Hiscox UK andHiscox Europe – good top line growth of 13.7% to despite the impact ofWindstorm Kyrill and the UK floods
Results The result for the year ended 31December 2007was a record profit of £237.2 million (2006: £201.1million). Gross written premium income increased 6.5% to £1,198.9 million (2006: £1,126.2 million) with net earned premium increasing 8.6% to £965.2 million (2006: £888.8 million). This was despite a weak dollar exchange rate persisting throughout 2007. The combined ratio was 84.4% (2006: 89.1%). Earnings per share on profit after tax increased 16.1% to 48.4p (2006: 41.7p) and net assets per share rose 21% to 209.5p per share (2006:173.2p). Return on equity was 28.8% (2006: 28.9%).
Dividend and capitalmanagement In March 2007, the Board proposed a total dividend of 12p for 2007. Subject to shareholders’ approval, we will pay a final dividend of 8p (2006: 7p) making a total distribution for the year of 12p (2006: 10p) an increase of 20%. This will be paid on 17 June 2008 to shareholders on the register on 16May 2008. Our dividend policy going forward is to increase the dividend year-on-year as we believe a growing income is well received by shareholders and amain plank of equity investment.
This year’s record result has generated additional capital at a time when we have reduced the 2008 capacity of our Lloyd’s Syndicate 33 by 20%.On top of the annual dividend of around £50million, we have announced a buy-back of our shares to treasury of up to £50million and repayment of debt of £50million, making an effective capital repayment of £150million.
Review of the year Our ambition remains to be a highly respected international specialist insurance and reinsurance company, built on a portfolio balanced between volatile international catastrophe business andmore steady local and regional business. During the last year wemade significant progress in strengthening theGroup.
2007was another cracking year for the international catastrophe exposed business. It always sounds easy in retrospect to write a book of catastrophe business when the catastrophes have not occurred, but it isn’t. It requires extremely careful analysis of exposures and sensible purchase of reinsurance, combined with the ability to secure shares of the most attractive business.
The household book lost money but enhanced its reputation by excelling in the management of claims. Household insurance is thought by the majority of buyers to be a commodity purchase – all policiesare thesameso it isonly price that matters. It is extraordinary that people whowould normally never buy the cheapest will cover the risk of losing their most precious assets with a cheap and often unread policy.Well you find out how good your policy is when you have a claim, and we set out to prove that a Hiscox policy is altogether better – and I believe that we succeeded.
Hiscox Ltd Report and Accounts 2007 Chairman’s statement 7 mark to market every night and know their exact exposure at any time. Not so, it would appear. It is a serious crisis, the full extent of which I do not think we have yet seen. In our underwriting books we have a very limited exposure which we have reserved fully. I comment on our investment portfolios below.
At the end of last year we reduced our equity exposure from 10% of overall funds to 7.8% and that has helped during the weak market in early 2008.We expect opportunities to emerge from the current turbulence and amore normal relationship between risk and reward to return.
The future Weare building a long-term business and our senior management have experience of several down-cycles.We have spent 15 years investing considerable money in building an international network to distribute our specialist products. This will mitigate the effect of this part of the cycle.
Our ChairmanRobert Hiscox has always advised us to ‘advance to the sound of gunfire, retreat when the Sirens call’. In 2007we followed this advice. Significant parts of our business advanced, particularly in reinsurance in London and Bermuda, but also in our smaller ticket businesses in theUK, USA and Europe.
The result of this has been a record level of controlled gross written premium, record profits on both an absolute and per share basis and a 20% increase in dividend per share. We are also hearing the Sirens of amarket in downturn and in 2008wewill retreat tactically. Across theGroupmarket conditions are becoming tougher but with variability in pricing trends by line of business. Our business strategy has long been set to take account of this environment.We are shrinking significantly in the areas such as international big ticket businesswherewe seemost pressure on pricing, shrinking moderately in areas like reinsurancewhich are less affected, and expanding in theUS, UK and European domesticmarkets where our specialist focus protects us from the extremes of market competition.
Group performance The pre-tax profit for the year was £237.2 million (2006: £201.1 million). Gross written premium grew to £1,198.9 million, an increase of 6.5% (2006: £1,126.2 million), which equals £3.04 per share (2006: £2.86). Earnings per share are 48.4p (2006: 41.7p). Return on equity was 28.8% (2006: 28.9%). Dividends per share have increased 20% to 12p per share (2006:10p). This excellent performance was achieved despite losses of £68million from the catastrophes which affected our business.
Hiscox Insurance Company RetailSyndicate 33 RetailHiscox Bermuda Syndicate 33 London Market
Themarine area saw a reduction in overall premiumwritten as we responded to declining rates, particularly in upstream energy. Combined ratios remained good, but the smaller level of income led to slightly lower profitability overall. Our global errors and omissions division was created from themerger of our technology, media and telecommunications teams and our global professional indemnity teams. Bigger ticket professional indemnity is an area where many catastrophe-focused players are expanding – seeking illusory ‘non-correlating’ business – forgetting that it is only worth doing if it remains profitable. The division has shown great discipline, shrinking in those areas where rates are under most pressure, allowing it to deliver a good result.We remain committed to the area, particularly its more specialist niches, and will expand when the rates return to better levels.
At Hiscox we have regarded front line underwriters as our ‘fighter pilots’; but just like real pilots, their tools are becoming ever more sophisticated and a greater range of skills need to be brought to bear before a risk is underwritten. Over the last several years we have invested significantly in our modelling capability with a focus on both aggregate management and risk pricing. This year we recruited a further three pricing actuaries to expand our strong analytical team.We believe that the enhanced transparency and greater understanding that the analytics give us, when combined with real management action, will make us more effective in dealing with the softer market that lies ahead.
Hiscox International Hiscox International comprises our business in Bermuda, the USA andGuernsey.
Wehave renamed it Hiscox Insurance Company Inc. and will use it as our admitted market platform for the USA. This represents a major milestone in our desire to build a strong US domestic platform.Wewill retain its profitable animal mortality business and will continue to use the American Live Stock brand in this specialist area.We now have four offices supporting our USA domestic operations in Armonk, Chicago, Manhattan andGeneva, Illinois. In time, we aim to acquire additional businesses or teams who can support the growth of our US domestic business.
Operations and IT As our business grows and develops our IT infrastructure becomes ever more central to our operations. In order to increase our operational resilience to external physical events wemoved all the Group’s core infrastructure to external data centres in suburban London and Paris during 2007.
People Hiscox’s performance is the result of the efforts of all of our staff. My thanks go to them all, including underwriters and business developers who grew our business at the right price, claims staff who deliver our promise and IT and operations who hold the business together (sometimes with few resources and dated systems). Many went the extra mile to make this result a reality.
Hiscox is committed to continue to equip our staff with the skills required for the changing times. In the year ahead there will be greater emphasis on training for underwriting in a soft market, adapting broker relationship management to the market and continuing with our leadership development programmes.We feel that if our staff have the best skills, they will deploy them to their own and the business benefit.
Conclusion Over the past decade we have built Hiscox from a largely
Lloyd’s- and London-focused insurance business to a global business with a specialty focus active in multiple regions of the world. This achievement stands us in good stead as we enter a tougher pricing environment.Wewill continue to balance our retail and volatile risks, giving us the resilience and firepower to respond to the crises and opportunities which will inevitably emerge, to the benefit of the business and its owners.
Business overview Hiscox is now an international insurance Groupwith a spread of global and regional businesses.
Steve Langan ManagingDirector, Hiscox UK Joined in 2005 asManaging Director of UK Retail andGroupMarketing Director. Previously Managing Director of Diageo’s Italian subsidiary.
Marc van der Veer ManagingDirector, Hiscox Europe Joined in May 2005. Previously headed up directors and officers’ liability underwriting, Continental Europe for XL Capital.
Pre-tax profit £155.6 million (2006: £90.7 million) and a combined ratio
Hiscox UK andHiscox Europe underwrite local specialty insurance from 20 different regional centres across Europe. Business is sourcedmainly through local brokers. There are twomain product streams covering: the personal property of wealthy individuals, including fine art; and the liability and property of professional or advisory and service-led businesses.
Security Syndicate 33 has an A (Excellent) from A.M. Best and uses Lloyd’s security, A+ (Strong) fromStandard & Poor’s and A (Excellent) from A.M. Best.
Security Hiscox Insurance Company Limited has an A- (Excellent) from A.M. Best and A- (Strong) fromStandard & Poor’s. Syndicate 33 has an A (Excellent) from A.M. Best and uses Lloyd’s security, A+ (Strong) fromStandard & Poor’s and A (Excellent) from A.M. Best.
HiscoxGuernsey Hiscox Guernsey has been operating since 1998 and offers a range of products including fine art insurance and kidnap and ransom protection.
Hiscox Bermuda had an excellent year despiteWindstorm Kyrill, UK floods and California fires
Steve Camm ManagingDirector, HiscoxGuernsey Joined Hiscox in 1994 as a Kidnap and Ransom Underwriter. Appointed Underwriting Director of Hiscox Guernsey in December 1998.
Hiscox has 27 offices in 13 countries.Most of these offices service local businesses and individuals with local Hiscox products. These smaller premium products include insurance for higher value homes aswell as specialist liability and property risks for professional businesses.
As local insurance providers becomemore sophisticated, more business is being underwritten locally. In order to improve broker access to our products, Hiscox Global Markets have opened new offices in New York, Paris and San Francisco. These offices use existing relationships and underwriting expertise to access business that would not be placed in the traditional markets.
Claims at Hiscox We are determined tomake our claims service better than the competition.
Focus onUK floods The UK floods in June and July were devastating for thoseaffectedand itwasahugeevent for the industry. Hiscox’s claims volume doubled during July, testing our service levelsand thatofour suppliers. Ourclaimsunderwriters, loss adjusters and disaster recovery specialists pulled out all the stops, responding to our clients’ difficulties with speed and sensitivity. The ABI predicted the industry would settle40% of flood claims by the end of 2007. Hiscox had settled over 59% of claims.We expect to have less than ten open claims by July 2008.
Since 2005 the claims teamhas beenworking in a systematic way to build upon the operational and technical robustness of our claims function. This has allowed us to maintain high standards given the growth of key business areas and increased geographical spread.
“The totalservicewas very professional, very prompt and eased the traumawe felt. Many thanks.”
“The floods brought us great distress. Life became quite fraught andtheonlysalvation in all this wasHiscox.Within 24 hourswe were in the hands of aprofessional team, your staff, the loss adjuster and the salvage team.We soon realised that help and advice was only a phone call away.”
“Courteous staff. Prompt processing of claim. Fast payment. Very pleasedwith service.”
Those fewHiscox customerswhowere still out of their houses at Christmaswere sent a hamper. One customer respondedwith a poem.
“When life takes a turn for the dampers, When house dwellers turn into campers, When your council has brains, As clogged as its drains, ThankGod for Hiscox’s hampers.”
“We recognise climate change is likely to increase flood risk and our business is preparing for this with increased analysis andmodelling of potential risks.We have seen the massive impact that flood has on our customers and the economy. Sadly, someof it could be prevented. TheGovernment needs to raise flood plainmanagement in its list of priorities.” MatthewSwann Hiscox Climatologist
“We felt theHigh Court had erred in thecase.We could also see that there was an important point of law to be defended andwinningwould have a positive impact on all of our clients engagedin investigative journalism.” AndrewSellers Head of UK and International Technology andMedia Claims at Hiscox
TheHiscox brand Wewant customers to reach for a Hiscox policy and be confident that we will deliver great service when they need it most.
“We understand our customers and know they are sophisticated and demanding.
Themessage behind the Hiscox brand is that we will always try to exceed those demandswith exceptional service.” Steve Langan ManagingDirector, Hiscox UK GroupMarketing Director
Over the last two years Hiscox has spent £23million onmarketing, promotingHiscox as an insurer you can have confidence in by focusing on our claims record.
The people at Hiscox Wewant our customers to experience Hiscox as: Intelligent not intellectual, bold not arrogant, thought provoking not patronising, different not standard, straightforward not users of jargon, positive not pushy, contemporary not stuffy, sophisticated not superior.
30 The people at Hiscox Hiscox Ltd Report and Accounts 2007
Head count growth Total number of staff as at 31 December
“Hiscox is a demanding, challenging client who embraces ‘out of box’ thinking and as a result is able to attract and integrate the best candidates regardless of background. This is not a wood-panelled or long-lunch environment but onewhich is open,meritocratic, robust, challenging, fastmoving and fun.” AndrewSimpson Partner andHead of Financial Services Practice WhiteheadMann LLP
Develop excellence Hiscox has a unique underwriting training programme developed by very experienced Hiscox underwriters. The training aims to reinforce Hiscox’s underwriting standards and covers: profitable underwriting; learning the lessons of history; and approaching every risk with a restless curiosity.
“During training, it isalways interesting and useful to speak to people fromother countries.We learn a lot. I guess it is one of Hiscox’s advantages.” David Viera Special Risks Underwriter Hiscox France
$360million was raised in conjunction with Goldman Sachs andWLRoss to capitalise Panther Re. Hiscox has no equity interest in Panther Re. Panther Re wrote gross premiums of approximately $160million in 2007. The sidecar is not controlled by theGroup and is not consolidated in theGroup’s financial statements.
Panther Re andHiscox Syndicate 33 have agreed that the successful reinsurance partnership between Panther Re and Syndicate 33 covering the 2007 year of account will not be renewed for the 2008 year of account.
Hiscox Insurance Company Limited continues to be rated A- (Excellent) by A.M. Best and A- (Strong) by Standard & Poor’s. At the end of 2007, net assets exceeded £126million.
Hiscox has a policy of focusing on high quality, short duration bonds. This has reduced the impact of market volatility witnessed in the second half of the year.We have negligible direct exposure to subprime residential mortgage backed securities, which lie at the root of the current market dislocation and all of which remained AAA rated at 31st December 2007. Despite the market conditions, the collateral underlying the mortgage backed and asset backed securities in our US dollar portfolio continues to perform in line with expectations. Similarly our holdings of corporate bonds have seen spreads widen but we expect to recoup any mark to market losses by holding the bonds to maturity. Indeed, we see good value in certain areas of the corporate bondmarket and expect to add to our holdings. In the last quarter of 2007we reduced our equity exposure from 10%of overall funds to7.8%and thathashelpedduring theweak market in early 2008.
Investment policy The investment policy is designed to maximise returns within the overall risk appetite of theGroup. The overriding philosophy with theGroup’s assets is not to lose money or to put at risk the Group’s capacity to underwrite.
Technical funds, the investments held for the payment of future claims, are primarily invested in high quality bonds and cash. The high quality and short duration of these funds allows theGroup to meet its aim of paying valid claims quickly. These funds are maintained in the currency of the insurance policy to reduce foreign exchange risk.
Due to the short tail nature of theGroup’s insurance liabilities, the aim is not to match the duration of the assets and liabilities precisely. Benchmarks are instead set for the fixed income fundmanagers which approximate the payment profile of the claims as well as providing the managers with some flexibility to enhance returns.
A proportion of theGroup’s assets are allocated to riskier assets, principally equities. Here, it is theGroup’s philosophy to take a longterm view in search of acceptable risk adjusted returns. The proportion of theGroup’s funds invested in risk assets will depend on the outlook for investment and underwriting markets. An allocation within the risk assets is made to less volatile, absolute return strategies.This balances the desire to enhance returns against the need to ensure capital is available to support underwriting throughout any downturn in financial markets.
TheGroup achieved a profit before tax of £237.2million in 2007 (2006: £201.1million). Earnings per sharewere 48.4p (2006: 41.7p). The post-tax return on shareholders’ equity was 28.8% (2006: 28.9%). The underwriting performance of each reporting segment is detailed below.
The net asset value grew to £824.3million from£682.1million driven by profitable contributions fromeach of the segments. Netassetvaluepersharegrewto209.5p from 173.2p.
Global Market’s reinsurance outwards costs have grown by approximately £46.2 million. This is attributable to the Panther Re sidecar arrangement which has taken cedings from theGroup of approximately £54million. Net premiumswritten decreased to £524.7 million from £603.6 million.
The strong profit before tax increased to £155.6 million (2006: £90.7 million) following the benign hurricane season experienced this year.
Investment income remained steady at £15.9 million (2006: £15.4 million). Exposure to equity holdings has weighed slightly on relative performance this year versus last.
Profit before tax of £17.2 million (2006: £32.4 million) was lower than the prior period following the additional marketing and growth related expenses and also due to losses fromWindstorm Kyrill and the UK floods. The net claims ratio increased to 45.5% (2006: 39.0%). The June and July floods, although well covered by low-level reinsurance coverages, still cost the business approximately £7.5 million net.
Europe by Hiscox Insurance Company Limited and the Irish surety business. It also includes the results of Syndicate 33’s European fine art, European regional events coverage and European household business, together with the income and expenses arising from the Group’s retail agency activities in Continental Europe.
Europe’s gross premiumswritten has grown by 24.5% as a result of good underlying growth in all established European territories, most notably Holland and France, together with an increase in activity though emergent offices in Portugal, Sweden and Spain. A focus on specialty commercial and TMT business is beginning to augment renewals of the traditional household accounts. Net premiumswritten increased by 20.5% from£51.6 million to £62.2 million.
The claims ratio was 40.1% (2006: 17.5%) following a benign hurricane season.
Finance costs decreased to £8.1 million (2006: £9.1 million) due a 9% average weakening in the US dollar exchange rate in 2007 plus $26million higher borrowings for the first sevenmonths of 2006. The change in average interest rates during the year wasmildly negative. Loss before tax was £9.3 million (2006 profit: £25.4 million).
Group investment performance The investment return benefited from the increase in funds under management together with higher interest rates, though the rates in Europe remained relatively low.
Bond portfolios in all currencies had short durations to protect the underlying assets against the changing interest rates in the US and UK.
TheGroup’s equity weighting was increased to 10% in the early part of the year, with a defensive andmore globallydiversifiedportfolio which includedsome absolute return funds. The equity weighting was reduced to 8% in the last quarter of 2007.
Other cash inflows result from the sale and redemption of investments, investment management fees and underwriting agency commissions.
TheGroup’s cash flow is impacted to a large extent by the results of Syndicate 33. Until 2005, theGroup had in general only received cash from the Syndicate following the closure of a year of account at the end of three years, except when Lloyd’s allowed early profit distributions subject to solvency requirements. However, from 2006 onwards, syndicate cash distribution has been determined on a oneyear accounting basis, although still subject to solvency requirements.
A net cash outflow arose from operations during the year of £162.7 million (2006: inflow of £157.4 million) principally as a result of the Groupmaking a net cash investment of £489.7 million (2006: £1.3 million disinvestment) into holdings of slightly longer dated financial assets that do not qualify for presentation as cash equivalents. The underlying positive cash conversion from operations of £327million (2006: £156.1 million) was strong once again. The £170.9 million improvement on the prior year reflects the profitable growth in gross underwriting activity together with good collections of outstanding amounts from reinsurance partners. In addition, substantial payouts were made in the prior year in relation to large hurricane related catastrophe losses suffered in 2005.
Investment revenue receipts excluding derivative transactions increased by over 28% or almost £20million on the prior year to £90.2 million, partially as a result of the larger portfolio generated from the growth in premiums collected and higher shareholder funds and also due to higher interest rates prevailing for much of the current year under review.
Current tax payments increased to £42.8 million (2006: £36.4 million) mainly in anticipation of the higher attributable UK based profits falling due to be taxed and paid.
Cash flows from investing activities 2007was a year of significant investment activities involving cash outflows. In July theGroup announced the acquisition of the ALTOHA Inc. Group in the USAwhich involved a net outflow of cash of £11.1 million. TheGroup also experienced a net cash outflow of £0.9 million on the disposal of Hiscox Investment Management Limited in December.
Cash flows from financing activities The net cash outflow from financing activities rose by £8.6 million to £50million, primarily due to an additional £13million of dividends and £11.3 million in respect of shared buy-backs offset by £14million of debt repayment in 2006.
£5.2 million (2006: £3.2 million) cash was received in respect of share options exercised during the year.
Relationship between cash flow statement and income statement TheGroup’s premium income can only be earned as the risk coverage period to which it relates elapses. Consequently whilst the cash flow statement reports on actual funds received in the year from premiumswritten, the income statement is influenced by the exclusion of newer premium inflows relating to future risk coverage periods. Likewise much of the cash outflowsmade during 2007 relate to claim liabilities recognised in prior income statements.
Liquidity of debt and fixed income securities The availability of funds at short notice is a prerequisite for any insurance business with short tail exposure to catastrophic events. TheGroup retains a deliberate level of debt and fixed incomesecurities in instruments with imminent maturity dates which can be liquidated rapidly for cash as required.
Riskmanagement framework The risk management framework extends to all aspects of risk including insurance risk, market risk, credit risk, operational risk, liquidity, social, environmental and ethical risk.
The core business of Hiscox is dealing with risk. The understanding of risk is intrinsic to every level of decision-making in theGroup.
TheGroup continues to underwrite significant risks in geographical regions that are prone to natural peril. This business remains a compelling proposition for theGroup, since it is capable of returning impressive margins over the medium- to long-term as the occurrence of catastrophes averages out.
By its nature, this business requires that underwriting staff exercise the greatest possible levels of foresight. TheGroup has developed robust risk management andmitigation techniques in preparation for the challenges that these risks present. These techniques are designed to shield the core capital base of theGroup against unexpected, repeat clusters of all but the most destructive of events.
The portfolio of risks is actively managed to maintain a balanced and diversified book. This is supported by the use of exposure aggregation and scenario modelling tools and by the purchase of a reinsurance programme designed to cap losses from concentrations of risks. Policywordingsare reviewed regularly in the light of legal developments to ensure that theGroup’s exposure is restricted, where possible, to those risks identified at the time of policy issuance.
Themodelling andmonitoring tools are used both in the underwriting process and by independent risk specialists. They are used to design the insurance and reinsurance programmes and control the business underwritten to ensure that the risk profiles of contracts match the exposures for which the programmes were devised.
Aggregation andmodelling resources are shared across theGroup. Management at Hiscox insurance subsidiaries worldwide are therefore able to adopt theGroup’s existing methodologies andmodels, albeit tailored to the intricacies of that particular market. Hiscox also runs realistic disaster scenario projections for eachGroup entity and for theGroup as a whole. TheGroup’s maximum net retentions based on the estimated losses from these scenarios are outlined in note 3.1 to the financial statements.
TheGroup’s performance relative to the unprecedented impact of catastrophes on the industry in recent years highlights the ability of its models to suggest precise and logical reinsurance placements. It also shows the distinctive benefits that Hiscox derives from its diversification in coverage and geography. By writing a well-diversified book with a large focus on uncorrelated retail business, Hiscox is able to offset losses on its more volatile accounts.
Competition and the insurance cycle Hiscox is continuing to grow its regional presence in the UK, Europe and USA. In all of thesemarkets around the world, Hiscox competes against major international groups with very similar offerings. At times, a minority of these groupsmay choose to underwrite for cash flow or market share purposes and at prices that sometimes fall short of the suggested break-even technical price.
The core business of Hiscox is dealingwith risk. The understanding of risk is intrinsic to every level of decisionmaking in theGroup.
In commonwith all insurers, theGroup is exposed to this price volatility. Prolonged periods of low premium rating levels or high levels of competition in the insurancemarkets are likely to have a negative impact on theGroup’s financial performance. Pricing levels are monitored on a continuous basis with monthly reports showing both current levels and trends over the past 12months throughout a wide range of products.
As theGroup frequently acts as the lead insurer in the complex co-insurance programmes required to cover significant high value assets, it has some ability to set market rates rather than follow them.
Mutualisation is a related risk arising from the phenomenon of pricing cycles in the industry. TheGroup is required to contribute towards obligations of other insurers who fail. Syndicate 33 contributes to the NewCentral Fund operated by the Council of Lloyd’s, and in the UKcertain Hiscox entities contribute to the Financial Services Compensation Scheme (FSCS). Should the level of failures escalate, theGroup could be subject to additional or special levies by Lloyd’s and/or the FSCS.
Other business areas where theGroup is to some extent reliant on the timely and effective supply of services from third parties include back office policy processing, data entry and cash collection. Although the Groupmanages these relationships to ensure continuity and quality of service, events could occur beyond its control that could affect these third parties and in turn impact on theGroup’s performance.
Credit riskwith reinsurance counterparties TheGroup purchases reinsurance protection to contain its exposure tosingleclaimsand theaggregationof claims from catastrophic events.
TheGroup places reinsurance with companies that it believes are strong financially and operationally. The limits on reinsurance counterparty risk are recommended by the Reinsurance Security Committee, which meets regularly under the chairmanship of the Group Finance Director. Evaluation criteria include financial strength, trading record, payment history, outlook and organisational structures. Information is drawn from the following sources: public information produced by the company; theGroup’s experience with the reinsurer and knowledge of their behaviour in the marketplace; analysis from a reinsurance consultant; rating agency commentary and gradings.
Sidecars have continued to be popular vehicles for acquiring additional capacity. These are reinsurance companies which participate in the business of another insurer, but which are separately capitalised or offer security or both. These companies may offer very high levels of reinsurance but are often vehicles of only a limited and very short-term duration and their attractiveness is highly dependent upon the amount and quality of collateralisation offered. Some reinsurance transactions have been entered into with these vehicles but each has been individually approved. There remains a risk that in the event of this shorter-term capacity being withdrawn following large losses it may bemore difficult to replace in the conventional market. During the year theGroupwas the sole client of Panther Re, a Bermudian reinsurer that takes a 40% share of certain property catastrophe reinsurance lines written by Syndicate 33. This arrangement was not renewed for 2008 andwas in part replaced by the newCougar Syndicate.
TheGroup’s experience of bad debt losses arising from its reinsurance arrangements has beenminimal.
Claims volatility TheGroup establishes provisions for unpaid claims, defence costs and related expenses to cover its ultimate liability in respect of both reported claims and incurred but not reported (IBNR) claims. These provisions take into account both theGroup’s and the industry’s experience of similar business, historical trends in reserving patterns, loss payments and pending levels of unpaid claims and awards.
The business also relies on IT and telecommunications systems. Whilst theGroup considers its systems to be resilient, their failure or impairment, or the inability to transfer data onto any new systems introduced, could cause a loss of business and/or damage to the reputation of the Hiscox Group, as well as remedial costs.
Themost difficult continuity risk for Hiscox to manage is the loss of key staff. The recruitment and retention of high quality people is of fundamental importance to Hiscox and theGroup takes the risk of losing such assets very seriously. To maintain the loyalty of staff, theGroup provides competitive remuneration packages and benefits as well as extensive training and support and a unique culture that embraces the individual and their aspirations. More information about Hiscox’s investment in its people can be found on pages 30 to 33.
Further details of theGroup’s investment profile and its management of currency risks are provided in notes 3, 18 and 20 to the financial statements.
Investment returns TheGroup’s entities hold significant portfolios of investments to support their obligations, including their insurance liabilities, and their profits depend in part upon the returns that these achieve. Changes in interest rates, equity returns and other economic variables can therefore affect theGroup’s financial performance substantially. A fall in the capital value of their investments could result in a reduction in the level of business that each entity is able to underwrite. In addition, a major insurance loss or unexpected sequence of attritional losses could result in a sustained cash outflow that might require the early realisation of investments on unfavourable terms.
TheGroup’s investment strategy seeks to minimise theconcentration of investment risk inanyoneparticular sector.
Continual changes in, or inappropriate levels of, regulation in the Group’s markets could also result in their becoming uncompetitive or unattractive to customers, which might lead them to place their insurance business in alternative markets in which theGroup has no presence.
Syndicate 33 has its own rating and also benefits from the Lloyd’s global rating. The Lloyd’s rating could be affected by matters outside of theGroup’s influence or control. Hiscox Insurance Company Limited, Hiscox Insurance Company (Guernsey) Limited and Hiscox Insurance Company (Bermuda) Limited have their own ratings from accredited agencies.
A downgrading of any of the rated entities could have a material adverse impact. TheGroupmight cease to meet the security criteria of brokers, resulting in a loss of new business, policy cancellations and non-renewals. TheGroup’s borrowing facilities might also be subject to review.
TheGroupmaintains an excellent relationship with the agencies that rate its entities.
Group senior management holds several meetings with representatives from the agencies each year and gives due consideration to the likelihood of rating consequences before executing any significant strategic action.
TheGroup’s investment strategy seeks tominimise the concentration of investment risk in any one particular sector.
Fundamental to corporate and social responsibility is honest and fair dealing in all activities of the Company. Hiscox has alwaysbeenextremelyconsciousofitsreputation.Management has always believed that a reputation for integrity and decent behaviour in all dealings, be theywithin theGroup orwith those fromoutsidewho come in contact with theGroup, will be good formorale and for the results of the business.
Hiscox’s commitment to responsible business practices is reflected: In themarketplace Dealingwith customers
Training and development Hiscox is committed to training and developing its employees to help themmaximise their potential. Each permanent member of staff is provided with a tailored personal development programme. Training and development needs are reviewed twice a year, along with performance, against clearly set objectives.
Hiscox also subscribes to Public Concern atWork, which provides free legal advice to any employee with a concern about possible danger or malpractice in the workplace.
TheGroup has maintained its involvement in its local communities with the strong support of its employees. In Bermuda, Hiscox supports the Bermuda Sunshine League which is a transitional living facility for children removed from unstable living environments and gives employees the opportunity to contribute their time and effort to children who require adult role models and a semblance of stability. Hiscox is a member of the Lloyd’s Community programme, which supports local initiatives concerning education, training, enterprise and regeneration. In London forexample, theReading Partners scheme has continued, through which staff assist pupils at the Elizabeth Selby Infants School in Tower Hamlets. Employees also mentor students at Morpeth School in Tower Hamlets.
Supporting the arts TheGroup continues to support the BermudaMasterworks Foundation, which aims to repatriate artworks by Bermudian artists or featuring Bermuda landscapes/seascapes. Hiscox Art Projects, a contemporary exhibition space situated in the London office with free entry to the public, continues to provide artists with an opportunity to exhibit their talents.
Hiscox staff also continued their six year long support of the Richard House Hospice, raising over £30,000 through various initiatives during 2007. One such initiative was the Ardéche challenge, where 24 people took part in a canoe race through the ArdécheGorge
in South Eastern France raising over £12,000 for the charity. Money was also raised through book sales and a Christmas raffle.
A Hiscox representative attends meetings organised by the City of LondonCorporation to keep abreast of environmental best practice and exchange ideas with other like-minded companies.
Robert Ralph Scrymgeour Hiscox Chairman (Aged 65) Robert Hiscox joinedHiscox in1965 and has been Chairman of the main holding company of Hiscox since its incorporation in 1973. He was Deputy Chairman of Lloyd’s between 1993 and 1995. He is a Non Executive Director of Grainger Trust plc.
Robert Simon Childs Chief Underwriting Officer Chief Executive Officer of Hiscox Bermuda and Chairman of Hiscox USA (Aged 56) Robert Childs joined Hiscox in1986, served as the Active Underwriter of the Hiscox Lloyd’s Syndicate 33 between 1993 and 2005, and is the Group’s Chief Underwriting Officer. Robert was Chairman of the Lloyd’s Market Association from January 2003 to May 2005.
Daniel Maurice Healy Non Executive Director and Chairman of the Audit Committee (Aged 65) Daniel Healy joined Hiscox in 2006. He was appointed Executive Vice President and Chief Financial Officer of North Fork Bancorporation in1992 and a member of its Board of Directors in 2000. He was a partner with KPMG LLP before joining North Fork.He was the Managing Partner of the San José, California and Long Island,NewYork offices and held other positions in that firm during his tenure.He holds Board positions with KBW, Inc. and HarlemRBI, a not for profit organisation. He is also a senior adviser to Permira Advisers LLC an international private equity firm.
Dr James Austin Charles King Non Executive Director and Chairman of the Conflict Committee (Aged 69) Dr James King joined Hiscox in2006. He chairs Keytech Limited, The Bermuda Telephone Company Ltd, the Argus Group of Companies,Grotto Bay Properties Ltd and the Establishment Investment Trust, a UK listed company. He was chairman of the Bank of N.T. Butterfield & Son Limited until 19 April 2007. He is a Trustee of theBermuda Institute of Ocean Sciences and a Director of Castle Harbour Limited. Dr King is a fellow of the Royal College of Surgeons, Canada and the American College of Surgeons.
Sir Mervyn Pedelty Senior Independent Director and Chairman of the Remuneration and Nomination Committee (Aged 59) Sir Mervyn Pedelty joined Hiscox in 2005. He was previously the Chief Executive and an Executive Director of The Co-operative Bank plc (from 1997 until his retirement in 2004) and also of Co-operative Financial Services Limited and the Co-operative Insurance Society Limited (from 2002 to 2004).He was a Director of theAssociation of British Insurers (from 2002 to 2004) and is a former Council Member of the British Bankers’ Association. Sir Mervyn is a Chartered Accountant and a Chartered Banker. His other current appointments include: independent Director of Friends Provident plc,Chairman of the FTSE4 Good Policy Committee, a Director of Performances Birmingham Limited and a Senior Adviser to Permira Advisers LLP.
Solicitors Appleby Hunter Bailhache Canon’s Court 22 Victoria Street POBox HM1179 Hamilton HMEXBermuda
During 2007, and up to the date of this report and accounts, the Group has complied with the provisions of the CombinedCode in all material respects.
TheBoard of Directors The Board comprises four Executive Directors and six independent Non Executive Directors, including a Senior Independent Director. Biographical details for eachmember of the Board are provided on pages 50 to 51.
The roles and activities of the Chairman andChief Executive are distinct and separate. The Chairman is responsible for running an effective Board and overall strategy, and the Chief Executive has responsibility for running theGroup’s business.
In accordance with the Company’s Bye-Laws all Directors are required to submit themselves for re-election at least every three years.
The Board considers all the Non Executive Directors to be independentwithin themeaning of theCombinedCode as there are no relationships or circumstances which would interfere with the exercise of their independent judgement.
The Board retains ultimate authority for high level strategic and management decisions including: settingGroup strategy, approving significant mergers or acquisitions, approving the financial statements, declaration of the interim dividend and recommendation of the final dividend, approvingGroup business plans and budgets, approving major new areas of business, approving capital raising, approving any bonus or rights issues of share capital, settingGroup investment guidelines, approving the Directors’ remuneration, approving significant expenditure or projects, and approving the issue of share options. The Board has, however, authorised the boards of the trading entities and business divisions to manage their respective operational affairs, to the extent that Company Board level approval is not required.
Healy as Chairman of the Committee together with Carol Franklin Engler, Dirk Stuurop, Andrea Rosen and Dr James King.
The Audit Committee meets at least four times a year to assist the Board onmatters of financial reporting, risk management and internal control. The Audit Committee monitors the scope, results and cost effectiveness of the internal and external audit functions, the independence and objectivity of the external auditors, and the nature and extent of non-audit work undertaken by the external auditors together with the level of related fees. The internal and external auditors have unrestricted access to the Audit Committee. All non-audit work undertaken by theGroup’s external auditors with fees greater than £50,000must be pre-approved by the Audit Committee. KPMGhas confirmed to the Audit Committee that in its opinion it remains independent. The Committee is satisfied that this is the case.
Risk Committees There are a number of committees within theGroupwhich have been established to oversee key risk areas, including committees covering reinsurance credit risk, liquidity risk, broker credit risk, business continuity risk and investment risk. These committees are comprised of Directors within theGroup companies and relevant senior employees.
The Company commissions independent research on feedback from shareholders and analysts on a regular basis following the Company’s results announcements. This research together with the analysts’ research notes are copied to the Non Executive Directors in full. The Chairman attends a number of meetings with shareholders as well as speaking at the analysts’ presentations. In addition, any specific items covered in letters received frommajor shareholders are reported to the Board. Major shareholders are invited to request meetings with the Senior Independent Director and/or the other Non Executive Directors, and they have been given the contact details of the Senior Independent Director.
The Board has reviewed the effectiveness of internal controls during 2007, including financial, operational and compliance controls. The Board confirms there is an ongoing process for identifying, evaluating andmanaging the significant risks faced by the Company, which has been in place throughout the year and up to the date of approval of the Annual Report and Accounts and accords with the guidance in the document ‘Internal Control: Guidance for Directors on the CombinedCode’. The head of each business area is responsible for implementing the risk management programme in their area of operations. The Risk team collates risk management information and the Head of Risk works with the risk committees to monitor significant risks andmovements, and review the relevant internal controls.
None of the Committee has any personal financial interest (other than asshareholders)orconflicts of interest arising from cross-directorships or day-to-day involvement in running the business. No Director plays any part in any discussion about his or her own remuneration.
Advice on specific topics is provided by Towers Perrin Remuneration Consultants.
The Remuneration and Nomination Committee believes that pay should be competitive but that superior reward should be driven by superior business results.
Remuneration of Executive Directors The remuneration received by each person who served as an Executive Director during the year is set out in the table below.
When approving Executive Director’s pay increases the Remuneration and Nomination Committee takes into account rates of inflation, WatsonWyatt data, other publicly available reports and comparable companies’ pay structures as appropriate.
Annual cash incentives (bonuses) Hiscox’s remuneration policy is underpinned by the belief that a significant portion of total remuneration should be attained through incentive awards, therefore linking rewards directly with performance. The expectation is that successful performance should enable individuals to achieve upper quartile total remuneration. The table on page 55 shows the payment of annual cash incentives to Executive Directors over the past ten years and illustrates the alignment between business performance and reward.
Incentives are awarded by setting an overall bonus pool and then allocating individual awards from that pool based on personal performance ratings. Two bonus pools are operated: the Personal Performance Bonus (PPB) and the Profit Related Bonus (PRB). The PPB is only available to junior andmid-level staff and is based on individual performance. It is designed to ensure that staff in these roles continue to bemotivated to perform and the benefit is up to 10%of relevant salaries.
Once the overall bonus pool has been established, individual bonuses, including those for Executive Directors, are calculated based on the results of each business area and individual performance. The Remuneration and Nomination Committee determines the bonuses to be paid to the Executive Directors based on the performance of theGroup and an assessment of individual performance. In this way, the bonus scheme aligns the interests of Executive Directors and employees with shareholders.
Pre-tax return Average bonus as a on equity percentage of salary
Performance conditions In order to ensure that these schemes are aligned with shareholders’ interests, the Remuneration and Nomination Committee regularly reviews the terms and conditions of the grants, including the performancemeasure.
The Remuneration and Nomination Committee believes that using ROE as the long-term performance condition better aligns the interests of employees with shareholders because: ROE captures the efficiency with which the Company is using shareholder funds to generate earnings, whereas EPS growth gives no indication of the level of return on the investment required to generate those additional earnings; the Company operates in a highly cyclical business where earnings can fluctuate considerably, which can have a distorting effect on EPS growth.Where EPS is used as a performance condition this can introduce an element of luck as to when in the cycle share grants are madewhich can operate to the disadvantage of both employees and shareholders. The Remuneration and Nomination Committee believes that an average ROE performance requirement over the three-year period smoothes out the cyclical fluctuations in earnings and ensures that over any given period shareholders will receive a minimum return on equity before awards granted to employees will vest.
ShareOption Schemes Awards are made to Executive Directors, senior managers and other staff at the discretion of the Remuneration and Nomination Committee. No grants were made during 2007, or up until the date of this report and accounts.
Performance Share Plan Restricted share awards are made to Executive Directors, senior managers and all other staff under the Performance Share Plan at the discretion of the Remuneration and Nomination Committee. Awards under this plan were made in 2007 and the Remuneration and Nomination Committee has also agreed to make awards under this plan in 2008. Awards under this plan are subject to the same testing conditions that were applied to the special awards granted in 2006 (described below).
In 2005, following the Rights Issue, we received shareholder approval to grant special awards to individuals within the Company of over up to five million shares, of which a maximum of 20%were available for Executive Directors (‘Special Award’). These awards vest after three years subject to the following performance conditions: 25% of the award vests if the Company achieves an average ROE of 10%posttax over the three years and 100% vests if the average return exceeds 17.5% post-tax. Vesting will occur on a straight-line basis between these points.
Awards were granted of over 2,771,500 shares on 26March 2007 and 52,000 shares on 2October 2007which were subject to the same testing performance conditions as the Special Awards, and it is also the current intention that future awards will be subject to those conditions.
Above 200,000 shares under option, the dividends would be re-invested into shares within an employee benefit trust. Executive Directors, however, would have the entire dividend re-invested in shares within the trust.
The Remuneration and Nomination Committee believes that this change better aligns senior management with shareholders by focusing employees on ROE and dividends and therefore Total Shareholder Return. It also encourages employees to retain the shares which is consistentwithourwish to create high levels of employee shareholding.
Details of this change will be included in the Notice of the Annual General Meeting.
Save as You Earn The sharesave scheme and international sharesave scheme are offered to all employees and currently have a 53%participation.
Remuneration of Non Executive Directors Non Executive Directors receive an annual fee in respect of their Board appointments together with additional compensation for their further duties in relation to Board committees. All amounts are denominated in USDollars. The structure of the fees paid are detailed below: The fees in relation to Hiscox Ltd for the year were: Hiscox Ltd Total Total
The comparative amounts for the prior year reflect the fees paid in relation for the period from appointment to 31 December 2006. The fees are reviewed annually but not necessarily increased. Fees are set at a level to attract individuals with a broad range of relevant skills and experience. The Non Executive Directors receive no other benefits.
Number of Number of Market price options at Number of Number of Number of options at at date of Date from 1 January options options options 31December Exercise price exercise which 2007 granted lapsed exercised 2007 £ £ exercisable Expiry date
Share options The interests of the Directors and employees under the UK and International Sharesave Schemes of theGroup are set out below: Number of Number of Market price options at Number of Number of Number of options at at date of Date from 1 January options options options 31December Exercise price exercise which 2007 granted lapsed exercised 2007 £ £ exercisable Expiry date
By order of the Board Andrea Rosen Acting Chairman of the Remuneration andNomination Committee Wessex House, 45 Reid Street, Hamilton HM12, Bermuda 3March 2008
Principal activity and business review TheCompany isaholdingcompany forsubsidiaries involved in the business of insurance in Bermuda, the US, the UK and Europe.
An analysis of the development and performance of the business can be found within the Chief Executive’s report on pages 8 to 15. A description of the major risks can be found in the Risk management section on pages 44 to 47.
Dividends An interim dividend of 4p (net) per share (2006: 3p (net))
The Directors recommend the payment of a final dividend of 8p (net) per share (2006: 7p (net)). If approved this will be paid on 17 June 2008 to shareholders on the register at the close of business on 16May 2008, provided that such dividend will not be paid to those shareholders who, prior to 16May 2008, have made an election to participate in the Company’s Dividend Access Plan if Hiscox plc subsequently declares a dividend for the purposes of such Dividend Access Plan prior to the payment date of such dividend.
If Hiscox Ltd has declared a dividend, those shareholders who have elected to participate in the Dividend Access Plan will receive payment of that dividend on 17 June 2008.
Directors The names and details of the individuals who served as
Political and charitable contributions TheGroupmade no political contributions during the year (2006: £nil).
Annual GeneralMeeting The notice of Annual General Meeting, to be held at the
By order of the Board RobinMehta Secretary Wessex House, 45 Reid Street, Hamilton HM12, Bermuda 3March 2008
Report of the independent registered public accounting firm to the Board of Directors and the shareholders of Hiscox LtdHiscox Ltd Report and Accounts 2007 61
We have audited the accompanying consolidated financial statements of Hiscox Ltd (‘the Company’) on pages 62 to 105which comprise the consolidated balance sheet as at 31 December 2007, and the consolidated income statement, consolidated statement of changes in equity and consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes.
Management’s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing andmaintaining internal control relevant to the preparation and fair presentation of financial statements that are free frommaterial misstatements, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.
Opinion In our opinion: the consolidated financial statements give a true and fair view of the consolidated financial position of the Company as at 31 December 2007, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards; and the part of the Directors’ remuneration report which wewere engaged to audit has been properly prepared in accordance with Schedule 7A to the UKCompanies Act 1985, as if those requirements were to apply to the Company.
Expenses Claims and claim adjustment expenses, net of reinsurance 24.2 (423,365) (382,341) Expenses for the acquisition of insurance contracts 8 (264,570) (235,797) Administration expenses (76,813) (76,533)
Profit for the year (all attributable to equity shareholders of the Company) 191,248 163,846
Earnings per share on profit attributable to equity shareholders of the Company
Property, plant and equipment 15 19,378 13,821 Investments in associates 16 1,502 28 Deferred acquisition costs 8 123,081 117,115 Financial assets carried at fair value 18 1,747,827 1,241,910 Loans and receivables including insurance receivables 19 385,222 446,272
Currency translation differences 13 – – – – (41,218) – – (41,218)
Net expense recognised directly in equity – – – – (41,218) – – (41,218) Profit for the year – – – – – – 163,846 163,846
Total recognised income/(expense) for year – – – – (41,218) – 163,846 122,628 Employee share options: Equity settled share based payments – – – – – – 5,238 5,238 Deferred tax release on share based payments – – – – – – 3,367 3,367
Currency translation differences 13 – – – – (4,269) – – (4,269) Net investment hedge – – – – 1,400 – – 1,400
Charges in respect of share based payments 10 5,689 5,238 Other non-cash movements (641) 1,551
Cash flows from operations (162,660) 157,396 Interest received 85,435 68,644 Equity dividends received 4,770 1,599 Interest paid (8,243) (9,416) Current tax paid (42,823) (36,363)
Proceeds from the issue of ordinary shares 22 5,159 3,217 Cash flows from the purchase of own shares including those arising on share buy-back programme 22 (11,343) 50 Dividends paid to Company’s shareholders 30 (43,591) (30,428) Repayments of borrowings and financial liabilities (272) (14,334)
The purchase, maturity and disposal of financial assets is part of theGroup’s insurance activities and is therefore classified as an operating cash flow. The purchase, maturity and disposal of derivative contracts is also classified as an operating cash flow.
Thecomparativeamounts reported herein for theyear ended 31 December 2006 have been extracted from the previously published report for that period,buthavebeenadjusted for reclassificationof certainminoroverseasagencyunderwritingexpensesandcommissions from‘otherexpenses’and‘other revenues’ to‘expenses for the acquisition of insurance contracts’, and for theGroup’s revised presentation of segment information (note4).The effect of the reclassificationof the aforementionedexpensesandcommissions is to increase thepreviously reported ‘expenses for the acquisition of insurance contracts’ for the year ended 31December 2006 by £9,948,000. Simultaneous identical reductions have beenmade in total to ‘other expenses’ and ‘other revenues’. These presentational adjustments have no impact on theGroup’s previously reported result from operating activities, profit before tax or shareholders’ equity. The Directors believe that the amended classification of these expenses and commissions provides a more appropriate presentation of their operating nature.
As detailed in note 3 theGroup adopted IFRS 7 Financial Instruments: Disclosures, and a corresponding amendment to IAS 1 Presentation of Financial Statements – Capital Disclosures on 1 January 2007. The adoption of IFRS 7 and the amendments to IAS 1 impacted the type and amount of disclosures made in these financial statements, but had no impact on the reported profits or financial position of the Group. In accordance with the transitional requirements of the standards, theGroup has provided full comparative information.
Hiscox Ltdwas incorporated under the lawsofBermudaon6September 2006. Details of the share for share exchange transaction and its effects are disclosed in note 22.
For the period from incorporation to 12December 2006, Hiscox Ltd was a shell companywith nomaterial revenues or assets and did not constitute a ‘business’ as defined by IFRS 3BusinessCombinations. Consequently, due to the relative values of bothCompanies, the shareholders of Hiscox plc immediately before the share exchange acquired, in effect, 100%of the enlarged share capital of Hiscox Ltd on completion of the transaction.
In order to appropriately reflect the substance of the transaction outlined above, the new holdingCompanywas accounted for using the reverse acquisition principles outlined in IFRS 3. Consequently, Hiscox plc was deemed to be the acquirer for accounting purposes and the legal parent Company, Hiscox Ltd, was treated as a subsidiary whose identifiable assets and liabilities are incorporated into theGroup at fair value.
(b) Associates Associates are those entities in which theGroup has significant influence but not control over the financial and operating policies. Significant influence is generally identified with a shareholding of between 20% and 50%of an entity’s voting rights. The consolidated financial statements include theGroup’s share of the total recognised gains and losses of associates on an equity accounted basis from the date that significant influence commences until the date that significant influence ceases. TheGroup’s share of its associates’ post-acquisition profits or losses after tax is recognised in the income statement each period, and its share of themovement in the associates’ net assets is reflected in the investments’ carrying values in the balance sheet.When theGroup’s share of losses equals or exceeds the carrying amount of the associate, the carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that theGroup has incurred obligations in respect of the associate.
Unrealised gains arising from transactionswith associates are eliminated to the extent of theGroup’s interest in the entity. Unrealised gains arising from transactions in associates are eliminated against the investment in the associate. Unrealised losses are eliminated in the sameway as unrealised gains, but only to the extent that there is no evidence of impairment.
2 Significant accounting policies continued 2.5 Foreign currency translation continued (c) Group companies continued (iii) all resulting exchange differences are recognised as a separate component of equity.
2.6 Property, plant and equipment Property, plant and equipment are stated at historical cost less depreciation and any impairment loss. Historical cost includes expenditure that is directly attributable to the acquisition of the items.
Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associatedwith the itemwill flow to the Group and the cost of the item can bemeasured reliably. All other repairs andmaintenance items are charged to the income statement during the financial period in which they are incurred.
Land and artwork assets are not depreciated as they are deemed to have indefinite useful economic lives. The cost of leasehold improvements is amortised over the unexpired term of the underlying lease or the estimated useful life of the asset, whichever is shorter. Depreciation on other assets is calculated using the straight-line method to allocate their cost or revalued amounts, less their residual values, over their estimated useful lives. The rates applied are as follows: Buildings 50 years Vehicles 3 years Leasehold improvements including fixtures and fittings 10–15 years Furniture, fittings and equipment 3–15 years
Goodwill represents amounts arising on acquisition of subsidiaries and associates. In respect of acquisitions that have occurred since 1 January 2004, goodwill represents the excess of the cost of an acquisition over the fair value of theGroup’s share of the net identifiable assets of the acquired subsidiary or associate at the acquisition date.
Goodwill on acquisition of subsidiaries is included in intangible assets. Goodwill on acquisition of associates is included in investments in associates. Goodwill is not amortised but is tested annually for impairment and carried at cost less accumulated impairment losses. The impairment review process examines whether or not the carrying value of the goodwill attributable to individual cash generating units exceeds its implied value. Any excess of goodwill over the recoverable amount arising from the review process indicates impairment.
(b) Syndicate capacity The cost of purchasing theGroup’s participation in the Lloyd’s insurance syndicates is not amortised but is tested annually for impairment and is carried at cost less accumulated impairment losses. Having considered the future prospects of the London insurancemarket, theBoard believe that theGroup’s ownership of syndicate capacity will provide economic benefits over an indefinite number of future periods.
(c) State authorisation licences State authorisation licences acquired in business combinations are recognised initially at their fair value. The asset is not amortised, as the Board considers that economic benefits will accrue to theGroup over an indefinite number of future periods, but is tested annually for impairment, and any accumulated impairment losses recognised are deducted from the historical cost amount to produce the net balance sheet carrying amount.
(d) Rights to customer contractual relationships Costs directly attributable to securing the intangible rights to customer contract relationships are recognised as an intangible asset where they can be identified separately andmeasured reliably and it is probable that they will be recovered by directly related future profits. These costs are amortised on a straight-line basis over the useful economic life which is deemed to be 20 years and are carried at cost less accumulated amortisation and impairment losses.
2.8 Financial assets including loans and receivables TheGroup has classified financial assets as a) financial assets designated at fair value through profit or loss, and b) loans and receivables. Management determines the classification of its financial investments at initial recognition. The decision by theGroup to designate all financial investments, comprising debt and fixed income securities, equities and shares in unit trusts and deposits with credit institutions, at fair value through profit or loss reflects the fact that the investment portfolios are managed, and their performance evaluated, on a fair value basis. Regular way purchases and sales of investments are accounted for at the date of trade.
Fair value for securities quoted in active markets is the bid price exclusive of transaction costs. For the minority of instruments where no active market exists, fair value is determined by referring to recent transactions and other valuation factors including the discounted value of expected future cash flows. Fair value changes are recognised immediately within the investment result line in the income statement.
A financial asset is classified into this category at inception if it is managed and evaluated on a fair value basis in accordance with documented strategy, if acquired principally for the purpose of selling in the short-term, or if it forms part of a portfolio of financial assets in which there is evidence of short-term profit taking.
Financial assets Objective factors that are considered when determining whether a financial asset or group of financial assets may be impaired include, but are not limited to, the following: negative rating agency announcements in respect of investment issuers, reinsurers and debtors; significant reported financial difficulties of investment issuers, reinsurers and debtors; actual breaches of credit terms such as persistent late payments or actual default; the disintegration of the active market(s) in which a particular asset is traded or deployed; and adverse economic or regulatory conditions that may restrict future cash flows and asset recoverability.
TheGroup issues short-term casualty and property insurance contracts that transfer significant insurance risk. Such contracts may also transfer a limited level of financial risk.
(c) Deferred acquisition costs (‘DAC’) Commissions and other direct and indirect costs that vary with and are related to securing new contracts and renewing existing contracts are capitalised as deferred acquisition costs. All other costs are recognised as expenses when incurred. DAC are amortised over the terms of the policies as premium is earned.
(d) Liability adequacy test At each balance sheet date, liability adequacy tests are performed by each segment of theGroup to ensure the adequacy of the contract liabilities net of related DAC. In performing these tests, current best estimates of future contractual cash flows and claims handling and administration expenses, as well as investment income from assets backing such liabilities, are used. Any deficiency is immediately charged to profit or loss initiallybywriting-off DAC and by subsequently establishing a provision for losses arising from liability adequacy tests (‘the unexpired risk provision’).
Any DACwritten-off as a result of this test cannot subsequently be reinstated.
TheGroup assesses its reinsurance assets on a regular basis and if there is objective evidence, after initial recognition, of an impairment in value, theGroup reduces the carrying amount of the reinsurance asset to its recoverable amount and recognises the impairment loss in the income statement.
Receivables and payables are recognised when due. These include amounts due to and fromagents, brokers and insurance contract holders.
If there is objective evidence that the insurance receivable is impaired, theGroup reduces the carrying amount of the insurance receivable accordingly and recognises the impairment loss in profit or loss.
Subrogation reimbursements are also considered as an allowance in themeasurementof the insurance liability for claims and are recognised in other assets when the liability is settled. The allowance is the assessment of the amount that can be recovered from the action against the liable third party.
A defined contribution arrangement is one under which theGroup pays fixed contributions into a separate entity and has no further obligation beyond the agreed contribution rate. A defined benefit scheme is a pension scheme that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. For thedefinedcontributionarrangement, theGroup pays contributions to a privately administered pension insurance plan on a contractual basis. The contributions are recognised as an employee benefit expense when they are due.
The proceeds received net of any directly attributable transaction costs are credited to share capital and share premiumwhen the options are exercised.
In accordance with the transitional arrangements of IFRS 2 only share based awards granted or modified after 7 November 2002, but not yet vested at the date of adoption of IFRS are included in the calculations.
2.17 Borrowings Borrowings are financial liabilities and are designated on inception as being held at fair value through profit or loss if they aremanaged and evaluated on a fair value basis in accordancewith a documented strategy or if they eliminate or significantly reduce ameasurement or recognition inconsistency. Borrowings are initially measured at fair valuewith all incremental transaction costs immediately expensed. Borrowings are then consequently measured at fair value at each balance sheet date thereafter, using observable market interest rate data for similar instruments, with all changes in value from one accounting period to the next reflected in the income statement unless they form part of a designated hedge accounting relationship inwhich case certain changes in value are recognised directly in equity, (see notes 2.18 and 18).
TheGroup hedges elements of its net investment in certain foreign entities through foreign currency borrowings that qualify for hedge accounting; accordingly gains or losses on retranslation are recognised in equity to the extent that the hedge relationship is effective. Accumulated gains or losses are recycled to the income statement only when the foreign operation is disposed of. The ineffective portion of any hedge is recognised immediately in the income statement.
Leases in which significantly all of the risks and rewards of ownership are transferred to theGroup are classified as finance leases. At the commencement of the lease term, finance leases are recognised as assets and liabilities at the lower of the fair value of the asset and the present value of theminimum lease payments. Theminimum lease payments are apportioned between finance charges and repayments of the outstanding liability, finance charges being charged to each period of the lease term so as to produce a constant rate of interest on the outstanding balance of the liability.
All other leases are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor)
2 Significant accounting policies continued 2.21 Leases continued (a) Hiscox as lessee continued are charged to the income statement on a straight-line basis over the period of the lease.
2.22 Dividend distribution Dividend distribution to the Company’s shareholders is recognised as a liability in theGroup’s financial statements in the period in which the dividends are approved.
2.23 Use of critical estimates and assumptions The Directors consider the accounting policies for determining insurance liabilities, amounts denominated in foreign currencies, the valuation of investments, the valuation of retirement benefit scheme obligations and the determination of current and deferred tax assets and liabilities as being most critical to an understanding of theGroup’s result and position.
There are several sources of uncertainty that need to be considered in the estimation of the insurance liabilities that theGroup will ultimately pay for valid claims. These include but are not restricted to: inflation; changes in legislation; changes in theGroup’s claims handling procedures; and discordant judicial opinions which extend theGroup’s coverage of risk beyond that envisaged at the time of original policy issuance. TheGroup seeks to gather corroborative evidence from all relevant sources before making judgements as to the eventual outcome of claims, particularly those under litigation, which have occurred and been notified to theGroup but remain unsettled at the balance sheet date.
Legislation concerning the determination of taxation assets and liabilities is complex and continually evolving. In preparing the Group’s financial statements, the Directors estimate taxation assets and liabilities after taking appropriate professional advice. The determination and finalisation of agreed taxation assets and liabilities may not occur until several years after the balance sheet date and consequently the final amounts payable or receivable may differ from those presently recorded in these financial statements.
2.24Reporting of additional performancemeasures TheDirectors consider that the claims ratio, expense ratio and combined ratio measures reported in respect of operating segments and theGroup overall at note 4 provide useful information regarding the underlying performance of theGroup’s businesses. Thesemeasures are widely recognised by the insurance industry and are consistent with internal performancemeasures reviewed by senior management including the chief operating decisionmaker. However, these threemeasures are not definedwithin the IFRS framework and body of standards and interpretations and thereforemay not be directly comparable with similarly titled additional performancemeasures reported by other companies.
The Board sets theGroup’s underwriting strategy for accepting and managing insurance risk prospectively, seeking to exploit identified opportunities and taking cognisance of other relevant anticipated market conditions. Specific underwriting objectives such as aggregation limits, reinsurance protection thresholds, geographical disaster event risk exposures and line of business diversification parameters are prepared and reviewed by the Chief Underwriting Officer in order to translate the Board’s summarised underwriting strategy into specific measurable actions and targets. These actions and targets are reviewed and approved by the Board in advance of each underwriting year. The Board continually reviews its underwriting strategy throughout each underwriting year in light of the evolving
3Management of risk continued 3.1 Insurance risk continued market pricing and loss conditions and as opportunities present themselves.
The Board requires all underwriters to operate within an overall Group appetite for individual events. This defines the maximum exposure that theGroup is prepared to retain on its own account for any one potential catastrophe event or disaster. TheGroup’s underwriting risk appetite seeks to ensure that it should not lose more than one years profit plus 15% of core capital as a result of a 1 in 250 bad year.
Realistic disaster scenarios are extreme, hypothetical events selected by Lloyd’s to represent major events occurring in areas with large insured values. They also reflect the areas that represent significant exposures for Hiscox.TheGroup compiles estimates of losses arising from realistic disaster events using statistical models alongside input from its underwriters. The selection of realistic disaster scenario events is adjusted each year and they are not therefore necessarily directly comparable from one year to the next. The events are extreme and as yet untested, and as such these estimates may prove inadequate as a result of incorrect assumptions, model deficiencies, or losses from unmodelled risks. This means that should a realistical disaster actually eventuate, theGroup’s final ultimate losses could materially differ from the current estimates presented below. Estimates of theGroup’s maximum loss exposure to a selection of realistic disaster scenarios are shown in the first table below. TheGroup’s estimated concentration of insurance risk, determined in relation to the broad categories of insurance liabilities reserved on the balance sheet, is summarised in the tables on page 74.
The delegation of underwriting authority to specific individuals, both internally and externally, is subject to regular review. All underwriting staff and binding agencies are set strict parameters in relation to the levels and types of business they can underwrite, based on individual levels of experience and competence. These parameters cover areas such as the maximum sums insured per insurance contract, maximum gross written premiums andmaximum aggregated exposures per geographical zone and risk class. Monthly meetings are held between the Chief UnderwritingOfficer and a specialist central analysis and review team in order to monitor claim development patterns and discuss individual underwriting issues as they arise. The Chief UnderwritingOfficer also holds weekly video conferencemeetings with this team to discuss interim underwriting matters.
TheGroup’s insurance contracts include provisions to contain losses such as the ability to impose deductibles and demand reinstatement premiums in certain cases. In addition, in order to manage theGroup’s exposure to repeated catastrophic events, relevant policies frequently contain payment limits to cap the maximum amount payable from these insured events over the contract period.
A significant proportion of the reinsurance inwards business provides cover on an excess of loss basis for individual events. TheGroup agrees to reimburse the cedant once their losses exceed aminimum level. Consequently the frequency and severity of reinsurance inwards’ claims is related not only to the number of significant insured events that occur but also to their individual magnitude. If numerous catastrophes occurred in any one year but the cedant’s individual loss on each was below the minimum stated, then theGroup would have no liability under such contracts.
Property risks –Marine andmajor assets TheGroup directly underwrites a diverse range of property risks. The risk profile of the property covered undermarine andmajor asset policies is different to that typically contained in the other classes of property (such as private households and contents insurance) covered by theGroup.
Typical property covered by marine and other major property contracts include fixed andmoveable assets such as ships and other vessels, cargo in transit, energy platforms and installations, pipelines, other
For this reason theGroup acceptsmajor property insurance risks for periods ofmainly one year so that each contract can be re-priced on renewal to reflect the continually evolving risk profile. Themost significant risks covered for periods exceeding one year are certain specialist lines such asmarine and offshore construction projectswhich can typically have building and assembling periods of between three and four years. These form a small proportion of theGroup’s overall portfolio.
Marine andmajor property contracts are normally underwritten by reference to the commercial replacement value of the property covered. The cost of repairing or rebuilding assets, of replacement or indemnity for contents and time taken to restart or resume operations to original levels for business interruption losses are the key factors that influence the level of claims under these policies.
Other property risks TheGroup provides home and contents insurance, together with cover for art work, antiques, classic cars, jewellery, collectables and other assets held by affluent individuals.
Contracts are underwritten by reference to the commercial replacement value of the properties and contents insured, and claims payment limits are always included to cap the amount payable on occurrence of the insured event.
TheGroup’s pricing strategy for casualty insurance policies is typically based upon historical claim frequencies and average claim severities, adjusted for inflation and extrapolated forwards to incorporate projected changes in claims patterns. In determining the price of each policy an allowance is alsomade for acquisition and administration expenses, reinsurance costs, investment returns and theGroup’s cost of capital.
The majority of theGroup’s casualty exposures are written on a claims made basis. However the final quantum of these claimsmay not be established for a number of years after the event. Consequently a significant proportion of the casualty insurance amounts reserved on the balance sheet may not be expected to settle within 24months of the balance sheet date.
(a) Equity price risk TheGroup is exposed to equity price risk through its holdings of equity and unit trust investments. However this is limited to a small and controlled proportion of the overall investment portfolio and the equity and unit trust holdings involved are well diversified over a number of companies and industries. The fair value amounts held at the balance sheet date may be analysed as follows: %weighting %weighting
Notes to the financial statements continued 3Management of risk continued 3.2 Financial risk continued (a) Equity price risk continued
Reliability of fair values TheGroup has elected to carry all financial investments at fair value through income as they aremanaged and evaluated on a fair value basis in accordancewith a documented strategy.With the exception of unquoted equity investments, all of the financial investments held by theGroup trade in publicmarkets and theGroup therefore determines fair value by reference to published price quotations in themost active financial markets inwhich the assets trade. TheGroup determines the fair value of financial assets primarily with reference to their closing bidmarket prices at the balance sheet date. The ability to obtain quoted bidmarket pricesmay be reduced in periods of diminished liquidity, such as those prevailing for certain categories of asset-backed and mortgage-backed fixed income instruments affected by the continued market dislocation that commenced during the second half of 2007. In such instances fair valuesmay be determined using other observable market inputs such as prices provided bymarketmakers such as dealers and brokers, and prices achieved in themost recent regular transaction of identical or closely related instruments occurring before the balance sheet date but updated for relevant perceived changes inmarket conditions.
Valuation of these securitieswill continue to be impacted by external market factors includingdefault rates, rating agency actions, and liquidity. The Company will make adjustments to the investment portfolio as appropriate as part of its overall portfolio strategy, but its ability to mitigate its risk by selling or hedging its exposures may be limited by themarket environment. TheCompany’s future resultsmay be impacted, both positively and negatively, by the valuation adjustments applied to these securities, howevermanagement does not feel that thiswill have amaterial impact on theGroup's results, cash flows or reported financial position. TheGroup currently expects all such instruments tomature as expected on their pre-determined contractual terms.
The fair value of unquoted equity investments is determined by reference to recent observable market transactions and other valuation factors including the discounted value of expected future cash flows. The carrying value of unquoted equity investments included in the Group’s balance sheet at 31 December 2007was £4,151,000 (2006: £976,000), representing less than 1% of the total financial assets carried at fair value.
The fair value of debt and fixed income assets in theGroup’s balance sheet at 31December 2007was£1,445million (2006: £1,044million). Thesemay be analysed as follows: 31December 31December
Nature of debt and fixed income holdings Government issued bonds and instruments 35 45 Asset backed securities (all AAA rated) 16 18 Mortgage backed instruments –Agency (all AAA rated) 7 3 Mortgage backed instruments –Non-agency (all AAA rated) 13 14 Corporate bonds 27 18 Lloyd’s andmoney market deposits 2 2
Onemethod of assessing interest rate sensitivity is through the examination of duration-convexity factors in the underlying portfolio. Using a duration-convexity based sensitivity analysis, if market interest rates had risen by 100 basis points at the balance sheet date, the fair value might have been expected to decrease by £22million (2006: decrease of £13million).
Insurance contract liabilities are not directly sensitive to the level of market interest rates, as they are undiscounted and contractually non-interest-bearing. TheGroup’s debt and fixed income assets are further detailed at note 18.
TheGroup’s major borrowing facility at 31 December 2007 totalled £91,764,000 (2006: £92,852,000). TheGroup agreed an interest ratemargin at the commencement of the borrowing term in November 2005 and the applicable base interest rate element is reset to applicable LIBORmarket rates at periodic intervals dependent on the Group’s perception of interest rate outlook. The overall interest charge associated with these borrowings is currently fixed at 6.12% until 30 June 2008. TheGroup has no other significant borrowings or other assets or liabilities carrying interest rate risk, other than the facilities and Letters of Credit outlined in note 33.
The largest counterparty exposure within AAA rating is with the US Treasury. A significant proportion of ‘other/not rated’ reinsurance assets at 31 December 2007 are supported by letter of credit guarantees issued by financial institutions with Standard & Poor’s or equivalent credit or financial strength ratings of A or better.
Debt and fixed income securities 18 742,964 72,210 140,634 87,861 1,043,669
The largest counterparty exposure within the AAA rating is with the US Treasury. The largest counterparty exposure under other ratings is a reinsurance asset that is supported by Letter of Credit guarantees rated A or better.
(d) Liquidity risk TheGroup is exposed to daily calls on its available cash resources mainly from claims arising from insurance contracts. Liquidity risk is the risk that cash may not be available to pay obligations when due at a reasonable cost. The Board sets limits on the minimum level of cash andmaturing funds available to meet such calls and on the minimum level of borrowing facilities that should be in place to cover at unexpected levels of claims and other cash demands.
A significant proportion of theGroup’s investments are in highly liquid assetswhich could be converted into cash in a prompt fashion and atminimal expense. The depositswith credit institutions largely comprise short dated certificates forwhich an activemarket exists andwhich theGroup can easily access. TheGroup’s exposure to equities is concentratedon shares and funds that are frequently tradedon internationally recognised stock exchanges.
Notes to the financial statementsHiscox Ltd Report and Accounts 2007 3Management of risk continued 3.2 Financial risk continued (c) Credit risk continued on their exposure to a single counterparty, or groupsof counterparties, and having regard to geographical locations. Such risks are subject to an annual ormore frequent review. There is no significant concentration of credit riskwith respect to loans and receivables, as theGrouphas a large number of internationally disperseddebtorswith unrelatedoperations.
TheGroupReinsuranceSecurityCommitteeassesses the creditworthiness of all reinsurers by reviewing credit grades provided by rating agencies and other publicly available financial information detailing their financial strength and performance. The financial analysis of reinsurers produces an assessment categorised by Standard & Poor’s (S&P) rating (or equivalent when not available from S&P).
TheCommittee considers the reputation of its reinsurancepartners and also receives details of recent payment history and the status of any ongoing negotiations betweenGroupcompanies and these third parties. This information is used to update the reinsurancepurchasing strategy.
An analysis of theGroup’s major exposures to counterparty credit risk excluding loans and receivables, based on Standard & Poor’s or equivalent rating, is presented below:
Between one and two years 374,869 – 11,117 385,986 257,883 Between two and five years 563,052 – – 563,052 307,325 Over five years 282,110 – – 282,110 192,890
TheGroup’s equities and shares in unit trusts and perpetual notes and other non-dated instruments have no contractual maturity terms but could also be orderly liquidated for cash in a prompt and reasonable timeframewithin one year of the balance sheet date if so required.
Within Between one Between two Over 2006 one year and two years and five years five years Total *Includes a diverse mix of certain specialty lines such as kidnap and ransom, terrorism, bloodstock and other risks which contain a mix of property and casualty exposures.
(e) Currency risk TheGroup operates internationally and its exposures to foreign exchange risk arise primarily with respect to the USDollar and the Euro. The assets of theGroup’s Bermudian, US and European insurance businesses are generally invested in assets denominated in the same currencies as their insurance and investment liabilities.
Financial assets carried at fair value 411,908 1,130,080 165,258 40,581 1,747,827 Loans and receivables including insurance receivables 158,151 168,889 48,280 9,902 385,222
Financial liabilities carried at fair value – 91,764 – – 91,764 Current tax 24,711 – – – 24,711
Employee retirement benefit obligations 3,801 – – – 3,801 Deferred tax 8,467 – – – 8,467
Financial liabilities carried at fair value 297 93,555 77 – 93,929 Current tax 20,793 – – – 20,793
Sensitivity analysis A 10% strengthening or weakening of the following currencies against Pound Sterling at 31 December 2007would be estimated to have (decreased)/increased equity and profit or loss before tax by the approximate amounts shown below. This analysis assumes that all other variables, in particular interest rates, remain constant. The analysis is performed on the same basis for 2006.
(f) Limitations of sensitivity analysis The sensitivity information given in notes (a) to (e) above demonstrates the impact of a change in a major input assumption while other assumptions remain unchanged. In reality, there is normally significant levels of correlation between the assumptions and other factors. It should also be noted that these sensitivities are non-linear, and larger or smaller impacts should not be interpolated or extrapolated from these results.
The sensitivity analyses do not take into consideration that theGroup’s assets and liabilities are actively managed. Additionally, the financial position of theGroupmay vary at the time that any actual market movement occurs. For example, theGroup’s financial risk management strategy aims tomanage the exposure tomarket fluctuations. As investment markets move past various trigger levels, management actions could include selling investments, changing investment portfolio allocation and taking other protective action.
TheGroup sets the amount of capital required in its funding structure in proportion to risk. TheGroup thenmanages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. In order to obtain or maintain an optimal capital structure theGroupmay adjust the amountofdividendspaid toshareholders, returncapital to shareholders, issue new shares, assume debt, or sell assets to reduce debt.
Therewerenochanges in theGroup’s approach to capital risk management during the current or prior year under review.
The funds raised through Letters of Credit and loan facilities have been applied to support both the 2008 year of account for Syndicate 33 and the capital requirements of Hiscox Insurance Company (Bermuda) Limited, formed in 2005.
Capital performance TheGroup’s main capital performancemeasure is the achieved Return on Equity (ROE). This marker best aligns the aspirations of employees and shareholders. As variable remuneration, the vesting of options and longer-term investment plans all relate directly to ROE, this concept is embedded in the workings and culture of theGroup. TheGroup maintains its cost of capital levels and its debt to overall equity ratios in line with others in the non-life insurance industry.
Another key area of capital modelling for Hiscox is to identify which insurance vehicle produces the best return on capital employed for theGroup, given certain restraints from licences, reinsurance and the regulatory environment. This modelling takes into account transactional costs and tax, in addition to the necessary capital ratios. It proves the capital efficiency of Lloyd’s, despite a tax disadvantage against offshore entities, and the cost advantage of processing smaller premium business outside of Lloyd’s.
The FGD has been applied in the UK through INSPRU andGENPRU. In accordance with these provisions, the parent company’s solvency margin consideration became aminimum capital requirement for the Group from 31December 2006 onwards. The estimated regulatory capital position of theGroup under FGD at 31 December 2007 was a surplus of £536million (2006: surplus of £435million), which is calculated as below. The final regulatory capital position will be submitted to the FSA before 30 April 2008 in accordance with the required regulatory timetable.
Group capital resources are less than theGroup’s total equity value primarily as a result of the inadmissability of certain assets including intangible assets for regulatory purposes.
4Operating segments TheGroup adopted IFRS 8Operating Segments with effect from 1 January 2007. TheGroup also mademinor changes to the structure of its internal organisation during the year under review. As a consequence of both events, minor changes have occurred in the identification of theGroup’s reportable segments from the prior year. Previously IAS 14 Segment Reporting (the predecessor standard to IFRS 8) resulted in theGroup identifying and reporting disaggregated primary statement information for two sets of reportable segments, whose designation was based on the dissimilarity of risks and rewards in theGroup’s operations and geographical location. Segment information is now required to be presented with singular reference to the basis of those regular internal reports about the separate components of theGroup that inform the chief operating decision maker and which are used in the assessment of financial performance and allocation of resources.
International comprises the results of Hiscox Insurance Company (Guernsey)Limited,Hiscox Inc.,Hiscox Insurance Company (Bermuda) Limited and the ALTOHA sub-group.
The four reportable segments identified above, and the under noted financial information related thereto, differ from the three primary business segments disclosed in the prior year, in three main ways: TheGroup’s central functions are now separately identified as the ‘Corporate Centre’ segment, with a greaterproportionofcentral revenuesandexpenses now being allocated to individual operating segments where appropriate.Previouslyall central revenuesandexpenses were includedwith theGlobal Markets business within a single segment.This isachangearising from the adoption of IFRS 8.
TheGroup’s specie business, all of which is written in Syndicate33, isnowpresentedwithin theGlobalMarkets segment and not within the UK and Europe segment as previously reported. This is a change arising fromminor amendments made to theGroup’s internal organisation during the year.
TheGlobal Markets segment also now includes all of theGroup’s larger TMT risks. In prior years, those risks underwrittenbyHiscox InsuranceCompanyLimited were reported in the UK and Europe segment.
Group’s operating segments is presented below. The comparative amounts for the prior year have been restated to conform to the requirements of IFRS 8. The comparative amounts have also been restated to reflect the re-classification of certain agency commissions and expenses outlined at note 2.2 above. All amounts reported below represent transactions with external parties only, with all inter-segment amounts eliminated. Performance is measured based on each reportable segments profit before tax.
(a) Profit before tax by segment Year to 31December 2007 Year to 31 December 2006
The following charges are included within the consolidated income statement: Year to 31December 2007 Year to 31 December 2006
(c) Segmental analysis of assets and liabilities The segment assets and liabilities at 31 December and the capital expenditure for the year then ended are as follows: 31December 2007 Global UK and Corporate Intragroup items
(d) Geographical information TheGroup’soperational segmentsunderwritebusiness fromlocations intheUKand Ireland, andalso through itsbranchnetwork inGuernsey, France, Germany, Belgium, the Netherlands, Spain, Portugal and Sweden. In addition, theGroup commenced underwriting and agency operations in Bermuda and the USA in 2006.
TheGroup’s largest external policyholder contributed less than 2% of total grossGroup premium revenues earned and the details thereof are not disclosed on the grounds of materiality.
There is no impact on the comparative amount for the application of reverse acquisition accounting in the prior year (note 2.3).
Return on financial investments and financial liabilities (note 7) 100,787 78,516 Fair value gains/(losses) on derivative instruments and borrowings (1,110) 27,034
7 Analysis of return on investments The return on investments for the year by currency was: The return on financial investments and financial liabilities by asset class for the year was: GlobalMarkets UK and Europe International Corporate Centre 2007 Total
Debt and fixed income securities 43,802 5.2 9,599 5.6 11,553 6.1 5,734 6.1 70,688 5.5 Equities and shares in unit trusts – – 1,131 1.3 2,181 9.1 3,647 6.4 6,959 4.1 Deposits with credit institutions/cash
The deferred amount of insurance contract acquisition costs attributable to reinsurers of £5,639,000 (2006: £6,529,000) is not eligible for offset against the gross balance sheet asset and is included separately within trade and other payables (note 25).
The amounts expected to be recovered before and after one year are estimated as follows: Within one year 117,442 110,586 After one year – –
Managing agency expenses 28,870 17,258 Overseas underwriting agency expenses 23,811 22,033 Connect agency expenses 14,492 12,547 Net foreign exchange (gains)/losses 13 (8,401) 38,354 Investment expenses 1,250 1,306 Other Group expenses including depreciation and amortisation 14, 15 13,846 13,445
Other expenses 73,868 104,943 10 Employee benefit expense The aggregate remuneration and associated costs were: Wages and salaries, including holiday pay and sabbatical leave charges 68,135 58,568 Social security costs 8,909 7,512 Share based payments cost of options granted to Directors and employees 22 5,689 5,238 Pension costs – defined contribution 7,256 1,689 Pension costs – net expense/(credit) arising on defined benefit schemes 28 (3,801) 12,180
The full audit fee payable for the Syndicate audit has been included above, although an element of this is borne by the third party participants in the Syndicate.
Fees payable to other external auditors in respect of the Company’s subsidiaries in the United States pursuant to legislation during 2007were £51,000 (2006: £nil).
13Net foreign exchange gains/(losses) The net foreign exchange gains/(losses) for the year include the following amounts: Exchange gains/(losses) recognised in the consolidated income statement 8,401 (38,354)
Year ended 31December 2006 Opening net book amount 6,105 24,505 – 2,489 33,099 Other additions – – – 300 300 Amortisation and impairment charge – – – (187) (187)
Year ended 31December 2007 Opening net book amount 6,105 24,505 – 2,602 33,212 Additions in year on business combinations – – 5,083 – 5,083 Other additions – – – 2,500 2,500 Disposal on sale of subsidiary (39) – – (81) (120) Amortisation charges – – – (223) (223)
TheGroup had no internally generated intangible assets at 31 December 2007 (2006: £nil).
Goodwill is allocated to theGroup’s cash generating units (‘CGUs’) identified according to country of operation and business segment.
TheGroup’s land and buildings assets relate to freehold property in the United Kingdom. At 31 December 2006 part of the buildings were occupied by third parties under separate operating lease arrangements (note 34).
Assets with a net book value of £510,000were held under finance leases (2006: £465,000). The total depreciation charge for the year in respect of assets held under finance leases was £106,000 (2006: £125,000).
16 Investments in associates continued The additions during the current year relate to equity investments made in Plexstar Insurance Services Limited, Barta & Partner GmbH andHIM Capital Holdings Ltd. Cash consideration of £1,273,000was paid.
The equity interests held by theGroup in respect of associates do not have quotedmarket prices and are not traded regularly in any active recognisedmarket. The associates concerned have nomaterial impact on the results or assets of theGroup. No impairments were identified during the current or prior financial year under review.
The amounts expected to be recovered before and after one year, based on historical experience, are estimated as follows: Within one year 147,987 136,790 After one year 132,101 165,982
Debt and fixed income securities 1,435,373 1,444,532 1,046,009 1,043,669 Equities and shares in unit trusts 135,427 159,421 117,457 141,841 Deposits with credit institutions 143,852 143,874 54,800 54,715
Total financial investments at fair value through profit or loss 1,714,652 1,747,827 1,218,266 1,241,910
Total financial liabilities at fair value through profit or loss 91,457 91,764 92,857 93,929
The amount of financial liabilities payable onmaturity is not materially different to the cost disclosed above.
Included in financial liabilities at 31 December 2007 are foreign currency borrowings from credit institutions totalling US$182,000,000 (2006: US$nil) that were designated as a hedging instrument in a net investment hedge relationship. The hedged itemwas the foreign currency spot retranslation risk associated with the first US$182,000,000 of theGroup’s net investment in its Bermudian andGuernsey subsidiaries. The hedging relationship commenced on 3 January 2007 and was entirely effective throughout the entire period up until the balance sheet date. Investments at 31 December are denominated in the following currencies at their fair value: Notes to the financial statementsHiscox Ltd Report and Accounts 2007
The table below illustrates the movements in financial assets during the year: Net additions/(disposals) into investment portfolio 507,179 (6,274) Net fair value gains 423 8,721
The amounts expected to be recovered before and after one year are estimated as follows: Within one year 381,639 446,272 After one year 3,583 –
There is no significant concentration of credit risk with respect to loans and receivables, as theGroup has a large number of internationally dispersed debtors. TheGroup has recognised a loss of £517,000 (2006: gain of £143,000) for the impairment (and subsequent recovery) of receivables during the year ended 31December 2007.
At 31 December 2007 theGroup had no derivative exposure on foreign exchange cylinder option contracts (2006: financial asset with net fair value of £1,685,000). TheGroup recognised gains totalling £317,000 in respect of these contracts in the current year (2006: gain of £6,577,000). No expenses or charges were incurred in the acquisition of the derivative contracts (2006: £nil).
TheGroup also entered into conventional foreign exchange forward and option contracts during the current and prior year primarily in order to manage the net investment in the Bermudian operation and currency exposures related to the proceeds raised from the Rights Issue. The contract outstanding at the prior balance sheet date required theGroup to sell US $293,000,000 at an agreed future rate to Pound Sterling at a fixed date within one year of the balance sheet date. At 31 December 2007, this contract had been closed out and a gain recognised of £732,000. Other contracts opened and closed during the current year resulted in a loss of £2,159,000 being recognised. TheGroup had no outstanding derivative exposures at 31 December 2007.
Contract Contract notional Fair value Fair value notional Fair value Fair value amounts of assets of liabilities amounts of assets of liabilities
Foreign exchange forward contract expiring: Within one year – – – 293,000 – 1,077
The amounts presented in the equity structure of theGroup above relate toHiscox Ltd, the legal parentCompany.
In accordance with the reverse acquisition provisions of IFRS 3Business Combinations, the amount of issued share capital included in the consolidated balance sheet reflects that of Hiscox plc, theGroup’s former legal parent company, up until the date of the reverse acquisition on 12 December 2006 together with that issued subsequently by Hiscox Ltd, the new legal parent, up until each respective balance sheet date.
Ordinary share Share Contributed capital premium surplus Changes in Group share capital Note £000 £000 £000
22 Share capital continued In accordance with Bermuda law, an amount of £442,161,000was reclassified as contributed surplus on completion of the reverse acquisition of Hiscox Ltd. Included in this amount are balances of £4,723,000 and £33,244,000 relating to the previously reported merger reserve and capital redemption reserve respectively.
Issue of ordinary shares to original subscriber at par value on incorporation – 140 Issue of ordinary shares on scheme of arrangement – 393,707 Employee share option scheme – ordinary shares issued 4,022 209 Redemption of subscriber’s shares – (140)
At the date of incorporation of the Company (6 September 2006) the authorised share capital of £7,000 comprised 140,000 ordinary shares of 5p each. On 21 September 2006 the authorised share capital was increased to £30,000,000 comprising 600,000,000 ordinary shares of 5p each. No further changes occurred during the current year under review.
The redemption of the original subscriber’s shares was at par value.
393,707,089 shares were issued at fair value to the members of Hiscox plc on 12 December 2006 in consideration for the cancellation of their shareholdings in that company.
Share options and performance share plan awards Share options and performance share plan awards are granted to Directors and to senior employees. The exercise price of the granted options is equal to the closing mid-market price of the shares on the day before the date of the grant. No exercise price is attached to performance plan awards, although their attainment is conditional on the employee completing three year’s service (the vesting period) and theGroup achieving targeted levels of returns on equity. Share options are also conditional on the employee completing three years’ service (the vesting period) or under exceptional circumstances (death, disability, retirement or redundancy). The options are exercisable starting three years from the grant date only if the Group achieves its targets of profitability; the options have a contractual option term of ten years. TheGroup has no legal or constructive obligation to re-purchase or settle the options in cash.
The range of principal Group assumptions applied in determining the fair value of share based payment instruments granted during the year under review are: Assumptions affecting inputs to fair value models 2007 2006
Annual risk free rates of return and discount rates (%) 5.5 3.5-5.0 Long-term dividend yield (%) 4.75 2.0-4.0 Expected life of options (years) 3.25 3.25-7.5 Implied volatility of share price (%) 26 32-49 Weighted average share price (p) 268.5 149.5
The highest price paid per share was 265p, the lowest price paid was 247.75p and the average price paid was 259.4p per share. At 31 December 2007Hiscox Ltd held 4,365,305 shares in treasury. Additional details are shown in note 35 to these financial statements in respect of additional Hiscox Ltd shares held by subsidiaries.
Recoverable from reinsurers Claims reported and loss adjustment expenses 137,868 214,148 Claims incurred but not reported 84,804 50,925 Unearned premiums 57,416 37,699
Net Claims reported and loss adjustment expenses 504,384 489,011 Claims incurred but not reported 488,831 374,245 Unearned premiums 440,584 428,073
24.1 Insurance contracts assumptions (a) Process used to decide on assumptions
The risks associated with insurance contracts and in particular with casualty insurance contracts are complex and subject to a number of variables that complicate quantitative sensitivity analysis.
For all risks, theGroup uses several statistical methods to incorporate the various assumptions made in order to estimate the ultimate cost of claims. The reserves for outstanding claims are actuarially estimated primarily by using both the Chain Ladder and Bornhuetter-Ferguson methods. There is close communication between the actuaries involved in the estimation process and theGroup’s underwriters to ensure that, when applying both estimation techniques, both parties are cognisant of all material factors relating to outstanding claims, and allowance is also made for the rating environment.
Where losses in the earliest underwriting years or years of account have yet to fully develop, a ‘tail’ arises on the reserving data, i.e. a gap between the current stage of development and the fully developed amount. The Chain Ladder methodology is used to calculate average development factors which, by fitting these development factors to a curve, allows an estimate to bemade of the potential claims development expected between the current and the fully developed amount, known as a ‘tail reserve’. This tail reserve is added to the current reserve position to calculate the total reserve required.
Chain Ladder techniques are less suitable in cases in which the insurer does not have developed claims history data for a particular class of business (e.g. in relation to more recent underwriting years or years of account). In these instances theGroup’s actuaries make reference to the Bornhuetter-Fergusonmethod.
The Bornhuetter-Fergusonmethod is based on the Chain Ladder approach but utilises estimated ultimate loss ratios. This method uses a combination of a benchmark or market-based estimate and an estimate based on claims experience. The former is based on ameasure of exposure such as premiums; the latter is based on the paid or incurred claims to date. The two estimates are combined using a formula that gives more weight to the experience-based estimate as time passes. This technique has been used in situations in which developed claims experience was not available for the projection (recent accident years or new classes of business).
In exceptional cases the required provision is calculated with reference to the actual exposures on individual policies. Adjustments aremadewithin the claims reservingmethodologies to remove distortions in the historical claims development patterns from large or isolated claims not expected to re-occur in the future. In addition, the reserves determined for themanagedSyndicate are converted to annually accounted figures using earnings patterns that are consistent with those for the underlying Syndicate business.
The choice of selected results for each accident year of each class of business depends on an assessment of the technique that has beenmost appropriate to observed historical developments. In certain instances, this has meant that different techniques or combinations of techniques have been selected for individual accident years or groups of accident years within the same class of business.
The top half of each table, on the following pages, illustrates how estimates of ultimate claim costs for each accident year have changed at successive year ends. The bottom half reconciles cumulative claim costs to the amounts still recognised as liabilities. A reconciliation of the liability at the 100% level to theGroup’s share, as included in theGroup balance sheet, is also shown.
24 Insurance liabilities and reinsurance assets continued 24.1 Insurance contracts assumptions continued (b) Claims development tables continued Insurance claims and claims expenses reserves – gross at 100%
at end of accident year 582,662 355,086 394,954 588,662 954,388 505,750 685,965 4,067,467 five years later 678,172 345,767 – – – – – 1,023,939 six years later 675,393 – – – – – – 675,393
Liability recognised in respect of prior accident years at 100% level 73,845
Group share of current ultimate claims estimate 502,547 273,539 294,832 447,271 783,246 391,773 556,927 3,250,135
Group’s share of cumulative payments (412,716) (231,364) (232,689) (328,865) (543,219) (212,542) (129,963)(2,091,358)
Liability for accident years before 2001 recognised onGroup’s balance sheet 57,110
24 Insurance liabilities and reinsurance assets continued 24.1 Insurance contracts assumptions continued (b) Claims development tables continued Reconciliation of 100%disclosures above toGroup’s share – net
Less: Attributable to external Names 69,063 33,405 48,666 84,617 96,884 46,210 21,091 399,936
Current year claims and loss adjustment expenses (562,223) 78,953 (483,270) (353,895) 3,275 (350,620) (Under)/over provision in respect of prior year claims and loss adjustment expenses 63,655 (3,750) 59,905 (41,602) 9,881 (31,721)
Reinsurers’ share of deferred acquisition costs 8 5,639 6,529 Accruals and deferred income 64,657 58,686
The amounts expected to be settled after one year of the balance sheet date primarily relate to finance leases and theGroup’s provision of sabbatical leave employee benefits.
26 Tax expense The amounts charged in the consolidated income statement comprise the following: Current tax expense 26,891 8,770 Deferred tax expense 27 19,060 28,446
Tax calculated at the standard corporation tax rate applicable in the UK* of 30% (2006: 30%)** 71,160 60,319 Effects of: Expenses not deductible for tax purposes (1,296) 652 Income not subject to tax – (10,264) Group entities subject to overseas tax at lower rates (24,843) (18,121) Tax losses for which no deferred tax asset is recognised 1,092 4,351 Other items (2,064) (75) Change of deferred tax rate (1,374) – Prior year tax adjustments 3,276 354
The applicable rate for deferred tax from April 2008 is 28%.
Open years of account and Section 107 disclaimers (19,341) (40,053) 19,850 – (39,544)
*The solvency regulations in the UK require certain entities within theGroup to establish an equalisation provision, to be utilised against abnormal levels of future losses in certain lines of business. The regulations prescribe that the provision is increased every year by an amount that is calculated as a percentage of net premiumswritten for those lines of business during the financial year subject to a maximum percentage. The amount of each annual increase is a deductible expense for tax purposes, and the equalisation provision is taxed when released. The entities within theGroup that are affected by this requirement continue to prepare their individual financial statements, for statutory filing and tax purposes, in accordance with UKGAAPwhich permits the recognition of equalisation provisions on the balance sheet. Equalisation provisions are not permitted under IFRSwhich therefore results in the temporary difference for tax purposes.
The gross amount recognised in theGroup balance sheet in respect of the defined benefit scheme is determined as follows: Present value of funded obligations 106,793 137,461 Fair value of scheme assets (127,576) (133,660)
Present value of unfunded obligations (20,783) 3,801 Unrecognised net actuarial gains 18,817 – Unrecognised surplus deemed irrecoverable 1,966 –
The plan assets are invested as follows: At 31December £000 £000
During the current year under review a series of changes to the scheme’s investment mix were executed by Trustees so as to achieve a greater degree of protection against interest rate volatility following the scheme’s recent closure. These changes resulted in themajority of the scheme’s debt and fixed income assets at 31December 2007 nowbeing held through the ownership of equity units in liability managed credit funds issued byStandard Life Assurance Limitedwhich invest in a broad spread of high quality corporate bondswith derivatives used in controlled conditions to extend durations in some cases.
The amounts recognised in theGroup’s income statement are as follows: Current service cost 200 4,191 Interest cost 6,657 6,397 Expected return on scheme assets (7,711) (6,431) Net actuarial losses including curtailment charges recognised – 7,355 Past service cost – 668 Settlement gain recognised (4,913) – Effect of deemed irrecoverability of surplus 1,966 –
The movement in liability recognised in theGroup’s balance sheet is as follows: At beginning of year 3,801 16,677 Total expense charged/(credited) in the income statement of theGroup 10 (3,801) 12,180 Contributions paid – (25,056)
A reconciliation of the fair value of the scheme assets is as follows: Opening fair value of scheme assets 133,660 101,409 Expected return on scheme assets 7,711 6,431 Difference between expected and actual return on scheme assets 75 6,480 Contributions by the employer – 25,056 Settlements with schememembers (11,687) – Benefits paid (2,183) (5,716)
28 Employee retirement benefit obligations continued A reconciliation of the present value of funded obligations of the scheme is as follows: Benefit obligation at beginning of year 137,461 137,533 Current service cost 200 4,191 Interest cost 6,657 6,397 Actuarial gains (18,742) (5,917) Benefits paid from scheme (2,183) (5,716) Curtailments and amendments – 973 Settlements with schememembers (16,600) –
Other principal acturial assumptions are as follows: Discount rate 5.80 5.10 Expected return on plan assets 6.09 6.09 Future salary increases 4.60 4.30 Inflation assumption 3.60 3.30 Pension increases 3.60 3.30
29 Earnings per share Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of shares in issue during the year, excluding ordinary shares purchased by theGroup and held in treasury as own shares.
Weighted average number of ordinary shares in issue (thousands) 395,308 392,558 Adjustments for share options (thousands) 13,530 12,449
Final dividend for the year ended: 31 December 2006 of 7.0p (net) per share 27,723 – 31December 2005 of 4.75p (net) per share – 18,639
A final dividend in respect of 2007 of 8p per share, amounting to a total dividend of 12p for the year, is to be proposed at the Annual General Meeting on 4 June 2008. These financial statements do not reflect this final dividend as a distribution or liability in accordance with IAS 10 Events after the Balance Sheet Date.
Intangible assets of £5,083,000 have been recognised in respect of the USState authorisation licences held by ALTOHA Inc.’s consolidated operations.
Intangible assets – 5,083 5,083 Cash and cash equivalents 17,919 – 17,919 Other assets 4,473 – 4,473 Insurance contract liabilities (4,617) – (4,617)
If the acquisition had occurred on 1 January 2007, Group net revenue for the year would have increased by £6,895,000 andGroup profit after tax for the year would have increased by £1,373,000.
The total consolidated profit after tax of the acquired entity since the acquisition date included in theGroup’s profit or loss for the period was £472,000.
Cash consideration of £300,000was received in respect of this disposal. TheGroup also received a 40%equity stake in the acquiror, HIMCapital Holdings Ltd, which is incorporated on theGroup’s balance sheet at 31 December 2007 as an equity accounted associate, as part of the consideration. The fair value of this holding at the date of transaction approximated to theGroup’s retained interest in 40% of the pre-transaction carrying values of Hiscox Investment Management Limited’s tangible net assets.
(c) Hiscox Insurance Company Limited has arranged a Letter of Credit of £50,000 (2006: £325,000) with NatWest Bank plc to support its consortium activities with Lloyd’s.
(e) As Hiscox Bermuda is not an admitted insurer or reinsurer in the US, the terms of certain US insurance and reinsurance contracts require Hiscox to provide Letters of Credit or other terms of collateral to clients. On 1 December 2006, Hiscox entered into a Letter of Credit Reimbursement and Pledge Agreement with Citibank for the provisionof aLetterofCredit facility in favour of US ceding companies. The agreement was a three year secured facility that allowedHiscox to request the issuance of up to US$300million in Letters of Credit. Letters of Credit issued under these facilities are collateralised by pledged cash and cash equivalents of Hiscox Bermuda. Letters of Credit under this facility totalling approximately US$38million were issuedwith an effective date of 31December 2007.
TheGroup’s capital expenditure contracted for at the balance sheet date but not yet incurred for property, plant and equipment was
Operating lease commitments TheGroup acts as both lessee and lessor in relation to various offices in the UK and overseas which are held under non-cancellable operating lease agreements. The leases have varying terms, escalation clauses and renewal rights. TheGroup also has payment obligations in respect of operating leases for certain items of office equipment. Operating lease rental expenses for the year totalled £4,691,000 (2006: £4,859,000). Operating lease rental income for the year totalled £468,000 (2006: £675,000).
The total future aggregate minimum lease rentals receivable by theGroup as lessor under non-cancellable operating property leases are as follows: No later than one year 468 513 Later than one year and no later than five years 1,872 1,974 Later than five years 117 1,027
35 Principal subsidiary companies of Hiscox Ltd at 31 December 2007
Hiscox plc* Holding company Great Britain Hiscox Insurance Company Limited General insurance Great Britain Hiscox Insurance Company (Guernsey) Limited* General insurance Guernsey Hiscox Inc. Underwriting agent USA (Delaware) Hiscox Holdings Inc. Insurance holding company USA (Delaware) ALTOHA Inc. Holding company USA (Delaware) American Live Stock Inc. Underwriting agent USA (Illinois) Hiscox Insurance Company Inc. General insurance USA (Illinois) Hiscox ASM Limited Underwriting agent Great Britain Hiscox Insurance Company (Bermuda) Limited* General insurance and reinsurance Bermuda Hiscox Dedicated Corporate Member Limited Lloyd’s corporate Name Great Britain Hiscox Select Insurance Fund PLC Insurance holding company Great Britain Hiscox Select Holdings Limited Insurance holding company Great Britain Hiscox Select A to J Limited Lloyd’s corporate Names Great Britain Hiscox Holdings Limited** Insurance holding company Great Britain Hiscox Insurance Holdings Limited Insurance holding company Great Britain Hiscox Assurances Services SARL Underwriting agent France Hiscox International Holdings B.V. Insurance holding company Netherlands Hiscox Syndicates Limited Lloyd’s managing agent Great Britain Hiscox Underwriting Ltd Underwriting agent Great Britain Hiscox AG Underwriting agent Germany Hiscox Overseas Holdings B.V.* Holding company Netherlands Hiscox bv Underwriting agent Netherlands Hiscox Connect Limited Online intermediary Great Britain Hiscox UnderwritingGroup Services Limited Service company Great Britain Hiscox NV Underwriting agent Belgium Hiscox Trustees Limited† Corporate trustee Great Britain Hiscox Pension Trustees Limited Pension trustee Great Britain Hiscox Qualifying Employees ShareOwnership Trustees Limited Share scheme trustee Great Britain *Held directly.
(a) Syndicate 33 at Lloyd’s Hiscox Syndicates Limited, a wholly owned subsidiary of the Company, receivedmanagement fees and profit commissions for providing a range of management services to Syndicate 33 in which Hiscox Dedicated Corporate Member Limited, and in the prior year the corporate member subsidiaries of Hiscox Select Insurance Fund PLC also participated.
Value of services provided by Hiscox Syndicates Limited to Syndicate 33 41,466 19,877
Profit for the year after tax 191,248 163,846 48,630 63,948 60,491
Member or Lloyd’sMember An underwriting member of Lloyd’s. Members collectively accept insurance risks through a Lloyd’s syndicate. Members are required to meet certain Lloyd’s solvency requirements and are responsible for their share of any losses made by the syndicates on which they participate, and are entitled to an equivalent share of any profits.
Open year A year of account of a syndicate which has not been closed by reinsurance to close (‘RITC’). RITC usually occurs at the end of the third year. A year of account can be left open beyond the third year if the extent of the future liability cannot be accurately quantified.
Qualifying quota share reinsurance (QQS) These are quota share reinsurance policies, which Lloyd’s allow in certain circumstances, that enable a syndicate to write gross premium in excess of its authorised stamp capacity.
Reinsurance to Close (RITC) The reinsurance to close of a syndicate comprises a premium payable by the closing year to the members on the next open year of account and a contract which transfers the liability for all claims in respect of the closing year to the next open year.
Sidecar A limited lifespan insurance company formed to give its investors access to the insurancemarket, and its cedants access to capital.
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