This book belongs to 2 Corporate Highlights 5 Chairman’s Statement 10 Chief Executive’s Report 23 Directors and Advisors 24 Corporate Governance 26 Directors’ Remuneration Report 28 Directors’ Report 30 Statement of Directors’ Responsibilities 31 Independent Auditors’ Report 32 Consolidated Profit and Loss Account, Technical Account – General Business 33 Consolidated Profit and Loss Account, Non-Technical Account 34 Consolidated Balance Sheet 36 Company Balance Sheet 37 Consolidated Cash Flow Statement 38 Notes to the Accounts 63 Notes to the Consolidated Cash Flow Statement 65 Five Year Summary 66 Notice of Annual General Meeting 67 Key Shareholder Information T H E HISCOX ANNUAL 2 0 0 2 Heroic performance – a quality for which Hiscox has always been renowned. This year, our annual report looks back on another twelve months of sterling achievement, and celebrates the spirit of classic British heroism that has made Hiscox a worldwide success story. Now read on… (cid:2) Rapid turnround to operating profit £34.5 million (2001: £21.2m loss). Pre-tax profit £20.3 million (2001: £32.5m loss) (cid:2) Hiscox plc gross written premium income up 23% to £676.7 million (cid:2) Group controlled gross written premium income up 21% to £941.3 million (cid:2) Excellent performance from Lloyd’s Syndicate 33. Gross written premium applicable to Hiscox plc up 35% to £461.8 million (2001: £343.2m). Operating profit £21.2 million (2001: £29.4m loss). 2003 capacity increased to £842 million from £504 million (cid:2) UK Retail operating profit up 54% to £11.7 million (2001: £7.6m). Gross written premium £148 million (2001: £144m). Product range expansion and broadening of distribution continues in 2003 International Retail business operating profit £1.6 million (2001: £0.6m). Gross written premium £67.4 million (2001: £62.1m). New opportunities for expansion as competitors withdraw Successful rights issue raised £110 million (net of expenses) to fund expansion. Capital committed and leveraged (cid:2) Final dividend of 2.4p OPERATING PROFIT/(LOSS) TO HISCOX PLC BEFORE TAX (£000) Lloyd’s business Retail business Total Earnings/loss per share (Based on operating profit/(loss) after tax) 2 The Hiscox Annual 2002 2002 21,228 13,254 34,482 11.3p 2001 (29,414) 8,194 (21,220) (9.7)p (cid:2) (cid:2) HISCOX PLC GROSS WRITTEN PREMIUM (£MILLION) International Business UK Retail Lloyd’s Business 700 600 500 400 300 200 100 0 1998 1999 2000 2001 2002 GROUP CONTROLLED GROSS WRITTEN PREMIUM London Market Reinsurance Marine, Non-Marine, Whole Account £162.8m ATMT Aerospace, Technology, Media, Telecommunications £69.0m Professional Insurances Traditional, Emerging £92.0m London Market Insurance Property, Construction, Terrorism, Energy, Marine Hull and Cargo, Liability, Political Risks, Specie, Enterprise, Risk Management £281.5m Affluent Personal Lines Fine Art, Kidnap and Ransom, Yachts, Bloodstock, High Value Household, Mass Affluent, Contingency, Personal Accident £336.0m Total £941.3m The Hiscox Annual 2002 3 Hiscox has once again proved its boldness, daring and dynamism. This year, we were the driving force behind the first ever Cat Bond transaction for a Lloyd's syndicate. The $33 million private placement provided Hiscox Syndicate 33 with a new source of catastrophe reinsurance protection for earthquake events in the USA, enabling us to underwrite profitable new business in this area. CHAIRMAN’S STATEMENT It’s been a splendid year for Hiscox with our successful rights issue and increase in capacity. Our Lloyd’s business has demonstrated a tremendous return to form as we capitalised on the excellent market conditions. Our growing retail insurance operations continue their highly satisfying performance, both in the UK and worldwide. BY ROBERT HISCOX, CHAIRMAN 2002 was an exceptional year for our Lloyd’s Syndicate 33. Such major losses that occurred during the year, especially in the marine market, were in the main avoided by the syndicate. Our underwriters kept their nerve after 9/11 and increased the premium income dra- matically. The resulting 2002 profit has more than covered the poor run-off of some of the earlier years. There was another satisfactory profit from our UK retail division and from our overseas operations. CAPITAL RAISING With the interim results in September 2002 we announced a rights issue. In the event, £110 million (net of expenses) was provided by shareholders on a 1 for 2 basis at 120p per share. Our largest shareholder, the Chubb Corporation, did not participate. This, together with other shareholders who were not able to participate, meant that around 50% of the shares had to be placed with new shareholders or with existing ones in excess of their pro-rata share. The fact that all shares were taken up was a great show of support and we are determined to justify it with good returns. DIVIDEND The directors propose a final dividend of 2.40p net (2001: nil) per ordinary share, making a total distribution for the year of 3.54p (2001: nil). This is a small increase on the amount paid in 2000, and on the larger amount of shares in issue this year. The dividend will be paid on 30 June 2003 to shareholders on the register on 22 April 2003. HISCOX SYNDICATE 33 AT LLOYD’S The result this year is dominated by the excellent perform- ance of Syndicate 33 in 2002. The performance and results for 1998-2000 were below the standards we set The Hiscox Annual 2002 5 THE result for the year ending 31 December 2002 is a rapid and welcome return to profit. The oper- ating profit was £34.5 million (2001: £21.2m loss) and the pre-tax profit was £20.3 million (2001: £32.5m loss). The gross premium income controlled by the Group rose to £941.3 million (2001: £780.0m), and the gross premium income applicable to Hiscox plc increased to £676.7 million (2001: £548.9m). Hiscox plc benefits from fees and profit commission earned on the income written for third parties. for ourselves (albeit better than the Lloyd’s average). 2001 would have been back on track if it were not for the WTC loss, and 2002 has had the best calendar year underwriting loss ratios in my working life. I am seriously proud of the work done by Robert Childs and his team. Battered by poor results and then smacked by 9/11, the Syndicate 33 underwriters went straight back to the floor of Lloyd’s and underwrote into the ensuing bull market with tremendous skill and courage. They added an extra £65 million income to the last three months of 2001, then continued the expansion in the 2002 year of account, writing around £850 million of premiums at 2002 monitoring rates of exchange. We increased the capacity of the Syndicate for 2003 to £842 million (2002: £504m) and Hiscox plc provides 65% of it. WTC We have increased the net reserve for this loss to Hiscox plc by £10 million. Our Syndicate 33 gross reserve has increased by $35 million to $475 million, of which $275 million had been paid by 28 February 2003. Gross notifications have increased from $576 million to $591 million. There is obviously a spotlight on the WTC loss as it is the biggest individual loss we and others have ever incurred. However, Syndicate 33 has a number of large losses at any one time, and occasional catastrophes covering a multitude of losses, some of which are settled below expectations and some above. What matters is to get our overall reserves for the business right. UK RETAIL The UK Retail business made a highly satisfactory oper- ating profit of £11.7 million (2001: £7.6m). The premium income increased to £147.6 million (2001: £143.6m) despite jettisoning some non-core business. Sian Fisher and her team are demonstrating discipline and self- control in focusing on their two main areas of business; speciality commercial and affluent personal lines. This specialisation gives them expertise and clout in the market. The brokers produce the vast majority of our business and our stability in turbulent times should increase the flow of their business to us. We continue to concentrate on organic growth with small add-on acquisitions of books of business that fit into our two core areas. 6 The Hiscox Annual 2002 Lloyd’s is fulfilling its role as the hub of the world insurance market Our retail business continues to develop its position as the UK’s leading specialist insurer of high-value homes Our internet business grows rapidly and I believe that it will be a major earner in the future as people get used to buying insurance online. The strategy of growing the retail business outside Lloyd’s is well on track and will pay even more hand- some dividends in the future if the Lloyd’s business has to be cut back when the cycle turns. INTERNATIONAL RETAIL BUSINESS Overall, our overseas operations made an operating profit of £1.6 million (2001: £0.6m). The Hiscox Insurance Co (Guernsey) made another excellent profit, as did our small venture in Ireland. Our three offices in Europe (France, Germany and the Netherlands) increased their aggregate income to Euros 45 million. They have now reached critical mass; they have excellent staff; market conditions are in their favour with rates up and the com- petition withdrawing, so I am confident that Europe will produce a good return in the future. LLOYD’S As the new chairman, Lord Levene, so elegantly put it, Lloyd’s is one of the few certainties in a very uncertain insurance world at present. The extensive housekeeping done in the crisis years and completed in 1996, resulting in the reserves for all losses prior to 1993 being thor- oughly scrutinised and then centralised into Equitas, has insulated the Lloyd’s Market from the recent deteriora- tion in old year losses hitting the rest of the insurance industry. Business has poured back into the London Market as the worldwide insurance industry, with very few exceptions, suffers from a shortage of capital and courage. Lloyd’s is fulfilling its role as the hub of the international market. MARKET TRENDS How long will the bull market last? The established inter- national insurance market remains in disarray. We are in the time-honoured position in the insurance cycle when current underwriting figures are excellent, but the losses and under-reserving of the past are eroding or destroying profits. There remains a delicious shortage of capacity and risk appetite for insurance, and an increasing demand for reinsurance due to shortage of capital. Traditionally, one of the curses of the insurance industry has been the ease of entry that allows new entrants to soften hard markets and fuel the downturn. However, this bottom of the cycle has had low inter- est rates and a difficult investment climate. This has not The Hiscox Annual 2002 7 longer they serve, and some will run out of steam after a while. Good directors will act on behalf of the Company whatever their perceived conflicts. There can be no rigid rules as long as we deal with human beings. I have no objection to the Government regularly ask- ing an individual or group to set down one view of how businesses should be run. It can be a useful guide. But when it goes beyond a guide and becomes a code that must be followed, it can be destructive. Form will domi- nate substance. And the tick-box activities of the burgeoning proxy agencies that use no intelligence but just recommend votes slavishly according to blind obedi- ence to the various reports are a complete abrogation of responsibility of any shareholder who uses them. Businesses need directors who help to guide the company into profit and away from danger, and also shareholders who can spot good business people from bad. PEOPLE We are lucky to have excellent non-executive directors and a board membership that complies with the recent Higgs Report, so my remarks above are without an axe to grind. We also have a wonderful staff throughout the Company. I have always believed that if we treat each other with respect and kindness, we will be a better company and one that will be a pleasure to deal with and thereby more profitable. I was therefore extremely gratified that Hiscox plc came tenth in the recent Sunday Times ‘100 Best Companies to Work For’ list, above any other financial services company. Given the poor results we have had in previous years and the stress of the insurance business when losses thud in, it was a consid- erable achievement. I would like to thank everyone at Hiscox, and wish them the rewards that their recent endeavours deserve. FINALLY Hiscox plc last year underwrote almost £1 billion income. It also reached the FTSE 250 which we know was due to the decline of others as well as our rise in value. However, we will keep striving to grow the busi- ness organically with small incremental acquisitions, avoiding the black holes of major acquisitions, and to give good returns to our shareholders. We have felt strongly supported by them during the recent hard times and now it is payback time. There is only one way of building a first class company and that is through profits. We will all focus 100% on producing them. – Robert Hiscox, 26 March 2003 Hiscox places strong focus on the well-being of our employees, resulting in our acknowledgement as the tenth best company to work for in the UK only limited the inflow of new capital – the $30 billion estimated to have been fed in is nowhere near the $200 billion estimated to have been eaten by losses and capital erosion – but is also forcing insurance companies to focus on underwriting returns, and to stop being invest- ment trusts with an expensive habit. This concentration on decent returns from underwriting should prolong the hard market for a good few years longer than would be the case with higher interest rates and easier investment markets. With our background training in Lloyd’s, where underwriting has always been paramount as the share- holders’ funds were held by the Names, and where proper reserving has been vital due to the annual venture, we are able to take full advantage of the hard market. CORPORATE GOVERNANCE Most of those in government and regulation have very little practical business experience. It is easy for them to believe that a proper board of directors will stop all cor- porate scandals, and that there is a simple formula for the perfect board. Anyone who has been in the business battlefield will know that what you need are people with integrity, good judgement and common sense (why did anyone call it common when it is so rare?). And they need to be united in the pursuit of profit for shareholders, not split into formulaic groups. Some will get better the 8 The Hiscox Annual 2002 Our return to profit and our increase in gross written premium in 2002 is the combined result of our long experience, underwriting wisdom, strategic focus and the courage to take advantage of world market conditions BY BRONEK MASOJADA, CHIEF EXECUTIVE Astrong rating environment, selective under- writing and good claims experience have contributed to a swift return to profit in 2002. The proceeds of our £110 million (net of expenses) rights issue have grown our balance sheet, and allowed us to expand our underwriting in 2003. We will be able to continue to take advantage of current market conditions. Hiscox continues to grow as a leading insurer of spe- cialty commercial and affluent personal lines customers. By focusing on a few well defined areas, we can provide excellent products and services to our customers and their brokers. It is this focus and responsiveness to the needs of our clients that has allowed us to grow our aggregate gross written premium so significantly this year. ditions are good across all lines of business. In our Syndicate business, as shown in chart 1, rates remain firm. In our retail business, as shown in chart 2, rates have increased, but not by the same degree as the syndi- cate business. Hiscox Insurance Company achieved a combined ratio of 97.9% (2001: 97.8%) – the third successive year of sub 98% combined ratio (chart 3). Since 1997 we have grown this business at a compound rate of 18.8% per annum. Achieving growth with good combined ratios makes Hiscox Insurance Company a top quartile performer. Hiscox focuses on a number of well defined business areas. Current trends in each are reviewed below: BUSINESS TRENDS The controlled gross premium income in the Group has grown to £941.3 million, an increase of 21%. Rating con- – Affluent Personal Lines: In our Syndicate business, we have significantly grown our US business with local managing general agents. This is a great current opportu- nity, but it may shrink in the future once domestic US 10 The Hiscox Annual 2002 TABLE 1: CONTROLLED GROSS WRITTEN PREMIUM BY SEGMENT Controlled Gross Written Premium £m Affluent Personal Lines Fine Art, Kidnap & Ransom, Yachts, Bloodstock, High Value Household, Mass Affluent, Contingency, Personal Accident Professional Insurances Traditional, Emerging ATMT Aerospace, Technology, Media, and Telecommunications London Market Reinsurance Marine, Non-Marine, Whole Account London Market Insurance Property, Construction, Terrorism, Energy, Marine Hull & Cargo, Liability, Political Risks, Specie, Enterprise, Risk Management Year ended 31 December 2002 Lloyd’s 186.6 2002 Retail* 149.4 2002 Total 336.0 2001 Lloyd’s 136.4 2001 Retail* 2001 Total 155.5 291.9 44.1 51.3 162.8 281.5 47.9 17.7 – – 92.0 69.0 43.3 37.1 36.0 79.3 14.1 51.2 162.8 124.4 281.5 233.2 – – 124.4 233.2 Total % owned by Hiscox plc 726.3 63% 215.0 100% 941.3 – 574.4 60% 205.6 780.0 100% – *Includes business written by Hiscox Insurance Company and Hiscox Insurance Company (Guernsey) Ltd, net of internal quota share reinsurance CHART 1: SYNDICATE 33 BUSINESS RATING INDEX CHART 2: RETAIL BUSINESS RATING INDEX ) % ( Affluent Personal Lines London Market Insurance London Market Reinsurance 300 280 260 240 220 200 180 160 140 120 100 80 60 7 9 8 8 0 9 8 0 9 1 2 7 to Dec 9 pr 9 8 to Dec 9 pr 0 g 9 0 to Dec 0 9 to Dec 9 g 0 pr 9 pr 0 g 9 1 to Dec 0 g 0 pr 0 2 to Dec 0 g 0 u u u u u 7 to A 9 to A 8 to A 0 to A 1 to A 7 to A 9 to A 8 to A 0 to A 1 to A May 9 May 9 May 9 May 0 May 0 Jan 9 Jan 9 Jan 0 Jan 0 Jan 0 Jan 9 Sep 9 Sep 9 Sep 9 Sep 0 Sep 0 0 1 1 2 2 ) % ( United Kingdom France Germany 140 130 120 110 100 90 1 1 1 0 0 to Feb 0 0 to Dec 0 pr 0 0 to A Mar 0 May 0 Jan 0 1 1 1 g 0 n 0 u 0 to Ju 0 to A July 0 Sept 0 v 0 o N 1 to Feb 0 1 to Dec 0 0 to Oct 0 pr 0 1 to A Mar 0 May 0 Jan 0 2 2 2 2 2 g 0 n 0 u 1 to Ju 1 to A July 0 Sept 0 v 0 o N 2 to Dec 0 1 to Oct 0 Jan 0 2 The Hiscox Annual 2002 11 CHART3: HISCOX INSURANCE COMPANY LIMITED Gross written premium £m Combined ratio % 140 120 100 80 60 40 20 0 118.0 107.9 102.6 97.7 97.8 97.9 1997 1998 1999 2000 2001 2002 2002, and we have been able to expand our book. 2002 was marked by an absence of any insured catastrophes – but two narrow misses by hurricanes reminded us why customers purchase reinsurance. – London Market Insurance: This has been an area of expansion. We have provided capacity to the market at a time when many domestic players around the world have been reeling. A very good start to the 2002 underwriting year has been offset by deterioration of an old marine loss and an old energy liability loss. Prospectively, I expect that this area will be a significant profit generator. Hiscox is a leader in professional insurance solutions for the media and advertising industry 176.4 163.9 127.3 90.0 97.8 74.7 180 160 140 120 100 80 60 40 20 0 1997 1998 1999 2000 2001 2002 companies return to this segment. In our retail business we are seeing good growth, mostly driven by rating increases, though we expect that this year we will see policy count growth as well. The UK Property owners book which we exited at the beginning of 2002 has now run off. The retreat from personal lines business by some of our major competitors, particularly in mainland Europe, is benefiting us and should enable us to reinforce our market position in the forthcoming year. – Professional Insurances: In the retail business we focus on the insurance of service based firms. We con- tinue to invest in this business, and are benefiting both from organic policy count growth and from rate increas- es. In the UK, growth has been particularly strong. Late last year we acquired the renewal rights to Denham Direct and we have decided to provide underwriting capacity to several underwriting agencies. In Europe we are just beginning to develop business in this area. In the Syndicate, the business is mainly US focused serv- ing major law firms. We are benefiting from the significant rate rises and capacity withdrawals within the professional indemnity market. – Aerospace, Technology, Media and Telecommuni- cations (ATMT): Our base of ATMT business continues to broaden. It has previously been dominated by aero- space business, but it is now also building a book of US and UK technology business. The problems of the media account, due to the often perverse outcomes of libel actions, have now been addressed, and prospects look good. During the forthcoming year we will be putting effort into expanding this book into the rest of Europe. – London Market Reinsurance: This area saw rate increases taking place even ahead of the tragic events of 9/11. Rates have remained firm to increasing throughout 12 The Hiscox Annual 2002 Hiscox's strength and stability are near- legendary. Our consistent strategy and security have enabled us to thrive for over a century, and this year has been no exception. A.M. Best affirmed the financial strength rating of A- (Excellent) of Hiscox Insurance Company, while Standard & Poor’s affirmed its rating of triple-‘B’-plus (Good) and has upgraded the outlook from stable to positive. Our operating profit was £34.5 million and our pre- tax profit is £20.3 million (2001: £32.5m loss). The difference between these results is due to contributions to the government mandated equalisation provision and to negative short term fluctuations in our investment port- folio. In 2002 we contributed £2.7 million (2001: £2.6m) to the equalisation provision. Our total return from our investment portfolio was £16.2 million (2001: £9.9m), but, in difficult markets, this was below our expected return based on long term rates. This caused a negative fluctuation of £11.4 million, (2001: £8.7m). Our Group pre-tax return on equity available at the start of the year based on operating profit was 20.9% (2001: -15.9%). On after-tax profits this is equivalent to 8.5% (2001: -17.3%). LLOYD’S BUSINESS Our Lloyd’s business comprises Hiscox plc’s share of the results of Syndicate 33 at Lloyd’s, together with profit commission and fees earned from third party capital. Also included are certain corporate expenses not allo- cated to other parts of the Group. It has had a good year. As shown in Table 2, controlled gross written premiums have grown to £726 million (2001: £574m). Hiscox plc’s share of this income has grown by 35% to £461.8 million (2001: £343.2m). This growth in income reflects the con- tinued increase in business written post the events of 9/11 and a slight increase in the ownership of Syndicate 33 to 63% (2001: 60%). Better terms and conditions and fewer losses have all translated to the combined ratio improv- ing to 94.1% (2001: 115.9%). This represents a good start and we expect further improvement. We have increased our net reserve for WTC by £10 million for three reasons. First, as the claim from a telecommunications client has developed, more physical damage losses have been reported than we anticipated. Hiscox insures clients against the impact of criminal activity, ranging from burglary through to kidnap and ransom GROUP FINANCIAL PERFORMANCE Group after-tax profits were £14.0 million (2001: £23.1m loss), equal to earnings per share of 6.6p (2001: loss per share of 14.8p). At a pre-tax operating level, profits were £34.5 million (2001: £21.2m loss). The Group combined ratio improved from 109.9% to 94.8%. These substantial improvements reflect the higher rates, selective under- writing and lower claims that we referred to earlier. This year each part of the Group contributed to the achievement of our operating profit. Our Lloyd’s busi- ness contributed £21.2 million, our UK Retail business contributed £11.7 million and our International busi- nesses contributed £1.6 million. In all cases this was a better performance than in the previous year. TABLE 2: LLOYD’S BUSINESS RESULTS Gross written premium (100%) Hiscox plc share of gross written premium Trading result Other income less expenses Loan interest and capacity amortization Operating profit 2002 £m 726.3 461.8 26.0 (2.0) (2.8) 21.2 2001 £m 574.4 343.2 (26.4) (0.5) (2.5) (29.4) Combined ratio (100% basis) 94.1% 115.9% 14 The Hiscox Annual 2002 We continue to earn our reputation as the leading insurer of fine art – whether in the nation’s top galleries or the homes of private collectors Second, we have increased our bad debt provision, reflecting the downgrades of a number of reinsurers dur- ing the year. To date, however, no reinsurer on our programme has failed to pay a claim as a result of insol- vency. Third, as part of the closing of Syndicate 33’s 2000 year of account, we have felt it prudent to increase the reserve on a claim from a transportation client which fell on that year. Syndicate 33 began 2002 with a capacity of £504 mil- lion (2001: £360m). By the end of the year we had effectively increased this to £706 million with the help of qualifying quota share reinsurances provided to us from a range of leading international reinsurers, including Berkshire Hathaway and Chubb. These quota share rein- surers pay Syndicate 33 a fee and a profit commission in return for Syndicate 33 underwriting business on their behalf. We welcome their support. We initially planned to increase Syndicate 33’s capacity for 2003 by 40% to £706 million (2002: £504m). In November we agreed with supporting capital providers to increase our capac- ity to £842 million. Qualifying quota shares allow us considerable flexibility to take advantage of market opportunities as, under current Lloyd’s rules, we could seek approval to increase these reinsurances to a maxi- mum of £336 million. UK RETAIL The UK retail business comprises the results of business written within Hiscox Insurance Company in the UK, together with the results of our direct activities. Table 3 TABLE 3: UK RETAIL BUSINESS RESULTS Gross written premium Trading profit Other income less expenses Operating profit Combined ratio 2002 £m 147.6 12.7 (1.0) 11.7 96.0% 2001 £m 143.6 9.0 (1.4) 7.6 95.4% The Hiscox Annual 2002 15 P R O F E S S O R B R AY N E explains THE “EXTRANET” Professor - Can you explain to us how Hiscox is using an “Extranet” to provide insurance in the United States of America? A splendid question, Lucy, and one which perfectly illustrates how Hiscox is applying innovation to provide a better service and develop its business. As you may know, an “Extranet” is a MARVELLOUS new invention which enables computing machines to be linked together with great security at great distances - even between continents! Imagine that an American businessman visits his insurance broker to obtain insurance protection for his company's buildings against acts of terrorism. Normally, the broker would have a limited choice of policies to offer. Obtaining a quotation and issuing the policy could also take days or weeks. However, Hiscox's innovative new solution provides swift access to capacity for terrorism insurance, with a very clear and straightforward policy wording. BUT how DOES the “Extranet” ACTUALLY work, PROFESSOR? WELL, Edmund - Firstly, the broker programs his computing machine with the client's insurance requirements. This information is conveyed across the Atlantic Ocean by means of electrical impulses along an undersea telegraph cable. The signal arrives instantaneously in London and is conveyed to Hiscox's giant computing machine. Here, the information is processed by a complex arrangement of valves and relays, the aggregate is checked for available capacity, and a quotation is calculated. The quotation is instantly relayed back to the United States and, if this is accepted by the client, a policy can be issued - all within ten minutes! AS A RESULT, THE CLIENT IS HAPPY, THE BROKER IS HAPPY, AND HISCOX HAS SOLD ANOTHER POLICY. And that, I'm sure you'll agree, represents a considerable “net” improvement FOR EVERYONE! Setting out our stall – Hiscox’s performance in the UK and international retail insurance markets continues to be fruitful shows how this business has had another good year with operating profit growing to £11.7 million (2001: £7.6m). Gross written premium has increased to £147.6 million (2001: £143.6m), despite the non-renewal of the £8.2 million property owners business. The combined ratio has remained at a market leading level of 96% (2001: 95.4%). At this level of performance our goal is to grow the business without compromising our underwriting standards. We currently serve less than 5% of our target markets, so we believe that our growth opportunities are huge. Last year we launched a Professional Insurances Portfolio that enables us to insure the full package of insurance required by small and medium sized service based businesses. This focus on specialty commercial business is in keeping with the overall strategy of the Hiscox Group. Looking forward to 2003, we expect to update our affluent personal line products – again broad- ening our product range. Both of these developments will allow us to serve better the two market segments on which we focus. During the year our direct business made rapid progress. This business is focused on ‘mass affluent’ per- sonal lines customers. We distribute policies direct by telephone and on the internet (www.hiscoxonline.com), also to employees of 44 companies through their intranets and through partnerships with financial institutions. At the end of February 2003 we had served 4,400 policyholders. A development during the course of this year will be the implementation of extranet technology to allow us to provide our partner brokers with more efficient under- writing and claims systems. This will be linked to the creation of a service centre in Colchester. Both of these developments will help us improve our cost position over time. INTERNATIONAL RETAIL BUSINESS This covers all the business written by Hiscox Insurance Company (Guernsey) Ltd., the business written by Hiscox Insurance Company in Europe and the results of our local underwriting agencies. Table 4 shows the results in some detail. In aggregate the business unit has performed well. Hiscox Guernsey has made another excellent profit. Our team there continues to underwrite more policies and has maintained its income despite a reduction in the size of risk they are willing to underwrite. This has brought the added advantage of better balance to the portfolio. Our mainland Europe business has had considerably improved results, almost halving its loss. Our combined ratio reduced to 111.3% (2001: 115.4%). This is not yet at our long term target, but we expect to see further progress as the individual offices gain scale. Our French operations traded profitably despite a large fine art loss in the first half of the year. German rates are improving, so The Hiscox Annual 2002 17 Back to school – Nicholas Thomson has been developing computer based training programmes for Hiscox so that we can retain his knowledge forever as these increases earn through, its results should improve. In Benelux, we need to gain further economies of scale. Our Irish business had another good year. We believe that there are huge opportunities for profitable growth in the whole of Europe. INVESTMENT MANAGEMENT Our investment management business has two roles with- in the Group. First and foremost, it supervises the external managers who have day-to-day responsibility for the investment of our assets. Second, it manages a small range of funds – such as the Hiscox Insurance Portfolio – which focus on sectors where we feel our detailed knowl- edge of the financial services industry can add value. Total managed assets grew to £790.4 million (2001: £521.0m), of which Hiscox plc’s share stood at £623.8 million at the end of 2002 (2001: £406.7m). This growth reflects the impact of our capital raising, the positive cash flow from our businesses and retained profit. This year we achieved a total return of 3.5% across those assets attributable to Hiscox plc (2001: 3.2%). This was below our assumed long term rates of return, causing a negative fluctuation of £11.4 million (2001: £8.7m). We have reduced our long term investment return targets for 2003 TABLE 4: INTERNATIONAL BUSINESS RESULTS Gross written premium Trading result Local agency results Operating profit/(loss) Europe 2002 £m 28.8 (1.0) (0.2) (1.2) Guernsey 2002 £m 38.6 2.8 – 2.8 Total 2002 £m 67.4 1.8 (0.2) 1.6 Europe 2001 £m 20.3 (1.9) (0.4) (2.3) Guernsey 2001 £m 41.8 3.2 (0.3) Total 2001 £m 62.1 1.3 (0.7) 2.9 0.6 Combined ratio (100% basis) 111.3% 89.8% 97.5% 115.4% 89.0% 99.6% 18 The Hiscox Annual 2002 Hiscox has shown striking intelligence by becoming the leading specialist in several niche areas of insurance, such as fine art and high value homes. We have now added business insurance to our range of specialisms with great success. Our expertise in providing indemnity insurance to meet the special needs of professions such as communications and I.T. has put Hiscox at the forefront of this fast-growing area. to 4% for bonds and 6% for equities. Table 5 summarises this position. Third party assets under management grew to £93.7 million (2001: £55.5m). Part of this growth was due to the acquisition of the business of Eldon Capital Management. Eldon brought an additional £45.8 million of third party funds to Hiscox; more importantly, its financial sector expertise reinforces our insurance focus and its experienced staff provide good succession for the management of Hiscox plc’s own assets. BALANCE SHEET The most important balance sheet event during the course of the year was the rights issue in November 2002 which raised £110 million net of expenses. At the year end our net asset value, before equalisation provision was 101.7p per share (2001: 91.4p per share), and our tan- gible net assets value, before equalisation provision was 93.8p per share (2001: 79.0p per share). During the year we also renewed a letter of credit facility that is used to provide funds at Lloyd’s to support our underwriting on Syndicate 33. The letter of credit was renewed at a level of £137.5 million. We are grateful for the support of our bankers who have allowed us to expand our underwriting at the most attractive point in the insurance cycle. PEOPLE This year, two individuals who have played an important role in the development of Hiscox are due to retire. The first is Nicholas Thomson, underwriter of Syndicate 33 from 1977 to 1993 and the Director of Underwriting for the Group until 2001. Nick embodies our underwriting culture – rational decision making and a strong sense of discipline. Over the past two years Nick has been devel- oping computer based training programmes for the Group so that we can retain his knowledge forever. David Truby, our group compliance officer, also retires after 20 years of service. David has advised all of us as we have sought to ensure that Hiscox adapts to the changing regulatory envi- ronment. I would like to thank them for their endeavours. Hiscox remains as good as its people. Nick and David are being followed by many other individuals of strength and quality. We further developed our training schemes this year, and it is pleasing to see them becoming part of the landscape at Hiscox. We were particularly pleased to be nominated tenth in the annual Sunday Times ‘100 Best Companies to Work For’ list. This is a great achievement. Finally, I would like to thank all of our staff. The past few years in insurance have been particularly difficult. Some of our businesses have performed well throughout the downturn and others have had to be restructured and refocused to return to profitability. This has taken commitment and resilience by many – and it is great to see the results of their labours being reflected in Group profits. We all are energised to ensure that this continues in the future. CONCLUSION The year has seen the business forging ahead. Using my usual yachting analogy, we have been sailing with a mainsail, jib and spinnaker and have taken full advantage of the conditions. The rights issue has allowed us to increase our level of business, effectively replacing our spinnaker with a bigger and better one. We will continue to surge forward in the year ahead. – Bronek Masojada, 26 March 2003 TABLE 5: INVESTMENTS 2002 £m 623.8 3.5% 16.2 27.6 (11.4) 93.7 2001 £m 406.7 3.2% 9.9 18.6 (8.7) 55.5 Total invested assets Total return Actual investment return Investment return at longer term rates Short term fluctuations Third party assets under management 20 The Hiscox Annual 2002 We have added even more awards to our trophy cabinet this year. Hiscox Insurance Company won the Insurance Times Claims Award 2002, acknowledging the excellence of our claims service, which is continually refined on the basis of in-depth research amongst brokers and clients. At the same awards ceremony, Hiscox's Syndicate 33 was named as the Lloyd's Syndicate of the Year 2002, recognising its outstanding underwriting performance and innovation. 23 Directors and Advisors 24 Corporate Governance 26 Directors’ Remuneration Report 28 Directors’ Report 30 Statement of Directors’ Responsibilities 31 Independent Auditors’ Report 32 Consolidated Profit and Loss Account, Technical Account – General Business 33 Consolidated Profit and Loss Account, Non-Technical Account 34 Consolidated Balance Sheet 36 Company Balance Sheet 37 Consolidated Cash Flow Statement 38 Notes to the Accounts 63 Notes to the Consolidated Cash Flow Statement 65 Five Year Summary 66 Notice of Annual General Meeting 67 Key Shareholder Information 22 The Hiscox Annual 2002 Directors and Advisors EXECUTIVE DIRECTORS INDEPENDENT NON-EXECUTIVE DIRECTORS Secretary Stuart John Bridges Robert Ralph Scrymgeour Hiscox Chairman (Aged 60) Robert Hiscox joined the Group in 1965. He was Deputy Chairman of Lloyd’s between 1993 and 1995. Bronislaw Edmund Masojada Chief Executive (Aged 41) Bronek Masojada joined the Group in 199 3. From 1989 to 1993 he was employed by McKinsey and Co. He was Chairman of the Lloyd’s Underwriting Agents Association from 1998 to 2001. He is currently Deputy Chairman of Lloyd’s. Stuart John Bridges Group Finance Director (Aged 42) Stuart Bridges is a qualified chartered accountant, who joined the Group at the start of 1999. He has held posts in various financial service companies including Henderson Investors plc. Robert Simon Childs Director of Underwriting (Aged 51) Chairman of the Lloyd’s Market Association Robert Childs has been Underwriter of Syndicate 33 since 1993. He joined the Group in 1986. Registered Office 1 Great St Helen’s London EC3A 6HX Registered Number 2837811 Auditors KPMG Audit Plc 8 Salisbury Square London EC4Y 8BB Tax Advisors PricewaterhouseCoopers 89 Sandyford Road Newcastle upon Tyne NE99 1PL Bankers Lloyds TSB Bank plc 113-116 Leadenhall Street London EC3A 4AX Stockbrokers ING Barings Limited 60 London Wall London EC2M 5TQ Registrars Northern Registrars Limited Northern House Penistone Road Fenay Bridge Huddersfield HD8 0LA Stephen Hargreaves Hall Senior Independent Director Chairman of Audit Committee (Aged 69) Stephen Hall was a partner in Ernst & Young from 1962 to 1993 and acted as Director of Finance at Lloyd’s from 1993 to 1994. He joined the Group on 24 August 1995. Anthony Howland Jackson Chairman of Remuneration and Conflicts Committees (Aged 61) Anthony Howland Jackson was previ- ously Chairman of Bain Hogg plc and Deputy Chairman of Aon UK Holdings Limited. He is Chairman of The General Insurance Standards Council. He joined the Group on 8 May 1997. Derek Nigel Donald Netherton (Aged 58) Derek Netherton was previously a Director of J. Henry Schroder & Co. Limited and is currently Chairman of Greggs plc and a non-executive Director of Next plc, Plantation & General Investments plc and St James’s Place Capital plc. He is a member of the Supervisory Board of the Schroder Exempt Prop e rt y U nit Tru st. He joined the Group on 6 August 1999. Carol Franklin Engler (Aged 51) Carol Franklin Engler is a partner in Vorausdenken. She was the Chief Executive Officer of the World Wide Fund for Nature in Switzerland until the end of 2001. From 1979 to 1999 she was employed by Swiss Re in a variety of roles including Head of the Aviation Department and Head of Human Resources. She is currently a non-execu- tive director of Citron plc. She joined the Group on 12 August 1999. Committee membership Stephen Hargreaves Hall Anthony Howland Jackson Derek Nigel Donald Netherton Carol Franklin Engler Robert Ralph Scrymgeour Hiscox Audit Committee Remuneration Committee Conflicts Committee Nominations Committee – – – – The Hiscox Annual 2002 23 (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) Corporate Governance THE COMBINED CODE Hiscox is committed to high standards of corporate governance. For the year ended 31 December 2002, and the period up to the date of approving the accounts, the Group has applied the principles and complied with the provi- sions of “The Combined Code” and “Internal Control: Guidance for Directors on The Combined Code” with the follow- ing exception that until April 2002, the Board as a whole acted as the Nominations Committee to deal with appointments to the Board. The membership of that Committee now comprises all the indepen- dent non-executive directors and one executive director. No appointments were made to the Board in the year. THE BOARD OF DIRECTORS The Board comprises four executive direc- tors and four independent non-executive directors, including a senior independent director. Brief biographical details for each member of the Board are provided on page 23. The roles and activities of Chairman and Chief Executive are distinct and sep- arate. The Chairman is responsible for running an effective Board and overall strategy, and the Chief Executive has exec- utive responsibility for running the Group’s business. In accordance with the Company’s Articles of Association, all directors are required to submit themselves for re-election by the shareholders at least every three years. Any director may seek independent professional advice at the Company’s expense. A copy of the advice is provided to the Company Secretary who will circu- late to all directors. No such advice was sought during the year. The Board meets at least four times a year and operates within established terms of reference. It is supplied with appropriate and timely information to enable it to review business strategy, trading performance, business risks and opportunities. THE BOARD’S COMMITTEES The Board has appointed and authorised a number of committees to manage aspects of the Group’s affairs. Each committee operates within established terms of refer- ence and each chairman reports directly to the Board. The Audit Committee comprises four independent non-executive directors. It meets at least four times a year to assist 24 The Hiscox Annual 2002 the Board on matters of financial reporting, risk management and internal control. The internal and external auditors have unre- stricted access to the Audit Committee, which monitors the scope, results and cost effectiveness of the external audit, the independence and objectivity of the audi- tors, and the nature and extent of non-audit work together with the level of related fees. All non-audit work with fees greater than £50,000 must be pre-approved by the Audit Committee. The Risk Committee comprises the Chief Executive, the Group Finance Director, the Group Compliance Officer and the Head of Internal Audit. It meets monthly to monitor the risk management framework and reports directly to the Board and the Audit Committee. The Remuneration Committee com- prises three independent non-executive directors. It has agreed terms of reference and meets at least twice a year. The Committee recommends to the Board a framework of executive remuneration and its cost. The Committee will also deter- mine on the Board’s behalf the specific remuneration packages for each of the executive directors, including pension rights and any compensation payments. The Board’s remuneration report is pre- sented on pages 26 and 27. The Conflicts Committee comprises all the independent non-executive directors and the Group Compliance Officer. It meets as and when required. Should a conflict of interest arise between group entities, there is a formal procedure to refer the matter to this Committee. The Nominations Committee now com- prises one executive director and all the non-executive directors. It meets as and when required to deal with appointments to the Board. It did not meet during the year. Two key management committees, the Executive Group and the Group Management Team, head the Group’s organisational structure. These committees meet weekly and manage the Group’s business operations in order to achieve the Board’s strategic business objectives. SHAREHOLDER COMMUNICATIONS Ongoing communication with private and institutional investors is a top priority for the Board. The executive directors communicate and meet directly with shareholders and analysts throughout the year, and do not limit this to the period following the release of financial results or other significant announcements. In addition to this direct communica- tion, information is continually provided to shareholders via stock exchange announcements and the Hiscox website. The annual report and accounts are sent to all shareholders, and further copies are available directly from Hiscox, via the FT report and accounts service, or through the Hiscox website. RISK MANAGEMENT FRAMEWORK The directors are responsible for operating the system of risk management and inter- na l c on trol a nd fo r re viewin g it s effectiveness. Hiscox acknowledges that it is neither possible, nor desirable, to elimi- nate risk completely and the system can only provide reasonable and not absolute assurance against material misstatement or loss. The constant aim is to be fully aware of the risks to which the business is exposed and to manage these risks to acceptable levels. Key senior management responsibili- ties are clearly identified together with their reporting lines to the relevant execu- tive directors. Terms of reference and reporting lines are in place for all key decision-making and monitoring commit- tees including the committees mentioned above. The execution of each delegated responsibility, by individuals and commit- tees, is closely monitored by regular reporting to, and challenge by, the Board and its committees. This monitoring, sup- ported by financial and non-financial management information, covers perfor- ma nc e ag a ins t agr ee d t a rge ts a nd objectives, as well as the risks to achieving these objectives and the effectiveness of the measures in place to manage these risks. Feedback and discussion within this reporting structure allows the Board to determine, communicate and enforce its appetite for the various risks to which the business is exposed. In parallel with its direct monitoring processes described above, the Board has Internal Audit and the Risk Committee as additional indirect means to monitor and review the effectiveness of risk manage- ment throughout the organisation. INTERNAL AUDIT The internal audit function is responsible for providing independent assurance directly to the Audit Committee on the adequacy and effectiveness of the Board’s example, compliance controls, strategic planning, scenario analysis and continuity planning. RISK MANAGEMENT CULTURE Hiscox’s culture of open communication and delegated responsibility allows this framework of embedded risk management to function well throughout the organisation. system of risk management and internal control. This assurance is provided by means of an agreed programme of review, responsive work and direct reporting of significant issues. Internal audit is also responsible for making recommendations at all levels where risk management may be usefully improved and for reporting the acceptance and impl eme ntation of significant recommendations to the Audit Committee. RISK COMMITTEE This high-level committee, chaired by the Chief Executive, is responsible for moni- toring all the risk management activities operating within the organisation and reporting significant issues to the Board and the Audit Committee. It also has an important role to play in promoting and developing good risk man- agement practice as well as identifying emerging risks and recommending appro- priate risk management strategies. The committee receives information from the internal audit function as well as conducting its own reviews at strategic, tactical and operational levels. KEY STRATEGIC RISK AREAS The Risk Committee has identified for the Board four key strategic risk areas which, together with supporting analyses, enable the Board to review with each executive director the risks they are responsible for managing: • Financial risks – including capital, third- party default and economic risks, managed by, for example, scenario analy- sis, reinsurance security limits and monitoring, credit control measures, investment controls, cash flow monitor- ing and currency exposure hedging. • Underwriting risks – including castas- trophic, systematic and data risks, managed by, for example, exposure limits for accounts and underwriters, training programmes, risk-based reviews, portfo- lio reviews, aggregation modelling, scenario analysis, reinsurance, data input controls, reconciliation and binding authority management systems. • Operational risks – including outsourc- ing, efficiency, project and people risks, managed by, for example, vetting, moni- toring, IT development processes, project management controls, competency assessment, employee development plan- ning and training delivery. • External risks – including regulatory, partnership, competitive and business interruption risks, managed by, for The Hiscox Annual 2002 25 Directors’ Remuneration Report This report sets out the remuneration poli- cies for the Group’s senior executives, including the executive directors. It should be read in conjunction with the details of directors’ remuneration on pages 54 to 58 which form the audited part of this Remuneration Report. The members of the Remuneration Committee are identified on page 23. None of the Committee has any personal financial interest (other than as sharehold- ers), conflicts of interests arising from cross-directorships or day-to-day involve- ment in running the business. Th e Committee makes recommendations to the Board. No director plays a part in any discus- sion about his or her own remuneration. REMUNERATION POLICY The Remuneration Committee recommends to the Board a framework of executive remu- neration and its cost. The Committee will also determine on the Board’s behalf the specific remuneration packages for each of the executive directors, including pension rights and any compensation payments. 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, i.e. to attract and retain quality staff and to encourage and reward superior performance. Pay elsewhere in the Group is considered in determining directors’ remuneration. REMUNERATION ELEMENTS There are four components to the remunera- tion package: base salary and benefits, annual cash bonuses, long term incentive arrangements and pensions. BASE SALARY AND BENEFITS The Remuneration Committee utilises the services of independent consultants, including independent reports published by Watson Wyatt and IDS (Incomes Data Services Limited), in its consideration of what comparable companies are paying and in setting annual salaries and other benefits. Using this information as a benchmark, and taking into account current economic and operational conditions, salary levels are determined for each individual which take into account experience, skills, development and performance. BONUSES The Remuneration Committee believes that a significant portion of the total remunera- tion should be attained through an incentive bonus which links rewards directly with per- formance. A bonus pool is created when the 26 The Hiscox Annual 2002 business profits of the Group, based on the year’s accounting result, exceed a return on equity linked to the longer term rate of return. Similarly the bonus pools allocated to each major business division are calcu- lated based on the business profits generated by that division. This pool is utilised to award annual bonuses to all staff including executive directors based upon the performance of their business area and upon their individual performance. In this way, the bonus scheme aligns the interests of employees with shareholders. The actual amount to be paid to executive directors is determin ed b y th e Re mu ner at i on Committee based on an assessment of their individual performance against objectives. The Remuneration Committee also reviews and confirms the recommenda- tions of management regarding the award of bonuses to senior managers and staff. LONG TERM AWARDS The Remuneration Committee believes strongly in the value of employee partici- pation in long term award schemes so that their interests may be aligned with those of shareholders. The Group has three share option schemes which were set up for this purpose. Awards were made during the year to executive directors, senior executives and other staff under the Approved and Unapproved share option schemes. The exercise of options under these schemes depends upon the basic earnings per share of the Group increasing at 2% more than the rate of inflation over a period of three years. These options are not offered at a discount and conform with institutional investor dilution guidelines. All directors entitled to share options are subject to these same performance criteria. Awards were also made during the year under the Sharesave Scheme and the International Sharesave Scheme. These schemes provide a medium-term incentive available to all staff. Awards depend upon the amount employees are prepared to save out of their salary subject to the maximum figure under the rules. The Remuneration Committee is very pleased with the commitment shown by employees in the future of the Group. The Group has also implemented a per- formance share plan for senior executives to complement the existing long term incentive arrangements. No awards were made during the year under this plan. The targets applicable to the awards made in previous years were subject to the follow- ing operational earnings per share (“EPS”) growth target: a) The participants will receive 100% of the award if the Group’s operating EPS (note 13) over a fixed three year period has increased by 35% (“the maximum target”); b) No award will vest unless the increase in the Group’s operating EPS over the period equals or exceeds 15% (“the base target”) at which point 40% of the award will vest; and; c) An award will vest on a straight line basis if the operating EPS growth is between the base target and the max- imum target. During the year, adjustments were approved by the Board to the number of awards and options in issue to take account of the recent Rights Issue and Open Offer and Placing. These adjustments were con- sistent with the preferred methodology set out in the Inland Revenue Share Schemes Manual and were based on the method of calculating the theoretical ex-rights price set out in Financial Reporting Standard 14 “Earnings per share”. Approval has been received from the Inland Revenue for the adjustments to all the approved schemes and the Company’s auditors have provided confirmation that the adjustments are fair and reasonable for those schemes that required such a confirmation. EXCHANGED OPTIONS Under the terms of the offers to purchase Hiscox Holdings Ltd and Economic Insurance Holdings Ltd in July 1996, the Company offered to exchange existing options held in the shares of those compa- nies for options on Hiscox plc shares. As a result of this offer, exchanged options were issued to 38 employees and former employees of those companies. The interests of executive directors in such exchanged options is shown in note 25 to the accounts. PENSIONS The non-contributory defined benefit Hiscox Pension Scheme has two sections. The first section provides benefits that accrue at the rate of one sixtieth for each year of service up to retirement age 60 for employees as well as former members of the Economic Insurance Holdings Ltd scheme. The other section provides benefits that accrue at the rate of one thirti- eth for each year of service up to retirement age 60 for senior executives as well as former members of The Hiscox Holdings Ltd scheme. At 1 January 2001, Hiscox introduced a non-contributory NON-EXECUTIVE DIRECTORS Non-executive directors receive an annual fee in respect of their Board and Board committee duties. The fees are reviewed, but not necessarily increased, annually and are set by the Board to attract individuals with a broad range of relevant skills and experience. The non-executive directors receive no other benefits. By order of the Board SJ Bridges Secretary 1 Great St Helen’s London EC3A 6HX 26 March 2003 defined contribution scheme for all staff joining the Group after that date. Only basic pay is pensionable. All schemes pro- vide a death in service benefit of four times a member’s salary. SERVICE CONTRACTS No directors have service contracts, but their contracts of employment provide for termination on six months, notice by either side. Since the termination notice period is only six months, no statement of mitigation policy is deemed necessary. The Remuneration Committee believes that these notice periods provide an appro- priate balance having regard to prevailing market conditions and current practice amongst public companies. No external appointment may be accepted by an exec- utive director where it may give rise to a conflict of interest. The consent of the Chairman is required in any event. The following graph shows the Company’s performance, measured by total shareholder return, compared with the performance of the FTSE All Share Insurance Index, also measured by total shareholder return. The FTSE All Share Insurance Index has been selected for this comparison because it is the most representative index for measuring the performance of the insurance market in which Hiscox participates. ) % ( Hiscox FTSE ASX Insurance Index 150 100 50 0 -50 D ec 96 Jun 97 D ec 97 Jun 98 D ec 98 Jun 99 D ec 99 Jun 00 D ec 00 Jun 01 D ec 01 Jun 02 D ec 02 Total shareholder return of Hiscox plc against the FTSE ASX Insurance Index Source: Bloomberg The Hiscox Annual 2002 27 Directors’ Report The directors have pleasure in submitting their annual report and financial statements for the year ended 31 December 2002. PRINCIPAL ACTIVITY AND BUSINESS REVIEW The Company is a holding company for subsidiaries involved in the business of insurance in the UK and overseas. The review of the year and likely future developments are described further in the Chairman’s Statement and the Chief Executive’s Report. FINANCIAL RESULTS The results for the year are shown in the profit and loss account on pages 32 and 33. DIVIDENDS An interim dividend of 1.14p per share (2001: nil), adjusted for the Rights Issue, was paid on 24 October 2002 in respect of the year ended 31 December 2002. The directors recommend the payment of a final dividend of 2.40p per share (2001: nil). This will be paid on 30 June 2003 to share- holders on the register at the close of business on 22 April 2003. DIRECTORS The names of the directors of the Company throughout the year and at the date of this report are listed on page 23. Details of their interests in the shares of the Company are set out in note 25 to the accounts. RRS Hiscox, AGC Howland Jackson and DND Netherton will retire by rotation in accor- dance with the Articles of Association at the Annual General Meeting and, being eligi- ble, will offer themselves for re-election as directors. GOING CONCERN After making enquiries, the directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the accounts. CORPORATE SOCIAL RESPONSIBILITY – Our core values: Underpinning the Hiscox culture is a set of core values, which determine the standard of behaviour Hiscox expects from all of its employees. These core values, which include integrity, qual- ity, efficiency and respect, are intended to guide everything Hiscox does in its busi- ness and they determine the way in which 28 The Hiscox Annual 2002 Hiscox employees deal with a range of stakeholders, both internal and external. Hiscox recognises that by conducting its business with these values firmly rooted at its core, it is more likely to achieve business success and create value for shareholders. – Employee policies: The Company has a clearly stated aim to be an employer of choice recognised for its people excellence. This influences all of its employment poli- cies. Our people genuinely make a difference and therefore we have to attract the best employees, enable them to perform to an excellent standard and to contribute to the development of the business, reward them on their level of contribution and pro- vide an environment in which they can enjoy their work. In order to facilitate this, the Group is committed to providing equal opportunities to potential and actual employees in all aspects of employment. Applications for employment by dis- abled persons are always fully considered, bearing in mind the aptitude of the appli- cant concerned. In the event of members of staff becoming disabled, every effort is made to ensure that their employment with the Group continues and that appropriate training is arranged. It is the policy of the Group that the training, career development and promotion of disabled persons should, as far as possible, be identical with that of other employees. Our employment policies and practices are free from discrimination on any grounds relating to selection, train- ing and development, career progression and any other employment matters. We are committed to training and devel- oping all of our employees to maximise their potential. A comprehensive develop- ment programme ensures our employees are highly knowledgeable and skilled. This is supported by a Performance Management approach that ensures training and develop- ment needs are reviewed regularly, as is performance, against clearly set objectives. We actively look to leverage the talent of every employee within the Company. Employees are kept informed of the busi- ness and its activities through formal briefings, team meetings, use of the intranet, video conferencing and informal routes. These also provide a means for the Company to listen to employees and involve them in taking the business forward. Employees are encouraged to identify with the Company through performance related pay and bonus schemes, savings related share option schemes and executive share option schemes. They are also encouraged to socialise with each other and enjoy their work environment. The Company therefore was delighted to be voted the tenth best company to work for in the UK and the number one company to work for in the insurance sector in the Sunday Times 100 Best Companies to Work For 2003 survey. The results of this survey were derived from both the views of employees and from a review of the poli- cies and processes of the companies surveyed. The Group is also committed to ensuring that all employees are provided with safe working conditions. A Health and Safety Committee oversees compliance with, and the development of, the Group’s health and safety policy which is available to all staff via the Group’s intranet. In addition, risk assessments are completed for the building and for all staff, records of which are main- tained for inspection by Environmental Health Officers. – Environmental policy: The way our insureds conduct their business is of para- mount importance to us, due to our core philosophy that for high quality underwrit- ing we need high quality insureds. In considering underwriting, the insureds’ atti- tudes to all aspects of their business, including their care of the environment, are considered. Hiscox also aims to minimise the impact on the environment from its business activ- ities. In accordance with the Group’s Environmental Policy, consumables are recycled or reused wherever possible and the Group strives continuously to reduce the amount of raw materials used in its business processes and by its staff – particularly through the extensive use of computeri- sation and communications technology. We were pleased that, for the second consecutive year, Hiscox received the Platinum Award with Special Commendation from the Corporation of London as part of its Clean City Scheme Awards, which puts it in the top 6 of the 727 companies rated. These awards are given as part of an annual scheme run by the Corporation to recognise the efforts of companies in the City in reducing, recy- cling and reusing waste, in order to support the sustainable use of raw materials. Each company’s building is judged by a panel of officers from the Corporation, public sector and private industry on the efforts it is mak- ing, its approach to recycling and its innovation in dealing with waste. A designated Hiscox representative attends meetings organised by the Corporation of London to keep abreast of best practices with regard to the environment and to exchange ideas with other like-minded companies. In 2002, Jupiter Asset Management’s Socially Responsible Investment (SRI) team assessed the extent to which Hiscox incorpo- rates environmental and social risks into the underwriting process. Feedback from Jupiter confirmed that because we have started to include these issues into some of our under- writing, we demonstrate sector leadership in our immediate peer group of listed Lloyd’s Underwriters. As a result, Hiscox was deemed to be suitable for a selection of Jupiter’s SRI funds on environmental and social grounds. – Community involvement: The involve- ment of Hiscox in the local community has continued this year, thanks to the strong support of our employees. F or exampl e, i n addition to the Hiscox Foundation’s charitable activities, we participated in a number of other charitable fund raising events during the year. We have also continued with our scheme at Virginia Primary School in Tower Hamlets where staff assist pupils with their numeracy development, and where we finance after hours tuition and assist in the school’s gover- nance. We also provide mentors for students at Morpeth School in Tower Hamlets. Our Art Café plans to hold a number of ex- hibitions of young artists in the coming year. POLITICAL AND CHARITABLE CONTRIBUTIONS The Group made no political contributions during the year (2001: £nil). Donations to the Hiscox Foundation, which is a UK reg- istered charity, amounted to £25,000 (2001: £25,000). The policy of the Hiscox Foundation is to assist and improve edu- cation, the arts and independent living for disabled and disadvantaged members of society. PAYMENT OF CREDITORS It is the policy of the Group to agree terms of payment for its business transactions with its suppliers. Payment is then made on these terms, subject to the terms and conditions being met by the supplier. The Group had 18.0 (2001: 16.5) days purchases outstanding at 31 December 2002 based on the average daily amount invoiced by suppliers during the year ended 31 December 2002. The Company is a holding company and accordingly has no days purchases out- standing at 31 December 2002. Therefore, the Group creditors days are considered to be more representative. The Group does not follow a specific code with re ga rd to th e pa yme nt of creditors. ANNUAL GENERAL MEETING The notice of the Annual General Meeting is contained on page 66. In addition to the ordinary business, the following items of special business will be considered at the meeting. Resolution 8, which will be proposed as an ordinary resolution, seeks to renew the directors’ authority to allot relevant securities pursuant to Section 80 of the Companies Act 1985. The authority con- tained in the resolution will be limited to the allotment of relevant securities to an aggregate nominal value of £4,820,390.90 representing 33.3% of the issued ordinary share capital as at 26 March 2003. This authority will terminate no later than fifteen months after the date of the Annual General Meeting. The directors presently have no intention of exercising this authority. Resolution 9, which will be proposed as an ordinary resolution, seeks to obtain approval for the Remuneration Report as set out on pages 26 and 27 of this Report and Accounts. Resolution 10, which will be proposed as a special resolution, seeks to renew the authority conferred on the Board to issue equity securities of the Company for cash without application of the pre-emption rights provided by Section 89 of the Companies Act 1985. Other than in connec- tion with a rights or scrip dividend issue, the authority contained in this resolution will be limited to an aggregate nominal value of £723,058.60, representing 5.0% of the issued ordinary share capital as at 26 March 2003. This authority will terminate no later than fifteen months after the date of the Annual General Meeting. The Company has been notified of the following shareholdings of 3% or more in the ordinary shares of the Company as at 14 March 2003. MAJOR INTERESTS IN SHARES Chubb Investment Services Ltd Fidelity International Limited AN Foster Landsdowne Partners Limited Partnership Morgan Stanley Securities Limited RRS Hiscox IN Thomson Legal & General Investment Management Ltd Number of shares Beneficial Number of shares Non-beneficial 54,529,566 27,300,209 2,720,000 10,530,000 9,808,297 8,829,859 9,306,802 8,697,745 – – 11,784,391 – – 582,715 – – % of total Hiscox plc shares Total 54,529,566 27,300,209 14,504,391 10,530,000 9,808,297 9,412,574 9,306,802 8,697,745 18.9 9.4 5.0 3.6 3.4 3.3 3.3 3.0 4,749,111 of AN Foster’s non-beneficial shareholding is held by a trust and is also included in RRS Hiscox’s beneficial shareholding. Hiscox Trustees Ltd is the trustee of the Hiscox plc Group employee share ownership plan trust (ESOP) and is interested in 255,466 ordinary shares in the Company. IN Thomson, AN Foster and RRS Hiscox, as employees of the Group, are potential beneficiaries of the ESOP and are also deemed to have an additional interest in these shares. By order of the Board SJ Bridges Secretary 1 Great St Helen’s London EC3A 6HX 26 March 2003 The Hiscox Annual 2002 29 Statement of Directors’ Responsibilities United Kingdom company law requires the directors to prepare financial statements for each financial year that give a true and fair view of the state of affairs of the Company and the Group as at the end of the financial year and of the profit or loss of the Group for that period. In preparing those financial statements, the directors are required to: a) select suitable accounting policies and apply them consistently; b) make judgements and estimates that are reasonable and prudent; c) state whether applicable accounting standards have been followed; and d) prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company and the Group will continue in business. The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 1985. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. 30 The Hiscox Annual 2002 Independent Auditors’ Report to the Members of Hiscox plc We have audited the financial statements on pages 32 to 64. We have also audited the information included by cross refer- ence within the directors’ remuneration report that is described as having been audited. This report is made solely to the Company’s members, as a body, in accor- dance with section 235 of the Companies Act 1985. Our audit work has been under- taken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other t ha n the Company and th e Company’s members as a body, for our audit work, for this report, or for the opin- ions we have formed. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS The directors are responsible for preparing the Annual Report and the directors’ remu- neration report. As described on page 30 this includes responsibility for preparing the financial statements in accordance with applicable United Kingdom law and accounting standards. Our responsibilities, as independent auditors, are established in the United Kingdom by statute, the Auditing Practices Board, the Listing Rules of the Financial Services Authority, and by our profession’s ethical guidance. We report to you our opinion as to whether the financial statements give a true and fair view and whether the finan- cial statements and the part of the directors’ remuneration report to be audited have been properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the directors’ report is not consistent with the financial statements, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regard- ing dire ctors’ remuneration and transactions with the Group is not disclosed. We review whether the statement on pages 24 and 25 reflects the Company’s compliance with the seven provisions of the Combined Code specified for our review by the Listing Rules, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and con- trol procedures. We read the other information con- tained in the Annual Report, including the corporate governance statement and con- sider whether it is consistent with the audited financial statements. We consider the implications for our report if we become aware of any apparent misstate- ments or material inconsistencies with the financial statements. BASIS OF AUDIT OPINION We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includes exami- nation, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and expla- nations which we considered necessary in order to provide us with sufficient evi- dence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion, we also evaluated the overall adequacy of the presentation of infor- mation in the financial statements and the part of the directors’ remuneration report to be audited. EQUALISATION PROVISIONS Our evaluation of the presentation of infor- mation in the financial statements has had regard to the statutory requirement for insurance companies to maintain equalisa- tion provisions. The nature of equalisation provisions, the amounts set aside at 31 December 2002, and the effect of the movement in those provisions during the year on the general business technical result and profit before tax, are disclosed in note 8. FUNDAMENTAL UNCERTAINTY In forming our opinion, we have consid- ered the adequacy of disclosures made in note 4 to the financial statements concern- ing the uncertainty over the material exposure that the Group faces to the terror- ist attack in the United States of America on 11 September 2001. In view of the significance of this uncertainty we consider that it should be drawn to your attention but our opinion is not qualified in this respect. OPINION In our opinion: • the financial statements give a true and fair view of the state of affairs of the Company and the Group as at 31 December 2002 and of the profit of the Group for the year then ended; and • the financial statements and the part of the directors’ remuneration report to be audited have been properly prepared in accordance with the Companies Act 1985. KPMG Audit Plc London Chartered Accountants Registered Auditor 26 March 2003 The Hiscox Annual 2002 31 Consolidated Profit and Loss Account Technical Account – General Business for the year ended 31 December 2002 Earned premiums, net of reinsurance Gross premiums written Outward reinsurance premiums Net premiums written Change in the gross provision for unearned premiums Change in the provision for unearned premiums, reinsurers’ share Change in the net provision for unearned premiums Earned premiums, net of reinsurance Allocated investment income transferred from the non-technical account Claims incurred, net of reinsurance Claims paid: Gross amount Reinsurers’ share Net claims paid Change in the provision for claims: Gross amount Reinsurers’ share Change in the net provision for claims Claims incurred, net of reinsurance Other technical income Net operating expenses Other technical charges Movement in equalisation provision Balance on the technical account All operations of the Group are continuing. Notes 2002 £000 2001 £000 5(d) 676,705 (260,561) 548,926 (136,349) 416,144 412,577 (95,366) 64,351 (77,806) 9,428 (31,015) (68,378) 5(d) 385,129 344,199 9(a), 9(c) 27,643 18,562 (290,008) 149,981 (253,041) 113,463 (140,027) (139,578) 35,869 (108,193) (247,646) 154,469 (72,324) (93,177) 4, 5(d) (212,351) (232,755) 5(d) 7 5(d) 5(d), 8 – (145,751) (3,856) (2,703) 1,324 (141,362) – (2,582) 48,111 (12,614) 32 The Hiscox Annual 2002 Consolidated Profit and Loss Account Non-Technical Account for the year ended 31 December 2002 Balance on the technical account Investment return Unrealised gains/(losses) on investments Investment management expenses and charges Allocated investment return transferred to the technical account Other income Other expenses Profit/(loss) on ordinary activities before tax Comprising: Operating profit/(loss) based on longer term investment return Short term fluctuations in investment return Movement in equalisation provision Tax on profit/(loss) on ordinary activities Profit/(loss) on ordinary activities after tax Dividends – Interim paid Dividends – Final payable Notes 2002 £000 2001 £000 48,111 (12,614) 9(a) 9(a) 9(a) 21,413 (4,425) (809) 15,131 (4,703) (560) 9(a), 9(c) 9(a), 9(c) 16,179 (27,643) 9,868 (18,562) 10 (11,464) 10,119 (26,451) (8,694) 3,333 (14,521) 5(d) 20,315 (32,496) 5(d) 9(a), 9(c) 5(d), 8 34,482 (11,464) (2,703) (21,220) (8,694) (2,582) 20,315 (32,496) 14 (6,340) 9,389 13,975 (23,107) (2,299) (6,914) (9,213) – – – Retained profit/(loss) for the year 24(a) 4,762 (23,107) Earnings/loss per share: – Adjusted basic, based on operating profit/(loss) after tax (on longer term investment return) – Basic, based on profit/(loss) on ordinary activities after tax – Diluted, based on profit/(loss) on ordinary activities after tax 13 13 13 11.3p 6.6p 6.5p (9.7)p (14.8)p (14.8)p In accordance with the amendment to Financial Reporting Standard (“FRS”) 3 “Reporting financial performance” in relation to the revaluation of investments, no note of historical cost profits or losses has been prepared as the Group’s only material gains and losses on assets relate to the holding and disposal of investments. Consolidated Statement of Total Recognised Gains and Losses for the year ended 31 December 2002 Profit/(loss) on ordinary activities after tax Exchange differences taken to reserves Total recognised gains and losses Notes 2002 £000 2001 £000 13,975 (50) (23,107) (35) 13,925 (23,142) The Hiscox Annual 2002 33 Notes 2002 £000 2001 £000 15(a) 15(b) 6,617 16,469 6,997 16,800 23,086 23,797 16(a) 16(b) 420 502,944 430 344,402 503,364 344,832 4 17 20 102,608 218,175 39,166 333,358 320,783 372,524 199,372 98,412 47,733 130,689 168,320 51,933 345,517 350,942 18 31(e) 7,119 121,196 7,018 62,520 128,315 69,538 2,643 83,784 10,813 2,221 66,699 5,637 97,240 74,557 1,418,305 1,236,190 Consolidated Balance Sheet at 31 December 2002 Assets Intangible assets Goodwill Other intangible assets Investments Land and buildings Other financial investments Reinsurers’ share of technical provisions Provision for unearned premiums Claims outstanding Debtors Debtors arising out of direct insurance operations Debtors arising out of reinsurance operations Other debtors Other assets Tangible assets Cash at bank and in hand Prepayments and accrued income Accrued interest Deferred acquisition costs Other prepayments and accrued income Total assets 34 The Hiscox Annual 2002 Liabilities Capital and reserves Called up share capital Share premium account Merger reserve Capital redemption reserve Profit and loss account Shareholders’ funds attributable to equity interests Technical provisions Provision for unearned premiums Claims outstanding Equalisation provision Provisions for other risks and charges Creditors: Creditors arising out of direct insurance operations Creditors arising out of reinsurance operations Other creditors including taxation and social security Accruals and deferred income Total liabilities The financial statements were approved by the Board of directors on 26 March 2003 and were signed on its behalf by: RRS Hiscox, Chairman SJ Bridges, Finance Director Notes 2002 £000 2001 £000 23, 24(a) 24(a) 24(a) 24(a) 24(a) 14,459 230,585 4,723 33,244 (2,709) 9,633 124,612 4,723 33,244 (7,421) 24(a) 280,302 164,791 4 8 22 21 351,594 568,365 13,932 258,124 616,164 11,229 933,891 885,517 – 926 65,423 67,892 36,414 45,850 72,608 42,838 169,729 161,296 34,383 23,660 1,418,305 1,236,190 The Hiscox Annual 2002 35 Company Balance Sheet at 31 December 2002 Fixed assets Tangible assets Investment in subsidiary undertakings Investments Current assets Other debtors Cash at bank and in hand Prepayments and accrued income Creditors: Amounts falling due within one year Net current assets Total assets less current liabilities Provisions for liabilities and charges Total net assets Capital and reserves Called up share capital Share premium account Merger reserve Capital redemption reserve Capital reserve Profit and loss account Shareholders’ funds attributable to equity interests The financial statements were approved by the Board of directors on 26 March 2003 and were signed on its behalf by: RRS Hiscox, Chairman SJ Bridges, Finance Director Notes 19(a) 19(b) 19(c) 2002 £000 2001 £000 498 115,457 108,177 381 115,457 43,813 224,132 159,651 20 110,199 20,182 464 86,241 759 4,237 130,845 91,237 21 (11,456) (14,771) 119,389 76,466 343,521 236,117 22 – (144) 343,521 235,973 23, 24(b) 24(b) 24(b) 24(b) 24(b) 24(b) 14,459 230,585 58,970 33,244 (1,269) 7,532 9,633 124,612 58,970 33,244 351 9,163 343,521 235,973 36 The Hiscox Annual 2002 Consolidated Cash Flow Statement for the year ended 31 December 2002 Cash Flow Statement Net cash inflow from general business Net shareholders’ cash outflow from Lloyd’s business Net cash flow from operating activities Servicing of finance Taxation recovered/(paid) Capital expenditure Acquisitions and disposals Equity dividends paid Financing Cash flows were invested as follows: Increase in cash holding Net portfolio investment: Shares and units in unit trusts Debt securities and other fixed interest securities Deposits with credit institutions Other investments Net investment of cash flows Notes 2002 £000 2001 £000 31(c) 31(a) 31(d) 31(d) 31(d) 31(d) 45,069 (23,037) 15,295 (12,489) 22,032 (1,709) 777 (3,569) – (2,299) 108,539 2,806 (680) (499) (2,774) 1,380 (3,453) 55,368 123,771 52,148 31(e) 25,288 6,369 31(e) 31(e) 31(e) 31(e) 19,911 10,314 68,265 (7) (1,937) 2,792 44,924 – 123,771 52,148 The Hiscox Annual 2002 37 Notes to the Accounts 1 BASIS OF PREPARATION The financial statements of the Group and the Company have been prepared in accordance with applicable accounting standards as at 31 December 2002 and under historical cost accounting rules, modified by the revaluation of investments. The financial statements have been pre- pared in accordance with the provisions set out in Section 255 of, and Schedule 9A to, the Companies Act 1985. The Group has adopted all material recommendations of the revised Statement of Recommended Practice “Accounting for Insurance Business” issued by the Association of British Insurers in December 1998. Financial Reporting Standard 19 “Deferred Tax” was published by the Accounting Standards Board in December 2000 and replaced the existing Statement of Standard Accounting Practice on deferred tax. FRS19 is effective for the year ended 31 December 2002. The adoption of FRS19 has required more detailed disclosure in the notes to the accounts but has had no material impact on the current or prior years’ results. The balance sheet of the parent company is prepared in accordance with the provi- sions of Section 226 of, and Schedule 4 to, the Companies Act 1985. As permitted by Section 230 of the Companies Act 1985, no profit and loss account of the parent company is presented. The profit after taxation for the Company for the year was £7,582,000 (2001: £1,688,000) and the retained loss for the financial year for the Company was £1,631,000 (2001: profit of £1,688,000). Results are determined on an annual basis. 2 BASIS OF CONSOLIDATION The consolidated financial statements include the assets, liabilities and results of the Company and its subsidiary undertak- ings up to 31 December each year. Profits or losses of subsidiary undertakings sold or acquired during the period are included in the consolidated results up to the date of dis- posal or from the date of acquisition, where acquisition accounting was adopted. Hiscox Dedicated Corporate Member Limited and the subsidiaries of Hiscox Select Holdings Limited underwrite as cor- porate members of Lloyd’s on the syndicate managed by Hiscox Syndicates Limited (the “managed syndicate”). In view of the sev- eral liability of underwriting members at Lloyd’s for the transactions of syndicates in which they participate, the attributable share of the transactions, assets and liabilities of the syndicate has been included in the financial statements. 38 The Hiscox Annual 2002 3 ACCOUNTING POLICIES The following principal accounting policies have been applied consistently in dealing with items which are considered material in relation to the Group’s financial statements. 3(a) Premiums For business written by the managed syndi- cate, written premiums comprise premiums on contracts incepting during the financial year. For all other business, written premi- ums comprise the premiums on contracts entered into during the accounting period, irrespective of whether they relate in whole or in part to a later accounting period. Written premiums are disclosed gross of commission payable to intermediaries and exclude taxes and duties levied on premiums. Premiums written include estimates for “pipeline” premiums and adjustments to premiums written in prior accounting peri- ods. Outward reinsurance premiums are accounted for in the same accounting period as the premiums for the related direct insur- ance or inwards reinsurance business. 3(b) Unearned premiums The provision for unearned premium com- prises the proportion of gross premiums written, which is estimated to be earned in the following or subsequent financial years, computed separately for each insurance con- tract using the daily pro rata method. Where the incidence of risk varies during the period covered by the contract, the provision is cal- culated taking into account the risk profile of the contracts. 3(c) Acquisition costs Acquisition costs comprise all direct and indirect costs arising from the acquisition of insurance contracts. Deferred acquisition costs represent the proportion of acquisition costs incurred which corresponds to the proportion of gross premiums written which is unearned at the balance sheet date. 3(d) Claims Claims incurred in respect of general business consist of claims and claims handling expenses paid during the financial year, together with the movement in the provision for outstanding claims and future claims handling expenses. Outstanding claims comprise provisions for the estimated cost of settling all claims incurred but unpaid up to the balance sheet date whether reported or not, together with related claims handling expenses. Anticipated reinsurance recoveries, and esti- mates of salvage and subrogation recoveries, are disclosed separately as assets. Whilst the directors consider that the gross provisions for claims and the related reinsurance recoveries are fairly stated on the basis of the information currently avail- able to them, the ultimate liability will vary as a result of subsequent information and events and may result in significant adjust- ments to the amounts provided. Adjustments to the amounts of claims provisions estab- lished in prior years are reflected in the financial statements for the period in which the adjustments are made. The provision for outstanding claims is actuarially calculated using the Chain Ladder and Bornhuetter-Ferguson methods. In exceptional cases the required provision is calculated with reference to the actual exposures. There is close communication between the actuaries and underwriters and allowance is made for the rating environ- ment. Ultimate claims are projected both gross and net of reinsurance using reinsur- ance recovery rates based on historical experience, adjusted for the current reinsur- ance programme. 3(e) Unexpired risk Provision is made for unexpired risks aris- ing from general business where the expected value of the claims and expenses attributable to the unexpired periods of poli- cies in force at the balance sheet date exceeds the unearned premiums provision in relation to such policies after the deduction of any acquisition costs deferred. The provi- sion for unexpired risks is calculated separately by classes of business which are managed together, after taking into account the relevant investment return. 3(f) Equalisation provision An equalisation provision has been estab- lished and calculated in accordance with the requirements of Chapter 6 of the Interim Prudential Sourcebook for Insurers to miti- gate exceptionally high loss ratios for classes of business displaying a high degree of claims volatility. 3(g) Investments – Group: Investments are stated at their current value. Listed investments comprise those quoted on the London and other International Stock Exchanges. These investments are stated at mid-market prices on the balance sheet date, or on the last stock exchange trading day before the balance sheet date. – Company: Investments in group under- takings and associates are stated at cost less provisions for impairment in value. 3(h) Investment return All investment return is recognised in the non-technical account. Unrealised gains Dividends on ordinary shares are recog- nised as income on the date the ordinary shares are marked ex-dividend. Other investment income and interest receivable are included in income on an accruals basis. Realised gains or losses on investments represent the difference between net sales proceeds and their purchase price or their valuation at the commencement of the year. losses on the difference investments between the current value of investments at their the balance sheet date and purchase price or their valuation at the commencement of the year. The movement investment gains/losses in unrealised includes an adjustment for previously recognised unrealised gains/losses on investments disposed of in the accounting period. represent and 3(i) Allocation of investment return An allocation is made from the non-techni- cal account to the general business technical account based on the longer term investment return on investments supporting the general insurance technical provisions and all the relevant shareholders’ funds. The longer term investment return is an estimate of the long term trend investment return for Hiscox plc and its subsidiaries, together with the Hiscox managed syndicate, having regard to past performance, current trends and future expectations. 3(j) Depreciation Depreciation is provided to write off the cost less the estimated residual value of tangible assets on a straight-line basis over their esti- mated useful economic lives or length of lease, if less, as follows: Short leasehold, fixtures 10–15 years and fittings Computer hardware and software 3–5 years 3 years Motor vehicles 4 years All other tangible fixed assets 3(k) Goodwill Goodwill arising on the acquisition of sub- sidiaries has been written off directly to reserves in the year of acquisition up to 31 December 1997. From 1 January 1998, in accordance with FRS 10 “Goodwill and intangible assets”, goodwill arising on acquisitions, being the difference between the fair value of the purchase consideration and the fair value of net assets acquired, is capitalised in the balance sheet and amor- tised on a straight-line basis over its useful economic life which is considered to not exceed 20 years. Provision is made for any impairment. On disposal or termination of a business acquired up to 31 December 1997, any related goodwill previously written off directly to reserves is written back through the profit and loss account as part of the profit or loss on disposal. On the disposal or termination of a business since 1 January 1998, the profit or loss on disposal or termi- nation is calculated after charging the unamortised amount of any related goodwill. 3(l) Other intangible assets Other intangible assets are the cost of pur- chasing the Group’s participation in Lloyd’s insurance syndicates. In accordance with FRS 10, this capacity is capitalised at cost in the balance sheet and amortised over its use- ful economic life which the directors consider to not exceed 20 years. Provision is made for any impairment. 3(m) Rates of exchange Assets, liabilities, revenues and costs denominated in foreign currencies are recorded at the rates of exchange ruling at the dates of the transactions. At the balance sheet date, monetary assets and liabilities are translated at the year-end rates of exchange. Any exchange profits or losses arising on the translation of foreign currency amounts relating to underwriting are taken directly to the technical account. Other exchange profits or losses are taken directly to the non-technical account. Investments in foreign enterprises are translated using the net investment method. All exchange profits or losses arising on the translation of these investments are taken to reserves. 3(n) Pension costs Pension contributions in respect of defined benefit schemes are charged against profits, with pension surpluses and deficits allocated over the remaining service periods of cur- rent employees. Differences between the amounts charged to the profit and loss account and payments made to the pension schemes are treated as assets or liabilities in the balance sheet. Pension contributions for defined contri- bution schemes are charged to the profit and loss account on an accruals basis. The G rou p ha s ado pte d F RS17 “Retirement Benefits”. This has had no material impact on the current year’s results, as only the transitional disclosure require- ments have been included. 3(o) Leases Where the Group enters into a lease which entails taking substantially all the risks and rewards of ownership of an asset, the lease is treated as a “finance lease”. The asset is recorded in the balance sheet as a tangible fixed asset and is depreciated over its esti- mated useful life or the term of the lease, whichever is shorter. Future instalments under such leases, net of finance charges, are included within creditors. Rentals payable are apportioned between the finance ele- ment, which is charged to the profit and loss account, and the capital element which reduces the outstanding obligation for future instalments. All other leases are accounted for as “operating leases” and the rental charges are charged to the profit and loss account on a straight-line basis over the period of the lease. 3(p) Taxation Current tax, including UK corporation tax and foreign tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax is recognised in respect of all timing differences, except for which no provision is permissible as explained below, that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the balance sheet date. Timing differences are differ- ences between the Group’s taxable profits and its results as stated in the financial state- ments that arise from the inclusion of gains and losses in tax assessments in periods dif- ferent from those in which they are recognised in the financial statements. A net deferred tax asset is regarded as recoverable and therefore recognised only when, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the under- lying timing differences can be deducted. Deferred tax is not recognised when fixed assets are revalued unless by the balance sheet date there is a binding agreement to sell the revalued assets and the gain or loss expected to arise on sale has been recog- nised in the financial statements. Neither is deferred tax recognised when fixed assets are sold and it is more likely than not that the taxable gain will be rolled over, being charged to tax only if and when the replace- ment assets are sold. Deferred tax is recognised in respect of the retained earnings of overseas sub- sidiaries and associates only to the extent that, at the balance sheet date, dividends have been accrued as receivable or a binding agreement to distribute past earnings in future has been entered into by the The Hiscox Annual 2002 39 Notes to the Accounts (continued) subsidiary or associate. Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse, based on tax rates and laws that that have been enacted or substan- tively enacted by the balance sheet date. Deferred tax is measured on a non-dis- counted basis. 4 WORLD TRADE CENTER The Group’s exposure to losses arising from the terrorist attack of 11 September 2001 arises almost entirely from its participation on Syndicate 33. Hiscox Insurance Company and the international operations of Hiscox have had a negligible loss from this event. The situation is unprecedented and as such, even 18 months after the event, the extent of the gross and net loss to the Group is difficult to assess with the degree of confidence which is usual for property insur- ance losses; facts or circumstances will come to light which may affect these esti- mates. The current projected estimate of net loss to Hiscox plc is £40 million (2001: £30 million), for which provision has been made in these financial statements. This takes no account of any potential subrogation. The Group has exposure to WTC losses on a number of non-liability accounts, in particular direct property, risk excess, cata- strophe and aviation hull. There is no significant liability exposure. As at 28 February 2003, US$ 275 million, 58% of the estimated overall loss, had been paid. This includes payment to Silverstein, on the basis of one occurrence, for the WTC property. The courts in the USA have not yet ruled on occurrence. Syndicate 33 has had no need to make a cash call. As part of the process for the setting of the loss reserves included in these accounts, the directors have again carried out a com- prehensive review of the Group’s exposures in respect of insurance and reinsurance poli- cies issued by Syndicate 33 to identify all those exposed directly or indirectly to losses from the events of 11 September 2001. Since the initial review carried out in October 2001, no further losses have been identified which were not identified at that time. This review has been supplemented by details of the notifications received from the XChanging Claims Services (formerly the Lloyd’s Claims Office) which amounted to US$591 million as at 28 February 2003 (31 March 2002: US$543 million). Hiscox has considered the insureds’ computations of their own losses. The directors of Hiscox plc believe that the insureds’ computations are likely to prove unreliable. Hiscox has esti- 40 The Hiscox Annual 2002 mated what the directors believe is an appro- priate discount or premium to these notifications, based on their past experience of large property losses and additional infor- mation received. The reserve required for the Group’s direct property exposure is sensitive to assumptions about the quantum of property damage and business interruption costs and to the legal issues relating to the cover pro- vided by certain insurance policies. In reserving for these claims, the directors have taken account of settlement patterns experi- enced on previous large property losses, where final claims settlements are usually considerably lower than initial market esti- mates, and the experience to date on settlement of WTC losses. Hiscox largely participates on the higher layers of risk excess policies. In certain cases, the property damage element of the claim falls well below the excess point. Most market notifications relating to these property reinsurances have been made on a total loss basis which are without merit on the basis of information which is currently available. The directors consider it likely that, in such cases, the final settlement will fall below the excess point so that Hiscox will incur no loss. The directors have never- theless, where appropriate, established a precautionary reserve in these cases on the assumption that a part payment may be made, although this may be lower than the notification which is for a total loss on the layer. The extent to which losses arise from property risk excess and catastrophe reinsur- ance policies vary, particularly if a wide definition of business interruption is adopted. Provision has been made for prop- erty and business interruption losses known to have occurred in the immediate vicinity of the WTC. Remoter losses have not been provided for. The current total estimated gross loss to Syndicate 33 is approximately US$475 million (2001: US$440 million). The increase from the previous year-end is for three reasons: a) An increase in bad debt provision to reflect the rating downgrades of a number of the reinsurers in the year. b) An increase in a claim from a telecommunications company where our original assessment, based on limited information, has been revised. It was considered that the greater part of the claim was likely to be generated from business interruption which we discerned was likely to be much inflated. The claim has developed, however, with in the losses c) An a much larger proportion of physical damage than we originally estimated. In line with our normal reserving practice we have therefore increased our reserve. increase loss on a transportation company where as part of closing the 2000 year of account we have taken the loss at the notified amount. We believe however that this loss could well settle below its current market estimate. The reinsurance program continued to respond to the increase in the property claims described in (b) and (c) above. Due to the sequence of actual payments, net recov- eries remain similar to last year. Syndicate 33’s net loss has increased to approximately US$125 million (2001: US$90 million). In arriving at this estimate it has been assumed that the terrorist attack in New York City on 11 September 2001 was one occurrence and also that the aircraft impacts on the WTC are one occurrence in respect of the property losses. In the unlikely event that Syndicate 33’s loss increases by, for example, a further US$100 million, and assuming there are no further reinsurance recoveries, the net cost to Hiscox plc would increase by approxi- mately £35 million. As at 28 February 2003 Syndicate 33 had paid US$275 million of the gross loss and recovered US$165 million from reinsurers. As part of our required funding of the US Trust Funds, a further US$56 million of cash advances and letters of credit had also been received from reinsurers at 28 February 2003. These recoveries of US$221 million at 28 February 2003 represent 63% of the expected total recoveries of approximately US$350 million. 84% of the remaining bal- ance of approximately US$129 million is due from reinsurers, including US$23 mil- lion due from Lloyd’s, rated A grade or better. Syndicate 33 has increased its bad debt provision on reinsurance recoveries from the WTC loss to US$7.5 million (2001: US$4.5 million). This results from the downgrade in rating of a number of the rein- surers during the year. No reinsurer on our programme has yet refused to pay a claim through insolvency. It has been assumed that no major reinsurer will fail. 5 SEGMENTAL INFORMATION a) 100% level technical account by business division The underwriting activities which are managed by the Group are shown below at the 100% level regardless of ownership of capacity: Gross premiums written Net premiums written Net premiums earned Net claims incurred Claims ratio (%) 2002 London Market £000 726,315 392,746 367,422 2002 2002 UK International Business £000 Retail £000 2002 Total £000 2001 London Market £000 2001 2001 UK International Business £000 Retail £000 2001 Total £000 147,583 123,243 119,988 67,356 41,468 37,219 941,254 557,457 524,629 574,339 412,100 343,555 143,550 121,830 112,171 62,147 40,444 34,554 780,036 574,374 490,280 229,225 62,565 10,997 302,787 288,344 58,212 9,385 355,941 62.4% 52.1% 29.5% 57.7% 83.9% 51.9% 27.2% 72.6% Commission Operating expenses Movement in deferred acquisition costs 92,048 32,585 1,509 34,814 19,202 (582) 26,957 1,222 (1,714) 153,819 53,009 (787) 100,307 31,752 (8,420) 35,672 17,382 (1,843) 27,395 1,894 (3,463) 163,374 51,028 (13,726) Net expenses 126,142 53,434 26,465 206,041 123,639 51,211 25,826 200,676 Commission ratio (%) Operating expense ratio (%) 23.4% 8.3% 28.3% 15.6% 65.0% 3.0% 27.6% 9.5% 24.3% 7.7% 29.3% 14.2% 67.7% 4.7% 28.4% 8.9% Expense ratio (%) 31.7% 43.9% 68.0% 37.1% 32.0% 43.5% 72.4% 37.3% Net longer term investment return 18,726 8,729 2,111 29,566 11,362 6,222 1,933 19,517 Technical profit/(loss)* (Note 5c) 30,781 12,718 1,868 45,367 (57,066) 8,970 1,276 (46,820) Combined ratio (%) 94.1% 96.0% 97.5% 94.8% 115.9% 95.4% 99.6% 109.9% *Before movement in equalisation provision. The impact of a 1% change in the combined ratios of each business division on technical profit/(loss) are: At 100% level 1% change in claims ratio 1% change in expense ratio At Group level 1% change in claims ratio 1% change in expense ratio 2002 London Market £000 3,674 3,927 2,015 2,154 2002 2002 UK International Business £000 Retail £000 1,200 1,232 1,200 1,232 372 415 372 415 2001 London Market £000 3,436 4,121 1,828 2,192 2001 2001 UK International Business £000 Retail £000 1,122 1,218 1,122 1,218 346 404 346 404 The additional segmental information provided above, by business division, has been added this year to the Report and Accounts to reflect the way the Group manages its business. In prior years’ Report and Accounts, the segmental information was disclosed only by reporting entity. This disclosure can be found in note 5(b). Key differences are as follows: “London Market” comprises the results of Syndicate 33 and the Hiscox Captive net of any business written between Group companies. Previously, the results of Syndicate 33 were reported within “Managed Syndicate” excluding the Hiscox Captive. “UK Retail” comprises all of the UK retail underwriting results of Hiscox Insurance Company Limited. Previously, the underwriting results of the UK retail business were reported in “Insurance Company”, together with the underwriting results of the International retail business written by Hiscox Insurance Company Limited. “International Business” comprises the results of Hiscox Insurance Company (Guernsey) Limited, the results of the Hiscox overseas agencies and the underwriting results of the International retail business written by Hiscox Insurance Company Limited. Previously, the results of Hiscox Insurance Company (Guernsey) Limited and the results of the Hiscox overseas agencies, together with the Hiscox Captive, were included within “International Operations”. The Hiscox Annual 2002 41 Notes to the Accounts (continued) 5 SEGMENTAL INFORMATION continued b) 100% level technical account by reporting entity The underwriting activities which are managed by the Group are shown below at the 100% level regardless of ownership of capacity: Gross premiums written Net premiums written Net premiums earned Net claims incurred Claims ratio (%) 2002 Managed Syndicate £000 721,971 388,967 363,643 2002 2002 Insurance International Operations Company £000 £000 2002 Total £000 176,423 144,154 136,900 42,860 24,336 24,086 941,254 557,457 524,629 2001 Managed Syndicate £000 567,303 406,752 338,207 2001 Insurance Company £000 2001 International Operations £000 2001 Total £000 163,861 139,166 126,578 48,872 28,456 25,495 780,036 574,374 490,280 225,958 73,327 3,502 302,787 282,152 67,461 6,328 355,941 62.1% 53.6% 14.5% 57.7% 83.4% 53.3% 24.8% 72.6% Commission Operating expenses Movement in deferred acquisition costs 92,048 32,577 1,509 44,056 19,926 (2,177) 17,715 506 (119) 153,819 53,009 (787) 100,307 31,691 (8,420) 43,087 18,842 (2,778) 19,980 495 (2,528) 163,374 51,028 (13,726) Net expenses 126,134 61,805 18,102 206,041 123,578 59,151 17,947 200,676 Commission ratio (%) Operating expense ratio (%) 23.7% 8.3% 30.5% 13.8% 72.8% 2.1% 27.6% 9.5% 24.7% 7.8% 31.0% 13.5% 70.2% 1.8% 28.4% 8.9% Expense ratio (%) 32.0% 44.3% 74.9% 37.1% 32.5% 44.5% 72.0% 37.3% Net longer term investment return 18,726 9,987 853 29,566 11,362 7,093 1,062 19,517 Technical profit/(loss)* (Note 5c) 30,277 11,755 3,335 45,367 (56,161) 7,059 2,282 (46,820) Combined ratio (%) 94.1% 97.9% 89.4% 94.8% 115.9% 97.8% 96.8% 109.9% *Before movement in equalisation provision. c) Reconciliation of 100% level technical results to Group results Technical profit/(loss) for 100% of continuing operations (Note 5a, 5b) Notional share attributable to Group at current level of capacity ownership Adjustments to reflect lower levels of capacity in prior years: 2000 (1999) year of account 2001 (2000) year of account Investment return on Group underwriting capital Amounts applicable to quota share reinsurers* Trading profit/(loss) for Group share of continuing operations (Note 5d, 5e) 2002 £000 2001 £000 45,367 (46,820) 35,724 (25,051) 2,404 159 6,161 (3,856) 1,065 2,001 4,479 1,324 40,592 (16,182) *For the 2002 year of account, the Group owned 63% (2001: 60%) of the Syndicate. 8% (2001: 7%) of that capacity was reinsured to three leading European reinsurers via a quota share arrangement. 42 The Hiscox Annual 2002 5 SEGMENTAL INFORMATION continued d) Profit on ordinary activities before taxation – by business division 2002 London Market/ Group £000 2002 2002 UK International Business £000 Retail £000 2001 London Market/ Group £000 2002 Total £000 2001 2001 UK International Business £000 Retail £000 2001 Total £000 Gross premiums written 461,766 147,583 67,356 676,705 343,229 143,550 62,147 548,926 Net premiums earned Investment return, based on longer term rate of return Net claims incurred Acquisition costs Administrative expenses Other technical income/(charges) 227,922 119,988 37,219 385,129 197,474 112,171 34,554 344,199 16,803 (138,789) (69,029) (7,045) (3,856) 8,729 (62,565) (34,232) (19,202) – 2,111 (10,997) (25,243) (1,222) – 27,643 (212,351) (128,504) (27,469) (3,856) 10,407 (165,158) (64,514) (5,961) 1,324 6,222 (58,212) (33,829) (17,382) – 1,933 (9,385) (23,932) (1,894) – 18,562 (232,755) (122,275) (25,237) 1,324 Trading result:* 26,006 12,718 1,868 40,592 (26,428) 8,970 1,276 (16,182) Agency and other income Profit commission Expenses Loan interest Goodwill and capacity amortisation 4,499 3,237 (9,712) (1,432) (1,370) 120 – (1,178) – – 12,286 200 (12,718) – (42) 16,905 3,437 (23,608) (1,432) (1,412) 3,211 159 (3,887) (1,099) (1,370) 26 – (1,423) – – 6,087 – (6,702) – (40) 9,324 159 (12,012) (1,099) (1,410) Operating profit/(loss) 21,228 11,660 1,594 34,482 (29,414) 7,573 621 (21,220) Short term fluctuations in investment return Movement in equalisation provision (7,739) – (3,135) (2,104) (590) (599) (11,464) (2,703) (3,990) – (3,670) (2,221) (1,034) (361) (8,694) (2,582) Profit/(loss) on ordinary activities before taxation 13,489 6,421 405 20,315 (33,404) 1,682 (774) (32,496) *Based on longer term investment return, before movement in equalisation provision and elimination of inter-company transactions. The additional segmental information provided above, by business division, has been added this year to the Report and Accounts to reflect the way the Group manages its business. In prior years’ Report and Accounts, the segmental information was disclosed only by reporting entity. This disclosure can be found in note 5(e). Key differences are as follows: “London Market/Group” comprises Hiscox plc’s share of the results of Syndicate 33, the results of the Hiscox Captive and the results of the non-underwriting entities of the Group, net of any business written between Group companies. Previously, Hiscox plc’s share of the results of Syndicate 33 and the results of the non-underwriting entities, excluding the Hiscox Captive, were included in “Lloyd’s Business/Group”. “UK Retail” comprises all of the UK retail business of Hiscox Insurance Company Limited, together with the results of the online agency business (Hiscox Connect Limited). Previously, the results of the UK retail business were reported in “Insurance Company”, together with the underwriting results of the International retail business. The results of Hiscox Connect Limited were previously included in “Lloyd’s Business/Group”. “International Business” comprises the results of Hiscox Insurance Company (Guernsey) Limited, the results of the Hiscox overseas agencies and the underwriting results of the International retail business written by Hiscox Insurance Company Limited. Previously, the results of Hiscox Insurance Company (Guernsey) Limited and the results of the Hiscox overseas agencies, together with the Hiscox Captive, were included within “International Operations”. The Hiscox Annual 2002 43 Notes to the Accounts (continued) 5 SEGMENTAL INFORMATION continued e) Profit on ordinary activities before taxation – by reporting entity 2002 Lloyd’s Business/ Group £000 2002 2002 Insurance International Operations Company £000 £000 2001 Lloyd’s Business/ Group £000 2002 Total £000 2001 Insurance Company £000 2001 International Operations £000 2001 Total £000 Gross premiums written 457,422 176,423 42,860 676,705 336,193 163,861 48,872 548,926 Net premiums earned Investment return, based on longer term rate of return Net claims incurred Acquisition costs Administrative expenses Other technical income/(charges) 224,143 136,900 24,086 385,129 192,126 126,578 25,495 344,199 16,803 (135,522) (69,029) (7,037) (3,856) 9,987 (73,327) (41,879) (19,926) – 853 (3,502) (17,596) (506) – 27,643 (212,351) (128,504) (27,469) (3,856) 10,407 (158,966) (64,514) (5,900) 1,324 7,093 (67,461) (40,309) (18,842) – 1,062 (6,328) (17,452) (495) – 18,562 (232,755) (122,275) (25,237) 1,324 Trading result:* 25,502 11,755 3,335 40,592 (25,523) 7,059 2,282 (16,182) Agency and other income Profit commission Expenses Loan interest Goodwill and capacity amortisation 4,619 3,237 (10,890) (1,432) (1,370) – – – – (42) 12,286 200 (12,718) – – 16,905 3,437 (23,608) (1,432) (1,412) 3,173 159 (5,258) (1,099) (1,370) 1 – – – (40) 6,150 – (6,754) – – 9,324 159 (12,012) (1,099) (1,410) Operating profit/(loss) 19,666 11,713 3,103 34,482 (29,918) 7,020 1,678 (21,220) Short term fluctuations in investment return Movement in equalisation provision (7,804) – (3,587) (2,703) (73) – (11,464) (2,703) (3,990) – (4,184) (2,582) (520) – (8,694) (2,582) Profit/(loss) on ordinary activities before taxation 11,862 5,423 3,030 20,315 (33,908) 254 1,158 (32,496) Net assets Tangible assets Intangible assets Total 177,393 22,372 76,186 714 3,637 – 257,216 23,086 68,599 23,043 72,727 754 (332) – 140,994 23,797 199,765 76,900 3,637 280,302 91,642 73,481 (332) 164,791 *Based on longer term investment return, before movement in equalisation provision and elimination of inter-company transactions. f) Net asset value per share Net asset value Net asset value (before equalisation provision) Net tangible asset value Net tangible asset value (before equalisation provision) 2002 Net asset value £000 280,302 294,234 257,216 271,148 2002 Number of shares* 000 289,177 289,177 289,177 289,177 2002 NAV per share p 96.9 101.7 88.9 93.8 2001 Net asset value £000 164,791 176,020 140,994 152,223 2001 Number of shares* 000 192,667 192,667 192,667 192,667 2001 NAV per share p 85.5 91.4 73.2 79.0 *The number of shares is the number of shares in issue as at 31 December of the relevant financial year. The number of shares as at 31 December 2001 has not been adjusted for the impact of the Rights Issue. If it had been, the number of shares would have increased to 202,300,000. Accordingly, the net asset values disclosed above for 2001 would have reduced. The net asset value (before equalisation provision) per share of 91.4p would have been restated to 87.0p. All the other disclosed net asset values per share for 2001 would have been adjusted in a similar manner. 44 The Hiscox Annual 2002 6 MOVEMENT IN PRIOR YEARS’ CLAIMS PROVISION Lloyd’s Business £000 Insurance Company £000 International Operations £000 2002 Total £000 2001 Total £000 Net loss provision brought forward as at 1 January Net payments during the year in respect of those provisions Net loss provision carried forward in respect of claims provided at 1 January 73,762 (23,326) (56,681) 79,400 (13,098) (60,992) 4,735 (1,460) (7,664) 157,897 (37,884) (125,337) 133,932 (31,547) (92,954) (Under)/over provision in prior years (6,245) 5,310 (4,389) (5,324) 9,431 The figures in respect of Lloyd’s business relate to closed years of account at 1 January 2002 only. 7 NET OPERATING EXPENSES Acquisition costs Change in deferred acquisition costs Reinsurance commission Administrative expenses 8 EQUALISATION PROVISION 2002 £000 2001 £000 156,103 (3,299) (34,522) 27,469 133,924 (13,677) (4,122) 25,237 145,751 141,362 Equalisation provisions are established in accordance with the requirements of Chapter 6 of the Interim Prudential Sourcebook for Insurers. These provisions, which are in addition to the provisions required to meet the anticipated ultimate cost of settlement of outstanding claims at the balance sheet date, are required by Schedule 9A to the Companies Act 1985 to be included within technical provisions at the balance sheet date notwithstanding that they do not represent liabilities at the balance sheet date. This has had the effect of reducing shareholders’ funds by £13,932,000 (2001: £11,229,000). The movement in equalisation provision during the year resulted in a decrease in the technical account and the Group profit before taxation of £2,703,000 (2001: £2,582,000). 9 INVESTMENT RETURN a) The total actual investment return before taxation comprises: Investment return on funds at Lloyd’s and other corporate funds: Investment income Unrealised gains/(losses) on investments Realised gains/(losses) on investments Investment return on syndicate funds: Investment income Realised gains/(losses) on investments Investment return on insurance company funds: Investment income Unrealised gains/(losses) on investments Realised gains/(losses) on investments Investment management expenses Total investment return Allocation to the technical account based on the longer term rate Short term fluctuations in investment return retained in the non-technical account 2002 £000 2001 £000 4,590 (2,939) (244) 3,507 (2,775) 115 1,407 847 7,057 1,827 5,045 1,404 8,884 6,449 8,354 (1,486) (171) 6,453 (1,928) (1,393) 6,697 3,132 (809) (560) 16,179 9,868 (27,643) (18,562) (11,464) (8,694) The Hiscox Annual 2002 45 Notes to the Accounts (continued) 9 INVESTMENT RETURN continued b) Longer term investment return The longer term return is based on a combination of historical experience and current expectations for each category of investments. The longer term return is calculated by applying the following yields to the weighted average of each category of assets. Shares and units in unit trusts Debt securities and other fixed interest securities Deposits with credit institutions c) Comparison of longer term investment return with actual returns 2002 % 7.0 6.0 6.0 2001 % 7.0 6.0 6.0 The actual return on investments is compared below with the longer term investment return over the year ended 31 December 2002 and for the five year period from 1 January 1998 to 31 December 2002. Actual investment return: Shares and units in unit trusts Debt securities and other fixed interest securities Deposits with credit institutions Longer term investment return: Shares and units in unit trusts Debt securities and other fixed interest securities Deposits with credit institutions 2002 Funds at Lloyd’s and other Corporate Assets £000 (2,764) 2,101 1,963 1,300 1,951 1,632 3,431 7,014 % (9.5) 7.7 3.4 7.0 6.0 6.0 2002 Share of Syndicate £000 138 7,008 1,333 8,479 95 8,031 2,516 10,642 % 10.1 5.2 3.2 7.0 6.0 6.0 2002 Insurance Company £000 (2,006) 7,162 1,244 6,400 1,304 6,346 2,337 9,987 % (9.6) 6.7 3.2 7.0 6.0 6.0 2002 Total £000 (4,632) 16,271 4,540 16,179 3,350 16,009 8,284 27,643 Short term fluctuations in investment return (5,714) (2,163) (3,587) (11,464) Actual investment return: Shares and units in unit trusts Debt securities and other fixed interest securities Deposits with credit institutions Longer term investment return: Shares and units in unit trusts Debt securities and other fixed interest securities Deposits with credit institutions 2001 Funds at Lloyd’s and other Corporate Assets £000 (2,028) 1,904 807 683 1,985 1,864 1,692 5,541 Short term fluctuations in investment return (4,858) % (7.2) 6.1 2.9 7.0 6.0 6.0 2001 Share of Syndicate £000 302 3,992 1,983 6,277 260 3,609 2,059 5,928 349 Longer term investment return credited to operating profit/(loss) and to the general business technical account Actual investment return included in profit/(loss) on ordinary activities in the non-technical account Effect of short term fluctuations over the period 46 The Hiscox Annual 2002 % 8.1 6.6 5.8 7.0 6.0 6.0 2001 Insurance Company £000 (2,394) 4,237 1,065 2,908 1,608 4,380 1,105 7,093 % (10.4) 5.6 5.1 7.0 6.0 6.0 2001 Total £000 (4,120) 10,133 3,855 9,868 3,853 9,853 4,856 18,562 (4,185) (8,694) 1998-2002 £000 1997-2001 £000 94,945 74,419 75,373 73,541 (20,526) (1,832) 10 OTHER INCOME AND EXPENSES Agency salaries Underwriting agency income Profit commission Other Total other income Operating profit/(loss) is stated after charging: Loan interest payable Amortisation of goodwill and Lloyd’s capacity costs Finance lease charges Operating lease charges (net of recharges to the managed syndicate) Depreciation (net of recharges to the managed syndicate) on tangible fixed assets: – Owned assets – Leased assets Exchange losses/(gains) Increase in provisions for bad and doubtful debts (including share of syndicate) 11 AUDITORS’ REMUNERATION Fees payable to the auditors and its associates (exclusive of VAT) a) Group Services as auditors Further assurance services – Tax compliance Other non-audit services* Work performed in relation to: – Rights Issue/Open Offer – Conversion scheme – Chubb bid – Other corporate projects b) Company Services as auditors Further assurance services – Tax compliance Other non-audit services* Work performed in relation to: – Rights Issue/Open Offer – Conversion scheme – Chubb bid – Other corporate projects 2002 £000 3,023 1,627 3,437 2,032 2001 £000 2,176 – 159 998 10,119 3,333 1,432 1,412 32 1,750 1,223 138 (814) 3,850 2001 £000 204 44 248 200 20 75 21 316 564 2001 £000 83 17 2002 % 54% 1% 55% 45% – – – 45% 100% 2002 % 31% – 31% 100 69% – – – 69% 100% 200 20 75 21 316 416 1,099 1,410 121 1,793 1,151 190 385 1,100 2001 % 36% 8% 44% 35% 4% 13% 4% 56% 100% 2001 % 20% 4% 24% 48% 5% 18% 5% 76% 100% 2002 £000 230 5 235 190 – – – 190 425 2002 £000 87 – 87 190 – – – 190 277 *Non-audit services with fees greater than £50,000 must be pre-approved by the audit committee which is comprised solely of independent directors. The Hiscox Annual 2002 47 Notes to the Accounts (continued) 12 EMPLOYEES’ REMUNERATION Their aggregate remuneration and associated costs were: Wages and salaries Social security costs Other pension costs 2002 £000 24,012 3,195 3,934 2001 £000 18,753 2,348 3,046 31,141 24,147 The average monthly number of staff employed by the Group was 367 (2001: 363), comprising 118 underwriting and 249 administrative staff (2001: 123 and 240 respectively). Of the total remuneration shown above, an amount of £12,343,000 was re-charged to the syndicate managed by Hiscox Syndicates Limited (2001: £11,421,000). The Group operates an Inland Revenue approved SAYE employee share option scheme and has taken advantage of the exemption given in UITF Abstract 17 “Employer share schemes” from recognising a charge in the profit and loss account for the discount on the options. 13 EARNINGS/LOSS PER ORDINARY SHARE Adjusted basic, based on operating profit/(loss) after tax (on longer term investment return) Basic, based on profit/(loss) on ordinary activities after tax Diluted, based on profit/(loss) on ordinary activities after tax* 2002 Earnings £000 23,720 13,975 13,975 Average number of shares 000 210,350 210,350 214,407 2002 EPS p 11.3 6.6 6.5 2001 Loss £000 Average number of shares** 000 2001 LPS p (15,090) (23,107) (23,107) 156,098 156,098 156,098 (9.7) (14.8) (14.8) *In accordance with FRS 14 “Earnings per share”, potential ordinary shares are only included in the calculation of diluted earnings/loss per share to the extent that they are dilutive i.e. those that on conversion to ordinary shares would decrease net profit per share or increase net loss from continuing operations. **The average number of shares and hence the loss per share for 2001 have been restated to reflect the impact on capital arising from the Rights Issue in September 2002. Earnings/loss per share has also been calculated based on the operating profit/(loss) after taxation as the directors believe this earnings/loss per share figure provides a better indication of operating performance. The reconciliation of basic earnings/loss per share based on profit/(loss) on ordinary activities after tax to adjusted basic earnings/loss per share based on operating profit/(loss) after tax is as follows: Basic based on profit/(loss) on ordinary activities after tax Short term fluctuations in investment return Movement in equalisation provision Adjusted basic based on operating profit/(loss) after tax 2002 EPS p 6.6 3.8 0.9 11.3 2001 LPS p (14.8) 3.9 1.2 (9.7) Diluted earnings/loss per share has been calculated taking into account 2,941,000 (2001: nil) options under employee share schemes and 1,116,000 (2001: nil) options under SAYE share schemes. 48 The Hiscox Annual 2002 14 TAXATION Current tax UK corporation tax on profits/(losses) of the period Foreign tax Adjustments in respect of previous periods UK corporation tax Foreign tax Total current tax Deferred tax Origination and reversal of timing differences Adjustments in respect of previous periods Total deferred tax Total tax on profit/(loss) on ordinary activities Factors that may affect future tax charges 2002 £000 4,531 301 1,275 (1) 6,106 2001 £000 525 9 350 – 884 3,222 (2,988) (9,276) (997) 234 (10,273) 6,340 (9,389) The differences between the total current tax shown above and the amount calculated by applying the standard rate of UK corporation tax to the profit/(loss) on ordinary activities before tax is as follows: Profit/(loss) on ordinary activities before tax Profit/(loss) on ordinary activities multiplied by the standard rate of corporation tax in the UK of 30% (2001: 30%) Effects of: Expenses not deductible for tax purposes Capital allowances in excess of depreciation Other short term timing differences Tax losses not utilised in the period Foreign tax, income tax and excess tax on Controlled Foreign Companies Adjustments in respect of previous periods Current tax charge for period Accelerated capital allowances Short term timing differences Underwriting losses Capital gains Undiscounted provision for deferred tax asset/(liability) 2002 £000 2001 £000 20,315 (32,496) 6,095 (9,749) (2,273) 96 721 – 192 1,275 10,847 20 233 (957) 140 350 6,106 884 499 12,325 – – – 13,103 1,495 (299) 12,824 14,299 There is a deferred tax asset unprovided of £1,955,000 for the Group. £1,413,000 of the unprovided tax asset is in respect of the unrealised loss arising within the holdings of shares and units in unit trusts. The balance relates to losses carried forward, of which £486,000 relates to overseas companies. The Company has a deferred tax asset unprovided of £501,000 at the year-end, of which £445,000 relates to the unrealised loss arising within the holdings of shares and units in unit trusts. The balance relates to excess management expenses brought forward from earlier years. The Hiscox Annual 2002 49 Notes to the Accounts (continued) 15 INTANGIBLE ASSETS a) Goodwill Cost At 1 January 2002 Goodwill acquired At 31 December 2002 Amortisation At 1 January 2002 Charge for the year At 31 December 2002 Net book value at 31 December 2002 Net book value at 31 December 2001 b) Other intangible assets Cost At 1 January 2002 Additions At 31 December 2002 Amortisation At 1 January 2002 Charge for the year At 31 December 2002 Net book value at 31 December 2002 Net book value at 31 December 2001 Other intangible assets represent the cost of acquiring syndicate capacity at the Lloyd’s auctions. 16 INVESTMENTS – GROUP a) Land and buildings Valuation or cost At 1 January 2002 Disposals At 31 December 2002 Depreciation At 1 January 2002 Charge for the year Disposals At 31 December 2002 Net book value at 31 December 2002 Net book value at 31 December 2001 None of the land and buildings were occupied by the Group for its own use during the current financial year. Freehold £000 Short Leasehold £000 407 – 407 – – – – 407 407 109 – 109 86 10 – 96 13 23 50 The Hiscox Annual 2002 £000 8,587 50 8,637 1,590 430 2,020 6,617 6,997 £000 19,634 651 20,285 2,834 982 3,816 16,469 16,800 Total £000 516 – 516 86 10 – 96 420 430 2002 Cost £000 60,541 295,177 148,409 254 2001 Cost £000 42,108 216,293 81,927 272 16 INVESTMENTS – GROUP continued b) Other financial investments Shares and units in unit trusts Debt securities and other fixed interest securities Deposits with credit institutions Other Funds at Lloyd’s and other Corporate Assets Share of Syndicate Market Value £000 28,151 27,496 93,659 422 Cost £000 30,503 26,945 93,553 254 Market Value £000 – 172,312 1,448 – Cost £000 – 170,168 1,448 – Insurance Company Total Market Value £000 27,587 98,463 53,406 – Cost £000 30,038 98,064 53,408 – Market Value £000 55,738 298,271 148,513 422 149,728 151,255 173,760 171,616 179,456 181,510 502,944 504,381 Funds at Lloyd’s and other Corporate Assets Share of Syndicate Insurance Company Total Shares and units in unit trusts Debt securities and other fixed interest securities Deposits with credit institutions Other Market Value £000 26,732 30,130 31,008 240 Cost £000 25,294 30,356 30,983 272 Market Value £000 3,594 102,690 3,062 – Cost £000 1,510 102,192 3,062 – Market Value £000 15,723 83,336 47,887 – Cost £000 15,304 83,745 47,882 – Market Value £000 46,049 216,156 81,957 240 88,110 86,905 109,346 106,764 146,946 146,931 344,402 340,600 Of the above investments, equities with a market value of £1,945,000 and all the debt securities and other fixed interest securities are listed on a recognised stock exchange. The total market value of investments purchased and disposed of in the year was £795,415,000 (2001: £303,094,000) and £634,345,000 (2001: £217,965,000) respectively. 17 DEBTORS ARISING OUT OF DIRECT INSURANCE OPERATIONS Policyholders Intermediaries 2002 £000 2001 £000 23,137 176,235 152 130,537 199,372 130,689 The Hiscox Annual 2002 51 Notes to the Accounts (continued) 18 TANGIBLE ASSETS – GROUP Cost At 1 January 2002 Additions Disposals At 31 December 2002 Depreciation At 1 January 2002 Charge for the year Disposals At 31 December 2002 Net book value at 31 December 2002 Net book value at 31 December 2001 Plant and Machinery £000 Fixtures and Fittings £000 8,265 2,296 (528) 5,479 216 (30) Total £000 13,744 2,512 (558) 10,033 5,665 15,698 4,897 1,600 (147) 1,829 400 – 6,726 2,000 (147) 6,350 2,229 8,579 3,683 3,436 7,119 3,368 3,650 7,018 Assets held under finance leases account for £434,000 of the net book value of the assets above (2001: £1,261,000). The total depreciation for the period relating to these assets amounted to £235,000 (2001: £357,000). 19 FIXED ASSETS – COMPANY a) Tangible Assets Cost at 1 January 2002 Additions Disposals Cost at 31 December 2002 b) Investment in subsidiary undertakings Hiscox Dedicated Corporate Member Limited Hiscox Holdings Limited Hiscox Insurance Holdings Limited Hiscox Select Insurance Fund PLC Hiscox Investment Management Limited For details of principal subsidiary undertakings, see note 30. c) Investments Cost at 1 January 2002 Purchases Sales Cost at 31 December 2002 Market value at 31 December 2002 Market value at 31 December 2001 Art £000 381 127 (10) 498 2001 £000 1,500 38,647 29,983 45,102 225 2002 £000 1,500 38,647 29,983 45,102 225 115,457 115,457 Other £000 Total £000 39 15 – 54 54 39 43,299 70,759 (4,677) 109,381 108,177 43,813 Debt securities and other fixed interest securities £000 Deposits with credit institutions £000 6,128 4,815 (4,677) 24,482 64,767 – Shares and units in unit trusts £000 12,650 1,162 – 13,812 6,266 89,249 12,395 6,463 89,265 13,123 6,153 24,498 The Company has given a fixed and floating charge over its investments and other assets to secure obligations to Lloyd’s in respect of its corporate member subsidiaries. Further details are given in note 27. 52 The Hiscox Annual 2002 20 OTHER DEBTORS Due from Group companies Taxation recoverable Deferred tax asset Net profit commission receivable Other debtors Share of syndicate’s other debtors balances 21 OTHER CREDITORS INCLUDING TAXATION AND SOCIAL SECURITY Proposed final dividend Due to Group companies Taxation payable Amounts owed to credit institutions Obligations under finance leases Other creditors Share of syndicate’s other creditors balances 22 PROVISION FOR OTHER RISKS AND CHARGES At 1 January 2002 Utilised in the year At 31 December 2002 There is no unprovided deferred tax liability for the Company or the Group. 23 SHARE CAPITAL Authorised – Ordinary shares of 5p each At 1 January 2002 26 September 2002 creation of new shares as part of Rights Issue At 31 December 2002 Issued and fully paid – Ordinary shares of 5p each At 1 January 2002 Exercise of approved and unapproved share options Exercise of SAYE share options New shares issued as part of Rights Issue At 31 December 2002 Group 2002 £000 – – 12,824 2,772 6,971 25,166 Group 2001 £000 Company 2002 £000 Company 2001 £000 – 2,912 15,207 314 14,418 19,082 109,085 1,083 2 – 29 – 85,072 1,164 – – 5 – 47,733 51,933 110,199 86,241 Group 2002 £000 6,914 – 2,730 21 454 11,396 14,899 Group 2001 £000 Company 2002 £000 Company 2001 £000 – – 2,424 2,059 1,042 14,845 22,468 6,914 4,541 – – – 1 – – 14,321 – – – 450 – 36,414 42,838 11,456 14,771 Group Deferred Tax £000 908 (908) – Group Other £000 18 (18) – Group Company Total Deferred Tax £000 £000 926 144 (926) (144) – – Number of shares £000 260,000,000 150,000,000 13,000 7,500 410,000,000 20,500 192,667,249 80,581 78,328 96,350,527 9,633 4 4 4,818 289,176,685 14,459 96,350,527 shares were issued at a price of 120.0p per share on 22 October 2002 as part of the Rights Issue. The mid-market price of Hiscox plc shares at close on 27 September 2002 was 140.0p. The Hiscox Annual 2002 53 Notes to the Accounts (continued) 24 RECONCILIATION OF MOVEMENT IN SHAREHOLDERS’ FUNDS a) Total shareholders’ funds Group Issued Share Capital 2002 £000 Share Premium Reserve 2002 £000 Merger Reserve 2002 £000 Capital Redemption Reserve 2002 £000 Capital Reserve 2002 £000 Profit and Loss Account 2002 £000 Total Share- holders’ Funds 2002 £000 Total Share- holders’ Funds 2001 £000 At 1 January 9,633 124,612 4,723 33,244 Exercise of share options Shares issued as part of Rights Issue Exchange differences taken to reserves Retained profit/(loss) for the year 8 4,818 – – 156 105,817 – – – – – – – – – – At 31 December 14,459 230,585 4,723 33,244 – – – – – – (7,421) 164,791 133,562 – – (50) 4,762 164 110,635 (50) 4,762 143 54,228 (35) (23,107) (2,709) 280,302 164,791 b) Total shareholders’ funds Company Issued Share Capital 2002 £000 Share Premium Reserve 2002 £000 Merger Reserve 2002 £000 Capital Redemption Reserve 2002 £000 At 1 January 9,633 124,612 58,970 33,244 Exercise of share options Shares issued as part of Rights Issue Unrealised gains/(losses) net of tax Retained profit/(loss) for the year 8 4,818 – – 156 105,817 – – – – – – – – – – Profit and Loss Account 2002 £000 Total Share- holders’ Funds 2002 £000 Total Share- holders’ Funds 2001 £000 9,163 235,973 180,641 – – – (1,631) 164 110,635 (1,620) (1,631) 143 54,228 (727) 1,688 Capital Reserve 2002 £000 351 – (1,620) – At 31 December 14,459 230,585 58,970 33,244 (1,269) 7,532 343,521 235,973 25 DIRECTORS’ EMOLUMENTS a) Executive directors RRS Hiscox BE Masojada RS Childs SJ Bridges Non-executive directors SH Hall AGC Howland Jackson DND Netherton C Franklin Engler 2002 Basic Salary/Fees £000 2002 Benefits £000 2002 Bonus £000 247 229 247 201 35 30 30 28 17 16 18 18 – – – – 164 260 250 205 – – – – 2002 Total £000 428 505 515 424 35 30 30 28 2001 Basic Salary/Fees £000 2001 Benefits £000 2001 Bonus £000 244 225 238 186 35 30 30 24 23 16 18 18 – – – – – – – – – – – – 2001 Total £000 267 241 256 204 35 30 30 24 b) Pension Entitlements The pension entitlements of the directors in relation to the Hiscox defined benefit scheme were as follows: Increase in accrued pension during the year £000 Total accrued pension at 31 Dec 2002 £000 Transfer value of the increase in accrued pension £000 Transfer value of accrued pension at 1 Jan 2002 £000 Transfer value of accrued pension at 31 Dec 2002 £000 Increase in transfer value of accrued benefit during the year £000 RRS Hiscox BE Masojada RS Childs SJ Bridges 8 3 10 3 179 20 107 12 136 12 82 15 3,158 141 1,164 70 3,617 120 1,049 68 459 (21) (115) (2) Notes The pension entitlement shown is that which would be paid annually on retirement based on service to the end of the year. The increase in accrued pension for the year excludes any increase for inflation. The transfer value has been calculated on the basis of actuarial advice in accordance with Actuarial Guidance Note GN11: Retirement Benefit Schemes – Transfer Values. No contractual contributions were due or have been paid by the directors during the year. 54 The Hiscox Annual 2002 25 DIRECTORS’ EMOLUMENTS continued c) Total directors’ remuneration of which £727,000 was recharged to the managed syndicate (2001: £981,000) was: Salaries, benefits and bonuses Fees to non-executive directors One director exercised his share options during the year (2001: nil). 2002 £000 1,872 123 2001 £000 1,094 119 1,995 1,213 d) (i) Directors’ share interests Executive directors RRS Hiscox BE Masojada RS Childs SJ Bridges Non-executive directors SH Hall AGC Howland Jackson DND Netherton C Franklin Engler 31 December 2002 5p Ordinary Shares Number of shares Beneficial 31 December 2002 5p Ordinary Shares Number of shares Non Beneficial 31 December 2001 5p Ordinary Shares Number of shares Beneficial 31 December 2001 5p Ordinary Shares Number of shares Non Beneficial 8,829,859 1,679,535 717,078 97,500 35,500 49,589 30,000 17,550 598,146 – – – – – – – 7,849,046 1,119,691 570,271 65,000 28,000 33,060 26,000 – 665,000 – – – – – – – Hiscox Trustees Ltd is the trustee of the Hiscox plc group Employee Share Ownership Plan Trust (ESOP) and at 31 December 2002 was interested in 255,466 (2001: 170,311) ordinary shares of the Company. The executive directors are potential beneficiaries of the ESOP and are also deemed to have an additional interest in these shares. Subsequent to the year-end, RRS Hiscox disposed of 15,431 non-beneficial shares. No other transactions have taken place subsequent to the year-end up to the date of these Report and Accounts. The Hiscox Annual 2002 55 Notes to the Accounts (continued) 25 DIRECTORS’ EMOLUMENTS continued d) continued (ii) Share options The share options disclosed below include replacement options in Hiscox plc relating to Hiscox Holdings Ltd and Hiscox Insurance Holdings Ltd share options granted prior to acquisition by Hiscox plc, plus options under the Hiscox plc Approved and Unapproved Share Options Schemes. During the year,adjustments were approved by the Board to the number of options in issue and the exercise prices to take account of the recent Rights Issue and Open Offer and Placing. These adjustments were consistent with the preferred methodology set out in the Inland Revenue Share Schemes Manual and were based on the method of calculating the theoretical ex-rights price set out in Financial Reporting Standard 14 “Earnings per share”. Approval has been received from the Inland Revenue for the adjustments to all the approved schemes and the Company’s auditors have provided confirmation that the adjustments are fair and reasonable for those schemes that required such a confirmation. No. of Adjusted exercise price £ options at 31 December 2002 Market price at date of exercise Date from which exercisable Expiry date 1.32 1.05 1.81 0.83 1.29 0.21 0.31 1.10 1.75 1.62 1.32 1.05 1.81 0.83 1.29 1.75 1.62 1.62 1.05 1.81 1.10 1.75 1.62 1.62 1.32 1.05 1.81 0.83 1.29 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 12 Oct 09 13 Oct 02 15 Jun 03 14 Jun 10 03 May 04 02 May 11 26 Sep 11 27 Sep 04 18 Nov 12 19 Nov 05 6 May 03 7 May 96 28 Jun 04 29 Jun 97 13 May 99 12 May 03 16 Dec 04 17 Dec 00 19 Oct 05 20 Oct 01 13 Oct 02 12 Oct 09 14 Jun 10 15 Jun 03 03 May 04 02 May 11 26 Sep 11 27 Sep 04 18 Nov 12 19 Nov 05 17 Dec 00 16 Dec 04 20 Oct 01 19 Oct 05 20 Oct 01 19 Oct 08 14 Jun 10 15 Jun 03 03 May 04 02 May 11 13 May 99 12 May 03 16 Dec 04 17 Dec 00 19 Oct 05 20 Oct 01 19 Oct 08 20 Oct 01 12 Oct 09 13 Oct 02 15 Jun 03 14 Jun 10 03 May 04 02 May 11 26 Sep 11 27 Sep 04 18 Nov 12 19 Nov 05 No. of options adjusted 7,092 9,457 4,728 11,821 – 82,092 109,457 54,728 136,821 175,000 33,098 558,098 5,036 7,554 10,072 7,566 7,566 9,457 14,186 6,620 11,821 – 105,763 158,645 211,526 87,566 87,566 109,457 164,186 76,620 136,821 200,000 79,878 1,338,150 7,566 6,147 1,418 4,727 4,728 87,566 71,147 16,418 54,727 54,728 24,586 284,586 25,181 7,566 6,147 1,418 9,457 14,185 6,620 11,821 – 528,816 87,566 71,147 16,418 109,457 164,185 76,620 136,821 200,000 82,395 1,391,030 219,957 3,571,864 No. of options lapsed No. of options exercised – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – SJ Bridges RS Childs RRS Hiscox BE Masojada No. of options at 1 January 2002 75,000 100,000 50,000 125,000 – No. of options granted – – – – 175,000 350,000 175,000 100,727 151,091 201,454 80,000 80,000 100,000 150,000 70,000 125,000 – – – – – – – – – – 200,000 1,058,272 200,000 80,000 65,000 15,000 50,000 50,000 260,000 503,635 80,000 65,000 15,000 100,000 150,000 70,000 125,000 – – – – – – – – – – – – – – – 200,000 1,108,635 200,000 Sub-total 2,776,907 575,000 56 The Hiscox Annual 2002 25 DIRECTORS’ EMOLUMENTS continued d) continued (ii) Share options continued No. of options at 1 January 2002 No. of options granted No. of options lapsed No. of options exercised No. of options adjusted No. of Adjusted exercise price £ options at 31 December 2002 Market price at date of exercise Date from which exercisable Expiry date Sub-total b’fwd 2,776,907 575,000 – – 219,957 3,571,864 Other Employees 20,145 50,363 171,237 402,907 390,000 219,500 470,000 203,000 788,000 1,463,000 105,000 100,000 832,500 1,625,000 – – – – – – – – – – – – – – – 2,425,000 – – – – (5,000) (32,000) (40,000) (27,500) (20,000) (45,000) – – (26,500) (10,000) – (20,145) – – (60,436) – – – – – – – – – – – – 2,517 8,561 17,119 36,405 17,720 40,658 16,581 72,601 134,057 9,929 9,456 76,180 152,711 – – 52,880 179,798 359,590 421,405 205,220 470,658 192,081 840,601 1,552,057 114,929 109,456 882,180 1,767,711 2,425,000 0.19 0.21 0.31 1.10 1.75 1.75 1.62 1.62 1.32 1.05 1.03 1.74 1.81 0.83 1.29 6,840,652 2,425,000 (206,000) (80,581) 594,495 9,573,566 1.30 – – 1.26 – – – – – – – – – – – 30 Apr 02 01 May 95 07 May 96 06 May 03 29 Jun 97 28 Jun 04 13 May 99 12 May 03 16 Dec 04 17 Dec 00 16 Dec 07 17 Dec 00 19 Oct 05 20 Oct 01 19 Oct 08 20 Oct 01 12 Oct 09 13 Oct 02 14 Jun 10 15 Jun 03 08 Nov 10 09 Nov 03 14 Feb 04 13 Feb 11 03 May 04 02 May 11 26 Sep 11 27 Sep 04 18 Nov 12 19 Nov 05 Total 9,617,559 3,000,000 (206,000) (80,581) 814,452 13,145,430 The interests of directors and employees under the UK and International Sharesave schemes of the Group are set out below: SJ Bridges RS Childs RRS Hiscox BE Masojada Other employees No. of options at 1 January 2002 10,049 10,049 8,209 13,049 16,485 112,778 430,264 1,492,743 – No. of options granted – – 9,282 – – – – – 233,520 No. of options lapsed No. of options exercised No. of options adjusted No. of Adjusted exercise price* £/Euro options at 31 December 2002 Market price at date of exercise Date from which exercisable Expiry date – – – – (15,197) (25,182) (58,039) (108,038) (9,282) – – (8,209) – (1,288) (58,540) (10,291) – – 950 950 – 1,234 – 1,561 34,184 129,893 – 10,999 10,999 9,282 14,283 – 30,617 396,118 1,514,598 224,238 0.88 0.88 1.08 0.67 1.50 1.08 0.88 0.67 1.02 – – 1.42 – 1.63 1.42 1.26-1.45 – – 31 Jan 04 01 Aug 03 01 Aug 03 31 Jan 04 01 Dec 05 31 May 06 01 Dec 04 31 May 05 01 Nov 01 30 Apr 02 01 Dec 02 31 May 03 01 Aug 03 31 Jan 04 01 Dec 04 31 May 05 01 Dec 05 31 May 06 2,093,626 242,802 (215,738) (78,328) 168,772 2,211,134 International Sharesave Scheme Other employees – – – 99,500 30,690 130,190 – – – – – – 9,408 – 108,908 30,690 1.06 1.62 – – 03 Jan 05 02 Jul 06 01 Dec 05 31 May 06 9,408 139,598 Total 2,093,626 372,992 (215,738) (78,328) 178,180 2,350,732 *International Sharesave Scheme exercise prices are denominated in Euros. The Company has taken advantage of the exemptions conferred in UITF 17 “Employee share schemes” in relation to the charging of notional costs to the profit and loss account. The aggregate gains made by the directors on exercise of the above options (based on market price at date of exercise less the exercise price) was £2,000 (2001: £nil). The market price of Hiscox plc shares at 31 December 2002 was 157.5p. The highest and lowest values of Hiscox shares during 2002 was 164.5p and 120.5p (2001: 226.0p and 72.5p). The Hiscox Annual 2002 57 Notes to the Accounts (continued) 25 DIRECTORS’ EMOLUMENTS continued d) continued (iii) Performance share plan During the year, adjustments were approved by the Board to the number of awards in issue to take account of the recent Rights Issue and Open Offer and Placing. These adjustments were consistent with the preferred methodology set out in the Inland Revenue Share Schemes Manual and were based on the method of calculating the theoretical ex-rights price set out in Financial Reporting Standard 14 “Earnings per share”. The Company’s auditors have provided confirmation that the adjustments are fair and reasonable. No. of shares awarded No. of shares lapsed No. of shares adjusted 7,093 2,364 945 No. of shares at 31 December 2002 82,093 27,364 10,945 No. of Date from which exercisable 1 April 03 1 April 04 1 April 05 10,402 120,402 9,457 2,364 945 109,457 27,364 10,945 1 April 03 1 April 04 1 April 05 12,766 147,766 Expiry date 31 Dec 09 31 Dec 10 31 Dec 11 31 Dec 09 31 Dec 10 31 Dec 11 2,364 945 3,309 9,457 2,364 945 12,766 33,327 24,576 14,927 27,364 10,945 38,309 109,457 27,364 10,945 147,766 385,827 284,576 172,927 1 April 04 1 April 05 31 Dec 10 31 Dec 11 1 April 03 1 April 04 1 April 05 1 April 03 1 April 04 1 April 05 31 Dec 09 31 Dec 10 31 Dec 11 31 Dec 09 31 Dec 10 31 Dec 11 – – – – – – – – – – – – – – – (5,000) (7,500) – (12,500) 72,830 843,330 (12,500) 112,073 1,297,573 – – – – – – – – – – – – – – – – – – – – SJ Bridges RS Childs RRS Hiscox BE Masojada Other employees No. of shares at 1 January 2002 75,000 25,000 10,000 110,000 100,000 25,000 10,000 135,000 25,000 10,000 35,000 100,000 25,000 10,000 135,000 357,500 267,500 158,000 783,000 Total 1,198,000 58 The Hiscox Annual 2002 26 PENSION CONTRIBUTIONS During the year, the Group contributed to the two sections of the Hiscox defined benefit pension scheme. The majority of Group employees are members of the scheme, which is non-contributory. The funds of the scheme are administered by trustees and are independent of the Group’s finances. The adequacy of the pension funds is assessed by triennial valuations carried out by independent actuaries. Defined benefit schemes A full actuarial valuation was carried out at 1 January 2000 by a qualified independent actuary. The valuation was updated on an FRS 17 basis as at 31 December 2002 by a qualified independent actuary. The major assumptions used by the actuary were, in nominal terms, as follows: Rate of increase in salaries Rate of increase in RPI linked pensions in payment Discount rate Inflation assumption 2002 2001 3.25% p.a. 2.25% p.a. 5.50% p.a. 2.25% p.a. 3.50% p.a. 2.50% p.a. 6.00% p.a. 2.50% p.a. The scheme is invested primarily in a unitised fund held with Fidelity Pension Management. The split of assets, their expected rate of return and the funding position at 31 December 2002, measured in accordance with the requirements of FRS 17, were as follows: Equities and properties Bonds Cash Total market value of assets Present value of scheme liabilities Surplus/(deficit) Related deferred tax (liability)/asset Surplus/(deficit) in the scheme – pension asset/(liability) The impact on the net assets and retained profits of the Group at 31 December 2002 of adopting FRS17 would be: Current position at 31 December 2002 Pension (asset)/liability on a SSAP24 basis Pension asset/(liability) on a FRS17 basis Restated position at 31 December 2002 2001 % 7.00 5.25 4.00 2002 % 6.50 4.75 4.00 2002 £000 30,935 10,037 2,561 43,533 (77,258) (33,725) 10,118 (23,607) 2001 £000 37,262 6,399 2,949 46,610 (59,800) (13,190) 3,957 (9,233) Net assets £000 280,302 103 (23,607) 256,798 As a result of the actuarial valuations as at 1 January 2000, the Group is making contributions to the scheme at the rate of 23.1% of pensionable salaries. Where a deficit needs to be funded, a proportion of the additional contributions will be recharged to Syndicate 33 in accordance with the Group’s normal recharging procedures. Analysis of the amount that would have been charged to operating profit/(loss) under FRS17 Current service cost Past service cost Gain/(loss) on settlements and curtailments Analysis of the amount that would have been credited to net finance charges under FRS17 Expected return on pension scheme assets Interest on pension scheme liabilities Net return 2002 £000 3,149 – – 3,149 2002 £000 3,147 (3,671) (524) The Hiscox Annual 2002 59 Notes to the Accounts (continued) 26 PENSION CONTRIBUTIONS continued Analysis of the actuarial gain that would have been included in the statement of total recognised gains and losses under FRS17 Actual return less expected return on pension scheme asset Experience gains and losses arising on the scheme liabilities Changes in assumptions underlying the present value of the scheme liabilities Movement in scheme deficit during the year At 1 January Current service cost Contributions Past service costs Net finance income Actuarial gain At 31 December History of experience gains and losses Difference between the expected and actual return on scheme assets: Amount (£000) Percentage of scheme assets Experience gains and losses on scheme liabilities: Amount (£000) Percentage of the present value of scheme liabilities Total actuarial gain in the statement of total recognised gains and losses: Amount (£000) Percentage of the present value of scheme liabilities 2002 £000 (8,809) (4,868) (6,142) (19,819) 2002 £000 (13,190) (3,149) 2,957 – (524) (19,819) (33,725) 2002 (8,809) 20% (4,868) 6% (19,819) 26% Defined contribution scheme At 1 January 2001, Hiscox introduced a non-contributory defined contribution scheme for all staff joining the Group. The total pension charge for the year amounted to £3,409,000 (2001: £2,856,000) of which £1,814,000 was recharged to managed syndicates (2001: £1,696,000). 27 GUARANTEES AND CONTINGENCIES i) The Company entered into a deed of covenant in respect of its corporate member subsidiaries, Hiscox Dedicated Corporate Member Ltd, Hiscox Select A, B and C Ltd, 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 £80,248,738 (2001: £15,875,563). Hiscox Select Insurance Fund PLC has entered into identical deeds of covenant in respect of its corporate member subsidiaries Hiscox Select D to J Ltd totalling £34,123,823 (2001: £35,813,004). The obligations under these deeds of covenant are secured by a fixed and floating charge over certain of the investments and other assets of the Company and of Hiscox Select Insurance Fund PLC 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 and might not be met in full. ii) The Company has an agreement with J P Morgan (Europe), an agent for a syndicate of banks, for a £137,500,000 irrevocable standby Letter of Credit facility. Commencing 1 January 2003, £125,000,000 was drawn down to support part of the Group’s underwriting activities for the 2003 account. Hiscox plc has a fixed and floating charge over the Group’s assets as a guarantee to the group of banks led by J P Morgan Chase Bank in connection with their Letter of Credit. iii) Hiscox Insurance Company Limited has arranged a letter of credit of £700,000 with Natwest Bank plc to support its consortium activities with Lloyd’s. 60 The Hiscox Annual 2002 Notes to the Accounts (continued) 28 LEASE COMMITMENTS a) Operating leases The Group has the following commitments under operating leases: Operating leases which expire: Within one year From two to five years inclusive Over five years The Company has no operating lease commitments. b) Finance leases The finance lease obligations to which the Group is committed are: In one year or less Between two and five years 29 RELATED PARTIES Land and buildings 2002 £000 Other 2002 £000 Total 2002 £000 Land and buildings 2001 £000 – 681 2,577 3,258 67 – – 67 67 681 2,577 2 681 2,577 3,325 3,260 Other 2001 £000 282 57 – 339 2002 £000 351 103 454 Total 2001 £000 284 738 2,577 3,599 2001 £000 648 394 1,042 The operations listed below are related parties within the definition of FRS 8. Hiscox Syndicates Limited, a wholly owned subsidiary of the Company received management fees and profit commissions for providing a range of management services to Syndicate 33 in which Hiscox Dedicated Corporate Member Limited and the corporate member subsidiaries of Hiscox Select Insurance Fund PLC participated. The value of services provided to the syndicate in the year was as follows: Services provided by Hiscox Syndicates Limited to the undertakings below: Lloyd’s Syndicate 33 Balances due to the Hiscox Group at the balance sheet dates were as follows: Due from respective related parties as at 31 December: Lloyd’s Syndicate 33 2002 £000 2001 £000 11,429 2,888 1,400 1,449 The Hiscox Annual 2002 61 Notes to the Accounts (continued) 30 PRINCIPAL SUBSIDIARY COMPANIES As at 31 December 2002 Company Hiscox Assurances Services SARL† Hiscox Insurance Company Limited† Hiscox Insurance Company (Guernsey) Limited†* Hiscox Dedicated Corporate Member Limited Hiscox Select Insurance Fund PLC Hiscox Select Holdings Limited† Hiscox Select A to J Limited† Hiscox Holdings Limited Hiscox Insurance Holdings Limited Hiscox International Holdings BV† Hiscox Syndicates Limited† Hiscox Underwriting Ltd† Hiscox AG† Hiscox BV† Hiscox Investment Management Limited Hiscox Connect Limited Hiscox Underwriting Group Services Limited Nature of business Underwriting agent General insurance General insurance Lloyd’s corporate name Insurance holding company Insurance holding company Lloyd’s corporate name Insurance holding company Insurance holding company Insurance holding company Lloyd’s managing agent Lloyd’s underwriting agent Underwriting agent Underwriting agent Investment management Online intermediary Service company Country of Incorporation France England Guernsey England England England England England England Netherlands England England Germany Netherlands England England England All companies are wholly owned. The proportion of voting rights of subsidiaries held is the same as the proportion of equity shares held. †Held indirectly. Hiscox Holdings Limited held 1,094,334 shares (2001: 1,094,334 shares) in Hiscox plc at 31 December 2002 with a market value of £1,723,576 (2001: £1,701,689). These shares are included within other financial investments. *Hiscox Insurance Company (Guernsey) Limited has subscribed cellular share capital of $1,175,000 in a cell in Harlequin Insurance PCC Limited, a protected cell company incorporated in Guernsey under the Protected Cell Companies Ordinance, 1997 (as amended). This cell, Cell Hiscox, made a profit in the year of $910,621 (2001: loss $1,020,147) which has been included in the figures of Hiscox Insurance Company (Guernsey) Limited and consolidated in these Report and Accounts. The cumulative loss of Cell Hiscox to date is $386,811. 62 The Hiscox Annual 2002 Notes to the Consolidated Cash Flow Statement 31 a) Reconciliation of operating profit/(loss) to net cash inflow from operating activities: Operating profit/(loss) before taxation after interest, based on longer term investment return Depreciation and amortisation of fixed assets Increase in general insurance technical provisions, net of reinsurance Increase/(decrease) in amounts owed to agents (Increase)/decrease in amounts owed by agents (Increase)/decrease in other debtors Increase/(decrease) in other creditors Cash transferred (to)/from Lloyd’s business (note 31c) Realised and unrealised investment (gains)/losses Short term fluctuations in investment return Interest expense (Profits)/losses relating to Lloyd’s business Other non-cash transactions Net cash inflow from operating activities b) Movement in opening and closing portfolio investments net of financing Net cash inflow/(outflow) for the period Portfolio investments Decrease/(increase) in loans Movement arising from cash flows Movement in long term and Lloyd’s business Changes in market value and exchange rate effects Increase in portfolio investments net of financing Total portfolio investments net of financing at 1 January Total portfolio investments net of financing at 31 December c) Cash flows of the Lloyd’s business Premiums received, net of reinsurance Claims paid, net of reinsurance Net portfolio investments Other net cash flows Net cash flow before retention and transfer from/(to) the Group Transfer from/(to) the Group Cash retained in the Lloyd’s business 2002 £000 2001 £000 34,482 3,422 22,254 13,238 (3,729) (1,024) 2,721 (23,037) 4,841 (11,464) 1,432 (21,034) (70) (21,220) 3,274 37,115 (6,280) (4,713) (35,779) 12,775 (12,489) 5,991 (8,694) 1,099 31,641 86 22,032 2,806 2002 £000 25,288 98,483 2,626 126,397 95,975 (2,717) 2001 £000 6,369 45,779 (905) 51,243 57,035 (4,549) 219,655 103,729 403,654 299,925 623,309 403,654 2002 £000 2001 £000 254,365 (80,382) 6,652 (107,697) 124,051 (52,881) 6,011 (32,635) 72,938 23,037 44,546 12,489 95,975 57,035 Notes 31(e) 31(e) 31(e) 31(c), 31(e) 31(e) The Hiscox Annual 2002 63 Notes to the Consolidated Cash Flow Statement (continued) 31 continued d) Analysis of cash flows for headings netted in the cash flow statement Servicing of finance Interest paid Interest paid element of finance leases Capital expenditure Payments to acquire tangible fixed assets Receipts from sales of tangible fixed assets Payments to acquire intangible fixed assets Acquisitions and disposals Payments to acquire investment in associated undertaking Acquisition of subsidiary undertaking Net cash and investments acquired with subsidiary Financing Proceeds from share issues* New bank loan Repayment of bank loan Capital element of finance leases *Net of expenses of £4,986,413 (2001: £1,779,633). Portfolio investment Purchase of shares and units in unit trusts Purchase of debt securities and other fixed interest securities Sale of shares and units in unit trusts Sale of debt securities and other fixed interest securities Increase/(decrease) in deposits with credit institutions Increase/(decrease) in other investments e) Movement in cash, portfolio investments and financing* Cash at bank and in hand Shares and units in unit trusts Debt securities and other fixed interest securities Deposits with credit institutions Other investments Loans due within 1 year Finance leases Total 2002 £000 2001 £000 (1,644) (65) (1,709) (2,470) (398) (701) (559) (121) (680) (2,772) 4 (6) (3,569) (2,774) – – – – 110,799 – (2,038) (222) (199) (2,527) 4,106 1,380 54,371 1,378 – (381) 108,539 55,368 19,911 175,765 – (165,451) 68,265 (7) 8,402 120,564 (10,339) (117,772) 44,924 – 98,483 45,779 At 1 Jan 2002 £000 62,520 46,049 216,156 81,957 73 Cash flow £000 25,288 19,911 10,314 68,265 (7) 406,755 (2,059) (1,042) 123,771 2,038 588 Changes in other business £000 Changes to market value and currencies £000 33,388 (3,732) 67,931 (1,612) – 95,975 – – – (6,490) 3,870 (97) (12) (2,729) – – At 31 Dec 2002 £000 121,196 55,738 298,271 148,513 54 623,772 (21) (454) 403,654 126,397 95,975 (2,729) 623,297 *These balances include amounts relating to syndicate participations, but exclude participations in associated undertakings of £368,000 (2001: £167,000). f) Scope of cash flow The consolidated cash flow statement excludes cash flows relating to underwriting on Lloyd’s syndicates. 64 The Hiscox Annual 2002 Five Year Summary Results Gross premiums written Net premiums written Net premiums earned Operating profit/(loss) before taxation Short term fluctuations in investment return Exceptional items Movement in equalisation provision Profit/(loss) on ordinary activities before taxation 2002 £000 2001 £000 2000 £000 1999 £000 1998 £000 676,705 416,144 385,129 34,482 (11,464) – (2,703) 20,315 548,926 412,577 344,199 (21,220) (8,694) – (2,582) (32,496) 384,736 260,687 241,450 2,950 1,043 1,803 (2,309) 3,487 323,677 245,371 201,452 5,427 (3,672) – (1,643) 112 241,302 193,291 172,460 12,195 2,260 2,535 (1,739) 15,251 Profit/(loss) on ordinary activities after taxation 13,975 (23,107) 5,430 84 9,725 Combined ratio Assets employed Intangible assets Financial investments Cash at bank and in hand Net technical provisions Other net assets Net assets Financed by Shareholders’ funds Key statistics Adjusted earnings/(loss) per share based on operating profit/(loss) after tax* Earnings/(loss) per share based on profit/(loss) on ordinary activities after tax* Diluted earnings/(loss) per share based on profit/(loss) on ordinary activities after tax* Dividends per share* Return on shareholders’ funds*** Share price – high** Share price – low** 94.8% 109.9% 103.1% 102.7% 97.3% 23,086 502,944 121,196 (613,108) 246,184 23,797 344,402 62,520 (512,993) 247,065 24,407 263,655 38,466 (303,652) 110,686 21,785 228,979 27,602 (295,042) 146,261 22,374 228,568 43,868 (242,054) 81,160 280,302 164,791 133,562 129,585 133,916 280,302 164,791 133,562 129,585 133,916 11.3p 6.6p 6.5p 3.54p 8.5% (9.7)p (14.8)p (14.8)p 0.00p (17.3%) 3.2p 3.5p 3.4p 3.17p 4.2% 2.4p 0.1p 0.1p 3.17p 0.1% 4.9p 6.3p 6.2p 3.17p 9.8% 164.5p 120.5p 226.0p 72.5p 144.0p 83.0p 202.5p 130.5p 260.0p 140.0p *Earnings/(losses) and dividends per share for earlier years have been restated for subsequent changes of capital not involving full consideration at fair value, including bonus issues and rights issues. **Closing mid market price. ***Profit on ordinary activities after taxation as a percentage of opening shareholders’ funds. The Hiscox Annual 2002 65 Notice of Annual General Meeting Notice is hereby given that the Annual General Meeting of Hiscox plc will be held at 1 Great St Helen’s London EC3A 6HX on 24 June 2003 at 11.00 am for the following purposes: ORDINARY BUSINESS 1) To receive the accounts of the company for the year ended 31 December 2002 together with the directors’ and auditors’ reports thereon. To re-appoint the following who retire as directors in accordance with the Articles of Association: 2) RRS Hiscox 3) AGC Howland Jackson 4) DND Netherton 5) To re-appoint KPMG Audit Plc as audi- tors of the Company to hold office from the conclusion of this meeting until the conclusion of the next general meeting of the Company at which accounts are laid. 6) To authorise the directors to determine the level of auditors’ remuneration. 7) To declare a final dividend for the year ended 31 December 2002 of 2.4 pence per ordinary share payable to shareholders on the register at the close of business on 22 April 2003. SPECIAL BUSINESS To consider, and if thought fit, pass the fol- lowing resolutions, of which resolutions 8 and 9 will be proposed as ordinary resolu- tions and resolution 10 will be proposed as a special resolution. ORDINARY RESOLUTIONS 8) That the directors be generally and unconditionally authorised (in substitution for all existing authorities) pursuant to Section 80 of the Companies Act 1985 (“the Act”) to allot relevant securities (within the meaning of that Section) up to a maximum aggregate nominal value of £4,820,390.90, representing 33.3% of the issued ordinary share capital as at 26 March 2003, for a period expiring (unless previously renewed, varied or revoked by the Company in general meeting) fifteen months from the date of the passing of this resolution provided that the authority of the directors shall extend to the making of any offer or agreement before the expi- ration or revocation of the authority which would or might require relevant securities to be allotted after the expiration or revo- cation of this authority and the directors may allot relevant securities in pursuance of any such offer or agreement notwith- standing the expiry or revocation of this authority. 66 The Hiscox Annual 2002 9) That the Remuneration Report con- tained within the Report and Accounts for the year ended 31 December 2002 be approved. SPECIAL RESOLUTION 10) That the directors be empowered (in addition to all existing authorities) pur- suant to Section 95 of the Act to allot equity securities (as defined in Section 94 of the Act) for cash pursuant to the author- ity conferred by Resolution 7 as if Section 89(1) of the Act did not apply to the allot- ment. This power will expire fifteen months after the date of the passing of this Resolution, but the Company may before such expiry make an offer or agreement which would or might require equity secu- rities to be allotted after the expiry of this power and the directors may allot equity securities in pursuance of that offer or agreement as if the authority conferred by this resolution had not expired provided that this power is limited to: (i) allotments of equity securities where such securities have been offered (whether by way of a rights issue, open offer or otherwise) to holders of ordi- nary shares in proportion (as nearly as may be) to their existing holdings of ordinary shares but subject to the directors having a right to make such exclusions or other arrangements in connection with the offer as they deem necessary or expedient: (a) to deal with equity securities repre- senting fractional entitlements; and (b) to deal with legal or practical prob- lems under the laws of, or the requirements of any recognised regulatory body or any stock exchange, in any territory; and (ii) the allotment of ordinary shares for cash otherwise than pursuant to para- graph (i) up to an aggregate nominal amount of £723,058.60. By order of the Board SJ Bridges Secretary 26 March 2003 NOTE A member entitled to attend and vote may appoint one or more proxies to attend and vote instead of him. The instrument appointing a proxy must be in writing and a form of proxy for use at the meeting is enclosed. A proxy need not also be a member of the Company. Annual General Meeting 24 June 2003 16 April 2003 Ex-dividend date* Record date for 2002 final dividend** Payment for final dividend *Shares bought on or after this date will not qualify for the dividend. **Shareholders must be on our register on this date to receive a dividend. 22 April 2003 30 June 2003 Hiscox plc, 1 Great St Helen’s, London EC3A 6HX, United Kingdom Or visit our website at www.hiscox.com The Hiscox Annual 2002 67 h t i m S r e b a B y b d e c u d o r p d n a d e n g i s e D Hiscox plc, 1 Great St Helen’s, London EC3A 6HX, United Kingdom Telephone: +44 (0) 870 240 5592 Facsimile: +44 (0) 800 032 0446 Email: enquiry@hiscox.com Website: www.hiscox.com