Record results – but that’s already old news. We are focused on the future and know that we will be judged by our prospects, not our past.
• Hiscox plc gross written premium income up 18% to £797.4 million
• Exceptional 12 months for Lloyd’s Syndicate 33, with a firm year-end renewal season. Gross written premium applicable to Hiscox plc up 17% to £541.4 million (2002: £461.8 million). Profit before tax of £64.5 million (2002: £13.9 million)
• UK Retail showed steady growth with gross written premium of £174.6 million (2002: £147.6 million) and profit before tax of £18.5 million (2002: £6.4 million)
London Market Direct Property, Construction, Terrorism, Energy, Marine Hull and Cargo, Liability, Political Risks, Specie, Enterprise Risk
Overview The result for the year ending 31 December 2003 is a record pre-tax profit of £83.4 million (2002: £20.7 million) and an operating profit of £77.1 million (2002: £34.6 million). The gross premium income underwritten by the Group rose to £1,083.2 million (2002: £941.3 million), and the gross premium income applicable to Hiscox plc increased to £797.4 million (2002: These profits were earned after a further provision of £40 million during the year for the World Trade Center (WTC) losses. The combined ratio of the Group was 87.2%, or 79.3% without the additional reserve for WTC (2002: 94.8%, or 91.8% without WTC).
CHAIRMAN’S STATEMENT “It is a great pleasure to report record profits and solid growth. Healthy earnings will continue to flow through from these good years and 2004 has started well. We will grow the business and its profitability by disciplined underwriting and by searching for new business in our chosen specialist areas.”
We have four offices outside London in Glasgow, Leeds, Birmingham and Maidenhead. Local business is mostly placed locally and the distribution of insurance is still very much influenced by relationships. Our offices are vital links into regional markets and we will allocate more resources to them this year.
International Retail Our two chosen specialities of High Net Worth and Professional Indemnity are also the focus of our international business. Our mainland European offices have grown in volume terms by 53% but have made a loss of £1.9 million (2002: £1.7 million) due to acquisition and new office costs. During the year we absorbed the High Net Worth business from Chubb Europe and wrote off the acquisition costs in the first year, and opened an office in Brussels to service a good proportion of that business. I am putting my head on the block that Europe has an enormous potential for us. The time to invest in expansion there is now while the rest of the Group is flourishing, to reap the reward when conditions here get tighter.
The cycle We fully expect competition to increase in the future as some of our competitors regain their capital and courage, but the foreseeable future remains very exciting. The year end showed good disciplined underwriting in the market. We have taken full advantage of the wonderful market conditions, but what we want and what our shareholders want is to make decent returns over the whole cycle.
We compete on service and underwriting skill, not just on price. If you compete on price alone, you die. Underwriting discipline is absolutely key, as is good underwriting data. We have plenty of both and will apply them rigorously. We made money throughout at least three full cycles between 1967 and 1997, and I believe that the current underwriters are cleverer than we were, and they are supported (and monitored) by infinitely more sophisticated data.
Lloyd’s Lloyd’s (and I mean the franchise, not the businesses using it) is as healthy as I have ever known it. Strong leadership from the Chairman and Chief Executive and direction from the Franchise Board give great comfort. I do not like mutualisation in insurance – we decline the bad risk, the other syndicate writes it and we end up paying. However, I am happy to accept it in Lloyd’s to be able to use the global licences and brand. I am absolutely behind all efforts to keep the market disciplined and to stop potentially loss-making syndicates before they threaten us. Lloyd’s syndicates should be the elite of the insurance world.
However, whilst margins are high and profits are being made, there is little urgency to finish the reform of the capital structure. The annual venture remains a great handicap to the businesses in the market. On the Lloyd’s three year accounting basis, I should be doing a long explanation of our underwriting in 2001 of which the result is now being settled by Lloyd’s Names. We are in fact leaving the 2001 year of account open due to the uncertainty caused by the World Trade Center litigation. We feel we must do this for equity between Names who have different participations in the 2001 and subsequent accounts.
“EUROPE HAS AN ENORMOUS POTENTIAL FOR US – THE TIME TO INVEST IN EXPANSION THERE IS NOW”
Overview 2003 was a great year for Hiscox. An exceptional performance by our London Market divisions was the primary contributor to profit growth. The other more retail focused divisions within the Group have also made a good contribution.
Our ratings indices remain high and market conditions continue to be attractive. The old adage of rates going up in the lift and coming down via the stairs remains true. This gives us confidence that we will see continued strong performance from the London Market. Over the next several years we plan to concentrate our growth in our retail divisions both inside and outside Lloyd’s. Group profits achieved this year give us the ability to continue to strengthen our balance sheet and to fund organic growth without recourse to shareholders.
CHIEF EXECUTIVE’S REPORT “This year’s success is a combination of attractive rates, good underwriting and the avoidance of big losses. We expect trading conditions to remain firm for some time ahead. Our focus will stay on profitable, organic growth.”
We expect to reduce our presence in London Market segments as rates soften, though we expect this to happen less rapidly than many doomsayers predict. We are determined to retain margin over market share. In the medium term, this may lead to a reduction in gross written premium of the Group, but we believe that this focus on profitable underwriting is in the long-term interests of our shareholders.
Trading conditions Rating conditions remain firm across most of our business. However, we remain alert to market trends. Trading conditions and prospects in each of our divisions are reviewed briefly below: – High Net Worth Personal Lines Our primary activity in this retail segment is the insurance of the homes, personal possessions and fine art of high net worth individuals. In the UK our business grew and performed well. We are adding more resources to this area as we seek to consolidate and extend our market leadership. In mainland Europe, acquisition of the renewal rights of a portfolio of high net worth clients from Chubb is building critical mass. The Kidnap and Ransom and Fine Art accounts, which are mainly underwritten through Syndicate 33, had a good year.
– Professional Insurances Our focus and expertise in this retail segment remains primarily on insuring the emerging professions, rather than the more traditional occupations. We have an in-depth knowledge of the specific risks of professions such as advertising agencies, management consultants and recruitment firms and continue to develop our position within these markets. In the UK this business continued to grow strongly and performed well. We are expanding our professional insurances activity into Germany, and aim to launch in France during the course of the year.
– Aerospace, Technology, Media and Telecommunications We operate a speciality team to underwrite global aerospace, technology, media and telecommunications business wherever it is located. Market conditions remain good. A key challenge is to build our distribution capability to access these broad markets. We are currently accessing US business by extensive travel to see local brokers. During the course of this year we will launch a USfocused e-commerce platform which will sit in brokers’ offices and be able to provide quotes online. This will allow us to provide these brokers with better service. We have been successful in the UK in using local offices as the distribution point to access business and referring it to London for underwriting by the speciality team. We have begun replicating this approach through our French office.
– London Market Reinsurance The rating environment remains good. In a few secondary areas prices have weakened to some extent, but in the core global hot-spots, such as Florida, conditions remain firm. Market discipline is being supported by the introduction of more refined data modelling techniques across the industry. Reinsurance programmes which are under-priced relative to the technical rate calculated using this new modelling approach are not being placed. The ongoing strength of the reinsurance market is a good trend as reducing reinsurance costs are always the precursor of a softer market.
“WE EXPECT OUR LONDON MARKET DIVISIONS TO CONTINUE TO GENERATE GOOD PROFITS – STEADY GROWTH OF THE RETAIL DIVISIONS WILL ENABLE US TO SUSTAIN OUR PROFITABILITY”
“WE BELIEVE THAT THIS FOCUS ON PROFITABLE UNDERWRITING IS IN THE LONG-TERM INTERESTS OF OUR SHAREHOLDERS”
This strong result was achieved after taking into account an increase in the World Trade Center reserve announced in the first half of the year which cost Hiscox plc £40 million. Since this announcement the aggregate notifications have reduced by $36 million to $552 million. This reduction is in line with our expectations following our experience in large property claims where we have the majority of our exposure.
Insurers are currently in court against the WTC leaseholder and we expect a preliminary resolution of the issue in 2004. The Syndicate’s 2001 year
*Restated for the adoption of UITFs 37 and 38. See note 5
Longer term rate of return: 2003 – 4% Bonds & Cash, 6% Equities.
Our specialist third party financial funds which are managed in-house performed well yet again. The funds under management increased by 35% which includes a 53% increase in the Hiscox Insurance Portfolio Fund.
– Balance Sheet Shareholders’ funds have grown from £279 million to £330 million. Net Asset Value per share before equalisation provision is 119.1p per share (2002: 101.8p per share). Tangible Net Asset Value before equalisation provision is 111.7p per share (2002: 93.8p per share). The Group has a standby letter of credit facility of £137.5 million which supports its activities. The business is well funded presently. Over the next two to three years we plan to use retained earnings to reduce the size of our letter of credit. This will allow our aggregate balance sheet to grow and catch up with the surge in premium income experienced over the last several years.
15 Directors and Advisors 16 Corporate Governance 18 Directors’ Remuneration Report 21 Directors’ Report 24 Statement of Directors’ Responsibilities 25 Independent Auditors’ Report 26 Consolidated Profit and Loss Account, Technical Account – General Business 27 Consolidated Profit and Loss Account, Non-Technical Account 28 Consolidated Balance Sheet 30 Company Balance Sheet 31 Consolidated Cash Flow Statement 32 Notes to the Accounts 56 Notes to the Consolidated Cash Flow Statement 58 Five Year Summary 59 Notice of Annual General Meeting 60 Key Shareholder Information
Stuart John Bridges Group Finance Director (Aged 43) Stuart Bridges is a qualified chartered accountant, who joined the Group at the start of 1999. He has held posts in various financial service companies including Henderson Investors plc.
Stephen Hargreaves Hall Senior Independent Director Chairman of Audit Committee (Aged 70) Stephen Hall was a partner in Ernst & Young from 1962 to 1993 and acted as Director of Finance at Lloyd’s from 1993 to 1994. He joined the Group on 24 August 1995.
Anthony Howland Jackson Chairman of Remuneration and Conflicts Committees (Aged 62) Anthony Howland Jackson was previously Chairman of Bain Hogg plc and Deputy Chairman of Aon UK Holdings Limited. He is Chairman of The General Insurance Standards Council. He joined the Group on 8 May 1997.
Derek Nigel Donald Netherton (Aged 59) Derek Netherton was previously a Director of J. Henry Schroder & Co. Limited and is currently Chairman of Greggs plc and a nonexecutive Director of Next plc, Plantation & General Investments plc and St James’s Place Capital plc. He was also a member of the Supervisory Board of the Schroder Exempt Property Unit Trust until 12 February 2004. He joined the Group on 6 August 1999.
Audit Attendance Remuneration Attendance Conflicts Attendance Nominations Committee Committee Committee Committee*
Stephen Hargreaves Hall ✓ 100% ✓ 100% ✓ 100% ✓ Anthony Howland Jackson ✓ 100% ✓ 100% ✓ 100% ✓ Derek Nigel Donald Netherton ✓ 75% ✓ 100% ✓ 100% ✓ Carol Franklin Engler ✓ 100% ✓ 100% ✓ 100% ✓ Robert Ralph Scrymgeour Hiscox – – – – – – ✓
The Audit Committee comprises four independent non-executive directors. It meets at least four times a year to assist the Board on matters of financial reporting, risk management and internal control. The internal and external auditors have unrestricted access to the Audit Committee, which monitors the scope, results and cost effectiveness of the external audit, the independence and objectivity of the auditors, and the nature and extent of non-audit work together with the level of related fees. All non-audit work with fees greater than £50,000 must be preapproved by the Audit Committee. KPMG Audit plc has confirmed to the Audit Committee that in its opinion it remains independent. The Committee is satisfied that this is the case.
The Remuneration Committee comprises four independent non-executive directors. It has agreed terms of reference and meets at least twice a year. The Committee recommends to the Board a framework of executive remuneration and its cost. The Committee will also determine on the Board’s behalf the specific remuneration packages for each of the executive directors, including pension rights and any compensation payments. The Board’s remuneration report is presented on pages 18 to 20.
Embedded risk management framework The directors are responsible for operating the system of risk management and internal control and for reviewing its effectiveness. This covers all aspects of risk including insurance risk, market risk, credit risk, operational risk and liquidity risk. This management system includes a variety of processes to identify, assess and manage the different classes of risk in the manner most appropriate to each class.
Key senior management responsibilities are clearly identified together with their reporting lines to the relevant executive directors. Terms of reference and reporting lines are in place for all key decision-making and monitoring committees including the committees mentioned above.
Risk areas – Insurance risk: The Group’s insurance portfolios are managed in accordance with the Board’s appetite by the Director of Underwriting using a wide range of analytical, monitoring and review tools. Delegation of underwriting authority internally and externally is linked to competence and regularly monitored. Reinsurance purchase is controlled centrally. The insurance portfolios are modelled extensively using a range of realistic disaster scenarios and statistical modelling processes. –Market risk: Managing the risk of price fluctuations in the insurance market is the responsibility of the Director of Underwriting, supported by a range of forecasting processes using hard and soft internal and external data. The Board’s appetite for investment risk is expressed in the investment strategy which is implemented by a number of external investment managers who are monitored and controlled by the in-house investment function. Currency exposure is managed by the Group Finance Director through hedging where appropriate.
– Liquidity risk: This is managed by the Group Finance Director through extensive cash flow planning and forecasting. This is closely linked to the management of investment risk to ensure opportunities are maximised within the parameters of the Board’s risk appetite.
Indirect assurance over risk management In parallel with its direct monitoring processes described above, the Board has Internal Audit and the Risk Committee as additional indirect means to monitor and review the effectiveness of risk management throughout the organisation.
Remuneration policy The Remuneration Committee recommends to the Board a framework of executive remuneration and its cost. The Committee will also determine on the Board’s behalf the specific remuneration packages for each of the executive directors, including pension rights and any compensation payments.
Base salary and benefits The Remuneration Committee utilises the services of independent consultants, including independent reports published by Watson Wyatt, in its consideration of what comparable companies are paying and in setting annual salaries and other benefits. Using this information as a benchmark, and taking into account current economic and operational conditions, salary levels are determined for each individual which take into account experience, skills, development and performance.
The following graph shows the Company's performance, measured by total shareholder return, compared with the performance of the FTSE All Share Insurance Index also measured by total shareholder return. The FTSE All Share Insurance Index has been selected for this comparison because it is the most representative index for measuring the performance of the insurance market in which Hiscox participates. The graph has been prepared based on the constituent companies in the index at the point of comparison.
Graph to show total shareholder return of Hiscox plc against the FTSE ASX Insurance Index
Awards were made during the year to executive directors, senior executives and other staff under the Approved and Unapproved share option schemes. The exercise of options under these schemes depends upon the basic earnings per share of the Group increasing at 2% more than the rate of inflation over a period of three years. These options are not offered at a discount and conform with institutional investor dilution guidelines. All directors entitled to share options are subject to these same performance criteria.
ii) The introduction of a sliding scale for option vesting linked to performance. Currently the performance requirements are “cliff edge” i.e. when the level of performance is met, all the options vest. It is now considered best practice to provide a range of performance over which the option vests.
Remuneration Committee is significantly more challenging than the historic earnings per share growth targets particularly for options (EPS growth of RPI+2% p.a.).
The proposed targets for the 2004 grants under both the Option Schemes and Performance Share Plan are as follows: a) the participants will receive 100% of their share grants if the Group’s ROE average is 10% over the three year performance period (the “maximum target”); b) no grants will vest unless the Group’s ROE average over the period equals or exceeds 8% at which point 40% of the grant will vest (the “minimum target”); and c) a grant will vest on a straight-line basis if the Group’s ROE average is between the base target and the maximum target.
The Company will be seeking formal shareholder approval at the Annual General Meeting for the above changes to the operation of the Company’s share incentive arrangements in line with corporate governance best practice.
The directors believe that the amendments to the Hiscox Approved Share Option Scheme, the Hiscox Unapproved Share Option Scheme and the Hiscox Performance Share Plan are in the best interests of shareholders and the Company and recommend that you vote in favour of the resolutions.
Copies of the amended rules of the Option Schemes and Performance Share Plan will be available for inspection at the offices of the Company at 1 Great St Helen’s, London EC3A 6HX, during usual office hours (Saturdays, Sundays and bank holidays excepted) from the date of despatch of the Report and Accounts up to and including the date of the Annual General Meeting and at the meeting itself.
Exchanged options Under the terms of the offers to purchase Hiscox Holdings Ltd and Economic Insurance Holdings Ltd in July 1996, the Company offered to exchange existing options held in the shares of those companies for options on Hiscox plc shares. As a result of this offer, exchanged options were issued to 38 employees and former employees of those companies. The interests of executive directors in such exchanged options are shown in note 28 to the accounts.
Service contracts No directors have service contracts, other than RRS Hiscox, and their contracts of employment provide for termination on six months’ notice by either side. Since the termination notice period is only six months, no statement of mitigation policy is deemed necessary. The contract with RRS Hiscox provides for 12 months’ notice period by either side.
The review of the year and likely future developments are described further in the Chairman’s Statement and the Chief Executive’s Report.
Directors The names of the directors of the Company throughout the year and at the date of this report are listed on page 15. Details of their interests in the shares of the Company are set out in note 28 to the accounts. BE Masojada and SH Hall will retire by rotation in accordance with the Articles of Association at the Annual General Meeting and, being eligible, will offer themselves for re-election as directors.
Corporate social responsibility – Our core values: Underpinning the Hiscox culture is a set of core values, which determine the standard of behaviour Hiscox expects from all of its employees. These core values, which include integrity, quality, efficiency and respect, are intended to guide everything Hiscox does in its business and they determine the way in which Hiscox employees deal with a range of stakeholders, both internal and external. Hiscox recognises that by conducting its business with these values firmly rooted at its core, it is more likely to achieve business success and create value for shareholders.
Our people genuinely make a difference and therefore we have to attract the best employees, enable them to perform to an excellent standard and to contribute to the development of the business, reward them on their level of contribution and provide an environment in which they can enjoy their work.
In order to facilitate this, the Group is committed to providing equal opportunities to potential and actual employees in all aspects of employment.
Employees are kept informed of the business and its activities through formal briefings, team meetings, use of the intranet, video conferencing and informal routes.
We were very pleased to receive an award for the third consecutive year from the Corporation of London for our initiatives in energy saving and waste minimisation. For 2003, we won the Clean City Awards Scheme Premier Award, the Chairman’s Cup, which is the highest accolade awarded by the Corporation of London and which recognises Hiscox as the leader in waste minimisation amongst all small waste producers in the City of London. The Clean City Awards are given as part of an annual scheme run by the Corporation to recognise the efforts of companies in the City in reducing, recycling and reusing waste, in order to support the sustainable use of raw materials. Each company’s building is judged by a panel of officers from the Corporation, public sector and private industry on the efforts it is making, its approach to recycling and its innovation in dealing with waste.
– Community involvement: The involvement of Hiscox in the local community has continued this year, thanks to the strong support of our employees.
For example, in addition to the Hiscox Foundation’s charitable activities, we participated in a number of other charitable fundraising events during the year.
Chubb Investment Services Ltd 54,529,566 18.7 Fidelity International Limited 17,400,417 6.0 AN Foster 14,210,390 4.9 Landsdowne Partners Limited Partnership 13,280,000 4.6 RRS Hiscox 9,463,310 3.2 IN Thomson 9,315,786 3.2 Legal & General Group plc 8,782,942 3.0 11,479,391 of AN Foster’s shareholding is non-beneficial, of which 4,749,111 is held by a trust and is also included in RRS Hiscox’s shareholding. 582,715 of RRS Hiscox’s shareholding is non-beneficial. Hiscox Trustees Ltd is the trustee of the Hiscox plc Group employee share ownership plan trust (ESOP) and is interested in 255,466 ordinary shares in the Company. IN Thomson, AN Foster and RRS Hiscox, as employees of the Group, are potential beneficiaries of the ESOP and are also deemed to have an additional interest in these shares.
Resolution 11, which will be proposed as an ordinary resolution, seeks to change the performance conditions applying to future awards granted under the Hiscox Performance Share Plan. Full details of the changes are set out in the Directors’ Remuneration Report.
Resolution 13, which will be proposed as a special resolution, seeks to obtain authority for the Company to purchase its own shares from the market. The authority contained in the resolution will be limited to a purchase of own shares up to a maximum number of 15,000,000 shares and the cost of the shares will be limited to a minimum share price of £0.50 per share and a maximum share price of £2.50 per share. This authority will terminate no later than fifteen months after the date of the Annual General Meeting.
In preparing those financial statements, the directors are required to: a) select suitable accounting policies and apply them consistently; b) make judgements and estimates that are reasonable and prudent; c) state whether applicable accounting standards have been followed; and d) prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company and the Group will continue in business.
Opinion In our opinion: • the financial statements give a true and fair view of the state of affairs of the Company and the Group as at 31 December 2003 and of the profit of the Group for the year then ended; and
Allocated investment income transferred from the non-technical account 11(a), 11(c) 30,583 27,643
Claims incurred, net of reinsurance Claims paid: Gross amount (275,227) (290,008) Reinsurers’ share 90,327 149,981
Net operating expenses 9 (186,039) (145,751) Other technical charges 7(c) (1,265) (3,856) Movement in equalisation provision 7(c), 10 (2,506) (2,703)
CONSOLIDATED PROFIT AND LOSS ACCOUNT NON-TECHNICAL ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2003 2003 Restated*
Investment return 11(a) 32,154 21,413 Unrealised gains/(losses) on investments 11(a) 8,026 (4,103) Investment expenses and charges 11(a) (805) (809)
Allocated investment return transferred to the technical account 11(a), 11(c) (30,583) (27,643)
Dividends – Interim paid (3,830) (2,299) Dividends – Final payable (8,414) (6,914)
Earnings per share: – Adjusted basic, based on operating profit after tax (on longer term investment return) 15 19.3p 11.3p – Basic, based on profit on ordinary activities after tax 15 20.9p 6.9p – Diluted, based on profit on ordinary activities after tax 15 20.6p 6.7p
Total gains and losses recognised since last annual report 60,505 *Restated for the adoption of UITFs 37 and 38. See note 5.
Investments Land and buildings 18(a) 410 420 Other financial investments 18(b) 773,289 501,774
Prepayments and accrued income Accrued interest 3,079 2,643 Deferred acquisition costs 101,817 83,784 Other prepayments and accrued income 10,106 10,813
Capital and reserves Called up share capital 26, 27(a) 14,565 14,459 Share premium account 27(a) 232,341 230,585 Merger reserve 27(a) 4,723 4,723 Capital redemption reserve 27(a) 33,244 33,244 Reserve for own shares 27(a) (686) (1,339) Profit and loss account 27(a) 45,650 (2,540)
Creditors Creditors arising out of direct insurance operations 35,229 65,423 Creditors arising out of reinsurance operations 62,491 67,892 Other creditors including taxation and social security 23 28,414 36,414
Total liabilities 1,598,977 1,417,135 *Restated for the adoption of UITFs 37 and 38. See note 5.
Fixed assets Tangible assets 21(a) 584 498 Investment in subsidiary undertakings 21(b) 115,457 115,457
Capital and reserves Called up share capital 26, 27(b) 14,565 14,459 Share premium account 27(b) 232,341 230,585 Merger reserve 27(b) 58,970 58,970 Capital redemption reserve 27(b) 33,244 33,244 Capital reserve 27(b) 163 (1,269) Profit and loss account 27(b) 5,577 7,532
CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2003 2003 Restated*
Cash Flow Statement Net cash inflow from general business 31,300 45,171 Net shareholders’ cash outflow from Lloyd’s business 34(c) (7,712) (23,037)
The financial statements have been prepared in accordance with the provisions set out in Section 255 of, and Schedule 9A to, the Companies Act 1985. The Group has adopted all recommendations of the revised Statement of Recommended Practice “Accounting for Insurance Business” issued by the Association of British Insurers in
As permitted by Section 230 of the Companies Act 1985, no profit and loss account of the parent company is presented. The profit after taxation for the Company for the year was £10,296,000 (2002: £7,582,000) and the retained loss for the financial year for the Company was £1,955,000 (2002: loss of £1,631,000).
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 be made 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.
Reinsurance recoveries from Qualifying Quota Share arrangements entered into for the 2002 and 2003 years of account have been calculated separately.
Reinsurance security is monitored continuously throughout the year involving both external sources, such as Standard & Poor’s and A M Best’s rating information on reinsurers, and internal sources. Reinsurer default rates are applied to the expected future reinsurance recoveries to determine a suitable level of bad debt provision.
3(o) Leases Where the Group enters into a lease which entails taking substantially all the risks and rewards of ownership of an asset, the lease is treated as a “finance lease”. The asset is recorded in the balance sheet as a tangible fixed asset and is depreciated over its estimated useful life or the term of the lease, whichever is shorter. Future instalments under such leases, net of finance charges, are included within creditors. Rentals payable are apportioned between the finance element, which is charged to the profit and loss account, and the capital element which reduces the outstanding obligation for future instalments.
Deferred tax is recognised in respect of all timing differences, except for which no provision is permissible as explained below, that have originated but not reversed at the
A net deferred tax asset is regarded as recoverable and therefore recognised only when, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted.
Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse, based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax is measured on a non-discounted basis.
4 World Trade Center The Group’s exposure to losses arising from the terrorist attack of 11 September 2001 arises almost entirely from its participation on Syndicate 33. Hiscox Insurance Company and the international operations of Hiscox have had a negligible loss from this event. The situation is unprecedented and as such, even more than two years after the event, the extent of the gross and net loss to the Group is difficult to assess with the degree of confidence which is usual for property insurance losses; facts or circumstances will come to light which may affect these estimates. Provision has been made in these financial statements, based on the 30 June 2003 gross notifications of US$588 million, resulting in a net loss to Hiscox plc of £75 million at £1:$1.79 (30 June 2003: £80 million at £1:$1.65, 31 December 2002: £40 million at £1:$1.61). This takes no account of any potential subrogation.
The gross reserves at 31 December 2002 of US$475 million were set after an appropriate discount or premium to individual notifications based on Hiscox’s past experience of large property losses and additional information received. Whilst claims continue to settle lower than the notifications level, they are taking longer to settle than originally anticipated, based on settlement patterns experienced on previous large property losses. Consequently, in order to eliminate uncertainty, the directors increased the reserves in June 2003 to the level of notifications at that time.
Syndicate 33’s net loss provided is approximately US$245 million. In arriving at this estimate it has been assumed that the terrorist attack in New York City on 11 September 2001 was one occurrence and that the aircraft impacts on the WTC are one occurrence in respect of the property losses.
All European Union listed companies are required to adopt International Financial Reporting Standards (“IFRS”) for accounting periods beginning on or after 1 January 2005, which will include comparative information for 2004. The Group has initiated a project to implement the conversion from UK GAAP to IFRS and to ensure that this happens within the required timescales.
7 Segmental information a) 100% level technical account by business division
The underwriting activities which are managed by the Group are shown below at the 100% level regardless of ownership of capacity: London UK International 2003 London UK International 2002 Market Retail Business Total Market Retail Business Total
The impact of a 1% change in the combined ratios of each business division on technical profit are: London UK International London UK International Market Retail Business Market Retail Business
Technical profit for 100% of continuing operations (Note 7a) 112,680 45,367
Notional share attributable to Group at current level of capacity ownership 79,718 35,724 Adjustments to reflect lower levels of capacity in prior years: Investment return on corporate assets 7,162 6,161 Amounts applicable to quota share reinsurers* (1,265) (3,856)
Short term fluctuations in investment return 2,913 5,238 641 8,792 (7,417) (3,135) (590) (11,142)
7 Segmental information continued d) Net asset value per share 2002 2002 2002 2003 2003 2003 Net asset Number NAV Net asset Number NAV value of shares* per share value of shares* per share Restated Restated Restated
Net asset value (before equalisation provision) 346,275 290,630 119.1 293,064 287,827 101.8
*2002 figures include Lloyd’s business relating to closed years of account at 1 January 2002 only.
Acquisition costs 184,951 156,103 Change in deferred acquisition costs (26,966) (3,299) Reinsurance commission (12,298) (34,522) Administrative expenses 40,352 27,469 10 Equalisation provision
Investment return on funds at Lloyd’s and other corporate funds: Investment income 8,591 4,590 Unrealised gains/(losses) on investments 1,778 (2,617) Realised gains/(losses) on investments 1,026 (244)
Allocation to the technical account based on the longer term rate (30,583) (27,643)
Short term fluctuations in investment return retained in the non-technical account 8,792 (11,142)
Shares and units in unit trusts 6.0 7.0 Debt securities and other fixed interest securities 4.0 6.0 Deposits with credit institutions 4.0 6.0
Actual investment return: Shares and units in unit trusts 7,196 16.1 – – 9,736 19.9 16,932 Debt securities and other fixed interest securities 2,408 3.1 11,418 4.0 3,591 3.8 17,417
Longer term investment return: Shares and units in unit trusts 1,951 7.0 95 7.0 1,304 7.0 3,350 Debt securities and other fixed interest securities 1,632 6.0 8,031 6.0 6,346 6.0 16,009
Longer term investment return credited to operating profit/(loss) and to the general business technical account 106,651 94,945 Actual investment return included in profit/(loss) on ordinary activities in the non-technical account 92,979 74,741
Shares and units in unit trusts 446 – 489 935 Debt securities and other fixed interest securities 784 2,913 945 4,642 Deposits with credit institutions 632 464 507 1,603
Agency salaries 1,472 3,023 Underwriting agency income 2,937 1,627 Profit commission 5,482 3,437
Tax services in relation to 1999 and prior years 15 5% 5 1%
Other non-audit services* Work performed in relation to: – Rights Issue/Open Offer – – 190 69% – Other corporate projects 11 11% – –
*Non-audit services with fees greater than £50,000 must be pre-approved by the Audit Committee which is comprised solely of independent directors.
The average monthly number of staff employed by the Group was 412 (2002: 367), comprising 141 underwriting and 271 administrative staff (2002: 118 and 249 respectively). Of the total remuneration shown above, an amount of £12,206,000 was re-charged to the syndicate managed by Hiscox Syndicates Limited (2002: £12,343,000).
Average 2002 number 2002 2003 number 2003 Earnings of shares EPS
Basic based on profit on ordinary activities after tax 20.9 6.9 Short term fluctuations in investment return (2.2) 3.5 Movement in equalisation provision 0.6 0.9
Adjustments in respect of previous periods UK corporation tax 5,217 1,275 Foreign tax – (1)
Deferred tax Origination and reversal of timing differences 18,452 3,222 Adjustments in respect of previous periods (4,753) (2,988)
The differences between the total current tax shown above and the amount calculated by applying the standard rate of UK corporation tax to the profit on ordinary activities before tax is as follows: 2003 Restated
Profit on ordinary activities multiplied by the standard rate of corporation tax in the UK of 30% (2002: 30%) 25,022 6,222 Effects of: Expenses not deductible for tax purposes (667) 1,343 Capital allowances in excess of depreciation 272 96 Short term timing differences on Lloyd’s business (16,955) (3,646) Other short term timing differences (3,264) 624 Foreign tax, income tax and excess tax on Controlled Foreign Companies (407) 192 Adjustments in respect of previous periods 5,217 1,275
Accelerated capital allowances 722 499 Short term timing differences (14,823) 12,325 Underwriting losses (1,398) – Capital gains (4) –
The Company has no unprovided deferred tax asset at the year end.
None of the land and buildings were occupied by the Group for its own use during the current financial year.
The Company has given a fixed and floating charge over its investments and other assets to secure obligations to Lloyd’s in respect of its corporate member subsidiaries. Further details are given in note 30.
Deferred tax asset – 12,824 16 2 Net profit commission receivable 7,918 2,772 – –
Share of syndicate’s overseas deposits 27,679 20,396 – – Share of syndicate’s other debtors balances 25,464 4,770 – –
23 Other creditors including taxation and social security Group Group Company Company
Due to Group companies – – 10,022 4,541 Corporation tax payable – 2,730 – – Amounts owed to credit institutions 477 21 – – Obligations under finance leases 255 454 – –
Change in Group share of syndicate – 12,840 12,840 Movement in the provision (36,637) (30,156) (66,793)
Net technical provisions 25 Provision for other risks and charges Group Company deferred tax deferred tax
Total shareIssued Share Capital Reserve Profit share- holders’ share premium Merger redemption Capital for own and loss holders’ funds capital reserve reserve reserve reserve shares account funds Restated
Exercise of share options 106 1,756 – – – – – 1,862 164 Shares issued as part of Rights Issue – – – – – – – – 110,635 UITF 37 reserve adjustment (see note 33) – – – – – 653 98 751 – UITF 38 reserve adjustment (see note 5) – – – – – – – – (102) Exchange differences taken to reserves – – – – – – (155) (155) (50) Retained profit for the year – – – – – – 48,247 48,247 5,186
Total Total Issued Share Capital Reserve Profit share- shareshare premium Merger redemption Capital for own and loss holders’ holders’
28 Directors’ emoluments salary/fees Benefits Bonus Total salary/fees Benefits Bonus Total
c) Total directors’ remuneration of which £547,000 was recharged to the managed syndicate (2002: £727,000) was: Salaries, benefits and bonuses 3,051 1,921 Fees to non-executive directors 168 123
Number of shares Number of shares Number of shares Number of shares Beneficial Non beneficial Beneficial Non beneficial
28 Directors’ emoluments continued d) continued (ii) Share options The share options disclosed below include replacement options in Hiscox plc relating to Hiscox Holdings Ltd and Hiscox Insurance Holdings Ltd share options granted prior to acquisition by Hiscox plc, plus options under the Hiscox plc Approved and Unapproved Share Options Schemes. The condition of exercise of the Approved and Unapproved share options is described on page 19.
No. of No. of Adjusted options at No. of No. of No. of options at exercise Market price Date from 1 January options options options 1 December price at date of which Expiry 2003 granted lapsed exercised 2003 £ exercise exercisable date
The aggregate gains made by the directors on exercise of the above options (based on market price at date of exercise less the exercise price) was £773,000 (2002: £2,000). The market price of Hiscox plc shares at 31 December 2003 was 143.0p. The highest and lowest values of Hiscox shares during 2003 was 170.5p and 137.0p (2002: 164.5p and 120.5p).
RS Childs 109,457 – – (109,457) – 1.35 1.52 13 Oct 99 1 April 03 31 Dec 09
During the year, the Group contributed to the two sections of the Hiscox defined benefit pension scheme. The funds of the scheme are administered by trustees and are independent of the Group’s finances. The adequacy of the pension funds is assessed by triennial valuations carried out by independent actuaries. The Group also contributed to a defined contribution scheme introduced on 1 January 2001 for all staff joining the Group. The total pension charge for the year amounted to £2,911,000 (2002: £3,409,000) of which £1,729,000 was recharged to managed syndicates (2002: £1,814,000).
Defined benefit schemes A full actuarial valuation was carried out at 31 December 2002 by a qualified independent actuary. The valuation was updated on an FRS 17 basis as at 31 December 2003 by a qualified independent actuary.
The scheme is invested primarily in unitised funds held with Fidelity Pension Management. The split of assets, their expected rate of return and the funding position at 31 December 2003, measured in accordance with the requirements of FRS 17, were as follows: Total market value of assets 58,202 43,533 46,610 Present value of scheme liabilities (91,536) (77,258) (59,800)
Actual return less expected return on pension scheme asset 3,267 Experience gains and losses arising on the scheme liabilities (2,517) Changes in assumptions underlying the present value of the scheme liabilities (6,418)
Difference between the expected and actual return on scheme assets: Percentage of scheme assets 6% Experience gains and losses on scheme liabilities: Percentage of the present value of scheme liabilities 3% Total actuarial gain in the statement of total recognised gains and losses: Percentage of the present value of scheme liabilities 6%
ii) The Company has an agreement with J P Morgan (Europe), an agent for a syndicate of banks, for a £137,500,000 irrevocable standby Letter of Credit facility. Commencing 1 January 2004, £132,354,060 was drawn down to support part of the Group’s underwriting activities for the 2004 account. Hiscox plc has a fixed and floating charge over the Group’s assets as a guarantee to the group of banks led by J P Morgan Chase Bank in connection with their Letter of Credit.
iv) The managed syndicate is subject to the New Central Fund annual contribution, which is an annual fee calculated on capacity. This fee was 3% on capacity for 2003, including the 2% premium levy, and is 1.25% for 2004. In addition to this annual fee, the Council of Lloyd’s has the discretion to call a further contribution of up to 3% per annum of capacity if required.
31 Lease commitments a) Operating leases The Group has the following commitments under operating leases: Land and Land and buildings Other Total buildings Other Total
b) Finance leases The finance lease obligations to which the Group is committed are: In one year or less 136 351 Between two and five years 119 103 32 Related parties
The operations listed below are related parties within the definition of FRS 8. Hiscox Syndicates Limited, a wholly owned subsidiary of the Company received management fees and profit commissions for providing a range of management services to Syndicate 33 in which Hiscox Dedicated Corporate Member Limited and the corporate member subsidiaries of Hiscox Select Insurance Fund PLC participated.
The value of services provided to the syndicate in the year was as follows: Services provided by Hiscox Syndicates Limited to the undertakings below: Balances due to the Hiscox Group at the balance sheet dates were as follows: Due (to)/from respective related parties as at 31 December: BE Masojada is a non-executive director of Ins-sure Holdings Limited and its subsidiaries, appointed in October 2002. These companies operate in a joint venture between Lloyd’s, the International Underwriting Association (IUA) and Xchanging. These companies provide policy issuance, premium collection, claims settlement and clearing services to the Lloyd’s and London insurance company markets. Hiscox Underwriting Group Services Ltd receives a fee in relation to this directorship. The balance due at 31 December 2003 was £19,858.
Hiscox Holdings Limited‡ Insurance holding company England Hiscox Insurance Holdings Limited Insurance holding company England
All companies are wholly owned. The proportion of voting rights of subsidiaries held is the same as the proportion of equity shares held.
Hiscox Trustees Limited is the trustee of the Hiscox plc Group Employee Share Ownership Plan (ESOP). The ESOP owns 255,466 shares (2002: 255,466 shares) in Hiscox plc at 31 December 2003. The shares have been purchased by the ESOP for future use in employee share option schemes. None of these shares are currently under option to employees, nor have been conditionally gifted to them. In accordance with UITF Abstract 38, which the Company has adopted early in 2003, the cost of these shares of £300,000 (2002: £300,000) has been taken to a separate reserve for own shares.
The adoption of UITF Abstracts 37 and 38 has resulted in a restatement of the comparative figures for 2002 and an adjustment to the opening reserves at 1 January 2002. More information on the impact of this prior year restatement can be found in note 5.
Net cash inflow/(outflow) for the period 34(e) (25,608) 25,288 Portfolio investments 34(d), 34(e) 35,968 98,483 Decrease/(increase) in loans 34(e) (257) 2,626
Total portfolio investments net of financing at 1 January 622,127 402,162
Net cash flow before retention and transfer from/(to) the Group 174,999 72,938 Transfer from/(to) the Group 7,712 23,037
Financing Proceeds from share issues* 1,862 110,799 (Payments)/receipts relating to own shares 751 (102) New bank loan 456 – Repayment of bank loan – (2,038) Capital element of finance leases (159) (222)
Portfolio investment Purchase of shares and units in unit trusts 74,316 19,911 Purchase of debt securities and other fixed interest securities 301,303 175,765 Sale of shares and units in unit trusts (29,730) – Sale of debt securities and other fixed interest securities (241,646) (165,451) Increase/(decrease) in deposits with credit institutions (68,275) 68,265 Increase/(decrease) in other investments – (7)
At 1 Jan Changes Changes to 2003 in other market value At 31 Dec
Cash at bank and in hand 121,196 (25,608) (42,643) – 52,945 Shares and units in unit trusts 54,568 44,586 – 12,793 111,947 Debt securities and other fixed interest securities 298,271 59,657 224,221 (2,679) 579,470
Operating profit/(loss) before taxation 77,122 34,584 (21,220) 2,950 5,427 Short term fluctuations in investment return 8,792 (11,142) (8,694) 1,043 (3,672) Exceptional items – – – 1,803 –
Profit/(loss) on ordinary activities before taxation 83,408 20,739 (32,496) 3,487 112
Key statistics Adjusted earnings/(loss) per share based on operating profit/(loss) after tax* 19.3p 11.3p (9.7)p 3.2p 2.4p Earnings/(loss) per share based on profit/(loss) on ordinary activities after tax* 20.9p 6.9p (14.8)p 3.5p 0.1p Diluted earnings/(loss) per share based on profit/(loss) on ordinary activities after tax* 20.6p 6.7p (14.8)p 3.4p 0.1p *Earnings/(losses) and dividends per share for earlier years have been restated for subsequent changes of capital not involving full consideration at fair value, including bonus issues and rights issues.
To re-appoint the following who retire as directors in accordance with the Articles of Association, special notice having been given for resolution 3: 2) BE Masojada 3) SH Hall (aged 70) 4) To re-appoint KPMG Audit Plc as auditors of the Company to hold office from the conclusion of this meeting until the conclusion of the next general meeting of the Company at which accounts are laid.
5) To authorise the directors to determine the level of auditors’ remuneration. 6) To declare a final dividend for the year ended 31 December 2003 of 2.9 pence (net) per ordinary share payable to shareholders on the register at the close of business on 23 April 2004.
Ordinary resolutions 7) That the directors be generally and unconditionally authorised (in substitution for all existing authorities) pursuant to Section 80 of the Companies Act 1985 (“the Act”) to allot relevant securities (within the meaning of that Section) up to a maximum aggregate nominal value of £4,855,172.85, representing 33.3% of the issued ordinary share capital as at 22 March 2004, for a period expiring (unless previously renewed, varied or revoked by the Company in general meeting) fifteen months from the date of the passing of this resolution provided that the authority of the directors shall extend to the making of any offer or agreement before the expiration or revocation of the authority which would or might require relevant securities to be allotted after the expiration or revocation of this authority and the directors may allot relevant securities in pursuance of any such offer or agreement notwithstanding the expiry or revocation of this authority.
8) That the Remuneration Report contained within the Report and Accounts for the year ended 31 December 2003 be approved.
9) That the amendment to the Rules of the Hiscox Approved Share Option Scheme by the addition of a replacement Schedule in the form produced to the Meeting and initialled by the Chairman for the purposes of identification, be and hereby is approved and that the directors be authorised to do all acts and things which they may consider necessary or expedient to carry the amendment into effect.
10) That the amendment to the Rules of the Hiscox Unapproved Share Option Scheme by the addition of a replacement Schedule in the form produced to the Meeting and initialled by the Chairman for the purposes of identification, be and hereby is approved and that the directors be authorised to do all acts and things which they may consider necessary or expedient to carry the amendment into effect.
11) That the amendment to the Rules of the Hiscox Performance Share Plan by the addition of a Schedule in the form produced to the Meeting and initialled by the Chairman for the purposes of identification, be and hereby is approved and that the directors be authorised to do all acts and things which they may consider necessary or expedient to carry the amendment into effect.
To be effective, the proxy and, unless previously registered with the Company, the authority or power of attorney under which it is executed or a notarially certified copy thereof must be lodged with the Company’s registrars not later than 48 hours before the time for holding the meeting or (as the case may be) the adjourned meeting.
In accordance with Regulation 41 of the Uncertificated Securities Regulations 2001, only those members entered on the relevant register of members of the Company as at 6.00 pm on 20 June 2004 shall be entitled to attend or vote at the meeting in respect of the number of shares registered in their name at that time. Changes to entries on the relevant register of members after 6.00 pm on 20 June 2004 shall be disregarded in determining the rights of any person to attend or vote at the meeting.