Earnings/loss per share 11.3p (9.7)p (Based on operating profit/(loss) after tax)
★ Rapid turnround to operating profit £34.5 million (2001: £21.2m loss).
★ UK Retail operating profit up 54% to £11.7 million (2001: £7.6m).
London Market Insurance Property, Construction, Terrorism, Energy, Marine Hull and Cargo, Liability, Political Risks, Specie, Enterprise, Risk Management £281.5m
Affluent Personal Lines Fine Art, Kidnap and Ransom, Yachts, Bloodstock, High Value Household, Mass Affluent, Contingency, Personal Accident £336.0m
2002 was an exceptional year for our Lloyd’s Syndicate 33. Such major losses that occurred during the year, especially in the marine market, were in the main avoided by the syndicate. Our underwriters kept their nerve after 9/11 and increased the premium income dramatically. The resulting 2002 profit has more than covered the poor run-off of some of the earlier years.
There was another satisfactory profit from our UK retail division and from our overseas operations.
DIVIDEND The directors propose a final dividend of 2.40p net (2001: nil) per ordinary share, making a total distribution for the year of 3.54p (2001: nil). This is a small increase on the amount paid in 2000, and on the larger amount of shares in issue this year. The dividend will be paid on 30 June 2003 to shareholders on the register on 22 April 2003.
It’s been a splendid year for Hiscox with our successful rights issue and increase in capacity. Our Lloyd’s business has demonstrated a tremendous return to form as we capitalised on the excellent market conditions. Our growing retail insurance operations continue their highly satisfying performance, both in the UK and worldwide.
for ourselves (albeit better than the Lloyd’s average). 2001 would have been back on track if it were not for the WTC loss, and 2002 has had the best calendar year underwriting loss ratios in my working life. I am seriously proud of the work done by Robert Childs and his team. Battered by poor results and then smacked by 9/11, the Syndicate 33 underwriters went straight back to the floor of Lloyd’s and underwrote into the ensuing bull market with tremendous skill and courage. They added an extra £65 million income to the last three months of 2001, then continued the expansion in the 2002 year of account, writing around £850 million of premiums at 2002 monitoring rates of exchange.
We increased the capacity of the Syndicate for 2003 to £842 million (2002: £504m) and Hiscox plc provides 65% of it.
UK RETAIL The UK Retail business made a highly satisfactory operating profit of £11.7 million (2001: £7.6m). The premium income increased to £147.6 million (2001: £143.6m) despite jettisoning some non-core business. Sian Fisher and her team are demonstrating discipline and selfcontrol in focusing on their two main areas of business; speciality commercial and affluent personal lines. This specialisation gives them expertise and clout in the market. The brokers produce the vast majority of our business and our stability in turbulent times should increase the flow of their business to us.
Business has poured back into the London Market as the worldwide insurance industry, with very few exceptions, suffers from a shortage of capital and courage. Lloyd’s is fulfilling its role as the hub of the international market.
Traditionally, one of the curses of the insurance industry has been the ease of entry that allows new entrants to soften hard markets and fuel the downturn.
The strategy of growing the retail business outside Lloyd’s is well on track and will pay even more handsome dividends in the future if the Lloyd’s business has to be cut back when the cycle turns.
INTERNATIONAL RETAIL BUSINESS Overall, our overseas operations made an operating profit of £1.6 million (2001: £0.6m). The Hiscox Insurance Co (Guernsey) made another excellent profit, as did our small venture in Ireland. Our three offices in Europe (France, Germany and the Netherlands) increased their aggregate income to Euros 45 million. They have now reached critical mass; they have excellent staff; market conditions are in their favour with rates up and the competition withdrawing, so I am confident that Europe will produce a good return in the future.
LLOYD’S As the new chairman, Lord Levene, so elegantly put it, Lloyd’s is one of the few certainties in a very uncertain insurance world at present. The extensive housekeeping done in the crisis years and completed in 1996, resulting
I have no objection to the Government regularly asking an individual or group to set down one view of how businesses should be run. It can be a useful guide. But when it goes beyond a guide and becomes a code that must be followed, it can be destructive. Form will dominate substance. And the tick-box activities of the burgeoning proxy agencies that use no intelligence but just recommend votes slavishly according to blind obedience to the various reports are a complete abrogation of responsibility of any shareholder who uses them. Businesses need directors who help to guide the company into profit and away from danger, and also shareholders who can spot good business people from bad.
Hiscox places strong focus on the well-being of our employees, resulting in our acknowledgement as the tenth best company to work for in the UK
Astrong rating environment, selective underwriting and good claims experience have contributed to a swift return to profit in 2002.
Hiscox continues to grow as a leading insurer of specialty commercial and affluent personal lines customers.
By focusing on a few well defined areas, we can provide excellent products and services to our customers and their brokers. It is this focus and responsiveness to the needs of our clients that has allowed us to grow our aggregate gross written premium so significantly this year.
Hiscox Insurance Company achieved a combined ratio of 97.9% (2001: 97.8%) – the third successive year of sub 98% combined ratio (chart 3). Since 1997 we have grown this business at a compound rate of 18.8% per annum. Achieving growth with good combined ratios makes Hiscox Insurance Company a top quartile performer.
Hiscox focuses on a number of well defined business areas. Current trends in each are reviewed below: – Affluent Personal Lines: In our Syndicate business, we have significantly grown our US business with local managing general agents. This is a great current opportunity, but it may shrink in the future once domestic US
Property, Construction, Terrorism, Energy, Marine Hull & Cargo, Liability, Political Risks, Specie, Enterprise, Risk Management *Includes business written by Hiscox Insurance Company and Hiscox Insurance Company (Guernsey) Ltd, net of internal quota share reinsurance
companies return to this segment. In our retail business we are seeing good growth, mostly driven by rating increases, though we expect that this year we will see policy count growth as well. The UK Property owners book which we exited at the beginning of 2002 has now run off. The retreat from personal lines business by some of our major competitors, particularly in mainland Europe, is benefiting us and should enable us to reinforce our market position in the forthcoming year.
– Professional Insurances: In the retail business we focus on the insurance of service based firms. We continue to invest in this business, and are benefiting both from organic policy count growth and from rate increases. In the UK, growth has been particularly strong. Late last year we acquired the renewal rights to Denham Direct and we have decided to provide underwriting capacity to several underwriting agencies. In Europe we are just beginning to develop business in this area. In the Syndicate, the business is mainly US focused serving major law firms. We are benefiting from the significant rate rises and capacity withdrawals within the professional indemnity market.
legendary. Our consistent strategy and security have enabled us to thrive for over a century, and this year has been no exception.
LLOYD’S BUSINESS Our Lloyd’s business comprises Hiscox plc’s share of the results of Syndicate 33 at Lloyd’s, together with profit commission and fees earned from third party capital. Also included are certain corporate expenses not allocated to other parts of the Group. It has had a good year. As shown in Table 2, controlled gross written premiums have grown to £726 million (2001: £574m). Hiscox plc’s share of this income has grown by 35% to £461.8 million (2001: £343.2m). This growth in income reflects the continued increase in business written post the events of 9/11 and a slight increase in the ownership of Syndicate 33 to 63% (2001: 60%). Better terms and conditions and fewer losses have all translated to the combined ratio improving to 94.1% (2001: 115.9%). This represents a good start and we expect further improvement.
We have increased our net reserve for WTC by £10 million for three reasons. First, as the claim from a telecommunications client has developed, more physical damage losses have been reported than we anticipated.
This year each part of the Group contributed to the achievement of our operating profit. Our Lloyd’s business contributed £21.2 million, our UK Retail business contributed £11.7 million and our International businesses contributed £1.6 million. In all cases this was a better performance than in the previous year.
Second, we have increased our bad debt provision, reflecting the downgrades of a number of reinsurers during the year. To date, however, no reinsurer on our programme has failed to pay a claim as a result of insolvency. Third, as part of the closing of Syndicate 33’s 2000 year of account, we have felt it prudent to increase the reserve on a claim from a transportation client which fell on that year.
Syndicate 33 began 2002 with a capacity of £504 million (2001: £360m). By the end of the year we had effectively increased this to £706 million with the help of qualifying quota share reinsurances provided to us from a range of leading international reinsurers, including Berkshire Hathaway and Chubb. These quota share reinsurers pay Syndicate 33 a fee and a profit commission in return for Syndicate 33 underwriting business on their behalf. We welcome their support. We initially planned to increase Syndicate 33’s capacity for 2003 by 40% to £706 million (2002: £504m). In November we agreed with supporting capital providers to increase our capacity to £842 million. Qualifying quota shares allow us considerable flexibility to take advantage of market opportunities as, under current Lloyd’s rules, we could seek approval to increase these reinsurances to a maximum of £336 million.
Normally, the broker would have a limited choice of policies to offer. Obtaining a quotation and issuing the policy could also take days or weeks. However,
Here, the information is processed by a complex arrangement of valves and relays, the aggregate is checked for available capacity, and a quotation is calculated.
POLICY. And that, I'm sure you'll agree, represents a considerable “net”
A development during the course of this year will be the implementation of extranet technology to allow us to provide our partner brokers with more efficient underwriting and claims systems. This will be linked to the creation of a service centre in Colchester. Both of these developments will help us improve our cost position over time.
INTERNATIONAL RETAIL BUSINESS This covers all the business written by Hiscox Insurance Company (Guernsey) Ltd., the business written by Hiscox Insurance Company in Europe and the results of our local underwriting agencies. Table 4 shows the results in some detail. In aggregate the business unit has performed well.
which focus on sectors where we feel our detailed knowledge of the financial services industry can add value.
Europe Guernsey Total Europe Guernsey Total £m £m £m £m £m £m
Back to school – Nicholas Thomson has been developing computer based training programmes for Hiscox so that we can retain his knowledge forever
Third party assets under management grew to £93.7 million (2001: £55.5m). Part of this growth was due to the acquisition of the business of Eldon Capital Management. Eldon brought an additional £45.8 million of third party funds to Hiscox; more importantly, its financial sector expertise reinforces our insurance focus and its experienced staff provide good succession for the management of Hiscox plc’s own assets.
BALANCE SHEET The most important balance sheet event during the course of the year was the rights issue in November 2002 which raised £110 million net of expenses. At the year end our net asset value, before equalisation provision was 101.7p per share (2001: 91.4p per share), and our tangible net assets value, before equalisation provision was 93.8p per share (2001: 79.0p per share).
During the year we also renewed a letter of credit facility that is used to provide funds at Lloyd’s to support our underwriting on Syndicate 33. The letter of credit was renewed at a level of £137.5 million. We are grateful for the support of our bankers who have allowed us to expand our underwriting at the most attractive point in the insurance cycle.
Third party assets under management 93.7 55.5 discipline. Over the past two years Nick has been developing computer based training programmes for the Group so that we can retain his knowledge forever. David Truby, our group compliance officer, also retires after 20 years of service. David has advised all of us as we have sought to ensure that Hiscox adapts to the changing regulatory environment. I would like to thank them for their endeavours.
Finally, I would like to thank all of our staff. The past few years in insurance have been particularly difficult. Some of our businesses have performed well throughout the downturn and others have had to be restructured and refocused to return to profitability. This has taken commitment and resilience by many – and it is great to see the results of their labours being reflected in Group profits. We all are energised to ensure that this continues in the future.
CONCLUSION The year has seen the business forging ahead. Using my usual yachting analogy, we have been sailing with a mainsail, jib and spinnaker and have taken full advantage of the conditions. The rights issue has allowed us to increase our level of business, effectively replacing our spinnaker with a bigger and better one. We will continue to surge forward in the year ahead.
Stephen Hargreaves Hall Senior Independent Director Chairman of Audit Committee (Aged 69) 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.
Anthony Howland Jackson Chairman of Remuneration and Conflicts Committees (Aged 61) Anthony Howland Jackson was previously Chairman of Bain Hogg plc and Deputy Chairman of Aon UK Holdings Limited. He is Chairman of The General Insurance Standards Council. He joined the Group on 8 May 1997.
Bronislaw Edmund Masojada Chief Executive (Aged 41) Bronek Masojada joined the Group in 1993. From 1989 to 1993 he was employed by McKinsey and Co. He was Chairman of the Lloyd’s Underwriting Agents Association from 1998 to 2001. He is currently Deputy Chairman of Lloyd’s.
Stuart John Bridges Group Finance Director (Aged 42) Stuart Bridges is a qualified chartered accountant, who joined the Group at the start of 1999. He has held posts in various financial service companies including Henderson Investors plc.
In addition to this direct communication, information is continually provided to shareholders via stock exchange announcements and the Hiscox website.
The directors are responsible for operating the system of risk management and internal control and for reviewing i ts effectiveness. Hiscox acknowledges that it is neither possible, nor desirable, to eliminate risk completely and the system can only provide reasonable and not absolute assurance against material misstatement or loss. The constant aim is to be fully aware of the risks to which the business is exposed and to manage these risks to acceptable levels.
In parallel with its direct monitoring processes described above, the Board has Internal Audit and the Risk Committee as additional indirect means to monitor and review the effectiveness of risk management throughout the organisation.
INTERNAL AUDIT The internal audit function is responsible for providing independent assurance directly to the Audit Committee on the adequacy and effectiveness of the Board’s the Board on matters of financial reporting, risk management and internal control. The internal and external auditors have unrestricted access to the Audit Committee, which monitors the scope, results and cost effectiveness of the external audit, the independence and objectivity of the auditors, and the nature and extent of non-audit work together with the level of related fees. All non-audit work with fees greater than £50,000 must be pre-approved by the Audit Committee.
The Risk Committee comprises the Chief Executive, the Group Finance Director, the Group Compliance Officer and the Head of Internal Audit. It meets monthly to monitor the risk management framework and reports directly to the Board and the Audit Committee.
The Remuneration Committee comprises three independent non-executive directors. It has agreed terms of reference and meets at least twice a year. The Committee recommends to the Board a framework of executive remuneration and its cost. The Committee will also determine on the Board’s behalf the specific remuneration packages for each of the executive directors, including pension rights and any compensation payments. The Board’s remuneration report is presented on pages 26 and 27.
Ongoing communication with private and institutional investors is a top priority for the Board.
THE COMBINED CODE Hiscox is committed to high standards of corporate governance.
For the year ended 31 December 2002, 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 following exception that until April 2002, the Board as a whole acted as the Nominations Committee to deal with appointments to the Board. The membership of that Committee now comprises all the independent non-executive directors and one executive director. No appointments were made to the Board in the year.
THE BOARD’S COMMITTEES The Board has appointed and authorised a number of committees to manage aspects of the Group’s affairs. Each committee operates within established terms of reference and each chairman reports directly to the Board.
The Audit Committee comprises four independent non-executive directors. It meets at least four times a year to assist
system of risk management and internal control. This assurance is provided by means of an agreed programme of review, responsive work and direct reporting of significant issues.
• Underwriting risks – including castastrophic, systematic and data risks, managed by, for example, exposure limits for accounts and underwriters, training programmes, risk-based reviews, portfolio reviews, aggregation modelling, scenario analysis, reinsurance, data input controls, reconciliation and binding authority management systems.
• Operational risks – including outsourcing, efficiency, project and people risks, managed by, for example, vetting, monitoring, IT development processes, project management controls, competency assessment, employee development planning and training delivery.
• External risks – including regulatory, partnership, competitive and business interruption risks, managed by, for
Directors’ Remuneration Report growth target: a) The participants will receive 100%
of the award if the Group’s operating EPS (note 13) over a fixed three year period has increased by 35% (“the maximum target”); b) No award will vest unless the increase in the Group’s operating EPS over the period equals or exceeds 15% (“the base target”) at which point 40% of the award will vest; and; c) An award will vest on a straight line basis if the operating EPS growth is between the base target and the maximum target.
EXCHANGED OPTIONS Under the terms of the offers to purchase Hiscox Holdings Ltd and Economic Insurance Holdings Ltd in July 1996, the Company offered to exchange existing options held in the shares of those companies for options on Hiscox plc shares. As a result of this offer, exchanged options were issued to 38 employees and former employees of those companies. The interests of executive directors in such exchanged options is shown in note 25 to the accounts.
LONG TERM AWARDS The Remuneration Committee believes strongly in the value of employee participation in long term award schemes so that their interests may be aligned with those of shareholders.
This report sets out the remuneration policies for the Group’s senior executives, including the executive directors. It should be read in conjunction with the details of directors’ remuneration on pages 54 to 58 which form the audited part of this Remuneration Report. The members of the Remuneration Committee are identified on page 23.
Pay elsewhere in the Group is considered in determining directors’ remuneration.
defined contribution scheme for all staff joining the Group after that date. 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. Since the termination notice period is only six months, no statement of mitigation policy is deemed necessary.
Directors’ Report encouraged to socialise with each other and enjoy their work environment.
The Company therefore was delighted to be voted the tenth best company to work for in the UK and the number one company to work for in the insurance sector in the Sunday Times 100 Best Companies to Work For 2003 survey. The results of this survey were derived from both the views of employees and from a review of the policies and processes of the companies surveyed.
– Environmental policy: 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.
Hiscox employees deal with a range of stakeholders, both internal and external. Hiscox recognises that by conducting its business with these values firmly rooted at its core, it is more likely to achieve business success and create value for shareholders.
Employees are encouraged to identify with the Company through performance related pay and bonus schemes, savings related share option schemes and executive share option schemes. They are also
The Company is a holding company for subsidiaries involved in the business of insurance in the UK and overseas.
DIVIDENDS An interim dividend of 1.14p per share (2001: nil), adjusted for the Rights Issue, was paid on 24 October 2002 in respect of the year ended 31 December 2002. The directors recommend the payment of a final dividend of 2.40p per share (2001: nil). This will be paid on 30 June 2003 to shareholders on the register at the close of business on 22 April 2003.
Resolution 8, 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 £4,820,390.90 representing 33.3% of the issued ordinary share capital as at 26 March 2003. This authority will terminate no later than fifteen months after the date of the Annual General Meeting. The directors presently have no intention of exercising this authority.
PAYMENT OF CREDITORS It is the policy of the Group to agree terms of payment for its business transactions with its suppliers.
The Group does not follow a specific code with regard to the payment of creditors.
ANNUAL GENERAL MEETING The notice of the Annual General Meeting is contained on page 66. In addition to the ordinary business, the following items of
Our Art Café plans to hold a number of exhibitions of young artists in the coming year.
4,749,111 of AN Foster’s non-beneficial shareholding is held by a trust and is also included in RRS Hiscox’s beneficial shareholding. Hiscox Trustees Ltd is the trustee of the Hiscox plc Group employee share ownership plan trust (ESOP) and is interested in 255,466 ordinary shares in the Company. IN Thomson, AN Foster and RRS Hiscox, as employees of the Group, are potential beneficiaries of the ESOP and are also deemed to have an additional interest in these shares.
MAJOR INTERESTS IN SHARES The Company has been notified of the following shareholdings of 3% or more in the ordinary shares of the Company as at 14 March 2003.
United Kingdom company law requires the directors to prepare financial statements for each financial year that give a true and fair view of the state of affairs of the Company and the Group as at the end of the financial year and of the profit or loss of the Group for that period. In preparing those financial statements, the directors are required to: a) select suitable accounting policies and apply them consistently; b) make judgements and estimates that are reasonable and prudent; c) state whether applicable accounting standards have been followed; and d) prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company and the Group will continue in business.
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 2002, 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 read the other information contained in the Annual Report, including the corporate governance statement and consider whether it is consistent with the audited financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements.
BASIS OF AUDIT OPINION We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed.
Allocated investment income transferred from the non-technical account 9(a), 9(c) 27,643 18,562
Claims incurred, net of reinsurance Claims paid: Gross amount (290,008) (253,041) Reinsurers’ share 149,981 113,463
Other technical income 5(d) – 1,324 Net operating expenses 7 (145,751) (141,362) Other technical charges 5(d) (3,856) – Movement in equalisation provision 5(d), 8 (2,703) (2,582)
Consolidated Profit and Loss Account Technical Account – General Business for the year ended 31 December 2002
Investment return 9(a) 21,413 15,131 Unrealised gains/(losses) on investments 9(a) (4,425) (4,703) Investment management expenses and charges 9(a) (809) (560)
Comprising: Operating profit/(loss) based on longer term investment return 5(d) 34,482 (21,220) Short term fluctuations in investment return 9(a), 9(c) (11,464) (8,694) Movement in equalisation provision 5(d), 8 (2,703) (2,582)
Earnings/loss per share: – Adjusted basic, based on operating profit/(loss) after tax (on longer term investment return) 13 11.3p (9.7)p – Basic, based on profit/(loss) on ordinary activities after tax 13 6.6p (14.8)p – Diluted, based on profit/(loss) on ordinary activities after tax 13 6.5p (14.8)p
Profit/(loss) on ordinary activities after tax 13,975 (23,107) Exchange differences taken to reserves (50) (35)
Consolidated Profit and Loss Account Non-Technical Account for the year ended 31 December 2002
Investments Land and buildings 16(a) 420 430 Other financial investments 16(b) 502,944 344,402
Reinsurers’ share of technical provisions Provision for unearned premiums 102,608 39,166
Debtors Debtors arising out of direct insurance operations 17 199,372 130,689 Debtors arising out of reinsurance operations 98,412 168,320
Creditors: Creditors arising out of direct insurance operations 65,423 45,850 Creditors arising out of reinsurance operations 67,892 72,608 Other creditors including taxation and social security 21 36,414 42,838
Fixed assets Tangible assets 19(a) 498 381 Investment in subsidiary undertakings 19(b) 115,457 115,457
Cash at bank and in hand 20,182 759 Prepayments and accrued income 464 4,237
Cash Flow Statement Net cash inflow from general business 45,069 15,295 Net shareholders’ cash outflow from Lloyd’s business 31(c) (23,037) (12,489)
Net cash flow from operating activities 31(a) 22,032 2,806 Servicing of finance 31(d) (1,709) (680) Taxation recovered/(paid) 777 (499) Capital expenditure 31(d) (3,569) (2,774) Acquisitions and disposals 31(d) – 1,380 Equity dividends paid (2,299) (3,453)
Cash flows were invested as follows: Increase in cash holding 31(e) 25,288 6,369 Net portfolio investment: Shares and units in unit trusts 31(e) 19,911 (1,937) Debt securities and other fixed interest securities 31(e) 10,314 2,792 Deposits with credit institutions 31(e) 68,265 44,924 Other investments 31(e) (7) –
Consolidated Cash Flow Statement for the year ended 31 December 2002
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. Ultimate claims are projected both gross and net of reinsurance using reinsurance recovery rates based on historical experience, adjusted for the current reinsurance programme.
3(b) Unearned premiums 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.
Outstanding claims comprise provisions for the estimated cost of settling all claims incurred but unpaid up to the balance sheet date whether reported or not, together with related claims handling expenses.
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 2002 and under historical cost accounting rules, modified by the revaluation of investments.
The financial statements have been prepared in accordance with the provisions set out in Section 255 of, and Schedule 9A to, the Companies Act 1985. The Group has adopted all material recommendations of the revised Statement of Recommended Practice “Accounting for Insurance Business” issued by the Association of British Insurers in December 1998.
fixed asset and is depreciated over its estimated useful life or the term of the lease, whichever is shorter. Future instalments under such leases, net of finance charges, are included within creditors. Rentals payable are apportioned between the finance element, which is charged to the profit and loss account, and the capital element which reduces the outstanding obligation for future instalments.
3(p) Taxation Current tax, including UK corporation tax and foreign tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date.
The Group has adopted FRS17 “Retirement Benefits”. This has had no material impact on the current year’s results, as only the transitional disclosure requirements have been included.
The current total estimated gross loss to Syndicate 33 is approximately US$475 million (2001: US$440 million). The increase from the previous year-end is for three reasons: a) An increase in bad debt provision to reflect the rating downgrades of a number of the reinsurers in the year.
b) An increase in a claim from a telecommunications company where our original assessment, based on limited information, has been revised. It was considered that the greater part of the claim was likely to be generated from business interruption which we discerned was likely to be much inflated. The claim has developed, however, with subsidiary or associate.
Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse, based on tax rates and laws that that have been enacted or substantively enacted by the balance sheet date. Deferred tax is measured on a non-discounted basis.
The Group has exposure to WTC losses on a number of non-liability accounts, in particular direct property, risk excess, catastrophe and aviation hull. There is no significant liability exposure. As at 28 February 2003, US$ 275 million, 58% of the estimated overall loss, had been paid. This includes payment to Silverstein, on the basis of one occurrence, for the WTC property. The courts in the USA have not yet ruled on occurrence. Syndicate 33 has had no need to make a cash call.
As part of the process for the setting of the loss reserves included in these accounts, the directors have again carried out a comprehensive review of the Group’s exposures in respect of insurance and reinsurance policies issued by Syndicate 33 to identify all those exposed directly or indirectly to losses from the events of 11 September 2001. Since the initial review carried out in October 2001, no further losses have been identified which were not identified at that time. This review has been supplemented by details of the notifications received from the XChanging Claims Services (formerly the Lloyd’s Claims Office) which amounted to US$591 million as at 28 February 2003 (31 March 2002: US$543 million). Hiscox has considered the insureds’ computations of their own losses. The directors of Hiscox plc believe that the insureds’ computations are likely to prove unreliable. Hiscox has esti-
The underwriting activities which are managed by the Group are shown below at the 100% level regardless of ownership of capacity: London UK International 2002 London UK International 2001 Market Retail Business Total Market Retail Business Total
The additional segmental information provided above, by business division, has been added this year to the Report and Accounts to reflect the way the Group manages its business. In prior years’ Report and Accounts, the segmental information was disclosed only by reporting entity. This disclosure can be found in note 5(b). Key differences are as follows: “London Market” comprises the results of Syndicate 33 and the Hiscox Captive net of any business written between Group companies. Previously, the results of Syndicate 33 were reported within “Managed Syndicate” excluding the Hiscox Captive.
“International Business” comprises the results of Hiscox Insurance Company (Guernsey) Limited, the results of the Hiscox overseas agencies and the underwriting results of the International retail business written by Hiscox Insurance Company Limited. Previously, the results of Hiscox Insurance Company (Guernsey) Limited and the results of the Hiscox overseas agencies, together with the Hiscox Captive, were included within “International Operations”.
Technical profit/(loss) for 100% of continuing operations (Note 5a, 5b) 45,367 (46,820)
Notional share attributable to Group at current level of capacity ownership 35,724 (25,051) Adjustments to reflect lower levels of capacity in prior years: Investment return on Group underwriting capital 6,161 4,479 Amounts applicable to quota share reinsurers* (3,856) 1,324
Investment return, based on longer term rate of return 16,803 8,729 2,111 27,643 10,407 6,222 1,933 18,562
Short term fluctuations in investment return (7,739) (3,135) (590) (11,464) (3,990) (3,670) (1,034) (8,694)
*Based on longer term investment return, before movement in equalisation provision and elimination of inter-company transactions.
“UK Retail” comprises all of the UK retail business of Hiscox Insurance Company Limited, together with the results of the online agency business (Hiscox Connect Limited). Previously, the results of the UK retail business were reported in “Insurance Company”, together with the underwriting results of the International retail business. The results of Hiscox Connect Limited were previously included in “Lloyd’s Business/Group”.
Profit/(loss) on ordinary activities before taxation 11,862 5,423 3,030 20,315 (33,908) 254 1,158 (32,496)
Net assets *Based on longer term investment return, before movement in equalisation provision and elimination of inter-company transactions.
Net loss provision brought forward as at 1 January 73,762 79,400 4,735 157,897 133,932 Net payments during the year in respect of those provisions (23,326) (13,098) (1,460) (37,884) (31,547) Net loss provision carried forward in respect of claims provided at 1 January (56,681) (60,992) (7,664) (125,337) (92,954)
Investment return on syndicate funds: Investment income 7,057 5,045 Realised gains/(losses) on investments 1,827 1,404
Investment return on insurance company funds: Investment income 8,354 6,453 Unrealised gains/(losses) on investments (1,486) (1,928) Realised gains/(losses) on investments (171) (1,393)
Allocation to the technical account based on the longer term rate (27,643) (18,562)
Shares and units in unit trusts 7.0 7.0 Debt securities and other fixed interest securities 6.0 6.0 Deposits with credit institutions 6.0 6.0 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 2002 and for the five year period from 1 January 1998 to 31 December 2002.
Funds at Lloyd’s 2002 2002 and other Share of Insurance 2002 Corporate Assets Syndicate Company Total
Longer term investment return: Shares and units in unit trusts 1,985 7.0 260 7.0 1,608 7.0 3,853 Debt securities and other fixed interest securities 1,864 6.0 3,609 6.0 4,380 6.0 9,853
Agency salaries 3,023 2,176 Underwriting agency income 1,627 – Profit commission 3,437 159
Other non-audit services* Work performed in relation to: – Rights Issue/Open Offer 190 45% 200 35% – Conversion scheme – – 20 4% – Chubb bid – – 75 13% – Other corporate projects – – 21 4%
*Non-audit services with fees greater than £50,000 must be pre-approved by the audit committee which is comprised solely of independent directors.
Their aggregate remuneration and associated costs were: Wages and salaries 24,012 18,753 Social security costs 3,195 2,348 Other pension costs 3,934 3,046
The Group operates an Inland Revenue approved SAYE employee share option scheme and has taken advantage of the exemption given in UITF Abstract 17 “Employer share schemes” from recognising a charge in the profit and loss account for the discount on the options.
Earnings/loss per share has also been calculated based on the operating profit/(loss) after taxation as the directors believe this earnings/loss per share figure provides a better indication of operating performance.
The reconciliation of basic earnings/loss per share based on profit/(loss) on ordinary activities after tax to adjusted basic earnings/loss per share based on operating profit/(loss) after tax is as follows: EPS LPS
Deferred tax Origination and reversal of timing differences 3,222 (9,276) Adjustments in respect of previous periods (2,988) (997)
Profit/(loss) on ordinary activities multiplied by the standard rate of corporation tax in the UK of 30% (2001: 30%) 6,095 (9,749) Effects of: Expenses not deductible for tax purposes (2,273) 10,847 Capital allowances in excess of depreciation 96 20 Other short term timing differences 721 233 Tax losses not utilised in the period – (957) Foreign tax, income tax and excess tax on Controlled Foreign Companies 192 140 Adjustments in respect of previous periods 1,275 350
Accelerated capital allowances 499 – Short term timing differences 12,325 13,103 Underwriting losses – 1,495 Capital gains – (299)
16 INVESTMENTS – GROUP Short Freehold Leasehold Total a) Land and buildings £000 £000 £000
Funds at Lloyd’s and Share of other Corporate Assets Syndicate Insurance Company Total
Shares and units in unit trusts 26,732 25,294 3,594 1,510 15,723 15,304 46,049 42,108 Debt securities and other fixed interest securities 30,130 30,356 102,690 102,192 83,336 83,745 216,156 216,293
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 27.
Deferred tax asset 12,824 15,207 2 – Net profit commission receivable 2,772 314 – –
21 OTHER CREDITORS INCLUDING TAXATION AND SOCIAL SECURITY Group Group Company Company
There is no unprovided deferred tax liability for the Company or the Group.
Exercise of share options 8 156 – – – – 164 143 Shares issued as part of Rights Issue 4,818 105,817 – – – 110,635 54,228 Unrealised gains/(losses) net of tax – – – – (1,620) – (1,620) (727) Retained profit/(loss) for the year – – – – – (1,631) (1,631) 1,688 25 DIRECTORS’ EMOLUMENTS
(i) Directors’ share interests 5p Ordinary Shares 5p Ordinary Shares 5p Ordinary Shares 5p Ordinary Shares Number of shares Number of shares Number of shares Number of shares
BE Masojada 1,679,535 – 1,119,691 – RS Childs 717,078 – 570,271 – SJ Bridges 97,500 – 65,000 –
Non-executive directors SH Hall 35,500 – 28,000 – AGC Howland Jackson 49,589 – 33,060 – DND Netherton 30,000 – 26,000 – C Franklin Engler 17,550 – – –
Hiscox Trustees Ltd is the trustee of the Hiscox plc group Employee Share Ownership Plan Trust (ESOP) and at 31 December 2002 was interested in 255,466 (2001: 170,311) ordinary shares of the Company. The executive directors are potential beneficiaries of the ESOP and are also deemed to have an additional interest in these shares.
Subsequent to the year-end, RRS Hiscox disposed of 15,431 non-beneficial shares. No other transactions have taken place subsequent to the year-end up to the date of these Report and Accounts.
The interests of directors and employees under the UK and International Sharesave schemes of the Group are set out below: No. of No. of Adjusted options at No. of No. of No. of No. of options at exercise Market price Date from 1 January options options options options 31 December price* at date of which Expiry 2002 granted lapsed exercised adjusted 2002 £/Euro exercise exercisable date
The aggregate gains made by the directors on exercise of the above options (based on market price at date of exercise less the exercise price) was £2,000 (2001: £nil). The market price of Hiscox plc shares at 31 December 2002 was 157.5p. The highest and lowest values of Hiscox shares during 2002 was 164.5p and 120.5p (2001: 226.0p and 72.5p).
No. of No. of No. of shares at No. of No. of No. of shares at Date from 1 January shares shares shares 31 December which Expiry 2002 awarded lapsed adjusted 2002 exercisable date
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.
The major assumptions used by the actuary were, in nominal terms, as follows: Rate of increase in salaries 3.25% p.a. 3.50% p.a. Rate of increase in RPI linked pensions in payment 2.25% p.a. 2.50% p.a. Discount rate 5.50% p.a. 6.00% p.a.
The scheme is invested primarily in a unitised fund held with Fidelity Pension Management. The split of assets, their expected rate of return and the funding position at 31 December 2002, measured in accordance with the requirements of FRS 17, were as follows: Total market value of assets 43,533 46,610 Present value of scheme liabilities (77,258) (59,800)
The impact on the net assets and retained profits of the Group at 31 December 2002 of adopting FRS17 would be: Net assets
Current position at 31 December 2002 280,302 Pension (asset)/liability on a SSAP24 basis 103 Pension asset/(liability) on a FRS17 basis (23,607)
As a result of the actuarial valuations as at 1 January 2000, the Group is making contributions to the scheme at the rate of 23.1% of pensionable salaries.
Analysis of the amount that would have been credited to net finance charges under FRS17
Analysis of the actuarial gain that would have been included in the statement of total recognised gains and losses under FRS17
At 1 January (13,190) Current service cost (3,149) Contributions 2,957 Past service costs – Net finance income (524) Actuarial gain (19,819)
i) The Company entered into a deed of covenant in respect of its corporate member subsidiaries, Hiscox Dedicated Corporate Member Ltd, Hiscox Select A, 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 £80,248,738 (2001: £15,875,563). Hiscox Select Insurance Fund PLC has entered into identical deeds of covenant in respect of its corporate member subsidiaries Hiscox Select D to J Ltd totalling £34,123,823 (2001: £35,813,004). 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 J P Morgan (Europe), an agent for a syndicate of banks, for a £137,500,000 irrevocable standby Letter of Credit facility. Commencing 1 January 2003, £125,000,000 was drawn down to support part of the Group’s underwriting activities for the 2003 account. Hiscox plc has a fixed and floating charge over the Group’s assets as a guarantee to the group of banks led by J P Morgan Chase Bank in connection with their Letter of Credit.
iii) Hiscox Insurance Company Limited has arranged a letter of credit of £700,000 with Natwest Bank plc to support its consortium activities with Lloyd’s.
b) Finance leases The finance lease obligations to which the Group is committed are: In one year or less 351 648 Between two and five years 103 394 29 RELATED PARTIES
Hiscox Holdings Limited held 1,094,334 shares (2001: 1,094,334 shares) in Hiscox plc at 31 December 2002 with a market value of £1,723,576 (2001: £1,701,689). These shares are included within other financial investments.
*Hiscox Insurance Company (Guernsey) Limited has subscribed cellular share capital of $1,175,000 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, made a profit in the year of $910,621 (2001: loss $1,020,147) which has been included in the figures of Hiscox Insurance Company (Guernsey) Limited and consolidated in these Report and Accounts. The cumulative loss of Cell Hiscox to date is $386,811.
a) Reconciliation of operating profit/(loss) to net cash inflow from operating activities: £000 £000
Operating profit/(loss) before taxation after interest, based on longer term investment return 34,482 (21,220) Depreciation and amortisation of fixed assets 3,422 3,274 Increase in general insurance technical provisions, net of reinsurance 22,254 37,115 Increase/(decrease) in amounts owed to agents 13,238 (6,280) (Increase)/decrease in amounts owed by agents (3,729) (4,713) (Increase)/decrease in other debtors (1,024) (35,779) Increase/(decrease) in other creditors 2,721 12,775 Cash transferred (to)/from Lloyd’s business (note 31c) (23,037) (12,489) Realised and unrealised investment (gains)/losses 4,841 5,991 Short term fluctuations in investment return (11,464) (8,694) Interest expense 1,432 1,099 (Profits)/losses relating to Lloyd’s business (21,034) 31,641 Other non-cash transactions (70) 86
Net cash inflow from operating activities 22,032 2,806 b) Movement in opening and closing portfolio investments net of financing Notes £000 £000
Net cash flow before retention and transfer from/(to) the Group 72,938 44,546 Transfer from/(to) the Group 23,037 12,489
Capital expenditure Payments to acquire tangible fixed assets (2,470) (2,772) Receipts from sales of tangible fixed assets (398) 4 Payments to acquire intangible fixed assets (701) (6)
Changes Changes to At 1 Jan in other market value At 31 Dec e) Movement in cash, portfolio investments and financing* 2002 Cash flow business and currencies 2002
Cash at bank and in hand 62,520 25,288 33,388 – 121,196 Shares and units in unit trusts 46,049 19,911 (3,732) (6,490) 55,738 Debt securities and other fixed interest securities 216,156 10,314 67,931 3,870 298,271
Profit/(loss) on ordinary activities after taxation 13,975 (23,107) 5,430 84 9,725
Key statistics Adjusted earnings/(loss) per share based on operating profit/(loss) after tax* 11.3p (9.7)p 3.2p 2.4p 4.9p Earnings/(loss) per share based on profit/(loss) on ordinary activities after tax* 6.6p (14.8)p 3.5p 0.1p 6.3p Diluted earnings/(loss) per share based on profit/(loss) on ordinary activities after tax* 6.5p (14.8)p 3.4p 0.1p 6.2p *Earnings/(losses) and dividends per share for earlier years have been restated for subsequent changes of capital not involving full consideration at fair value, including bonus issues and rights issues.
9) That the Remuneration Report contained within the Report and Accounts for the year ended 31 December 2002 be approved.
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 BUSINESS To consider, and if thought fit, pass the following resolutions, of which resolutions 8 and 9 will be proposed as ordinary resolutions and resolution 10 will be proposed as a special resolution.
ORDINARY RESOLUTIONS 8) 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 £4,820,390.90, representing 33.3% of the issued ordinary share capital as at 26 March 2003, 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 agreement before the expiration or revocation of the authority which would or might require relevant securities to be allotted after the expiration or revocation of this authority and the directors may allot relevant securities in pursuance of any such offer or agreement notwithstanding the expiry or revocation of this authority.