Our business A balanced portfolio that creates opportunity throughout a cyclical market Hiscox’s strategy is to balance the more volatile catastrophe-exposed insurance and reinsurance with steady local specialty insurance. Our diversity by product and geography gives us great flexibility, particularly in a tough commercial environment. We are able to grow and shrink the catastrophe-exposed lines according to market conditions. Currently, rates for reinsurance, which makes up 28% of our income, are healthy. When these rates are no longer favourable, we have the flexibility to shrink this side of the business. Our local specialty insurance business tends to be steadier throughout the insurance cycle and we have successfully grown our retail lines by 8.9% year-on-year over the last five years.
Our professions, specialty commercial, and technology lines have made good progress. We launched five new professional indemnity products during the year specifically for the unique risks professions such as facilities managers and interior and garden designers face. These products have sold well, filling a real customer need. Recession-related claims have not been as severe as we had expected.
The GSSA is based on Hiscox’s own internally assessed capital requirements and is informed by the Group’s Economic Capital Model (ECM), which together with the BSCR forms part of the BMA’s annual solvency assessment. The ECM combines factor-based risk charges with stochastically modeled elements. It is a forward-looking model for which primary inputs are derived from the following year’s business plan, in respect of expected levels of premium, exposure and underwriting losses (both catastrophe and non-catastrophe).
The net claims ratio improved to 40.3% (2011: 56.6%), with much less catastrophe impact in the year. Superstorm Sandy and Costa Concordia being the two larger events of note compared to an over-active 2011.
Group invested assets* £3,055.8m £2,873.4m *excludes derivatives and investment in insurance linked fund and in catastrophe bonds.
We insure individual customers, businesses and other insurers for damage caused by a range of catastrophes, both natural (e.g. hurricanes, earthquakes) and man-made (such as terrorism), which can cause heavy underwriting losses that could have a material impact on the Group’s earnings.
Risk appetite: Our appetite for certain lines of business changes according to market conditions and the risk appetite of the Group. Monitoring: We regularly monitor pricing levels, producing detailed monthly reports grouping current prices with exposure and trends over the past 12 months. This ensures that we quickly identify and control any problems created by adverse changes in market conditions. Lead insurer: We frequently act as the lead insurer in the coinsurance programmes required to cover significant high-value assets, so we have some ability to set market rates rather than follow them.
Supporting the arts, science and technology Hiscox continues to sponsor the Whitechapel Gallery’s collections programme and was a major sponsor of the 2012 Serpentine Gallery Pavilion in Kensington Gardens. For the second year running, Hiscox supplied a bursary for two students of The Royal Academy of Art in London. Hiscox continues to support the Bermuda Masterworks Foundation, which aims to repatriate artworks by Bermudian artists or featuring Bermuda landscapes/seascapes. Hiscox supports 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. In September 2012 Hiscox became the title sponsor of The Sunday Times Hiscox Tech Track 100, charting the fastest growing private technology, telecoms and digital media companies.
Chairman of Committee is highlighted in solid 35Board of Directors Hiscox Ltd Report and Accounts 2012
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 but are not excessive and are applied at all levels of the organisation; bonus scheme which enables employees to earn attractive bonuses for generating good levels of return on equity; 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.
Bonus above £100,000 Bonus above €150,000 Bonus above $200,000 50% of bonus taken in year one Balance of bonus split 50% in year two, and 50% in year three
Directors’ interests 31 December 2012 5p Ordinary Shares number of shares beneficial 5p Ordinary Shares number of shares beneficial
IAS 19: Employee Benefits (2011) is due to be in effect from 1 January 2013. The amendments require immediate recognition of actuarial gains and losses in other comprehensive income and to eliminate the corridor method that the Group currently operates. In addition, net interest income or expense is required to be calculated using the discount rate used to measure the defined benefit asset or liability. The key impact of adopting the amendments to IAS 19 for the year ended 31 December 2012 would have been to recognise a liability of £16.9 million.
(d) Termination benefits Termination benefits are payable when employment is terminated before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to either: terminating the employment of current employees according to a detailed formal plan without 2 Significant accounting policies continued 2.15 Employee benefits continued
The Committee considers the reputation of its reinsurance partners and also receives details of recent payment history and the status of any ongoing negotiations between Group companies and these third-parties. This information is used to update the reinsurance purchasing strategy. Individual operating units maintain records of the payment history for significant brokers and contract holders with whom they conduct regular business. The exposure to individual counterparties is also managed by other mechanisms, such as the right of offset where counterparties are both debtors and creditors of the Group and obtaining collateral from unrated counterparties. Management information reports detail provisions for impairment on loans and receivables and subsequent write-off. Exposures to individual intermediaries and groups of intermediaries are collected within the ongoing monitoring of the controls associated with regulatory solvency.
Capital performance The Group’s main capital performance measure is the achieved return on equity (ROE). This marker best aligns the aspirations of employees and shareholders. As variable remuneration, the vesting of options and longer-term investment plans all relate directly to ROE, this concept is embedded in the workings and culture of the Group. The Group maintains its cost the risk characteristics of the underlying assets. In order to obtain or maintain an optimal capital structure the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, assume debt, or sell assets to reduce debt.
In 2005, the UK Financial Services Authority (FSA) and Lloyd’s introduced a new capital regime that requires insurance companies to calculate their own capital requirements through Individual Capital Assessments (ICA). Hiscox Insurance Company Limited and Hiscox’s Lloyd’s operations maintain ICA models in accordance with this regime. The models are concentrated specifically on the particular product lines, market conditions and risk appetite of each entity. The Group used its own integrated modeling expertise to produce the ICA calculations. The results mirrored those driving the existing internal capital setting process.
Agency related income 5,866 6,769 Profit commission 5,532 7,383 Other underwriting income – catastrophe bonds 1,123 1,006 Other income 1,409 2,164
The deferred amount of insurance contract acquisition costs attributable to reinsurers of £18,340,000 (2011: £15,641,000) is not eligible for offset against the gross balance sheet asset and is included separately within trade and other payables (note 27).
Reinsurers’ share of insurance liabilities 541,387 493,422 Provision for non-recovery and impairment (998) (907)
The amounts expected to be recovered before and after one year are estimated as follows: Within one year 476,930 499,805 After one year 15,134 7,917
Estimates of ultimate claims are adjusted each reporting period to reflect emerging 26 Insurance liabilities and reinsurance assets continued
(b) Net Group deferred tax liabilities analysed by balance sheet headings
At beginning of year – – Total expense charged in the income statement of the Group 9 1,800 1,700 Contributions paid (1,800) (1,700)
The average life expectancy in years of a pensioner retiring at age 60 on the balance sheet date is as follows: years years
Interim dividend for the year ended: 31 December 2012 of 6.0p (net) per share 23,567 – 31 December 2011 of 5.1p (net) per share – 19,738 Final dividend for the year ended: 31 December 2011 of 11.9p (net) per share 46,606 – 31 December 2010 of 11.5p (net) per share – 44,111