Our strategy is: to use our underwriting expertise in London and Bermuda to write high-margin volatile or complex risks; to build our distribution in the UK, Europe and the US for our specialist retail products; to protect and nurture our distinctive culture and ethos by recruiting the best people, and by focusing on organic growth.
Total Group controlled income for 2010 3%Tech and media errors and omissions 17%Art and private client 4%Small property 31% Reinsurance 4% Large property 4% Global errors and omissions 6% Specialty – terrorism, specie, political risks, aerospace 9% Marine and energy 13% Local errors and omissions and commercial 9%Specialty –
Specialist retail businesses in the UK and Europe delivered good growth and doubled profits, again despite catastrophes.
The first ‘direct from insurer’ small business offering in the US launched with promising early results.
We are market leaders in many of our specialist areas and our customers value the expertise and cover we provide.
What our UK customers said:* 98% of business insurance customers were satisfied that we spoke to them in a clear way and avoided using financial jargon over 90% of our home insurance customers surveyed were satisfied with the way we settled their claim.
In Europe, a survey** of our brokers saw Hiscox rated the top insurer for superb service and the best claims service.
won Best Small Business Insurance award for the second year running at the Start Your
Lloyd’s only, or outside Lloyd’s in the UK only; it would have been easy to accept business only from brokers. As it is, since 1993, we have raised the capital to go from agent to principal, formed insurance companies, opened offices in
Our emphasis has always been on organic growth and start-ups which are tougher than the instant gratification of acquisitions, but mean that we build what we want. Investing is a word used by politicians to cover expenditure so I am reluctant to use it on our expansion in new areas, but new ventures take time to grow to profitability and I do consider them an excellent investment.
General insurance is a great business as there is an insatiable and constantly growing demand for it. What drives rates up and down is supply of capital in the industry, combined with management weakness.
A small example of management weakness: the premium for piracy of ships in the Gulf of
Aden can be calculated very roughly by relating the number of journeys through the Gulf to the number of successful kidnaps by pirates.
How can any management allow an underwriter to compete at a quarter of the rates of the established market? We have continued to quote the sensible rate which effectively leads to our doing less business. We will be back when our competitors realise their folly and withdraw from the market, as some already have.
In our 2010 Interim Statement I said that a half-year profit of £97.2 million was a testament to the strength of our business given the unnatural number of natural catastrophes (and one massive oil spill)
Our long-term strategy has been to build a balanced book of international businesses, retreating from any area when the competition gets foolish and advancing when we can charge the proper price. It seems an immutable rule of insurance that a big loss will hit the area of weakest rates, and this year has proved the rule.
We were underweight in Chile, New Zealand and Australia, had declined a significant insured in the oil spill and had pruned our UK household book, as our view was that each area was under-rated for just the catastrophes which have occurred.
The Board proposes to pay a final dividend shareholders on the register on 13 May 2011, making total dividends for the year of 16.5p (2009: 15.0p) an increase of 10%, in line with our policy of steady dividend growth. Subject to shareholder approval at the forthcoming
Annual General Meeting, a scrip dividend alternative to the cash dividend is to be offered to shareholders and the Company’s Dividend
Access Plan will be suspended. The balance of profit retained helps to increase the net asset value per share which, combined with dividend growth, underpins the share price. Growth in net assets per share will inexorably drive the share price up whatever rating Mr Market puts on our shares or the sector.
Directors, Richard Gillingwater and Robert (Bob) McMillan, to the Hiscox Ltd board. Richard
Independent Director replacing Andrea Rosen who was acting in the role following the death of Sir Mervyn Pedelty in January 2010. Bob
We are building a business with a brand based on trust. We strive to offer flexible, intelligent underwriting backed by great service which people will want to buy for peace of mind, knowing they will be made good in times of loss, and definitely not because it is the cheapest in the market. But our brand has to be built on the behaviour of our people, and I am very grateful to them for their excellent work which led us to be voted the most trusted insurer in the UK.
Fortunately the reinsurance market is more disciplined as are many of the areas in which we specialise. We will not compete to hold market share but will underwrite selectively regardless of top line. There is talk that a major market loss is needed to turn the market, and it would appear that some competitors are hanging on to business at the wrong rate hoping that a big bang somewhere will enable them to increase the price. I personally hope that there continues to be a constant attrition of medium losses and no major event so that discipline has to be learnt the hard way.
A deficiency in the insurance market has long been how the broker is remunerated. The clients should pay the broker, as they do their other advisers, for the advice given and the work done to transfer the risks. However, in our market, the insurer has traditionally paid the brokers through giving them a slice of the premium as brokerage or commission. This not only leads to obvious conflicts (the higher the premium, the bigger the pay; the placing of business with the highest payer of commission not the best insurer), but also made the clients believe that they got the services of brokers for nothing. As fees have properly grown to be the correct way to pay the broker, the broker fraternity have had to learn how to cost their services, and have been reluctant to charge the proper fee. They have also competed with each other to a ridiculous extent on fees. Not getting enough revenue as a result, they bring pressure on the insurers to make up the deficiency. This is a big issue at the moment, and I just hope that it will be resolved sensibly before a solution is imposed either by the law, or again by a crusading regulator.
In 2010 Hiscox made a pre-tax profit of £211.4 million, a good result considering the low returns on offer in the investment markets and the large number of catastrophes the industry faced. This result reflects the diverse strengths of our businesses: Hiscox London Market and Hiscox Bermuda showed outstanding discipline in their risk selection, while our specialist retail businesses in the UK, Europe and Guernsey strengthened their market positions by focusing on quality products sold at a fair price with a fast and friendly claims service; our US business continues to build critical mass in a difficult market.
2011 will test the industry further as prices remain under pressure and investment returns diminish. Our long-term strategy of balance and diversification has built a business designed for these conditions. Hiscox always plans for profit throughout the cycle, so our London Market and
Chilean earthquake. In each case disciplined underwriting, with a focus on margin over volume, led us to incur claims that were substantially below the market average. This discipline also led to a reduced premium income of £572.7 million (2009: £663.0 million), a trend that will continue in 2011.
The London Market business is managed through the following six product lines: Reinsurance: This remains our largest line of business, accounting for £234.9 million of premium income. This division took the brunt of Hiscox losses arising from
but the fact that it still made a profit shows the excellence of its people and portfolio.
It enjoys a great reputation in the market, which has enabled it to attract substantial quota share reinsurance support from other syndicates and major European and global insurers. This allows us to play an influential role in the market while keeping within our risk appetite. The important January 1 renewals were largely within our expectations, with modest reductions in pricing. Margins remain attractive but this line of business
Hiscox UK: Hiscox UK’s premium income grew by 7.6% to £327.0 million (2009: £304.0 million) and the combined ratio improved to 94.6% (2009: 97.9%). Profits remained virtually flat at £28.8 million (2009: £29.1 million) despite total catastrophe losses of £28 million arising from the
Hiscox Europe: Hiscox Europe had a tremendous year and made a profit of €11.9 million (2009: €0.4 million). The top line grew million), and it achieved a combined ratio of 97.4% (2009: 114.6%). This improvement will shrink gradually as we trim our exposures in response to lower rates.
Specialty: Our specialty lines benefit from operating in niche markets including personal accident, event cancellation and abandonment, terrorism, political risks and kidnap and ransom. Specialty continues to perform well and has enjoyed significant releases from reserves as recoveries were made on political risk claims.
Hiscox a specialist aviation team, who came on board in the second half of the year. Our goal is to build a material business, but only when conditions are right.
London Market to remain challenging. Generally market prices are under pressure, so it is only through increasingly selective underwriting that we can retain business at attractive prices.
was driven by a number of factors. First, we have made progress in breaking down the silos separating country units, ensuring that lessons learned in one market are rapidly transferred to the others. Second, our creation of a pan-European service centre in Lisbon has allowed us to take advantage of pan-European economies of scale.
Third, our decision to invest in the growth of our smaller commercial and technology businesses has paid off; and, fourth, the art and private client teams improved the quality of their book with the application of a more sophisticated pricing approach.
We also created a new specialty line that sells kidnap and ransom and related products from our local offices to local brokers and experimented with a direct offering in France. In aggregate, these actions drove growth, improved the loss ratio and reduced the expense ratio. Hiscox Europe is, I believe, now in a position to become a sustainable contributor to the Group.
Hiscox International comprises our businesses in Bermuda, Guernsey and the US. Aggregate premium written grew by 15.3% to £405.2 million (2009: £351.4 million), though profits dropped to £43.1 million (2009: £124.2 million).
(2009: $262.9 million). After a relatively lossfree 2009, profits were hit by the Chilean and New Zealand earthquakes. During the year our healthcare team established itself as a sensible player in the market. In 2011 we expect to see pricing in the reinsurance market remain under pressure and as a result our Bermuda business will shrink.
Hiscox Guernsey: The team showed great discipline in the piracy market, increasing prices in the face of increasing attacks, higher demands from pirates and the bizarre decision of some of our competitors to slash their prices. This inevitably led to a reduction in piracy revenues but Hiscox
Guernsey remained overall flat. Our fine art business had a very good year with modest growth in premiums and increased profits.
Our team in Guernsey also provides product leadership for kidnap and ransom across the Group, and their hard work during the year saw us consolidate our position as a worldwide leader in this field, with particular growth in Europe, the US
(2009: $162.1 million), but profitability was weak, in part due to some claims from longstanding large technology risks. In early 2009 we made a significant investment in the operation, believing that the financial crisis would allow us to recruit good people and that customers’ concerns about financial stability would lead to a re-rating in the market. We were correct in our first assumption and are very pleased with the strength of talent we attracted, but the effective guarantee given by the government to some of the weaker players meant that rather than a market re-rating, prices actually fell further. Our philosophy of underwriting for profit over volume meant that in this challenging pricing environment we did not reach the scale we expected.
This led to the sale of our animal mortality business and the closure of our Boston office. These swift but necessary actions will allow us to keep focusing on building a quality business in what remains a very difficult market.
A milestone was the launch of our US direct commercial business. Our test site opened for business in November 2010, selling errors and omissions, commercial general liability and property owners’ business to firms of zero to ten employees in 15 states. We expect to work on improving our processes and infrastructure during the first quarter of 2011 and once this is stable and working effectively we will support the business with a significant marketing investment.
It is only when a customer claims that you can live up to your brand promise. Our claims operations across the world were tested during 2010 and the team rose to the challenge. The year began with the challenges of Windstorm
We expect market returns in the near term, particularly from bonds and cash, to remain low. However, we prefer to preserve the balance sheet, accepting the lower income on offer, rather than to stretch further for yield in credit, duration or structured products.
insurer, according to a 2010 consumer study by the Reputation Institute. The reduction in our expense ratios in the UK and Europe reflects the improving efficiency of our processes. Over a four-year period this has dropped by 6%, making a substantial contribution to profits.
During 2010 we conducted a ‘lean’ process review of a number of areas. In each case we identified significant improvements, whether in the timeliness of our underwriting reviews, the quality of our data or the cost of our service.
The European insurance industry is in the midst of a tremendous change driven by the introduction of a new regulatory framework called Solvency II. The framework has three essential elements called ‘pillars’: Pillar 1 covers the amount of capital we must hold; Pillar 2 focuses on governance and risk management; Pillar 3 on transparency and disclosure. As a
Authority (FSA) and Lloyd’s in the UK, and other regulators in other jurisdictions. The BMA has applied to the EU for approval as an ‘equivalent regulator’ – effectively that European supervisors can rely on its judgement – and it is making great progress on meeting the various tests which will be applied to it. Success in achieving equivalence will mean that Hiscox is able to apply a single consistent framework across the Group.
We are therefore in constant communication with the BMA, the UK’s FSA and Lloyd’s of London on the path to implementing
The challenges of Solvency II arise from the fact that its rules are yet to be fully formulated, from the UK’s well known tendency to ‘gold plate’
Insurance is an industry where the decisions and actions by staff on the front line make a crucial difference to the performance of their businesses. We are lucky at Hiscox in having staff who not only enjoy this responsibility and the challenges which it brings, but who also make the right decisions for our business and its customers. Our exposure to Deepwater
The markets in which we operate have become progressively more challenging over the past three years, and we expect the trend of increasing competition and falling prices
These specialist retail businesses offer products that are clearly distinct from those of their competitors; they have developed reputations for excellent standards of service and for paying claims fairly. This combination will stand our employees, customers and shareholders in good stead.
Hiscox has a strong history of going out to find good business, rather than waiting in London for it to come to us. Hiscox underwriters have always travelled the world to build long-lasting relationships with local brokers that showcase our unique expertise. Previously we brought that business back to London, but over the past 15 years we have benefited from building a local presence in a handful of key regional markets.
Hiscox UK has grown its broker business by 360%; 69% of this growth has been generated from brokers based outside of London.
Munich, Armonk or Los Angeles. We now have 28 offices across the world, feeding us good new risks that help sustain our business.
In continental Europe brokers represent only 30% of our target market so we use a wider variety of distribution channels here. These include banks and composite insurers who are happy for us to cover their clients for their more specialist risks. This diverse choice allows clients to buy our products through their preferred sales channels and it has delivered steady growth over the past five years, including
We sell policies directly to professional services businesses with ten or fewer employees. These small firms tend to be uneconomic for brokers as they pay relatively little in premiums. Many have straightforward specialist needs so are better suited to getting their cover online. Hiscox
UK has been a great success – it currently insures 38,000 small businesses with an average premium of £400 – and we have high hopes for our US and
European direct operations. In the UK we also insure higher value household direct.
Hiscox aims to offer our products and expertise to new markets and customers via any route they would prefer.
Hiscox’s unique culture to a wider audience: bold, intelligent, freethinking, straightforward, responsible and with a passion for good customer service.
In 2010 we had the best reputation of any UK insurer, a consumer study by the
Reputation Institute found. This is tangible proof that our marketing investment is helping us to build a brand that customers know and trust. What we have learnt in the UK is guiding our efforts in building our new direct operations in the US
of the total number of staff, is informed of all the strategic decisions and facts and figures of the Group, which enables them to influence the direction and performance of the Group.
They also act as mentors to talented young people and ensure that we are operating in a way which is consistent with our values everywhere in the Group. In 2010, five new
The idea behind it is simple: if employees feel very engaged they are more likely to stay and deliver their very best for the company. Being able to measure levels of commitment enables
Hiscox to identify areas where it can improve performance and boost staff retention.
The survey is based on four key measurements: emotional commitment – the extent to which employees value, enjoy and believe in their work, in their manager, team and Hiscox; rational commitment – the extent to which employees believe Hiscox, their managers, and their teams have their best professional and development interests at heart; discretionary effort – employees’
The Group’s overall underwriting performance was relatively strong despite the impact of the large catastrophe losses and we report a combined ratio including the impact of foreign exchange of 89.3% (2009: 86.0%).
to £572.7 million (2009: £663.0 million) reflecting the cut back in those lines where rates are weak, in particular, the US property insurance lines and big-ticket professional indemnity.
Reinsurance purchased was higher than in the prior year as the segment benefited from a new quota share reinsurance arrangement which enabled an increase in underwriting capacity. Other reinsurance contracts which were renewed with commercial reinsurers during 2010 were on similar terms to the previous year and the quota share arrangement with
Gross written premiums rose by 8.0% to £454.7 million (2009: £421.0 million) reflecting growth in all core lines especially the professional and specialty commercial businesses.
compared to the prior year ratio of 53.4% despite the UK freeze losses experienced in the earlier and latter parts of the year and Windstorm
The combined ratio before the impact of foreign exchange improved by 8.5% to 94.8% from 103.3% in the prior year. This reflects not only the improved loss ratio but also benefits from the efficiencies achieved by the centralising of operations in Europe through the opening of the shared service centre.
As a result profit before tax for the year increased by 92.8% to £39.6 million (2009: £20.5 million).
Gross premiums written increased 15.3% to £405.2 million (2009: £351.4 million). The rise was driven by Bermuda taking advantage of attractive reinsurance rates and a new quota share arrangement coupled with our continued expansion in the US. Gross premiums written in Guernsey remained stable due to disciplined underwriting on the more volatile piracy lines.
The net claims ratio was heavily impacted by the losses on the Chile and New Zealand earthquakes together with the Australian floods during the year and as such declined by 20.2%
to 53.2% (2009: 33.0%). The impact on the combined ratio excluding foreign exchange was a deterioration of 17.8% to 96.4%.
An investment result of £16.3 million (2009: £8.9 million) was recognised on those assets controlled centrally. Total expenses, including certain foreign exchange items, fell by 49.5% to £4.4 million (2009: £8.7 million). Foreign exchange gains of £8.4 million (2009: £10.3 million) include the foreign currency impact on certain intra-group loan balances. Profit before tax of £7.3 million
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.
The inflow was mainly due to prompt settlement of premiums and reinsurance claims.
InsuranceBee Inc, a specialist errors and omissions insurance broker. The Group also disposed of its associate holding in HIM Capital
An area of increased investment for the Group during the year was on IT systems development.
The Group embarked on several new enhancement projects including the web platform for the US direct business and a management information project aimed at improving the quality and efficiency of financial information provided to management, inherently aiding the implementation of the new Solvency II regime.
Net cash outflows from financing activities for the year were £172.9 million (2009: inflow £1.6 million). The outflow is due to the repayment of the borrowing facility and the payment of dividends.
At 31 December 2010, $165 million had been drawn by way of Letter of Credit and £20 million by way of cash (2009: $225 million and $138 million respectively).
Solvency II is the new solvency regime for all insurers and reinsurers due to come into effect from 1 January 2013. It aims to create solvency requirements that are consistent across all member states and which better reflect the risks that insurers and reinsurers face.
The new regime is based on a three-pillar approach as follows: Pillar 1 – Quantitative requirements
Group’s risk management framework and an analysis has been done to identify those areas that require small incremental changes.
Full details of the requirements are continually developing and as such uncertainty remains over the full impact of the new regime. During the year, the Group made significant progress in achieving its objectives of implementing the three Pillars completing the QIS 5 exercise and enhancing existing corporate governance functions.
with the positive effect of good cashflow being partly offset by the decision to repay £138 million of Group borrowing during the period. The investment result, excluding derivatives, amounted to £98.8 million (2009: £182.8 million) equating to a return of 3.6% (2009: 7.2%).
Euro zone countries and fears of a slow down in Chinese growth. Faced with growing economic uncertainty in many developed countries, central bankers kept short-term interest rates at abnormally low levels and employed a variety of stimulatory tools, most noticeably quantitative easing, which drove government bond yields to the lowest level seen in recent times.
The likelihood of a prolonged period of easier monetary policy encouraged investors to seek better returns away from cash and short-dated government bonds. Consequently the investment return, whilst not matching that of 2009, has comfortably exceeded our initial expectations.
The bond portfolios produced substantial profits for the Group and comfortably outperformed the relevant government bond benchmarks. This was due principally to the level of corporate debt exposure which, having been increased in 2009, was retained throughout the majority of 2010.
Bond markets have not been without risk and in consultation with our managers we have studiously avoided sovereign bonds from peripheral Europe and have only modest bank debt exposure to a few national champions in Spain and Italy. In contrast to our positive appetite for credit, duration in government bonds has been kept short. With hindsight this approach has been too cautious but the fourth quarter of the year has highlighted the perils of longer dated bonds. Whilst it was a profitable period for the portfolio overall the sudden sell off in government bonds in the last few weeks of the year is a salutary reminder of how quickly the pendulum can swing.
Going into 2011 therefore, there is little margin for error given our desire to avoid losing money in any 12-month reporting period. Indeed, with the possibility of interest rates rising from artificially low levels and further volatility likely in equity markets, the chances of an investment loss in 2011 are statistically greater than they have been recently for anything other than a cash-like portfolio. We are therefore more intent than usual on conserving capital rather than chasing yields, particularly in the absence of any compelling and appropriate opportunities.
We do, however, believe they represent good value in the medium term and have a reasonable chance of providing a useful boost to the overall performance in 2011.
Bond currency split £2,779.7m Invested assets at a sovereign level in Europe and at a municipal level in the US. Having survived 2008 and prospered in the following two years, 2011 will be a year where the investment strategy is more defensively focused and mindful of our primary objective which is the preservation of capital to support the insurance business. This will leave us in a good position to take advantage of an investment world with higher interest rates and where the reward for taking risk is both greater and more apparent.
The risks associated with the core business of insurance and reinsurance represent some of the greater exposures, however the Group is exposed to a number of other risks and, as part of its risk management framework, the
The Group’s risk management framework, which extends to all aspects of risk including insurance, market, credit, operational, liquidity, reputational and strategic risks is headed by the Risk
Board and cascaded through the Group’s global operations as part of the business planning cycle and through the risk management framework, which encompasses the following committees: Group Underwriting Review Reinsurance Purchase Review Group Reinsurance Security Committee Cash Flow Review Group Broker Credit Committee Investment Committee Reserving Committees Business Continuity Committee.
Chief Executive Officer, Chief Financial Officer or Chief Underwriting Officer, apart from the
The Group primarily manages exposure to these risks through a clearly defined risk appetite which dictates the business plan and is realised through disciplined underwriting, close and continuous monitoring of exposures and aggregations and a prudent and disciplined reinsurance purchase programme to limit losses from risk concentrations. The Group adapts its business plan, target products and reinsurance programme to produce a well-diversified book.
Of critical importance is the quality of our underwriting models and risk aggregation capability. Incentives ensure that underwriting staff make sound and objective judgements that are aligned with the Group’s overall strategic objectives and risk appetite. Clear authority limits are also in place that are regularly reviewed and monitored. Policy wordings are reviewed regularly by specialists and legal experts in the light of legal developments to ensure that the Group’s exposure is restricted, as far as possible, to those risks identified at the time of policy issuance. The modelling and monitoring tools are used both in the underwriting process and by independent risk specialists. They are used to design the insurance and reinsurance business plans and control the business underwritten to ensure that the risk profiles of contracts match the exposures for which the plans were devised.
Group level to mitigate the effect of catastrophes and unexpected concentrations of risk. However, the scope and type of reinsurance protection purchased may change depending on the extent and competitiveness of cover available in the market. The purchase of reinsurance in turn exposes the Group to the risk that reinsurance protection against catastrophic and systemic insurance losses is inadequate or inappropriate.
At times, a minority of these groups may choose to underwrite for cash flow or market share purposes at prices that sometimes fall short of the break even technical price. The Group is firm in its resolve to reject business that is unlikely to generate underwriting profits.
The Group’s cycle management strategy and related modelling and monitoring are essential to ensure that it quickly identifies and controls any accumulating adverse effects of changes.
Mutualisation is a related risk arising from the phenomenon of pricing cycles in the industry.
The Group is required to contribute towards the obligations of other financial institutions who fail.
Treasury. Any such requests depend on the final level of claims from deposit holders (net of asset recoveries), the period of repayment demanded by HM Treasury and the ability of the banks to make such repayments. HM Treasury indicated that it will not demand any principal repayments for three years. The Group participates in many industry bodies, associations and task-force initiatives in order to monitor developments and influence their strategic direction. In particular, the continued involvement of the Group’s executives in the reshaping of the Lloyd’s market underscores that commitment.
The Group establishes provisions for unpaid claims, defence costs and related expenses to cover its ultimate liability in respect of both reported claims and incurred but not reported (IBNR) claims. These provisions take into account both the Group’s and the industry’s experience of similar business, historical trends in reserving patterns, loss payments and pending levels of unpaid claims and awards, as well as any potential changes in historic rates arising from market or economic conditions.
The provision estimates are subject to rigorous review and challenge by senior management from all areas of the business and the final provision is approved by the reserving committees. The provision is set above the expected or mean reserve requirement to minimise the risk that actual claims exceed the amount provided.
Technical funds are primarily invested 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.
These funds are maintained in the currency of the insurance policy to reduce foreign exchange risk.
Due to the short-tail nature of the Group’s insurance liabilities, the aim is not to match the duration of the assets and liabilities precisely.
A proportion of the Group’s assets are allocated to riskier assets (risk assets), principally equities.
Here, it is the Group’s philosophy to take a longterm view in search of acceptable risk-adjusted returns. The proportion of the Group’s funds invested in risk assets will depend on the outlook for investment and underwriting markets. An allocation within the risk assets is made to less volatile, absolute return strategies. This balances the desire to enhance returns against the need to ensure capital is available to support underwriting throughout any downturn in financial markets.
Europe, and movements in foreign exchange rates may have a material adverse effect on its financial performance and position. In addition the capital base of the Bermuda, Guernsey and US insurance companies is in US Dollars.
Further details of the Group’s investment profile and its management of currency risks are provided in notes 3 and 19 to the financial statements.
Liquidity risk is the risk of being unable to meet liabilities to customers or other creditors as they fall due, or the risk of incurring excessive costs in selling assets or having to raise finance in a very short period.
The majority of the Group’s cash inflows and outflows are routine and can be forecast well in advance. The primary source of inflows is insurance premiums whilst outflows are to policyholders for claims made. Cash flow is forecast on rolling weekly, monthly and quarterly basis depending on the source, and, in the event of a major catastrophe, such forecasting may be up to three years in advance. Free cash is invested according to the Group’s investment policy and cash requirements can normally be met through regular income streams (i.e.
premiums or investment income), existing cash balances or realising investments that have reached maturity.
The Group’s liquidity risk arises from large, unplanned cash demands and the principal source of risk is a major catastrophe resulting in a high value of claims. This could be exacerbated if a large portion of claims are funded pending recovery from a reinsurance partner. The Group plans for this risk through the following measures.
Taking into account the stress and scenario analyses, we maintain extensive borrowing facilities. These are held with a diverse range of major international banks in order to minimise the risk of one or more being unable to honour their commitments.
Given the nature of its activities, the Group is exposed to new and emerging risks. For example, a change in US legislation may result in unintended risks being underwritten, or may require us to cease business in certain US states.
Being able to identify and plan for unexpected events has become an increasingly important component of business cycle management.
Emerging risk identification and control is therefore a core part of risk management activity in relation to all aspects of the business, including underwriting, operations and strategy. Significant efforts are made, including obtaining external expertise, to try to identify any threats to the
The identification of emerging risks is a core agenda item in each Risk Committee. The
Group takes all reasonable steps to minimise the likelihood and impact of such events and to be prepared for their occurrence.
Hiscox generates considerable premium income through agents to whom binding authority is given to accept risks on behalf of Hiscox Group carriers. All binding authorities are strictly controlled through tight underwriting guidelines
Reinsurance Security Committee (RSC), which is chaired by the Chief Financial Officer.
The Group has taken significant steps to minimise the impact of business interruption that could result from a major external event.
A formal disaster recovery plan is in place for both workspace recovery and retrieval of communications, IT systems and data.
In the event of a major event, these procedures will enable the Group to move the affected operations to alternative facilities within very short periods of time. The disaster recovery plan is tested regularly and includes disaster simulation tests. Employees of the Group are widely located throughout the UK, Europe,
b n m a rk e t lo s s y e a r re tu rn p e ri o d
At Hiscox several core values guide our business. These are: to challenge convention, to act with integrity at all times, to have respect for all our business partners, to have courage, to do everything to the highest quality and to excel in the service we provide.
These values underpin a reputation we have earned for integrity and decent behaviour in everything we do, which we firmly believe is good for the morale of staff and for the results of the business.
In 2009 Hiscox UK conducted an environmental audit of its operations and calculated its carbon footprint with the help of independent consultants
Our sustainability efforts have also been recognised by the City of London Corporation, which gave Hiscox’s London office a Clean City
Hiscox regards insurance brokers as important stakeholders in our business, and we endeavour to have good relationships with them to create a competitive advantage in the marketplace.
In keeping with its policy of open and transparent communication, Hiscox reports both its half and full year results to its investors via a series of presentations as well as ensuring all relevant
Hiscox is dedicated to providing its customers with risk management advice to prevent distressing losses such as burglary and fire in the home. The Hiscox philosophy is that insurance is a promise to pay, so should a loss occur, it aims to fully support its customers and to pay their claims as soon as is possible.
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.
Competitive benefits packages contain health and fitness perks and opportunities for flexible working and career breaks. Watson Wyatt 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.
Hiscox is committed to training and developing its employees to help them maximise their potential. Each permanent member of staff is provided with a tailored personal development programme. Their training and development needs are reviewed twice a year, as well as their performance against clearly set objectives.
Employees are kept informed of business developments through formal briefings, team meetings, intranet bulletins, video conferences and other more informal routes. Management takes these opportunities to listen to staff and involve them in taking the business forward.
Habitat for Humanity, more than 60 employees from five locations in the USA participated in
Hiscox has a three-year commitment to support the Whitechapel Art Gallery, in the East
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. Hiscox staff continued their support of the Richard House Hospice and during 2010 raised over £29,500. The foundation has committed to support HART (Humanitarian
The geographical and currency splits are shown to the right. One of the main advantages of trading through Lloyd’s is the considerably lower capital ratios that are available due to the diversification of business written in Syndicate 33 and in Lloyd’s as a whole. For 2011
Syndicate 33 has a capital requirement ratio of approximately 45% of Syndicate capacity.
The size of the Syndicate is increased or reduced according to the strength of the insurance environment in its main classes. At present,
Syndicate, with the remainder owned by thirdparty Lloyd’s Names. Hiscox receives a fee and a profit commission of approximately 17.5% of profit on the element it does not own.
For the 2011 year of account, Syndicate 33’s capacity has been reduced from £1 billion to £900 million, primarily to reflect the reduced appetite in certain business lines.
The chart below right shows the gross premiums written of Syndicate 33 for the last ten years.
Hiscox-owned underwriting agencies. Syndicate 3624 has a capital requirement ratio of 73% of syndicate capacity. Total underwriting capacity of Syndicate 3624 has been increased to £250 million for the 2011 year of account reflecting the focus on the expansion in the US.
Cougar Syndicate 6104 was set up under a limited tenancy agreement for the 2008 year of account with an initial capacity of £34 million.
Cougar Syndicate 6104’s capacity was increased to £45 million. The Syndicate will continue for the 2011 year of account with a reduction in underwriting capacity to £37 million.
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 professional indemnity business.
Hiscox Insurance Company Limited has an A.M. Best rating of A (Excellent), a Standard
Company (Guernsey) Limited writes mainly kidnap and ransom and fine art insurance.
Company (Bermuda) Limited was set up as an expansion of the reinsurance operations of
Chicago, Illinois and is an admitted insurance company with licences in all 50 US states and the District of Columbia. Its main business was animal mortality insurance for cattle and horses.
These business lines were sold during the year and the Company wrote other property and liability coverage. From November 2010, the
(Excellent) by A.M. Best. At the end of 2010, net assets exceeded $58 million (2009: $56 million).
3% Other Europe 3% Belgium 4% Netherlands 8% Germany 12% France 70% UK
Richard Gillingwater joined Hiscox in December 2010. He is Dean of Cass Business School. He spent a decade at Kleinwort Benson, before moving to and eventually becoming joint Head of Corporate Finance for BZW, a division of Barclays Bank. When that became Credit Suisse First Boston, he became Chairman of European Investment Banking. In 2003 he became Chief Executive and later Chairman of the Shareholder Executive which manages the UK Government’s day-today relationships with government-owned businesses. He was awarded a CBE in the Queen’s Birthday Honours List 2008 in recognition of his services to the fi nancial services industry.
Robert Hiscox joined Hiscox in 1965 and has been Chairman of the main holding company of Hiscox since its incorporation in 1973. He was Deputy Chairman of Lloyd’s between 1993 and 1995. He is a Non Executive Director of Grainger Tru st plc, and AGICM Ltd.
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 Chairman of the Lloyd’s Tercentenary Foundation, a charity which supports research in areas of interest to the insurance industry.
Stuart Bridges joined Hiscox in 1999. He is a Chartered Accountant and has held posts in various fi nancial service companies in the UK and US, including Henderson Global Investors. During the year he was Chairman of the Business Advisory Board of the Institute of Chartered Accountants in England and Wales, a member of the Financial Regulation and Taxation Committee of the Association of British Insurers and is Chairman of the Lloyd’s Market Association Finance Committee.
Robert Simon Childs Chief Underwriting Offi cer and Chairman of Hiscox USA (Aged 59)
Robert (Bob) McMillan joined the Hiscox Ltd Board in December 2010. He spent 24 years with the Progressive Insurance Corporation where he served in various positions including National Director of Product Development, then claims before becoming National Director of Marketing. He led Progressive’s initiatives in multi-channel distribution, fi nancial responsibility based rating, and immediate response claims. He has received two United States patents related to motor insurance pricing. He has lectured on business innovation at the University of Virginia’s Darden School of Business and at the Harvard Business School. He has been a Non Executive Director of Hiscox Inc. since March 2007.
Daniel Maurice Healy Non Executive Director and Chairman of the Audit Committee (Aged 68)
Andrea Rosen joined the Hiscox Ltd Board in 2006. She is a Director of Alberta Investment Management Corporation and a Director of Emera Inc. She was previously Vice Chair of TD Financial Group and President of TD Canada Trust from 2002 to 2005. Prior to this she held various positions within the TD Financial Group from 1994 to 2002, including Executive Vice President of TD Commercial Banking and Vice Chair of TD Securities. She was Vice President of Varity Corporation from 1991 to 1994 and held various positions with Wood Gundy Inc. from 1981 to 1990.
Bankers Bank of Bermuda – HSBC 6 Front Street Hamilton HM 11 Bermuda
The corporate governance framework for companies registered in Bermuda is established by the Company’s constitution together with
Director. Biographical details for each member of the Board are provided on pages 32 to 33.
The Board continues to believe in the need for an Executive Chairman. 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.
It is supplied with appropriate and timely information to enable it to review business strategy, trading performance, business risks and opportunities. The Board of Hiscox Ltd met four times during the year. The Board considers all the Non Executive Directors to be independent within the meaning of the Combined Code and the new UK Corporate Governance Code as there are no relationships or circumstances which would interfere with the exercise of their independent judgement.
Decision, a copy of which can be found on the Group’s website: www.hiscox.com.
The Board retains ultimate authority for high-level strategic and management decisions including: setting Group strategy, approving significant mergers or acquisitions, approving the financial statements, declaration of the interim dividend and recommendation of the final dividend, approving Group business plans and budgets, approving major new areas of business, approving capital raising, approving any bonus or rights issues of share capital, setting Group investment guidelines, approving the Directors’
The Board has appointed and authorised a number of committees to manage aspects of the Group’s affairs. Each committee operates within established written terms of reference and each committee Chairman reports directly to the Board.
The Group Executive Committee, comprising the Executive Directors, meets monthly to raise and discuss topics such as Group strategy
Director) would represent the Committee in the selection process and she, as well as the
McMillan as a Non Executive Director. He has been a Non Executive Director of Hiscox Inc.
since March 2007 and the Board consider that the knowledge and experience gained from this role, together with Bob’s background in the insurance industry, are a significant benefit to the Board. Richard Gillingwater took over as
There are a number of committees within the Group which have been established to oversee specific risk areas, including underwriting, reserving, reinsurance credit, liquidity, broker credit, business continuity and investments. A Group risk committee ensures that risk management activities are effective and integrated. These committees comprise
Directors of the Company and its subsidiaries and relevant senior employees.
Directors. In addition the Non Executives periodically meet without the Chairman and
Chairman and the Executive Directors. No major issues concerning Board performance have been raised during the year.
The Executive Directors communicate and meet directly with shareholders and analysts throughout each year, and do not limit this to the period following the release of financial results or other significant announcements.
Dirk Stuurop resigned as a Director of Hiscox Ltd on 19 August 2010 and did not attend the Annual
The Company commissions independent research on feedback from shareholders and analysts on a regular basis following the
The Board has reviewed the effectiveness of internal controls during 2010, including financial, operational and compliance controls. The Board confirms there is an ongoing process for identifying, evaluating and managing the significant risks faced by the Company, which has been in place throughout the year and up to the date of approval of the Annual Report and Accounts and accords with the guidance in the document ‘Internal Control: Guidance for
This policy is consistent with the overall reward approach across the Group.
The sections in this report entitled ‘Annual cash incentives’, ‘Share incentive schemes’,
The Remuneration and Nomination Committee meets at least twice a year. The members of the Committee for 2010 were Andrea Rosen (Chairman), Daniel Healy, Dr James King,
Dirk Stuurop, Ernst Jansen, Gunnar Stokholm and Sir Mervyn Pedelty (until his death in January 2010 when Andrea took over as Chair).
The primary purpose of the Committee is to determine: the overall remuneration strategy, policy and cost for the Group; the levels and make-up of remuneration for the four Executive Directors; and the award of sizeable bonuses to individuals other than the Executive Directors.
The remuneration philosophy is to provide rewards that are competitive in every country in which Hiscox operates and that are consistent with our overall reward principles: competitive base pay; benefits which encourage health and security for the individual and his or her family but are not excessive and are consistent at all levels of the organisation; an annual bonus scheme which enables employees to earn attractive bonuses for generating good levels of return on equity; to encourage share ownership at all levels of the organisation and require it at senior levels; and contracts and notice periods that are in line with acceptable market practice but limit severance payments made on termination.
The elements of remuneration at Hiscox are: fixed reward (base salary, benefits and retirement benefits) and variable reward (annual cash incentives (bonuses) and share incentive schemes).
Fixed reward is made up of base salary, benefits and retirement benefits.
Towers Watson, and the competitive position of Hiscox salaries (based on the Towers Watson salary reports), in order to set the overall salary budget.
When approving Executive Directors’ salaries, the Remuneration and Nomination Committee takes into account rates of inflation, individual performance, and competitive positioning of salaries as informed by Towers Watson data and other publicly available reports.
The base salaries of the Executive Directors were not increased in 2010.
Hiscox’s remuneration policy is underpinned by the belief that a reasonable portion of total remuneration should be attained through incentive awards, thereby linking rewards directly with performance. The expectation is that successful performance (company and individual) should enable employees to achieve upper quartile total remuneration.
Bonus (PRB). The PPB is only available to junior and mid-level staff and is based entirely on individual performance ratings. It is designed to ensure that employees in these roles continue to be motivated to perform and the benefit is up to 10% of relevant salaries.
The PRB scheme is triggered when the business profits of the Group, based on the year’s pre-tax operating result, exceed a return on equity (ROE)
Hurdle Rate of return for the division’s allocated equity. For the large premium business divisions the calculation is the same as for the Group (described above). Effective 2011 the small premium business divisions will have bonus pools calculated by taking 15% of total profits once the Hurdle Rate has been achieved.
Once the overall bonus pool has been established, individual bonuses, including those for Executive Directors, are calculated based on the results of each business area and individual performance. The Remuneration and Nomination Committee determines the bonuses to be paid to the Executive Directors based on the performance of the Group and an assessment of individual performance.
In this way, the bonus scheme aligns the interests of Executive Directors and employees with shareholders.
The payment of larger bonuses is normally deferred over a three-year period as follows (with receipt dependent on continued service).
Early payment of deferred bonuses for reasons other than the above can only be made with the agreement of the Chief Executive, and the
The Remuneration and Nomination Committee believes that employees should be encouraged to own Hiscox shares so that they are aligned with the long-term success of the Company.
Awards under this plan were made in 2010 and the Remuneration and Nomination Committee has also agreed to make awards under this plan in 2011. The maximum annual award to an individual under the Performance Share
Formal shareholding guidelines are in place which mean that within five years of becoming an Executive Director, Hiscox Partner (the top 5% of employees in the company) or a member of a subsidiary board, the employee will be expected to own Hiscox shares valued at 100%
of salary for Hiscox Partners and members of subsidiary boards and 150% of salary for
Executive Directors’ reward packages are consistent with the rest of the business. The actual compensation paid to the four Executive
The Remuneration and Nomination Committee believes that using ROE as the long-term performance condition better aligns the interests of employees with shareholders as ROE best captures the efficiency with which the Company is using shareholder funds to generate earnings.
The Remuneration and Nomination Committee believes that an average ROE performance requirement over the three-year period smoothes out any cyclical fluctuations in earnings and ensures that over any given period shareholders will receive a minimum return on equity before awards granted to employees will vest.
ROE has been calculated as profit after tax and goodwill amortisation divided by shareholders funds at the beginning of each year, excluding foreign currency items on economic hedges and intragroup borrowings.
Remuneration of Executive Directors 2010 Basic salary 2009 Basic salary 2009 Benefi ts
The consent of the Chairman is required in any event. During the year, RRS Hiscox has been a Non Executive Director of Grainger Trust plc and was paid £35,000 for his services and of AGICM Ltd and was paid £10,000. During the year, RS Childs has been a Non Executive
Director of HIM Capital Limited and HIM Capital Holdings Limited until resignation on 21 September 2010 and did not receive any payment for his services. SJ Bridges and BE Masojada did not hold any Non Executive Director positions during the year.
RS Childs 78,958 – – (78,958) – 1.755 3.364 3-May-04 2-May-11
BE Masojada 169,195 – – (169,195) – 1.020 3.410 15-Jun-03 14-Jun-10
Other employees 151,679 – – (151,679) – 1.020 3.380-3.483 15-Jun-03 14-Jun-10
The interests of the Directors and employees under the UK and International Sharesave Schemes of the Group are set out below: Number of options at 1 January
RS Childs – 3,210 – – 3,210 2.826 – 01-May-13 01-Nov-13
RS Childs 4,147 – – (4,147) – 2.220 3.340 01-May-10 31-Oct-10
Senior Independent Director of Hiscox Ltd since redomicile. Andrea Rosen was subsequently appointed Chairman of the Remuneration and Nomination Committee and Acting Senior
Independent Director. Dirk Stuurop resigned on 19 August 2010. Richard Gillingwater and Robert (Bob) McMillan were appointed on 1 December 2010. On 28 February 2011, Richard Gillingwater was appointed Senior Independent Director.
The Group made no political contributions during the year (2009: £nil). Charitable donations totalled £1,109,000 (2009: £1,171,000) of which £500,000 (2009: £1,000,000) was donated to the Hiscox Foundation, a UK registered charity.
As at 28 February 2011, the Company has been notified of the following significant holdings of voting rights in its ordinary shares: Number of shares % of total
The Directors have pleasure in submitting their Annual Report and financial statements for the year ended 31 December 2010.
Executive’s report on pages 5 to 11. A description of the major risks can be found in the risk management section on pages 21 to 25.
The Group achieved a pre-tax profit for the year of £211.4 million (2009: £320.6 million). Detailed results for the year are shown in the consolidated income statement on page 49, and also within the Group financial performance section on pages 16 to 17.
Group is set out on pages 16 to 17. The financial position of the Group, its cash flows and borrowing facilities are included therein.
For this reason they continue to adopt the going concern basis in preparing the accounts.
(2009: 4.5p (net)) was paid on 28 September 2010 by Hiscox Ltd in respect of the year ended 31 December 2010. The Directors recommend the payment of a final dividend of 11.5p (net) per share (2009: second interim dividend 10.5p
It is envisaged that the Company will suspend indefinitely the Company’s Dividend Access Plan if the scrip dividend alternative is approved.
Company and the undertakings included in the consolidation taken as a whole; and the Directors’ report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
Finance Director, SJ Bridges. The statements were approved for issue on 28 February 2011.
Independent auditors’ report to the Board of Directors and the shareholders of Hiscox Ltd
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial
We conducted our audit in accordance with International Standards on Auditing.
Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements and the part of the
Directors’ remuneration report to be audited are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements and the part of the
The procedures selected depend on our judgement, including the assessment of the risks of material misstatement of the consolidated financial statements and the part of the Directors’ remuneration report to be audited, whether due to fraud or error.
In making those risk assessments, we consider internal controls relevant to the entity’s preparation and fair presentation of the consolidated financial statements and the part of the Directors’ remuneration report to be audited in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.
Company’s compliance with the nine provisions of the June 2008 Combined
Code specified for our review by those rules, and we report if it does not.
Board’s statements on internal control cover all risks and controls, or to form an opinion on the effectiveness of the
Reporting Standards as adopted by the EU; and the part of the Directors’ remuneration report which we were engaged to audit has been properly prepared in accordance with Schedule 8 to the
Consolidated statement of comprehensive income For the year ended 31 December 2010, after tax
The notes on pages 53 to 99 are an integral part of these consolidated financial statements.
Total equity (all attributable to owners of the Company) 1,266,114 1,121,286
for the year (all attributable to owners of the Company) – – – 11,729 178,800 190,529
Charges in respect of share based payments 9, 24 8,047 5,260
Changes in operational assets and liabilities: Insurance and reinsurance contracts 141,646 (58,366)
Effect of exchange rate fluctuations on cash and cash equivalents 508 (30,844)
The Hiscox Group, which is headquartered in Hamilton, Bermuda, comprises Hiscox
The Company is registered and domiciled in Bermuda and on 12 December 2006 its ordinary shares were listed on the London
The consolidated financial statements for the year ended 31 December 2010 include all of the Group’s subsidiary companies and the Group’s interest in associates.
The financial statements were approved for issue by the Board of Directors on 2 Significant accounting policies
(IAS). Insofar as a particular standard is not explicitly referred to, the two terms are used in these financial statements synonymously.
Compliance with IFRS includes the adoption of interpretations issued by the International
IFRS 4 does not specify the recognition or measurement of insurance contracts, transactions reported in these consolidated financial statements have been prepared in accordance with another comprehensive body of accounting principles for insurance contracts, namely accounting principles generally accepted in the UK.
In July 2010 the IASB published an exposure draft for Phase II of the Insurance Contracts project. The exposure draft was open for comment until 30 November 2010 and the IASB aim to issue a final standard by mid 2011.
In April 2010, the IASB published an exposure draft containing proposals on recognition, presentation and disclosure of defined benefit plans as currently defined by IAS 19. The exposure draft was open to comment until September 2010 and it is expected that a finalised standard will be issued during the first quarter of 2011.
The exposure draft proposes that the defined employee benefit cost is recognised immediately and removes the option of the corridor method which the Group currently applies. In addition, the exposure draft proposes that companies present the defined employee benefit cost as follows: service costs within employment expenses; net interest income or expense within finance costs; remeasurement within other comprehensive income.
The financial statements are presented in Pounds Sterling and are rounded to the nearest thousand unless otherwise stated.
The Group elected to apply the transitional arrangements contained in IFRS 4 that permitted the disclosure of only five years of data in claims development tables, in the year ended 31 December 2005 which was the year of adoption. The number of years of data presented was increased from nine in the prior year, to the maximum of ten in the current financial year.
Limited underwrites as a corporate member of Lloyd’s on the main Syndicates managed by Hiscox Syndicates Limited (the ‘main managed Syndicates’ numbered 33 and, 3624). In view of the several but not joint liability of underwriting members at Lloyd’s for the transactions of syndicates in which they participate, the Group’s attributable share of the transactions, assets and liabilities of these Syndicates has been included in the financial statements.
The Group manages the underwriting of, but does not participate as a member of, Syndicate 6104 at Lloyd’s which provides reinsurance to Syndicate 33 on a normal commercial basis. Consequently, aside from the receipt of managing agency fees, defined profit commissions as appropriate and interest arising on effective assets included within the experience account, the Group has no share in the assets, liabilities or transactions of Syndicate 6104, nor is it controlled. The position and performance of that Syndicate is therefore not included in the Group’s financial statements.
The consolidated financial statements give rise to goodwill nor gain or loss. Adoption of this standard had no impact on previous acquisitions or the financial position of the Group.
In April 2010, the IASB issued its annual amendments to International Financial
The following standards and interpretations have been issued but are not yet effective.
The amendment to IFRIC 14, The Limit on a Defined Benefit Asset, Minimum Funding
Requirements is effective for annual periods beginning on or after 1 January 2011.
The amendment provides guidance on assessing the recoverable amount of a net pension asset in a defined benefit scheme and permits an entity to treat the prepayment of a minimum funding requirement as an asset. Adoption of this standard will have no impact on the financial position of the Group.
(Amendment) is effective for annual periods beginning on or after 1 January 2011.
Adoption of this standard will have no impact on the financial position of the Group.
In assessing control, potential voting rights that are currently exercisable or convertible
The Group has financial assets and cash of over £2.78 billion. The portfolio is predominantly invested in liquid short-dated bonds and cash to ensure significant liquidity to the Group and to reduce risk from the financial markets. In addition the Group has significant borrowing facilities in place.
A review of the financial performance of the Group is set out on pages 16 to 17.
The accounting policies adopted are consistent with those of the previous financial year except as follows: The Group has adopted, for the first time, the following new and amended Standards and Interpretations issued by the IASB and endorsed by the EU as of 1 January 2010.
IFRS 3 (Revised) Business Combinations and IAS 27 (Amended) Consolidated and
January 2008 and are applicable for accounting periods commencing on or after 1 July 2009. IFRS 3 incorporates a number of changes in accounting for business combinations which will impact the amount of goodwill recognised and the results reported in the period of the combination and future reporting periods.
IAS 27 requires that a change in the ownership interest of a subsidiary, provided that control is maintained, to be accounted for as an equity transaction. As such, a transaction of this nature will no longer 2 Significant accounting policies continued 2.2 Basis of preparation continued
An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.
In respect of acquisitions that have occurred since 1 January 2004, goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets and contingent liabilities assured of the acquired subsidiary or associate at the acquisition date.
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the retranslation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as IAS 39 effective net investment hedges or when the underlying balance is deemed to form part of the Group’s net investment in a subsidiary operation and is unlikely to be settled in the foreseeable future.
The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the date of the transactions); and all resulting exchange differences are recognised as a separate component of equity.
Property, plant and equipment are stated at historical cost less depreciation and any impairment loss. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, include the Group’s share of the total recognised gains and losses of associates on an equity accounted basis from the date that significant influence commences until the date that significant influence ceases.
Intragroup balances, transactions and any unrealised gains arising from intragroup transactions are eliminated in preparing the consolidated financial statements.
In accordance with IAS 21, foreign currency gains and losses on intragroup monetary assets and liabilities may not fully eliminate on consolidation when the intragroup monetary item concerned is transacted between two Group entities that have different functional currencies. Unrealised gains arising from transactions with associates are eliminated to the extent of the Group’s interest in the entity.
(the ‘functional currency’). The functional currency of all individual entities in the Group is deemed to be Sterling with the exception of the entities operating in France, Germany, the Netherlands and Belgium whose functional currency is Euros, those subsidiary entities operating from the US and Bermuda whose functional currency is US Dollars, Hiscox
category at inception if it is managed and evaluated on a fair value basis in accordance with documented strategy, if acquired principally for the purpose of selling in the short-term, or if it forms part of a portfolio of financial assets in which there is evidence of short-term profit taking.
Assets that have an indefinite useful life are not subject to amortisation and are tested annually or whenever there is an indication of impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Objective factors that are considered when determining whether a non-financial asset
(such as goodwill, an intangible asset or item of property, plant and equipment) or group of non-financial assets may be impaired include, but are not limited to, the following: adverse economic, regulatory or environmental conditions that may restrict future cash flows and asset usage and/or recoverability; the likelihood of accelerated obsolescence arising from the development of new technologies and products; and the disintegration of the active market(s)
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.
The Group has classified financial assets as a) financial assets designated at fair value through profit or loss, and b) loans and receivables. Management determines the classification of its financial investments at initial recognition. The decision by the Group to designate all financial investments, comprising debt and fixed income securities, equities and shares in unit trusts and deposits with credit institutions, at fair value through profit or loss reflects the fact that the investment portfolios are managed, and their performance evaluated, on a fair value basis. Regular way purchases and sales of investments are accounted for at the date of trade.
Having considered the future prospects of the London insurance market, the Board believes that the Group’s ownership of syndicate capacity will provide economic benefits over an indefinite number of future periods.
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 2 Significant accounting policies continued 2.6 Intangible assets continued
of premium received on in-force contracts that relates to unexpired risks at the balance sheet date is reported as the unearned premium liability.
Claims and associated expenses are charged to profit or loss as incurred based on the estimated liability for compensation owed to contract holders or third-parties damaged by the contract holders.
DAC are amortised over the terms of the insurance contracts as the related premium is earned.
Contracts entered into by the Group, with reinsurers, under which the Group is compensated for losses on one or more insurance or reinsurance contracts and that meet the classification requirements for insurance contracts, are classified as insurance contracts held. Contracts that do not meet these classification requirements are classified as financial assets.
The Group had no derivative instruments designated for hedge accounting during the current and prior financial year (see note 2.17).
Where any Group company purchases the parent Company’s equity share capital
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.
The Group’s share of the results of associates is reported separately.
The accounting policies for insurance premiums are outlined below. Profit commission, investment income and other sources of income are recognised on an accruals basis net of any discounts and amounts such as sales-based taxes collected on behalf of third-parties.
Gross premiums written comprise premiums on business incepting in the financial year together with adjustments to estimates of premiums written in prior accounting periods. Estimates are included for pipeline premiums and an allowance is also made for cancellations. Premiums are stated before the deduction of brokerage and commission but net of taxes and duties levied. Premiums are recognised as revenue
(premiums earned) proportionally over the period of coverage. The portion significant reported financial difficulties of investment issuers, reinsurers and debtors; actual breaches of credit terms such as persistent late payments or actual default; the disintegration of the active market(s)
in which a particular asset is traded or deployed; adverse economic or regulatory conditions that may restrict future cash flows and asset recoverability; and the withdrawal of any guarantee from statutory funds or sovereign agencies implicitly supporting the asset.
The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units).
Plan assets exclude any insurance contracts issued by the Group. To the extent that a surplus emerges on the defined benefit obligation, it is only recognisable on the asset side of the balance sheet when it is probable that future economic benefits will be recovered by the scheme sponsor in the form of refunds or reduced future contributions.
Actuarial gains and losses are only recognised when the net cumulative unrecognised actuarial gains and losses for each individual plan at the end of the previous accounting period exceeds 10%
of the higher of the defined benefit obligation and the fair value of the plan assets at that date. Such actuarial gains or losses falling outside of this 10% corridor are charged or credited to income over the employees’
The Group provides sabbatical leave to employees on completion of a minimum service period of ten years. The present value of the expected costs of these benefits is accrued over the period of employment.
In determining this liability, consideration is given to future increases in salary levels, experience with employee departures and periods of service.
Group’s performance share plans, outlined in the Directors’ remuneration report together with the Group’s Save as You Earn (SAYE) schemes.
The defined benefit scheme closed to future accrual with effect from 31 December 2006 and active members were offered membership of the defined contribution scheme from 1 January 2007.
recognised as reinsurance assets. These assets consist of short-term balances due from reinsurers (classified within loans and receivables) as well as longer-term receivables (classified as reinsurance assets) that are dependent on the expected claims and benefits arising under the related reinsured insurance contracts.
(i.e. salvage). The Group may also have the right to pursue third-parties for payment of some or all costs (i.e. subrogation).
Estimates of salvage recoveries are included as an allowance in the measurement of the insurance liability for claims and salvage property is recognised in other assets when the liability is settled. The allowance is the amount that can reasonably be recovered from the disposal of the property.
At the commencement of the lease term, finance leases are recognised as assets and liabilities at the lower of the fair value of the asset and the present value of the minimum lease payments. The minimum lease payments are apportioned between finance charges and repayments of the outstanding liability, finance charges being charged to each period of the lease term so as to produce a constant rate of interest on the outstanding balance of the liability.
All borrowings drawn after 6 May 2008 are now measured at amortised cost at each balance sheet date thereafter using the effective interest method. Any difference between the remeasured amortised cost carrying amount and the ultimate redemption amount is recognised in the income statement over the period of the borrowings.
It recognises the impact of the revision of original estimates, if any, in the income statement, and a corresponding adjustment to equity, over the remaining vesting period.
The Group recognises a liability and an expense for bonuses and profit sharing, based on a formula that takes into consideration the profit attributable to the Company’s shareholders after certain adjustments. The Group recognises a provision where a contractual obligation to employees exists or where there is a past practice that has created a constructive obligation.
the non-life insurance industry generally, is fundamentally driven by a desire to originate, retain and service insurance contracts to maturity. The Group’s cash flows are funded mainly through advance premium collections and the timing of such premium inflows is reasonably predictable.
Additional unaudited information is also provided in the corporate governance and risk management sections of this
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.
The determination and finalisation of agreed taxation assets and liabilities may not occur until several years after the balance sheet date and consequently the final amounts payable or receivable may differ from those presently recorded in these financial statements.
Net asset value per share and return on equity measures, disclosed at notes 5 and 6, are likewise considered to be additional performance measures.
The Group’s overall appetite for accepting and managing varying classes of risk is defined by the Group’s Board. The Board has developed a governance framework and has set Group wide risk management policies and procedures which include risk identification, risk management and mitigation and risk reporting. The objective of these policies and procedures is to protect the Group’s shareholders, policyholders and other stakeholders from negative events that could hinder the Group’s delivery of its contractual obligations and its achievement of sustainable profitable economic and social performance.
Non Executive Directors and a clear upwards reporting structure back into the Board. The Group, in common with
The Group carries its financial investments at fair value through profit or loss with fair value determined using published price quotations in the most active financial markets in which the assets trade. During periods of economic distress and diminished liquidity, the ability to obtain quoted bid prices may be reduced and as such a greater degree of judgement is required in obtaining the most reliable source of valuation. Note 3.2 to the financial statements discusses the reliability of the
With regard to employee retirement benefit scheme obligations, the amounts disclosed in these consolidated financial statements are sensitive to judgemental assumptions regarding mortality, inflation, investment returns and interest rates on corporate bonds, many of which have been subject to specific recent volatility. This complex set of economic variables may be expected to influence the liability obligation element of the reported net balance amount to a greater extent than the reported value of the scheme assets element. For example, if the recent cuts in official UK interest rates are replicated with lower yields emerging in
UK corporate bond indices, a significant uplift may occur in the reported net scheme deficit through the reduced effect of discounting outweighing any expected appreciation in asset values. A sensitivity analysis is given at note 30.
2 Significant accounting policies continued 2.22 Use of critical estimates, judgements and assumptions continued
The Group compiles estimates of losses arising from realistic disaster events using statistical models alongside input from its underwriters. These require significant management judgement. Realistic disaster scenarios are extreme hypothetical events selected to represent major events occurring in areas with large insured values. They also reflect the areas that represent significant exposures for Hiscox. The selection of realistic disaster scenario events is adjusted each year and they are not therefore necessarily directly comparable from one year to the next. The events are extreme and as yet untested, and as such these estimates may prove inadequate as a result of incorrect assumptions, model deficiencies, or losses from unmodelled risks. This means that should a realistic disaster actually eventuate, the Group’s final ultimate losses could materially differ from those estimates modelled by management.
Underwriting Officer and a specialist central analysis and review team in order to monitor claim development patterns and discuss individual underwriting issues as they arise.
The Chief Underwriting Officer also holds weekly video conference meetings with this team to discuss interim underwriting matters.
However, the scope and type of reinsurance protection purchased may change depending on the extent and competitiveness of cover available in the market.
The delegation of underwriting authority to specific individuals, both internally and externally, is subject to regular review.
The main circumstances that result in claims against the reinsurance inwards book are conventional catastrophes, such as earthquakes or storms, and other events including fires and explosions. The occurrence and impact of these events are very difficult to model over the short-term which complicates attempts to anticipate loss frequencies on an annual basis. In those years where there is a low incidence of severe catastrophes, loss frequencies on the reinsurance inwards book can be relatively low.
3 Management of risk continued 3.1 Insurance risk continued accepted under limited circumstances.
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 pricing strategy for casualty insurance policies is typically based upon historical claim frequencies and average claim severities, adjusted for inflation and extrapolated forwards to incorporate projected changes in claims patterns.
The majority of the Group’s insurance risks are short tail and, based on historical claims experience, significant claims are normally notified and settled within 12 to 24 months of the insured event occurring. Those claims taking the longest time to develop and settle typically relate to casualty risks where legal complexities occasionally develop regarding the insured’s alleged omissions or negligence. The length of time required to obtain definitive legal judgements and make eventual settlements exposes the
Group to a degree of reserving risk in an inflationary environment.
The Group provides home and contents insurance, together with cover for art work, antiques, classic cars, jewellery, collectables and other assets. The Group also extends cover to reimburse certain policyholders when named insureds or insured assets are seized for kidnap and a ransom demand is subsequently met. Events which can generate claims on these contracts include burglary, kidnap, seizure of assets, acts of vandalism, fires, flooding and storm damage. Losses on most classes can be predicted with a greater degree of certainty as there is a rich history of actual loss experience data and the locations of the assets covered, and the individual levels of security taken by owners are relatively static from one year to the next. The losses associated with these contracts tend to be of a higher frequency and lower severity than the marine and other major property assets covered above.
Contracts are underwritten by reference to the commercial replacement value of the properties and contents insured.
Claims payment limits are always included to cap the amount payable on occurrence of the insured event.
The casualty underwriting strategy attempts to ensure that the underwritten risks are well diversified in terms of type and amount of potential hazard, industry and geography.
The Group directly underwrites a diverse range of property risks. The risk profile of the property covered under marine and major asset policies is different to that typically contained in the other classes of property (such as private households and contents insurance)
For this reason the Group accepts major property insurance risks for periods of mainly one year so that each contract can be re-priced on renewal to reflect the continually evolving risk profile.
A 10% upward movement is estimated to have an equal but opposite effect.
The fair value of debt and fixed income assets in the Group’s balance sheet at 31 December 2010 was £2,285 million (2009: £2,256 million). These may be analysed as follows: quotations in the most active financial markets in which the assets trade.
The fair value of financial assets is measured primarily with reference to their closing bid market prices at the balance sheet date. The ability to obtain quoted bid market prices may be reduced in periods of diminished liquidity. In addition, those quoted prices that may be available may represent an unrealistic proportion of market holdings or individual trade sizes that could not be readily available to the
Group. In such instances fair values may be determined or partially supplemented using other observable market inputs such as prices provided by market makers such as dealers and brokers, and prices achieved in the most recent regular transaction of identical or closely related instruments occurring before the balance sheet date but updated for relevant perceived changes in market conditions.
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.
Valuation of these securities will continue to be impacted by external market factors including default rates, rating agency actions, and liquidity.
The fair value of equity assets in the Group’s balance sheet at 31 December 2010 was £155 million (2009: £134 million).
The key financial risk for the Group is that the proceeds from its financial assets and investment result generated thereon are not sufficient to fund the obligations.
The most important entity and economic variables that could result in such an outcome relate to the reliability of fair value measures, equity price risk, interest rate risk, credit risk, liquidity risk and currency risk. The Group’s policies and procedures for managing exposure to these specific categories of risk are detailed below.
This information is used to update the reinsurance purchasing strategy. Individual operating units maintain records of the payment history for significant brokers and contract holders with whom they conduct regular business. The exposure to individual counterparties is also managed by other mechanisms, such as the right of offset where counterparties are both debtors and creditors of the Group.
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.
The Group structures the levels of credit risk accepted by placing limits on their exposure to a single counterparty, or groups of counterparties, and having regard to geographical locations. Such risks are subject to an annual or more frequent review. 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 with unrelated operations. Reinsurance is used to contain insurance risk. This does not, however, discharge the Group’s liability as primary insurer. If a reinsurer fails to pay a claim for any reason, the Group remains liable for the payment to the policyholder. The creditworthiness of reinsurers is therefore continually reviewed throughout the year.
(2009: £138 million). The Group has no other significant borrowings or other assets or liabilities carrying interest rate risk, other than the facilities and Letters of Credit outlined in note 35.
The Group has exposure to credit risk, 3 Management of risk continued 3.2 Financial risk continued
Amounts attributable to largest single counterparty 252,213 76,466 43,420 16,583 at 31 December 2009 Note AAA
The largest counterparty exposure within AAA rating is with the US Treasury. Catastrophe bonds included within ‘other/not rated’ are rated
Between one and two years 807,481 3,755 5,606 – 816,842 719,700
Property – marine and major assets 54,426 33,557 34,163 10,194 132,340 *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.
The Group operates internationally and its exposures to foreign exchange risk arise primarily with respect to the US Dollar, Pound Sterling and the Euro. These exposures may be classified in two main categories: 1) Structural foreign exchange risk through consolidation of net investments in subsidiaries with different functional currencies within the Group results; and 2) Operational foreign exchange risk through routinely entering into insurance, investment and operational contracts, as a Group of international insurance entities serving international communities, where rights and obligations are denominated in currencies other than each respective entity’s functional currency.
The Group has the ability to draw on its current borrowing facility in any currency requested, enabling the Group to match its funding requirements with the relevant currency.
Due attention is paid to local regulatory solvency and risk-based capital requirements.
Details of all foreign currency derivative contracts entered into with external parties are given in note 21. All foreign currency derivative transactions with external parties are managed centrally. Included in the tables below are net non-monetary liabilities of £142 million (2009: £240 million) which are denominated in foreign currencies.
The currency profile of the Group’s assets and liabilities is as follows: As at 31 December 2010 Sterling
Loans and receivables including insurance receivables 127,361 259,539 88,480 13,402 488,782
to support general trading activities; external Names – 27.5% of Syndicate 33’s capacity is capitalised by thirdparties paying a profit share of approximately 17.5%; Syndicate 6104 at Lloyd’s – with an approximate capacity of £45 million for the 2010 year of account (2009 year of account: £43 million). This Syndicate is wholly backed by external members and takes a pure 2009 year of account quota share of Syndicate 33’s international property catastrophe reinsurance account; gearing quota shares – historically the
The funds raised through Letters of Credit and loan facilities have been applied to support both the 2010 year of account for Syndicate 33 and the capital requirements of Hiscox Insurance
Syndicate also benefits from the Lloyd’s ratings of A (Excellent) from A.M. Best and A+ (Strong) from Standard & Poor’s.
The Group’s main capital performance measure is the achieved return on equity
(ROE). This marker best aligns the aspirations of employees and shareholders.
As variable remuneration, the vesting of options and longer-term investment plans the risk characteristics of the underlying assets. In order to obtain or maintain an optimal capital structure the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, assume debt, or sell assets to reduce debt.
The Board ensures that the use and allocation of capital are given a primary focus in all significant operational actions.
With that in mind, the Group has developed and embedded sophisticated capital modelling tools within its business.
These join together short-term and longterm business plans and link divisional aspirations with the Group’s overall strategy.
Group to utilise the Letter of Credit as Funds at Lloyd’s to support underwriting on the 2010, 2011 and 2012 years of account. The revolving credit facility has a maximum three-year contractual period for repayment.
Furthermore, estimates of sensitivity may become less reliable in unusual market conditions such as instances when risk-free interest rates fall towards zero.
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.
US household business, together with the income and expenses arising from the Group’s retail agency activities in the UK and in continental Europe.
It also includes an element of kidnap and ransom and terrorism written in Syndicate 33.
and Syndicate 3624 excluding the European errors and omissions, fire and aviation business. It also includes the results of the larger TMT business written by Hiscox Insurance Company
Limited and Syndicate 33. Corporate Centre comprises the investment return, finance costs and administrative costs associated with
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.
Directive (FGD), compels insurance companies that are members of a group to consider the solvency margin of their ultimate parent company. This consideration must refer to the surplus assets of the ultimate parent’s related insurers, reinsurers, intermediate holding companies and other regulated entities.
INSPRU and GENPRU. In accordance with these provisions, the parent company’s solvency margin consideration became a minimum capital requirement for the
The Group’s operating segments consist of four segments which recognise the differences between products and services, customer groupings and geographical areas. Financial information is used in this format by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The format is representative of the management structure of the segments.
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.
International segment and an element of kidnap and ransom and terrorism included in UK and Europe.
UK and Europe comprises the results of Hiscox Insurance Company Limited, all relate directly to ROE, this concept is embedded in the workings and culture of the Group. The Group maintains its cost of capital levels and its debt to overall equity ratios in line with others in the non-life insurance industry.
The capital requirements of an insurance group are determined by its exposure to risk and the solvency criteria established by management and statutory regulations.
(FSA) and Lloyd’s introduced a new capital regime that requires insurance companies to calculate their own capital requirements through Individual Capital Assessments
(ICA). Hiscox Insurance Company Limited and Syndicate 33 maintain ICA models in accordance with this regime. The models are concentrated specifically on the particular product lines, market conditions and risk appetite of each entity. If the FSA
Sourcebook (GENPRU) when completing the ICA return. The Group used its own integrated modelling expertise to produce the ICA calculations. The results mirrored those driving the existing internal capital setting process.
The strong control and risk management environment, together with the sophistication of the modelling, have produced a capital ratio below that suggested under the previous risk-based capital regime.
The following charges are included within the consolidated income statement: London Market
The claims ratio is calculated as claims and claim adjustment expenses, net of reinsurance, as a proportion of net premiums earned.
At Group level 1% change in claims or expense ratio 3,961 4,222 3,129 – 4,533 3,673 2,775 –
The segment assets and liabilities at 31 December and the capital expenditure for the year then ended are as follows: London Market
Intragroup assets and liabilities that cross segments are presented under the separate category heading ‘Intragroup items and eliminations’.
The Group’s operational segments underwrite business domestically in Bermuda and from locations in the UK and Ireland, the US,
Adjusted for the time weighted impact of capital distributions and issuance of shares (34,820) (20,429)
Debt and fixed income securities 39,464 4.2 9,586 2.6 22,078 3.6 11,106 4.7 82,234 3.7
Debt and fixed income securities 80,616 8.0 19,212 5.9 48,887 9.2 4,239 3.8 152,954 7.7
Equities and shares in unit trusts – – 14,769 28.5 7,668 17.5 3,923 12.3 26,360 20.7
Fees payable to the Group’s main external auditors, KPMG, its member firms and its associates (exclusive of VAT) include the following amounts recorded in the consolidated income statement: Group
Fees payable to the Company’s auditors for the audit of the Group’s consolidated financial statements 181 188
Exchange gains/(losses) classified as a separate component of equity 11,729 (69,589)
Opening balance sheet impact of non retranslation of non-monetary items (3,207) 50,525
Closing balance sheet impact of non retranslation of non-monetary items (1,251) (3,207)
Retranslation loss on managed net investment in Bermuda and Guernsey insurance operations – (5,207) (5,207)
Goodwill is allocated to the Group’s cash generating units (CGUs) identified according to country of operation and business segment.
Goodwill is considered to have an indefinite life and as such is tested annually for impairment based on the recoverable amount which is considered to be the higher of the fair value or value in use. Accumulated amortisation and impairment of goodwill relates to the amortisation charged prior to the Group’s adoption of IFRS.
The carrying value of this asset is tested for impairment based on its fair value which reflects the total costs to acquire the licences in each state.
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.
The amortisation charge for the year includes £2,196,000 (2009: £660,000) relating to capitalised internally generated software costs and is included in other expenses in the income statement.
The net book value of capitalised internally generated software costs at 31 December 2010 was £16,684,000 (2009: £7,368,000).
Assets with a net book value of £99,000 were held under finance leases (2009: £398,000). The total depreciation charge for the year in respect of assets held under finance leases was £24,000 (2009: £56,000) and is included in other expenses.
At 31 December 2010 there were no assets under development upon which no depreciation has yet been charged (2009: £1,906,000).
Associates incorporated in Europe up to 25% 943 436 1,379 30
The deferred amount of insurance contract acquisition costs attributable to reinsurers of £17,048,000 (2009: £17,584,000) is not eligible for offset against the gross balance sheet asset and is included separately within trade and other payables (note 27).
The amounts expected to be recovered before and after one year, based on historical experience, are estimated as follows: Within one year 236,541 217,278
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 gain during the year of £4,487,000 (2009: gain of £2,085,000) in respect of impaired balances.
Financial assets are measured at their bid price values, with all changes from one accounting period to the next being recorded through the income statement.
The Group’s investment in catastrophe bonds consists of £15.5 million (2009: £11.3 million), comprising of 13 catastrophe bonds (2009: 12)
Total investments 2,443,655 2,400,972 20 Loans and receivables including insurance receivables
The Group entered into both exchange-traded and over the counter derivative contracts for a number of purposes during 2010. 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 2010 all mature within one year of the balance sheet date and are detailed below: Derivative financial instrument liabilities included on balance sheet
During the current and prior year the Group entered into a series of conventional over the counter forward contracts in order to secure translation gains made on Euro, US Dollar and other non Pound Sterling denominated monetary assets. The contracts require the
Group to forward sell a fixed amount of the relevant currency for Pound Sterling at pre-agreed future exchange rates. The Group made a gain on these forward contracts of £1,522,000 (2009: £769,000) as included in note 7. The opposite exchange loss is included within financial investments.
The contracts have fixed maturity dates and are structured such that cash inflows are binary in nature and are triggered by the occurrence of specific natural events in specific geographical zones which cause pre-determined losses to the insurance industry in excess of a specified amount. The Group itself does not have to suffer losses to receive a payment once the industry loss strike amount on each contract has been reached. Consequently the contracts are not accounted for as insurance contracts in accordance with IFRS 4. The Group ceased trading in these instruments during the year, realising a loss on settlement of £5,000 (2009: £609,000).
In accordance with the Amendments to IFRS 7 Financial Instruments: Disclosures, the fair value of financial instruments based on a three-level fair value hierarchy that reflects the significance of the inputs used in measuring the fair value is provided below.
The fair value of shares in unit trusts are based on the net asset value of the fund as reported by independent pricing sources or the fund manager.
Included within Level 1 of the fair value hierarchy are government bonds, Treasury bills and exchange traded equities which are measured based on quoted prices.
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 are 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, including event linked future contracts.
Level 3 contains investments in a limited partnership and unquoted equity securities 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 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.
Employee share option scheme – proceeds from shares issued 91 2,413 –
Employee share option scheme – proceeds from shares issued 139 3,969 –
Performance share plan awards are granted to Directors and to senior employees. Up until 2005, share options were also granted.
The exercise price of the granted options is equal to the closing mid-market price of the shares on the day before the date of the grant.
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 £8,047,000 (2009: £5,260,000). This comprises charges of £7,619,000 (2009: £4,972,000) in respect of performance share plan awards and £428,000 (2009: £288,000) 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 2010 2009
The weighted average fair value of each share option granted during the year was 81.5p (2009: 85.5p). The weighted average fair value of each performance share plan award granted during the year was 340.4p (2009: 308.0p).
There were no transactions by the Company in its own shares during the year.
The amounts expected to be recovered and settled before and after one year, based on historical experience, are estimated as follows: Within one year 1,008,399 939,565
Estimates of ultimate claims are adjusted each reporting period to reflect emerging 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
The development of insurance liabilities provides a measure of the Group’s ability to estimate the ultimate value of claims.
The top half of each table, on the following pages, illustrates how estimates of ultimate claim costs for each accident year have changed at successive year ends.
This methodology produces optimal estimates when a large claims development history is available and the claims development patterns throughout the earliest years are stable. Chain Ladder techniques are less suitable in cases in which the insurer does not have developed claims history data for a particular class of business (e.g. in relation to more recent underwriting years or years of account). In these instances the Group’s actuaries make reference to the Bornhuetter-
Catastrophe events which are expected to impact multiple business units in the
In exceptional cases the required provision is calculated with reference to the actual exposures on individual policies. In addition, the reserves determined for the managed
For all risks, the Group uses several statistical methods to incorporate the various assumptions made into the ultimate cost of claims. There is close communication between the actuaries involved in the estimation process and the Group’s underwriters to ensure that all parties are aware of material factors relating to outstanding claims reserves.
An allowance is also made for the current rating and inflationary environment.
Outstanding claims reserves are actuarially estimated primarily using the Chain Ladder and Bornhuetter-Ferguson methods.
The Chain Ladder method may be applied to premiums, paid claims or incurred claims
The basic technique involves the analysis of historical claims development factors and the selection of estimated development factors based on this historical pattern.
Where losses in the earliest underwriting years or years of account have yet to fully develop an adjustment is made to the pattern to allow for further expected development. The selected development factors are then applied to cumulative claims data for each accident year to produce an estimated ultimate claims cost for each accident year.
Estimate of ultimate claims costs as adjusted for foreign exchange* at end of eight years later 461,216 255,949 – – – – – – – – 717,165 nine years later 446,087 – – – – – – – – – 446,087
Total at beginning of year (1,549,323) 328,890 (1,220,433) (1,767,728) 426,303 (1,341,425)
Exchange differences and other movements (22,186) 3,314 (18,872) 154,954 (31,509) 123,445
Claims reported and loss adjustment expenses (802,254) 131,697 (670,557) (800,307) 173,987 (626,320)
Total at end of year (1,706,404) 374,193 (1,332,211) (1,549,323) 328,890 (1,220,433)
Total claims and claim adjustment expenses (733,074) 162,077 (570,997) (508,238) 45,020 (463,218)
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
The standard rate of corporation tax in Bermuda is 0% whereas the effective rate of tax for the Group is 15.4% (2009: 12.5%). A reconciliation of the difference is provided below: Profit before tax 211,366 320,618
Tax calculated at the standard corporation tax rate applicable in Bermuda: 0% (2009: 0%) – –
Impact of overseas tax rates on: Effect of rate change (1,377) –
Tax losses for which no deferred tax asset is recognised 9,639 (130)
Sch 23 FA 2003 deduction and share based payments (1,803) (2,974)
The deferred tax asset relates to losses arising in overseas entities and is subject to overseas relief against future profits. Management considers it probable that taxable profits will arise in future in order to utilise the deferred tax asset.
UK deferred income tax assets and liabilities are calculated at 27%. The UK Government has indicated its intention to reduce UK tax rates year-on-year to 24% by the full year commencing April 2014, however at the balance sheet date, no such measures were substantially enacted.
12, all deferred tax assets and liabilities are classified as non-current.
The Company’s subsidiary, Hiscox plc, operates a defined benefit pension scheme based on final pensionable salary. The scheme closed to future accrual with effect from 31 December 2006 and active members were offered membership of a defined contribution scheme from 1 January 2007. The funds of the defined benefit scheme are controlled by the trustee and are held separately from those of the Group.
The gross amount recognised in the Group balance sheet in respect of the defined benefit scheme is determined as follows: Present value of scheme obligations 146,737 140,676
as an inflation measure used to determine the minimum statutory increases to be applied to the revaluation of deferred pensions and to the increase of pensions in payment.
Based on the rules of the Group’s defined benefit scheme, it is expected that CPI will be allowed to be used for revaluation in deferment but
RPI should be used for increases in payment. The Group has sought legal confirmation that this impact is limited to contracted out members.
The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit actuarial cost method. A formal full actuarial valuation is performed on a triennial basis, most recently at 31 December 2008, and updated at each intervening balance sheet date by the actuaries. The present value of the defined benefit obligation is determined by discounting the estimated future cash flows using interest rates of AA rated corporate bonds that have terms to maturity that approximate to the terms of the related pension liability.
The actual return on scheme assets was a gain of £14,516,000 (2009: £4,221,000).
Experience gains/(losses) on scheme assets 6,075 (3,678) (18,107) 75 6,480 10,764
Additional memorandum information at the end of the current and previous five accounting periods is presented below: Present value of scheme obligations 146,737 140,676 101,615 106,793 137,461 137,533
Present value of unfunded obligations/(surplus scheme assets) 2,681 22,285 (13,551) (20,783) 3,801 36,124
Gross liability recognised on balance sheet – – – – 3,801 16,677
The triennial valuation carried out as at 31 December 2008, resulted in a deficit position of £5.1 million and excludes the impact of the equalisation of scheme obligations. The cost of equalisation of scheme obligations of £11.8 million was recognised in 2009 and paid in full in 2010. The Group has agreed to fund the £5.1 million deficit paying instalments over four years. During the year the Group made a second instalment of £1.7 million to the defined benefit scheme (2009: £1.5 million). 61% of any scheme surplus or deficit calculated is recharged or refunded to Syndicate 33.
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 2010 by approximately £80,000 (2009: £4 million), the Group considers that the most sensitive and judgemental assumptions are the discount rate and inflation.
Basic earnings per share are calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of shares in issue during the year, excluding ordinary shares held by the Group and held in treasury as own shares.
Weighted average number of ordinary shares for diluted earnings per share (thousands) 393,726 387,814
Diluted earnings per share has been calculated after taking account of 13,996,961 (2009: 14,345,744) options and awards under employee share option and performance plan schemes and 665,060 (2009: 619,870) options under SAYE schemes.
Second interim dividend for the year ended: 31 December 2009 of 10.5p (net) per share 39,442 –
(b) On 5 July 2010 Hiscox plc entered into a new Letter of Credit and revolving credit facility with Lloyds TSB Bank, for a total $750 million which may be drawn in cash (under a revolving credit facility), Letter of Credit or a combination thereof, providing that the cash portion does not exceed $450 million. In addition the terms also provide that upon request the facility may be drawn in a currency other than
(c) Hiscox Insurance Company Limited has arranged a Letter of Credit of £50,000 (2009: £50,000) with NatWest Bank plc to support its consortium activities with Lloyd’s.
(e) As Hiscox Insurance Company (Bermuda) Limited is not an admitted insurer or reinsurer in the US, the terms of certain US insurance and reinsurance contracts require Hiscox to provide Letters of Credit or other terms of collateral to clients. On 27 February 2009,
Citibank for the provision of a Letter of Credit facility in favour of US ceding companies. The agreement was a three-year secured facility that allowed Hiscox to request the issuance of up to US$450 million in Letters of Credit. Letters of Credit issued under these facilities are collateralised by pledged US Government Securities of Hiscox Bermuda. Letters of Credit under this facility totalling US$89,110,000 were issued with an effective date of 31 December 2010 (2009: US$109,000,000).
The Group’s capital expenditure contracted for at the balance sheet date but not yet incurred for property, plant and equipment
The aggregate minimum lease payments required by the Group under non-cancellable operating leases, over the expected lease terms, are as follows: No later than one year Land and buildings 7,505 5,683
Later than one year and no later than five years 344 1,053
Finance lease interest expense for the year totalled £8,806 (2009: £20,000).
Hiscox Europe Underwriting Limited Insurance intermediary Great Britain *Held directly. **Hiscox Holdings Limited held 54,560 shares in Hiscox Ltd (2009: 54,560) at 31 December 2010.
Details of the remuneration of the Group’s key personnel are shown in the Directors’ remuneration report on pages 37 to 45. A number of the Group’s key personnel hold insurance contracts with the Group, all of which are on normal commercial terms and are not material in nature.
Hiscox Syndicates Limited, a wholly owned subsidiary of the Company, received management fees and profit commissions for providing a range of management services to Syndicate 33.
Amounts receivable from Syndicate 33 at 31 December excluding profit commission accrued 13,163 964
Significant flooding in Queensland, Australia, dominated the end of 2010 and beginning of 2011. The Group has provided for £10 million in relation to the net losses which it believes were incurred pre 31 December 2010. The start of 2011 also saw a severe tropical cyclone,
Financial assets carried at fair value 2,459,107 2,413,300 2,081,772 1,747,827 1,241,910
To request a copy of the 2010 Hiscox corporate brochure visit www.hiscox.com