Transcript 2005 Preliminary results presentation

www.hiscox.com
Hiscox plc
Preliminary results for the
year ended 31 December 2005
March 2006
Aerospace  Bloodstock  Classic Cars  Employers’ Liability  Energy  Financial Institutions  Fine Art  High Value Household  Kidnap & Ransom 
Marine  Media  Personal Accident  Political Risks  Professional Indemnity  Property  Reinsurance  Specie  Technology  Terrorism  War
Good results for a tough year
Profit before tax (£m)
Combined Ratio (%)
89.5
70.2
92.6
96.0
2004
2005
2004
2005
2
Disciplined underwriting
Gross Written Premium (£m)
861.2
900
797.4
800
900
800
676.7
700
600
816.6
Net Premium Earned (£m)
600
500
500
400
400
300
300
200
200
100
100
0
0
2002
693.3
2004
2005
700
548.9
2001
714.9
2003
2004
2005
547.5
385.1
344.2
2001
2002
2003
3
Delivering on a per share basis
EPS (p)
Net Asset Value per
share (p)
21.3
15.6
2004
2005
125.7
147.7
31 Dec 2004 31 Dec 2005
Dividend
5p
2004
7p
2005
4
Strategy delivering balance
 Hiscox UK
– Great results
 Hiscox Global Markets
– Good underwriting results
 Hiscox Europe
– Second year of profit
 Regional expansion
– Creation of Hiscox Bermuda
– Creation of Hiscox USA
5
Financial performance
6
Hiscox plc results
Full Year 2005
£000
Full Year 2004
£000
Gross Premiums Written
861,174
816,609
Net Premiums Written
681,236
704,085
Net Premiums Earned
693,299
714,852
Profit before tax
70,221
89,522
Profit after tax
48,630
63,948
Basic Earnings per share (p)
15.6p
21.3p
Final Dividend (p)
4.75p
3.5p
7.0p
5.0p
• £m
578.0
368.8
• p per share
147.7
125.7
12.8%
20.6%
Full Year Dividend (p)
Net Asset Value
Return on equity after tax*
* Post tax, based on adjusted opening shareholders’ funds
7
Segmental analysis
For the year ended 31 December
Global
Markets &
Corporate
Centre
£000
2005
UK &
Europe International
£000
£000
Total
£000
Global
Markets &
Corporate
Centre
£000
2004
UK &
Europe
£000
International
£000
Total
£000
Gross Premiums Written
555,183
262,271
43,720
861,174
511,491
267,801
37,317
816,609
Net Premiums Written
417,128
235,276
28,832
681,236
451,517
233,103
19,465
704,085
Net Premiums Earned
428,334
241,603
23,362
693,299
483,958
212,368
18,526
714,852
Profit before tax
20,716
43,350
6,155
70,221
67,810
18,855
2,857
89,522
Combined Ratio
99.9%
86.9%
91.3%
96.0%
90.9%
98.0%
92.0%
92.6%
Global Markets & Corporate Centre: Hiscox plc’s share of the results of Syndicate 33, excluding Syndicate 33’s specie, fine art and non-US household business. It also includes the investment return and administrative costs
associated with the parent company and other group management activities.
UK & Europe: The results of Hiscox Insurance Company Limited, Hiscox plc’s share of Syndicate 33’s specie, fine art and non-US household business, together with the income and expenses arising from the group’s retail
agency activities in the UK and in continental Europe.
International: The results of Hiscox Insurance Company (Guernsey) Limited, Hiscox Insurance Company (Bermuda) Limited, and the US agency, Hiscox Inc.
8
Investment performance
31 December 2005
Bonds
Equities
Deposits/Cash
Actual Return
Group Invested
Assets*
31 December 2004
Asset
Allocation
%
Return
%
Return
£000
Asset
Allocation
%
Return
%
Return
£000
62.3
3.1
26,733
75.9
2.9
20,716
7.2
13.1
12,278
7.9
10.3
8,571
30.5
3.7
11,276
16.2
3.0
5,711
4.0
50,287
3.6
34,458
£1,651.5m
£1,100.3m
* As at 31 December
9
Financial activity
 £170m rights issue at 183p - Nov 2005
 45% gearing at 31 December 2005
– £137.5m letter of credit
– $225m term and revolving loan facilities
– Further gearing from third party capital
 Syndicate 33
– 73% ownership
– 41% capital ratio
 Strong internal capital modelling
10
Hiscox Global Markets
11
London Market
Reinsurance
Specialty
Jan05 to Dec05
Jul04 to Jun05
Jan04 to Dec04
Jul03 to Jun04
Jan03 to Dec03
Jul02 to Jun03
Jan02 to Dec02
Jul01 to Jun02
Jan01 to Dec01
Jul00 to Jun01
Jan00 to Dec00
Jul99 to Jun00
Jan99 to Dec99
Jul98 to Jun99
Jan98 to Dec98
Index level
%
Rating
Syndicate 33 Rating Index
400
300
200
100
0
12
Hurricane impact
 Reserving process led by Jeremy Pinchin,
new Head of Claims
 Total estimated loss to plc:
Gross loss
(US$m)
Net loss
(US$m)
Katrina
485.0
156.9
Rita
166.1
81.2
Wilma
81.3
45.6
Total
732.4
283.7
 Bottom line impact of £85m, an increase of £25m
since rights issue
 Limited reinsurance cover left for these events
13
Business areas
Reinsurance and Major
Property
London Market Insurance
Non-marine reinsurance; marine &
aviation reinsurance; whole account
reinsurance; commercial property;
onshore energy
Terrorism; professional indemnity;
directors & officers; political risks;
financial institutions
 USA cat rates up 50% across the book
 Demand for terrorism product remains
high
 Retro pricing at an all-time high
 European rates up 5% on average
 Property insurance rates rising
 Terrorism - worldwide spread
 Professional indemnity profitable,
rates stable
 Withdrawal from directors and officers
indemnity
14
Business areas
Specialty
Technology, Media,
Telecoms
Marine and Energy
Kidnap & ransom; contingency;
MGAs; homeowners; SMEs;
bloodstock; personal accident
Technology, media, telecoms
errors & omissions
Marine hull; cargo; offshore
energy; marine & energy liability;
 Profitable despite hurricane
activity
 Risk management and
claims service remains
highly valued
 Offshore energy rates up
strongly, especially Gulf of
Mexico
 Continued expansion into
Europe
 Offshore energy coverage
reduced and more restrictive
 San Francisco office now
open
 Quota share for Gulf of Mexico
 Stable rating environment
on non-catastrophe
exposed business
 Catastrophe exposed risks
rates up – between 25%
and 100%
 Increased catastrophe
deductible
 Liability and hull rates
increasing
15
Expanding business reach
 Representation in New York,
San Francisco and Paris
 E-commerce initiatives. Homeowners
generated c.US$600K in January,
increasing significantly month on month
 Leading peer to peer trading
16
The opportunity
 Hardening catastrophe market
 Changes to reduce volatility
– Quota share reinsurance
– Reduction in property aggregate and line size
– Marine reinsurance book re-focused
 Strong underlying specialty book
 Established name, experienced team
17
Hiscox UK & Hiscox Europe
18
Hiscox Insurance Company
Combined Ratio: %
Gross Written Premium: £m
250
231.3 232.8
218.7
120
118.0
107.9
200
102.6
100
176.4
97.7 97.8 97.9
93.6 92.6
163.9
88.5
80
150
127.3
100
90.0
60
97.8
74.7
40
50
20
0
0
1997
1998
1999
2000
Core
2001
2002
2003
2004
2005
1997
1998
1999
2000
2001
2002
2003
2004
2005
Non-Core
19
Performance
2005 (£m)
2004 (£m)
UK
Europe
GWP
207.3
55.0
212.1
55.7
Net Premiums Earned
194.5
47.1
170.0
42.4
Profit before tax
40.4
3.0
17.5
1.4
Combined Ratio
84.1%
99.7%
96.8%
103.2%
UK
Europe
20
80%
UK Personal Lines
UK PI
France
Jan-05 to Dec-05
Jul-04 to Jun-05
Jan-04 to Dec-04
Jul-03 to Jun-04
Jan-03 to Dec-03
Jul-02 to Jun-03
Jan-02 to Dec-02
Jul-01 to Jun-02
Jan-01 t0 Dec-01
Jul-00 to Jun-01
Rolling 12 Month Index of Rates
Rates
160%
150%
140%
130%
120%
110%
100%
90%
Germany
21
Hiscox UK
Art and Private Client
Professions & Specialty
Commercial
High value household and contents; fine art;
classic cars; specie; executive household
Professional indemnity; directors & officers;
commercial office; internet & email
 Successful launch of broker e-trading
 Successful launch of broker e-trading
 Purchase of $8m of fine art renewal rights
from AIG
 Strong underwriting growth/discipline
 UK Household products rated market
leader by Defaqto
 Launch of Direct Commercial
 Cross-selling success
 Strong growth in Direct
22
Europe
Art and Private Client
Professions & Specialty
Commercial
High value household and contents; fine art;
classic cars; specie; executive household
Professional indemnity; directors & officers;
commercial office; internet & email
 Stable rating environment
 France: core professional indemnity
launched
 Strong fine art growth following new
product introduction in Nov 2004
 Record combined ratio
 Germany: exited unprofitable
partnerships
 Holland: professional indemnity team in
place
23
2006: Accelerated marketing
 Build Hiscox as a consumer brand
Objective
Target Market
Plans
 Accelerate growth across direct and broker
channels
 A-B households
 TV debut (May)
 Invest behind proven growth drivers
(digital, direct mail, press advertising)
 Contemporary arts sponsorship
24
UK HNW opportunity
is enormous
UK Contents >£75K
1000000
 2.8 million HNW
households in UK
900000
800000
 16% of UK total
Policy Volume
700000
600000
 39% of all sums
insured
500000
400000
 Highly fragmented
300000
200000
100000
0
£75K
£1m+
Contents Sums Insured
Source: Hiscox, Datamonitor, ABI
25
Hiscox International
26
Performance
2005 (£m)
2004 (£m)
GWP
43.7
37.3
Net Premiums Earned
23.4
18.5
Profit before tax
6.2
2.9
Combined Ratio
91.3%
92.0%
27
Business areas
Guernsey
Bermuda
USA
International: fine art; kidnap
& ransom; personal accident
International: reinsurance;
internal quota shares
Professional indemnity; fine
art; terrorism
 Stable rating environment
 Underwriting, pricing and
modelling staff in place
 Ed Donnelly –
experienced local as
President
 Record profitability for
Guernsey operation in
2005
 Staffing levels increased
for 2006 to promote
growth
 Back office staff recruited
 International reinsurance
rates stable
 USA rates continue to
rise
 Recruited underwriting
staff
 13 March 2006 start
 Est. US$15m first year
28
2006 Bermuda business plan
Expected 2006 business mix
100% = US$325m
Kidnap & Ransom
and Fine Art
27%
52%
8%
8%
5%
UK
Reinsurance
External
Syndicate 33
Q.S.
USA
Internal
29
Already performing
 Committed to a total of US$155m of business
– At 1 March 2006 48% of our budget
 US$46m is new reinsurance business
– At 1 March 2006 26% of our budget
 On target to meet business plan
30
Summary and outlook
31
Summary
 Satisfying results
– Good profits
– Growth in net asset value per share
– Dividend growth
 Disciplined underwriting
 Distribution extended
– Hiscox Global Markets
– Hiscox Bermuda
– Hiscox USA
32
Clear strategic focus
100% = £1,105m
Total group controlled income for 2005
 Build distribution to
access new markets
Art & Private
Client
London
Market
29%
15%
9%
15%
27%
Professions
& Specialty
Commercial
5%
 Grow regional to
balance London
Market volatility
Specialty
Reinsurance &
Major Property
London Market
Syndicate 33
& Hiscox Bermuda
TMT
 Retain specialist focus
Regional
Syndicate 33,
Hiscox Insurance Company,
Hiscox Guernsey & Hiscox USA
33
Clear geographic and
product focus
Hiscox plc
Hiscox International
Hiscox
Global Markets
 Reinsurance &
Major Property
 London Market
 Marine & Energy
 Specialty
 Technology & Media
Hiscox
Bermuda
 Reinsurance
 Group Capital
Support
Hiscox
Guernsey
 Art & Private
Client
 Kidnap &
Ransom
Hiscox UK & Europe
Hiscox
USA
Hiscox
UK
Hiscox
Europe
 Art & Private
Client
 PI & Specialty
Commercial
 Regional Media
& Technology
 Art & Private
Client
 PI & Specialty
Commercial
 Regional Media
& Technology
 Direct
 Art & Private
Client
 PI & Specialty
Commercial
 Regional Media
& Technology
34
Outlook
 Attractive rating environment
 Strategy of balance will continue
– Regional business in UK, Europe, USA and Guernsey
– Global business in London and Bermuda
 Seasoned leaders and staff in place
35
Appendices
 Realistic disaster scenarios
 Geographical & currency split
 Loss ratios as a % of Syndicate premiums
 Syndicate 33 capacity and Hiscox plc ownership
 Reinsurance
 Company background
 Glossary of terms
36
Realistic disaster scenarios
Syndicate 33 - Losses shown as a percentage of 2006 capacity
35
30
25
20
Gross Loss
Loss %
Net Loss
15
10
5
0
California
Earthquake
Florida
Windstorm
Specific
European
Windstorm
Specific
Japanese
Earthquake
Specific New
Madrid
Earthquake
Gulf of
Mexico
Windstorm
Industry Loss
US$54Bn
US$80Bn
US$30Bn
US$50Bn
US$40Bn
US$60Bn
Return Period
1 in 250 yr
1 in 200 yr
1 in 500 yr 1 in 500 yr
1 in 500 yr
1 in 250 yr
37
Geographical & currency split
2006 Geographical split
2006 Currency split
USD
UK
North America
23%
55.9%
34.6%
23%
26.5%
28.4%
9.4%
Worldwide
0.6%
Middle East
GBP
Western Europe
(excl. UK)
0.2%
Northern Africa
1.1%
East Asia
0.2%
Central Asia
0.9%
Caribbean
0.5%
Central America
0.5%
Central &
Eastern Europe
0.7%
Central &
Southern Africa
13.2%
EUR
CAD
2.5%
0.4%
South America
0.2%
South Asia
1.2%
Oceania
38
Loss ratios as a % of
Syndicate premiums
Syndicate 33 incurred losses as a percentage of signed premium
GILR
NILR
YOA
2002
2003
2004
2005
2002
2003
2004
2005
12 mths
13.4%
11.6%
30.0%
84.3%
20.0%
14.1%
30.8%
63.3%
24 mths
27.9%
30.0%
59.3%
36.6%
35.3%
59.0%
36 mths
37.2%
39.9%
45.3%
47.6%
48 mths
41.7%
44.9%
39
Syndicate 33 capacity &
Hiscox plc ownership
900
25
48
833
800
774
842
700
547
65%
201
600
£m
846
550
65%
550
71%
605
73%
500
400
300
200
504
360
360
277
55%
191
53%
191
53%
100
0
2000
2001
2002
Capacity
2003
2004
Hiscox plc Ownership
2005
2006
QQS
40
Group reinsurance security
2006 Programme
Receivables at 31/12/05 of £467.8m
Other
11%
AAA
6%
AA
26%
AAA
A
4%
AA
40%
56%
A
57%
41
Reinsurance
Reinsurance as a % of GWP
(ex. QQS)
Reinsurance receivables
as a % of total assets
40
35.3%
30
26.9%
35
30
25
27.3% 26.0%
25
20.9%
20
20
18.2%
17.0%
15.4%
17.3%
15
11.8%
15
13.7%
10.8%
10
10
5
5
0
2000
2001
2002
2003
2004
2005
0
2000
2001
2002
2003
2004
2005
42
Building a balanced business
1200
800
600
London Market
Syndicate 33
Regional
Syndicate 33
400
Regional
Hiscox
Insurance
Company
200
* London Market/Regional split estimated for these years
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992*
1991*
1990*
1989*
0
1988*
Gross Written Premium
1000
43
Glossary of terms
Annual Venture
The system used for running a Lloyd’s syndicate under which each “year of account” is treated
separately. Members own capacity on a syndicate for a “year of account” and the results are declared
when the year is closed by the RITC mechanism, usually after three years.
Claims ratio
Net claims incurred, including IBNR, as a percentage of net earned premiums.
Combined ratio
The total of the claims and expenses ratios.
Equalisation provision
This a provision made to cover future catastrophe losses and is calculated in accordance with a set
sector formula, which has the effect of smoothing the profit cycle.
Expenses ratio
Expenses as a percentage of net written premiums.
Funds at Lloyd’s
The amount of assets, which can be cash, investments or letters of credit, that a syndicate member
has to deposit with Lloyd’s to support his share of the capacity on a syndicate. The minimum amount
is 40% of the capacity owned by the member.
Gross written premium
Premiums contracted for before any deductions.
Group controlled
gross written premium
The total gross written premium controlled by the group including the 35% of the syndicate capacity not
owned by Hiscox in 2004 (29% in 2005).
IBNR
Incurred but not reported. An estimate made at the end of each accounting period to cover the
expected cost of losses that have occurred but have not yet been reported to the insurer or reinsurer.
Incurred loss ratio
Paid and outstanding losses as a percentage of premiums. Gross incurred loss ratio is before
deducting any reinsurance and net is after deducting reinsurance.
44
Glossary of terms
Long-tail
A term used to describe an insurance risk that has the potential for claims development or new claims
to be reported a number of years after expiry of the term of the policy.
Member or Name
The companies or individuals who own the capacity of a syndicate and who belong to the
membership of the Society of Lloyd’s.
Net premiums earned
Premiums received after the cost of reinsurance and adjustment for unearned premium. Unearned
premium covers the future period of risk of an insurance policy.
Net premiums written
Premiums contracted for after deduction of reinsurance.
Open year
A Year of Account of a syndicate which has not been closed by Reinsurance To Close (RITC). RITC
usually occurs at the end of the third year. A Year of Account can be left open beyond the third year if
the extent of the future liability cannot be accurately quantified.
Qualifying quota share
reinsurance
These are quota share reinsurance policies, which Lloyd’s allow in certain circumstances, that enable
a syndicate to write gross premium in excess of its capacity.
Reinsurance to close – RITC
The reinsurance to close comprises a premium payable by the closing year to the members on the
next open year of account and a contract which transfers the liability for all claims in respect of the
closing year to the next open year.
Run-off account
At Lloyd’s, a year of account which is kept open after the date on which it would normally have been
closed.
Subrogation
The right of the underwriter to “stand in the shoes of the insured” and take over the Insured's rights,
following payment of a claim, to recover the payment of an incurred loss from a third party responsible
for the loss. It is limited to the amount of loss paid by the insurance policy.
Syndicate Capacity
Also referred to as the ‘stamp’. The maximum amount of business that a syndicate in Lloyd’s can
write per year, aggregated from all its members.
45