Building the direct business requires us to spend significant amounts on our marketing which offers very tangible benefits to the whole Group and in 2011 we were shortlisted as one of the five best brands in the UK at the Marketing Society Awards alongside household names such as John Lewis and British Airways. It is a real achievement for our UK team to have created such a recognisable brand when we operate in what is thought of as a grey industry.
Investments 2011 was a challenging year for our investments. This is not a surprise given the continuing volatility and uncertainty in world financial markets. We achieved a total return of £25.9 million before derivatives with a yield of 0.9% (2010: £98.8 million, 3.6%).
We have also been innovative over the years in finding ways to expand our gross capacity without necessarily increasing our retained exposures. We have used financial instruments that allow investors to take on the risk and returns of the business we write. For example, we were the first Lloyd’s business to create a sidecar, when we created Panther Re in 2006. We were also the first in Lloyd’s to issue a catastrophe bond. We haven’t returned to that market since then, because the terms on offer haven’t been as attractive as in the traditional reinsurance market.
1. Recruit the best Hiscox aims to fill posts by recruiting internally, where possible. Because we strive to attract and retain the best people, we believe we have the ideal candidates for many jobs already working in the firm. We also want to stretch our people so they can reach their full potential. In 2011, 154 new appointments were either internal promotions or recommendations from current employees. When we do recruit talent from outside, we ensure that they go through a thorough assessment. Another source of talent to fill senior roles in the future is our graduate trainee and internship programme. In 2011, we recruited 19 graduate trainees an increase of 20% on 2010. One of our aims is to educate the brightest students about the vibrant career this industry can offer. We received 1,089 applications for these graduate roles globally, an average of 57 applications for every role.
3. Motivate Having attracted and trained the best people we can find, it is then essential that we keep them motivated and ensure they thrive in their roles.
Adjusted number of shares in issue (m) 388.2 380.6 *excluding derivative assets and catastrophe bonds.
The Group risk management framework The Risk Committee of the Board advises our Directors on how to best manage the Group’s risk profile. Our risk appetite is set by the Board and fed through to our divisions through the risk management framework, which is made up of a number of committees, including: Group Underwriting Review Reserving Committees Cash Flow Review Group Reinsurance Security Committee Broker Credit Committee Investment Committee Operational Risk Committee.
Our reporting currency is Sterling, but a significant proportion of our operational costs are located in the US and Europe. In addition the capital bases of our insurance companies in Bermuda, Guernsey and US are in US Dollars. Therefore, movements in foreign exchange rates may have a material adverse effect on our financial performance and position.
We have identified the key aspects of our business that are critical to maintaining our ratings. These are closely managed to minimise the risk of an event that might jeopardise our ratings and to ensure that we respond appropriately to unforeseen events. We have regular and open communication with the major credit rating agencies to ensure that we continue to meet their expectations and that the potential impact on our ratings is given careful consideration before we make any significant business or strategic decision.
Communication and participation Employees are kept informed of business developments through formal briefings, team meetings, intranet bulletins, video conferences and other more informal routes. Management takes these opportunities to listen to staff and involve them in taking the business forward.
Supporting the arts and sciences The Group continues to support the Bermuda Masterworks Foundation, which aims to repatriate artworks by Bermudian artists or featuring Bermuda landscapes/seascapes. Hiscox has renewed a three-year commitment to support the Whitechapel Art Gallery, in the East End of London. We sponsor the collections gallery at the Whitechapel, which is a touchstone for contemporary art internationally. Hiscox is supporting The Royal Institution (RI) with a loan and corporate sponsorship. The RI is the oldest independent research body in the world and has been dedicated to connecting people with the world of science for over 200 years. During 2011 Hiscox also supported two students of The Royal Academy of Art in London with a bursary.
The Board of Directors The Board comprises four Executive Directors and seven independent Non Executive Directors, including a Senior Independent Director. Biographical details for each member of the Board are provided on pages 34 to 35.
The Committee’s role in nomination is to monitor the structure, size and composition of the Hiscox Ltd Board and when Board vacancies arise, to nominate, for approval by the Board, appropriate candidates to fill those roles. The Committee also has a role to consider the succession planning for executive directors and senior managers; and has a particular remit to make recommendations on the succession planning for Chairman and the Chief Executive. When considering candidates for Board roles, the Committee will ensure that an appropriate process is followed to ensure that an objective review of the skills, background and time available is undertaken. The Committee will take external advice as appropriate.
Once the bonus pools have been established individual bonuses are determined based on the results of the relevant business area, individual performance and the size of the relevant bonus pool. The Remuneration and Nomination Committee determines the bonuses to be paid to the Executive Directors based on the performance of the Group and an assessment of individual performance. In this way the bonus scheme aligns the interests of Executive Directors and employees with shareholders.
Dividends An interim dividend of 5.1p (net) per share (2010: 5.0p (net)) was paid on 21 September 2011 by Hiscox Ltd in respect of the year ended 31 December 2011. The Directors recommend the payment of a final dividend of 11.9p (net) per share (2010: 11.5p (net)). If approved this will be paid on 19 June 2012 to shareholders on the register at the close of business on 11 May 2012. As in the previous year the Directors propose that shareholders may elect to receive the final dividend in new ordinary shares, a scrip dividend rather than cash.
Return on equity (%) 1.7 16.5 49Financial summary Hiscox Ltd Report and Accounts 2011
In July 2010 the IASB published an exposure draft for Phase II of the insurance contracts project.
determined by comparing proceeds with carrying amount. These are included in the income statement.
2.7 Financial assets including loans and receivables The Group 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 the Group 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.
The Group assesses its reinsurance assets on a regular basis and, if there is objective evidence, after initial recognition, of an impairment in value, the Group reduces the carrying amount of the reinsurance asset to its recoverable amount and recognises the impairment loss in the income statement.
Directly held equity securities 3 2 Units held in funds – traditional long only 73 69 Units held in funds – long and short and special strategies 24 29
A significant proportion of the Group’s investments are in highly liquid assets which could be converted to cash in a prompt fashion and at minimal expense. The deposits with credit institutions largely comprise short-dated certificates for which an active market exists and which the Group can easily access. The Group’s exposure to equities is concentrated on shares and funds that are traded on internationally recognised stock exchanges.
Employee retirement benefit obligations – – – – – Deferred tax 45,421 – – – 45,421
As at 31 December 2011 Effect on equity after tax £m
Costs allocated to the Corporate Centre are non-underwriting related costs and are not included within the combined ratio. The impact on profit before tax of a 1% change in each component of the segmental combined ratios is: London Market
Goodwill is allocated to the Group’s cash generating units (CGUs) identified according to country of operation and business segment. Goodwill is considered to have an indefinite life and as such is tested annually for impairment based on the recoverable amount which is considered to be the higher of the fair value or value in use. Accumulated amortisation and impairment of goodwill relates to the amortisation charged prior to the Group’s adoption of IFRS.
The Group has not provided for deferred tax assets totalling £8,714,000 (2010: £18,216,000) including £8,713,000 (2010: £18,088,000) in relation to losses in overseas companies of £25,408,000 (2010: £51,769,000). In accordance with IAS 12, all deferred tax assets and liabilities are classified as non-current.
The Group has estimated the sensitivity of the net obligation recognised in the consolidated balance sheet to isolated changes in these assumptions at 31 December 2011 as follows: Present value of unfunded obligations before change in assumption
Included in the final dividend for 2010 and the interim dividend for 2011, were scrip dividends to the value of £12,308,238 and £1,029,226 respectively.
35 Contingencies and guarantees The Group’s subsidiaries are like most other insurers, continuously involved in legal proceedings, claims and litigation in the normal course of business.
Operating lease commitments The Group 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. The Group also has payment obligations in respect of operating leases for certain items of office equipment. Operating lease rental expenses for the year totalled £7,256,000 (2010: £7,171,000). Operating lease rental income for the year totalled £420,000 (2010: £635,000).
Finance lease interest expense for the year totalled £1,430 (2010: £8,806).
This report has been printed in the UK by Pureprint Group, a CarbonNeutral® company, using their environmental printing technology. Vegetable-based inks were used throughout. The paper is a mixture of 50% and 100% recycled and the pulp is bleached using a totally chlorine free (TCF) process. Both printer and paper mill are ISO14001 and registered to EMAS.