Final Results

RNS Number : 1314Y
Hiscox Ltd
27 February 2012
 



Monday 27 February 2012

 

Hiscox Ltd

 

Full year results for the year ended 31 December 2011

 

"Balance provides stability"

 

 


2011

2010

Gross premiums written

£1,449.2m

£1,432.7m

Net premiums earned

£1,145.0m

£1,131.2m

Profit before tax

£17.3m

£211.4m

Profit after tax

£21.3m

£178.8m

Earnings per share

5.5p

47.2p

Total dividend per share for year

17.0p

16.5p

Net asset value per share

323.5p

332.7p

Group combined ratio excluding foreign exchange

99.3%

89.8%

Group combined ratio

99.5%

89.3%

Return on equity

1.7%

16.5%

Investment return

    0.9%

               3.6%

                                                                                                                       

 

Financial highlights

 

·      Pre-tax profit of £17.3 million (2010: £211.4 million) - a good result considering natural catastrophe losses of £270 million

·      Gross written premiums level at £1,449.2 million (2010: £1,432.7 million)

·      Earnings per share 5.5p (2010: 47.2p)

·      Total dividend for the year increased by 3.0% to 17.0p (2010: 16.5p)

·      Net assets per share decreased by 2.8% to 323.5p (2010: 332.7p)

·      Combined ratio 99.5% (2010: 89.3%) 

 

Operational highlights

 

·      Robert Hiscox to step down from the Board in 2013

·      UK retail business delivers good growth and another record profit of £49.0 million (2010: £28.8 million)

·      Hiscox London Market achieved aprofit of £57.6 million (2010: £121.4 million), offsetting catastrophe reinsurance losses with profits in international property, marine, and other specialist lines

·      Rates are rising in reinsurance and slowly increasing in other specialty lines

·      Hiscox USA is progressing well with 29% growth in core broker lines and over 6,000 policies sold by the direct business in the first year of operation

 

Robert Hiscox, Chairman of Hiscox Ltd, commented:

"We have made a small profit in an unusually difficult year.  Some key rates are rising, we are employing some brilliant talent, we have fledgling businesses poised for growth and profit, and our mature businesses have small market shares and enormous opportunities.  I look forward to my final year as Chairman confident that the next era of the business will be rewarding to both shareholders and staff".

 

 

 

 



For further information:

 

Hiscox Ltd                                                                   

 

Charles Dupplin, Group Company Secretary                                 +1 441 278 8300                                   

Kylie O'Connor, Head of Group Communications, London              +44 (0)20 7448 6656     

 

 

Brunswick                                                                                +44 (0)20 7404 5959

 

Tom Burns                                                                   

 

 

 

Notes to editors 

 

About Hiscox

 

Hiscox, the international specialist insurer, is headquartered in Bermuda and listed on the London Stock Exchange (LSE:HSX). There are three main underwriting parts of the Group - Hiscox London Market, Hiscox UK and Europe and Hiscox International. Hiscox London Market underwrites internationally traded business in the London Market - generally large or complex business which needs to be shared with other insurers or needs the international licences of Lloyd's. Hiscox UK and Hiscox Europe offer a range of specialist insurance for professionals and business customers, as well as high net worth individuals. Hiscox International includes operations in Bermuda, Guernsey and USA.

 

For further information, visit www.hiscox.com


Chairman's statement

 

Again we have been well and truly tested by Mother Nature and a small profit is a good result in the circumstances. By any measurement, it was a phenomenally catastrophic year with definitely more economic damage caused by natural catastrophes than ever before, including in the second half of the year the major international loss from the Bangkok floods. We were able to absorb these considerable losses, despite much reduced investment returns, through the profits from our specialist books in the London Market, and the retail businesses in the UK, Europe and Guernsey. In particular, a £49.0 million profit from the UK business, the most mature of our retail accounts, demonstrates the potential for our similar accounts in Europe and the US. Our strategy of balance worked well.

Results
The result for the year ending 31 December 2011 was a profit before tax of £17.3 million (2010: £211.4 million) on a gross written premium income of £1,449.2 million (2010: £1,432.7 million). The combined ratio was 99.5% (2010: 89.3%). Earnings per share 5.5p (2010: 47.2p) and net assets per share 323.5p (2010: 332.7p). The return on equity was 1.7% (2010: 16.5%).

Dividend, balance sheet and capital management.

The Board proposes to pay a final dividend of 11.9p (2010: 11.5p) on 19 June 2012 to shareholders on the register on 11 May 2012, making total dividends for the year of 17.0p (2010: 16.5p) an increase of 3%, in line with our policy of steady dividend growth. A scrip dividend alternative to the cash dividend will continue to be offered to shareholders.

 

The market

As usual, the CEO Bronek Masojada will comment in detail on conditions in the general markets and the performance of our various businesses in them.  I can see that rates are rising in many of our key areas, especially those which have suffered large losses, which bodes well for 2012.  Some comment that the rises are not big enough but they suit me.  If we get a great surge in rates, which happens only rarely and then after a major event following a lean period, prices go too high and start coming down almost immediately.  In an ideal world rates would bump along at a level at which good underwriters could make money and the bad ones wither and die.  Given that the insurance market is remorselessly cyclical, I like small rises which help margins for the good without encouraging foolishness in the bad.

There is still too much capacity in the insurance world, some of it new from hedge funds and the like.  The reinsurance market is more stable than the insurance market as there are fewer well rated reinsurers and more disciplined adherence to catastrophe models.  In the insurance market, we daily walk away from risks where uneducated capacity has plunged into the market at rates which can only lose them money. The curse of the industry is that we sell a product the cost of which is only discovered years later when the claims roll in.  This breeds optimism, and nobody is more optimistic than the new entrant with no legacy problems (they think), but also no legacy book of business or experience.  All existing business in the world is already placed with an insurer, and which broker is going to switch it to a new entrant unless they cut the price or widen the terms?

 

When I started underwriting (with unlimited liability for the first 21 years - and nothing could make an underwriter more conscious of risk than taking it with everything they own), there was no computer adding up aggregate liabilities.  Premium income could be counted, but not the exposure, and claims come from exposure not income.  Statistics and management information have improved enormously over the years, and every year I believe that management of our competitors will force commercial discipline on their underwriters, but some foolish underwriting continues. In Lloyd's, if rates are being cut foolishly, the Franchise Director moves in to test the business plan, and if necessary to stop it.  I hope the discipline of Solvency II will similarly test the "we will beat whatever price the competition has quoted" underwriting that you even see advertised regularly.

Corporate Governance
I have decided to step down as Chairman of the Board while I still feel near the top of my game and have informed my fellow directors that I would like to retire from the board this time next year when I will have just turned 70.  My passion for the business remains undiminished, and I will be available if the new chairman or others wish to draw on my 47 years of experience.  The independent directors have instituted a search from both within and without the company, and I know that they will find a suitable candidate to lead the board for the next exciting era of the business.

There is no better fun than building a business.  It has been an enormous privilege to lead Hiscox since 1970 when my father died and I am very grateful to those who have helped me to achieve what has been achieved so far.  I have always aimed to employ people brighter than I am, and have always believed that a businessman should only be judged a success if the business thrives after he has gone.  I am convinced that the current top executives prove that I have achieved my employment ambition, and I know that they have the talent and the drive to create a truly great business well into the future. Since before we became publicly quoted in 1993 we have had strong non-executive directors and I am grateful to them for their excellent advice on our strategy and tactics, and their robust challenge when they see the need.  The regulator likes to see evidence of regular robust challenge, but it has to be said that challenge for its own sake is pointless, and if correct decisions are being made, calm agreement can be found without artificial contrarian debate.


We first expanded from Lloyd's into the UK regions in 1989, then into Europe from 1993.  We bought an ailing UK insurance company in 1996 which was on the regulator's monthly watch list and have turned it into a thriving company which made £49.2 million last year.  We have built successful insurance companies in Guernsey and Bermuda, and have started an insurance company in the US which is growing to profitability.  We have developed direct businesses in the UK, France and the US.  We have grown from a Lloyd's syndicate to a truly international insurance business, headquartered in Bermuda.

We also have a very strong corporate ethical culture which has led us through some very stormy waters in our early days at Lloyd's when it went through its period of lack of integrity and appalling underwriting in the 1980's and 1990's.  I was privileged to play an early part in regulation at Lloyd's when basic standards were being imposed, and a substantial part in the Reconstruction and Renewal of Lloyd's (together with Bronek Masojada who was on the McKinsey team), especially the Renewal through the introduction of Corporate Membership which created a renaissance of the UK insurance industry.  With Solvency II the industry is now going through a massive assessment of the capital each business needs by codifying all the risks in great detail into a computer model, and I am glad that our massive housekeeping exercise has thrown up no surprises.  Risk is our business and I have spent 47 years assessing it, and as I said before, 21 of them with unlimited liability.

 

The work we are doing should make us a safer business which brings me comfort as my family and I have a substantial percentage of our worth in Hiscox shares and as I get older I get more risk averse as I cannot make it again.  We have always encouraged our staff to buy or hold shares in the company as we strongly believe that a feeling of ownership breeds responsibility, and I know that our investors like the fact that we have plenty of skin in the game.

 

The future

The general insurance market has had an excellent record for the last 10 years despite enormous natural and man-made catastrophes (although it feels unrecognized with the ever increasing blanket of regulation with which we are smothered). It is an exciting business being in reality bookmaking as we quote odds on almost every conceivable event, loss or tragedy happening around the world. It is a fulfilling career as we enable private ownership and commercial endeavour to flourish through adversity. I think that the boring image, which could not be further from the truth, is dissipating, and we are attracting some extremely talented young people into our business which again bodes well for the future.

 

We have built a brand based on trust and service and have been rated as the most trusted insurer in the UK.  The value of our brand depends on our integrity and our fair treatment of customers which acts as a sharp pencil in the small of the back of every member of staff to live up to the advertised standard.  I would like to thank them all for carrying the flag so well.

 

Some key rates are rising, we are employing some brilliant talent, we have fledgling businesses poised for growth and profit, and our mature businesses have small market shares and enormous opportunities.  I look forward to my final year as Chairman confident that the next era of the business will be rewarding to both shareholders and staff.

 

 

Robert Hiscox

27 February 2012



2011 Chief Executive's report

 

As the Chairman has said, 2011 was a year dominated by natural catastrophes. Earthquakes, floods, tornadoes, hurricanes and a tsunami caused insured losses in excess of $100 billion making it one of the most expensive years on record for the industry. The fact that Hiscox made a profit of £17.3 million for the year (2010: £211.4 million) is a demonstration of the strength and resilience of our Group. The UK, Guernsey and European operations and several of our London Market divisions contributed strong profits, which offset the net £270 million (2010: £165 million) in catastrophe related claims reserved in our London and Bermuda reinsurance units, and the lower investment returns. 

 

Our strategy of balance and diversification has therefore shown its value once again. Wewill continue, with ever greater effort, to grow our retail-focused businesses around the world and invest in our specialist businesses in London. This will further enhance our capacity to weather future catastrophes and provide attractive returns to shareholders.

 

 

Hiscox London Market

Our London Market business navigated its way through the thick of the storm in 2011 with amazing resilience thanks to its spread of business. Profits in international property, marine, and other specialist lines offset reinsurance losses allowing it to make an aggregate profit of £57.6 million (2010: £121.4 million). This is a fantastic achievement given the exposure it had to the global catastrophes of 2011. Revenues increased marginally to £585.4 million (2010: £572.7 million) showing yet again the truth of the mantra "profit is sanity: revenue vanity". Looking at each business line in turn:

 

·      Reinsurance. Although underweight in most loss affected areas, this team was impacted by the many natural catastrophes in 2011. The team took advantage of distressed conditions following the events in the first half to expand their writings at the important mid-year renewals. They have also continued to build their partnerships with third party providers of reinsurance support. The team retains their nerve and are optimistic about 2012.

·      Property. Discipline over many years has seen our core property account shrink, but the result is good. The team have expanded their book into insuring non-catastrophe exposed contractors equipment for fire and theft and this is developing well. In 2012 they have seen upward pressure on rates, and business which had threatened 'never to come back to London', unless written at uneconomic prices, is returning from the US domestic market. This augurs well for the future. The division has also benefited from subrogation recoveries on property claims resulting from the events of 9/11.

·      Energy and Marine. This team suffered from the large Maersk Gryphon loss - a North Sea oil platform which was put out of production by poor weather - in the early part of the year, but discipline and its smart spread of business have allowed it to make a profit in the year. In 2012, we reserved $20 million net for the sinking of the Costa Concordia.  We expect that this event will result in upward pressure on rates in the marine market.

·      Global Response. Our team has continued to serve clients around the world in the terrorism, kidnap and ransom, piracy and political risk areas. Piracy remains challenging as prices are inadequate for the risks being run and our book continues to shrink. The Arab Spring created repatriation losses but again the spread of business allowed the division to perform well in the year.

·      Specialty. This division consists of the bloodstock, contingency, personal accident, specie, media and technology businesses written in the London market. It had a very good year. The specie and technology accounts benefited from the settlement of some old claims which resulted in substantial releases from reserves. Our contingency team supported the Rugby World Cup organizers in New Zealand as they dealt with the impact of the Christchurch earthquakes on their seminal event, demonstrating our claims handling ability in such an unusual situation. During the course of the year we closed our bloodstock account as poor rating had caused it to shrink to a size where it was no longer viable.

·      Casualty. This was once one of our biggest and most profitable lines, but relentless rate reductions and disciplined underwriting by the team has seen it shrink to less than a sixth of its cyclical high. The account remains profitable: we think that the suicidal competition in the 2012 renewal season will make a turn in pricing inevitable so we are investing in extending our capability in this area.

·      Aviation and space. We have had a presence in the space market for many years and this business continues to perform well. Our aviation venture is now in its second year and we have established a small market presence with a reputation as a considered and disciplined participant.

 

Our London Market business is primarily conducted in London through Lloyd's with a focus on large internationally traded syndicated risks and on the specialist and the unusual. Hiscox is a brand to be proud of, but we know in the global insurance market the continued high regard for the Lloyd's brand and the success of the market as whole is necessary for us to out-perform. We therefore believe in the value of the Lloyd's licenses, the need for a secure, well supervised market and the benefits of shared central services such as policy production, money collection and claims settlement and payment. Some of our competitors believe that they can gain individual advantage by performing many of these tasks themselves, independent of the market. We do not, as we believe that fragmentation will lead to poorer service to clients and brokers leading to an erosion of Lloyd's, and hence our own competitiveness. We are therefore supportive of efforts to improve the volume claims service which acts on behalf of the market and will continue to oppose efforts to fragment this community resource. We are also supportive of Lloyd's efforts to invest in upgrading the central market processing environment, but again with the concern that fragmentation must not be allowed. In all these matters we believe in holding Lloyd's and other central service providers to account, as if they do the job well, more business will flow to London and Lloyd's and we will win more than our fair share of the best business.

 

 

Hiscox UK and Europe

Our businesses in the UK and Europe focus on insuring higher net worth personal insurances and small businesses active in areas such as marketing, consulting and other office-based professional services. We market these products both through brokers and direct to the customer. The year saw continued growth, pushing premium income up 9.5% to £498.0 million (2010: £454.7 million). At the same time, we were able to increase our profits in this segment to £51.4 million (2010: £39.6 million), a fantastic result. 

 

·      Hiscox UK. Our UK business has become a powerhouse, achieving another record profit of £49.0 million (2010: £28.8 million) despite a big fall in investment income and the competitive market conditions which prevailed. It had substantial top-line growth of 12.3% to £367.1 million (2010: £327.0 million). This result was driven by a focus on disciplined underwriting and by the strength of the Hiscox brand. Most satisfying has been the performance of our high net worth team. They reaped the rewards of their efforts in 2009 and 2010 when, against prevailing market trends, they maintained discipline, increased prices marginally and as a result made a very healthy profit this year. Their nascent luxury motor account also made a good profit - a real achievement in its third year. The commercial business had a reasonable year, despite being challenged by claims arising from mistakes by some of the professionals we insure which have been revealed by the recession.

 

We have worked for several years to build our distribution with a broader range of partners. In late 2010 we entered into an agreement with the Dual underwriting agency, for them to underwrite and market our products, and our business together has developed well. We have also created a specialist team to focus on Marsh, Aon and Willis, the three largest national brokers with whom we have strong Group relationships but with whom we do little business in the UK. Our business with them is growing slowly, but much remains to be done. We have also created new relationships with a number of independent brokers who have moved books of specialist business to us. We have won their support because our underwriters and operations staff respond to their requests for assistance faster than the competition and because of our reputation for paying valid claims fast and fairly. Not all of our underwriting partnerships have gone well, and at the end of 2011 we cancelled a household partnership which had not performed to our expectations. This will have a negative impact on Hiscox UK's 2012 top-line growth, but we expect that it will have a positive effect on profitability. 

 

Our direct business continues to go from strength to strength and is now a £65 million business. Both our commercial and personal lines units achieved excellent profits in 2011. We have added a new travel product to our personal lines offering and expect to follow with more choices of cover during 2012. 

 

Building the direct business requires us to spend significant amounts on our marketing which offers very tangible benefits to the whole Group and in 2011 we were short-listed as one of the five best brands in the UK at the Marketing Society Awards alongside household names such as John Lewis and British Airways. It is a real achievement for our UK team to have created such a recognizable brand when we operate in what is thought of as a grey industry.

 

·      Hiscox Europe. Although its profits fell to £2.4 million (2010: £10.8 million), 2011 is Europe's third successive year of overall profitability. Most of the profit fall was due to a decline in investment income and a single large reserve. Hiscox Europe is now at the same stage of development as the UK business in 2001 and as its scale grows I expect that profits will grow. The top line was flat at £130.9 million (2010: £127.6 million), though this masks some changes in its business mix. Our art and private client business shrank, as expected, as the impact of underwriting actions taken in 2010 fed through. This decline was offset by growth in the commercial area where our specialist kidnap and ransom, media, technology and related products performed well, as have our partnerships with other financial institutions. Our relationship with the bank BBVA in Spain, through whose branches we sell our specialist commercial products, has performed particularly well.

 

Despite the economic challenges that Europe faced, and will no doubt face in 2012, we are continuing to invest on the continent. For the past two years we have been building a direct business in France focusing on small commercial lines. In 2012 we will be supporting this direct business with an expanded marketing campaign - in fact our first French television commercial aired in January. Early responses have been positive, and if all goes well we hope to build a direct business to match that in the UK. 

 

 

Hiscox International

Hiscox International has suffered most visibly from the catastrophe losses in 2011. It swung to a loss of £89.5 million (2010: profit of £43.1 million) and its premiums shrank 9.7% to £365.8 million (2010: £405.2 million). As trends in each business unit within the division vary materially I comment on each separately below:

 

·      Hiscox Bermuda. The focus of our business in Bermuda is overwhelmingly on catastrophe reinsurance so in a year like 2011 it is not surprising that the unit suffered a big loss. Hiscox Bermuda's disciplined underwriting saw its written premiums reducing by 9.5% to £177.7 million (2010: £196.4 million). It is the nature of reinsurance to be volatile but on average the results are very attractive. Since we created our business in Bermuda in 2006 it has achieved an aggregate combined ratio, including 2011, of around 80% - a very respectable result.

 

·      Hiscox USA. The US has made good progress in 2011. Its revenue fell by 15.5% to £108.3 million (2010: £128.2 million) which was mainly due to the withdrawal from two lines of business at the end of 2010 and the transfer of our large technology and media portfolios to Hiscox London Market. It saw strong growth of 29.0% in our core areas of kidnap and ransom, construction, terrorism, media and professional lines and we believe this progress will continue. Our network of offices across the US has been crucial in helping us attract business.    

 

2011 also saw the launch of our US direct commercial offering aimed at start ups and small businesses. We have been building the brand in the US through traditional and digital marketing. We have been using social media in the form of a branded entertainment web TV series called Leap Year, aimed at budding entrepreneurs which has been watched by over 4 million viewers. The series won a coveted Digital Luminary award for branded entertainment in the company of brands like Yahoo and NASA. We have also entered into marketing partnerships with GEICO and other major insurers, a real testament to the quality of the products we have on offer. We sold over 6,000 policies direct to consumers by the end of the year. The trend remains positive and we will continue to invest further in this fledgling business in 2012.

 

·     Hiscox Guernsey. This business underwrites kidnap and ransom, piracy, fine art and terrorism and continues to be a star performer. Its revenues declined marginally to £79.8 million (2010: £80.6 million) despite a very disciplined underwriting approach towards piracy. The team made a profit despite suffering a large fine art loss when a painting was being transported from the auction house to a client. This team is concentrating on expanding its distribution and expects to strengthen this in several territories in 2012.

 

 

Claims

Insurance is basically a promise to pay. Claims are where that promise is tested. In 2011 our UK claims team dealt professionally with the welter of claims resulting from the severe winter freezes, while our Bermuda and London Market claims teams have been at the forefront of adjusting and paying claims arising from the string of natural catastrophes. It is pleasing to see that during all of this they kept their promise with prompt and fair payment of valid claims with a smile.

 

In 2011 we released £199 million (2010: £133 million) from prior years' reserves. We have benefited from some legal victories, most prominently in our long running litigation over subrogation from the World Trade Centre, and from some large technology and professional liability cases. At the end of 2011 our actuarial analysis shows that we continue to hold the same size margin above best estimate as at the end of 2010.

 

In the UK we took the big step of insourcing all of the claims from our direct to consumer business, recruiting a small number of staff from our outsource partner and expanding the services which we offer to claimants. Our claims service remains one of the best in the industry and in 2011 we were awarded Post Magazine's Commercial Lines and Personal Lines claims team of the year. We continue to invest in claims and a priority in 2012 will be Europe. The challenge is to use our skills on a pan European basis as the individual operations remain quite small.

 

 

Investments

2011 was a challenging year for our investments. This is not a surprise given the continuing volatility and uncertainty in world financial markets. We achieved a total return of £25.9 million before derivatives with a yield of 0.9% (2010: £98.8 million, 3.6%).

 

We started the year concerned about a possible increase in interest rates but happy to take some credit risk and we positioned the bond portfolios accordingly. The stance on duration in particular proved to be too cautious in light of the flight to quality that took place in Government bond markets in the second half. Additionally, in some cases, our non Government bonds incurred mark to market losses.  However, we have the resilience to hold these through periods of market turbulence as we will eventually realise value for them as they move to maturity.

 

We took advantage of some of the market weakness in the summer to increase our equity weighting slightly. Again, we believe we have a strong enough balance sheet to withstand the volatility that inevitably comes with owning shares and are prepared to do so as long as we can see value in the longer term.

 

Looking forward we expect investment returns to remain depressed. We are not tempted by the range of products which may offer higher apparent returns but would rather accept what the market has to offer from conventional sources.

 

 

Operations and IT

Great underwriting only delivers value to customers if supported by excellent operations. During the year we continued to improve our operational capabilities. In Hiscox London Market we re-engineered our processes so that all risk details are entered into our systems within 48 hours of binding, providing us with real underwriting insight and control benefits. Across our European and UK businesses we improved the quality of our data leading to more timely and accurate customer documentation. In Hiscox UK we introduced sophisticated capacity planning tools to ensure that we had the resources in place to meet spikes in demand. Our quality, as perceived by our customers, is measured using Net Promoter scores and we are now receiving industry-leading scores. In the US our new service centre, which supports the direct business, is also getting very positive customer reviews.

 

All this operational improvement has been mirrored in improvements in our IT performance. The IT team re-organized themselves during the year to match our business unit structure, allowing for more interaction between teams and greater accountability to the business for delivering specific projects. As a result, we have seen a higher number of projects being completed more efficiently and to a higher standard. 

 

 

Our Leadership

Robert's announcement that he intends to retire as Chairman in 12 months time marks a watershed for the Group. Robert joined Hiscox in 1965 and took over its leadership in 1970 when we had two small boxes at Lloyd's and controlled premium income of just over £2 million. We now have controlled premiums of £1,664 million and operate from 27 locations in 11 countries. During this time Robert has steered Hiscox through the many challenges such as 9/11 which have occasionally shaken the industry to its foundations. He has also served the Lloyd's marketplace with distinction in a number of roles during its toughest times. He was a member of the Rowland Taskforce in 1991 and was Deputy Chairman of Lloyd's during its turbulent years of Reconstruction and Renewal from 1993-1995. He has done all of this with drive, energy, perspicacity, determination, iconoclasm, wit and aplomb. We will not be losing Robert's guidance as in 2013 he will remain with the business as Honorary President.

 

A huge part of Robert's success has been formed around his ability to recruit great people and he has given them the freedom to build their businesses. One of the most important of these hires was Nicholas Thomson who will be standing down as a Non Executive of our UK based subsidiary boards shortly. Nick joined Robert in 1973, becoming Underwriter of Syndicate 33 from 1976 until 1993 and Director of Underwriting from 1993 until 2001. Nick served as a Hiscox plc Board Director from 1993 until 2001. He has also always served on our UK based subsidiary boards, moving to a Non Executive position in 2001. Nick's contribution to our underwriting culture has been immense and we will miss the grenades of underwriting and business insight that he rolled down the board room table with unfailing regularity.

 

Strong experienced Non Executives have also been of huge value to the Group. Foremost amongst these has been Anthony Howland-Jackson who will also be standing down shortly. After a distinguished career in broking, Anthony joined the Board of Hiscox plc and our UK based subsidiaries in 1997. He served as Senior Independent Director on the Board of Hiscox plc standing down from this Board when we re-domiciled to Bermuda in 2006. Since then he has continued to serve as a Non Executive Director of our UK based businesses. Anthony's well timed questions caused us to re-assess many of our more fanciful ideas and his words of advice were always listened to.

 

The Board has initiated a selection process to find a successor to Robert. This process is being led by the Chairman of the Remuneration and Nomination Committee, Andrea Rosen, supported by our Senior Independent Director, Richard Gillingwater, and with input from all Hiscox Ltd Non Executive Directors who form the Committee. The Remuneration and Nomination Committee have appointed a leading search firm as advisors and we will make an announcement on succession in due course.    

 

 

People

We are always working to attract the most talented people to work here, to retain them and to help them to develop. Robert has led by example in this and we seek to live up to his standards. In 2011 both Hiscox London Market and Hiscox UK achieved Chartered Insurer status. This reflects the investment we have put into ensuring our staff achieve industry qualifications which we then back up with internal training and development programs.

 

We really believe the quality of our staff is a competitive advantage in the industry, and the resilience of our result this year reflects their individual contributions on a risk-by-risk and day-by-day basis. I thank them all. 

 

 

Outlook

We have seen substantial rises in rates for catastrophe reinsurance in loss affected territories such as Japan, New Zealand and Australia, but areas which were already well rated, such as the United States, have seen more modest increases. Unfortunately, catastrophe reinsurance in areas which continue to need price rises such as Europe have remained flat. In non catastrophe areas the trends are more mixed. European insurance pricing remains reasonable in our lines, and in the UK there is some downward pressure in commercial insurance, whilst personal lines are flat albeit at healthy levels. In the US we are seeing modest upward pressure.

 

In this environment we believe that we can thrive. The UK will continue with its consumer and brand led expansion; Europe will focus on driving growth in current product areas and current territories, developing greater scale and with that improved profitability; the US will continue to drive for scale in current areas and build on the exciting possibilities of its direct business; The London Market, Bermuda and Guernsey insurance businesses will take advantage of areas with rate increases, expanding judiciously in property related lines but continuing to shrink in casualty; overall Reinsurance is even better rated than in previous years and unless the world turns upside down, should return to its usual profitability.  I feel excited as I see these plans coming together and am confident the profits they generate will benefit shareholders and staff.

 

Bronek Masojada

27 February 2012


 


CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2011

 

 



Note

2011

Total

£000


2010

Total

£000

Income






Gross premiums written


4

1,449,219


1,432,674

Outward reinsurance premiums



(275,208)


(301,047)

Net premiums written


4

1,174,011


1,131,627







Gross premiums earned



1,428,954


1,435,118

Premiums ceded to reinsurers



(283,947)


(303,960)

Net premiums earned


4

1,145,007


1,131,158







Investment result


7

24,495


100,249

Other revenues


9

17,322


22,079

Revenue



1,186,824


1,253,486

Expenses






Claims and claim adjustment expenses, net of reinsurance


17

(697,898)


(570,997)

Expenses for the acquisition of insurance contracts



(269,792)


(269,891)

Operational expenses


9

(203,204)


(206,403)

Foreign exchange gains



7,816


15,484

Total expenses



(1,163,078)


(1,031,807)







Results of operating activities



23,746


221,679

Finance costs



(6,698)


(10,090)

Share of profit/(loss) of associates after tax



223


(223)

Profit before tax



17,271


211,366

Tax expense


19

4,001


(32,566)

Profit for the year (all attributable to owners of the Company)



21,272


178,800

 

 

Earnings per share on profit attributable to owners of the Company






Basic


20

5.5p


47.2p

Diluted


20

5.3p


45.4p

 

  

 

 

 



CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2011, AFTER TAX




2011

Total

£000


2010

Total

£000







Profit for the year



21,272


178,800

Other comprehensive income






Currency translation gains (net of tax of £nil (2010: £nil))



11,060


11,729

Total other comprehensive income



11,060


11,729

Total comprehensive income recognised for the year (all attributable to owners of Company)



32,332


190,529

 

 

The related notes 1 to 22 are an integral part of this document.

 

 

  

 



CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2011


Note

2011

£000

2010

£000

Assets








Intangible assets


67,552

64,108

Property, plant and equipment


18,155

19,742

Investments in associates


6,380

6,886

Deferred tax


25,748

14,077

Deferred acquisition costs


150,050

142,736

Financial assets carried at fair value

12

2,368,636

2,459,107

Reinsurance assets

11

492,515

462,765

Loans and receivables including insurance receivables

13

507,722

485,414

Current tax asset


69,436

-

Cash and cash equivalents

16

516,547

336,017

Total assets


4,222,741

3,990,852





Equity and liabilities








Shareholders' equity




Share capital


20,563

20,297

Share premium


32,086

15,800

Contributed surplus


245,005

245,005

Currency translation reserve


60,517

49,457

Retained earnings


897,728

935,555

Total equity (all attributable to owners of the Company)


1,255,899

1,266,114





Employee retirement benefit obligations


-

-

Deferred tax


152,447

45,421

Insurance liabilities

17

2,500,260

2,279,867

Financial liabilities

12

-

20,457

Current tax


-

29,995

Trade and other payables

             18

314,135

348,998

Total liabilities


2,966,842

2,724,738

Total equity and liabilities


4,222,741

3,990,852

 

The related notes 1 to 22 are an integral part of this document.


 

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 

 

 


Note

Share

Capital

£000

Share

Premium

£000

Contributed

Surplus

£000

 

Currency

Translation

Reserve

£000

Retained

Earnings

£000

 

Total

£000










Balance at 1 January 2010

 



20,158

11,831

303,465

37,728

748,104

1,121,286

Total recognised comprehensive income for the year (all attributable to owners of the Company)

 



-

-

-

11,729

178,800

190,529

Employee share options:









Equity settled share based payments



-

-

-

-

9,000

9,000

Proceeds from shares issued



139

3,969

-

-

-

4,108

Deferred tax



-

-

-

-

(349)

(349)

Dividends paid to owners of the Company


21

-

-

(58,460)

-

-

(58,460)

Balance at 31 December 2010



20,297

15,800

245,005

49,457

935,555

1,266,114

Total recognised comprehensive income for the year (all attributable to owners of the Company)

 



-

-

-

11,060

21,272

32,332

Employee share options:









Equity settled share based payments



-

-

-

-

8,677

8,677

Proceeds from shares issued



91

3,124

-

-

-

3,215

Deferred tax



-

-

-

-

(3,927)

(3,927)

Scrip dividends



175

13,162

-

-

-

13,337

Dividends paid to owners of the Company


21

-

-

-

-

(63,849)

(63,849)

Balance at 31 December 2011



20,563

32,086

245,005

60,517

897,728

1,255,899

 

 

The related notes 1 to 22 are an integral part of this document.

 

 

 CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2011

 

 


2011

£000

2010

£000

Profit before tax


17,271

211,366

Adjustments for:




Interest and equity dividend income


(50,333)

(61,606)

Interest expense


6,698

10,090

Net fair value gains on financial assets


30,878

(25,672)

Depreciation and amortisation


8,098

7,065

Charges in respect of share based payments


8,677

8,047

Other non-cash movements


(1,070)

1,323

Effect of exchange rate fluctuations on cash presented separately


(1,451)

(508)





Changes in operational assets and liabilities:




Insurance and reinsurance contracts


138,667

141,646

Financial assets carried at fair value


78,501

(2,527)

Financial liabilities carried at fair value


(457)

82

Other assets and liabilities


(18,888)

(23,704)

Cash flows from operations


216,591

265,602

Interest received


50,244

60,332

Equity dividends received


1,531

1,274

Interest paid


(6,163)

(4,628)

Current tax paid


(4,003)

(51,580)

Net cash flows from operating activities


258,200

271,000

Cash flows from the acquisition of subsidiaries


-

(3,662)

Cash flows from the sale and purchase of associates


729

   468

Cash flows from the purchase of property, plant and equipment


(2,561)

(3,462)

Cash flows from the purchase of intangible assets


(9,992)

(15,591)

Net cash flows from investing activities


(11,824)

(22,247)

Proceeds from the issue of ordinary shares


3,215

4,108

Dividends paid to owners of the Company


(50,512)

(58,460)

Net (repayments)/receipts of borrowings


(20,000)

(118,539)

Net cash flows from financing activities


(67,297)

(172,891)

Net increase in cash and cash equivalents


179,079

75,862

Cash and cash equivalents at 1 January


336,017

259,647

Net increase in cash and cash equivalents


179,079

75,862

Effect of exchange rate fluctuations on cash and cash equivalents


1,451

508

Cash and cash equivalents at 31 December


516,547

336,017

 

The purchase, maturity and disposal of financial assets is part of the Group's insurance activities and is therefore classified as an operating cash flow. The purchase, maturity and disposal of derivative contracts is also classified as an operating cash flow. Included within cash and cash equivalents held by the Group are balances totalling £77,203,000 (2010: £63,447,000) not available for immediate use by the Group outside of the Lloyd's Syndicate within which they are held.

 

The related notes 1 to 22 are an integral part of this document.

 

              NOTES TO THE FINANCIAL STATEMENTS

1. General information

The financial information set out in this statement is extracted from the Group's consolidated financial statements for the year ended 31 December 2011. The auditors have reported on those 2011 financial statements which include comparative amounts for 2010. Their report was unqualified.

 

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 USA and employs over 1250 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 22 in accordance with International Financial Reporting Standards ('IFRS') adopted by the European Union.

 

The consolidated financial statements for the year ended 31 December 2011 include all of the Group's subsidiary companies and the Group's interest in associates. All amounts relate to continuing operations. The financial statements were approved for issue by the Board of Directors on 27 February 2012.

2. Significant accounting policies

 

The accounting policies adopted are consistent with those of the previous financial year except as follows:

 

The Group has adopted, for the first time, the following new and amended Standards and Interpretations issued by the IASB and endorsed by the EU as of 1 January 2011.

 

The amendment to IFRIC 14, The Limit on a Defined Benefit Asset, Minimum Funding Requirements is effective for annual periods beginning on or after 1 January 2011. The amendment provides guidance on assessing the recoverable amount of a net pension asset in a defined benefit scheme and permits an entity to treat the prepayment of a minimum funding requirement as an asset.

 

IAS 24 Related Party Disclosure (Amendment) is effective for annual periods beginning on or after 1 January 2011. The amendment clarifies the definition of a related party in order to simplify the identification of such relationships and to eliminate inconsistencies in application.

 

Early adoption of SI 2008/489, disclosure requirements for auditors remuneration, has occurred. The amendments are intended to align the classification of non-audit services for the purposes of disclosure in the accounts with the classification of non-audit services under the Auditing Practice Board's Ethical Standards.

 

Adoption of the above had no material effect on the financial performance or position of the Group.

 

A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after 1 January 2011, and have not been applied in preparing these consolidated financial statements. None of these is expected to have a significant effect on the consolidated financial statements, except for IFRS 9 and IAS 19.

 

Defined Benefit Plans - Amendments to IAS 19 is due to be in effect from 1 January 2013. The amendments require immediate recognition of actuarial gains and losses in other comprehensive income and to eliminate the corridor method that the Group currently operates.  The principal amendment is the requirement to calculate net interest income or expense using the discount rate used to measure the defined benefit asset or liability.

 

IFRS 9 Financial Instruments is due to be effective from 1 January 2015. The standard contains two primary measurement categories for financial assets of amortised cost and fair value. Financial assets are classified in to one of these two categories on initial recognition.  A financial asset is measured at amortised cost if the following conditions are met : it is held where the objective is to hold the asset in order to collect contractual cash flows; and, its contractual terms give rise on specified dates to cash flows that are solely payment of principal and interest on the principal outstanding. All other financial assets are to be classified at fair value.

 

2.1 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 have been referred to as IFRS. The standards from prior years continue to bear the title 'International Accounting Standards' (IAS). Insofar as a particular standard is not explicitly referred to, the two terms are used in these financial statements synonymously. Compliance with IFRS includes the adoption of interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC).

 

In March 2004, the IASB issued IFRS 4 Insurance Contracts which specifies the financial reporting for insurance contracts by an insurer. The standard is only the first phase in the IASB's insurance contract project and as such is only a stepping stone to Phase II, introducing limited improvements to accounting for insurance contracts. Accordingly, to the extent that IFRS 4 does not specify the recognition or measurement of insurance contracts, transactions reported in these consolidated financial statements have been prepared in accordance with another comprehensive body of accounting principles for insurance contracts, namely accounting principles generally accepted in the UK.

 

In July 2010 the IASB published an exposure draft for Phase II of the insurance contracts project.   

 

The exposure draft proposes a number of significant changes to the measurement of insurance contracts and as such adoption of a final standard in a form similar to the exposure draft will likely have a significant impact on the results of the Group. 

 

In February 2012, the IASB extended its timeline for either re-exposing or issuing a staff draft for Phase II of the insurance contracts project to the second half of 2012.  The ultimate timeline for a final standard will depend on whether the IASB issues a new exposure draft before issuing a standard.  While the IASB has not indicated an effective date for a final standard, transitional provisions propose that it should be applied retrospectively with opening differences accounted for in equity.

 

The Group are generally supportive of the proposed measurement principles for short duration contracts however we have submitted a comment letter to the IASB outlining our concerns and issues with some of the definitions and detail included within the exposure draft.  We continue to monitor the progress of the project.

 

 

2.2 Basis of preparation

The financial statements are presented in Pounds Sterling and are rounded to the nearest thousand unless otherwise stated.

 

They are compiled on a going concern basis and prepared on the historical cost basis except that pension scheme assets included in the measurement of the employee retirement benefit obligation, and 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 and to all periods presented, solely for the purpose of producing the consolidated Group financial statements.

 

The Group elected to apply the transitional arrangements contained in IFRS 4 that permitted the disclosure of only five years of data in claims development tables, in the year ended 31 December 2005 which was the year of adoption. The number of years of data presented was increased from nine in the prior year, to the maximum of ten in the current year.

 

The Group has financial assets and cash of over £2.87 billion. The portfolio is predominantly invested in liquid short dated bonds and cash to ensure significant liquidity to the Group and to reduce risk from the financial markets. In addition the Group has significant borrowing facilities in place.

 

The Group writes a balanced book of insurance and reinsurance business spread by product and geography. As such, the Directors believe that the Group is well placed to manage its business risk and continue to trade successfully.

 

The Directors therefore 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.

 

2.3 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. Financial risk

 

Credit risk

 

The Group mitigates counterparty credit risk by concentrating debt and fixed income investments in high quality instruments, including a particular emphasis on government gilts issued mainly by European Union and North American countries.

 

An analysis of the Group's major exposures to counterparty credit risk excluding loans and receivables, based on Standard & Poor's or equivalent rating, is presented below:

 

 

 

As at 31 December 2011

 

AAA

£000

 

AA

£000

 

A

£000

Other / not rated

£000

 

Total

£000







Debt and fixed income securities

767,709

808,076

400,257

194,546

2,170,588

Deposits with credit institutions

2,500

-

10,088

260

12,848

Catastrophe bonds

-

-

-

11,639

11,639

Reinsurance assets

27,682

181,862

262,709

20,262

492,515

Cash and cash equivalents

157,395

41,094

316,843

1,215

516,547

Total

955,286

1,031,032

989,897

227,922

3,204,137

Amounts attributable to largest single counterparty

211,465

267,442

54,235

13,216


 

 

 

 

As at 31 December 2010

 

AAA

£000

 

AA

£000

 

A

£000

Other / not rated

£000

 

Total

£000







Debt and fixed income securities

1,530,973

202,410

308,966

242,164

2,284,513

Deposits with credit institutions

3,819

207

-

254

4,280

Catastrophe bonds

-

-

-

15,452

15,452

Reinsurance assets

22,931

169,083

253,810

16,941

462,765

Cash and cash equivalents

35,874

137,223

160,382

2,538

336,017

Total

1,593,597

508,923

723,158

277,349

3,103,027

Amounts attributable to largest single counterparty

252,213

76,466

43,420

16,583


 

The largest counterparty exposure within AAA rating at 31 December 2011 is with the UK Treasury and for AA rating is with the US Treasury. At 31 December 2010, the largest counterparty exposure within AAA rating was the US Treasury. Catastrophe bonds included within other/non rated are rated BB and B. 

 

At 31 December 2011, the Group held no material debt and fixed income securities that were past due or impaired beyond their reported fair values, either for the current period under review or on a cumulative basis (2010 : £nil). For the current period and prior period, the Group did not experience any material defaults on debt securities.

 

An analysis of the Group's debt and fixed income securities at 31 December by class is detailed below:

 

 




2011

%

2010

%







Government issued bonds and instruments




23

22

Agency and Government supported debt




25

31

Asset backed securities




11

8

Mortgage backed instruments - Agency




6

4

Mortgage backed instruments - Non-Agency




5

6

Corporate bonds




27

27

Lloyd's and money market deposits




3

2

 

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.

The positions at 31 December 2011 in respect of government issued and supported debt are shown in the table below. The Group has no direct government exposure to Portugal, Italy, Ireland, Greece or Spain.

 

 

 

 



Government issued

£000

Government Supported

£000

 

Total

£000







United States of America



302,605

269,048

571,653

United Kingdom



208,235

81,699

289,934

Australia



-

13,975

13,975

Belgium



-

1,537

1,537

Canada



-

58,380

58,380

Denmark



-

5,158

5,158

Finland



6,380

3,985

10,365

France



4,015

16,533

20,548

Germany



92,414

36,205

128,619

Netherlands



-

24,539

24,539

Norway



-

6,035

6,035

New Zealand



-

584

584

Supranationals



-

30,135

30,135

South Korea



2,833

-

2,833

Sweden



2,307

3,494

5,801

Other



338

141

479

Total



619,127

551,448

1,170,575

 

Included above are £1,049 million in relation to holdings in debt securities and £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, £88 million is held in UK Treasury bills and £26 million held in a UK Government bond.

 

Additionally, the geographical location and credit quality of individual bank borrowers are closely monitored. An analysis of the Group's exposure to bank counterparties by country and credit rating held at 31 December 2011 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.

 

Bank debt
















Senior





Subordinated





AAA

AA

A

BBB

BB

Sub-total

A

BBB

Sub-total

Total



£000

£000

£000

£000

£000

£000

£000

£000

£000

£000

United States of America


-

-

73,615

2,723

-

76,338

-

1,372

1,372

77,710

United Kingdom


319

8,505

23,912

-

-

32,736

3,327

1,148

4,475

37,211

Australia


-

7,314

295

-

-

7,609

-

-

-

7,609

Belgium


-

-

3,429

-

-

3,429

-

-

-

3,429

Canada


1,241

12,240

7,840

604

-

21,925

2,884

-

2,884

24,809

Denmark


-

-

1,544

-

-

1,544

-

-

-

1,544

Finland


-

1,518

-

-

-

1,518

-

-

-

1,518

France


3,889

4,750

7,573

-

-

16,212

712

-

712

16,924

Germany


-

-

3,720

-

-

3,720

-

-

-

3,720

Italy


-

-

-

4,294

-

4,294

-

319

319

4,613

Netherlands


2,329

7,348

6,415

-

-

16,092

691

-

691

16,783

Norway


130

-

378

-

1,431

1,939

-

-

-

1,939

New Zealand


-

2,768

-

-

-

2,768

-

-

-

2,768

Spain


928

-

1,920

-

-

2,848

-

-

-

2,848

Sweden


-

6,359

4,733

-

-

11,092

-

-

-

11,092

Switzerland


-

-

11,597

-

-

11,597

-

-

-

11,597

Other


-

-

594

429

-

1,023

-

-

-

1,023

Total


8,836

50,802

147,565

8,050

1,431

216,684

7,614

2,839

10,453

227,137

Included in the bank debt table above, are £222 million in relation to holdings in debt securities and £5 million held as cash equivalents.

 

Liquidity risk

 

A significant proportion of the Group's investments are in highly liquid assets which could be converted to cash in a prompt fashion and at minimal expense. The deposits with credit institutions largely comprise short dated certificates for which an active market exists and which the Group can easily access. The Group's exposure to equities is concentrated on shares and funds that are frequently 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 :

 

 

 

 

 

 

 

Debt and fixed income securities

£000

 

Deposits with credit institutions

£000

 

 

Catastrophe bonds

£000

 

Cash and cash equivalents

£000

 

 

2011

Total

£000

 

 

2010

Total

£000









Less than one year


560,520

2,760

2,373

516,547

1,082,200

825,186

Between one and two years


473,904

10,088

3,686

-

487,678

816,842

Between two and five years


816,665

-

5,580

-

822,245

654,638

Over five years


265,897

-

-

-

265,897

290,083

Other non-dated instruments


53,602

-

-

-

53,602

53,513

Total


2,170,588

12,848

11,639

516,547

2,711,622

2,640,262

 

The Group's equities and shares in unit trusts and other non-dated instruments have no contractual maturity terms but could also be liquidated in an orderly manner for cash in a prompt and reasonable time frame within one year of the balance sheet date.

 

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 fine art, UK regional events coverage and non US household business which is included within the results of UK and Europe. It also includes the fire and aviation businesses from Syndicate 3624, and the larger TMT business written by Hiscox Insurance Company Limited. In addition, it excludes an element of kidnap and ransom and terrorism included in UK and Europe.

 

UK and Europe comprises the results of Hiscox Insurance Company Limited, the results of Syndicate 33's fine art, UK regional events coverage and non US household business, together with the income and expenses arising from the Group's retail  agency activities in the UK and in continental Europe. In addition, it includes the European errors and omissions business from Syndicate 3624. It excludes the results of the larger retail TMT business written by Hiscox Insurance Company Limited. It also includes an element of kidnap and ransom and terrorism written in Syndicate 33.

 

International comprises the results of Hiscox Insurance Company (Guernsey) Limited, Hiscox Insurance Company (Bermuda) Limited, Hiscox Inc. and  Hiscox Insurance Company Inc., Syndicate 3624 excluding the European errors and omissions, fire and aviation businesses.

 

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 22. Corporate Centre forms a reportable segment due to its investment activities which earn significant external coupon revenues.

 

All amounts reported below represent transactions with external parties only.  In the normal course of trade, the Group's entities enter into various reinsurance arrangements with one another.  The related results of these transactions are eliminated on consolidation and are not included within the results of the segments.  This is consistent with the information used by the chief operating decision maker when evaluating the results of the Group.  Performance is measured based on each reportable segment's profit before tax.

 

 

a) Profit before tax by segment






Year ended 31 December 2011


London

Market

£000

UK and

Europe

£000

 

International

£000

Corporate

Centre

                £000

 

Total

£000







Gross premiums written

585,441

498,006

365,772

-

1,449,219

Net premiums written

 

413,390

472,608

288,013

-

1,174,011

Net premiums earned

 

418,764

448,594

277,649

-

1,145,007







Investment result*

8,782

7,248

6,313

2,152

24,495

Other revenues

9,858

3,938

3,311

215

17,322

Revenue

437,404

459,780

287,273

2,367

1,186,824







Claims and claim adjustment expenses, net of reinsurance

(238,026)

(207,018)

(252,854)

-

(697,898)

Expenses for the acquisition of insurance contracts

(99,257)

(106,300)

(64,235)

-

(269,792)

Operational expenses

(39,685)

(94,985)

(56,229)

(12,305)

(203,204)

Foreign exchange (losses)/gains

(1,507)

(25)

(3,097)

12,445

7,816

Total expenses

(378,475)

(408,328)

(376,415)

140

(1,163,078)







Results of operating activities

58,929

51,452

(89,142)

2,507

23,746

Finance costs

(1,308)

-

(399)

(4,991)

(6,698)

Share of profit of associates after tax

-

-

65

158

223

Profit before tax

57,621

51,452

(89,476)

 

(2,326)

17,271

*Includes interest received of £48,802,000






 



 






Year ended 31 December 2010


London

Market

£000

UK and

Europe

£000

 

International

£000

Corporate

Centre

                £000

 

Total

£000

Gross premiums written

572,748

454,692

405,234

-

1,432,674

Net premiums written

389,581

428,032

314,014

-

1,131,627

Net premiums earned

396,096

422,180

312,882

-

1,131,158







Investment result*

39,068

17,244

27,624

16,313

100,249

Other revenues

12,054

3,671

5,836

518

22,079

Revenue

447,218

443,095

346,342

16,831

1,253,486







Claims and claim adjustment expenses, net of reinsurance

(195,570)

(213,001)

(162,426)

-

(570,997)

Expenses for the acquisition of insurance contracts

(92,832)

(99,069)

(77,990)

-

(269,891)

Operational expenses

(44,733)

(89,440)

(59,419)

(12,811)

(206,403)

Foreign exchange gains/(losses)

11,669

(1,972)

(2,610)

8,397

15,484

Total expenses

(321,466)

(403,482)

(302,445)

(4,414)

(1,031,807)







Results of operating activities

125,752

39,613

43,897

12,417

221,679

Finance costs

(4,392)

(9)

(433)

(5,256)

(10,090)

Share of (loss)/profit of associates after tax

-

-

(323)

100

(223)

Profit before tax

121,360

39,604

43,141

7,261

211,366

*Includes interest received of £60,332,000






b) 100% operating results by segment

 

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 there from.



 




Year ended 31 December 2011

 


London

Market

£000

UK and

Europe

£000

 

International

£000

Corporate

Centre

£000

 

Total

£000

 

Gross premiums written

779,261

514,075

370,168

-

1,663,504

Net premiums written

543,696

487,609

292,640

-

1,323,945

Net premiums earned

555,533

463,706

283,138

-

1,302,377







Investment result

12,024

7,399

6,503

2,152

28,078

Other revenues

1,553

3,380

1,990

215

7,138

Claims and claim adjustment expenses, net of reinsurance

(314,517)

(214,609)

(254,627)

-

(783,753)

Expenses for the acquisition of insurance contracts

(130,593)

(111,624)

(65,127)

-

(307,344)

Operational expenses

(50,182)

(95,946)

(56,245)

(12,305)

(214,678)

Foreign exchange gains/ (losses)

72

90

(3,103)

12,445

9,504

Results of operating activities

73,890

52,396

(87,471)

2,507

41,322

 

 




Year ended 31 December 2010

 


London

Market

£000

UK and

Europe

£000

 

International

£000

Corporate

Centre

Total

Gross premiums written

782,523

472,247

416,103

-

1,670,873

Net premiums written

524,658

443,693

321,236

-

1,289,587

Net premiums earned

545,945

438,773

322,341

-

1,307,059







Investment result

53,870

17,848

28,572

16,313

116,603

Other revenues

-

3,029

4,393

518

7,940

Claims and claim adjustment expenses, net of reinsurance

(263,610)

(220,101)

(171,347)

-

(655,058)

Expenses for the acquisition of insurance contracts

(127,202)

(105,394)

(78,611)

-

(311,207)

Operational expenses

(55,873)

(90,489)

(60,755)

(12,811)

(219,928)

Foreign exchange gains/(losses)

11,272

(1,983)

(2,892)

8,397

14,794

Results of operating activities

164,402

41,683

41,701

12,417

260,203

 

Segment results at the 100% level presented above differ from those presented at the Group's share at note 4(a) solely as a result of the Group not owning 100% of the capacity of Syndicate 33 at Lloyd's.

 

 

 



 

100 % Ratio analysis


Year ended 31 December 2011

 

 

London

Market

 

UK and

Europe

 

 

International

 

Corporate

Centre

 

 

Total

 

Claims ratio (%)

56.6

46.3

89.9

-

60.2

Expense ratio (%)

32.5

44.7

42.9

-

39.1

Combined ratio excluding foreign exchange impact  (%)

89.1

91.0

132.8

-

99.3

Foreign exchange impact (%)

-

-

1.1

-

0.2

Combined ratio (%)

89.1

91.0

133.9

-

99.5

Combined ratio excluding non monetary foreign exchange impact (%)

90.0

90.9

133.9

-

99.9

 

 



Year ended 31 December 2010

 

 

London

Market

 

UK and

Europe

 

 

International

Corporate

Centre

 

Total

Claims ratio (%)

48.3

50.2

53.2

-

50.1

Expense ratio (%)

33.5

44.6

43.2

-

39.7

Combined ratio excluding foreign exchange impact (%)

81.8

94.8

96.4

-

89.8

Foreign exchange impact (%)

(2.1)

0.5

0.9

-

(0.5)

Combined ratio (%)

79.7

95.3

97.3

-

89.3

Combined ratio excluding non monetary foreign exchange impact (%)

79.7

95.3

97.3

-

89.3

 

 

The impacts on profit before tax of a 1% change in each component of the segmental combined ratios are:


 

Year to 31 December 2011

 

 

Year ended 31 December 2010

 

 

 

 

 

 

London

Market

£000

UK and

Europe

£000

 

International

£000

Corporate

Centre

£000

London

Market

£000

UK and

Europe

£000

 

International

£000

Corporate

Centre

£000

At 100% level







1% change in claims or expense ratio

5,555

4,637

2,831

-

5,459

4,388

3,223

-

 

At Group level









1% change in claims or expense ratio

4,188

4,486

2,776

-

3,961

4,222

3,129

-

 

 

 

5. Net asset value per share

 


2011



2010

 

Net asset value

NAV per


Net asset value

NAV per

 

(total equity)

share


(total equity)

share

 

£000

p


£000

p

               






Net asset value

1,255,899

323.5


1,266,114

332.7

Net tangible asset value

1,188,347

306.1


1,202,006

315.8

The net asset value per share is based on 388,233,074 shares (2010: 380,613,336), being the adjusted number of shares in issue at 31 December. Net tangible assets comprise total equity excluding intangible assets.

 

 

 

6. Return on equity

 





2011

2010

 

 





£000

£000

 

               







 

Profit for the year (all attributable to owners of the Company)





21,272

178,800

 

Opening shareholders' equity





1,266,114

1,121,286

 

Adjusted for the time weighted impact of capital distribution and issuance of shares



(14,025)

(34,820)


 

Adjusted opening shareholders' equity





1,252,089

1,086,466

 

Annualised return on equity (%)





1.7

16.5

 








 

 

7. Investment result

The total result for the Group before taxation comprises :



2011

£000


2010

£000

Investment income including interest receivable


50,333


61,606

Net realised gains on financial investment at fair value through profit or loss


5,040


12,971

Net fair value gains/(losses) on financial investment at fair value through profit or loss


(29,431)


24,272

Investment result - financial assets


25,942


98,849

Fair value gains/(losses) on derivative instruments and borrowings (note 14)


(1,447)


1,400

Total result


24,495


100,249

Investment expenses are presented within other expenses (note 9).

 

8.  Analysis of return on financial investments

       

(i)     The weighted average return on financial investments for the year by currency, based on monthly asset values, was:

 

 



2011

%


2010

%

Sterling


1.0


3.6

US Dollar


0.6


3.8

Other


1.6


2.3

 

(ii)  Investment return

Year ended 31 December 2011

 


London Market

UK and Europe

International

Corporate Centre

Total


£000

%

£000

%

£000

%

£000

£000          

%












Debt and fixed income securities

9,477

1.1

7,642

1.8

10,846

1.6

1,968

0.9

29,933

1.3

Equities and shares in unit trusts

-

-

(1,168)

(2.4)

(4,392)

(9.3)

(375)

(0.9)

(5,935)

(3.8)

Deposits with credit institutions/cash and cash equivalents

225

0.4

725

1.0

868

0.4

126

0.2

1,944

0.4


9,702

1.1

7,199

1.3

7,322

0.8

1,719

0.5

25,942

0.9

 

 

 

 

 

Year ended 31 December 2010

 


London Market

UK and Europe

International

Corporate Centre

Total


£000

%

£000

%

£000

%

£000

%

£000

%












Debt and fixed income securities

39,464

4.2

9,586

2.6

22,078

3.6

11,106

4.7

82,234

3.7

Equities and shares in unit trusts

-

-

6,079

11.6

4,468

9.0

5,025

13.4

15,572

11.1

Deposits with credit institutions/cash and cash equivalents

138

0.3

500

0.8

218

0.1

187

0.4

1,043

0.3


39,602

4.0

16,165

3.3

26,764

3.2

16,318

5.0

98,849

3.6

 

9. Other revenues and operational expenses

 




2011

£000

2010

£000

Agency related income



6,769

6,816

Profit commission



7,383

10,616

Other underwriting income - catastrophe bonds



1,006

1,280

Other income



2,164

3,367

Other revenues



17,322

22,079






Wages and salaries



69,185

80,359

Social security cost



12,930

13,689

Pension cost - defined contribution



5,724

5,209

Pension cost - defined benefit



1,700

1,700

Share based payments



8,677

8,047

Other expenses



73,575

74,668

Marketing expenses



19,955

11,863

Investment expenses



3,360

3,803

Depreciation and amortisation



8,098

7,065






Operational expenses



203,204

206,403

 

10. Net foreign exchange gains/(losses)

The net foreign exchange gains for the year include the following amounts:



2011

£000


2010

£000

Exchange gains recognised in the consolidated income statement


7,816


15,484

Exchange gains classified as a separate component of equity


11,060


11,729

Overall impact of foreign exchange related items on net assets


18,876


27,213

The above excludes profits or losses on foreign exchange derivative contracts which are included within the investment result and are outlined in note 14.

 

 

 

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.

 

 



2011

£000


2010

£000

Opening balance sheet impact of non retranslation of non monetary items


(1,251)


(3,207)

Gain included within profit representing the non retranslation of non monetary items


3,395


1,956

Closing balance sheet impact of non retranslation of non monetary items


2,144


(1,251)

 

11. Reinsurance assets

 



2011


2010



£000


£000

Reinsurers' share of insurance liabilities


493,422


463,724

Provision for non-recovery and impairment


(907)


(959)

Reinsurance assets (note 17)


492,515


462,765

Amounts due from reinsurers in respect of outstanding premiums and claims already paid by the Group are included in loans and receivables (note 13). The Group recognised a gain during the year of £52,000 (2010: gain of £4,487,000) in respect of impaired balances.

 

12.  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.

 



2011


2010



£000


£000

Debt and fixed income securities


2,170,588


2,284,513

Equities and shares in unit trusts


173,432


154,862

Deposits with credit institutions


12,848


4,280

Total investments


2,356,868


2,443,655

Catastrophe bonds


11,639


15,452

Derivative financial instruments (note 14)


129


-

Total financial assets carried at fair value


2,368,636


2,459,107

 

 



2011


2010



£000


£000

Borrowings from credit institutions carried at amortised cost*


-


20,000

Derivative financial instruments


-


457

Total financial liabilities


-


20,457

 

*The fair value of borrowings from credit institutions is not considered to be significantly different from the amortised cost value.

 



Investments at 31 December are denominated in the following currencies at their fair value:

 

 

 

 

 

 

2011

%

2010

%

 



Sterling

21.7

24.5

US Dollars

67.5

67.1

Euro and other currencies

10.8

8.4

 

 

13.  Loans and receivables including insurance receivables

 



2011


2010



£000


£000

Gross receivables arising from insurance and reinsurance contracts


429,676


412,524

Provision for impairment


(956)


(1,041)

Net receivables arising from insurance and reinsurance contracts


428,720


411,483






Due from contract holders, brokers, agents and intermediaries


299,879


298,214

Due from reinsurance operations


128,841


113,269

 

Prepayments and accrued income


428,720

8,387


411,483

7,656

Other loans and receivables:





Net profit commission receivable


13,792


15,276

Accrued interest


10,149


11,888

Share of Syndicate's other debtors balances


19,726


23,230

Other debtors including related party amounts


26,948


15,881

Total loans and receivables including insurance receivables


507,722


485,414

 

There is no significant concentration of credit risk with respect to loans and receivables, as the Group has a large number of internationally dispersed debtors. The Group has recognised a gain of £85,000 (2010: loss of £86,000) for the impairment of receivables during the year ended 31 December 2011.

 

14. Derivative financial instruments

 

The Group entered into both exchange-traded and over the counter derivative contracts for a number of purposes during 2011. The Group had the right and intention to settle each contract on a net basis. The assets and liabilities of these contracts at 31  December 2011 all mature within one year of the balance sheet date and are detailed below:

31 December 2011



Gross contract

notional

amount


Fair

value of

assets


Fair

value of

liabilities


 

Net balance sheet position


Derivative financial instrument assets included on balance sheet


£000


£000


£000


£000


Foreign exchange forward contracts


22,552


12,662


12,533


129


Total


22,552


12,662


12,533


129


 

 

 

 

 

 

 

 

31 December 2011



Gross contract

notional

amount


Fair

value of

assets


Fair

value of

liabilities


 

Net balance sheet position


Derivative financial instrument liabilities included on balance sheet


£000


£000


£000


£000


Interest rate futures contracts


37,156


-


-


-


Total


37,156


-


-


-


 

31 December 2010



Gross contract

notional

amount


Fair

value of

assets


Fair

value of

liabilities


 

Net balance sheet position


Derivative financial instrument liabilities included on balance sheet


£000


£000


£000


£000


Foreign exchange forward contracts


20,223


10,070


10,500


430


Interest rate futures contracts


64,407


16,557


16,582


25


Credit default swaps


25,398


-


2


2


Total

110,028


26,627


27,084


457


 

Foreign exchange forward contracts

 

During the current and prior year the Group entered into a series of conventional over the counter forward contracts in order to secure translation gains made on Euro, US Dollar and other non Pound Sterling denominated monetary assets. The contracts require the Group to forward sell a fixed amount of the relevant currency for Pound Sterling at pre-agreed future exchange rates. The Group made a loss on these forward contracts of £84,000 (2010: gain of £1,522,000) as included in note 7. The opposite exchange gain is included within financial investments.

 

There was no initial purchase cost associated with these instruments.

 

Interest rate future contracts

During the year the Group continued short selling a number of government bond futures and sovereign futures denominated in a range of currencies to informally hedge substantially all of the interest rate risk on specific long portfolios of the matching currencies denominated corporate bonds. All contracts are exchange traded and the Group made a loss on these futures contracts of £1,796,000 (2010: £117,000) as included in note 7.

 

Equity index futures

 

During the year, the Group purchased a number of equity index futures in order to hedge equity market exposure pending the acquisition of shares in unit trusts. All contracts were exchange traded and the Group made a profit of £433,000 (2010: £nil) as included in note 7.

 

15. Fair value measurements

 

In accordance with the Amendments to IFRS 7 Financial Instruments: Disclosures the fair value of financial instruments based on a three-level fair value hierarchy that reflects the significance of the inputs used in measuring the fair value is provided below.



 

 

As at 31 December 2011


Level 1

Level 2

Level 3

Total

Financial assets


£000

£000

£000

£000







Debt and fixed income securities


500,672

1,669,916

-

2,170,588

Equities and share in unit trusts


-

162,806

10,626

173,432

Deposits with credit institutions


12,848

-

-

12,848

Catastrophe bonds


-

11,639

-

11,639

Derivative instrument assets


-

129

-

129

Total


513,520

1,844,490

10,626

2,368,636

 

 

 

 

 

As at 31 December 2010


Level 1

Level 2

Level 3

Total

Financial assets


£000

£000

£000

£000







Debt and fixed income securities


516,528

1,767,985

-

2,284,513

Equities and share in unit trusts


70

147,866

6,926

154,862

Deposits with credit institutions


4,280

-

-

4,280

Catastrophe bonds


-

15,452

-

15,452

 

Total


520,878

1,931,303

6,926

2,459,107

 

Financial liabilities

Derivative financial instruments


-

457

-

457

 

 

The levels of the fair value hierarchy are defined by the standard as follows:

 

Level 1 - fair values measured using quoted prices (unadjusted) in active markets for identical instruments,

Level 2 - fair values measured using directly or indirectly observable inputs or other similar valuation techniques for which all

significant inputs are based on observable market data,

Level 3 - fair values measured using valuation techniques for which significant inputs are not based on market observable data.

 

The fair value of the Group's financial assets are based on prices provided by investment managers who obtain market data from numerous independent pricing services. The pricing services used by the investment manager obtain actual transaction prices for securities that have quoted prices in active markets. For those securities which are not actively traded, the pricing services use common market valuation pricing models. Observable inputs used in common market valuation pricing models include, but are not limited to, broker quotes, credit ratings, interest rates and yield curves, prepayment speeds, default rates and other such inputs which are available from market sources.

 

The fair values of the Group's investments in catastrophe bonds are based on quoted market prices or where such prices are not available, by reference to broker or underwriter bid indications.

 

Investments in mutual funds comprise a portfolio of stock investments in trading entities which are invested in various quoted investments. The fair value of shares in unit trusts are based on the net asset value of the fund as reported by independent pricing sources or the fund manager.

 

Included within Level 1 of the hierarchy are Government bonds, Treasury bills and exchange traded equities which are measured based on quoted prices.

 

Level 2 of the hierarchy contains U.S Government Agencies, Corporate Securities, Asset Backed Securities, Mortgage Backed Securities and Catastrophe bonds. The fair value of these assets are based on 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 of those instruments classified as Level 2. Also included within Level 2 are units held in traditional long funds and long and short special funds and over the counter derivatives.

 

Level 3 contains investments in a limited partnership and unquoted equity securities which have limited observable inputs on which to measure fair value.  Unquoted equities are carried at cost which is deemed to be comparable to fair value. The effect of changing one or more inputs used in the measurement of fair value of these instruments to another reasonably possible assumption would not be significant and no further analysis has been performed.

 

In certain cases, the inputs used to measure the fair value of a financial instrument may fall into more than one level within the fair value hierarchy. In this instance, the fair value of the instrument in its entirety is classified based on the lowest level of input that is significant to the fair value measurement.

 

During the year, there were no transfers made between Level 1 and Level 2 of the fair value hierarchy.

 

The following table sets forth a reconciliation of opening and closing balances for financial instruments classified under Level 3 of the fair value hierarchy:

 

 

 

 

 

 


Equities and shares in unit trusts

Deposits with credit institutions

Derivative

financial instruments

Total

31 December 2011


£000

£000

£000

£000







Balance at 1 January


6,926

-

-

6,926

Total gains or losses through profit or loss*


1,242

-

-

1,242

Purchases


3,002

-

-

3,002

Issues






Settlements


(544)

-

-

(544)

Transfers into Level 2






Closing balance


10,626

-

-

10,626

 



Equities and shares in unit trusts

Deposits with credit institutions

Derivative

financial instruments

Total

31 December 2010


£000

£000

£000

£000







Balance at 1 January


4,260

-

-

4,260

Total gains or losses through profit or loss*


842

-

-

842

Purchases


1,824

-

-

1,824

Issues


-

-

-

-

Settlements


-

-

-

-

Transfers into Level 2


-

-

-

-

Closing balance


6,926

-

-

6,926

*Total gains/(losses) are included within the investment result in the income statement

 

 

16. Cash and cash equivalents      



2011


2010



£000


£000

Cash at bank and in hand


258,927


260,710

Short-term bank deposits


257,620


75,307



516,547


336,017

 

The Group holds its cash deposits with a well diversified range of banks and financial institutions.

 



17.   Insurance liabilities and reinsurance assets



2011


2010



£000


£000

Gross





Claims reported and loss adjustment expenses


938,498


802,254

Claims incurred but not reported


964,073


904,150

Unearned premiums


597,689


573,463

Total insurance liabilities, gross


2,500,260


2,279,867

 

 





Recoverable from reinsurers





Claims reported and loss adjustment expenses


187,973


131,697

Claims incurred but not reported


224,855


242,496

Unearned premiums


79,687


88,572

Total reinsurers' share of insurance liabilities


492,515


462,765






Net





Claims reported and loss adjustment expenses


750,525


670,557

Claims incurred but not reported


739,218


661,654

Unearned premiums


518,002


484,891

Total insurance liabilities, net


2,007,745


1,817,102

The gross claims reported, the loss adjustment expenses liabilities and the liability for claims incurred but not reported are net of expected recoveries from salvage and subrogation. The amounts for salvage and subrogation at the end of 2011 and 2010 are not material.

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 eight years. Analysis at the 100% level is required in order to avoid distortions arising from reinsurance to close arrangements which subsequently increase the Group's share of ultimate claims for each accident year three years after the end of that accident year.

The top half of each table illustrates how estimates of ultimate claim costs for each accident year have changed at successive year ends. The bottom half reconciles cumulative claim costs to the amounts still recognised as liabilities. A reconciliation of the liability at the 100% level to the Group's share, as included in the balance sheet, is also shown.

 

 



Insurance claims and claims expenses reserves - gross at 100% level

Accident year

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Total


£000

£000

£000

£000

£000

£000

£000

£000

£000

£000

£000

Estimate of ultimate claims costs as adjusted for foreign exchange*:












at end of accident year

413,184

466,817

703,352

1,181,038

607,845

814,411

1,138,242

865,308

1,040,776

1,342,851

8,573,824

one year later

437,595

479,567

780,406

1,307,247

580,772

730,346

968,161

723,236

893,734

-

6,901,064

two years later

445,766

450,905

744,857

1,309,989

559,679

693,912

945,948

665,513

-

-

5,816,569

three years later

429,751

464,336

704,672

1,291,432

528,667

706,535

906,391

-

-

-

5,031,784

four years later

425,705

459,437

707,894

1,285,490

538,593

700,267

-

-

-

-

4,117,386

five years later

399,825

448,549

689,366

1,286,662

528,182

-

-

-

-

-

3,352,584

six years later

395,574

443,914

693,070

1,241,435

-

-

-

-

-

-

2,773,993

seven years later

397,049

433,538

674,175

-

-

-

-

-

-

-

1,504,762

eight years later

383,247

429,429

-

-

-

-

-

-

-

-

812,676

nine years later

384,727

-

-

-

-

-

-

-

-

-

384,727

Current estimate of cumulative claims

384,727

429,429

674,175

1,241,435

528,182

700,267

906,391

665,513

893,734

1,342,851

7,766,704

Cumulative payments to date

(337,051)

(419,839)

(617,994)

(1,167,039)

(455,780)

(570,177)

(714,342)

(473,533)

(435,502)

(331,251)

(5,522,508)

Liability recognised at 100% level

47,676

9,590

56,181

74,396

72,402

130,090

192,049

191,980

458,232

1,011,600

2,244,196

Liability recognised in respect of prior accident years at 100% level











89,859

Total gross liability to external parties at 100% level


2,334,055

*The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2011.

 

Reconciliation of 100% disclosures above to Group's share - gross

Accident year

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Total


£000

£000

£000

£000

£000

£000

£000

£000

£000

£000

£000

Current estimate of cumulative claims

384,727

429,429

674,175

1,241,435

528,182

700,267

906,391

665,513

893,734

1,342,851

7,766,704

Less:Attributable to external Names

(78,366)

(96,389)

(158,879)

(310,875)

(110,438)

(137,899)

(173,449)

(111,234)

(138,144)

(198,129)

(1,513,802)

Group's share of current ultimate claims estimate

306,361

333,040

515,296

930,560

417,744

562,368

732,942

554,279

755,590

1,144,722

6,252,902













Cumulative payments to date

(337,051)

(419,839)

(617,994)

(1,167,039)

(455,780)

(570,177)

(714,342)

(473,533)

(435,502)

(331,251)

(5,522,508)

Less:Attributable to external Names

65,747

94,246

144,651

295,205

93,607

107,948

129,641

72,899

57,269

42,423

1,103,636

Group's share of cumulative payments

(271,304)

(325,593)

(473,343)

(871,834)

(362,173)

(462,229)

(584,701)

(400,634)

(378,233)

(288,828)

(4,418,872)













Liability for 2002 to 2011 accident years recognised on Group's balance sheet

35,057

7,447

41,953

58,726

55,571

100,139

148,241

153,645

377,357

855,894

1,834,030

Liability for accident years before 2002 recognised on Group's balance sheet











68,541

Total Group liability to external parties included in balance sheet - gross**


1,902,571

** This represents the claims element of the Group's insurance liabilities.



Insurance claims and claims expenses reserves - net at 100% level

Accident year

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Total


£000

£000

£000

£000

£000

£000

£000

£000

£000

£000

£000

Estimate of ultimate claims costs as adjusted for foreign exchange*:












at end of accident year

278,813

368,640

588,123

694,883

540,273

704,951

788,664

699,134

823,698

1,040,657

6,527,836

one year later

304,138

389,344

642,944

798,902

531,608

641,184

704,512

587,970

724,754

-

5,325,356

two years later

314,738

354,561

617,364

788,855

514,331

621,008

701,306

561,371

-

-

4,473,534

three years later

290,692

364,975

579,523

763,321

470,863

588,955

661,089

-

-

-

3,719,418

four years later

284,205

355,928

580,450

752,750

488,023

585,147

-

-

-

-

3,046,503

five years later

268,666

350,593

564,886

753,311

475,691

-

-

-

-

-

2,413,147

six years later

262,542

346,939

565,374

731,725

-

-

-

-

-

-

1,906,580

seven years later

268,143

335,507

549,172

-

-

-

-

-

-

-

1,152,822

eight years later

256,535

327,249

-

-

-

-

-

-

-

-

583,784

  nine years later

266,886

-

-

-

-

-

-

-

-

-

266,886

Current estimate of cumulative claims

266,886

327,249

549,172

731,725

475,691

585,147

661,089

561,371

724,754

1,040,657

5,923,741

Cumulative payments to date

(206,430)

(320,079)

(486,977)

(665,968)

(405,032)

(467,043)

(537,004)

(411,187)

(378,092)

(277,611)

(4,155,423)

Liability recognised at 100% level

60,456

7,170

62,195

65,757

70,659

118,104

124,085

150,184

346,662

763,046

1,768,318

Liability recognised in respect of prior accident years at 100% level











41,780

Total net liability to external parties at 100% level

1,810,098            

 

*The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2011.

 

Reconciliation of 100% disclosures above to Group's share - net

Accident year

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Total


£000

£000

£000

£000

£000

£000

£000

£000

£000

£000

£000

Current estimate of cumulative claims

266,886

327,249

549,172

731,725

475,691

585,147

661,089

561,371

724,754

1,040,657

5,923,741

Less:Attributable to external Names

(52,080)

(71,829)

(129,973)

(175,292)

(99,258)

(119,202)

(123,113)

(90,647)

(103,540)

(137,891)

(1,102,825)

Group's share of current ultimate claims estimate

214,806

255,420

419,199

556,433

376,433

465,945

537,976

470,724

621,214

902,766

4,820,916













Cumulative payments to date

(206,430)

(320,079)

(486,977)

(665,968)

(405,032)

(467,043)

(537,004)

(411,187)

(378,092)

(277,611)

(4,155,423)

Less:Attributable to external Names

35,729

70,171

113,766

160,728

82,118

90,238

93,316

61,793

51,086

34,255

793,200

Group's share of cumulative payments

(170,701)

(249,908)

(373,211)

(505,240)

(322,914)

(376,805)

(443,688)

(349,394)

(327,006)

(243,356)

(3,362,223)













Liability for 2002 to 2011 accident years recognised on Group's balance sheet

44,105

5,512

45,988

51,193

53,519

89,140

94,288

121,330

294,208

659,410

1,458,693

Liability for accident years before 2002 recognised on Group's balance sheet











31,050

Total Group liability to external parties included in the balance sheet - net **

1,489,743

** This represents the claims element of the Group's insurance liabilities and reinsurance assets.

 

 

Movement in insurance claims liabilities and reinsurance claims assets

 




2011




2010


Gross

Reinsurance

Net


Gross

Reinsurance

Net

Year ended 31 December

£000

£000

£000


£000

£000

£000

Total at beginning of year

(1,706,404)

374,193

(1,332,211)


(1,549,323)

328,890

(1,220,433)

Claims and loss adjustment expenses for the year

(830,368)

132,470

(697,898)


(733,074)

162,077

(570,997)

Cash paid for claims settled in the year

650,510

(95,433)

555,077


598,179

(120,088)

478,091

Exchange differences and other movements

(16,309)

1,598

(14,711)


(22,186)

3,314

(18,872)

Total at end of year

(1,902,571)

412,828

(1,489,743)


(1,706,404)

374,193

(1,332,211)









Claims reported and loss adjustment expenses

(938,498)

187,973

(750,525)


(802,254)

131,697

(670,557)

Claims incurred but not reported

(964,073)

224,855

(739,218)


(904,150)

242,496

(661,654)

Total at end of year

(1,902,571)

412,828

(1,489,743)


(1,706,404)

374,193

(1,332,211)

The insurance claims expense reported in the consolidated income statement is comprised as follows:

 




2011




2010


Gross

Reinsurance

Net


Gross

Reinsurance

Net

 Year ended 31 December

£000

£000

£000


£000

£000

£000

Current year claims and loss adjustment expenses

(1,126,667)

229,314

(897,353)


(864,128)

160,277

(703,851)

(Under)/over provision in respect of prior year claims and loss adjustment expenses

296,299

(96,844)

199,455


131,054

1,800

132,854

Total claims and claims handling expense

(830,368)

132,470

(697,898)


(733,074)

162,077

(570,997)

 

18. Trade and other payables

 



2011


2010



£000


£000

Creditors arising out of direct insurance operations


58,346


52,368

Creditors arising out of reinsurance operations


152,866


181,159



211,212


233,527






Obligations under finance leases


-


45

Share of Syndicate's other creditors' balances


4,856


4,887

Social security and other taxes payable


10,640


14,563

Other creditors


14,939


13,995



30,435


33,490

Reinsurers' share of deferred acquisition costs


15,641


17,048

Accruals and deferred income


56,847


64,933

Total


314,135


348,998

 

 

  

 

19. Tax expense

The Company and its subsidiaries are subject to enacted tax laws in the jurisdictions in which they are incorporated and domiciled.

The amounts charged in the consolidated income statement comprise the following:

 


2011

2010


£000

£000

Current tax (credit)/expense

(95,429)

57,166

Deferred tax expense/(credit)

91,428

(24,600)




Total tax (credit)/expense

(4,001)

32,566

 

During 2011 the group's Lloyd's corporate member, Hiscox Dedicated Corporate Member Ltd, changed its tax filing position on the timing of the deduction for tax purposes of member-level reinsurance premiums. Consequently, a prior year current tax adjustment has arisen and results in a closing current tax debtor.  Equally, deductions for member-level reinsurance premiums which were previously deferred for tax, and formed part of the deferred tax balance have been taken in earlier years, and no longer form part of the deferred tax balance.

 

The effect of this change in current tax is a credit to the income statement of £81,287,000.

 

The effect of this change in deferred tax is a charge to the income statement of £73,296,000.

 

A permanent difference arises as a result of the difference in UK effective tax rate between the earlier and later years.

 

20.  Earnings per share

Basic

Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of shares in issue during the year, excluding ordinary shares purchased by the Group and held in treasury as own shares.

 



2011


2010

 

Profit attributable to the Company's equity holders (£000)


21,272


178,800

Weighted average number of ordinary shares (thousands)


383,602


379,064

Basic earnings per share (pence per share)


5.5p


47.2p

 

Diluted

Diluted earnings per share is calculated adjusting for the assumed conversion of all dilutive potential ordinary shares.  The Company has one category of dilutive potential ordinary shares, share options.  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.

 



2011

 


2010

Profit attributable to Company's equity holders (£000)


21,272


178,800






Weighted average number of ordinary shares in issue (thousands)


383,602


379,064

Adjustments for share options (thousands)


15,610


14,662

Weighted average number of ordinary shares for diluted earnings per share (thousands)


399,212


393,726

Diluted earnings per share (pence per share)


5.3p


45.4p

Diluted earnings per share has been calculated after taking account of 15,029,986  (2010: 13,996,961) options and awards under employee share option and performance plan schemes and 579,518  (2010: 665,060) options under SAYE schemes.

 

 

 

21.  Dividends paid to owners of the Company



2011


2010



£000


£000

Interim dividend for the year ended :





- 31 December 2011 of 5.1p (net) per share


19,738


-

- 31 December 2010 of 5.0p (net) per share


-


19,018

Final dividend for the year ended :





- 31 December 2010 of 11.5p (net) per share

 

Second interim dividend for the year ended:


44,111


-

- 31 December 2009 of 10.5p (net) per share


-


39,442



63,849


58,460

Included in the final dividend for 2010 and the interim dividend for 2011, were scrip dividends to the value of £12,308,238 and £1,029,226 respectively. Subject to shareholder approval at the forthcoming Annual General Meeting on 30 May 2012, a scrip dividend alternative to the cash dividend is to be offered again to the Owners of the Company. These financial statements do not reflect this dividend as a distribution or liability in accordance with IAS 10 Events after the reporting period.

 

 

22.  Foreign currency items on economic hedges and intragroup borrowings

 

The Group have 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, foreign exchange losses arise which are not eliminated through the income statement on consolidation. Implicit offsetting gains are reflected instead on retranslation of the counterparty company's closing balance sheet through other comprehensive income and into the Group's currency translation reserve within equity.

 

Impact as at 31 December 2011


 

Consolidated income

statement

2011

£000

Consolidated  other comprehensive income

2011

£000

 

Total economic impact

2011

£000

Unrealised translation (losses)/gains on intragroup borrowings

(4,540)

4,540

-





Total (losses)/gains recognised

(4,540)

4,540

-

Impact as at 31 December 2010


 

Consolidated income

statement

2010

£000

Consolidated

other comprehensive income

2010

£000

 

Total economic impact

2010

£000

Unrealised translation gains / (losses)  on intragroup borrowings

1,846

(1,846)

-





Total gains/(losses) recognised

1,846

(1,846)

-

 

 

The Group did not enter into any economic hedging derivative contracts during the current year.

 

 

Note:

The Annual Report and Accounts for 2011 will be available to shareholders no later than 23 March 2012. Copies of the Report may be obtained by writing to the Company Secretary, Hiscox Ltd, Wessex House, 45 Reid Street, Hamilton HM12, Bermuda. A copy of this and other announcements can be found at www.hiscox.com.

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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