While the events of September 11 have been a disappointing setback to recovery, Syndicate 33 is now benefiting from the subsequent surge of business to the London Market. Our retail business led by the Hiscox Insurance Company continues to grow well.
• Strategy of balancing London Market business with regional retail business working well
Earnings per share (10.2)p 3.5p (Based on operating profit/(loss) after tax)
The result for the year ending 31 December 2001 is an operating loss of £21.2 million (2000: profit £3.0m) and a pre-tax loss of £32.5 million (2000: profit £3.5m). The gross premium income controlled by the Group increased to £780.0 million (2000: £603.3m), and the gross premium income applicable to Hiscox plc increased to £548.9 million (2000: £384.7m).
The result is dominated by losses from the terrorist attack on September 11 on the World Trade Center (WTC). Without that tragic event, we would this year be announcing a reasonable increase on last year’s operating profit and a further move towards a decent return on equity.
However, we acknowledge that the recent results of Hiscox plc have not been good. We have explanations but no excuses as our ambition is to defeat the down cycles, however severe they are, and we take no pride in the fact that others have fared worse. We will do better. Current figures show that we are back on track, and with better margins and a much higher premium income, proper returns should be made in the very near future.
Bronek Masojada reports on the business in detail in his CEO’s report that follows. I will just highlight some of the important issues of the year and comment on the future.
World Trade Center We have not altered our estimate of the final loss to Syndicate 33 from the WTC of $440 million gross, reduced to $90 million after reinsurance recoveries (or approximately £30 million to Hiscox plc). This is based on a detailed analysis of each claim, and on one total loss being paid to the leaseholder.
Uncertainties remain. The site is still being cleared and in some cases the loss adjusters are not yet able to make accurate assessments of business interruption losses. At 31 March 2002 we had received notifications of claims from our insurance and reinsurance accounts totalling $543 million and the US Trust Funds have been appropriately funded. The flow of property claims has now virtually halted. It is our experience that the physical loss following a very large property loss is nearly always exaggerated immediately after the event. It is the liability losses (in which we have no material involvement) that traditionally take years to settle and grow with time.
Prior to the WTC loss, conditions were improving satisfactorily and I said in last year’s report that they were better than they had been for years. Post WTC, the withdrawal of risk appetite by reinsurers and thereby insurers caused a leap in the cycle with rates rising rapidly
and terms and conditions tightening. Syndicate 33 has been able to reduce its exposure per risk whilst substantially increasing its income from a less volatile, better balanced portfolio. In other words, much more money for much less risk.
Given a normal run of claims, the current rates being obtained should yield a very acceptable profit.
Hiscox Insurance Company (Hisco) Hisco continues its steady progress. The combined loss ratio for 2001 of 97.8% (2000: 97.7%) was within our target of 95% to 98%, with the gross premium income up to £163.9 million (2000: £127.3 million). The UK combined ratio was 95.4% which was highly satisfactory. A reinforcement of the health of Hisco is the inflow of cash. Hisco started the year with technical reserves (Warren Buffett’s "float") of £120.5 million, and ended the year with £152.7 million despite having paid out a considerable sum to settle some old pre-acquisition fully reserved liabilities.
The strategy of building a business outside Lloyd’s is working well and has an exciting future. Being small and nimble has two enormous advantages. One, decisions can be implemented immediately, and it is much more fun to work in than being a small cog in a huge wheel. Two, communication is easier, and staff can feel that they are making a significant contribution every time they conclude a successful transaction or reduce an expense. Hisco is turning out to be an excellent balance to the Lloyd’s business.
Dividend The Board decided that having raised new money, with market conditions giving us fantastic opportunities to use every penny of capital, and having made
a loss, we should not pay a dividend out of the 2001 accounts. We expect to resume the dividend payments when profits return this year.
Losses at Lloyd’s allow reforms which have never been possible during good times so we now have a good opportunity to finish the rationalisation of the market. If it is to remain a mutual bourse, it needs strong leadership to impose strict underwriting disciplines and low expenses, and we welcome the new proposals to strengthen the management of the franchise. The current Chief Executive has the right ideas and he has our support.
However, the consolidation of the reinsurance industry into five major players is arguably a good thing as it will bring sensible price stability. Cheap reinsurance offered to weak insurers always fuels the stupid price-cutting and lack of discipline in the down cycle. Similarly, the consolidation of the insurance industry, combined with the withdrawal from property and casualty insurance by some large composite competitors, gives us remaining players a great opportunity to get it right. We are now able to pick the right business and charge the right price. If we combine that with better use of technology to reduce costs, the future will be good.
We also have an excellent team in Hisco led by Sian Fisher with solid experience in running an insurance company outside the London Market and turning it from losses (not made by us) into profits. I would like to thank them and ask for more of the same.
And behind all the underwriting are some dedicated support staff who make the underwriting possible. As I say every year, and I say it because I mean it, we are only as good as our people, and I think we have the best.
be the possibility of losses of unexpected magnitude, and we must make sufficient margins over a period of time to cover them.
We should reach around £1 billion of managed gross premium income this year. I know turnover is vanity and profit is sanity, but the rates we are achieving make good profits most likely if we have any normal pattern of losses. The strategy is balanced growth, both in building the retail business to balance the London Market wholesale business, and within both business areas. We now basically have a better balance at higher rates, with a highly talented and motivated staff determined to keep it that way and to grow Hiscox plc into the premier UK based insurer, rewarding shareholders with proper returns. I am looking forward to the next few years with relish.
“The consolidation of the insurance industry, combined with the withdrawal from property and casualty insurance by some large composite competitors, gives us remaining players a great opportunity to get it right”
Our overseas expansion continues. Our Guernsey operations grew profitably, and a specialist operation in Ireland has been added to our mainland European offices.
• London Market Reinsurance Reinsurance rates began increasing at the beginning of 2001. This allowed us to begin expanding the account. The attack on the World Trade Center has caused significant losses. Our exposure is mainly to the reinsurance of property and associated business interruption. The impact of this event has been twofold. It has led to significantly higher rates on January renewals, but these rates have drawn in additional capital to this segment – particularly new start-ups based in Bermuda. There are concerns about future pricing trends but, to date, our experience is that demand continues to exceed supply and prices remain firm. We expect this account to grow significantly in the year ahead.
Overview As Robert said in his Chairman’s Statement, 2001 has been dominated by the tragic events of September 11. The human tragedy and its associated financial cost overshadow all achievements in the year. For Hiscox the year began well with further progress by our retail business and a near breakeven result from our Lloyd’s business at the half year. At the full year, the cost of WTC has led to a significant overall loss. This setback has had an inevitable positive impact on the rating environment and opportunities for profit in the year ahead.
My report gives an overview of the Group’s operations, first in terms of business developments by market segment for the total premium income controlled by Hiscox (see Table 1), followed by detailed commentary on financial performance of components of the Group.
Business trends by segment During the year the controlled premium income of the Group grew to £780.0m, an increase of 29.3%. Rating increases have been a significant, though not the sole, driver of this growth. Rates were rising in both our retail areas and our Lloyd’s business in the first half of the year. The events of September 11 led to rapid rate rises which we exploited, expanding both our London Market Reinsurance and Direct accounts. The trends in the retail area were only marginally affected by the September 11 attack, and rate increases account for only a third of our growth. The balance has been split equally between organic growth and acquisition.
We expect the higher rating levels to prevail for some time, with some areas seeing further increases, though not at the pace experienced to date. In each major business segment, business trends and expectations differ, so I comment on them individually as follows: A year ago we had the wind at our backs. In September we were hit by a freak squall. With the yacht now upright and her spinnaker raised, we are powering ahead and making the most of the market conditions.
Syndicate 33 Retail* Total Syndicate 33 Retail* Total £m £m £m £m £m £m
Property, Construction, Terrorism, Energy, Marine Hull & Cargo, Liability, Political Risks, Specie, Enterprise Risk Management
Proportion owned by Hiscox plc 60% 100% – 53% 100% –
Germany m o n th r o lli n g a ve ra g e
m o n th r o lli n g a ve ra g e
“Our experienced team and good broker relationships give us a competitive advantage”
Company. In the retail area, we have raised our profile with the sponsorship of Tech Track 100 – an award to the 100 fastest growing technology companies in the UK. We already insure 25 of the prize winners, but clearly have an opportunity for further expansion. Growth of our retail technology account has offset the decline in the retail media account where we have suffered from the legal lottery surrounding libel in the UK. In Lloyd’s we are now the major lead for space business. Aerospace income reduced relative to last year, as there were fewer satellites launched. We expect this business unit to grow as, despite the dotcom bust, businesses are realising that they need protection of the sort we can offer.
• Professional Insurances Our UK book has grown well, with the introduction of a broader product range to cover not just liability areas, but a client’s property coverages as well. It is taking time to sell this new concept to clients and their brokers, but we anticipate success. In the Syndicate we are insuring a select group of US professional firms.
The operating performance of the Group reflects the underlying performance in our core business areas – our Lloyd’s business and our Retail business. I review these in detail below.
Lloyd’s business Our Lloyd’s business comprises Hiscox plc’s share of the underwriting conducted through Syndicate 33, with fees and profit commissions earned on managing the business and investment returns on the capital supporting the business.
The gross premium received by Syndicate 33 in 2001 in total grew by 29% to £574m. This growth is due to two separate business decisions. At the start of the year, in anticipation of a firmer rating environment we began expanding our book – focusing on those areas where rapidly increasing rates meant good prospects for profit. Post WTC, we sought to take advantage of the step change in the rating environment by writing a further £60m of premium. In order to do this we requested and received specific regulatory clearance.
Expansion has continued into 2002. In our business planning we anticipated increasing our underwriting by 40%. At the time of writing we anticipate exceeding this and are working to put in place qualifying quota share reinsurance arrangements to allow us to underwrite a further £100m of premium income. Given the current rating environment and with a normal loss pattern, we anticipate that this underwriting will yield a healthy profit.
Ltd and underwriting agencies in France, Germany, Holland and Ireland. Table 4 below shows the performance of the businesses.
ratio has improved from 46.5% to 32.5% as we have benefited from the economies of scale in the growing business and we have retained more premium income. Other income declined compared with 2000 as 2000 benefited from a one-off fee from the unwinding of a name’s conversion scheme inherited with the Hiscox Select acquisition. Loan interest and amortisation costs grew marginally during the year as we drew on our letters of credit used for funds at Lloyd’s.
The events of September 11 have tested the Syndicate’s claims paying ability. Under US insurance regulation Syndicate 33 is required to lodge monies in trust funds in the USA to meet anticipated claims. In total it has lodged $283m in the USA for WTC. Syndicate 33 met this requirement from its own resources, supported by existing bank facilities and reinsurance arrangements. I would like to thank all those banks and reinsurers who supported us.
Trading result (25.5) (1.1) Other income less expenses (1.9) (0.4) Loan interest and capacity amortisation (2.5) (2.3)
Europe Our European business is conducted through our underwriting agencies which underwrite on behalf of both Syndicate 33 and Hiscox Insurance Company. Table 4 combines both the results of their underwriting on behalf of Hiscox Insurance Company together with the associated local agency costs.
“In the year ahead we will be working both to deliver further growth and to sustain underlying underwriting performance”
UK Europe Guernsey Retail Total UK Europe Guernsey Retail Total £m £m £m £m £m £m £m £m
Investment management At Hiscox we oversee the management of £599m of financial assets. £528m of this represents financial assets attributable to Hiscox plc and Syndicate 33. These funds are managed by external fund managers, supervised by our team at Hiscox Investment Management (HIM). The balance represents funds managed for third party investors.
HIM manages the Hiscox Insurance Portfolio, a specialist sub-fund of the S&F Hiscox Open Ended Investment Company. During the year this fund grew from £31.6m to £52.2m. Its total return during the year was 1.4%, putting it fourth out of 266 International Equity Funds (Source: Micropal). This is a second consecutive year of outstanding performance.
FRS17 In preparation for the introduction of FRS 17, the actuarial valuation of the Hiscox Pension fund was updated on a FRS17 basis. As at 31 December 2001, this showed scheme liabilities of £59.8m and assets of £46.6m, a shortfall of £9.2m (net of tax).
The board has taken action to address the pension shortfall with certain of the terms of the Defined Benefit plan being altered during the course of 2001. With effect from 1 January 2001, all new Hiscox employees become members of a Defined Contribution Pension Plan.
particularly in Hiscox Insurance Company, was beginning to require further capital. Post WTC, the Group raised £54m net of expenses to strengthen our overall balance sheet position. £20m of the funds raised have been allocated to Hisco, £20m has been allocated to support our underwriting on Syndicate 33, with the balance available at Group level.
People A service based business such as Hiscox is only as good as its people. In difficult conditions they have worked hard to drive the Group forward and I would like to thank them for their efforts and commitment. A deliberate act of terrorism has diminished the immediate financial effect of their endeavours, but I expect that in the near future the Group’s results will show a proper reflection of their individual and team achievements and we will be able to reward them appropriately.
“During the year we made significant progress with staff training in underwriting, management and leadership skills. These endeavours will help ensure that Hiscox remains an employer of choice”
Stephen Hargreaves Hall (Aged 69)*†F‡^ Senior Independent Director Stephen Hall was a partner in Ernst & Young from 1962 to 1993 and acted as Director of Finance at Lloyd’s from 1993 to 1994. He joined the Group on 24 August 1995.
Carol Franklin Engler (Aged 51)*†F‡^ Carol Franklin Engler was the Chief Executive Officer of the World Wide Fund for Nature in Switzerland until the end of 2001. From 1979 to 1999 she was employed by Swiss Re in a variety of roles including Head of the Aviation Department and Head of Human Resources. She joined the Group on 12 August 1999.
* member of the Audit Committee † member of Remuneration Committee F member of Conflicts Committee ‡ independent directors ^ member of the Nominations Committee
Bronislaw Edmund Masojada Chief Executive (Aged 40)^ Bronek Masojada joined the Group in 1993. From 1989 to 1993 he was employed by McKinsey and Co. He is currently Deputy Chairman of Lloyd’s.
Robert Simon Childs Director of Underwriting (Aged 50) Robert Childs has been Underwriter of Syndicate 33 since 1993. He joined the Group in 1986.
Hiscox plc Report and Accounts 200124 of the comprehensive and integrated system of business risk management and internal control.
The system is designed to identify and assess the risks associated with achieving the Group’s business objectives, and to manage these risks on an ongoing basis to acceptable levels. It is not intended or possible to eliminate risk altogether.
This approach supports the overall business philosophy, enabling the Group to respond rapidly to opportunities, while being fully aware of the degree of risk accepted.
The Board is confident that this system provides the Group with a distinct competitive advantage, and is therefore continually seeking ways to refine and enhance it.
The main elements of the system are as follows: • Risk identification – Workshops and reviews are used to identify, assess and prioritise business risks.
• Review – All trading units operate a hierarchical system of review to maintain underwriting standards and disseminate knowledge.
• Authority – Limits to personal authority are clearly defined for all roles and adherence is monitored.
• Competence – Significant effort is devoted to attracting and developing high quality employees. Training is a high priority and performance and competence are carefully managed.
• Financial controls – An established system of financial controls operates to maintain accuracy and safeguard the Group’s financial assets.
• Compliance – New regulations are assessed and incorporated into the Group’s system of controls as necessary. Compliance with existing regulations is monitored as appropriate.
external auditors have unrestricted access to the Audit Committee, which monitors the scope, results and cost effectiveness of the audit, the independence and objectivity of the auditors, and the nature and extent of non-audit work together with the level of related fees.
The Risk Committee comprises two executive directors and the heads of internal audit. It meets monthly to monitor risk management and internal control, and reports directly to the Board and the Audit Committee.
The Remuneration Committee comprises three independent nonexecutive directors. It meets twice a year to review the Group’s remuneration policy and determine all aspects of the executive directors’ and other senior executives’ remuneration. The Board’s remuneration report is presented on pages 25 and 26.
Two key management committees, the Executive Group and the Group Management Team, head the Group’s organisational structure. These committees meet weekly and manage the Group’s business operations in order to achieve the Board’s strategic business objectives.
The directors communicate and meet directly with shareholders and analysts throughout the year, and do not limit this to the period following the release of financial results or other significant announcements.
Risk and internal control The directors are responsible for operating and reviewing the effectiveness
For the year ended 31 December 2001, and the period up to the date of approving the accounts, the Group has applied the principles and complied with the provisions of ‘The Combined Code’ and ‘Internal Control: Guidance for Directors on The Combined Code’ with the exception that the Board as a whole has acted as the Nominations Committee to deal with appointments to the Board. In April 2002 the membership of that Committee was changed to include four independent non-executive directors and two executive directors. No appointments were made to the Board in the year.
Any director may seek independent professional advice at the Company’s expense, although no such fees were incurred during the year.
Pensions The non-contributory defined benefit Hiscox Pension Scheme has two sections.
The first section provides benefits that accrue at the rate of one sixtieth for each year of service up to retirement age 60 for employees as well as former members of the Economic Insurance Holdings Ltd scheme. The other section provides benefits that accrue at the rate of one thirtieth for each year of service up to retirement age 60 for members of the Hiscox partnership as well as former members of The Hiscox Holdings Ltd scheme. At 1 January 2001, Hiscox introduced a non-contributory defined contribution scheme for all staff joining the Group. Only basic pay is pensionable. All schemes provide a death in service benefit of four times a member’s salary.
Service contracts No directors have service contracts, but their contracts of employment provide for termination on six months notice by either side.
strongly in the value of employee participation in long term award schemes so that their interests may be aligned with those of shareholders.
Awards were made during the year to executive directors, Hiscox principals and other staff under the Approved and Unapproved share option schemes. The exercise of options under these schemes depends upon the earnings per share of the Group increasing at two per cent more than the rate of inflation over a period of three years. These options are not offered at a discount and conform with institutional investor dilution guidelines.
The Group has also implemented a performance share plan for senior executives to complement the existing long term incentive arrangements. Awards were made during the year utilising shares in Hiscox plc already held by Hiscox Holdings Limited. The targets applicable to the awards made in the year were subject to the following operational earnings per share (“EPS”) growth target: a) The participants will receive 100%
Remuneration policy The Remuneration Committee determines the Group’s remuneration policy and the levels and various elements of remuneration paid to its executive directors and senior executives.
Base salary and benefits The Remuneration Committee has utilised the services of independent consultants in its consideration of what comparable companies are paying and in setting annual salaries and other benefits. Using this information as a benchmark, salary levels are determined for each individual which take into account experience, skills, development and performance.
8 Variation of share capital In the event of any variation in the issued ordinary share capital of the Company, the Board may make such adjustments as it considers appropriate to the number of ordinary shares subject to any option and the exercise price per share under any option.
9 Cash equivalent and phantom options On the exercise of any option the Board has discretion to pay the employee a “cash equivalent” sum instead of arranging for the issue or transfer of all or any number of the relevant shares to him. The cash equivalent is the difference between the market value of the shares at the time of exercise and the exercise price.
10 Alteration of the International Sharesave Scheme The Board may at any time alter or add to the International Sharesave Scheme. However, the prior approval of the Company in general meeting must be obtained in the case of any alteration or addition which is to the advantage of participants and which relates to eligibility, individual and overall limits, a participant’s entitlement to shares, the terms of such shares and the variation of capital provisions. The approval of the Company in general meeting is not, however, required for any minor alteration or addition to benefit the administration of the International Sharesave Scheme, to take account of any change in legislation or to obtain or maintain favourable tax, exchange control or regulatory treatment for the participants, the Company or any member of the Group.
5 Exercise of options An option granted under the International Sharesave Scheme may not normally be exercised before the maturity date of the relevant savings contract.
Special provisions permitting early exercise of options apply in respect of participants who cease employment with the Group before the maturity of their savings contract because of their death, disability, redundancy, retirement at age 60 or at contractual retirement age, or where the company or business for which they work is transferred out of the Group. If a participant ceases employment for any other reason (other than dismissal for misconduct), he may exercise any options that he has held for at least three years within six months of his so ceasing.
Where a non-UK participant exercises an option and the total amount of savings and interest that he has available for exercise is less than the amount that he would have received under an equivalent savings contract entered into under the UK Sharesave Scheme, for example because of interest rate differences or exchange rate movements, he may decide to make up the difference from his own funds.
3 Grant of options The Board may invite all eligible employees to apply for options to acquire ordinary shares in the Company. Employees applying for options must agree to make regular monthly savings of between £10 and £250 (in local currency) under a savings contract approved by the Board. It is envisaged that the savings contracts will mirror the equivalent contracts taken out under the UK Sharesave Scheme, although the Board can approve different contracts if this would be desirable in any particular jurisdiction.
Payment is then made on these terms, subject to the terms and conditions being met by the supplier. The Group had 16.5 (2000: 13.4) days purchases outstanding at 31 December 2001 based on the average daily amount invoiced by suppliers during the year ended 31 December 2001. The Company is a holding company and accordingly has no days purchases outstanding at 31 December 2001. Therefore, the Group creditors days are considered to be more representative.
Political and charitable contributions The Group made no political contributions during the year (2000: £nil). Donations to UK charities amounted to £25,000 (2000: £25,000).
Personnel policies are reviewed regularly and initiatives are made in all the main areas of personnel policy. Performance related pay systems are well established and are reviewed regularly and refined as necessary to meet changes in business needs.
Environmental policy Hiscox aims to minimise the impact on the environment from its business activities, in particular through the extensive use of computerisation and communications technology. Where possible consumables are recycled.
The way our insureds conduct their business is of paramount importance to us, due to our core philosophy that for high quality underwriting we need high quality insureds. In considering underwriting, the insureds’ attitudes to all aspects of their business, including their care of the environment, are considered.
Resolution 9, which will be proposed as an ordinary resolution, seeks to obtain approval for the Hiscox International Sharesave Scheme details of which are set out on page 26 of this Report and Accounts.
Resolution 7, which will be proposed as an ordinary resolution, seeks to renew the directors’ authority to allot relevant securities pursuant to Section 80 of the Companies Act 1985. The authority contained in the resolution will be limited to the allotment of relevant securities to an aggregate nominal value of £3,179,097.57. This authority will terminate no later than fifteen months after the date of the Annual General Meeting.
Fidelity International Limited 6,793,472 – 6,793,472 3.5 Landsdowne Partners Limited Partnership 5,845,000 – 5,845,000 3.0
Report of the Independent Auditor to the Members of Hiscox plc
Equalisation provisions Our evaluation of the presentation of information in the financial statements has had regard to the statutory requirement for insurance companies to maintain equalisation provisions. The nature of equalisation provisions, the amounts set aside at 31 December 2001, and the effect of the movement in those provisions during the year on the general business technical result and profit before tax, are disclosed in note 8.
We have audited the financial statements on pages 30 to 60.
We review whether the statement on page 24 reflects the Company’s compliance with the seven provisions of the Combined Code specified for our review by the Financial Services Authority, and we report if it does not. We are not required to consider the Board’s statements on internal control over all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures.
Earned premiums, net of reinsurance Gross premiums written 5(d) 548,926 384,736 Outward reinsurance premiums (136,349) (124,049)
Claims incurred, net of reinsurance Claims paid: Gross amount (253,041) (220,628) Reinsurers’ share 113,463 104,887
Other technical income 5(d) 1,324 1,184 Net operating expenses 7 (141,362) (120,462) Movement in equalisation provision 5(d), 8 (2,582) (2,309)
Allocated investment return transferred to the technical account 9(a), 9(c) (18,562) (16,222)
Dividends – Interim paid – (1,708) Dividends – Final payable – (3,404)
Loss/earnings per share: – Basic, based on operating (loss)/profit after tax (on longer term investment return) 14 (10.2)p 3.5p – Basic, based on (loss)/profit on ordinary activities after tax 14 (15.5)p 3.8p – Diluted, based on (loss)/profit on ordinary activities after tax 14 (15.5)p 3.8p
Consolidated Statement of Total Recognised Gains and Losses for the year ended 31 December 2001
(Loss)/profit on ordinary activities after tax (23,107) 5,430 Exchange differences taken to reserves (35) 50
Investments Land and buildings 16(a) 430 437 Other financial investments 16(b) 344,402 263,655
Debtors Debtors arising out of direct insurance operations 17 130,689 135,830 Debtors arising out of reinsurance operations 168,320 65,662
The financial statements were approved by the Board of directors on 26 April 2002 and were signed on its behalf by: RRS Hiscox Chairman SJ Bridges Finance Director
Cash at bank and in hand 759 684 Prepayments and accrued income 4,237 238
Consolidated Cash Flow Statement for the year ended 31 December 2001
Deferred acquisition costs represent the proportion of acquisition costs incurred which corresponds to the proportion of gross premiums written which is unearned at the balance sheet date.
Whilst the directors consider that the gross provisions for claims and the related reinsurance recoveries are fairly stated on the basis of the information currently available to them, the ultimate liability will vary as a result of subsequent information and events and may result in significant adjustments to the amounts provided. Adjustments to the amounts of claims provisions established in prior years are reflected in the financial statements for the period in which the adjustments are made.
The provision for outstanding claims is actuarially calculated using the Chain Ladder and Bornhuetter-Ferguson methods. In exceptional cases the required provision is calculated with reference to the actual exposures. There is close communication between the actuaries and underwriters and allowance is made for the rating environment.
3(e) Unexpired risk Provision is made for unexpired risks arising from general business where the expected value of the claims and expenses attributable to the unexpired periods of policies in force at the balance sheet date exceeds the unearned premiums provision in relation to such member of Lloyd’s on the syndicate managed by Hiscox Syndicates Limited (the “managed syndicate”). Subsidiaries of Hiscox Select Holdings Limited underwrite as corporate members of Lloyd’s on the managed syndicate as well as on other non-Hiscox managed syndicates. In view of the several liability of underwriting members at Lloyd’s for the transactions of syndicates in which they participate, the attributable share of the transactions, assets and liabilities of the syndicates has been included in the financial statements.
3(a) Premiums Written premiums comprise the premiums on contracts entered into during the accounting period, irrespective of whether they relate in whole or in part to a later accounting period. Written premiums are disclosed gross of commission payable to intermediaries and exclude taxes and duties levied on premiums.
3(b) Unearned premiums For general business accounted for on the annual basis, the provision for unearned premium comprises the proportion of gross premiums written, which is estimated to be earned in the following or subsequent financial years, computed separately for each insurance contract using the daily pro rata method. Where the incidence of risk varies during the period covered by the contract, the provision is calculated taking into account the risk profile of the contracts.
3(c) Acquisition costs Acquisition costs comprise all direct and indirect costs arising from the acquisition of insurance contracts.
1 Basis of preparation The financial statements of the Group and the Company have been prepared in accordance with applicable accounting standards as at 31 December 2001 and under historical cost accounting rules, modified by the revaluation of investments.
As permitted by Section 230 of the Companies Act 1985, no profit and loss account of the parent company is presented. The profit after taxation for the Company for the year was £1,688,000 (2000: loss of £933,000).
Results are determined on an annual basis, except for the results of the underwriting participations of the Hiscox Select subsidiaries on non-managed syndicates, which are accounted for on a three-year basis. This is because of accounting practices at Lloyd’s whereby this data is not available on an annual basis for most non-managed syndicates.
3(k) Depreciation Depreciation is provided to write off the cost less the estimated residual value of tangible assets on a straight-line basis over their estimated useful economic lives or length of lease, if less, as follows: Short leasehold, fixtures and fittings 10–15 years Computer hardware and software 3–5 years Motor vehicles 3 years All other fixed assets 4 years 3(l) Goodwill Goodwill arising on the acquisition of subsidiaries has been written off directly to reserves in the year of acquisition up to 31 December 1997. From 1 January 1998, in accordance with FRS 10 “Goodwill and intangible assets”, goodwill arising on acquisitions, being the difference between the fair value of the purchase consideration and the fair value of net assets acquired, is capitalised in the balance sheet and amortised on a straight-line basis over its useful economic life which is considered to not exceed 20 years.
3(n) Rates of exchange Assets, liabilities, revenues and costs denominated in foreign currencies are recorded at the rates of exchange ruling at the dates of the transactions. At the balance sheet date, monetary assets and liabilities are translated at the year-end rates of exchange. Any exchange profits or losses arising are taken directly to the profit and loss account.
allocated to underwriting years proportionately to the funds contributed by the year. Investment income and all investment gains and losses relating to syndicate investments and cash are included in the non-technical account, with an allocation made to the technical account as described in section 3(j).
3(h) Investments Group Investments are stated at their current value. Listed investments comprise those quoted on the London and other International Stock Exchanges. These investments are stated at mid-market prices on the balance sheet date, or on the last stock exchange trading day before the balance sheet date.
Company Investments in group undertakings and associates are stated at cost less provisions for impairment in value.
Unrealised gains and losses on investments represent the difference between the current value of investments at the balance sheet date and their purchase price. The movement in unrealised investment gains/losses includes an adjustment for previously recognised unrealised gains/losses on investments disposed of in the accounting period.
3(g) Hiscox Select non-managed syndicate participations These participations are accounted for on a three-year basis and have been calculated according to the provisions of Schedule 9A to the Companies Act 1985 as follows: The excess of premiums written over claims and expenses paid in respect of business commencing in an underwriting year is carried forward as a technical provision as part of outstanding claims. Premiums include a provision for “pipeline” premiums. Profits arising from underwriting are normally recognised at the end of the second year following the end of the underwriting year when the underwriting account is usually closed by reinsurance into the following year of account. The payment of a reinsurance to close premium does not eliminate the liability of the closed year for outstanding claims. If the reinsuring syndicate was unable to meet its obligations, and other elements of the Lloyd’s chain of security were to fail, then the closed underwriting account would have to settle outstanding claims. The directors consider that the likelihood of such a failure of the reinsurance to close is remote, and consequently the reinsurance to close has been deemed to settle liabilities outstanding at the closure of an underwriting account. Where appropriate, provision is made for losses in respect of open underwriting years on a syndicate by syndicate basis.
Syndicate investment income is accounted for on a receivable basis. Interest income is accrued up to the relevant 31 December. Syndicate investments and cash are held on a pooled basis, the return from which is
final settlement will fall below the excess point so that Hiscox will incur no loss. The directors have nevertheless, where appropriate, established a precautionary reserve in these cases on the assumption that a part payment may be made, although this may be lower than the notification which is for a total loss on the layer.
The extent to which losses arise from property risk excess and catastrophe reinsurance policies vary, particularly if a wide definition of business interruption is adopted. Provision has been made for property and business interruption losses known to have occurred in the immediate vicinity of the WTC. Remoter losses have not been provided for.
89% of this reinsurance is placed outside Lloyd’s. Syndicate 33 has made a general provision for bad debts of $4.5 million against their reinsurance recoveries in relation to the WTC losses. It has been assumed that no major reinsurer will fail. Syndicate 33 has already collected 38% of this reinsurance in the form of letters of credit or cash advances as part of our required funding of the US Trust Funds.
Syndicate 33 has had no need to make a cash call.
usual for insurance losses; facts or circumstances will come to light which may affect these estimates. The current projected estimate of net loss to Hiscox plc is £30 million for which provision has been made in these financial statements. This takes no account of any potential subrogation.
The Group has exposure to WTC losses on a number of non-liability accounts, in particular direct property, risk excess, catastrophe and aviation hull. Aviation hull losses have already largely been settled. There is no significant liability exposure.
Deferred taxation, calculated on the liability method, is provided on all material timing differences to the extent that it is probable that the liability will crystallise.
Fire and other damage to property 111,224 (76,043) (45,767) 5,947 (4,639)
The underwriting activities which are managed by the Group are shown below at the 100% level regardless of ownership of capacity: Managed Insurance International 2001 Managed Insurance International 2000 Syndicate Company Operations Total Syndicate Company Operations Total
The impact of a 1% change in the combined ratios of each business division on technical profit/(loss) are: Managed Insurance International Managed Insurance International Syndicate Company Operations Syndicate Company Operations
Short term fluctuations in investment return (3,990) (4,184) (520) (8,694) (764) 1,742 65 1,043 Profit on sale of long-term business – – – – – 846 – 846 Profit on sale of non-managed Lloyd’s capacity – – – – 957 – – 957 Movement in equalisation provision – (2,582) – (2,582) – (2,309) – (2,309)
Net asset value (before equalisation provision) 176,020 192,667 91.4 142,209 148,001 96.1
Net loss provision brought forward as at 1 January 133,932 85,904 Net payments during the year in respect of those provisions (31,547) (16,270) Net loss provision carried forward in respect of claims provided at 1 January (92,954) (56,202)
The figures in respect of aligned capacity relate to closed years of account at 1 January 2001 only.
Acquisition costs 133,924 103,484 Change in deferred acquisition costs (13,677) 662 Reinsurance commission (4,122) (2,185) Administrative expenses, including profit commission 25,237 18,501 8 Equalisation Provision
Short term fluctuations in investment return retained in the non-technical account (8,694) 1,043 b) Longer term investment return
c) Comparison of longer term investment return with actual returns The actual return on investments is compared below with the longer term investment return over the year ended 31 December 2001 and for the five year period from 1 January 1997 to 31 December 2001.
Actual investment return: Shares and units in unit trusts (2,028) (7.2) 302 8.1 (2,394) (10.4) (4,120) Debt securities and other fixed interest securities 1,904 6.1 3,992 6.6 4,237 5.6 10,133
Funds at Lloyd’s 2000 2000 and other Share of Insurance 2000 Corporate Assets Syndicate Company Total
Longer term investment return: Shares and units in unit trusts 1,740 7.0 256 7.0 1,268 7.0 3,264 Debt securities and other fixed interest securities 2,264 6.0 3,072 6.0 4,294 6.0 9,630
Agency salaries 2,176 2,908 Profit commission 159 387 Profit on sale of long-term business – 846 Profit on sale of non-managed Lloyd’s capacity – 957
Operating (loss)/profit is stated after charging: Loan interest payable 1,099 951 Amortisation of goodwill and Lloyd’s capacity costs 1,410 1,313 Finance lease charges 121 172 Operating lease charges (net of recharges to the managed syndicate) 1,793 1,670 Depreciation (net of recharges to the managed syndicate) on tangible fixed assets: – Owned assets 1,151 518 – Leased assets 190 222 Exchange losses/(gains) 385 (823) Provisions for bad and doubtful debts (including share of syndicate) 1,100 1,058 11 Auditors’ Remuneration
On 31 January 2001, the Group acquired 100% of the issued share capital of The Construction and General Guarantee Insurance Company Ltd (CGGI) for a consideration of IR£2,988,000. The goodwill acquired above represents the difference between the consideration and the fair value of the net assets of CGGI acquired.
16 Investments – Group Short Freehold Leasehold Total a) Land and buildings £000 £000 £000
Charge for the year – 7 7 Disposals – – –
Shares and units in unit trusts 28,387 24,285 4,346 1,747 20,977 19,184 53,710 45,216 Debt securities and other fixed income securities 32,831 32,943 57,468 56,225 78,819 77,647 169,118 166,815
The total market value of investments purchased and disposed of in the year was £303,094,000 (2000: £210,680,000) and £217,965,000 (2000: £182,618,000) respectively.
Cost at 31 December 2001 381 b) Investment in subsidiary undertakings £000 £000
The Company has given a fixed and floating charge over its investments and other assets to secure obligations to Lloyd’s in respect of its corporate member subsidiaries. Further details are given in note 28.
Proposed dividend – 3,404 – 3,404 Due to Group companies – – 14,321 12,766 Taxation payable 2,424 3,101 – – Amounts owed to credit institutions 2,059 681 – – Obligations under finance leases 648 753 – –
23 Provision for other risks and charges Group Group Group Company
During the year 205,029 Ordinary Shares of 5p each were issued on exercise of share options. 44,461,435 shares were issued at a price of 126.0p per share on 18 December 2001 as part of the Open Offer. The mid-market price of Hiscox plc shares at close on 18 December 2001 was 153.5p.
Exercises of share options (note 26) 10 133 – – – – 143 84 Shares issued from open offer 2,223 52,005 – – – – 54,228 3,525 Unrealised gains/(losses) – – – – (727) – (727) 147 Retained profit/(loss) for the year – – – – – 1,688 1,688 (6,045)
Non-executive directors *Directors’ emoluments relate to the period they served as directors of Hiscox plc. IN Thomson resigned as a director of Hiscox plc on 4 July 2001.
b) Pension Entitlements The pension entitlements of the directors on the Hiscox defined benefit scheme were as follows: Increase in accrued Accumulated total Transfer value of the pension during the year accrued pension at increase in accrued 31 December 2001 year end pension
Number of shares Number of shares Number of shares Number of shares Beneficial Non Beneficial Beneficial Non Beneficial
Non-executive directors SH Hall 28,000 – 23,000 – AGC Howland Jackson 33,060 – 15,431 – DND Netherton 26,000 – – – C Franklin Engler – – – –
*Hiscox Trustees Ltd is the trustee of the Hiscox plc group Employee Share Ownership Plan Trust (ESOP) and at 31 December 2001 was interested in 170,311 (2000: 170,311) ordinary shares of the company. The executive directors are potential beneficiaries of the ESOP and are deemed to have an interest in these shares. Subsequent to the year end C Franklin Engler acquired 11,000 shares.
No. of No. of options at No. of No. of options at Exercise Market price Date from 1 January options options 31 December Price at date of which Expiry 2001† granted exercised 2001 £ exercise exercisable date
27 Pension Contributions During the year, the Group contributed to the two sections of the Hiscox defined benefit pension scheme. The majority of Group employees are members of the scheme which is non contributory. The funds of the scheme are administered by trustees and are independent of the Group’s finances. The adequacy of the pension funds is assessed by triennial valuations carried out by independent actuaries.
Rate of increase in RPI linked pensions in payment 2.5% p.a. Discount rate 6.0% p.a.
Total market value of assets 46,610 Present value of scheme liabilities (59,800)
Where a deficit needs to be funded, a proportion of the additional contributions will be recharged to Syndicate 33 in accordance with the Group’s normal recharging procedures.
Defined contribution scheme At 1 January 2001, Hiscox introduced a non contributory defined contribution scheme for all staff joining the Group.
28 Guarantees and Contingencies i) The Company entered into a deed of covenant in respect of its corporate member subsidiaries, Hiscox Select B and C Ltd, to meet the subsidiaries’ obligations to Lloyd’s. The total guarantee given by the Company under this deed of covenant (subject to limited exceptions) amounts to £15,875,563 (2000: £15,155,636). Hiscox Select Insurance Fund PLC has entered into identical deeds of covenant in respect of its corporate member subsidiaries Hiscox Select A, D to J Ltd totalling £35,813,004 (2000: £36,474,589). The obligations under these deeds of covenant are secured by a fixed and floating charge over certain of the investments and other assets of the Company and of Hiscox Select Insurance Fund PLC in favour of Lloyd’s. Lloyd’s has a right to retain the income on the charged investments in circumstances where it considers there to be a risk that the covenant might need to be called and might not be met in full.
ii) The Company has an agreement with Chase Manhattan International Ltd, an agent for a syndicate of banks, for a £75,000,000 irrevocable standby Letter of Credit facility. Commencing 1 January 2002, £66,500,000 was drawn down to support part of the Group’s underwriting activities for the 2002 account. Hiscox plc has a fixed and floating charge over the Group’s assets as a guarantee to the group of banks led by Chase Manhattan plc in connection with their Letter of Credit.
All companies are wholly owned. The proportion of voting rights of subsidiaries held is the same as the proportion of equity shares held. †Held indirectly.
Hiscox Holdings Limited held 1,094,334 shares (2000: 2,154,770 shares) in Hiscox plc at 31 December 2001 with a market value of £1,701,689 (2000: £2,992,000). These shares are included within other financial investments.
*Hiscox Insurance Company (Guernsey) Limited has subscribed cellular share capital of $250,000 in a cell in Harlequin Insurance PCC Limited, a protected cell company incorporated in Guernsey under the Protected Cell Companies Ordinance, 1997 (as amended). This cell, Cell Hiscox, incurred a loss for the year of US$1,020,147 which has been included in the figures of Hiscox Insurance Company (Guernsey) Limited and consolidated in these report and accounts.
Net cash inflow/(outflow) for the period 32(f) 6,369 895 Portfolio investments 32(f) 45,779 27,587 Decrease/(increase) in loans 32(f) (905) 129
Movement arising from cash flows 51,243 28,611 Movement in long term and Lloyd’s business 32(f) 57,035 10,177 Changes in market value and exchange rate effects 32(f) (4,549) 6,881
Total portfolio investments net of financing at 1 January 299,925 254,256
Premiums received 124,051 201,740 Claims paid (52,881) (90,052) Net portfolio investments 6,011 5,238 Other net cash flows (32,635) (84,704)
Servicing of finance Interest paid (559) (784) Interest paid element of finance leases (121) (198)
Portfolio investment Purchase of shares and units in unit trusts 8,402 18,143 Purchase of debt securities and other fixed income securities 120,564 143,244 Sale of shares and units in unit trusts (10,339) (124) Sale of debt securities and other fixed income securities (117,772) (162,376) Increase/(decrease) in deposits with credit institutions 44,924 28,891 Increase/(decrease) in other investments – (191)
*These amounts are the same as the balance sheet amounts reported. They include amounts relating to syndicate participations.
g) Scope of cash flow The consolidated cash flow statement excludes cash flows relating to underwriting on Lloyd’s syndicates.
Notice of Annual General Meeting ordinary shares in proportion (as nearly as may be) to their existing holdings of ordinary shares but subject to the directors having a right to make such exclusions or other arrangements in connection with the offer as they deem necessary or expedient: (a) to deal with equity securities representing fractional entitlements; and
Note A member entitled to attend and vote may appoint one or more proxies to attend and vote instead of him. The instrument appointing a proxy must be in writing and a form of proxy for use at the meeting is enclosed.
Special resolution 10) That the directors be empowered (in addition to all existing authorities) pursuant to Section 95 of the Act to allot equity securities (as defined in Section 94 of the Act) for cash pursuant to the authority conferred by Resolution 7 as if Section 89(1) of the Act did not apply to the allotment. This power will expire fifteen months after the date of the passing of this Resolution, but the Company may before such expiry make an offer or agreement which would or might require equity securities to be allotted after the expiry of this power and the directors may allot equity securities in pursuance of that offer or agreement as if the authority conferred by this resolution had not expired provided that this power is limited to: (i) allotments of equity securities where such securities have been offered (whether by way of a rights issue, open offer or otherwise) to holders of
Notice is hereby given that the Annual General Meeting of Hiscox plc will be held at 1 Great St Helen’s London EC3A 6HX on 2 July 2002 at 11.00 am for the following purposes: Ordinary business 1) To receive the accounts of the company for the year ended 31 December 2001 together with the directors’ and auditor’s reports thereon.
To re-appoint the following who retire as directors in accordance with the Articles of Association: 2) SJ Bridges 3) RS Childs 4) C Franklin Engler 5) To re-appoint KPMG Audit Plc as auditors of the Company to hold office from the conclusion of this meeting until the conclusion of the next general meeting of the Company at which accounts are laid.
Special business To consider, and if thought fit, pass the following resolutions, of which resolution 7, 8 and 9 will be proposed as ordinary resolutions and resolution 10 will be proposed as a special resolution.
Ordinary resolutions 7) That the directors be generally and unconditionally authorised (in substitution for all existing authorities) pursuant to Section 80 of the Companies Act 1985 (“the Act”) to allot relevant securities (within the meaning of that Section) up to a maximum aggregate nominal value of £3,179,097.57 for a period expiring (unless previously renewed, varied or revoked by the Company in general meeting) fifteen months from the date of the passing of this resolution provided that the authority of the directors shall extend to the making of any offer or