Strategic focus 100% = £1,792m Total Group controlled income for 2012
Hiscox USA revenues grew by 32.6% to $230.5 million. US Direct business increased by over 200% to nearly $10.0 million gross premiums written with strong continued growth prospects
Final dividend equivalent of 12.0p taking total dividend for the year to 18.0p, an increase of 5.9% (2011: 17.0p)
Hiscox Spain gained recognition for Best Workplace 2012 as awarded by Great Place to Work.
In addition, a sum of 12.0p per share will be paid instead of a final dividend for the year ended 31 December 2012 as part of the B share scheme. This amount, together with the interim dividend of 6.0p per share, represents a total dividend for 2012 equal to 18.0p per share (2011: 17.0p), an increase of 5.9%, in line with our policy of progressive dividend growth. As a result of this amount being paid as part of the B share scheme, a scrip dividend alternative will not be offered to shareholders.
We have created insurance companies in the UK, Guernsey and the US to underwrite the simpler business, and one in Bermuda to augment our strong reinsurance presence. We have the huge advantage of all our underwriters being able to use one of our local companies if suitable or Lloyd’s with its great brand, financial strength and worldwide licences.
Catastrophe and internationally traded business The core profit earner remains our founding London Market business. I believe that London will retain its prominence in the world of internationally traded business, and that Lloyd’s will be the strongest magnet in that market.
Bermuda is a great addition to our involvement in that business and they and London work
Since I announced last year that I would be stepping down as Chairman, I have been asked to look back over my years in the insurance world and have enjoyed the memories of growing the business from days of buccaneering in a lawless market place, through the Lloyd’s crisis and recently through stronger and stricter strait-jackets of rules and regulations. But I get greater pleasure from looking forward at the future opportunities for this business as it moves into its next era. I would not be stepping down if I were not absolutely sure that the business is in great shape and the next generation are more than qualified to take it to the next level.
The FSA is about to be split in two into prudential and conduct supervision under the Bank of England with the duty to ensure we are able to pay claims when they fall due. I could wish that we had one regulator to form a relationship with and not two as there is always a fear of duplication or of something falling between the two stools, but we are where we are. We need effective regulation as the whole industry suffers when an insurer misbehaves or becomes insolvent. The FSA has taken virtually all selfregulation away from our industry which means that by definition we are invigilated and regulated by people with little or no trading experience in our business. We need good regulation, in parallel to widen the distribution and to grow diversified accounts.
We will continue to study the alternative risk transfer methods that are being developed and use them or write them, depending on the price levels.
Overseas expansion We first expanded the retail account into Europe, starting in 1993, and it has taken time to reach critical size. It is easy to see Europe as one geographical area when it is immensely different in the business practices in each country despite 38 years of efforts to create a single market. We are winning there and the next few years should see a steady increase in profitability.
Bermuda followed and that too has been very successful. Robert Childs, who is due to take over from me as Chairman, set up the Bermuda company, and proceeded shortly afterwards to open our US offices. We have made a big commitment to the US and I am very excited at the possibilities.
We have spent the last era building businesses both inside and outside Lloyd’s and I believe we have developed some very strong future profit generators to add to our existing international and retail businesses. I hand over to Robert Childs (who has done incredibly valuable work at Hiscox for 26 years) and the top team with a happy heart. I have had fantastic fun building the business, and it will be just as enjoyable watching the success in the next era.
The future looks as exciting as the past has been for me
Fires, storms and floods are the everyday experience of insurance companies. 2011 was exceptional in its severity so in comparison 2012 felt like a more normal loss experience, despite it being the third most expensive year on record for major catastrophes. We dealt with record flood activity in the UK, Superstorm Sandy in the US, fine art thefts in Europe, fires in substantial properties across the world and the sinking of Costa Concordia. A profit of £217.1 million (2011: £17.3 million) and return on equity of 16.9% (2011: 1.7%) is therefore a good result and was driven by a combination of good underwriting performance and an excellent (for current market conditions) investment return. Our aim is to make good profits in years such as 2012, small profits in poor years (as we saw in 2011) and exceptional profits in very low loss frequency years.
Reinsurance: The many catastrophes of 2011 provided significant opportunities in 2012 as rates doubled in some loss affected areas. We increased market share in Japan and maintained a good position
Chief Executive’s report in other territories. The team delivered a very strong result despite the impact of Superstorm Sandy which we reserved for the Group as a whole at a net £90 million.
We continue to underwrite catastrophe business in London and Bermuda on behalf of third-parties. It is a profitable use of our expertise and gives our partners valuable diversification. For several years we have been underwriting a book on behalf of Aviva and this quota share arrangement came to an end in 2012. Aviva has been a good partner, and whilst we are sorry to see the end of the relationship, we have more than replaced their support with capital from other sources – a testament to our team’s reputation and track record.
Market conditions remained attractive at the important 1 January renewals, with rates flat to positive in the key North American territories and softening in international markets. Overall reinsurance rates are still healthy.
Global response: The global response team serves clients around the world, covering personnel and property for kidnap and ransom, terrorism, war and political violence risks. 2012 proved to be calmer than 2011 and this has produced a strong result. The market in which we operate requires a high degree of service and responsiveness, and our team continues to deliver to the highest standards, maintaining our marketleading position. The world remains a volatile place, and companies are increasingly looking to protect their assets. We have the expertise and are well placed to help.
Marine liability insurance is one of the oldest risks in the London Market and is proving to be at the cutting edge of modernisation
In 2013 Hiscox UK has a big agenda. Distribution for the insurance market has evolved over the years; it is no longer as black and white as broker versus direct. We are launching a tied agency to address for Hiscox. We have given retail brokers the ability to place smaller risks quickly and cost effectively directly with us online and this investment in e-trading has delivered modest premiums in 2012 which we expect to grow in 2013. We will also be looking to trade in this manner in other lines of business.
Aviation and space: Both lines continue to make steady profitable progress. Pricing in the aviation market remains challenging, but our risk selection and hence loss experience have remained exemplary, so results are very acceptable for our second year of underwriting this class of business. There has been increased launch activity in the space market leading to slightly higher volumes. As the global economy continues to depend on more support from extraterrestrial services, we believe this business will grow steadily over time.
Our London Market business has a global remit. It makes use of the Lloyd’s brand name and licences to write business located around the world. Lloyd’s is making steady progress to enhance its own licence network, and we at Hiscox are supportive of all efforts to expand the range of licences the market has for both reinsurance and insurance. We are particularly supportive of licensing which allows us to trade from London without the costs of teams on the ground. In 2012 we saw the benefit of doing this with the significant expansion of our Japanese and Thai reinsurance exposures, and the insurance support we were able to give the New Zealand economy to enable the rebuilding of Christchurch. All of this business was underwritten from London, backed by extensive visits to local clients and brokers. We hope that as regulators get more parochial they will remember the benefits of accessing global expertise and capital, and will not restrict our ability to trade in this way.
Hiscox Europe: Our European business has reached its fourth consecutive year of profitability. Revenues have grown by 5.9% to €160.4 million (2011: €151.4 million), though only 1.1% to £132.3 million when looked at in sterling. Profits grew to £3.9 million (2011: £2.4 million) despite increased marketing spend to support our French direct business. The combined ratio rose to 100.9% (2011: 100.5%), with improved investment returns driving the profit. Combined ratios and returns on equity are being challenged by the European economy and issues of scale.
The combined ratio challenges have come from two fronts. First we have seen some recession-related claims: jewellery thefts in public places, aggressive home invasions, and some large fine art thefts. The second is our expense ratio. This is driven by increased marketing expenditure to support the growing direct business in France, and also an increasing focus on smaller ticket business. This business is attractive from a loss ratio perspective, but initially it does drive up operating cost. We will be working in 2013 to re-engineer our business to bring this ratio down.
Hiscox International Hiscox international comprises our activities in Bermuda, Guernsey and the United States. In aggregate they had a good year, though obviously not as positive as it might have been without Superstorm Sandy which materially impacted both our Bermudian and United States businesses. Each of the three business’s progress is discussed below.
Hiscox Guernsey: This business underwrites kidnap and ransom, piracy, fine art, terrorism and personal accident insurance. It delivered a very good profit even though revenues declined by 8.5% to £73.0 million (2011: £79.8 million). This is due to a disciplined approach to underwriting piracy and business that was previously signed in three-year deals to take advantage of good terms, prices and conditions. The team continues to concentrate on expanding its distribution into new territories.
Hiscox USA: Our US business made excellent progress during the year. Revenues grew by 32.6% to reach $230.5 million (2011: $173.8 million), with strong growth across every office and in every product. The business was performing well ahead of plan at the bottom line until Superstorm Sandy. We suffered losses on our construction account with most other areas escaping relatively unscathed. As they mature our professional liability accounts are developing well – a reflection of early prudent reserving. During the year we launched ‘Hiscox One’, a one-stop modular insurance cover for film and television productions. It is the first integrated product on the market and has been received well. The direct business continued to expand, reaching almost $10 million in premium income (2011: $3 million) with some exciting prospects in store for 2013. We will continue to market the products online in 2013, and test brand advertising on billboards, specialist publications and other print media in Austin
Chief Executive’s report continued and San Diego, with the aim to accelerate growth in these key markets.
The US business is on track and we continue to invest in driving it to success. Our ambition is that the broker channel business will be profitable in 2013, assuming a normal loss year. The ongoing marketing investment in the direct business will hold back profitability in the short-term, but as we grow in knowledge and experience in the US we anticipate more rapid success.
Claims When you sell insurance, claims are something you anticipate and plan for and at Hiscox we pride ourselves on settling our clients’ claims swiftly and fairly. As highlighted at the start of my report we had a busy year. Costa Concordia and Superstorm Sandy hit the headlines, but there was lots of other activity. 2012 was a year of dramatic weather in the UK and Hiscox UK received 1,500 storm and flood claims with related claims paid of £14 million, nearly five times the previous year.
Handling claims well requires a balance of thorough process and controls as well as an ability to deal with claimants and their brokers. During the year we completed the implementation of a new claims management solution for Hiscox London Market which has transformed the way we do claims in that area, leading to better decision making, enhanced productivity and improved indemnity costs. In a 2012 independent survey of claims brokers we continued to score favourably for broker satisfaction and, with the enhancements in service that the new system will allow, we are hopeful that our perception in the market will improve further in the year ahead. In our UK and European businesses, customer satisfaction with our claims handling has continued to improve, and effective claims handling continues to set us apart in the market.
Hiscox’s cautious reserving philosophy is again reflected in reserve releases of £152 million, down from releases of £199 million in 2011.
Whilst the investment world may look a safer place in 2013, plenty of uncertainty still exists and the portfolio is cautiously positioned overall, both from a duration and credit quality standpoint. After such a favourable period for bonds, the yield to maturity of our portfolios has declined over the year and our expectation of returns from them in 2013 is therefore correspondingly reduced. We do, however, retain an appetite for sensible risk, hence our continued allocation to equities. We feel they offer a better risk-reward ratio than exists in the higher yielding bond and structured credit strategies where we continue to resist temptation.
Our leadership and our people As announced 12 months ago Robert Hiscox steps down as Chairman with the presentation of these results. Robert’s record of successful leadership is unparalleled in the insurance industry and his contribution has rightly been recognised publicly over the year. When Robert took the reins at Hiscox in 1970 annual revenues amounted to £2.3 million; this has grown to £1.6 billion in 2012. Robert has accepted the role of Honorary President and we look forward to his ongoing sage counsel.
There is a great benefit to having someone who knows the detail of our business in the role of Chairman. The greatest risk to the prosperity of our business is the success of its underwriting. In insurance the premiums are visible whilst the risks only become visible when the claims occur – when it is too late to change course. As the banks have shown, even the most sophisticated systems cannot adequately surface some critical risks on a timely basis. As Chairman, Robert Childs will have the enormous advantage of understanding where the risks lie, which ones are easy to measure and monitor and which will rely on judgement and feel. He also has the experience of dealing with a huge industry loss and knows that reacting in the right way is often the determinant of success in these tough situations.
The broad Hiscox team make their contributions in many roles, geographies and disciplines. It is the dedication to excellence that builds our reputation as a Group. Our excellent marketing can deliver the message, but I am always personally gratified to be complimented on a claim paid well, a risk well underwritten or a recruitment process thoughtfully handled. These are all the result of individual decisions well executed – the personal standards of each person involved shining through. Our many staff deserve our thanks and it is great that their efforts have been justly rewarded in good performance.
Outlook As I said at the start of my statement, 2012 was a more normal year for the global industry after the challenges of 2011. That means that we do not expect material upward or downward pressure in pricing. Reinsurance pricing is up slightly in areas closest to recent losses – in the US East Coast, Japan and parts of Asia. In the US domestic market there are reports of slight upward movement in some areas for the second year in a row. Parts of the UK are very competitive, whilst others are benign, so our aggregate expectation is for a stable pricing environment where good risk selection, good underwriting and good service will be rewarded. Investment returns will likely trend down, reflecting the broader financial market.
Looking further ahead than 12 months I believe we have the ability to materially grow the size of our business within the classes and geographies in which we currently operate. In our most developed retail market, the UK high net worth area, we still have only single digit market share, so the opportunity here is significant, not to mention the opportunities in other territories. Our retail commercial market share is even smaller, and our direct businesses have just begun. In our internationally traded businesses we are a smallish player other than in a few very specific segments, so again we have the opportunity to grow and develop. Expansion of our geographic footprint could also create new opportunities.
As I enter my twentieth year at Hiscox, I remain enthusiastic and optimistic for the opportunities ahead. I remain impatient and unsatisfied that we have not captured more of them already – a trait I have had bred into me by Robert Hiscox – and I am sure that with a steady determined focus on winning clients one at a time we will continue to grow our business profitably to the satisfaction of clients, staff and shareholders.
Hiscox Bermuda Hiscox London Market – Volatile Hiscox USA Hiscox Guernsey Hiscox London Market – Retail Hiscox Europe Hiscox UK
Errors and omissions; directors and officers’ liability; property; specialty; kidnap and ransom; terrorism; technology/media; direct to customer commercial business
Total Group controlled premium December 2012: £1,792m (Year-on-year change in original currency)
Boxplot and whisker diagram of modeled Hiscox Ltd net loss (USD)
The return period is the frequency at which an industry insured loss of a certain amount or greater is likely to occur. For example, an event with a return period of 20 years would be expected to occur on average �ve times in 100 years.
Capital management Hiscox believes in managing its capital. The Board monitors the capital strength of the Group and ensures its insurance carriers are suitably capitalised for regulatory and ratings purposes, taking into account future needs including growth where opportunities arise. As discussed in the Chairman’s statement, as a result of our strong performance in 2012, the Board has reviewed the Group’s capital level and proposed that a special distribution of 38.0p per share (approximately £150 million), should be made. A further amount of 12.0p per share is proposed instead of payment of a final dividend. This return of capital will align the Group’s available capital with its risk appetite and ensure a surplus is maintained above the rating agencies’ minimum capital requirements to remain in the A range, the most restrictive of the Group’s external capital assessments.
The impact of this distribution and how it compares to the Group’s capital requirements is presented in the chart below right.
Management compares the capital requirements of the Group against its available capital. Available capital is defined by the Group as shareholders’ equity which was £1,378 million at 31 December 2012 (2011: £1,256 million). Debt or preference shares are not defined as available capital by the Group as they do not absorb losses, should they occur, ahead of or alongside ordinary shareholders.
Capital Both A.M. Best and Standard & Poor’s have shared their capital models with management. These models calculate a capital adequacy score by measuring available capital, after making various balance sheet adjustments, as a proportion of required capital which incorporates charges for premium, reserve, investment and catastrophe risk. Management’s interpretation of A.M. Best’s ‘Best Capital Adequacy Ratio’ (BCAR) model indicates the Group has a healthy surplus above the minimum capital required to maintain the carriers’ A ratings. On a similar basis the Standard & Poor’s modeled result indicates a surplus in excess of the mid-point of the required A range with additional headroom above the minimum requirement. Projections indicate a reasonable level of flexibility would be maintained following the £150 million special distribution.
Group regulators As a Bermudian registered holding company, the Bermuda Monetary Authority (BMA) has been assessed as the Group’s regulator under the Bermuda Group Supervisory Framework. During 2011, the BMA introduced proposals for a group solvency capital requirement under which the Group provides a solvency return in accordance £150m Additional special distribution
the Group Solvency Self Assessment framework (GSSA) including assessment of the Group’s Bermuda Solvency Capital Requirement (BSCR). At this time the legislation for these requirements is still in draft form, with a proposed implementation date of 1 January 2014. Nevertheless, the Group continues to monitor its compliance with these requirements ahead of this implementation date.
If the return of capital is approved by the shareholders on 28 March, the available capital will reduce to approximately £1,228 million, comfortably exceeding current regulatory and rating agency requirements. This level of capital would be in line with the Group’s stated risk appetite for 2013.
Profit before tax for the year was £217.1 million (2011: £17.3 million), including a solid investment return of 3.1% (2011: 0.9%) and despite Superstorm Sandy losses of £90 million. The Group recorded a post-tax return on equity of 16.9% (2011: 1.7%) and earnings per share were 53.1p (2011: 5.5p).
The underwriting performance for each operating segment is detailed on the next page.
Hiscox London Market Gross premiums written increased by 9.3% to £640.0 million (2011: £585.4 million), with strong growth in the property division along with the aviation and reinsurance accounts.
Reinsurance purchased was at a similar level to the prior year at 27.8% of gross premiums written (2011: 29.4%). The quota share arrangement with Syndicate 6104 and others remained in place and are increasing in 2013.
As a result, the combined ratio improved greatly to 75.5% (2011: 89.1%). Profit before tax for the year was £121.9 million (2011: £57.6 million).
Hiscox UK and Europe Gross premiums written rose by 1.9% to £507.5 million (2011: £498.0 million). Gross premiums written for the UK increased by 2.2% with a reduction in the art and private client lines offset by gains in professional and specialty commercial. Europe remained broadly constant year-on-year with gross premiums written of £132.3 million (2011: £130.9 million), being a 1.1% increase. In underlying currency terms, Europe fared better with an increase of 5.9%.
The net claims ratio remained constant at 47.2% (2011: 46.3%). Two specific losses in the year contributed to the small decline. The combined ratio declined to 94.4% (2011: 91.0%), in part due to a slight increase in the expense ratio as we increased the marketing spend in both UK and Europe for the year.
Hiscox International Gross premiums written increased 14.3% to £418.3 million (2011: £365.8 million) largely driven by the US. The US increased premiums by 32.6%, driven in the main from the specialty lines, but all areas contributed. The Direct division grew by 223% from a small base. Bermuda also saw their premium increase by 13.0% to £200.7 million (2011: £177.7 million). Gross premiums written in Guernsey decreased as less piracy and multi-year policies were written.
As a result, the profit before tax was £62.6 million (2011: loss of £89.5 million).
Hiscox Corporate Centre Investments performed well during the year with a return of £18.5 million (2011: £2.2 million). This was offset in part by operational expenses increasing to £17.3 million (2011: £12.3 million) and foreign exchange losses of £11.5 million (2011: gain £12.4 million). The losses on foreign exchange were as a result of holding US Dollar assets. The loss before tax was £16.5 million (2011: loss £2.3 million).
Cash and liquidity The Group’s primary source of liquidity is from premium income and investment income. These funds are used predominantly to pay claims, expenses, reinsurance costs, dividends and taxes, and to invest in more assets. During the year there were additional rebates of tax.
Total net cash inflows for the year were £150.6 million (2011: inflow £179.1 million). The inflow was mainly due to prompt settlement of premiums and reinsurance recoveries, along with amounts recovered on tax. Net cash outflow from investing activities, being comparable to the prior year, was £13.7 million (2011: £11.8 million). The Group continues to invest in its IT infrastructure and the development of projects such as a management information project aimed at improving the quality and efficiency of information provision. Marketing expenses increased to £26 million in the year.
At 31 December 2012, $308 million (2011: $340 million) had been drawn by way of Letter of Credit against this facility.
The implementation of the new regime remains uncertain, with a probable delay at least until 2015. The Group continues to monitor developments within Europe, and is confident of being well placed against the new requirements when they come into force.
Adjusted number of shares in issue (m) 394.2 388.2 *excluding derivative assets, insurance linked fund and catastrophe bonds.
In summary, the investment objective is to maximise investment returns within an overall risk appetite and giving due regard to prevailing financial, economic and market conditions. The overriding concern is not to lose money in any 12-month period. Balancing these desires is becoming increasingly challenging in the current environment as the chances of losing money, given even a modest appetite for risk, are increasing. The portfolio therefore is constructed principally bearing in mind the need to pay claims and to provide capital for underwriting in all market conditions rather than to produce more yield from artificially overpriced assets. In order to allow some measured risk to be taken within the portfolio the Board has, in recent years, set aside capital against the possibility of a negative result from the investment portfolio in any one year and this continues to be the case for 2013. This gives us the ability to withstand volatility in markets but also the capacity to take advantage of any opportunities that may be thrown up by market dislocations.
Our core business is to take risk and our strategy is to maximise return on equity within a defined risk appetite. Our ongoing success depends on how well we understand and manage the significant exposures we face. It is therefore crucial that our knowledge of those risks underpins every important decision we make across the Group.
Diversified portfolio: Hiscox has a well-diversified portfolio by product and geography to help balance any catastrophe exposure. Risk appetite: We clearly define our risk appetite for underwriting risk, which dictates our business plan. To ensure that we do not exceed our risk appetite, we monitor our exposures closely and take mitigating actions to maintain business plan. This enables us to maximise the expected risk return profile on the whole portfolio and offset the potential losses on more volatile accounts. Underwriting discipline: Underwriters are incentivised to make sound decisions that are aligned with Group’s overall strategic objectives and risk appetite. Clear limits are placed on their underwriting authority. Policy wordings are regularly reviewed in the light of legal developments to ensure the Group’s exposure is restricted, as far as possible, to those risks identified in the policy at the time of issue. Modeling: We have tailored our modeling resources to assist insurance and reinsurance plans and ensure that the exposure we write matches expectations. The risk aggregation and modeling resources are shared across the Group to ensure everyone uses the same modeling tools.
Stress and scenario testing: We run stress and scenario tests for a range of specific events for each of our business units as well as the Group as a whole, so we can estimate our potential losses from a major catastrophe. Reinsurance: We buy reinsurance for our business carriers and the Group as a whole, to mitigate the effect of catastrophes and unexpected concentrations in risk. The scope and type of protection we buy may change from year-to-year depending on the extent and competitiveness of cover available in the market. The Group is exposed to the risk that the reinsurance protection it has bought is inadequate or inappropriate, but this is monitored and managed using modeling techniques, supervised by a dedicated Reinsurance Purchase Group.
Historical data and actuarial analysis: The provisions we make to pay claims reflect our own experience and the industry’s view of similar business; historical trends in reserving patterns, loss payments and pending levels of unpaid claims and awards, as well as any potential changes in historic rates arising from market or economic conditions. Details of the actuarial and statistical methods and assumptions used to calculate reserves are set out on note 26 to the consolidated financial statements. The provisions we make are set above the actuarial mid-point to reduce the risk that actual claims exceed the amount that has been set aside. Senior management and board approval: Our provision estimates are subject to rigorous review by senior management from all areas of the business including independent actuaries. The final provision is approved by the relevant boards on the recommendation of dedicated reserving committees.
The premiums and technical funds we hold for the payment of future claims are inevitably exposed to investment risk.
We are unable to meet our liabilities to customers or other creditors when they fall due. Also the risk that we incur excessive costs by selling assets or raising finance quickly to meet our obligations.
Conservative policy: Our overriding concern is to not lose money or to put at risk the Group’s capacity to underwrite. Our policy is designed to maximise returns within an overall risk appetite. Technical funds: Those funds held for reserves are invested primarily in high-quality bonds and cash. The high-quality and short duration of these funds allows the Group to meet its aim of paying valid claims quickly. Currency matching: These funds, as far as possible, are maintained in the currency of the original premiums for which they are set aside to reduce foreign exchange risk. Duration: As many of our insurance and reinsurance liabilities have short time spans, we do not aim to match exactly the duration of our assets and liabilities. Benchmarks: Our fixed income fund managers are set benchmarks that approximate the payment profile of our claims while still providing them with some flexibility to enhance returns. Equities: A proportion of the Group’s assets is allocated to riskier assets, principally equities. For these assets we take a long-term view so we can achieve the best risk-adjusted returns. The proportion of funds we invest in risk assets will depend on the outlook for investment and underwriting markets. We make an allocation to less volatile, absolute return strategies within our risk assets, so as to balance our desire to maximise returns with the need to ensure capital is available to support our underwriting throughout any downturn in financial markets. Guidelines: Investment risk also encompasses the risk of default of counterparties, which is primarily with issuers of bonds in which we invest. Our third-party investment managers are issued guidelines as to the type and nature of bonds in which to invest.
Careful selection: We buy reinsurance only from companies that we believe to be strong. Every reinsurer we use must be approved by a dedicated Reinsurance Security Committee, based on an assessment of financial strength, trading record, payment history, outlook, organisational structure, plus its external credit ratings. Monitoring: Our credit exposures to these companies are closely monitored. The companies are continuously monitored so that we are able to identify any potential problems. The committee considers public information, experience of the companies concerned, their behaviour in the marketplace and analysis from external consultants and from rating agencies. Guidelines: We set guidelines for exposure to each of our approved reinsurers.
Hiscox generates considerable premium income through agents to whom binding authority is given to underwrite insurance policies on our behalf. Agents may underwrite business outside of our normal guidelines.
Hiscox’s commitment to responsible business practices is reflected in: The environment It is our policy to have a responsible approach to identifying, and then minimising, the environmental impacts of our business activities and those that arise from our ownership and occupation of office premises. In doing so, we seek to reduce the amount of waste our activities produce, and the amount of resources we consume. We have made commitments to our shareholders and staff to reduce our carbon footprint. Our environmental policy encourages the business to operate more sustainably by: measuring our use of water, energy and other products in order to reduce consumption over time; buying sustainably-sourced or energyefficient products where we can; and minimising waste by recycling products as much as is feasible. We generate significant cost and energy savings primarily through careful use of electricity, water and gas.
Hiscox is also a founding member of ClimateWise which aims to leverage the insurance industry’s expertise to understand, communicate and act on climate change risk. Members commit to six key principles and are independently reviewed against these annually. These principles span risk analysis, public policy, influencing our customers, investment and managing our direct emissions. In the most recent independent review, Hiscox was recognised as being one of the most improved performers.
Dealing with customers Hiscox is dedicated to providing its customers with risk management advice to prevent distressing losses such as burglary and fire in the home. Similarly, when a small business client is sued, our expert claims staff bring to bear years of expertise to defend the client or resolve the situation swiftly. The Hiscox philosophy is that insurance is a promise to pay, so should a loss occur, we aim to fully support our customers and to pay their claims as soon as possible. Hiscox was awarded ‘Best Small Business Insurer’ by Start your Business magazine. Other accolades include the Customer Care Award from The British Insurance Awards 2012, for putting our customers at the heart of the business and moving against the tide by bringing direct household claims back in-house.
of behaviour that is expected of all our employees. The Group recognises that through this conduct we are more likely to achieve business success and therefore create additional value for shareholders. Hiscox aims for the highest standards of corporate governance while striving to remain, in essence, a non-bureaucratic organisation. An effective and firm system of internal controls ensures that risks are managed within acceptable limits, but not at the expense of innovation or speed of response. The Group believes that we have the balance right and, furthermore, that this is one of our greatest strengths. The Group’s policies ensure that we continue to follow a best practice approach to managing people and remain a fair and professional employer. In the unlikely event of an employee having a serious concern relating to the operations of the business, a whistleblowing policy explains to staff how they can confidentially raise their misgivings. Hiscox also subscribes to Public Concern at Work, which provides free legal advice to any employee with a concern about possible danger or malpractice in the workplace.
Rewards and benefits Hiscox encourages employees to share in the success of the Group through performance related pay: bonus, savings-related share option schemes and executive share option schemes. Competitive benefits packages contain health and fitness perks and opportunities for flexible working and career breaks. Towers Watson benchmarks our salary packages against the financial services industry as a whole and against the Lloyd’s market specifically (where applicable) and our salaries are also considered on a country-by-country basis.
Communication and participation Employees are kept informed of business developments through formal briefings, team meetings, intranet bulletins, video conferences and other more informal routes. Management take these opportunities to listen to staff and involve them in taking the business forward.
The Hiscox Foundation The Hiscox Foundation is a charity funded by an annual contribution from Hiscox 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 employees to become involved in charitable work. The foundation has supported the Humanitarian Aid Relief Trust with a further £30,000. HART helps some of the poorest and most abused people in the world.
Syndicate 33 Hiscox can trace its origins in the Lloyd’s Market to 1901. Today, Hiscox Syndicate 33 is one of the largest composite syndicates at Lloyd’s, and has an A.M. Best syndicate rating of A (Excellent). Syndicate 33 underwrites a mixture of reinsurance, major property and energy business, as well as a range of specialty lines including contingency and technology and media risks among others. The business is mainly property-related short-tail business. Syndicate 33 trades through the Lloyd’s worldwide licences and ratings. It also benefits from the Lloyd’s brand. Lloyd’s has an A (Excellent) rating from A.M. Best, an A+ (Strong) from Standard & Poor’s, and an A+ (Strong) rating from Fitch.
The geographical and currency splits are shown below. 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. The size of the Syndicate is increased or reduced according to the strength of the insurance environment in its main classes. At present, Hiscox owns approximately 72.5% of the Syndicate, with the remainder owned by thirdparty Lloyd’s Names. Hiscox receives a fee and a profit commission of approximately 20% of profit on the element it does not own. For the 2013 year of account, Syndicate 33’s capacity has remained flat at £950 million. The chart right shows the gross premiums written of Syndicate 33 for the last 12 years.
Insurance carriers Hiscox Ltd Report and Accounts 201230 29% Rest of the world 9% Asia 2% UK
Hiscox Insurance Company Hiscox purchased Hiscox Insurance Company Limited in 1996, in keeping with its aim of diversifying its activities outside of Lloyd’s and writing a focused book of regional specialist risks. The Group has reshaped the Company’s original portfolio to concentrate on high-value household and smaller premium commercial business.
Hiscox Insurance Company Limited has licences throughout Europe. It is the primary insurance vehicle used by the UK and mainland Europe offices for their business. The success of the portfolio can be seen in the chart below right.
Hiscox Insurance Company Limited has achieved average compound growth in gross premiums written of 12.2% from 1997 to 2012, despite discontinuing almost all of its original business. It has also significantly improved its combined ratio.
Hiscox Insurance Company (Bermuda) Formed by Hiscox in late 2005, Hiscox Insurance Company (Bermuda) Limited was set up as an expansion of the reinsurance operations of Hiscox and as an internal reinsurer of the Group.
Hiscox Insurance Company Inc. is rated A (Excellent) by A.M. Best. At the end of 2012, net assets exceeded $56 million (2011: $58 million).
Bronek Masojada joined Hiscox in 1993. From 1989 to 1993 he was employed by McKinsey and Co. Bronek served as a Deputy Chairman of Lloyd’s from 2001 to 2007. 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 a member of the Board of the Association of British Insurers and the Junior Warden of the Worshipful Company of Insurers. Bronek is Chairman of the Lloyd’s Tercentenary Foundation, a charity which supports research in areas of interest to the insurance industry.
Daniel Maurice Healy Non Executive Director and Chairman of the Audit Committee (Aged 70)
Andrea Sarah Rosen Non Executive Director and Chairman of the Remuneration and Nomination Committee (Aged 58)
Gunnar Stokholm joined Hiscox in 2008. He worked for Zurich Financial Services between 1995 and 2004, in a number of roles including CEO for Australia and Asian markets. He spent the majority of his career at Topdanmark Insurance and held the position of Managing Director of Topdanmark Holding from 1986 to 1995.
Daniel Healy joined Hiscox in 2006. He was appointed Executive Vice President and Chief Financial Officer of North Fork Bancorporation in 1992 and a member of its Board of Directors in 2000. He was a partner with KPMG LLP before joining North Fork. He was the Managing Partner of the San José, California and Long Island, New York offices and held other positions in that firm during his tenure. He holds Board positions at KBW Inc and Bond Street Holdings.
Dr James King joined Hiscox in 2006. He chairs Keytech Limited, The Bermuda Telephone Company Ltd and Grotto Bay Properties Ltd. He was Chairman of the Bank of N.T. Butterfield & Son Limited until 19 April 2007 and the Establishment Investment Trust, a UK-listed company until August 2011. He is a Director of Castle Harbour Limited. Dr King is a fellow of the Royal College of Surgeons, Canada and the American College of Surgeons.
The Board of Directors The Board comprises four Executive Directors, including an Executive Chairman, and eight independent Non Executive Directors, including a Senior Independent Director. Biographical details for each member of the Board are provided on pages 34 to 35. In order to ensure that the composition of the Board remains appropriate the Remuneration and Nomination Committee monitors the composition of the Board and is required to consider the balance of skills, experience, independence and knowledge before any appointment is made and this is also reviewed as part of the Board evaluation process as described on page 38. There is an induction process for new Directors. The roles and activities of the Chairman and Chief Executive are distinct and separate. The Chairman is responsible for running an effective Board including oversight of corporate governance and overall strategy and meets periodically with the Senior Independent Director. The Chief Executive has responsibility for running the Group’s business.
In accordance with the UK Corporate Governance Code one Director submits theirself for appointment, and the remaining Directors submit themselves for re-appointment, at the Annual General Meeting of the Company. The external commitments of the Directors are disclosed in their profiles on pages 34 to 35. Non Executive Directors are appointed for a specified term. Their terms of appointment state that their continuation in office is contingent upon their satisfactory performance and prescribe the time commitment required of them in order to discharge their duties. The terms also state that appropriate preparation time is required ahead of each meeting. A review of the remuneration of the Non Executive Directors, which does not include performance-related elements, was carried out in 2012 but did not result in any change. Robert Childs will not receive any further performance related remuneration once he is appointed as Non Executive Chairman. Directors received briefings on solvency regulation at two of the Board meetings held during the year.
The Group Executive Committee The Group Executive Committee is comprises the Executive Directors and, for the last four months of the year, the Deputy Group Chief Underwriting Officer. It meets monthly to raise and discuss topics such as Group strategy (subject always to Board approval), approval of senior appointments and remuneration (other than Board appointments), management of the Group’s trading performance, mergers and acquisitions (which are not significant to the Group), significant issues raised by management and approval of exceptional spend within the limits established by the Board. Below this there are local management teams that drive the local businesses.
The Audit Committee The Audit Committee of Hiscox Ltd is chaired by Daniel Healy and comprises Caroline Foulger, Richard Gillingwater, Ernst Jansen, Dr James King, Bob McMillan, Andrea Rosen and Gunnar Stokholm. The Chairman of the Committee, Daniel Healy, is considered by the Board to have recent and relevant financial experience. It operates according to Terms of Reference published on the Group’s website. The Audit Committee meets at least three times a year to assist the Board on matters of financial reporting, risk management and internal control. The Audit Committee monitors the scope, results and cost effectiveness of the internal and external audit functions, the independence and objectivity of the external auditors, and the nature and extent of non-audit work undertaken by the external auditors together with the level of related fees. The internal and external auditors have unrestricted access to the Audit Committee. All non-audit work undertaken by the Group’s external auditors with fees greater than £50,000 must be pre-approved by the Audit Committee. KPMG has confirmed to the Audit Committee that in its opinion it remains independent. The Committee is satisfied that this is the case.
The Remuneration and Nomination Committee The Remuneration and Nomination Committee comprises Caroline Foulger, Richard Gillingwater, Daniel Healy, Ernst Jansen, Dr James King, Bob McMillan, Andrea Rosen and Gunnar Stokholm. It is chaired by Andrea Rosen. It operates according to Terms of Reference published on the Group’s website and generally meets three times a year.
The Committee’s role in nomination is to monitor the structure, size and composition of the Hiscox Ltd Board and, when Board vacancies arise, to nominate, for approval by the Board, appropriate candidates to fill those roles. The Committee is mindful of the need for diversity, including gender diversity, in the selection process and in considering an appointment will ensure that the candidate pool includes at least one female.
The risk management systems are set out in detail in the risk management report on pages 23 to 27.
The Board acknowledges that it is neither possible, nor desirable, to eliminate risk completely. The system is designed to manage rather than eliminate the risk of failure to achieve business objectives, and can only provide reasonable and not absolute assurance against material misstatement or loss. The constant aim is to be fully aware of the risks to which the business is exposed and to manage these risks to acceptable levels.
The Committee’s role in remuneration is to determine: the overall remuneration strategy, policy and cost for the Group; the levels and make-up of remuneration for the Executive Directors; and the award of sizeable bonuses to individuals other than the Executive Directors.
The Remuneration and Nomination Committee takes into account inflation rate movements by country, market data provided by its own consultants, Towers Watson, and the competitive position of Hiscox salaries (based on the Towers Watson salary reports), in order to set the overall salary budget.
In 2012 Executive Directors’ salaries increased by an average of 5%, which was broadly in line with increases seen elsewhere in the Group. Between 2009 and 2011 there were no salary increases for any Executive Directors, compared with around 3% per annum for the Group. For the two years prior to 2009 the CEO received base salary increases below the average for the Group. We believe that it is important to note that, during this period from 2007 to 2012, the CEO had explicitly requested that his salary increases be eliminated or kept to a limited amount in order to set an example for the Company of compensation restraint. The Committee viewed this as an admirable stance and supported the CEO’s position. However, we now believe that the impact over time of this position has resulted in a meaningful disparity between the CEO’s actual salary and the appropriate level of base pay for the role.
A number of important changes will be made to senior executive roles in Hiscox in 2013. As already announced, Robert Hiscox will retire as Executive Chairman and a new Non Executive Chairman will be formally appointed. These changes will have an impact on the role of the Executive Directors and therefore the Remuneration Committee has taken the opportunity to review the base salaries of the CEO and CFO in the context of the consequential expansion of their leadership responsibilities.
In the case of Bermuda, the London Market and Guernsey business units, the pool is 15% of profits in excess of the Hurdle Rate return on allocated equity. In the case of the UK and Europe, the bonus pool is 15% of profits from the ground up, but this is only released when the business unit’s return on allocated equity exceeds the Hurdle Rate. For businesses in the development phase, such as our US business, bonuses are awarded on achievement of budgets agreed at the beginning of the year.
A portion of each business unit’s pool is available to pay bonuses for corporate centre staff, including the Executive Directors. There are also controls in place to ensure that, as the Executives seek to maximise the Group’s return on equity, Hiscox does not exceed the risk appetite set by the Board.
Retirement benefits These also vary by local country practice. All open Hiscox retirement schemes are based on defined contributions.
Stuart Bridges and Bronek Masojada hold Lifetime Allowance protection certificates and have therefore opted out of the pension scheme. They receive a 10% cash allowance (less an offset for the employer’s National Insurance liability) in lieu of the standard employer pension contribution. Robert Childs and Robert Hiscox are in receipt of pensions from the closed defined benefit scheme and are entitled to no further pension provision.
As can be seen from the following table the bonus pool and individual bonuses vary significantly with performance from year-to-year. In 2012 the performance of the business was very good in what remains a very challenging business environment. This resulted in a pre-tax return on equity of 18% and an average bonus of 183%. This contrasts with 2011, when no bonuses were earned by the Executive Directors.
Performance Share Plan Restricted share awards or nil cost option awards (depending on the appropriate practice by country) are made to Executive Directors and other senior managers at the discretion of the Remuneration and Nomination Committee. Awards under this plan were made in 2012 and the Remuneration and Nomination Committee has also agreed to make awards under this plan in 2013. The maximum annual award to an individual under the Performance Share Plan is a value of 200% of basic salary.
PSP award will vest will be a 7.0% post-tax return on equity over a three-year period. If this minimum threshold rate of return is reached or exceeded, then 25% of the PSP awards granted in 2013 will vest. The whole of the award will only vest if a 14.5% post-tax return on equity is achieved. The rate of vesting for performance above the threshold level of performance will remain unchanged and will be determined on a straight line sliding scale.
Executive Director reward Executive Directors’ reward packages are consistent with the rest of the business. The actual compensation paid to the four Executive Directors in 2012 is outlined in the table below. Details of their contractual notice periods are contained in the table opposite.
ROE has been calculated as profit after tax and goodwill amortisation divided by shareholder funds at the beginning of each year, excluding foreign currency items on economic hedges and intragroup borrowings. ROE encourages efficient use of capital, or its return to shareholders. In 2013 £150 million of capital will be returned, above normal progressive dividends.
External Non Executive Directorships No external appointments may be accepted by an Executive Director where such appointment may give rise to a conflict of interest. The consent of the Chairman is required in any event. During the year, BE Masojada has been a member of the Board of the Association of British Insurers and was not remunerated for his services. RRS Hiscox, RS Childs, and SJ Bridges did not hold any Non Executive Director positions during the year.
UK Sharesave Scheme SJ Bridges 3,210 – – – 3,210 2.826 – 01-May-13 31-Oct-13 RRS Hiscox – 2,764 – – 2,764 3.255 – 01-May-15 31-Oct-15 RS Childs 3,210 – – – 3,210 2.826 – 01-May-13 31-Oct-13 BE Masojada 3,107 – – – 3,107 2.896 – 01-Dec-13 31-May-14
Directors The names and details of the individuals who served as Directors of the Company during the year, as well as one additional Director, Caroline Foulger, who joined the Board on 1 January 2013, are set out on pages 34 to 35. Details of the Chairman’s professional commitments are included in his biography. The bye-laws of the Company govern the appointment and replacement of Directors. It was announced on 30 July 2012 that Robert Hiscox would retire as Chairman in February 2013 and accordingly he will not be seeking re-appointment as a Director at the Annual General Meeting. Caroline Foulger will submit herself for appointment at that meeting and, in accordance with the UK Corporate Governance Code, all other Directors will submit themselves for re-appointment. The bye-laws may only be amended with the approval of shareholders in general meeting in accordance with relevant legislation.
Major interests in shares As at 22 February 2013, the Company had been notified of the following interests of 5% or more of voting rights in its ordinary shares: Number of shares % of total *
A copy of the Company’s bye-laws is available for inspection at the Company’s registered office. The powers given to the Directors are contained in the Company's bye-laws and are subject to relevant legislation and, in certain circumstance (including in relation to the issuing and buying back by the Company of its shares), approval by shareholders in general meeting. At the Annual General Meeting in 2012 the Directors were granted authorities to allot and issue shares and to make market purchases of shares.
Financial results The Group achieved a pre-tax profit for the year of £217.1 million (2011: £17.3 million). Detailed results for the year are shown in the consolidated income statement on page 51, and also within the Group financial performance section on pages 18 to 19.
By order of the Board Jeremy Pinchin, Secretary Wessex House, 45 Reid Street, Hamilton HM12, Bermuda
In addition to our audit of the consolidated financial statements, the Directors have engaged us to audit the information in the Directors’ remuneration report that is described as having been audited, which the Directors have decided to prepare (in addition to that required to be prepared) as if the Company were required to comply with the requirements of Schedule 8 to the UK Companies Act 2006 The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008 No.410).
Management’s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the EU and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement whether due to fraud or error.
We review whether the corporate governance statement reflects the Company’s compliance with the nine provisions of the UK Corporate Governance Code specified for our review by those rules, and we report if it does not. We are not required by the terms of our engagement to consider whether the Board’s statements on internal control cover all risks and controls, or to form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures.
We also read the other information contained in the Report and Accounts and consider whether it is consistent with the audited consolidated financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the consolidated financial statements. Our responsibilities do not extend to any other information.
Gross premiums earned 1,487,859 1,428,954 Premiums ceded to reinsurers (289,238) (283,947)
Expenses Claims and claim adjustment expenses, net of reinsurance 26.2 (538,826) (697,898) Expenses for the acquisition of insurance contracts 17 (283,615) (269,792)
Total comprehensive income recognised for the year (all attributable to owners of the Company) 171,966 32,332
Property, plant and equipment 15 18,055 18,155 Investments in associates 16 9,054 6,380
Loans and receivables including insurance receivables 20 492,064 507,722 Current tax asset 1,513 69,436 Cash and cash equivalents 23 657,662 516,547
Total equity (all attributable to owners of the Company) 1,378,384 1,255,899
Financial liabilities 19 301 – Current tax 6,998 – Trade and other payables 27 265,615 314,135
Total recognised comprehensive income for the year (all attributable to owners of the Company) – – – 11,060 21,272 32,332 Employee share options: Equity settled share based payments – – – – 8,677 8,677 Proceeds from shares issued 24 91 3,124 – – – 3,215
Employee share options: Equity settled share based payments – – – – 6,135 6,135 Proceeds from shares issued 24 52 1,649 – – – 1,701 Deferred and current tax 29 – – – – 5,190 5,190
Dividends paid to owners of the Company 32 – – – – (70,173) (70,173)
Profit before tax 217,124 17,271 Adjustments for: Interest and equity dividend income (45,699) (50,333) Interest expense 8,605 6,698 Net fair value (gains)/losses on financial assets (37,654) 30,878 Depreciation, amortisation and impairment 14, 15 7,833 8,098 Charges in respect of share based payments 9, 24 6,135 8,677 Other non-cash movements 1,239 (1,070) Effect of exchange rate fluctuations on cash presented separately 9,481 (1,451)
Cash flows from operations 122,593 216,591 Interest received 51,743 50,244 Equity dividends received 1,631 1,531 Interest paid (7,256) (6,163) Current tax received/(paid) 56,403 (4,003)
Included within cash and cash equivalents held by the Group are balances totaling £86,168,000 (2011: £77,203,000) not available for immediate use by the Group outside of the Lloyd’s syndicate within which they are held.
The consolidated financial statements for the year ended 31 December 2012 include all of the Group’s subsidiary companies and the Group’s interest in associates. All amounts relate to continuing operations.
The financial statements were approved for issue by the Board of Directors on 25 February 2013.
In July 2010 the IASB published an exposure draft for Phase II of the insurance contracts project. The exposure draft proposes a number of significant changes to the measurement of insurance contracts and as such adoption of a final standard in a form similar to the exposure draft will likely have a significant impact on the results of the Group.
They are compiled on a going concern basis and prepared on the historical cost basis except that pension scheme assets included in the measurement of the employee retirement benefit obligation, and certain financial instruments including derivative instruments, are measured at fair value. Employee retirement benefit obligations are determined using actuarial analysis. The balance sheet of the Group is presented in order of increasing liquidity.
The Group writes a balanced book of insurance and reinsurance business spread by product and geography. The Directors believe that the Group is well placed to manage its business risk and continue to trade successfully.
The accounting policies adopted are consistent with those of the previous financial year. There were no new or amended Standards and Interpretations issued by the IASB and endorsed by the EU as of 1 January 2012 that had a material impact on the Group.
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
Notes to the consolidated financial statements continued impact the disclosures in respect of fair value measurement on adoption.
The adoption of IFRS 9 will have an effect on the classification and measurement of the Group’s financial assets.
IFRS 12: Disclosure of Interests in Other Entities is effective for annual periods beginning 1 January 2014, with retrospective application. It includes all of the disclosures that were previously included in IAS 27 related to consolidated financial statements, as well as all of the disclosures that were previously included in IAS 31 and IAS 28: Investment in Associates. A number of new disclosures are also required, including the judgements made by management in determining whether it controls an entity. The standard will impact the disclosures made by the Group in respect of its interests in subsidiaries, joint arrangements and associates on adoption.
As a result of the issuance of IFRS 10, IFRS 11 and IFRS 12, consequential amendments have been made to IAS 27 and IAS 28. IAS 27 now contains requirements only relating to separate financial statements, while the amendments to IAS 28 incorporate the accounting for joint ventures. Both standards are effective for annual periods beginning on or after 1 January 2014. The adoption of these standards is not expected to have an effect on the Group’s consolidated financial statements.
IFRS 9: Financial Instruments sets out the recognition and measurement requirements for financial instruments and some contracts to buy or sell non-financial items. The IASB has broken the project into three phases, classification and measurement, impairment methodology and hedge accounting. The IASB continues to add to the standard as it completes the various phases of its project and it will eventually form a complete replacement for IAS 39: Financial Instruments Recognition and Measurement.
An exposure draft containing amendments to the standard was released in November 2012. It introduces a third measurement category, under which a financial asset is required to be measured at fair value through other comprehensive income, ‘FVOCI’, if its cash flows are solely payments of principal and interest and are held in a business model in which assets are managed both in order to collect contractual cash flows and for sale. The existing option to measure an asset at FVTPL in order to reduce an accounting mismatch would be available for financial assets that would otherwise be mandatorily measured at FVOCI.
Land and artwork assets are not depreciated as they are deemed to have indefinite useful economic lives. The cost of leasehold improvements is amortised over the unexpired term of the underlying lease or the estimated useful life of the asset, whichever is shorter. Depreciation on other assets is calculated using the straight-line method to allocate their cost or revalued amounts, less their residual values, over their estimated useful lives. The rates applied are as follows: buildings 50 years vehicles 3 years leasehold improvements including fixtures and fittings 10–15 years furniture, fittings and equipment 3–15 years
between two Group entities that have different functional currencies. Unrealised gains arising from transactions with associates are eliminated to the extent of the Group’s interest in the entity. Unrealised gains arising from transactions with associates are eliminated against the investment in the associate. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.
(c) Transactions eliminated on consolidation Intragroup balances, transactions and any unrealised gains arising from intragroup transactions are eliminated in preparing the consolidated financial statements. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. In accordance with IAS 21, foreign currency gains and losses on intragroup monetary assets and liabilities may not fully eliminate on consolidation when the intragroup monetary item concerned is transacted 2 Significant accounting policies continued 2.3 Basis of consolidation continued (a) Subsidiaries continued
(d) Rights to customer contractual relationships Costs directly attributable to securing the intangible rights to customer contractual relationships are recognised as an intangible asset where they can be identified separately and measured reliably and it is probable that they will be recovered by directly related future profits. These costs are amortised on a straight-line basis over the useful economic life which is deemed to be 20 years and are carried at cost less accumulated amortisation and impairment losses.
(e) Computer software Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring into use the specific software. These costs are amortised over the expected useful life of the software of between three and five years on a straight-line basis.
Internally developed computer software is only capitalised when it is probable that the expected future economic benefits that are attributable to the asset will flow to the Group and the cost of the asset can be measured reliably. Amortisation of internally developed computer software begins when the software is available for use and is allocated on a straight-line basis over the expected useful life of the asset. The useful life of the asset is reviewed annually and, if different from previous estimates, is changed accordingly with the change being accounted for as a change in accounting estimates in accordance with IAS 8.
(d) Liability adequacy tests At each balance sheet date, liability adequacy tests are performed by each segment of the Group to ensure the adequacy of the contract liabilities net of related DAC. In performing these tests, current best estimates of future contractual cash flows and claims handling and administration expenses, as well as investment income from assets backing such liabilities, are used. Any deficiency is immediately charged to profit or loss initially 2.10 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 quoted market 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 derivatives 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.
2.11 Own shares Where any Group company purchases the parent 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 owners on consolidation. Where such shares are subsequently sold, reissued or otherwise disposed of, any consideration received is included in equity attributable to the Company’s owners, net of any directly attributable incremental transaction costs and the related tax effects.
bank overdrafts together with commission fees charged in respect of Letters of Credit. Arrangement fees in respect of financing arrangements are charged over the life of the related facilities.
(b) Hiscox as lessor Rental income from operating leases is recognised on a straight-line basis over the term of the relevant contractual agreement.
The most critical estimate included within the Group’s balance sheet is the estimate for losses incurred but not reported. The total estimate as at 31 December 2012 possibility of withdrawal; or providing termination benefits as a result of an offer made to encourage voluntary redundancy.
2.18 Finance costs Finance costs consist of interest charges accruing on the Group’s borrowings and
i) Underwriting risk The Board sets the Group’s underwriting strategy for accepting and managing underwriting risk, seeking to exploit identified opportunities in the light of other relevant anticipated market conditions. Specific underwriting objectives such as aggregation limits, reinsurance protection thresholds, geographical disaster event risk exposures and line of business diversification parameters are prepared and reviewed by the Chief Underwriting Officer in order to translate the Board’s summarised underwriting strategy into specific measurable actions and targets. These actions and targets are reviewed and approved by the Board in advance of each underwriting year. The Board continually reviews its underwriting strategy throughout each underwriting year in light of the evolving market pricing and loss conditions and as opportunities present themselves. The Group’s underwriters and management consider underwriting risk at an individual
Estimates of losses incurred but not reported are continually evaluated, based on entity-specific historical experience and contemporaneous developments observed in the wider industry when relevant, and are also updated for expectations of prospective future developments. Although the possibility exists for material changes in estimates to have a critical impact on the Group’s reported performance and financial position, it is anticipated that the scale and diversity of the Group’s portfolio of insurance business considerably lessens the likelihood of this occurring. The overall reserving risk is discussed in more detail in note 3.1 and the procedures used in estimating the cost of settling insured losses at the balance sheet date including losses incurred but not reported are detailed in note 26.
The Board requires all underwriters to operate within an overall Group appetite for individual events. This defines the maximum exposure that the Group is prepared to retain on its own account for any one potential catastrophe event or disaster. The Group’s underwriting risk appetite seeks to ensure that it should not lose more than one year’s profit plus 15% of core capital as a result of a 1 in 250 bad underwriting year.
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 underwriting risk the Group routinely performs a wide range of activities including the following: regularly updating the Group’s risk models; documenting, monitoring and reporting on the Group’s strategy to manage risk; developing systems that facilitate the identification of emerging issues promptly; utilising sophisticated computer modeling tools to simulate catastrophes and measure 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.
The Group’s insurance contracts include provisions to contain losses, such as the ability to impose deductibles and demand reinstatement premiums in certain cases. In addition, in order to manage the Group’s exposure to repeated catastrophic events, relevant policies frequently contain 3 Management of risk continued 3.1 Insurance risk continued i) Underwriting risk continued
Estimated concentration of gross and net insurance liabilities on balance sheet by territory coverage of premium written 31 December 2012
The provision of insurance to cover allegations made against individuals acting in the course of fiduciary or managerial responsibilities, including directors and officers’ insurance, is one example of a casualty insurance risk. However the Group’s specific exposure to this specific risk category is relatively limited. The Group’s casualty insurance contracts mainly experience low severity attritional losses. By nature, some casualty losses may take longer to settle than the other categories of business.
Reserving risk The Group’s procedures for estimating the outstanding costs of settling insured losses at the balance sheet date, including claims incurred but not yet reported, are detailed in note 26.
A significant proportion of the reinsurance inwards business provides cover on an excess of loss basis for individual events. The Group agrees to reimburse the cedant once their losses exceed a minimum level. Consequently the frequency and severity of reinsurance inwards claims is related not only to the number of significant insured events that occur but also to their individual magnitude. If numerous catastrophes occurred in any one year, but the cedant’s individual loss on each was below the minimum stated, then the Group would have no liability under such contracts. Maximum gross line sizes and aggregate exposures are set for each type of programme.
The fair value of equity assets in the Group’s balance sheet at 31 December 2012 was £190 million (2011: £173 million). These may be analysed as follows: Nature of equity and unit trust holdings
Geographic focus Specific UK mandates 44 39 Global mandates 56 61
The allocation of equity risk is not heavily confined to any one market index so as to reduce the Group’s exposure to individual sensitivities. A 10% downward correction in equity prices at 31 December 2012 would have been expected to reduce Group equity and profit after tax for the year by approximately £16.7 million (2011: £15.0 million) assuming that the only area impacted was equity financial assets. A 10% upward movement is estimated to have an equal but opposite effect.
The Group may also, from time-to-time, enter into interest rate future contracts in order to minimise the interest rate risk on specific longer duration portfolios.
At 31 December 2012, the Group holds asset-backed and mortgage-backed fixed income instruments in its investment portfolio however has minimal direct exposure to sub-prime asset classes. Together with the Group’s investment managers, management continues to monitor the potential for any adverse development associated with this investment exposure through the analysis of relevant factors such as credit ratings, collateral, subordination levels and default rates in relation to the securities held. The Group has no direct exposure to sovereign debt in Portugal, Ireland, Italy, Greece or Spain. Note 3.2d shows the Group’s positions at 31 December 2012 for government issued, government supported and bank debt exposures. The Group did not experience any material defaults on debt securities during the year.
(d) Credit risk The Group 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.
31 December 2012 was £2,195 million (2011: £2,171 million). These may be analysed as follows: Nature of debt and fixed income holdings
At 31 December 2012, no amounts were outstanding on the Group’s borrowing facility (2011: £nil). The Group has no other significant borrowings or other assets 3 Management of risk continued 3.2 Financial risk continued (c) Interest rate risk continued
The largest counterparty exposure within the AAA rating at both 31 December 2012 and 2011 is with the UK Treasury, and for AA rating is with the US Treasury. On 22 February 2013, Moody's downgraded the UK’s government bonds from Aaa to Aa1. Standard & Poor’s maintain the AAA rating currently.
Catastrophe bonds included within ‘other/non-rated’ are rated BB and B. A significant proportion of ‘other/non-rated’ assets are rated BBB and BB at 31 December 2012 and 31 December 2011. The reinsurance assets classified as AAA rated include collateralised reinsurance arrangements.
An analysis of the Group’s positions in respect of government issued and supported debt are shown in the table below. The Group has no direct government exposure to Portugal, Italy, Ireland, Greece or Spain.
Included above are £1,012 million (2011: £1,049 million) in relation to holdings in debt securities, £10 million (2011: £nil) held as deposits with credit institutions and £111 million (2011: £122 million) held as cash equivalents, having a maturity of less than three months at the time of purchase. Of the amount held as cash equivalents, £35 million (2011: £114 million) is held with the UK Government and £75 million (2011: £nil) with the US Treasury.
Included in the table above, are £222 million in relation to holdings in debt securities and £5 million held as cash equivalents.
Between one and two years 468,475 – – 468,475 487,678 Between two and five years 808,545 246 – 808,791 822,245 Over five years 349,761 – – 349,761 265,897
The Group’s equities and shares in unit trusts and other non-dated instruments have no contractual maturity terms but could also be liquidated in an orderly manner for cash in a prompt and reasonable timeframe within one year of the balance sheet date.
Property – marine and major assets 80,386 38,146 32,185 5,040 155,757 *Includes a diverse mix of certain specialty lines such as kidnap and ransom, terrorism, bloodstock and other risks which contain a mix of property and casualty exposures.
At a consolidated level, the Group is exposed to foreign exchange gains or losses on balances held between Group companies where one party to the transaction has a functional currency other than Pound Sterling. To the extent that such gains or losses are considered to relate to economic hedges and intragroup borrowings, they are disclosed separately in order for users of the financial statements to obtain a fuller understanding of the Group’s financial performance (note 13).
Operational foreign exchange risk is controlled within the Group’s individual entities. The assets of the Group’s overseas operations are generally invested in the same currencies as their underlying insurance and investment liabilities, producing a natural hedge. Due attention is paid to local regulatory solvency and risk-based capital requirements.
As a result of the accounting treatment for non-monetary items, the Group may also experience volatility in its income statement during a period when movements in foreign exchange rates fluctuate significantly. In accordance with IFRS, non-monetary items are recorded at original transaction rates and are not remeasured at the reporting date. These items include unearned premiums, deferred acquisition costs and reinsurers’ share of unearned premiums. Consequently, a mismatch arises in the income statement between the amount of premium recognised at historical transaction rates, and the related claims which are retranslated using currency rates in force at the reporting date. The Group considers this to be a timing issue which can cause significant volatility in the income statements. Further details of the impact of the accounting treatment are provided in note 12.
Property, plant and equipment 10,372 6,537 1,146 – 18,055 Investments in associates 8,754 – 300 – 9,054
Loans and receivables including insurance receivables 77,951 304,258 91,375 18,480 492,064 Current tax asset – 107 1,406 – 1,513
Employee retirement benefit obligations – – – – – Deferred tax 138,362 – – – 138,362
Employee retirement benefit obligations – – – – – Deferred tax 152,447 – – – 152,447
Strengthening of US Dollar 119.9 31.9 Weakening of US Dollar (95.1) (23.1) Strengthening of Euro 14.1 19.2 Weakening of Euro (11.6) (15.7)
3.3 Capital risk management The Group’s primary objectives when managing 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 the Group’s shareholders by pricing its insurance products and services commensurately with the level of risk; to maintain an efficient cost of capital; to comply with all regulatory requirements by a significant margin; and to maintain financial strength ratings of A in each of its insurance entities.
The Group sets the amount of capital required in its funding structure in proportion to risk. The Group then manages the capital structure and makes adjustments to it in the light of changes in economic conditions and 3 Management of risk continued 3.2 Financial risk continued
All amounts reported on the following page represent transactions with external parties only. In the normal course of trade, the Group’s entities enter into various reinsurance arrangements with one another. The related results of these transactions are eliminated on consolidation and are not included within the results of the segments. This is consistent with the information used by the chief operating decision maker when evaluating the results of the Group. Performance is measured based on each reportable segment’s profit before tax.
The Group’s four operating segments are: London Market comprises the results of Syndicate 33, excluding the results of the fine art, UK regional events coverage and non US household business which is included within the results of UK and Europe. It also includes the fire and aviation businesses from Syndicate 3624, and the larger TMT business written by Hiscox Insurance Company Limited. In addition, it excludes an element of kidnap and ransom and terrorism included in UK and Europe.
The Group’s regulatory capital is supervised by the Bermuda Monetary Authority (BMA). For the last two years, the BMA has conducted impact assessments of the regulatory capital requirements for groups, in preparation for the requirements to become enforceable from the beginning of 2013. The Group had sufficient capital to meet the regulatory capital requirements during both of the impact assessments.
The claims ratio is calculated as claims and claim adjustment expenses, net of reinsurance, as a proportion of net premiums earned. The expense ratio is calculated as the total of expenses for the acquisition of insurance contracts, and operational expenses, including profit related pay, as a proportion of net premiums earned. The foreign exchange impact ratio is calculated as the foreign exchange gains or losses as a proportion of net premiums earned. The combined ratio is the total of the claims, expenses and foreign exchange impact ratios. The combined ratio excluding non-monetary foreign exchange impact is calculated by adjusting the net premiums earned and the expenses for the acquisition of insurance contracts by the movement arising from retranslating net unearned premiums and net deferred acquisition costs at year end rates of exchange. All ratios are calculated using the 100% results.
At 100% level (note 4b) 1% change in claims or expense ratio 5,496 4,895 3,072 – 5,555 4,637 2,831 –
At Group level 1% change in claims or expense ratio 4,190 4,769 3,027 – 4,188 4,486 2,776 –
Investment result – financial assets 8 92,690 25,942 Fair value losses on derivative financial instruments 21 (266) (1,447)
(b) Investment return London Market UK and Europe International Corporate Centre 2012 Total
Debt and fixed income securities 9,477 1.1 7,642 1.8 10,846 1.6 1,968 0.9 29,933 1.3 Equities and shares in unit trusts – – (1,168) (2.4) (4,392) (9.3) (375) (0.9) (5,935) (3.8) Deposits with credit institutions/
Overall impact of foreign exchange related items on net assets (55,979) 18,876
The above excludes profit or losses on foreign exchange derivative financial instruments which are included within the investment result.
Opening balance sheet impact of non-retranslation of non-monetary items 2,144 (1,251) (Loss)/gain included within profit representing the non-retranslation of non-monetary items (4,818) 3,395
Closing balance sheet impact of non-retranslation of non-monetary items (2,674) 2,144 13 Foreign currency items on intragroup borrowings The Group has loan arrangements, denominated in US Dollars and Euros, in place between certain Group companies. In most cases, as one party to each arrangement has a functional currency other than the US Dollar or the Euro, foreign exchange (gains)/losses arise which are not eliminated through the income statement on consolidation. Implicit offsetting gains/(losses) are reflected instead on retranslation of the counterparty company’s closing balance sheet through other comprehensive income and into the Group’s currency translation reserve within equity.
The £100,000 impairment recognised in the year for goodwill is included in operational expenses in the consolidated income statement (2011: £nil).
Other intangible assets relate to the costs of acquiring rights to customer contractual relationships with additions in the current and prior year relating to software licence and development costs. These intangible assets are amortised on a straight-line basis over their useful economic life.
Capitalised software and development costs are amortised when the assets become available for use on a straight-line basis over the expected useful life of the asset. The carrying value of software and development costs is reviewed for impairment on an ongoing basis by reference to the stage and expectation of a project. No impairment is due as at 31 December 2012.
The amortisation charge for the year includes £4,302,000 (2011: £3,634,000) relating to capitalised internally generated software costs and is included in operational expenses in the consolidated income statement.
The impairment charge of £491,000 in the year is included in operational expenses in the consolidated income statement (2011: £nil).
Additions during the year 3,104 – Disposals during the year – (729) Net (loss)/profit from investments in associates (430) 223
The Group’s interests in its principal associates, all of which are unlisted, were as follows: 100% results
Total at the end of 2012 69,579 53,817 17,510 915 100% results
Associates incorporated in the UK from 25% to 35% 5,984 3,294 5,041 198
During 2012, the Group disposed of its holding in InsuranceBee, Inc. During 2011 the Group sold its holding in Plexstar Insurance Services Ltd.
The amounts expected to be recovered before and after one year are estimated as follows: 2012
The amounts expected to be recovered before and after one year, based on historical experience, are estimated as follows: Within one year 286,532 265,525 After one year 253,857 226,990
Amounts due from reinsurers in respect of outstanding premiums and claims already paid by the Group are included in loans and receivables (note 20). The Group recognised a loss during the year of £91,000 (2011: gain of £52,000) in respect of previously impaired balances.
Total investments 2,398,098 2,356,868 Insurance linked fund 8,098 – Catastrophe bonds – 11,639 Derivative financial instruments 21 73 129
On 27 December 2012, the Group invested $13.2 million into the Third Point Reinsurance Opportunities Fund (‘the Fund’), representing a 32% non-voting interest holding, subject to a two-year initial lock-up period. The Group has committed to invest an additional $16.8 million into the Fund which is payable on demand. The Fund specialises in catastrophe reinsurance opportunities and is classified by the Group as an insurance linked fund.
The Group has entered into a quota share arrangement with Third Point Re Cat Ltd, a wholly-owned reinsurance entity of the Fund. No contracts have been ceded to the entity as of 31 December 2012.
The Group’s investment in catastrophe bonds was dissolved during the year (2011: £11.6 million). 2011 comprised 16 catastrophe bonds with credit ratings of BB and B. The issuers of these securities used the proceeds to collateralise certain catastrophe reinsurance obligations mainly in US and European wind and earthquake risks.
Gross receivables arising from insurance and reinsurance contracts 425,720 429,676 Provision for impairment (986) (956)
Due from contract holders, brokers, agents and intermediaries 295,892 299,879 Due from reinsurance operations 128,842 128,841
Prepayments and accrued income 10,345 8,387 Other loans and receivables: Net profit commission receivable 7,295 13,792 Accrued interest 9,120 10,149 Share of Syndicates’ other debtors’ balances 13,138 19,726 Other debtors including related party amounts 27,432 26,948
There is no significant concentration of credit risk with respect to loans and receivables as the Group has a large number of internationally dispersed debtors. The Group has recognised a loss of £30,000 (2011: gain of £85,000) for the impairment of receivables during the year ended 31 December 2012.
21 Derivative financial instruments The Group entered into both exchange-traded and over-the-counter derivative contracts for a number of purposes during 2012. The Group had the right and intention to settle each contract on a net basis. The assets and liabilities of these contracts at 31 December 2012 all mature within one year of the balance sheet date and are detailed below: Derivative financial instrument included on balance sheet
31 December 2011 Derivative financial instrument assets included on balance sheet
Foreign exchange forward contracts 22,552 12,662 12,533 129 31 December 2011 Derivative financial instrument liabilities included on balance sheet
Interest rate futures contracts During the year the Group continued short selling a number of government bond futures and sovereign futures denominated in a range of currencies to informally hedge substantially all of the interest rate risk on specific long portfolios of the matching currencies denominated corporate bonds. All contracts are exchange traded and the Group made a loss on these futures contracts of £337,000 (2011: £1,796,000) as included in note 7.
Equity index futures During the prior year, the Group purchased a number of equity index futures in order to hedge equity market exposure pending the acquisition of shares in unit trusts. All contracts were exchange traded and the Group made a profit of £433,000 as included in note 7.
The levels of the fair value hierarchy are defined by the standard as follows: Level 1 – fair values measured using quoted prices (unadjusted) in active markets for identical instruments; Level 2 – fair values measured using directly or indirectly observable inputs or other similar valuation techniques for which all significant inputs are based on market observable data; Level 3 – fair values measured using valuation techniques for which significant inputs are not based on market observable data.
Level 2 of the hierarchy contains US Government agencies, corporate securities, asset backed securities and mortgage backed securities and catastrophe bonds. The fair value of these assets is based on the prices obtained from both investment managers and investment custodians as discussed above. The Group records the unadjusted price provided and validates the price through a number of methods including a comparison of the prices provided by the investment managers with the investment custodians and the valuation used by external parties to derive fair value. Quoted prices for US Government agencies and corporate securities are based on a limited number of transactions for those securities and as such the Group considers these instruments to have similar characteristics to those instruments classified as Level 2. Also included within Level 2 are units held in traditional long funds and long and short special funds and over the counter derivatives.
Level 3 contains investments in a limited partnership and unquoted equity securities and an insurance linked fund which have limited observable inputs on which to measure fair value. Unquoted equities are carried at cost, which is deemed to be comparable to fair value. The Group invested into the insurance linked fund in December 2012, which is subject to a two-year initial lock-up period. The fund specialises in catastrophe reinsurance opportunities. The effect of changing one or more inputs used in the measurement of fair value of these instruments to another reasonably possible assumption would not be significant and no further analysis has been performed.
During the year, there were no significant transfers made between Level 1 and Level 2 of the fair value hierarchy.
Unrealised gains and losses in the year on securities held at the end of the year
Cash at bank and in hand 428,454 258,927 Short-term deposits 229,208 257,620
The Group holds its cash deposits with a well-diversified range of banks and financial institutions. Cash includes overnight deposits. Short-term deposits include debt securities with an original maturity date of less than three months and money market funds.
Employee share option scheme – ordinary shares issued 1,054 1,811 Scrip dividends to owners of the Company 32 1,758 3,503
In accordance with IFRS 2 the Group 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 £6,135,000 (2011: £8,677,000). This comprises charges of £5,793,000 (2011: £8,361,000) in respect of performance share plan awards and £342,000 (2011: £316,000) in respect of share option awards. The Group 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 flow methodology in respect of performance share plan awards.
The range of principal Group assumptions applied in determining the fair value of share based payment instruments granted during the year under review are: Assumptions affecting inputs to fair value models 2012 2011
Movements in the number of share options during the year and details of the balances outstanding at 31 December 2012 are shown in the Directors’ remuneration report.
At 31 December 2012 Hiscox Ltd held 19,682,214 shares in treasury (2011: 22,836,487). Additional details are shown in note 37 to these financial statements in respect of additional Hiscox Ltd shares held by subsidiaries.
Gross Claims reported and claim adjustment expenses 932,604 938,498 Claims incurred but not reported 1,000,300 964,073 Unearned premiums 663,708 597,689
The amounts expected to be recovered and settled before and after one year, based on historical experience, are estimated as follows: Within one year 1,190,613 1,160,744 After one year 865,610 847,001
claims experience. Changes in expected claims may result in a reduction or an increase in the ultimate claim costs and a release or an increase in reserves in the period in which the change occurs.
26 Insurance liabilities and reinsurance assets continued 26.1 Insurance contracts assumptions continued (b) Claims development tables continued Insurance claims and claim adjustment expenses reserves – gross at 100%
Estimate of ultimate claims costs as adjusted for foreign exchange* at end of accident year eight years later 413,874 638,611 – – – – – – – – 1,052,485 nine years later 413,545 – – – – – – – – – 413,545 Current estimate of cumulative claims
Liability for 2003 to 2012 accident years recognised on Group’s balance sheet
Liability for accident years before 2003 recognised on Group’s balance sheet **This represents the claims element of the Group’s insurance liabilities and reinsurance assets.
Total at beginning of year (1,902,571) 412,828 (1,489,743) (1,706,404) 374,193 (1,332,211) Claims and claim adjustment expenses for year (719,792) 180,966 (538,826) (830,368) 132,470 (697,898) Cash paid for claims settled in the year 614,723 (124,685) 490,038 650,510 (95,433) 555,077 Exchange differences and other movements 74,736 (15,670) 59,066 (16,309) 1,598 (14,711)
Claims reported and claim adjustment expenses (932,604) 192,311 (740,293) (938,498) 187,973 (750,525) Claims incurred but not reported (1,000,300) 261,128 (739,172) (964,073) 224,855 (739,218)
Total at end of year (1,932,904) 453,439 (1,479,465) (1,902,571) 412,828 (1,489,743)
Current year claims and claim adjustment expenses (930,635) 239,912 (690,723) (1,126,667) 229,314 (897,353) Over/(under) provision in respect of prior year claims and claim adjustment expenses 210,843 (58,946) 151,897 296,299 (96,844) 199,455
Reinsurers’ share of deferred acquisition costs 17 18,340 15,641 Accruals and deferred income 73,139 56,847
The amounts expected to be settled before and after one year are estimated as follows: Within one year 248,155 300,976 After one year 17,460 13,159
28 Tax expense The Company and its subsidiaries are subject to enacted tax laws in the jurisdictions in which they are incorporated and domiciled. The principal subsidiaries of the Company and the country in which they are incorporated are listed in note 37. The amounts charged in the consolidated income statement comprise the following: Current tax Expense for the year 15,751 380 Adjustments in respect of prior years 2,973 (95,809)
Deferred tax Expense for the year 595 17,090 Adjustments in respect of prior years 2,912 77,992 Effect of rate change (12,879) (3,654)
The standard rate of corporation tax in Bermuda is 0% whereas the effective rate of tax for the Group is 4.3% (2011: -22.5%). A reconciliation of the difference is provided below: Profit before tax 217,124 17,271 Tax calculated at the standard corporation tax rate applicable in Bermuda: 0% (2011: 0%) – – Effects of Group entities subject to overseas tax at different rates 31,594 21,620 Impact of overseas tax rates on: Effect of rate change (12,879) (3,654) Expenses not deductible for tax purposes 1,734 11,665 Tax losses for which no deferred tax asset is recognised 6,752 (2,651)
During 2011 the Group’s Lloyd’s corporate member, Hiscox Dedicated Corporate Member Ltd, changed its tax filing position on the timing of the deduction for tax purposes of member-level reinsurance premiums. Consequently, a prior year current tax adjustment arose and resulted in a closing current tax debtor at 31 December 2012. Equally, deductions for member-level reinsurance premiums which were previously deferred for tax, and formed part of the deferred tax balance had been taken in earlier years, and no longer formed part of the deferred tax balance. The effect of this change in current tax was a credit to the income statement of £81,287,000. The effect of this change in deferred tax was a charge to the income statement of £73,296,000. A permanent difference arises as a result of the difference in UK effective tax rate between the earlier and later years. This rebate was received during 2011 and 2012.
The amount of deferred tax asset expected to be recovered after more than 12 months is £25,608,000 (2011: £25,748,000).
As the fair value of scheme obligations exceeds the present value of the scheme assets, the scheme reports a deficit. The Group recognises actuarial gains and losses using the corridor method as defined in the Group’s accounting policy.
The amounts recognised in the Group’s income statement are as follows: Note
The actual return on scheme assets was a gain of £17,807,000 (2011: £3,392,000).
The movement in liability recognised in the Group’s balance sheet is as follows: Note
A reconciliation of the fair value of scheme assets is as follows: Opening fair value of scheme assets 140,517 144,056 Expected return on scheme assets 8,097 8,988 Difference between expected and actual return on scheme assets 9,710 (5,596) Contributions by the employer 1,800 1,700 Settlements with scheme members – – Benefits paid (3,264) (8,098) Expenses paid (347) (533)
A reconciliation of the present value of scheme obligations of the scheme is as follows: Opening present value of scheme obligations 155,685 146,737 Current service cost 347 533 Interest cost 7,548 7,705 Amendments – (3,037) Actuarial losses/(gains) 13,451 12,378 Benefits paid from scheme (3,264) (8,098) Settlements with scheme members – – Expenses paid (347) (533)
Gross liability recognised on balance sheet – – – – – – 3,801
Discount rate 4.5 4.9 Expected return on scheme assets 5.6 5.8 Inflation assumption (RPI) 2.9 3.1 Inflation assumption (CPI) 2.1 2.3 Pension increases 2.9 3.1
The triennial valuation carried out as at 31 December 2011 resulted in a deficit position of £19.7 million. The Group agreed to fund the £19.7 million deficit paying instalments over five years. During the year the Group made its first instalment of £1.8 million to the defined benefit scheme (2011: £1.7 million) which included £0.2 million for the expenses of the pension fund (2011: £0.2 million). 61% of any scheme surplus or deficit calculated is recharged or refunded to Syndicate 33.
The expected return on scheme assets is based on historical data and management’s expectations of long-term future returns. While management believes that the actuarial assumptions are appropriate, any significant changes to those could affect the balance sheet and income statement. Whilst an additional one year of life expectancy for all scheme members might be expected to reduce the present value of unfunded obligations at 31 December 2012 by approximately £4,650,000 (2011: £1,396,000), the Group considers that the most sensitive and judgemental assumptions are the discount rate and inflation.
CPI revalution in deferment is used for contracted-out members. Contracted-in members are linked to RPI as well as for all pension in payment increase.
The Group has estimated the sensitivity of the net obligation recognised in the consolidated balance sheet to isolated changes in these assumptions at 31 December 2012 as follows: Present value of unfunded obligations before change in assumption
Effect of a change in discount rate Use of discount rate of 4.75% 16,907 6,634 –
Effect of an increase in inflation Use of RPI inflation assumption of 3.15% 16,907 20,039 –
Profit for the year attributable to the owners of the Company (£000) 207,772 21,272 Weighted average number of ordinary shares (thousands) 391,592 383,602 Basic earnings per share (pence per share) 53.1p 5.5p
Weighted average number of ordinary shares in issue (thousands) 391,592 383,602 Adjustments for share options (thousands) 16,427 15,610
The final and interim dividends were either paid in cash or issued as a scrip dividend at the option of the shareholder. The final dividend for the year ended 31 December 2011 was paid in cash of £44,301,000 (2010: £31,803,000) and 562,194 shares for the scrip dividend (2010: 3,227,459).
The interim dividend for the year ended 31 December 2012 was paid in cash of £18,206,000 (2011: £18,709,000) and 1,196,214 shares for the scrip dividend (2011: 276,006).
Subject to shareholder approval at the forthcoming Extraordinary General Meeting on 28 March 2013, the Board proposes to pay 12p per ordinary share instead of a final dividend for the year ended 31 December 2012. Together with the interim dividend of 6p per ordinary share, this represents a total dividend for 2012 of 18p per ordinary share. In addition, the Board proposes to pay a special distribution of 38p per ordinary share. Such amounts will be paid by way of a B share scheme. A scrip dividend alternative will not be offered to shareholders.
33 Acquisitions On 6 August 2012, the Group acquired a 25% holding in Lark (2012) Ltd, ‘Lark’, for total consideration of £3,104,000. Lark is a specialist UK insurance broker. The company is treated as an associate of the Group from this date. No goodwill arose on acquisition.
During 2011, the Group sold its holding in Plexstar Insurance Services Ltd.
35 Contingencies and guarantees The Group’s subsidiaries are, like most other insurers, continuously involved in legal proceedings, claims and litigation in the normal course of business.
The following guarantees have also been issued: (a) Hiscox Ltd and Hiscox Capital Ltd have entered into deeds of covenant in respect of a subsidiary, Hiscox Dedicated Corporate Member
Limited, to meet the subsidiary’s obligations at Lloyd’s. The total guarantee given under these deeds of covenant (subject to limitations) amounts to £15 million (2011: £15 million) in respect of Hiscox Ltd and $350 million (2011: $350 million) in respect of Hiscox Capital Ltd. The obligations in respect of this deed of covenant are secured by a fixed and floating charge over certain of the investments and other assets of the company in favour of Lloyd’s. Lloyd’s has a right to retain the income on the charged investments in circumstances where it considers there to be a risk that the covenant might need to be called.
(d) The managed syndicates are subject to the New Central Fund annual contribution, which is an annual fee calculated on gross premiums written. This fee was 0.5% for 2013 and 2012. 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.
(e) As Hiscox Insurance Company (Bermuda) Limited is not an admitted insurer or reinsurer in the US, the terms of certain US insurance and reinsurance contracts require Hiscox to provide Letters of Credit or other terms of collateral to clients. In 2012, Hiscox renegotiated its Letter of Credit Reimbursement and Pledge Agreement with Citibank for the provision of a Letter of Credit facility in favour of US ceding companies and other jurisdictions. In addition, Hiscox entered into new Letter of Credit facility agreements with the Royal Bank of Scotland and Commerzbank AG during 2012. The agreements combined are a three-year secured facility that allowed Hiscox to request the issuance of up to US$400 million in Letters of Credit. Letters of Credit issued under these facilities are collateralised by US Government and Corporate Securities of Hiscox Insurance Company (Bermuda) Limited. Letters of Credit under this facility totaling US$126,579,000 were issued with an effective date of 31 December 2012 (2011: US$68,759,000 on a US$450 million facility).
36 Capital and lease commitments Capital commitments The Group’s capital expenditure contracted for at the balance sheet date but not yet incurred for property, plant, equipment and software development was £418,000 (2011: £326,000).
Later than one year and no later than five years Land and buildings 25,967 25,239 Office equipment 72 –
The total future aggregate minimum lease rentals receivable by the Group as lessor under non-cancellable operating property leases are as follows: No later than one year 584 373 Later than one year and no later than five years 613 246 Later than five years – –
Obligations under finance leases There were no finance lease arrangements in place at 31 December 2012 or 31 December 2011.
Finance lease interest expense for the year was £nil (2011: £1,430).
All companies are wholly-owned. The proportion of voting rights of subsidiaries held is the same as the proportion of equity shares held.
Hiscox Syndicates Limited 21,102 38,577 Hiscox Group insurance carriers 1,836 10,460 Hiscox Group insurance intermediaries (7,874) (14,845) Other Hiscox Group companies (8,321) (7,581)
The following amounts reflected in the income statement were transacted with Syndicate 33: 31 December
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