Hiscox Ltd
Report and Accounts
2012
Contents
About the Hiscox Group
2 Corporate highlights
3 Why invest in Hiscox?
4 Chairman’s statement
7 Chief Executive’s report
13 Hiscox business structure
14 Actively managed business mix
15
Actively managed key
underwriting exposures
16 Capital
Financial review
18 Group financial performance
20 Group investments
Governance and remuneration
23 Risk management
28 Corporate responsibility
30
Insurance carriers
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 2012
28% Reinsurance
5%
Large property
2%
Global errors and omissions
10% Specialty – terrorism, specie,
political risks, aerospace
8%
Marine and energy
100% = £1,792m
Local errors and
omissions and commercial
18%
Tech and media
errors and omissions
3%
Art and private client
14%
Specialty – kidnap and
ransom, contingency,
personal accident
7%
Small property
5%
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 return (%)
Reserve releases (£m)
Capital return
2012
2011
1,565.8
1,449.2
1,198.6
1,145.0
217.1
207.8
53.1
18.0
17.3
21.3
5.5
17.0
349.7
323.5
85.5
84.6
16.9
3.1
152
99.5
99.3
1.7
0.9
199
Capital return of £200 million (50.0p per share including final dividend) by way of B share scheme
Final dividend equivalent of 12.0p taking total dividend for the year to 18.0p, an increase
of 5.9% (2011: 17.0p)
Additional special distribution of 38.0p per share (approximately £150 million) combined
with share consolidation
Operational highlights
Robert Childs replaces Robert Hiscox as Chairman on 26 February 2013;
Richard Watson now Chief Underwriting Officer
Hiscox London Market profit of £121.9 million (2011: £57.6 million) with contributions across all lines
Hiscox Bermuda delivered a pleasing profit despite Superstorm Sandy
UK retail business delivers another good profit of £45.2 million (2011: £49.0 million)
Hiscox USA revenues grew by 32.6% to $230.5 million. US Direct business increased by over
200% to nearly $10.0 million gross premiums written with strong continued growth prospects
Net asset value p per share
Dividend p per share
Profit before tax (m)
323.5
349.7
17.0
18.0
£217.1
2012
£17.3
2011
2012
2011
2012
2011
2
Corporate highlights Hiscox Ltd Report and Accounts 2012
Why invest
in Hiscox?
8.0%
Increase in gross premiums
written
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 8.9% 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 2008 and 2012 include:
increased gross written premiums
by 36.5% to over £1.5 billion;
healthy combined ratio averaging 87.3%;
delivered average ROE of 14.9%;
maintained a progressive dividend policy
with compound growth of 9.0%;
returned additional £150 million of capital.
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:*
97% 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.
Hiscox was awarded ‘Best small business
insurer’ as voted for by Start your Business
magazine. As well as the Customer Care award
at The British Insurance Awards 2012, for putting
our customers at the heart of our business and
moving against the tide by bringing our direct
household claims back in-house.
Hiscox won Company of the Year at the
2012 London Market Awards, recognising
the strength of the business over the previous
18 months. Robert Hiscox was presented with
a lifetime achievement award at both the 2012
London Market Awards and the 2012 Insurance
Insider awards.
* 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, 1 January 2012 –
31 December 2012.
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.
managers, their teams and their role. In 2012
our survey shows Hiscox enjoys high employee
engagement as we average in the top 85th
percentile when compared with 127 companies
based around the world. Particularly pleasing
was our ‘intent to stay’ score which was in the
in the 95th percentile.
In September, Hiscox conducted its fifth global
employee engagement survey. Open to all
permanent members of staff, it looks at how
committed employees feel to Hiscox, their
Hiscox Spain gained recognition for Best
Workplace 2012 as awarded by Great Place
to Work.
Why invest in Hiscox? Hiscox Ltd Report and Accounts 2012
3
Chairman’s
statement
It is a nostalgic moment to be writing my
last Chairman’s report, and pleasing to
be able to announce a solid profit. The year
had its catastrophic moments, but as
we grow bigger and more balanced, we can
absorb Mother Nature’s punches and the
vicissitudes of accidents and criminal acts
with greater ease.
profit to shareholders which will have a
favourable impact on both the Group premium
to capital gearing ratio and return on capital,
whilst still providing sufficient headroom above
existing internal and external capital needs.
This proposed return of capital will be made
by way of a B share scheme and will be
combined with a share consolidation.
Robert Hiscox
Chairman
In addition, a sum of 12.0p per share will be
paid instead of a final dividend for the year ended
31 December 2012 as part of the B share
scheme. This amount, together with the interim
dividend of 6.0p per share, represents a total
dividend for 2012 equal to 18.0p per share
(2011: 17.0p), an increase of 5.9%, in line with our
policy of progressive dividend growth. As a result
of this amount being paid as part of the B share
scheme, a scrip dividend alternative will not
be offered to shareholders.
Full details of the proposed return of capital
and final dividend equivalent will be set out in
a circular expected to be despatched to Hiscox
shareholders on or around 26 February 2013.
The business
As ever, Bronek will comment in detail in
his following report on the various business
activities. I would like to comment on the
current state of the business that I have
helped develop over the last 48 years and
its future opportunities.
The basic underwriting strategy
When I stopped underwriting for our Lloyd’s
Syndicate in 1988, the ‘retail’ account of
relatively simple insurance business was 50%
of the portfolio, the balance being internationally
traded reinsurance and large insurance
business. That balance remains roughly the
same to this day, albeit over a larger and more
diverse Group.
We have created insurance companies in the UK,
Guernsey and the US to underwrite the simpler
business, and one in Bermuda to augment our
strong reinsurance presence. We have the huge
advantage of all our underwriters being able
to use one of our local companies if suitable
or Lloyd’s with its great brand, financial strength
and worldwide licences.
Catastrophe and internationally
traded business
The core profit earner remains our founding
London Market business. I believe that London
will retain its prominence in the world of
internationally traded business, and that Lloyd’s
will be the strongest magnet in that market.
The catastrophe and major loss business
currently looks very volatile with international
political unrest and more disturbed weather
patterns. This is an opportunity for us as it keeps
demand up and the weaker competitors away.
Bermuda is a great addition to our involvement
in that business and they and London work
Since I announced last year that I would
be stepping down as Chairman, I have been
asked to look back over my years in the
insurance world and have enjoyed the
memories of growing the business from days
of buccaneering in a lawless market place,
through the Lloyd’s crisis and recently
through stronger and stricter strait-jackets
of rules and regulations. But I get greater
pleasure from looking forward at the future
opportunities for this business as it moves
into its next era. I would not be stepping
down if I were not absolutely sure that the
business is in great shape and the next
generation are more than qualified to take
it to the next level.
Results
The result for the year ending 31 December
2012 was a profit before tax of £217.1 million
(2011: £17.3 million) on a gross written premium
income of £1,565.8 million (2011: £1,449.2
million). The combined ratio was 85.5%
(2011: 99.5%). Earnings per share were 53.1p
(2011: 5.5p) and the net assets per share rose
to 349.7p (2011: 323.5p). The return on equity
was 16.9% (2011: 1.7%).
Dividend, balance sheet and capital
management
The Board has reviewed the capital requirements
of the Group for the coming year and has
proposed that a special distribution of 38.0p per
share (amounting to approximately £150 million),
should be made. This will reduce capital levels
close to those of the 2012 opening balance
sheet, effectively distributing all of this year’s
4
Chairman’s statement Hiscox Ltd Report and Accounts 2012
We have made
a very good profit
despite the second
costliest storm
on record and
a challenging
investment market
in parallel to widen the distribution and to grow
diversified accounts.
We will continue to study the alternative risk
transfer methods that are being developed
and use them or write them, depending
on the price levels.
The London Market division also writes
a successful balancing book of non-catastrophe
business in London and through other
offices worldwide.
Retail insurance business
The accounts that we call ‘retail’ business
are very close to my heart as when I underwrote
at the box, I built up those accounts leaving
the larger risks to my partner Nicholas Thomson.
I always thought that the retail accounts were
worth building up for their stability. In 1988
we set about widening our distribution to non-
Lloyd’s brokers and into Europe, and later in
1996 we bought an insurance company to
take the retail account. We paid £28 million
for the company (including a £6 million premium
over assets) which seemed a high price,
and I remember being warned by our investment
banker that we were betting the bank. It is
highly satisfactory to see the UK and European
businesses make a profit of nearly £50 million
this year. A pretty good investment.
The growing retail accounts are very important
to us as they give stability to our profitability and
add real value as steady profits are rated at a
greater multiple. We have invested heavily into
them both in terms of money and effort as we
believe them to be core to our building a
balanced and steadily more valuable business.
Overseas expansion
We first expanded the retail account into Europe,
starting in 1993, and it has taken time to reach
critical size. It is easy to see Europe as one
geographical area when it is immensely different
in the business practices in each country despite
38 years of efforts to create a single market.
We are winning there and the next few years
should see a steady increase in profitability.
Next we set up our Guernsey operation which
has been a huge success and will remain a hub
for some of our accounts.
Bermuda followed and that too has been very
successful. Robert Childs, who is due to take
over from me as Chairman, set up the Bermuda
company, and proceeded shortly afterwards
to open our US offices. We have made a big
commitment to the US and I am very excited
at the possibilities.
We are well aware of the graveyard of businesses
which have expanded overseas, so having
expanded in the sophisticated (but battered)
economies of Europe and the US, we will
consider any expansion east or to other
emerging economies with great caution. It will
happen when the right opportunity arises.
Marketing
I have always firmly believed that if you are good
at what you do you should make every effort
to spread that good news to potential clients.
I think our marketing has done just that and
I must congratulate Steve Langan who heads
our UK retail side and masterminds our
worldwide marketing. It has made us stand out
from the crowd, has given us standards to live
up to, has pulled in a great amount of business
and has been a very good investment.
IT
I bore my colleagues by banging on that
we should be an IT company with insurance
attached, not an insurance company which
uses IT. We are good at underwriting which
we have done overall successfully for 112 years,
but the next era will be dominated by IT, from
an increasing competitive advantage from
management information, especially in
calculating underwriting rates, to distribution
of policies. The company with the best IT and
the ability to use it well will win.
Investments
Investment income has contributed on average
50% of our profits in the past, but today’s
low interest rates make that impossible in the
near future without phenomenal risk taking.
The low returns from the bulk of our portfolio of
Government bonds give little protection against
the potential volatility from any risk assets we
own. David Astor, our Chief Investment Officer,
works tirelessly to eke extra yield without undue
risk and has nearly hit that 50% this year despite
difficult conditions.
Insurance politics
The year has seen us conquer the burden of
Solvency ll and I think achieve greater harmony
with our regulator, freeing us up to get on with
making money. The financial burden of the
implementation of Solvency ll on us and the
industry has been considerable. After 48 years
of assessing risks, which is what underwriting
is, it was surreal to have a one size fits all model
for assessing the risks in the business inflicted
on us in minute detail by actuarially driven
regulators, combined with corporate governance
diktats imposing huge expectations on non-
executive directors combined with an extra layer
of risk assessment staffing.
The FSA is about to be split in two into prudential
and conduct supervision under the Bank of
England with the duty to ensure we are able to
pay claims when they fall due. I could wish that
we had one regulator to form a relationship with
and not two as there is always a fear of
duplication or of something falling between the
two stools, but we are where we are. We need
effective regulation as the whole industry suffers
when an insurer misbehaves or becomes
insolvent. The FSA has taken virtually all self-
regulation away from our industry which means
that by definition we are invigilated and regulated
by people with little or no trading experience
in our business. We need good regulation,
Chairman’s statement Hiscox Ltd Report and Accounts 2012
5
Chairman’s
statement continued
The future looks
as exciting
as the past has
been for me
and to help the regulator I wish that all entities
involved in general insurance, from the ABI,
the International Underwriters Association,
the Chartered Insurance Association and
Lloyd’s, would form a General Insurance Body
to be a strong lobby and, to an extent, a self-
regulating body. We in the industry know when
a competitor is going to go bust as we trade
against them and see the folly; we ought to have
a system of warning the regulator. And we
desperately need a strong lobby to fight for
us in the corridors of power. For instance,
when a very senior politician starts attacking
the insurance industry for its performance over
flood damage, someone needs to hit back very
hard with the truth.
The next era
I set out to run an honest business, to choose
the best people to help me run the business, and
to pick honest and careful clients who we would
treat with great integrity and efficiency. The
ability to pick the right people is to me the most
important talent in all of life. My first major
delegation was to Nicholas Thomson who was
a brilliant underwriter and we owe him a huge
debt of gratitude for the strong underwriting
discipline he instilled. The next major delegation
was to Bronek Masojada who joined in 1993 as
Managing Director to help run the company and
took the reins as CEO in 2000. Like an Oscar
winner I would like to mention a whole host of
others who have been indispensable, especially
Alec Foster who handled our Lloyd’s members
in the early days and invested all our money
so wisely, but space does not permit.
We have spent the last era building businesses
both inside and outside Lloyd’s and I believe we
have developed some very strong future profit
generators to add to our existing international
and retail businesses. I hand over to Robert
Childs (who has done incredibly valuable work
at Hiscox for 26 years) and the top team with a
happy heart. I have had fantastic fun building the
business, and it will be just as enjoyable watching
the success in the next era.
Robert Hiscox
25 February 2013
6
Chairman’s statement Hiscox Ltd Report and Accounts 2012
Chief Executive’s
report
Fires, storms and floods are the everyday
experience of insurance companies.
2011 was exceptional in its severity so in
comparison 2012 felt like a more normal loss
experience, despite it being the third most
expensive year on record for major
catastrophes. We dealt with record flood
activity in the UK, Superstorm Sandy in the
US, fine art thefts in Europe, fires in substantial
Bronek Masojada
Chief Executive
properties across the world and the sinking
of Costa Concordia. A profit of £217.1 million
(2011: £17.3 million) and return on equity of
16.9% (2011: 1.7%) is therefore a good result
and was driven by a combination of good
underwriting performance and an excellent
(for current market conditions) investment
return. Our aim is to make good profits in
years such as 2012, small profits in poor years
(as we saw in 2011) and exceptional profits
in very low loss frequency years.
Our strategy remains to build balance and
diversification within the business. We saw good
growth in the London Market, Bermuda and
particularly the United States. Profits flowed from
our London Market, UK, Bermuda and Guernsey
businesses, offsetting the ongoing investment
in the United States.
Hiscox London Market
Hiscox London Market business remains a
powerhouse. Exceptional underwriting and
a well-diversified portfolio have delivered a profit
of £121.9 million (2011: £57.6 million) with every
division contributing. Gross premium income
grew by 9.3% to £640.0 million (2011: £585.4
million). The business achieved a combined ratio
of 75.5% (2011: 89.1%) despite Superstorm Sandy
and some large individual claims such as Costa
Concordia. I review each division in turn below.
Reinsurance: The many catastrophes
of 2011 provided significant opportunities
in 2012 as rates doubled in some loss
affected areas. We increased market share
in Japan and maintained a good position
in other territories. The team delivered
a very strong result despite the impact
of Superstorm Sandy which we reserved
for the Group as a whole at a net £90 million.
We continue to underwrite catastrophe
business in London and Bermuda on behalf
of third-parties. It is a profitable use of our
expertise and gives our partners valuable
diversification. For several years we have
been underwriting a book on behalf of Aviva
and this quota share arrangement came
to an end in 2012. Aviva has been a good
partner, and whilst we are sorry to see the
end of the relationship, we have more than
replaced their support with capital from
other sources – a testament to our team’s
reputation and track record.
Market conditions remained attractive
at the important 1 January renewals,
with rates flat to positive in the key North
American territories and softening in
international markets. Overall reinsurance
rates are still healthy.
Property: Our property division delivered
a good profit. It grew strongly in US small
commercial, personal and onshore energy
lines and was only marginally affected
by Superstorm Sandy. The fire, theft and
collision insurance book performed less well.
This business tends to be less catastrophe
exposed and so should be a source of stable
profits within the division. We will be working
hard to achieve this in 2013.
Global response: The global response team
serves clients around the world, covering
personnel and property for kidnap and
ransom, terrorism, war and political violence
risks. 2012 proved to be calmer than
2011 and this has produced a strong result.
The market in which we operate requires
a high degree of service and responsiveness,
and our team continues to deliver to the
highest standards, maintaining our market-
leading position. The world remains a volatile
place, and companies are increasingly
looking to protect their assets. We have
the expertise and are well placed to help.
Marine and energy: The team had a good
year with profits and growth in offshore
energy more than offsetting the Costa
Concordia loss which is expected to settle
at net $20 million. To the wider industry this
loss has deteriorated, mainly due to the rising
costs of removing the wreck. As the world
becomes more environmentally conscious
this type of expense will continue to increase,
and we expect this to be reflected in future
premiums for marine liability and related
risks. In addition our offshore energy team
has performed exceptionally well.
Marine liability insurance is one of the oldest
risks in the London Market and is proving
to be at the cutting edge of modernisation
Chief Executive’s report Hiscox Ltd Report and Accounts 2012
7
Chief Executive’s
report continued
Hiscox London Market
2012
£m
2011
£m
Gross premiums written
640.0 585.4
Net premiums earned
419.0
418.8
Underwriting profit
105.1
50.3
Investment result
Foreign exchange
Profit before tax
27.0
8.8
(10.2)
(1.5)
121.9
57.6
Combined ratio
75.5% 89.1%
Combined ratio excluding
foreign exchange
73.1% 89.1%
Hiscox UK
2012
£m
2011
£m
Gross premiums written
375.2
367.1
Net premiums earned
351.3
325.2
Underwriting profit
Investment result
Foreign exchange
Profit before tax
31.2
41.5
14.6
(0.6)
7.3
0.2
45.2
49.0
Combined ratio
92.1% 87.5%
Combined ratio excluding
foreign exchange
91.9% 87.6%
for Hiscox. We have given retail brokers the
ability to place smaller risks quickly and cost
effectively directly with us online and this
investment in e-trading has delivered modest
premiums in 2012 which we expect to grow
in 2013. We will also be looking to trade
in this manner in other lines of business.
Casualty: The casualty market remains
a challenging place and we continue to
reduce our lines as the rates on offer remain
inadequate. We do, however, believe that
ultimately economic sanity will prevail and the
market will inevitably harden. In preparation,
during the course of 2012 we recruited
several senior staff to build on our existing
team. The division has performed well
at the bottom line, as we have benefited
from releases in prior years – demonstrating
our prudent approach to reserving.
Aviation and space: Both lines continue
to make steady profitable progress. Pricing
in the aviation market remains challenging,
but our risk selection and hence loss
experience have remained exemplary, so
results are very acceptable for our second
year of underwriting this class of business.
There has been increased launch activity
in the space market leading to slightly higher
volumes. As the global economy continues
to depend on more support from
extraterrestrial services, we believe this
business will grow steadily over time.
Our London Market business has a global remit.
It makes use of the Lloyd’s brand name and
licences to write business located around the
world. Lloyd’s is making steady progress to
enhance its own licence network, and we at
Hiscox are supportive of all efforts to expand
the range of licences the market has for both
reinsurance and insurance. We are particularly
supportive of licensing which allows us to trade
from London without the costs of teams on
the ground. In 2012 we saw the benefit of doing
this with the significant expansion of our
Japanese and Thai reinsurance exposures,
and the insurance support we were able to
give the New Zealand economy to enable the
rebuilding of Christchurch. All of this business
was underwritten from London, backed by
extensive visits to local clients and brokers.
We hope that as regulators get more parochial
they will remember the benefits of accessing
global expertise and capital, and will not restrict
our ability to trade in this way.
Hiscox UK and Hiscox Europe
In 1987 we took our first step into UK retail
business (or local specialty insurance) moving
into Continental Europe in 1993. By 2012 our
businesses had expanded materially, writing
premium income of £507.5 million (2011: £498.0
million) and delivering a profit of £49.1 million
(2011: £51.5 million). There is plenty of room
to grow in these markets and I remain confident
that we have the products, expertise and brand
to continue to expand.
Hiscox UK: Our UK business made
another excellent profit of £45.2 million
(2011: £49.0 million) despite spending more
on marketing and paying record flood
losses. The business benefited from a good
investment return and good underwriting.
Growth in commercial product lines offset
the cancellation of two high net worth
underwriting partnerships, resulting in
an increase in revenues of 2.2% to £375.2
million (2011: £367.1 million). The progress
in our core lines is set out below:
The high net worth business delivered
a strong profit despite the largest single
loss in its history – a London house fire.
Premium income shrank slightly, reflecting
the previously announced withdrawal from
two partnerships which did not live up
to expectations. We also experienced the
greatest level of flood activity in our history,
paying claims to the value of £14 million in
flood and storm losses. You only find out the
worth of your insurer when you make a claim
so it is pleasing that during this busy year our
team lived up to its reputation for excellence,
winning ‘The British Insurance Awards
Customer Care’ accolade. In the competitive
luxury motor market we reached maturity
with a second year of profit, our service
and brand setting the team apart.
Our professions, specialty commercial,
and technology lines have made good
progress. We launched five new professional
indemnity products during the year
specifically for the unique risks professions
such as facilities managers and interior
and garden designers face. These products
have sold well, filling a real customer need.
Recession-related claims have not been as
severe as we had expected.
The direct business continues to propel the
brand. We increased our marketing spend
in the year by £4 million and returned to TV
with an advertising campaign that promotes
our ethos of trust, honesty and fair customer
service. An unexpected outcome has been
the strength with which our broker partners
have identified with this message, reinforcing
our relationships. The direct household
products have been held back by challenges
within our online platform hampering our
flexibility in pricing. We are investing in 2013
and beyond to address this. Our commercial
products continue to move ahead despite
an increasingly competitive market. Again
the brand and our service reputation are real
differentiators. Competitors can copy
our wordings, but these more intangible
elements are real protective moats
to our business.
In 2013 Hiscox UK has a big agenda.
Distribution for the insurance market has
evolved over the years; it is no longer as
black and white as broker versus direct.
We are launching a tied agency to address
8
Chief Executive’s report Hiscox Ltd Report and Accounts 2012
Hiscox Europe
2012
£m
2011
£m
Gross premiums written
132.3
130.9
Net premiums earned
125.6
123.4
Underwriting profit
Investment result
Foreign exchange
Profit before tax
1.8
2.7
3.1
(0.1)
(1.0)
(0.2)
3.9
2.4
Combined ratio
100.9% 100.5%
Combined ratio excluding
foreign exchange
100.2% 100.4%
Hiscox International
2012
£m
2011
£m
Gross premiums written
418.3 365.8
Net premiums earned
302.7 277.6
Underwriting profit
Investment result
Foreign exchange
Profit before tax
30.3
(92.7)
29.2
6.3
3.1
(3.1)
62.6
(89.5)
Combined ratio
89.2% 133.9%
Combined ratio excluding
foreign exchange
90.2% 132.8%
gaps in our current model, working
direct and in partnership with specialist
commercial brokers who don’t have in-
house private client expertise but who want
to offer a Hiscox Home Insurance policy to
their clients. We also announced our plans
to open a multi-function office in York during
2013, with progressive in-sourcing of some
of our direct customer service centres.
We have had effective relationships with
our outsourcing partners for over a decade,
but we feel that the next stage in our journey
requires greater control over critical aspects
of our customer service.
Hiscox Europe: Our European business
has reached its fourth consecutive year
of profitability. Revenues have grown by 5.9%
to €160.4 million (2011: €151.4 million), though
only 1.1% to £132.3 million when looked at
in sterling. Profits grew to £3.9 million (2011:
£2.4 million) despite increased marketing
spend to support our French direct business.
The combined ratio rose to 100.9% (2011:
100.5%), with improved investment returns
driving the profit. Combined ratios and
returns on equity are being challenged by
the European economy and issues of scale.
The combined ratio challenges have come
from two fronts. First we have seen some
recession-related claims: jewellery thefts
in public places, aggressive home invasions,
and some large fine art thefts. The second
is our expense ratio. This is driven by
increased marketing expenditure to support
the growing direct business in France, and
also an increasing focus on smaller ticket
business. This business is attractive from
a loss ratio perspective, but initially it does
drive up operating cost. We will be working
in 2013 to re-engineer our business to bring
this ratio down.
We continue to see opportunity in Europe.
Partnerships with major financial institutions
have performed well and are expanding from
their commercial focus to high net worth
personal lines. We also expect in time to see
the broader brand benefit from our direct
activities. We were on French TV for the first
time ever in 2012. This supported our small
direct business, and is also, reflecting our
UK experience, driving brand recognition
and perception in the broker channel.
We will be launching a direct business in
Germany in 2013, and I am confident that,
in time, the German and French business
will replicate the success we enjoy in the UK.
Hiscox International
Hiscox international comprises our activities
in Bermuda, Guernsey and the United States.
In aggregate they had a good year, though
obviously not as positive as it might have been
without Superstorm Sandy which materially
impacted both our Bermudian and United
States businesses. Each of the three business’s
progress is discussed below.
Hiscox Bermuda: Our main focus in
Bermuda is on reinsurance with an emerging
presence in healthcare. Revenues grew by
11.5% to $318.1 million (2011: $285.2 million).
Profits grew substantially despite the cost
of Superstorm Sandy. This performance
reflects strong growth in the reinsurance
business with a focus on areas like Japan,
Thailand and Australia which were
particularly affected by natural catastrophes
in 2011. Healthcare made steady progress.
The reinsurance market is evolving and we
must change with it. New forms of capital
are entering the industry, selling collateralised
policies or buying catastrophe bonds issued
by cedents like Hiscox, in competition with
traditional markets. For a number of years
we have invested in a small portfolio of
catastrophe bonds issued by cedents.
In 2012 we invested in a fund managed
by Third Point Reinsurance Investment
Management Ltd and took a stake in the
firm. After all, a catastrophe bond is no more
than a reinsurance contract and a bond
investment linked together. We will also
be ceding tailored portfolios of catastrophe
reinsurance exposure to the fund. We need
to adapt as the market adapts and this
helps us to do so.
Hiscox Guernsey: This business
underwrites kidnap and ransom, piracy,
fine art, terrorism and personal accident
insurance. It delivered a very good profit even
though revenues declined by 8.5% to £73.0
million (2011: £79.8 million). This is due to
a disciplined approach to underwriting piracy
and business that was previously signed
in three-year deals to take advantage of good
terms, prices and conditions. The team
continues to concentrate on expanding
its distribution into new territories.
Hiscox USA: Our US business made
excellent progress during the year.
Revenues grew by 32.6% to reach $230.5
million (2011: $173.8 million), with strong
growth across every office and in every
product. The business was performing
well ahead of plan at the bottom line until
Superstorm Sandy. We suffered losses
on our construction account with most
other areas escaping relatively unscathed.
As they mature our professional liability
accounts are developing well – a reflection
of early prudent reserving. During the year
we launched ‘Hiscox One’, a one-stop
modular insurance cover for film and
television productions. It is the first
integrated product on the market and has
been received well. The direct business
continued to expand, reaching almost $10
million in premium income (2011: $3 million)
with some exciting prospects in store for
2013. We will continue to market the
products online in 2013, and test brand
advertising on billboards, specialist
publications and other print media in Austin
Chief Executive’s report Hiscox Ltd Report and Accounts 2012
9
Chief Executive’s
report continued
and San Diego, with the aim to accelerate
growth in these key markets.
The US business is on track and we continue
to invest in driving it to success. Our
ambition is that the broker channel business
will be profitable in 2013, assuming a normal
loss year. The ongoing marketing investment
in the direct business will hold back
profitability in the short-term, but as we grow
in knowledge and experience in the US
we anticipate more rapid success.
Claims
When you sell insurance, claims are something
you anticipate and plan for and at Hiscox we pride
ourselves on settling our clients’ claims swiftly
and fairly. As highlighted at the start of my report
we had a busy year. Costa Concordia and
Superstorm Sandy hit the headlines, but there
was lots of other activity. 2012 was a year
of dramatic weather in the UK and Hiscox UK
received 1,500 storm and flood claims with
related claims paid of £14 million, nearly five times
the previous year.
Handling claims well requires a balance
of thorough process and controls as well as an
ability to deal with claimants and their brokers.
During the year we completed the implementation
of a new claims management solution for Hiscox
London Market which has transformed the way
we do claims in that area, leading to better
decision making, enhanced productivity and
improved indemnity costs. In a 2012 independent
survey of claims brokers we continued to score
favourably for broker satisfaction and, with the
enhancements in service that the new system
will allow, we are hopeful that our perception
in the market will improve further in the year
ahead. In our UK and European businesses,
customer satisfaction with our claims handling
has continued to improve, and effective claims
handling continues to set us apart in the market.
Hiscox’s cautious reserving philosophy is again
reflected in reserve releases of £152 million,
down from releases of £199 million in 2011.
Operations and IT
The key ingredients for a successful insurer
are capital, good people and effective IT.
IT is a significant expenditure for the Group
and is likely to increase in the short- to medium-
term with the objective of improving distribution
and service. In 2012 we developed a Group IT
strategy, providing a clear roadmap for activity
over the next five years.
The day-to-day delivery of services to brokers,
customers and within the Group is continually
improving. As the company grows, we can never
be satisfied and will continue to look at ways
to improve processes and minimise expenses.
We have undertaken various lean management
initiatives across the Group in 2012 including:
improving how we operate our small commercial
insurance lines in Europe, introducing a client-
focused underwriting centre in the US and
significantly increasing the amount of time
underwriters spend on broker activity in the
UK through the creation of virtual teams aligned
to each UK region. Each of these steps has
progressively improved service reliability and
predictability. In 2013 the focus will be on using
the momentum of 2012 to maintain service whilst
reducing cost.
Investments
Hiscox’s focus on property-related insurance
means that our invested assets, when measured
relative to our premium income, are lower than
the industry average. Despite this, investment
income has historically accounted for about
50% of our profits. We began the year with
cautious expectations, given the low interest rate
environment and our view that a lot could have
gone wrong during the year. However, our worst
fears were not realised and, with a fair wind from
central banks, the investment result exceeded
our expectations – and accounted for 42.6%
of our profits, only just below the longer-term
average. We achieved a total return of £92.7
million before derivatives equating to a yield
of 3.1% (2011: £25.9 million, 0.9%).
Our asset allocation changed little during
the year. In the bond portfolios, duration was kept
short and a healthy weighting towards non
government bonds was maintained. We made
some alterations to the selection of equity and
hedge fund managers but our overall exposure
remained constant at around 6% of assets.
With the words and actions of central bankers
reassuring investors that interest rates would
be kept low and a financial upheaval, particularly
in Europe, would not be tolerated, a ‘risk on’
mentality eventually prevailed. This served us well
as non government bonds and equities were
much in demand. Our bond portfolios all beat
their benchmarks and benefited from the
narrowing of credit spreads and, unlike the
previous year, there was not much opportunity
cost to being short duration. The risk assets
portfolio produced particularly strong returns both
in absolute terms and relative to market indices.
Whilst the investment world may look a safer
place in 2013, plenty of uncertainty still exists
and the portfolio is cautiously positioned overall,
both from a duration and credit quality standpoint.
After such a favourable period for bonds, the yield
to maturity of our portfolios has declined over
the year and our expectation of returns from them
in 2013 is therefore correspondingly reduced.
We do, however, retain an appetite for sensible
risk, hence our continued allocation to equities.
We feel they offer a better risk-reward ratio
than exists in the higher yielding bond and
structured credit strategies where we continue
to resist temptation.
Capital management
We announced today a special distribution
of approximately £150 million, equal to 38p
per share, which is on top of the final dividend
equivalent of 12p. This takes our total capital back
to approximately the level at the start of 2012.
10
Chief Executive’s report Hiscox Ltd Report and Accounts 2012
A lot of detailed analysis has been done to
support this decision, but in essence we feel that
we started the year in a strong capital position,
and looking forward we can see that our
prospective profits will generate enough capital
to support our growth so that there was no need
to retain our after-tax profits for the year.
with his other responsibilities. Jeremy Pinchin has
succeeded Charles as CEO of Hiscox Bermuda
and Company Secretary, whilst remaining Group
Head of Claims. All of these moves have entailed
personal challenges for the individuals and their
families and I am grateful for the sacrifices they
have made to help us build our business.
Our leadership and our people
As announced 12 months ago Robert Hiscox
steps down as Chairman with the presentation
of these results. Robert’s record of successful
leadership is unparalleled in the insurance
industry and his contribution has rightly been
recognised publicly over the year. When Robert
took the reins at Hiscox in 1970 annual revenues
amounted to £2.3 million; this has grown to
£1.6 billion in 2012. Robert has accepted the role
of Honorary President and we look forward to his
ongoing sage counsel.
The Board undertook a thorough selection
process in recruiting Robert’s successor. I am
delighted that they have chosen Robert Childs,
our Chief Underwriter who has been with us
for 26 years. This decision has been greeted
very warmly within Hiscox and the industry.
There is a great benefit to having someone who
knows the detail of our business in the role of
Chairman. The greatest risk to the prosperity
of our business is the success of its underwriting.
In insurance the premiums are visible whilst the
risks only become visible when the claims occur –
when it is too late to change course. As the banks
have shown, even the most sophisticated systems
cannot adequately surface some critical risks
on a timely basis. As Chairman, Robert Childs will
have the enormous advantage of understanding
where the risks lie, which ones are easy to
measure and monitor and which will rely on
judgement and feel. He also has the experience
of dealing with a huge industry loss and knows
that reacting in the right way is often the
determinant of success in these tough situations.
Beyond the more visible Chairman’s succession,
we have made some other senior executive
moves. In June Richard Watson returned from
the US, where he served as Chief Executive,
to become Deputy Chief Underwriter and
he now succeeds Robert Childs as Group Chief
Underwriter. Richard made a major contribution
to shaping our US business, setting it on a
successful path. His experience managing the
London Market business and a more retail
environment in the US makes him well placed
to oversee our underwriting culture. Ben Walter
replaced Richard Watson as Chief Executive of
Hiscox USA. Ben joined us two years ago as
Chief Operating Officer of Hiscox USA from the
fund management industry. Gary Head, the Chief
Underwriter of Hiscox UK, has moved to the US
to serve as its Chief Underwriter. Charles Dupplin
returned to the UK from Bermuda where he
served as Chief Executive of Hiscox Bermuda,
and Group Company Secretary. He will continue
as Head of M&A and Special Projects, a role he
had in Bermuda, but which received less attention
The broad Hiscox team make their contributions
in many roles, geographies and disciplines.
It is the dedication to excellence that builds
our reputation as a Group. Our excellent
marketing can deliver the message, but I am
always personally gratified to be complimented
on a claim paid well, a risk well underwritten
or a recruitment process thoughtfully handled.
These are all the result of individual decisions well
executed – the personal standards of each person
involved shining through. Our many staff deserve
our thanks and it is great that their efforts have
been justly rewarded in good performance.
Outlook
As I said at the start of my statement, 2012 was
a more normal year for the global industry after
the challenges of 2011. That means that we do not
expect material upward or downward pressure in
pricing. Reinsurance pricing is up slightly in areas
closest to recent losses – in the US East Coast,
Japan and parts of Asia. In the US domestic
market there are reports of slight upward
movement in some areas for the second year in
a row. Parts of the UK are very competitive, whilst
others are benign, so our aggregate expectation is
for a stable pricing environment where good risk
selection, good underwriting and good service will
be rewarded. Investment returns will likely trend
down, reflecting the broader financial market.
Looking further ahead than 12 months I believe
we have the ability to materially grow the size of
our business within the classes and geographies
in which we currently operate. In our most
developed retail market, the UK high net worth
area, we still have only single digit market share,
so the opportunity here is significant, not to
mention the opportunities in other territories.
Our retail commercial market share is even
smaller, and our direct businesses have just
begun. In our internationally traded businesses
we are a smallish player other than in a few
very specific segments, so again we have the
opportunity to grow and develop. Expansion
of our geographic footprint could also create
new opportunities.
As I enter my twentieth year at Hiscox, I remain
enthusiastic and optimistic for the opportunities
ahead. I remain impatient and unsatisfied that
we have not captured more of them already –
a trait I have had bred into me by Robert Hiscox –
and I am sure that with a steady determined
focus on winning clients one at a time we will
continue to grow our business profitably to
the satisfaction of clients, staff and shareholders.
Bronek Masojada
25 February 2013
Chief Executive’s report Hiscox Ltd Report and Accounts 2012
11
The Hiscox Group
has over 1,400 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
York
USA
Atlanta
Chicago
Los Angeles
New York City
San Francisco
White Plains (New York)
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
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
1,792
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
2012
12
12
Hiscox locations/Building a balanced business Hiscox Ltd Report and Accounts 2012
Chairman’s statement Hiscox Ltd Report and Accounts 2012
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
Jeremy Pinchin, Chief Executive Officer
Global reinsurance; Group capital support;
healthcare insurance
Hiscox Guernsey
Steve Camm, Managing Director
Fine art; kidnap and ransom; terrorism
Hiscox USA
Ben Walter, Chief Executive Officer
Errors and omissions; directors and officers’ liability; property;
specialty; kidnap and ransom; terrorism; technology/media;
direct to customer commercial business
Hiscox
UK and Europe
Hiscox UK
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
Hiscox Europe
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 2012
13
Actively managed
business mix
Total Group controlled premium December 2012: £1,792m
(Year-on-year change in original currency)
(+8.3%)
£503m
Non-marine
Marine
Aviation
Whole account
(+19.0%)
£377m
Professional
liabilities
Errors and
omissions
Directors
and officers’
liability
Commercial
office
Small
technology
and media
E&O
(+7.6%)
£307m
Kidnap and
ransom
Contingency
Terrorism
Specie
Personal
accident
Political risks
Aviation
Contractors’
equipment
(-6.8%)
£255m
Home and
contents
Fine art
Classic car
(+28.8%)
£175m
Managing
general agents
Commercial
property
Onshore
energy
USA
homeowners
(-3.8%)
£135m
Marine hull
Energy liability
Upstream-
midstream
energy
Reinsurance
Local E&O and
commercial
Specialty
Art and
private client
Property
Marine
and energy
14
14
Actively managed business mix Hiscox Ltd Report and Accounts 2012
(-3.4%)
£40m
Professional
indemnity
Large tech
and media E&O
Global E&O
Actively managed
key underwriting
exposures
Boxplot and whisker diagram of modeled Hiscox Ltd net loss (USD)
Upper 95%/lower 5%
Modeled mean loss
Hiscox Ltd loss ($m)
s
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w
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700
600
500
400
300
200
100
0
JP
EQ
US
EQ
EU
WS
US
WS
JP
EQ
US
EQ
EU
WS
US
WS
JP
EQ
US
EQ
EU
WS
US
WS
JP
EQ
US
EQ
EU
WS
US
WS
JP
EQ
US
EQ
EU
WS
US
WS
Industry loss
return period
and peril
Mean industry
loss $bn
5–10 year
10–25 year
25–50 year
50–100 year
100–250 year
01
02
05
19
04
07
09
39
19
18
14
69
38
32
19
103
66
40
26
160
This chart shows a modeled range of net loss the Group might expect from any one castastrophe event.
The white line between the bars depicts the modeled mean loss.
The return period is the frequency at which an industry insured loss of a certain amount or greater is likely to occur.
For example, an event with a return period of 20 years would be expected to occur on average five times in 100 years.
JP EQ – Japanese earthquake, US EQ – United States earthquake, EU WS – European windstorm, US WS – United States windstorm
Realistic disaster scenarios, Hiscox Ltd
The table below presents selected realistic disaster scenarios based on our book of business in force at 1 January 2013 and
industry data. Given the nature of the risks underwritten, the loss estimates may be materially different than those that arise
depending on the size and nature of the event.
Japan earthquake
Gulf of Mexico windstorm
Florida windstorm
European windstorm
San Francisco earthquake
Gross loss
US$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
405
805
589
483
632
211
185
136
173
156
18.0
35.8
26.2
21.5
28.1
9.4
8.2
6.1
7.7
6.9
0.4
0.2
0.1
0.6
0.3
50
107
125
30
50
240
80
100
200
110
Actively managed key underwriting exposures Hiscox Ltd Report and Accounts 2012
15
Capital
£150m
Additional special distribution
Both A.M. Best and Standard & Poor’s have
shared their capital models with management.
These models calculate a capital adequacy
score by measuring available capital, after
making various balance sheet adjustments,
as a proportion of required capital which
incorporates charges for premium, reserve,
investment and catastrophe risk. Management’s
interpretation of A.M. Best’s ‘Best Capital
Adequacy Ratio’ (BCAR) model indicates the
Group has a healthy surplus above the minimum
capital required to maintain the carriers’ A
ratings. On a similar basis the Standard & Poor’s
modeled result indicates a surplus in excess
of the mid-point of the required A range with
additional headroom above the minimum
requirement. Projections indicate a reasonable
level of flexibility would be maintained following
the £150 million special distribution.
The rating agency capital requirements shown
in the chart below are based on the Group’s own
internal projections of the requirements based
upon its 2013 business plan. The A.M. Best
capital requirements stated are also consistent
with the latest assessment received from A.M.
Best in November 2012, which also took into
consideration the 2013 business plan.
Group regulators
As a Bermudian registered holding company,
the Bermuda Monetary Authority (BMA) has been
assessed as the Group’s regulator under the
Bermuda Group Supervisory Framework. During
2011, the BMA introduced proposals for a group
solvency capital requirement under which the
Group provides a solvency return in accordance
Capital management
Hiscox believes in managing its capital. The
Board monitors the capital strength of the Group
and ensures its insurance carriers are suitably
capitalised for regulatory and ratings purposes,
taking into account future needs including
growth where opportunities arise. As discussed
in the Chairman’s statement, as a result of our
strong performance in 2012, the Board has
reviewed the Group’s capital level and proposed
that a special distribution of 38.0p per share
(approximately £150 million), should be made.
A further amount of 12.0p per share is proposed
instead of payment of a final dividend. This return
of capital will align the Group’s available capital
with its risk appetite and ensure a surplus is
maintained above the rating agencies’ minimum
capital requirements to remain in the A range,
the most restrictive of the Group’s external
capital assessments.
The impact of this distribution and how it
compares to the Group’s capital requirements
is presented in the chart below right.
Capital requirements
The Group monitors its capital requirements
based on both external risk measures, set
by regulators and the ratings agencies, and
its own internal guidelines of risk appetite.
A full description of the requirements set by
the regulators for the most significant insurance
carriers is included in note 3.3 to the financial
statements. A brief explanation of the primary
internal and external capital constraints
at a Group level is given below.
Management compares the capital requirements
of the Group against its available capital.
Available capital is defined by the Group as
shareholders’ equity which was £1,378 million
at 31 December 2012 (2011: £1,256 million).
Debt or preference shares are not defined
as available capital by the Group as they
do not absorb losses, should they occur,
ahead of or alongside ordinary shareholders.
However, the Group can source additional
funding through a revolving credit and Letter
of Credit facility. Additional funding from these
sources comprised $875 million at 31 December
2012 (2011: $750 million).
Rating agencies
The ability of the Group to attract business,
particularly reinsurance, is dependent upon
the maintenance of appropriate financial
strength ratings from the leading rating agencies,
Standard & Poor’s, A.M. Best and Fitch.
These ratings are assigned individually to
the insurance carriers of the Group, but capital
adequacy is also monitored by the rating
agencies at the consolidated Group level.
16
Capital Hiscox Ltd Report and Accounts 2012
The Group manages the underwriting portfolio
so that in a 1 in 250 aggregate bad year it would
lose no more than 15% of the Group’s core
capital plus assigned buffer capital (currently
£100 million). A market loss at this remote return
period would be very big indeed and would
certainly bring about positive market changes.
The Group would be well positioned in the
resulting strong market with capital in the order
of £1 billion in addition to its LOC facilities and
its now well-developed reinsurance partnerships.
If the return of capital is approved by the
shareholders on 28 March, the available capital
will reduce to approximately £1,228 million,
comfortably exceeding current regulatory and
rating agency requirements. This level of capital
would be in line with the Group’s stated risk
appetite for 2013.
The Board believes that this level of capital
gives sufficient flexibility to achieve its desired
business growth whilst maintaining the Group’s
current capital strength.
the Group Solvency Self Assessment framework
(GSSA) including assessment of the Group’s
Bermuda Solvency Capital Requirement
(BSCR). At this time the legislation for these
requirements is still in draft form, with a proposed
implementation date of 1 January 2014.
Nevertheless, the Group continues to monitor
its compliance with these requirements ahead
of this implementation date.
The BSCR model applies factors to premium,
reserves and assets/liabilities to determine
the minimum capital required to remain solvent
throughout the year.
The GSSA is based on Hiscox’s own internally
assessed capital requirements and is informed
by the Group’s Economic Capital Model (ECM),
which together with the BSCR forms part
of the BMA’s annual solvency assessment.
The ECM combines factor-based risk charges
with stochastically modeled elements. It is a
forward-looking model for which primary inputs
are derived from the following year’s business
plan, in respect of expected levels of premium,
exposure and underwriting losses (both
catastrophe and non-catastrophe).
The proposed return of capital will leave
the Group with a comfortable surplus above
Hiscox’s internal projections of both the BSCR
and GSSA for the 2013 business plan.
Internal capital requirements
The chief determinant of our capital requirement
in 2013 is our own internal risk appetite which
is more restrictive than any external measure.
Projected capital requirement
£1.4bn available capital
£1.2bn available capital (post return)
A.M. Best
(standard model)
A.M. Best
(catastrophe
stressed)
Standard
& Poor’s
Bermuda
Solvency Capital
Requirement
(BSCR)
GSSA (Hiscox’s
internal capital
assessment)
Hiscox internal
risk appetite
Rating agency requirements are an internal projection, by Hiscox, based upon the 2013 business plan.
The Hiscox internal risk appetite reflects Hiscox’s goal of maximising its return on capital within accepted levels of risk.
All capital requirements have been normalised, with respect to variations in the allowable capital in each assessment,
for comparison to a consistent available capital figure.
Capital Hiscox Ltd Report and Accounts 2012
17
Group financial
performance
£217.1m
Profit before tax
85.5%
Combined ratio
Profit before tax for the year was £217.1
million (2011: £17.3 million), including a solid
investment return of 3.1% (2011: 0.9%) and
despite Superstorm Sandy losses of £90
million. The Group recorded a post-tax return
on equity of 16.9% (2011: 1.7%) and earnings
per share were 53.1p (2011: 5.5p).
The net claims ratio remained constant at 47.2%
(2011: 46.3%). Two specific losses in the year
contributed to the small decline. The combined
ratio declined to 94.4% (2011: 91.0%), in part
due to a slight increase in the expense ratio
as we increased the marketing spend in both
UK and Europe for the year.
Net asset value per share increased by 8.1%
to 349.7p (2011: 323.5p). The Group continues
to maintain a progressive dividend policy and
total dividend per share rose by 5.9% to 18.0p
(2011: 17.0p), subject to shareholder approval
of the final dividend equivalent. Following
a review of the Group’s capital position, it is
proposed to make a further special distribution,
subject to shareholder approval, through
the B share scheme of 38.0p per share.
Gross premiums written of £1.56 billion were
up 8.0% year-on-year. Strong growth in the
property, reinsurance, aviation and local E&O
and commercial lines were offset in part by a
decline in art and private clients. The Group’s
combined ratio including foreign exchange was
85.5% (2011: 99.5%).
This has been a good year for the Group in the
investment markets, with the Group’s investments
producing a return of 3.1% (2011: 0.9%). All asset
classes outstripped their benchmarks.
The underwriting performance for each
operating segment is detailed on the next page.
Hiscox London Market
Gross premiums written increased by 9.3%
to £640.0 million (2011: £585.4 million), with
strong growth in the property division along
with the aviation and reinsurance accounts.
Reinsurance purchased was at a similar level
to the prior year at 27.8% of gross premiums
written (2011: 29.4%). The quota share
arrangement with Syndicate 6104 and others
remained in place and are increasing in 2013.
The net claims ratio improved to 40.3%
(2011: 56.6%), with much less catastrophe
impact in the year. Superstorm Sandy and Costa
Concordia being the two larger events of note
compared to an over-active 2011.
As a result, the combined ratio improved greatly
to 75.5% (2011: 89.1%). Profit before tax for the
year was £121.9 million (2011: £57.6 million).
Hiscox UK and Europe
Gross premiums written rose by 1.9% to £507.5
million (2011: £498.0 million). Gross premiums
written for the UK increased by 2.2% with
a reduction in the art and private client lines
offset by gains in professional and specialty
commercial. Europe remained broadly constant
year-on-year with gross premiums written
of £132.3 million (2011: £130.9 million), being
a 1.1% increase. In underlying currency terms,
Europe fared better with an increase of 5.9%.
As a result, profit before tax for the year was
slightly down at £49.1 million (2011: £51.5 million).
Hiscox International
Gross premiums written increased 14.3% to
£418.3 million (2011: £365.8 million) largely driven
by the US. The US increased premiums by
32.6%, driven in the main from the specialty lines,
but all areas contributed. The Direct division
grew by 223% from a small base. Bermuda also
saw their premium increase by 13.0% to £200.7
million (2011: £177.7 million). Gross premiums
written in Guernsey decreased as less piracy
and multi-year policies were written.
The net claims ratio improved significantly
to 46.0% (2011: 89.9%) with only Superstorm
Sandy as a larger event during the year compared
to the multiple catastrophe events in 2011.
The impact on the combined ratio was an
improvement of 44.7% to 89.2% (2011: 133.9%).
As a result, the profit before tax was £62.6 million
(2011: loss of £89.5 million).
Hiscox Corporate Centre
Investments performed well during the year
with a return of £18.5 million (2011: £2.2 million).
This was offset in part by operational expenses
increasing to £17.3 million (2011: £12.3 million)
and foreign exchange losses of £11.5 million
(2011: gain £12.4 million). The losses on foreign
exchange were as a result of holding US Dollar
assets. The loss before tax was £16.5 million
(2011: loss £2.3 million).
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 £150.6
million (2011: inflow £179.1 million). The inflow
was mainly due to prompt settlement of
premiums and reinsurance recoveries, along
with amounts recovered on tax. Net cash outflow
from investing activities, being comparable
to the prior year, was £13.7 million (2011:
£11.8 million). The Group continues to invest
in its IT infrastructure and the development
of projects such as a management information
project aimed at improving the quality and
efficiency of information provision. Marketing
expenses increased to £26 million in the year.
Net cash outflows from financing activities
for the year were £60.8 million (2011: outflow
18
Group financial performance Hiscox Ltd Report and Accounts 2012
Group key performance indicators
London
Market
UK and
Europe International
Corporate
Centre
2012
Total
London
Market
UK and
Europe
International
Corporate
Centre
2011
Total
Gross premiums written (£m)
640.0
507.5
418.3
- 1,565.8
585.4
498.0
365.8
– 1,449.2
Net premiums written (£m)
462.4
479.9
325.8
-
1,268.1
413.4
472.6
288.0
– 1,174.0
Net premiums earned (£m)
419.0
476.9
302.7
-
1,198.6
418.8
448.6
277.6
– 1,145.0
Investment result (£m)
27.0
17.7
29.2
18.5
92.4
8.8
7.2
6.3
Profit/(loss) before tax (£m)
121.9
49.1
62.6
(16.5)
217.1
57.6
51.5
(89.5)
Claims ratio (%)
Expense ratio (%)
Foreign exchange impact (%)
Combined ratio (%)
40.3
32.8
47.2
46.9
46.0
44.2
2.4
0.3
(1.0 )
75.5
94.4
89.2
-
-
-
-
44.1
40.5
0.9
56.6
32.5
46.3
44.7
89.9
42.9
–
–
1.1
85.5
89.1
91.0
133.9
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, insurance linked fund and catastrophe bonds.
2012
3,055.8
1,330.5
4,386.3
1,378.4
349.7
332.0
394.2
2.2
(2.3)
–
–
–
–
24.5
17.3
60.2
39.1
0.2
99.5
2011
2,873.4
1,349.3
4,222.7
1,255.9
323.5
306.1
388.2
£67.3 million). The outflow is due to payment
of dividends to shareholders, with less scrip
dividends having been taken up in the year.
of being well placed against the new
requirements when they come into force.
The Bermuda Monetary Authority (BMA) has
begun supervising the Group, under the new
Group Supervisory Framework. The new
framework places a regulatory capital
requirement upon the Group for the first time.
Testing of the new standards was undertaken
during 2012 in which the Group had sufficient
capital to meet requirements. The BMA continues
to work towards Solvency II equivalence.
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. The bank facility was
renegotiated during the year up to $875 million.
There was no cash drawn down on the banking
facility during the year.
At 31 December 2012, $308 million (2011: $340
million) had been drawn by way of Letter of Credit
against this facility.
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.
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.
The implementation of the new regime remains
uncertain, with a probable delay at least
until 2015. The Group continues to monitor
developments within Europe, and is confident
Group financial performance Hiscox Ltd Report and Accounts 2012
19
Group investments
£3.06bn
Invested assets
The Group’s invested assets at 31 December
2012 totaled £3.06 billion (2011: £2.87 billion).
Continued positive cash flow accounted
for the increase in assets under management
during the year. The investment result,
excluding derivatives, amounted to
£92.7 million (2011: £25.9 million) equating
to a return of 3.1% (2011: 0.9%).
We approached 2012 with a good degree
of scepticism and in the knowledge that events
in the Eurozone, together with concerns
over the potential for the US and Chinese
economies to disappoint, could lead to a modest
and volatile investment return. In the event
these fears proved to be unfounded and nearly
all asset classes appreciated in value as central
bankers rode to the rescue, ensuring there
was ample liquidity where necessary and
pursuing monetary policy designed to keep
interest rates artificially low along much of
the yield curve. This support from their central
banks enabled politicians to kick various cans
down the road. Indeed, when there was a
deadline for a political decision to be made,
America did its best to alarm markets before
averting the worst impact of the much heralded
fiscal cliff. The ‘do whatever it takes’ and open-
ended nature of the language accompanying
various official statements in the latter half
of the year provided fresh impetus to the equity
rally and further compressed yields in bond
markets. Against this background the Group’s
investment return comfortably exceeded
initial expectations.
With a healthy allocation to non government
bonds, the fixed income portfolios beat their
benchmarks and generated much better returns
than last year as they benefited from both the
marked narrowing of spreads that occurred
across a broad credit spectrum and, to a lesser
degree, a further small decline in government
bond yields. Mortgage backed securities
(‘MBS’), mostly concentrated in the US Dollar
portfolios, provided the main source of
outperformance. The Federal Reserve added
agency MBS to the list of bonds that they would
purchase in significant quantities, whilst non
agency MBS made further gains, given their
attractive yields and a background of a generally
improving US housing market. The proportion
of the portfolio invested in this area has declined
steadily in recent years with principal repayments
at par. However, following the strong recovery
in prices of the underlying bonds, some outright
sales were made, further reducing the overall
exposure. Corporate bonds, in general, did well
but the bank debt, where we remained focused
on the national champions and the senior part
of their capital structure, outperformed following
the reduction in ‘tail risk’ engendered by the
central banks. The margin of outperformance
in the other currency portfolios was less but
all of the managers did well, largely due to their
credit exposure.
The allocation to risk assets, which was
maintained at approximately 6% of invested
assets throughout the year, made a solid
contribution to returns. The changes that have
been made to the selection of funds that we
invest in has borne fruit and the blend of long
only and equity based hedge funds returned
14.8%, with both categories exceeding their
respective benchmarks.
Group investment performance
Bonds
Bonds total
Equities
£
US$
Other
Deposits and cash equivalents
Actual return
Group invested assets*
*excludes derivatives and investment in insurance linked fund and in catastrophe bonds.
31 December 2012
31 December 2011
Asset allocation
%
Return
%
Return
£000
Asset allocation
%
13.2
49.0
9.6
71.8
6.2
22.0
2.2
3.2
2.2
2.8
62,579
14.8
26,974
0.5
3.1
3,137
92,690
£3,055.8m
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
29,933
(5,935)
1,944
25,942
£2,873.4m
20
Group investments Hiscox Ltd Report and Accounts 2012
after recent gains, they represent a likely source
of excess returns over time. Volatility in equity
markets remains but so does their reasonable
valuation and attraction relative to other assets.
Given the above, our sights for the investment
return in 2013 are set fairly low.
In summary, the investment objective is to
maximise investment returns within an overall
risk appetite and giving due regard to prevailing
financial, economic and market conditions.
The overriding concern is not to lose money
in any 12-month period. Balancing these desires
is becoming increasingly challenging in the
current environment as the chances of losing
money, given even a modest appetite for risk, are
increasing. The portfolio therefore is constructed
principally bearing in mind the need to pay claims
and to provide capital for underwriting in all
market conditions rather than to produce more
yield from artificially overpriced assets. In order
to allow some measured risk to be taken within
the portfolio the Board has, in recent years, set
aside capital against the possibility of a negative
result from the investment portfolio in any one
year and this continues to be the case for 2013.
This gives us the ability to withstand volatility in
markets but also the capacity to take advantage
of any opportunities that may be thrown up by
market dislocations.
There were no dramatic tactical shifts during
the year, with surplus liquidity being invested
in line with the asset allocation that prevailed at
the end of 2012. We have not dropped our guard
in matters of credit and the quality of our bond
portfolios remains high with over 90% of
securities rated single A or better. Sovereign
bonds whose price depends largely on the
prospect of support from the ECB were absent
from our portfolio throughout the year.
Conservative levels of cash were maintained for
the payment of claims and general corporate
purposes, with further liquidity being available
from lines of credit which remained available and
undrawn for cash purposes throughout the year.
Cash continues to be invested with a focus on
safety rather than yield.
Whilst there are some grounds, looking ahead,
to believe that economic activity is set to improve
and the risks of a financial mishap are reduced,
we still think that, on balance, it is a time for
caution. The effects of financial repression have
meant that the yields of the bond portfolios have
declined over the year and there is little scope
for further capital gain. Stretching for yield is
an option but there is not much to be gained from
taking duration risk and much to be lost when
interest rates rise. On credit, we are wary of
straying back into below investment grade
securities at levels which may look relatively
attractive in the short-term, but have limited
upside and will perform more like equities when
the tide turns. We are however prepared to take
a modest amount of selective risk in order to
avoid having a portfolio that is condemned to
producing little by way of return. This is currently
concentrated in the equity allocation where, even
High quality and well diversified portfolio
Investment portfolio: £3,055.8m
Asset allocation
22.0% Cash
6.2% Risk assets
71.8% Bonds
Group investments Hiscox Ltd Report and Accounts 2012
21
21
Group investments
continued
Bond currency split
1.8% CAD
11.6% EUR
18.4% GBP
68.2% USD
Bond credit quality
2.2% BB and below
5.7% BBB
16.8% A
18.8% AA
22.9% AAA
33.6% Gvt.
22
Group investments Hiscox Ltd Report and Accounts 2012
Risk management
Our core business is to take risk and our
strategy is to maximise return on equity
within a defined risk appetite. Our ongoing
success depends on how well we understand
and manage the significant exposures we
face. It is therefore crucial 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. Our risk management
framework is designed to oversee a culture
of innovative and prudent underwriting.
The Group risk management framework
The Risk Committee of the Board advises our
Directors on how best to 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 ensures 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.
Diversified portfolio: Hiscox has a well-diversified portfolio by
product and geography to help balance any catastrophe exposure.
Risk appetite: We clearly define our risk appetite for underwriting
risk, which dictates our business plan. To ensure that we do not
exceed our risk appetite, we monitor our exposures closely and
take mitigating actions to maintain business plan. This enables
us to maximise the expected risk return profile on the whole portfolio
and offset the potential losses on more volatile accounts.
Underwriting discipline: Underwriters are incentivised to make
sound decisions that are aligned with Group’s overall strategic
objectives and risk appetite. Clear limits are placed on their
underwriting authority. Policy wordings are regularly reviewed
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 of issue.
Modeling: We have tailored our modeling resources to assist
insurance and reinsurance plans and ensure that the exposure
we write matches expectations. The risk aggregation and modeling
resources are shared across the Group to ensure everyone uses
the same modeling tools.
Risk management Hiscox Ltd Report and Accounts 2012
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 2012
Stress and scenario testing: 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.
Reinsurance: We buy reinsurance for our business carriers
and the Group as a whole, to mitigate the effect of catastrophes
and unexpected concentrations in risk. The scope and type
of 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, supervised
by a dedicated Reinsurance Purchase Group.
Pricing discipline: 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 as it can drive
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.
Remuneration: Hiscox incentivises underwriters on return
on equity, rewarding staff for profit not revenue.
Risk appetite: Our appetite for certain lines of business changes
according to market conditions and the risk appetite of the Group.
Monitoring: We regularly monitor pricing levels, producing
detailed monthly reports grouping current prices with exposure
and trends over the past 12 months. This ensures that we quickly
identify and control any problems created by adverse changes
in market conditions.
Lead insurer: We frequently act as the lead insurer in the co-
insurance programmes required to cover significant high-value
assets, so we have some ability to set market rates rather than
follow them.
Historical data and actuarial analysis: The provisions we make
to pay claims reflect our own experience and the industry’s view
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 on note
26 to the consolidated financial statements. The provisions we make
are set above the actuarial mid-point to reduce the risk that actual
claims exceed the amount that has been set aside.
Senior management and board approval: 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.
Principal risks continued
What is the risk?
Why do we have it?
How is it managed?
Investment risk
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
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 quickly 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.
Conservative 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.
Currency matching: 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.
Duration: 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.
Benchmarks: 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.
Equities: A proportion of the Group’s assets is 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.
Guidelines: 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.
Risk management: 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 risk management measures.
Forecasting: 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.
Cash: Available 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.
Stress tests: We run tests to estimate the impact of a major
catastrophe on our cash position in order to identify potential issues.
We also run scenario analysis that considers 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.
Credit: We maintain extensive borrowing facilities. These
arrangements have been made with a range of major international
banks to minimise the risk of one or more of the institutions being
unable to honour their commitments to us.
Liquid assets: 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 2012
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 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.
Vetting and auditing: 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.
Careful selection: We buy reinsurance only from companies that
we believe to be strong. Every reinsurer we use must be approved
by a dedicated Reinsurance Security Committee, based on an
assessment of financial strength, trading record, payment history,
outlook, organisational structure, plus its external credit ratings.
Monitoring: Our credit exposures to these companies are closely
monitored. The companies are continuously monitored so that
we are able to identify 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.
Guidelines: We set guidelines for exposure to each of our
approved reinsurers.
26
Risk management Hiscox Ltd Report and Accounts 2012
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 underwriting
activities is 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.
Currency matching: 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 to 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.
Currency hedging: 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.
The business in which we
operate is determined largely
by financial strength ratings
issued by the major credit
rating agencies.
Careful management: 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, or change in strategy,
that might jeopardise our ratings.
Communication: Regular and open communication with the
major credit rating agencies helps to ensure we continue to meet
their expectations.
Like every other business
we are reliant on data
and computer systems
in order to go about
our everyday business.
Disaster recovery planning: A formal disaster recovery plan
is in place to deal with workspace recovery and the retrieval
of communications, IT systems and data should a major problem
occur. These procedures would enable us to move the affected
operations to alternative facilities quickly. The plan is tested regularly
and includes simulation tests.
Our business is taking
risk, which by its nature
is inherently uncertain.
Risk assessment: 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 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 2012
27
Corporate
responsibility
£0.8m
Donated to charities
Hiscox UK
®
Working with co2balance.com
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 the amount of waste our activities
produce, and the amount of resources we
consume. We have made commitments to
our shareholders and staff to reduce our carbon
footprint. Our environmental policy encourages
the business to operate more sustainably by:
measuring our use of water, energy and other
products in order to reduce consumption over
time; buying sustainably-sourced or energy-
efficient products where we can; and minimising
waste by recycling products as much as
is feasible. We generate significant cost and
energy savings primarily through careful use
of electricity, water and gas.
For the third year in a row, Hiscox UK has been
carbon neutral. Our carbon footprint has
improved by approximately 5% in comparison to
the last audited year. The balance of our carbon
emissions is offset through an investment in an
African Energy Efficient Stove Project in Kenya.
Replacing open fires with energy efficient stoves
in villages throughout the area results in reduced
firewood and therefore carbon emissions. The
stoves more than halve the amount of smoke
from firewood, benefiting family health. For more
information, please go to www.hiscox.com.
Our sustainability efforts have also been
recognised by the City of London Corporation.
The London office was recently awarded
Platinum in the Clean City Award scheme.
Hiscox Bermuda received the Greenrock Green
Workplace award for the second year in a row.
Greenrock Green Workplace Awards (GWAs) is
an environmental competition bringing together
businesses of all sizes that share the same vision
of a greener workplace.
emissions. In the most recent independent
review, Hiscox was recognised as being one
of the most improved performers.
The marketplace
Hiscox won Company of the Year at the 2012
London Market Awards, recognising the strength
of the business over the previous 18 months.
Robert Hiscox was presented with a lifetime
achievement award at both the London Market
Awards and the Insurance Insider awards in 2012.
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 and Hiscox regularly
updates partner brokers on new developments
at Hiscox and in the insurance industry. Hiscox
UK has instigated a ‘superb service’ ethos,
developing a greater understanding of what
works for individual brokers and thereby building
strong relationships. Hiscox UK and Hiscox
London Market have 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.
Hiscox was awarded ‘Best Small Business
Insurer’ by Start your Business magazine.
Other accolades include the Customer Care
Award from The British Insurance Awards 2012,
for putting our customers at the heart of the
business and moving against the tide by bringing
direct household claims back in-house.
Hiscox is also a founding member of ClimateWise
which aims to leverage the insurance industry’s
expertise to understand, communicate and act
on climate change risk. Members commit to six
key principles and are independently reviewed
against these annually. These principles span
risk analysis, public policy, influencing our
customers, investment and managing our direct
The workplace
Hiscox Spain gained recognition for Best
Workplace 2012 as awarded by Great Place
to Work.
Culture
The Hiscox culture is underpinned by a set
of core values that determine a standard
28
Corporate responsibility Hiscox Ltd Report and Accounts 2012
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 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 the 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
take these opportunities to listen to staff and
involve them in taking the business forward.
The community
Hiscox donated £768,000 to charities in 2012.
In 2012 Hiscox Bermuda continued to support
Centre Against Abuse which provides shelter,
support and tools to those affected by abuse.
Hiscox also supports the Women’s Resource
Centre providing services related to the
empowerment of women. Other charities include
YouthNet, a school-based mentoring programme,
and The Eliza Dolittle Society Bermuda which
helps feed Bermuda’s hungry. Other support
was provided to Kaleidoscope Arts Foundation,
dedicated to teaching art to children, Friends
of Hospice’s Agape House which is Bermuda’s
only in-patient palliative care facility and SCARS
(Saving Children and Revealing Secrets) whose
mission is to reduce the risk of child abuse.
Hiscox USA also gives priority to charitable
endeavours and staff are actively involved in the
San Francisco Make-A-Wish Foundation. Staff
also volunteered time and money to aid victims
of Superstorm Sandy. Dozens of Hiscox USA
employees participated in charity bike rides in
California and Pennsylvania, raising over $25,000
for cancer research and prevention as part of the
Livestrong initiative. In London, staff supported
pupils at the Elizabeth Selby Infants School in
Tower Hamlets through the Reading Partners’
Scheme and have volunteered in the gardens of
Richard House Children’s Hospice. In Colchester,
staff raised £23,000 for Headway.
Supporting the arts, science and technology
Hiscox continues to sponsor the Whitechapel
Gallery’s collections programme and was
a major sponsor of the 2012 Serpentine Gallery
Pavilion in Kensington Gardens. For the second
year running, Hiscox supplied a bursary for
two students of The Royal Academy of Art
in London. Hiscox continues to support the
Bermuda Masterworks Foundation, which aims
to repatriate artworks by Bermudian artists
or featuring Bermuda landscapes/seascapes.
Hiscox supports The Royal Institution (RI) with
a loan and corporate sponsorship. The RI is the
oldest independent research body in the world
and has been dedicated to connecting people
with the world of science for over 200 years. In
September 2012 Hiscox became the title sponsor
of The Sunday Times Hiscox Tech Track 100,
charting the fastest growing private technology,
telecoms and digital media companies.
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. The foundation has supported
the Humanitarian Aid Relief Trust with a further
£30,000. HART helps some of the poorest
and most abused people in the world.
Corporate responsibility Hiscox Ltd Report and Accounts 2012
29
For more detail
on corporate
responsibility
see hiscox.com
Insurance carriers
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. Total underwriting capacity of
Syndicate 3624 remained flat at £250 million for
the 2013 year of account.
Syndicate 6104
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 2013 year of account and
Syndicate 6104’s capacity was increased
to £66 million, from £39 million. Syndicate
6104 pays an overrider and profit commission
to Syndicate 33.
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 below. 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. 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 20%
of profit on the element it does not own. For the
2013 year of account, Syndicate 33’s capacity
has remained flat at £950 million. The chart right
shows the gross premiums written of Syndicate
33 for the last 12 years.
Syndicate 33
Gross premiums written geographical split (%)
2%
3%
9%
UK
Europe
Asia
29%
Rest of the world
57%
North America
30
30
Insurance carriers Hiscox Ltd Report and Accounts 2012
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
6
6
0
5
9
7
3
0
0
9
5
2
7
9
8
6
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 2013
1,200
1,000
800
600
400
200
0
* Quota share reinsurance policies, which Lloyd’s allows in certain circumstances, that enable a syndicate to write gross premium
in excess of its capacity.
1,024
994
1,034
827
844
830
885
872
825
786
722
567
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Syndicate 33
Gross premiums written currency split (%)
4%
CAD
9%
EUR
12%
GBP
75%
USD
Insurance carriers Hiscox Ltd Report and Accounts 2012
31
31
Insurance carriers
continued
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 right.
Hiscox Insurance Company Limited has
achieved average compound growth in gross
premiums written of 12.2% from 1997 to 2012,
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 2012, net assets exceeded
£240 million (2011: £214 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 2012, net assets exceeded
$12 million (2011: $11 million).
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 2012, net assets exceeded
$1,019 million (2011: $846 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 2012, net
assets exceeded $56 million (2011: $58 million).
Hiscox Insurance Company (Bermuda) Limited
Gross premiums written ($m) External business
350
300
250
200
150
100
50
0
297
299
299
263
271
212
171
2006
2007
2008
2009
2010
2011
2012
32
Insurance carriers Hiscox Ltd Report and Accounts 2012
Hiscox Insurance Company Limited
Gross premiums written geographical split by origin (%)
3%
2%
4%
8%
Other Europe
Belgium
Netherlands
Germany
12%
France
71%
UK
Hiscox Insurance Company Limited
Gross premiums written (£m)
450
400
350
300
250
200
150
100
50
0
419
419
404
381
325
284
231
233
242
219
176
164
127
90
98
75
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Insurance carriers Hiscox Ltd Report and Accounts 2012
33
Board of
Directors
Executive Directors
Robert Ralph
Scrymgeour Hiscox
Chairman, stepping
down 2013 (Aged 70)
Bronislaw Edmund
Masojada
Chief Executive
(Aged 51)
Stuart John Bridges
Chief Financial Officer
(Aged 52)
Robert Simon Childs
Chief Underwriting
Officer, Chairman
designate (Aged 61)
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.
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 a member
of the Board of the
Association of British
Insurers and the
Junior Warden of the
Worshipful Company
of Insurers. Bronek
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 Prudential
Financial 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. He is
a Non Executive
Director of Caledonia
Investments plc.
Robert Childs joined
Hiscox in 1986,
served as the Active
Underwriter of the
Hiscox Lloyd’s
Syndicate 33 between
1993 and 2005, and
was the Group’s Chief
Underwriting Officer
until February 2013.
In 2012 Robert joined
the Council of Lloyd’s.
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),
former Chairman of the
Advisory Board of the
School of Management
of Royal Holloway
University of London,
and Chairman of
The Bermuda Society.
34
Board of Directors Hiscox Ltd Report and Accounts 2012
Independent Non
Executive Directors
Caroline Foulger
Non Executive Director
(Aged 52)
Caroline Foulger joined
Hiscox in January 2013.
Until May 2012, Caroline
led Pricewaterhouse-
Coopers’ (PwC)
Insurance and
Reinsurance team
in Bermuda, and was
Head of the PwC
Bermuda Government
and Public Sector
Practice. Caroline
is a Fellow of the
Institute of Chartered
Accountants in England
and Wales, a member
of the Institute of
Chartered Accountants
of Bermuda and a
member of the Institute
of Directors.
Secretary
Jeremy Pinchin
Registered office
Wessex House
45 Reid Street
Hamilton HM 12
Bermuda
Registered number
38877
Auditors
KPMG Audit Limited
Crown House
4 Par-la-Ville Road
Hamilton HM 08
Bermuda
Bankers
HSBC Bank Bermuda
Limited
6 Front Street
Hamilton HM 11
Bermuda
Solicitors
Appleby
Canon’s Court
22 Victoria Street
PO Box HM 1179
Hamilton
HMEX 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
Richard Gillingwater
Senior Independent
Director (Aged 56)
Daniel Maurice Healy
Non Executive Director
and Chairman of the
Audit Committee
(Aged 70)
Ernst Robert Jansen
Non Executive Director
(Aged 64)
Dr James Austin
Charles King
Non Executive Director
and Chairman of the
Conflict Committee
(Aged 74)
Robert McMillan
Non Executive Director
(Aged 60)
Andrea Sarah Rosen
Non Executive Director
and Chairman of the
Remuneration and
Nomination Committee
(Aged 58)
Gunnar Stokholm
Non Executive Director
(Aged 63)
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 advisor
to the Executive Board
and is Director of two
investment vehicles
of Achmea.
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 holds
Board positions
at KBW Inc and Bond
Street Holdings.
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.
Richard Gillingwater
joined Hiscox in
December 2010.
He is a Non Executive
Director and Chairman
Designate of Henderson
Group plc and a Non
Executive Director
of Wm Morrison
Supermarkets PLC.
He is currently Chairman
of CDC Group plc.
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.
In 2007 he became
Dean of Cass Business
School, retiring at the
end of 2012. Richard
is a Non Executive
Director of SSE plc
and Helical Bar plc.
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 2012
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, and
for premium listed companies the UK Corporate
Goverance Code applies. During 2012, and up
to the date of this Report and Accounts, the
Group has complied with the provisions of the
UK Corporate Governance Code in all material
respects. It was announced during the year
that Robert Childs would succeed Robert
Hiscox as Chairman. Whilst Mr Hiscox remains
Chairman at the date of this report it is clear
that Mr Childs will not meet the independence
criteria set out in the Code when he is appointed
and this is explained below.
The Board of Directors
The Board comprises four Executive Directors,
including an Executive Chairman, and eight
independent Non Executive Directors, including
a Senior Independent Director. Biographical
details for each member of the Board are
provided on pages 34 to 35. 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, experience, independence and knowledge
before any appointment is made and this is also
reviewed as part of the Board evaluation process
as described on page 38. There is an induction
process for new Directors. 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 one Director submits theirself
for appointment, and the remaining 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 in 2012 but did not result in any
change. Robert Childs will not receive any further
performance related remuneration once he is
appointed as Non Executive Chairman. Directors
received briefings on solvency regulation at two
of the Board meetings held during the year.
Directors’ training was also assessed as part
of the annual evaluation described on page 38.
The appointment and removal of the Company
Secretary is a matter for the Board as a whole.
Whilst the Board acknowledges the value that
knowledge and experience of the organisation
can bring, it also recognises the need to
progressively refresh its membership over
time. Non Executive Directors will normally
be expected to serve for six years. They may
be invited to serve for longer, but service beyond
nine years is unlikely. Any service beyond six
years is subject to particularly rigorous review.
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. 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
from 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 an annual meeting of senior staff.
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.
36
Corporate governance Hiscox Ltd Report and Accounts 2012
The Group Executive Committee
The Group Executive Committee is comprises
the Executive Directors and, for the last four
months of the year, the Deputy Group Chief
Underwriting Officer. It 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 Caroline Foulger,
Richard Gillingwater, Ernst Jansen, Dr James
King, Bob McMillan, Andrea Rosen and Gunnar
Stokholm. The 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 Caroline Foulger, 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
is mindful of the need for diversity, including
gender diversity, in the selection process and
in considering an appointment will ensure that
the candidate pool includes at least one female.
The Committee also has a role to consider
succession planning for Executive Directors
and senior managers; and has a particular remit
to make recommendations on succession
planning for the 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.
It was announced on 30 July 2012 that Robert
Childs would succeed Robert Hiscox as
Chairman. A job and person specification was
prepared for the Chairman’s role, and a thorough
search of both internal and external candidates
was conducted by the recruitment consultancy
Egon Zehnder under the direction of the
Committee. The successful candidate was
already a Director of the Company and currently
holds the position of Group Chief Underwriting
Officer. As at the date of this report Robert Hiscox
remains Chairman. However, it is clear that
Robert Childs will not meet the independence
criteria required by the UK Corporate Governance
Code when he is appointed as Non Executive
Chairman. Notwithstanding this it was felt that
Robert Childs had the strength of character,
the commercial experience and the detailed
knowledge of the Group’s business to make him
an excellent Chairman. The Senior Independent
Director represented the Committee throughout
the selection process and consulted the
Company’s major shareholders prior to any
decision being made. As well as Egon Zehnder,
the Senior Independent Director, the Chairman
of the Remuneration and Nomination Committee
and the Chief Executive interviewed all shortlisted
internal and external candidates.
In July 2012 the Remuneration and Nomination
Committee became aware that Caroline Foulger
was potentially available as a Non Executive
Director and it was felt that she offered a rare
combination of qualities, having been a partner
in PricewaterhouseCoopers (PwC) for ten years
and head of PwC’s insurance and reinsurance
practice in Bermuda. Following an evaluation of
the balance of skills, experience, independence
and knowledge on the Board it was concluded
that her qualities would be complementary.
Interviews were conducted by the Chairman,
the Chairman of the Remuneration and
Nomination Committee, the Chief Executive,
the Chief Financial Officer, the Senior
Independent Director and the Group Human
Resources Director. It was concluded that
the Company’s interests would be served
on this occasion by moving swiftly, and following
nomination by the Committee, the Board
approved the appointment with effect from
1 January 2013. Consequently no search firm
was retained, nor was the position advertised.
Corporate governance Hiscox Ltd Report and Accounts 2012
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.
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 internal Board and committee evaluation
process was conducted during the year. This
followed an externally facilitated review carried
out in 2011. This year’s evaluation included a
review of Board composition and whether there
was an appropriate balance of skills, experience,
independence and knowledge. It also considered
how diversity, including gender diversity, could be
improved. Other areas covered were succession
planning, Board meeting content and focus, the
support to the Board, the quality and provision
of information, the Non Executive Directors’ input
into the strategy and shareholder engagement.
It was decided that no purpose would be served
in assessing the performance of an outgoing
Chairman in this year’s evaluation. However, it is
intended that the Chairman’s performance will
feature in future evaluations. The findings of the
evaluation were 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. 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 2012.
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, is 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.
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
2012, 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 2012
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 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.
Remuneration and Nomination Committee
The Remuneration and Nomination Committee
generally meets three times a year. The members
of the Committee for 2012 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 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
and Deloitte, independent remuneration
consultants. The Company also uses the Towers
Watson compensation benchmarking reports
and other publicly available 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 but are not excessive and are
applied at all levels of the organisation;
bonus scheme which enables employees
to earn attractive bonuses for generating
good levels of return on equity;
encourage share ownership at all levels of the
organisation and require it at senior levels; and
contracts and notice periods that are in line
with acceptable market practice but limit
severance payments made on termination.
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.
Base salary
Base salaries are subject to an annual review.
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 the size and scope of a
role, rates of salary increases elsewhere in the
Group, individual and Group performance, and
competitive positioning of salaries as informed
by Towers Watson data and other publicly
available reports.
In 2012 Executive Directors’ salaries increased
by an average of 5%, which was broadly in line
with increases seen elsewhere in the Group.
Between 2009 and 2011 there were no salary
increases for any Executive Directors, compared
with around 3% per annum for the Group. For
the two years prior to 2009 the CEO received
base salary increases below the average for
the Group. We believe that it is important to
note that, during this period from 2007 to 2012,
the CEO had explicitly requested that his salary
increases be eliminated or kept to a limited
amount in order to set an example for the
Company of compensation restraint. The
Committee viewed this as an admirable stance
and supported the CEO’s position. However,
we now believe that the impact over time of this
position has resulted in a meaningful disparity
between the CEO’s actual salary and the
appropriate level of base pay for the role.
A number of important changes will be made to
senior executive roles in Hiscox in 2013. As already
announced, Robert Hiscox will retire as Executive
Chairman and a new Non Executive Chairman will
be formally appointed. These changes will have an
impact on the role of the Executive Directors and
therefore the Remuneration Committee has taken
the opportunity to review the base salaries of the
CEO and CFO in the context of the consequential
expansion of their leadership responsibilities.
In addition to the role changes described
above, the Committee was also aware that
the size and complexity of the Hiscox Group
Directors’ remuneration report Hiscox Ltd Report and Accounts 2012
39
Directors’
remuneration
report continued
has increased considerably over time, but that
this was not fully reflected in the base salary
progression due to the history described above.
To inform the review the Committee undertook
analysis of absolute and relative performance
over the period. Over the past five years Hiscox
has delivered a total shareholder return (TSR)
of just under 100%, outperforming the FTSE
250 by just over 60% points and the FTSE
non-life by just under 30% points. Over the past
ten years Hiscox has delivered a TSR of just
over 330%, outperforming the FTSE 250
by over 50% points and the FTSE non-life by
140% points. The Committee believes that this
overwhelmingly illustrates that Bronek Masojada
and Stuart Bridges have delivered excellent
results to shareholders over a significant period
of time.
As a result of this review the Committee has
decided to increase Bronek Masojada’s salary
to £540,000 and Stuart Bridges’ salary to
£400,000 effective April 2013. The Committee
recognises that these are unusual and significant
increases which do not reflect past increases.
The changes for 2013 are not intended to form
a pattern for future increases.
It is important to note that the Executive Directors
and the Remuneration Committee take the issue
of pay discipline very seriously and firmly believe
that while base pay should be set at a reasonable
level, upper quartile total compensation should
only be achieved as a result of superior returns
to shareholders. This is demonstrated clearly by
the fact that in three of the previous 12 years the
Executive Directors did not receive any bonus
payment because the pre-tax return on equity
did not meet the agreed hurdle. The Committee
does, however, take equally seriously, the need
to retain high-performing executives by ensuring
that their pay is competitive. The Committee has
considered the costs involved in the event of
needing to recruit new executives compared with
the costs of increasing compensation to retain
successful proven executives. Getting this balance
right is clearly in the interests of shareholders.
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.
Stuart Bridges and Bronek Masojada hold
Lifetime Allowance protection certificates and
have therefore opted out of the pension scheme.
They receive a 10% cash allowance (less an
offset for the employer’s National Insurance
liability) in lieu of the standard employer pension
contribution. Robert Childs and Robert Hiscox
are in receipt of pensions from the closed defined
benefit scheme and are entitled to no further
pension provision.
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.
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 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
described above, the Hurdle Rate for 2012
was set at 7.5% and for 2013 will be set at 7.0%.
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,
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
40
Directors’ remuneration report Hiscox Ltd Report and Accounts 2012
and an assessment of individual performance.
In this way the bonus scheme aligns the
interests of Executive Directors and employees
with shareholders.
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.
As can be seen from the following table
the bonus pool and individual bonuses vary
significantly with performance from year-to-year.
In 2012 the performance of the business was
very good in what remains a very challenging
business environment. This resulted in a
pre-tax return on equity of 18% and an average
bonus of 183%. This contrasts with 2011,
when no bonuses were earned by the
Executive Directors.
Executive Directors’ cash incentives and ROE
Pre-tax return
on equity
%
Average bonus as a
percentage of salary
%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
(24)
13
30
28
19
35
36
14
34
19
1
18
0
90
202
173
54
274
372
53
287
108
0
183
The payment of larger bonuses is normally
deferred over a three-year period as follows
(with receipt dependent on continued service).
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
4/4
4/4
4/4
N/A
N/A
N/A
N/A
3/3
3/3
3/3
3/3
3/3
3/3
3/3
N/A
N/A
N/A
N/A
4/4
4/4
4/4
4/4
4/4
4/4
4/4
Directors’ remuneration report Hiscox Ltd Report and Accounts 2012
41
Directors’
remuneration
report continued
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. ROE encourages efficient
use of capital, or its return to shareholders. In
2013 £150 million of capital will be returned,
above normal progressive dividends.
The performance conditions for the PSP have been
unchanged since 2007. For future awards to be
made in 2013 and subsequent years the Committee
has decided to align the approach to setting the
PSP performance conditions with the method of
setting the bonus hurdle. The benchmark rate will
be set annually as described above under ‘Annual
cash incentives’ (taking account of medium-term
forward-looking investment returns) and the vesting
threshold will be five percentage points above this.
As a result of these proposed changes the
threshold rate below which none of the 2013
PSP award will vest will be a 7.0% post-tax
return on equity over a three-year period. If this
minimum threshold rate of return is reached or
exceeded, then 25% of the PSP awards granted
in 2013 will vest. The whole of the award will
only vest if a 14.5% post-tax return on equity
is achieved. The rate of vesting for performance
above the threshold level of performance
will remain unchanged and will be determined
on a straight line sliding scale.
Save as You Earn
The sharesave scheme and international
sharesave scheme are offered to all employees
and currently have a 56% participation.
Shareholding guidelines
We strongly believe that senior managers within
Hiscox should be aligned with Hiscox shareholders
by owning a minimum 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 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.
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 2012 and
the Remuneration and Nomination Committee
has also agreed to make awards under this
plan in 2013. The maximum annual award
to an individual under the Performance Share
Plan is a value of 200% 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 that have vested.
Performance conditions
Performance conditions for the Performance
Share Plan (PSP) 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
42
Directors’ remuneration report Hiscox Ltd Report and Accounts 2012
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 2012 is outlined in the table below.
Details of their contractual notice periods
are contained in the table opposite.
RRS Hiscox
BE Masojada
RS Childs
SJ Bridges
44%
56%
21%
39%
40%
33%
67%
21%
42%
37%
Base Annual cash incentive Share incentive scheme
‘Base’ refers to base salary for the year.
‘Annual cash incentive’ is the annual amount allocated from the profit bonus pool.
‘Share incentive scheme’ is the estimated value at award of the Performance Share
Plan awards made during the year.
Non Executive Director remuneration
Non Executive Directors receive an annual fee in
respect of their Board appointments together with
additional compensation for their further duties
in relation to Board Committees. The fees paid
in 2012 are summarised in the table on page 44.
In 2013 Robert Childs will become Chairman of
Hiscox Ltd. His appointment is as Non Executive
Chairman and as such he will be paid a fee of
£275,000 p.a. but will no longer be entitled to
participate in the annual bonus scheme or
receive grants under the Performance Share
Plan. His outstanding Performance Share Plan
grants from 2011 and 2012 will vest, in line with
the scheme rules, in 2014 and 2015 respectively.
Total shareholder return (%)
Hiscox
FTSE Non life insurance
FTSE All share
120
100
80
60
40
20
0
-20
-40
-60
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
M ar 12
Jun 12
S e p 12
D ec 12
Remuneration of Executive Directors
RRS Hiscox
BE Masojada
RS Childs
SJ Bridges
Total
2012
Basic salary
£000
2012
Benefits
£000
311
453
371
344
1,479
2
35
2
28
67
2012
Bonus
£000
400
850
750
700
2,700
2012
Total
£000
713
1,338
1,123
1,072
4,246
2011
Basic salary
£000
2011
Benefits
£000
2011
Bonus
£000
302
438
358
328
1,426
1
2
2
2
7
–
–
–
–
–
2011
Total
£000
303
440
360
330
1,433
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, BE Masojada has been a member of the Board of the Association
of British Insurers and was not remunerated for his services. RRS Hiscox, RS Childs, and SJ Bridges did not hold any Non Executive Director
positions during the year.
Directors’ remuneration report Hiscox Ltd Report and Accounts 2012
43
43
Chairman’s statement Hiscox Ltd Report and Accounts 2012
Directors’
remuneration
report continued
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
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
All amounts are denominated in US Dollars. The structure of the fees paid is detailed below. In 2013 Robert Childs will become Chairman of
Hiscox Ltd. His appointment is as Non Executive Chairman and as such he will be paid a fee of £275,000 p.a. but will no longer be entitled to
participate in the annual bonus scheme or receive grants under the Performance Share Plan. His outstanding Performance Share Plan
grants from 2011 and 2012 will vest in line with the scheme rules in 2014 and 2015 respectively.
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
47
42
32
37
32
42
39
Total
2012
$000
130
125
115
120
115
125
122
Total
2011
$000
128
123
113
118
113
122
119
Increase
in accrued
pension
during the
year
£000
12
2
10
1
Transfer
accrued
annual pension at
31 Dec 12
£000
Transfer value
of increase
in accrued
pension
£000
Transfer value
of accrued
pension at
1 Jan 12
£000
Transfer value
of accrued
pension at
31 Dec 12
£000
262
45
257
34
–
–
–
–
5,727
1,269
7,828
745
5,582
1,166
6,799
736
Increase/
(decrease) in
transfer value of
accrued benefit
during the year
£000
(145)
(103)
(1,029)
(9)
44
Directors’ remuneration report Hiscox Ltd Report and Accounts 2012
Share options
SJ Bridges
RS Childs
BE Masojada
Other employees
Total
Number of
options at
1 January
2012
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
1,441,868
3,554,433
Number of
options
granted
Number of
options
lapsed
Number of
options
exercised
Number of
options at
31 December
2012
154,578
154,578
154,578
463,734
–
206,104
206,103
206,104
–
–
–
–
(206,104 )
–
–
–
(206,104 )
618,311
(206,104 )
–
–
–
–
206,104
206,104
206,104
(206,104)
618,312
(233,957 )
(64,097 )
(24,652 )
(26,977 )
–
204,803
438,772
448,610
(349,683)
1,092,185
(761,891)
2,792,542
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Exercise price
£
1.465
1.514
1.499
Market price
at date of
exercise
£
Date from
which
exercisable
Expiry date
02-Apr-06
–
–
13-Jul-07
– 06-Apr-08
01-Apr-13
12-Jul-14
05-Apr-15
1.252 4.052-4.053 19-Nov-05 18-Nov-12
01-Apr-13
1.465
12-Jul-14
1.514
05-Apr-15
1.499
02-Apr-06
–
–
13-Jul-07
– 06-Apr-08
1.252 4.070-4.135 19-Nov-05 18-Nov-12
01-Apr-13
1.465
1.514
12-Jul-14
05-Apr-15
1.499
02-Apr-06
–
–
13-Jul-07
– 06-Apr-08
1.252 4.214-4.879 19-Nov-05 18-Nov-12
01-Apr-13
1.465 4.576-4.879
12-Jul-14
1.514 3.795-4.718
05-Apr-15
1.499
02-Apr-06
13-Jul-07
4.047 06-Apr-08
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
2012
3,210
–
3,210
3,107
9,686
32,385
93,325
66,509
154,774
111,793
146,337
447,960
–
–
Number of
options
granted
Number of
options
lapsed
Number of
options
exercised
Number of
options at
31 December
2012
Exercise price
£
Market price
at date of
exercise
£
Date from
which
exercisable
Expiry date
–
2,764
–
–
–
–
–
–
–
–
–
–
186,297
164,122
–
–
–
–
–
–
(1,513 )
(8,175 )
(17,491 )
(5,636 )
(7,117 )
(23,487 )
(3,534 )
(2,470 )
–
–
–
–
(9,686 )
(32,385 )
(91,812 )
(52,796 )
(3,053 )
(328 )
(2,324 )
(123 )
–
–
3,210
2,764
3,210
3,107
–
–
–
5,538
134,230
105,829
136,896
424,350
182,763
161,652
31-Oct-13
– 01-May-13
2.826
31-Oct-15
– 01-May-15
3.255
31-Oct-13
– 01-May-13
2.826
– 01-Dec-13 31-May-14
2.896
1.982 4.000-4.565 01-May-11
31-Oct-11
1.956 4.000-4.243 01-Dec-11 31-May-12
2.418 3.713-4.870 01-May-12
31-Oct-12
2.752 4.673-4.826 01-Dec-12 31-May-13
2.826 4.250-4.360 01-May-13
31-Oct-13
4.360 01-Dec-13 31-May-14
2.896
3.077 4.000-4.553 01-May-14
31-Oct-14
4.360 01-Dec-14 31-May-15
2.843
– 01-May-15
3.255
31-Oct-15
– 01-Dec-15 31-May-16
3.642
Total
1,072,296
353,183
(69,423)
(192,507)
1,163,549
International Sharesave
Scheme
Other employees
24,582
47,732
70,355
84,521
39,845
61,258
109,693
–
–
–
–
–
–
–
–
–
73,507
54,272
(16,789 )
(8,412 )
–
–
–
–
–
–
–
(7,793 )
(39,320 )
(51,020 )
–
–
–
–
–
–
–
–
19,335
84,521
39,845
61,258
109,693
73,507
54,272
1.956 4.092-4.868 01-Dec-11 31-May-12
2.418 3.713-4.250 01-May-12
31-Oct-12
2.752 4.553-4.826 01-Dec-12 31-May-13
– 01-May-13
2.826
31-Oct-13
– 01-Dec-13 31-May-14
2.896
– 01-May-14
3.077
31-Oct-14
– 01-Dec-14 31-May-15
2.843
31-Oct-15
– 01-May-15
3.127
– 01-Dec-15 31-May-16
3.718
Total
437,986
127,779
(25,201)
(98,133)
442,431
Directors’ remuneration report Hiscox Ltd Report and Accounts 2012
45
Directors’
remuneration
report continued
Performance Share Plan
SJ Bridges
RS Childs
RRS Hiscox
BE Masojada
Other employees
Number of
awards at
1 January
2012
121,934
200,000
150,000
125,000
–
225,000
175,000
125,000
–
90,588
83,137
50,000
76,260
75,000
–
193,986
275,000
250,000
175,000
–
604,323
264,962
683,881
2,741,500
2,842,240
2,808,000
–
Number of
awards
granted
Number of
awards
lapsed
Number of
awards
exercised
Number of
awards at
31 December
2012
Market price
at date of
exercise
£
Date from
which released
–
18,709
–
–
125,000
21,048
–
–
125,000
–
–
4,677
–
–
75,000
–
25,725
–
–
175,000
–
–
–
242,564
–
15,000
3,018,700
–
(30,000 )
–
–
–
(33,750 )
–
–
–
–
–
(7,500 )
–
–
–
–
(41,250 )
–
–
–
–
–
–
(537,451 )
(287,500 )
(233,500 )
(122,500 )
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(16,257)
–
(59,859)
(1,180,375 )
121,934
188,709
150,000
125,000
125,000
212,298
175,000
125,000
125,000
90,588
83,137
47,177
76,260
75,000
75,000
193,986
259,475
250,000
175,000
175,000
588,066
264,962
624,022 3.971-4.204
07-Apr-11
–
02-Apr-12
–
07-Apr-13
–
07-Apr-14
–
19-Mar-15
–
02-Apr-12
–
07-Apr-13
–
07-Apr-14
–
–
19-Mar-15
– 26-Mar-10
07-Apr-11
–
02-Apr-12
–
07-Apr-13
–
07-Apr-14
–
19-Mar-15
–
07-Apr-11
–
02-Apr-12
–
07-Apr-13
–
07-Apr-14
–
19-Mar-15
–
4.090 12-Jan-09
– 26-Mar-10
07-Apr-11
1,266,238 3.850-4.832 02-Apr-12
07-Apr-13
07-Apr-14
19-Mar-15
–
–
–
– 2,554,740
– 2,589,500
– 2,896,200
Total
12,335,811
3,846,423 (1,293,451)
(1,256,491 ) 13,632,292
46
Directors’ remuneration report Hiscox Ltd Report and Accounts 2012
Directors’ report
The Directors have pleasure in submitting
their Annual Report and consolidated
financial statements for the year ended
31 December 2012.
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 7 to 11. 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.
The information that fulfils the requirements of
the corporate governance statement as referred
to in Disclosure and Transparency Rule 7.2 can
be found in the corporate governance statement
on pages 36 to 38 and in this report.
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 £217.1 million (2011: £17.3 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 6.0p (net) per share
(2011: 5.1p (net)) was paid on 19 September
2012 by Hiscox Ltd in respect of the year
ended 31 December 2012. The Directors
are recommending the return of capital to
shareholders through an issue of B shares
and this will be considered at an Extraordinary
General Meeting to be held on 28 March 2013.
It is proposed that in place of a final dividend,
a sum equal to 12.0p per share will be payable
to shareholders as part of the return of capital.
(The final dividend for 2011 was 11.9p per share.)
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
The names and details of the individuals who
served as Directors of the Company during the
year, as well as one additional Director, Caroline
Foulger, who joined the Board on 1 January
2013, are set out on pages 34 to 35. Details
of the Chairman’s professional commitments
are included in his biography. The bye-laws
of the Company govern the appointment and
replacement of Directors. It was announced
on 30 July 2012 that Robert Hiscox would retire
as Chairman in February 2013 and accordingly
he will not be seeking re-appointment as a
Director at the Annual General Meeting. Caroline
Foulger will submit herself for appointment at
that meeting and, in accordance with the UK
Corporate Governance Code, all other Directors
will submit themselves for re-appointment.
The bye-laws may only be amended with the
approval of shareholders in general meeting
in accordance with relevant legislation.
Political and charitable contributions
The Group made no political contributions during
the year (2011: £nil). Charitable donations totaled
£768,000 (2011: £533,000) of which £500,000
(2011: £250,000) 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 22 February 2013, the Company had been
notified of the following interests of 5% or more
of voting rights in its ordinary shares:
Number of shares
*
% of total *
Invesco Limited†
54,031,056
13.44
Massachusetts Financial
Services Company †
39,800,146
10.09
*Based on voting rights of 394,387,209 as at 22 February 2013.
†Indirect holding.
A copy of the Company’s bye-laws is available
for inspection at the Company’s registered office.
The powers given to the Directors are contained
in the Company's bye-laws and are subject to
relevant legislation and, in certain circumstance
(including in relation to the issuing and buying
back by the Company of its shares), approval
by shareholders in general meeting. At the
Annual General Meeting in 2012 the Directors
were granted authorities to allot and issue shares
and to make market purchases of shares.
Directors’ report Hiscox Ltd Report and Accounts 2012
47
Directors’ report
continued
Annual General Meeting
The notice of the Annual General Meeting,
to be held on 16 May 2013 at 10:00am (2:00pm
(BST)), will be contained in a separate circular to
be sent to shareholders. This will be despatched
following the Extraordinary General Meeting
to be held on 28 March 2013.
By order of the Board
Jeremy Pinchin, Secretary
Wessex House, 45 Reid Street,
Hamilton HM12, Bermuda
25 February 2013
31 December 2012
5p Ordinary Shares
number of shares
beneficial
31 December 2011
5p Ordinary Shares
number of shares
beneficial
5,135,534
4,944,068
3,505,527
3,496,077
2,165,357
2,104,316
1,157,508
1,112,152
–
–
100,000
100,000
72,188
53,231
–
–
–
–
61,454
43,525
–
–
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, RSS Hiscox and the Chief
Financial Officer, SJ Bridges. The statements
were approved for issue on 25 February 2013.
48
Director’s report/Directors’ responsibilities statement Hiscox Ltd Report and Accounts 2012
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 (%)
Reserve releases (£m)
2012
2011
1,565.8
1,449.2
1,198.6
1,145.0
217.1
207.8
53.1
18.0
17.3
21.3
5.5
17.0
349.7
323.5
85.5
84.6
16.9
3.1
152
99.5
99.3
1.7
0.9
199
Financial summary Hiscox Ltd Report and Accounts 2012
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 2012,
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 Audit Limited
Hamilton, Bermuda
25 February 2013
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 2012, 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 2012
Consolidated income statement
For the year ended 31 December 2012
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 (losses)/gains
Total expenses
Results of operating activities
Finance costs
Share of (loss)/profit of associates after tax
Profit before tax
Tax (expense)/credit
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 2012, after tax
Profit for the year
Other comprehensive (loss)/income
Currency translation (losses)/gains (net of tax of £nil (2011: £nil))
Total other comprehensive (loss)/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
2012
Total
£000
2011
Total
£000
4 1,565,819 1,449,219
(275,208)
(297,679)
4 1,268,140
1,174,011
1,487,859 1,428,954
(283,947)
(289,238)
4 1,198,621 1,145,007
7
9
92,424
13,930
24,495
17,322
1,304,975 1,186,824
26.2
17
9
12
(538,826)
(283,615)
(236,202)
(20,173)
(697,898)
(269,792)
(203,204)
7,816
(1,078,816) (1,163,078)
226,159
(8,605)
(430)
217,124
(9,352)
23,746
(6,698)
223
17,271
4,001
207,772
21,272
53.1p
50.9p
5.5p
5.3p
10
16
28
31
31
Note
2012
Total
£000
2011
Total
£000
207,772
21,272
12
(35,806)
11,060
(35,806)
11,060
171,966
32,332
Consolidated income statement/Consolidated statement of comprehensive income Hiscox Ltd Report and Accounts 2012
51
Consolidated balance sheet
At 31 December 2012
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
Note
2012
£000
2011
£000
29
16
14
15
69,617
18,055
9,054
25,608
166,041
67,552
18,155
6,380
25,748
150,050
17
19 2,406,269 2,368,636
492,515
507,722
69,436
516,547
540,389
492,064
1,513
657,662
23
20
18, 26
4,386,272 4,222,741
24
24
20,703
41,313
245,005
24,711
25
25 1,046,652
24
20,563
32,086
245,005
60,517
897,728
Total equity (all attributable to owners of the Company)
1,378,384 1,255,899
Employee retirement benefit obligations
Deferred tax
Insurance liabilities
Financial liabilities
Current tax
Trade and other payables
Total liabilities
Total equity and liabilities
30
–
138,362
–
152,447
29
26 2,596,612 2,500,260
–
–
314,135
301
6,998
265,615
27
19
3,007,888 2,966,842
4,386,272 4,222,741
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 25 February 2013 and signed on its behalf by:
RRS Hiscox
Chairman
SJ Bridges
Chief Financial Officer
52
Consolidated balance sheet Hiscox Ltd Report and Accounts 2012
Consolidated statement of changes in equity
Balance at 1 January 2011
20,297
15,800
245,005
49,457
935,555 1,266,114
Note
Share
capital
£000
Share
premium
£000
Contributed
surplus
£000
Currency
translation
reserve
£000
Retained
earnings
£000
Total
£000
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
Balance at 31 December 2011
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 and current tax
Scrip dividends
Dividends paid to owners of the Company
–
–
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)
20,563
32,086
245,005
60,517
897,728 1,255,899
–
–
52
–
88
–
–
–
1,649
–
7,578
–
–
–
–
–
–
–
(35,806
)
207,772
171,966
–
–
–
–
–
6,135
–
5,190
–
(70,173)
6,135
1,701
5,190
7,666
(70,173)
24
29
24, 32
32
24
29
24, 32
32
Balance at 31 December 2012
20,703
41,313
245,005
24,711 1,046,652 1,378,384
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 2012
53
Consolidated statement of cash flows
For the year ended 31 December 2012
Profit before tax
Adjustments for:
Interest and equity dividend income
Interest expense
Net fair value (gains)/losses on financial assets
Depreciation, amortisation and impairment
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 received/(paid)
Net cash flows from operating activities
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 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
2012
£000
2011
£000
217,124
17,271
14, 15
9, 24
(45,699)
8,605
(37,654)
7,833
6,135
1,239
9,481
(8,245)
(49,377)
301
12,850
122,593
51,743
1,631
(7,256)
56,403
(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)
16
24
32
225,114
258,200
(3,104)
(3,103)
(7,505)
729
(2,561)
(9,992)
(13,712)
(11,824)
1,701
(62,507)
–
3,215
(50,512)
(20,000)
(60,806)
(67,297)
150,596
179,079
516,547
150,596
(9,481)
336,017
179,079
1,451
23
657,662
516,547
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 totaling £86,168,000 (2011: £77,203,000) 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 2012
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 1,400 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 2012 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
25 February 2013.
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 was the first
phase in the IASB’s insurance contract
project and as such is 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.
Since the original exposure draft, further
amendments have been made to the
proposals. As a result, the IASB has
committed to re-exposing the draft during
the first half of 2013. In addition, the IASB
has also stated they will allow at least three
full years from the date of any final standard
to actual implementation, therefore 2018 is
likely to be the earliest date for the adoption
of a new standard.
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 £3.06 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. There were no new or
amended Standards and Interpretations
issued by the IASB and endorsed by the
EU as of 1 January 2012 that had a material
impact on the Group.
A number of new standards, amendments
to standards and interpretations are
effective for annual periods beginning
after 1 January 2012, and have not been
applied in preparing these consolidated
financial statements.
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
55
Notes to the consolidated
financial statements
continued
2 Significant accounting policies continued
2.2 Basis of preparation continued
IAS 19: Employee Benefits (2011) is due
to be in effect from 1 January 2013. The
amendments require immediate recognition
of actuarial gains and losses in other
comprehensive income and to eliminate
the corridor method that the Group currently
operates. In addition, net interest income
or expense is required to be calculated using
the discount rate used to measure the
defined benefit asset or liability. The key
impact of adopting the amendments to IAS
19 for the year ended 31 December 2012
would have been to recognise a liability
of £16.9 million.
IFRS 9: Financial Instruments sets out the
recognition and measurement requirements
for financial instruments and some contracts
to buy or sell non-financial items. The IASB
has broken the project into three phases,
classification and measurement, impairment
methodology and hedge accounting. The
IASB continues to add to the standard as
it completes the various phases of its project
and it will eventually form a complete
replacement for IAS 39: Financial Instruments
Recognition and Measurement.
IFRS 9 (2010): Financial Instruments:
Classification and Measurement is due to
be effective from 1 January 2015. Under the
standard, a financial asset is measured at
amortised cost if it is held within a business
model whose objective is to hold assets to
collect contractual cash flows and its cash
flows are solely payments of principal and
interest. All other financial assets are
measured at fair value, with changes in fair
value recognised in profit or loss, ‘FVTPL’,
except for some equity investments for
which changes in fair value are recognised
in other comprehensive income.
An exposure draft containing amendments
to the standard was released in November
2012. It introduces a third measurement
category, under which a financial asset is
required to be measured at fair value through
other comprehensive income, ‘FVOCI’, if its
cash flows are solely payments of principal
and interest and are held in a business
model in which assets are managed both
in order to collect contractual cash flows
and for sale. The existing option to measure
an asset at FVTPL in order to reduce an
accounting mismatch would be available
for financial assets that would otherwise
be mandatorily measured at FVOCI.
The adoption of IFRS 9 will have an effect
on the classification and measurement
of the Group’s financial assets.
impact the disclosures in respect of fair
value measurement on adoption.
IFRS 10: Consolidated Financial Statements
is effective for annual periods beginning
1 January 2014, with retrospective
application. It replaces the portion of IAS 27:
Consolidated and Separate Financial
Statements that addresses the accounting
for consolidated financial statements. IFRS
10 revises the definition of ‘control’, the
key factor in determining whether an entity
is consolidated. The adoption of IFRS 10
is not expected to have an effect on the
Group’s consolidated financial statements.
IFRS 11: Joint Arrangements is effective for
annual periods beginning 1 January 2014,
with retrospective application. It replaces
IAS 31: Interests in Joint Ventures
and SIC-13: Jointly-Controlled Entities –
Non-Monetary Contributions by Venturers.
The standard clarifies the definition of a
joint arrangement and uses the principle
of control in IFRS 10 to define joint control.
The standard is not expected to have
a significant impact on the consolidated
financial statements of the Group.
IFRS 12: Disclosure of Interests in Other
Entities is effective for annual periods
beginning 1 January 2014, with retrospective
application. It includes all of the disclosures
that were previously included in IAS 27
related to consolidated financial statements,
as well as all of the disclosures that were
previously included in IAS 31 and IAS 28:
Investment in Associates. A number of
new disclosures are also required, including
the judgements made by management
in determining whether it controls an entity.
The standard will impact the disclosures
made by the Group in respect of its interests
in subsidiaries, joint arrangements and
associates on adoption.
As a result of the issuance of IFRS 10, IFRS
11 and IFRS 12, consequential amendments
have been made to IAS 27 and IAS 28. IAS
27 now contains requirements only relating
to separate financial statements, while
the amendments to IAS 28 incorporate
the accounting for joint ventures. Both
standards are effective for annual periods
beginning on or after 1 January 2014.
The adoption of these standards is not
expected to have an effect on the Group’s
consolidated financial statements.
IFRS 13: Fair Value Measurement is effective
for annual periods beginning 1 January
2013 and is to be applied prospectively.
The standard defines fair value, sets out
in a single IFRS a framework for measuring
fair value, and requires disclosures about
fair value measurements. The standard will
IAS 1 (amended): Presentation of Financial
Statements is effective for annual periods
beginning 1 July 2012. The amendment
will require a change in the presentation
of items of other comprehensive income,
requiring companies to group together
items within other comprehensive income
that may be reclassified to the profit or loss
section of the income statement. Upon
adoption, the amendment will result in
changes to the presentation of the Group’s
other comprehensive income.
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 (‘HDCM’) 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). As at 31 December 2012,
HDCM owned 72.5% of Syndicate 33 (2011:
72.5%). 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
56
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
2 Significant accounting policies continued
2.3 Basis of consolidation continued
(a) Subsidiaries continued
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. 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, Spain, Portugal, Ireland
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.
Goodwill and fair value adjustments arising
on the acquisition of a foreign entity
are treated as the foreign entity’s assets
and liabilities and are translated at the
closing rate.
2.5 Property, plant and equipment
Property, plant and equipment are stated
at historical cost less depreciation and any
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 determined by
comparing proceeds with carrying amount.
These are included in the income statement.
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
57
Notes to the consolidated
financial statements
continued
2 Significant accounting policies continued
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 fair value of consideration
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.
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.
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 at least 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. This assumption is reviewed
annually to determine whether the asset
continues to have an indefinite life.
(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
due to the stability of the US insurance
market. The licenses are 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.
This assumption is reviewed annually
to determine whether the asset continues
to have an indefinite life.
Financial assets are initially recognised
at fair value. Subsequent to initial
recognition financial assets are measured
as described below.
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.
(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.
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.
(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.
(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.
58
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
2 Significant accounting policies continued
2.9 Impairment of assets continued
(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.
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
and accrued based on the results of the
managed syndicate.
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
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
59
Notes to the consolidated
financial statements
continued
2 Significant accounting policies continued
2.13 Insurance contracts continued
(d) Liability adequacy tests continued
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
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.
60
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
2 Significant accounting policies continued
2.15 Employee benefits continued
(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
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 reperformed 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 2012
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
61
Notes to the consolidated
financial statements
continued
2 Significant accounting policies continued
2.22 Use of critical estimates,
judgements and assumptions continued
is £1,000 million (2011: £964 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
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, risk
management and capital 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
62
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
3 Management of risk continued
3.1 Insurance risk continued
i) Underwriting risk continued
payment limits to cap the maximum amount
payable from these insured events over
the contract period.
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, shown on page 15, 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 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.
Overleaf is a summary of the gross and net
insurance liabilities for each category, split
by region of risk.
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 premiums written
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
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
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
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 2012
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 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
Reinsurance
inwards
£000
2,222
1,700
4,567
4,220
286,305
141,113
107,676
94,429
292,506
238,366
Property –
marine and
major assets
£000
11,098
4,939
20,995
14,739
88,501
46,615
11,716
8,604
181,389
161,215
Types of insurance risk in the Group
Property –
other
assets
£000
Casualty –
professional
indemnity
£000
142,799
124,722
70,753
61,637
131,387
76,376
38,838
34,904
33,223
26,545
316,820
283,463
130,375
111,989
291,391
270,016
29,665
29,188
–
–
Casualty –
other risks
£000
7,167
7,092
16,837
14,615
34,715
30,428
22,695
17,531
102,296
82,429
*
Other
£000
Total
£000
23,427
13,868
34,073
27,878
20,602
17,767
77,960
60,544
64,614
49,291
503,533
435,784
277,600
235,078
852,901
582,315
288,550
245,200
674,028
557,846
693,276
313,699
417,000
768,251
183,710
220,676 2,596,612
479,828
236,112
324,184
694,656
152,095
169,348 2,056,223
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
Types of insurance risk in the Group
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
*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 contains 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 2012
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 includes
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 repriced 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 artwork,
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 repriced.
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 2012
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 and the
insurance linked fund, 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 2012, 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 2012 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 2012 was
£190 million (2011: £173 million). These may
be analysed as follows:
Nature of equity and unit
trust holdings
2012
% weighting
2011
% 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
4
69
27
44
56
3
73
24
39
61
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 2012
would have been expected to reduce
Group equity and profit after tax for
the year by approximately £16.7 million
(2011: £15.0 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.
The fair value of debt and fixed income
assets in the Group’s balance sheet at
66
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
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 and obtaining
collateral from unrated counterparties.
Management information reports detail
provisions for impairment on loans and
receivables and subsequent write-off.
Exposures to individual intermediaries
and groups of intermediaries are collected
within the ongoing monitoring of the controls
associated with regulatory solvency.
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.
31 December 2012 was £2,195 million
(2011: £2,171 million). These may be analysed
as follows:
Nature of debt and
fixed income holdings
2012
% weighting
2011
% weighting
(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.
Government issued bonds
and instruments
Agency and government
supported debt
Asset backed securities
Mortgage backed
instruments – agency
Mortgage backed
instruments – non-agency
Mortgage backed
instruments – commercial
Corporate bonds
Lloyd’s deposits and
bond funds
34
12
10
7
3
3
27
4
23
25
11
6
5
–
27
3
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 £39 million (2011:
decrease of £38 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 2012, no amounts were
outstanding on the Group’s borrowing
facility (2011: £nil). The Group has no other
significant borrowings or other assets
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 policyholder. The creditworthiness
of reinsurers is therefore continually
reviewed throughout the year.
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
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 counterparty credit 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 2012
Debt and fixed income securities
Deposits with credit institutions
Catastrophe bonds
Reinsurance assets
Cash and cash equivalents
Total
Amounts attributable to largest single counterparty
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
Note
19
19
18
23
AAA
£000
AA
£000
A
£000
816,153
900
–
16,714
149,291
834,671
–
–
153,440
77,090
369,528
12,303
–
340,711
429,949
Other/
non-rated
£000
Total
£000
174,514 2,194,866
13,203
–
540,389
657,662
–
–
29,524
1,332
983,058 1,065,201 1,152,491
205,370 3,406,120
209,847
489,070
106,502
5,398
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
The largest counterparty exposure within the AAA rating at both 31 December 2012 and 2011 is with the UK Treasury, and for AA rating
is with the US Treasury. On 22 February 2013, Moody's downgraded the UK’s government bonds from Aaa to Aa1. Standard & Poor’s
maintain the AAA rating currently.
Catastrophe bonds included within ‘other/non-rated’ are rated BB and B. A significant proportion of ‘other/non-rated’ assets are rated BBB
and BB at 31 December 2012 and 31 December 2011. The reinsurance assets classified as AAA rated include collateralised reinsurance
arrangements.
At 31 December 2012 and 2011 the Group held no material debt or 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. 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 2012
3 Management of risk continued
3.2 Financial risk continued
(d) Credit risk continued
An analysis of the Group’s positions 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
New Zealand
Norway
Supranationals
South Korea
Sweden
Other
Total
31 December 2012
31 December 2011
Government
issued
£000
Government
supported
£000
Total
£000
Government
issued
£000
Government
supported
£000
489,070
209,847
–
–
17,297
–
7,003
6,551
109,871
–
–
3,118
–
2,614
2,191
1,474
120,991
23,083
8,921
–
31,373
4,384
2,197
1,531
51,806
12,329
–
–
25,645
209
1,133
–
610,061
232,930
8,921
–
48,670
4,384
9,200
8,082
161,677
12,329
–
3,118
25,645
2,823
3,324
1,474
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
584
6,035
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
584
6,035
30,135
2,833
5,801
479
849,036
283,602 1,132,638
619,127
551,448 1,170,575
Included above are £1,012 million (2011: £1,049 million) in relation to holdings in debt securities, £10 million (2011: £nil) held as deposits
with credit institutions and £111 million (2011: £122 million) held as cash equivalents, having a maturity of less than three months at the time
of purchase. Of the amount held as cash equivalents, £35 million (2011: £114 million) is held with the UK Government and £75 million (2011:
£nil) with the US Treasury.
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. Bank debt held by the Group is mostly senior unsecured
and covered bonds. The subordinated bonds are all classed as Lower Tier 2 capital.
Senior
Subordinated
31 December 2012
AAA
£000
AA
£000
A
£000
BBB
£000
Sub-total
£000
A
£000
United States
of America
United Kingdom
Australia
Canada
Denmark
France
Germany
Netherlands
New Zealand
Norway
Spain
Sweden
Switzerland
Other
–
10,632
1,102
12,066
349
1,364
–
1,893
662
1,704
–
1,853
–
–
–
4,375
7,829
4,973
–
292
–
3,516
637
–
–
6,723
–
190
65,651
12,948
–
15,090
537
8,373
1,712
4,751
–
1,059
–
6,432
8,833
304
1,311
–
–
–
–
–
–
–
–
–
614
–
–
495
66,962
27,955
8,931
32,129
886
10,029
1,712
10,160
1,299
2,763
614
15,008
8,833
989
603
303
–
1,828
–
–
–
–
–
–
–
–
–
–
BBB
£000
–
894
–
823
–
–
–
765
–
–
–
–
–
–
Total
31,625
28,535
125,690
2,420
188,270
2,734
2,482
B
£000
Sub-total
£000
Total
£000
–
1,394
–
–
–
–
–
–
–
–
–
–
–
–
1,394
603
2,591
–
2,651
–
–
–
765
–
–
–
–
–
–
67,565
30,546
8,931
34,780
886
10,029
1,712
10,925
1,299
2,763
614
15,008
8,833
989
6,610
194,880
Included in the bank debt table above, are £192 million in relation to holdings in debt securities and £3 million held as deposits with
credit institutions.
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
69
Notes to the consolidated
financial statements
continued
3 Management of risk continued
3.2 Financial risk continued
(d) Credit risk continued
31 December 2011
AAA
£000
AA
£000
United States
of America
United Kingdom
Australia
Belgium
Canada
Denmark
Finland
France
Germany
Italy
Netherlands
New Zealand
Norway
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
–
–
Senior
A
£000
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
BBB
£000
B
£000
Sub-total
£000
A
£000
BBB
£000
Sub-total
£000
Total
£000
Subordinated
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
2,768
1,939
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
2,768
1,939
2,848
11,092
11,597
1,023
2,839
10,453
227,137
Included in the table above, are £222 million in relation to holdings in debt securities and £5 million held as cash equivalents.
(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 is 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
497,658
468,475
808,545
349,761
Deposits
with credit
institutions
£000
12,957
–
246
–
Cash
and cash
equivalents
£000
2012
Total
£000
2011
Total
£000
657,662 1,168,277 1,082,200
487,678
468,475
822,245
808,791
265,897
349,761
–
–
–
2,124,439
13,203
657,662 2,795,304 2,658,020
70,427
–
–
70,427
53,602
2,194,866
13,203
657,662 2,865,731 2,711,622
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.
70
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
3 Management of risk continued
3.2 Financial risk continued
(e) Liquidity risk continued
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 as at 31 December
Pound Sterling
US Dollar
Euro
Canadian Dollar
2012
Years
1.58
5.97
2.08
2.13
2011
Years
2.26
5.64
1.45
4.01
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
194,812
86,882
99,599
160,302
59,053
50,443
98,970
41,829
26,896
124,411
30,705
14,129
67,604
34,942
18,414
256,700
34,988
14,906
Over
five years
£000
32,860
5,242
1,052
17,838
2,365
4,523
2012
Total
£000
394,246
168,895
145,961
559,251
127,111
84,001
651,091
336,940
427,554
63,880 1,479,465
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
*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 are 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.
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
71
Notes to the consolidated
financial statements
continued
3 Management of risk continued
3.2 Financial risk continued
(f) Currency risk continued
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 £181 million
(2011: £169 million) which are denominated in foreign currencies.
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:
As at 31 December 2012
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
Sterling
£000
US Dollar
£000
Euro
£000
Other
£000
Total
£000
63,309
10,372
8,754
–
53,314
6,308
6,537
–
23,809
83,584
523,212 1,587,848
410,944
304,258
107
254,002
67,136
77,951
–
231,463
–
1,146
300
1,799
24,416
253,677
52,038
91,375
1,406
103,522
–
–
–
–
4,727
69,617
18,055
9,054
25,608
166,041
41,532 2,406,269
540,389
10,271
492,064
18,480
1,513
–
657,662
68,675
Total assets
1,035,511 2,677,397
529,679
143,685 4,386,272
Sterling
£000
US Dollar
£000
Euro
£000
Other
£000
Total
£000
–
–
–
138,362
641,484 1,493,727
–
–
156,618
75
6,615
71,794
–
–
348,878
226
383
31,765
–
–
–
138,362
112,523 2,596,612
301
6,998
265,615
–
–
5,438
858,330 1,650,345
381,252
117,961 3,007,888
Employee retirement benefit obligations
Deferred tax
Insurance liabilities
Financial liabilities
Current tax
Trade and other payables
Total liabilities
72
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
3 Management of risk continued
3.2 Financial risk continued
(f) Currency risk continued
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
Sterling
£000
US Dollar
£000
Euro
£000
Other
£000
Total
£000
6,308
61,244
7,692
9,623
66
5,726
23,555
–
51,693
70,969
511,306 1,601,720
373,469
69,576
226,133
145,876
3,385
62,654
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
Sensitivity analysis
As at 31 December 2012, the Group used closing rates of exchange of £1:€1.23 and £1:$1.63 (2011: £1:€1.19 and £1:$1.54). 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 2012
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
119.9
(95.1)
14.1
(11.6)
31.9
(23.1)
19.2
(15.7)
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
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 2012 for a total of $875
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 $400 million. This facility
was secured during 2012 by the
Company’s subsidiary Hiscox plc.
The Letter of Credit availability period
ends on 31 December 2013. This
enables the Group to utilise the Letter
of Credit as Funds at Lloyd’s to support
underwriting on the 2012, 2013 and
2014 years of account. The revolving
credit facility has a maximum three-
year contractual period for repayment.
At 31 December 2012 US$308 million
was drawn by way of Letter of Credit
to support the Funds at Lloyd’s
requirement and there were no cash
drawings (2011: $340 million and £nil
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 20%;
Syndicate 6104 at Lloyd’s – with a
capacity of £39 million for the 2012
year of account (2011 year of account:
£37 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 2012 year of account
for Syndicates 33 and 3624 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:
Hiscox Insurance
Company Limited
Hiscox Insurance
Company (Bermuda)
Limited
Hiscox Insurance
Company (Guernsey)
Limited
Hiscox Insurance
Company Inc.
A.M. Best
Fitch
Standard
& Poor’s
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
of the Group. The Group maintains its cost
74
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
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 on the following
page 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.
3 Management of risk continued
3.3 Capital risk management continued
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.
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.
The Group’s regulatory capital is supervised
by the Bermuda Monetary Authority
(BMA). For the last two years, the BMA
has conducted impact assessments of the
regulatory capital requirements for groups,
in preparation for the requirements to
become enforceable from the beginning
of 2013. The Group had sufficient capital
to meet the regulatory capital requirements
during both of the impact assessments.
In 2005, the UK Financial Services Authority
(FSA) and Lloyd’s introduced a new capital
regime that requires insurance companies
to calculate their own capital requirements
through Individual Capital Assessments
(ICA). Hiscox Insurance Company Limited
and Hiscox’s Lloyd’s operations maintain
ICA models in accordance with this regime.
The models are concentrated specifically
on the particular product lines, market
conditions and risk appetite of each entity.
The Group used its own integrated modeling
expertise to produce the ICA calculations.
The results mirrored those driving the
existing internal capital setting process.
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
the Integrated Prudential Sourcebook for
Insurers (INSPRU) and General Prudential
Sourcebook (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.
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,
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
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 2012
Year to 31 December 2011
Gross premiums
written
Net premiums
written
Net premiums
earned
640,042
507,522
418,255
– 1,565,819
585,441
498,006
365,772
– 1,449,219
462,397
479,861
325,882
– 1,268,140
413,390
472,608
288,013
–
1,174,011
419,026
476,945
302,650
– 1,198,621
418,764
448,594
277,649
– 1,145,007
Investment result*
Other revenues
26,973
7,115
17,754
2,136
29,202
3,992
18,495
687
92,424
13,930
8,782
9,858
7,248
3,938
6,313
3,311
2,152
215
24,495
17,322
Revenue
453,114
496,835
335,844
19,182 1,304,975
437,404
459,780
287,273
2,367 1,186,824
Claims and claim
adjustment
expenses, net of
reinsurance
Expenses for
the acquisition
of insurance
contracts
Operational
expenses
Foreign exchange
(losses)/gains
(176,253)
(222,562)
(140,011)
–
(538,826)
(238,026)
(207,018)
(252,854)
–
(697,898)
(97,853)
(112,487)
(73,275)
–
(283,615)
(99,257)
(106,300)
(64,235)
–
(269,792)
(45,606)
(111,074)
(62,233)
(17,289)
(236,202)
(39,685)
(94,985)
(56,229)
(12,305)
(203,204)
(10,187)
(1,647)
3,113
(11,452)
(20,173)
(1,507)
(25)
(3,097)
12,445
7,816
Total expenses
(329,899)
(447,770)
(272,406)
(28,741) (1,078,816)
(378,475)
(408,328)
(376,415)
140 (1,163,078)
Results of operating
activities
Finance costs
Share of (loss)/profit
of associates
after tax
123,215
(1,319)
49,065
–
63,438
(697)
(9,559)
(6,589)
226,159
(8,605)
58,929
(1,308)
51,452
–
(89,142)
(399)
2,507
(4,991)
23,746
(6,698)
–
–
(64)
(366)
(430)
–
–
65
158
223
Profit before tax
121,896
49,065
62,677
(16,514)
217,124
57,621
51,452
(89,476)
(2,326)
17,271
*Interest revenues included total £50,811,000 (2011: £48,802,000).
The following charges are included within the consolidated income statement:
London
Market
£000
720
UK and
Europe
£000
442
International
£000
1,012
1,532
1,896
1,527
Year to 31 December 2012
Year to 31 December 2011
Corporate
Centre
£000
Total
£000
London
Market
£000
UK and
Europe
£000
International
£000
Corporate
Centre
£000
Total
£000
83
30
2,257
1,325
1,488
1,226
106
4,145
4,985
1,198
1,250
1,499
6
3,953
Depreciation
Amortisation of
intangible assets
76
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
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 2012
Year to 31 December 2011
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
40.3
32.8
73.1
2.4
75.5
UK and
Europe
47.2
46.9
94.1
0.3
94.4
46.0
44.2
90.2
(1.0)
89.2
Total
44.1
40.5
84.6
0.9
85.5
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
74.6
94.7
89.2
85.1
90.0
90.9
133.9
–
–
–
–
–
–
Total
60.2
39.1
99.3
0.2
99.5
99.9
–
–
–
–
–
–
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, including profit
related pay, 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 2012
Year to 31 December 2011
London
Market
£000
UK and
Europe
£000
International
£000
Corporate
Centre
£000
London
Market
£000
UK and
Europe
£000
International
£000
Corporate
Centre
£000
5,496
4,895
3,072
4,190
4,769
3,027
–
–
5,555
4,637
2,831
4,188
4,486
2,776
–
–
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 2012
Year to 31 December 2011
Gross premiums written
Net premiums written
Net premiums earned
844,330 523,405
424,189
601,736 491,992 330,941
549,603 489,453 307,206
779,261
– 1,791,924
– 1,424,669 543,696
– 1,346,262 555,533 463,706
514,075
370,168
487,609 292,640
283,138
– 1,663,504
– 1,323,945
– 1,302,377
Investment result
Other revenues
Claims and claim adjustment
expenses, net of reinsurance
Expenses for the acquisition
of insurance contracts
Operational expenses
Foreign exchange
(losses)/gains
Results of operating
activities
36,842
–
18,283
2,097
29,590
2,453
18,495 103,210
5,237
687
12,024
1,553
7,399
3,380
6,503
1,990
2,152
215
28,078
7,138
(221,637) (230,740)
(141,154)
– (593,531)
(314,517)
(214,609)
(254,627)
–
(783,753)
(125,810)
(54,091)
(117,955)
(111,810)
(74,751)
(61,162)
– (318,516)
(17,289) (244,352)
(130,593)
(50,182)
(111,624)
(95,946)
(65,127)
(56,245)
–
(12,305)
(307,344)
(214,678)
(13,372)
(1,711)
3,138
(11,452)
(23,397)
72
90
(3,103)
12,445
9,504
171,535
47,617
65,320
)
(9,559
274,913
73,890
52,396
)
(87,471
2,507
41,322
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 2012
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
As at 31 December 2012
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
33,215
50,862
826,094
886,937
426,004
10,469
45,023
428,107
230,013
264,231
69,617
15,779
166,041
68,391
216,967 2,415,323
870,731
275,825
540,389
(852,386)
606,413 1,074,731 (1,176,477) 1,194,902
10,154
–
73,424
–
–
1,765
2,223,112
977,843 1,837,139 1,158,309 (1,810,131) 4,386,272
1,267,797
926,709
566,218
222,193
914,223
72,923
–
193,282 (1,003,831)
(151,626) 2,596,612
411,276
2,194,506
788,411
987,146
193,282 (1,155,457) 3,007,888
4,262
3,743
1,776
585
–
10,366
London
Market
£000
UK and
Europe
£000
International
£000
Corporate
Centre
£000
Intragroup items
and eliminations
£000
Total
£000
As at 31 December 2011
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
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 and 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
International
£000
Corporate
Centre
£000
Total
£000
London
Market
£000
UK and
Europe
£000
UK and Ireland
Europe
United States
Rest of World
19,774
6,922
339,991
225,560
287,673
167,970
12,431
22,828
1,068 245,074
48,861 109,707
24,360
– 319,878
27,829
–
197,720
306,114
– 586,133
– 384,128 235,273
274,108
145,270
22,127
32,807
Year to 31 December 2012
Year to 31 December 2011
Corporate
Centre
£000
Total
£000
310,393
–
200,776
–
–
522,357
– 395,428
International
£000
11,925
27,677
194,116
127,348
592,247 505,572 390,040
– 1,487,859
593,576
474,312
361,066
– 1,428,954
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 2012
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
2012
Net asset
value
per share
pence
Net asset
value
)
(total equity
£000
1,378,384
1,308,767
349.7 1,255,899
332.0 1,188,347
2011
Net asset
value
per share
pence
323.5
306.1
The net asset value per share is based on 394,200,249 shares (2011: 388,233,074 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 gains/(losses) on financial investments at fair value through profit or loss
Investment result – financial assets
Fair value losses on derivative financial instruments
Total result
Investment expenses are presented within other expenses (note 9).
2012
£000
2011
£000
207,772
21,272
1,255,899 1,266,114
(14,025)
(28,095)
1,227,804 1,252,089
16.9
1.7
Note
2012
£000
2011
£000
45,699
9,071
37,920
50,333
5,040
(29,431)
8
21
92,690
(266)
25,942
(1,447)
92,424
24,495
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
2012
%
3.6
3.2
1.8
2011
%
1.0
0.6
1.6
London Market
UK and Europe
International
Corporate Centre
2012 Total
£000
26,813
–
242
27,055
%
3.5
–
0.2
3.1
£000
%
£000
%
£000
%
£000
%
8,585
8,288
796
17,669
1.9
13.8
19,191
8,580
2.5
14.0
7,990
10,106
3.9
16.6
62,579
26,974
0.7
2.8
1,700
29,471
0.6
2.7
399
18,495
0.4
5.1
3,137
92,690
2.8
14.8
0.5
3.1
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
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
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)
1.0
1.3
868
7,322
1.6
(9.3)
0.4
0.8
1,968
(375)
126
1,719
0.9
(0.9)
29,933
(5,935)
0.2
0.5
1,944
25,942
1.3
(3.8)
0.4
0.9
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
Marketing expenses
Investment expenses
Depreciation, amortisation and impairment
Other expenses
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
2012
£000
5,866
5,532
1,123
1,409
2011
£000
6,769
7,383
1,006
2,164
13,930
17,322
88,294
15,299
6,117
1,800
6,135
26,251
3,543
7,833
80,930
69,185
12,930
5,724
1,700
8,677
19,955
3,360
8,098
73,575
236,202 203,204
Note
35
36
2012
£000
2,703
5,032
870
–
8,605
2011
£000
1,960
3,933
804
1
6,698
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:
The auditing of the accounts of any associate of the Group
All audit-related assurance services
Taxation compliance services
All non-audit-related assurance services
2012
£000
911
129
–
21
2011
£000
908
132
8
–
1,061
1,048
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.
80
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
12 Net foreign exchange (losses)/gains
The net foreign exchange gains for the year include the following amounts:
Exchange (losses)/gains recognised in the consolidated income statement
Exchange (losses)/gains classified as a separate component of equity
Overall impact of foreign exchange related items on net assets
2012
£000
2011
£000
(20,173)
(35,806)
7,816
11,060
(55,979)
18,876
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
(Loss)/gain included within profit representing the non-retranslation of non-monetary items
Closing balance sheet impact of non-retranslation of non-monetary items
2012
£000
2,144
(4,818)
(2,674)
2011
£000
(1,251)
3,395
2,144
13 Foreign currency items on 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 (gains)/losses arise
which are not eliminated through the income statement on consolidation. Implicit offsetting gains/(losses) 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 2012
Unrealised translation gains/(losses) on intragroup borrowings
Total gains/(losses) recognised
Impact as at 31 December 2011
Unrealised translation (losses)/gains on intragroup borrowings
Total (losses)/gains recognised
Consolidated
income
statement
2012
£000
Consolidated
other
comprehensive
income
2012
£000
891
891
(891)
(891)
Consolidated
income
statement
2011
£000
(4,540)
(4,540)
Consolidated
other
comprehensive
income
2011
£000
4,540
4,540
Total
impact on
equity
2012
£000
–
–
Total
impact on
equity
2011
£000
–
–
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
81
Notes to the consolidated
financial statements
continued
14 Intangible assets
At 1 January 2011
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
6,308
–
6,308
19,539
(2,857)
9,982
(1,344)
70,739
(6,631)
16,682
8,638
64,108
7,975
–
–
7,975
24,505
–
–
24,505
6,308
–
–
16,682
7,397
(3,634)
8,638
–
(319)
64,108
7,397
(3,953)
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
Year ended 31 December 2012
Opening net book amount
Other additions
Amortisation charges
Impairment
Closing net book amount
At 31 December 2012
Cost
Accumulated amortisation and impairment
7,975
–
–
(100)
24,505
–
–
–
6,308
–
–
–
20,445
7,150
(4,302)
–
8,319
–
(683)
–
67,552
7,150
(4,985)
(100)
7,875
24,505
6,308
23,293
7,636
69,617
10,405
(2,530)
24,505
–
6,308
–
34,086
(10,793)
9,982
(2,346)
85,286
(15,669)
Net book amount
7,875
24,505
6,308
23,293
7,636
69,617
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.
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 6.7% (2011: 4.8%) 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.
The £100,000 impairment recognised in the year for goodwill is included in operational expenses in the consolidated income statement (2011: £nil).
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 2012 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 value in use to the Group’s US insurer. The value in use is calculated
using a discounted projected cash flow based on business plans approved by management, and discounted at an appropriate rate. Key
assumptions include new business growth, retention rates, market cycle and claims inflation. The results of that test show 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. These intangible assets are amortised on a straight-line basis over their useful economic life.
82
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
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 2012.
The amortisation charge for the year includes £4,302,000 (2011: £3,634,000) relating to capitalised internally generated software costs
and is included in operational expenses in the consolidated income statement.
The net book value of capitalised internally generated software costs at 31 December 2012 was £23,293,000 (2011: £20,445,000).
There are no charges for impairment during the current or prior financial year.
At 31 December 2012 there were £13,505,000 of assets under development on which no amortisation has been charged (2011: £8,873,000).
15 Property, plant and equipment
At 1 January 2011
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
Year ended 31 December 2012
Opening net book amount
Additions
Disposals
Depreciation charge
Impairment
Foreign exchange movements
Closing net book amount
At 31 December 2012
Cost
Accumulated depreciation
Net book amount
Land and
buildings
£000
Leasehold
improvements
£000
Vehicles
£000
6,104
(340)
5,764
5,764
–
–
(82)
60
5,742
6,164
(422)
5,742
5,742
–
–
(77)
(491)
(170)
3,162
(986)
2,176
2,176
584
(21)
(292)
40
2,487
3,765
(1,278)
2,487
2,487
260
–
(391)
–
(138)
5,004
2,218
258
(150)
108
108
–
(58)
–
–
50
142
(92)
50
50
80
(27)
(33)
–
–
70
Furniture
fittings and
equipment
and art
£000
Total
£000
44,678
(32,984)
54,202
(34,460)
11,694
19,742
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
9,876
2,876
(90)
(1,756)
–
(143)
18,155
3,216
(117)
(2,257)
(491)
(451)
10,763
18,055
5,498
(494)
3,816
(1,598)
114
(44)
43,743
(32,980)
53,171
(35,116)
5,004
2,218
70
10,763
18,055
The Group’s land and buildings assets relate to freehold property in the UK and US.
The impairment charge of £491,000 in the year is included in operational expenses in the consolidated income statement (2011: £nil).
Assets with a net book value of £nil were held under finance leases (2011: £nil).
During the year no expenditure was recognised in the carrying value of property that is under the course of construction (2011: £nil).
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
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
Net (loss)/profit from investments in associates
At end of year
The Group’s interests in its principal associates, all of which are unlisted, were as follows:
2012
£000
2011
£000
6,380
6,886
3,104
–
(430)
–
(729)
223
9,054
6,380
100% results
2012
Associates incorporated in the UK
Associates incorporated in Europe
Total at the end of 2012
2011
Associates incorporated in the UK
Associates incorporated in Europe
Associates incorporated in the USA
Total at the end of 2011
% interest
held at
31 December
Assets
£000
Liabilities
£000
Revenues
£000
Profit after tax
£000
from 25% to 35%
from 25% to 49%
67,773
1,806
52,720
1,097
14,987
2,523
69,579
53,817
17,510
661
254
915
100% results
% interest
held at
31 December
Assets
£000
Liabilities
£000
Revenues
£000
Profit after tax
£000
from 25% to 35%
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)
On 6 August 2012, the Group acquired a 25% holding in Lark (2012) Ltd, for total consideration of £3,104,000 as referred to in note 33.
The company is treated as an associate from this date.
During 2012, the Group disposed of its holding in InsuranceBee, Inc. During 2011 the Group sold its holding in Plexstar Insurance
Services Ltd.
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.
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
Foreign exchange adjustment
Gross
£000
Reinsurance
£000
2012
Net
£000
Gross
£000
Reinsurance
£000
2011
Net
£000
150,050
(15,641)
134,409
142,736
(17,048)
125,688
353,193
(333,758)
(3,444)
(53,077)
50,143
235
300,116
(283,615)
(3,209)
320,529
(314,385)
1,170
(43,186)
44,593
–
277,343
(269,792)
1,170
Balance deferred at 31 December
166,041
(18,340)
147,701
150,050
(15,641)
134,409
The deferred amount of insurance contract acquisition costs attributable to reinsurers of £18,340,000 (2011: £15,641,000) is not eligible
for offset against the gross balance sheet asset and is included separately within trade and other payables (note 27).
The amounts expected to be recovered before and after one year are estimated as follows:
Within one year
After one year
2012
£000
2011
£000
137,754
9,947
126,847
7,562
147,701
134,409
84
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
18 Reinsurance assets
Reinsurers’ share of insurance liabilities
Provision for non-recovery and impairment
Reinsurance assets
Note
2012
£000
2011
£000
541,387
(998)
493,422
(907)
26
540,389
492,515
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
286,532
253,857
265,525
226,990
540,389
492,515
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 loss during the year of £91,000 (2011: gain of £52,000) 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
Insurance linked fund
Catastrophe bonds
Derivative financial instruments
Total financial assets carried at fair value
Derivative financial instruments
Total financial liabilities
Note
2012
Fair value
£000
2011
Fair value
£000
2,194,866 2,170,588
173,432
12,848
190,029
13,203
2,398,098 2,356,868
–
11,639
129
8,098
–
73
21
2,406,269 2,368,636
Note
21
2012
Fair value
£000
2011
Fair value
£000
301
301
–
–
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).
On 27 December 2012, the Group invested $13.2 million into the Third Point Reinsurance Opportunities Fund (‘the Fund’), representing
a 32% non-voting interest holding, subject to a two-year initial lock-up period. The Group has committed to invest an additional $16.8 million
into the Fund which is payable on demand. The Fund specialises in catastrophe reinsurance opportunities and is classified by the Group
as an insurance linked fund.
The Group has entered into a quota share arrangement with Third Point Re Cat Ltd, a wholly-owned reinsurance entity of the Fund.
No contracts have been ceded to the entity as of 31 December 2012.
The Group’s investment in catastrophe bonds was dissolved during the year (2011: £11.6 million). 2011 comprised 16 catastrophe bonds
with credit ratings of BB and B. The issuers of these securities used the proceeds to collateralise certain catastrophe reinsurance obligations
mainly in US and European wind and earthquake risks.
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
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:
2012
£000
2011
£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
404,769
408,328
1,496,748 1,508,234
254,026
293,349
2,194,866 2,170,588
105,486
82,683
1,860
90,303
81,620
1,509
190,029
173,432
12,957
246
–
12,588
260
–
13,203
12,848
2,398,098 2,356,868
2012
£000
2011
£000
425,720
(986)
429,676
(956)
424,734
428,720
295,892
128,842
299,879
128,841
424,734
428,720
10,345
8,387
7,295
9,120
13,138
27,432
13,792
10,149
19,726
26,948
492,064
507,722
476,930
15,134
499,805
7,917
492,064
507,722
There is no significant concentration of credit risk with respect to loans and receivables as the Group has a large number of internationally
dispersed debtors. The Group has recognised a loss of £30,000 (2011: gain of £85,000) for the impairment of receivables during the year
ended 31 December 2012.
86
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
21 Derivative financial instruments
The Group entered into both exchange-traded and over-the-counter derivative contracts for a number of purposes during 2012. 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 2012 all mature
within one year of the balance sheet date and are detailed below:
31 December 2012
Derivative financial instrument included on balance sheet
Foreign exchange forward contracts
Interest rate futures contracts
31 December 2011
Derivative financial instrument assets included on balance sheet
Foreign exchange forward contracts
31 December 2011
Derivative financial instrument liabilities included on balance sheet
Interest rate futures contracts
All derivatives contracts settle within three months of the year end.
Gross contract
notional amount
£000
Fair value
of assets
£000
Fair value
of liabilities
£000
Net balance
sheet position
£000
17,755
36,655
73
–
301
–
228
–
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
Gross contract
notional amount
£000
37,156
Fair value
of assets
£000
–
Fair value
of liabilities
£000
Net balance
sheet position
£000
–
–
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 gain
on these forward contracts of £71,000 (2011: loss of £84,000) as included in note 7. The opposite exchange loss 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 £337,000 (2011: £1,796,000)
as included in note 7.
Equity index futures
During the prior 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 as included in note 7.
No such futures were purchased in 2012.
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
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 2012
Financial assets
Debt and fixed income securities
Equities and shares in unit trusts
Deposits with credit institutions
Catastrophe bonds
Insurance linked fund
Derivative instrument assets
Total
Financial liabilities
Derivative financial instruments
As at 31 December 2011
Financial assets
Debt and fixed income securities
Equities and shares in unit trusts
Deposits with credit institutions
Catastrophe bonds
Insurance linked fund
Derivative instrument assets
Total
Financial liabilities
Derivative financial instruments
Level 1
£000
Level 2
£000
Level 3
£000
Total
£000
718,393 1,476,473
176,494
–
–
–
73
–
13,203
–
–
–
– 2,194,866
190,029
13,203
–
8,098
73
13,535
–
–
8,098
–
731,596 1,653,040
21,633 2,406,269
–
301
–
301
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
–
–
–
–
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 market observable 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 is 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 2012
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 is 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 and an insurance linked fund 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 Group invested into the insurance linked fund in December 2012, which is subject to a two-year initial lock-up period. The fund
specialises in catastrophe reinsurance opportunities. 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 significant 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 2012
Balance at 1 January
Total gains or losses through profit or loss*
Purchases
Settlements
Closing balance
Unrealised gains and losses in the year
on securities held at the end of the year
*Total gains/(losses) are included within the investment result in the income statement.
31 December 2011
Balance at 1 January
Total gains or losses through profit or loss*
Purchases
Settlements
Closing balance
Unrealised gains and losses in the year
on securities held at the end of the year
*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 deposits
Equities and shares
in unit trusts
£000
Deposits with
credit institutions
£000
Insurance
linked fund
£000
Derivative financial
instruments
£000
10,626
2,587
322
–
13,535
2,587
–
–
–
–
–
–
–
–
8,098
–
8,098
–
–
–
–
–
–
–
Equities and shares
in unit trusts
£000
Deposits with
credit institutions
£000
Insurance
linked fund
£000
Derivative financial
instruments
£000
6,926
1,242
3,002
(544)
10,626
1,242
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
£000
10,626
2,587
8,420
–
21,633
2,587
Total
£000
6,926
1,242
3,002
(544)
10,626
1,242
2012
£000
2011
£000
428,454
229,208
258,927
257,620
657,662
516,547
The Group holds its cash deposits with a well-diversified range of banks and financial institutions. Cash includes overnight deposits.
Short-term deposits include debt securities with an original maturity date of less than three months and money market funds.
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
89
Notes to the consolidated
financial statements
continued
24 Share capital
Group
Authorised
Issued share capital
31 December 2012
31 December 2011
Share
capital
£000
Number
of shares
Share
capital
£000
Number
of shares
40,000 800,000,000
414,069,422
20,703
30,000 600,000,000
411,256,520
20,563
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 2011
Employee share option scheme – proceeds from shares issued
Scrip dividends to owners of the Company
At 31 December 2011
Employee share option scheme – proceeds from shares issued
Scrip dividends to owners of the Company
At 31 December 2012
Note
32
32
Ordinary
share
capital
£000
20,297
91
175
Share
premium
£000
Contributed
surplus
£000
15,800
3,124
13,162
245,005
–
–
20,563
32,086
245,005
52
88
1,649
7,578
–
–
20,703
41,313
245,005
Contributed surplus is a distributable reserve and arose on the reverse acquisition of Hiscox plc on 12 December 2006.
During the year, the Group offered its shareholders the option of receiving a scrip dividend alternative to the cash dividend. This resulted
in the Company paying the shareholders, who opted for a scrip dividend, in shares of equal value to the cash dividend at a specified date.
The full dividend was distributed from retained earnings and the new shares issued for the scrip dividend were reflected in share capital
and share premium.
Equity structure of Hiscox Ltd
At 1 January
Employee share option scheme – ordinary shares issued
Scrip dividends to owners of the Company
At 31 December
All issued shares are fully paid.
Note
32
Number of
5p ordinary
shares in issue
(thousands
2012
)
Number of
5p ordinary
shares in issue
(thousands
2011
)
411,257
405,943
1,054
1,758
1,811
3,503
414,069
411,257
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 employees
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 repurchase 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 £6,135,000 (2011: £8,677,000). This comprises charges of £5,793,000 (2011: £8,361,000) in respect of performance
share plan awards and £342,000 (2011: £316,000) 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 2012
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)
2012
2011
0.9-1.9
0.27-0.55
3.95-4.31 4.24-4.59
3.25
29
397.0
3.25
28
416.0
The weighted average fair value of each share option granted during the year was 93.4p (2011: 89.9p). The weighted average fair value
of each performance share plan award granted during the year was 414.0p (2011: 397.0p).
Movements in the number of share options during the year and details of the balances outstanding at 31 December 2012 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
2012
£000
2011
£000
24,711
60,517
1,046,652
897,728
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 2012 Hiscox Ltd held 19,682,214 shares in treasury (2011: 22,836,487). 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
2012
£000
2011
£000
932,604
1,000,300
663,708
938,498
964,073
597,689
2,596,612 2,500,260
192,311
261,128
86,950
187,973
224,855
79,687
18
540,389
492,515
740,293
739,172
576,758
750,525
739,218
518,002
2,056,223 2,007,745
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
1,190,613 1,160,744
847,001
865,610
2,056,223 2,007,745
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
91
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 claims
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 2012 and 2011
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 necessitates 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 reoccur 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.
Estimates of ultimate claims are adjusted
each reporting period to reflect emerging
92
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
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%
2003
£000
2004
£000
2005
£000
2006
£000
2007
£000
2008
£000
2009
£000
2010
£000
2011
£000
2012
£000
Total
£000
677,420
586,952
785,828
1,132,098
451,232
462,982 750,898 1,252,403 560,426 700,297
716,648 1,254,360 539,926 664,529
435,298
677,008 864,069
678,079 1,236,690 509,990
448,028
519,672 670,233 828,996
442,618
681,010 1,231,059
–
641,088
432,405 663,389 1,232,155
509,716
–
–
427,914 666,685 1,188,963 496,764
–
–
–
417,794 648,433 1,182,120
–
–
–
–
638,611
413,874
–
–
–
–
–
413,545
1,089,977
924,155
901,688 635,020 805,499
–
628,871
–
–
–
–
–
–
–
–
–
–
–
–
1,305,556
999,343
830,500
691,660 858,866 1,177,441
–
–
–
–
–
–
–
–
1,068,466
8,927,372
– 7,379,128
– 5,952,968
– 5,042,735
– 4,373,588
– 3,478,753
– 2,780,326
– 2,248,347
– 1,052,485
413,545
–
413,545
638,611
1,182,120
496,764
641,088
828,996
628,871
805,499
1,177,441
1,068,466
7,881,401
(380,930
)
)
(603,815
(1,137,927
)
(456,744
)
(551,708
)
(705,187
)
(490,583
)
(508,862
)
)
(612,544
(211,444
)
)
(5,659,744
32,615
34,796
44,193
40,020
89,380
123,809
138,288
296,637
564,897
857,022
2,221,657
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 2012.
Reconciliation of 100% disclosures above to Group’s share – gross
2003
£000
2004
£000
2005
£000
2006
£000
2007
£000
2008
£000
2009
£000
2010
£000
2011
£000
2012
£000
Total
£000
413,545
638,611
1,182,120
496,764
641,088
828,996
628,871
805,499
1,177,441
1,068,466
7,881,401
(92,227
)
)
(149,455
)
(297,239
(104,031
)
)
(124,512
)
(158,706
)
(104,563
(122,246
)
(167,408
)
(151,799
)
(1,472,186
)
321,318
489,156
884,881
392,733
516,576
670,290
524,308
683,253
1,010,033
916,667
6,409,215
(380,930
)
)
(603,815
(1,137,927
)
(456,744
)
(551,708
)
(705,187
)
(490,583
)
(508,862
)
)
(612,544
(211,444
)
(5,659,744
)
83,632
140,725
286,497
94,183
105,597
131,908
81,998
69,254
86,192
21,317
1,101,303
)
(297,298
(463,090
)
(851,430
)
)
(362,561
(446,111
)
)
(573,279
(408,585
)
)
(439,608
)
(526,352
(190,127
)
(4,558,441
)
24,020
26,066
33,451
30,172
70,465
97,011
115,723
243,645
483,681
726,540
1,850,774
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 2003 to
2012 accident years
recognised on
Group’s balance sheet
Liability for accident
years before 2003
recognised on
Group’s balance sheet
107,975
2,329,632
82,130
1,932,904
Total Group liability to external parties included in balance sheet – gross**
**This represents the claims element of the Group’s insurance liabilities.
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
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 2003 to
2012 accident years
recognised on
Group’s balance sheet
Liability for accident
years before 2003
recognised on
Group’s balance sheet
2003
£000
2004
£000
2005
£000
2006
£000
2007
£000
2008
£000
2009
£000
2010
£000
2011
£000
2012
£000
Total
£000
668,943
566,426
355,725
375,233
768,212
618,704
342,232 594,381 758,222
733,810
352,920
557,991
724,053
343,372 558,860
338,539 544,064
724,336 460,025
334,976 544,245 703,604 453,022
–
323,900
–
316,035
–
321,250
762,679
683,708
522,105
681,434
513,824 622,394
677,599
603,148
497,020
572,223 639,340 548,086
455,123
–
471,721 568,043 608,530
–
–
543,510
–
–
–
–
–
–
–
–
–
–
–
–
1,016,675
800,335
681,858
573,182 705,854 940,543
–
547,415 665,628
–
–
–
–
–
–
–
–
–
–
–
–
–
–
528,724
520,847
–
695,163
–
–
790,001
6,848,455
– 5,799,380
– 4,685,645
– 3,859,493
– 3,274,579
– 2,610,474
– 2,035,847
– 1,547,787
836,882
–
321,250
–
321,250
520,847
695,163
453,022
543,510
608,530
548,086
665,628
940,543
790,001
6,086,580
(313,107
)
)
(487,971
)
(644,541
(420,041
)
)
(471,241
(508,311
)
)
(422,048
(445,819
)
)
(502,022
)
(182,459
(4,397,560
)
8,143
32,876
50,622
32,981
72,269
100,219
126,038
219,809
438,521
607,542
1,689,020
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 2012.
Reconciliation of 100% disclosures above to Group’s share – net
2003
£000
2004
£000
2005
£000
2006
£000
2007
£000
2008
£000
2009
£000
2010
£000
2011
£000
2012
£000
Total
£000
321,250
520,847
695,163
453,022
543,510
608,530
548,086
665,628
940,543
790,001
6,086,580
(70,288
)
)
(122,336
(167,281
)
(94,653
)
(106,623
)
(109,893
)
(86,099
)
(90,474
)
)
(121,073
)
(97,137
)
(1,065,857
250,962
398,511
527,882
358,369
436,887
498,637
461,987
575,154
819,470
692,864
5,020,723
(313,107
)
)
(487,971
)
(644,541
(420,041
)
)
(471,241
(508,311
)
)
(422,048
(445,819
)
)
(502,022
)
(182,459
(4,397,560
)
68,282
113,935
154,537
86,235
90,960
87,609
64,676
58,138
65,136
18,319
807,827
(244,825
)
(374,036
)
(490,004
)
(333,806
)
)
(380,281
(420,702
)
)
(357,372
(387,681
)
(436,886
)
(164,140
)
(3,589,733
)
6,137
24,475
37,878
24,563
56,606
77,935
104,615
187,473
382,584
528,724
1,430,990
65,222
1,754,242
48,475
1,479,465
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 2012
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 claim adjustment expenses for year
Cash paid for claims settled in the year
Exchange differences and other movements
Gross
£000
Reinsurance
£000
2012
Net
£000
Gross
£000
Reinsurance
£000
2011
Net
£000
(1,902,571)
(719,792)
614,723
74,736
412,828 (1,489,743) (1,706,404)
(830,368)
(538,826)
180,966
650,510
490,038
(124,685)
(16,309)
59,066
(15,670)
374,193 (1,332,211)
(697,898)
132,470
555,077
(95,433)
(14,711)
1,598
Total at end of year
(1,932,904)
453,439 (1,479,465) (1,902,571)
412,828 (1,489,743)
Claims reported and claim adjustment expenses
Claims incurred but not reported
(932,604)
(1,000,300)
192,311
261,128
(740,293)
(739,172)
(938,498)
(964,073)
187,973
224,855
(750,525)
(739,218)
Total at end of year
(1,932,904)
453,439 (1,479,465) (1,902,571)
412,828 (1,489,743)
The insurance claims expense reported in the consolidated income statement is comprised as follows:
Year ended 31 December
Current year claims and claim adjustment expenses
Over/(under) provision in respect of prior year
claims and claim adjustment expenses
Gross
£000
Reinsurance
£000
2012
Net
£000
Gross
£000
Reinsurance
£000
2011
Net
£000
(930,635)
239,912
(690,723) (1,126,667)
229,314
(897,353)
210,843
(58,946)
151,897
296,299
(96,844)
199,455
Total claims and claim adjustment expenses
(719,792)
180,966
(538,826)
(830,368)
132,470
(697,898)
27 Trade and other payables
Creditors arising out of direct insurance operations
Creditors arising out of reinsurance operations
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
2012
£000
2011
£000
15,606
130,605
58,346
152,866
146,211
211,212
10,239
8,649
9,037
4,856
10,640
14,939
27,925
30,435
17
18,340
73,139
15,641
56,847
265,615
314,135
248,155
17,460
300,976
13,159
265,615
314,135
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 2012
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 expense/(credit)
Deferred tax
Expense for the year
Adjustments in respect of prior years
Effect of rate change
Total deferred tax (credit)/expense
Total tax charged/(credited) to the income statement
2012
£000
2011
£000
15,751
2,973
380
(95,809)
18,724
(95,429)
595
2,912
(12,879)
17,090
77,992
(3,654)
(9,372)
91,428
9,352
(4,001)
The standard rate of corporation tax in Bermuda is 0% whereas the effective rate of tax for the Group is 4.3% (2011: -22.5%). A reconciliation
of the difference is provided below:
Profit before tax
Tax calculated at the standard corporation tax rate applicable in Bermuda: 0% (2011: 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 charge/(credit) for the period
2012
£000
2011
£000
217,124
–
31,594
(12,879)
1,734
6,752
716
(727)
(23,723)
–
5,885
17,271
–
21,620
(3,654)
11,665
(2,651)
(1,435)
(1,867)
(10,242)
380
(17,817)
9,352
(4,001)
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 arose and
resulted in a closing current tax debtor at 31 December 2012. Equally, deductions for member-level reinsurance premiums which were
previously deferred for tax, and formed part of the deferred tax balance had been taken in earlier years, and no longer formed part of the
deferred tax balance. The effect of this change in current tax was a credit to the income statement of £81,287,000. The effect of this change
in deferred tax was 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. This rebate was received during 2011 and 2012.
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
2012
£000
2011
£000
25,608
25,748
2012
£000
2011
£000
11,370
(149,732)
24,616
(177,063)
(138,362)
(152,447)
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 2012
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
(b) Net Group deferred tax liabilities analysed by balance sheet headings
At 31 December
Tangible assets
Trading losses in UK entities
Trade and other payables
Intangible assets – Syndicate capacity
Other items
Total deferred tax assets
Investment in associated enterprises
Financial assets
Insurance contracts – equalisation provision*
Reinsurance premiums
Retirement benefit obligations
Open years of account
Total deferred tax liabilities
Net total deferred tax liabilities
2011
£000
25,748
25,748
Income
statement
(charge)/credit
£000
Transfer from
equity
£000
(140)
(140)
–
–
Income
statement
(charge)/credit
£000
Transfer from
equity
£000
2011
£000
2,614
12,959
525
3,344
5,174
(955)
(12,959)
510
(468)
(3,947)
24,616
(17,819)
(6)
(1,018)
(26,929)
(128,240)
(610)
(156,803)
(20,260)
–
22
(4,103)
14,379
521
10,819
16,512
(177,063)
27,331
(152,447)
–
–
–
–
4,573
4,573
2012
£000
25,608
25,608
2012
£000
1,659
–
1,035
2,876
5,800
11,370
–
–
–
–
–
–
–
–
(6)
(996)
(31,032)
(113,861)
(89)
(145,984)
(3,748)
(149,732)
(138,362)
* 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 23% for the year ended 31 December 2012 (2011: 25%). The UK Government
has indicated its intention to reduce UK tax rates to 21% by the full year commencing April 2014, however at the balance sheet date, no such
measures were substantially enacted.
Movements in deferred and current tax relating to tax deductions arise on employee share options are recognised in the statement of
change to equity to the extent that the movement exceeds the corresponding charge to the income statement. The total recognised in the
statement of changes in equity is £5,190,000, comprising £4,573,000 deferred tax and £617,000 current tax (2011: £3,927,000 deferred tax).
Deferred tax assets of £25,608,000 (2011: £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. £23,809,000 (2011: £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 Group has not provided for deferred tax assets totalling £13,931,000 (2011:
£8,714,000) including £13,841,000 (2011: £8,713,000) in relation to losses in overseas companies of £39,545,000 (2011: £25,408,000).
In accordance with IAS 12, all deferred tax assets and liabilities are classified as non-current.
The amount of deferred tax asset expected to be recovered after more than 12 months is £25,608,000 (2011: £25,748,000).
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
2012
£000
2011
£000
173,420
(156,513)
155,685
(140,517)
16,907
(32,991)
16,084
15,168
(27,247)
12,079
–
–
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
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.
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 2011, and updated at each intervening balance sheet
date by the actuaries. 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
2012
£000
2011
£000
105,644
47,417
3,452
91,758
44,825
3,934
156,513
140,517
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 £17,807,000 (2011: £3,392,000).
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
Contributions paid
At end of year
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
98
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
Note
2012
£000
2011
£000
347
7,548
(8,097)
–
1,034
968
533
7,705
(8,988)
(3,037)
–
5,487
9
1,800
1,700
Note
9
2012
£000
–
1,800
(1,800)
2011
£000
–
1,700
(1,700)
–
–
2012
£000
2011
£000
140,517
8,097
9,710
1,800
–
(3,264)
(347)
144,056
8,988
(5,596)
1,700
–
(8,098)
(533)
156,513
140,517
30 Employee retirement benefit obligations continued
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
2012
£000
2011
£000
155,685
347
7,548
–
13,451
(3,264)
–
(347)
146,737
533
7,705
(3,037)
12,378
(8,098)
–
(533)
173,420
155,685
A summary of the scheme’s recent experience is shown below:
Experience gains/(losses) on scheme obligations
Experience gains/(losses) on scheme assets
2012
£000
4,372
9,710
2011
£000
–
(5,596)
2010
£000
–
6,075
2009
£000
2008
£000
–
(3,678)
–
(18,107)
2007
£000
2,783
75
2006
£000
(3,310)
6,480
Additional memorandum information at the end of the current and previous six accounting periods is presented below:
2012
£000
2011
£000
2010
£000
2009
£000
2008
£000
2007
£000
2006
£000
173,420
(156,513)
155,685
(140,517)
146,737
(144,056)
140,676
(118,391)
101,615
(115,166)
106,793
(127,576)
137,461
(133,660)
Present value of scheme obligations
Fair value of scheme assets
Present value of unfunded obligations/
(surplus scheme assets)
16,907
15,168
2,681
22,285
(13,551)
(20,783)
Gross liability recognised on balance sheet
–
–
–
–
–
–
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
2012
years
26.9
28.3
2012
years
28.3
29.8
2012
%
4.5
5.6
2.9
2.1
2.9
3,801
3,801
2011
years
26.6
27.8
2011
years
27.7
29.0
2011
%
4.9
5.8
3.1
2.3
3.1
The triennial valuation carried out as at 31 December 2011 resulted in a deficit position of £19.7 million. The Group agreed to fund the
£19.7 million deficit paying instalments over five years. During the year the Group made its first instalment of £1.8 million to the defined
benefit scheme (2011: £1.7 million) which included £0.2 million for the expenses of the pension fund (2011: £0.2 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 2012 by approximately £4,650,000 (2011: £1,396,000), the Group considers that the most sensitive
and judgemental assumptions are the discount rate and inflation.
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
99
Notes to the consolidated
financial statements
continued
30 Employee retirement benefit obligations continued
CPI revalution in deferment is used for contracted-out members. Contracted-in members are linked to RPI as well as for all pension
in payment increase.
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 2012 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 4.75%
Effect of an increase in inflation
Use of RPI inflation assumption of 3.15%
16,907
6,634
16,907
20,039
–
–
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)
2012
2011
207,772
391,592
53.1p
21,272
383,602
5.5p
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)
2012
2011
207,772
21,272
391,592
16,427
383,602
15,610
408,019
399,212
50.9p
5.3p
Diluted earnings per share has been calculated after taking account of 15,915,875 (2011: 15,029,986) options and awards under employee
share option and performance plan schemes and 510,925 (2011: 579,518) options under SAYE schemes.
32 Dividends paid to owners of the Company
Interim dividend for the year ended:
31 December 2012 of 6.0p (net) per share
31 December 2011 of 5.1p (net) per share
Final dividend for the year ended:
31 December 2011 of 11.9p (net) per share
31 December 2010 of 11.5p (net) per share
2012
£000
2011
£000
23,567
–
46,606
–
–
19,738
–
44,111
70,173
63,849
100
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
32 Dividends paid to owners of the Company continued
The final and interim dividends were either paid in cash or issued as a scrip dividend at the option of the shareholder. The final dividend
for the year ended 31 December 2011 was paid in cash of £44,301,000 (2010: £31,803,000) and 562,194 shares for the scrip dividend
(2010: 3,227,459).
The interim dividend for the year ended 31 December 2012 was paid in cash of £18,206,000 (2011: £18,709,000) and 1,196,214 shares
for the scrip dividend (2011: 276,006).
Subject to shareholder approval at the forthcoming Extraordinary General Meeting on 28 March 2013, the Board proposes to pay 12p per
ordinary share instead of a final dividend for the year ended 31 December 2012. Together with the interim dividend of 6p per ordinary share,
this represents a total dividend for 2012 of 18p per ordinary share. In addition, the Board proposes to pay a special distribution of 38p
per ordinary share. Such amounts will be paid by way of a B share scheme. A scrip dividend alternative will not be offered to shareholders.
33 Acquisitions
On 6 August 2012, the Group acquired a 25% holding in Lark (2012) Ltd, ‘Lark’, for total consideration of £3,104,000. Lark is a specialist
UK insurance broker. The company is treated as an associate of the Group from this date. No goodwill arose on acquisition.
There were no acquisitions in the prior year.
34 Disposals
The Group disposed of its holding in InsuranceBee, Inc. for no consideration.
During 2011, the Group sold its holding in Plexstar Insurance Services Ltd.
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 (2011: £15 million) in respect of Hiscox Ltd and $350 million (2011: $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 circumstances where
it considers there to be a risk that the covenant might need to be called.
(b) During 2012, Hiscox plc entered into a new Letter of Credit and revolving credit facility with Lloyds TSB Bank, for a total $875 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 $400 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 2012 $308 million (2011: $340 million) was drawn by way of Letter of Credit to support the Funds at Lloyd’s
requirement and no cash drawings were outstanding (2011: £nil).
(c)
Hiscox Insurance Company Limited has arranged a Letter of Credit of £50,000 (2011: £50,000) with NatWest Bank plc to support
its consortium activities with Lloyd’s.
(d)
(e)
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 2013 and 2012. 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.
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 2012, Hiscox renegotiated
its Letter of Credit Reimbursement and Pledge Agreement with Citibank for the provision of a Letter of Credit facility in favour of US
ceding companies and other jurisdictions. In addition, Hiscox entered into new Letter of Credit facility agreements with the Royal Bank
of Scotland and Commerzbank AG during 2012. The agreements combined are a three-year secured facility that allowed Hiscox to
request the issuance of up to US$400 million in Letters of Credit. Letters of Credit issued under these facilities are collateralised by US
Government and Corporate Securities of Hiscox Insurance Company (Bermuda) Limited. Letters of Credit under this facility totaling
US$126,579,000 were issued with an effective date of 31 December 2012 (2011: US$68,759,000 on a US$450 million facility).
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
101
Notes to the consolidated
financial statements
continued
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, equipment and software
development was £418,000 (2011: £326,000).
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 totaled £7,233,000 (2011:
£7,256,000). Operating lease rental income for the year totaled £615,000 (2011: £420,000).
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
2012
£000
2011
£000
7,482
194
25,967
72
18,101
7,359
1
25,239
–
22,106
51,816
54,705
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
2012
£000
584
613
–
1,197
2011
£000
373
246
–
619
Obligations under finance leases
There were no finance lease arrangements in place at 31 December 2012 or 31 December 2011.
Finance lease interest expense for the year was £nil (2011: £1,430).
37 Principal subsidiary companies of Hiscox Ltd at 31 December 2012
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 2012 (2011: 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.
102
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012
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
The following balances were outstanding (payable) at the year end to Syndicate 33 by Group companies.
Hiscox Syndicates Limited
Hiscox Group insurance carriers
Hiscox Group insurance intermediaries
Other Hiscox Group companies
The following amounts reflected in the income statement were transacted with Syndicate 33:
Hiscox Syndicates Limited
Hiscox Group insurance carriers
Hiscox Group insurance intermediaries
31 December
2012
£000
31 December
2011
£000
21,102
1,836
(7,874)
(8,321)
38,577
10,460
(14,845)
(7,581)
6,743
26,611
31 December
2012
£000
31 December
2011
£000
25,840
6,313
12,550
32,276
3,556
14,133
44,703
49,965
(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
2012
£000
Total
2011
£000
12,994
11,593
3,286
2,679
29
10,539
–
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 2012
103
2012
£000
2011
£000
2010
£000
2009
£000
2008
£000
1,565,819 1,449,219 1,432,674 1,435,401 1,147,364
898,394
1,174,011 1,131,627 1,157,023
1,268,140
928,095
1,131,158 1,098,102
1,198,621 1,145,007
105,180
320,618
17,271
70,808
280,497
21,272
211,366
178,800
217,124
207,772
67,552
64,108
69,617
48,557
2,406,269 2,368,636 2,459,107 2,413,300 2,081,772
440,622
259,647
(1,817,102) (1,702,225) (1,773,622)
153,697
100,151
516,547
(2,056,223) (2,007,745)
310,909
223,984
657,662
336,017
301,059
50,413
1,378,384 1,255,899 1,266,114 1,121,286
951,026
349.7
323.5
332.7
299.2
258.1
53.1
50.9
85.5
16.9
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
18.00
17.00
16.50
15.00
12.75
489.40
369.30
424.70
340.50
381.40
317.00
362.00
277.00
361.00
194.75
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)
*Closing mid-market prices.
104
Five year summary Hiscox Ltd Report and Accounts 2012
To request a copy of the 2012
Hiscox corporate brochure
visit www.hiscox.com
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Cover
Aerial view of London
Hiscox Ltd
4th Floor
Wessex House
45 Reid Street
Hamilton HM 12
Bermuda
T +1 441 278 8300
F +1 441 278 8301
E enquiries@hiscox.com
www.hiscox.com
11010 03/12