and San Diego, with the aim to accelerate significantly increasing the amount of time
Chief Executive’s growth in these key markets. underwriters spend on broker activity in the
UK through the creation of virtual teams aligned
report continued The US business is on track and we continue to each UK region. Each of these steps has
to invest in driving it to success. Our progressively improved service reliability and
ambition is that the broker channel business predictability. In 2013 the focus will be on using
will be profitable in 2013, assuming a normal the momentum of 2012 to maintain service whilst
loss year. The ongoing marketing investment reducing cost.
in the direct business will hold back
profitability in the short-term, but as we grow Investments
in knowledge and experience in the US Hiscox’s focus on property-related insurance
we anticipate more rapid success. means that our invested assets, when measured
relative to our premium income, are lower than
Claims the industry average. Despite this, investment
When you sell insurance, claims are something income has historically accounted for about
you anticipate and plan for and at Hiscox we pride 50% of our profits. We began the year with
ourselves on settling our clients’ claims swiftly cautious expectations, given the low interest rate
and fairly. As highlighted at the start of my report environment and our view that a lot could have
we had a busy year. Costa Concordia and gone wrong during the year. However, our worst
Superstorm Sandy hit the headlines, but there fears were not realised and, with a fair wind from
was lots of other activity. 2012 was a year central banks, the investment result exceeded
of dramatic weather in the UK and Hiscox UK our expectations – and accounted for 42.6%
received 1,500 storm and flood claims with of our profits, only just below the longer-term
related claims paid of £14 million, nearly five times average. We achieved a total return of £92.7
the previous year. million before derivatives equating to a yield
of 3.1% (2011: £25.9 million, 0.9%).
Handling claims well requires a balance
of thorough process and controls as well as an Our asset allocation changed little during
ability to deal with claimants and their brokers. the year. In the bond portfolios, duration was kept
During the year we completed the implementation short and a healthy weighting towards non
of a new claims management solution for Hiscox government bonds was maintained. We made
London Market which has transformed the way some alterations to the selection of equity and
we do claims in that area, leading to better hedge fund managers but our overall exposure
decision making, enhanced productivity and remained constant at around 6% of assets.
improved indemnity costs. In a 2012 independent With the words and actions of central bankers
survey of claims brokers we continued to score reassuring investors that interest rates would
favourably for broker satisfaction and, with the be kept low and a financial upheaval, particularly
enhancements in service that the new system in Europe, would not be tolerated, a ‘risk on’
will allow, we are hopeful that our perception mentality eventually prevailed. This served us well
in the market will improve further in the year as non government bonds and equities were
ahead. In our UK and European businesses, much in demand. Our bond portfolios all beat
customer satisfaction with our claims handling their benchmarks and benefited from the
has continued to improve, and effective claims narrowing of credit spreads and, unlike the
handling continues to set us apart in the market. previous year, there was not much opportunity
cost to being short duration. The risk assets
Hiscox’s cautious reserving philosophy is again portfolio produced particularly strong returns both
reflected in reserve releases of £152 million, in absolute terms and relative to market indices.
down from releases of £199 million in 2011.
Whilst the investment world may look a safer
Operations and IT place in 2013, plenty of uncertainty still exists
The key ingredients for a successful insurer and the portfolio is cautiously positioned overall,
are capital, good people and effective IT. both from a duration and credit quality standpoint.
IT is a significant expenditure for the Group After such a favourable period for bonds, the yield
and is likely to increase in the short- to medium- to maturity of our portfolios has declined over
term with the objective of improving distribution the year and our expectation of returns from them
and service. In 2012 we developed a Group IT in 2013 is therefore correspondingly reduced.
strategy, providing a clear roadmap for activity We do, however, retain an appetite for sensible
over the next five years. risk, hence our continued allocation to equities.
We feel they offer a better risk-reward ratio
The day-to-day delivery of services to brokers, than exists in the higher yielding bond and
customers and within the Group is continually structured credit strategies where we continue
improving. As the company grows, we can never to resist temptation.
be satisfied and will continue to look at ways
to improve processes and minimise expenses. Capital management
We have undertaken various lean management We announced today a special distribution
initiatives across the Group in 2012 including: of approximately £150 million, equal to 38p
improving how we operate our small commercial per share, which is on top of the final dividend
insurance lines in Europe, introducing a client- equivalent of 12p. This takes our total capital back
focused underwriting centre in the US and to approximately the level at the start of 2012.
10 Chief Executive’s report Hiscox Ltd Report and Accounts 2012