Hiscox Ltd
Report and Accounts
2011
Contents
About the Hiscox Group
2 Corporate highlights
3 Why invest in Hiscox?
4 Chairman’s statement
6 Chief Executive’s report
13 Hiscox business structure
14 Reinsurance
17 People
Financial review
18 Group financial performance
20 Group investments
Governance and remuneration
23 Risk management
28 Corporate responsibility
Insurance carriers
30
34 Board of Directors
36 Corporate governance
39 Directors’ remuneration report
47 Directors’ report
48
Directors’ responsibilities statement
Financial summary
50
Independent auditors’ report
51 Consolidated income statement
Consolidated statement of
51
comprehensive income
52 Consolidated balance sheet
Consolidated statement
53
of changes in equity
Consolidated statement
of cash flows
Notes to the consolidated
financial statements
54
55
104 Five year summary
Our ambition is to be a highly
respected specialist insurer with
a diverse portfolio by product
and geography. We believe
that building balance between
catastrophe-exposed business
and less volatile local specialty
business gives us opportunities
for profitable growth throughout
the insurance cycle.
Our strategy is:
to use our underwriting expertise
in London and Bermuda to write
high-margin volatile or complex risks;
to build our distribution in the UK, Europe
and the US for our specialist retail products;
to protect and nurture our distinctive culture
and ethos by recruiting the best people,
and by focusing on organic growth.
Strategic focus
Total Group controlled income for 2011
28% Reinsurance
3% Large property
3% Global errors
and omissions
9% Specialty – terrorism,
specie, political risks,
aerospace
8% Marine and energy
100% = £1,664m
Local errors and omissions
and commercial
16%
Tech and media errors
and omissions
3%
Art and
private client
17%
8%
Specialty –
kidnap and ransom,
contingency,
personal accident
Small property
5%
Why invest in Hiscox? Hiscox Ltd Report and Accounts 2011
1
Corporate
highlights
Group key performance indicators
Gross premiums written (£m)
Net premiums earned (£m)
Profit before tax (£m)
Profit after tax (£m)
Earnings per share (p)
Total dividend per share for year (p)
Net asset value per share (p)
Group combined ratio (%)
Group combined ratio excluding foreign exchange (%)
Return on equity (%)
Investment performance (%)
Operational highlights
2011
2010
1,449.2
1,432.7
1,145.0
1,131.2
17.3
21.3
5.5
17.0
211.4
178.8
47.2
16.5
323.5
332.7
99.5
99.3
1.7
0.9
89.3
89.8
16.5
3.6
Robert Hiscox to step down from the Board in 2013
UK retail business delivers good growth and another record profit of £49.0 million
(2010: £28.8 million)
Hiscox London Market achieved a profit of £57.6 million (2010: £121.4 million), offsetting catastrophe
reinsurance losses with profits in international property, marine, and other specialist lines
Rates are rising in reinsurance and slowly increasing in other specialty lines
Hiscox USA is progressing well with 29% growth in core broker lines and over 6,000 policies
sold by the direct business in the first year of operation
323.5
17.0
Net asset value p per share, 2011
Dividend p per share, 2011
£17.3m
Profit before tax
2
Corporate highlights Hiscox Ltd Report and Accounts 2011
Why invest
in Hiscox?
We are a leading specialist
insurer with:
balance that
creates opportunity
throughout the cycle;
strong financial
performance;
a transparent
approach to risk;
specialist expertise
that is valued by
our customers.
Our business
A balanced portfolio that creates
opportunity throughout a cyclical market
Hiscox’s strategy is to balance the more volatile
catastrophe-exposed insurance and reinsurance
with steady local specialty insurance. Our
diversity by product and geography gives us
great flexibility, particularly in a tough commercial
environment. We are able to grow and shrink
the catastrophe-exposed lines according
to market conditions. Currently, rates for
reinsurance, which makes up 28% of our
income, are healthy. When these rates are
no longer favourable, we have the flexibility
to shrink this side of the business. Our local
specialty insurance business tends to be
steadier throughout the insurance cycle and
we have successfully grown our retail lines
by 7.5% year-on-year over the last five years.
Our performance
Strong financial performance
Hiscox has a strong record of top-line growth
with a focus on ROE. Performance highlights
between 2007 and 2011 include:
increased gross written premiums
by 20.9% to over £1.4 billion
healthy combined ratio averaging 87.1%
delivered average ROE of 17.3%
maintained a progressive dividend policy
with compound growth of 9.1%.
Our expertise
A transparent approach to risk
The very business of insurance is managing risk.
The understanding of risk is intrinsic to every
level of decision-making in the Group. We devote
a great deal of expertise to understanding
the impact of global events and model these
rigorously. We also draw on over 100 years of
experience in insurance to assess these risks.
Catastrophes such as hurricanes and earthquakes
could hit at any time, and naturally would have
an impact on our business. Therefore twice a
year, in our analysts’ presentations and on our
website, we publish estimates of what the Group’s
losses would be should such a catastrophe occur.
Our people
Specialist expertise that is valued
by our customers
We are market leaders in many of our specialist
areas and our customers value the expertise
and cover we provide.
What our UK customers said:*
99% of home insurance customers
were satisfied that we answered their
questions and provided the information
they needed today
94% of our home insurance customers
surveyed were satisfied with the service
they received.
In Europe, a survey** of our brokers saw
Hiscox rated as a leading high net worth
insurance brand.
In 2011, Hiscox UK was awarded Commercial
and Personal Lines Team of the Year at the Claim
Awards ceremony. On the commercial side,
Hiscox UK won Best Small Business Insurance
award for the third year running at the Start
Your Business Awards 2011.
* Results from our monthly customer satisfaction survey for customers
telephoning one of our UK-based contact centres.
** Results from a survey of 301 existing household/commercial brokers
in Belgium, France, Germany and the Netherlands in January 2011.
Building a balanced business
Gross premiums written at 100% level (£m)
Hiscox Bermuda
Hiscox London Market – Volatile
Hiscox USA
Hiscox Guernsey
Hiscox London Market – Retail
Hiscox Europe
Hiscox UK
1800
1600
1400
1200
1000
800
600
400
200
0
1,713
1,671 1,664
1,476
1,407
1,390
1,111 1,105
1,083
941
780
603
514
480
370
379
378
422 403 413
244
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Why invest in Hiscox? Hiscox Ltd Report and Accounts 2011
3
Chairman’s
statement
Robert Hiscox
Chairman
Again we have been well and truly tested
by Mother Nature and a small profit is a
good result in the circumstances. By any
measurement, it was a phenomenally
catastrophic year with definitely more
economic damage caused by natural
catastrophes than ever before, including
in the second half of the year the major
international loss from the Bangkok floods.
We were able to absorb these considerable
losses, despite much reduced investment
returns, through the profits from our
specialist books in the London Market,
and the retail businesses in the UK, Europe
and Guernsey. In particular, a £49.0 million
profit from the UK business, the most mature
of our retail accounts, demonstrates the
potential for our similar accounts in Europe
and the US. Our strategy of balance
worked well.
Results
The result for the year ending 31 December
2011 was a profit before tax of £17.3 million
(2010: £211.4 million) on a gross written premium
income of £1,449.2 million (2010: £1,432.7
million). The combined ratio was 99.5% (2010:
89.3%). Earnings per share 5.5p (2010: 47.2p)
and net assets per share 323.5p (2010: 332.7p).
The return on equity was 1.7% (2010: 16.5%).
Dividend, balance sheet and capital
management.
The Board proposes to pay a final dividend
of 11.9p (2010: 11.5p) on 19 June 2012 to
shareholders on the register on 11 May 2012,
making total dividends for the year of 17.0p
(2010: 16.5p) an increase of 3%, in line with
our policy of steady dividend growth. A scrip
dividend alternative to the cash dividend will
continue to be offered to shareholders.
The market
As usual, the CEO Bronek Masojada will
comment in detail on conditions in the general
markets and the performance of our various
businesses in them. I can see that rates are rising
in many of our key areas, especially those which
have suffered large losses, which bodes well for
2012. Some comment that the rises are not big
enough but they suit me. If we get a great surge
in rates, which happens only rarely and then
after a major event following a lean period, prices
go too high and start coming down almost
immediately. In an ideal world rates would bump
along at a level at which good underwriters could
make money and the bad ones wither and die.
Given that the insurance market is remorselessly
cyclical, I like small rises which help margins
for the good without encouraging foolishness
in the bad.
There is still too much capacity in the insurance
world, some of it new from hedge funds and the
like. The reinsurance market is more stable than
the insurance market as there are fewer well
rated reinsurers and more disciplined adherence
to catastrophe models. In the insurance market,
we daily walk away from risks where uneducated
capacity has plunged into the market at rates
which can only lose them money. The curse
of the industry is that we sell a product the cost
of which is only discovered years later when the
claims roll in. This breeds optimism, and nobody
is more optimistic than the new entrant with no
legacy problems (they think), but also no legacy
book of business or experience. All existing
business in the world is already placed with an
insurer, and which broker is going to switch it to
a new entrant unless they cut the price or widen
the terms?
When I started underwriting (with unlimited
liability for the first 21 years – and nothing could
make an underwriter more conscious of risk than
taking it with everything they own), there was
no computer adding up aggregate liabilities.
Premium income could be counted, but not the
exposure, and claims come from exposure not
income. Statistics and management information
have improved enormously over the years, and
every year I believe that management of our
competitors will force commercial discipline on
their underwriters, but some foolish underwriting
continues. In Lloyd’s, if rates are being cut
foolishly, the Franchise Director moves in to test
the business plan, and if necessary to stop it.
I hope the discipline of Solvency II will similarly
test the “we will beat whatever price the
competition has quoted” underwriting that you
even see advertised regularly.
Corporate governance
I have decided to step down as Chairman of
the Board while I still feel near the top of my
game and have informed my fellow Directors
that I would like to retire from the Board this time
next year when I will have just turned 70. My
passion for the business remains undiminished,
and I will be available if the new Chairman or
others wish to draw on my 47 years of
experience. The independent Directors have
instituted a search from both within and without
the company, and I know that they will find
a suitable candidate to lead the Board for
the next exciting era of the business.
There is no better fun than building a business.
It has been an enormous privilege to lead Hiscox
since 1970 when my father died and I am very
grateful to those who have helped me to achieve
what has been achieved so far. I have always
aimed to employ people brighter than I am, and
have always believed that a businessman should
only be judged a success if the business thrives
after he has gone. I am convinced that the
current top executives prove that I have achieved
my employment ambition, and I know that they
have the talent and the drive to create a truly
great business well into the future. Since before
we became publicly quoted in 1993 we have had
strong Non Executive Directors and I am grateful
to them for their excellent advice on our strategy
and tactics, and their robust challenge when they
see the need. The regulator likes to see evidence
of regular robust challenge, but it has to be said
that challenge for its own sake is pointless,
and if correct decisions are being made, calm
4
Chairman’s statement Hiscox Ltd Report and Accounts 2011
agreement can be found without artificial
contrarian debate.
We first expanded from Lloyd’s into the UK
regions in 1989, then into Europe from 1993.
We bought an ailing UK insurance company
in 1996 which was on the regulator’s monthly
watch list and have turned it into a thriving
company which made £49.2 million last year.
We have built successful insurance companies
in Guernsey and Bermuda, and have started
an insurance company in the US which is
growing to profitability. We have developed
direct businesses in the UK, France and the
US. We have grown from a Lloyd’s syndicate
to a truly international insurance business,
headquartered in Bermuda.
We have built a brand based on trust and service
and have been rated as the most trusted insurer
in the UK. The value of our brand depends on
our integrity and our fair treatment of customers
which acts as a sharp pencil in the small of the
back of every member of staff to live up to the
advertised standard. I would like to thank them
all for carrying the flag so well.
Some key rates are rising, we are employing
some brilliant talent, we have fledgling
businesses poised for growth and profit, and
our mature businesses have small market shares
and enormous opportunities. I look forward to
my final year as Chairman confident that the next
era of the business will be rewarding to both
shareholders and staff.
Robert Hiscox
27 February 2012
We also have a very strong corporate ethical
culture which has led us through some very
stormy waters in our early days at Lloyd’s when
it went through its period of lack of integrity and
appalling underwriting in the 1980s and 1990s.
I was privileged to play an early part in regulation
at Lloyd’s when basic standards were being
imposed, and a substantial part in the
Reconstruction and Renewal of Lloyd’s (together
with Bronek Masojada who was on the McKinsey
team), especially the Renewal through the
introduction of Corporate Membership which
created a renaissance of the UK insurance
industry. With Solvency II the industry is now
going through a massive assessment of the
capital each business needs by codifying all the
risks in great detail into a computer model, and
I am glad that our massive housekeeping exercise
has thrown up no surprises. Risk is our business
and I have spent 47 years assessing it, and as
I said before, 21 of them with unlimited liability.
The work we are doing should make us a safer
business which brings me comfort as my family
and I have a substantial percentage of our worth
in Hiscox shares and as I get older I get more risk
averse as I cannot make it again. We have always
encouraged our staff to buy or hold shares in the
company as we strongly believe that a feeling of
ownership breeds responsibility, and I know that
our investors like the fact that we have plenty
of skin in the game.
The future
The general insurance market has had an
excellent record for the last ten years despite
enormous natural and man-made catastrophes
(although it feels unrecognised with the ever
increasing blanket of regulation with which we
are smothered). It is an exciting business being
in reality bookmaking as we quote odds on
almost every conceivable event, loss or tragedy
happening around the world. It is a fulfilling
career as we enable private ownership and
commercial endeavour to flourish through
adversity. I think that the boring image, which
could not be further from the truth, is dissipating,
and we are attracting some extremely talented
young people into our business which again
bodes well for the future.
Chairman’s statement Hiscox Ltd Report and Accounts 2011
5
As the Chairman has said, 2011 was
a year dominated by natural catastrophes.
Earthquakes, floods, tornadoes, hurricanes
and a tsunami caused insured losses in
excess of $100 billion making it one of the
most expensive years on record for the
industry. The fact that Hiscox made a profit
of £17.3 million for the year (2010: £211.4
million) is a demonstration of the strength
and resilience of our Group. The UK,
Guernsey and European operations and
several of our London Market divisions
contributed strong profits, which offset
the net £270 million (2010: £165 million)
in catastrophe related claims reserved
in our London and Bermuda reinsurance
units, and the lower investment returns.
Our strategy of balance and diversification has
therefore shown its value once again. We will
continue, with ever greater effort, to grow our
retail-focused businesses around the world and
invest in our specialist businesses in London.
This will further enhance our capacity to weather
future catastrophes and provide attractive
returns to shareholders.
Hiscox London Market
Our London Market business navigated its
way through the thick of the storm in 2011 with
amazing resilience thanks to its spread of
business. Profits in international property, marine,
and other specialist lines offset reinsurance
losses allowing it to make an aggregate profit
of £57.6 million (2010: £121.4 million). This is a
fantastic achievement given the exposure it had
to the global catastrophes of 2011. Revenues
increased marginally to £585.4 million (2010:
£572.7 million) showing yet again the truth of the
mantra “profit is sanity: revenue vanity”. Looking
at each business line in turn:
Reinsurance: Although underweight in
most loss affected areas, this team was
impacted by the many natural catastrophes
in 2011. The team took advantage of
distressed conditions following the events
in the first half to expand their writings at
the important mid-year renewals. They have
also continued to build their partnerships
with third-party providers of reinsurance
support. The team retains their nerve and
are optimistic about 2012.
Property: Discipline over many years has
seen our core property account shrink, but
the result is good. The team have expanded
their book into insuring non-catastrophe
exposed contractors equipment for fire and
theft and this is developing well. In 2012 they
have seen upward pressure on rates, and
business which had threatened ‘never to
Reinsurance
Insurance
Chief Executive’s
report
Bronek Masojada
Chief Executive
Hiscox Group rating index
Index level (%). 12-month rolling period
140
120
100
80
60
40
20
0
A pr 06 – M ar 07
Jun 05 – M ay 06
Fe b 05 – Jan 06
A pr 05 – M ar 06
D ec 05 – N ov 06
Fe b 06 – Jan 07
Jun 06 – M ay 07
Jun 07 – M ay 08
Jun 08 – M ay 09
O ct 06 – S e p 07
D ec 06 – N ov 07
A pr 07 – M ar 08
O ct 07 – S e p 08
D ec 07 – N ov 08
A pr 08 – M ar 09
O ct 08 – S e p 09
D ec 08 – N ov 09
A u g 06 – Jul 07
Fe b 07 – Jan 08
A u g 07 – Jul 08
Fe b 08 – Jan 09
A u g 08 – Jul 09
O ct 05 – S e p 06
A u g 05 – Jul 06
Fe b 09 – Jan 10
A pr 09 – M ar 10
Jun 09 – M ay 10
Jun 10 – M ay 11
A pr 10 – M ar 11
A u g 09 – Jul 10
O ct 09 – S e pt 10
Fe b 10 – Jan 11
O ct 10 – S e p 11
Fe b 11 – Jan 12
A u g 10 – Jul 11
D ec 10 – N ov 11
D ec 09 – N ov 10
6
Chief Executive’s report Hiscox Ltd Report and Accounts 2011
Hiscox London Market
2011
£m
2010
£m
Gross premiums written
585.4 572.7
Net premiums earned
418.8 396.1
Underwriting profit
Investment result
Foreign exchange
Profit before tax
50.3
70.6
8.8
39.1
(1.5)
11.7
57.6 121.4
Combined ratio
89.1% 79.7%
Combined ratio excluding
foreign exchange
89.1% 81.8%
Hiscox UK
2011
£m
2010
£m
Gross premiums written
367.1
327.0
Net premiums earned
325.2
302.6
Underwriting profit
41.5
16.2
Investment result
Foreign exchange
Profit before tax
Combined ratio
7.3
0.2
12.4
0.2
49.0
28.8
87.5% 94.6%
Combined ratio excluding
foreign exchange
87.6% 94.7%
come back to London’, unless written at
uneconomic prices, is returning from the US
domestic market. This augurs well for the
future. The division has also benefited from
subrogation recoveries on property claims
resulting from the events of 9/11.
Marine and energy: This team suffered
from the large Maersk Gryphon loss –
a North Sea oil platform which was put out
of production by poor weather – in the early
part of the year, but discipline and its smart
spread of business have allowed it to make
a profit in the year. In 2012, we reserved
$20 million net for the sinking of the Costa
Concordia. We expect that this event will
result in upward pressure on rates in the
marine market.
Global response: Our team has continued
to serve clients around the world in the
terrorism, kidnap and ransom, piracy and
political risk areas. Piracy remains challenging
as prices are inadequate for the risks being
run and our book continues to shrink. The
Arab Spring created repatriation losses but
again the spread of business allowed the
division to perform well in the year.
Specialty: This division consists of the
bloodstock, contingency, personal accident,
specie, media and technology businesses
written in the London Market. It had a very
good year. The specie and technology
accounts benefited from the settlement of
some old claims which resulted in substantial
releases from reserves. Our contingency team
supported the Rugby World Cup organisers in
New Zealand as they dealt with the impact of
the Christchurch earthquakes on their seminal
event, demonstrating our claims handling
ability in such an unusual situation. During the
course of the year we closed our bloodstock
account as poor rating had caused it to
shrink to a size where it was no longer viable.
Casualty: This was once one of our biggest
and most profitable lines, but relentless rate
reductions and disciplined underwriting
by the team has seen it shrink to less than
a sixth of its cyclical high. The account
remains profitable: we think that the suicidal
competition in the 2012 renewal season
will make a turn in pricing inevitable so we
are investing in extending our capability
in this area.
Aviation and space: We have had a
presence in the space market for many
years and this business continues to
perform well. Our aviation venture is now
in its second year and we have established
a small market presence with a reputation
as a considered and disciplined participant.
Our London Market business is primarily
conducted in London through Lloyd’s with a
focus on large internationally traded syndicated
risks and on the specialist and the unusual.
Hiscox is a brand to be proud of, but we know
in the global insurance market the continued high
regard for the Lloyd’s brand and the success of
the market as whole is necessary for us to out-
perform. We therefore believe in the value of the
Lloyd’s licenses, the need for a secure, well
supervised market and the benefits of shared
central services such as policy production,
money collection and claims settlement and
payment. Some of our competitors believe that
they can gain individual advantage by performing
many of these tasks themselves, independent
of the market. We do not, as we believe that
fragmentation will lead to poorer service to clients
and brokers leading to an erosion of Lloyd’s, and
hence our own competitiveness. We are therefore
supportive of efforts to improve the volume
claims service which acts on behalf of the market
and will continue to oppose efforts to fragment
this community resource. We are also supportive
of Lloyd’s efforts to invest in upgrading the central
market processing environment, but again with
the concern that fragmentation must not be
allowed. In all these matters we believe in holding
Lloyd’s and other central service providers to
account, as if they do the job well, more business
will flow to London and Lloyd’s and we will win
more than our fair share of the best business.
Hiscox UK and Europe
Our businesses in the UK and Europe focus on
insuring higher net worth personal insurances
and small businesses active in areas such as
marketing, consulting and other office-based
professional services. We market these products
both through brokers and direct to the customer.
The year saw continued growth, pushing premium
income up 9.5% to £498.0 million (2010: £454.7
million). At the same time, we were able to
increase our profits in this segment to £51.4
million (2010: £39.6 million), a fantastic result.
Hiscox UK: Our UK business has become
a powerhouse, achieving another record
profit of £49.0 million (2010: £28.8 million)
despite a big fall in investment income and
the competitive market conditions which
prevailed. It had substantial top-line growth
of 12.3% to £367.1 million (2010: £327.0
million). This result was driven by a focus on
disciplined underwriting and by the strength
of the Hiscox brand. Most satisfying has
been the performance of our high net worth
team. They reaped the rewards of their efforts
in 2009 and 2010 when, against prevailing
market trends, they maintained discipline,
increased prices marginally and as a result
made a very healthy profit this year. Their
nascent luxury motor account also made
a good profit – a real achievement in its third
year. The commercial business had a
reasonable year, despite being challenged
by claims arising from mistakes by some
of the professionals we insure which have
been revealed by the recession.
We have worked for several years to build
our distribution with a broader range of
partners. In late 2010 we entered into
Chief Executive’s report Hiscox Ltd Report and Accounts 2011
7
Chief Executive’s
report continued
Hiscox Europe
2011
€m
2010
€m
Gross premiums written
151.4
146.7
Net premiums earned
143.8
134.7
Underwriting profit
Investment result
Foreign exchange
Profit before tax
4.1
(0.1 )
0.3
4.3
6.2
5.7
–
11.9
Combined ratio
99.5% 97.4%
Combined ratio excluding
foreign exchange
99.8% 97.4%
Hiscox International
2011
£m
2010
£m
Gross premiums written
365.8 405.2
Net premiums earned
277.6 312.9
Underwriting profit
(92.7)
18.1
Investment result
Foreign exchange
Profit before tax
6.3
27.6
(3.1)
(2.6)
(89.5)
43.1
Combined ratio
133.9% 97.3%
Combined ratio excluding
foreign exchange
132.8% 96.4%
an agreement with the Dual underwriting
agency, for them to underwrite and market
our products, and our business together
has developed well. We have also created
a specialist team to focus on Marsh, Aon
and Willis, the three largest national brokers
with whom we have strong Group
relationships but with whom we do little
business in the UK. Our business with them
is growing slowly, but much remains to be
done. We have also created new relationships
with a number of independent brokers who
have moved books of specialist business to
us. We have won their support because our
underwriters and operations staff respond
to their requests for assistance faster
than the competition and because of our
reputation for paying valid claims fast and
fairly. Not all of our underwriting partnerships
have gone well, and at the end of 2011 we
cancelled a household partnership which
had not performed to our expectations. This
will have a negative impact on Hiscox UK’s
2012 top-line growth, but we expect that
it will have a positive effect on profitability.
Our direct business continues to go from
strength to strength and is now a £65 million
business. Both our commercial and personal
lines units achieved excellent profits in 2011.
We have added a new travel product to our
personal lines offering and expect to follow
with more choices of cover during 2012.
Building the direct business requires us to
spend significant amounts on our marketing
which offers very tangible benefits to the
whole Group and in 2011 we were short-
listed as one of the five best brands in the
UK at the Marketing Society Awards
alongside household names such as
John Lewis and British Airways. It is a real
achievement for our UK team to have created
such a recognisable brand when we operate
in what is thought of as a grey industry.
Hiscox Europe: Although its profits fell
to £2.4 million (2010: £10.8 million), 2011
is Europe’s third successive year of overall
profitability. Most of the profit fall was due
to a decline in investment income and
a single large reserve. Hiscox Europe is
now at the same stage of development
as the UK business in 2001 and as its
scale grows I expect that profits will grow.
The top line was flat at £130.9 million (2010:
£127.6 million), though this masks some
changes in its business mix. Our art and
private client business shrank, as expected,
as the impact of underwriting actions taken
in 2010 fed through. This decline was offset
by growth in the commercial area where
our specialist kidnap and ransom, media,
technology and related products performed
well, as have our partnerships with other
financial institutions.
Despite the economic challenges that
Europe faced, and will no doubt face in 2012,
we are continuing to invest on the continent.
For the past two years we have been building
a direct business in France focusing on
small commercial lines. In 2012 we will be
supporting this direct business with an
expanded marketing campaign – in fact our
first French television commercial aired in
January. Early responses have been positive,
and if all goes well we hope to build a direct
business to match that in the UK.
Hiscox International
Hiscox International has suffered most visibly
from the catastrophe losses in 2011. It swung
to a loss of £89.5 million (2010: profit of £43.1
million) and its premiums shrank 9.7% to £365.8
million (2010: £405.2 million). As trends in each
business unit within the division vary materially
I comment on each separately below:
Hiscox Bermuda: The focus of our
business in Bermuda is overwhelmingly
on catastrophe reinsurance so in a year like
2011 it is not surprising that the unit suffered
a big loss. Hiscox Bermuda’s disciplined
underwriting saw its written premiums
reducing by 9.5% to £177.7 million (2010:
£196.4 million). It is the nature of reinsurance
to be volatile but on average the results
are very attractive. Since we created
our business in Bermuda in 2006 it has
achieved an aggregate combined ratio,
including 2011, of around 80% – a very
respectable result.
Hiscox USA: The US has made good
progress in 2011. Its revenue fell by 15.5%
to £108.3 million (2010: £128.2 million) which
was mainly due to the withdrawal from two
lines of business at the end of 2010 and the
transfer of our large technology and media
portfolios to Hiscox London Market. It saw
strong growth of 29.0% in our core areas
of kidnap and ransom, construction,
terrorism, media and professional lines
and we believe this progress will continue.
Our network of offices across the US has
been crucial in helping us attract business.
2011 also saw the launch of our US direct
commercial offering aimed at start ups and
small businesses. We have been building
the brand in the US through traditional and
digital marketing. We have been using social
media in the form of a branded entertainment
web TV series called Leap Year, aimed at
budding entrepreneurs which has been
watched by over four million viewers.
The series won a coveted Digital Luminary
award for branded entertainment in the
company of brands like Yahoo and NASA.
We have also entered into marketing
partnerships with GEICO and other major
insurers, a real testament to the quality
of the products we have on offer. We sold
over 6,000 policies direct to consumers
by the end of the year. The trend remains
positive and we will continue to invest
further in this fledgling business in 2012.
8
Chief Executive’s report Hiscox Ltd Report and Accounts 2011
Hiscox Guernsey: This business
underwrites kidnap and ransom, piracy,
fine art and terrorism and continues to be
a star performer. Its revenues declined
marginally to £79.8 million (2010: £80.6
million) despite a very disciplined
underwriting approach towards piracy.
The team made a profit despite suffering
a large fine art loss when a painting was
being transported from the auction house
to a client. This team is concentrating on
expanding its distribution and expects to
strengthen this in several territories in 2012.
Claims
Insurance is basically a promise to pay. Claims
are where that promise is tested. In 2011 our UK
claims team dealt professionally with the welter
of claims resulting from the severe winter freezes,
while our Bermuda and London Market claims
teams have been at the forefront of adjusting and
paying claims arising from the string of natural
catastrophes. It is pleasing to see that during all
of this they kept their promise with prompt and
fair payment of valid claims with a smile.
In 2011 we released £199 million (2010: £133
million) from prior years’ reserves. We have
benefited from some legal victories, most
prominently in our long running litigation over
subrogation from the World Trade Center, and from
some large technology and professional liability
cases. At the end of 2011 our actuarial analysis
shows that we continue to hold the same size
margin above best estimate as at the end of 2010.
In the UK we took the big step of insourcing
all of the claims from our direct to consumer
business, recruiting a small number of staff
from our outsource partner and expanding the
services which we offer to claimants. Our claims
service remains one of the best in the industry
and in 2011 we were awarded Post Magazine’s
Commercial Lines and Personal Lines claims
team of the year. We continue to invest in claims
and a priority in 2012 will be Europe. The challenge
is to use our skills on a pan European basis as
the individual operations remain quite small.
Investments
2011 was a challenging year for our investments.
This is not a surprise given the continuing
volatility and uncertainty in world financial
markets. We achieved a total return of £25.9
million before derivatives with a yield of 0.9%
(2010: £98.8 million, 3.6%).
We started the year concerned about a possible
increase in interest rates but happy to take some
credit risk and we positioned the bond portfolios
accordingly. The stance on duration in particular
proved to be too cautious in light of the flight
to quality that took place in Government bond
markets in the second half. Additionally, in some
cases, our non government bonds incurred
mark to market losses. However, we have the
resilience to hold these through periods of
market turbulence as we will eventually realise
value for them as they move to maturity.
We took advantage of some of the market
weakness in the summer to increase our equity
weighting slightly. Again, we believe we have
a strong enough balance sheet to withstand
the volatility that inevitably comes with owning
shares and are prepared to do so as long as
we can see value in the longer-term.
Looking forward we expect investment returns
to remain depressed. We are not tempted by
the range of products which may offer higher
apparent returns but would rather accept what
the market has to offer from conventional sources.
Operations and IT
Great underwriting only delivers value to
customers if supported by excellent operations.
During the year we continued to improve our
operational capabilities. In Hiscox London
Market we re-engineered our processes so
that all risk details are entered into our systems
within 48 hours of binding, providing us with
real underwriting insight and control benefits.
Across our European and UK businesses we
improved the quality of our data leading to more
timely and accurate customer documentation.
In Hiscox UK we introduced sophisticated
capacity planning tools to ensure that we had
the resources in place to meet spikes in demand.
Our quality, as perceived by our customers,
is measured using Net Promoter scores and
we are now receiving industry-leading scores.
In the US our new service centre, which supports
the direct business, is also getting very positive
customer reviews.
All this operational improvement has been
mirrored in improvements in our IT performance.
The IT team re-organised themselves during the
year to match our business unit structure, allowing
for more interaction between teams and greater
accountability to the business for delivering
specific projects. As a result, we have seen
a higher number of projects being completed
more efficiently and to a higher standard.
Our leadership
Robert’s announcement that he intends to
retire as Chairman in 12 months’ time marks a
watershed for the Group. Robert joined Hiscox
in 1965 and took over its leadership in 1970 when
we had two small boxes at Lloyd’s and controlled
premium income of just over £2 million. We now
have controlled premiums of £1,664 million and
operate from 27 locations in 11 countries. During
this time Robert has steered Hiscox through
the many challenges such as 9/11 which have
occasionally shaken the industry to its foundations.
He has also served the Lloyd’s marketplace
with distinction in a number of roles during
its toughest times. He was a member of the
Rowland Taskforce in 1991 and was Deputy
Chairman of Lloyd’s during its turbulent years
of Reconstruction and Renewal from 1993–1995.
He has done all of this with drive, energy,
perspicacity, determination, iconoclasm, wit
and aplomb. We will not be losing Robert’s
guidance as in 2013 he will remain with the
business as Honorary President.
Chief Executive’s report Hiscox Ltd Report and Accounts 2011
9
Chief Executive’s
report continued
Outlook
We have seen substantial rises in rates for
catastrophe reinsurance in loss affected
territories such as Japan, New Zealand and
Australia, but areas which were already well
rated, such as the United States, have seen
more modest increases. Unfortunately,
catastrophe reinsurance in areas which
continue to need price rises such as Europe
have remained flat. In non catastrophe areas
the trends are more mixed. European insurance
pricing remains reasonable in our lines, and
in the UK there is some downward pressure
in commercial insurance, whilst personal lines
are flat albeit at healthy levels. In the US we are
seeing modest upward pressure.
In this environment we believe that we can
thrive. The UK will continue with its consumer
and brand led expansion; Europe will focus
on driving growth in current product areas
and current territories, developing greater scale
and with that improved profitability; the US
will continue to drive for scale in current areas
and build on the exciting possibilities of its
direct business; The London Market, Bermuda
and Guernsey insurance businesses will
take advantage of areas with rate increases,
expanding judiciously in property related lines
but continuing to shrink in casualty; overall
Reinsurance is even better rated than in previous
years and unless the world turns upside down,
should return to its usual profitability. I feel
excited as I see these plans coming together
and am confident the profits they generate
will benefit shareholders and staff.
Bronek Masojada
27 February 2012
A huge part of Robert’s success has been
formed around his ability to recruit great people
and he has given them the freedom to build their
businesses. One of the most important of these
hires was Nicholas Thomson who will be
standing down as a Non Executive of our UK
based subsidiary boards shortly. Nick joined
Robert in 1973, becoming Underwriter of
Syndicate 33 from 1976 until 1993 and Director
of Underwriting from 1993 until 2001. Nick
served as a Hiscox plc Board Director from 1993
until 2001. He has also always served on our UK
based subsidiary boards, moving to a Non
Executive position in 2001. Nick’s contribution
to our underwriting culture has been immense
and we will miss the grenades of underwriting
and business insight that he rolled down the
boardroom table with unfailing regularity.
Strong experienced Non Executives have also
been of huge value to the Group. Foremost
amongst these has been Anthony Howland-
Jackson who will also be standing down shortly.
After a distinguished career in broking, Anthony
joined the Board of Hiscox plc and our UK
based subsidiaries in 1997. He served as Senior
Independent Director on the Board of Hiscox
plc standing down from this Board when we
re-domiciled to Bermuda in 2006. Since then
he has continued to serve as a Non Executive
Director of our UK based businesses. Anthony’s
well timed questions caused us to re-assess
many of our more fanciful ideas and his words
of advice were always listened to.
The Board has initiated a selection process to
find a successor to Robert. This process is being
led by the Chairman of the Remuneration and
Nomination Committee, Andrea Rosen,
supported by our Senior Independent Director,
Richard Gillingwater, and with input from all
Hiscox Ltd Non Executive Directors who form the
Committee. The Remuneration and Nomination
Committee have appointed a leading search firm
as advisers and we will make an announcement
on succession in due course.
People
We are always working to attract the most
talented people to work here, to retain them
and to help them to develop. Robert has led
by example in this and we seek to live up to his
standards. In 2011 both Hiscox London Market
and Hiscox UK achieved Chartered Insurer
status. This reflects the investment we have
put into ensuring our staff achieve industry
qualifications which we then back up with
internal training and development programs.
We really believe the quality of our staff is a
competitive advantage in the industry, and the
resilience of our result this year reflects their
individual contributions on a risk-by-risk and
day-by-day basis. I thank them all.
10
Chief Executive’s report Hiscox Ltd Report and Accounts 2011
Actively managed business mix
Total Group controlled premium December 2011: £1,664m
(Year-on-year change in original currency)
(-7.9%)
£464m
Marine
Non-marine
Aviation
Whole account
(+30.2%)
£318m
Professional
liabilities
Errors and
omissions
Directors
and officers’
liability
Commercial
office
Small
technology
and media
E&O
(-1.5%)
£278m
Home and
contents
Fine art
Classic car
(+14.5%)
£288m
Kidnap and
ransom
Contingency
Terrorism
Specie
Personal
accident
Political risks
Aviation
Contractors’
equipment
(-0.5%)
£139m
Marine hull
Energy liability
Upstream-
midstream
energy
(-4.4%)
£136m
Managing
general agents
Commercial
property
Onshore
energy
USA
homeowners
(-44.3%)
£41m
Professional
indemnity
Large tech
and media E&O
Reinsurance
Local E&O and
commercial
Specialty
Art and
private client
Marine
and energy
Property
Global E&O
Chief Executive’s report Hiscox Ltd Report and Accounts 2011
11
The Hiscox Group
has over 1,250 staff
in 11 countries.
Bermuda
Hamilton
Europe
Amsterdam
Bordeaux
Brussels
Cologne
Dublin
Hamburg
Lisbon
Lyon
Madrid
Munich
Paris
Guernsey
St Peter Port
Latin
American
gateway
Miami
UK
Birmingham
Colchester
Glasgow
Leeds
London
Maidenhead
Manchester
USA
Atlanta
Chicago
Los Angeles
New York City
San Francisco
White Plains (New York)
12
12
Chairman’s statement Hiscox Ltd Report and Accounts 2011
Chief Executive’s report Hiscox Ltd Report and Accounts 2011
Hiscox business
structure
Hiscox
London Market
Hiscox
London Market
Russell Merrett, Managing Director
Reinsurance; property; marine and energy; specialty; kidnap
and ransom; terrorism; political risks; errors and omissions;
aviation and aerospace
Hiscox
International
Hiscox
Bermuda
Charles Dupplin, Chief Executive Officer
Global reinsurance; group capital support; healthcare
insurance
Hiscox
Guernsey
Hiscox
USA
Hiscox
UK and Europe
Hiscox
UK
Hiscox
Europe
Steve Camm, Managing Director
Fine art; kidnap and ransom; terrorism
Richard Watson, Chief Executive Officer
Errors and omissions; directors and officers’ liability; property;
specialty; kidnap and ransom; terrorism; technology/media;
direct to customer commercial business
Steve Langan, Managing Director
Fine art; high-value household; errors and omissions;
directors and officers’ liability; specialty commercial;
technology/media; direct to customer household and
commercial business
Pierre-Olivier Desaulle, Managing Director
Fine art; high-value; household; errors and omissions;
directors and officers’ liability; specialty commercial;
technology/media; kidnap and ransom; terrorism; direct
to customer commercial business
Hiscox business structure Hiscox Ltd Report and Accounts 2011
13
Reinsurance
Robert Childs, Chief Underwriting Officer,
explains more about Hiscox’s biggest line
of business.
our capacity behind specialist insurers writing
in classes or territories which we could not
otherwise access.
We also write reinsurance on behalf of other
(insurance and reinsurance) companies who
have entrusted capital to us, and in return we
receive an underwriting fee and can earn a
profit commission on that business. It’s a good
arrangement: it provides us with extra capacity,
which we can use to increase our footprint in
the market and to grasp new opportunities. But,
in the event of a loss, our downside is limited.
Hiscox has been underwriting reinsurance since
the 1970s, and a number of the Group’s senior
management were reinsurance underwriters,
so it is a strong part of our corporate DNA.
Robert Childs
Chief Underwriting Officer
How does reinsurance work?
Just as companies buy insurance to cover
potential risks to their business, insurance
companies themselves also buy insurance
(known as reinsurance) to transfer some
of their own risk. Reinsurance is a remarkably
flexible financial tool that insurers use to
manage the downside risk of their insurance
portfolios. It can help insurers absorb large
losses and reduce volatility in what can be
a very unpredictable industry. It can also act
as additional capital, allowing insurers to take
on more risk when they see the time is right.
Hiscox is an insurer, so we buy reinsurance
to help mitigate our own risk. We are also
a reinsurer that sells cover to other insurers.
Reinsurance is our largest line of business,
accounting for 28% of our Group premium
income in 2011. We underwrite it in both
Bermuda and London.
How would you describe Hiscox’s
reinsurance business?
Most of our business is property reinsurance
but we also underwrite a small amount of marine,
personal accident and casualty reinsurance.
We focus on ‘short-tail’ risks, where claims
occurrence and development are more
immediate and are therefore more easily
quantifiable, giving us greater certainty.
The majority of our reinsurance premiums
come from contracts that cover insurers’
catastrophic exposures, including hurricane,
wind, earthquake or flood. We also provide
reinsurance against individual risks, most often
fire or explosion, which are also known as risk
excess contracts. For example, we may provide
reinsurance for a client’s losses between $10
million and $20 million ‘any one risk’ as part
of an overall programme that provides a total
of $150 million in coverage for a single event.
The advantage for us is that our potential loss
is strictly defined – if the client’s loss exceeds
$20 million by any amount, we’ll only pay the
$10 million for which we are responsible in that
programme. This kind of underwriting needs
specialist knowledge to get under the skin of
how each client underwrites their own risks.
We do that by having very experienced
underwriters who build good relationships with
their clients. It helps that we are underwriters
of both insurance and reinsurance. We are able
to approach reinsurance with the knowledge
gained as a buyer as well as a seller.
Another substantial area of reinsurance
underwriting for us is in contracts called ‘pro-rata
treaties’, where we participate in a proportional
share of an insurer’s premiums and losses.
This form of reinsurance often acts as a capital
substitute, where clients transfer risk through
the purchase of reinsurance to free up capital.
Pro-rata treaties also offer us the chance to put
14
Reinsurance Hiscox Ltd Report and Accounts 2011
How do you use catastrophe models
in your business?
Catastrophe models can help reinsurers
estimate potential losses. We were early-
adopters of models as for decades we have
held the belief that analysis and science is the
route to profitable underwriting. The first model
we used was back in the early 1980s – long
before they became common in the industry.
It was developed by my predecessor and was
based on in-house research and used portable
computers with a bus-ticket printer!
We have come a long way since then and
much of the raw modeling is done using models
created by specialist companies. We have a
team of around 20 modelers who use our own
research to modify the models supplied by
the likes of Risk Management Solutions
(RMS) and AIR Worldwide. Through our many
years of underwriting reinsurance we have
developed a huge database, which contains
information not only on our own insurance
losses but other peoples’ as well. This empirical
database and methodology is a good foil to
the pure modeled approach.
We know that a mathematical model needs an
underwriter to use common sense to interpret it.
We have some of the best and most experienced
around. Our customised models, our
experienced underwriters and our backroom
team of scientists are the foundations for what
generates our ‘Hiscox view of risk’.
Boxplot and whisker diagram of Hiscox Ltd net loss (USD)
Upper 95%/lower 5%
Modeled mean loss
Hiscox Ltd loss ($m)
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Industry loss
return period
and peril
Mean industry
loss $bn
5–10 year
10–25 year
25–50 year
50–100 year
100–250 year
01
02
05
18
04
07
09
36
19
18
14
66
38
32
19
99
67
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26
152
This chart shows a modeled range of net loss the Group might expect from any one castastrophe event.
The white line between the bars depicts the modelled mean loss.
The return period is the frequency at which an industry insured loss of a certain amount or greater is likely to occur.
For example, an event with a return period of 20 years would be expected to occur on average five times in 100 years.
JP EQ – Japanese earthquake, US EQ – United States earthquake, EU WS – European windstorm, US HU – United States hurricane
Reinsurance Hiscox Ltd Report and Accounts 2011
15
Reinsurance
continued
Within the reinsurance account itself we are
able to achieve some balance between the
principal zones of exposure by peril, those are
the wind and earthquake in USA and Japan
and wind in Europe. Further balance can be
gained by adding in other territories but only
when adequately compensated.
As we achieve diversification in the risks we
write across the Group as a whole, we do not
have to seek diversification in the reinsurance
account per se. In reinsurance, diversification
can become ‘worsification’ if you are not
careful. It can dilute the quality and longer-term
profitability of your business if you take on
uncorrelated, but inadequately priced risk.
Successful reinsurance underwriting is about
making sure you take on risk at the right price
and has a lot of similarities with investment
management. We require to be paid adequately
for risk.
We have also been innovative over the years
in finding ways to expand our gross capacity
without necessarily increasing our retained
exposures. We have used financial instruments
that allow investors to take on the risk and
returns of the business we write. For example,
we were the first Lloyd’s business to create a
sidecar, when we created Panther Re in 2006.
We were also the first in Lloyd’s to issue a
catastrophe bond. We haven’t returned to that
market since then, because the terms on offer
haven’t been as attractive as in the traditional
reinsurance market.
What plans do you have for 2012?
We try to play the cycle intelligently. It’s fairly
simple to say: if prices go down you write less
business, but if they go up you write more; it’s
not always so easy to do. With the upheaval in
the market we see plenty of opportunities for
us in the year ahead and we have the financial
muscle and the underwriting know-how to
maximise those opportunities profitably for
our shareholders.
The Hiscox view has often been more
conservative than that produced by the industry
catastrophe models because of the tweaks and
fine-tuning we have made to them ourselves.
The latest version of the RMS model, the
incoming RMS 11, has caused projected US
hurricane losses to rise significantly, more
in line with our original view.
Can you explain what the Hiscox view
of risk is?
Essentially it’s our view of the underlying
exposures we have on our book. It reflects
the underwriting risk appetite defined by the
Group’s executive management. The view is
formulated by our Catastrophe Management
Team, which I chair, and which comprises
the head of modeling, our climate science
research manager and a number of our senior
underwriters. We calculate our accumulated
exposure to potential major disasters, such as
a US hurricane or a Japanese earthquake, by
running our numbers through our customised
catastrophe models. That process produces
a very specific loss number that we expect
our underwriters’ books to not exceed in
a major catastrophe.
The Hiscox view of risk underpins the pricing
models our underwriters use and informs their
view on which risks to take.
We consolidate what our teams in London
and Bermuda have written and measure that
against our pre-defined risk appetite. Our
modeling team updates the data on a regular
basis and if the number is out of line with the
pre-agreed risk appetite then we will manage
our exposures accordingly.
2011 was a very costly year for natural
catastrophes. How did Hiscox fare?
Natural catastrophes in 2011 cost Hiscox
around £270 million, yet despite this we
made a profit. This is largely due to our long
held strategy of balancing the bigger volatile
business, such as reinsurance, with smaller
steadier insurance business.
Most of the catastrophic events that led to
reinsurance claims occurred outside the USA
in 2011. We had believed that in a number
of these regions the catastrophe perils were
not adequately rated. We had some exposure
and suffered losses but because of this rate
inadequacy we wrote less exposure and our
losses were smaller than they could have been.
How do you hedge the reinsurance bets
you’ve taken?
Primarily, our strategy of balance helps
to offset the volatility of our higher margin
business against the less volatile, and
lower margin insurance business. We also
purchase reinsurance cover to reduce our
own peak exposures.
16
Reinsurance Hiscox Ltd Report and Accounts 2011
People
1,254
Total number of staff
at December 2011
3. Motivate
Having attracted and trained the best people
we can find, it is then essential that we keep them
motivated and ensure they thrive in their roles.
The Hiscox Partnership
Senior staff members who have made an
important contribution to the Group’s success
may be appointed as a Hiscox Partner. The
Hiscox Partnership, which numbers up to 5%
of the total number of staff, is informed of all
the strategic decisions and facts and figures
of the Group, which enables them to influence
the direction and performance of the Group.
They also act as mentors to talented young
people and ensure that we are operating in
a way which is consistent with our values
everywhere in the Group. In 2011, six new
Partners were appointed.
Employee engagement survey
In September, Hiscox conducted its fourth
global employee engagement survey. The
survey, which was open to all permanent
members of staff, looked at how committed
employees feel to Hiscox, their managers,
their teams and their role. The idea behind it
is simple: if employees feel very engaged they
are more likely to stay and deliver their very
best for the company. Being able to measure
levels of commitment enables Hiscox to identify
areas where it can improve performance
and boost staff retention.
The survey is based on four key measurements:
emotional commitment – the extent to
which employees value, enjoy and believe
in their work, in their manager, team
and Hiscox;
rational commitment – the extent to which
employees believe Hiscox, their managers,
and their teams have their best professional
and development interests at heart;
discretionary effort – employees’ willingness
to go above and beyond what is expected
of them; and
intention to stay.
The survey shows Hiscox enjoys high employee
engagement as we average in the top 80th
percentile when compared with 127 companies
based around the world. Particularly pleasing
was our ‘intent to stay’ score which is in the
90th percentile.
The quality of our people has been a
key ingredient in our success. Hiscox’s
reputation for innovation and dynamism
has been built in large part on the energy,
professionalism, commitment and
expertise of our employees.
A good reputation takes a long time to build,
but can be lost very quickly. We place a
great emphasis on recruiting the best people,
developing their skills and careers and ensuring
that they are motivated. Some of the specific
actions we take to fulfil each of these principles
are described below. The unique personality
of Hiscox is expressed through our employees
to our clients. We want customers to find us
intelligent but not intellectual, bold but not
arrogant, thought-provoking but not patronising,
different while being straightforward, positive
but not pushy, contemporary not stuffy,
sophisticated but not superior.
1. Recruit the best
Hiscox aims to fill posts by recruiting internally,
where possible. Because we strive to attract
and retain the best people, we believe we have
the ideal candidates for many jobs already
working in the firm. We also want to stretch
our people so they can reach their full potential.
In 2011, 154 new appointments were either
internal promotions or recommendations from
current employees. When we do recruit talent
from outside, we ensure that they go through
a thorough assessment. Another source of
talent to fill senior roles in the future is our
graduate trainee and internship programme.
In 2011, we recruited 19 graduate trainees
an increase of 20% on 2010. One of our aims
is to educate the brightest students about
the vibrant career this industry can offer. We
received 1,089 applications for these graduate
roles globally, an average of 57 applications
for every role.
2. Develop excellence
Hiscox has a unique underwriting training
programme developed by some of our very
experienced underwriters. The training,
which aims to reinforce Hiscox’s underwriting
standards, includes how to underwrite profitably
across the cycle and the importance of learning
the lessons of history when assessing risks.
We also want to instil in our underwriters a
restless curiosity, to challenge convention and
not simply to accept a practice because that
is the way it has always been done in the past.
Across the Group a total of 296 delegates
completed our underwriting training programme
in 2011. Hiscox London Market and Hiscox UK
recently achieved Chartered Insurer status as
the high standards and professionalism of our
staff were recognised by The Chartered
Insurance Institute (CII).
People Hiscox Ltd Report and Accounts 2011
17
Group financial
performance
£17.3m
Profit before tax
99.5%
Combined ratio
Profit before tax for the year was £17.3 million
(2010: £211.4 million), despite reserving £270
million (2010: £165 million) for catastrophe
losses and the volatile investment markets
experienced during the year. The Group
recorded a post tax return on equity of 1.7%
(2010: 16.5%) and earnings per share were
5.5p (2010: 47.2p).
The net claims ratio improved by 3.9% to 46.3%
compared to the prior year ratio of 50.2%, where
one specific larger loss in Europe was balanced
by a better claims experience in the UK. The
combined ratio before the impact of foreign
exchange improved to 91.0% from 94.8% in
the prior year reflecting the improved claims
experience during the year.
Net asset value per share reduced by 2.8% to
323.5p (2010: 332.7p) driven by smaller profits
and the dividend payments made during the
year. The Group continues to maintain a
progressive dividend policy and total dividend
per share rose by 3% to 17.0p (2010: 16.5p).
Gross premiums written of £1.45 billion were
up 1.2% compared to the prior year. Strong
growth in the local errors and omissions
business and specialty lines were offset by
reductions in reinsurance and large technology
and media lines. The Group’s combined ratio
including foreign exchange was 99.5%
(2010: 89.3%) due to reserves of £270 million
(2010: £165 million) for the large amount of
catastrophes during 2011.
This has been a challenging year in the investment
markets, with the Group’s investments
producing a return of 0.9% (2010: 3.6%).
The underwriting performance for each
operating segment is detailed below.
Hiscox London Market
Gross premiums written increased slightly by
2.2% to £585.4 million (2010: £572.7 million),
with growth in specialty lines offset by
reductions in reinsurance and large technology
and media lines.
Reinsurance purchased was at a similar level to
the prior year at 29.4% of gross premiums written
(2010: 32.0%). The quota share arrangement
with Syndicate 6104 remained in place.
The net claims ratio deteriorated to 56.6%
(2010: 48.3%), due to a high number of
catastrophe events including; Australian floods,
Japanese earthquake and the resulting tsunami,
two further earthquakes in New Zealand,
the US tornados in Alabama and Joplin,
and the Thailand floods.
As a result, the combined ratio (excluding
the impact of foreign currency movements)
worsened to 89.1% (2010: 81.8%). Profit
before tax for the year was £57.6 million (2010:
£121.4 million).
Hiscox UK and Europe
Gross premiums written rose by 9.5% to
£498.0 million (2010: £454.7 million). Gross
premiums written for the UK increased by
12.3% mainly due to good growth in the
professional and specialty commercial
lines of business. Europe remained broadly
constant year to year with gross premiums
written of £130.9 million (2010: £127.6 million).
As a result profit before tax for the year increased
by 30.0% to £51.5 million (2010: £39.6 million).
Hiscox International
Gross premiums written decreased 9.7% to
£365.8 million (2010: £405.2 million). The US
reduced premiums by 15.5%, reflecting changes
made in 2010, where we exited our inland marine
and animal mortality business, and transferred
our large technology and media businesses to
Hiscox London Market. Bermuda also saw their
premium reduce by 9.5% due to a disciplined
underwriting approach. Gross premiums written
in Guernsey were steady as they continued to
underwrite cautiously in piracy lines.
The net claims ratio was heavily impacted by
the catastrophe losses on the Australian floods,
Japanese earthquake and the resulting tsunami,
two further earthquakes in New Zealand, the
US tornados in Alabama and Joplin, Hurricane
Irene, and the floods in Thailand. The net claims
ratio therefore declined to 89.9% (2010: 53.2%).
The impact on the combined ratio excluding
foreign exchange was a deterioration of 36.4%
to 132.8% (2010: 96.4%).
As a result, the loss before tax was £89.5 million
(2010: profit £43.1 million).
Hiscox Corporate Centre
Operational expenses, decreased slightly
to £12.3 million (2010: £12.8 million). Foreign
exchange gains of £12.4 million (2010: £8.4
million) include foreign currency impacts on
certain intragroup positions. The loss before
tax was £2.3 million (2010: profit £7.3 million)
driven by a much reduced investment return
as a result of market turmoil.
Cash and liquidity
The Group’s primary source of liquidity is from
premium income and investment income. These
funds are used predominantly to pay claims,
expenses, reinsurance costs, dividends and
taxes, and to invest in more assets. During
the year there were additional rebates of tax.
Total net cash inflows for the year were £179.1
million (2010: inflow £75.9 million). The inflow
was mainly due to prompt settlement of
premiums and reinsurance recoveries. Net
cash outflow from investing activities for the
year was £11.8 million (2010: £22.2 million),
primarily as a result of the development of IT
systems recorded within intangible assets,
a continued area of increased investment for
the Group during the year. Projects included
a management information project aimed at
improving the quality and efficiency of financial
18
Group financial performance Hiscox Ltd Report and Accounts 2011
Group key performance indicators
Gross premiums written (£m)
585.4
498.0
365.8
– 1,449.2
572.8
454.7
405.2
– 1,432.7
London
Market
UK and
Europe International
Corporate
Centre
2011
Total
London
Market
UK and
Europe
International
Corporate
Centre
2010
Total
Net premiums written (£m)
Net premiums earned (£m)
Investment result (£m)
Profit/(loss) before tax (£m)
Claims ratio (%)
Expense ratio (%)
Foreign exchange impact (%)
Combined ratio (%)
Financial assets and cash* (£m)
Other assets (£m)
Total assets (£m)
Net assets (£m)
Net asset value per share (p)
Net tangible asset value per share (p)
Adjusted number of shares in issue (m)
*excluding derivative assets and catastrophe bonds.
413.4
472.6
288.0
418.8
448.6
277.6
8.8
7.2
6.3
57.6
51.5
(89.5)
56.6
32.5
46.3
44.7
89.9
42.9
–
–
1.1
89.1
91.0
133.9
–
–
2.2
(2.3)
–
–
–
–
1,174.0
389.6
428.0
314.0
– 1,131.6
1,145.0
396.1
422.2
312.9
– 1,131.2
24.5
39.1
17.2
17.3
121.4
39.6
60.2
39.1
48.3
33.5
50.2
44.6
27.6
43.1
53.2
43.2
0.2
(2.1)
0.5
0.9
99.5
79.7
95.3
97.3
2011
2,873.4
1,349.3
4,222.7
1,255.9
323.5
306.1
388.2
16.3
100.2
7.3
211.4
–
–
–
–
50.1
39.7
(0.5)
89.3
2010
2,779.7
1,211.2
3,990.9
1,266.1
332.7
315.8
380.6
The Group is working with the Financial Services
Authority (FSA) towards approval of our internal
model for our FSA regulated entities. This work
is progressing as planned.
The Group also submitted its Solvency II final
application pack to Lloyd’s in December on
behalf of its syndicates. This pack included
information around our readiness for the
Solvency II regime. It is currently anticipated
that the Group’s capital model will be used
to set capital requirements, for the syndicates
that the Group manages, in 2013.
The Bermuda Monetary Authority (BMA)
has begun supervising the Group, under the
new Group Supervisory Framework. This will
include the first full statutory submission for
2011 which is to be filed by the end of May
2012. The BMA continues to work towards
Solvency II equivalence.
information provided to management, under
the Solvency II regime.
Net cash outflows from financing activities
for the year were £67.3 million (2010: outflow
£172.9 million). The outflow is due to payment
of dividends to shareholders and the full
repayment of the cash borrowing facility
outstanding at 2010 of £20 million.
The Group maintains relationships with a limited
number of banks, whose credit status and ability
to meet day-to-day banking requirements are
monitored by the Group.
There were no impairments recorded against
cash or cash equivalents and no issues
regarding recoverability have been identified
on these assets. The Group has no direct
exposure to sovereign debt in Portugal,
Ireland, Italy, Greece or Spain.
At 31 December 2011, $340 million had been
drawn by way of Letter of Credit against the
Group’s $750 million revolving credit facility,
with no cash drawings outstanding (2010: $165
million and £20 million respectively).
Solvency II
Solvency II is the new solvency regime for all
European insurers and reinsurers. It aims to
create solvency requirements that are consistent
across all European member states which better
reflect the risks that insurers and reinsurers face.
Group financial performance Hiscox Ltd Report and Accounts 2011
Group investments Hiscox Ltd Report and Accounts 2011
19
19
Group investments
£2,873.4m
Invested assets
The Group’s invested assets at 31 December
2011 totalled £2.87 billion (2010: £2.78 billion).
Cash flow remained healthy and the £75
million of Group borrowing that was
outstanding at the half year was repaid
before year end. The investment result,
excluding derivatives, amounted to £25.9
million (2010: £98.8 million) equating to
a return of 0.9% (2010: 3.6%).
Investment income in 2011 was forecast to be
much reduced from that achieved in 2009 and
2010 and some volatility was to be expected.
As it turned out, after a reasonably bright start,
investment markets succumbed to a bout of
significant turbulence, reminiscent of the latter
part of 2008. Investors like certainty, not the
indecisiveness served up by politicians in
America over raising the debt ceiling and in
Europe over the Eurozone crisis. The reality that
Greece might default and the loss by the US of
its AAA status finally sapped investors’ appetite
for risk and triggered a flight to quality. The main
beneficiaries of the ensuing risk aversion
included the US, UK and German government
bond markets. Additionally, with the threat of
recession growing, the Federal Reserve and
the Bank of England responded with increased
monetary stimulus adding further pressure to
the downward trend in treasury and gilt yields.
Riskier assets, by contrast, including corporate
bonds and equities, were shunned by investors
with prices marked down amidst a growing lack
of liquidity. The performance of Eurozone
sovereign bonds diverged dramatically.
The second half of the year therefore proved to
be particularly challenging. Unlike the previous
two years our fixed income portfolios generally
delivered subdued returns and underperformed
their government bond benchmarks. Effectively,
the widening of corporate credit spreads offset
the rally in the prices of our short dated
government securities. Bank bonds in particular
came under stress as worries of capital shortfalls
and an interbank funding crisis grew. At 31
December 2011 approximately 10% of our bond
portfolio was invested in bank debt. The vast
majority of these are the senior debt of banks
deemed to be strategically important to their
national economies. We have limited exposure
to banks in the troubled parts of the Eurozone,
being a total of £7.5 million issued by Santander
of Spain and Intesa of Italy. Given the heightened
level of concern the list of approved institutions
with which we may place cash has been
reviewed and reduced. Cash is also invested
in money market funds which are considered
to be significant in scale, well diversified
and managed by substantial organisations.
Our allocation to risk assets delivered a negative
return. Whilst the portfolio of funds performed
relatively well in difficult markets, beating a
negative benchmark is never entirely satisfactory.
Additional resource has been devoted to the
selection of our long only and hedge fund
managers and a number of changes have been
made to their composition. On the whole the
long only funds outperformed but some of our
hedge funds had a disappointing year by their
recent standards. Although volatile, over time
we expect our risk assets to contribute to the
growth of the Group’s net asset value.
There were few tactical shifts during the year.
Cash was managed to prudent levels with further
ample liquidity available from our holdings in
short dated government bonds and undrawn
credit facilities. The credit quality of the bond
portfolio remained high. We maintained our
aversion to the sovereign debt of Greece,
Ireland, Italy, Portugal and Spain and view our
US government securities as being no more
likely to default at AA+ than they were at AAA.
Given a desire not to lose money in a 12-month
period, the low interest rate environment
continues to restrict the amount of risk that
we might otherwise take. However, we did take
advantage of the sharp market sell off in August
and increased equity exposure by approximately
£30 million which benefited the return for the
year. The high yield bonds, bank loans and
structured securities that were bought during
the 2007/2008 crisis were sold. These were
largely acquired on a buy and hold basis and
have comfortably delivered the returns that
we hoped for. Valuations are no longer as
compelling as they were in this sector.
In 2011 there was an opportunity cost to not
holding more and longer dated government
bonds but the objective of preserving the
balance sheet has been achieved. As we go
into 2012 we expect global economic growth
to be patchy and generally subdued with
short-term interest rates in our main markets
being kept at low levels throughout the year.
Longer dated bond yields could be susceptible
to any signs of economic improvement and the
likelihood of another government bond rally
of significant scale is much reduced. Duration
therefore is likely to remain short relative to our
liabilities. Along with cash we continue to see
treasuries, gilts and bunds as essential for
liquidity, rather than as great investments.
Indeed, we would rather lend to quality
companies than heavily indebted sovereigns
and still view an allocation to investment grade
corporate bonds as a sensible way to pick up
some extra yield. Returns from equities have
a good chance of beating that of cash and
government bonds but further bouts of volatility
are inevitable and we will manage our exposure
in the light of valuations and our overall risk
appetite. There are higher yields available
for those that are willing to give up their liquidity
and take more risk; indeed monetary policy is
designed to encourage this behaviour. However,
we have seen this end badly before and remain
inclined to take what is reasonably on offer
which currently implies another year of relatively
low returns. Discretion is likely to be the better
part of valour.
20
Group investments Hiscox Ltd Report and Accounts 2011
Group investment performance
Bonds
Bonds total
Equities
Deposits and cash equivalents
Actual return
Group invested assets*
*excludes derivatives and investment in catastrophe bonds.
£
US$
Other
31 December 2011
31 December 2010
Asset allocation
%
14.2
52.5
8.8
75.5
6.0
18.5
Return
%
1.6
1.0
1.9
1.3
(3.8)
0.4
0.9
Return
£000
Asset allocation
%
18.5
56.8
6.9
82.2
5.6
12.2
29,933
(5,935)
1,944
25,942
Return
%
2.7
4.0
2.8
3.7
11.1
0.3
3.6
Return
£000
82,234
15,572
1,043
98,849
£2,873.4m
£2,779.7m
High quality and well diversified portfolio
Investment portfolio: £2,873.4m
Asset allocation
18.5% Cash
6%
Risk assets
75.5% Bonds
Group investments Hiscox Ltd Report and Accounts 2011
21
Group investments
continued
Bond currency split
1.8% CAD
18.8% GBP
9.9%
EUR
69.5% USD
Bond credit quality
3.2% BB and Below
5.8% BBB
18.4% A
37.2% AA
35.4% AAA
22
Group investments Hiscox Ltd Report and Accounts 2011
Risk management
Our core business is to take risk and our
strategy is to maximise return on equity
within a defined ‘risk appetite’. It is therefore
essential that we understand the significant
exposures we face to manage the business
well. It is also important that our knowledge
of those risks underpins every important
decision we make across the Group.
The risks from our core business of insurance
and reinsurance represent many of our most
significant exposures. We are also exposed
to a number of other risks: investment, credit,
operational, liquidity, and strategic. To identify
and manage these we have developed a risk
management framework, which we regularly
review and improve in the light of the changing
risk environment and evolving best practice
on risk management.
The Group risk management framework
The Risk Committee of the Board advises our
Directors on how to best manage the Group’s
risk profile. Our risk appetite is set by the Board
and fed through to our divisions through the risk
management framework, which is made up
of a number of committees, including:
Group Underwriting Review
Reserving Committees
Cash Flow Review Group
Reinsurance Security Committee
Broker Credit Committee
Investment Committee
Operational Risk Committee.
One of our Executive Directors – either the
Chairman, Chief Executive Officer, Chief
Financial Officer or Chief Underwriting Officer –
chairs each of these committees, apart from the
Operational Risk Committee, which is chaired
by the Chief Operations Officer.
The responsibilities of our senior management
are clearly defined, as are our reporting lines,
and where responsibilities are delegated the
Board and its committees closely monitor their
activity, aided by financial and non-financial
management information.
This monitoring assesses the level of risk
being taken by the Group in pursuing its
objectives, and to ensure that this level of risk
remains within the parameters set by the Board.
A dedicated team reports to the Risk
Committee of the Board which monitors and
reviews the risk profile and the effectiveness
of our risk management activities. This team
has a wide range of tools to measure risks and
is organised centrally so we can share best
practice on managing risks across the Group.
Major risks
The major risks facing the Group are designated
as being either of ‘principal’ or ‘secondary’
importance. Principal risks are those viewed
to be potentially the most damaging for the
Group, while secondary risks are not deemed
to be critical at this stage. Certain of these risks
arise from financial instruments held by the
Group and are also discussed in note 3 to
the consolidated financial statements.
Principal risks
What is the risk?
Why do we have it?
How is it managed?
Catastrophic and systemic
insurance losses
We insure individual customers,
businesses and other insurers
for damage caused by a range
of catastrophes, both natural
(e.g.hurricanes, earthquakes)
and man-made (such as
terrorism), which can cause
heavy underwriting losses that
could have a material impact
on the Group’s earnings.
Though volatile and potentially
costly, this business is compelling
for us, as it is capable of earning
good margins over the medium
to long-term.
Hiscox has a well diversified portfolio by product and
geography to help balance any catastrophe exposure.
We have a clearly defined appetite for underwriting risk,
which dictates our business plan. To ensure that our risk
appetite is not exceeded we maintain disciplined underwriting,
regularly monitor our exposures to, and aggregations of risk
in particular places closely and buy reinsurance to limit our
losses from disasters. We adapt our business plan, target
products and reinsurance programme to ensure our book of
business is well diversified. This enables us to maximise the
expected risk return profile on the whole portfolio and offset
potential losses on more volatile accounts.
The quality of our underwriting models and our capability
to accurately measure our aggregate exposure are key to
managing this risk. Our underwriters are given incentives
to make sound decisions that are aligned with the Group’s
overall strategic objectives and risk appetite. Clear limits are
also placed on their authority. We regularly review our policy
wordings in the light of legal developments to ensure the
Group’s exposure is restricted, as far as possible, to those
risks identified in the policy at the time it was issued. Both
our underwriting staff and independent risk specialists use
Risk management Hiscox Ltd Report and Accounts 2011
23
Risk management
continued
Principal risks continued
What is the risk?
Why do we have it?
How is it managed?
Catastrophic and systemic
insurance losses continued
Competition and the
insurance cycle
Hiscox competes against major
international insurance and
reinsurance groups. At times,
some of these groups may
choose to underwrite risks at
prices that fall below the
breakeven technical price.
Prolonged periods when
premium levels are low or when
competition is intense are likely
to have a negative impact on the
Group’s financial performance.
We operate in open, aggressively
competitive markets in which
barriers to entry for new players
are low and where competitors
may choose to differentiate
themselves by undercutting
their rivals. As a result, capacity
levels in these markets will rise
and fall, causing prices to go
up and down, creating volatile
market cycles.
As an insurance company
we are required to hold
claims reserves.
Reserving for insurance risks
We make financial provisions for
unpaid claims, defence costs
and related expenses to cover
our ultimate liability both from
reported claims and from
‘incurred but not reported’
(IBNR) claims. There is the
possibility that we do not make
sufficient provision for our
exposures, which could affect
the Group’s earnings, capital
and possibly even its survival.
24
Risk management Hiscox Ltd Report and Accounts 2011
our modeling and monitoring tools to design the insurance
and reinsurance business plans and to ensure that the
exposures we underwrite match expectations. We share our
risk aggregation and modeling resources across the Group
to ensure everyone uses the same modeling tools (tailored
to their specific market). We run stress and scenario tests for
a range of specific events for each of our business units as
well as the Group as a whole, so we can estimate our potential
losses from a major catastrophe.
We buy reinsurance to mitigate the effect of catastrophes and
unexpected concentrations of risk. We buy protection both for
our business carriers and the Group as a whole. The scope
and type of reinsurance protection we buy may change from
year to year depending on the extent and competitiveness of
cover available in the market. The Group is exposed to the risk
that the reinsurance protection it has bought is inadequate
or inappropriate, but this is monitored and managed using
modeling techniques, under the supervision of a dedicated
Reinsurance Purchase Group.
We are firmly resolved to reject business that is unlikely to
generate underwriting profits. Accepting risks below their
technical price is detrimental to the industry’s prospects since
it drives the prevailing market rates down to a point where
underwriting losses mount, insurers’ capital is destroyed
causing some businesses to fail, customers to receive poor
service and the industry to suffer negative publicity. Hiscox
incentivises underwriters on return on equity which rewards
staff for profit not revenue.
Our appetite for certain lines of business changes according
to the prevailing market conditions and the risk appetite of the
Group. We regularly monitor pricing levels, producing detailed
monthly reports grouping current prices with exposure and
trends over the past 12 months. Thus we ensure that we
quickly identify and control developing problems created
by adverse changes in market conditions.
We frequently act as the lead insurer in the co-insurance
programmes required to cover significant high value assets, so
we have some ability to set market rates rather than follow them.
The provisions we make to pay claims reflect both our own
experience – and that of the industry – of similar business,
historical trends in reserving patterns, loss payments and
pending levels of unpaid claims and awards, as well as any
potential changes in historic rates arising from market or
economic conditions. Details of the actuarial and statistical
methods and assumptions used to calculate reserves are
set out in note 26 to the consolidated financial statements.
Our provision estimates are subject to rigorous review by
senior management from all areas of the business including
independent actuaries. The final provision is approved by
the relevant boards on the recommendation of dedicated
reserving committees.
The provisions we make are set above the expected or ‘mean
reserve’ requirement to reduce the risk that actual claims
exceed the amount that has been set aside.
Principal risks continued
What is the risk?
Investment risk
Why do we have it?
How is it managed?
The premiums and technical
funds we hold for the payment
of future claims are inevitably
exposed to investment risk.
We invest the cash we receive
from our clients and the capital
on our balance sheet until it
might be needed to be paid
as claims.
Liquidity risk
That we are unable to meet our
liabilities to customers or other
creditors when they fall due. Also
the risk that we incur excessive
costs by selling assets or raising
finance in a very short time to
meet our obligations.
We provide cover against a
range of catastrophes, so if one
occurs we may be faced with
large, unplanned cash demands.
This situation could be
exacerbated if we have to fund a
large portion of claims pending
recovery from our reinsurers.
We have a conservative investment policy: our overriding
concern is to not lose money or to put at risk the Group’s
capacity to underwrite. Our policy is designed to maximise
returns within an overall risk appetite.
Technical funds – those funds held for reserves – are invested
primarily in high quality bonds and cash. The high quality and
short duration of these funds allows the Group to meet its aim
of paying valid claims quickly. These funds, as far as possible,
are maintained in the currency of the original premiums for
which they are set aside to reduce foreign exchange risk.
As many of our insurance and reinsurance liabilities have
short time spans, we do not aim to match exactly the duration
of our assets and liabilities. Our fixed income fund managers
are set benchmarks that approximate the payment profile
of our claims while still providing them with some flexibility
to enhance returns.
A proportion of the Group’s assets are allocated to riskier
assets, principally equities. For these assets we take a long-
term view so we can achieve the best risk-adjusted returns.
The proportion of funds we invest in risk assets will depend on
the outlook for investment and underwriting markets. We make
an allocation to less volatile, absolute return strategies within
our risk assets, so as to balance our desire to maximise returns
with the need to ensure capital is available to support our
underwriting throughout any downturn in financial markets.
Investment risk also encompasses the risk of default of
counterparties, which is primarily with issuers of bonds in which
we invest. Our third-party investment managers are issued
guidelines as to the type and nature of bonds in which to invest.
We believe the likelihood that we may be unable to meet
our liabilities, or that we incur excessive costs in doing so,
is extremely remote, because of our range of risk
management measures.
Most of our cash inflows and outflows are routine and can
be forecast well in advance. Our primary source of inflows
is insurance premiums while our outflows are largely expenses
and payments to policyholders through claims. We forecast
our cash flow for the week, month, quarter or up to two years
ahead, depending on the source. Free cash is invested
according to the Group’s investment policy and our cash
requirements can normally be met through our regular income
streams: premiums, investment income, existing cash balances
or by realising investments that have reached maturity.
We run stress tests to estimate the impact of a major
catastrophe on our cash position in order to identify any
potential issues. We also run scenario analyses that consider
the impact on our liquidity should a number of adverse events
occur simultaneously, such as an economic downturn and
declining investment returns combined with unusually high
insurance losses.
We maintain extensive borrowing facilities. These arrangements
have been made with a range of major international banks
so as to minimise the risk of one or more of the institutions
being unable to honour their commitments to us.
Our investment policy recognises the demands created
by our underwriting strategy, so that some investments
may need to be realised before maturity or at short notice.
Hence a high proportion of our investments are in liquid
assets, which reduces our risk of making losses because
we may have to sell assets quickly.
Risk management Hiscox Ltd Report and Accounts 2011
25
Risk management
continued
Principal risks continued
What is the risk?
Why do we have it?
How is it managed?
Regulatory change
The insurance industry
is undergoing a period of
unprecedented regulatory
change, which may impact the
capital we are required to hold.
Insurance is a regulated industry.
While regulations typically evolve
on an ongoing basis, there may
be times where the regulatory
landscape undergoes a
significant shift. We are currently
facing such a situation.
We currently have a dedicated team assessing and
developing new internal arrangements compliant with
new regulations, operating under the guidance of the
Group CFO.
Major risks: secondary
What is the risk?
Why do we have it?
How is it managed?
Insurance risk:
binding authorities
Hiscox generates considerable
premium income through agents
to whom binding authority is
given to underwrite insurance
policies on our behalf. Agents
may underwrite business outside
of our normal guidelines.
Credit risk:
reinsurance counterparties
We buy reinsurance to protect
us from large single claims as
well as the aggregate effect
of many claims resulting from
catastrophes. The risk is that
our reinsurers are unable to
meet their obligations to us,
which would put a strain on
our earnings and capital.
Binding authorities give the
Group access to a greater
volume of business.
All binding authorities we grant are closely controlled
through tight underwriting guidelines. We vet all our agents
prior to appointment and monitor and audit them regularly.
Agents are frequently audited to ensure they meet
our standards.
We cover clients against a range
of catastrophes and protect
ourselves through reinsurance.
We face credit risk where we
seek to recover sums from other
reinsurers.
We buy reinsurance only from companies that we believe
to be strong. Our credit exposures to these companies
are closely monitored. Every reinsurer we use must be
approved by a dedicated Reinsurance Security Committee,
based on an assessment of its financial strength, trading
record, payment history, outlook, organisational structure,
plus its external credit ratings. Approved reinsurers are
monitored continuously, so that we are able to identify
quickly any potential problems. The committee considers
public information, experience of the companies
concerned, their behaviour in the marketplace and analysis
from external consultants and from rating agencies.
We set guidelines for exposure to each of our approved
reinsurers.
26
Risk management Hiscox Ltd Report and Accounts 2011
Major risks: secondary continued
What is the risk?
Why do we have it?
How is it managed?
Investment risk:
foreign exchange risk
Our reporting currency is
Sterling, but a significant
proportion of our operational
costs are located in the US
and Europe. In addition the
capital bases of our insurance
companies in Bermuda,
Guernsey and US are in US
Dollars. Therefore, movements
in foreign exchange rates may
have a material adverse effect
on our financial performance
and position.
Strategic risk:
Hiscox credit rating
The external ratings assigned
to the Group and its subsidiaries
are essential to our profitability,
particularly for our reinsurance
business, and to manage our
financing costs and access
to capital. A reduction in these
external ratings may impact
the Group’s ability to generate
business and/or access finance.
Operational risk: IT continuity
We are unable to transact with
intermediaries and customers
due to an IT failure.
Emerging risks
We are exposed to new and
emerging risks, primarily through
legal or political decisions.
For example, a change in US
legislation may result in
exposures being included within
our coverage that had not been
intended by our underwriters,
or may require us to cease
business in certain US states.
We are an international insurance
and reinsurance group that
operates in numerous markets
around the world.
The business in which we
operate is determined largely
by financial strength ratings
issued by the major credit
rating agencies.
Like every other business we
are reliant on data and computer
systems in order to go about our
everyday business.
Our business is taking risk,
which by its nature, is inherently
uncertain.
As the US Dollar is the Group’s largest underwriting
currency, our policy is to match our US Dollar insurance
liabilities with investments held in that currency so we
can minimise any losses from currency fluctuations.
We will hold a percentage of our capital in the matching
currency of that part of our underlying business, where it is
deemed appropriate. We closely monitor our net currency
positions and will enter into currency hedges if we anticipate
adverse movements in exchange rates. Further details of
the Group’s investment profile and its management of
currency risks are provided in notes 3 and 19 to the
consolidated financial statements.
We have identified the key aspects of our business that
are critical to maintaining our ratings. These are closely
managed to minimise the risk of an event that might
jeopardise our ratings and to ensure that we respond
appropriately to unforeseen events.
We have regular and open communication with the major
credit rating agencies to ensure that we continue to meet
their expectations and that the potential impact on our
ratings is given careful consideration before we make
any significant business or strategic decision.
We have a formal disaster recovery plan in place that
deals with both workspace recovery and the retrieval of
communications, IT systems and data if a major problem
occurred. These procedures would enable us to move the
affected operations to alternative facilities very quickly.
The disaster recovery plan is tested regularly and
includes disaster simulation tests.
Identifying, planning for and controlling emerging risks
is an important part of our risk management activity
across all aspects of our business, including underwriting,
operations and strategy. We make a significant effort to
try to identify material emerging threats to the Group. It
is a core responsibility of each of our risk committees and
we believe we take all reasonable steps to minimise the
likelihood and impact of emerging risks and to prepare for
them in case they occur.
Risk management Hiscox Ltd Report and Accounts 2011
27
Corporate
responsibility
Hiscox UK
®
Working with co2balance.com
£0.5m
Donated to charities
At Hiscox several core values guide
our business. These are: to challenge
convention, to act with integrity at all
times, to have respect for all our business
partners, to have courage, to do everything
to the highest quality and to excel in the
service we provide. These values underpin
a reputation we have earned for integrity
and decent behaviour in everything we do,
which we firmly believe is good for the morale
of staff and for the results of the business.
Hiscox’s commitment to responsible business
practices is reflected in:
The environment
It is our policy to have a responsible approach
to identifying, and then minimising, the
environmental impacts of our business activities
and those that arise from our ownership and
occupation of office premises. In doing so,
we seek to reduce to a minimum the amount
of waste our activities produce, and the amount
of resources we consume. Hiscox aims to be
a responsible business, respecting the
environment and reducing our carbon footprint
and has made commitments both to our
shareholders and our staff.
During 2010 we launched an environmental
policy in Hiscox UK, outlining our commitment
to measure our carbon footprint and to reduce
it as far as we can. During 2012 we will be
building on this good work by rolling it out across
the Group. The policy encourages the business
to operate more sustainably by: measuring our
use of water, energy and other products in order
to reduce their consumption over time; buying
sustainably-sourced goods or energy-efficient
products where we can; and minimising waste
by recycling and reusing products as much
as is feasible.
For the second year in a row Hiscox UK was
carbon neutral. We conducted an environmental
audit of our UK operations and calculated our
carbon footprint with the help of independent
consultants Corporate Citizenship. We
generated significant cost and energy savings
through increased recycling and more careful
use of electricity, water and gas. Overall, Hiscox
UK reduced our carbon footprint by 6% in 2009
and 7% in 2010. The balance of our carbon
emissions were offset through an investment in
an African Energy Efficient Stove Project in Kenya.
This project is focused on providing energy
efficient stoves for families in villages throughout
the area, replacing inefficient open fires. Energy
efficient stoves significantly reduce the amount
of firewood required and therefore carbon
emissions. The stoves more than halve the
amount of smoke from firewood, benefiting the
families health and are approximately 70% more
efficient than an open fire as each stove will save
over 15 tonnes of fuel over the lifetime of the
stove. These stoves themselves go directly to
families, and we have provided 242 so far. For
more information, please go to www.hiscox.com.
Our sustainability efforts have also been
recognised by the City of London Corporation.
In 2011, for a third year in a row, our London
office received a Clean City Scheme Gold award.
Hiscox Bermuda was awarded the Greenrock
Green Workplace award in 2011. Greenrock
Green Workplace Awards (GWAs) is an
environmental competition bringing together
businesses of all sizes that share the same
vision of a greener workplace. It awarded
seven companies and individuals for their
environmental practices.
Hiscox is a founding member of ClimateWise,
a collaborative insurance initiative through
which members aim to work together to
respond to the myriad of risks and opportunities
of climate change.
The marketplace
Dealing with business partners
We regard insurance brokers as important
stakeholders in our business, and we endeavour
to have good relationships with them to create
a competitive advantage in the marketplace.
Clear communication is key in this and Hiscox
regularly updates its partner brokers of new
developments at Hiscox and in the insurance
industry. Hiscox UK and Hiscox London Market
recently achieved Chartered Insurer status from
The Chartered Insurance Institute, recognising
the professionalism and expertise of staff and
making it easier to build relationships with like
minded business partners.
Dealing with investors
In keeping with our policy of open and
transparent communication, Hiscox reports both
its half and full year results to investors via a
series of presentations as well as ensuring all
relevant Group financial information is available
on the corporate website. In addition, senior
management and key employees meet investors
and analysts throughout the year to explain and
answer questions on the Group financial
performance and business strategy.
Dealing with customers
Hiscox is dedicated to providing its customers
with risk management advice to prevent
distressing losses such as burglary and fire in
the home. Similarly, when a small business client
is sued, our expert claims staff bring to bear
years of expertise to defend the client or resolve
the situation swiftly. The Hiscox philosophy is
that insurance is a promise to pay, so should
a loss occur, we aim to fully support our customers
and to pay their claims as soon as possible.
The workplace
Culture
The Hiscox culture is underpinned by a set
of core values that determine a standard of
behaviour that is expected of all our employees.
The Group recognises that through this conduct
we are more likely to achieve business success
and therefore create additional value for
shareholders. Hiscox aims for the highest
28
Corporate responsibility Hiscox Ltd Report and Accounts 2011
Hiscox has made
a donation to the
Team 2012
Fundraising
Appeal, supporting
Britain’s athletes
on their journey
to success.
standards of corporate governance while
striving to remain, 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 we have got this balance
right and, furthermore, that this is one of our
greatest strengths. The Group’s policies ensure
that we continue to follow a best practice
approach to managing people and remain
a fair and professional employer. In the unlikely
event of an employee having a serious 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.
Hiscox wants to employ the best people and
provide them with the means and the motivation
to excel. This is 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 it gives them 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, religion,
sexual inclination or background.
Rewards and benefits
Hiscox encourages employees to share in
the success of the Group through performance
related pay, bonus, savings-related share option
schemes and executive share option schemes.
Competitive benefits packages contain health
and fitness perks and opportunities for flexible
working and career breaks. Towers Watson
benchmarks our salary packages against
the financial services industry as a whole
and against the Lloyd’s market specifically
(where applicable) and our salaries are also
considered on a country-by-country basis.
Training and development
Hiscox is committed to training and developing
our employees to help them maximise their
potential. Each permanent member of staff
is provided with a tailored personal development
programme. Their training and development
needs are reviewed twice a year, as well as
their performance against clearly set objectives.
Communication and participation
Employees are kept informed of business
developments through formal briefings,
team meetings, intranet bulletins, video
conferences and other more informal routes.
Management takes these opportunities to
listen to staff and involve them in taking
the business forward.
The community
Hiscox donated £533,000 to charities in 2011.
The Group has maintained its involvement in
its local communities with the strong support
of its employees. In Bermuda, Hiscox supports
the Centre Against Abuse which provides shelter,
support and tools to those involved in
relationship abuse. We assist in the furnishing
of the safe house for battered women and their
children. Hiscox also supports The Women’s
Resource Centre by funding the Centre’s 24
hour hotline. Other support was provided to
the Bermuda Senior Islanders’ Centre (a senior
citizens social group), and Big Brothers and Big
Sisters of Bermuda (a one-to-one mentoring
programme). Hiscox USA doubled its donations
to $100,000 supporting a variety of charities
across the US and helped to organise events
where employees volunteered their time.
These charities included; City Year (New York),
Make-A-Wish (San Francisco) and the Children’s
Restoration Network (Atlanta). Hiscox is a
member of the Lloyd’s Community programme,
which supports local initiatives concerning
education, training, enterprise and regeneration.
In London, members of our staff help pupils at
the Elizabeth Selby Infants School in Tower
Hamlets through the Reading Partners’ Scheme.
Employees also mentor students at Cambridge
Heath Sixth Form.
Supporting the arts and sciences
The Group continues to support the Bermuda
Masterworks Foundation, which aims to
repatriate artworks by Bermudian artists or
featuring Bermuda landscapes/seascapes.
Hiscox has renewed a three-year commitment
to support the Whitechapel Art Gallery, in the
East End of London. We sponsor the collections
gallery at the Whitechapel, which is a touchstone
for contemporary art internationally. Hiscox is
supporting The Royal Institution (RI) with a loan
and corporate sponsorship. The RI is the oldest
independent research body in the world and
has been dedicated to connecting people with
the world of science for over 200 years. During
2011 Hiscox also supported two students of The
Royal Academy of Art in London with a bursary.
The Hiscox Foundation
The Hiscox Foundation is a charity funded
by an annual contribution from Hiscox to give
donations to deserving causes. It gives priority
to any charity in which a member of staff is
involved, with the aim of encouraging and
developing employees to become involved
in charitable work. Hiscox staff continued
their support of the Richard House Hospice
and during 2011 raised over £28,500. The
foundation has supported HART (Humanitarian
Aid Relief Trust) with a further £30,000 during
2011. HART helps some of the poorest and
most abused people in the world. More details
of the charities Hiscox supports can be found
on our website www.hiscox.com.
Corporate responsibility Hiscox Ltd Report and Accounts 2011
29
Insurance 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 underwrites a mixture
of reinsurance, major property and energy
business, as well as a range of specialty lines
including contingency and technology and
media risks among others. The business is
mainly property-related short-tail business.
Syndicate 33 trades through the Lloyd’s
worldwide licences and ratings. It also
benefits from the Lloyd’s brand. Lloyd’s has
an A (Excellent) rating from A.M. Best, an A+
(Strong) from Standard & Poor’s, and an A+
(Strong) rating from Fitch.
The geographical and currency splits are
shown to the right. 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. For 2012
Syndicate 33 has a capital requirement ratio
of approximately 34% of Syndicate capacity.
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 approximately 72.5% of the
Syndicate, with the remainder owned by third-
party Lloyd’s Names. Hiscox receives a fee and
a profit commission of approximately 17.5% of
profit on the element it does not own. For the
2012 year of account, Syndicate 33’s capacity
has been increased to £950 million from £900
million. The chart below right shows the gross
premiums written of Syndicate 33 for the last
11 years.
Syndicate 3624
Syndicate 3624 is a wholly owned syndicate
which began underwriting for the 2009 year
of account with an underwriting capacity of £150
million. The syndicate has a diversified portfolio
of worldwide risks including E&O, property,
construction, technology and media, healthcare,
aviation and events. The diversification of the
syndicate from both an exposure and
geographical perspective means the syndicate
is well balanced to grow in a controlled way.
The syndicate is primarily exposed to short
tail liability risks. Syndicate 3624 has a capital
requirement ratio of 55% of syndicate capacity.
Total underwriting capacity of Syndicate 3624
remained flat at £250 million for the 2012
year of account.
Cougar Syndicate 6104
Cougar Syndicate 6104 was set up under
a limited tenancy agreement for the 2008 year
of account with an initial capacity of £34 million.
It is wholly backed by external Names and takes
a pure year of account quota share of Syndicate
33’s international property catastrophe
reinsurance account. The arrangement has been
extended through to the 2012 year of account
and Cougar Syndicate 6104’s capacity was
increased to £39 million, from £37 million.
Syndicate 33
Capacity and Hiscox ownership (£m)
Capacity
Hiscox Ltd ownership
Qualifying quota share
Syndicate 33
Gross premiums written (£m)
1,200
1,000
800
600
400
200
0
8
4
2
4
8
5
2
6
4
8
2
3
8
4
7
7
7
4
5
0
5
5
0
5
5
7
8
4
7
8
5
3
6
4
0
6
7
5
0
5
7
4
3
0
0
7
4
4
5
8
0
5
7
5
0
0
0
1,
9
3
0
5
9
7
3
0
0
9
5
2
7
9
8
6
3
5
6
1
0
2
4
0
5
0
6
3
1
9
1
7
7
2
2001
2002
2003 2004
2005
2006
2007
2008
2009
2010
2011
2012
1,200
1,000
800
600
400
200
0
30
Insurance carriers Hiscox Ltd Report and Accounts 2011
1,024
994
1,034
827
844
830
885
872
786
722
567
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Syndicate 33
Gross premiums written currency split (%)
4%
CAD
11%
EUR
15%
GBP
70%
USD
Syndicate 33
Gross premiums written geographical split (%)
1.8% UK
4.1%
Europe
8%
Asia
48.3% North America
37.8% Rest of world
Insurance carriers Hiscox Ltd Report and Accounts 2011
31
Insurance carriers
continued
Hiscox Insurance Company Limited
Gross premiums written geographical split by origin (%)
3%
2%
4%
7%
Other Europe
Belgium
Netherlands
Germany
12%
France
72%
UK
Hiscox Insurance Company Limited
Gross premiums written (£m)
450
400
350
300
250
200
150
100
50
0
419
404
381
325
284
231
233
242
219
164
176
127
90
98
75
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
32
Insurance carriers Hiscox Ltd Report and Accounts 2011
Hiscox Insurance Company
Hiscox purchased Hiscox Insurance Company
Limited in 1996, in keeping with its aim of
diversifying its activities outside of Lloyd’s and
writing a focused book of regional specialist
risks. The Group has reshaped the Company’s
original portfolio to concentrate on high value
household and smaller premium commercial
business.
Hiscox Insurance Company Limited has licences
throughout Europe. It is the primary insurance
vehicle used by the UK and mainland Europe
offices for their business. The success of the
portfolio can be seen in the chart below left.
Hiscox Insurance Company Limited has
achieved average compound growth in gross
premiums written of 13.1% from 1997 to 2011,
despite discontinuing almost all of its original
business. It has also significantly improved
its combined ratio.
Hiscox Insurance Company Limited has an
A.M. Best rating of A (Excellent), a Standard
& Poor’s rating of A (Strong) and an A (Strong)
rating from Fitch.
At the end of 2011, net assets exceeded
£224 million (2010: £197 million).
Hiscox Insurance Company (Guernsey)
Formed by Hiscox in 1998, Hiscox Insurance
Company (Guernsey) Limited writes mainly
kidnap and ransom and fine art insurance.
Hiscox Guernsey has an A.M. Best rating
of A (Excellent) and an A (Strong) rating from
Fitch. At the end of 2011, net assets exceeded
$11 million (2010: $28 million), having distributed
$20 million in dividends during the year.
Hiscox Insurance Company (Bermuda)
Formed by Hiscox in late 2005, Hiscox Insurance
Company (Bermuda) Limited was set up as an
expansion of the reinsurance operations of
Hiscox and as an internal reinsurer of the Group.
Hiscox Bermuda has an A.M. Best rating
of A (Excellent) and an A (Strong) rating from
Fitch. At the end of 2011, net assets exceeded
$846 million (2010: $941 million).
Hiscox Insurance Company Inc.
Hiscox Insurance Company Inc. was acquired
by the Group in 2007 through the purchase of
the then parent holding company ALTOHA, Inc.
Hiscox Insurance Company Inc. is based in
Chicago, Illinois and is an admitted insurance
company with licences in all 50 US states and
the District of Columbia. Its main business is
property and liability cover sold through insurance
brokers. From November 2010, the Company
launched a direct commercial business.
Hiscox Insurance Company Inc. is rated A
(Excellent) by A.M. Best. At the end of 2011, net
assets exceeded $58 million (2010: $58 million).
Hiscox Insurance Company (Bermuda) Limited
Gross premiums written ($m) External business
350
300
250
200
150
100
50
0
297
299
263
271
212
171
2006
2007
2008
2009
2010
2011
Insurance carriers Hiscox Ltd Report and Accounts 2011
33
Board of Directors
Executive Directors
Robert Ralph
Scrymgeour Hiscox
Chairman (Aged 69)
Bronislaw Edmund
Masojada
Chief Executive
(Aged 50)
Stuart John Bridges
Chief Financial Officer
(Aged 51)
Robert Simon Childs
Chief Underwriting Officer
and Chairman of Hiscox USA
(Aged 60)
Robert Hiscox joined
Hiscox in 1965 and has
been Chairman of the
main holding company
of Hiscox since its
incorporation in 1973.
He was Deputy Chairman
of Lloyd’s between 1993
and 1995. He was a
Non Executive Director
of AGICM Ltd until July
2011 and Grainger Trust
plc until February 2012.
Robert was appointed
High Sheriff of Wiltshire
in March 2011.
Bronek Masojada joined
Hiscox in 1993. From
1989 to 1993 he was
employed by McKinsey
and Co. Bronek served
as a Deputy Chairman
of Lloyd’s from 2001
to 2007. He was a Non
Executive Director of
Ins-sure Holdings Limited
from 2002 to 2006 and is
a past President of The
Insurance Institute of
London. He is Chairman of
the Lloyd’s Tercentenary
Foundation, a charity
which supports research
in areas of interest to the
insurance industry.
Stuart Bridges joined
Hiscox in 1999. He is a
Chartered Accountant
and has held posts in
various financial service
companies in the UK and
US, including Henderson
Global Investors. During
the year he was a member
of the Financial Regulation
and Taxation Committee
of the Association of
British Insurers, a member
of the audit committee of
the Institute of Chartered
Accountants in England
and Wales and Chairman
of the Lloyd’s Market
Association Finance
Committee.
Robert Childs joined
Hiscox 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.
In 2012 Robert joined
the Council of Lloyd’s.
He is Active Underwriter
of Lloyd’s Syndicate 3624.
Robert was Chairman
of the Lloyd’s Market
Association from January
2003 to May 2005. He
is a Trustee of Enham (a
charity for the disabled),
Chairman of the Advisory
Board of the School of
Management of Royal
Holloway University of
London, and Chairman
of The Bermuda Society.
Independent Non
Executive Directors
Richard Gillingwater
Senior Independent
Director (Aged 55)
Richard Gillingwater
joined Hiscox in
December 2010. He is
Dean of Cass Business
School. He spent a
decade at Kleinwort
Benson, before moving
to and eventually
becoming joint Head
of Corporate Finance
for BZW, a division of
Barclays Bank. When
that became Credit
Suisse First Boston,
he became Chairman
of European Investment
Banking. In 2003 he
became Chief Executive
and later Chairman
of the Shareholder
Executive. Richard
is a Non Executive
Director of SSE plc and
Non Executive Chairman
of CDC Group plc.
34
Board of Directors Hiscox Ltd Report and Accounts 2011
Secretary
Charles Dupplin
Registered office
Wessex House
45 Reid Street
Hamilton HM 12
Bermuda
Registered number
38877
Auditors
KPMG
Crown House
4 Par-la-Ville Road
Hamilton HM 08
Bermuda
Solicitors
Appleby
Canon’s Court
22 Victoria Street
PO Box HM 1179
Hamilton
HMEX Bermuda
Bankers
HSBC Bank Bermuda
Limited
6 Front Street
Hamilton HM 11
Bermuda
Stockbrokers
UBS Limited
1 Finsbury Avenue
London EC2M 2PP
United Kingdom
Registrars
Capita Registrars (Jersey)
Limited
PO Box 532
St Helier
Jersey JE4 5UW
Member of the
Audit Committee
Member of the
Conflict Committee
Member of the
Remuneration and
Nomination Committee
Chairman of Committee
is highlighted in solid
Independent Non
Executive Directors
Daniel Maurice Healy
Non Executive Director
and Chairman of the Audit
Committee (Aged 69)
Ernst Robert Jansen
Non Executive Director
(Aged 63)
Dr James Austin
Charles King
Non Executive Director
and Chairman of the
Conflict Committee
(Aged 73)
Robert McMillan
Non Executive Director
(Aged 59)
Gunnar Stokholm
Non Executive Director
(Aged 62)
Andrea Sarah Rosen
Senior Independent Director
(Jan 2010–Feb 2011)
and Chairman of the
Remuneration and
Nomination Committee
(Aged 57)
Ernst Jansen joined
Hiscox in 2008. He
held several Managing
Director positions in
the European chemical
industry between 1980
and 1990. He was an
Executive Director then
Vice Chairman of Eureko
B.V. (now Achmea BV)
between 1992 and 2007
and following retirement
he became an adviser to
the Executive Board. He
is also a Non Executive
Director of Friends
Provident International
Limited.
Dr James King joined
Hiscox in 2006. He chairs
Keytech Limited, The
Bermuda Telephone
Company Ltd and Grotto
Bay Properties Ltd. He
was Chairman of the Bank
of N.T. Butterfield & Son
Limited until 19 April 2007
and the Establishment
Investment Trust, a UK
listed company until
August 2011. He is a
Director of Castle Harbour
Limited. Dr King is a fellow
of the Royal College of
Surgeons, Canada and
the American College
of Surgeons.
Daniel Healy joined
Hiscox in 2006. He was
appointed Executive
Vice President and Chief
Financial Officer of North
Fork Bancorporation in
1992 and a member of
its Board of Directors in
2000. He was a partner
with KPMG LLP before
joining North Fork. He was
the Managing Partner of
the San José, California
and Long Island, New
York offices and held
other positions in that firm
during his tenure. He is
Chief Executive Officer of
Bond Street Holdings Inc
and Florida Community
Bank, a subsidiary and
holds a Board position
with KBW, Inc.. He is
also a Senior Adviser to
Permira Advisers LLC, an
international private equity
firm. He was previously
Chairman of Herald
National Bank.
Gunnar Stokholm
joined Hiscox in 2008.
He worked for Zurich
Financial Services
between 1995 and
2004, in a number of
roles including CEO
for Australia and Asian
markets. He spent the
majority of his career at
Topdanmark Insurance
and held the position of
Managing Director of
Topdanmark Holding
from 1986 to 1995.
Andrea Rosen joined the
Hiscox Ltd Board in 2006.
She is a Director of Alberta
Investment Management
Corporation, Emera Inc.
and Manulife Financial
Corporation. She was
previously Vice Chair of
TD Financial Group and
President of TD Canada
Trust from 2002 to 2005.
Prior to this she held
various positions within
the TD Financial Group
from 1994 to 2002,
including Executive
Vice President of TD
Commercial Banking
and Vice Chair of TD
Securities. She was Vice
President of Varity
Corporation from 1991
to 1994 and held various
positions with Wood
Gundy Inc. from 1981
to 1990.
Robert (Bob) McMillan
joined the Hiscox Ltd
Board in December 2010.
He spent 24 years with
the Progressive Insurance
Corporation where he
served in various positions
including National Director
of Product Development,
then claims before
becoming National
Director of Marketing.
He led Progressive’s
initiatives in multi-channel
distribution, financial
responsibility based
rating, and immediate
response claims. He
has received two United
States patents related
to motor insurance
pricing. He has lectured
on business innovation
at the University of
Virginia’s Darden School
of Business and at
the Harvard Business
School. He has been a
Non Executive Director
of Hiscox Inc. since
March 2007.
Board of Directors Hiscox Ltd Report and Accounts 2011
35
Corporate
governance
Overview and basis of reporting
Hiscox Ltd (‘the Company’) is the Bermudian
domiciled holding company for the Group. The
Company has a premium listing on the London
Stock Exchange. The corporate governance
framework for companies registered in Bermuda
is established by the Company’s constitution
together with Companies Act legislation. During
2011, and up to the date of this report and
accounts, the Group has complied with the
provisions of the UK Corporate Governance
Code (formerly the Combined Code) in all
material respects.
The Board of Directors
The Board comprises four Executive Directors
and seven independent Non Executive Directors,
including a Senior Independent Director.
Biographical details for each member of the
Board are provided on pages 34 to 35.
It is supplied with appropriate and timely
information to enable it to review business
strategy, trading performance, business risks
and opportunities. The Board of Hiscox Ltd met
four times during the year. The Board considers
all the Non Executive Directors to be independent
within the meaning of the UK Corporate
Governance Code as there are no relationships
or circumstances which would interfere with
the exercise of their independent judgement.
The Board’s Terms of Reference include a
Schedule of Matters Reserved for Board
Decision, a copy of which can be found on the
Group’s website: www.hiscox.com. Aside of the
opportunity which the Non Executive Directors
have to challenge and contribute to the
development of strategy in the regular Board
meetings the Non Executive Directors also
attended the annual Hiscox Partners’ meeting.
In order to ensure that the composition of the
Board remains appropriate the Remuneration
and Nomination Committee monitors the
composition of the Board and is required to
consider the balance of skills and experience
before any appointment is made. The balance of
skills and experience is also reviewed as part of
the Board evaluation process as described on
page 38. The roles and activities of the Chairman
and Chief Executive are distinct and separate.
The Chairman is responsible for running an
effective Board including oversight of corporate
governance and overall strategy and meets
periodically with the Senior Independent
Director. The Chief Executive has responsibility
for running the Group’s business.
In accordance with the UK Corporate
Governance Code, all Directors submit
themselves for re-appointment at the Annual
General Meeting of the Company. The external
commitments of the Directors are disclosed in
their profiles on pages 34 to 35. Non Executive
Directors are appointed for a specified term.
Their terms of appointment state that their
continuation in office is contingent upon their
satisfactory performance and prescribe the
time commitment required of them in order to
discharge their duties. The terms also state that
appropriate preparation time is required ahead
of each meeting. A review of the remuneration
of the Non Executive Directors, which does not
include performance-related elements, was
carried out during the year. All Directors received
briefings at every Board meeting cycle on how
the Company is addressing changes in solvency
regulation. Directors’ training was also assessed
as part of the performance evaluation described
on page 38. The appointment and removal of
the Company Secretary is a matter for the Board
as a whole. 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.
The Board meets at least four times a year and
operates within established Terms of Reference.
The Board retains ultimate authority for high-level
strategic and management decisions 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, approving any bonus or rights
issues of share capital, setting Group investment
guidelines, approving the Directors’ remuneration,
approving significant expenditure or projects,
and approving the issue of share options. The
Board has, however, authorised the boards
of the trading entities and business divisions
to manage their respective operational affairs,
to the extent that Company Board level approval
is not required.
The Board’s committees
The Board has appointed and authorised
a number of committees to manage aspects
of the Group’s affairs including financial
reporting, internal control and risk management.
Each committee operates within established
written terms of reference and each committee
Chairman reports directly to the Board.
The Group Executive Committee
The Group Executive Committee, comprising
the Executive Directors, meets monthly to raise
and discuss topics such as Group strategy
(subject always to Board approval), approval
of senior appointments and remuneration
(other than Board appointments), management
of the Group’s trading performance, mergers
and acquisitions (which are not significant to the
Group), significant issues raised by management
and approval of exceptional spend within the
limits established by the Board. Below this there
are local management teams that drive the
local businesses.
The Audit Committee
The Audit Committee of Hiscox Ltd is chaired by
Daniel Healy and comprises Richard Gillingwater,
Ernst Jansen, Dr James King, Bob McMillan,
Andrea Rosen and Gunnar Stokholm. The
36
Corporate governance Hiscox Ltd Report and Accounts 2011
Meetings and attendance table
Director
RRS Hiscox
BE Masojada
SJ Bridges
RS Childs
RD Gillingwater
DM Healy
ER Jansen
Dr J King
R McMillan
AS Rosen
G Stokholm
Ltd Board
Audit
Committee
Remuneration
and nomination
Committee
Attended
Attended
Attended
4/4
4/4
4/4
4/4
4/4
4/4
4/4
4/4
3/4
4/4
4/4
n/a
n/a
n/a
n/a
3/3
3/3
3/3
3/3
2/3
3/3
2/3
n/a
n/a
n/a
n/a
2/2
2/2
2/2
2/2
1/2
2/2
2/2
Chairman of the Committee, Daniel Healy,
is considered by the Board to have recent
and relevant financial experience. It operates
according to Terms of Reference published
on the Group’s website. The Audit Committee
meets at least three times a year to assist the
Board on matters of financial reporting, risk
management and internal control. The Audit
Committee 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. The internal and external auditors
have unrestricted access to the Audit
Committee. 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 has confirmed to
the Audit Committee that in its opinion it remains
independent. The Committee is satisfied that
this is the case.
The Remuneration and
Nomination Committee
The Remuneration and Nomination Committee
comprises Richard Gillingwater, Daniel Healy,
Ernst Jansen, Dr James King, Bob McMillan,
Andrea Rosen and Gunnar Stokholm. It is
chaired by Andrea Rosen. It operates according
to Terms of Reference published on the Group’s
website and generally meets three times a year.
The Committee’s role in remuneration is
described in the Directors’ remuneration report
presented on pages 39 to 46.
The Committee’s role in nomination is to monitor
the structure, size and composition of the
Hiscox Ltd Board and when Board vacancies
arise, to nominate, for approval by the Board,
appropriate candidates to fill those roles.
The Committee also has a role to consider the
succession planning for executive directors
and senior managers; and has a particular remit
to make recommendations on the succession
planning for Chairman and the Chief Executive.
When considering candidates for Board roles,
the Committee will ensure that an appropriate
process is followed to ensure that an objective
review of the skills, background and time
available is undertaken. The Committee will
take external advice as appropriate.
For the most recent appointment (of the
Senior Independent Director) a recruitment
consultancy was appointed and the acting
Senior Independent Director represented
the Committee in the selection process.
The Chairman, the Chief Executive Officer
and the Group Human Resources Director
then interviewed the shortlisted candidates.
In 2011, a particular consideration for the
Remuneration and Nomination Committee
has been the succession of Robert Hiscox
as Chairman of Hiscox Ltd. A selection
process has been put in place, a job and
person specification has been prepared
and the search firm Egon Zehnder has been
appointed to advise the Committee throughout
that process. A decision is expected to be
made and announced during 2012.
During the year the Chairman reported to the
Board a change in his commitments following
his appointment as High Sheriff of Wiltshire.
Corporate governance Hiscox Ltd Report and Accounts 2011
37
Corporate
governance
continued
The Conflicts Committee
The Group has a Conflicts Committee which
comprises independent Non Executive Directors
from within the Group, and is chaired by Dr
James King. It meets as and when required.
Conflicts of interest may arise from time to time
because Syndicate 33, Syndicate 3624 and
Syndicate 6104 are managed by a Hiscox-owned
Lloyd’s Managing Agency. 27.5% of the Names
on Syndicate 33 are third-parties and 72.5%
of Syndicate 33 is owned by a Hiscox Group
company. 100% of Syndicate 3624 is owned
by a Hiscox Group company. 100% of Syndicate
6104 is owned by third-parties. The Conflicts
Committee serves to protect the interests of the
third-party Syndicate Names. Should such a
potential conflict of interest arise, there is a formal
procedure to refer the matter to this Committee.
The Company 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.
An alert service is available on www.hiscox.com
to notify any stakeholder of new stock exchange
announcements.
Risk Committees
There are a number of committees within the
Group which have been established to oversee
specific risk areas, including underwriting,
reserving, reinsurance credit, liquidity, broker
credit, business continuity and investments.
A Group risk committee ensures that risk
management activities are effective and
integrated. These committees comprise
Directors of the Company and its subsidiaries
and relevant senior employees.
Performance evaluation
An externally facilitated board evaluation process
was conducted during the year. This included a
review of the culture and dynamics of the Board,
the interaction of the Board with its Committees,
the information provided to the Board, and the
performance of the Chairman. Each Director
was interviewed and asked to complete a
questionnaire. The findings of the evaluation
were then discussed by the Board as a whole.
In addition the Non Executives periodically meet
without the Chairman and Executive Directors
to discuss a wide range of issues concerning
the Company including as appropriate the
performance of the Chairman and the Executive
Directors. Such a meeting was held after the
external evaluation exercise. While no major issues
concerning Board performance were raised
during the year a number of improvements were
suggested around Board information and minute
taking, and Board visits to Hiscox operations.
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.
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
attended the Annual General Meeting in 2011.
Accountability and internal control
The Directors are responsible for maintaining
a sound system of internal control to safeguard
the investment made by shareholders and the
Company’s assets, and for reviewing its
effectiveness.
The risk management systems are set out in
detail in the risk management report on pages
23 to 27.
The Board has reviewed the effectiveness of its
risk management and internal controls during
2011, including financial, operational and
compliance controls. The Board confirms there
is an ongoing process for identifying, evaluating
and managing the significant risks faced by the
Company, which has been in place throughout
the year and up to the date of approval of the
Annual Report and Accounts and accords with
the guidance in the document ‘Internal Control:
Revised Guidance for Directors on the Combined
Code’. The head of each business area is
responsible for implementing the risk management
programme in their area of operations. The Risk
function collates risk management information
and works with the risk committees to monitor
significant risks and movements, and review the
relevant internal controls.
The Group also has an internal audit function
which has direct access to the Audit Committee
and reports to each meeting.
The Board 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.
38
Corporate governance Hiscox Ltd Report and Accounts 2011
Directors’
remuneration
report
This report sets out the remuneration
policy for the Group’s senior executives.
This policy is consistent with the overall
reward approach across the Group. The
sections in this report entitled ‘Annual cash
incentives’, ‘Share incentive schemes’,
‘Remuneration of Executive Directors’
and ‘Pensions’ have been audited by KPMG.
The remainder of the report is unaudited.
Remuneration and Nomination Committee
The Remuneration and Nomination Committee
and generally meets three times a year. The
members of the Committee for 2011 were
Andrea Rosen (Chairman), Richard Gillingwater,
Daniel Healy, Ernst Jansen, Dr James King,
Bob McMillan and Gunnar Stokholm.
The Committee’s role in remuneration is to
determine:
the overall remuneration strategy, policy
and cost for the Group;
the levels and make-up of remuneration
for the four Executive Directors; and
the award of sizeable bonuses to individuals
other than the Executive Directors.
The Committee’s role in nomination is outlined
on page 37.
No member of the committee has any personal
financial interest (other than as a shareholder) or
conflicts of interest arising from cross directorships
or day-to-day involvement in running the
business. No Director plays any part in any
discussion about his or her own remuneration.
The Committee is provided with data and
has access to advice from Towers Watson,
independent remuneration consultants.
The Company also uses the Towers Watson
compensation benchmarking reports.
Remuneration policy
The remuneration philosophy is to provide
rewards that are competitive in every country
in which Hiscox operates and that are consistent
with our overall reward principles:
competitive base pay;
benefits which encourage health and
security for the individual and his or her
family but are not excessive and are
consistent at all levels of the organisation;
annual bonus scheme which enables
employees to earn attractive bonuses for
generating good levels of return on equity;
encourage share ownership at all levels of the
organisation and require it at senior levels; and
contracts and notice periods that are in line
with acceptable market practice but limit
severance payments made on termination.
As a business Hiscox is focused on generating
strong returns on equity and long-term shareholder
returns, therefore our reward structure is aligned
with this.
The Remuneration and Nomination Committee
regularly reviews our remuneration approach.
Remuneration elements
The elements of remuneration at Hiscox
are: fixed reward (base salary, benefits and
retirement benefits) and variable reward
(annual cash incentives (bonuses) and share
incentive schemes).
Fixed reward
Fixed reward is made up of base salary, benefits
and retirement benefits.
Base salary
Base salaries are reviewed annually. The
Remuneration and Nomination Committee takes
into account inflation rate movements by country,
market data provided by its own consultants,
Towers Watson, and the competitive position
of Hiscox salaries (based on the Towers Watson
salary reports), in order to set the overall
salary budget.
Individual salaries are set by taking into account
all of the above as well as individual performance
and skills.
When approving Executive Directors’ salaries,
the Remuneration and Nomination Committee
takes into account rates of inflation, individual
performance, and competitive positioning of
salaries as informed by Towers Watson data
and other publicly available reports.
The base salaries of the Executive Directors
were not increased in 2011.
Benefits
Benefits are set within agreed principles but
reflect normal practice for each country. Hiscox
benefits include health insurance, life insurance
and long-term disability schemes.
Retirement benefits
These also vary by local country practice.
All open Hiscox retirement schemes are based
on defined contributions.
Variable reward
Annual cash incentives (bonuses)
Hiscox’s remuneration policy is underpinned
by the belief that a reasonable portion of total
remuneration should be attained through
incentive awards, thereby linking rewards
directly with performance. The expectation
is that successful performance (company
and individual) should enable employees to
achieve upper quartile total remuneration.
The Group operates two different types of
bonus pools: the Personal Performance Bonus
pools (PPB) and the Profit Related Bonus pools.
The PPB is only available to junior and mid-level
staff and is based entirely on individual
performance ratings. It is designed to ensure
that employees in these roles continue to be
motivated to perform their roles well, irrespective
of overall Group performance. The benefit is
up to 10% of relevant salaries.
Directors’ remuneration report Hiscox Ltd Report and Accounts 2011
39
Directors’
remuneration
report continued
Total shareholder return (%)
Hiscox
FTSE Non life insurance
FTSE All share
100
80
60
40
20
0
-20
-40
-60
All employees, including Executive Directors,
participate in profit related bonus pools. These
pools are calculated at a business unit level and
for the Group as a whole on the basis of a set
percentage of profits in excess of a return on
allocated equity hurdle (‘Hurdle Rate’). The
Hurdle Rate is currently set at a 7.5%. In the case
of Bermuda, the London Market and Guernsey
business units the pool is 15% of profits in excess
of the Hurdle Rate return on allocated equity. In
the case of the UK and Europe, the bonus pool
is 15% of profits from the ground up, but this is
only released when the business unit’s return
on allocated equity exceeds the Hurdle Rate.
For businesses in the development phase, such
as our US business, bonuses are awarded on
achievement of budgets agreed at the beginning
of the year.
A portion of each business unit’s pool is available
to pay bonuses for corporate centre staff,
including the Executive Directors. There are also
controls in place to ensure that as the Executives
seek to maximise the Group’s return on equity
that Hiscox does not exceed the risk appetite set
by the Board.
Once the bonus pools have been established
individual bonuses are determined based on the
results of the relevant business area, individual
performance and the size of the relevant bonus
pool. The Remuneration and Nomination
Committee determines the bonuses to be paid
to the Executive Directors based on the
performance of the Group and an assessment
of individual performance. In this way the bonus
scheme aligns the interests of Executive
Directors and employees with shareholders.
The Hurdle Rate is reviewed annually by using a
benchmark which takes account of the medium-
term forward looking investment returns
(specifically the 1–3 year Gilt and Treasury yields,
cash returns and the general investment
environment). The Hurdle Rate is set at 5% above
this benchmark rate. If the benchmark rate
dropped to zero, or exceeded 7.5% (suggesting
a Hurdle Rate of 5% or above 12.5%) we would
review this approach. Based on the approach
the Hurdle Rate for 2011 was set at 7.5%.
Executive Directors’ cash incentives and ROE
Pre-tax return
on equity
%
Average bonus as a
percentage of salary
%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
3
(24)
13
30
28
19
35
36
14
34
19
1
0
0
90
202
173
54
274
372
53
287
108
0
D ec 06
M ar 07
Jun 07
S e p 07
D ec 07
M ar 08
Jun 08
S e p 08
D ec 08
M ar 09
Jun 09
S e p 09
D ec 09
M ar 10
Jun 10
S e p 10
D ec 10
M ar 11
Jun 11
S e p 11
D ec 11
40
40
Directors’ remuneration report Hiscox Ltd Report and Accounts 2011
The payment of larger bonuses is normally
deferred over a three-year period as follows
(with receipt dependent on continued service).
Bonus of £50,000,
€75,000, $100,000
and below
Entire bonus taken
in cash in year one
Bonus above £50,000
and below £100,000
Bonus above €75,000
and below €150,000
Bonus above $100,000
and below $200,000
£50,000, €75,000,
$100,000 taken
in year one
Balance of bonus
split 50% in year two,
and 50% in year three
Bonus above £100,000
Bonus above €150,000
Bonus above $200,000
50% of bonus taken
in year one
Balance of bonus
split 50% in year two,
and 50% in year three
Share ownership is encouraged amongst senior
personnel by allowing the deferred element of
the annual bonus to be used, without deferral for:
payment of the exercise price on the
exercise of share options;
payment of tax on the exercise
of performance shares;
purchase of shares; and
payment of debt due on share purchases.
The only exception to this is for US-based
employees where, due to the implications of
the US Internal Revenue Code, employees are
not able to receive the deferred element of their
bonuses early in order to purchase shares.
Early payment of deferred bonuses for reasons
other than the above can only be made with
the agreement of the Chief Executive, and the
Remuneration and Nomination Committee
in the case of Executive Directors.
Share Incentive Schemes
The Remuneration and Nomination Committee
believes that employees should be encouraged
to own Hiscox shares so that they are aligned with
the long-term success of the Company. Hiscox
operates a Performance Share Plan for senior
managers, a UK Save as You Earn scheme and
an International Save as You Earn scheme.
Performance Share Plan
Restricted share awards or nil cost option
awards (depending on the appropriate practice
by country) are made to Executive Directors
and other senior managers at the discretion of
the Remuneration and Nomination Committee.
Awards under this plan were made in 2011 and
the Remuneration and Nomination Committee
has also agreed to make awards under this
plan in 2012. The maximum annual award to an
individual under the Performance Share Plan is a
value of 200% of basic salary. The highest actual
grant awarded in 2011 was 152% of basic salary.
Dividend payments
In order to better align senior managers with
Total Shareholder Return, the concept which is
applied to the Performance Share Plan awards is
that the recipient is provided with the equivalent
of the dividend either in shares or cash. This
specifically works as follows:
dividends (or amounts equal to dividends)
on shares granted under the Performance
Share Plan roll up in the form of shares
between the grant and vesting;
at the end of the performance period the
employee would have options over the
proportion of the share grant which vests
by reference to the satisfaction of the
applicable performance target as well as
over the number of shares representing the
‘rolled up’ dividends on those shares; and
for UK-based employees only, after vesting
but before exercise, the employee would
then receive ‘shadow dividends’ (i.e. amounts
equal to dividends paid) on the total number
of shares remaining under option.
Performance conditions
Performance conditions for the Performance
Share Plan are as follows:
25% of the award vests if the Company
achieves an average ROE of 10% post-tax
for each of the three years;
100% vests if the average three-year return
exceeds 17.5% post-tax; and
vesting will occur on a straight-line basis
between these points.
The Remuneration and Nomination Committee
believes that using ROE as the long-term
performance condition better aligns the interests
of employees with shareholders as ROE best
captures the efficiency with which the Company
is using shareholder funds to generate earnings.
The Remuneration and Nomination Committee
believes that an average ROE performance
requirement over the three-year period smoothes
out any cyclical fluctuations in earnings and
ensures that over any given period shareholders
will receive a minimum return on equity before
awards granted to employees will vest.
ROE has been calculated as profit after tax and
goodwill amortisation divided by shareholder
funds at the beginning of each year, excluding
foreign currency items on economic hedges
and intragroup borrowings.
Save as You Earn
The sharesave scheme and international
sharesave scheme are offered to all employees
and currently have a 55% participation.
Shareholding guidelines
We strongly believe that senior managers
within Hiscox should be aligned with Hiscox
shareholders by owning a reasonable number
of Hiscox shares.
Formal shareholding guidelines are in place
which mean that within five years of becoming
an Executive Director, Hiscox Partner (the top
5% of employees in the company) or a member
of a subsidiary board, the employee will be
Directors’ remuneration report Hiscox Ltd Report and Accounts 2011
Directors’ remuneration report Hiscox Ltd Report and Accounts 2011
41
41
Directors’
remuneration
report continued
expected to own Hiscox shares valued at 100%
of salary for Hiscox Partners and members
of subsidiary boards and 150% of salary for
Executive Directors.
The table at the end of the remuneration report
details Directors’ interests in the long-term
incentive plans.
Executive Director reward
Executive Directors’ reward packages are
consistent with the rest of the business. The
actual compensation paid to the four Executive
Directors in 2011 is outlined in the table below.
Details of their contractual notice periods are
contained in the table below.
RRS Hiscox
BE Masojada
RS Childs
SJ Bridges
49%
51%
38%
41%
39%
62%
59%
61%
Base Share incentive scheme
‘Base’ refers to base salary for the year.
‘Share incentive scheme’ is the estimated value at award of the Performance Share Plan
awards made during the year.
Remuneration of Executive Directors
RRS Hiscox
BE Masojada
RS Childs
SJ Bridges
2011
Basic salary
£000
2011
Benefits
£000
2011
Bonus
£000
302
438
358
328
1
2
2
2
–
–
–
–
2011
Total
£000
303
440
360
330
2010
Basic salary
£000
2010
Benefits
£000
310
438
358
328
2
2
2
2
2010
Bonus
£000
300
500
400
350
2010
Total
£000
612
940
760
680
External Non Executive Directorships
No external appointments may be accepted by an Executive Director where such appointment may give rise to a conflict of interest.
The consent of the Chairman is required in any event. During the year, RRS Hiscox has been a Non Executive Director of Grainger Trust plc
and was paid £40,000 for his services and of AGICM Ltd and was paid £5,000, for the period until his resignation on 12 July 2011. RS Childs,
SJ Bridges and BE Masojada did not hold any Non Executive Director positions during the year.
Service contract table
Director
RRS Hiscox
BE Masojada
RS Childs
SJ Bridges
R Gillingwater
DM Healy
ER Jansen
Dr J King
R McMillan
AS Rosen
G Stokholm
42
Directors’ remuneration report Hiscox Ltd Report and Accounts 2011
Effective date of
Hiscox Ltd contract
12 Dec 2006
12 Dec 2006
12 Dec 2006
12 Dec 2006
1 Dec 2010
11 Oct 2006
20 Nov 2008
11 Oct 2006
1 Dec 2010
11 Oct 2006
20 Nov 2008
Unexpired term
and notice period
12 months
6 months
6 months
6 months
3 months
3 months
3 months
3 months
3 months
3 months
3 months
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. All amounts are denominated in US Dollars. The structure of the fees paid is detailed below.
The fees in relation to Hiscox Ltd for the year were:
R Gillingwater
DM Healy
ER Jansen
Dr J King
R McMillan
AS Rosen
G Stokholm
Pensions
RRS Hiscox
BE Masojada
RS Childs
SJ Bridges
Hiscox Ltd
Board
$000
Committees
$000
83
83
83
83
83
83
83
45
40
30
35
30
39
36
Total
2011
$000
128
123
113
118
113
122
119
Total
2010
$000
15
122
112
117
13
130
117
Increase
in accrued
pension
during the
year
£000
12
3
(5)
2
Transfer
accrued
annual pension at
31 Dec 11
£000
Transfer value
of increase
in accrued
pension
£000
Transfer value
of accrued
pension at
1 Jan 11
£000
Transfer value
of accrued
pension at
31 Dec 11
£000
250
43
247
33
–
–
–
–
5,056
746
6,185
528
5,727
1,269
7,828
745
Increase/
(decrease) in
transfer value of
accrued benefit
during the year
£000
671
523
1,643
217
Directors’ remuneration report Hiscox Ltd Report and Accounts 2011
43
Directors’
remuneration
report continued
Share options
SJ Bridges
RS Childs
BE Masojada
Other employees
Total
Number of
options at
1 January
2011
154,578
154,578
154,578
463,734
206,104
206,104
206,103
206,104
824,415
206,104
206,104
206,104
206,104
824,416
87,993
93,609
393,687
485,308
659,222
650,775
2,370,594
4,483,159
Number of
options
granted
Number of
options
lapsed
Number of
options
exercised
Number of
options at
31 December
2011
154,578
154,578
154,578
463,734
206,104
206,104
206,103
206,104
824,415
206,104
206,104
206,104
206,104
824,416
–
–
233,957
268,900
463,424
475,587
Exercise price
£
Market price
at date of
exercise
£
Date from
which
exercisable
Expiry date
1.465
1.514
1.499
1.252
1.465
1.514
1.499
1.252
1.465
1.514
1.499
02-Apr-06
–
–
13-Jul-07
– 06-Apr-08
01-Apr-13
12-Jul-14
05-Apr-15
– 19-Nov-05 18-Nov-12
01-Apr-13
02-Apr-06
–
12-Jul-14
–
13-Jul-07
05-Apr-15
– 06-Apr-08
– 19-Nov-05 18-Nov-12
01-Apr-13
02-Apr-06
–
12-Jul-14
–
13-Jul-07
05-Apr-15
– 06-Apr-08
1.755 3.773-4.006 03-May-04 02-May-11
0.806 3.545-3.999 27-Sep-04 26-Sep-11
1.252 3.852-3.930 19-Nov-05 18-Nov-12
01-Apr-13
02-Apr-06
1.465 3.738-4.243
12-Jul-14
1.514 3.738-4.107
13-Jul-07
05-Apr-15
1.499 3.752-3.880 06-Apr-08
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(87,993)
(93,609)
(159,730)
(216,408)
(195,798)
(175,188)
(928,726) 1,441,868
(928,726) 3,554,433
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
44
Directors’ remuneration report Hiscox Ltd Report and Accounts 2011
Share options
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
RRS Hiscox
RS Childs
BE Masojada
Other employees
Number of
options at
1 January
2011
3,210
4,907
3,210
4,343
3,107
47,942
480,883
314,128
109,514
80,222
189,504
129,996
–
–
Number of
options
granted
Number of
options
lapsed
Number of
options
exercised
–
–
–
–
–
–
–
–
–
–
–
–
292,265
448,213
–
–
–
–
–
(2,606)
(10,946)
(17,036)
(13,905)
(13,156)
(30,701)
(18,203)
(145,928)
(253)
–
(4,907)
–
(4,343)
–
(45,336)
(460,251)
(264,707)
(2,284)
(557)
(4,029)
–
–
–
Number of
options at
31 December
2011
3,210
–
3,210
–
3,107
–
9,686
32,385
93,325
66,509
154,774
111,793
146,337
447,960
Total
1,370,966
740,478
(252,734)
(786,414) 1,072,296
Exercise price
£
Market price
at date of
exercise
£
Date from
which
exercisable
Expiry date
– 01-May-13
– 01-May-13
3.824 01-Dec-10
31-Oct-13
2.826
3.884 01-Dec-11 31-May-12
1.956
31-Oct-13
2.826
31-May-11
2.210
– 01-Dec-13 31-May-14
2.896
31-May-11
2.210 3.500-4.199 01-Dec-10
1.982 3.666-4.220 01-May-11
31-Oct-11
1.956 3.699-4.198 01-Dec-11 31-May-12
3.820 01-May-12
2.418
31-Oct-12
4.221 01-Dec-12 31-May-13
2.752
2.826 3.490-4.198 01-May-13
31-Oct-13
– 01-Dec-13 31-May-14
2.896
31-Oct-14
– 01-May-14
3.077
– 01-Dec-14 31-May-15
2.843
International Sharesave
Scheme
Other employees
11,584
152,888
46,911
47,732
70,355
84,521
39,845
–
–
–
–
–
–
–
–
–
61,258
109,693
(11,584)
(15,754)
–
–
–
–
–
–
–
–
(137,134)
(22,329)
–
–
–
–
–
–
–
–
24,582
47,732
70,355
84,521
39,845
61,258
109,693
31-May-11
2.210
– 01-Dec-10
1.982 3.666-4.137 01-May-11
31-Oct-11
1.956 3.703-3.884 01-Dec-11 31-May-12
31-Oct-12
2.418
– 01-May-12
– 01-Dec-12 31-May-13
2.752
– 01-May-13
2.826
31-Oct-13
– 01-Dec-13 31-May-14
2.896
31-Oct-14
– 01-May-14
3.077
– 01-Dec-14 31-May-15
2.843
Total
453,836
170,951
(27,338)
(159,463)
437,986
Directors’ remuneration report Hiscox Ltd Report and Accounts 2011
45
Directors’
remuneration
report continued
Performance Share Plan
SJ Bridges
RS Childs
RRS Hiscox
BE Masojada
Other employees
Number of
awards at
1 January
2011
110,000
200,000
150,000
–
140,000
225,000
175,000
–
90,588
75,000
50,000
76,260
–
175,000
275,000
250,000
–
843,265
460,291
1,530,500
2,836,000
3,035,096
–
Number of
awards
granted
Number of
awards
lapsed
Number of
awards
exercised
Number of
awards at
31 December
2011
Market price
at date of
exercise
£
Date from
which released
11,934
–
–
125,000
15,189
–
–
125,000
–
8,137
–
–
75,000
18,986
–
–
175,000
–
–
173,548
–
–
2,943,000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(7,500)
(94,500)
(192,856)
(135,000)
–
121,934
–
200,000
–
150,000
–
125,000
(155,189)
–
–
225,000
–
175,000
–
125,000
–
90,588
–
83,137
–
50,000
–
76,260
–
75,000
–
193,986
–
275,000
–
250,000
–
175,000
(238,942)
604,323
(195,329)
264,962
(1,012,667)
683,881
–
2,741,500
– 2,842,240
– 2,808,000
07-Apr-11
–
02-Apr-12
–
07-Apr-13
–
07-Apr-14
–
07-Apr-11
3.96
02-Apr-12
–
07-Apr-13
–
–
07-Apr-14
– 26-Mar-10
07-Apr-11
–
02-Apr-12
–
07-Apr-13
–
07-Apr-14
–
07-Apr-11
–
02-Apr-12
–
07-Apr-13
–
07-Apr-14
–
3.49-4.12 12-Jan-09
3.75-3.85 26-Mar-10
07-Apr-11
3.50-4.25
02-Apr-12
–
07-Apr-13
–
07-Apr-14
–
Total
10,697,000
3,670,794
(429,856)
(1,602,127) 12,335,811
46
Directors’ remuneration report Hiscox Ltd Report and Accounts 2011
Directors’ report
Directors
The names and details of the individuals who
served as Directors of the Company during the
year are set out on pages 34 to 35. Details of
the Chairman’s professional commitments are
included in his biography.
In accordance with the UK Corporate
Governance Code all Directors will submit
themselves for re-appointment at the Annual
General Meeting of the Company.
Political and charitable contributions
The Group made no political contributions during
the year (2010: £nil). Charitable donations
totalled £533,000 (2010: £1,109,000) of which
£250,000 (2010: £500,000) 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
28 and 29.
Major interests in shares
As at 24 February 2012, the Company had been
notified of the following interests of five per cent
or more of voting rights in its ordinary shares:
Number of shares
% of total*
Invesco Limited
54,031,056
13.91
Massachusetts Financial
Services Company
19,620,700
5.05
*Based on voting rights of 388,420,033 as at 24 February 2012.
A copy of the Company’s Bye-Laws is available
for inspection at the Company’s registered office.
Annual General Meeting
The notice of the Annual General Meeting, to be
held at the Fairmont Hamilton Princess Hotel,
76 Pitts Bay Road, Pembroke HM 08, Bermuda
on 30 May 2012 at 10:00am (2:00pm (BST)), is
contained in a separate circular to shareholders
enclosed with this report.
By order of the Board
Charles Dupplin, Secretary
Wessex House, 45 Reid Street,
Hamilton HM12, Bermuda
27 February 2012
The Directors have pleasure in submitting
their Annual Report and consolidated
financial statements for the year ended
31 December 2011.
Principal activity and business review
The Company is a holding company for
subsidiaries involved in the business of insurance
in Bermuda, the US, the UK, Guernsey and
Europe. An analysis of the development and
performance of the business, its position at the
end of the year, and the likely future development
can be found within the Chief Executive’s report
on pages 6 to 12. A description of the major risks
can be found in the risk management section
on pages 23 to 27. In addition, note 3 to the
consolidated financial statements provides
a detailed discussion on the risks which are
inherent to the Group’s business and how those
risks are managed. Details of the key financial
performance indicators are given on page 2.
All information described above is incorporated
by reference into this report and is deemed
to form part of this report.
Financial results
The Group achieved a pre-tax profit for the year
of £17.3 million (2010: £211.4 million). Detailed
results for the year are shown in the consolidated
income statement on page 51, and also within
the Group financial performance section on
pages 18 to 19.
Going concern
A review of the financial performance of the
Group is set out on pages 18 to 19. The financial
position of the Group, its cash flows and
borrowing facilities are included therein. The
Group has considerable financial resources
and a well-balanced book of business.
After making enquiries, the Directors have an
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 consolidated
financial statements.
Dividends
An interim dividend of 5.1p (net) per share
(2010: 5.0p (net)) was paid on 21 September
2011 by Hiscox Ltd in respect of the year ended
31 December 2011. The Directors recommend
the payment of a final dividend of 11.9p (net) per
share (2010: 11.5p (net)). If approved this will be
paid on 19 June 2012 to shareholders on the
register at the close of business on 11 May 2012.
As in the previous year the Directors propose
that shareholders may elect to receive the final
dividend in new ordinary shares, a scrip dividend
rather than cash.
Share capital
Details of the structure of the Company’s share
capital and changes in the share capital during
the year are disclosed in note 24 to the
consolidated financial statements.
Directors’ report Hiscox Ltd Report and Accounts 2011
47
31 December 2011
5p Ordinary Shares
number of shares
beneficial
31 December 2010
5p Ordinary Shares
number of shares
beneficial
4,944,068
6,637,176
3,496,077
3,504,517
2,104,316
1,991,272
1,112,152
1,149,438
–
–
100,000
100,000
53,231
20,698
–
–
–
–
43,525
24,116
–
–
Directors’ report
continued
Directors’ interests
Executive Directors
RRS Hiscox
BE Masojada
RS Childs
SJ Bridges
Non Executive Directors
R Gillingwater
D Healy
E R Jansen
Dr J King
R McMillan
A Rosen
G Stokholm
Directors’
responsibilities
statement
The Board is responsible for ensuring the
maintenance of proper accounting records
which disclose with reasonable accuracy the
financial position of the Company. It is required
to ensure that the financial statements present
a fair view for each financial period.
We confirm that to the best of our knowledge:
the financial statements, prepared in
accordance with the applicable set
of accounting standards, present fairly,
in all material respects, the assets, liabilities,
financial position and profit or loss of the
Company and the undertakings included
in the consolidation taken as a whole; and
the Directors’ report includes a fair review
of the development and performance of the
business and the position of the Company
and the undertakings included in the
consolidation taken as a whole, together
with a description of the principal risks
and uncertainties that they face.
The Directors responsible for authorising the
responsibility statement on behalf of the Board
are the Chairman, RRS Hiscox and the Chief
Financial Officer, SJ Bridges. The statements
were approved for issue on 27 February 2012.
48
Director’s report/Directors’ responsibilities statement Hiscox Ltd Report and Accounts 2011
Financial
summary
Group key performance indicators
Gross premiums written (£m)
Net premiums earned (£m)
Profit before tax (£m)
Profit after tax (£m)
Earnings per share (p)
Total dividend per share for year (p)
Net asset value per share (p)
Group combined ratio (%)
Group combined ratio excluding foreign exchange (%)
Return on equity (%)
Investment return (%)
2011
2010
1,449.2
1,432.7
1,145.0
1,131.2
17.3
21.3
5.5
17.0
211.4
178.8
47.2
16.5
323.5
332.7
99.5
99.3
1.7
0.9
89.3
89.8
16.5
3.6
Financial summary Hiscox Ltd Report and Accounts 2011
49
Opinion
In our opinion:
the consolidated financial statements
present fairly, in all material respects,
the consolidated financial position
of the Company as at 31 December
2011, and of its consolidated financial
performance and its consolidated
cash flows for the year then ended in
accordance with International Financial
Reporting Standards as adopted
by the EU; and
the part of the Directors’ remuneration
report which we were engaged
to audit has been properly prepared
in accordance with Schedule 8 to the
UK Companies Act 2006 The Large
and Medium-sized Companies and
Groups (Accounts and Reports)
Regulations 2008 (SI 2008 No. 410),
as if those requirements were to apply
to the Company.
KPMG
Hamilton, Bermuda
27 February 2012
Independent auditors’
report to the Board
of Directors and
the shareholders
of Hiscox Ltd
We have audited the accompanying
consolidated financial statements of
Hiscox Ltd (‘the Company’) on pages 51
to 103 which comprise the consolidated
balance sheet as at 31 December 2011,
and the consolidated income statement,
consolidated statement of comprehensive
income, consolidated statement of
changes in equity and consolidated cash
flow statement for the year then ended,
and a summary of significant accounting
policies and other explanatory notes.
In addition to our audit of the consolidated
financial statements, the Directors have
engaged us to audit the information in
the Directors’ remuneration report that is
described as having been audited, which
the Directors have decided to prepare
(in addition to that required to be prepared)
as if the Company were required to comply
with the requirements of Schedule 8 to the
UK Companies Act 2006 The Large and
Medium-sized Companies and Groups
(Accounts and Reports) Regulations 2008
(SI 2008 No. 410).
Management’s responsibility for the
consolidated financial statements
Management is responsible for the
preparation and fair presentation of
these consolidated financial statements
in accordance with International Financial
Reporting Standards as adopted by
the EU and for such internal control
as management determines is necessary
to enable the preparation of consolidated
financial statements that are free from
material misstatement whether due
to fraud or error.
Auditors’ responsibility
Our responsibility is to express an opinion
on these consolidated financial statements
based on our audit and, under the terms
of our engagement letter, to audit the part
of the Directors’ remuneration report that
is described as having been audited.
We conducted our audit in accordance
with International Standards on Auditing.
Those standards require that we comply
with ethical requirements and plan and
perform the audit to obtain reasonable
assurance whether the consolidated
financial statements and the part of the
Directors’ remuneration report to be audited
are free from material misstatement.
An audit involves performing procedures
to obtain audit evidence about the amounts
and disclosures in the consolidated
financial statements and the part of the
Directors’ remuneration report to be audited.
The procedures selected depend on
our judgement, including the assessment
of the risks of material misstatement of the
consolidated financial statements and the
part of the Directors’ remuneration report
to be audited, whether due to fraud or error.
In making those risk assessments, we
consider internal control relevant to the
entity’s preparation and fair presentation
of the consolidated financial statements
and the part of the Directors’ remuneration
report to be audited in order to design
audit procedures that are appropriate
in the circumstances, but not for the
purpose of expressing an opinion on the
effectiveness of the entity’s internal control.
An audit also includes evaluating the
appropriateness of accounting policies used
and the reasonableness of accounting
estimates made by management, as well
as evaluating the overall presentation of the
consolidated financial statements and the
part of the Directors’ remuneration report
to be audited.
We believe that the audit evidence we
have obtained is sufficient and appropriate
to provide a basis for our audit opinion.
We review whether the corporate
governance statement reflects the
Company’s compliance with the nine
provisions of the UK Corporate Governance
Code specified for our review by those
rules, and we report if it does not.
We are not required by the terms of our
engagement to consider whether the
Board’s statements on internal control
cover all risks and controls, or to form an
opinion on the effectiveness of the Group’s
corporate governance procedures or its
risk and control procedures.
We also read the other information
contained in the Report and Accounts
and consider whether it is consistent
with the audited consolidated financial
statements. We consider the implications
for our report if we become aware of
any apparent misstatements or material
inconsistencies with the consolidated
financial statements. Our responsibilities
do not extend to any other information.
50
Independent auditors’ report to the Board of Directors and the shareholders of Hiscox Ltd Hiscox Ltd Report and Accounts 2011
Consolidated income statement
For the year ended 31 December 2011
Income
Gross premiums written
Outward reinsurance premiums
Net premiums written
Gross premiums earned
Premiums ceded to reinsurers
Net premiums earned
Investment result
Other revenues
Revenue
Expenses
Claims and claim adjustment expenses, net of reinsurance
Expenses for the acquisition of insurance contracts
Operational expenses
Foreign exchange gains
Total expenses
Results of operating activities
Finance costs
Share of profit/(loss) of associates after tax
Profit before tax
Tax credit/(expense)
Profit for the year (all attributable to owners of the Company)
Earnings per share on profit attributable to owners of the Company
Basic
Diluted
Consolidated statement of comprehensive income
For the year ended 31 December 2011, after tax
Profit for the year
Other comprehensive income
Currency translation gains (net of tax of £nil (2010: £nil))
Total other comprehensive income
Total comprehensive income recognised for the year
(all attributable to owners of the Company)
The notes on pages 55 to 103 are an integral part of these consolidated financial statements.
Note
2011
Total
£000
2010
Total
£000
4 1,449,219 1,432,674
(301,047)
(275,208)
4 1,174,011 1,131,627
1,428,954 1,435,118
(303,960)
(283,947)
4 1,145,007
1,131,158
7
9
24,495
17,322
100,249
22,079
1,186,824 1,253,486
26.2
17
9
12
(697,898)
(269,792)
(203,204)
7,816
(570,997)
(269,891)
(206,403)
15,484
(1,163,078) (1,031,807)
23,746
(6,698)
223
17,271
4,001
221,679
(10,090)
(223)
211,366
(32,566)
21,272
178,800
5.5p
5.3p
47.2p
45.4p
10
16
28
31
31
Note
2011
Total
£000
2010
Total
£000
21,272
178,800
12
11,060
11,060
11,729
11,729
32,332
190,529
Consolidated income statement/Consolidated statement of comprehensive income Hiscox Ltd Report and Accounts 2011
51
Consolidated balance sheet
At 31 December 2011
Assets
Intangible assets
Property, plant and equipment
Investments in associates
Deferred tax
Deferred acquisition costs
Financial assets carried at fair value
Reinsurance assets
Loans and receivables including insurance receivables
Current tax asset
Cash and cash equivalents
Total assets
Equity and liabilities
Shareholders’ equity
Share capital
Share premium
Contributed surplus
Currency translation reserve
Retained earnings
Total equity (all attributable to owners of the Company)
Employee retirement benefit obligations
Deferred tax
Insurance liabilities
Financial liabilities
Current tax
Trade and other payables
Total liabilities
Total equity and liabilities
Note
2011
£000
2010
£000
29
16
14
15
67,552
18,155
6,380
25,748
150,050
64,108
19,742
6,886
14,077
142,736
17
19 2,368,636 2,459,107
462,765
485,414
–
336,017
492,515
507,722
69,436
516,547
23
20
18, 26
4,222,741 3,990,852
24
24
24
25
25
20,563
32,086
245,005
60,517
897,728
20,297
15,800
245,005
49,457
935,555
1,255,899 1,266,114
30
–
152,447
–
45,421
29
26 2,500,260 2,279,867
20,457
–
29,995
–
348,998
314,135
27
19
2,966,842 2,724,738
4,222,741 3,990,852
The notes on pages 55 to 103 are an integral part of these consolidated financial statements.
The consolidated Group financial statements were approved by the Board of Directors on 27 February 2012 and signed on its behalf by:
RRS Hiscox
Chairman
SJ Bridges
Chief Financial Officer
52
Consolidated balance sheet Hiscox Ltd Report and Accounts 2011
Consolidated statement of changes in equity
Balance at 1 January 2010
Total recognised comprehensive income
for the year (all attributable to owners of the Company)
Employee share options:
Equity settled share based payments
Proceeds from shares issued
Deferred tax
Dividends paid to owners of the Company
Balance at 31 December 2010
Total recognised comprehensive income
for the year (all attributable to owners of the Company)
Employee share options:
Equity settled share based payments
Proceeds from shares issued
Deferred tax
Scrip dividends
Dividends paid to owners of the Company
Note
Share
capital
£000
Share
premium
£000
Contributed
surplus
£000
Currency
translation
reserve
£000
Retained
earnings
£000
Total
£000
20,158
11,831
303,465
37,728
748,104 1,121,286
–
–
139
–
–
–
–
11,729
178,800
190,529
–
3,969
–
–
–
–
–
(58,460)
–
–
–
–
9,000
–
(349)
–
9,000
4,108
(349)
(58,460)
20,297
15,800
245,005
49,457
935,555 1,266,114
–
–
91
–
175
–
–
–
3,124
–
13,162
–
–
–
–
–
–
–
11,060
21,272
32,332
–
–
–
–
–
8,677
–
(3,927)
–
(63,849)
8,677
3,215
(3,927)
13,337
(63,849)
24
29
32
24
29
24, 32
32
Balance at 31 December 2011
20,563
32,086
245,005
60,517
897,728 1,255,899
The notes on pages 55 to 103 are an integral part of these consolidated financial statements.
Consolidated statement of changes in equity Hiscox Ltd Report and Accounts 2011
53
Consolidated statement of cash flows
For the year ended 31 December 2011
Profit before tax
Adjustments for:
Interest and equity dividend income
Interest expense
Net fair value gains/(losses) on financial assets
Depreciation and amortisation
Charges in respect of share based payments
Other non-cash movements
Effect of exchange rate fluctuations on cash presented separately
Changes in operational assets and liabilities:
Insurance and reinsurance contracts
Financial assets carried at fair value
Financial liabilities carried at fair value
Other assets and liabilities
Cash flows from operations
Interest received
Equity dividends received
Interest paid
Current tax paid
Net cash flows from operating activities
Cash flows from the acquisition of subsidiaries
Cash flows from the sale and purchase of associates
Cash flows from the purchase of property, plant and equipment
Cash flows from the purchase of intangible assets
Net cash flows from investing activities
Proceeds from the issue of ordinary shares
Dividends paid to owners of the Company
Net (repayments)/receipts 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
Cash and cash equivalents at 31 December
Note
2011
£000
2010
£000
17,271
211,366
14, 15
9, 24
33
16
24
32
(50,333)
6,698
30,878
8,098
8,677
(1,070)
(1,451)
138,667
78,501
(457)
(18,888)
216,591
50,244
1,531
(6,163)
(4,003)
(61,606)
10,090
(25,672)
7,065
8,047
1,323
(508)
141,646
(2,527)
82
(23,704)
265,602
60,332
1,274
(4,628)
(51,580)
258,200
271,000
–
729
(2,561)
(9,992)
(3,662)
468
(3,462)
(15,591)
(11,824)
(22,247)
3,215
(50,512)
(20,000)
4,108
(58,460)
(118,539)
(67,297)
(172,891)
179,079
75,862
336,017
179,079
1,451
259,647
75,862
508
23
516,547
336,017
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. The purchase, maturity and disposal of derivative contracts is also classified as an operating cash flow.
Included within cash and cash equivalents held by the Group are balances totalling £77,203,000 (2010: £63,447,000) not available
for immediate use by the Group outside of the Lloyd’s syndicate within which they are held.
The notes on pages 55 to 103 are an integral part of these consolidated financial statements.
54
Consolidated statement of cash flows Hiscox Ltd Report and Accounts 2011
Notes to the consolidated
financial statements
1 General information
The Hiscox Group, which is headquartered
in Hamilton, Bermuda, comprises Hiscox
Ltd (the parent Company, referred to herein
as the ‘Company’) and its subsidiaries
(collectively, the ‘Hiscox Group’ or the
‘Group’). For the period under review the
Group provided insurance and reinsurance
services to its clients worldwide. It has
operations in Bermuda, the UK, Europe,
and the US and employs over 1,250 people.
The Company is registered and domiciled
in Bermuda and on 12 December 2006 its
ordinary shares were listed on the London
Stock Exchange. As such it is required
to prepare its annual audited financial
information in accordance with Section
4.1 of the Disclosure and Transparency
Rules and the Listing Rules, both issued
by the Financial Services Authority (FSA),
in addition to the Bermuda Companies Act
1981. The first two pronouncements issued
by the FSA require the Group to prepare
financial statements which comprise the
consolidated income statement, the
consolidated statement of comprehensive
income, the consolidated balance sheet, the
consolidated statement of changes in equity,
the consolidated cash flow statement and
the related notes 1 to 38 in accordance with
International Financial Reporting Standards
(IFRS) as adopted by the European Union.
The consolidated financial statements for
the year ended 31 December 2011 include
all of the Group’s subsidiary companies
and the Group’s interest in associates.
All amounts relate to continuing operations.
The financial statements were approved
for issue by the Board of Directors on
27 February 2012.
2 Significant accounting policies
The principal accounting policies applied
in the preparation of these consolidated
Group financial statements are set
out below. The most critical individual
components of these financial statements
that involve the highest degree of judgement
or significant assumptions and estimations
are identified at note 2.22.
2.1 Statement of compliance
The consolidated financial statements
have been prepared in accordance
with IFRS as adopted by the European
Union and in accordance with the
provisions of the Bermuda Companies
Act 1981.
Since 2002, the standards adopted by the
International Accounting Standards Board
(IASB) have been referred to as IFRS. The
standards from prior years continue to bear
the title ‘International Accounting Standards’
(IAS). Insofar as a particular standard is not
explicitly referred to, the two terms are used
in these financial statements synonymously.
Compliance with IFRS includes the adoption
of interpretations issued by the International
Financial Reporting Interpretations
Committee (IFRIC).
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 another comprehensive
body of accounting principles for insurance
contracts, namely accounting principles
generally accepted in the UK.
In July 2010 the IASB published an exposure
draft for Phase II of the insurance contracts
project.
The exposure draft proposes a number
of significant changes to the measurement
of insurance contracts and as such adoption
of a final standard in a form similar to the
exposure draft will likely have a significant
impact on the results of the Group.
In February 2012, the IASB extended its
timeline for either re-exposing or issuing a
staff draft on the insurance contracts project
to the second half of 2012. The ultimate
timeline for a final standard will depend on
whether the IASB issues a new exposure
draft before issuing a standard. While the
IASB has not indicated an effective date
for a final standard, transitional provisions
propose that it should be applied
retrospectively with opening differences
accounted for in equity.
submitted a comment letter to the IASB
outlining our concerns and issues with some
of the definitions and detail included within
the exposure draft. We continue to monitor
the progress of the project.
2.2 Basis of preparation
The financial statements are presented
in Pounds Sterling and are rounded to the
nearest thousand unless otherwise stated.
They are compiled on a going concern basis
and prepared on the historical cost basis
except that pension scheme assets included
in the measurement of the employee
retirement benefit obligation, and certain
financial instruments including derivative
instruments are measured at fair value.
Employee retirement benefit obligations
are determined using actuarial analysis.
The balance sheet of the Group is presented
in order of increasing liquidity.
The accounting policies have been applied
consistently by all Group entities, to all
periods presented, solely for the purpose
of producing the consolidated Group
financial statements.
The Group has financial assets and
cash of over £2.87 billion. The portfolio is
predominantly invested in liquid short-dated
bonds and cash to ensure significant liquidity
to the Group and to reduce risk from the
financial markets. In addition the Group
has significant borrowing facilities in place.
The Group writes a balanced book of
insurance and reinsurance business spread
by product and geography. The Directors
believe that the Group is well placed
to manage its business risk and continue
to trade successfully.
A review of the financial performance
of the Group is set out on pages 18 to 19.
The financial position of the Group, its cash
flows and borrowing facilities are included
therein. In addition, note 3 to the financial
statements provides a detailed discussion
on the risks which are inherent to the Group’s
business and how those risks are managed.
The Directors have an expectation
that the Company and the Group
have adequate resources to continue
in operational existence for the foreseeable
future. Accordingly, they continue
to adopt the going concern basis in
preparing the Annual Report and Accounts.
The accounting policies adopted are
consistent with those of the previous
financial year except as follows:
The Group is generally supportive of the
proposed measurement principles for
short duration contracts however we have
The Group has adopted, for the first time,
the following new and amended Standards
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
55
Notes to the consolidated
financial statements
continued
2 Significant accounting policies continued
2.2 Basis of preparation continued
and Interpretations issued by the IASB and
endorsed by the EU as of 1 January 2011.
The amendment to IFRIC 14, The Limit on
a Defined Benefit Asset, Minimum Funding
Requirements is effective for annual periods
beginning on or after 1 January 2011.
The amendment provides guidance on
assessing the recoverable amount of a
net pension asset in a defined benefit
scheme and permits an entity to treat
the prepayment of a minimum funding
requirement as an asset.
IAS 24 Related Party Disclosure
(Amendment) is effective for annual periods
beginning on or after 1 January 2011.
The amendment clarifies the definition
of a related party in order to simplify the
identification of such relationships and to
eliminate inconsistencies in application.
Early adoption of SI 2008/489, disclosure
requirements for auditors remuneration, has
occurred. The amendments are intended to
align the classification of non-audit services
for the purposes of disclosure in the financial
statements with the classification of non-
audit services under the UK Auditing
Practice Board’s Ethical Standards. The
disclosure for 2010 has been restated to
conform to the current year presentation.
Adoption of the above had no material effect
on the financial performance or position of
the Group.
A number of new standards, amendments
to standards and interpretations are effective
for annual periods beginning after 1 January
2011, and have not been applied in preparing
these consolidated financial statements.
None of these is expected to have a
significant effect on the consolidated
financial statements except for IFRS 9
and IAS 19.
Defined Benefit Plans – Amendments to
IAS 19 is due to be in effect from 1 January
2013. The amendments require immediate
recognition of actuarial gains and losses
in other comprehensive income and to
eliminate the corridor method that the
Group currently operates. The principal
amendment is the requirement to calculate
net interest income or expense using the
discount rate used to measure the defined
benefit asset or liability.
IFRS 9 Financial Instruments is due to be
effective from 1 January 2015. The standard
contains two primary measurement
categories for financial assets of amortised
cost and fair value. Financial assets are
classified in to one of these two categories
on initial recognition. A financial asset is
measured at amortised cost if the following
conditions are met: it is held where the
objective is to hold the asset in order to
collect contractual cash flows; and, its
contractual terms give rise on specified
dates to cash flows that are solely payment
of principal and interest on the principal
outstanding. All other financial assets are
to be classified at fair value.
2.3 Basis of consolidation
(a) Subsidiaries
Subsidiaries are those entities controlled
by the Group. Control exists when the Group
has the power, directly or indirectly, to
govern the financial and operating policies
of an entity so as to obtain benefits from
its activities. Generally this occurs when
the Group obtains a shareholding of more
than half of the voting rights of an entity.
In assessing control, potential voting rights
that are currently exercisable or convertible
are taken into account. Management
also exercise significant judgement about
any actual or perceived control acquired
indirectly, through normal commercial
dealings with entities of a special purpose
nature. The Group does not undertake any
such arrangements with such entities where
control of that entity would be acquired. The
consolidated financial statements include
the assets, liabilities and results of the Group
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 underwrites as a corporate member
of Lloyd’s on the main Syndicates managed
by Hiscox Syndicates Limited (the ‘main
managed Syndicates’ numbered 33 and,
3624). 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 these Syndicates has been
included in the financial statements.
The Group manages the underwriting
of, but does not participate as a member
of, Syndicate 6104 at Lloyd’s which provides
reinsurance to Syndicate 33 on a normal
commercial basis. Consequently, aside
from the receipt of managing agency fees,
defined profit commissions as appropriate
and interest arising on effective assets
included within the experience account,
the Group has no share in the assets,
liabilities or transactions of Syndicate
6104, nor is it controlled. The position
and performance of that Syndicate is
therefore not included in the Group’s
financial statements.
The Group uses the acquisition method
of accounting to account for the acquisition
of subsidiaries. At the date of acquisition,
the Group recognises the identifiable assets
acquired and liabilities assumed as part
of the overall business combination
transaction at their acquisition date fair
value. Recognition of these items is subject
to the definitions of assets and liabilities
in the Framework for the Preparation and
Presentation of Financial Statements. The
Group may also recognise intangible items
not previously recognised by the acquired
entity such as customer relationships.
(b) Associates
Associates are those entities in which
the Group has significant influence but
not control over the financial and operating
policies. Significant influence is generally
identified with a shareholding of between
20% and 50% of an entity’s voting rights.
The consolidated financial statements
include the Group’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 Group’s share of its associates’ post-
acquisition profits or losses after tax is
recognised in the income statement for 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 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 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.
In accordance with IAS 21, foreign currency
gains and losses on intragroup monetary
assets and liabilities may not fully eliminate
on consolidation when the intragroup
monetary item concerned is transacted
between two Group entities that have
different functional currencies. Unrealised
gains arising from transactions with
associates are eliminated to the extent
of the Group’s interest in the entity.
56
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
2 Significant accounting policies continued
2.3 Basis of consolidation continued
(c) Transactions eliminated
on consolidation continued
Unrealised gains arising from transactions
with associates are eliminated against the
investment in the associate. Unrealised
losses are eliminated in the same way
as unrealised gains, but only to the extent
that there is no evidence of impairment.
2.4 Foreign currency translation
(a) Functional 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 subsidiary entities
operating from the US and Bermuda whose
functional currency is US Dollars, Hiscox
Insurance Company (Guernsey) Limited
and Syndicate 3624 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 IAS 39
effective net investment hedges or when
the underlying balance is deemed to form
part of the Group’s net investment in
a subsidiary operation and is unlikely
to be settled in the foreseeable future.
Non-monetary items carried at historical
cost are translated in the balance sheet
at the exchange rate prevailing on the
original transaction date. Non-monetary
items measured at fair value are translated
using the exchange rate ruling when
the fair value was determined.
(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:
assets and liabilities for each balance
sheet presented are translated at
the closing rate at the date of that
balance sheet;
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); and
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.
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 and associates.
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 and contingent liabilities
assumed of the acquired subsidiary or
associate at the acquisition date.
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.
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 generally accepted
accounting principles.
2.5 Property, plant and equipment
Property, plant and equipment are stated
at historical cost less depreciation and any
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 and the cost
of the item can be measured reliably. All
other repairs and maintenance items 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
indefinite useful economic lives. The cost
of leasehold improvements is amortised
over the unexpired term of the underlying
lease or the estimated useful life of the asset,
whichever is shorter. Depreciation on other
assets is calculated using the straight-line
method to allocate their cost or revalued
amounts, less their residual values, over
their estimated useful lives. The rates
applied are as follows:
buildings
vehicles
leasehold improvements
including 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
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 recoverable
amount. Any excess of goodwill over the
recoverable amount arising from the review
process 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
believes that the Group’s ownership of
syndicate capacity will provide economic
benefits over an indefinite number of
future periods.
(c) State authorisation licences
State authorisation licences acquired in
business combinations are recognised
initially at their fair value. The asset is not
amortised, as the Board considers that
economic benefits will accrue to the Group
over an indefinite number of future periods,
but is tested annually for impairment,
and any accumulated impairment losses
recognised are deducted from the historical
cost amount to produce the net balance
sheet carrying amount.
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
57
Notes to the consolidated
financial statements
continued
Financial assets are initially recognised
at fair value. Subsequent to initial
recognition financial assets are measured
as described below.
2 Significant accounting policies continued
2.6 Intangible assets continued
(d) Rights to customer contractual
relationships
Costs directly attributable to securing
the intangible rights to customer contractual
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 on a straight-line basis over
the useful economic life which is deemed
to be 20 years and are carried at cost
less accumulated amortisation and
impairment losses.
(e) 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
between three and five years on a straight-
line basis.
Internally developed computer software is
only capitalised when it is probable that the
expected future economic benefits that
are attributable to the asset will flow to the
Group and the cost of the asset can be
measured reliably. Amortisation of internally
developed computer software begins when
the software is available for use and is
allocated on a straight-line basis over the
expected useful life of the asset. The useful
life of the asset is reviewed annually and if
different from previous estimates is changed
accordingly with the change being
accounted for as a change in accounting
estimates in accordance with IAS 8.
2.7 Financial assets including loans
and receivables
The Group has classified financial assets
as a) financial assets designated at fair value
through profit or loss, and b) loans and
receivables. Management determines the
classification of its financial investments
at initial recognition. The decision by the
Group to designate all financial investments,
comprising debt and fixed income
securities, equities and shares in unit trusts
and deposits with credit institutions, at fair
value through profit or loss reflects the fact
that the investment portfolios are managed,
and their performance evaluated, on a fair
value basis. Regular way purchases and
sales of investments are accounted for
at the date of trade.
Financial assets are de-recognised when the
right to receive cash flows from them expires
or where they have been transferred and the
Group has also transferred substantially all
risks and rewards of ownership.
Fair value for securities quoted in active
markets is the bid price exclusive of
transaction costs. 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. An analysis of fair values of financial
instruments and further details as to how they
are measured are provided in note 22.
(a) Financial assets at fair value
through profit or loss
A financial asset is classified into this
category at inception if it is managed and
evaluated on a fair value basis in accordance
with documented strategy, if acquired
principally for the purpose of selling in the
short-term, or if it forms part of a portfolio
of financial assets in which there is evidence
of short-term profit taking.
(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 included in this category and
are reviewed for impairment as part of the
impairment review of loans and receivables.
Loans and receivables are carried at
amortised cost less any provision for
impairment in value.
2.8 Cash and cash equivalents
The Group has 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.
(a) Non-financial assets
Objective factors that are considered when
determining whether a non-financial asset
(such as goodwill, an intangible asset or item
of property, plant and equipment) or group
of non-financial assets may be impaired
include, but are not limited to, the following:
adverse economic, regulatory or
environmental conditions that may
restrict future cash flows and asset
usage and/or recoverability;
the likelihood of accelerated
obsolescence arising from the
development of new technologies
and products; and
the disintegration of the active market(s)
to which the asset is related.
(b) Financial assets
Objective factors that are considered when
determining whether a financial asset or
group of financial assets may be impaired
include, but are not limited to, the following:
negative rating agency announcements
in respect of investment issuers,
reinsurers and debtors;
significant reported financial difficulties
of investment issuers, reinsurers
and debtors;
actual breaches of credit terms
such as persistent late payments
or actual default;
the disintegration of the active market(s)
in which a particular asset is traded
or deployed;
adverse economic or regulatory
conditions that may restrict future cash
flows and asset recoverability; and
the withdrawal of any guarantee from
statutory funds or sovereign agencies
implicitly supporting the asset.
(c) Impairment loss
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).
Where an impairment loss subsequently
reverses, the carrying amount of the asset
is increased to the revised estimate of
its recoverable amount, but so that the
increased carrying amount does not exceed
the carrying amount that would have been
determined had no impairment loss been
recognised for the asset in prior periods.
A reversal of an impairment loss is
recognised as income immediately.
Impairment losses recognised in respect
of goodwill are not subsequently reversed.
58
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
2 Significant accounting policies continued
and accrued based on the results
of the managed syndicate.
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. Fair values are obtained from
quoted market values and, if these are not
available, valuation techniques including
option pricing models as appropriate.
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 formally
designated as a hedging instrument, fair
value changes are recognised immediately
in the income statement. Changes in the
value of derivatives and other financial
instruments formally designated as hedges
of net investments in foreign operations are
recognised in the currency translation
reserve to the extent they are effective;
gains or losses relating to the ineffective
portion of the hedging instruments are
recognised immediately in the consolidated
income statement.
The Group had no derivative instruments
designated for hedge accounting during the
current and prior financial year (see note 2.17).
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 owners on consolidation.
Where such shares are subsequently sold,
reissued or otherwise disposed of, any
consideration received is included in equity
attributable to the Company’s owners,
net of any directly attributable incremental
transaction costs and the related tax effects.
2.12 Revenue
Revenue comprises insurance and
reinsurance premiums earned on the
rendering of insurance protection, net of
reinsurance, together with profit commission,
investment returns, agency fees and other
income inclusive of fair value movements
on derivative instruments not formally
designated for hedge accounting treatment.
The Group’s share of the results of
associates is reported separately.
The accounting policies for insurance
premiums are outlined below. Profit
commission, investment income and
other sources of income are recognised
on an accruals basis net of any discounts
and amounts such as sales-based taxes
collected on behalf of third-parties.
Profit commission is calculated
2.13 Insurance contracts
(a) Classification
The Group issues short-term casualty
and property insurance contracts that
transfer significant insurance risk. Such
contracts may also transfer a limited level
of financial risk.
(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
(premiums earned) 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.
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 deferred
acquisition costs. All other costs are
recognised as expenses when incurred.
DAC are amortised over the terms of the
insurance contracts as the related premium
is earned.
(d) Liability adequacy tests
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.
The Group assesses its reinsurance assets
on a regular basis and, if there is objective
evidence, after initial recognition, of an
impairment in value, the Group reduces
the carrying amount of the reinsurance asset
to its recoverable amount and recognises
the impairment loss in the income statement.
(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
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
59
Notes to the consolidated
financial statements
continued
2 Significant accounting policies continued
2.13 Insurance contracts continued
(g) Salvage and subrogation
reimbursements continued
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 tax asset
is realised or the deferred tax liability is
settled. Deferred tax assets are recognised
to the extent that it is probable that 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 operated both defined
contribution and defined benefit pension
schemes during the year under review.
The defined benefit scheme closed to future
accrual with effect from 31 December
2006 and active members were offered
membership of the defined contribution
scheme from 1 January 2007.
A defined contribution plan is a pension
plan under which the Group 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
pays contributions to publicly or privately
administered pension insurance plans
on a contractual basis. 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 amount 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. To the extent that
a surplus emerges on the defined benefit
obligation, it is only recognisable on the asset
side of the balance sheet when it is probable
that future economic benefits will be recovered
by the scheme sponsor in the form of refunds
or reduced future contributions.
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. Such actuarial gains or losses falling
outside of this 10% corridor are charged
or credited to income over the employees’
expected average remaining working
lives. 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.
(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.
In determining this liability, consideration
is given to future increases in salary levels,
experience with employee departures
and periods of service.
(c) Share based compensation
The Group operates a number of equity
settled share based employee compensation
plans. These include both the approved and
unapproved share option schemes, and the
Group’s performance share plans, outlined
in the Directors’ remuneration report
together with the Group’s Save as You Earn
(SAYE) schemes.
The fair value of the employee services
received, measured at grant date,
in exchange for the grant of the awards
is recognised as an expense with the
corresponding credit being recorded
in retained earnings within equity. The total
amount to be expensed over the vesting
period is determined by reference to the fair
value of the awards 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 awards that are expected to
become exercisable. At each balance sheet
date, the Group revises its estimates of the
number of awards 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.
When the terms and conditions of an equity
settled share based employee compensation
plan are modified, and the expense to be
recognised increases as a result of the
modification, then the increase is recognised
evenly over the remaining vesting period.
When a modification reduces the expense
to be recognised, there is no adjustment
recognised and the pre-modification
expense continues to be applied. 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
arrangements of IFRS 2 only share
based awards granted or modified 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
60
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
2 Significant accounting policies continued
2.15 Employee benefits continued
(d) Termination benefits continued
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 recognises
a provision where a contractual obligation
to employees exists 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 Financial liabilities
All borrowings drawn are measured at
amortised cost at each balance sheet
date using the effective interest method.
Any difference between the remeasured
amortised cost carrying amount and the
ultimate redemption amount is recognised
in the income statement over the period
of the borrowings.
2.17 Net investment hedge accounting
In order to qualify for hedge accounting,
the Group is required to document in
advance the relationship between the item
being hedged and the hedging instrument.
The Group is also required to document
and demonstrate an assessment of the
relationship between the hedged item
and the hedging instrument, which shows
that the hedge will be highly effective on
an on-going basis. This effectiveness testing
is re-performed at each period end to ensure
that the hedge remains highly effective.
The Group hedged elements of its net
investment in certain foreign entities through
foreign currency borrowings that qualified
for hedge accounting from 3 January
2007 until their replacement on 6 May 2008;
accordingly gains or losses on retranslation
are recognised in equity to the extent
that the hedge relationship was effective
during this period. Accumulated gains
or losses will be recycled to the income
statement only when the foreign operation
is disposed of. The ineffective portion
of any hedge is recognised immediately
in the income statement.
2.18 Finance costs
Finance costs consist of interest charges
accruing on the Group’s borrowings and
bank overdrafts together with commission
fees charged in respect of Letters of Credit.
Arrangement fees in respect of financing
arrangements are charged over the life
of the related facilities.
2.19 Provisions
The Group is subject to various insurance-
related assessments and guarantee fund
levies. Provisions are recognised where
there is a present obligation (legal or
constructive) as a result of a past event that
can be measured reliably and it is probable
that an outflow of economic benefits will
be required to settle that obligation.
2.20 Leases
(a) Hiscox as lessee
Leases in which significantly all of the risks
and rewards of ownership are transferred
to the Group 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.
(b) Hiscox as lessor
Rental income from operating leases is
recognised on a straight-line basis over the
term of the relevant contractual agreement.
2.21 Dividend distribution
Dividend distribution to the Company’s
shareholders is recognised as a liability
in the Group’s financial statements in the
period in which the dividends are approved.
2.22 Use of critical estimates,
judgements and assumptions
The preparation of financial statements
requires the use of significant estimates,
judgements and assumptions. The
Directors consider the accounting policies
for determining insurance liabilities, the
valuation of investments, the valuation
of retirement benefit scheme obligations
and the determination of deferred tax assets
and liabilities as being most critical to
an understanding of the Group’s result
and position.
The most critical estimate included within
the Group’s balance sheet is the estimate
for losses incurred but not reported. The
total estimate as at 31 December 2011 is
£964 million (2010: £904 million) and is
included within total insurance liabilities
on the balance sheet.
Estimates of losses incurred but not
reported are continually evaluated based
on entity specific historical experience and
contemporaneous developments observed
in the wider industry when relevant, and are
also updated for expectations of prospective
future developments. Although the possibility
exists for material changes in estimates
to have a critical impact on the Group’s
reported performance and financial position,
it is anticipated that the scale and diversity
of the Group’s portfolio of insurance
business considerably lessens the likelihood
of this occurring. The overall reserving risk
is discussed in more detail in note 3.1 and
the procedures used in estimating the cost
of settling insured losses at the balance
sheet date including losses incurred but
not reported are detailed in note 26.
The Group carries its financial investments
at fair value through profit or loss with fair
value determined using published price
quotations in the most active financial
markets in which the assets trade. During
periods of economic distress and
diminished liquidity, the ability to obtain
quoted bid prices may be reduced and
as such a greater degree of judgement
is required in obtaining the most reliable
source of valuation. Note 3.2 to the financial
statements discusses the reliability of the
Group’s fair values.
With regard to employee retirement benefit
scheme obligations, the amounts disclosed
in these consolidated financial statements
are sensitive to judgemental assumptions
regarding mortality, inflation, investment
returns and interest rates on corporate
bonds, many of which have been subject
to specific recent volatility. This complex
set of economic variables may be expected
to influence the liability obligation element
of the reported net balance amount to
a greater extent than the reported value
of the scheme assets element. For example,
if official UK interest rates are replicated with
lower yields emerging in UK corporate bond
indices, a significant uplift may occur in the
reported net scheme deficit through the
reduced effect of discounting outweighing
any expected appreciation in asset values.
A sensitivity analysis is given at note 30.
Legislation concerning the determination
of taxation assets and liabilities is complex
and continually evolving. In preparing the
Group’s financial statements, the Directors
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
61
Notes to the consolidated
financial statements
continued
2 Significant accounting policies continued
2.22 Use of critical estimates,
judgements and assumptions continued
estimate taxation assets and liabilities after
taking appropriate professional advice.
To the extent that taxable losses carried
forward by the Group exceed taxable
temporary differences relating to the same
taxation authority and taxable entity which
will result in amounts against which the
losses can be utilised, the Group uses
estimates of probable future taxable profits
available to determine whether recognition
of a deferred tax asset is appropriate.
The determination and finalisation
of agreed taxation assets and liabilities
may not occur until several years after
the balance sheet date and consequently
the final amounts payable or receivable
may differ from those presently recorded
in these financial statements.
2.23 Reporting of additional
performance measures
The Directors consider that the claims ratio,
expense ratio and combined ratio measures
reported in respect of operating segments
and the Group overall at note 4 provide
useful information regarding the underlying
performance of the Group’s businesses.
These measures are widely recognised by
the insurance industry and are consistent
with internal performance measures
reviewed by senior management including
the chief operating decision maker.
However, these three measures are not
defined within the IFRS framework and
body of standards and interpretations and
therefore may not be directly comparable
with similarly titled additional performance
measures reported by other companies.
Net asset value per share and return on
equity measures, disclosed at notes 5 and
6, are likewise considered to be additional
performance measures.
3 Management of risk
The Group’s overall appetite for accepting
and managing varying classes of risk
is defined by the Group’s Board. The Board
has developed a governance framework
and has set Group wide risk management
policies and procedures which include
risk identification, risk management and
mitigation and risk reporting. The objective
of these policies and procedures is to protect
the Group’s shareholders, policyholders
and other stakeholders from negative
events that could hinder the Group’s
delivery of its contractual obligations and
its achievement of sustainable profitable
economic and social performance.
The Board exercises oversight of
the development and operational
implementation of its risk management
policies and procedures, and ongoing
compliance therewith, partially through
its own enquiries but primarily through
a dedicated internal audit function, which
has operational independence, clear terms
of reference influenced by the Board’s
Non Executive Directors and a clear
upwards reporting structure back into
the Board. The Group, in common with
the non-life insurance industry generally,
is fundamentally driven by a desire to
originate, retain and service insurance
contracts to maturity. The Group’s cash
flows are funded mainly through advance
premium collections and the timing of such
premium inflows is reasonably predictable.
In addition, the majority of material cash
outflows are typically triggered by the
occurrence of insured events non-correlated
to financial markets, and not by the
inclination or will of policyholders.
The principal sources of risk relevant to
the Group’s operations and its financial
statements fall into two broad categories:
insurance risk and financial risk both of
which are described in notes 3.1 and 3.2
below. The Group also actively manages
its capital risks as detailed in note 3.3.
Additional unaudited information is also
provided in the corporate governance
and risk management sections of this
Report and Accounts.
3.1 Insurance risk
The predominant risk to which the Group
is exposed is insurance risk which is
assumed through the underwriting process.
Insurance risk can be sub-categorised
into i) underwriting risk including the risk
of catastrophe and systemic insurance
losses and the insurance competition
and cycle, and ii) reserving risk.
i) Underwriting risk
The Board sets the Group’s underwriting
strategy for accepting and managing
underwriting risk, seeking to exploit
identified opportunities in the light of other
relevant anticipated market conditions.
Specific underwriting objectives such as
aggregation limits, reinsurance protection
thresholds, geographical disaster event
risk exposures and line of business
diversification parameters are prepared
and reviewed by the Chief Underwriting
Officer in order to translate the Board’s
summarised underwriting strategy into
specific measurable actions and targets.
These actions and targets are reviewed
and approved by the Board in advance
of each underwriting year. The Board
continually reviews its underwriting strategy
throughout each underwriting year in light
of the evolving market pricing and loss
conditions and as opportunities present
themselves. The Group’s underwriters
and management consider underwriting
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. To assist with the process
of pricing and managing underwriting 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
modeling 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; and
developing processes that continually
factor market intelligence into the
pricing process.
The delegation of underwriting authority
to specific individuals, both internally
and externally, is subject to regular review.
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. These
parameters cover areas such as the
maximum sums insured per insurance
contract, maximum gross written premiums
and maximum aggregated exposures per
geographical zone and risk class. Monthly
meetings are held between the Chief
Underwriting Officer and a specialist central
analysis and review team in order to monitor
claim development patterns and discuss
individual underwriting issues as they arise.
The Chief Underwriting Officer also holds
weekly video conference meetings with this
team to discuss interim underwriting matters.
The Group’s insurance contracts include
provisions to contain losses such as the
62
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
3 Management of risk continued
3.1 Insurance risk continued
i) Underwriting risk continued
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 also manages underwriting risk
by purchasing reinsurance. 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
and unexpected concentrations of risk.
However, the scope and type of
reinsurance protection purchased may
change depending on the extent and
competitiveness of cover available
in the market.
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 underwriting risk
appetite seeks to ensure that it should not
lose more than one year’s profit plus 15%
of core capital as a result of a 1 in 250 bad
underwriting year.
The Group compiles estimates of losses
arising from realistic disaster events using
statistical models alongside input from
its underwriters. These require significant
management judgement. Realistic disaster
scenarios are extreme hypothetical events
selected to represent major events occurring
in areas with large insured values. They also
reflect the areas that represent significant
exposures for Hiscox. The selection
of realistic disaster scenario events
is adjusted each year and they are not
therefore necessarily directly comparable
from one year to the next. The events are
extreme and as yet untested, and as such
these estimates may prove inadequate
as a result of incorrect assumptions, model
deficiencies, or losses from unmodeled
risks. This means that should a realistic
disaster actually eventuate, the Group’s final
ultimate losses could materially differ from
those estimates modeled by management.
The Group’s estimated exposure to certain
industry events is summarised below.
These estimates have been made using
modeled assumptions and management
judgement and given the nature of risks
underwritten may be materially different
from actual losses suffered depending
on the size and nature of the event.
Japan earthquake
Gulf of Mexico windstorm
Florida windstorm
European windstorm
San Francisco earthquake
Gross loss
US$m
Net loss
US$m
Gross loss
as a % of
total equity
Net loss
as a % of
total equity
Net loss as %
of insurance
industry loss
Industry
loss size
US$bn
Return period
years
230
759
477
456
519
122
185
110
208
139
11.9
39.2
24.7
23.6
26.8
6.3
9.6
5.7
10.8
7.2
0.2
0.2
0.1
0.7
0.3
50
107
125
30
50
240
80
100
200
110
Overleaf is a summary of the gross and net insurance liabilities for each category split by region of risk.
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
63
Notes to the consolidated
financial statements
continued
3 Management of risk continued
3.1 Insurance risk continued
i) Underwriting risk continued
Estimated concentration of gross and net
insurance liabilities on balance sheet by territory
coverage of premium written 31 December 2011
UK and Ireland
Europe
United States
Other territories
Multiple territory coverage
Total
Gross
Net
Gross
Net
Gross
Net
Gross
Net
Gross
Net
Gross
Net
Estimated concentration of gross and net
insurance liabilities on balance sheet by territory
coverage of premium written 31 December 2010
UK and Ireland
Europe
United States
Other territories
Multiple territory coverage
Total
Gross
Net
Gross
Net
Gross
Net
Gross
Net
Gross
Net
Gross
Net
Types of insurance risk in the Group
Reinsurance
inwards
£000
16,985
13,575
14,383
11,843
246,957
171,255
122,281
91,606
370,228
307,442
Property –
Marine and
major assets
£000
16,339
4,366
4,893
4,618
53,306
23,107
37,026
32,901
172,933
128,813
Property –
Other
assets
£000
Casualty –
Professional
indemnity
£000
136,379
134,889
68,600
62,324
81,804
33,393
19,877
12,764
61,808
31,625
319,209
280,220
98,754
93,435
237,744
220,686
27,574
24,278
3,435
3,358
Casualty –
Other risks
£000
12,548
7,683
12,547
10,168
46,446
39,423
3,579
3,095
88,278
86,776
*
Other
£000
Total
£000
30,079
19,251
39,627
33,591
26,260
20,453
63,769
44,314
66,612
56,493
531,539
459,984
238,804
215,979
692,517
508,317
274,106
208,958
763,294
614,507
770,834
284,497
368,468
686,716
163,398
226,347 2,500,260
595,721
193,805
274,995
621,977
147,145
174,102 2,007,745
Types of insurance risk in the Group
Reinsurance
inwards
£000
31,637
24,427
31,983
22,081
181,963
116,634
28,524
23,503
268,350
197,678
Property –
Marine and
major assets
£000
19,881
5,330
2,577
2,044
18,706
16,339
27,577
21,756
177,678
135,679
Property –
Other
assets
£000
Casualty –
Professional
indemnity
£000
136,202
132,554
71,130
67,239
104,422
58,361
34,303
23,207
68,834
50,207
295,631
257,998
63,295
59,135
267,698
248,849
36,326
33,643
44,785
41,549
Casualty –
Other risks
£000
7,513
2,258
11,779
3,827
39,355
22,837
3,424
2,905
114,857
91,218
*
Other
£000
Total
£000
17,326
10,528
24,360
19,717
20,776
16,720
65,570
52,574
63,405
56,305
508,190
433,095
205,124
174,043
632,920
479,740
195,724
157,588
737,909
572,636
542,457
246,419
414,891
707,735
176,928
191,437 2,279,867
384,323
181,148
331,568
641,174
123,045
155,844
1,817,102
*Includes a diverse mix of certain specialty lines such as kidnap and ransom, terrorism, bloodstock and other risks which contain a mix of property and casualty exposures.
The estimated liquidity profile to settle these net claims liabilities is given in note 3.2 (e).
The specific insurance risks accepted by the Group fall broadly into the following main categories: reinsurance inwards, marine and major
asset property, other property risks, professional indemnity casualty and casualty other insurance risks. These specific categories
are defined for risk review purposes only as each contain risks specific to the nature of the cover provided. They are not exclusively aligned
to any specific reportable segment in the Group’s operational structure or the primary internal reports reviewed by the chief operating
decision maker. The following describes the policies and procedures used to identify and measure the risks associated with each individual
category of business.
Reinsurance inwards
The Group’s reinsurance inwards acceptances are primarily focused on large commercial property, homeowner and marine and crop
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 are 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.
64
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
3 Management of risk continued
3.1 Insurance risk continued
i) Underwriting risk continued
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.
The Group writes reinsurance risks
for periods of mainly one year so that
contracts can be assessed for pricing
and terms and adjusted to reflect
any changes in market conditions.
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. The Group’s
exposure to commodity price risk in relation
to these types of insurance contracts is
very limited, given the controlled extent of
business interruption cover offered in the
areas prone to losses of asset production.
Other property risks
The Group provides home and contents
insurance, together with cover for art work,
antiques, classic cars, jewellery, collectables
and other assets. The Group also extends
cover to reimburse certain policyholders
when named insureds or insured assets
are seized for kidnap and a ransom demand
is subsequently met. Events which can
generate claims on these contracts include
burglary, kidnap, seizure of assets, acts
of vandalism, fires, flooding and storm
damage. Losses on most classes can be
predicted with a greater degree of certainty
as there is a rich history of actual loss
experience data and 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.
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 and professional
and technological liability risks rather than
human bodily injury risks, which are only
accepted under limited circumstances.
Claims typically arise from incidents
such as errors and omissions attributed
to the insured, professional negligence
and specific losses suffered as a result
of electronic or technological failure
of software products and websites.
The provision of insurance to cover
allegations made against individuals acting
in the course of fiduciary or managerial
responsibilities, including directors’
and officers’ insurance is one example
of a casualty insurance risk. However
the Group’s specific exposure to this
specific risk category is relatively limited.
The Group’s casualty insurance contracts
mainly experience low severity attritional
losses. By nature, some casualty losses
may take longer to settle than the other
categories of business.
The Group’s pricing strategy for casualty
insurance policies is typically based upon
historical claim 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.
Reserving risk
The Group’s procedures for estimating
the outstanding costs of settling insured
losses at the balance sheet date, including
claims incurred but not yet reported, are
detailed in note 26.
The majority of the Group’s insurance risks
are short tail and, based on historical claims
experience, significant claims are normally
notified and settled within 12 to 24 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. The length of time required
to obtain definitive legal judgements and
make eventual settlements exposes the
Group to a degree of reserving risk in an
inflationary environment.
The majority of the Group’s casualty
exposures are written 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
24-months of the balance sheet date.
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
65
Notes to the consolidated
financial statements
continued
3 Management of risk continued
3.1 Insurance risk continued
Reserving risk continued
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.
For the inwards reinsurance lines,
there is often a time lag between the
establishment and re-estimate of case
reserves and reporting to the Group.
The Group works closely with the
reinsured to ensure timely reporting and
also centrally analyses industry loss data
to verify the reported reserves.
3.2 Financial risk
Overview
The Group is exposed to financial
risk through its ownership of financial
instruments including financial liabilities.
These items collectively represent
a significant element of the Group’s net
shareholder funds. The Group invests in
financial assets in order to fund obligations
arising from its insurance contracts
and financial liabilities.
The key financial risk for the Group is that
the proceeds from its financial assets
and investment result generated thereon
are not sufficient to fund the obligations.
The most important entity and economic
variables that could result in such an
outcome relate to the reliability of fair value
measures, equity price risk, interest rate
risk, credit risk, liquidity risk and currency
risk. The Group’s policies and procedures
for managing exposure to these specific
categories of risk are detailed below.
(a) Reliability of fair values
The Group has elected to carry all financial
investments at fair value through profit
or loss as they are managed and evaluated
on a fair value basis in accordance with
a documented strategy. With the exception
of unquoted equity investments, all of the
financial investments held by the Group are
available to trade in markets and the Group
therefore seeks to determine fair value by
reference to published prices or as derived
by pricing vendors using observable
quotations in the most active financial
markets in which the assets trade. The fair
value of financial assets is measured
primarily with reference to their closing bid
market prices at the balance sheet date.
The ability to obtain quoted bid market prices
may be reduced in periods of diminished
liquidity. In addition, those quoted prices that
may be available may represent an unrealistic
proportion of market holdings or individual
trade sizes that could not be readily available
to the Group. In such instances fair values
may be determined or partially
supplemented using other observable
market inputs such as prices provided by
market makers such as dealers and brokers,
and prices achieved in the most recent
regular transaction of identical or closely
related instruments occurring before the
balance sheet date but updated for relevant
perceived changes in market conditions.
At 31 December 2011, the Group holds
asset-backed and mortgage-backed
fixed income instruments in its investment
portfolio however has minimal direct
exposure to sub-prime asset classes.
Together with the Group’s investment
managers, management continues
to monitor the potential for any adverse
development associated with this
investment exposure through the analysis
of relevant factors such as credit ratings,
collateral, subordination levels and default
rates in relation to the securities held. The
Group has no direct exposure to sovereign
debt in Portugal, Ireland, Italy, Greece or
Spain. Note 3.2d shows the Group’s
positions at 31 December 2011 for
government issued, government supported
and bank debt exposures. The Group did
not experience any material defaults on debt
securities during the year.
Valuation of these securities will continue
to be impacted by external market factors
including default rates, rating agency
actions, and liquidity. The Group will make
adjustments to the investment portfolio
as appropriate as part of its overall portfolio
strategy, but its ability to mitigate its risk
by selling or hedging its exposures may
be limited by the market environment.
The Group’s future results may be
impacted, both positively and negatively,
by the valuation adjustments applied to
these securities.
Note 22 provides an analysis of the
measurement attributes of the Group’s
financial instruments.
(b) Equity price risk
The Group is exposed to equity price risk
through its holdings of equity and unit
trust investments. This is limited to a small
and controlled proportion of the overall
investment portfolio and the equity and unit
trust holdings involved are well diversified
over a number of companies and industries.
The fair value of equity assets in the Group’s
balance sheet at 31 December 2011 was
£173 million (2010: £155 million).
These may be analysed as follows:
Nature of equity and unit
trust holdings
2011
% weighting
2010
% weighting
Directly held equity
securities
Units held in funds –
traditional long only
Units held in funds –
long and short and
special strategies
Geographic focus
Specific UK mandates
Global mandates
3
73
24
39
61
2
69
29
44
56
The allocation of equity risk is not heavily
confined to any one market index so as
to reduce the Group’s exposure to individual
sensitivities. A 10% downward correction
in equity prices at 31 December 2011
would have been expected to reduce
Group equity and profit after tax for the
year by approximately £15.0 million (2010:
£13.1 million) assuming that the only area
impacted was equity financial assets.
A 10% upward movement is estimated
to have an equal but opposite effect.
(c) Interest rate risk
Fixed income investments represent
a significant proportion of the Group’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 fair value
of the Group’s investment portfolio of debt
and fixed income securities is normally
inversely correlated to movements in market
interest rates. If market interest rates rise,
the fair value of the Group’s debt and
fixed income investments would tend
to fall and vice versa if credit spreads
remained constant.
Debt and fixed income assets are
predominantly invested in high quality
corporate, government and asset backed
bonds. The investments typically have
relatively short durations and terms to
maturity. The portfolio is managed to
minimise the impact of interest rate risk
on anticipated Group cash flows.
The Group may also from time to time, enter
into interest rate future contracts in order
to minimise the interest rate risk on specific
longer duration portfolios.
66
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
3 Management of risk continued
3.2 Financial risk continued
(c) Interest rate risk continued
or liabilities carrying interest rate risk, other
than the facilities and Letters of Credit
outlined in note 35.
policyholder. The creditworthiness of
reinsurers is therefore 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).
Despite the rigorous nature of this
assessment exercise, and the resultant
restricted range of reinsurance
counterparties with acceptable strength
and credit credentials that emerges
therefrom, some degree of credit risk
concentration remains inevitable.
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 reports detail
provisions for impairment on loans and
receivables and subsequent write-off.
Exposures to individual intermediaries
and groups of intermediaries are collected
within the ongoing monitoring of the controls
associated with regulatory solvency.
The fair value of debt and fixed income
assets in the Group’s balance sheet
at 31 December 2011 was £2,171 million
(2010: £2,285 million). These may
be analysed as follows:
Nature of debt and
fixed income holdings
2011
% weighting
2010
% weighting
Government issued bonds
and instruments
Agency and government
supported debt
Asset backed securities
Mortgage backed
instruments – agency
Mortgage backed
instruments – non-agency
Corporate bonds
Lloyd’s and money
market deposits
23
25
11
6
5
27
3
22
31
8
4
6
27
2
One method of assessing interest rate
sensitivity is through the examination of
duration-convexity factors in the underlying
portfolio. Using a duration-convexity 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 £38 million (2010:
decrease of £28 million) assuming that the
only balance sheet area impacted was debt
and fixed income financial assets.
Duration is the weighted average length
of time required for an instrument’s cash
flow stream to be recovered, where the
weightings involved are based on the
discounted present values of each cash
flow. A closely related concept, modified
duration, measures the sensitivity of the
instrument’s price to a change in its yield
to maturity. Convexity measures the
sensitivity of modified duration to changes
in the yield to maturity.
Using these three concepts, scenario
modeling derives the above estimated
impact on instruments’ fair values for
a 100 basis point change in the term
structure of market interest rates.
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’s debt and
fixed income assets are further detailed at
note 19.
At 31 December 2011, no amounts were
outstanding on the Group’s borrowing
facility (2010: £20 million). The Group has no
other significant borrowings or other assets
(d) Credit risk
The Group has exposure to credit risk,
which is the risk that a counterparty will
suffer a deterioration in perceived financial
strength or be unable to pay amounts in full
when due.
The concentrations of credit risk exposures
held by insurers may be expected to be
greater than those associated with other
industries, due to the specific nature
of reinsurance markets and the extent
of investments held in financial markets.
In both markets, the Group interacts with
a number of counterparties who are
engaged in similar activities with similar
customer profiles, and often in the same
geographical areas and industry sectors.
Consequently, as many of these
counterparties are themselves exposed
to similar economic characteristics,
one single localised or macroeconomic
change could severely disrupt the ability
of a significant number of counterparties
to meet the Group’s agreed contractual
terms and obligations.
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; and
counterparty risk with respect
to cash and cash equivalents,
and investments including
deposits, derivative transactions
and catastrophe bonds.
The Group’s maximum exposure to credit
risk is represented by the carrying values
of financial assets and reinsurance assets
included in the consolidated balance
sheet at any given point in time. The Group
does not use credit derivatives or other
products to mitigate maximum credit
risk exposures on reinsurance assets.
The Group structures the levels of credit
risk accepted by placing limits on their
exposure to a single counterparty,
or groups of counterparties, and having
regard to geographical locations. 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
with unrelated operations. 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
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
67
Notes to the consolidated
financial statements
continued
3 Management of risk continued
3.2 Financial risk continued
(d) Credit risk continued
The Group also mitigates credit counterparty risk by concentrating debt and fixed income investments in highly liquid instruments, including
a particular emphasis on government bonds issued mainly by North American countries and the European Union, excluding those from
Portugal, Greece, Ireland, Italy and Spain.
An analysis of the Group’s major exposures to counterparty credit risk excluding loans and receivables, based on Standard & Poor’s
or equivalent rating, is presented below:
As at 31 December 2011
Debt and fixed income securities
Deposits with credit institutions
Catastrophe bonds
Reinsurance assets
Cash and cash equivalents
Total
Note
19
19
18
23
AAA
£000
AA
£000
A
£000
Other/
non-rated
£000
Total
£000
767,709
2,500
–
27,682
157,395
808,076
–
–
181,862
41,094
400,257
10,088
–
262,709
316,843
194,546 2,170,588
12,848
11,639
492,515
516,547
260
11,639
20,262
1,215
955,286 1,031,032
989,897
227,922 3,204,137
Amounts attributable to largest single counterparty
211,465
267,442
54,235
13,216
As at 31 December 2010
Debt and fixed income securities
Deposits with credit institutions
Catastrophe bonds
Reinsurance assets
Cash and cash equivalents
Total
Note
AAA
£000
AA
£000
A
£000
19
19 1,530,973
3,819
–
22,931
35,874
18
23
202,410
207
–
169,083
137,223
308,966
–
–
253,810
160,382
Other/
non-rated
£000
Total
£000
242,164 2,284,513
4,280
15,452
462,765
336,017
254
15,452
16,941
2,538
1,593,597
508,923
723,158
277,349 3,103,027
Amounts attributable to largest single counterparty
252,213
76,466
43,420
16,583
The largest counterparty exposure within AAA rating at 31 December 2011 is with the UK Treasury, and for AA rating is with the US Treasury.
During the year, the US Treasury was downgraded from AAA to AA, which led to the significant shift from AAA to AA assets in the above
table. At 31 December 2010, the largest counterparty exposure within AAA rating was the US Treasury. Catastrophe bonds included within
‘other/not rated’ are rated BB and B. A significant proportion of ‘other/not rated’ reinsurance assets at 31 December 2011 and 31 December
2010 are supported by Letter of Credit guarantees issued by financial institutions with Standard & Poor’s or equivalent credit or financial
strength ratings of A or better.
At 31 December 2011 the Group held no material debt and fixed income assets that were past due or impaired beyond their reported fair
values, either for the current period under review or on a cumulative basis (2010: £nil). For the current period and prior period, the Group
did not experience any material defaults on debt securities.
Within the fixed income portfolios, which include debt securities, deposits with credit institutions and cash equivalent assets, there are
exposures to a range of government borrowers, on either a direct or guaranteed basis, and banking institutions. The Group, together with
its investment managers, closely manages its geographical exposures across government issued and supported debt.
68
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
3 Management of risk continued
3.2 Financial risk continued
(d) Credit risk continued
The positions at 31 December 2011 in respect of government issued and supported debt are shown in the table below. The Group has no
direct government exposure to Portugal, Italy, Ireland, Greece or Spain.
United States of America
United Kingdom
Australia
Belgium
Canada
Denmark
Finland
France
Germany
Netherlands
Norway
New Zealand
Supranationals
South Korea
Sweden
Other
Total
Government
issued
£000
Government
supported
£000
302,605
208,235
–
–
–
–
6,380
4,015
92,414
–
–
–
–
2,833
2,307
338
269,048
81,699
13,975
1,537
58,380
5,158
3,985
16,533
36,205
24,539
6,035
584
30,135
–
3,494
141
Total
£000
571,653
289,934
13,975
1,537
58,380
5,158
10,365
20,548
128,619
24,539
6,035
584
30,135
2,833
5,801
479
619,127
551,448 1,170,575
Included above are £1,049m in relation to holdings in debt securities and £122m held as cash equivalents, having a maturity of less than
three months at the time of purchase. Of the amount held as cash equivalents, £88m is held in UK Treasury bills and £26m is held in a UK
Government bond.
Additionally, the geographical location and credit quality of individual bank borrowers are closely monitored. An analysis of the Group’s
exposure to bank counterparties by country and credit rating is detailed below as at 31 December 2011. Bank debt held by the Group
is mostly senior unsecured and covered bonds. The subordinated bonds are all classed as lower tier 2 capital.
AAA
£000
AA
£000
Senior
A
£000
BBB
£000
B
£000
Sub-total
£000
A
£000
BBB
£000
Sub-total
£000
Sub-total
£000
Subordinated
United States
of America
United Kingdom
Australia
Belgium
Canada
Denmark
Finland
France
Germany
Italy
Netherlands
Norway
New Zealand
Spain
Sweden
Switzerland
Other
–
319
–
–
1,241
–
–
3,889
–
–
2,329
130
–
928
–
–
–
–
8,505
7,314
–
12,240
–
1,518
4,750
–
–
7,348
–
2,768
–
6,359
–
–
73,615
23,912
295
3,429
7,840
1,544
–
7,573
3,720
–
6,415
378
–
1,920
4,733
11,597
594
Total
8,836
50,802
147,565
2,723
–
–
–
604
–
–
–
–
4,294
–
–
–
–
–
–
429
8,050
–
–
–
–
–
–
–
–
–
–
–
1,431
–
–
–
–
–
76,338
32,736
7,609
3,429
21,925
1,544
1,518
16,212
3,720
4,294
16,092
1,939
2,768
2,848
11,092
11,597
1,023
1,431
216,684
–
3,327
–
–
2,884
–
–
712
–
–
691
–
–
–
–
–
–
7,614
1,372
1,148
–
–
–
–
–
–
–
319
–
–
–
–
–
–
–
1,372
4,475
–
–
2,884
–
–
712
–
319
691
–
–
–
–
–
–
77,710
37,211
7,609
3,429
24,809
1,544
1,518
16,924
3,720
4,613
16,783
1,939
2,768
2,848
11,092
11,597
1,023
2,839
10,453
227,137
Included in the bank debt table above, are £222m in relation to holdings in debt securities and £5m held as cash equivalents.
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
69
Notes to the consolidated
financial statements
continued
3 Management of risk continued
3.2 Financial risk continued
(e) Liquidity risk
The Group is exposed to daily calls on its available cash resources mainly from claims arising from insurance and reinsurance 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 cash and maturing funds available to meet such calls and on the minimum level of borrowing facilities that should
be in place to cover unexpected levels of claims and other cash demands.
A significant proportion of the Group’s investments are in highly liquid assets which could be converted to 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’s exposure to equities is concentrated on shares and funds that are traded
on internationally recognised stock exchanges.
The main focus of the investment portfolio is on high-quality short duration debt and fixed income securities, and cash. There are
no significant holdings of investments with specific repricing dates. Notwithstanding the regular interest receipts and also the Group’s
ability to liquidate these securities and the majority of its other financial instrument assets for cash in a prompt and reasonable manner,
the contractual maturity profile of the fair value of these securities at 31 December was as follows:
Fair values at balance sheet date
analysed by contractual maturity
Less than one year
Between one and two years
Between two and five years
Over five years
Sub-total
Other non-dated instruments
Total
Debt and
fixed income
securities
£000
560,520
473,904
816,665
265,897
Deposits
with credit
institutions
£000
2,760
10,088
–
–
Catastrophe
bonds
£000
2,373
3,686
5,580
–
Cash
and cash
equivalents
£000
2011
Total
£000
2010
Total
£000
516,547 1,082,200
487,678
822,245
265,897
–
–
–
825,186
816,842
654,638
290,083
2,116,986
12,848
11,639
516,547 2,658,020 2,586,749
53,602
–
–
–
53,602
53,513
2,170,588
12,848
11,639
516,547 2,711,622 2,640,262
The Group’s equities and shares in unit trusts and other non-dated instruments have no contractual maturity terms but could also
be liquidated in an orderly manner for cash in a prompt and reasonable timeframe within one year of the balance sheet date.
The available headroom of working capital is monitored through the use of a detailed Group cash flow forecast which is reviewed
by management monthly or more frequently as required.
Average contractual maturity analysed by
denominational currency of investments
Pound Sterling
US Dollar
Euro
Canadian Dollar
2011
Years
2.26
5.64
1.45
4.01
2010
Years
1.89
4.83
3.82
2.24
70
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
3 Management of risk continued
3.2 Financial risk continued
(e) Liquidity risk continued
The following is an analysis by liability type of the estimated timing of net cash flows based on the net claims liabilities held. The Group does
not discount claims liabilities. The estimated phasing of settlement is based on current estimates and historical trends and the actual timing
of future settlement cash flows may differ materially from that disclosure below.
Liquidity requirements to settle estimated
profile of net claim liabilities on balance sheet
Reinsurance inwards
Property – marine and major assets
Property – other assets
Casualty – professional indemnity
Casualty – other risks
Other*
Total
Liquidity requirements to settle estimated
profile of net claim liabilities on balance sheet
Reinsurance inwards
Property – marine and major assets
Property – other assets
Casualty – professional indemnity
Casualty – other risks
Other*
Total
Within
one year
£000
Between one
and two years
£000
Between two
and five years
£000
230,546
80,386
98,334
150,017
60,093
51,250
110,980
38,146
25,568
124,183
32,768
13,536
73,170
32,185
16,954
230,161
37,042
14,241
Over
five years
£000
37,288
5,040
819
17,353
5,350
4,333
2011
Total
£000
451,984
155,757
141,675
521,714
135,253
83,360
670,626
345,181
403,753
70,183 1,489,743
Within
one year
£000
Between one
and two years
£000
Between two
and five years
£000
161,531
29,233
112,654
117,058
66,493
39,831
91,515
17,715
37,758
114,352
44,187
11,339
85,066
17,753
28,314
210,116
37,681
14,114
Over
five years
£000
36,512
1,720
4,049
37,672
9,487
6,061
2010
Total
£000
374,624
66,421
182,775
479,198
157,848
71,345
526,800
316,866
393,044
95,501 1,332,211
*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.
Details of the payment profile of the Group’s borrowings, derivative instruments and other liabilities is given in notes 19 and 27.
(f) Currency risk
The Group operates internationally and its exposures to foreign exchange risk arise primarily with respect to the US Dollar, Pound Sterling
and the Euro. These exposures may be classified in two main categories:
1)
Structural foreign exchange risk through consolidation of net investments in subsidiaries with different functional currencies within
the Group results; and
Operational foreign exchange risk through routinely entering into insurance, investment and operational contracts, as a Group
of international insurance entities serving international communities, where rights and obligations are denominated in currencies
other than each respective entity’s functional currency.
2)
The Group’s exposure to structural foreign exchange risk primarily relates to the US Dollar net investments made in its domestic operation
in Bermuda and its overseas operation in Guernsey and the US. Other structural exposures also arise on a smaller scale in relation to net
investments made in European operations. The Group’s risk appetite permits the acceptance of structural foreign exchange movements
within defined aggregate limits and exchange rate parameters which are monitored centrally. Exchange rate derivatives are used when
appropriate to shield the Group against significant movements outside of a defined range.
At a consolidated level, the Group is exposed to foreign exchange gains or losses on balances held between Group companies where one
party to the transaction has a functional currency other than Pound Sterling. To the extent that such gains or losses are considered to relate
to economic hedges and intragroup borrowings, they are disclosed separately in order for users of the financial statements to obtain a fuller
understanding of the Group’s financial performance (note 13).
The Group has the ability to draw on its current borrowing facility in any currency requested, enabling the Group to match its funding
requirements with the relevant currency.
Operational foreign exchange risk is controlled within the Group’s individual entities. The assets of the Group’s overseas operations
are generally invested in the same currencies as their underlying insurance and investment liabilities producing a natural hedge.
Due attention is paid to local regulatory solvency and risk-based capital requirements.
Details of all foreign currency derivative contracts entered into with external parties are given in note 21. All foreign currency derivative
transactions with external parties are managed centrally. Included in the tables below are net non-monetary liabilities of £169 million
(2010: £142 million) which are denominated in foreign currencies.
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
71
Notes to the consolidated
financial statements
continued
3 Management of risk continued
3.2 Financial risk continued
(f) Currency risk continued
As a result of the accounting treatment for non-monetary items, the Group may also experience volatility in its income statement during
a period when movements in foreign exchange rates fluctuate significantly. In accordance with IFRS, non-monetary items are recorded
at original transaction rates and are not remeasured at the reporting date. These items include unearned premiums, deferred acquisition
costs and reinsurers’ share of unearned premiums. Consequently, a mismatch arises in the income statement between the amount
of premium recognised at historical transaction rates, and the related claims which are retranslated using currency rates in force at the
reporting date. The Group considers this to be a timing issue which can cause significant volatility in the income statements. Further details
of the impact of the accounting treatment are provided in note 12.
The currency profile of the Group’s assets and liabilities is as follows:
Sterling
£000
US Dollar
£000
Euro
£000
Other
£000
Total
£000
61,244
9,623
5,726
–
51,693
6,308
7,692
66
23,555
70,969
511,306 1,601,720
373,469
69,576
226,133
145,876
62,654
3,385
117,577
235,090
–
840
588
2,193
23,183
215,795
38,502
125,488
3,397
91,922
67,552
–
18,155
–
6,380
–
25,748
–
4,205
150,050
39,815 2,368,636
492,515
10,968
507,722
10,225
69,436
–
516,547
71,958
1,152,788 2,430,874
501,908
137,171 4,222,741
Sterling
£000
US Dollar
£000
Euro
£000
Other
£000
Total
£000
–
–
152,447
–
617,082 1,458,367
–
156,673
–
93,544
–
–
294,780
–
53,802
–
–
–
152,447
130,031 2,500,260
–
314,135
–
10,116
863,073 1,615,040
348,582
140,147 2,966,842
As at 31 December 2011
Intangible assets
Property, plant and equipment
Investments in associates
Deferred tax
Deferred acquisition costs
Financial assets carried at fair value
Reinsurance assets
Loans and receivables including insurance receivables
Current tax asset
Cash and cash equivalents
Total assets
Employee retirement benefit obligations
Deferred tax
Insurance liabilities
Financial liabilities
Trade and other payables
Total liabilities
72
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
3 Management of risk continued
3.2 Financial risk continued
(f) Currency risk continued
As at 31 December 2010
Intangible assets
Property, plant and equipment
Investments in associates
Deferred tax
Deferred acquisition costs
Financial assets carried at fair value
Reinsurance assets
Loans and receivables including insurance receivables
Cash and cash equivalents
Sterling
£000
US Dollar
£000
Euro
£000
Other
£000
Total
£000
57,800
11,379
6,302
–
43,762
6,308
7,710
–
14,077
72,080
598,779 1,648,985
360,902
222,202
121,807
57,680
132,916
135,457
–
653
584
–
23,462
174,224
32,927
126,154
54,828
64,108
–
19,742
–
6,886
–
14,077
–
3,432
142,736
37,119 2,459,107
462,765
11,256
485,414
4,142
336,017
23,925
Total assets
1,044,075 2,454,071
412,832
79,874 3,990,852
Sterling
£000
US Dollar
£000
Euro
£000
Other
£000
Total
£000
Employee retirement benefit obligations
Deferred tax
Insurance liabilities
Financial liabilities
Current tax
Trade and other payables
Total liabilities
–
45,421
–
–
545,358 1,417,667
–
–
237,488
20,457
29,995
36,698
–
–
268,833
–
–
67,915
–
–
–
45,421
48,009 2,279,867
20,457
29,995
348,998
–
–
6,897
677,929 1,655,155
336,748
54,906 2,724,738
Sensitivity analysis
As at 31 December 2011, the Group used closing rates of exchange of £1:€1.19 and £1:$1.54 (2010: £1:€1.17 and £1:$1.57). The Group
performs sensitivity analysis based on a 10% strengthening or weakening of Pound Sterling against the Euro and US Dollar. This analysis
assumes that all other variables, in particular interest rates, remain constant and that the underlying valuation of assets and liabilities
in their base currency is unchanged. The process of deriving the undernoted estimates takes account of the linear retranslation movements
of foreign currency monetary assets and liabilities together with the impact on the retranslation of those Group entities with non-Sterling
functional currency financial statements. During the year, the Group transacted in a number of over the counter forward currency derivative
contracts. The impact of these contracts on the sensitivity analysis is negligible.
As at 31 December 2011
Strengthening of US Dollar
Weakening of US Dollar
Strengthening of Euro
Weakening of Euro
Effect on equity
after tax
£m
Effect on profit
before tax
£m
93.2
(73.4)
14.5
(11.9)
25.5
(18.0)
19.8
(16.2)
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
73
Notes to the consolidated
financial statements
continued
3 Management of risk continued
3.2 Financial risk continued
(g) Limitations of sensitivity analysis
The sensitivity information given in notes
(a) to (f) above demonstrates the estimated
impact of a change in a major input
assumption while other assumptions remain
unchanged. In reality, there are normally
significant levels of correlation between the
assumptions and other factors. It should
also be noted that these sensitivities are
non-linear, and larger or smaller impacts
should not be interpolated or extrapolated
from these results. The same limitations
exist in respect to the retirement benefit
scheme sensitivities presented at note
30 to these financial statements.
Furthermore, estimates of sensitivity
may become less reliable in unusual market
conditions such as instances when risk-free
interest rates fall towards zero.
The sensitivity analyses do not take into
consideration that the Group’s assets and
liabilities are actively managed. Additionally,
the financial position of the Group may vary
at the time that any actual market movement
occurs. For example, the Group’s financial
risk management strategy aims to manage
the exposure to market fluctuations.
As investment markets move past various
trigger levels, management actions could
include selling investments, changing
investment portfolio allocation and taking
other protective action.
3.3 Capital risk management
The Group’s primary objectives when
managing its capital position are:
to safeguard its ability to continue
as a going concern, so that it can
continue to provide long-term growth
and progressive dividend returns
for shareholders;
to provide an adequate return
to the Group’s shareholders by pricing
its insurance products and services
commensurately with the level of risk;
to maintain an efficient cost of capital;
to comply with all regulatory requirements
by a significant margin; and
to maintain financial strength ratings
of A in each of its insurance entities.
The Group sets the amount of capital
required in its funding structure in proportion
to risk. The Group then manages the capital
structure and makes adjustments to it in the
light of changes in economic conditions and
the risk characteristics of the underlying
assets. In order to obtain or maintain
an optimal capital structure the Group
may adjust the amount of dividends paid to
shareholders, return capital to shareholders,
issue new shares, assume debt, or sell
assets to reduce debt.
The Group’s activities are funded by a
mixture of capital sources including issued
equity share capital, retained earnings,
Letters of Credit, bank debt and other
third-party insurance capital.
The Board ensures that the use and
allocation of capital are given a primary
focus in all significant operational actions.
With that in mind, the Group has developed
and embedded sophisticated capital
modeling 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.
During the year the Group was in
compliance with capital requirements
imposed by regulators in each jurisdiction
where the Group operates.
There were no changes in the Group’s
approach to capital risk management during
the current or prior year under review.
Gearing
The Group currently utilises short-to
medium-term gearing as an additional
source of funds to maximise the
opportunities from strong markets
and to reduce the risk profile of 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:
Letter of Credit and revolving credit
facility – the Group’s main facility
was replaced during 2010 for a total
of $750 million which may be drawn
as cash (under a revolving credit
facility), Letter of Credit or a
combination thereof, providing that
the cash portion does not exceed $450
million. This facility was secured during
2010 by the Company’s subsidiary
Hiscox plc. The Letter of Credit
availability period ended on 31
December 2011. This enables the
Group to utilise the Letter of Credit
as Funds at Lloyd’s to support
underwriting on the 2010, 2011 and
2012 years of account. The revolving
credit facility has a maximum three-
year contractual period for repayment.
At 31 December 2011 US$340 million
was drawn by way of Letter of Credit
74
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
to support the Funds at Lloyd’s
requirement and there were no cash
drawings (2010: $165 million and £20
million respectively) to support general
trading activities;
external Names – 27.5% of Syndicate
33’s capacity is capitalised by third-
parties paying a profit share
of approximately 17.5%;
Syndicate 6104 at Lloyd’s – with
a capacity of £37 million for the 2011
year of account (2010 year of account:
£45 million). This Syndicate is wholly
backed by external members and takes
pure years of account quota share of
Syndicate 33’s international property
catastrophe reinsurance account;
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; and
qualifying quota shares – these are
reinsurance arrangements that allow
the Group to increase the amount
of premium it writes in hard markets.
The funds raised through Letters of Credit
and loan facilities have been applied
to support both the 2011 year of account
for Syndicate 33 and the capital
requirements of Hiscox Insurance
Company (Bermuda) Limited.
Financial strength
The financial strength ratings of the Group’s
insurance company subsidiaries are outlined
below:
A.M. Best
Fitch
Standard
& Poor’s
Hiscox Insurance
Company Limited
Hiscox Insurance
Company (Bermuda)
Limited
Hiscox Insurance
Company (Guernsey)
Limited
Hiscox Insurance
Company Inc.
A (Excellent)
A
A (Strong)
A (Excellent)
A
A (Excellent)
A
A (Excellent)
–
–
–
–
Syndicate 33 benefits from an A.M. Best
rating of A (Excellent). In addition, the
Syndicate also benefits from the Lloyd’s
ratings of A (Excellent) from A.M. Best
and A+ (Strong) from Standard & Poor’s.
Capital performance
The Group’s main capital performance
measure is the achieved return on equity
(ROE). This marker best aligns the
aspirations of employees and shareholders.
As variable remuneration, the vesting of
options and longer-term investment plans
all relate directly to ROE, this concept
is embedded in the workings and culture
3 Management of risk continued
3.3 Capital risk management continued
of the Group. The Group maintains its cost
of capital levels and its debt to overall equity
ratios in line with others in the non-life
insurance industry.
Capital modeling 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.
In 2005, the UK Financial Services Authority
(FSA) and Lloyd’s introduced a new capital
regime that requires insurance companies
to calculate their own capital requirements
through Individual Capital Assessments
(ICA). Hiscox Insurance Company Limited
and Syndicate 33 maintain ICA models
in accordance with this regime. The models
are concentrated specifically on the
particular product lines, market conditions
and risk appetite of each entity. 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: Insurers (IPRU(INS)), the
Integrated Prudential Sourcebook for
Insurers (INSPRU) and General Prudential
Sourcebook (GENPRU) when completing
the ICA return. The Group used its own
integrated modeling expertise to produce
the ICA calculations. The results mirrored
those driving the existing internal capital
setting process.
The Group’s capital requirements are
managed both centrally and at a regulated
entity level. The assessed capital
requirement for the business placed through
Hiscox Insurance Company Limited, Hiscox
Insurance Company (Bermuda) Limited,
Hiscox Insurance Company (Guernsey)
Limited and Hiscox Insurance Company
Inc., is driven by the level of resources
necessary to maintain both regulatory
requirements and the capital necessary
to maintain financial strength of an A rating.
For Syndicate 33 and Syndicate 3624,
the ICA process produces a result that is
uplifted by Lloyd’s to identify the capital
required to hold the A rating. The strong
control and risk management environment,
together with the sophistication of the
modeling, have produced a capital ratio
below that suggested under the previous
risk-based capital regime. Another key area
of capital modeling for Hiscox is to identify
which insurance vehicle produces the best
return on capital employed for the Group,
given certain restraints from licences,
reinsurance and the regulatory environment.
This modeling 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 modeling process,
the EU Insurance Group’s Directive of 1998,
as amended by the Financial Group’s
Directive (FGD), 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 FGD has been applied in the UK through
INSPRU and GENPRU. In accordance with
these provisions, the parent company’s
solvency margin consideration became
a minimum capital requirement for the
Group from 31 December 2006 onwards.
The Group complied with the requirement
for the current and prior year.
In the Group’s other geographical territories,
including the US, its subsidiaries underwriting
insurance business are required to operate
within broadly similar risk-based externally
imposed capital requirements when
accepting business.
During 2011, the Bermuda Monetary
Authority (BMA) introduced a group solvency
capital requirement. A dry-run of the impact
of these new requirements was conducted
by the BMA, over groups which they have
regulatory oversight. The Hiscox Group
participated in this assessment and found
that the capital requirements fairly reflected
the risks contained within the Group. The
capital requirements necessary to maintain
a financial strength of an A rating will continue
to be the main determinate of capital
strategy for the Group.
4 Operating segments
The Group’s operating segments consist
of four segments which recognise the
differences between products and services,
customer groupings and geographical
areas. Financial information is used in this
format by the chief operating decision maker
in deciding how to allocate resources
and in assessing performance. The format
is representative of the management
structure of the segments.
The Group’s four operating segments are:
London Market comprises the results
of Syndicate 33, excluding the results
of the fine art, UK regional events
coverage and non US household
business which is included within
the results of UK and Europe.
It also includes the fire and aviation
businesses from Syndicate 3624,
and the larger TMT business written
by Hiscox Insurance Company Limited.
In addition, it excludes an element
of kidnap and ransom and terrorism
included in UK and Europe.
UK and Europe comprises the results
of Hiscox Insurance Company Limited,
the results of Syndicate 33’s fine art,
UK regional events coverage and non
US household business, together with
the income and expenses arising from
the Group’s retail agency activities
in the UK and in continental Europe.
In addition, it includes the European
errors and omissions business from
Syndicate 3624. It excludes the results
of the larger retail TMT business written
by Hiscox Insurance Company Limited.
It also includes an element of kidnap
and ransom and terrorism written
in Syndicate 33.
International comprises the results
of Hiscox Insurance Company
(Guernsey) Limited, Hiscox Insurance
Company (Bermuda) Limited, Hiscox
Inc., Hiscox Insurance Company Inc.
and Syndicate 3624 excluding
the European errors and omissions,
fire and aviation business.
Corporate Centre comprises the
investment return, finance costs
and administrative costs associated
with Group management activities.
Corporate Centre also includes
the majority of foreign currency items
on economic hedges and intragroup
borrowings. These relate to certain
foreign currency items on economic
hedges and intragroup borrowings,
further details of which are given
at note 13. Corporate Centre forms
a reportable segment due to its
investment activities which earn
significant external coupon revenues.
All amounts reported below represent
transactions with external parties only.
In the normal course of trade, the Group’s
entities enter into various reinsurance
arrangements with one another. The related
results of these transactions are eliminated
on consolidation and are not included
within the results of the segments.
This is consistent with the information
used by the chief operating decision maker
when evaluating the results of the Group.
Performance is measured based on each
reportable segment’s profit before tax.
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
75
Notes to the consolidated
financial statements
continued
4 Operating segments continued
(a) Profit before tax by segment
London
Market
£000
UK and
Europe
£000
International
£000
Corporate
Centre
£000
Total
£000
London
Market
£000
UK and
Europe
£000
International
£000
Corporate
Centre
£000
Total
£000
Year to 31 December 2011
Year to 31 December 2010
Gross premiums
written
Net premiums
written
Net premiums
earned
585,441
498,006
365,772
– 1,449,219
572,748
454,692
405,234
– 1,432,674
413,390
472,608
288,013
– 1,174,011
389,581
428,032
314,014
– 1,131,627
418,764
448,594
277,649
– 1,145,007
396,096
422,180
312,882
–
1,131,158
Investment result*
Other revenues
8,782
9,858
7,248
3,938
6,313
3,311
2,152
215
24,495
17,322
39,068
12,054
17,244
3,671
27,624
5,836
16,313
518
100,249
22,079
Revenue
437,404
459,780
287,273
2,367 1,186,824
447,218
443,095
346,342
16,831 1,253,486
Claims and claim
adjustment
expenses, net of
reinsurance
Expenses for
the acquisition
of insurance
contracts
Operational
expenses
Foreign exchange
gains/(losses)
(238,026)
(207,018)
(252,854)
–
(697,898)
(195,570)
(213,001)
(162,426)
–
(570,997)
(99,257)
(106,300)
(64,235)
–
(269,792)
(92,832)
(99,069)
(77,990)
–
(269,891)
(39,685)
(94,985)
(56,229)
(12,305)
(203,204)
(44,733)
(89,440)
(59,419)
(12,811)
(206,403)
(1,507)
(25)
(3,097)
12,445
7,816
11,669
(1,972)
(2,610)
8,397
15,484
Total expenses
(378,475)
(408,328)
(376,415)
140 (1,163,078)
(321,466)
(403,482)
(302,445)
(4,414) (1,031,807)
Results of operating
activities
Finance costs
Share of (loss)/profit
of associates
after tax
58,929
(1,308)
51,452
–
(89,142)
(399)
2,507
(4,991)
23,746
(6,698)
125,752
(4,392)
39,613
(9)
43,897
(433)
12,417
(5,256)
221,679
(10,090)
–
–
65
158
223
–
–
(323)
100
(223)
Profit before tax
57,621
51,452
(89,476)
(2,326)
17,271
121,360
39,604
43,141
7,261
211,366
*Interest revenues included total £48,802,000 (2010: £60,332,000).
The following charges are included within the consolidated income statement:
Year to 31 December 2011
Year to 31 December 2010
Depreciation
Amortisation of
intangible assets
London
Market
£000
UK and
Europe
£000
International
£000
Corporate
Centre
£000
Total
£000
1,325
1,488
1,226
106
4,145
London
Market
£000
455
UK and
Europe
£000
International
£000
Corporate
Centre
£000
2,155
1,932
1,198
1,250
1,499
6
3,953
1,212
845
403
Total
£000
4,605
2,460
63
–
76
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
4 Operating segments continued
(a) Profit before tax by segment continued
The Group’s wholly owned subsidiary, Hiscox Syndicates Limited, oversees the operation of Syndicate 33 at Lloyd’s. The Group’s
percentage participation in Syndicate 33 can fluctuate from year to year and consequently, presentation of the results at the 100% level
removes any distortions arising therefrom.
Year to 31 December 2011
Year to 31 December 2010
100% ratio analysis
Claims ratio (%)
Expense ratio (%)
Combined ratio excluding
foreign exchange impact (%)
Foreign exchange impact (%)
Combined ratio (%)
Combined ratio excluding
non-monetary foreign
exchange impact (%)
International
Corporate
Centre
International
Corporate
Centre
London
Market
56.6
32.5
89.1
–
89.1
UK and
Europe
46.3
44.7
91.0
–
91.0
89.9
42.9
132.8
1.1
133.9
Total
60.2
39.1
99.3
0.2
99.5
London
Market
48.3
33.5
81.8
(2.1)
79.7
UK and
Europe
50.2
44.6
94.8
0.5
95.3
53.2
43.2
96.4
0.9
97.3
90.0
90.9
133.9
99.9
79.7
95.3
97.3
–
–
–
–
–
–
Total
50.1
39.7
89.8
(0.5)
89.3
89.3
–
–
–
–
–
–
The claims ratio is calculated as claims and claim adjustment expenses, net of reinsurance, as a proportion of net premiums earned.
The expense ratio is calculated as the total of expenses for the acquisition of insurance contracts, and operational expenses as a proportion
of net premiums earned. The foreign exchange impact ratio is calculated as the foreign exchange gains or losses as a proportion of net
premiums earned. The combined ratio is the total of the claims, expenses and foreign exchange impact ratios. The combined ratio excluding
non-monetary foreign exchange impact is calculated by adjusting the net premiums earned and the expenses for the acquisition of
insurance contracts by the movement arising from retranslating net unearned premiums and net deferred acquisition costs at year end rates
of exchange. All ratios are calculated using the 100% results.
Costs allocated to the Corporate Centre are non-underwriting related costs and are not included within the combined ratio.
The impact on profit before tax of a 1% change in each component of the segmental combined ratios is:
At 100% level (note 4b)
1% change in claims or expense ratio
At Group level
1% change in claims or expense ratio
(b) 100% operating result by segment
Year to 31 December 2011
Year to 31 December 2010
London
Market
£000
UK and
Europe
£000
International
£000
Corporate
Centre
£000
London
Market
£000
UK and
Europe
£000
International
£000
Corporate
Centre
£000
5,555
4,637
2,831
4,188
4,486
2,776
–
–
5,459
4,388
3,223
3,961
4,222
3,129
–
–
London
Market
£000
UK and
Europe
£000
International
£000
Corporate
Centre
£000
Total
£000
London
Market
£000
UK and
Europe
£000
Year to 31 December 2011
Gross premiums written
Net premiums written
Net premiums earned
779,261
370,168
514,075
543,696 487,609 292,640
555,533 463,706 283,138
– 1,663,504
– 1,323,945
– 1,302,377 545,945
782,523
472,247
524,658 443,693
438,773
Year to 31 December 2010
Corporate
Centre
£000
Total
£000
– 1,670,873
– 1,289,587
– 1,307,059
International
£000
416,103
321,236
322,341
Investment result
Other revenues
Claims and claim adjustment
expenses, net of reinsurance
Expenses for the acquisition
of insurance contracts
Operational expenses
Foreign exchange
gains/(losses)
12,024
1,553
7,399
3,380
6,503
1,990
2,152
215
28,078
7,138
53,870
–
17,848
3,029
28,572
4,393
16,313
518
116,603
7,940
(314,517) (214,609) (254,627)
– (783,753)
(263,610)
(220,101)
(171,347)
– (655,058)
(130,593)
(50,182)
(111,624)
(95,946)
(65,127)
(56,245)
– (307,344)
(12,305) (214,678)
(127,202)
(55,873)
(105,394)
(90,489)
(78,611)
(60,755)
–
(12,811)
(311,207)
(219,928)
72
90
(3,103)
12,445
9,504
11,272
(1,983)
(2,892)
8,397
14,794
Results of operating activities
73,890
52,396
(87,471)
2,507
41,322
164,402
41,683
41,701
12,417 260,203
Segment results at the 100% level presented above differ from those presented at the Group’s share at note 4(a) solely as a result
of the Group not owning 100% of the capacity of Syndicate 33 at Lloyd’s.
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
77
Notes to the consolidated
financial statements
continued
4 Operating segments continued
(c) Segmental analysis of assets and liabilities
The segment assets and liabilities at 31 December and the capital expenditure for the year then ended are as follows:
London
Market
£000
UK and
Europe
£000
International
£000
Corporate
Centre
£000
Intragroup items
and eliminations
£000
Total
£000
Year to 31 December 2011
Intangible assets
Deferred acquisition costs
Financial assets
Reinsurance assets
Other assets
Total assets
Insurance liabilities
Other liabilities
Total liabilities
Capital expenditure
Intangible assets
Deferred acquisition costs
Financial assets
Reinsurance assets
Other assets
Total assets
Insurance liabilities
Other liabilities
Total liabilities
Capital expenditure
36,758
44,868
896,702
808,304
472,942
5,389
46,903
333,553
219,167
353,634
67,552
15,257
150,050
56,072
223,209 2,375,016
869,891
112,914
492,515
(647,870)
407,817 1,029,800 (1,126,585) 1,137,608
10,148
–
51,661
–
–
2,207
2,259,574
958,646 1,461,951 1,091,609 (1,549,039) 4,222,741
1,299,104
863,907
550,201
257,816
782,405
73,180
–
119,381
(131,450) 2,500,260
466,582
(847,702)
2,163,011
808,017
855,585
119,381
(979,152) 2,966,842
1,532
4,527
3,605
392
–
10,056
London
Market
£000
UK and
Europe
£000
32,995
51,275
995,824
660,057
514,351
5,524
45,574
413,989
185,625
253,925
International
£000
15,441
43,529
797,048
85,778
345,893
Year to 31 December 2010
Corporate
Centre
£000
Intragroup items
and eliminations
£000
Total
£000
–
2,358
10,148
–
32,480
–
64,108
142,736
226,652 2,465,993
462,765
(468,695)
855,250
954,236 (1,213,155)
2,254,502
904,637 1,287,689
996,864 (1,452,840) 3,990,852
1,315,215
811,866
536,196
208,759
528,390
194,115
–
139,015
(99,934) 2,279,867
444,871
(908,884)
2,127,081
744,955
722,505
139,015 (1,008,818) 2,724,738
4,152
2,731
8,742
372
–
15,997
Segment assets and liabilities primarily consist of operating assets and liabilities, which represent the majority of the balance sheet.
Intragroup assets and liabilities that cross segments are presented under the separate category heading ‘Intragroup items and eliminations’.
Capital expenditure comprises expenditure on intangible assets (note 14) other than goodwill, and additions to property, plant
and equipment (note 15), but excluding assets acquired on business combinations.
(d) Geographical information
The Group’s operational segments underwrite business domestically in Bermuda and from locations in the UK and Ireland, the US,
Guernsey, France, Germany, Belgium, the Netherlands, Spain, Portugal.
The following table provides an analysis of the Group’s gross premium revenues earned by material geographical location from external parties:
Gross premium revenues
earned from external parties
London
Market
£000
UK and
Europe
£000
UK and Ireland
Europe
United States
Rest of World
274,108
24,360
27,829 145,270
22,127
306,114
32,807
235,273
Year to 31 December 2011
Corporate
Centre
£000
Total
£000
London
Market
£000
UK and
Europe
£000
– 310,393
– 200,776
– 522,357
– 395,428
28,534 285,350
127,639
27,459
8,557
361,192
28,757
176,527
International
£000
27,360
35,658
219,210
108,875
Year to 31 December 2010
Corporate
Centre
£000
Total
£000
341,244
–
–
190,756
– 588,959
314,159
–
International
£000
11,925
27,677
194,116
127,348
593,576
474,312 361,066
– 1,428,954
593,712 450,303
391,103
– 1,435,118
The Group’s largest external policyholder contributed less than 2% of total gross Group premium revenues earned and the details thereof
are not disclosed on the grounds of materiality.
78
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
4 Operating segments continued
(d) Geographical information continued
The Group has not reported geographical segmental details of non-current assets excluding financial instruments and including loans
and receivables, rights and obligations under insurance and reinsurance contracts, investments in associates and subsidiaries as such
details are not used by the chief operating decision maker to evaluate the performance of the Group.
5 Net asset value per share
Net asset value
Net tangible asset value
Net asset
value
)
(total equity
£000
2011
Net asset
value
per share
pence
Net asset
value
)
(total equity
£000
1,255,899
1,188,347
323.5 1,266,114
306.1 1,202,006
2010
Net asset
value
per share
pence
332.7
315.8
The net asset value per share is based on 388,233,074 shares (2010: 380,613,336 shares), being the adjusted number of shares in issue
at 31 December.
Net tangible assets comprise total equity excluding intangible assets.
6 Return on equity
Profit for the year (all attributable to owners of the Company)
Opening shareholders’ equity
Adjusted for the time weighted impact of capital distributions and issuance of shares
Adjusted opening shareholders’ equity
Annualised return on equity (%)
7 Investment result
The total result for the Group before taxation comprises:
Investment income including interest receivable
Net realised gains on financial investments at fair value through profit or loss
Net fair value (losses)/gains on financial investments at fair value through profit or loss
Investment result – financial assets
Fair value (losses)/gains on derivative financial instruments
Total result
Investment expenses are presented within other expenses (note 9).
2011
£000
2010
£000
21,272
178,800
1,266,114 1,121,286
(34,820)
(14,025)
1,252,089 1,086,466
1.7
16.5
Note
2011
£000
2010
£000
50,333
5,040
(29,431)
25,942
(1,447)
61,606
12,971
24,272
98,849
1,400
24,495
100,249
8
21
8 Analysis of return on financial investments
(a) The weighted average return on financial investments for the year by currency, based on monthly asset values, was:
Sterling
US Dollar
Other
(b) Investment return
Debt and fixed income securities
Equities and shares in unit trusts
Deposits with credit institutions/
cash and cash equivalents
2011
%
1.0
0.6
1.6
2010
%
3.6
3.8
2.3
London Market
UK and Europe
International
Corporate Centre
2011 Total
£000
9,477
–
225
9,702
%
1.1
–
0.4
1.1
£000
%
£000
%
£000
%
£000
%
7,642
(1,168)
725
7,199
1.8
(2.4)
10,846
(4,392)
1.6
(9.3)
1,968
(375)
0.9
(0.9)
29,933
(5,935)
1.0
1.3
868
7,322
0.4
0.8
126
1,719
0.2
0.5
1,944
25,942
1.3
(3.8)
0.4
0.9
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
79
Notes to the consolidated
financial statements
continued
8 Analysis of return on financial investments continued
(b) Investment return continued
Debt and fixed income securities
Equities and shares in unit trusts
Deposits with credit institutions/
cash and cash equivalents
London Market
UK and Europe
International
Corporate Centre
2010 Total
£000
39,464
–
138
39,602
%
4.2
–
0.3
4.0
£000
%
£000
9,586
6,079
500
16,165
2.6
11.6
0.8
3.3
22,078
4,468
218
26,764
%
3.6
9.0
0.1
3.2
£000
%
£000
11,106
5,025
187
16,318
4.7
13.4
82,234
15,572
0.4
5.0
1,043
98,849
%
3.7
11.1
0.3
3.6
9 Other revenues and operational expenses
Agency related income
Profit commission
Other underwriting income – catastrophe bonds
Other income
Other revenues
Wages and salaries
Social security cost
Pension cost – defined contribution
Pension cost – defined benefit
Share based payments
Other expenses
Marketing expenses
Investment expenses
Depreciation and amortisation
Operational expenses
10 Finance costs
Interest and expenses associated with bank borrowings
Interest and charges associated with Letters of Credit
Interest charges on experience account
Interest charges arising on finance leases
2011
£000
6,769
7,383
1,006
2,164
2010
£000
6,816
10,616
1,280
3,367
17,322
22,079
69,185
12,930
5,724
1,700
8,677
73,575
19,955
3,360
8,098
80,359
13,689
5,209
1,700
8,047
74,668
11,863
3,803
7,065
203,204 206,403
Note
35
36
2011
£000
1,960
3,933
804
1
2010
£000
3,117
3,216
3,748
9
6,698
10,090
11 Auditors’ remuneration
Fees payable to the Group’s main external auditors, KPMG, its member firms and its associates (exclusive of VAT) include the following
amounts recorded in the consolidated income statement:
Group
Amounts receivable by the auditor and associates in respect of:
1. The auditing of accounts of any associate of the Group
2. Audit-related assurance services
3. Taxation compliance services
4. All taxation advisory services not falling within part 3
5. Internal audit services
6. All assurance services not falling within parts 1 to 5
7. All services relating to corporate finance transactions entered into, or proposed to be entered into,
by or on behalf of the Group or any of its associates not falling within parts 1 to 6
8. All non-audit services not falling in parts 2 to 7*
Total auditors’ remuneration expense
* 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.
80
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
2011
£000
908
77
8
–
–
55
–
–
1,048
Restated
2010
£000
848
74
3
–
–
–
–
10
935
11 Auditors’ remuneration continued
The full audit fee payable for the Syndicate audit has been included above, although an element of this is borne by the third-party
participants in the Syndicate.
12 Net foreign exchange gains/(losses)
The net foreign exchange gains for the year include the following amounts:
Exchange gains recognised in the consolidated income statement
Exchange gains classified as a separate component of equity
Overall impact of foreign exchange related items on net assets
2011
£000
2010
£000
7,816
11,060
15,484
11,729
18,876
27,213
The above excludes profit or losses on foreign exchange derivative financial instruments which are included within the investment result.
Net unearned premiums and deferred acquisition costs are treated as non-monetary items in accordance with IFRS. As a result, a foreign
exchange mismatch arises caused by these items being earned at historical rates of exchange prevailing at the original transaction date
whereby resulting claims are retranslated at the end of each period. The impact of this mismatch on the income statement is shown below.
Opening balance sheet impact of non retranslation of non-monetary items
Gain included within profit representing the non retranslation of non-monetary items
Closing balance sheet impact of non retranslation of non-monetary items
2011
£000
2010
£000
(1,251)
3,395
2,144
(3,207)
1,956
(1,251)
13 Foreign currency items on economic hedges and intragroup borrowings
The Group has loan arrangements, denominated in US Dollars and Euros, in place between certain Group companies. In most cases, as
one party to each arrangement has a functional currency other than the US Dollar or the Euro, foreign exchange losses arise which are not
eliminated through the income statement on consolidation. Implicit offsetting gains are reflected instead on retranslation of the counterparty
company’s closing balance sheet through other comprehensive income and into the Group’s currency translation reserve within equity.
Impact as at 31 December 2011
Unrealised translation (losses)/gains on intragroup borrowings
Total (losses)/gains recognised
Impact as at 31 December 2010
Unrealised translation gains/(losses) on intragroup borrowings
Total gains/(losses) recognised
The Group did not enter into any economic hedging derivative contracts during the current or prior year.
Consolidated
income
statement
2011
£000
Consolidated
other
comprehensive
income
2011
£000
(4,540)
(4,540)
4,540
4,540
Consolidated
income
statement
2010
£000
Consolidated
other
comprehensive
income
2010
£000
1,846
1,846
(1,846)
(1,846)
Total
impact on
equity
2011
£000
–
–
Total
impact on
equity
2010
£000
–
–
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
81
Notes to the consolidated
financial statements
continued
14 Intangible assets
At 1 January 2010
Cost
Accumulated amortisation and impairment
Net book amount
Year ended 31 December 2010
Opening net book amount
Other additions
Amortisation charges
Closing net book amount
At 31 December 2010
Cost
Accumulated amortisation and impairment
Net book amount
Year ended 31 December 2011
Opening net book amount
Other additions
Amortisation charges
Closing net book amount
At 31 December 2011
Cost
Accumulated amortisation and impairment
Goodwill
£000
Syndicate
capacity
£000
State
authorisation
licences
£000
Software and
development
costs
£000
Other
£000
Total
£000
10,405
(2,430)
24,505
–
7,975
24,505
7,975
–
–
7,975
24,505
–
–
24,505
10,405
(2,430)
24,505
–
7,975
24,505
6,308
–
6,308
6,308
–
–
6,308
6,308
–
6,308
8,029
(661)
7,368
5,337
(1,080)
54,584
(4,171)
4,257
50,413
7,368
11,510
(2,196)
4,257
4,645
(264)
50,413
16,155
(2,460)
16,682
8,638
64,108
19,539
(2,857)
9,982
(1,344)
70,739
(6,631)
16,682
8,638
64,108
7,975
–
–
7,975
24,505
–
–
6,308
–
–
16,682
7,397
(3,634)
8,638
–
(319)
64,108
7,397
(3,953)
24,505
6,308
20,445
8,319
67,552
10,405
(2,430)
24,505
–
6,308
–
26,936
(6,491)
9,982
(1,663)
78,136
(10,584)
Net book amount
7,975
24,505
6,308
20,445
8,319
67,552
Goodwill is allocated to the Group’s cash generating units (CGUs) identified according to country of operation and business segment.
Goodwill is considered to have an indefinite life and as such is tested annually for impairment based on the recoverable amount which is
considered to be the higher of the fair value or value in use. Accumulated amortisation and impairment of goodwill relates to the amortisation
charged prior to the Group’s adoption of IFRS.
Value in use is considered to be the best indication of the recoverable amount for goodwill. Value in use calculations are performed using
cash flow projections based on financial forecasts covering a five-year period. A discount factor of 4.8% (2010: 2.5%) has been applied
to the projections to determine the net present value. The outcome of the value in use calculation is measured against the carrying value
of the asset and where the carrying value is in excess of the value in use, the asset is written down to this amount.
There were no impairments recognised in the current or prior year for goodwill.
The Group’s intangible asset relating to Syndicate capacity has been allocated, for impairment testing purposes, to one individual CGU,
being the active Lloyd’s corporate member entity. The asset is tested annually for impairment based on its recoverable amount which is
considered to be the higher of the asset’s fair value or its value in use. The fair value of Syndicate capacity can be determined from the
Lloyd’s of London Syndicate capacity auctions. Based on the average open market price witnessed in the recent Autumn 2011 auction,
the carrying value of Syndicate capacity recognised on the balance sheet is significantly below the market price.
As part of a business combination in 2007, the Group acquired insurance authorisation licences for 50 US states. This intangible asset
has been allocated for impairment testing purposes to one individual CGU, being the Group’s North American underwriting businesses.
The carrying value of this asset is tested for impairment based on its fair value which reflects the total costs to acquire the licences in each
state. The results of that testing show that no impairment is due.
Other intangible assets relate to the costs of acquiring rights to customer contractual relationships with additions in the current and prior
year relating to software licence and development costs. Customer contractual relationships are amortised on a straight line basis over
the useful economic life.
82
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
14 Intangible assets continued
The carrying value of customer contractual relationships is tested annually for impairment based on the recoverable amount which is
considered to be the higher of the fair value or value in use. The asset’s value in use is considered to be the best indication of its recoverable
amount. Value in use is calculated for customer contractual relationships in the same manner as described above for goodwill and the same
discount rate used. The results of this testing show that no impairment is due.
Capitalised software and development costs are amortised when the assets become available for use on a straight line basis over the
expected useful life of the asset. The carrying value of software and development costs is reviewed for impairment on an ongoing basis
by reference to the stage and expectation of a project. No impairment is due as at 31 December 2011.
The amortisation charge for the year includes £3,634,000 (2010: £2,196,000) relating to capitalised internally generated software costs
and is included in other expenses in the income statement.
The net book value of capitalised internally generated software costs at 31 December 2011 was £20,446,000 (2010: £16,684,000).
There are no charges for impairment during the current or prior financial year.
At 31 December 2011 there were £8,873,000 of assets under development on which no amortisation has been charged (2010: £4,817,000).
15 Property, plant and equipment
At 1 January 2010
Cost
Accumulated depreciation
Net book amount
Year ended 31 December 2010
Opening net book amount
Additions
Disposals
Depreciation charge
Foreign exchange movements
Closing net book amount
At 31 December 2010
Cost
Accumulated depreciation
Net book amount
Year ended 31 December 2011
Opening net book amount
Additions
Disposals
Depreciation charge
Foreign exchange movements
Closing net book amount
At 31 December 2011
Cost
Accumulated depreciation
Net book amount
Land and
buildings
£000
Leasehold
improvements
£000
Vehicles
£000
Furniture
fittings and
equipment
and art
£000
Total
£000
6,007
(259)
5,748
5,748
20
–
(81)
77
5,764
6,104
(340)
5,764
5,764
–
–
(82)
60
3,807
(1,206)
2,601
2,601
828
(808)
(510)
65
2,176
3,162
(986)
2,176
2,176
584
(21)
(292)
40
5,742
2,487
6,164
(422)
5,742
3,765
(1,278)
2,487
940
(498)
42,732
(29,279)
53,486
(31,242)
442
13,453
22,244
442
46
(333)
(47)
–
13,453
2,568
(395)
(3,967)
35
22,244
3,462
(1,536)
(4,605)
177
108
11,694
19,742
258
(150)
108
44,678
(32,984)
54,202
(34,460)
11,694
19,742
108
–
(58)
–
–
50
142
(92)
50
11,694
2,075
(186)
(3,771)
64
19,742
2,659
(265)
(4,145)
164
9,876
18,155
45,560
(35,684)
55,631
(37,476)
9,876
18,155
The Group’s land and buildings assets relate to freehold property in the UK and US.
Assets with a net book value of £nil were held under finance leases (2010: £99,000). The total depreciation charge for the year in respect
of assets held under finance leases was £4,000 (2010: £24,000) and is included in other expenses.
At 31 December 2011 there were no assets under development upon which no depreciation has yet been charged (2010: £nil).
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
83
Notes to the consolidated
financial statements
continued
16 Investments in associates
Year ended 31 December
At beginning of year
Additions during the year
Disposals during the year
Share of post-tax profit/(loss) recognised for the period
At end of year
The Group’s interests in its principal associates, all of which are unlisted, were as follows:
2011
£000
2010
£000
6,886
7,318
–
(729)
223
318
(527)
(223)
6,380
6,886
100% results
2011
Associates incorporated in the UK
Associates incorporated in Europe
Associates incorporated in the USA
Total at the end of 2011
2010
Associates incorporated in the UK
Associates incorporated in Europe
Associates incorporated in the USA
Total at the end of 2010
% interest
held at
31 December
Assets
£000
Liabilities
£000
Revenues
£000
Profit after tax
£000
from 25% to 37%
25%
25%
5,984
900
691
7,575
3,294
386
645
4,325
5,041
1,341
116
6,498
198
15
(894)
(681)
100% results
% interest
held at
31 December
Assets
£000
Liabilities
£000
Revenues
£000
Profit after tax
£000
From 25% to 49%
25%
25%
1,847
455
210
2,512
1,230
284
(1)
1,513
1,098
326
11
1,435
185
20
(1,756)
(1,551)
On 23 March 2011, the Group sold its holding in Plexstar Insurance Services Ltd, resulting in a loss of £33,000. Further consideration is due
to be received during 2012, estimated to be £200,000.
During 2010, the Group disposed of its 40% holding in HIM Capital Holdings Ltd recognising a gain of £458,000. Also in December 2010, the
Group increased its holding in Blyth Valley Ltd to 100% as referred to in note 33. The company was treated as a subsidiary of the Group from
this date.
The equity interests held by the Group in respect of associates do not have quoted market prices and are not traded regularly in any active
recognised market. The associates concerned have no material impact on the results or assets of the Group. No impairments were identified
during the current or prior financial year under review.
17 Deferred acquisition costs
Balance deferred at 1 January
Acquisition costs incurred in relation to insurance
contracts written
Acquisition costs expensed to the income statement
Gross
£000
Reinsurance
£000
2011
Net
£000
Gross
£000
Reinsurance
£000
2010
Net
£000
142,736
(17,048)
125,688
141,505
(17,584)
123,921
321,699
(314,385)
(43,186)
44,593
278,513
(269,792)
318,876
(317,645)
(47,218)
47,754
271,658
(269,891)
Balance deferred at 31 December
150,050
(15,641)
134,409
142,736
(17,048)
125,688
The deferred amount of insurance contract acquisition costs attributable to reinsurers of £15,641,000 (2010: £17,048,000) is not eligible
for offset against the gross balance sheet asset and is included separately within trade and other payables (note 27).
The amounts expected to be recovered before and after one year are estimated as follows:
Within one year
After one year
2011
£000
2010
£000
126,847
7,562
124,822
866
134,409
125,688
84
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
18 Reinsurance assets
Reinsurers’ share of insurance liabilities
Provision for non-recovery and impairment
Reinsurance assets
Note
2011
£000
2010
£000
493,422
(907)
463,724
(959)
26
492,515
462,765
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
265,525
226,990
236,541
226,224
492,515
462,765
Amounts due from reinsurers in respect of outstanding premiums and claims already paid by the Group are included in loans and receivables
(note 20). The Group recognised a gain during the year of £52,000 (2010: gain of £4,487,000) in respect of previously impaired balances.
19 Financial assets and liabilities
Financial assets are measured at their bid price values, with all changes from one accounting period to the next being recorded through
the income statement.
Debt and fixed income securities
Equities and shares in unit trusts
Deposits with credit institutions
Total investments
Catastrophe bonds
Derivative financial instruments
Total financial assets carried at fair value
Borrowings from credit institutions carried at amortised cost*
Derivative financial instruments
Total financial liabilities
*The fair value of borrowings from credit institutions is not considered to be significantly different from the amortised cost.
Note
2011
Fair value
£000
2010
Fair value
£000
2,170,588 2,284,513
154,862
4,280
173,432
12,848
2,356,868 2,443,655
15,452
–
11,639
129
21
2,368,636 2,459,107
Note
21
2011
Fair value
£000
2010
Fair value
£000
–
–
–
20,000
457
20,457
An analysis of the credit risk and contractual maturity profiles of the Group’s financial instruments is given in notes 3.2(d) and 3.2(e).
The Group’s investment in catastrophe bonds consists of £11.6 million (2010: £15.5 million), comprising of 16 catastrophe bonds (2010: 13)
with credit ratings of BB and B. The issuers of these securities have used the proceeds to collateralise certain catastrophe reinsurance
obligations mainly in US and European wind and earthquake risks. The investment in these contracts is therefore at risk of loss, in whole
or in part if a covered catastrophe occurs with the maximum loss being equal to the total investment.
The entire amount of the Group’s borrowings from December 2010, all being Pound Sterling, was repaid during the year and there is no
amount outstanding at 31 December 2011.
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
85
Notes to the consolidated
financial statements
continued
19 Financial assets and liabilities continued
Investments at 31 December are denominated in the following currencies at their fair value:
2011
£000
2010
£000
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
20 Loans and receivables including insurance receivables
Gross receivables arising from insurance and reinsurance contracts
Provision for impairment
Net receivables arising from insurance and reinsurance contracts
Due from contract holders, brokers, agents and intermediaries
Due from reinsurance operations
Prepayments and accrued income
Other loans and receivables:
Net profit commission receivable
Accrued interest
Share of Syndicates other debtors’ balances
Other debtors including related party amounts
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
408,328
514,726
1,508,234 1,578,075
191,712
254,026
2,170,588 2,284,513
90,303
81,620
1,509
80,226
61,565
13,071
173,432
154,862
12,588
260
–
12,848
3,755
525
–
4,280
2,356,868 2,443,655
2011
£000
2010
£000
429,676
(956)
412,524
(1,041)
428,720
411,483
299,879
128,841
298,214
113,269
428,720
411,483
8,387
7,656
13,792
10,149
19,726
26,948
15,276
11,888
23,230
15,881
507,722
485,414
499,805
7,917
474,010
11,404
507,722
485,414
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 gain of £85,000 (2010: loss of £86,000) for the impairment of receivables during the year
ended 31 December 2011.
86
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
21 Derivative financial instruments
The Group entered into both exchange-traded and over the counter derivative contracts for a number of purposes during 2011. The Group
had the right and intention to settle each contract on a net basis. The assets and liabilities of these contracts at 31 December 2011 all mature
within one year of the balance sheet date and are detailed below:
31 December 2011
Derivative financial instrument assets included on balance sheet
Foreign exchange forward contracts
Gross contract
notional amount
£000
Fair value
of assets
£000
Fair value
of liabilities
£000
Net balance
sheet position
£000
22,552
12,662
12,533
129
31 December 2011
Derivative financial instrument liabilities included on balance sheet
Interest rate futures contracts
Gross contract
notional amount
£000
Fair value
of assets
£000
Fair value
of liabilities
£000
Net balance
sheet position
£000
37,156
–
–
–
31 December 2010
Derivative financial instrument liabilities included on balance sheet
Foreign exchange forward contracts
Interest rate futures contracts
Credit default swaps
Gross contract
notional amount
£000
20,223
64,407
25,398
Fair value
of assets
£000
10,070
16,557
–
10,500
16,582
2
Fair value
of liabilities
£000
Net balance
sheet position
£000
110,028
26,627
27,084
430
25
2
457
Foreign exchange forward contracts
During the current and prior year the Group entered into a series of conventional over the counter forward contracts in order to secure
translation gains made on Euro, US Dollar and other non Pound Sterling denominated monetary assets. The contracts require the
Group to forward sell a fixed amount of the relevant currency for Pound Sterling at pre-agreed future exchange rates. The Group made
a loss on these forward contracts of £84,000 (2010: gain of £1,522,000) as included in note 7. The opposite exchange gain is included
within financial investments.
There was no initial purchase cost associated with these instruments.
Interest rate futures contracts
During the year the Group continued short selling a number of government bond futures and sovereign futures denominated in a range
of currencies to informally hedge substantially all of the interest rate risk on specific long portfolios of the matching currencies denominated
corporate bonds. All contracts are exchange traded and the Group made a loss on these futures contracts of £1,796,000 (2010: £117,000)
as included in note 7.
Equity index futures
During the year, the Group purchased a number of equity index futures in order to hedge equity market exposure pending the acquisition
of shares in unit trusts. All contracts were exchange traded and the Group made a profit of £433,000 (2010: £nil) as included in note 7.
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
87
Notes to the consolidated
financial statements
continued
22 Fair value measurements
In accordance with the Amendments to IFRS 7 Financial Instruments: Disclosures, the fair value of financial instruments based
on a three-level fair value hierarchy that reflects the significance of the inputs used in measuring the fair value is provided below.
As at 31 December 2011
Financial assets
Debt and fixed income securities
Equities and shares in unit trusts
Deposits with credit institutions
Catastrophe bonds
Derivative instrument assets
Total
As at 31 December 2010
Financial assets
Debt and fixed income securities
Equities and shares in unit trusts
Deposits with credit institutions
Catastrophe bonds
Total
Financial liabilities
Derivative financial instruments
Level 1
£000
Level 2
£000
Level 3
£000
Total
£000
500,672 1,669,916
162,806
–
11,639
129
–
12,848
–
–
– 2,170,588
173,432
12,848
11,639
129
10,626
–
–
–
513,520 1,844,490
10,626 2,368,636
Level 1
£000
Level 2
£000
Level 3
£000
Total
£000
516,528 1,767,985
147,866
–
15,452
70
4,280
–
– 2,284,513
154,862
4,280
15,452
6,926
–
–
520,878 1,931,303
6,926 2,459,107
–
457
–
457
The levels of the fair value hierarchy are defined by the standard as follows:
Level 1 – fair values measured using quoted prices (unadjusted) in active markets for identical instruments;
Level 2 – fair values measured using directly or indirectly observable inputs or other similar valuation techniques for which all significant
inputs are based on observable market data;
Level 3 – fair values measured using valuation techniques for which significant inputs are not based on market observable data.
The fair values of the Group’s financial assets are based on prices provided by investment managers who obtain market data from numerous
independent pricing services. The pricing services used by the investment manager obtain actual transaction prices for securities that have
quoted prices in active markets. For those securities which are not actively traded, the pricing services use common market valuation pricing
models. Observable inputs used in common market valuation pricing models include, but are not limited to, broker quotes, credit ratings,
interest rates and yield curves, prepayment speeds, default rates and other such inputs which are available from market sources.
The fair values of the Group’s investments in catastrophe bonds are based on quoted market prices or, where such prices are not available,
by reference to broker or underwriter bid indications.
Investments in mutual funds comprise a portfolio of stock investments in trading entities which are invested in various quoted investments.
The fair value of shares in unit trusts are based on the net asset value of the fund as reported by independent pricing sources or the
fund manager.
Included within Level 1 of the fair value hierarchy are government bonds, Treasury bills and exchange traded equities which are measured
based on quoted prices.
88
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
22 Fair value measurements continued
Level 2 of the hierarchy contains US Government agencies, corporate securities, asset backed securities and mortgage backed securities
and catastrophe bonds. The fair value of these assets are based on the prices obtained from both investment managers and investment
custodians as discussed above. The Group records the unadjusted price provided and validates the price through a number of methods
including a comparison of the prices provided by the investment managers with the investment custodians and the valuation used by
external parties to derive fair value. Quoted prices for US Government agencies and corporate securities are based on a limited number
of transactions for those securities and as such the Group considers these instruments to have similar characteristics to those instruments
classified as Level 2. Also included within Level 2 are units held in traditional long funds and long and short special funds and over the
counter derivatives.
Level 3 contains investments in a limited partnership and unquoted equity securities which have limited observable inputs on which
to measure fair value. Unquoted equities are carried at cost, which is deemed to be comparable to fair value. The effect of changing
one or more inputs used in the measurement of fair value of these instruments to another reasonably possible assumption would
not be significant and no further analysis has been performed.
In certain cases, the inputs used to measure the fair value of a financial instrument may fall into more than one level within the fair value
hierarchy. In this instance, the fair value of the instrument in its entirety is classified based on the lowest level of input that is significant
to the fair value measurement.
During the year, there were no transfers made between Level 1 and Level 2 of the fair value hierarchy.
The following table sets forth a reconciliation of opening and closing balances for financial instruments classified under Level 3 of the fair
value hierarchy:
31 December 2011
Balance at 1 January
Total gains or losses through profit or loss*
Purchases
Settlements
Closing balance
*Total gains/(losses) are included within the investment result in the income statement.
31 December 2010
Balance at 1 January
Total gains or losses through profit or loss*
Purchases
Settlements
Closing balance
*Total gains/(losses) are included within the investment result in the income statement.
23 Cash and cash equivalents
Cash at bank and in hand
Short-term bank deposits
Equities and shares
in unit trusts
£000
Deposits with
credit institutions
£000
Derivative financial
instruments
£000
6,926
1,242
3,002
(544)
10,626
–
–
–
–
–
–
–
–
–
–
Equities and shares
in unit trusts
£000
Deposits with
credit institutions
£000
Derivative financial
instruments
£000
4,260
842
1,824
–
6,926
–
–
–
–
–
–
–
–
–
–
Total
£000
6,926
1,242
3,002
(544)
10,626
Total
£000
4,260
842
1,824
–
6,926
2011
£000
2010
£000
258,927
257,620
260,710
75,307
516,547
336,017
The Group holds its cash deposits with a well diversified range of banks and financial institutions.
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
89
Notes to the consolidated
financial statements
continued
24 Share capital
Group
Issued share capital
31 December 2011
31 December 2010
Share
capital
£000
Number
of shares
Share
capital
£000
Number
of shares
20,563
411,256,520
20,297
405,943,169
The amounts presented in the equity structure of the Group above relate to Hiscox Ltd, the legal parent Company.
Changes in Group share capital and contributed surplus
At 1 January 2010
Employee share option scheme – proceeds from shares issued
Dividends to owners of the Company
At 31 December 2010
Employee share option scheme – proceeds from shares issued
Scrip dividends
Dividends to owners of the Company
At 31 December 2011
Note
32
Ordinary
share
capital
£000
20,158
139
–
Share
premium
£000
Contributed
surplus
£000
11,831
3,969
–
303,465
–
(58,460)
20,297
15,800
245,005
91
175
–
3,124
13,162
–
–
–
–
20,563
32,086
245,005
In accordance with the reverse acquisition provisions of IFRS 3 Business Combinations, the amount of issued share capital included in the
consolidated balance sheet reflects that of Hiscox plc, the Group’s former legal parent company, up until the date of the reverse acquisition
on 12 December 2006 together with that issued subsequently by Hiscox Ltd, the new legal parent, up until each respective balance sheet date.
Contributed surplus is a distributable reserve and arose on the reverse acquisition of Hiscox plc on 12 December 2006.
Equity structure of Hiscox Ltd
At 1 January
Employee share option scheme – ordinary shares issued
Scrip dividends
At 31 December
All issued shares are fully paid.
Number of
5p ordinary
shares in issue
(thousands
2011
)
Number of
5p ordinary
shares in issue
(thousands
2010
)
405,943
403,149
1,811
3,503
2,794
–
411,257
405,943
Share options and performance share plan awards
Performance share plan awards are granted to Directors and to senior employees. Up until 2005, share options were also granted.
The exercise price of the granted options is equal to the closing mid-market price of the shares on the day before the date of the grant.
No exercise price is attached to performance plan awards, although their attainment is conditional on the employee completing three years’
service (the vesting period) and the Group achieving targeted levels of returns on equity. Share options are also conditional on the employee
completing three years’ service (the vesting period) or less under exceptional circumstances (death, disability, retirement or redundancy).
The options are exercisable starting three years from the grant date only if the Group achieves its targets of return on equity; the options have
a contractual option term of ten years. The Group has no legal or constructive obligation to re-purchase or settle the options in cash.
In accordance with IFRS 2 the Group recognises an expense for the fair value of share option and performance share plan award
instruments issued to employees, over their vesting period through the income statement. The expense recognised in the consolidated
income statement during the year was £8,677,000 (2010: £8,047,000). This comprises charges of £8,361,000 (2010: £7,619,000) in respect
of performance share plan awards and £316,000 (2010: £428,000) in respect of share option awards. The Group has applied the principles
outlined in the Black-Scholes option pricing model when determining the fair value of each share option instrument and discounted cash
flow methodology in respect of performance share plan awards.
90
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
24 Share capital continued
Share options and performance share plan awards continued
The range of principal Group assumptions applied in determining the fair value of share based payment instruments granted during the year
under review are:
Assumptions affecting inputs to fair value models
Annual risk free rates of return and discount rates (%)
Long-term dividend yield (%)
Expected life of options (years)
Implied volatility of share price (%)
Weighted average share price (p)
2011
2010
0.9-1.9
4.24-4.59
3.25
29
397.0
1.8-2.0
3.9-4.14
3.25
29-30
340.4
The weighted average fair value of each share option granted during the year was 89.9p (2010: 81.5p). The weighted average fair value
of each performance share plan award granted during the year was 397.0p (2010: 340.4p).
Movements in the number of share options during the year and details of the balances outstanding at 31 December 2011 are shown
in the Directors’ remuneration report.
The implied volatility assumption is based on historical data for periods of between five and ten years immediately preceding grant date.
For options issued after 1 January 2006 the assumptions regarding long-term dividend yield have been aligned to the progressive dividend
policy announced during the 2005 Rights Issue.
25 Retained earnings and other reserves
Currency translation reserve at 31 December
Retained earnings at 31 December
2011
£000
2010
£000
60,517
49,457
897,728
935,555
The currency translation reserve comprises qualifying net investment gains and losses and foreign exchange differences arising from
the translation of the financial statements of, and investments in, foreign operations.
There were no transactions by the Company in its own shares during the year.
At 31 December 2011 Hiscox Ltd held 22,836,487 shares in treasury (2010: 25,142,874). Additional details are shown in note 37 to these
financial statements in respect of additional Hiscox Ltd shares held by subsidiaries.
26 Insurance liabilities and reinsurance assets
Gross
Claims reported and claim adjustment expenses
Claims incurred but not reported
Unearned premiums
Total insurance liabilities, gross
Recoverable from reinsurers
Claims reported and claim adjustment expenses
Claims incurred but not reported
Unearned premiums
Total reinsurers’ share of insurance liabilities
Net
Claims reported and claim adjustment expenses
Claims incurred but not reported
Unearned premiums
Total insurance liabilities, net
Note
2011
£000
2010
£000
938,498
964,073
597,689
802,254
904,150
573,463
2,500,260 2,279,867
187,973
224,855
79,687
131,697
242,496
88,572
18
492,515
462,765
750,525
739,218
518,002
670,557
661,654
484,891
2,007,745
1,817,102
The amounts expected to be recovered and settled before and after one year, based on historical experience, are estimated as follows:
Within one year
After one year
1,160,744 1,008,399
808,703
847,001
2,007,745
1,817,102
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
91
Estimates of ultimate claims are
adjusted each reporting period to reflect
emerging claims experience. Changes
in expected claims may result in a reduction
or an increase in the ultimate claim costs
and a release or an increase in reserves
in the period in which the change occurs.
(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 nine 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, on the following
pages, 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.
Notes to the consolidated
financial statements
continued
26 Insurance liabilities and reinsurance
assets continued
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 2011 and
2010 are not material.
26.1 Insurance contracts assumptions
(a) Process used to decide
on assumptions
The risks associated with insurance
contracts are complex and subject
to a number of variables that complicate
quantitative sensitivity analysis. Uncertainty
over the timing and amount of future
claim payments necessitate the holding
of significant reserves for liabilities that
may only emerge a number of accounting
periods later.
For all risks, the Group uses several
statistical methods to incorporate the
various assumptions made into the ultimate
cost of claims. There is close communication
between the actuaries involved in the
estimation process and the Group’s
underwriters to ensure that all parties
are aware of material factors relating to
outstanding claims reserves. 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 re-occur in the future. An allowance
is also made for the current rating and
inflationary environment.
Outstanding claims reserves are actuarially
estimated primarily using the Chain Ladder
and Bornhuetter-Ferguson methods.
The Chain Ladder method 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.
Where losses in the earliest underwriting
years or years of account have yet to fully
develop an adjustment is made to the
pattern to allow for further expected
development. The selected development
factors are then applied to cumulative claims
data for each accident year to produce
an estimated ultimate claims cost for each
accident year.
The Chain Ladder method is adopted for
mature classes of business where sufficient
claims development data is available.
This methodology produces optimal
estimates when a large claims development
history is available and the claims
development patterns throughout the
earliest years are stable. 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).
Catastrophe events which are expected
to impact multiple business units in the
Group are analysed by the central analysis
team. They combine information from
underwriters, the claims team and past
experience of similar events to produce
gross and net estimates of the ultimate loss
cost to each part of the Group. These figures
are then incorporated by the actuarial team
into the quarterly reserving exercise. This
process ensures that a consistent approach
is taken across the Group.
In exceptional cases the required provision
is calculated with reference to the actual
exposures on individual policies. 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. This often means
that different techniques or combinations of
techniques have been selected for individual
accident years or groups of accident years
within the same class of business.
92
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
26 Insurance liabilities and reinsurance assets continued
26.1 Insurance contracts assumptions continued
(b) Claims development tables continued
Insurance claims and claim adjustment expenses reserves – gross at 100%
2002
£000
2003
£000
2004
£000
2005
£000
2006
£000
2007
£000
2008
£000
2009
£000
2010
£000
2011
£000
Total
£000
1,138,242
413,184
437,595
445,766 450,905
429,751 464,336
425,705 459,437
399,825 448,549 689,366 1,286,662
443,914 693,070 1,241,435
395,574
–
674,175
397,049 433,538
–
–
429,429
383,247
–
–
–
384,727
814,411
607,845
1,181,038
703,352
466,817
580,772 730,346
479,567 780,406 1,307,247
693,912 945,948
559,679
744,857 1,309,989
704,672 1,291,432 528,667 706,535 906,391
–
707,894 1,285,490 538,593 700,267
–
–
–
–
–
–
–
–
–
–
1,040,776
865,308
968,161 723,236 893,734
–
665,513
–
–
–
–
–
–
–
–
–
–
–
–
–
–
528,182
–
–
–
–
1,342,851
8,573,824
– 6,901,064
– 5,816,569
– 5,031,784
– 4,117,386
– 3,352,584
– 2,773,993
– 1,504,762
812,676
–
384,727
–
384,727
429,429
674,175
1,241,435
528,182
700,267
906,391
665,513
893,734
1,342,851
7,766,704
(337,051
)
(419,839
)
(617,994
)
)
(1,167,039
(455,780
)
)
(570,177
(714,342
)
(473,533
)
)
(435,502
(331,251
)
(5,522,508
)
47,676
9,590
56,181
74,396
72,402
130,090
192,049
191,980
458,232
1,011,600
2,244,196
Total gross liability to external parties at 100% level
*The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2011.
Reconciliation of 100% disclosures above to Group’s share – gross
2002
£000
2003
£000
2004
£000
2005
£000
2006
£000
2007
£000
2008
£000
2009
£000
2010
£000
2011
£000
Total
£000
384,727
429,429
674,175
1,241,435
528,182
700,267
906,391
665,513
893,734
1,342,851
7,766,704
(78,366
)
(96,389
)
)
(158,879
(310,875
)
(110,438
)
(137,899
)
)
(173,449
(111,234
)
)
(138,144
(198,129
)
(1,513,802)
306,361
333,040
515,296
930,560
417,744
562,368
732,942
554,279
755,590
1,144,722
6,252,902
(337,051
)
(419,839
)
(617,994
)
)
(1,167,039
(455,780
)
)
(570,177
(714,342
)
(473,533
)
)
(435,502
(331,251
)
(5,522,508
)
65,747
94,246
144,651
295,205
93,607
107,948
129,641
72,899
57,269
42,423
1,103,636
(271,304
)
)
(325,593
(473,343
)
)
(871,834
)
(362,173
(462,229
)
(584,701
)
(400,634
)
(378,233
)
(288,828
)
(4,418,872
)
35,057
7,447
41,953
58,726
55,571
100,139
148,241
153,645
377,357
855,894
1,834,030
89,859
2,334,055
68,541
1,902,571
Total Group liability to external parties included in balance sheet – gross**
**This represents the claims element of the Group’s insurance liabilities.
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
five years later
six years later
seven years later
eight years later
nine years later
Current estimate of
cumulative claims
Cumulative
payments to date
Liability recognised
at 100% level
Liability recognised
in respect of
prior accident years
at 100% level
Accident year
Current estimate of
cumulative claims
Less: attributable
to external Names
Group’s share of
current ultimate
claims estimate
Cumulative
payments to date
Less: attributable
to external Names
Group’s share
of cumulative
payments
Liability for 2002 to
2011 accident years
recognised on Group’s
balance sheet
Liability for accident
years before 2002
recognised on Group’s
balance sheet
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
93
Notes to the consolidated
financial statements
continued
26 Insurance liabilities and reinsurance assets continued
26.1 Insurance contracts assumptions continued
(b) Claims development tables continued
Insurance claims and claim adjustment expenses reserves – net at 100%
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
five years later
six years later
seven years later
eight years later
nine years later
Current estimate of
cumulative claims
Cumulative
payments to date
Liability recognised
at 100% level
Liability recognised
in respect of prior
accident years
at 100% level
Accident year
Current estimate of
cumulative claims
Less: attributable
to external Names
Group’s share of
current ultimate
claims estimate
Cumulative
payments to date
Less: attributable
to external Names
Group’s share
of cumulative
payments
Liability for 2002 to
2011 accident years
recognised on
Group’s balance sheet
Liability for accident
years before 2002
recognised on
Group’s balance sheet
2002
£000
2003
£000
2004
£000
2005
£000
2006
£000
2007
£000
2008
£000
2009
£000
2010
£000
2011
£000
Total
£000
588,123
368,640
694,883
278,813
304,138 389,344 642,944 798,902
617,364 788,855
314,738 354,561
763,321
579,523
364,975
290,692
752,750 488,023
284,205 355,928 580,450
475,691
753,311
268,666 350,593 564,886
–
731,725
565,374
262,542 346,939
–
–
549,172
268,143 335,507
–
–
–
327,249
256,535
–
–
–
–
266,886
704,951
540,273
641,184
531,608
514,331
621,008
470,863 588,955
585,147
–
–
–
–
–
788,664
704,512
701,306
661,089
–
–
–
–
–
–
699,134
587,970
561,371
–
–
–
–
–
–
–
823,698
724,754
–
–
–
–
–
–
–
–
1,040,657
6,527,836
– 5,325,356
– 4,473,534
– 3,719,418
– 3,046,503
– 2,413,147
– 1,906,580
– 1,152,822
583,784
–
266,886
–
266,886
327,249
549,172
731,725
475,691
585,147
661,089
561,371
724,754
1,040,657
5,923,741
(206,430
)
(320,079
)
(486,977
)
)
(665,968
)
(405,032
(467,043
)
)
(537,004
)
(411,187
)
(378,092
(277,611
)
(4,155,423
)
60,456
7,170
62,195
65,757
70,659
118,104
124,085
150,184
346,662
763,046
1,768,318
Total net liability to external parties at 100% level
*The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2011.
Reconciliation of 100% disclosures above to Group’s share – net
2002
£000
2003
£000
2004
£000
2005
£000
2006
£000
2007
£000
2008
£000
2009
£000
2010
£000
2011
£000
Total
£000
266,886
327,249
549,172
731,725
475,691
585,147
661,089
561,371
724,754
1,040,657
5,923,741
(52,080
)
(71,829
)
)
(129,973
)
(175,292
)
(99,258
)
(119,202
(123,113
)
(90,647
)
)
(103,540
(137,891
)
(1,102,825
)
214,806
255,420
419,199
556,433
376,433
465,945
537,976
470,724
621,214
902,766
4,820,916
(206,430
)
(320,079
)
(486,977
)
)
(665,968
)
(405,032
(467,043
)
)
(537,004
)
(411,187
)
(378,092
(277,611
)
)
(4,155,423
35,729
70,171
113,766
160,728
82,118
90,238
93,316
61,793
51,086
34,255
793,200
(170,701
)
(249,908
)
(373,211
)
(505,240
)
)
(322,914
(376,805
)
(443,688
)
(349,394
)
)
(327,006
(243,356
)
(3,362,223
)
44,105
5,512
45,988
51,193
53,519
89,140
94,288
121,330
294,208
659,410
1,458,693
41,780
1,810,098
31,050
1,489,743
Total Group liability to external parties included in the balance sheet – net**
**This represents the claims element of the Group’s insurance liabilities and reinsurance assets.
94
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
26 Insurance liabilities and reinsurance assets continued
26.2 Movements in insurance claims liabilities and reinsurance claims assets
Year ended 31 December
Total at beginning of year
Claims and loss adjustment expenses for year
Cash paid for claims settled in the year
Exchange differences and other movements
Gross
£000
Reinsurance
£000
2011
Net
£000
Gross
£000
Reinsurance
£000
2010
Net
£000
(1,706,404)
(830,368)
650,510
(16,309)
374,193 (1,332,211) (1,549,323)
(733,074)
(697,898)
132,470
598,179
555,077
(95,433)
(22,186)
(14,711)
1,598
328,890 (1,220,433)
(570,997)
162,077
478,091
(120,088)
(18,872)
3,314
Total at end of year
(1,902,571)
412,828 (1,489,743) (1,706,404)
374,193 (1,332,211)
Claims reported and loss adjustment expenses
Claims incurred but not reported
(938,498)
(964,073)
187,973
224,855
(750,525)
(739,218)
(802,254)
(904,150)
131,697
242,496
(670,557)
(661,654)
Total at end of year
(1,902,571)
412,828 (1,489,743) (1,706,404)
374,193 (1,332,211)
The insurance claims expense reported in the consolidated income statement is comprised as follows:
Year ended 31 December
Current year claims and loss adjustment expenses
Over/(under) provision in respect of prior year
claims and loss adjustment expenses
Gross
£000
Reinsurance
£000
2011
Net
£000
Gross
£000
Reinsurance
£000
2010
Net
£000
(1,126,667)
229,314
(897,353)
(864,128)
160,277
(703,851)
296,299
(96,844)
199,455
131,054
1,800
132,854
Total claims and claim adjustment expenses
(830,368)
132,470
(697,898)
(733,074)
162,077
(570,997)
27 Trade and other payables
Creditors arising out of direct insurance operations
Creditors arising out of reinsurance operations
Obligations under finance leases
Share of Syndicates other creditors’ balances
Social security and other taxes payable
Other creditors
Reinsurers’ share of deferred acquisition costs
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
Note
2011
£000
2010
£000
36
17
58,346
152,866
52,368
181,159
211,212
233,527
–
4,856
10,640
14,939
45
4,887
14,563
13,995
30,435
33,490
15,641
56,847
17,048
64,933
314,135
348,998
300,976
13,159
338,541
10,457
314,135
348,998
The amounts expected to be settled after one year of the balance sheet date primarily relate to deferred bonuses and the Group’s provision
of sabbatical leave employee benefits.
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
95
Notes to the consolidated
financial statements
continued
28 Tax expense
The Company and its subsidiaries are subject to enacted tax laws in the jurisdictions in which they are incorporated and domiciled. The
principal subsidiaries of the Company and the country in which they are incorporated are listed in note 37. The amounts charged in the
consolidated income statement comprise the following:
Current tax
Expense for the year
Adjustments in respect of prior years
Total current tax (credit)/expense
Deferred tax
Expense/(credit) for the year
Adjustments in respect of prior years
Effect of rate change
Total deferred tax expense/(credit)
Total tax (credited)/charged to the income statement
2011
£000
2010
£000
380
(95,809)
58,228
(1,062)
(95,429)
57,166
17,090
77,992
(3,654)
(22,532)
(691)
(1,377)
91,428
(24,600)
(4,001)
32,566
The standard rate of corporation tax in Bermuda is 0% whereas the effective rate of tax for the Group is -22.5% (2010: 15.4%). A reconciliation
of the difference is provided below:
Profit before tax
Tax calculated at the standard corporation tax rate applicable in Bermuda: 0% (2010: 0%)
Effects of Group entities subject to overseas tax at different rates
Impact of overseas tax rates on:
Effect of rate change
Expenses not deductible for tax purposes
Tax losses for which no deferred tax asset is recognised
Other
Sch 23 FA 2003 deduction and share based payments
Non-taxable income
Overseas tax
Prior year tax adjustments
Tax (credit)/charge for the period
2011
£000
2010
£000
17,271
–
21,620
211,366
–
28,866
(3,654)
11,665
(2,651)
(1,435)
(1,867)
(10,242)
380
(17,817)
(1,377)
273
9,639
396
(1,803)
(2,839)
1,164
(1,753)
(4,001)
32,566
During 2011 the group’s Lloyd’s corporate member, Hiscox Dedicated Corporate Member Ltd, changed its tax filing position on the timing of the
deduction for tax purposes of member-level reinsurance premiums. Consequently, a prior year current tax adjustment has arisen and results
in a closing current tax debtor. Equally, deductions for member-level reinsurance premiums which were previously deferred for tax, and formed
part of the deferred tax balance have been taken in earlier years, and no longer form part of the deferred tax balance. The effect of this change
in current tax is a credit to the income statement of £81,287,000. The effect of this change in deferred tax is a charge to the income statement
of £73,296,000. A permanent difference arises as a result of the difference in UK effective tax rate between the earlier and later years.
29 Deferred tax
Deferred tax assets
Trading losses in overseas entities
Net deferred tax liabilities
Deferred tax assets
Deferred tax liabilities
Total net deferred tax liability
2011
£000
2010
£000
25,748
14,077
2011
£000
2010
£000
24,616
(177,063)
14,968
(60,389)
(152,447)
(45,421)
Deferred tax assets and deferred tax liabilities relating to the same tax authority are presented net in the Group’s balance sheet.
96
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
29 Deferred tax continued
(a) Group deferred tax assets analysed by balance sheet headings
At 31 December
Trading losses in overseas entities
Deferred tax assets
At 31 December
Tangible assets
Trading losses in UK entities
Trade and other payables
Intangible assets – Syndicate capacity
Reinsurance premiums
Other items
Total deferred tax assets
(b) Group deferred tax liabilities analysed by balance sheet headings
At 31 December
Investment in associated enterprises
Financial assets
Insurance contracts – equalisation provision*
Reinsurance premiums
Retirement benefit obligations
Open years of account
Total deferred tax liabilities
Income
statement
(charge)/credit
£000
2010
£000
Transfer from
equity
£000
14,077
11,671
14,077
11,671
–
–
2010
£000
1,366
–
990
3,881
(5,376)
14,107
Income
statement
(charge)/credit
£000
Transfer from
equity
£000
1,248
12,959
(465)
(537)
5,376
(5,006)
–
–
–
–
–
(3,927)
2011
£000
25,748
25,748
2011
£000
2,614
12,959
525
3,344
–
5,174
14,968
13,575
(3,927)
24,616
2010
£000
(17)
(1,093)
(23,079)
–
–
Income
statement
(charge)/credit
£000
11
75
(3,850)
(128,240)
(610)
(24,189)
(36,200)
(132,614)
15,940
(60,389)
(116,674)
Transfer from
equity
£000
–
–
–
–
–
–
–
–
2011
£000
(6)
(1,018)
(26,929)
(128,240)
(610)
(156,803)
(20,260)
(177,063)
* 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 provision
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 provision is taxed when released. Equalisation provisions are not permitted under IFRS which therefore results in the temporary difference for tax purposes. Following a change in the legislation at the end
of 2008, Lloyd’s Corporate Members are also entitled to a tax deduction for claims equalisation losses although this is not a solvency requirement for Lloyd’s. The Group has provided for the deferred tax liability on its Corporate Members’ claims
equalisation reserve during the year.
UK deferred income tax assets and liabilities are calculated at 25%. The UK Government has indicated its intention to reduce UK tax rates
year-on-year to 23% by the full year commencing April 2014, however at the balance sheet date, no such measures were substantially enacted.
Deferred tax assets of £25,748,000, relating to losses arising in overseas entities, which depend on the availability of future taxable profits in
excess of profits arising from the reversal of other temporary differences are recognised above. Business projections indicate it is probable
that sufficient future taxable income will be available against which to offset these recognised deferred tax assets within five years. £23,555,000
of the tax losses to which these assets relate will expire after 15 years or later; the balance of tax losses carried forward has no time limit.
The amount of deferred tax asset expected to be recovered after more than 12 months is £25,748,000.
The Group has not provided for deferred tax assets totalling £8,714,000 (2010: £18,216,000) including £8,713,000 (2010: £18,088,000)
in relation to losses in overseas companies of £25,408,000 (2010: £51,769,000). In accordance with IAS 12, all deferred tax assets and
liabilities are classified as non-current.
30 Employee retirement benefit obligations
The Company’s subsidiary, Hiscox plc, operates a defined benefit pension scheme based on final pensionable salary. The scheme closed
to future accrual with effect from 31 December 2006 and active members were offered membership of a defined contribution scheme
from 1 January 2007. The funds of the defined benefit scheme are controlled by the trustee and are held separately from those of the Group.
The employer’s expense for the defined contribution scheme is taken to the income statement.
The gross amount recognised in the Group balance sheet in respect of the defined benefit scheme is determined as follows:
Present value of scheme obligations
Fair value of scheme assets
Deficit for funded plans
Unrecognised net actuarial losses
Unrecognised surplus deemed irrecoverable
Net amount recognised as a defined benefit obligation
2011
£000
2010
£000
155,685
(140,517)
146,737
(144,056)
15,168
(27,247)
12,079
2,681
(12,310)
9,629
–
–
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
97
Notes to the consolidated
financial statements
continued
30 Employee retirement benefit obligations continued
The unrecognised net actuarial losses are the net cumulative gains and losses on both the scheme’s obligations and underlying assets.
As the fair value of scheme obligations exceeds the present value of the scheme assets, the scheme reports a deficit. The Group recognises
actuarial gains and losses using the corridor method as defined in the Group’s accounting policy.
On 8 July 2010, the UK Government announced its decision to replace the Retail Prices Index (‘RPI’) with the Consumer Prices Index (‘CPI’)
as an inflation measure used to determine the minimum statutory increases to be applied to the revaluation of deferred pensions and to the
increase of pensions in payment.
The Group sought legal confirmation, and we have confirmed that CPI revaluation in deferment is used for contracted out members from
1 January 2011. Contracted in members retain their link to RPI as well as for all pension in payment increases.
The effect of using the CPI to determine the scheme liabilities at 31 December 2011 does not have a significant effect on scheme liabilities.
The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit actuarial cost method. A formal
full actuarial valuation is performed on a triennial basis, most recently at 31 December 2008, and updated at each intervening balance sheet
date by the actuaries. The triennial actuarial valuation at 31 December 2011 is currently being completed. 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 to the terms of the related pension liability.
The scheme assets are invested as follows:
At 31 December
Equities
Debt and fixed income assets
Cash
2011
£000
2010
£000
91,758
44,825
3,934
64,249
75,918
3,889
140,517
144,056
The majority of the scheme’s debt and fixed income assets are held through the ownership of units in managed credit funds issued
by Standard Life Assurance Limited which invest in a broad spread of high quality corporate bonds with derivatives used in controlled
conditions to extend durations in some cases.
The amounts recognised in the Group’s income statement are as follows:
Current service cost
Interest cost
Expected return on scheme assets
Recognition of past service credit
Amortisation of net actuarial loss
Effect of deemed irrecoverability of surplus
Total included in staff costs
The actual return on scheme assets was a gain of £3,392,000 (2010: £14,516,000).
The movement in liability recognised in the Group’s balance sheet is as follows:
At beginning of year
Total expense charged in the income statement of the Group
Past service costs recognised in other creditors
Contributions paid
At end of year
Notes
2011
£000
2010
£000
533
7,705
(8,988)
(3,037)
–
5,487
346
7,952
(8,441)
–
323
1,520
9
1,700
1,700
Notes
9
2011
£000
–
1,700
–
(1,700)
2010
£000
–
1,700
–
(1,700)
–
–
98
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
30 Employee retirement benefit obligations continued
A reconciliation of the fair value of scheme assets is as follows:
Opening fair value of scheme assets
Expected return on scheme assets
Difference between expected and actual return on scheme assets
Contributions by the employer
Settlements with scheme members
Benefits paid
Expenses paid
Closing fair value of scheme assets
A reconciliation of the present value of scheme obligations of the scheme is as follows:
Opening present value of scheme obligations
Current service cost
Interest cost
Amendments
Actuarial losses/(gains)
Benefits paid from scheme
Settlements with scheme members
Expenses paid
Closing present value of scheme obligations
2011
£000
2010
£000
144,056
8,988
(5,596)
1,700
–
(8,098)
(533)
118,391
8,441
6,075
13,500
–
(2,351)
–
140,517
144,056
2011
£000
2010
£000
146,737
533
7,705
(3,037)
12,378
(8,098)
–
(533)
140,676
346
7,952
–
114
(2,351)
–
–
155,685
146,737
A summary of the scheme’s recent experience is shown below:
Experience gains/(losses) on scheme obligations
Experience gains/(losses) on scheme assets
2011
£000
–
(5,596)
2010
£000
–
6,075
2009
£000
2008
£000
–
(3,678)
–
(18,107)
2007
£000
2,783
75
2006
£000
2005
£000
(3,310)
6,480
(1,223)
10,764
Additional memorandum information at the end of the current and previous six accounting periods is presented below:
2011
£000
2010
£000
2009
£000
2008
£000
2007
£000
2006
£000
2005
£000
155,685
(140,517)
146,737
(144,056)
140,676
(118,391)
101,615
(115,166)
106,793
(127,576)
137,461
(133,660)
137,533
(101,409)
Present value of scheme obligations
Fair value of scheme assets
Present value of unfunded obligations/
(surplus scheme assets)
Gross liability recognised on balance sheet
–
–
–
–
–
15,168
2,681
22,285
(13,551
)
(20,783
)
3,801
3,801
36,124
16,677
Assumptions regarding future mortality experience are set based on professional advice, published statistics and actual experience.
The average life expectancy in years of a pensioner retiring at age 60 on the balance sheet date is as follows:
Male
Female
The average life expectancy in years of a pensioner retiring at 60, 15 years after the balance sheet date is as follows:
Male
Female
Other principal actuarial assumptions are as follows:
Discount rate
Expected return on scheme assets
Inflation assumption (RPI)
Inflation assumption (CPI)
Pension increases
2011
years
26.6
27.8
2011
years
27.7
29.0
2011
%
4.90
5.80
3.10
2.30
3.10
2010
years
24.5
27.6
2010
years
25.6
28.6
2010
%
5.40
6.40
3.60
–
3.60
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
99
Notes to the consolidated
financial statements
continued
30 Employee retirement benefit obligations continued
The triennial valuation carried out as at 31 December 2008, resulted in a deficit position of £5.1 million and excludes the impact of the
equalisation of scheme obligations. The cost of equalisation of scheme obligations of £11.8 million was recognised in 2009 and paid in full in
2010. The Group agreed to fund the £5.1 million deficit paying instalments over four years. During the year the Group made a third instalment
of £1.7 million to the defined benefit scheme (2010: £1.7 million). 61% of any scheme surplus or deficit calculated is recharged or refunded
to Syndicate 33.
The expected return on scheme assets is based on historical data and management’s expectations of long-term future returns.
While management believes that the actuarial assumptions are appropriate, any significant changes to those could affect the balance
sheet and income statement. Whilst an additional one year of life expectancy for all scheme members might be expected to reduce
the present value of unfunded obligations at 31 December 2011 by approximately £1,396,000 (2010: £80,000), the Group considers
that the most sensitive and judgemental assumptions are the discount rate and inflation.
The Group has estimated the sensitivity of the net obligation recognised in the consolidated balance sheet to isolated changes in these
assumptions at 31 December 2011 as follows:
Present value
of unfunded
obligations
before change
in assumption
£000
Present value
of unfunded
obligations
after change
£000
(Increase)
/decrease
in obligation
recognised on
balance sheet
£000
Effect of a change in discount rate
Use of discount rate of 5.15%
Effect of an increase in inflation
Use of CPI inflation assumption of 3.35%
15,168
7,223
15,168
17,975
–
–
31 Earnings per share
Basic earnings per share are calculated by dividing the profit attributable to equity holders of the Company by the weighted average number
of shares in issue during the year, excluding ordinary shares held by the Group and held in treasury as own shares.
Basic
Profit for the year attributable to the owners of the Company (£000)
Weighted average number of ordinary shares (thousands)
Basic earnings per share (pence per share)
2011
2010
21,272
383,602
5.5p
178,800
379,064
47.2p
Diluted
Diluted earnings per share is calculated adjusting for the assumed conversion of all dilutive potential ordinary shares. The Company
has one category of dilutive potential ordinary shares, share options and awards. 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 for the year attributable to the owners of the Company (£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)
2011
2010
21,272
178,800
383,602
15,610
379,064
14,662
399,212
393,726
5.3p
45.4p
Diluted earnings per share has been calculated after taking account of 15,029,986 (2010: 13,996,961) options and awards under employee
share option and performance plan schemes and 579,518 (2010: 665,060) options under SAYE schemes.
100
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
32 Dividends paid to owners of the Company
Interim dividend for the year ended:
31 December 2011 of 5.1p (net) per share
31 December 2010 of 5.0p (net) per share
Final dividend for the year ended:
31 December 2010 of 11.5p (net) per share
Second interim dividend for the year ended:
31 December 2009 of 10.5p (net) per share
2011
£000
2010
£000
19,738
–
44,111
–
19,018
–
–
39,442
63,849
58,460
Included in the final dividend for 2010 and the interim dividend for 2011, were scrip dividends to the value of £12,308,238 and £1,029,226
respectively.
Subject to shareholder approval at the forthcoming Annual General Meeting on 30 May 2012, a scrip dividend alternative to a cash
dividend is to be offered to the owners of the Company. These financial statements do not reflect this dividend as a distribution or liability
in accordance with IAS 10 Events after the reporting period.
33 Acquisitions
There were no acquisitions in the current year.
In December 2010, the Group increased its 25.2% holding in Blyth Valley Ltd to 100%. Full control of the company was obtained and as
such the Group consolidated the results of Blyth Valley Ltd at 31 December 2011 and 2010. Total cash consideration of £3,662,220 was
paid representing net identifiable assets acquired of £243,000 and customer relationships not previously recognised by Blyth Valley Ltd
of £3,619,000.
In addition during 2010, the Group acquired a 25% holding in InsuranceBee Inc for total consideration of $500,000 (£323,000).
InsuranceBee Inc was, until the Group acquired 100% of Blyth Valley Ltd, the American sister company of Blyth Valley Ltd and is a specialist
errors and omissions insurance broker.
34 Disposals
On 23 March 2011, the Group sold its holding in Plexstar Insurance Services Ltd with a further consideration to be settled in 2012. On cash
settlement, this recognised an initial loss of £33,000. Further consideration is due to be received during 2012, estimated to be £200,000.
During 2010, the Group disposed of its 40% holding in HIM Capital Holdings Limited recognising a gain on disposal of £458,000.
35 Contingencies and guarantees
The Group’s subsidiaries are like most other insurers, continuously involved in legal proceedings, claims and litigation in the normal course
of business.
The Group is subject to insurance solvency regulations in all the territories in which it issues insurance contracts. 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)
Hiscox Ltd and Hiscox Capital Ltd have entered into deeds of covenant in respect of a subsidiary, Hiscox Dedicated Corporate Member
Limited, to meet the subsidiary’s obligations at Lloyd’s. The total guarantee given under these deeds of covenant (subject to limitations)
amounts to £15 million (2010: £15 million) in respect of Hiscox Ltd and $350 million (2010: $350 million) in respect of Hiscox Capital Ltd.
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 circumstance where
it considers there to be a risk that the covenant might need to be called and may be met in full.
(b)
In the prior year, Hiscox plc entered into a new Letter of Credit and revolving credit facility with Lloyds TSB Bank, for a total $750 million
which may be drawn in cash (under a revolving credit facility), Letter of Credit or a combination thereof, providing that the cash portion
does not exceed $450 million. In addition, the terms also provide that upon request the facility may be drawn in a currency other than
US Dollar. At 31 December 2011 $340 million (2010: $165 million) was drawn by way of Letter of Credit to support the Funds at Lloyd’s
requirement and no cash drawings were outstanding (2010: £20 million).
(c)
Hiscox Insurance Company Limited has arranged a Letter of Credit of £50,000 (2010: £50,000) with NatWest Bank plc to support
its consortium activities with Lloyd’s.
(d)
The managed syndicates are subject to the New Central Fund annual contribution, which is an annual fee calculated on gross
premiums written. This fee was 0.5% for 2011 and 2010. 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.
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
101
Notes to the consolidated
financial statements
continued
35 Contingencies and guarantees continued
(e)
As Hiscox Insurance Company (Bermuda) Limited is not an admitted insurer or reinsurer in the US, the terms of certain US insurance
and reinsurance contracts require Hiscox to provide Letters of Credit or other terms of collateral to clients. In 2009, Hiscox entered into
a Letter of Credit Reimbursement and Pledge Agreement with Citibank for the provision of a Letter of Credit facility in favour of US
ceding companies. The agreement was a three-year secured facility that allowed Hiscox to request the issuance of up to US$450 million
in Letters of Credit. Letters of Credit issued under these facilities are collateralised by pledged US Government Securities of Hiscox
Insurance Company (Bermuda) Limited. Letters of Credit under this facility totalling US$67,208,000 were issued with an effective date
of 31 December 2011 (2010: US$89,110,000).
36 Capital and lease commitments
Capital commitments
The Group’s capital expenditure contracted for at the balance sheet date but not yet incurred for property, plant and equipment
was £326,000 (2010: £229,000).
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 for the year totalled £7,256,000
(2010: £7,171,000). Operating lease rental income for the year totalled £420,000 (2010: £635,000).
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
Later than one year and no later than five years
Later than five years
Land and buildings
Office equipment
Land and buildings
Office equipment
Land and buildings
2011
£000
2010
£000
7,359
1
25,239
–
22,106
7,505
28
24,737
1
26,437
54,705
58,708
The total future aggregate minimum lease rentals receivable by the Group as lessor under non-cancellable operating property leases
are as follows:
No later than one year
Later than one year and no later than five years
Later than five years
2011
£000
373
246
–
619
2010
£000
275
344
–
619
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 expense for the year totalled £1,430 (2010: £8,806).
The finance lease obligations to which the Group is committed include the following minimum lease payments:
Current liabilities due for settlement no later than 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.
102
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
2011
£000
–
–
–
–
–
2010
£000
45
–
45
(1)
44
37 Principal subsidiary companies of Hiscox Ltd at 31 December 2011
Company
Nature of business
Country
Hiscox plc*
Hiscox Insurance Company Limited
Hiscox Insurance Company (Guernsey) Limited*
Hiscox Holdings Inc.
ALTOHA, Inc.
Hiscox Insurance Company Inc.
Hiscox Inc.
Hiscox Insurance Company (Bermuda) Limited*
Hiscox Dedicated Corporate Member Limited
Hiscox Holdings Limited**
Hiscox Insurance Holdings Limited
Hiscox Syndicates Limited
Hiscox Underwriting Group Services Limited
Hiscox Capital Ltd*
Hiscox Underwriting Ltd
Hiscox Europe Underwriting Limited
*Held directly.
**Hiscox Holdings Limited held 54,560 shares in Hiscox Ltd at 31 December 2011 (2010: 54,560).
Holding company
General insurance
General insurance
Insurance holding company
Holding company
General insurance
Underwriting agent
General insurance and reinsurance
Lloyd’s corporate Name
Insurance holding company
Insurance holding company
Lloyd’s managing agent
Service company
Reinsurance
Underwriting agent
Insurance intermediary
Great Britain
Great Britain
Guernsey
USA (Delaware)
USA (Delaware)
USA (Illinois)
USA (Delaware)
Bermuda
Great Britain
Great Britain
Great Britain
Great Britain
Great Britain
Bermuda
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.
38 Related-party transactions
Details of the remuneration of the Group’s key personnel are shown in the Directors’ remuneration report on pages 39 to 46. A number
of the Group’s key personnel hold insurance contracts with the Group, all of which are on normal commercial terms and are not material
in nature.
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.
Value of services provided by Hiscox Syndicates Limited to Syndicate 33
Amounts receivable from Syndicate 33 at 31 December excluding profit commission accrued
2011
£000
2010
£000
32,276
44,538
22,426
13,163
(b) Transactions with associates
Certain companies within the Group conduct insurance and other business with associates. These transactions arise in the normal course
of obtaining insurance business through brokerages, and are based on arm’s length arrangements.
Gross premium income achieved through associates
Commission expense charged by associates
Amounts payable to associates at 31 December
Amounts receivable from associates at 31 December
Details of the Group’s associates are given in note 16.
Total
2011
£000
Total
2010
£000
11,593
13,228
2,679
3,285
–
120
–
–
(c) Internal reinsurance arrangements
During the current and prior year, there were a number of reinsurance arrangements entered into in the normal course of trade between
various Group companies.
The related results of these transactions have been eliminated on consolidation.
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2011
103
Five year summary
Results
Gross premiums written
Net premiums written
Net premiums earned
Profit before tax
Profit for the year after tax
Assets employed
Intangible assets
Financial assets carried at fair value
Cash and cash equivalents
Insurance liabilities and reinsurance assets
Other net assets
Net assets
Net asset value per share (p)
Key statistics
Basic earnings per share (p)
Diluted earnings per share (p)
Combined ratio (%)
Return on equity (%)
Dividends per share (p)
Share price – high* (p)
Share price – low* (p)
2011
£000
2010
£000
2009
£000
†
2008
£000
2007
£000
1,449,219 1,432,674 1,435,401 1,147,364 1,198,949
974,910
1,174,011 1,131,627 1,157,023
965,190
1,131,158 1,098,102
1,145,007
237,199
320,618
17,271
191,248
280,497
21,272
898,394
928,095
105,180
70,808
211,366
178,800
50,413
64,108
67,552
40,452
2,368,636 2,459,107 2,413,300 2,081,772 1,747,827
302,742
(1,817,102) (1,702,225) (1,773,622) (1,433,799)
167,082
516,547
(2,007,745)
310,909
223,984
440,622
153,697
259,647
336,017
100,151
48,557
1,255,899 1,266,114 1,121,286
951,026
824,304
323.5
332.7
299.2
258.1
209.5
5.5
5.3
99.5
1.7
47.2
45.4
89.3
16.5
75.2
72.3
86.0
30.1
18.8
18.1
75.3
9.2
48.4
46.8
84.4
28.8
17.00
16.50
15.00
12.75
12.00
424.70
340.50
381.40
317.00
362.00
277.00
361.00
194.75
304.50
246.75
*Closing mid market prices.
† As a result of a change in presentation, 2008 and later years included acquisition costs for the purchase of reinsurance contracts within expenses for the acquisition of insurance contracts. Earlier years include these costs within ‘outward
reinsurance premiums’.
104
Five year summary Hiscox Ltd Report and Accounts 2011
To request a copy of the 2011
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visit www.hiscox.com
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Cover: Thailand floods, 2011
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