Monday 28 February 2011
A resilient result
| 2010 | 2009 | |
| Gross premiums written | £1,432.7m | £1,435.4m |
| Net premiums earned | £1,131.2m | £1,098.1m |
| Profit before tax | £211.4m | £320.6m |
| Profit after tax | £178.8m | £280.5m |
| Earnings per share | 47.2p | 75.2p |
| Total dividend per share for year | 16.5p | 15.0p |
| Net asset value per share | 332.7p | 299.2p |
| Group combined ratio excluding foreign exchange | 89.8% | 82.2% |
| Group combined ratio | 89.3% | 86.0% |
| Return on equity | 16.5% | 30.1% |
Financial highlights
- A strong pre-tax profit of £211.4 million (2009: £320.6 million) despite specific catastrophe claims of £165 million
- Profit after tax £178.8 million (2009: £280.5 million);15.4% effective tax rate
- Gross written premiums remain flat at £1,432.7 million (2009: £1,435.4 million)
- Investment return of 3.6% (2009: 7.2%)
- Earnings per share 47.2p (2009: 75.2p)
- Total dividend for the year increased by 10% to 16.5p (2009: 15.0p)
- Net assets per share increased by 11.2% to 332.7p (2009: 299.2p)
- Combined ratio 89.3% (2009: 86.0%)
- Return on equity 16.5% (2009: 30.1%)
Operational highlights
- Hiscox London Market focused on margin over growth reducing income by 13.6%, delivering profits of £121.4 million despite catastrophes.
- Specialist retail businesses in the UK and Europe delivered good growth and doubled profits, again despite catastrophes.
- Rates still attractive in reinsurance and stable in other specialty lines.
- The first ‘direct from insurer’ small business offering in the US launched with promising early results.
Robert Hiscox, Chairman of Hiscox Ltd, commented:
“Mother Nature has well and truly tested us this year and a pre-tax profit of £211.4 million is further strong evidence of the resilience of our business.”
For further information:
Hiscox Ltd
| Charles Dupplin, Group Company Secretary | +1 441 278 8300 |
| Kylie O’Connor, Head of Group Communications, London | +44 (0) 20 7448 6656 |
| Brunswick | +44 (0)20 7404 5959 |
| Tom Burns | |
| Daniel Thole |
Notes to editors
About Hiscox
Hiscox, the international specialist insurer, is headquartered in Bermuda and listed on the London Stock Exchange (LSE:HSX). There are three main underwriting parts of the Group - Hiscox London Market, Hiscox UK and Europe and Hiscox International. Hiscox London Market underwrites internationally traded business in the London Market - generally large or complex business which needs to be shared with other insurers or needs the international licences of Lloyd's. Hiscox UK and Hiscox Europe offer a range of specialist insurance for professionals and business customers, as well as high net worth individuals. Hiscox International includes operations in Bermuda, Guernsey and USA.
For further information, visit www.hiscox.com.
Chairman’s statement
In our 2010 Interim Statement I said that a half-year profit of £97.2 million was a testament to the strength of our business given the unnatural number of natural catastrophes (and one massive oil-spill) during the period. Well, Mother Nature has well and truly tested us further in the second half and a full-year pre-tax profit of £211.4 million is further strong evidence of the resilience of our business.
Our long-term strategy has been to build a balanced book of international businesses, retreating from any area when the competition gets foolish and advancing when we can charge the proper price. It seems an immutable rule of insurance that a big loss will hit the area of weakest rates, and this year has proved the rule. We were underweight in Chile, New Zealand and Australia, had declined a significant insured in the oil-spill and had pruned our UK household book, as our view was that each area was under-rated for just the catastrophes which have occurred.
Results
The result for the year ending 31 December 2010 was a profit before tax of £211.4 million (2009: £320.6 million) on a gross written premium of £1,432.7 million (2009: £1,435.4 million). The combined ratio was 89.3% (2009: 86.0%). Earnings per share on profits after tax were 47.2p (2009: 75.2p) and net assets per share increased to 332.7p (2009: 299.2p). The return on equity was 16.5% (2009: 30.1%).
Dividend, balance sheet and capital management
The Board proposes to pay a final dividend of 11.5p (2009: 10.5p) on 21 June 2011 to shareholders on the register on 13 May 2011, making total dividends for the year of 16.5p (2009: 15.0p) an increase of 10%, in line with our policy of steady dividend growth. Subject to shareholder approval at the forthcoming Annual General Meeting, a scrip dividend alternative to the cash dividend is to be offered to shareholders and the Company’s Dividend Access Plan will be suspended. The balance of profit retained helps to increase the net asset value per share which, combined with dividend growth, underpins the share price. Growth in net assets per share will inexorably drive the share price up whatever rating Mr Market puts on our shares or the sector.
New Directors
In December we appointed two distinguished and very experienced new non-executive directors, Richard Gillingwater and Robert (Bob) McMillan, to the Hiscox Ltd board. Richard Gillingwater is currently the Dean of Cass Business School and brings vital knowledge from his experience in the financial services sector. Richard has now been appointed Senior Independent Director replacing Andrea Rosen who was acting in the role following the death of Sir Mervyn Pedelty in January 2010. Bob McMillan has been a member of our US board since 2007 and his knowledge of retail insurance from his time with the Progressive Insurance Company has proved invaluable.
Courage and creativity
It takes courage to go against the herd, to pioneer in new areas, or to say no to major suppliers of business. In 1993, when Bronek Masojada joined, we were a simple underwriting agency. It would have been easy to remain so, solely managing syndicates in Lloyd's. It would have been easy to have expanded through Lloyd’s only, or outside Lloyd’s in the UK only; it would have been easy to accept business only from brokers. As it is, since 1993, we have raised the capital to go from agent to principal, formed insurance companies, opened offices in Bermuda, throughout the UK, Europe and the USA, expanded our distribution channels to include direct offerings, and moved our domicile to Bermuda. Our leading value is courage, and we will continue to develop the business in our own way while watching closely, but not following, the herd.
Our emphasis has always been on organic growth and start-ups which are tougher than the instant gratification of acquisitions, but mean that we build what we want. Investing is a word used by politicians to cover expenditure so I am reluctant to use it on our expansion in new areas, but new ventures take time to grow to profitability and I do consider them an excellent investment. We have written off the cost of building businesses against the profits of the day, and those businesses are now in many cases yielding a handsome return. Our UK and European regional offices are now an indispensable and profitable part of our distribution, and I believe our US offices will be so too when they reach critical mass. Our direct business in the UK now makes good money and has enormous growth potential. Our new direct offering in the US – the first direct commercial policy from an insurer - is in pre-marketing phase and showing promise.
The insurance cycle
General insurance is a great business as there is an insatiable and constantly growing demand for it. What drives rates up and down is supply of capital in the industry, combined with management weakness.
A small example of management weakness: the premium for piracy of ships in the Gulf of Aden can be calculated very roughly by relating the number of journeys through the gulf to the number of successful kidnaps by pirates. We had built a rating for this and were trading successfully when the competition decided to under-cut our rates by about 50%. At the same time, the pirates doubled their demands. How can any management allow an underwriter to compete at a quarter of the rates of the established market? We have continued to quote the sensible rate which effectively leads to our retreating from the business. We will be back when our competitors realise their folly and withdraw from the market, as some already have.
Fortunately the reinsurance market is more disciplined as are many of the areas in which we specialise. We will not compete to hold market share but will underwrite selectively regardless of top line. There is talk that a major market loss is needed to turn the market, and it would appear that some competitors are hanging on to business at the wrong rate hoping that a big bang somewhere will enable them to increase the price. I personally hope that there continues to be a constant attrition of medium losses and no major event so that discipline has to be learnt the hard way.
Broker remuneration
The vast majority of our business comes from brokers and undoubtedly always will. Their job is a difficult one. They have to assess the risks of their diverse clients and transfer those risks to insurers at a reasonable price. Their definition of reasonable and ours will obviously sometimes conflict, and we must have the discipline to say no – sometimes not easy to do to a robust provider of business.
A deficiency in the insurance market has long been how the broker is remunerated. The clients should pay the broker, as they do their other advisers, for the advice given and the work done to transfer the risks. However, in our market, the insurer has traditionally paid the brokers through giving them a slice of the premium as brokerage or commission. This not only leads to obvious conflicts (the higher the premium, the bigger the pay; the placing of business with the highest payer of commission not the best insurer), but also made the clients believe that they got the services of brokers for nothing. As fees have properly grown to be the correct way to pay the broker, the broker fraternity have had to learn how to cost their services, and have been reluctant to charge the proper fee. They have also competed with each other to a ridiculous extent on fees. Not getting enough revenue as a result, they bring pressure on the insurers to make up the deficiency. This is a big issue at the moment, and I just hope that it will be resolved sensibly before a solution is imposed either by the law, or again by a crusading regulator.
The future
We are building a business with a brand based on trust. We strive to offer flexible, intelligent underwriting backed by great service which people will want to buy for peace of mind, knowing they will be made good in times of loss, and definitely not because it is the cheapest in the market. But our brand has to be built on the behaviour of our people, and I am very grateful to them for their excellent work which led us to be voted the most trusted insurer in the UK. When I see the calibre of the staff throughout the Group, I am confident that the creativity and growth of the last decade will continue strongly over the next.
Robert Hiscox
28 February 2011
Chief Executive’s report
In 2010 Hiscox made a pre-tax profit of £211.4 million, a good result considering the low returns on offer in the investment markets and the large number of catastrophes the industry faced this year. This result reflects the diverse strengths of our businesses: Hiscox London Market and Hiscox Bermuda showed outstanding discipline in their risk selection, while our specialist retail businesses in the UK, Europe and Guernsey strengthened their market positions by focusing on quality products sold at a fair price with a fast and friendly claims service; our US business continues to build critical mass in a difficult market.
2011 will test the industry further as prices remain under pressure and investment returns diminish. Our long-term strategy of balance and diversification has built a business designed for these conditions. Hiscox always plans for profit throughout the cycle, so our London Market and Bermudian businesses will maintain the same excellent underwriting discipline they showed in 2010 and it will be the turn of our specialist retail businesses to drive the Group forward.
Hiscox London Market
Our London Market business has been the powerhouse of the Group. It delivered a pre-tax profit of £121.4 million (2009: £179.9 million). This result, though lower than 2010, was helped by some canny underwriting decisions, particularly around Deepwater Horizon and the Chilean earthquake. In each case disciplined underwriting, with a focus on margin over volume, led us to incur claims that were substantially below the market average. This discipline also led to a reduced premium income of £572.7 million (2009: £663.0 million), a trend that will continue in 2011.
The London Market business is managed through the following six product lines:
- Reinsurance: This remains our largest line of business, accounting for £234.9 million of premium income. This division took the brunt of Hiscox losses arising from Chile and New Zealand – amongst others – but the fact that it still made a profit shows the excellence of its people and portfolio. It enjoys a great reputation in the market, which has enabled it to attract substantial quota share reinsurance support from other syndicates and major European and global insurers. This allows us to play an influential role in the market while keeping within our risk appetite. The important January 1 renewals were largely within our expectations, with modest reductions in pricing. Margins remain attractive but this line of business will shrink gradually as we trim our exposures in response to lower rates.
- Property: Our primary focus is catastrophe-exposed property risks of global companies, homeowners and small businesses. Property rates have been under pressure for some time and we have substantially reduced premium income to £95.7 million (2009: £137.4 million). Our experience is that good underwriting decisions like these, although painful to execute in the short term, serve the business well over the long term. We will return to serve customers with our previous risk appetite when our competitors, who have made this segment uneconomic, retreat nursing their losses, as they inevitably will. As regards our non-catastrophe exposed activities, during the year we entered the mechanical equipment insurance market through a relationship with a respected underwriting team.
- Marine and energy: Good disciplined underwriting based on sound appreciation of the technical facts meant we had minimal exposure to those affected by the Deepwater Horizon loss. We have achieved good results in this sector and have the risk appetite to expand if rates rise during the course of 2011.
- Specialty: Our specialty lines benefit from operating in niche markets including personal accident, event cancellation and abandonment, terrorism, political risks and kidnap and ransom. Specialty continues to perform well and has enjoyed significant releases from reserves as recoveries were made on political risk claims.
- Casualty: This market, particularly US casualty, remains under pressure and so this line shrank during the year. We had expected to see some losses arising out of the global financial crisis but, so far, these have not materialised. We expect to remain a modest participant in this market for as long as rates remain at their current levels.
- Aviation and aerospace: Hiscox has had a long-standing participation in the insurance of satellites, both at launch and in orbit. Savvy technical ability meant that we were not involved in some of the major losses that affected this class during the year. We also welcomed to Hiscox a specialist aviation team, who came on board in the second half of the year. Our goal is to build a material business, but only when conditions are right.
Looking forward, we expect pricing in the London Market to remain challenging. Generally market prices are under pressure, so it is only through increasingly selective underwriting that we can retain business at attractive prices. We are convinced this is the right approach, even though it may mean that our premium income (and exposure) falls in the year ahead.
Hiscox UK and Europe
Our businesses in the UK and mainland Europe have a focus on art and private client insurance for wealthy individuals, property and liability insurance of small commercial enterprises, and on errors and omissions insurance for technology and media businesses. We market our products through brokers and direct to our customers. In the year we have seen continued growth while increasing our profitability. Total profit before tax for the year was £39.6 million (2009: £20.6 million) on total premium income of £454.7 million (2009: £421.0 million).
- Hiscox UK: Hiscox UK’s premium income grew by 7.6% to £327.0 million (2009: £304.0 million) and the combined ratio improved to 94.6% (2009: 97.9%). Profits remained virtually flat at £28.8 million (2009: £29.1 million) despite total catastrophe losses of £28 million arising from the UK freezes in January and November/December and event cancellation losses arising from the Icelandic volcanic ash cloud. In addition, Hiscox UK experienced some recession related errors and omission losses. This good performance shows the resilience of our business. The art and private client team deserves to be singled out for praise. In late 2009 they decided that on technical grounds prices were inadequate and implemented price rises of approximately 5% in a falling market. Their discipline was rewarded by a profitable result despite the many challenges of the year. Our commercial area achieved profits, albeit at lower levels than 2009. The direct business continues to expand with the top line growing by almost 20%. This business achieved a good level of profit in aggregate. In addition to the benefits of good underwriting, Hiscox UK has also seen the fruits of a sustained focus on expense ratio.
We are positive about the future. We have entered a new underwriting partnership with Dual, an established MGA, where we have taken a 25% share of their existing book of business. We also expect to see our direct business continue to develop. We are cautious about our broker-generated business as we believe that the market will remain soft. The ability of Hiscox UK to withstand market pressures in 2010 shows the strength of our specialist market position and we are confident that it will continue to enhance the value of the Group going forward. - Hiscox Europe: Hiscox Europe had a tremendous year and made a profit of €11.9 million (2009: €0.4 million). The top line grew by 11.5% to €146.7 million (2009: €131.6 million), and it achieved a combined ratio of 97.4% (2009: 114.6%). This improvement was driven by a number of factors. First, we have made progress in breaking down the silos separating country units ensuring that lessons learned in one market are rapidly transferred to the others. Second, our creation of a pan-European service centre in Lisbon has allowed us to take advantage of pan-European economies of scale. Third, our decision to invest in the growth of our smaller commercial and technology businesses has paid off; and, fourth, the art and private client teams improved the quality of their book with the application of a more sophisticated pricing approach. We also created a new specialty line that sells kidnap and ransom and related products from our local offices to local brokers and experimented with a direct offering in France. In aggregate, these actions drove growth, improved the loss ratio and reduced the expense ratio. Hiscox Europe is, I believe, now in a position to become a sustainable contributor to the Group.
Hiscox International
Hiscox International comprises our businesses in Bermuda, Guernsey and the US. Aggregate premium written grew by 15.3% to £405.2 million (2009: £351.4 million), though profits dropped to £43.1 million (2009: £124.2 million).
- Hiscox Bermuda: Our Bermudian business, supported by a significant third party quota share reinsurance, was able to grow its income by 15.6% to $303.8 million (2009: $262.9 million). After a relatively loss free 2009, profits were hit by the Chilean and New Zealand earthquakes. During the year our healthcare team established itself as a sensible player in the market. In 2011 we expect to see pricing in the reinsurance market remain under pressure and as a result our Bermuda business will shrink.
- Hiscox Guernsey: The team showed great discipline in the piracy market, increasing prices in the face of increasing attacks, higher demands from pirates and the bizarre decision of some of our competitors to slash their prices. This inevitably led to a reduction in piracy revenues but Hiscox Guernsey remained overall flat. Our fine art business had a very good year with modest growth in premiums and increased profits. Our team in Guernsey also provides product leadership for kidnap and ransom across the Group, and their hard work during the year saw us consolidate our position as a worldwide leader in this field, with particular growth in Europe, the US and Latin America.
- Hiscox USA: Hiscox USA had a tough year. Premiums grew 22.4% to $198.3 million (2009: $162.1 million), but profitability was weak, in part due to some claims from longstanding large technology risks. In early 2009 we made a significant investment in the operation, believing that the financial crisis would allow us to recruit good people and that customers’ concerns about financial stability would lead to a re-rating in the market. We were correct in our first assumption and are very pleased with the strength of talent we attracted, but the effective guarantee given by the government to some of the weaker players meant that rather than a market re-rating, prices actually fell further. Our philosophy of underwriting for profit over volume meant that in this challenging pricing environment we did not reach the scale we expected. In the middle of 2010 we took decisive action and adapted accordingly. We decided to focus our errors and omissions and property business through wholesale brokers only and to concentrate our specialist lines (kidnap and ransom, terrorism, construction, media and not-for-profit directors and officers) on major brokers in those niches. This led to the sale of our animal mortality business and the closure of our Boston office. These swift but necessary actions will allow us to keep focusing on building a quality business in what remains a very difficult market.
A milestone was the launch of our US direct commercial business. Our test site opened for business in November 2010, selling errors and omissions, commercial general liability and property owners’ business to zero to ten employee firms in 15 states. We expect to work on improving our processes and infrastructure during the first quarter of 2011 and once this is stable and working effectively we will support the business with a significant marketing investment. We expect that in time we will see a repeat of the success we enjoy in the UK.
Claims
It is only when a customer claims that you can live up to your brand promise. Our claims operations across the world were tested during 2010 and the team rose to the challenge. The year began with the challenges of Windstorm Xynthia and a freeze in the UK. It was followed by the earthquake in Chile and losses arising from the Icelandic volcanic ash cloud. The year continued with Deepwater Horizon, the New Zealand earthquake, riots in Thailand, the December freeze in the UK and finally, the beginning of the Australian floods. Throughout this succession of calamities our claims teams have paid claims with the utmost efficiency and effectiveness. We strongly believe that a claim paid fairly and fast creates a competitive advantage, and judging by customer feedback we largely achieve this goal.
In my statement last year I expressed our concerns about the proposed Lloyd’s Claims Scheme. Some of these seem to have been recognised now by others in the market and we hope that as Lloyd’s finalises changes in 2011 it takes these concerns on board. We firmly believe that the need to provide a single point of notification for all claims, to differentiate between large and small claims and to provide a market-wide service for small claims must be recognised. Lloyd’s claims handling, particularly on syndicated risks, is the cornerstone of its enviable reputation, so it is imperative that the market provides an effective unified solution.
Investments
During the year our investment portfolio, excluding derivatives, delivered a return of £98.8 million, a yield of 3.6% on an average portfolio of £2,717.5 million. The market was testing but on balance rewarded those prepared to take some measured risk. As a result our bond portfolio performed well, as our decision to maintain a healthy allocation to credit paid off. Our risk assets, a selection of equity and hedge funds, produced a good return but in aggregate under-performed their long only equity benchmark. The composition and benchmarking of risk assets will be a focus of attention in 2011. We expect market returns in the near term, particularly from bonds and cash, to remain low. However, we prefer to preserve the balance sheet, accepting the lower income on offer, rather than to stretch further for yield in credit, duration or structured products.
Operations and IT
As our specialist retail businesses have grown we have needed to increase the robustness of our processes. Last year, across the Group, we issued 370,000 policies and settled 40,000 claims. We rely on the efforts of many dedicated and professional operations and IT staff to deliver the services and infrastructure to do this effectively. Their high standards and those of our front line underwriters and claims handlers have helped us build the best reputation of any UK insurer, according to a 2010 consumer study by the Reputation Institute. The reduction in our expense ratios in the UK and Europe reflects the improving efficiency of their processes. Over a four year period this has dropped by 6%, making a substantial contribution to profits.
We can never be satisfied with how we are doing. During 2010 we conducted a ‘lean’ process review of a number of areas. In each case we identified significant improvements, whether in the timeliness of our underwriting reviews, the quality of our data or the cost of our service. The implementation of these recommendations will, over time, lead to continued improvements in our expense ratio.
Solvency II
The European insurance industry is in the midst of a tremendous change driven by the introduction of a new regulatory framework called Solvency II. The framework has three essential elements called ’pillars’: Pillar 1 covers the amount of capital we must hold; Pillar 2 focuses on governance and risk management; Pillar 3 on transparency and disclosure. As a Bermuda domiciled group we are in a slightly anomalous situation. We expect to apply Solvency II principles consistently across our Group, with the Bermuda Monetary Authority (BMA) acting as our lead regulator, but with collaboration with the Financial Services Authority (FSA) and Lloyd’s in the UK, and other regulators in other jurisdictions. The BMA has applied to the EU for approval as an ’equivalent regulator’ - effectively that European supervisors can rely on its judgment – and it is making great progress on meeting the various tests which will be applied to it. Success in achieving equivalence will mean that Hiscox is able to apply a single consistent framework across the Group.
In many ways Solvency II is simply a formalisation of existing risk management systems used within our business. We have a well developed enterprise risk management approach which has been judged effective by some of the rating agencies. We have also been very transparent to shareholders on the underwriting risks we run. For many years we have published on our website and annual report our ‘boxplot and whisker’ chart which gives shareholders a clear view of the estimated losses we could suffer in the event of major catastrophes. At the moment we are assuming that Bermuda will achieve equivalence and that we will implement the Solvency II approach across the whole Group. We are therefore in constant communication with the BMA, the UK’s FSA and Lloyd’s of London on the path to implementing Solvency II within Hiscox.
The challenges of Solvency II arise from the fact that its rules are yet to be fully formulated, from the UK’s well known tendency to ’gold plate’ European Directives, and that the FSA itself is undergoing wrenching organisational and philosophical changes at the same time as Solvency II is being formulated and implemented. The challenges for all those involved in the process can be summed up by the fact that our application for approval under Solvency II is expected to reach 5,000 pages, and it is thought that the FSA will receive over 100 similar applications. One has to feel sorry for the teams who have to read and approve all the applications.
Achieving effective implementation of Solvency II is one of the Group’s top priorities in 2011 and 2012.
People
Insurance is an industry where the decisions and actions by staff on the front line make a crucial difference to the performance of their businesses. We are lucky at Hiscox in having staff who not only enjoy this responsibility and the challenges which it brings, but who also make the right decisions for our business and its customers. Our exposure to Deepwater Horizon is minimal thanks to a single sound underwriting decision. Our US catastrophe exposed property portfolio has shrunk thanks to a team exercising discipline. Our UK art and private client business has performed well despite some terrible weather and thanks to brave underwriting decisions going against the market trend. Our European art and private client business has improved the quality of its business thanks to co-ordinated actions over an extended period. Our claims teams make difficult decisions every day – whether resolving a coverage dispute between terrorism and property insurers without the client being adversely affected or dealing with many personal difficulties arising from the UK freeze. It is our ambition to ensure that Hiscox remains a place where the individual makes the difference no matter how much we grow – and with the quality and dedication of the staff who work for us across the globe I feel confident that this ethos will continue to be central to our business.
Outlook
The markets in which we operate have become progressively more challenging over the past three years, and we expect the trend of increasing competition and falling prices to continue. In this environment our strategy of building our retail businesses to balance the more volatile big-ticket businesses will come into its own. We will allow our big-ticket businesses in Bermuda and London to shrink as they focus on margin over volume, while at the same time we expect our specialist retail businesses to grow their revenue and profits. These specialist retail businesses offer products that are clearly distinct from those of their competitors; they have developed reputations for excellent standards of service and for paying claims fairly. This combination will stand our employees, customers and shareholders in good stead.
Bronek Masojada
28 February 2011
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