Hiscox USA continues good premium growth, up by 31.1% to £189.5 million (2012: £144.5 million).
In addition, a sum of 14.0p per share will be paid instead of a final dividend for the year ended 31 December 2013 as part of the C/D share scheme. This amount, together with the interim dividend of 7.0p per share, represents a total dividend for 2013 equal to 21.0p per share (2012: 18.0p), an increase of 16.7%, in line with our policy of progressive dividend growth. As a result of this amount being paid as part of the C/D share scheme, a scrip dividend alternative will not be offered to shareholders.
The market and our opportunities So much of the punditry this year has been about the growth of the ILS (insurance linked securities) market and its effect on reinsurers and pricing. Competition has increased but as a respected leader in reinsurance we have been able to maintain our share of well-rated business. Reducing margins are a big issue for businesses that have no alternative to reinsurance. Although we are not immune, we are in the fortunate position of being able to reduce lines of business where this competition impinges and grow in areas where it does not.
I am pleased to report a profit before tax of £244.5 million (2012: £217.5 million) and a return on equity of 19.3% (2012: 17.1%). The improved profit was the result of better performance within our European and US businesses, coupled with continued good performances from our UK, Guernsey, London Market and Bermuda businesses. Our long-term strategy of building locally traded specialist retail business to balance our internationally traded business continues to deliver.
— Alternative distribution: It is a perception, though a slightly unfair one, that Lloyd’s underwriters sit at Lloyd’s waiting for business. Our underwriters are frequent travellers visiting existing brokers and seeking new agents who will send business to London. We have created a new division that combines technology with this desire to travel to bring new opportunities to London. The marine employers’ liability product referred to earlier is a case in point.
Investments Hiscox’s investment income has historically accounted for about half of the Group’s profits, but this was never going to be the case in 2013 given the harsh investment climate and our excellent underwriting result. Our investments, before derivatives, made £58.9 million (2012: £92.7 million) equating to a return of 1.9% (2012: 3.1%). We had expected our return to be lower than in 2012, but 1.9% can qualify as better than expected in the world of financial recession in which we are investing. The return from our bond portfolios was much lower than in 2012, but this was as forecast. It has been a challenging time for most fixed income investors, and indeed 2013 turned out to be one of the more volatile years in these markets. It was a good year to be short duration, and our caution has resulted in a low, but positive contribution.
We have also made progress in areas less visible to shareholders. We are steadily appointing a second tier of management who will in the future
Realistic disaster scenarios, Hiscox Ltd The table below presents selected realistic disaster scenarios based on our book of business in force at 1 January 2014 and industry data. Given the nature of the risks underwritten, the loss estimates may be materially different than those that arise depending on the size and nature of the event.
Management compares the capital requirements of the Group against its available capital. Available capital is defined by the Group as shareholders’ equity which was £1,409 million at 31 December 2013 (2012: £1,365 million). Debt or preference shares are not defined as available capital by the Group as they do not absorb losses, should they occur, ahead of or alongside ordinary shareholders.
Hiscox London Market Gross premiums written increased by 4.4% to £668.2 million (2012: £640.0 million) driven by strong growth in the property and specialty divisions. This was offset to some extent by the decline in reinsurance premiums as a result of the challenging rating environment.
Whilst longer dated yields have risen, the reaffirmation from many Central Bankers that short-term interest rates were set to stay low for some time has left the yields in our bond portfolios at comparable levels to this time last year. Accordingly, our return expectations from this source are still modest. The level of overall investment income is expected once again to remain highly dependent on the performance of our risk asset portfolio. Although short-dated bonds may be similarly valued to a year ago, the same cannot be said of equities. Current valuations and an uncertain outlook for earnings in the near term warrant continued close monitoring of our exposure. We believe therefore that patience and prudence should still lie at the heart of our investment strategy but with some appetite for risk in asset classes where valuation seems more reasonable.
High-quality, conservative portfolio Investment portfolio: £3.129 billion as at 31 December 2013
A dedicated team reports to the Risk Committee of the Board which monitors and reviews the risk profile and the effectiveness of our risk management activities. This team has a wide range of tools to measure risks and is organised centrally so we can share best practice on managing risks across the Group.
— We constantly monitor new regulation and review our internal arrangements operating under the guidance of the Group CFO.
— Vetting and auditing: All binding authorities we grant are closely controlled through tight underwriting guidelines. We vet all our agents prior to appointment and monitor and audit them regularly. Agents are frequently audited to ensure they meet our standards.
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 management, public policy, influencing our customers, investment and managing our direct emissions. More information is available at www.climatewise.org.uk.
Scope 1 – onsite gas combustion and refrigerant loss3 205 204 484
Corporate responsibility Hiscox Ltd Report and Accounts 2013 that risks are managed within acceptable limits, but not at the expense of innovation or a speedy response. We believe that we have the balance right and, furthermore, that this is one of our greatest strengths.
Hiscox Insurance Company (Guernsey) Formed by Hiscox in 1998, Hiscox Insurance Company (Guernsey) Limited writes mainly kidnap and ransom and fine art insurance. Hiscox Guernsey has an A.M. Best rating of
Richard Colin Watson Chief Underwriting Officer (Aged 50) 16 May 2013*
Robert McMillan Independent Non Executive Director (Aged 61) 01 December 2010*
Steve Langan Managing Director, Hiscox UK and Europe, and Group Marketing Director
The Hiscox Partnership numbers up to 5% of the total staff. A Partner’s contribution can be in a variety of ways: through the leadership or development of an important area or line of business, or through technical and operational expertise that benefits the business significantly. Most have taken a risk in their careers and many have made personal sacrifices for Hiscox, whether it be moving into an unproven or new area for the Group or relocating themselves and their families. The Partners are the leaders of our business and individually and collectively influence our Group’s development and success.
The roles and activities of the Chairman and Chief Executive are distinct and separate. The Chairman is responsible for running an effective Board including oversight of corporate governance and overall strategy and meets
Performance evaluation As in the previous year, an internal board and committee evaluation process was conducted in 2013. The internal evaluation included a review of Board composition and whether there was an appropriate balance of skills, experience, independence and knowledge. It also considered how diversity, including gender diversity, could be improved. Other areas covered were succession planning, how the Board works as a unit, Board meeting content and focus, the support to the Board, the quality and provision of information, the Non Executive Directors’ input into the strategy and shareholder engagement. The findings of the evaluation were discussed by the Board as a whole. An external evaluation of the Board and its committees is scheduled to take place in 2014. The last external evaluation was carried out in 2011.
We are a Bermuda incorporated company therefore not subject to the new UK disclosure regulations. Our intention, however, has always been to provide transparent remuneration disclosure and to engage with shareholders on the topic therefore our 2013 remuneration report is consistent with the new regulations and we will be submitting the policy and remuneration report for an advisory vote at the AGM on 15 May 2014.
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.
The Committee may make minor changes to this remuneration policy to aid in its operation or implementation without seeking shareholder approval (e.g. for regulatory or administrative purposes), provided that any such change is not to the material advantage of Directors. For the avoidance of doubt the Committee may continue to operate the PSP in accordance with the rules (e.g. the treatment of awards in the context of a change of control or other forms of corporate restructure).
Service contracts It is the Company’s policy that Executive Directors should have service contracts with an indefinite term which can be terminated by the Company by giving notice not exceeding 12 months or the Director by giving notice of six months. Following the agreement of updated employment terms, this will apply to all current Executive Directors with effect from 15 May 2014 and would generally be applied to future appointments.
Details of pension entitlements All open Hiscox retirement schemes are based on defined contributions.
Directors’ interests 31 December 2013 5 55/89p* Ordinary Shares number of shares beneficial 5p Ordinary Shares number of shares beneficial
RS Childs 206,104 – – (206,104) – 1.465 5.100 02-Apr-06 01-Apr-13
Membership of the Remuneration Committee The Committee members for 2013 were RS Childs, C Foulger, R Gillingwater, DM Healy, ER Jansen, Dr J King, R McMillan, AS Rosen (Chairman) and G Stokholm.
Financial summary Hiscox Ltd Report and Accounts 2013 70 Independent auditors’ report 71 Consolidated income statement 71 Consolidated statement of comprehensive income 72 Consolidated balance sheet 73 Consolidated statement of changes in equity 74 Consolidated statement of cash flows 75 Notes to the consolidated financial statements 124 Five-year summary
Opinion In our opinion: — the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as at 31 December 2013, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the EU; and — the part of the annual report on remuneration 2013 which we were engaged to audit has been properly prepared in accordance with Schedule 8 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008 No. 410) made under the Companies Act 2006 as if those requirements were to apply to the Company.
Profit for the year (all attributable to owners of the Company) 237,758 208,026
Loans and receivables including insurance receivables 20 493,419 492,064 Current tax asset 3,530 1,513 Cash and cash equivalents 23 564,375 657,662
Total recognised comprehensive income/(expense) for the period (all attributable to owners of the Company), as restated
In July 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 2018 is likely to be the earliest date for the adoption of a new standard.
The impact of the change is shown in the table below.
(b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the retranslation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as IAS 39 effective net investment hedges or when the underlying balance is deemed to form part of the Group’s net investment in a subsidiary operation and is unlikely to be settled in the foreseeable future. Non-monetary items carried at historical cost are translated in the balance sheet at the exchange rate prevailing on the original transaction date. Non-monetary items measured at fair value are translated using the exchange rate ruling when the fair value was determined.
Key areas of exposure to credit risk include: — reinsurers’ share of insurance liabilities; — amounts due from reinsurers in respect of claims already paid; — amounts due from insurance contract holders; and — counterparty risk with respect to cash and cash equivalents, and investments including deposits, derivative transactions and catastrophe bonds.
Using these three concepts, scenario modeling derives the above estimated impact on instruments’ fair values for a 100 basis point change in the term structure of market interest rates.
An analysis of the Group’s major exposures to counterparty credit risk excluding loans and receivables, based on Standard & Poor’s or equivalent rating, is presented below: As at 31 December 2013 Note AAA
Property – marine and major assets 86,882 41,829 34,942 5,242 168,895 *Includes a diverse mix of certain specialty lines such as kidnap and ransom, terrorism, bloodstock and other risks which contain a mix of property and casualty exposures.
Intangible assets 66,412 6,308 – – 72,720 Property, plant and equipment 15,198 4,023 998 – 20,219 Investments in associates 7,648 – 106 – 7,754 Deferred tax – 30,526 1,597 – 32,123 Deferred acquisition costs 59,263 106,386 27,168 4,811 197,628 Financial assets carried at fair value 633,631 1,638,455 273,732 39,236 2,585,054 Reinsurance assets 58,885 348,888 39,149 11,900 458,822 Loans and receivables including insurance receivables 157,583 256,103 57,427 22,306 493,419 Current tax asset – – 3,530 – 3,530 Cash and cash equivalents 162,746 250,121 103,539 47,969 564,375
3.3 Capital risk management The Group’s primary objectives when managing its capital position are: — to safeguard its ability to continue as a going concern, so that it can continue to provide long-term growth and progressive dividend returns for shareholders; — to provide an adequate return to the Group’s shareholders by pricing its insurance products and services commensurately with the level of risk; — to maintain an efficient cost of capital; — to comply with all regulatory requirements by a significant margin; and — to maintain financial strength ratings of A in each of its insurance entities.
Opening balance sheet impact of non-retranslation of non-monetary items (2,674) 2,144 Loss included within profit representing the non-retranslation of non-monetary items (2,116) (4,818)
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. The Group has recognised a loss of £296,000 (2012: loss of £30,000) for the impairment of receivables during the year ended 31 December 2013.
Level 2 of the hierarchy contains US Government agencies, corporate securities, asset backed securities and mortgage-backed securities. The fair value of these assets is based on the prices obtained from both investment managers and investment custodians as discussed above. The Group records the unadjusted price provided and validates the price through a number of methods including a comparison of the prices provided by the investment managers with the investment custodians and the valuation used by external parties to derive fair value. Quoted prices for US Government agencies and corporate securities are based on a limited number of transactions for those securities and as such the Group considers these instruments to have similar characteristics to those instruments classified as Level 2. Also included within Level 2 are units held in traditional long funds and long and short special funds and over-the-counter derivatives.
Balance at 1 January 10,626 – 10,626 Fair value gains or losses through profit or loss* 2,707 – 2,707 Foreign exchange losses (120) – (120)
Up until 2 April 2013, the Group issued 5p ordinary shares. From this date, new ordinary shares of 5 55/89p each exist. All issued shares are fully paid.
Diluted earnings per share (pence per share) 63.5p 51.0p *The comparative information has been restated for the adoption of IAS 19 (2011). See note 2.2 for details.
Net asset value per share (p) 402.2 346.4 323.5 332.7 299.2