in any one year but the cedant’s individual loss on each was below the minimum stated, then the Group would have no liability under such contracts. Maximum gross line sizes and aggregate exposures are set for each type of programme.
Typical property covered by marine and other major property contracts include fixed and moveable assets such as ships and other vessels, cargo in transit, energy platforms and installations, pipelines, other subsea assets, satellites, commercial buildings and industrial plants and machinery. These assets are typically exposed to a blend of catastrophic and other large loss events and attritional claims arising from conventional hazards such as collision, flooding, fire and theft. Climatic changes may give rise to more frequent and severe extreme weather events (for example earthquakes, windstorms and river flooding etc.) and it may be expected that their frequency will increase over time.
Other property risks The Group provides home and contents insurance, together with cover for art work, antiques, classic cars, jewellery, collectables and other assets typically held by affluent individuals. The Group also extends cover to reimburse certain policyholders when named insureds or insured assets are seized for kidnap and a ransom demand is subsequently met. Events which can generate claims on these contracts include burglary, kidnap, seizure of assets, acts of vandalism, fires, flooding and storm damage. Losses on most classes can be predicted with a greater degree of certainty as there is a rich history of actual loss experience data and the locations of the assets covered, and the individual levels of security taken by owners are relatively static from one year to the next. The losses associated with these contracts tend to be of a higher frequency and lower severity than the marine and other major property assets covered above.
The provision of insurance to cover allegations made against individuals acting in the course of fiduciary or managerial responsibilities, including directors’ and officers’ insurance, is one example of a casualty insurance risk. However the Group’s specific exposure to this specific risk category is relatively limited. The Group’s casualty insurance contracts mainly experience low severity attritional losses.
The majority of the Group’s casualty exposures are written on a claims made basis. However the final quantum of these claims may not be established for a number of years after the event. Consequently a significant proportion of the casualty insurance amounts reserved on the balance sheet may not be expected to settle within 24 months of the balance sheet date.
Reliability of fair values The Group has elected to carry all financial investments at fair value through profit or loss as they are managed and evaluated on a fair value basis in accordance with a documented strategy. With the exception of unquoted equity investments, all of the financial investments held by the Group are available to trade in markets and the Group therefore seeks to determine fair value by reference to published prices or as derived by pricing vendors using observable quotations in the most active financial markets in which the assets trade. The Group seeks to determine the fair value of financial assets primarily with reference to their closing bid market prices at the balance sheet date. The ability to obtain quoted bid market prices may be reduced in periods of diminished liquidity, such as those prevailing for certain categories of fixed income instruments affected by the continued market dislocation that commenced during the second half of 2007. In addition, those quoted prices that may be available may represent an unrealistic proportion of market holdings or individual trade sizes that could not be readily available to the Group. In such instances fair values may be determined or partially supplemented using other observable market inputs such as prices provided by market makers such as dealers and brokers, and prices achieved in the most recent regular transaction of identical or closely related instruments occurring before the balance sheet date but updated for relevant perceived changes in market conditions. Throughout 2008 the Group witnessed substantial declines in observable market values for many fixed income assets such as corporate, municipal and asset backed bonds. In some cases the extent and duration of declines witnessed appeared to arise as a response to global macroeconomic and liquidity concerns and not as a result of specific issuer events or credit concerns. During 2009, the Group experienced a sharp recovery in those investments which were heavily marked down in 2008.
At 31 December 2009, the Group holds asset-backed and mortgage-backed fixed income instruments in its investment portfolio but has minimal direct exposure to sub-prime asset classes. Together with the Group’s investment managers, management continues to monitor the potential for any adverse development associated with this investment exposure through the analysis of relevant factors such as credit ratings, collateral, subordination levels and default rates in relation to the securities held.
Note 23 provides an analysis of the measurement attributes of the Group’s financial instruments.
Directly held equity securities 2 – Units held in funds – traditional long only 68 68 Units held in funds – long and short and special strategies 30 32
Geographic focus Specific UK mandates 37 29 Global mandates 63 71
The allocation of equity risk is not heavily confined to any one market index so as to reduce the Group’s exposure to individual sensitivities. A 10% downward correction in equity prices at 31 December 2009 would have been expected to reduce Group equity and profit after tax for the year by approximately £11.4 million (2008: £10.0 million) assuming that the only area impacted was equity financial assets. A 10% upward movement is estimated to have an equal but opposite effect.
The Group may also from time to time, enter into interest rate future contracts in order to minimise the interest rate risk on specific longer duration portfolios.
The fair value of debt and fixed income assets in the Group’s balance sheet at 31 December 2009 was £2,256 million (2008: £1,929 million). These may be analysed as follows: %weighting % weighting
Government issued bonds and instruments 28 35 Agency and Government supported debt 28 17 Asset backed securities 6 10 Mortgage backed instruments – Agency 4 8 Mortgage backed instruments – Non-agency 6 8 Corporate bonds 26 20 Lloyd’s and money market deposits 2 2
Notes to the consolidated financial statements continued 3 Management of risk continued 3.2 Financial risk continued (c) Credit risk continued
An analysis of the Group’s major exposures to counterparty credit risk excluding loans and receivables, based on Standard & Poor’s or equivalent rating, is presented below: Other/ AAA AA A not rated Total
Debt and fixed income securities 20 1,471,797 179,416 172,832 104,554 1,928,599
(d) Liquidity risk The Group is exposed to daily calls on its available cash resources mainly from claims arising from insurance and reinsurance contracts. Liquidity risk is the risk that cash may not be available to pay obligations when due at a reasonable cost. The Board sets limits on the minimum level of cash and maturing funds available to meet such calls and on the minimum level of borrowing facilities that should be in place to cover unexpected levels of claims and other cash demands.
The Group’s equities and shares in unit trusts and other non-dated instruments have no contractual maturity terms but could also be liquidated for cash in a prompt and reasonable timeframe within one year of the balance sheet date.
The following is an analysis by liability type of the estimated timing of net cash flows based on the net claims liabilities held. The Group does not discount claims liabilities. The estimated phasing of settlement is based on current estimates and historical trends and the actual timing of future settlement cash flows may differ materially from that disclosure below.
Property – marine and major assets 54,426 33,557 34,163 10,194 132,340
Property – marine and major assets 71,590 41,561 39,787 6,630 159,568 *Includes a diverse mix of certain specialty lines such as kidnap and ransom, terrorism, bloodstock and other risks which contain a mix of property and casualty exposures.
Details of the payment profile of the Group’s borrowings, derivative instruments and other liabilities is given in notes 20 and 28.
(e) Currency risk The Group operates internationally and its exposures to foreign exchange risk arise primarily with respect to the US Dollar, Pound Sterling and the Euro. These exposures may be classified in two main categories: 1) Structural foreign exchange risk through consolidation of net investments in subsidiaries with different functional currencies within the Group results; and 2) Operational foreign exchange risk through routinely entering into insurance, investment and operational contracts, as a Group of international insurance entities serving international communities, where rights and obligations are denominated in currencies other than each respective entity's functional currency.
Property, plant and equipment 13,678 7,893 673 – 22,244 Investments in associates 6,728 – 590 – 7,318 Deferred tax – 14,077 – – 14,077
Loans and receivables including insurance receivables 127,361 259,539 88,480 13,402 488,782 Current tax – – – – –
Property, plant and equipment 16,378 2,404 886 – 19,668 Investments in associates 6,504 – 696 – 7,200 Deferred tax assets – 5,996 – – 5,996
Gearing The Group currently utilises short- to mediumterm gearing as an additional source of funds to maximise the opportunities from strong markets and to reduce the risk profile of the business when the rating environment shows a weaker model for the more volatile business. The Group’s gearing is obtained from a number of sources, including: Letter of Credit and revolving credit facility – the Group’s main facility currently in place is for a total of £350 million which may be drawn as cash (under a revolving credit facility), Letter of Credit or a combination thereof, providing that the cash portion does not exceed £200 million. This facility was secured during 2008 by the Company’s subsidiary Hiscox plc. The Letter of Credit availability period ends on 31 December 2009. This enables the Group to utilise the Letter of Credit as Funds at Lloyd’s to support underwriting on both the 2009 and 2010 years of account. The revolving credit facility has a maximum five year contractual period for repayment.
At 31 December 2009 US$225 million was drawn by way of Letter of Credit to support the Funds at Lloyd’s requirement and a further £138 million by way of cash (2008: £137.5 million and US$130 million respectively) to support general trading activities; external Names – 27.5% of Syndicate 33’s capacity is capitalised by thirdparties paying a profit share of approximately 17.5%; Syndicate 6104 at Lloyd’s – with an approximate capacity of £43 million for the 2009 year of account (2008 year of account: £34 million). This Syndicate is wholly backed by external members and takes a pure 2009 year of account quota share of Syndicate 33’s international property catastrophe reinsurance account; gearing quota shares – historically the Group has used reinsurance capital to fund its capital requirement for short-term expansions in the volume of business underwritten by the Syndicate; and qualifying quota shares – these are reinsurance arrangements that allow the Group to increase the amount of premium it writes in hard markets.
Capital performance The Group’s main capital performance measure is the achieved return on equity (ROE). This marker best aligns the aspirations of employees and shareholders.
3 Management of risk continued 3.3 Capital risk management continued the Group. The Group maintains its cost of capital levels and its debt to overall equity ratios in line with others in the non-life insurance industry.
In 2005, the UK Financial Services Authority (FSA) and Lloyd’s introduced a new capital regime that requires insurance companies to calculate their own capital requirements through Individual Capital Assessments (ICA). Hiscox Insurance Company Limited and Syndicate 33 maintain ICA models in accordance with this regime. The models are concentrated specifically on the particular product lines, market conditions and risk appetite of each entity. If the FSA considers an ICA to be inadequate, it can require the entity to maintain an increased capital safeguard. The Directors are also required to certify that the Group has complied, in all material aspects, with the provisions of the Interim Prudential Sourcebook: Insurers (IPRU(INS)), the Integrated Prudential Sourcebook for Insurers (INSPRU) and General Prudential Sourcebook (GENPRU) when completing the ICA return. The Group used its own integrated modelling expertise to produce the ICA calculations. The results mirrored those driving the existing internal capital setting process.
During the year, following a new geographic management structure including new business written through Syndicate 3624, the Group has changed its segmental reporting to provide more effective financial reporting for the evaluation of business segments by the chief operating decision maker to make decisions about future allocation of resources. Accordingly the 2008 segmental comparatives have been restated in order to enable comparison of results by the user.
UK and Europe comprises the results of Hiscox Insurance Company Limited, the results of Syndicate 33’s fine art, UK regional events coverage and non US household business, together with the income and expenses arising from the Group’s retail agency activities in the UK and in continental Europe. It excludes the results of the larger retail TMT business written by Hiscox Insurance Company Limited. It also includes an element of kidnap and ransom and terrorism written in Syndicate 33.
International comprises the results of Hiscox Insurance Company (Guernsey) Limited, Hiscox Insurance Company (Bermuda) Limited, Syndicate 3624, Hiscox Inc. and Hiscox Insurance Company Inc.. It also includes the results of the larger TMT business written by Hiscox Insurance Company Limited and Syndicate 33.
Corporate Centre comprises the investment return, finance costs and administrative costs associated with Group management activities. Corporate Centre also includes the majority of foreign currency items on economic hedges and intragroup borrowings. These relate to certain foreign currency items on economic hedges and intragroup borrowings, further details of which are given at note 14. Corporate Centre forms a reportable segment due to its investment activities which earn significant external coupon revenues.
All amounts reported below represent transactions with external parties only, with all inter-segment amounts eliminated which is consistent with the information used by the chief operating decision maker when evaluating the results of the Group. Performance is measured based on each reportable segment’s profit before tax.
London UK and Corporate London UK and Corporate Market Europe International Centre Total Market Europe International Centre Total
The following charges are included within the consolidated income statement: Year to 31 December 2009 Year to 31 December 2008
Year to 31 December 2008 Year to 31 December 2009 Restated
At 100% level (note 4b) 1% change in claims or expense ratio 6,248 3,824 2,875 – 5,894 3,179 2,076 –
(b) 100% operating result by segment Year to 31 December 2008
Notes to the consolidated financial statements continued 4 Operating segments continued (c) Segmental analysis of assets and liabilities continued
The following table provides an analysis of the Group’s gross premium revenues earned by material geographical location from external parties: Year to 31 December 2008
London UK and Corporate London UK and CorporateGross premium revenues Market Europe International Centre Total Market Europe International Centre Total
Profit for the year (all attributable to owners of the Company) 280,497 70,808 Opening shareholders’ equity 951,026 824,304 Adjusted for the time weighted impact of capital distributions and issuance of shares (20,429) (55,700)
2008 Total London Market UK and Europe International Corporate Centre Restated
Debt and fixed income securities (7,966) (0.9) 7,374 3.4 (7,819) (2.2) 4,384 5.4 (4,027) (0.3) Equities and shares in unit trusts – – (25,529) (41.9) (5,552) (16.2) (7,186) (18.0) (38,267) (28.4) Deposits with credit institutions/
Notes to the consolidated financial statements continued 9 Other revenues and expenses
Agency related income 6,651 5,324 Profit commission 12,248 14,382 Other underwriting income, catastrophe bonds 410 – Other income 189 152
Other expenses 116,939 76,499 10 Employee benefit expense The aggregate remuneration and associated costs were: Wages and salaries, including holiday pay and sabbatical leave charges 108,626 79,048 Social security costs 12,391 10,468 Share based payments cost of options granted to Directors and employees 25 5,260 5,269 Pension costs – defined contribution 6,510 5,794 Pension costs – net expense/(credit) arising on defined benefit schemes 31 13,300 –
The average monthly number of staff employed by the Group was 1,061 (2008: 914) comprising 368 underwriting and 693 administrative staff (2008: 335 and 579 respectively). Of the total remuneration shown above, an amount of £21,555,000 (2008: £21,053,000) was recharged to Syndicate 33.
Overall impact of foreign exchange related items on net assets (95,143) 260,337
Realised gains on foreign currency derivative contracts used to manage retranslation risk associated with the net investment in Bermuda and Guernsey insurance operations 314 – 314
Notes to the consolidated financial statements continued 14 Foreign currency items on economic hedges and intragroup borrowings continued
The contracts expired in January 2009 and a gain of £314,000 was recognised for the year ended 31 December 2009. Formal hedge accounting designation was not achievable due to the specific effectiveness requirements of IAS 39.
Additions in year on business combinations 1,909 – 1,225 – 3,134 Other additions – – – 5,230 5,230 Amortisation charges – – – (259) (259)
The Group has previously recognised intangible assets totalling £6,308,000 relating to insurance authorisation licences for 50 US states acquired in the business combination of ALTOHA Inc. (note 34). This intangible asset has been allocated for impairment testing purposes to one individual CGU being the Group’s North American underwriting businesses. The Group has considered the recoverable amount of this CGU on a consistent basis to the active Lloyd’s corporate member entity outlined above.
Other intangible assets relate to the costs of acquiring rights to customer contractual relationships from AON Limited in 2007, and the additions during 2008 and 2009 relate to software licence and development costs.
The amortisation charge for the year includes £660,000 (2008: £nil) relating to capitalised software costs and is included in other expenses in the income statement. The net book value of capitalised software costs at 31 December 2009 was £7,368,000 (2008: £5,230,000). There are no charges for impairment during the current or prior financial year.
At 31 December 2009 there were no assets under development on which no amortisation has been charged (2008: £5,230,000).
Notes to the consolidated financial statements continued 17 Investments in associates
Associates incorporated in the UK From 25% to 49% 11,100 7,800 8,743 234 Associates incorporated in Europe up to 25% 943 436 1,379 30
Associates incorporated in the UK From 25% to 49% 11,981 8,809 6,214 877 Associates incorporated in Europe up to 25% 2,066 1,289 1,483 268
The equity interests held by the Group in respect of associates do not have quoted market prices and are not traded regularly in any active recognised market. The associates concerned have no material impact on the results or assets of the Group. No impairments were identified during the current or prior financial year under review.
Acquisition costs incurred in relation to insurance contracts written 312,705 (42,212) 270,493 270,126 (40,634) 229,492 Acquisition costs expensed to the income statement (302,330) 45,696 (256,634) (262,077) 34,134 (227,943)
The deferred amount of insurance contract acquisition costs attributable to reinsurers of £17,584,000 (2008: £21,068,000) is not eligible for offset against the gross balance sheet asset and is included separately within trade and other payables (note 28).
Amounts due from reinsurers in respect of outstanding premiums and claims already paid by the Group are included in loans and receivables (note 21). The Group recognised a gain during the year of £2,085,000 (2008: loss of £4,205,000) in respect of impaired balances.
Debt and fixed income securities 2,255,737 1,928,599 Equities and shares in unit trusts 133,841 124,864 Deposits with credit institutions 11,394 28,269
Total investments 2,400,972 2,081,732 Catastrophe bonds 11,310 – Derivative financial instruments 22 1,018 40
Total financial liabilities 138,539 143,350 *The fair value of borrowings from credit institutions is not considered to be significantly different from the amortised cost.
The Group’s investment in catastrophe bonds consists of £11.3 million, comprising of 12 catastrophe bonds with credit ratings of BB or above. The issuers of these securities have used the proceeds to collateralise certain catastrophe reinsurance obligations mainly in US and European wind and earthquake risks. The investment in these contracts is therefore at risk of loss, in whole or in part if a covered catastrophe occurs.
Gross receivables arising from insurance and reinsurance contracts 413,449 441,752 Provision for impairment (955) (560)
Due from contract holders, brokers, agents and intermediaries 270,593 274,470 Due from reinsurance operations 141,901 166,722
Prepayments and accrued income 10,020 7,948 Other loans and receivables: Net profit commission receivable 17,758 11,959 Accrued interest 12,227 9,480 Share of Syndicate’s other debtors’ balances 20,273 13,546 Other debtors including related party amounts 16,010 10,190
The amounts expected to be recovered before and after one year are estimated as follows: Within one year 482,194 491,529 After one year 6,588 2,786
22 Derivative financial instruments The Group entered into both exchange-traded and over the counter derivative contracts for a number of purposes during 2009. The Group had the right and intention to settle each contract on a net basis. The assets and liabilities of these contracts at 31 December 2009 all mature within one year of the balance sheet date and are detailed below: 31 December 2009 Gross contract Fair value Fair value Net balance notional amount of assets of liabilities sheet position
Derivative financial instrument liabilities included on balance sheet 000 £000 £000 £000
Interest rate futures contracts During the year the Group continued short selling a number of Government bond futures and sovereign futures denominated in a range of currencies to informally hedge substantially all of the interest rate risk on specific long portfolios of the matching currencies denominated corporate bonds. All contracts are exchange traded and the Group made a loss on these futures contracts of £78,000 (2008: £360,000) as included in note 7.
The Group made a loss on event linked future contracts of £609,000 (2008: gain of £45,000) as included in note 7.
Notes to the consolidated financial statements continued 23 Fair value measurements In accordance with the Amendments to IFRS7 Financial Instruments: Disclosures, the fair value of financial instruments based on a three-level fair value hierarchy that reflects the significance of the inputs used in measuring the fair value is provided below.
Financial assets Debt and fixed income securities 627,702 1,628,035 – 2,255,737 Equities and shares in unit trusts 162 129,419 4,260 133,841 Deposits with credit institutions 11,394 – – 11,394 Catastrophe bonds – 11,310 – 11,310 Derivative financial instruments – 1,018 – 1,018
Included within Level 1 of the fair value hierarchy are Government bonds, Treasury bills and exchange traded equities which are measured based on quoted prices.
The following table sets forth a reconciliation of opening and closing balances for financial instruments classified under Level 3 of the fair value hierarchy: Equities and shares Deposits with Derivative in unit trusts credit institutions Instruments Total
Balance at 1 January – – – – Total gains or losses through profit or loss* – – – –
Transfers into Level 3 – 5,877 – 5,877 Settlements – – – –
*Total gains/(losses) are included within the investment result in the income statement.
85Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2009
The range of principal Group assumptions applied in determining the fair value of share based payment instruments granted during the year under review are: Assumptions affecting inputs to fair value models 2009 2008
Annual risk free rates of return and discount rates (%) 1.4 3.2-5.6 Long-term dividend yield (%) 4.24 4.75 Expected life of options (years) 3.25 3.25 Implied volatility of share price (%) 31 27-30 Weighted average share price (p) 310.8 247.9
The weighted average fair value of each share option granted during the year was 85.5p (2008: 60.5p). The weighted average fair value of each performance share plan award granted during the year was 308.0p (2008: 213.4p).
Movements in the number of share options during the year and details of the balances outstanding at 31 December 2009 are shown in the Directors’ remuneration report.
During 2008, Hiscox Ltd purchased 28,300,742 of ordinary shares of 5p each in open market transactions. These shares are held in treasury. In addition, during 2008, 1,000,000 ordinary shares of 5p each were purchased and held in trust. Retained earnings reduced by £65,066,000 being the consideration paid for these transactions. Included within this amount were transaction cost expenses of £125,000 directly related to the purchases. The highest price paid per share was 260p, the lowest price paid was 191.5p and the average price paid was 221.7p per share.
At 31 December 2009 Hiscox Ltd held 28,142,874 shares in treasury. Additional details are shown in note 38 to these financial statements in respect of additional Hiscox Ltd shares held by subsidiaries.
Gross Claims reported and claim adjustment expenses 800,307 885,905 Claims incurred but not reported 749,016 881,823 Unearned premiums 573,028 509,688
Recoverable from reinsurers Claims reported and claim adjustment expenses 173,987 180,406 Claims incurred but not reported 154,903 245,897 Unearned premiums 91,236 77,491
27.1 Insurance contracts assumptions (a) Process used to decide on assumptions The risks associated with insurance contracts and in particular with casualty insurance contracts are complex and subject to a number of variables that complicate quantitative sensitivity analysis. Delays in the notification of claims necessitate the holding of significant reserves for liabilities that may only emerge a number of accounting periods later.
Chain Ladder techniques are less suitable in cases in which the insurer does not have developed claims history data for a particular class of business (e.g. in relation to more recent underwriting years or years of account). In these instances the Group’s actuaries make reference to the BornhuetterFerguson method.
The choice of selected results for each accident year of each class of business depends on an assessment of the technique that has been most appropriate to observed historical developments. In certain instances, this has meant that different techniques or combinations of techniques have been selected for individual accident years or groups of accident years within the same class of business.
27 Insurance liabilities and reinsurance assets continued 27.1 Insurance contracts assumptions continued (b) Claims development tables continued
The top half of each table, on the following pages, illustrates how estimates of ultimate claim costs for each accident year have changed at successive year ends. The bottom half reconciles cumulative claim costs to the amounts still recognised as liabilities. A reconciliation of the liability at the 100% level to the Group’s share, as included in the Group balance sheet, is also shown.
Liability recognised in respect of prior accident years at 100% level 95,065
Liability for accident years before 2001 recognised on Group’s balance sheet 74,150
Notes to the consolidated financial statements continued 27 Insurance liabilities and reinsurance assets continued 27.1 Insurance contracts assumptions continued (b) Claims development tables continued Insurance claims and claim adjustment expenses reserves – net at 100%
Estimate of ultimate claims costs as adjusted for foreign exchange* at end of seven years later 454,670 265,416 – – – – – – – 720,086 eight years later 452,892 – – – – – – – – 452,892 Current estimate of
Total net liability to external parties at 100% level 1,544,786 *The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2009.
Claims reported and loss adjustment expenses (800,307) 173,987 (626,320) (885,905) 180,406 (705,499) Claims incurred but not reported (749,016) 154,903 (594,113) (881,823) 245,897 (635,926)
Total at end of year (1,549,323) 328,890 (1,220,433) (1,767,728) 426,303 (1,341,425)
The insurance claims expense reported in the consolidated income statement is comprised as follows: Gross Reinsurance Net Gross Reinsurance Net
Total claims and claim adjustment expenses (508,238) 45,020 (463,218) (698,471) 219,091 (479,380)
Reinsurers’ share of deferred acquisition costs 18 17,584 21,068 Accruals and deferred income 82,328 58,050
The amounts expected to be settled before and after one year are estimated as follows: Within one year 336,383 300,966 After one year 3,100 11,940
The principal subsidiaries of the Company and the country in which they are incorporated are listed in note 38.
The amounts charged in the consolidated income statement comprise the following: Current tax expense/(credit) 53,375 (32,341) Deferred tax (credit)/expense 30 (13,254) 66,713
(a) Group deferred tax assets analysed by balance sheet headings Income statement Transfer to 2008 (charge)/credit equity 2009
Deferred income tax assets are recognised for tax losses carried forward to the extent that the realisation of the related tax benefit through the future taxable profits is probable. The Group has not provided for deferred tax assets totalling £8,452,000 (2008: £7,628,000) in relation to losses in overseas companies of £22,138,000 (2008: £21,230,000). This is as a result of the transfer of these subsidiaries to Hiscox Ltd from Hiscox plc. In accordance with IAS 12, all deferred tax assets and liabilities are classified as non-current.
31 Employee retirement benefit obligations The Company’s subsidiary, Hiscox plc, operates a defined benefit pension scheme based on final pensionable salary. The scheme closed to future accrual with effect from 31 December 2006 and active members were offered membership of a defined contribution scheme from 1 January 2007. The funds of the defined benefit scheme are controlled by the trustee and are held separately from those of the Group.
The unrecognised net actuarial gains are the net cumulative gains and losses on both the scheme’s obligations and underlying assets.
The majority of the scheme’s debt and fixed income assets are held through the ownership of equity units in managed credit funds issued by Standard Life Assurance Limited which invest in a broad spread of high quality corporate bonds with derivatives used in controlled conditions to extend durations in some cases.
The amounts recognised in the Group’s income statement are as follows: Current service cost 300 200 Interest cost 5,720 6,135 Expected return on scheme assets (7,899) (7,720) Past service costs 11,800 – Net actuarial gain recognised – (433) Effect of deemed irrecoverability of surplus 3,379 1,818
The actual return on scheme assets was a gain of £4,221,000 (2008: loss of £10,387,000).
A reconciliation of the fair value of scheme assets is as follows: Opening fair value of scheme assets 115,166 127,576 Expected return on scheme assets 7,899 7,720 Difference between expected and actual return on scheme assets (3,678) (18,107) Contributions by the employer 1,500 – Settlements with scheme members – – Benefits paid (2,496) (2,023)
A summary of the scheme’s recent experience is shown below: Experience gains/(losses) on scheme obligations – – 2,783 (3,310) (1,223) Experience (losses)/gains on scheme assets (3,678) (18,107) 75 6,480 10,764
Other principal actuarial assumptions are as follows: Discount rate 5.70 6.70 Expected return on scheme assets 6.50 6.90 Inflation assumption 3.90 3.00 Pension increases 3.90 3.00
Effect of a change in discount rate Use of discount rate of 5.45% (22,285) (30,165) –
Effect of an increase in inflation Use of inflation assumption of 4.15% (22,285) (24,454) –
Profit for the year attributable to the owners of the Company (£000) 280,497 70,808 Weighted average number of ordinary shares (thousands) 372,848 377,506 Basic earnings per share (pence per share) 75.2p 18.8p
Diluted earnings per share has been calculated after taking account of 14,345,744 (2008: 13,003,000) options and awards under employee share option and performance plan schemes and 619,870 (2008: 348,000) options under SAYE schemes.
A second interim dividend in respect of 2009 of 10.5p per share, amounting to a total dividend of 15.0p for the year, was approved by the Board of Directors on 25 February 2010. These financial statements do not reflect this dividend as a distribution or liability in accordance with IAS 10 Events after the reporting period.
On 16 August 2007, the Group acquired 100% of the share capital of ALTOHA Inc. in the US. The total consideration was £29,052,000 which included contingent consideration of £7,530,000. No goodwill arose on acquisition. Intangible assets of £5,083,000 were initially recognised in respect of the US State authorisation licences held by ALTOHA Inc.’s consolidated operations. During 2008, further cash consideration of £1,225,000 was paid in finalisation of their ultimate purchase value.
The following guarantees have also been issued: (a) On 18 November 2009, Hiscox Capital Ltd and Hiscox Ltd entered into a deed of covenant in respect of a fellow subsidiary, Hiscox Dedicated Corporate Member Limited, in order to meet the subsidiary’s obligations to Lloyd’s. The total guarantee given under the deed of covenant (subject to limited exceptions) amounts to US$350 million provided by Hiscox Capital Ltd and £15 million provided by Hiscox Ltd. In the prior year, and up to 18 November 2009, a similar guarantee was provided by Hiscox Ltd and Hiscox Insurance Company (Bermuda) Limited for £138,831,798. The obligations in respect of this deed of covenant are secured by a fixed and floating charge over certain of the investments and other assets of the Company in favour of Lloyd’s. Lloyd’s has a right to retain the income on the charged investments in circumstances where it considers there to be a risk that the covenant might need to be called and may be met in full.
(b) In the prior year Hiscox plc negotiated a new Letter of Credit and revolving credit facility with Lloyds TSB Bank, for a total of £350 million which may be drawn as cash (under a revolving credit facility), Letter of Credit or a combination thereof, providing that the cash portion does not exceed £200 million. In addition, the terms also provide that upon request the facility may be drawn in foreign currency. At 31 December 2009 $225 million (2008: £137.5 million) was drawn by way of Letter of Credit to support the Funds at Lloyd’s requirement and a further £138 million by way of cash (2008: US$130 million).
(c) Hiscox Insurance Company Limited has arranged a Letter of Credit of £50,000 (2008: £50,000) with NatWest Bank plc to support its consortium activities with Lloyd’s.
(e) As Hiscox Insurance Company (Bermuda) Limited is not an admitted insurer or reinsurer in the US, the terms of certain US insurance and reinsurance contracts require Hiscox to provide Letters of Credit or other terms of collateral to clients. On 27 February 2009, Hiscox replaced its previous US$300 million facility and entered into a Letter of Credit Reimbursement and Pledge Agreement with Citibank for the provision of a Letter of Credit facility in favour of US ceding companies. The agreement was a three-year secured facility that allowed Hiscox to request the issuance of up to US$450 million in Letters of Credit. Letters of Credit issued under these facilities are collateralised by pledged cash and cash equivalents of Hiscox Bermuda. Letters of Credit under this facility totalling approximately US$109 million were issued with an effective date of 31 December 2009 (2008: US$38 million).
Later than one year and no later than five years Land and buildings 15,730 17,913 Office equipment 457 99
Notes to the consolidated financial statements continued 37 Capital and lease commitments continued
38 Principal subsidiary companies of Hiscox Ltd at 31 December 2009 Company Nature of business Country
Hiscox plc* Holding company Great Britain Hiscox Insurance Company Limited General insurance Great Britain Hiscox Insurance Company (Guernsey) Limited* General insurance Guernsey Hiscox Inc. Underwriting agent USA (Delaware) Hiscox Holdings Inc. Insurance holding company USA (Delaware) ALTOHA Inc. Holding company USA (Delaware) American Live Stock Inc. Underwriting agent USA (Illinois) Hiscox Insurance Company Inc. General insurance USA (Illinois) Hiscox ASM Limited Insurance intermediary Great Britain Hiscox Insurance Company (Bermuda) Limited* General insurance and reinsurance Bermuda Hiscox Dedicated Corporate Member Limited Lloyd’s corporate Name Great Britain Hiscox Select Insurance Fund PLC Insurance holding company Great Britain Hiscox Select Holdings Limited Insurance holding company Great Britain Hiscox Holdings Limited** Insurance holding company Great Britain Hiscox Insurance Holdings Limited Insurance holding company Great Britain Hiscox Assurances Services SARL Underwriting agent France Hiscox International Holdings B.V. Insurance holding company Netherlands Hiscox Syndicates Limited Lloyd’s managing agent Great Britain Hiscox Underwriting Ltd Underwriting agent Great Britain Hiscox AG Underwriting agent Germany Hiscox Overseas Holdings B.V.* Holding company Netherlands Hiscox bv Underwriting agent Netherlands Hiscox Connect Limited Online intermediary Great Britain Hiscox Underwriting Group Services Limited Service company Great Britain Hiscox NV Underwriting agent Belgium Hiscox Trustees Limited† Corporate trustee Great Britain Hiscox Pension Trustees Limited Pension trustee Great Britain Hiscox Qualifying Employees Share Ownership Trustees Limited Share scheme trustee Great Britain Amershill Limited Underwriting agent Great Britain Hiscox Insurance Services (Guernsey) Limited Underwriting agent Guernsey Hiscox Capital Ltd* General insurance Bermuda Hiscox Agency Ltd* Underwriting agent Bermuda Hiscox Services Ltd* Service company Bermuda Hiscox Europe Underwriting Limited Insurance intermediary Great Britain Hiscox Europe Services Limited Service company Great Britain *Held directly.
38 Principal subsidiary companies of Hiscox Ltd at 31 December 2009 continued
Amounts receivable from Syndicate 33 at 31 December excluding profit commission accrued 964 745
Key statistics *Closing mid market prices. †The 2008 comparatives have been updated from those previously reported to reflect the reclassification of acquisition costs on the purchase of reinsurance contracts from ‘outward reinsurance premiums’ to ‘expenses for the acquisition of insurance contracts’ (see note 2.2). Earlier year results have not been adjusted.
To request a copy of the 2009 Hiscox brochure visit www.hiscox.com
Design: Browns www.brownsdesign.com Print: St IvesWesterham Press Photography: Portraits © John Ross and Matthew Septimus Front and back cover © Beat Glanzmann/Corbis
This brochure is printed on recycled paper containing 100% post-consumer waste, manufactured at a mill that has been awarded the ISO14001 certificate for environmental management. The pulp is bleached using a Totally Chlorine Free process.
4th Floor Wessex House 45 Reid Street Hamilton HM 12 Bermuda
R ep o rt an d A cco u n ts