Hiscox 2014 preliminary results

RNS Number : 1694G
Hiscox Ltd
02 March 2015
 



Hiscox Ltd full year results

 

For the year ended 31 December 2014

"A strong result"

 

2014

2013

Gross premiums written

£1,756.3m

£1,699.5m

Net premiums earned

£1,316.3m

£1,283.3m

Profit before tax

£231.1m

£244.5m

Earnings per share

67.4p

66.3p

Total dividend per share for year

22.5p

21.0p

Special distribution

45.0p

36.0p

Net asset value per share

462.5p

402.2p

Group combined ratio

83.9%

83.0%

Return on equity

17.1%

19.3%

Investment return

1.8%

1.9%

Reserve releases

£172m

£140m

 

Highlights

·      Strong premium growth in insurance of 8.8%, including 24.1% for Hiscox USA.

·      Record profits in Hiscox UK and Europe of £73.3 million (2013: £56.4 million).

·      Retail businesses now over half the Group's gross premiums written, with retail profits now covering the standard dividend.

·      Hiscox London Market profit before tax of £62.6 million (2013: £63.1 million), growing with consistent profitability.

·      Hiscox Re reducing premiums as planned by 13.9% and delivered good profits, with new products and Kiskadee ILS funds on track to reach $500 million by mid-year.

·      Long-term investment in brand, product and distribution provides opportunities for profitable growth throughout the cycle.

Capital return

·      Capital return of 60.0p per share, approximately £192 million, by way of E/F share scheme and share consolidation.

·      This comprises a special distribution of 45.0p per share and final dividend equivalent of 15.0p per share, taking the total dividend for the year to 22.5p, an increase of 7.1% (2013: 21.0p).

 

Bronek Masojada, Chief Executive of Hiscox Ltd, commented:

"Hiscox has had another good year. We have been able to grow profitably in insurance and position Hiscox Re sensibly, reducing premiums and attracting new capital in the face of tough conditions. The strategy of diversification we have pursued for decades means that, whatever the headwinds, we have the firepower to set our own course. We have the strategy, brand, people and capital support for a rewarding future."


For further information

Hiscox Ltd


Jeremy Pinchin, Group Company Secretary

+1 441 278 8300

Kylie O'Connor, Head of Group Communications, London

+44 (0)20 7448 6656

 

Brunswick


Tom Burns

+44 (0)20 7404 5959

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 divisions in the Group - Hiscox Retail (which includes Hiscox UK and Europe, Hiscox Guernsey, Hiscox USA and subsidiary brand, DirectAsia), Hiscox London Market and Hiscox Re. Through its retail businesses in the UK, Europe and the US Hiscox offers a range of specialist insurance for professionals and business customers, as well as homeowners. Hiscox underwrites internationally traded, bigger ticket business and reinsurance through Hiscox London Market and Hiscox Re.

 

For further information, visit  www.hiscoxgroup.com.

 

Chairman's statement

 

I am able to report another strong result for the Hiscox Group, a pre-tax profit of £231.1 million (2013: £244.5 million). We have done well in difficult markets by maintaining discipline in both our underwriting and investment portfolio, and pursuing our strategy of building balance through diversity of product, geography and distribution.

 

While the double whammy of burgeoning capital and fewer losses has put pressure on bigger ticket rates, we have continued to invest in the retail businesses in the UK, Europe, the US, Guernsey and more recently in Asia. Our London Market team has dug out nuggets of profitable business against tough competition. Hiscox Re, our reinsurance arm, has adapted swiftly, developing new products and opportunities to engage customers.

 

Results

 

The results for the year ending 31 December 2014 were a profit before tax of £231.1 million (2013: £244.5 million). Gross written premium increased by 3.3% to £1,756.3 million (2013: £1,699.5 million). The combined ratio was 83.9% (2013: 83.0%). Earnings per share increased to 67.4p (2013: 66.3p) and the net asset value per share increased by 15% to 462.5p (2013: 402.2p). Return on equity was 17.1% (2013: 19.3%).

 

Dividend, balance sheet and capital management

 

The Board has proposed that a special distribution be made of 60.0p per share (amounting to approximately £192.0 million) to include 15.0p per share instead of a final dividend. The total dividend for 2014 is equal to 22.5p per share (2013: 21.0p), an increase of 7.1%. The return of capital will be made using a similar scheme to last year and will again be accompanied by a share consolidation. Full details will be set out in a circular to be despatched to Hiscox shareholders on or around 3 March 2015. This is now the third successive year in which we have been able to return capital to shareholders and again I say that this is a tactic for the circumstances we are in, not a long-term strategy to return capital every year.

 

Investments

 

Given the continued challenging markets, and relatively cautious approach, we are content with our investment result of £56.4 million (2013: £58.9 million), which equates to a return of 1.8% (2013: 1.9%).

 

Our bias towards short-term bond investments provides something of a constraint in current markets but it is driven by the desire not to suffer losses when bond yields rise.

 

Our performance was improved by our risk assets, which produced a pleasing return of 7.6%. However, we do not believe it is appropriate to take excessive risks in search of higher yields, as our investments are mainly earmarked to pay claims and support our business, although we continue to look for appropriate opportunities in the equity markets. In 2015, we are planning for a continuation of the same market conditions that have produced low, but still positive, returns for us in recent years.

 

The changing market

The ongoing low interest rates and benign claims experience continues to attract new capital to our markets, putting pressure on brokers and insurers. In my opinion, the new sources of capital are here to stay. They have become accustomed to operating in our business, so I think they are unlikely to move on (as perhaps some hope they will) when rewards improve in other parts of the capital markets.

 

Squeezed margins and consolidation have put pressure on old relationships. Our response has been to support brokers through collaborative product innovation and improved processes, focussing on expertise and service to help their clients. We also continue to explore and support new distribution channels. Over many years we have built a powerful direct-to-consumer business, which we are replicating in different countries. Alongside this, our broker e-trading capabilities, our involvement in specialist underwriting agency White Oak, our support of new facilities and our recent bolt-on acquisitions, all give us access to a broader portfolio of risks.

 

In the face of strong headwinds, one can see a clear divergence of strategy in the market with some companies growing big ticket business and some contracting. Our underwriting strategy combines underwriting rigour with an eye for opportunity and is designed to manage all stages of the insurance cycle: we plan for the soft market conditions we are experiencing. We believe that when margins reduce you take your foot off the accelerator and when they increase you push down hard. We also believe that our strategy of persistently investing and building the retail businesses as a counter weight to the more volatile lines continues to be the right one.

 

The Board

 

It has been nearly nine years since we created the Hiscox Ltd board, and according to UK corporate governance directors potentially cease to be independent after nine years' service. As such, a number of our original Board members will be stepping down during the year. These include Dr James King, Andrea Rosen and Dan Healy. I am particularly pleased our businesses in Bermuda and the US will continue to benefit from James and Dan's sage counsel as they continue to serve the Group on our subsidiary Boards. I would also like to express my deep gratitude to Andrea for the many valuable contributions she has made to the Company over the last nine years.

 

In preparation for this we have conducted an external search to recruit two replacements and are recommending to shareholders the appointment of Lynn Carter and Anne MacDonald to our Board.  Lynn Carter will bring 38 years' experience in the banking industry, most recently as President of Capital One Bank, while Anne held the position of Chief Marketing Officer at four different Fortune 100 companies including Travelers and PepsiCo. These appointments support our focus on retail growth and brand building.

 

In addition, Richard Gillingwater Senior Independent Director, who joined the board in 2010 will step down after the AGM due to his new commitments at Scottish and Southern Energy as well as Henderson Global Investors. The Group has benefited greatly from Richard's acumen and measured approach and I wish him all the best in his new role at SSE.

 

Finally

 

We continue to recruit, train and motivate the best people. Their desire to do the right thing, however hard, is what makes our customers want to do business with us. I am thankful to everyone at Hiscox for their diligence and for the ongoing support of our customers.

 

I recently visited our York office, having the week before returned from visiting our new office in Singapore. I was inspired by the enthusiasm and drive of the young teams and the commitment and intellect of the leadership in both places. It is pleasing to see that Hiscox businesses, from Singapore, to Atlanta and York all reflect the same values and determination to succeed.

 

During my time at Hiscox I have seen our strategy, those same values and that determination tested in battle - and prevail. In turbulent times we have delivered profitable organic growth and returned extra capital to shareholders. I expect the strong headwinds to continue but our course will not change; it has already brought the business, our staff and our shareholders success, and I believe will bring greater rewards in the future.

 

 

 

Robert Childs

2 March 2015

2014 Chief Executive's report

 

I am pleased to report a profit before tax of £231.1 million (2013: £244.5 million), a return on equity of 17.1% (2013: 19.3%) and revenue growth of  3.3% to £1,756 million (2013: £1,699 million) - a credible performance in current market conditions. This result reflects the continued good progress of our retail businesses which, for the first time account for over half of Hiscox Ltd's gross written premiums. Our US business contributed materially to this, growing organically by 24.1% to over $360 million. Hiscox UK and Europe all delivered record profits. Our London Market business has made a good margin and grown in a difficult market. Our reinsurance business has had a tremendous year and acquitted itself well in challenging pricing circumstances, receiving ongoing support from our quota share partners and attracting new investors to our insurance linked funds which are now on track to reach $500 million in assets under management.

 

With these results, we have announced a capital return of 60 pence per share, comprising a special distribution of 45 pence per share and a further 15 pence per share instead of a final dividend. The total capital return is equal to approximately £192 million. I am pleased that for another year our business is strong enough to allow this return of capital and at the same time we are able to invest in talent, infrastructure, small acquisitions and new opportunities.

 

Market challenges remain - pricing pressure due to the absence of large losses, a flood of capital into reinsurance, technological change putting pressure on infrastructure, and low investment returns due to ongoing financial repression. Our long term strategy is showing its mettle, and our options - in terms of products, distribution routes and geographies - allows us to adapt and continue to deliver good returns to shareholders.

 

 

Hiscox Retail

 

We began growing our specialty retail business outside Lloyd's in 1989, with an initial focus on high net worth homes. It reached £2 million in its first year. Since then we have broadened the product offering, entered new countries and built new distribution channels. Hiscox Retail now comprises over half of the Group's gross written premium - £891.1 million in total (2013: £819.4 million). Over the last 10 years it has grown at 12.8% compound, and yet we are still a small participant in most of the segments we target. In 2014 it contributed profits of £78.1 million (2013: £61.2 million), enough to cover the equivalent of the final dividend for the Group. The combined ratio improved slightly to 93.5% (2013: 94.3%). The scale, steady profits and brand value of this segment truly differentiate Hiscox in the insurance marketplace.

 

Hiscox Retail comprises Hiscox UK and Europe, and Hiscox International. I review them in turn below:

 

Hiscox UK and Europe

 

This division provides personal lines cover - from high-value households, fine art and collectibles to luxury motor - and commercial insurance for small and medium sized businesses, typically operating in white-collar industries. These products are distributed via brokers, through a growing network of partnerships, and direct to the consumer.

 

Our retail businesses in the UK and Europe delivered record profits of £73.3 million (2013: £56.4 million) despite serious floods in the UK - and hailstorms, windstorms and floods in Europe.

 

Hiscox UK and Ireland

Hiscox UK and Ireland increased gross written premiums by 5.5% to £435.0 million (2013: £412.4 million) with strong growth in areas where margins are good and reductions in less profitable business. It achieved a combined ratio of 88.6%, at the better end of our normal expectations.

 

The first half of the year was dominated by floods in South East England where we have a concentration of customers. As always, our claims team delivered an exceptional service, meaning we were able to close 92% of claims on average within eight weeks of being reported. The floods highlighted issues with the Government's Flood Re scheme, which was particularly unfavourable for many of our insureds. We led an active campaign throughout the year to change this and were pleased that some of our concerns have been addressed.

 

In the second half of the year we launched a series of new and refreshed products including Data and Cyber Risks, and Personal Accident cover, which are showing positive early signs. These innovations have contributed to a particularly good year for the UK broker business.

 

We always look at opportunities to develop a market-leading position in our chosen areas of specialism and we have made a series of small acquisitions to this end. We acquired Event Assured in September, consolidating our position as market leaders in insurance for small events, conferences and exhibitions. Today we announce completion of our acquisition of R&Q Marine Services, a managing general agent specialising in yachts and general marine leisure which underwrites on behalf of other insurers. We will now combine their knowledge with our distribution and marketing capability to serve more customers in our target segments.

 

We are seeing some success with Hiscox Private Clients, our tied agency through which we sell high net worth home insurance direct to customers. This complements our highly successful direct to consumer mid-net worth home and small commercial business products. Through these direct operations we serve over 124,000 customers and we still have plenty of room to grow.

 

A major achievement in the year was the delivery (on time and relatively close to budget) of the first phase of our £50 million programme to renew the IT infrastructure that underpins our retail operations. We are already seeing benefits in improved customer experience and higher sales for phase one which supports our direct home business. We are now working on phase two which will renew the infrastructure for our direct commercial business. This should be completed by the end of 2015. At the same time we have in-sourced our home and commercial customer experience centres - all of which will improve service and customer retention, accelerating our growth. We now have over 120 staff in York, and by the end of 2015 they will be housed in a new office which has room to cater for further expansion.

 

In the autumn, after a two year break, we returned to TV with a new home advertisement supported by cinema, print and poster campaigns. This has generated a great deal of new interest with calls, website visits and sales all increasing by over 30% during the campaign.

 

 

Hiscox Europe

Our European business had an excellent year, growing gross written premiums by 8.5% to €190.8 million (2013: €175.8 million). It delivered a combined ratio of 94.1%, including marketing costs of €4 million (or 2% on the combined ratio) as we begin the process of building a direct business in Europe. This is a good performance in the toughest economy in which we operate.

 

Each part of our European operation has performed well, benefiting from a focused business plan and improved expense management. Our partnerships with other financial services providers such as BBVA, Crédit Agricole, ABN AMRO and Generali who distribute our specialist products to their customers have helped our commercial business grow to almost €100 million. We have also invested in expertise, allowing us to develop products for software developers, radiologists, laboratories and equestrian centres.

 

Our Art and Private Client business in Europe has had a welcome return to growth and remained profitable despite the most severe weather related claims for the past five years. Hailstorms, windstorms and severe rain particularly affected Belgium and Netherlands, but we now have the scale to absorb these losses.

 

Germany performed especially well, reflecting the benefits of a consistent strategy, stable team and established broker relationships. Spain also had a good year, despite its ongoing economic difficulties thanks to committed, ambitious leadership.

 

Europe is benefiting from improving scale. We continue steadily to improve our expense ratio through our EuroFit project, which involves local process improvements and the concentration of functions in our shared service centre in Lisbon. A success during the year was the in-sourcing of our escape of water claims (a particular challenge in France) from a third-party to our team in Lisbon, resulting in lower costs and higher client satisfaction.

 

Our direct-to-consumer small business products in France and Germany are benefiting from more investment as they follow of our direct strategy in the UK and USA. Although the French and German direct businesses are still relatively in their infancy, with a total premium of only €4 million, we think the market opportunity is there and that with the right sustained investment we will build good direct businesses.

 

 

Hiscox International

 

This division comprises Hiscox Guernsey, Hiscox USA and DirectAsia. Its revenues grew by 15.7% to £301.1 million (2013: £260.3 million) and it achieved a combined ratio of 100.1% (2013: 98.5%). This good growth demonstrates there are still many opportunities for us across the world.

 

Hiscox Guernsey

During the year we formed the Hiscox Special Risks division, bringing together different teams from across the Group that focus on special risks, including kidnap and ransom, private client fine art and executive security, in a structure designed to boost local and global collaboration. Led from Hiscox Guernsey, Hiscox Special Risks has additional teams in London, Munich, Paris, New York, Los Angeles and Miami. We also underwrite personal accident, terrorism and fine art risks from Guernsey. In December 2014, we expanded our Miami operation recruiting additional staff and acquiring the renewal rights to a book of Latin American business.

 

Despite operating in highly competitive lines, Hiscox Special Risks has a well-earned reputation for expertise and service giving an element of stability to this business. Clients also benefit from our exclusive arrangement with security experts Control Risks.

 

Hiscox USA

Our US business had another year of strong growth. Gross written premiums increased by 24.1% to $367.6 million (2013: $296.2 million) with the broker business making a profit for the second year in a row. The professional liability products were a growth engine and provide a counterweight to other areas still in the investment stage.

 

Commercial property is under pressure, with double-digit rate reductions so we remain disciplined in this area. In all other lines, rates remain broadly flat. Media and entertainment is an area where we are investing, with IT infrastructure and an enhanced suite of products. The small business direct and partnerships division continue to forge ahead, with year-on-year growth of 75% and over 80,000 policies now in force. It is approaching scale.

 

The team has also been busy bringing other new products to market. New financial services and general liability lines, a new cyber deception endorsement and the roll-out of Hiscox Pro - the overarching name for our suite of profession's products - all give us opportunities. These have been welcomed by the market and are delivering promising early results.

 

Our investment in marketing and focus on differentiation in a crowded marketplace remains important to us, and during the year we launched a brand building campaign under the theme of 'Encourage Courage'. Celebrating Hiscox as an insurer that understands the challenges of building a business and the value in taking risk, the campaign is already resonating well with staff, brokers and customers. We expect to make a multi-year investment in the brand to support and drive the growth of our business in the US.

 

DirectAsia

Early in the year, Hiscox completed the acquisition of DirectAsia, a direct-to-consumer operation in Singapore, Hong Kong and Thailand. DirectAsia sells predominantly motor insurance with ancillary lines in travel. The business was acquired for $55 million, plus an earn out we would be happy to achieve and brought with it net assets of $23 million. DirectAsia uses the same IT platform that we are installing elsewhere in the Group and has good underwriting capabilities and customer service ability. We recognised a challenger business similar to Hiscox in a geography we are keen to explore.

 

The business is progressing as expected. Gross written premiums for the year were US$29.5 million, a 15.2% increase year-on-year (2013: US$25.6 million). The premium income for the period of our ownership was US$ 22 million.

 

Our key contribution to DirectAsia so far has been to bring our broader marketing knowledge. We have seconded staff and hired a new Chief Marketing Officer. We have also laid the groundwork for TV advertising for the first time in Thailand, part of a sustained campaign supported by print and social media marketing. It launched in January 2015 and initial results are encouraging.

 

Hiscox London Market

 

This segment uses the global licenses, distribution network and credit rating available through Lloyd's to insure clients throughout the world.

 

Our London Market businesses delivered a profit of £62.6 million (2013: £63.1 million), and increased gross written premiums by 9.0% to £510.8 million (2013: £468.6 million). It achieved a combined ratio of 84.2% (2013: 81.4%), with good underwriting and a favourable claims environment combining to generate another strong result.

 

All areas contributed to growth and we were able to maintain our core renewal book while finding new business opportunities. We remain restlessly ambitious, considering new lines of business and distribution routes at the same time as navigating the choppy waters that come with squeezed margins, a changing distribution landscape and an influx of apparently insatiable capital. The current consolidation phase among our competitors will create opportunity, either as brokers seek to avoid over-concentration of their placements or individuals seek to build their careers in human-sized businesses.

 

Looking at each division in turn:

 

Property

Our property division includes US and international commercial property, power and mining risks and US catastrophe exposed personal lines traded in the London Market.

 

Growth in property was led by small-ticket household and commercial business which is written through binding authorities with long standing US partners. It benefited from the allocation of additional catastrophe aggregate as we reduced our exposure in our reinsurance business. It is not without risk however, and we paid a number of claims on homes affected by Hurricane Odile which hit the Mexican Baja Peninsula in September. Big-ticket property business remains challenging, with a competitive renewal season, and we expect these conditions to worsen over time. As a result we will remain selective in the risks we write.

 

Marine and energy

Against a backdrop of challenging trading conditions, the team has worked hard to maintain the account. Within upstream energy, ratings have been strained due to a lack of meaningful losses, while within marine lines our disciplined approach enabled us still to seek out reasonable margins despite rates being broadly flat. The Costa Concordia saga reflects the challenges of large claims. The cost to the industry grew above expectations during the claim, so we were pleased to make a small release at the year-end vindicating our cautious initial reserving.

 

London is the global centre for marine and energy risks, but we cannot assume this will continue forever. The team has taken important steps towards realising new opportunities in emerging markets including hiring an on-the-ground agent in Brazil to build a local Hiscox marketing presence. It has also participated on the Willis Global 360 facility. This facility allows us to see a broader spread of business while maintaining underwriting integrity, and we aim to grow it in 2015.

 

Casualty

The casualty division continues to be a bright spot, performing well and growing, albeit from a small base. We bolstered the team during the year with some hires within directors and officers' and casualty reinsurance, and they are now producing a steady stream of business. It has also been pleasing to see stable rates in errors and omissions, a core part of the casualty account after many years of deterioration. We expect this area to become a significant pillar of the portfolio in time, so it is encouraging to see our investment in talent paying off.

 

Aerospace and specialty

This division includes our aviation, space, contingency, terrorism, kidnap and ransom, political risks and personal accident business.

 

An unprecedented number of claims - from the tragic losses of Malaysian Airlines flights MH17 and MH370 and AirAsia flight QZ8501, to the damage and destruction of 18 aircraft at Libya's Tripoli airport - kept the aviation market in the headlines over the year, with industry losses exceeding $1 billion. A combination of good luck and careful underwriting meant that we avoided many of the non-war losses, though events at Tripoli airport did cost us £2.3 million. Despite industry expectations that the market would harden, the year concluded with rates in broadly the same place as they were at the start of 2014. In 2015, we expect to maintain the account, while being ready to explore any opportunities that may arise.

 

In the rest of the division, we achieved good margins, despite the rating environment being variable. In some lines this has been no mean feat. For example the political unrest surrounding Russia and the Ukraine and the subsequent impact of sanctions has been keenly felt within our political risks book. We have invested in people, expanding both our personal accident and contingency teams.

 

In terrorism, intense competition and a move towards facilities (bundling risks to facilitate placement) are having a negative effect. We were happy to step into the gap that was created by the US Congress's failure to promptly renew its Terrorism Risk Insurance Programme Reauthorisation Act (TRIPRA), providing certainty to customers with material city-centre property exposures.

 

Alternative distribution

The ways in which business reaches our London teams continue to change and evolve as brokers seek greater efficiency and technology allows different, more effective means of communicating. The role of the alternative distribution division is to facilitate innovation, drawing on all the resources of the London Market business. Its biggest business is the underwriting of specialist automotive and equipment, including extended warranty. In this we support White Oak, a specialist in this area. This relationship has grown over time to now represent 25% of our London Market Insurance revenues. Our acquisition of a 10% stake in White Oak and appointment of our Chief Underwriting Officer to its Board underscores the significance of this business to us.

 

We are also grasping new opportunities, including multi-lines Lloyd's consortia, quota-share treaties and binding authorities. Such arrangements give partners access to our capital and expertise in exchange for access to business we might not have otherwise seen. We remain open to other non-traditional ways of distributing products underwritten by our teams in London.

 

Hiscox Re

 

The Hiscox Re segment comprises the Group's reinsurance businesses across the world. It has had a tremendous year, not only in terms of its contribution to the Group's profits, but also in the way it has adapted to the changing dynamic in the global reinsurance industry. Profits were £105.6 million (2013: £129.0 million) despite our revenues declining by 13.9% to £354.3 million (2013: £411.5 million) as we continued our disciplined response to the challenging pricing environment. The combined ratio was 49.8% (2013: 58.9%). The last two years reflect an almost complete absence of large losses due not only to low industry-wide losses, but also good risk selection by our teams.

 

We formed the Hiscox Re division in mid-2013, bringing teams in London, Paris and Bermuda under common leadership. Since then they have forged a strong identity in the eyes of clients and brokers, reflecting the reality of a business which can commit over $200 million to the right risk. The team has developed innovative new products, setting them apart from the industry. Popular products have included Risk Aggregate Protection, Second Event Catastrophe Aggregate Trigger covers, Quarterly Aggregate Protection and Cyber Aggregate Excess of Loss. These have created more opportunities for conversations with clients, brought in over $30 million in new premium and enhanced existing relationships. The team will continue to develop new products as it charts a course through a market where pricing is challenging.

 

The way capital is deployed in the reinsurance industry is changing. For many years we have used quota share support from industry partners to increase our ability to commit material sums to support clients within traditional structures. We expect this to continue for many years as clients' value the stability the traditional approach brings. At the same time we are adapting to changing sources of capital. Our Kiskadee family of insurance linked funds will, in its second year of operation, attract $500 million in capital. We see opportunities to grow these funds, and other ILS products, further as investors become more comfortable with taking both insurance and reinsurance risks.

 

Hiscox Re has also broadened its focus by continuing to invest in specialty, healthcare and casualty reinsurance. These three lines of business are growing steadily, with the right degree of caution. Combined, they exceeded $60 million premium income in 2014 and we expect this growth to continue.

 

Looking forward, the critical uncertainty is catastrophe reinsurance pricing. Rates fell at the important 1/1 renewals by approximately 12.5%, in line with our expectations. This marks the third consecutive year that prices have reduced. The great advantage that Hiscox Re has over its competitors is that the Hiscox Group is not over-reliant on this piece of the pie. This means that our reinsurance team can remain disciplined, reducing volume if necessary, secure in the knowledge as a Group we have many opportunities elsewhere. For instance, we have already re-allocated catastrophe aggregate from reinsurance to our small ticket property insurance team where pricing is now more attractive. It also means that cedants see Hiscox as a secure partner that will pay claims in adverse circumstances. The reinsurance industry has had three years without any material claims, over six years since a major Gulf of Mexico windstorm, and almost 10 years without a major Florida hurricane. This will inevitably change and when it does, Hiscox Re has a full team of talented people and diverse sources of capital to expand as the opportunity presents itself.

 

 

Claims

 

2014 is a year that will be remembered for its devastating aviation losses. Our exposure to these events - from the loss of Malaysia Airlines MH370 and MH17, AirAsia flight QZ8501 and the loss of the Air Algérie flight to Mali, to the destruction at Libya's Tripoli airport - was limited, reserved at net $6.8 million. We also reserved $6.8 million for the passenger ferry that caught fire in the Adriatic Sea, resulting in the tragic loss of life.

 

It was a relatively benign year for large scale natural catastrophes, and a quiet hurricane season resulted in no material losses outside of the $12.5 million reserved for Hurricane Odile which hit the Mexican peninsula in September. In Europe, severe floods, windstorms and hailstone events during the first half of the year affected our customers in the UK, Belgium and the Netherlands. Our reserving for these events stands at £8.8 million for the UK and €5.3 million for Belgium and the Netherlands. We also reserved $7.2m for February's severe snowstorms in Japan.

 

We are here to pay claims when the worst happens, so it is always pleasing to receive external recognition for the quality of our teams and the fair and fast treatment that our customers experience. Nine out of ten people that insure their property with us in the UK say they would recommend us to their friends and family, and in the London Market Gracechurch survey we achieved the second highest ranking for overall customer satisfaction. We do not rest on our laurels however and continue to strive for ways to work better, faster and even more effectively for our customers.

 

Reserve releases of £172 million were up from £140 million last year, as we maintain a cautious approach.

 

Marketing

 

During 2014 we increased marketing spend across the Group by 3.9% to £ 31.8 million (2013: £30.6million). The vast majority of our marketing efforts are focused on our direct-to-customer operations in the UK, the US and Europe. We have also invested significantly in marketing our newly acquired Asian operations, DirectAsia. Our investment in broker channel marketing continued, where we marketed direct to brokers, or we helped them market to their customers. A small amount was also spent on corporate sponsorships, mainly supporting art related activities but also growing our presence in York.

 

Our marketing has been instrumental in building the Hiscox brand, communicating what we do to an ever wider audience, building awareness of Hiscox and ultimately driving sales. The benefits have been felt most in the UK where it has had a positive impact on the direct, retail broker and even our Lloyd's activities. As we spend more in other locations I believe we will see similar broad business benefits.

 

 

Operations and IT

 

Our operations and IT capability has benefited greatly from investment and effective leadership, and we have made good progress in several important areas. Our project to replace the core underwriting, policy administration and claims systems supporting our retail businesses continues. The first phase of implementation, for our UK direct home system, launched successfully on time and almost on budget in October and this has already doubled our online conversion rates and increased sales. The next stage is the migration of our direct commercial activities.

 

In Europe our 'EuroFit' programme is still succeeding in accelerating growth whilst driving down the combined expense ratio. We continue to expand our European Service Centre in Lisbon and to implement changes that simplify our business and processes. This includes investing in our online quoting platforms for brokers.

 

In the US our operations team has focused on building scalable infrastructure, streamlining operational processes and automating some simple underwriting. A major focus was smaller directors and officers' risks where we halved the question set and in 2015 we will be rolling this out to other areas.

 

In the London Market, we have become more engaged in driving market-wide improvements. The most notable success was our involvement in the London Market Group's London Matters report which quantified the market's position, its opportunities and threats in a way that had not been done before. The report garnered government interest and gave new direction to the market modernisation programme. We are also seeing value in our participation on several key project boards, focused on the delivery of a single electronic trading platform for the market and an overhaul of back office functions for improved efficiency.

 

At the Digital Insurance and Technology Awards, our IT team was recognised with four awards - Digital Project Team of the Year, Outsourcing Partner of the Year, Green Insurance IT Initiative and CIO of the Year for Stéphane Flaquet. This is well deserved recognition of a team which has done well.

 

Investments

 

As in 2013 the expectations for the year's investment result were relatively modest and, given a cautious approach, we are content with the performance for 2014. Our investments before derivatives made £56.4 million (2013: £58.9 million) equating to a return of 1.8% (2013: 1.9%). A bias to short duration bond portfolios driven by a desire not to lose money when yields rise as well as the short tail nature of our liabilities meant that, at 1.5%, the return from the bond allocation was quite low. Once again the dollar and sterling bond markets, where the majority of our assets are invested, confounded expectation and with the benefit of hindsight, it would have been a good year to own longer dated securities. Our returns were boosted however by the performance of our risk assets. In the context of volatile and challenging markets they produced a more than acceptable return of 7.6%. 2014 saw very divergent performance within stock markets and sectors and it is gratifying that on average the funds that we supported avoided many of the pitfalls and beat their benchmarks by a good margin.

 

The wait for higher interest rates is proving to be longer than expected. However, to the extent that we have learned to live with low but positive returns of late, we are planning for the same in 2015. We remain unconvinced that now is the time to stretch for yield in the fixed income arena and, if anything, recent bouts of illiquidity have reaffirmed this view. The majority of our cash and bonds are there to pay claims and support our business and, although we are prepared to take investment risk, as in underwriting we seek to do so at the right price. We continue to see the best opportunities for this in the equity market from time to time.

 

Capital management

 

We have announced a capital return of 60 pence per share with these results, approximately equal to £192 million in total. Including this amount, in the past 10 years Hiscox has returned a net total of £857 million to shareholders through progressive dividends, share buy backs and capital returns. At the same time we have grown shareholder's funds from £369 million to £1,262 million, post this capital return. Over the same time period we have grown our top line by a compound 8.0% per annum.

 

We far prefer to invest in opportunities to support organic growth or make small acquisitions. Over the past 12 months we have made 4 acquisitions to support areas as diverse as contingency, yachts and kidnap and ransom. This includes our announcement today of the acquisition of R&Q Marine Services. We are always on the look-out for opportunities which strengthen our position in specialty areas.

 

 

Outlook

 

At Hiscox we have pursued a strategy of diversification for over 20 years. Our mantra of steadily building our retail business (through product innovation, geographic expansion and occasional small acquisition) - to allow our big ticket businesses to expand and shrink in line with their market opportunities - has worked and we believe will continue to work. In 2014, for the first time, our aggregate specialist retail business will account for over 50% of Hiscox Ltd's gross written premium.  Its growth, combined with growth in the London Market Insurance business, has offset the declining income in our reinsurance business. As a result, our Group profits, while heavily influenced by big-ticket insurance and reinsurance results (and we love it that they can do so well) are not wholly dependent on these areas as the only source of profits. Our retail businesses make material profits as well.

 

At the same time, we have been successful at adapting to the changing market. The way capital is provided to reinsurance is changing. Our response to this change, the Kiskadee Funds, has grown to almost $500 million, from nothing two years ago. Our US business is on course to reach $500 million in revenues by 2016, making us a recognised contender in the US specialty market. The brand building we have done in the UK, which is now slowly extending to Europe and the US, means we have an identity few other insurers can match. We have taken the bold step (and delivered on phase one) of ripping out old technology to replace it with new, rather than papering over the cracks. We are not standing still.

 

Thanks to all these efforts we have the fire power to set our own course, and are not being blown around by industry headwinds. It means that we have credible opportunities to develop our business and make money even in the tough times that lay ahead for some parts of our business.

 

 

Bronek Masojada

2 March 2015

 

Consolidated income statement

For the year ended 31 December 2014



2014
Total

2013

Total



Note

  £000

£000





Gross premiums written


4

1,756,260

1,699,478

Outward reinsurance premiums



(412,850)

(328,364)


4

1,343,410

1,371,114

Gross premiums earned



1,674,982

1,598,879

Premiums ceded to reinsurers



(358,723)

(315,568)


4

1,316,259

1,283,311

Investment result


7

56,212

59,809

Other revenues


9

19,956

20,905

Revenue



1,392,427

1,364,025





Claims and claim adjustment expenses



(645,145)

(572,440)

Reinsurance recoveries



113,477

53,161


17

(531,668)

(519,279)

Expenses for the acquisition of insurance contracts



(318,616)

(305,777)

Operational expenses


9

(310,853)

(276,965)

Foreign exchange gains/(losses)



4,974

(9,890)

Total expenses



(1,156,163)

(1,111,911)



236,264

252,114

Finance costs



(6,418)

(7,176)

Share of profit/(loss) from associates after tax



1,229

(400)



231,075

244,538

Tax expense


19

(14,923)

(6,780)

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



216,152

237,758





Basic


20

67.4p

66.3p

Diluted


20

64.5p

63.5p

The related notes 1 to 23 are an integral part of this document.

Consolidated statement of comprehensive income

For the year ended 31 December 2014, after tax

 

 


2014

Total

2013

Total



£000

£000

Profit for the year

216,152

237,758

Other comprehensive income



Items never reclassified to profit and loss



   Remeasurements of the employee retirement benefit obligation

(22,759)

9,775

   Income tax relating to components of other comprehensive income

5,470

(2,865)


(17,289)

6,910

Items that may be reclassified to profit and loss:



   Exchange differences on translating foreign operations

34,019

(2,030)

   Income tax relating to components of other comprehensive income

-

-


34,019

(2,030)

Other comprehensive income net of tax

16,730

4,880

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

232,882

242,638




The related notes 1 to 23 are an integral part of this document.

 

Consolidated balance sheet

At 31 December 2014


2014

2013







Note

£000

£000







105,946

72,720



29,497

20,219



10,670

7,754



33,490

32,123



230,373

197,628


12

2,828,847

2,585,054


11

525,345

458,822

Loans and receivables including insurance receivables


13

556,259

493,419



8,031

3,530

Cash and cash equivalents


16

650,651

564,375

Total assets



4,979,109

4,435,644















19,913

20,854



10,417

4,953



89,864

89,864



56,700

22,681

Retained earnings



1,276,446

1,271,109

Total equity (all attributable to owners of the Company)



1,453,340

1,409,461



866

-

Total equity



1,454,206

1,409,461








32,166

4,366



26,390

75,946


17

2,835,199

2,609,121


12

7,109

229



32,379

32,383

Trade and other payables


18

591,660

304,138

Total liabilities



3,524,903

3,026,183

Total equity and liabilities



4,979,109

4,435,644

The related notes 1 to 23 are an integral part of this document.

 

 

Consolidated statement of changes in equity

For the year ended 31 December 2014


Share capital

Share premium

Contributed surplus

Currency translation reserve

Retained earnings

Non controlling interest

Total


Note

£000

£000

£000

£000

£000

£000

£000

Balance at 1 January 2013


20,703

41,313

245,005

24,711

1,033,634

-

1,365,366

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


-

-

-

-

237,758

-

237,758

Other comprehensive income/(expense) net of tax (all attributable to owners of the company)


-

-

-

(2,030)

6,910

-

4,880

Employee share options:









Equity settled share based payments


-

-

-

-

12,523

-

12,523

Proceeds from shares issued


133

3,990

-

-

-

-

4,123

Deferred and current tax on employee share options


-

-

-

-

5,030

-

5,030

B Share Scheme:









Return of capital, special distribution

21

-

(42,453)

(107,718)

-

-

-

(150,171)

Final dividend equivalent

21

-

-

(47,423)

-

-

-

(47,423)

Scrip dividends

21

18

2,103

-

-

-

-

2,121

Dividends paid to owners of the Company

21

-

-

-

-

(24,746)

-

(24,746)

Balance at 31 December 2013


20,854

4,953

89,864

22,681

1,271,109

-

1,409,461

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


-

-

-

-

216,152

-

216,152

Other comprehensive income/(expense) net of tax (all attributable to owners of the company)


-

-

-

34,019

(17,289)

-

16,730

Employee share options:









Equity settled share based payments


-

-

-

-

14,439

-

14,439

Proceeds from shares issued


74

2,669

-

-

-

-

2,743

Deferred and current tax on employee share options


-

-

-

-

1,874

-

1,874

C/D Share Scheme:









Return of capital, special distribution

21

-

(35)

-

-

(126,049)

-

(126,084)

Final dividend equivalent

21

-

-

-

-

(49,728)

-

(49,728)

Share consolidation and sub division


(1,032)

1,032

-

-

-

-

-

Shares purchased by Trust


-

-

-

-

(10,593)

-

(10,593)

Acquisition of DirectAsia


-

-

-

-

-

866

866

Scrip dividends

21

17

1,798

-

-

-

-

1,815

Dividends paid to owners of the Company

21

-

-

-

-

(23,469)

-

(23,469)

Balance at 31 December 2014


19,913

10,417

89,864

56,700

1,276,446

866

1,454,206

The related notes 1 to 23 are an integral part of this document

 

Consolidated statement of cash flows

For the year ended 31 December 2014



2014

2013



Note

£000

£000

Profit before tax



231,075

244,538

Adjustments for:





Interest and equity dividend income



(45,146)

(42,571)

Interest expense



6,418

7,176

Net fair value gains on financial assets



(12,121)

(14,847)

Depreciation and amortisation



12,857

9,650

Charges in respect of share based payments



14,439

12,523

Profit from sale of subsidiaries



-

(1,536)

Other non-cash movements



(497)

925

Effect of exchange rate fluctuations on cash presented separately



6,740

491

Changes in operational assets and liabilities:





Insurance and reinsurance contracts



174,158

70,576

Financial assets carried at fair value



(171,076)

(170,817)

Financial liabilities carried at fair value



6,880

(72)

Other assets and liabilities



(27,943)

(527)

Cash flows from operations



195,784

115,509

Interest received



43,292

41,494

Equity dividends received



1,702

789

Interest paid



(5,990)

(5,229)

Cash paid to the defined benefit pension scheme



(200)

(1,800)

Current tax (paid)/received



(62,563)

(39,712)

Cash flows from subscriptions received in advance



169,928

4,848

Net cash flows from operating activities



341,953

115,879

Cash flows from the sale and purchase of subsidiaries



(2,627)

20,940

Cash flows from the sale and purchase of associates



(1,687)

600

Cash flows from the purchase of property, plant and equipment



(11,727)

(4,545)

Cash flows from the purchase of intangible assets



(27,580)

(9,594)

Net cash flows from investing activities



(43,621)

7,401

Proceeds from the issue of ordinary shares



2,743

4,123

Shares repurchased



(10,593)

-

Distributions made to owners of the Company


21

(197,466)

(220,219)

Net cash flows from financing activities



(205,316)

(216,096)

Net increase/(decrease) in cash and cash equivalents



93,016

(92,796)

Cash and cash equivalents at 1 January



564,375

657,662

Net increase/(decrease) in cash and cash equivalents



93,016

(92,796)

Effect of exchange rate fluctuations on cash and cash equivalents



(6,740)

(491)

Cash and cash equivalents at 31 December



650,651

564,375

The purchase, maturity and disposal of financial assets is part of the Group's insurance activities and is therefore classified as an operating cash flow. The purchase, maturity and disposal of derivative contracts is also classified as an operating cash flow. Included within cash and cash equivalents held by the Group are balances totaling £142,617,000 (2013: £113,312,000) not available for immediate use by the Group outside of the Lloyd's Syndicate within which they are held. Additionally, cash and cash equivalents includes £169,928,000 (2013: £4,848,000) for subscriptions received in advance by the Kiskadee Diversified and Select ILS funds that remain un-invested at 31 December 2014.

 

The related notes 1 to 23 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 2014. The auditors have reported on those 2014 financial statements which include comparative amounts for 2013. 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, Asia and USA with over 1,800 staff.

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 Conduct Authority (FCA), in addition to the Bermuda Companies Act 1981. The first two pronouncements issued by the FCA 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 statement of cash flows and the related notes 1 to 23 in accordance with International Financial Reporting Standards ('IFRS') adopted by the European Union.

The consolidated financial statements for the year ended 31 December 2014 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 2 March 2015.

2. Significant accounting policies

Except as described below, the accounting policies applied in these consolidated financial statements are consistent with the prior year. The consolidated financial statements as at, and for the year ended 31 December 2014 were compliant with International Financial Reporting Standards as adopted by the European Union and in accordance with the provisions of the Bermuda Companies Act 1981.

 

Changes in accounting policies

 

(a)   IFRS 7 : Offsetting Financial Assets and Financial Liabilities (amendments to IAS32)

The amendments clarify that the rights of set-off must not only be legally enforceable in the normal course of business, but must also be enforceable in the event of default and the event of bankruptcy or insolvency of all of the counterparties to the contract, including the reporting entity itself. The amendments also clarify that rights of set-off must not be contingent on a future event. The amendment has no material impact on the financial statements

 

(b) IFRIC 21 : Levies Charged by Public Authorities on Entities that Operate in a Specific Market

IFRIC 21 provides guidance on when to recognise a liability for a levy imposed by a government, both for levies that are accounted for in accordance with IAS37 Provisions, Contingent Liabilities and Contingent Assets and those where the timing and amount of the levy is certain. The adoption of the interpretation has not had a material impact on the financial statements.

 

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).

The Group currently applies IFRS 4 Insurance Contracts which specifies the financial reporting for insurance contracts by an insurer. The standard was issued by the IASB as the first phase in their project to develop a comprehensive standard 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 June 2013, the IASB issued their second exposure draft for Phase II of the insurance contracts project. The exposure draft in its current form will require 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 addition, the IASB has stated they will allow approximately three full years from the date of any final standard to actual implementation, therefore 2019 is likely to be the earliest date for the adoption. 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 has financial assets and cash of over £3.2 billion, excluding the assets held by the Kiskadee Diversified and Select Funds. 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.

As explained in note 4, during 2013 the Group restructured its reinsurance business written by the London, Bermuda and Paris teams and combined them into one operating unit, Hiscox Re. In addition we introduced a single management structure for UK and Europe and brought all retail business under one umbrella. From January 2014 the Group commenced reporting and monitoring its performance along these new reporting lines. The results of 2013 have been restated in the appropriate notes to the consolidated financial statements.

 

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 North American countries and the European Union. The Group has a £9.2 million exposure to sovereign debt in Spain and Italy.

 

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 2014

AAA

AA

A

Other / non-rated

Total


£000

£000

£000

£000

£000

Debt and fixed income securities

726,822

999,298

508,734

291,325

2,526,179

Deposits with credit institutions

-

3,482

19,296

3,607

26,385

Reinsurance assets

53,960

182,558

262,520

26,307

525,345

Cash and cash equivalents

64,260

5,050

577,834

3,507

650,651

Total

845,042

1,190,388

1,368,384

324,746

3,728,560

Amounts attributable to largest single counterparty

164,004

335,676

256,758

12,475








As at 31 December 2013

 

AAA

AA

A

Other / non-rated

Total


£000

£000

£000

£000

£000

Debt and fixed income securities

654,602

1,143,308

310,642

227,277

2,335,829

Deposits with credit institutions

-

4,292

1,802

146

6,240

Reinsurance assets

12,020

149,759

269,353

27,690

458,822

Cash and cash equivalents

132,415

86,436

344,868

656

564,375

Total

799,037

1,383,795

926,665

255,769

3,365,266

Amounts attributable to largest single counterparty

115,430

517,997

110,198

7,050


 

The largest counterparty exposure within AAA rating at 31 December 2014 and 2013 is the German Government.  For the AA rating it is with the US Treasury at both 31 December 2014 and 2013.  A significant proportion of 'other/non-rated' assets are rated BBB and BB at 31 December 2014 and 2013. At 31 December 2014 and 2013, the Group held no material debt and fixed income securities that were past due or impaired beyond their reported fair values. For the current period and prior period, the Group did not experience any material defaults on debt securities.

 

The Group's AAA rated reinsurance assets include fully collateralised positions at 31 December 2014 and 2013.

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




2014

2013




%

%

Government issued bonds and instruments



30

41

Agency and government supported debt



12

9

Asset backed securities



9

10

Mortgage backed instruments - agency



4

5

Mortgage backed instruments - non-agency



2

3

Mortgage backed instruments - commercial



6

3

Corporate bonds



34

26

Lloyd's deposits and bond funds



3

3

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.

 

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 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

Deposits with credit institutions

Cash and cash equivalents

2014 total

2013 total


£000

£000

£000

£000

£000

Less than one year

465,868

25,507

650,651

1,142,026

1,129,902

Between one and two years

529,526

-

-

529,526

517,064

Between two and five years

1,052,013

878

-

1,052,891

846,583

Over five years

421,616

-

-

421,616

332,822

Lloyd's deposits

57,156

-

-

57,156

80,073

Total

2,526,179

26,385

650,651

3,203,215

2,906,444

 

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 segment reporting follows the organisational structure and management's internal reporting systems, which form the basis for assessing the financial reporting performance of, and allocation of resource to each business segment. During 2013 the Group restructured its reinsurance business written by the London, Bermuda and Paris teams and combined them into one operating unit, Hiscox Re. In addition we introduced a single management structure for UK and Europe and brought all retail business under one umbrella. From January 2014 the Group commenced reporting and monitoring its performance along these new reporting lines.

 

The changes from the 2013 structure comprised:

·      separating the London Market business unit into insurance and reinsurance lines, forming the London Market Insurance division and combining the reinsurance business with Hiscox Bermuda to make Hiscox Re;

·      bringing together Hiscox UK and Europe with Hiscox Guernsey, Hiscox US and the newly acquired DirectAsia business to form Hiscox Retail;

·      the Corporate Centre division has remained unchanged.

 

As a consequence of the change in reportable segments, the corresponding operating results and combined ratios for earlier periods presented have been restated on a comparable basis. There is no impact to the overall profit before tax or the net asset value of the Group for prior periods.

 

The Group's four revised primary business segments are identified as follows:

·      Hiscox Retail brings together the results of the UK and Europe, and Hiscox International being the US, Guernsey and Asia retail business divisions. Hiscox UK and Europe underwrite European personal and commercial lines of business through Hiscox Insurance Company Limited, together with the fine art and non-US household insurance business written through Syndicate 33. In addition, the UK includes elements of specialty and international employees and officers' insurance written by Syndicate 3624. Hiscox International comprises the specialty and fine art lines written through Hiscox Insurance Company (Guernsey) Limited, and the motor business written via DirectAsia, together with US commercial, property and specialty business written by Syndicate 3624 and Hiscox Insurance Company Inc. via the Hiscox USA business division.

·      Hiscox London Market comprises the internationally traded insurance business written by the Group's London-based underwriters via Syndicate 33, including lines in property, marine and energy, casualty and other specialty insurance lines. In addition, the segment includes elements of business written by Syndicate 3624 being auto physical damage, auto extended warranty and aviation business.

·      Hiscox Re is the Reinsurance division of the Hiscox Group, combining the underwriting platforms in Bermuda, London and Paris. The segment comprises the performance of Hiscox Insurance Company (Bermuda) Limited, excluding the internal quota share arrangements, with the reinsurance contracts written by Syndicate 33. In addition, the healthcare and casualty reinsurance contracts written in the Bermuda hub on Syndicate capacity are also included. The segment also captures the performance of Kiskadee, the Hiscox Group's Insurance Linked Securities business.

·      Corporate Centre comprises the investment return, finance costs and administrative costs associated with Group management activities. Corporate Centre also includes the majority of foreign currency items on economic hedges and intragroup borrowings. These relate to certain foreign currency items on economic hedges and intragroup borrowings, further details of these can be found in note 13 of the consolidated financial statements. Corporate Centre forms a reportable segment due to its investment activities which earn significant external returns.

 

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 2014


Hiscox Retail

Hiscox London Market

Hiscox Re

Corporate  centre

Total


£000

£000

£000

£000

£000

Gross premiums written

891,115

510,825

354,320

-

1,756,260

Net premiums written

825,878

336,895

180,637

-

1,343,410

Net premiums earned

790,721

332,497

193,041

-

1,316,259







Investment result

25,934

8,719

9,348

12,211

56,212

Other revenues

6,643

6,283

6,777

253

19,956

Revenue

823,298

347,499

209,166

12,464

1,392,427







Claims and claim adjustment expenses, net of reinsurance

(325,806)

(159,864)

(45,998)

-

(531,668)

Expenses for the acquisition of insurance contracts

(205,748)

(93,569)

(19,299)

-

(318,616)

Operational expenses

(209,213)

(40,597)

(39,623)

(21,420)

(310,853)

Foreign exchange losses

(5,121)

9,044

2,682

(1,631)

4,974

Total expenses

(745,888)

(284,986)

(102,238)

(23,051)

(1,156,163)







Results of operating activities

77,410

62,513

106,928

(10,587)

236,264

Finance costs

-

(46)

(1,365)

(5,007)

(6,418)

Share of (loss)/profit of associates after tax

655

182

-

392

1,229

Profit before tax

78,065

62,649

105,563

(15,202)

231,075


Year ended 31 December 2013 restated


Hiscox Retail

Hiscox London Market

Hiscox Re

Corporate  centre

Total


£000

£000

£000

£000

£000

Gross premiums written

819,388

468,587

411,503

-

1,699,478

Net premiums written

751,144

359,941

260,029

-

1,371,114

Net premiums earned

711,081

303,251

268,979

-

1,283,311







Investment result

19,134

6,262

14,381

20,032

59,809

Other revenues

7,841

6,426

5,485

1,153

20,905

Revenue

738,056

315,939

288,845

21,185

1,364,025







Claims and claim adjustment expenses, net of reinsurance

(299,781)

(136,788)

(82,710)

-

(519,279)

Expenses for the acquisition of insurance contracts

(188,414)

(86,108)

(31,255)

-

(305,777)

Operational expenses

(184,348)

(27,981)

(41,027)

(23,609)

(276,965)

Foreign exchange (losses)/gains

(3,911)

(1,873)

(3,308)

(798)

(9,890)

Total expenses

(676,454)

(252,750)

(158,300)

(24,407)

(1,111,911)







Results of operating activities

61,602

63,189

130,545

(3,222)

252,114

Finance costs

-

(45)

(1,563)

(5,568)

(7,176)

Share of loss of associates after tax

(423)

-

-

23

(400)

Profit before tax

61,179

63,144

128,982

(8,767)

244,538


The Group's wholly owned subsidiary, Hiscox Syndicates Limited, oversees the operation of Syndicate 33 at Lloyd's. The Group's percentage participation in Syndicate 33 can fluctuate from year to year and consequently presentation of the results at the 100% level removes any distortions arising therefrom.

 

b.

100% operating results by segment

Year ended 31 December 2014


Hiscox Retail

Hiscox London Market

Hiscox Re

Corporate centre

Total


£000

£000

£000

£000

£000

Gross premiums written

914,372

647,094

421,599

-

1,983,065

Net premiums written

844,471

434,133

215,534

-

1,494,138

Net premiums earned

808,876

427,342

229,343

-

1,465,561

Investment result

26,191

11,722

10,364

12,211

60,488

Other revenues

2,618

-

1,136

253

4,007

Claims and claim adjustment expenses, net of reinsurance

(330,554)

(202,670)

(50,434)

-

(583,658)

Expenses for the acquisition of insurance contracts

(211,407)

(120,417)

(23,760)

-

(355,584)

Operational expenses

(208,961)

(49,242)

(44,048)

(21,420)

(323,671)

Foreign exchange (losses)/gains

(5,196)

12,713

4,080

(1,631)

9,966

Results of operating activities

81,567

79,448

126,681

(10,587)

277,109


Year ended 31 December 2013 restated



Hiscox Retail

Hiscox London Market

Hiscox Re

Corporate centre

Total


£000

£000

£000

£000

£000

Gross premiums written

841,251

595,932

486,938

-

1,924,121

Net premiums written

768,518

447,819

303,520

-

1,519,857

Net premiums earned

728,361

388,867

318,086

-

1,435,314

Investment result

19,290

8,575

15,180

20,032

63,077

Other revenues

5,418

-

1,832

1,153

8,403

Claims and claim adjustment expenses, net of reinsurance

(303,326)

(168,990)

(98,379)

-

(570,695)

Expenses for the acquisition of insurance contracts

(193,659)

(109,453)

(38,463)

-

(341,575)

Operational expenses

(185,772)

(33,594)

(45,627)

(23,609)

(288,602)

Foreign exchange (losses)/gains

(4,034)

(4,444)

(4,947)

(798)

(14,223)

Results of operating activities

66,278

80,961

147,682

(3,222)

291,699


100% ratio analysis

Year ended 31 December 2014


Hiscox Retail

Hiscox London Market

Hiscox Re

Corporate centre

Total

Claims ratio (%)

40.9

47.4

22.0

-

39.8

Expense ratio (%)

52.0

39.8

29.6

-

44.9

Combined ratio excluding foreign exchange impact (%)

92.9

87.2

51.6

-

84.7

Foreign exchange impact (%)

0.6

(3.0)

(1.8)

-

(0.8)

Combined ratio (%)

93.5

84.2

49.8

-

83.9


Year ended 31 December 2013 restated


Hiscox Retail

Hiscox London Market

Hiscox Re

Corporate  centre

Total

Claims ratio (%)

41.6

43.5

30.9

-

39.8

Expense ratio (%)

52.1

36.8

26.4

-

42.3

Combined ratio excluding foreign exchange impact (%)

93.7

80.3

57.3

-

82.1

Foreign exchange impact (%)

0.6

1.1

1.6

-

0.9

Combined ratio (%)

94.3

81.4

58.9

-

83.0

 

 

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


Year to 31 December 2014

Year ended 31 December 2013 restated


Hiscox Retail

Hiscox London Market

Hiscox Re

Corporate  centre

Hiscox Retail

Hiscox London Market

Hiscox Re

Corporate  centre


£000

£000

£000

£000

£000

£000

£000

£000

At 100% level









1% change in claims or expense ratio

8,089

4,273

2,293

-

7,284

3,889

3,181

-

At Group level









1% change in claims or expense ratio

7,907

3,325

1,930

-

7,111

3,033

2,690

-


5. Net asset value per share




2014

2013




Net asset

value

(total equity)

 

NAV

per share

Net asset

value

(total equity)

 

NAV

per share




£000

p

£000

p

Net asset value



1,454,206

462.5

1,409,461

402.2

Net tangible asset value



1,348,260

428.8

1,336,741

381.4

The net asset value per share is based on 314,419,567 shares (2013: 350,460,458), being the adjusted number of shares in issue at 31 December. Net tangible assets comprise total equity excluding intangible assets.


6. Return on equity




2014

2013



£000

£000

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


216,152

237,758

Opening shareholders' equity


1,409,461

1,365,366

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


(142,812)

(134,580)

Adjusted opening shareholders' equity


1,266,649

1,230,786

Annualised return on equity (%)


17.1

19.3

 

 

7. Investment result



The total investment result for the Group before taxation comprises:


2014

2013



£000

£000

Investment income including interest receivable


45,146

42,571

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


(1,055)

2,391

Net fair value gains on financial investments at fair value through profit or loss


12,264

13,962

Investment result - financial assets


56,355

58,924

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


(143)

885

Total result


56,212

59,809

 

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:



2014

2013



%

%

Sterling


2.7

3.4

US Dollar


1.5

1.5

Other


1.5

0.7


ii. Investment return:






2014

2013








£000

%

£000

%

Debt and fixed income securities







36,714

1.5

17,105

0.7

Equities and shares in unit trusts







17,604

7.6

39,289

18.3

Deposits with credit institutions/cash and cash equivalents







2,037

0.4

2,530

0.5








56,355

1.8

58,924

1.9



9. Other revenues and operational expenses



2014

2013



£000

£000

Agency related income


8,060

7,100

Profit commission


9,965

9,161

Other underwriting income


1,136

1,832

Other income


795

2,812

Other revenues


19,956

20,905





Wages and salaries


108,622

101,780

Social security costs


19,551

20,498

Pension cost - defined contribution


8,112

6,593

Pension cost - defined benefit


660

1,000

Share based payments


14,439

12,523

Marketing expenses


31,829

30,550

Investment expenses


4,192

3,833

Depreciation, amortisation and impairment


12,857

9,650

Other expenses


110,591

90,538

Operational expenses


310,853

276,965


10. Net foreign exchange gains/(losses)

The net foreign exchange gains/(losses) for the year include the following amounts:



2014

2013



£000

£000

Exchange gains/(losses) recognised in the consolidated income statement

4,974

(9,890)

Exchange gains/(losses) classified as a separate component of equity

34,019

(2,030)

Overall impact of foreign exchange related items on net assets

38,993

(11,920)

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.



2014

2013



£000

£000

Opening balance sheet impact of non-retranslation of non-monetary items

(4,790)

(2,674)

Gain/(loss) included within profit representing the non-retranslation of non-monetary items

6,398

(2,116)

Closing balance sheet impact of non-retranslation of non-monetary items

1,608

(4,790)


11. Reinsurance assets



2014

2013



£000

£000

Reinsurers' share of insurance liabilities

526,085

459,603

Provision for non-recovery and impairment

(740)

(781)

Reinsurance assets (note 17)

525,345

458,822

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 £41,000 (2013: £217,000) 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.

 



2014

2013



£000

£000

Debt and fixed income securities

2,526,179

2,335,829

Equities and shares in unit trusts

252,916

223,024

Deposits with credit institutions

26,385

6,240

Total investments

2,805,480

2,565,093

Insurance linked fund

22,888

19,917

Derivative financial instruments (note 14)

479

44

Total financial assets carried at fair value

2,828,847

2,585,054

 


2014

2013



£000

£000

Third-party investment in Kiskadee Funds

7,033

-

Derivative financial instruments (note 14)

76

229

Total financial liabilities carried at fair value

7,109

229

The Group has made a total investment of $30.0 million into the Third Point Reinsurance Opportunities Fund ('the Fund'), $13.2 million in 2012 and an additional $16.8 million in 2013. During the year the Fund made a gain of $2.8 million (2013: $2.9 million). The Fund specialises in catastrophe reinsurance opportunities and is classified by the Group as an insurance linked fund. The Group submitted a full redemption effective 1 January 2015, after notification was received that the Fund will be winding down. During January 2015, $12.7 million was received as the first redemption payment and the remaining $23.0 million was issued as redemption shares which will pay out when the underlying contracts expire at 30 June 2015.

The Group participates in a quota share arrangement with Third Point Re Cat Ltd, a wholly-owned reinsurance entity of the Fund. During the year, contracts with a premium of $2.1 million were ceded to the entity (2013: $3.3 million).

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



2014

2013



£000

£000

Sterling


653,126

633,631

US Dollars


1,823,380

1,618,494

Euro and other currencies


328,974

312,968

Total investments


2,805,480

2,565,093


13. Loans and receivables including insurance receivables



2014

2013



£000

£000

Gross receivables arising from insurance and reinsurance contracts

482,641

422,405

Provision for impairment

(2,131)

(1,282)

Net receivables arising from insurance and reinsurance contracts

480,510

421,123




Due from contract holders, brokers, agents and intermediaries

349,955

302,820

Due from reinsurance operations

130,555

118,303


480,510

421,123

 

Prepayments and accrued income

9,068

6,754

Other loans and receivables:



Net profit commission receivable

25,116

18,905

Accrued interest

9,448

9,463

Share of Syndicate's other debtors balances

12,952

12,192

Other debtors including related party amounts

19,165

24,982

Total loans and receivables including insurance receivables

556,259

493,419

There is no significant concentration of credit risk with respect to loans and receivables, as the Group has a large number of internationally dispersed debtors. The Group has recognised a loss of £849,000 (2013: loss of £296,000) for the impairment of receivables during the year ended 31 December 2014. The carrying amounts disclosed above are reasonably approximate to the fair value at the reporting date.

14. Derivative financial instruments

The Group entered into both exchange-traded and over-the-counter derivative contracts for a number of purposes during 2014. 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 2014 all mature within one year of the balance sheet date and are detailed below.

 

31 December 2014



Gross contract

notional amount

Fair value of assets

Fair value of

liabilities

Net balance sheet position

Derivative financial instrument included on balance sheet


£000

£000

£000

£000

Foreign exchange forward contracts


25,875

479

(76)

403

Interest rate futures contracts


31,421

-

-

-

Credit default swaps


1,639

-

-

-

The foreign exchange forward contracts are represented by gross fair value of assets and liabilities as detailed below

Gross fair value of assets



19,596

3,003

22,599

Gross fair value of liabilities



(19,117)

(3,079)

(22,196)

Total



479

(76)

403


31 December 2013



Gross contract

notional amount

Fair value of assets

Fair value of

liabilities

Net balance sheet position

Derivative financial instrument included on balance sheet


£000

£000

£000

£000

Foreign exchange forward contracts


26,793

44

(229)

(185)

Interest rate futures contracts


37,083

-

-

-

Credit default swaps


-

-

-

-

The foreign exchange forward contracts are represented by gross fair value of assets and liabilities as detailed below

Gross fair value of assets



7,622

15,686

23,308

Gross fair value of liabilities



(7,578)

(15,915)

(23,493)

Total



44

(229)

(185)

All derivative contracts settle within three months of the year end.

Foreign exchange forward contracts

During the current and prior year the Group entered into a series of conventional over the counter forward contracts in order to secure translation gains made on Euro, US Dollar and other non-Pound Sterling denominated monetary assets. The contracts require the Group to forward sell a fixed amount of the relevant currency for Pound Sterling at pre-agreed future exchange rates. The Group made a gain on these forward contracts of £1,941,000 (2013: loss of £77,000) 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 £2,078,000 (2013: gain of £1,175,000) as included in note 7.

Equity index options

The Group did not purchase equity options during 2014. During 2013 the Group purchased and disposed of an equity index option to protect against a decline in equity prices. The Group made a loss of £213,000 on this contract.

 

15. Fair value measurements

In accordance with IFRS 13 : Fair value measurements, 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 2014

Level 1

Level 2

Level 3

Total

Financial assets

£000

£000

£000

£000

Debt and fixed income securities

682,940

1,843,239

-

2,526,179

Equities and shares in unit trusts

-

239,238

13,678

252,916

Deposits with credit institutions

26,385

-

-

26,385

Insurance linked fund

-

-

22,888

22,888

Derivative financial instruments

-

479

-

Total

709,325

2,082,956

36,566

2,828,847






Financial liabilities





Third-party investment in Kiskadee Funds

-

-

7,033

7,033

Derivative financial instruments

-

76

-

76

Total

-

76

7,033

7,109






As at 31 December 2013

Level 1

Level 2

Level 3

Total

Financial assets

£000

£000

£000

£000

Debt and fixed income securities

875,882

1,459,947

-

2,335,829

Equities and shares in unit trusts

-

208,960

14,064

223,024

Deposits with credit institutions

6,240

-

-

6,240

Insurance linked fund

-

-

19,917

19,917

Derivative financial instruments

-

44

-

Total

882,122

1,668,951

33,981

2,585,054






Financial liabilities





Derivative financial instruments

-

229

-

229

Total

-

229

-

229


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.

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 certain Government bonds, Treasury bills and exchange traded equities which are measured based on quoted prices in active markets.

Level 2 of the hierarchy contains certain Government bonds, U.S Government agencies, corporate securities, asset backed securities and mortgage backed securities. The fair value of these assets is 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, unquoted equity securities and an insurance linked fund which have limited observable inputs on which to measure fair value. Unquoted equities are carried at 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. The Group invested into the insurance linked fund in December 2012, and it was subject to a two-year lock up period. The fund specialises in catastrophe reinsurance opportunities. The fair value of the fund is estimated to be the net asset value reported by the fund administrator at the balance sheet date. This net asset value is based on the fair value of the underlying insurance contracts in the fund which are sensitive to estimates of insurance losses that have occurred. A change in these loss estimates could have had a material impact to the valuation of the fund. The fund was partially redeemed in January 2015 with remaining redemption shares issued which will pay out when the underwriting contracts expire at 30 June 2015.

 

The third party investment in the Kiskadee Funds consists of the third party interest of investors in the Kiskadee Funds that is classified as a financial liability in the Group consolidated financial statements in accordance with IAS 32. The fair value of the Kiskadee Funds is estimated to be the net asset value reported to third party investors as at the balance sheet date. The net asset value is based on the fair value of the underlying reinsurance contracts in the fund. Significant inputs and assumptions in calculating the fair value of the underlying reinsurance contracts include the fair value of cash and cash equivalents as well as estimates of insurance assets and liabilities. The Group have considered changes in the net asset valuation of the Kiskadee Funds if reasonably different inputs and assumptions were used and have found no significant changes in the valuation.

 

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

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

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

 


31 December 2014



Financial assets


Financial liabilities


Equities and shares in unit trusts

Insurance linked fund

Total


Third party investment in Kiskadee Funds


£000

£000

£000


£000

Balance at 1 January

14,064

19,917

33,981


-

Fair value gains or losses through profit or loss*

2,920

1,725

4,645


(589)

Foreign exchange gains/(losses)

284

1,246

1,530


(408)

Purchases

6

-

6


(6,036)

Settlements

(3,596)

-

(3,596)


-

Closing balance

13,678

22,888

36,566


(7,033)

Unrealised gains and losses in the year on securities held at the end of the year

3,204

2,971

6,175


(589)







31 December 2013







Equities and shares in unit trusts

Insurance linked fund

Total


Third party investment in Kiskadee Funds


£000

£000

£000


£000

Balance at 1 January

13,535

8,098

21,633


-

Fair value gains or losses through profit or loss*

575

1,832

2,407


-

Foreign exchange losses

(91)

(762)

(853)


-

Purchases

522

10,749

11,271


-

Settlements

(477)

-

(477)


-

Closing balance

14,064

19,917

33,981


-

Unrealised gains and losses in the year on securities held at the end of the year

484

1,070

1,554


-



*Fair value gains/(losses) are included within the investment result in the income statement for equities and shares in unit trusts and through other income for the insurance linked fund.

 

 

16. Cash and cash equivalents



2014

2013



£000

£000

Cash at bank and in hand

400,245

384,925

Short-term deposits

39,220

174,602

Cash held by special purpose vehicle

41,258

-

Subscriptions received in advance

169,928

4,848


650,651

564,375

The Group holds its cash deposits with a well diversified range of banks and financial institutions. Cash includes overnight deposits. Short-term deposits include debt securities with an original maturity date of less than three months and money market funds.

The cash held by special purpose vehicle consists of underlying interests held by the Kiskadee Funds which are consolidated by the Group but in which the Group has an interest of less than 100%. The remaining interests are held by third party investors and included in the consolidated balance sheet as financial liabilities in accordance with IAS 32.

 

Subscriptions received in advance consist of cash received as at 31 December 2014 by the two Kiskadee Funds and not yet invested at the balance sheet date. As a result the Group has recognised a liability under trade and other payables for the same amount.

 

17. Insurance liabilities and reinsurance assets



2014

2013



£000

£000

Gross



Claims reported and claims adjustment expenses

825,017

829,548

Claims incurred but not reported

1,142,847

1,023,514

Unearned premiums

867,335

756,059

Total insurance liabilities, gross

2,835,199

2,609,121




Recoverable from reinsurers



Claims reported and claims adjustment expenses

129,134

146,946

Claims incurred but not reported

239,185

213,000

Unearned premiums

157,026

98,876

Total reinsurers' share of insurance liabilities

525,345

458,822




Net



Claims reported and claims adjustment expenses

695,883

682,602

Claims incurred but not reported

903,662

810,514

Unearned premiums

710,309

657,183

Total insurance liabilities, net

2,309,854

2,150,299

The gross claims reported, the claims adjustment expenses liabilities and the liability for claims incurred but not reported are net of expected recoveries from salvage and subrogation. The amounts for salvage and subrogation at the end of 2014 and 2013 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 ten 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

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

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

1,167,629

596,460

798,898

1,122,920

846,961

1,020,921

1,310,216

1,098,545

890,535

973,977

9,827,062

one year later

1,292,691

570,684

711,966

950,357

703,726

877,502

1,194,916

994,129

782,856

-

8,078,827

two years later

1,295,819

549,963

675,728

926,613

646,417

819,753

1,144,378

909,188

-

-

6,967,859

three years later

1,277,729

519,355

687,319

887,005

639,461

804,579

1,160,292

-

-

-

5,975,740

four years later

1,271,809

528,466

681,104

851,003

637,494

788,776

-

-

-

-

4,758,652

five years later

1,272,604

518,090

651,140

817,596

634,264

-

-

-

-

-

3,893,694

six years later

1,227,639

505,290

635,027

808,919

-

-

-

-

-

-

3,176,875

seven years later

1,220,862

500,007

619,265

-

-

-

-

-

-

-

2,340,134

eight years later

1,222,165

498,017

-

-

-

-

-

-

-

-

1,720,182

nine years later

1,212,717

-

-

-

-

-

-

-

-

-

1,212,717













Current estimate of cumulative claims

1,212,717

498,017

619,265

808,919

634,264

788,776

1,160,292

909,188

782,856

973,977

8,388,271

Cumulative payments to date

(1,152,561)

(479,011)

(575,065)

(756,506)

(542,770)

(599,212)

(886,585)

(608,635)

(353,858)

(204,296)

(6,158,499)

Liability recognised at 100% level

60,156

19,006

44,200

52,413

91,494

189,564

273,707

300,553

428,998

769,681

2,229,772

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











81,163

Total gross liability to external parties at 100% level







2,310,935

* The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2014.

 

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

Accident year

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Total

£000

£000

£000

£000

£000

£000

£000

£000

£000

£000

£000

Current estimate of cumulative claims

1,212,717

498,017

619,265

808,919

634,264

788,776

1,160,292

909,188

782,856

973,977

8,388,271

Less:

attributable to external Names

(305,498)

(104,346)

(120,507)

(153,263)

(106,850)

(121,195)

(170,825)

(121,309)

(89,291)

(116,704)

(1,409,788)

Group's share of current ultimate claims estimate

907,219

393,671

498,758

655,656

527,414

667,581

989,467

787,879

693,565

857,273

6,978,483













Cumulative payments to date

(1,152,561)

(479,011)

(575,065)

(756,506)

(542,770)

(599,212)

(886,585)

(608,635)

(353,858)

(204,296)

(6,158,499)

Less: attributable to external Names

290,777

99,672

111,280

143,000

91,789

86,102

129,113

80,922

33,848

18,738

1,085,241

Group share of cumulative payments

(861,784)

(379,339)

(463,785)

(613,506)

(450,981)

(513,110)

(757,472)

(527,713)

(320,010)

(185,558)

(5,073,258)













Liability for 2005 to 2014 accident years recognised on Group's balance sheet

45,435

14,332

34,973

42,150

76,433

154,471

231,995

260,166

373,555

671,715

1,905,225

Liability for accident years before 2005 recognised on Group's balance sheet











62,639

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





1,967,864

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

 

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

Accident year

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

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

685,378

532,264

698,091

786,744

702,058

817,612

1,021,869

805,898

777,594

809,047

7,636,555

one year later

787,487

524,676

633,994

702,569

587,981

721,122

953,477

718,326

687,551

-

6,317,183

two years later

778,302

507,481

612,562

698,422

562,157

679,913

904,975

664,831

-

-

5,408,643

three years later

753,207

465,362

583,458

657,951

563,239

662,563

898,983

-

-

-

4,584,763

four years later

742,700

481,091

579,524

624,453

556,338

652,763

-

-

-

-

3,636,869

five years later

742,865

468,562

553,421

617,493

551,806

-

-

-

-

-

2,934,147

six years later

721,424

461,897

549,315

610,784

-

-

-

-

-

-

2,343,420

seven years later

712,801

462,098

535,957

-

-

-

-

-

-

-

1,710,856

eight years later

705,063

460,028

-

-

-

-

-

-

-

-

1,165,091

nine years later

690,705

-

-

-

-

-

-

-

-

-

690,705













Current estimate of cumulative claims

690,705

460,028

535,957

610,784

551,806

652,763

898,983

664,831

687,551

809,047

6,562,455

Cumulative payments to date

(639,821)

(441,326)

(497,953)

(562,757)

(475,597)

(505,060)

(682,243)

(445,918)

(318,328)

(180,042)

(4,749,045)

Liability recognised at 100% level

50,884

18,702

38,004

48,027

76,209

147,703

216,740

218,913

369,223

629,005

1,813,410

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











45,736

Total net liability to external parties at 100%







1,859,146

*The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2014.

 

 

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

Accident year

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Total

£000

£000

£000

£000

£000

£000

£000

£000

£000

£000

£000

Current estimate of cumulative claims

690,705

460,028

535,957

610,784

551,806

652,763

898,983

664,831

687,551

809,047

6,562,455

Less:

attributable to external Names

(166,979)

(96,216)

(104,194)

(108,092)

(85,754)

(87,912)

(118,219)

(75,287)

(71,306)

(90,344)

(1,004,303)

Group's share of current ultimate claims estimate

523,726

363,812

431,763

502,692

466,052

564,851

780,764

589,544

616,245

718,703

5,558,152













Cumulative payments to date

(639,821)

(441,326)

(497,953)

(562,757)

(475,597)

(505,060)

(682,243)

(445,918)

(318,328)

(180,042)

(4,749,045)

Less: attributable to external Names

154,017

91,466

95,829

98,129

72,415

64,022

89,784

47,093

28,005

15,995

756,755

Group share of cumulative payments

(485,804)

(349,860)

(402,124)

(464,628)

(403,182)

(441,038)

(592,459)

(398,825)

(290,323)

(164,047)

(3,992,290)













Liability for 2005 to 2014 accident years
recognised on Group's balance sheet

37,922

13,952

29,639

38,064

62,870

123,813

188,305

190,719

325,922

554,656

1,565,862

Liability for accident years before 2005 recognised on Group's balance sheet











33,683

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





1,599,545

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

 

 

Movement in insurance claims liabilities and reinsurance claims assets

Year ended 31 December




2014



2013


Gross

Reinsurance

Net

Gross

Reinsurance

Net


£000

£000

£000

£000

£000

£000

Total at beginning of year

(1,853,062)

359,946

(1,493,116)

(1,932,904)

453,439

(1,479,465)

Claims and claims adjustment expenses for the year

(645,145)

113,477

(531,668)

(572,440)

53,161

(519,279)

Cash paid for claims settled in the year

591,796

(124,194)

467,602

640,505

(147,926)

492,579

Exchange differences and other movements

(61,453)

19,090

(42,363)

11,777

1,272

13,049

Total at end of year

(1,967,864)

368,319

(1,599,545)

(1,853,062)

359,946

(1,493,116)








Claims reported and claims adjustment expenses

(825,017)

129,134

(695,883)

(829,548)

146,946

(682,602)

Claims incurred but not reported

(1,142,847)

239,185

(903,662)

(1,023,514)

213,000

(810,514)

Total at end of year

(1,967,864)

368,319

(1,599,545)

(1,853,062)

359,946

(1,493,116)

 

 

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

Year ended 31 December




2014



2013


Gross

Reinsurance

Net

Gross

Reinsurance

Net


£000

£000

£000

£000

£000

£000

Current year claims and claims adjustment expenses

(845,086)

141,189

(703,897)

(761,179)

101,561

(659,618)

Over provision in respect of prior year claims and claims adjustment expenses

199,941

(27,712)

172,229

188,739

(48,400)

140,339

Total claims and claims handling expense

(645,145)

113,477

(531,668)

(572,440)

53,161

(519,279)


18. Trade and other payables



2014

2013



£000

£000

Creditors arising out of direct insurance operations

11,969

15,364

Creditors arising out of reinsurance operations

248,267

130,814


260,236

146,178




Share of Syndicate's other creditors' balances

3,212

8,230

Social security and other taxes payable

9,782

14,764

Subscription received in advance

169,928

4,848

Other creditors

11,968

8,052


194,890

35,894

Reinsurers' share of deferred acquisition costs

30,215

23,479

Accruals and deferred income

106,319

98,587

Total

591,660

304,138


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:

 



2014

2013



£000

£000

Current tax expense

62,172

72,425

Deferred tax credit

(47,249)

(65,645)

Total tax charged to the income statement

14,923

6,780



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.

 



2014

2013

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

216,152

237,758

Weighted average number of ordinary shares (thousands)

320,554

358,652

Basic earnings per share (pence per share)

67.4p

66.3p


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.



2014

2013

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

216,152

237,758




Weighted average number of ordinary shares in issue (thousands)

320,554

358,652

Adjustments for share options (thousands)

14,315

15,860

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

334,869

374,512

Diluted earnings per share (pence per share)

64.5p

63.5p

Diluted earnings per share has been calculated after taking account of 13,527,726 (2013: 15,131,711) options and awards under employee share option and performance plan schemes and 787,419 (2013: 728,284) options under SAYE schemes.

 

 

21. Dividends paid to owners of the Company



2014

2013



£000

£000

Interim dividend for the year ended :



-  31 December 2014 of 7.5p (net) per share

23,469

-

-  31 December 2013 of 7.0p (net) per share

-

24,746


23,469

24,746

 

The final dividend for the year ended 31 December 2013 was paid as part of the C/D Share Scheme (2012: B Share Scheme). 261,555,693 C and 93,647,894 D Shares of 50p each were issued, of which 14p per share was in lieu of a final dividend for 2013 of a cash value of £49,728,000. During 2013, the final dividend equivalent for the year ended 31 December 2012 was settled as 395,188,526 B Shares of 50p each, of which 12p per share was issued in lieu of a final cash dividend of £47,423,000.

 The interim dividends for 2014 and 2013 were either paid in cash or issued as a scrip dividend at the option of the shareholder. The interim dividend for the year ended 31 December 2014 was paid in cash of  £22,049,000  (2013: £22,625,000) and 270,917 shares for the scrip dividend (2013: 324,261).

Subject to shareholder approval at the forthcoming Extraordinary General Meeting on 25 March 2015, the Board proposes to pay a 15.0p per ordinary share instead of a final dividend for the year ended 31 December 2014.  Together with the interim dividend of 7.5p per ordinary share, this represents a total dividend for 2014 of 22.5p per ordinary share.  In addition, the Board proposes to pay a special distribution of 45.0p per ordinary share.  Such amounts will be paid by way of a E/F share scheme.  A scrip dividend alternative will not be offered to shareholders.

22. Foreign currency items on intragroup borrowings

The Group has loan arrangements denominated in US Dollars and Euros, in place between certain Group companies.  In most cases, as one party to each arrangement has a functional currency other than the US Dollar or the Euro, foreign exchange gains or losses arise which are not eliminated through the income statement on consolidation. Implicit offsetting (losses)/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 2014





Consolidated income

statement

2014

Consolidated other comprehensive income

2014

Total impact on equity 2014


£000

£000

£000

Unrealised translation gains/(losses) on intragroup borrowings

677

(677)

-

Total gains/(losses) recognised

677

(677)

-





Impact as at 31 December 2013





Consolidated income

statement

2013

Consolidated other comprehensive income

2013

Total  impact on equity 2013


£000

£000

£000

Unrealised translation (losses)/gains on intragroup borrowings

(849)

849

-

Total (losses)/gains recognised

(849)

849

-

23 Post balance sheet event

On 27 February 2015 the Group acquired R&Q Marine Services Ltd (RQMS) for a consideration of £7,375,000 plus a further amount contingent on the business generating certain levels of gross premiums written over the next 12 months. RQMS are a managing agent specialising in yachts and general marine leisure which underwrites on behalf of other insurers.

Note:

The Annual Report and Accounts for 2014 will be available to shareholders no later than 17 March 2015. 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.hiscoxgroup.com.

 


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