Contents
02 Highlights
03 Who we are
04 Board of Directors
08 Chairman’s statement
10 Chief Executive’s report
16 The Hiscox business at a glance
18 Hiscox distribution
20 The Hiscox brand and values
21 Hiscox people
22 Risk carriers
26 Group financial performance
29 Cash flow and liquidity
30 Capital
32 Risk management
36 Corporate responsibility
38 Corporate governance
41 Directors’ remuneration report
44 Directors’ report
48 Statement of Directors’ responsibilities
49 Independent auditors’ report to the shareholders of Hiscox plc
50 Consolidated income statement
51 Consolidated balance sheet
52 Company balance sheet
53 Consolidated statement of changes in equity
54 Company statement of changes in equity
55 Cash flow statement – Consolidated Group
56 Cash flow statement – Company
57 Notes to the financial statements
101 Five year summary
102 Notice of Annual General Meeting
104 Definition of insurance terms
Hiscox plc Report and Accounts 2005 01
Highlights
Financial
• Pre-tax profit of £70.2 million, after £165
million net loss from 2005 hurricane season
• Final dividend increased 36 per cent, making
a total dividend of 7.0p per share for the year
(2004: 5.0p per share)
• Strong performance from regional specialist
businesses, including a profit before tax
of £40.4 million from Hiscox UK and second
year of profit for Hiscox Europe.
Operational
• Hiscox Bermuda formed, financed by
successful £170.0 million Rights Issue
(net of expenses)
• Hiscox Bermuda and Hiscox Guernsey
awarded A- (Excellent) ratings from
A.M. Best in addition to existing A- (Excellent)
rating for the Hiscox Insurance Company
• Strong management team in place with
new appointments in Europe, UK and USA
• Successful launch of broker e-trading
to complement the good growth
in direct business.
Outlook
• Hiscox Bermuda well positioned to take
advantage of favourable rates
• Hiscox USA operational in 2006 with strong
experienced team
• Accelerated marketing activity in 2006
to stimulate growth for Hiscox UK
• The structure of the business and its
distribution channels are now both in
place and working to drive the growth
of the Group for the next decade.
Group key performance indicators
Profit before tax (£m)
Group combined ratio
Earnings per share
Dividend per share
Shareholders’ equity (£m)
Net unearned premiums (£m)
Net asset value per share
Return on equity
02 Hiscox plc Report and Accounts 2005
2005
70.2
96.0%
15.6p
7.00p
578.0
361.9
147.7p
12.8%
2004
89.5
92.6%
21.3p
5.00p
368.8
373.1
125.7p
20.6%
Who we are
A leading specialist insurer with expertise
in covering a wide range of specialist personal
and business risks, and offices and customers
around the world.
The Hiscox ambition is to build a highly
respected business, recognised for the quality
of its people, products and services, and
the robustness of its financial performance.
Hiscox Global Markets
Reinsurance and Major Property
Marine and Energy
London Market
Specialty
Aerospace
Technology, Media and Telecoms
Hiscox UK
Hiscox Europe
Fine Art and Household
Professions and Specialty Commercial
Hiscox International
(Bermuda, Guernsey, USA)
Reinsurance
Fine Art and Household
Kidnap and Ransom
Errors and Omissions
Inter-group Reinsurance
Hiscox Investment Management
Supervision of Group funds
Management of specialist funds
for third-party investors
Hiscox plc Report and Accounts 2005 03
Board of Directors
Executive Directors
Robert Ralph Scrymgeour Hiscox
Chairman (Aged 63)
Robert Hiscox joined the Group in 1965
and has been Chairman since 1970.
He was Deputy Chairman of Lloyd’s
between 1993 and 1995. He is a Non
Executive Director of Grainger Trust plc.
Robert Simon Childs
Chief Underwriting Officer
Chief Executive Officer of Hiscox Bermuda
Chairman of Hiscox USA (Aged 54)
Robert Childs joined the Hiscox Group
in 1986, served as the Active Underwriter
of the Hiscox Lloyd’s Syndicate 33 between
1993 and 2005, and is the Group’s Chief
Underwriting Officer. Robert was Chairman
of the Lloyd’s Market Association from
January 2003 to May 2005.
Bronislaw Edmund Masojada
Chief Executive (Aged 44)
Bronek Masojada joined the Group
in 1993. From 1989 to 1993 he was
employed by McKinsey and Co. He was
a member of the team that advised
Lloyd’s during the Rowland Taskforce in
1991, and in the preparation of the first
Lloyd’s Business Plan in 1993. Bronek
served as Chairman of the Lloyd’s
Underwriting Agents Association from
1998 to 2001, and is currently a Deputy
Chairman of Lloyd’s and immediate
past President of The Insurance Institute
of London. He is Non Executive Director
of Ins-sure Holdings Limited.
Stuart John Bridges
Group Finance Director (Aged 45)
Stuart Bridges is a qualified chartered
accountant, who joined the Group
in 1999. He has held posts in various
financial service companies in the UK
and US, including Henderson Global
Investors. His experience spans a broad
spectrum of corporate finance ranging
from mergers and acquisitions to banking,
fund management and venture capital.
He was a member of the Financial
Reporting Council’s review group on
The Turnbull Guidance on Internal Control.
04 Hiscox plc Report and Accounts 2005
Independent Non Executive Directors
Sir Mervyn Pedelty
Non Executive Director (Aged 57)
Sir Mervyn Pedelty was previously
Executive Director and Chief Executive
of The Co-operative Bank plc (from 1997
to 2004) and of Co-operative Financial
Services Limited and the Co-operative
Insurance Society Limited (from 2002 to
2004). He was also a Director and deputy
chair of Unity Trust Bank plc (from 1997
to 2004) and a Director of the Association
of British Insurers (from 2002 to 2004).
He is also a former Council Member of
the British Bankers’ Association. His other
current appointments include: Chairman
of the FTSE4Good Policy Committee,
a Director of Business in the Community
Limited, a Director of Symphony Hall
(Birmingham) Limited and a Senior
Industry Adviser to Permira Advisers
Limited. He joined the Group on
1 July 2005.
Anthony Howland Jackson
Senior Independent Director and Chairman
of Remuneration and Conflicts Committees
(Aged 64)
Anthony Howland Jackson was previously
Chairman of Bain Hogg plc and Deputy
Chairman of Aon UK Holdings Limited.
He was Chairman of The General Insurance
Standards Council until 3 January 2005.
He joined the Group on 8 May 1997.
Carol Franklin Engler
Non Executive Director and Chairman
of Nomination Committee (Aged 54)
Carol Franklin Engler is the Ombudsman
for the Swiss telecommunication industry
and an Executive Director of the Swiss
National Museum. 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
Executive Director of Citron AG and
Prime Forestry Switzerland AG. She
joined the Group on 12 August 1999.
Derek Nigel Donald Netherton
Non Executive Director and Chairman
of Investment Committee (Aged 61)
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 and
St James’s Place Capital plc. He was
also a member of the Supervisory Board
of the Schroder Exempt Property Unit
Trust until February 2004 and a Non
Executive Director of Plantation & General
Investments plc until June 2004.
He joined the Group on 6 August 1999.
Adrian Auer
Non Executive Director and Chairman
of Audit Committee (Aged 57)
Adrian Auer was previously Group Finance
Director for the RMC Group plc from 2003
to 2005. He is Chairman of Readymix plc,
and his other directorships include
Bespak plc, Foseco plc, Filtrona plc,
and Shanks plc. He joined the Group
on 1 July 2005.
Secretary
Stuart John Bridges
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
UBS Limited
1 Finsbury Avenue
London EC2M 2PP
Registrars
Capita Registrars
The Registry
34 Beckenham Road
Kent BR3 4TU
Hiscox plc Report and Accounts 2005 05
Chairman’s statement
Our past investment in regional expansion
has helped the Group make a very satisfactory
profit despite the many catastrophes in 2005.
Our new investments in Bermuda and the USA
give us an even wider geographic spread, with
growing books of regional specialist business
to balance our internationally traded business.
I am confident of further profitable growth.
Results
The result for the year ending 31 December 2005 is a pre-tax profit of
£70.2 million (2004: £89.5 million). The net assets per share increased
to 147.7p per share (2004: 125.7p per share) and the earnings per
share on profit after tax were 15.6p per share (2004: 21.3p per share).
The gross premium income underwritten was £1,105.0 million
(2004: £1,110.9 million), of which £861.2 million (2004: £816.6 million)
was applicable to Hiscox plc.
We thought that 2004 was a turbulent year, but 2005 well surpassed
it with 400 catastrophic natural and man-made events officially
recorded causing an estimated $83 billion of insured damage. The four
hurricanes in the US and the Caribbean included Katrina, the most
expensive in history. In the circumstances, a profit of £70.2 million
(after a net loss of £165 million from the hurricanes) is satisfactory,
and made possible by our strategy of building a book of regional
specialist business (sometimes called ‘retail’ business) to balance
the global business written in London (and Bermuda in future) that
can be buffeted by catastrophes.
Dividend
As recommended at the time of our Rights Issue, in November 2005,
the final dividend, subject to shareholders’ approval, will be 4.75p per
share (2004: 3.5p per share) making a total distribution for the year
of 7p (2004: 5p), an increase of 40 per cent on the previous year.
This will be paid on 26 June 2006 to shareholders on the register
on 21 April 2006. We have always had a policy of steadily increasing
the dividend, but it had fallen behind the growth of the Company in
recent years. With a little persuasion from our long-term institutional
shareholders, we also agreed that we would target a total dividend of
9p for 2006 subject to adequate profitability and shareholders’ approval.
Corporate events
The hurricanes of 2005 stopped the slide in rates in those lines
of business affected by the losses and generally stiffened the resolve
of underwriters in some other areas. In order to take advantage of the
improved conditions in one of our core areas, international reinsurance,
we raised £170.0 million through a Rights Issue to help create Hiscox
Bermuda, which was formed in time for the end of year renewal
season. Bermuda is now a prime market for international reinsurance
and large internationally traded business, and Hiscox Bermuda will
widen the distribution of our skill in those areas. The new venture
will write reinsurances of some of our specialist regional business
as well as direct reinsurance to give a properly balanced account.
Robert Childs, our Chief Underwriting Officer, has moved to Bermuda
which shows his and our commitment to the new venture. He will also
oversee our new project to underwrite more regional business in the
USA through our new operation Hiscox USA led by Ed Donnelly.
Current business
Our Global Markets business did well to achieve a combined ratio
of 99.9 per cent and a small profit considering the battering it took
from the hurricanes. This was helped by the book of specialist regional
business written by them which balanced, to an extent, the volatility
of the reinsurance account and the big ticket London Market business.
Income was steady as they were cutting back their income and
exposure during 2005 in the areas where rates were falling, in line
with our policy of reducing income when rates reduce and going for
it when prices rise. As I said above, this all changed by the year end
due to the hurricanes and they were able to take advantage of better
rates during the renewal season.
08 Hiscox plc Report and Accounts 2005
and fair settlement of claims and cracking good service to all who
come into contact with Hiscox. We want to be chosen because
we offer quality, not the cheapest price.
People
Bronek’s report shows the business in great detail, and I think
it is a great credit to him and the team he has gathered round him.
Bronek joined a small private Lloyd’s agency in 1993 since when
his dynamism, intellect and vision have led a very focused but well
spread expansion in the public arena. I know it is unfashionable for
a Chief Executive to spend more than a couple of years in the post,
but I consider many of them just mercenaries who join with a huge
signing on fee, demand a loyalty bonus to stay, and then leave with
a huge pay-off when they are found to be wanting. I prefer executives
(and shareholders) who feel like long-term owners of the business
and want to build it well into the future. All the staff at Hiscox contribute
with cheerful enthusiasm as we strive to create a great business,
and I am very grateful to them. They are a pleasure to work with.
Finally
I am sometimes embarrassed that Hiscox has been alive since
1901 and is still relatively small compared with some other new
coming shooting stars. However, I think that its longevity does show
a long-term dedication to the business and a will not to give up before
the job is done. To use the hackneyed metaphor, we are running
a marathon, not a sprint. The exciting thing is that we all feel that
we have only just begun. Every day brings a new challenge, right
now with new businesses in the USA and Bermuda, new offices
in the UK and Europe, new technology to harness and new business
processes to reduce cost, which makes it constantly interesting and
invigorating. We have great people and a better spread of business
than ever before, and I am confident that we are entering a new
era of profitable growth.
Robert Hiscox
Chairman
13 March 2006
Going forward, the Global Markets account written in London will
be complemented by Hiscox Bermuda which will widen the spread
of the account. Our reinsurance and big ticket account will always
be vulnerable to extreme weather catastrophes and any run of
substantial losses. This is why both in London and Bermuda,
and throughout the rest of the Group, we seek to write a balancing
account of specialist business.
The success story of the year was our specialist regional business
in the UK which achieved a combined ratio of 84.1 per cent. We are
clearly selling good products at a fair price, so to sell more and
accelerate our growth we intend to increase our marketing substantially
in 2006. Our European offices turned in a decent profit this year and
Guernsey made its usual excellent result. Since 1989 we have spent
considerable management time and money on building a regional
presence throughout the UK and Europe, and now in the USA.
The investment is paying off with the UK showing highly satisfactory
results and Europe showing strong potential. The USA is a new
venture with proven management that has succeeded in the past
and I am sure will do so again.
The market
Bermuda is the focus of much attention at the moment as it has now
outgrown the London Market in reinsurance. It resembles the Lloyd’s
of old in its entrepreneurial spirit, speed of reaction and swift and
sensible regulation. Brokers find it very user-friendly. Meanwhile Lloyd’s
has produced another plan to be the optimal platform and has just
announced the appointment of a new Chief Executive. In 1991, in the
Rowland Task Force report on Lloyd’s, the worst statistic for me was
that Lloyd’s underwriters paid brokers higher commission than any
other insurance company, but brokers made less money dealing with
it than any other insurance company. Fifteen years later, after three
changes of Chief Executive and much talk of optimal platforms and
a fortune spent on a scrapped IT system, the same statistic probably
still applies. The current Chairman has done a great job facing outwards
with foreign regulators, the Government and PR, but he now needs
to face inwards with his new CEO and simplify market processes
and the capital structure or Lloyd’s will wither away.
The future
We have a vision of building a highly respected international specialist
insurer, and we have been laying strong foundations for some time
in different areas on which we can now develop strong businesses.
Bermuda will give us a better spread of London Market type business.
The UK regions have enormous scope for growth in their specialist
areas as do the European offices. Our direct business grows healthily
and will benefit from more advertising. Forty per cent of our business
currently comes from the world’s biggest insurance market, the USA,
and we now have Hiscox USA to add a portfolio of smaller business
to give balance.
The Hiscox brand
The extra marketing and advertising in 2006 should not only give
a powerful boost to our direct business which continues to grow well,
but is aimed to increase awareness of our brand across all sectors
of insurance we want to underwrite. In a world where insurance
is often seen as a commodity which sells on price alone, we want
Hiscox to be a premium brand which reflects our values of integrity
and quality of product and service. Any insurer can issue a standard
policy, but we want to be trusted to provide superior service around
our policies – flexible underwriting giving the policyholders the cover
they need rather than the cover we want to give them, flexible, rapid
Hiscox plc Report and Accounts 2005 09
Chief Executive’s report
2005 was the year in which Hiscox
demonstrated the strength of our strategy
of balance. For the last decade we have
been steadily building our businesses outside
the Lloyd’s market and have created a spread
between globally traded and specialist regional
risks. This meant that after the market-wide
impact of Hurricanes Katrina, Rita and Wilma
we were in a position to create Hiscox Bermuda,
allowing us to participate in this growing market.
10 Hiscox plc Report and Accounts 2005
Strategy
Hiscox has had a consistent vision over the past decade, to build
a respected specialist insurer recognised for the quality of its people,
products and service, and its strong financial performance.
In our journey we have applied the following key principles:
recruit and retain quality people and reward them fairly
1.
2. maintain a clear preference for profitability over size
3.
focus on specialist products backed by first-class service
4. balance the volatility of the London Market with specialist
regional business
5. broaden distribution to access new markets
6.
increase efficiency and reduce intermediation costs.
It is this consistent vision that has allowed us to grow steadily,
moving from a single location in 1993 to 20 offices across three
continents, building regional specialist businesses and growing
market capitalisation from £15 million in 1993 to almost £1 billion,
with the share price rising from 33p to today’s level.
I believe the current shape of our business can drive the development
of the Group for the next decade. We aim to build significant
businesses in the UK, Europe and the USA which will focus on
specialist regional risks, with local underwriters and local customer
service and claims payment. Hiscox Guernsey will focus on specialist
regional business for international customers. Hiscox Global Markets
in London and Hiscox Bermuda will underwrite internationally traded
reinsurance and big ticket business in these locations, but will use the
rest of the Hiscox network for marketing and business development.
Group performance
The pre-tax profit this year of £70.2 million (2004: £89.5 million)
is equal to 15.6p per share (2004: 21.3p per share). This profit
should be judged in the context of the most expensive year of
natural catastrophes ever in the history of our industry.
Total revenues were £861.2 million (2004: £816.6 million). The small
increase in premium reflects our disciplined underwriting in the face
of declining prices in global traded risks and certain regional classes
offset by increased ownership of Syndicate 33. Hurricanes Katrina,
Rita and Wilma had a market-changing impact on certain classes
and areas, and this will give us the opportunity to grow in 2006.
The precise opportunity will vary across the different divisions within
the Group. Conditions in each division’s market, their past financial
performance and their prospects are reviewed below.
Hiscox Global Markets
This division uses the global licences and distribution network available
to those who underwrite at Lloyd’s to reach brokers and customers
located around the world. The majority of its business is reinsurance,
major property and other large international risks. The remainder
is specialist business which provides the division with some balance.
Gross written premium increased to £555.2 million (2004: £511.5 million)
and the division made a pre-tax profit of £20.7 million. The overwhelming
financial events of the year which affected this division were the
hurricanes. These cost us $730 million on a gross basis and $285 million
net of reinsurance. The impact to Hiscox plc was to reduce pre-tax profit
by £85 million. Our prudent purchase of reinsurance has significantly
mitigated our loss, but we have very limited cover remaining for these
events. This is not surprising after the biggest insured event in the
history of insurance and the most expensive year of insured natural
catastrophes ever.
A profitable result, albeit assisted by a significant exchange rate gain,
is an outstanding achievement for a business active in this segment.
Many of its competitors are on their knees. This result vindicates
our strategy of building balanced businesses even at a divisional level,
and reflects a great performance by the underwriting team.
The rating environment for the lines of business within Hiscox Global
Markets remains robust. The hurricane season has put upward
pressure on prices for reinsurance and London Market business
affected by the storms. There were significant price rises on the South
East Coast of America and other flood or hurricane prone coastal
areas, some small rises elsewhere in the US and the UK, and very
few rises and some falls elsewhere in the world. In 2006 we plan
to take advantage of the higher prices while reducing our exposure
in the Gulf of Mexico. In the specialist areas, business has remained
profitable and significant price rises are not expected.
During 2005 our broker partners continued to restructure their
businesses as they responded to the changes wrought by Elliot
Spitzer, the New York Attorney General. We in turn are responding
in two ways:
• first, we are establishing Hiscox Global Markets business
development and marketing teams in Paris, New York and
San Francisco. Underwriting expertise will remain concentrated
in London. Initial indications are that this will pay off with
an increased flow of attractive business
• second, we are leading the development of greater electronic
trading capabilities. The demise of Kinnect, the electronic operating
platform sponsored by Lloyd’s, has meant that businesses like
Hiscox have to decide how to reduce the cost of trading in Lloyd’s
themselves. Hiscox is working with five other major managing
agents (a group known as G6) to do this. There have been many
initiatives of this sort which have failed in the past, but we are
determined to succeed.
Hiscox Global Markets remains our core business. At the end of the
year Richard Watson assumed leadership of the unit. Richard has
been with Hiscox for 20 years and has had experience in underwriting
most classes of Hiscox business during his career. Richard’s disciplined
underwriting skills and leadership capability will ensure that Hiscox
Global Markets adapts to the changing market environment in ways
which maximise our profits within reasonable risk parameters.
Hiscox UK and Hiscox Europe
These two divisions focus on selling personal and commercial
products to similar customers in different countries. In personal lines
both businesses aim to insure the wealthiest five per cent of the
population – seeking clients who are ‘rich, careful and honest’.
On the commercial side, they seek to insure service-based businesses
with 50 or fewer employees or ‘professionally run professional firms’.
Prices in our specialist regional businesses remain attractive. Rates
have reduced slightly over the past 12 months, but we believe that
they are still at reasonable levels.
Hiscox UK
Hiscox UK is the most mature area of business we have built outside
of Lloyd’s in the last decade. It had a stunning 2005. Gross written
premium remained static at £207.3 million (2004: £212.1 million) with
a combined ratio of 84.1 per cent (2004: 96.8 per cent) and pre-tax
profits of £40.4 million (2004: £17.5 million).
The muted top line growth reflects our focus on profits over volume.
In 2005 we reduced our participation in the UK solicitors’ professional
indemnity market – a drop of £14 million of written premiums – but this
underwriting discipline will be rewarded at the bottom line. The UK
business has made a greater profit than the original cost of purchasing
it in 1996. We must remember the result is assisted by the absence of
any significant natural catastrophes in the UK over the past 12 months.
Mother Nature decided to focus on the USA and, as a Group, we have
benefited from our geographic spread.
We remain a market leader in the art and private client areas and are
becoming a leader in the insurance of small service-based businesses.
Our business is sold overwhelmingly through brokers. In 2005 we
launched an electronic platform to support both of these products
with brokers. Feedback has been excellent and we expect that over
time the electronic placing will allow brokers to do more business
with us, lowering both their and our costs.
Hiscox Global Markets
Hiscox UK and Hiscox Europe
Gross premiums written
Net premiums earned
Profit before tax
Combined ratio
2005
£m
555.2
428.3
20.7
99.9%
2004
£m
2005 (£m)
UK
Europe
2004 (£m)
UK
Europe
511.5
Gross premiums written
207.3
484.0
Net premiums earned
67.8
Profit before tax
194.5
40.4
55.0
47.1
3.0
212.1
170.0
17.5
55.7
42.4
1.4
90.9%
Combined ratio
84.1%
99.7%
96.8%
103.2%
Building a balanced business Gross written premium at 100% level (£m)
1,200
1,000
800
600
400
200
4
4
2
0
9
1
0
0
1
2
3
1
3
8
0
1,
1
1
1
1,
5
0
1,1
1
4
9
0
8
7
0
7
3
9
7
3
8
7
3
2
2
4
3
0
4
3
1
4
3
0
6
0
8
4
4
1
5
0
1988*
1989*
1990*
1991*
1992*
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
London Market – Syndicate 33(cid:2)(cid:2) Regional – Syndicate 33(cid:2)(cid:2) Regional – Hiscox Insurance Company
s
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*
The amounts for all periods prior to 2004 are those previously published on a UK GAAP basis, the Group’s primary reporting framework at that time. The figures reported for 2004 and 2005
are prepared in accordance with IFRSs as adopted by the EU. The main differences arising on the Group’s transition to IFRSs are outlined at note 3 to the financial statements.
Hiscox plc Report and Accounts 2005 11
Chief Executive’s report continued
Our direct business is making steady progress as an increasing
number of clients become more comfortable purchasing their home
and contents insurance and their commercial insurance over the
internet and telephone. In 2006 we plan to increase our advertising
to stimulate demand in both direct and brokered business.
Steve Langan became Managing Director of Hiscox UK during
the year. Steve joins us from Diageo where his experience in
consumer marketing and leading businesses should ensure that
our efforts in building the Hiscox brand to grow the business
are well rewarded.
Hiscox Europe
Hiscox Europe has repaid the support we have given it. It made pre-
tax profits of £3.0 million (2004: £1.4 million), with a combined ratio
of 99.7 per cent (2004: 103.2 per cent) and revenues of £55.0 million
(2004: £55.7 million). These good results have been at the expense
of top line growth as in 2005 our focus has been on improving the
underwriting and reducing operational costs. Having achieved that,
in 2006 we can concentrate on growth.
In May last year we employed Marc Van der Veer, an experienced
Directors and Officers underwriter, to become Managing Director of
this business unit. We have subsidiaries in France, Germany and the
Benelux and Marc and his team will be focused on developing major
businesses in these countries. We do serve other European markets
in Spain, Portugal and Sweden on a small scale, managed out of
London and served through partnerships with local brokers with local
Hiscox representation. Over the longer term these relationships may
become stepping stones for greater activity in these countries.
Our ambition is for Hiscox Europe to reach a similar scale and profit
as Hiscox UK. In 2006 we will be focusing on developing a sales
culture to demonstrate that the choice is not between growth
and profit, but that both can be achieved in Europe.
Hiscox International
Hiscox International covers our offshore activities in Guernsey and
Bermuda, and our nascent business in the United States. The division
made a pre-tax profit of £6.2 million (2004: £2.9 million), achieved
a combined ratio of 91.3 per cent (2004: 92.0 per cent) and had
revenues of £43.7 million (2004: £37.3 million). All the profit in this
division was made by Hiscox Guernsey as the other two businesses
only commenced underwriting in 2006.
Hiscox Guernsey has been in operation for seven years. It has
grown from a very small beginning, formed because particular
business could no longer be written in Lloyd’s, to a major financial
institution in Guernsey.
Hiscox Bermuda was created in November last year and funded with
the proceeds of our Rights Issue and bank debt to take advantage
of the improving market conditions following the impact of the 2005
catastrophes. We had to move fast and the regulatory authorities in
Bermuda, our shareholders, bankers and brokers, were very supportive
for which I would like to thank them. Hiscox Bermuda is led by
Robert Childs, Chief Underwriting Officer, who was previously
Managing Director of Hiscox Global Markets. Robert’s leadership
reflects the seriousness with which we take this opportunity and
the role that we feel Bermuda can play in our future. At the end
of February 2006, Hiscox Bermuda had gross committed income of
US$155 million of which US$46 million was to external clients and the
balance reinsurance support of other Group companies. We believe
we are on track to achieve the full year target of US$325 million
announced at the time of the Rights Issue.
Hiscox USA is still at an early stage of its development and officially opens
in March. Ed Donnelly is busy getting licences and building his team.
Investment management
The fair value of all financial investments and cash holdings under Group
management at 31 December 2005 (including the Group’s share
of syndicate assets) was £1,651.5 million (2004: £1,100.3 million).
During 2005 these funds generated a return of £50.3 million
(2004: £34.5 million).
Group investment policy concentrates on making good absolute
returns for an acceptable risk. This focus on absolute returns ensures
that even in poor investment years we have the necessary capital
to underwrite. We ensure that this goal is reached through modelling
of likely returns, backed by the judgement of our internal and external
fund managers. We also have an explicit guide that the technical
reserves of the Group should be invested in bonds, and no more
than 50 per cent of capital to support underwriting may be invested
in ‘risk’ assets such as equities and property. Due to the short-tail
nature of the insurance risks we underwrite and the unknown loss
dates, we do not attempt to match asset and liability duration. We do
however remain matched in currency between our anticipated liabilities
and assets.
The Group’s funds are overseen by our team at Hiscox Investment
Management (HIM). The HIM team supervise our external
fund managers.
In addition to this supervisory role, the team also manages £165 million
in six specialist funds for third-party investors. The Hiscox Insurance
Portfolio, managed by Alec Foster, has performed outstandingly over
the past five years. Alec remains as Managing Director and David Astor
Syndicate 33 rating index Index level (%)
Hiscox Insurance Company rating index Index level (%)
400
300
200
100
0
Jan 05-D ec 05
Jan 03-D ec 03
Jan 02-D ec 02
Jan 01-D ec 01
Jan 98-D ec 98
Jan 04-Jun 05
Jan 04-D ec 04
Jul 03-Jun 04
Jul 02-Jun 03
Jul 01-Jun 02
Jul 00-Jun 01
Jan 00-D ec 00
Jul 99-Jun 00
Jan 99-D ec 99
Jul 98-Jun 99
160
150
140
130
120
110
100
90
Jul 00-Jun 01
Jan 01-D ec 01
Jul 01-Jun 02
Jan 02-D ec 02
Jul 02-Jun 03
Jan 03-D ec 03
Jul 03-Jun 04
Jan 04-D ec 04
Jul 04-Jun 05
Jan 05-D ec 05
London Market
Reinsurance
Specialty
UK Personal Lines
UK PI
France
Germany
12 Hiscox plc Report and Accounts 2005
became the Group Investment Officer during the year. Since joining
Hiscox in 2002, David has run three financial funds, each of which has
significantly outperformed its benchmarks since launch. The Hiscox
US Financial Fund has beaten the Standard & Poor’s 500 index
by 55 per cent since launch in 1994.
We have had superior returns in our specialist areas which should
help our ambition to grow the third party funds under management.
In 2005 we launched two new funds, the Hiscox Global Financials
Fund in October and the Aramus Financials Fund for Clariden Bank
in Switzerland in December. These funds have already attracted over
£42 million since launch.
Balance sheet
During the course of the year net assets per share grew to 147.7p
per share (2004: 125.7p per share). Tangible net assets grew to
139.3p per share (2004: 115.5p per share). The critical financing
events of the year were the Rights Issue to fund Hiscox Bermuda,
and the arrangement of various facilities.
In November the Rights Issue raised £170.0 million through the
issue of shares at 183p per share. We received strong support from
shareholders. Senior management invested net new money. It is good
to receive such strong support from internal and external stakeholders.
We also raised a debt facility of $225 million from a consortium
of leading banks. The same syndicate also supported a refinancing
of our £137.5 million letter of credit.
in mortality and long bond rates late in the year increased the
liabilities by 38.6 per cent. We will continue to invest well and
make further contributions to reduce the deficit.
People
It is often thought that to enter the insurance business, all that is
needed is a pile of money and a bunch of people. Newcomers often
underestimate the difference that quality motivated staff can make.
We believe passionately in attracting, developing and retaining good
people, allowing them to use their brains to make a difference – as one
new employee said when comparing Hiscox with a former employer,
“at Hiscox I feel that I have been hired to use my brain, not in spite
of having one”. The reward for creating an environment like this is a
motivated team – and external recognition for the fourth consecutive
year as one of The Sunday Times 100 Best Companies To Work For.
Conclusion
2006 is a year of challenges. Rates are at an attractive level so our
ambition is to grow the business. During 2005 we created the business
shape which I believe has the potential to take Hiscox forward with
steady growth and profitability for Hiscox UK, Europe, Guernsey and
USA, balancing the more opportunistic expansion and contraction
required within Hiscox Global Markets and Hiscox Bermuda. Over time
this should create substantial value for our shareholders.
At the time of the Rights Issue we announced that as such a substantial
amount of the Group’s business could originate from the Bermudan
and US markets the Board was considering a potential redomicile
of the parent company to Bermuda. This work is ongoing.
Bronek Masojada
Chief Executive
13 March 2006
The balance sheet includes a liability of £16.7 million
(2004: £34.7 million) in respect of the pension fund. The investment
return for 2005 on the fund was 19.4 per cent, however a decline
Hiscox International
Gross premiums written
Net premiums earned
Profit before tax
Combined ratio
2005
£m
43.7
23.4
6.2
2004
£m
37.3
18.5
2.9
91.3%
92.0%
Hiscox plc product split 100% = £1,105 million total group controlled income for 2005
London Market
Syndicate 33
Hiscox Bermuda
London Market
29%
Art and Private Client
15%
Professions
and Specialty
Commercial
9%
15%
Specialty
Regional
Syndicate 33
Hiscox Insurance Company
Hiscox Guernsey
Hiscox USA
27%
Reinsurance and
Major Property
5%
TMT
Hiscox plc Report and Accounts 2005 13
The Hiscox business at a glance
Hiscox Global Markets
Hiscox UK
Hiscox Global Markets underwrites
internationally traded business and other
specialist business from around the world,
via the Lloyd’s insurance market. The Lloyd’s
market gives Hiscox Syndicate 33 the ability
to write worldwide business using Lloyd’s
licences and credit rating and to source
specialist business such as technology, media,
kidnap and ransom through an international
network of brokers.
Hiscox UK underwrites local specialty
insurance from nine different regional centres.
Business is sourced mainly through local
brokers. Hiscox UK has three main product
streams covering:
• The personal property of wealthy individuals
• The liability and property of professional
or advisory and service-led businesses
• Executive household and small professional
risks marketed direct to the consumer.
Richard Watson
Managing Director
Highlights
Gross written premium up on last year
to £555.2 million. Pre-tax profit of
£20.7 million despite hurricane impact.
Strong Specialty book balances volatility
of London Market risks.
Appointment of new business
development representatives in
New York, San Francisco and Paris.
Product split
Reinsurance and Major Property 37%
Key product areas: marine, non-marine
and aviation reinsurance; whole account
reinsurance; commercial property;
onshore energy.
Marine and Energy 12%
Key product areas: marine hull; cargo;
liability; upstream-midstream energy.
Specialty 25%
Key product areas: contingency; kidnap
and ransom; bloodstock; small residential
and commercial property; personal
accident; international household.
Technology, Media and Telecoms 5%
Key product areas: errors and omissions;
cyberliability, hacker damage and
business interruption for technology,
media and telecoms organisations.
London Market 21%
Key product areas: terrorism; professional
indemnity; directors and officers; political
risks; financial institutions.
Carrier
This division uses Syndicate 33 at Lloyd’s
as its primary risk carrier in the London
Market. Hiscox Syndicate 33 is one of
the largest syndicates at Lloyd’s. For the
2005 year of account the Group owned
71.1 per cent of Hiscox Syndicate
33’s capacity.
Security
Hiscox Syndicate 33 has an A (Excellent)
rating from A.M. Best and uses Lloyd’s
security, A (Strong) from Standard &
Poor’s and A (Excellent) from A.M. Best.
Product split
Art and Private Client 49%
Key product areas: higher value homes
and possessions, fine art, specie (loss
or damage to valuables in transit, vault
or other premises).
Professional and Specialty Commercial 47%
Key product areas: industry specific
professional indemnity; employment
practices liability; directors and officers’
liability; buildings, contents and business
interruption for offices.
Direct and Partnerships 4%
Key product areas: executive home
and contents insurance.
Carrier
Hiscox UK primarily uses Hiscox
Insurance Company Limited as its
risk carrier.
Security
A- (Excellent) from A.M. Best and
A- (Strong) from Standard & Poor’s.
Steve Langan
Managing Director
Highlights
Stunning results with pre-tax profit
of £40.4 million and combined ratio
of 84.1 per cent.
Muted top-line growth due to reduced
participation in UK solicitors’ professional
indemnity market.
Successful launch of broker e-trading
for personal and commercial lines.
2006 will see increased advertising
to stimulate growth in both brokered
and direct business.
Hiscox Global Markets product split (%)
Hiscox UK product split (%)
Direct and Partnerships
4
Professional
and Specialty
Commercial
47
49
Art and Private Client
London Market
21
Technology, Media
and Telecoms
5
Reinsurance and
Major Property
37
25
Specialty
12
Marine and Energy
16 Hiscox plc Report and Accounts 2005
Hiscox Europe
Hiscox Europe underwrites local specialty
insurance from offices in Amsterdam, Brussels,
Cologne, Lisbon, Madrid, Munich and Paris.
This business is sourced through local brokers
and has two main product streams covering:
• The personal property of wealthy individuals
• The liabilities and property of professional
or advisory and service-led businesses.
Hiscox International
Hiscox International consists of
Hiscox Guernsey, Hiscox Bermuda
and Hiscox USA.
Product split
Art and Private Client 78%
Key product areas: higher value homes
and possessions, fine art.
Professional and Specialty Commercial 22%
Key product areas: industry specific
professional indemnity; employment
practices liability; directors and officers’
liability; buildings, contents and business
interruption for offices, contingency.
Carrier
Hiscox Europe primarily uses the Hiscox
Insurance Company Limited as its risk
carrier. Hiscox Insurance Company
Limited has a comprehensive set of
licences allowing it to trade throughout
the European Union.
Security
A- (Excellent) from A.M. Best and
A- (Strong) from Standard & Poor’s.
Marc Van der Veer
Managing Director
Highlights
Profitable for second year, with combined
ratio of 99.7 per cent. Strong growth
in fine art business.
New leadership team have worked
on improving underwriting and reducing
operational costs. 2006 will focus
on profitable growth.
Geographic split
Hiscox Guernsey
Hiscox Guernsey has been operating
since 1998 and offers a range of
products including fine art and kidnap
& ransom insurance.
Hiscox Bermuda
Hiscox Bermuda commenced
underwriting in January 2006 and will
provide the Group with access to
significant new volumes of reinsurance
and capital to support our other
underwriting business.
Hiscox USA
Hiscox USA opened in March 2006 and
underwrites specialist business including
professional indemnity, fine art, terrorism
and technology, media and telecoms.
The office, based in Armonk in New York
State, is focused on rolling out Hiscox’s
specialist products for middle market
USA businesses.
In addition to the Armonk office Hiscox
has opened two satellite offices in
Manhattan and San Francisco to develop
its distribution network for larger risks.
Carriers
Hiscox Guernsey uses Hiscox Insurance
Company (Guernsey) Limited as its
primary risk carrier.
Hiscox Bermuda uses Hiscox Insurance
Company (Bermuda) Limited as its
risk carrier.
Security
Both Hiscox Guernsey and Hiscox
Bermuda have individual A- (Excellent)
ratings from A.M. Best.
Robert Childs
Chief Underwriting Officer
Chief Executive Officer of Hiscox Bermuda
Chairman of Hiscox USA
Steve Camm
Underwriting Director of Hiscox Guernsey
Highlights
Record pre-tax profit for Hiscox Guernsey
at £7.4 million.
Bermuda well placed to take advantage
of rapidly rising reinsurance rates.
Hiscox USA team formed under
experienced local president, Ed Donnelly.
Hiscox Europe product split (%)
Hiscox Investment Management
Professional
and Specialty
Commercial
22
78
Art and Private Client
Alec Foster
Managing Director
Hiscox has an investment management
subsidiary which is responsible for
supervising the investment of Group
funds which total £1.6 billion. Hiscox
Investment Management also manages
a number of specialist funds, in the
insurance and banking sector, for third-
party investors.
Product split
Hiscox Investment Management
manages six funds:
Insurance:
Hiscox Insurance Portfolio Fund.
Financials:
Hiscox US Financial Fund
Hiscox European Financial Fund
Hiscox Far Eastern Financial Fund
Hiscox Global Financials Fund
Aramus Financial Fund.
Hiscox plc Report and Accounts 2005 17
Hiscox brokers
Hiscox trades overwhelmingly via brokers and the Group chooses
these intermediaries carefully. For example brokers who apply for
an agency with Hiscox UK and Global Markets must meet the
following criteria:
• appropriate accreditation from the Financial Services Authority
and Lloyd’s
• sponsorship from a senior Hiscox underwriter who then retains
a degree of responsibility for the broker
• financially stable
• similar philosophy and ethics.
Most importantly, Hiscox brokers will have a similar niche focus
and understanding of specialist products. They will have high ethical
and service standards when dealing with clients.
Hiscox has a positive reputation with UK brokers. An independent survey
on behalf of a syndicate of insurers, co-ordinated by the British Insurance
Brokers’ Association in 2005 supports this. The survey of over 1,000
UK brokers provides useful information for insurers to benchmark their
performance. Highlights of the results for Hiscox include:
• ranked first in the product which meets your customers’ needs
category (for both commercial and personal lines)
• ranked first in the personal lines speed of settlement on claims
category. Achieved 4.4 out of possible 5, where average was 3.6
• equal first for quality of underwriting in commercial lines
• for brand perception, in personal lines, first for acting with integrity,
reliable and trustworthy and delivers on promises
• the strongest brand identity of the companies named in the survey,
especially within the personal lines market.
Insurex Expo-Sure
In February 2005 Hiscox acquired Insurex Expo-Sure Limited,
a specialist distributor of event insurance for the conference, exhibition,
event and hospitality market that covers everything from large corporate
events to local weddings. The acquisition is a good fit as the Global
Markets division has been underwriting event and contingency
insurance for over 25 years. The Group sees this as an opportunity
to use its specialist knowledge in local regional markets.
Hiscox distribution
The Hiscox distribution network widened significantly over
the last decade. Today, the Group operates from 20 different
geographic locations.
This expansion outside the London Market has been concentrated
on core specialty product lines where Hiscox has leading expertise.
The underlying philosophy has been to start and grow organically
as far as possible, complemented by small strategic acquisitions.
Value enhancing acquisitions
The Group’s overriding preference is for organic growth in core
product areas. However, it will always consider opportunities
with the potential to strengthen core areas or achieve other
strategic objectives.
Hiscox acquisitions
1996
Economic Insurance Company Limited – creating an FSA
approved business platform.
2000
Renewal rights to Chartwell Underwriting’s regional business –
forming the basis of Hiscox offices in Leeds, Birmingham and
Glasgow.
2001
Interest in Heritage Group Limited – back office services for
Hiscox Insurance Company (Guernsey) Limited (subsequently
sold at a profit of £2.6 million).
2001
Construction and General Guarantee Insurance Company Limited
– Irish bond business.
2002
Renewal rights to XL London Market’s Denham Direct professional
indemnity book.
2002
Eldon Fund Management subsidiary of Fox-Pitt Kelton Group –
adding to the fund management business of Hiscox Investment
Management.
2003
Renewal rights to Chubb’s mainland Europe household book.
2005
Purchase of Insurex Expo-Sure Limited – move into lower premium
contingency business.
2005
Renewal rights to fine art business of Ascot Underwriting Limited –
AIG’s Lloyd’s operation.
The Group’s focus has been on acquisitions outside of the Lloyd’s
market with the potential to grow the Hiscox UK and Europe business
and improve geographic distribution.
18 Hiscox plc Report and Accounts 2005
Direct
Hiscox launched executive household insurance in 2000. This product
is sold directly to customers via the internet and telephone.
This business has grown through developing partnerships with affinity
groups, including The Law Society and the Institute of Directors,
who exclusively endorse our household insurance for their members.
This approach has led to more than 50 successful partnerships.
Hiscox has also formed distribution arrangements with banks such
as Clydesdale, Yorkshire and HBOS to provide a solution for high
value home insurance. The Direct and Partnership Division represented
ten per cent of total home and contents income in 2005.
Over the last year, Hiscox UK has increased its marketing spend
and tested a variety of new advertising concepts and direct mail
programmes. While this activity is helping to increase awareness
of the Hiscox brand, its primary purpose is to generate business
for the UK operations.
On the back of this success, Hiscox launched a direct commercial
professional indemnity product to customers in 2005 that should
show significant growth in 2006.
Direct Division: Live policy count
25,000
20,000
15,000
10,000
5,000
0
Jan 05
Feb 05
M ar 05
A pr 05
M ay 05
Jun 05
Jul 05
A ug 05
S ep 05
O ct 05
N ov 05
D ec 05
Jan 06
Feb 06
Household(cid:2)(cid:2) Commercial
Hiscox offices
1901
1993
1994
1998
1999
2000
2001
2001
2002
2003
2004
2005
2005
2006
2006
2006
2006
2006
London
Paris
Munich
Harrogate (relocated to Leeds
in 2001) and Guernsey
Amsterdam
Birmingham and Glasgow
Brussels
Dublin
Maidenhead
Colchester
Madrid
Tunbridge Wells
Bermuda
Bristol
Armonk, USA
New York, USA
San Francisco, USA
Cologne
Hiscox plc Report and Accounts 2005 19
Building the Hiscox brand
During 2005 Hiscox took its first steps in serious advertising to
help build the brand and generate sales for the Executive Household
Division. These efforts included direct mail and print advertising,
and focuses on the superior claims expertise Hiscox offers.
Building on this experience and success, 2006 will see Hiscox
significantly increase marketing activity, primarily in advertising
the Hiscox brand among both UK consumers and the Group’s
UK broker operations.
This activity will be directed by Steve Langan, UK Managing Director
and Head of Group Marketing, who brings over 20 years brand
building experience to the Group.
I lost
my crocodile.
No tears
When thieves cleaned out a client’s home – stuffed crocodile
and all – a Hiscox policy ensured he was not left down in
the mouth.
Another reason why independent market researchers,
Defaqto, awarded us 5 stars for our buildings and contents
insurance.
If your home contents are worth £50,000 or more, you too
can rely on us for extraordinary cover and a claims service
to match – at surprisingly competitive prices.
With us, the extraordinary is simply standard policy.
CALL OR BUY ONLINE
0845 365 1283
www.hiscox.com/press
Please quote reference DT079
Monday to Friday, 8.30am to 8pm
HOME INSURANCE
extraordinary cover
Hiscox Insurance Company Limited is authorised and regulated by the Financial Services Authority.
This service is for UK residents only.
The Hiscox brand and values
Hiscox has a strong brand within the UK, Europe and London
broker markets. As a specialist insurer that conducts the majority
of its business via intermediaries, the Hiscox name is not particularly
well known among the general public. Hiscox is less well known
in markets, such as the USA, where it takes advantage of the Lloyd’s
brand to open doors.
In 2005 Hiscox commissioned external research that formed a project
to restate the unique qualities and values of the Hiscox Group. It found
that the characteristics that most distinguish Hiscox from its competitors
are the high quality of its people and a reputation for leadership in the
marketplace due to its challenging of convention. The following core
values were identified.
Integrity is the most deeply rooted Hiscox quality of all, reflected
in the direct and honest way that Hiscox goes about its business.
Courage is crucial for challenging received wisdom.
Rigour drives the constant pursuit of quality and efficiency.
Execution good ideas count for nothing unless you make
them happen.
Empathy we never lose sight of the fact that the strength of our
business ultimately relies on how well we treat our employees,
partners and customers.
These core brand values are the compass that steers Hiscox
internally and externally.
Courage
Daring to be
different
Challenging
convention to
deliver value
Empathy
Treating others
as they want to
be treated
Rigour
Good enough
is not enough
Execution
Seeing it
through
Integrity
True to our
word
20 Hiscox plc Report and Accounts 2005
Hiscox people
In March 2006, for the fourth consecutive year, Hiscox has been
recognised by The Sunday Times 100 Best Companies To Work For
survey as one of the UK’s best employers. This accolade aids the
Group’s ambition to recruit and retain high quality staff.
‘At Hiscox a culture of innovation means everyone is actively involved
in the future of the Company. When it was announced a new office
would open in Bermuda every employee was invited to hear the
Chairman and Chief Executive discuss the opportunity and answer
questions. In our survey, staff said they were excited about the
direction of the organisation, their 82 per cent positive score beaten
by just five other firms.’
Source: The Sunday Times 5 March 2006.
Recruitment
Hiscox seeks to attract smart, driven people to all of its positions.
The Group’s recruitment philosophy is based on a genuine interest
in what applicants can do, not who they are or where they have
come from. The recruitment process is designed to be challenging,
so that applicants are stretched in ways that reflect the demanding
environment in which they will work should they be successful.
Personal development
The Group believes that there is a strong correlation between
the personal growth of its staff and the growth of the business.
Each employee therefore has a personal development plan, which
is created annually through one to one meetings with their manager.
Staff are encouraged to continue their professional education and
gain appropriate qualifications. All underwriters are required to pass
the ACII examinations. Hiscox supports the professional education
process by paying tuition fees and providing study leave.
Hiscox makes a further contribution to employees’ professional
development by providing in-house technical underwriting training.
All underwriters are required to acquire an underwriting passport
to show that they have a wide range of knowledge on the different
parts of the Group. This is supplemented by personal impact
training and management development courses.
Recognition and reward
Advancement within Hiscox depends on the ability of the individual
and the initiative they show in putting their knowledge to work.
Staff performance is evaluated annually. Performance reviews seek
to allow open feedback between management and staff.
The Hiscox reward philosophy is to target base salaries and benefits
at the market median, with variable personal performance and profit-
linked bonuses taking rewards into the upper quartile. The Group uses
external surveys to ensure that this philosophy is met in practice.
Senior staff are eligible for performance share awards and share option
awards. A share save scheme is open to all staff.
Office employee numbers at 31 January 2006
Office
London
UK – Regions
France
Germany
The Netherlands
Belgium
Guernsey
Bermuda
New York
Total
Male:female ratio 56:44
Under 35’s/over 55’s 61%/4%
336
118
50
50
20
9
7
5
6
601
Hiscox plc Report and Accounts 2005 21
Risk carriers
Syndicate 33
Hiscox can trace its origins in the Lloyd’s Market to 1901. Today,
Hiscox Syndicate 33 is one of the largest composite syndicates
at Lloyd’s, and has an A.M. Best syndicate rating of A (Excellent).
Syndicate 33 trades through the Lloyd’s worldwide licences and rating.
It also benefits from the Lloyd’s brand. Lloyd’s has an A (excellent)
rating from A.M. Best and A (strong) from Standard & Poor’s.
The geographical and currency split is shown below.
Syndicate 33 underwrites a mixture of reinsurance, major property
and energy business, as well as a range of specialty lines including
contingency, technology and media risks. The business is mainly
property-related short-tail business; there is little exposure to aviation
or motor business.
Syndicate 33 2005 geographical split (%)
Rest of World
43
UK
8
4
Europe
Asia
2
43
North America
Capital and performance
One of the main advantages of trading through Lloyd’s is the
considerably lower capital ratios that are available due to the
diversification of business written in Syndicate 33 and in Lloyd’s
as a whole. Syndicate 33 has a capital requirement ratio
of approximately 41 per cent of gross premium after brokers’
commission for 2006.
The size of the Syndicate is increased or reduced according to the
strength of the insurance environment in its main classes. At present,
Hiscox owns 73 per cent of the Syndicate, with 27 per cent
being owned by Lloyd’s Names. Hiscox receives a fee and a profit
commission of approximately 17.5 per cent on the element it does
not own.
The charts below show the performance of Syndicate 33 for the
last six years.
Syndicate 33 2005 currency split (%)
Syndicate 33 capacity and Hiscox plc ownership (£m)
GBP
17
EUR
7
CAD
4
72
USD
1,000
900
800
700
600
500
400
300
200
100
0
8
4
2
4
8
5
2
6
4
8
3
3
8
4
7
7
7
4
5
0
5
5
0
5
5
5
0
6
1
0
2
4
0
5
7
7
2
0
6
3
0
6
3
1
9
1
1
9
1
2000
2001
2002
2003
2004
2005
2006
Capacity Hiscox plc ownership(cid:2)(cid:2) Qualifying quota share
Syndicate 33 Gross written premium (£m)
Syndicate 33 Combined ratio (%)
1,000
900
800
700
600
500
400
300
200
100
0
7
2
8
4
4
8
0
3
8
2
2
7
7
6
5
7
5
4
2000
2001
2002
2003
2004
2005
140
120
100
80
60
40
20
0
6
1
1
6
0
1
4
9
6
8
9
9
2
9
2000
2001
2002
2003
2004
2005
The amounts and ratios for all periods prior to 2004 are those previously published on a UK GAAP basis, the Group’s primary reporting framework at that time. The figures reported for 2004
and 2005 are prepared in accordance with IFRSs as adopted by the EU. The main differences arising on the Group’s transition to IFRSs are outlined at note 3 to the financial statements.
22 Hiscox plc Report and Accounts 2005
Hiscox Insurance Company
Hiscox purchased Hiscox Insurance Company Limited in 1996.
Previously known as the Economic Insurance Company, it was formed
in 1901 and wrote a diversified portfolio, including general household,
travel and pet insurance. In keeping with its aim of diversifying its
activities outside of Lloyd’s and writing a focused book of regional
specialist risks, the Group has since comprehensively reshaped the
portfolio to concentrate on high value household and smaller premium
professional indemnity business. The Hiscox Insurance Company has
licences throughout Europe. It is the primary carrier used by the UK
and mainland Europe offices for their business.
The success of this strategy can be seen in the chart below. Hiscox
Insurance Company Limited has achieved average compound growth
in gross written premium of 15.1 per cent since its purchase, despite
discontinuing almost all of its original business. It has also significantly
improved its combined ratio.
Hiscox Insurance Company Limited is rated A- (Excellent) by A.M. Best
and A- (Strong) by Standard & Poor’s. At the end of 2005, net assets
were £123.6 million.
Hiscox Insurance Company (Guernsey)
Formed by Hiscox in 1998, Hiscox Insurance Company (Guernsey)
Limited writes mainly kidnap and ransom and offshore fine art insurance.
Its gross written premium and combined ratio since inception are
shown in the charts below.
Hiscox Guernsey has an A- (Excellent) rating from A.M. Best.
Hiscox Insurance Company (Bermuda)
Formed by Hiscox in late 2005, Hiscox Insurance Company
(Bermuda) Limited commenced writing risks in January 2006.
Capitalised at US$500 million, it was formed to access reinsurance
business shown to the growing Bermudan market and also to become
a carrier for certain other Group income.
Hiscox Bermuda has an A- (Excellent) rating from A.M. Best.
Future carriers
Following the successful start to the Group’s USA operation, the Group
aims to establish surplus and admitted lines licenced carriers in the
USA once the size of operation can produce a sufficient return
on equity for these ventures.
Hiscox Insurance Company Limited Gross written premium (£m)
Hiscox Insurance Company Limited Combined ratio (%)
300
250
200
150
100
50
0
1
3
2
3
3
2
9
1
2
6
7
1
4
6
1
7
2
1
0
9
8
9
5
7
1997
1998
1999
2000
2001
2002
2003
2004
2005
Core(cid:2)(cid:2) Non-Core
140
120
100
80
60
40
20
0
8
1
1
8
0
1
3
0
1
8
9
8
9
8
9
4
9
3
9
9
8
1997
1998
1999
2000
2001
2002
2003
2004
2005
Hiscox Insurance Company (Guernsey) Limited Gross written premium ($m)
Hiscox Insurance Company (Guernsey) Limited Combined ratio (%)
100
80
60
40
20
0
9
7
1
6
2
6
6
6
8
6
7
4
8
3
1999
2000
2001
2002
2003
2004
2005
120
100
80
60
40
20
0
9
8
1
9
0
9
1
9
1
9
1
9
4
8
1999
2000
2001
2002
2003
2004
2005
The amounts and ratios for all periods prior to 2004 are those previously published on a UK GAAP basis, the Group’s primary reporting framework at that time. The figures reported for 2004
and 2005 are prepared in accordance with IFRSs as adopted by the EU. The main differences arising on the Group’s transition to IFRSs are outlined at note 3 to the financial statements.
Hiscox plc Report and Accounts 2005 23
Group financial performance
The Group achieved a pre-tax profit of £70.2 million in 2005
(2004: £89.5 million). Earnings per share were 15.6p (2004: 21.3p).
The post tax return on shareholders’ equity was 12.8 per cent
(2004: 20.6 per cent).
The underwriting performance of each reporting segment is detailed
below. Total assets at 31 December 2005 grew to £2,746.9 million
(2004: £1,818.4 million) and the net asset value grew to £578.0 million
from £368.8 million driven by profitable contributions from each
of the insurers together with £170.0 million of net proceeds from
a 0.327 for 1 Rights Issue in November 2005, priced at 183p per share.
At the same time as the Rights Issue, the Group increased its credit
facilities by putting in place a term loan and revolving credit facility
of $225 million in addition to the £137.5 million letter of credit
which supports its underwriting at Lloyd’s.
Group financial performance
Global Markets
and Corporate
Centre
2005
UK and
Europe International
2005
2005
Consolidated
Group
Total
2005
Global Markets
and Corporate
Centre
2004
UK and
Europe
2004
International
2004
Consolidated
Group
Total
2004
Gross premiums written (£m)
555.2
262.3
Net premiums written (£m)
417.1
235.3
Net premiums earned (£m)
428.3
241.6
43.7
28.8
23.4
1.6
6.1
861.2
681.2
693.3
42.9
70.2
511.5
267.8
451.5
233.1
484.0
212.4
20.0
67.8
14.1
18.9
37.3
19.5
18.5
0.4
2.8
816.6
704.1
714.9
34.5
89.5
20.9
20.7
20.4
43.4
Investment income net of expenses (£m)
Profit before tax (£m)
Claims ratio
Expense ratio
Combined ratio
Financial assets and cash (£m)
Other assets (£m)
Total assets (£m)
Net assets (£m)
Net asset value per share (pence)
Adjusted number of shares in issue (000s)
70.8%
45.1%
2.8%
61.8%
72.9%
55.1%
1.1%
67.5%
29.1%
41.8%
88.5%
34.2%
18.0%
42.9%
90.9%
25.1%
99.9%
86.9%
91.3%
96.0%
90.9%
98.0%
92.0%
92.6%
2005
1,651.5
1,095.4
2,746.9
578.0
147.7
391,216
2004
1,100.3
718.1
1,818.4
368.8
125.7
293,306
Global Markets and Corporate Centre: Hiscox plc’s share of the results of Syndicate 33, excluding Syndicate 33’s specie, fine art and non-US household business. It also includes the investment
return and administrative costs associated with the parent company and other Group management activities.
UK and Europe: The results of Hiscox Insurance Company Limited, Hiscox plc’s share of Syndicate 33’s specie, fine art and non-US household business, together with the income and expenses
arising from the Group’s retail agency activities in the UK and in continental Europe.
International: The results of Hiscox Insurance Company (Guernsey) Limited, Hiscox Insurance Company (Bermuda) Limited, and the US agency, Hiscox Inc.
26 Hiscox plc Report and Accounts 2005
Underwriting performance – Hiscox Global Markets
Hiscox Global Markets comprises the results of Syndicate 33, excluding
Syndicate 33’s specie, fine art and non-US household business.
• Gross written premium remained steady. The effects of lower
rates were offset by the increased ownership of the syndicate to
71.1 per cent for the 2005 year of account (2004: 65.0 per cent)
and a stronger US dollar.
• Net written premium decreased due to higher reinsurance costs,
a substantial amount of which related to the reinstatement costs
for the 2005 hurricanes.
• Investment income increased to £20.9 million (2004: £20.0 million),
driven by increased funds under management and higher interest
rates in the USA, offset by the loss on derivative contracts.
• Profit before tax fell to £20.7 million (2004: £67.8 million), mainly
as a result of the worst year ever for insurance losses from natural
catastrophes partly offset by net exchange gains.
• The net claims ratio decreased from 72.9 per cent to 70.8 per cent.
This is predominantly the result of the significant hurricane losses
being offset by foreign exchange movements arising from the
application of IFRS.
• The expense ratio deteriorated to 29.1 per cent from 18.0 per cent
primarily as a result of foreign exchange movements arising from
the application of IFRS. For details on the calculation of the claims
and expense ratios, please refer to note 5 in the notes to the
financial statements.
• The combined ratio increased to 99.9 per cent (2004:
90.9 per cent).
Hiscox UK performance
This comprises business written by the Hiscox Insurance Company
in the UK and Ireland, excluding Irish surety business. It also includes
the results of Syndicate 33’s specie, fine art and non-US household
business, together with income and expenses arising from the Group’s
retail agency activities in the UK.
• Gross written premium decreased by two per cent due to
reduced income from the specie and eurobond binders. Having
reduced the solicitors’ account by £14 million, the professions and
specialty commercial business remained flat.
• Net written premium remained steady.
• Investment income increased to £16.0 million (2004: £11.5 million)
as interest rates remained high and equities performed well.
• Profit before tax rose to £40.4 million (2004: £17.5 million) as rating
conditions remained firm and there were no major catastrophes.
• The net claims ratio decreased to 43.6 per cent (2004:
55.0 per cent); the gross claims ratio remained level.
• The expense ratio decreased to 40.5 per cent (2004:
41.8 per cent). Both internal expenses and brokerage decreased
as a percentage of gross written premium despite a significantly
increased marketing spend.
• The combined ratio improved to 84.1 per cent (2004:
96.8 per cent).
Hiscox UK and Hiscox Europe
Gross premiums written (£m)
Net premiums written (£m)
Net premiums earned (£m)
Investment income (£m)
Profit before tax (£m)
Claims ratio
Expense ratio
Combined ratio
UK
2005
Europe
2005
207.3
185.6
194.5
16.0
40.4
55.0
49.7
47.1
4.4
3.0
Total
2005
262.3
235.3
241.6
20.4
43.4
UK
2004
Europe
2004
Total
2004
212.1
183.8
170.0
11.5
17.5
55.7
49.3
42.4
2.6
1.4
267.8
233.1
212.4
14.1
18.9
43.6%
51.5%
45.1%
55.0%
56.7%
55.1%
40.5%
48.2%
41.8%
41.8%
46.5%
42.9%
84.1%
99.7%
86.9%
96.8%
103.2%
98.0%
Hiscox plc Report and Accounts 2005 27
Hiscox plc Report and Accounts 2005 27
Group financial performance continued
Hiscox Europe performance
This comprises business written in mainland Europe by Hiscox
Insurance Company and the Irish surety company, together with the
income and expenses arising from the Group’s retail agency activities
in Continental Europe.
• Gross written premium remained steady year on year. The operation
in France achieved growth in gross written premium of 20 per cent.
However, this was offset by a reduction in gross written premium
in Germany due to the decision to discontinue certain binder
business. The Group’s operations in the other European countries
achieved 40 per cent growth in gross written premium.
• Net written premium similarly remained flat overall.
• Investment income increased to £4.4 million (2004: £2.6 million),
with improved credit control and cash management leading
to higher levels of cash in the business.
• The performance of the Irish surety company continued
to exceed expectations.
• Profit before tax improved to £3.0 million (2004: £1.4 million).
• The net claims ratio improved to 51.5 per cent (2004:
56.7 per cent). France had an outstanding year but this
was offset to some extent by some large claims in Germany.
• The expense ratio deteriorated from 46.5 per cent to
48.2 per cent following the earnings trend of net premiums.
• The combined ratio improved to 99.7 per cent
(2004: 103.2 per cent), primarily driven by a favourable loss
ratio in France.
Group investment performance
Bonds
Equities
Deposits and cash
Actual return
Group invested assets*
**As at 31 December.
28 Hiscox plc Report and Accounts 2005
Underwriting performance – International
International comprises the results of Hiscox Insurance Company
(Guernsey) Limited (which mainly writes kidnap and ransom and
offshore fine art business); in future it will include the results of Hiscox
Insurance Company (Bermuda) Limited which commenced trading
on 1 January 2006 and Hiscox Inc., the newly formed agency
in the USA, which commenced business in March 2006.
• Gross written premium increased by 17 per cent to £43.7 million
as market conditions remained firm.
• Net written premium increased by 48 per cent, driven by growth
in gross written premiums and the decision to increase risk retention
in Guernsey during 2005, reducing the level of reinsurance.
• Investment income increased to £1.6 million (2004: £0.4 million)
as investments and cash grew to £21.3 million from £9.5 million due
to the good trading and cash from the sale of shares in Heritage,
an associated undertaking.
• Profit before tax more than doubled to £6.2 million (2004:
£2.9 million) on the back of the trends described above, including
a profit on the sale of the Heritage Group shares of £2.6 million.
• The claims ratio remained excellent at 2.8 per cent
(2004: 1.1 per cent). This remains low due to the level
of reinsurance purchased.
• The expense ratio improved to 88.5 per cent (2004: 90.9 per cent)
mainly as a result of the increased retention in Guernsey causing
net premiums earned to increase. In absolute terms administrative
expenses increased by £1.8 million (2004: £0.5 million) mainly due
to the set up costs of Hiscox USA.
• The combined ratio improved to 91.3 per cent from 92.0 per cent.
Group investment performance
Bonds are the largest proportion of the Group’s investments at
62.3 per cent and returned +3.1 per cent for the year. Two thirds
of the bond portfolios are in US and Canadian fixed interest securities
where returns were lower than in the UK. Bond portfolios in all currencies
had short durations in order to protect the underlying assets against
rising interest rates in the US and UK during 2005. The equities
are invested for absolute returns and our weighting was 7.2 per cent.
We invest in a number of pooled funds covering UK, US and global
mandates and the return of +13.1 per cent reflected the spread
of risk and the defensiveness of the portfolios. The cash weighting
at 30.5 per cent was high at year end due to the money raised from
the Rights Issue in November 2005 being held on deposit. This high
weighting will fall in 2006 as the cash is invested in predominantly
fixed interest securities.
31 December 2005
31 December 2004
Asset
allocation
%
62.3
7.2
30.5
Return
%
Return
£000
3.1
13.1
3.7
26,733
12,278
11,276
Asset
allocation
%
75.9
7.9
16.2
Return
%
2.9
10.3
3.0
Return
£000
20,176
8,571
5,711
4.0
50,287
3.6
34,458
£1,651.5m
£1,100.3m
Cash flow and liquidity
The primary sources of cash flow for the Group’s business are
insurance and reinsurance premium receipts and net investment
returns. The Group is also able to access ready funds through
the sale of investments.
The letter of credit and debt facilities outlined overleaf on page 30,
together with the £170 million of additional funds raised through
the successful Rights Issue in November 2005, have increased
the Group’s already considerable cash resources.
Cash outflows are used primarily to settle insurance claims, pay
operating expenses and distribute dividends to shareholders.
The Group’s cash flow is impacted to a large extent by the results
of Syndicate 33. Until 2005, the Group had in general only received
cash from the syndicate following the closure of a year of account
at the end of three years, except when Lloyd’s allowed early profit
distributions subject to solvency requirements. However, for 2006,
syndicate cash distribution will be determined on a one-year accounting
basis, although still subject to solvency requirements.
Cash flows for 2005
Net cash inflow from operating activities during the year was
£18.9 million (2004: £38.5 million), reflecting a strong contribution
from the growing and increasingly profitable insurance company
and investment income generated from Group cash and investments.
Cash flow from Syndicate 33 was good, with few payments being
made for the 2005 hurricane losses in the year although there were
some outgoings on the 2004 hurricane losses. The Rights Issue
resulted in a net inflow of £170 million and US$208 million was drawn
from the US$225 million loan facility to capitalise the new insurance
company in Bermuda.
Group cash outflows included £2.6 million (2004: £1.4 million)
of interest payments. Capital expenditure was £4.5 million (2004:
£5.6 million) and dividend payments for the year totalled £16.9 million
(2004: £12.8 million).
The Group’s cash management strategy is to invest cash that is surplus
to immediate operating requirements in high quality debt and fixed
income securities of short duration. In general, the investment portfolio
produces relatively steady cash returns during periods of interest rate
stability. Where interest rates are lower for sustained periods, investment
income typically reduces, as the proceeds from higher-yielding
securities are reinvested at lower prevailing market rates. However,
it is still possible to realise a partial cash flow benefit in a low interest
rate environment, since the underlying market value of the investments
tends to increase, leading to higher realised cash gains from their
eventual sale.
Liquidity of debt and fixed income securities
The contractual maturity profile of the Group’s debt and fixed income
securities as at 31 December 2005 is in the table below.
It should be noted that length of contract does not preclude the
Group from realising the value of its securities for cash in a prompt
and reasonable manner as and when required.
Cash flow
Maturity of debt and fixed income securities
2005
£000
2004
£000
Net cash flows from operating activities
18,917
38,523
Net cash used in investing activities
(2,421)
(9,742)
Net cash flows from financing activities
276,289
(11,054)
Net increase in cash and cash equivalents
292,785
17,727
Less than one year
Between one and two years
Between three and five years
Over five years
2005
£000
2004
£000
167,175
295,897
327,522
174,660
309,353
135,032
255,723
95,098
Sub-total
Perpetual notes and other non-dated instruments
965,254
63,541
795,206
38,757
Total debt and fixed income securities
1,028,795
833,963
Hiscox plc Report and Accounts 2005 29
Capital
Overview
Hiscox is strongly capitalised with a stable asset and shareholder
base. Its activities are funded by a mixture of equity, retained earnings,
letters of credit, bank debt and other third-party insurance capital.
Group assets are invested predominantly in bonds with high credit
ratings, to ensure a high liquidity and to limit investment risk in the
capital base.
The Directors ensure that the use and allocation of capital are given
a primary focus in all significant operational actions. Over the last five
years, the Group has developed and embedded sophisticated capital
modelling tools within its business. These join together short-term
and long-term business plans and link divisional aspirations with the
Group’s overall strategy. The models provide the basis of the allocation
of capital to different businesses and business lines, as well as the
regulatory and rating agency capital processes.
Gearing
The Group’s ability to increase or decrease the volumes of business
that it can underwrite relates directly to its level of capital. Hiscox
utilises short to medium-term gearing as an additional source of funds
to maximise the opportunities from strong markets and to de-risk
the business when the rating environment shows a weaker model
for the more volatile business.
The Group’s gearing is obtained from a number of sources, including:
• letters of credit – in November 2005 the Group secured
a £137.5 million facility from a syndicate of banks at a margin
of 1.1 per cent
• term and revolving loan facility – also in November 2005, the Group
secured a US$225 million facility at 1.3 per cent margin
• external Names – 27 per cent of Syndicate 33’s capacity is
capitalised by third parties paying a profit share of approximately
17.5 per cent
• gearing quota shares – historically the Group has used reinsurance
capital to fund its capital requirement for short-term expansions
in the volume of business underwritten by the syndicate
• qualifying quota shares – these are reinsurance arrangements
that allow the Group to increase the amount of premium it writes
in strong markets.
The funds raised through letters of credit and loan facilities in 2005
have been applied to support both the 2006 year of account for
Syndicate 33 and the capital requirements of the new insurance
company in Bermuda.
Capital position
Strategic expansion in its existing business and the entry into Bermuda
during the year afforded the Group opportunities to further optimise
its capital position. In view of the favourable rating outlook and market
conditions for raising additional equity, the Group completed a Rights
Issue on 8 November 2005 that raised £170 million, net of expenses.
The Board was particularly pleased with the support shown by
shareholders in taking up some 98.7 per cent of the offer, and also
with the low level of discount reflected in the issue price. All of the
proceeds have been used to establish the Group’s new insurance
operation in Bermuda, which has a capital base of approximately
US$500 million.
Financial strength
Standard & Poor’s and A.M. Best’s ratings of the financial strength
of the UK insurance company were unchanged at A- during the year.
On 12 December 2005, A.M. Best initiated an A- (Excellent) rating for
the newly established Hiscox Insurance Company (Bermuda) Limited.
On 31 March 2006, A.M. Best initiated an A- (Excellent) rating for
Hiscox Insurance Company (Guernsey) Limited. Syndicate 33 benefits
from the Lloyd’s A global rating. The Group is confident of maintaining
these excellent ratings.
Capital performance
The Group’s main capital performance measure is the achieved
return on capital employed (ROCE). This marker best aligns the
aspirations of employees and shareholders. As variable remuneration,
the vesting of options and longer-term investment plans all relate
directly to ROCE, this concept is embedded in the workings
and culture of Hiscox.
Capital modelling and regulation
The capital requirements of an insurance group are determined by its
exposure to risk and the solvency criteria established by management
and statutory regulations. Hiscox is compliant by a significant margin
on every prescribed capital test.
In 2005, the Financial Services Authority (FSA) and Lloyd’s introduced
a new capital regime that gives insurance companies the chance
to calculate their own capital requirements through Individual Capital
Assessments (ICA). Hiscox Insurance Company and Syndicate 33
have now developed their ICA models.
30 Hiscox plc Report and Accounts 2005
The estimated regulatory capital position of the Group under IGD
at 31 December 2005 was a surplus of £343 million (2004: surplus
of £168 million), which is calculated as below. The final audited
regulatory capital position will be submitted to the FSA before
30 April 2006 in accordance with the required regulatory timetable.
The improvement in the Group’s IGD surplus during 2005 relates
mainly to the capital contributed by shareholders through the Rights
Issue and the profitable result for the year.
In the Group’s other geographical territories, including the USA,
it is required to operate within broadly similar risk-based capital
requirements when accepting business.
The models are concentrated specifically on the particular product
lines, market conditions and risk appetite of each entity. If the FSA
considers an ICA to be inadequate, it can require the entity to maintain
an increased capital safeguard. The Directors are also required to
certify that the Group has complied, in all material aspects, with the
provisions of the Interim Prudential Sourcebook and the Integrated
Prudential Sourcebook (PRU) for insurers.
Hiscox used its own integrated modelling expertise to produce the
ICA calculations. The results mirrored those driving the existing internal
capital setting process.
The assessed capital requirement for the business placed through
Hiscox Insurance Company Limited is driven by the level of resources
necessary to hold an A rating. The Group’s internal work on the ICA
of Hiscox Insurance Company has produced results that support
the level of capital required by the models of the rating agencies.
For Syndicate 33, the ICA process produces a result that is grossed
up by Lloyd’s to identify the capital required to hold the A rating.
It is pleasing to note that the strong control and risk management
environment, together with the sophistication of the modelling, have
produced a capital ratio below that suggested under the previous
risk-based capital regime.
Another key area of capital modelling for Hiscox is to identify which
carrier produces the best return on capital employed for the Group,
given certain restraints from licences, reinsurance and the regulatory
environment. This modelling takes into account transactional costs
and tax, in addition to the necessary capital ratios. It proves the capital
efficiency of Lloyd’s, despite a tax disadvantage against offshore
entities, and the cost advantage of processing smaller premium
business outside of Lloyd’s.
In addition to the ICA modelling process, the EU Insurance Group’s
Directive of 1998 (IGD), as amended in 2002, compels insurance
companies that are members of a group to consider the solvency
margin of their ultimate parent company. This consideration must refer
to the surplus assets of the ultimate parent’s related insurers, reinsurers,
intermediate holding companies and other regulated entities.
The IGD has been applied in the UK through PRU with effect from
31 December 2004. In accordance with PRU, the parent company’s
solvency margin consideration will become a minimum capital
requirement for the Group from 31 December 2006.
Capital position (Unaudited)
Group capital resources
Group capital resources requirement
Surplus
31 December 31 December
2004
£m
2005
£m
494
(151)
343
310
(142)
168
Hiscox plc Report and Accounts 2005 31
Risk management
Hiscox is an insurance business that is primarily involved in the
evaluation and acceptance of risk. Consequently, the management
of risk permeates every level of decision making in the Group. It is
intrinsic to the underwriting and reinsurance strategy, inherent in the
craft of managing the resulting investments and uppermost in the minds
of staff settling claims and closing exposures.
In short, a culture of risk management pervades the entire Group.
The appetite for all aspects of risk is set by the main Board and
cascaded down into the Group’s operations through a well designed
structure of management committees. These committees are assigned
specific areas of focus, such as underwriting, loss modelling, reinsurance
purchase and security, investments and claims reserving.
The committees oversee the procedures for delegating authority
and powers to accept risk to the Group’s staff. They are tasked
with embedding strategies to identify and manage all significant risks
relevant to their respective areas. The committees report separately
into a formal oversight committee that comprises executive Board
Directors and other senior management. This mechanism enables
the Board to be quick and decisive in dealing with unacceptable
levels of risk when they arise.
In parallel with these direct risk management processes, the Board
uses Internal Audit and a dedicated risk management function to
monitor and review the effectiveness of risk management throughout
the organisation.
The major risks that the Group faces are presented below. A number
of these factors are common to all insurance businesses, while others
are relevant to Hiscox specifically. For a discussion of the major risks
and uncertainties impacting the Group’s financial statements, see note
4 to the financial statements.
Catastrophe and systemic insurance losses
In common with other insurers, the Group’s earnings can be affected
by unpredictable events and circumstances. These may include, but
are not limited to, conditions such as natural and other catastrophes,
legal developments, social change and the emergence of latent risks.
Such events could create significant levels of losses if the Group’s
underwriting models, aggregation tools and policy wordings do not
prevent unplanned concentrations of risk, both in geographical regions
and types of policy.
The failure to manage concentrations of exposure is therefore the
single greatest risk to Hiscox.
The Group continues to underwrite significant risks in geographical
regions that are prone to natural peril. This book of business remains
a compelling proposition for the Group, since it is capable of returning
impressive margins over the medium- to long-term as the occurrence
of catastrophes averages out.
By its nature, this business requires that underwriting staff exercise the
greatest levels of foresight. Accordingly, the Group has invested heavily
to develop robust risk management and mitigation techniques so that
it is well prepared for the unique challenges that these risks present.
These techniques are designed to shield the core capital base of the
Group against unexpected, repeat clusters of all but the most intense
and destructive of events.
The portfolio of risks is actively managed to maintain a balanced and
diversified book within defined agreed limits at local and regional levels.
This is supported by the use of sophisticated exposure aggregation
and scenario modelling tools and ultimately by the purchase of a
reinsurance programme designed to cap losses from concentrations
of risks. Policy wordings are also reviewed regularly in the light of
legal developments to ensure that the Group’s exposure is restricted,
where possible, to those risks identified at the time of policy issuance.
The design of the underwriting and reinsurance programmes, and
the associated control of aggregate exposures around the Group,
are fundamental to the risk profile of Hiscox. The modelling and
monitoring systems are deployed both in the underwriting process
and by independent risk specialists. The models are used to design
the insurance and reinsurance programmes and control the business
that is written to ensure that the risk profiles of contracts match
the exposures for which the programmes were devised.
Aggregation and modelling resources are shared across the entire
Group. Management at the new Hiscox operation in Bermuda is
therefore able to adopt the Group’s existing methodologies and
models, albeit tailored to the intricacies of that particular market.
Hiscox also runs realistic disaster scenario projections for each
Group entity and for the Group as a whole. The Group’s maximum
net retentions based on the estimated losses from these scenarios
are outlined in note 4.1 to the financial statements.
The Group’s performance relative to the unprecedented impact
of catastrophes on the industry in recent years highlights the ability
of its models to suggest precise and logical reinsurance placements.
It also shows the distinctive benefits that Hiscox derives from its
diversification in coverage and geography. By writing a well diversified
book with a large focus on uncorrelated retail business, Hiscox is able
to offset losses on its more volatile accounts.
Competition and the insurance cycle
The principal markets for the Group’s products continue to grow.
Hiscox companies are expanding further into the USA and Bermuda
and extending their regional presence in the UK and Europe.
In all of these markets around the world, Hiscox competes against
major international groups with very similar offerings. At times,
a minority of these groups may choose to underwrite for cash flow
or market share purposes and at prices that sometimes fall short
of the suggested breakeven technical price.
The Group is firm in its resolve to reject business that is unlikely to
generate underwriting profits. Accepting insurance risk below technical
price is detrimental to the industry’s prospects, since it drives the
prevailing rates in the market lower to the point where business failures
occur, insurers’ capital is destroyed, customers receive sub optimal
service and the industry suffers from negative publicity. As capacity
levels in the market fall, prices inevitably rise until the point where
the cycle of irrational pricing may begin again.
In common with all insurers, the Group is exposed to this price
volatility. Accordingly, prolonged periods of low premium rating levels
or high levels of competition in the insurance markets are likely to have
a negative impact on the Group’s financial performance. However,
pricing levels are monitored on a continuous basis with monthly reports
showing both current levels and trends over the past 12 months
throughout a wide range of products.
32 Hiscox plc Report and Accounts 2005
To counter this, Hiscox alters its appetite for the lines of business
and the layers it writes within them in response to market conditions
and the risk appetite of the Group. The Group’s cycle management
strategy and related modelling and monitoring are essential to ensure
that it controls any accumulating adverse effects of changes, such as
a move to higher or more volatile layers. As the Group frequently acts
as the lead insurer in the complex co-insurance programmes required
to cover significant high value assets, it has some ability to set market
rates rather than follow them.
Mutualisation is a related risk arising from the phenomenon of pricing
cycles in the industry. The Group is required to contribute towards
obligations arising from poorly priced risks accepted by other insurers
who subsequently fail. Syndicate 33 contributes to the New Central
Fund, which is a policyholders’ protection fund that the Council
of Lloyd’s operates to make payments when other Lloyd’s Names fail
to pay valid claims. In the UK, certain Hiscox entities are required to
pay a percentage of net premium income on certain policies to the
Financial Services Compensation Scheme (FSCS), which is a statutory
fund that compensates, to agreed levels, policyholders affected by
insolvent insurers. Should the level of failures escalate, the Group
could be subject to additional or special levies by Lloyd’s or the FSCS.
The Group’s executives have long recognised that the future of Hiscox
is linked, in some part, to the fortunes and conduct of its competitors.
Consequently, the Group participates in many industry bodies,
associations and task force initiatives in order to monitor developments
and influence their strategic direction. In particular, the involvement
of the Group’s executives in the reshaping of the Lloyd’s market over
the last decade underscores that commitment.
Binding authorities and other outsourcing
Hiscox writes a considerable amount of premium income through
agents to whom binding authority is given to accept risks on behalf
of Hiscox Group carriers. Binder management exists as a separate
discipline outside of the underwriting process at Hiscox. All delegations
are strictly controlled through tight underwriting guidelines and limits
and extensive monitoring, review and auditing of the agencies.
However, as there is no absolute guarantee that an agent will
comply with the terms of its authority, Hiscox could be exposed
to uncontemplated losses.
Other business areas where the Group is to some extent reliant on
the timely and effective supply of services from third parties include
back office policy processing, data entry and cash collection. Although
the Group manages these relationships to ensure continuity and
quality of service, events could occur beyond its control that could
affect these third parties and in turn impact on the Group’s performance.
The Group selects all of its agents and business partners carefully.
All significant areas of outsourcing undergo a rigorous tendering
process, where numerous attributes other than just price
competitiveness are given due consideration. All third parties
operate within the terms of formal service level agreements, with
repercussions for underperformance.
Credit risk with reinsurance counterparties
The Group purchases reinsurance protection to contain exposure
against its capital from single claims and the aggregation of claims
from catastrophic events.
The Group places reinsurance with companies that it believes
are strong financially and operationally. The limits on reinsurance
counterparty risk are set by the Reinsurance Security Committee,
which meets regularly under the chairmanship of the Group Finance
Director. Evaluation criteria include financial strength, trading record,
payment history, outlook and organisational structures. Information
is drawn from the following sources: public information produced
by the Company; the Group’s experience with the reinsurer and
knowledge of their behaviour in the marketplace; analysis from
a reinsurance consultant; rating agency commentary and gradings.
An analysis of the insurance assets receivable from the Group’s
major reinsurance partners, by reference to their underlying
Standard & Poor’s or equivalent ratings, at 31 December is as follows:
AAA
AA
A
Other/not rated
Total
31 December 31 December
2004
£000
2005
£000
28,481
162,066
317,081
46,210
11,670
81,530
132,899
47,160
553,838
273,259
The Group’s experience of bad debt losses arising from its
reinsurance arrangements compares favourably with industry
averages. Its largest insurance carrier, Syndicate 33 at Lloyd’s,
has experienced better than average recoveries from its reinsurance
placements on a consistent basis.
In addition, neither Hiscox Insurance Company Limited nor Hiscox
Insurance Company (Guernsey) Limited has incurred bad debt
expenses of any significance for the period covered in the table below.
Note: this table compares Syndicate 33’s performance at the 100 per cent level against that
which could have been expected to occur had it suffered the same percentage of bad debts
as the Lloyd’s market average. Figures for the Lloyd’s market average are based on published
bad debt expenses as a percentage of reinsurance recoveries at the 36 months stage, for
each year of account. The 2002 result at the 36 months stage is the most recent figure
published by Lloyd’s.
25,000
20,000
15,000
10,000
5,000
0
1997
1998
1999
2000
2001
2002
Hiscox plc Report and Accounts 2005 33
Risk management continued
Claims volatility
The Group establishes provisions for unpaid claims, defence costs
and related expenses to cover its ultimate liability in respect of both
reported claims and incurred but not reported (IBNR) claims. These
provisions take into account both the Group’s and the industry’s
experience of similar business, historical trends in reserving patterns
and loss payments and pending levels of unpaid claims and awards.
Business continuity
It is critical for Hiscox that the key resources required to support
insurance underwriting and other essential business activities continue
to be available. Consequently, the Group has taken significant steps
to mitigate the impact of business interruptions that may result from
a variety of events, including the loss of key individuals and facilities
such as premises, computer networks and telephony.
The Group’s in-house actuarial teams prepare estimates after discussions
with underwriting and claims management staff. In addition, annual
reviews are conducted by external advisors, and formal actuarial auditors
in the case of Syndicate 33 who have close and relevant experience
of current claims development trends in the industry. The results of these
reviews are given considerable weighting in determining any adjustments
that may be required to existing reserves.
Reserve estimates are subject to regular monthly reviews. Adjustments
are made to take into account management’s latest view of the probable
ultimate liability, based on claims and other developments and new
data. Yet there can be no absolute guarantee that the ultimate losses
will not differ materially from the provisions the Group has established.
It is particularly difficult to estimate IBNR claims and those arising
from large catastrophes.
Note 25 to the financial statements provides information on the
Group’s estimation of ultimate claim costs over recent years.
Additional information is provided in note 4 to the financial
statements and the corporate governance section.
The Group’s business could be affected adversely if staff were to
be prevented from using its major premises for any reason. Whereas
five years ago the vast majority of Hiscox personnel were based in
a single location in London, today the Group’s staff are more widely
distributed. With offices around the UK, Europe, USA, Bermuda and
Guernsey, less than half of the Group’s personnel are now based in
London. This geographical dispersion reduces the Group’s exposure
to natural, operational and terrorist events that could prevent access
to its premises.
The business also relies to a significant extent on IT and
telecommunications systems. Whilst the Group considers its systems
to be resilient, their failure or impairment, or the inability to transfer
data onto any new systems introduced, could cause a loss of
business and/or damage to the reputation of the Hiscox Group,
as well as remedial costs.
The most difficult continuity risk for Hiscox to manage is the loss
of key staff. The recruitment and retention of high quality people
is of fundamental importance to Hiscox and the Group takes the risk
of losing such assets very seriously. To maintain the loyalty of staff,
the Group provides competitive remuneration packages and benefits
and a unique culture that embraces the individual and their aspirations.
In March 2006, Hiscox appeared in The Sunday Times 100 Best
Companies To Work For rankings for the fourth successive year.
It has previously been voted the number one employer in the financial
services sector.
In the event that key staff do leave, the Group’s contingency plans
ensure continuity of service both internally and to policyholders. These
include cross-training and rotation of duties to ensure that staff can
perform multiple roles. Most staff work in teams rather than in isolation,
which lessens the impact of normal staff turnover on the business.
Hiscox has a formal disaster recovery plan that addresses its premises
and technology related risks. Robust contingency strategies are
in place for both workspace recovery and back up of data-centres
and telephony. In the event of an outage, these procedures will enable
the Group to move operations to alternative facilities within very short
periods of time. The alternative facilities are supplied by separate
localised utility grids and telecommunications carriers.
The disaster recovery plan is tested regularly and the Group also
performs disaster simulations.
34 Hiscox plc Report and Accounts 2005
Hiscox devotes considerable resources throughout the Group
to meet its regulatory obligations. The senior management of each
Hiscox business maintain constructive, productive and valuable
relationships with all of the regulatory bodies in their respective
territories. Furthermore, the Group debates all current regulatory issues
and encourages the development of new initiatives in areas such
as risk management and reporting that will help safeguard the
future of the industry.
Rating agencies
The ability of the Group’s insurance operations to write certain
classes of business, including reinsurance inwards business,
may be affected by a change in the financial strength or credit rating
issued by an accredited rating agency such as A.M. Best, Moody’s
or Standard & Poor’s.
Syndicate 33 has its own rating and also benefits from the Lloyd’s
global rating. The Lloyd’s rating could be affected by matters outside
of the Group’s influence or control. Hiscox Insurance Company Limited,
Hiscox Insurance Company (Guernsey) Limited and Hiscox Insurance
Company (Bermuda) Limited have their own separate ratings from
accredited agencies.
A downgrading of the ratings of Lloyd’s, Syndicate 33, Hiscox
Insurance Company Limited, Hiscox Insurance Company (Guernsey)
Limited or Hiscox Insurance Company (Bermuda) Limited could have
a material adverse impact. The Group might cease to meet the
security criteria of brokers, resulting in a loss of new business, policy
cancellations and non-renewals. The Group’s borrowing facilities
might also be subject to review.
The Group enjoys an excellent relationship with the agencies that
rate its entities. Group senior management hold several meetings with
representatives from the agencies each year and gives due consideration
to the likelihood of rating consequences before executing any
significant strategic action.
Currency fluctuations
The US dollar is the Group’s largest underwriting currency. A significant
proportion of the Group’s US dollar insurance liabilities are supported
by investments held in the same currency. However, as a significant
proportion of the Group’s operational cost base is located in the
UK and Europe, movements in foreign exchange rates may have
a material adverse effect on its financial performance and position.
Further details of the Group’s investment profile and its management
of currency risks are provided in notes 4, 19 and 21 to the
financial statements.
Investment returns
The Group’s entities hold significant portfolios of investments to
support their obligations, including their insurance liabilities, and their
profits depend in part upon the returns that these achieve. Changes
in interest rates, equity returns and other economic variables can
therefore affect the Group’s financial performance substantially.
A fall in the capital value of their investments could result in a reduction
in the level of business that each entity is able to underwrite. In addition,
a major insurance loss or unexpected sequence of attritional losses
could result in a sustained cash outflow that might require the early
realisation of investments on unfavourable terms.
The Group has a detailed investment strategy that seeks to minimise
the concentration of investment risk in any one particular sector or
issuer. It retains the majority of its assets in high quality short duration
debt securities and fixed term deposits, further details of which are
provided in notes 4 and 19 to the financial statements.
Regulatory issues
The Group’s entities are incorporated and transact business
in a variety of countries and states, all of which require strong
levels of accountability to the local regulatory authorities.
The various Hiscox businesses operating in the UK are subject
to high levels of regulation from the FSA and the Council of Lloyd’s.
The numerous regulatory bodies that oversee the Group’s international
operations include the Guernsey Financial Services Commission, the
Bermuda Monetary Authority and individual state insurance departments
in the USA. These bodies all have significant powers of intervention
including the ultimate sanction of removing the authorisation to carry
on insurance business.
Regulatory action could affect the Group’s results and position in
numerous ways. For example, it could be required to allocate inefficient
levels of capital around the Group in order to overcome minimum
regulatory hurdles, or bear the costs of implementing new compliance
or sophisticated computer modelling systems. Continual changes
in, or inappropriate levels of, regulation in the Group’s markets could
also result in their becoming uncompetitive or unattractive to customers,
which might lead them to place their insurance business in other
alternative markets in which the Group has no presence.
Hiscox plc Report and Accounts 2005 35
Corporate responsibility
Fundamental to corporate and social
responsibility is honest and fair dealing in all
activities of the Company. Hiscox has always
been extremely conscious of its reputation.
Management has always believed that
a reputation for integrity and decent behaviour
in all dealings, be they within the Group or with
those from outside who come in contact with
the Group, will be good for morale and
for the results of the business.
Robert Hiscox
The Group’s commitment to responsible business practices is
reflected in:
• being placed in The Sunday Times 100 Best Companies
To Work For for the last four years
• active involvement in helping local communities
• pioneering plain English insurance policies with a culture of rapid
and fair claims handling
• open communication with all stakeholders
• its inclusion in the FTSE4Good UK Index
• being awarded the Platinum Clean City Award for five consecutive
years, for our care for the environment.
Hiscox supports the ten principles of the United Nations Global
Compact in respect of human rights, labour, the protection of the
environment and anti-corruption and strives to support and advance
those principles within its sphere of influence.
Helping customers and treating them fairly
Hiscox is dedicated to advising customers on risk management
to prevent burglary and fire in the home and other distressing losses.
Should a loss occur, we appreciate that insurance is a promise to pay,
and our claims service aims to support our customers and make
them whole as soon as possible.
Hiscox also provides high quality risk management advice for
commercial customers and again, should a loss occur, its claims
settlement aims to restore business continuity with minimum disruption.
The Group pioneered the use of clear wordings on insurance policies,
especially those intended for private customers. In addition, policies
are normally inclusive, which means that risks are covered unless
excluded specifically.
Customer feedback is considered carefully and used to enhance future
products and services.
Employees
Hiscox wants to employ the best people and provide them with the
means and the motivation to excel. Obviously, this will be achieved
with fair rewards and by providing staff with an environment in which
they can enjoy their work and reach their full potential.
Hiscox recognises how important it is for employees to maintain
a healthy work-life balance and gives staff the option of flexible
and home working wherever possible.
Equal opportunities
Hiscox is committed to providing equal opportunities to all employees
and potential employees in all aspects of employment regardless
of disability, sex, race, sexual inclination or background.
Rewards and benefits
Hiscox encourages employees to identify with the success of the
Group through performance-related pay and bonus schemes,
savings-related share option schemes and executive share option
schemes. Competitive benefits packages contain health, fitness,
flexible working and career break opportunities. Salary packages are
benchmarked by Watson Wyatt against the financial services industry
as a whole and against the Lloyd’s market specifically.
During 2005, staff retention was 87 per cent.
36 Hiscox plc Report and Accounts 2005
Training and development
Hiscox is committed to training and developing its employees to help
them to maximise their potential. Each permanent member of staff
is provided with a tailored personal development programme. Training
and development needs are reviewed twice a year, along with
performance, against clearly set objectives.
The Hiscox Foundation gives charitable donations to deserving causes.
It gives priority to any charity in which a member of staff is involved
with the aim of encouraging such activity. For instance, in 2005
a team of 25 employees undertook the Three Peaks Challenge,
raising some £8,000 for the Richard House Hospice including
support from The Hiscox Foundation.
This local hospice, which provides respite and care for children and
young people not expected to live into adulthood, is the beneficiary
of much of the staff’s charitable fundraising.
Stakeholder engagement
The Hiscox senior management makes it a priority to keep its
stakeholders fully informed.
Brokers are an important Hiscox stakeholder. Hiscox endeavours to
have good relationships with them to create a competitive advantage
in the marketplace. Clear communications are key to good relations
and a quarterly Hiscox broker magazine keeps brokers informed
of developments at Hiscox and in the insurance industry.
Energy and the environment
The way our insureds conduct their business is of paramount
importance to us, due to our core philosophy that for high-quality
underwriting we need high-quality insureds. In considering
underwriting, the insureds’ attitudes to all aspects of their business,
including their care of the environment, are considered.
The Group’s direct environmental impact is mainly from the energy
it uses and the emissions and waste it generates from its premises.
In accordance with the Group’s Environmental Policy, consumables
are recycled and reused wherever possible. The Group is taking steps
to reduce the amount of raw materials used in business processes
and by staff particularly through the extensive use of computerisation
and communications technology. During 2006 and 2007, Hiscox
will begin upgrading its computer printers to multi-function devices
capable of scanning, photocopying, and double-sided printing.
This should reduce the cost of consumables and waste volumes
and increase the efficiency of document storage, search and retrieval.
Programmes for recycling batteries, mobile phones, lamps and CDs
continued during the year. The Group’s efforts were rewarded by a
Platinum Award from the City of London Corporation for the fifth year
in succession. A Hiscox representative attends meetings organised by
the City of London Corporation to keep abreast of environmental best
practice and exchange ideas with other like-minded companies.
Communication and participation
Employees are kept informed of business developments through
formal briefings, team meetings, intranet bulletins, video conferences
and informal routes. Management takes these opportunities to listen
to staff and involve them in taking the business forward. A quarterly
staff magazine provides updates on issues and social events.
Culture
The Hiscox culture is underpinned by a set of core values that
determine the standard of behaviour expected of employees.
These core values guide everything that Hiscox does in its business.
By conducting its business with these core values in mind, the Group
recognises that it is more likely to achieve business success and
create value for its shareholders.
Hiscox strives for the highest standards of corporate governance while
being in essence a non-bureaucratic organisation. An effective and
firm system of internal controls ensures that risks are managed within
acceptable limits, but not at the expense of innovation or speed of
response. The Group believes that it has got this balance right and
that it is one of its greatest strengths.
The Group’s policies ensure that it continues to follow a best practice
approach to managing its people and remains a fair and professional
employer. In the unlikely event of an employee having a material
concern relating to the operations of the business, a whistleblowing
policy explains to staff how they can confidentially raise their misgivings.
Hiscox also subscribes to Public Concern at Work, which provides
free legal advice to any employee with a concern about possible
danger or malpractice in the workplace.
Local culture
As the Group expands throughout the world, it aims to recruit local
staff wherever possible to help develop a rapport with the local
community and make a direct contribution to the local economy.
Community involvement
The Group has maintained its involvement in its local communities with
the strong support of its employees. The reading partners scheme
has continued, through which staff assist pupils at the Elizabeth Selby
Infants School in Tower Hamlets. Employees also mentor students
at Morpeth School in Tower Hamlets.
Hiscox is also a member of the Lloyd’s Community programme,
which supports local initiatives concerning education, training,
enterprise and regeneration.
Hiscox supports the Wiltshire Bobby Van Trust, which installs security
in the homes of elderly, disadvantaged or vulnerable people in Wiltshire.
Hiscox Art Projects continues to provide talented artists with
opportunities to exhibit their art. In 2005 Hiscox sponsored the
Glasgow School of Arts and The École Nationale Supérieur des
Beaux-Arts in Paris, degree shows. It also supported the Paintings
in Hospitals charity.
Hiscox plc Report and Accounts 2005 37
Corporate governance
The Combined Code
Hiscox is committed to high standards of corporate governance,
and for the year ended 31 December 2005 and the period up to the
date of approving the accounts, the Group has applied the principles
and complied with the provisions set out in section 1 of the revised
Combined Code published in July 2003, with the following exceptions:
Stephen Hall, Senior Independent Director for the year until his
retirement on 31 December 2005, had served for more than nine
years but was nevertheless considered independent by the Board
by virtue of his character and objectivity.
With the exception of the unavoidable absence of Carol Franklin Engler,
all the Directors attended the Annual General Meeting.
The Board of Directors
The Board comprises four Executive Directors and five independent
Non Executive Directors, including a Senior Independent Director.
Brief biographical details for each member of the Board are provided
on pages 4 and 5.
The roles and activities of the Chairman and Chief Executive are distinct
and separate. The Chairman is responsible for running an effective
Board and overall strategy, and the Chief Executive has executive
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.
Anthony Howland Jackson succeeded Stephen Hall as Senior
Independent Director on 1 January 2006.
All Directors are entitled to seek independent professional advice at the
Company’s expense. A copy of the advice is provided to the Company
Secretary who will circulate it 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. During 2005 the
Board met six times.
The Board delegates operational management of the trading entities
and divisions to their own Boards but reserves certain matters for
itself, including: setting group strategy, approving significant mergers
or acquisitions, approving the financial statements, declaration of the
interim dividend and recommendation of the final dividend, approving
group business plans and budgets, approving major new areas
of business, approving capital raising, setting Group investment
guidelines, approving the Directors’ remuneration, approving significant
expenditure or projects, and approving the issue of share options.
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 written terms of reference and each committee
Chairman reports directly to the Board.
The Audit Committee
The Audit Committee comprised Stephen Hall as Chairman of the
Committee together with Anthony Howland Jackson, Derek Netherton
and Carol Franklin Engler until July 2005 at which time Adrian Auer
joined the Committee. Adrian Auer succeeded Stephen Hall as
Committee Chairman on 1 January 2006 and is considered by
the Board to have recent and relevant financial experience.
38 Hiscox plc Report and Accounts 2005
The Audit Committee meets at least four times a year to assist the Board
on matters of financial reporting, risk management and internal control.
The internal and external auditors have unrestricted access to the Audit
Committee, which monitors the scope, results and cost effectiveness
of the internal and external audit functions, the independence and
objectivity of the external auditors, and the nature and extent of non-
audit work undertaken by the external auditors together with the level
of related fees. All non-audit work undertaken by the Group’s external
auditors with fees greater than £50,000 must be pre-approved by
the Audit Committee. KPMG Audit Plc has confirmed to the Audit
Committee that in its opinion it remains independent. The Committee
is satisfied that this is the case.
The Nomination Committee
The Nomination Committee is chaired by Carol Franklin Engler
and comprises the Group Chairman, Robert Hiscox, and all the
non executive directors. It meets as and when required to deal with
appointments to the Board and employs external search and recruitment
agencies when considering new appointments. The Committee met
twice during the year.
The Remuneration Committee
The Remuneration Committee comprised Anthony Howland Jackson
as Committee Chairman, Stephen Hall, Derek Netherton and
Carol Franklin Engler between 1 January and 30 June 2005.
Adrian Auer and Sir Mervyn Pedelty were appointed to the Committee
on 1 July 2005. Stephen Hall retired on 31 December 2005.
The Remuneration Committee meets at least twice a year and
recommends to the Board a framework of executive remuneration,
and also determines on the Board’s behalf the specific remuneration
packages for each of the Executive Directors, including pension rights
and any compensation payments. The Directors’ Remuneration
Report is presented on pages 41 to 43.
The Conflict Committee
The Conflict Committee is chaired by Anthony Howland Jackson
and comprises all the independent non executive directors. It meets
as and when required. Should a potential conflict of interest arise at
any time between Group entities, there is a formal procedure to refer
the matter to this Committee. The Committee met once during the year.
Conflicts arise from time to time because Syndicate 33 is managed
by a Hiscox-owned Lloyd’s Managing Agency. 27 per cent of the
Names in the Syndicate are third parties; 73 per cent of the Syndicate
is owned by a Hiscox Group company. The Conflict Committee
serves to protect the interests of the third-party Syndicate Names.
The Risk Committee
The Risk Committee is chaired by the Chief Executive, and comprises
the Group Finance Director, the Head of Compliance & Internal Audit,
the Head of Risk, and senior managers from a selection of the Group’s
divisions. It meets monthly to monitor the risk management framework
and makes reports to the Board and Audit Committee.
It also plays an important role in promoting and developing good
risk management practice as well as identifying emerging risks
and recommending appropriate risk management strategies.
The Committee receives information from internal audit as well as
conducting its own reviews at strategic, tactical and operational levels.
The Executive Group and the Group Management Team
Two key management committees, the Executive Group and the
Group Management Team, sit at the heart of 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.
Performance evaluation
During the year, the performance of the Board, its main committees
and the individual Directors was formally and rigorously evaluated.
A questionnaire was circulated to Directors concerning the performance
of the Board as a whole and of its main committees. The responses
were collated, and summarised. Open and frank Board discussions
were held concerning the results, and all specific issues raised
were addressed.
Having received input from each of the Executive Directors,
the Non Executive Directors met under the chairmanship of the
Senior Independent Director to discuss and evaluate the
Chairman’s performance.
The Non Executive Directors also met with the Chairman during
the year to discuss a wide range of issues, including the performance
of the executive members of the Board.
The Chief Executive held one-to-one meetings with each of the
Executive Directors to discuss their performance over the year
and to set targets for the year ahead. Similarly, the Chairman
evaluated the performance of the Chief Executive and of the
Non Executive Directors.
The evaluation process concluded that the Board as a whole and
its main committees had functioned well during the year and that
the individuals had also performed well, with each making a significant
contribution to the Company. The mix of skills on the Board was felt
to be appropriate and worked well. The issues identified during the
evaluation, such as whether additional time needs to be devoted
to the Group in 2006, have been thoroughly discussed and action
plans have been put in place where appropriate.
Shareholder communications
The Executive Directors communicate and meet directly with
shareholders and analysts throughout each year, and do not limit
this to the period following the release of financial results or other
significant announcements.
All Directors endeavour to attend the Annual General Meeting.
With the exception of the unavoidable absence of Carol Franklin Engler
from the Annual General Meeting, all the Directors attended both the
general meetings held during the year.
In addition to the Executive Directors, the Senior Independent
Director attends the six-monthly analysts’ meeting. The Company also
commissions independent research on feedback from shareholders
and analysts on a regular basis following the Company’s results
announcements. This research together with the analysts’ research
notes are copied to the Non Executive Directors in full. The Chairman
attends a number of meetings with shareholders as well as speaking
at the analysts’ presentations. In addition, any specific items covered
in letters received from major shareholders are reported to the Board.
Major shareholders are invited to request meetings with the Senior
Independent Director and/or the other Non Executive Directors,
and they have been given the contact details of the Senior
Independent Director.
An alert service is available on www.hiscox.com to notify any
stakeholder of new stock exchange announcements.
Embedded risk management framework
The Directors are responsible for maintaining a sound system
of internal control to safeguard shareholders’ investment and the
Company’s assets, and for reviewing its effectiveness. This covers
all aspects of risk including insurance risk, market risk, credit risk,
operational risk, liquidity risk, social, environmental and ethical risk.
This management system has been in place throughout the year and
up to the date of approval of the Annual Report, and includes a variety
of processes to identify, assess and manage the different classes
of risk in the manner most appropriate to each class. The Board
has reviewed the effectiveness of internal controls during 2005
and confirms there is an ongoing process for identifying, evaluating
and managing the significant risks faced by the Company, and that
it accords with the guidance in the document, ‘Internal Control:
Guidance for Directors on the Combined Code’.
Hiscox acknowledges that it is neither possible, nor desirable, to
eliminate risk completely. The system is designed to manage rather
than eliminate the risk of failure to achieve business objectives, and
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 responsibilities are clearly identified together
with their reporting lines to the relevant Executive Directors. Terms
of reference and reporting lines are in place for all key decision making
and monitoring committees including the committees mentioned
above. In addition, there is a dedicated Risk Department which liaises
regularly with Internal Audit, and the Head of Risk reports to the
respective Boards and committees on a regular basis.
Board meetings and attendance
RRS Hiscox
BE Masojada
SJ Bridges
RS Childs
SH Hall
AGC Howland Jackson
DND Netherton
C Franklin Engler
AR Auer
Sir Mervyn Pedelty
Board
Audit
Number of
meetings
Number
attended
Number of
meetings
Number
attended
Remuneration
Number of
meetings
Number
attended
Nomination
Number of
meetings
Number
attended
6
6
6
6
6
6
6
6
4
4
6
6
6
6
6
4
5
6
4
3
N/A
N/A
N/A
N/A
5
5
5
5
3
N/A
N/A
N/A
N/A
N/A
5
4
4
4
3
N/A
N/A
N/A
N/A
N/A
2
2
2
2
–
–
N/A
N/A
N/A
N/A
1
2
1
1
–
–
2
N/A
N/A
N/A
2
2
2
2
–
–
2
N/A
N/A
N/A
1
2
2
2
–
–
Hiscox plc Report and Accounts 2005 39
Corporate governance continued
The execution of each delegated responsibility, by individuals and
committees, is closely monitored by regular reporting to, and challenge
by, the Board and its committees. This monitoring, supported by
financial and non-financial management information, covers performance
against agreed targets and 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 allow the Board to determine, communicate and enforce
its appetite for the various risks to which the business is exposed.
Hiscox’s culture of open communication and delegated responsibility
allows this framework of embedded risk management to function well
throughout the organisation, enabling rapid responses to the evolving
risks to the business.
The internal audit function is responsible for providing independent
assurance directly to the Audit Committee on the adequacy and
effectiveness of the Board’s 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 implementation of significant
recommendations to the Audit Committee. This function independently
tracks and reports to the Audit Committee on the implementation
of its own recommendations and those of the external auditors.
The Turnbull Guidance, ‘Internal Control: Guidance for Directors on
the Combined Code’, was updated by the Financial Reporting Council
in October 2005 and is effective for financial years beginning on or
after 1 January 2006. The Board welcomes the revised guidance and
confirms its intention to follow its recommendations throughout 2006.
Further information concerning Hiscox’s approach to risk management
is included on pages 32 to 35.
40 Hiscox plc Report and Accounts 2005
Directors’ remuneration report
This report sets out the remuneration policies for the Group’s senior
executives for the next and future financial years. The members
of the Remuneration Committee are identified on page 38.
The Remuneration Committee also reviews and confirms the
recommendations of management regarding the award of bonuses
to senior managers and staff.
None of the Committee has any personal financial interest (other than
as shareholders) or conflicts of interests arising from cross-directorships
or day-to-day involvement in running the business. The Remuneration
Committee makes recommendations to the Board. No Director plays
a part in any discussion about his or her own remuneration.
Long-term awards
The Remuneration Committee believes strongly in the value of
employee participation in long-term award schemes and operates
three share option schemes so that their interests may be aligned
with those of shareholders.
Remuneration policy
The Remuneration Committee recommends to the Board a framework
of executive remuneration and its cost. The Committee also determines
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, which is to attract and retain quality
staff and to encourage and reward superior performance.
Remuneration elsewhere in the Group is considered in determining
Directors’ remuneration.
Remuneration elements
There are four components to the remuneration package: base salary
and benefits, annual cash bonuses, long-term incentive arrangements
and pensions.
Base salary and benefits
The Remuneration Committee uses reports provided by Watson
Wyatt in their capacity as independent remuneration consultants,
together with publicly available reports. It considers what comparable
companies are paying when 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. Watson Wyatt provide no other
services to the Company.
Bonuses
The Remuneration Committee believes that a significant portion of
the total remuneration should be attained through an incentive bonus,
which links rewards directly with performance. A bonus pool is created
when the business profits of the Group, based on the year’s pre-tax
operating result, exceed a return on equity linked to the longer term
rate of return (‘Hurdle Return’). The bonus pool is limited to a
percentage of profits above the Hurdle Return. Similarly, the bonus
pools allocated to each major business division are calculated based
on the business profits generated by that division above the Hurdle
Return. 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 Executive Directors and
employees with shareholders. The actual amount to be paid to
Executive Directors is determined by the Remuneration Committee
and is based on the performance of the Group and an assessment
of individual performance.
Awards were made during the year to Executive Directors, senior
executives and other staff under the Hiscox Approved Share Option
Scheme and the Hiscox Unapproved Share Option Scheme (the
‘Option Schemes’). The exercise of options under these schemes
depends upon achieving certain performance targets 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 elect to save out of their salary, subject to the
maximum figure under the rules. There are no performance criteria
for these schemes.
The Remuneration Committee is very pleased with the commitment
shown by employees in the future of the Group.
No awards were made during the year under the Hiscox Performance
Share Plan (the ‘Performance Share Plan’) although special awards
were subsequently made on 12 January 2006 which were subject
to more stretching performance conditions (the ‘Special Award’),
as approved at the Extraordinary General Meeting of the Company
on 6 December 2005.
In order to ensure employees’ interests are aligned with shareholders’,
the Remuneration Committee regularly reviews the terms and
conditions of share incentive grants made to employees. The 2003
review resulted in the Remuneration Committee proposing changes
to the terms and conditions applying to future grants of options under
the Option Schemes and awards under the Performance Share Plan
and these amendments were approved and adopted on 22 June 2004.
Consequently awards earned under these schemes are currently
running with two different sets of terms and conditions.
Exercise of options granted prior to 22 June 2004 under the
Performance Share Plan is subject to the following terms:
(a) the participants will receive 100 per cent of the award if the Group’s
operating EPS over a fixed three year period has increased
by 35 per cent (‘the maximum target’)
(b) no award will vest unless the increase in the Group’s operating
EPS over the period equals or exceeds 15 per cent (‘the minimum
target’) at which point 40 per cent of the award will vest
(c) an award will vest on a straight-line basis if the operating EPS
growth is between the minimum target and the maximum target.
Hiscox plc Report and Accounts 2005 41
Directors’ remuneration report continued
All options granted under the Option Schemes since 22 June 2004,
as well as awards granted under the Performance Share Plan,
other than the special award are to be granted in accordance with
the revised terms and conditions as follows:
The ROE will be calculated as profit before tax and goodwill
amortisation divided by shareholders’ funds at the beginning of each
year. The ROE will be calculated for each of the three financial years
constituting the performance period and then averaged.
(i)
(ii)
there will be no facility for the re-testing of performance conditions
the participants will receive 100 per cent of their share grants if the
Group’s Return on Equity (‘ROE’) average is ten per cent over the
three year performance period (the ‘maximum target’)
(iii) no grants will vest unless the Group’s ROE average over the period
equals or exceeds eight per cent at which point 40 per cent of the
grant will vest (the ‘minimum target’)
(iv) a grant will vest on a straight-line basis if the Group’s ROE average
is between the minimum target and the maximum target.
Exercise of options granted prior to 22 June 2004 under the Option
Schemes is dependent upon the basic earnings per share of the
Group increasing at two per cent more than the rate of inflation over
a period of three years.
The Remuneration Committee believes that using ROE as the long-
term performance condition better aligns the interests of employees
with shareholders because:
(ii)
(i) ROE captures the efficiency with which the Company is using
shareholder funds to generate earnings, whereas EPS growth
gives no indication of the level of return on the investment required
to generate those additional earnings
the Company operates in a highly cyclical business where earnings
can fluctuate considerably, which can have a distorting effect on
EPS growth. Where EPS is used as a performance condition this
can introduce an element of luck as to when in the cycle share
grants are made which can operate to the disadvantage of both
employees and shareholders. The Remuneration Committee
believes that an average ROE performance requirement over
the three year period smoothes out the cyclical fluctuations
in earnings and ensures that over any given period shareholders
will receive a minimum return on equity before share grants
to employees will vest.
The Remuneration Committee will review the ROE target attaching
to grants on an annual basis in light of the prevailing bond yields and
make adjustments to the target, provided that in the opinion of the
Remuneration Committee the adjusted target shall be no easier
to satisfy than the original target when imposed and provided
that shareholders will be consulted in advance in respect of any
material change.
The 2005 reviews resulted in the amendments to the rules of the
Hiscox Unapproved Share Option Scheme by the addition of a new
Schedule 2 so as to allow the grant of options to French employees
that will qualify for favourable tax treatment in France (‘Approved
Options in France’). These were approved by shareholders
on 21 June 2005.
Pensions
The pension entitlement shown in the table below is that which would
be paid annually on retirement based on service to the end of the year,
with the exception of RRS Hiscox, whose figures below are based on
his actual pension in payment. 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 version
8.1 Actuarial Guidance Note GN11: Retirement Benefit Schemes –
Transfer Values. No contractual contributions were due or have been
paid by the Directors during the year. RRS Hiscox retired from the
scheme on 3 January 2003.
RS Childs left the Hiscox final salary pension scheme on 31 December
2005. Prior to this date the Company injected £670,000 to the pension
scheme to augment RS Childs’ pension entitlement. The Trustees
of the Scheme agreed to this augmentation, after receiving legal and
actuarial advice. RS Childs will no longer acquire any benefits under
the final salary pension scheme.
Pensions
RRS Hiscox
BE Masojada
RS Childs
SJ Bridges
42 Hiscox plc Report and Accounts 2005
in accrued
Increase Total accrued Transfer value
of increase
in accrued
pension
£000
pension at
pension during 31 December
2005
£000
the year
£000
Transfer value Transfer value
Increase in
of accrued transfer value
of accrued
pension at
of accrued
pension at
1 January 31 December benefit during
the year
£000
2005
£000
2005
£000
8
5
60
4
177
31
188
23
203
65
1,003
43
4,105
355
2,496
227
4,388
482
3,834
311
283
127
1,338
84
Remuneration of Non Executive Directors
Non Executive Directors receive an annual fee in respect of their Board
appointments together with additional compensation for their further
duties in relation to Board committees. The fees are reviewed annually,
but are not necessarily increased 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.
Hiscox plc
Subsidiary
Board and
Board Committees
£
£
SH Hall*
AGC Howland Jackson
DND Netherton
C Franklin Engler
AR Auer**
Sir Mervyn Pedelty**
30,000
28,500
28,500
28,500
14,250
14,250
17,500
18,750
13,250
8,250
5,375
5,625
Total
2005
£
47,500
47,250
41,750
36,750
19,625
19,875
Total
2004
£
47,500
45,000
40,000
35,000
–
–
*SH Hall resigned with effect 31 December 2005.
**AR Auer and Sir Mervyn Pedelty were appointed with effect 1 July 2005.
Executive Directors’ service contracts
Directors’ service contracts are on a rolling basis and the unexpired term
shown in the following table is therefore the same as the notice period.
The Remuneration Committee believes that these notice periods
provide an appropriate balance having regard to prevailing market
conditions and current practice amongst public companies.
No external appointment may be accepted by an Executive Director
where it may give rise to a conflict of interest. The consent of the
Chairman is required in any event.
None of the contracts include any provision for compensation payments
on early termination.
Director
RRS Hiscox
BE Masojada
RS Childs
SJ Bridges
SH Hall*
AGC Howland Jackson
DND Netherton
C Franklin Engler
AR Auer
Sir Mervyn Pedelty
Effective
date of contract
Unexpired term
and notice period
20 Dec 2002
1 Jan 1998
1 Jan 1998
1 Jan 1999
14 Dec 2004
14 Dec 2004
14 Dec 2004
14 Dec 2004
1 Jul 2005
1 Jul 2005
12 months
6 months
6 months
6 months
3 months
3 months
3 months
3 months
3 months
3 months
*SH Hall resigned with effect 31 December 2005.
External non executive directorships
During the year Robert Hiscox has been a Non Executive Director
of Grainger Trust plc and is paid £25,000 for his services.
Bronek Masojada is Deputy Chairman of Lloyd’s. Bronek is also
a Non Executive Director of Ins-sure Holding Limited and its subsidiaries.
The fees for his services are remitted to the Group, as disclosed
in note 36.
Neither Stuart Bridges nor Robert Childs held Non Executive Director
positions during the year.
By order of the Board
SJ Bridges
Secretary
1 Great St Helen’s
London EC3A 6HX
13 March 2006
Remuneration of Executive Directors
The emoluments received by each person who served as an Executive Director during the year are set out below:
RRS Hiscox
BE Masojada
RS Childs
SJ Bridges
Total shareholder return
%
100
80
60
40
20
0
-20
-40
-60
-80
D ec 00
2005 Basic
salary/fees
£000
2005
Benefits
£000
258
309
291
249
16
15
18
14
2005
Bonus
£000
125
175
150
150
2005
Total
£000
399
499
459
413
2004 Basic
salary/fees
£000
2004
Benefits
£000
250
286
262
216
16
15
18
14
2004
Bonus
£000
400
475
575
300
2004
Total
£000
666
776
855
530
D ec 01
D ec 02
D ec 03
D ec 04
D ec 05
Hiscox plc
FTSE ASX Nonlife Insurance Index
Source: Bloomberg
The above 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 plc Report and Accounts 2005 43
Directors’ report
The Directors have pleasure in submitting their Annual Report
and financial statements for the year ended 31 December 2005.
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 report on Group financial
performance.
Financial results
The Group achieved a pre-tax profit for the year of £70.2 million
(2004: £89.5 million). Detailed results for the year are shown in the
consolidated income statement on page 50.
Dividends
An interim dividend of 2.25p (net) per share (2004: 1.5p (net)) was paid
on 24 October 2005 in respect of the year ended 31 December 2005.
The Directors recommend the payment of a final dividend of 4.75p
(net) per share (2004: 3.5p (net)). If approved this will be paid on
26 June 2006 to shareholders on the register at the close of business
on 21 April 2006.
Directors
The names and details of the individuals who served as Directors
of the Company during the year (including those offering themselves
for re-election) are set out on pages 4 and 5. Stephen Hall was the
Senior Independent Director during the year under review but retired
on 31 December 2005. Anthony Howland Jackson succeeded him
as the Senior Independent Director on 1 January 2006. The Board
are grateful for the significant contribution that Stephen Hall has
made to the Group’s development.
Adrian Auer and Sir Mervyn Pedelty were both appointed as Non
Executive Directors on 1 July 2005 to continue to maintain the balance
of a strong non executive team. Adrian Auer has recent experience
as the Group Finance Director of a public company. Sir Mervyn Pedelty
has recent experience as the Chief Executive of a public company
in the financial services sector and the Board believes this will be
especially valuable in discussions of Group strategy.
In accordance with the Articles of Association and Combined Code,
Robert Hiscox, Anthony Howland Jackson and Derek Netherton
will retire at the Annual General Meeting and, being eligible, offer
themselves for re-election as Directors. Adrian Auer and Sir Mervyn
Pedelty were appointed as Directors since the previous Annual General
Meeting and therefore stand for appointment as Directors. Following
formal performance evaluation, the individuals are considered to be
effective and have demonstrated commitment to their respective roles.
The Company provides Directors and Officers’ insurance for all of
its Directors. The Directors have the benefit of “qualifying third party
indemnity provisions” for the purposes of sections 309A to 309C
of the Companies Act 1985 pursuant to the Company’s Articles
of Association. A copy of the Articles of Association is available
for inspection at the Company’s registered office.
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
The Board takes regular account of the significance of social,
environmental and ethical (‘SEE’) matters to the business of the
Company and has identified and assessed the significant risks to
the Company’s short and long-term value arising from such matters,
and has considered any potential to enhance value by responding
to the issues appropriately.
The Board confirms it has received adequate information to assess
SEE issues and that appropriate training is available to Directors
should they request it.
The Board recognises the potential impact of socio-economic issues
upon the short and long-term value of the Company. The Head of Risk
oversees the risk management framework through which the business
units report relevant risks to the Board and Audit Committee
throughout each year.
Directors’ interests
Executive Directors
RRS Hiscox
BE Masojada
RS Childs
SJ Bridges
Non Executive Directors
SH Hall*
AGC Howland Jackson
DND Netherton
C Franklin Engler
AR Auer
Sir Mervyn Pedelty
31 December 2005
5p ordinary shares
Number of shares
beneficial
31 December 2005
5p ordinary shares
Number of shares
non-beneficial
31 December 2004
5p ordinary shares
Number of shares
beneficial
31 December 2004
5p ordinary shares
Number of shares
non-beneficial
9,382,500
2,702,902
1,382,067
460,877
45,500
65,804
19,905
17,550
–
–
580,237
–
–
–
–
–
–
–
–
–
8,912,059
2,359,455
1,173,468
286,363
35,500
49,589
15,000
17,550
N/A
N/A
567,715
–
–
–
–
–
–
–
N/A
N/A
*SH Hall resigned with effect 31 December 2005.
Hiscox Trustees Limited is the trustee of the Hiscox plc Group Employee Share Ownership Plan Trust (‘the ESOP’) and is interested in 135,782 ordinary shares in the Company. The Executive
Directors are potential beneficiaries of the ESOP and are therefore each deemed to have an interest in the Hiscox shares owned by Hiscox Trustees Limited, the trustee of the ESOP.
The Directors have not dealt in any securities of the Company between 31 December 2005 and the date of approval of these Report and Accounts.
Details of Directors’ interests in share options are set out on pages 95 to 96.
44 Hiscox plc Report and Accounts 2005
Political and charitable contributions
The Group made no political contributions during the year (2004: £nil).
Charitable donations totalled £78,650 (2004: £78,300) of which
£50,000 (2004: £50,000) was donated to the Hiscox Foundation,
a UK registered charity. The policy of the Hiscox Foundation is to assist
and improve education, the arts and independent living for disabled
and disadvantaged members of society. Further information concerning
the Group’s charitable activities is contained in the report on Corporate
responsibility on pages 36 to 37.
Resolution 12, 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 pre-emption rights
as provided by Section 89 of the Companies Act 1985. The authority
contained in this resolution will be limited to an aggregate nominal value
of £979,984.78, representing 5.0 per cent of the issued ordinary share
capital as at 13 March 2006. This authority will terminate no later than
the earlier of the conclusion of the next Annual General Meeting or
a date falling 15 months after the date of the passing of the resolution.
Payment of creditors
It is the policy of the Group to agree terms of payment for its business
transactions with its suppliers and ensure that the supplier is aware
of the terms of payment.
Payment is then made on these terms, subject to the other terms and
conditions being met by the supplier. The Group had 17.1 (2004: 15.4)
days’ purchases outstanding at 31 December 2005 based on the
average daily amount invoiced by suppliers during the year ended
31 December 2005. The Company is a holding company and
accordingly has no days’ purchases outstanding at 31 December 2005.
Therefore, the Group creditors’ days are considered to be more
representative. The Group does not follow a specific code with
regard to the payment of creditors.
Major interests in shares
The Company has been notified of the following shareholdings of
three per cent or more in the ordinary shares of the Company as at
13 March 2006:
Number of shares
% of total
Amvescap plc
Fidelity International Limited
Barclays plc
Legal & General Group plc
Morley Fund Management Limited
62,255,281
33,515,451
14,330,810
14,187,498
13,476,468
15.9
8.5
3.7
3.6
3.4
Adoption of International Financial Reporting Standards
In accordance with European Union (‘EU’) law (IAS Regulation EC
1606/2002), the consolidated financial statements included in this
report have been prepared in accordance with International Financial
Reporting Standards (‘IFRSs’) as adopted by the EU. This is the first
year that the Group has adopted IFRSs as the basis for reporting
its consolidated results.
In addition, the individual accounts of the parent company have
also been prepared for the first occasion in accordance with IFRSs
as adopted by the EU, as permitted by Statutory Instrument 2004
No. 2947 ‘The Companies Act 1985 (International Accounting
Standards and Other Accounting Amendments) Regulations 2004’.
Annual General Meeting
The notice of the Annual General Meeting is contained on pages
102 and 103. In addition to the ordinary business, the following items
of special business will be considered at the meeting.
Resolution 10, which will be proposed as an ordinary resolution, seeks
to obtain approval for the remuneration report as set out on pages
41 to 43 of this Report and Accounts.
Resolution 11, 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
contained in the resolution will be limited to the allotment of relevant
securities to an aggregate nominal value of £6,533,231.86 representing
33.3 per cent of the issued ordinary share capital as at 13 March 2006.
This authority will terminate no later than the earlier of the conclusion
of the next Annual General Meeting or a date falling 15 months after
the date of the passing of the resolution. The Directors presently have
no intention of exercising this authority.
Resolution 13, which will be proposed as a special resolution, seeks
to obtain authority for the Company to repurchase its own shares from
the market. In certain circumstances, it may be advantageous for the
Company to purchase its own shares pursuant to Section 166 of the
Companies Act 1985. The Directors intend to exercise this authority
only where they believe that a purchase would be the best use of
the Company’s resources, result in an increased earnings per share
and is in the best interests of the Company’s shareholders as a whole.
Any ordinary shares purchased pursuant to this authority may either
be held as treasury shares or cancelled by the Company, depending
on which course of action is considered by the Directors to be in the
best interests of the shareholders at the time.
The authority contained in the resolution will be limited to a purchase
of own shares up to a maximum number of 19,500,000 shares,
representing 4.97 per cent of the issued capital of the Company as
at 13 March 2006, and the price to be paid for the shares will be limited
to a minimum share price of £0.50 per share and a maximum price per
share that is not more than five per cent above the average of the
closing middle market quotations for an ordinary share as derived from
the London Stock Exchange Daily Official List for the five business
days immediately preceding the date on which the ordinary share is
purchased. This authority will terminate on the earlier of the conclusion
of the next Annual General Meeting or a date falling 15 months after
the date of the passing of the resolution.
The total number of options to subscribe for ordinary shares that
were outstanding as at 13 March 2006 was 18,503,779 which
represented 4.7 per cent of the issued share capital as at that date
(which represents 5.0 per cent of the Company’s issued share capital
if the authority to purchase shares under the resolution is used in full).
There are no warrants.
Save to the extent purchased pursuant to the Companies (Acquisition
of Own Shares) (Treasury Shares) Regulations 2003 (the ‘Regulations’),
any shares purchased under this resolution will be cancelled. Shares
purchased by the Company pursuant to the Regulations may be
subsequently transferred to an employees’ share scheme, and such
transfers will not exceed five per cent of the issued ordinary share
capital of the Company (adjusted for scrip/bonus and Rights Issues)
in any rolling ten year period. The Company does not currently hold
any treasury shares. Hiscox Holdings Limited and Hiscox Trustees
Limited, subsidiaries of the Company, own 54,560 and 135,782
shares respectively in the Company at 13 March 2006.
Your Directors consider that each of the resolutions described above
and in the notice of Annual General Meeting will be of benefit to and
is in the best interest of the Company and shareholders as a whole.
Your Directors unanimously recommend that you vote in favour of the
resolutions. Those Directors who hold ordinary shares in the Company
intend to do so in respect of their own beneficial holdings, except with
regard to Resolution 10 (relating to the remuneration report) on which
they will not vote.
By order of the Board
SJ Bridges
Secretary
1 Great St Helen’s, London EC3A 6HX
13 March 2006
Hiscox plc Report and Accounts 2005 45
Statement of Directors’ responsibilities
The Directors are responsible for keeping proper accounting records
that disclose with reasonable accuracy at any time the financial
position of the parent Company and enable them to ensure that its
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.
Under applicable law and regulations, the Directors are also responsible
for preparing a Directors’ report, Directors’ remuneration report and
the Corporate governance statement that comply with that law and
those regulations.
The Directors are responsible for the maintenance and integrity of
the corporate and financial information included on the Company’s
website. Legislation in the UK governing the preparation and
dissemination of financial statements may differ from legislation
in other jurisdictions.
The Directors are responsible for preparing the Annual Report and
the Group and parent Company financial statements in accordance
with applicable law and regulations.
Company law requires the Directors to prepare Group and parent
Company financial statements for each financial year. Under that
law they are required to prepare the Group financial statements
in accordance with IFRSs as adopted by the EU and have elected
to prepare the parent Company financial statements on the
same basis.
The Group and parent Company financial statements are required
by law and IFRSs as adopted by the EU to present fairly the financial
position of the Group and the parent Company and the performance
for that period; the Companies Act 1985 provides in relation to such
financial statements that references in the relevant part of that Act to
financial statements giving a true and fair view are references to their
achieving a fair presentation.
In preparing each of the Group and parent Company financial
statements, the Directors are required to:
(a) select suitable accounting policies and then apply them
consistently
(b) make judgments and estimates that are reasonable and prudent
(c) state whether they have been prepared in accordance with IFRSs
as adopted by the EU
(d) prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Group and the parent
Company will continue in business.
48 Hiscox plc Report and Accounts 2005
Independent auditors’ report to the shareholders of Hiscox plc
Basis of audit opinion
We conducted our audit in accordance with International Standards
on Auditing (UK and Ireland) issued by the Auditing Practices Board.
An audit includes examination, on a test basis, of evidence relevant
to the amounts and disclosures in the financial statements and the
part of the Directors’ remuneration report to be audited. It also
includes an assessment of the significant estimates and judgments
made by the Directors in the preparation of the financial statements,
and of whether the accounting policies are appropriate to the
Group’s and Company’s circumstances, consistently applied
and adequately disclosed.
We planned and performed our audit so as to obtain all the information
and explanations which we considered necessary in order to provide
us with sufficient evidence to give reasonable assurance that the
financial statements and the part of the Directors’ remuneration report
to be audited 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 information
in the financial statements and the part of the Directors’ remuneration
report to be audited.
Opinion
In our opinion:
•
•
•
the Group financial statements give a true and fair view,
in accordance with IFRSs as adopted by the EU, of the state
of the Group’s affairs as at 31 December 2005 and of the
Group’s profit for the year then ended
the Company financial statements give a true and fair view,
in accordance with IFRSs as adopted by the EU as applied in
accordance with the provisions of the Companies Act 1985, of the
state of the Company’s affairs as at 31 December 2005
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 and, as regards the financial
statements, Article 4 of the IAS Regulation.
KPMG Audit Plc
Chartered Accountants
Registered Auditor
London
13 March 2006
We have audited the Group and Company financial statements
(the ‘financial statements’) of Hiscox plc for the year ended
31 December 2005 which comprise the Consolidated income
statement, the Consolidated and Company balance sheets, the
Consolidated and Company cash flow statements, the Consolidated
and Company statements of changes in equity and the related
notes. These financial statements have been prepared under
the accounting policies set out therein. We have also audited the
information in 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 accordance with section 235 of the Companies Act 1985.
Our audit work has been undertaken 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 than the Company and the Company’s members
as a body, for our audit work, for this report, or for the opinions
we have formed.
Respective responsibilities of Directors and auditors
The Directors’ responsibilities for preparing the Annual Report,
the Directors’ remuneration report and the financial statements
in accordance with applicable law and International Financial
Reporting Standards (IFRSs) as adopted by the EU are set
out in the Statement of Directors’ responsibilities on page 48.
Our responsibility is to audit the financial statements and the part
of the Directors’ remuneration report to be audited in accordance
with relevant legal and regulatory requirements and International
Standards on Auditing (UK and Ireland).
We report to you our opinion as to whether the financial statements
give a true and fair view and whether 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 and,
as regards the financial statements, Article 4 of the IAS regulation.
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 regarding Directors’ remuneration and other transactions
is not disclosed.
We review whether the Corporate governance statement reflects
the Company’s compliance with the nine provisions of the 2003 FRC
Combined Code specified for our review by the Listing Rules of the
Financial Services Authority, 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 control procedures.
We read other information contained in the Annual Report and
consider whether it is consistent with the audited financial statements.
We consider the implications for our report if we become aware of any
apparent misstatements or material inconsistencies with the financial
statements. Our responsibilities do not extend to any other information.
Hiscox plc Report and Accounts 2005 49
Consolidated income statement
For the year ended 31 December 2005
Income
Gross premiums written
Outward reinsurance premiums
Net premiums written
Insurance premiums earned
Insurance premiums ceded to reinsurers
Net premiums earned
Investment result
Other income
Net revenue
Expenses
Claims and claim adjustment expenses, net of reinsurance
Expenses for the acquisition of insurance contracts
Administration expenses
Other operating expenses
Total expenses
Results of operating activities
Finance costs
Share of profit of associates
Profit before tax
Tax expense
Profit for the year (all attributable to equity shareholders of the Company)
Earnings per share on profit attributable to equity shareholders of the Company
Basic
Diluted
Notes
2005
£000
2004
£000
5
5
861,174
(179,938)
816,609
(112,524)
681,236
704,085
879,344
(186,045)
847,524
(132,672)
5
693,299
714,852
7
10
25
9
10
12
17
27
30
30
43,883
81,297
35,806
15,112
818,479
765,770
(457,025)
(199,979)
(41,197)
(46,973)
(382,063)
(177,960)
(43,198)
(71,440)
(745,174)
(674,661)
73,305
(3,334)
250
91,109
(1,977)
390
70,221
(21,591)
89,522
(25,574)
48,630
63,948
15.6p
15.1p
21.3p
21.0p
50 Hiscox plc Report and Accounts 2005
Consolidated balance sheet
At 31 December 2005
Assets
Intangible assets
Property, plant and equipment
Investments in associates
Deferred acquisition costs
Financial assets
Loans and receivables including insurance receivables
Reinsurance contract receivables
Cash and cash equivalents
Total assets
Equity and liabilities
Shareholders’ equity
Share capital
Share premium
Other reserves
Retained earnings
Total equity
Employee retirement benefit obligations
Deferred tax
Insurance contracts
Financial liabilities
Current tax
Trade and other payables
Total liabilities
Total equity and liabilities
Notes
2005
£000
2004
£000
15
17
16
33,099
12,128
18
106,747
9
19 1,237,778
436,981
20
506,376
413,759
22
18, 25
29,989
10,691
1,109
109,970
980,731
327,482
238,871
119,563
2,746,886 1,818,406
23
23
24
24
19,570
401,365
38,789
118,289
14,685
234,267
37,499
82,375
578,013
368,826
29
16,677
15,193
34,718
14,517
28
25 1,723,000 1,246,903
57
19
7,855
145,530
126,246
16,581
271,176
26
2,168,873 1,449,580
2,746,886 1,818,406
The consolidated Group financial statements were approved by the Board of Directors on 13 March 2006 and signed on its behalf by:
RRS Hiscox
Chairman
SJ Bridges
Group Finance Director
Hiscox plc Report and Accounts 2005 51
Company balance sheet
At 31 December 2005
Assets
Property, plant and equipment
Investment in subsidiary undertakings
Investment in associate
Deferred tax
Financial assets
Current tax assets
Loans and receivables
Prepayments and accrued income
Cash and cash equivalents
Total assets
Equity and liabilities
Shareholders’ equity
Share capital
Share premium
Other reserves
Retained earnings
Total equity
Employee retirement benefit obligations
Deferred tax
Financial liabilities
Current tax
Trade and other payables
Total liabilities
Total equity and liabilities
Notes
2005
£000
2004
£000
15
19
17
28
19
20
22
23
23
24
24
29
28
19
26
3,709
406,997
18
2,089
144,945
3,238
158,334
1,104
11,945
3,571
115,457
200
–
137,582
–
175,652
982
5,183
732,379
438,627
19,570
401,365
92,214
26,369
14,685
234,267
92,214
18,631
539,518
359,797
16,677
–
125,986
–
50,198
34,718
2,018
–
614
41,480
192,861
78,830
732,379
438,627
The Company financial statements were approved by the Board of Directors on 13 March 2006 and signed on its behalf by:
RRS Hiscox
Chairman
SJ Bridges
Group Finance Director
52 Hiscox plc Report and Accounts 2005
Consolidated statement of changes in equity
Balance at 1 January 2004
Currency translation differences
Net income/(expenses) recognised directly in equity
Profit for the year
Total recognised income for year
Employee share options:
Equity settled share based payments
Proceeds from shares issued
Change in own shares
Dividends to shareholders
Balance at 31 December 2004
Currency translation differences
Net income/(expenses) recognised directly in equity
Profit for the year
Total recognised income for year
Employee share options:
Equity settled share based payments
Deferred tax release on share based payments
Proceeds from shares issued
Rights Issue of equity shares
Expenses related to Rights Issue of equity shares
Change in own shares
Dividends to shareholders
Share
capital
£000
Share
premium
£000
Notes
14,565
–
232,341
–
24
Merger
reserve
£000
4,723
–
–
–
–
–
120
–
–
–
–
–
–
1,926
–
–
–
–
–
–
–
–
–
Currency
translation
reserve
£000
Capital
redemption
reserve
£000
Retained
earnings
£000
Total
£000
–
(468)
(468)
–
(468)
–
–
–
–
33,244
–
29,812
–
314,685
(468)
–
–
–
–
–
–
–
–
63,948
(468)
63,948
63,948
63,480
1,194
–
254
(12,833)
1,194
2,046
254
(12,833)
14,685
234,267
4,723
(468)
33,244
82,375
368,826
–
–
–
–
–
–
–
–
–
–
67
4,818
–
–
–
–
–
1,522
171,550
(5,974)
–
–
–
–
–
–
–
–
–
–
–
–
–
1,290
1,290
–
1,290
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,290
–
48,630
1,290
48,630
48,630
49,920
2,059
1,950
–
–
–
192
(16,917)
2,059
1,950
1,589
176,368
(5,974)
192
(16,917)
23
32
24
23
23
23
32
Balance at 31 December 2005
19,570
401,365
4,723
822
33,244
118,289
578,013
Hiscox plc Report and Accounts 2005 53
Company statement of changes in equity
Balance at 1 January 2004
Profit for the year
Total recognised income for the year
Employee share options:
Equity settled share based payments
Proceeds from shares issued
Dividends to shareholders
Balance at 31 December 2004
Profit for the year
Total recognised income for the year
Employee share options:
Equity settled share based payments
Proceeds from shares issued
Rights Issue of equity shares
Expenses related to Rights Issue of equity shares
Dividends to shareholders
Share
capital
£000
Share
premium
£000
Notes
Merger
reserve
£000
Capital
redemption
reserve
£000
Retained
earnings
£000
Total
£000
14,565
232,341
58,970
33,244
7,441
346,561
–
–
–
120
–
–
–
–
1,926
–
–
–
–
–
–
–
–
–
–
–
22,836
22,836
22,836
22,836
1,194
–
(12,840)
1,194
2,046
(12,840)
14,685
234,267
58,970
33,244
18,631
359,797
–
–
–
–
–
67
4,818
–
–
–
1,522
171,550
(5,974)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
22,596
22,596
22,596
22,596
2,059
–
–
–
(16,917)
2,059
1,589
176,368
(5,974)
(16,917)
23
32
23
23
23
32
Balance at 31 December 2005
19,570
401,365
58,970
33,244
26,369
539,518
54 Hiscox plc Report and Accounts 2005
Cash flow statement
For the year ended 31 December 2005
Consolidated Group
Profit before tax
Interest received
Net (gains)/losses on financial assets
Retirement benefit charges in excess of contributions paid
Depreciation
Charges in respect of share based payments
Other non-cash charges
Changes in operational assets and liabilities:
Insurance and reinsurance contracts
Financial assets
Other assets and liabilities
Cash generated from operations
Interest received
Interest paid
Current tax paid
Net cash flows from operating activities
Cash flows from the acquisition and sale of subsidiaries and associates
Cash flows from the sale/(purchase) of property, plant and equipment
Cash flows from the purchase of intangible assets
Loans repaid by related parties
Net cash used in investing activities
Proceeds from the issue of ordinary shares
Net cash flows from transactions in own shares
Dividends paid to Company’s shareholders
Proceeds from borrowings
Repayments of borrowings
Net cash flows from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at 1 January
Net increase in cash and cash equivalents
Effect of exchange rate fluctuations on cash and cash equivalents
Notes
2005
£000
2004
£000
15
11
16
36
32
70,221
(46,844)
4,289
(18,041)
3,281
2,059
690
89,522
(33,069)
593
1,384
2,934
1,194
1,302
212,462
(256,280)
13,048
193,591
(230,913)
(19,469)
(15,115)
46,844
(2,573)
(10,239)
7,069
33,069
(1,409)
(206)
18,917
38,523
3,750
(4,474)
(3,277)
1,580
(1,091)
(5,565)
(3,406)
320
(2,421)
(9,742)
171,983
192
(16,917)
121,133
(102)
2,046
254
(12,833)
–
(521)
276,289
(11,054)
292,785
17,727
119,563
292,785
1,411
102,712
17,727
(876)
Cash and cash equivalents at 31 December
22
413,759
119,563
The purchase, maturity and disposal of financial assets is part of the Group’s insurance activities and is therefore classified as an operating cash flow.
Included within cash and cash equivalents held by the Group are balances totalling £50,313,000 (2004: £35,835,000) not available for use by the
Group which are held within the Lloyd’s Syndicate.
Hiscox plc Report and Accounts 2005 55
Cash flow statement
For the year ended 31 December 2005
Company
Profit before tax
Interest received
Net (gains)/losses on financial assets
Depreciation
Other non-cash charges
Changes in operational assets and liabilities:
Financial assets
Other assets and liabilities
Cash generated from operations
Interest received
Interest paid
Current tax paid
Net cash flows from operating activities
Cash flows from the acquisition and sale of subsidiaries and associates
Cash flows from the sale/(purchase) of property, plant and equipment
Net cash used in investing activities
Proceeds from the issue of ordinary shares
Dividends paid to Company’s shareholders
Proceeds from borrowings
Net cash flows from financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at 1 January
Net movement in cash and cash equivalents
Effect of exchange rate fluctuations on cash and cash equivalents
Cash and cash equivalents at 31 December
Notes
2005
£000
2004
£000
19,433
(6,015)
2,974
40
1,731
25,605
(5,676)
(2,369)
40
–
15
(5,281)
8,490
(35,827)
14,054
21,372
6,015
(711)
(3,899)
(4,173)
5,676
–
–
22,777
1,503
(291,540)
(14)
(200)
(3,019)
(291,554)
(3,219)
171,983
(16,917)
120,930
2,046
(12,840)
–
32
19
275,996
(10,794)
7,219
(12,510)
5,183
7,219
(457)
17,693
(12,510)
–
22
11,945
5,183
The purchase, maturity and disposal of financial assets is part of the Company’s operating activities and is therefore classified as an operating cashflow.
56 Hiscox plc Report and Accounts 2005
Notes to the financial statements
1 General information
The Hiscox Group, which is headquartered in London, United
Kingdom, comprises Hiscox plc (the parent Company, referred to
herein as the “Company”) and its subsidiaries (collectively, the Hiscox
Group or the “Group”). The Group provides insurance, reinsurance
and investment management services to its clients worldwide.
It has operations in the UK, Europe, USA and Bermuda and
employs over 600 people worldwide.
Hiscox plc is a public limited company incorporated and domiciled
in Great Britain under the Companies Act 1985. The address of the
registered office is 1 Great St Helen’s, London, EC3A 6HX.
The consolidated financial statements of the Company for the year
ended 31 December 2005 comprise all of the Group’s subsidiary
companies and the Group’s interest in associates. All amounts relate
to continuing operations.
The financial statements were authorised for issue by the Directors
on 13 March 2006.
2 Significant accounting policies
The principal accounting policies applied in the preparation of these
consolidated Group and Company financial statements are set
out below.
2.1 Statement of compliance
These consolidated Group and Company financial statements have
been prepared in accordance with International Financial Reporting
Standards as adopted by the EU and in accordance with the
provisions of the Companies Act 1985. The Company has also
applied the provisions of Statutory Instrument 2004 No. 2947
“The Companies Act 1985 (International Accounting Standards
and Other Accounting Amendments) Regulations 2004.”
Since 2002, the standards adopted by the IASB have been
referred to as ‘International Financial Reporting Standards’ (IFRSs).
The standards from prior years continue to bear the title ‘International
Accounting Standards’ (IASs). Insofar as a particular standard is
not explicitly referred to, the two terms are used in these financial
statements synonymously.
These are the Group and Company’s first financial statements
prepared in accordance with IFRSs as adopted by the EU. The
disclosures required by IFRS 1 First-time Adoption of International
Financial Reporting Standards concerning the transition from
UK GAAP to IFRSs, and its effect on the reported financial position,
financial performance and cash flows, are given in note 3.
The Group and Company have taken advantage of the following
exemptions set out in IFRS 1:
– IFRS 3 Business Combinations has not been applied retrospectively
to business combinations that occurred before 1 January 2004.
Accumulated amortisation on goodwill arising before 1 January 2004
has not, therefore, been reversed
– all cumulative actuarial gains and losses arising on employee
benefit schemes to 1 January 2004 have been recognised
in equity at 1 January 2004
– cumulative translation differences for all foreign operations are
deemed to be zero at 1 January 2004
– the provisions of IFRS 2 Share-based payment to exclude equity
settled awards granted on or before 7 November 2002, or to awards
granted after that date but vesting prior to 1 January 2005.
The Group and the Company have not availed themselves of the
exemptions within IFRS 1 that allow comparative information
presented in the first year of adoption of IFRSs not to comply with
IAS 32 Financial Instruments: Disclosure and Presentation, IAS 39
Financial Instruments: Recognition and Measurement and
IFRS 4 Insurance Contracts.
The Group has elected to apply the transitional arrangements
contained in IFRS 4 that permit the disclosure of only five years
of data in claims development tables, in the year of adoption.
The number of years of data presented will be increased in
each succeeding additional year, up to a maximum of ten years,
if material outstanding claims exist for such periods.
In March 2004, the IASB issued IFRS 4 Insurance Contracts which
specifies the financial reporting for insurance contracts by an insurer.
The standard is only the first phase in the IASB’s insurance contract
project and as such is only a stepping stone to phase II, introducing
limited improvements to accounting for insurance contracts.
Accordingly, to the extent that IFRS 4 does not specify the recognition
or measurement of insurance contracts, transactions reported in these
consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the UK.
2.2 Basis of preparation
The financial statements are presented in Pounds Sterling and are
rounded to the nearest thousand. They are prepared on the historical
cost basis except that ownership interests held in financial assets
and liabilities, and derivative financial instruments, are recorded
at fair value through profit or loss.
The accounting policies set out below have been applied consistently
to all periods presented in these consolidated Group and Company
financial statements and in preparing an opening balance sheet at
1 January 2004 for the purposes of the transition to IFRSs as
adopted by the EU.
The accounting policies have been applied consistently by all Group
entities solely for the purpose of producing the consolidated Group
and Company financial statements.
The Company has taken advantage of the exemption provided under
Section 230 of the Companies Act 1985 not to publish its individual
income statement and related notes. The profit after taxation for
the Company for the year was £22,596,000 (2004: £22,836,000).
The Directors have considered recently published IFRSs, new
interpretations and amendments to existing standards that are
mandatory to the Group and Company’s accounting periods
commencing on or after 1 January 2006 and which have not
been subject to early adoption. The main developments that are
expected to be of relevance to forthcoming financial years are:
– IAS 39 (Amendment), the Fair Value Option (effective 1 January 2006).
The Directors believe that this amendment should not have a
significant impact as the Company and the Group should be able
to comply with the amended criteria for continuing the designation
of financial instruments at fair value through profit or loss
– IFRS 7 Financial Instruments: Disclosures, and a complementary
amendment to IAS 1 Presentation of Financial Statements – Capital
Disclosures (effective 1 January 2007). IFRS 7 introduces additional
minimum disclosure requirements regarding exposures to risk arising
from financial instruments. The amendment to IAS 1 introduces
minimum disclosures about the level of an entity’s capital and how
it manages that capital. The Directors’ current assessment is that
the main additional disclosures arising from the application of these
developments from 1 January 2007 will be more detailed sensitivity
analysis to market risk, and additional capital management disclosures.
2.3 Basis of consolidation
(a) Subsidiaries
Subsidiaries are those entities controlled by the Company. Control
exists when the Company has the power, directly or indirectly,
to govern the financial and operating policies of an entity so as to obtain
benefits from its activities. In assessing control, potential voting rights
Hiscox plc Report and Accounts 2005 57
Notes to the financial statements continued
that are currently exercisable or convertible are taken into account.
The consolidated financial statements include the assets, liabilities
and results of the Company and subsidiaries up to 31 December
each year. The financial statements of subsidiaries are included
in the consolidated financial statements only from the date that
control commences until the date that control ceases.
Hiscox Dedicated Corporate Member Limited and the subsidiaries
of Hiscox Select Holdings Limited underwrite as corporate members
of Lloyd’s on the syndicate managed by Hiscox Syndicates Limited
(the ‘managed syndicate’). In view of the several but not joint liability
of underwriting members at Lloyd’s for the transactions of syndicates
in which they participate, the Group’s attributable share of the
transactions, assets and liabilities of the syndicate has been included
in the financial statements.
The Group uses the purchase method of accounting to account for
the acquisition of subsidiaries. The cost of an acquisition is measured
as the fair value of the assets given, equity instruments issued and
liabilities incurred or assumed at the date of exchange, plus costs
directly attributable to the acquisition. Identifiable assets acquired and
liabilities and contingent liabilities assumed in a business combination
are measured initially at their fair values at the acquisition date,
irrespective of the extent of any minority interest. The excess of the
cost of acquisition over the fair value of the Group’s share of the
identifiable net assets acquired is recorded as goodwill. If the cost of
acquisition is less than the fair value of the net assets of the subsidiary
acquired, the difference is recognised directly in the income statement.
The Company recognises all investments in Group undertakings
at cost less provisions for impairment in value.
(b) Associates
Associates are those entities in which the Group or the Company
has significant influence but not control over the financial and
operating policies. The consolidated financial statements include
the Group or the Company’s share of the total recognised gains and
losses of associates on an equity accounted basis from the date that
significant influence commences until the date that significant influence
ceases. The Company and the Group’s share of its associates’
post-acquisition profits or losses after tax is recognised in the income
statement each period, and its share of the movement in the associates’
net assets is reflected in the investments’ carrying values in the
balance sheet. When the Company or Group’s share of losses equals
or exceeds the carrying amount of the associate, the carrying amount
is reduced to nil and recognition of further losses is discontinued
except to the extent that the Company or the Group has incurred
obligations in respect of the associate.
(c) Transactions eliminated on consolidation
Intragroup balances, transactions and any unrealised gains arising
from intragroup transactions are eliminated in preparing the
consolidated financial statements. Unrealised losses are also eliminated
unless the transaction provides evidence of an impairment of the
asset transferred.
Unrealised gains arising from transactions with associates and jointly
controlled entities are eliminated to the extent of the Group’s interest
in the entity. Unrealised gains arising from transactions in associates
are eliminated against the investment in the associate.
2.4 Foreign currency translation
(a) Functional and presentational currency
Items included in the financial statements of each of the Group’s
entities are measured using the currency of the primary economic
environment in which the entity operates (the ‘functional currency’).
The functional currency of all individual entities in the Group is
deemed to be Sterling with the exception of the entities operating
in France, Germany, the Netherlands and Belgium whose functional
currency is Euros, those entities operating from the USA and Bermuda
58 Hiscox plc Report and Accounts 2005
whose functional currency is US Dollars, and Hiscox Insurance
Company (Guernsey) Limited whose functional currency is also
US Dollars.
(b) Transactions and balances
Foreign currency transactions are translated into the functional
currency using the exchange rates prevailing at the dates of the
transactions. Foreign exchange gains and losses resulting from the
settlement of such transactions and from the retranslation at year
end exchange rates of monetary assets and liabilities denominated
in foreign currencies are recognised in the income statement,
except when deferred in equity as qualifying net investment hedges.
(c) Group companies
The results and financial position of all the Group entities that have
a functional currency different from the presentation currency are
translated into the presentation currency as follows:
(i) assets and liabilities for each balance sheet presented are
translated at the closing rate at the date of that balance sheet
(ii)
income and expenses for each income statement are translated
at average exchange rates (unless this average is not a reasonable
approximation of the cumulative effect of the rates prevailing
on the transaction dates, in which case income and expenses
are translated at the date of the transactions)
(iii) all resulting exchange differences are recognised as a separate
component of equity.
When a foreign operation is sold, such exchange differences are
recognised in the income statement as part of the gain or loss on sale.
Goodwill and fair value adjustments arising on the acquisition of a
foreign entity are treated as the foreign entity’s assets and liabilities
and are translated at the closing rate.
2.5 Property, plant and equipment
Property, plant and equipment are stated at historical cost less
depreciation and any recognised impairment loss. Historical cost
includes expenditure that is directly attributable to the acquisition
of the items.
Subsequent costs are included in the asset’s carrying amount or
recognised as a separate asset, as appropriate, only when it is probable
that future economic benefits associated with the item will flow to
the Group or the Company and the cost of the item can be measured
reliably. All other repairs and maintenance are charged to the income
statement during the financial period in which they are incurred.
Land and Artwork assets are not depreciated as they are deemed
to have an indefinite useful economic life. Depreciation on other assets
is calculated using the straight-line method to allocate their cost
or revalued amounts to their residual values over their estimated
useful lives, as follows:
– Buildings
– Vehicles
– Short leasehold fixtures and fittings
– Furniture, fittings and equipment
50 years
3 years
10-15 years
3-15 years
The assets’ residual values and useful lives are reviewed at each
balance sheet date and adjusted if appropriate.
An asset’s carrying amount is written down immediately to its
recoverable amount if the asset’s carrying amount is greater than
its estimated recoverable amount.
Gains and losses on disposals are determined by comparing proceeds
with carrying amount. These are included in the income statement.
2.6 Intangible assets
(a) Goodwill
Goodwill represents amounts arising on acquisition of subsidiaries,
associates and joint ventures. In respect of acquisitions that have
occurred since 1 January 2004, goodwill represents the excess
of the cost of an acquisition over the fair value of the Group’s share
of the net identifiable assets of the acquired subsidiary or associate
at the acquisition date.
In respect of acquisitions prior to this date, goodwill is included on
the basis of its deemed cost, which represents the amount recorded
under previous GAAP.
Goodwill on acquisition of subsidiaries is included in intangible assets.
Goodwill on acquisition of associates is included in investments
in associates. Goodwill is not amortised but is tested annually for
impairment and carried at cost less accumulated impairment losses.
The impairment review process examines whether or not the carrying
value of the goodwill attributable to individual cash generating units
exceeds its implied value. Any excess of goodwill over implied value
indicates impairment.
Gains and losses on the disposal of an entity include the carrying
amount of goodwill relating to the entity sold.
(b) Syndicate capacity
The cost of purchasing the Group’s participation in the Lloyd’s
insurance syndicates is not amortised but is tested annually for
impairment and is carried at cost less accumulated impairment losses.
Having considered the future prospects of the London insurance
market, the Board believe that the Group’s ownership of syndicate
capacity will provide economic benefits over an indefinite number
of future periods.
(c) Rights to customer contractual relationships
Costs directly attributable to securing rights to customer contract
relationships are recognised as an intangible asset where they can
be identified separately and measured reliably and it is probable that
they will be recovered by directly related future profits. These costs
are amortised over the useful economic life which is deemed to
be 20 years and are carried at cost less accumulated amortisation
and impairment losses.
(d) Computer software
Acquired computer software licences are capitalised on the basis
of the costs incurred to acquire and bring into use the specific
software. These costs are amortised over the expected useful life
of the software of three years on a straight line basis.
Internally developed computer software is only capitalised where
the cost can be measured reliably. The Group intends to and has
adequate resources to complete development and where the
computer software will yield future economic benefits in excess
of the costs incurred.
2.7 Investments
The Group and the Company have classified financial investments as
a) financial assets designated at fair value through profit or loss, and b)
loans and receivables. The accounting policies for investments in
subsidiaries and associated enterprises are set out at note 2.3 above.
Management determines the classification of its financial investments
at initial recognition and re-evaluates this at every reporting date.
The decision by the Group and the Company to designate all financial
investments at fair value through the income statement reflects the
fact that the investment portfolios are managed, and their performance
evaluated, on a fair value basis. Regular purchases and sales
of investments are accounted for at the date of trade.
Fair value for securities quoted in active markets is the bid price.
For instruments where no active market exists, fair value is determined
by referring to recent transactions and other valuation factors including
the discounted value of expected future cash flows. Fair value changes
are recognised immediately within the investment result line in the
income statement.
(a) Financial assets at fair value through income
A financial asset is classified into this category at inception if acquired
principally for the purpose of selling in the short-term, if it forms part
of a portfolio of financial assets in which there is evidence of short-term
profit taking, or if so designated by management.
(b) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed
or determinable payments that are not quoted on an active market.
Receivables arising from insurance contracts are also classified in this
category and are reviewed for impairment as part of the impairment
review of loans and receivables. Loans and receivables are carried
at cost less any provision for impairment in value.
2.8 Cash and cash equivalents
The Group and the Company have classified cash deposits and
short-term highly liquid investments as cash and cash equivalents.
These assets are readily convertible into known amounts of cash
and are subject to inconsequential changes in value. Cash equivalents
are financial investments with less than three months to maturity
at the date of acquisition.
2.9 Impairment of assets
Assets that have an indefinite useful life are not subject to amortisation
and are tested annually or whenever there is an indication of impairment.
Assets that are subject to amortisation are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable. An impairment loss is recognised
for the amount by which the asset’s carrying amount exceeds its
recoverable amount. The recoverable amount is the higher of an
asset’s fair value less costs to sell and value in use. For the purpose
of assessing impairment, assets are grouped at the lowest levels for
which there are separately identifiable cash flows (cash generating units).
2.10 Derivative financial instruments
Derivatives are initially recognised at fair value on the date on which a
derivative contract is entered into and are subsequently valued at their
fair value at each balance sheet date. The method of recognising the
resulting gain or loss depends on whether the derivative is designated
as a hedging instrument, and if so, the nature of the item being hedged.
For derivatives not designated as a hedging instrument, fair value
changes are recognised immediately in the income statement.
The Group and the Company had no financial instruments designated
for hedge accounting during the current and prior financial year.
2.11 Own shares
Where any Group company purchases the parent Company’s equity
share capital (own shares), the consideration paid, including any directly
attributable incremental costs (net of income taxes), is deducted from
equity attributable to the Company’s equity holders. Where such
shares are subsequently sold, reissued or otherwise disposed of,
any consideration received is included in equity attributable to the
Company’s equity holders, net of any directly attributable incremental
transaction costs and the related income tax effects.
2.12 Net revenue
Net revenue comprises insurance premiums earned, net of reinsurance,
together with profit commission, investment returns, agency fees and
other income inclusive of foreign exchange gains. The accounting
policies for insurance premiums and investment returns are outlined
below. Profit commission and other sources of income are recognised
on an accruals basis.
Hiscox plc Report and Accounts 2005 59
Notes to the financial statements continued
2.13 Insurance contracts
(a) Classification
The Group issues short-term casualty and property insurance contracts
that transfer insurance risk. Such contracts may also transfer a limited
level of financial risk.
The Group assesses its reinsurance assets on a regular basis and
if there is objective evidence that the reinsurance asset is impaired
the Group reduces the carrying amount of the reinsurance asset
to its recoverable amount and recognises the impairment loss
in the income statement.
(b) Recognition and measurement
Gross premiums written comprise premiums on business incepting in
the financial year together with adjustments to estimates of premiums
written in prior accounting periods. Estimates are included for pipeline
premiums and an allowance is also made for cancellations. Premiums
are stated before the deduction of brokerage and commission but net
of taxes and duties levied. Premiums are recognised as revenue (earned
premiums) proportionally over the period of coverage. The portion of
premium received on in-force contracts that relates to unexpired risks
at the balance sheet date is reported as the unearned premium liability.
Premiums are shown before deduction of commission.
Claims and associated expenses are charged to profit or loss as
incurred based on the estimated liability for compensation owed
to contract holders or third parties damaged by the contract holders.
They include direct and indirect claims settlement costs and arise
from events that have occurred up to the balance sheet date even
if they have not yet been reported to the Group. The Group does
not discount its liabilities for unpaid claims. Liabilities for unpaid claims
are estimated using the input of assessments for individual cases
reported to the Group and statistical analysis for the claims incurred
but not reported, and an estimate of the expected ultimate cost
of more complex claims that may be affected by external factors
e.g. court decisions.
(c) Deferred acquisition costs (“DAC”)
Commissions and other direct and indirect costs that vary with and
are related to securing new contracts and renewing existing contracts
are capitalised as an intangible asset. All other costs are recognised
as expenses when incurred. The DAC is amortised over the terms
of the policies as premium is earned.
(d) Liability adequacy test
At each balance sheet date, liability adequacy tests are performed
by each segment of the Group to ensure the adequacy of the contract
liabilities net of related DAC. In performing these tests, current best
estimates of future contractual cash flows and claims handling and
administration expenses, as well as investment income from assets
backing such liabilities, are used. Any deficiency is immediately
charged to profit or loss initially by writing off DAC and by subsequently
establishing a provision for losses arising from liability adequacy
tests (“the unexpired risk provision”).
Any DAC written off as a result of this test cannot subsequently
be reinstated.
(e) Outwards reinsurance contracts held
Contracts entered into by the Group, with reinsurers, under which
the Group is compensated for losses on one or more insurance or
reinsurance contracts and that meet the classification requirements
for insurance contracts, are classified as insurance contracts held.
Contracts that do not meet these classification requirements
are classified as financial assets.
The benefits to which the Group is entitled under outwards reinsurance
contracts are recognised as reinsurance assets. These assets consist
of short-term balances due from reinsurers (classified within loans
and receivables) as well as longer-term receivables (classified as
reinsurance assets) that are dependent on the expected claims
and benefits arising under the related reinsured insurance contracts.
Reinsurance liabilities primarily comprise premiums payable for
“outwards” reinsurance contracts. These amounts are recognised
in profit or loss proportionally over the period of the contract.
Receivables and payables are recognised when due.
60 Hiscox plc Report and Accounts 2005
(f) Receivables and payables related to insurance contracts
Receivables and payables are recognised when due. These include
amounts due to and from agents, brokers and insurance
contract holders.
If there is objective evidence that the insurance receivable is impaired,
the Group reduces the carrying amount of the insurance receivable
accordingly and recognises the impairment loss in profit or loss.
(g) Salvage and subrogation reimbursements
Some insurance contracts permit the Group to sell property acquired
in settling a claim (i.e. salvage). The Group may also have the right to
pursue third parties for payment of some or all costs (i.e. subrogation).
Estimates of salvage recoveries are included as an allowance in the
measurement of the insurance liability for claims and salvage property
is recognised in other assets when the liability is settled. The allowance
is the amount that can reasonably be recovered from the disposal
of the property.
Subrogation reimbursements are also considered as an allowance in
the measurement of the insurance liability for claims and are recognised
in other assets when the liability is settled. The allowance is the
assessment of the amount that can be recovered from the action
against the liable third party.
2.14 Deferred tax
Deferred tax is provided in full, using the liability method, on temporary
differences arising between the tax bases of assets and liabilities and
their carrying amounts in the financial statements. However, if the
deferred income tax arises from initial recognition of an asset or liability
in a transaction other than a business combination that at the time
of the transaction affects neither accounting nor taxable profit or loss,
it is not recognised. Deferred tax is determined using tax rates and
laws that have been enacted or substantively enacted by the balance
sheet date and are expected to apply when the related deferred
income tax asset is realised or the deferred tax liability is settled.
Deferred tax assets are recognised to the extent that it is probable
that the future taxable profit will be available against which the
temporary differences can be utilised.
Deferred tax is provided on temporary differences arising on
investments in subsidiaries and associates, except where the Group
controls the timing of the reversal of the temporary difference and
it is probable that the temporary difference will not reverse in the
foreseeable future.
2.15 Employee benefits
(a) Pension obligations
The Group and the Company operates both defined contribution
and defined benefit pension schemes.
A defined contribution plan is a pension plan under which the
Group or Company pays fixed contributions into a separate entity
and has no further obligation beyond the agreed contribution rate.
A defined benefit plan is a pension plan that defines an amount
of pension benefit that an employee will receive on retirement,
usually dependent on one or more factors such as age, years
of service and compensation.
For defined contribution plans, the Group and the Company pay
contributions to publicly or privately administered pension insurance
plans on a contractual basis. The Group and the Company have no
further payment obligations once the contributions have been paid.
The contributions are recognised as an employee benefit expense
when they are due. Prepaid contributions are recognised as an
asset to the extent that a cash refund or a reduction in future
payments is available.
The liability recognised in the balance sheet in respect of defined
benefit pension plans is the present value of the defined benefit
obligation at the balance sheet date less the fair value of plan assets,
together with adjustments for unrecognised actuarial gains or losses
and past service costs. Plan assets exclude any insurance contracts
issued by the Group.
Actuarial gains and losses arising from experience adjustments and
changes in actuarial assumptions are charged or credited to income
over the employees’ expected average remaining working lives.
Actuarial gains and losses are only recognised when the net cumulative
unrecognised actuarial gains and losses for each individual plan at
the end of the previous accounting period exceeds 10% of the higher
of the defined benefit obligation and the fair value of the plan assets
at that date.
Past service costs are recognised immediately in income, unless
the changes to the pension plan are conditional on the employees
remaining in service for a specified period of time (the vesting period).
In this case, the past service costs are amortised on a straight-line
basis over the vesting period.
Rights to reimbursement from other parties participating in the Lloyd’s
Syndicate of some of the expenditure required to settle the defined
benefit obligation are recognised within receivables in accordance
with the policies outlined at 2.7 (b) above.
(b) Other long-term employee benefits
The Group provides sabbatical leave to employees on completion
of a minimum service period of ten years. The present value of the
expected costs of these benefits is accrued over the period
of employment.
(c) Share based compensation
The Group and the Company operate a number of equity settled
share based employee compensation plans. These include both the
approved and unapproved share option schemes outlined at note 31
together with the Group’s save as you earn (‘SAYE’) schemes.
The fair value of the employee services received in exchange for
the grant of the options is recognised as an expense with the
corresponding credit being recorded in equity. The total amount to be
expensed over the vesting period is determined by reference to the fair
value of the options granted, excluding the impact of any non market
vesting conditions (e.g. profitability or net asset growth targets).
Non market vesting conditions are included in assumptions about the
number of options that are expected to become exercisable. At each
balance sheet date, the Group revises its estimates of the number
of options that are expected to vest. It recognises the impact of
the revision of original estimates, if any, in the income statement,
and a corresponding adjustment to equity over the remaining
vesting period.
The proceeds received net of any directly attributable transaction
costs are credited to share capital and share premium when the
options are exercised.
In accordance with the transitional arrangement of IFRS 2, only share
options granted after 7 November 2002 but not yet vested at the
date of adoption of IFRS, are included in the calculations.
(d) Termination benefits
Termination benefits are payable when employment is terminated
before the normal retirement date, or whenever an employee accepts
voluntary redundancy in exchange for these benefits. The Group
recognises termination benefits when it is demonstrably committed
to either: terminating the employment of current employees according
to a detailed formal plan without possibility of withdrawal; or providing
termination benefits as a result of an offer made to encourage
voluntary redundancy.
(e) Profit sharing and bonus plans
The Group recognises a liability and an expense for bonuses and profit
sharing, based on a formula that takes into consideration the profit
attributable to the Company’s shareholders after certain adjustments.
The Group and the Company recognise a provision where contractually
obliged or where there is a past practice that has created
a constructive obligation.
(f) Accumulating compensation benefits
The Group recognises a liability and an expense for accumulating
compensation benefits (e.g. holiday entitlement), based on the additional
amount that the Group expects to pay as a result of the unused
entitlement accumulated at the balance sheet date.
2.16 Borrowings
Borrowings are classified as financial liabilities and are designated
on inception as being held at fair value through profit or loss. Financial
liabilities are consequently measured at fair value at inception and
at each balance sheet date thereafter, with all changes in value from
one accounting period to the next reflected in the income statement.
2.17 Provisions
The Group and the Company are subject to various insurance related
assessments or guarantee fund levies. Related provisions are provided
for where there is a present obligation (legal or constructive) as a result
of a past event.
2.18 Leases
Leases in which significantly all of the risks and rewards of ownership
are transferred by the Group and the Company are classified as
finance leases. At the commencement of the lease term, finance
leases are recognised as assets and liabilities at the lower of the
fair value of the asset and the present value of the minimum lease
payments. The minimum lease payments are apportioned between
finance charges and repayments of the outstanding liability, finance
charges being charged to each period of the lease term so as
to produce a constant rate of interest on the outstanding balance
of the liability.
All other leases are classified as operating leases. Payments made
under operating leases (net of any incentives received from the lessor)
are charged to the income statement on a straight-line basis over
the period of the lease.
2.19 Dividend distribution
Dividend distribution to the Company’s shareholders is recognised
as a liability in the Group and Company’s financial statements
in the period in which the dividends are approved.
2.20 Use of critical estimates and assumptions
The inherent uncertainty of insurance risk requires the Group to make
estimates and assumptions that affect the reported amounts of assets
and liabilities at the balance sheet date. The most significant area of
uncertainty in the financial statements relates to the insurance claim
liabilities of the Group and the related loss adjustment expenses.
Estimates and judgements are continually evaluated based on historical
experience and other factors, including expectations of future events
that are believed to be reasonable in the circumstances.
Hiscox plc Report and Accounts 2005 61
Notes to the financial statements continued
There are several sources of uncertainty that need to be considered in
the estimation of the liabilities that the Group will ultimately pay for valid
claims. These include but are not restricted to: inflation; changes in
legislation; changes in the Group’s claims handling procedures; and
discordant judicial opinions which extend the Group’s coverage of risk
beyond that envisaged at the time of original policy issuance.
The Group seeks to gather corroborative evidence from all relevant
sources before making judgements as to the eventual outcome of
claims, particularly those under litigation, which have occurred and
been notified to the Group but remain unsettled at the balance
sheet date.
The Directors consider the accounting policies for determining
insurance liabilities, amounts denominated in foreign currencies,
the valuation of investments and recognition of premiums, as being
most critical to an understanding of the Group and Company’s
result and position.
3 Explanation of transition to IFRSs as adopted by the EU
As stated in note 2.1, these are the Group and Company’s first
financial statements prepared in accordance with IFRSs as adopted
by the EU. The accounting policies set out in note 2 have been applied
in preparing the financial statements for the year ended 31 December
2005, the comparative information presented in these financial
statements for the year ended 31 December 2004 and in the
preparation of an opening IFRSs balance sheet at 1 January 2004
(the date of transition).
In preparing opening IFRSs balance sheets, the Group and Company
have adjusted amounts reported previously in financial statements
prepared in accordance with its previous basis of accounting (UK
GAAP). An explanation of how the transition from UK GAAP to IFRSs
has affected the Group and Company’s position, financial performance
and cash flows is set out in the following tables and the notes
that accompany the tables.
Note 25 to consolidated financial statements provides a greater
analysis of the main methods used by the Group when formulating
estimates of the insurance claims liabilities at each balance sheet date.
The principal changes which have a material impact on either
net assets or profit for the year are explained further at notes 3.a
to 3.g below:
Notes
UK GAAP
£000
1 January 2004
Effect of
transition
to IFRSs
£000
31 December 2004
Effect of
transition
to IFRSs
£000
IFRSs
£000
IFRSs
£000
UK GAAP
£000
3a, 3g
7,742
123,570
519
3b 1,159,275
2,739
252,187
52,945
3b
3g
8
2,387
–
7,750
125,957
519
10,663
138,390
1,109
(92,125) 1,067,150 1,399,200
–
2,739
238,256
253,691
61,332
102,712
–
1,504
49,767
28
1,569
–
10,691
139,959
1,109
(90,987) 1,308,213
–
238,871
119,563
–
615
58,231
1,598,977
(38,459) 1,560,518 1,848,950
(30,544) 1,818,406
14,565
232,341
–
37,967
(686)
45,650
–
–
–
–
686
(15,838)
14,565
232,341
–
37,967
–
29,812
14,685
234,267
–
37,967
(473)
85,153
–
–
(468)
–
473
(2,778)
14,685
234,267
(468)
37,967
–
82,375
3h
329,837
(15,152)
314,685
371,599
(2,773)
368,826
3f
3c
–
15,503
3d, 3g 1,097,637
477
–
155,523
3e, 3f
–
33,334
33,334
(13,858)
25,261
1,645
(36,975) 1,060,662 1,290,936
57
7,855
153,242
477
–
149,715
–
–
(5,808)
34,718
34,718
(10,744)
14,517
(44,033) 1,246,903
57
7,855
145,530
–
–
(7,712)
1,269,140
(23,307) 1,245,833 1,477,351
(27,771) 1,449,580
1,598,977
(38,459) 1,560,518 1,848,950
(30,544) 1,818,406
Consolidated Group balance sheet
Assets
Property, plant and equipment
Intangible assets including intangible insurance assets
Investments in associates
Financial assets including loans and receivables
Current tax
Reinsurance contracts receivables
Cash and cash equivalents
Total assets
Equity
Share capital
Share premium
Currency translation reserve
Other reserves
Reserve for own shares
Retained earnings
Total equity
Liabilities
Employee retirement benefit obligations
Deferred tax
Insurance contracts
Financial liabilities
Current tax
Trade and other payables
Total liabilities
Total equity and liabilities
62 Hiscox plc Report and Accounts 2005
3 Explanation of transition to IFRSs as adopted by the EU continued
Consolidated Group income statement
For the year ended 31 December 2004
Income
Gross premiums written
Outward reinsurance premiums
Net premiums written
Net change in provision for unearned premiums
Net premiums earned
Investment result
Other income
Net revenue
Expenses
Claims and claim adjustment expenses, net of reinsurance
Expenses for the acquisition of insurance contracts
Administration expenses
Other operating expenses
Total expenses
Results of operating activities
Finance costs
Share of profit of associates
Profit before tax
Tax expense
Profit for the year (all attributable to equity shareholders of the Company)
Earnings per share on profit attributable to equity shareholders
Basic (as originally published)
Diluted (as originally published)
Basic (as restated for the effect of the Rights Issue)
Diluted (as restated for the effect of the Rights Issue)
Notes
UK GAAP
£000
Effect of
transition
to IFRSs
£000
IFRSs
£000
3g
3g
3g
3g
3b
3g
3g
3g
3g
3a, 3d, 3f, 3g
778,893
(97,327)
37,716
(15,197)
816,609
(112,524)
681,566
(39,137)
22,519
49,904
704,085
10,767
642,429
72,423
714,852
31,999
14,527
3,807
585
35,806
15,112
688,955
76,815
765,770
(355,852)
(165,106)
(46,557)
(42,819)
(26,211)
(12,854)
3,359
(28,621)
(382,063)
(177,960)
(43,198)
(71,440)
(610,334)
(64,327)
(674,661)
3b
3c
78,621
(1,977)
390
12,488
–
–
91,109
(1,977)
390
77,034
(22,460)
12,488
(3,114)
89,522
(25,574)
54,574
9,374
63,948
18.7p
18.5p
–
–
3.2p
3.2p
–
–
21.9p
21.7p
21.3p
21.0p
Hiscox plc Report and Accounts 2005 63
Notes to the financial statements continued
3 Explanation of transition to IFRSs as adopted by the EU continued
Parent Company balance sheet
1 January 2004
Effect of
transition
to IFRSs
£000
Notes
UK GAAP
£000
IFRSs
£000
UK GAAP
£000
31 December 2004
Effect of
transition
to IFRSs
£000
28
–
–
35,065
2,961
IFRSs
£000
3,571
115,457
200
314,216
5,183
Assets
Property, plant and equipment
Investments in subsidiary undertakings
Investments in associate
Financial assets including loans and receivables
Cash and cash equivalents
584
115,457
–
247,133
129
8
–
–
9,042
17,564
592
115,457
–
256,175
17,693
3,543
115,457
200
279,151
2,222
3b, 3e
3e
Total assets
Equity
Share capital
Share premium
Other reserves
Retained earnings
Total equity
Liabilities
Employee retirement benefit obligations
Deferred tax
Current tax
Trade and other payables
Total liabilities
Total equity and liabilities
3.a Intangible assets
Goodwill
Goodwill acquired in a business combination is no longer amortised
but is tested for impairment on at least an annual basis. Up to
31 December 1997, under UK GAAP goodwill arising on the
acquisition of subsidiaries was written-off directly to reserves in
the year of acquisition. From 1 January 1998, in accordance with
FRS 10 Goodwill and Intangible Assets, goodwill was capitalised and
amortised on a straight-line basis over its useful economic life which
was deemed to be 20 years. Any goodwill previously amortised or
written-off has not been reinstated on adoption of IFRSs and thus the
value of goodwill has been taken as the carrying amount on adoption.
Syndicate capacity
In accordance with IAS 38 Intangible Assets, the useful lives of all
of the Group’s recognised intangible assets have been reviewed on
adoption of IFRSs. Following this review it has been concluded that
syndicate capacity has an indefinite useful life and so will no longer
be amortised but will be subject to at least annual impairment test.
Syndicate capacity previously amortised has been reinstated
on adoption of IFRSs.
3.b Financial assets
Valuation
In the Group and Company’s UK GAAP financial statements, financial
assets are stated at their current value. For listed investments,
comprising those quoted on the London and other international stock
exchanges, current value was deemed to be the mid-market prices
on the balance sheet date, or on the last stock exchange trading
day before the balance sheet date. All realised or unrealised gains
and losses were taken to the income statement.
For the purposes of measuring financial assets under IAS 39 Financial
Instruments: Recognition and Measurement all financial assets are
classified into the following four categories:
64 Hiscox plc Report and Accounts 2005
363,303
26,614
389,917
400,573
38,054
438,627
14,565
232,341
92,377
5,577
–
–
(163)
1,864
14,565
232,341
92,214
7,441
14,685
234,267
93,712
4,864
–
–
(1,498)
13,767
14,685
234,267
92,214
18,631
344,860
1,701
346,561
347,528
12,269
359,797
–
–
–
18,443
33,334
–
–
(8,421)
33,334
–
–
10,022
–
670
614
51,761
34,718
1,348
–
(10,281)
34,718
2,018
614
41,480
18,443
24,913
43,356
53,045
25,785
78,830
363,303
26,614
389,917
400,573
38,054
438,627
3b
3f
3e
(a)
financial assets at fair value through income
(b) held-to-maturity investments
(c)
loans and receivables
(d) available-for-sale financial assets.
A full review of the Group and Company’s investments has been
performed as part of the adoption of IFRSs and all equities and debt
securities have been classified as financial assets at fair value through
the income statement.
The accounting for this category of financial asset is similar to the
Group’s previous accounting policy under UK GAAP. However, under
IFRSs listed investments are valued at bid price on the balance sheet
date, or on the last stock exchange trading day before the balance
sheet date. The accounting for this category of financial asset is
different to the parent Company’s previous accounting policy under UK
GAAP. In addition to being valued on a mid rather than bid price basis,
the parent Company’s previous accounting policy was also to
recognise unrealised fair value adjustments through a capital reserve
on the balance sheet rather than through the income statement.
This previous accounting treatment was in accordance with
Section 226 of, and Schedule 4 to, the Companies Act 1985.
Derivative financial instruments
The Group and the Company have entered into a small number
of foreign exchange contracts in order to manage its net investment
in a foreign operation, and its exposure to business denominated
in a currency other than its presentational currency. In accordance
with IAS 39 these contracts have been recognised in the balance
sheet at their fair value. Fair value gains or losses on these instruments
are recognised in the income statement.
Cash and cash equivalents
In the Group and Company’s UK GAAP financial statements deposits
with credit institutions were included within investments. These deposits
were predominantly composed of short dated certificates of deposit.
Under IFRSs cash equivalents are included with cash at bank and
in hand as cash and cash equivalents. IAS 7 Cash Flow Statements
defines cash equivalents as short-term, highly liquid investments
that are readily convertible to known amounts of cash and which
are subject to an insignificant risk of changes in value. An investment
normally qualifies as a cash equivalent only when it has a short
maturity of three months or less from the date of acquisition. All
certificates of deposit which meet this criteria have been disclosed
as cash equivalents in the IFRSs balance sheet. This adjustment
has no impact on shareholders’ funds or profit after tax.
3.c Taxation
Current tax was provided in the UK GAAP financial statements for
amounts expected to be paid (or recovered) using the tax rates and
laws that had been enacted or substantially enacted at the balance
sheet date.
Deferred tax was recognised in respect of all timing differences, with
certain exceptions, that had originated but not reversed at the balance
sheet date where transactions or events that result in an obligation
to pay more tax or a right to pay less tax in the future had occurred
at the balance sheet date. Timing differences are differences between
the Group and Company’s taxable profits and its results as stated
in the UK GAAP financial statements that arise from the inclusion
of gains and losses in tax assessments in periods different from those
in which they are recognised in the financial statements. Deferred tax
was measured at the average tax rates that are expected to apply in
periods in which the timing differences are expected to reverse. The
Group did not discount its UK GAAP deferred tax assets or liabilities.
IAS 12 Income Taxes takes a balance sheet approach with deferred
tax being calculated, using the liability method, on temporary
differences arising between the tax bases of assets and liabilities and
their carrying amounts in the consolidated financial statements.
Deferred income tax is determined using tax rates and laws that have
been enacted or substantively enacted by the balance sheet date and
are expected to apply in periods in which the timing differences are
expected to reverse.
3.d Insurance contracts
Equalisation provision
In the UK GAAP financial statements an equalisation provision was
established for Hiscox Insurance Company Limited in accordance with
the requirements of PRU 7.5 of the Integrated Prudential Sourcebook
(Insurance and other amendments) Instrument 2004. This provision,
which was in addition to the provisions required to meet the
anticipated ultimate cost of settlement of outstanding claims at the
balance sheet date, was required by Schedule 9A to the Companies
Act 1985 to be included within technical provisions at the balance
sheet date notwithstanding that it does not represent liabilities at the
balance sheet date.
Under IFRS 4, provisions for possible future claims arising from
insurance contracts that are not in existence at the reporting date
(such as catastrophe and equalisation provisions) are not recognised.
3.e Dividend recognition
Under UK GAAP dividends are recognised in the income statement
in the period to which they relate irrespective of when they are
declared and approved. IAS 10 Events after the Balance Sheet Date
does not allow the recognition of dividends to holders of equity
instruments approved after the balance sheet date because they
do not meet the criteria of a present obligation in IAS 37 Provisions,
Contingent Liabilities and Contingent Assets. Accordingly only
dividends approved (i.e. appropriately authorised and no longer at the
discretion of the Group or Company) are recognised as receivable or
payable at the balance sheet date. In addition, under IFRSs dividend
distributions by the Company are debited directly to reserves instead
of being reflected in the Income Statement for the year.
3.f Employee benefits
Retirement benefit obligations
Under IAS 19 Employee Benefits the present value of the defined
benefit obligation is matched against the fair value of the plan assets
out of which the obligations are to be settled directly and other
unrecognised actuarial gains and losses. The resulting pension scheme
asset or liability is recognised in the balance sheet. Previously under
UK GAAP the assets and liabilities of defined benefit pension schemes
were off-balance sheet items which were only disclosed by way of
a footnote. Under SSAP 24 Accounting for Pension Costs, pension
contributions were charged to the income statement so as to spread
the cost of pensions over employees’ working lives with the Group.
Differences between these amounts charged and payments made
to the Group’s pension schemes were treated as an asset or liability
in the UK GAAP balance sheet.
The standard also allows the recognition of a right to reimbursement
from other parties of some of the expenditure required to settle the
defined benefit obligation. Accordingly, the Group has recognised
income and a corresponding asset representing the share of the
defined benefit obligation paid or payable by third party capital
providers on Syndicate 33.
Share-based payments
IFRS 2 Share-based Payment requires the recognition of an expense
representing the fair value of employee services rendered in exchange
for the grant of options. The amount to be expensed has been
determined by reference to the fair value of the options granted.
The impact of any non-market vesting conditions is not included
in the calculation of the fair value but is included in the assumptions
about the number of options that are expected to become exercisable.
The fair value is expensed over the vesting period which is three
years for all of the Group’s share option schemes.
In accordance with the transitional arrangements contained in the
standard, only share options granted after 7 November 2002 but
not yet vested at 1 January 2005 were included in the calculations.
Sabbatical leave
After ten years of service, all permanent employees of the Group are
eligible to take an eight week paid sabbatical leave. The present value
of the cost of this compensated absence is expensed in the income
statement over the period of service in accordance with IAS 19.
3.g Rates of exchange
Functional currency
The functional currency is the currency of the primary economic
environment in which an entity operates. The functional currency
of all entities in the Group has been deemed to be Sterling with the
exception of the entities operating in France, Germany, the Netherlands
and Belgium whose functional currency are Euros, and Hiscox
Insurance Company (Guernsey) Limited, Hiscox Inc. and Hiscox
Insurance Company (Bermuda) Limited, whose functional currency
are US Dollars.
IAS 21 The Effects of Changes in Foreign Exchange Rates requires
that foreign currency transactions are recorded, on initial recognition
in the functional currency, by applying to the foreign currency amount
the spot exchange rate between the functional currency and the
foreign currency at the date of the transaction. Exchange differences
Hiscox plc Report and Accounts 2005 65
Notes to the financial statements continued
arising on the settlement of monetary items or on translating monetary
items at rates different from those at which they were translated
on initial recognition in the functional currency during the period
or in previous financial statements are recognised in the income
statement when they arise.
Previously under UK GAAP, investments in foreign enterprises were
translated by the Group using the net investment method which
applies the closing rate to all assets and liabilities and income and
expenses. All resulting exchange differences were similarly taken
to reserves.
Under IFRSs unearned premium and deferred acquisition costs are
non monetary assets and liabilities and accordingly are not retranslated
from the historic rates. Previously, the retranslation of these items
at the closing rate was permitted under UK GAAP.
Presentational currency
The presentational currency of the Group and the Company, which
is the currency used in the presentation of the consolidated Group
and Company financial statements, is Sterling. The results and
financial position of those entities whose functional currency is not
Sterling have been translated to the presentational currency as follows:
– all assets and liabilities are translated at the closing rate at the
balance sheet date
– income and expenses are translated at the exchange rates
prevailing on the dates of transactions
– all resulting exchange differences are recognised as a separate
component of equity.
3.h Summary reconciliation of opening equity at date of transition
Total equity at 1 January 2004 reported previously under UK GAAP
Employee benefits
Deferred tax
Rates of exchange
Intangible assets
Dividend recognition
Insurance contracts
Other adjustments
Total equity at 1 January 2004 in accordance with IFRSs
Daily transactional rates
As part of the system improvements made on adoption of IFRSs
the Group has moved to daily transactional rates of exchange as
it believes that this provides more accurate financial information.
The only exception to this is for business whose functional currency
is not denominated in Sterling for which average monthly rates continue
to be adopted for the translation into the presentational currency.
Disclosure
All exchange differences arising on the retranslation of monetary assets
and liabilities to functional currency at the balance sheet date have been
taken to the income statement and included in other operating income
or expenses. Under UK GAAP these differences were included on
a line by line basis throughout the income statement.
Notes
Group
£000
Company
£000
3f
3c
3g
3a
3e
3d
329,837
(40,987)
13,858
(17,679)
4,830
8,414
16,476
(64)
344,860
854
–
–
–
921
–
(74)
314,685
346,561
3.i Explanation of material adjustments to the
cash flow statement
The transition from UK GAAP to IFRSs necessitates significant
presentational and other adjustments being made to the Group’s
previously reported cash flow statement for the year ended
31 December 2004. IAS 7 Cash Flow Statements prescribes a format
for presenting the Group’s cash flows that is more condensed than
the comparable UK GAAP standard FRS 1 Cash Flow Statements.
Previously the Group’s cash flows were classified under eight
standard headings.
IAS 7 now requires that the Group’s cash flow statement be
condensed into three standard headings: operating, investing and
financing activities. The difference in format means that the Group’s
UK GAAP and IFRSs cash flow statements are not comparable on
a line by line basis. Cash flows from capital expenditure, acquisitions
and disposals, shown separately under UK GAAP, are now included
as part of investing activities under IFRSs. The payment of dividends
is included as a financing activity under IFRSs.
Previously the Group’s cash flow statement excluded cash flows
relating to underwriting on Lloyd’s syndicates. On transition to IFRSs
these have now been included.
4 Management of insurance and financial risk
The Group enters into contracts that directly accept and transfer
insurance risk, which in turn creates exposures to financial and other
classes of risk. Consequently, Hiscox is fundamentally concerned with
the identification and management of all significant risks. The Board
has set Group-wide risk management policies which cover specific
areas such as risk tolerance boundaries and procedures for
communicating risk matters in a timely manner to management.
The main sources of risk relevant to the financial statements are set
out below together with an outline of the ways in which the Group
and Company manages them. Additional information is also provided
in the Corporate governance and Risk management sections of this
Annual Report.
Interest received, together with the receipt of dividends on equity
investments (including those payable by subsidiary undertakings)
are presented within cash flows from operational activities.
4.1 Insurance risk and exposure controls
Insurance risk is transferred to the Group by contract holders through
the underwriting process.
Under UK GAAP the Group and Company’s cash comprises cash
at bank. Under IFRSs, cash and cash equivalents include both cash
at bank and other short-term highly liquid investments, such as
certificates of deposit, with original maturities of three months or less.
The Group’s overall appetite for accepting varying classes of insurance
risk is set by the Group’s Board. Management of insurance risk
on a day-to-day basis is the responsibility of the Chief Underwriting
Officer, who receives assistance from the management information
and risk modelling departments.
66 Hiscox plc Report and Accounts 2005
All underwriting staff and binding agencies are set strict parameters
in relation to the levels and types of business they can underwrite,
based on individual levels of experience and competence.
The delegation of underwriting authority to specific individuals,
both internally and externally, is subject to regular review.
Regular meetings are held between the leaders of individual underwriting
teams and the Chief Underwriting Officer, the risk modelling department
and the actuarial department in order to monitor claim development
patterns and discuss individual issues as they arise.
One tool for managing insurance risk is reinsurance. Considerable
reinsurance protection such as excess of loss cover is purchased at
an entity level and is also considered at an overall Group level to mitigate
the effect of catastrophes. The scope and type of reinsurance protection
purchased may change depending on the competitiveness of cover
available in the market. Very large or complex risks are often shared
with a number of other insurers under co-insurance arrangements.
The Group’s insurance contracts include provisions to contain losses
such as the ability to impose deductibles and demand reinstatement
premiums in certain cases. In addition, in order to manage the Group’s
exposure to repeated catastrophic events, relevant policies frequently
contain payment limits to cap the maximum amount payable from
these insured events over the contract period.
The Group’s internal audit function, which is wholly independent of the
underwriting function, performs reviews throughout the Group to verify
that underwriting teams are in compliance with the Board’s policies
and required procedures.
The Board requires all underwriters to operate within an overall Group
appetite for individual events. This defines the maximum exposure
that the Group is prepared to retain on its own account for any
one potential catastrophe event or disaster.
The Group’s maximum net claims exposure during 2006 for a single
potential natural event with an expected occurrence of once in
250 years is estimated at £140 million.
The Group also seeks to limit the net amount of risk retained on
the account for other large risks and non natural perils such as major
accidents or acts of terrorism to no more than £105 million per event.
The Group’s concentration of insurance risk, in relation to the broad
categories of insurance liabilities reserved on the balance sheet,
is summarised overleaf.
The Group’s exposure to insurance risk arises from the possibility that
an insured event occurs, and a claim is subsequently submitted by
the insured for payment. The Group considers insurance risk at an
individual contract level, and also from a portfolio perspective where
the risks assumed in similar classes of policies are aggregated and
the exposure evaluated in light of historical portfolio experience
and prospective factors.
For a portfolio of insurance contracts where the theory of probability
is applied to pricing and provisioning, the principal accounting risk that
the Group faces is that the actual claim payments required exceed the
projected amount of the insurance liabilities. This could occur because
the frequency or severity of claims is greater than estimated. Insurance
events are unpredictable in terms of occurrence, timing and magnitude.
This means that the actual number and amount of claims will vary
from the estimates established using statistical techniques. Other
unpredictable factors that contribute towards the Group’s insurance risk
accounting exposure include the emergence of latent risks and legal
developments such as broadening judicial interpretations of coverage
and the measurement of damages, none of which can be quantified
with any absolute certainty at the balance sheet date.
Historical experience suggests that the larger the portfolio of similar
insurance contracts, the smaller the relative variability about the
expected outcome will be. Factors that may increase insurance
risk include lack of diversification in terms of type and amount of risk,
geographical location and type of policyholder covered. Consequently,
the Group seeks to diversify risk acceptances where possible.
However, significant geographical concentrations of risk can exist within
individual segments of the portfolio. The Group’s reserves are calculated
by an experienced in-house team of actuaries. The amounts reserved
are subject to frequent peer reviews and, for the managed Syndicate,
an annual actuarial audit is also performed by external actuaries.
To assist with the process of pricing and managing insurance risk
the Group routinely performs a wide range of activities including
the following:
– regularly updating the Group’s risk models
– documenting, monitoring and reporting on the Group’s strategy
to manage risk
– developing systems that facilitate the identification of emerging
issues promptly
– utilising sophisticated computer modelling tools to simulate
catastrophes and measure the resultant potential losses before
and after reinsurance
– monitoring legal developments and amending the wording
of policies when necessary
– regularly aggregating risk exposures across individual underwriting
portfolios and known accumulations of risk
– examining the aggregated exposures in advance of underwriting
further large risks
– developing processes that continually factor market intelligence
into the pricing process.
Hiscox plc Report and Accounts 2005 67
Notes to the financial statements continued
4.1 Insurance risk and exposure controls continued
Gross and net insurance liabilities on balance sheet
31 December 2005
Type of risk
Property –
Reinsurance Marine and
inwards major assets
£000
£000
Property –
Casualty –
Other Professional
assets
£000
Casualty –
indemnity Other risks
£000
£000
Other*
£000
Total
£000
Territory of policyholder
UK and Ireland
Europe
United States
Rest of World
Total
Gross
Net
Gross
Net
Gross
Net
Gross
Net
Gross
Net
Gross and net insurance liabilities on balance sheet
31 December 2004
Territory of policyholder
UK and Ireland
Europe
United States
Rest of World
Total
Gross
Net
Gross
Net
Gross
Net
Gross
Net
Gross
Net
61,792
33,432
33,467
17,036
244,726
136,142
39,433
23,066
33,921
22,375
20,078
12,608
190,390
115,728
65,860
34,611
96,063
87,538
59,242
52,322
118,921
87,047
19,040
14,975
227,692
185,025
36,644
29,865
185,433
163,828
20,301
17,972
45,959
30,947
6,378
4,885
51,595
39,284
10,999
8,149
54,357
30,938
14,351
9,802
41,070
29,842
45,288
29,207
519,784
390,255
170,160
126,518
832,135
571,871
200,921
127,980
379,418
310,249
293,266
470,070
114,931
155,066 1,723,000
209,676
185,322
241,882
396,690
83,265
99,789 1,216,624
Reinsurance
Property –
Marine and
inwards major assets
£000
£000
Type of risk
Property –
Other
assets
£000
Casualty –
Professional
indemnity
£000
Casualty –
Other risks
£000
Other*
£000
Total
£000
9,156
6,594
6,235
5,531
120,553
103,021
8,759
7,881
31,430
25,542
10,821
8,444
118,917
103,867
55,299
38,433
79,046
75,548
48,023
44,895
96,996
89,425
14,457
12,804
209,547
161,825
27,197
20,134
152,609
125,947
18,356
15,140
35,821
20,764
4,550
2,895
36,991
28,238
8,070
5,287
54,916
35,506
12,618
9,515
44,820
34,469
41,716
26,327
419,916
325,779
109,444
91,414
570,886
484,967
146,657
105,872
144,703
216,467
238,522
407,709
85,432
154,070 1,246,903
123,027
176,286
222,672
323,046
57,184
105,817 1,008,032
*Includes a diverse mix of certain specialty lines such as kidnap and ransom, terrorism, bloodstock and other risks which contain a mix of property and casualty exposures.
A significant proportion of the reinsurance inwards business provides
cover on an excess of loss basis for individual events. The Group
agrees to reimburse the cedant once their losses exceed a minimum
level. Consequently the frequency and severity of reinsurance inwards’
claims is related not only to the number of significant insured events
that occur but also to their individual magnitude. If numerous
catastrophes occurred in any one year but the cedant’s individual
loss on each was below the minimum stated, then the Group
would have no liability under such contracts.
Maximum gross line sizes and aggregate exposures are set for each
type of programme. At current exchange rates, the normal maximum
individual line size that the Group would commit to is £20 million, and
this would only apply to certain segments of the reinsurance inwards
business such as catastrophe excess of loss cover. Line limits are
strictly adhered to in order to cap the Group’s maximum exposure.
In almost all cases the reinsurance inwards lines actually written
are well below maximum levels.
Frequency and severity of claims
The specific insurance risks accepted by the Group fall into four main
categories: reinsurance inwards, marine and major property risks,
other property risks and casualty insurance risks. A discussion of the
frequency and severity of claims for each of those categories is given
below. The Group has no significant exposure to asbestos risks or
life and health insurance business.
Reinsurance inwards
The Group’s reinsurance inwards acceptances are primarily focused
on large commercial property, homeowner and marine exposures held
by other insurance companies predominantly in North America and
other developed economies. This business is characterised more
by large claims arising from individual events or catastrophes than the
high frequency, low severity attritional losses associated with certain
other business written by the Group. Multiple insured losses can
periodically arise out of a single natural or man-made occurrence.
The main circumstances that result in claims against the reinsurance
inwards book are conventional catastrophes, such as earthquakes or
storms, and other events including fires and explosions. The occurrence
and impact of these events is very difficult to model over the short-
term which complicates attempts to anticipate loss frequencies on
an annual basis. In those years where there is a low incidence of
severe catastrophes, loss frequencies on the reinsurance inwards
book can be relatively low.
68 Hiscox plc Report and Accounts 2005
Property risks – Marine and major assets
The Group directly underwrites a diverse range of property risks.
The risk profile of the property covered under marine and major asset
policies is different to that typically contained in the other classes
of property (such as private households and contents insurance)
covered by the Group.
Typical property covered by marine and other major property contracts
include fixed and moveable assets such as ships and other vessels,
cargo in transit, energy platforms and installations, pipelines, other
subsea assets, satellites, commercial buildings and industrial plants
and machinery. These assets are typically exposed to a blend of
catastrophic and other large loss events, and attritional claims arising
from conventional hazards such as collision, flooding, fire and theft.
Climatic changes may give rise to more frequent and severe extreme
weather events (for example earthquakes, windstorms and river
flooding etc.) and it may be expected that their frequency will
increase over time.
For this reason the Group accepts major property insurance risks
for periods of mainly one year so that each contract can be re-priced
on renewal to reflect the continually evolving risk profile. The most
significant risks covered for periods exceeding one year are certain
specialist lines such as marine and offshore construction projects
which can typically have building and assembling periods of between
three and four years. These form a small proportion of the Group’s
overall portfolio.
Marine and major property contracts are normally underwritten
by reference to the commercial replacement value of the property
covered. The cost of repairing or rebuilding assets, of replacement
or indemnity for contents and time taken to restart or resume
operations to original levels for business interruption losses are
the key factors that influence the level of claims under these policies.
Other property risks
The Group provides home and contents insurance, together with
cover for art work, antiques, classic cars, jewellery, collectables and
other assets held by affluent individuals.
Events which can generate claims on these contracts include burglary,
acts of vandalism, fires, flooding and storm damage. Losses can be
predicted with a good degree of certainty as the locations of the
assets covered, and the individual levels of security taken by owners,
are relatively static from one year to the next. The losses associated
with these contracts tend to be of a higher frequency and lower
severity than the marine and other major property assets covered
above.
The Group’s home and contents insurance contracts are exposed
to weather and climatic risks such as floods and windstorms and their
consequences. As outlined earlier the frequency and severity of these
losses do not lend themselves to accurate prediction over the short-
term. Contract periods are therefore not normally more than one year
at a time to enable risks to be regularly re-priced.
Contracts are underwritten by reference to the commercial replacement
value of the properties and contents insured, and claims payment
limits are always included to cap the amount payable on occurrence
of the insured event.
Casualty insurance risks
The casualty underwriting strategy attempts to ensure that the
underwritten risks are well diversified in terms of type and amount
of potential hazard, industry and geography. However, the Group’s
exposure is more focused towards marine, professional and
technological liability risks rather than human bodily injury risks, which
are only accepted under limited circumstances. Claims typically arise
from incidents such as errors and omissions attributed to the insured,
professional negligence and specific losses suffered as a result of
electronic or technological failure of software products and websites.
The Group’s casualty insurance contracts mainly experience low
severity attritional losses.
The Group’s pricing strategy for casualty insurance policies is typically
based upon historical claims frequencies and average claim severities,
adjusted for inflation and extrapolated forwards to incorporate projected
changes in claims patterns. In determining the price of each policy
an allowance is also made for acquisition and administration expenses,
reinsurance costs, investment returns and the Group’s cost of capital.
Sources of uncertainty in the estimation of future claim payments
The Group’s procedures for estimating the outstanding costs of
settling insured losses at the balance sheet date, including those not
yet notified by, or apparent to, the insured, are detailed in note 25.
The uncertainty in estimating the ultimate cost of claims typically
centres on factors such as agreeing the extent of policy coverage,
estimating the amount of the policyholder’s loss that is directly
attributable to the insured event, and uncertainty regarding the
timing and expense of handling the ultimate settlement.
The majority of the Group’s insurance risks are short tail and claims
are normally notified and settled within 12 months of the insured
event occurring. Those claims taking the longest time to develop
and settle typically relate to casualty risks where legal complexities
occasionally develop regarding the insured’s alleged omissions or
negligence. Certain marine and property insurance contracts such
as those relating to subsea and other energy assets, and the related
business interruption risks, can also take longer than normal to settle.
This is because of the length of time required for detailed subsea
surveys to be carried out and damage assessments agreed together
with difficulties in predicting when the assets can be brought back
into full production.
The majority of the Group’s casualty exposures are on a claims
made basis. However the final quantum of these claims may not
be established for a number of years after the event. Consequently
a significant proportion of the casualty insurance amounts reserved
on the balance sheet may not be expected to settle within 12 months
of the balance sheet date. A greater proportion of the casualty claims
provision at the year end relates to IBNR losses than the provisions
made for property and other categories of insurance risks.
4.2 Financial risk
The Group and the Company are exposed to financial risk through
their ownership of financial assets, financial liabilities, reinsurance assets
and insurance liabilities. In particular the key financial risk for the
Group is that the proceeds from its financial assets are not sufficient
to fund the obligations arising from its insurance contracts. The most
important components of this financial risk are interest rate risk, credit
risk, liquidity risk and currency risk. The Group and the Company’s
exposure to equity price risk is limited to a small proportion of the
investment portfolio and is diversified over a number of companies
and industries.
An analysis of the Group and the Company’s exposure to each
significant component of financial risk is given in Sections 4.3
to 4.6 below.
Hiscox plc Report and Accounts 2005 69
Notes to the financial statements continued
The Group and the Company structure the levels of credit risk
accepted by placing limits on their exposure to a single counterparty,
or Groups of counterparties, and to geographical and industry
segments. Such risks are subject to an annual or more frequent
review. There is no significant concentration of credit risk with
respect to loans and receivables, as the Group has a large number
of internationally dispersed debtors. The Company’s loans and
receivables are largely due from other Group companies.
Reinsurance is used to contain insurance risk. This does not, however,
discharge the Group’s liability as primary insurer. If a reinsurer fails to
pay a claim for any reason, the Group remains liable for the payment
to the policyholder. The creditworthiness of reinsurers is continually
reviewed throughout the year.
The Group Reinsurance Security Committee assesses the
creditworthiness of all reinsurers by reviewing credit grades provided
by rating agencies and other publicly available financial information
detailing their financial strength and performance. The financial analysis
of reinsurers produces an assessment categorised by Standard &
Poor’s (S&P) rating (or equivalent when not available from S&P).
The Committee considers the reputation of its reinsurance partners
and also receives details of recent payment history and the status
of any ongoing negotiations between Group companies and these
third parties. This information is used to update the reinsurance
purchasing strategy.
Individual operating units maintain records of the payment history
for significant brokers and contract holders with whom they conduct
regular business. The exposure to individual counterparties is also
managed by other mechanisms, such as the right of offset where
counterparties are both debtors and creditors of the Group.
Management information reported to the Group’s Board includes
details of provisions for impairment on loans and receivables and
subsequent write-off. Exposures to individual intermediaries and
groups of intermediaries are collected within the ongoing monitoring
of the controls associated with regulatory solvency.
The Group and the Company also mitigate their credit counterparty
risk by concentrating debt and fixed income investments in high
quality instruments, including a particular emphasis on government
gilts issued mainly by European Union and North American countries.
An analysis of the Group and Company’s major exposures to
counterparty credit risk excluding loans and receivables, based
on Standard & Poor’s or equivalent rating, is presented overleaf:
4.3 Interest rate risk
Financial investments represent a significant proportion of the Group
and the Company’s assets and the Board continually monitors
investment strategy to minimise the risk of a fall in the portfolio’s
market value which could affect the amount of business that the
Group is able to underwrite or its ability to settle claims as they fall
due. The vast majority of the Group and the Company’s investments
comprise debt and fixed income securities. The fair value of the Group
and the Company’s investment portfolio of debt and fixed income
securities is inversely correlated to movements in market interest
rates. If market interest rates fall, the fair value of the Group and the
Company’s debt and fixed income investments would tend to rise
and vice versa.
Debt and fixed income assets are predominantly invested in high
quality corporate, government and municipal bonds. The investments
typically have relatively short durations and terms to maturity.
The fair value of debt and fixed income assets in the Group’s balance
sheet at 31 December 2005 was £1,029 million (2004: £834 million).
Using a duration-convexation based sensitivity analysis, if market
interest rates had risen by 100 basis points at the balance sheet date,
the fair value might have been expected to decrease by £13 million
(2004: decrease of £6 million).
The fair value of the Company’s debt and fixed income assets at
31 December 2005 was £95 million (2004: £96 million). A duration-
convexation sensitivity analysis suggests that, if market interest rates
had risen by 100 basis points at the balance sheet date, their fair value
might have been expected to decrease by £1 million (2004: decrease
of £1 million).
Insurance contract liabilities are not directly sensitive to the level
of market interest rates, as they are undiscounted and contractually
non-interest-bearing.
The Group and the Company’s major borrowing facility at 31 December
2005 totalled £120,930,000 (2004: nil) and incurred a fixed rate
of interest of 5.61%. This interest rate has been reset several times
subsequent to the year end, and is currently fixed at 6.06% until
31 July 2006. The Group and the Company have no other significant
borrowings or other assets or liabilities carrying interest rate risk,
other than the facilities and letters of credit outlined in note 33.
4.4 Credit risk
The Group and the Company have exposure to credit risk, which
is the risk that a counterparty will suffer a deterioration in solvency
or be unable to pay amounts in full when due.
Key areas of exposure to credit risk include:
– reinsurers’ share of insurance liabilities
– amounts due from reinsurers in respect of claims already paid
– amounts due from insurance contract holders
– amounts due from insurance intermediaries
– counterparty risk with respect to investments including deposits
and derivative transactions.
70 Hiscox plc Report and Accounts 2005
4.4 Credit risk continued
Group
As at 31 December 2005
Debt and fixed income securities
Assets arising from reinsurance contracts held
Cash and cash equivalents
Deposits with credit institutions
Derivative financial assets/(liabilities)
Total
As at 31 December 2004
Debt and fixed income securities
Assets arising from reinsurance contracts held
Cash and cash equivalents
Deposits with credit institutions
Derivative financial assets
Total
Company
As at 31 December 2005
Debt and fixed income securities
Deposits with credit institutions
Cash and cash equivalents
Derivative financial assets/(liabilities)
Total
As at 31 December 2004
Debt and fixed income securities
Cash and cash equivalents
Derivative financial assets
Total
Notes
19
22
19
19, 21
Notes
19
22
19
19, 21
Notes
19
19
22
19, 21
Notes
19
22
19, 21
AAA
£000
AA
£000
A
£000
Other/
not rated
£000
Total
£000
733,809
28,481
291,548
–
–
57,648
162,066
112,039
7,466
(5,056)
128,326
317,081
10,169
82,110
–
109,012 1,028,795
553,838
413,759
89,576
(5,056)
46,210
3
–
–
1,053,838
334,163
537,686
155,225 2,080,912
AAA
£000
AA
£000
A
£000
548,594
11,670
–
–
–
56,289
81,530
100,212
4,524
1,348
167,622
132,899
19,347
54,113
–
Other/
not rated
£000
61,458
47,160
4
–
–
Total
£000
833,963
273,259
119,563
58,637
1,348
560,264
243,903
373,981
108,622 1,286,770
AAA
£000
AA
£000
63,549
–
–
–
10,243
634
11,945
(5,056)
A
£000
7,149
–
–
–
Other/
not rated
£000
14,398
–
–
–
Total
£000
95,339
634
11,945
(5,056)
63,549
17,766
7,149
14,398
102,862
AAA
£000
68,557
–
–
AA
£000
8,269
5,183
1,348
A
£000
15,267
–
–
Other/
not rated
£000
4,156
–
–
Total
£000
96,249
5,183
1,348
68,557
14,800
15,267
4,156
102,780
Hiscox plc Report and Accounts 2005 71
Notes to the financial statements continued
4.5 Liquidity risk
The Group is exposed to daily calls on its available cash resources mainly from claims arising from insurance contracts. Liquidity risk is the risk that
cash may not be available to pay obligations when due at a reasonable cost. The Board sets limits on the minimum level of maturing funds available
to meet such calls and on the minimum level of borrowing facilities that should be in place to cover maturities, claims and surrenders at unexpected
levels of demand.
The vast majority of the Group and the Company’s investments are in highly liquid assets which could be converted into cash in a prompt fashion and
at minimal expense. The deposits with credit institutions largely comprise short dated certificates for which an active market exists and which the Group
can easily access. The Group and the Company’s exposure to equities is concentrated on shares and funds that are frequently traded on internationally
recognised stock exchanges.
The main focus of the investment portfolio is on high quality and frequently traded short duration debt and fixed income securities. Notwithstanding
the regular interest receipts and also the Group and the Company’s ability to liquidate these securities for cash in a prompt and reasonable manner,
the maturity profile of these securities at 31 December 2005 was as follows:
Less than one year
Between one and two years
Between three and five years
Over five years
Sub-total
Group
2005
£000
Group
2004
£000
Company
2005
£000
Company
2004
£000
167,175
295,897
327,522
174,660
309,353
135,032
255,723
95,098
37,936
22,169
31,182
2,004
36,461
28,785
29,952
–
965,254
795,206
93,291
95,198
Perpetual notes and other non-dated instruments
63,541
38,757
2,048
1,051
Total debt and fixed income securities
1,028,795
833,963
95,339
96,249
Average maturity analysed by denominational currency of investments
Pound Sterling
US Dollar
Euro
Canadian Dollar
2005
Years
5.65
6.01
3.83
0.84
2004
Years
3.50
3.26
4.08
0.04
2005
Years
2.20
–
–
–
2004
Years
1.53
–
–
–
4.6 Currency risk
The Group operates internationally and its exposures to foreign exchange risk arise primarily with respect to the US Dollar and the Euro. The assets of
the Group’s Bermudan, US and European insurance businesses are generally invested in assets denominated in the same currencies as their insurance
and investment liabilities. However, the non retranslation of non monetary insurance assets and liabilities such as unearned premiums at each balance
sheet date results in exchange gains and losses which impact on the income statement. The profile of the Group’s assets and liabilities, categorised
by currency at their translated carrying amount, at 31 December was as follows:
As at 31 December 2005
Property, plant and equipment
Intangible assets
Deferred acquisition costs
Investments in associates
Financial assets
Assets arising from reinsurance contracts held
Loans and receivables including insurance receivables
Cash and cash equivalents
Sterling
£000
US Dollar
£000
Euro
£000
Other
£000
Total
£000
11,311
33,099
29,071
18
450,142
67,762
187,566
43,039
388
–
54,226
–
623,824
415,793
199,032
325,282
429
–
19,632
–
136,220
18,104
40,901
27,410
–
–
3,818
–
12,128
33,099
106,747
18
27,592 1,237,778
506,376
436,981
413,759
4,717
9,482
18,028
Total assets
822,008 1,618,545
242,696
63,637 2,746,886
Insurance contracts
Financial liabilities
Trade and other payables
Deferred tax
Employee retirement benefit obligations
Current tax
Total liabilities
72 Hiscox plc Report and Accounts 2005
Sterling
£000
US Dollar
£000
Euro
£000
Other
£000
Total
£000
394,652 1,140,620
125,986
79,226
–
–
–
260
142,090
15,193
16,677
16,581
154,351
–
38,070
–
–
–
33,377 1,723,000
126,246
271,176
15,193
16,677
16,581
–
12,790
–
–
–
584,453 1,345,832
192,421
46,167 2,168,873
4.6 Currency risk continued
As at 31 December 2004
Property, plant and equipment
Intangible assets
Deferred acquisition costs
Investments in associates
Financial assets
Assets arising from reinsurance contracts held
Loans and receivables including insurance receivables
Cash and cash equivalents
Total assets
Insurance contracts
Financial liabilities
Trade and other payables
Deferred tax
Employee retirement benefit obligations
Current tax
Total liabilities
Sterling
£000
US Dollar
£000
Euro
£000
Other
£000
Total
£000
10,412
29,989
33,945
200
347,052
69,009
131,255
62,340
–
–
59,801
909
486,510
149,843
167,670
23,106
279
–
13,856
–
112,537
19,840
23,423
27,674
–
–
2,368
–
34,632
179
5,134
6,443
10,691
29,989
109,970
1,109
980,731
238,871
327,482
119,563
684,202
887,839
197,609
48,756 1,818,406
Sterling
£000
US Dollar
£000
Euro
£000
Other
£000
Total
£000
352,920
57
60,116
14,517
34,718
7,855
735,338
–
73,108
–
–
–
134,767
–
11,259
–
–
–
23,878 1,246,903
57
145,530
14,517
34,718
7,855
–
1,047
–
–
–
470,183
808,446
146,026
24,925 1,449,580
The Company’s main foreign currency exposures relate to financial assets (note 19) and its net investment in the Bermudan operation. The Company
hedges its net investment in the Bermuda operation by borrowing a proportion of the sum invested in US Dollars which is the functional currency
of Hiscox Insurance Company (Bermuda) Limited (note 19). The Company’s remaining exposure is partially hedged by way of a forward contract
derivative instrument (note 21).
5 Segmental information
At 31 December 2005, the Group was managed on a worldwide basis in three primary business segments:
– Global Markets and Corporate Centre comprises the results of Syndicate 33, excluding Syndicate 33’s specie, fine art and non-US household
business. It also includes the investment return and administrative costs associated with the Company and other Group management activities.
– UK and Europe comprises the results of Hiscox Insurance Company Limited, the results of Syndicate 33’s specie, fine art and non-US household
business, together with income and expenses arising from the Group’s retail agency activities in the UK and in continental Europe.
– International comprises the results of Hiscox Insurance Company (Guernsey) Limited and Hiscox Insurance Company (Bermuda) Limited which
commenced underwriting on 1 January 2006. This segment also includes the activities of the Group’s newly formed US agency, Hiscox Inc.
This segmentation reflects the internal operational structure within the Group and how the business units are strategically managed to offer different
products and services, with different risk profiles, to specific customer Groups. All revenue sources are captured by one of the three business
segments shown above.
Hiscox plc Report and Accounts 2005 73
39,799
(382,063)
(194,992)
(42,858)
(32,578)
102,160
30,291
3,508
(5,367)
(39,483)
91,109
(1,977)
390
Notes to the financial statements continued
5 Segmental information continued
The primary segment results for the year are as follows:
(a) Profit before tax by segment
Year to 31 December 2005
Year to 31 December 2004
Global
Markets and
Corporate
Centre
£000
UK and
Europe International
£000
£000
Global
Markets and
Corporate
Centre
£000
Total
£000
UK and
Europe
£000
International
£000
Total
£000
Gross premiums written
Net premiums written
Net premiums earned
555,183
417,128
428,334
262,271
235,276
241,603
43,720
28,832
23,362
861,174
681,236
693,299
511,491
451,517
483,958
267,801
233,103
212,368
37,317
19,465
18,526
816,609
704,085
714,852
Investment result based on longer term rates of return
Net claims incurred
Acquisition costs
Administrative expenses
Other income/(expenses)
36,181
(347,865)
(118,546)
(14,342)
55,060
14,300
(108,498)
(81,827)
(24,571)
2,362
1,632
(662)
(18,380)
(2,284)
(162)
52,113
(457,025)
(218,753)
(41,197)
57,260
28,011
(268,695)
(108,726)
(18,211)
(32,996)
11,374
(113,161)
(70,537)
(24,197)
1,067
414
(207)
(15,729)
(450)
(649)
Trading result
Agency and other income
Profit commission
Short-term investment return fluctuations
Other expenses
Operating result
Finance costs
Associates result
Profit before tax
38,822
8,376
7,357
(15,252)
(15,253)
24,050
(3,334)
–
43,369
22,640
–
6,081
(28,740)
43,350
–
–
3,506
2,469
–
(70)
–
5,905
–
250
85,697
33,485
7,357
(9,241)
(43,993)
73,305
(3,334)
250
83,341
7,138
3,539
(8,044)
(16,187)
69,787
(1,977)
–
16,914
22,535
(31)
2,733
(23,296)
18,855
–
–
1,905
618
–
(56)
–
2,467
–
390
20,716
43,350
6,155
70,221
67,810
18,855
2,857
89,522
The longer term rates of return are calculated based on a 6% return on equities and 4% for all other investments including cash. These rates are
applied to the average value of investments held in each class during the current and prior financial year.
The following charges are included within the income statement:
Year to 31 December 2005
Year to 31 December 2004
Global
Markets and
Corporate
Centre
£000
UK and
Europe* International
£000
£000
Depreciation
Amortisation of intangible assets
Impairment loss on investment in associate
1,318
47
182
1,963
120
–
–
–
–
Global
Markets and
Corporate
Centre
£000
1,148
–
–
Total
£000
3,281
167
182
UK and
Europe*
£000
1,690
–
–
International
£000
96
–
–
Total
£000
2,934
–
–
*The majority of all UK based tangible assets, and their related financing arrangements, have been accounted for and are held by entities in the Global Markets and Corporate Centre segment.
The UK and Europe business benefits from certain operational facilities and other tangible assets shared with the Global Market and Corporate Centre segment. The depreciation cost reflected
for the UK and Europe segment is that primarily recharged internally by the Global Markets and Corporate Centre segment.
100% Ratio analysis
Claims ratio (%)
Expense ratio (%)
Combined ratio (%)
Year to 31 December 2005
Year to 31 December 2004
Global
Markets and
Corporate
Centre
UK and
Europe International
70.8
29.1
99.9
45.1
41.8
86.9
2.8
88.5
91.3
Global
Markets and
Corporate
Centre
72.9
18.0
90.9
Total
61.8
34.2
96.0
UK and
Europe
International
55.1
42.9
98.0
1.1
90.9
92.0
Total
67.5
25.1
92.6
In calculating the claims and expense ratios the Group has applied an estimated allocation of the foreign exchange gains and losses to each category.
74 Hiscox plc Report and Accounts 2005
5 Segmental information continued
The impact of a 1% change in each component of the segmental combined ratios are:
At 100% level (note 5c)
1% change in claims or expense ratio
At Group level
1% change in claims or expense ratio
(b) Reconciliation of 100% level to Group results
Trading result based on longer term rates of return at 100% level (note 5c)
Notional share attributable to Group at current level of capacity ownership
Adjustment to reflect different levels of capacity in prior years:
2001 year of account
2002 year of account
2003 year of account
2004 year of account
Amounts attributable to quota share reinsurers
Trading result based on longer term rates of return for the Group (note 5a)
Year to 31 December 2005
Year to 31 December 2004
Global
Markets and
Corporate
Centre
£000
UK and
Europe International
£000
£000
Global
Markets and
Corporate
Centre
£000
UK and
Europe
£000
International
£000
6,268
2,565
234
7,436
2,304
185
4,289
2,416
234
4,826
2,124
185
2005
£000
2004
£000
102,381
119,507
93,872
100,438
–
–
(2,505)
(5,670)
–
(184)
223
33
–
1,650
85,697
102,160
For the 2005 year of account the Group owned 71% (2004: 65%) of the Syndicate. For the 2002 year of account, 8% of the capacity (2001 year of account: 7%)
was reinsured to three leading European insurers via a quota share arrangement.
(c) 100% level underwriting results by segment
Year to 31 December 2005
Year to 31 December 2004
Global
Markets and
Corporate
Centre
£000
UK and
Europe International
£000
£000
Global
Markets and
Corporate
Centre
£000
Total
£000
UK and
Europe
£000
International
£000
Total
£000
Gross premiums written
Net premiums written
Net premiums earned
786,347
584,132
626,784
274,886
245,823
256,472
43,720 1,104,953
858,787
28,832
906,618
23,362
785,513
760,966
743,645
288,092
251,340
230,374
37,317 1,110,922
19,465 1,031,771
992,545
18,526
Investment result based on longer term rates of return
Net claims incurred
Acquisition costs
Administrative expenses
Other income/(expenses)
51,287
(504,042)
(174,189)
(30,777)
83,887
14,300
(115,659)
(87,501)
(25,385)
3,536
1,632
(662)
(18,380)
(2,284)
–
67,219
(620,363)
(280,070)
(58,446)
87,423
34,018
(412,874)
(175,018)
(30,106)
(55,955)
11,374
(126,834)
(76,558)
(25,531)
1,067
414
(207)
(15,729)
(450)
(649)
45,806
(539,915)
(267,305)
(56,087)
(55,537)
Trading result based on longer term rates of return
52,950
45,763
3,668
102,381
103,710
13,892
1,905
119,507
Hiscox plc Report and Accounts 2005 75
Notes to the financial statements continued
5 Segmental information continued
(d) Segmental analysis of assets and liabilities
The segment assets and liabilities at 31 December and the capital expenditure for the year then ended are as follows:
Year to 31 December 2005
Year to 31 December 2004
Global
Markets and
Corporate
Centre
£000
UK and
Europe International
£000
£000
Eliminations
and
unallocated
items
£000
Global
Markets and
Corporate
Centre
£000
Total
£000
UK and
Europe
£000
International
£000
Financial assets
Reinsurance assets
Intangible assets
Deferred acquisition costs
Other assets
907,295
426,718
30,144
59,587
485,467
319,460
67,177
2,955
36,456
163,111
11,023
12,481
–
10,704
316,473
– 1,237,778
506,376
–
33,099
–
106,747
–
862,886
(102,165)
745,351
156,504
29,315
65,005
346,760
231,031
69,415
674
36,403
167,628
4,349
12,952
–
8,562
19,084
Eliminations
and
unallocated
items
£000
–
–
–
–
(74,627)
Total
£000
980,731
238,871
29,989
109,970
458,845
Total assets
1,909,211
589,159
350,681
(102,165) 2,746,886 1,342,935
505,151
44,947
(74,627) 1,818,406
Insurance liabilities
Other liabilities
1,339,838
369,415
353,110
134,218
30,052
12,631
– 1,723,000
445,873
(70,391)
897,615
126,433
326,091
115,549
23,197
12,953
– 1,246,903
202,677
(52,258)
Total liabilities
1,709,253
487,328
42,683
(70,391) 2,168,873 1,024,048
441,640
36,150
(52,258) 1,449,580
Capital expenditure
5,012
2,696
388
–
8,096
9,709
70
–
–
9,779
Segment assets and liabilities primarily consist of operating assets and liabilities, which represent the majority of the balance sheet. Inter-segmental
assets and liabilities, together with taxation balances that are not allocated to specific segments, are presented under the separate category headed
‘Eliminations and unallocated items’.
Capital expenditure comprises additions to property, plant and equipment (note 15) and intangible assets (note 16).
(e) Secondary reporting format – geographical segments
The Group’s operational segments underwrite business from locations in the UK and Ireland, and also through its branch network in Guernsey, France,
Germany, Belgium and the Netherlands. The Group commenced underwriting and agency operations in Bermuda and the USA in 2006.
The following table provides an analysis of the Group’s gross insurance premium earned by geographical location of policyholders:
Gross earned premiums
UK and Ireland
Europe
United States
Rest of World
Year to 31 December 2005
Year to 31 December 2004
Global
Markets and
Corporate
Centre
£000
UK and
Europe International
£000
£000
99,916
51,504
308,794
105,401
207,338
55,616
8,773
2,654
2,449
8,841
1,558
26,500
Global
Markets and
Corporate
Centre
£000
98,515
56,117
303,228
109,499
Total
£000
309,703
115,961
319,125
134,555
UK and
Europe
£000
178,362
51,457
10,766
3,186
International
£000
Total
£000
328
7,750
1,651
26,665
277,205
115,324
315,645
139,350
565,615
274,381
39,348
879,344
567,359
243,771
36,394
847,524
76 Hiscox plc Report and Accounts 2005
5 Segmental information continued
(e) Secondary reporting format – geographical segments continued
The following tables provide an analysis of total segment assets at the end of the year, and capital expenditure incurred during the year, by geographical
location. Capital expenditure relates to the acquisition of intangible assets and property, plant and equipment during the year. Amounts are stated before
the elimination of inter-segmental assets and liabilities and also exclude taxation balances that are not allocated to specific segments (note 5(d)).
Amounts are allocated based on where the assets are located.
Total segment assets
UK and Ireland
Europe
United States
Bermuda
Capital expenditure
UK and Ireland
Europe
United States
Bermuda
6 Net asset value per share
Net asset value
Net tangible asset value
At 31 December 2005
At 31 December 2004
Global
Markets and
Corporate
Centre
£000
1,909,211
–
–
–
UK and
Europe International
£000
£000
Global
Markets and
Corporate
Centre
£000
Total
£000
556,880
32,279
–
–
57,599 2,523,690 1,342,935
–
32,279
–
508
–
292,574
–
508
292,574
UK and
Europe
£000
465,808
39,343
–
–
International
£000
Total
£000
44,947 1,853,690
39,343
–
–
–
–
–
1,909,211
589,159
350,681 2,849,051 1,342,935
505,151
44,947 1,893,033
At 31 December 2005
At 31 December 2004
Global
Markets and
Corporate
Centre
£000
UK and
Europe International
£000
£000
5,012
–
–
–
2,401
295
–
–
5,012
2,696
–
–
118
270
388
Global
Markets and
Corporate
Centre
£000
9,709
–
–
–
Total
£000
7,413
295
118
270
8,096
9,709
UK and
Europe
£000
International
£000
–
70
–
–
70
–
–
–
–
–
Total
£000
9,709
70
–
–
9,779
2005
Net asset
value
£000
578,013
544,914
2005
NAV
per share
pence
2004
Net asset
value
£000
147.7
139.3
368,826
338,837
2004
NAV
per share
pence
125.7
115.5
The net asset value per share is based on 391,216,294 shares (2004: 293,305,922), being the adjusted number of shares in issue at 31 December.
7 Investment result
The total investment return for the Group before taxation comprises:
Investment income including interest receivable
Net realised losses on investments at fair value through profit or loss
Net fair value gains on investments at fair value through profit or loss
Return on investments (note 8)
Fair value gains/(losses) on derivative instruments (note 21)
Total return on financial assets
2005
£000
2004
£000
48,172
(8,040)
10,155
50,287
(6,404)
35,051
(6,608)
6,015
34,458
1,348
43,883
35,806
Hiscox plc Report and Accounts 2005 77
Notes to the financial statements continued
8 Analysis of return on investments
The return on investments for the year by currency was:
Sterling
US Dollar
Other
The return on investments by asset class for the year was:
Global Markets
and Corporate
Centre
UK and Europe
International
£000
%
£000
%
£000
%
2005
%
6.1
2.5
2.2
2005
Total
£000
Debt and fixed income securities at fair value through income
Equities and shares in unit trusts at fair value through income
Deposits with credit institutions/cash and cash equivalents
20,627
4,294
3,855
2.9
10.8
2.9
5,992
7,524
6,434
4.4
15.2
4.4
114
460
987
1.7
10.8
3.5
26,733
12,278
11,276
28,776
3.2
19,950
6.0
1,561
4.0
50,287
Global Markets
and Corporate
Centre
UK and Europe
International
£000
14,703
3,409
1,799
19,911
%
2.6
9.0
2.3
2.9
£000
%
£000
5,473
4,853
3,863
14,189
4.9
11.2
3.6
5.6
–
309
49
358
%
–
5.7
1.3
3.9
2004
Total
£000
20,176
8,571
5,711
34,458
Debt and fixed income securities at fair value through income
Equities and shares in unit trusts at fair value through income
Deposits with credit institutions/cash and cash equivalents
9 Insurance contract acquisition costs
2004
%
5.5
1.6
2.8
%
3.1
13.1
3.7
4.0
%
2.9
10.3
3.0
3.6
2005
2005
Gross Reinsurance
£000
£000
2005
Net
£000
2004
2004
Gross Reinsurance
£000
£000
2004
Net
£000
Balance deferred at 1 January
Acquisition costs incurred in relation to insurance contracts written
Acquisition costs expensed to the income statement
109,970
203,289
(206,512)
(4,552) 105,418
(4,477) 198,812
6,533 (199,979)
99,374
192,601
(182,005)
(9,399)
802
89,975
193,403
4,045 (177,960)
Balance deferred at 31 December
106,747
(2,496) 104,251
109,970
(4,552) 105,418
The deferred amount of insurance contract acquisition costs attributable to reinsurers of £2,496,000 (2004: £4,552,000) is not eligible for offset against
the gross balance sheet asset and is included separately within accruals and deferred income (note 26).
10 Other operating income and expenses
Agency related income
Profit commission
Exchange gains
Other income
Other income
Managing agency expenses
Overseas underwriting agency expenses
Connect agency expenses
Exchange losses
Investment expenses
Other Group expenses
Other operating expenses
78 Hiscox plc Report and Accounts 2005
2005
£000
3,044
9,807
57,420
11,026
2004
£000
6,212
3,508
–
5,392
81,297
15,112
9,869
19,886
6,135
–
1,013
10,070
7,447
21,101
2,155
35,576
1,374
3,787
46,973
71,440
11 Employee benefit expense
The aggregate remuneration and associated costs were:
Wages and salaries, including holiday pay and sabbatical leave charges
Social security costs
Share based payments cost of options granted to Directors and employees (note 23)
Pension costs – defined contribution
Pension costs – net expense arising on defined benefit plans (note 29)
Other employment benefits
2005
£000
2004
£000
37,581
6,124
2,059
825
4,047
–
31,900
4,645
1,194
669
4,457
–
50,636
42,865
The average monthly number of staff employed by the Group was 514 (2004: 446) comprising 190 underwriting and 324 administrative staff
(2004: 154 and 292 respectively). Of the total remuneration shown above, an amount of £14,433,000 (2004: £13,697,000) was recharged
to the syndicate managed by Hiscox Syndicates Limited. The Company had no employees in the current or prior financial year.
12 Finance costs
Expense associated with letters of credit and other bank borrowing facilities (note 33)
Interest charges arising on finance leases
13 Auditors’ remuneration
Fees payable to the auditors and its associates (exclusive of VAT) include the following amounts recorded in the income statement:
(a) Group
Audit and assurance services:
Statutory audit fee
Regulatory audit fee
Other*
Other non-audit services**:
Work performed in relation to corporate projects*
Total auditors’ remuneration expense
2005
£000
3,302
32
2004
£000
1,952
25
3,334
1,977
2005
£000
305
25
53
383
211
211
594
2004
£000
230
15
–
245
5
5
250
*Other assurance fees include work performed in relation to the establishment of the Group’s Bermudan operation and also the Group’s transition to IFRSs. Other non-audit fees include work
performed in relation to the establishment of the Group’s Bermudan operation.
**Non-audit services with fees greater than £50,000 must be pre-approved by the Audit Committee which is composed solely of independent non executive directors.
Hiscox plc Report and Accounts 2005 79
Notes to the financial statements continued
13 Auditors’ remuneration continued
(b) Company
Audit and assurance services:
Statutory audit fee
Regulatory audit fee
Other non-audit services*:
Work performed in relation to corporate projects
2005
£000
115
–
115
–
–
2004
£000
119
–
119
–
–
Total auditors’ remuneration expense
115
119
*Non-audit services with fees greater than £50,000 must be pre-approved by the Audit Committee which is composed solely of independent non executive directors.
KPMG Audit Plc acted as auditors to the Group during the current and previous financial year. KPMG Audit Plc were also appointed as auditors to
Syndicate 33 during the current financial year under review. The full fee payable for the Syndicate audit has been included for 2005 above, although
an element of this is borne by the third-party participants in the Syndicate.
In addition to the above expenses, the auditors also earned fees of £245,000 exclusive of VAT (2004: nil) in relation to the Group’s Rights Issue which
have been deducted from the share premium reserve (note 23).
14 Net foreign exchange gains
The net foreign exchange gains/(losses) for the year include the following amounts:
Exchange gains/(losses) recognised in the income statement
Exchange gains/(losses) classified as a separate component of equity
This excludes profits or losses on foreign exchange derivative contracts which are outlined in note 21.
2005
£000
2004
£000
57,420
(35,576)
1,290
(468)
15 Property, plant and equipment
(a) Group
At 1 January 2004
Cost
Accumulated depreciation
Net book amount
Year ended 31 December 2004
Opening net book amount
Additions
Disposals
Depreciation charge
Closing net book amount
At 31 December 2004
Cost
Accumulated depreciation
Net book amount
80 Hiscox plc Report and Accounts 2005
Land and
buildings
£000
Leasehold
improvements
£000
Vehicles
£000
Furniture,
fittings,
equipment
and art
£000
Total
£000
407
–
407
407
2,985
(407)
(40)
2,945
2,985
(40)
2,945
–
–
–
–
–
–
–
–
–
–
–
1,060
(789)
17,353
(10,281)
18,820
(11,070)
271
7,072
7,750
271
307
(91)
(92)
395
7,072
3,081
–
(2,802)
7,750
6,373
(498)
(2,934)
7,351
10,691
508
(113)
20,430
(13,079)
23,923
(13,232)
395
7,351
10,691
15 Property, plant and equipment continued
(a) Group continued
Year ended 31 December 2005
Opening net book amount
Additions
Disposals
Depreciation charge
Closing net book amount
At 31 December 2005
Cost
Accumulated depreciation
Net book amount
Land and
buildings
£000
Leasehold
improvements
£000
Vehicles
£000
Furniture,
fittings and
equipment
and art
£000
Total
£000
2,945
–
–
(40)
2,905
2,985
(80)
2,905
–
6
–
–
6
6
–
6
395
217
(36)
(100)
7,351
4,596
(65)
(3,141)
10,691
4,819
(101)
(3,281)
476
8,741
12,128
647
(171)
24,925
(16,184)
28,563
(16,435)
476
8,741
12,128
The Group’s land and buildings assets relate to freehold property in the United Kingdom. At 31 December 2005 and 2004 part of the buildings were
occupied by third parties under separate operating lease arrangements (note 34).
Assets with a net book value of £476,000 were held under finance leases (2004: £397,000). The total depreciation charge for the year in respect of
assets held under finance leases was £100,000 (2004: £86,000). The Company held no assets under finance leases during the current or prior year.
(b) Company
At 1 January 2004
Cost
Accumulated depreciation
Net book amount
Year ended 31 December 2004
Opening net book amount
Additions
Disposals
Depreciation charge
Closing net book amount
At 31 December 2004
Cost
Accumulated depreciation
Net book amount
Year ended 31 December 2005
Opening net book amount
Additions
Disposals
Depreciation charge
Closing net book amount
At 31 December 2005
Cost
Accumulated depreciation
Net book amount
Land and
buildings
£000
–
–
–
–
2,985
–
(40)
2,945
2,985
(40)
2,945
2,945
–
–
(40)
Art
£000
592
–
592
592
34
–
–
626
626
–
626
626
225
(47)
–
Total
£000
592
–
592
592
3,019
–
(40)
3,571
3,611
(40)
3,571
3,571
225
(47)
(40)
2,905
804
3,709
2,985
(80)
2,905
804
–
804
3,789
(80)
3,709
The Company’s land and buildings assets relate to freehold property in the United Kingdom. At 31 December 2005 and 2004 part of the buildings were
occupied by third parties under separate operating lease arrangements (note 34).
Hiscox plc Report and Accounts 2005 81
Notes to the financial statements continued
16 Intangible assets
Group
At 1 January 2004
Cost
Accumulated amortisation and impairment
Net book amount
Year ended 31 December 2004
Opening net book amount
Additions in year
Closing net book amount
At 1 January 2005
Cost
Accumulated amortisation and impairment
Net book amount
Year ended 31 December 2005
Opening net book amount
Additions in year
Amortisation and impairment charge
Closing net book amount
At 31 December 2005
Cost
Accumulated amortisation and impairment
Net book amount
Goodwill
£000
Syndicate
capacity
£000
Other
£000
Total
£000
8,547
(2,442)
20,343
–
149
(14)
29,039
(2,456)
6,105
20,343
135
26,583
6,105
–
20,343
3,286
6,105
23,629
135
120
255
26,583
3,406
29,989
8,547
(2,442)
23,629
–
269
(14)
32,445
(2,456)
6,105
23,629
255
29,989
6,105
–
–
23,629
876
–
255
2,401
(167)
29,989
3,277
(167)
6,105
24,505
2,489
33,099
8,547
(2,442)
24,505
–
2,670
(181)
35,722
(2,623)
6,105
24,505
2,489
33,099
The additions to syndicate capacity during 2005 and 2004 represent the amounts paid, inclusive of transaction costs, by the Group in acquiring an
additional 1% of capacity of Syndicate 33 in open market auctions (2004: 6%). The Group’s intangible asset relating to syndicate capacity has been
allocated, for impairment testing purposes, to one individual cash generating unit being the Lloyd’s corporate member entities. The Group has considered
the recoverable amount from the Lloyd’s corporate member entities on a value in use basis. This calculation uses cash flow projections based on
financial forecasts approved by management covering a five year period. Cash flows beyond the five year period are extrapolated based on an average
level of return and annual growth. The results of this exercise indicate that the recoverable amount exceeds the intangible’s carrying value.
Other intangibles primarily relate to the costs of acquiring rights to customer contractual relationships and also include a limited level of capitalised
software costs. The additions during the year primarily comprise the Group’s acquisition of the business of Insurex Expo-Sure in February 2005.
The amortisation charge for the year includes £40,000 (2004: £nil) relating to capitalised software costs. The net book value of capitalised software
costs at 31 December 2005 was £80,000 (2004: £120,000). There are no charges for impairment during the current or prior financial year.
The Group had no internally generated intangible assets at 31 December 2005 (2004: £nil).
Goodwill is allocated to the Group’s cash generating units (‘CGUs’) identified according to country of operation and business segment.
At 31 December 2005 and 2004 the Group’s goodwill balances are all attributable to UK based operations.
82 Hiscox plc Report and Accounts 2005
17 Investments in associates
Year ended 31 December
At beginning of year
Investments acquired during year
Investments disposed of during year
Share of post tax profit for the period until disposal
Provision for impairment
At end of year
Group
2005
£000
Group
2004
£000
Company
2005
£000
Company
2004
£000
1,109
–
(1,159)
250
(182)
519
200
–
390
200
–
–
–
(182)
–
200
–
–
18
1,109
18
200
The Group’s interests in its principal associates, all of which are unlisted, were as follows:
Name
Heritage Group Ltd
Blyth Valley Ltd
Total at the end of 2004
Blyth Valley Ltd
Total at the end of 2005
% interest
held at
Country of
31 December incorporation
Assets
£000
Liabilities
£000
Revenues
£000
49.9 Guernsey
UK
25.2
12,481
190
10,650
94
11,996
462
25.2
UK
12,671
10,744
12,458
160
160
87
87
512
512
Profit/
(loss)
£000
920
(78)
842
(11)
(11)
The equity interest held by the Group in respect of the associate does not have a quoted market price and are not traded in any active market.
Consequently its fair value cannot be reliably measured with any degree of certainty. An impairment charge of £182,000 (2004: nil) was recognised
in profit or loss during the year.
The Group sold its investment in Heritage Group Limited on 11 July 2005 for a net consideration of £3,750,000. The gain arising on disposal
of £2,591,000 is included within the other income (note 10).
The Company’s investment in associate at 31 December 2005 relates solely to its 25.2% holding in the ordinary share capital of Blyth Valley Ltd.
18 Reinsurance assets
Reinsurers’ share of insurance liabilities
Provision for non recovery and impairment
Total assets arising from reinsurance contracts
The amounts expected to be recovered before and after one year, based on historical experience, are estimated as follows:
Within one year
After one year
2005
£000
2004
£000
514,248
(7,872)
248,554
(9,683)
506,376
238,871
189,258
317,118
117,137
121,734
506,376
238,871
Amounts due from reinsurers in respect of outstanding premiums, and claims already paid by the Group are included in loans and receivables (note 20).
Hiscox plc Report and Accounts 2005 83
Notes to the financial statements continued
19 Financial assets and liabilities
Financial assets and liabilities are all measured at their bid price fair values with all changes from one accounting period to the next being recorded
through the income statement as provided for by IAS 39.
Group
2005
Cost
£000
2005
Fair value
£000
2004
Cost
£000
2004
Fair value
£000
Debt and fixed income securities
Equities and shares in unit trusts
Deposits with credit institutions
1,036,335
101,895
89,532
1,028,795
119,407
89,576
839,082
80,065
58,640
833,963
86,783
58,637
Company
2005
Cost
£000
2005
Fair value
£000
95,279
44,555
634
95,339
48,972
634
2004
Cost
£000
96,567
38,338
–
2004
Fair value
£000
96,249
39,985
–
Total investments
1,227,762
1,237,778
977,787
979,383
140,468
144,945
134,905
136,234
Derivative instrument assets (note 21)
–
–
–
1,348
–
–
–
1,348
Total financial assets
1,227,762
1,237,778
977,787
980,731
140,468
144,945
134,905
137,582
Group
2005
Cost
£000
2005
Fair value
£000
Short-term borrowings from credit institutions
Derivative instrument liabilities (note 21)
121,070
–
121,190
5,056
Total financial liabilities
121,070
126,246
2004
Cost
£000
57
–
57
2004
Fair value
£000
57
–
57
Company
2005
Cost
£000
2005
Fair value
£000
2004
Cost
£000
2004
Fair value
£000
120,810
–
120,930
5,056
120,810
125,986
–
–
–
–
–
–
An analysis of the credit risk and contractual maturity profiles of the Group and Company’s debt and fixed income securities is given in notes 4.4 and 4.5.
The Group and the Company have no material exposure to financial assets not actively traded on recognised markets within their investment portfolios.
Investments at 31 December are denominated in the following currencies at their fair value:
Group
2005
£000
Group
2004
£000
Company
2005
£000
Company
2004
£000
266,771
598,834
163,190
224,628
462,166
147,169
95,339
–
–
96,249
–
–
1,028,795
833,963
95,339
96,249
93,916
24,990
501
63,787
22,996
–
39,068
9,904
–
29,089
10,896
–
119,407
86,783
48,972
39,985
89,455
–
121
58,637
–
–
89,576
58,637
634
–
–
634
–
–
–
–
1,237,778
979,383
144,945
136,234
Group
2005
£000
Group
2004
£000
Company
2005
£000
Company
2004
£000
980,731
246,892
10,155
750,411
224,305
6,015
137,582
2,556
4,807
99,386
34,957
3,239
1,237,778
980,731
144,945
137,582
Debt and fixed income securities
Sterling
US Dollars
Euro and other currencies
Equities and shares in unit trusts
Sterling
US Dollars
Euro and other currencies
Deposits with credit institutions
Sterling
US Dollars
Euro and other currencies
Total investments
The table below illustrates the movements in financial assets during the year:
At 1 January
Net additions to investment portfolio
Net fair value gains/(losses)
At 31 December
84 Hiscox plc Report and Accounts 2005
19 Financial assets and liabilities continued
Company investment in subsidiary undertakings
Hiscox Insurance Company (Bermuda) Limited
Hiscox Dedicated Corporate Member Limited
Hiscox Holdings Limited
Hiscox Insurance Holdings Limited
Hiscox Select Insurance Fund PLC
Hiscox Investment Management Limited
At 31 December
For additional details of the principal subsidiary undertakings, see note 35.
20 Loans and receivables
(a) Group
Gross receivables arising from insurance and reinsurance contracts
Less provision for impairment
Net receivables arising from insurance and reinsurance contracts
Due from contract holders, brokers, agents and intermediaries
Due from reinsurance operations
Other loans and receivables:
Prepayments and accrued income
Net profit commission receivable
Accrued interest
Right to reimbursement of defined benefit obligation (note 29)
Share of syndicate’s other debtors balances
Other debtors including related party amounts (note 36)
Less provision for impairment
Total loans and receivables including insurance receivables
The amounts expected to be recovered before and after one year are estimated as follows:
Within one year
After one year
2005
£000
2004
£000
291,540
1,500
38,647
29,983
45,102
225
–
1,500
38,647
29,983
45,102
225
406,997
115,457
2005
£000
2004
£000
351,051
(1,018)
258,424
(869)
350,033
257,555
302,571
47,462
223,167
34,388
350,033
257,555
8,632
17,410
6,943
5,462
40,579
7,922
–
8,201
11,458
5,428
7,345
33,735
3,760
–
436,981
327,482
436,818
163
327,426
56
436,981
327,482
There is no significant concentration of credit risk with respect to loans and receivables, as the Group has a large number of internationally dispersed
debtors. The Group has recognised a loss of £449,000 (2004: £1,932,000) for the impairment of its receivables during the year ended 31 December 2005.
(b) Company
Due from Group companies
Other debtors
Total
The Company’s loans and receivables are all expected to be recovered after one year.
2005
£000
2004
£000
158,220
114
175,563
89
158,334
175,652
Hiscox plc Report and Accounts 2005 85
Notes to the financial statements continued
21 Derivative financial instruments
The Group and the Company entered into a small number of foreign exchange cylindrical collar contracts in order to manage exposure to business
denominated in a currency other than their presentational currency. At 31 December 2005 the net fair value position of the Company and the Group’s
derivative exposure on these contracts was a financial liability of £4,892,000 (2004: asset of £1,348,000 included within financial assets). No expenses
or charges were incurred in the acquisition of the derivative contracts (2004: £nil). There were no realised gains or losses in the current or prior
financial year.
Foreign exchange option contracts expiring:
Within one year
Between one and five years
After five years
Total at 31 December
2005
Contract
notional
amounts
US$000
160,000
50,000
–
210,000
2005
Fair value
of assets
£000
2005
Fair value
of liabilities
£000
2004
Contract
notional
amounts
US$000
2004
Fair value
of assets
£000
2004
Fair value
of liabilities
£000
297
472
–
769
4,010
1,651
–
–
75,000
–
–
2,126
–
5,661
75,000
2,126
–
778
–
778
The Group and the Company have the right and intention to settle the above contracts on a net basis. Consequently, only the net asset or liability
is recognised in the balance sheet as detailed in note 19.
The Group and the Company also entered into a foreign exchange forward contract during the year in order to manage the net investment in the
Bermudan operation and currency exposures related to the proceeds raised from the Rights Issue (note 23). The contract requires the Group and
the Company to sell US$292,689,000 at an agreed future rate to Pound Sterling at a fixed date within one year of the balance sheet date.
At 31 December 2005, the fair value position of this contract to the Group and Company was a liability of £164,000 (2004: £nil).
22 Cash and cash equivalents
Cash at bank and in hand
Short-term bank deposits
Group
2005
£000
Group
2004
£000
Company
2005
£000
Company
2004
£000
370,165
43,594
61,332
58,231
1,380
10,565
2,222
2,961
413,759
119,563
11,945
5,183
The short-term bank deposits of the Group and the Company have an original maturity of three months or less. The carrying amount of these assets
approximates to their fair value.
23 Share capital and premium
At 1 January 2004
Employee share option scheme – proceeds from shares issued
At 31 December 2004
Employee share option scheme – proceeds from shares issued
Rights Issue of ordinary shares
Expenses related to Rights Issue
At 31 December 2005
Number of
shares in issue
(thousands)
291,292
2,407
Ordinary
share
capital
£000
14,565
120
Share
premium
£000
232,341
1,926
293,699
14,685
234,267
1,331
96,377
–
67
4,818
–
1,522
171,550
(5,974)
391,407
19,570
401,365
The total authorised number of ordinary shares at 31 December 2005 was 600,000,000 (2004: 410,000,000), with a nominal value of 5p per share.
The increase in authorised share capital during the year was approved by shareholders on 6 December 2005. All issued shares are fully paid. The
Company issued 96,376,553 new ordinary shares at a price of 183p per share as part of the Rights Issue which was completed during November
2005.
86 Hiscox plc Report and Accounts 2005
23 Share capital and premium continued
The Group acquired £72,000 (2004: £109,000) and disposed of £274,000 (2004: £363,000) of the Company’s own shares through transactions on the
London Stock Exchange. These shares were acquired by the Group Employee Share Ownership Plan (ESOP) and those issued were to staff as part
of the employee performance share plans. The net effect of transactions in own shares during the year was an increase to retained earnings of £192,000
(2004: £254,000). The Group has the right to reissue these shares at a later date. Additional details of these transactions, including the number of own
shares held, are given in note 35. The Company did not hold any of its owns shares during the current or prior year.
Share options
Share options are granted to directors and to senior employees. The exercise price of the granted options is equal to the market price of the shares on
the date of the grant. Options are conditional on the employee completing three year’s service (the vesting period). The options are exercisable starting
three years from the grant date only if the Group achieves its targets of profitability; the options have a contractual option term of ten years. The Group
has no legal or constructive obligation to repurchase or settle the options in cash.
In accordance with IFRS 2 the Group recognises an expense for the fair value of share option instruments issued to employees, over their vesting period
through the income statements. The expense recognised in the Consolidated Income Statement during the year was £2,059,000 (2004: £1,194,000).
The Group has conservatively applied the principles outlined in the Black Scholes option pricing model when determining the fair value of each
share option instrument. The range of principal Group assumptions applied in determining the fair value of options that have not yet fully vested
at 31 December are:
Assumptions affecting inputs to options pricing model
Annual risk free rates of return (%)
Long-term dividend yield and growth (%)
Expected life of options (years)
Implied volatility of share price over a ten year period (%)
Weighted average share price (pence)
2005
3.5-5.0
2.0
3.25-7.5
32-49
149.5
2004
3.5-4.5
2.0
3.25-6.5
39-49
152.2
Movements in the number of share options during the year and details of the balances outstanding at 31 December 2005 are shown at note 31.
The implied volatility assumption is based on historical data.
24 Retained earnings and other reserves
Merger reserve
Capital redemption reserve
Currency translation reserve
Total other reserves at 31 December
Retained earnings at 31 December
Group
2005
£000
4,723
33,244
822
Group
2004
£000
Company
2005
£000
Company
2004
£000
4,723
33,244
(468)
58,970
33,244
–
58,970
33,244
–
38,789
37,499
92,214
92,214
118,289
82,375
26,369
18,631
The merger reserve reflects the net premium on shares issued as part of several business combinations which occurred in 1996 and 1998.
The capital redemption reserve arises from the redemption of some of the Company’s issued share capital. These redemptions occurred in prior financial
years. The purpose of establishing the capital redemption reserve is to maintain the level of equity represented by contributed capital.
The currency translation reserve comprises foreign exchange differences arising from the translation of the financial statements of, and investments in,
foreign operations.
Included within retained earnings is an amount of £17,941,000 (2004: £17,941,000), which is not distributable and is held to meet solvency capital
requirements to maintain an equalisation reserve. The amounts in the equalisation reserve are realised when particular entities in the Group have suffered
insurance losses in excess of levels set out in the relevant solvency capital regulations.
Hiscox plc Report and Accounts 2005 87
Notes to the financial statements continued
25 Insurance liabilities and reinsurance assets
Gross
Claims reported and loss adjustment expenses
Claims incurred but not reported
Unearned premiums
Total insurance liabilities, gross
Recoverable from reinsurers
Claims reported and loss adjustment expenses
Claims incurred but not reported
Unearned premiums
Total reinsurers’ share of insurance liabilities (note 18)
Net
Claims reported and loss adjustment expenses
Claims incurred but not reported
Unearned premiums
Total insurance liabilities, net
2005
£000
2004
£000
815,307
507,186
400,507
478,050
352,631
416,222
1,723,000 1,246,903
281,746
186,054
38,576
125,186
70,544
43,141
506,376
238,871
533,561
321,132
361,931
352,864
282,087
373,081
1,216,624 1,008,032
The amounts expected to be earned and settled before and after one year, based on historical experience, are estimated as follows:
Within one year
After one year
628,383
588,241
536,463
471,569
1,216,624 1,008,032
The gross claims reported, the loss adjustment expenses liabilities and the liability for claims incurred but not reported are net of expected recoveries
from salvage and subrogation. The amounts for salvage and subrogation at the end of 2005 and 2004 are not material.
25.1 Insurance contracts assumptions
(a) Process used to decide on assumptions
The risks associated with insurance contracts and in particular with casualty insurance contracts are complex and subject to a number of variables
that complicate quantitative sensitivity analysis.
For all risks, the Group uses several statistical methods to incorporate the various assumptions made in order to estimate the ultimate cost of claims.
The reserves for outstanding claims are actuarially estimated primarily by using both the Chain Ladder and Bornhuetter-Ferguson methods. There is close
communication between the actuaries involved in the estimation process and the Group’s underwriters to ensure that, when applying both estimation
techniques, both parties are cognisant of all material factors relating to outstanding claims, and allowance is also made for the rating environment.
The Chain Ladder method is adopted for mature classes of business where sufficient claims development data is available in order to produce estimates
of the ultimate claims and premiums by actuarial reserving Group and underwriting year or year of account for the managed syndicate. This methodology
produces optimal estimates when a large claims development history is available and the claims development patterns throughout the earliest years
are stable.
Where losses in the earliest underwriting years or years of account have yet to fully develop, a ‘tail’ arises on the reserving data, i.e. a gap between
the current stage of development and the fully developed amount. The Chain Ladder methodology is used to calculate average development factors
which, by fitting these development factors to a curve, allows an estimate to be made of the potential claims development expected between the current
and the fully developed amount, known as a ‘tail reserve’. This tail reserve is added to the current reserve position to calculate the total reserve required.
Chain Ladder methods may be applied to premiums, paid claims or incurred claims (i.e. paid claims plus case estimates). The basic technique involves
the analysis of historical claims development factors and the selection of estimated development factors based on this historical pattern. The selected
development factors are then applied to cumulative claims data for each accident year that is not yet fully developed to produce an estimated ultimate
claims cost for each accident year.
Chain Ladder techniques are less suitable in cases in which the insurer does not have developed claims history data for a particular class of business (e.g. in
relation to more recent underwriting years or years of account). In these instances the Group’s actuaries make reference to the Bornhuetter-Ferguson method.
The Bornhuetter-Ferguson method is based on the Chain Ladder approach but utilises estimated ultimate loss ratios. This method uses a combination of
a benchmark or market-based estimate and an estimate based on claims experience. The former is based on a measure of exposure such as premiums;
the latter is based on the paid or incurred claims to date. The two estimates are combined using a formula that gives more weight to the experience-based
estimate as time passes. This technique has been used in situations in which developed claims experience was not available for the projection (recent
accident years or new classes of business).
In exceptional cases the required provision is calculated with reference to the actual exposures on individual policies.
88 Hiscox plc Report and Accounts 2005
25.1 Insurance contracts assumptions continued
Adjustments are made within the claims reserving methodologies to remove distortions in the historical claims development patterns from large
or isolated claims not expected to reoccur in the future. In addition, the reserves determined for the managed syndicate are converted to annually
accounted figures using earnings patterns that are consistent with those for the underlying syndicate business.
The choice of selected results for each accident year of each class of business depends on an assessment of the technique that has been most
appropriate to observed historical developments. In certain instances, this has meant that different techniques or combination of techniques have been
selected for individual accident years or groups of accident years within the same class of business.
(b) Claims development tables
The development of insurance liabilities provides a measure of the Group’s ability to estimate the ultimate value of claims. The Group analyses actual
claims development compared with previous estimates on an accident year basis. This exercise is performed to include the liabilities of Syndicate 33
at the 100% level regardless of the Group’s actual level of ownership, which has increased significantly over the last five years. Analysis at the 100%
level is required in order to avoid distortions arising from reinsurance to close arrangements which subsequently increase the Group’s share of ultimate
claims for each accident year three years after the end of that accident year.
The top half of each table illustrates how estimates of ultimate claim costs for each accident year have changed at successive year-ends. The bottom
half reconciles cumulative claim costs to the amounts still recognised as liabilities. A reconciliation of the liability at the 100% level to the Group’s share,
as included in the Group balance sheet, is also shown.
Insurance claims – gross at 100% level
Accident year
Estimate of ultimate claims costs as adjusted for foreign exchange*:
at end of accident year
one year later
two years later
three years later
four years later
2001
£000
2002
£000
2003
£000
2004
£000
2005
£000
Total
£000
665,949
651,191
721,274
743,075
780,660
378,178
402,673
408,262
393,389
–
423,768
436,832
411,662
–
–
645,822 1,061,574 3,175,291
718,460
– 2,209,156
–
– 1,541,198
–
– 1,136,464
–
780,660
–
Current estimate of cumulative claims
Cumulative payments to date
780,660
(570,122)
393,389
(262,890)
411,662
(258,532)
718,460 1,061,574 3,365,745
(357,584)
(151,147) (1,600,275)
Liability recognised at 100% level
Liability in respect of prior accident years at 100% level
Total gross liability at 100% level
210,538
130,499
153,130
360,876
910,427 1,765,470
82,193
1,847,663
Reconciliation of amounts disclosed at 100% level to liability disclosed in the Group’s balance sheet
Accident year
Current estimate of cumulative claims
Attributable to external names
2001
£000
2002
£000
2003
£000
2004
£000
2005
£000
Total
£000
780,660
(244,919)
393,389
(101,987)
411,662
(114,132)
718,460 1,061,574 3,365,745
(206,100)
(950,021)
(282,883)
Group share of current estimate of cumulative claims
535,741
291,402
297,530
512,360
778,691 2,415,724
Cumulative payments to date
Attributable to external names
(570,122)
172,850
(262,890)
62,572
(258,532)
68,215
(357,584)
104,519
(151,147) (1,600,275)
445,431
37,275
Group share of cumulative payments
(397,272)
(200,318)
(190,317)
(253,065)
(113,872) (1,154,844)
Liability for 2001 to 2005 accident years
recognised on Group’s balance sheet
Liability for accident years before 2001
recognised on Group’s balance sheet
Total Group liability – gross**
138,469
91,084
107,213
259,295
664,819 1,260,880
–
–
–
–
–
61,613
1,322,493
*The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2005.
**This represents the claims element of the Group’s insurance liabilities.
Hiscox plc Report and Accounts 2005 89
Notes to the financial statements continued
25.1 Insurance contracts assumptions continued
Insurance claims – net at 100% level
Accident year
Estimate of ultimate claims costs as adjusted for foreign exchange*:
at end of accident year
one year later
two years later
three years later
four years later
2001
£000
2002
£000
2003
£000
2004
£000
2005
£000
Total
£000
334,022
375,679
446,385
485,328
472,594
252,224
273,613
287,307
267,929
–
334,122
352,261
323,048
–
–
540,776
570,186
–
–
–
645,835 2,106,979
– 1,571,739
– 1,056,740
753,257
–
472,594
–
Current estimate of cumulative claims
Cumulative payments to date
472,594
(312,926)
267,929
(167,841)
323,048
(212,095)
570,186
(294,764)
645,835 2,279,592
(127,075) (1,114,701)
Liability recognised at 100% level
Liability in respect of prior accident years at 100% level
Total net liability at 100% level
159,668
100,088
110,953
275,422
518,760 1,164,891
26,576
1,191,467
Reconciliation of amounts disclosed at 100% level to liability disclosed in the Group’s balance sheet
Accident year
Current estimate of cumulative claims
Attributable to external names
2001
£000
2002
£000
2003
£000
2004
£000
2005
£000
Total
£000
472,594
(141,884)
267,929
(67,615)
323,048
(88,449)
570,186
(163,364)
645,835 2,279,592
(625,422)
(164,110)
Group share of current estimate of cumulative claims
330,710
200,314
234,599
406,822
481,725 1,654,170
Cumulative payments to date
Attributable to external names
(312,926)
89,168
(167,841)
37,092
(212,095)
55,841
(294,764)
87,187
(127,075) (1,114,701)
300,490
31,202
Group share of cumulative payments
(223,758)
(130,749)
(156,254)
(207,577)
(95,873)
(814,211)
Liability for 2001 to 2005 accident years
recognised on Group’s balance sheet
Liability for accident years before 2001
recognised on Group’s balance sheet
Total Group liability – net**
106,952
69,565
78,345
199,245
385,852
839,959
–
–
–
–
–
14,734
854,693
*The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2005.
**This represents the claims element of the Group’s insurance liabilities and reinsurance assets.
25.2 Movements in insurance claims liabilities and reinsurance claims assets
Year ended 31 December
Total at beginning of year
Claims and claims handling expense for year
Cash paid for claims settled in the year
Exchange differences and other movements
2005
2005
Gross Reinsurance
£000
£000
2005
Net
£000
2004
Gross
£000
2004
Reinsurance
£000
2004
Net
£000
(830,681)
(810,678)
391,710
(72,844)
195,730
353,653
(109,904)
28,321
(634,951)
(457,025)
281,806
(44,523)
(656,820)
(447,753)
240,200
33,692
189,183
65,690
(49,630)
(9,513)
(467,637)
(382,063)
190,570
24,179
Total at end of year
(1,322,493)
467,800
(854,693)
(830,681)
195,730
(634,951)
Notified claims
Incurred but not reported
Total at end of year
(815,307)
(507,186)
281,746
186,054
(533,561)
(321,132)
(478,050)
(352,631)
125,186
70,544
(352,864)
(282,087)
(1,322,493)
467,800
(854,693)
(830,681)
195,730
(634,951)
The insurance claims expense reported in the income statement is comprised as follows:
Current year claims and loss adjustment expenses
(Under)/over provision in respect of prior year
claims and loss adjustment expenses
2005
2005
Gross Reinsurance
£000
£000
2005
Net
£000
2004
Gross
£000
2004
Reinsurance
£000
2004
Net
£000
(785,128)
322,278
(462,850)
(436,160)
63,610
(372,550)
(25,550)
31,375
5,825
(11,593)
2,080
(9,513)
Total claims and claims handling expense
(810,678)
353,653
(457,025)
(447,753)
65,690
(382,063)
90 Hiscox plc Report and Accounts 2005
26 Trade and other payables and deferred income
(a) Group
Creditors arising out of direct insurance operations
Creditors arising out of reinsurance operations
Obligations under finance leases (note 34)
Share of syndicate’s other creditors balances
Reinsurers’ share of deferred acquisition costs
Social security and other taxes payable
Other creditors
Accruals and deferred income
Total
The amounts expected to be settled before and after one year are estimated as follows:
Within one year
After one year
2005
£000
2004
£000
30,945
150,947
28,399
60,368
181,892
88,767
449
34,331
2,496
6,191
12,255
370
16,641
4,552
5,458
3,040
55,722
30,061
33,562
26,702
271,176
145,530
269,246
1,930
143,550
1,980
271,176
145,530
The amounts expected to be settled after one year of the balance sheet date primarily relate to finance leases and the Group’s provision of sabbatical
leave employee benefits.
(b) Company
Due to Group companies
Other creditors
Total
The liabilities of the Company all fall due for payment within one year of the balance sheet date.
27 Taxation
The amounts charged in the income statement comprise the following:
Current tax expense
Deferred tax expense (note 28)
2005
£000
2004
£000
49,975
223
41,419
61
50,198
41,480
Group
2005
£000
Group
2004
£000
22,564
(973)
12,702
12,872
21,591
25,574
The tax expense on the Group’s profit before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable
to profits of the consolidated companies as follows:
Profit before tax
Tax calculated at the standard UK Corporation tax rate of 30% (2004: 30%)
Effects of:
Expenses not deductible for tax purposes
Income not subject to tax
Foreign tax, income tax and excess tax on controlled foreign companies
Tax losses for which no deferred tax asset is recognised
Other items
Prior year current tax
Prior year deferred tax
Tax charge for the period
2005
£000
2004
£000
70,221
89,522
21,067
26,857
687
(113)
(2,535)
1,011
(347)
1,632
189
3,822
(3,221)
(536)
112
(1,339)
1,615
(1,736)
21,591
25,574
Hiscox plc Report and Accounts 2005 91
Notes to the financial statements continued
28 Deferred tax
Deferred tax assets
Deferred tax liabilities
Total net deferred tax asset/(liability)
All material tax assets and liabilities relate to the same tax authority.
The movement on the total net deferred tax asset/(liability) is as follows:
At 1 January
Income statement (charge)/credit:
Transfer from deferred tax to current tax
Released from reserves
At 31 December
(a) Group and Company deferred tax assets analysed by balance sheet headings
At 31 December
Tangible assets
Financial assets
Trade and other payables
Retirement benefit obligations
Other items
Total deferred tax assets
Group
2005
£000
Group
2004
£000
Company
2005
£000
Company
2004
£000
16,366
(31,559)
15,618
(30,135)
5,025
(2,936)
–
(2,018)
(15,193)
(14,517)
2,089
(2,018)
Group
2005
£000
Group
2004
£000
Company
2005
£000
Company
2004
£000
(14,517)
973
(3,599)
1,950
(1,645)
(12,872)
–
–
(2,018)
4,107
–
–
–
(2,018)
–
–
(15,193)
(14,517)
2,089
(2,018)
Group
2004
£000
Company
2005
£000
Company
2004
£000
Group
2005
£000
879
3,967
3,192
5,004
3,324
895
43
2,889
10,416
1,375
49
4,976
–
–
–
16,366
15,618
5,025
–
–
–
–
–
–
(b) Group and Company deferred tax liabilities analysed by balance sheet headings and syndicate participation
At 31 December
Intangible assets
Investment in associated enterprises
Financial assets
Insurance contracts – equalisation provision*
Other items
Group
2005
£000
(377)
(191)
–
(5,637)
(1,826)
(36)
(191)
(1,536)
(5,383)
(1,314)
Open years of account and Section 107 disclaimers
(8,031)
(23,528)
(8,460)
(21,675)
Group
2004
£000
Company
2005
£000
Company
2004
£000
–
–
(2,936)
–
–
(2,936)
–
–
–
(2,018)
–
–
(2,018)
–
Total deferred tax liabilities
(31,559)
(30,135)
(2,936)
(2,018)
*The solvency regulations in the UK require certain entities within the Group to establish an equalisation provision, to be utilised against abnormal levels of future losses in certain lines of business.
The regulations prescribe that the reserve is increased every year by an amount that is calculated as a percentage of net premiums written for those lines of business during the financial year
subject to a maximum percentage. The amount of each annual increase is a deductible expense for tax purposes, and the equalisation reserve is taxed when released. The entities within the
Group that are affected by this requirement continue to prepare their individual financial statements, for statutory filing and taxation purposes, in accordance with UK GAAP which permits the
recognition of equalisation reserves on the balance sheet. Equalisation reserves are not permitted under IFRSs which therefore results in the temporary difference for taxation purposes.
Deferred income tax assets are recognised for tax losses carried forward to the extent that the realisation of the related tax benefit through the future
taxable profits is probable. The Group has not provided for deferred tax assets totalling £2,671,000 in relation to losses of overseas companies
(2004: £1,661,000). The aggregate amount of temporary differences associated with investments in subsidiaries and associates for which no deferred
tax liability has been recognised is £16,892,000 (2004: £8,275,000). These temporary differences are unlikely to reverse in the foreseeable future.
In accordance with IAS 12, all deferred tax assets and liabilities are classified as non current.
The Company had no unprovided deferred tax assets at the year end (2004: £nil).
92 Hiscox plc Report and Accounts 2005
29 Retirement benefit obligations
The gross amount recognised in the Group and Company balance sheets are determined as follows:
Present value of funded obligations
Fair value of plan assets
Present value of unfunded obligations
Unrecognised actuarial gains/(losses)
Unrecognised past service cost
Gross liability in the balance sheet
2005
£000
2004
£000
137,533
(101,409)
99,229
(65,020)
36,124
(19,447)
–
34,209
509
–
16,677
34,718
Included within loans and receivables for the Group (note 20) is a right to reimbursement of £5,462,000 (2004: £7,345,000) recoverable from third-party
names in Syndicate 33 representing their contribution to funding the defined benefit scheme obligation.
The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. A full actuarial valuation is
performed on a triennial basis and updated at each intervening balance sheet date by the actuaries. The last full actuarial valuation was performed
at 31 December 2005. The present value of the defined benefit obligation is determined by discounting the estimated future cash flows using interest
rates of AA rated corporate bonds that have terms to maturity that approximate the terms of the related pension liability.
The plan assets are invested as follows:
At 31 December
Equities and property
Debt and fixed income securities
Cash
The amounts recognised in the Group’s income statement are as follows:
Current service cost
Interest cost
Expected return on plan assets
Net actuarial (gains)/losses recognised during the year
Past service cost
Total included in staff costs (note 11)
The actual return on plan assets was £15,531,000 (2004: £4,777,000).
The movement in liability recognised in the Group and Company balance sheets are as follows:
At beginning of year
Total expense charged in the income statement of the Group (note 11)
Contributions paid
At end of year
2005
£000
2004
£000
81,577
4,993
14,839
58,497
4,750
1,773
101,409
65,020
2005
£000
2004
£000
2,916
5,228
(4,767)
–
670
2,997
4,921
(3,461)
–
–
4,047
4,457
2005
£000
2004
£000
34,718
4,047
(22,088)
33,334
4,457
(3,073)
16,677
34,718
The Company recharges all pension related expenses to the individual operating subsidiaries that benefit from the services of the Group’s employees.
The Group’s actuaries have based their assessment on the most recent mortality data available which suggests that the average pensionable period
in which benefits will be paid to members is 26 years (2004: 22 years). The other principal actuarial assumptions used in determining the defined benefit
scheme’s obligation were as follows:
Discount rate
Expected return on plan assets
Future salary increases
Inflation assumption
Pension increases
2005
%
4.75
5.79
4.00
3.00
3.00
2004
%
5.40
5.85
3.80
2.80
2.80
During the year the Group contributed to the defined benefit scheme at the rate of 22.6% (2004: 22.6%) of pensionable salaries. Additional contributions
totalling £19,400,000 were paid during 2005 to reduce the deficit. The Group has agreed that further additional contributions will be made. 61% of the
deficit calculated is recharged to Syndicate 33.
Hiscox plc Report and Accounts 2005 93
Notes to the financial statements continued
30 Earnings per share
Basic
Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary
shares in issue during the year, excluding ordinary shares purchased by the Group and held as own shares (note 23).
Profit attributable to the Company’s equity holders (£000)
Weighted average number of ordinary shares (thousands)
Basic earnings per share (pence per share)
2005
2004
48,630
310,797
63,948
300,653
15.6p
21.3p
The comparative weighted average number of shares in issue for 2004 has been adjusted for the effects of the Rights Issue in November 2005,
in accordance with IAS 33 Earnings per share.
Diluted
Diluted earnings per share is calculated adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive
potential ordinary shares. The Company has one category of dilutive potential ordinary shares, share options. For the share options, a calculation is made
to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Company’s
shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated as above
is compared with the number of shares that would have been issued assuming the exercise of the share options.
Profit attributable to the Company’s equity holders (£000)
Weighted average number of ordinary shares in issue (thousands)
Adjustments for share options (thousands)
Weighted average number of ordinary shares for diluted earnings per share (thousands)
Diluted earnings per share (pence per share)
2005
2004
48,630
63,948
310,797
12,283
300,653
3,375
323,080
304,028
15.1p
21.0p
Diluted earnings per share has been calculated after taking account of 11,829,000 (2004: 2,435,000) options under employee share schemes and
454,000 (2004: 940,000) options under SAYE schemes.
94 Hiscox plc Report and Accounts 2005
31 Directors’ emoluments and share option schemes
Information regarding the remuneration and emoluments of Directors is given in the Directors’ remuneration report on pages 41 to 43.
Share options
The conditions of exercise of the Approved and Unapproved share options is described on page 42.
Number
of options
granted
Number
of options
lapsed
Number
Number of
options at
of options 31 December
exercised
2005
Exercise
price
£
Market price
at date of
exercise
£
Date from
which
exercisable
Expiry date
SJ Bridges
RS Childs
RRS Hiscox
BE Masojada
Other employees
Number of
options at
1 January
2005
82,092
109,457
54,728
136,821
175,000
150,000
150,000
–
–
–
–
–
–
–
–
150,000
858,098
150,000
87,566
109,457
164,186
76,620
136,821
200,000
200,000
200,000
–
–
–
–
–
–
–
–
–
200,000
1,174,650
200,000
87,565
54,727
54,728
50,000
50,000
–
–
–
–
–
–
50,000
297,020
50,000
87,565
109,457
164,185
76,620
136,821
200,000
200,000
200,000
–
–
–
–
–
–
–
–
–
200,000
1,174,648
200,000
189,897
635,377
613,488
1,131,538
114,929
109,456
836,214
1,373,672
2,177,500
2,317,500
2,270,000
–
–
–
–
–
–
–
–
–
–
–
– 2,395,000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(8,209)
–
–
(87,562)
–
(15,000)
(15,000)
(30,000)
(10,000)
–
–
–
–
–
–
–
–
82,092
109,457
54,728
136,821
175,000
150,000
150,000
150,000
– 1,008,098
–
–
–
–
–
–
–
–
–
87,566
109,457
164,186
76,620
136,821
200,000
200,000
200,000
200,000
– 1,374,650
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
87,565
54,727
54,725
50,000
50,000
50,000
347,020
87,565
109,457
164,185
76,620
136,821
200,000
200,000
200,000
200,000
1.320
1.051
1.809
0.831
1.290
1.510
1.560
1.545
1.622
1.320
1.051
1.809
0.831
1.290
1.510
1.560
1.545
1.622
1.051
1.809
1.510
1.560
1.545
1.622
1.320
1.051
1.809
0.831
1.290
1.510
1.560
1.545
– 13 Oct 02 12 Oct 09
– 15 Jun 03 14 Jun 10
– 03 May 04 02 May 11
– 27 Sep 04 26 Sep 11
– 19 Nov 05 18 Nov 12
– 02 Apr 06 01 Apr 13
12 Jul 14
–
– 06 Apr 08 05 Apr 15
13 Jul 07
– 20 Oct 01 19 Oct 08
– 13 Oct 02 12 Oct 09
– 15 Jun 03 14 Jun 10
– 03 May 04 02 May 11
– 27 Sep 04 26 Sep 11
– 19 Nov 05 18 Nov 12
– 02 Apr 06 01 Apr 13
–
12 Jul 14
– 06 Apr 08 05 Apr 15
13 Jul 07
– 20 Oct 01 19 Oct 08
– 15 Jun 03 14 Jun 10
– 03 May 04 02 May 11
– 02 Apr 06 01 Apr 13
–
12 Jul 14
– 06 Apr 08 05 Apr 15
13 Jul 07
– 20 Oct 01 19 Oct 08
– 13 Oct 02 12 Oct 09
– 15 Jun 03 14 Jun 10
– 03 May 04 02 May 11
– 27 Sep 04 26 Sep 11
– 19 Nov 05 18 Nov 12
– 02 Apr 06 01 Apr 13
–
12 Jul 14
– 06 Apr 08 05 Apr 15
13 Jul 07
– 1,374,648
(38,855)
(162,663)
(117,663)
(182,568)
–
–
(87,563)
151,042
472,714
495,825
940,761
114,929
109,456
661,089
(246,275) 1,127,397
(140,000) 2,022,500
(150,000) 2,152,500
– 2,240,000
– 2,385,000
1.754 1.935-1.99 17 Dec 00 16 Dec 07
1.622 1.66-2.23 20 Oct 01 19 Oct 08
1.320 1.87-2.23 13 Oct 02 12 Oct 09
1.051 1.57-2.23 15 Jun 03 14 Jun 10
– 09 Nov 03 08 Nov 10
1.032
1.736
– 14 Feb 04 13 Feb 11
1.809 1.935-2.23 03 May 04 02 May 11
0.831 1.545-2.23 27 Sep 04 26 Sep 11
1.290 1.935-2.23 19 Nov 05 18 Nov 12
1.66 02 Apr 06 01 Apr 13
1.510
–
1.560
12 Jul 14
– 06 Apr 08 05 Apr 15
1.545
13 Jul 07
Total
15,273,987 2,995,000
(165,771) (1,125,587) 16,977,629
11,769,571 2,395,000
(165,771) (1,125,587) 12,873,213
Hiscox plc Report and Accounts 2005 95
Notes to the financial statements continued
31 Directors’ emoluments and share option schemes continued
The interests of the Directors and employees under the UK and International Sharesave Schemes of the Group are set out below:
UK Sharesave Scheme
SJ Bridges
RS Childs
RRS Hiscox
RRS Hiscox
BE Masojada
Other employees
International Sharesave Scheme
Other employees
Number of
options at
1 January
2005
7,321
7,321
9,282
–
6,956
118,749
158,523
326,200
628,385
–
Number
of options
granted
Number
of options
lapsed
Number
Number of
options at
of options 31 December
exercised
2005
Exercise
price*
£/€
Market price
at date of
exercise*
£/€
Date from
which
exercisable
Expiry date
–
–
–
5,757
–
–
–
–
–
382,213
–
–
–
–
–
–
(17,398)
(43,656)
(39,925)
(5,756)
–
–
–
–
–
(118,749)
(4,878)
(1,439)
–
–
7,321
7,321
9,282
5,757
6,956
–
136,247
281,105
588,460
376,457
– 01 Dec 06 31 May 07
1.26
– 01 Dec 06 31 May 07
1.26
– 01 Dec 05 31 May 06
1.02
– 01 Dec 08 31 May 09
1.62
– 01 Dec 07 31 May 08
1.36
0.67
1.585-1.91 01 Dec 04 31 May 05
1.02 1.665-2.235 01 Dec 05 31 May 06
1.665 01 Dec 06 31 May 07
1.26
– 01 Dec 07 31 May 08
1.36
– 01 Dec 08 31 May 09
1.62
1,262,737
387,970
(106,735)
(125,066) 1,418,906
83,913
30,690
19,286
41,020
–
–
–
–
–
42,013
174,909
42,013
–
–
–
–
–
–
(83,913)
–
–
–
–
–
30,690
19,286
41,020
42,013
1.06
1.62
1.81
2.00
2.39
(83,913)
133,009
2.30-2.35
03 Jan 05
02 Jul 05
– 01 Dec 05 31 May 06
– 01 Dec 06 31 May 07
– 01 Dec 07 31 May 08
– 01 Dec 08 31 May 09
*International Sharesave Scheme prices are denominated in Euros.
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
£nil (2004: £20,000). The market price of Hiscox plc shares at 31 December 2005 was 231p (2004: 166.5p). The highest and lowest prices of Hiscox
shares during 2005 were 234.5p and 152.25p (2004: 180.5p and 143.5p).
In January 2006 approval was received from HM Revenue & Customs to adjust the entitlement of participants in the Employee Share Schemes in
respect of both the number of shares under option and the option exercise price to take account of the Rights Issue. The adjustments have been
calculated in accordance with a formula set out by HM Revenue & Customs and have the effect that the number of options that each option holder is
entitled to has increased by 3% and the price of each option has decreased by 3%. The aggregate monetary value of options granted has not changed
as a result of the adjustment. These adjustments have taken place subsequent to the balance sheet date and are not reflected in the above tables.
Number of
options at
1 January
2005
10,945
27,364
10,945
10,945
10,945
27,364
172,927
271,435
Number
of options
granted
Number
of options
lapsed
Number
Number of
options at
of options 31 December
exercised
2005
Exercise
price
£
Market price
at date of
exercise
£
–
–
–
–
–
–
–
–
–
–
–
–
–
(27,364)
(10,945)
(10,945)
(27,364)
(10,945)
(10,945)
(10,945)
–
(158,699)
–
–
–
–
–
–
3,283
1.069
1.585
1.069
1.585
1.069
1.585
1.069
1.5925
1.069
1.585
–
1.069
1.069 1.5675-1.69
(38,309)
(229,843)
3,283
Date from
which
exercisable
01 Apr 05
01 Apr 04
01 Apr 05
01 Apr 05
01 Apr 05
01 Apr 04
01 Apr 05
Expiry date
31 Dec 11
31 Dec 10
31 Dec 11
31 Dec 11
31 Dec 11
31 Dec 10
31 Dec 11
(iii) Performance share plan
SJ Bridges
RS Childs
RS Childs
RRS Hiscox
BE Masojada
Other employees
Total
32 Dividends
Interim dividend for the year ended:
31 December 2004 of 1.5p (net) per share
31 December 2005 of 2.25p (net) per share
Final dividend for the year ended:
31 December 2003 of 2.9p (net) per share
31 December 2004 of 3.5p (net) per share
Group
2005
£000
Group
2004
£000
Company
2005
£000
Company
2004
£000
–
6,631
–
10,286
4,383
–
8,450
–
–
6,631
–
10,286
4,383
–
8,457
–
16,917
12,833
16,917
12,840
A final dividend in respect of 2005 of 4.75p per share, amounting to a total dividend of 7p for the year, is to be proposed at the Annual General Meeting
on 20 June 2006. These financial statements do not reflect this final dividend as a distribution or liability in accordance with IAS 10 Events after the
Balance Sheet Date.
96 Hiscox plc Report and Accounts 2005
33 Contingencies and guarantees
The Company and its subsidiaries are, like all other insurers, continuously involved in legal proceedings, claims and litigation in the normal course
of business. The Group does not believe that such actions will have a material effect on its profit or loss and financial condition.
The Group is subject to insurance solvency regulations in all the territories in which it issues insurance contracts, and it has complied with all the local
solvency regulations. There are no contingencies associated with the Group’s compliance or lack of compliance with these regulations.
The following guarantees have also been issued:
(a) The Company has entered into a deed of covenant in respect of its corporate member subsidiaries, Hiscox Dedicated Corporate Member Limited,
Hiscox Select A to J Limited, to meet the subsidiaries’ obligations to Lloyd’s. The total guarantee given by the Company under this deed of covenant
(subject to limited exceptions) amounts to £118,831,798 (2004: £117,209,120). The obligations in respect of this deed of covenant are secured
by a fixed and floating charge over certain of the investments and other assets of the Company in favour of Lloyd’s. Lloyd’s has a right to retain
the income on the charged investments in circumstances where it considers there to be a risk that the covenant might need to be called and may
be met in full
(b) The Company has an agreement with Lloyds TSB Bank, an agent for a syndicate of banks, for a £137,500,000 irrevocable standby Letter of Credit
Facility and a US $225,000,000 Term and Revolving Credit Facility. Commencing 7 November 2005 £137,500,000 was drawn down on the Letter
of Credit Facility to support part of the Group’s underwriting activities. Hiscox plc has given a fixed and floating charge over the Group’s assets
as a guarantee to the group of banks led by Lloyds TSB Bank in connection with their Letter of Credit. On 5 December 2005, the Group drew
down US $208,000,000 of the term and revolving credit facility to support its investment in the new Bermudan operations
(c) Hiscox Insurance Company Limited has arranged a Letter of Credit of £325,000 with Natwest Bank plc to support its consortium activities with Lloyd’s
(d) The managed syndicate is subject to the New Central Fund annual contribution, which is an annual fee calculated on capacity. This fee was 0.5%
for 2005, and is 1.0% for 2006 with a further 0.75% being loaned to the New Central Fund. In addition to this fee, the Council of Lloyd’s has the
discretion to call a further contribution of up to 3% of capacity if required.
34 Capital and lease commitments
Capital commitments
The Group’s capital expenditure contracted for at the balance sheet date but not yet incurred is as follows:
Property, plant and equipment
Intangible assets
2005
£000
1,150
–
1,150
2004
£000
–
–
–
The Company had no capital commitments at 31 December 2005 or 2004.
Operating lease commitments
The Group acts as both lessee and lessor in relation to various offices in the UK and overseas which are held under non–cancellable operating lease
agreements. The leases have varying terms, escalation clauses and renewal rights. The Group also has payment obligations in respect of operating
leases for certain items of office equipment. Operating lease rental expenses, net of recharges to the managed syndicate, for the year totalled
£1,936,000 (2004: £2,041,000). Operating lease rental income for the year totalled £586,000 (2004: £241,000).
The aggregate minimum lease payments required by the Group under non-cancellable operating leases, over the expected lease terms, are as follows:
No later than one year
Land and buildings
Office equipment
Later than one year and no later than five years
Land and buildings
Office equipment
Later than five years
Land and buildings
Office equipment
2005
£000
2004
£000
4,326
57
14,679
31
26,126
–
4,113
180
14,221
120
29,527
–
45,219
48,161
Hiscox plc Report and Accounts 2005 97
Notes to the financial statements continued
34 Capital and lease commitments continued
The total future aggregate minimum lease rentals receivable by the Group and the Company as lessor under non-cancellable operating property
lease are as follows:
No later than one year
Later than one year and no later than five years
Later than five years
2005
£000
586
2,205
1,027
2004
£000
586
2,312
1,507
3,818
4,405
Obligations under finance leases
It is the Group’s policy to lease certain of its motor vehicles under finance lease arrangements. The leases have a typical term of three years and are on a fixed
repayment basis with a final lump sum component at the end of each agreement should the Group decide to acquire ownership of the vehicle. Interest
rates are fixed at the contract commencement date. The Group’s obligations under leases are secured by the lessors’ charges over the leased assets.
Finance lease interest expenses, net of recharges to the managed syndicate, for the year totalled £32,000 (2004: £25,000).
The finance lease obligations to which the Group are committed include the following minimum lease payments:
Current liabilities due for settlement within one year
Non-current liabilities due for settlement after one year and no later than five years
Less: future finance lease interest charges
The present value of the minimum lease payments is not materially different to the currently disclosed obligation.
The Company has no finance lease obligations or capital commitments.
2005
£000
222
293
515
(66)
449
2004
£000
171
258
429
(59)
370
35 Principal subsidiary companies
As at 31 December 2005
Company
Hiscox Insurance Company Limited*
Hiscox Insurance Company (Guernsey) Limited*
Hiscox Inc.*
Hiscox Holdings Inc.*
Hiscox Insurance Company (Bermuda) 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 Assurances Services SARL*
Hiscox International Holdings B.V.*
Hiscox Syndicates Limited*
Hiscox Underwriting Ltd*
Hiscox AG*
Hiscox bv*
Hiscox Investment Management Limited
Hiscox Connect Limited
Hiscox Underwriting Group Services Limited
Hiscox NV*
Hiscox Trustees Limited †
Hiscox Pension Trustees Limited
Hiscox Qualifying Employees Share Ownership Trustees Limited
Nature of business
General insurance
General insurance
Underwriting agent
Insurance holding company
General insurance and reinsurance
Lloyd’s corporate names
Insurance holding company
Insurance holding company
Lloyd’s corporate name
Insurance holding company
Insurance holding company
Underwriting agent
Insurance holding company
Lloyd’s managing agent
Lloyd’s managing agent
Underwriting agent
Underwriting agent
Investment management
Online intermediary
Service company
Underwriting agent
Corporate trustee
Pension trustee
Share scheme trustee
Country
Great Britain
Guernsey
USA (Delaware)
USA (Delaware)
Bermuda
Great Britain
Great Britain
Great Britain
Great Britain
Great Britain
Great Britain
France
Netherlands
Great Britain
Great Britain
Germany
Netherlands
Great Britain
Great Britain
Great Britain
Belgium
Great Britain
Great Britain
Great Britain
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 54,560 (2004: 67,580 shares) in Hiscox plc at 31 December 2005. The cost of these shares of £52,000 (2004: £64,000) is included within retained earnings.
During 2005, 13,020 of these shares were issued to staff as part of the employee performance share plans (2004: 339,304 shares). The net consideration received was £18,000 (2004:
£363,000).
†Hiscox Trustees Limited is the trustee of the Hiscox plc Group Employee Share Ownership Plan (ESOP). Hiscox Trustees Limited took up its entitlement of 33,459 shares in the Company
at a price of £1.83 arising from the Rights Issue in November 2005. It also acquired 6,732 ordinary shares costing £11,000 during the year. The ESOP disposed of 229,843 shares during the
year at a price of £1.26. The ESOP owned 135,782 shares (2004: 325,434 shares) in Hiscox plc at 31 December 2005. The shares have been purchased by the ESOP for future use in employee
share option schemes and are held as own shares. None of these shares are currently under option to employees, nor have any been conditionally gifted to them. The cost of these shares
of £192,000 (2004: £409,000) is included within retained earnings.
98 Hiscox plc Report and Accounts 2005
36 Related-party transactions
Details of the remuneration of the Group’s key personnel are shown in the Director’s remuneration report on pages 41 to 43. A number of the Group’s
key personnel hold insurance contracts and investment management agreements with the Group, all of which are on normal commercial terms.
The following transactions were conducted with related parties during the year.
(a) Syndicate 33 at Lloyd’s
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.
Value of services provided by Hiscox Syndicates Limited to Syndicate 33
Amounts receivable from Syndicate 33 at 31 December
2005
£000
2004
£000
25,918
15,305
3,157
30
(b) Associates
Certain companies within the Group received management and other commercial services from a number of wholly owned subsidiaries of Heritage
Group Limited, which was an associate of the Group until 11 July 2005. These transactions arose in the normal course of business and are based
on arms length arrangements. One Director of Heritage Group Limited is also a Director of Hiscox Insurance Company (Guernsey) Limited.
The ultimate parent Company of Hiscox Insurance Company (Guernsey) Limited is Hiscox plc.
Value of management services provided during the year by the consolidated operations of the Heritage Group Limited
Amounts payable/(receivable) at 31 December
2005
US$000
2004
US$000
855
–
701
–
The Group’s debtors receivable at 31 December 2004 (note 20) included an amount due from Heritage Group Limited of £1,580,000 in respect of an
original balance of £1,900,000 due to Hiscox Insurance Company Limited. Repayments of £1,580,000 (2004: £320,000) were received by the Group
during the year. There were no amounts outstanding at 31 December 2005.
Certain companies within the Group conduct insurance and other business with Blyth Valley Limited, an associate. These transactions arise in the normal
course of obtaining insurance business through brokerages, and are based on arms length arrangements. One Director of Blyth Valley Limited also served
as a Director of Hiscox Insurance Company Limited. The ultimate parent Company of Hiscox Insurance Company Limited is Hiscox plc.
Gross premium income achieved through Blyth Valley Limited during year
Commission expense for year charged by Blyth Valley Limited
Amounts payable to Blyth Valley Limited at 31 December in respect of commissions
Amounts receivable from Blyth Valley Limited at 31 December in respect of insurance premiums
2005
£000
2004
£000
1,808
1,146
368
243
40
1
23
2
(c) Other
BE Masojada is a Non Executive Director of Ins-sure Holdings Limited and its subsidiaries, appointed in October 2002. These companies operate
in a joint venture between Lloyd’s, the International Underwriting Association (IUA) and Xchanging. These companies provide policy issuance, premium
collection, claims settlement and clearing services to Lloyd’s and the London insurance company markets. Hiscox Underwriting Group Services Limited
received the annual fee of £20,000 (2004: £20,000) in relation to this directorship. The balance due at 31 December 2005 was £10,000 (2004: £5,000).
BE Masojada is also Deputy Chairman of Lloyd’s. Hiscox Underwriting Group Services Limited received the annual fee of £41,250 (2004: £41,250)
in relation to his services. There were no amounts outstanding at 31 December 2005 (2004: £nil).
Hiscox plc Report and Accounts 2005 99
Notes to the financial statements continued
36 Related-party transactions continued
(d) Parent Company
The Company engaged in the following transactions with other Group companies during the year under review.
Dividends receivable from other Group companies:
Hiscox Dedicated Corporate Member Limited
Hiscox Holdings Limited
Hiscox Select Insurance Fund PLC
Expenses recharged from other Group companies:
Hiscox Underwriting Group Services Limited
Other
Amounts due (to)/from other Group companies at 31 December:
Hiscox Dedicated Corporate Member Limited
Hiscox Holdings Limited
Hiscox Select Insurance Fund PLC and subsidiaries
Hiscox Syndicates Limited
Hiscox Underwriting Group Services Limited
Hiscox Insurance Holdings Limited
Other
2005
£000
2004
£000
–
18,000
–
12,000
2,500
5,000
18,000
19,500
6,755
104
4,262
97
6,859
4,359
14,634
20,023
(23,387)
(14,520)
50,677
54,508
6,310
47,553
1,579
(13,830)
(5,968)
45,403
54,508
4,899
108,245
134,144
100 Hiscox plc Report and Accounts 2005
Five year summary
Results
Gross premium written
Net premium written
Net premium earned
Profit/(loss) on ordinary activities before tax
Profit/(loss) on ordinary activities after tax
Assets employed
Intangible assets
Financial assets
Cash and cash equivalents
Net technical provisions
Other net assets
Net assets
Net asset value per share
Key statistics
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
Combined ratio
Return on equity
Dividends per share
Share price – high*
Share price – low*
*Closing mid market prices.
2005
£000
2004
£000
2003
£000
2002
£000
2001
£000
861,174
681,236
693,299
70,221
48,630
816,609
704,085
714,852
89,522
63,948
797,380
660,966
547,451
83,408
60,491
676,705
416,144
385,129
20,739
14,399
548,926
412,577
344,199
(32,496)
(23,107)
33,099
1,237,778
413,759
29,989
980,731
119,563
(1,216,624) (1,008,032)
246,575
110,001
21,753
773,289
52,945
(845,450)
327,300
23,086
501,774
121,196
(613,108)
246,184
23,797
344,402
62,520
(512,993)
247,065
578,013
368,826
329,837
279,132
164,791
147.7p
125.7p
113.5p
97.0p
85.5p
15.6p
15.1p
96.0%
12.8%
21.3p
21.0p
92.6%
20.6%
20.9p
20.6p
87.2%
21.7%
6.9p
6.7p
94.8%
8.7%
(14.8)p
(14.8)p
109.9%
(17.3)%
7.00p
5.00p
4.20p
3.54p
0.00p
234.5p
152.25p
180.5p
143.5p
170.5p
137.0p
164.5p
120.5p
226.0p
72.5p
The amounts and ratios for 2001 to 2003 are those previously published on a UK GAAP basis, the Group’s primary reporting framework at that time.
The figures reported for 2004 and 2005 are prepared in accordance with IFRSs as adopted by the EU. The main differences arising on the Group’s
transition to IFRSs are outlined at note 3 to the financial statements.
Hiscox plc Report and Accounts 2005 101
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 20 June 2006
at 11:00 am for the following purposes:
Ordinary business
(1) To receive the accounts of the Company for the year ended
31 December 2005 together with the Directors’ and auditors’
reports thereon.
(2) To re-appoint RRS Hiscox who retires as a Director in accordance
with the Articles of Association and the Combined Code.
(3) To re-appoint AGC Howland Jackson who retires as a Director in
accordance with the Articles of Association and the Combined Code.
(4) To re-appoint DND Netherton who retires as a Director in accordance
with the Articles of Association and the Combined Code.
(5) To appoint AR Auer who has been appointed as a Director since
the previous Annual General Meeting, in accordance with the
Articles of Association and the Combined Code.
(6) To appoint Sir Mervyn Pedelty who has been appointed as a
Director since the previous Annual General Meeting, in accordance
with the Articles of Association and the Combined Code.
(7) To re-appoint KPMG Audit Plc as auditors 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.
(8) To authorise the Directors to determine the level of auditors’
remuneration.
(9) To consider the recommendation of the Directors as to a final
dividend for the year ended 31 December 2005 of 4.75 pence
(net) per ordinary share payable to shareholders on the register
at the close of business on 21 April 2006.
Special business
To consider and, if thought fit, pass the following resolutions, of
which resolutions 10 and 11 will be proposed as ordinary resolutions,
and resolutions 12 and 13 will be proposed as special resolutions.
Ordinary resolutions
(10) To approve the Directors’ remuneration report for the year ended
31 December 2005.
(11) 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 £6,533,231.86, representing 33.3% of the
issued ordinary share capital as at 13 March 2006, for a period
expiring (unless previously renewed, varied or revoked by the
Company in general meeting) on the earlier of the conclusion
of the next Annual General Meeting or the date falling 15 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 expiration or revocation of this authority
which would or might require relevant securities to be allotted
after the expiration or revocation of this authority and the
Directors may allot relevant securities in pursuance of any
such offer or agreement notwithstanding the expiry or revocation
of this authority.
Special resolutions
(12) That the Directors be empowered (in substitution for all existing
authorities) pursuant to Section 95 of the Act to allot equity
securities (as defined in Section 94(2) of the Act) for cash pursuant
to the authority conferred by Resolution 11 as if Section 89(1) did
not apply to the allotment. This power will expire on the earlier of
the conclusion of the next Annual General Meeting or a date falling
15 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 securities 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 ordinary 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)
(b)
to deal with equity securities representing fractional
entitlements
to deal with legal or practical problems under the laws
of, or the requirements of any recognised regulatory body
or any stock exchange in, any territory.
(ii)
the allotment of ordinary shares for cash otherwise than
pursuant to paragraph (i) up to an aggregate nominal amount
of £979,984.78.
(13) That the Company be authorised to purchase its own shares from
the market. The authority will be limited to a purchase of own
shares up to a maximum number of 19,500,000 shares and the
price to be paid for the shares will be limited to a minimum share
price of £0.50 per share and a maximum price per share that is
not more than five per cent above the average of the closing
middle market quotations for an ordinary share as derived from
the London Stock Exchange Daily Official List for the five business
days immediately preceding the date on which the ordinary share
is purchased. This authority will terminate on the earlier of the
conclusion of the next Annual General Meeting or a date falling
15 months after the date of the passing of this resolution.
The Company may make a contract or contracts to purchase
ordinary shares under the authority hereby conferred prior to the
expiry of such authority which will or may be executed wholly or
partly after the expiry of such authority and may make a purchase
of ordinary shares in pursuance of any such contract or contracts.
By order of the Board
SJ Bridges
Secretary
13 March 2006
102 Hiscox plc Report and Accounts 2005
Notes
1. A member entitled to attend and vote at the Annual General
Meeting (the ‘Meeting’) may appoint one or more proxies (who
need not be a member of the Company) to attend and, on a poll,
to vote on his or her behalf. In order to be effective, any appointment
of proxy must be undertaken in accordance with these notes
and returned:
• in hard copy form by post, by courier or by hand, to the
Company’s registrars, Capita Registrars, Proxy Department,
The Registry, 34 Beckenham Road, Beckenham, Kent
BR3 4BR, not later than 48 hours before the time for holding
the Meeting (or in the event that the Meeting is adjourned,
48 hours before the time of any adjourned Meeting)
• in the case of CREST members (including Personal Members),
by having an appropriate CREST message transmitted.
2. Return of the form of proxy will not preclude a member from
attending the Meeting and voting in person.
3. To appoint a proxy or to give an instruction to a previously
appointed proxy via the CREST system, the CREST message
must be received by the issuer’s agent (ID RA10) not later than
48 hours before the time for holding the Meeting or (as the case
may be) the adjourned meeting. Please note, however, that proxy
messages cannot be sent through CREST on weekends, bank
holidays or after 8.00 pm on any day. For the purpose of this
deadline, the time of receipt will be taken to be the time (as
determined by the timestamp applied to the message by the
CREST Applications Host) from which the issuer’s agent is able
to retrieve the message. CREST Personal Members or other
CREST sponsored members and those CREST members that
have accepted voting service provider(s) should contact their
CREST sponsor or voting service provider(s) for assistance with
appointing proxies via CREST. For further information on CREST
procedures, limitations and system timings, please refer to the
CREST manual. We may treat as invalid a proxy appointment sent
by CREST in the circumstances set out in Regulation 35(5)(a)
of the Uncertificated Securities Regulations 2001.
In accordance with Regulation 41 of the Uncertificated Securities
Regulations 2001, only those members entered on the relevant
register of members of the Company as at 6.00 pm on 18 June
2006 (or in the event that the Meeting is adjourned, 48 hours
before the time of any adjourned Meeting) shall be entitled to
attend or vote at the Meeting in respect of the number of shares
registered in their name at that time. Changes to entries on the
relevant register of members after 6.00 pm on 18 June 2006
(or in the event that the Meeting is adjourned, 48 hours before the
time of any adjourned meeting) shall be disregarded in determining
the rights of any person to attend or vote at the meeting.
4.
Copies of the register of Directors’ interests and copies of
Directors’ service contracts (including the terms and conditions
of appointment of Non Executive Directors) kept by the Company
will be available for inspection for at least 15 minutes before
the commencement of the Meeting and will remain available
during the continuance of the Meeting to any person attending
the Meeting.
Hiscox plc Report and Accounts 2005 103
Definition of insurance terms
Binder (or binding authority)
An authority granted by an underwriter to an agent (known
as a coverholder) whereby that agent is entitled to accept,
within certain limits, insurance business on behalf of the underwriter.
Qualifying quota share reinsurance
These are quota share reinsurance policies, which Lloyd’s allow
in certain circumstances, that enable a syndicate to write gross
premium in excess of its authorised stamp capacity.
Cedant
An insurer that transfers insurance risk to another insurer under
a reinsurance contract.
Claims ratio
Net claims incurred, including IBNR, as a percentage of net
earned premiums.
Combined ratio
The total of the claims and expenses ratios.
Coverholder
An agent authorised to accept, within certain limits, insurance
business on behalf of an underwriter. The coverholder deals with
premium collection, the issue of certificates and in certain instances
the servicing of claims, and has full power to commit the underwriter
within the terms of the authority.
Expense ratio
Net operating expenses as percentage of net earned premiums.
Gross written premium
Premiums contracted for before any deductions.
Incurred loss ratio
Paid and outstanding losses as a percentage of premiums. Gross
incurred loss ratio is before deducting any reinsurance; the net loss
ratio is after deducting reinsurance.
Individual capital assessments
Risk-based calculations of the capital required by each FSA-authorised
insurance entity in accordance with FSA regulations.
Long-tail
A term used to describe an insurance risk that has the potential for
claims development or new claims to be reported a number of years
after expiry of the term of the policy.
Member or Name
An underwriting member of Lloyd’s. Groups of these individuals
(‘Names’) collectively accept insurance risks through a Lloyd’s
syndicate. Names are required to meet certain Lloyd’s solvency
requirements and are responsible for their share of any losses
made by the syndicates on which they participate, and are entitled
to an equivalent share of any profits.
Net earned premium
Premiums received after the cost of reinsurance and adjustment
for unearned premium. Unearned premium covers the future period
of risk of an insurance policy.
Net written premium
Premiums received after the cost of reinsurance.
Open year
A year of account of a syndicate which has not been closed by
reinsurance to close (‘RITC’). RITC usually occurs at the end of the
third year. A year of account can be left open beyond the third year
if the extent of the future liability cannot be accurately quantified.
Quota shares
Where insurance risks are re-insured on a proportional basis,
premiums and claims are divided in the same proportions between
the insurer and re-insurer.
Return on equity (‘ROE’)
Net profit after tax expressed as a percentage of adjusted opening
equity. This percentage measures profitability by expressing the
efficiency of the Group’s utilisation of shareholders’ funds.
Reinsurance to Close (‘RITC’)
The reinsurance to close of a syndicate comprises a premium payable
by the closing year to the members on the next open year of account
and a contract which transfers the liability for all claims in respect
of the closing year to the next open year.
Short-tail
A term used to describe an insurance risk where claims are expected
to arise near to the dates on which a policy was current.
Specie
The line of business that covers cash and valuables in vaults, premises
or transit.
Stamp capacity or syndicate capacity
The maximum amount of business that a syndicate in Lloyd’s
can write per year, aggregated from all its members.
Subrogation
The right of the underwriter to ‘stand in the shoes of the insured’ and
take over the insured’s rights, following payment of a claim, to recover
the payment of an incurred loss from a third party responsible for the
loss. It is limited to the amount of the loss paid by the insurance policy.
Syndicate
A grouping of Lloyd’s underwriters. Each syndicate has an active
underwriter who is authorised to accept business on behalf of each
underwriting member participating therein. A member of a syndicate
is still a principal in his own right and is personally liable for his agreed
share of each risk that is accepted by the syndicate. He is not liable
for the debts of other syndicate members and thus the liability
is several but not joint.
Year of account
The year to which risk is allocated and to which all premiums
and claims in respect of that risk are attributed. The year of account
of a risk is determined by the calendar year in which it incepts.
A year of account is normally closed by reinsurance at the end
of 36 months.
104 Hiscox plc Report and Accounts 2005
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Hiscox plc
1 Great St Helen’s
London EC3A 6HX
Tel: 020 7448 6000
Fax: 020 7448 6900
Email: enquiry@hiscox.com
Website: www.hiscox.com
Hiscox Syndicates Limited, Hiscox
Underwriting Limited, Hiscox Insurance
Company Limited and Hiscox Investment
Management Limited are authorised and
regulated by the Financial Services Authority.