As the wise man said, “I dread success. To have succeeded is to have finished one’s business on earth, like the male spider, who is killed by a female the moment he has succeeded in his courtship. I like a state of continual becoming, with a goal in front and not behind.”
High Net Worth Personal Lines Fine Art, Kidnap and Ransom, Yachts, Bloodstock, High Value Household, Contingency, Personal Accident
People The profits and dividend have been made by all our staff and I want to thank them right at the beginning. Shareholders provide the capital to back the endeavours of the staff, and the staff use their brains to provide the best possible insurance products and service to make profits. Capital, people and goodwill are all we have in the insurance industry, and the people make the goodwill. We constantly need good people, so if you are, or if you know, a good person who wants to work in a vibrant, growing insurance company – please get in touch.
Ambition and strategy The ambition remains to build a highly respected and profitable specialist insurer. The strategy also remains the same – to underwrite internationally traded risks and London Market speciality business through the Hiscox Syndicate 33 at Lloyd’s, and balance it with European retail business written outside Lloyd’s, mainly through the Hiscox Insurance Company.
The strategy has not changed for many years. Syndicate 33 always wrote a retail book to complement the more volatile catastrophe book and still does. It was among the first to form a service company to underwrite retail business to regional brokers in 1989, and we were the first Lloyd’s company to acquire a general insurance company to underwrite retail business outside Lloyd’s in 1996.
There is no doubt that internationally traded business will come under pressure first, so we are increasing our emphasis on building the more stable retail book in and out of Lloyd’s. The Board allocates capital where the best use of it can be made. We have recently put the maximum resource behind Syndicate 33: now endeavours outside Lloyd’s could yield the best return.
A strong investment performance exceeded our long-term benchmark making the real pre-tax profit better than the operating profit by £6.3 million. Positive cashflow helped and total assets (shareholders’ funds and technical insurance funds) rose to £826.2 million. Net assets per share increased to 119.1p (2002: 101.8p) and earnings per share, on operating profit after tax, rose to
Bronek Masojada will cover the business in detail in his report which follows. I will just make a few comments.
Lloyd’s Syndicate 33 2003 was another exceptional year for Syndicate 33 with a total profit of £87 million on a gross income of £827 million (2002: £726 million). I cannot emphasise enough my admiration for Rob Childs and his team who have increased the income dramatically in the period following the ghastly experience of September 11, 2001 – not only showing great spirit in adversity, but also producing some of the best figures in the history of the syndicate. It was ever true that feast always follows famine in the insurance world for those who keep their nerve.
UK Retail UK Retail showed good steady growth of 18% to £174.6 million, on which it made a pre-tax profit of £18.5 million – a convincing vindication of our retail thrust.
“2003 WAS ANOTHER EXCEPTIONAL YEAR FOR SYNDICATE 33, PRODUCING SOME OF THE BEST FIGURES IN THE HISTORY OF THE SYNDICATE”
“THE EARNINGS FLOW FROM THESE GOOD YEARS WILL BE FELT FOR THE NEXT FEW YEARS”
The near future looks good as the rates are at a very profitable level and competition is sensible. Looking further out, I think that margins will stay healthier for longer than usual for three reasons. First, reinsurance is expensive and hard to buy, and it is the false comfort of cheap reinsurance which is the main seducer of underwriters into weak underwriting. Second, interest rates are still low, which keeps the focus on profitable underwriting. Third, old liabilities continue to eat at our established rivals whilst we are sheltered from all old liabilities by Equitas which reinsured all the liabilities of Lloyd’s prior to 1993. A word of praise is due to Equitas which continues to provide solid results considering the constant bad news on asbestosis and other latent disease losses.
We would not have to leave it open if the syndicate had one on-going capital supplier.
I hope that the Chairman Lord Levene will swing his eighteen inch guns round to the annual venture before long, and persuade the individual Names and the spread corporate investors to become sensible shareholders for their sakes and that of the market. They add a layer of cost to us which will be a serious handicap when margins get tighter.
Finally Much as I thrive on adversity, it is a pleasure to report a period of solid growth and dramatic increase in profitability after the traumas of the recent years. I know that commentators on our business want to see regular rabbits popping out of hats and surprising new initiatives. Our strategy remains the same and we laid the foundations for it years ago. In this strong market we are focusing hard on growing in our core areas and time spent on grand new projects or acquisitions would distract us. We never dismiss acquisitions, but they have traditionally been a graveyard in insurance. We search for good people and books of business to add to the quality of our existing business without bringing a legacy of problems. We continue to strive to maximise the use of technology to cut costs and widen our distribution net.
This is my 40th year at Hiscox and I feel that we have just begun. Following Warren Buffett’s rationale “it is hard to teach a new dog old tricks”, I hope that the Board and shareholders will allow me to enjoy the next few years (unfortunately not another 40) which I believe will be rewarding for all of us.
Group strategy Our strategy is to build a profitable leading speciality insurer. We are achieving this by focusing on specific markets, and then developing our position to become a meaningful player within them. We actively allocate our capital within our chosen markets where we see opportunities to earn the best returns. In the past year our strategy has allowed us to grow our controlled gross written premium by £141.9 million to £1,083.2 million – a growth of 15%. The majority of premium growth has come from the London Market divisions where
“OVER THE NEXT SEVERAL YEARS WE PLAN TO CONCENTRATE OUR GROWTH IN OUR RETAIL DIVISIONS BOTH INSIDE AND OUTSIDE LLOYD’S”
the movement in rates have been most favourable. Our retail businesses continue to perform well year-on-year and in 2003 Hiscox Insurance Company achieved a combined ratio of 93.6%.
Our future strategy is to build the retail constituent of the business as we believe that this brings balance to our business. Retail business underwritten either through Syndicate 33 or Hiscox Insurance Company now accounts for 40% of the Group’s controlled gross written premium. We plan to grow this business by deploying a mixture of technology-based distribution, international travel to visit clients and brokers and serving local markets through our office network.
“WE ARE FOCUSING ON SPECIFIC MARKETS, AND THEN DEVELOPING OUR POSITION TO BECOME A MEANINGFUL PLAYER WITHIN THEM”
– London Market Insurance This sector experienced the greatest premium rises following the tragic events of September 2001. We are now seeing some price reductions in the big ticket international property areas where price rises were the most marked. Rates for smaller and medium sized property coverages remain attractive. The small ticket property insurance conducted in the USA through managing general agents has been a real winner. During the January 2004 renewal season, we reduced the number of these relationships, to focus on those with the most expertise and professionalism. In certain marine and liability classes rates continue to rise and we will expand in these classes. In aggregate rates across the division’s business are attractive and good profits can be made, but we are alert to every nuance of change in rates, terms and conditions to ensure that we decline business rather than underwrite it on unattractive terms.
of account has not been closed due to the uncertainties that surround the final settlement of the WTC claim. We expect that we will have a much clearer picture by this time next year, and we plan to close the syndicate then.
To date the discipline shown in the markets in which our Lloyd’s business competes, the low interest rate environment and the expensiveness of reinsurance give us confidence that the hard market will last longer than many doubters believe.
GROUP FINANCIAL PERFORMANCE In 2003 the Group achieved a pre-tax profit of £83.4 million, an increase of 302% over the previous year. Operating profits, calculated before taking into account short term fluctuations in investment income and equalisation provisions, were £77.1 million, an increase of 123% over 2002. Earnings per share were 20.9p per share (2002: 6.9p per share). Our post-tax return on shareholders’ equity was
Our reserve is struck on a one loss scenario for the events of September 11.
– UK Retail The UK Retail business delivered a very strong performance. Gross written premium increased to £174.6 million (2002: £147.6 million), operating profits grew to £15.0 million (2002: £11.7 million) and the combined ratio improved to 90.3% (2002: 96.0%). This result was achieved through a combination of good underwriting and a catastrophe-free year. We have now completed our programme of building regional offices across the UK. Our presence in Glasgow, Leeds, Birmingham and Maidenhead gives us good geographical coverage from which to build and consolidate our position in the retail market. Despite the advances in modern communications, our experience has been that a local presence helps build relationships and market knowledge. During the course of the year we will be moving our fledgling Business Centre team from London to our newly acquired building in Colchester. We also expect to increase resources in the high net worth personal lines team. Part of the additional resources will be a new IT system which should enhance both our brokers’ and Hiscox’s efficiency. Hiscox Connect, our online and telephone
UK Europe* Guernsey** UK Europe Guernsey £m £m £m £m £m £m *Includes £850k of costs and renewal commission for Chubb acquisition.
– International Operations This segment covers business written in mainland Europe and through our insurance company in Guernsey. In aggregate, this business unit has had a reasonable year.
Hiscox Guernsey sustained its excellent performance. Our team continued to expand their book of business, particularly in the Fine Art area. In our operations in mainland Europe we have seen a combined ratio improvement and growth at the top line, but challenges remain. We are beginning to develop scale following acquisition of the Chubb high net worth renewal rights. Our operation in France is profitable and we are just below breakeven in Germany. Benelux is the only market where we currently lack sufficient scale. The market opportunities abroad are abundant and our goal is to be as successful in Europe as we are in the UK.
“THE MARKET OPPORTUNITIES ABROAD ARE ABUNDANT AND OUR GOAL IS TO BE AS SUCCESSFUL IN EUROPE AS WE ARE IN THE UK”
– Investment Management Our investment management business, Hiscox Investment Management, has two functions within the company. First and foremost it supervises the external managers who have day-to-day responsibility for the investment of our funds. Secondly, it manages a small range of specialist financial funds, including the Hiscox Insurance Portfolio. Our focus is purely on the financial sector where our detailed knowledge can add value to investment strategies.
In aggregate, our Group investments had a good year. Some effective asset allocation shifts into high yield corporate bonds and equities in the first quarter of the year were key drivers to the strong performance. We expect more subdued investment returns in 2004 as the high yield bond segment has been reduced.
People I would like to thank all our staff for their endeavours over the last several years. The results are testament to their hard work and energy. Unlike Shackleton who offered small wages, bitter cold and constant danger when he advertised for staff to join him on his famous journey, we seek to offer market-competitive rewards and stimulating and demanding roles within our firm. Overall our staff feel rewarded by this approach and we were delighted to be recognised externally by a second appearance in the Sunday Times ‘Top 100 Companies To Work For’, and to be rated top amongst financial services businesses.
Robert Simon Childs Director of Underwriting (Aged 52) Chairman of the Lloyd’s Market Association, Robert Childs has been Underwriter of Syndicate 33 since 1993. He joined the Group in 1986.
She is currently a non-executive director of Citron plc. She joined the Group on 12 August 1999.
Registrars Capita Registrars Northern House Woodsome Park Fenay Bridge Huddersfield HD8 0LA
There have been four main Hiscox plc Board meetings during the year. There has been a 100% attendance by all directors at these meetings. *The Nominations Committee did not meet during the year.
The Board of directors The Board comprises four executive directors and four independent non-executive directors, including a senior independent director. Brief biographical details for each member of the Board are provided on page 15.
The Risk Committee comprises the Chief Executive, the Group Finance Director, the Head of Compliance & Internal Audit, and a senior manager from each of the Lloyd’s and Retail arms of the Group. It meets monthly to monitor the risk management framework and reports directly to the Board and the Audit Committee.
The Nominations Committee comprises one executive director and all the nonexecutive directors. It meets as and when required to deal with appointments to the Board. It did not meet during the year.
– Credit risk: Management of credit risk is the responsibility of the Group Finance Director. The Board’s appetite for credit risk from clients, distributors and reinsurers is expressed in terms of limits and thresholds which drive the risk acceptance and credit control processes.
– Operational risk: The different types of operational risk are managed by different specialist senior managers. A wide variety of metrics and processes are used to monitor and control key operational risk matters such as projects, systems, compliance, distribution, outsourcing, competence and continuity. The Board, its subsidiary boards and committees receive regular reports on relevant operational risk areas.
This function also independently tracks and reports to the Audit Committee on the implementation of its own recommendations and those of the external auditors.
Risk Committee This high-level committee, chaired by the Chief Executive, is responsible for monitoring all the risk management activities operating within the organisation and reporting significant issues to the Board and the Audit Committee.
The committee receives information from Internal Audit as well as conducting its own reviews at strategic, tactical and operational levels.
This report sets out the remuneration policies for the Group’s senior executives, including the executive directors. It should be read in conjunction with the details of directors’ remuneration on pages 47 to 51 which form the audited part of this Remuneration Report. The members of the Remuneration Committee are identified on page 15.
None of the Committee has any personal financial interest (other than as shareholders), conflicts of interests arising from cross-directorships or day-to-day involvement in running the business. The Committee makes recommendations to the Board. No director plays a part in any discussion about his or her own remuneration.
The general philosophy underlying the Group’s remuneration policy for its senior executives, including executive directors, is the same as that applied to all employees, i.e. to attract and retain quality staff and to encourage and reward superior performance.
Remuneration elements There are four components to the remuneration package: base salary and benefits, annual cash bonuses, long term incentive arrangements and pensions.
Dec 96 Dec 97Jun 97 Dec 99Dec 98Jun 98 Jun 02 Dec 02Dec 01Jun 01Jun 99 Jun 00 Dec 00
Long term awards The Remuneration Committee believes strongly in the value of employee participation in long term award schemes so that their interests may be aligned with those of shareholders.
The Group has also implemented a performance share plan for senior executives to complement the existing long term incentive arrangements. No awards were made during the year under this plan. The targets applicable to the awards made in previous years were subject to the following operational earnings per share (“EPS”) growth target: a) The participants will receive 100% of the award if the Group’s operating EPS (note 15) over a fixed three year period has increased by 35% (“the maximum target”); b) No award will vest unless the increase in the Group’s operating EPS over the period equals or exceeds 15% (“the base target”) at which point 40% of the award will vest; and; c) An award will vest on a straight-line basis if the operating EPS growth is between the base target and the maximum target.
In order to ensure that the objective of aligning employee interests with shareholders is met, the Remuneration Committee regularly reviews the terms and conditions of share incentive grants made to employees. The latest review has resulted in the Remuneration Committee proposing the following changes to the terms and conditions applying to future grants of options under the Hiscox Approved Share Option Scheme and the Hiscox
Unapproved Share Option Scheme (the “Option Schemes”) and awards under the Hiscox Performance Share Plan (the “Performance Share Plan”): i) There will be no facility for the re-testing of performance conditions. The views of the Company’s shareholders and corporate governance best practice has changed since the original approval of the Option Schemes and the Performance Share Plan by shareholders and the re-testing of performance conditions is no longer considered appropriate. In the future any share grants will lapse if the performance conditions have not been satisfied at the end of the three year performance period.
iii) The vesting of any future grants of options under the Option Schemes and awards under the Performance Share Plan should be subject to the satisfaction of an average Return on Equity (“ROE”) performance requirement over the three year performance period rather than the current earnings per share (“EPS”) growth targets. The Remuneration Committee believes that this change better aligns the interests of employees with shareholders because: – ROE captures the efficiency with which the Company is using shareholder funds to generate earnings whereas earnings per share growth gives no indication of the level of return on the investment required to generate those additional earnings; – the Company operates in a highly cyclical business where earnings can fluctuate considerably which can have a distorting effect on EPS growth. Where EPS is used as a performance condition this can introduce an element of luck as to when in the cycle share grants are made which can operate to the disadvantage of both employees and shareholders. The Remuneration Committee believes that an average ROE performance requirement over the three year period smoothes out the cyclical fluctuations in earnings and ensures that over any given period shareholders will receive a minimum return on equity before share grants made to employees will vest; – the ROE target has been set at a level which in the opinion of the
Pensions The Hiscox Pension Scheme is an Inland Revenue approved occupational pension arrangement. This is a defined benefit arrangement and is non-contributory. There are two sections: the first section provides for benefits accruing at the rate of one-sixtieth for each year of service up to retirement age of 60 for employees, including former members of the Economic Insurance Holdings Limited Scheme who retain the right to a retirement age of 63. The second section provides for a pension at retirement age of up to two-thirds of final pensionable salary, accruing at the rate of the lower of: a) one-thirtieth for each year of service up to retirement age of 60, or b) an amount for each year of service up to retirement age of 60 based on a proportional accrual of years service to retirement age.
On 1 January 2001, Hiscox introduced a noncontributory defined contribution arrangement for all employees joining after that date, with contributions based on basic salary. All members are provided with death in service cover of up to four times basic salary.
The directors have pleasure in submitting their annual report and financial statements for the year ended 31 December 2003.
These also provide a means for the Company to listen to employees and involve them in taking the business forward.
Employees are encouraged to identify with the Company through performance related pay and bonus schemes, savings related share option schemes and executive share option schemes. They are also encouraged to socialise with each other and enjoy their work environment.
Political and charitable contributions The Group made no political contributions during the year (2002: £nil). Charitable donations totalled £36,250 (2002: £35,950) of which £25,000 (2002: £25,000) was donated to the Hiscox Foundation, a UK registered charity. The policy of the Hiscox Foundation is to assist and improve education, the arts and independent living for disabled and disadvantaged members of society.
Resolution 7, which will be proposed as an ordinary resolution, seeks to renew the directors’ authority to allot relevant securities pursuant to Section 80 of the Companies Act 1985. The authority contained in the resolution will be limited to the allotment of relevant securities to an aggregate nominal value of £4,855,172.85 representing 33.3% of the issued ordinary share capital as at 22 March 2004. This authority will terminate no later than fifteen months after the date of the Annual General Meeting. The directors presently have no intention of exercising this authority.
Resolution 8, which will be proposed as an ordinary resolution, seeks to obtain approval for the Remuneration Report as set out on pages 18 to 20 of this Report and Accounts.
Major interests in shares The Company has been notified of the following shareholdings of 3% or more in the ordinary shares of the Company as at 12 March 2004.
Resolution 10, which will be proposed as an ordinary resolution, seeks to change the performance conditions applying to future options granted under the Hiscox Unapproved Share Option Scheme. Full details of the changes are set out in the Directors’ Remuneration Report.
The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 1985. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
We review whether the statement on pages 16 and 17 reflects the Company’s compliance with the seven provisions of the Combined Code specified for our review by the Listing Rules, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures.
Equalisation reserves Our evaluation of the presentation of information in the financial statements has had regard to the statutory requirement for insurance companies to maintain equalisation reserves. The nature of equalisation reserves, the amounts set aside at 31 December 2003, and the effect of the movement in those reserves during the year on the general business technical result and profit before tax, are disclosed in note 10.
CONSOLIDATED PROFIT AND LOSS ACCOUNT TECHNICAL ACCOUNT – GENERAL BUSINESS FOR THE YEAR ENDED 31 DECEMBER 2003
Earned premiums, net of reinsurance Gross premiums written 7(c) 797,380 676,705 Outward reinsurance premiums (136,414) (260,561)
Change in the gross provision for unearned premiums (74,902) (95,366) Change in the provision for unearned premiums, reinsurers’ share (38,613) 64,351
Change in the provision for claims: Gross amount (61,545) 35,869 Reinsurers’ share (41,876) (108,193)
Comprising: Operating profit based on longer term investment return 7(c) 77,122 34,584 Short term fluctuations in investment return 11(a), 11(c) 8,792 (11,142) Movement in equalisation provision 7(c), 10 (2,506) (2,703)
Consolidated Statement of Total Recognised Gains and Losses for the year ended 31 December 2003 2003 Restated*
Profit on ordinary activities after tax 60,491 14,399 Exchange differences taken to reserves (155) (50)
Debtors Debtors arising out of direct insurance operations 19 251,026 199,372 Debtors arising out of reinsurance operations 53,878 98,412
The financial statements were approved by the Board of directors on 22 March 2004 and were signed on its behalf by: RRS Hiscox, Chairman
Cash at bank and in hand 129 20,182 Prepayments and accrued income 453 464
Net cash flow from operating activities 34(a) 23,588 22,134 Servicing of finance 34(d) (2,233) (1,709) Taxation recovered/(paid) (59) 777 Capital expenditure 34(d) (3,052) (3,569) Acquisitions and disposals 34(d) (50) – Equity dividends paid (10,744) (2,299)
Cash flows were invested as follows: (Decrease)/increase in cash holding 34(e) (25,608) 25,288 Net portfolio investment: Shares and units in unit trusts 34(e) 44,586 19,911 Debt securities and other fixed interest securities 34(e) 59,657 10,314 Deposits with credit institutions 34(e) (68,275) 68,265 Other investments 34(e) – (7)
Hiscox Dedicated Corporate Member Limited and the subsidiaries of Hiscox Select Holdings Limited underwrite as corporate members of Lloyd’s on the syndicate managed by Hiscox Syndicates Limited (the “managed syndicate”). In view of the several liability of underwriting members at Lloyd’s for the transactions of syndicates in which they participate, the attributable share of the transactions, assets and liabilities of the syndicate has been included in the financial statements.
3(a) Premiums For business written by the managed syndicate, written premiums comprise premiums on contracts incepting during the financial year. For all other business, written premiums comprise the premiums on contracts entered into during the accounting period, irrespective of whether they relate in whole or in part to a later accounting period. Written premiums are disclosed gross of commission payable to intermediaries and exclude taxes and duties levied on premiums.
Outstanding claims comprise provisions for the estimated cost of settling all claims incurred but unpaid up to the balance sheet date whether reported or not, together with related claims handling expenses. Anticipated reinsurance recoveries, and estimates of salvage and subrogation recoveries, are disclosed separately as assets.
The provision for outstanding claims for the Group is actuarially calculated utilising both Chain Ladder and Bornhuetter-Ferguson methods. There is close communication between the actuaries and underwriters and allowance is made for the rating environment.
Ultimate premium and claims amounts are projected both gross and net of reinsurance using reinsurance recovery rates based on historical experience, adjusted for the current reinsurance programme.
Adjustments are made within the reserving methodology to allow for expected significant movements to the figures not actually processed by 31 December 2003 and also to remove distortions in the historical claims development patterns from large claims not expected to reoccur in the future. The reserving methodology in relation to the
3(g) Investments – Group: Investments are stated at their current value. Listed investments comprise those quoted on the London and other International Stock Exchanges. These investments are stated at mid-market prices on the balance sheet date, or on the last stock exchange trading day before the balance sheet date.
3(l) Other intangible assets Other intangible assets are the cost of purchasing the Group’s participation in Lloyd’s insurance syndicates. In accordance with FRS 10, this capacity is capitalised at cost in the balance sheet and amortised over its useful economic life which the directors consider to not exceed 20 years. Provision is made for any impairment.
The Group has adopted the transitional disclosure requirements of FRS17 “Retirement Benefits”. This has had no material impact on the current year’s results.
All other leases are accounted for as “operating leases” and the rental charges are charged to the profit and loss account on a straight-line basis over the period of the lease.
3(q) Own shares The Company follows the accounting treatment required by UITF 37 for the purchase and sale of own shares. For own shares held in the Employee Share Ownership Plan Trust (ESOP), the Company has adopted the accounting treatment required by UITF 38. In accordance with UITFs 37 and 38, consideration paid for own shares is deducted in arriving at shareholders’ funds. No gain or loss is recognised in the profit and loss account or statement of total recognised gains and losses on the purchase, sale or cancellation of own shares. Consideration paid or received for the purchase or sale of own shares are shown as separate amounts in the reconciliation of movements in shareholders’ funds.
The Group has exposure to WTC losses on a number of non-liability accounts, in particular direct property, risk excess, catastrophe and aviation hull. There is no significant liability exposure.
As at 29 February 2004, Syndicate 33 had paid US$426 million of the gross loss and recovered US$279 million from reinsurers. This includes payment to Silverstein, on the basis of one occurrence, for the WTC property. The courts in the USA have not yet ruled on occurrence. Syndicate 33 has had no need to make a cash call. As part of our required funding of the US Trust Funds, a further US$22 million of cash advances and letters of credit had also been received from reinsurers at 29 February 2004. These recoveries of US$301 million at 29 February 2004 represent 88% of the expected total recoveries of approximately US$343 million. 89% of the remaining balance of approximately US$42 million is due from reinsurers rated A grade or better.
5 Prior year restatement During the year, the Company adopted UITF Abstract 37 relating to purchases and sales of own shares and UITF Abstract 38 relating to own shares held in an ESOP Trust. In order to comply with these Abstracts, it was necessary for the Company to make an adjustment to its opening reserves, including the creation of a separate reserve for Own Shares, and to restate the 2002 profit and loss account and closing balance sheet for 2002. The impact of these adjustments is to decrease opening shareholders’ funds for the year ended 31 December 2002 by £1,492,000. The impact on the profit and loss account and other reserves for the year ended 31 December 2002 is to increase profits by £424,000 and to debit the reserve for own shares by £102,000. The cumulative net impact on opening shareholders’ funds for the year ended 31 December 2003 is a reduction of £1,170,000. The impact of the adjustment on the basic earnings per share for 2002 is an increase of 0.3 pence per share. The impact on 2002’s net asset value per share is an increase of 0.1 pence per share. This restatement has been made in respect of 1,094,334 own shares held at 31 December 2002 by a subsidiary undertaking, Hiscox Holdings Limited, and 255,466 own shares held in an ESOP Trust. At 31 December 2003, the number of own shares held was 406,884 by Hiscox Holdings Limited and 255,466 in the ESOP Trust.
Movement in deferred acquisition costs (32,362) (1,525) (2,938) (36,825) 1,509 (582) (1,714) (787)
Net longer term investment return 21,779 7,281 2,631 31,691 18,726 8,729 2,111 29,566 *Before movement in equalisation provision.
“London Market” comprises the results of Syndicate 33 and the Hiscox Captive net of any business written between Group companies.
“UK Retail” comprises all of the UK retail underwriting results of Hiscox Insurance Company Limited.
“International Business” comprises the results of Hiscox Insurance Company (Guernsey) Limited, the results of the Hiscox overseas agencies and the underwriting results of the International retail business written by Hiscox Insurance Company Limited.
7 Segmental information continued b) Reconciliation of 100% level technical results to Group results
c) Profit on ordinary activities before taxation – by business division 2003 London
Investment return, based on longer term rate of return 20,671 7,281 2,631 30,583 16,803 8,729 2,111 27,643
Profit on ordinary activities before taxation 64,458 18,523 427 83,408 13,913 6,421 405 20,739 *Based on longer term investment return, before movement in equalisation provision and elimination of inter-company transactions.
“London Market/Group” comprises Hiscox plc’s share of the results of Syndicate 33, the results of the Hiscox Captive and the results of the non-underwriting entities of the Group, net of any business written between Group companies.
“UK Retail” comprises all of the UK retail business of Hiscox Insurance Company Limited, together with the results of the online agency business (Hiscox Connect Limited).
Net tangible asset value (before equalisation provision) 324,522 290,630 111.7 269,978 287,827 93.8 *The number of shares is the adjusted number of shares in issue as at 31 December of the relevant financial year.
Group Company Operations Total Restated Company Operations Restated 8 Movement in prior years’ claims provision
Net loss provision brought forward as at 1 January 232,363 93,227 6,536 332,126 157,897 Net payments during the year in respect of those provisions (78,888) (22,962) (38) (101,888) (37,884) Net loss provision carried forward in respect of claims provided at 1 January (178,511) (62,831) (7,181) (248,523) (125,337)
11 Investment return a) The total actual investment return before taxation comprises: 2003 Restated
Investment return on syndicate funds: Investment income 12,656 7,057 Realised gains/(losses) on investments 974 1,827
Investment return on insurance company funds: Investment income 9,955 8,354 Unrealised gains/(losses) on investments 6,248 (1,486) Realised gains/(losses) on investments (1,048) (171)
The longer term rate of investment return is based on a combination of historical experience and current expectations for each category of investments. The longer term investment return is calculated by applying the following yields to the weighted average of each category of assets.
The actual return on investments is compared below with the longer term investment return over the year ended 31 December 2003 and for the five year period from 1 January 1999 to 31 December 2003. Investment yield is calculated using the weighted average value of investments during the year.
Longer term investment return: Shares and units in unit trusts 2,674 6.0 – 6.0 2,931 6.0 5,605 Debt securities and other fixed interest securities 3,136 4.0 11,651 4.0 3,778 4.0 18,565
Actual investment return: Shares and units in unit trusts (2,442) (8.8) 138 10.1 (2,006) (9.6) (4,310) Debt securities and other fixed interest securities 2,101 7.7 7,008 5.2 7,162 6.7 16,271
11 Investment return continued d) Impact of a 1% change in the longer term rates of investment return on operating profit
The impact of a 1% change in the longer term rates of investment return for each category of asset by segment on operating profit is: Funds at Lloyd’s and other Insurance 2003 Corporate Assets Share of Syndicate Company Total
Funds at Lloyd’s and other Insurance 2002 Corporate Assets Share of Syndicate Company Total
Shares and units in unit trusts 279 14 186 479 Debt securities and other fixed interest securities 272 1,339 1,058 2,669 Deposits with credit institutions 572 419 390 1,381 12 Other income and charges
Operating profit is stated after charging: Loan interest payable 1,946 1,432 Amortisation of goodwill and Lloyd’s capacity costs 1,450 1,412 Finance lease charges 19 32 Operating lease charges (net of recharges to the managed syndicate) 1,972 1,750 Depreciation (net of recharges to the managed syndicate) on tangible fixed assets: – Owned assets 1,739 1,223 – Leased assets 74 138 Exchange losses/(gains) 3,698 (814) Increase/(decrease) in provisions for bad and doubtful debts (including share of syndicate) (221) 3,850 13 Auditors’ remuneration
Other non-audit services* Work performed in relation to: – Rights Issue/Open Offer – – 190 45% – Other corporate projects 45 15% – –
Their aggregate remuneration and associated costs were: Wages and salaries 32,011 24,012 Social security costs 3,915 3,195 Other pension costs 3,417 3,934
Adjusted basic, based on operating profit after tax (on longer term investment return) 55,929 289,790 19.3 23,822 210,095 11.3 Basic, based on profit on ordinary activities after tax 60,491 289,790 20.9 14,399 210,095 6.9 Diluted, based on profit on ordinary activities after tax* 60,491 293,462 20.6 14,399 214,152 6.7 *In accordance with FRS 14 “Earnings per share”, potential ordinary shares are only included in the calculation of diluted earnings per share to the extent that they are dilutive i.e. those that on conversion to ordinary shares would decrease net profit per share from continuing operations.
Earnings per share has also been calculated based on the operating profit after taxation as the directors believe this earnings per share figure provides a better indication of operating performance.
The reconciliation of basic earnings per share based on profit on ordinary activities after tax to adjusted basic earnings per share based on operating profit after tax is as follows: 2003 EPS EPS Restated p p
Diluted earnings per share has been calculated taking into account 2,579,000 (2002: 2,941,000) options under employee share schemes and 1,093,000 (2002: 1,116,000) options under SAYE share schemes.
Current tax UK corporation tax on profits of the period 3,998 4,531 Foreign tax 3 301
There is a deferred tax asset unprovided of £2,005,000 for the Group. £232,000 of the unprovided tax asset is in respect of the unrealised loss arising within the holdings of shares and units in unit trusts. The balance of £1,773,000 relates to losses of overseas companies.
Net book value at 31 December 2002 6,617 b) Other intangible assets £000
18 Investments – Group Short Freehold Leasehold Total a) Land and buildings £000 £000 £000
Market Market Market Market value Cost value Cost value Cost value Cost
Shares and units in unit trusts 26,981 29,464 – – 27,587 30,038 54,568 59,502 Debt securities and other fixed interest securities 27,496 26,945 172,312 170,168 98,463 98,064 298,271 295,177
The total market value of investments purchased and disposed of in the year was £806,002,000 (2002: £795,415,000) and £544,680,000 (2002: £634,345,000) respectively.
Assets held under finance leases account for £266,000 of the net book value of the assets above (2002: £434,000). The total depreciation for the period relating to these assets amounted to £122,000 (2002: £235,000).
For details of principal subsidiary undertakings, see note 33. Debt securities Shares and and other Deposits units in fixed interest with credit unit trusts securities institutions Other Total
Change in Group share of syndicate – 28,242 28,242 Movement in the provision 89,891 91,216 181,107
Exercise of approved and unapproved share options 1,657,354 83 Exercise of SAYE share options 458,521 23 27 Reconciliation of movement in shareholders’ funds Total
Prior year restatement (see note 5) – – – – – (1,339) 169 (1,170) (1,492)
Exercise of share options 106 1,756 – – – – – 1,862 164 Shares issued as part of Rights Issue – – – – – – – – 110,635 Unrealised gains/(losses) net of tax – – – – 1,432 – – 1,432 (1,620) Retained profit/(loss) for the year – – – – – – (1,955) (1,955) (1,631)
Notes The pension entitlement shown is that which would be paid annually on retirement based on service to the end of the year. The increase in accrued pension for the year excludes any increase for inflation. The transfer value has been calculated on the basis of actuarial advice in accordance with Actuarial Guidance Note GN11: Retirement Benefit Schemes – Transfer Values. No contractual contributions were due or have been paid by the directors during the year. RRS Hiscox retired on 3 January 2003 and elected to take a tax free lump sum in exchange for part of his entitlement. The figures above allow for his post commutation pension.
d) (i) Directors’ share interests 5p Ordinary Shares 5p Ordinary Shares 5p Ordinary Shares 5p Ordinary Shares
BE Masojada 2,317,808 – 1,679,535 – RS Childs 1,152,469 – 717,078 – SJ Bridges 205,283 – 97,500 –
Non-executive directors SH Hall 35,500 – 35,500 – AGC Howland Jackson 49,589 – 49,589 – DND Netherton 30,000 – 30,000 – C Franklin Engler 17,550 – 17,550 –
Hiscox Trustees Ltd is the trustee of the Hiscox plc Group Employee Share Ownership Plan Trust (ESOP) and at 31 December 2003 was interested in 255,466 (2002: 255,466) ordinary shares of the Company. The executive directors are potential beneficiaries of the ESOP and are also deemed to have an additional interest in these shares.
Subsequent to the year end, RS Childs exercised 10,999 options under the Employee Sharesave Scheme. No other transactions have taken place subsequent to the year end up to the date of this Report and Accounts.
No. of No. of Adjusted options at No. of No. of No. of options at exercise Market price Date from 1 January options options options 31 December price at date of which Expiry 2003 granted lapsed exercised 2003 £ exercise exercisable date
The interests of directors and employees under the UK and International Sharesave Schemes of the Group are set out below: No. of No. of Adjusted options at No. of No. of No. of options at exercise Market price Date from 1 January options options options 31 December price* at date of which Expiry 2003 granted lapsed exercised 2003 £/Euro exercise exercisable date
International Sharesave Scheme *International Sharesave Scheme exercise prices are denominated in Euros.
The Company has taken advantage of the exemptions conferred in UITF Abstract 17 “Employee share schemes” in relation to the charging of notional costs to the profit and loss account.
SJ Bridges 82,093 – – (82,093) – 1.35 1.53 13 Oct 99 1 April 03 31 Dec 09
BE Masojada 109,457 – – (109,457) – 1.35 1.54 13 Oct 99 1 April 03 31 Dec 09
Other employees 385,827 – – (385,827) – 1.35 1.51-1.55 13 Oct 99 1 April 03 31 Dec 09
The major assumptions used by the actuary were, in nominal terms, as follows: Rate of increase in salaries 3.80% pa 3.25% pa 3.50% pa Rate of increase in RPI linked pensions in payment 2.80% pa 2.25% pa 2.50% pa Rate of increase of pensions in deferment 2.80% pa 2.25% pa 2.50% pa Discount rate 5.40% pa 5.50% pa 6.00% pa Inflation assumption 2.80% pa 2.25% pa 2.50% pa
The impact on the net assets and retained profits of the Group at 31 December 2003 of adopting FRS17 would be: Net assets
Current position at 31 December 2003 329,837 Pension (asset)/liability on a SSAP24 basis (5,310) Pension asset/(liability) on a FRS17 basis (23,334)
During the year the Group has contributed to the scheme at the rate of 23.1% of pensionable salaries plus an additional contribution of £7,000,000. From 1 January 2004, the Group is making contributions to the scheme at the rate of 22.6% of pensionable salaries plus an additional contribution of £2,766,000 per annum.
Analysis of the amount that would have been charged to operating profit under FRS17
Current service cost 2,348 Past service cost – Gain/(loss) on settlements and curtailments –
Expected return on pension scheme assets 2,845 Interest on pension scheme liabilities (4,278)
30 Guarantees and contingencies i) The Company entered into a deed of covenant in respect of its corporate member subsidiaries, Hiscox Dedicated Corporate Member Ltd, Hiscox Select A to J Ltd, to meet the subsidiaries’ obligations to Lloyd’s. The total guarantee given by the Company under this deed of covenant (subject to limited exceptions) amounts to £108,167,046 (2002: Hiscox plc gave a guarantee of £80,248,738 and its subsidiary Hiscox Select Insurance Fund PLC gave a guarantee of £34,123,823). The obligations under these deeds of covenant are secured by a fixed and floating charge over certain of the investments and other assets of the Company in favour of Lloyd’s. Lloyd’s has a right to retain the income on the charged investments in circumstances where it considers there to be a risk that the covenant might need to be called and might not be met in full.
Operating leases which expire: From two to five years inclusive 62 47 109 681 – 681
‡Hiscox Holdings held 406,884 shares (2002: 1,094,334 shares) in Hiscox plc at 31 December 2003. In accordance with UITF Abstract 37, which came into force during 2003, the cost of these shares of £386,000 (2002: £1,039,000) has been taken to a separate reserve for own shares.
During 2003, 687,450 of these shares were issued to staff at a price of £1.069 as part of the employee performance share plans. This gave rise to a profit on disposal of £82,000 which has been credited to reserves along with proceeds of £16,000 received on the sale of rights received from the Rights Issue in relation to these shares. These gains on own shares have not been taken through the profit and loss account nor through the statement of total recognised gains or losses in accordance with UITF Abstract 37.
2003 Restated a) Reconciliation of operating profit to net cash inflow from operating activities £000 £000
Operating profit before taxation after interest, based on longer term investment return 77,122 34,584 Depreciation and amortisation of fixed assets 4,125 3,422 Increase in general insurance technical provisions, net of reinsurance 43,482 22,254 Increase/(decrease) in amounts owed to agents (2,591) 13,238 (Increase)/decrease in amounts owed by agents (11,295) (3,729) (Increase)/decrease in other debtors (24,979) (1,024) Increase/(decrease) in other creditors 482 2,721 Cash transferred (to)/from Lloyd’s business (note 34c) (7,712) (23,037) Realised and unrealised investment (gains)/losses (8,004) 4,519 Short term fluctuations in investment return 8,792 (11,142) Interest expense 1,946 1,432 (Profits)/losses relating to Lloyd’s business (56,516) (21,034) Other non-cash transactions (1,264) (70)
Net cash inflow from operating activities 23,588 22,134 2003 Restated b) Movement in opening and closing portfolio investments net of financing Notes £000 £000
Movement arising from cash flows 10,103 126,397 Movement in Lloyd’s business 34(c), 34(e) 182,711 95,975 Changes in market value and exchange rate effects 34(e) 10,042 (2,407)
Total portfolio investments net of financing at 31 December 824,983 622,127 c) Cash flows of the Lloyd’s business £000 £000
Premiums received, net of reinsurance 442,742 254,365 Claims paid, net of reinsurance (104,587) (80,382) Net portfolio investments 12,055 6,652 Other net cash flows (175,211) (107,697)
34 continued 2003 Restated d) Analysis of cash flows for headings netted in the cash flow statement £000 £000
Capital expenditure Payments to acquire tangible fixed assets (2,935) (2,470) Receipts from sales of tangible fixed assets – (398) Payments to acquire intangible fixed assets (117) (701)
Restated Cash flow business and currencies 2003 e) Movement in cash, portfolio investments and financing* £000 £000 £000 £000 £000
f) Scope of cash flow The consolidated cash flow statement excludes cash flows relating to underwriting on Lloyd’s syndicates.
Profit/(loss) on ordinary activities after taxation 60,491 14,399 (23,107) 5,430 84
Cash at bank and in hand 52,945 121,196 62,520 38,466 27,602
Notice is hereby given that the Annual General Meeting of Hiscox plc will be held at 1 Great St Helen’s London EC3A 6HX on 22 June 2004 at 11.00 am for the following purposes: Ordinary business 1) To receive the accounts of the Company for the year ended 31 December 2003 together with the directors’ and auditors’ reports thereon.
Special business To consider, and if thought fit, pass the following resolutions, of which resolutions 7 to 11 will be proposed as ordinary resolutions and resolutions 12 and 13 will be proposed as special resolutions.
Special resolutions 12) That the directors be empowered (in addition to all existing authorities) pursuant to Section 95 of the Act to allot equity securities (as defined in Section 94 of the Act) for cash pursuant to the authority conferred by Resolution 7 as if Section 89(1) of the Act did not apply to the allotment. This power will expire fifteen months after the date of the passing of this Resolution, but the Company may before such expiry make an offer or agreement which would or might require equity securities to be allotted after the expiry of this power and the directors may allot equity securities in pursuance of that offer or agreement as if the authority conferred by this resolution had not expired provided that this power is limited to: (i) allotments of equity securities where such securities have been offered (whether by way of a rights issue, open offer or otherwise) to holders of ordinary shares in proportion (as nearly as may be) to their existing holdings of ordinary shares but subject to the directors having a right to make such exclusions or other arrangements in connection with the offer as they deem necessary or expedient: (a) to deal with equity securities representing fractional entitlements; and
(ii) the allotment of ordinary shares for cash otherwise than pursuant to paragraph (i) up to an aggregate nominal amount of £728,275.90.
13) That the Company be authorised to purchase its own shares from the market. The authority will be limited to a purchase of own shares up to a maximum number of 15,000,000 shares and the cost of the shares will be limited to a minimum share price of £0.50 per share and a maximum share price of £2.50 per share. This authority will terminate no later than fifteen months after the date of the Annual General Meeting.
Copies of the register of directors’ interests and copies of any directors’ service contracts kept by the Company will be available for at least 15 minutes before the commencement of the meeting and will remain available during the continuance of the meeting to any person attending the meeting.
• Payment for final dividend 28 June 2004 *Shares bought on or after this date will not qualify for the dividend. **Shareholders must be on our register on this date to receive the dividend.
Enquiries Hiscox plc 1 Great St Helen’s London EC3A 6HX United Kingdom
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