3 Chairman’s statement 5 Chief Executive’s report 12 Hiscox business structure 13 Hiscox distribution
Hiscox London Market focused on margin over growth, reducing income by 13.6%
Rates still attractive in reinsurance and stable in other specialty lines.
recommended provider for home and contents insurance. On the commercial side, Hiscox UK
* Results from our monthly customer satisfaction survey for customers telephoning one of our UK-based contact centres. ** Results from a survey of 301 existing household/commercial brokers in Belgium, France, Germany and the Netherlands between November 2010 and January 2011.
Hiscox’s strategy is to balance the more volatile catastrophe-exposed insurance and reinsurance with steady local specialty insurance. Our diversity by product and geography gives us great flexibility, particularly in a tough commercial environment. We are able to grow and shrink the catastrophe-exposed lines according to market conditions. Currently, rates for reinsurance, which makes up almost a third of our income, are healthy. When these rates are no longer favourable, we have the flexibility to shrink this side of the business. Our local specialty insurance business tends to be steadier throughout the insurance cycle and we have successfully grown our retail lines by 11.3% year-on-year over the last five years.
The understanding of risk is intrinsic to every level of decision-making in the Group. We devote a great deal of expertise to understanding the impact of global events and model these
since 2007 and his knowledge of retail insurance from his time with the Progressive Insurance
It takes courage to go against the herd, to pioneer in new areas, or to say no to major suppliers of business. In 1993, when Bronek
Masojada joined, we were a simple underwriting agency. It would have been easy to remain so, solely managing syndicates in Lloyd’s. It would have been easy to have expanded through
USA, expanded our distribution channels to include direct offerings, and moved our domicile to Bermuda. Our leading value is courage, and we will continue to develop the business in our own way while watching closely, but not following, the herd.
during the period. Well, Mother Nature has well and truly tested us further in the second half and a full-year pre-tax profit of £211.4 million is further strong evidence of the resilience of our business.
The result for the year ending 31 December 2010 was a profit before tax of £211.4 million (2009: £320.6 million) on a gross written premium of £1,432.7 million (2009: £1,435.4 million). The combined ratio was 89.3% (2009: 86.0%). Earnings per share on profits after tax were 47.2p (2009: 75.2p) and net assets per share increased to 332.7p (2009: 299.2p).
In December we appointed two distinguished and very experienced new Non Executive
Business School and brings vital knowledge from his experience in the financial services sector. Richard has now been appointed Senior
When I see the calibre of the staff throughout the Group, I am confident that the creativity and growth of the last decade will continue strongly over the next.
The vast majority of our business comes from brokers and undoubtedly always will. Their job is a difficult one. They have to assess the risks of their diverse clients and transfer those risks to insurers at a reasonable price. Their definition of reasonable and ours will obviously sometimes conflict, and we must have the discipline to say no – sometimes not easy to do to a robust provider of business.
Bermudian businesses will maintain the same excellent underwriting discipline they showed in 2010 and it will be the turn of our specialist retail businesses to drive the Group forward.
Our London Market business has been the powerhouse of the Group. It delivered a pre-tax profit of £121.4 million (2009: £179.9 million).
This result, though lower than 2009, was helped by some canny underwriting decisions, particularly around Deepwater Horizon and the
We are convinced this is the right approach, even though it may mean that our premium income (and exposure) falls in the year ahead.
Our businesses in the UK and mainland Europe have a focus on art and private client insurance for wealthy individuals, property and liability insurance of small commercial enterprises, and on errors and omissions insurance for technology and media businesses. We market our products through brokers and direct to our customers. In the year we have seen continued growth while increasing our profitability. Total profit before tax for the year was £39.6 million (2009: £20.5 million) on total premium income of £454.7 million (2009: £421.0 million).
December and event cancellation losses arising from the Icelandic volcanic ash cloud. In addition, Hiscox UK experienced some recession-related errors and omission losses. This good performance shows the resilience of our business. The art and private client team deserves to be singled out for praise. In late 2009 they decided that on technical grounds prices were inadequate and implemented price rises of approximately 5% in a falling market.
Their discipline was rewarded by a profitable result despite the many challenges of the year. Our commercial area achieved profits, albeit at lower levels than 2009. The direct business continues to expand with the top line growing by almost 20%. This business achieved a good level of profit in aggregate.
In addition to the benefits of good underwriting, Hiscox UK has also seen the fruits of a sustained focus on expense ratio.
We are cautious about our broker-generated business as we believe that the market will remain soft. The ability of Hiscox UK
to withstand market pressures in 2010 shows the strength of our specialist market position and we are confident that it will continue to enhance the value of the Group going forward.
Property: Our primary focus is catastrophe-exposed property risks of global companies, homeowners and small businesses. Property rates have been under pressure for some time and we have substantially reduced premium income to £95.7 million (2009: £137.4 million).
Marine and energy: Good disciplined underwriting based on sound appreciation of the technical facts meant we had minimal exposure to those affected by the
Deepwater Horizon loss. We have achieved good results in this sector and have the risk appetite to expand if rates rise during the course of 2011.
casualty, remains under pressure and so this line shrank during the year. We had expected to see some losses arising out of the global financial crisis but, so far, these have not materialised. We expect to remain a modest participant in this market for as long as rates remain at their current levels.
Aviation and aerospace: Hiscox has had a long-standing participation in the insurance of satellites, both at launch and in orbit. Savvy technical ability meant that we were not involved in some of the major losses that affected this class during the year. We also welcomed to
Hiscox Bermuda: Our Bermudian business, supported by a significant thirdparty quota share reinsurance, was able to grow its income by 15.6% to $303.8 million
In the middle of 2010 we took decisive action and adapted accordingly. We decided to focus our errors and omissions and property business through wholesale brokers only and to concentrate our specialist lines (kidnap and ransom, terrorism, construction, media and not-for-profit directors and officers) on major brokers in those niches.
Xynthia and a freeze in the UK. It was followed by the earthquake in Chile and losses arising from the Icelandic volcanic ash cloud. The year continued with Deepwater Horizon, the New
In my statement last year I expressed our concerns about the proposed Lloyd’s Claims
Scheme. Some of these seem to have been recognised now by others in the market and we hope that as Lloyd’s finalises changes in 2011 it takes these concerns on board. We firmly believe that the need to provide a single point of notification for all claims, to differentiate
During the year our investment portfolio, excluding derivatives, delivered a return of £98.8 million, a yield of 3.6% on an average portfolio of £2,717.5 million. The market was testing but on balance rewarded those prepared to take some measured risk. As a result our bond portfolio performed well, as our decision to maintain a healthy allocation to credit paid off.
Our risk assets, a selection of equity and hedge funds, produced a good return but in aggregate under-performed their long only equity benchmark. The composition and benchmarking of risk assets will be a focus of attention in 2011.
As our specialist retail businesses have grown we have needed to increase the robustness of our processes. Last year, across the Group, we issued 370,000 policies and settled 40,000 claims. We rely on the efforts of many dedicated and professional operations and IT staff to deliver the services and infrastructure to do this effectively. Their high standards and those of our front line underwriters and claims handlers have helped us build the best reputation of any UK
The implementation of these recommendations will, over time, lead to continued improvements in our expense ratio.
Bermuda domiciled group we are in a slightly anomalous situation. We expect to apply
Total Group controlled premium December 2010: £1,671m (Year-on-year change in original currency)
(BMA) acting as our lead regulator, but with collaboration with the Financial Services
European Directives, and that the FSA itself is undergoing wrenching organisational and philosophical changes at the same time as
The challenges for all those involved in the process can be summed up by the fact that our application for approval under Solvency II
is expected to reach 5,000 pages, and it is thought that the FSA will receive over 100 similar applications. One has to feel sorry for the teams who have to read and approve all the applications.
to continue. In this environment our strategy of building our retail businesses to balance the more volatile big-ticket businesses will come into its own. We will allow our big-ticket businesses in Bermuda and London to shrink as they focus on margin over volume, while at the same time we expect our specialist retail businesses to grow their revenue and profits.
risks benefit greatly from the guidance of a broker or advisor which is why most specialist insurance is delivered through an intermediary. Although Hiscox has a multi-channel distribution strategy, the vast majority of our business comes from our broker partners around the world.
London since 1995 has shown us that having a local presence brings several advantages.
We develop better relationships with regional brokers, who appreciate our specialist knowledge, entrepreneurialism and desire to truly understand their clients’ risks. We have better new business growth, because we see more submissions from these intermediaries than we would sitting in London. And our retention rate is higher, as this business tends not to move solely on price.
Europe and the US – regions where we already operate and where we know there is a strong appetite for our products. When the opportunity has arisen to either acquire a good-quality book of regional business at an attractive price or to hire an excellent team of local underwriters we have opened an office, whether in Brussels,
Since 2005, Hiscox has established a network of offices across the US. Over 40% of the
Group’s revenues come from this market, mainly through Hiscox London Market, but our branches throughout the country have enabled us to capture smaller US corporate risks that are not seen in the London Market.
Hiscox also has an established direct to consumer business in the UK that it has built up since 2005 and newer direct businesses in the US and France. In all these regions we specialise in professional and general liability as well as buildings and office contents cover.
He has used the brand and marketing expertise he gained at Diageo and
Many of you will have seen our distinctive adverts, either on TV, in newspapers or on billboards. They have helped transmit
Our consistent investment has paid off: our direct business grew by 22% last year.
The unique personality of Hiscox is expressed through our employees to our clients. We want customers to find us intelligent but not intellectual, bold but not arrogant, thought-provoking but not patronising, different while being straightforward, positive but not pushy, contemporary not stuffy, sophisticated but not superior.
Hiscox aims to fill posts by recruiting internally, where possible. Because we strive to attract and retain the best people, we believe we have the ideal candidates for many jobs already working in the firm. We also want to stretch our people so they can reach their full potential.
In 2010, 77 new appointments were either internal promotions or recommendations from current employees. When we do recruit talent from outside, we ensure that they go through a thorough assessment. Another source of talent to fill senior roles in the future is our graduate trainee and internship programme. In 2010, we nearly doubled our intake, recruiting 22 graduate trainees into the UK, one in Bermuda and three in France. One of our aims is to educate the brightest students about the vibrant career this industry can offer. The average number of candidates seen for each job filled in 2010 was five.
Hiscox has a unique underwriting training programme developed by some of our very experienced underwriters. The training, which aims to reinforce Hiscox’s underwriting standards, includes how to underwrite profitably across the cycle and the importance of learning the lessons of history when assessing risks.
We also want to instil in our underwriters a restless curiosity, to challenge convention and not simply to accept a practice because that is the way it has always been done in the past.
In 2010 Hiscox Europe instigated a programme of back-to-basics underwriting training with a specific focus on disciplined underwriting in challenging markets. This training helped achieve a 20% increase in new business submissions for our target areas in our commercial lines. Across the Group a total of 353 delegates completed our underwriting training programme in 2010.
Senior staff members who have made an important contribution to the Group’s success may be appointed as a Hiscox Partner. The
willingness to go above and beyond what is expected of them; and intention to stay.
Profit before tax for the year was £211.4 million (2009: £320.6 million), despite the large catastrophe losses and tougher investment markets experienced during the year. The Group recorded a post tax return on equity of 16.5% (2009: 30.1%)
Gross premiums written of £1.4 billion were relatively flat compared to the prior year as we cut back in those lines where rates were weak and focused on areas where a greater return was expected.
Notwithstanding the challenge of the investment markets during the year, the Group’s investments produced an annualised return of 3.6% (2009: 7.2%).
The net claims ratio deteriorated to 48.3%, from 38.8% in 2009, impacted by the losses on the Chile and New Zealand earthquakes together with the Australian floods. As a result, the combined ratio (excluding the impact of foreign currency movements) declined to 81.8% (2009: 71.0%). Profit before tax for the year was £121.4 million (2009: £179.9 million).
Adjusted number of shares in issue (m) 380.6 374.8 *excluding derivative assets and catastrophe bonds.
Total net cash inflows for the year were £75.9 million (2009: outflow £150.1 million).
Net cash outflow from investing activities for the year was £22.2 million (2009: £11.7 million), primarily as a result of the purchase of tangible and intangible assets. The Group purchased the remaining shareholding in its associate company
The Group maintains relationships with a limited number of banks, whose credit status and ability to meet day-to-day banking requirements are monitored by the Group.
During the year, the Group secured a new revolving credit facility for a total of $750 million replacing the £350 million facility in place in the prior year. This may be drawn by way of cash or Letter of Credit or a combination of the two, providing the cash portion does not exceed $450 million. The facility may be drawn in any foreign currency that the Group requests.
Hiscox to lead the work on implementing the new rules and a comprehensive implementation plan is well underway. Many of Solvency II’s qualitative requirements are already an integral part of the
In a year when investment markets were characterised by periods of ‘risk on’ or ‘risk off’, the outcome over the 12 months has favoured riskier assets. Volatility, however, remained a feature, with the general sense of optimism being punctuated by periods of doubt particularly in relation to the financial condition of certain
With the broadly positive trends from 2009 continuing into 2010 there were very few shifts in the portfolio during the year. Cash was kept at a relatively low but prudent level, supported by significant holdings of government and government-backed bonds. Although mostly short in duration these provided superior income to cash and ensured that the liquidity and integrity of the balance sheet remained high. However, it was the allocations to non government bonds and risk assets that enhanced the portfolio’s performance. Our risk assets exposure was maintained at around 5%
throughout the year. It comprises a selection of long only equity funds and equity based hedge funds. The latter account for roughly 30% of this portfolio and are expected to deliver less exciting but more stable returns. When combined with the long only funds, the risk assets produced a satisfactory result in total.
Few commentators expect official rates to rise in our main markets during 2011 but there are signs of inflationary pressures and a policy shift, or at least the expectation thereof, cannot be ruled out. The allocation to cash is therefore likely to drift higher and duration of the bond portfolios kept low relative to their benchmarks.
Given that returns from the bond portfolios are forecast to be lower than 2009 and 2010 and will provide a more limited cushion against the possibility of a weak equity market, our allocation to equities is set to remain around current levels.
The impact of the financial crisis has not gone away. Economic recovery in the developed world and the outlook for Chinese growth are areas for concern, and doubts remain about solvency 12.2% Cash 82.2% Bonds 5.6% Risk assets
Group invested assets* £2,779.7m £2,660.6m *excludes derivatives and investment in catastrophe bonds.
The core business of Hiscox is managing risk; as such the understanding of risk is intrinsic to every level of decision-making in the Group.
Group has systems and procedures to identify and manage them. These procedures are regularly reviewed and improved in the light of the evolving risk environment and best practice.
Board in relation to management of the Group’s risk profile. The Group’s risk appetite is set by the
Risk Committee of the Board. These functions are organised centrally to assist in the integration of best practice throughout the Group. A range of risk management tools are used to assess and manage risk both at business unit level and on a Group-wide basis.
or ‘secondary’. Principal major risks represent the most pertinent risks to which the Group is currently exposed, and secondary major risks represent other material risks to which the Group is currently exposed, but not deemed critical at this stage. Detailed information relating to the
Group’s financial statements is set out in note 3 to the financial statements.
The Group continues to underwrite significant risks in geographical regions that are prone to natural peril or which provide cover against other catastrophes, such as terrorism. This business remains a compelling proposition for the Group as it is capable of returning good margins over the medium to long-term as the occurrence of catastrophes average out. As with similar insurers, the Group’s earnings are affected by unpredictable external events such as natural and other catastrophes, legal developments, social and economic change and the emergence of latent risks. Such events can create significant levels of underwriting losses.
This enables us to maximise expected risk/return on the portfolio as a whole and offset potential losses on more volatile accounts.
Aggregation and modelling resources are shared across the Group. Subsidiaries and locations worldwide therefore employ the same sophisticated standard of modelling tools tailored to the characteristics of each specific market. The Group assesses realistic disaster
The Group also manages underwriting risk by purchasing reinsurance. Reinsurance protection such as excess of loss cover is purchased at an entity level and is also considered at an overall
This risk is monitored and managed using similar modelling techniques to those described above, under the supervision of a dedicated
In our markets, Hiscox competes against major international groups with similar offerings.
Accepting insurance risk below the technical price is detrimental to the industry’s prospects, since it drives the prevailing rates in the market lower to the point where business failures occur, insurers’ capital is destroyed, customers receive suboptimal 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. In common with all insurers, the Group is exposed to this price volatility. Prolonged periods of low premium rating levels or high levels of competition in the insurance markets are likely to have a negative impact on the Group’s financial performance.
To manage this risk, Hiscox alters its appetite for the lines of business and the layers it writes in response to market conditions and the risk appetite of the Group. Pricing levels are monitored on a continuous basis, with detailed monthly reports grouping current prices with exposure and trends over the past 12 months.
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.
Central Fund operated by the Council of Lloyd’s, and in the UK certain Hiscox entities contribute to the Financial Services Compensation Scheme (FSCS). Insurance companies may be asked to contribute to the recent claims on the FSCS from the banking industry, currently funded by HM
The Group invests premiums and technical funds, which are held for the payment of future claims, and as such is exposed to investment risk. The Group’s investment policy is designed to maximise returns within an overall risk appetite which stipulates a one in 100 year loss tolerance.
Where appropriate the Board may seek to set aside additional capital to support the recommended asset allocation. The overriding philosophy with the Group’s assets is not to lose money or to put at risk the Group’s capacity to underwrite.
Emerging risk identification and control is a core part of risk management activity in relation to all aspects of our business, including underwriting, operations and strategy.
Benchmarks are instead set for the fixed income fund managers which approximate the payment profile of the claims as well as providing the managers with some flexibility to enhance returns.
Dollar insurance liabilities with investments held in the same currency in order to minimise the effect of currency fluctuations. Whilst the Group’s reporting currency is Sterling, a significant proportion of the Group’s operational cost base is located in the US and
Running stress tests to estimate the size and timing of claims that might be payable in the event of a number of major catastrophes all occurring within a short period of time. We also run scenario analyses which consider the impact on liquidity of a range of adverse events happening simultaneously; for example, an economic downturn and declining investment returns combined with unusual levels of insurance losses.
Our investment policy recognises that some investments may need to be realised before maturity or at short notice and hence a high proportion of investments must be held in liquid assets. This minimises the risk of loss in the event of having to sell assets quickly. Using these measures we believe the likelihood of being unable to meet our liabilities, or of incurring excessive costs in doing so, to be extremely remote.
Agents to whom binding authorities are granted are regularly examined to ensure they meet the Group’s minimum standards. These checks are performed by staff independent of the underwriting function and the process is overseen by a committee comprising both underwriters and non-underwriters from the senior management team and the Director of Compliance and Internal Audit.
The Group purchases reinsurance protection to limit its exposure to single claims and the aggregation of claims from catastrophic events. The Group places reinsurance with companies that it believes are strong financially and operationally. Credit exposures to these companies are closely managed by the
RSC following an internal assessment of the company’s financial strength, trading record, payment history, outlook and organisational structure, in addition to credit ratings granted by external agents. Approved reinsurers are monitored continuously to identify potential deteriorations as early as possible. Monitoring procedures include consideration of public information produced by reinsurers; the Group’s experience of the reinsurers and their behaviour in the marketplace; and analysis from external consultants and from rating agencies. Credit limits are set for approved reinsurers both at a Hiscox Group level and for each underwriting subsidiary based on a defined risk appetite.
The external ratings assigned to the Group and its subsidiaries are essential to maintaining profitability, particularly in relation to our reinsurance business and managing the costs of financing and access to capital. The Group has identified the key aspects of our business which are critical to maintaining our ratings.
These are closely managed to minimise the risk of an event which might jeopardise any rating and to ensure that we respond appropriately to unforeseen external events. We maintain regular and open communication with our rating agencies to ensure that we continue to meet their expectations and that careful consideration is given to the potential impact on a rating of any significant decision.
USA, Bermuda and Guernsey. This geographical dispersion reduces the Group’s exposure to natural or terrorist events that could prevent access to premises or loss of staff. In the event of a loss of staff, for example as a result of a pandemic, a plan is in place to re-assign key responsibilities and transfer resources to ensure key business functions can continue to operate.
Hiscox’s commitment to responsible business practices is reflected in: The environment
In 2010 Hiscox UK developed an environmental policy statement, laying out its commitment to measure its carbon footprint and to reduce that as far as it can. The policy encourages the business to operate more sustainably by: measuring our use of water, energy and other products in order to reduce their consumption over time; buying sustainably-sourced goods or energy-efficient products where we can; and minimising waste by recycling and reusing products as much as is feasible. It is intended that this policy and environmental best practice will be rolled out across the Group.
undertook to encourage its employees to change their behaviour in an effort to become carbon neutral. The business generated significant cost and energy savings through increased recycling and more careful use of electricity, water and gas.
They achieved a 13% decrease in overall waste sent to landfill, a 15% decrease in overall building energy use and a 12% reduction in water use.
Overall, Hiscox UK reduced its carbon footprint by 6%; the balance of its (largely unavoidable) carbon emissions were offset through an investment in an African Energy Efficient Stove Project.
Group financial information is available on its website. In addition, senior management and key employees meet investors and analysts throughout the year to explain and answer questions on the Group financial performance and business strategy.
The Hiscox culture is underpinned by a set of core values that determine a standard of behaviour that is expected of all our employees.
The Group believes that it has got this balance right and, furthermore, that this is one of its greatest strengths. The Group’s policies ensure that it continues to follow a best practice approach to managing its people and remains a fair and professional employer. In the unlikely event of an employee having a serious concern relating to the operations of the business, a whistleblowing policy explains to staff how they can confidentially raise their misgivings.
Hiscox is committed to providing equal opportunities to all employees and potential employees in all aspects of employment,
Hiscox encourages employees to share in the success of the Group through performancerelated pay, bonus, savings-related share option schemes and executive share option schemes.
A monthly staff e-zine provides updates on issues and social events.
Community programme, which supports local initiatives concerning education, training, enterprise and regeneration. In London, members of our staff help pupils at the Elizabeth Selby
Infants School in Tower Hamlets through the Reading Partners’ Scheme. Employees also mentor students at Morpeth School in Tower Hamlets.
Masterworks Foundation, which aims to repatriate artworks by Bermudian artists or featuring Bermuda landscapes/seascapes.
End of London. We sponsor the collections gallery at the Whitechapel, which is a touchstone for contemporary art internationally.
Hiscox is supporting The Royal Institution with a loan and corporate sponsorship. We are proud to support this independent charity which is the oldest independent research body in the world and has been dedicated to connecting people with the world of science for over 200 years.
HART helps some of the poorest and most abused people in the world. More details of the charities Hiscox supports can be found on our website www.hiscox.com.
Hiscox can trace its origins in the Lloyd’s Market to 1901. Today, Hiscox Syndicate 33 is one of the largest composite syndicates at Lloyd’s, and has an A.M. Best syndicate rating of A (Excellent). Syndicate 33 underwrites a mixture of reinsurance, major property and energy business, as well as a range of specialty lines including contingency, technology and media risks among others. The business is mainly property-related short-tail business. Syndicate 33 trades through the Lloyd’s worldwide licences and ratings. It also benefits from the Lloyd’s brand. Lloyd’s has an A (Excellent) rating from
Syndicate 3624 is a wholly owned syndicate which began underwriting for the 2009 year of account with an underwriting capacity of £150 million. Syndicate 3624 writes the US E&O
account written through the Hiscox underwriting agency in Armonk, New York and a 50% quota share of Syndicate 33’s TMT business written by
It is wholly backed by external Names and takes a pure year of account quota share of Syndicate 33’s international property catastrophe reinsurance account. The arrangement was extended for the 2010 year of account and
Hiscox Insurance Company Limited has licences throughout Europe. It is the primary insurance vehicle used by the UK and mainland Europe offices for their business. The success of the reshaped portfolio can be seen in the chart below right.
Hiscox Insurance Company Limited has achieved average compound growth in gross premiums written of 13.8% from 1997 to 2010, despite discontinuing almost all of its original business. It has also significantly improved its combined ratio.
At the end of 2010, net assets exceeded £197 million (2009: £172 million).
Hiscox Guernsey has an A.M. Best rating of A (Excellent) and an A (Strong) rating from
Fitch. At the end of 2010, net assets exceeded $28 million (2009: $28 million).
Hiscox Bermuda has an A.M. Best rating of A (Excellent) and an A (Strong) rating from
Hiscox Insurance Company Inc. was acquired by the Group in 2007 through the purchase of the then parent holding company ALTOHA, Inc.
Robert Childs joined Hiscox 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 Offi cer. Robert was Chairman of the Lloyd’s Market Association from January 2003 to May 2005. Robert is a Trustee of Enham (a charity for the disabled), Chairman of the Advisory Board of the School of Management of Royal Holloway University of London, and Chairman of The Bermuda Society.
Daniel Healy joined Hiscox in 2006. He was appointed Executive Vice President and Chief Financial Offi cer of North Fork Bancorporation in 1992 and a member of its Board of Directors in 2000. He was a partner with KPMG LLP before joining North Fork. He was the Managing Partner of the San José, California and Long Island, New York offi ces and held other positions in that fi rm during his tenure. He is Chairman of Herald National Bank and he holds Board positions with KBW, Inc. and Harlem RBI, a not-forprofi t organisation. He is also a Senior Adviser to Permira Advisers LLC, an international private equity fi rm.
Ernst Jansen joined Hiscox in 2008. He held several Managing Director positions in the European chemical industry between 1980 and 1990. He was an Executive Director then Vice Chairman of Eureko B.V. between 1992 and 2007. Following retirement he became an adviser to the Executive Board and is a member of the Supervisory Board of a number of Eureko operating companies.
Dr James Austin Charles King Non Executive Director and Chairman of the Confl ict Committee (Aged 72)
Dr James King joined Hiscox in 2006. He chairs Keytech Limited, The Bermuda Telephone Company Ltd, Grotto Bay Properties Ltd and the Establishment Investment Trust, a UK listed company. He was Chairman of the Bank of N.T. Butterfi eld & Son Limited until 19 April 2007. He is a Director of Castle Harbour Limited. Dr King is a fellow of the Royal College of Surgeons, Canada and the American College of Surgeons.
Andrea Sarah Rosen Senior Independent Director (Jan 2010– Feb 2011) and Chairman of the Remuneration and Nomination Committee (Aged 56)
Registered offi ce Wessex House 45 Reid Street Hamilton HM 12 Bermuda
Hiscox Ltd (‘the Company’) is the Bermudian domiciled holding company for the Group.
During 2010, and up to the date of this report and accounts, the Group has complied with the provisions of the Combined Code in all material respects.
The Board comprises four Executive Directors and seven independent Non Executive
remuneration, approving significant expenditure or projects, and approving the issue of share options. The Board has, however, authorised the boards of the trading entities and business divisions to manage their respective operational affairs, to the extent that Company Board level approval is not required.
(subject always to Board approval), approval of senior appointments and remuneration (other than Board appointments), management of the Group’s trading performance, mergers and acquisitions (which are not significant to the
European and US and executive groups and approval of exceptional spend within the limits established by the Board. The London, European and US executive groups provide strategic direction and are a forum for communicating important issues. Below these geographic executive groups, are the local management teams that drive the local businesses.
The Audit Committee of Hiscox Ltd is chaired by Daniel Healy and comprises Richard
Daniel Healy, is considered by the Board to have recent and relevant financial experience.
Pedelty, with Andrea Rosen as alternate, and is now chaired by Andrea Rosen. It meets a minimum of twice a year to deal with appointments to the Board and to recommend a framework of executive remuneration.
The Directors’ remuneration report is presented on pages 37 to 45.
The Group has a Conflicts Committee which comprises independent Non Executive Directors from within the Group, and is chaired by Dr
Lloyd’s Managing Agency. 27.5% of the Names on Syndicate 33 are third-parties and 72.5%
of Syndicate 33 is owned by a Hiscox Group company. 100% of Syndicate 3624 is owned by a Hiscox Group company. 100% of Syndicate 6104 is owned by third-parties. The Conflicts
Committee serves to protect the interests of the third-party Syndicate Names. Should such a potential conflict of interest arise, there is a formal procedure to refer the matter to this Committee.
Periodically the Chairman reviews the performance of the Board as a whole. He meets with the Non Executive Directors separately and as a body to discuss a wide range of issues, including the performance of the Executive
Executive Directors to discuss a similarly wide range of issues concerning the company including as appropriate the performance of the
General Meeting. All other Directors attended the Annual General Meeting in 2010.
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.
The Directors are responsible for maintaining a sound system of internal control to safeguard the investment made by shareholders and the
Directors on the Combined Code’. The head of each business area is responsible for implementing the risk management programme in their area of operations. The Risk function collates risk management information and works with the risk committees to monitor significant risks and movements, and review the relevant internal controls.
This report sets out the remuneration policy for the Group’s senior executives.
No member of the committee has any personal financial interest (other than as a shareholder)
or conflicts of interest arising from cross directorships or day-to-day involvement in running the business. No Director plays any part in any discussion about his or her own remuneration.
The Committee is provided with data and has access to advice from Towers Watson, independent remuneration consultants.
All employees, including Executive Directors, are eligible for the Profit Related Bonus.
Rate’). The minimum Hurdle Rate is currently set at a 10% pre-tax return on equity with the bonus pool comprising 15% of profits in excess of that.
From 2011 the Hurdle Rate will be reviewed by using a ‘benchmark rate’ which takes account of the medium-term, forward looking investment returns (specifically 1–3 year Gilt and Treasury yields, cash returns and the general investment environment). The Hurdle Rate will then be set at 5% above this benchmark rate. If the benchmark rate drops below zero or above 7.5% (suggesting a Hurdle Rate of below 5% or above 12.5%)
Balance of bonus split 50% in year two, and 50% in year three
Hiscox operates a Performance Share Plan for senior managers, a UK Save as You Earn scheme and an International Save as You Earn scheme.
Restricted share awards or nil cost option awards (depending on the appropriate practice by country) are made to Executive Directors and other senior managers at the discretion of the Remuneration and Nomination Committee.
Total Shareholder Return, the concept which is applied to the Performance Share Plan awards is that the recipient is provided with the equivalent of the dividend either in shares or cash. This specifically works as follows: dividends (or amounts equal to dividends)
Share Plan roll up in the form of shares between the grant and vesting; at the end of the performance period the employee would have options over the proportion of the share grant which vests by reference to the satisfaction of the applicable performance target as well as over the number of shares representing the
‘rolled up’ dividends on those shares; and for UK-based employees only, after vesting but before exercise, the employee would then receive ‘shadow dividends’ (i.e.
amounts equal to dividends paid) on the total number of shares remaining under option. Up to a maximum of 200,000 shares under option per individual, these amounts would be paid in cash, twice yearly, at the same time as dividends are paid to shareholders, until the option is exercised (which could be for up to a further seven years, when the option expires). Above 200,000 shares under option, the ‘shadow dividends’ would be re-invested into shares within the trust. Executive Directors, however, would have the entire ‘shadow dividend’ re-invested in shares within an employee benefit trust.
Details of their contractual notice periods are contained in the table below right.
‘Base’ refers to base salary for the year. ‘Annual cash incentive’ is the annual amount allocated from the profi t bonus pool. ‘Share incentive scheme’ is the estimated value at award of the Performance Share Plan awards made during the year.
Share Plan are as follows: 25% of the award vests if the Company achieves an average ROE of 10% post-tax for each of the three years; 100% vests if the average three-year return exceeds 17.5% post-tax; and vesting will occur on a straight-line basis between these points.
The sharesave scheme and international sharesave scheme are offered to all employees and currently have a 55% participation.
No external appointments may be accepted by an Executive Director where such appointment may give rise to a conflict of interest.
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. All amounts are denominated in US Dollars. The structure of the fees paid are detailed below.
The fees in relation to Hiscox Ltd for the year were: Hiscox Ltd Board
SJ Bridges 56,398 – – (56,398) – 1.755 3.401 3-May-04 2-May-11
RRS Hiscox 56,398 – – (56,398) – 1.755 3.688 3-May-04 2-May-11
SJ Bridges 4,256 – – (4,256) – 2.220 3.340 01-May-10 31-Oct-10
RRS Hiscox 4,907 – – – 4,907 1.956 – 01-Dec-11 31-May-12
BE Masojada 4,343 – – – 4,343 2.210 – 01-Dec-10 31-May-11
the year are disclosed in note 24 to the consolidated financial statements.
The policy of the Hiscox Foundation is to assist and improve education, the arts and independent living for disabled and disadvantaged members of society. Further information concerning the
Group’s charitable activities is contained in the report on corporate responsibility on page 27.
The notice of the Annual General Meeting, to be held at the Elbow Beach Hotel, 60 South Shore
Road, Paget PG04, Bermuda on 8 June 2011 at 10:00am (2:00pm (BST)), is contained in a separate circular to shareholders enclosed with this report.
The Company is a holding company for subsidiaries involved in the business of insurance in Bermuda, the US, the UK, Guernsey and
Europe. An analysis of the development and performance of the business and likely future development can be found within the Chief
In addition, note 3 to the financial statements provides a detailed discussion on the risks which are inherent to the Group’s business and how those risks are managed. Details of the key financial performance indicators are given on page 1.
All information described above is incorporated by reference into this report and is deemed to form part of this report.
The Group has considerable financial resources and a well-balanced book of business.
After making enquiries, the Directors have an expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future.
(net)). If approved this will be paid on 21 June 2011 to shareholders on the register at the close of business on 13 May 2011. The Directors propose that shareholders may elect to receive the final dividend in new ordinary shares, a ‘scrip dividend’, rather than cash. A resolution to approve the scrip dividend alternative will be put to shareholders at the Annual General Meeting.
We confirm that to the best of our knowledge: the financial statements, prepared in accordance with the applicable set of accounting standards, present fairly, in all material respects, the assets, liabilities, financial position and profit or loss of the
The Directors responsible for authorising the responsibility statement on behalf of the Board are the Chairman, RRS Hiscox and the Group
Directors’ interests 5p Ordinary Shares number of shares beneficial 5p Ordinary Shares number of shares benefi cial
In addition to our audit of the consolidated financial statements, the Directors have engaged us to audit the information in the Directors’ remuneration report that is described as having been audited, which the Directors have decided to prepare
as if the Company were required to comply with the requirements of Schedule 8 to the
Reporting Standards as adopted by the EU and for such internal controls as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement whether due to fraud or error.
Our responsibility is to express an opinion on these consolidated financial statements based on our audit and, under the terms of our engagement letter, to audit the part of the Directors’ remuneration report that is described as having been audited.
An audit also includes evaluating the appropriateness of accounting principles used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements and the part of the Directors’ remuneration report to be audited.
We are not required by the terms of our engagement to consider whether the
Claims and claim adjustment expenses, net of reinsurance 26.2 (570,997) (463,218)
Profit for the year (all attributable to owners of the Company) 178,800 280,497
Currency translation gains/(losses) (net of tax of £nil (2009: £nil)) 12 11,729 (69,589)
for the year (all attributable to owners of the Company) – – – (69,589) 280,497 210,908
Employee share options: Equity settled share based payments 24 – – – – 5,260 5,260
Proceeds from shares issued 24 91 2,413 – – – 2,504
Dividends paid to owners of the Company 32 – – (48,613) – – (48,613)
Proceeds from shares issued 24 139 3,969 – – – 4,108
Dividends paid to owners of the Company 32 – – (58,460) – – (58,460)
Cash flows from the sale and purchase of associates 16 468 –
Cash flows from the purchase of property, plant and equipment (3,462) (8,802)
Included within cash and cash equivalents held by the Group are balances totalling £63,447,000 (2009: £31,607,000) not available for immediate use by the Group outside of the Lloyd’s syndicate within which they are held.
Group provided insurance and reinsurance services to its clients worldwide. It has operations in Bermuda, the UK, Europe, and the US and employs over 1,100 people.
Stock Exchange. As such it is required to prepare its annual audited financial information in accordance with Section 4.1 of the Disclosure and Transparency
Rules and the Listing Rules, both issued by the Financial Services Authority (FSA), in addition to the Bermuda Companies Act 1981. The first two pronouncements issued by the FSA require the Group to prepare financial statements which comprise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated balance sheet, the consolidated statement of changes in equity, the consolidated cash flow statement and the related notes 1 to 39 in accordance with
The principal accounting policies applied in the preparation of these consolidated
IFRS as adopted by the European Union and in accordance with the provisions of the Bermuda Companies Act 1981.
(IASB) have been referred to as IFRS. The standards from prior years continue to bear the title ‘International Accounting Standards’
Insurance Contracts which specifies the financial reporting for insurance contracts by an insurer. The standard is only the first phase in the IASB’s insurance contract project and as such is only a stepping stone to Phase II, introducing limited improvements to accounting for insurance contracts. Accordingly, to the extent that
The exposure draft proposes a number of significant changes to the measurement of insurance contracts and as such adoption of a final standard in a form similar to the exposure draft will likely have a significant impact on the results of the Group. As yet, there is no effective date agreed for a new standard however transitional provisions propose that it should be applied retrospectively with opening differences accounted for in equity.
The Group is generally supportive of the proposed measurement principles for short duration contracts however we have submitted a comment letter to the IASB
outlining our concerns and issues with some of the definitions and detail included within the exposure draft. We continue to monitor the progress of the project.
The effective date for the new standard has not been determined however retrospective application will be required.
Should IAS 19 be amended to reflect the proposed changes, the Group will no longer be permitted to apply the corridor approach and as such, should the proposals be included within the new standard, we expect there to be an impact to the financial position of the Group.
They are compiled on a going concern basis and prepared on the historical cost basis except that pension scheme assets included in the measurement of the employee retirement benefit obligation, and certain financial instruments including derivative instruments are measured at fair value.
The balance sheet of the Group is presented in order of increasing liquidity.
Notes to the consolidated financial statements continued are taken into account. Management also exercise significant judgement about any actual or perceived control acquired indirectly, through normal commercial dealings with entities of a special purpose nature. The Group does not undertake any such arrangements with such entities where control of that entity would be acquired.
The consolidated financial statements include the assets, liabilities and results of the Group up to 31 December each year.
The financial statements of subsidiaries are included in the consolidated financial statements only from the date that control commences until the date that control ceases.
The Group uses the acquisition method of accounting to account for the acquisition of subsidiaries. At the date of acquisition, the Group recognises the identifiable assets acquired and liabilities assumed as part of the overall business combination transaction at their acquisition date fair value. Recognition of these items is subject to the definitions of assets and liabilities in the Framework for the Preparation and
Group may also recognise intangible items not previously recognised by the acquired entity such as customer relationships.
Associates are those entities in which the Group has significant influence but not control over the financial and operating policies. Significant influence is generally identified with a shareholding of between 20% and 50% of an entity’s voting rights.
Reporting Standards. Such amendments remove inconsistencies and clarify wording and unless otherwise stated are effective for financial years beginning on or after 1 January 2010. The Group adopted the revisions where applicable with no impact to the financial statements.
The amendment clarifies the definition of a related party in order to simplify the identification of such relationships and to eliminate inconsistencies in application.
The financial position of the Group, its cash flows and borrowing facilities are included therein. In addition, note 3 to the financial statements provides a detailed discussion on the risks which are inherent to the Group’s business and how those risks are managed.
as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance items are charged to the income statement during the financial period in which they are incurred.
The Group’s share of its associates’ postacquisition profits or losses after tax is recognised in the income statement for 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 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 Group has incurred obligations in respect of the associate.
Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
Unrealised gains arising from transactions with associates are eliminated against the investment in the associate. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.
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
Insurance Company (Guernsey) Limited and Syndicate 3624 whose functional currency is also US Dollars.
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted on an active market. Receivables arising from insurance contracts are included in this category and are reviewed for impairment as part of the impairment review of loans and receivables.
The Group has classified cash deposits and short-term highly liquid investments as cash and cash equivalents. These assets are readily convertible into known amounts of cash and are subject to inconsequential changes in value. Cash equivalents are financial investments with less than three months to maturity at the date of acquisition.
Objective factors that are considered when determining whether a financial asset or group of financial assets may be impaired include, but are not limited to, the following: negative rating agency announcements in respect of investment issuers, reinsurers and debtors; the expected useful life of the software of between three and five years on a straightline basis.
Financial assets are de-recognised when the right to receive cash flows from them expires or where they have been transferred and the
The cost of purchasing the Group’s participation in the Lloyd’s insurance syndicates is not amortised but is tested annually for impairment and is carried at cost less accumulated impairment losses.
State authorisation licences acquired in business combinations are recognised initially at their fair value. The asset is not amortised, as the Board considers that economic benefits will accrue to the Group over an indefinite number of future periods, but is tested annually for impairment, and any accumulated impairment losses recognised are deducted from the historical cost amount to produce the net balance sheet carrying amount.
Costs directly attributable to securing the intangible rights to customer contractual relationships are recognised as an intangible asset where they can be identified separately and measured reliably and it is probable that they will be recovered by directly related future profits. These costs are amortised on a straight-line basis over the useful economic life which is deemed to be 20 years and are carried at cost less accumulated amortisation and impairment losses.
They include direct and indirect claims settlement costs and arise from events that have occurred up to the balance sheet date even if they have not yet been reported to the Group. The Group does not discount its liabilities for unpaid claims. Liabilities for unpaid claims are estimated using the input of assessments for individual cases reported to the Group and statistical analysis for the claims incurred but not reported, and an estimate of the expected ultimate cost of more complex claims that may be affected by external factors e.g. court decisions.
Commissions and other direct and indirect costs that vary with and are related to securing new contracts and renewing existing contracts are capitalised as deferred acquisition costs. All other costs are recognised as expenses when incurred.
At each balance sheet date, liability adequacy tests are performed by each segment of the Group to ensure the adequacy of the contract liabilities net of related DAC. In performing these tests, current best estimates of future contractual cash flows and claims handling and administration expenses, as well as investment income from assets backing such liabilities, are used. Any deficiency is immediately charged to profit or loss initially by writing-off DAC and by subsequently establishing a provision for losses arising from liability adequacy tests (‘the unexpired risk provision’).
Any DAC written-off as a result of this test cannot subsequently be reinstated.
The benefits to which the Group is entitled under outwards reinsurance contracts are gains or losses relating to the ineffective portion of the hedging instruments are recognised immediately in the consolidated income statement.
(own shares), the consideration paid, including any directly attributable incremental costs (net of income taxes), is deducted from equity attributable to the Company’s owners on consolidation.
An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount.
A reversal of an impairment loss is recognised as income immediately.
Impairment losses recognised in respect of goodwill are not subsequently reversed.
Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently valued at their fair value at each balance sheet date. Fair values are obtained from quoted market values and, if these are not available, valuation techniques including option pricing models as appropriate.
The amount recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognised actuarial gains or losses and past service costs.
expected average remaining working lives. 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.
The Group operates a number of equity settled share based employee compensation plans. These include both the approved and unapproved share option schemes, and the
The fair value of the employee services received, measured at grant date, in exchange for the grant of the awards is recognised as an expense with the corresponding credit being recorded in retained earnings within equity. The total amount to be expensed over the vesting period is determined by reference to the fair value of the awards granted, excluding the impact of any non-market vesting conditions when the liability is settled. The allowance is the assessment of the amount that can be recovered from the action against the liable third-party.
Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, if the deferred income tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss, it is not recognised. Deferred tax is determined using tax rates and laws that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Deferred tax assets are recognised to the extent that it is probable that the future taxable profit will be available against which the temporary differences can be utilised.
The Group operated both defined contribution and defined benefit pension schemes during the year under review.
Subrogation reimbursements are also considered as an allowance in the measurement of the insurance liability for claims and are recognised in other assets 2 Significant accounting policies continued 2.13 Insurance contracts continued
The Group is subject to various insurancerelated assessments and guarantee fund levies. Provisions are recognised where there is a present obligation (legal or constructive) as a result of a past event that can be measured reliably and it is probable that an outflow of economic benefits will be required to settle that obligation.
Leases in which significantly all of the risks and rewards of ownership are transferred to the Group are classified as finance leases.
Rental income from operating leases is recognised on a straight-line basis over the term of the relevant contractual agreement.
Dividend distribution to the Company’s shareholders is recognised as a liability in the Group’s financial statements in the period in which the dividends are approved.
Directors consider the accounting policies for determining insurance liabilities, the valuation of investments, the valuation of retirement benefit scheme obligations and the determination of deferred tax assets and liabilities as being most critical to an understanding of the Group’s result and position.
The most critical estimate included within the Group’s balance sheet is the estimate for losses incurred but not reported. The total estimate as at 31 December 2010 is £904 million (2009: £749 million) and is included within total insurance liabilities on the balance sheet.
In order to qualify for hedge accounting, the Group is required to document in advance the relationship between the item being hedged and the hedging instrument.
The Group is also required to document and demonstrate an assessment of the relationship between the hedged item and the hedging instrument, which shows that the hedge will be highly effective on an on-going basis. This effectiveness testing is re-performed at each period end to ensure that the hedge remains highly effective.
Finance costs consist of interest charges accruing on the Group’s borrowings and bank overdrafts together with commission fees charged in respect of Letters of Credit.
(e.g. profitability or net asset growth targets). Non-market vesting conditions are included in assumptions about the number of awards that are expected to become exercisable. At each balance sheet date, the Group revises its estimates of the number of awards that are expected to vest.
When the terms and conditions of an equity settled share based employee compensation plan are modified, and the expense to be recognised increases as a result of the modification, then the increase is recognised evenly over the remaining vesting period. When a modification reduces the expense to be recognised, there is no adjustment recognised and the premodification expense continues to be applied. The proceeds received net of any directly attributable transaction costs are credited to share capital and share premium when the options are exercised.
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.
The Group recognises a liability and an expense for accumulating compensation 2 Significant accounting policies continued 2.15 Employee benefits continued
In addition, the majority of material cash outflows are typically triggered by the occurrence of insured events non-correlated to financial markets, and not by the inclination or will of policyholders.
The predominant risk to which the Group is exposed is insurance risk which is assumed through the underwriting process.
Insurance risk can be sub-categorised into i) underwriting risk including the risk of catastrophe and systemic insurance losses and the insurance competition and cycle, and ii) reserving risk.
The Board sets the Group’s underwriting strategy for accepting and managing underwriting risk, seeking to exploit identified opportunities in the light of other relevant anticipated market conditions.
These actions and targets are reviewed and approved by the Board in advance of each underwriting year. The Board continually reviews its underwriting strategy throughout each underwriting year in light of the evolving market pricing and loss conditions and as opportunities present themselves. The Group’s underwriters and management consider underwriting risk at an individual contract level, and also from a portfolio perspective where the risks assumed in similar classes of policies are aggregated and the exposure evaluated in light of historical portfolio experience and prospective factors. To assist with the process of pricing and managing underwriting risk
Legislation concerning the determination of taxation assets and liabilities is complex and continually evolving. In preparing the
Group’s financial statements, the Directors estimate taxation assets and liabilities after taking appropriate professional advice.
These measures are widely recognised by the insurance industry and are consistent with internal performance measures reviewed by senior management including the chief operating decision maker.
However, these three measures are not defined within the IFRS framework and body of standards and interpretations and therefore may not be directly comparable with similarly titled additional performance measures reported by other companies.
The Board exercises oversight of the development and operational implementation of its risk management policies and procedures, and ongoing compliance therewith, partially through its own enquiries but primarily through a dedicated internal audit function, which has operational independence, clear terms of reference influenced by the Board’s
of core capital as a result of a 1 in 250 bad underwriting year.
The Group’s estimated exposure to certain industry events is summarised below.
These estimates have been made using modelled assumptions and management judgement and given the nature of risks underwritten may be materially different from actual losses suffered depending on the size and nature of the event.
and maximum aggregated exposures per geographical zone and risk class. Monthly meetings are held between the Chief
The Group also manages underwriting risk by purchasing reinsurance. Reinsurance protection such as excess of loss cover is purchased at an entity level and is also considered at an overall Group level to mitigate the effect of catastrophes and unexpected concentrations of risk.
The Board requires all underwriters to operate within an overall Group appetite for individual events. This defines the maximum exposure that the Group is prepared to retain on its own account for any one potential catastrophe event or disaster. The Group’s underwriting risk appetite seeks to ensure that it should not the Group routinely performs a wide range of activities including the following: regularly updating the Group’s risk models; documenting, monitoring and reporting on the Group’s strategy to manage risk; developing systems that facilitate the identification of emerging issues promptly; utilising sophisticated computer modelling tools to simulate catastrophes and measure the resultant potential losses before and after reinsurance; monitoring legal developments and amending the wording of policies when necessary; regularly aggregating risk exposures across individual underwriting portfolios and known accumulations of risk; examining the aggregated exposures in advance of underwriting further large risks; and developing processes that continually factor market intelligence into the pricing process.
All underwriting staff and binding agencies are set strict parameters in relation to the levels and types of business they can underwrite, based on individual levels of experience and competence. These parameters cover areas such as the maximum sums insured per insurance contract, maximum gross written premiums 3 Management of risk continued 3.1 Insurance risk continued i) Underwriting risk continued
The Group’s reinsurance inwards acceptances are primarily focused on large commercial property, homeowner and marine and crop exposures held by other insurance companies predominantly in North America and other developed economies. This business is characterised more by large claims arising from individual events or catastrophes than the high-frequency, low-severity attritional losses associated with certain other business written by the Group. Multiple insured losses can periodically arise out of a single natural or man-made occurrence.
Estimated concentration of gross and net insurance liabilities on balance sheet by territory coverage of premium written 31 December 2010
Estimated concentration of gross and net insurance liabilities on balance sheet by territory coverage of premium written 31 December 2009
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.
The Group’s procedures for estimating the outstanding costs of settling insured losses at the balance sheet date, including claims incurred but not yet reported, are detailed in note 26.
A significant proportion of the reinsurance inwards business provides cover on an excess of loss basis for individual events.
The Group agrees to reimburse the cedant once their losses exceed a minimum level.
Consequently the frequency and severity of reinsurance inwards claims is related not only to the number of significant insured events that occur but also to their individual magnitude. If numerous catastrophes occurred in any one year, but the cedant’s individual loss on each was below the minimum stated, then the Group would have no liability under such contracts. Maximum gross line sizes and aggregate exposures are set for each type of programme.
The most significant risks covered for periods exceeding one year are certain specialist lines such as marine and offshore construction projects which can typically have building and assembling periods of between three and four years.
Group equity and profit after tax for the year by approximately £13.1 million (2009: £11.4 million) assuming that the only area impacted was equity financial assets.
Fixed income investments represent a significant proportion of the Group’s assets and the Board continually monitors investment strategy to minimise the risk of a fall in the portfolio’s market value which could affect the amount of business that the Group is able to underwrite or its ability to settle claims as they fall due. The fair value of the Group’s investment portfolio of debt and fixed income securities is normally inversely correlated to movements in market interest rates. If market interest rates fall, the fair value of the Group’s debt and fixed income investments would tend to rise and vice versa if credit spreads remained constant.
At 31 December 2010, the Group holds asset-backed and mortgage-backed fixed income instruments in its investment portfolio however has minimal direct exposure to sub-prime asset classes.
The Group will make adjustments to the investment portfolio as appropriate as part of its overall portfolio strategy, but its ability to mitigate its risk by selling or hedging its exposures may be limited by the market environment. The Group’s future results may be impacted, both positively and negatively, by the valuation adjustments applied to these securities.
Note 22 provides an analysis of the measurement attributes of the Group’s financial instruments.
The Group is exposed to equity price risk through its holdings of equity and unit trust investments. This is limited to a small and controlled proportion of the overall investment portfolio and the equity and unit trust holdings involved are well diversified over a number of companies and industries.
These may be analysed as follows: 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.
For the inwards reinsurance lines, there is often a time lag between the establishment and re-estimate of case reserves and reporting to the Group.
The Group works closely with the reinsured to ensure timely reporting and also centrally analyses industry loss data to verify the reported reserves.
The Group is exposed to financial risk through its ownership of financial instruments including financial liabilities.
These items collectively represent a significant element of the Group’s net shareholder funds. The Group invests in financial assets in order to fund obligations arising from its insurance contracts and financial liabilities.
The Group has elected to carry all financial investments at fair value through profit or loss as they are managed and evaluated on a fair value basis in accordance with a documented strategy. With the exception of unquoted equity investments, all of the financial investments held by the Group are available to trade in markets and the Group therefore seeks to determine fair value by reference to published prices or as derived by pricing vendors using observable 3 Management of risk continued 3.1 Insurance risk continued
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)
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
Management information reports detail 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 concentrations of credit risk exposures held by insurers may be expected to be greater than those associated with other industries, due to the specific nature of reinsurance markets and the extent of investments held in financial markets.
In both markets, the Group interacts with a number of counterparties who are engaged in similar activities with similar customer profiles, and often in the same geographical areas and industry sectors.
Consequently, as many of these counterparties are themselves exposed to similar economic characteristics, one single localised or macroeconomic change could severely disrupt the ability of a significant number of counterparties to meet the Group’s agreed contractual terms and obligations.
The Group’s maximum exposure to credit risk is represented by the carrying values of financial assets and reinsurance assets included in the consolidated balance sheet at any given point in time. The Group does not use credit derivatives or other products to mitigate maximum credit risk exposures on reinsurance assets.
One method of assessing interest rate sensitivity is through the examination of duration-convexity factors in the underlying portfolio. Using a duration-convexity based sensitivity analysis, if market interest rates had risen by 100 basis points at the balance sheet date, the fair value might have been expected to decrease by £28 million (2009: decrease of £32 million) assuming that the only balance sheet area impacted was debt and fixed income financial assets.
Using these three concepts, scenario modelling derives the above estimated impact on instruments’ fair values for a 100 basis point change in the term structure of market interest rates.
At 31 December 2010, £20 million was drawn on the Group’s borrowing facility
Debt and fixed income securities 19 1,555,636 198,001 256,120 245,980 2,255,737
BB or above. A significant proportion of ‘other/not rated’ reinsurance assets at 31 December 2010 and 31 December 2009 are supported by Letter of Credit guarantees issued by financial institutions with Standard & Poor’s or equivalent credit or financial strength ratings of A or better.
The Group is exposed to daily calls on its available cash resources mainly from claims arising from insurance and reinsurance 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 cash and maturing funds available to meet such calls and on the minimum level of borrowing facilities that should be in place to cover unexpected levels of claims and other cash demands.
Between two and five years 648,551 – 6,087 – 654,638 672,198
Property – marine and major assets 29,233 17,715 17,753 1,720 66,421
Operational foreign exchange risk is controlled within the Group’s individual entities. The assets of the Group’s overseas operations are generally invested in the same currencies as their underlying insurance and investment liabilities producing a natural hedge.
As a result of the accounting treatment for non-monetary items, the Group may also experience volatility in its income statement during a period when movements in foreign exchange rates fluctuate significantly. In accordance with IFRS, non-monetary items are recorded at original transaction rates and are not remeasured at the reporting date. These items include unearned premiums, deferred acquisition costs and reinsurers’ share of unearned premiums. Consequently, a mismatch arises in the income statement between the amount of premium recognised at historical transaction rates, and the related claims which are retranslated using currency rates in force at the reporting date. The Group considers this to be a timing issue which can cause significant volatility in the income statements. Further details of the impact of the accounting treatment is provided in note 12.
As at 31 December 2010, the Group used closing rates of exchange of £1:€1.17 and £1:$1.57 (2009: £1:€1.13 and £1:$1.61). The Group performs sensitivity analysis based on a 10% strengthening or weakening of Pound Sterling against the Euro and US Dollar. This analysis assumes that all other variables, in particular interest rates, remain constant and that the underlying valuation of assets and liabilities in their base currency is unchanged. The process of deriving the undernoted estimates takes account of the linear retranslation movements of foreign currency monetary assets and liabilities together with the impact on the retranslation of those Group entities with non-Sterling functional currency financial statements. During the year, the Group transacted in a number of over the counter forward currency derivative contracts. The impact of these contracts on the sensitivity analysis is negligible.
was drawn by way of Letter of Credit to support the Funds at Lloyd’s requirement and a further £20 million by way of cash (2009: $225 million and £138 million respectively)
Group has used reinsurance capital to fund its capital requirement for short-term expansions in the volume of business underwritten by the
The financial strength ratings of the Group’s insurance company subsidiaries are outlined below: A.M. Best Fitch Standard & Poor’s
Syndicate 33 benefits from an A.M. Best rating of A (Excellent). In addition, the
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.
There were no changes in the Group’s approach to capital risk management during the current or prior year under review.
The Group currently utilises short-to medium-term gearing as an additional source of funds to maximise the opportunities from strong markets and to reduce the risk profile of the business when the rating environment shows a weaker model for the more volatile business. The Group’s gearing is obtained from a number of sources, including: Letter of Credit and revolving credit facility – the Group’s main facility was replaced during 2010 for a total of $750 million which may be drawn as cash (under a revolving credit facility), Letter of Credit or a combination thereof, providing that the cash portion does not exceed $450 million. This facility was secured during 2010 by the Company’s subsidiary
Hiscox plc. The Letter of Credit availability period ends on 31
(a) to (f) above demonstrates the estimated impact of a change in a major input assumption while other assumptions remain unchanged. In reality, there are normally significant levels of correlation between the assumptions and other factors. It should also be noted that these sensitivities are non-linear, and larger or smaller impacts should not be interpolated or extrapolated from these results. The same limitations exist in respect to the retirement benefit scheme sensitivities presented at note 30 to these financial statements.
In addition, it includes the European errors and omissions business from
Syndicate 3624. It excludes the results of the larger retail TMT business written by Hiscox Insurance Company Limited.
Corporate Centre also includes the majority of foreign currency items on economic hedges and intragroup borrowings. These relate to certain foreign currency items on economic hedges and intragroup borrowings, further details of which are given at note 13. Corporate Centre forms a reportable segment due to its investment activities which earn significant external coupon revenues.
This is consistent with the information used by the chief operating decision maker when evaluating the results of the Group.
Performance is measured based on each reportable segment’s profit before tax.
Lloyd’s, despite a tax disadvantage against offshore entities, and the cost advantage of processing smaller premium business outside of Lloyd’s.
In addition to the ICA modelling process, the EU Insurance Group’s Directive of 1998, as amended by the Financial Group’s
The Group complied with the requirement for the current and prior year.
considers an ICA to be inadequate, it can require the entity to maintain an increased capital safeguard. The Directors are also required to certify that the Group has complied, in all material aspects, with the provisions of the Interim Prudential
Inc., is driven by the level of resources necessary to maintain both regulatory requirements and the capital necessary to maintain financial strength of an A rating.
For Syndicate 33, the ICA process produces a result that is uplifted by Lloyd’s to identify the capital required to hold the A rating.
Another key area of capital modelling for Hiscox is to identify which insurance vehicle produces the best return on capital 3 Management of risk continued 3.3 Capital risk management continued
Share of (loss)/profit of associates *Interest revenues included total £60,332,000 (2009: £74,584,000).
The expense ratio is calculated as the total of expenses for the acquisition of insurance contracts, and operational expenses as a proportion of net premiums earned. The foreign exchange impact ratio is calculated as the foreign exchange gains or losses as a proportion of net premiums earned. The combined ratio is the total of the claims, expenses and foreign exchange impact ratios. The combined ratio excluding non-monetary foreign exchange impact is calculated by adjusting the net premiums earned and the expenses for the acquisition of insurance contracts by the movement arising from retranslating net unearned premiums and net deferred acquisition costs at year end rates of exchange. All ratios are calculated using the 100% results.
Costs allocated to the Corporate Centre are non-underwriting related costs and are not included within the combined ratio.
The impact on profit before tax of a 1% change in each component of the segmental combined ratios is: London Market
1% change in claims or expense ratio 5,459 4,388 3,223 – 6,248 3,824 2,875 –
Segment assets and liabilities primarily consist of operating assets and liabilities, which represent the majority of the balance sheet.
The net asset value per share is based on 380,613,336 shares (2009: 374,819,025 shares), being the adjusted number of shares in issue at 31 December.
Net realised gains on financial investments at fair value through profit or loss 12,971 19,733
Net fair value gains/(losses) on financial investments at fair value through profit or loss 24,272 87,296
(a) The weighted average return on financial investments for the year by currency, based on monthly asset values, was: %
Equities and shares in unit trusts – – 6,079 11.6 4,468 9.0 5,025 13.4 15,572 11.1
Interest and charges associated with Letters of Credit 35 3,216 2,780
Fees payable to the Company’s auditors and its associates for other services: The audit of subsidiaries pursuant to legislation 645 638
Fees in respect of the defined benefit pension scheme: Total auditors’ remuneration expense 935 1,112 * Other fees relate primarily to corporate advisory and fi nancial reporting consulting services. Non-audit services with fees greater than £50,000 must be pre-approved by the Audit Committee which is composed solely of independent Non Executive Directors.
The net foreign exchange gains/(losses) for the year include the following amounts: Exchange gains/(losses) recognised in the consolidated income statement 15,484 (25,554)
Overall impact of foreign exchange related items on net assets 27,213 (95,143)
Net unearned premiums and deferred acquisition costs are treated as non-monetary items in accordance with IFRS. As a result, a foreign exchange mismatch arises caused by these items being earned at historical rates of exchange prevailing at the original transaction date whereby resulting claims are retranslated at the end of each period. The impact of this mismatch on the income statement is shown below.
Gain/(loss) included within profit representing the non retranslation of non-monetary items 1,956 (53,732)
The Group has loan arrangements, denominated in US Dollars, in place between certain Group companies. In most cases, as one party to each arrangement has a functional currency other than the US Dollar, foreign exchange losses arise which are not eliminated through the income statement on consolidation. Implicit offsetting gains are reflected instead on retranslation of the counterparty company’s closing balance sheet through other comprehensive income and into the Group’s currency translation reserve within equity.
The Group did not enter into any economic hedging derivative contracts during the current year.
Value in use is considered to be the best indication of the recoverable amount for goodwill. Value in use calculations are performed using cash flow projections based on financial forecasts covering a five-year period. A discount factor of 2.5% (2009: 1.8%) has been applied to the projections to determine the net present value. The outcome of the value in use calculation is measured against the carrying value of the asset and where the carrying value is in excess of the value in use, the asset is written down to this amount.
The Group’s intangible asset relating to Syndicate capacity has been allocated, for impairment testing purposes, to one individual CGU, being the active Lloyd’s corporate member entity. The asset is tested annually for impairment based on its recoverable amount which is considered to be the higher of the asset’s fair value or its value in use. The fair value of Syndicate capacity can be determined from the Lloyd’s of London Syndicate capacity auctions. Based on the average open market price witnessed in the recent Autumn 2010 auction, the carrying value of Syndicate capacity recognised on the balance sheet is significantly below the market price.
The carrying value of customer contractual relationships is tested annually for impairment based on the recoverable amount which is considered to be the higher of the fair value or value in use. The asset’s value in use is considered to be the best indication of its recoverable amount. Value in use is calculated for customer contractual relationships in the same manner as described above for goodwill and the same discount rate used.
There are no charges for impairment during the current or prior financial year.
At 31 December 2010 there were £4,817,000 of assets under development on which no amortisation has been charged (2009: £nil).
Associates incorporated in the UK From 25% to 49% 11,100 7,800 8,743 234
During the year, the Group disposed of its 40% holding in HIM Capital Holdings Ltd recognising a gain of £458,000.
On 17 December 2010, the Group increased its holding in Blyth Valley Ltd to 100% as referred to in note 33. The company is treated as a subsidiary of the Group from this date.
Acquisition costs expensed to the income statement (317,645) 47,754 (269,891) (302,330) 45,696 (256,634)
The amounts expected to be recovered before and after one year are estimated as follows: Within one year 124,822 123,921
Total financial liabilities 20,457 138,539 *The fair value of borrowings from credit institutions is not considered to be signifi cantly different from the amortised cost.
with credit ratings of BB or above. The issuers of these securities have used the proceeds to collateralise certain catastrophe reinsurance obligations mainly in US and European wind and earthquake risks. The investment in these contracts is therefore at risk of loss, in whole or in part if a covered catastrophe occurs with the maximum loss being equal to the total investment.
The Group’s borrowings from credit institutions at 31 December 2010 are denominated in Pound Sterling (2009: Pound Sterling).
The entire amount from December 2009 was repaid during the year and the amount outstanding at 31 December 2010 is expected to be repaid in full within one year from the balance sheet date. The movement in fair value of derivative instrument liabilities includes settlements totalling £1,460,000 (2009: £49,838,000), realised gains of £1,371,000 (2009: £3,234,000) and unrealised losses
The amounts expected to be recovered before and after one year are estimated as follows: Within one year 474,010 482,194
There is no significant concentration of credit risk with respect to loans and receivables as the Group has a large number of internationally dispersed debtors. The Group has recognised a loss of £86,000 (2009: £395,000) for the impairment of receivables during the year ended
During the year the Group continued short selling a number of government bond futures and sovereign futures denominated in a range of currencies to informally hedge substantially all of the interest rate risk on specific long portfolios of the matching currencies denominated corporate bonds. All contracts are exchange traded and the Group made a loss on these futures contracts of £117,000 (2009: £78,000)
In June 2008 the Group commenced trading event-linked future contracts which are transacted on the Chicago Climate Futures Exchange.
Investments in mutual funds comprise a portfolio of stock investments in trading entities which are invested in various quoted investments.
Total gains or losses through profit or loss* 842 – – 842
No exercise price is attached to performance plan awards, although their attainment is conditional on the employee completing three years’
service (the vesting period) and the Group achieving targeted levels of returns on equity. Share options are also conditional on the employee completing three years’ service (the vesting period) or less under exceptional circumstances (death, disability, retirement or redundancy).
The options are exercisable starting three years from the grant date only if the Group achieves its targets of return on equity; the options have a contractual option term of ten years. The Group has no legal or constructive obligation to re-purchase or settle the options in cash.
Annual risk free rates of return and discount rates (%) 3.4-3.9 1.4
Movements in the number of share options during the year and details of the balances outstanding at 31 December 2010 are shown in the Directors’ remuneration report.
At 31 December 2010 Hiscox Ltd held 25,142,874 shares in treasury (2009: 28,142,874). Additional details are shown in note 37 to these financial statements in respect of additional Hiscox Ltd shares held by subsidiaries.
The Group analyses actual claims development compared with previous estimates on an accident year basis.
This exercise is performed to include the liabilities of Syndicate 33 at the 100% level regardless of the Group’s actual level of ownership, which has increased significantly over the last eight years.
Analysis at the 100% level is required in order to avoid distortions arising from reinsurance to close arrangements which subsequently increase the Group’s share of ultimate claims for each accident year, three years after the end of that accident year.
The bottom half reconciles cumulative claim costs to the amounts still recognised as liabilities. A reconciliation of the liability at the 100% level to the Group’s share, as included in the Group balance sheet, is also shown.
The Chain Ladder method is adopted for mature classes of business where sufficient claims development data is available.
Group are analysed by the central analysis team. They combine information from underwriters, the claims team and past experience of similar events to produce gross and net estimates of the ultimate loss cost to each part of the Group. These figures are then incorporated by the actuarial team into the quarterly reserving exercise. This process ensures that a consistent approach is taken across the Group.
The gross claims reported, the loss adjustment expenses liabilities and the liability for claims incurred but not reported are net of expected recoveries from salvage and subrogation. The amounts for salvage and subrogation at the end of 2010 and 2009 are not material.
The risks associated with insurance contracts are complex and subject to a number of variables that complicate quantitative sensitivity analysis. Uncertainty over the timing and amount of future claim payments necessitate the holding of significant reserves for liabilities that may only emerge a number of accounting periods later.
Total gross liability to external parties at 100% level 26 Insurance liabilities and reinsurance assets continued 26.1 Insurance contracts assumptions continued
Estimate of ultimate claims costs as adjusted for foreign exchange* at end eight years later 823,678 382,319 – – – – – – – – 1,205,997 nine years later 808,695 – – – – – – – – – 808,695
Liability recognised in respect of prior accident years at 100% level *The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2010.
Liability for accident years before 2001 recognised on Group’s balance sheet 66,387 **This represents the claims element of the Group’s insurance liabilities.
Claims and loss adjustment expenses for year (733,074) 162,077 (570,997) (508,238) 45,020 (463,218)
Cash paid for claims settled in the year 598,179 (120,088) 478,091 571,689 (110,924) 460,765
Claims incurred but not reported (904,150) 242,496 (661,654) (749,016) 154,903 (594,113)
Current year claims and loss adjustment expenses (864,128) 160,277 (703,851) (725,132) 122,538 (602,594)
The amounts expected to be settled before and after one year are estimated as follows: Within one year 338,541 336,383
Effects of: Group entities subject to overseas tax at different rates 28,866 41,397
* 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 provision is increased every year by an amount that is calculated as a percentage of net premiums written for those lines of business during the fi nancial year subject to a maximum percentage. The amount of each annual increase is a deductible expense for tax purposes, and the equalisation provision is taxed when released. Equalisation provisions are not permitted under IFRS which therefore results in the temporary difference for tax purposes. Following a change in the legislation at the end of 2008, Lloyd’s Corporate Members are also entitled to a tax deduction for claims equalisation losses although this is not a solvency requirement for Lloyd’s. The Group has provided for the deferred tax liability on its Corporate Members’ claims equalisation reserve during the year.
Deferred income tax assets are recognised for tax losses carried forward to the extent that the realisation of the related tax benefit through the future taxable profits is probable. The Group has not provided for deferred tax assets totalling £18,216,000 (2009: £8,452,000) including £18,088,000 (2009: £8,488,000) in relation to losses in overseas companies of £51,769,000 (2009: £22,138,000). In accordance with IAS
The unrecognised net actuarial losses are the net cumulative gains and losses on both the scheme’s obligations and underlying assets.
As the fair value of scheme obligations exceeds the present value of the scheme assets, the scheme reports a deficit. The Group recognises actuarial gains and losses using the corridor method as defined in the Group’s accounting policy. As a result of a court ruling in the prior year, past service costs of £11.8 million were recognised in respect of the equalisation of the scheme obligation for the period between May 1992 and May 1997. The requirement on the scheme to equalise is based on the Barber case in the early 1990s which established that it was unlawful under EU law for retirement ages for men and women to differ. The past service cost was recognised immediately.
On 8 July 2010, the UK Government announced its decision to replace the Retail Prices Index (‘RPI’) with the Consumer Prices Index (‘CPI’)
The effect of using the CPI to determine the scheme liabilities at 31 December 2010 does not have a significant effect on scheme liabilities.
The amounts recognised in the Group’s income statement are as follows: Notes
The movement in liability recognised in the Group’s balance sheet is as follows: Notes
Total expense charged in the income statement of the Group 9 1,700 13,300
Difference between expected and actual return on scheme assets 6,075 (3,678)
A reconciliation of the present value of scheme obligations of the scheme is as follows: Opening present value of scheme obligations 140,676 101,615
A summary of the scheme’s recent experience is shown below: Experience gains/(losses) on scheme obligations – – – 2,783 (3,310) (1,223)
The Group has estimated the sensitivity of the net obligation recognised in the consolidated balance sheet to isolated changes in these assumptions at 31 December 2010 as follows: Present value of unfunded obligations before change in assumption
Diluted earnings per share is calculated adjusting for the assumed conversion of all dilutive potential ordinary shares. The Company has one category of dilutive potential ordinary shares, share options and awards. For the share options, a calculation is made to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Company’s shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share options.
Profit for the year attributable to the owners of the Company (£000) 178,800 280,497
Weighted average number of ordinary shares in issue (thousands) 379,064 372,848
Interim dividend for the year ended: 31 December 2010 of 5.0p (net) per share 19,018 –
Final dividend for the year ended: 31 December 2008 of 8.5p (net) per share – 31,779
On 15 December 2010, the group increased its 25.2% holding in Blyth Valley Ltd to 100%. Full control of the company was obtained and as such the Group have consolidated the results of Blyth Valley Ltd at 31 December 2010. Total cash consideration of £3,662,220 was paid representing net identifiable assets acquired of £243,000 and customer relationships not previously recognised by Blyth Valley
The Group’s subsidiaries are like most other insurers, continuously involved in legal proceedings, claims and litigation in the normal course of business.
Limited, to meet the subsidiaries obligations at Lloyd’s. The total guarantee given under these deeds of covenant (subject to limitations)
amounts to £15 million (2009: £15 million) in respect of Hiscox Ltd and $350 million (2009: $350 million) in respect of Hiscox Capital Ltd.
The obligations in respect of this deed of covenant are secured by a fixed and floating charge over certain of the investments and other assets of the company in favour of Lloyd’s. Lloyd’s has a right to retain the income on the charged investments in circumstance where it considers there to be a risk that the covenant might need to be called and may be met in full.
USD. At 31 December 2010 $165 million (2009: $225 million) was drawn by way of Letter of Credit to support the Funds at Lloyd’s requirement and a further £20 million (2009: £138 million) by way of cash.
(d) The managed syndicate is subject to the New Central Fund annual contribution, which is an annual fee calculated on gross premiums written. This fee was 0.5% for 2010 and 2009. In addition to this fee, the Council of Lloyd’s has the discretion to call a further contribution of up to 3% of capacity if required.
Hiscox renegotiated its previous US$300 million facility and entered into a Letter of Credit Reimbursement and Pledge Agreement with
The Group acts as both lessee and lessor in relation to various offices in the UK and overseas which are held under non-cancellable operating lease agreements. The leases have varying terms, escalation clauses and renewal rights. The Group also has payment obligations in respect of operating leases for certain items of office equipment. Operating lease rental expenses for the year totalled £7,171,000 (2009: £5,656,000). Operating lease rental income for the year totalled £635,000 (2009: £468,000).
Later than one year and no later than five years Land and buildings 24,737 15,730
The total future aggregate minimum lease rentals receivable by the Group as lessor under non-cancellable operating property leases are as follows: No later than one year 275 468
It is the Group’s policy to lease certain of its motor vehicles under finance lease arrangements. The leases have a typical term of three years and are on a fixed repayment basis with a final lump sum component at the end of each agreement should the Group decide to acquire ownership of the vehicle. Interest rates are fixed at the contract commencement date. The Group’s obligations under leases are secured by the lessors’ charges over the leased assets.
37 Principal subsidiary companies of Hiscox Ltd at 31 December 2010
Value of services provided by Hiscox Syndicates Limited to Syndicate 33 44,538 50,845
Certain companies within the Group conduct insurance and other business with associates. These transactions arise in the normal course of obtaining insurance business through brokerages, and are based on arm’s length arrangements.
During the current and prior year, there were a number of reinsurance arrangements entered into in the normal course of trade between various Group companies.
Yasi, make landfall in northern Queensland. On 22 February 2011, an earthquake measuring 6.3 on the Richter scale struck approximately ten kilometres south-east of Christchurch, New Zealand’s second most populous city. The earthquake caused extensive damage in the Christchurch area and, although it is too early to assess, the Group expects to report losses of a similar or greater magnitude as those recorded for the September 2010 New Zealand earthquake. Losses relating to these events in 2011 are not included within the results for 2010.
Profit for the year after tax 178,800 280,497 70,808 191,248 163,846
Net asset value per share (p) 332.7 299.2 258.1 209.5 173.2
Photography: Portraits © John Ross and Matthew Septimus Cover © Getty Images
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