Earnings per share on profit after tax up 16.1% to 48.4p (2006: 41.7p)
Hiscox Global Markets has invested in building underwriting teams outside London.We have established hubs in Paris and in New York to give brokers greater choice in the way they access Hiscox. As well as business which comes to London, we can also serve those brokers who, for whatever reason, decide to place their business in their local market.
Boxplot andwhisker diagramof Hiscox Ltd net loss (USD)Hiscox Ltd losses (millions USD)
Highlights £69.1million pre-tax profit (2006: £51.9 million) and a combined ratio of 75.4% (2006: 62.7%)
The resulting campaignshave beenhighly regarded and set Hiscox among international brands like Proctor and Gamble, British Airways and Tesco.
]“Thebehaviourand performance of Hiscox employees is what will set us apart fromother insurers. Our ambition is to attract and develop extraordinary people.” AmandaBrown GroupHumanResources Director of staff, in an independent employee survey, said they were proud towork at Hiscox
Hiscox Insurance Company Limited Gross premiumswritten geographical split by origin (%)
Company Limited in 1996, in keeping with its aim of diversifying its activities outside of Lloyd’s and writing a focused book of regional specialist risks. TheGroup has reshaped the Company’s original portfolio to concentrate on high value household and smaller premium professional indemnity business. Hiscox Insurance Company has licences throughout Europe. It is the primary insurance vehicle used by the UK and mainland Europe offices for their business.
Hiscox Insurance Company (Guernsey) Formed by Hiscox in 1998, Hiscox Insurance
HiscoxGlobalMarkets performance HiscoxGlobal Markets comprises the results of Syndicate 33, excluding Syndicate 33’s fine art, UK regional events coverage, non-US household business and the underwriting result of Hiscox Inc. It includes the results of the larger retail technology andmedia (TMT) business written by Hiscox Insurance Company Limited.
The expense ratio increased to 53.3% (2006: 53.0%) in part due to increasedmarketing costs. The combined ratio increased to 98.8% (2006: 92.0%) duemainly to the effects of the UK floods.
Company (Guernsey) Limited, Hiscox Insurance Company (Bermuda) Limited, Hiscox Inc. and Hiscox Insurance Company Inc.
Three new associate companies were purchased during the year which required net cash payments of £1.3 million.
Risk appetite is set by the main Board and cascaded down into the Group’s operations throughmanagement and specialist committees. These latter committees have terms of reference that assign specific areas of focus, and oversee activities such as underwriting, loss modelling, reinsurance purchase and security, broker credit risk, investments, claims reserving and business continuity.
Major risks Themajor risks that theGroup faces are presented below. A number of these factors are common to all insurance businesses, while others are relevant to Hiscox specifically. For a discussion of the major risks and uncertainties impacting the Group’s financial statements, see note 3 to the financial statements.
Business continuity It is critical for Hiscox that the key resources required to support insurance underwriting and other essential business activities continue to be available. TheGroup has taken significant steps to mitigate the impactofbusiness interruptions that may result from a variety of events, including the loss of key individuals and facilities such as premises, computernetworksand communications.TheGroup’sbusiness could be affected adversely if staff were to be prevented from using its major premises for any reason. TheGroup’s staff are widely distributed with offices around the UK, Europe, USA, Bermuda andGuernsey. This geographical dispersion reduces theGroup’s exposure to natural, operationalandterroristevents thatcouldpreventaccess to its premises.
Theproportions of salary, cash incentives and share incentive schemes in the overall reward for Executive Directors are detailed below: RRSHiscox vv
Share incentive schemes The Remuneration and Nomination Committee believes strongly in the value of employee participation in long-term share schemes in order to further align employee interests with those of the shareholder.
For the Special Awards (see below) and subsequent performance share awards ROE has been calculated as profit after tax and goodwill amortisation divided by shareholders’ funds at the beginning of each year. The ROE for the option award granted in 2005 has been calculated as profit before tax and goodwill amortisation divided by shareholders’ funds at the beginning of each year. The ROEwill be calculated for each of the three financial years constituting the performance period and then averaged.
The exercise of options granted since 22 June 2004 are subject to the following performance conditions: an option will vest as to 100%of their shares if the Group’s pre-tax ROE average is 10% over the three-year performance period (the ‘maximum target’); an option will not vest at all unless theGroup’s pre-tax ROE average over the period equals or exceeds 8%, at which point the options will vest as to 40%of the shares (the ‘minimum target’); and an option will vest on a straight line basis if theGroup’s pre-tax ROE average is between the minimum target and the maximum target.
Ju n 56 Directors’ remuneration report Hiscox Ltd Report and Accounts 2007
Directors’ responsibility The Board is responsible for ensuring the maintenance of proper accounting recordswhichdisclose with reasonable accuracy the financial position of the company. It is required to ensure that the financial statements present a fair view for each financial period.
Major interests in shares TheCompany has been notified of the following shareholdings of 5% or more in the ordinary shares of the Company as at 3March 2008: Number of shares % of total
In addition to our audit of the consolidated financial statements, the Directors have engaged us to review their Corporate Governance Statement as if the Company were required to comply with the Listing Rules of the Financial Services Authority in relation to those matters.We reviewwhether theCorporateGovernance Statement reflects theCompany’s compliance with the nine provisions of the 2006Combined Code specified for our review by those rules, and we report if it does not.We are not required by the terms of our engagement to consider whether the Board’s statements on internal control cover all risks and controls, or to form an opinion on the effectiveness of theGroup’s corporate governance procedures or its risk and control procedures.
Change in own shares held in treasury – – – – – – 50 50 Dividends to external shareholders 30 – – – – – – (30,428) (30,428)
Changes in operational assets and liabilities: Insurance and reinsurance contracts 133,951 45,426 Financial assets (489,745) 1,311 Other assets and liabilities 31,112 (17,953)
The Company is registered and domiciled in Bermuda and on 12 December 2006 its ordinary shares were listed on the London Stock Exchange. As such it is required to prepare financial information in accordance with the Bermuda Companies Act 1981, which permits theGroup to prepare financial statements which comprise the consolidated income statement, the consolidated balance sheet, the consolidated statement of changes in equity, the consolidated cash flow statement and the related notes 1 to 36 in accordance with International Financial Reporting Standards (‘IFRS’). Accordingly, the financial information has been prepared in accordance with Bermuda Law.
The financial statements were approved for issue by the Board of Directors on 3March 2008.
2.2 Basis of preparation The financial statements are presented in Pounds Sterling and are rounded to the nearest thousand unless otherwise stated. They are compiled on a going concern basis and prepared on the historical cost basis except that pension scheme plan assets included in the measurement of the employee retirement benefit obligation, and financial instruments including derivative instruments and financial liabilities at fair value through profit or loss, are measured at fair value. Employee retirement benefit obligations are determined using actuarial analysis. The balance sheet of theGroup is presented in order of increasing liquidity.
3Management of risk continued 3.1 Insurance risk continued Property risks –Marine andmajor assets continued subsea assets, satellites, commercial buildings and industrial plants andmachinery. These assets are typically exposed to a blend of catastrophic and other large loss events, and attritional claims arising from conventional hazards such as collision, flooding, fire and theft. Climatic changes may give rise to more frequent and severe extreme weatherevents(forexampleearthquakes,windstormsand river flooding etc.) anditmaybeexpected that their frequency will increase over time.
Casualty insurance risks The casualty underwriting strategy attempts to ensure that the underwritten risks are well diversified in terms of type and amount of potential hazard, industry and geography. However, theGroup’s exposure is more focused towards marine and professional and technological liability risks rather than human bodily injury risks, which are only accepted under limited circumstances. Claims typically arise from incidents such as errors and omissions attributed to the insured, professional negligence and specific losses suffered as a result of electronic or technological failure of software products and websites. The provision of insurance to cover allegationsmade against individuals acting in the course of fiduciary ormanagerial responsibilities, including directors’ and officers’ insurance, is one example of a casualty insurance risk. However theGroup’s specific exposure to this specific risk category is relatively limited. TheGroup’s casualty insurance contracts mainly experience low severity attritional losses.
Debt and fixed income assets are predominantly invested in high quality corporate, government and asset backed bonds. The investments typically have relatively short durations and terms to maturity. The portfolio is managed to minimise the impact of interest rate risk on anticipatedGroup cash flows.
Reinsurance is used to contain insurance risk. This does not, however, discharge theGroup’s liability asprimary insurer. If a reinsurer fails to pay a claim for any reason, theGroup remains liable for the payment to the policyholder. The creditworthiness of reinsurers is therefore continually reviewed throughout the year.
3Management of risk continued 3.2 Financial risk continued (d) Liquidity risk continued
3Management of risk continued 3.2 Financial risk continued (e) Currency risk continued
Intangible assets 33,212 – – – 33,212 Property, plant and equipment 12,222 1,088 511 – 13,821 Investments in associates 28 – – – 28
Financial strength Standard & Poor’s and A.M. Best’s ratings of the financial strength of theGroup’s UK insurance company subsidiary, Hiscox Insurance Company Limited, remained at A- (Excellent) during the year. Similarly Hiscox Insurance Company (Bermuda) Limited and Hiscox Insurance Company (Guernsey) Limited retained their A- (Excellent) ratings from A.M. Best. Syndicate 33 benefits from an A.M. Best rating of A (Excellent) and the Lloyd’s ratings of A (Excellent) from A.M. Best and A+ (Strong) from Standard & Poor’s.
The assessed capital requirement for the business placed through Hiscox Insurance Company Limited is driven by the level of resources necessary tomaintain anA-rating.TheGroup’s internalworkon the ICA of Hiscox Insurance Company for regulatory purposes has produced results that also support the level of capital required by the rating agencies.
In calculating the claims and expense ratios theGroup has applied an estimated allocation of the foreign exchange gains and losses to each category. The impact on profit before tax of a 1% change in each component of the segmental combined ratios is: Year to 31December 2007 Year to 31 December 2006
At 31 December 2007 there were £2,336,000 of assets under construction, upon which no depreciation has yet been charged (2006: £nil).
The Chain Ladder method is adopted for mature classes of business where sufficient claims development data is available in order to produce estimates of the ultimate claims and premiums by actuarial reservingGroup and underwriting year or year of account for the managed Syndicate.Thismethodologyproducesoptimal estimates whena large claims development history is available and the claims development patterns throughout the earliest years are stable.
Chain Ladder methods may be applied to premiums, paid claims or incurred claims (i.e. paid claims plus case estimates). The basic technique involves the analysis of historical claims development factors and the selection of estimated development factors based on this historical pattern. The selected development factors are then applied to cumulative claims data for each accident year that is not yet fully developed to produce an estimated ultimate claims cost for each accident year.
at end of accident year 287,895 237,401 307,137 492,147 572,367 450,018 593,001 2,939,966 five years later 392,112 235,466 – – – – – 627,578 six years later 388,403 – – – – – – 388,403
Current estimate of cumulative claims 388,403 235,466 298,719 481,864 649,302 447,659 593,001 3,094,414
Obligations under finance leases 34 457 442 Share of Syndicate’s other creditors’ balances 2,681 15,481 Social security and other taxes payable 4,067 5,846 Other creditors 13,704 8,049
28 Employee retirement benefit obligations The Company’s subsidiary, Hiscox plc, operates a defined benefit pension scheme based on final pensionable salary. The scheme closed to future accrual with effect from 31December 2006 and active members were offered membership of a defined contribution scheme from1 January 2007. The funds of the defined benefit scheme are controlled by the trustee and are held separately from those of theGroup.
The adjustments made to book values recognise an additional pre-acquisition dividend payable to the former shareholders, and the recognition of intangible assets in the form of US State authorisation licences.
The following guarantees have also been issued: (a) Hiscox plc has entered into a deed of covenant in respect of its corporate member subsidiary, Hiscox Dedicated Corporate Member Limited, to meet the subsidiaries’ obligations to Lloyd’s. The total guarantee given by the Company under this deed of covenant (subject to limited exceptions) amounts to £118,831,798 (2006: £118,831,798). The obligations in respect of this deed of covenant are secured by a fixed and floating charge over certain of the investments and other assets of the Company in favour of Lloyd’s. Lloyd’s has a right to retain the income on the charged investments in circumstances where it considers there to be a risk that the covenant might need to be called andmay bemet in full.