The future We have a vision of building a highly respected international specialist insurer, and we have been laying strong foundations for some time in different areas on which we can now develop strong businesses. Bermuda will give us a better spread of London Market type business. The UK regions have enormous scope for growth in their specialist areas as do the European offices. Our direct business grows healthily and will benefit from more advertising. Forty per cent of our business currently comes from the world’s biggest insurance market, the USA, and we now have Hiscox USA to add a portfolio of smaller business to give balance.
eg io na l s pl it es tim at ed fo r th es e ye ar s 1, 1, £m £m
Steve Langan became Managing Director of Hiscox UK during the year. Steve joins us from Diageo where his experience in consumer marketing and leading businesses should ensure that our efforts in building the Hiscox brand to grow the business are well rewarded.
Product split Reinsurance and Major Property 37% Key product areas: marine, non-marine and aviation reinsurance; whole account reinsurance; commercial property; onshore energy.
Robert Childs Chief Underwriting Officer Chief Executive Officer of Hiscox Bermuda Chairman of Hiscox USAHighlights
If your home contents are worth £50,000 or more, you too can rely on us for extraordinary cover and a claims service to match – at surprisingly competitive prices.
Senior staff are eligible for performance share awards and share option awards. A share save scheme is open to all staff.
The charts below show the performance of Syndicate 33 for the last six years.
UK and Europe: The results of Hiscox Insurance Company Limited, Hiscox plc’s share of Syndicate 33’s specie, fine art and non-US household business, together with the income and expenses arising from the Group’s retail agency activities in the UK and in continental Europe.
• Gross written premium remained steady year on year. The operation in France achieved growth in gross written premium of 20 per cent. However, this was offset by a reduction in gross written premium in Germany due to the decision to discontinue certain binder business. The Group’s operations in the other European countries achieved 40 per cent growth in gross written premium.
• The combined ratio improved to 99.7 per cent (2004: 103.2 per cent), primarily driven by a favourable loss ratio in France.
Liquidity of debt and fixed income securities The contractual maturity profile of the Group’s debt and fixed income securities as at 31 December 2005 is in the table below.
The assessed capital requirement for the business placed through Hiscox Insurance Company Limited is driven by the level of resources necessary to hold an A rating. The Group’s internal work on the ICA of Hiscox Insurance Company has produced results that support the level of capital required by the models of the rating agencies.
Another key area of capital modelling for Hiscox is to identify which carrier produces the best return on capital employed for the Group, 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 Group continues to underwrite significant risks in geographical regions that are prone to natural peril. This book of business remains a compelling proposition for the Group, since it is capable of returning impressive margins over the medium- to long-term as the occurrence of catastrophes averages out.
Mutualisation is a related risk arising from the phenomenon of pricing cycles in the industry. The Group is required to contribute towards obligations arising from poorly priced risks accepted by other insurers who subsequently fail. Syndicate 33 contributes to the New Central Fund, which is a policyholders’ protection fund that the Council of Lloyd’s operates to make payments when other Lloyd’s Names fail to pay valid claims. In the UK, certain Hiscox entities are required to pay a percentage of net premium income on certain policies to the Financial Services Compensation Scheme (FSCS), which is a statutory fund that compensates, to agreed levels, policyholders affected by insolvent insurers. Should the level of failures escalate, the Group could be subject to additional or special levies by Lloyd’s or the FSCS.
An analysis of the insurance assets receivable from the Group’s major reinsurance partners, by reference to their underlying Standard & Poor’s or equivalent ratings, at 31 December is as follows: The Group’s experience of bad debt losses arising from its reinsurance arrangements compares favourably with industry averages. Its largest insurance carrier, Syndicate 33 at Lloyd’s, has experienced better than average recoveries from its reinsurance placements on a consistent basis.
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.
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 the Group’s influence or control. Hiscox Insurance Company Limited, Hiscox Insurance Company (Guernsey) Limited and Hiscox Insurance Company (Bermuda) Limited have their own separate ratings from accredited agencies.
Hiscox supports the ten principles of the United Nations Global Compact in respect of human rights, labour, the protection of the environment and anti-corruption and strives to support and advance those principles within its sphere of influence.
The Group pioneered the use of clear wordings on insurance policies, especially those intended for private customers. In addition, policies are normally inclusive, which means that risks are covered unless excluded specifically.
The roles and activities of the Chairman and Chief Executive are distinct and separate. The Chairman is responsible for running an effective Board and overall strategy, and the Chief Executive has executive responsibility for running the Group’s business.
The Non Executive Directors also met with the Chairman during the year to discuss a wide range of issues, including the performance of the executive members of the Board.
The general philosophy underlying the Group’s remuneration policy for its senior executives, including Executive Directors, is the same as that applied to all employees, which is to attract and retain quality staff and to encourage and reward superior performance.
BE Masojada 2,702,902 – 2,359,455 – RS Childs 1,382,067 – 1,173,468 – SJ Bridges 460,877 – 286,363 – Non Executive Directors SH Hall* 45,500 – 35,500 – AGC Howland Jackson 65,804 – 49,589 – DND Netherton 19,905 – 15,000 – C Franklin Engler 17,550 – 17,550 – AR Auer – – N/A N/A Sir Mervyn Pedelty – – N/A N/A
In preparing each of the Group and parent Company financial statements, the Directors are required to: (a) select suitable accounting policies and then apply them consistently
Respective responsibilities of Directors and auditors The Directors’ responsibilities for preparing the Annual Report, the Directors’ remuneration report and the financial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU are set out in the Statement of Directors’ responsibilities on page 48.
Opinion In our opinion: • the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the EU, of the state of the Group’s affairs as at 31 December 2005 and of the Group’s profit for the year then ended
Rights Issue of equity shares 23 4,818 171,550 – – – – 176,368 Expenses related to Rights Issue of equity shares 23 – (5,974) – – – – (5,974) Change in own shares – – – – – 192 192 Dividends to shareholders 32 – – – – – (16,917) (16,917)
The consolidated financial statements of the Company for the year ended 31 December 2005 comprise all of the Group’s subsidiary companies and the Group’s interest in associates. All amounts relate to continuing operations.
The Group and the Company have not availed themselves of the exemptions within IFRS 1 that allow comparative information presented in the first year of adoption of IFRSs not to comply with IAS 32 Financial Instruments: Disclosure and Presentation, IAS 39
(d) Computer software Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring into use the specific software. These costs are amortised over the expected useful life of the software of three years on a straight line basis.
(b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted on an active market. Receivables arising from insurance contracts are also classified in this category and are reviewed for impairment as part of the impairment review of loans and receivables. Loans and receivables are carried at cost less any provision for impairment in value.
(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 an intangible asset. All other costs are recognised as expenses when incurred. The DAC is amortised over the terms of the policies as premium is earned.
All other leases are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease.
2.19 Dividend distribution Dividend distribution to the Company’s shareholders is recognised as a liability in the Group and Company’s financial statements in the period in which the dividends are approved.
There are several sources of uncertainty that need to be considered in the estimation of the liabilities that the Group will ultimately pay for valid claims. These include but are not restricted to: inflation; changes in legislation; changes in the Group’s claims handling procedures; and discordant judicial opinions which extend the Group’s coverage of risk beyond that envisaged at the time of original policy issuance. The Group 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 the Group but remain unsettled at the balance sheet date.
Previously the Group’s cash flow statement excluded cash flows relating to underwriting on Lloyd’s syndicates. On transition to IFRSs these have now been included.
The Group’s internal audit function, which is wholly independent of the underwriting function, performs reviews throughout the Group to verify that underwriting teams are in compliance with the Board’s policies and required procedures.
The fair value of debt and fixed income assets in the Group’s balance sheet at 31 December 2005 was £1,029 million (2004: £834 million). Using a duration-convexation 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 £13 million (2004: decrease of £6 million).
Assets arising from reinsurance contracts held 67,762 415,793 18,104 4,717 506,376 Loans and receivables including insurance receivables 187,566 199,032 40,901 9,482 436,981
This excludes profits or losses on foreign exchange derivative contracts which are outlined in note 21.
Cost Fair value Cost Fair value Cost Fair value Cost Fair value
Derivative instrument assets (note 21) – – – 1,348 – – – 1,348
The amounts expected to be recovered before and after one year are estimated as follows: Within one year 436,818 327,426 After one year 163 56
There is no significant concentration of credit risk with respect to loans and receivables, as the Group has a large number of internationally dispersed debtors. The Group has recognised a loss of £449,000 (2004: £1,932,000) for the impairment of its receivables during the year ended 31 December 2005.
The Company’s loans and receivables are all expected to be recovered after one year.
Included within retained earnings is an amount of £17,941,000 (2004: £17,941,000), which is not distributable and is held to meet solvency capital requirements to maintain an equalisation reserve. The amounts in the equalisation reserve are realised when particular entities in the Group have suffered insurance losses in excess of levels set out in the relevant solvency capital regulations.
Gross Claims reported and loss adjustment expenses 815,307 478,050 Claims incurred but not reported 507,186 352,631 Unearned premiums 400,507 416,222
Liability for 2001 to 2005 accident years recognised on Group’s balance sheet 138,469 91,084 107,213 259,295 664,819 1,260,880
Current estimate of cumulative claims 472,594 267,929 323,048 570,186 645,835 2,279,592
Total at end of year (1,322,493) 467,800 (854,693) (830,681) 195,730 (634,951)
The insurance claims expense reported in the income statement is comprised as follows: Gross Reinsurance Net Gross Reinsurance Net
Notes to the financial statements continued 90 Hiscox plc Report and Accounts 2005
Obligations under finance leases (note 34) 449 370 Share of syndicate’s other creditors balances 34,331 16,641 Reinsurers’ share of deferred acquisition costs 2,496 4,552 Social security and other taxes payable 6,191 5,458 Other creditors 12,255 3,040
Diluted Diluted earnings per share is calculated adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Company has one category of dilutive potential ordinary shares, share options. For the share options, a calculation is made to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Company’s shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share options.
Notes to the financial statements continued 94 Hiscox plc Report and Accounts 2005
**Hiscox Holdings Limited held 54,560 (2004: 67,580 shares) in Hiscox plc at 31 December 2005. The cost of these shares of £52,000 (2004: £64,000) is included within retained earnings. During 2005, 13,020 of these shares were issued to staff as part of the employee performance share plans (2004: 339,304 shares). The net consideration received was £18,000 (2004: †Hiscox Trustees Limited is the trustee of the Hiscox plc Group Employee Share Ownership Plan (ESOP). Hiscox Trustees Limited took up its entitlement of 33,459 shares in the Company at a price of £1.83 arising from the Rights Issue in November 2005. It also acquired 6,732 ordinary shares costing £11,000 during the year. The ESOP disposed of 229,843 shares during the year at a price of £1.26. The ESOP owned 135,782 shares (2004: 325,434 shares) in Hiscox plc at 31 December 2005. The shares have been purchased by the ESOP for future use in employee share option schemes and are held as own shares. None of these shares are currently under option to employees, nor have any been conditionally gifted to them. The cost of these shares of £192,000 (2004: £409,000) is included within retained earnings.
Value of management services provided during the year by the consolidated operations of the Heritage Group Limited 855 701
• in the case of CREST members (including Personal Members), by having an appropriate CREST message transmitted.
Long-tail A term used to describe an insurance risk that has the potential for claims development or new claims to be reported a number of years after expiry of the term of the policy.