To return to the valuation of insurance companies, I can understand that the volatility of earnings from the catastrophe account makes a valuation based on earnings difficult. Conversely, our strategy of building more stable specialist accounts should be valued much more highly if they can demonstrate sustainable earnings which I believe some have and the others will.
Te ch an d med ia err or s an d om iss ion s 4%
Hiscox USA: Saw a year of dramatic expansion. We took advantage of the broader financial difficulties in 2008 and set out on an ambitious plan to attract quality staff. We were able to hire seasoned experts in inland marine, property, construction, terrorism, kidnap and ransom and media, among other lines. We also opened new offices in Los Angeles, Boston, Miami, Atlanta and Kansas City, and expanded our existing offices in San Francisco, Chicago, New York City and Armonk. In all we recruited 84 people, pushing our total headcount up to 184 people.
Chief Executive’s report continued mortgage securities, an allocation to risk assets and a safe allocation to cash and Government bonds. Our caution towards complex products helped us to avoid the worst in 2008 and, as our portfolio recovered in 2009, we saw much better returns. We expect interest rates to remain low for at least the next year. With this in mind, we have reduced the duration of our Government bond portfolio but continue to retain a good allocation to credit, mostly through corporate bonds and to some exposure to mortgage and asset backed products. Whatever we do, we do not expect, in a world of 0.5% to 1.0% returns on short-term Government bonds, to see an investment return this year of the same level that we enjoyed in 2009.
Operations and IT The future efficiency and competitiveness of this business depends on effective IT and efficient operations. Michael Gould, our Group COO, and his team have replaced our 15 yearold London Market system during 2009. During 2010 we will continue to invest in the new system, to make all of the post-implementation tweaks and improvements that our underwriters and operations people have requested. We are also designing and developing a new system for our retail businesses which will be first tested in Guernsey and then implemented across all our retail activities. This will make it easier to roll out new products and drive down our expense ratio. As part of the development process Michael will be driving us to adopt lean processes – applying manufacturing concepts to the operating approach of our business.
Hiscox International Hiscox International consists of Hiscox Bermuda, Hiscox Guernsey and Hiscox USA.
Security Hiscox Insurance Company (Bermuda) Limited has an A (Excellent) rating from A.M. Best and an A (Strong) rating from Fitch. Hiscox Insurance Company (Guernsey) Limited has an A (Excellent) rating from A.M. Best and an A (Strong) rating from Fitch. Hiscox Insurance Company Inc. has an A (Excellent) rating from A.M. Best.
A good reputation takes a long time to build, but can be lost very quickly. We place a great emphasis on recruiting the best people, developing their skills and careers and ensuring that they are motivated. Some of the specific actions we take to fulfil each of these principles are described below.
The survey is based on four key measurements: emotional commitment – the extent to which employees value, enjoy and believe in their work, in their manager, team and Hiscox; rational commitment – the extent to which employees believe Hiscox, their managers, and their teams have their best professional and development interests at heart; discretionary effort – employees’ willingness to go above and beyond what is expected of them; and intention to stay.
Hiscox UK and Europe Hiscox UK and Europe comprises the results of Hiscox Insurance Company Limited, the results of Syndicate 33’s fine art, UK regional events coverage and non US household business together with the income and expenses arising from the Group’s retail agency activities in the UK and continental Europe. It excludes the results of the larger TMT business written by Hiscox Insurance Company Limited. It also includes an element of kidnap and ransom and terrorism written in Syndicate 33.
The Group’s invested assets increased slightly to £2.66 billion (2008: £2.52 billion) as positive cashflows offset the effect of the decline in the US Dollar against the Pound. The investment return, excluding derivative positions, amounted to £182.8 million (2008: £27.6 million negative).
The risk management framework extends to all aspects of risk including insurance, market, credit, operational, liquidity, environmental, ethical and strategic risks. The core business of Hiscox is dealing with risk. The understanding of risk is intrinsic to every level of decision-making in the Group.
Hiscox Insurance Company Hiscox purchased Hiscox Insurance 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. The Group has reshaped the Company’s original portfolio to concentrate on high value household and smaller premium professional indemnity business.
Hiscox Insurance Company Limited has an A.M. Best rating of A (Excellent) and a Standard & Poor’s rating of A (Strong).
Gunnar Stokholm Non Executive Director (Aged 60) Gunnar Stokholm joined Hiscox in 2008. He worked for Zurich Financial Services between 1995 and 2004, in a number of roles including CEO for Australia and Asian markets. He spent the majority of his career at Topdanmark Insurance and held the position of Managing Director of Topdanmark Holding from 1986 to 1995.
The Group Executive Committee The Group Executive Committee, comprising the Executive Directors, meets monthly to raise and discuss topics such as Group strategy (subject always to Board approval), approval of senior appointments and remuneration (other than Board appointments), management of the Group’s trading performance, mergers and acquisitions (which are not significant to the Group), significant issues raised by the London, European and US executive groups and approval of exceptional spend within the limits established by the Board. The London, European and US executive groups provide strategic direction and are a forum for communicating important issues. Below these geographic executive groups, are the local management teams that drive the local businesses.
We confirm that to the best of our knowledge: the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and the Directors’ report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
Total recognised comprehensive income/(expense) for the year (all attributable to owners of the Company) – – – (69,589) 280,497 210,908 Employee share options: Equity settled share based payments 25 – – – – 5,260 5,260 Excess tax benefit on share based payments – – – – – – Proceeds from shares issued 25 91 2,413 – – – 2,504
With regard to employee retirement benefit scheme obligations, the amounts disclosed in these consolidated financial statements are sensitive to judgemental assumptions regarding mortality, inflation, investment returns and interest rates on corporate bonds, many of which have been subject to specific recent volatility. This complex set of economic variables may be expected to influence the liability obligation element of the reported net balance amount to a greater extent than the reported value of the scheme assets element. For example, if the recent cuts in official UK interest rates are replicated with lower yields emerging in UK corporate bond indices, a significant uplift may occur in the reported net scheme deficit through the reduced effect of discounting outweighing any expected appreciation in asset values. A sensitivity analysis is given at note 31.
Frequency and severity of claims The specific insurance risks accepted by the Group fall broadly into four main categories: reinsurance inwards, marine and major property risks, other property risks and casualty insurance risks including professional indemnity. These specific categories are defined for risk review purposes only and are not exclusively aligned to any specific reportable segment in the Group’s operational structure or the primary internal reports reviewed by the chief operating decision maker. A discussion of the frequency and severity of claims for each of those categories is given below. The Group has no significant exposure to asbestos risks or life insurance business.
inwards major assets assets indemnity Other risks Other* Total *Includes a diverse mix of certain specialty lines such as kidnap and ransom, terrorism, bloodstock and other risks which contain a mix of property and casualty exposures.
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 Catastrophe financial and cash 2009 2008 securities institutions bonds assets equivalents Total Total
3 Management of risk continued 3.2 Financial risk continued (e) Currency risk continued
The funds raised through Letters of Credit and loan facilities have been applied to support both the 2009 year of account for Syndicate 33 and the capital requirements of Hiscox Insurance Company (Bermuda) Limited.
Financial strength The financial strength ratings of the Group’s insurance company subsidiaries are outlined below: Standard A.M. Best Fitch & Poor’s
(c) Segmental analysis of assets and liabilities The segment assets and liabilities at 31 December and the capital expenditure for the year then ended are as follows: London UK and Corporate Intragroup items Market Europe International Centre and eliminations Total
(d) Geographical information The Group’s operational segments underwrite business domestically in Bermuda and from locations in the UK and Ireland, the US, Guernsey, France, Germany, Belgium, the Netherlands, Spain, Portugal, Sweden and Austria.
8 Analysis of return on financial investments (a) The weighted average return on financial investments for the year by currency, based on monthly asset values, was: US Dollar 8.5 (2.5)
Managing agency expenses 33,051 19,513 Overseas underwriting agency expenses 47,943 28,787 Connect agency expenses 11,795 13,343 Investment expenses 2,690 1,899 Other Group expenses including central overheads 21,460 12,957
Borrowings from credit institutions carried at amortised cost* 138,000 90,278 Derivative financial instruments 22 539 53,072
Event linked futures contracts 2,400 18 557 539 31 December 2008 Gross contract Fair value Fair value Net balance notional amount of assets of liabilities sheet position
Changes in Group share capital and contributed surplus £000 £000 £000
Insurance claims and claim adjustment expenses reserves – gross at 100%
Total Group liability to external parties included in balance sheet – gross** 1,549,323 **This represents the claims element of the Group’s insurance liabilities.
Additional memorandum information at the end of the current and previous four accounting periods is presented below: Present value of scheme obligations 140,676 101,615 106,793 137,461 137,533 Fair value of scheme assets (118,391) (115,166) (127,576) (133,660) (101,409)
Our ambition remains to be a highly respected international specialist insurance and reinsurance company, built on a balance betweenvolatile international catastrophe business andmore steady local and regional business. Robert Hiscox Chairman