Hiscox could never be accused of following the pack. Helen Yates looks at how the firm's recent decision to redomicile to Bermuda has put it right at the centre of the London versus Bermuda debate.

The first point, which Hiscox is at pains to emphasise, is that it did not decide to move its holding company from London to Bermuda purely for tax purposes. "We would have gone to Guernsey if we were just moving for tax reasons," says Bronek Masojada, chief executive of Hiscox Ltd (nee Hiscox Plc). But naturally, Bermuda's favourable tax regime was highlighted in a circular sent to shareholders in October. And on 15 November shareholders found in favour of the corporate reorganisation by a majority of 99.99% at an Extraordinary General Meeting and Court Meeting. "The reaction was very positive from shareholders," recalls Masojada. At the time of going to press, the reorganisation had been successfully completed.

Hiscox is no stranger to striking out on its own. In 1996, it was the first Lloyd's syndicate to buy a retail insurer - Economic Insurance Company, now Hiscox Insurance Company - which offered the group the ability to underwrite in both the Lloyd's market and the company markets. And there are some interesting parallels between how the news was received then to more recent reactions to the Bermuda move. "Articles in the press have included statements like 'Hiscox to leave Lloyd's!'" recollects Masojada. "We had some similar comments when we bought our UK insurance company, and ten years later we are three times bigger in Lloyd's."

Stoking the fire

While Masojada is adamant that Hiscox is not turning its back on the London market - pointing out that Syndicate 33's capacity is going up by 5% in 2007, to £875m up from £833m - the group has become a popular example in the London versus Bermuda debate. The rivalry between the markets - whether real or perceived - once again made headlines when Hiscox, followed by fellow syndicate Omega Underwriting, announced it was upping sticks and moving to Bermuda.

That Hiscox's decision was seen as so significant is largely down to chairman Robert Hiscox's outspoken views on the weaknesses he considers inherent in the Lloyd's marketplace. His views have made it much easier for the media to portray the decision to move as a snub on the London market. Speaking at the beginning of the year when the company announced its annual results, Hiscox said that Bermuda had outgrown "antiquated" Lloyd's and that it "resembles the Lloyd's of old in its entrepreneurial spirit, speed of reaction and swift sensible regulation".

Masojada seems unwilling to become embroiled in the debate. "S&P said that in 2004 Bermuda was a bigger reinsurance market than London," he says. "But London is well ahead on direct and global business. Bermuda was big on sidecars this year but at Lloyd's we just call them Names." He outlines the three main factors behind the decision to move the domicile of the group, of which tax is but one. Another reason is this year's launch of Hiscox USA in New York and new start-up Hiscox Bermuda, and the belief that the centre for decision-making should be in closer proximity to these businesses and their markets. Bermuda's regulatory flexibility is also a main attraction, a system described as "deliciously smooth and safely regulated" by Robert Hiscox.

For Masojada, a bit of competition never hurt anyone. "I think competition is good," he said, reiterating a recent comment by Lord Levene in a speech to the Bermuda Society that "competition makes both parties raise their game".

Hiscox takes great pride in its involvement in reform projects for the London Market. Chief operating officer Sue Langley is currently spearheading the G6 peer-to-peer approach, which is generally considered a more market-friendly solution for Lloyd's than previous attempts to automate the market, many of which have been doomed to failure - costly technology platform Kinnect being the most recent.

Quietly confident

Not wishing to speak too soon and jinx what is looking likely to be a bumper year for the industry, Masojada is quietly confident about the group's prospective end-of-year results. Compared to last year's triple blow in the form of Katrina, Rita and Wilma, this year's hurricane season could not have been more different. Despite early predictions that 2006 would yet again hit the industry where it hurts most - in the mid-Atlantic and the Gulf of Mexico - a quiet season provided a much-needed breather and an opportunity for Hiscox to push ahead with its ambitious plans. "Of course we're happy but the year isn't over yet," says Masojada. "There was an earthquake in Hawaii a month ago and a tsunami in Japan last week - we're happy but we're not counting our chickens. One swallow does not make a summer and it's important for both buyers and sellers to remember that."

There was some disappointment at the release of its half year results (Hiscox does not submit quarterly reports) where profits dropped by £27m to £61.3m compared to the first half of 2005. This was largely due to currency exchange movements, which also saw the group's combined ratio jump almost ten points from 83.5% to 93.2%. But it wasn't all bad news. Gross written premiums rose by 43% to £625.1m and Hiscox USA and Hiscox Bermuda both got off to a good start. "It was a good first half with strong growth fuelled by high rates for all business exposed to catastrophes, helped by steady growth from our retail non-catastrophe business," said Robert Hiscox at the time. "The successful start of our new ventures in Bermuda and the USA has strengthened our strategy of international spread, and balance between high-risk and low-risk specialist insurance."

This balance paid off following last year's record-breaking losses. With many reinsurers recording a negative end-of-year profit, Hiscox reported a pre-tax yield of £70.2m despite incurring hurricane losses of £165m, down only slightly from £89.5m in 2004. Masojada says he was surprised it had been such a quiet year after Katrina, Rita and Wilma, and a welcome breather, but that the company's business mix had prepared it for all eventualities. "A specialised diversified business provides a better return to the shareholders over time," he insists.

According to AM Best, Hiscox's risk management framework includes a variety of processes to identify, assess and manage the different classes of risk. This includes a risk committee, which monitors the risk management framework, identifies emerging risks and recommends appropriate strategies. Underwriters price the risk based on their professional judgment, market experience and recommendation of Hiscox's independent loss modelling team. Syndicate 33 is required to retain (prior to any third party reinsurance) at least 60% of all gross property catastrophe reinsurance business written in 2007 (50% in 2008), creating an incentive for the syndicate to produce and retain quality business.

Shunning "worsification"

Looking ahead to 2007 there is optimism that rates will continue to remain high across peak zones but some concern for those areas where prices are softening. Masojada said Hiscox would be forced to "re-evaluate" if rates for lines such as terrorism and professional indemnity continued to come down. "Underwriting discipline will be important in the non-catastrophe areas," he added. While Hiscox has successfully carved out a niche for its specialty products - including terrorism, fine arts, and kidnap & ransom - the group will only continue to write business that is profitable. It is clear Hiscox has not replicated the tactics taken by a number of reinsurers this year to reduce their catastrophe exposures by diversifying into unprofitable lines of business, "or as someone said recently - a policy of 'worsification'", quips Masojada.

Hiscox Eye of the Panther

One trend Hiscox has been happy to follow is the sidecar phenomenon. In just one year capital market investors have pumped $4bn into these "disposable reinsurers". This latest industry craze has seen 18 of these special purpose vehicles formed this year, most in Bermuda with a spattering in the Cayman Islands. Sidecars have provided much-needed peak zone capacity this year, particularly for the retrocession market, which all but disappeared after Hurricanes Katrina, Rita and Wilma.

On 1 December, Hiscox Syndicate 33 announced the creation of Panther Re Bermuda Limited (backed by asset management firm WL Ross & Co), a sidecar with capitalisation of $360m. Panther Re is the first ever Lloyd's syndicate sidecar, although Lloyd's sidecar Thunderbird Re was also launched this year in the Cayman Islands. Under terms of the quota share agreement, Panther Re will assume a 40% pro rata share of Syndicate 33's property catastrophe reinsurance business for 2007 with a similar pro rata share to be agreed for 2008.

Hiscox Bronek Masojada, CEO of Hiscox

Bronek Masojada joined Hiscox Holdings as managing director in 1993. He became managing director of Hiscox in July 1996 and then chief executive of Hiscox in 2000. Since joining Hiscox, he has led the transition from a small private company to a significant quoted entity. Prior to joining Hiscox, he worked at McKinsey & Company and was a member of the McKinsey team which advised Lloyd's during the Rowland Taskforce in 1991, and in the preparation of the first Lloyd's Business Plan in 1993. In addition to his role at Hiscox, he is a member of the Council of Lloyd's and is currently serving his second term as deputy chairman.