Remuneration 53 Letter to shareholders 55 Remuneration policy report 64 Annual report on remuneration 2015 73 Directors’ report 75 Directors’ responsibilities statement
Local specialty lines w Premium growth between 5–15% per annum w Pays dividends w Brand builds strong market position w Profits act as additional capital
Our industry has enjoyed a long period of reduced catastrophic activity. The effect has been to attract more capital, and thus competition resulting in reduced prices. This is more keenly felt on accounts that attract larger premiums. We are prepared for this; we have a proven strategy of balancing the bigger-ticket with the smaller retail business. Our diverse product range sold across a wide geographic area means we are well placed to thrive in this environment.
Chief Executive’s report It was not a loss-free year for our industry, or Hiscox. We, like others, have benefited from the absence of major natural catastrophes. Our attritional claims were broadly in line with past years, and our skilled underwriting teams avoided material impact from some of the larger industry losses such as the explosions in Tianjin in China, tornado and freeze-related claims in the US, floods in the UK and mining-related collapses in South America. In total these cost us a modest £25.1 million.
Our focus on product innovation is paying off, adding US$70 million in premium since the start of 2015. This includes new cyber products and takeout quota shares which either expand a client’s original product or support an existing business when internal appetites are reached. Product development has evolved, it is about asking how we can help support clients’ broad aims and responding from there.
Reserve releases of £205.9 million were up from £172.2 million last year. This demonstrates our continued cautious approach to reserving, with the majority of the release coming from shorter tail lines and the earlier years of longer tail lines where we are confident that we will not be subject to any further claims development.
Capital management At the start of 2015 we returned £192 million of capital to shareholders. We have today announced that we will be returning 16.0p per share in addition to our normal dividend. Cumulative dividends and capital returns since 2012 will then total £750 million. This year we are retaining a greater proportion of our earnings so that we can fund the growth that we can foresee in our retail business.
In te rn at io na lly tr ad ed li ne s Lo ca l s p ec ia lty li ne s
Pierre-Olivier joined Hiscox in 2000 from MMC Marsh & McLennan Companies. He started his career at Marsh in strategy consulting, joining insurance broker Marsh France in 1993 where he held various senior management roles in strategic planning, personal lines and professional insurance. As Managing Director of Hiscox France, he grew the French business into the largest and most profitable operation for Hiscox Europe and in 2009 was appointed Managing Director of Hiscox Europe. He has led Europe to profitable growth with the development of professional insurance and distribution beyond the broker channel in partnerships and direct.
Capital management Hiscox believes in managing its capital. The Board monitors the capital strength of the Group and ensures its insurance carriers are suitably capitalised for regulatory and ratings purposes, taking into account future needs including growth where opportunities arise. As discussed in the Chairman’s statement, once again as a result of our strong performance in 2015 the Board has reviewed the Group’s capital level and proposed that a second interim dividend of 32p per share (approximately £91 million), should be made. This comprises a special dividend of 16.0p and a final dividend equivalent of 16.0p, bringing the year’s total distribution to 40.0p. This return of capital will align the Group’s available capital with the rating agencies’ minimum capital requirements to remain in the A range. The impact of this distribution and how it compares to the Group’s capital requirements is presented in the chart on page 21.
The BSCR model applies factors to premium, reserves and assets/liabilities to determine the minimum capital required to remain solvent throughout the year. The GSSA is based on Hiscox’s own internally assessed capital requirements and is informed by the Group Capital Model (GCM) which, together with the BSCR, forms part of the BMA’s annual solvency assessment. The GCM provides a holistic view of the Group capital requirements and draws upon the Group’s key underlying risk models. The proposed return of capital will leave the Group with a comfortable surplus above Hiscox’s latest internal projections of both the BSCR and GSSA.
Hiscox Corporate Centre The central investment portfolio returned a lower £6.5 million (2014: £12.2 million) during 2015, but follows two good years. Foreign exchange gains boosted the result by £8.3 million compared to a loss of £1.6 million in 2014. Overall, the loss before tax remained constant at £14.6 million (2014: £15.2 million).
Asset allocation High-quality, conservative portfolio Investment portfolio: £3.609 billion as at 31 December 2015 10.8% EUR
– Liquid assets: our investment policy recognises the demands created by our underwriting strategy, so that some investments may need to be realised before maturity or at short notice. Hence a high proportion of our investments are in liquid assets, which reduces our risk of making losses because we may have to sell assets quickly.
– Guidelines: we set guidelines for exposure to each of our approved reinsurers.
We believe in identifying, then minimising the environmental impact of our business activities.
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 A (Excellent) and an A+ (Strong) rating from Fitch. At the end of 2015, net assets exceeded $15 million (2014: $8 million).
is rated A (Excellent) by A.M. Best. At the end of 2015, net assets exceeded $66 million (2014: $60 million).
Richard Colin Watson Chief Underwriting Officer (Aged 52) 16 May 2013*
Lynn Carter Independent Non Executive Director (Aged 59) 20 May 2015*
The Audit Committee The Audit Committee of Hiscox Ltd comprises Lynn Carter, Caroline Foulger, Ernst Jansen, Colin Keogh, Anne MacDonald, Bob McMillan
– Both firms were given access to data and the opportunity to meet with senior executives.
A core function of the Remuneration Committee’s role is to determine: – the overall remuneration strategy, policy and cost for the Group; – the levels and make-up of remuneration for the Executive Directors; – the award of sizeable bonuses to individuals other than the Executive Directors; and – the awards and operation of the Company’s share plans, including the Performance Share Plan.
Selected Board members retain legacy interests in closed defined benefit schemes. However, there is no entitlement to any further accrual under these plans.
Set at an appropriate level by reference to local market practice and reflecting individual and family circumstances.
Non Executive Directors receive an annual fee in respect of their Board appointments together with additional compensation for further duties (e.g. Board Committee membership and chairmanship). The fees for the Non Executive Directors (excluding the Chairman) are determined by the Chairman.
4. Unvested Performance Share Plan (PSP) awards Treatment would be in accordance with the plan rules and relevant grant documentation. The intended approach is summarised below: – awards will vest in line with the normal scheme vesting date (unless the Committee determines otherwise). Awards vest to the extent that the relevant performance target is considered to have been met; – the award will normally be pro-rated to reflect the period which has elapsed from the commencement of the award to the date of termination unless the Committee determines otherwise.
In line with the remuneration policy, 50% of the 2015 bonus will be deferred over a period of two years. Receipt of these deferred amounts is normally subject to continued service.
BE Masojada, RC Watson and SJ Bridges hold lifetime allowance protection certificates and have therefore opted out of the Company pension scheme. They receive a 10% cash allowance (less an offset for the employer’s UK National Insurance liability) in lieu of the standard employer pension contribution. The value of this benefit is shown in the Executive Director remuneration table on page 64.
Relative importance of the spend on pay The chart below shows the relative movement in profit, shareholder returns and employee remuneration for the 2015 and prior financial year. Shareholder return for the year incorporates the distribution made on behalf of that year. Employee remuneration includes salary, benefits, bonus, long-term incentives and retirement benefits.
CEO single figure of remuneration (£) 2,536,943 1,759,123 1,509,248 1,938,759 2,341,737 3,130,535 3,413,700
Independent auditor’s report to the Board of Directors and the shareholders of Hiscox Ltd
Income Gross premiums written 4 1,944,220 1,756,260 Outward reinsurance premiums (372,376) (412,850)
Share consolidation and sub-division (930) 930 – – – – – – Shares purchased by Trust – – – – (6,712) (6,712) – (6,712) Shares issued in relation to Scrip Dividend
Cash flows from the sale and purchase of subsidiaries 33 (7,375) (2,627) Cash flows from the sale and purchase of associates 16 (2,089) (1,687) Cash flows from the purchase of property, plant and equipment (19,272) (11,727) Cash flows from the purchase of intangible assets (30,952) (27,580)
The Group has financial assets and cash of over £3.6 billion. The portfolio is predominantly invested in liquid short-dated bonds and cash to ensure significant liquidity to the Group and to reduce risk from the financial markets. In addition the Group has significant borrowing facilities in place.
The benefits to which the Group is entitled under outwards reinsurance contracts are recognised as reinsurance assets. These assets consist of short-term balances due from reinsurers (classified within loans and receivables) as well as longer-term receivables (classified as reinsurance assets) that are dependent on the expected claims and benefits arising under the related reinsured insurance contracts.
Note 3.2 to the financial statements discusses the reliability of the Group’s fair values.
Debt and fixed income securities 19 726,822 999,298 508,734 291,325 2,526,179
Details of the payment profile of the Group’s borrowings, derivative instruments and other liabilities are given in notes 21 and 27.
Strengthening of US Dollar 114.8 47.5 Weakening of US Dollar (93.3) (38.3) Strengthening of Euro 17.6 19.9 Weakening of Euro (14.4) (16.3)
The Board ensures that the use and allocation of capital are given a primary focus in all significant operational actions. With that in mind, the Group has developed and embedded capital modeling tools within its business. These join together short-term and long-term business plans and link divisional aspirations with the Group’s overall strategy. The models provide the basis of the allocation of capital to different businesses and business lines, as well as the regulatory and rating agency capital processes.
Closing balance sheet impact of non-retranslation of non-monetary items 3,450 1,608 13 Foreign currency items on intragroup borrowings The Group has loan arrangements, denominated in US Dollars and Euros, in place between certain Group companies. In most cases, as one party to each arrangement has a functional currency other than the US Dollar or the Euro, foreign exchange losses/(gains) arise which are not eliminated through the income statement on consolidation. Implicit offsetting gains/(losses) are reflected instead on retranslation of the counterparty company’s closing balance sheet through other comprehensive income and into the Group’s currency translation reserve within equity.
Acquisitions on purchase of subsidiary (note 33) – – – – 9,185 9,185
At 31 December 2015 there were £20,478,000 of assets under development on which amortisation has yet to be charged (2014: £17,672,000).
Note 10 includes details of the interest expense for the year included in financing costs.
E/F Share issue and return of capital On 2 March 2015, Hiscox Ltd announced its intention to return approximately £192 million, or 60p per existing ordinary share, to shareholders. This comprised 45p per share in the form of a special distribution and a final dividend equivalent of 15p per share. This was also accompanied by a consolidation of the Company’s existing ordinary share capital as described below. These proposals were approved by shareholders at an Extraordinary General Meeting held on 25 March 2015.
On 26 March 2015, E/F Shares were issued to existing shareholders on the basis of one E or F Share (at the election of the shareholder) for each existing ordinary share held. Each E Share entitled the shareholder to receive 60p in the form of a dividend payable on 2 April 2015. Each F Share would be purchased by UBS Limited for the same amount. Following its purchase of the F Shares, UBS Limited exercised a put option requiring the Company to buy the shares for 60p each.
that has been most appropriate to observed historical developments. This often means that different techniques or combinations of techniques have been selected for individual accident years or groups of accident years within the same class of business. Estimates of ultimate claims are adjusted each reporting period to reflect emerging claims experience. Changes in expected claims may result in a reduction or an increase in the ultimate claim costs and a release or an increase in reserves in the period in which the change occurs.
Deferred tax assets of £35,147,000 (2014: £33,490,000), relating to losses arising in overseas entities, which depend on the availability of future taxable profits in excess of profits arising from the reversal of other timing differences, are recognised above. Business projections indicate it is probable that sufficient future taxable income will be available against which to offset these recognised deferred tax assets within six years. £34,224,000 (2014: £32,250,000) of the tax losses to which these assets relate will expire after ten years or later; the balance of tax losses carried forward has no time limit. The Group has not provided for deferred tax assets totalling £20,474,000 (2014: £12,926,000) including £20,474,000 (2014: £12,926,000) in relation to losses in overseas companies of £72,016,000 (2014: £40,359,000). In accordance with IAS 12, all deferred tax assets and liabilities are classified as non-current. The amount of deferred tax asset expected to be recovered after more than 12 months is £35,147,000 (2014: £33,490,000).
A reconciliation of the fair value of scheme assets is as follows: Opening fair value of scheme assets 195,209 185,666 Interest income 7,118 8,589 Cash flows Contribution by the employer – 200 Benefit payments (5,041) (5,389) Administration expenses (623) (444) Remeasurements Return on plan assets (excluding interest income) 2,382 6,587
The Group has estimated the sensitivity of the net obligation recognised in the consolidated balance sheet to isolated changes in these assumptions at 31 December 2015 as follows: Present value of unfunded obligations before change in assumption
Profit for the year attributable to the owners of the Company (£000) 209,895 216,152 Weighted average number of ordinary shares (thousands) 288,209 320,554 Basic earnings per share (pence per share) 72.8p 67.4p
(b) Hiscox plc continued with its Letter of Credit and revolving credit facility with Lloyds Banking Group, as agent for a syndicate of banks, reduced to US$500 million (2014: US$875 million) which may be drawn in cash (under a revolving credit facility), Letter of Credit or a combination thereof, providing that the cash portion does not exceed US$228 million. In addition, the terms also provide that upon request the facility may be drawn in a currency other than US Dollar. At 31 December 2015 US$71.9 million (2014: US$441.5 million) was drawn by way of Letter of Credit to support the Funds at Lloyd’s requirement and no cash drawings were outstanding (2014: £nil).