Includes final dividend equivalent of 14.0p taking total dividend for the year to 21.0p, an increase of 16.7% (2012: 18.0p).
Our success in reinsurance has rather overshadowed the London Market insurance business which has quietly been doing very well. With its new leadership we feel it is well placed to continue to grow in 2014.
facilities in the London Market this year as the market has seen an increase in their number and size. We have a lot of experience writing them in the US where business has been routinely placed in this way. We believe that facilities can be underwritten profitably provided we have underwriting control, a right to say no and realistic commissions. If these conditions are satisfied, then we expect facilities to play a role in 2014’s business expansion plans.
— Marine and energy: The marine and energy team delivered another good profit. The marine hull team have worked hard to improve profitability in a lack-lustre market and delivered an exceptional result. Pressure was felt in energy lines as fewer construction projects, and more oil companies looking to self insure, led to reduced demand. In 2014, we are focused on building opportunities in emerging markets such as Brazil.
Our political risks team have had a good year despite the challenging times. The team is looking at ways to leverage their expertise and underwrite outside the Lloyd’s market, potentially using licences available to our insurance companies.
Structural and role changes always have the potential to upset a business, so it is a testament to the robustness of Hiscox and the drive to succeed amongst all our staff that we flourished this year. I would like to thank all staff for the role they played in achieving this – but know that they remain hungry for further progress and success.
This is the second year in a row of such a capital return, but we do not believe that this is a pattern. We are working hard to deploy as much capital as possible in sectors where we can earn returns in excess of our cost of capital, but we think the right decision is to return capital not properly deployed, after retaining a prudent buffer, to shareholders. The Board will continue to keep this balance under review.
Hiscox began writing insurance outside of Lloyd’s in 1996 and now has nine offices in the UK and Ireland. Hiscox specialises in art, private client and luxury motor insurance, as well as professional liability and property insurance for small- and medium-sized businesses. Hiscox UK also provides home and small business insurance directly to consumers.
The net claims ratio improved to 43.4% (2012: 47.2%) as a result of the benign loss environment, despite the December UK floods. This led to an overall reduction in the combined ratio to 92.6% (2012: 94.4%), allowing UK and Europe to achieve a record profit before tax for the year of £56.4 million (2012: £49.1 million).
The business in which we operate is determined largely by financial strength ratings issued by the major credit rating agencies.
Scope 3 – air and rail business travel 1,889 2,128 3,629
Supporting the arts, science and technology Hiscox continues to support the arts, science and technology, through its work with the Royal Academy Schools, providing a bursary for two second-year students; sponsorship of the Collections exhibitions at the Whitechapel Gallery and the Chapman Brothers’ exhibition at the Serpentine Gallery Pavilion. Hiscox supports the City of London’s Sculpture in the City project, designed to transform the local landscape with unique and well-known pieces of modern sculpture. Ten Hiscox employees volunteered to work with students from Skinners Academy in Hackney and six other local schools to bring the sculptures to life. As part of Hiscox’s support of the Public Catalogue Foundation (PCF) project, Hiscox insured ‘Your paintings: Masterpieces in Schools’, an exhibition which allowed thousands of UK schoolchildren to experience masterpieces up close. Hiscox supports the Royal Institution (RI) with a loan and corporate sponsorship The RI is the oldest independent research body in the world, dedicated to connecting people with the world of science for over 200 years.
2013 was the second year of sponsorship of the Sunday Times Hiscox Tech Track 100, charting the fastest growing private technology, telecoms and digital media companies. Hiscox Guernsey supports Art in the Islands, and has assisted, through funding and advice, a team of entrepreneurial artists and art professionals to create a floating museum/art gallery in the Channel Islands.
— Annual incentive payments for Executive Directors are paid only when the company has achieved an ROE for the year in excess of a pre-established hurdle rate. If the hurdle rate is not met, we simply do not pay bonuses to the Directors. In other words, like shareholders, we are focused on results, not inputs or effort or other measures often used to justify bonus payments. Once the Hurdle Rate is achieved the aggregate size of the bonus pool relates to the level of earnings delivered. —Our long-term incentive Performance Share Plan (PSP) is also linked to achieving a pre-established annual Hurdle Rate. This ensures that all shares granted under the plan vest only to the extent that Hiscox has delivered the minimum three-year returns reflected in the agreed hurdle. — Executive shareholdings at Hiscox are extensive and meaningful. Hiscox encourages all employees to have a stake in the business and mandatory shareholding guidelines apply to senior managers. We are pleased that the personal Hiscox shareholdings of the Hiscox Executive Directors far exceed these guidelines. With such a considerable amount of their personal wealth invested in Hiscox shares, we believe the Directors are indeed aligned with our shareholders and thus focused on net asset growth, total shareholder return and risk management.
Comments on 2013 performance The 2013 business performance has been extremely strong; a near record underwriting result, strong revenue growth and a credible investment return. Highlights are: — profit before tax increase of 12.5%; — gross written premium growth of 8.5%; — growth in net tangible asset value per share of 16%; — return on equity (post-tax) increased to 19.3% (from 17.1% in 2012); and — Earnings per share increase of 24.9%.
As we disclosed in the 2012 Directors’ remuneration report, Stuart Bridges and Bronek Masojada received salary increases of 14% and 18% respectively, effective 1 April 2013. We confirmed at the time that these were unusual increases which would not set a pattern for the future. The salary increases for the three Executive Directors which will take effect on 1 April 2014 will be consistent with the overall UK-based employee salary increases.
The Company has a robust track record of paying bonuses which are proportionate to financial results, see page 60 of this report for further details. Where performance is deemed to be below a pre-determined hurdle, payouts will be nil.
Currently, the performance measures are linked to the achievement of ROE performance over an agreed hurdle, during the performance period. Details of targets for awards to be granted in 2014 are set out on page 61.
Min On target Above target Min On target Above target Min On target Above target
Based on the three-year average return on equity of 12.8%, the awards ending with the 2013 performance year, will vest at 52.7% on 7 April 2014. Executive Directors will also receive dividend equivalents in the form of additional awards based on dividends paid during the three-year performance period. The estimated value of these awards is covered in the Executive Director remuneration table on page 59.
SJ Bridges 154,578 – – (154,578) – 1.465 5.100 02-Apr-06 01-Apr-13
The Directors consider that the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s and the Group’s performance, business model and strategy.
Total equity (all attributable to owners of the Company) 1,409,461 1,365,366
1 General information The Hiscox Group, which is headquartered in Hamilton, Bermuda, comprises Hiscox Ltd (the parent Company, referred to herein as the ‘Company’) and its subsidiaries (collectively, the ‘Hiscox Group’ or the ‘Group’). For the period under review the Group provided insurance and reinsurance services to its clients worldwide. It has operations in Bermuda, the UK, Europe, and the US with over 1,600 staff.
The Group reassessed the control conclusion for its investees at 1 January 2013 and no changes in control conclusions were made.
(b) Syndicate capacity The cost of purchasing the Group’s participation in the Lloyd’s insurance syndicates is not amortised but is tested annually for impairment and is carried at cost less accumulated impairment losses. Having considered the future prospects of the London insurance market, the Board believes that the Group’s ownership of syndicate capacity will provide economic benefits over an indefinite number of future periods. This assumption is reviewed annually to determine whether the asset continues to have an indefinite life.
2.10 Derivative financial instruments Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently valued at their fair value at each balance sheet date. Fair values are obtained from quoted market values and, if these are not available, valuation techniques including option pricing models as appropriate. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. For derivatives not formally designated as a hedging instrument, fair value changes are recognised immediately in the income statement. Changes in the value of derivatives and other financial instruments formally designated as hedges of net investments in foreign operations are recognised in the currency translation reserve to the extent within the investment result line in the income statement. An analysis of fair values of financial instruments and further details as to how they are measured are provided in note 22.
Between one and two years 515,116 1,948 – 517,064 468,475 Between two and five years 846,162 421 – 846,583 808,791 Over five years 332,822 – – 332,822 349,761
At 31 December 2013 US$333 million was drawn by way of Letter of Credit to support the Funds at Lloyd’s requirement and there were no cash drawings (2012: $308 million and £nil million respectively) to support general trading activities; — external Names – 27.5% of Syndicate 33’s capacity is capitalised by third-parties paying a profit share of approximately 20%; — Syndicate 6104 at Lloyd’s – with a capacity of £66 million for the 2013 year of account (2012 year of account: £39 million). This Syndicate is wholly backed by external members and takes pure years of account quota share of Syndicate 33’s international property catastrophe reinsurance account; — gearing quota shares – historically the Group has used reinsurance capital to fund its capital requirement for short-term expansions in the volume of business underwritten by the Syndicate; and — qualifying quota shares – these are reinsurance arrangements that allow the Group to increase the amount of premium it writes in hard markets.
The funds raised through Letters of Credit and loan facilities have been applied to support both the 2013 year of account for Syndicates 33 and 3624 and the capital requirements of Hiscox Insurance Company (Bermuda) Limited.
Company (Bermuda) Limited, Hiscox Inc., Hiscox Insurance Company Inc. and Syndicate 3624 excluding the European errors and omissions, aviation business, auto physical damage and warranty and specialty UK businesses. —Corporate Centre comprises the investment return, finance costs and administrative costs associated with Group management activities. Corporate Centre also includes the majority of foreign currency items on economic hedges and intragroup borrowings. These relate to certain foreign currency items on economic hedges and intragroup borrowings, further details of which are given at note 13. Corporate Centre forms a reportable segment due to its investment activities which earn significant external coupon revenues.
Year to 31 December 2013 Year to 31 December 2012 restated*
The claims ratio is calculated as claims and claim adjustment expenses, net of reinsurance, as a proportion of net premiums earned. The expense ratio is calculated as the total of expenses for the acquisition of insurance contracts, and operational expenses, including profit-related pay, as a proportion of net premiums earned. The foreign exchange impact ratio is calculated as the foreign exchange gains or losses as a proportion of net premiums earned. The combined ratio is the total of the claims, expenses and foreign exchange impact ratios. The combined ratio excluding non-monetary foreign exchange impact is calculated by adjusting the net premiums earned and the expenses for the acquisition of insurance contracts by the movement arising from retranslating net unearned premiums and net deferred acquisition costs at year end rates of exchange. All ratios are calculated using the 100% results.
Unrealised gains and losses in the year on securities held at the end of the year 2,587 –
The weighted average fair value of each share option granted during the year was 112.9p (2012: 93.4p). The weighted average fair value of each performance share plan award granted during the year was 568.0p (2012: 414.0p).
Reinsurers’ share of deferred acquisition costs 17 23,479 18,340 Accruals and deferred income 98,587 73,139
The scheme assets are invested are as follows: At 31 December
The amounts recognised in total comprehensive income are as follows: Note 2012 restated *
Net defined benefit liability at beginning of year 13,824 12,092 Defined benefit cost included in net income 1,000 1,054 Recovery of charge from third-party Names 85 108 Total remeasurement included in other comprehensive income (9,775) 2,069 Employer contributions by Hiscox Group (1,800) (1,800) Less contributions received by Hiscox Group from third-party Names 301 301
(c) Hiscox Insurance Company Limited has arranged a Letter of Credit of £50,000 (2012: £50,000) with NatWest Bank plc to support its consortium activities with Lloyd’s, the arrangement is collateralised with cash of £50,000 (2012: £50,000).
36 Capital and lease commitments Capital commitments The Group’s capital expenditure contracted for at the balance sheet date but not yet incurred for property, plant, equipment and software development was £1,902,000 (2012: £418,000).