Contents 2 Corporate highlights 4 Chairman’s statement 8 Chief Executive’s report 16 Business overview 17 Business structure 18 At a glance 20 Hiscox locations 21 Hiscox products 22 Claims at Hiscox 26 The Hiscox brand 30 The people at Hiscox 34 Insurance carriers 38 Managing theGroup’s assets 39 Group financial performance 42 Cash flow and liquidity 44 Risk management 48 Corporate responsibility 50 Board of Directors 52 Corporate governance 54 Directors’ remuneration report 60 Directors’ report 61 Report of the independent registered public accounting firm 62 Consolidated income statement 63 Consolidated balance sheet 64 Consolidated statement of changes in equity 65 Consolidated cash flow statement 66 Notes to the financial statements 106 Five year summary 107 Glossary 108 Credits
“Our ambition remains to be a highly respected international specialist insurance and reinsurance company, built on a balance between volatile international catastrophe business andmore steady localandregional business.” Robert Hiscox Chairman 2 Corporate highlights Hiscox Ltd Report and Accounts 2007
Regional business relatively stable in the softening market with good growth prospects
After a record result in 2006, I amdelighted to announce a further record in 2007.We took full advantage of the strong rates for international reinsurance in London andBermuda, added some gearing fromour sidecar ‘Panther’, andwith disciplined underwriting, skilful avoidance of variousmarket losses and some help fromMother Nature, were handsomely rewarded. Our regional businesses in theUK, Europe and the USA continued to grow, with theUKmaking a good profit despite the storms and floods. Our strategy of growing stable regional businesseswill nowbecomemore valuable as some international rates fall following two yearswith relatively light catastrophes.
Our business needs capital to support underwriting and to build the network of regional businesses.We havemade regular small £237.2m record profit before tax
Hiscox Europe increased premium income by 25% and had a third year of profit despite losses fromWindstorm Kyrill which bodes well for the future as we increase our product range.
Hiscox USA established a firm foothold and the acquisition of the American Live Stock Insurance Company, now renamedHiscox Insurance Company Inc., will give us the ability to market our policies on an admitted basis in addition to the surplus lines basis using Hiscox Syndicate 33 at Lloyd’s.
Themarket The insurance cycle is alive and definitely kicking and it would appear that some insurers are, as usual, suffering from rapid and severe memory loss. (How can they forget 2005when years of premiumswere wiped out?) Rates are reducing rapidly in obvious areas where there are large premiums to be competed for and the lust for non-catastrophe exposed business is turning underwriting discipline to jelly. I sometimes wonder whether underwriters who havemade a 10%profit and then reduce rates by10% think they are going to make 9%, instead of the obvious NIL. Any management, including the management of Lloyd’s, who sees a rising income in an areaof falling ratesought toaskserious questions. It was disappointing to see the capacity of Lloyd’s reducing only 2% for 2008 (an actual increase at constant exchange rates) whenmost of the seasoned underwriters like us were reducing by 20%.
Sub-prime crisis After a period of grace during which the banks had re-established a reputation for financial discipline, control of risk and expertise in passing that risk off to others (and insurers were widely assumed to have taken the risk off them), there is a measure of schadenfreude in their current turmoil. Critics have wondered why the insurance industry has been unable to quantify its losses almost immediately after major catastrophes, telling us that the banks can
Dividend and capitalmanagement continued acquisitions but prices have been driven very high. If the sub-prime crisis and the competitive insurance conditions reduce the profitability and the expectations of some attractive businesses wewill need capital to be able to buy if the right opportunity arises.
As usual I will highlight some salient points of the year under review and leave BronekMasojada to report in more detail.
2007was a year of good progress on the regional side of the business. Hiscox UKmade a profit despite being assaulted byWindstorm Kyrill in January and floods in June and July.
The commercial side of Hiscox UK showed the benefit of balance and its superb underwriting profits kept UK profitable. It has built up an excellent book in the small professional businesses area with intelligent cover and efficient processes. There is less competition for small risks which require a distinct skill in underwriting and claims
Our regional businesses are showing healthy growth.We believe that we have demonstrated that our household policies give superior cover backed by great service. Our specialist commercial policies have a strong following in their markets and havemuch further to go.We have built many advantages into our business over the last few years which will benefit us greatly in the years to come. Our residence in Bermuda gives us considerable strategic advantages and amore global perspective. Our international spread of offices lead to business opportunities not available to us before, and give our staff increased choices in their careers.We have a great group of people with a wide range of skills in international and regional business with a network of offices and contacts throughout the world. Themarket may be testing in the next few years but we have been building towards this moment and I am confident that we will prosper.
Investments The end of 2007 (and the beginning of 2008) has been a challenging period for investing. However, our policy of focusing on high quality, short duration bonds has kept us away from the structured products that have done somuch damage in the financial world.We have a negligible exposure to certain sub-prime securities, all of which remain AAA rated.
People Wehave continued to seek, recruit, train andmotivate the best people. There is a spirit which pervades throughout all our offices which is made up of a desire to do an excellent job with drive, efficiency and integrity. I think that because of this customers want to do business with Hiscox. I am very grateful to everyone at Hiscox for what they have built over the last few years culminating in the excellent results over the last two.
Our Global Markets and Bermuda businesses are most affected by the cycle and they will let those with short memories take the business off them if the price is not right. There is still plenty of good business at fair prices so they have budgeted to make a good profit in 2008. Reinsurance prices are relatively firm, so those who are reducing insurance premiums to unrealistic levels will be squeezed by expensive reinsurance and less income to pay losses.
Hiscox is most well known for its expertise in the high net worth arena, but it is our balance of business that gave us the flexibility to deliver this record result while still investing in the future. The decision to expand in reinsurance in both London and Bermuda, combined with a strong performance in big ticket international business, generated record returns and we invested in both our UK direct business and the USA.
HiscoxGlobalMarkets HiscoxGlobal Markets underwrites a mix of bigger ticket international business where the Lloyd’s licences provide market access, and smaller ticket specialty business which comes to London for both historic and relationship reasons. RichardWatson led it to a stunning year. Gross written premiumswere £676.5 million (2006: £709.1 million) and profits surged to £155.6 million (2006: £90.7 million). The combined ratio improved to 81.7% (2006: 90.1%). The growth in profits was due to an excellent performance by the reinsurance, property and specialty teams.Our marine and global errors and omissions (E&O) teams all made solid contributions.
The reinsurance area expanded significantly in the year, with the added capacity of a special purpose re-insurer Panther Re, which was capitalised byWLRoss &Co. Growth in a year that turned out to have very few insured natural catastrophes has been amajor contributor to theGroup’s growth in profits. In October last year Panther Re and Syndicate 33 agreed that their successful reinsurance partnership covering the 2007 year of account would not be renewed for 2008.We commuted our contract with Panther Re in January 2008 in a deal which brought benefits to both parties. In place of Panther Re we created the smaller Cougar Syndicate at Lloyd’s which is capitalised by a mix of individual andCorporate Names. Initially set up for one year, Cougar Syndicate has a capacity of £34.6 million. Although we expect our reinsurance writings to reduce as rates are easing, we will write enough well-rated business to satisfy both Cougar and ourselves.
The property team underwrite all of our catastrophe exposed primary property and property binder business. They had a good year as modest expansion and few losses led to a significant profit contribution.We havemoved the reinsurance protections of this business towards a quota share structure, creating partnerships to share both risk and reward.
Under the specialty banner we bring together a range of areas such as bloodstock, contingency, kidnap and ransom, terrorism, personal accident and political risks. The division had an almost static top line but improved combined ratios led to a good performance.
It is the specialty division which provides a fair degree of balance of non-correlated business to Hiscox Global Markets and theGroup, so it is an area wewill cherish as market conditions deteriorate.
It had another successful year. Gross written premium grew to £220.2 million (2006: £151.3 million) and the combined ratio 75.4% (2006: 62.7%). Profits grew to £69.1million (2006: £51.9 million). This improvement was driven by a good performance in each business.
Hiscox Bermuda had a great year. Robert Childs led his team to expand their external reinsurance book by 60% to £148.7million (2006: £93.0million). This expansion, coupledwith a year of low loss frequency, generated a combined ratio of 56.7% and allowed the profits to flow. In 2008we expect the business to shrink as the team shows the same discipline in softer markets as it did in expanding at the right time. Hiscox Guernsey had another good year under the leadership of Steve Camm and RobDavies. Gross written premium remained virtually flat at £49.1 million (2006: £48.6 million). Profits remained strong. Our Guernsey team continues to drive the expansion of our worldwide kidnap and ransom business. During the year we acquired a portfolio of this business from AON, which is made up of Latin American risks from third party intermediaries.We also recruited another team based in New York. These two teamswill build our relationships with local retail brokers – injecting a stronger growth element into this business.
Hiscox USA had a step change in size this year. Led by Ed Donnelly, premiums grew 130% to £22.4 million (2006: £9.7 million). Our team expanded to 88 people. During the year we acquired the American Live Stock Insurance Company. It contributed £3million to this year’s business.
HiscoxUK andHiscox Europe Despite challenging conditions our businesses in both the UK and Europe delivered good top line growth with gross premiumswritten increasing by 13.7% to £302.3 million (2006: £265.8 million). Aggregate profits fell to £21.8 million (2006: £33.1 million), and the combined ratio was 98.2% (2006: 96.2%) reflecting the impact ofWindstorm Kyrill and the UK floods.
Hiscox UK, led by Steve Langan, produced profits despite several catastrophe events. It has grown gross written premiums 10.7% to £229.2 million (2006: £207.1million) though profits have fallen to £17.2 million (2006: £32.4 million). The decline has been due to the impact of Windstorm Kyrill, the UK floods in June and July and further investment in our UKmarketing campaign. UK property rates had been low for some time and, in part due to the impact of the floods, we are now seeing rates firm. Our marketing campaign continues to show returns. Brand awareness almost trebled in 18months and customer numbers for the direct business grew to 54,000. Theprofessionsandspecialtycommercial area focuses on knowledge-basedbusinessesemploying250or fewer staff. Over several years we have developed specific products for firms active in this sector and are building our market presence. This year we beganmarketing these liability and property products to firms employing ten or fewer staff via the internet. These smaller firms increasingly use the internet to purchase insurance and Hiscox is able to serve their specialist needs. One of the consequences of the UK floods andWindstorm Kyrill has been the need to restructure Hiscox UK’s reinsurance programme as it is no longer economic to continue unchanged. In 2008we havedecidedto increase the deductible on our catastrophe programmeto £10million from its previous level of £1million.
Hiscox Europe, led byMarc van der Veer, produced a fourth year of profits and growth. Gross written premiums grew 24.5% to reach £73.1million (2006: £58.7 million) and profits increased to £4.6 million (2006: £0.7 million). The profit improvement includes the benefit of a stronger Euro exchange rate, but even excluding this we are ahead year-on-year. This was achieved despite some serious losses as a result ofWindstorm Kyrill. During the year we opened an office in Hamburg and in 2008we opened another in Bordeaux.We remain committed to growth in the territories where we are currently active. Europe has very good loss ratios, and it is through growth and efficiency gains that we expect profits to improve.
Claims Director. Since then, Jeremy has been working in a systematic way with the senior claims team to enhance our claims promise. We have been investing in the operational and technical robustness of our claims function given the growth of key business areas and increased geographic spread. The claims team’s work was put to the test this year and they passed with flying colours. In the UK, we receivedmany plaudits for the outstanding service which we gave to many policyholders following the UK floods. Across theGroup, claims staff often work in tough situations to return our policyholders to normality as soon as possible. They enhance our reputation of paying valid claims fast.
During 2008wewill begin a significant project to migrate our systems ontoanewoperatingplatform allowing us to discard older technologies andmove to a single system across theGroup. The project, which will take around three years and cost £25million, will enhance operational efficiencies by providing easier access to risk data. The system is designed to support any future growth theGroupmay experience.
(2006: £1.74 billion). Investment income grew to £100.8 million (2006: £78.5 million), a return of 5.4% (2006: 4.6%) on average funds.We havemanaged to avoid the worst damage from the sub-prime crisis affecting theworld.Weremainpredominantly invested in cash and short durationbondsandhavemore than sufficient liquidity to meet most eventualities. As the world faces this unprecedented situation we are certain that opportunities will arise.We havemade an initial investment in corporate bonds with lower credit ratings than our customary AAA,with a duration of up to five years.We are prepared tohold thebondspurchased tomaturity accepting themark to market volatility as we believe the returns will be more attractive with this approach.
During the course of the year we accepted an offer from the management of Hiscox Investment Management to purchase a majority of the shares of this business. They have renamed themselves HIMCapital and wewish themwell in their venture.We retain access to the knowledge of Alec Foster, HIMCapital’s Chairman and the overseer of our Group funds for many years, under a consultancy contract. David Astor has succeeded Alec as our in-house overseer of the third party fundmanagers who have day-to-day responsibility for investing our funds.
Balance sheet Net assets per share grew to 209.5p per share (2006: 173.2p) and tangible net assets grew to 199.3p per share (2006: 164.8p). On the financing front we had a quiet year.We considered issuing longer term debt but the market turmoil that began in the summer made this inadvisable. Our healthy profits andmeasured growth have led us to consider our own optimal balance sheet structure. The need to have a taut balance sheet has to be balanced against the inevitable increase in exposure to external shocks as the insurance pricing cycle turns.We believe we have struck the right balance in the £100million capital management programmewhich we announced in December. £50million will be spent buying back shares in the market and a further £50million will be spent repaying debt. In addition, we will be returning almost £50million to shareholders this year through our dividend. At the end of February 2008we have spent £14.1 million buying back 5.4 million shares into treasury. The average price paid was 258.7p per share.
3b n m ar ke tl os s ye ar re tu rn pe rio d
bn m ar ke tl os s ye ar re tu rn pe rio d
9b n m ar ke tl os s ye ar re tu rn pe rio d
RichardWatson ManagingDirector, HiscoxGlobalMarkets Joined Hiscox in 1986 as a Political Risk Underwriter. AppointedManaging Director ofHiscoxGlobalMarkets inOctober 2005.
Hiscox UK good top line growth in core areas: Art and Private Client, Professions and Specialty Commercial, TechnologyMedia and Telecoms and Direct 25%growth in Hiscox Europe
Hiscox Global Markets underwrites insurance and reinsurance business across the world. It uses Lloyd’s broker network, licences and coinsurance capability to share in some of the world’s largest andmost complex risks. Hiscox Global Markets has also developed distribution through hub offices in Paris, New York and San Francisco to access smaller or more sophisticated specialist risks in their local markets such as technology, media and kidnap and ransom.
Hiscox UK also underwrites executive household, small professional risks and event cover marketed direct to the consumer.
Hiscox Bermuda Hiscox Bermuda opened in 2005 and underwrites a significant property reinsurance account, predominantly catastrophe and risk excess of loss business and some internal reinsurances.
HiscoxUSA Hiscox USA opened in March 2006 and underwrites errors and omissions, kidnap and ransom and terrorism for smaller to medium-sized businesses. American Live Stock Insurance Company underwrites animal mortality insurance.
Milestone for Hiscox USA, acquisition of American Live Stock gives access to admitted licences
Robert Childs ChiefUnderwritingOfficer Chief ExecutiveOfficer of Hiscox Bermuda Chairman of HiscoxUSA Joined Hiscox in1986. Active Underwriter of Syndicate 33 from 1993 to 2005. Chief UnderwritingOfficer of the Group for seven years.
EdDonnelly President, HiscoxUSA Joined Hiscox in 2005. Previously Senior Vice President at Professional Indemnity Agency, a subsidiary of HCC Insurance Company.
Security Hiscox Insurance Company (Bermuda) Limited has an A- (Excellent) from A.M. Best.
Security Hiscox Insurance Company (Guernsey) Limited has an A- (Excellent) from A.M. Best.
Security Syndicate 33 has an A (Excellent) rating from A.M. Best and uses Lloyd’s security, A+ (Strong) from Standard & Poor’s and A (Excellent) from A.M. Best.
Creation of theHiscox offices 1901 London 1993 Paris 1994 Munich 1998 Guernsey, Leeds 1999 Amsterdam 2000 Birmingham, Glasgow 2001 Brussels, Dublin 2002 Maidenhead 2003 Colchester 2004 Madrid 2005 Bermuda 2006 Armonk, Bristol, Cologne, Lisbon, Lyon, Manhattan, San Francisco, Stockholm 2007 Chicago, Geneva, Hamburg, Manchester 2008 Bordeaux
Fast and effective It took 13minutes for flood waters to rise from three inches to two feet inourcustomer’sGeorgianhouse inNorth Hampshire. The deluge was beyond the capacity of nearby drains and the failure of the area’s pumping station complicatedmatters. Sewage flooded our customer's kitchen, conservatory, study and the ground floor of an office. Hiscox’s loss adjuster arrived the next morning to assess the damage, with the disaster recovery company arriving in the afternoon to remove carpets, sanitise hard areas and start the important drying process with industrial blowers. Our customer said: “Wewerevery impressedwith the service – a loss adjuster was appointed promptly and spent a lot of time on our property. Decisions weremade quickly, which I think is important because the longer it takes, theworse the damagewill be.”
Focus on technology andmedia claims The Hiscox approach to technology and media claims sets us apart from the competition. Our claims underwriters aim to get under the skin of our customers’ business. The team uses its in-depth knowledge of industry risks to help prevent or minimise any problems before they arise. This partnership approachmeans our claims staff often go beyond the policy commitment to help the insured.
Standing by our policyholders When freelance journalist GraemeMcLagan wrotehisbookBent Coppers:The Inside Story of ScotlandYard’s Battle Against Police Corruption, heandhis publishers knew it would be controversial. They were not expecting to be in court for the next four years facing accusations of libel from an ex-police officer backed by the Police Federation.When others would have walked away, Hiscox provided expertise and encouragement.Working with specialist media lawyers, the teamwas determined to stand by the publisher. The result: TheOrion PublishingGroupwon a landmark ruling in the law of libel by the Court of Appeal which ruled that journalist GraemeMcLagan acted responsibly when he researched andwrote the book.
“Hiscox had faith inme andwere determined to fight this to the end.” GraemeMcLagan
Winners of the Brand Extension category at the 2007Marketing Society Awards ‘Best Use of Data for a Financial Product’ in the 2007Data Strategy Awards ‘Best Financial’ and ‘Innovation’ awards in the 2006Direct Response Intelligence Awards
Awareness index CPS indexHome Direct policy count Commercial Direct policy count
HiscoxDirectDirect marketing cost per sale (CPS), total awareness growth and policy count
In 2007Hiscoxwas the recipient of the following broker voted awards for the Insurance Times: Personal Lines Insurer of the Year Commercial Lines Insurer of the Year Lloyd’s Syndicate of the Year
In 2007 one third of new appointments were internal promotions or referrals from current employees. Hiscox has an extremely thorough recruitment process. The average number of candidates seen per hire in 2007was eight.
198 underwriters completed this core training programme during 2007. This includes 81%of underwriters from our new businesses in Bermuda and the US.
As the business grows the leadership challenge is being shared with more andmore people.
It is a special focus of Hiscox to develop the right kind of leadership skills using and sharing the wealth of experience that exists in theGroup. During 2007, 45 people completed the extraordinary leadership training programme.
Motivate Having attracted and trained the best people we can find, it is then essential to keep themmotivated and thriving in their various roles.
TheHiscox Partnership One of the motivators to senior people who have contributed significantly to the success of the Group is to be appointed a Hiscox Partner. The Hiscox Partnership is comprised of up to 5% of the total number of staff. The Partnership is informed of all the strategic decisions and facts and figures of theGroup, which enables those senior people to influence the direction and performance of theGroup. In 2007 nine new partners joined the team.
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 andmedia 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 rating. It also benefits from the Lloyd’s brand. Lloyd’s has an A (Excellent) rating from A.M. Best and A+ (Strong) fromStandard & Poor’s. The geographical and currency splits are shown on 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. Syndicate 33 has a capital requirement ratioof approximately50% of Syndicate capacity. Thesizeof theSyndicate is increased or reduced according to the strength of the insurance environment in its main classes. At present, Hiscox owns approximately 72.6% of the Syndicate, with 27.4% being owned by third party Lloyd’s Names. Hiscox receives a fee and a profit commission of approximately 17.5% on the element it does not own.
The chart below shows the performance of Syndicate 33 for the last seven years.
Panther Re In December 2006, Hiscox announced a market-leading sidecar transaction, which broke new groundwithin the Lloyd’s Market. Hiscox, in conjunction withWLRoss as lead investor, andGoldman Sachs as financial adviser and lead arranger, created the sidecar, Panther Re, which was the first sidecar in the Lloyd’s market. A ‘sidecar’ is a limited-life insurance company, formed to give its investors access to the insurance market, and its cedants access to capital. The quota share arrangement that Syndicate 33 entered into with Panther Re enabled Syndicate 33 to write more of the favourably rated reinsurance business available during 2007. Panther Re’s sole activity is the quota share arrangement it entered into with Syndicate 33 for 2007, underwhich it tooka40% pro-rata share of the Syndicate’s property catastrophe reinsurance business. In return Syndicate 33 received a ceding commission and a profit commission.
Cougar Syndicate Cougar Syndicate has been set up for 2008 with a capacity of £34.6 million and is wholly backed by external Names. The Syndicate is taking a pure year account quota share of Syndicate 33’s international property catastrophe reinsurance account under a limited tenancy agreement initially for a one-year period only. Management is provided by Hiscox Syndicates Ltd.
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 14.2% from 1997 to 2007, despite discontinuing almost all of its original business. It has also significantly improved its combined ratio.
Company (Guernsey) Limited writes mainly kidnap and ransom and fine art insurance. Its gross premiumswritten since inception are shown in the chart opposite. Hiscox GuernseyhasanA-(Excellent) rating fromA.M. Best.
Hiscox Insurance Company (Bermuda) Formed by Hiscox in late 2005, Hiscox
Insurance Company (Bermuda) Limited completed its first full year of business in 2006. Initially capitalised at $500 million, it has access to reinsurance business shown to the growing Bermudian market and has also become a vehicle for intergroup reinsurance. Hiscox Bermuda has an A- (Excellent) rating from A.M. Best. At the end of 2007, net assets were $760.7 million.
AmericanLiveStock In July 2007 theGroup announced the acquisition of ALTOHA, Inc. an insurance holding company and its subsidiaries American Live Stock Insurance Company, the premier live stock insurer in the US, and Harding &Harding, Inc. the affiliated insurance agency. ALTOHA and its subsidiaries are based in Geneva, Illinois and have 25 staff.
American Live Stock Insurance Company is an admitted insurance company with licences in all 50 US states. Its insurance is also available internationally in Australia and South Africa. Its main business is animal mortality insurance for cattle and horses, although farmowners cover is also provided in certain areas. American Live Stock Insurance Company has changed its name to Hiscox Insurance Company Inc. An affiliated agency, Harding &Harding, Inc. has changed its name to American Live Stock Inc. and places all of its business with Hiscox Insurance Company Inc.
Invested assets in theGroup grew to £2.05 billion (2006: £1.74 billion). The investment returns, excluding derivative positions, grewby 28% to £100.8million (2006: £78.5million) in the last year due in part to an increase in theGroup assets as a result of positive cash flows.
Gross premiumswritten decreased by 4.6% on the prior year. The weaker Dollar to Pound Sterling translation rate obscures real underlying growth in gross premiums written activity of approximately 2%.
Investment income increased to £46.6 million (2006: £33.1 million) as continued strong cash generation led to a rise in the average level of assets under management in the Syndicate and interest rates remained at good levels.
Insurance Company Limited in the UK and Ireland. It also includes the results of Syndicate 33’s fine art, UK regional events coverage and non-US household business, together with income and expenses arising from theGroup’s retail agency activities in the UK. It excludes the results of the larger retail TMT business written by Hiscox Insurance Company Limited and the Irish surety business.
Gross premiumswritten increased by 10.7% due to increased income from all core lines of business, especially in the direct business and professional and specialty commercial lines.
Investment income has reduced to £2.5 million (2006: £3.9 million) due a change in theGroup investments attributed to the European division.
The Irish surety business continued its excellent performance in the year.
Profit before tax increased to £4.6 million (2006: £0.7 million) followingmoderate net losses but including an exchange gain.
Europe’s net claims ratioof45.2%represents a 5% improvement on the prior year despite moderate net losses early in the year fromWindstorm Kyrill (estimated at approx. £1.5 million) together with a number of medium sized losses during the first half, particularly in the Netherlands andGermany.
The expense ratio decreased to 51.0% (2006: 56.4%). The combined ratio improved to 96.2% (2006: 106.6%), primarily driven by favourable loss ratios in France and the Netherlands as well as in the new areas of European development.
Bermuda gross premiumswritten increased by 45.5% to £220.2 million from£151.3million. Bermuda grew gross premiumswritten so as to benefit from the strong underwriting rates on external catastrophe exposed business. Bermuda gross premiumswritten growth of approximately 60%was achieved despite the adverse foreign exchange effects of the weaker USDollar. The US division has grown its gross premiumswritten by approximately 130%on the prior year. Underlying organic growth of approximately 90% (in translated Pound Sterling terms) has been augmented with approximately £2.9 million of new premiums contributed by the acquired Hiscox Insurance Company Inc. business.
Net premiumswritten increased by 34.8% to £185.2 million, driven by growth in gross premiumswritten. Investment income increased to £23.9 million (2006: £16.4 million). The Bermuda investment income surpassed the 2006 level as continued strong cash generation led a rise in the average level of assets under management and US interest rates remained high. Profit before tax increased to £69.1million (2006: £51.9 million) with strong profits fromHiscox Bermuda andGuernsey due to a favourable claims and rating environment.
The expense ratio improved to 35.3% (2006: 45.2%). A number of one-off set-up costs were incurred in the prior year.
Hiscox Corporate Centre performance Corporate Centre comprises the investment return and administration costs associated with the Company and other Group management activities. These non-underwriting entities capture the majority of theGroup’s funding costs.
Underlying investment income decreased to £10.8million (2006: £36.7 million), mainly due to a one-off derivative gain of £27million in 2006.
TheGroup’s cash flows originate frommultiple sources. Core cash inflows include insurance premium remittances, which are typically received frompolicyholders in advance of providing risk coverage, losses recovered from reinsurance partners and net investment returns. After allowing for the payment of acquisition costs and other short-term expense requirements, surplus cash balances arising are invested in an optimalmix of assets, concentratedmainly on high quality debt and fixed income securities of short duration.
In general, the investment portfolio produces relatively steady cash returns during periods of interest rate stability.Where interest rates are lower for sustained periods, investment income typically reduces, as the proceeds from higher-yielding securities are reinvested in securities offering coupon payments at lower prevailing market rates. However, it is still possible to realise a partial cash flow benefit in a low interest rate environment, since the underlying market value of the investments tends to increase, leading to higher realised cash gains from their eventual sale.
Interest payments of £8.2 million (2006: £9.4 million) were made during the year in respect of theGroup’s US$182million borrowings and assets held under finance leases. The reduction on the prior year is mainly attributable to the relative weakness in the USDollar exchange rate during 2006 and $26million of principal repayments beingmade in July 2006.
Capital expenditure on fixed assets grew by £2.3 million to £7.8 million reflecting the start of a major IT transformation project in theGroup.
£2.5 million cash was also spent acquiring intangible customer relationship assets during the year (2006: £0.3 million).
£54.9 million (2006: £30.4 million) was returned to shareholders during 2007 comprising dividend payments of £43.6 million (2006: £30.4 million) and share repurchases of £11.3 million.
£0.3 million (2006: £0.1 million) was paid in respect of finance lease obligations during the year. None of theGroup’s borrowings fell due for repayment during 2007 (2006: net payment of £14.2 million). It is management’s intention that net debt will be reduced by approximately £50million during 2008 excluding letters of credit. Investment income generated on the proceeds of borrowings largely offsets the interest obligations. However, such interest income is reported separately with operating activities in the cash flow statement.
Notwithstanding the contractual maturity profile of these securities, theGroup is able to realise cash from its investment portfolios in a reasonable manner as and when required.
£489.7m net cash investment into financial assets £54.9m cash returned to shareholders
The risks associated with the core business represent some of the greater exposures, however theGroup is exposed to a number of other risks and has developed systems and procedures to identify andmanage them.
Senior management responsibilities are clearly identified together with their reporting lines and the execution of delegated responsibility is closely monitored by reporting to the Board and its committees. This monitoring, supported by financial and non-financial management information, covers performance against agreed targets and objectives, as well as the risks to achieving these objectives and the effectiveness of the measures in place to manage these risks.
In parallel with these direct risk management processes, there is a dedicated risk management function which, in conjunction with Internal Audit, monitors and reviews the effectiveness of risk management throughout the organisation and reports to the Board. These functions are organised centrally to assist in the integration of best practice throughout theGroup. Risk management tools allow individual Group businesses to assess their own risks locally whilst feeding into weighted global reports at Group level.
Catastrophe and systemic insurance losses Likeother insurers,theGroup’searningscanbeaffectedbyunpredictable events and circumstances. Thesemay include, butarenot limited to, conditionssuchas natural and other catastrophes, legal developments, social change and the emergence of latent risks. Such events could create significant levels of losses if theGroup’s underwriting models, aggregation tools and policy wordings do not prevent unplanned concentrationsof risk, both ingeographical regions and types of policy.
TheGroup 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
To counter this, Hiscox alters its appetite for the lines of business and the layers it writes within them in response to market conditions and the risk appetite of theGroup. TheGroup’s cycle management strategy and related modelling andmonitoring are essential to ensure that it controls any accumulating adverse effects of changes.
TheGroup participates in many industry bodies, associations and task-force initiatives in order to monitor developments and influence their strategic direction. In particular, the involvement of theGroup’s executives in the reshaping of the Lloyd’s market underscores that commitment.
Binding authorities and other outsourcing Hiscox writes a considerable amount of premium income through agents to whom binding authority is given to accept risks on behalf of Hiscox Group insurance vehicles. Binder management exists as a separate discipline outside of the underwriting process at Hiscox. All delegations are strictly controlled through tight underwriting guidelines and limits and extensive vetting, monitoring, and auditing of the agencies. However, as there is no absolute guarantee that an agent will comply with the terms of its authority, Hiscox could be exposed to unanticipated losses.
TheGroup selects its agents and business partners carefully. Significantareasofoutsourcing undergo a rigorous tendering process, where numerous attributes other than just price competitiveness are given due consideration. All third parties operate within the terms of formal service levelagreements,with repercussions for underperformance.
Reserve estimates are subject to regular reviews. Adjustments are made to take into account management’s latest view of the probable ultimate liability, based on claims and other developments and new data. Yet there can be no absolute guarantee that the ultimate losses will not differ materially from the provisions theGroup has established. It is particularly difficult to estimate IBNR claims and those arising from large catastrophes. Note 24 to the financial statements provides information on theGroup’s estimation of ultimate claim costs over recent years. Additional information is provided in note 3 to the financial statements.
Hiscox is continuing to grow its regional presence in theUK, Europe andUSA.
In the event that key staff do leave, theGroup’s contingency plans ensure continuity of service both internally and to policyholders. These include cross-training and rotation of duties to ensure that staff can performmultiple roles. Most staff work in teams rather than in isolation, which lessens the impact of normal staff turnover on the business.
Hiscox has a formal disaster recovery plan that addresses its premises and technology related risks. Robust contingency strategies are in place for both workspace recovery and back-up of data centres and communications. In theeventof anoutage,theseprocedureswill enable theGroup to move operations to alternative facilities within very short periods of time. The alternative facilities are supplied by separate localised utility grids and telecommunications carriers. The disaster recovery plan is tested regularly and theGroup also performs disaster simulations.
Currency fluctuations The USDollar is theGroup’s largest underwriting currency. A significant proportion of theGroup’s USDollar insurance liabilities are supported by investments held in the same currency. However, as a significant proportion of theGroup’s operational cost base is located in the UK and Europe, movements in foreign exchange rates may have a material adverse effect on its financial performance and position.
Regulation TheGroup’s entities are incorporated and transact business in a variety of countries and states, all of which require strong levels of accountability to the local regulatory authorities.
The various Hiscox businesses operating in the UK are subject to high levels of regulation from the FSA and the Council of Lloyd’s. The numerous regulatory bodies that oversee theGroup’s international operations include theGuernsey Financial Services Commission, the BermudaMonetary Authority and individual state insurance departments in the USA. These bodies all have significant powers of intervention including the ultimate sanction of removing the authorisation to carry on insurance business.
Regulatory action could affect theGroup’s results and position in numerous ways. For example, it could be required to allocate inefficient levels of capital around theGroup in order to overcomeminimum regulatory hurdles, or bear the costs of implementing new compliance or sophisticated computer modelling systems.
Hiscox devotes considerable resources throughout theGroup to meet its regulatory obligations. The senior management of each Hiscox business maintains constructive, productive and valuable relationships with all of the regulatory bodies in their respective territories. Furthermore, theGroup debates all current regulatory issues and encourages the development of new initiatives in areas such as risk management and reporting that will help safeguard the future of the industry.
Rating agencies The ability of theGroup’s insurance operations to write certain classes of business, including reinsurance, may be affected by a change in the financial strength or credit rating issued by an accredited rating agency such as A.M. Best, Moody’s or Standard & Poor’s.
Hiscox UK is dedicated to advising customers on risk management to prevent burglary and fire in thehome andotherdistressing losses. Should a loss occur, the Hiscox UK philosophy is that insurance is a promise to pay, and the claims service aims to support customers and make themwhole as soon as possible. For more information about Claims at Hiscox see pages 22 to 25.
Dealingwith 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 a quarterly Hiscox broker magazine keeps brokers informed of developments at Hiscox and in the insurance industry.
Dealingwith 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 from its website. In addition, senior management and key performers meet investors and analysts to explain and take questions on theGroup financial performance and business strategy.
In theworkplace Hiscox wants to employ the best people and provide themwith the means and the motivation to excel. This is achieved with fair rewards and by providing staff with an environment in which they can enjoy their work and reach their full potential. Hiscox recognises how important it is for employees to maintain a healthy work/life balance and gives staff the option of flexible and homeworking wherever possible.
Equal opportunities Hiscox is committed to providing equal opportunities to all employees and potential employees in all aspects of employment regardless of disability, sex, race, religion, sexual inclination or background.
Rewards and benefits Hiscox encourages employees to identify with the success of the Group through performance-related pay and bonus schemes, savingsrelated share option schemes and executive share option schemes. Competitive benefits packages contain health, fitness, flexible working and career break opportunities. Salary packages are benchmarked byWatsonWyatt against the financial services industry as a whole and against the Lloyd’s market specifically, where applicable.
Communication and participation Employees are kept informed of business developments through formal briefings, teammeetings, intranet bulletins, video conferences and informal routes. Management takes these opportunities to listen to staff and involve them in taking the business forward. Amonthly staff e-zine provides updates on issues and social events.
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. By conducting its business with these core values in mind, theGroup 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 essence a non-bureaucratic organisation. An effective and firm system of internal controls ensures that risks are managedwithin acceptable limits, but not at the expense of innovation or speed of response. TheGroup believes that it has got this balance right and that it is one of its greatest strengths. TheGroup’s policies ensure that it continues to follow a best practice approach to managing its people and remains a fair and professional employer. In the unlikely event of an employee having a material concern relating to the operations of the business, a whistleblowing policy explains to staff how they can confidentially raise their misgivings.
In the community In total, Hiscox donated £616,572 to charities in 2007.
As theGroup expands throughout the world, it aims to recruit local staff wherever possible to help develop a rapport with the local community andmake a direct contribution to the local economy.
TheHiscox Foundation The Hiscox Foundation, a charity funded by an annual donation from Hiscox, has been set up to give donations to deserving causes. It gives priority to any charity in which a member of staff is involved with the aim of encouraging and developing such activity.
In the environment The way customers conduct their business is of paramount importance to theGroup. Hiscox’s approach to underwriting their risks will take into account customers’ attitudes to all aspects of their business, including care of the environment.
As part of its approach, Hiscox has joined Climatewise, an insurance industry initiative which aims to reduce the economy’s and society’s long-term risk from climate change. Hiscox is developing a strategy to support the principles of Climatewise and is encouraged by the actions taken by Lloyd’s to assist the market to meet the majority of the principles.
TheGroup’s direct environmental impact is mainly from the energy it usesand the emissions and waste it generates from its premises. In accordance with theGroup’s Environmental Policy, consumables are recycled and reused wherever possible. TheGroup is taking steps to reduce the amount of rawmaterials used in business processes and by staff, particularly through the extensive use of computerisation and communications technology. During 2007, Hiscox upgraded its IT data centre and reduced the number of servers required by theGroup. Programmes for recycling batteries, mobile phones, lamps andCDs continued during the year.
Bronislaw Edmund Masojada Chief Executive (Aged 46) Bronek Masojada joined Hiscox in1993. From1989 to1993 he was employed by McKinsey and Co. Bronek served as a Deputy Chairman of Lloyd’s from 2001 to 2007 and as Chairman of the Lloyd’s Underwriting Agents Association from 1998 to 2001. He was a Non Executive Director of Ins-sure Holdings Limited from 2002 to 2006 and is a past president of The Insurance Institute of London. He is Chairman of the Lloyd's Tercentenary Foundation, a charity which supports research in areas of interest to the insurance industry.
Stuart John Bridges Group Finance Director (Aged 47) 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 was a member of the Financial Reporting Council’s review group on The Turnbull Guidance on Internal Control.
Carol Franklin Engler Non Executive Director (Aged 56) Carol Franklin Engler joined Hiscox in1999. She is the Ombudsman for the Swiss telecommunication industry and the Executive Chairman of Forests for Friends Ltd and The Tree Partner Company in Switzerland. Carol was the Chief Executive Officer of the WorldWide Fund for Nature in Switzerland from1999 to 2002. From 1979 to 1999 she was employed by Swiss Re in a variety of roles including Head of the Aviation Department and Head of Human Resources.
Andrea Sarah Rosen Non Executive Director (Aged 53) Andrea Rosen joined Hiscox in 2006. She was appointed as a Director of Alberta Investment Management Corporation in October 2007 and is a Director of Emera Inc. She was previously Vice Chair of TD Financial Group and President of the TD Canada Trust from 2002 to 2005. Prior to this she held various positions within the TD Financial Group from 1994 to 2002, including Executive Vice President of TD Commercial Banking and Vice Chair of TD Securities. She was Vice President of Varity Corporation from 1991 to 1994 and held various positions with Wood Gundy Inc. from 1981 to 1990.
Dirk Arie Stuurop Non Executive Director (Aged 59) Dirk Stuurop joinedHiscox in2006.He is managingpartner of Lighthouse Holdings LLC. In 2004 he was appointed Vice Chairman of the Board of RAM Holdings Limited, a Bermudian domiciled financial guaranty reinsurance operation. From 1999 to 2006, Dirk was President of Stuurop & Company, a privately owned firm providing strategic advice to executive managements and boards of directors. In 1999 he retired as Chairman of Global Financial Institutions at Merrill Lynch where heworked from 1982. He served as Chairman of Worldinsure Ltd, from 2000 to 2002 and as Senior Executive Director to Banc of America Securities in 2003.
Bankers Bank of Bermuda –HSBC 6 Front Street Hamilton HM11 Bermuda
Overview and basis of reporting Hiscox Ltd (‘the Company’) is a Bermudian domiciled holding company for theGroup. 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 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 five times during the year.
TheBoard’s committees The Board has appointed and authorised a number of committees to manage aspects of theGroup’s affairs. Each committee operates within established written terms of reference and each committee Chairman reports directly to the Board.
Executive Directors, meets monthly to raise and discuss topics such asGroup strategy (subject always to Board approval), approval of senior appointments and remuneration (other than Board appointments), management of theGroup’s trading performance, mergers and acquisitions (which are not significant to theGroup), significant issues raised by the London and International executive committees and approval of exceptional spend within the limits established by the Board. The London Executive Committee considers day-to-day issues arising from theGroup’s UK andmainland Europe businesses. The International Executive Committee considers issues arising from theGroup’s Bermuda, Guernsey and US businesses.
TheRemuneration andNomination Committee The Remuneration and Nomination Committee is chaired by Sir Mervyn Pedelty and comprises Carol Franklin Engler, Dirk Stuurop, Daniel Healy, Andrea Rosen and Dr James King. 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 54 to 59.
The Conflicts Committee TheGroup has a Conflicts Committee which is comprised of independent Non Executive Directors fromwithin theGroup, and chaired by Dr James King. It meets as and when required. Conflicts of interest may arise from time to time because Syndicate 33 andCougar Syndicate are managed by a Hiscox-owned Lloyd’s Managing Agency. 27.4% of the Names on Syndicate 33 are third parties with 72.6% of Syndicate 33 owned by a HiscoxGroup company. 100% of Cougar Syndicate is owned by third parties. The Conflicts Committee serves to protect the interests of the third party Syndicate Names. Should such a potential conflict of interest arise, there is a formal procedure to refer the matter to this Committee.
Performance evaluation During the year, the Chairman led a review of the performance of the Board as a whole. The Non Executive Directors met with the Chairman to discuss a wide range of issues, including the performance of the Executive Directors of the Board and senior management. In addition the Non Executives met without the Chairman and the Executive Directors during the year. The performance of the Executive Directors and the Chairman was discussed. Nomajor issues regarding the performance of the Board were raised in these discussions.
The Chief Executive held one-to-onemeetings 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 andmeet 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.
The risk management systems are set out in detail in the Risk management report on pages 44 to 47.
TheGroup also has an Internal Audit function which has direct access to the Audit Committee and reports to eachmeeting.
This report sets out the remuneration policy for theGroup’s senior executives. This policy is consistent with the overall reward approach across theGroup. The sections of this report entitled ‘Remuneration of Executive Directors’, ‘Annual cash incentives’, ‘Share incentive schemes’ and ‘Pensions’ have been audited by KPMG. The remainder of the report is unaudited.
Remuneration andNomination Committee The Remuneration and Nomination Committee meets at least twiceayear.Detailsof thememberscanbe foundonpages
TheRemunerationandNominationCommitteemakes recommendations to theBoardon theoverall frameworkandcostof remuneration for Hiscox and determines the specific remuneration packages for the Executive Directors.
Remuneration policy The remuneration philosophy within Hiscox is to provide rewards which attract and retain quality staff and encourage and reward superior performance.
Remuneration elements There are four main elements of the remuneration packages in Hiscox: base salary and benefits, annual cash incentives (bonuses), share incentives and pensions.
Base salary and benefits Base salarieswithin theGroup are reviewed annually. TheRemuneration and Nomination Committee considers the overall budget and approach for the review, taking into account economic and operational conditions. Individual salaries are then reviewed using theWatson Wyatt Financial Services Salary Survey as a benchmark. Individual skills, experience and performance are also taken into account when setting salaries.
WatsonWyatt is an independent remuneration consultant who provides ad hoc information to the Remuneration and Nomination Committee and does not provide any other services to the Company.
As from 1 January 2007, certain benefits were rolled into basic salary.
All employees, including Executive Directors, are eligible for the Profit Related Bonus. The PRB scheme is triggered when the business profits of theGroup, based on the year’s pre-tax operating result, exceed a Return on Equity (ROE) linked to the longer term rate of return (‘Hurdle Rate’). The minimumHurdle Rate has previously been set at a 10%pre-tax return on allocated equity with the bonus pool comprising 15%of profits in excess of that. Bonus pools are then calculated for eachmajor business division based on the performance of that division against the Hurdle Rate of return for the division’s allocated equity.
The payment of larger bonuses is deferred over a three-year period as follows.
Bonus of £50,000/$100,000/ Entire bonus taken in cash €75,000 and below in year one
Bonus above £50,000/$100,000/ £50,000/$100,000/€75,000 €75,000 and below £100,000/ taken in cash in year one $200,000/€150,000 Remainder of bonus split 50%
Bonus above £100,000/$200,000/ 50% of bonus taken in year one €150,000 25% taken in year two 25% taken in year three
Share ownership is encouraged amongst senior personnel by allowing thedeferredelementof theannualbonus tobeused,withoutdeferral, for: payment of the exercise price on the exercise of share options; payment of tax on the exercise of share options; purchase of shares; and payment of debt due on share purchases.
The following share incentive schemes are operated by Hiscox: the Hiscox Approved ShareOption Scheme, the Hiscox Unapproved ShareOption Scheme (the ‘ShareOption Schemes’), the Performance Share Plan and a Save as You Earn (SAYE) scheme. Options and awards that were granted under the share incentive schemes established by Hiscox plc were rolled over into Hiscox Ltd shares at the time of the re-domicile. Hiscox Ltd has established share incentive schemes which are substantially the same as those previously operated by Hiscox plc and since the re-domicile all options and awards have been granted under the Hiscox Ltd schemes.
The Remuneration and Nomination Committee has agreed the following changes to the Performance Share Plan: Dividends (or amounts equal to dividends) on shares granted under the Performance Share Plan (including in respect of the 2006 and 2007 grants) will roll up in the form of shares between the grant and vesting. At the end of the performance period the employee would have options over the proportion of the share grant which vests by reference to the satisfaction of the applicable performance target as well as over the number of shares representing the ‘rolled up’ dividends on those shares. After vesting but before exercise, the employee would then receive ‘shadow dividends’ (i.e. amounts equal to dividends paid) on the total number of shares remaining under option up to a maximum of 200,000 shares per employee. These amounts would be paid in cash, twice yearly, at the same time as dividends are paid to shareholders, until the option is exercised (which could be for up to a futher seven years, when the option expires).
The table at the end of the Remuneration report details Directors’ interests in the long-term incentive plans.
Pensions The final salary pension scheme (the Scheme) was closed for future accrual on 31December 2006. All active members, including SJ Bridges and BEMasojada, transferred to theGroup Personal Pension arrangement (theGPP), a defined contribution arrangement on 1 January 2007. As compensation for the closure of the Scheme, Transitional Allowances were made. The amount was fixed in April 2007, payable over three years and could be taken as cash or paid into theGPP. In 2007 the payment made to BEMasojada was £33,600 and to SJ Bridges was £39,800. RRSHiscox, a pensioner member, retired on 3 January 2003 and RSChilds who left the Scheme on 31December 2005, is an existing deferredmember.
The pension entitlement from the Scheme is shown opposite. This is the benefit that would be paid annually on retirement, based on service to date of deferment and then increased to 31 December 2007. The increase in the accrued pension for the year excludes any increase for inflation. However, figures for RRSHiscox are based on his actual pension in payment. The transfer values have been calculated on the basis of actuarial advice in accordance with version 9 Actuarial Guidance NoteGN11: Retirement Benefit Schemes – Transfer Values.
Executive Directors’ service contracts Directors’ service contracts are on a rolling basis and the unexpired term shown in the following table is therefore the same as the notice period. The Remuneration and Nomination Committee believes that these notice periods provide an appropriate balance and provide sufficient protection to the Company, having regard to prevailing market conditions and current practice amongst public companies. None of the contracts include any provision for compensation payments on early termination.
The consent of the Chairman is required in any event. During the year RRSHiscox was a Non Executive Director of Grainger Trust plc and was paid £35,000 for his services and AGICM Ltd for which he received no fees. BEMasojada was Deputy Chairman of Lloyd’s until 31 January 2007 and the fees were remitted to theGroup for his service. Neither SJ Bridges nor RSChilds held Non Executive Director positions during the year.
Pensions Increase Increase/ in accrued Total Transfer value Transfer value Transfer value (decrease) in pension accrued of increase of accrued of accrued transfer value of during the annual pension at in accrued pension at pension at accrued benefit year 31 Dec 07 pension 1 Jan 07 31Dec 07 during the year
Share options The conditions of exercise of the Approved and Unapproved share options are described on pages 55 and 56.
The aggregate gain made by the Directors on exercise of the above options (based onmarket price at date of exercise less the exercise price) was £929,045 (2006: £25,568). Themarket price of Hiscox Ltd shares at 31 December 2007was 286.5p (2006: 280.25p). The highest and lowest prices of Hiscox shares during 2007were 304.5p and 246.75p (2006: 280.25p and 193.75p).
Performance share plan Number of Number of Market price options at Number of Number of Number of awards at at date of 1 January awards awards awards 31December exercise Date from 2007 granted lapsed exercised 2007 £ which released
TheDirectors have pleasure in submitting their Annual Report and financial statements for the year ended 31 December 2007.
Financial results TheGroup achieved a pre-tax profit for the year of £237.2 million (2006: £201.1 million). Detailed results for the year are shown in the consolidated income statement on page 62, and also within the Group financial performance section on pages 39 to 41.
Going concern After making enquiries, the Directors have a reasonable expectation that theCompany and theGroup 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.
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 22 to the consolidated financial statements.
Directors of theCompany during the year are set out on pages 50 to 51.
Robert Hiscox, Dr James King and Andrea Rosen retire by rotation in accordance with the Bye-Laws of the Company and they have each submitted themselves for re-election at the second Annual General Meeting of the Company.
Charitabledonations totalled £616,572 (2006: £567,000) of which £550,000 (2006: £500,000) was donated to the Hiscox Foundation, a UK registered charity. The policy of the Hiscox Foundation is to assist and improve education, the arts and independent living for disabled and disadvantagedmembers of society. Further information concerning theGroup’s charitable activities is contained in the report on Corporate responsibility on pages 48 to 49.
ElbowBeach Hotel, 60 South Shore Road, Paget PG04, Bermuda on 4 June 2008 at 10am (2pmBST), is contained in a separate circular to shareholders enclosed with this report.
Directors’ interests 31December 2007 31December 2007 31December 2006 31December 2006 5pOrdinary 5pOrdinary 5pOrdinary 5pOrdinary Shares Shares Shares Shares number of shares number of shares number of shares number of shares beneficial non-beneficial beneficial non-beneficial
SJ Bridges 592,053 – 468,421 – NonExecutive Directors CFranklin Engler 23,288 – 23,288 –
Dr J King – – – – Sir Mervyn Pedelty 18,000 – – – ARosen – – – – DStuurop 50,000 – – –
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 as if the Company were required to comply with the requirements of Schedule 7A to the UK Companies Act 1985.
We also read the other information contained in the Report and Accounts and consider whether it is consistent with the audited financial statements.We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information.
Income Gross premiums written 4 1,198,949 1,126,164 Outward reinsurance premiums (224,039) (150,767)
Gross premiums earned 1,179,444 1,033,585 Premiums ceded to reinsurers (214,254) (144,757)
Total equity (all attributable to equity shareholders of the Company) 824,304 682,085
Financial liabilities carried at fair value 18 91,764 93,929 Current tax 24,711 20,793 Trade and other payables 25 235,875 254,825
The notes on pages 66 to 105 are an integral part of these consolidated financial statements.
The consolidatedGroup financial statements were approved by the Board of Directors on 3March 2008 and signed on its behalf by: RRSHiscox Chairman
Currency Capital Share Share Contributed Merger translation redemption Retained capital premium surplus reserve reserve reserve earnings Total
Net expense recognised directly in equity – – – – (2,869) – – (2,869) Profit for the year – – – – – – 191,248 191,248
Total recognised income/(expense) for year – – – – (2,869) – 191,248 188,379 Employee share options: Equity settled share based payments – – – – – – 5,689 5,689 Deferred tax transfer on share based payments – – – – – – (2,074) (2,074) Proceeds from shares issued 22 204 4,955 – – – – – 5,159 Change in own shares held in treasury – – – – – – (11,343) (11,343) Dividends to external shareholders 30 – – (43,591) – – – – (43,591)
Hiscox Ltd Report and Accounts 2007Consolidated statement of changes in equity
Profit before tax 237,199 201,062 Adjustments for: Interest and equity dividend income (90,205) (70,243) Interest expense 8,177 9,404 Net (gains)/losses on financial investments derivatives and borrowings 687 (9,422) Non-cash movement in retirement benefit obligation (3,801) (12,876)
Cash outflow from the acquisition of subsidiary 31 (11,133) – Cash outflow from the sale of subsidiary 32 (936) – Cash outflow from acquisition of associates 16 (1,273) – Cash flows from the purchase of property, plant and equipment (7,789) (5,452) Cash flows from the purchase of intangible assets 14 (2,500) (300)
Included within cash and cash equivalents held by theGroup are balances totalling £53,336,000 (2006: £41,304,000) not available for immediate use by theGroup outside of the Lloyd’s Syndicate within which they are held.
Bermuda, comprises Hiscox Ltd (the parent Company, referred to herein as the ‘Company’) and its subsidiaries (collectively, the ‘Hiscox Group’ or the ‘Group’). For the period under review theGroup provided insurance, reinsurance and investment management services to its clients worldwide. It has operations in Bermuda, the UK, Europe, and USA and employs over 800 people.
The consolidated financial statements for the year ended31December 2007 include all of theGroup’s subsidiary companies and theGroup’s interest in associates. All amounts relate to continuing operations.
2 Significant accounting policies The principal accounting policies applied in the preparation of these consolidatedGroup financial statements are set out below. The most critical individual components of these financial statements that involve the high degree of judgement or significant assumptions and estimations are identified at note 2.23.
2.1 Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards and in accordance with the provisions of the Bermuda Companies Act 1981.
In March 2004, the IASB issued IFRS 4 Insurance Contracts which specifies the financial reporting for insurance contracts by an insurer. The standard is only the first phase in the IASB’s insurance contract project and as such is only a stepping stone to phase II, introducing limited improvements to accounting for insurance contracts. Accordingly, to the extent that IFRS 4 does not specify the recognition or measurement of insurance contracts, transactions reported in these consolidated financial statements have been prepared in accordance with another comprehensive body of accounting principles for insurance contracts, namely accounting principles generally accepted in the UK.
The accounting policies have been applied consistently by all Group entities, to all periods presented, solely for the purpose of producing the consolidatedGroup financial statements.
TheGroup 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 31December 2005 which was the year of adoption. Thenumberof yearsof datapresented was increased from six in the prior year, to seven in the current financial year, and will be increased in each succeeding additional year up to a maximumof ten years ifmaterial outstanding claims exist for suchperiods.
The consolidated financial statements also reflect the early adoption of IFRS 8Operating Segments from that date. IFRS 8 is a disclosure standard concerning the designation and presentation of operating segment information and therefore has no impact on the reported primary financial statements or financial position of theGroup. Four IFRIC interpretations became effective for financial reporting purposes during the year under review, however their adoption has not resulted in any changes to theGroup’s stated accounting policies.
The Directors have considered recently published IFRS, new interpretations and amendments to existing standards that are mandatory to theGroup’s accounting periods commencing on or after 1 January 2008 and which have not been subject to early adoption.With the exception of recent revisions to IFRS 3Business Combinations, which generally require transaction costs on business combinations to be accounted for separately as period costs by way of an immediate charge to the income statement rather than being capitalised as part of the overall cost of combination for goodwill purposes, the Directors’ current assessment is that the adoption of these changes will necessitate minor presentational changes only.
2.3 Change of holding company in prior year On12December 2006Hiscox Ltd replacedHiscox plc as theGroup’s holding company byway of a share for share exchange.
TheGroup’s consolidated financial statements are issued in the name of the legal parent Company, Hiscox Ltd. However, as a consequence of applying reverse acquisition accounting, the results for the year ended 31December 2006 represented a continuation of the consolidated activities of Hiscox plc for the year ended 31December 2006 plus those of Hiscox Ltd from 12December 2006. In accordance with Bermuda law theGroup’s previously reported share premium, merger reserve and capital redemption reserve were presented as contributed surplus at 31December 2006. Contributed surplus is a distributable reserve.
Subsidiaries are those entities controlled by theGroup. Control exists when theGroup has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Generally this occurs when theGroup obtains a shareholding of more than half of the voting rights of an entity. In assessing control, potential voting rights that are currently exercisable or convertible are taken into account. The consolidated financial statements include the assets, liabilities and results of theGroup up to 31December each year. The financial statements of subsidiaries are included in the consolidated financial statements only from the date that control commences until the date that control ceases.
Hiscox DedicatedCorporateMember Limited underwrites as a corporatemember of Lloyd’s on themain syndicatemanaged by Hiscox Syndicates Limited (the ‘mainmanaged syndicate’). In view of the several but not joint liability of underwritingmembers at Lloyd’s for the transactions of syndicates in which they participate, the Group’s attributable share of the transactions, assets and liabilities of this main Syndicate has been included in the financial statements.
(b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the retranslation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying net investment hedges. 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 itemsmeasured at fair value are translated using the exchange rate rulingwhen the fair value was determined.
(c) Group companies The results and financial position of all theGroup entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: (i) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet
In respect of acquisitions prior to this date, goodwill is included on the basis of its deemed cost, which represents the amount recorded under previousGAAP.
Internally developed computer software is only capitalised where the cost can bemeasured 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.
2.9 Cash and cash equivalents TheGroup has classified cash deposits and short-term highly liquid investments as cash and cash equivalents. These assets are readily convertible into known amounts of cash and are subject to inconsequential changes in value. Cash equivalents are financial investments with less than three months to maturity at the date of acquisition.
2.10 Impairment of assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually or whenever there is an indication of impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Non-financial assets Objective factors that are considered when determiningwhether a non-financial asset (such as goodwill, an intangible asset or item of property, plant and equipment) or group of non-financial assets may be impaired include, but are not limited to, the following: adverse economic, regulatory or environmental conditions that may restrict future cash flows and asset usage and/or recoverability; the likelihood of accelerated obsolescence arising from the development of new technologies and products; and the disintegration of the active market(s) to which the asset is related.
Impairment loss An impairment loss is recognised for the amount by which the asset’s carrying 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).
Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed thecarryingamount thatwouldhavebeendetermined had no impairment loss been recognised for the asset in prior periods. A reversal of an impairment loss is recognisedas income immediately. Impairment losses recognised in respect of goodwill are not subsequently reversed.
2.11 Derivative financial instruments Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently valued at their fair value at each balance sheet date. Fair values are obtained from quotedmarket values and, if these are not available, valuation techniques including option pricing models as appropriate. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. For derivatives not formally designated as a hedging instrument, fair value changes are recognised immediately in the income statement.
Changes in the value of derivative and other financial instruments formally designated as hedges of net investments in foreign operations are recognised in the currency translation reserve to the extent they are effective; gains or losses relating to the ineffective portion of the hedging instruments are recognised immediately in the consolidated income statement.
TheGroup had no derivative instruments designated for hedge accounting during the current and prior financial year (see note 2.18).
Company’s equity share capital (own shares), the consideration paid, including any directly attributable incremental costs (net of income taxes), is deducted from equity attributable to the Company’s equity shareholders.Where such shares are subsequently sold, reissued or otherwise disposed of, any consideration received is included in equity attributable to the Company’s equity shareholders, net of any directly attributable incremental transaction costs and the related tax effects.
2.13 Revenue Revenue comprises insurance premiums earned on the rendering of insurance protection, net of reinsurance, together with profit commission, investment returns, agency fees and other income inclusive of foreign exchange gains on instruments not formally designated for hedge accounting treatment. TheGroup’s share of the results of associates is reported separately. The accounting policies for insurance premiums are outlined below. Profit commission, investment income and other sources of income are recognised on an accruals basis net of any discounts and amounts such as sales based taxes collected on behalf of third parties.
(b) Recognition andmeasurement Gross premiumswritten comprise premiums on business incepting in the financial year togetherwith adjustments to estimates of premiums written in prior accounting periods. Estimates are included for pipeline premiums and an allowance is alsomade for cancellations. Premiums are stated before the deduction of brokerage and commission but net of taxes and duties levied. Premiums are recognised as revenue (earned premiums) proportionally over the period of coverage. The portion of premium received on in-force contracts that relates to unexpired risks at the balance sheet date is reported as the unearned premium liability.
2 Significant accounting policies continued 2.14 Insurance contracts continued (b) Recognition andmeasurement continued
Claims and associated expenses are charged to profit or loss as incurred based on the estimated liability for compensation owed to contract holders or third parties damaged by the contract holders. They include direct and indirect claims settlement costs and arise from events that have occurred up to the balance sheet date even if they have not yet been reported to theGroup. TheGroup does not discount its liabilities for unpaid claims. Liabilities for unpaid claims are estimated using the input of assessments for individual cases reported to the Group and statistical analysis for the claims incurred but not reported, and an estimate of the expected ultimate cost of more complex claims that may be affected by external factors e.g. court decisions.
(e) Outwards reinsurance contracts held Contracts entered into by theGroup, with reinsurers, under which theGroup is compensated for losses on one or more insurance or reinsurance contracts and that meet the classification requirements for insurance contracts, are classified as insurance contracts held. Contracts that do not meet these classification requirements are classified as financial assets.
Thebenefits to which theGroup is entitled under outwards reinsurance contracts are recognised as reinsurance assets. These assets consist of short-term balances due from reinsurers (classified within loans and receivables) as well as longer-term receivables (classified as reinsurance assets) that are dependent on the expected claims and benefits arising under the related reinsured insurance contracts. Reinsurance liabilities primarily comprise premiums payable for ‘outwards’ reinsurance contracts. These amounts are recognised in profit or loss proportionally over the period of the contract. Receivables and payables are recognised when due.
(g) Salvage and subrogation reimbursements Some insurance contracts permit theGroup to sell property acquired in settling a claim (i.e. salvage). TheGroupmay 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.
2.15 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 theGroup 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.
The liability recognised in the balance sheet in respect of the defined benefit pension scheme is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognised actuarial gains or losses and past service costs. Scheme assets exclude any insurance contracts issued by theGroup. On curtailment, all unrecognised actuarial gains or losses are recognised in the income statement where relevant.
Adjustments either from or to other parties participating in the Lloyd’s Syndicate regarding the defined benefit scheme are recognised as a
2 Significant accounting policies continued 2.16 Employee benefits continued (a) Pension obligations continued component of the income statement charge or credit and within receivables on the balance sheet in accordance with the policies outlined at 2.8 (b) above.
(b) Other long-term employee benefits TheGroup provides sabbatical leave to employees on completion of aminimumservice period of ten years. The present value of the expected costs of these benefits is accrued over the period of employment. In determining this liability, consideration is given to future increases in salary levels, experiencewith employeedepartures andperiods of service.
(c) Share based compensation TheGroup operates a number of equity settled share based employee compensation plans. These include both the approved and unapproved share option schemes, and theGroup’s performance share plans, outlined in the Directors’ remuneration report together with the Group’s save as you earn (‘SAYE’) schemes.
The fair value of the employee services received, measured at grant date, in exchange for the grant of the awards is recognised as an expense with the corresponding credit being recorded in retained earnings within equity. The total amount to be expensed over the vesting period is determined by reference to the fair value of the awards granted, excluding the impact of any non-market vesting conditions (e.g. profitability or net asset growth targets). Non-market vesting conditions are included in assumptions about the number of awards that are expected to become exercisable. At each balance sheet date, theGroup revises its estimates of the number of awards that are expected to vest. It recognises the impact of the revision of original estimates, if any, in the income statement, and a corresponding adjustment to equity, over the remaining vesting period.
When the terms and conditions of an equity settled share based employee 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.
(d) Termination benefits Termination benefits are payable when employment is terminated before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. TheGroup recognises termination benefits when it is demonstrably committed to either: terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal; or providing termination benefits as a result of an offer made to encourage voluntary redundancy.
(e) Profit sharing and bonus plans TheGroup recognises a liability and an expense for bonuses and profit sharing, based on a formula that takes into consideration the profit attributable to theCompany’s shareholders after certain adjustments. TheGroup recognises a provision where a contractual obligation to employees exists or where there is a past practice that has created a constructive obligation.
(f) Accumulating compensation benefits TheGroup recognises a liability and an expense for accumulating compensation benefits (e.g. holiday entitlement), based on the additional amount that theGroup expects to pay as a result of the unused entitlement accumulated at the balance sheet date.
2.18 Net investment hedge accounting In order to qualify for hedge accounting, theGroup is required to document in advance the relationship between the item being hedged and the hedging instrument. TheGroup is also required to document and demonstrate an assessment of the relationship between the hedged item and the hedging instrument, which shows that the hedge will be highly effective on an ongoing basis. This effectiveness testing is re-performed at each period end to ensure that the hedge remains highly effective.
2.19 Finance costs Finance costs consist of interest charges accruing on theGroup’s borrowings and bank overdrafts together with commission fees charged in respect of letters of credit. Arrangement fees in respect of financing arrangements are chargedover the life of the related facilities.
The inherent uncertainty of insurance risk requires theGroup to make estimates and assumptions that affect the reported amounts of insurance and reinsurance assets and liabilities at the balance sheet date. This is the most significant area of potential uncertainty in theGroup’s financial statements.
Estimates are continually evaluated based on entity specific historical experience and contemporaneous developments observed in the wider industry, and are also updated for expectations of prospective future developments. Although the possibility exists for material changes in insurance liabilities estimates to have a critical impact on theGroup’sreportedperformanceand financial position,it is anticipated that the scale and diversity of theGroup’s portfolio of insurance business considerably lessens the likelihood of this occurring. Note 24 to consolidated financial statements provides a greater analysis of the main methods used by theGroup when formulating estimates of the insurance claims liabilities at each balance sheet date.
With regard to employee retirement benefit scheme obligations, the assets, liabilities and changes disclosed in these consolidated financial statements are sensitive to assumptions regarding mortality, inflation, investment returns and interest rates on corporate bonds, the latter of which has been subject to specific recent volatility.
TheGroup’s overall appetite for accepting andmanaging varying classes of risk is defined by theGroup’s Board. The Board has developed a governance framework and set Group-wide risk management policies and procedures which cover specific areas such as risk identification, risk management andmitigation, and risk reporting. The objective of these policies and procedures is to protect theGroup’s shareholders, policyholders and other stakeholders from negative events that could hinder theGroup’s delivery of its contractual obligations and its achievement of sustainable profitable economic and social performance.
The Board exercises oversight over the development and operational implementation of its risk management policies and procedures, and ongoing compliance therewith, partially through its own enquiries but primarily through a dedicated internal audit function, which has operational independence, clear terms of reference influenced by the Board’s Non Executive Directors and a clear upwards reporting structure back into the Board.
Themain sources of risk relevant to theGroup’s operations and its financial statements fall into two broad categories: insurance risk and financial risk. Note 3.1 details theGroup’s approach tomanaging insurance risk specifically whilst note 3.2 onwards outlines the Group’s sensitivity to financial risk generally. Additional information is alsoprovided in theCorporategovernanceandRiskmanagement sections of this Report andAccounts.
3.1 Insurance risk Insurance risk is transferred to theGroup by contract holders through the underwriting process. TheGroup’s exposure to insurance risk arises from the possibility that an insured event occurs, and a claim is subsequently submitted by the insured for payment. Management of insurance risk on a day-to-day basis is the responsibility of theChief UnderwritingOfficer, who receives assistance from the management information and riskmodelling departments.
TheGroup’s underwriters andmanagement consider insurance risk at an individual contract level, and also from a portfolio perspective where the risks assumed in similar classes of policies are aggregated and the exposure evaluated in light of historical portfolio experience and prospective factors. To assist with the process of pricing and managing insurance risk theGroup routinely performs a wide range of activities including the following: regularly updating theGroup’s risk models; documenting, monitoring and reporting on theGroup’s strategy to manage risk; developing systems that facilitate the identification of emerging issues promptly; utilising sophisticated computer modelling tools to simulate catastrophes andmeasure the resultant potential losses before and after reinsurance; monitoring legal developments and amending the wording of policies when necessary; regularly aggregating risk exposures across individual underwriting portfolios and known accumulations of risk; examining the aggregated exposures in advance of underwriting further large risks; and developing processes that continually factor market intelligence into the pricing process.
One tool for managing insurance risk is reinsurance. Reinsurance protection such as excess of loss cover is purchased at an entity level and is also considered at an overall Group level to mitigate the effect of catastrophes and unexpected concentrations of risk. However, the scope and type of reinsurance protection purchasedmay change depending on the competitiveness of cover available in the market.
Net loss as a% Industry Return Gross loss Net loss Gross loss as Net loss as of insurance loss size period*
at 1 January 2007 £m £m a%of GWP a%of NWP industry loss £ billion years *A return period relates to the annual probability of a loss from an individual event for a particular peril exceeding a given amount. For example if industry underwriting models suggests that there is a 1% chance per year of a Japanese earthquake generating an insured loss to the industry exceeding £25 billon, then the return period for a £25 billion Japanese earthquake would commonly be described as 100 years. Similarly a 250 year return period suggests a level of insured loss to the industry with a 0.4% probability of exceedance.
Frequency and severity of claims The specific insurance risks accepted by theGroup fall broadly into four main categories: reinsurance inwards, marine andmajor property risks, other property risks and casualty insurance risks. These specific categories are defined for risk review purposes only and are not exclusively aligned to any specific reportable segment in theGroup’s operational structure or the primary internal reports reviewed by the chief operating decision maker. A discussion of the frequency and severity of claims for each of those categories is given below. TheGroup has no significant exposure to asbestos risks or life insurance business.
Reinsurance inwards TheGroup’s reinsurance inwards acceptances are primarily focused on large commercial property, homeowner andmarine exposures held by other insurance companies predominantly in North America and other developed economies. This business is characterisedmore by large claims arising from individual events or catastrophes than the high frequency, low severity attritional losses associated with certain other business written by theGroup. 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 is very difficult to model over the short-termwhich 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.
Events which can generate claims on these contracts include burglary, acts of vandalism, fires, flooding and storm damage. Losses can be predictedwith 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 associatedwith these contracts tend to be of a higher frequency and lower severity than themarine and other major property assets covered above.
TheGroup’s homeandcontents insurance contracts are exposed toweather andclimatic risks such as floods andwindstorms and their consequences. As outlined earlier the frequency and severity of these lossesdonot lend themselves to accurate prediction over the short-term. Contract periods are therefore not normallymore than one year at a time to enable risks to be regularly re-priced.
TheGroup’s procedures for estimating the outstanding costs of settling insured losses at the balance sheet date, including those not yet notified by, or apparent to, the insured, are detailed in note 24.
The majority of theGroup’s insurance risks are short tail and, based on past history, significant claims are normally notified and settled within 12 to 24months of the insured event occurring. Those claims taking the longest time to develop and settle typically relate to casualty risks where legal complexities occasionally develop regarding the insured’s alleged omissions or negligence.
TheGroup is exposed to financial risk through its ownership of financial assets including loans and receivables, financial liabilities and reinsurance assets. These items collectively represent a significant element of theGroup’s net shareholder funds.
The key financial risk for theGroup is that the proceeds from its financial assets are not sufficient to fund the obligations arising from its insurance contracts and financial liabilities.Themost important entity and economic variables that could result in such an outcome relate to risk factors such as equity price risk, interest rate risk, credit risk, liquidity risk and currency risk. TheGroup’s policies and procedures formanaging exposure to these specific categories of risk are detailed below.
Nature of equity and unit trust holdings Directly held equity securities 3 1 Units held in funds – traditional long only 77 92 Units held in funds – long and short and special strategies 20 7
The allocation of equity risk is not heavily confined to any onemarket index so as to reduce theGroup’s exposure to individual sensitivities. A 10%downward correction in equity prices at 31 December 2007 would have been expected to reduceGroup equity and profit after tax for the year by approximately £11.6 million (2006: £9.9 million). A10% upward movement is estimated to have an equal but opposite effect.
At 31December 2007, theGroup holds asset-backed andmortgagebacked fixed income instruments in its investment portfolio but has minimaldirectexposure to sub-prime asset classes. All such instruments with sub-prime exposure held by theGroupwere independently rated AAAby at least one of themajor rating agencies at 31December 2007. Togetherwith theGroup's investmentmanagers, management continues tomonitor the potential for any adverse development associatedwith 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.
(b) Interest rate risk Fixed income investments represent a significant proportion of the Group’s assets and the Board continually monitors investment strategy tominimise the risk of a fall in the portfolio’s market value which could affect the amount of business that theGroup is able to underwrite or its ability to settle claims as they fall due. The fair value of theGroup’s investment portfolio of debt and fixed income securities is inversely correlated tomovements in market interest rates. If market interest rates fall, the fair value of theGroup’s debt and fixed income investments would tend to rise and vice versa.
(c) Credit risk TheGroup has exposure to credit risk, which is the risk that a counterparty will suffer a deterioration in perceived financial strength or be unable to pay amounts in full when due.
TheGroup’s maximum exposure to credit risk is represented by the carrying values of monetary assets and reinsurance assets included in the consolidated balance sheet. TheGroup does not use credit derivatives or other products tomitigatemaximum credit risk exposures. TheGroup structures the levels of credit risk acceptedbyplacing limits
Debt and fixed income securities 18 1,116,903 106,754 158,157 62,718 1,444,532
Deposits with credit institutions 18 – – 54,715 – 54,715 Derivative financial assets/(liabilities) 18, 20 – 608 – – 608
At 31 December 2007 theGroup held nomaterial debt and fixed income assets that were past due or impaired beyond their reported fair values, either for the current period under review or on a cumulative basis (2006: £nil). For the current and prior periods under review, all of theGroup’s maturing financial instruments settled on their original contractual terms and payment dates, and theGroup therefore experienced no losses of, or delays in recovering, principal amounts invested.
Individual operating units maintain records of the payment history for significant brokers and contract holders with whom they conduct regular business. The exposure to individual counterparties is also managed by other mechanisms, such as the right of offset where counterparties are both debtors and creditors of theGroup. Management information reported to theGroup’s Board includes details of provisions for impairment on loans and receivables and subsequent write-off. Exposures to individual intermediaries and groups of intermediaries are collected within the ongoing monitoring of the controls associated with regulatory solvency.
TheGroup also mitigates credit counterparty risk by concentrating debt and fixed income investments in high quality instruments, including a particular emphasis on government gilts issuedmainly by European Union and North American countries.
Themain focus of the investment portfolio is on high quality short duration debt and fixed income securities, and cash. There is no significant holdings of investments with specific repricing dates. Notwithstanding the regular interest receipts and also theGroup’s ability to liquidate these securities and its other financial instrument assets, for cash in a prompt and reasonable manner, the contractual maturity profile of the fair value of these securities at 31 December was as follows: Debt and Cash Deposits fixed income and cash with credit 2007 2006* securities equivalents institutions Total Total
Perpetual notes and other non-dated instruments 48,069 – – 48,069 60,288 *Included in amounts receivable in ‘less than one year’ are derivative balances at 31 December 2007 of £nil (2006: £608,000).
The following is an analysis by liability type of the estimated timing of net cash flows based on the net claims liabilities held. TheGroup 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 flowsmay differ materially from that disclosure below.
Details of the payment profile of otherGroup liabilities is given in notes 18 and 25.
TheGroup has financed a portion of its net investment in its Bermudian andGuernsey based operations, which haveUSDollar functional currencies, using USDollar denominated borrowings, to which net investment hedge accounting has applied for the vast majority of the year under review,
(see note18). TheGroup also entered into foreign currency derivative transactions during the current and prior years under review, details of which are given in note 20. All foreign currency derivative transactions are managed centrally by designated individuals, delegated thresholds are set and Board approval is required in advance of all significant individual and aggregated positions being taken. Included in the tables below are net non-monetary liabilities of £233million (2006: £231million) which are denominated in foreign currencies.
The profile of theGroup’s assets and liabilities, categorised by currency at their translated carrying amount is as follows: Sterling USDollar Euro Other Total
Financial assets carried at fair value 478,159 580,028 147,386 36,337 1,241,910 Loans and receivables including insurance receivables 152,076 242,823 41,588 9,785 446,272
Effect on Effect on profit equity before tax £m £m 31December 2007 31December 2006
3Management of risk continued 3.2 Financial risk continued (e) Currency risk continued Sensitivity analysis continued
A 10%weakening of the Pound Sterling against the above currencies at 31 December would have been expected to result in equal but opposite effect on the above currencies to the amounts shownabove, on thebasis that all other variables remain constant.
3.3 Capital riskmanagement TheGroup’s primary objectives whenmanaging its capital position are: to safeguard its ability to continue as a going concern, so that it can continue to provide long-term growth and progressive dividend returns for shareholders; to provide an adequate return to theGroup’s shareholders by pricing its insurance products and services commensurately with the level of risk; the attainment of an efficient cost of capital; and to comply with all regulatory requirements by a significant margin.
TheGroup’s activities are funded by a mixture of capital sources including issued equity share capital, retained earnings, Letters of Credit, bank debt and other third party insurance capital.
TheBoard ensures that the use and allocation of capital are given a primary focus in all significant operational actions.With that inmind, the Grouphasdeveloped andembedded sophisticated capitalmodelling toolswithin its business. These join together short-termand long-term business plans and link divisional aspirationswith theGroup’s overall strategy. Themodels provide thebasis of the allocation of capital to different businesses andbusiness lines, aswell as the regulatory and rating agency capital processes.
Gearing TheGroup currently utilises short-tomedium-termgearing 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 aweakermodel for themore volatile business. TheGroup’s gearing is obtained from a number of sources, including: Letters of Credit – in November 2005, theGroup secured a £137.5 million facility from a syndicate of banks at a margin of 1.1%; term and revolving loan facility – also in November 2005, theGroup secured a $225million facility at 1.3%margin of which $182million remains available; external Names – 27.4% of Syndicate 33’s capacity is capitalised by third parties paying a profit share of approximately 17.5%; sidecar – in December 2006, Syndicate 33 entered into a limited tenacy quota share reinsurance arrangement with Panther Re, whose sole activity was to participate in the 2007 year property catastrophe reinsurance business of its only client, Syndicate 33. Panther Re was capitalised at $360million and all risks underwritten were fully collateralised; Cougar SyndicateatLloyd’s–witha capacity of £34.6 million, this syndicate is wholly backed by external membersandwill takeapure2008year of account quota share of Syndicate 33’s international property catastrophe reinsurance account; gearing quota shares – historically theGroup has used reinsurancecapital 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 theGroup to increase the amount of premium it writes in hard markets.
Capitalmodelling and regulation The capital requirements of an insurance group are determined by its exposure to risk and the solvency criteria established by management and statutory regulations.
In 2005, the Financial Services Authority (FSA) and Lloyd’s introduced a new capital regime that enables insurance companies the chance to calculate their own capital requirements through Individual Capital Assessments (ICA).Hiscox InsuranceCompanyLimitedandSyndicate33 maintain ICAmodels 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
TheGroup used its own integrated modelling expertise to produce the ICA calculations. The results mirrored those driving the existing internal capital setting process.
In theGroup’s other geographical territories, including the USA, its subsidiaries underwriting insurance business are required to operate within broadly similar risk-based externally imposed capital requirements when accepting business.
Corporate Centre comprises the investment return, finance costs and administrative costs associated with Groupmanagement activities. Corporate Centre forms a reportable segment due to its investment activities which earn significant external revenues.
4Operating segments continued This is a change arising fromminor amendments made to theGroup’s internal organisation during the year. Information regarding the
TheGroup’s wholly owned subsidiary, Hiscox Syndicates Limited, oversees the operation of Syndicate 33 at Lloyd’s. TheGroup’s percentage participation in Syndicate 33 can fluctuate from year to year and consequently, presentation of the results at the 100% level removes any distortions arising therefrom.
At 100% level (note 4b) 1% change in claims or expense ratio 7,660 2,598 1,695 – 7,865 2,400 948 –
At Group level 1% change in claims or expense ratio 5,522 2,483 1,646 – 5,675 2,279 935 –
Markets Europe International Centre and eliminations Total 31December 2006 Global UK and Corporate Intragroup items Markets Europe International Centre and eliminations Total
The following table provides an analysis of theGroup’s gross premium revenues earned by material geographical location of external parties: Year to 31December 2007 Year to 31 December 2006
TheGroup has not reported segmental details of non-current assets excluding financial instruments and including loans and receivables, rights and obligations under insurance and reinsurance contracts, investments in associates and subsidiaries on the grounds of the relevance of these items to theGroup’s operations and the usefulness of such information to users.
The net asset value per share is based on 393,386,041 shares (2006: 393,725,396), being the adjusted number of shares in issue at 31December.
6 Investment result The total result for theGroup before taxation comprises: Investment income including interest receivable 90,259 75,526 Net realised gains/(losses) on financial investments at fair value through profit or loss 10,105 (5,731) Net fair value gains on financial investments at fair value through profit or loss 423 8,721
Debt and fixed income securities 30,518 4.2 7,601 3.3 323 2.6 3,653 4.0 42,095 4.0 Equities and shares in unit trusts 194 9.9 6,994 9.9 1,014 17.6 5,315 10.4 13,517 10.6 Deposits with credit institutions/cash 8Deferred acquisition costs
Acquisition costs incurred in relation to insurance contracts written 284,071 (12,645) 271,426 253,271 (11,139) 242,132 Acquisition costs expensed to the income statement (278,105) 13,535 (264,570) (242,303) 7,106 (235,797)
Agency related income 4,626 4,861 Profit commission 10,468 5,332 Other income 3,950 5,499
The averagemonthly number of staff employed by theGroup was 804 (2006: 637) comprising 301underwriting and 503 administrative staff (2006: 270 and 367 respectively). Of the total remuneration shown above, an amount of £19,838,000 (2006: £20,780,000) was recharged to the syndicate managed by Hiscox Syndicates Limited.
Interest and expenses associated with bank borrowings carried at fair value 18 6,278 7,325 Interest and charges associated with Letters of Credit 33 1,845 2,038 Interest charges arising on finance leases 54 41 12 Auditors’ remuneration Fees payable to theGroup’s main external auditor KPMG, its member firms and its associates (exclusive of VAT) include the following amounts recorded in the consolidated income statement: Fees payable to the Company’s auditor for the audit of theGroup’s consolidated financial statements 201 110
Fees payable to the Company’s auditor and its associates for other services: The audit of subsidiaries pursuant to legislation 345 321 Other services pursuant to legislation 50 30 All other services* 93 307
Fees in respect of the defined benefit pension scheme: Total auditors’ remuneration expense 701 777 *Other fees relate primarily to corporate advisory and financial reporting consulting services (2006: Group’s Scheme of Arrangement and the listing of Hiscox Ltd on the London Stock Exchange). Non-audit services with fees greater than £50,000must be pre-approved by the Audit Committee which is composed solely of independent Non Executive Directors.
Exchange losses classified as a separate component of equity** (2,869) (41,218)
This excludes profits or losses on foreign exchange derivative contracts which are includedwithin the investment result and are outlined in note 20.
Consolidated income statement Derivative gains/(losses) on foreign exchange contracts included within investment return 6, 20 (1,110) 27,034
TheGroup’s intangible asset relating to syndicate capacity has been allocated, for impairment testing purposes, to one individual cash generating unit being the active Lloyd’s corporate member entity. TheGroup has considered the recoverable amount from the active Lloyd’s corporate member entity on a value in use basis. This calculation uses cash flow projections based on financial forecasts approved by management covering a five-year period. Cash flows beyond the five-year period are extrapolated based on an average level of return and annual growth estimated at 2% consistent with the industry long term average. A pre-tax discount factor of 7% has been applied to projected cash flows as part of the exercise. The results of this exercise indicate that the recoverable amount exceeds the intangible’s carrying value. TheGroup’s weighted average cost recognised on the balance sheet is approximately 10Pence per Pound of syndicate capacity held, which is significantly below the average openmarket price of 26 Pence per Poundwitnessed in the recent Lloyd’s of London Syndicate 33 capacity auctions in Autumn 2007.
TheGroup has recognised intangible assets of £5,083,000 relating to insurance authorisation licences for 50 US states acquired in the business combination of ALTOHA Inc. (note 31). This intangible asset has been allocated for impairment testing purposes to one individual cash generating unit being theGroup’s North American underwriting businesses. TheGroup has considered the recoverable amount of this cash generating unit on a consistent basis to the active Lloyd’s corporate member entity outlined above.
Other intangibles primarily relate to the costs of acquiring rights to customer contractual relationships, and at 31 December 2006 also included a limited level of capitalised software costs. The additions during 2006 primarily comprised theGroup’s acquisition of the customer relationships of Global Flying Insurance Services. The additions during 2007 primarily relate to the costs of acquiring rights to customer contractual relationships held previously by AON Limited.
The amortisation charge for the year includes £40,000 (2006: £40,000) relating to capitalised software costs. The net book value of capitalised software costs at 31 December 2007was £nil (2006: £40,000). There are no charges for impairment during the current or prior financial year.
At 31 December 2007 and 2006 theGroup’s goodwill net book amount is all attributable to UK based operations.
Additions during the year 1,393 – Share of post-tax profit recognised for the period 81 10
TheGroup’s interests in its principal associates, all of which are unlisted, were as follows: Entity 100%pro-forma information for year ended 31December 2007
Reinsurers’ share of insurance liabilities 283,414 306,550 Provision for non-recovery and impairment (3,326) (3,778)
Amounts due from reinsurers in respect of outstanding premiums and claims already paid by theGroup are included in loans and receivables (note 19). TheGroup recognised a gain during the year of £452,000 (2006: £4,094,000) in respect of impaired balances.
18 Financial assets and liabilities carried at fair value Financial assets and liabilities are measured at their bid price fair values and ask price fair values respectively, with all changes from one accounting period to the next being recorded through the income statement, except in the case of unlisted equity investments, and borrowing instruments that formed part of a designated hedge accounting relationship from 1January 2007 as provided for by IAS 39.
Borrowings from credit institutions (see below) 91,457 91,764 92,857 92,852 Derivative instrument liabilities 20 – – – 1,077
An analysis of the credit risk and contractual maturity profiles of theGroup’s debt and fixed income securities is given in notes 3.2(c) and 3.2(d). TheGroup has nomaterial exposure to financial assets not actively traded on recognisedmarkets.
TheGroup’s borrowings from credit institutions at 31 December 2006 and 2007 are denominated in USDollars, half fall due for repayment in 2008 and half fall due for repayment in 2009. The movement in fair value of financial liabilities during 2007 includes no net principal repayments, £1,400,000 of foreign exchange gains recognised directly in equity (see note 13 and below) and £302,000 of fair value losses (2006: £14,212,000 of net principal repayments, £14,121,000 of foreign exchange gains and £5,000 of fair value gains). The amounts recognised as fair value gains and losses are attributable to changes in applicable benchmark interest rates.
Notes to the financial statements continued 18 Financial assets and liabilities carried at fair value continued
Prepayments and accrued income 9,562 6,746 Other loans and receivables: Net profit commission receivable 13,850 14,443 Accrued interest 9,003 6,065 Right to reimbursement of defined benefit obligation 28 – 1,163 Share of Syndicate’s other debtors’ balances 12,705 44,316 Other debtors including related party amounts 12,338 18,060
20Derivative financial instruments Derivative financial instruments are used on occasion to hedge certain economic relationships including the foreign exchange volatility arising from translating the net investments in, and results of, subsidiary companies with different functional currencies, and the foreign exchange impact of insurance business dominated in foreign currencies. During the current and prior financial year, the Group has not elected to denominate any derivative contracts as formal hedging instruments and, as a consequence, has not applied the hedge accounting provisions of IAS 39 in respect of these contracts.
Foreign exchange cylinder option contracts expiring: Within one year – – – 50,000 1,700 15 Between one and five years – – – – – –
TheGroup had the right and intention to settle all contracts on a net basis at 31 December 2006. Consequently, only the net balance was recognised in the 2006 balance sheet as detailed in note 18.
Cash at bank and in hand 236,417 142,200 Short-term bank deposits 66,325 360,671 22 Share capital 31December 2007 31December 2006
Employee share option scheme – proceeds from shares issued 124 2,829 264 Transfers on reverse acquisition 2.3 – (404,194) 442,161
Employee share option scheme – proceeds from shares issued 204 4,955 – Dividends to shareholders – – (43,591)
Number of Number of 5p ordinary 5p ordinary shares in issue shares in issue (thousands) (thousands)
In accordance with IFRS 2 theGroup recognises an expense for the fair value of share option and performance share plan award instruments issued to employees, over their vesting period through the income statement. The expense recognised in the Consolidated Income Statement during the year was £5,689,000 (2006: £5,238,000). This comprises charges of £4,352,000 (2006: £2,828,000) in respect of performance share plan awards and £1,337,000 (2006: £2,410,000) in respect of share option awards. The amount expensed in the prior year includes £930,000 in respect of modification arising in January 2006, pursuant to theGroup’s Rights Issue in November 2005. TheGroup has applied the principles outlined in the Black-Scholes option pricing model when determining the fair value of each share option instrument and discounted cash flowmethodology in respect of performance share plan awards. The forfeiture of expected dividends during the vesting period was taken into account when determining the fair value measurement of performance share plan awards.
Theweighted average fair value of each share option granted during the year was 67.9p (2006: 95.9p). Theweighted average fair value of each performance share plan award granted during the year was 232.8p (2006: 210.0p).
Movements in the number of share options during the year and details of the balances outstanding at 31December 2007 are shown in the Directors’ remuneration report.
Additional details on theGroup’s share option schemes are shown in the Directors’ remuneration report accompanying these financial statements.
4,365,305 ordinary shares of 5p each were purchased by Hiscox Ltd in openmarket transactions during the current year (2006: nil) and are held in treasury. Retained earnings have been reduced by £11,343,000 being the consideration paid. Included within this amount are transaction cost expenses of £23,000 directly related to the purchases.
Included within Group retained earnings is an amount of £21,578,000 (2006: £20,578,000), which is not distributable and is held to meet solvency capital requirements to maintain an equalisation provision. The amounts in the equalisation provision are realised when particular entities in theGroup have suffered insurance losses in excess of levels set out in the relevant solvency capital regulations.
Gross Claims reported and loss adjustment expenses 642,252 703,159 Claims incurred but not reported 573,635 425,170 Unearned premiums 498,000 465,772
The amounts expected to be recovered and settled before and after one year, based on historical experience, are estimated as follows: Within one year 844,570 685,409 After one year 589,229 605,920
The gross claims reported, the loss adjustment expenses liabilities and the liability for claims incurred but not reported are net of expected recoveries from salvage and subrogation. The amounts for salvage and subrogation at the end of 2007 and 2006 are not material.
Notes to the financial statements continued 24 Insurance liabilities and reinsurance assets continued 24.1 Insurance contracts assumptions continued (a) Process used to decide on assumptions continued
(b) Claims development tables The development of insurance liabilities provides a measure of the Group’s ability to estimate the ultimate value of claims. TheGroup analyses actual claims development compared with previous estimates on an accident year basis. This exercise is performed to include the liabilities of Syndicate 33 at the 100% level regardless of theGroup’s actual level of ownership, which has increased significantly over the last six years. Analysis at the 100% level is required in order to avoid distortions arising from reinsurance to close arrangements which subsequently increase theGroup’s share of ultimate claims for each accident year three years after the end of that accident year.
Current estimate of cumulative claims 675,393 345,767 383,093 584,437 1,057,875 488,644 685,965 4,221,174
Current estimate of cumulative claims 675,393 345,767 383,093 584,437 1,057,875 488,644 685,965 4,221,174 Less: Attributable to external Names (172,846) (72,228) (88,261) (137,166) (274,629) (96,871) (129,038) (971,039)
Less: Attributable to external Names 137,450 57,683 66,166 105,140 192,672 49,447 23,560 632,118
Total net liability to external parties at 100% level 1,289,820 *The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2007. ** This represents the claims element of theGroup’s insurance liabilities.
Current estimate of cumulative claims 388,403 235,466 298,719 481,864 649,302 447,659 593,001 3,094,414 Less: Attributable to external Names (93,570) (47,506) (67,445) (114,287) (160,471) (90,264) (113,637) (687,180)
Liability for accident years before 2001 recognised onGroup’s balance sheet 24,795
Total at beginning of year (1,128,329) 265,073 (863,256) (1,322,493) 467,800 (854,693) Claims and claims adjustment expense for year (498,568) 75,203 (423,365) (395,497) 13,156 (382,341) Cash paid for claims settled in the year 452,235 (131,505) 320,730 504,656 (193,527) 311,129 Exchange differences and other movements (41,225) 13,901 (27,324) 85,005 (22,356) 62,649
Total at end of year (1,215,887) 222,672 (993,215) (1,128,329) 265,073 (863,256)
Total claims and claims handling expense (498,568) 75,203 (423,365) (395,497) 13,156 (382,341)
Creditors arising out of direct insurance operations 30,353 33,473 Creditors arising out of reinsurance operations 114,317 126,319
The amounts expected to be settled before and after one year are estimated as follows: Within one year 234,828 252,298 After one year 1,047 2,527
Tax charge for the period 45,951 37,216 *The principal charge to current tax arises in respect of theGroup’s UK subsidiaries. **The UK corporation tax rate will be changed from 30% to 28% from April 2008.
27Deferred tax continued Themovement on the total net deferred tax liability is as follows: Income statement charge (19,060) (28,446) Transfer from deferred tax to current tax 19,850 31,805 (Charge to)/released from equity (2,074) 3,367
(a) Group deferred tax assets analysed by balance sheet headings Income statement Transfer to Transfer from 2006 (charge)/credit current tax equity 2007
Trade and other payables 8,991 6,471 – – 15,462 Retirement benefit obligations 6,876 2,600 – – 9,476
(b) Group deferred tax liabilities analysed by balance sheet headings andSyndicate participation Income statement Transfer to Transfer from 2006 (charge)/credit current tax equity 2007
Insurance contracts – equalisation provision* (6,064) 21 – – (6,043) Other items (3,654) 3,654 – – –
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. During the period, management revised its assumptions about the recoverability of carried forward unused tax losses to be recognised as deferred tax assets. Management’s assessment is that it is now probable that enough taxable profit will be available to allow part of the benefit to be utilised. Part of the balance has therefore now been provided. TheGroup has not provided for deferred tax assets totalling £8,104,000 (2006: £7,023,000) in relation to losses in overseas companies of £23,667,000 (2006: £20,064,000). The aggregate amount of temporary differences associated with investments in subsidiaries and associates for which no deferred tax liability has been recognised is £nil (2006: £73,855,000). This is as a result of the transfer of these subsidaries to Hiscox Ltd fromHiscox plc. In accordance with IAS 12, all deferred tax assets and liabilities are classified as non-current.
28 Employee retirement benefit obligations continued Included within loans and receivables for theGroup (note 19) at 31 December 2006was a right to reimbursement of £1,163,000 recoverable from third party Names in Syndicate 33, representing their contribution to funding the defined benefit scheme obligation (2007: £nil). The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit acturial costmethod. A formal full actuarial valuation is performed on a triennial basis, most recently at 31December 2005, and updated at each intervening balance sheet date by the actuaries. The present value of the defined benefit obligation is determined by discounting the estimated future cash flows using interest rates of AA rated corporate bonds that have terms tomaturity that approximate to the terms of the related pension liability.
The reduction in current service cost is attributable to the scheme’s closure to future accrual on 31 December 2006.
A summary of the scheme’s recent experience is shown below: Experience gains/(losses) on scheme liabilities 2,783 (3,310) (1,223) 992 Experience gains on scheme assets 75 6,480 10,764 1,316
The average life expectancy in years of a pensioner retiring at 60,15 years after the balance sheet date is as follows: years years
During the year theGroupmade no contributions to the defined benefit scheme (2006: contribution rate of 33.3% of pensionable salaries). No additional contributions were paid during 2007 (2006: £20,570,000 ). TheGroup has agreed that further additional contributions will be made if necessary although no contributions are currently expected to bemade in 2008 given the current level of underlying scheme surplus. 61% of the deficit calculated is recharged or refunded to Syndicate 33.
The expected return on scheme assets is based on historical data andmanagement’s expectations of long-term future returns.
Profit attributable to the Company’s equity holders (£000) 191,248 163,846 Weighted average number of ordinary shares (thousands) 395,308 392,558 Basic earnings per share (pence per share) 48.4p 41.7p
Diluted earnings per share has been calculated after taking account of 13,014,000 (2006: 11,806,000) options and awards under employee share option and performance plan schemes and 516,000 (2006: 643,000) options under SAYE schemes.
Interim dividend for the year ended: 31 December 2007 of 4.0p (net) per share 15,868 – 31December 2006 of 3.0p (net) per share – 11,789
31 Acquisitions during the financial year On 16 August 2007, theGroup acquired 100% of the share capital of ALTOHA Inc. in the USA. The total consideration was £29,052,000which includes contingent consideration of £7,530,000 as outlined below. No goodwill arose on acquisition.
Net identifiable assets 33,007 (3,955) 29,052 Cash consideration paid on business combination including acquisition related transaction costs of £197,000 (21,522) Contingent cash consideration on business combination paid into escrow facility (7,530)
The intangible assets shown above arose from the licences held by the acquired group which strengthens theGroup’s market position in targeted business segments.
Notes to the financial statements continued 32Disposals during the financial year TheGroup’s wholly owned subsidiary, Hiscox
Investment Management Limited was sold on 5 December 2007. This business did not constitute a discontinued operation as defined by IFRS 5NonCurrent Assets Held for Sale and DiscontinuedOperations due to its relative insignificance to the Group and the fact that it did not represent a major line of business or operating segment.
TheGroup is subject to insurance solvency regulations in all the territories in which it issues insurance contracts, and it has complied with all the local solvency regulations. There are no contingencies associated with theGroup’s compliance or lack of compliance with these regulations.
(b) Hiscox plc has an agreement with Lloyds TSBBank, an agent for a syndicate of banks, for a £137,500,000 irrevocable standby Letter of Credit Facility and a US$225,000,000 Term and Revolving Credit Facility. Commencing 7 November 2005 £137,500,000was drawn down on the Letter of Credit Facility to support part of theGroup’s underwriting activities. TheGroup has given a fixed and floating charge over certain assets as a guarantee to the group of banks led by Lloyds TSBBank in connection with their Letter of Credit. At 31 December 2007, US$182,000,000 of the term and revolving credit facility was available and fully drawn (2006: US$182,000,000).
(d) The managed syndicate is subject to the New Central Fund annual contribution, which is an annual fee calculated on capacity for 2007 and on gross premiums written for 2008. This fee was 1.0% for 2007 and 0.5% for 2008. 0.75%was loaned to the central fund for 2007which was repaid during the year. No loan exists for 2008. In addition to this fee, the Council of Lloyd’s has the discretion to call a further contribution of up to 3% of capacity if required.
The aggregate minimum lease payments required by theGroup under non-cancellable operating leases, over the expected lease terms, are as follows: No later than one year Land and buildings 4,705 4,553 Office equipment 141 129
Later than one year and no later than five years Land and buildings 14,032 14,687 Office equipment 199 246
Finance lease interest expense for the year totalled £54,000 (2006: £41,000).
The finance lease obligations to which theGroup is committed include the followingminimum lease payments: Current liabilities due for settlement within one year 246 233 Non-current liabilities due for settlement after one year and no later than five years 261 273
**Hiscox Holdings Limited held 54,560 shares in Hiscox Ltd (2006: 54,560) at 31 December 2007. †Hiscox Trustees Limited is the trustee of the Hiscox Employee ShareOwnership Plan (ESOP). The ESOP owned 132,399 shares in Hiscox Ltd (2006: 135,782) at 31 December 2007. The shares have been purchased by the ESOP for future use in employee share option schemes and are held as own shares. None of these shares are currently under option to employees, nor have any been conditionally gifted to them.
36 Related-party transactions Details of the remuneration of theGroup’s key personnel are shown in the Directors’ remuneration report on pages 54 to 59.
A number of theGroup’s key personnel hold insurance contracts and investment management agreements with theGroup, all of which are on normal commercial terms and are not material in nature.
Amounts receivable from Syndicate 33 at 31 December excluding profit commission 1,402 1,695
(b) Transactionswith associates Certain companies within theGroup conduct insurance and other business with associates. These transactions arise in the normal course of obtaining insurance business through brokerages, and are based on arm’s length arrangements.
During the current and proceeding year, there were reinsurance arrangements between Hiscox Dedicated Corporate Member Limited, Hiscox Insurance Company Limited, Hiscox Insurance Company (Guernsey) Limited and Hiscox Insurance Company (Bermuda) Limited.
(d) Other Blyth Valley Ltd was theGroup’s sole associate during the prior year. BEMasojada was a non-executive Director of Ins-sure Holdings Limited and its subsidiaries throughout the prior year until resignation on 31December 2006. These companies operate in a joint venture between Lloyd’s, the International Underwriting Association (IUA) and Xchanging. These companies provide policy issuance, premium collection, claims settlement and clearing services to Lloyd’s and the London insurance companymarkets. Hiscox UnderwritingGroup Services Limited received the annual fee of £nil (2006: £20,000) in relation to this directorship. The balance due at 31 December 2007was £nil (2006: £20,000).
BEMasojada was also Deputy Chairman of Lloyd’s in the prior year. Hiscox UnderwritingGroup Services Limited received the annual fee of £nil (2006: £46,250) in relation to his services. There were no amounts outstanding at 31 December 2007 (2006: £nil).
Financial assets carried at fair value 1,747,827 1,241,910 1,237,778 980,731 773,289
Net asset value per share (p) 209.5 173.2 147.7 125.7 113.5
The amounts and ratios for 2003 are those previously published on a UKGAAP basis, theGroup’s primary reporting framework at that time. The figures reported for 2004 to 2007 are prepared in accordance with IFRS.
Expense ratio Net operating expenses as a percentage of net earned premiums.
Individual capital assessments Risk-based calculations of the capital required by each FSAauthorised insurance entity in accordance with FSA regulations.
Net premiumswritten Premiums received after the cost of reinsurance and adjustment for unearned premium. Unearned premium covers the future period of risk of an insurance policy.
Re-domicile The establishment of a new parent company for the Hiscox Group, based in Bermuda.
Return on Equity (ROE) Net profit after tax expressed as a percentage of adjusted opening equity. This percentagemeasures profitability by expressing the efficiency of theGroup’s utilisation of shareholders’ funds.
Specie The line of business that covers cash and valuables in vaults, premises or transit.
Stamp capacity or syndicate capacity Themaximum amount of business that a syndicate in Lloyd’s canwrite per year, aggregated from all its members.
Design by Browns Print by St IvesWesterham Press Photography (Chairman/Chief Executive) by John Ross Photography (portraits) by John Ross and Stephen Raynor