3%Tech and media errors and omissions 17%Art and private client 5%Small property 3% Large property 3% Global errors and omissions 9% Specialty – terrorism, specie, political risks, aerospace 8% Marine and energy 28% Reinsurance 16% Local errors and omissions and commercial 8%Specialty – kidnap and ransom, contingency, personal accident
Rates are rising in reinsurance and slowly increasing in other specialty lines
Corporate highlights £17.3m Profit before tax 323.5 Net asset value p per share, 2011 17.0 Dividend p per share, 2011
rigorously. We also draw on over 100 years of experience in insurance to assess these risks.
99% of home insurance customers were satisfied that we answered their questions and provided the information they needed today 94% of our home insurance customers surveyed were satisfied with the service they received.
In Europe, a survey** of our brokers saw Hiscox rated as a leading high net worth insurance brand.
In 2011, Hiscox UK was awarded Commercial and Personal Lines Team of the Year at the Claim Awards ceremony. On the commercial side, Hiscox UK won Best Small Business Insurance award for the third year running at the Start Your Business Awards 2011.
* 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 in January 2011.
Our expertise A transparent approach to risk The very business of insurance is managing risk. 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
When I started underwriting (with unlimited liability for the first 21 years – and nothing could make an underwriter more conscious of risk than taking it with everything they own), there was no computer adding up aggregate liabilities. Premium income could be counted, but not the exposure, and claims come from exposure not income. Statistics and management information have improved enormously over the years, and every year I believe that management of our competitors will force commercial discipline on their underwriters, but some foolish underwriting continues. In Lloyd’s, if rates are being cut foolishly, the Franchise Director moves in to test the business plan, and if necessary to stop it. I hope the discipline of Solvency II will similarly test the “we will beat whatever price the competition has quoted” underwriting that you even see advertised regularly.
Corporate governance I have decided to step down as Chairman of the Board while I still feel near the top of my game and have informed my fellow Directors that I would like to retire from the Board this time next year when I will have just turned 70. My passion for the business remains undiminished, and I will be available if the new Chairman or others wish to draw on my 47 years of experience. The independent Directors have instituted a search from both within and without the company, and I know that they will find a suitable candidate to lead the Board for the next exciting era of the business.
There is no better fun than building a business. It has been an enormous privilege to lead Hiscox since 1970 when my father died and I am very grateful to those who have helped me to achieve what has been achieved so far. I have always aimed to employ people brighter than I am, and have always believed that a businessman should only be judged a success if the business thrives after he has gone. I am convinced that the current top executives prove that I have achieved my employment ambition, and I know that they have the talent and the drive to create a truly great business well into the future. Since before we became publicly quoted in 1993 we have had strong Non Executive Directors and I am grateful to them for their excellent advice on our strategy and tactics, and their robust challenge when they see the need. The regulator likes to see evidence of regular robust challenge, but it has to be said that challenge for its own sake is pointless, and if correct decisions are being made, calm
Again we have been well and truly tested by Mother Nature and a small profit is a good result in the circumstances. By any measurement, it was a phenomenally catastrophic year with definitely more economic damage caused by natural catastrophes than ever before, including in the second half of the year the major international loss from the Bangkok floods. We were able to absorb these considerable losses, despite much reduced investment returns, through the profits from our specialist books in the London Market, and the retail businesses in the UK, Europe and Guernsey. In particular, a £49.0 million profit from the UK business, the most mature of our retail accounts, demonstrates the potential for our similar accounts in Europe and the US. Our strategy of balance worked well.
Dividend, balance sheet and capital management. The Board proposes to pay a final dividend of 11.9p (2010: 11.5p) on 19 June 2012 to shareholders on the register on 11 May 2012, making total dividends for the year of 17.0p (2010: 16.5p) an increase of 3%, in line with our policy of steady dividend growth. A scrip dividend alternative to the cash dividend will continue to be offered to shareholders.
Some key rates are rising, we are employing some brilliant talent, we have fledgling businesses poised for growth and profit, and our mature businesses have small market shares and enormous opportunities. I look forward to my final year as Chairman confident that the next era of the business will be rewarding to both shareholders and staff.
We also have a very strong corporate ethical culture which has led us through some very stormy waters in our early days at Lloyd’s when it went through its period of lack of integrity and appalling underwriting in the 1980s and 1990s. I was privileged to play an early part in regulation at Lloyd’s when basic standards were being imposed, and a substantial part in the Reconstruction and Renewal of Lloyd’s (together with Bronek Masojada who was on the McKinsey team), especially the Renewal through the introduction of Corporate Membership which created a renaissance of the UK insurance industry. With Solvency II the industry is now going through a massive assessment of the capital each business needs by codifying all the risks in great detail into a computer model, and I am glad that our massive housekeeping exercise has thrown up no surprises. Risk is our business and I have spent 47 years assessing it, and as I said before, 21 of them with unlimited liability.
The work we are doing should make us a safer business which brings me comfort as my family and I have a substantial percentage of our worth in Hiscox shares and as I get older I get more risk averse as I cannot make it again. We have always encouraged our staff to buy or hold shares in the company as we strongly believe that a feeling of ownership breeds responsibility, and I know that our investors like the fact that we have plenty of skin in the game.
The future The general insurance market has had an excellent record for the last ten years despite enormous natural and man-made catastrophes (although it feels unrecognised with the ever increasing blanket of regulation with which we are smothered). It is an exciting business being in reality bookmaking as we quote odds on almost every conceivable event, loss or tragedy happening around the world. It is a fulfilling career as we enable private ownership and commercial endeavour to flourish through adversity. I think that the boring image, which could not be further from the truth, is dissipating, and we are attracting some extremely talented young people into our business which again bodes well for the future.
Property: Discipline over many years has seen our core property account shrink, but the result is good. The team have expanded their book into insuring non-catastrophe exposed contractors equipment for fire and theft and this is developing well. In 2012 they have seen upward pressure on rates, and business which had threatened ‘never to
Hiscox is a brand to be proud of, but we know in the global insurance market the continued high regard for the Lloyd’s brand and the success of the market as whole is necessary for us to outperform. We therefore believe in the value of the Lloyd’s licenses, the need for a secure, well supervised market and the benefits of shared central services such as policy production, money collection and claims settlement and payment. Some of our competitors believe that they can gain individual advantage by performing many of these tasks themselves, independent of the market. We do not, as we believe that fragmentation will lead to poorer service to clients and brokers leading to an erosion of Lloyd’s, and hence our own competitiveness. We are therefore supportive of efforts to improve the volume claims service which acts on behalf of the market and will continue to oppose efforts to fragment this community resource. We are also supportive of Lloyd’s efforts to invest in upgrading the central market processing environment, but again with the concern that fragmentation must not be allowed. In all these matters we believe in holding Lloyd’s and other central service providers to account, as if they do the job well, more business will flow to London and Lloyd’s and we will win more than our fair share of the best business.
Hiscox UK and Europe Our businesses in the UK and Europe focus on insuring higher net worth personal insurances and small businesses active in areas such as marketing, consulting and other office-based professional services. We market these products both through brokers and direct to the customer. The year saw continued growth, pushing premium income up 9.5% to £498.0 million (2010: £454.7 million). At the same time, we were able to increase our profits in this segment to £51.4 million (2010: £39.6 million), a fantastic result.
We have worked for several years to build our distribution with a broader range of partners. In late 2010 we entered into come back to London’, unless written at uneconomic prices, is returning from the US domestic market. This augurs well for the future. The division has also benefited from subrogation recoveries on property claims resulting from the events of 9/11.
Marine and energy: This team suffered from the large Maersk Gryphon loss – a North Sea oil platform which was put out of production by poor weather – in the early part of the year, but discipline and its smart spread of business have allowed it to make a profit in the year. In 2012, we reserved $20 million net for the sinking of the Costa Concordia. We expect that this event will result in upward pressure on rates in the marine market.
Casualty: This was once one of our biggest and most profitable lines, but relentless rate reductions and disciplined underwriting by the team has seen it shrink to less than a sixth of its cyclical high. The account remains profitable: we think that the suicidal competition in the 2012 renewal season will make a turn in pricing inevitable so we are investing in extending our capability in this area.
Our London Market business is primarily conducted in London through Lloyd’s with a focus on large internationally traded syndicated risks and on the specialist and the unusual.
an agreement with the Dual underwriting agency, for them to underwrite and market our products, and our business together has developed well. We have also created a specialist team to focus on Marsh, Aon and Willis, the three largest national brokers with whom we have strong Group relationships but with whom we do little business in the UK. Our business with them is growing slowly, but much remains to be done. We have also created new relationships with a number of independent brokers who have moved books of specialist business to us. We have won their support because our underwriters and operations staff respond to their requests for assistance faster than the competition and because of our reputation for paying valid claims fast and fairly. Not all of our underwriting partnerships have gone well, and at the end of 2011 we cancelled a household partnership which had not performed to our expectations. This will have a negative impact on Hiscox UK’s 2012 top-line growth, but we expect that it will have a positive effect on profitability.
Our direct business continues to go from strength to strength and is now a £65 million business. Both our commercial and personal lines units achieved excellent profits in 2011. We have added a new travel product to our personal lines offering and expect to follow with more choices of cover during 2012.
Hiscox Europe: Although its profits fell to £2.4 million (2010: £10.8 million), 2011 is Europe’s third successive year of overall profitability. Most of the profit fall was due to a decline in investment income and a single large reserve. Hiscox Europe is now at the same stage of development as the UK business in 2001 and as its scale grows I expect that profits will grow. The top line was flat at £130.9 million (2010: £127.6 million), though this masks some changes in its business mix. Our art and private client business shrank, as expected, as the impact of underwriting actions taken in 2010 fed through. This decline was offset by growth in the commercial area where our specialist kidnap and ransom, media, technology and related products performed well, as have our partnerships with other financial institutions.
Hiscox USA: The US has made good progress in 2011. Its revenue fell by 15.5% to £108.3 million (2010: £128.2 million) which was mainly due to the withdrawal from two lines of business at the end of 2010 and the transfer of our large technology and media portfolios to Hiscox London Market. It saw strong growth of 29.0% in our core areas of kidnap and ransom, construction, terrorism, media and professional lines and we believe this progress will continue. Our network of offices across the US has been crucial in helping us attract business.
Operations and IT Great underwriting only delivers value to customers if supported by excellent operations. During the year we continued to improve our operational capabilities. In Hiscox London Market we re-engineered our processes so that all risk details are entered into our systems within 48 hours of binding, providing us with real underwriting insight and control benefits. Across our European and UK businesses we improved the quality of our data leading to more timely and accurate customer documentation. In Hiscox UK we introduced sophisticated capacity planning tools to ensure that we had the resources in place to meet spikes in demand. Our quality, as perceived by our customers, is measured using Net Promoter scores and we are now receiving industry-leading scores. In the US our new service centre, which supports the direct business, is also getting very positive customer reviews.
Our leadership Robert’s announcement that he intends to retire as Chairman in 12 months’ time marks a watershed for the Group. Robert joined Hiscox in 1965 and took over its leadership in 1970 when we had two small boxes at Lloyd’s and controlled premium income of just over £2 million. We now have controlled premiums of £1,664 million and operate from 27 locations in 11 countries. During this time Robert has steered Hiscox through the many challenges such as 9/11 which have occasionally shaken the industry to its foundations. He has also served the Lloyd’s marketplace with distinction in a number of roles during its toughest times. He was a member of the Rowland Taskforce in 1991 and was Deputy Chairman of Lloyd’s during its turbulent years of Reconstruction and Renewal from 1993–1995. He has done all of this with drive, energy, perspicacity, determination, iconoclasm, wit and aplomb. We will not be losing Robert’s guidance as in 2013 he will remain with the business as Honorary President.
Strong experienced Non Executives have also been of huge value to the Group. Foremost amongst these has been Anthony HowlandJackson who will also be standing down shortly. After a distinguished career in broking, Anthony joined the Board of Hiscox plc and our UK based subsidiaries in 1997. He served as Senior Independent Director on the Board of Hiscox plc standing down from this Board when we re-domiciled to Bermuda in 2006. Since then he has continued to serve as a Non Executive Director of our UK based businesses. Anthony’s well timed questions caused us to re-assess many of our more fanciful ideas and his words of advice were always listened to.
The Board has initiated a selection process to find a successor to Robert. This process is being led by the Chairman of the Remuneration and Nomination Committee, Andrea Rosen, supported by our Senior Independent Director, Richard Gillingwater, and with input from all Hiscox Ltd Non Executive Directors who form the Committee. The Remuneration and Nomination Committee have appointed a leading search firm as advisers and we will make an announcement on succession in due course.
People We are always working to attract the most talented people to work here, to retain them and to help them to develop. Robert has led by example in this and we seek to live up to his standards. In 2011 both Hiscox London Market and Hiscox UK achieved Chartered Insurer status. This reflects the investment we have put into ensuring our staff achieve industry qualifications which we then back up with internal training and development programs.
We really believe the quality of our staff is a competitive advantage in the industry, and the resilience of our result this year reflects their individual contributions on a risk-by-risk and day-by-day basis. I thank them all.
Chief Executive’s report Hiscox Ltd Report and Accounts 2011 11 £41m
Reinsurance; property; marine and energy; specialty; kidnap and ransom; terrorism; political risks; errors and omissions; aviation and aerospace
Fine art; high-value household; errors and omissions; directors and officers’ liability; specialty commercial; technology/media; direct to customer household and commercial business
Fine art; high-value; household; errors and omissions; directors and officers’ liability; specialty commercial; technology/media; kidnap and ransom; terrorism; direct to customer commercial business
Robert Childs, Chief Underwriting Officer, explains more about Hiscox’s biggest line of business.
Hiscox is an insurer, so we buy reinsurance to help mitigate our own risk. We are also a reinsurer that sells cover to other insurers. Reinsurance is our largest line of business, accounting for 28% of our Group premium income in 2011. We underwrite it in both Bermuda and London.
The majority of our reinsurance premiums come from contracts that cover insurers’ catastrophic exposures, including hurricane, wind, earthquake or flood. We also provide reinsurance against individual risks, most often fire or explosion, which are also known as risk excess contracts. For example, we may provide reinsurance for a client’s losses between $10 million and $20 million ‘any one risk’ as part of an overall programme that provides a total of $150 million in coverage for a single event. The advantage for us is that our potential loss is strictly defined – if the client’s loss exceeds $20 million by any amount, we’ll only pay the $10 million for which we are responsible in that programme. This kind of underwriting needs specialist knowledge to get under the skin of how each client underwrites their own risks. We do that by having very experienced underwriters who build good relationships with their clients. It helps that we are underwriters of both insurance and reinsurance. We are able to approach reinsurance with the knowledge gained as a buyer as well as a seller.
JP EQ – Japanese earthquake, US EQ – United States earthquake, EU WS – European windstorm, US HU – United States hurricane 10–25 year 25–50 year 50–100 year 100–250 year5–10 year
We have come a long way since then and much of the raw modeling is done using models created by specialist companies. We have a team of around 20 modelers who use our own research to modify the models supplied by the likes of Risk Management Solutions (RMS) and AIR Worldwide. Through our many years of underwriting reinsurance we have developed a huge database, which contains information not only on our own insurance losses but other peoples’ as well. This empirical database and methodology is a good foil to the pure modeled approach.
We know that a mathematical model needs an underwriter to use common sense to interpret it. We have some of the best and most experienced around. Our customised models, our experienced underwriters and our backroom team of scientists are the foundations for what generates our ‘Hiscox view of risk’.
The Hiscox view has often been more conservative than that produced by the industry catastrophe models because of the tweaks and fine-tuning we have made to them ourselves. The latest version of the RMS model, the incoming RMS 11, has caused projected US hurricane losses to rise significantly, more in line with our original view.
The Hiscox view of risk underpins the pricing models our underwriters use and informs their view on which risks to take.
We consolidate what our teams in London and Bermuda have written and measure that against our pre-defined risk appetite. Our modeling team updates the data on a regular basis and if the number is out of line with the pre-agreed risk appetite then we will manage our exposures accordingly.
Most of the catastrophic events that led to reinsurance claims occurred outside the USA in 2011. We had believed that in a number of these regions the catastrophe perils were not adequately rated. We had some exposure and suffered losses but because of this rate inadequacy we wrote less exposure and our losses were smaller than they could have been.
How do you hedge the reinsurance bets you’ve taken? Primarily, our strategy of balance helps to offset the volatility of our higher margin business against the less volatile, and lower margin insurance business. We also purchase reinsurance cover to reduce our own peak exposures.
Within the reinsurance account itself we are able to achieve some balance between the principal zones of exposure by peril, those are the wind and earthquake in USA and Japan and wind in Europe. Further balance can be gained by adding in other territories but only when adequately compensated.
What plans do you have for 2012? We try to play the cycle intelligently. It’s fairly simple to say: if prices go down you write less business, but if they go up you write more; it’s not always so easy to do. With the upheaval in the market we see plenty of opportunities for us in the year ahead and we have the financial muscle and the underwriting know-how to maximise those opportunities profitably for our shareholders.
The net claims ratio deteriorated to 56.6% (2010: 48.3%), due to a high number of catastrophe events including; Australian floods, Japanese earthquake and the resulting tsunami, two further earthquakes in New Zealand, the US tornados in Alabama and Joplin, and the Thailand floods.
As a result, the combined ratio (excluding the impact of foreign currency movements) worsened to 89.1% (2010: 81.8%). Profit before tax for the year was £57.6 million (2010: £121.4 million).
As a result, the loss before tax was £89.5 million (2010: profit £43.1 million).
Hiscox Corporate Centre Operational expenses, decreased slightly to £12.3 million (2010: £12.8 million). Foreign exchange gains of £12.4 million (2010: £8.4 million) include foreign currency impacts on certain intragroup positions. The loss before tax was £2.3 million (2010: profit £7.3 million) driven by a much reduced investment return as a result of market turmoil.
Total net cash inflows for the year were £179.1 million (2010: inflow £75.9 million). The inflow was mainly due to prompt settlement of premiums and reinsurance recoveries. Net cash outflow from investing activities for the year was £11.8 million (2010: £22.2 million), primarily as a result of the development of IT systems recorded within intangible assets, a continued area of increased investment for the Group during the year. Projects included a management information project aimed at improving the quality and efficiency of financial
The Group is working with the Financial Services Authority (FSA) towards approval of our internal model for our FSA regulated entities. This work is progressing as planned.
The Group also submitted its Solvency II final application pack to Lloyd’s in December on behalf of its syndicates. This pack included information around our readiness for the Solvency II regime. It is currently anticipated that the Group’s capital model will be used to set capital requirements, for the syndicates that the Group manages, in 2013.
The Bermuda Monetary Authority (BMA) has begun supervising the Group, under the new Group Supervisory Framework. This will include the first full statutory submission for 2011 which is to be filed by the end of May 2012. The BMA continues to work towards Solvency II equivalence.
The second half of the year therefore proved to be particularly challenging. Unlike the previous two years our fixed income portfolios generally delivered subdued returns and underperformed their government bond benchmarks. Effectively, the widening of corporate credit spreads offset the rally in the prices of our short dated government securities. Bank bonds in particular came under stress as worries of capital shortfalls and an interbank funding crisis grew. At 31 December 2011 approximately 10% of our bond portfolio was invested in bank debt. The vast majority of these are the senior debt of banks deemed to be strategically important to their national economies. We have limited exposure to banks in the troubled parts of the Eurozone, being a total of £7.5 million issued by Santander of Spain and Intesa of Italy. Given the heightened level of concern the list of approved institutions with which we may place cash has been reviewed and reduced. Cash is also invested in money market funds which are considered to be significant in scale, well diversified and managed by substantial organisations.
There were few tactical shifts during the year. Cash was managed to prudent levels with further ample liquidity available from our holdings in short dated government bonds and undrawn credit facilities. The credit quality of the bond portfolio remained high. We maintained our aversion to the sovereign debt of Greece, Ireland, Italy, Portugal and Spain and view our US government securities as being no more likely to default at AA+ than they were at AAA. Given a desire not to lose money in a 12-month period, the low interest rate environment continues to restrict the amount of risk that we might otherwise take. However, we did take advantage of the sharp market sell off in August and increased equity exposure by approximately £30 million which benefited the return for the year. The high yield bonds, bank loans and structured securities that were bought during the 2007/2008 crisis were sold. These were largely acquired on a buy and hold basis and have comfortably delivered the returns that we hoped for. Valuations are no longer as compelling as they were in this sector.
In 2011 there was an opportunity cost to not holding more and longer dated government bonds but the objective of preserving the balance sheet has been achieved. As we go into 2012 we expect global economic growth to be patchy and generally subdued with short-term interest rates in our main markets being kept at low levels throughout the year. Longer dated bond yields could be susceptible to any signs of economic improvement and the likelihood of another government bond rally of significant scale is much reduced. Duration therefore is likely to remain short relative to our liabilities. Along with cash we continue to see treasuries, gilts and bunds as essential for liquidity, rather than as great investments. Indeed, we would rather lend to quality companies than heavily indebted sovereigns and still view an allocation to investment grade corporate bonds as a sensible way to pick up some extra yield. Returns from equities have a good chance of beating that of cash and government bonds but further bouts of volatility are inevitable and we will manage our exposure in the light of valuations and our overall risk appetite. There are higher yields available for those that are willing to give up their liquidity and take more risk; indeed monetary policy is designed to encourage this behaviour. However, we have seen this end badly before and remain inclined to take what is reasonably on offer which currently implies another year of relatively low returns. Discretion is likely to be the better part of valour.
Group invested assets* £2,873.4m £2,779.7m *excludes derivatives and investment in catastrophe bonds.
We insure individual customers, businesses and other insurers for damage caused by a range of catastrophes, both natural (e.g.hurricanes, earthquakes) and man-made (such as terrorism), which can cause heavy underwriting losses that could have a material impact on the Group’s earnings.
Our core business is to take risk and our strategy is to maximise return on equity within a defined ‘risk appetite’. It is therefore essential that we understand the significant exposures we face to manage the business well. It is also important that our knowledge of those risks underpins every important decision we make across the Group.
The risks from our core business of insurance and reinsurance represent many of our most significant exposures. We are also exposed to a number of other risks: investment, credit, operational, liquidity, and strategic. To identify and manage these we have developed a risk management framework, which we regularly review and improve in the light of the changing risk environment and evolving best practice on risk management.
Catastrophic and systemic insurance losses continued our modeling and monitoring tools to design the insurance and reinsurance business plans and to ensure that the exposures we underwrite match expectations. We share our risk aggregation and modeling resources across the Group to ensure everyone uses the same modeling tools (tailored to their specific market). We run stress and scenario tests for a range of specific events for each of our business units as well as the Group as a whole, so we can estimate our potential losses from a major catastrophe. We buy reinsurance to mitigate the effect of catastrophes and unexpected concentrations of risk. We buy protection both for our business carriers and the Group as a whole. The scope and type of reinsurance protection we buy may change from year to year depending on the extent and competitiveness of cover available in the market. The Group is exposed to the risk that the reinsurance protection it has bought is inadequate or inappropriate, but this is monitored and managed using modeling techniques, under the supervision of a dedicated Reinsurance Purchase Group.
The provisions we make to pay claims reflect both our own experience – and that of the industry – of similar business, historical trends in reserving patterns, loss payments and pending levels of unpaid claims and awards, as well as any potential changes in historic rates arising from market or economic conditions. Details of the actuarial and statistical methods and assumptions used to calculate reserves are set out in note 26 to the consolidated financial statements. Our provision estimates are subject to rigorous review by senior management from all areas of the business including independent actuaries. The final provision is approved by the relevant boards on the recommendation of dedicated reserving committees. The provisions we make are set above the expected or ‘mean reserve’ requirement to reduce the risk that actual claims exceed the amount that has been set aside.
We believe the likelihood that we may be unable to meet our liabilities, or that we incur excessive costs in doing so, is extremely remote, because of our range of risk management measures. Most of our cash inflows and outflows are routine and can be forecast well in advance. Our primary source of inflows is insurance premiums while our outflows are largely expenses and payments to policyholders through claims. We forecast our cash flow for the week, month, quarter or up to two years ahead, depending on the source. Free cash is invested according to the Group’s investment policy and our cash requirements can normally be met through our regular income streams: premiums, investment income, existing cash balances or by realising investments that have reached maturity. We run stress tests to estimate the impact of a major catastrophe on our cash position in order to identify any potential issues. We also run scenario analyses that consider the impact on our liquidity should a number of adverse events occur simultaneously, such as an economic downturn and declining investment returns combined with unusually high insurance losses. We maintain extensive borrowing facilities. These arrangements have been made with a range of major international banks so as to minimise the risk of one or more of the institutions being unable to honour their commitments to us.
We buy reinsurance only from companies that we believe to be strong. Our credit exposures to these companies are closely monitored. Every reinsurer we use must be approved by a dedicated Reinsurance Security Committee, based on an assessment of its financial strength, trading record, payment history, outlook, organisational structure, plus its external credit ratings. Approved reinsurers are monitored continuously, so that we are able to identify quickly any potential problems. The committee considers public information, experience of the companies concerned, their behaviour in the marketplace and analysis from external consultants and from rating agencies. We set guidelines for exposure to each of our approved reinsurers.
Insurance is a regulated industry. While regulations typically evolve on an ongoing basis, there may be times where the regulatory landscape undergoes a significant shift. We are currently facing such a situation.
We currently have a dedicated team assessing and developing new internal arrangements compliant with new regulations, operating under the guidance of the Group CFO.
As the US Dollar is the Group’s largest underwriting currency, our policy is to match our US Dollar insurance liabilities with investments held in that currency so we can minimise any losses from currency fluctuations. We will hold a percentage of our capital in the matching currency of that part of our underlying business, where it is deemed appropriate. We closely monitor our net currency positions and will enter into currency hedges if we anticipate adverse movements in exchange rates. Further details of the Group’s investment profile and its management of currency risks are provided in notes 3 and 19 to the consolidated financial statements.
Our business is taking risk, which by its nature, is inherently uncertain.
Hiscox’s commitment to responsible business practices is reflected in: The environment It is our policy to have a responsible approach to identifying, and then minimising, the environmental impacts of our business activities and those that arise from our ownership and occupation of office premises. In doing so, we seek to reduce to a minimum the amount of waste our activities produce, and the amount of resources we consume. Hiscox aims to be a responsible business, respecting the environment and reducing our carbon footprint and has made commitments both to our shareholders and our staff.
During 2010 we launched an environmental policy in Hiscox UK, outlining our commitment to measure our carbon footprint and to reduce it as far as we can. During 2012 we will be building on this good work by rolling it out across the Group. 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.
For the second year in a row Hiscox UK was carbon neutral. We conducted an environmental audit of our UK operations and calculated our carbon footprint with the help of independent consultants Corporate Citizenship. We generated significant cost and energy savings through increased recycling and more careful use of electricity, water and gas. Overall, Hiscox UK reduced our carbon footprint by 6% in 2009 and 7% in 2010. The balance of our carbon emissions were offset through an investment in an African Energy Efficient Stove Project in Kenya.
This project is focused on providing energy efficient stoves for families in villages throughout the area, replacing inefficient open fires. Energy efficient stoves significantly reduce the amount of firewood required and therefore carbon emissions. The stoves more than halve the amount of smoke from firewood, benefiting the families health and are approximately 70% more efficient than an open fire as each stove will save over 15 tonnes of fuel over the lifetime of the stove. These stoves themselves go directly to families, and we have provided 242 so far. For more information, please go to www.hiscox.com.
Hiscox Bermuda was awarded the Greenrock Green Workplace award in 2011. Greenrock Green Workplace Awards (GWAs) is an environmental competition bringing together businesses of all sizes that share the same vision of a greener workplace. It awarded seven companies and individuals for their environmental practices.
Hiscox is a founding member of ClimateWise, a collaborative insurance initiative through which members aim to work together to respond to the myriad of risks and opportunities of climate change.
The marketplace Dealing with business partners We regard insurance brokers as important stakeholders in our business, and we endeavour to have good relationships with them to create a competitive advantage in the marketplace. Clear communication is key in this and Hiscox regularly updates its partner brokers of new developments at Hiscox and in the insurance industry. Hiscox UK and Hiscox London Market recently achieved Chartered Insurer status from The Chartered Insurance Institute, recognising the professionalism and expertise of staff and making it easier to build relationships with like minded business partners.
The workplace Culture 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 recognises that through this conduct we are more likely to achieve business success and therefore create additional value for shareholders. Hiscox aims for the highest
Hiscox wants to employ the best people and provide them with the means and the motivation to excel. This is achieved with fair rewards and by providing staff with an environment in which they can enjoy their work and reach their full potential. Hiscox recognises how important it is for employees to maintain a healthy work/life balance and it gives them the option of flexible and home working wherever possible.
The Hiscox Foundation The Hiscox Foundation is a charity funded by an annual contribution from Hiscox to give donations to deserving causes. It gives priority to any charity in which a member of staff is involved, with the aim of encouraging and developing employees to become involved in charitable work. Hiscox staff continued their support of the Richard House Hospice and during 2011 raised over £28,500. The foundation has supported HART (Humanitarian Aid Relief Trust) with a further £30,000 during 2011. 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 has made a donation to the Team 2012 Fundraising Appeal, supporting Britain’s athletes on their journey to success.
The geographical and currency splits are shown to the right. One of the main advantages of trading through Lloyd’s is the considerably lower capital ratios that are available due to the diversification of business written in Syndicate 33 and in Lloyd’s as a whole. For 2012 Syndicate 33 has a capital requirement ratio of approximately 34% of Syndicate capacity. The size of the Syndicate is increased or reduced according to the strength of the insurance environment in its main classes. At present, Hiscox owns approximately 72.5% of the Syndicate, with the remainder owned by thirdparty Lloyd’s Names. Hiscox receives a fee and a profit commission of approximately 17.5% of profit on the element it does not own. For the 2012 year of account, Syndicate 33’s capacity has been increased to £950 million from £900 million. The chart below right shows the gross premiums written of Syndicate 33 for the last 11 years.
Syndicate 3624 Syndicate 3624 is a wholly owned syndicate which began underwriting for the 2009 year of account with an underwriting capacity of £150 million. The syndicate has a diversified portfolio of worldwide risks including E&O, property, construction, technology and media, healthcare, aviation and events. The diversification of the syndicate from both an exposure and geographical perspective means the syndicate is well balanced to grow in a controlled way. The syndicate is primarily exposed to short tail liability risks. Syndicate 3624 has a capital requirement ratio of 55% of syndicate capacity. Total underwriting capacity of Syndicate 3624 remained flat at £250 million for the 2012 year of account.
Hiscox Insurance Company Hiscox purchased Hiscox Insurance Company Limited in 1996, in keeping with its aim of diversifying its activities outside of Lloyd’s and writing a focused book of regional specialist risks. The Group has reshaped the Company’s original portfolio to concentrate on high value household and smaller premium commercial business.
Hiscox Insurance Company Limited has licences throughout Europe. It is the primary insurance vehicle used by the UK and mainland Europe offices for their business. The success of the portfolio can be seen in the chart below left.
Hiscox Insurance Company Limited has an A.M. Best rating of A (Excellent), a Standard & Poor’s rating of A (Strong) and an A (Strong) rating from Fitch.
Hiscox Guernsey has an A.M. Best rating of A (Excellent) and an A (Strong) rating from Fitch. At the end of 2011, net assets exceeded $11 million (2010: $28 million), having distributed $20 million in dividends during the year.
Hiscox Insurance Company Inc. is based in Chicago, Illinois and is an admitted insurance company with licences in all 50 US states and the District of Columbia. Its main business is property and liability cover sold through insurance brokers. From November 2010, the Company launched a direct commercial business.
Hiscox Insurance Company (Bermuda) Limited Gross premiums written ($m) External business
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 Officer. In 2012 Robert joined the Council of Lloyd’s. He is Active Underwriter of Lloyd’s Syndicate 3624. Robert was Chairman of the Lloyd’s Market Association from January 2003 to May 2005. He 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.
Robert Hiscox joined Hiscox in 1965 and has been Chairman of the main holding company of Hiscox since its incorporation in 1973. He was Deputy Chairman of Lloyd’s between 1993 and 1995. He was a Non Executive Director of AGICM Ltd until July 2011 and Grainger Trust plc until February 2012. Robert was appointed High Sheriff of Wiltshire in March 2011.
Auditors KPMG Crown House 4 Par-la-Ville Road Hamilton HM 08 Bermuda
Stockbrokers UBS Limited 1 Finsbury Avenue London EC2M 2PP United Kingdom
Dr James King joined Hiscox in 2006. He chairs Keytech Limited, The Bermuda Telephone Company Ltd and Grotto Bay Properties Ltd. He was Chairman of the Bank of N.T. Butterfield & Son Limited until 19 April 2007 and the Establishment Investment Trust, a UK listed company until August 2011. He is a Director of Castle Harbour Limited. Dr King is a fellow of the Royal College of Surgeons, Canada and the American College of Surgeons.
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. (now Achmea BV) between 1992 and 2007 and following retirement he became an adviser to the Executive Board. He is also a Non Executive Director of Friends Provident International Limited.
Andrea Sarah Rosen Senior Independent Director (Jan 2010–Feb 2011) and Chairman of the Remuneration and Nomination Committee (Aged 57)
In order to ensure that the composition of the Board remains appropriate the Remuneration and Nomination Committee monitors the composition of the Board and is required to consider the balance of skills and experience before any appointment is made. The balance of skills and experience is also reviewed as part of the Board evaluation process as described on page 38. The roles and activities of the Chairman and Chief Executive are distinct and separate. The Chairman is responsible for running an effective Board including oversight of corporate governance and overall strategy and meets periodically with the Senior Independent Director. The Chief Executive has responsibility for running the Group’s business.
In accordance with the UK Corporate Governance Code, all Directors submit themselves for re-appointment at the Annual General Meeting of the Company. The external commitments of the Directors are disclosed in their profiles on pages 34 to 35. Non Executive Directors are appointed for a specified term. Their terms of appointment state that their continuation in office is contingent upon their satisfactory performance and prescribe the time commitment required of them in order to discharge their duties. The terms also state that appropriate preparation time is required ahead of each meeting. A review of the remuneration of the Non Executive Directors, which does not include performance-related elements, was carried out during the year. All Directors received briefings at every Board meeting cycle on how the Company is addressing changes in solvency regulation. Directors’ training was also assessed as part of the performance evaluation described on page 38. The appointment and removal of the Company Secretary is a matter for the Board as a whole. All Directors are entitled to seek independent professional advice at the Company’s expense.
It is supplied with appropriate and timely information to enable it to review business strategy, trading performance, business risks and opportunities. The Board of Hiscox Ltd met four times during the year. The Board considers all the Non Executive Directors to be independent within the meaning of the UK Corporate Governance Code as there are no relationships or circumstances which would interfere with the exercise of their independent judgement.
The Group Executive Committee The Group Executive Committee, comprising the Executive Directors, meets monthly to raise and discuss topics such as Group strategy (subject always to Board approval), approval of senior appointments and remuneration (other than Board appointments), management of the Group’s trading performance, mergers and acquisitions (which are not significant to the Group), significant issues raised by management and approval of exceptional spend within the limits established by the Board. Below this there are local management teams that drive the local businesses.
Chairman of the Committee, Daniel Healy, is considered by the Board to have recent and relevant financial experience. It operates according to Terms of Reference published on the Group’s website. The Audit Committee meets at least three times a year to assist the Board on matters of financial reporting, risk management and internal control. The Audit Committee monitors the scope, results and cost effectiveness of the internal and external audit functions, the independence and objectivity of the external auditors, and the nature and extent of non-audit work undertaken by the external auditors together with the level of related fees. The internal and external auditors have unrestricted access to the Audit Committee. All non-audit work undertaken by the Group’s external auditors with fees greater than £50,000 must be pre-approved by the Audit Committee. KPMG has confirmed to the Audit Committee that in its opinion it remains independent. The Committee is satisfied that this is the case.
For the most recent appointment (of the Senior Independent Director) a recruitment consultancy was appointed and the acting Senior Independent Director represented the Committee in the selection process. The Chairman, the Chief Executive Officer and the Group Human Resources Director then interviewed the shortlisted candidates.
In 2011, a particular consideration for the Remuneration and Nomination Committee has been the succession of Robert Hiscox as Chairman of Hiscox Ltd. A selection process has been put in place, a job and person specification has been prepared and the search firm Egon Zehnder has been appointed to advise the Committee throughout that process. A decision is expected to be made and announced during 2012.
During the year the Chairman reported to the Board a change in his commitments following his appointment as High Sheriff of Wiltshire.
Performance evaluation An externally facilitated board evaluation process was conducted during the year. This included a review of the culture and dynamics of the Board, the interaction of the Board with its Committees, the information provided to the Board, and the performance of the Chairman. Each Director was interviewed and asked to complete a questionnaire. The findings of the evaluation were then discussed by the Board as a whole. In addition the Non Executives periodically meet without the Chairman and Executive Directors to discuss a wide range of issues concerning the Company including as appropriate the performance of the Chairman and the Executive Directors. Such a meeting was held after the external evaluation exercise. While no major issues concerning Board performance were raised during the year a number of improvements were suggested around Board information and minute taking, and Board visits to Hiscox operations.
Accountability and internal control The Directors are responsible for maintaining a sound system of internal control to safeguard the investment made by shareholders and the Company’s assets, and for reviewing its effectiveness.
The Board has reviewed the effectiveness of its risk management and internal controls during 2011, including financial, operational and compliance controls. The Board confirms there is an ongoing process for identifying, evaluating and managing the significant risks faced by the Company, which has been in place throughout the year and up to the date of approval of the Annual Report and Accounts and accords with the guidance in the document ‘Internal Control: Revised Guidance for 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.
Remuneration and Nomination Committee The Remuneration and Nomination Committee and generally meets three times a year. The members of the Committee for 2011 were Andrea Rosen (Chairman), Richard Gillingwater, Daniel Healy, Ernst Jansen, Dr James King, Bob McMillan and Gunnar Stokholm.
The Committee’s role in remuneration is to determine: the overall remuneration strategy, policy and cost for the Group; the levels and make-up of remuneration for the four Executive Directors; and the award of sizeable bonuses to individuals other than the Executive Directors.
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.
Remuneration elements The elements of remuneration at Hiscox are: fixed reward (base salary, benefits and retirement benefits) and variable reward (annual cash incentives (bonuses) and share incentive schemes).
The base salaries of the Executive Directors were not increased in 2011.
Executive Directors’ cash incentives and ROE Pre-tax return on equity %
A portion of each business unit’s pool is available to pay bonuses for corporate centre staff, including the Executive Directors. There are also controls in place to ensure that as the Executives seek to maximise the Group’s return on equity that Hiscox does not exceed the risk appetite set by the Board.
Bonus above £50,000 and below £100,000 Bonus above €75,000 and below €150,000 Bonus above $100,000 and below $200,000 $100,000 taken in year one Balance of bonus split 50% in year two, and 50% in year three
Early payment of deferred bonuses for reasons other than the above can only be made with the agreement of the Chief Executive, and the Remuneration and Nomination Committee in the case of Executive Directors.
Share Incentive Schemes The Remuneration and Nomination Committee believes that employees should be encouraged to own Hiscox shares so that they are aligned with the long-term success of the Company. Hiscox operates a Performance Share Plan for senior managers, a UK Save as You Earn scheme and an International Save as You Earn scheme.
Performance Share Plan Restricted share awards or nil cost option awards (depending on the appropriate practice by country) are made to Executive Directors and other senior managers at the discretion of the Remuneration and Nomination Committee. Awards under this plan were made in 2011 and the Remuneration and Nomination Committee has also agreed to make awards under this plan in 2012. The maximum annual award to an individual under the Performance Share Plan is a value of 200% of basic salary. The highest actual grant awarded in 2011 was 152% of basic salary.
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) on shares granted under the Performance 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.
Performance conditions Performance conditions for the Performance 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 Remuneration and Nomination Committee believes that using ROE as the long-term performance condition better aligns the interests of employees with shareholders as ROE best captures the efficiency with which the Company is using shareholder funds to generate earnings. The Remuneration and Nomination Committee believes that an average ROE performance requirement over the three-year period smoothes out any cyclical fluctuations in earnings and ensures that over any given period shareholders will receive a minimum return on equity before awards granted to employees will vest.
ROE has been calculated as profit after tax and goodwill amortisation divided by shareholder funds at the beginning of each year, excluding foreign currency items on economic hedges and intragroup borrowings.
Save as You Earn The sharesave scheme and international sharesave scheme are offered to all employees and currently have a 55% participation.
Directors’ remuneration report Hiscox Ltd Report and Accounts 201142 expected to own Hiscox shares valued at 100% of salary for Hiscox Partners and members of subsidiary boards and 150% of salary for Executive Directors.
Executive Director reward Executive Directors’ reward packages are consistent with the rest of the business. The actual compensation paid to the four Executive Directors in 2011 is outlined in the table below. Details of their contractual notice periods are contained in the table below.
Increase/ (decrease) in transfer value of accrued benefit during the year
SJ Bridges 154,578 – – – 154,578 1.465 – 02-Apr-06 01-Apr-13
RS Childs 206,104 – – – 206,104 1.252 – 19-Nov-05 18-Nov-12
BE Masojada 206,104 – – – 206,104 1.252 – 19-Nov-05 18-Nov-12
Other employees 87,993 – – (87,993) – 1.755 3.773-4.006 03-May-04 02-May-11
UK Sharesave Scheme SJ Bridges 3,210 – – – 3,210 2.826 – 01-May-13 31-Oct-13 RRS Hiscox 4,907 – – (4,907) – 1.956 3.884 01-Dec-11 31-May-12 RS Childs 3,210 – – – 3,210 2.826 – 01-May-13 31-Oct-13 BE Masojada 4,343 – – (4,343) – 2.210 3.824 01-Dec-10 31-May-11
Major interests in shares As at 24 February 2012, the Company had been notified of the following interests of five per cent or more of voting rights in its ordinary shares: Number of shares % of total*
A copy of the Company’s Bye-Laws is available for inspection at the Company’s registered office.
By order of the Board Charles Dupplin, Secretary Wessex House, 45 Reid Street, Hamilton HM12, Bermuda 47Directors’ report Hiscox Ltd Report and Accounts 2011
Principal activity and business review 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, its position at the end of the year, and the likely future development can be found within the Chief Executive’s report on pages 6 to 12. A description of the major risks can be found in the risk management section on pages 23 to 27. In addition, note 3 to the consolidated 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 2.
Financial results The Group achieved a pre-tax profit for the year of £17.3 million (2010: £211.4 million). Detailed results for the year are shown in the consolidated income statement on page 51, and also within the Group financial performance section on pages 18 to 19.
We have audited the accompanying consolidated financial statements of Hiscox Ltd (‘the Company’) on pages 51 to 103 which comprise the consolidated balance sheet as at 31 December 2011, and the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes.
In addition to our audit of the consolidated financial statements, the Directors have engaged us to audit the information in the Directors’ remuneration report that is described as having been audited, which the Directors have decided to prepare (in addition to that required to be prepared) as if the Company were required to comply with the requirements of Schedule 8 to the UK Companies Act 2006 The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008 No. 410).
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements and the part of the Directors’ remuneration report to be audited. The procedures selected depend on our judgement, including the assessment of the risks of material misstatement of the consolidated financial statements and the part of the Directors’ remuneration report to be audited, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements and the part of the Directors’ remuneration report to be audited in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies 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.
Consolidated statement of comprehensive income For the year ended 31 December 2011, after tax
Expenses Claims and claim adjustment expenses, net of reinsurance 26.2 (697,898) (570,997) Expenses for the acquisition of insurance contracts 17 (269,792) (269,891)
Profit for the year (all attributable to owners of the Company) 21,272 178,800
Profit for the year 21,272 178,800 Other comprehensive income Currency translation gains (net of tax of £nil (2010: £nil)) 12 11,060 11,729
Total comprehensive income recognised for the year (all attributable to owners of the Company)
Property, plant and equipment 15 18,155 19,742 Investments in associates 16 6,380 6,886
Loans and receivables including insurance receivables 20 507,722 485,414 Current tax asset 69,436 – Cash and cash equivalents 23 516,547 336,017
Total equity (all attributable to owners of the Company) 1,255,899 1,266,114
The consolidated Group financial statements were approved by the Board of Directors on 27 February 2012 and signed on its behalf by: RRS Hiscox Chairman
Total recognised comprehensive income for the year (all attributable to owners of the Company) – – – 11,729 178,800 190,529 Employee share options: Equity settled share based payments – – – – 9,000 9,000 Proceeds from shares issued 24 139 3,969 – – – 4,108
Employee share options: Equity settled share based payments – – – – 8,677 8,677 Proceeds from shares issued 24 91 3,124 – – – 3,215
Changes in operational assets and liabilities: Insurance and reinsurance contracts 138,667 141,646 Financial assets carried at fair value 78,501 (2,527) Financial liabilities carried at fair value (457) 82 Other assets and liabilities (18,888) (23,704)
Cash and cash equivalents at 1 January 336,017 259,647 Net increase in cash and cash equivalents 179,079 75,862 Effect of exchange rate fluctuations on cash and cash equivalents 1,451 508
Included within cash and cash equivalents held by the Group are balances totalling £77,203,000 (2010: £63,447,000) not available for immediate use by the Group outside of the Lloyd’s syndicate within which they are held.
1 General information The Hiscox Group, which is headquartered in Hamilton, Bermuda, comprises Hiscox Ltd (the parent Company, referred to herein as the ‘Company’) and its subsidiaries (collectively, the ‘Hiscox Group’ or the ‘Group’). For the period under review the Group provided insurance and reinsurance services to its clients worldwide. It has operations in Bermuda, the UK, Europe, and the US and employs over 1,250 people.
The financial statements were approved for issue by the Board of Directors on 27 February 2012.
In March 2004, the IASB issued IFRS 4 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 IFRS 4 does not specify the recognition or measurement of insurance contracts, transactions reported in these consolidated financial statements have been prepared in accordance with another comprehensive body of accounting principles for insurance contracts, namely accounting principles generally accepted in the UK.
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.
In February 2012, the IASB extended its timeline for either re-exposing or issuing a staff draft on the insurance contracts project to the second half of 2012. The ultimate timeline for a final standard will depend on whether the IASB issues a new exposure draft before issuing a standard. While the IASB has not indicated an effective date for a final standard, transitional provisions propose that it should be applied retrospectively with opening differences accounted for in equity.
A review of the financial performance of the Group is set out on pages 18 to 19. 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.
The accounting policies adopted are consistent with those of the previous financial year except as follows: The Group has adopted, for the first time, the following new and amended Standards
Notes to the consolidated financial statements continued liabilities or transactions of Syndicate 6104, nor is it controlled. The position and performance of that Syndicate is therefore not included in the Group’s financial statements.
Hiscox Dedicated Corporate Member Limited underwrites as a corporate member of Lloyd’s on the main Syndicates managed by Hiscox Syndicates Limited (the ‘main managed Syndicates’ numbered 33 and, 3624). In view of the several but not joint liability of underwriting members at Lloyd’s for the transactions of syndicates in which they participate, the Group’s attributable share of the transactions, assets and liabilities of these Syndicates has been included in the financial statements. The Group manages the underwriting of, but does not participate as a member of, Syndicate 6104 at Lloyd’s which provides reinsurance to Syndicate 33 on a normal commercial basis. Consequently, aside from the receipt of managing agency fees, defined profit commissions as appropriate and interest arising on effective assets included within the experience account, the Group has no share in the assets, and Interpretations issued by the IASB and endorsed by the EU as of 1 January 2011.
The amendment to IFRIC 14, The Limit on a Defined Benefit Asset, Minimum Funding Requirements is effective for annual periods beginning on or after 1 January 2011. The amendment provides guidance on assessing the recoverable amount of a net pension asset in a defined benefit scheme and permits an entity to treat the prepayment of a minimum funding requirement as an asset.
IAS 24 Related Party Disclosure (Amendment) is effective for annual periods beginning on or after 1 January 2011. The amendment clarifies the definition of a related party in order to simplify the identification of such relationships and to eliminate inconsistencies in application.
Early adoption of SI 2008/489, disclosure requirements for auditors remuneration, has occurred. The amendments are intended to align the classification of non-audit services for the purposes of disclosure in the financial statements with the classification of nonaudit services under the UK Auditing Practice Board’s Ethical Standards. The disclosure for 2010 has been restated to conform to the current year presentation.
Adoption of the above had no material effect on the financial performance or position of the Group.
Defined Benefit Plans – Amendments to IAS 19 is due to be in effect from 1 January 2013. The amendments require immediate recognition of actuarial gains and losses in other comprehensive income and to eliminate the corridor method that the Group currently operates. The principal amendment is the requirement to calculate net interest income or expense using the discount rate used to measure the defined benefit asset or liability.
Goodwill on acquisition of subsidiaries is included in intangible assets. Goodwill on acquisition of associates is included in investments in associates. Goodwill is not amortised but is tested annually for impairment and carried at cost less accumulated impairment losses.
The impairment review process examines whether or not the carrying value of the goodwill attributable to individual cash generating units exceeds its recoverable amount. Any excess of goodwill over the recoverable amount arising from the review process indicates impairment. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.
(c) State authorisation licences 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.
exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the date of the transactions); and all resulting exchange differences are recognised as a separate component of equity.
An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are
2.4 Foreign currency translation (a) Functional currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the ‘functional currency’). The functional currency of all individual entities in the Group is deemed to be Sterling with the exception of the entities operating in France, Germany, the Netherlands and Belgium whose functional currency is Euros, those subsidiary entities operating from the US and Bermuda whose functional currency is US Dollars, Hiscox Insurance Company (Guernsey) Limited and Syndicate 3624 whose functional currency is also US Dollars.
(c) Group companies The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; income and expenses for each income statement are translated at average 2 Significant accounting policies continued 2.3 Basis of consolidation continued (c) Transactions eliminated on consolidation continued
(b) Financial assets 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; significant reported financial difficulties of investment issuers, reinsurers and debtors; actual breaches of credit terms such as persistent late payments or actual default; the disintegration of the active market(s) in which a particular asset is traded or deployed; adverse economic or regulatory conditions that may restrict future cash flows and asset recoverability; and the withdrawal of any guarantee from statutory funds or sovereign agencies implicitly supporting the asset.
Financial assets are de-recognised when the right to receive cash flows from them expires or where they have been transferred and the Group has also transferred substantially all risks and rewards of ownership.
Internally developed computer software is only capitalised when it is probable that the expected future economic benefits that are attributable to the asset will flow to the Group and the cost of the asset can be measured reliably. Amortisation of internally developed computer software begins when the software is available for use and is allocated on a straight-line basis over the expected useful life of the asset. The useful life of the asset is reviewed annually and if different from previous estimates is changed accordingly with the change being accounted for as a change in accounting estimates in accordance with IAS 8.
Reinsurance liabilities primarily comprise premiums payable for ‘outwards’ reinsurance contracts. These amounts are recognised in profit or loss proportionally over the period of the contract. Receivables and payables are recognised when due.
(g) Salvage and subrogation reimbursements Some insurance contracts permit the Group to sell property acquired in settling a claim (i.e. salvage). The Group may also have the right to pursue third-parties for payment and accrued based on the results of the managed syndicate.
(b) Recognition and measurement Gross premiums written comprise premiums on business incepting in the financial year together with adjustments to estimates of premiums written in prior accounting periods. Estimates are included for pipeline premiums and an allowance is also made for cancellations. Premiums are stated before the deduction of brokerage and commission but net of taxes and duties levied. Premiums are recognised as revenue (premiums earned) proportionally over the period of coverage. The portion of premium received on in-force contracts that relates to unexpired risks at the balance sheet date is reported as the unearned premium liability.
(d) Liability adequacy tests At each balance sheet date, liability adequacy tests are performed by each segment of the Group to ensure the adequacy of the contract liabilities net of related DAC. In performing these tests, current best estimates of future contractual cash flows and claims handling and 2.10 Derivative financial instruments Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently valued at their fair value at each balance sheet date. Fair values are obtained from quoted market values and, if these are not available, valuation techniques including option pricing models as appropriate. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. For derivatives not formally designated as a hedging instrument, fair value changes are recognised immediately in the income statement. Changes in the value of derivatives and other financial instruments formally designated as hedges of net investments in foreign operations are recognised in the currency translation reserve to the extent they are effective; gains or losses relating to the ineffective portion of the hedging instruments are recognised immediately in the consolidated income statement.
(c) Share based compensation 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 Group’s performance share plans, outlined in the Directors’ remuneration report together with the Group’s Save as You Earn (SAYE) schemes.
(d) Termination benefits Termination benefits are payable when employment is terminated before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to either: terminating the employment of current employees according to a detailed formal plan without scheme from 1 January 2007.
(b) Other long-term employee benefits The Group provides sabbatical leave to employees on completion of a minimum service period of ten years. The present value of the expected costs of these benefits is accrued over the period of employment. In determining this liability, consideration is given to future increases in salary levels, of some or all costs (i.e. subrogation). Estimates of salvage recoveries are included as an allowance in the measurement of the insurance liability for claims and salvage property is recognised in other assets when the liability is settled. The allowance is the amount that can reasonably be recovered from the disposal of the property.
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 2011 is £964 million (2010: £904 million) and is included within total insurance liabilities on the balance sheet.
Estimates of losses incurred but not reported are continually evaluated based on entity specific historical experience and contemporaneous developments observed in the wider industry when relevant, and are also updated for expectations of prospective future developments. Although the possibility exists for material changes in estimates to have a critical impact on the Group’s reported performance and financial position, it is anticipated that the scale and diversity of the Group’s portfolio of insurance business considerably lessens the likelihood of this occurring. The overall reserving risk is discussed in more detail in note 3.1 and the procedures used in estimating the cost of settling insured losses at the balance sheet date including losses incurred but not reported are detailed in note 26.
2.20 Leases (a) Hiscox as lessee Leases in which significantly all of the risks and rewards of ownership are transferred to the Group are classified as finance leases. At the commencement of the lease term, finance leases are recognised as assets and liabilities at the lower of the fair value of the asset and the present value of the minimum lease payments. The minimum lease payments are apportioned between finance charges and repayments of the outstanding liability, finance charges being charged to each period of the lease term so as to produce a constant rate of interest on the outstanding balance of the liability. All other leases are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease.
2.17 Net investment hedge accounting 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.
The Group’s insurance contracts include provisions to contain losses such as the its achievement of sustainable profitable economic and social performance.
Additional unaudited information is also provided in the corporate governance and risk management sections of this Report and Accounts.
i) Underwriting risk The Board sets the Group’s underwriting strategy for accepting and managing underwriting risk, seeking to exploit identified opportunities in the light of other relevant anticipated market conditions. Specific underwriting objectives such as aggregation limits, reinsurance protection thresholds, geographical disaster event risk exposures and line of business diversification parameters are prepared and reviewed by the Chief Underwriting Officer in order to translate the Board’s summarised underwriting strategy into specific measurable actions and targets. These actions and targets are reviewed estimate taxation assets and liabilities after taking appropriate professional advice. To the extent that taxable losses carried forward by the Group exceed taxable temporary differences relating to the same taxation authority and taxable entity which will result in amounts against which the losses can be utilised, the Group uses estimates of probable future taxable profits available to determine whether recognition of a deferred tax asset is appropriate. The determination and finalisation of agreed taxation assets and liabilities may not occur until several years after the balance sheet date and consequently the final amounts payable or receivable may differ from those presently recorded in these financial statements.
2.23 Reporting of additional performance measures The Directors consider that the claims ratio, expense ratio and combined ratio measures reported in respect of operating segments and the Group overall at note 4 provide useful information regarding the underlying performance of the Group’s businesses. 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. Net asset value per share and return on equity measures, disclosed at notes 5 and 6, are likewise considered to be additional performance measures.
The Group compiles estimates of losses arising from realistic disaster events using statistical models alongside input from its underwriters. These require significant management judgement. Realistic disaster scenarios are extreme hypothetical events selected to represent major events occurring in areas with large insured values. They also reflect the areas that represent significant exposures for Hiscox. The selection of realistic disaster scenario events is adjusted each year and they are not therefore necessarily directly comparable ability to impose deductibles and demand reinstatement premiums in certain cases. In addition, in order to manage the Group’s exposure to repeated catastrophic events, relevant policies frequently contain payment limits to cap the maximum amount payable from these insured events over the contract period.
Reinsurance inwards 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. The main circumstances that result in claims against the reinsurance inwards book are conventional catastrophes, such as earthquakes or storms, and other events including fires and explosions. The occurrence and impact of these events are very difficult to model over the short-term which complicates attempts to anticipate loss frequencies on an annual basis. In those years where there is a low incidence of severe catastrophes, loss frequencies on the reinsurance inwards book can be relatively low.
investment portfolio and the equity and unit trust holdings involved are well diversified over a number of companies and industries. The fair value of equity assets in the Group’s balance sheet at 31 December 2011 was £173 million (2010: £155 million). These may be analysed as follows: Nature of equity and unit trust holdings
quotations in the most active financial markets in which the assets trade. The fair value of financial assets is measured primarily with reference to their closing bid market prices at the balance sheet date. The ability to obtain quoted bid market prices may be reduced in periods of diminished liquidity. In addition, those quoted prices that may be available may represent an unrealistic proportion of market holdings or individual trade sizes that could not be readily available to the Group. In such instances fair values may be determined or partially supplemented using other observable market inputs such as prices provided by market makers such as dealers and brokers, and prices achieved in the most recent regular transaction of identical or closely related instruments occurring before the balance sheet date but updated for relevant perceived changes in market conditions.
(b) Equity price risk 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
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. The Group structures the levels of credit risk accepted by placing limits on their exposure to a single counterparty, or groups of counterparties, and having regard to geographical locations. Such risks are subject to an annual or more frequent review. There is no significant concentration of credit risk with respect to loans and receivables, as the Group has a large number of internationally dispersed debtors with unrelated operations. Reinsurance is used to contain insurance risk. This does not, however, discharge the Group’s liability as primary insurer. If a reinsurer fails to pay a claim for any reason, the Group remains liable for the payment to the
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 £38 million (2010: decrease of £28 million) assuming that the only balance sheet area impacted was debt and fixed income financial assets.
At 31 December 2011, no amounts were outstanding on the Group’s borrowing facility (2010: £20 million). The Group has no other significant borrowings or other assets 3 Management of risk continued 3.2 Financial risk continued (c) Interest rate risk continued
An analysis of the Group’s major exposures to counterparty credit risk excluding loans and receivables, based on Standard & Poor’s or equivalent rating, is presented below: As at 31 December 2011 Note AAA
Debt and fixed income securities 19 767,709 808,076 400,257 194,546 2,170,588
Debt and fixed income securities 19 1,530,973 202,410 308,966 242,164 2,284,513
3 Management of risk continued 3.2 Financial risk continued (d) Credit risk continued
Property – marine and major assets 80,386 38,146 32,185 5,040 155,757
Operational foreign exchange risk is controlled within the Group’s individual entities. The assets of the Group’s overseas operations are generally invested in the same currencies as their underlying insurance and investment liabilities producing a natural hedge. Due attention is paid to local regulatory solvency and risk-based capital requirements.
Financial assets carried at fair value 511,306 1,601,720 215,795 39,815 2,368,636
3 Management of risk continued 3.2 Financial risk continued (f) Currency risk continued
Loans and receivables including insurance receivables 132,916 222,202 126,154 4,142 485,414
Sensitivity analysis As at 31 December 2011, the Group used closing rates of exchange of £1:€1.19 and £1:$1.54 (2010: £1:€1.17 and £1:$1.57). 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.
Strengthening of US Dollar 93.2 25.5 Weakening of US Dollar (73.4) (18.0) Strengthening of Euro 14.5 19.8 Weakening of Euro (11.9) (16.2)
The funds raised through Letters of Credit and loan facilities have been applied to support both the 2011 year of account for Syndicate 33 and the capital requirements of Hiscox Insurance Company (Bermuda) Limited.
coverage and non US household business which is included within the results of UK and Europe. It also includes the fire and aviation businesses from Syndicate 3624, and the larger TMT business written by Hiscox Insurance Company Limited. In addition, it excludes an element of kidnap and ransom and terrorism included in UK and Europe.
UK and Europe comprises the results of Hiscox Insurance Company Limited, the results of Syndicate 33’s fine art, UK regional events coverage and non US household business, together with the income and expenses arising from the Group’s retail agency activities in the UK and in continental Europe. 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. It also includes an element of kidnap and ransom and terrorism written in Syndicate 33.
International comprises the results of Hiscox Insurance Company (Guernsey) Limited, Hiscox Insurance Company (Bermuda) Limited, Hiscox Inc., Hiscox Insurance Company Inc. and Syndicate 3624 excluding the European errors and omissions, fire and aviation business.
Corporate Centre comprises the investment return, finance costs and administrative costs associated with Group management activities. 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.
The Group’s four operating segments are: London Market comprises the results of Syndicate 33, excluding the results of the fine art, UK regional events of the Group. The Group maintains its cost of capital levels and its debt to overall equity ratios in line with others in the non-life insurance industry.
In 2005, the UK Financial Services Authority (FSA) and Lloyd’s introduced a new capital regime that requires insurance companies to calculate their own capital requirements through Individual Capital Assessments (ICA). Hiscox Insurance Company Limited and Syndicate 33 maintain ICA models in accordance with this regime. The models are concentrated specifically on the particular product lines, market conditions and risk appetite of each entity. If the FSA 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 Sourcebook: Insurers (IPRU(INS)), the Integrated Prudential Sourcebook for Insurers (INSPRU) and General Prudential Sourcebook (GENPRU) when completing the ICA return. The Group used its own integrated modeling expertise to produce the ICA calculations. The results mirrored those driving the existing internal capital setting process.
The Group’s capital requirements are managed both centrally and at a regulated entity level. The assessed capital requirement for the business placed through Hiscox Insurance Company Limited, Hiscox Insurance Company (Bermuda) Limited, Hiscox Insurance Company (Guernsey) Limited and Hiscox Insurance Company 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 and Syndicate 3624, the ICA process produces a result that is uplifted by Lloyd’s to identify the capital required to hold the A rating. The strong control and risk management environment, together with the sophistication of the modeling, have produced a capital ratio below that suggested under the previous risk-based capital regime. Another key area of capital modeling for Hiscox is to identify which insurance vehicle produces the best return on capital employed for the Group, given certain restraints from licences, 3 Management of risk continued 3.3 Capital risk management continued
The claims ratio is calculated as claims and claim adjustment expenses, net of reinsurance, as a proportion of net premiums earned. The expense ratio is calculated as the total of expenses for the acquisition of insurance contracts, and operational expenses as a proportion of net premiums earned. The foreign exchange impact ratio is calculated as the foreign exchange gains or losses as a proportion of net premiums earned. The combined ratio is the total of the claims, expenses and foreign exchange impact ratios. The combined ratio excluding non-monetary foreign exchange impact is calculated by adjusting the net premiums earned and the expenses for the acquisition of insurance contracts by the movement arising from retranslating net unearned premiums and net deferred acquisition costs at year end rates of exchange. All ratios are calculated using the 100% results.
At 100% level (note 4b) 1% change in claims or expense ratio 5,555 4,637 2,831 – 5,459 4,388 3,223 –
At Group level 1% change in claims or expense ratio 4,188 4,486 2,776 – 3,961 4,222 3,129 –
Segment assets and liabilities primarily consist of operating assets and liabilities, which represent the majority of the balance sheet. Intragroup assets and liabilities that cross segments are presented under the separate category heading ‘Intragroup items and eliminations’.
The net asset value per share is based on 388,233,074 shares (2010: 380,613,336 shares), being the adjusted number of shares in issue at 31 December.
Profit for the year (all attributable to owners of the Company) 21,272 178,800 Opening shareholders’ equity 1,266,114 1,121,286 Adjusted for the time weighted impact of capital distributions and issuance of shares (14,025) (34,820)
Investment income including interest receivable 50,333 61,606 Net realised gains on financial investments at fair value through profit or loss 5,040 12,971 Net fair value (losses)/gains on financial investments at fair value through profit or loss (29,431) 24,272
Wages and salaries 69,185 80,359 Social security cost 12,930 13,689 Pension cost – defined contribution 5,724 5,209 Pension cost – defined benefit 1,700 1,700 Share based payments 8,677 8,047 Other expenses 73,575 74,668 Marketing expenses 19,955 11,863 Investment expenses 3,360 3,803 Depreciation and amortisation 8,098 7,065
11 Auditors’ remuneration continued The full audit fee payable for the Syndicate audit has been included above, although an element of this is borne by the third-party participants in the Syndicate.
12 Net foreign exchange gains/(losses) The net foreign exchange gains for the year include the following amounts: Exchange gains recognised in the consolidated income statement 7,816 15,484 Exchange gains classified as a separate component of equity 11,060 11,729
Opening balance sheet impact of non retranslation of non-monetary items (1,251) (3,207) Gain included within profit representing the non retranslation of non-monetary items 3,395 1,956
Closing balance sheet impact of non retranslation of non-monetary items 2,144 (1,251)
13 Foreign currency items on economic hedges and intragroup borrowings The Group has loan arrangements, denominated in US Dollars and Euros, in place between certain Group companies. In most cases, as one party to each arrangement has a functional currency other than the US Dollar or the Euro, foreign exchange 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.
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 4.8% (2010: 2.5%) 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.
There were no impairments recognised in the current or prior year for goodwill.
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 2011 auction, the carrying value of Syndicate capacity recognised on the balance sheet is significantly below the market price.
The amortisation charge for the year includes £3,634,000 (2010: £2,196,000) relating to capitalised internally generated software costs and is included in other expenses in the income statement.
The net book value of capitalised internally generated software costs at 31 December 2011 was £20,446,000 (2010: £16,684,000). There are no charges for impairment during the current or prior financial year.
Associates incorporated in the UK From 25% to 49% 1,847 1,230 1,098 185
The amounts expected to be recovered before and after one year are estimated as follows: 2011
Reinsurers’ share of insurance liabilities 493,422 463,724 Provision for non-recovery and impairment (907) (959)
19 Financial assets and liabilities Financial assets are measured at their bid price values, with all changes from one accounting period to the next being recorded through the income statement.
Borrowings from credit institutions carried at amortised cost* – 20,000 Derivative financial instruments 21 – 457
Total financial liabilities – 20,457 *The fair value of borrowings from credit institutions is not considered to be significantly different from the amortised cost.
Gross receivables arising from insurance and reinsurance contracts 429,676 412,524 Provision for impairment (956) (1,041)
Due from contract holders, brokers, agents and intermediaries 299,879 298,214 Due from reinsurance operations 128,841 113,269
The amounts expected to be recovered before and after one year are estimated as follows: Within one year 499,805 474,010 After one year 7,917 11,404
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 gain of £85,000 (2010: loss of £86,000) for the impairment of receivables during the year ended 31 December 2011.
21 Derivative financial instruments The Group entered into both exchange-traded and over the counter derivative contracts for a number of purposes during 2011. The Group had the right and intention to settle each contract on a net basis. The assets and liabilities of these contracts at 31 December 2011 all mature within one year of the balance sheet date and are detailed below: Derivative financial instrument assets included on balance sheet
31 December 2010 Derivative financial instrument liabilities included on balance sheet
Financial assets Debt and fixed income securities 500,672 1,669,916 – 2,170,588 Equities and shares in unit trusts – 162,806 10,626 173,432 Deposits with credit institutions 12,848 – – 12,848 Catastrophe bonds – 11,639 – 11,639 Derivative instrument assets – 129 – 129
The fair values of the Group’s investments in catastrophe bonds are based on quoted market prices or, where such prices are not available, by reference to broker or underwriter bid indications.
In certain cases, the inputs used to measure the fair value of a financial instrument may fall into more than one level within the fair value hierarchy. In this instance, the fair value of the instrument in its entirety is classified based on the lowest level of input that is significant to the fair value measurement.
The following table sets forth a reconciliation of opening and closing balances for financial instruments classified under Level 3 of the fair value hierarchy: Equities and shares in unit trusts
Balance at 1 January 6,926 – – 6,926 Total gains or losses through profit or loss* 1,242 – – 1,242
Closing balance 10,626 – – 10,626 *Total gains/(losses) are included within the investment result in the income statement.
Closing balance 6,926 – – 6,926 *Total gains/(losses) are included within the investment result in the income statement.
Cash at bank and in hand 258,927 260,710 Short-term bank deposits 257,620 75,307
Employee share option scheme – proceeds from shares issued 91 3,124 – Scrip dividends 175 13,162 – Dividends to owners of the Company 32 – – –
In accordance with the reverse acquisition provisions of IFRS 3 Business Combinations, the amount of issued share capital included in the consolidated balance sheet reflects that of Hiscox plc, the Group’s former legal parent company, up until the date of the reverse acquisition on 12 December 2006 together with that issued subsequently by Hiscox Ltd, the new legal parent, up until each respective balance sheet date.
Share options and performance share plan awards Performance share plan awards are granted to Directors and to senior employees. Up until 2005, share options were also granted. The exercise price of the granted options is equal to the closing mid-market price of the shares on the day before the date of the grant. 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.
The weighted average fair value of each share option granted during the year was 89.9p (2010: 81.5p). The weighted average fair value of each performance share plan award granted during the year was 397.0p (2010: 340.4p).
Movements in the number of share options during the year and details of the balances outstanding at 31 December 2011 are shown in the Directors’ remuneration report.
At 31 December 2011 Hiscox Ltd held 22,836,487 shares in treasury (2010: 25,142,874). Additional details are shown in note 37 to these financial statements in respect of additional Hiscox Ltd shares held by subsidiaries.
Recoverable from reinsurers Claims reported and claim adjustment expenses 187,973 131,697 Claims incurred but not reported 224,855 242,496 Unearned premiums 79,687 88,572
The Chain Ladder method is adopted for mature classes of business where sufficient claims development data is available. This methodology produces optimal estimates when a large claims development history is available and the claims development patterns throughout the earliest years are stable. Chain Ladder techniques are less suitable in cases in which the insurer does not have developed claims history data for a particular class of business (e.g. in relation to more recent underwriting years or years of account). In these instances the Group’s actuaries make reference to the Bornhuetter- Ferguson method.
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 2011 and 2010 are not material.
The Chain Ladder method may be applied to premiums, paid claims or incurred claims (i.e. paid claims plus case estimates). The basic technique involves the analysis of historical claims development factors and the selection of estimated development factors based on this historical pattern. Where losses in the earliest underwriting years or years of account have yet to fully develop an adjustment is made to the pattern to allow for further expected development. The selected development factors are then applied to cumulative claims data for each accident year to produce an estimated ultimate claims cost for each accident year.
Total gross liability to external parties at 100% level 26 Insurance liabilities and reinsurance assets continued 26.1 Insurance contracts assumptions continued (b) Claims development tables continued Insurance claims and claim adjustment expenses reserves – gross at 100%
Total Group liability to external parties included in the balance sheet – net**
Estimate of ultimate claims costs as adjusted for foreign exchange* at end of accident year eight years later 256,535 327,249 – – – – – – – – 583,784 nine years later 266,886 – – – – – – – – – 266,886 Current estimate of cumulative claims
Total at end of year (1,902,571) 412,828 (1,489,743) (1,706,404) 374,193 (1,332,211)
Total claims and claim adjustment expenses (830,368) 132,470 (697,898) (733,074) 162,077 (570,997)
Obligations under finance leases 36 – 45 Share of Syndicates other creditors’ balances 4,856 4,887 Social security and other taxes payable 10,640 14,563 Other creditors 14,939 13,995
Reinsurers’ share of deferred acquisition costs 17 15,641 17,048 Accruals and deferred income 56,847 64,933
28 Tax expense The Company and its subsidiaries are subject to enacted tax laws in the jurisdictions in which they are incorporated and domiciled. The principal subsidiaries of the Company and the country in which they are incorporated are listed in note 37. The amounts charged in the consolidated income statement comprise the following: Current tax Expense for the year 380 58,228 Adjustments in respect of prior years (95,809) (1,062)
Deferred tax Expense/(credit) for the year 17,090 (22,532) Adjustments in respect of prior years 77,992 (691) Effect of rate change (3,654) (1,377)
Sch 23 FA 2003 deduction and share based payments (1,867) (1,803) Non-taxable income (10,242) (2,839) Overseas tax 380 1,164 Prior year tax adjustments (17,817) (1,753)
During 2011 the group’s Lloyd’s corporate member, Hiscox Dedicated Corporate Member Ltd, changed its tax filing position on the timing of the deduction for tax purposes of member-level reinsurance premiums. Consequently, a prior year current tax adjustment has arisen and results in a closing current tax debtor. Equally, deductions for member-level reinsurance premiums which were previously deferred for tax, and formed part of the deferred tax balance have been taken in earlier years, and no longer form part of the deferred tax balance. The effect of this change in current tax is a credit to the income statement of £81,287,000. The effect of this change in deferred tax is a charge to the income statement of £73,296,000. A permanent difference arises as a result of the difference in UK effective tax rate between the earlier and later years.
Insurance contracts – equalisation provision* (23,079) (3,850) – (26,929) Reinsurance premiums – (128,240) – (128,240) Retirement benefit obligations – (610) – (610)
UK deferred income tax assets and liabilities are calculated at 25%. The UK Government has indicated its intention to reduce UK tax rates year-on-year to 23% by the full year commencing April 2014, however at the balance sheet date, no such measures were substantially enacted.
The effect of using the CPI to determine the scheme liabilities at 31 December 2011 does not have a significant effect on scheme liabilities.
Current service cost 533 346 Interest cost 7,705 7,952 Expected return on scheme assets (8,988) (8,441) Recognition of past service credit (3,037) – Amortisation of net actuarial loss – 323 Effect of deemed irrecoverability of surplus 5,487 1,520
The actual return on scheme assets was a gain of £3,392,000 (2010: £14,516,000).
At beginning of year – – Total expense charged in the income statement of the Group 9 1,700 1,700 Past service costs recognised in other creditors – – Contributions paid (1,700) (1,700)
A reconciliation of the fair value of scheme assets is as follows: Opening fair value of scheme assets 144,056 118,391 Expected return on scheme assets 8,988 8,441 Difference between expected and actual return on scheme assets (5,596) 6,075 Contributions by the employer 1,700 13,500 Settlements with scheme members – – Benefits paid (8,098) (2,351) Expenses paid (533) –
A reconciliation of the present value of scheme obligations of the scheme is as follows: Opening present value of scheme obligations 146,737 140,676 Current service cost 533 346 Interest cost 7,705 7,952 Amendments (3,037) – Actuarial losses/(gains) 12,378 114 Benefits paid from scheme (8,098) (2,351) Settlements with scheme members – – Expenses paid (533) –
Additional memorandum information at the end of the current and previous six accounting periods is presented below: Present value of scheme obligations 155,685 146,737 140,676 101,615 106,793 137,461 137,533 Fair value of scheme assets (140,517) (144,056) (118,391) (115,166) (127,576) (133,660) (101,409)
Gross liability recognised on balance sheet – – – – – 3,801 16,677
The average life expectancy in years of a pensioner retiring at 60, 15 years after the balance sheet date is as follows: years years
Profit for the year attributable to the owners of the Company (£000) 21,272 178,800 Weighted average number of ordinary shares (thousands) 383,602 379,064 Basic earnings per share (pence per share) 5.5p 47.2p
Profit for the year attributable to the owners of the Company (£000) 21,272 178,800
Interim dividend for the year ended: 31 December 2011 of 5.1p (net) per share 19,738 – 31 December 2010 of 5.0p (net) per share – 19,018 Final dividend for the year ended: 31 December 2010 of 11.5p (net) per share 44,111 – Second interim dividend for the year ended: 31 December 2009 of 10.5p (net) per share – 39,442
Subject to shareholder approval at the forthcoming Annual General Meeting on 30 May 2012, a scrip dividend alternative to a cash dividend is to be offered to the owners of the Company. These financial statements do not reflect this dividend as a distribution or liability in accordance with IAS 10 Events after the reporting period.
In 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 consolidated the results of Blyth Valley Ltd at 31 December 2011 and 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 Ltd of £3,619,000.
In addition during 2010, the Group acquired a 25% holding in InsuranceBee Inc for total consideration of $500,000 (£323,000). InsuranceBee Inc was, until the Group acquired 100% of Blyth Valley Ltd, the American sister company of Blyth Valley Ltd and is a specialist errors and omissions insurance broker.
34 Disposals On 23 March 2011, the Group sold its holding in Plexstar Insurance Services Ltd with a further consideration to be settled in 2012. On cash settlement, this recognised an initial loss of £33,000. Further consideration is due to be received during 2012, estimated to be £200,000.
Limited, to meet the subsidiary’s obligations at Lloyd’s. The total guarantee given under these deeds of covenant (subject to limitations) amounts to £15 million (2010: £15 million) in respect of Hiscox Ltd and $350 million (2010: $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.
(e) As Hiscox Insurance Company (Bermuda) Limited is not an admitted insurer or reinsurer in the US, the terms of certain US insurance and reinsurance contracts require Hiscox to provide Letters of Credit or other terms of collateral to clients. In 2009, Hiscox entered into a Letter of Credit Reimbursement and Pledge Agreement with Citibank for the provision of a Letter of Credit facility in favour of US ceding companies. The agreement was a three-year secured facility that allowed Hiscox to request the issuance of up to US$450 million in Letters of Credit. Letters of Credit issued under these facilities are collateralised by pledged US Government Securities of Hiscox Insurance Company (Bermuda) Limited. Letters of Credit under this facility totalling US$67,208,000 were issued with an effective date of 31 December 2011 (2010: US$89,110,000).
36 Capital and lease commitments Capital commitments The Group’s capital expenditure contracted for at the balance sheet date but not yet incurred for property, plant and equipment was £326,000 (2010: £229,000).
The aggregate minimum lease payments required by the Group under non-cancellable operating leases, over the expected lease terms, are as follows: No later than one year Land and buildings 7,359 7,505 Office equipment 1 28
Later than one year and no later than five years Land and buildings 25,239 24,737 Office equipment – 1
The finance lease obligations to which the Group is committed include the following minimum lease payments: Current liabilities due for settlement no later than one year – 45 Non-current liabilities due for settlement after one year and no later than five years – –
37 Principal subsidiary companies of Hiscox Ltd at 31 December 2011
Amounts receivable from Syndicate 33 at 31 December excluding profit commission accrued 22,426 13,163
(c) Internal reinsurance 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.
The related results of these transactions have been eliminated on consolidation.
Net asset value per share (p) 323.5 332.7 299.2 258.1 209.5
Key statistics *Closing mid market prices. † As a result of a change in presentation, 2008 and later years included acquisition costs for the purchase of reinsurance contracts within expenses for the acquisition of insurance contracts. Earlier years include these costs within ‘outward reinsurance premiums’.