Our performance Strong financial results Hiscox has a strong record for top-line growth with a focus on shareholder value. Between 2010 and 2014 the Group: – increased gross written premiums by 22.6% to £1.76 billion; – posted a healthy combined ratio averaging 88.2%; – delivered average return on equity of 14.3%; – maintained a progressive dividend policy with compound growth of 8.1%; – returned £422 million of extra capital to shareholders.
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.
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.
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.
Hiscox began writing insurance outside of Lloyd’s in 1989 and now has nine offices in the UK and Ireland. Hiscox specialises in art, private client and luxury motor insurance, as well as professional liability and property insurance for small- and medium-sized businesses. Hiscox UK also provides home and small business insurance directly to consumers.
The use of data and analytics is an important way to improve underwriting processes across the Group. In 2015, we will launch a major initiative in our UK business: a sophisticated tool that analyses individual customers to provide a price that reflects their unique risk. It will eliminate excess cost from the underwriting process, while also freeing up our underwriters’ time to spend on more complex risks.
Capital requirements The Group monitors its capital requirements based on both external risk measures, set by regulators and the ratings agencies, and its own internal guidelines of risk appetite. A full description of the requirements set by the regulators for the most significant insurance carriers is included in note 3.3 to the financial statements. A brief explanation of the primary internal and external capital constraints at a Group level is given below.
Hiscox Re Gross premiums written reduced by 13.9% to £354.3 million (2013: £411.5 million), in a very challenging environment. The healthcare business written in Bermuda, however, had 37% growth year-on-year. With a second consecutive year of minimal catastrophe activity, the net claims ratio remained low at 22.0% (2013: 30.9%). This drove an improvement in the net combined ratio to 49.8% (2013: 58.9%).
Cash and liquidity The Group’s primary source of liquidity is from premium and investment income. These funds are used predominantly to pay claims, expenses, reinsurance costs, dividends and taxes, and to invest in more assets. In addition, during 2014 the Group decided to return excess capital to its shareholders of £128 million on top of standard dividends, additionally the Employee Benefit Trust purchased net £10.6 million of shares during the year into the Trust. At the end of the year, the Group received £170 million for subscriptions received in advance of investment by the Kiskadee Select and Diversified funds. In all, inflows for the year were £93.0 million (2013: outflow of £92.8 million). The Group paid £62.6 million of tax during the year compared to £39.7 million in 2013. The Group had cash outflows from investing activities of £43.6 million (2013: inflow of £7.4 million), incorporating the acquisition of DirectAsia and further IT investment.
We started 2014 in the belief that a recovery was gaining traction in the US and the UK and that the worst may be over in other parts of the world. Our portfolio was positioned accordingly. As it turned out this optimism marked yet another false dawn as various deflationary forces exerted themselves, especially in the Eurozone, producing weaker growth and lower inflation than anticipated. These pressures gathered steam toward the end of the year and, with the Bank of Japan embarking on an aggressive package to revive their economy and the ECB expected to do the same, longer dated bond yields in developed markets fell sharply. The prospect of an official increase in interest rates in the US and the UK in 2015 therefore fell further
– Duration: As many of our insurance and reinsurance liabilities have short time spans, we do not aim to match exactly the duration of our assets and liabilities.
Our business is taking risk, which by its nature is inherently uncertain.
Hiscox is a founding member of ClimateWise, which aims to leverage the insurance industry’s expertise to understand, communicate and act on the risks associated with climate change. Hiscox is independently assessed against a commitment to six key principles, including risk analysis, public policy, influencing our customers, investment strategies, managing our own impact and reporting on our direct emissions. In 2014 Hiscox was ranked joint second. More information is available at www.climatewise.org.uk.
Syndicate 6104 Syndicate 6104 was set up under a limited tenancy agreement for the 2008 year of account. It is wholly backed by external Names and takes a pure year of account quota share of Syndicate 33’s property catastrophe reinsurance account. The arrangement has been extended through to the 2015 year of account and Syndicate 6104’s capacity was decreased to £65 million, from £72 million. Syndicate 6104 pays an overrider and profit commission to Syndicate 33.
53% North America 31% Rest of world 9% Asia 5% Europe 2% UK
The Conflicts Committee The Group has a Conflicts Committee which is chaired by Dr James King and comprises Caroline Foulger, Richard Gillingwater, Daniel Healy, Ernst Jansen, Dr James King, Bob McMillan, Andrea Rosen, and Gunnar Stokholm. It meets as and when required. Conflicts of interest may arise from time to time because Syndicate 33, Syndicate 3624 and Syndicate 6104 are managed by a Hiscox-owned Lloyd’s Managing Agency. 27.5% of the Names on Syndicate 33 are third-parties and 72.5% of Syndicate 33 is owned by a Hiscox Group company. 100% of Syndicate 3624 is owned by a Hiscox Group company. 100% of Syndicate 6104 is owned by third-parties. The Committee serves to protect the interests of the third-party Syndicate Names. There is also potential for similar conflicts to arise as a result of the Group’s insurance linked securities (ILS) activity. Should a potential conflict of interest arise, there is a formal procedure to refer the matter to this Committee.
The external auditors provide reports at each Committee meeting on topics such as the control environment, key accounting matters and mandatory communications. The Committee also received a comprehensive presentation from the auditors demonstrating to its satisfaction how their independence and objectivity is maintained when providing nonaudit services. Any contracts with the auditors, KPMG, for non-audit services in excess of £50,000 must be approved by the Committee in advance. Approval will not be given for any contract which may impair the auditors’ independence or objectivity. During the year the value of non-audit services provided by KPMG amounted to £88,000 (2013: £88,000). There were no circumstances where KPMG was engaged to provide services which might have led to a conflict of interests, nor does the Audit Committee consider the quantum of the fees impacts the independence of the auditors. During the year the Non Executive Directors met with the external and internal auditors
Annual bonuses will be capped We will be capping the Executive Directors’ individual opportunity under the annual bonus plan. In setting the level of these caps we considered competitor practice and historical bonus payment levels. We also took account of the fact the caps represent maximum incentive levels, not expected, and our disciplined approach of paying for results will continue unchanged.
Comments on 2014 performance and Executive Director reward You will see from the statements of the Chairman and the Chief Executive that in 2014, against a challenging reinsurance market, we have delivered a return on equity of 17.1% and an increase in net asset value per share of 15.0%. Our retail businesses have delivered just over half of the Group’s gross written premium whilst our reinsurance and London Market businesses have adapted appropriately to market conditions. The compensation for Executive
For 2015, the bonus pool will be funded by a set percentage of profits on achievement of a Hurdle Rate of ROE. The bonus for 2014 was determined on a similar basis. Further detail is set out on page 61.
Notes to the policy table Performance measure targets and target setting The performance targets for the annual bonus and share plan awards to Executive Directors are intended to be closely aligned with the Company’s short-term and long-term objectives. The intention is to provide a direct link between reward levels and performance. The Company operates a bonus pool approach for the annual incentive. This ensures that both individual bonus levels and overall spend are commensurate with the performance of the Company. The Committee applies judgement based on a range of factors (as described in the table above) to ensure that outcomes for Executive Directors are based on performance in-the-round rather than based on a formulaic outcome. The profit pool approach currently used ensures that overall bonus amounts are aligned to the performance of the Company and remain appropriate and affordable.
Where awards are granted in the form of nil-cost options, at the end of the performance period the employee would have an option over the proportion of the share grant which vests by reference to the satisfaction of the applicable performance target as well as over the number of shares representing the rolled-up dividends on those shares. Participants in selected jurisdictions (subject to tax/legal/regulatory restrictions) after vesting but before exercise, may receive amounts equal to dividends paid on the total number of shares that have vested.
In line with the remuneration policy, the Executive Directors, along with other employees across the Group, participated in the 2014 profit-related bonus pools. These pools were calculated at a business unit level and for the Group as a whole on the basis of a set percentage of profits on achievement of a return on allocated equity hurdle (‘Hurdle Rate’). The Hurdle Rate is set annually by using an investment benchmark rate which takes account of one- to three-year gilt and treasury yields, cash returns and the general investment environment. The return on equity Hurdle Rate for the 2014 financial year was set at 7%, which was 5% above the investment benchmark rate.
SJ Bridges 154,578 – – (154,578) – 1.499 6.933-7.219 06-Apr-08 05-Apr-15
RC Watson 128,815 – – (128,815) – 1.499 6.402-6.431 06-Apr-08 05-Apr-15
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 of a new standard.
2 Significant accounting policies continued 2.4 Foreign currency translation continued (a) Functional currency continued
The useful life of the asset is reviewed annually and, if different from previous estimates, is changed accordingly with the change being accounted for as a change in accounting estimates in accordance with IAS 8.
(g) Salvage and subrogation reimbursements Some insurance contracts permit the Group to sell property acquired in settling a claim (i.e. salvage). The Group may also have the right to pursue third-parties for payment of some or all costs (i.e. subrogation). Estimates of salvage recoveries are included as an allowance in the measurement of the insurance liability for claims and salvage property is recognised in other assets when the liability is settled. The allowance is the amount that can reasonably be recovered from the disposal of the property. Subrogation reimbursements are also considered as an allowance in the measurement of the insurance liability for claims and are recognised in other assets when the liability is settled. The allowance is the assessment of the amount that can be recovered from the action against the liable third-party.
The Group carries its financial investments at fair value through profit or loss, with fair value determined using published price quotations in the most active financial markets in which the assets trade, where available. During periods of economic distress and diminished liquidity, the ability to obtain quoted bid prices may be reduced and as such a greater degree of judgement is required in obtaining the most reliable source of valuation. Note 3.2 to the financial statements discusses the reliability of the Group’s fair values.
The majority of the Group’s insurance risks are short-tail and, based on historical claims experience, significant claims are normally notified and settled within 12 to 24 months of the insured event occurring. Those claims taking the longest time to develop and settle typically relate to casualty risks where legal complexities occasionally develop regarding the insured’s alleged omissions or negligence. The length of time required to obtain definitive legal judgements and make eventual settlements exposes the Group to a degree of reserving risk in an inflationary environment.
of financial assets and reinsurance assets included in the consolidated balance sheet at any given point in time. The Group does not use credit derivatives or other products to mitigate maximum credit risk exposures on reinsurance assets. The Group structures the levels of credit risk accepted by placing limits on their exposure to a single counterparty, or groups of counterparties, and having regard to geographical locations. Such risks are subject to an annual or more frequent review. 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 with unrelated operations. Reinsurance is used to contain insurance risk. This does not, however, discharge the Group’s liability as primary insurer. If a reinsurer fails to pay a claim for any reason, the Group remains liable for the payment to the policyholder. The creditworthiness of reinsurers is therefore continually reviewed throughout the year.
Strengthening of US Dollar 112.1 41.7 Weakening of US Dollar (91.4) (33.8) Strengthening of Euro 15.7 16.3 Weakening of Euro (12.8) (13.2)
Year to 31 December 2014 Year to 31 December 2013 restated 4 Operating segments continued
The amortisation charge for the year includes £7,385,000 (2013: £6,434,000) relating to capitalised internally generated software costs and is included in operational expenses in the consolidated income statement.
Acquisition costs incurred in relation to insurance contracts written 425,773 (87,328) 338,445 405,504 (71,401) 334,103 Acquisition costs expensed to the income statement (399,658) 81,042 (318,616) (371,663) 65,886 (305,777)
The amounts expected to be recovered before and after one year are estimated as follows: Within one year 183,810 153,286 After one year 16,348 20,863 18 Reinsurance assets Note
The amounts expected to be recovered before and after one year are estimated as follows: Within one year 534,921 474,316 After one year 21,338 19,103
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)
The amounts expected to be settled before and after one year are estimated as follows: Within one year 563,663 277,386 After one year 27,997 26,752
Movements in deferred and current tax relating to tax deductions arising on employee share options are recognised in the statement of changes in equity to the extent that the movement exceeds the corresponding charge to the income statement. Movements in deferred tax relating to the employee retirement benefit obligation are recognised in the statement of changes in equity to the extent that the movement corresponds to actuarial gains and losses recognised in the statement of changes in equity. The total recognised in the statement of changes in equity is £7,344,000, comprising £3,668,000 deferred tax and £3,676,000 current tax (2013: £603,000 deferred tax and £2,768,000 current tax).
Net defined benefit liability at beginning of year 3,635 13,824 Defined benefit cost included in net income 660 1,000 (Charge)/recovery from third-party Names (110) 85 Total remeasurement included in other comprehensive income 22,759 (9,775) Employer contributions by Hiscox Group (200) (1,800) Less contributions received by Hiscox Group from third-party Names – 301
Profit for the year attributable to the owners of the Company (£000) 216,152 237,758