Contents 02 Highlights 03 Who we are 04 Board of Directors 08 Chairman’s statement 10 Chief Executive’s report 16 The Hiscox business at a glance 18 Hiscox distribution 20 The Hiscox brand and values 21 Hiscox people 22 Risk carriers 26 Group financial performance 29 Cash flow and liquidity 30 Capital 32 Risk management 36 Corporate responsibility 38 Corporate governance 41 Directors’ remuneration report 44 Directors’ report 48 Statement of Directors’ responsibilities 49 Independent auditors’ report to the shareholders of Hiscox plc 50 Consolidated income statement 51 Consolidated balance sheet 52 Company balance sheet 53 Consolidated statement of changes in equity 54 Company statement of changes in equity 55 Cash flow statement – Consolidated Group 56 Cash flow statement – Company 57 Notes to the financial statements 101 Five year summary 102 Notice of Annual General Meeting 104 Definition of insurance terms
• Strong performance from regional specialist businesses, including a profit before tax of £40.4 million from Hiscox UK and second year of profit for Hiscox Europe.
• Strong management team in place with new appointments in Europe, UK and USA
• Successful launch of broker e-trading to complement the good growth in direct business.
• Hiscox Bermuda well positioned to take advantage of favourable rates
• The structure of the business and its distribution channels are now both in place and working to drive the growth of the Group for the next decade.
A leading specialist insurer with expertise in covering a wide range of specialist personal and business risks, and offices and customers around the world.
The Hiscox ambition is to build a highly respected business, recognised for the quality of its people, products and services, and the robustness of its financial performance.
Robert Ralph Scrymgeour Hiscox Chairman (Aged 63) Robert Hiscox joined the Group in 1965 and has been Chairman since 1970. He was Deputy Chairman of Lloyd’s between 1993 and 1995. He is a Non Executive Director of Grainger Trust plc.
Stuart John Bridges Group Finance Director (Aged 45) Stuart Bridges is a qualified chartered accountant, who joined the Group in 1999. He has held posts in various financial service companies in the UK and US, including Henderson Global Investors. His experience spans a broad spectrum of corporate finance ranging from mergers and acquisitions to banking, fund management and venture capital.
He was a member of the Financial Reporting Council’s review group on The Turnbull Guidance on Internal Control.
Robert Simon Childs Chief Underwriting Officer Chief Executive Officer of Hiscox Bermuda Chairman of Hiscox USA (Aged 54) Robert Childs joined the Hiscox Group in 1986, served as the Active Underwriter of the Hiscox Lloyd’s Syndicate 33 between 1993 and 2005, and is the Group’s Chief Underwriting Officer. Robert was Chairman of the Lloyd’s Market Association from January 2003 to May 2005.
Sir Mervyn Pedelty Non Executive Director (Aged 57) Sir Mervyn Pedelty was previously Executive Director and Chief Executive of The Co-operative Bank plc (from 1997 to 2004) and of Co-operative Financial Services Limited and the Co-operative Insurance Society Limited (from 2002 to 2004). He was also a Director and deputy chair of Unity Trust Bank plc (from 1997 to 2004) and a Director of the Association of British Insurers (from 2002 to 2004). He is also a former Council Member of the British Bankers’ Association. His other current appointments include: Chairman of the FTSE4Good Policy Committee, a Director of Business in the Community Limited, a Director of Symphony Hall (Birmingham) Limited and a Senior Industry Adviser to Permira Advisers Limited. He joined the Group on 1 July 2005.
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Our past investment in regional expansion has helped the Group make a very satisfactory profit despite the many catastrophes in 2005. Our new investments in Bermuda and the USA give us an even wider geographic spread, with growing books of regional specialist business to balance our internationally traded business. I am confident of further profitable growth.
The gross premium income underwritten was £1,105.0 million (2004: £1,110.9 million), of which £861.2 million (2004: £816.6 million) was applicable to Hiscox plc.
Dividend As recommended at the time of our Rights Issue, in November 2005, the final dividend, subject to shareholders’ approval, will be 4.75p per share (2004: 3.5p per share) making a total distribution for the year of 7p (2004: 5p), an increase of 40 per cent on the previous year. This will be paid on 26 June 2006 to shareholders on the register on 21 April 2006. We have always had a policy of steadily increasing the dividend, but it had fallen behind the growth of the Company in recent years. With a little persuasion from our long-term institutional shareholders, we also agreed that we would target a total dividend of 9p for 2006 subject to adequate profitability and shareholders’ approval.
Robert Childs, our Chief Underwriting Officer, has moved to Bermuda which shows his and our commitment to the new venture. He will also oversee our new project to underwrite more regional business in the USA through our new operation Hiscox USA led by Ed Donnelly.
Going forward, the Global Markets account written in London will be complemented by Hiscox Bermuda which will widen the spread of the account. Our reinsurance and big ticket account will always be vulnerable to extreme weather catastrophes and any run of substantial losses. This is why both in London and Bermuda, and throughout the rest of the Group, we seek to write a balancing account of specialist business.
The market Bermuda is the focus of much attention at the moment as it has now outgrown the London Market in reinsurance. It resembles the Lloyd’s of old in its entrepreneurial spirit, speed of reaction and swift and sensible regulation. Brokers find it very user-friendly. Meanwhile Lloyd’s has produced another plan to be the optimal platform and has just announced the appointment of a new Chief Executive. In 1991, in the Rowland Task Force report on Lloyd’s, the worst statistic for me was that Lloyd’s underwriters paid brokers higher commission than any other insurance company, but brokers made less money dealing with it than any other insurance company. Fifteen years later, after three changes of Chief Executive and much talk of optimal platforms and a fortune spent on a scrapped IT system, the same statistic probably still applies. The current Chairman has done a great job facing outwards with foreign regulators, the Government and PR, but he now needs to face inwards with his new CEO and simplify market processes and the capital structure or Lloyd’s will wither away.
Finally I am sometimes embarrassed that Hiscox has been alive since 1901 and is still relatively small compared with some other new coming shooting stars. However, I think that its longevity does show a long-term dedication to the business and a will not to give up before the job is done. To use the hackneyed metaphor, we are running a marathon, not a sprint. The exciting thing is that we all feel that we have only just begun. Every day brings a new challenge, right now with new businesses in the USA and Bermuda, new offices in the UK and Europe, new technology to harness and new business processes to reduce cost, which makes it constantly interesting and invigorating. We have great people and a better spread of business than ever before, and I am confident that we are entering a new era of profitable growth.
2005 was the year in which Hiscox demonstrated the strength of our strategy of balance. For the last decade we have been steadily building our businesses outside the Lloyd’s market and have created a spread between globally traded and specialist regional risks. This meant that after the market-wide impact of Hurricanes Katrina, Rita and Wilma we were in a position to create Hiscox Bermuda, allowing us to participate in this growing market.
Strategy Hiscox has had a consistent vision over the past decade, to build a respected specialist insurer recognised for the quality of its people, products and service, and its strong financial performance.
Total revenues were £861.2 million (2004: £816.6 million). The small increase in premium reflects our disciplined underwriting in the face of declining prices in global traded risks and certain regional classes offset by increased ownership of Syndicate 33. Hurricanes Katrina, Rita and Wilma had a market-changing impact on certain classes and areas, and this will give us the opportunity to grow in 2006. The precise opportunity will vary across the different divisions within the Group. Conditions in each division’s market, their past financial performance and their prospects are reviewed below.
Hiscox Global Markets This division uses the global licences and distribution network available to those who underwrite at Lloyd’s to reach brokers and customers located around the world. The majority of its business is reinsurance, major property and other large international risks. The remainder is specialist business which provides the division with some balance.
A profitable result, albeit assisted by a significant exchange rate gain, is an outstanding achievement for a business active in this segment. Many of its competitors are on their knees. This result vindicates our strategy of building balanced businesses even at a divisional level, and reflects a great performance by the underwriting team.
The rating environment for the lines of business within Hiscox Global Markets remains robust. The hurricane season has put upward pressure on prices for reinsurance and London Market business affected by the storms. There were significant price rises on the South East Coast of America and other flood or hurricane prone coastal areas, some small rises elsewhere in the US and the UK, and very few rises and some falls elsewhere in the world. In 2006 we plan to take advantage of the higher prices while reducing our exposure in the Gulf of Mexico. In the specialist areas, business has remained profitable and significant price rises are not expected.
• second, we are leading the development of greater electronic trading capabilities. The demise of Kinnect, the electronic operating platform sponsored by Lloyd’s, has meant that businesses like Hiscox have to decide how to reduce the cost of trading in Lloyd’s themselves. Hiscox is working with five other major managing agents (a group known as G6) to do this. There have been many initiatives of this sort which have failed in the past, but we are determined to succeed.
Prices in our specialist regional businesses remain attractive. Rates have reduced slightly over the past 12 months, but we believe that they are still at reasonable levels.
Hiscox UK Hiscox UK is the most mature area of business we have built outside of Lloyd’s in the last decade. It had a stunning 2005. Gross written premium remained static at £207.3 million (2004: £212.1 million) with a combined ratio of 84.1 per cent (2004: 96.8 per cent) and pre-tax profits of £40.4 million (2004: £17.5 million).
We remain a market leader in the art and private client areas and are becoming a leader in the insurance of small service-based businesses.
Our business is sold overwhelmingly through brokers. In 2005 we launched an electronic platform to support both of these products with brokers. Feedback has been excellent and we expect that over time the electronic placing will allow brokers to do more business with us, lowering both their and our costs.
Our direct business is making steady progress as an increasing number of clients become more comfortable purchasing their home and contents insurance and their commercial insurance over the internet and telephone. In 2006 we plan to increase our advertising to stimulate demand in both direct and brokered business.
Hiscox Europe Hiscox Europe has repaid the support we have given it. It made pretax profits of £3.0 million (2004: £1.4 million), with a combined ratio of 99.7 per cent (2004: 103.2 per cent) and revenues of £55.0 million (2004: £55.7 million). These good results have been at the expense of top line growth as in 2005 our focus has been on improving the underwriting and reducing operational costs. Having achieved that, in 2006 we can concentrate on growth.
Our ambition is for Hiscox Europe to reach a similar scale and profit as Hiscox UK. In 2006 we will be focusing on developing a sales culture to demonstrate that the choice is not between growth and profit, but that both can be achieved in Europe.
Hiscox Guernsey has been in operation for seven years. It has grown from a very small beginning, formed because particular business could no longer be written in Lloyd’s, to a major financial institution in Guernsey.
Hiscox USA is still at an early stage of its development and officially opens in March. Ed Donnelly is busy getting licences and building his team.
Group investment policy concentrates on making good absolute returns for an acceptable risk. This focus on absolute returns ensures that even in poor investment years we have the necessary capital to underwrite. We ensure that this goal is reached through modelling of likely returns, backed by the judgement of our internal and external fund managers. We also have an explicit guide that the technical reserves of the Group should be invested in bonds, and no more than 50 per cent of capital to support underwriting may be invested in ‘risk’ assets such as equities and property. Due to the short-tail nature of the insurance risks we underwrite and the unknown loss dates, we do not attempt to match asset and liability duration. We do however remain matched in currency between our anticipated liabilities and assets.
We have had superior returns in our specialist areas which should help our ambition to grow the third party funds under management. In 2005 we launched two new funds, the Hiscox Global Financials Fund in October and the Aramus Financials Fund for Clariden Bank in Switzerland in December. These funds have already attracted over £42 million since launch.
Balance sheet During the course of the year net assets per share grew to 147.7p per share (2004: 125.7p per share). Tangible net assets grew to 139.3p per share (2004: 115.5p per share). The critical financing events of the year were the Rights Issue to fund Hiscox Bermuda, and the arrangement of various facilities.
In November the Rights Issue raised £170.0 million through the issue of shares at 183p per share. We received strong support from shareholders. Senior management invested net new money. It is good to receive such strong support from internal and external stakeholders. We also raised a debt facility of $225 million from a consortium of leading banks. The same syndicate also supported a refinancing of our £137.5 million letter of credit.
The balance sheet includes a liability of £16.7 million (2004: £34.7 million) in respect of the pension fund. The investment return for 2005 on the fund was 19.4 per cent, however a decline
Hiscox plc Report and Accounts 2005 13 in mortality and long bond rates late in the year increased the liabilities by 38.6 per cent. We will continue to invest well and make further contributions to reduce the deficit.
People It is often thought that to enter the insurance business, all that is needed is a pile of money and a bunch of people. Newcomers often underestimate the difference that quality motivated staff can make. We believe passionately in attracting, developing and retaining good people, allowing them to use their brains to make a difference – as one new employee said when comparing Hiscox with a former employer, “at Hiscox I feel that I have been hired to use my brain, not in spite of having one”. The reward for creating an environment like this is a motivated team – and external recognition for the fourth consecutive year as one of The Sunday Times 100 Best Companies To Work For.
Hiscox plc product split 100% = £1,105 million total group controlled income for 2005 £m £m
Gross written premium up on last year to £555.2 million. Pre-tax profit of £20.7 million despite hurricane impact.
Specialty 25% Key product areas: contingency; kidnap and ransom; bloodstock; small residential and commercial property; personal accident; international household.
Carrier This division uses Syndicate 33 at Lloyd’s as its primary risk carrier in the London Market. Hiscox Syndicate 33 is one of the largest syndicates at Lloyd’s. For the 2005 year of account the Group owned 71.1 per cent of Hiscox Syndicate 33’s capacity.
Security Hiscox Syndicate 33 has an A (Excellent) rating from A.M. Best and uses Lloyd’s security, A (Strong) from Standard & Poor’s and A (Excellent) from A.M. Best.
Muted top-line growth due to reduced participation in UK solicitors’ professional indemnity market.
2006 will see increased advertising to stimulate growth in both brokered and direct business.
Product split Art and Private Client 49% Key product areas: higher value homes and possessions, fine art, specie (loss or damage to valuables in transit, vault or other premises).
Professional and Specialty Commercial 47% Key product areas: industry specific professional indemnity; employment practices liability; directors and officers’ liability; buildings, contents and business interruption for offices.
Hiscox UK underwrites local specialty insurance from nine different regional centres. Business is sourced mainly through local brokers. Hiscox UK has three main product streams covering: • The personal property of wealthy individuals
• The liability and property of professional or advisory and service-led businesses
Bermuda well placed to take advantage of rapidly rising reinsurance rates.
Geographic split Hiscox Guernsey Hiscox Guernsey has been operating since 1998 and offers a range of products including fine art and kidnap & ransom insurance.
Hiscox Bermuda Hiscox Bermuda commenced underwriting in January 2006 and will provide the Group with access to significant new volumes of reinsurance and capital to support our other underwriting business.
In addition to the Armonk office Hiscox has opened two satellite offices in Manhattan and San Francisco to develop its distribution network for larger risks.
Carriers Hiscox Guernsey uses Hiscox Insurance Company (Guernsey) Limited as its primary risk carrier.
Hiscox Bermuda uses Hiscox Insurance Company (Bermuda) Limited as its risk carrier.
Security Both Hiscox Guernsey and Hiscox Bermuda have individual A- (Excellent) ratings from A.M. Best.
Profitable for second year, with combined ratio of 99.7 per cent. Strong growth in fine art business.
New leadership team have worked on improving underwriting and reducing operational costs. 2006 will focus on profitable growth.
Product split Art and Private Client 78% Key product areas: higher value homes and possessions, fine art.
Professional and Specialty Commercial 22% Key product areas: industry specific professional indemnity; employment practices liability; directors and officers’ liability; buildings, contents and business interruption for offices, contingency.
Hiscox has an investment management subsidiary which is responsible for supervising the investment of Group funds which total £1.6 billion. Hiscox Investment Management also manages a number of specialist funds, in the insurance and banking sector, for thirdparty investors.
Product split Hiscox Investment Management manages six funds: Insurance: Hiscox Insurance Portfolio Fund.
Financials: Hiscox US Financial Fund Hiscox European Financial Fund Hiscox Far Eastern Financial Fund Hiscox Global Financials Fund Aramus Financial Fund.
Hiscox brokers Hiscox trades overwhelmingly via brokers and the Group chooses these intermediaries carefully. For example brokers who apply for an agency with Hiscox UK and Global Markets must meet the following criteria: • appropriate accreditation from the Financial Services Authority and Lloyd’s
Most importantly, Hiscox brokers will have a similar niche focus and understanding of specialist products. They will have high ethical and service standards when dealing with clients.
Hiscox has a positive reputation with UK brokers. An independent survey on behalf of a syndicate of insurers, co-ordinated by the British Insurance Brokers’ Association in 2005 supports this. The survey of over 1,000 UK brokers provides useful information for insurers to benchmark their performance. Highlights of the results for Hiscox include: • ranked first in the product which meets your customers’ needs category (for both commercial and personal lines)
Insurex Expo-Sure In February 2005 Hiscox acquired Insurex Expo-Sure Limited, a specialist distributor of event insurance for the conference, exhibition, event and hospitality market that covers everything from large corporate events to local weddings. The acquisition is a good fit as the Global Markets division has been underwriting event and contingency insurance for over 25 years. The Group sees this as an opportunity to use its specialist knowledge in local regional markets.
Economic Insurance Company Limited – creating an FSA approved business platform.
Interest in Heritage Group Limited – back office services for Hiscox Insurance Company (Guernsey) Limited (subsequently sold at a profit of £2.6 million).
Construction and General Guarantee Insurance Company Limited – Irish bond business.
Eldon Fund Management subsidiary of Fox-Pitt Kelton Group – adding to the fund management business of Hiscox Investment Management.
Purchase of Insurex Expo-Sure Limited – move into lower premium contingency business.
Hiscox has also formed distribution arrangements with banks such as Clydesdale, Yorkshire and HBOS to provide a solution for high value home insurance. The Direct and Partnership Division represented ten per cent of total home and contents income in 2005.
Over the last year, Hiscox UK has increased its marketing spend and tested a variety of new advertising concepts and direct mail programmes. While this activity is helping to increase awareness of the Hiscox brand, its primary purpose is to generate business for the UK operations.
On the back of this success, Hiscox launched a direct commercial professional indemnity product to customers in 2005 that should show significant growth in 2006.
Building the Hiscox brand During 2005 Hiscox took its first steps in serious advertising to help build the brand and generate sales for the Executive Household Division. These efforts included direct mail and print advertising, and focuses on the superior claims expertise Hiscox offers.
Building on this experience and success, 2006 will see Hiscox significantly increase marketing activity, primarily in advertising the Hiscox brand among both UK consumers and the Group’s UK broker operations.
This activity will be directed by Steve Langan, UK Managing Director and Head of Group Marketing, who brings over 20 years brand building experience to the Group.
Hiscox has a strong brand within the UK, Europe and London broker markets. As a specialist insurer that conducts the majority of its business via intermediaries, the Hiscox name is not particularly well known among the general public. Hiscox is less well known in markets, such as the USA, where it takes advantage of the Lloyd’s brand to open doors.
In 2005 Hiscox commissioned external research that formed a project to restate the unique qualities and values of the Hiscox Group. It found that the characteristics that most distinguish Hiscox from its competitors are the high quality of its people and a reputation for leadership in the marketplace due to its challenging of convention. The following core values were identified.
Execution good ideas count for nothing unless you make them happen.
Empathy we never lose sight of the fact that the strength of our business ultimately relies on how well we treat our employees, partners and customers.
extraordinary cover Hiscox Insurance Company Limited is authorised and regulated by the Financial Services Authority. This service is for UK residents only.
When thieves cleaned out a client’s home – stuffed crocodile and all – a Hiscox policy ensured he was not left down in the mouth.
The Hiscox reward philosophy is to target base salaries and benefits at the market median, with variable personal performance and profitlinked bonuses taking rewards into the upper quartile. The Group uses external surveys to ensure that this philosophy is met in practice.
In March 2006, for the fourth consecutive year, Hiscox has been recognised by The Sunday Times 100 Best Companies To Work For survey as one of the UK’s best employers. This accolade aids the Group’s ambition to recruit and retain high quality staff.
‘At Hiscox a culture of innovation means everyone is actively involved in the future of the Company. When it was announced a new office would open in Bermuda every employee was invited to hear the Chairman and Chief Executive discuss the opportunity and answer questions. In our survey, staff said they were excited about the direction of the organisation, their 82 per cent positive score beaten by just five other firms.’ Source: The Sunday Times 5 March 2006.
Syndicate 33 underwrites a mixture of reinsurance, major property and energy business, as well as a range of specialty lines including contingency, technology and media risks. The business is mainly property-related short-tail business; there is little exposure to aviation or motor business.
Hiscox Insurance Company (Guernsey) Formed by Hiscox in 1998, Hiscox Insurance Company (Guernsey) Limited writes mainly kidnap and ransom and offshore fine art insurance. Its gross written premium and combined ratio since inception are shown in the charts below.
Future carriers Following the successful start to the Group’s USA operation, the Group aims to establish surplus and admitted lines licenced carriers in the USA once the size of operation can produce a sufficient return on equity for these ventures.
The Group achieved a pre-tax profit of £70.2 million in 2005 (2004: £89.5 million). Earnings per share were 15.6p (2004: 21.3p). The post tax return on shareholders’ equity was 12.8 per cent (2004: 20.6 per cent).
The underwriting performance of each reporting segment is detailed below. Total assets at 31 December 2005 grew to £2,746.9 million (2004: £1,818.4 million) and the net asset value grew to £578.0 million from £368.8 million driven by profitable contributions from each of the insurers together with £170.0 million of net proceeds from a 0.327 for 1 Rights Issue in November 2005, priced at 183p per share. At the same time as the Rights Issue, the Group increased its credit facilities by putting in place a term loan and revolving credit facility of $225 million in addition to the £137.5 million letter of credit which supports its underwriting at Lloyd’s.
Investment income net of expenses (£m) 20.9 20.4 1.6 42.9 20.0 14.1 0.4 34.5
Global Markets and Corporate Centre: Hiscox plc’s share of the results of Syndicate 33, excluding Syndicate 33’s specie, fine art and non-US household business. It also includes the investment return and administrative costs associated with the parent company and other Group management activities.
Underwriting performance – Hiscox Global Markets Hiscox Global Markets comprises the results of Syndicate 33, excluding Syndicate 33’s specie, fine art and non-US household business.
• Net written premium decreased due to higher reinsurance costs, a substantial amount of which related to the reinstatement costs for the 2005 hurricanes.
• Investment income increased to £20.9 million (2004: £20.0 million), driven by increased funds under management and higher interest rates in the USA, offset by the loss on derivative contracts.
• Profit before tax fell to £20.7 million (2004: £67.8 million), mainly as a result of the worst year ever for insurance losses from natural catastrophes partly offset by net exchange gains.
• The expense ratio deteriorated to 29.1 per cent from 18.0 per cent primarily as a result of foreign exchange movements arising from the application of IFRS. For details on the calculation of the claims and expense ratios, please refer to note 5 in the notes to the financial statements.
• Gross written premium decreased by two per cent due to reduced income from the specie and eurobond binders. Having reduced the solicitors’ account by £14 million, the professions and specialty commercial business remained flat.
• Net written premium remained steady. • Investment income increased to £16.0 million (2004: £11.5 million)
as interest rates remained high and equities performed well. • Profit before tax rose to £40.4 million (2004: £17.5 million) as rating conditions remained firm and there were no major catastrophes. • The net claims ratio decreased to 43.6 per cent (2004: 55.0 per cent); the gross claims ratio remained level. • The expense ratio decreased to 40.5 per cent (2004: 41.8 per cent). Both internal expenses and brokerage decreased as a percentage of gross written premium despite a significantly increased marketing spend.
• The combined ratio improved to 84.1 per cent (2004: 96.8 per cent).
• Net written premium similarly remained flat overall. • Investment income increased to £4.4 million (2004: £2.6 million), with improved credit control and cash management leading to higher levels of cash in the business.
• Profit before tax improved to £3.0 million (2004: £1.4 million). • The net claims ratio improved to 51.5 per cent (2004: 56.7 per cent). France had an outstanding year but this was offset to some extent by some large claims in Germany.
• Net written premium increased by 48 per cent, driven by growth in gross written premiums and the decision to increase risk retention in Guernsey during 2005, reducing the level of reinsurance.
• Profit before tax more than doubled to £6.2 million (2004: £2.9 million) on the back of the trends described above, including a profit on the sale of the Heritage Group shares of £2.6 million.
• The claims ratio remained excellent at 2.8 per cent (2004: 1.1 per cent). This remains low due to the level of reinsurance purchased.
• The expense ratio improved to 88.5 per cent (2004: 90.9 per cent) mainly as a result of the increased retention in Guernsey causing net premiums earned to increase. In absolute terms administrative expenses increased by £1.8 million (2004: £0.5 million) mainly due to the set up costs of Hiscox USA.
Cash outflows are used primarily to settle insurance claims, pay operating expenses and distribute dividends to shareholders.
The Group’s cash flow is impacted to a large extent by the results of Syndicate 33. Until 2005, the Group had in general only received cash from the syndicate following the closure of a year of account at the end of three years, except when Lloyd’s allowed early profit distributions subject to solvency requirements. However, for 2006, syndicate cash distribution will be determined on a one-year accounting basis, although still subject to solvency requirements.
The Group’s cash management strategy is to invest cash that is surplus to immediate operating requirements in high quality debt and fixed income securities of short duration. In general, the investment portfolio produces relatively steady cash returns during periods of interest rate stability. Where interest rates are lower for sustained periods, investment income typically reduces, as the proceeds from higher-yielding securities are reinvested at lower prevailing market rates. However, it is still possible to realise a partial cash flow benefit in a low interest rate environment, since the underlying market value of the investments tends to increase, leading to higher realised cash gains from their eventual sale.
Less than one year 167,175 309,353 Between one and two years 295,897 135,032 Between three and five years 327,522 255,723 Over five years 174,660 95,098
The Directors ensure that the use and allocation of capital are given a primary focus in all significant operational actions. Over the last five years, the Group has developed and embedded sophisticated capital modelling tools within its business. These join together short-term and long-term business plans and link divisional aspirations with the Group’s overall strategy. The models provide the basis of the allocation of capital to different businesses and business lines, as well as the regulatory and rating agency capital processes.
• term and revolving loan facility – also in November 2005, the Group secured a US$225 million facility at 1.3 per cent margin
In 2005, the Financial Services Authority (FSA) and Lloyd’s introduced a new capital regime that gives insurance companies the chance to calculate their own capital requirements through Individual Capital Assessments (ICA). Hiscox Insurance Company and Syndicate 33 have now developed their ICA models.
Hiscox used its own integrated modelling expertise to produce the ICA calculations. The results mirrored those driving the existing internal capital setting process.
For Syndicate 33, the ICA process produces a result that is grossed up by Lloyd’s to identify the capital required to hold the A rating. It is pleasing to note that 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.
In addition to the ICA modelling process, the EU Insurance Group’s Directive of 1998 (IGD), as amended in 2002, 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.
The IGD has been applied in the UK through PRU with effect from 31 December 2004. In accordance with PRU, the parent company’s solvency margin consideration will become a minimum capital requirement for the Group from 31 December 2006.
The improvement in the Group’s IGD surplus during 2005 relates mainly to the capital contributed by shareholders through the Rights Issue and the profitable result for the year.
In the Group’s other geographical territories, including the USA, it is required to operate within broadly similar risk-based capital requirements when accepting business.
Hiscox is an insurance business that is primarily involved in the evaluation and acceptance of risk. Consequently, the management of risk permeates every level of decision making in the Group. It is intrinsic to the underwriting and reinsurance strategy, inherent in the craft of managing the resulting investments and uppermost in the minds of staff settling claims and closing exposures.
In short, a culture of risk management pervades the entire Group.
The major risks that the Group faces are presented below. A number of these factors are common to all insurance businesses, while others are relevant to Hiscox specifically. For a discussion of the major risks and uncertainties impacting the Group’s financial statements, see note 4 to the financial statements.
By its nature, this business requires that underwriting staff exercise the greatest levels of foresight. Accordingly, the Group has invested heavily to develop robust risk management and mitigation techniques so that it is well prepared for the unique challenges that these risks present. These techniques are designed to shield the core capital base of the Group against unexpected, repeat clusters of all but the most intense and destructive of events.
The portfolio of risks is actively managed to maintain a balanced and diversified book within defined agreed limits at local and regional levels. This is supported by the use of sophisticated exposure aggregation and scenario modelling tools and ultimately by the purchase of a reinsurance programme designed to cap losses from concentrations of risks. Policy wordings are also reviewed regularly in the light of legal developments to ensure that the Group’s exposure is restricted, where possible, to those risks identified at the time of policy issuance.
Competition and the insurance cycle The principal markets for the Group’s products continue to grow. Hiscox companies are expanding further into the USA and Bermuda and extending their regional presence in the UK and Europe.
In all of these markets around the world, Hiscox competes against major international groups with very similar offerings. At times, a minority of these groups may choose to underwrite for cash flow or market share purposes and at prices that sometimes fall short of the suggested breakeven technical price.
The Group is firm in its resolve to reject business that is unlikely to generate underwriting profits. Accepting insurance risk below technical price is detrimental to the industry’s prospects, since it drives the prevailing rates in the market lower to the point where business failures occur, insurers’ capital is destroyed, customers receive sub optimal service and the industry suffers from negative publicity. As capacity levels in the market fall, prices inevitably rise until the point where the cycle of irrational pricing may begin again.
To counter this, Hiscox alters its appetite for the lines of business and the layers it writes within them in response to market conditions and the risk appetite of the Group. The Group’s cycle management strategy and related modelling and monitoring are essential to ensure that it controls any accumulating adverse effects of changes, such as a move to higher or more volatile layers. As the Group frequently acts as the lead insurer in the complex co-insurance programmes required to cover significant high value assets, it has some ability to set market rates rather than follow them.
However, as there is no absolute guarantee that an agent will comply with the terms of its authority, Hiscox could be exposed to uncontemplated losses.
The Group selects all of its agents and business partners carefully. All significant areas of outsourcing undergo a rigorous tendering process, where numerous attributes other than just price competitiveness are given due consideration. All third parties operate within the terms of formal service level agreements, with repercussions for underperformance.
The Group places reinsurance with companies that it believes are strong financially and operationally. The limits on reinsurance counterparty risk are set by the Reinsurance Security Committee, which meets regularly under the chairmanship of the Group Finance Director. Evaluation criteria include financial strength, trading record, payment history, outlook and organisational structures. Information is drawn from the following sources: public information produced by the Company; the Group’s experience with the reinsurer and knowledge of their behaviour in the marketplace; analysis from a reinsurance consultant; rating agency commentary and gradings.
Hiscox plc Report and Accounts 2005 33 31 December 31 December
Note: this table compares Syndicate 33’s performance at the 100 per cent level against that which could have been expected to occur had it suffered the same percentage of bad debts as the Lloyd’s market average. Figures for the Lloyd’s market average are based on published bad debt expenses as a percentage of reinsurance recoveries at the 36 months stage, for each year of account. The 2002 result at the 36 months stage is the most recent figure published by Lloyd’s.
The Group’s in-house actuarial teams prepare estimates after discussions with underwriting and claims management staff. In addition, annual reviews are conducted by external advisors, and formal actuarial auditors in the case of Syndicate 33 who have close and relevant experience of current claims development trends in the industry. The results of these reviews are given considerable weighting in determining any adjustments that may be required to existing reserves.
Reserve estimates are subject to regular monthly reviews. Adjustments are made to take into account management’s latest view of the probable ultimate liability, based on claims and other developments and new data. Yet there can be no absolute guarantee that the ultimate losses will not differ materially from the provisions the Group has established. It is particularly difficult to estimate IBNR claims and those arising from large catastrophes.
Note 25 to the financial statements provides information on the Group’s estimation of ultimate claim costs over recent years. Additional information is provided in note 4 to the financial statements and the corporate governance section.
The Group’s business could be affected adversely if staff were to be prevented from using its major premises for any reason. Whereas five years ago the vast majority of Hiscox personnel were based in a single location in London, today the Group’s staff are more widely distributed. With offices around the UK, Europe, USA, Bermuda and Guernsey, less than half of the Group’s personnel are now based in London. This geographical dispersion reduces the Group’s exposure to natural, operational and terrorist events that could prevent access to its premises.
In March 2006, Hiscox appeared in The Sunday Times 100 Best Companies To Work For rankings for the fourth successive year. It has previously been voted the number one employer in the financial services sector.
The disaster recovery plan is tested regularly and the Group also performs disaster simulations.
Further details of the Group’s investment profile and its management of currency risks are provided in notes 4, 19 and 21 to the financial statements.
Investment returns The Group’s entities hold significant portfolios of investments to support their obligations, including their insurance liabilities, and their profits depend in part upon the returns that these achieve. Changes in interest rates, equity returns and other economic variables can therefore affect the Group’s financial performance substantially.
Regulatory issues The Group’s entities are incorporated and transact business in a variety of countries and states, all of which require strong levels of accountability to the local regulatory authorities.
The various Hiscox businesses operating in the UK are subject to high levels of regulation from the FSA and the Council of Lloyd’s. The numerous regulatory bodies that oversee the Group’s international operations include the Guernsey Financial Services Commission, the Bermuda Monetary Authority and individual state insurance departments in the USA. These bodies all have significant powers of intervention including the ultimate sanction of removing the authorisation to carry on insurance business.
Regulatory action could affect the Group’s results and position in numerous ways. For example, it could be required to allocate inefficient levels of capital around the Group in order to overcome minimum regulatory hurdles, or bear the costs of implementing new compliance or sophisticated computer modelling systems. Continual changes in, or inappropriate levels of, regulation in the Group’s markets could also result in their becoming uncompetitive or unattractive to customers, which might lead them to place their insurance business in other alternative markets in which the Group has no presence.
Rating agencies The ability of the Group’s insurance operations to write certain classes of business, including reinsurance inwards business, may be affected by a change in the financial strength or credit rating issued by an accredited rating agency such as A.M. Best, Moody’s or Standard & Poor’s.
A downgrading of the ratings of Lloyd’s, Syndicate 33, Hiscox Insurance Company Limited, Hiscox Insurance Company (Guernsey) Limited or Hiscox Insurance Company (Bermuda) Limited could have a material adverse impact. The Group might cease to meet the security criteria of brokers, resulting in a loss of new business, policy cancellations and non-renewals. The Group’s borrowing facilities might also be subject to review.
The Group enjoys an excellent relationship with the agencies that rate its entities. Group senior management hold several meetings with representatives from the agencies each year and gives due consideration to the likelihood of rating consequences before executing any significant strategic action.
Fundamental to corporate and social responsibility is honest and fair dealing in all activities of the Company. Hiscox has always been extremely conscious of its reputation.
• being awarded the Platinum Clean City Award for five consecutive years, for our care for the environment.
Hiscox also provides high quality risk management advice for commercial customers and again, should a loss occur, its claims settlement aims to restore business continuity with minimum disruption.
Customer feedback is considered carefully and used to enhance future products and services.
Equal opportunities Hiscox is committed to providing equal opportunities to all employees and potential employees in all aspects of employment regardless of disability, sex, race, sexual inclination or background.
Training and development Hiscox is committed to training and developing its employees to help them to maximise their potential. Each permanent member of staff is provided with a tailored personal development programme. Training and development needs are reviewed twice a year, along with performance, against clearly set objectives.
Local culture As the Group expands throughout the world, it aims to recruit local staff wherever possible to help develop a rapport with the local community and make a direct contribution to the local economy.
Hiscox supports the Wiltshire Bobby Van Trust, which installs security in the homes of elderly, disadvantaged or vulnerable people in Wiltshire.
The Hiscox Foundation gives charitable donations to deserving causes. It gives priority to any charity in which a member of staff is involved with the aim of encouraging such activity. For instance, in 2005 a team of 25 employees undertook the Three Peaks Challenge, raising some £8,000 for the Richard House Hospice including support from The Hiscox Foundation.
Stakeholder engagement The Hiscox senior management makes it a priority to keep its stakeholders fully informed.
The Group’s direct environmental impact is mainly from the energy it uses and the emissions and waste it generates from its premises. In accordance with the Group’s Environmental Policy, consumables are recycled and reused wherever possible. The Group is taking steps to reduce the amount of raw materials used in business processes and by staff particularly through the extensive use of computerisation and communications technology. During 2006 and 2007, Hiscox will begin upgrading its computer printers to multi-function devices capable of scanning, photocopying, and double-sided printing. This should reduce the cost of consumables and waste volumes and increase the efficiency of document storage, search and retrieval.
Programmes for recycling batteries, mobile phones, lamps and CDs continued during the year. The Group’s efforts were rewarded by a Platinum Award from the City of London Corporation for the fifth year in succession. A Hiscox representative attends meetings organised by the City of London Corporation to keep abreast of environmental best practice and exchange ideas with other like-minded companies.
The Board of Directors The Board comprises four Executive Directors and five independent Non Executive Directors, including a Senior Independent Director. Brief biographical details for each member of the Board are provided on pages 4 and 5.
In accordance with the Company’s Articles of Association, all Directors are required to submit themselves for re-election by the shareholders at least every three years.
Anthony Howland Jackson succeeded Stephen Hall as Senior Independent Director on 1 January 2006.
All Directors are entitled to seek independent professional advice at the Company’s expense. A copy of the advice is provided to the Company Secretary who will circulate it to all Directors. No such advice was sought during the year.
The Audit Committee meets at least four times a year to assist the Board on matters of financial reporting, risk management and internal control.
The Remuneration Committee meets at least twice a year and recommends to the Board a framework of executive remuneration, and also determines on the Board’s behalf the specific remuneration packages for each of the Executive Directors, including pension rights and any compensation payments. The Directors’ Remuneration Report is presented on pages 41 to 43.
The Conflict Committee The Conflict Committee is chaired by Anthony Howland Jackson and comprises all the independent non executive directors. It meets as and when required. Should a potential conflict of interest arise at any time between Group entities, there is a formal procedure to refer the matter to this Committee. The Committee met once during the year.
The Risk Committee The Risk Committee is chaired by the Chief Executive, and comprises the Group Finance Director, the Head of Compliance & Internal Audit, the Head of Risk, and senior managers from a selection of the Group’s divisions. It meets monthly to monitor the risk management framework and makes reports to the Board and Audit Committee.
The Committee receives information from internal audit as well as conducting its own reviews at strategic, tactical and operational levels.
Performance evaluation During the year, the performance of the Board, its main committees and the individual Directors was formally and rigorously evaluated.
A questionnaire was circulated to Directors concerning the performance of the Board as a whole and of its main committees. The responses were collated, and summarised. Open and frank Board discussions were held concerning the results, and all specific issues raised were addressed.
The evaluation process concluded that the Board as a whole and its main committees had functioned well during the year and that the individuals had also performed well, with each making a significant contribution to the Company. The mix of skills on the Board was felt to be appropriate and worked well. The issues identified during the evaluation, such as whether additional time needs to be devoted to the Group in 2006, have been thoroughly discussed and action plans have been put in place where appropriate.
Board Audit Remuneration Nomination Number of Number Number of Number Number of Number Number of Number meetings attended meetings attended meetings attended meetings attended
BE Masojada 6 6 N/A N/A N/A N/A N/A N/A SJ Bridges 6 6 N/A N/A N/A N/A N/A N/A RS Childs 6 6 N/A N/A N/A N/A N/A N/A
In addition to the Executive Directors, the Senior Independent Director attends the six-monthly analysts’ meeting. The Company also commissions independent research on feedback from shareholders and analysts on a regular basis following the Company’s results announcements. This research together with the analysts’ research notes are copied to the Non Executive Directors in full. The Chairman attends a number of meetings with shareholders as well as speaking at the analysts’ presentations. In addition, any specific items covered in letters received from major shareholders are reported to the Board.
Major shareholders are invited to request meetings with the Senior Independent Director and/or the other Non Executive Directors, and they have been given the contact details of the Senior Independent Director.
The execution of each delegated responsibility, by individuals and committees, is closely monitored by regular reporting to, and challenge by, the Board and its committees. This monitoring, supported by financial and non-financial management information, covers performance against agreed targets and objectives, as well as the risks to achieving these objectives and the effectiveness of the measures in place to manage these risks. Feedback and discussion within this reporting structure allow the Board to determine, communicate and enforce its appetite for the various risks to which the business is exposed.
Hiscox’s culture of open communication and delegated responsibility allows this framework of embedded risk management to function well throughout the organisation, enabling rapid responses to the evolving risks to the business.
Further information concerning Hiscox’s approach to risk management is included on pages 32 to 35.
Remuneration policy The Remuneration Committee recommends to the Board a framework of executive remuneration and its cost. The Committee also determines on the Board’s behalf the specific remuneration packages for each of the Executive Directors, including pension rights and any compensation payments.
Remuneration elsewhere in the Group is considered in determining Directors’ remuneration.
Remuneration elements There are four components to the remuneration package: base salary and benefits, annual cash bonuses, long-term incentive arrangements and pensions.
Base salary and benefits The Remuneration Committee uses reports provided by Watson Wyatt in their capacity as independent remuneration consultants, together with publicly available reports. It considers what comparable companies are paying when setting annual salaries and other benefits. Using this information as a benchmark, and taking into account current economic and operational conditions, salary levels are determined for each individual which take into account experience, skills, development and performance. Watson Wyatt provide no other services to the Company.
Long-term awards The Remuneration Committee believes strongly in the value of employee participation in long-term award schemes and operates three share option schemes so that their interests may be aligned with those of shareholders.
Exercise of options granted prior to 22 June 2004 under the Performance Share Plan is subject to the following terms: (a) the participants will receive 100 per cent of the award if the Group’s operating EPS over a fixed three year period has increased by 35 per cent (‘the maximum target’)
(b) no award will vest unless the increase in the Group’s operating EPS over the period equals or exceeds 15 per cent (‘the minimum target’) at which point 40 per cent of the award will vest
All options granted under the Option Schemes since 22 June 2004, as well as awards granted under the Performance Share Plan, other than the special award are to be granted in accordance with the revised terms and conditions as follows: (i) there will be no facility for the re-testing of performance conditions (ii) the participants will receive 100 per cent of their share grants if the
Exercise of options granted prior to 22 June 2004 under the Option Schemes is dependent upon the basic earnings per share of the Group increasing at two per cent more than the rate of inflation over a period of three years.
The Remuneration Committee believes that using ROE as the longterm performance condition better aligns the interests of employees with shareholders because: (i) ROE captures the efficiency with which the Company is using shareholder funds to generate earnings, whereas EPS growth gives no indication of the level of return on the investment required to generate those additional earnings
(ii) the Company operates in a highly cyclical business where earnings can fluctuate considerably, which can have a distorting effect on EPS growth. Where EPS is used as a performance condition this can introduce an element of luck as to when in the cycle share grants are made which can operate to the disadvantage of both employees and shareholders. The Remuneration Committee believes that an average ROE performance requirement over the three year period smoothes out the cyclical fluctuations in earnings and ensures that over any given period shareholders will receive a minimum return on equity before share grants to employees will vest.
The 2005 reviews resulted in the amendments to the rules of the Hiscox Unapproved Share Option Scheme by the addition of a new Schedule 2 so as to allow the grant of options to French employees that will qualify for favourable tax treatment in France (‘Approved Options in France’). These were approved by shareholders on 21 June 2005.
Pensions The pension entitlement shown in the table below is that which would be paid annually on retirement based on service to the end of the year, with the exception of RRS Hiscox, whose figures below are based on his actual pension in payment. The increase in accrued pension for the year excludes any increase for inflation. The transfer value has been calculated on the basis of actuarial advice in accordance with version 8.1 Actuarial Guidance Note GN11: Retirement Benefit Schemes – Transfer Values. No contractual contributions were due or have been paid by the Directors during the year. RRS Hiscox retired from the scheme on 3 January 2003.
RS Childs left the Hiscox final salary pension scheme on 31 December 2005. Prior to this date the Company injected £670,000 to the pension scheme to augment RS Childs’ pension entitlement. The Trustees of the Scheme agreed to this augmentation, after receiving legal and actuarial advice. RS Childs will no longer acquire any benefits under the final salary pension scheme.
Transfer value Transfer value Increase in Increase Total accrued Transfer value of accrued of accrued transfer value in accrued pension at of increase pension at pension at of accrued pension during 31 December in accrued 1 January 31 December benefit during the year 2005 pension 2005 2005 the year
Remuneration of Non Executive Directors Non Executive Directors receive an annual fee in respect of their Board appointments together with additional compensation for their further duties in relation to Board committees. The fees are reviewed annually, but are not necessarily increased and are set by the Board to attract individuals with a broad range of relevant skills and experience. The Non Executive Directors receive no other benefits.
*SH Hall resigned with effect 31 December 2005. **AR Auer and Sir Mervyn Pedelty were appointed with effect 1 July 2005.
Executive Directors’ service contracts Directors’ service contracts are on a rolling basis and the unexpired term shown in the following table is therefore the same as the notice period.
RRS Hiscox 20 Dec 2002 12 months BE Masojada 1 Jan 1998 6 months RS Childs 1 Jan 1998 6 months SJ Bridges 1 Jan 1999 6 months SH Hall* 14 Dec 2004 3 months AGC Howland Jackson 14 Dec 2004 3 months DND Netherton 14 Dec 2004 3 months C Franklin Engler 14 Dec 2004 3 months AR Auer 1 Jul 2005 3 months Sir Mervyn Pedelty 1 Jul 2005 3 months *SH Hall resigned with effect 31 December 2005.
Bronek Masojada is Deputy Chairman of Lloyd’s. Bronek is also a Non Executive Director of Ins-sure Holding Limited and its subsidiaries. The fees for his services are remitted to the Group, as disclosed in note 36.
Neither Stuart Bridges nor Robert Childs held Non Executive Director positions during the year.
The above graph shows the Company’s performance, measured by total shareholder return, compared with the performance of the FTSE All-Share Insurance Index also measured by total shareholder return. The FTSE All-Share Insurance Index has been selected for this comparison because it is the most representative index for measuring the performance of the insurance market in which Hiscox participates.
Adrian Auer and Sir Mervyn Pedelty were both appointed as Non Executive Directors on 1 July 2005 to continue to maintain the balance of a strong non executive team. Adrian Auer has recent experience as the Group Finance Director of a public company. Sir Mervyn Pedelty has recent experience as the Chief Executive of a public company in the financial services sector and the Board believes this will be especially valuable in discussions of Group strategy.
Hiscox Trustees Limited is the trustee of the Hiscox plc Group Employee Share Ownership Plan Trust (‘the ESOP’) and is interested in 135,782 ordinary shares in the Company. The Executive Directors are potential beneficiaries of the ESOP and are therefore each deemed to have an interest in the Hiscox shares owned by Hiscox Trustees Limited, the trustee of the ESOP.
The Directors have not dealt in any securities of the Company between 31 December 2005 and the date of approval of these Report and Accounts.
Details of Directors’ interests in share options are set out on pages 95 to 96.
In accordance with the Articles of Association and Combined Code, Robert Hiscox, Anthony Howland Jackson and Derek Netherton will retire at the Annual General Meeting and, being eligible, offer themselves for re-election as Directors. Adrian Auer and Sir Mervyn Pedelty were appointed as Directors since the previous Annual General Meeting and therefore stand for appointment as Directors. Following formal performance evaluation, the individuals are considered to be effective and have demonstrated commitment to their respective roles.
Corporate social responsibility The Board takes regular account of the significance of social, environmental and ethical (‘SEE’) matters to the business of the Company and has identified and assessed the significant risks to the Company’s short and long-term value arising from such matters, and has considered any potential to enhance value by responding to the issues appropriately.
The Board confirms it has received adequate information to assess SEE issues and that appropriate training is available to Directors should they request it.
Therefore, the Group creditors’ days are considered to be more representative. The Group does not follow a specific code with regard to the payment of creditors.
Major interests in shares The Company has been notified of the following shareholdings of three per cent or more in the ordinary shares of the Company as at 13 March 2006: Number of shares % of total
Amvescap plc 62,255,281 15.9 Fidelity International Limited 33,515,451 8.5 Barclays plc 14,330,810 3.7 Legal & General Group plc 14,187,498 3.6 Morley Fund Management Limited 13,476,468 3.4
Resolution 10, which will be proposed as an ordinary resolution, seeks to obtain approval for the remuneration report as set out on pages 41 to 43 of this Report and Accounts.
Resolution 11, which will be proposed as an ordinary resolution, seeks to renew the Directors’ authority to allot relevant securities pursuant to Section 80 of the Companies Act 1985. The authority contained in the resolution will be limited to the allotment of relevant securities to an aggregate nominal value of £6,533,231.86 representing 33.3 per cent of the issued ordinary share capital as at 13 March 2006.
Resolution 13, which will be proposed as a special resolution, seeks to obtain authority for the Company to repurchase its own shares from the market. In certain circumstances, it may be advantageous for the Company to purchase its own shares pursuant to Section 166 of the Companies Act 1985. The Directors intend to exercise this authority only where they believe that a purchase would be the best use of the Company’s resources, result in an increased earnings per share and is in the best interests of the Company’s shareholders as a whole.
The total number of options to subscribe for ordinary shares that were outstanding as at 13 March 2006 was 18,503,779 which represented 4.7 per cent of the issued share capital as at that date (which represents 5.0 per cent of the Company’s issued share capital if the authority to purchase shares under the resolution is used in full). There are no warrants.
The Directors are responsible for preparing the Annual Report and the Group and parent Company financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare Group and parent Company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with IFRSs as adopted by the EU and have elected to prepare the parent Company financial statements on the same basis.
The Group and parent Company financial statements are required by law and IFRSs as adopted by the EU to present fairly the financial position of the Group and the parent Company and the performance for that period; the Companies Act 1985 provides in relation to such financial statements that references in the relevant part of that Act to financial statements giving a true and fair view are references to their achieving a fair presentation.
(c) state whether they have been prepared in accordance with IFRSs as adopted by the EU
Under applicable law and regulations, the Directors are also responsible for preparing a Directors’ report, Directors’ remuneration report and the Corporate governance statement that comply with that law and those regulations.
We have audited the Group and Company financial statements (the ‘financial statements’) of Hiscox plc for the year ended 31 December 2005 which comprise the Consolidated income statement, the Consolidated and Company balance sheets, the Consolidated and Company cash flow statements, the Consolidated and Company statements of changes in equity and the related notes. These financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors’ remuneration report that is described as having been audited.
Our responsibility is to audit the financial statements and the part of the Directors’ remuneration report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).
We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the part of the Directors’ remuneration report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the financial statements, Article 4 of the IAS regulation. We also report to you if, in our opinion, the Directors’ report is not consistent with the financial statements, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding Directors’ remuneration and other transactions is not disclosed.
We review whether the Corporate governance statement reflects the Company’s compliance with the nine provisions of the 2003 FRC Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures.
We read other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information.
• the Company financial statements give a true and fair view, in accordance with IFRSs as adopted by the EU as applied in accordance with the provisions of the Companies Act 1985, of the state of the Company’s affairs as at 31 December 2005
Assets Property, plant and equipment 15 3,709 3,571 Investment in subsidiary undertakings 19 406,997 115,457 Investment in associate 17 18 200 Deferred tax 28 2,089 –
Current tax assets 3,238 – Loans and receivables 20 158,334 175,652 Prepayments and accrued income 1,104 982 Cash and cash equivalents 22 11,945 5,183
Employee retirement benefit obligations 29 16,677 34,718 Deferred tax 28 – 2,018 Financial liabilities 19 125,986 – Current tax – 614 Trade and other payables 26 50,198 41,480
Currency translation differences 24 – – – (468) – – (468)
Net income/(expenses) recognised directly in equity – – – (468) – – (468) Profit for the year – – – – – 63,948 63,948
Total recognised income for year – – – (468) – 63,948 63,480 Employee share options: Equity settled share based payments – – – – – 1,194 1,194 Proceeds from shares issued 23 120 1,926 – – – – 2,046
Total recognised income for year – – – 1,290 – 48,630 49,920 Employee share options: Equity settled share based payments – – – – – 2,059 2,059 Deferred tax release on share based payments – – – – – 1,950 1,950 Proceeds from shares issued 23 67 1,522 – – – – 1,589
Total recognised income for the year – – – – 22,836 22,836 Employee share options: Equity settled share based payments – – – – 1,194 1,194 Proceeds from shares issued 23 120 1,926 – – – 2,046
Total recognised income for the year – – – – 22,596 22,596
Profit before tax 70,221 89,522 Interest received (46,844) (33,069) Net (gains)/losses on financial assets 4,289 593 Retirement benefit charges in excess of contributions paid (18,041) 1,384
Charges in respect of share based payments 11 2,059 1,194 Other non-cash charges 690 1,302
Cash generated from operations (15,115) 7,069 Interest received 46,844 33,069 Interest paid (2,573) (1,409) Current tax paid (10,239) (206)
Cash flows from the acquisition and sale of subsidiaries and associates 3,750 (1,091) Cash flows from the sale/(purchase) of property, plant and equipment (4,474) (5,565) Cash flows from the purchase of intangible assets 16 (3,277) (3,406) Loans repaid by related parties 36 1,580 320
Proceeds from the issue of ordinary shares 171,983 2,046 Net cash flows from transactions in own shares 192 254 Dividends paid to Company’s shareholders 32 (16,917) (12,833) Proceeds from borrowings 121,133 – Repayments of borrowings (102) (521)
The purchase, maturity and disposal of financial assets is part of the Group’s insurance activities and is therefore classified as an operating cash flow.
Included within cash and cash equivalents held by the Group are balances totalling £50,313,000 (2004: £35,835,000) not available for use by the Group which are held within the Lloyd’s Syndicate.
Changes in operational assets and liabilities: Financial assets (5,281) (35,827) Other assets and liabilities 8,490 14,054
Proceeds from the issue of ordinary shares 171,983 2,046 Dividends paid to Company’s shareholders 32 (16,917) (12,840) Proceeds from borrowings 19 120,930 –
Cash and cash equivalents at 1 January 5,183 17,693 Net movement in cash and cash equivalents 7,219 (12,510) Effect of exchange rate fluctuations on cash and cash equivalents (457) –
Hiscox plc is a public limited company incorporated and domiciled in Great Britain under the Companies Act 1985. The address of the registered office is 1 Great St Helen’s, London, EC3A 6HX.
2 Significant accounting policies The principal accounting policies applied in the preparation of these consolidated Group and Company financial statements are set out below.
Since 2002, the standards adopted by the IASB have been referred to as ‘International Financial Reporting Standards’ (IFRSs). The standards from prior years continue to bear the title ‘International Accounting Standards’ (IASs). Insofar as a particular standard is not explicitly referred to, the two terms are used in these financial statements synonymously.
– the provisions of IFRS 2 Share-based payment to exclude equity settled awards granted on or before 7 November 2002, or to awards granted after that date but vesting prior to 1 January 2005.
2.2 Basis of preparation The financial statements are presented in Pounds Sterling and are rounded to the nearest thousand. They are prepared on the historical cost basis except that ownership interests held in financial assets and liabilities, and derivative financial instruments, are recorded at fair value through profit or loss.
The Company has taken advantage of the exemption provided under Section 230 of the Companies Act 1985 not to publish its individual income statement and related notes. The profit after taxation for the Company for the year was £22,596,000 (2004: £22,836,000).
The Directors believe that this amendment should not have a significant impact as the Company and the Group should be able to comply with the amended criteria for continuing the designation of financial instruments at fair value through profit or loss
– IFRS 7 Financial Instruments: Disclosures, and a complementary amendment to IAS 1 Presentation of Financial Statements – Capital Disclosures (effective 1 January 2007). IFRS 7 introduces additional minimum disclosure requirements regarding exposures to risk arising from financial instruments. The amendment to IAS 1 introduces minimum disclosures about the level of an entity’s capital and how it manages that capital. The Directors’ current assessment is that the main additional disclosures arising from the application of these developments from 1 January 2007 will be more detailed sensitivity analysis to market risk, and additional capital management disclosures.
2.3 Basis of consolidation (a) Subsidiaries Subsidiaries are those entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights
(b) Associates Associates are those entities in which the Group or the Company has significant influence but not control over the financial and operating policies. The consolidated financial statements include the Group or the Company’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. The Company and the Group’s share of its associates’ post-acquisition profits or losses after tax is recognised in the income statement each period, and its share of the movement in the associates’ net assets is reflected in the investments’ carrying values in the balance sheet. When the Company or Group’s share of losses equals or exceeds the carrying amount of the associate, the carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Company or the Group has incurred obligations in respect of the associate.
2.4 Foreign currency translation (a) Functional and presentational currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the ‘functional currency’).
(ii) 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)
Notes to the financial statements continued 58 Hiscox plc Report and Accounts 2005
Internally developed computer software is only capitalised where the cost can be measured reliably. The Group intends to and has adequate resources to complete development and where the computer software will yield future economic benefits in excess of the costs incurred.
2.7 Investments The Group and the Company have classified financial investments as a) financial assets designated at fair value through profit or loss, and b) loans and receivables. The accounting policies for investments in subsidiaries and associated enterprises are set out at note 2.3 above.
Fair value for securities quoted in active markets is the bid price. For instruments where no active market exists, fair value is determined by referring to recent transactions and other valuation factors including the discounted value of expected future cash flows. Fair value changes are recognised immediately within the investment result line in the income statement.
2.8 Cash and cash equivalents The Group and the Company have classified cash deposits and short-term highly liquid investments as cash and cash equivalents. These assets are readily convertible into known amounts of cash and are subject to inconsequential changes in value. Cash equivalents are financial investments with less than three months to maturity at the date of acquisition.
2.10 Derivative financial instruments Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently valued at their fair value at each balance sheet date. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. For derivatives not designated as a hedging instrument, fair value changes are recognised immediately in the income statement. The Group and the Company had no financial instruments designated for hedge accounting during the current and prior financial year.
The Group assesses its reinsurance assets on a regular basis and if there is objective evidence that the reinsurance asset is impaired the Group reduces the carrying amount of the reinsurance asset to its recoverable amount and recognises the impairment loss in the income statement.
If there is objective evidence that the insurance receivable is impaired, the Group reduces the carrying amount of the insurance receivable accordingly and recognises the impairment loss in profit or loss.
Deferred tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the Group controls the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
2.15 Employee benefits (a) Pension obligations The Group and the Company operates both defined contribution and defined benefit pension schemes.
For defined contribution plans, the Group and the Company pay contributions to publicly or privately administered pension insurance plans on a contractual basis. The Group and the Company have no further payment obligations once the contributions have been paid.
The contributions are recognised as an employee benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available.
Past service costs are recognised immediately in income, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past service costs are amortised on a straight-line basis over the vesting period.
Rights to reimbursement from other parties participating in the Lloyd’s Syndicate of some of the expenditure required to settle the defined benefit obligation are recognised within receivables in accordance with the policies outlined at 2.7 (b) above.
(c) Share based compensation The Group and the Company operate a number of equity settled share based employee compensation plans. These include both the approved and unapproved share option schemes outlined at note 31 together with the Group’s save as you earn (‘SAYE’) schemes.
In accordance with the transitional arrangement of IFRS 2, only share options granted after 7 November 2002 but not yet vested at the date of adoption of IFRS, are included in the calculations.
(d) Termination benefits Termination benefits are payable when employment is terminated before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to either: terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal; or providing termination benefits as a result of an offer made to encourage voluntary redundancy.
2.16 Borrowings Borrowings are classified as financial liabilities and are designated on inception as being held at fair value through profit or loss. Financial liabilities are consequently measured at fair value at inception and at each balance sheet date thereafter, with all changes in value from one accounting period to the next reflected in the income statement.
2.17 Provisions The Group and the Company are subject to various insurance related assessments or guarantee fund levies. Related provisions are provided for where there is a present obligation (legal or constructive) as a result of a past event.
2.20 Use of critical estimates and assumptions The inherent uncertainty of insurance risk requires the Group to make estimates and assumptions that affect the reported amounts of assets and liabilities at the balance sheet date. The most significant area of uncertainty in the financial statements relates to the insurance claim liabilities of the Group and the related loss adjustment expenses. Estimates and judgements are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable in the circumstances.
Intangible assets including intangible insurance assets 3a, 3g 123,570 2,387 125,957 138,390 1,569 139,959
The Directors consider the accounting policies for determining insurance liabilities, amounts denominated in foreign currencies, the valuation of investments and recognition of premiums, as being most critical to an understanding of the Group and Company’s result and position.
The principal changes which have a material impact on either net assets or profit for the year are explained further at notes 3.a to 3.g below: 62 Hiscox plc Report and Accounts 2005
3 Explanation of transition to IFRSs as adopted by the EU continued
Income Gross premiums written 3g 778,893 37,716 816,609 Outward reinsurance premiums 3g (97,327) (15,197) (112,524)
Expenses Claims and claim adjustment expenses, net of reinsurance 3g (355,852) (26,211) (382,063) Expenses for the acquisition of insurance contracts 3g (165,106) (12,854) (177,960)
Profit for the year (all attributable to equity shareholders of the Company) 54,574 9,374 63,948
Earnings per share on profit attributable to equity shareholders Basic (as originally published) 18.7p 3.2p 21.9p Diluted (as originally published) 18.5p 3.2p 21.7p Basic (as restated for the effect of the Rights Issue) – – 21.3p Diluted (as restated for the effect of the Rights Issue) – – 21.0p
Investments in subsidiary undertakings 115,457 – 115,457 115,457 – 115,457 Investments in associate – – – 200 – 200 Financial assets including loans and receivables 3b, 3e 247,133 9,042 256,175 279,151 35,065 314,216
Current tax – – – 614 – 614 3.a Intangible assets Goodwill Goodwill acquired in a business combination is no longer amortised but is tested for impairment on at least an annual basis. Up to 31 December 1997, under UK GAAP goodwill arising on the acquisition of subsidiaries was written-off directly to reserves in the year of acquisition. From 1 January 1998, in accordance with FRS 10 Goodwill and Intangible Assets, goodwill was capitalised and amortised on a straight-line basis over its useful economic life which was deemed to be 20 years. Any goodwill previously amortised or written-off has not been reinstated on adoption of IFRSs and thus the value of goodwill has been taken as the carrying amount on adoption.
Syndicate capacity In accordance with IAS 38 Intangible Assets, the useful lives of all of the Group’s recognised intangible assets have been reviewed on adoption of IFRSs. Following this review it has been concluded that syndicate capacity has an indefinite useful life and so will no longer be amortised but will be subject to at least annual impairment test. Syndicate capacity previously amortised has been reinstated on adoption of IFRSs.
3.b Financial assets Valuation In the Group and Company’s UK GAAP financial statements, financial assets are stated at their current value. For listed investments, comprising those quoted on the London and other international stock exchanges, current value was deemed to be the mid-market prices on the balance sheet date, or on the last stock exchange trading day before the balance sheet date. All realised or unrealised gains and losses were taken to the income statement.
For the purposes of measuring financial assets under IAS 39 Financial Instruments: Recognition and Measurement all financial assets are classified into the following four categories: (a) financial assets at fair value through income
A full review of the Group and Company’s investments has been performed as part of the adoption of IFRSs and all equities and debt securities have been classified as financial assets at fair value through the income statement.
Derivative financial instruments The Group and the Company have entered into a small number of foreign exchange contracts in order to manage its net investment in a foreign operation, and its exposure to business denominated in a currency other than its presentational currency. In accordance with IAS 39 these contracts have been recognised in the balance sheet at their fair value. Fair value gains or losses on these instruments are recognised in the income statement.
Cash and cash equivalents In the Group and Company’s UK GAAP financial statements deposits with credit institutions were included within investments. These deposits were predominantly composed of short dated certificates of deposit.
Deferred tax was recognised in respect of all timing differences, with certain exceptions, that had originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax or a right to pay less tax in the future had occurred at the balance sheet date. Timing differences are differences between the Group and Company’s taxable profits and its results as stated in the UK GAAP financial statements that arise from the inclusion of gains and losses in tax assessments in periods different from those in which they are recognised in the financial statements. Deferred tax was measured at the average tax rates that are expected to apply in periods in which the timing differences are expected to reverse. The Group did not discount its UK GAAP deferred tax assets or liabilities.
IAS 12 Income Taxes takes a balance sheet approach with deferred tax being calculated, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is determined using tax rates and laws that have been enacted or substantively enacted by the balance sheet date and are expected to apply in periods in which the timing differences are expected to reverse.
3.d Insurance contracts Equalisation provision In the UK GAAP financial statements an equalisation provision was established for Hiscox Insurance Company Limited in accordance with the requirements of PRU 7.5 of the Integrated Prudential Sourcebook (Insurance and other amendments) Instrument 2004. This provision, which was in addition to the provisions required to meet the anticipated ultimate cost of settlement of outstanding claims at the balance sheet date, was required by Schedule 9A to the Companies Act 1985 to be included within technical provisions at the balance sheet date notwithstanding that it does not represent liabilities at the balance sheet date.
3.e Dividend recognition Under UK GAAP dividends are recognised in the income statement in the period to which they relate irrespective of when they are declared and approved. IAS 10 Events after the Balance Sheet Date does not allow the recognition of dividends to holders of equity instruments approved after the balance sheet date because they do not meet the criteria of a present obligation in IAS 37 Provisions,
The standard also allows the recognition of a right to reimbursement from other parties of some of the expenditure required to settle the defined benefit obligation. Accordingly, the Group has recognised income and a corresponding asset representing the share of the defined benefit obligation paid or payable by third party capital providers on Syndicate 33.
The fair value is expensed over the vesting period which is three years for all of the Group’s share option schemes.
Total equity at 1 January 2004 reported previously under UK GAAP 329,837 344,860 Employee benefits 3f (40,987) 854 Deferred tax 3c 13,858 – Rates of exchange 3g (17,679) – Intangible assets 3a 4,830 – Dividend recognition 3e 8,414 921 Insurance contracts 3d 16,476 – Other adjustments (64) (74)
Total equity at 1 January 2004 in accordance with IFRSs 314,685 346,561 arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition in the functional currency during the period or in previous financial statements are recognised in the income statement when they arise.
Under IFRSs unearned premium and deferred acquisition costs are non monetary assets and liabilities and accordingly are not retranslated from the historic rates. Previously, the retranslation of these items at the closing rate was permitted under UK GAAP.
Presentational currency The presentational currency of the Group and the Company, which is the currency used in the presentation of the consolidated Group and Company financial statements, is Sterling. The results and financial position of those entities whose functional currency is not Sterling have been translated to the presentational currency as follows: – all assets and liabilities are translated at the closing rate at the balance sheet date
Daily transactional rates As part of the system improvements made on adoption of IFRSs the Group has moved to daily transactional rates of exchange as it believes that this provides more accurate financial information. The only exception to this is for business whose functional currency is not denominated in Sterling for which average monthly rates continue to be adopted for the translation into the presentational currency.
Disclosure All exchange differences arising on the retranslation of monetary assets and liabilities to functional currency at the balance sheet date have been taken to the income statement and included in other operating income or expenses. Under UK GAAP these differences were included on a line by line basis throughout the income statement.
The main sources of risk relevant to the financial statements are set out below together with an outline of the ways in which the Group and Company manages them. Additional information is also provided in the Corporate governance and Risk management sections of this Annual Report.
4.1 Insurance risk and exposure controls Insurance risk is transferred to the Group by contract holders through the underwriting process.
For a portfolio of insurance contracts where the theory of probability is applied to pricing and provisioning, the principal accounting risk that the Group faces is that the actual claim payments required exceed the projected amount of the insurance liabilities. This could occur because the frequency or severity of claims is greater than estimated. Insurance events are unpredictable in terms of occurrence, timing and magnitude.
Historical experience suggests that the larger the portfolio of similar insurance contracts, the smaller the relative variability about the expected outcome will be. Factors that may increase insurance risk include lack of diversification in terms of type and amount of risk, geographical location and type of policyholder covered. Consequently, the Group seeks to diversify risk acceptances where possible.
– documenting, monitoring and reporting on the Group’s strategy to manage risk
– developing systems that facilitate the identification of emerging issues promptly
– developing processes that continually factor market intelligence into the pricing process.
The Group’s maximum net claims exposure during 2006 for a single potential natural event with an expected occurrence of once in 250 years is estimated at £140 million.
The Group also seeks to limit the net amount of risk retained on the account for other large risks and non natural perils such as major accidents or acts of terrorism to no more than £105 million per event.
The Group’s concentration of insurance risk, in relation to the broad categories of insurance liabilities reserved on the balance sheet, is summarised overleaf.
Gross and net insurance liabilities on balance sheet 31 December 2005 Type of risk Property – Property – Casualty –
The main circumstances that result in claims against the reinsurance inwards book are conventional catastrophes, such as earthquakes or storms, and other events including fires and explosions. The occurrence and impact of these events is very difficult to model over the shortterm 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.
Property risks – Marine and major assets 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) covered by the Group.
Marine and major property contracts are normally underwritten by reference to the commercial replacement value of the property covered. The cost of repairing or rebuilding assets, of replacement or indemnity for contents and time taken to restart or resume operations to original levels for business interruption losses are the key factors that influence the level of claims under these policies.
Other property risks The Group provides home and contents insurance, together with cover for art work, antiques, classic cars, jewellery, collectables and other assets held by affluent individuals.
The Group’s home and contents insurance contracts are exposed to weather and climatic risks such as floods and windstorms and their consequences. As outlined earlier the frequency and severity of these losses do not lend themselves to accurate prediction over the shortterm. Contract periods are therefore not normally more than one year at a time to enable risks to be regularly re-priced.
Casualty insurance risks 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. However, the Group’s exposure is more focused towards marine, professional and technological liability risks rather than human bodily injury risks, which are only accepted under limited circumstances. Claims typically arise from incidents such as errors and omissions attributed to the insured, professional negligence and specific losses suffered as a result of electronic or technological failure of software products and websites. The Group’s casualty insurance contracts mainly experience low severity attritional losses.
The Group’s pricing strategy for casualty insurance policies is typically based upon historical claims frequencies and average claim severities, adjusted for inflation and extrapolated forwards to incorporate projected changes in claims patterns. In determining the price of each policy an allowance is also made for acquisition and administration expenses, reinsurance costs, investment returns and the Group’s cost of capital.
Sources of uncertainty in the estimation of future claim payments The Group’s procedures for estimating the outstanding costs of settling insured losses at the balance sheet date, including those not yet notified by, or apparent to, the insured, are detailed in note 25.
The uncertainty in estimating the ultimate cost of claims typically centres on factors such as agreeing the extent of policy coverage, estimating the amount of the policyholder’s loss that is directly attributable to the insured event, and uncertainty regarding the timing and expense of handling the ultimate settlement.
The majority of the Group’s insurance risks are short tail and claims are normally notified and settled within 12 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. Certain marine and property insurance contracts such as those relating to subsea and other energy assets, and the related business interruption risks, can also take longer than normal to settle.
This is because of the length of time required for detailed subsea surveys to be carried out and damage assessments agreed together with difficulties in predicting when the assets can be brought back into full production.
An analysis of the Group and the Company’s exposure to each significant component of financial risk is given in Sections 4.3 to 4.6 below.
4.4 Credit risk The Group and the Company have exposure to credit risk, which is the risk that a counterparty will suffer a deterioration in solvency or be unable to pay amounts in full when due.
Key areas of exposure to credit risk include: – reinsurers’ share of insurance liabilities
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 continually reviewed throughout the year.
The Group Reinsurance Security Committee assesses the creditworthiness of all reinsurers by reviewing credit grades provided by rating agencies and other publicly available financial information detailing their financial strength and performance. The financial analysis of reinsurers produces an assessment categorised by Standard & Poor’s (S&P) rating (or equivalent when not available from S&P). The Committee considers the reputation of its reinsurance partners and also receives details of recent payment history and the status of any ongoing negotiations between Group companies and these third parties. This information is used to update the reinsurance purchasing strategy.
Management information reported to the Group’s Board includes details of provisions for impairment on loans and receivables and subsequent write-off. Exposures to individual intermediaries and groups of intermediaries are collected within the ongoing monitoring of the controls associated with regulatory solvency.
The Group and the Company also mitigate their credit counterparty risk by concentrating debt and fixed income investments in high quality instruments, including a particular emphasis on government gilts issued mainly by European Union and North American countries.
Debt and fixed income securities 19 548,594 56,289 167,622 61,458 833,963 Assets arising from reinsurance contracts held 11,670 81,530 132,899 47,160 273,259
4.5 Liquidity risk The Group is exposed to daily calls on its available cash resources mainly from claims arising from insurance contracts. Liquidity risk is the risk that cash may not be available to pay obligations when due at a reasonable cost. The Board sets limits on the minimum level of maturing funds available to meet such calls and on the minimum level of borrowing facilities that should be in place to cover maturities, claims and surrenders at unexpected levels of demand.
The vast majority of the Group and the Company’s investments are in highly liquid assets which could be converted into cash in a prompt fashion and at minimal expense. The deposits with credit institutions largely comprise short dated certificates for which an active market exists and which the Group can easily access. The Group and the Company’s exposure to equities is concentrated on shares and funds that are frequently traded on internationally recognised stock exchanges.
Average maturity analysed by denominational currency of investments 2005 2004 2005 2004 Years Years Years Years
4.6 Currency risk The Group operates internationally and its exposures to foreign exchange risk arise primarily with respect to the US Dollar and the Euro. The assets of the Group’s Bermudan, US and European insurance businesses are generally invested in assets denominated in the same currencies as their insurance and investment liabilities. However, the non retranslation of non monetary insurance assets and liabilities such as unearned premiums at each balance sheet date results in exchange gains and losses which impact on the income statement. The profile of the Group’s assets and liabilities, categorised by currency at their translated carrying amount, at 31 December was as follows: As at 31 December 2005 Sterling US Dollar Euro Other Total
As at 31 December 2004 Sterling US Dollar Euro Other Total
– UK and Europe comprises the results of Hiscox Insurance Company Limited, the results of Syndicate 33’s specie, fine art and non-US household business, together with income and expenses arising from the Group’s retail agency activities in the UK and in continental Europe.
– International comprises the results of Hiscox Insurance Company (Guernsey) Limited and Hiscox Insurance Company (Bermuda) Limited which commenced underwriting on 1 January 2006. This segment also includes the activities of the Group’s newly formed US agency, Hiscox Inc.
This segmentation reflects the internal operational structure within the Group and how the business units are strategically managed to offer different products and services, with different risk profiles, to specific customer Groups. All revenue sources are captured by one of the three business segments shown above.
Corporate UK and Corporate UK and Centre Europe International Total Centre Europe International Total
Short-term investment return fluctuations (15,252) 6,081 (70) (9,241) (8,044) 2,733 (56) (5,367)
The longer term rates of return are calculated based on a 6% return on equities and 4% for all other investments including cash. These rates are applied to the average value of investments held in each class during the current and prior financial year.
The following charges are included within the income statement: Year to 31 December 2005 Year to 31 December 2004 Global Global
100% Ratio analysis Year to 31 December 2005 Year to 31 December 2004
In calculating the claims and expense ratios the Group has applied an estimated allocation of the foreign exchange gains and losses to each category.
5 Segmental information continued The impact of a 1% change in each component of the segmental combined ratios are: Year to 31 December 2005 Year to 31 December 2004 Global Global
Trading result based on longer term rates of return at 100% level (note 5c) 102,381 119,507
Notional share attributable to Group at current level of capacity ownership 93,872 100,438 Adjustment to reflect different levels of capacity in prior years: 2001 year of account – (184) 2002 year of account – 223 2003 year of account (2,505) 33 2004 year of account (5,670) – Amounts attributable to quota share reinsurers – 1,650
Trading result based on longer term rates of return for the Group (note 5a) 85,697 102,160
Markets and and Markets and and Corporate UK and unallocated Corporate UK and unallocated
Capital expenditure comprises additions to property, plant and equipment (note 15) and intangible assets (note 16).
(e) Secondary reporting format – geographical segments The Group’s operational segments underwrite business from locations in the UK and Ireland, and also through its branch network in Guernsey, France, Germany, Belgium and the Netherlands. The Group commenced underwriting and agency operations in Bermuda and the USA in 2006.
The following table provides an analysis of the Group’s gross insurance premium earned by geographical location of policyholders: Gross earned premiums Year to 31 December 2005 Year to 31 December 2004
(e) Secondary reporting format – geographical segments continued The following tables provide an analysis of total segment assets at the end of the year, and capital expenditure incurred during the year, by geographical location. Capital expenditure relates to the acquisition of intangible assets and property, plant and equipment during the year. Amounts are stated before the elimination of inter-segmental assets and liabilities and also exclude taxation balances that are not allocated to specific segments (note 5(d)). Amounts are allocated based on where the assets are located.
The return on investments by asset class for the year was: Global Markets and Corporate 2005
Debt and fixed income securities at fair value through income 20,627 2.9 5,992 4.4 114 1.7 26,733 3.1 Equities and shares in unit trusts at fair value through income 4,294 10.8 7,524 15.2 460 10.8 12,278 13.1 Deposits with credit institutions/cash and cash equivalents 3,855 2.9 6,434 4.4 987 3.5 11,276 3.7
Debt and fixed income securities at fair value through income 14,703 2.6 5,473 4.9 – – 20,176 2.9 Equities and shares in unit trusts at fair value through income 3,409 9.0 4,853 11.2 309 5.7 8,571 10.3 Deposits with credit institutions/cash and cash equivalents 1,799 2.3 3,863 3.6 49 1.3 5,711 3.0 9 Insurance contract acquisition costs
Acquisition costs incurred in relation to insurance contracts written 203,289 (4,477) 198,812 192,601 802 193,403 Acquisition costs expensed to the income statement (206,512) 6,533 (199,979) (182,005) 4,045 (177,960)
Managing agency expenses 9,869 7,447 Overseas underwriting agency expenses 19,886 21,101 Connect agency expenses 6,135 2,155 Exchange losses – 35,576 Investment expenses 1,013 1,374 Other Group expenses 10,070 3,787
Notes to the financial statements continued 78 Hiscox plc Report and Accounts 2005
The average monthly number of staff employed by the Group was 514 (2004: 446) comprising 190 underwriting and 324 administrative staff (2004: 154 and 292 respectively). Of the total remuneration shown above, an amount of £14,433,000 (2004: £13,697,000) was recharged to the syndicate managed by Hiscox Syndicates Limited. The Company had no employees in the current or prior financial year.
Expense associated with letters of credit and other bank borrowing facilities (note 33) 3,302 1,952 Interest charges arising on finance leases 32 25 13 Auditors’ remuneration Fees payable to the auditors and its associates (exclusive of VAT) include the following amounts recorded in the income statement: (a) Group
Other non-audit services**: Work performed in relation to corporate projects* 211 5
Total auditors’ remuneration expense 594 250 *Other assurance fees include work performed in relation to the establishment of the Group’s Bermudan operation and also the Group’s transition to IFRSs. Other non-audit fees include work performed in relation to the establishment of the Group’s Bermudan operation.
Audit and assurance services: Statutory audit fee 115 119 Regulatory audit fee – –
14 Net foreign exchange gains The net foreign exchange gains/(losses) for the year include the following amounts: Exchange gains/(losses) recognised in the income statement 57,420 (35,576)
(a) Group Furniture, fittings, Land and Leasehold equipment buildings improvements Vehicles and art Total
Year ended 31 December 2005 Opening net book amount 2,945 – 395 7,351 10,691
Year ended 31 December 2004 Opening net book amount – 592 592
Year ended 31 December 2005 Opening net book amount 2,945 626 3,571
Year ended 31 December 2004 Opening net book amount 6,105 20,343 135 26,583 Additions in year – 3,286 120 3,406
Year ended 31 December 2005 Opening net book amount 6,105 23,629 255 29,989 Additions in year – 876 2,401 3,277 Amortisation and impairment charge – – (167) (167)
Other intangibles primarily relate to the costs of acquiring rights to customer contractual relationships and also include a limited level of capitalised software costs. The additions during the year primarily comprise the Group’s acquisition of the business of Insurex Expo-Sure in February 2005.
The amortisation charge for the year includes £40,000 (2004: £nil) relating to capitalised software costs. The net book value of capitalised software costs at 31 December 2005 was £80,000 (2004: £120,000). There are no charges for impairment during the current or prior financial year.
The Group had no internally generated intangible assets at 31 December 2005 (2004: £nil).
Year ended 31 December At beginning of year 1,109 519 200 –
The Group’s interests in its principal associates, all of which are unlisted, were as follows: % interest Profit/ held at Country of Assets Liabilities Revenues (loss)
The equity interest held by the Group in respect of the associate does not have a quoted market price and are not traded in any active market. Consequently its fair value cannot be reliably measured with any degree of certainty. An impairment charge of £182,000 (2004: nil) was recognised in profit or loss during the year.
The Group sold its investment in Heritage Group Limited on 11 July 2005 for a net consideration of £3,750,000. The gain arising on disposal of £2,591,000 is included within the other income (note 10).
The Company’s investment in associate at 31 December 2005 relates solely to its 25.2% holding in the ordinary share capital of Blyth Valley Ltd.
Short-term borrowings from credit institutions 121,070 121,190 57 57 120,810 120,930 – – Derivative instrument liabilities (note 21) – 5,056 – – – 5,056 – –
Investments at 31 December are denominated in the following currencies at their fair value: Group Group Company Company
US Dollars 598,834 462,166 – – Euro and other currencies 163,190 147,169 – –
Notes to the financial statements continued 84 Hiscox plc Report and Accounts 2005
19 Financial assets and liabilities continued Company investment in subsidiary undertakings
Hiscox Insurance Company (Bermuda) Limited 291,540 – Hiscox Dedicated Corporate Member Limited 1,500 1,500 Hiscox Holdings Limited 38,647 38,647 Hiscox Insurance Holdings Limited 29,983 29,983 Hiscox Select Insurance Fund PLC 45,102 45,102 Hiscox Investment Management Limited 225 225
21 Derivative financial instruments The Group and the Company entered into a small number of foreign exchange cylindrical collar contracts in order to manage exposure to business denominated in a currency other than their presentational currency. At 31 December 2005 the net fair value position of the Company and the Group’s derivative exposure on these contracts was a financial liability of £4,892,000 (2004: asset of £1,348,000 included within financial assets). No expenses or charges were incurred in the acquisition of the derivative contracts (2004: £nil). There were no realised gains or losses in the current or prior financial year.
notional Fair value Fair value notional Fair value Fair value amounts of assets of liabilities amounts of assets of liabilities
The Group and the Company also entered into a foreign exchange forward contract during the year in order to manage the net investment in the Bermudan operation and currency exposures related to the proceeds raised from the Rights Issue (note 23). The contract requires the Group and the Company to sell US$292,689,000 at an agreed future rate to Pound Sterling at a fixed date within one year of the balance sheet date. At 31 December 2005, the fair value position of this contract to the Group and Company was a liability of £164,000 (2004: £nil).
Cash at bank and in hand 370,165 61,332 1,380 2,222 Short-term bank deposits 43,594 58,231 10,565 2,961
Employee share option scheme – proceeds from shares issued 1,331 67 1,522 Rights Issue of ordinary shares 96,377 4,818 171,550 Expenses related to Rights Issue – – (5,974)
Notes to the financial statements continued 86 Hiscox plc Report and Accounts 2005
23 Share capital and premium continued The Group acquired £72,000 (2004: £109,000) and disposed of £274,000 (2004: £363,000) of the Company’s own shares through transactions on the London Stock Exchange. These shares were acquired by the Group Employee Share Ownership Plan (ESOP) and those issued were to staff as part of the employee performance share plans. The net effect of transactions in own shares during the year was an increase to retained earnings of £192,000 (2004: £254,000). The Group has the right to reissue these shares at a later date. Additional details of these transactions, including the number of own shares held, are given in note 35. The Company did not hold any of its owns shares during the current or prior year.
Share options Share options are granted to directors and to senior employees. The exercise price of the granted options is equal to the market price of the shares on the date of the grant. Options are conditional on the employee completing three year’s service (the vesting period). The options are exercisable starting three years from the grant date only if the Group achieves its targets of profitability; the options have a contractual option term of ten years. The Group has no legal or constructive obligation to repurchase or settle the options in cash.
In accordance with IFRS 2 the Group recognises an expense for the fair value of share option instruments issued to employees, over their vesting period through the income statements. The expense recognised in the Consolidated Income Statement during the year was £2,059,000 (2004: £1,194,000). The Group has conservatively applied the principles outlined in the Black Scholes option pricing model when determining the fair value of each share option instrument. The range of principal Group assumptions applied in determining the fair value of options that have not yet fully vested at 31 December are: Assumptions affecting inputs to options pricing model 2005 2004
Annual risk free rates of return (%) 3.5-5.0 3.5-4.5 Long-term dividend yield and growth (%) 2.0 2.0 Expected life of options (years) 3.25-7.5 3.25-6.5 Implied volatility of share price over a ten year period (%) 32-49 39-49 Weighted average share price (pence) 149.5 152.2
The merger reserve reflects the net premium on shares issued as part of several business combinations which occurred in 1996 and 1998.
The capital redemption reserve arises from the redemption of some of the Company’s issued share capital. These redemptions occurred in prior financial years. The purpose of establishing the capital redemption reserve is to maintain the level of equity represented by contributed capital.
Recoverable from reinsurers Claims reported and loss adjustment expenses 281,746 125,186 Claims incurred but not reported 186,054 70,544 Unearned premiums 38,576 43,141
Net Claims reported and loss adjustment expenses 533,561 352,864 Claims incurred but not reported 321,132 282,087 Unearned premiums 361,931 373,081
For all risks, the Group uses several statistical methods to incorporate the various assumptions made in order to estimate the ultimate cost of claims. The reserves for outstanding claims are actuarially estimated primarily by using both the Chain Ladder and Bornhuetter-Ferguson methods. There is close communication between the actuaries involved in the estimation process and the Group’s underwriters to ensure that, when applying both estimation techniques, both parties are cognisant of all material factors relating to outstanding claims, and allowance is also made for the rating environment.
The Chain Ladder method is adopted for mature classes of business where sufficient claims development data is available in order to produce estimates of the ultimate claims and premiums by actuarial reserving Group and underwriting year or year of account for the managed syndicate. This methodology produces optimal estimates when a large claims development history is available and the claims development patterns throughout the earliest years are stable.
In exceptional cases the required provision is calculated with reference to the actual exposures on individual policies.
The choice of selected results for each accident year of each class of business depends on an assessment of the technique that has been most appropriate to observed historical developments. In certain instances, this has meant that different techniques or combination of techniques have been selected for individual accident years or groups of accident years within the same class of business.
Estimate of ultimate claims costs as adjusted for foreign exchange*: at end of accident year 665,949 378,178 423,768 645,822 1,061,574 3,175,291 three years later 743,075 393,389 – – – 1,136,464 four years later 780,660 – – – – 780,660
Reconciliation of amounts disclosed at 100% level to liability disclosed in the Group’s balance sheet
Liability in respect of prior accident years at 100% level 26,576
Group share of cumulative payments (223,758) (130,749) (156,254) (207,577) (95,873) (814,211)
Total Group liability – net** 854,693 *The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2005.
Current year claims and loss adjustment expenses (785,128) 322,278 (462,850) (436,160) 63,610 (372,550) (Under)/over provision in respect of prior year claims and loss adjustment expenses (25,550) 31,375 5,825 (11,593) 2,080 (9,513)
Total claims and claims handling expense (810,678) 353,653 (457,025) (447,753) 65,690 (382,063)
27 Taxation The amounts charged in the income statement comprise the following: Group Group
Current tax expense 22,564 12,702 Deferred tax expense (note 28) (973) 12,872
Income statement (charge)/credit: 973 (12,872) 4,107 (2,018) Transfer from deferred tax to current tax (3,599) – – – Released from reserves 1,950 – – –
Trade and other payables 3,192 2,889 – – Retirement benefit obligations 5,004 10,416 – – Other items 3,324 1,375 – –
Intangible assets (377) (36) – – Investment in associated enterprises (191) (191) – –
Insurance contracts – equalisation provision* (5,637) (5,383) – – Other items (1,826) (1,314) – –
*The solvency regulations in the UK require certain entities within the Group to establish an equalisation provision, to be utilised against abnormal levels of future losses in certain lines of business. The regulations prescribe that the reserve is increased every year by an amount that is calculated as a percentage of net premiums written for those lines of business during the financial year subject to a maximum percentage. The amount of each annual increase is a deductible expense for tax purposes, and the equalisation reserve is taxed when released. The entities within the Group that are affected by this requirement continue to prepare their individual financial statements, for statutory filing and taxation purposes, in accordance with UK GAAP which permits the recognition of equalisation reserves on the balance sheet. Equalisation reserves are not permitted under IFRSs which therefore results in the temporary difference for taxation purposes.
The Company had no unprovided deferred tax assets at the year end (2004: £nil).
29 Retirement benefit obligations The gross amount recognised in the Group and Company balance sheets are determined as follows: Present value of funded obligations 137,533 99,229 Fair value of plan assets (101,409) (65,020)
The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. A full actuarial valuation is performed on a triennial basis and updated at each intervening balance sheet date by the actuaries. The last full actuarial valuation was performed at 31 December 2005. 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 the terms of the related pension liability.
The Group’s actuaries have based their assessment on the most recent mortality data available which suggests that the average pensionable period in which benefits will be paid to members is 26 years (2004: 22 years). The other principal actuarial assumptions used in determining the defined benefit scheme’s obligation were as follows: Discount rate 4.75 5.40 Expected return on plan assets 5.79 5.85 Future salary increases 4.00 3.80 Inflation assumption 3.00 2.80 Pension increases 3.00 2.80
During the year the Group contributed to the defined benefit scheme at the rate of 22.6% (2004: 22.6%) of pensionable salaries. Additional contributions totalling £19,400,000 were paid during 2005 to reduce the deficit. The Group has agreed that further additional contributions will be made. 61% of the deficit calculated is recharged to Syndicate 33.
Basic Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year, excluding ordinary shares purchased by the Group and held as own shares (note 23).
Weighted average number of ordinary shares in issue (thousands) 310,797 300,653 Adjustments for share options (thousands) 12,283 3,375
Weighted average number of ordinary shares for diluted earnings per share (thousands) 323,080 304,028
Number of Number of Market price options at Number Number Number options at Exercise at date of Date from 1 January of options of options of options 31 December price exercise which 2005 granted lapsed exercised 2005 £ £ exercisable Expiry date
The aggregate gains made by the Directors on exercise of the above options (based on market price at date of exercise less the exercise price) was £nil (2004: £20,000). The market price of Hiscox plc shares at 31 December 2005 was 231p (2004: 166.5p). The highest and lowest prices of Hiscox shares during 2005 were 234.5p and 152.25p (2004: 180.5p and 143.5p).
(iii) Performance share plan Number of Number of Market price options at Number Number Number options at Exercise at date of Date from 1 January of options of options of options 31 December price exercise which 2005 granted lapsed exercised 2005 £ £ exercisable Expiry date 32 Dividends Group Group Company Company
Interim dividend for the year ended: 31 December 2004 of 1.5p (net) per share – 4,383 – 4,383 31 December 2005 of 2.25p (net) per share 6,631 – 6,631 –
A final dividend in respect of 2005 of 4.75p per share, amounting to a total dividend of 7p for the year, is to be proposed at the Annual General Meeting on 20 June 2006. These financial statements do not reflect this final dividend as a distribution or liability in accordance with IAS 10 Events after the Balance Sheet Date.
33 Contingencies and guarantees The Company and its subsidiaries are, like all other insurers, continuously involved in legal proceedings, claims and litigation in the normal course of business. The Group does not believe that such actions will have a material effect on its profit or loss and financial condition.
The Group is subject to insurance solvency regulations in all the territories in which it issues insurance contracts, and it has complied with all the local solvency regulations. There are no contingencies associated with the Group’s compliance or lack of compliance with these regulations.
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 4,326 4,113 Office equipment 57 180
Later than five years Land and buildings 26,126 29,527 Office equipment – –
34 Capital and lease commitments continued The total future aggregate minimum lease rentals receivable by the Group and the Company as lessor under non-cancellable operating property lease are as follows: No later than one year 586 586 Later than one year and no later than five years 2,205 2,312 Later than five years 1,027 1,507
The finance lease obligations to which the Group are committed include the following minimum lease payments: Current liabilities due for settlement within one year 222 171 Non-current liabilities due for settlement after one year and no later than five years 293 258
Hiscox Insurance Company Limited* General insurance Great Britain Hiscox Insurance Company (Guernsey) Limited* General insurance Guernsey Hiscox Inc.* Underwriting agent USA (Delaware) Hiscox Holdings Inc.* Insurance holding company USA (Delaware) Hiscox Insurance Company (Bermuda) Limited General insurance and reinsurance Bermuda Hiscox Dedicated Corporate Member Limited Lloyd’s corporate names Great Britain Hiscox Select Insurance Fund PLC Insurance holding company Great Britain Hiscox Select Holdings Limited* Insurance holding company Great Britain Hiscox Select A to J Limited* Lloyd’s corporate name Great Britain Hiscox Holdings Limited** Insurance holding company Great Britain Hiscox Insurance Holdings Limited Insurance holding company Great Britain Hiscox Assurances Services SARL* Underwriting agent France Hiscox International Holdings B.V.* Insurance holding company Netherlands Hiscox Syndicates Limited* Lloyd’s managing agent Great Britain Hiscox Underwriting Ltd* Lloyd’s managing agent Great Britain Hiscox AG* Underwriting agent Germany Hiscox bv* Underwriting agent Netherlands Hiscox Investment Management Limited Investment management Great Britain Hiscox Connect Limited Online intermediary Great Britain Hiscox Underwriting Group Services Limited Service company Great Britain Hiscox NV* Underwriting agent Belgium Hiscox Trustees Limited† Corporate trustee Great Britain Hiscox Pension Trustees Limited Pension trustee Great Britain Hiscox Qualifying Employees Share Ownership Trustees Limited Share scheme trustee Great Britain
Notes to the financial statements continued 98 Hiscox plc Report and Accounts 2005
36 Related-party transactions Details of the remuneration of the Group’s key personnel are shown in the Director’s remuneration report on pages 41 to 43. A number of the Group’s key personnel hold insurance contracts and investment management agreements with the Group, all of which are on normal commercial terms.
(a) Syndicate 33 at Lloyd’s 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 in which Hiscox Dedicated Corporate Member Limited and the corporate member subsidiaries of Hiscox Select Insurance Fund PLC participated.
Value of services provided by Hiscox Syndicates Limited to Syndicate 33 25,918 15,305
BE Masojada is also Deputy Chairman of Lloyd’s. Hiscox Underwriting Group Services Limited received the annual fee of £41,250 (2004: £41,250) in relation to his services. There were no amounts outstanding at 31 December 2005 (2004: £nil).
(d) Parent Company The Company engaged in the following transactions with other Group companies during the year under review.
Expenses recharged from other Group companies: Hiscox Underwriting Group Services Limited 6,755 4,262
Key statistics Earnings/(loss) per share based on profit/(loss) on ordinary activities after tax 15.6p 21.3p 20.9p 6.9p (14.8)p Diluted earnings/(loss) per share based on profit/(loss) on ordinary activities after tax 15.1p 21.0p 20.6p 6.7p (14.8)p *Closing mid market prices.
(2) To re-appoint RRS Hiscox who retires as a Director in accordance with the Articles of Association and the Combined Code.
(4) To re-appoint DND Netherton who retires as a Director in accordance with the Articles of Association and the Combined Code.
(8) To authorise the Directors to determine the level of auditors’ remuneration.
(9) To consider the recommendation of the Directors as to a final dividend for the year ended 31 December 2005 of 4.75 pence (net) per ordinary share payable to shareholders on the register at the close of business on 21 April 2006.
Special business To consider and, if thought fit, pass the following resolutions, of which resolutions 10 and 11 will be proposed as ordinary resolutions, and resolutions 12 and 13 will be proposed as special resolutions.
Ordinary resolutions (10) To approve the Directors’ remuneration report for the year ended
(in substitution for all existing authorities) pursuant to Section 80 of the Companies Act 1985 (“the Act”) to allot relevant securities (within the meaning of that Section) up to a maximum aggregate nominal value of £6,533,231.86, representing 33.3% of the issued ordinary share capital as at 13 March 2006, for a period expiring (unless previously renewed, varied or revoked by the Company in general meeting) on the earlier of the conclusion of the next Annual General Meeting or the date falling 15 months from the date of the passing of this resolution, provided that the authority of the Directors shall extend to the making of any offer or agreement before the expiration or revocation of this authority which would or might require relevant securities to be allotted after the expiration or revocation of this authority and the Directors may allot relevant securities in pursuance of any such offer or agreement notwithstanding the expiry or revocation of this authority.
Special resolutions (12) That the Directors be empowered (in substitution for all existing authorities) pursuant to Section 95 of the Act to allot equity securities (as defined in Section 94(2) of the Act) for cash pursuant to the authority conferred by Resolution 11 as if Section 89(1) did not apply to the allotment. This power will expire on the earlier of the conclusion of the next Annual General Meeting or a date falling 15 months after the date of the passing of this resolution but the Company may before such expiry make an offer or agreement which would or might require equity securities to be allotted after the expiry of this power and the Directors may allot equity securities in pursuance of that offer or agreement as if the authority conferred by this resolution had not expired provided that this power is limited to: (i) allotments of equity securities where such securities have been offered (whether by way of a Rights Issue, open offer or otherwise) to holders of ordinary shares in proportion (as nearly as may be) to their existing holdings of ordinary shares but subject to the Directors having a right to make such exclusions or other arrangements in connection with the offer as they deem necessary or expedient: (a) to deal with equity securities representing fractional entitlements
(b) to deal with legal or practical problems under the laws of, or the requirements of any recognised regulatory body or any stock exchange in, any territory.
(ii) the allotment of ordinary shares for cash otherwise than pursuant to paragraph (i) up to an aggregate nominal amount of £979,984.78.
(13) That the Company be authorised to purchase its own shares from the market. The authority will be limited to a purchase of own shares up to a maximum number of 19,500,000 shares and the price to be paid for the shares will be limited to a minimum share price of £0.50 per share and a maximum price per share that is not more than five per cent above the average of the closing middle market quotations for an ordinary share as derived from the London Stock Exchange Daily Official List for the five business days immediately preceding the date on which the ordinary share is purchased. This authority will terminate on the earlier of the conclusion of the next Annual General Meeting or a date falling 15 months after the date of the passing of this resolution. The Company may make a contract or contracts to purchase ordinary shares under the authority hereby conferred prior to the expiry of such authority which will or may be executed wholly or partly after the expiry of such authority and may make a purchase of ordinary shares in pursuance of any such contract or contracts.
Notes 1. A member entitled to attend and vote at the Annual General
Meeting (the ‘Meeting’) may appoint one or more proxies (who need not be a member of the Company) to attend and, on a poll, to vote on his or her behalf. In order to be effective, any appointment of proxy must be undertaken in accordance with these notes and returned: • in hard copy form by post, by courier or by hand, to the Company’s registrars, Capita Registrars, Proxy Department, The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4BR, not later than 48 hours before the time for holding the Meeting (or in the event that the Meeting is adjourned, 48 hours before the time of any adjourned Meeting)
3. To appoint a proxy or to give an instruction to a previously appointed proxy via the CREST system, the CREST message must be received by the issuer’s agent (ID RA10) not later than 48 hours before the time for holding the Meeting or (as the case may be) the adjourned meeting. Please note, however, that proxy messages cannot be sent through CREST on weekends, bank holidays or after 8.00 pm on any day. For the purpose of this deadline, the time of receipt will be taken to be the time (as determined by the timestamp applied to the message by the CREST Applications Host) from which the issuer’s agent is able to retrieve the message. CREST Personal Members or other CREST sponsored members and those CREST members that have accepted voting service provider(s) should contact their CREST sponsor or voting service provider(s) for assistance with appointing proxies via CREST. For further information on CREST procedures, limitations and system timings, please refer to the CREST manual. We may treat as invalid a proxy appointment sent by CREST in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities Regulations 2001.
Individual capital assessments Risk-based calculations of the capital required by each FSA-authorised insurance entity in accordance with FSA regulations.
Net earned premium Premiums received after the cost of reinsurance and adjustment for unearned premium. Unearned premium covers the future period of risk of an insurance policy.
Qualifying quota share reinsurance These are quota share reinsurance policies, which Lloyd’s allow in certain circumstances, that enable a syndicate to write gross premium in excess of its authorised stamp capacity.
Reinsurance to Close (‘RITC’) The reinsurance to close of a syndicate comprises a premium payable by the closing year to the members on the next open year of account and a contract which transfers the liability for all claims in respect of the closing year to the next open year.
Subrogation The right of the underwriter to ‘stand in the shoes of the insured’ and take over the insured’s rights, following payment of a claim, to recover the payment of an incurred loss from a third party responsible for the loss. It is limited to the amount of the loss paid by the insurance policy.
Syndicate A grouping of Lloyd’s underwriters. Each syndicate has an active underwriter who is authorised to accept business on behalf of each underwriting member participating therein. A member of a syndicate is still a principal in his own right and is personally liable for his agreed share of each risk that is accepted by the syndicate. He is not liable for the debts of other syndicate members and thus the liability is several but not joint.
Year of account The year to which risk is allocated and to which all premiums and claims in respect of that risk are attributed. The year of account of a risk is determined by the calendar year in which it incepts. A year of account is normally closed by reinsurance at the end of 36 months.
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