What is also pleasing is the way individuals have chosen to move and travel in order to build the business. Many members of staff spend huge proportions of their time on the road travelling to see brokers and producers both within their home countries and around the world. Others are learning new languages in order to be more effective and others are volunteering to move temporarily – and in some cases permanently – to help Hiscox take advantage of new opportunities.
Investment income declined due to the effects of unrealised losses on fixed income assets and equities. A relatively benign current loss environment resulted in a claims ratio
Expenses decreased by 20.7%. Loss before tax was £67.9 million (2007: £9.3 million).
Net cash outflows from financing activities for the year were £108.5 million (2007: outflow £50.0 million).
The Group repaid $182 million being the full amount of its loan facility during the year.
In May the Group refinanced its bank facilities with a £350 million secured syndicated loan facility at a 1% margin. The £200 million cash element of this is a five year revolving facility.
Our ability to hold the discounted securities to maturity will benefit the Group’s investment return in the coming years at a time when interest rates in general are likely to be low.
Major risks The major risks that the Group faces are presented below. Detailed information on the major risks and uncertainties impacting the Group’s financial statements, is set out in note 3 to the financial statements.
Aggregation and modelling resources are shared across the Group. Subsidiaries and locations worldwide therefore employ the same sophisticated standard of modelling tools tailored to the characteristics of each specific market. We also run realistic disaster scenario projections on a subsidiary and consolidated basis in order to estimate the potential loss across all books of business following a range of specific events. We adjust our business plan, target products and reinsurance programme
To manage this risk, Hiscox alters its appetite for the lines of business and the layers it writes in response to market conditions and the risk appetite of the Group. Pricing levels are monitored on a continuous basis with detailed monthly reports showing current prices relative to exposure, trends over the past 12 months, and projections to the year end. The Group’s cycle management strategy and related modelling and monitoring are essential to ensure that it quickly identifies and controls any accumulating adverse effects of changes. As the Group 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.
Dealing with investors In keeping with its policy of open and transparent communication, Hiscox reports both its half and full year results to its investors via a series of presentations as well as ensuring all relevant Group financial information is available from its website. In addition, senior management and key performers meet investors and analysts to explain and take questions on the Group financial performance and business strategy.
Culture The Hiscox culture is underpinned by a set of core values that determine the standard of behaviour expected of employees. These core values – challenge convention, integrity, respect, courage, quality and excellence in execution – guide everything that Hiscox does in its business. With this conduct, the Group recognises that it is more likely to achieve business success and create value for its shareholders. Hiscox strives for the highest standards of corporate governance while being in essence a non-bureaucratic organisation. An effective and firm system of internal controls ensures that risks are managed within acceptable limits, but not at the expense
The Board retains ultimate authority for high level strategic and management decisions including: setting Group strategy, approving significant mergers or acquisitions, approving the financial statements, declaration of the interim dividend and recommendation of the final dividend, approving Group business plans and budgets, approving major new areas of business, approving capital raising, approving any bonus or rights issues of share capital, setting Group 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.
None of the committee has any personal financial interest (other than as shareholders) or conflicts of interest arising from crossdirectorships or day-to-day involvement in running the business. No Director plays any part in any discussion about his or her own remuneration.
Remuneration policy The remuneration philosophy is to provide rewards that are competitive in every country in which Hiscox operates and that are consistent with our overall reward principles: competitive base pay; benefits which encourage health and security for the individual and their family but are not excessive and are consistent at all levels of the organisation; an annual bonus scheme which enables employees to earn attractive bonuses for generating good levels of return on equity; to encourage share ownership at all levels of the organisation and require it at senior levels; and contracts and notice periods that are in line with acceptable market practice but limit severance payments made on termination.
Base salary Base salaries are reviewed annually. The Remuneration and Nomination Committee takes into account inflation rate movements by country, market data provided by it’s own consultants, Towers Perrin and the competitive position of Hiscox salaries (using Watson Wyatt salary reports) in order to set the overall salary budget.
The Special Award In 2005, following the Rights Issue, we received shareholder approval to grant special awards to individuals within the Company of up to five million shares, of which a maximum of 20% are available for Executive Directors (‘Special Award’). These awards have the same performance conditions as described above for the Performance Share Plan. The post tax ROE over the three-year performance period was 22.7%. The performance conditions for this grant have therefore been met and the shares have vested in full.
Directors The names and details of the individuals who served as Directors of the Company during the year are set out on pages 30 to 31.
Political and charitable contributions The Group made no political contributions during the year (2007: £nil). Charitable donations totalled £717,000 (2007: £616,572) of which £500,000 (2007: £550,000) was donated to the Hiscox Foundation, a UK registered charity. The policy of the Hiscox Foundation is to assist and improve education, the arts and independent living for disabled and disadvantaged members of society. Further information concerning the Group’s charitable activities is contained in the report on Corporate responsibility on page 29.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements and the part of the Directors’ remuneration report to be audited. The procedures selected depend on our judgement, including the assessment of the risks of material misstatement of the financial statements and the part of the Directors’ remuneration report to be audited, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements and the part of the Directors’ remuneration report to be audited in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting principles used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements and the part of the Directors’ remuneration report to be audited.
Total comprehensive income recognised (all attributable to owners of Company) 196,339 25,051 221,390 188,379
Loans and receivables including insurance receivables 21 494,315 385,222 Current tax 26,289 – Cash and cash equivalents 23 440,622 302,742
Current tax – 24,711 Trade and other payables 27 296,832 235,875
Cash flows from operations 133,026 (162,660) Interest received 89,608 85,435 Equity dividends received 2,619 4,770 Interest paid (5,327) (8,243) Current tax paid (18,982) (42,823)
(the ‘main managed Syndicates’ numbered 33 and, commencing 1 January 2009, 3624). In view of the several but not joint liability of underwriting members at Lloyd’s for the transactions of syndicates in which they participate, the Group’s attributable share of the transactions, assets and liabilities of this main Syndicate have been included in the financial statements. The Group manages the underwriting of, but does not participate as a member of, Syndicate 6104 at Lloyd’s which provides reinsurance to Syndicate 33 on a normal commercial basis. Consequently, aside from the receipt of managing agency fees and defined profit commissions as appropriate, the Group has no share in the assets, liabilities or transactions of Syndicate 6104, nor is it controlled. The position and performance of that Syndicate is therefore not included in the Group’s financial statements.
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
2.12 Revenue Revenue comprises insurance premiums earned on the rendering of insurance protection, net of reinsurance, together with profit commission, investment returns, agency fees and other income inclusive of fair value movements on derivative instruments not formally designated for hedge accounting treatment. The Group’s share of the results of associates is reported separately. The accounting policies for insurance premiums are outlined below. Profit commission, investment income and other sources of income are recognised on an accruals basis net of any discounts and amounts such as sales based taxes collected on behalf of third parties.
2 Significant accounting policies continued 2.13 Insurance contracts continued (e) Outwards reinsurance contracts held continued
In the prior year and up to 6 May 2008 (when all existing borrowings were repaid in full), borrowings were consequently remeasured at fair value at each balance sheet date 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 formed part of a designated hedge accounting relationship in which case certain changes in value were recognised directly in equity, (see notes 2.17 and 20).
The main sources of risk relevant to the Group’s operations and its financial statements fall into two broad categories: insurance risk and financial risk. Note 3.1 details the Group’s approach to managing insurance risk specifically whilst note 3.2 onwards outlines the Group’s sensitivity to financial risk generally. Additional unaudited information is also provided in the corporate governance and risk management sections of this Report and Accounts.
Property – Property – Casualty – Reinsurance Marine and Other Professional Casualty –territory coverage of premium written inwards major assets assets indemnity Other risks Other* Total
The allocation of equity risk is not heavily confined to any one market index so as to reduce the Group’s exposure to individual sensitivities. A 10% downward correction in equity prices at 31 December 2008 would have been expected to reduce Group equity and profit after tax for the year by approximately £10.0 million (2007: £11.6 million) assuming that the only area impacted was equity financial assets. A 10% upward movement is estimated to have an equal but opposite effect.
Using these three concepts, scenario modelling derives the above estimated impact on instruments' fair values for a 100 basis point change in the term structure of market interest rates.
Insurance contract liabilities are not directly sensitive to the level of market interest rates, as they are undiscounted and contractually non-interest-bearing. The Group’s debt and fixed income assets are further detailed at note 20.
Notes to the financial statements continued 3 Management of risk continued 3.2 Financial risk continued (c) Credit risk continued
The main focus of the investment portfolio is on high quality short duration debt and fixed income securities, and cash. There are no significant holdings of investments with specific repricing dates. Notwithstanding the regular interest receipts and also the Group’s ability to liquidate these securities and the majority of its other financial instrument assets for cash in a prompt and reasonable manner, the contractual maturity profile of the fair value of these securities at 31 December was as follows: Debt and Deposits Derivative Cash fixed income with credit financial and cash 2008 2007 securities institutions assets equivalents Total Total
At a consolidated level, the Group is exposed to foreign exchange gains or losses on balances held between group companies where one party to the transaction has a functional currency other than Pound Sterling. To the extent that such gains or losses are considered to relate to economic hedges and intragroup borrowings, they are disclosed separately in order for users of the financial statements to obtain a fuller understanding of the Group’s financial performance (note 14).
Details of all foreign currency derivative contracts entered into with external parties are given in note 22. All foreign currency derivative transactions with external parties are managed centrally. Included in the tables below are net non-monetary liabilities of £225m (2007: £233m) which are denominated in foreign currencies.
3 Management of risk continued 3.3 Capital risk management continued a surplus of £638 million (2007: surplus of £536 million), which is calculated as below. The final regulatory capital position will be submitted to the FSA before 30 April 2009 in accordance with the required regulatory timetable.
In the Group’s other geographical territories, including the USA, its subsidiaries underwriting insurance business are required to operate within broadly similar risk-based externally imposed capital requirements when accepting business.
Retranslation gain on managed net investment in Bermuda and Guernsey insurance operations – 67,591 67,591
Year ended 31 December 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)
Acquisition costs incurred in relation to insurance contracts written 270,126 (8,564) 261,562 284,071 (12,645) 271,426 Acquisition costs expensed to the income statement (262,077) 9,209 (252,868) (278,105) 13,535 (264,570)
Debt and fixed income securities 1,993,551 1,928,599 1,435,373 1,444,532 Equities and shares in unit trusts 155,399 124,864 135,427 159,421 Deposits with credit institutions 28,219 28,269 143,852 143,874
Due from contract holders, brokers, agents and intermediaries 274,470 201,157 Due from reinsurance operations 166,722 126,607
The currency translation reserve comprises qualifying net investment gains and losses and foreign exchange differences arising from the translation of the financial statements of, and investments in, foreign operations.
28 Tax expense The Company and its subsidiaries are subject to enacted tax laws in the jurisdictions in which they are incorporated and domiciled.
(a) Group deferred tax assets analysed by balance sheet headings Income statement Transfer to Transfer to 2007 (charge)/credit current tax equity 2008
Present value of unfunded obligations (13,551) (20,783) Unrecognised net actuarial gains 9,767 18,817 Unrecognised surplus deemed irrecoverable 3,784 1,966
Effect of a change in discount rate Use of discount rate of 6.45% (13,551) (8,859) –
Value of services provided by Hiscox Syndicates Limited to Syndicate 33 55,947 41,466
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